SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
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 (I.R.S. Employer
incorporation or organization) Identification No.)
221 West Philadelphia Street, York, PA 17405-0872
---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 845-7511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
( X ) Yes ( ) No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
( X ) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At November 2, 2005 the Company
had 78,629,805 shares of Common Stock outstanding, with a par value of $.01 per
share.
Page 1 of 36
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended September 30, 2005
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Statements of Operations 3
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Unaudited Interim Consolidated Condensed
Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 33
Item 4 - Controls and Procedures 33
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 34
Item 2 - Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 35
Item 4 - Submission of Matters to a Vote of
Security Holders 35
Item 6 - Exhibits 35
Signatures 36
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands, except per share amounts)
Net sales $ 415,964 $ 389,965 $ 1,267,773 $ 1,228,732
Cost of products sold 206,962 191,449 622,547 614,268
Gross profit 209,002 198,516 645,226 614,464
Selling, general and administrative expenses 134,324 128,296 419,248 395,516
Restructuring and impairment costs (Note 9) 131,311 2,108 131,351 3,165
Operating (loss)/income (56,633) 68,112 94,627 215,783
Other income and expenses:
Interest expense 4,552 6,431 15,325 18,232
Interest income (2,115) (1,235) (6,584) (3,124)
Other (income) expense, net 426 347 (5,421) 1,145
(Loss)/income before income taxes (59,496) 62,569 91,307 199,530
Provision for income taxes 1,309 16,225 45,170 58,196
(Loss)/income from continuing operations (60,805) 46,344 46,137 141,334
(Loss)/income from discontinued operations,
(Including gain on sale in the nine months ended
September 30, 2004 of $43,031) (Note 6) - 340 - 43,225
Net (loss)/income $ (60,805) $ 46,684 $ 46,137 $ 184,559
(Loss)/income per common share - basic (Note 3)
Continuing operations $ (0.77) $ 0.58 $ 0.58 $ 1.76
Discontinued operations - - - 0.54
Total (loss)/income per common share - basic $ (0.77) $ 0.58 $ 0.58 $ 2.30
(Loss)/income per common share - diluted (Note 3)
Continuing operations $ (0.77) $ 0.57 $ 0.57 $ 1.72
Discontinued operations - - - 0.53
Total (loss)/income per common share - diluted $ (0.77) $ 0.57 $ 0.57 $ 2.25
Cash dividends declared per common share $ 0.06000 $ 0.05250 $ 0.18000 $ 0.15750
Weighted average common shares outstanding (Note 3):
Basic 78,895 80,495 79,905 80,304
Diluted 78,895 82,110 81,357 81,910
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
September 30, December 31,
2005 2004
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 398,581 $ 506,369
Accounts and notes receivable trade, net 259,920 238,873
Inventories, net (Notes 1 and 7) 228,960 213,709
Prepaid expenses and other current assets 99,533 97,458
Total Current Assets 986,994 1,056,409
Property, plant and equipment, net 376,340 407,527
Identifiable intangible assets, net 104,701 258,084
Goodwill, net 949,138 996,262
Other noncurrent assets 48,645 79,863
Total Assets $ 2,465,818 $ 2,798,145
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 78,829 $ 91,576
Accrued liabilities 161,131 179,765
Income taxes payable 57,652 60,387
Notes payable and current portion
of long-term debt 66,276 72,879
Total Current Liabilities 363,888 404,607
Long-term debt 684,601 779,940
Deferred income taxes 55,794 58,196
Other noncurrent liabilities 105,126 110,829
Total Liabilities 1,209,409 1,353,572
Minority interests in consolidated subsidiaries 610 600
Commitments and contingencies (Note 11)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued - -
Common stock, $.01 par value; 200 million shares
authorized; 81.4 million shares issued at
September 30, 2005 and December 31, 2004 814 814
Capital in excess of par value 179,176 189,277
Retained earnings 1,158,097 1,126,262
Accumulated other comprehensive income (Note 2) 80,317 164,100
Treasury stock, at cost, 3.0 million shares at
September 30, 2005 and 0.8 million at
December 31, 2004 (162,605) (36,480)
Total Stockholders' Equity 1,255,799 1,443,973
Total Liabilities and Stockholders' Equity $ 2,465,818 $ 2,798,145
<FN>
See accompanying notes to unaudited interim consolidated condensed financial
statements.
</FN>
4
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
2005 2004
(in thousands)
Cash flows from operating activities:
Income from continuing operations $ 46,137 $ 141,333
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 33,190 30,301
Amortization 6,375 6,282
Restructuring and impairment costs 131,351 3,165
Cash flows from discontinued operating activities - (1,713)
Other, net (85,237) 5,132
Net cash provided by operating activities 131,816 184,500
Cash flows from investing activities:
Capital expenditures (30,311) (36,902)
Acquisitions of businesses, net of cash acquired (17,319) (16,556)
Expenditures for identifiable intangible assets (196) -
Proceeds from sale of Gendex - 102,500
Cash flows used in discontinued operations' investing activities - (148)
Other, net 233 (1,015)
Net cash (used in) provided by investing activities (47,593) 47,879
Cash flows from financing activities:
Payments on long-term borrowings (13,376) (571)
Net change in short-term borrowings 1,967 750
Cash paid for treasury stock (163,597) (24,799)
Cash dividends paid (14,437) (12,595)
Proceeds from exercise of stock options 18,880 35,831
Realization of cross currency swap value 23,508 10,248
Net cash (used in) provided by financing activities (147,055) 8,864
Effect of exchange rate changes on cash and cash equivalents (44,956) 2,352
Net (decrease) increase in cash and cash equivalents (107,788) 243,595
Cash and cash equivalents at beginning of period 506,369 163,755
Cash and cash equivalents at end of period $ 398,581 $ 407,350
<FN>
See accompanying notes to unaudited interim consolidated condensed financial
statements.
</FN>
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2005
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair statement of the results for interim periods have been
included. Results for interim periods should not be considered indicative of
results for a full year. These financial statements should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included in the Company's most recent Form 10-K filed March 16, 2005.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. Intercompany accounts and transactions are
eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market. At September 30, 2005,
the cost of $11.9 million or 5% and at December 31, 2004, the cost of $10.8
million or 5% of inventories were determined by the last-in, first-out (LIFO)
method. The cost of other inventories was determined by the first-in, first-out
(FIFO) or average cost methods.
If the FIFO method had been used to determine the cost of the LIFO
inventories, the amounts at which net inventories are stated would be higher
than reported by $2.1 million at September 30, 2005 and by $1.4 million at
December 31, 2004.
Identifiable Finite-lived Intangible Assets
Identifiable finite-lived intangible assets, which primarily consist of
patents, trademarks and licensing agreements, are amortized on a straight-line
basis over their estimated useful lives. These assets are reviewed for
impairment whenever events or circumstances suggest that the carrying amount of
the asset may not be recoverable in accordance with Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets". 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
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets" which requires that at
least an annual impairment test be applied to goodwill and indefinite-lived
intangible assets. The Company performs impairment tests on at least an annual
basis using a fair value approach rather than an evaluation of the undiscounted
cash flows. If impairment is identified on goodwill under SFAS 142, the
resulting charge is determined by recalculating goodwill through a hypothetical
purchase price allocation of the fair value and reducing the current carrying
value to the extent it exceeds the recalculated goodwill. If impairment is
identified on indefinite-lived intangibles, the resulting charge reflects the
excess of the asset's carrying cost over its fair value. The Company's goodwill
decreased by $47.1 million during the nine months ended September 30, 2005 to
$949.1 million, which was due primarily to the effects of foreign currency
translation of $58.6 million, partially offset by increases due to acquisition
activity of $15.1 million.
6
The Company performed the required annual impairment tests in the second
quarter of 2005 and no impairment was identified. This impairment assessment
included an evaluation of approximately 20 reporting units. In addition to the
annual impairment test, 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
events or through the annual development of operating unit business plans in the
fourth quarter of each year or otherwise, impairment assessments are performed
as necessary.
Derivative Financial Instruments
The Company records all derivative instruments on the balance sheet at their
fair value and changes in fair value are recorded each period in current
earnings or comprehensive income in accordance with Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities".
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. Additionally, the Company utilizes interest
rate swaps to convert floating rate debt to fixed rate, fixed rate debt to
floating rate, cross currency basis swaps to convert debt denominated in one
currency to another currency, and commodity swaps to fix its variable raw
materials costs.
Revenue Recognition
Revenue, net of related discounts and allowances, is recognized in accordance
with shipping terms and as title and risk of loss passes to customers. Net sales
include shipping and handling costs collected from customers in connection with
the sale.
The Company offers cash rebates based on targeted sales increases to
customers who qualify. 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)".
The Company establishes a provision recorded against revenue for product
returns in instances when incorrect products or quantities are inadvertently
shipped. In addition, the Company establishes provisions for costs or losses
that are expected with regard to returns for which revenue has been recognized
for event-driven circumstances relating to product quality issues, complaints
and / or other product specific issues.
