SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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.
(Exact name of registrant as specified in its charter)
Delaware 39-1434669
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
221 West Philadelphia Street, York, Pennsylvania 17405-0872
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (717) 845-7511
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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.
Yes [X] No [ ]
Page 1 of 97
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The aggregate market value of the voting common stock held by
non-affiliates of the registrant computed by reference to the closing
price as of the last business day of the registrants most recently
completed second quarter June 25, 2004, was $3,961,313,243.
The number of shares of the registrant's Common Stock outstanding as
of the close of business on March 1, 2005 was 80,734,518.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of DENTSPLY
International Inc. to be used in connection with the 2005 Annual Meeting
of Stockholders (the "Proxy Statement") are incorporated by reference
into Part III of this Annual Report on Form 10-K to the extent provided
herein. Except as specifically incorporated by reference herein the
Proxy Statement is not deemed to be filed as part of this Annual Report
on Form 10-K.
2
PART I
Item 1. Business
Certain statements made by the Company, including without limitation,
statements containing the words "plans", "anticipates", "believes",
"expects", or words of similar import may be deemed to be forward-looking
statements and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Investors are
cautioned that forward-looking statements involve risks and uncertainties
which may materially affect the Company's business and prospects.
History and Overview
DENTSPLY International Inc. ("DENTSPLY" or the "Company"), a Delaware
corporation, was created by a merger of Dentsply International Inc. ("Old
Dentsply") and GENDEX Corporation in 1993. Old Dentsply, founded in
1899, was a manufacturer and distributor of artificial teeth, dental
equipment, and dental consumable products. GENDEX, founded in 1983, was
a manufacturer of dental x-ray equipment and handpieces. On February 27,
2004 the Company sold the x-ray equipment business of the former GENDEX
Corporation to Danaher Corporation for $102.5 million. Reference is made
to the information about discontinued operations set forth in Note 6 of
the Notes to Consolidated Financial Statements in this Annual Report on
Form 10-K.
DENTSPLY is the world's largest designer, developer, manufacturer and
marketer of a broad range of products for the dental market. The
Company's worldwide headquarters and executive offices are located in
York, Pennsylvania.
Through the year ended December 31, 2004, the Company operated within
five operating segments all of which were primarily engaged in the
design, manufacture and distribution of dental products in three
principal categories: 1) Dental consumables, 2) Dental laboratory
products, and 3) Specialty dental products. In January 2005, the Company
reorganized its operating group structure by consolidating into four
operating groups. Sales of the Company's dental products accounted for
approximately 98% of DENTSPLY's consolidated sales for the year ended
December 31, 2004. The remaining 2% of consolidated sales are primarily
related to materials sold to the investment casting industry.
The Company conducts its business in over 120 foreign countries,
principally through its foreign subsidiaries. DENTSPLY has a
long-established presence in Canada and in the European market,
particularly in Germany, Switzerland, France, Italy and the United
Kingdom. The Company also has a significant market presence in Central
and South America including Brazil, Mexico, Argentina, Colombia, and
Chile; in South Africa; and in the Pacific Rim including Japan,
Australia, New Zealand, China (including Hong Kong), Thailand, India,
Philippines, Taiwan, Korea, Vietnam and Indonesia. DENTSPLY has also
established marketing activities in Moscow, Russia to serve the countries
of the former Soviet Union.
For 2004, 2003, and 2002, the Company's sales to customers outside the
United States, including export sales, accounted for approximately 60%,
58% and 56%, respectively, of consolidated net sales. Reference is made
to the information about the Company's United States and foreign sales by
shipment origin and assets set forth in Note 4 of the Notes to
Consolidated Financial Statements in this Annual Report on Form 10-K.
As a result of the Company's significant international operations,
DENTSPLY is subject to fluctuations in exchange rates of various foreign
currencies and other risks associated with foreign trade. The impact of
currency fluctuations in any given period can be favorable or
unfavorable. The impact of foreign currency fluctuations of European
currencies on operating income is partially offset by sales in the United
States of products sourced from plants and third party suppliers located
overseas, principally in Germany and Switzerland. The Company enters
into forward foreign exchange contracts to selectively hedge assets,
liabilities and purchases denominated in foreign currencies. Reference is
made to the information regarding foreign exchange risk management
activities set forth in Quantitative and Qualitative Disclosure About
Market Risk under Item 7A and Note 16 of the Notes to Consolidated
Financial Statements in this Annual Report on Form 10-K.
3
The success of the Company is largely dependent upon the continued
strength of dental markets and the general economic environments of the
regions in which it operates. Negative changes to these markets and
economies could materially impact the Company's results of operations and
financial condition. In addition, many of the Company's markets are
affected by government reimbursement programs. Changes to these programs
could have a positive or negative impact on the Company's results.
Certain provisions of DENTSPLY's Certificate of Incorporation and
By-laws and of Delaware law could have the effect of making it difficult
for a third party to acquire control of DENTSPLY. Such provisions include
the division of the Board of Directors of DENTSPLY into three classes,
with the three-year term of a class expiring each year, a provision
allowing the Board of Directors to issue preferred stock having rights
senior to those of the common stock and certain procedural requirements
which make it difficult for stockholders to amend DENTSPLY's By-laws and
call special meetings of stockholders. In addition, members of DENTSPLY's
management and participants in its Employee Stock Ownership Plan
collectively own approximately 10% of the outstanding common stock of
DENTSPLY, which may discourage a third party from attempting to acquire
control of DENTSPLY in a transaction that is opposed by DENTSPLY's
management and employees.
Principal Products
The worldwide professional dental industry encompasses the diagnosis,
treatment and prevention of disease and ailments of the teeth, gums and
supporting bone. DENTSPLY's principal dental product categories are dental
consumables, dental laboratory products and dental specialty products. These
products are produced by the Company in the United States and internationally
and are distributed throughout the world under some of the most well-established
brand names and trademarks in the industry, including ANKYLOS(R), AQUASIL(TM),
CAULK(R), CAVITRON(R), CERAMCO(R), CERCON(R), CITANEST(R), DELTON(R),
DENTSPLY(R), DETREY(R), ELEPHANT(R), ESTHET.X(R), FRIALIT(R), GAC
ORTHOWORKS(TM), GOLDEN GATE(R), IN-OVATION(TM), MAILLEFER(R), MIDWEST(R),
MYSTIQUE(TM), NUPRO(R), ORAQIX(R), PEPGEN P-15(TM), POLOCAINE(R), PROFILE(R),
PROTAPER(TM), RINN(R), R&R(R), SANI-TIP(R), THERMAFIL(R), TRUBYTE(R) and
XYLOCAINE(R).
Dental Consumables. Consumable products consist of dental sundries used
in dental offices in the treatment of patients and small equipment used
by the dental professional. DENTSPLY's products in this category include
dental anesthetics, prophylaxis paste, dental sealants, impression
materials, restorative materials, bone grafting materials, tooth
whiteners, and topical fluoride. The Company manufactures thousands of
different consumable products marketed under more than a hundred brand
names. Small equipment products consist of various durable goods used in
dental offices for treatment of patients. DENTSPLY's small equipment
products include high and low speed handpieces, intraoral curing light
systems and ultrasonic scalers and polishers. Sales of general dental
consumables accounted for approximately 34% of the Company's consolidated
sales for the year ended December 31, 2004.
Dental Laboratory Products. Laboratory products are used in dental
laboratories in the preparation of dental appliances. DENTSPLY's
products in this category include dental prosthetics, including
artificial teeth, precious metal dental alloys, dental ceramics, and
crown and bridge materials. Equipment in this category includes computer
aided machining (CAM) ceramics systems and porcelain furnaces. Sales of
dental laboratory products accounted for approximately 33% of the
Company's consolidated sales for the year ended December 31, 2004.
Dental Specialty Products. Specialty dental products are used for
specific purposes within the dental office and laboratory settings.
DENTSPLY's products in this category include endodontic (root canal)
instruments and materials, implants, and orthodontic appliances and
accessories. Sales of specialty products accounted for approximately 31%
of the Company's consolidated sales for the year ended December 31, 2004.
4
Markets, Sales and Distribution
DENTSPLY distributes approximately 55% of its dental products through
domestic and foreign distributors, dealers and importers. However,
certain highly technical products such as precious metal dental alloys,
dental ceramics, crown and bridge porcelain products, endodontic
instruments and materials, orthodontic appliances, implants and bone
substitute and grafting materials are sold directly to the dental
laboratory or dental professional in some markets. No single customer
accounted for more than ten percent of consolidated net sales in 2004.
Reference is made to the information about the Company's foreign and
domestic operations and export sales set forth in Note 4 of the Notes to
Consolidated Financial Statements in this Annual Report on Form 10-K.
Although much of its sales are made to distributors, dealers, and
importers, DENTSPLY focuses its marketing efforts on the dentists, dental
hygienists, dental assistants, dental laboratories and dental schools who
are the end users of its products. As part of this end-user "pull
through" marketing approach, DENTSPLY employs approximately 1,700 highly
trained, product-specific sales and technical staff to provide
comprehensive marketing and service tailored to the particular sales and
technical support requirements of the dealers and the end users. The
Company conducts extensive distributor and end-user marketing programs
and trains laboratory technicians and dentists in the proper use of its
products, introducing them to the latest technological developments at
its Educational Centers located throughout the world in key dental
markets. The Company also maintains ongoing relationships with various
dental associations and recognized worldwide opinion leaders in the
dental field, although there is no assurance that these influential
dental professionals will continue to support our products.
DENTSPLY believes that demand in a given geographic market for dental
procedures and products varies according to the stage of social, economic
and technical development that the market has attained. Geographic
markets for DENTSPLY's dental products can be categorized into the
following three stages of development:
The United States, Canada, Western Europe, the United Kingdom, Japan,
and Australia are highly developed markets that demand the most advanced
dental procedures and products and have the highest level of expenditures
on dental care. In these markets, the focus of dental care is
increasingly upon preventive care and specialized dentistry. In addition
to basic procedures such as the excavation and filling of cavities and
tooth extraction and denture replacement, dental professionals perform an
increasing volume of preventive and cosmetic procedures. These markets
require varied and complex dental products, utilize sophisticated
diagnostic and imaging equipment, and demand high levels of attention to
protection against infection and patient cross-contamination.
In certain countries in Central America, South America and the Pacific
Rim, dental care is often limited to the excavation and filling of
cavities and other restorative techniques, reflecting more modest per
capita expenditures for dental care. These markets demand diverse
products such as high and low speed handpieces, restorative compounds,
finishing devices and custom restorative devices.
In the People's Republic of China, India, Eastern Europe, the countries
of the former Soviet Union, and other developing countries, dental
ailments are treated primarily through tooth extraction and denture
replacement. These procedures require basic surgical instruments,
artificial teeth for dentures and bridgework.
The Company offers products and equipment for use in markets at each of
these stages of development. The Company believes that as each of these
markets develop, demand for more technically advanced products will
increase. The Company also believes that its recognized brand names, high
quality and innovative products, technical support services and strong
international distribution capabilities position it well to take
advantage of any opportunities for growth in all of the markets that it
serves.
5
The Company believes that the market for its products will grow based
on the following factors:
o Increasing worldwide population.
o Growth of the population 65 or older - The percentage of the United
States, European and Japanese population over age 65 is expected to
nearly double by the year 2030. In addition to having significant
needs for dental care, the elderly are well positioned to pay for the
required procedures since they control sizable amounts of discretionary
income.
o Natural teeth are being retained longer - Individuals with natural
teeth are much more likely to visit a dentist in a given year than
those without any natural teeth remaining.
o The Changing Dental Practice in the U.S. - Dentistry in North
America has been transformed from a profession primarily dealing with
pain, infections and tooth decay to one with increased emphasis on
preventive care and cosmetic dentistry.
o Per capita and discretionary incomes are increasing in emerging
nations - As personal incomes continue to rise in the emerging nations
of the Pacific Rim and Latin America, healthcare, including dental
services, are a growing priority.
o The Company's business is less susceptible than other industries to
general downturns in the economies in which it operates. Several of the
products the Company offers relate to dental procedures that are
considered necessary by patients regardless of the economic environment.
Product Development
Technological innovation and successful product development are
critical to strengthening the Company's prominent position in worldwide
dental markets, maintaining its leadership positions in product
categories where it has a high market share, and increasing market share
in product categories where gains are possible. While many of DENTSPLY's
innovations represent evolutionary improvements of existing products, the
Company also continues to successfully launch products that represent
fundamental change. Its research centers throughout the world employ
approximately 400 scientists, Ph.D.'s, engineers, technicians and support
staff dedicated to research and product development. Approximately $44.6
million, $43.3 million, and $39.9 million, respectively, was internally
invested by the Company in connection with the development of new
products and in the improvement of existing products in the years ended
2004, 2003, and 2002, respectively. In addition, the Company licenses and
purchases technologies developed by other third parties as part of these
activities.
In 2004, the Company established an Office of Advanced Technology which
will focus on new and emerging technologies in dentistry. The creation of
this function is a critical step in meeting the Company's strategic goal
of taking a leadership role in defining the future of dentistry.
There can be no assurance that DENTSPLY will be able to continue to
develop innovative products and that regulatory approval of any new
products will be obtained, or that if such approvals are obtained, such
products will be favorably accepted in the marketplace. Additionally,
there is no assurance that entirely new technology or approaches to
dental treatment will not be introduced that could render the Company's
products obsolete.
Operating and Technical Expertise
DENTSPLY believes that its manufacturing capabilities are important to
its success. The manufacture of the Company's products requires
substantial and varied technical expertise. Complex materials technology
and processes are necessary to manufacture the Company's products. The
Company continues to automate its global manufacturing operations in
order to remain a low cost producer.
6
The Company has constructed a major dental anesthetic filling plant
outside Chicago which was completed in 2004. The Company believes that
this plant will become operational, following the approval and validation
of the manufacturing practices by the Medicines and Healthcare products
Regulatory Agency ("MHRA"), the agency responsible for drug products
approvals in the United Kingdom. The MHRA inspected the plant in November
2004 and we are awaiting their approval. Upon approval by the MHRA and
subsequent approval by the relative health authorities, the Plant will
begin to supply injectible anesthetic product to the Company's markets in
the United Kingdom, Ireland, Australia, and New Zealand. We also
anticipate making our formal submission for approval to the FDA for the
U.S. and Canadian markets in the first quarter of 2005. Upon receipt of
FDA approval, the plant is expected to supply these markets with
injectible anesthetic product. This initiative is very important to the
Company since the assets acquired from AstraZeneca did not include
production facilities. Since the purchase, the Company has contracted
with AstraZeneca and other third party manufacturers to produce the
Company's injectible anesthetic product requirements at their facilities
on a contract manufacturing basis until this plant can produce for the
respective markets. The supply contracts with AstraZeneca for the markets
in the United Kingdom, Ireland, Australia, and New Zealand have expired
in April 2004 and the contracts with AstraZenaca for the U.S. and
Canadian markets will expire in June 2005. The Company has built
inventory of products from the contracted manufacturers in an effort to
meet anticipated needs of the market until the Company's plant is
approved; however, there is no assurance that the approvals from the MHRA
or the FDA will be received in a timely manner to prevent an interruption
of the supply of inventory.
The Company has completed or has in progress a number of other key
initiatives around the world that are focused on helping the Company
improve its operating margins.
o A Corporate Purchasing office has been established to leverage the
buying power of Dentsply around the world and reduce our product costs
through lower prices and reduced related overhead.
o The Company has centralized its warehousing and distribution in
North America and Europe. While the initial gains from this strategy
have been realized, ongoing efforts are in place to maximize additional
opportunities that can be gained through improving our functional
expertise in supply chain management. In an effort to improve customer
service levels and reduce costs, the Company relocated its European
warehouse from Nijmegen, The Netherlands to Radolfzell, Germany in the
first quarter of 2004.
o The Company considers the implementation of lean manufacturing
techniques as a fundamental part of its supply chain strategy. With a
focus on reducing non-value added activities, numerous manufacturing
sites have dramatically reduced inventory levels, increased space
utilization and improved labor productivity. This was accomplished
while reducing manufacturing lead times and improving the Company's
delivery performance to dealers and end-users.
o DENTSPLY has seen improved productivity and cost reductions from the
formation of a North American Shared Services group. As a result, the
Company is currently in the process of establishing a European Shared
Services group in Yverdon, Switzerland which it expects to be fully
implemented by the first quarter of 2006.
o Information technology initiatives are underway to generate enhanced
worldwide financial data, to standardize worldwide telecommunications,
implement improved manufacturing and financial accounting systems and
an ongoing training of IT users to maximize the capabilities of global
systems.
o DENTSPLY continues to pursue opportunities to leverage its assets by
consolidating business units where appropriate and to optimize its
diversity of worldwide manufacturing capabilities.
7
Financing
DENTSPLY's long-term debt at December 31, 2004 was $781.5 million and
the ratio of long-term debt to total capitalization was 35.1%. This
capitalization ratio is down from 54.3% at December 31, 2001, the quarter
in which the Degussa Dental acquisition was completed. DENTSPLY may incur
additional debt in the future, including the funding of additional
acquisitions and capital expenditures. DENTSPLY's ability to make
payments on its indebtedness, and to fund its operations depends on its
future performance and financial results, which, to a certain extent, are
subject to general economic, financial, competitive, regulatory and other
factors and the interest rate environment that are beyond its control.
Although Management believes that the Company has and will continue to
have sufficient liquidity, there can be no assurance that DENTSPLY's
business will generate sufficient cash flow from operations in the future
to service its debt and operate its business.
The Company's cash increased $342.6 million during the year ended
December 31, 2004 to $506.4 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 in addition to the low cost of this debt,
net of earnings on the cash.
DENTSPLY's existing borrowing documentation contains a number of
covenants and financial ratios which it is required to satisfy. 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. Any breach of any such covenants or restrictions would
result in a default under the existing borrowing documentation that would
permit the lenders to declare all borrowings under such documentation to
be immediately due and payable and, through cross default provisions,
would entitle DENTSPLY's other lenders to accelerate their loans.
DENTSPLY may not be able to meet its obligations under its outstanding
indebtedness in the event that any cross default provision is triggered.
At December 31, 2004, the Company was in compliance with these covenants.
The Company has $69.8 million of long-term borrowings coming due in
2005. Additional information about DENTSPLY's working capital, liquidity
and capital resources is provided in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Annual
Report on Form 10-K.
Competition
The Company conducts its operations, both domestic and foreign, under
highly competitive market conditions. Competition in the dental products
industry is based primarily upon product performance, quality, safety and
ease of use, as well as price, customer service, innovation and
acceptance by professionals and technicians. DENTSPLY believes that its
principal strengths include its well-established brand names, its
reputation for high-quality and innovative products, its leadership in
product development and manufacturing, and its commitment to customer
satisfaction.
The size and number of the Company's competitors vary by product line
and from region to region. There are many companies that produce some,
but not all, of the same types of products as those produced by the
Company. Certain of DENTSPLY's competitors may have greater resources
than does the Company in certain of its product offerings.
The worldwide market for dental supplies is highly competitive. There
can be no assurance that the Company will successfully identify new
product opportunities and develop and market new products successfully,
or that new products and technologies introduced by competitors will not
render the Company's products obsolete or noncompetitive.
8
Regulation
The Company's products are subject to regulation by, among other
governmental entities, the United States Food and Drug Administration
(the "FDA"). In general, if a dental "device" is subject to FDA
regulation, compliance with the FDA's requirements constitutes compliance
with corresponding state regulations. In order to ensure that dental
products distributed for human use in the United States are safe and
effective, the FDA regulates the introduction, manufacture, advertising,
labeling, packaging, marketing and distribution of, and record-keeping
for, such products. The anesthetic products sold by the Company are
regulated as a drug by the FDA and by all other similar regulatory
agencies around the world.
Dental devices of the types sold by DENTSPLY are generally classified
by the FDA into a category that renders them subject only to general
controls that apply to all medical devices, including regulations
regarding alteration, misbranding, notification, record-keeping and good
manufacturing practices. DENTSPLY's facilities are subject to periodic
inspection by the FDA to monitor DENTSPLY's compliance with these
regulations. There can be no assurance that the FDA will not raise
compliance concerns. Failure to satisfy FDA requirements can result in
FDA enforcement actions, including product seizure, injunction and/or
criminal or civil proceedings. In the European Union, DENTSPLY's products
are subject to the medical devices laws of the various member states
which are based on a Directive of the European Commission. Such laws
generally regulate the safety of the products in a similar way to the FDA
regulations. DENTSPLY products in Europe bear the CE sign showing that
such products adhere to the European regulations.
All dental amalgam filling materials, including those manufactured and
sold by DENTSPLY, contain mercury. Various groups have alleged that
dental amalgam containing mercury is harmful to human health and have
actively lobbied state and federal lawmakers and regulators to pass laws
or adopt regulatory changes restricting the use, or requiring a warning
against alleged potential risks, of dental amalgams. The FDA's Dental
Devices Classification Panel, the National Institutes of Health and the
United States Public Health Service have each indicated that no direct
hazard to humans from exposure to dental amalgams has been demonstrated.
If the FDA were to reclassify dental mercury and amalgam filling
materials as classes of products requiring FDA pre-market approval, there
can be no assurance that the required approval would be obtained or that
the FDA would permit the continued sale of amalgam filling materials
pending its determination. In Europe, in particular in Scandinavia and
Germany, the contents of mercury in amalgam filling materials has been
the subject of public discussion. As a consequence, in 1994 the German
health authorities required suppliers of dental amalgam to amend the
instructions for use for amalgam filling materials, to include a
precaution against the use of amalgam for children under eighteen years
of age and to women of childbearing age. DENTSPLY also manufactures and
sells non-amalgam dental filling materials that do not contain mercury.
The introduction and sale of dental products of the types produced by
the Company are also subject to government regulation in the various
foreign countries in which they are produced or sold. DENTSPLY believes
that it is in substantial compliance with the foreign regulatory
requirements that are applicable to its products and manufacturing
operations.
Sources and Supply of Raw Materials
All of the raw materials used by the Company in the manufacture of its
products are purchased from various suppliers and are available from
numerous sources. No single supplier accounts for a significant
percentage of DENTSPLY's raw material requirements.
9
Intellectual Property
Products manufactured by DENTSPLY are sold primarily under its own
trademarks and trade names. DENTSPLY also owns and maintains more than
2,000 patents throughout the world and is licensed under a small number
of patents owned by others.
