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 September 30,2004
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.)
221 West Philadelphia Street, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
( 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 November 5, 2004 the
Company had 80,687,915 shares of Common Stock outstanding, with a par value
of $.01 per share.
Page 1 of 34
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended September 30, 2004
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 22
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 31
Item 4 - Controls and Procedures 31
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 32
Item 2 - Changes in Securities, Use of Proceeds
and Issuer Purchases of Equity Securities 33
Item 6 - Exhibits and Reports on Form 8-K 33
Signatures 34
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(in thousands, except per share amounts)
Net sales $ 390,592 $ 375,503 $ 1,231,298 $ 1,141,217
Cost of products sold 191,548 191,702 614,496 576,579
Gross profit 199,044 183,801 616,802 564,638
Selling, general and administrative expenses 128,825 120,020 397,855 370,493
Restructuring and other costs (Note 9) 2,108 -- 3,165 --
Operating income 68,111 63,781 215,782 194,145
Other income and expenses:
Interest expense 6,431 6,102 18,232 18,650
Interest income (1,235) (377) (3,124) (1,003)
Other (income) expense, net 347 (1,526) 1,145 (2,601)
Income before income taxes 62,568 59,582 199,529 179,099
Provision for income taxes 16,225 19,295 58,196 57,923
Income from continuing operations 46,343 40,287 141,333 121,176
Income from discontinued operations,
(Including gain on sale in the nine months ended
September 30, 2004 of $43,031) (Note 6) 340 1,027 43,225 2,623
Net income $ 46,683 $ 41,314 $ 184,558 $ 123,799
Earnings per common share - basic (Note 3)
Continuing operations $ 0.58 $ 0.51 $ 1.76 $ 1.54
Discontinued operations -- 0.01 0.54 0.03
Total earnings per common share - basic $ 0.58 $ 0.52 $ 2.30 $ 1.57
Earnings per common share - diluted (Note 3)
Continuing operations $ 0.57 $ 0.50 $ 1.73 $ 1.51
Discontinued operations -- 0.01 0.53 0.03
Total earnings per common share - diluted $ 0.57 $ 0.51 $ 2.26 $ 1.54
Cash dividends declared per common share $ 0.05250 $ 0.05250 $ 0.15750 $ 0.14450
Weighted average common shares outstanding (Note 3):
Basic 80,495 78,999 80,304 78,712
Diluted 82,110 81,007 81,910 80,458
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
September 30, December 31,
2004 2003
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 407,350 $ 163,755
Accounts and notes receivable-trade, net 241,869 241,385
Inventories, net (Notes 1 and 7) 212,052 205,587
Prepaid expenses and other current assets 93,687 88,463
Assets held for sale (Note 6) -- 28,262
Total Current Assets 954,958 727,452
Property, plant and equipment, net 381,091 376,211
Identifiable intangible assets, net 237,763 246,475
Goodwill, net 958,065 963,264
Other noncurrent assets 86,160 114,736
Noncurrent assets held for sale (Note 6) -- 17,449
Total Assets $ 2,618,037 $ 2,445,587
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 73,953 $ 86,338
Accrued liabilities 163,595 172,684
Income taxes payable 55,518 26,551
Notes payable and current portion
of long-term debt 22,478 21,973
Liabilities of discontinued operations (Note 6) -- 20,206
Total Current Liabilities 315,544 327,752
Long-term debt 781,960 790,202
Deferred income taxes 66,993 66,861
Other noncurrent liabilities 140,726 137,016
Noncurrent liabilities of discontinued operations (Note 6) -- 1,269
Total Liabilities 1,305,223 1,323,100
Minority interests in consolidated subsidiaries 79 418
Commitments and contingencies (Note 11)
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 September 30, 2004
and December 31, 2004 814 814
Capital in excess of par value 186,126 166,952
Retained earnings 1,061,497 889,601
Accumulated other comprehensive income (Note 2) 96,373 104,920
Unearned ESOP compensation -- (380)
Treasury stock, at cost, 0.9 million shares at September 30, 2004
and 2.1 million shares at December 31, 2003 (32,075) (39,838)
Total Stockholders' Equity 1,312,735 1,122,069
Total Liabilities and Stockholders' Equity $ 2,618,037 $ 2,445,587
<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)
Nine Months Ended
September 30,
2004 2003
(in thousands)
Cash flows from operating activities:
Income from continuing operations $ 141,333 $ 121,176
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 30,301 28,224
Amortization 6,282 6,590
Restructuring and other costs 3,165 --
Cash flows from discontinued operating activities (1,713) 1,522
Other, net 5,132 9,291
Net cash provided by operating activities 184,500 166,803
Cash flows from investing activities:
Capital expenditures (36,902) (54,280)
Acquisitions of businesses, net of cash acquired (16,556) (5,613)
Expenditures for identifiable intangible assets -- (2,410)
Proceeds from sale of Gendex 102,500 --
Cash flows used in discontinued operations' investing activities (148) (1,229)
Other, net (1,015) 556
Net cash provided by (used in) investing activities 47,879 (62,976)
Cash flows from financing activities:
Payments on long-term borrowings (571) (50,026)
Net change in short-term borrowings 750 (1,750)
Cash paid for treasury stock (24,799) --
Cash dividends paid (12,595) (10,846)
Proceeds from exercise of stock options 35,831 13,332
Other, net 10,248 7,320
Net cash provided (used in) by financing activities 8,864 (41,970)
Effect of exchange rate changes on cash and cash equivalents 2,352 3,501
Net increase in cash and cash equivalents 243,595 65,358
Cash and cash equivalents at beginning of period 163,755 25,652
Cash and cash equivalents at end of period $ 407,350 $ 91,010
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2004
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 15, 2004 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 September 30,
2004, the cost of $10.9 million or 5% and at December 31, 2003, the cost of
$11.4 million or 6% of inventories were 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.
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 by $1.2 million at September 30, 2004 and by $1.0 million at
December 31, 2003.
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. 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.
The Company performs ongoing impairment analysis on intangible assets related
to new technology. 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
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets" which requires that an
annual impairment approach be applied to goodwill and indefinite-lived
intangible assets. The Company performs annual impairment tests 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. The Company's goodwill decreased
by $5.2 million during the nine months ended September 30, 2004 to $958.1
million, which was due primarily to the effects of foreign currency
translation.
The Company performed the required annual impairment tests in the second
quarter of 2004 and no impairment was identified. This impairment assessment
included an evaluation of 22 reporting units. In addition to minimum annual
impairment tests, SFAS 142 also requires that impairment assessments be made
more frequently if events or changes in circumstances indicate that the
goodwill or indefinite-lived intangible assets might be impaired. As the
Company learns of such changes in circumstances through periodic analysis of
actual results or through the annual development of operating unit business
plans in the fourth quarter of each year, for example, impairment assessments
are performed as necessary.
6
Derivative Financial Instruments
The Company records all derivative instruments on the balance sheet at
their fair value and changes in fair value are recorded each period in
current earnings or comprehensive income in accordance with Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities".
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 costs.
Revenue Recognition
Revenue, net of related discounts and allowances, is recognized at the time
of shipment in accordance with shipping terms and as title and risk of loss
pass to customers. Net sales include shipping and handling costs collected
from customers in connection with the sale.
The Company offers certain cash rebate programs to customers based on
targeted sales increases. The Company has three primary programs which
include the precious metal alloy rebate program, the Corporate general dental
practices program and the Corporate group dental practices program. These
rebate programs are developed to incent the customers to purchase product
quantities in excess of their previous year's purchases. In accounting for
these rebate programs, the Company records an accrual throughout the year as
a reduction of net sales for the estimated rebate as sales take place in
accordance with EITF 01-09, " Accounting for Consideration Given by a Vendor
to a Customer (Including a Reseller of the Vendor's Products)".
The Company establishes a provision recorded against revenue for product
returns in instances when incorrect products or quantities are inadvertently
shipped. In addition, the Company establishes provisions for costs or losses
that are expected with regard to returns for which revenue has been
recognized for event-driven circumstances relating to product quality issues,
complaints and / or other product specific issues.
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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(in thousands, except per share amounts)
Net income, as reported $ 46,683 $ 41,314 $ 184,558 $ 123,799
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (3,345) (2,791) (9,817) (8,209)
Pro forma net income $ 43,338 $ 38,523 $ 174,741 $ 115,590
Basic earnings per common share
As reported $ 0.58 $ 0.52 $ 2.30 $ 1.57
Pro forma under fair value based method $ 0.54 $ 0.49 $ 2.18 $ 1.47
Diluted earnings per common share
As reported $ 0.57 $ 0.51 $ 2.26 $ 1.54
Pro forma under fair value based method $ 0.53 $ 0.48 $ 2.13 $ 1.44
7
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(in thousands)
Net income $ 46,683 $ 41,314 $ 184,558 $ 123,799
Other comprehensive income:
Foreign currency translation adjustments 16,689 9,888 (1,535) 58,391
Unrealized gain on available-for-sale securities 15 1,250 64 7,869
Net gain (loss) on derivative financial
instruments (2,097) 2,514 (7,076) 967
Total comprehensive income $ 61,290 $ 54,966 $ 176,011 $ 191,026
During the quarter and the nine months ended September 30, 2004, foreign
currency translation adjustments included translation gains of $22.2 million
and losses of $5.8 million, respectively, offset by losses of $5.5 million
and gains of $4.2 million, respectively, on the Company's loans designated as
hedges of net investments. During the quarter and the nine months ended
September 30, 2003, the Company had translation gains of $24.2 million and
$87.3 million, respectively, offset by losses of $14.3 million and $28.9
million, respectively, on its loans designated as hedges of net investments.
