EXHIBIT 13 - Pages 9 through 44 of the Company's Annual Report to
Shareholders for fiscal year 2001
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Year ended December 31,
2001 2000 1999 1998 1997
Statement of Income Data: (dollars in thousands, except per share amounts)
Net sales $ 1,129,094 $889,796 $836,438 $800,456 $725,596
Net sales without precious metals content 1,078,831 889,796 836,438 800,456 725,596
Gross profit 569,671 463,594 431,811 416,304 368,726
Restructuring and other costs (income) 5,073 (56) - 71,500 -
Operating income 178,363 163,916 149,617 69,852 132,456
Income before income taxes 185,127 151,796 138,019 55,101 122,006
Net income $ 121,496 (1) $ 101,016 $ 89,863 $ 34,825 (2) $ 74,554
Earnings per Common Share:
Net income-basic $ 1.56 (1) $ 1.30 $ 1.14 $ 0.44 (2) $ 0.92
Net income-diluted 1.54 (1) 1.29 1.13 0.43 (2) 0.92
Cash dividends declared per
common share $ 0.18333 $ 0.17083 $ 0.15417 $ 0.14000 $ 0.13000
Weighted Average Common Shares Outstanding:
Basic 77,671 77,785 79,131 79,995 80,906
Diluted 78,975 78,560 79,367 80,396 81,344
Balance Sheet Data:
Working capital $ 125,726 $ 157,316 $ 138,448 $ 128,076 $ 107,678
Total assets 1,798,151 866,615 863,730 895,322 774,376
Total debt 731,158 110,294 165,467 233,761 129,510
Stockholders' equity 609,519 520,370 468,872 413,801 423,933
Return on average stockholders' equity 19.5% (3) 20.4% 20.4% 19.2% (3) 18.9%
Long-term debt to total capitalization 54.3% 17.4% 23.7% 34.4% 19.9%
Other Data:
Depreciation and amortization $ 54,334 $ 41,359 $ 39,624 $ 37,474 $ 32,405
Capital expenditures 49,337 (4) 28,425 33,386 31,430 27,660
Interest expense, net 20,574 9,291 14,640 14,168 11,006
Property, plant and equipment, net 240,890 181,341 180,536 158,998 147,130
Goodwill and other intangibles, net 1,012,160 344,753 349,421 346,073 336,905
Cash flows from operating activities 211,068 (5) 145,622 125,877 (5) 96,323 (5) 96,647
Inventory days 94 (6) 114 122 132 128
Receivable days 47 52 52 55 53
Income tax rate 34.4% 33.5% 34.9% 36.8% 38.9%
<FN>
All share and per share amounts reflect the 3-for-2 common stock split effective January 31, 2002.
(1) Includes non-recurring income, after tax, of $11.6 million or $0.15 per common share.
(2) Includes non-recurring costs, after tax, of $45.4 million or $0.56 per common share.
(3) 2001 and 1998 exclude income statement effect of non-recurring income (costs), after tax, of $11.6 million and
($45.4 million), respectively.
(4) Includes $9.0 million for replacement of equipment lost in January 2001 fire.
(5) 2001, 1999 and 1998 include non-recurring cash inflows (outflows) of $29.1 million, ($13.1 million) and
($2.6 million), respectively.
(6) Reflects full year impact of Degussa Dental acquired in October 2001.
</FN>
D15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements made by the Company, including without limitation,
statements containing the words "plans", "anticipates", "believes",
"expects", or words of similar import may be deemed to be forward-looking
statements and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned
that forward-looking statements involve risks and uncertainties which may
materially affect the Company's business and prospects, and should be read
in conjunction with the risk factors discussed within Item I, Part I of the
Company's Annual Report on Form 10-K.
RESULTS OF OPERATIONS, 2001 COMPARED TO 2000
The Company made three significant acquisitions during 2001. In January
2001, the Company acquired the outstanding shares of Friadent GmbH
("Friadent"), a global dental implant manufacturer and marketer headquartered
in Mannheim, Germany. In March 2001, the Company acquired the dental
injectible anaesthetic assets of AstraZeneca ("AZ Assets"). In October 2001,
the Company acquired the Degussa Dental Group ("Degussa Dental"), a
manufacturer and seller of dental products, including precious metal alloys,
ceramics, dental laboratory equipment and chairside products headquartered
in Hanau, Germany. The details of these transactions are discussed in Note
3 to the Consolidated Financial Statements. The results of these acquired
companies have been included in the consolidated financial statements since
the dates of acquisition. These acquisitions, accounted for using the
purchase method, significantly impact the comparability of 2001 results
versus 2000. Accordingly, unaudited pro forma information is presented in
Note 3 to the Consolidated Financial Statements to help facilitate
comparisons.
Net Sales
Net sales increased $239.3 million, or 26.9%, to $1,129.1 million, up
from $889.8 million in 2000. The internal sales growth rate for the year
was 6.2%, excluding a 22.4% increase due to acquisitions and a negative 1.7%
foreign currency translation impact due to the strong U.S. dollar against
the major currencies in Europe, Asia and Brazil. Sales in the United States
grew 13.3%; 7.4% from base business (internal sales growth exclusive of
acquisitions/divestitures and the impact of currency translation); and 5.9%
from net acquisitions/divestitures. Notable growth was achieved in
endodontics, orthodontics, intra-oral cameras and digital x-ray systems.
European sales, including the Commonwealth of Independent States ("CIS"),
increased 60.7%. European base business sales increased 5.6%. Currency
translation had a negative 2.4% impact on sales for the year. Acquisitions
added 57.5% to European sales during the year. Notable growth was achieved
in the German and U.K. consumables businesses, and in the endodontic product
line throughout Europe. Asia (excluding Japan) base business sales
increased 9.7% as the Company's subsidiaries in the key Asian countries,
especially South Korea, continued to gain market share. Acquisitions added
an additional 16.2% in Asia, offset by a negative 4.8% impact from currency
translation. Latin American base business sales decreased 2.9% primarily
due to weak economies in Brazil and Argentina. Acquisitions added 11.8% to
Latin American net sales offset by 8.9% for the negative impact of currency
translation. Sales in the rest of the world grew 48.5%; 4.4% from base
business, 48.4% from acquisitions less 4.3% from currency translation. Solid
sales growth in Canada and Australia was offset by negative sales growth in
the Middle East and Japan.
****
Graph titled "2001 Geographic Breakdown"
Information disclosed:
% of
Region 2001 Sales
United States 51%
Europe 29%
Pacific Rim, Asia and Latin America 9%
Other 11%
****
Base business sales for heavy equipment, including x-ray equipment and
intra-oral cameras, increased 9.1% while consumable and small equipment
sales increased 6.5%. These increases were offset slightly by softening net
sales of non-dental products in 2001.
****
Graph titled "2001 Product Breakdown"
Information disclosed:
% of
Product 2001 Sales
Consumables and Small Equipment 90%
Heavy Equipment 7%
Other 3%
****
Sales in 2001 of $1,129.1 million included sales from the acquisition of
Degussa Dental which was acquired at the beginning of the fourth quarter
2001. A significant portion of Degussa Dental's net sales is comprised of
sales of precious metals generated through its precious metal alloy product
offerings. Due to the fluctuations of precious metal prices, DENTSPLY will
report sales both with and without precious metals to give the reader a
clearer understanding of its business. DENTSPLY leases most of it precious
metals primarily to free up working capital and to minimize the effect of
any price movement in the underlying metals. DENTSPLY's net sales in 2001,
excluding the sales value of precious metals, were $1,078.8 million, an
increase of 21.2% over 2000.
D15
Gross Profit
Gross profit for 2001 represented 50.5% of net sales, or 52.8% excluding
sales of precious metals, compared to 52.1% of net sales in 2000. There were
no sales of precious metals in 2000. The gross profit margin, excluding
precious metals, was benefited by a favorable product mix, restructuring,
and operational improvements during 2001. These benefits were offset by the
negative impact of a stronger U.S. dollar and the negative impact of the
amortization of the Friadent and Degussa Dental inventory step-ups recorded
in connecton with the the purchase accounting. The Company continues to
drive projects, including lean manufacturing, waste elimination and
centralized warehousing, focused on improving our operating processes and
product flows. These efforts not only strengthen our gross profit margin
rates and reduce inventory levels, but also improve our overall competitive
advantage.
****
Graph titled "Gross Profit Percentage"
Information disclosed:
Gross Profit
Year Percentage
1997 50.8%
1998 52.0%
1999 51.6%
2000 52.1%
2001 52.8%
Footnote:
Excludes precious metals content of net sales.
****
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $86.5
million, or 28.9%, in 2001. As a percentage of sales, SG&A expenses
increased to 34.2% compared to 33.7% in 2000. As a percentage of sales
without the precious metals content, SG&A expenses were 35.8% in 2001.
Acquisitions and higher research and development spending were the primary
reasons for this increase.
During 2001, the Company recorded net restructuring and other costs of
$5.1 million. In the first quarter 2001, the Company recorded a $5.5 million
restructuring charge to improve efficiencies in Europe, Brazil and North
America. In the fourth quarter 2001, the Company recorded $11.5 million of
restructuring and other costs primarily related to the Degussa Dental
acquisition and its integration with DENTSPLY. An additional cost of $2.4
million was recorded in the fourth quarter of 2001 for a payment to be made
at the point of regulatory filings related to Oraqix, aproduct to which the
Company acquired rights in the AZ Asset acquisition. These charges were
offset by a gain of $8.5 million related to the restructuring of the
Company's U.K. pension arrangements in October 2001 and a gain of $5.8
million for an insurance settlement for equipment destroyed in the fire at
the Company's Maillefer facility in Switzerland (see Note 13 to the
Consolidated Financial Statements).
****
Graph titled "Operating Income Percentage"
Information disclosed:
Operating Income
Year Percentage
1997 18.3%
1998 17.7%
1999 17.9%
2000 18.4%
2001 17.0%
Footnote:
Excludes precious metals content of net sales and non-recurring
costs.
****
Other Income and Expenses
Net interest expense increased $11.3 million due to higher debt levels in
2001 to finance the significant acquisition activity during 2001, offset
somewhat by a strong operating cash flow and lower interest rates. Other
income of $27.3 million in 2001 compares with other expense of $2.8 million
in 2000. The increase in 2001 was primarily the result of a $23.1 million
gain related to the Company's March 2001 sale of InfoSoft, LLC to
PracticeWorks, Inc. in exchange for 6.5% convertible preferred stock issued
by PracticeWorks, Inc., valued at $32 million. This investment is included
in "Other noncurrent assets" in the Company's balance sheet and is measured
for recoverability on a periodic basis (see Note 3 to the Consolidated
Financial Statements). Also contributing to the increase in other income was
$1.7 million of accrued dividends related to this preferred stock, a $1.4
million minority interest benefit recorded in the fourth quarter related to
an intangible impairment charge included in restructuring and other costs
and $1.2 million of gains from foreign exchange transactions. The other
expense in 2000 represented mainly losses on foreign exchange transactions.
Earnings
Income before income taxes in 2001 increased $33.3 million, or 21.9% to
$185.1 million, from $151.8 million in 2000. The effective tax rate for
operations increased to 34.4% in 2001 from 33.5% in 2000.
Net income increased $20.5 million, or 20.3%, to $121.5 million in 2001
from $101.0 million in 2000. Fully diluted earnings per share were $1.54 in
2001, an increase of 19.4% from $1.29 in 2000. Earnings in 2001 included
non-recurring net income of $11.6 million or $0.15 per diluted share which
included the restructuring and other costs of $5.1 million recorded in the
first and fourth quarters of 2001, offset by the related minority interest
benefit of $1.4 million and the gain on the Infosoft LLC sale of $23.1
million recorded in the first quarter of 2001. Excluding this non-recurring
income, net income was $109.9 million and diluted earnings per common share
were $1.39, an increase of 7.8% over 2000. Net income and diluted earnings
per common share for the year includes a negative impact from the $84.6
million Tulsa earn-out payment made in May for additional amortization and
interest costs and one-time inventory step-up charges for Friadent and
Degussa Dental during the year.
****
Graph titled "Earnings"
Information disclosed:
Earnings Per
Net Income Diluted Common
Year (in millions) Share
1997 $ 74.6 $ 0.92
1998 80.2 0.99
1999 89.9 1.13
2000 101.0 1.29
2001 109.9 1.39
Footnote:
The 5 year compounded annualized growth rates for net income
and earnings per diluted common share are 10% and 11%,
respectively. 1998 and 2001 are shown before non-recurring
income (costs). Per share data has been adjusted for the threefor-
two stock split effective January 2002.
****
D15
RESULTS OF OPERATIONS, 2000 COMPARED TO 1999
Net Sales
Net sales increased $53.4 million, or 6.4%, to $889.8 million, up from
$836.4 million in 1999. Base business accounted for 9.5% of the sales
growth in 2000. Currency translation negatively impacted net sales by 3.1%,
mainly due to the devaluation of the Brazilian Real and the strengthening of
the U.S. dollar against the major European currencies. Sales in the United
States grew 10.6%; 10.6% from base business and 0.1% from acquisitions,
offset by 0.1% from translation. There was strong base business growth in
the United States from equipment and consumable product lines. European
base business sales, including the Commonwealth of Independent States,
increased 3.2%. This, however, was offset by the impact of currency
translation on European sales, which had a negative 10.1% effect, and a
negative impact of 0.4% from divestitures. Both equipment and consumables
experienced an increase in base business sales in Europe in 2000. The
increase in consumable sales in Europe was tempered by European dealers who
sharply curtailed their fourth quarter consumable purchases as their annual
growth incentive rebate targets were not attainable. The economy in the
Pacific Rim continued to improve, resulting in a 24.0% increase in base
business sales. Pacific Rim net sales in 1999 were impacted by $1.4 million
of inventory returns from dealers in India. Excluding these returns, the
Pacific Rim base business sales grew 16.0% in 2000. Excluding acquisitions
and exchange, sales in Latin America grew 12.4%. Sales in the rest of the
world were up 11.3%; 13.5% from base business, offset by 0.1% from
divestitures and 2.1% from exchange. The increase was mainly due to base
business sales increases in Canada, the Middle East and Africa, Australia
and Japan.