DENTSPLY's policy is to protect its products and technology through
patents and trademark registrations in the United States and in
significant international markets for its products. The Company
carefully monitors trademark use worldwide, and promotes enforcement of
its patents and trademarks in a manner that is designed to balance the
cost of such protection against obtaining the greatest value for the
Company. DENTSPLY believes its patents and trademark properties are
important and contribute to the Company's marketing position but it does
not consider its overall business to be materially dependent upon any
individual patent or trademark.
Employees
As of December 31, 2004, the Company and its subsidiaries employed
approximately 7,700 employees. A small percentage of the Company's
employees are represented by labor unions. Hourly workers at the
Company's Ransom & Randolph facility in Maumee, Ohio are represented by
Local No. 12 of the International Union, United Automobile, Aerospace and
Agriculture Implement Workers of America under a collective bargaining
agreement that expires on January 31, 2008. Hourly workers at the
Company's Midwest Dental Products facility in Des Plaines, Illinois are
represented by International Association of Machinists and Aerospace
Workers, AFL-CIO in Chicago under a collective bargaining agreement that
expires on May 31, 2006. In addition, approximately 30% of DeguDent and
25% of DeDent, two of the Company's German operating units, are
represented by labor unions. The Company provides pension and
postretirement benefits to many of these employees (see Note 14 to the
consolidated financial statements). The Company believes that its
relationship with its employees is good.
The Company's success is dependent upon its management and employees.
The loss of senior management employees or any failure to recruit and
train needed managerial, sales and technical personnel could have a
material adverse effect on the Company.
Acquisition Activities
DENTSPLY believes that the dental products industry continues to
experience consolidation with respect to both product manufacturing and
distribution, although it continues to be fragmented creating a number of
acquisition opportunities. As a result, during the past five years, the
Company has made several acquisitions including three significant
acquisitions made during 2001. These acquisitions included the Degussa
Dental Group, Friadent Gmbh and the dental injectible anaesthetic assets
of AstraZeneca. The Company continues to view acquisitions as a key part
of its growth strategy. These acquisition activities are intended to
supplement the Company's core growth and assure ongoing expansion of its
business. In addition, acquisitions have provided DENTSPLY with new
technologies and additional product and geographic breadth. The Company
continues to be active in evaluating potential acquisitions although
there is no assurance that these efforts will result in completed
transactions as there are many factors that affect the success of such
activities. If we do succeed in acquiring a business or product, there
can be no assurance that we will achieve any of the benefits that we
might anticipate from such an acquisition and the attention and effort
devoted to the integration of an acquired business could divert
management's attention from normal business operations. If we make
acquisitions, we may incur debt, assume contingent liabilities or create
additional expenses, any of which might adversely effect our financial
results. Any financing that we might need for acquisitions may only be
available to us on terms that restrict our business or that impose
additional costs that reduce our operating results.
10
Environmental Matters
DENTSPLY believes that its operations comply in all material respects
with applicable environmental laws and regulations. Maintaining this
level of compliance has not had, and is not expected to have, a material
effect on the Company's capital expenditures or on its business.
Securities and Exchange Act Reports
DENTSPLY makes available free of charge through its website at
www.dentsply.com its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to these reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after such
materials are filed with or furnished to, the Securities and Exchange
Commission.
The public may read and copy any materials the Company files with the
SEC at its Public Reference Room at the following address:
450 Fifth Street, NW
Washington, D.C. 20549
The public may obtain information on the operation of this Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, since
the Company is an electronic filer, the public may access reports, the
proxy and information statements and other information filed or furnished
by the Company at the Internet site maintained by the SEC
(http://www.sec.gov).
11
Item 2. Properties
The following is a current list of DENTSPLY's principal
manufacturing and operating locations as of December 31, 2004:
Leased
Location Function or Owned
United States:
Los Angeles, California Manufacture and distribution of investment Leased
casting products
Yucaipa , California Manufacture and distribution of dental Owned
laboratory products and dental ceramics
Lakewood, Colorado Manufacture and distribution of bone grafting Leased
materials and hydroxylapatite plasma-feed coating
materials and distribution of dental implant poducts
Milford, Delaware Manufacture of consumable dental products Owned
Des Plaines, Illinois Manufacture and assembly of dental handpieces Leased
Elk Grove Village, Illinois Future manufacture of anesthetic products Owned
Elgin, Illinois Manufacture of dental x-ray film holders, film Owned
mounts and accessories
Maumee, Ohio Manufacture and distribution of investment Owned
casting products
York, Pennsylvania Manufacture and distribution of artificial teeth Owned
and other dental laboratory products;
York, Pennsylvania Manufacture of small dental equipment and Owned
preventive dental products
Johnson City, Tennessee Manufacture and distribution of endodontic Leased
instruments and materials
Foreign:
Catanduva, Brazil Manufacture and distribution of consumable Owned
dental products
Petropolis, Brazil Manufacture and distribution of artificial teeth Owned
and consumable dental products
12
Leased
Location Function or Owned
Bonsucesso, Brazil Manufacture and distribution of dental Owned
anesthetics
Tianjin, China Manufacture and distribution of dental products Leased
Plymouth, England Manufacture of dental hand instruments Leased
Ivry Sur-Seine, France Manufacture and distribution of investment Leased
casting products
Bohmte, Germany Manufacture and distribution of dental Owned
laboratory products
Hanau, Germany Manufacture and distribution of precious metal Owned
dental alloys, dental ceramics and dental
implant products
Konstanz, Germany Manufacture and distribution of consumable Owned
dental products
Mannheim, Germany Manufacture and distribution of dental Owned
implant products
Munich, Germany Manufacture and distribution of endodontic Owned
instruments and materials
Radolfzell, Germany Distribution of dental products Leased
Rosbach, Germany Manufacture and distribution of dental ceramics Owned
Nasu, Japan Manufacture and distribution of precious metal Owned
dental alloys, consumable dental products and
orthodontic products
Hoorn, Netherlands Manufacture and distribution of precious metal Owned
dental alloys and dental ceramics
Las Piedras, Puerto Rico Manufacture of crown and bridge materials Owned
Ballaigues, Switzerland Manufacture and distribution of endodontic Owned
instruments
Ballaigues, Switzerland Manufacture and distribution of endodontic Owned
instruments, plastic components and
packaging material
Le Creux, Switzerland Manufacture and distribution of endodontic Owned
instruments
In addition, the Company maintains sales and distribution offices at
certain of its foreign and domestic manufacturing facilities, as well as
at various other United States and international locations. Most of the
various sites around the world that are used exclusively for sales and
distribution are leased.
DENTSPLY believes that its properties and facilities are well
maintained and are generally suitable and adequate for the purposes for
which they are used.
13
Item 3. 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. The Department of Justice
appealed this decision to the U.S. Third Circuit Court of Appeals. The
Third Circuit Court issued its decision on February 22, 2005 and reversed
the decision of the District Court. The effect of this decision, if it
withstands any appeal challenge by the Company, will be the issuance of
an injunction requiring DENTSPLY to discontinue its policy of not
allowing its tooth dealers to take on new competitive teeth lines. This
decision relates only to the distribution of artificial teeth sold in the
U.S., which affects less than 2.5% of the Company's sales. While the
Company believes its tooth distribution practices do not violate the
antitrust laws, we are confident that we can continue to develop this
business regardless of the final legal outcome. The Company is currently
evaluating its legal options as well as its marketing and sales
strategies in light of the current court ruling.
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. The Judge has entered an
Order granting class certification, as an Opt-in class (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) 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 Notice of the class action was sent on February 23, 2005
to dentists licensed to practice in California during the relevant
period. 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. The Company's insurance carrier has 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. This case was settled in the first quarter of 2005, which was
within the range of loss for which the Company had previously recorded
accruals, and DENTSPLY obtained a paid up license under the 3M patent.
14
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The following table sets forth certain information regarding the
executive officers of the Company as of February 28, 2005.
Name Age Position
Gerald K. Kunkle Jr. 58 Vice Chairman of the Board and
Chief Executive Officer
Thomas L. Whiting 62 President and Chief Operating
Officer
Bret W. Wise 44 Executive Vice President
Christopher T. Clark 43 Senior Vice President
William R. Jellison 47 Senior Vice President and Chief
Financial Officer
Rudolf Lehner 47 Senior Vice President
James G. Mosch 47 Senior Vice President
J. Henrik Roos 47 Senior Vice President
Brian M. Addison 50 Vice President, Secretary and
General Counsel
Gerald K. Kunkle Jr. was named Vice Chairman of the Board and Chief
Executive Officer of the Company effective January 1, 2004. Prior
thereto, Mr. Kunkle served as President and Chief Operating Officer since
January, 1997. Prior to joining DENTSPLY, Mr. Kunkle served as President
of Johnson and Johnson's Vistakon Division, a manufacturer and marketer
of contact lenses, from January 1994 and, from early 1992 until January
1994, was President of Johnson and Johnson Orthopaedics, Inc., a
manufacturer of orthopaedic implants, fracture management products and
trauma devices.
Thomas L. Whiting was named President and Chief Operating Officer of
the Company effective January 1, 2004. Prior thereto, Mr. Whiting served
as Executive Vice President since November, 2002. Prior to this
appointment, Mr. Whiting served as Senior Vice President since early
1995. Prior to his Senior Vice President appointment, Mr. Whiting was
Vice President and General Manager of the Company's L.D. Caulk Operating
unit from March 1987 to early 1995. Prior to that time, Mr. Whiting held
management positions with Deseret Medical and the Parke-Davis Company.
Bret W. Wise was named Executive Vice President effective January 10,
2005 and oversees the Operating Groups headed by Christopher Clark and
Rudolf Lehner in addition to the Corporate Planning and Business
Development and Corporate Research and Development functions. Prior to
that time, he was Senior Vice President and Chief Financial Officer of
the Company since December 2002. Prior to that time, Mr. Wise was Senior
Vice President and Chief Financial Officer with Ferro Corporation of
Cleveland, OH. Prior to joining Ferro Corporation in 1999, Mr. Wise held
the position of Vice President and Chief Financial Officer at WCI Steel,
Inc., of Warren, OH, from 1994 to 1999. Prior to joining WCI Steel, Inc.,
Mr. Wise was a partner with KPMG LLP. Mr. Wise is a Certified Public
Accountant.
15
Christopher T. Clark was named Senior Vice President effective
November 1, 2002 and oversees the following areas: North American Group
Marketing and Administration; Alliance and Government Sales; and the
DENTSPLY Canada, DENTSPLY Pharmaceutical, DENTSPLY Professional, Dentsply
Rinn, L.D. Caulk and Maillefer North America operating units. Through
December 31, 2004, he was responsible for the following areas: North
American Group Marketing and Administration; Alliance and Government
Sales; and the Ransom and Randolph, DENTSPLY Sankin, L.D. Caulk, and
DeDent operating units. Prior to this appointment, Mr. Clark served as
Vice President and General Manager of the Gendex operating unit since
June 1999. Prior to that time, he served as Vice President and General
Manager of the Trubyte operating unit since July of 1996. Prior to that,
Mr. Clark was Director of Marketing of the Trubyte Operating Unit since
September 1992 when he started with the Company.
William R. Jellison was named Senior Vice President and Chief Financial
Officer of the Company effective January 10, 2005. In this position, he
is also responsible for Accounting, Treasury, Tax, Information Technology
and Internal Audit. Prior to that and through December 31, 2004 he was
Senior Vice President since November1, 2002, responsible for the
following operating units: DENTSPLY Asia, DENTSPLY Professional, Dentsply
Endodontics, including Tulsa Dental Products, Maillefer, and Vereinigte
Dentalwerke ("VDW"). From the period April 1998 to November 1, 2002, Mr.
Jellison served as Senior Vice President and Chief Financial Officer of
the Company. Prior to that time, Mr. Jellison held various financial
management positions including Vice President of Finance, Treasurer and
Corporate Controller for Donnelly Corporation of Holland, Michigan since
1980. Mr. Jellison is a Certified Management Accountant.
Rudolf Lehner was named Senior Vice President effective December 12,
2001 and oversees the following operating units: DeDent, DeguDent
Germany, DeguDent Austria, DENTSPLY France, DENTSPLY Italy, DENTSPLY
Russia, DENTSPLY United Kingdom, Elephant Dental and Middle East/Africa.
Through December 31, 2004, he was responsible for the following operating
units: DeguDent Germany, DeguDent Austria, DENTSPLY France, DENTSPLY
Italy, DENTSPLY Russia, DENTSPLY United Kingdom, Elephant Dental and
Middle East/Africa. Prior to that time, Mr. Lehner was Chief Operating
Officer of Degussa Dental since mid-2000. From 1999 to mid 2000, he had
the overall responsibilities for Sales & Marketing at Degussa Dental.
From 1994 to 1999, Mr. Lehner held the position of Chief Executive
Officer of Elephant Dental. From 1990 to 1994, he had overall
responsibility for international activities at Degussa Dental. Prior to
that, Mr. Lehner held various positions at Degussa Dental and its parent,
Degussa AG, since starting in 1984.
James G. Mosch was named Senior Vice President effective November 1,
2002 and oversees the following operating units: DENTSPLY Australia,
DENTSPLY Brazil, DENTSPLY Latin America, DENTSPLY Mexico, Maillefer,
Ransom and Randolph, Tulsa Dental Products and Vereinigte Dentalwerke
("VDW"). Through December 31, 2004, he was responsible for the following
operating units: DENTSPLY Pharmaceutical, DENTSPLY Australia, DENTSPLY
Brazil, DENTSPLY Canada, DENTSPLY Latin America and DENTSPLY Mexico.
Prior to this appointment, Mr. Mosch served as Vice President and General
Manager of the DENTSPLY Professional operating unit since July 1994 when
he started with the Company.
J. Henrik Roos was named Senior Vice President effective June 1, 1999
and oversees the following operating units: CeraMed, Dentsply Asia,
Dentsply Prosthetics, Dentsply Sankin, Friadent and GAC. Through December
31, 2004, he was responsible for the following operating units: CeraMed,
Dentsply Prosthetics, Friadent and GAC. Prior to his Senior Vice
President appointment, Mr. Roos served as Vice President and General
Manager of the Company's Gendex division from June 1995 to June 1999.
Prior to that, he served as President of Gendex European operations in
Frankfurt, Germany since joining the Company in August 1993.
Brian M. Addison has been Vice President, Secretary and General Counsel
of the Company since January 1, 1998. Prior to that he was Assistant
Secretary and Corporate Counsel since December 1994. From August 1994 to
December 1994 he was a Partner at the Harrisburg, Pennsylvania law firm
of McNees, Wallace & Nurick. Prior to that he was Senior Counsel at
Hershey Foods Corporation.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information set forth under the caption "Supplemental Stock
Information" is filed as part of this Annual Report on Form 10-K.
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. The table below contains certain information with respect to the
repurchase of shares of the Company's common stock during the quarter
ended December 31, 2004.
Number Of
Shares That
May be Purchased
Total Number Total Cost Average Price Under The Share
Of Shares Of Shares Paid Per Repurchase
Period Purchased Purchased Share Program
(in thousands, except per share amounts)
October 1-31, 2004 - $ - $ - 460.0
November 1-30, 2004 185.0 9,579 51.78 275.0
December 1-31, 2004 (1) 90.0 5,020 55.78 -
275.0 $ 14,599 $ 53.09
<FN>
(1) Of these shares purchased, 30,000 shares at a total cost of $1,695,000, settled in January 2005.
</FN>
Item 6. Selected Financial Data
The information set forth under the caption "Selected Financial Data"
is filed as part of this Annual Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" is filed
as part of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The information set forth under the caption "Quantitative and
Qualitative Disclosure About Market Risk" is filed as part of this Annual
Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
The information set forth under the captions " Management's Report on
Internal Control Over Financial Reporting," "Report of Independent
Registered Public Accounting Firm," "Consolidated Statements of Income,"
"Consolidated Balance Sheets," "Consolidated Statements of Stockholders'
Equity," "Consolidated Statements of Cash Flows," and "Notes to
Consolidated Financial Statements" is filed as part of this Annual Report
on Form 10-K.
17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Conclusion Regarding the Effectiveness 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 were effective 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.
(b) Management's Report on Internal Control Over Financial Reporting
Management's report on the Company's internal control over financial
reporting is included in this Annual Report on Form 10-K and is
incorporated herein by reference. The Company's independent registered
public accounting firm has issued a report on management's assessment of
the Company's internal control over financial reporting, as stated in
their report which is included in this Annual Report on Form 10-K.
(c) Changes in Internal Controls Over Financial Reporting
There have been no changes in the Company's internal control over
financial reporting that occurred during the quarter ended December 31,
2004 that have materially affected, or are likely to materially affect,
our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
18
PART III
Item 10. Directors and Executive Officers of the Registrant
The information (i) set forth under the caption "Executive Officers of
the Registrant" in Part I of this Annual Report on Form 10-K and (ii) set
forth under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the 2005 Proxy Statement is
incorporated herein by reference.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics that
applies to the Chief Executive Officer and the Chief Financial Officer
and substantially all of the Company's management level employees. This
Code of Business Conduct and Ethics is provided as Exhibit 14 of this
Annual Report on Form 10-K.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in
the 2005 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" and "Securities Authorized for
Issuance Under Equity Compensation Plans" in the 2005 Proxy Statement is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
No relationships or transactions are required to be reported.
Item 14. Principal Accountant Fees and Services
The information set forth under the caption "Relationship with
Independent Registered Public Accounting Firm" in the 2005 Proxy
Statement is incorporated herein by reference.
19
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report
1 Financial Statements
The following consolidated financial statements of the Company are
filed as part of this Annual Report on Form 10-K and are covered by
the Report of Independent Registered Public Accounting Firm also
filed as part of this report:
Consolidated Statements of Income - Years ended December 31, 2004,
2003 and 2002
Consolidated Balance Sheets - December 31, 2004 and 2003
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows - Years ended December 31,
2004, 2003 and 2002
Notes to Consolidated Financial Statements
2 Financial Statement Schedule
The following financial statement schedule is filed as part of this
Annual Report on Form 10-K and is covered by the Report of
Independent Registered Public Accounting Firm:
Schedule II -- Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required to be included herein under the related instructions or
are inapplicable and, therefore, have been omitted.
20
3 Exhibits. The Exhibits listed below are filed or incorporated by
reference as part of this Annual Report on Form 10-K.
Exhibit
Number Description
3.1 Restated Certificate of Incorporation (10)
3.2 By-Laws, as amended (9)
4.1. (a) United States Commercial Paper Issuing and paying Agency Agreement dated as of
August 12,1999 between the Company and the Chase Manhattan Bank. (7)
(b) United States Commercial Paper Dealer Agreement dated as of March 28, 2002 between
the Company and Salomon Smith Barney Inc. (11)
(c) United States Commercial Paper Dealer Agreement dated as of April 30, 2002 between the
Company and Credit Suisse First Boston Corporation. (11)
(d) Euro Commercial Paper Note Agreement dated as of July 18, 2002 between the Company and
Citibank International plc. (11)
(e) Euro Commercial Paper Dealer Agreement dated as of July 18, 2002 between the Company
and Citibank International plc and Credit Suisse First Boston (Europe) Limited. (11)
4.2 (a) Note Agreement (governing Series A, Series B and Series C Notes) dated March 1, 2001 between
the Company and Prudential Insurance Company of America. (8)
(b) First Amendment to Note Agreement dated September 1, 2001 between the Company and
Prudential Insurance Company of America. (9)
4.3 (a) 5-Year Competitive Advance, Revolving Credit and Guaranty Agreements dated
as of May 25, 2001 among the Company, the guarantors named therein, the banks
named therein, the ABN Amro Bank, N.V as Administrative Agent, and First Union National Bank and
Harris Trust and Savings Bank as Documentation Agents. (9)
(b) 364-Day Competitive Advance, Revolving Credit and Guaranty Agreements dated as of May 25, 2001
among the Company, the guarantors named therein, the banks named therein, the ABN Amro Bank, N.V
as Administrative Agent, and First Union National Bank and Harris Trust and Savings Bank as
Documentation Agents. (9)
(c) Amendment to the 5-Year Competitive Advance, Revolving Credit and Guaranty Agreements
dated as of May 25, 2001 among the Company, the guarantors named therein, the banks named
therein, the ABN Amro Bank, N.V as Administrative Agent, and First Union National Bank
and Harris Trust and Savings Bank as Documentation Agents. (11)
(d) Amendment to the 364-Day Competitive Advance, Revolving Credit and Guaranty Agreements
dated as of May 25, 2001 among the Company, the guarantors named therein, the banks named
therein, the ABN Amro Bank, N.V as Administrative Agent, and First Union National Bank and
Harris Trust and Savings Bank as Documentation Agents. (11)
(e) Amendment to the 5-Year Competitive Advance, Revolving Credit and Guaranty Agreements dated
as of August 30, 2001 among the Company, the guarantors named therein, the banks named therein,
the ABN Amro Bank, N.V as Administrative Agent, and First Union National Bank and Harris Trust
and Savings Bank as Documentation Agents. (11)
(f) Amendment to the 364-Day Competitive Advance, Revolving Credit and Guaranty Agreements dated
as of August 30, 2001 among the Company, the guarantors named therein, the banks named therein,
the ABN Amro Bank, N.V as Administrative Agent, and First Union National Bank and Harris Trust
and Savings Bank as Documentation Agents. (11)
(g) Amendment to the 364-Day Competitive Advance, Revolving Credit and Guaranty Agreements dated
as of May 24, 2002 among the Company, the guarantors named therein, the banks named therein,
the ABN Amro Bank, N.V as Administrative Agent, and First Union National Bank and Harris Trust
and Savings Bank as Documentation Agents. (11)
21
Exhibit
Number Description
(h) Amendment to the 364-Day Competitive Advance, Revolving Credit and Guaranty Agreements dated as
of May 23, 2003 among the Company, the guarantors named therein, the banks named therein, the
ABN Amro Bank, N.V as Administrative Agent, and First Union National Bank and Harris Trust and
Savings Bank as Documentation Agents. (12)
(i) Amendment to the 364-Day Competitive Advance, Revolving Credit and Guaranty Agreements dated
as of May 21, 2004 among the Company, the guarantors named therein, the banks named therein,
the ABN Amro Bank, N.V as Administrative Agent, and Wachovia Bank, Fleet National Bank and
Harris Trust and Savings Bank as Documentation Agents.