7
Stock Compensation
The Company has stock-based employee compensation plans and applies the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations
in accounting for these plans. Under this method, no compensation expense is
recognized for fixed stock option plans, provided that the exercise price is
greater than or equal to the price of the stock at the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands, except per share amounts)
Net (loss)/income, as reported $ (60,805) $ 46,684 $ 46,137 $ 184,559
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (2,817) (3,345) (8,365) (9,817)
Pro forma net (loss)/income $ (63,622) $ 43,339 $ 37,772 $ 174,742
Basic (loss)/income per common share
As reported $ (0.77) $ 0.58 $ 0.58 $ 2.30
Pro forma under fair value based method $ (0.81) $ 0.54 $ 0.47 $ 2.18
Diluted (loss)/income per common share
As reported $ (0.77) $ 0.57 $ 0.57 $ 2.25
Pro forma under fair value based method $ (0.81) $ 0.53 $ 0.46 $ 2.13
Stockholders' Equity
In December 2004 the Board of Directors approved a stock repurchase program
under which the Company could repurchase shares of stock in an amount to
maintain up to 3,000,000 shares of treasury stock. In September 2005 the Board
of Directors increased the authorization to repurchase shares under the stock
repurchase program in an amount to maintain up to 5,500,000 shares of treasury
stock. As a result of this program, the Company repurchased 2,951,278 shares at
an average cost per share of $54.86 and a total cost of $161.9 million during
the first nine months of 2005. During 2005, the Company also settled on 30,000
shares that were purchased in 2004 at a cost of $1.7 million. As of September
30, 2005, the Company held 2,963,529 shares of treasury stock. The Company also
received proceeds of $18.9 million as a result of the exercise of 774,125 stock
options during the nine months ended September 30, 2005.
NEW ACCOUNTING PRONOUNCEMENTS
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, as amended by
the SEC, is effective for 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.
8
In November 2004, the FASB issued Statement of Financial Accounting
Standards No 151 ("SFAS 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 SFAS
151, these charges are required to be treated as period charges regardless of
whether they meet the criterion of unusually abnormal. Additionally, SFAS 151
requires that allocation of fixed production overhead to the cost of conversion
be based on the normal capacity of the production facilities. SFAS 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 ("SFAS 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. SFAS 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 standard to have a material impact on the Company's
financial statements.
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 is anticipating taking
advantage of repatriating foreign earnings under Section 965 of the Internal
Revenue Code, however the size and timing of any repatriation is still being
reviewed.
NOTE 2 - COMPREHENSIVE INCOME/(LOSS)
The components of comprehensive income/(loss), net of tax, are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands)
Net (loss)/income $ (60,805) $ 46,684 $ 46,137 $ 184,559
Other comprehensive (loss)/income:
Foreign currency translation adjustments (3,194) 16,689 (108,606) (1,535)
Unrealized gain on available-for-sale securities 96 15 156 64
Net gain (loss) on derivative financial
instruments 3,311 (2,097) 24,667 (7,076)
Total comprehensive (loss)/income $ (60,592) $ 61,291 $ (37,646) $ 176,012
During the quarter and the nine months ended September 30, 2005, the Company
had translation losses of $7.1 million and $149.5 million, respectively, offset
by gains of $3.9 million and $40.9 million, respectively, on its loans
designated as hedges of net investments. During the quarter and the nine months
ended September 30, 2004, foreign currency translation adjustments included
translation gains of $22.2 million and losses of $5.8 million, respectively,
offset by losses of $5.5 million and gains of $4.2 million, respectively, on the
Company's loans designated as hedges of net investments.
9
The balances included in accumulated other comprehensive income/(loss) in the
consolidated balance sheets are as follows:
September 30, December 31,
2005 2004
(in thousands)
Foreign currency translation adjustments $ 70,810 $ 179,416
Net gain (loss) on derivative financial
instruments 12,028 (12,639)
Unrealized gain on available-for-sale securities 498 342
Minimum pension liability (3,019) (3,019)
$ 80,317 $ 164,100
The cumulative foreign currency translation adjustments included translation
gains of $148.3 million and $297.9 million as of September 30, 2005 and December
31, 2004, respectively, offset by losses of $77.5 million and $118.5 million,
respectively, on loans designated as hedges of net investments.
NOTE 3 - INCOME/(LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted
income/(loss) per common share:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands, except per share amounts)
Basic (Loss)/Income Per Common Share Computation
(Loss)/Income from continuing operations $ (60,805) $ 46,344 $ 46,137 $ 141,334
Income from discontinued operations - 340 - 43,225
Net (Loss)/income $ (60,805) $ 46,684 $ 46,137 $ 184,559
Common shares outstanding 78,895 80,495 79,905 80,304
(Loss)/income per common share from continuing operations $ (0.77) $ 0.58 $ 0.58 $ 1.76
Income per common share from discontinued operations - - - 0.54
Total (loss)/income per common share - basic $ (0.77) $ 0.58 $ 0.58 $ 2.30
Diluted (Loss)/Income Per Common Share Computation
(Loss)/Income from continuing operations $ (60,805) $ 46,344 $ 46,137 $ 141,334
Income from discontinued operations - 340 - 43,225
Net (Loss)/income $ (60,805) $ 46,684 $ 46,137 $ 184,559
Common shares outstanding 78,895 80,495 79,905 80,304
Incremental shares from assumed exercise
of dilutive options - 1,615 1,452 1,606
Total shares 78,895 82,110 81,357 81,910
(Loss)/income per common share from continuing operations $ (0.77) $ 0.57 $ 0.57 $ 1.72
Income per common share from discontinued operations - - - 0.53
Total (loss)/income per common share - dilutive $ (0.77) $ 0.57 $ 0.57 $ 2.25
10
Options to purchase 1,324,369 shares of common stock that were outstanding
during the quarter ended September 30, 2005 were not included in the computation
of diluted income/(loss) per share due to their antidilutive effects on
income/(loss) per share as a result of the net loss for the quarter.
Additionally, during the nine months ended September 30, 2005 and 2004, options
to purchase shares of common stock of 1,007,264 and 85,400, 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.
NOTE 4 - BUSINESS ACQUISITIONS
Effective January 2005, the Company acquired all the outstanding capital
stock of GAC SA from the Gebroulaz Foundation. GAC SA is primarily a distributor
of orthodontic products with subsidiaries in Switzerland, France, Germany and
Norway. The Company purchased GAC SA primarily to further strengthen its
orthodontic business through the acquired company's presence in the orthodontic
market in Europe. Effective May 2005, the Company acquired the Assets of
Raintree Essix, L.L.C. ("Raintree"). Raintree is a brand leader for specialty
plastic sheets used in orthodontic treatment, as well as other accessories for
the orthodontic market. The Company purchased Raintree primarily to further
strengthen its orthodontic product offerings. Effective May 2005, the Company
acquired all the outstanding capital stock of Glenroe Technologies, Inc.
("Glenroe"). Glenroe is a manufacturer of orthodontic accessory products
including elastic force materials, specialty plastics, and intricate molded
plastic parts, including NEOCLIPS, a new product used with DENTSPLY's newly
launched Interactive MYSTIQUE bracket (the world's first low friction
translucent ceramic bracket). The Company purchased Glenroe primarily to further
strengthen its orthodontic product offerings. The above described transactions
included aggregate payments at closing of approximately $15.9 million (net of
cash acquired of $2.9 million). Each transaction includes provisions for
possible additional payments based on the performance of the individual
businesses post closing (generally for three years). All of these acquired
companies are included in the "U.S. Dental Laboratory
Business/Implants/Orthodontics/Japan/Asia" operating segment.
The results of operations of the acquired companies are included in the
accompanying financial statements since the effective dates of the transactions.
The purchase price of these acquisitions has been allocated on the basis of
preliminary estimates of the fair values of assets acquired and liabilities
assumed. The current aggregate purchase price allocation for these acquisitions
is as follows:
Current assets $ 7,181
Property, plant and equipment 2,063
Identifiable intangible assets and goodwill 15,590
Other long-term assets 26
Total assets 24,860
Current liabilities (5,492)
Other long-term liabilities (2,049)
Total liabilities (7,541)
Net assets $ 17,319
NOTE 5 - SEGMENT INFORMATION
The Company follows Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for disclosing information about
reportable segments in financial statements. The Company has numerous operating
businesses covering a wide range of products and geographic regions, primarily
serving the professional dental market. Professional dental products represented
approximately 98% of sales for the periods ended September 30, 2005 and 2004.
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,
impairment, interest and taxes.
11
In January 2005, the Company reorganized its operating group structure
consolidating into four operating groups from the five groups under the prior
management structure. The segment information below reflects this revised
structure for all periods shown.
A description of the activities of the Company's four reportable segments
follows:
U.S. Consumable Business/Canada
This business group includes responsibility for the design, manufacturing,
sales, and distribution for certain small equipment, chairside consumable
products and dental anesthetics in the U.S. and the sales and distribution of
all such Company products in Canada.
Dental Consumables - Europe, 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, the Middle East,
Africa and the CIS. In addition, the group has responsibility for the design,
manufacturing, sales, and distribution for certain small equipment and chairside
consumable products and certain specialty products in Europe, the Middle East,
Africa and the CIS.
Australia/Latin America/Endodontics/Non-dental
This business group includes responsibility for the design, manufacture,
and/or sales and distribution of dental anesthetics, chairside consumable and
laboratory products in Brazil. It also has responsibility for the sales and
distribution of all Company dental products sold in Australia and Latin America.
