SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-16211
DENTSPLY International Inc.
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(Exact name of registrant as specified in its charter)
Delaware 39-1434669
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
570 West College Avenue, P. O. Box 872, York, PA 17405-0872
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(Address of principal executive offices) (Zip Code)
(717) 845-7511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
( X ) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At May 5, 2002 the Company
had 78,159,451 shares of Common Stock outstanding, with a par value of $.01
per share.
Page 1 of 18
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended March 31, 2002
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Statements of Income 3
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Unaudited Interim Consolidated Condensed
Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended March 31,
2002 2001
(in thousands, except per share amounts)
Net sales $ 351,218 $ 245,669
Cost of products sold 180,872 115,855
Gross profit 170,346 129,814
Selling, general and administrative expenses 114,716 89,393
Restructuring and other costs (income) (Note 6) (1,957) 5,500
Operating income 57,587 34,921
Other income and expenses:
Interest expense 7,728 3,581
Interest income (253) (244)
Other (income) expense, net (104) (22,832)
Income before income taxes 50,216 54,416
Provision for income taxes 17,120 20,090
Net income $ 33,096 $ 34,326
Earnings per common share (Note 3):
Basic $ 0.42 $ 0.44
Diluted 0.42 0.44
Cash dividends declared per common share $ 0.04583 $ 0.04583
Weighted average common shares outstanding:
Basic 77,947 77,463
Diluted 79,621 78,491
See accompanying notes to unaudited interim consolidated condensed financial statements.
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
March 31, December 31,
2002 2001
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 19,837 $ 33,710
Accounts and notes receivable-trade, net 205,958 191,534
Inventories, net (Notes 1 and 5) 204,173 197,454
Prepaid expenses and other current assets 60,113 61,545
Total Current Assets 490,081 484,243
Property, plant and equipment, net 266,332 240,890
Identifiable intangible assets, net 220,169 248,890
Goodwill, net 776,221 763,270
Other noncurrent assets 63,502 60,858
Total Assets $ 1,816,305 $ 1,798,151
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 62,593 $ 69,904
Accrued liabilities 163,863 194,357
Income taxes payable 96,432 86,622
Notes payable and current portion
of long-term debt 10,664 7,634
Total Current Liabilities 333,552 358,517
Long-term debt 726,129 723,524
Deferred income taxes 33,172 32,526
Other noncurrent liabilities 83,740 73,628
Total Liabilities 1,176,593 1,188,195
Minority interests in consolidated subsidiaries 463 437
Commitments and contingencies (Note 8)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued -- --
Common stock, $.01 par value; 100 million shares authorized;
81.4 million shares issued at March 31, 2002 and December 31, 2001 814 814
Capital in excess of par value 153,686 152,916
Retained earnings 626,920 597,414
Accumulated other comprehensive loss (81,355) (77,388)
Unearned ESOP compensation (3,039) (3,419)
Treasury stock, at cost, 3.3 million shares at March 31, 2002
and 3.5 million shares at December 31, 2001 (57,777) (60,818)
Total Stockholders' Equity 639,249 609,519
Total Liabilities and Stockholders' Equity $ 1,816,305 $ 1,798,151
See accompanying notes to unaudited interim consolidated condensed financial statements.
4
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31,
---------------------------------
2002 2001
(in thousands)
Cash flows from operating activities:
Net income $ 33,096 $ 34,326
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 8,051 6,410
Amortization 2,321 6,285
Restructuring and other costs (1,957) 5,500
Gain on sale of business -- (23,121)
Other, net (29,112) 17,858
Net cash provided by operating activities 12,399 47,258
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (37,558) (201,164)
Proceeds from bulk sale of precious metals inventory 6,754 --
Capital expenditures (9,815) (8,284)
Other, net 347 (1,692)
Net cash used in investing activities (40,272) (211,140)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of
deferred financing costs 92,246 197,115
Payments on long-term borrowings (79,570) (33,707)
Increase (decrease) in short-term borrowings 3,093 (3,737)
Cash paid for treasury stock -- (875)
Cash dividends paid (3,569) (3,548)
Other, net 2,977 2,247
Net cash provided by financing activities 15,177 157,495
Effect of exchange rate changes on cash and cash equivalents (1,177) 6,292
Net decrease in cash and cash equivalents (13,873) (95)
Cash and cash equivalents at beginning of period 33,710 15,433
Cash and cash equivalents at end of period $ 19,837 $ 15,338
See accompanying notes to unaudited interim consolidated condensed financial statements.
