SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-16211
DENTSPLY International Inc.
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(Exact name of registrant as specified in its charter)
Delaware 39-1434669
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
570 West College Avenue, P. O. Box 872, York, PA 17405-0872
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(Address of principal executive offices) (Zip Code)
(717) 845-7511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
( X ) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At May 5, 2003 the Company
had 78,650,819 shares of Common Stock outstanding, with a par value of $.01
per share.
Page 1 of 20
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended March 31, 2003
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Statements of Income 3
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Unaudited Interim Consolidated Condensed
Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 16
Item 4 - Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
Section 302 Certification Statements 19
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended March 31,
2003 2002
(in thousands, except per share amounts)
Net sales $ 396,187 $ 354,868
Cost of products sold 206,116 185,496
Gross profit 190,071 169,372
Selling, general and administrative expenses 128,061 114,416
Restructuring and other (income) costs (Note 6) -- (1,957)
Operating income 62,010 56,913
Other income and expenses:
Interest expense 6,094 7,054
Interest income (266) (253)
Other expense (income), net (538) (104)
Income before income taxes 56,720 50,216
Provision for income taxes 18,453 17,120
Net income $ 38,267 $ 33,096
Earnings per common share (Note 3):
Basic $ 0.49 $ 0.42
Diluted 0.48 0.42
Cash dividends declared per common share $ 0.046 $ 0.046
Weighted average common shares outstanding:
Basic 78,442 77,947
Diluted 80,007 79,621
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
March 31, December 31,
2003 2002
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 46,178 $ 25,652
Accounts and notes receivable-trade, net 228,857 221,262
Inventories, net (Notes 1 and 5) 228,903 214,492
Prepaid expenses and other current assets 73,914 79,595
Total Current Assets 577,852 541,001
Property, plant and equipment, net 329,014 313,178
Identifiable intangible assets, net 238,094 236,009
Goodwill, net 918,840 898,497
Other noncurrent assets 125,098 98,348
Total Assets $ 2,188,898 $ 2,087,033
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 77,059 $ 66,625
Accrued liabilities 175,002 190,783
Income taxes payable 114,389 103,787
Notes payable and current portion
of long-term debt 4,421 4,550
Total Current Liabilities 370,871 365,745
Long-term debt 797,627 769,823
Deferred income taxes 30,707 27,039
Other noncurrent liabilities 91,845 87,239
Total Liabilities 1,291,050 1,249,846
Minority interests in consolidated subsidiaries 1,335 1,259
Commitments and contingencies (Note 7)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued -- --
Common stock, $.01 par value; 100 million shares authorized;
81.4 million shares issued at March 31, 2003 and December 31, 2002 814 814
Capital in excess of par value 157,934 156,898
Retained earnings 765,627 730,971
Accumulated other comprehensive gain (Note 2) 24,727 1,624
Unearned ESOP compensation (1,520) (1,899)
Treasury stock, at cost, 2.9 million shares at March 31, 2003
and 3.0 million shares at December 31, 2002 (51,069) (52,480)
Total Stockholders' Equity 896,513 835,928
Total Liabilities and Stockholders' Equity $ 2,188,898 $ 2,087,033
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
4
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31,
--------------------------------------
2003 2002
(in thousands)
Cash flows from operating activities:
Net income $ 38,267 $ 33,096
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 9,776 8,051
Amortization 2,323 2,321
Restructuring and other costs -- (1,957)
Other, net (7,326) (29,112)
Net cash provided by operating activities 43,040 12,399
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (2,354) (37,558)
Proceeds from bulk sale of precious metals inventory -- 6,754
Capital expenditures (18,294) (9,815)
Other, net 92 347
Net cash used in investing activities (20,556) (40,272)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of
deferred financing costs 23 92,246
Payments on long-term borrowings (1,475) (79,570)
Decrease in short-term borrowings (224) 3,093
Cash dividends paid (3,606) (3,569)
Other, net 2,156 2,977
Net cash (used in) provided by financing activities (3,126) 15,177
Effect of exchange rate changes on cash and cash equivalents 1,168 (1,177)
Net increase (decrease) in cash and cash equivalents 20,526 (13,873)
Cash and cash equivalents at beginning of period 25,652 33,710
Cash and cash equivalents at end of period $ 46,178 $ 19,837
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
The accompanying unaudited interim consolidated condensed financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which in the opinion of management are necessary for a fair
statement of financial position, results of operations and cash flows for
the interim periods. These interim financial statements conform to the
requirements for interim financial statements and consequently do not
include all the disclosures normally required by generally accepted
accounting principles. Disclosures included in the Company's most recent
Form 10-K filed March 29, 2002 are updated where appropriate.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
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.
