EXHIBIT 13 - Pages 9 through 47 of the Company's Annual Report to Shareholders
for fiscal year 2002
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Year ended December 31,
2002 2001 2000 1999 1998
(dollars in thousands, except per share amounts)
Statement of Income Data:
Net sales $ 1,513,742 $1,132,968 $ 889,796 $ 836,438 $ 800,456
Net sales without precious metal content 1,326,653 1,082,323 889,796 836,438 800,456
Gross profit 732,899 568,520 462,771 430,972 415,286
Restructuring and other costs (income) (2,732) 5,073 (56) - 71,500
Operating income 256,500 176,045 161,422 147,229 67,216
Income before income taxes 220,985 185,127 151,796 138,019 55,101
Net income $ 147,952 $ 121,496 $ 101,016 $ 89,863 $ 34,825
Earnings per Common Share:
Net income-basic $ 1.89 $ 1.56 $ 1.30 $ 1.14 $ 0.44
Net income-diluted 1.85 1.54 1.29 1.13 0.43
Cash dividends declared per
common share $ 0.18400 $ 0.18333 $ 0.17083 $ 0.15417 $ 0.14000
Weighted Average Common Shares Outstanding:
Basic 78,180 77,671 77,785 79,131 79,995
Diluted 79,994 78,975 78,560 79,367 80,396
Balance Sheet Data:
Working capital $ 175,256 $ 125,726 $ 157,316 $ 138,448 $ 128,076
Total assets 2,087,033 1,798,151 866,615 863,730 895,322
Total debt 774,373 731,158 110,294 165,467 233,761
Stockholders' equity 835,928 609,519 520,370 468,872 413,801
Return on average stockholders' equity 20.5% 21.5% 20.4% 20.4% 8.3%
Long-term debt to total capitalization 47.9% 54.3% 17.4% 23.7% 34.4%
Other Data:
Depreciation and amortization $ 43,859 $ 54,334 $ 41,359 $ 39,624 $ 37,474
Capital expenditures 57,454 49,337 28,425 33,386 31,430
Property, plant and equipment, net 313,178 240,890 181,341 180,536 158,998
Goodwill and other intangibles, net 1,134,506 1,012,160 344,753 349,421 346,073
Interest expense, net 27,385 18,256 6,797 12,252 11,532
Cash flows from operating activities 172,983 211,068 145,622 125,877 96,323
Inventory days 100 93 114 122 132
Receivable days 49 46 52 52 55
Income tax rate 33.0% 34.4% 33.5% 34.9% 36.8%
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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 and uncertainties discussed within Item I,
Part I of the Company's Annual Report on Form 10-K.
In January 2002, the Company acquired the partial denture business of
Austenal Inc. ("Austenal"), and in 2001 the Company made three significant
acquisitions. In January 2001, the Company acquired the outstanding shares
of Friadent GmbH ("Friadent"), a global dental implant manufacturer and
marketer. 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. 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 between years.
A significant portion of DENTSPLY'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 and because the precious
metal content of the Company's sales is largely a pass-through to customers
and has minimal effect on earnings, DENTSPLY reports sales both with and
without precious metals to show the Company's performance independent of
precious metal price volatility and to enhance comparability of performance
between periods.Certain reclassifications have been made to prior years' data
in order to conform to the current year presentation.
RESULTS OF OPERATIONS, 2002 COMPARED TO 2001
Net Sales
Net sales in 2002 increased $380.8 million, or 33.6%, to $1,513.7 million.
Net sales, excluding precious metals, increased $244.3 million, or 22.6%, to
$1,326.7 million. The growth in sales, excluding the precious metal content,
was driven by internal growth of 6.8%, 14.6% growth from acquisitions and a
1.2% positive impact from currency translation as several major currencies
strengthened against the U.S. dollar during the year. The sales growth in
2002, excluding precious metal content, in total and by region is as follows:
Sales Growth By Region
(excluding precious metal content)
-------------------------------------------------------------
Total United All Other
Consolidated States Europe Regions
Internal growth 6.8% 9.1% 5.4% 2.7%
Acquisition growth 14.6% 4.5% 33.0% 16.3%
Foreign currency translation 1.2% 0.1% 5.6% -2.0%
22.6% 13.7% 44.0% 17.0%
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Internal sales growth was strongest in the United States at 9.1%, while
Europe grew 5.4% organically. The Company also continued to experience strong
internal growth in the Pacific Rim and Asia (excluding Japan). Internal
growth was most notable in implants, endodontics, orthodontics, other
consumables, intra-oral cameras and digital x-ray systems. The laboratory
side of the business was the weakest, particularly in Europe where economic
conditions appear to be reducing demand for high-end procedures that are
deferrable by the patient.
****
Graph titled "2002 Geographic Sales"
Information disclosed:
% of
Region Sales
United States 45%
Europe 37%
Japan 5%
Pacific Rim and Asia 3%
Latin America 4%
Other Regions 6%
****
****
Graph titled "2002 Product Distribution"
Information disclosed:
% of
Product Category Sales
Consumables and Small Equipment 92%
Heavy Equipment 6%
Non-Dental 2%
****
Internal sales growth for heavy equipment, including x-ray equipment and
intra-oral cameras, was 8.5% in 2002 while internal sales growth for
consumable and small equipment, including laboratory products, was 7.1%.
These increases were offset slightly by softening sales of non-dental
products.
Gross Profit
Gross profit was $732.9 million in 2002 compared to $568.5 million in 2001,
an increase of $164.4 million, or 28.9%. Gross profit, including precious
metals, represented 48.4% of net sales in 2002 compared to 50.2% in 2001. The
decline in 2002 is due to the inclusion of the Degussa Dental business for a
full year versus just one quarter in 2001 and the corresponding relatively
high precious metal content of these sales. Gross profit for 2002, excluding
precious metal content, represented 55.2% of net sales compared to 52.5% in
2001. The gross profit margin in 2002, excluding the precious metals pass
through, benefited from new product introductions, a favorable product mix,
and the integration and restructuring benefits related to acquisitions
completed over the past several years. The 2001 period included the negative
impact of the amortization of the Friadent and Degussa Dental inventory
step-ups recorded in connecton with purchase price 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 percentage
and reduce inventory levels, but also improve our overall competitive
advantage.
D16
****
Graph titled "Gross Profit Percentage"
Information disclosed:
Gross Profit
Year Percentage
1998 51.9%
1999 51.5%
2000 52.0%
2001 52.5%
2002 55.2%
Footnote:
Excludes precious metals content of net sales.
****
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $91.7
million, or 23.7%, to $479.1 million in 2002 from $387.4 million in 2001. As
a percentage of sales, including precious metals, SG&A expenses decreased to
31.7% compared to 34.2% in 2001. This decrease is mainly due to the
discontinuation of goodwill and indefinite-lived intangible asset
amortization in 2002, which in 2001 amounted to $17.8 million ($14.0 million,
net of tax). As a percentage of sales, excluding precious metals, SG&A
expenses increased to 36.1% compared to 35.8% in 2001. This increase was
primarily driven by the inclusion of the Degussa Dental business, and its
higher SG&A expense ratio (excluding precious metal content), for a full year
versus one quarter in 2001, offset by the discontinuation of goodwill and
indefinite-lived intangible asset amortization in 2002. This increase also
included higher insurance and legal expenses in 2002.
During 2002, the Company recorded restructuring and other income of $2.7
million ($1.8 million, net of tax), including $3.7 million which resulted
from changes in estimates related to prior period restructuring initiatives,
offset somewhat by a restructuring charge for the combination of the CeraMed
and U.S. Friadent divisions of $1.7 million. In addition, the Company
recognized a gain of $0.7 million related to the insurance settlement for
fire damages sustained at the Company's Maillefer facility. The 2001 period
included a restructuring charge of $5.5 million to improve efficiencies in
Europe, Brazil and North America and $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 for a payment
made at the point of regulatory filings related to Oraqix, a product for
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 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. The above items in 2001, on a net basis,
amount to charges of $5.1 million ($3.5 million, net of tax) (see Note 14 to
the Consolidated Financial Statements).
****
Graph titled "Operating Income Percentage"
Information disclosed:
Operating Income
Year Percentage
1998 8.4%
1999 17.6%
2000 18.1%
2001 16.3%
2002 19.3%
Footnote:
Excludes precious metals content of net sales.
****
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Other Income and Expenses
Net interest expense increased $9.1 million in 2002 due to higher debt
levels associated with the acquisition activities in 2002 and 2001. Other
income decreased $35.5 million in 2002, due primarily to income recognized in
2001 of $24.5 million ($15.1 million, net of tax) which included a $23.1
million gain from the sale of Infosoft, LLC and a $1.4 million minority
interest benefit related to an intangible impairment charge included in
restructuring and other costs. Other income and expense in 2002 also
included a $4.7 million unfavorable change in currency transaction gain/loss
resulting from the significant weakening of the U.S. dollar in 2002, a $1.1
million loss realized on the share exchange with PracticeWorks, Inc. and a
net loss of $2.5 million on mark-to-market adjustment for the warrants
received in the transaction. Also contributing to the decrease in other
income in 2002 was a decrease of $0.8 million in accrued dividends related to
the PracticeWorks, Inc. preferred stock prior to the time of the
PracticeWorks share exchange.
Earnings
Income before income taxes in 2002 increased $35.9 million, or 19.4%, to
$221.0 million from $185.1 million in 2001. The effective tax rate decreased
to 33.0% in 2002 from 34.4% in 2001.
Net income increased $26.5 million, or 21.8%, to $148.0 million in 2002
from $121.5 million in 2001. Fully diluted earnings per share were $1.85 in
2002, an increase of 20.1% from $1.54 in 2001. Net income in 2002 and 2001
included charges and income that affect the comparability between years as
described above.
RESULTS OF OPERATIONS, 2001 COMPARED TO 2000
Net Sales
Net sales in 2001 increased $243.2 million, or 27.3%, to $1,133.0 million.
Net sales, excluding precious metals, increased $192.5 million, or 21.6%, to
$1,082.3 million. The growth in sales, excluding the precious metal content,
was driven by internal growth of 6.2% and 17.1% growth from acquisitions,
partially offset by a 1.7% negative impact from currency translation as the
U.S. dollar strengthened against several major currencies during the year.