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2002
The accompanying unaudited interim consolidated condensed financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which in the opinion of management are necessary for a fair
statement of financial position, results of operations and cash flows for
the interim periods. These interim financial statements conform to the
requirements for interim financial statements and consequently do not
include all the disclosures normally required by generally accepted
accounting principles. Disclosures included in the Company's most recent
Form 10-K filed March 29, 2002 are updated where appropriate.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. Intercompany accounts and transactions
are eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market. At March 31,
2002, the cost of $17.4 million or 9% of inventories was determined by the
last-in, first-out (LIFO) method. At December 31, 2001, the cost of $23.6
million or 12% of inventories was determined by the last-in, first-out
(LIFO) method. The cost of other inventories was determined by the first-in,
first-out (FIFO) or average cost method.
If the FIFO method had been used to determine the cost of the LIFO
inventories, the amounts at which net inventories are stated would be higher
than reported at March 31, 2002 by $0.4 million and by $2.3 million at
December 31, 2001.
Derivative Financial Instruments
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies, interest rate swaps to convert floating
rate debt to fixed rate or fixed rate debt to floating rate, cross currency
basis swaps to convert debt denominated in one currency to another currency
and commodity swaps to fix its variable raw materials.
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities"
on January 1, 2001. This standard, as amended by SFAS 138, requires that all
derivative instruments be recorded on the balance sheet at their fair value
and that changes in fair value be recorded each period in current earnings
or comprehensive income.
Stock Split
All share and per share data in the accompanying financial statements and
notes to the financial statements reflect the three-for-two stock split
effective January 31, 2002.
6
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three Months Ended
March 31,
2002 2001
(in thousands)
Net income $ 33,096 $ 34,326
Other comprehensive income:
Foreign currency translation adjustments (4,939) (14,880)
Cumulative effect of change in accounting
principle for derivative and hedging
activities (SFAS 133) -- (503)
Net gain (loss) on derivative financial
instruments 972 (1,471)
Total comprehensive income $ 29,129 $ 17,472
The balances included in accumulated other comprehensive loss in the
consolidated balance sheets are as follows:
March 31, December 31,
2002 2001
(in thousands)
Foreign currency translation adjustments $(80,130) $(75,191)
Net loss on derivative financial
instruments (341) (1,313)
Minimum pension liability (884) (884)
$(81,355) $(77,388)
7
NOTE 3 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
Three Months Ended
March 31,
2002 2001
(in thousands, except per share amounts)
Basic EPS Computation
Numerator (Income) $33,096 $34,326
Denominator:
Common shares outstanding 77,947 77,463
Basic EPS $ 0.42 $ 0.44
Diluted EPS Computation
Numerator (Income) $33,096 $34,326
Denominator:
Common shares outstanding 77,947 77,463
Incremental shares from assumed exercise
of dilutive options 1,674 1,028
Total shares 79,621 78,491
Diluted EPS $ 0.42 $ 0.44
Options to purchase 1.2 million shares of common stock that were
outstanding during the quarter ended March 31, 2001 were not included in the
computation of diluted earnings per share since the options' exercise prices
were greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
NOTE 4 - BUSINESS ACQUISITIONS/DIVESTITURES
In January 2002, the Company acquired the partial denture business of
Austenal Inc. ("Austenal"), in a cash transaction valued at approximately
$23.8 million, including debt assumed. Headquartered in Chicago, Illinois,
Austenal manufactures dental laboratory products and is the world leader in
the manufacture and sale of systems used by dental laboratories to fabricate
partial dentures.
In October 2001, the Company completed the acquisition of Degussa Dental
Group ("Degussa Dental"), a unit of Degussa AG, pursuant to the May 2001
Sale and Purchase Agreement. The preliminary purchase price for Degussa
Dental was 548 million Euros or $503 million, which was paid at closing. The
preliminary purchase price is subject to increase or decrease, based on
certain working capital levels of Degussa Dental as of October 1, 2001.