This business group also includes the responsibility for the design and
manufacturing for endodontic products in the U.S., Switzerland and Germany and
is responsible for sales and distribution of all Company endodontic products in
the U.S., Canada, Switzerland, Benelux, Scandinavia, and Eastern Europe, and
certain endodontic products in Germany. This business group is also responsible
for the Company's non-dental business.
U.S. Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
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. The business is
responsible for sales and distribution of all Company products throughout Asia
and Japan.
Significant interdependencies exist among the Company's operations in certain
geographic areas. Inter-group sales are at prices intended to provide a
reasonable profit to the manufacturing unit after recovery of all manufacturing
costs and to provide a reasonable profit for purchasing locations after coverage
of marketing and general and administrative costs.
Generally, the Company evaluates performance of the operating groups based on
the groups' operating income and net third party sales excluding precious metal
content. The Company considers sales excluding precious metal content as the
appropriate sales measurement due to the fluctuations of precious metal prices
and due to the fact that the precious metal content is largely a pass-through to
customers and has minimal effect on earnings.
12
The following tables set forth information about the Company's operating
groups for the quarters and nine month periods ended September 30, 2005 and
2004:
Third Party Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands)
U.S. Consumable Business / Canada $ 89,742 $ 79,783 $ 256,538 $ 235,937
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 118,990 118,543 373,354 408,632
Australia/Latin America/Endodontics/
Non-Dental 86,679 81,527 268,075 249,034
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 121,363 110,142 372,272 338,210
All Other (a) (810) (30) (2,466) (3,081)
Total $ 415,964 $ 389,965 $ 1,267,773 $ 1,228,732
Third Party Net Sales, excluding precious metal content
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands)
U.S. Consumable Business / Canada $ 89,502 $ 79,783 $ 255,812 $ 235,937
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 89,554 87,483 288,395 299,347
Australia/Latin America/Endodontics/
Non-Dental 86,156 81,086 266,647 247,776
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 109,076 96,892 335,186 297,005
All Other (a) (809) (30) (2,466) (3,081)
Total excluding Precious Metal Content 373,479 345,214 1,143,574 1,076,984
Precious Metal Content 42,485 44,751 124,199 151,748
Total including Precious Metal Content $ 415,964 $ 389,965 $ 1,267,773 $ 1,228,732
<FN>
(a) Includes: operating expenses of two distribution warehouses not managed by
named segments, Corporate and inter-segment eliminations.
</FN>
13
Intersegment Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands)
U.S. Consumable Business / Canada $ 82,746 $ 78,739 $ 234,970 $ 237,838
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 41,196 37,580 126,766 121,268
Australia/Latin America/Endodontics/
Non-Dental 13,491 12,602 48,298 42,081
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 10,268 9,308 31,182 26,334
All Other (a) 38,577 36,066 127,074 119,252
Eliminations (186,278) (174,295) (568,290) (546,773)
Total $ - $ - $ - $ -
Segment Operating Income/(Loss)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands)
U.S. Consumable Business / Canada $ 27,513 $ 25,094 $ 71,184 $ 71,398
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 13,631 11,446 36,939 46,664
Australia/Latin America/Endodontics/
Non-Dental 32,173 33,365 109,501 104,442
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 16,534 12,189 56,301 40,529
All Other (a) (15,173) (11,874) (47,947) (44,085)
Segment Operating Income 74,678 70,220 225,978 218,948
Reconciling Items:
Restructuring and impairment costs (b) 131,311 2,108 131,351 3,165
Interest expense 4,552 6,431 15,325 18,232
Interest income (2,115) (1,235) (6,584) (3,124)
Other (income) expense, net 426 347 (5,421) 1,145
(Loss)/income before income taxes $ (59,496) $ 62,569 $ 91,307 $ 199,530
<FN>
<F1>(a) Includes: operating expenses of two distribution warehouses not managed by
named segments, Corporate and inter-segment eliminations.
<F2>(b) During the third quarter of 2005, the Company recorded an impairment
charge of $131.3 million ($111.6 million after tax) for the impairment of
the indefinite-lived injectible anesthetic intangible asset for the
Pharmaceutical division within the Company's U.S. Consumable Business/
Canada segment. This impairment charge was related to the analysis of
the results of the Food and Drug Administration's (FDA's) Pre-Approval
Inspection of the pharmaceutical manufacturing facility, which the
Company received during the third quarter of 2005. (See also Note 9)
</FN>
14
Assets
September 30, December 31,
2005 2004
(in thousands)
U.S. Consumable Business / Canada (b) $ 854,472 $ 982,086
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 625,693 713,592
Australia/Latin America/Endodontics/
Non-Dental 592,869 582,828
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 393,768 390,140
All Other (a) (984) 129,499
Total $ 2,465,818 $ 2,798,145
(a) Includes: operating expenses of two distribution warehouses not managed by
named segments, Corporate and inter-segment eliminations.
(b) During the third quarter of 2005, the Company recorded an impairment
charge of $131.3 million ($111.6 million after tax) for the impairment of
the indefinite-lived injectible anesthetic intangible asset for the
Pharmaceutical division within the Company's U.S. Consumable Business/
Canada segment. This impairment charge was related to the analysis of
the results of the Food and Drug Administration's (FDA's) Pre-Approval
Inspection of the pharmaceutical manufacturing facility, which the
Company received during the third quarter of 2005. (See also Note 9)
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.
In addition, during the first quarter of the year 2004, the Company
discontinued the operations of the Company's dental needle business.
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". As a result, the statements of operations and
related financial statement disclosures for all prior years have been restated
to present the Gendex business and needle business as discontinued operations
separate from continuing operations.
Discontinued operations net revenue and income before income taxes for the
periods presented were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands)
Net sales $ - $ (43) $ - $ 17,392
Gain on sale of Gendex - - - 72,943
Income before income taxes
(including gain on sale in the nine
months ended September 30, 2004) - 247 - 73,088
15
NOTE 7 - INVENTORIES
Inventories consist of the following:
September 30, December 31,
2005 2004
(in thousands)
Finished goods $ 141,412 $ 130,150
Work-in-process 42,904 42,427
Raw materials and supplies 44,644 41,132
$ 228,960 $ 213,709
NOTE 8 - BENEFIT PLANS
The components of the net periodic benefit cost for the Company's benefit
plans are as follows:
Other Postretirement
Pension Benefits Benefits
------------------------ ------------------------
Three Months Ended Three Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands)
Service cost $ 1,271 $ 1,220 $ 34 $ 67
Interest cost 1,259 1,475 178 171
Expected return on plan assets (613) (867) - -
Net amortization and deferral 135 161 (112) (55)
Net periodic benefit cost $ 2,052 $ 1,989 $ 100 $ 183
Other Postretirement
Pension Benefits Benefits
------------------------ ------------------------
Nine Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands)
Service cost $ 4,145 $ 3,469 $ 101 $ 202
Interest cost 4,727 4,424 534 512
Expected return on plan assets (2,464) (2,502) - -
Net amortization and deferral 692 512 (335) (166)
Net periodic benefit cost $ 7,100 $ 5,903 $ 300 $ 548
16
Information related to the funding of the Company's benefit plans for 2005 is
as follows:
Other
Pension Postretirement
Benefits Benefits
(in thousands)
Actual, September 30, 2005 $ 5,181 $ 810
Projected for the remainder of the year 1,763 365
Total for year $ 6,944 $ 1,175
NOTE 9 - RESTRUCTURING AND IMPAIRMENT COSTS
Impairment of Indefinite-Lived Injectible Anesthetic Intangible Asset
During the third quarter of 2005, the Company received the results of the
Food and Drug Administration's (FDA's) Pre-Approval Inspection of its
pharmaceutical manufacturing facility located outside of Chicago. This facility
was built to manufacture the Company's injectible anesthetic product, which was
part of the assets acquired from AstraZeneca in 2001. The Company conducted an
extensive review of the items identified by the FDA and developed action plans
to address these items. Included in this review were the expected time-line and
costs for responding to the FDA findings, the expected time required for FDA
re-application and approval, the expected ramp-up costs to achieve anticipated
volumes for the U.S., European and Japanese markets, and the extension of
contract manufacturing agreements to provide a supply of injectible anesthetic
product until the plant can achieve full production under the revised time-line.
As a result of this review, the Company concluded that the start-up of its
pharmaceutical manufacturing facility will be delayed, and it now expects to
begin producing injectible anesthetics at the facility for the U.S. and Japanese
markets in 2007.
