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, 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.
_____________________________________________________________________
(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.)
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 November 5, 2002 the
Company had 78,345,926 shares of Common Stock outstanding, with a par value
of $.01 per share.
Page 1 of 25
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended September 30, 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 15
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 21
Item 4 - Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
Section 302 Certification Statements 24
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
(in thousands, except per share amounts)
Net sales $ 363,456 $ 253,501 $ 1,092,652 $ 753,805
Cost of products sold 184,230 121,116 557,550 357,879
Gross profit 179,226 132,385 535,102 395,926
Selling, general and administrative expenses 118,173 87,975 352,989 266,759
Restructuring and other (income) costs (Note 6) (778) -- (2,779) 5,500
Operating income 61,831 44,410 184,892 123,667
Other income and expenses:
Interest expense 7,485 4,872 23,497 12,749
Interest income (183) (212) (603) (696)
Other expense (income), net 2,634 1,695 4,102 (22,025)
Income before income taxes 51,895 38,055 157,896 133,639
Provision for income taxes 16,129 12,136 52,213 45,990
Net income $ 35,766 $ 25,919 $ 105,683 $ 87,649
Earnings per common share (Note 3):
Basic $ 0.46 $ 0.33 $ 1.35 $ 1.13
Diluted 0.45 0.33 1.32 1.11
Cash dividends declared per common share $ 0.04600 $ 0.04583 $ 0.13800 $ 0.13750
Weighted average common shares outstanding:
Basic 78,247 77,751 78,120 77,613
Diluted 80,127 79,150 79,949 78,855
See accompanying notes to unaudited interim consolidated condensed financial statements.
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
September 30, December 31,
2002 2001
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 23,895 $ 33,710
Accounts and notes receivable-trade, net 208,355 191,534
Inventories, net (Notes 1 and 5) 219,786 197,454
Prepaid expenses and other current assets 60,043 61,545
Total Current Assets 512,079 484,243
Property, plant and equipment, net 294,418 240,890
Identifiable intangible assets, net 227,365 248,890
Goodwill, net 876,973 763,270
Other noncurrent assets 85,264 60,858
Total Assets $ 1,996,099 $ 1,798,151
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 62,122 $ 69,904
Accrued liabilities 192,582 194,357
Income taxes payable 111,728 86,622
Notes payable and current portion
of long-term debt 7,694 7,634
Total Current Liabilities 374,126 358,517
Long-term debt 772,959 723,524
Deferred income taxes 21,469 32,526
Other noncurrent liabilities 71,995 73,628
Total Liabilities 1,240,549 1,188,195
Minority interests in consolidated subsidiaries 1,232 437
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 September 30, 2002 and December 31, 2001 814 814
Capital in excess of par value 155,471 152,916
Retained earnings 692,308 597,414
Accumulated other comprehensive loss (Note 2) (37,355) (77,388)
Unearned ESOP compensation (2,657) (3,419)
Treasury stock, at cost, 3.1 million shares at September 30, 2002
and 3.5 million shares at December 31, 2001 (54,263) (60,818)
Total Stockholders' Equity 754,318 609,519
Total Liabilities and Stockholders' Equity $ 1,996,099 $ 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)
Nine Months Ended September 30,
-------------------------------------
2002 2001
(in thousands)
Cash flows from operating activities:
Net income $ 105,683 $ 87,649
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 24,480 19,716
Amortization 7,661 20,933
Restructuring and other costs (2,779) 5,500
Gain on sale of business -- (23,121)
Other, net (33,970) 7,282
Net cash provided by operating activities 101,075 117,959
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (51,140) (308,261)
Proceeds from the redemption of preferred stock investment 15,000 --
Proceeds from bulk sale of precious metals inventory 6,754 --
Capital expenditures (39,765) (34,918)
Other, net 3,544 3,188
Net cash used in investing activities (65,607) (339,991)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of
deferred financing costs 156,715 358,048
Payments on long-term borrowings (191,122) (125,908)
Decrease in short-term borrowings (566) (4,054)
Cash paid for treasury stock -- (875)
Cash dividends paid (10,757) (10,662)
Other, net 6,516 6,832
Net cash (used in) provided by financing activities (39,214) 223,381
Effect of exchange rate changes on cash and cash equivalents (6,069) (4,903)
Net decrease in cash and cash equivalents (9,815) (3,554)
Cash and cash equivalents at beginning of period 33,710 15,433
Cash and cash equivalents at end of period $ 23,895 $ 11,879
See accompanying notes to unaudited interim consolidated condensed financial statements.