The sales growth in 2001, excluding precious metal content, in total and by
region is as follows:
Sales Growth By Region
(excluding precious metal content)
-------------------------------------------------------------
Total United All Other
Consolidated States Europe Regions
Internal growth 6.2% 7.4% 5.6% 3.0%
Acquisition growth 17.1% 4.4% 40.9% 27.1%
Foreign currency translation -1.7% 0.0% -2.4% -5.9%
21.6% 11.8% 44.1% 24.2%
Internal sales growth was strongest in the United States at 7.4%, while
Europe grew 5.6% internally. The Company also continued to experience strong
internal growth in the Pacific Rim and Asia (excluding Japan). Internal
growth was most notable in endodontics, orthodontics, other consumables,
intra-oral cameras and digital x-ray systems.
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****
Graph titled "2001 Geographic Sales"
Information disclosed:
% of
Region Sales
United States 51%
Europe 29%
Japan 4%
Pacific Rim and Asia 4%
Latin America 5%
Other Regions 7%
****
****
Graph titled "2001 Product Distribution"
Information disclosed:
% of
Product Category Sales
Consumables and Small Equipment 90%
Heavy Equipment 7%
Non-Dental 3%
****
Internal sales growth for heavy equipment, including x-ray equipment and
intra-oral cameras, was 9.1%, while consumable and small equipment internal
sales growth was 6.5%. These increases were offset slightly by softening
sales of non-dental products in 2001.
Gross Profit
Gross profit was $568.5 million in 2001 compared to $462.8 million in 2000,
an increase of $105.7 million, or 22.8%. Gross profit for 2001 represented
50.2% of net sales, or 52.5% excluding sales of precious metals, compared to
52.0% 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 purchase
accounting.
Operating Expenses
SG&A expense increased $86.0 million, or 28.5%, to $387.4 million in 2001
from $301.4 million in 2000. As a percentage of sales, SG&A expenses
increased to 34.2% compared to 33.9% in 2000. As a percentage of sales
without precious metal content, SG&A expenses were 35.8% in 2001.
Acquisitions and higher research and development spending were the primary
reasons for this increase. In addition, amortization of goodwill and
indefinite-lived intangible assets increased to $17.8 million ($14.0 million,
net of tax) from $10.2 million ($8.3 million, net of tax) in 2000, which
contributed to the increase.
During 2001, the Company recorded net restructuring and other costs of $5.1
million ($3.5 million, net of tax). The 2001 period included a restructuring
charge of $5.5 million to improve efficiencies in Europe, Brazil and North
America and $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 for a payment made at the point
of regulatory filings related to Oraqix, a product for 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 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 14 to the Consolidated Financial Statements).
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Other Income and Expenses
Net interest expense increased $11.5 million in 2001 due to higher debt
levels associated with the significant acquisition activity during 2001,
offset somewhat by 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 due primarily to income recognized in 2001
of $24.5 million ($15.1 million, net of tax) which included a $23.1 million
gain related to the Company's sale of InfoSoft, LLC to PracticeWorks, Inc.
and a $1.4 million minority interest benefit related to an intangible
impairment charge included in restructuring and other costs. Also
contributing to the increase in other income was $1.7 million of accrued
dividends related to this preferred stock investment 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 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. Net income in 2001 and 2000
included charges and income that affect the comparability between years as
described above. Net income and diluted earnings per common share for 2001
include additional goodwill amortization and interest costs related to the
$84.6 million Tulsa earn-out payment and inventory step-up charges for
Friadent and Degussa Dental during the year.
FOREIGN CURRENCY
Since approximately 50% of the Company's 2002 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, Switzerland, and the Netherlands.
CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES
The Company has identified below the accounting estimates believed to be
critical to its business and results of operations. These critical estimates
represent those 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 and
indefinite-lived intangible assets be discontinued and instead an annual
impairment approach be applied. The Company performed the transitional
impairment tests upon adoption and the annual impairment tests during 2002,
as required, and no impairment was identified. These impairment tests are
based upon a fair value approach rather than an evaluation of the
undiscounted cash flows. If impairment is identified 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. If
impairment is identified on indefinite-lived intangibles, the resulting
charge reflects the excess of the asset's carrying cost over its fair value.
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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.
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. Except for certain earnings that the
Company intends to reinvest indefinitely, provision has been made for the
estimated U.S. federal income tax liabilities applicable to undistributed
earnings of affiliates and associated companies. Judgement is required in
assessing the future tax consequences of events that have been recognized in
our financial statements or tax returns. If the outcome of these future tax
consequences differs from our estimates the outcome could materially impact
our financial position or our results of operations. In addition, we operate
within multiple taxing jurisdictions and are subject to audit in these
jurisdictions. We record accruals for the estimated outcomes of these audits
and the accruals may change in the future due to the outcome of these audits.
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 any liabilities for probable losses well in the past; however,
court decisions could cause liability to be incurred in excess of estimates.
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LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities during 2002 were $173.0 million
compared to $211.1 million during 2001. The 2001 cash flows benefited from a
$29.1 million reduction in precious metal inventory acquired in the Degussa
Dental acquisition. Excluding this reduction, cash flows from operating
activities decreased by $9.0 million from 2001 to 2002. This decrease
resulted primarily from restructuring outflows and payments of annual volume
rebates for precious metal purchases, offset somewhat by higher operating
earnings.
****
Graph titled "Working Capital Management"
Information disclosed:
Inventory Receivable
Year Days Days
1998 132 55
1999 122 52
2000 114 52
2001 93 46
2002 100 49
****
Investing activities, for the year ended December 31, 2002, include capital
expenditures of $57.5 million. During 2003, the Company expects its capital
expenditures to be approximately $70 million. This increase from 2002 is due
largely to expenditures related to the construction of the Company's
pharmaceutical manufacturing facility in Chicago, IL. Net acquisition
activity for 2002 was $49.8 million, which primarily included cash paid to
acquire Austenal of $21.1 million and additional net consideration of $24.7
million related to the purchases of Degussa Dental, the AZ Assets and
Friadent. Additionally, in 2003, the Company expects to make the remaining
payments of $18 million related to the Oraqix agreement and may be required
to make a payment of up to $10 million for the final consideration related to
the Degussa Dental purchase if an unfavorable ruling is received in
arbitration (see Note 3 to the consolidated financial statements).
The Company's long-term debt increased by $46.3 million in 2002 to $769.8
million. This net change included an increase of $136.6 million due to
exchange rate fluctuations on non-U.S. dollar denominated debt. A portion of
this debt qualifies as a hedge of the Company's net investments in certain
foreign subsidiaries and the offset of this increase is reflected in
"Accumulated other comprehensive gain (loss)". In addition, another portion of
this debt is hedged by cross currency swaps, the value of which increased by
$58.1 million in 2002 to an asset position of $52.3 million and is reflected
in "Other noncurrent assets". As a result, the income statement impact of the
change in currency related to the debt is completely offset by the income
statement impact of changes in the fair values of the swaps. Excluding the
exchange rate fluctuations, long-term debt was reduced by $90.3 million
during 2002 from operating cash flows. During 2002, the Company's ratio of
long-term debt to total capitalization decreased to 47.9% compared to 54.3%
at December 31, 2001.
Under its multi-currency revolving credit agreement, the Company is able to
borrow up to $250 million through May 2006 ("the five-year facility") and
$250 million through May 2003 ("the 364 day facility"). The 364-day facility
terminates in May 2003, 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 an aggregate $250 million under two commercial paper
facilities; a $250 million U.S. facility and a $250 million U.S. dollar
equivalent European facility ("Euro CP facility"). Under the Euro CP
facility, borrowings can be denominated in Swiss francs, Japanese yen, Euros,
British pounds and U.S. dollars. The 364-day facility serves as a back-up to
these commercial paper facilities. The total available credit under the
commercial paper facilities and the 364-day facility is $250 million.
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The Company also has access to $83.2 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 $420.9 million at
December 31, 2002. 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, 2002, the Company was in
compliance with these covenants.
The following table presents the Company's scheduled contractual cash
obligations at December 31, 2002:
Less Than 1-4 5 Years
Contractual Obligations 1 Year Years Or More Total
(in thousands)
Long-term debt $ 23,156 $706,429 $ 40,238 $769,823
Operating leases 75,542 23,493 12,394 111,429
$ 98,698 $729,922 $ 52,632 $881,252
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, the Financial Accounting Standards Board ("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
adoption is not expected to be material.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity". The principal change resulting
from this statement as compared to EITF 94-3 relates to more stringent
requirements for the recognition of a liability for a cost associated with an
exit or disposal activity. This Statement requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. Based on a preliminary assessment of this new standard, the
Company believes that SFAS 146 may impact the timing of the recognition of
future restructuring activities, whereby liabilities associated with the
elements of the restructuring plan may need to be recognized at various dates
subsequent to the commitment date rather than at the commitment date, which
is the Company's current practice.
D16
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
In addtion, it clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The interpretation is effective on a
prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements of FIN 45 are effective for financial statements
of interim or annual periods ending after December 15, 2002 and the Company
has complied with these requirements. The Company is currently evaluating the
impact of the application of this interpretation, but does not expect that
FIN 45 will have a material impact on its financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of FAS 123". This Statement amends
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation", to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The annual disclosure provisions of SFAS 148 are effective
for annual periods ending after December 31, 2002 and the interim disclosure
provisions are effective for the first interim period beginning after
December 15, 2002. The Company has complied with these disclosure
requirements and has elected not to adopt the fair value based accounting
provisions of this new standard.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51".
The primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to
determine when and which business enterprise should consolidate the variable
interest entity (the "primary beneficiary"). This new model for consolidation
applies to an entity which either (1) the equity investors (if any) do not
have a controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46
requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a variable interest entity make additional
disclosures. Certain disclosure requirements of FIN 46 are effective for
financial statements issued after January 31, 2003. The remaining provisions
of FIN 46 are effective immediately for all variable interest entities
created after January 31, 2003 and are effective beginning in the first
interim or annual reporting period beginning after June 15, 2003 for all
variable interest entities created before February 1, 2003. The Company has
determined that the application of this standard will not have a material
impact on its financial statements.