Based on current information, the Company expects to pay an additional
$10-20 million for this closing balance sheet adjustment. In accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", the goodwill associated with this acquisition was not
amortized. Degussa Dental manufactures and sells dental products, including
precious metal alloys, ceramics and dental laboratory equipment, and
chairside products. Headquartered in Hanau-Wolfgang, Germany since 1992,
Degussa Dental Group has production facilities throughout the world.
8
In January 2001, the Company agreed to acquire the dental injectible
anesthetic assets of AstraZeneca ("AZ Assets"), including permanent,
exclusive and royalty-free licensing rights to the dental products and
tradenames, for $136.5 million and royalties on future sales of a new
anesthetic product for scaling and root planing, Oraqix(TM) ("Oraqix"), that
was in Stage III clinical trials at the time of the agreement. The $136.5
million purchase price was composed of the following: an initial $96.5
million payment which was made at closing in March 2001; a $20 million
contingency payment associated with the first year sales of injectible
dental anesthetic which was paid during the first quarter of 2002; a $10
million payment upon submission of an Oraqix New Drug Application ("NDA")
in the U.S., and Marketing Authorization Application ("MAA") in Europe for
the Oraqix product under development; and a $10 million payment upon
approval of the NDA and MAA. Because the Oraqix product has not received
regulatory approvals for its use, payments made with respect to this product
prior to approval are considered to be research and development costs and
are expensed as incurred. After an analysis of the available clinical data,
the Company concluded that the Oraqix product does not provide pain relief
equivalent to that provided by injectible anesthetic. As a result, the
Company renegotiated the contract to require a $2.0 million payment upon
submission of the NDA and MAA, an $8.0 million payment and a $10.0 million
prepaid royalty upon approval of both applications. Under the terms of the
renegotiated agreement, the $2.0 million payment was accrued during the
fourth quarter of 2001 and was paid during the first quarter of 2002.
In January 2001, the Company acquired the outstanding shares of Friadent
GmbH ("Friadent") for 220 million German marks or $106 million ($105
million, net of cash acquired). During the first quarter of 2002, the
Company received a closing balance sheet adjustment of 16.5 million German
marks or approximately $7.3 million. Headquartered in Mannheim, Germany,
Friadent is a major global dental implant manufacturer and marketer with
subsidiaries in Germany, France, Denmark, Sweden, the United States,
Switzerland, Brazil, and Belgium.
The acquisitions above were accounted for under the purchase method of
accounting; accordingly, the results of their operations are included in the
accompanying financial statements since the respective dates of the
acquisitions. The purchase prices plus direct acquisition costs have been
allocated on the basis of estimated fair values at the dates of acquisition,
pending final determination of the fair value of certain acquired assets and
liabilities. The current purchase price allocations for Austenal, Degussa
Dental, Friadent and the AZ Assets are as follows:
Austenal Degussa Dental Friadent AZ Assets
(in thousands)
Current assets $ 10,667 $ 175,447 $ 16,244 $ -
Property, plant and equipment 906 72,842 4,184 878
Identifiable intangible assets
and goodwill 16,244 367,326 106,809 129,591
Other long-term assets 1,236 8,655 1,119 -
Current liabilities (4,089) (86,987) (27,553) (11,122)
Other long-term liabilities (1,157) (34,336) (3,054) -
$ 23,807 $ 502,947 $ 97,749 $ 119,347
NOTE 5 - INVENTORIES
Inventories consist of the following:
March 31, December 31,
2002 2001
(in thousands)
Finished goods $121,728 $119,030
Work-in-process 37,365 35,539
Raw materials and supplies 45,080 42,885
$204,173 $197,454
9
NOTE 6 - RESTRUCTURING AND OTHER COSTS
In the fourth quarter of 2001, the Company recorded a charge of $12.3
million for restructuring and other costs. The charge included costs of
$6.0 million to restructure the Company's existing operations, primarily in
Germany, Japan and Brazil, as a result of the integration with Degussa
Dental. The primary effect of this plan is the elimination of duplicative
functions created as a result of combining the Company's operations in these
countries with those of Degussa Dental. Included in this charge were
severance costs of $2.1 million, lease/contract termination costs of $1.1
and other restructuring costs of $0.2 million. In addition, the Company
recorded $2.6 million of impairment charges on fixed assets that will be
disposed of as a result of the restructuring plan. This restructuring plan
will result in the elimination of approximately 160 administrative and
manufacturing positions in Germany, Japan and Brazil, 110 of which remain to
be eliminated as of March 31, 2002. The Company anticipates that most
aspects of this plan will be completed by the fourth quarter of 2002. The
remaining charge of $6.3 million involves impairment charges on intangible
assets.