Gross Profit
Gross profit increased $31.8 million, or 7.4%, to $463.6 million from
$431.8 million in 1999. As a percentage of sales, gross profit increased
from 51.6% in 1999 to 52.1% in 2000. The gross profit margin was benefited
by restructuring and operational improvements along with a favorable product
mix in 2000. The percentage improvement occurred despite the negative impact
of a strong U.S. dollar during 2000.
Operating Expenses
Selling, general and administrative expense increased $17.5 million, or
6.2%, in 2000. As a percentage of sales, expenses remained unchanged,
representing 33.7% of net sales in both periods. Increased research and
development spending, a sales force increase, and higher legal expenses were
offset by shared service initiatives and solid internal sales growth.
In the fourth quarter 2000, the Company recorded a $2.8 million pre-tax
gain on a settlement related to a property previously owned by the Company,
along with a $2.7 million pre-tax restructuring charge related to its French
and Latin American businesses. The primary focus of the restructuring was
the consolidation of operations in these regions in order to eliminate
duplicative functions. Both of these items are reflected in the
"Restructuring and other costs (income)" line on the income statement (see
Note 13 to the Consolidated Financial Statements).
Other Income and Expenses
The decrease in net interest expense of $5.3 million was mainly due to
debt repayment enabled by strong cash flow generation along with lower
interest rates as we converted a portion (approximately $60 million) of our
debt to lower rate Swiss Francs. Other expense was $2.8 million in 2000
compared to other income of $3.0 million in 1999. The expense in 2000
included a net increase of $2.6 million in exchange transaction losses due
to the strengthening of the U.S. dollar against the major European
currencies, while the prior year included other income of $2.4 million
related to the divestiture of medical businesses in 1994 and 1996, and $0.4
million due to a favorable settlement of a disputed lease commitment in the
United Kingdom.
D15
Earnings
Income before income taxes increased $13.8 million, or 10.0%, from $138.0
million in 1999 to $151.8 million in 2000. The effective tax rate for
operations decreased to 33.5% in 2000 from 34.9% in 1999. Net income
increased $11.1 million, or 12.4%, to $101.0 million in 2000 from $89.9
million in 1999 due to higher sales, higher gross profit as a percentage of
sales, lower net interest expense, and a lower provision for income taxes
partially offset by higher other expense in 2000.
Diluted earnings per common share increased from $1.13 in 1999 to $1.29
in 2000, or 14.2%.
FOREIGN CURRENCY
Since approximately 45% of the Company's 2001 revenues have been
generated in currencies other than the U.S. dollar, the value of the U.S.
dollar in relation to those currencies affects the results of operations of
the Company. The impact of currency fluctuations in any given period can be
favorable or unfavorable. The impact of foreign currency fluctuations of
European currencies on operating income is partially offset by sales in the
U.S. of products sourced from plants and third party suppliers located
overseas, principally in Germany and Switzerland.
CRITICAL ACCOUNTING POLICIES
In response to the SEC's Release No. 33-8040, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies," we have identified
below the accounting principles critical to our business and results of
operations. We determined these critical principles by considering
accounting policies that involve the most complex or subjective decisions or
assessments.
Goodwill and Other Long-Lived Assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". This statement requires that the amortization of goodwill be
discontinued and instead an annual impairment approach be applied. The
impairment tests will be performed upon adoption and annually thereafter (or
more often if adverse events occur) and will be based upon a fair value
approach rather than an evaluation of the undiscounted cash flows. If
impairment exists, under SFAS 142, the resulting charge is determined by
recalculating goodwill through a hypothetical purchase price allocation of
the fair value and reducing the current carrying value to the extent it
exceeds the recalculated goodwill.
Other long-lived assets such as identifiable intangible assets and fixed
assets are amortized or depreciated over their estimated useful lives. These
assets are reviewed for impairment whenever events or circumstances provide
evidence that suggest that the carrying amount of the asset may not be
recoverable with impairment being based upon an evaluation of the
identifiable undiscounted cash flows. If impaired, the resulting charge
reflects the excess of the asset's carrying cost over its fair value.
If market conditions become less favorable, future cash flows, the key
variable in assessing the impairment of these assets, may decrease and as a
result the Company may be required to recognize impairment charges.
Inventories
Inventories are stated at the lower of cost or market. The cost of
inventories is determined primarily by the first-in, first-out ("FIFO") or
average cost methods, with a small portion being determined by the last-in,
first-out ("LIFO") method. The Company establishes reserves for inventory
estimated to be obsolete or unmarketable equal to the difference between the
cost of inventory and estimated market value based upon assumptions about
future demand and market conditions. If actual market conditions are less
favorable than those anticipated, additional inventory reserves may be
required.
D15
Accounts Receivable
The Company sells dental equipment and supplies primarily through a
worldwide network of distributors, although certain product lines are sold
directly to the end user. For customers on credit terms, the Company
performs ongoing credit evaluation of those customers' financial condition
and generally does not require collateral from them. The Company
establishes allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, their
ability to make required payments may become impaired, and increases in
these allowances may be required. In addition, a negative impact on sales to
those customers may occur.
Income Taxes
Income taxes are determined in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income tax liabilities and
assets are determined based on the difference between financial statements
and tax bases of liabilities and assets using enacted tax rates in effect
for the year in which the differences are expected to reverse. SFAS 109 also
provides for the recognition of deferred tax assets if it is more likely
than not that the assets will be realized in future years. A valuation
allowance has been established for deferred tax assets for which realization
is not likely. In assessing the valuation allowance, the Company has
considered future taxable income and ongoing tax planning strategies.
Changes in these circumstances, such as a decline in future taxable income,
may result in an additional valuation allowance being required.
Litigation
The Company and its subsidiaries are from time to time parties to
lawsuits arising out of their respective operations. The Company records
liabilities when a loss is probable and can be reasonably estimated. These
estimates are based on an analysis made by internal and external legal
counsel which considers information known at the time. The Company believes
it has estimated well in the past; however, court decisions could cause
liability to be incurred in excess of estimates.
IMPACT OF INFLATION
The Company has generally offset the impact of inflation on wages and the
cost of purchased materials by reducing operating costs and increasing
selling prices to the extent permitted by market conditions.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities increased to $211.1 million in 2001
or 45.0% from 2000. Excluding one-time precious metals inventory reductions
of $29.1 million, cash flows from operating activities increased 25% to
$182.0 million in 2001. The increase of $36.4 million was due primarily to
increased earnings, reductions in both inventory days and receivable days to
94 and 47, respectively, along with an increase in short-term liabilities.
****
Graph titled "Working Capital Management"
Information disclosed:
Inventory Receivable
Year Days Days
1997 128 53
1998 132 55
1999 122 52
2000 114 52
2001 94 47
Footnote:
Inventory days for 2001 reflects full-year impact of Degussa Dental
acquired in October 2001.
****
Within investment activities for 2001 were capital expenditures of $49.3
million, which includes approximately $9.0 million for replacement of
equipment destroyed in the January 2001 fire at the Company's Maillefer
facility in Switzerland, which was funded through insurance proceeds. In
addition, the Company's acquisition activity in 2001 resulted in cash
outflows of $812.5 million (see Note 3 to the Consolidated Financial
Statements).
During 2001, the Company repurchased 37,500 shares of its common stock
for $0.9 million. The Board of Directors did not authorize any share
repurchases for 2002. The timing and amounts of any future purchases will
depend upon many factors, including market conditions and the Company's
business and financial condition.
At December 31, 2001, the Company's current ratio was 1.4 with working
capital of $125.7 million. This compares with a current ratio of 1.9 and
working capital of $157.3 million at December 31, 2000.
D15
In order to fund its significant acquisition activity, the Company
completed numerous financing initiatives during 2001. In March 2001, the
Company issued Series A and B private placement notes to Prudential Capital
Group totaling Swiss francs 166.9 million ($100 million) at an average rate
of 4.49% with six year final maturities. The notes were issued to finance
the acquisition of the AZ Assets. In May 2001, the Company replaced and
expanded its revolving credit agreements to $500 million from its previous
level of $300 million. In October 2001, the Company issued a Series C
private placement note to Prudential Capital Group for Swiss francs 80.4
million ($50 million) at a rate of 4.96% with a five year final maturity.
The series A and B notes were also amended to increase the interest rate by
30 basis points, reflecting the Company's higher leverage. In December
2001, the Company issued a private placement note through ABN AMRO for
Japanese yen 6.2 billion ($50 million) at a rate of 1.39% with a four year
final maturity. In December 2001, the Company issued 350 million Eurobonds
($315 million) with a coupon of 5.75%, maturing December 2006 at an
effective yield of 5.89%. The Company simultaneously entered into a series
of fixed to variable rate swaps to convert its fixed rate 5.75% coupon
Eurobond into variable rate debt, currently at 3.2%. Additionally, the
Company entered into a series of freestanding Euro to U.S. dollar cross
currency basis swaps to effectively convert the Eurobonds and related
interest expense to U.S. dollar. The Series C note, the ABN AMRO note and
the Eurobonds were issued to finance the Degussa Dental acquisition. Also
contributing to the overall funding of the Degussa Dental acquisition was
the reduction of approximately $71 million of precious metals inventory
through a combination of a sale/leaseback and excess quantity reductions,
the proceeds of which were used to pay down debt (see Note 9 to the
Consolidated Financial Statements).
Due to this activity, the Company's long-term debt increased $614.0
million from $109.5 million at December 31, 2000 to $723.5 million at
December 31, 2001. The resulting long-term debt to total capitalization at
December 31, 2001 was 54.3% compared to 17.4% at December 31, 2000.
Under its recently updated multi-currency revolving credit agreement, the
Company is able to borrow up to $250 million on an unsecured basis through
May 2006 ("the five-year facility") and $250 million through May 2002 ("the
364 day facility"). The 364-day facility terminates in May 2002, but may be
extended, subject to certain conditions, for additional periods of 364
days. This revolving credit agreement is unsecured and contains various
financial and other covenants.
The Company also has available a $200 million commercial paper facility
which was established in September 1999. The 364-day facility serves as a
back-up to this commercial paper facility. The total available credit under
the commercial paper facility and the 364-day facility is $250 million.
The Company also has access to $70.4 million in uncommitted short-term
financing under lines of credit from various financial institutions.
Substantially all of these lines of credit have no major restrictions and
are provided under demand notes between the Company and the lending
institutions.
In total, the Company had unused lines of credit of $357.9 million at
December 31, 2001. Access to most of these available lines of credit is
contingent upon the Company being in compliance with certain affirmative and
negative covenants relating to its operations and financial condition. The
most restrictive of these covenants pertain to asset dispositions,
maintenance of certain levels of net worth, and prescribed ratios of
indebtedness to total capital and operating income plus depreciation and
amortization to interest expense. At December 31, 2001, the Company was in
compliance with these covenants.
The following table presents the Company's scheduled contractual cash
obligations at December 31, 2001:
Less Than 1-4 5 Years
Contractual Obligations 1 Year Years Or More Total
(in thousands)
Long-term debt $214,282 $ 91,370 $417,872 $ 723,524
Operating leases 72,367 20,239 16,597 109,203
$286,649 $ 111,609 $434,469 $ 832,727
D15
The Company expects on an ongoing basis, to be able to finance cash
requirements, including capital expenditures, stock repurchases, debt
service, operating leases and potential future acquisitions, from the funds
generated from operations and amounts available under its existing credit
facilities.
PENDING ACCOUNTING CHANGES
In June 2001 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets". SFAS 141 addresses financial
accounting and reporting for business combinations. Specifically, effective
for business combinations occurring after July 1, 2001, it eliminates the
use of the pooling method of accounting and requires all business
combinations to be accounted for under the purchase method. SFAS 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. The primary change related to this new standard is that
the amortization of goodwill and intangible assets with indefinite useful
lives will be discontinued and instead an annual impairment approach will be
applied. Except for goodwill and intangible assets with indefinite lives
related to acquisitions after July 1, 2001 (in which case, amortization will
not be recognized at all), the Company discontinued amortization of goodwill
and intangible assets with indefinite lives effective January 1, 2002. The
application of these new standards will have a positive impact on earnings
per share of approximately $0.15 in 2002. Based upon preliminary
evaluations, the Company does not believe the adoption of SFAS 142 will
result in the recognition of any material impairment charges.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations". It
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and (or)
the normal operation of a long-lived asset, except for certain obligations
of lessees. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense over the asset's
useful life. SFAS 143 is effective for the Company in 2003 and the effect
of adopting it is not expected to be material.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and APB 30, " Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 requires an
impairment loss to be recognized only if the carrying amounts of long-lived
assets to be held and used are not recoverable from their expected and
undiscounted future cash flows. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The effect of adopting this standard is
not expected to be material.
EURO CURRENCY CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the
European Union (the "participating countries") established fixed conversion
rates between their legacy currencies and the newly established Euro
currency.
The legacy currencies remained legal tender in the participating
countries between January 1, 1999 and January 1, 2002 (the "transition
period"). On January 1, 2002, the European Central Bank issued
Euro-denominated bills and coins for use in cash transactions. On or before
July 1, 2002, the legacy currencies of participating countries will no
longer be legal tender for any transactions.
The Company's various operating units which are affected by the Euro
conversion adopted the Euro as the functional currency effective January 1,
2001. At this time, the Company does not expect the reasonably foreseeable
consequences of the Euro conversion to have material adverse effects on the
Company's business, operations or financial condition.