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 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 September 30,
2002, the cost of $16.1 million or 7% 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 September 30, 2002 by $0.7 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, net of tax, are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(in thousands)
Net income $ 35,766 $ 25,919 $ 105,683 $ 87,649
Other comprehensive income:
Foreign currency translation adjustments (11,521) 7,164 44,007 (9,623)
Unrealized (loss) gain on available-for-sale securities (678) -- 1,063 --
Cumulative effect of change in accounting
principle for derivative and hedging
activities (SFAS 133) -- -- -- (503)
Net loss on derivative financial
instruments (2,157) (1,007) (5,037) (1,940)
Total comprehensive income $ 21,410 $ 32,076 $ 145,716 $ 75,583
The balances included in accumulated other comprehensive loss in the
consolidated balance sheets are as follows:
September 30, December 31,
2002 2001
(in thousands)
Foreign currency translation adjustments $(31,184) $(75,191)
Net loss on derivative financial
instruments (6,350) (1,313)
Unrealized gain on available-for-sale securities 1,063 --
Minimum pension liability (884) (884)
$(37,355) $(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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(in thousands, except per share amounts)
Basic EPS Computation
Numerator (Income) $ 35,766 $ 25,919 $105,683 $ 87,649
Denominator:
Common shares outstanding 78,247 77,751 78,120 77,613
Basic EPS $ 0.46 $ 0.33 $ 1.35 $ 1.13
Diluted EPS Computation
Numerator (Income) $ 35,766 $ 25,919 $105,683 $ 87,649
Denominator:
Common shares outstanding 78,247 77,751 78,120 77,613
Incremental shares from assumed exercise
of dilutive options 1,880 1,399 1,829 1,242
Total shares 80,127 79,150 79,949 78,855
Diluted EPS $ 0.45 $ 0.33 $ 1.32 $ 1.11
Options to purchase 51,000 and 18,000 shares of common stock that were
outstanding during the quarter ended September 30, 2002 and 2001,
respectively, were not included in the computation of diluted earnings per
share since the options' exercise prices were greater than the average market
price of the common shares and, therefore, the effect would be antidilutive.
Antidilutive options outstanding during the nine months ended September 30,
2002 and 2001 were 87,000 and 102,000, respectively.
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 was subject to increase or decrease, based on certain working
capital levels of Degussa Dental as of October 1, 2001. In June 2002, the
Company made a partial payment of 12.1 million Euros or $11.4 million as a
closing balance sheet adjustment but is still in negotiations with Degussa AG
related to the final payment. Based on current information, the Company
expects to pay up to $10 million for this final closing balance sheet payment
and anticipates making this payment in early 2003. 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 data was inadequate to support the original agreement. As
a result, the Company renegotiated the contract to require a $2.0 million
payment upon submission of the NDA and MAA, payments of $6.0 million and $2.0
million upon the approval of the NDA and MAA, respectively, for licensing
rights and a $10.0 million prepaid royalty 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 cash of 16.5 million German marks or approximately $7.3 million,
representing a final balance sheet adjustment. As a result of this closing
balance sheet adjustment, goodwill was reduced by 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 $ 8,197 $ 166,011 $ 16,244 $ --
Property, plant and equipment 274 71,647 4,184 878
Identifiable intangible assets and goodwill 27,534 413,329 106,809 129,591
Other long-term assets 125 14,157 1,119 --
Current liabilities (11,166) (103,899) (27,553) (11,122)
Other long-term liabilities (1,157) (42,140) (3,054) --
$ 23,807 $ 519,105 $ 97,749 $ 119,347
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 sale resulted in a
$23.1 million pretax gain which was included in "Other expense (income),
net". The Company recorded this preferred stock investment and subsequent
accrued dividends to "Other noncurrent assets" and has measured the
investment for recoverability on a periodic basis.
9
In June 2002, the Company completed a transaction with PracticeWorks to
exchange the accumulated balance of this preferred stock investment for a
combination of $15.0 million of cash, 1.0 million shares of PracticeWorks'
common stock valued at $15.0 million and 450,000 seven-year term stock
warrants issued by PracticeWorks, valued at $3.6 million, based on the
Black-Scholes option pricing model. The transaction resulted in a loss to the
Company of $1.1 million, which is included in "Other expense (income), net".
