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 June 30, 1999
-------------
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
570 West College Avenue, P. O. Box 872, York, PA 17405-0872
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 845-7511
----------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
( X ) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At August 5, 1999 the Company
had 52,884,555 shares of Common Stock outstanding, with a par value of $.01 per
share.
Page 1 of 36
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Exhibit Index at Page 22
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DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended June 30, 1999
---------------
INDEX
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Page No.
--------
PART I - FINANCIAL INFORMATION (unaudited)
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets............ 3
Consolidated Condensed Statements of Income...... 4
Consolidated Condensed Statements of Cash Flows.. 5
Consolidated Condensed Statement of
Stockholders' Equity........................... 7
Notes to Unaudited Consolidated Condensed
Financial Statements........................... 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.... 13
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk................................ 18
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................... 19
Item 2 - Changes in Securities and Use of Proceeds... 19
Item 4 - Submission of Matters to a Vote of
Security Holders.................................. 19
Item 6 - Exhibits and Reports on Form 8-K............ 20
Signatures........................................... 21
2
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
June 30, December 31,
1999 1998
ASSETS ------------ ------------
Current assets: (in thousands)
Cash and cash equivalents $ 10,836 $ 8,690
Accounts and notes receivable-trade, net 134,562 134,218
Inventories 137,430 139,235
Prepaid expenses and other current assets 43,535 40,309
--------- ---------
Total Current Assets 326,363 322,452
Property, plant and equipment, net 174,831 158,998
Other noncurrent assets, net 20,151 67,799
Identifiable intangible assets, net 79,382 80,537
Costs in excess of fair value of net
assets acquired, net 280,543 265,536
--------- ---------
Total Assets $ 881,270 $ 895,322
LIABILITIES AND STOCKHOLDERS' EQUITY ========= =========
Current liabilities:
Accounts payable $ 35,701 $ 42,654
Accrued liabilities 83,780 99,427
Income taxes payable 42,353 36,025
Notes payable and current portion
of long-term debt 35,132 16,270
--------- ---------
Total Current Liabilities 196,966 194,376
Long-term debt 186,060 217,491
Deferred income taxes 15,447 18,803
Other liabilities 46,846 48,113
--------- ---------
Total Liabilities 445,319 478,783
--------- ---------
Minority interests in consolidated subsidiaries 2,780 2,738
Stockholders= equity: --------- ---------
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued
Common stock, $.01 par value; 100 million
shares authorized; 54.3 million
shares issued at June 30, 1999 and 54.3
million shares issued at December 31, 1998 543 543
Capital in excess of par value 151,752 152,871
Retained earnings 359,533 324,745
Accumulated other comprehensive income (38,061) (14,730)
Employee stock ownership plan reserve (7,218) (7,977)
Treasury stock, at cost, 1.4 million shares
at June 30, 1999 and 1.7 million shares
at December 31, 1998 (33,378) (41,651)
--------- ---------
Total Stockholders' Equity 433,171 413,801
--------- ---------
Total Liabilities and Stockholders' Equity $ 881,270 $ 895,322
========= =========
See accompanying notes to unaudited consolidated condensed financial statements.
3
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except per share data)
Net sales $209,125 $197,126 $405,713 $377,832
Cost of products sold 99,709 93,275 194,669 178,644
-------- -------- -------- --------
Gross profit 109,416 103,851 211,044 199,188
Selling, general and
administrative expenses 73,020 68,530 140,340 132,315
Restructuring and other
costs - 29,000 - 29,000
-------- -------- -------- --------
Operating income 36,396 6,321 70,704 37,873
Interest expense 4,295 3,797 8,867 6,763
Interest income (376) (441) (498) (659)
Other (income) expense, net (355) 908 (909) (564)
-------- -------- -------- --------
Income before income taxes 32,832 2,057 63,244 32,333
Provision for income taxes 11,642 1,473 22,526 12,752
-------- -------- -------- --------
Net income $ 21,190 $ 584 $ 40,718 $ 19,581
======== ======== ======== ========
Earnings per common share:
Basic $.40 $.01 $.77 $.36
Diluted $.40 $.01 $.77 $.36
Cash dividends declared
per common share .05625 .05125 .1125 .1025
Weighted average common shares outstanding:
Basic 52,758 53,942 52,663 54,032
Diluted 52,947 54,278 52,854 54,393
See accompanying notes to unaudited consolidated condensed financial statements.