The Company also concluded that the receipt of the FDA's Pre-Approval
Inspection Report and the results of the extensive review constituted a
triggering event for performance of an event-driven impairment assessment
conducted in accordance with SFAS 142 for the indefinite-lived injectible
anesthetic intangible asset and in accordance with SFAS 144 for the long-lived
assets related to the Pharmaceutical manufacturing facility outside Chicago, and
the Oraqix(R) definite-lived intangible asset. In performing the SFAS 142 and
SFAS 144 impairment tests, the Company formulated its best estimate of cash
flows from the respective assets taking into consideration (1) the Company's
projected sales and manufacturing cost projections for the injectible anesthetic
products (2) current and projected market share for the injectible anesthetic
products and (3) the costs to complete the production facility. Additionally,
due to the delay in obtaining FDA approval and the market impact, the Company
increased the risk-adjusted discount rate used in the SFAS 142 impairment test
to reflect the increased risk of the business caused by this delay. As a result
of the changes made to the event-driven impairment analysis model in the third
quarter of 2005 to address the results of the FDA's Pre-Approval Inspection and
the Company's extensive review and action plans, the discounted cash flows
associated with the indefinite lived injectible anesthetic intangible asset were
less than the carrying value of approximately $158 million. Thus, the Company
wrote-down the value of the indefinite-lived intangible asset by $131.3 million
($111.6 after tax) to its new carrying value of approximately $27 million. The
analysis did not reflect or cause an impairment of the Pharmaceutical
manufacturing facility or the definite-lived intangible asset associated with
Oraqix(R) which were tested as an asset group under SFAS 144 on an undiscounted
basis.
The carrying value of the indefinite-lived intangible asset, prior to the
impairment charge, was approximately $158 million. After the impairment charge,
the Company has approximately $27 million of remaining indefinite-lived
intangible assets related to the dental injectible anesthetic assets acquired
from AstraZeneca in 2001. As previously noted, the impairment does not affect
other long-lived assets related to the acquisition and the Company's dental
anesthetic products, which are part of the Company's Pharmaceutical division
within the U.S. Consumable/Canada Business segment. These assets include the
Oraqix(R) definite-lived intangible assets and the plant and equipment for the
business, which total approximately $95 million. Based on the Company's current
assumptions, these assets are not impaired. However, the Company's impairment
tests are highly sensitive to the Company's current expectations of future cash
flows. Such expectations could change as a result of changes in the Company's
anticipated pricing of its products, the cost of third party supplies of dental
injectible anesthetic products pending the FDA approval and achievement of full
production at the Chicago manufacturing facility, the Company's success in
completing the steps to respond to items identified by the FDA with respect to
its Pre-Approval Inspection, the ability to obtain regulatory approval for the
manufacturing facility, the timing of the achievement of full production at the
manufacturing facility, as well as increased competition, downturns in the
economic environment, introduction of new technologies and the impact of other
17
market factors. If any of these assumptions were to become less favorable, then
the Company's assessment of future cash flows, which are the key variable in
assessing asset impairment, may change, and as a result, the Company may be
required to recognize further impairment charges.
Restructuring
During the third and fourth quarters of 2004, the Company recorded
restructuring and other costs of $5.8 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 $4.9 million and
lease/contract termination costs of $0.9 million. In addition, during the nine
months ended September 30, 2005, the Company recorded income of $0.2 million (no
income or expense was recorded during the quarter ended September 30, 2005)
related primarily to adjustments to the severance provisions. The plans include
the elimination of approximately 115 administrative and manufacturing positions
primarily in Germany. Certain of these positions need to be replaced at the
Shared Services Center and therefore the net reduction in positions is expected
to be approximately 65. These plans are expected to be substantially complete by
the end of the first quarter of 2006. As of September 30, 2005, approximately 55
of these positions have been eliminated. The major components of these charges
and the remaining outstanding balances at September 30, 2005 are as follows:
Amounts Amounts Balance
2004 Applied 2005 Applied September 30,
Provisions 2004 Provisions 2005 2005
(in thousands)
Severance $ 4,877 $ (583) $ (210) $ (1,093) $ 2,991
Lease/contract
terminations 881 - - (374) 507
$ 5,758 $ (583) $ (210) $ (1,467) $ 3,498
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. During 2004, the Company
recorded charges of $1.4 million ($0.2 million and $1.4 million during the
quarter and nine months ended September 30, 2004, respectively) for additional
severance, lease termination and other restructuring costs incurred during the
period related to these plans. In addition, during the nine months ended
September 30, 2005, the Company incurred $0.2 million (no income or expense was
recorded during the quarter ended September 30, 2005) of costs related to these
plans. These restructuring plans resulted in the elimination of approximately 70
administrative and manufacturing positions primarily in the United States.
Certain of these positions needed to be replaced at the consolidated site and
therefore the net reduction in positions is expected to be approximately 25.
These plans were substantially complete as of September 30, 2005. The major
components of these charges and the remaining outstanding balances at September
30, 2005 are as follows:
Amounts Amounts Amounts Balance
2003 Applied 2004 Applied 2005 Applied September 30,
Provisions 2003 Provisions 2004 Provisions 2005 2005
(in thousands)
Severance $ 908 $ (49) $ 451 $ (1,083) $ 29 $ (178) $ 78
Lease/contract
terminations 562 (410) 13 (165) - - -
Other restructuring
costs 27 (27) 922 (852) 122 (174) 18
Intangible and other asset
impairment charges 3,000 (3,000) - - 62 (62) -
$ 4,497 $ (3,486) $ 1,386 $ (2,100) $ 213 $ (414) $ 96
18
NOTE 10 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's activities expose it to a variety of market risks which
primarily include the risks related to the effects of changes in foreign
currency exchange rates, interest rates and commodity prices. These financial
exposures are monitored and managed by the Company as part of its overall
risk-management program. The objective of this risk management program is to
reduce the potentially adverse effects that these market risks may have on the
Company's operating results.
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 derivative instruments and 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 September 30, 2005, 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, had a
notional amount totaling 180 million Swiss francs, and effectively converted the
underlying variable interest rates on the debt to a fixed rate of 3.3% for a
term 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 which began in March 2005.
The Company selectively enters into commodity price swaps to effectively fix
certain variable raw material costs. At September 30, 2005, the Company had
swaps in place to purchase 600 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. In addition the Company had swaps in place
to purchase 82,800 troy ounces of silver bullion for use in the production of
its amalgam products at an average fixed rate of $6.50 per troy ounce. The
Company generally hedges up to 80% of its projected annual platinum and silver
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 and typically hedge up to 80% of the specific
transactions.
Fair Value Hedges
The Company uses interest rate swaps to convert a portion of its fixed rate
debt to variable rate debt. In December 2001, the Company issued 350 million in
Eurobonds at a fixed rate of 5.75% maturing in December 2006 to partially
finance the Degussa Dental acquisition. Coincident with the issuance of the
Eurobonds, the Company entered into two integrated transactions: (a) an interest
rate swap agreement with notional amounts totaling Euro 350 million which
converted the 5.75% fixed rate Euro-denominated financing to a variable rate
(based on the London Interbank Borrowing Rate ("LIBOR")) Euro-denominated
19
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 September 30, 2005 and December 31, 2004, the
accumulated fair value of the interest rate swap was $9.2 million and $14.7
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 September 30, 2005 and
December 31, 2004.
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.
As a result of this amendment, the Company became economically exposed to the
impact of exchange rates on the Euro 350 million Eurobonds and designated the
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.
Additionally, the cross-currency element of the integrated transaction
continued to be marked-to-market in the income statement (completely offset by
the corresponding change in the Eurobonds) through June 2005 when the Company
also terminated this component of the integrated transaction. Upon termination,
the Company realized the remaining $20.1 million of accumulated value of the
swap. The termination of the cross-currency basis swap resulted in the Company
becoming exposed to variable Euro interest rate risk for the remaining term of
the bond.
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 September 30, 2005 and December 31, 2004, 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
September 30, 2005 and December 31, 2004, the accumulated translation gains on
investments in foreign subsidiaries, primarily denominated in Euros, Swiss
francs and Japanese yen, net of these debt hedges, were $70.8 million and $179.4
million, respectively, which was included in Accumulated Other Comprehensive
income.
Other
The aggregate net fair value of the Company's derivative instruments at
September 30, 2005 and December 31, 2004 was $30.1 million and $36.0 million,
respectively.
In accordance with SFAS 52, "Foreign Currency Translation", the Company
utilizes long-term intercompany loans, for which settlement is not planned or
anticipated in the foreseeable future, to eliminate foreign currency transaction
exposures of certain foreign subsidiaries. Net gains or losses related to these
long-term intercompany loans are included in "Accumulated other comprehensive
income ".
20
NOTE 11- COMMITMENTS AND CONTINGENCIES
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes it is unlikely
that pending litigation to which DENTSPLY is a party will have a material
adverse effect upon its consolidated financial position or results of
operations.
In June 1995, the Antitrust Division of the United States Department of Justice
initiated an antitrust investigation regarding the policies and conduct
undertaken by the Company's Trubyte Division with respect to the distribution of
artificial teeth and related products. On January 5, 1999, the Department of
Justice filed a Complaint against the Company in the U.S. District Court in
Wilmington, Delaware alleging that the Company's tooth distribution practices
violate the antitrust laws and seeking an order for the Company to discontinue
its practices. The trial in the government's case was held in April and May
2002. On August 14, 2003, the Judge entered a decision that the Company's tooth
distribution practices do not violate the antitrust laws. The Department of
Justice appealed this decision to the U.S. Third Circuit Court of Appeals. The
Third Circuit Court reversed the decision of the District Court. The Company has
filed a petition with the U.S. Supreme Court asking it to hear an appeal of the
Third Circuit Court decision. The effect of the decision of the Third Circuit,
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. 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.