Inventories
Inventories are stated at the lower of cost or market. At March 31,
2003, the cost of $14.4 million or 6% of inventories was determined by the
last-in, first-out (LIFO) method. At December 31, 2002, the cost of $13.0
million or 6% of inventories was determined by the last-in, first-out (LIFO)
method. The cost of other inventories was determined by the first-in,
first-out (FIFO) or average cost method.
If the FIFO method had been used to determine the cost of the LIFO
inventories, the amounts at which net inventories are stated would be higher
than reported at March 31, 2003 and December 31, 2002 by $0.8 million.
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.
The Company has Euro, Swiss franc and Japanese yen denominated long-term
debt that qualifies as a hedge of its net investments in Europe, Switzerland
and Japan. As a result, the related exchange rate fluctuations affecting
debt are offset in "Accumulated other comprehensive gain (loss)". The
Company has Euro denominated debt which, through March 2003, was hedged by
cross currency swaps and fixed to variable rate interest rate swaps. In
March 2003, the Company amended its cross currency swap related to its
Eurobond debt by exchanging the final settlement of U.S. dollars for Euros
at a fixed rate of $0.90 in return for lower cash interest payments over the
remaining term of the swap. As a result of this exchange, the Company has
become economically exposed to the impact of exchange rates on the final
principal payment and, as of the date of the swap amendment, has designated
the principal as a hedge of its net investment in Euro region operations.
6
Stock Compensation
The Company has stock-based employee compensation plans and 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 these 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.
Three Months Ended March 31,
2003 2002
(in thousands, except per share amounts)
Net income as reported $ 38,267 $ 33,096
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (2,694) (2,183)
Pro forma net income $ 35,573 $ 30,913
Basic earnings per common share
As reported $ 0.49 $ 0.42
Pro forma under fair value based method $ 0.45 $ 0.40
Diluted earnings per common share
As reported $ 0.48 $ 0.42
Pro forma under fair value based method $ 0.44 $ 0.39
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three Months Ended
March 31,
2003 2002
(in thousands)
Net income $ 38,267 $ 33,096
Other comprehensive income:
Foreign currency translation adjustments 23,496 (4,939)
Unrealized gain on available-for-sale securities 1,294 --
Net (loss) gain on derivative financial
instruments (1,687) 972
Total comprehensive income $ 61,370 $ 29,129
7
The balances included in accumulated other comprehensive gain in the
consolidated balance sheets are as follows:
March 31, December 31,
2003 2002
(in thousands)
Foreign currency translation adjustments $ 37,044 $ 13,548
Net loss on derivative financial
instruments (7,670) (5,983)
Unrealized loss on available-for-sale
securities (3,560) (4,854)
Minimum pension liability (1,087) (1,087)
$ 24,727 $ 1,624
NOTE 3 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
Three Months Ended
March 31,
2003 2002
(in thousands, except per share amounts)
Basic EPS Computation
Numerator (Income) $38,267 $33,096
Denominator:
Common shares outstanding 78,442 77,947
Basic EPS $ 0.49 $ 0.42
Diluted EPS Computation
Numerator (Income) $38,267 $33,096
Denominator:
Common shares outstanding 78,442 77,947
Incremental shares from assumed exercise
of dilutive options 1,565 1,674
Total shares 80,007 79,621
Diluted EPS $ 0.48 $ 0.42
Options to purchase 1.6 million and 1.2 million shares of common stock
that were outstanding during the quarter ended March 31, 2003 and 2002,
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.