4.4 Private placement note dated December 28, 2001 between the Company and Massachusetts Mutual Life
Insurance Company and Nationwide Life Insurance Company. (9)
4.5 (a) Eurobonds Agency Agreement dated December 13, 2001 between the Company and Citibank, N.A. (9)
(b) Eurobond Subscription Agreement dated December 11, 2001 between the Company and Credit Suisse
First Boston (Europe) Limited, UBS AG, ABN AMRO Bank N.V., First Union Securities, Inc.;
and Tokyo-Mitsubishi International plc (the Managers). (9)
(c) Pages 4 through 16 of the Company's Eurobond Offering Circular dated December 11, 2001. (9)
10.1 1993 Stock Option Plan (2)
10.2 1998 Stock Option Plan (1)
10.3 2002 Stock Option Plan (10)
10.4 (a) Trust Agreement for the Company's Employee Stock Ownership Plan between the Company and
T. Rowe Price Trust Company dated as of November 1, 2000. (8)
(b) Plan Recordkeeping Agreement for the Company's Employee Stock Ownership Plan between the
Company and T. Rowe Price Trust Company dated as of November 1, 2000. (8)
10.5 Written Description of the Chairman's Agreement between the Company and John C. Miles II. (12)
10.6 Employment Agreement dated January 1, 1996 between the Company and W. William Weston (4)*
10.7 Employment Agreement dated January 1, 1996 between the Company and Thomas L. Whiting (4)*
10.8 Employment Agreement dated October 11,1996 between the Company and Gerald K. Kunkle Jr. (5)*
10.9 Employment Agreement dated April 20, 1998 between the Company and William R. Jellison (6)*
10.10 Employment Agreement dated September 10, 1998 between the Company and Brian M. Addison (6)*
10.11 Employment Agreement dated June 1, 1999 between the Company and J. Henrik Roos (7)*
10.12 Employment Agreement dated October 1, 2001 between the Company and Rudolf Lehner (9)*
10.13 Employment Agreement dated November 1, 2002 between the Company and Christopher T. Clark (11)*
10.14 Employment Agreement dated November 1, 2002 between the Company and James G. Mosch (11)*
10.15 Employment Agreement dated December 1, 2002 between the Company and Bret W. Wise (11)*
10.16 DENTSPLY International Inc. Directors' Deferred Compensation Plan effective January 1, 1997 (5)*
10.17 Supplemental Executive Retirement Plan effective January 1, 1999 *
10.18 Written Description of Year 2004 Incentive Compensation Plan.
10.19 (a) AZLAD Products Agreement, dated January 18, 2001 between AstraZeneca AB and Maillefer
Instruments Holdings, S.A. (a subsidiary of the Company). (8)
(b) AZLAD Products Manufacturing Agreement, dated January 18, 2001 between AstraZeneca AB and
Maillefer Instruments Holdings, S.A. (8)
(c) AZ Trade Marks License Agreement, dated January 18, 2001 between AstraZeneca AB and
Maillefer Instruments Holdings, S.A. (8)
(d) AZLAD Products Manufacturing Agreement, effective March 1, 2004 between AstraZeneca AB
and Maillefer Instruments Holdings, S.A. (12)
22
Exhibit
Number Description
10.20 Sale and Purchase Agreement of Gendex Equipment Business between the Company and
Danaher Corporation Dated December 11, 2003. (12)
10.21 (a) Precious metal inventory Purchase and Sale Agreement dated November 30, 2001
between Fleet Precious Metal Inc. and the Company. (9)
(b) Precious metal inventory Purchase and Sale Agreement dated December 20, 2001
between JPMorgan Chase Bank and the Company. (9)
(c) Precious metal inventory Purchase and Sale Agreement dated December 20, 2001
between Mitsui & Co., Precious Metals Inc. and the Company. (9)
10.22 Rental Contract between Hesta Beteiligungsgesellschaft mbH and Dentsply DeTrey GmbH
effective January 1, 2004.
14 DENTSPLY International Inc. Code of Business Conduct and Ethics
21.1 Subsidiaries of the Company
23.1 Consent of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP
31 Section 302 Certification Statements
32 Section 906 Certification Statement
* Management contract or compensatory plan.
(1) Incorporated by reference to exhibit included in the Company's
Registration Statement on Form S-8 (No. 333-56093).
(2) Incorporated by reference to exhibit included in the Company's
Registration Statement on Form S-8 (No. 33-71792).
(3) Incorporated by reference to exhibit included in the Company's
Registration Statement on Form S-8 (No. 33-79094).
(4) Incorporated by reference to exhibit included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File No. 0-16211.
(5) Incorporated by reference to exhibit included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996, File No. 0-16211.
(6) Incorporated by reference to exhibit included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998, File No. 0-16211.
(7) Incorporated by reference to exhibit included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, File No. 0-16211.
(8) Incorporated by reference to exhibit included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000, File No. 0-16211.
(9) Incorporated by reference to exhibit included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2001, File No. 0-16211.
(10) Incorporated by reference to exhibit included in the Company's
Registration Statement on Form S-8 (No. 333-101548).
(11) Incorporated by reference to exhibit included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2002, File No. 0-16211.
(12) Incorporated by reference to exhibit included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2003, File No. 0-16211.
23
Loan Documents
The Company and certain of its subsidiaries have entered into various
loan and credit agreements and issued various promissory notes and
guaranties of such notes, listed below, the aggregate principal amount of
which is less than 10% of its assets on a consolidated basis. The
Company has not filed copies of such documents but undertakes to provide
copies thereof to the Securities and Exchange Commission supplementally
upon request.
(1) Master Grid Note dated November 4, 1996 executed in favor of
The Chase Manhattan Bank in connection with a line of credit up to
$20,000,000 between the Company and The JPMorganChase Bank.
(2) Agreement dated June 11, 2004 in the principal amount of
$3,000,000 between Dentsply Research and Development Corp, Hong Kong
Branch and Bank of Tokyo Mitsubishi.
(3) Form of "comfort letters" to various foreign commercial lending
institutions having a lending relationship with one or more of the
Company's international subsidiaries.
(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.
24
SCHEDULE II
DENTSPLY INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2004
Additions
-----------------------------
Charged
Balance at (Credited) Charged to Write-offs Balance
Beginning To Costs Other Net of Translation at End
Description of Period And Expenses Accounts Recoveries Adjustment of Period
(in thousands)
Allowance for doubtful accounts:
For Year Ended December 31,
2002 $ 12,602 $ 2,904 $ 3,560 (a) $(1,987) $ 1,413 $ 18,492
2003 18,492 569 (29) (4,771) 2,041 16,302
2004 16,302 2,126 (133) (c) (1,997) 926 17,224
Allowance for trade discounts:
For Year Ended December 31,
2002 913 988 - (871) 61 1,091
2003 1,091 1,494 19 (1,681) 139 1,062
2004 1,062 1,655 (24) (1,605) 70 1,158
Inventory valuation reserves:
For Year Ended December 31,
2002 24,359 4,855 4,671 (b) (5,581) 2,366 30,670
2003 30,670 2,845 (22) (3,418) 3,037 33,112
2004 33,112 3,173 (2,357) (c) (7,308) 1,278 27,898
Deferred tax asset valuation allowance:
For Year Ended December 31,
2002 2,864 3,431 - (1,129) 176 5,342
2003 5,342 5,764 - (2,596) 1,139 9,649
2004 9,649 11,951 - (375) 1,582 22,807
- ------------------
<FN>
(a) Includes $797 from acquisition of Austenal and $2,763 related to the acquisition of Degussa Dental.
(b) Includes $588 from acquisition of Austenal and $4,083 related to the acquisition of Degussa Dental.
(c) Related primarily to the sale of Gendex.
</FN>
25
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Year ended December 31,
2004 2003 2002 2001 2000
Statement of Income Data: (dollars in thousands, except per share amounts)
Net sales $ 1,694,232 $1,567,994 $1,415,893 $1,044,252 $ 810,409
Net sales without precious metal content 1,481,872 1,364,346 1,230,371 993,956 810,409
Gross profit 846,518 770,533 703,714 542,281 438,728
Restructuring and other costs (income) 7,124 3,700 (2,732) 5,073 (56)
Operating income 295,130 267,983 249,452 170,209 155,571
Income before income taxes 274,155 251,196 214,090 179,522 146,907
Net income from continuing operations $ 210,286 $ 169,853 $ 143,641 $ 117,714 $ 97,822
Net income from discontinued operations 42,879 4,330 4,311 3,782 3,194
Total net income $ 253,165 $ 174,183 $ 147,952 $ 121,496 $ 101,016
Earnings per common share - basic:
Continuing operations $ 2.61 $ 2.16 $ 1.84 $ 1.51 $ 1.26
Discontinued operations 0.54 0.05 0.05 0.05 0.04
Total earnings per common share - basic $ 3.15 $ 2.21 $ 1.89 $ 1.56 $ 1.30
Earnings per common share - diluted
Continuing operations $ 2.56 $ 2.11 $ 1.80 $ 1.49 $ 1.25
Discontinued operations 0.53 0.05 0.05 0.05 0.04
Total earnings per common share - diluted $ 3.09 $ 2.16 $ 1.85 $ 1.54 $ 1.29
Cash dividends declared per
common share $ 0.21750 $ 0.19700 $ 0.18400 $ 0.18333 $ 0.17083
Weighted Average Common Shares Outstanding:
Basic 80,387 78,823 78,180 77,671 77,785
Diluted 82,014 80,647 79,994 78,975 78,560
Balance Sheet Data:
Cash and cash equivalents $ 506,369 $ 163,755 $ 25,652 $ 33,710 $ 15,433
Total assets 2,798,145 2,445,587 2,087,033 1,798,151 866,615
Total debt 852,819 812,175 774,373 731,158 110,294
Stockholders' equity 1,443,973 1,122,069 835,928 609,519 520,370
Return on average stockholders' equity 19.7% 17.8% 20.5% 21.5% 20.4%
Long-term debt to total capitalization 35.1% 41.3% 47.9% 54.3% 17.4%
Other Data:
Depreciation and amortization $ 49,296 $ 45,661 $ 41,352 $ 51,512 $ 39,170
Capital expenditures 56,257 76,583 55,476 47,529 26,885
Property, plant and equipment, net 407,527 376,211 313,178 240,890 181,341
Goodwill and other intangibles, net 1,254,346 1,209,739 1,134,506 1,012,160 344,753
Interest expense, net 19,629 24,205 27,389 18,256 6,735
Cash flows from operating activities 306,259 257,992 172,983 211,068 145,622
Inventory days 92 93 100 93 114
Receivable days 47 50 49 46 52
Income tax rate 23.3% 32.4% 32.9% 34.4% 33.4%
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements made by the Company, including without limitation,
statements in the Overview section below and other statements containing
the words "plans", "anticipates", "believes", "expects", or words of
similar import may be deemed to be forward-looking statements and are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements involve risks and uncertainties which may
materially affect the Company's business and prospects, and should be
read in conjunction with the risk factors and uncertainties discussed
within Item I, Part I of this Annual Report on Form 10-K.
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 all other
regions; (2) the development, introduction and contribution 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 average overall internal growth rate of
4-6% is a long-term sustainable rate for the Company. During 2004, the
Company's overall internal growth was approximately 4.0% compared to 4.4%
in 2003. Our internal growth rates in the United States (43% of sales)
and Europe (38% of sales), the largest dental markets in the world, were
3.4% and 4.1%, respectively during 2004 compared to 3.3% and 8.3%,
respectively for 2003. Our internal growth rate in all other regions
during 2004, which represents approximately 19% of our sales, was 5.2%,
compared to 0.4% in 2003. Among the other regions, the Asian region, has
historically been one of our highest growth markets and management
believes it represents a long-term growth opportunity for the industry
and the Company. Also within the other region is the Japanese market,
which represents the third largest dental market in the world behind the
United States and Europe. Although Japan's dental market growth has been
weak in the past few years, as it closely parallels its economic growth,
the Company also views this market as an important long-term growth
opportunity, both in terms of a recovery in the Japanese economy and the
opportunity to increase our market share. There can be no assurance that
the Company's assumptions concerning the growth rates in its markets or
the dental market generally will be correct and if such rates are less
than expected, the Company's projected growth rates and results of
operations may be adversely effected.
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. During 2004, approximately 25 new products were
introduced around the world and the Company expects approximately 20 new
products to be introduced in 2005. Of specific note, in the fourth
quarter of 2004, the Company introduced its Oraqix(R) anesthetic gel
product, a revolutionary new non-injectible anesthetic for use in scaling
and root planing procedures. In addition, during 2004 the Company
introduced BioPure MTAD, an irrigant that is used to disinfect the tooth
canal as well as remove the smear layer that's created in a root canal
procedure.
27
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, in 2004 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. In addition, the Company licenses and
purchases technologies developed by other third parties. Specifically, in
2004, the Company purchased the rights to a unique compound called SATIF
from Sanofi-Aventis. The Company believes that this technology will
provide enhancements to future products with such benefits as greater
protection against enamel caries, the ability to desensitize exposed
dentin and the ability to retard, or to inhibit the formation of staining
on the enamel.
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 (See also
Acquisition Activity in Part I, Item 1 of this Form 10-K).
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. In addition, the Company
remains focused on enhancing efficiency through expanded use of
technology and process improvement initiatives. 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.
FACTORS IMPACTING COMPARABILITY BETWEEN YEARS
In the first and second quarters of 2003, the Company recorded charges
and reserve reversals which represented corrections of errors from prior
periods ("Charge and Reserve Errors"). Had the Charge and Reserve Errors
been recorded in the proper periods, reported net income from continuing
operations would have been higher by $1.3 million in 2003 and lower by
$3.4 million in 2002 (see Note 19 of the Consolidated Financial
Statements included in the Company's Form 10-K for the period ended
December 31, 2003).
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.
Reclassifications
Certain other reclassifications have been made to prior years' data in
order to conform to current year presentation.
28
RESULTS OF CONTINUING OPERATIONS, 2004 COMPARED TO 2003
Net Sales
The discussions below summarize the Company's sales growth, excluding
precious metals, 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.
Year Ended December 31,
2004 2003 2002
(in millions)
Net Sales $ 1,694.2 $ 1,568.0 $ 1,415.9
Precious Metal Content of Sales (212.3) (203.7) (185.5)
Net Sales Excluding Precious Metal Content $ 1,481.9 $ 1,364.3 $ 1,230.4
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 adjusted when the
prices of underlying precious metals change.
Net sales in 2004 increased $126.2 million, or 8.1%, to $1,694.2
million. Net sales, excluding precious metal content, increased $117.5
million, or 8.6%, to $1,481.9 million. Sales growth excluding precious
metal content was comprised of 4.0% internal growth and 4.6% of foreign
currency translation. The 4.0% internal growth was comprised of 3.4% in
the United States, 4.1% in Europe and 5.2% for all other regions
combined.
The internal sales growth, excluding precious metal content, in the
United States was driven by strong growth in specialty dental products,
offset by negative growth in anesthetic products due to competitive
pressures 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 5.2% in all other regions was largely the result of
strong growth in the Asian region, Canada and the Middle East/Africa,
offset by lower sales in Japan.
29
Gross Profit
Gross profit was $846.5 million in 2004 compared to $770.5 million in
2003, an increase of $76.0 million, or 9.9%. Gross profit, measured
against sales including precious metal content, represented 50.0% of net
sales in 2004 compared to 49.1% in 2003. The gross profit for 2004,
measured against sales excluding precious metal content, represented
57.1% of net sales compared to 56.5% in 2003. This margin improvement
from 2003 to 2004 was due primarily to favorable geographic and product
mix shifts in addition to ongoing operational improvements related to the
Company's restructuring and process improvement initiatives.
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $45.4
million, or 9.1%, to $544.3 million during 2004 from $498.9 million in
2003. The 9.1% increase in expenses reflects increases for the
translation impact from a weaker U.S. dollar of approximately $25.3
million. SG&A expenses, measured against sales including precious metal
content, increased to 32.1% compared to 31.8% in 2003. SG&A expenses, as
measured against sales excluding precious metal content, increased to
36.7% compared to 36.6% in 2003. The higher expense level in 2004 was
primarily related to litigation settlement costs, additional costs
related to the Sarbanes-Oxley compliance and costs related to the launch
of the Oraqix(R) product. In addition, the Company continued to leverage
expenses, including research and development costs, which served to
partially offset these additional costs. Moving forward, as the Company
leverages expenses, it expects to reinvest a portion of these savings to
further strengthen research and development and selling activities.
During 2004, the Company recorded restructuring and other costs of $7.1
million ($5.0 million net of tax). These costs were primarily related to
the creation of a European Shared Services Center in Yverdon,
Switzerland, and the consolidation of certain sales/customer service and
distribution facilities in Europe and Japan. The primary objective of
these restructuring initiatives is to improve operational efficiencies
and to reduce costs within the related businesses. These plans are
expected to be fully complete by the first quarter of 2006. 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, which
was substantially completed during the first quarter of 2004. This
transfer was completed in an effort to improve customer service levels
and reduce costs. The Company also incurred additional charges related to
the consolidation of its U.S. laboratory businesses, which was initiated
in the fourth quarter of 2003. 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 was substantially complete at the
end of 2004.
The Company anticipates the remaining costs to complete these
restructuring initiatives will be approximately $1.5 million which will
be expensed primarily during the first half of 2005 as the related costs
are incurred. These plans are projected to result in future annual
expense reductions of $5 to $7 million when fully implemented in 2006.
During 2003, the Company recorded restructuring and other costs of $3.7
million ($2.3 million net of tax). The largest portion of this was an
impairment charge related to certain investments made in emerging
technologies that the Company no longer viewed as recoverable. In
addition, as noted above, in December 2003, the Company commenced the
consolidation of its U.S. laboratory businesses and recorded a charge for
a portion of the costs to complete the consolidation (see Note 15 to the
Consolidated Financial Statements).
30
Other Income and Expenses
Net interest expense and other expenses were $21.0 million during 2004
compared to $16.8 million in 2003. The 2004 period included $19.6
million of net interest expense, $1.2 million of currency transaction
losses and $0.2 million of other nonoperating costs. The 2003 period
included $24.2 million of net interest expense, $0.3 million of currency
transaction gains and $7.1 million of other nonoperating income, which
included gains on the PracticeWorks common stock and warrants sold in the
fourth quarter of 2003 of $7.4 million ($4.7 million net of tax). The
decrease in net interest expense was primarily due to increased interest
income generated from the Company's higher cash levels.
Income Taxes
The effective tax rate decreased to 23.3% in 2004 from 32.4% in 2003.
During 2004, the Company recorded a tax benefit of $19.5 million
primarily from the reversal of previously accrued taxes from the
settlement of prior years' domestic and foreign tax audits, benefits of
additional R&D credits and other adjustments. The impact of this benefit
on the effective tax rate for 2004 was 7.1%. Management believes that the
effective tax rate for 2005 will be in the range of 31% to 32%.
Earnings
Income from continuing operations increased $40.4 million, or 23.8%, to
$210.3 million in 2004 from $169.9 million in 2003. Fully diluted
earnings per share from continuing operations were $2.56 in 2004, an
increase of 21.3% from $2.11 in 2003. Income from continuing operations
and diluted earnings per share from continuing operations in 2004
included the benefit of the tax adjustments ($19.5 million and $0.24 per
share) and the restructuring and other costs ($5.0 million and $0.06 per
share) described above. In addition, income from continuing operations
and diluted earnings per share from continuing operations in 2003
included the gain on the sale of the PracticeWorks securities ($4.7
million and $0.06 per share) and the restructuring and other costs ($2.3
million and $0.03 per share) described above.
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.
Income from discontinued operations was $42.9 million during 2004 and
$4.3 million in 2003. Fully diluted earnings per share from discontinued
operations were $0.53 and $0.05 for 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
Through December 31, 2004, the Company had five operating groups, which
were managed by five Senior Vice Presidents and represented our operating
segments. Each of these operating groups covered 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 4 of the Consolidated
Financial Statements. The management of each group is evaluated for
performance and incentive compensation purposes on net third party sales,
excluding precious metal content and segment operating income.
31
Dental Consumables--U.S. and Europe/Japan/Non-dental
Net sales for this group were $284.6 million in 2004, a 7.5% increase
compared to $264.6 million in 2003. Internal growth was 3.3% and
currency translation added 4.2% 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 $4.7 million during 2004 to $87.1 million
from $82.4 million in 2003. Sales growth was the most significant
contributor to the increase. Operating profit also benefited from
currency translation.
Endodontics/Professional Division Dental Consumables/Asia
Net sales for this group increased $25.2 million during 2004, or 6.6%,
to $406.7 million up from $381.5 million in 2003. Internal sales growth
was 4.9% and currency translation added 1.7% to 2004 sales. Sales growth
was driven by higher sales in the Endodontics and Asian businesses.
Operating profit was $163.0 million in 2004, an increase of $9.0
million from $154.0 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 $344.5 million in 2004, an increase of
$37.9 million, or 12.4%, compared to $306.6 million in 2003. Internal
growth was 2.1% and currency translation added 10.3% to sales in 2004.
The sales growth was driven by the Italian, Middle East, Africa and
France consumable businesses, offset by lower sales in the European
Dental Laboratory businesses, primarily in Germany, and lower sales in
the United Kingdom consumables business.
Operating profit increased $13.3 million in 2004 to $43.8 million from
$30.5 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.
Australia/Canada/Latin America/U.S. Pharmaceutical
Net sales for this group increased $5.4 million during 2004, or 4.8%,
to $118.6 million compared to $113.2 million in 2003. Internal growth
was negative 0.7% and currency translation added 5.5%. The lower internal
sales growth was primarily driven by lower sales in the U.S
Pharmaceutical business and flat growth in the Latin American businesses
offset by the sales growth of the Canadian and Australian businesses.
Operating profit was $15.6 million in 2004, a $3.6 million increase
from $12.0 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.
32
U.S. Dental Laboratory Business/Implants/Orthodontics
Net sales for this group was $306.7 million in 2004, a 10.5% increase
compared to $277.6 million in 2003. Internal growth was 7.7% 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 $12.4 million during 2004, to $53.8 million
from $41.4 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.
RESULTS OF CONTINUING OPERATIONS, 2003 COMPARED TO 2002
Net Sales
Net sales in 2003 increased $152.1 million, or 10.7%, to $1,568.0
million. Net sales, excluding precious metal content, increased $134.0
million, or 10.9%, to $1,364.3 million. Sales growth excluding precious
metal content was comprised of 4.4% internal growth, 6.6% foreign
currency translation less 0.1% for net acquisitions/divestitures. The
4.4% internal growth was comprised of 8.3% in Europe, 3.3% in the United
States and 0.4% for all other regions combined.