The exchange provided the Company with immediate cash, as well as, improved
liquidity on its investment in PracticeWorks, while also providing additional
market appreciation potential if PracticeWorks' business and stock price
continue to perform well. As a result of the transaction, the Company will no
longer recognize income for preferred stock dividends. The common stock has
been classified as available-for-sale and any fair value adjustments to this
investment will be reflected in other comprehensive income until sold. The
warrants are classified as derivative financial instruments as defined under
SFAS No. 133 and any fair value adjustments in these holdings will be
reflected in current income each quarter until sold. For the quarter and the
nine months ended September 30, 2002 the unrealized loss on the stock
warrants was $1.3 million and $0.1 million, respectively. These unrealized
losses were included in "Other expense (income), net".
NOTE 5 - INVENTORIES
Inventories consist of the following:
September 30, December 31,
2002 2001
(in thousands)
Finished goods $136,197 $119,030
Work-in-process 38,031 35,539
Raw materials and supplies 45,558 42,885
$219,786 $197,454
NOTE 6 - RESTRUCTURING AND OTHER COSTS
On January 25, 2001, a fire broke out in the Company's Maillefer facility
in Switzerland. The fire caused severe damage to a building and to most of
the equipment it contained. During the third quarter of 2002, the Company
received insurance proceeds for settlement of the damages caused to the
building. These proceeds resulted in the Company recognizing a net gain on
the damaged building of approximately $0.8 million. The Company received
insurance proceeds on the destroyed equipment during the fourth quarter of
2001 and recorded the related disposal gains during that period.
10
During the second quarter of 2002 the Company recorded a charge of $1.7
million for restructuring and other costs. The charge primarily related to
the elimination of duplicative functions created as a result of combining the
Company's Ceramed and U.S. Friadent divisions. Included in this charge were
severance costs of $0.5 million, lease/contract termination costs of $0.9
million and other restructuring costs of $38,000. In addition, the Company
recorded $0.2 million of impairment charges on fixed assets that will be
disposed of as a result of the restructuring plan. During the third quarter
of 2002, the Company determined that the costs to complete this plan were
higher than initially estimated and as a result an adjustment of $0.2 million
was recorded as a change in estimate. This restructuring plan will result in
the elimination of approximately 35 administrative and manufacturing
positions in the United States, 15 of which remain to be eliminated as of
September 30, 2002. The plan is expected to be completed during the first
quarter of 2003. The major components of these restructuring charges and the
remaining outstanding balances at September 30, 2002 are as follows:
Amounts Change Balance
2002 Applied in Estimate September 30,
Provisions 2002 2002 2002
Severance $ 541 $ (85) $ 234 $ 690
Lease/contract terminations 895 -- (54) 841
Other restructuring costs 38 -- (10) 28
Fixed asset impairment charges 195 (195) -- --
$ 1,669 $ (280) $ 170 $ 1,559
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
million 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. During 2002, the
Company determined that the costs to complete this plan were lower than
originally estimated and as a result $1.2 million of these costs were
reversed as a change in estimate. This restructuring plan will result in the
elimination of approximately 160 administrative and manufacturing positions
in Germany, Japan and Brazil, 15 of which remain to be eliminated as of
September 30, 2002. As part of these reorganization activities, some of these
positions were replaced with lower-cost outsourced services. The Company
anticipates that most aspects of this plan will be completed by the first
quarter of 2003. 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.
Included in this charge were severance costs of $3.1 million, lease/contract
termination costs of $0.6 million and other restructuring costs of $0.8
million. In addition, the Company recorded $1.0 million of impairment charges
on fixed assets that will be disposed of as a result of the restructuring
plan. This restructuring plan resulted in the elimination of approximately
310 administrative and manufacturing positions in Brazil and Germany. As part
of these reorganization activities, some of these positions were replaced
with lower-cost outsourced services. During the first quarter of 2002, this
plan was 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. 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, 45 of which remain to be
eliminated as of September 30, 2002. The Company anticipates that most
aspects of this plan will be completed during 2003.