In the first quarter of 2001, the Company recorded a charge of $5.5
million related to reorganizing certain functions within Europe, Brazil and
North America. The primary objectives of this reorganization were to
consolidate duplicative functions and to improve efficiencies within these
regions and are expected to contribute to future earnings. Included in this
charge were severance costs of $3.1 million, lease/contract termination
costs of $0.6 million and other restructuring costs of $0.8 million. In
addition, the Company recorded $1.0 million of impairment charges on fixed
assets that will be disposed of as a result of the restructuring plan. This
restructuring plan resulted in the elimination of approximately 310
administrative and manufacturing positions in Brazil and Germany. During the
first quarter of 2002, this plan was substantially completed and the
remaining accrual balances of $1.9 million were reversed as a change in
estimate.
As part of combining Friadent and Degussa Dental with the Company, $14.1
million of liabilities were established through purchase price accounting
for the restructuring of the acquired companies' operations in Germany,
Brazil, the United States and Japan. These liabilities relate primarily to
the elimination of duplicative functions created as a result of combining
the companies. Included in this liability were severance costs of $11.9
million, lease/contract termination costs of $1.1 million and other
restructuring costs of $1.1 million. This restructuring plan will result in
the elimination of approximately 200 administrative and manufacturing
positions in Germany, Brazil and the United States, 175 of which remain to
be eliminated as of March 31, 2002. The Company anticipates that most
aspects of this plan will be completed by the fourth quarter of 2002.
The major components of these restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at March 31, 2002 are as follows:
Amounts
Recorded
Through Amounts Amounts Change Balance
2001 Purchase Price Applied Applied in Estimate March 31,
Provisions Accounting 2001 2002 2002 2002
Severance $ 5,270 $ 11,929 $ (1,850) $ (2,274) $ (678) $ 12,397
Lease/contract terminations 1,682 1,071 (563) (385) (387) 1,418
Other restructuring costs 897 1,062 - (23) (799) 1,137
Fixed asset impairment charges 3,634 - (3,634) - - -
Intangible asset impairment charges 6,291 - (6,291) - - -
$ 17,774 $ 14,062 $ (12,338) $ (2,682) $ (1,864) $ 14,952
In the fourth quarter of 2000, the Company recorded a pre-tax charge of
$2.7 million related to the reorganization of its French and Latin American
businesses. The primary focus of the reorganization is consolidation of
operations in these regions in order to eliminate duplicative functions. The
restructuring plan resulted in the elimination of approximately 40
administrative positions, mainly in France. During the first quarter of
2002, this plan was substantially finalized and the Company reversed an
accrual of $0.1 million as a change in estimate.
10
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". This statement requires that the amortization of goodwill and
indefinite life intangible assets be discontinued and instead an annual
impairment test approach be applied. These impairment tests are required to
be performed transitionally upon adoption and annually thereafter (or more
often if adverse events occur). These impairment tests will be based upon a
fair value approach rather than an evaluation of the undiscounted cash
flows. If goodwill impairment is identified, the resulting charge is
determined by recalculating goodwill through a hypothetical purchase price
allocation of the fair value and reducing the current carrying value to the
extent it exceeds the recalculated goodwill. If impairment is identified on
indefinite life intangibles, the resulting charge reflects the excess of the
asset's carrying cost over its fair value. Other intangible assets with
finite lives will continue to be amortized over their useful lives. The
Company performed the transitional impairment tests during the first quarter
of 2002 and no impairment was identified.
In accordance with SFAS 142, prior period amounts have not been restated.
The following table presents prior year reported amounts adjusted to
eliminate the amortization of goodwill and indefinite life intangible assets.
Three Months Ended March 31,
2002 2001
(in thousands, except per share amounts)
Reported net income $ 33,096 (1) $ 34,326 (2)
Add: amortization adjustment, net of related tax - 2,882
Adjusted net income $ 33,096 $ 37,208
Reported basic earnings per share $ 0.42 (1) $ 0.44 (2)
Add: amortization adjustment - 0.04
Adjusted basic earnings per share $ 0.42 $ 0.48
Reported diluted earnings per share $ 0.42 (1) $ 0.44 (2)
Add: amortization adjustment - 0.04
Adjusted diluted earnings per share $ 0.42 $ 0.48
(1) Includes restructuring and other income of $1.3 million, after tax, or $0.02 per share.