D16
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 in addition to the
risks on its financial instruments, such as possible impacts on its pricing
and production costs, 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 total
long-term debt was $774.0 million versus its carrying value of $769.8 million
as of December 31, 2002. The fair value approximated the carrying value since
much of the Company's debt is variable rate and reflects current market
rates. The fixed rate Eurobonds are 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 therefore the fair value of these
instruments approximates their carrying values. The Company has fixed rate
Swiss franc and Japanese yen denominated notes with estimated fair values
that differ from their carrying values. At December 31, 2002, the fair value
of these instruments was $235.6 million versus their carrying values of
$231.4 million. The fair values differ from the carrying values due to lower
market interest rates at December 31, 2002 versus the rates at issuance of
the notes. The Company holds equity securities, classified as
available-for-sale, within "Other noncurrent assets". The carrying value of
these securities was $12.4 million which includes $7.9 million of unrealized
losses which the Company deems to be temporary. In accordance with SFAS 115,
the Company records the unrealized losses related to these securities within
"Accumulated other comprehensive gain (loss)"until sold.
Derivative Financial Instruments
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. Additionally, the Company utilizes
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. The Company also holds stock warrants which are considered
derivative financial instruments as defined under SFAS No. 133.
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, 2002 are summarized in the table that
follows. These foreign exchange contracts generally have maturities of less
than twelve months and counterparties to the transactions are typically
large international financial institutions.
D16
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 debt denominated
in one currency to another currency. In July 1998, the Company entered
into interest rate swap agreements with notional amounts totaling $80.0
million converting a portion of its variable rate financing to fixed rate
debt. These U.S. dollar swaps were terminated in February 2001 at a cost of
$1.2 million. In January 2000 and February 2001, the Company entered into
interest rate swap agreements with notional amounts totaling 180 million
Swiss francs converting a portion of the Company's variable rate financing
to fixed rate debt. These agreements effectively convert the underlying
debt's interest rate to an average fixed rate of 3.3% for an average period
of 4 years. In February 2002, the Company entered into interest rate swap
agreements with notional amounts totaling 12.6 billion Japanese yen
converting a portion of its variable rate financing to fixed rate debt.
These agreements effectively convert the underlying debt's interest rate to
an average fixed rate of 1.6% for a term of ten years. As part of this
transaction, the Company offset a portion of its Swiss franc swaps (115
million Swiss francs) by entering into reverse swap agreements with
identical terms. 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 4.4%. 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. dollars, currently at 2.8%. 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 and
foreign exchange rates. At December 31, 2002, the estimated net fair
values of the swap agreements was $52.3 million.
Commodity Price Risk Management The Company selectively enters into
commodity price swaps to effectively fix certain variable raw material
costs. 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 was $4.20 per troy ounce. In November, 2002, the Company entered
into a commodity price swap agreement with notional amounts totaling
300,000 troy ounces of silver bullion to hedge forecasted purchases
throughout calendar year 2003. The average fixed rate of this agreement is
$4.65 per troy ounce. At December 31, 2002, the estimated fair value was
$14,000.
As of December 31, 2002, the Company had leased $59.3 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 in "Cost of products sold". The terms of the leases are
less than one year and the average lease rate at December 31, 2002 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 to
limit the Company's exposure to commodity price volatility.
D16
EXPECTED MATURITY DATES DECEMBER 31, 2002
2008 and Carrying Fair
2003 2004 2005 2006 2007 beyond Value Value
(dollars in thousands)
Notes Payable and Current Portion
of Long-term Debt:
U.S. dollar denominated $ 3,487 $ - $ - $ - $ - $ - $ 3,487 $ 3,487
Average interest rate 2.48% 2.48%
Australian dollar denominated 143 - - - - - 143 143
Average interest rate 8.75% 8.75%
Denmark krone denominated 62 - - - - - 62 62
Average interest rate 6.50% 6.50%
Euro denominated 138 - - - - - 138 138
Average interest rate 6.00% 6.00%
Japanese yen denominated 720 - - - - - 720 720
Average interest rate 2.00% 2.00%
-----------------------------------------------------------------------------------
4,550 - - - - - 4,550 4,550
2.76% 2.76%
Long Term Debt:
U.S. dollar denominated - 154 22 - - - 176 176
Average interest rate 5.46% 5.64% 5.48%
Swiss franc denominated - - 40,238 145,432 40,238 - 225,908 229,753
Average interest rate 4.49% 3.63% 4.49% 3.94%
Japanese yen denominated 19,914 18,441 18,222 105,776 - - 162,353 162,695
Average interest rate 1.26% 1.43% 1.41% 0.56% 0.84%
Euro denominated 1,701 - - 378,144 - - 379,845 379,845
Average interest rate 5.99% 5.75% 5.75%
Thai baht denominated 1,113 - - - - - 1,113 1,113
Average interest rate 2.75% 2.75%
Chile peso denominated 428 - - - - - 428 428
Average interest rate 6.80% 6.80%
-----------------------------------------------------------------------------------
23,156 18,595 58,482 629,352 40,238 - 769,823 774,010
1.78% 1.46% 3.53% 4.39% 4.49% 4.18%
Foreign Exchange Forward Contracts:
Forward purchase, 1.8 billion Japanese
yen 14,606 - - - - - 596 596
Forward purchase, 30.8 million Swiss
francs 21,916 - - - - - 311 311
Forward purchase, 7.3 million Canadian
dollar 4,812 - - - - - (97) (97)
Forward sales, 3.2 million Euro 3,105 - - - - - (54) (54)
Interest Rate Swaps:
Interest rate swaps - U.S. dollar,
terminated 2/2001 (58) (33) (21) - - - (112) (112)
Interest rate swaps - Japanese yen - - - - - 105,777 (7,882) (7,882)
Average interest rate 1.6%
Interest rate swaps - Swiss francs - - - 47,026 - - (2,861) (2,861)
Average interest rate 3.4%
Interest rate swaps - Euro - - - 367,290 - - 10,854 10,854
Average interest rate 4.4%
Basis swap - Euro-U.S. Dollar - - - 315,000 - - 52,290 52,290
Average interest rate 2.8%
Silver Swap - U.S. dollar 1,394 - - - - - 14 14
D16
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 includes
consideration of the system of internal accounting controls 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/Bret W. Wise
John C. Miles II Gerald K. Kunkle Bret W. Wise
Chairman and President and Senior Vice
Chief Executive Officer Chief Operating Officer President and
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 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, 2002 and
2001, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002 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.
As discussed in Notes 1 and 8 to the consolidated financial statements, on
January 1, 2002 the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets".
/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
January 23, 2003
D16
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2002 2001 2000
(in thousands, except per share amounts)
Net sales (Note 4) $1,513,742 $1,132,968 $ 889,796
Cost of products sold 780,843 564,448 427,025
Gross profit 732,899 568,520 462,771
Selling, general and administrative expenses 479,131 387,402 301,405
Restructuring and other costs (income) (Note 14) (2,732) 5,073 (56)
Operating income 256,500 176,045 161,422
Other income and expenses:
Interest expense 29,238 19,358 7,659
Interest income (1,853) (1,102) (862)
Other expense (income), net (Note 5) 8,130 (27,338) 2,829
Income before income taxes 220,985 185,127 151,796
Provision for income taxes (Note 12) 73,033 63,631 50,780
Net income $ 147,952 $ 121,496 $ 101,016
Earnings per common share (Note 2):
Basic $ 1.89 $ 1.56 $ 1.30
Diluted 1.85 1.54 1.29
Cash dividends declared per common share $ 0.18400 $ 0.18333 $ 0.17083
Weighted average common shares outstanding (Note 2):
Basic 78,180 77,671 77,785
Diluted 79,994 78,975 78,560
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
D16
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2002 2001
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 25,652 $ 33,710
Accounts and notes receivable-trade, net (Note 1) 221,262 191,534
Inventories, net (Notes 1 and 6) 214,492 197,454
Prepaid expenses and other current assets 79,595 61,545
Total Current Assets 541,001 484,243
Property, plant and equipment, net (Notes 1 and 7) 313,178 240,890
Identifiable intangible assets, net (Notes 1 and 8) 236,009 248,890
Goodwill, net (Notes 1 and 8) 898,497 763,270
Other noncurrent assets 98,348 60,858
Total Assets $ 2,087,033 $ 1,798,151
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 66,625 $ 69,904
Accrued liabilities (Note 9) 190,783 194,357
Income taxes payable 103,787 86,622
Notes payable and current portion
of long-term debt (Note 10) 4,550 7,634
Total Current Liabilities 365,745 358,517
Long-term debt (Note 10) 769,823 723,524
Deferred income taxes 27,039 32,526
Other noncurrent liabilities 87,239 73,628
Total Liabilities 1,249,846 1,188,195
Minority interests in consolidated subsidiaries 1,259 437
Commitments and contingencies (Note 16)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued -- --
Common stock, $.01 par value; 200 million shares authorized;
81.4 million shares issued at December 31, 2002 and December 31, 2001 814 814
Capital in excess of par value 156,898 152,916
Retained earnings 730,971 597,414
Accumulated other comprehensive gain (loss) 1,624 (77,388)
Unearned ESOP compensation (1,899) (3,419)
Treasury stock, at cost, 3.0 million shares at December 31, 2002
and 3.5 million shares at December 31, 2001 (52,480) (60,818)
Total Stockholders' Equity 835,928 609,519
Total Liabilities and Stockholders' Equity $ 2,087,033 $ 1,798,151
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
D16
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Unearned Total
Capital in Other ESOP Stock-
Common Excess of Retained Comprehensive Compensa- Treasury holders'
Stock Par Value Earnings Gain (Loss) tion Stock Equity
(in thousands)
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, net of tax:
Foreign currency translation adjustment -- -- -- (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, net of tax:
Foreign currency translation adjustment -- -- -- (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
Comprehensive Income:
Net income -- -- 147,952 -- -- -- 147,952
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment -- -- -- 88,739 -- -- 88,739
Unrealized loss on available-for-sale
securities -- -- -- (4,854) -- -- (4,854)
Net loss on derivative financial
instruments -- -- -- (4,670) -- -- (4,670)
Minimum pension liability adjustment -- -- -- (203) -- -- (203)
Comprehensive Income 226,964
Exercise of stock options -- 715 -- -- -- 8,338 9,053
Tax benefit from stock options exercised -- 3,320 -- -- -- -- 3,320
Cash dividends ($0.184 per share) -- -- (14,395) -- -- -- (14,395)
Decrease in unearned ESOP compensation -- -- -- -- 1,520 -- 1,520
Fractional share payouts -- (53) -- -- -- -- (53)
Balance at December 31, 2002 $ 814 $ 156,898 $ 730,971 $ 1,624 $ (1,899) $ (52,480) $ 835,928
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
D16
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------------
2002 2001 2000
(in thousands)
Cash flows from operating activities:
Net income $ 147,952 $ 121,496 $ 101,016
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 34,032 25,219 22,024
Amortization 9,827 29,115 19,335
Deferred income taxes (6,019) 6,451 4,249
Restructuring and other (income) costs (2,732) 5,073 (56)
Other non-cash costs (income) 9,281 (3,849) 815
Gain on sale of business -- (23,121) --