D15
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information below provides information about the Company's market
sensitive financial instruments and includes "forward-looking statements"
that involve risks and uncertainties. Actual results could differ
materially from those expressed in the forward-looking statements. The
Company's major market risk exposures are changing interest rates, movements
in foreign currency exchange rates and potential price volatility of
commodities used by the Company in its manufacturing processes. The
Company's policy is to manage interest rates through the use of floating
rate debt and interest rate swaps to adjust interest rate exposures when
appropriate, based upon market conditions. A portion of the Company's
borrowings are denominated in foreign currencies which exposes the Company
to market risk associated with exchange rate movements. The Company's
policy generally is to hedge major foreign currency exposures through
foreign exchange forward contracts. These contracts are entered into with
major financial institutions thereby minimizing the risk of credit loss. In
order to limit the unanticipated earnings fluctuations from volatility in
commodity prices, the Company selectively enters into commodity price swaps
to convert variable raw material costs to fixed costs.The Company does not
hold or issue derivative financial instruments for speculative or trading
purposes. The Company is subject to other foreign exchange market risk
exposure as a result of non-financial instrument anticipated foreign
currency cash flows which are difficult to reasonably predict, and have
therefore not been included in the table below. All items described are
non-trading and are stated in U.S. dollars.
Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The
Company believes the carrying amounts of cash and cash equivalents, accounts
receivable (net of allowance for doubtful accounts), prepaid expenses and
other current assets, accounts payable, accrued liabilities, income taxes
payable and notes payable approximate fair value due to the short-term
nature of these instruments. The Company estimates the fair value of its
long-term debt was $720.6 million versus its carrying value of $723.5
million as of December 31, 2001. The fair value was relatively similar to
the carrying value since the fixed rate Eurobonds were effectively converted
to variable rate as a result of an interest rate swap and the interest rates
on revolving debt and commercial paper are variable and reflect current
market rates. In addition, the face value of the Japanese yen private
placement note approximates fair value as its issue date was December 28,
2001. The fixed rate Swiss franc denominated notes were the only debt
instruments where the fair values were lower than the carrying values due to
higher Swiss rates at December 31, 2001 versus the rates at issuance of the
notes.
Derivative Financial Instruments
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies, interest rate swaps to convert floating
rate debt to fixed rate, fixed rate debt to floating rate, cross currency
basis swaps to convert debt denominated in one currency to another currency
and commodity swaps to fix its variable raw materials.
Foreign Exchange Risk Management The Company enters into forward
foreign exchange contracts to selectively hedge assets and liabilities
denominated in foreign currencies. Market value gains and losses are
recognized in income currently and the resulting gains or losses offset
foreign exchange gains or losses recognized on the foreign currency
assets and liabilities hedged. Determination of hedge activity is based
upon market conditions, the magnitude of the foreign currency assets and
liabilities and perceived risks. The Company's significant contracts
outstanding as of December 31, 2001 are summarized in the table that
follows. These foreign exchange contracts generally have maturities of
less than six months and counterparties to the transactions are typically
large international financial institutions.
D15
Interest Rate Risk Management The Company enters into interest rate
swaps to convert floating rate debt to fixed rate, fixed rate debt to
floating rate, and cross currency basis swaps to convert Euro debt to
U.S. dollar cash flows. In July 1998, the Company entered into interest
rate swap agreements with notional amounts totaling $80.0 million which
converts a portion of the Company's variable rate financing to fixed
rates. The average fixed rate of these agreements was 5.7% with an
original maturity of five years. The U.S. dollar swaps were terminated in
February 2001 at a cost of $1.2 million, $0.3 million remains to be
amortized over the remaining term of the related debt. In January 2000
and February 2001, the Company entered into interest rate swap agreements
with notional amounts totaling 180 million Swiss francs which converts a
portion of the Company's variable rate financing to fixed rates. The
average fixed rate of these agreements is 3.3% and fixes the rate for an
average of four years. In December 2001, the Company entered into a
series of fixed to variable rate swaps to convert its fixed rate 5.75%
coupon Eurobonds into variable debt, currently at 3.2%. Additionally, the
Company entered into a series of freestanding Euro to U.S. dollar cross
currency basis swaps to effectively convert the Eurobonds and related
interest expense to U.S. dollar. DENTSPLY Sankin, the Company's Japanese
subsidiary acquired in the Degussa Dental transaction, has a yen interest
rate swap of notional amounts totaling Japanese yen 70 million to convert
its variable rate debt into fixed rate of 2.9% which matures in December
2002. The fair value of these swap agreements is the estimated amount the
Company would receive (pay) at the reporting date, taking into account
the effective interest rates. At December 31, 2001 the estimated fair
values of the swap agreements was $(12.8) million.
Commodity Price Risk Management The Company selectively enters into
commodity price swaps to convert variable raw material costs to fixed.
In August 2000, the Company entered into a commodity price swap agreement
with notional amounts totaling 270,000 troy ounces of silver bullion
throughout calendar year 2001. The average fixed rate of this agreement
was $5.10 per troy ounce. In November 2001, the Company entered into a
commodity price swap agreement with notional amounts totaling 270,000
troy ounces of silver bullion throughout calendar year 2002. The average
fixed rate of this agreement is $4.20 per troy ounce. At December 31,
2001, the estimated fair value was $0.1 million.
As of December 31, 2001, the Company leased $59.6 million of precious
metals. Under this arrangement the Company leases fixed quantities of
precious metals which are used in producing alloys and pays a lease rate
(a percent of the value of the leased inventory) to the lessor. These
precious metal leases are accounted for as operating leases and the lease
fee is recorded as cost of goods sold. The terms of the leases are less
than one year, and the average lease rate at December 31, 2001 was 2.5%.
The Company's objective for using these operating lease arrangements to
supply its precious metals needs is to free up working capital and smooth
the effects of commodity price volatility.
D15
EXPECTED MATURITY DATES DECEMBER 31, 2001
Carrying Fair
2002 2003 2004 2005 2006 Value Value
(dollars in thousands)
Notes Payable and Current Portion
of Long-term Debt
U.S. dollar denominated $ 4,014 $ - $ - $ - $ - $ 4,014 $ 4,014
Average interest rate 3.1%
Australian dollar denominated 77 - - - - 77 77
Average interest rate 8.0%
Euro denominated 1,163 - - - - 1,163 1,163
Average interest rate 6.3%
Japanese yen denominated 2,380 - - - - 2,380 2,380
Average interest rate 2.0%
Long Term Debt:
U.S. dollar denominated 6,669 - 822 - - 7,491 7,491
Average interest rate 2.3% 4.4%
Swiss franc denominated 137,372 - - 33,175 114,309 284,856 281,907
Average interest rate 2.5% 4.5% 4.8%
Japanese yen denominated 67,899 15,843 17,009 16,796 - 117,547 117,547
Average interest rate 0.7% 1.4% 1.4% 1.4%
Australian dollar denominated 255 - - - - 255 255
Average interest rate 4.6%
Euro denominated 600 7,725 - - 303,563 311,888 311,888
Average interest rate 5.5% 6.2% 5.75%
Thai baht denominated 1,086 - - - - 1,086 1,086
Average interest rate 3.7%
Chile peso denominated 266 - - - - 266 266
Average interest rate 8.8%
Brazil real denominated 135 - - - - 135 135
Average interest rate 19.6%
Foreign Exchange Forward Contracts:
Forward purchase, 36.4 million Japanese yen 282 - - - - 282 277
Forward purchase, 0.4 million Swiss francs 216 - - - - 216 221
Forward sales, 234.5 million Japanese yen 1,911 - - - - 1,911 1,799
Forward sales, 6.9 million Euro 6,028 - - - - 6,028 6,079
Interest Rate Swaps:
Interest rate swaps - U.S. dollar,
terminated 2/2001 (152) (58) (34) (21) - (265) (265)
Average interest rates
Interest rate swaps - Japanese yen 533 - - - - (12) (12)
Average interest rates 2.9%
Interest rate swaps - Swiss francs - 29,825 38,774 - 38,774 (1,122) (1,122)
Average interest rates 3.4% 3.3% 3.3%
Interest rate swaps - Euro - - - - 309,190 (5,627) (5,627)
Average interest rates 4.8%
Basis swap - Euro-U.S. Dollar - - - - 315,000 (5,810) (5,810)
Average interest rates 3.2%
Silver Swap - U.S. dollar 1,134 - - - - 84 84
D15
Management's Financial Responsibility
The management of DENTSPLY International Inc. is responsible for the
preparation and integrity of the consolidated financial statements and all
other information contained in this Annual Report. The financial statements
were prepared in accordance with generally accepted accounting principles
and include amounts that are based on management's informed estimates and
judgments.
In fulfilling its responsibility for the integrity of financial
information, management has established a system of internal accounting
controls supported by written policies and procedures. This provides
reasonable assurance that assets are properly safeguarded and accounted for
and that transactions are executed in accordance with management's
authorization and recorded and reported properly.
The financial statements have been audited by our independent
accountants, PricewaterhouseCoopers LLP, whose unqualified report is
presented below. The independent accountants perform audits of the
financial statements in accordance with generally accepted auditing
standards, which include a review of the system of internal accounting
controls to the extent necessary to determine the nature, timing and extent
of audit procedures to be performed.
The Audit and Information Technology Committee (the "Committee") of the
Board of Directors, consisting solely of outside Directors, meets with the
independent accountants with and without management to review and discuss
the major audit findings, internal control matters and quality of financial
reporting. The independent accountants also have access to the Committee to
discuss auditing and financial reporting matters with or without management
present.
/s/John C. Miles II /s/Gerald K. Kunkle /s/William R. Jellison
John C. Miles II Gerald K. Kunkle William R. Jellison
Chairman and President and Senior Vice President and
Chief Executive Officer Chief Operating Officer Chief Financial Officer
Report of Independent Accountants
To the Board of Directors and Stockholders
of DENTSPLY International Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position
of DENTSPLY International Inc. and its subsidiaries at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. The
financial statements of the Company for the year ended December 31, 1999
were audited by other independent accountants whose report dated, January
20, 2000, expressed an unqualified opinion on those statements.
/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
January 21, 2002, except for Note 16, as to which the date is January 31,
2002
D15
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2001 2000 1999
(in thousands, except per share amounts)
Net sales (Note 4) $ 1,129,094 $ 889,796 $ 836,438
Cost of products sold 559,423 426,202 404,627
Gross profit 569,671 463,594 431,811
Selling, general and administrative expenses 386,235 299,734 282,194
Restructuring and other costs (income) (Note 13) 5,073 (56) -
Operating income 178,363 163,916 149,617
Other income and expenses:
Interest expense 21,676 10,153 15,758
Interest income (1,102) (862) (1,118)
Other (income) expense, net (27,338) 2,829 (3,042)
Income before income taxes 185,127 151,796 138,019
Provision for income taxes (Note 11) 63,631 50,780 48,156
Net income $ 121,496 $ 101,016 $ 89,863
Earnings per common share (Notes 2 and 16):
Basic $ 1.56 $ 1.30 $ 1.14
Diluted 1.54 1.29 1.13
Cash dividends declared per common share (Note 16) $ 0.18333 $ 0.17083 $ 0.15417
Weighted average common shares outstanding (Notes 2 and 16):
Basic 77,671 77,785 79,131
Diluted 78,975 78,560 79,367
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
D15
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2001 2000
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 33,710 $ 15,433
Accounts and notes receivable-trade, net (Note 1) 191,534 133,643
Inventories, net (Notes 1 and 5) 197,454 133,304
Prepaid expenses and other current assets 61,545 43,074
Total Current Assets 484,243 325,454
Property, plant and equipment, net (Notes 1 and 6) 240,890 181,341
Identifiable intangible assets, net (Notes 1 and 7) 248,890 80,730
Costs in excess of fair value of net
assets acquired, net (Note 1) 763,270 264,023
Other noncurrent assets 60,858 15,067
Total Assets $ 1,798,151 $ 866,615
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 69,904 $ 45,764
Accrued liabilities (Note 8) 194,357 88,058
Income taxes payable 86,622 33,522
Notes payable and current portion
of long-term debt (Note 9) 7,634 794
Total Current Liabilities 358,517 168,138
Long-term debt (Note 9) 723,524 109,500
Deferred income taxes 32,526 16,820
Other noncurrent liabilities 73,628 47,226
Total Liabilities 1,188,195 341,684
Minority interests in consolidated subsidiaries 437 4,561
Commitments and contingencies (Note 15)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued - -
Common stock, $.01 par value; 100 million shares authorized;
81.4 million shares issued at December 31, 2001 and December 31, 2000 814 543
Capital in excess of par value 152,916 151,899
Retained earnings 597,414 490,167
Accumulated other comprehensive loss (77,388) (49,296)
Unearned ESOP compensation (3,419) (4,938)
Treasury stock, at cost, 3.5 million shares at December 31, 2001
and 4.0 million shares at December 31, 2000 (60,818) (68,005)
Total Stockholders' Equity 609,519 520,370
Total Liabilities and Stockholders' Equity $ 1,798,151 $ 866,615
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
D15
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Capital in Other Unearned Total
Common Excess of Retained Comprehensive ESOP Treasury Stockholders'
Stock Par Value Earnings Loss Compensation Stock Equity
(in thousands)
Balance at December 31, 1998 $ 543 $ 152,871 $ 324,745 $ (14,730) $ (7,977) $ (41,651) $ 413,801
Comprehensive Income:
Net income - - 89,863 - - - 89,863
Other comprehensive loss:
Foreign currency translation adjustment,
net of $1,797 tax - - - (28,479) - - (28,479)
Comprehensive Income 61,384
Exercise of stock options and warrants - (1,823) - - - 5,998 4,175
Tax benefit from stock options
and warrants exercised - 730 - - - - 730
Reissuance of treasury stock - (269) - - - 3,622 3,353
Repurchase of common stock, at cost - - - - - (3,890) (3,890)
Cash dividends ($0.15417 per share) - - (12,200) - - - (12,200)
Decrease in unearned ESOP compensation - - - - 1,519 - 1,519
Balance at December 31, 1999 543 151,509 402,408 (43,209) (6,458) (35,921) 468,872
Comprehensive Income:
Net income - - 101,016 - - - 101,016
Other comprehensive loss:
Foreign currency translation adjustment,
net of $688 tax - - - (5,416) - - (5,416)
Minimum pension liability adjustment - - - (671) - - (671)
Comprehensive Income 94,929
Exercise of stock options - (583) - - - 8,008 7,425
Tax benefit from stock options exercised - 973 - - - - 973
Repurchase of common stock, at cost - - - - - (40,092) (40,092)
Cash dividends ($0.17083 per share) - - (13,257) - - - (13,257)
Decrease in unearned ESOP compensation - - - - 1,520 - 1,520