(2) Includes gain from the sale of a business and restructuring and other costs of $9.8 million, after tax, or $0.13 per share.
The net carrying values of goodwill and identifiable intangible assets
are as follows:
March 31, December 31,
2002 2001
(in thousands)
Goodwill $776,221 $763,270
Indefinite life identifiable intangible assets:
Trademarks $ 4,080 $ 4,080
Licensing agreements 124,070 118,979
Finite life identifiable intangible assets 92,019 125,831
Total identifiable intangible assets $220,169 $248,890
The change in the net carrying value of goodwill was primarily related
to the goodwill associated with the acquisition of Austenal purchased in
January 2002, the closing balance sheet adjustment received in the Friadent
acquisition (see note 4) and foreign currency translation adjustments. The
increase in indefinite life licensing agreements was due to final purchase
price adjustments related to the AZ asset acquisition. These intangible
assets relate to the royalty-free licensing rights to AstraZeneca's dental
products and tradenames. The change in finite life identifiable intangible
assets was due
11
primarily to the finalization of the valuations of the intangible assets
acquired in the Degussa Dental acquisition which were previously based on
estimates.
Finite life identifiable intangible assets consist of the following:
March 31, 2002 December 31, 2001
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
(in thousands)
Patents $ 58,737 $ (28,943) $ 29,794 $ 64,514 $ (27,866) $ 36,648
Trademarks 33,906 (5,413) 28,493 59,610 (5,630) 53,980
Licensing agreements 29,374 (15,232) 14,142 29,405 (14,877) 14,528
Other 44,675 (25,085) 19,590 44,961 (24,286) 20,675
$ 166,692 $ (74,673) $ 92,019 $ 198,490 $ (72,659) $ 125,831
Amortization expense for finite life identifiable intangible assets was
$2.3 million for the three months ended March 31, 2002. The annual estimated
amortization expense related to these intangible assets for each of the five
succeeding fiscal years is $10.3 million, $9.5 million, $8.4 million, $7.1
million and $6.1 million for 2002, 2003, 2004, 2005 and 2006, respectively.
NOTE 8 - 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.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and
conduct undertaken by the Company's Trubyte Division with respect to the
distribution of artificial teeth and related products. On January 5, 1999
the Department of Justice filed a complaint against the Company in the U.S.
District Court in Wilmington, Delaware alleging that the Company's tooth
distribution practices violate the antitrust laws and seeking an order for
the Company to discontinue its practices. Three follow on private class
action suits on behalf of dentists, laboratories and denture patients in
seventeen states, respectively, who purchased Trubyte teeth or products
containing Trubyte teeth, were filed and transferred to the U.S. District
Court in Wilmington, Delaware. The class action filed on behalf of the
dentists has been dismissed by the plaintiffs. The private party suits seek
damages in an unspecified amount. The Company filed motions for summary
judgment in all of the above cases. The Court denied the Company's motion
for summary judgment regarding the Department of Justice action, granted the
motion on the lack of standing of the patient class action and granted the
motion on the lack of standing of the laboratory class action to pursue
damage claims. In an attempt to avoid the effect of the Court's ruling, the
attorneys for the laboratory class action filed a new complaint naming
DENTSPLY and its dealers as co-conspirators with respect to DENTSPLY's
distribution policy. The Company filed a motion to dismiss this re-filed
complaint. The Court again granted DENTSPLY's motion on the lack of
standing of the laboratory class action to pursue damage claims. The
attorneys for the patient class have also filed a new action to avoid the
effect of the Court's ruling. This action is filed in the U.S. District
Court in Delaware. Four private party class actions on behalf of indirect
purchasers were filed in California state court. These cases are based on
allegations similar to those in the Department of Justice case. In response
to the Company's motion, these cases have been consolidated in one Judicial
District in Los Angeles. A similar private party action was filed in
Florida. The trial in the government's case began in April 2002. It is
unlikely a decision will be made by the Court until the fall of 2002. It is
the Company's position that the conduct and activities of the Trubyte
division do not violate the antitrust laws.