11
The major components of these restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at September 30, 2002 are as follows:
Amounts
Recorded
Through Amounts Amounts Change Balance
2001 Purchase Applied Applied in Estimate September 30,
Provisions Accounting 2001 2002 2002 2002
Severance $ 5,270 $ 11,929 $ (1,850) $ (5,238) $ (1,605) $ 8,506
Lease/contract terminations 1,682 1,071 (563) (551) (438) 1,201
Other restructuring costs 897 1,062 -- (150) (445) 1,364
Fixed asset impairment charges 3,634 -- (3,634) 656 (656) --
Intangible asset impairment charges 6,291 -- (6,291) -- -- --
$ 17,774 $ 14,062 $(12,338) $ (5,283) $ (3,144) $ 11,071
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 was 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. The Company also added positions
as a result of these reorganization activities. During 2002, the Company
determined that the costs to complete this plan were lower than originally
estimated and as a result $0.3 million of these costs were reversed as a
change in estimate. As of September 30, 2002 this plan was substantially
complete.
In the second quarter of 1998, the Company rationalized and restructured
its worldwide laboratory business, primarily for the closure of the Company's
German tooth manufacturing facility. All major aspects of the plan were
completed in 1999, except for the disposition of the property and plant
located in Dreieich, Germany, which has been written-down to its estimated
fair value, but which has not yet been sold. In the second quarter of 2002,
the Company entered into a tentative agreement to sell this property. This
recent activity has provided the Company with more updated fair value
information and as a result the Company has written-up the carrying value of
the property by $0.5 million to its revised estimated fair value.
12
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 are 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 addition, as part of the adoption of the
standard, the Company assessed and identified intangible assets which were
deemed indefinite-lived.
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 September 30, Nine Months Ended September 30,
2002 2001 2002 2001
(in thousands, except per share amounts)
Reported net income $ 35,766 (1) $ 25,919 $ 105,683 (2) $ 87,649 (3)
Add: amortization adjustment, net of related tax -- 3,675 -- 10,459
Adjusted net income $ 35,766 $ 29,594 $ 105,683 $ 98,108
Reported basic earnings per share $ 0.46 (1) $ 0.33 $ 1.35 (2) $ 1.13 (3)
Add: amortization adjustment -- 0.05 -- 0.13
Adjusted basic earnings per share $ 0.46 $ 0.38 $ 1.35 $ 1.26
Reported diluted earnings per share $ 0.45 (1) $ 0.33 $ 1.32 (2) $ 1.11 (3)
Add: amortization adjustment -- 0.05 -- 0.13
Adjusted diluted earnings per share $ 0.45 $ 0.38 $ 1.32 $ 1.24
(1) Includes restructuring and other income of $0.6 million, after tax, or $0.01 per share.
(2) Includes restructuring and other income of $1.9 million, after tax, or $0.02 per share.
(3) Includes gain from the sale of a business and restructuring and other costs of $9.8 million, after tax, or $0.12 per share.
The net carrying values of goodwill and identifiable intangible assets are
as follows:
September 30, December 31,
2002 2001
(in thousands)
Goodwill $876,973 $763,270
Indefinite life identifiable intangible assets:
Trademarks $ 4,080 $ 4,080
Licensing agreements 140,585 118,979
Finite life identifiable intangible assets 82,700 125,831
Total identifiable intangible assets $227,365 $248,890
13
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, purchase price adjustments related to the Degussa Dental acquisition,
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 and foreign currency
translation adjustments. 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 primarily to the
finalization of the valuations of the intangible assets acquired in the
Degussa Dental acquisition which were previously based on estimates and
foreign currency translation adjustments.
Finite life identifiable intangible assets consist of the following:
September 30, 2002 December 31, 2001
---------------------------------------- --------------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
(in thousands)
Patents $ 53,153 $ (30,782) $ 22,371 $ 64,514 $ (27,866) $ 36,648
Trademarks 35,917 (6,185) 29,732 59,610 (5,630) 53,980
Licensing agreements 34,820 (16,320) 18,500 29,405 (14,877) 14,528
Other 38,382 (26,285) 12,097 44,961 (24,286) 20,675
$ 162,272 $ (79,572) $ 82,700 $ 198,490 $ (72,659) $ 125,831
Amortization expense for finite life identifiable intangible assets for the
quarter and the nine months ended September 30, 2002 was $2.5 million and
$7.7 million, respectively. The annual estimated amortization expense related
to these intangible assets for each of the five succeeding fiscal years is
$10.1 million, $9.2 million, $8.2 million, $6.8 million and $5.9 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 it is
remote 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. 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 Court has granted the Company's motion
on the lack of standing of the laboratory and patient class actions to pursue
damage claims. 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 has been filed in
Florida. The trial in the government's case was held in April and May 2002,
the post-trial briefing occurred during the summer and the final arguments
were made in September of 2002. It is unlikely a decision will be made by
the Court until late in 2002. It is the Company's position that the conduct
and activities of the Trubyte division do not violate the antitrust laws.