Balance at December 31, 2000 543 151,899 490,167 (49,296) (4,938) (68,005) 520,370
Comprehensive Income:
Net income - - 121,496 - - - 121,496
Other comprehensive loss:
Foreign currency translation adjustment,
net of $6,264 tax - - - (26,566) - - (26,566)
Cumulative effect of change in accounting
principle for derivative and hedging
activities (SFAS 133) - - - (503) - - (503)
Net loss on derivative financial
instruments - - - (810) - - (810)
Minimum pension liability adjustment - - - (213) - - (213)
Comprehensive Income 93,404
Exercise of stock options - (45) - - - 8,062 8,017
Tax benefit from stock options exercised - 1,333 - - - - 1,333
Repurchase of common stock, at cost - - - - - (875) (875)
Cash dividends ($0.18333 per share) - - (14,249) - - - (14,249)
Decrease in unearned ESOP compensation - - - - 1,519 - 1,519
Three-for-two common stock split 271 (271) - - - - -
Balance at December 31, 2001 $ 814 $ 152,916 $ 597,414 $ (77,388) $ (3,419) $ (60,818) $ 609,519
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
D15
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------------
2001 2000 1999
(in thousands)
Cash flows from operating activities:
Net income $ 121,496 $ 101,016 $ 89,863
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 25,219 22,024 19,933
Amortization 29,115 19,335 19,691
Deferred income taxes 6,451 4,249 5,885
Restructuring and other costs (income) 5,073 (56) -
Other non-cash transactions (3,849) 815 319
Gain on sale of business (23,121) - -
Loss on disposal of property, plant and equipment 54 482 304
Non-cash ESOP compensation 1,519 1,520 1,519
Changes in operating assets and liabilities, net of
acquisitions and divestitures:
Accounts and notes receivable-trade, net (3,709) (9,218) 2,384
Inventories, net (2001 includes one-time precious
metals inventory reduction of $29,087) 14,763 (1,216) 4,394
Prepaid expenses and other current assets 47 (1,526) (2,223)
Accounts payable 9,180 1,492 1,040
Accrued liabilities 28,704 7,018 (14,343)
Income taxes 4,295 (834) 11
Other, net (4,169) 521 (2,900)
Net cash provided by operating activities 211,068 145,622 125,877
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (812,523) (14,995) (673)
Expenditures for identifiable intangible assets (4,265) (1,423) (3,256)
Proceeds from bulk sale of precious metals inventory 41,814 - -
Insurance proceeds received for fire-destroyed equipment 8,980 - -
Proceeds from sale of property, plant and equipment 645 215 1,825
Capital expenditures (49,337) (28,425) (33,386)
Net cash used in investing activities (814,686) (44,628) (35,490)
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 8,017 7,425 4,175
Cash paid for treasury stock (875) (40,092) (3,890)
Cash dividends paid (14,228) (13,004) (11,859)
Proceeds from the termination of a pension plan 8,486 - -
Proceeds from long-term borrowings, net of deferred financing costs 1,435,175 114,341 99,407
Payments on long-term borrowings (819,186) (149,390) (177,946)
Increase (decrease) in short-term borrowings 7,511 (18,389) 4,909
Net cash provided by (used in) financing activities 624,900 (99,109) (85,204)
Effect of exchange rate changes on cash and cash equivalents (3,005) 2,130 (4,238)
Net increase in cash and cash equivalents 18,277 4,015 945
Cash and cash equivalents at beginning of period 15,433 11,418 10,473
Cash and cash equivalents at end of period $ 33,710 $ 15,433 $ 11,418
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
D15
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
(in thousands)
Supplemental disclosures of cash flow information:
Interest paid $ 15,967 $ 7,434 $ 13,863
Income taxes paid 47,215 39,064 34,951
Supplemental disclosures of non-cash transactions:
Receipt of convertible preferred stock in connection
with the sale of a business 32,000 - -
Issuance of treasury stock in connection with the
acquisition of certain assets - - 3,353
The company assumed liabilities in conjunction
with the following acquisitions:
Fair Value Cash Paid for
of Assets Assets or Liabilities
Date Acquired Acquired Capital Stock Assumed
(in thousands)
Degussa Dental Group October 2001 $ 624,270 $ 502,947 $ 121,323
CeraMed Dental (remaining 49%) July 2001 20,000 20,000 -
Tulsa Dental Products (earn-out payment) May 2001 84,627 84,627 -
Dental injectible anesthetic assets of
AstraZeneca March 2001 104,405 98,725 5,680
Friadent GmbH January 2001 135,632 105,025 30,607
PreVest, Inc. October 2000 2,000 2,000 -
San Diego Swiss Machining, Inc. September 2000 7,729 7,702 27
ESP, LLC August 2000 2,452 2,452 -
Darway, Inc. July 2000 3,485 3,469 16
Midwest Orthodontic Manufacturing, LLC July 2000 999 604 395
The accompanying notes are an integral part of these financial statements.
D15
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
DENTSPLY designs, develops, manufactures and markets a broad range of
products for the dental market. The Company believes that it is the world's
leading manufacturer and distributor of dental prosthetics, precious metal
dental alloys, dental ceramics, endodontic instruments and materials,
prophylaxis paste, dental sealants, ultrasonic scalers, dental injectible
anesthetics and crown and bridge materials; the leading United States
manufacturer and distributor of dental x-ray equipment, dental handpieces,
intraoral cameras, dental x-ray film holders, film mounts and bone
substitute/grafting materials; and a leading worldwide manufacturer or
distributor of impression materials, orthodontic appliances, dental cutting
instruments and dental implants. The Company distributes its dental products
in over 120 countries under some of the most well established brand names in
the industry. DENTSPLY is committed to the development of innovative, high
quality, cost-effective new products for the dental market
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. Intercompany accounts and transactions
are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and
assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Accounts and Notes Receivable-Trade
The Company sells dental equipment and supplies primarily through a
worldwide network of distributors, although certain product lines are sold
directly to the end user. For customers on credit terms, the Company
performs ongoing credit evaluation of those customers' financial condition
and generally does not require collateral from them. The Company establishes
allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. Accounts and notes
receivable-trade are stated net of these allowances which were $12.6 million
and $6.4 million at December 31, 2001 and 2000, respectively. Certain of the
Company's larger distributors are offered cash rebates based on targeted
sales increases. The Company records an accrual based on its projected cash
rebate obligations.
Inventories
Inventories are stated at the lower of cost or market. At December 31,
2001 and 2000, the cost of $23.6 million, or 12%, and $14.0 million, or
10%, respectively, of inventories was determined by the last-in, first-out
("LIFO") method. The cost of other inventories was determined by the
first-in, first-out ("FIFO") or average cost method. The Company establishes
reserves for inventory estimated to be obsolete or unmarketable equal to the
difference between the cost of inventory and estimated market value based
upon assumptions about future demand and market conditions.
If the FIFO method had been used to determine the cost of LIFO
inventories, the amounts at which net inventories are stated would be higher
than reported at December 31, 2001 by $2.3 million and lower than reported
at December 31, 2000 by $0.2 million.
D15
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Except for leasehold improvements, depreciation for
financial reporting purposes is computed by the straight-line method over
the following estimated useful lives: buildings - generally 40 years and
machinery and equipment - 4 to 15 years. The cost of leasehold improvements
is amortized over the shorter of the estimated useful life or the term of
the lease. Maintenance and repairs are charged to operations; replacements
and major improvements are capitalized.
Identifiable Intangible Assets
Identifiable intangible assets, which primarily consist of patents,
trademarks and licensing agreements, are amortized on a straight-line basis
over their estimated useful lives, ranging from 5 to 40 years. Long-lived
assets are reviewed for impairment whenever events or circumstances provide
evidence that suggest that the carrying amount of the asset may not be
recoverable Impairment is based upon an evaluation of the identifiable
undiscounted cash flows. If impaired, the resulting charge reflects the
excess of the asset's carrying cost over its fair value (see Note 13).
Costs in Excess of Fair Value of Net Assets Acquired
The excess of costs of acquired companies and product lines over the fair
value of net assets acquired ("goodwill") is amortized on a straight-line
basis over 25 to 40 years. Costs in excess of the fair value of net assets
acquired are stated net of accumulated amortization of $80.1 million and
$62.0 million at December 31, 2001 and 2000, respectively. Costs in excess
of fair value of net assets acquired are evaluated periodically to determine
whether later events or circumstances warrant revised estimates of useful
lives. The recovery of goodwill is evaluated by an analysis of operating
results and consideration of other significant events or changes in the
business environment. If an operating unit has current operating losses and
based upon projections there is a likelihood that such operating losses will
continue, the Company will evaluate whether impairment exists on the basis
of undiscounted expected future cash flows from operations. If impairment
exists, the carrying amount of goodwill is reduced by the estimated
shortfall of cash flows on a discounted basis.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". This statement requires that the amortization of goodwill be
discontinued and instead an annual impairment approach be applied. The
impairment tests will be performed upon adoption and annually thereafter (or
more often if adverse events occur) and will be based upon a fair value
approach rather than an evaluation of the undiscounted cash flows. If
impairment exists, under SFAS 142, the resulting charge is determined by
recalculating goodwill through a hypothetical purchase price allocation of
the fair value and reducing the current carrying value to the extent it
exceeds the recalculated goodwill.
Derivative Financial Instruments
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies, interest rate swaps to convert floating
rate debt to fixed rate or fixed rate debt to floating rate, cross currency
basis swaps to convert debt denominated in one currency to another currency
and commodity swaps to fix its variable raw materials.
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities"
on January 1, 2001. This standard, as amended by SFAS 138, requires that all
derivative instruments be recorded on the balance sheet at their fair value
and that changes in fair value be recorded each period in current earnings
or comprehensive income. See Note 14 for additional information.
Litigation
The Company and its subsidiaries are from time to time parties to
lawsuits arising out of their respective operations. The Company records
liabilities when a loss is probable and can be reasonably estimated. These
estimates are based on an analysis made by internal and external legal
counsel which considers information known at the time.
D15
Foreign Currency Translation
The functional currency for foreign operations, except for those in
highly inflationary economies, has been determined to be the local currency.
Assets and liabilities of foreign subsidiaries are translated at exchange
rates on the balance sheet date; revenue and expenses are translated at the
average year-to-date rates of exchange. The effects of these translation
adjustments are reported in a separate component of stockholders' equity.
Exchange gains and losses arising from transactions denominated in a
currency other than the functional currency of the entity involved and
translation adjustments in countries with highly inflationary economies are
included in income. Exchange gains of $1.2 million in 2001 and exchange
losses of $2.7 million in 2000 and $0.1 million in 1999 are included in
other (income) expense, net.
Revenue Recognition
Revenue, net of related discounts and allowances, is recognized when
product is shipped and risk of loss has transferred to the customer.
Research and Development Costs
Research and development costs are charged to expense as incurred and are
included in selling, general and administrative expenses. Research and
development costs amounted to approximately $28.3 million, $20.4 million and
$18.5 million for 2001, 2000 and 1999, respectively.
Income Taxes
Income taxes are determined in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income tax liabilities and
assets are determined based on the difference between financial statements
and tax bases of liabilities and assets using enacted tax rates in effect
for the year in which the differences are expected to reverse. SFAS 109 also
provides for the recognition of deferred tax assets if it is more likely
than not that the assets will be realized in future years. A valuation
allowance has been established for deferred tax assets for which realization
is not likely.
Earnings Per Share
Basic earnings per share is calculated by dividing net earnings by the
average number of shares outstanding for the period. Diluted earnings per
share is calculated by dividing net earnings by the average number of shares
outstanding for the period, adjusted for the effect of an assumed exercise
of all dilutive options outstanding at the end of the period.
Stock Compensation
The Company applies the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for stock compensation plans. Under this method, no compensation
expense is recognized for fixed stock option plans, provided that the
exercise price is greater than or equal to the price of the stock at the
date of grant.
Reclassifications
Certain reclassifications have been made to prior years' data in order to
conform to the current year presentation.
D15
Pending Accounting Changes
In June 2001 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets". SFAS 141 addresses financial
accounting and reporting for business combinations. Specifically, effective
for business combinations occurring after July 1, 2001, it eliminates the
use of the pooling method of accounting and requires all business
combinations to be accounted for under the purchase method. SFAS 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. The primary change related to this new standard is that
the amortization of goodwill and intangible assets with indefinite useful
lives will be discontinued and instead an annual impairment approach will be
applied. Except for goodwill and intangible assets with indefinite lives
related to acquisitions after July 1, 2001 (in which case, amortization will
not be recognized at all), the Company discontinued amortization of goodwill
and intangible assets with indefinite lives effective January 1, 2002. The
application of these new standards will have a positive impact on earnings
per share of approximately $0.15 in 2002. Based upon preliminary
evaluations, the Company does not believe the adoption of SFAS 142 will
result in the recognition of any material impairment charges.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations". It
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and (or)
the normal operation of a long-lived asset, except for certain obligations
of lessees. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense over the asset's
useful life. SFAS 143 is effective for the Company in 2003 and the effect
of adopting it is not expected to be material.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and APB 30, " Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 requires an
impairment loss to be recognized only if the carrying amounts of long-lived
assets to be held and used are not recoverable from their expected and
undiscounted future cash flows. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The effect of adopting this standard is
not expected to be material.