12
DENTSPLY INTERNATIONAL INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made by the Company, including without limitation,
statements containing the words "plans", "anticipates", "believes",
"expects", or words of similar import constitute forward-looking statements
which are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements involve risks and uncertainties which may
materially affect the Company's business and prospects, and should be read
in conjunction with the risk factors discussed within the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS
Quarter Ended March 31, 2002 Compared to Quarter Ended March 31, 2001
Net Sales
Net sales for the quarter ended March 31, 2002 increased $105.5 million,
or 43.0%, to $351.2 million, up from $245.7 million in the same period of
2001. Base business sales growth (internal sales growth exclusive of
acquisitions/divestitures and the impact of currency translation) for the
first quarter was 6.5%, excluding a 38.3% increase due to net acquisitions
and a negative 1.8% foreign currency translation impact due to the strong
U.S. dollar against the major currencies in Europe, Asia and Brazil. This
growth was achieved over both large equipment and consumables and small
equipment product categories.
Sales in the United States for the first quarter grew 20.9%; 7.6% from
base business sales growth in both large equipment and consumables; and
13.3% from net acquisitions/divestitures. Notable growth was achieved in
endodontics, bone grafting materials, intraoral cameras and digital x-ray
systems.
European sales, including the Commonwealth of Independent States,
increased 97.7% during the first quarter of 2002. European base business
sales growth increased 5.3%. Currency translation had a negative 3.6%
impact on the quarter in Europe. Acquisitions/divestitures added 96.0% to
European sales during the quarter. The United Kingdom, German, and Italian
consumable businesses had strong performance. Notable growth was achieved
in endodontic products.
Asia (excluding Japan) base business sales increased 5.2% despite slowing
economies in this region. Notable growth was achieved by Dentsply's
subsidiaries in South Korea and China. Net acquisitions added an additional
25.0% in Asia, offset by a negative 2.6% impact from currency translation.
Latin American base business sales declined 0.4% during the first quarter of
2002 primarily due to numerous economic and political issues which hampered
sales growth throughout this region. Acquisitions added 19.6% to Latin
American net sales offset by 6.9% for the negative impact of currency
translation. Sales in the rest of the world grew 40.9%; 8.1% from base
business primarily in Canada and Australia which was partially offset by
negative volume growth in the Middle East, less 4.1% from the impact of
currency translation plus 36.9% from acquisitions.
Sales for the three months ended March 31, 2002 of $351.2 million
included sales of precious metals generated through the precious metal alloy
product offerings of newly acquired Degussa Dental. Due to the fluctuations
of precious metal prices, the sales value of this component may vary from
period to period. The Company's net sales for the three months ended March
31, 2002, excluding the sales value of precious metals, were $302.2 million,
an increase of 23.0% over the same period of 2001.
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Gross Profit
Gross profit for the first quarter represented 48.5% of net sales, or
56.4% excluding precious metals, compared to 52.8% of net sales in 2001.
There were no sales of precious metals in the first quarter of 2001. The
gross profit margin, excluding precious metals, benefited by a favorable
product mix; operational improvements, including the positive results of
earlier restructuring activities; and inventory step-up charges for
acquisitions included in the 2001 results. These benefits were offset
slightly by the negative impact of a stronger U.S. dollar in the first
quarter of 2002.
Operating Expenses
Selling, general and administrative (SG&A) expense increased $25.3
million, or 28.3%. As a percentage of sales, SG&A expenses decreased from
36.4% in the first quarter of 2001 to 32.7% for the same period of 2002 due
to recent acquisitions. SG&A spending, excluding acquisitions, represented
34.6% of sales during the first quarter of 2002 compared to 36.4% for the
same period in 2001. This decrease is mainly due to the discontinuation of
goodwill amortization. The Company has completed its transitional impairment
review of goodwill as required as part of the its adoption of Statement of
Financial Accounting Standards (SFAS) 142, and did not have any impairment
on its goodwill.
During the first quarter of 2002, the Company recorded restructuring and
other income of $2.0 million as certain prior period European restructuring
initiatives were completed at a lower cost than initially recorded. The
first quarter of 2001 included a restructuring charge of $5.5 million to
improve efficiencies in Europe, Brazil and North America.