4
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
-------------------
1999 1998
-------- --------
Cash flows from operating activities: (in thousands)
Net income $ 40,718 $ 19,582
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 9,883 8,990
Amortization 8,474 9,340
Non-cash restructuring and other costs --- 29,000
Other, net (18,156) (45,609)
-------- --------
Net cash provided by operating activities 40,919 21,303
-------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired 3,446 (49,828)
Additional consideration for prior purchased
business (5,000) ---
Property, plant and equipment additions (13,989) (15,371)
Other, net 19 (498)
-------- --------
Net cash used in investing activities (15,524) (65,697)
-------- --------
Cash flows from financing activities:
Debt repayment (45,058) (42,477)
Proceeds from long-term debt 11,894 101,496
Increase in bank overdrafts and
other short-term borrowings 15,450 15,228
Cash paid for treasury stock --- (31,210)
Cash dividends paid (5,912) (5,549)
Other, net 4,561 4,755
-------- --------
Net cash (used in) provided by financing activities (19,065) 42,243
-------- --------
Effect of exchange rate changes on cash
and cash equivalents (4,184) (925)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,146 (3,076)
Cash and cash equivalents at beginning of period 8,690 9,848
-------- --------
Cash and cash equivalents at end of period $ 10,836 $ 6,772
======== ========
See accompanying notes to unaudited consolidated condensed financial statements.
5
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
(unaudited)
Six Months Ended
June 30,
-------------------
1999 1998
-------- --------
Supplemental disclosures of cash flow information:
Interest paid $ 7,270 $ 4,932
Income taxes paid 16,532 24,096
Non-cash transactions:
Liabilities assumed from acquisitions - 23,347
Issuance of treasury stock in connection with
the acquisition of certain assets 3,353 -
Supplemental disclosures of non-cash transactions (in thousands):
In January 1998, the Company purchased the assets of Blendax Professional Dental
Business ("Blendax"). In March 1998, the Company purchased the assets of
InfoSoft, Inc. ("InfoSoft"). In April and May of 1998, the Company purchased a
67% majority interest in GAC ("GAC"). In May 1998, the Company purchased the
capital stock of Crescent Dental Manufacturing ("Crescent") and also the capital
stock of Herpo Productos Dentarios Ltda. ("Herpo"). In conjunction with the
acquisitions, liabilities were assumed as follows:
Blendax InfoSoft GAC Crescent Herpo
-------- -------- -------- -------- --------
Estimated fair value
of assets acquired $ 6,711 $ 10,530 $ 36,475 $ 5,868 $ 13,842
Cash paid for assets
or capital stock (6,112) (8,618) (22,740) (5,214) (7,395)
-------- -------- -------- -------- --------
Liabilities assumed $ 599 $ 1,912 $ 13,735 $ 654 $ 6,447
======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated condensed financial statements.