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 appealed this decision to the Third Circuit and the Court
has upheld the decision of the District Court in dismissing the Plaintiffs'
damages claims, with the exception of allowing the Plaintiffs to pursue a damage
claim based on a theory of resale price maintenance agreements between the
Company and its tooth dealers. This was not an issue in the government case and
it is unknown whether the Plaintiffs will pursue such a claim. 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 for which they
were not paid. The Notice of the class action was sent on February 23, 2005 to
the approximately 29,000 dentists licensed to practice in California during the
relevant period and a total of 166 dentists have opted into the class action. As
the result of a recent decision by a California Appellate Court, the plaintiffs
have filed an appeal to convert the claim to an opt-out claim from its current
status as an opt-in claim. 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 primary level insurance carrier has
confirmed coverage for the breach of warranty claims in this matter up to their
policy limits.
21
DENTSPLY INTERNATIONAL INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made by the Company, including without limitation,
statements containing the words "plans", "anticipates", "believes", "expects",
or words of similar import constitute forward-looking statements which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that forward-looking statements
involve risks and uncertainties which may materially affect the Company's
business and prospects, and should be read in conjunction with the risk factors
discussed herein and within the Company's Annual Report on Form 10-K for the
year ended December 31, 2004.
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. This annualized internal growth rate
expectation typically includes approximately 1-2% of price increases. The
Company typically implements most of its price changes in the third or fourth
quarters of the year. These price changes and other marketing and promotional
programs, which are offered to customers from time to time, in the ordinary
course of business, may impact customer purchasing activity. During the first
nine months of 2005, the Company's overall internal growth was 2.5% compared to
4.0% for the full year 2004. Our internal growth rates in the United States (44%
of sales) and Europe (36% of sales), the largest dental markets in the world,
were 6.3% and negative 2.3%, respectively during the first nine months of 2005
compared to 3.4% and 4.1%, respectively for the full year 2004. As discussed
further within the Results of Continuing Operations, the lower sales in Europe
were primarily due to issues related to a new dental reimbursement program
effective in 2005 in Germany, the Company's most significant market in this
region. Our internal growth rate in all other regions during the first nine
months of 2005, which represents approximately 20% of our sales, was 3.3%,
compared to 5.2% for the full year 2004. 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 over 25 new products to be introduced
in 2005. Of specific note, in late 2004, the Company introduced Oraqix(R), its
new non-injectible anesthetic gel for use in scaling and root planing procedures
and BioPure MTAD, a new irrigant used in root canal procedures. In the first
quarter of 2005, the Company introduced Calamus, a unique obturation delivery
system used in root canal procedures and Xeno IV, the Company's first
introduction of single component self etching adhesive technology to the US
market. In addition, during the second quarter of 2005, we introduced
Interactive Mystique, the world's first low friction translucent ceramic
orthodontic bracket. It has a clear interactive clip called Neoclip, which can
be rapidly placed and removed from the Mystique bracket. During the third
quarter of 2005, the Company introduced Cercon Arts, a software system for the
Company's Cercon product that allows the technician to develop copings from a
stone model, and provides better utilization of the Cercon block.
22
New advances in technology are anticipated to have a significant influence on
future products in dentistry. As a result, the Company has pursued several
research and development initiatives to support this development. Specifically,
the Company continues to work on product activities with the Georgia Institute
of Technology's Research Institute and Doxa AB to pursue potential new advances
in dentistry. 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 is
currently working to develop products based on this technology and believes that
this compound will provide such benefits to future products 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.
Also, during 2005 the Company entered into a long-term collaborative agreement
with IDMoS Dental Systems Limited, a wholly owned subsidiary of IDMoS plc for
the commercialization of IDMoS' caries detection and monitoring technology.
Under the agreement, DENTSPLY will have exclusive worldwide rights to market
products based on the technology and IDMoS will be responsible for further
development of the technology. The Company believes that IDMoS technology brings
unique capabilities to preventive dentistry in the area of caries detection and
monitoring. The Company also believes that this technology has clinical benefits
significantly beyond other devices and technologies in the market today,
including radiology. Although we believe these activities will lead to new
innovative dental products, they involve new technologies and there can be no
assurance that commercialized products will be developed.
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. As further discussed in Note 4 to the Consolidated Condensed
Financial Statements, during the first nine months of 2005 the Company purchased
GAC SA, Raintree Essix and Glenroe Technologies. All three of the acquired
companies specialize in the orthodontics products market. The Company expects
these acquisitions to increase full year 2005 sales by approximately $25
million.
The Company also remains focused on reducing costs and improving
competitiveness. Management expects to continue to consolidate operations or
functions to improve efficiencies, reduce the cost of those operations and
functions and/or improve 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.
The Company completed construction of a dental anesthetic manufacturing
facility outside of Chicago in 2004. Earlier this year the plant received the
approval and validation of the manufacturing practices by the Medicines and
Healthcare products Regulatory Agency ("MHRA"), the agency responsible for drug
product approvals in the United Kingdom, and which is accepted by Ireland,
Australia and New Zealand. As a result, the facility began releasing products to
the market in the United Kingdom and Australia in the second quarter of this
year. The Company made a submission to the Food and Drug Administration ("FDA")
in spring 2005 to obtain the necessary facility approval to sell in the United
States the injectible anesthetic products manufactured at the facility. The FDA
conducted a Pre-Approval Inspection in July 2005 and identified items that need
to be addressed in connection with the U.S. inspection and submission.
After the Company received the results of the FDA's Pre-Approval Inspection
in the third quarter of 2005, we conducted an extensive review of the items
identified by the FDA and we developed action plans to address these items.
Included in this review were the expected time-line and costs for responding to
the FDA findings, the expected time required for FDA re-application and
approval, the expected ramp-up costs to achieve anticipated volumes for the
U.S., European and Japanese markets, and the extension of contract manufacturing
agreements to provide a supply of injectible anesthetic product until the
manufacturing facility can achieve full production under the revised time-line.
As a result of the Company's review and its changed expectations, the production
of U.S. and Japanese injectible anesthetics from the manufacturing facility is
not expected until 2007, and the Company concluded that the indefinite-lived
injectible anesthetic intangible asset acquired from AstraZeneca in 2001 became
impaired in the third quarter of 2005, resulting in a $131.3 million pre-tax
charge ($111.6 million after tax)(See also Note 9 to the Consolidated
Condensed Financial Statements). This impairment does not impact the Company's
needle-free Oraqix(R) product.
The Company has contract manufacturing relationships for the supply of dental
injectible anesthetic product for the markets affected by the regulatory delay
pending receipt of the necessary approvals. While that supply has been adequate
to date, there can be no assurance that the Company will be able to obtain an
adequate supply of its injectible anesthetic products in the future in the event
that the requisite approvals are not timely received or maintained in each
market served by the Company.
23
The Company anticipates that the Pharmaceutical division will enhance the
Company's overall profitability once the anesthetic filling plant becomes fully
operational. Because the manufacturing facility is not expected to begin
production for the U.S. or Japanese markets until 2007, we do not anticipate
operational improvements until the facility has completed its ramp-up period. We
anticipate that we will begin seeing these improvements in 2008.
RESULTS OF CONTINUING OPERATIONS, QUARTER ENDED SEPTEMBER 30, 2005 COMPARED
TO QUARTER ENDED SEPTEMBER 30, 2004
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.
Three Months Ended
September 30,
2005 2004
(in millions)
Net Sales $ 416.0 $ 390.0
Precious Metal Content of Sales (42.5) (44.8)
Net Sales Excluding Precious Metal Content $ 373.5 $ 345.2
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 for the quarter ended September 30, 2005 increased $26.0 million,
or 6.7%, from the same period in 2004 to $416.0 million. Net sales, excluding
precious metal content, increased $28.3 million, or 8.2%, to $373.5 million.
Sales growth excluding precious metal content was comprised of 5.4% of internal
growth and 0.8% of foreign currency translation and 2.0% related to
acquisitions. The 5.4% internal growth was comprised of 7.6% in the United
States, 4.7% in Europe and 1.3% for all other regions combined.
The internal sales growth, excluding precious metal content, in the United
States was driven by strong growth the dental consumable product category,
offset somewhat by lower sales in the dental laboratory product category. In
Europe, the low internal growth resulted from lower sales in the dental
laboratory category offset by strong growth in the specialty dental and dental
consumable product categories. The decrease in the laboratory category was
primarily related to reimbursement changes in the German dental market
prosthetic procedures which became effective in 2005. The prosthetic area of the
German dental market has improved in the third quarter compared to the first and
second quarters as the dentists, laboratories, insurance companies and patients
have become more familiar with the new reimbursement program and claims are
being processed through the system more rapidly. We expect that the German
market will again be lower in the fourth quarter of 2005 than the same period in
2004, negatively impacting the European internal growth, however, it should be
running at a more normalized run rate. The internal growth of 1.3% in all other
regions was largely the result of strong growth in the Asian region, partially
offset by lower sales in Brazil and Australia.
24
Gross Profit
Gross profit was $209.0 million for the quarter ended September 30, 2005
compared to $198.5 million in 2004, an increase of $10.5 million, or 5.3%. Gross
profit, measured against sales including precious metal content, represented
50.2% of net sales in 2005 compared to 50.9% in 2004. The gross profit for the
third quarter of 2005, measured against sales excluding precious metal content,
represented 56.0% of net sales compared to 57.5% in 2004. This slight margin
decline from 2005 to 2004 was due to the decrease in the laboratory product
sales in Europe as discussed previously and start-up costs related to the
anesthetic manufacturing facility, partially offset by the impact of new
products and manufacturing improvements in many of the Company's businesses.