The internal sales growth in 2003, excluding precious metal content,
was highest in Europe with strong growth in the specialty dental category
and certain products within the dental laboratory category. In the
United States internal sales growth was strongest in the specialty dental
category and in certain products within the dental consumable category,
offset by a softening in sales in the dental laboratory category.
Gross Profit
Gross profit was $770.5 million in 2003 compared to $703.7 million in
2002, an increase of $66.8 million, or 9.5%. Gross profit, measured
against sales including precious metal content, represented 49.1% of net
sales in 2003 compared to 49.7% in 2002. The gross profit for 2003,
measured against sales excluding precious metal content, represented
56.5% of net sales compared to 57.2% in 2002. Gross profit as reported
would have been higher by $2.8 million in 2003 and lower by $5.4 million
in 2002 had the Charge and Reserve Errors been recorded in the proper
periods. In addition, geographic mix negatively influenced gross margins
in 2003 compared to 2002.
Operating Expenses
SG&A expense increased $41.9 million, or 9.2%, to $498.9 million in
2003 from $457.0 million in 2002. The 9.2% increase in expenses, as
reported, reflects increases for the translation impact from a weaker
U.S. dollar of approximately $35.2 million. SG&A expenses, measured
against sales including precious metal content, decreased to 31.8%
compared to 32.3% in 2002. SG&A expenses, as measured against sales
excluding precious metal content, decreased to 36.6% compared to 37.1% in
2002. SG&A would have been higher by $0.8 million in 2003 and lower by
$0.3 million in 2002, had the Charge and Reserve Errors been recorded in
the proper periods. The leveraging of general and administrative
expenses was the primary reason for the percentage decrease in SG&A
expenses from 2002 to 2003.
33
During 2003, the Company recorded restructuring and other costs of $3.7
million. The largest portion of this was an impairment charge related to
certain investments made in emerging technologies that the Company no
longer viewed as recoverable. In addition, in December 2003, the Company
commenced the consolidation of its U.S. laboratory businesses and
recorded a charge for a portion of the costs to complete the
consolidation.
During 2002, the Company recorded restructuring and other income of
$2.7 million, including a $3.7 million benefit which resulted from
changes in estimates related to prior period restructuring initiatives,
offset somewhat by a restructuring charge for the combination of the
CeraMed and U.S. Friadent divisions of $1.7 million. In addition, the
Company recognized a gain of $0.7 million related to the insurance
settlement for fire damages sustained at the Company's Maillefer
facility. (see Note 15 to the Consolidated Financial Statements).
Other Income and Expenses
Net interest expense and other expenses were $16.8 million in 2003
compared to $35.4 million in 2002. The 2003 period included $24.2 million
of net interest expense, $0.3 million of currency transaction gains and
$7.1 million of other nonoperating income, which included gains on the
PracticeWorks common stock and warrants sold in the fourth quarter of
2003 of $7.4 million. The year 2002 included: $27.4 million of net
interest; $3.5 million of currency transaction losses; a $1.1 million
loss realized on the share exchange with PracticeWorks, Inc.; and a $2.6
million mark-to-market loss related to PracticeWorks warrants.
Income Taxes/Earnings
The effective tax rate decreased to 32.4% in 2003 from 32.9% in 2002.
Income from continuing operations increased $26.3 million, or 18.3%, to
$169.9 million in 2003 from $143.6 million in 2002. Fully diluted
earnings per share from continuing operations were $2.11 in 2003, an
increase of 17.2% from $1.80 in 2002. Had the Charge and Reserve Errors
described above been recorded in the proper periods, income from
continuing operations would have been higher by $1.3 million ($.02 per
diluted share) in 2003 and lower by $3.4 million ($.04 per diluted share)
in 2002.
Discontinued Operations
Income from discontinued operations was $4.3 million in both 2003 and
2002. Fully diluted earnings per share from discontinued operations were
$.05 in both 2003 and 2002.
Operating Segment Results
Dental Consumables--U.S. and Europe/Japan/Non-dental
Net sales for this group were $264.6 million in 2003, a 9.3% increase
compared to $242.1 million in 2002. Internal growth was 2.8% and
currency translation added 6.5% to sales in 2003. The U.S. consumables
business had the highest growth in the group, which was offset by lower
sales in the Japanese market and low growth in the non-dental business.
Operating profit increased $11.5 million to $82.4 million from $70.9
million in 2002. Sales growth in the U.S. dental consumable business and
gross margin improvement in the European dental consumable business were
the most significant contributors to the increase. Operating profit
benefited from currency translation. Operating profit would have been
lower by $2.7 million in 2003 and higher by $1.6 million in 2002 if the
Charge and Reserve Errors had been recorded in the proper period.
34
Endodontics/Professional Division Dental Consumables/Asia
Net sales for this group increased $23.9 million, or 6.7%, up from
$357.6 million in 2002. Internal growth was 3.8% and currency
translation added 2.9% to 2003 sales. Sales growth was strongest in the
endodontic business. This was offset by lower sales in the dental
consumables business primarily in the U.S. market.
Operating profit was $154.0 million, an increase of $12.4 million from
$141.6 million in 2002. Continued growth in the endodontic business was
primarily responsible for the increase. In addition, operating profit
benefited from currency translation partially offset by the negative
currency impact of intercompany transactions. Operating profit would
have been lower by $0.7 million in 2003 and lower by $0.6 million in 2002
if the Charge and Reserve Errors had been recorded in the proper period.
Dental Consumables--United Kingdom, France, Italy, CIS, Middle East,
Africa/European Dental Laboratory Business
Net sales for this group were $306.6 million in 2003, a 26.9% increase
compared to $241.6 million in 2002. Internal growth was 6.7% and currency
translation added 20.2% to sales in 2003. The primary reason for the
sales growth was strong sales performance in Germany, France, CIS and
Africa.
Operating profit increased $19.2 million to $30.6 million from $11.4
million in 2002. The primary reason for the profit improvement was sales
increases and margin improvement in the European dental laboratory
business including improvements from the consolidation of the historical
Dentsply tooth business in Europe into the DeguDent business. In
addition, operating profit benefited from currency translation.
Operating profit would have been lower by $0.3 million in 2003 if the
Charge and Reserve Errors had been recorded in the proper period.
Australia/Canada/Latin America/Pharmaceutical
Net sales for this group increased $4.8 million, or 4.4%, compared to
$108.5 million in 2002. Internal growth was 3.6% and currency
translation added 0.8% to 2003 sales. Sales were strongest in the U.S.
pharmaceutical business and in Latin America. Canada and Australia
experienced slower sales growth.
Operating profit was $12.0 million, a $2.8 million decrease from $14.8
million in 2002. Lower operating margins in Latin America hurt
profitability. Operating profit would have been higher by $1.0 million
in 2003 and lower by $0.7 million in 2002 if the Charge and Reserve
Errors had been recorded in the proper period.
U.S. Dental Laboratory Business/Implants/Orthodontics
Net sales for this group were $277.6 million in 2003, a 6.7% increase
compared to $260.1 million in 2002. Internal growth was 3.0% and
currency translation added 3.7% to sales in 2003. Sales growth was
adversely impacted by the soft U.S. dental laboratory market. Sales
growth for implants in Europe and the orthodontic business showed
continued strong sales growth.
Operating profit decreased $8.8 million to $41.4 million from $50.2
million in 2002. The soft U.S. dental laboratory market and the negative
currency impact of intercompany transactions adversely impacted operating
profit. Operating profit would have been higher by $4.7 million in 2003
and lower by $5.3 million in 2002 if the Charge and Reserve Errors had
been recorded in the proper period.
35
FOREIGN CURRENCY
Since approximately 55% of the Company's 2004 revenues were generated
in currencies other than the U.S. dollar, the value of the U.S. dollar in
relation to those currencies affects the results of operations of the
Company. The impact of currency fluctuations in any given period can be
favorable or unfavorable. The impact of foreign currency fluctuations of
European currencies on operating income is partially offset by sales in
the U.S. of products sourced from plants and third party suppliers
located overseas, principally in Germany and Switzerland. On a net basis,
net income benefited from changes in currency translation in both 2004
and 2003 compared to the prior years.
CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES
The Company has identified below the accounting estimates believed to
be critical to its business and results of operations. These critical
estimates represent those accounting policies that involve the most
complex or subjective decisions or assessments.
Goodwill and Other Long-Lived Assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". This statement requires that the amortization of goodwill and
indefinite-lived intangible assets be discontinued and instead an annual
impairment approach be applied. The Company performed the annual
impairment tests of goodwill and indefinite-lived intangible assets
during 2004, as required, and no impairment was identified. These
impairment tests are based upon a fair value approach rather than an
evaluation of the undiscounted cash flows. If impairment is identified
under SFAS 142, the resulting charge is determined by recalculating
goodwill through a hypothetical purchase price allocation of the fair
value and reducing the current carrying value to the extent it exceeds
the recalculated goodwill. If impairment is identified on
indefinite-lived intangibles, the resulting charge reflects the excess of
the asset's carrying cost over its fair value.
Other long-lived assets, such as identifiable intangible assets and
fixed assets, are amortized or depreciated over their estimated useful
lives. These assets are reviewed for impairment whenever events or
circumstances provide evidence that suggest that the carrying amount of
the asset may not be recoverable with impairment being based upon an
evaluation of the identifiable undiscounted cash flows. If impaired, the
resulting charge reflects the excess of the asset's carrying cost over
its fair value.
If market conditions become less favorable, future cash flows, the key
variable in assessing the impairment of these assets, may decrease and as
a result the Company may be required to recognize impairment charges.
Market conditions can change due to many factors including increased
competition, downturns in the economic environment and introductions of
new technologies.
The Company's impairment tests relating to the perpetual license rights
to the trademarks and formulations for dental anaesthetic products
acquired from AstraZeneca in 2001 are highly sensitive to cash flow
assumptions resulting from the sale of these products and the Company's
success in completing and the timing of starting up the greenfield
sterile filling plant to produce these products in the United States.
36
Inventories
Inventories are stated at the lower of cost or market. The cost of
inventories is determined primarily by the first-in, first-out ("FIFO")
or average cost methods, with a small portion being determined by the
last-in, first-out ("LIFO") method. The Company establishes reserves for
inventory estimated to be obsolete or unmarketable equal to the
difference between the cost of inventory and estimated market value based
upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those anticipated, additional
inventory reserves may be required.
Accounts Receivable
The Company sells dental equipment and supplies both through a
worldwide network of distributors and directly to end users. For
customers on credit terms, the Company performs ongoing credit evaluation
of those customers' financial condition and generally does not require
collateral from them. The Company establishes allowances for doubtful
accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of the
Company's customers were to deteriorate, their ability to make required
payments may become impaired, and increases in these allowances may be
required. In addition, a negative impact on sales to those customers may
occur.
Accruals for Product Returns, Customer Rebates and Product Warranties
The Company makes provisions for customer returns, customer rebates and
for product warranties at the time of sale. These accruals are based on
past history, projections of customer purchases and sales and expected
product performance in the future. Because the actual results for
product returns, rebates and warranties are dependent in part on future
events, these matters require the use of estimates. The Company has a
long history of product performance in the dental industry and thus has
an extensive knowledge base from which to draw in measuring these
estimates.
Income Taxes
Income taxes are determined using the liability method of accounting
for income taxes in accordance with Financial Statement of Accounting
Standard No. 109 "Accounting for Income Taxes" ("SFAS 109"). Under SFAS
109, tax expense includes US and international income taxes plus the
provision for US taxes on undistributed earnings of international
subsidiaries not deemed to be permanently invested.
Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effect of such temporary
differences is reported as deferred income taxes. Deferred tax assets
are recognized if it is more likely than not that the assets will be
realized in future years. The Company establishes a valuation allowance
for deferred tax assets for which realization is not likely. As of
December 31, 2004, the Company recorded a valuation allowance of $22.8
million against the benefit of the net operating loss carryforwards of
foreign subsidiaries.
The Company operates within multiple taxing jurisdictions and in the
normal course of business is examined in various jurisdictions. Tax
accruals related to the estimated outcome of these examinations are
recorded in accordance with Statement of Financial Standards No. 5
"Accounting for Contingencies" ("SFAS 5"). The reversal of the accruals is
recorded when examinations are completed, statutes of limitation close or
tax laws change. A net benefit of $5.5 million was recorded from the
release of previously accrued taxes related to domestic and foreign
examinations that were concluded in 2004, less current year tax accruals
for existing examination risks. Tax credits and other incentives reduce
tax expense in the year the credits are claimed. In 2004, the Company
filed amended returns for prior years and received federal and state
refunds of $4.3 million for additional R&D credits.
On October 22, 2004, the American Jobs Creation Act of 2004 (the
"AJCA") was signed into law. The AJCA enacted a provision that provides
the Company with the opportunity to repatriate up to $500 million of
reinvested earnings and to claim a deduction equal to 85% of the
repatriated amount. The Company did not elect the benefit of this
provision in 2004. The Company has not determined whether, and to what
extent, an election will be made in 2005.
37
Litigation
The Company and its subsidiaries are from time to time parties to
lawsuits arising out of their respective operations. The Company records
liabilities when a loss is probable and can be reasonably estimated.
These estimates made by management are based on an analysis made by
internal and external legal counsel which considers information known at
the time. The Company believes it has estimated any liabilities for
probable losses well in the past; however, the unpredictability of court
decisions could cause liability to be incurred in excess of estimates.
Legal costs related to these lawsuits are expensed as incurred.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities during the year ended December 31,
2004 were $306.3 million compared to $258.0 million during the year ended
December 31, 2003. The increase of $48.3 million results primarily from
increased earnings, favorable working capital changes and increased tax
benefits related to the higher level of stock option exercise activity
versus the prior year.
Investing activities during 2004 include capital expenditures of $56.3
million. The Company expects that capital expenditures will range from
$55 million to $60 million in 2005. Acquisition-related activity for the
year ended December 31, 2004 was $20.5 million which was primarily due to
the final payment to AstraZeneca related to the Oraqix(R) product (see
Note 4 to the Consolidated Condensed Financial Statements) and an
investment in new technology. 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. As a result of this program, the company repurchased 815,000 shares
at an average cost per share of $48.34 and a total cost of $39.4 million.
Of these shares purchased, 30,000, at a cost of $1.7 million, will settle
in 2005. In addition, in December 2004 the Board of Directors approved a
stock repurchase program under which the Company may repurchase shares of
stock in an amount to maintain up to 3,000,000 shares of treasury stock.
As of December 31, 2004, the Company held 757,000 shares of treasury
stock. The Company also received proceeds of $45.3 million as a result of
the exercise of 2,165,000 stock options during the year ended December
31, 2004.
The Company's long-term borrowings increased by a net of $39.9 million
during the year ended December 31, 2004. This net change included an
increase of $62.1 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 $22.2 million of debt payments made
during the year. During the year ended December 31, 2003, the Company's
ratio of long-term debt to total capitalization decreased to 35.1%
compared to 41.3% at December 31, 2003.
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 $125 million and no debt was outstanding under the
commercial paper facilities at December 31, 2004.
38
The Company also has access to $54.0 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 $307.0 million available at
December 31, 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 December 31,
2004, the Company was in compliance with these covenants.
At December 31, 2004, the Company held $60.1 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 third party financing to fund an ownership position
in the required precious metal inventory levels.
The Company's cash increased $342.6 million during the year ended
December 31, 2004 to $506.4 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 in addition to the low cost of this debt,
net of earnings on the cash. The Company anticipates that cash will
continue to build throughout 2005, subject to any uses of cash for
acquisitions, stock purchases and potential debt prepayment.
Greater
Less Than 1-3 3-5 Than
Contractual Obligations 1 Year Years Years 5 Years Total
(in thousands)
Long-term borrowings $ 71,346 $ 779,940 $ - $ - $ 851,286
Operating leases 18,725 19,433 7,424 5,207 50,789
Interest on long-term borrowings 25,128 27,131 9,306 12,301 73,866
Precious metal consignment agreements 60,125 - - - 60,125
$175,324 $ 826,504 $ 16,730 $ 17,508 $1,036,066
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.
39
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 FSP also requires those employers to
provide certain disclosures regarding the effect of the federal subsidy
provided by the Act. FSP 106-2 superceded FSP 106-1 when it became
effective on July 1, 2004. The Company has not yet determined whether the
benefits provided under its postretirement benefit plans are actuarially
equivalent to Medicare Part D under The Act, and as a result, the
Company's benefit obligations or its net periodic service cost do not
reflect any amount associated with the subsidy. The Company does not
expect this act will have a material impact on the Company's
postretirement benefits liabilities or on its financial statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R ("SFAS 123R"), "Share-Based Payment". This standard
eliminates the guidance of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and amends FASB
Statement No. 123, "Accounting for Stock Based Compensation" ("FAS 123").
The standard requires that all public companies report share-based
compensation expense at the grant date fair value of the related
share-based awards and no longer permits companies to account for options
under the intrinsic value approach of APB 25. SFAS 123R is effective for
interim and annual periods beginning after June 15, 2005. As the Company
has accounted for stock option grants under the APB 25 in the past, this
statement is expected to have a material impact on the Company's
financial statements once effective ($0.14 to $0.16 per diluted share on
an annualized basis). The Company is currently assessing its compensation
programs, its option valuation techniques and assumptions, and the
possible transition alternatives in order to determine the full impact of
adopting this standard.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter
4". This statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing", to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material
(spoilage). Under ARB No. 43, in certain circumstances, items such as
idle facility expense, excessive spoilage, double freight, and rehandling
costs that were considered to be unusually abnormal were required to be
treated as period charges. Under FASB No. 151, these charges are
required to be treated as period charges regardless of whether they meet
the criterion of unusually abnormal. Additionally, FASB No. 151 requires
that allocation of fixed production overhead to the cost of conversion
be based on the normal capacity of the production facilities. FASB No.
151 is effective for all fiscal years beginning after June 15, 2005. The
Company does not expect the application of this standard to have a
material impact on the Company's financial statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Nonmonetary Assets an amendment of APB
Opinion No. 29". This statement amends Opinion 29 to eliminate the
exceptions that allowed for other than fair value measurement when
similar productive assets were exchanged, and replaced the exceptions
with a general exception for exchanges of nonmonetary assets that do not
have commercial substance. FASB Statement No 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The Company does not expect the application of this
statement to have a material impact on the Company's financial statements.
40
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information below provides information about the Company's market
sensitive financial instruments and includes "forward-looking statements"
that involve risks and uncertainties. Actual results could differ
materially from those expressed in the forward-looking statements. The
Company's major market risk exposures are changing interest rates,
movements in foreign currency exchange rates and potential price
volatility of commodities used by the Company in its manufacturing
processes. The Company's policy is to manage interest rates through the
use of floating rate debt and interest rate swaps to adjust interest rate
exposures when appropriate, based upon market conditions. A portion of
the Company's borrowings are denominated in foreign currencies which
serves to partially offset the Company's exposure on its net investments
in subsidiaries denominated in foreign currencies. 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 order to limit the unanticipated earnings fluctuations
from volatility in commodity prices, the Company selectively enters into
commodity price swaps to convert variable raw material costs to fixed
costs. The Company does not hold or issue derivative financial
instruments for speculative or trading purposes. The Company is subject
to other foreign exchange market risk exposure in addition to the risks
on its financial instruments, such as possible impacts on its pricing and
production costs, which are difficult to reasonably predict, and have
therefore not been included in the table below. All items described are
non-trading and are stated in U.S. dollars.
Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The
Company believes the carrying amounts of cash and cash equivalents,
accounts receivable (net of allowance for doubtful accounts), prepaid
expenses and other current assets, accounts payable, accrued liabilities,
income taxes payable and notes payable approximate fair value due to the
short-term nature of these instruments. The Company estimates the fair
value of its total long-term debt was $859.9 million versus its carrying
value of $851.3 million as of December 31, 2004. The fair value
approximated the carrying value since much of the Company's debt is
variable rate and reflects current market rates. The fixed rate Eurobonds
are effectively converted to variable rate as a result of an interest
rate swap and the interest rates on revolving debt and commercial paper
are variable and therefore the fair value of these instruments
approximates their carrying values. The Company has fixed rate Swiss
franc and Japanese yen denominated notes with estimated fair values that
differ from their carrying values. At December 31, 2004, the fair value
of these instruments was $245.7 million versus their carrying values of
$237.0 million. The fair values differ from the carrying values due to
lower market interest rates at December 31, 2004 versus the rates at
issuance of the notes.
Derivative Financial Instruments
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. 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.
Foreign Exchange Risk Management The Company enters into forward
foreign exchange contracts to selectively hedge assets and liabilities
denominated in foreign currencies. Market value gains and losses are
recognized in income currently and the resulting gains or losses offset
foreign exchange gains or losses recognized on the foreign currency
assets and liabilities hedged. Determination of hedge activity is
based upon market conditions, the magnitude of the foreign currency
assets and liabilities and perceived risks. The Company's significant
contracts outstanding as of December 31, 2004 are summarized in the
table that follows. These foreign exchange contracts generally have
maturities of less than twelve months and the counterparties to the
transactions are typically large international financial institutions.
41
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 December 31, 2004 and 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. At December 31, 2004 and 2003, the accumulated
translation gains on investments in foreign subsidiaries, primarily
denominated in Euros, Swiss francs and Japanese yen, net of these debt
hedges, were $179.4 million and $109.5 million, respectively, which was
included in Accumulated Other Comprehensive income.
Interest Rate Risk Management The Company uses interest rate swaps
to convert a portion of its variable rate debt to fixed rate debt. As
of December 31, 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 at a fixed rate of 4.2% for a term of seven years starting in
March 2005.
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) 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 December 31, 2004 and 2003, the
accumulated fair value of the interest rate swap was $14.7 million and
$14.1 million, respectively, and was recorded in Prepaid Expenses and
Other Current Assets and Other Noncurrent Assets. The notional amount
of the underlying Eurobond was increased by a corresponding amount at
December 31, 2004 and 2003.
42
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. 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, included 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. As of December 31, 2004 and 2003, the accumulated
fair value of the cross-currency element of the integrated transaction
was $33.0 million and $56.6 million, respectively, and was recorded in
Prepaid Expenses and Other Current Assets and Other Noncurrent Assets.
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 designated the Euro 350 million Eurobonds as a
hedge of net investment, on the date of the amendment and thus the
impact of translation changes related to the final principal payment
are recorded in accumulated other comprehensive income.
The fair value of these swap agreements is the estimated amount the
Company would receive (pay) at the reporting date, taking into account
the effective interest rates and foreign exchange rates. As of December
31, 2004 and 2003, the estimated net fair values of the swap agreements
was $35.7 million and $63.1 million, respectively.