The balances included in accumulated other comprehensive income in the
consolidated balance sheets are as follows:
September 30, December 31,
2004 2003
(in thousands)
Foreign currency translation adjustments $ 107,997 $ 109,532
Net loss on derivative financial
instruments (10,629) (3,553)
Unrealized gain on available-for-sale securities 215 151
Minimum pension liability (1,210) (1,210)
$ 96,373 $ 104,920
The cumulative foreign currency translation adjustments included
translation gains of $187.2 million and $193.0 million as of September 30,
2004 and December 31, 2003, respectively, offset by losses of $79.2 million
and $83.5 million, respectively, on loans designated as hedges of net
investments.
8
NOTE 3 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(in thousands, except per share amounts)
Basic Earnings Per Common Share Computation
Income from continuing operations $ 46,343 $ 40,287 $141,333 $121,176
Income (loss) from discontinued operations 340 1,027 43,225 2,623
Net income $ 46,683 $ 41,314 $184,558 $123,799
Common shares outstanding 80,495 78,999 80,304 78,712
Earnings per common share from continuing operations $ 0.58 $ 0.51 $ 1.76 $ 1.54
Earnings per common share from discontinued operations -- 0.01 0.54 0.03
Total earnings per common share - basic $ 0.58 $ 0.52 $ 2.30 $ 1.57
Diluted Earnings Per Common Share Computation
Income from continuing operations $ 46,343 $ 40,287 $141,333 $121,176
Income (loss) from discontinued operations 340 1,027 43,225 2,623
Net income $ 46,683 $ 41,314 $184,558 $123,799
Common shares outstanding 80,495 78,999 80,304 78,712
Incremental shares from assumed exercise
of dilutive options 1,615 2,008 1,606 1,746
Total shares 82,110 81,007 81,910 80,458
Earnings per common share from continuing operations $ 0.57 $ 0.50 $ 1.73 $ 1.51
Earnings per common share from discontinued operations -- 0.01 0.53 0.03
Total earnings per common share - diluted $ 0.57 $ 0.51 $ 2.26 $ 1.54
Options to purchase 17,000 and 53,500 shares of common stock that were
outstanding during the quarters ended September 30, 2004 and 2003 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. Antidilutive options
outstanding during the nine months ended September 30, 2004 and 2003 were
85,400 and were 104,300 million, respectively.
9
NOTE 4 - BUSINESS ACQUISITIONS/DIVESTITURES
In March 2001, the Company acquired the dental injectible anesthetic
assets of AstraZeneca ("AZ Assets"). The total purchase price of this
transaction was composed of an initial $96.5 million payment which was made
at closing in March 2001 and 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.
In a separate agreement, as amended, the Company acquired the know-how,
patent and trademark rights to the non-injectible periodontal anesthetic
product known as Oraqix(R) with a purchase price composed of the following: 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(R) 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 and classified within the restructuring and other costs line item
during the fourth quarter of 2001 and was paid during the first quarter of
2002. The MAA was approved in Sweden, the European Union member reference
state, and the Company made the required $2.0 million payment to AstraZeneca
in the second quarter of 2003. The NDA application was approved in December
2003 and as a result the remaining payments of $16.0 million became due and
were accrued in 2003 and the payments were made in January 2004. These
payments were capitalized and will be amortized over the term of the
licensing agreements.
NOTE 5 - SEGMENT 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% of sales for the periods ended
September 30, 2004 and 2003.
Operating businesses are organized into five operating groups, which have
overlapping product offerings, geographical presence, customer bases,
distribution channels, and regulatory oversight. In determining reportable
segments, the Company considers its operating and management structure and
the types of information subject to regular review by its chief operating
decision-maker. The accounting policies of the segments are consistent with
those described for the consolidated financial statements in the summary of
significant accounting policies (see Note 1). The Company measures segment
income for reporting purposes as net operating profit before restructuring,
interest and taxes.
A description of the activities provided within each of the Company's five
reportable segments follows:
Dental Consumables - U.S. and Europe/Japan/Non-Dental
This business group includes responsibility for the design, manufacturing,
sales, and distribution for certain small equipment and chairside consumable
products in the U.S., Germany, Scandinavia, Iberia and Eastern Europe; the
design and manufacture of certain chairside consumable and laboratory
products in Japan, the sales and distribution of all Company products in
Japan; and the Company's non-dental business.
Endodontics/Professional Division Dental Consumables/Asia
This business group includes the responsibility for the design and
manufacturing for endodontic products in the U.S., Switzerland and Germany;
certain small equipment and chairside consumable products in the U.S.; and
laboratory products in China. The business is responsible for sales and
distribution of all Company products throughout Asia - except Japan; all
Company endodontic products in the U.S., Canada, Switzerland, Benelux,
Scandinavia, and Eastern Europe, and certain endodontic products in Germany;
and certain small equipment and chairside consumable products in the U.S.
10
Dental Consumables - United Kingdom, France, Italy, CIS, Middle East,
Africa/European Dental Laboratory Business
This business group includes responsibility for the design and manufacture
of dental laboratory products in Germany and the Netherlands and the sales
and distribution of these products in Europe, Eastern Europe, Middle East,
Africa and the CIS. The group also has responsibility for sales and
distribution of the Company's other dental products in France, United
Kingdom, Italy, Middle East, Africa and the CIS.
Australia/Canada/Latin America/U.S. Pharmaceutical
This business group includes responsibility for the design, manufacture,
sales and distribution of dental anesthetics in the U.S. and Brazil and
chairside consumable and laboratory products in Brazil. It also has
responsibility for the sales and distribution of all Company dental products
sold in Australia, Canada, Latin America and Mexico.
U.S. Dental Laboratory Business/Implants/Orthodontics
This business group includes the responsibility for the design,
manufacture, sales and distribution for laboratory products in the U.S. and
the sales and distribution of U.S. manufactured laboratory products in
certain international markets; the design, manufacture, world-wide sales and
distribution of the Company's dental implant and bone generation products;
and the world-wide sales and distribution of the Company's orthodontic
products.
Significant interdependencies exist among the Company's operations in
certain geographic areas. Inter-group sales are at prices intended to provide
a reasonable profit to the manufacturing unit after recovery of all
manufacturing costs and to provide a reasonable profit for purchasing
locations after coverage of marketing and general and administrative costs.
Generally, the Company evaluates performance of the operating groups based
on the groups' operating income and net third party sales excluding precious
metal content.
The following tables set forth information about the Company's operating
groups for the quarters and nine month periods ended September 30, 2004 and
2003:
Third Party Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 71,699 $ 64,950 $ 216,407 $ 200,040
Endodontics/Professional Division
Dental Consumables/Asia 99,901 96,003 302,878 281,503
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 101,754 102,958 353,012 322,359
Australia/Canada/Latin America/
U.S. Pharmaceutical 29,580 29,829 88,458 85,430
U.S. Dental Laboratory Business/
Implants/Orthodontics 80,668 74,907 255,314 235,737
All Other (a) 6,990 6,856 15,229 16,148
Total $ 390,592 $ 375,503 $1,231,298 $1,141,217
11
Third Party Net Sales, excluding precious metal content
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 67,642 $ 62,206 $ 207,339 $ 190,645
Endodontics/Professional Division
Dental Consumables/Asia 98,293 95,358 298,525 279,075
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 70,334 68,719 242,449 217,394
Australia/Canada/Latin America/
U.S. Pharmaceutical 29,344 29,736 87,778 84,386
U.S. Dental Laboratory Business/
Implants/Orthodontics 72,877 65,896 226,951 206,207
All Other (a) 6,990 6,856 15,229 16,148
Total excluding Precious Metal Content 345,480 328,771 1,078,271 993,855
Precious Metal Content 45,112 46,732 153,027 147,362
Total including Precious Metal Content $ 390,592 $ 375,503 $1,231,298 $1,141,217
Intersegment Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 57,125 $ 49,468 $ 169,184 $ 147,861
Endodontics/Professional Division
Dental Consumables/Asia 39,090 37,057 120,719 116,596
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 17,969 18,949 63,646 61,090
Australia/Canada/Latin America/
U.S. Pharmaceutical 8,130 8,273 27,567 23,895
U.S. Dental Laboratory Business/
Implants/Orthodontics 8,438 7,167 23,949 24,294
All Other (a) 35,007 35,544 116,939 115,425
Eliminations (165,759) (156,458) (522,004) (489,161)
Total $ -- $ -- $ -- $ --
12
Segment Operating Income
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 20,477 $ 17,375 $ 61,640 $ 52,996
Endodontics/Professional Division
Dental Consumables/Asia 37,595 36,598 117,438 112,864
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 4,754 5,784 26,337 19,380
Australia/Canada/Latin America/
U.S. Pharmaceutical 5,114 3,479 12,045 9,614
U.S. Dental Laboratory Business/
Implants/Orthodontics 11,614 8,667 38,988 30,666
All Other (a) (9,335) (8,122) (37,501) (31,375)
Segment Operating Income 70,219 63,781 218,947 194,145
Reconciling Items:
Restructuring and other costs 2,108 -- 3,165 --
Interest Expense 6,431 6,102 18,232 18,650
Interest Income (1,235) (377) (3,124) (1,003)
Other (income) expense, net 347 (1,526) 1,145 (2,601)
Income before income taxes $ 62,568 $ 59,582 $ 199,529 $ 179,099
Assets
September 30, December 31,
2004 2003
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 195,037 $ 187,248
Endodontics/Professional Division
Dental Consumables/Asia 1,223,429 1,215,723
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 573,337 590,208
Australia/Canada/Latin America/
U.S. Pharmaceutical 290,400 256,299
U.S. Dental Laboratory Business/
Implants/Orthodontics 303,347 311,782
All Other (a) 32,487 (115,673)
Total $ 2,618,037 $ 2,445,587
(a) Includes: one operating division not managed by named segments, operating
expenses of two distribution warehouses not managed by named segments,
Corporate and inter-segment eliminations.