14
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 September 30, 2002 Compared to Quarter Ended September 30, 2001
Net Sales
Net sales for the quarter ended September 30, 2002 increased $110.0
million, or 43.4%, to $363.5 million, up from $253.5 million in the same
period of 2001. Excluding non-dental sales, net sales of dental products
increased $110.3 million, or 45.0%, to $355.5 million in the third quarter of
2002. Base business sales growth (internal sales growth exclusive of
acquisitions/divestitures and the impact of currency translation) for the
dental business in the third quarter was 6.2%, excluding a 37.0% increase due
to net acquisitions and a positive 1.8% foreign currency translation impact
due to the weakening of the U.S. dollar against the major currencies in
Europe during the quarter. This growth was achieved over both large equipment
and consumables (which includes small equipment) product categories. As noted
in the second quarter, operational issues that resulted in shipping backlogs
a year ago at the European central warehouse improved the second quarter of
2002. If we remove the catch up of these backlogs from the third quarter of
2001, base business sales of dental products increased 6.8% in the third
quarter of 2002.
Sales in the United States for the third quarter grew 19.1%: 8.6% from base
business sales growth in both large equipment and consumables; and 10.5% from
net acquisitions/divestitures and currency translation. Notable base business
growth was achieved in endodontics, orthodontics, and a broad range of
consumable products.
European sales, including the Commonwealth of Independent States (C.I.S.),
increased 119.3% during the third quarter of 2002. Reported European base
business sales growth increased 7.7% in the third quarter of 2002. European
base business sales growth would have increased approximately 10.6% in the
third quarter of 2002 without the catch up of the European central warehouse
backlogs in the third quarter of 2001. Currency translation had a positive
8.9% impact on the quarter in Europe. Acquisitions/divestitures added 102.7%
to European sales during the quarter. Notable base business growth was
achieved in endodontics, orthodontics, implants, and a broad range of
consumable products in Germany, United Kingdom, and France.
Asia (excluding Japan) base business sales increased 8.6%. Notable growth
was achieved by Dentsply's subsidiaries in South Korea, Taiwan and Hong Kong.
Net acquisitions added an additional 23.1% in Asia and currency translation
added 2.4%. Latin American base business sales declined 9.4% during the
third quarter, 2002, primarily due to numerous economic and political issues
which hampered sales growth throughout this region. Acquisitions added 13.1%
to Latin American net sales offset by 11.5% for the negative impact of
currency translation. Sales in the rest of the world grew 43.3%; 46.3% from
net acquisitions and a positive 2.3% from currency translation less 5.3% net
base business sales declines, primarily in Japan and Middle East/Africa,
which were partially offset by solid base business sales increases in Canada
and Australia.
Sales for the three months ended September 30, 2002 of $363.5 million
included sales of precious metals generated through the precious metal alloy
product offerings of 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 September 30,
2002, excluding the sales value of precious metals, were $321.8 million, an
increase of 26.9% over the same period of 2001.
15
Gross Profit
Gross profit for the third quarter represented 49.3% of net sales, or 55.7%
without precious metals content, compared to 52.2% of net sales in 2001.
There were no sales of precious metals in the third quarter of 2001. The
gross profit margin, without precious metals content, benefited by a
favorable product mix and operational improvements, including the positive
results of earlier restructuring activities.
Operating Expenses
Selling, general and administrative (SG&A) expense increased $30.2 million,
or 34.3%. As a percentage of sales, SG&A expenses decreased from 34.7% in
the third quarter of 2001 to 32.5% for the same period of 2002. SG&A
spending, excluding acquisitions, represented 34.2% of sales during the third
quarter of 2002 compared to 34.7% for the same period in 2001. This decrease
is mainly due to the discontinuation of goodwill amortization.