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $6.0 million,
or 4.7%, to $134.3 million during the three months ended September 30, 2005 from
$128.3 million in 2004. The 4.7% increase in expenses reflects increases for the
translation impact from a weaker U.S. dollar of approximately $1.0 million. SG&A
expenses, measured against sales including precious metal content, decreased to
32.3% in 2005 compared to 32.9% in 2004. SG&A expenses, as measured against
sales excluding precious metal content, decreased to 36.0% in 2005 compared to
37.2% in 2004. The higher expense ratio in 2004 primarily resulted from costs
related to the launch of the Oraqix(R) product and additional costs related to
the Sarbanes-Oxley compliance, partially offset by increased costs in the 2005
period as a result of the initiation of a global tax project using outside
consultants.
During the quarter ended September 30, 2005, the Company recorded
restructuring and impairment costs of $131.3 million ($111.6 million after tax).
This amount is primarily attributable the impairment of the indefinite-lived
injectible anesthetic intangible acquired from AstraZeneca in 2001. This
impairment charge was recorded as a result of an event driven impairment
analysis conducted in accordance with SFAS 142. (See also Note 9 to the
Consolidated Condensed Financial Statements).
Other Income and Expenses
Net interest and other expenses were $2.9 million during the three months
ended September 30, 2005 compared to $5.5 million in 2004. The 2005 period
included $2.4 million of net interest expense, $0.1 million of currency
transaction gains and $0.6 million of other nonoperating costs. The 2004 period
included $5.2 million of net interest expense, $0.1 million of currency
transaction losses and $0.2 million of other nonoperating income. The decrease
in net interest expense was primarily due to increased interest income generated
from the Company's higher average cash levels, lower debt levels and the
positive impact of cross currency interest rate swaps put into place in the
first quarter of 2005.
Income Taxes/Earnings
The discussions below contain earnings and earnings per diluted share,
excluding the impact of certain one time items. These disclosures excluding
the one time impacts provide the reader with earnings and earnings per diluted
share results on a comparable basis between periods.
As the presentation of earnings and earnings per diluted share excluding one
time impacts 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 (loss)/earnings and (loss)/earnings
per diluted share excluding one time impacts to net earnings and earnings per
diluted share excluding one time impacts. Our definitions and calculations of
earnings and earnings per diluted share excluding one time impacts and other
operating measures derived earnings and earnings per diluted share excluding one
time impacts may not necessarily be the same as those used by other companies.
25
Three Months Ended September 30, 2005 (in thousands, except per share amounts):
Income Diluted
(Expense) Per Share
Loss from Continuing Operations $ (60,805) $ (0.77)
Charges for Unusual Items:
Impairment Charge 111,595 1.41
Dilutive Effect of Including Potential
Outstanding Shares on Earnings Per Share (a) - (0.01)
Earnings From Continuing Operations Before Unusual Items $ 50,790 $ 0.63
(a) For the three months ended September 30, 2005, the dilutive weighted average
number of common shares outstanding excluded potential common shares from stock
options of 1,324. These shares were excluded from the GAAP calculation of
earnings per share due to their antidilutive effect resulting from the loss from
continuting operations.
Three Months Ended September 30, 2004 (in thousands, except per share amounts):
Income Diluted
(Expense) Per Share
Income from Continuing Operations $ 46,344 $ 0.57
Charges (Income) for Unusual Items:
Reduction of Income Taxes for Prior Period Items (2,848) (0.04)
Restructuring Charges 1,317 0.02
Earnings From Continuing Operations Before Unusual Items $ 44,813 $ 0.55
Management believes that the presentation of earnings and earnings per
diluted share excluding the one time impacts provides useful information to
investors because of the significance of the impacts on the comparability of the
results between periods. Management does not believe that these one time impacts
are reflective of normal operating results and as such, believes that the
presentation of earnings and earnings per dilutive share excluding the one time
impacts provides investors with meaningful comparisons between periods.
The Company's effective tax rate for the quarter ended September 30, 2005 was
negative 2.2% compared to 25.9% for the same period in 2004. The effective rate
for 2005 is reflective of the relatively low net tax benefit associated with the
impairment of the indefinite-lived injectible anesthetic intangible which was
primarily held at a Swiss based entity with a minimal tax rate. The negative
impact of the impairment charge on the effective tax rate for the quarter ended
September 30, 2005 was 31.2%. The 2004 rate includes benefits of $2.8 million
resulting from the resolution of certain tax matters related to prior periods.
These benefits reduced the effective tax rate by 4.6% during the quarter ended
September 30, 2004.
Net loss from continuing operations for the third quarter of 2005 of $60.8
million, or $ 0.77 per diluted share was a decrease compared to net income from
continuing operations of $46.3 million, or $0.57 per diluted share in the third
quarter of 2004. The third quarter of 2005 included the pre-tax charge for
impairment of the intangible asset of $131.3 million ($111.6 million after tax),
or $1.41 per share. The third quarter of 2004 included a reduction of income
taxes of $2.8 million, or $0.04 per diluted share, related to tax matters from
prior periods and also included a pretax charge of $2.1 million, or $0.02 per
diluted share, related to restructuring activities. Earnings from continuing
operations, excluding the items noted above for the third quarter of 2005 and
2004, would have been $50.8 million or $0.63 per diluted share in the third
quarter of 2005 compared to $44.8 million or $0.55 per diluted share in the
third quarter of 2004, representing an increase of 14.5% in net income per
dilutive share.
26
Operating Segment Results
In January 2005, the Company reorganized its operating group structure
consolidating into four operating groups from the five groups under the prior
management structure. These four operating groups are managed by four Senior
Vice Presidents and represent our operating segments. Each of these operating
groups covers a wide range of product categories and geographic regions. The
product categories and geographic regions often overlap across the groups.
Further information regarding the details of each group is presented in Note 5
of the Consolidated 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.
U.S. Consumable Business/Canada
Net sales for this group were $89.5 million during the quarter ended
September 30, 2005, a 12.2% increase compared to $79.8 million in 2004. Internal
growth was 11.2% and currency translation added 1.0% to sales in 2005. The
chairside consumable products business and the Oraqix(R) product within the
dental anesthetics business, were the strongest portions of this group offset by
a lower growth rate in the Canadian business due primarily to inventory
adjustments associated with dealer consolidations within that market.
Operating profit increased $2.4 million during the three months ended
September 30, 2005 to $27.5 million compared to $25.1 million in 2004. The
increase was primarily related to strong margins on improved sales in the
chairside consumable products business offset by increased start-up costs at the
Pharmaceutical manufacturing facility outside of Chicago. In addition, operating
profit benefited slightly from currency translation.
During the three months ended September 30, 2005, the Company recorded a
$131.3 million ($111.6 million after tax)impairment charge to the
indefinite-lived injectible anesthetic intangible. This impairment, which was
recorded in restructuring and impairment costs, was a result of the Company's
in-depth analysis performed upon the receipt of the results of the Food and Drug
Administration's (FDA's) Pre-Approval Inspection of the pharmaceutical
manufacturing facility during the third quarter of 2005. This in-depth analysis
included an extensive review of the items identified by the FDA as well as the
Company's action plans to address these items. (See also Note 9 to the
Consolidated Condensed Financial Statements). This impairment does not impact
the Company's needle-free Oraqix(R) product.
Dental Consumables--Europe, CIS, Middle East, Africa/European Dental
Laboratory Business
Net sales for this group were $89.6 million during the quarter ended
September 30, 2005, a 2.4% increase compared to $87.5 million in 2004. Internal
growth was a positive 2.8% with currency translation subtracting 0.4%. The
positive growth was a result of significant increases in sales of the consumable
businesses in Europe. However, the changes in German reimbursement programs
related to prosthetic procedures, as discussed earlier, resulted in slower sales
in Germany during the third quarter of 2005 which offset the strong consumable
business growth. Although the Company believes that the German dental market
will improve as the dentists, laboratories, insurance companies and patients
become more familiar with the new reimbursement program, we expect that sales in
the German market will be lower in 2005 than the 2004 levels, which will
negatively impact the group's internal growth for 2005.
Operating profit increased $2.2 million during the three months ended
September 30, 2005 to $13.6 million from $11.4 million in 2004. The increase in
operating profit was driven primarily by the strong sales of the consumable
businesses, offset by the weakness in the laboratory products in the German
businesses. In addition, operating profit was negatively impacted by currency
translation.
Australia/Latin America/Endodontics/Non-dental
Net sales for this group increased $5.1 million during the quarter ended
September 30, 2005, or 6.3%, to $86.2 million from $81.1 million in 2004.
Internal growth was 3.8% with currency translation adding 2.5%. Strong growth
continued in the group's endodontic and Brazilian businesses offset slightly by
decreases in the Australian business.
Operating profit was $32.2 million during the third quarter of 2005, a $1.2
million decrease from $33.4 million in 2004. The decrease was primarily related
to the weakness in the Australian business and higher expenses in the Brazilian
business, offset by increases in the endodontic businesses. In addition,
operating profit benefited from currency translation.