13
NOTE 6 - DISCONTINUED OPERATIONS
On February 27, 2004, the Company sold the assets and related liabilities
of the Gendex business to Danaher Corporation for $102.5 million cash, plus
the assumption of certain pension liabilities. Although the sales agreement
contained a provision for a post-closing adjustment to the purchase price
based on changes in certain balance sheet accounts, no such adjustments were
necessary. This transaction resulted in a pre-tax gain of $72.9 million
($43.0 million after-tax). Gendex is a manufacturer of dental x-ray
equipment and accessories and intraoral cameras. The sale of Gendex narrows
the Company's product lines to focus primarily on dental consumables.
During the first quarter of the year 2004, the Company discontinued the
operations of the Company's dental needle business (see Note 9).
The Gendex business and the dental needle business are distinguishable as
separate components of the Company in accordance with Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets". The Gendex business and the needle business
were classified as held for sale at December 31, 2003 in accordance with SFAS
144. The statements of operations and related financial statement disclosures
for all prior years have been restated to present the Gendex business and
needle business as discontinued operations separate from continuing
operations.
Discontinued operations net revenue and income before income taxes for the
periods presented were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(in thousands)
Net sales $ (43) $24,918 $17,392 $73,340
Gain on sale of Gendex - - 72,943 -
Income before income taxes (including gain on
sale in the nine months ended September 30, 2004) 247 1,563 73,088 4,249
NOTE 7 - INVENTORIES
Inventories consist of the following:
September 30, December 31,
2004 2003
(in thousands)
Finished goods $129,306 $123,290
Work-in-process 42,118 41,997
Raw materials and supplies 40,628 40,300
$212,052 $205,587
14
NOTE 8 - BENEFIT PLANS
The components of the net periodic benefit cost for the Company's benefit
plans are as follows:
Other Postretirement
Pension Benefits Benefits
-------------------------- ----------------------
Three Months Ended Three Months Ended
September 30, September 30,
2004 2003 2004 2003
(in thousands)
Service cost $ 1,220 $ 1,188 $ 67 $ 84
Interest cost 1,475 1,289 171 261
Expected return on plan assets (904) (713) -- --
Net amortization and deferral 198 119 (55) (95)
Net periodic benefit cost $ 1,989 $ 1,883 $ 183 $ 250
Other Postretirement
Pension Benefits Benefits
--------------------- -------------------
Nine Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(in thousands)
Service cost $ 3,469 $ 3,184 $ 202 $ 253
Interest cost 4,424 3,846 512 783
Expected return on plan assets (2,502) (2,153) -- --
Net amortization and deferral 512 356 (166) (286)
Net periodic benefit cost $ 5,903 $ 5,233 $ 548 $ 750
Information related to the funding of the Company's benefit plans for 2004
is as follows:
Other
Pension Postretirement
Benefits Benefits
(in thousands)
Actual, September 30, 2004 $4,341 $1,092
Projected for the remainder of the year 1,214 364
Total for year $5,555 $1,456
15
NOTE 9 - RESTRUCTURING AND OTHER COSTS AND CHARGES
During the third quarter of 2004, the Company recorded restructuring and
other costs of $1.9 million. These costs were related to the restructuring
and consolidation of the Company's European laboratory business. The primary
objective of this restructuring plan is to improve operational efficiencies
and to reduce costs within this business. The charge relates to severance
costs for the elimination of approximately 40 administrative and
manufacturing positions primarily in Germany. This plan is expected to be
substantially complete by the first quarter of 2005. As of September 30,
2004, all of these positions remained to be eliminated and the full severance
accrual remained outstanding.
During the fourth quarter of 2003, the Company recorded restructuring and
other costs of $4.5 million. These costs were primarily related to impairment
charges recorded to certain investments in emerging technologies. The
products related to these technologies were abandoned and therefore these
assets were no longer viewed as being recoverable. In addition, certain costs
were associated with the restructuring or consolidation of the Company's
operations, primarily its U.S. laboratory businesses and the closure of its
European central warehouse in Nijmegan, The Netherlands. Included in this
charge were severance costs of $0.9 million, lease/contract termination costs
of $0.6 million and intangible and other asset impairment charges of $3.0
million. In addition, during the quarter and the nine months ended September
30, 2004, the Company recorded charges of $0.2 million and $1.3 million,
respectively, for additional severance, lease termination and other
restructuring costs incurred during the periods related to this plan. This
restructuring plan will result in the elimination of approximately 65
administrative and manufacturing positions primarily in the United States, 12
of which remain to be eliminated as of September 30, 2004. Certain of these
positions will need to be replaced at the consolidated site and therefore the
net reduction in positions is expected to be approximately 25. This plan is
expected to be substantially complete by December 31, 2004. The major
components of these charges and the remaining outstanding balances at
September 30, 2004 are as follows:
Amounts Amounts Balance
2003 Applied 2004 Applied September 30,
Provisions 2003 Provisions 2004 2004
(in thousands)
Severance $ 908 $ (49) $ 444 $ (989) $ 314
Lease/contract
terminations 562 (410) 82 (180) 54
Other restructuring
costs 27 (27) 784 (784) --
Intangible and other asset
impairment charges 3,000 (3,000) -- -- --
$ 4,497 $(3,486) $ 1,310 $(1,953) $ 368
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 in 2002, $4.4 million of
liabilities were established through purchase accounting for the
restructuring of the acquired company's 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. During 2003, the Company reversed a
total of $1.1 million, which was recorded to goodwill, as a change in
estimate as it determined the costs to complete the plan were lower than
originally estimated. This restructuring plan included the elimination of
approximately 75 administrative and manufacturing positions in the United
States and Germany. This plan was substantially complete at March 31, 2004.
16
The major components of the 2002 restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at September 30, 2004 are as follows:
Change
in Estimate
Amounts Recorded
Recorded Through
Through Amounts Change Amounts Purchase Amounts Balance
2002 Purchase Applied in Estimate Applied Accounting Applied September 30,
Provisions Accounting 2002 2002 2003 2003 2004 2004
(in thousands)
Severance $ 541 $ 2,927 $ (530) $ (164) $ (988) $ (878) $ (575) $ 333
Lease/contract
terminations 895 1,437 (500) 120 (665) (245) (351) 691
Other restructuring
costs 38 60 (60) (36) -- -- -- 2
Fixed asset
impairment charges 195 -- (195) -- -- -- -- --
$ 1,669 $ 4,424 $(1,285) $ (80) $(1,653) $(1,123) $ (926) $ 1,026
During the fourth quarter 2003, the Company made the decision to
discontinue the operations of its dental needle business. The business
consists of one manufacturing location which ceased operations on March 31,
2004. As a result of this decision, the Company recorded a charge in the
fourth quarter of 2003 of $1.6 million as a reduction in income from
discontinued operations. Included in this charge were severance costs of $0.4
million, fixed asset impairment charges of $0.5 million, $0.4 million of
impairment charges related to goodwill and other restructuring costs of $0.3
million. In addition, during the nine months ended September 30, 2004, the
Company recorded charges of $0.4 million for additional severance, other
restructuring costs and fixed asset impairment charges incurred during the
period related to this closing. This plan resulted in the elimination of
approximately 55 administrative and manufacturing positions in the United
States. This plan was substantially complete at March 31, 2004. The major
components of these charges are as follows:
Amounts Amounts Balance
2003 Applied 2004 Applied September 30,
Provisions 2003 Provisions 2004 2004
(in thousands)
Severance $ 405 $ -- $ 72 $ (477) $--
Other restructuring costs 300 (300) 125 (125) --
Fixed asset impairment charges 520 (520) 246 (246) --
Goodwill impairment charges 360 (360) -- -- --
$ 1,585 $(1,180) $ 443 $ (848) $--
In the first and second quarters of 2003, the Company recorded charges and
reserve reversals which represented corrections of errors from prior periods.