During the third quarter of 2002, the Company recorded restructuring and
other income of $0.8 million resulting primarily from the final insurance
settlement associated with the 2001 fire at the Company's Maillefer facility
(see Note 6 to the condensed consolidated financial statements).
Other Income and Expenses
Net interest expense increased $2.6 million in the third quarter of 2002
due to higher debt levels to finance the acquisition activity in 2001 and
2002, offset slightly by cash received from the PracticeWorks preferred stock
conversion. Other expense increased $0.9 million, including a $1.3 million
mark-to-market loss on the warrants received from PracticeWorks in June,
2002. The third quarter of 2001 included preferred stock dividend income of
$0.5 million from PracticeWorks. Currency transactions losses in the third
quarter of 2002 were $1.3 million lower than the currency transactions losses
recorded in the third quarter of 2001. Minority interest expense, included in
Other expense (income), increased $0.3 million in the third quarter of 2002,
including the minority interest for the Degussa Dental operations.
Earnings
Income before income taxes in the third quarter of 2002 increased $13.8
million due to higher pre-tax profits from operations in 2002. The effective
year-to-date tax rate for operations was 33.0% in the third quarter of both
periods.
Net income for the third quarter of 2002 was $35.8 million, or $.45 diluted
earnings per common share compared to $25.9 million, or $.33 diluted earnings
per common share in the third quarter of 2001, an increase of 36.4%. Net
income for the third quarter of 2002, excluding restructuring and other
income of $0.8 million, was $35.2 million, or $.44 diluted earnings per
common share compared to $25.9 million, or $.33 diluted earnings per common
share in the third quarter of 2001, an increase of 33.3%.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001
Net Sales
Net sales for the nine months ended September 30, 2002 increased $338.9
million, or 45.0%, to $1,092.7 million, up from $753.8 million in the same
period of 2001. Excluding non-dental sales, net sales of dental products
increased $340.0 million, or 46.7%, to $1,068.2 million in the first nine
months of 2002. Base business sales growth (internal sales growth exclusive
of acquisitions/divestitures and the impact of currency translation) for the
dental business in the first nine months was 7.4%, excluding a 38.7% increase
due to net acquisitions and a positive 0.6% foreign currency translation
impact due to the weakening of the U.S. dollar against DENTSPLY's major
functional reporting currencies. This growth was achieved over both large
equipment and consumables (which includes small equipment) product
categories.
Sales in the United States for the first nine months of 2002 grew 19.9%:
8.4% from base business sales growth in both large equipment and consumables;
and 11.5% from net acquisitions/divestitures and translation. Notable growth
was achieved in endodontics and orthodontics.
16
European sales, including the Commonwealth of Independent States, increased
110.7% during the first nine months of 2002. European base business sales
growth increased 6.6% when compared to the prior year. Currency translation
had a positive 3.9% impact on the first nine months in Europe.
Acquisitions/divestitures added 100.2% to European sales during the first
nine months. Notable base business growth was achieved in endodontics,
orthodontics and a broad range of consumable products in Germany, United
Kingdom, and France.
Asia (excluding Japan) base business sales increased 6.8%. Notable growth
was achieved by Dentsply's subsidiaries in South Korea and India. Net
acquisitions added an additional 24.1% in Asia and the impact from currency
translation was a positive 0.7%. Latin American base business sales declined
5.8% during the first nine months of 2002 primarily due to economic and
political issues which hampered sales growth throughout this region.
Acquisitions added 16.8% to Latin American net sales offset by 8.7% for the
negative impact of currency translation. Sales in the rest of the world grew
52.9%; 7.2% from base business primarily in Canada, Japan, and Australia,
which was partially offset slightly by a softening of sales growth in the
Middle East. Currency translation had a positive 0.4% impact on the first
nine months of 2002, while acquisitions added 45.3% to sales in the rest of
the world.
Sales for the nine months ended September 30, 2002 of $1,092.7 million
included sales of precious metals generated through the precious metal alloy
product offerings of Degussa Dental. The Company's net sales for the nine
months ended September 30, 2002, excluding the sales value of precious
metals, were $956.6 million, an increase of 26.9% over the same period of
2001.