D15
NOTE 2 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
Income Shares Per Share
(Numerator) (Denominator) Amount
(in thousands, except per share amounts)
Year Ended December 31, 2001
Basic EPS $121,496 77,671 $ 1.56
Incremental shares from assumed exercise
of dilutive options - 1,304
Diluted EPS $121,496 78,975 $ 1.54
Year Ended December 31, 2000
Basic EPS $101,016 77,785 $ 1.30
Incremental shares from assumed exercise
of dilutive options - 775
Diluted EPS $101,016 78,560 $ 1.29
Year Ended December 31, 1999
Basic EPS $ 89,863 79,131 $ 1.14
Incremental shares from assumed exercise
of dilutive options and warrants - 236
Diluted EPS $ 89,863 79,367 $ 1.13
Options to purchase 1.4 million and 1.0 million shares of common stock
that were outstanding during the years ended 2000 and 1999, respectively,
were not included in the computation of diluted earnings per share since the
options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
D15
NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES
Each acquisition completed in 2001 and 2000 was accounted for under the
purchase method of accounting; accordingly, the results of their operations
are included in the accompanying financial statements since the respective
dates of the acquisitions. The purchase prices were allocated on the basis
of estimates of the fair values of assets acquired and liabilities assumed.
The preliminary allocation of purchase prices, subject primarily to the
completion of fixed asset and intangible asset valuations, is outlined below.
In October 2001, the Company completed the acquisition of Degussa Dental
Group ("Degussa Dental"), a unit of Degussa AG, pursuant to the May 2001
Sale and Purchase Agreement. The preliminary purchase price for Degussa
Dental was 548 million Euros or $503 million, which was paid at closing. The
preliminary purchase price is subject to increase or decrease, based on
certain working capital levels of Degussa Dental as of October 1, 2001. The
Company expects that the final purchase price will be approximately 576
million Euros or $530 million, excluding restructuring and other costs
associated with the acquisition of approximately $8.0 million. In accordance
with Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets", the goodwill and indefinite lived intangible
assets associated with this acquisition were not amortized. Degussa Dental
manufactures and sells dental products, including precious metal alloys,
ceramics and dental laboratory equipment, and chairside products.
Headquartered in Hanau-Wolfgang, Germany since 1992, Degussa Dental Group
has production facilities throughout the world.
In August 1996, the Company purchased a 51% interest in CeraMed Dental
("CeraMed") for $5 million with the right to acquire the remaining 49%
interest. In March 2001, the Company entered into an agreement for an early
buy out of the remaining 49% interest in CeraMed at a cost of $20 million,
which was made in July 2001, with a potential contingent consideration
("earn-out") provision capped at $5 million. The earn-out is based on future
sales of CeraMed products during the August 1, 2001 to July 31, 2002 time
frame with any additional pay out due on September 30, 2002. In accordance
with Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets", the goodwill associated with the acquisition of
the 49% interest was not amortized.
Certain assets of Tulsa Dental Products LLC were purchased in January
1996 for $75.1 million, plus $5.0 million paid in May 1999 related to
earn-out provisions in the purchase agreement based on performance of the
acquired business. The purchase agreement provided for an additional
earn-out payment based upon the operating performance of the Tulsa Dental
business for one of the three two-year periods ending December 31, 2000,
December 31, 2001 or December 31, 2002, as selected by the seller. The
seller chose the two-year period ended December 31, 2000 and the final
earn-out payment of $84.6 million was made in May 2001 resulting in an
increase in goodwill.
In January 2001, the Company agreed to acquire the dental injectible
anesthetic assets of AstraZeneca ("AZ Assets"), including permanent,
exclusive and royalty-free licensing rights to the dental products and
tradenames, for $136.5 million and royalties on future sales of a new
anesthetic product for scaling and root planing, Oraqix(TM) ("Oraqix"), that
was in Stage III clinical trials at the time of the agreement. The $136.5
million purchase price was composed of the following: an initial $96.5
million payment which was made at closing in March 2001; a $20 million
contingency payment associated with the first year sales of injectible
dental anesthetic which has been accrued in 2001 and will be paid in the
first quarter of 2002; a $10 million payment upon submission of an Oraqix
New Drug Application ("NDA") in the U.S., and Marketing Authorization
Application ("MAA") in Europe for the Oraqix product under development; and
a $10 million payment upon approval of the NDA and MAA. Because the Oraqix
product has not received regulatory approvals for its use, payments made
with respect to this product prior to approval are considered to be research
and development costs and are expensed as incurred. After an analysis of the
available clinical data, the Company concluded that the Oraqix product does
not provide pain relief equivalent to that provided by injectible
anesthetic. As a result, the Company renegotiated the contract to require a
$2.0 million payment upon submission of the NDA and MAA, an $8.0 million
payment and a $10.0 million prepaid royalty upon approval of both
applications. The $2.0 million payment was accrued and expensed during the
fourth quarter of 2001 (see Note 13).
In January 2001, the Company acquired the outstanding shares of
Friadent GmbH ("Friadent") for 220 million German marks or $106 million
($105 million, net of cash acquired). Headquartered in Mannheim, Germany,
Friadent is a major global dental implant manufacturer and marketer with
subsidiaries in Germany, France, Denmark, Sweden, the United States,
Switzerland, Brazil, and Belgium.
D15
The acquisitions above were accounted for under the purchase method of
accounting; accordingly, the results of their operations are included in the
accompanying financial statements since the respective dates of the
acquisitions. The purchase prices plus direct acquisition costs have been
allocated on the basis of estimated fair values at the dates of acquisition,
pending final determination of the fair value of certain acquired assets and
liabilities. The acquisition costs for Tulsa and Ceramed were allocated to
goodwill. The preliminary purchase price allocations for Degussa Dental,
Friadent and the AZ Assets are as follows:
Degussa
Dental Friadent AZ Assets
(in thousands)
Current assets $ 173,537 $ 16,244 $ -
Property, plant and equipment 45,979 4,184 1,082
Identifiable intangible assets and costs in excess of
fair value of net assets acquired 396,099 114,085 123,945 *
Other long-term assets 8,655 1,119 -
Current liabilities (86,987) (27,553) (5,680)
Other long-term liabilities (34,336) (3,054) -
$ 502,947 $ 105,025 $ 119,347
<FN>
* Includes accrual made for the earn-out payment of $20.6 million.
</FN>
Unaudited pro forma results of operations assume the acquisitions made
during 2001 had occurred on January 1, 2000 and are presented below. No
effect has been given in this pro forma information for any of the
acquisitions made during 2000 as their effect would not be significant.
Though useful for comparison, these pro forma results are not intended to
reflect actual earnings had the acquisitions occurred on the dates indicated
and are not a projection of future results or trends.
Pro Forma
Results
As Reported (Unaudited)
(in thousands, except per share amounts)
Year ended December 31, 2001
Net sales $ 1,129,094 $ 1,449,141
Net income 121,496 121,137
Earnings per common share
Basic $ 1.56 $ 1.56
Diluted 1.54 1.54
Year ended December 31, 2000
Net sales $ 889,796 $ 1,455,289
Net income 101,016 86,357
Earnings per common share
Basic $ 1.30 $ 1.11
Diluted 1.29 1.10
D15
In October 2000, the Company acquired certain assets and the business of
PVI, Inc., doing business as PreVest, Inc. ("PreVest"), for $2.0 million.
The business is a multi-industry manufacturer of investment materials
produced for the precision casting of metal alloys.
In September 2000, the Company purchased the assets of the ultrasonic
dental tip business of San Diego Swiss Machining, Inc. ("SDSM") for $7.7
million. Headquartered in Chula Vista, California, the dental tip business
of SDSM produces and distributes a proprietary line of ultrasonic instrument
tips used to shape and clean root canals during endodontic therapy.
In August 2000, the Company acquired a 51% interest in ESP, LLC ("ESP"),
located in New Orleans, Louisiana, for $2.5 million. ESP manufactures and
markets the Chimal product lines of lotions and creams to the worldwide
dental, medical, automotive, cosmetology, industrial and food markets. The
Chimal skin shield contains ingredients that bond to the skin and seal out
irritants such as chemicals and solvents while sealing in natural
moisturizers.
In July 2000, the Company purchased the assets of Darway Inc. ("Darway"),
of San Mateo, California, for $3.5 million. Darway manufactures the
patented Palodent Contoured Sectional Matrix System, which is used by
dentists to provide a means to contain filling material when the restoration
of a tooth requires removing tooth structure that faces an adjacent tooth,
the tongue or the cheek.
In July 2000, the Company purchased certain assets of Midwest Orthodontic
Manufacturing, LLC ("MOM"), based in Columbus, Indiana, for $0.6 million.
MOM produces a broad array of ancillary materials used in orthodontia from
its Indiana facility, including elastics, retainer cases and springs.
No acquisitions were completed in 1999.
In January 2002, the Company acquired the partial denture business of
Austenal Inc., in a cash transaction valued at approximately $23.8 million,
including debt assumed. Headquartered in Chicago, Illinois, Austenal
manufactures dental laboratory products and is the world leader in the
manufacture and sale of systems used by dental laboratories to fabricate
partial dentures.
In March 2001, the Company sold InfoSoft, LLC to PracticeWorks, Inc.
InfoSoft, LLC, a wholly owned subsidiary of the Company, that developed and
sold software and related products for dental practice management.
PracticeWorks is the dental software management and dental claims processing
company which was spun-off by Infocure Corporation. In the transaction, the
Company received 6.5% convertible preferred stock in PracticeWorks, with a
fair value of $32 million. This investment plus accrued dividends to date
are included in "Other noncurrent assets". These preferred shares are
convertible into approximately 1.0 million shares of PracticeWorks common
stock. If not previously converted, the preferred shares are redeemable for
cash after 5 years. This sale resulted in a $23.1 million pretax gain which
is included in "Other (income) expense, net". The Company will measure
recoverability on this investment on a periodic basis.
D15
NOTE 4 - SEGMENT AND GEOGRAPHIC INFORMATION
The Company follows Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for reporting information
about reporting segments in financial statements. The Company has four
operating segments that report to the chief operating decision maker. Each
of the operating segments cover a wide range of product and geographic
responsibility. These operating segments are aggregated into one reportable
segment for purposes of SFAS 131. Substantially all of the Company's
operating segments do business as a designer, manufacturer and distributor
of dental products. Dental products represented approximately 97%, 95% and
94% of sales in 2001, 2000 and 1999, respectively.
The Company's operations are structured to achieve consolidated
objectives. As a result, significant interdependencies exist among the
Company's operations in different geographic areas. Intercompany sales of
manufacturing materials between areas are at prices which, in general,
provide a reasonable profit after coverage of all manufacturing costs.
Intercompany sales of finished goods are at prices intended to provide a
reasonable profit for purchasing locations after coverage of marketing and
general and administrative costs.
The following table sets forth information about the Company's operations
in different geographic areas for 2001, 2000 and 1999. Net sales reported
below represents revenues from external customers of operations resident in
the country or territory identified. Assets by geographic area are those
used in the operations in the geographic area.
United Other
States Germany Foreign Consolidated
(in thousands)
2001
Net sales $ 627,358 $156,595 $ 345,141 $ 1,129,094
Long-lived assets 138,380 66,756 91,584 296,720
2000
Net sales $ 560,692 $57,989 $ 271,115 $ 889,796
Long-lived assets 87,314 42,049 66,519 195,882
1999
Net sales $ 509,004 $65,688 $ 261,746 $ 836,438
Long-lived assets 82,768 43,932 66,454 193,154
The following table presents sales information by product for the Company:
Year Ended December 31,
2001 2000 1999
(in thousands)
Consumables and small equipment $ 1,008,133 $765,751 $ 716,519
Heavy equipment 81,913 76,374 71,867
Other 39,048 47,671 48,052
$ 1,129,094 $889,796 $ 836,438
Third party export sales from the United States are less than ten percent
of consolidated net sales. One customer, a distributor, accounted for 11%,
14% and 13% of consolidated net sales in 2001, 2000 and 1999, respectively.
Another customer, a distributor, accounted for 9% of consolidated net sales
in 2001 and 10% in 2000 and 1999.
D15
NOTE 5 - INVENTORIES
Inventories consist of the following:
December 31,
2001 2000
(in thousands)
Finished goods $119,030 $ 84,436
Work-in-process 35,539 22,102
Raw materials and supplies 42,885 26,766
$197,454 $133,304
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
2001 2000
(in thousands)
Assets, at cost:
Land $19,752 $14,525
Buildings and improvements 128,053 87,381
Machinery and equipment 262,265 170,141
Construction in progress 20,566 13,211
430,636 285,258
Less: Accumulated depreciation 189,746 103,917
$240,890 $181,341
D15
NOTE 7 - IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets consist of the following:
December 31,
2001 2000
(in thousands)
Patents $ 64,514 $ 47,605
Trademarks 64,710 31,737
Licensing agreements 150,477 29,733
Other 44,961 34,922
324,662 143,997
Less: Accumulated amortization 75,772 63,267
$248,890 $ 80,730
NOTE 8 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
2001 2000
(in thousands)
Payroll, commissions, bonuses and
other cash compensation $39,139 $ 20,129
Employee benefits 15,458 7,893
General insurance 13,886 12,052
Sales and marketing programs 21,533 7,428
Restructuring and other costs 24,497 6,897
Earn-out related to the AZ Asset purchase 20,622 -
Other 59,222 33,659
$ 194,357 $ 88,058
D15
NOTE 9 - FINANCING ARRANGEMENTS
Short-Term Borrowings
Short-term bank borrowings amounted to $3.5 million and $0.4 million at
December 31, 2001 and 2000, respectively. The weighted average interest
rates of these borrowings were 3.3% and 8.61% at December 31, 2001 and 2000,
respectively. Unused lines of credit for short-term financing at December
31, 2001 and 2000 were $66.9 million and $54.7 million, respectively.
Substantially all short-term borrowings were classified as long-term as of
December 31, 2001 and 2000, reflecting the Company's intent and ability to
refinance these obligations beyond one year and are included in the table
below. Substantially all unused lines of credit have no major restrictions
and are provided under demand notes between the Company and the lending
institution. Interest is charged on borrowings under these lines of credit
at various rates, generally below prime or equivalent money rates.