The net after-tax impact of these corrections for the nine month period ended
September 30, 2003 was a charge of $1.3 million, included in income from
continuing operations (see Note 19 of the Consolidated Financial Statements
included in the Company's Form 10-K for the period ended December 31, 2003).
17
NOTE 10 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's activities expose it to a variety of market risks which
primarily include the risks related to the effects of changes in foreign
currency exchange rates, interest rates and commodity prices. These financial
exposures are monitored and managed by the Company as part of its overall
risk-management program. The objective of this risk management program is to
reduce the potentially adverse effects that these market risks may have on
the Company's operating results.
A portion of the Company's borrowings and certain inventory purchases are
denominated in foreign currencies which exposes the Company to market risk
associated with exchange rate movements. The Company's policy generally is
to hedge major foreign currency transaction exposures through foreign
exchange forward contracts. These contracts are entered into with major
financial institutions thereby minimizing the risk of credit loss. In
addition, the Company's investments in foreign subsidiaries are denominated
in foreign currencies, which creates exposures to changes in exchange rates.
The Company uses debt denominated in the applicable foreign currency as a
means of hedging a portion of this risk.
With the Company's significant level of long-term debt, changes in the
interest rate environment can have a significant 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 the use of
commodities which are subject to market fluctuations. In order to limit the
unanticipated earnings fluctuations from such market fluctuations, the
Company selectively enters into commodity price swaps, primarily for silver,
used in the production of dental amalgam. Additionally, the Company uses
non-derivative methods, such as the precious metal consignment agreement to
effectively hedge commodity risks.
Cash Flow Hedges
The Company uses interest rate swaps to convert a portion of its variable
rate debt to fixed rate debt. As of September 30, 2004, the Company has two
groups of significant variable rate to fixed rate interest rate swaps. One
of the groups of swaps was entered into in January 2000 and February 2001,
has a notional amount totaling 180 million Swiss francs, and effectively
converts the underlying variable interest rates on the debt to a fixed rate
of 3.3% for a period of approximately four years. The other significant
group of swaps entered into in February 2002, has notional amounts totaling
12.6 billion Japanese yen, and effectively converts the underlying variable
interest rates to an average fixed rate of 1.6% for a term of ten years. As
part of entering into the Japanese yen swaps in February 2002, the Company
entered into reverse swap agreements with the same terms to offset 115
million of the 180 million of Swiss franc swaps. Additionally, in the third
quarter of 2003, the Company exchanged the remaining portion of the Swiss
franc swaps, 65 million Swiss francs, for a forward-starting variable to
fixed interest rate swap. Completion of this exchange allowed the Company to
pay down debt and the forward-starting interest rate swap locks in the rate
of borrowing for future Swiss franc variable rate debt, that will arise upon
the maturity of the Company's fixed rate Swiss franc notes in 2005, at 4.2%
for a term of seven years.
18
The Company selectively enters into commodity price swaps to effectively
fix certain variable raw material costs. In April 2004, the Company entered
into a commodity price swap agreement with notional amounts totaling 80,000
troy ounces of silver bullion, used in the production of its amalgam
products, to hedge forecasted purchases throughout the remainder of calendar
year 2004. The average fixed rate of this agreement is $5.95 per troy ounce.
The Company generally hedges between 33% and 67% of its projected annual
silver needs related to these products. Additionally, in April 2004, the
Company entered into a commodity price swap agreement with notional amounts
totaling 1,200 troy ounces of platinum bullion, used in the production of its
impression material products, to hedge forecasted purchases throughout the
remainder of calendar year 2004. The average fixed rate of this agreement is
$781.00 per troy ounce. The Company generally hedges between 33% and 67% of
its projected annual platinum needs related to these products.
The Company enters into forward exchange contracts to hedge the foreign
currency exposure of its anticipated purchases of certain inventory from
Japan. In addition, exchange contracts are used by certain of the Company's
subsidiaries to hedge intercompany inventory purchases which are denominated
in non-local currencies. The forward contracts that are used in these
programs mature in twelve months or less. The Company generally hedges
between 33% and 67% of its anticipated purchases from the supplying
locations.
Fair Value Hedges
The Company uses interest rate swaps to convert a portion of its fixed rate
debt to variable rate debt. In December 2001, the Company issued 350 million
in Eurobonds at a fixed rate of 5.75% maturing in December 2006 to partially
finance the Degussa Dental acquisition. Coincident with the issuance of the
Eurobonds, the Company entered into two integrated transactions: (a) an
interest rate swap agreement with notional amounts totaling Euro 350 million
which converted the 5.75% fixed rate Euro-denominated financing to a variable
rate (based on the London Interbank Borrowing Rate ("LIBOR"))
Euro-denominated financing; and (b) a cross-currency basis swap which
converted this variable rate Euro-denominated financing to variable rate U.S.
dollar-denominated financing.
The Euro 350 million interest rate swap agreement was designated as a fair
value hedge of the Euro 350 million in fixed rate debt pursuant to SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133). In accordance with SFAS No. 133, the interest rate swap and underlying
Eurobond have been marked-to-market via the income statement. As of
September 30, 2004 and December 31, 2003, the accumulated fair value of the
interest rate swap was $13.4 million and $14.1 million, respectively, and was
recorded in Other Noncurrent Assets. The notional amount of the underlying
Eurobond was increased by a corresponding amount at September 30, 2004 and
December 31, 2003.
From inception through the first quarter of 2003, the cross-currency
element of the integrated transaction was not designated as a hedge and
changes in the fair value of the cross-currency element of the integrated
transaction were marked-to-market in the income statement, offsetting the
impact of the change in exchange rates on the Eurobonds that were also
recorded in the income statement. As of September 30, 2004 and December 31,
2003, the accumulated fair value of the cross-currency element of the
integrated transaction was $37.7 million and $56.6 million, respectively, and
was recorded in Other Noncurrent Assets. The notional amount of the
underlying Eurobond was increased by a corresponding amount at September 30,
2004 and December 31, 2003. See Hedges of Net Investments in Foreign
Operations below for further information related to the cross-currency
element of the integrated transaction.
19
Hedges of Net Investments in Foreign Operations
The Company has numerous investments in foreign subsidiaries. The net
assets of these subsidiaries are exposed to volatility in currency exchange
rates. Currently, the Company uses both non-derivative financial
instruments, including foreign currency denominated debt held at the parent
company level and long-term intercompany loans, for which settlement is not
planned or anticipated in the foreseeable future and derivative financial
instruments to hedge some of this exposure. Translation gains and losses
related to the net assets of the foreign subsidiaries are offset by gains and
losses in the non-derivative and derivative financial instruments designated
as hedges of net investments.
At September 30, 2004 and December 31, 2003, the Company had
Euro-denominated, Swiss franc-denominated and Japanese yen-denominated debt
(at the parent company level) to hedge the currency exposure related to a
designated portion of the net assets of its European, Swiss and Japanese
subsidiaries. During 2003, the Company designated its Euro-denominated debt
as a hedge of a portion of the net assets of its European subsidiaries, due
to the change in the cross-currency element of the integrated transaction
discussed below. At September 30, 2004 and December 31, 2003, the
accumulated translation losses related to foreign currency denominated-debt
included in Accumulated other comprehensive income were $79.2 million and
$83.5 million, respectively.
In the first quarter of 2003, the Company amended the cross-currency
element of the integrated transaction to realize the $ 51.8 million of
accumulated value of the cross-currency swap. The amendment eliminated the
final payment (at a fixed rate of $.90) of $315 million by the Company in
exchange for the final payment of Euro 350 million by the counterparty in
return for the counterparty paying the Company LIBOR plus 4.29% for the
remaining term of the agreement or approximately $14.0 million on an annual
basis. Other cash flows associated with the cross-currency element of the
integrated transaction, including the Company's obligation to pay on $315
million LIBOR plus approximately 1.34% and the counterparty's obligation to
pay on Euro 350 million LIBOR plus approximately 1.47%, remained unchanged by
the amendment. Additionally, the cross-currency element of the integrated
transaction continues to be marked-to-market.
No gain or loss was recognized upon the amendment of the cross currency
element of the integrated transaction, as the interest rate of LIBOR plus
4.29% was established to ensure that the fair value of the cash flow streams
before and after amendment were equivalent.
As a result of the amendment, the Company became economically
exposed to the impact of exchange rates on the final principal
payment on the Euro 350 million Eurobonds, and has designated the
Euro 350 million Eurobonds as a hedge of its net investments in
Euro-based foreign subsidiaries. Since March 2003, the effect of
currency on the net investments in Euro-based foreign
subsidiaries has resulted in gains of $52.9 million, net of the
Eurobond hedge, which has been recorded as part of "Accumulated
other comprehensive income".
Other
The aggregate net fair value of the Company's derivative instruments at
September 30, 2004 and December 31, 2003 was $41.6 million and $63.1 million,
respectively.