Loss on disposal of property, plant and equipment 1,703 54 482
Non-cash ESOP compensation 1,520 1,519 1,520
Changes in operating assets and liabilities, net of
acquisitions and divestitures:
Accounts and notes receivable-trade, net (13,946) (3,709) (9,218)
Inventories, net (8,940) 14,763 (1,216)
Prepaid expenses and other current assets (1,515) 47 (1,526)
Accounts payable (7,275) 9,180 1,492
Accrued liabilities (12,732) 28,704 7,018
Income taxes 17,833 4,295 (834)
Other, net 3,994 (4,169) 521
Net cash provided by operating activities 172,983 211,068 145,622
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (49,805) (812,523) (14,995)
Expenditures for identifiable intangible assets (3,309) (4,265) (1,423)
Proceeds from bulk sale of precious metals inventory 6,754 41,814 --
Insurance proceeds received for fire-destroyed equipment 2,535 8,980 --
Redemption of preferred stock 15,000 -- --
Proceeds from sale of property, plant and equipment 1,777 645 215
Capital expenditures (57,454) (49,337) (28,425)
Net cash used in investing activities (84,502) (814,686) (44,628)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of deferred financing costs 100,244 1,435,175 114,341
Payments on long-term borrowings (190,589) (819,186) (149,390)
(Decrease) increase in short-term borrowings (3,666) 7,511 (18,389)
Proceeds from exercise of stock options and warrants 9,053 8,017 7,425
Cash paid for treasury stock -- (875) (40,092)
Cash dividends paid (14,358) (14,228) (13,004)
Proceeds from the termination of a pension plan -- 8,486 --
Fractional share payout (53) -- --
Net cash (used in) provided by financing activities (99,369) 624,900 (99,109)
Effect of exchange rate changes on cash and cash equivalents 2,830 (3,005) 2,130
Net (decrease) increase in cash and cash equivalents (8,058) 18,277 4,015
Cash and cash equivalents at beginning of period 33,710 15,433 11,418
Cash and cash equivalents at end of period $ 25,652 $ 33,710 $ 15,433
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
D16
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001 2000
(in thousands)
Supplemental disclosures of cash flow information:
Interest paid $25,545 $15,967 $ 7,434
Income taxes paid 55,913 47,215 39,064
Supplemental disclosures of non-cash transactions:
Receipt of convertible preferred stock in connection
with the sale of a business -- 32,000 --
Receipt of common stock and stock warrants in exchange
for convertible preferred stock 18,582 -- --
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)
Austenal, Inc. January 2002 $ 35,330 $ 21,065 $ 14,265
Degussa Dental Group October 2001 665,531 519,191 146,340
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 130,469 119,347 11,122
Friadent GmbH January 2001 128,356 97,749 30,607
Aggregate 2000 acquisitions Various 2000 16,665 16,227 438
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
D16
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 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 dental injectable anesthetics,
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 in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from those
estimates, if different assumptions are made or if different conditions exist.
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 $18.5 million
and $12.6 million at December 31, 2002 and 2001, 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,
2002 and 2001, the cost of $13.0 million, or 6%, and $23.6 million, or 12%,
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 methods. 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, 2002 and December 31, 2001 by $0.8 million and $2.3 million,
respectively.
D16
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. 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. 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.
Identifiable Finite-lived Intangible Assets
Identifiable finite-lived 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. 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. 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.
Goodwill and Indefinite-Lived Intangible 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 and
indefinite-lived intangible assets be discontinued and instead an annual
impairment approach be applied. The Company performed the transitional
impairment tests upon adoption and the annual impairment tests during 2002,
as required, and no impairment was identified. These impairment tests are
based upon a fair value approach rather than an evaluation of the
undiscounted cash flows. If impairment is identified 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. If
impairment is identified on indefinite-lived intangibles, the resulting
charge reflects the excess of the asset's carrying cost over its fair value.
Derivative Financial Instruments
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.
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. Additionally, the Company utilizes
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. The Company also holds stock warrants which are considered
derivative financial instruments as defined under SFAS No. 133.
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.
D16
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 losses of $3.5 million in 2002 and $2.7 million
in 2000 and exchange gains of $1.2 million in 2001 are included in "Other
expense (income), 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. Net
sales includes shipping and handling costs collected from customers in
connection with the sale.
A significant portion of the Company's net sales is comprised of sales of
precious metals generated through its precious metal alloy product offerings.
The precious metals content of sales was $187.1 million and $50.6 million for
2002 and 2001, respectively. There were no sales of precious metals in 2000.
Warranties
The Company provides warranties on certain equipment products. Estimated
warranty costs are accrued when sales are made to customers. Estimates for
warranty costs are based primarily on historical warranty claim experience.
Research and Development Costs
Research and development ("R&D") costs relate primarily to internal costs
for salaries and direct overhead costs. In addition, the Company sometimes
contracts with outside vendors to conduct R&D activities. All such R&D costs
are charged to expense when incurred. The Company capitalizes the costs of
equipment that has general R&D uses and expenses such equipment that is
solely for specific R&D projects. The depreciation related to this
capitalized equipment is included in the Company's R&D costs. R&D costs are
included in "Selling, general and administrative expenses" and amounted to
approximately $41.6 million, $28.3 million and $20.4 million for 2002, 2001
and 2000, 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
weighted average number of shares outstanding for the period. Diluted
earnings per share is calculated by dividing net earnings by the weighted
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.
D16
Stock Compensation
The Company has stock-based employee compensation plans which are described
more fully in Note 11. The Company applies the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", 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. The
following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
Year Ended December 31,
2002 2001 2000
(in thousands, except per share amounts)
Net income as reported $ 147,952 $ 121,496 $ 101,016
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (9,576) (6,137) (4,614)
Pro forma net income $ 138,376 $ 115,359 $ 96,402
Basic earnings per common share
As reported $ 1.89 $ 1.56 $ 1.30
Pro forma under fair value based method $ 1.77 $ 1.49 $ 1.24
Diluted earnings per common share
As reported $ 1.85 $ 1.54 $ 1.29
Pro forma under fair value based method $ 1.73 $ 1.46 $ 1.23
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes foreign currency translation
adjustments related to the Company's foreign subsidiaries, net of the related
changes in certain financial instruments hedging these foreign currency
investments. In addition, changes in the fair value of the Company's
available-for-sale investment securities and certain derivative financial
instruments and changes in its minimum pension liability are recorded in
other comprehensive income (loss). These adjustments are recorded in other
comprehensive income (loss) net of any related tax effects. For the years
ended 2002 and 2000 these adjustments were net of tax benefits of $32.9
million and $1.1 million, respectively. For the year ended 2001, these
adjustments were net of tax liabilities of $5.6 million.
The balances included in accumulated other comprehensive gain (loss) in the
consolidated balance sheets are as follows:
December 31,
2002 2001
(in thousands)
Foreign currency translation adjustments $ 13,548 $(75,191)
Net loss on derivative financial
instruments (5,983) (1,313)
Unrealized loss on available-for-sale securities (4,854) --
Minimum pension liability (1,087) (884)
$ 1,624 $(77,388)
Reclassifications
Certain reclassifications have been made to prior years' data in order to
conform to the current year presentation.
D16
Pending Accounting Changes
In June 2001, the Financial Accounting Standards Board ("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
adoption is not expected to be material.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity". The principal change resulting
from this statement as compared to EITF 94-3 relates to more stringent
requirements for the recognition of a liability for a cost associated with an
exit or disposal activity. This Statement requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. Based on a preliminary assessment of this new standard, the
Company believes that SFAS 146 may impact the timing of the recognition of
future restructuring activities, whereby liabilities associated with the
elements of the restructuring plan may need to be recognized at various dates
subsequent to the commitment date rather than at the commitment date, which
is the Company's current practice.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
In addtion, it clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The interpretation is effective on a
prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements of FIN 45 are effective for financial statements
of interim or annual periods ending after December 15, 2002 and the Company
has complied with these requirements. The Company is currently evaluating the
impact of the application of this interpretation, but does not expect that
FIN 45 will have a material impact on its financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of FAS 123". This Statement amends
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation", to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The annual disclosure provisions of SFAS 148 are effective
for annual periods ending after December 31, 2002 and the interim disclosure
provisions are effective for the first interim period beginning after
December 15, 2002. The Company has complied with these disclosure
requirements and has elected not to adopt the fair value based accounting
provisions of this new standard.
D16
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51".
The primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to
determine when and which business enterprise should consolidate the variable
interest entity (the "primary beneficiary"). This new model for consolidation
applies to an entity which either (1) the equity investors (if any) do not
have a controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46
requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a variable interest entity make additional
disclosures. Certain disclosure requirements of FIN 46 are effective for
financial statements issued after January 31, 2003. The remaining provisions
of FIN 46 are effective immediately for all variable interest entities
created after January 31, 2003 and are effective beginning in the first
interim or annual reporting period beginning after June 15, 2003 for all
variable interest entities created before February 1, 2003. The Company has
determined that the application of this standard will not have a material
impact on its financial statements.
.