Long-Term Borrowings
December 31,
2001 2000
(in thousands)
$250 million multi-currency revolving credit agreement expiring May 2006,
Japanese yen 1.3 billion at 0.63%, Swiss francs 230.0 million at 2.52% $ 147,028 $ -
$250 million multi-currency revolving credit agreement expiring May 2002,
Japanese yen 7.3 billion at 0.65% 55,338 -
Prudential Private Placement Notes, Swiss franc denominated, 84.4 million at 4.56% and
82.5 million at 4.42% maturing March 2007, 80.4 million at 4.96% maturing October 2006 147,489 -
ABN Private Placement Note, Japanese yen 6.2 billion at 1.39% maturing December 2005 47,527 -
Euro 350.0 million Eurobonds at 5.75% maturing December 2006 303,563 -
$200 million commercial paper facility rated A/2-P/2 U.S. dollar borrowings at 2.30% 6,650 -
$175 million multi-currency revolving credit agreement expiring October 2002 - 92,105
$20 million bank multi-currency revolving credit agreement expiring October 2001 - 8,031
Other borrowings, various currencies and rates 20,061 9,740
727,656 109,876
Less: Current portion (included in notes payable and
current portion of long-term debt) 4,132 376
$ 723,524 $ 109,500
The table below reflects the contractual maturity dates of the various
borrowings at December 31, 2001. The borrowings contractually due in 2002 have
been classified as long-term due to the Company's intent and ability to renew or
refinance these obligations beyond 2002.
2002 $ 214,282
2003 23,568
2004 17,831
2005 49,971
2006 and thereafter 417,872
$ 723,524
D15
In July 1998, the Company entered into interest rate swap agreements with
notional amounts totaling $80.0 million which converted a portion of the
Company's variable rate financing to fixed rates. The average fixed rate of
these agreements was 5.7% and fixed the rate for an average of five years.
The U.S. dollar swaps were terminated in February 2001 at a cost of $1.2
million, which is being amortized over the remaining term of the related
debt. In January 2000 and February 2001, the Company entered into interest
rate swap agreements with notional amounts totaling Swiss franc 180 million
which converts a portion of the Company's variable rate financing to fixed
rates. The average fixed rate of these agreements is 3.3% and fixes the
rate for an average of four years. In December 2001, the Company entered
into a series of fixed to variable rate swaps to convert its fixed rate
5.75% coupon Eurobonds into variable debt, currently at 3.2%. Additionally,
the Company entered into a series of freestanding Euro to U.S. dollar cross
currency basis swaps to effectively convert the Eurobonds and related
interest expense to U.S. dollar. DENTSPLY Sankin, the Company's Japanese
subsidiary acquired in the Degussa transaction, has an interest rate swap
with a notional amount of Japanese yen 70 million to convert its variable
rate debt into fixed rate of 2.9% which matures in December 2002.
In May 2001, the Company replaced and increased its multiple revolving
credit agreements with a single agreement providing a total available credit
of $500 million with participation from thirteen banks. The revolving credit
agreements contain certain affirmative and negative covenants as to the
operations and financial condition of the Company, the most restrictive of
which pertain to asset dispositions, maintenance of certain levels of net
worth, and prescribed ratios of indebtedness to total capital and operating
income plus depreciation and amortization to interest expense. The Company
pays a facility fee of 0.125 % annually on the amount of the commitment
under the $250 million five year facility and 0.10 % annually under the $250
million 364-day facility. Interest rates on amounts borrowed under the
facility will depend on the maturity of the borrowing, the currency
borrowed, the interest rate option selected, and the Company's long-term
credit rating from Moody's and Standard and Poors.
The $250 million 364-day facility A may be extended, subject to certain
conditions, for additional periods of 364 days, which the Company intends to
extend annually. The entire $500 million revolving credit agreement has a
usage fee of 0.125 % annually if utilization exceeds 50% of the total
available facility.
The $200 million commercial paper facility has utilization, dealer, and
annual appraisal fees which on average cost 0.11 % annually. The $250
million 364-day revolving credit facility A acts as back-up credit to this
commercial paper facility. The total available credit under the commercial
paper facility and the 364-day facility is $250 million. The short-term
commercial paper borrowings were classified as long-term, as of December 31,
2001, reflecting the Company's intent and ability to renew these obligations
beyond 2002.
In March 2001, the Company issued Series A and B private placement notes
to Prudential Capital Group totaling Swiss francs 166.9 million ($100
million) at an average rate of 4.49% with six year final maturities. The
notes were issued to finance the acquisition of the AZ Assets. In October
2001 the Company issued a Series C private placement note to Prudential
Capital Group for Swiss francs 80.4 million ($50 million) at rate of 4.96%
with a five year final maturity. The series A and B notes were also amended
to increase the interest rate by 30 basis points, reflecting the Company's
higher leverage. In December 2001, the Company issued a private placement
note through ABN AMRO for Japanese yen 6.2 billion ($50 million) at rate of
1.39% with a four year final maturity. The Series C note and the ABN note
were issued to partially finance the Degussa Dental acquisition.
The Company issued 350 million Eurobonds with a coupon of 5.75%, maturing
December 2006 at an effective yield of 5.89%. These bonds were issued to
partially finance the Degussa Dental acquisition.
D15
NOTE 10 - STOCKHOLDERS' EQUITY
The Board of Directors authorized the repurchase of 1.5 million, 6.0
million and 0.8 million shares of common stock for the years ended December
31, 2001, 2000 and 1999, respectively, on the open market or in negotiated
transactions. Each of these authorizations to repurchase shares expired on
December 31 of the respective years. The Company repurchased 37,500 shares
for $0.9 million, 2.2 million shares for $40.1 million and 0.3 million
shares for $3.9 million in 2001, 2000 and 1999, respectively.
A former Chairman of the Board holds options to purchase 45,000 shares of
common stock at an exercise price of $14.83, which was equal to the market
price on the date of grant. The options are exercisable at any time through
January 2004.
The Company has four stock option plans (1987 Plan, 1992 Plan, 1993 Plan
and 1998 Plan). Under the 1987, 1992 and 1993 Plans, a committee appointed
by the Board of Directors granted to key employees and directors of the
Company options to purchase shares of common stock at an exercise price
determined by such committee, but not less than the fair market value of the
common stock on the date of grant. Options expire ten years and one month
or ten years and one day after date of grant under the 1987 Plan and 1992
Plan, respectively. Options generally expire ten years after the date of
grant under the 1993 Plan. For the 1987 Plan, 1992 Plan and 1993 Plan,
grants become exercisable over a period of three years after the date of
grant at the rate of one-third per year, except that they become immediately
exercisable upon death, disability or retirement.
The 1998 Plan authorized that 6.5 million shares of common stock, plus
shares not granted under the 1993 Plan, may be granted under the plan,
subject to adjustment as follows: each January, if 7% of the outstanding
common shares of the Company exceed 6.5 million, the excess becomes
available for grant under the plan. No further grants can be made under the
1993 Plan. The 1998 Plan enables the Company to grant "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended, to key employees of the Company, and
"non-qualified stock options" ("NSOs") which do not constitute ISOs to key
employees and non-employee directors of the Company. Each non-employee
director receives automatic NSOs to purchase 9,000 shares of common stock on
the date he or she becomes a non-employee director and an additional 9,000
options on the third anniversary of the date the non-employee director was
last granted an option. Grants of options to key employees are solely
discretionary. ISOs and NSOs generally expire ten years from date of grant
and become exercisable over a period of three years after the date of grant
at the rate of one-third per year, except that they become immediately
exercisable upon death, disability or retirement.
D15
The following is a summary of the status of the Plans as of December 31,
2001, 2000 and 1999 and changes during the years ending on those dates:
Outstanding Exercisable
--------------------------------- ----------------------------------
Weighted Weighted Available
Average Average for
Exercise Exercise Grant
Shares Price Shares Price Shares
December 31, 1998 3,692,567 $ 15.46 2,041,451 $ 13.89 5,480,850
Authorized - 641,316
Granted 1,839,000 15.86 (1,839,000)
Exercised (310,449) 12.98 -
Expired/Canceled (153,750) 16.78 153,750
December 31, 1999 5,067,368 15.72 2,401,523 14.95 4,436,916
Authorized - 15,957
Granted 1,377,600 24.43 (1,377,600)
Exercised (501,531) 14.75 -
Expired/Canceled (151,194) 16.65 151,194
December 31, 2000 5,792,243 17.85 2,989,478 15.64 3,226,467
Authorized - 250,730
Granted 1,605,900 30.43 (1,605,900)
Exercised (497,813) 16.01 -
Expired/Canceled (167,087) 18.47 (167,087)
December 31, 2001 6,733,243 $ 20.97 3,732,179 $ 16.76 1,704,210
The following table summarizes information about stock options outstanding
under the Plans at December 31, 2001:
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------------
Weighted
Number Average Number
Outstanding Remaining Weighted Exercisable Weighted
at Contractual Average at Average
December 31 Life Exercise December 31 Exercise
Exercise Price Range 2001 (in years) Price 2001 Price
$10.01 - $13.33 551,664 3.2 $ 12.35 551,664 $ 12.35
13.34 - 16.67 2,574,486 6.5 15.58 2,150,643 15.65
16.68 - 20.00 699,596 6.6 18.96 573,351 19.06
20.01 - 23.33 226,550 8.3 22.51 67,455 21.51
23.34 - 26.67 1,188,599 8.9 24.95 389,066 24.95
26.68 - 30.00 86,400 9.5 28.12 - -
30.01 - 33.33 1,405,948 9.9 31.17 - -
6,733,243 7.5 $ 20.97 3,732,179 $ 16.76
D15
The Company uses the Black-Scholes option pricing model to value option
awards. The per share weighted average fair value of stock options and the
weighted average assumptions used to determine these values are as follows:
Year Ended December 31,
2001 2000 1999
Per share fair value $ 11.47 $ 9.01 $ 6.16
Expected dividend yield 0.61% 0.75% 1.04%
Risk-free interest rate 5.01% 5.37% 6.16%
Expected volatility 33% 32% 29%
Expected life (years) 5.50 5.50 6.50
The Black-Scholes option pricing model was developed for tradable options
with short exercise periods and is therefore not necessarily an accurate
measure of the fair value of compensatory stock options.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for the Plans and, accordingly, no compensation cost has been
recognized for stock options in the financial statements. Had the Company
determined compensation cost based on the fair value of stock options at the
grant date under SFAS 123, the Company's net income and earnings per common
share would have been reduced as indicated below:
Year Ended December 31,
2001 2000 1999
(in thousands, except per share amounts)
Net income
As reported $ 121,496 $ 101,016 $ 89,863
Pro forma under SFAS 123 115,359 96,402 86,703
Basic earnings per common share
As reported 1.56 1.30 1.14
Pro forma under SFAS 123 1.49 1.24 1.10
Diluted earnings per common share
As reported 1.54 1.29 1.13
Pro forma under SFAS 123 1.46 1.23 1.09
D15
NOTE 11 - INCOME TAXES
The components of income before income taxes are as follows:
Year Ended December 31,
2001 2000 1999
(in thousands)
United States ("U.S.") $136,135 $120,149 $111,038
Foreign 48,992 31,647 26,981
$185,127 $151,796 $138,019
The components of the provision for income taxes are as follows:
Year Ended December 31,
2001 2000 1999
(in thousands)
Current:
U.S. federal $ 44,237 $ 34,291 $ 33,813
U.S. state 1,331 1,330 1,497
Foreign 11,612 10,910 11,252
Total 57,180 46,531 46,562
Deferred:
U.S. federal 13,813 7,356 (1,943)
U.S. state 1,141 669 (274)
Foreign (8,503) (3,776) 3,811
Total 6,451 4,249 1,594
$ 63,631 $ 50,780 $ 48,156
The reconcilation of the U.S. federal statutory tax rate to the effective
rate is as follows:
Year Ended December 31,
2001 2000 1999
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
Effect of:
State income taxes, net of federal benefit 0.9 0.9 0.6
Nondeductible amortization of goodwill 1.0 1.2 1.4
Foreign earnings at various rates (2.7) (2.3) 1.5
Foreign tax credit (0.8) (0.5) (5.0)
Foreign losses with no tax benefit 0.5 0.8 0.9
Extraterritorial income (0.9) (1.0) (1.0)
Tax exempt income - (0.7) -
Other 1.4 0.1 1.5
Effective income tax rate 34.4 % 33.5 % 34.9 %
D15
The tax effect of temporary differences giving rise to deferred tax assets
and liabilities are as follows:
December 31, 2001 December 31, 2000
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
(in thousands)
Employee benefit accruals $ 1,725 $ 7,711 $ 1,536 $ 5,023
Product warranty accruals 2,055 - 1,703 -
Facility relocation accruals 107 217 15 217
Insurance premium accruals 4,145 - 4,402 -
Restructuring and other cost accruals 3,025 5,602 168 14,180
Differences in financial reporting and tax basis for:
Inventory 5,418 - 907 -
Property, plant and equipment - (23,866) - (23,107)
Identifiable intangible assets - (16,151) - (13,985)
Other 11,105 (1,011) 5,082 1,378
Tax loss carryforwards in foreign jurisdictions - 2,864 - 2,353
Valuation allowance for tax loss carryforwards - (2,864) - (2,353)
$ 27,580 $(27,498) $ 13,813 $ (16,294)
Current and noncurrent deferred tax assets and liabilities are included in
the following balance sheet captions:
December 31,
2001 2000
(in thousands)
Prepaid expenses and other current assets $ 29,069 $ 16,554
Income taxes payable (1,489) (2,741)
Other noncurrent assets 5,028 526
Deferred income taxes (32,526) (16,820)
Certain foreign subsidiaries of the Company have tax loss carryforwards
of $28.8 million at December 31, 2001, of which $7.7 million expire through
2009 and $21.1 million may be carried forward indefinitely. The tax benefit
of these tax loss carryforwards has been partially offset by a valuation
allowance. The valuation allowance of $2.8 million and $2.4 million at
December 31, 2001 and 2000, respectively, relates to foreign tax loss
carryforwards for which realizability is uncertain. The change in the
valuation allowances for 2001 and 2000 results primarily from the generation
of additional foreign tax loss carryforwards.