In accordance with SFAS 52, "Foreign Currency Translation", the Company
utilizes long-term intercompany loans, for which settlement is not planned or
anticipated in the foreseeable future, to eliminate foreign currency
transaction exposures of certain foreign subsidiaries. Net gains or losses
related to these long-term intercompany loans are included in "Accumulated
other comprehensive income ".
20
NOTE 11- 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
unlikely 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. The trial in the government's case
was held in April and May 2002. On August 14, 2003, the Judge entered a
decision that the Company's tooth distribution practices do not violate the
antitrust laws. On October 14, 2003, the Department of Justice appealed this
decision to the U.S. Third Circuit Court of Appeals. Oral argument of this
case in the Third Circuit was held in September 2004.
Subsequent to the filing of the Department of Justice Complaint in 1999,
several private party class actions were filed based on allegations similar
to those in the Department of Justice case, on behalf of laboratories, and
denture patients in seventeen states who purchased Trubyte teeth or products
containing Trubyte teeth. These cases were transferred to the U.S. District
Court in Wilmington, Delaware. 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. The Plaintiffs in the laboratory case have appealed this decision to
the Third Circuit and briefs of the parties have been submitted. Also,
private party class actions on behalf of indirect purchasers were filed in
California and Florida state courts. The California and Florida cases have
been dismissed by the Plaintiffs following the decision by the Federal
District Court Judge issued in August 2003.
On March 27, 2002, a Complaint was filed in Alameda County, California
(which was transferred to Los Angeles County) by Bruce Glover, D.D.S.
alleging, inter alia, breach of express and implied warranties, fraud, unfair
trade practices and negligent misrepresentation in the Company's manufacture
and sale of Advance(R) cement. The Complaint seeks damages in an unspecified
amount for costs incurred in repairing dental work in which the Advance(R)
product allegedly failed. In January 2004, the Judge entered an Order
granting class certification only on the claims of breach of warranty and
fraud. In general, the Class is defined as California dentists who purchased
and used Advance(R) cement and were required, because of failures of the
cement, to repair or reperform dental procedures. The Company challenged the
certification of a class in higher courts, but such challenges have been
unsuccessful. In July, the Court issued a decision that the class would be
opt-in, as proposed by the Company, rather than opt-out (this means that
after Notice of the class action is sent to possible class members, a party
will have to determine they meet the class definition and take affirmative
action in order to join the class). The Advance(R) cement product was sold
from 1994 through 2000 and total sales in the United States during that
period were approximately $5.2 million. In the third quarter of 2004, the
Company's insurance carrier confirmed coverage for the breach of warranty
claims in this matter.
On July 13, 2004, the Company was served with a Complaint filed
by 3M Innovative Properties Company in the U.S. District Court
for the Western District of Wisconsin, alleging that the
Company's Aquasil(R) Ultra silicone impression material, introduced
in late 2002, infringes a 3M patent. 3M seeks an injunction and
damages in the case and its patent expires in November 2005. The
Company is defending against the 3M allegations. The trial in
this matter is currently scheduled for February 2005.
21
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 herein and within the Company's
Annual Report on Form 10-K for the year ended December 31, 2003.
OVERVIEW
Dentsply International Inc. is the world's largest manufacturer of
professional dental products. The Company is headquartered in the United
States, and operates in more than 120 other countries, principally through
its foreign subsidiaries. While the United States and Europe are the
Company's largest markets, the Company serves all of the major professional
dental markets worldwide.
The Company monitors numerous benchmarks in evaluating its business,
including: (1) internal growth in the United States, Europe and the Pacific
Rim; (2) the development and introduction of innovative new products; (3)
growth through acquisition; and (4) continued focus on controlling costs and
enhancing efficiency. We define "internal growth" as the increase in our net
sales from period to period, excluding precious metal content, the impact of
changes in currency exchange rates, and the net sales, for a period of twelve
months following the transaction date, of businesses that we have acquired or
divested.
Management believes that an internal growth rate of 4-6% is a long-term
sustainable rate for the Company. During the nine months ended September 30,
2004, the Company's overall internal growth was approximately 3.9% compared
to 4.4% for the same period of 2003. Our internal growth rates in the United
States and Europe, the largest dental markets in the world, were 2.6% and
4.6%, respectively during the nine months ended September 30, 2004. Our
internal growth rate in all other regions during the nine months ended
September 30, 2004, which represents approximately 19% of our sales, was
5.5%, due largely to strong growth in the Asian region, excluding Japan.
Although a small component of our business (approximately 4% of sales), the
Asian region, excluding Japan, has historically been one of the highest
growth regions for the Company and management believes it represents a
long-term growth opportunity for the industry and the Company. Japan
represents the third largest dental market in the world behind the United
States and Europe. Japan's dental market growth has been weak as it closely
parallels its economic growth. The Company also views the Japanese market as
an important growth opportunity, both in terms of a recovery in the Japanese
economy and the opportunity to increase our market share.
Product innovation is a key component of the Company's overall growth
strategy. Historically, the company has introduced in excess of twenty new
products each year. Through nine months of 2004, eighteen new products have
been introduced around the world and an equivalent number of new products are
scheduled for introduction during the balance of the year. Specifically, in
the third quarter of 2004 the Company announced the introduction of its
Qraqix anesthetic gel product, a revolutionary new non-injectable anesthetic
for use in scaling and root planning procedures.
New advances in technology are anticipated to have a significant influence
on future products in dentistry. In anticipation of this, the company has
pursued several new research and development initiatives to support this
development. Specifically, earlier this year the Company entered into a
five-year agreement with the Georgia Institute of Technology's Research
Institute to pursue potential new advances in dentistry. In addition, we
recently completed an agreement with Doxa AB to develop and commercialize
products within the dental field based upon Doxa's bioactive ceramic
technology. The Doxa technology is designed to induce chemical integration
between the material and dentition or bone structure. These agreements are
consistent with the Company's strategy of being the leading innovator in the
industry.
Although the professional dental market in which the Company operates has
experienced consolidation, it is still a fragmented industry. The Company
continues to focus on opportunities to expand the Company's product offerings
through acquisition. Management believes that there will continue to be
adequate opportunities to participate as a consolidator in the industry for
the foreseeable future.
22
The Company also remains focused on reducing costs and improving
competitiveness. Management expects to continue to consolidate operations or
functions and reduce the cost of those operations and functions while
improving service levels. The Company believes that the benefits from these
opportunities will improve the cost structure and offset areas of rising
costs such as energy, benefits, regulatory oversight and compliance and
financial reporting in the United States.
Discontinued Operations
In February 2004, the Company sold its Gendex equipment business to Danaher
Corporation. Additionally, in the first quarter of 2004 the Company
discontinued production of dental needles. The sale of the Gendex business
and discontinuance of dental needle production have been accounted for as
discontinued operations pursuant to Statement of Financial Accounting
Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". The results of operations for all periods presented have been
restated to reclassify the results of operations for both the Gendex
equipment and the dental needle businesses as discontinued operations.
RESULTS OF CONTINUING OPERATIONS, QUARTER ENDED SEPTEMBER 30, 2004 COMPARED
TO QUARTER ENDED SEPTEMBER 30, 2003
Net Sales
The discussions below summarize the Company's sales growth, excluding
precious metal content, from internal growth and net acquisition growth and
highlights the impact of foreign currency translation. These disclosures of
net sales growth provide the reader with sales results on a comparable basis
between periods.
As the presentation of net sales excluding precious metal content could be
considered a measure not calculated in accordance with generally accepted
accounting principles (a non-GAAP measure), the Company provides the
following reconciliation of net sales to net sales excluding precious metal
content. Our definitions and calculations of net sales excluding precious
metal content and other operating measures derived using net sales excluding
precious metal content may not necessarily be the same as those used by other
companies.
Three Months Ended
September 30,
2004 2003
(in millions)
Net Sales $ 390.6 $ 375.5
Precious Metal Content of Sales (45.1) (46.7)
Net Sales Excluding Precious Metal Content $ 345.5 $ 328.8
Management believes that the presentation of net sales excluding precious
metal content provides useful information to investors because a significant
portion of DENTSPLY's net sales is comprised of sales of precious metals
generated through sales of the Company's precious metal alloy products, which
are used by third parties to construct crown and bridge materials. 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
metal content to show the Company's performance independent of precious metal
price volatility and to enhance comparability of performance between periods.
The Company uses its cost of precious metal purchased as a proxy for the
precious metal content of sales, as the precious metal content of sales is
not separately tracked and invoiced to customers. The Company believes that
it is reasonable to use the cost of precious metal content purchased in this
manner since precious metal alloy sale prices are generally adjusted when the
prices of underlying precious metals change.
Net sales during the quarter ended September 30, 2004 increased $15.1
million, or 4.0%, over 2003 to $390.6 million. Net sales, excluding precious
metal content, increased $16.7 million, or 5.1%, to $345.5 million. Sales
growth, excluding precious metal content, was comprised of 1.7% internal
growth and 3.4% foreign currency translation. The 1.7% internal growth was
comprised of 1.6% in the United States, 0.4% in Europe and 4.0% for all other
regions combined.