27
U.S. Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
Net sales for this group was $109.1 million during the three months ended
September 30, 2005, a 12.6% increase compared to $96.9 million in 2004. Internal
growth was 5.0%, currency translation added 0.3% to sales in 2004, and 7.3% was
added through acquisitions. Significant growth in the orthodontic and implant
businesses was supported by solid growth in the Asian business, offset by
weakness in the U.S. laboratory market.
Operating profit increased $4.3 million during the three months ended
September 30, 2005 to $16.5 million from $12.2 million in 2004. The increase in
operating profits was driven primarily by the sales growth in the implant,
orthodontics and Asian businesses. In addition, operating profit had a slight
negative impact from currency translation.
RESULTS OF CONTINUING OPERATIONS, NINE MONTHS ENDED SEPTEMBER 30, 2005
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004
Net Sales
The following is a reconciliation of net sales to net sales excluding
precious metal content.
Nine Months Ended
September 30,
2005 2004
(in millions)
Net Sales $ 1,267.8 $ 1,228.7
Precious Metal Content of Sales (124.2) (151.7)
Net Sales Excluding Precious Metal Content $ 1,143.6 $ 1,077.0
Net sales for the nine months ended September 30, 2005 increased $39.1
million, or 3.2%, from the same period in 2004 to $1,267.8 million. Net sales,
excluding precious metal content, increased $66.6 million, or 6.2%, to $1,143.6
million. Sales growth excluding precious metal content was comprised of 2.5% of
internal growth, 2.1% of foreign currency translation and 1.6% related to
acquisitions. The 2.5% internal growth was comprised of 6.3% in the United
States, negative 2.3% in Europe and 3.3% 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 and dental consumable
product categories, partially offset by lower sales in the dental laboratory
product category. In Europe, the negative internal growth was driven by the
lower sales in the dental laboratory category, partially offset by strong growth
in the specialty dental and dental consumable product categories. The decrease
in the laboratory category was primarily related to reimbursement issues in the
German dental market. The internal growth of 3.3% in all other regions was
largely the result of strong growth in the Asian and Middle East/Africa regions,
offset by lower sales in Canada and Australia.
Gross Profit
Gross profit was $645.2 million for the nine months ended September 30, 2005
compared to $614.5 million in 2004, an increase of $30.7 million, or 5.0%. Gross
profit, measured against sales including precious metal content, represented
50.9% of net sales in 2005 compared to 50.0% in 2004. The gross profit for the
first nine months of 2005, measured against sales excluding precious metal
content, represented 56.4% of net sales compared to 57.1% in 2004. The slight
margin decline from 2005 to 2004 was driven by the decrease in the laboratory
product sales in Europe and start-up costs related to the pharmaceutical
manufacturing facility, offset by the impact of new products and manufacturing
improvements in many of the Company's businesses.
28
Operating Expenses
SG&A expense increased $23.7 million, or 6.0%, to $419.2 million during the
nine months ended September 30, 2005 from $395.5 million in 2004. The 6.0%
increase in expenses reflects increases for the translation impact from a weaker
U.S. dollar of approximately $8.4 million. SG&A expenses, measured against sales
including precious metal content, increased to 33.1% in 2005 compared to 32.2%
in 2004. SG&A expenses, as measured against sales excluding precious metal
content, remained constant at 36.7% in 2005 and 2004. The 2005 expense ratio was
impacted by higher expense ratios related to the acquired businesses, the global
tax project and costs related to the biennial International Dental Show ("IDS"),
entirely offset by higher costs associated with Sarbanes-Oxley compliance and
the Oraqix(R) launch during 2004.
During the nine months ended September 30, 2005, the Company recorded
restructuring and impairment costs of $131.4 million. This amount is primarily
attributable to a charge of $131.3 million ($111.6 million after tax) related to
the impairment of the indefinite-lived injectible anesthetic intangible acquired
from AstraZeneca in 2001. This impairment charge was recorded as a result of an
event driven impairment analysis conducted in accordance with SFAS 142. During
the nine months ended September 30, 2005, the Company also recorded
restructuring and other income of $0.1 million for severance provision
adjustments related to the consolidation of certain sales/customer service
facilities in Europe and the formation of a European Shared Services Center in
Yverdon, Switzerland. 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 end of the
first quarter of 2006. The Company also incurred additional charges of $0.2
million 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 as of September 30, 2005
(See also Note 9 to the Consolidated Condensed Financial Statements).
The Company anticipates the remaining costs to complete these restructuring
initiatives will be approximately $0.7 million which will be expensed during the
remainder of 2005 as the related costs are incurred. These plans are projected
to result in future annual expense reductions of $4 to $6 million when fully
implemented in 2006. (See also Note 9 to the Consolidated Condensed Financial
Statements).
Other Income and Expenses
Net interest and other expenses were $3.3 million during the nine months
ended September 30, 2005 compared to $16.3 million in 2004. The 2005 period
included $8.7 million of net interest expense, $5.9 million of currency
transaction gains and $0.5 million of other nonoperating costs. The 2004 period
included $15.1 million of net interest expense, $0.9 million of currency
transaction losses and $0.3 million of other nonoperating costs. The increase in
currency transaction gains during 2005 was primarily the result of a transaction
involving the transfer of intangible assets between legal entities with
different functional currencies. Exchange transaction gains or losses occur from
movement of foreign currency rates between the date of the transaction and the
date of final financial settlement. The decrease in net interest expense was
primarily due to increased interest income generated from the Company's higher
average cash levels, lower debt levels and the positive impact of cross currency
interest rate swaps put into place in the first quarter of 2005.
29
Income Taxes/Earnings
The following is a reconciliation of earnings and earnings per share to
earnings and earnings per share excluding one time impacts.
Nine Months Ended September 30, 2005 (in thousands, except per share amounts):
Income Diluted
(Expense) Per Share
Income from Continuing Operations $ 46,137 $ 0.57
Charges for Unusual Items:
Impairment Charge 111,595 1.37
Reduction of Income Taxes for Prior Period Items (2,108) (0.03)
Earnings From Continuing Operations Before Unusual Items $ 155,624 $ 1.91
Nine Months Ended September 30, 2004 (in thousands, except per share amounts):
Income Diluted
(Expense) Per Share
Income from Continuing Operations $ 141,334 $ 1.73
Charges (Income) for Unusual Items:
Reduction of Income Taxes for Prior Period Items (4,086) (0.05)
Restructuring Charges 2,143 0.03
Earnings From Continuing Operations Before Unusual Items $ 139,391 $ 1.70
The Company's effective tax rate for the nine months ended September 30, 2005
increased to 49.5% from 29.2% for the same period in 2004. The effective rate
for the 2005 period is reflective of the relatively low net tax benefit
associated with the impairment of the indefinite-lived injectible anesthetic
intangible which was primarily held at a Swiss based entity with a minimal tax
rate. The 2005 period is also reflective of a net tax benefit of $2.1 million
from the reversal of previously accrued taxes from prior year tax matters. The
negative impact of the impairment charge and the net tax benefit on the
effective tax rate for the 2005 period was 19.4%. The 2004 period is reflective
of a net tax benefits of $4.1 million from the reversal of previously accrued
taxes from the settlement of prior years' tax audits. The impact of the net tax
benefit on the effective tax rate for the 2004 period was 2.0%.
Income from continuing operations for the nine months ended September 30,
2005 of $46.1 million, or $ 0.57 per diluted share was a decrease compared to
net income from continuing operations of $141.3 million, or $1.73 per diluted
share for the same period in 2004. The 2005 period included the after tax charge
for impairment of the intangible asset of $111.6 million, or $1.37 per diluted
share, as well as a net tax benefit of $2.1 million, or $0.03 per diluted share,
from the reversal of previously accrued taxes from the settlement of prior
years' tax audits. The 2004 period included a reduction of income taxes of $4.1
million, or $0.05 per diluted share, related to tax matters from prior periods
and also included an after tax charge of $2.1 million, or $0.03 per diluted
share, related to restructuring activities. Earnings from continuing operations,
excluding the items noted above for the nine months ended September 30, 2005 and
2004, would have been $154.5 million, or $1.90 per diluted share, compared to
$139.4 million, or $1.70 for the same period during 2004, representing an
increase of 11.8% in net income per dilutive share.
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 and $0.53 per diluted
share for the nine months ended September 30, 2004, which was almost entirely
related to the gain realized on the sale of Gendex business.
30
Operating Segment Results
U.S. Consumable Business/Canada
Net sales for this group were $255.8 million during the nine months ended
September 30, 2005, an 8.4% increase compared to $235.9 million in 2004.
Internal growth was 7.5% and currency translation added 0.9% to sales in 2005.
The chairside consumable products business and the Oraqix(R) product within the
dental anesthetics business were the strongest portions of this group driving
the 7.5% internal growth.
Operating profit decreased $0.2 million during the nine months ended
September 30, 2005 to $71.2 million compared to $71.4 million in 2004. The
decrease was related to non-capitalizable costs associated with the
pharmaceutical manufacturing facility outside of Chicago, offset by strong
margins on improved sales in the chairside consumable products business. In
addition, operating profit benefited slightly from currency translation.