The Company has provided for the potential repatriation of certain
undistributed earnings of its foreign subsidiaries and considers earnings
above the amounts on which tax has been provided to be permanently
reinvested. Income taxes have not been provided on $132 million of
undistributed earnings of foreign subsidiaries, which will continue to be
reinvested. If remitted as dividends, these earnings could become subject
to additional tax, however such repatriation is not anticipated. Any
additional amount of tax is not practical to estimate, however, the Company
believes that U.S. foreign tax credits would largely eliminate any U.S. tax
payable.
D15
NOTE 12 - BENEFIT PLANS
Defined Contribution Plans
Substantially all of the employees of the Company and its subsidiaries
are covered by government or Company-sponsored benefit plans. Total costs
for Company-sponsored defined benefit, defined contribution and employee
stock ownership plans amounted to $7.9 million in 2001, $5.1 million in 2000
and $5.3 million in 1999.
The DENTSPLY Employee Stock Ownership Plan ("ESOP") is a non-contributory
defined contribution plan that covers substantially all of the United States
based non-union employees of the Company. Contributions to the ESOP for
2001, 2000 and 1999 were $2.1 million for each year. The Company makes
annual contributions to the ESOP of not less than the amounts required to
service ESOP debt. In connection with the refinancing of ESOP debt in March
1994, the Company agreed to make additional cash contributions totaling at
least $1.7 million through 2003. Dividends received by the ESOP on
allocated shares are either reinvested in participants' accounts or passed
through to Plan participants, at the participant's election. Most ESOP
shares were initially pledged as collateral for its debt. As the debt is
repaid, shares are released from collateral and allocated to active
employees based on the proportion of debt service paid in the year. At
December 31, 2001, the ESOP held 8.2 million shares, of which 7.5 million
were allocated to plan participants and 0.7 million shares were unallocated
and pledged as collateral for the ESOP debt. Unallocated shares were
acquired prior to December 31, 1992 and are accounted for in accordance with
Statement of Position 76-3. Accordingly, all shares held by the ESOP are
considered outstanding and are included in the earnings per common share
computations.
The Company sponsors an employee 401(k) savings plan for its United
States workforce to which enrolled participants may contribute up to IRS
defined limits.
Defined Benefit Plans
The Company maintains a number of separate contributory and
non-contributory qualified defined benefit pension plans and other
postretirement medical plans for certain union and salaried employee groups
in the United States. Pension benefits for salaried plans are based on
salary and years of service; hourly plans are based on negotiated benefits
and years of service. Annual contributions to the pension plans are
sufficient to satisfy legal funding requirements. Pension plan assets are
held in trust and consist mainly of common stock and fixed income
investments.
The Company maintains defined benefit pension plans for its employees in
Germany, Japan, The Netherlands, and Switzerland. These plans provide
benefits based upon age, years of service and remuneration. The German
plans are unfunded book reserve plans. Other foreign plans are not
significant individually or in the aggregate. Most employees and retirees
outside the United States are covered by government health plans.
Postretirement Healthcare
The plans for postretirement healthcare have no plan assets. The
postretirement healthcare plan covers certain union and salaried employee
groups in the United States and is contributory, with retiree contributions
adjusted annually to limit the Company's contribution to $21 per month per
retiree for most participants who retired after June 1, 1985. The Company
also sponsors unfunded non-contributory postretirement medical plans for a
limited number of union employees and their spouses and retirees of a
discontinued operation.
D15
Reconciliations of changes in the above plans' benefit obligations, fair
value of assets, and statement of funded status are as follows:
Other Postretirement
Pension Benefits Benefits
------------------------------ -----------------------------
December 31, December 31,
2001 2000 2001 2000
(in thousands)
Reconciliation of Benefit Obligation
Benefit obligation at beginning of year $ 60,781 $ 55,227 $ 7,552 $ 6,756
Service cost 1,877 1,960 205 182
Interest cost 3,548 3,072 539 542
Participant contributions 813 60 391 -
Actuarial losses 1,561 4,615 268 1,163
Amendments - 358 - -
Acquisitions 19,540 - - -
Effects of exchange rate changes (3,126) (1,922) - -
Benefits paid (3,860) (2,589) (1,078) (1,091)
Benefit obligation at end of year $ 81,134 $ 60,781 $ 7,877 $ 7,552
Reconciliation of Plan Assets
Fair value of plan assets at beginning of year $ 41,183 $ 40,204 $ - $ -
Actual return on assets (471) 1,498 - -
Acquisitions 4,751 - - -
Effects of exchange rate changes (1,395) (377) - -
Employer contributions 2,327 1,832 687 1,091
Participant contributions 813 615 391 -
Benefits paid (3,860) (2,589) (1,078) (1,091)
Fair value of plan assets at end of year $ 43,348 $ 41,183 $ - $ -
Reconciliation of Funded Status
Actuarial present value of projected
benefit obligations $ 81,134 $ 60,781 $ 7,877 $ 7,552
Plan assets at fair value 43,348 41,183 - -
Funded status (37,786) (19,598) (7,877) (7,552)
Unrecognized transition obligation 1,590 1,949 - -
Unrecognized prior service cost 678 801 - -
Unrecognized net actuarial gain (loss) 1,482 (3,406) (2,450) (1,914)
Unfunded benefit obligations at
end of year $(34,036) $(20,254) $(10,327) $(9,466)
D15
The amounts recognized in the accompanying Consolidated Balance Sheets
are as follows:
Other Postretirement
Pension Benefits Benefits
--------------------------- ---------------------------
December 31, December 31,
2001 2000 2001 2000
(in thousands)
Other noncurrent liabilities $ (43,589) $ (29,492) $ (10,327) $ (9,466)
Other noncurrent assets 8,669 8,567 - -
Accumulated other
comprehensive loss 884 671 - -
Unfunded benefit obligation at
end of year $ (34,036) $ (20,254) $ (10,327) $ (9,466)
The aggregate benefit obligation for those plans where the accumulated
benefit obligation exceeded the fair value of plan assets was $43.6 million and
$29.5 million at December 31, 2001 and 2000, respectively.
Components of the net periodic benefit cost for the plans are as follows:
Other Postretirement
Pension Benefits Benefits
------------------------------------------- ------------------------------------------
2001 2000 1999 2001 2000 1999
(in thousands)
Service cost $ 1,877 $ 1,960 $ 2,090 $ 205 $ 182 $ 160
Interest cost 3,548 3,072 3,170 539 542 488
Expected return on plan assets (2,525) (2,020) (2,435) - - -
Net amortization and deferral 287 (2,368) (1,300) (63) 174 (108)
Net periodic benefit cost $ 3,187 $ 644 $ 1,525 $ 681 $ 898 $ 540
The weighted average assumptions used in accounting for the Company's
plans, principally in foreign locations, are as follows:
Other Postretirement
Pension Benefits Benefits
------------------------------------------- ------------------------------------------
2001 2000 1999 2001 2000 1999
Discount rate 4.4% 5.7% 5.6% 7.3% 7.0% 7.5%
Expected return on plan assets 5.0% 5.7% 5.0% n/a n/a n/a
Rate of compensation increase 2.5% 3.5% 3.0% n/a n/a n/a
Health care cost trend n/a n/a n/a 7.0% 7.0% 7.0%
Assumed health care cost trend rates have an impact on the amounts reported
for postretirement benefits. A one percentage point change in assumed healthcare
cost trend rates would have the following effects for the year ended December
31, 2001:
Other Postretirement
Benefits
---------------------------
1% Increase 1% Decrease
(in thousands)
Effect on total of service and interest cost components $ 86 $ (61)
Effect on postretirement benefit obligation 804 (327)
D15
NOTE 13 - RESTRUCTURING AND OTHER COSTS (INCOME)
Restructuring and other costs (income) consists of the following:
Year Ended December 31,
2001 2000 1999
(in thousands)
Gain on pension plan termination $ (8,486) $ - $ -
Gain on insurance settlement associated with fire (5,758) - -
Costs related to the Oraqix agreement 2,345 - -
Reversal of 1998 restucturing charge (802) - -
Restructuring and other costs 17,774 2,702 -
German property settlement - (2,758) -
Total restructuring and other costs (income) $ 5,073 $ (56) $ -
The Company's subsidiary in the United Kingdom restructured its pension
plans in the fourth quarter of 2001, simplifying its structure by
consolidating its two separate defined contribution plans into one plan and
terminating the other plan. An unallocated surplus of approximately $8.5
million existed in the terminated plan. As a result, these unallocated funds
reverted back to the Company.
On January 25, 2001, a fire broke out in one the Company's Swiss
manufacturing facilities. The fire caused severe damage to a building and to
most of the equipment it contained. The Company has received insurance
proceeds for its destoyed equipment, and it expects some additional proceeds
to be received by the second quarter of 2002 to settle the building damage.
These payments resulted in the Company recognizing a net gain on the
disposal of the destroyed equipment of approximately $5.8 million.
As discussed in Note 3, the Company has agreed in 2001 to a payment of
$2.0 million to AstraZenaca related to the submission of the Oraqix product
New Drug Application in the U.S., and Marketing Authorization Application in
Europe. Under the terms of the agreement, the Company expensed and accrued
this payment and related estimated application costs as of December 31, 2001.
In the fourth quarter of 1998, the Company recorded a restructuring
charge of $42.5 million related to the discontinuance of the intra-oral
camera business at the Company's New Image division located in Carlsbad,
California. The charge included the write-off of certain intangible assets,
including goodwill associated with the business, write-off of discontinued
products, write-down of fixed assets and other assets, and severance and
other costs associated with the discontinuance of the New Image division and
closure of its facility. During 2001 this plan was completed and the
remaining accrual balances of $0.8 million were reversed as a change in
estimate.
In the fourth quarter of 2001, the Company recorded a charge of $12.3
million for restructuring and other costs. The charge included costs of
$6.0 million to restructure the Company's existing operations, primarily in
Germany, Japan and Brazil, as a result of the integration with Degussa
Dental. The primary effect of this plan is the elimination of duplicative
functions created as a result of combining the Company's operations in these
countries with those of Degussa Dental. Included in this charge were
severance costs of $2.1 million, lease/contract termination costs of $1.1
and other restructuring costs of $0.2 million. In addition, the Company
recorded $2.6 million of impairment charges on fixed assets that will be
disposed of as a result of the restructuring plan. This restructuring plan
will result in the elimination of approximately 160 administrative and
manufacturing positions in Germany, Japan and Brazil, substantially all of
which remain to be eliminated as of December 31, 2001. The Company
anticipates that most aspects of this plan will be completed by the fourth
quarter of 2002. The remaining charge of $6.3 million involves impairment
charges on intangible assets.
D15
In the first quarter of 2001, the Company recorded a charge of $5.5
million related to reorganizing certain functions within Europe, Brazil and
North America. The primary objectives of this reorganization were to
consolidate duplicative functions and to improve efficiencies within these
regions and are expected to contribute to future earnings. Included in this
charge were severance costs of $3.1 million, lease/contract termination
costs of $0.6 million and other restructuring costs of $0.8 million. These
other costs are primarily for legal costs associated with the severance
arrangements. In addition, the Company recorded $1.0 million of impairment
charges on fixed assets that will be disposed of as a result of the
restructuring plan. This restructuring plan will result in the elimination
of approximately 330 administrative and manufacturing positions in Brazil
and Germany. At December 31, 2001, approximately 20 of these positions
remain to be eliminated. The Company anticipates that most aspects of this
plan will be completed by the first quarter of 2002.
As part of combining Friadent and Degussa Dental with the Company, $14.1
million of liabilities were established through purchase price accounting
for the restructuring of the acquired companies' operations in Germany,
Brazil, the United States and Japan. These liabilities relate primarily to
the elimination of duplicative functions created as a result of combining
the companies. Included in this liability were severance costs of $11.9
million, lease/contract termination costs of $1.1 million and other
restructuring costs of $1.1 million. This restructuring plan will result in
the elimination of approximately 200 administrative and manufacturing
positions in Germany, Brazil and the United States, substantially all of
which remain to be eliminated as of December 31, 2001. The Company
anticipates that most aspects of this plan will be completed by the fourth
quarter of 2002.
The major components of these restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at December 31, 2001 are as follows:
Amounts
Recorded
Through Amounts Balance
2001 Purchase Price Applied December 31,
Provisions Accounting 2001 2001
Severance $ 5,270 $ 11,929 $ (1,850) $ 15,349
Lease/contract terminations 1,682 1,071 (563) 2,190
Other restructuring costs 897 1,062 - 1,959
Fixed asset impairment charges 3,634 - (3,634) -
Intangible asset impairment charges 6,291 - (6,291) -
$ 17,774 $ 14,062 $ (12,338) $ 19,498
During the fourth quarter, of 2000 the Company recorded a settlement of
$2.8 million related to a claim against the German government in connection
with the confiscation and subsequent sale of a property formally owned by
the Company in Berlin, Germany.
In the fourth quarter of 2000, the Company recorded a charge of $2.7
million related to the reorganization of its French and Latin American
businesses. The primary focus of the reorganization was the consolidation of
operations in these regions in order to eliminate duplicative functions. The
Company anticipates that this plan will increase operational efficiencies
and contribute to future earnings. Included in this charge were severance
costs of $2.3 million and other costs of $0.4 million. The restructuring
will result in the elimination of approximately 40 administrative positions,
mainly in France. At December 31, 2001, approximately 5 of these positions
remain to be eliminated. The Company anticipates that most aspects of this
plan will be completed by the first quarter of 2002. The major components of
this restructuring charge and the remaining outstanding balances follow:
Amounts Amounts Balance
2000 Applied Applied December 31,
Provision 2000 2001 2001
(in thousands)
Severance $ 2,299 $ (611) $ (825) $ 863
Other restructuring costs 403 - (403) -
$ 2,702 $ (611) $ (1,228) $ 863
D15
In the second quarter of 1998, the Company rationalized and restructured
the Company's worldwide laboratory business, primarily for the closure of
the Company's German tooth manufacturing facility. All major aspects of the
plan were completed in 1999, except for the disposition of the property and
plant located in Dreieich, Germany, which has been written-down to its
estimated fair value, but which has not been sold as of December 31, 2001.