23
The internal sales growth, excluding precious metal content, in the United
States was impacted by strong growth in orthodontic products, offset by
lower sales in certain products within the dental consumable category
including anesthetic products. Growth in the 2004 quarter was negatively
impacted by the hurricane activity that occurred in the Southeast part of the
United States during the period. In Europe, internal growth was primarily
driven by strong growth in implant and endodontic products, offset by
lower sales in the dental consumable category. The growth in Europe
during the quarter was negatively impacted by lower growth in Germany which
represents more than half of sales in Europe. The slow sales in Germany are
believed to be the result of changes in government reimbursement that
occurred effective January 1, 2004 and further changes that are anticipated
as of January 1, 2005. We believe that these changes may result in lower
sales in Germany in the fourth quarter of 2004 as dentists and patients defer
procedures until the new reimbursement rules are effective in 2005. The
internal growth of 4.0% in all other regions was largely the result of strong
growth in the Asian region offset by weak growth in Latin America.
Gross Profit
Gross profit was $199.0 million for the quarter ended September 30, 2004
compared to $183.8 million in 2003, an increase of $15.2 million, or 8.3%.
Gross profit, measured against sales including precious metal content,
represented 51.0% of net sales in 2004 compared to 48.9% in 2003. The gross
profit for 2004, measured against sales excluding precious metal content,
represented 57.6% of net sales compared to 55.9% in 2003. This margin
improvement from 2003 to 2004 was due to higher average realized selling
prices, new product introductions, reduced costs related to improvements in
the operational side of the business and favorable mix changes.
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $8.8
million, or 7.3%, to $128.8 million during the third quarter of 2004 from
$120.0 million in 2003. The 7.3% increase in expenses reflects increases for
the translation impact from a weaker U.S. dollar of approximately $4.9
million. SG&A expenses, measured against sales including precious metal
content, increased to 33.0% compared to 32.0% in 2003. SG&A expenses,
measured against sales excluding precious metal content, increased to 37.3%
compared to 36.5% in 2003. The increase in costs as a percentage of sales was
largely the result of costs related to the launch of the Oraqix(R) product
and additional costs related to the Sarbanes-Oxley compliance.
During the third quarter of 2004, the Company recorded restructuring and
other costs of $2.1 million. These costs were primarily related to the
restructuring and consolidation of our European lab business, initiated in
the third quarter of 2004. In addition, these costs were related to costs
incurred in the consolidation of its U.S. laboratory businesses which was
initiated in the fourth quarter of 2003.
Other Income and Expenses
Net interest expense and other expenses were $5.5 million during the
quarter ended September 30, 2004 compared to $4.2 million in 2003. The 2004
period included $5.2 million of net interest expense, $0.1 million of
currency transaction losses and $0.2 million of other non-operating expense.
The 2003 period included $5.7 million of net interest expense, $1.0 million
of currency transaction gains and $0.5 million of other non-operating income
including an unrealized gain on the PracticeWorks warrants sold in the fourth
quarter of 2003. The decrease in net interest expense was primarily due to
increased interest income generated from the Company's higher cash levels.
Earnings
The effective tax rate decreased to 25.9% for the quarter ended September
30, 2004 from 32.4% in 2003. The 2004 period includes a benefit of $2.9 million
resulting from the resolution of certain tax matters related to prior periods.
These benefits reduced the effective tax rate by 4.6% during the quarter ended
September 30, 2004. The Company operates and is subject to audit in many taxing
jurisdictions throughout the world. The Company makes provisions based on the
expected outcome of tax assessments and audits given the best information
available and adjusts such provisions upon resolution of the assessments or
audits, or when additional information about the outcome is available.
24
Income from continuing operations increased $6.0 million, or 15.0%, to
$46.3 million during the third quarter of 2004 from $40.3 million in 2003.
Fully diluted earnings per share from continuing operations during the 2004
period were $0.57, an increase of 14.0% from $0.50 in 2003. The third quarter
of 2004 includes pretax charges of $2.1 million related to restructuring
activities and a reduction of income taxes of $2.9 million related to tax
matters from prior periods.
Discontinued Operations
In February 2004, the Company sold its Gendex equipment business to Danaher
Corporation. Also in the first quarter of 2004, the Company discontinued
production of dental needles. Accordingly, the Gendex equipment and needle
businesses have been reported as discontinued operations for all periods
presented.
The gain from discontinued operations was $0.3 million during the quarter
ended September 30, 2004 compared to income of $1.0 million for the same
period in 2003. Fully diluted earnings per share from discontinued
operations was a gain of less than $0.01 for the quarter ended September 30,
2004 and income of $0.01 for the same period in 2003.
Operating Segment Results
The Company has five operating groups, managed by five Senior Vice
Presidents that equate to its operating segments. Each of these operating
groups covers a wide range of product categories and geographic regions. The
product categories and geographic regions often overlap across the groups.
Further information regarding the details of each group is presented in Note
5 of the Consolidated Condensed Financial Statements. The management of each
group is evaluated for performance and incentive compensation purposes on
third party net sales, excluding precious metal content, and segment
operating income.
Dental Consumables--U.S. and Europe/Japan/Non-dental
Net sales for this group were $67.6 million during the quarter ended
September 30, 2004, an 8.7% increase compared to $62.2 million in 2003.
Internal growth was 5.6% and currency translation added 3.1% to sales in
2004. The Japanese and Non-dental businesses in the group had the highest
growth, offset by lower growth in the U.S. and European Consumable businesses.
Operating profit increased $3.1 million during the three months ended
September 30, 2004 to $20.5 million in 2003. Sales growth (third party and
inter-segment) and an improved mix of products in the U.S. and European
dental consumable businesses and the leveraging of expenses in the Japanese
business were the most significant contributors to the increase.
Endodontics/Professional Division Dental Consumables/Asia
Net sales for this group increased $2.9 million during the three months
ended September 30, 2004, or 3.1%, to $98.3 million up from $95.4 million in
2003. Internal growth was 1.8% and currency translation added 1.3% to 2004
sales. Sales growth was highest in the Endodontics and Asian businesses
offset by lower sales in certain consumables products in the United States.
Operating profit was $37.6 million during the quarter ended September 30,
2004, an increase of $1.0 million from $36.6 million in 2003. This increase
was driven by sales growth in the group's Endodontics and Asian businesses.
In addition, operating profit benefited from currency translation.
Dental Consumables--United Kingdom, France, Italy, CIS, Middle East,
Africa/European Dental Laboratory Business
Net sales for this group were $70.3 million during the quarter ended
September 30, 2004, a 2.3% increase compared to $68.7 million in 2003.
Internal growth was negative 6.0% with currency translation adding 8.3%.
Changes in German reimbursement programs resulted in slower sales in Germany
during the 2004 quarter which was the primary driver of the negative 6%
internal sales growth.
25
Operating profit decreased $1.0 million during the three months ended
September 30, 2004 to $4.8 million from $5.8 million in 2003. The reduction
in operating profits was driven primarily by lower sales, particularly in the
German businesses. In addition, operating profit benefited from currency
translation.
Australia/Canada/Latin America/U.S. Pharmaceutical
Net sales for this group decreased $0.4 million during the quarter ended
September 30, 2004, or 1.3%, to $29.3 million from $29.7 million in 2003. The
lower internal sales was attributable to the Mexican and Brazilian businesses
within the Latin America group and decreases in the U.S. Pharmaceutical sales.
Operating profit was $5.1 million during the second quarter of 2004, a $1.6
million increase from $3.5 million in 2003 The increase was driven by
improved gross profit margins and the leveraging of overhead expenses in the
International operations within the group.
U.S. Dental Laboratory Business/Implants/Orthodontics
Net sales for this group was $72.9 million during the three months ended
September 30, 2004, a 10.6% increase compared to $65.9 million in 2003.
Internal growth was 8.5% and currency translation added 2.1% to sales in
2004. The internal growth increase was primarily due to strong growth in the
implant and orthodontics businesses.
Operating profit increased $2.9 million during the three months ended
September 30, 2004 to $11.6 million from $8.7 million in 2003. This increase
was driven by improved sales and improved gross profit margins in the implant
business as well as improved leveraging of SG&A expenses in the implant and
U.S. Dental Laboratory businesses.
RESULTS OF CONTINUING OPERATIONS, NINE MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003
Net Sales
The following is a reconciliation of net sales to net sales excluding
precious metal content.
Nine Months Ended
September 30,
2004 2003
(in millions)
Net Sales $ 1,231.3 $ 1,141.2
Precious Metal Content of Sales (153.0) (147.3)
Net Sales Excluding Precious Metal Content $ 1,078.3 $ 993.9
Net sales during the nine months ended September 30, 2004 increased $90.1
million, or 7.9%, over 2003 to $1,231.3 million. Net sales, excluding
precious metal content, increased $84.4 million, or 8.5%, to $1,078.3
million. Sales growth, excluding precious metal content, was comprised of
3.9% internal growth and 4.6% foreign currency translation. The 3.9%
internal growth was comprised of 2.6% in the United States, 4.6% in Europe
and 5.5% for all other regions combined.