Commodity Price Risk Management The Company selectively enters into
commodity price swaps to effectively fix certain variable raw material
costs. These swaps are used purely to stabilize the cost of components
used in the production of certain of the Company's products. The
Company generally accounts for the commodity swaps as cash flow hedges
under SFAS 133. As a result, the Company records the fair value of the
swap primarily through other comprehensive income based on the tested
effectiveness of the commodity swap. Realized gains or losses in other
comprehensive income are released and recorded to costs of products
sold as the products associated with the commodity swaps are sold.
Consignment Arrangements
The Company consigns the precious metals used in the production of
precious metal alloy products from various financial institutions. Under
these consignment arrangements, the banks own the precious metal, and,
accordingly, the Company does not report this consigned inventory as part
of its inventory on its consolidated balance sheet. These agreements are
cancelable by either party at the end of each consignment period; however
because the Company has access to numerous financial institutions with
excess capacity, consignment needs created by cancellations can be
shifted among the other institutions. The consignment agreements allow
the Company to take ownership of the metal at approximately the same time
customer orders are received and to closely match the price of the metal
acquired to the price charged to the customer (i.e., the price charged to
the customer is largely a pass through).
43
As precious metal prices fluctuate, the Company evaluates the impact of
the precious metal price fluctuation on its target gross margins for
precious metal alloy products and revises the prices customers are
charged for precious metal alloy products accordingly, depending upon the
magnitude of the fluctuation. While the Company does not separately
invoice customers for the precious metal content of precious metal alloy
products, the underlying precious metal content is the primary component
of the cost and sales price of the precious metal alloy products. For
practical purposes, if the precious metal prices go up or down by a small
amount, the Company will not immediately modify prices, as long as the
cost of precious metals embedded in the Company's precious metal alloy
price closely approximates the market price of the precious metal. If
there is a significant change in the price of precious metals, the
Company adjusts the price for the precious metal alloys, maintaining its
margin on the products.
At December 31, 2004, the Company had 142,505 troy ounces of precious
metal, primarily gold, platinum and palladium, on consignment for periods
of less than one year with a market value of $60.1 million. Under the
terms of the consignment agreements, the Company also makes compensatory
payments to the consignor banks based on a percentage of the value of the
consigned precious metals inventory. At December 31, 2004, the average
annual rate charged by the consignor banks was 1.3%. These compensatory
payments are considered to be a cost of the metals purchased and are
recorded as part of the cost of products sold.
44
EXPECTED MATURITY DATES DECEMBER 31, 2004
(represents notional amounts for derivative financial instruments)
2010 and Carrying Fair
2005 2006 2007 2008 2009 beyond Value Value
(dollars in thousands)
Notes Payable:
U.S. dollar denominated $ 1,402 $ - $ - $ - $ - $ - $1,402$ 1,402
Average interest rate 3.29% 3.29%
Denmark krone denominated 48 - - - - - 48 48
Average interest rate 6.00% 6.00%
Euro denominated 4 - - - - - 4 4
Average interest rate 3.17% 3.17%
Japanese yen denominated 79 - - - - - 79 79
Average interest rate 1.38% 1.38%
------------------------------------------------------
1,533 - - - - - 1,533 1,533
3.28% 3.28%
Current Portion of
Long-term Debt:
U.S. dollar denominated 327 - - - - - 327 327
Average interest rate 3.67% 3.67%
Swiss franc denominated 48,759 - - - - - 48,759 49,008
Average interest rate 4.49% 4.49%
Japanese yen denominated 22,260 - - - - - 22,260 22,368
Average interest rate 1.30% 1.30%
------------------------------------------------------
71,346 - - - - - 71,346 71,703
3.49% 3.49%
Long Term Debt:
U.S. dollar denominated - 315 7 - - - 322 322
Average interest rate 3.42% 3.44% 3.42%
Swiss franc denominated - 119,245 48,759 - - - 168,004 176,269
Average interest rate 4.77% 4.49% 4.69%
Japanese yen denominated - 122,463 - - - - 122,463 122,463
Average interest rate 0.56% 0.56%
Euro denominated - 489,151 - - - - 489,151 489,151
Average interest rate 5.75% 5.75%
------------------------------------------------------
- 731,174 48,766 - - - 779,940 788,205
4.72% 4.49% 4.71%
Foreign Exchange
Forward Contracts:
Forward sale, 9.2 million
Australian dollars 7,181 - - - - - 224 224
Forward purchase, 13.3 million
Canadian dollars 11,089 - - - - - 86 86
Forward sale, 2.6 billion
Japanese yen 25,548 - - - - - (133) (133)
Forward sale, 19.9 million
Mexican Pesos 1,785 - - - - - 21 21
Forward sale, 23.0 million
Canadian dollars 19,100 - - - - - (93) (93)
Forward purchase, 150 million
Japanese yen 1,405 - - - - - 59 59
164 164
Interest Rate Swaps:
Interest rate swaps - U.S. dollar,
terminated 2/2001 (21) - - - - - (21) (21)
Interest rate swaps - Japanese yen - - - - - 122,463 (4,628) (4,628)
Average interest rate 1.6%
Interest rate swaps - Swiss francs - - - - - 56,985 (7,317) (7,317)
Average interest rate 4.2%
Interest rate swaps - Euro - 474,478 - - - 14,673 14,673
Average interest rate 3.6%
Basis swap - Euro-U.S. Dollar - 315,000 - - - - 32,986 32,986
Average interest rate 3.9%
35,693 35,693
Commodity Swaps:
Platinum Swap - U.S. dollar 1,524 - - - - - 18 18
45
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. The
Company's internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those
policies and procedures that pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors
of the company; and provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness of internal controls over financial
reporting to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004. In
making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control--Integrated Framework. Based on its assessment
management concluded that, as of December 31, 2004, the Company's
internal control over financial reporting was effective based on those
criteria.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited
by PricewaterhouseCoopers LLP, an independent registered public
accounting firm as stated in their report which is included herein.
/s/ Gerald K. Kunkle, Jr. /s/William R. Jellison
Gerald K. Kunkle, Jr. William R. Jellison
Vice Chairman and Senior Vice President and
Chief Executive Officer Chief Financial Officer
46
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of DENTSPLY International Inc.:
We have completed an integrated audit of DENTSPLY International Inc.'s
2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2004 and audits of its 2003 and
2002 consolidated financial statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1), present fairly, in all material respects,
the financial position of DENTSPLY International Inc. and its
subsidiaries at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing
under Item 15(a) (2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in "Management's
Report on Internal Control Over Financial Reporting," appearing under
Item 9A, that the Company maintained effective internal control over
financial reporting as of December 31, 2004 based on criteria established
in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria. Furthermore,
in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated
Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
47
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting
includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, PA
March 15, 2005
48
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2004 2003 2002
(in thousands, except per share amounts)
Net sales (Note 4) $1,694,232 $1,567,994 $1,415,893
Cost of products sold 847,714 797,461 712,179
Gross profit 846,518 770,533 703,714
Selling, general and administrative expenses 544,264 498,850 456,994
Restructuring and other costs (income) 7,124 3,700 (2,732)
Operating income 295,130 267,983 249,452
Other income and expenses:
Interest expense 25,098 26,079 29,242
Interest income (5,469) (1,874) (1,853)
Other (income) expense, net (Note 5) 1,346 (7,418) 7,973
Income before income taxes 274,155 251,196 214,090
Provision for income taxes (Note 13) 63,869 81,343 70,449
Income from continuing operations 210,286 169,853 143,641
Income from discontinued operations, net of tax (Note 6) 42,879 4,330 4,311
Net income $ 253,165 $ 174,183 $ 147,952
Earnings per common share - basic (Note 2)
Continuing operations $ 2.61 $ 2.16 $ 1.84
Discontinued operations $ 0.54 0.05 0.05
Total earnings per common share - basic $ 3.15 $ 2.21 $ 1.89
Earnings per common share - diluted (Note 2)
Continuing operations $ 2.56 $ 2.11 $ 1.80
Discontinued operations 0.53 0.05 0.05
Total earnings per common share - diluted $ 3.09 $ 2.16 $ 1.85
Cash dividends declared per common share $ 0.21750 $ 0.19700 $ 0.18400
Weighted average common shares outstanding (Note 2):
Basic 80,387 78,823 78,180
Diluted 82,014 80,647 79,994
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
49
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2004 2003
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 506,369 $ 163,755
Accounts and notes receivable-trade, net (Note 1) 238,873 241,385
Inventories, net (Notes 1 and 7) 213,709 205,587
Prepaid expenses and other current assets (Notes 13 and 16) 97,458 88,463
Assets held for sale -- 28,262
Total Current Assets 1,056,409 727,452
Property, plant and equipment, net (Notes 1 and 8) 407,527 376,211
Identifiable intangible assets, net (Notes 1 and 9) 258,084 246,475
Goodwill, net (Notes 1 and 9) 996,262 963,264
Other noncurrent assets (Notes 13, 14 and 16) 79,863 114,736
Noncurrent assets held for sale -- 17,449
Total Assets $ 2,798,145 $ 2,445,587
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 91,576 $ 86,338
Accrued liabilities (Note 10) 179,765 172,684
Income taxes payable 60,387 66,614
Notes payable and current portion
of long-term debt (Note 11) 72,879 21,973
Liabilities of discontinued operations -- 20,206
Total Current Liabilities 404,607 367,815
Long-term debt (Note 11) 779,940 790,202
Deferred income taxes 58,196 66,861
Other noncurrent liabilities (Note 14) 110,829 96,953
Noncurrent liabilities of discontinued operations -- 1,269
Total Liabilities 1,353,572 1,323,100
Minority interests in consolidated subsidiaries 600 418
Commitments and contingencies (Note 17)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued -- --
Common stock, $.01 par value; 200 million shares authorized;
81.4 million shares issued at December 31, 2004
and December 31, 2003 814 814
Capital in excess of par value 189,277 166,952
Retained earnings 1,126,262 889,601
Accumulated other comprehensive income 164,100 104,920
Unearned ESOP compensation -- (380)
Treasury stock, at cost, 0.8 million shares at December 31, 2004
and 2.1 million shares at December 31, 2003 (36,480) (39,838)
Total Stockholders' Equity 1,443,973 1,122,069
Total Liabilities and Stockholders' Equity $ 2,798,145 $ 2,445,587
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
50
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumu-
lated
Other
Capital in Compre- Unearned Total
Common Excess of Retained hensive ESOP Treasury Stockholders'
Stock Par Value Earnings Income Compensation Stock Equity
(in thousands)
Balance at December 31, 2001 $ 814 $ 152,916 $ 597,414 $ (77,388) $ (3,419) $ (60,818) $ 609,519
Comprehensive Income:
Net income - - 147,952 - - - 147,952
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - - 88,739 - - 88,739
Unrealized loss on available-for-sale
securities - - - (4,854) - - (4,854)
Net loss on derivative financial
instruments - - - (4,670) - - (4,670)
Minimum pension liability adjustment - - - (203) - - (203)
Comprehensive Income 226,964
Exercise of stock options - 715 - - - 8,338 9,053
Tax benefit from stock options exercised - 3,320 - - - - 3,320
Cash dividends ($0.184 per share) - - (14,395) - - - (14,395)
Decrease in unearned ESOP compensation - - - - 1,520 - 1,520
Fractional share payouts - (53) - - - - (53)
Balance at December 31, 2002 814 156,898 730,971 1,624 (1,899) (52,480) 835,928
Comprehensive Income:
Net income - - 174,183 - - - 174,183
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - - 95,984 - - 95,984
Unrealized gain on available-for-sale
securities - - - 5,005 - - 5,005
Net gain on derivative financial
instruments - - - 2,430 - - 2,430
Minimum pension liability adjustment - - - (123) - - (123)
Comprehensive Income 277,479
Exercise of stock options - 4,229 - - - 12,642 16,871
Tax benefit from stock options exercised - 5,825 - - - - 5,825
Cash dividends ($0.197 per share) - - (15,553) - - - (15,553)
Decrease in unearned ESOP compensation - - - - 1,519 - 1,519
Balance at December 31, 2003 814 166,952 889,601 104,920 (380) (39,838) 1,122,069
Comprehensive Income:
Net income - - 253,165 - - - 253,165
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - - 69,884 - - 69,884
Unrealized gain on available-for-sale
securities - - - 191 - - 191
Net loss on derivative financial
instruments - - - (9,086) - - (9,086)
Minimum pension liability adjustment - - - (1,809) - - (1,809)
Comprehensive Income 312,345
Exercise of stock options - 4,257 - - - 41,061 45,318
Tax benefit from stock options exercised - 18,068 - - - - 18,068
Treasury shares purchased - - - - - (37,703) (37,703)
Cash dividends ($0.2175 per share) - - (16,504) - - - (16,504)
Decrease in unearned ESOP compensation - - - - 380 - 380
Balance at December 31, 2004 $ 814 $ 189,277 $1,126,262 $ 164,100 $ - $ (36,480)$ 1,443,973
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
51
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------
2004 2003 2002
(in thousands)
Cash flows from operating activities:
Net income from continuing operations $ 210,286 $ 169,853 $ 143,641
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 40,841 36,897 32,338
Amortization 8,455 8,764 9,014
Deferred income taxes 7,058 32,411 (8,435)
Restructuring and other (income) costs 7,124 3,700 (2,732)
Other non-cash costs (income) (394) (1,173) 9,281
Gain on sale of business -- -- --
Loss on disposal of property, plant and equipment 958 459 1,703
Gain on sale of PracticeWorks securities -- (5,806) --
Non-cash ESOP compensation 380 1,519 1,520
Changes in operating assets and liabilities, net of
acquisitions and divestitures:
Accounts and notes receivable-trade, net 16,061 (4,899) (13,030)
Inventories, net 4,103 15,197 (5,686)
Prepaid expenses and other current assets (765) 4,894 (1,601)
Accounts payable (1,386) 16,538 (7,698)
Accrued liabilities 5,756 (26,561) (12,922)
Income taxes 27,584 (271) 20,425
Other, net 4,471 (657) 3,712
Cash flows (used in) provided by discontinued operating activities (24,273) 7,127 3,453
Net cash provided by operating activities 306,259 257,992 172,983
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (17,165) (15,038) (49,805)
Expenditures for identifiable intangible assets (3,352) (2,410) (2,629)
Proceeds from bulk sale of precious metals inventory -- -- 6,754
Proceeds from sale of Gendex 102,500 -- --
Insurance proceeds received for fire-destroyed equipment -- -- 2,535
Redemption of PracticeWorks preferred stock -- -- 15,000
Proceeds from sale of PracticeWorks securities -- 23,506 --
Proceeds from sale of property, plant and equipment 1,788 2,959 1,777
Capital expenditures (56,257) (76,583) (55,476)
Other (1,756) -- --
Cash flows used in discontinued operations' investing activities (148) (1,811) (2,658)
Net cash provided by (used in) investing activities 25,610 (69,377) (84,502)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of deferred financing costs -- 634 100,244
Payments on long-term borrowings (22,151) (70,738) (190,589)
(Decrease) increase in short-term borrowings 624 (3,277) (3,666)
Proceeds from exercise of stock options and warrants 45,318 16,871 9,053
Cash paid for treasury stock (37,703) -- --
Cash dividends paid (15,823) (14,999) (14,358)
Realization of cross currency swap value 13,664 10,736 --
Fractional share payout -- -- (53)
Net cash used in financing activities (16,071) (60,773) (99,369)
Effect of exchange rate changes on cash and cash equivalents 26,816 10,261 2,830
Net increase (decrease) in cash and cash equivalents 342,614 138,103 (8,058)
Cash and cash equivalents at beginning of period 163,755 25,652 33,710
Cash and cash equivalents at end of period $ 506,369 $ 163,755 $ 25,652
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
52
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
(in thousands)
Supplemental disclosures of cash flow information:
Interest paid $ 24,836 $ 25,796 $ 25,545
Income taxes paid 44,952 57,733 55,913
Supplemental disclosures of non-cash transactions:
Receipt of PracticeWorks common stock and stock warrants
in exchange for convertible preferred stock - - 18,582
The company assumed liabilities in conjunction
with the following acquisitions:
Fair Value Cash Paid for
of Assets Assets or Liabilities
Date Acquired Acquired Capital Stock Assumed
(in thousands)
Austenal, Inc. January 2002 $ 31,929 $ 17,770 $ 14,159
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
53
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
DENTSPLY designs, develops, manufactures and markets a broad range of
products for the dental market. The Company believes that it is the
world's leading manufacturer and distributor of dental prosthetics,
precious metal dental alloys, dental ceramics, endodontic instruments and
materials, prophylaxis paste, dental sealants, ultrasonic scalers and
crown and bridge materials; the leading United States manufacturer and
distributor of dental handpieces, dental x-ray film holders, film mounts
and bone substitute/grafting materials; and a leading worldwide
manufacturer or distributor of dental injectible anesthetics, impression
materials, orthodontic appliances, dental cutting instruments and dental
implants. The Company distributes its dental products in over 120
countries under some of the most well established brand names in the
industry.
DENTSPLY is committed to the development of innovative, high-quality,
cost effective products for the dental market.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries. Intercompany accounts and
transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported
amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates, if different assumptions are
made or if different conditions exist.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Accounts and Notes Receivable-Trade
The Company sells dental equipment and supplies both through a
worldwide network of distributors and directly to end users. For
customers on credit terms, the Company performs ongoing credit evaluation
of those customers' financial condition and generally does not require
collateral from them. The Company establishes allowances for doubtful
accounts for estimated losses resulting from the inability of its
customers to make required payments. Accounts and notes receivable-trade
are stated net of these allowances which were $17.2 million and $16.3
million at December 31, 2004 and 2003, respectively. The Company recorded
provisions for doubtful accounts, included in "Selling, general and
administrative expenses", of approximately $2.1 million, $0.6 million and
$2.9 million for 2004, 2003 and 2002, respectively.
Certain of the Company's customers are offered cash rebates based on
targeted sales increases. In accounting for these rebate programs, the
Company records an accrual as a reduction of net sales for the estimated
rebate as sales take place throughout the year in accordance with EITF
01-09, " Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)".
54
Inventories
Inventories are stated at the lower of cost or market. At December 31,
2004 and 2003, the cost of $10.8 million, or 5%, and $11.4 million, or
6%, respectively, of inventories was determined by the last-in,
first-out ("LIFO") method. The cost of other inventories was determined
by the first-in, first-out ("FIFO") or average cost methods. The Company
establishes reserves for inventory estimated to be obsolete or
unmarketable equal to the difference between the cost of inventory and
estimated market value based upon assumptions about future demand and
market conditions.
If the FIFO method had been used to determine the cost of LIFO
inventories, the amounts at which net inventories are stated would be
higher than reported at December 31, 2004 and December 31, 2003 by $1.4
million and $1.0 million, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Except for leasehold improvements, depreciation for
financial reporting purposes is computed by the straight-line method over
the following estimated useful lives: buildings - generally 40 years and
machinery and equipment - 4 to 15 years. The cost of leasehold
improvements is amortized over the shorter of the estimated useful life
or the term of the lease. Maintenance and repairs are charged to
operations; replacements and major improvements are capitalized. These
assets are reviewed for impairment whenever events or circumstances
provide evidence that suggest that the carrying amount of the asset may
not be recoverable. Impairment is based upon an evaluation of the
identifiable undiscounted cash flows. If impaired, the resulting charge
reflects the excess of the asset's carrying cost over its fair value.
Identifiable Finite-lived Intangible Assets
Identifiable finite-lived intangible assets, which primarily consist of
patents, trademarks and licensing agreements, are amortized on a
straight-line basis over their estimated useful lives, ranging from 5 to
40 years. These assets are reviewed for impairment whenever events or
circumstances provide evidence that suggest that the carrying amount of
the asset may not be recoverable. The Company closely monitors intangible
assets related to new technology for indicators of impairment as these
assets have more risk of becoming impaired. Impairment is based upon an
evaluation of the identifiable undiscounted cash flows. If impaired, the
resulting charge reflects the excess of the asset's carrying cost over
its fair value.
Goodwill and Indefinite-Lived Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". This statement requires that the amortization of goodwill and
indefinite-lived intangible assets be discontinued and instead an annual
impairment approach be applied. The Company performed the annual
impairment tests of goodwill and indefinite-lived intangible assets
during 2004, as required, and no impairment was identified. These
impairment tests are based upon a fair value approach rather than an
evaluation of the undiscounted cash flows. If impairment is identified
under SFAS 142, the resulting charge is determined by recalculating
goodwill through a hypothetical purchase price allocation of the fair
value and reducing the current carrying value to the extent it exceeds
the recalculated value. If impairment is identified on indefinite-lived
intangibles, the resulting charge reflects the excess of the asset's
carrying cost over its fair value.
55
Derivative Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", on January 1, 2001. This standard, as amended by SFAS 138
and 149, requires that all derivative instruments be recorded on the
balance sheet at their fair value and that changes in fair value be
recorded each period in current earnings or comprehensive income.
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. Additionally, the Company utilizes
interest rate swaps to convert floating rate debt to fixed rate, fixed
rate debt to floating rate, cross currency basis swaps to convert debt
denominated in one currency to another currency, and commodity swaps to
fix its variable raw materials costs.
Litigation
The Company and its subsidiaries are from time to time parties to
lawsuits arising out of their respective operations. The Company records
liabilities when a loss is probable and can be reasonably estimated.
These estimates are made by management based on an analysis made by
internal and external legal counsel which considers information known at
the time. Legal costs related to these lawsuits are expensed as incurred.
Foreign Currency Translation
The functional currency for foreign operations, except for those in
highly inflationary economies, has been determined to be the local
currency.
Assets and liabilities of foreign subsidiaries are translated at
exchange rates on the balance sheet date; revenue and expenses are
translated at the average year-to-date rates of exchange. The effects of
these translation adjustments are reported in stockholders' equity within
"Accumulated other comprehensive income". During the years ended
December 31, 2004, 2003 and 2002 the Company had translation gains of
$104.9 million, $153.0 million and $121.4 million, respectively, offset
by losses of $35.0 million, $57.0 million and $32.7 million,
respectively, on its loans designated as hedges of net investments.
Exchange gains and losses arising from transactions denominated in a
currency other than the functional currency of the entity involved and
translation adjustments in countries with highly inflationary economies
are included in income. Exchange losses of $1.2 million in 2004 and $3.5
million in 2002 and exchange gains of $0.3 million in 2003 are included
in "Other expense (income), net".
Revenue Recognition
Revenue, net of related discounts and allowances, is recognized 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.