The Company continues active efforts to sell this idle property.
NOTE 14 - FINANCIAL INSTRUMENTS AND DERIVATIVES
Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The
Company believes the carrying amounts of cash and cash equivalents, accounts
receivable (net of allowance for doubtful accounts), prepaid expenses and
other current assets, accounts payable, accrued liabilities, income taxes
payable and notes payable approximate fair value due to the short-term
nature of these instruments. The Company estimates the fair value of its
long-term debt was $720.6 million versus its carrying value of $723.5
million as of December 31, 2001. The fair value was relatively similar to
the carrying value since the fixed rate Eurobonds were effectively converted
to variable rate as a result of an interest rate swap and the interest rates
on revolving debt and commercial paper are variable and reflect current
market rates. In addition, the face value of the Japanese yen private
placement note approximates fair value as its issue date was December 28,
2001. The fixed rate Swiss franc denominated notes were the only debt
instruments where the fair values were lower than the carrying values due to
higher Swiss rates at December 31, 2001 versus the rates at issuance of the
notes.
Adoption of SFAS 133
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued
by the Financial Accounting Standards Board (FASB) in June 1998. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities on the balance sheet and
measurement of those instruments at fair value. This statement, as amended,
was adopted effective January 1, 2001, and as required, the Company
recognized a cumulative adjustment for the change in accounting principle.
This adjustment increased other current liabilities by $1.1 million and
resulted in a cumulative loss, reflected in current earnings of $0.3 million
($0.2 million, net of tax), and a reduction in other comprehensive income of
$0.8 million ($0.5 million, net of tax). The cumulative loss on adoption of
SFAS 133 recognized in the income statement was recorded in "Other (income)
expense, net" and was considered immaterial for presentation as a cumulative
effect of a change in accounting principle.
Derivative Instruments and Hedging Activities
The Company's activities expose it to a variety of market risks which
primarily include the risks related to the effects of changes in foreign
currency exchange rates, interest rates and commodity prices. These
financial exposures are monitored and managed by the Company as part of its
overall risk-management program. The objective of this risk management
program is to reduce the potentially adverse effects that these market risks
may have on the Company's operating results.
A portion of the Company's borrowings and certain inventory purchases are
denominated in foreign currencies which exposes the Company to market risk
associated with exchange rate movements. The Company's policy generally is
to hedge major foreign currency transaction exposures through foreign
exchange forward contracts. These contracts are entered into with major
financial institutions thereby minimizing the risk of credit loss. In
addition, the Company's investments in foreign subsidiaries are denominated
in foreign currencies, which creates exposures to changes in exchange rates.
The Company uses debt denominated in the applicable foreign currency as a
means of hedging some of this risk.
D15
With the Company's significant level of long-term debt, changes in the
interest rate environment can have a major impact on the Company's earnings,
depending upon its interest rate exposure. As a result, the Company manages
its interest rate exposure with the use of interest rate swaps, when
appropriate, based upon market conditions.
The manufacturing of some of the Company's products requires a
significant volume of commodities with potentially volatile prices. In
order to limit the unanticipated earnings fluctuations from such volatility
in commodity prices, the Company selectively enters into commodity price
swaps to convert variable raw material costs to fixed costs.
Cash Flow Hedges
The Company uses interest rate swaps to convert a portion of its variable
rate debt to fixed rate debt. In January 2000, the Company entered into an
interest rate swap agreement with notional amounts totaling 50 million Swiss
francs which converts a portion of the Company's variable rate Swiss franc
financing to a fixed rate of 3.4% for a period of three years. In February
2001, the Company entered into interest rate swap agreements with notional
amounts totaling 130 million Swiss francs which converts a portion of the
Company's variable rate financing to an average fixed rate of 3.3% for an
average period of four years. In addition, the Company's Japanese subsidiary
acquired in the Degussa Dental transaction, has an interest rate swap
agreement with notional amounts totaling 70 million Japanese yen which
converts a portion of its variable rate Japanese yen financing to a fixed
rate of 2.9% through December 2002.
The Company selectively enters into commodity price swaps to convert
variable raw material costs to fixed. In August 2000, the Company entered
into a commodity price swap agreement with notional amounts totaling 270,000
troy ounces of silver bullion throughout calendar year 2001. The average
fixed rate of this agreement was $5.10 per troy ounce. In November 2001, the
Company entered into a commodity price swap agreement with notional amounts
totaling 270,000 troy ounces of silver bullion throughout calendar year
2002. The average fixed rate of this agreement is $4.20 per troy ounce. The
Company generally hedges between 33% and 67% of its projected annual silver
needs.
For the year ended December 31, 2001, the Company recognized a net loss
of $0.4 million in "Other expense (income), net", which represented the
total ineffectiveness of all cash flow hedges.
As of December 31, 2001, $0.1 million of deferred net losses on
derivative instruments recorded in accumulated other comprehensive income
are expected to be reclassified to current earnings during the next twelve
months. Transactions and events that are expected to occur over the next
twelve months that will necessitate such a reclassification include: the
sale of inventory that includes previously hedged purchases of silver and
the amortization of a portion of the net deferred loss on interest rate
swaps terminated as part of a swap restructuring in February 2001, which is
being amortized over the remaining term of the underlying loan being hedged.
The maximum term over which the Company is hedging exposures to variability
of cash flows (for all forecasted transactions, excluding interest payments
on variable-rate debt) is eighteen months.
Fair Value Hedges
The Company also uses interest rate swaps to convert a portion of its
fixed rate debt to variable rate debt. In addition cross currency basis
swaps are used to convert debt denominated in one currency to another
currency. In December 2001, the Company completed two integrated
transactions where it entered into an interest rate swap agreement with
notional amounts totalling Euro 350 million which converted its 5.75%
coupon, fixed rate Eurobond financing into variable rate Euro denominated
financing and it then entered into a cross currency basis swap which
converted this variable based Euro denominated financing to variable based
U.S. dollar financing at a current rate of 3.2%.
D15
Hedges of Net Investments in Foreign Operations
The Company has numerous investments in foreign subsidiaries. The net
assets of these subsidiaries are exposed to the volatility in currency
exchange rates. Currently, the Company uses non-derivative financial
instruments (debt at the parent company level) to hedge some of this
exposure. The translation gains and losses related to the net assets of the
foreign subsidiaries are offset by gains and losses in the parent company's
debt obligations. At December 31, 2001, the Company had Swiss franc
denominated and Japenese yen denominated debt (at the parent company level)
to hedge the currency exposure related to the net assets of its Swiss and
Japanese subsidiaries.
For the year ended December 31, 2001, $10.9 million of net gains related
to this foreign currency denominated debt were included in the Company's
foreign currency translation adjustment.
Other
As of December 31, 2001, the Company had recorded the fair value of
derivative instrument assets of $2.7 million in "Prepaid expenses and other
current assets" and $0.3 million in "Other noncurrent assets" on the balance
sheet. The Company recorded the fair value of derivative instrument
liabilities of $1.4 million in "Accounts payable" and $14.1 million in
"Other noncurrent liabilities" on the balance sheet.
In accordance with SFAS 52, "Foreign Currency Translation", the Company
utilizes long-term intercompany loans to eliminate foreign currency
transaction exposures of certain foreign subsidiaries. Net gains or losses
related to these long-term intercompany loans, those for which settlement is
not planned or anticipated in the foreseeable future, are included in the
Company's foreign currency translation adjustment.
Precious Metal Lease Agreement
As of December 31, 2001, the Company leased $59.6 million of precious
metals. Under this arrangement the Company leases fixed quantities of
precious metals which are used in producing alloys and pays a lease rate (a
percent of the value of the leased inventory) to the lessor. These precious
metal leases are accounted for as operating leases and the lease fee is
recorded as cost of goods sold. The terms of the leases are less than one
year, and the average lease rate at December 31, 2001 was 2.5%. The
Company's objective for using these operating lease arrangements to supply
its precious metals needs is to free up working capital and smooth the
effects of commodity price volatility.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases automobiles and certain office, warehouse, machinery
and equipment and manufacturing facilities under non-cancelable operating
leases. These leases generally require the Company to pay insurance,
property taxes and other expenses related to the leased property. Total
rental expense for all operating leases was $13.0 million for 2001, $10.5
million for 2000, and $10.3 million for 1999.
Rental commitments, principally for real estate (exclusive of taxes,
insurance and maintenance), automobiles and office equipment amount to:
$12.8 million for 2002, $9.6 million for 2003, $6.7 million for 2004, $4.0
million for 2005, $3.4 million for 2006, and $13.2 million thereafter.
D15
Litigation
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes that
pending litigation to which DENTSPLY is a party will not have a material
adverse effect upon its consolidated financial position or results of
operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and
conduct undertaken by the Company's Trubyte Division with respect to the
distribution of artificial teeth and related products. On January 5, 1999
the Department of Justice filed a complaint against the Company in the U.S.
District Court in Wilmington, Delaware alleging that the Company's tooth
distribution practices violate the antitrust laws and seeking an order for
the Company to discontinue its practices. Three follow on private class
action suits on behalf of dentists, laboratories and denture patients in
seventeen states, respectively, who purchased Trubyte teeth or products
containing Trubyte teeth, were filed and transferred to the U.S. District
Court in Wilmington, Delaware. The class action filed on behalf of the
dentists has been dismissed by the plaintiffs. The private party suits seek
damages in an unspecified amount. The Company filed motions for summary
judgment in all of the above cases, which were argued to the court in
December 2000. The Court denied the Company's motion for summary judgment
regarding the Department of Justice action, granted the motion on the lack
of standing of the patient class action and granted the motion on the lack
of standing of the laboratory class action to pursue damage claims. In an
attempt to avoid the effect of the Court's ruling, the attorneys for the
laboratory class action filed a new complaint naming DENTSPLY and its
dealers as co-conspirators with respect to DENTSPLY's distribution policy.
The Company filed a motion to dismiss this re-filed complaint. The Court
again granted DENTSPLY's motion on the lack of standing of the laboratory
class action to pursue damage claims. The attorneys for the patient class
have also filed a new action to avoid the effect of the Court's ruling.
This action is filed in the U.S. District Court in Delaware. Four private
party class actions on behalf of indirect purchasers were filed in
California state court. These cases are based on allegations similar to
those in the Department of Justice case. In response to the Company's
motion, these cases have been consolidated in one Judicial District in Los
Angeles. It is the Company's position that the conduct and activities of
the Trubyte division do not violate the antitrust laws.
Other
The Company has no material non-cancelable purchase commitments.
The Company has employment agreements with its executive officers. These
agreements generally provide for salary continuation for a specified number
of months under certain circumstances. If all of the employees under
contract were to be terminated by the Company without cause (as defined),
the Company's liability would be approximately $10.1 million at December 31,
2001.
NOTE 16 - SUBSEQUENT EVENTS
On December 12, 2001, the Board of Directors approved a three-for-two
split of the Company's common stock. The stock split was effective Jaunuary
31, 2002.
The effect of the stock split has been recognized retroactively in the
stockholders' equity accounts on the balance sheets as of December 31, 2001
and in all share and per share data in the accompanying financial statements
and notes to financial statements. Stockholders' equity accounts have been
restated to reflect the reclassification of an amount equal to the par value
of the increase in issued common shares from the capital in excess of par to
the common stock account.
D15
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
(in thousands, except per share amounts)
2001
Net sales $ 245,669 $ 254,635 $ 253,501 $ 375,289 $1,129,094
Gross profit 129,814 133,727 132,385 173,745 569,671
Operating income 34,921 44,336 44,410 54,696 178,363
Net income 34,326 27,404 25,919 33,847 121,496
Earnings per common share-basic $ 0.44 $ 0.36 $ 0.33 $ 0.43 $ 1.56
Earnings per common share-diluted 0.44 0.34 0.33 0.43 1.54
Cash dividends declared per common share 0.04583 0.04583 0.04583 0.04584 0.18333
2000
Net sales $ 213,956 $ 224,788 $ 216,699 $ 234,353 $ 889,796
Gross profit 110,475 118,431 112,260 122,428 463,594
Operating income 36,740 39,731 38,137 49,308 163,916
Net income 22,193 24,627 23,335 30,861 101,016
Earnings per common share-basic $ 0.28 $ 0.32 $ 0.30 $ 0.40 $ 1.30
Earnings per common share-diluted 0.28 0.32 0.29 0.40 1.29
Cash dividends declared per common share 0.04167 0.04167 0.04167 0.04582 0.17083
D15
Supplemental Stock Information
The common stock of the Company is traded on the NASDAQ National Market
under the symbol "XRAY". The following table sets forth high, low and
closing sale prices of the Company's common stock for the periods indicated
as reported on the NASDAQ National Market:
Market Range of Common Stock
Period-end Cash
Closing Dividend
High Low Price Declared
2001
First Quarter $ 26.67 $ 21.67 $ 24.33 $0.04583
Second Quarter 31.07 23.33 29.57 0.04583
Third Quarter 31.63 26.01 30.63 0.04583
Fourth Quarter 34.69 28.62 33.47 0.04584
2000
First Quarter $ 19.25 $ 15.42 $ 18.92 $0.04167
Second Quarter 21.75 16.75 20.54 0.04167
Third Quarter 24.92 19.67 23.29 0.04167
Fourth Quarter 28.92 20.59 26.08 0.04582
1999
First Quarter $ 18.33 $ 14.29 $ 15.50 $0.03750
Second Quarter 19.42 14.21 19.25 0.03750
Third Quarter 19.54 13.67 15.17 0.03750
Fourth Quarter 16.50 13.96 15.75 0.04167
<FN>
All amounts reflect the 3-for-2 stock split effective January 31, 2002.
</FN>
The Company estimates, based on information supplied by its transfer agent,
that there are approximately 26,500 holders of common stock, including 456
holders of record.
D15