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, 2002
Basic EPS $147,952 78,180 $ 1.89
Incremental shares from assumed exercise
of dilutive options - 1,814
Diluted EPS $147,952 79,994 $ 1.85
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
Options to purchase 0.1 million and 1.4 million shares of common stock that
were outstanding during the years ended 2002 and 2000, 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.
D16
NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES
Acquisitions
All acquisitions completed in 2002, 2001 and 2000 were accounted for under
the purchase method of accounting; accordingly, the results of the operations
acquired are included in the accompanying financial statements for the
periods subsequent to 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.
In January 2002, the Company acquired the partial denture business of
Austenal Inc. ("Austenal") in a cash transaction valued at approximately
$21.1 million, including debt assumed. Previously headquartered in Chicago,
Illinois, Austenal manufactured dental laboratory products and was the world
leader in the manufacture and sale of systems used by dental laboratories to
fabricate partial dentures. The purchase price 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 preliminary purchase price allocation
for Austenal is as follows (in thousands):
Current assets $ 6,896
Property, plant and equipment 999
Identifiable intangible assets and goodwill 22,838
Other long-term assets 4,597
Current liabilities (13,193)
Other long-term liabilities (1,072)
$ 21,065
Pro forma financial information has not been presented for Austenal since
its effect would not be significant.
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 was subject to increase or decrease, based on certain working
capital levels of Degussa Dental as of October 1, 2001. In June 2002, the
Company made a partial payment of 12.1 million Euros, or $11.4 million, as a
closing balance sheet adjustment. An additional closing balance sheet
adjustment is subject to a dispute between the parties and is in arbitration.
The Company may be required to pay up to $10 million for the final closing
balance sheet adjustment depending upon the outcome of the arbitration. Any
payments would result in additional purchase price. Previously headquartered
in Hanau-Wolfgang, Germany, Degussa Dental manufactured and sold dental
products, including precious metal alloys, ceramics and dental laboratory
equipment, and chairside products.
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 is composed of the following: an initial $96.5 million
payment which was made at closing in March 2001; a $20 million contingency
payment (including related accrued interest) associated with the first year
sales of injectible dental anesthetic which was paid during the first quarter
of 2002; a $2.0 million payment upon submission of a New Drug Application
("NDA") in the U.S. and a Marketing Authorization Application ("MAA") in
Europe for the Oraqix product under development; payments of $6.0 million and
$2.0 million upon the approval of the NDA and MAA, respectively, for
licensing rights; and a $10.0 million prepaid royalty payment upon approval
of both applications. Under the terms of the agreement, the $2.0 million
payment related to the application filings was accrued during the fourth
quarter of 2001 and was paid during the first quarter of 2002. Because the
Oraqix product had not received regulatory approvals for its use, this
payment was considered to be research and development costs and was expensed
as incurred. The Company expects that the regulatory applications will be
approved during 2003, and as a result, it expects to make the remaining
payments of $18.0 million during the year. These payments will be capitalized
and amortized over the term of the licensing agreement.
D16
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). During the first quarter of 2002, the Company
received cash of 16.5 million German marks or approximately $7.3 million,
representing a final balance sheet adjustment. As a result of this closing
balance sheet adjustment, goodwill was reduced by approximately $7.3 million.
Previously headquartered in Mannheim, Germany, Friadent was a major global
dental implant manufacturer and marketer with subsidiaries in Germany,
France, Denmark, Sweden, the United States, Switzerland, Brazil, and Belgium.
The respective purchase prices plus direct acquisition costs for Degussa
Dental, Friadent and the AZ Assets have been allocated on the basis of
estimated fair values at the dates of acquisition. The purchase price
allocations for these acquisitions are as follows:
Degussa Dental Friadent AZ Assets
(in thousands)
Current assets $ 166,124 $ 16,244 $ --
Property, plant and equipment 71,641 4,184 878
Identifiable intangible assets and goodwill 413,725 104,484 129,591
Other long-term assets 14,041 3,444 --
Current liabilities (104,642) (27,553) (11,122)
Other long-term liabilities (41,698) (3,054) --
$ 519,191 $ 97,749 $ 119,347
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 was 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. The Company was
not required to make a payment under this earn-out provision.
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.
During 2000, the Company completed five acquisitions with an aggregate
purchase price of of $16.7 million.
D16
Divestitures
In March 2001, the Company sold InfoSoft, LLC to PracticeWorks Inc.
("PracticeWorks"). InfoSoft, LLC was the wholly owned subsidiary of the
Company, that developed and sold software and related products for dental
practice management. In the transaction, the Company received 6.5%
convertible preferred stock in PracticeWorks, with a fair value of $32
million. This sale resulted in a $23.1 million pretax gain which was included
in "Other expense (income), net". The Company recorded this preferred stock
investment and subsequent accrued dividends to "Other noncurrent assets".
In June 2002, the Company completed a transaction with PracticeWorks to
exchange the accumulated balance of this preferred stock investment for a
combination of $15.0 million of cash, 1.0 million shares of PracticeWorks'
common stock valued at $15.0 million and 450,000 seven-year term stock
warrants issued by PracticeWorks, valued at $3.6 million, based on the
Black-Scholes option pricing model. The transaction resulted in a loss to the
Company of $1.1 million, which is included in "Other expense (income), net".
The exchange provided the Company with immediate cash, as well as, improved
liquidity on its investment in PracticeWorks, while also providing additional
market appreciation potential if PracticeWorks' business and stock price
perform positively. As a result of the transaction, the Company no longer
receives preferred stock dividends. The common stock has been classified as
available-for-sale and any fair value adjustments to this investment are
reflected in "Accumulated other comprehensive gain (loss)" until sold. The
warrants are classified as derivative financial instruments as defined under
SFAS No. 133 and any fair value adjustments in these holdings are reflected
in current income each quarter. For the year ended December 31, 2002, the
unrealized loss on the stock warrants was $2.5 million. These unrealized
losses were included in "Other expense (income), net".
D16
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 disclosing information
about reportable segments in financial statements. The Company has numerous
operating businesses covering a wide range of products and geographic
regions, primarily serving the professional dental market. Professional
dental products represented approximately 98%, 97% and 95% of sales in 2002,
2001 and 2000, respectively. Accordingly, all operating businesses are
aggregated into one reportable segment for purposes of SFAS 131.
six
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 2002, 2001 and 2000. Net sales reported
below represent revenues for shipments made by operating businesses located
in the country or territory identified, including export sales. Assets
reported represent those held by the operating businesses located in the
respective geographic areas.
United Other
States Germany Foreign Consolidated
(in thousands)
2002
Net sales $ 738,831 $ 333,691 $ 441,220 $ 1,513,742
Long-lived assets 186,674 100,744 114,780 402,198
2001
Net sales $ 627,480 $ 160,347 $ 345,141 $ 1,132,968
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
The following table presents sales information by product category:
Year Ended December 31,
2002 2001 2000
(in thousands)
Consumables and small equipment $1,390,522 $1,016,062 $ 769,740
Heavy equipment 90,231 81,913 76,374
Non-dental 32,989 34,993 43,682
$1,513,742 $1,132,968 $ 889,796
Third party export sales from the United States are less than ten percent
of consolidated net sales. No customers accounted for more than ten percent
of consolidated net sales in 2002. In 2001, one customer, a distributor,
accounted for 11% of consolidated net sales. In 2000, two customers, both
distributors, accounted for 14% and 10% of consolidated net sales.
D16
NOTE 5 - OTHER EXPENSE (INCOME)
Other expense (income), net consists of the following:
Year Ended December 31,
-----------------------------
2002 2001 2000
Foreign exchange transaction losses (gains) $ 3,489 $ (1,177) $ 2,695
Gain on sale of InfoSoft, LLC -- (23,121) --
Unrealized losses on stock warrants 2,471 -- --
Preferred stock dividend income (929) (1,710) --
Loss on preferred stock conversion 1,056 -- --
Minority interests 364 (1,265) (215)
Other 1,679 (65) 349
$ 8,130 $(27,338) $ 2,829
NOTE 6 - INVENTORIES
Inventories consist of the following:
December 31,
2002 2001
(in thousands)
Finished goods $134,989 $119,030
Work-in-process 39,065 35,539
Raw materials and supplies 40,438 42,885
$214,492 $197,454
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
2002 2001
(in thousands)
Assets, at cost:
Land $ 34,746 $ 19,752
Buildings and improvements 160,566 114,202
Machinery and equipment 274,915 238,157
Construction in progress 28,368 20,566
498,595 392,677
Less: Accumulated depreciation 185,417 151,787
$313,178 $240,890
D16
NOTE 8 - GOODWILL AND INTANGIBLE 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 and
indefinite-lived intangible assets be discontinued and instead an annual
impairment test approach be applied. The impairment tests are required to be
performed transitionally upon adoption and annually thereafter (or more often
if adverse events occur) and are based upon a fair value approach rather than
an evaluation of the undiscounted cash flows. If goodwill impairment is
identified, 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. If impairment is identified on indefinite-lived intangibles, the
resulting charge reflects the excess of the asset's carrying cost over its
fair value. Other intangible assets with finite lives will continue to be
amortized over their useful lives. The Company performed the transitional
impairment tests and the annual impairment tests during 2002, as required by
SFAS 142, and no impairment was identified. In addition, as part of the
adoption of the standard, the Company assessed and identified intangible
assets which were deemed indefinite-lived.
In accordance with SFAS 142, prior period amounts have not been restated.
The following table presents prior year reported amounts adjusted to
eliminate the amortization of goodwill and indefinite-lived intangible assets.
Year Ended December 31,
2002 2001 2000
(in thousands, except per share amounts)
Reported net income $ 147,952 $ 121,496 $ 101,016
Add: amortization adjustment, net of related tax -- 13,963 8,319
Adjusted net income $ 147,952 $ 135,459 $ 109,335
Reported basic earnings per share $ 1.89 $ 1.56 $ 1.30
Add: amortization adjustment -- 0.18 0.11
Adjusted basic earnings per share $ 1.89 $ 1.74 $ 1.41
Reported diluted earnings per share $ 1.85 $ 1.54 $ 1.29
Add: amortization adjustment -- 0.18 0.11
Adjusted diluted earnings per share $ 1.85 $ 1.72 $ 1.40
The table below presents the net carrying values of goodwill and
identifiable intangible assets. The indefinite-lived intangible-lived assets
were designated as such as of January 1, 2002; however, the Company has shown
the value of these assets at December 31, 2001 for comparative purposes.