6
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Accumulated
Capital in Other Total
Common Excess of Retained Comprehensive Treasury Stockholders'
Stock Par Value Earnings Income ESOP Reserve Stock Equity
(in thousands) ------ ----------- -------- ------------- ------------ --------- ------------
Balance at December 31, 1998 $ 543 $152,871 $324,745 $(14,730) $ (7,977) $(41,651) $413,801
Comprehensive Income:
Net income 40,718 40,718
Other comprehensive income
Foreign currency translation
adjustments (23,331) (23,331)
--------
Comprehensive Income 17,387
Exercise of stock options and
warrants (1,365) 4,651 3,286
Tax benefit related to stock
options and warrants exercised 515 515
Reissuance of treasury stock (269) 3,622 3,353
Net change in ESOP reserve 759 759
Cash dividends declared, $.1125
per share (5,930) (5,930)
------ -------- -------- -------- -------- -------- --------
Balance at June 30, 1999 $ 543 $151,752 $359,533 $(38,061) $ (7,218) $(33,378) $433,171
====== ======== ======== ======== ======== ======== ========
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
7
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------
JUNE 30, 1999
-------------
The accompanying interim consolidated condensed financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which
in the opinion of management are necessary for a fair presentation of financial
position, results of operations and cash flows for the interim periods. These
interim financial statements conform with the requirements for interim financial
statements and consequently do not include all the disclosures normally required
by generally accepted accounting principles.
Disclosures are updated where appropriate.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated condensed financial statements include the accounts of
DENTSPLY International Inc. (the "Company") and its subsidiaries. Minority
interests in net income of consolidated subsidiaries are not material and are
included in other (income) expense, net.
Inventories
- -----------
Inventories are stated at the lower of cost or market. At June 30, 1999 and
December 31, 1998, the cost of $14.0 million or 10% and $15.3 million or 11%,
respectively, of inventories was determined by the last-in, first-out (LIFO)
method. The cost of other inventories was determined by the first-in, first-out
(FIFO) or average cost method.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Except for leasehold improvements, depreciation for financial
reporting purposes is computed by the straight-line method over the following
estimated useful lives: buildings - generally 40 years; and machinery and
equipment - 4 to 15 years. The cost of leasehold improvements is amortized over
the shorter of the estimated useful life or the term of the lease. For income
tax purposes, depreciation is computed using various methods.
Derivatives
- -----------
The Company's only involvement with derivative financial instruments is
forward contracts to hedge certain assets and liabilities denominated in foreign
currencies and swap agreements which convert current floating interest debt to
fixed rates.
8
NOTE 2 - EARNINGS PER COMMON SHARE
- ----------------------------------
The following table sets forth the computation of basic and diluted
earnings per common share:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Basic EPS Computation: ------- ------- ------- -------
Numerator(Income) $21,190 $ 584 $40,718 $19,581
------- ------- ------- -------
Denominator:
Common shares outstanding 52,758 53,942 52,663 54,032
------- ------- ------- -------
Basic EPS $ 0.40 $ 0.01 $ 0.77 $ 0.36
======= ======= ======= =======
Diluted EPS Computation:
Numerator(Income) $21,190 $ 584 $40,718 $19,581
------- ------- ------- -------
Denominator:
Common shares outstanding 52,758 53,942 52,663 54,032
Incremental shares from assumed
exercise of dilutive options
and warrants 189 336 191 361
------- ------- ------- -------
Total shares 52,947 54,278 52,854 54,393
------- ------- ------- -------
Diluted EPS $ 0.40 $ 0.01 $ 0.77 $ 0.36
======= ======= ======= =======
NOTE 3 - INVENTORIES
- --------------------
Inventories consist of the following:
June 30, December 31,
1999 1998
------------ ------------
(in thousands)
Finished goods $ 80,628 $ 75,637
Work-in-process 26,677 27,632
Raw materials and supplies 30,125 35,966
-------- --------
$137,430 $139,235
======== ========
Pre-tax income was $.3 million lower in the six months ended June 30, 1999
and $.3 million lower for the same period in 1998 as a result of using the LIFO
method compared to the first-in, first-out (FIFO) method. If the FIFO method had
been used to determine the cost of the LIFO inventories, the amounts at which
net inventories are stated would be lower than reported at June 30, 1999 and
December 31, 1998 by $.7 million and $1.0 million, respectively.