During the nine months ended September 30, 2005, the Company recorded a
$131.3 million ($111.6 million after tax) impairment charge to the
indefinite-lived injectible anesthetic intangible. This impairment, which was
recorded in restructuring and impairment costs, was a result of the Company's
in-depth analysis performed upon the receipt of the results of the Food and Drug
Administration's (FDA's) Pre-Approval Inspection of the pharmaceutical
manufacturing facility during the third quarter of 2005. This in-depth analysis
included an extensive review of the items identified by the FDA as well as the
Company's action plans to address these items. (See also Note 9 to the
Consolidated Condensed Financial Statements). This impairment does not impact
the Company's needle-free Oraqix(R) product.
Dental Consumables--Europe, CIS, Middle East, Africa/European Dental
Laboratory Business
Net sales for this group were $288.4 million during the nine months ended
September 30, 2005, a 3.7% decrease compared to $299.3 million in 2004. Internal
growth was negative 6.8% with currency translation adding 3.1%. Changes in
German reimbursement programs related to prosthetic procedures, as discussed
earlier, resulted in slower sales in Germany during the first nine months of
2005 which was the primary driver of the negative 6.8% internal sales growth.
Although the Company believes that the German dental market will improve as the
dentists, laboratories, insurance companies and patients become more familiar
with the new reimbursement program, we expect that sales in the German market
will be lower in 2005 than the 2004 levels, which will negatively impact the
group's internal growth for 2005.
Operating profit decreased $9.7 million during the nine months ended
September 30, 2005 to $36.9 million from $46.6 million in 2004. The reduction in
operating profit was driven primarily by lower sales, particularly in the German
businesses. In addition, operating profit benefited from currency translation.
Australia/Latin America/Endodontics/Non-dental
Net sales for this group increased $18.8 million during the nine months ended
September 30, 2005, or 7.6%, to $266.6 million from $247.8 million in 2004.
Internal growth was 4.9% with currency translation adding 2.7%. Continued solid
growth was shown in the endodontic business along with strong growth in the
non-dental business and strong growth throughout the Latin American businesses,
excluding Brazil, offset slightly by decreases in the Australian business.
Operating profit was $109.5 million during the first nine months of 2005, a
$5.1 million increase from $104.4 million in 2004. The increase was primarily
related to the continued strength of the endodontic business. The non-dental
business also improved this group's operating profit partially offset by the
Australian and Brazilian businesses. In addition, operating profit benefited
from currency translation.
U.S. Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
Net sales for this group were $335.2 million during the nine months ended
September 30, 2005, a 12.9% increase compared to $297.0 million in 2004.
Internal growth was 5.8%, currency translation added 1.5% to sales in 2004, and
5.6% was added through acquisitions. Significant growth in the implant,
orthodontic and Asian businesses was supported by solid growth in the Japanese
business, offset by weakness in the U.S. laboratory markets.
Operating profit increased $15.8 million during the nine months ended
September 30, 2005 to $56.3 million from $40.5 million in 2004. The increase in
operating profits was driven primarily by the sales growth in the implant,
orthodontics and Asian businesses. In addition, operating profit benefited from
currency translation.
31
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the Company's disclosure in its 2004
Annual Report on Form 10-K filed March 16, 2005
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 2005
Cash flows from operating activities during the nine months ended September
30, 2005 were $131.8 million compared to $184.5 million during 2004. The
decrease of $52.7 million was primarily the result of unfavorable working
capital changes, most notably with respect to receivables and inventories. Also
contributing to this decline, was the payment of a patent litigation settlement
and decreased tax benefits related to a lower level of stock option exercise
activity versus the prior year, offset somewhat by higher earnings.
Investing activities during the first nine months of 2005 include capital
expenditures of $30.3 million. The Company expects that capital expenditures
will range from $45 million to $50 million for the full year of 2005.
Acquisition-related activity for the period ended September 30, 2005 was $17.3
million which was primarily related to the acquisitions of GAC SA, Raintree
Essix and Glenroe Technologies (see Note 4 to the Consolidated Condensed
Financial Statements).
In December 2004 the Board of Directors approved a stock repurchase program
under which the Company was able to repurchase shares of stock in an amount to
maintain up to 3,000,000 shares of treasury stock. In September 2005 the Board
of Directors increased the authorization to repurchase shares under the stock
repurchase program in an amount to maintain up to 5,500,000 shares of treasury
stock. As a result of this program, the Company repurchased 2,981,278 shares at
an average cost per share of $54.86 and a total cost of $163.6 million during
the in the first nine months of 2005. During 2005, the Company also settled on
30,000 shares that were purchased in 2004 at a cost of $1.7 million. As of
September 30, 2005, the Company held 2,963,529 shares of treasury stock. The
Company also received proceeds of $18.9 million as a result of the exercise of
774,125 stock options during the nine months ended September 30, 2005.
The Company's long-term borrowings decreased by a net of $13.4 million during
the period ended September 30, 2005. This net change included debt payments of
$48.7 million, offset by additional borrowings of $37.0 million with the
remaining decrease being primarily related to exchange rate fluctuations on debt
denominated in foreign currencies and changes in the value of interest rate
swaps. During the period ended September 30, 2005, the Company's ratio of
long-term debt to total capitalization increased to 35.3% compared to 35.1% at
December 31, 2004.
Under its multi-currency revolving credit agreement, the Company is able to
borrow up to $500 million through May 2010. This facility is unsecured and
contains certain affirmative and negative covenants relating to its operations
and financial condition. The most restrictive of these covenants pertain to
asset dispositions and prescribed ratios of indebtedness to total capital and
operating income plus depreciation and amortization to interest expense. At
September 30, 2005, the Company was in compliance with these 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 $500 million and $37 million was outstanding under the commercial paper
facilities at September 30, 2005.
The Company also has access to $56.5 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.
At September 30, 2005, the Company had unused lines of credit related to the
revolving credit agreement and the uncommitted short-term lines of credit of
$412.7 million.
At September 30,2005, the Company held $58.5 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
32
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 balance was $398.6 million at September 30, 2005. The
Company has accumulated cash to this level 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 build throughout
2005, subject to any uses of cash for acquisitions, stock purchases and
potential debt prepayment.
There have been no material changes to the Company's scheduled contractual
cash obligations disclosed in its 2004 Annual Report on Form 10-K filed March
16, 2005. 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.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no significant material changes to the market risks as
disclosed in the Company's Annual Report on Form 10-K filed for the year ending
December 31, 2004.
Item 4 - 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.
There have been no changes in the Company's internal control over financial
reporting that occurred during the quarter ended September 30, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. The Company is currently centralizing its
transaction accounting processing in Europe into our European Shared Services
Center and has brought in seven locations during the first nine months of 2005
and expects the remaining European locations to be complete by the end of the
first quarter of 2006.
33
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes it is unlikely
that pending litigation to which DENTSPLY is a party will have a material
adverse effect upon its consolidated financial position or results of
operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and conduct
undertaken by the Company's Trubyte Division with respect to the distribution of
artificial teeth and related products. On January 5, 1999, the Department of
Justice filed a Complaint against the Company in the U.S. District Court in
Wilmington, Delaware alleging that the Company's tooth distribution practices
violate the antitrust laws and seeking an order for the Company to discontinue
its practices. The trial in the government's case was held in April and May
2002. On August 14, 2003, the Judge entered a decision that the Company's tooth
distribution practices do not violate the antitrust laws. The Department of
Justice appealed this decision to the U.S. Third Circuit Court of Appeals. A
panel of three Judges of 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. The
Company filed a petition with the Third Circuit requesting a rehearing of this
decision by the full Third Circuit Court, which petition was denied. The Company
plans to file a petition with the U.S. Supreme Court asking it to hear an appeal
of the Third Circuit Court decision. 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.
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 the
Court held oral argument in April 2005. 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 for which they
were not paid. The Notice of the class action was sent on February 23, 2005 to
the approximately 29,000 dentists licensed to practice in California during the
relevant period and a total of 166 dentists have opted into the class action. As
the result of a recent decision by a California Appellate Court, the plaintiffs
have filed an appeal to convert the claim to an opt-out claim from its current
status as an opt-in claim. 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 primary level insurance carrier has
confirmed coverage for the breach of warranty claims in this matter.
34
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
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. In September 2005 the Board of
Directors increased the authorization to repurchase shares under the stock
repurchase program in an amount to maintain up to 5,500,000 shares of treasury
stock. During the quarter ended September 30, 2005, the Company had the
following activity with respect to this repurchase program:
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)
July 1-31, 2005 - $ - $ - 899.0
August 1-31, 2005 907.3 48,181 53.10 7.4
September 1-30, 2005 - - - 2,536.5
907.3 $ 48,181 $ 53.10
Item 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to security holders for vote during the quarter
ended September 30, 2005.
Item 6 - Exhibits
(a) Exhibits
31 Section 302 Certification Statements.
32 Section 906 Certification Statement.
35
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENTSPLY INTERNATIONAL INC.
November 3, 2005 /s/ Gerald K. Kunkle, Jr.
Date Gerald K. Kunkle, Jr.
Chairman and
Chief Executive Officer
November 3, 2005 /s/ William R. Jellison
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
36