December 31,
2002 2001
(in thousands)
Goodwill $898,497 $763,270
Indefinite-lived identifiable intangible assets:
Trademarks $ 4,080 $ 4,080
Licensing agreements 149,254 118,979
Finite-lived identifiable intangible assets 82,675 125,831
Total identifiable intangible assets $236,009 $248,890
D16
A reconciliation of changes in the Company's goodwill is as follows:
December 31,
2002 2001
(in thousands)
Balance, beginning of the year $ 763,270 $ 264,023
Acquisition activity 68,201 545,239
Divestitures -- (5,948)
Impairment charges -- --
Amortization -- (15,423)
Effects of exchange rate changes 67,026 (24,621)
Balance, end of the year $ 898,497 $ 763,270
The change in the net carrying value of goodwill was primarily related to
the goodwill associated with the acquisition of Austenal purchased in January
2002, purchase price adjustments related to the Degussa Dental acquisition,
the closing balance sheet adjustment received in the Friadent acquisition
(see Note 3) and foreign currency translation adjustments. The increase in
indefinite-lived licensing agreements was due to final purchase price
adjustments related to the AZ Asset acquisition and foreign currency
translation adjustments. These intangible assets relate to the royalty-free
licensing rights to AstraZeneca's dental products and tradenames. The change
in finite-lived identifiable intangible assets was due primarily to the
finalization of the valuations of the intangible assets acquired in the
Degussa Dental acquisition which were previously based on estimates and
foreign currency translation adjustments.
Finite-lived identifiable intangible assets consist of the following:
December 31, 2002 December 31, 2001
-------------------------------------- ----------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
(in thousands)
Patents $ 53,902 $ (30,015) $ 23,887 $ 64,514 $ (27,866) $ 36,648
Trademarks 37,145 (6,608) 30,537 59,610 (5,630) 53,980
Licensing agreements 23,730 (6,411) 17,319 29,405 (14,877) 14,528
Other 26,151 (15,219) 10,932 44,961 (24,286) 20,675
$ 140,928 $ (58,253) $ 82,675 $ 198,490 $ (72,659) $ 125,831
Amortization expense for goodwill and indefinite-lived intangible assets
for 2001 and 2000 was $17.8 million and $10.2 million, respectvely.
Amortization expense for finite-lived identifiable intangible assets for
2002, 2001 and 2000 was $9.8 million, $11.3 million and $9.1 million,
respectively. The annual estimated amortization expense related to these
intangible assets for each of the five succeeding fiscal years is $9.8
million, $8.7 million, $7.5 million, $6.8 million and $5.9 million for 2003,
2004, 2005, 2006 and 2007, respectively.
D16
NOTE 9 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
2002 2001
(in thousands)
Payroll, commissions, bonuses and
other cash compensation $ 44,490 $ 39,139
Employee benefits 13,181 15,458
General insurance 14,965 13,886
Sales and marketing programs 19,401 21,533
Restructuring and other costs 18,043 24,497
Earn-out related to the AZ Asset purchase -- 20,622
Warranty liabilities 8,576 7,951
Other 72,127 51,271
$190,783 $194,357
A reconciliation of changes in the Company's warranty liability for 2002 is
as follows:
Warranty
Liability
December 31, 2002
(in thousands)
Balance, beginning of the year $ 7,951
Accruals for warranties issued during the year 5,381
Accruals related to pre-existing warranties (1,654)
Warranty settlements made during the year (3,705)
Effects of exchange rate changes 603
Balance, end of the year $ 8,576
D16
NOTE 10 - FINANCING ARRANGEMENTS
Short-Term Borrowings
Short-term bank borrowings amounted to $3.2 million and $3.5 million at
December 31, 2002 and 2001, respectively. The weighted average interest rates
of these borrowings were 2.5% and 3.3% at December 31, 2002 and 2001,
respectively. Unused lines of credit for short-term financing at December 31,
2002 and 2001 were $80.0 million and $66.9 million, respectively.
Substantially all short-term borrowings were classified as long-term as of
December 31, 2002 and 2001, 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,
2002 2001
(in thousands)
$250 million multi-currency revolving credit agreement expiring May 2006,
Japanese yen 12.6 billion at 0.56%, Swiss francs 65.0 million at 1.25% $152,803 $147,028
$250 million multi-currency revolving credit agreement expiring May 2003 -- 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 178,881 147,489
ABN Private Placement Note, Japanese yen 6.2 billion at 1.39% maturing December 2005 52,562 47,527
Euro 350.0 million Eurobonds at 5.75% maturing December 2006 378,144 303,563
$250 million commercial paper facility rated A/2-P/2 U.S. dollar borrowings -- 6,650
Other borrowings, various currencies and rates 8,836 20,061
771,226 727,656
Less: Current portion (included in notes payable and current portion of long-term debt) 1,403 4,132
$769,823 $723,524
The table below reflects the contractual maturity dates of the various
borrowings at December 31, 2002 (in thousands). The borrowings contractually
due in 2003 have been classified as long-term due to the Company's intent and
ability to renew or refinance these obligations beyond 2003. The individual
borrowings under the revolving credit agreement are structured to mature on a
quarterly basis but because the Company has the intent and ability to extend
them until the expiration date of the agreement, these borrowings are
considered contractually due in May 2006.
2003 $ 23,156
2004 18,595
2005 58,482
2006 629,352
2007 40,238
2008 and thereafter --
$769,823
D16
In July 1998, the Company entered into interest rate swap agreements with
notional amounts totaling $80.0 million converting a portion of its variable
rate financing to fixed rate debt. These U.S. dollar swaps were terminated in
February 2001 at a cost of $1.2 million. In January 2000 and February 2001,
the Company entered into interest rate swap agreements with notional amounts
totaling 180 million Swiss francs converting a portion of the Company's
variable rate financing to fixed rate debt. These agreements effectively
convert the underlying debt's interest rate to an average fixed rate of 3.3%
for an average period of 4 years. In February 2002, the Company entered into
interest rate swap agreements with notional amounts totaling 12.6 billion
Japanese yen converting a portion of its variable rate financing to fixed
rate debt. These agreements effectively convert the underlying debt's
interest rate to an average fixed rate of 1.6% for a term of ten years. As
part of this transaction, the Company offset a portion of its Swiss franc
swaps (115 million Swiss francs) by entering into reverse swap agreements
with identical terms. 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 4.4%. 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, currently at 2.8%.
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 ("facility B") and 0.10 % annually under
the $250 million 364-day facility ("facility A"). 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 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 Company has complementary U.S. dollar and Euro multicurrency commercial
paper facilities totaling $250 million which have utilization, dealer, and
annual appraisal fees which on average cost 0.11 % annually. The $250
million facility A acts as back-up credit to this commercial paper facility.
The total available credit under the commercial paper facilities and the
facility A 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. There were no
outstanding commercial paper obligations at December 31, 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 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. The Series C note and the ABN note
were issued to partially finance the Degussa Dental acquisition.
In December 2001, 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.
At December 31, 2002, the Company had total unused lines of credit,
including lines available under its short-term arrangements, of $420.9
million.
D16
NOTE 11 - STOCKHOLDERS' EQUITY
The Board of Directors authorized the repurchase of 1.5 million and 6.0
million shares of common stock for the years ended December 31, 2001 and
2000, 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 and
2.2 million shares for $40.1 million in 2001 and 2000, respectively. No share
repurchases were made during 2002.
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 stock options outstanding under three stock option plans
(1993 Plan, 1998 Plan and 2002 Plan). Further grants can be made under the
1998 and 2002 Plans. Under the1993 Plan, 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 generally expire ten years after the date of grant
under the 1993 Planand 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 grants of 6.5 million shares of common stock, plus
shares not granted under the 1993 Plan at the time of adoption of the 1998
Plan (as noted above, 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. Grants of options to key employees are solely
discretionary with the Board of Directors of the Company. 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. Such options are granted at exercise prices not less than the
fair market value of the common stock on the grant date.
The 2002 Plan authorized grants of 7.0 milion shares of common stock, (plus
any unexercised portion of canceled or terminated stock options granted under
the DENTSPLY International Inc. 1993 and 1998 Stock Option Plans), subject to
adjustment as follows: each January, if 7% of the outstanding common shares
of the Company exceed 7.0 million, the excess becomes available for grant
under the Plan. The 2002 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. Grants of options to key employees
are solely discretionary with the Board of Directors of the Company. 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. Such options are granted at exercise prices not
less than the fair market value of the common stock on the grant date.
It is intended that grants will be made under the 1998 Plan until the
shares authorized under that Plan are fully utilized. Then option grants
will only be made under the 2002 Plan, which will include the unexercised
portion of canceled or terminated options granted under the 1993 or 1998
Plans. Each non-employee director receives an automatic grant of 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 of the non-employee director was last granted an
option.
D16
The following is a summary of the status of the Plans as of December 31,
2002, 2001 and 2000 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, 1999 5,067,368 $ 15.72 2,401,523 $ 14.95 4,436,916
Authorized (Lapsed) - 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 (Lapsed) - (83,444)
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
Authorized (Lapsed) - 7,023,106
Granted 1,574,550 36.91 (1,574,550)
Exercised (515,565) 17.33 -
Expired/Canceled (100,639) 19.08 100,639
December 31, 2002 7,691,589 $ 24.50 4,649,889 $ 18.99 7,253,405
The following table summarizes information about stock options
outstanding under the Plans at December 31, 2002:
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 2002 (in years) Price 2002 Price
$10.01 - $15.00 738,515 2.1 $ 13.34 738,515 $ 13.34
15.01 - 20.00 2,596,019 6.1 16.52 2,577,019 16.51
20.01 - 25.00 1,341,693 7.8 24.59 856,343 24.60
25.01 - 30.00 86,750 8.5 27.89 25,850 27.92
30.01 - 35.00 1,383,012 8.9 31.22 452,162 31.17
35.01 - 40.00 1,545,600 9.9 36.96 - -
7,691,589 7.3 $ 24.50 4,649,889 $ 18.99
D16
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,
2002 2001 2000
Per share fair value $ 12.69 $ 11.47 $ 9.01
Expected dividend yield 0.50% 0.61% 0.75%
Risk-free interest rate 3.35% 5.01% 5.37%
Expected volatility 34% 33% 32%
Expected life (years) 5.50 5.50 5.50
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.