9
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment consist of the following:
June 30, December 31,
1999 1998
------------ ------------
Assets, at cost: (in thousands)
Land $ 16,379 $ 12,315
Buildings and improvements 82,759 74,966
Machinery and equipment 145,537 138,644
Construction in progress 16,456 13,262
-------- --------
261,131 239,187
Less: Accumulated depreciation 86,300 80,189
-------- --------
$174,831 $158,998
======== ========
NOTE 5 - NOTES PAYABLE AND CURRENT PORTION OF LONG-TERM DEBT
- ------------------------------------------------------------
The increase from December 31, 1998 in notes payable and current portion of
long-term debt ($18.9 million) was primarily due to the maturing of long-term
debt.
NOTE 6 - RESTRUCTURING AND OTHER COSTS
- --------------------------------------
In the second quarter of 1998, the Company recorded a pre-tax charge of
$29.0 million for restructuring and other costs. This charge included costs of
$26.0 million to rationalize and restructure the Company's worldwide laboratory
business, primarily for the closure of the Company's German tooth manufacturing
facility. The remaining $3.0 million of the charge was recorded to cover
termination costs associated with its former implant products business. Included
in the $26.0 million restructuring charge are costs to cover severance, the
write-down of property, plant and equipment, and tooth product rationalization.
The principal actions involve the closure of the Company's Dreieich, Germany
tooth facility and rationalization of certain tooth products in Europe, North
America and Australia. The Company anticipates the restructuring will reduce
production costs and increase operational efficiencies, contributing to future
earnings. The restructuring results in the elimination of approximately 275
administrative and manufacturing positions, mostly in Germany. The closure of
the German tooth facility was completed in the first quarter of 1999 with
benefits of the restructuring expected to begin late in 1999 or early 2000.
10
The major components of the charge and remaining accruals follow:
Non-Cash Cash
Amounts Amounts Balance
Provision Applied Applied June 30, 1999
--------- -------- ------- -------------
(in thousands)
Severance $13,400 $ 700 $11,200 $ 1,500
Write-down of property,
plant and equipment 6,000 6,000 - -
Implant termination costs 3,000 2,800 200 -
Other 6,600 - 2,900 3,700
------- ------- ------- -------
$29,000 $ 9,500 $14,300 $ 5,200
======= ======= ======= =======
In the fourth quarter of 1998, the Company recorded a pre-tax charge of
$42.5 million for restructuring the New Image business. This charge includes the
write-off of intangibles, including goodwill associated with the business,
write-off of discontinued products, write-down of fixed assets and other assets,
and severance and other costs associated with the discontinuance of the New
Image division in Carlsbad, California. As part of the restructuring, certain
intraoral camera products will be sold and supported by the Gendex Dental X-ray
division in Des Plaines, Illinois. The restructuring includes the elimination of
approximately 115 administrative and manufacturing positions in California. The
restructuring was substantially completed at June 30, 1999. The facility in
California was closed at the end of the first quarter of 1999.
The major components of the charge and remaining accruals follow:
Non-Cash Cash
Amounts Amounts Balance
Provision Applied Applied June 30, 1999
--------- -------- ------- -------------
(in thousands)
Write-off of intangibles
including goodwill $33,200 $33,200 $ - $ -
Discontinued products 3,800 3,800 - -
Write-down of fixed assets 1,500 1,500 - -
Severance 1,000 - 1,000 -
Write-down of other assets 700 700 - -
Other costs 2,300 - 400 1,900
------- ------- ------- -------
$42,500 $39,200 $ 1,400 $ 1,900
======= ======= ======= =======
NOTE 7 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
DENTSPLY and its subsidiaries are from time to time parties to lawsuits arising
out of their respective operations. The Company believes that pending litigation
to which DENTSPLY is a party will not have a material adverse effect upon its
consolidated financial position or results of operations.