A significant portion of the Company's net sales is comprised of sales
of precious metals generated through its precious metal alloy product
offerings. The precious metals content of sales was $212.3 million,
$203.7 million and $185.5 million for 2004, 2003 and 2002, respectively.
Warranties
The Company provides warranties on certain equipment products.
Estimated warranty costs are accrued when sales are made to customers.
Estimates for warranty costs are based primarily on historical warranty
claim experience.
56
Research and Development Costs
Research and development ("R&D") costs relate primarily to internal
costs for salaries and direct overhead costs. In addition, the Company
contracts with outside vendors to conduct R&D activities. All such R&D
costs are charged to expense when incurred. The Company capitalizes the
costs of equipment that have general R&D uses and expenses such equipment
that is solely for specific R&D projects. The depreciation related to
this capitalized equipment is included in the Company's R&D costs. R&D
costs are included in "Selling, general and administrative expenses" and
amounted to approximately $44.6 million, $43.3 million and $39.9 million
for 2004, 2003 and 2002, respectively.
Income Taxes
Income taxes are determined using the liability method of accounting
for income taxes in accordance with Financial Statement of Accounting
Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS
109, tax expense includes US and international income taxes plus the
provision for US taxes on undistributed earnings of international
subsidiaries not deemed to be permanently invested. Tax credits and
other incentives reduce tax expense in the year the credits are claimed.
Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effect of such temporary
differences is reported as deferred income taxes. Deferred tax assets
are recognized if it is more likely than not that the assets will be
realized in future years. The Company establishes a valuation allowance
for deferred tax assets for which realization is not likely.
The Company accounts for income tax contingencies in accordance with
the Statement of Financial Standards No. 5, "Accounting for
Contingencies".
Earnings Per Share
Basic earnings per share is calculated by dividing net earnings by the
weighted average number of shares outstanding for the period. Diluted
earnings per share is calculated by dividing net earnings by the weighted
average number of shares outstanding for the period, adjusted for the
effect of an assumed exercise of all dilutive options outstanding at the
end of the period.
57
Stock Compensation
The Company has stock-based employee compensation plans which are
described more fully in Note 13. The Company applies the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for stock compensation plans. Under this method, no
compensation expense is recognized for fixed stock option plans, provided
that the exercise price is greater than or equal to the price of the
stock at the date of grant. The following table illustrates the effect on
net income and earnings per share if the Company had applied the fair
value recognition provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation (see also discussion of SFAS 123R in
New Accounting Pronouncements).
Year Ended December 31,
2004 2003 2002
(in thousands, except per share amounts)
Net income as reported $ 253,165 $ 174,183 $ 147,952
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (11,668) (11,062) (9,576)
Pro forma net income $ 241,497 $ 163,121 $ 138,376
Basic earnings per common share
As reported $ 3.15 $ 2.21 $ 1.89
Pro forma under fair value based method $ 3.00 $ 2.07 $ 1.77
Diluted earnings per common share
As reported $ 3.09 $ 2.16 $ 1.85
Pro forma under fair value based method $ 2.95 $ 2.02 $ 1.73
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes foreign currency translation
adjustments related to the Company's foreign subsidiaries, net of the
related changes in certain financial instruments hedging these foreign
currency investments. In addition, changes in the fair value of the
Company's available-for-sale investment securities and certain derivative
financial instruments and changes in its minimum pension liability are
recorded in other comprehensive income (loss). These changes are recorded
in other comprehensive income (loss) net of any related tax effects. For
the years ended 2004, 2003 and 2002, these adjustments were net of tax
benefits, primarily related to foreign currency translation adjustments,
of $32.0 million, $29.1 million and $32.9 million, respectively.
The balances included in accumulated other comprehensive income in the
consolidated balance sheets are as follows:
December 31,
2004 2003
(in thousands)
Foreign currency translation adjustments $ 179,416 $ 109,532
Net loss on derivative financial
instruments (12,639) (3,553)
Unrealized gain (loss) on available-for-sale securities 342 151
Minimum pension liability (3,019) (1,210)
$ 164,100 $ 104,920
The cumulative foreign currency translation adjustments included
translation gains of $297.9 million and $193.0 million as of December 31,
2004 and 2003, respectively, offset by losses of $118.5 million and $83.5
million, respectively, on loans designated as hedges of net investments.
58
Reclassifications
Certain reclassifications have been made to prior years' data in order
to conform to the current year presentation.
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 FSP also requires those employers to
provide certain disclosures regarding the effect of the federal subsidy
provided by the Act. FSP 106-2 superceded FSP 106-1 when it became
effective on July 1, 2004. The Company has not yet determined whether the
benefits provided under its postretirement benefit plans are actuarially
equivalent to Medicare Part D under The Act, and as a result, the
Company's benefit obligations or its net periodic service cost do not
reflect any amount associated with the subsidy. The Company does not
expect this act will have a material impact on the Company's
postretirement benefits liabilities or on its financial statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R ("SFAS 123R"), "Share-Based Payment". This standard
eliminates the guidance of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and amends FASB
Statement No. 123, "Accounting for Stock Based Compensation" ("FAS 123").
The standard requires that all public companies report share-based
compensation expense at the grant date fair value of the related
share-based awards and no longer permits companies to account for options
under the intrinsic value approach of APB 25. SFAS 123R is effective for
interim and annual periods beginning after June 15, 2005. As the Company
has accounted for stock option grants under the APB 25 in the past, this
statement is expected to have a material impact on the Company's
financial statements once effective ($0.14 to $0.16 per diluted share on
an annualized basis). The Company is currently assessing its compensation
programs, its option valuation techniques and assumptions, and the
possible transition alternatives in order to determine the full impact of
adopting this standard.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter
4". This statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing", to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material
(spoilage). Under ARB No. 43, in certain circumstances, items such as
idle facility expense, excessive spoilage, double freight, and rehandling
costs that were considered to be unusually abnormal were required to be
treated as period charges. Under FASB No. 151, these charges are
required to be treated as period charges regardless of whether they meet
the criterion of unusually abnormal. Additionally, FASB No. 151 requires
that allocation of fixed production overhead to the cost of conversion
be based on the normal capacity of the production facilities. FASB No.
151 is effective for all fiscal years beginning after June 15, 2005. The
Company does not expect the application of this standard to have a
material impact on the Company's financial statements.
59
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Nonmonetary Assets an amendment of APB
Opinion No. 29". This statement amends Opinion 29 to eliminate the
exceptions that allowed for other than fair value measurement when
similar productive assets were exchanged, and replaced the exceptions
with a general exception for exchanges of nonmonetary assets that do not
have commercial substance. FASB Statement No 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The Company does not expect the application of this
statement to have a material impact on the Company's financial statements.
NOTE 2 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
Earnings per common share
----------------------------------
Income From Income From
Continuing Discontinued Net Continuing Discontinued
Operations Operations Income Shares Operations Operations Total
(in thousands, except per share amounts)
Year Ended December 31, 2004
Basic $ 210,286 $ 42,879 $ 253,165 80,387 $ 2.61 $ 0.54 $ 3.15
Incremental shares from
assumed exercise of
dilutive options - - - 1,627
Diluted $ 210,286 $ 42,879 $ 253,165 82,014 $ 2.56 $ 0.53 $ 3.09
Year Ended December 31, 2003
Basic $ 169,853 $ 4,330 $ 174,183 78,823 $ 2.16 $ 0.05 $ 2.21
Incremental shares from
assumed exercise of
dilutive options - - - 1,824
Diluted $ 169,853 $ 4,330 $ 174,183 80,647 $ 2.11 $ 0.05 $ 2.16
Year Ended December 31, 2002
Basic $ 143,641 $ 4,311 $ 147,952 78,180 $ 1.84 $ 0.05 $ 1.89
Incremental shares from
assumed exercise of
dilutive options - - - 1,814
Diluted $ 143,641 $ 4,311 $ 147,952 79,994 $ 1.80 $ 0.05 $ 1.85
Options to purchase 1.0 million, 1.4 million and 0.1 million shares of
common stock that were outstanding during the years ended 2004, 2003 and
2002, respectively, were not included in the computation of diluted
earnings per share since the options' exercise prices were greater than
the average market price of the common shares and, therefore, the effect
would be antidilutive.
60
NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES
Acquisitions
The Company accounts for all acquisitions under the purchase method of
accounting; accordingly, the results of the operations acquired are
included in the accompanying financial statements for the periods
subsequent to the respective dates of the acquisitions. The purchase
prices are allocated on the basis of estimates of the fair values of
assets acquired and liabilities assumed.
In January 2002, the Company acquired the partial denture business of
Austenal Inc. ("Austenal") in a cash transaction valued at approximately
$17.8 million. Previously headquartered in Chicago, Illinois, Austenal
manufactured dental laboratory products and was the world leader in the
manufacture and sale of systems used by dental laboratories to fabricate
partial dentures.
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.
Divestitures
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. 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.
NOTE 4 - SEGMENT AND GEOGRAPHIC INFORMATION
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 in
2004, 2003 and 2002.
61
The operating businesses are combined into operating groups which have
overlapping product offerings, geographical presence, customer bases,
distribution channels, and regulatory oversight. These operating groups
are considered the Company's reportable segments under SFAS 131 as the
Company's chief operating decision-maker regularly reviews financial
results at the operating group level and uses this information to manage
the Company's operations. 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
services provided within each of the Company's five reportable segments
is provided below. The disclosure below reflects the Company's segment
reporting structure through December 31, 2004. In January 2005, the
Company reorganized its operating group structure consolidating into four
operating groups. Segment information will be disclosed under this new
structure beginning in the first quarter of 2005.
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.
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 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; chairside consumable and laboratory products in Brazil. It also
has responsibility for the sales and distribution of all Company 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.
62
Generally, the Company evaluates performance of segments based on the
segments operating income and net third party sales excluding precious
metal content.
The following table sets forth information about the Company's
operating groups for 2004, 2003 and 2002.
Third Party Net Sales
2004 2003 2002
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 298,045 $ 277,304 $ 254,503
Endodontics/Professional Division
Dental Consumables/Asia 412,885 384,706 358,226
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 499,728 453,632 375,317
Australia/Canada/Latin America/
U.S. Pharmaceutical 119,631 114,447 109,661
U.S. Dental Laboratory Business/
Implants/Orthodontics 343,199 317,160 297,705
All Other (a) 20,744 20,745 20,481
Total $1,694,232 $1,567,994 $1,415,893
Third Party Net Sales, excluding precious metal content
2004 2003 2002
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 284,584 $ 264,648 $ 242,117
Endodontics/Professional Division
Dental Consumables/Asia 406,667 381,509 357,642
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 344,500 306,605 241,578
Australia/Canada/Latin America/
U.S. Pharmaceutical 118,643 113,262 108,454
U.S. Dental Laboratory Business/
Implants/Orthodontics 306,734 277,577 260,099
All Other (a) 20,744 20,745 20,481
Total excluding Precious Metal Content 1,481,872 1,364,346 1,230,371
Precious Metal Content 212,360 203,648 185,522
Total including Precious Metal Content $1,694,232 $1,567,994 $1,415,893
63
Intersegment Net Sales
2004 2003 2002
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 229,090 $ 207,284 $ 190,520
Endodontics/Professional Division
Dental Consumables/Asia 163,480 158,501 151,125
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 83,634 76,648 63,636
Australia/Canada/Latin America/
U.S. Pharmaceutical 35,046 33,276 37,923
U.S. Dental Laboratory Business/
Implants/Orthodontics 31,577 31,737 29,036
All Other (a) 158,537 158,377 153,842
Eliminations (701,364) (665,823) (626,082)
Total $ -- $ -- $ --
Depreciation and Amortization
2004 2003 2002
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 9,467 $ 6,719 $ 6,869
Endodontics/Professional Division
Dental Consumables/Asia 12,209 11,042 10,574
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 9,802 9,189 7,140
Australia/Canada/Latin America/
U.S. Pharmaceutical 2,899 1,715 1,259
U.S. Dental Laboratory Business/
Implants/Orthodontics 8,519 7,652 7,259
All Other (a) 6,400 9,344 8,251
Total $49,296 $45,661 $41,352
64
Segment Operating Income
2004 2003 2002
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 87,114 $ 82,378 $ 70,941
Endodontics/Professional Division
Dental Consumables/Asia 162,960 154,025 141,585
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 43,845 30,545 11,356
Australia/Canada/Latin America/
U.S. Pharmaceutical 15,567 12,031 14,758
U.S. Dental Laboratory Business/
Implants/Orthodontics 53,758 41,428 50,191
All Other (a) (60,990) (48,724) (42,111)
Segment Operating Income 302,254 271,683 246,720
Reconciling Items:
Restructuring and other costs 7,124 3,700 (2,732)
Interest Expense 25,098 26,079 29,242
Interest Income (5,469) (1,874) (1,853)
Other (income) expense, net 1,346 (7,418) 7,973
Income before income taxes $ 274,155 $ 251,196 $ 214,090
Assets
2004 2003 2002
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 204,473 $ 187,248 $ 181,747
Endodontics/Professional Division
Dental Consumables/Asia 1,229,456 1,215,723 1,189,961
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 632,554 590,208 517,067
Australia/Canada/Latin America/
U.S. Pharmaceutical 313,145 256,299 169,989
U.S. Dental Laboratory Business/
Implants/Orthodontics 279,589 311,782 310,258
All Other (a) 138,928 (115,673) (281,989)
Total $2,798,145 $ 2,445,587 $ 2,087,033
65
Capital Expenditures
2004 2003 2002
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 7,364 $ 8,569 $ 8,394
Endodontics/Professional Division
Dental Consumables/Asia 9,532 8,517 12,550
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 5,242 5,075 9,624
Australia/Canada/Latin America/
U.S. Pharmaceutical 26,389 39,547 3,434
U.S. Dental Laboratory Business/
Implants/Orthodontics 4,594 5,265 8,870
All Other (a) 3,136 9,610 12,604
Total $56,257 $76,583 $55,476
(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.
Geographic Information
The following table sets forth information about the Company's
operations in different geographic areas for 2004, 2003 and 2002. Net
sales reported below represent revenues for shipments made by operating
businesses located in the country or territory identified, including
export sales. Assets reported represent those held by the operating
businesses located in the respective geographic areas.
United Other
States Germany Foreign Consolidated
(in thousands)
2004
Net sales $ 727,875 $ 436,047 $ 530,310 $ 1,694,232
Long-lived assets 204,807 125,897 136,511 467,215
2003
Net sales $ 705,309 $ 395,170 $ 467,515 $ 1,567,994
Long-lived assets 213,607 121,481 129,059 464,147
2002
Net sales $ 684,553 $ 324,069 $ 407,271 $ 1,415,893
Long-lived assets 178,978 100,707 114,099 393,784
66
Product and Customer Information
The following table presents sales information by product category:
Year Ended December 31,
2004 2003 2002
(in thousands)
Dental consumables $ 578,128 $ 554,172 $ 522,913
Dental laboratory products 559,278 521,079 472,471
Specialty dental products 520,001 459,193 387,520
Non-dental 36,825 33,550 32,989
$1,694,232 $1,567,994 $1,415,893
Dental consumable products consist of dental sundries and small
equipment products used in dental offices in the treatment of patients.
DENTSPLY's products in this category include dental injectible
anesthetics, prophylaxis paste, dental sealants, impression materials,
restorative materials, bone grafting materials, tooth whiteners and
topical fluoride. The Company manufactures thousands of different
consumable products marketed under more than a hundred brand names.
Small equipment products consist of various durable goods used in dental
offices for treatment of patients. DENTSPLY's small equipment products
include high and low speed handpieces, intraoral curing light systems and
ultrasonic scalers and polishers.
Dental laboratory products are used in dental laboratories in the
preparation of dental appliances. DENTSPLY's products in this category
include dental prosthetics, including artificial teeth, precious metal
dental alloys, dental ceramics, and crown and bridge materials and
equipment products used in laboratories consisting of computer aided
machining (CAM) ceramics systems and porcelain furnaces.
Specialty dental products are used for specific purposes within the
dental office and laboratory settings. DENTSPLY's products in this
category include endodontic (root canal) instruments and materials,
dental implants, and orthodontic appliances and accessories.
Non-dental products are comprised primarily of investment casting
materials that are used in the production of jewelry, golf club heads and
other casted products.
No customers accounted for more than ten percent of consolidated net
sales in 2004, 2003 and 2002. Third party export sales from the United
States are less than ten percent of consolidated net sales.
67
NOTE 5 - OTHER (INCOME) EXPENSE
Other (income) expense, net consists of the following:
Year Ended December 31,
------------------------------
2004 2003 2002
(in thousands)
Foreign exchange transaction (gains) losses $ 1,179 $ (263) $3,481
(Gain) loss on PracticeWorks securities -- (7,395) 2,598
Minority interests 223 (312) 364
Other (56) 552 1,530
$ 1,346 $(7,418) $7,973
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:
Year Ended December 31,
-----------------------------
2004 2003 2002
(in thousands)
Net sales $17,519 $106,313 $96,142
Gain on sale of Gendex 72,943 -- --
Income before income taxes (including gain on
sale in 2004) 72,803 7,329 6,893
68
NOTE 7 - INVENTORIES
Inventories consist of the following:
December 31,
2004 2003
(in thousands)
Finished goods $130,150 $123,290
Work-in-process 42,427 41,997
Raw materials and supplies 41,132 40,300
$213,709 $205,587
NOTE 8- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
2004 2003
(in thousands)
Assets, at cost:
Land $ 47,355 $ 40,553
Buildings and improvements 204,676 190,222
Machinery and equipment 331,409 295,354
Construction in progress 73,447 60,036
656,887 586,165
Less: Accumulated depreciation 249,360 209,954
$407,527 $376,211
69
NOTE 9 - GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". This statement requires that the amortization of goodwill and
indefinite-lived intangible assets be discontinued and instead an annual
impairment test approach be applied. The impairment tests are required to
be performed annually (or more often if adverse events occur) and are
based upon a fair value approach rather than an evaluation of
undiscounted cash flows. If goodwill impairment is identified, the
resulting charge is determined by recalculating goodwill through a
hypothetical purchase price allocation of the fair value and reducing the
current carrying value to the extent it exceeds the recalculated
goodwill. If impairment is identified on indefinite-lived intangibles,
the resulting charge reflects the excess of the asset's carrying cost
over its fair value. Other intangible assets with finite lives will
continue to be amortized over their useful lives.
The Company performed the required annual impairment tests of goodwill
and indefinite-lived intangible assets in 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.
The table below presents the net carrying values of goodwill and
identifiable intangible assets.
December 31,
2004 2003
(in thousands)
Goodwill $996,262 $963,264
Indefinite-lived identifiable intangible assets:
Trademarks $ 4,080 $ 4,080
Licensing agreements 178,610 165,621
Finite-lived identifiable intangible assets 75,394 76,774
Total identifiable intangible assets $258,084 $246,475
A reconciliation of changes in the Company's goodwill is as follows:
December 31,
2004 2003
(in thousands)
Balance, beginning of the year $ 963,264 $ 898,497
Acquisition activity 509 15,153
Changes to purchase price allocation (9,446) (28,381)
Reclassification to assets held for sale -- (5,771)
Impairment charges (Note 15) -- (360)
Effects of exchange rate changes 41,935 84,126
Balance, end of the year $ 996,262 $ 963,264
The change in the net carrying value of goodwill in 2004 was primarily
due to foreign currency translation adjustments, changes to the purchase
price allocations of the Degussa Dental and Friadent acquisitions and a
small acquisition. The purchase price allocation changes were primarily
related to the reversal of preacquisition tax contingencies due to
expiring statutes.
70
The increase in indefinite-lived licensing agreements was due to
foreign currency translation adjustments. These intangible assets relate
exclusively to the royalty-free licensing rights to AstraZeneca's dental
products and trademarks, which are primarily denominated in Swiss francs.
The change in finite-lived identifiable intangible assets was due
primarily to amortization for the period, the purchase of new technology
and foreign currency translation adjustments.
Goodwill by reportable segment is as follows:
December 31,
2004 2003
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $138,961 $134,018
Endodontics/Professional Division
Dental Consumables/Asia 185,099 184,277
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 375,811 352,900
Australia/Canada/Latin America/
U.S. Pharmaceutical 22,423 20,922
U.S. Dental Laboratory Business/
Implants/Orthodontics 270,523 267,702
All Other 3,445 3,445
Total $996,262 $963,264
Finite-lived identifiable intangible assets consist of the following:
December 31, 2004 December 31, 2003
----------------------------------------- ---------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
(in thousands)
Patents $ 56,330 $(37,394) $ 18,936 $ 55,142 $(33,425) $21,717
Trademarks 36,782 (8,598) 28,184 34,936 (7,142) 27,794
Licensing agreements 31,960 (10,308) 21,652 30,858 (8,105) 22,753
Other 15,996 (9,374) 6,622 12,573 (8,063) 4,510
$ 141,068 $(65,674) $ 75,394 $ 133,509 $(56,735) $76,774
Amortization expense for finite-lived identifiable intangible assets
for 2004, 2003 and 2002 was $8.5 million, $8.8 million and $9.0 million,
respectively. The annual estimated amortization expense related to these
intangible assets for each of the five succeeding fiscal years is $7.8
million, $7.0 million, $6.2 million, $5.8 million and $5.6 million for
2005, 2006, 2007, 2008 and 2009, respectively.
71
NOTE 10 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
2004 2003
(in thousands)
Payroll, commissions, bonuses, other
cash compensation and employee benefits $ 57,738 $ 56,892
General insurance 15,844 15,852
Sales and marketing programs 15,757 15,944
Restructuring and other costs (Note 15) 6,224 7,781
Accrued Oraqix payments -- 16,000
Warranty liabilities 3,681 3,629
Other 80,521 56,586
$179,765 $172,684
A reconciliation of changes in the Company's warranty liability for
2004 is as follows:
December 31,
2004
(in thousands)
Balance, beginning of the year $ 3,629
Accruals for warranties issued during the year 2,010
Accruals related to pre-existing warranties (460)
Warranty settlements made during the year (1,635)
Reclassification to liabilities of discontinued operations --
Effects of exchange rate changes 137
Balance, end of the year $ 3,681
72
NOTE 11 - FINANCING ARRANGEMENTS
Short-Term Borrowings
Short-term bank borrowings amounted to $1.5 million and $0.8 million at
December 31, 2004 and 2003, respectively. The weighted average interest
rates of these borrowings were 3.3% and 4.8% at December 31, 2004 and
2003, respectively. Unused lines of credit for short-term financing at
December 31, 2004 and 2003 were $52.5 million and $84.9 million,
respectively. Substantially all short-term borrowings were classified as
long-term as of December 31, 2004 and 2003, reflecting the Company's
intent and ability to refinance these obligations beyond one year and are
included in the table below. The unused lines of credit have no major
restrictions and are provided under demand notes between the Company and
the lending institution. Interest is charged on borrowings under these
lines of credit at various rates, generally below prime or equivalent
money rates.