NOTE 12 - INCOME TAXES
The components of income before income taxes are as follows:
Year Ended December 31,
2002 2001 2000
(in thousands)
United States ("U.S.") $121,901 $136,135 $120,149
Foreign 99,084 48,992 31,647
$220,985 $185,127 $151,796
The components of the provision for income taxes are as follows:
Year Ended December 31,
2002 2001 2000
(in thousands)
Current:
U.S. federal $ 46,919 $ 44,237 $ 34,291
U.S. state 2,520 1,331 1,330
Foreign 29,613 11,612 10,910
Total 79,052 57,180 46,531
Deferred:
U.S. federal (5,164) 13,813 7,356
U.S. state (590) 1,141 669
Foreign (265) (8,503) (3,776)
Total (6,019) 6,451 4,249
$ 73,033 $ 63,631 $ 50,780
D16
The reconcilation of the U.S. federal statutory tax rate to the
effective rate is as follows:
Year Ended December 31,
2002 2001 2000
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
Effect of:
State income taxes, net of federal benefit 0.6 0.9 0.9
Nondeductible amortization of goodwill - 1.0 1.2
Foreign earnings at various rates (4.1) (2.7) (2.3)
Foreign tax credit - (0.8) (0.5)
Foreign losses with no tax benefit 1.9 0.5 0.8
Extraterritorial income (1.1) (0.9) (1.0)
Tax exempt income - - (0.7)
Other 0.7 1.4 0.1
Effective income tax rate 33.0 % 34.4 % 33.5 %
D16
The tax effect of temporary differences giving rise to deferred tax
assets and liabilities are as follows:
December 31, 2002 December 31, 2001
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
(in thousands)
Employee benefit accruals $ 1,795 $ 10,090 $ 1,725 $ 7,711
Product warranty accruals 2,018 -- 2,055 --
Facility relocation accruals 360 217 107 217
Insurance premium accruals 4,029 -- 4,145 --
Restructuring and other cost accruals 7,573 13,921 3,025 5,602
Differences in financial reporting and tax basis for:
Inventory 7,106 -- 5,418 --
Property, plant and equipment -- (30,605) -- (23,866)
Identifiable intangible assets -- (39,353) -- (16,151)
Unrealized losses (gains) included in other
comprehensive income -- 18,324 (2,054) (4,210)
Other 18,638 5,515 13,159 3,199
Tax loss carryforwards in foreign jurisdictions -- 9,521 -- 2,864
Valuation allowance for tax loss carryforwards -- (5,342) -- (2,864)
$ 41,519 $(17,712) $ 27,580 $(27,498)
Current and noncurrent deferred tax assets and liabilities are
included in the following balance sheet captions:
December 31,
2002 2001
(in thousands)
Prepaid expenses and other current assets $ 42,096 $ 29,069
Income taxes payable (577) (1,489)
Other noncurrent assets 9,327 5,028
Deferred income taxes (27,039) (32,526)
D16
Certain foreign subsidiaries of the Company have tax loss carryforwards of
$54.0 million at December 31, 2002, of which $18.6 million expire through
2010 and $35.4 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 $5.3 million and $2.9 million at
December 31, 2002 and 2001, respectively, relates to foreign tax loss
carryforwards for which realizability is uncertain. The change in the
valuation allowances for 2002 and 2001 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 $260 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.
NOTE 13 - BENEFIT 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 $11.5 million in 2002, $7.9 million in 2001 and
$5.1 million in 2000.
Defined Contribution Plans
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 were
$2.2 million for 2002 and $2.1 million for both 2001 and 2000. 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 $0.6 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,
2002, the ESOP held 7.7 million shares, of which 7.3 million were allocated
to plan participants and 0.4 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 for 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.
D16
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,
2002 2001 2002 2001
(in thousands)
Reconciliation of Benefit Obligation
Benefit obligation at beginning of year $ 81,134 $ 60,781 $ 7,877 $ 7,552
Service cost 3,428 1,877 419 205
Interest cost 4,464 3,548 833 539
Participant contributions 972 813 442 391
Actuarial losses 2,877 1,561 2,537 268
Amendments -- -- -- --
Acquisitions -- 19,540 -- --
Effects of exchange rate changes 14,955 (3,126) -- --
Benefits paid (4,119) (3,860) (1,373) (1,078)
Benefit obligation at end of year $ 103,711 $ 81,134 $ 10,735 $ 7,877
Reconciliation of Plan Assets
Fair value of plan assets at beginning of year $ 43,348 $ 41,183 $ -- $ --
Actual return on assets (10) (471) -- --
Acquisitions -- 4,751 -- --
Effects of exchange rate changes 7,716 (1,395) -- --
Employer contributions 3,331 2,327 931 687
Participant contributions 972 813 442 391
Benefits paid (4,119) (3,860) (1,373) (1,078)
Fair value of plan assets at end of year $ 51,238 $ 43,348 $ -- $ --
Reconciliation of Funded Status
Actuarial present value of projected
benefit obligations $ 103,711 $ 81,134 $ 10,735 $ 7,877
Plan assets at fair value 51,238 43,348 -- --
Funded status (52,473) (37,786) (10,735) (7,877)
Unrecognized transition obligation 1,581 1,590 -- --
Unrecognized prior service cost 590 678 34 --
Unrecognized net actuarial loss (gain) 7,499 1,482 25 (2,450)
Net amount recognized $ (42,803) $ (34,036) $ (10,676) $ (10,327)
D16
The amounts recognized in the accompanying Consolidated Balance
Sheets are as follows:
Other Postretirement
Pension Benefits Benefits
------------------------- -----------------------
December 31, December 31,
2002 2001 2002 2001
(in thousands)
Other noncurrent liabilities $(55,063) $(43,589) $(10,676) $(10,327)
Other noncurrent assets 10,498 8,669 -- --
Accumulated other
comprehensive loss 1,762 884 -- --
Net amount recognized $(42,803) $(34,036) $(10,676) $(10,327)
The aggregate benefit obligation for those plans where the accumulated
benefit obligation exceeded the fair value of plan assets was $55.1 million
and $43.6 million at December 31, 2002 and 2001, respectively.
Components of the net periodic benefit cost for the plans are as follows:
Other Postretirement
Pension Benefits Benefits
----------------------------------- ----------------------------------
2002 2001 2000 2002 2001 2000
(in thousands)
Service cost $ 3,428 $ 1,877 $ 1,960 $ 419 $ 205 $ 182
Interest cost 4,464 3,548 3,072 833 539 542
Expected return on plan assets (2,706) (2,525) (2,020) -- -- --
Net amortization and deferral 445 287 (2,368) 27 (63) 174
Net periodic benefit cost $ 5,631 $ 3,187 $ 644 $ 1,279 $ 681 $ 898
The weighted average assumptions used in accounting for the Company's
plans, principally in foreign locations, are as follows:
Other Postretirement
Pension Benefits Benefits
------------------------------------------- ------------------------------------------
2002 2001 2000 2002 2001 2000
Discount rate 5.1% 5.4% 5.7% 6.8% 7.3% 7.0%
Expected return on plan assets 5.5% 5.0% 5.7% n/a n/a n/a
Rate of compensation increase 3.0% 2.5% 3.5% n/a n/a n/a
Initial health care cost trend n/a n/a n/a 10.0% 7.0% 7.0%
Ultimate health care cost trend n/a n/a n/a 5.0% 7.0% 7.0%
Years until ultimate trend is reached n/a n/a n/a 10.0 n/a n/a
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, 2002:
Other Postretirement
Benefits
---------------------------
1% Increase 1% Decrease
(in thousands)
Effect on total of service and interest cost components $ 123 $ (154)
Effect on postretirement benefit obligation 1,001 (836)
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NOTE 14 - RESTRUCTURING AND OTHER COSTS (INCOME)
Restructuring and other costs (income) consists of the following:
Year Ended December 31,
2002 2001 2000
(in thousands)
Restructuring and other costs $ 1,669 $ 17,774 $ 2,702
Reversal of restructuring charges due to
changes in estimates (3,687) (802) --
Gain on pension plan termination -- (8,486) --
Gain on insurance settlement associated with fire (714) (5,758) --
Costs related to the Oraqix agreement -- 2,345 --
German property settlement -- -- (2,758)
Total restructuring and other costs (income) $ (2,732) $ 5,073 $ (56)
On January 25, 2001, the Company suffered a fire at its Maillefer facility
in Switzerland. The fire caused severe damage to a building and to most of
the equipment it contained. During the third quarter of 2002, the Company
received insurance proceeds for settlement of the damages caused to the
building. These proceeds resulted in the Company recognizing a net gain on
the damaged building of approximately $0.7 million. The Company also received
insurance proceeds on the destroyed equipment during the fourth quarter of
2001 and recorded the related disposal gains of $5.8 million during that
period.
During the second quarter of 2002, the Company recorded a charge of $1.7
million for restructuring and other costs. The charge primarily related to
the elimination of duplicative functions created as a result of combining the
Company's Ceramed and U.S. Friadent divisions. Included in this charge were
severance costs of $0.6 million, lease/contract termination costs of $0.9
million and $0.2 million of impairment charges on fixed assets that will be
disposed of as a result of the restructuring plan. This restructuring plan
resulted in the elimination of approximately 35 administrative and
manufacturing positions in the United States and was substantially complete
as of December 31, 2002.
As part of combining Austenal with the Company, $4.4 million of liabilities
were established through purchase price accounting for the restructuring of
the acquired companies' operations, primarily in the United States and
Germany. Included in this liability were severance costs of $2.9 million,
lease/contract termination costs of $1.4 million and other restructuring
costs of $0.1 million. This restructuring plan will result in the elimination
of approximately 90 administrative and manufacturing positions in the United
States and Germany, 50 of which remain to be eliminated as of December 31,
2002. The Company anticipates that most aspects of this plan will be
completed by the fourth quarter of 2003.