11
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. A follow on private class action suit on behalf of dentists who
purchased Trubyte teeth was filed January 12, 1999 in the Supreme Court of the
State of New York for New York County which was transferred to and is now
pending in the U.S. District Court in Wilmington, Delaware. A second follow on
private class action suit on behalf of laboratories who purchased Trubyte teeth
was filed April 21, 1999 in the U.S. District Court in Wilmington, Delaware.
This case has been assigned to the same judge who is handling the Department of
Justice action. It is the Company's position that the conduct and activities of
the Trubyte Division do not violate the antitrust laws.
12
DENTSPLY INTERNATIONAL INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made by the Company that are forward-looking, 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 set forth in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
RESULTS OF OPERATIONS
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
For the quarter ended June 30, 1999, net sales increased $12.0 million, or 6.1%,
to $209.1 million, up from $197.1 million in the same period of 1998.
Acquisitions net of divestitures contributed 2.7% growth to the quarter. Base
sales were up 4.8% with a base sales increase of 6.8% in the United States. The
sales increase was offset by a base business decline of 2.5% in Europe
including: lower U.K. sales due to distributor consolidations; a significant
drop in sales to the Commonwealth of Independent States (C.I.S.) due to
depressed economic conditions in that region; and continuous softness in the
German market. Base business sales increased 15.7% in the Pacific Rim and Latin
America as the Asian economies began to recover and the Company experienced some
pent up demand for endodontic and orthodontic products in Latin America. Base
business sales growth in other territories was up 4.1%. Exchange rates
negatively impacted sales by nearly 1.4% in the quarter due to the strong U.S.
dollar.
Gross profit increased $5.5 million, or 5.3%, to $109.4 million from $103.9
million in the second quarter of 1998, but decreased as a percentage of sales
from 52.7% in the second quarter of 1998 to 52.3% in the same period of 1999.
Costs associated with moving the remaining manufacturing operations for New
Image and Germany's tooth manufacturing facility negatively impacted performance
in the first quarter in addition to purchase price accounting adjustments
related to the acquisition of VDW and lower margins associated with GAC, the
Company's orthodontics distribution business acquired in the second quarter of
1998.
Selling, general and administrative expenses increased $4.5 million, or 6.6%. As
a percentage of sales, expenses remained flat at 34.9% for the second quarter of
1999 compared to 34.8% for the same period of 1998.
Restructuring and other costs of $29 million were recorded in the second quarter
of 1998. The Company's German tooth manufacturing facility has been closed and
production has been transferred to company facilities in Brazil and Pennsylvania
during the first half of 1999.
Net interest expense increased $0.6 million in the second quarter of 1999 due to
increased interest expenses on debt incurred to finance acquisitions and the
stock repurchase program in 1998.
Other income increased $1.3 million in the second quarter of 1999 due primarily
to favorable currency fluctuations as the U.S. dollar strengthened against the
major European currencies.
13
Income before income taxes increased $30.8 million including $29.0 million of
restructuring and other costs recorded in the second quarter of 1998. Without
these costs, income before income taxes increased $1.8 million, or 5.8%. The
effective tax rate for operations was lowered to 35.7% in the second quarter of
1999 compared to 37.3% in the second quarter of 1998 reflecting savings from
federal, state and foreign tax planning activities. Net income increased $20.6
million including the after tax impact of $18.9 million for the restructuring
and other costs recorded in the second quarter of 1998. Without these costs, net
income increased $1.8 million, or 9.3%, from the second quarter of 1998 due to
higher sales, currency exchange gains, and a lower provision for income tax
offset somewhat by a lower gross profit margin. Reported basic and diluted
earnings per common share were $.40 in 1999 compared to $.01 in the second
quarter of 1998 including $.35 for restructuring and other costs in 1998.
Without these costs, basic and diluted earnings per common share increased from
$.36 in 1998 to $.40 in 1999, or 11.1%.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
For the six months ended June 30, 1999, net sales increased $27.9 million, or
7.4%, to $405.7 million, up from $377.8 million in the same period of 1998. The
increase resulted from strong sales growth in the United States and Latin
America both from base business and from acquisitions, net of divestitures.