8
NOTE 4 - BUSINESS ACQUISITIONS/DIVESTITURES
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 purchase price allocation for Austenal
is as follows (in thousands):
Current assets $ 6,313
Property, plant and equipment 2,789
Identifiable intangible assets and goodwill 25,599
Other long-term assets 4,291
Current liabilities (16,153)
Other long-term liabilities (1,774)
$21,065
In October 2001, the Company completed the acquisition of the Degussa
Dental Group ("Degussa Dental"). The Company paid 548 million Euros or $503
million at the closing date and paid 12.1 million Euros, or $11.4 million,
as a closing balance sheet adjustment in June 2002. 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.
In March 2001, the Company acquired the dental injectible anesthetic
assets of AstraZeneca ("AZ Assets"). The total purchase price of this
transaction was $136.5 million which was 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. The $2.0 million payment related
to the application filings was accrued as current expense during the fourth
quarter of 2001 and was paid during the first quarter of 2002. 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.
9
NOTE 5 - INVENTORIES
Inventories consist of the following:
March 31, December 31,
2003 2002
(in thousands)
Finished goods $142,554 $134,989
Work-in-process 40,661 39,065
Raw materials and supplies 45,688 40,438
$228,903 $214,492
NOTE 6 - RESTRUCTURING AND OTHER COSTS
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 75 administrative and manufacturing
positions in the United States and Germany, 28 of which remain to be
eliminated as of March 31, 2003. 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 March 31, 2003 are as follows:
Change
in Estimate
Amounts Recorded
Recorded Through
Through Amounts Change Amounts Purchase Balance
2002 Purchase Applied in Estimate Applied Accounting March 31,
Provisions Accounting 2002 2002 2003 2003 2003
Severance $ 541 $ 2,927 $ (530) $ (164) $ (420) $ 127 $ 2,481
Lease/contract terminations 895 1,437 (500) 120 (168) -- 1,784
Other restructuring costs 38 60 (60) (36) -- -- 2
Fixed asset impairment charges 195 -- (195) -- -- -- --
$ 1,669 $ 4,424 $(1,285) $ (80) $ (588) $ 127 $ 4,267
10
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, primarily in the
second quarter, the Company reversed a net total of $1.0 million as a change
in estimate as it determined the costs to complete the plan were lower than
originally estimated. 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 March 31, 2003.
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 third 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, 36 of
which remain to be eliminated as of March 31, 2003. 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 March 31, 2003 are as follows:
Change
in Estimate
Amounts Recorded
Recorded Through
Through Amounts Amounts Change Purchase Amounts Balance
2001 Purchase Applied Applied in Estimate Accounting Applied March 31,
Provisions Accounting 2001 2002 2002 2002 2003 2003
Severance $ 5,270 $ 11,929 $ (1,850) $ (6,257) $ (655) $ (174) $ (185) $ 8,078
Lease/contract terminations 1,682 1,071 (563) (579) (721) 203 (66) 1,027
Other restructuring costs 897 1,062 -- (552) (759) 458 (57) 1,049
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 (308) $ 10,154
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 the second quarter of
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.
11
NOTE 7 - COMMITMENTS AND CONTINGENCIES
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.
12
DENTSPLY INTERNATIONAL INC.
Item 2 - 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 constitute forward-looking statements
which are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements involve risks and uncertainties which may
materially affect the Company's business and prospects, and should be read
in conjunction with the risk factors discussed within the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
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.