The major components of the 2002 restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at December 31, 2002 are as follows:
Amounts
Recorded
Through Amounts Change Balance
2002 Purchase Applied in Estimate December 31,
Provisions Accounting 2002 2002 2002
Severance $ 541 $ 2,927 $ (530) $ (164) $ 2,774
Lease/contract terminations 895 1,437 (500) 120 1,952
Other restructuring costs 38 60 (60) (36) 2
Fixed asset impairment charges 195 -- (195) -- --
$ 1,669 $ 4,424 $(1,285) $ (80) $ 4,728
D16
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.
As discussed in Note 3, the Company agreed in 2001 to a payment of $2.0
million to AstraZeneca related to the submission of the Oraqix product New
Drug Application in the U.S. and a Marketing Authorization Application in
Europe. Under the terms of the agreement, this payment and related estimated
application costs were accrued during the fourth quarter of 2001.
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. Included in this charge were severance costs of $2.1 million,
lease/contract termination costs of $1.1 million 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. The remaining charge of $6.3 million involves
impairment charges on intangible assets. During 2002, the Company determined
that the costs to complete this plan were lower than originally estimated and
as a result $1.0 million of these costs were reversed as a change in
estimate. This restructuring plan will result in the elimination of
approximately 160 administrative and manufacturing positions in Germany,
Japan and Brazil, 10 of which remain to be eliminated as of December 31,
2002. As part of these reorganization activities, some of these positions
were replaced with lower-cost outsourced services. The Company anticipates
that most aspects of this plan will be completed by the first quarter of
2003.
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.
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. 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 resulted in the elimination of approximately
310 administrative and manufacturing positions in Brazil and Germany. As part
of these reorganization activities, some of these positions were replaced
with lower-cost outsourced services. During the first quarter of 2002, this
plan was substantially completed and the remaining accrual balances of $1.9
million were reversed as a change in estimate.
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. 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, 38 of which remain to be
eliminated as of December 31, 2002. The Company anticipates that most aspects
of this plan will be completed during 2003.
The major components of the 2001 restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at December 31, 2002 are as follows:
Change
Amounts in Estimate
Recorded Recorded
Through Amounts Amounts Change Through Balance
2001 Purchase Applied Applied in Estimate Purchase December 31,
Provisions Accounting 2001 2002 2002 Accounting 2002
Severance $ 5,270 $ 11,929 $ (1,850) $ (6,257) $ (655) $ (174) $ 8,263
Lease/contract terminations 1,682 1,071 (563) (579) (721) 203 1,093
Other restructuring costs 897 1,062 -- (552) (759) 458 1,106
Fixed asset impairment charges 3,634 -- (3,634) 223 (747) 524 --
Intangible asset impairment charges 6,291 -- (6,291) -- -- -- --
$ 17,774 $ 14,062 $ (12,338) $ (7,165) $ 2,882 $ 1,011 $ 10,462
D16
In the fourth quarter of 2000, the Company recorded a pre-tax charge of
$2.7 million related to the reorganization of its French and Latin American
businesses. The primary focus of the reorganization was consolidation of
operations in these regions in order to eliminate duplicative functions. The
restructuring plan resulted in the elimination of approximately 40
administrative positions, mainly in France. The Company also added positions
as a result of these reorganization activities. During 2002, the Company
determined that the costs to complete this plan were lower than originally
estimated, and as a result, $0.2 million of these costs were reversed as a
change in estimate. As of December 31, 2002, this plan was substantially
complete.
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 second quarter of 1998, the Company rationalized and restructured
its 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 yet been sold. During 2002, the carrying value
of this property was written-up by $0.5 million to reflect the Company's
revised estimate of its fair value.
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.
NOTE 15 - 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 total
long-term debt was $774.0 million versus its carrying value of $769.8 million
as of December 31, 2002. The fair value approximated the carrying value since
much of the Company's debt is variable rate and reflects current market
rates. The fixed rate Eurobonds are 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 therefore the fair value of these
instruments approximates their carrying values. The Company has fixed rate
Swiss franc and Japanese yen denominated notes with estimated fair values
that differ from their carrying values. At December 31, 2002, the fair value
of these instruments was $235.6 million versus their carrying values of
$231.4 million. The fair values differ from the carrying values due to lower
market interest rates at December 31, 2002 versus the rates at issuance of
the notes. The Company holds equity securities, classified as
available-for-sale, within "Other noncurrent assets". The carrying value of
these securities was $12.4 which includes $7.9 million of unrealized losses
which the Company deems to be temporary. In accordance with SFAS 115, the
Company records the unrealized losses related to these securities within
"Accumulated other comprehensive gain (loss)" until sold.
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.
D16
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 a portion of this risk.
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 and February 2001, the Company
entered into interest rate swap agreements with notional amounts totaling 180
million Swiss francs converting a portion of the Company's variable rate
financing to fixed rate debt. These agreements effectively convert the
underlying debt's interest rate to an average fixed rate of to 3.3% for an
average period of 4 years. In February 2002, the Company entered into
interest rate swap agreements with notional amounts totaling 12.6 billion
Japanese yen converting a portion of its variable rate financing to fixed
rate debt. These agreements effectively convert the underlying debt's
interest rate to an average fixed rate of 1.6% for a term of ten years. As
part of this transaction, the Company offset a portion of its Swiss franc
swaps (115 million Swiss francs) by entering into reverse swap agreements
with identical terms.
The Company selectively enters into commodity price swaps to effectively
fix certain variable raw material costs. 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 was$4.20 per troy ounce. In November
2002, the Company entered into a commodity price swap agreement with notional
amounts totaling 300,000 troy ounces of silver bullion to hedge forecasted
purchases throughout calendar year 2003. The average fixed rate of this
agreement is $4.65 per troy ounce. The Company generally hedges between 33%
and 67% of its projected annual silver needs.
The Company enters into forward exchange contracts to hedge the foreign
currency exposure of its anticipated purchases of certain inventory from
Japan. The forward contracts that are used in this program mature in twelve
months or less. The Company generally hedges between 33% and 67% of its
anticipated purchases from Japan.
During 2002 and 2001, the Company recognized a net losses of $0.1 million
and $0.4 million, respectively, in "Other expense (income), net", which
represented the total ineffectiveness of all cash flow hedges.
As of December 31, 2002, $0.6 million of deferred net gains on derivative
instruments recorded in "Accumulated other comprehensive gain (loss)" 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
purchases made in Japanese yen. 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.
D16
Fair Value Hedges
The Company 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 2.8%.
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, 2002, 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. The translation gains and losses related to this
foreign currency denominated debt are included in "Accumulated other
comprehensive gain (loss)".
Other
The Company holds stock warrants which are classified as derivative
financial instruments as defined under SFAS No. 133. These warrant holdings
are valued under a Black-Scholes option pricing model and any fair value
adjustments are reflected in current income each quarter until sold. For the
year ended December 31, 2002, the unrealized loss on the stock warrants was
$2.5 million. These unrealized losses were included in "Other expense
(income), net".
As of December 31, 2002, the Company had recorded the fair value of
derivative instrument assets of $4.6 million in "Prepaid expenses and other
current assets" and $59.7 million in "Other noncurrent assets" on the balance
sheet. The Company recorded the fair value of derivative instrument
liabilities of $2.3 million in "Accrued liabilites" and $7.9 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 "Accumulated other comprehensive gain (loss)" on the balance sheet.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases automobiles and machinery and equipment and certain
office warehouse, and manufacturing facilities under non-cancelable operating
leases. These leases generally require the Company to pay insurance, taxes
and other expenses related to the leased property. Total rental expense for
all non-precious metals operating leases was $18.4 million for 2002, $12.7
million for 2001, and $10.5 million for 2000.
Rental commitments, principally for real estate (exclusive of taxes,
insurance and maintenance), automobiles and office equipment are as follows
(in thousands):
2003 $ 16,233
2004 11,506
2005 7,636
2006 4,351
2007 3,313
2008 and thereafter 9,081
$ 52,120
D16
As of December 31, 2002, the Company had leased $59.3 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 in "Cost of products sold". The terms of the leases are less than
one year and the average lease rate at December 31, 2002 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 reduce the Company's
exposure to commodity price volatility.
Litigation
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes it is
remote that pending litigation to which DENTSPLY is a party will 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 Court has granted the Company's motion
on the lack of standing of the laboratory and patient class actions to pursue
damage claims. 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. A similar private party action has been filed in
Florida. The trial in the government's case was held in April and May 2002,
the post-trial briefing occurred during the summer and the final arguments
were made in September of 2002. The case is pending a decision by the
Federal District Court Judge who heard the case. 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 in
the agreements), the Company's liability would be approximately $14.0 million
at December 31, 2002.
D16
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
(in thousands, except per share amounts)
2002
Net sales $ 354,868 $ 381,013 $ 366,037 $ 411,824 $ 1,513,742
Gross profit 169,372 184,540 178,932 200,055 732,899
Operating income 56,913 64,801 61,156 73,630 256,500
Net income 33,096 36,820 35,766 42,270 147,952
Earnings per common share-basic $ 0.4246 $ 0.4711 $ 0.4571 $ 0.5397 $ 1.8925
Earnings per common share-diluted 0.4157 0.4598 0.4464 0.5276 1.8495
Cash dividends declared per common share 0.04600 0.04600 0.04600 0.04600 0.18400
2001
Net sales $ 245,695 $ 254,676 $ 253,528 $ 379,069 $ 1,132,968
Gross profit 129,669 133,597 132,241 173,013 568,520
Operating income 34,340 43,762 43,827 54,116 176,045
Net income 34,326 27,404 25,919 33,847 121,496
Earnings per common share-basic $ 0.4431 $ 0.3530 $ 0.3334 $ 0.4347 $ 1.5642
Earnings per common share-diluted 0.4373 0.3472 0.3275 0.4264 1.5384
Cash dividends declared per common share 0.04583 0.04583 0.04583 0.04584 0.18333
D16
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
2002
First Quarter $ 37.93 $ 31.60 $ 37.06 $0.04600
Second Quarter 40.95 35.25 36.91 0.04600
Third Quarter 43.50 31.25 40.17 0.04600
Fourth Quarter 43.10 31.89 37.20 0.04600
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
<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 25,000 holders of common stock,
including 489 holders of record.
D16