European sales increased slightly due to acquisitions offset to a large extent
by the impact of dealer consolidations in the U.K. and a soft market in Germany.
Sales in the Pacific Rim were adversely impacted by inventory returns from
dealers in India during the first quarter. Sales in the rest of the world
increased from strong base sales and from acquisitions. Exchange rate
fluctuations reduced net sales by 0.8% during the first half of 1999.
Gross profit increased $11.9 million, or 5.9%, to $211.0 million from $199.2
million in the first six months of 1998. As a percentage of sales, gross profit
decreased from 52.7% in the first six months of 1998 to 52.0% in the same period
of 1999. Costs associated with moving the remaining manufacturing operations for
New Image and Germany's tooth manufacturing facility negatively impacted
performance in the first half in addition to purchase price accounting
adjustments related to the acquisition of VDW and lower margins associated with
GAC, the Company's orthodontics distribution business acquired in the second
quarter of 1998.
Selling, general and administrative expense increased $8.0 million, or 6.1%. As
a percentage of sales, expenses decreased from 35.0% in the first six months of
1998 to 34.6% for the same period of 1999. This percentage decrease included a
credit of $1.1 million in Germany resulting from the curtailment of the Dreieich
pension plan and a reduction in general insurance costs.
Restructuring and other costs of $29 million were recorded in the second quarter
of 1998.
Net interest expense increased $2.3 million during the first six months of 1999
due to increased interest expense on debt incurred to finance acquisitions and
the stock repurchase program in 1998.
Other income increased $0.3 million in the first six months of 1999 due
primarily to favorable currency fluctuations in Europe.
Income before income taxes increased $30.9 million primarily due to the $29.0
million of restructuring and other costs recorded in the second
14
quarter of 1998. Without these costs, income before income taxes increased $1.9
million, or 3.1%. The effective tax rate for operations was lowered to 35.7% in
the first six months of 1999 compared to 37.3% in the first six months of 1998
reflecting the benefits of tax planning activities. Net income increased $21.1
million including the after tax impact of $18.9 million for restructuring and
other costs. Without these costs, net income increased $2.3 million, or 6.0% in
the first six months of 1999 compared to 1998 due to higher sales, lower
expenses as a percentage of sales and a lower provision for income taxes offset
somewhat by a lower gross profit percentage in the first six months of 1999.
Reported basic and diluted earnings per common share were $.77 in 1999 compared
to $.36 per share in the first six months of 1998. Earnings per share for the
first six months of 1998 included $.35 for restructuring and other costs.
Without these costs, basic and diluted earnings per common share increased from
$.71 in 1998 to $.77 in 1999 or 8.5%.
LIQUIDITY AND CAPITAL RESOURCES
Investing activities for the six months ended June 30, 1999 include capital
expenditures of $14.0 million.
The Company's current ratio was 1.7 with working capital of $129.4 million at
June 30, 1999. This compares with a current ratio of 1.7 and working capital of
$128.1 million at December 31, 1998.
The Company expects to be able to finance cash requirements, including capital
expenditures, stock repurchases, debt service, and possible future acquisitions,
from the funds generated from operations and amounts available under the
existing Bank Revolving Loan Facility. The Company also expects to have
available a $200 million Commercial Paper Facility by the end of the third
quarter. This facility will initially be used to pay down existing bank debt and
will help minimize the Company's overall cost of capital.
For the six months ended June 30, 1999, cash flows from operating activities
were $40.9 million or approximately $53 million excluding the negative cash flow
from the restructurings compared to $21.3 million for the six months ended June
30, 1998. Cash flows from operating activities for 1999 included $11.7 million
of negative cash flow associated with the two restructurings recorded in 1998.
The increase of $19.6 million results primarily from decreases in inventory
offset by decreases in accrued liabilities.