Long-Term Borrowings
December 31,
2004 2003
(in thousands)
$250 million multi-currency revolving credit agreement expiring May 2006,
Japanese yen 12.6 billion at 0.56% $ 122,463 $ 116,659
$125 million multi-currency revolving credit agreement expiring May 2005 - -
Prudential Private Placement Notes, Swiss franc denominated, 84.4 million at 4.56% and
82.5 million at 4.42% maturing March 2007, 80.4 million at 4.96% maturing October 2006 216,762 198,722
ABN Private Placement Note, Japanese yen 6.2 billion at 1.39% maturing December 2005 20,285 38,646
Euro 350.0 million Eurobonds at 5.75% maturing December 2006 489,151 452,712
$250 million commercial paper facility rated A/2-P/2 U.S. dollar borrowings - -
Other borrowings, various currencies and rates 2,625 4,599
851,286 811,338
Less: Current portion (included in notes payable and current portion of long-term debt) 71,346 21,136
$ 779,940 $ 790,202
The table below reflects the contractual maturity dates of the
various borrowings at December 31, 2004 (in thousands). The individual
borrowings under the revolving credit agreement are structured to mature
on a quarterly basis but because the Company has the intent and ability
to extend them until the expiration date of the agreement, these
borrowings are considered contractually due in May 2006.
2005 $ 71,346
2006 731,174
2007 48,766
2008 --
2009 --
2010 and beyond --
$851,286
73
The Company utilizes interest rate swaps to convert the variable rate
Japanese yen-denominated debt under the revolving facility to fixed rate
debt. In addition, swaps are used to convert the fixed rate Eurobond to
variable rate financing. The Company's use of interest rate swaps is
further described in " QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK" and in Note 16.
The Company has a $375 million revolving credit agreement with
participation from fifteen banks. The revolving credit agreements contain
a number of covenants and financial ratios which it is required to
satisfy. 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. Any breach of any such
covenants or restrictions would result in a default under the existing
borrowing documentation that would permit the lenders to declare all
borrowings under such documentation to be immediately due and payable
and, through cross default provisions, would entitle the Company's other
lenders to accelerate their loans. At December 31, 2004, the Company was
in compliance with these covenants. The Company pays a facility fee of
0.125 % annually on the amount of the commitment under the $250 million
five year facility ("facility B") and 0.125% annually under the $125
million 364-day facility ("facility A"). Interest rates on amounts
borrowed under the facility will depend on the maturity of the borrowing,
the currency borrowed, the interest rate option selected, and the
Company's long-term credit rating from Moody's and Standard and Poors.
The $125 million facility A may be extended, subject to certain
conditions, for additional periods of 364 days, which the Company intends
to extend annually. The entire $375 million revolving credit agreement
has a usage fee of 0.125 % annually if utilization exceeds 50% of the
total available facility.
The Company has complementary U.S. dollar and Euro multicurrency
commercial paper facilities totaling $250 million which have utilization,
dealer, and annual appraisal fees which on average cost 0.11% annually.
The $125 million facility A acts as back-up credit to this commercial
paper facility. The total available credit under the commercial paper
facilities and the facility A is $125 million There were no outstanding
commercial paper obligations at December 31, 2004.
In March 2001, the Company issued Series A and B private placement
notes to Prudential Capital Group totaling Swiss francs 166.9 million at
an average rate of 4.49% with six year final maturities. The notes were
issued to finance the acquisition of the AZ Assets. In October 2001, the
Company issued a Series C private placement note to Prudential Capital
Group for Swiss francs 80.4 million at a rate of 4.96% with a five year
final maturity. The series A and B notes were also amended in October
2001 to increase the interest rate by 30 basis points, reflecting the
Company's higher leverage. In December 2001, the Company issued a
private placement note through ABN AMRO for Japanese yen 6.2 billion at a
rate of 1.39% with a four year final maturity. The Series C note and the
ABN note were issued to partially finance the Degussa Dental acquisition.
In December 2001, the Company issued 350 million Eurobonds with a
coupon of 5.75%, maturing December 2006 at an effective yield of 5.89%.
These bonds were issued to partially finance the Degussa Dental
acquisition.
At December 31, 2004, the Company had total unused lines of credit,
including lines available under its short-term arrangements, of $307.0
million.
74
NOTE 12 - STOCKHOLDERS' EQUITY
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. As a result of this program, the company repurchased 815,000 shares
for a total cost of $39.4 million. Of these shares purchased, 30,000, at
a cost of $1.7 million, will settle in 2005. No share repurchases were
made during 2003 and 2002. In December 2004 the Board of Directors
approved a stock repurchase program under which the Company may
repurchase shares of stock in an amount to maintain up to 3,000,000
shares of treasury stock. As of December 31, 2004, the Company held
757,000 shares of treasury stock.
The Company has stock options outstanding under three stock option
plans (1993 Plan, 1998 Plan and 2002 Plan). Further grants can only be
made under the 2002 Plan. Under the 1993 and 1998 Plans, a committee
appointed by the Board of Directors granted to key employees and
directors of the Company options to purchase shares of common stock at an
exercise price determined by such committee, but not less than the fair
market value of the common stock on the date of grant. Options generally
expire ten years after the date of grant under these plans and grants
become exercisable over a period of three years after the date of grant
at the rate of one-third per year, except that they become immediately
exercisable upon death, disability or retirement.
The 2002 Plan authorized grants of 7.0 million shares of common stock,
(plus any unexercised portion of canceled or terminated stock options
granted under the DENTSPLY International Inc. 1993 and 1998 Stock Option
Plans), subject to adjustment as follows: each January, if 7% of the
outstanding common shares of the Company exceed 7.0 million, the excess
becomes available for grant under the Plan. The 2002 Plan enables the
Company to grant "incentive stock options" ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, to key
employees of the Company, and "non-qualified stock options" ("NSOs")
which do not constitute ISOs to key employees and non-employee directors
of the Company. Grants of options to key employees are solely
discretionary with the Board of Directors of the Company. ISOs and NSOs
generally expire ten years from date of grant and become exercisable over
a period of three years after the date of grant at the rate of one-third
per year, except that they become immediately exercisable upon death,
disability or retirement. Such options are granted at exercise prices not
less than the fair market value of the common stock on the grant date.
Future option grants may only be made under the 2002 Plan, which will
include the unexercised portion of canceled or terminated options granted
under the 1993 or 1998 Plans. The number of shares available for grant
under the 2002 plan as of December 31, 2004 was 5,249,000 shares. Each
non-employee director receives an automatic grant of NSOs to purchase
9,000 shares of common stock on the date he or she becomes a non-employee
director and an additional 9,000 options on the third anniversary of the
date of the non-employee director was last granted an option.
75
The following is a summary of the status of the Plans as of December
31, 2004, 2003 and 2002 and changes during the years ending on those
dates:
Outstanding Exercisable
--------------------- ----------------------
Weighted Weighted Available
Average Average for
Exercise Exercise Grant
Shares Price Shares Price Shares
December 31, 2001 6,733,243 20.97 3,732,179 $ 16.76 1,704,210
Authorized (Lapsed) - 7,023,106
Granted 1,574,550 36.91 (1,574,550)
Exercised (515,565) 17.33 -
Expired/Canceled (100,639) 19.08 100,639
December 31, 2002 7,691,589 24.50 4,649,889 18.99 7,253,405
Authorized (Lapsed) - 177,882
Granted 1,434,300 43.84 (1,434,300)
Exercised (829,155) 19.30 -
Expired/Canceled (119,277) 29.38 119,277
December 31, 2003 8,177,457 28.35 5,225,300 22.22 6,116,264
Authorized (Lapsed) - 8,100
Granted 1,127,799 53.61 (1,127,799)
Exercised (2,117,484) 21.03 -
Expired/Canceled (252,817) 26.57 252,817
December 31, 2004 6,934,955 $ 34.76 4,498,889 $ 27.99 5,249,382
The following table summarizes information about stock options outstanding under the Plans at December 31, 2004:
Options Outstanding Options Exercisable
--------------------------------- ------------------------
Weighted
Number Average Number
Outstanding Remaining Weighted Exercisable Weighted
at Contractual Average at Average
December 31 Life Exercise December 31 Exercise
Exercise Price Range 2004 (in years) Price 2004 Price
$10.01 - $15.00 74,100 1.5 $ 13.89 74,100 $ 13.89
15.01 - 20.00 1,279,604 4.2 16.37 1,279,604 16.37
20.01 - 25.00 798,750 5.8 24.63 798,750 24.63
25.01 - 30.00 29,920 6.0 28.39 29,920 28.39
30.01 - 35.00 928,662 6.7 31.17 928,662 31.17
35.01 - 40.00 1,393,155 7.8 36.93 952,361 36.97
40.01 - 45.00 1,385,765 8.9 44.20 429,191 44.26
45.01 - 50.00 58,700 9.0 48.48 6,301 46.99
50.01 - 55.00 986,299 9.9 54.80 - -
6,934,955 7.2 $ 34.76 4,498,889 $ 27.99
76
The Company uses the Black-Scholes option pricing model to value option
awards. The per share weighted average fair value of stock options and
the weighted average assumptions used to determine these values are as
follows:
Year Ended December 31,
2004 2003 2002
Per share fair value $ 13.46 $ 14.85 $ 12.69
Expected dividend yield 0.44% 0.48% 0.50%
Risk-free interest rate 3.56% 3.36% 3.35%
Expected volatility 20% 31% 34%
Expected life (years) 5.50 5.50 5.50
The Black-Scholes option pricing model was developed for tradable
options with short exercise periods and is therefore not necessarily an
accurate measure of the fair value of compensatory stock options.
The rollforward of the common shares and the treasury shares
outstanding is as follows:
Common Treasury Outstanding
Shares Shares Shares
(in thousands)
Balance at December 31, 2001 81,389 (3,509) 77,880
Exercise of stock options -- 519 519
Fractional share payouts (1) -- (1)
Balance at December 31, 2002 81,388 (2,990) 78,398
Exercise of stock options -- 853 853
Balance at December 31, 2003 81,388 (2,137) 79,251
Exercise of stock options -- 2,165 2,165
Repurchase of common stock at cost -- (785) (785)
Balance at December 31, 2004 81,388 (757) 80,631
77
NOTE 13 - INCOME TAXES
The components of income before income taxes from continuing operations
are as follows:
Year Ended December 31,
2004 2003 2002
(in thousands)
United States ("U.S.") $111,779 $113,994 $116,160
Foreign 162,376 137,202 97,930
$274,155 $251,196 $214,090
The components of the provision for income taxes from continuing
operations are as follows:
Year Ended December 31,
2004 2003 2002
(in thousands)
Current:
U.S. federal $20,706 $28,693 $ 47,627
U.S. state 197 1,941 2,520
Foreign 35,908 18,298 28,737
Total 56,811 48,932 78,884
Deferred:
U.S. federal 2,556 12,077 (7,586)
U.S. state 479 2,466 (908)
Foreign 4,023 17,868 59
Total 7,058 32,411 (8,435)
$63,869 $81,343 $ 70,449
The reconcilation of the U.S. federal statutory tax rate to the
effective rate is as follows:
Year Ended December 31,
2004 2003 2002
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
Effect of:
State income taxes, net of federal benefit 0.2 1.1 0.5
Federal benefit of R&D credits (1.5) (0.2) (0.2)
Foreign earnings at lower rates than US federal (6.3) (5.0) (3.1)
Net benefit for audit resolutions (2.0) -- --
Federal benefit of extraterritorial income exclusion (0.9) (0.9) (1.1)
Federal tax on unremitted earnings of certain
foreign subsidiaries 1.0 2.5 --
Other (2.2) (0.1) 1.8
Effective income tax rate on continuing operations 23.3 % 32.4 % 32.9 %
78
The tax effect of temporary differences giving rise to deferred tax
assets and liabilities are as follows:
December 31, 2004 December 31, 2003
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
(in thousands)
Employee benefit accruals $ 2,722 $ 10,230 $ 2,225 $ 9,053
Product warranty accruals 860 -- 1,155 --
Insurance premium accruals 6,016 -- 6,077 --
Commission and bonus accrual (1,361) -- 1,526 --
Sales and marketing accrual 1,819 -- 1,474 --
Restructuring and other cost accruals 636 738 2,947 2,824
Differences in financial reporting and tax basis for:
Inventory 6,161 -- 8,467 --
Property, plant and equipment -- (35,872) -- (34,793)
Identifiable intangible assets -- (67,925) -- (59,578)
Unrealized losses (gains) included in other
comprehensive income 9,163 62,795 -- 45,305
Miscellaneous Accruals 10,070 -- 10,519 --
Other 2,401 10,426 3,884 8,455
Taxes on unremitted earnings of foreign subsidiaries -- (18,379) -- (15,620)
Discontinued Operations 25 (34) 1,883 4,293
Tax loss carryforwards in foreign jurisdictions -- 22,807 -- 9,649
Valuation allowance for tax loss carryforwards -- (22,807) -- (9,649)
$ 38,512 $(38,021) $ 40,157 $(40,061)
Current and noncurrent deferred tax assets and liabilities are included
in the following balance sheet captions:
December 31,
2004 2003
(in thousands)
Prepaid expenses and other current assets $ 40,369 $ 41,427
Income taxes payable (1,857) (1,270)
Other noncurrent assets 20,175 26,800
Deferred income taxes (58,196) (66,861)
79
The Company's effective tax rate for 2004 was 23.3%. During 2004, the
Company recorded a tax benefit of $19.5 million primarily from the
reversal of previously accrued taxes from the settlement of prior years'
domestic and foreign tax audits, refunds of additional R&D credits and
other adjustments. The impact of this benefit on the effective tax rate
for 2004 was 7.1%.
The Company operates within multiple taxing jurisdictions and in the
normal course of business is examined in various jurisdictions. Tax
accruals related to the estimated outcome of these examinations are
recorded in accordance with Statement of Financial Standards No. 5
"Accounting for Contingencies" ("SFAS 5"). The reversal of the accruals
is recorded when examinations are completed, statutes of limitation close
or tax laws change. A net benefit of $5.5 million was recorded from the
release of previously accrued taxes related to domestic and foreign
examinations that were concluded in 2004, less current year tax accruals
for existing examination risks.
Certain foreign subsidiaries of the Company have tax loss carryforwards
of $73.0 million at December 31, 2004, of which $14.3 million expire
through 2011 and $58.7 million may be carried forward indefinitely. The
tax benefit of these tax loss carryforwards has been fully offset by a
valuation allowance at December 31, 2004, because it is uncertain whether
the benefits will be realized in the future. The valuation allowance at
December 31, 2004 and 2003 was $22.8 million and $9.6 million,
respectively.
The Company has provided federal income taxes on certain undistributed
earnings of its foreign subsidiaries that the Company anticipates will be
repatriated. Deferred federal income taxes have not been provided on
$409 million of cumulative earnings of foreign subsidiaries that the
Company has determined to be permanently reinvested. It is not
practicable to estimate the amount of tax that might be payable on these
permanently reinvested earnings.
On October 22, 2004, the American Jobs Creation Act of 2004 (the
"AJCA") was signed into law. The AJCA enacted a provision that provides
the Company with the opportunity to repatriate up to $500 million of
reinvested earnings and to claim a deduction equal to 85% of the
repatriated amount. The Company did not elect the benefit of this
provision in 2004. The Company has not determined whether, and to what
extent, an election will be made in 2005.
The pretax income from discontinued operations for the years ended
December 31, 2004, 2003 and 2002 was $72.8 million, $7.3 million and $6.9
million, respectively. The income tax expense related to discontinued
operations for the years ended December 31, 2004, 2003 and 2002 was $29.9
million, $3.0 million and $2.6 million, respectively.
80
NOTE 14 - BENEFIT PLANS
Substantially all of the employees of the Company and its subsidiaries
are covered by government or Company-sponsored benefit plans. Total
costs for Company-sponsored defined benefit, defined contribution and
employee stock ownership plans amounted to $11.7 million in 2004, $13.5
million in 2003 and $11.5 million in 2002.
Defined Contribution Plans
The DENTSPLY Employee Stock Ownership Plan ("ESOP") is a
non-contributory defined contribution plan that covers substantially all
of the United States based non-union employees of the Company.
Contributions to the ESOP were $0.4 million for 2004, $2.2 million for
2003 and $2.2 million for 2002. The Company makes annual contributions
to the ESOP of not less than the amounts required to service ESOP debt.
In connection with the refinancing of ESOP debt in March 1994, the
Company agreed to make additional cash contributions totaling at least
$0.6 million through 2003. Dividends received by the ESOP on allocated
shares are either reinvested in participants' accounts or passed through
to Plan participants, at the participant's election. Most ESOP shares
were initially pledged as collateral for its debt. As the debt is
repaid, shares were released from collateral and allocated to active
employees based on the proportion of debt service paid in the year. At
December 31, 2004, the ESOP held 5.8 million shares, all of which were
allocated to plan participants as the ESOP debt was fully repaid in
2004. Unallocated shares were acquired prior to December 31, 1992 and
are accounted for in accordance with Statement of Position 76-3.
Accordingly, all shares held by the ESOP are considered outstanding and
are included in the earnings per common share computations.
The ESOP loan was extinguished on March 31, 2004. All future
allocations will come from a combination of forfeited shares and shares
acquired in the open market. The Company has targeted future ESOP
allocations at 6% of pensionable earnings. The share allocation will be
accounted at fair value at the point of allocation, each year-end, in
accordance with SOP 93-6. The 2005 estimated annual expense, net of
forfeitures, is estimated to be approximately $4.5 million based on the
current share price of $54.00.
The Company sponsors an employee 401(k) savings plan for its United
States workforce to which enrolled participants may contribute up to IRS
defined limits.
Defined Benefit Plans
The Company maintains a number of separate contributory and
non-contributory qualified defined benefit pension plans and other
postretirement medical plans for certain union and salaried employee
groups in the United States. Pension benefits for salaried plans are
based on salary and years of service; hourly plans are based on
negotiated benefits and years of service. Annual contributions to the
pension plans are sufficient to satisfy legal funding requirements.
Pension plan assets are held in trust and consist mainly of common stock
and fixed income investments.
The Company maintains defined benefit pension plans for its employees
in Germany, Japan, The Netherlands, and Switzerland. These plans provide
benefits based upon age, years of service and remuneration.
Substantially all of the German plans are unfunded book reserve plans.
Other foreign plans are not significant individually or in the
aggregate. Most employees and retirees outside the United States are
covered by government health plans.
Postretirement Healthcare
The plans for postretirement healthcare have no plan assets. The
postretirement healthcare plan covers certain union and salaried employee
groups in the United States and is contributory, with retiree
contributions adjusted annually to limit the Company's contribution for
participants who retired after June 1, 1985. The Company also sponsors
unfunded non-contributory postretirement medical plans for a limited
number of union employees and their spouses and retirees of a
discontinued operation.
81
Reconciliations of changes in the above plans' benefit obligations,
fair value of assets, and statement of funded status are as follows:
Other Postretirement
Pension Benefits Benefits
------------------------ ---------------------
December 31, December 31,
2004 2003 2004 2003
(in thousands)
Reconciliation of Benefit Obligation
Benefit obligation at beginning of year $ 122,567 $ 103,711 $ 12,200 $ 10,735
Service cost 4,790 4,137 130 235
Interest cost 5,927 5,358 685 726
Participant contributions 1,583 1,185 705 570
Actuarial (gains) losses 11,688 (3,561) 61 1,165
Amendments 238 343 -- --
Divestitures (924) -- -- --
Effects of exchange rate changes 10,938 15,248 -- --
Benefits paid (5,376) (3,854) (2,170) (1,231)
Benefit obligation at end of year $ 151,431 $ 122,567 $ 11,611 $ 12,200
Reconciliation of Plan Assets
Fair value of plan assets at beginning of year $ 60,108 $ 51,238 $ -- $ --
Actual return on assets 2,439 520 -- --
Effects of exchange rate changes 5,090 5,584 -- --
Employer contributions 7,149 5,435 1,465 661
Participant contributions 1,583 1,185 705 570
Benefits paid (5,376) (3,854) (2,170) (1,231)
Fair value of plan assets at end of year $ 70,993 $ 60,108 $ -- $ --
Reconciliation of Funded Status
Actuarial present value of projected
benefit obligations $ 151,431 $ 122,567 $ 11,611 $ 12,200
Plan assets at fair value 70,993 60,108 -- --
Funded status (80,438) (62,459) (11,611) (12,200)
Unrecognized transition obligation 1,336 1,495 -- --
Unrecognized prior service cost 865 795 (1,756) (2,254)
Unrecognized net actuarial loss (gain) 20,371 6,043 3,736 3,743
Net amount recognized $ (57,866) $ (54,126) $ (9,631) $(10,711)
82
The amounts recognized in the accompanying Consolidated Balance Sheets
are as follows:
Other Postretirement
Pension Benefits Benefits
------------------- -------------------
December 31, December 31,
2004 2003 2004 2003
(in thousands)
Other noncurrent assets $ 14,269 $ 11,905 $ -- $ --
Other noncurrent liabilities (77,076) (67,854) (9,631) (10,711)
Accumulated other
comprehensive loss 4,941 1,823 -- --
Net amount recognized $(57,866) $(54,126) $(9,631) $(10,711)
December 31,
2004 2003
(in thousands)
Accumulated benefit obligation $ 141,077 $ 116,865
Increase in other
comprehensive loss 3,118 61
Information for pension plans with an accumulated benefit obligation
in excess of plan assets
December 31,
2004 2003
(in thousands)
Projected benefit obligation $99,910 $79,531
Accumulated benefit obligation 89,566 81,172
Fair value of plan assets 18,885 14,243
Components of the net periodic benefit cost for the plans are as follows:
Other Postretirement
Pension Benefits Benefits
----------------------------- -----------------------------
2004 2003 2002 2004 2003 2002
(in thousands)
Service cost $ 4,823 $ 4,137 $ 3,428 $ 130 $ 235 $ 419
Interest cost 5,936 5,358 4,464 685 726 833
Expected return on plan assets (3,474) (3,018) (2,706) -- -- --
Net amortization and deferral 549 576 445 (430) (265) 27
Net periodic benefit cost $ 7,834 $ 7,053 $ 5,631 $ 385 $ 696 $1,279
The weighted average assumptions used to determine benefit obligations
for the Company's plans, principally in foreign locations, are as follows:
Other Postretirement
Pension Benefits Benefits
----------------------------- -----------------------------
2004 2003 2002 2004 2003 2002
Discount rate 4.3% 5.0% 5.1% 6.0% 6.0% 6.8%
Rate of compensation increase 2.1% 3.0% 3.0% n/a n/a n/a
Initial health care cost trend n/a n/a n/a 9.5% 9.5% 10.0%
Ultimate health care cost trend n/a n/a n/a 5.0% 5.0% 5.0%
Years until ultimate trend is reached n/a n/a n/a 8.0 9.0 10.0
83
The weighted average assumptions used to determine net periodic benefit
cost for the Company's plans, principally in foreign locations, are as follows:
Other Postretirement
Pension Benefits Benefits
----------------------------- -----------------------------
2004 2003 2002 2004 2003 2002
Discount rate 5.0% 5.1% 5.4% 6.0% 6.8% 7.3%
Expected return on plan assets 5.6% 5.5% 5.0% n/a n/a n/a
Rate of compensation increase 2.0% 3.0% 2.5% n/a n/a n/a
Initial health care cost trend n/a n/a n/a 9.5% 10.0% 7.0%
Ultimate health care cost trend n/a n/a n/a 5.0% 5.0% 7.0%
Years until ultimate trend is reached n/a n/a n/a 9.0 10.0 n/a
Measurement Date 12/31/2004 12/31/2003 12/31/2002 12/31/2004 12/31/2003 12/31/2002
Assumed health care cost trend rates have an impact on the amounts
reported for postretirement benefits. A one percentage point change in
assumed healthcare cost trend rates would have the following effects for the
year ended December 31, 2004:
Other Postretirement
Benefits
-------------------
1% Increase 1% Decrease
(in thousands)
Effect on total of service and interest cost components $ 91 $ (57)
Effect on postretirement benefit obligation 950 (824)
Plan Assets:
The weighted average asset allocations of the plans at
December 31, 2004 and 2003 by asset category are as follows:
Target December 31,
Allocation 2004 2003
Equity 30%-65% 31% 51%
Debt 30%-65% 57% 47%
Real estate 0%-15% 6% 0%
Other 0%-15% 6% 2%
-------- --------
Total 100% 100%
-------- --------
Equity securities do not include Company stock of Dentsply International
Inc. The expected return on plan assets is the weighted average long-term
expected return based upon asset allocations and historic average returns
for the markets where the assets are invested, principally
in foreign locations.