RESULTS OF OPERATIONS
Quarter Ended March 31, 2003 Compared to Quarter Ended March 31, 2002
Net Sales
Net sales for the quarter ended March 31, 2003 increased $41.3 million, or
11.6%, to $396.2 million. Net sales, excluding precious metals, increased
$36.3 million, or 11.9%, to $341.8 million. The growth in sales, excluding
the precious metal content, was driven by internal growth of 5.2%, a 7.0%
positive impact from currency translation as several major currencies
strengthened against the U.S. dollar during the first quarter of 2003, less
0.3% for divestitures. The internal growth rate for the dental business,
excluding precious metal content, was 5.5%, including 5.6% in the U.S., 4.6%
in Europe and 6.4% in all other regions.
The internal sales growth of 5.5% for the dental business, excluding
precious metal content, was led by consumable and small equipment, including
laboratory products, up 5.6%, while internal sales growth for heavy
equipment, including x-ray equipment and intra-oral cameras, was up 3.6%.
Internal growth was most notable in endodontics, orthodontics and implants.
These increases were offset slightly by softening sales of non-dental
products.
Two factors negatively impacted base business growth during the quarter:
(1) the heavy snowstorms that hit the U.S. East Coast in February, closing
businesses (including dental offices) for two to three days, and (2) the IDS
(International Dental Show) - the huge European tradeshow held every other
year during the last week in March. We believe these two events reduced
internal sales growth in the quarter by over one full point.
13
Gross Profit
Gross profit was $190.1 million in the first three months of 2003
compared to $169.4 million in the comparable period of 2002, an increase of
$20.7 million, or 12.2%. Gross profit, including precious metals,
represented 48.0% of net sales in the first quarter of 2003 compared to
47.7% in 2002. Gross profit for the first quarter of 2003, excluding
precious metal content, represented 55.6% of net sales compared to 55.4% in
2002, the improvement being driven by new product introductions and product
mix.
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $13.7
million, or 12.0%, to $128.1 million in the first quarter of 2003 from
$114.4 million in the comparable period of 2002. The 12.0% increase in
expenses, as reported, included increases for the translation impact from a
weaker U.S. dollar. SG&A expenses increased 4.0% in the first quarter of
2003 at constant exchange rates for both periods. As a percentage of sales,
including precious metals, SG&A expenses represented approximately 32.3% of
net sales in both periods. As a percentage of sales, excluding precious
metals, SG&A expenses represented approximately 37.5% of net sales in both
periods.
No restructuring activity was recorded during the first quarter of 2003.
During the first quarter of 2002, the Company recorded restructuring and
other income of $2.0 million ($1.3 million, net of tax), as certain prior
period restructuring initiatives in Europe, Brazil, and North America were
completed at a lower cost than initially recorded.
Other Income and Expenses
Net interest expense decreased $1.0 million in the first quarter of 2003
due to lower variable interest rates and lower constant dollar debt levels
in 2003. Other income increased $0.4 million in the first quarter of 2003,
including a net gain of $1.2 million recorded in the first quarter of 2003
on the mark-to-market adjustment for the warrants received in the 2002 share
exchange with PracticeWorks, Inc. The first quarter of 2002 included $0.5
million of accrued dividends related to the PracticeWorks, Inc. preferred
stock which was owned until the PracticeWorks share exchange was completed
in the second quarter of 2002.
Earnings
Income before income taxes for the three months ended March 31, 2003,
increased $6.5 million, or 12.9%, to $56.7 million from $50.2 million in the
comparable period of 2002. Income before income taxes in the prior year
period included $2.0 million of restructuring income.
The effective tax rate decreased to 32.5% in the first quarter of 2003
from 34.0% in the comparable period of 2002. Net income increased $5.2
million, or 15.7%, to $38.3 million in the first quarter of 2003 from $33.1
million in the comparable period of 2002. Net income in the prior year
period included restructuring income, net of tax, of $1.3 million.
Fully diluted earnings per share were $0.48 in the first quarter of 2003,
an increase of 14.3% from $0.42 in the comparable period in 2002. Fully
diluted earnings per share in the prior year period included restructuring
income of $.02. Net income in the first quarter of 2003 and 2002 included
charges and income that affect the comparability between periods as
described above.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the Company's disclosure in its
2002 Annual Report on Form 10-K filed March 28, 2003.
14
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 2003
Cash flows from operating activities during the quarter ended March 31,
2003 were $43.0 million compared to $12.4 million during the quarter ended
March 31, 2002. The increase of $30.6 million results primarily from
increased earnings and more favorable working capital changes versus prior
year specifically with respect to accounts receivables and accounts payables.