NEW STANDARDS
Statement of Financial Accounting Standards No. 133 ("FASB 133"), "Accounting
for Derivative Instruments and Hedging Activities," was issued by the Financial
Accounting Standards Board (FASB) in June 1998. This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires recognition of all derivatives as either assets or liabilities on
the balance sheet and measurement of those instruments at fair value. If certain
conditions are met, a derivative may be designated specifically as (a) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment referred to as a fair value hedge, (b) a
hedge of the exposure to variability in cash flows of a forecasted transaction
(a cash flow hedge), or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a forecasted transaction.
15
This statement was originally required to be adopted effective January 1, 2000;
however, in June 1999 FASB issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", which delays the effective date to January 1, 2001. The
Company has not yet determined the effect of adopting FASB 133.
YEAR 2000
The following discussion contains Year 2000 Readiness Disclosures under the Year
2000 Information and Readiness Disclosures Act.
An issue affecting DENTSPLY and all other companies is whether computer systems
and applications will recognize and process data for the Year 2000 and beyond.
The Year 2000 issue arose because many existing computer programs use only the
last two digits to refer to a year. These computer programs do not recognize a
year that begins with "20" instead of "19". The inability of many computer
applications to interpret the Year 2000 correctly may cause potential business
disruptions affecting all aspects of normal operations. The Year 2000 issue has
global ramifications affecting not only the Company's operations but also the
operations of the Company's suppliers, vendors and customers.
In 1995, the Company commenced an upgrade of its information technology ("IT")
systems for all of its locations. A primary software was chosen to upgrade the
Company's computerized business application systems to world class standards and
also enable the Company to become Year 2000 compliant. The upgrade included
necessary hardware and software improvements, training, data conversion, systems
testing and implementation.
The identification, planning, and development phases of the Year 2000 project
have been completed. The Company is in the process of implementing the
information system upgrades. Work has been substantially completed on the
Company's worldwide systems. To date, the Company has spent approximately $17.3
million for the IT project. An additional $1.4 million of spending is
anticipated for the remainder of the information system's upgrade. These costs
encompass the total upgrade of the Company's manufacturing, distribution and
financial reporting systems. The Company has not deferred other IT projects due
to its Year 2000 initiative, but rather, the Year 2000 initiative has been part
of the upgrade of its current IT system. Possible Year 2000 issues that are not
covered by the IT upgrade are being addressed separately and may require
software replacement, reprogramming or other remedial action. The Company has
been engaged in a program and an audit review process to identify affected
systems and applications and to develop a plan to correct any issues in the most
effective manner. Based on this audit review, the Company does not expect to see
any significant changes in these systems and applications. The Company is in the
process of formulating contingency plans to the extent necessary in fiscal 1999.
The Year 2000 initiative presents a number of uncertainties including the status
and planning of third parties. The Company has surveyed its significant
customers and vendors as to their Year 2000 compliance. Based on the nature of
their responses, the Company is developing contingency plans as appropriate.
However, the Company has no means of assuring that external customers and
vendors will be Year 2000 compliant. The inability of third parties to complete
their Year 2000 resolution process in a timely fashion could materially impact
the Company.
16
The Company's Year 2000 remediation efforts along with the information system
upgrade are funded from the Company's operating cash flows and its borrowing
facilities. The following table contains historical and estimated future costs
of the total IT system upgrade, which includes the Year 2000 initiative.
Infrastructure and daily IT-related operating expenses have been excluded from
the reported costs.
Project Costs Anticipated
To Date Future Costs
------------- ------------
(in thousands)
Capital Expenditures $ 9,090 $ 748
Expenses 8,166 603
-------- --------
Total $ 17,256 $ 1,351
======== ========
EURO CURRENCY CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
(the "participating countries") established fixed conversion rates between their
legacy currencies and the newly established Euro currency.