Other Income and Expenses
Net interest expense increased $4.1 million in the first quarter of 2002
due to higher debt levels to finance the acquisition activity in 2001 and
2002. Other income decreased $22.7 million due to the $23.1 million gain
from the sale of Infosoft,LLC in the first quarter of 2001.
Earnings
Income before income taxes in the first quarter of 2002 decreased $4.2
million including the $23.1 million gain from the sale of Infosoft, LLC
recorded in the first quarter of 2001 offset mostly by higher pre-tax
profits from operations in 2002. The effective tax rate for operations was
34.0% in the first quarter of 2002 compared to 33.5% in the first quarter of
2001.
Net income for the first quarter of 2002 was $33.1 million, or $.42
diluted earnings per common share compared to $34.3 million, or $.44 diluted
earnings per common share in the first quarter of 2001. Excluding
restructuring benefits in 2002 and the gain for the sale of Infosoft, LLC
and the restructuring charge in the first quarter of 2001, first quarter
2002 net income was $31.8 million, an increase of 29.8% over 2001. Diluted
earnings per common share were $.40 in 2002 compared to $.31 in 2001, an
increase of 29.0%.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the Company's disclosure in its
2001 Annual Report on Form 10-K filed March 29, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Quarter Ended March 31, 2002
For the three months ended March 31, 2002, cash flows from operating
activities were $12.4 million compared to $47.3 million for the three months
ended March 31, 2001. The decrease of $34.9 million results primarily from
higher inventory and receivables levels, payments of annual volume rebates
for precious metal purchases and some initial restructuring outflows, offset
by higher operating earnings.
Investing activities for the three months ended March 31, 2002 include
capital expenditures of $9.8 million. Net acquisition activity for the three
months ended March 31, 2002 was $37.6 million (see Note 4 to the condensed
consolidated financial statements).
14
The Company's current ratio was 1.5 with working capital of $156.5
million at March 31, 2002. This compares with a current ratio of 1.4 and
working capital of $125.7 million at December 31, 2001.
The Company's long-term debt increased slightly by $2.6 million from
December 31, 2001 to $726.1 million. The resulting long-term debt to total
capitalization at March 31, 2002 was 53.2% compared to 54.3% at December 31,
2001.
Under its multi-currency revolving credit agreement, the Company is able
to borrow up to $250 million through May 2006 ("the five-year facility") and
$250 million through May 2002 ("the 364 day facility"). The 364-day facility
terminates in May 2002, but may be extended, subject to certain conditions,
for additional periods of 364 days. This revolving credit agreement is
unsecured and contains various financial and other covenants. The Company
also has available a $250 million commercial paper facility, which, during
the first quarter of 2002, was replaced and expanded from its previous level
of $200 million. The 364-day facility serves as a back-up to this commercial
paper facility. The total available credit under the commercial paper
facility and the 364-day facility is $250 million.
The Company also has access to $77.6 million in uncommitted short-term
financing under lines of credit from various financial institutions.
Substantially all of these lines of credit have no major restrictions and
are provided under demand notes between the Company and the lending
institutions.
In total, the Company had unused lines of credit of $348.0 million at
March 31, 2002. Access to most of these available lines of credit is
contingent upon the Company being in compliance with certain affirmative and
negative covenants relating to its operations and financial condition. The
most restrictive of these covenants pertain to asset dispositions,
maintenance of certain levels of net worth, and prescribed ratios of
indebtedness to total capital and operating income plus depreciation and
amortization to interest expense. At March 31, 2002, the Company was in
compliance with these covenants.
There have been no material changes to the Company's scheduled
contractual cash obligations disclosed in its 2001 Annual Report on Form
10-K filed March 29, 2002.
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.
Quarter Ending June 30, 2002
In March 2001, the Company sold InfoSoft, LLC to PracticeWorks Inc.
("PracticeWorks"). InfoSoft, LLC was the wholly owned subsidiary of the
Company, that developed and sold software and related products for dental
practice management. PracticeWorks is the dental software management and
dental claims processing company which was spun-off by Infocure Corporation.
In the transaction, the Company received 6.5% convertible preferred stock in
PracticeWorks, with a fair value of $32 million. This investment plus
accrued dividends to date are included in "Other noncurrent assets". These
preferred shares are convertible into approximately 1.0 million shares of
PracticeWorks common stock. If not previously converted, the preferred
shares are redeemable for cash after 5 years. The Company measures
recoverability on this investment on a periodic basis. This sale resulted in
a $23.1 million pretax gain which was included in "Other (income) expense,
net".