Cash Flows:
The Company expects to contribute $0.1 million to its U.S. defined
benefit pension plans, $1.2 million to its postretirement medical plans,
and $7.1 million to its other postretirement benefit plans in 2005.
Estimated Future Benefit Payments
Other Postretirement
Pension Benefits Benefits
---------------- --------------
(in thousands)
2005 $ 6,022 $ 1,175
2006 5,516 1,164
2007 6,233 1,141
2008 6,034 1,101
2009 6,703 1,040
2010-2014 40,426 4,864
84
NOTE 15 - RESTRUCTURING AND OTHER COSTS (INCOME) AND OTHER CHARGES
Restructuring and Other Costs (Income)
Restructuring and other costs (income) consists of the following:
Year Ended December 31,
2004 2003 2002
(in thousands)
Restructuring and other costs $ 7,144 $ 4,497 $ 1,669
Reversal of restructuring charges due to
changes in estimates (20) (797) (3,687)
Gain on insurance settlement associated with fire -- -- (714)
Total restructuring and other costs (income) $ 7,124 $ 3,700 $(2,732)
During the third and fourth quarters of 2004, the Company recorded
restructuring and other costs of $5.7 million. These costs were primarily
related to the creation of a European Shared Services Center in Yverdon,
Switzerland, which resulted in the identification of redundant personnel
in the Company's European accounting functions. In addition, these costs
related to the consolidation of certain sales/customer service and
distribution facilities in Europe and Japan. The primary objective of
these restructuring initiatives is to improve operational efficiencies
and to reduce costs within the related businesses. Included in this
charge were severance costs of $4.8 million and lease/contract
termination costs of $0.9 million. The plans include the elimination of
approximately 120 administrative and manufacturing positions primarily in
Germany. These plans are expected to be complete by the first quarter of
2006. As of December 31, 2004, approximately 105 of these positions
remained to be eliminated. The major components of these charges and the
remaining outstanding balances at December 31, 2004 are as follows:
Amounts Balance
2004 Applied December 31,
Provisions 2004 2004
(in thousands)
Severance $ 4,877 $ (583) $4,294
Lease/contract
terminations 881 -- 881
Other restructuring
costs -- -- --
$ 5,758 $ (583) $5,175
85
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
2004, the Company recorded charges of $1.4 million for additional
severance, lease termination and other restructuring costs incurred
during the period related to these plans. These restructuring plans will
result in the elimination of approximately 70 administrative and
manufacturing positions primarily in the United States, 18 of which
remain to be eliminated as of December 31, 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. These
plans are expected to be complete by March 31, 2005. The major components
of these charges and the remaining outstanding balances at December 31,
2004 are as follows:
Amounts Amounts Balance
2003 Applied 2004 Applied December 31,
Provisions 2003 Provisions 2004 2004
(in thousands)
Severance $ 908 $ (49) $ 451 $(1,083) $227
Lease/contract
terminations 562 (410) 13 (165) --
Other restructuring
costs 27 (27) 922 (852) 70
Intangible and other asset
impairment charges 3,000 (3,000) -- -- --
$ 4,497 $(3,486) $ 1,386 $(2,100) $297
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 were 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.
86
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 and 2004, the
Company reversed a total of $1.3 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.
The major components of the 2002 restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at December 31, 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 December 31,
Provisions Accounting 2002 2002 2003 2003/2004 2004 2004
(in thousands)
Severance $ 541 $ 2,927 $ (530) $ (164) $ (988) $ (878) $ (661) $247
Lease/contract
terminations 895 1,437 (500) 120 (665) (373) (411) 503
Other restructuring
costs 38 60 (60) (36) -- -- -- 2
Fixed asset
impairment charges 195 -- (195) -- -- -- -- --
$1,669 $ 4,424 $(1,285) $ (80) $(1,653) $(1,251) $(1,072) $752
In the fourth quarter of 2001, the Company recorded a charge of $12.3
million for restructuring and other costs. The charge included costs of
$6.0 million to restructure the Company's existing operations, primarily
in Germany, Japan and Brazil, as a result of the integration with Degussa
Dental. Included in this charge were severance costs of $2.1 million,
lease/contract termination costs of $1.1 million and other restructuring
costs of $0.2 million. In addition, the Company recorded $2.6 million of
impairment charges on fixed assets that were disposed of as a result of
the restructuring plan. The remaining charge of $6.3 million involves
impairment charges on intangible assets. During 2002 and 2003 the Company
reversed a net total of $1.0 million and $0.8 million, respectively, as a
change in estimate as it determined the costs to complete the plan were
lower than originally estimated. This restructuring plan resulted in the
elimination of approximately 160 administrative and manufacturing
positions in Germany, Japan and Brazil. As part of these reorganization
activities, some of these positions were replaced with lower-cost
outsourced services. This plan was complete at December 31, 2003.
87
In the first quarter of 2001, the Company recorded a charge of $5.5
million related to reorganizing certain functions within Europe, Brazil
and North America. The primary objectives of this reorganization were to
consolidate duplicative functions and to improve efficiencies within
these regions. Included in this charge were severance costs of $3.1
million, lease/contract termination costs of $0.6 million and other
restructuring costs of $0.8 million. In addition, the Company recorded
$1.0 million of impairment charges on fixed assets that will be disposed
of as a result of the restructuring plan. This restructuring plan
resulted in the elimination of approximately 310 administrative and
manufacturing positions in Brazil and Germany. As part of these
reorganization activities, some of these positions were replaced with
lower-cost outsourced services. During the first quarter of 2002, this
plan was completed and the remaining accrual balances of $1.9 million
were reversed as a change in estimate.
On January 25, 2001, the Company suffered a fire at its Maillefer
facility in Switzerland. The fire caused severe damage to a building and
to most of the equipment it contained. During the third quarter of 2002,
the Company received insurance proceeds for settlement of the damages
caused to the building. These proceeds resulted in the Company
recognizing a net gain on the damaged building of approximately $0.7
million. The Company also received insurance proceeds on the destroyed
equipment during the fourth quarter of 2001 and recorded the related
disposal gains of $5.8 million during that period.
During the 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 year ended December 31,
2004, the Company recorded charges of $0.5 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 December 31,
Provisions 2003 Provisions 2004 2004
(in thousands)
Severance $ 405 $ -- $ 72 $(477) $--
Other restructuring costs 300 (300) 133 (133) --
Fixed asset impairment charges 520 (520) 265 (265) --
Goodwill impairment charges 360 (360) -- -- --
$ 1,585 $(1,180) $ 470 $(875) $--
Other Charges
In the first and second quarters of 2003, the Company recorded charges
and reserve reversals which represented corrections of errors from prior
periods ("Charge and Reserve Errors"). Had the Charge and Reserve Errors
been recorded in the proper periods, reported net income from continuing
operations would have higher by $1.3 million in 2003, lower by $3.4
million in 2002, higher by $1.2 million in 2001 and higher by $0.8
million in 2000.
The Company performed an analysis of the Charge and Reserve Errors on
both a qualitative and quantitative basis and concluded that the errors
were not material to the results of operations and financial position of
the Company for the years ended December 31, 2000, 2001, 2002 and 2003.
Accordingly, prior period financial statements were not restated. (see
Note 19 of the Consolidated Financial Statements included in the
Company's Form 10-K for the period ended December 31, 2003).
88
NOTE 16 - FINANCIAL INSTRUMENTS AND DERIVATIVES
Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The
Company believes the carrying amounts of cash and cash equivalents,
accounts receivable (net of allowance for doubtful accounts), prepaid
expenses and other current assets, accounts payable, accrued liabilities,
income taxes payable and notes payable approximate fair value due to the
short-term nature of these instruments. The Company estimates the fair
value of its total long-term debt was $859.9 million versus its carrying
value of $851.3 million as of December 31, 2004. The fair value
approximated the carrying value since much of the Company's debt is
variable rate and reflects current market rates. The fixed rate Eurobonds
are effectively converted to variable rate as a result of an interest
rate swap and the interest rates on revolving debt and commercial paper
are variable and therefore the fair value of these instruments
approximates their carrying values. The Company has fixed rate Swiss
franc and Japanese yen denominated notes with estimated fair values that
differ from their carrying values. At December 31, 2004, the fair value
of these instruments was $245.7 million versus their carrying values of
$237.0 million. The fair values differ from the carrying values due to
lower market interest rates at December 31, 2004 versus the rates at
issuance of the notes.
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.
Certain of the Company's inventory purchases are denominated in foreign
currencies which exposes the Company to market risk associated with
exchange rate movements. The Company's policy generally is to hedge
major foreign currency transaction exposures through foreign exchange
forward contracts. These contracts are entered into with major financial
institutions thereby minimizing the risk of credit loss. In addition,
the Company's investments in foreign subsidiaries are denominated in
foreign currencies, which creates exposures to changes in exchange rates.
The Company uses debt denominated in the applicable foreign currency as a
means of hedging a portion of this risk.
With the Company's significant level of long-term debt, changes in the
interest rate environment can have a major impact on the Company's
earnings, depending upon its interest rate exposure. As a result, the
Company manages its interest rate exposure with the use of interest rate
swaps, when appropriate, based upon market conditions.
The manufacturing of some of the Company's products requires the use of
commodities which are subject to market fluctuations. In order to limit
the unanticipated earnings changes from such market fluctuations, the
Company selectively enters into commodity price swaps for certain
materials used in the production of its products. 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 December 31, 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 at a fixed rate of 4.2% for a term
of seven years starting in March 2005.
89
The Company selectively enters into commodity price swaps to
effectively fix certain variable raw material costs. At December 31,
2004, the Company had swaps in place to purchase 1,800 troy ounces of
platinum bullion for use in the production of its impression material
products. The average fixed rate of this agreement is $846.50 per troy
ounce. The Company generally hedges up to 80% 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 up to 80% of its anticipated purchases from the
supplying locations.
As of December 31, 2004, $0.2 million of deferred net gains on
derivative instruments recorded in "Accumulated other comprehensive gain
(loss)" are expected to be reclassified to current earnings during the
next twelve months. This reclassification is primarily due to the sale of
inventory that includes previously hedged purchases. The maximum term
over which the Company is hedging exposures to variability of cash flows
(for all forecasted transactions, excluding interest payments on
variable-rate debt) is eighteen months. Overall, the derivatives
designated as cash flow hedges are nearly 100% effective.
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) 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 with no net impact to the income statement. As of
December 31, 2004 and 2003, the accumulated fair value of the interest
rate swap was $14.7 million and $14.1 million, respectively, and was
recorded in Prepaid Expenses and Other Current Assets and Other
Noncurrent Assets. The notional amount of the underlying Eurobond was
increased by a corresponding amount at December 31, 2004 and 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, completely
offsetting the impact of the change in exchange rates on the Eurobonds
that were also recorded in the income statement. 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, included 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. As of
December 31, 2004 and 2003, the accumulated fair value of the
cross-currency element of the integrated transaction was $33.0 million
and $56.6 million, respectively, and was recorded in Prepaid Expenses and
Other Current Assets and Other Noncurrent Assets.
90
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 designated the Euro 350 million Eurobonds as a hedge of net
investment, on the date of the amendment and thus the impact of
translation changes related to the final principal payment are recorded
in accumulated other comprehensive income.
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 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 December 31, 2004 and 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. At December 31, 2004 and 2003, the accumulated translation
gains on investments in foreign subsidiaries, primarily denominated in
Euros, Swiss francs and Japanese yen, net of these debt hedges, were
$179.4 million and $109.5 million, respectively, which was included in
Accumulated Other Comprehensive income.
Other
As of December 31, 2004, the Company had recorded assets representing
the fair value of derivative instruments of $15.3 million in "Prepaid
expenses and other current assets" and $32.7 million in "Other noncurrent
assets" on the balance sheet and liabilities representing the fair value
of derivative instruments of $3.6 million in "Accrued liabilities" and
$8.4 million in "Other noncurrent liabilities".
In accordance with SFAS 52, "Foreign Currency Translation", the Company
utilizes long-term intercompany loans to eliminate foreign currency
transaction exposures of certain foreign subsidiaries. Net gains or
losses related to these long-term intercompany loans, those for which
settlement is not planned or anticipated in the foreseeable future, are
included "Accumulated other comprehensive income (loss)".
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NOTE 17 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases automobiles and machinery and equipment and certain
office, warehouse, and manufacturing facilities under non-cancelable
operating leases. These leases generally require the Company to pay
insurance, taxes and other expenses related to the leased property.
Total rental expense for all operating leases was $22.0 million for 2004,
$20.7 million for 2003, and $17.4 million for 2002.
Rental commitments, principally for real estate (exclusive of taxes,
insurance and maintenance), automobiles and office equipment are as
follows (in thousands):
2005 $ 18,725
2006 12,645
2007 6,788
2008 4,373
2009 3,051
2010 and thereafter 5,207
$ 50,789
Litigation
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. The Department of Justice
appealed this decision to the U.S. Third Circuit Court of Appeals. The
Third Circuit Court issued its decision on February 22, 2005 and reversed
the decision of the District Court. The effect of this decision, if it
withstands any appeal challenge by the Company, will be the issuance of
an injunction requiring DENTSPLY to discontinue its policy of not
allowing its tooth dealers to take on new competitive teeth lines. This
decision relates only to the distribution of artificial teeth sold in the
U.S., which affects less than 2.5% of the Company's sales. While the
Company believes its tooth distribution practices do not violate the
antitrust laws, we are confident that we can continue to develop this
business regardless of the final legal outcome. The Company is currently
evaluating its legal options as well as its marketing and sales
strategies in light of the current court ruling.
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.
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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. The Judge has entered an
Order granting class certification, as an Opt-in class (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) 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 Notice of the class action was sent on February 23, 2005
to dentists licensed to practice in California during the relevant
period. 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. The Company's insurance carrier has 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. This case was settled in the first quarter of 2005, which was
within the range of loss for which the Company had previously recorded
accruals, and DENTSPLY obtained a paid up license under the 3M patent.
Other
The Company has no material non-cancelable purchase commitments.
The Company has employment agreements with its executive officers.
These agreements generally provide for salary continuation for a
specified number of months under certain circumstances. If all of the
employees under contract were to be terminated by the Company without
cause (as defined in the agreements), the Company's liability would be
approximately $12.7 million at December 31, 2004.
93
NOTE 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Dentsply International Inc.
Quarterly Financial Information (Unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
(in thousands, except per share amounts)
2004
Net sales from continuing operations $ 414,359 $ 424,408 $ 389,965 $ 465,500 $ 1,694,232
Gross profit from continuing operations 203,892 212,056 198,516 232,054 846,518
Operating income from continuing operations 70,106 77,565 68,111 79,348 295,130
Net income from continuing operations 45,768 49,222 46,343 68,953 210,286
Net income from discontinued operations 43,064 (179) 340 (346) 42,879
Net income $ 88,832 $ 49,043 $ 46,683 $ 68,607 $ 253,165
Earnings per common share - basic
Continuing operations $ 0.57 $ 0.61 $ 0.58 $ 0.85 $ 2.61
Discontinued operations 0.54 -- -- -- 0.54
Total earnings per common share $ 1.11 $ 0.61 $ 0.58 $ 0.85 $ 3.15
Earnings per common share - diluted
Continuing operations $ 0.56 $ 0.60 $ 0.57 $ 0.83 $ 2.56
Discontinued operations 0.53 -- -- -- 0.53
Total earnings per common share $ 1.09 $ 0.60 $ 0.57 $ 0.83 $ 3.09
Cash dividends declared per common share $ 0.0525 $ 0.0525 $ 0.0525 $ 0.0600 $ 0.2175
2003
Net sales from continuing operations $ 370,511 $ 393,693 $ 374,738 $ 429,052 $ 1,567,994
Gross profit from continuing operations 182,091 197,349 183,081 208,012 770,533
Operating income from continuing operations 60,524 69,840 63,781 73,838 267,983
Net income from continuing operations 37,439 43,450 40,287 48,677 169,853
Net income from discontinued operations 828 768 1,027 1,707 4,330
Net income $ 38,267 $ 44,218 $ 41,314 $ 50,384 $ 174,183
Earnings per common share - basic
Continuing operations $ 0.48 $ 0.55 $ 0.51 $ 0.62 $ 2.16
Discontinued operations 0.01 0.01 0.01 0.02 0.05
Total earnings per common share $ 0.49 $ 0.56 $ 0.52 $ 0.64 $ 2.21
Earnings per common share - diluted
Continuing operations 0.47 $ 0.54 $ 0.50 $ 0.60 $ 2.11
Discontinued operations 0.01 0.01 0.01 0.02 0.05
Total earnings per common share $ 0.48 $ 0.55 $ 0.51 $ 0.62 $ 2.16
Cash dividends declared per common share $ 0.0460 $ 0.0460 $ 0.0525 $ 0.0525 $ 0.1970
Sales excluding precious metal content were $358.6 million, $373.2
million, $345.2 million and $404.9 million, respectively, for the first,
second, third and fourth quarters of 2004. Sales excluding precious metal
content were $316.6 million, $347.7 million, $328.4 million and $371.6
million, respectively, for the first, second, third and fourth quarters
of 2003. This measurement could be considered a non-GAAP measure as
discussed further in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
94
Supplemental Stock Information
The common stock of the Company is traded on the NASDAQ National Market
under the symbol "XRAY". The following table sets forth high, low and
closing sale prices of the Company's common stock for the periods
indicated as reported on the NASDAQ National Market:
Market Range of Common Stock Period-end Cash
Closing Dividend
High Low Price Declared
2004
First Quarter $ 45.44 $ 41.75 $ 44.33 $0.05250
Second Quarter 52.26 44.09 52.10 0.05250
Third Quarter 52.91 46.30 51.94 0.05250
Fourth Quarter 56.84 50.02 56.20 0.06000
2003
First Quarter $ 37.95 $ 32.10 $ 34.79 $0.04600
Second Quarter 41.10 32.35 40.96 0.04600
Third Quarter 47.05 40.41 44.84 0.05250
Fourth Quarter 47.40 41.85 45.17 0.05250
2002
First Quarter $ 37.93 $ 31.60 $ 37.06 $0.04600
Second Quarter 40.95 35.25 36.91 0.04600
Third Quarter 43.50 31.25 40.17 0.04600
Fourth Quarter 43.10 31.89 37.20 0.04600
The Company estimates, based on information supplied by its transfer
agent, that there are approximately 28,997 holders of common stock,
including 491 holders of record.
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:/s/ Gerald K. Kunkle, Jr.
-----------------------------
Gerald K. Kunkle, Jr.
Vice Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ John C. Miles II March 16, 2005
- ------------------------- --------------------
John C. Miles II Date
Chairman of the Board and a Director
/s/ Gerald K. Kunkle, Jr. March 16, 2005
- ---------------------------- --------------------
Gerald K. Kunkle, Jr. Date
Vice Chairman of the Board and
Chief Executive Officer and a Director
(Principal Executive Officer)
/s/ William R. Jellison March 16, 2005
- ------------------------- --------------------
William R.Jellison Date
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Dr. Michael C. Alfano March 16, 2005
- ------------------------- --------------------
Dr. Michael C. Alfano Date
Director
/s/ Eric K. Brandt March 16, 2005
- ------------------------- --------------------
Eric K. Brandt Date
Director
/s/ Paula H. Cholmondeley March 16, 2005
- ------------------------- --------------------
Paula H. Cholmondeley Date
Director
96
/s/ Michael J. Coleman March 16, 2005
- ------------------------- --------------------
Michael J. Coleman Date
Director
/s/ William F. Hecht March 16, 2005
- ------------------------- --------------------
William F. Hecht Date
Director
/s/ Leslie A. Jones March 16, 2005
- ------------------------- --------------------
Leslie A. Jones Date
Director
/ /s/Edgar H. Schollmaier March 16, 2005
- ------------------------- --------------------
Edgar H. Schollmaier Date
Director
/s/ W. Keith Smith March 16, 2005
- ------------------------- --------------------
W. Keith Smith Date
Director
97