The legacy currencies will remain legal tender in the participating countries
between January 1, 1999 and January 1, 2002 (the "transition period"). Starting
January 1, 2002 the European Central Bank will issue Euro-denominated bills and
coins for use in cash transactions. On or before July 1, 2002, the legacy
currencies of participating countries will no longer
be legal tender for any transactions.
The Company's various operating units which are affected by the Euro conversion
intend to keep their books in their respective legacy currency through a portion
of the three year transition period. At this time, the Company does not expect
the reasonable foreseeable consequences of the Euro conversion to have material
adverse effects on the Company's business, operations or financial condition.
IMPACT OF INFLATION
The Company has generally offset the impact of inflation on wages and the cost
of purchased materials by reducing operating costs and increasing selling prices
to the extent permitted by market conditions.
17
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, 1998.
18
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 that pending
litigation to which DENTSPLY is a party will not 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. A follow on private class action suit on behalf of dentists who
purchased Trubyte teeth was filed January 12, 1999 in the Supreme Court of the
State of New York for New York County which was transferred to and is now
pending in the U.S. District Court in Wilmington, Delaware. A second follow on
private class action suit on behalf of laboratories who purchased Trubyte teeth
was filed April 21, 1999 in the U.S. District Court in Wilmington, Delaware.
This case has been assigned to the same judge who is handling the Department of
Justice action. It is the Company's position that the conduct and activities of
the Trubyte Division do not violate the antitrust laws.
Item 2 - Changes in Securities and Use of Proceeds
On April 5, 1999, the Company issued an aggregate of 145,000 shares of
Common Stock to High Tech Medical Instrumentation, Inc. ("HTMI") in connection
with the acquisition of certain assets from HTMI. The issuance and sale of the
shares was intended to be exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, based on, among other things, the nature of
the purchaser, the fact that the purchaser and each of its shareholders
represented and warranted to the Company, among other things, that such
purchaser and, in the event that any shareholder received shares from the
purchaser, each shareholder was acquiring the shares for investment only and not
with a view to the resale or distribution thereof, and the fact that
certificates representing the shares were issued with legend to the effect that
such shares had not been registered under the Securities Act or any state
securities laws and could not be sold or transferred in the absence of such
registration or an exemption therefrom. The shares issued to HTMI were
subsequently registered on a shelf registration statement on Form S-3 filed with
the Securities and Exchange Commission on April 12, 1999.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) On May 19, 1999, the Company held its 1999 Annual Meeting of
Stockholders.
(b) Not applicable.
19
(c) The following matters were voted upon at the Annual Meeting, with the
results indicated:
1. Election of Class I Directors:
Votes Broker
Nominee Votes For Withheld Non-Votes
------- ---------- -------- ---------
Burton C. Borgelt 38,938,049 437,946 N/A
Douglas K. Chapman 38,811,370 564,624 N/A
C. Frederick Fetterolf 38,755,809 620,371 N/A
2. Proposal to ratify the appointment of KPMG LLP, independent
certified accountants, to audit the books and accounts of the
Company for the year ending December 31,1999:
Votes For: 39,176,543 Votes Against: 143,081
Abstentions: 56,371 Broker Non-Votes: N/A
(d) Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed herewith:
---------
Number Description
------ -----------
3.2 By laws, as amended
27 Financial Data Schedule (pursuant to Item 601(c)(1)(iv) of
Regulation S-K, this exhibit shall not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of 1934,
as amended)
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the period ended
June 30, 1999.
20
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.
August 16, 1999 /s/ John C. Miles II
- ----------------- ----------------------------------
Date John C. Miles II
Chairman and
Chief Executive Officer
August 16, 1999 /s/ William R. Jellison
- ----------------- ----------------------------------
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
21
EXHIBIT INDEX
-------------
Number Description Sequential Page No.
------ ----------- -------------------
3.2 By laws, as amended 23
27 Financial Data Schedule 36
(pursuant to Item 601(c)(1)(iv) of Regulation S-K, this
exhibit shall not be deemed filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended)
22