The internal sales growth, excluding precious metal content, in the United
States was driven by growth in specialty dental products, offset by negative
growth in certain products within the dental consumable category and in
equipment products within the dental laboratory category. In Europe strong
internal sales growth in specialty dental products was offset by flat growth
in the dental consumable category. The internal growth of 5.5% in all other
regions was largely the result of strong growth in the Asian region, Canada
and the Middle East, offset by lower sales in Japan.
26
Gross Profit
Gross profit was $616.8 million for the nine months ended September 30,
2004 compared to $564.6 million in 2003, an increase of $52.2 million, or
9.2%. Gross profit, measured against sales including precious metal content,
represented 50.1% of net sales in 2004 compared to 49.5% in 2003. The gross
profit for 2004, measured against sales excluding precious metal content,
represented 57.2% of net sales compared to 56.8% in 2003. This margin
improvement from 2003 to 2004 was due to higher average realized selling
prices, new product introductions and favorable mix changes, offset in part
by startup costs that were incurred in the pharmaceutical plant in Chicago as
the media and the stability trials were being conducted.
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $27.4
million, or 7.4%, to $397.9 million during the first nine months of 2004 from
$370.5 million in 2003. The 7.4% increase in expenses reflects increases for
the translation impact from a weaker U.S. dollar of approximately $19.0
million. SG&A expenses, measured against sales including precious metal
content, decreased to 32.3% compared to 32.5% in 2003. SG&A expenses, as
measured against sales excluding precious metal content, decreased to 36.9%
compared to 37.3% in 2003. The continued leveraging of expenses was the
primary reason for the percentage decrease in SG&A expenses from 2003 to
2004. The benefits of the expense leveraging were partially offset by costs
related to the launch of the Oraqix(R) product and additional costs related
to the Sarbanes-Oxley compliance.
During 2004, the Company recorded restructuring and other costs of $3.2
million. These costs were largely related to the restructuring and
consolidation of our European laboratory business, initiated in the third
quarter of 2004. In addition, restructuring costs were incurred related to
the closure of the Company's European central warehouse in Nijmegan, The
Netherlands and transfer of this function to a Company-owned facility in
Radolfzell, Germany, and additional charges related to the consolidation of
its U.S. laboratory businesses which was initiated in the fourth quarter of
2003. The primary objective of the European laboratory plan was to improve
operational efficiencies and to reduce costs within this business and is
expected to be substantially complete by the first quarter of 2005. The
transfer of the European warehouse was an effort to improve customer service
levels and reduce costs. This relocation was substantially complete during
the first quarter of 2004. The Company made the decision to consolidate the
United States laboratory businesses in order to improve operational
efficiencies, to broaden customer penetration and to strengthen customer
service. This plan is expected to be substantially complete by the end of
2004.
The Company anticipates the remaining costs to complete these restructuring
initiatives will be approximately $1.7 million and $1.2 million during the
fourth quarter of 2004 and the first quarter of 2005, respectively, which
will be expensed as the costs are incurred. These plans are projected to
result in future annual expense reductions of $3 to $5 million when fully
implemented in 2005.
Other Income and Expenses
Net interest expense and other expenses were $16.3 million during the nine
months ended September 30, 2004 compared to $15.0 million in 2003. The 2004
period included $15.1 million of net interest expense, $0.9 million of
currency transaction losses and $0.3 million of other nonoperating costs. The
2003 period included $17.6 million of net interest expense, $1.5 million of
currency transaction gains and $1.1 million of other nonoperating income,
including an unrealized gain on the PracticeWorks warrants sold in the fourth
quarter of 2003. The decrease in net interest expense was primarily due to
increased interest income generated from the Company's higher cash levels.
27
Earnings
The effective tax rate decreased to 29.2% for the nine months ended
September 30, 2004 from 32.3% in 2003. The 2004 period includes a benefit of
$4.1 million resulting from the resolution of certain tax matters related to
prior periods. These benefits reduced the effective tax rate by 2.0% during
the nine months ended September 30, 2004.
Income from continuing operations increased $20.1 million, or 16.6%, to
$141.3 million during the nine months ended September 30, 2004 from $121.2
million in 2003. Fully diluted earnings per share from continuing operations
during the 2004 period were $1.73, an increase of 14.6% from $1.51 in 2003.
Income from continuing operations in the 2004 period includes pretax
restructuring charges of $3.2 million and reductions in income taxes of $4.1
million related to the resolution of certain tax matters related to prior
periods. Income from continuing operations in the 2003 period includes $1.3
million of net after-tax charges to reflect the correction of errors from
prior periods (see Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Form 10-K for
the period ended December 31, 2003).
Discontinued Operations
Income from discontinued operations was $43.2 million during the nine
months ended September 30, 2004 and $2.6 million for the same period in
2003. Fully diluted earnings per share from discontinued operations were
$0.53 and $0.03 for the periods ended September 30, 2004 and 2003,
respectively. The income from discontinued operations in 2004 was almost
entirely related to the gain realized on the sale of Gendex business.
Operating Segment Results
Dental Consumables--U.S. and Europe/Japan/Non-dental
Net sales for this group were $207.3 million for the nine months ended
September 30, 2004, an 8.8% increase compared to $190.6 million in 2003.
Internal growth was 4.4% and currency translation added 4.4% to sales in
2004. The U.S. and European consumables businesses had the highest growth in
the group, which was offset by lower sales in the Japanese market.
Operating profit increased $8.6 million during the nine months ended
September 30, 2004 to $61.6 million from $53.0 million in 2003. Sales growth
and lower SG&A expenses as a percentage of sales were the most significant
contributors to the increase. Operating profit also benefited from currency
translation.
Endodontics/Professional Division Dental Consumables/Asia
Net sales for this group increased $19.4 million during the nine months
ended September 30, 2004, or 7.0%, to $298.5 million up from $279.1 million
in 2003. Internal sales growth was 5.4% and currency translation added 1.6%
to 2004 sales. Sales growth was driven by higher sales in the Endodontics and
Asian businesses.
Operating profit was $117.4 million during the nine months ended September
30, 2004, an increase of $4.5 million from $112.9 million in 2003. This
increase was driven by continued sales growth in the group's businesses. In
addition, operating profit benefited from currency translation.
Dental Consumables--United Kingdom, France, Italy, CIS, Middle East,
Africa/European Dental Laboratory Business
Net sales for this group was $242.4 million for the nine months ended
September 30, 2004, an increase of $25.0 million, a 11.5% increase compared
to $217.4 million in 2003. Internal growth was 1.1% and currency translation
added 10.4% to sales in 2004. The sales growth was driven by the Italian,
Middle East and Africa consumable businesses, offset by lower sales in the
European Dental Laboratory businesses, primarily in Germany.
Operating profit increased $6.9 million for the nine months ended September
30, 2004 to $26.3 million from $19.4 million in 2003. The operating profit
improvement was primarily related to the sales growth and lower SG&A expenses
as a percentage of sales. In addition, operating profit benefited from
currency translation.
28
Australia/Canada/Latin America/U.S. Pharmaceutical
Net sales for this group increased $3.4 million during the nine months
ended September 30, 2004, or 4.0%, to $87.8 million compared to $84.4 million
in 2003. Internal growth was negative 1.8% and currency translation added
5.8%. The lower internal sales growth was primarily driven by the U.S
Pharmaceutical and Latin American businesses offset by the sales growth of
the Canadian and Australian businesses.
Operating profit was $12.0 million during the nine months ended September
30, 2004, a $2.4 million increase from $9.6 million in 2003. This increase
was driven by improved sales and higher margins in the international
operations in the group. In addition, operating profit benefited from
currency translation.
U.S. Dental Laboratory Business/Implants/Orthodontics
Net sales for this group was $227.0 million for the nine months ended
September 30, 2004, a 10.1% increase compared to $206.2 million in 2003.
Internal growth was 7.3% and currency translation added 2.8% to sales in
2004. The internal growth increase was primarily due to strong growth in the
orthodontics and dental implants businesses, offset by slower growth in the
U.S. dental laboratory business.
Operating profit increased $8.3 million during the nine months ended
September 30, 2004, to $39.0 million from $30.7 million in 2003. This
increase was driven by improved sales of the orthodontics and dental implants
businesses and lower SG&A expenses at the U.S. dental laboratory business.
In addition, operating profit benefited from currency translation.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the Company's disclosure in its 2003
Annual Report on Form 10-K filed March 15, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 2004
Cash flows from operating activities during the nine months ended September
30, 2004 were $184.5 million compared to $166.8 million during the same
period in 2003. The increase of $17.7 million results primarily from
increased earnings versus the prior year.
Investing activities for the nine months ended September 30, 2004 include
capital expenditures of $36.9 million. The Company expects that capital
expenditures will range from $55 million to $60 million for the full year
2004. Acquisition activity for the nine months ended September 30, 2004 was
$16.6 million which was primarily related to the final payments due to
AstraZeneca upon the approval of Oraqix(R) by the Food and Drug
Administration in the United States (see Note 4 to the Consolidated Condensed
Financial Statements). Additionally, in February 2004, the Company completed
the sale of its Gendex equipment business and received cash proceeds of
$102.5 million.