The Company is currently in negotiations with PracticeWorks to
restructure this preferred stock investment. Under the tentative plan, the
Company would receive a combination of $15.0 million in cash, $15.0 million
of PracticeWorks common stock based on its secondary offering price and
450,000 seven-year term stock warrants issued by PracticeWorks as settlement
for the accumulated investment balance. Although the total value of the
transaction may fluctuate through the date of settlement which is expected
to occur in late June 2002, the Company anticipates that a loss of
approximately $1.0 to $1.5 million, pre-tax, or $0.01 per share will be
realized on the transaction. The Company is still finalizing its
negotiations with PracticeWorks and the final agreement will be contingent
on PracticeWorks completing its secondary offering.
15
NEW ACCOUNTING STANDARDS
In June 2001 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets". SFAS 141 addresses financial
accounting and reporting for business combinations. Specifically, effective
for business combinations occurring after July 1, 2001, it eliminates the
use of the pooling method of accounting and requires all business
combinations to be accounted for under the purchase method. SFAS 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. The primary change related to this new standard is that
the amortization of goodwill and intangible assets with indefinite useful
lives will be discontinued and instead an annual impairment approach (or
more often if adverse events occur) will be applied. Except for goodwill and
intangible assets with indefinite lives related to acquisitions after July
1, 2001 (for which amortization was not recognized at all), the Company
discontinued amortization of goodwill and intangible assets with indefinite
lives effective January 1, 2002 (see Note 7 to the condensed consolidated
financial statements).
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations". It
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and (or)
the normal operation of a long-lived asset, except for certain obligations
of lessees. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense over the asset's
useful life. SFAS 143 is effective for the Company in 2003 and the effect
of adopting it is not expected to be material.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and APB 30, " Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 requires an
impairment loss to be recognized only if the carrying amounts of long-lived
assets to be held and used are not recoverable from their expected and
undiscounted future cash flows. The Company adopted SFAS 144 effective
January 1, 2002. This standard has not had, nor is expected to have, a
material impact on the Company.
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 remained legal tender in the participating
countries between January 1, 1999 and January 1, 2002 (the "transition
period"). On January 1, 2002, the European Central Bank issued
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 adopted the Euro as the functional currency effective January 1,
2001. At this time, the Company does not expect the reasonably 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.
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, 2001.
16
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes 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. Three follow on private class
action suits on behalf of dentists, laboratories and denture patients in
seventeen states, respectively, who purchased Trubyte teeth or products
containing Trubyte teeth, were filed and transferred to the U.S. District
Court in Wilmington, Delaware. The class action filed on behalf of the
dentists has been dismissed by the plaintiffs. The private party suits seek
damages in an unspecified amount. The Company filed motions for summary
judgment in all of the above cases. The Court denied the Company's motion
for summary judgment regarding the Department of Justice action, granted the
motion on the lack of standing of the patient class action and granted the
motion on the lack of standing of the laboratory class action to pursue
damage claims. In an attempt to avoid the effect of the Court's ruling, the
attorneys for the laboratory class action filed a new complaint naming
DENTSPLY and its dealers as co-conspirators with respect to DENTSPLY's
distribution policy. The Company filed a motion to dismiss this re-filed
complaint. The Court again granted DENTSPLY's motion on the lack of
standing of the laboratory class action to pursue damage claims. The
attorneys for the patient class have also filed a new action to avoid the
effect of the Court's ruling. This action is filed in the U.S. District
Court in Delaware. Four private party class actions on behalf of indirect
purchasers were filed in California state court. These cases are based on
allegations similar to those in the Department of Justice case. In response
to the Company's motion, these cases have been consolidated in one Judicial
District in Los Angeles. A similar private party action was filed in
Florida. The trial in the government's case began in April 2002. It is
unlikely a decision will be made by the Court until the fall of 2002. It is
the Company's position that the conduct and activities of the Trubyte
division do not violate the antitrust laws.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K - None.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENTSPLY INTERNATIONAL INC.
May 15, 2002 /s/ John C. Miles II
Date John C. Miles II
Chairman and
Chief Executive Officer
May 15, 2002 /s/ William R. Jellison
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
18