Investing activities, for the quarter ended March 31, 2003, include
capital expenditures of $18.3 million. The Company expects capital
expenditures for 2003 to be approximately $70 million, which is largely
driven by expenditures related to the construction of the Company's
pharmaceutical manufacturing facility in Chicago, IL. Net acquisition
activity for the first three months of 2003 was $2.4 million which relates
to the purchase of one of the Company's suppliers. Additionally, during
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 4 to
the condensed consolidated financial statements).
The Company's long-term debt increased by $27.8 million during the first
quarter of 2003 to $797.6 million. This net change included an increase of
$29.3 million due to exchange rate fluctuations on non-U.S. dollar
denominated debt and changes in interest rate swaps related to this debt
(see Note 1 to the condensed consolidated financial statements). Excluding
the exchange rate and interest rate swap changes, long-term debt was reduced
by $1.5 million during the first quarter of 2003. During the first quarter
of 2003, the Company's ratio of long-term debt to total capitalization
decreased to 47.1% compared to 47.9% at December 31, 2002.
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. The Company is currently in the process
of extending this facility and expects this effort to be successful. 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 in the aggregate is $250 million and no debt was outstanding under
these facilities at March 31, 2003.
The Company also has access to $81.0 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 $422.0 million at
March 31, 2003. 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 March 31, 2003, the Company was in
compliance with these covenants.
There have been no material changes to the Company's scheduled
contractual cash obligations disclosed in its 2002 Annual Report on Form
10-K filed March 28, 2003.
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.
15
NEW ACCOUNTING STANDARDS
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. This application
of this interpretation has not had a material impact on the Company's
financial statements.
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.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". The statement amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Specifically, the statement clarifies under what circumstances
a contract with an initial net investment meets the characteristic of a
derivative. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
SFAS No. 149 is effective for contracts entered into or modified after June
30, 2003. The Company is currently assessing the impact of the new standard
on the financial statements.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no significant material changes to the market risks as
disclosed in the Company's Annual Report on Form 10-K filed for the year
ending December 31, 2002.
Item 4 - Controls and Procedures
(a) As of May 12, 2003, the Company carried out an evaluation under the
supervision and with the participation of the Company's management,
including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the Company's disclosure
controls and procedures. Based on that evaluation, the CEO and CFO
concluded that the Company's disclosure controls and procedures have
been designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Company
in reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. A controls system,
no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls systems are met, and no
evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been
detected.
(b) Subsequent to the date of the most recent evaluation of the Company's
internal controls, there were no significant changes in the Company's
internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
16
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings
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.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
99 Chief Executive Officer and Chief Financial Officer Certification
Statements.
(b) Reports on Form 8-K
On April 22, 2003, the Company filed a Form 8-K, under item 9,
furnishing the press release issued on that date regarding its
first-quarter 2003 sales and earnings.
On April 29, 2003, the Company filed a Form 8-K, under item 9,
furnishing a transcript of its April 23, 2003 conference call regarding
the Company's discussion of its first-quarter 2003 sales and earnings.
17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENTSPLY INTERNATIONAL INC.
May 13, 2003 /s/ John C. Miles II
Date John C. Miles II
Chairman and
Chief Executive Officer
May 13, 2003 /s/ Bret W. Wise
Date Bret W. Wise
Senior Vice President and
Chief Financial Officer
18
Section 302 Certifications Statement
I, John C. Miles II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DENTSPLY
International Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
/s/ John C. Miles II
Chairman and Chief Executive Officer
19
Section 302 Certifications Statement
I, Bret W. Wise, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DENTSPLY
International Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
/s/ Bret W. Wise
Senior Vice President and Chief Financial Officer
20