In December 2003, the Board of Directors authorized the repurchase of up to
1.0 million shares of common stock for the year ended December 31, 2004 on
the open market, with authorization expiring at the end of the year. During
the first nine months of 2004, the Company repurchased 540,000 shares at an
average cost per share of $45.92 and a total cost of $24.8 million (see also
Part II, Item 2 of this Form 10-Q). In addition, the Company received
proceeds of $35.8 million as a result of the exercise of 1,816,198 stock
options during the nine months ended September 30, 2004.
The Company's long-term debt decreased by $8.2 million during the nine
months ended September 30, 2004 to $782.0 million. This change included a net
decrease of $7.6 million due to exchange rate fluctuations on debt
denominated in foreign currencies and changes in the value of interest rate
swaps, and net repayments of $0.6 million made during the period. During the
nine months ended September 30, 2004, the Company's ratio of long-term debt
to total capitalization decreased to 37.3% compared to 41.3% at December 31,
2003.
29
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
$125 million through May 2005 ("the 364 day facility"). The 364-day facility
terminates in May 2005, 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 multi-currency revolving credit facility
serves as a back-up to these commercial paper facilities. The total
available credit under the commercial paper facilities and the multi-currency
facility in the aggregate is $250 million and no debt was outstanding under
the commercial paper facilities at September 30, 2004.
The Company also has access to $75.0 million in uncommitted short-term
financing under lines of credit from various financial institutions. The
lines of credit have no major restrictions and are provided under demand
notes between the Company and the lending institutions.
The Company had unused lines of credit of $318.0 million available at
September 30, 2004 subject to the Company's 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 September 30, 2004, the
Company was in compliance with these covenants.
At September 30, 2004, the Company held $63.7 million of precious metals on
consignment from several financial institutions. These consignment
agreements allow the Company to acquire the precious metal at approximately
the same time and for the same price as alloys are sold to the Company's
customers. In the event that the financial institutions would discontinue
offering these consignment arrangements, and if the Company could not obtain
other comparable arrangements, the Company may be required to obtain
financing to fund an ownership position in the required precious metal
inventory levels.
The Company's cash increased $243.6 million during the nine months ended
September 30, 2004 to $407.4 million. The Company has continued to accumulate
cash in 2004 rather than reduce debt due to pre-payment penalties that would
be incurred in retiring debt and the related interest rate swap agreements.
The Company anticipates that cash will continue to build throughout the
remainder of 2004, subject to any uses of cash for acquisitions and stock
purchases.
There have been no material changes to the Company's scheduled contractual
cash obligations disclosed in its 2003 Annual Report on Form 10-K filed March
15, 2004. 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.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2004, the Financial Accounting Standards Board ("FASB") released
FASB Staff Position ("FSP") No. 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", requires a company to consider
current changes in applicable laws when measuring its postretirement benefit
costs and accumulated postretirement benefit obligation. However, because of
uncertainties of the effect of the provisions of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "Act") on plan sponsors
and certain accounting issues raised by the Act, FSP 106-1 allows plan
sponsors to elect a one-time deferral of the accounting for the Act. The
Company elected the deferral provided by FSP 106-1 to analyze the impact of
the Act on prescription drug coverage provided to a limited number of
retirees from one of its business units. In May 2004, FASB released FSP 106-2
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." This FSP provides final
guidance on the accounting for the effects of the Act for employers that
sponsor postretirement health care plans that provide prescription drug
benefits. The FSB also requires those employers to provide certain
disclosures regarding the effect of the federal subsidy provided by the Act.
FSB 106-2 superceded FSB 106-1 when it became effective on July 1, 2004. The
Act has not had a material impact on the Company's Postretirement benefits
liabilities or on the Company's financial statements.
30
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, 2003.
Item 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures as of the end of the period covered by this report
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 the
SEC's rules and forms. The Company believes that a controls system, no
matter how well designed and operated, cannot provide absolute assurance that
the objectives of the controls system 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) Change in Internal Control over Financial Reporting
As of September 30, 2004, we are continuing our assessment of the
effectiveness of our internal control procedures related to
information systems access controls, financial reporting and
certain entity-wide controls related to corporate governance. As
of the date of this filing, we have identified deficiencies which
are being remediated relating to information systems access
controls, documentation of control procedures and segregation of
duties. We expect to have these matters fully remediated by the
end of 2004.
No changes in the Company's internal control over financial
reporting occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
31
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
unlikely 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. The trial in the government's case
was held in April and May 2002. On August 14, 2003, the Judge entered a
decision that the Company's tooth distribution practices do not violate the
antitrust laws. On October 14, 2003, the Department of Justice appealed this
decision to the U.S. Third Circuit Court of Appeals. Oral argument of this
case in the Third Circuit was held in September 2004.
Subsequent to the filing of the Department of Justice Complaint in 1999,
several private party class actions were filed based on allegations similar
to those in the Department of Justice case, on behalf of laboratories, and
denture patients in seventeen states who purchased Trubyte teeth or products
containing Trubyte teeth. These cases were transferred to the U.S. District
Court in Wilmington, Delaware. 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. The Plaintiffs in the laboratory case have appealed this decision to
the Third Circuit and briefs of the parties have been submitted. Also,
private party class actions on behalf of indirect purchasers were filed in
California and Florida state courts. The California and Florida cases have
been dismissed by the Plaintiffs following the decision by the Federal
District Court Judge issued in August 2003.
On March 27, 2002, a Complaint was filed in Alameda County, California
(which was transferred to Los Angeles County) by Bruce Glover, D.D.S.
alleging, inter alia, breach of express and implied warranties, fraud, unfair
trade practices and negligent misrepresentation in the Company's manufacture
and sale of Advance(R) cement. The Complaint seeks damages in an unspecified
amount for costs incurred in repairing dental work in which the Advance(R)
product allegedly failed. In January 2004, the Judge entered an Order
granting class certification only on the claims of breach of warranty and
fraud. In general, the Class is defined as California dentists who purchased
and used Advance(R) cement and were required, because of failures of the
cement, to repair or reperform dental procedures. The Company challenged the
certification of a class in higher courts, but such challenges have been
unsuccessful. In July, the Court issued a decision that the class would be
opt-in, as proposed by the Company, rather than opt-out (this means that
after Notice of the class action is sent to possible class members, a party
will have to determine they meet the class definition and take affirmative
action in order to join the class). The Advance(R) cement product was sold
from 1994 through 2000 and total sales in the United States during that
period were approximately $5.2 million. In the third quarter of 2004, the
Company's insurance carrier confirmed coverage for the breach of warranty
claims in this matter.
On July 13, 2004, the Company was served with a Complaint filed
by 3M Innovative Properties Company in the U.S. District Court
for the Western District of Wisconsin, alleging that the
Company's Aquasil(R) Ultra silicone impression material, introduced
in late 2002, infringes a 3M patent. 3M seeks an injunction and
damages in the case and its patent expires in November 2005. The
Company is defending against the 3M allegations. The trial in
this matter is currently scheduled for February 2005.
32
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
In December 2003, the Board of Directors authorized the repurchase of up to
1.0 million shares of common stock for the year ended December 31, 2004 on
the open market, with authorization expiring at the end of the year. During
the nine months ended September 30, 2004, the Company had the following
activity with respect to this repurchase program:
Number Of
Shares That
May Yet Be
Total Number Total Cost Average Price Purchased
Of Shares Of Shares Paid Per Under The
Period Purchased Purchased Share Program
(in thousands, except per share amounts)
January, 2004 -- $ -- $ -- 1,000.0
February, 2004 126.5 5,413 42.79 873.5
March, 2004 148.5 6,531 43.98 725.0
April, 2004 -- -- -- 725.0
May, 2004 25.5 1,222 47.92 699.5
June, 2004 75.0 3,739 49.85 624.5
July, 2004 25.0 1,225 49.00 599.5
August, 2004 139.5 6,669 47.81 460.0
September, 2004 -- -- -- 460.0
540.0 $24,799 $ 45.92
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31 Section 302 Certification Statements.
32 Section 906 Certification Statement.
(b) Reports on Form 8-K
On October 26, 2004, the Company filed a Form 8-K, under item 2.02,
furnishing the press release issued on October 26, 2004 regarding its
third quarter 2004 sales and earnings.
On November 1, 2004, the Company filed a Form 8-K, under item 2.02,
furnishing a transcript of its October 27, 2004 conference call regarding
the Company's discussion of its third quarter 2004 sales and earnings.
On November 5, 2004, the Company filed a Form 8-K, under item
5.02, disclosing the Company's appointment of a new Director to
the Board of Directors.
33
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.
November 8, 2004 /s/ Gerald K. Kunkle, Jr.
Date Gerald K. Kunkle, Jr.
Vice Chairman and
Chief Executive Officer
November 8, 2004 /s/ Bret W. Wise
Date Bret W. Wise
Senior Vice President and
Chief Financial Officer
34