The Company expects the foreign currency impact during the fourth quarter
of 2002 to be approximately 3% positive due to both the current exchange
rates and the fact that Degussa Dental, with significant Euro-based sales,
was first included in the Company's results in the fourth quarter of 2001.
Gross Profit
Gross profit for the first nine months of 2002 represented 49.0% of net
sales, or 55.9% without precious metals content, compared to 52.5% of net
sales in 2001. There were no sales of precious metals in the first nine
months of 2001. The gross profit margin, without precious metals content,
benefited by a favorable product mix and operational improvements, including
the positive results of earlier restructuring activities and the elimination
of the negative impact of inventory step-up from acquisitions recorded in the
prior year.
Operating Expenses
Selling, general and administrative (SG&A) expense increased $86.2 million,
or 32.3%. As a percentage of sales, SG&A expenses decreased from 35.4% in
the first nine months of 2001 to 32.3% for the same period of 2002. SG&A
spending, excluding acquisitions, represented 34.2% of sales during the first
nine months of 2002 compared to 35.4% 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 under the Statement of Financial Accounting Standards (SFAS) 142,
and did not have any impairment of its goodwill.
During the first nine months of 2002, the Company recorded restructuring
and other income of $2.8 million, $2.0 million of which resulted from changes
in estimates related to prior period restructuring initiatives of $3.7
million, offset somewhat by a restructuring charge for the combination of the
CeraMed and U.S. Friadent divisions of $1.7 million in the second quarter of
2002. In addition, the Company recognized a gain of $0.8 million related to
the insurance settlement for fire damages sustained at the Company's
Maillefer facility. The first quarter of 2001 included a restructuring charge
of $5.5 million to improve efficiencies in Europe, Brazil and North America
(see Note 6 to the condensed consolidated financial statements).
Other Income and Expenses
Net interest expense increased $10.8 million in the first nine months of
2002 due to higher debt levels to finance the acquisition activity in 2001
and 2002. Other income decreased $26.1 million due to the $23.1 million gain
from the sale of Infosoft,LLC in the first quarter of 2001 and $1.3 million
of unfavorable currency transactions resulting from the significant weakening
of the U.S. dollar in the first nine months of 2002. Other income and expense
for the first nine of 2002 also included the loss realized on the share
exchange with PracticeWorks of $1.1 million and a net loss of $0.1 million on
the mark-to-market adjustment for the warrants received in the transaction.
Minority interest expense, included in Other expense (income), increased $0.6
million including the minority interest for newly acquired Degussa Dental
operations.
17
Earnings
Income before income taxes in the first nine months of 2002 increased $24.3
million, up $47.4 million without the $23.1 million gain from the sale of
Infosoft, LLC recorded in the first quarter of 2001, due primarily to higher
pre-tax profits from operations in 2002. The effective year-to-date tax rate
for operations was 33.0% in the first nine months of both periods.
Net income for the first nine months of 2002 was $105.7 million, or $1.32
diluted earnings per common share compared to $87.6 million, or $1.11 diluted
earnings per common share in the first nine months of 2001. Excluding
restructuring benefits in 2002 and the gain from the sale of Infosoft, LLC
and the restructuring charge in the first quarter of 2001, the first nine
months of 2002 net income was $103.8 million, an increase of 33.4% over 2001.
Excluding these items, diluted earnings per common share were $1.30 in 2002
compared to $.99 in 2001, an increase of 31.3%.
Quarter Ending December 31, 2002
As noted in Note 4, the Company exchanged its Preferred Stock and accrued
dividends in PracticeWorks, for $15 million of cash, $15 million of common
stock with a one-year lockup, and 450,000 warrants at a strike price of
$15.50 with a seven-year life. This transaction provided the Company with
some immediate cash, as well as improved liquidity on its investment in
PracticeWorks. The Company no longer receives a benefit for preferred stock
dividends. Any price movement in the Company's common stock holding is
reflected in equity ("Accumulated other comprehensive loss") until the stock
is sold and any price movement in the warrants is reflected in in "Other
expense (income), net" each quarter until sold.
During October 2002, the market price of PracticeWorks common stock
declined significantly. While we don't know where the PracticeWorks' stock
price will close at December 31, 2002, recent PracticeWorks' market values
could negatively impact DENTSPLY's earnings by approximately $.02 - $.03 per
share in the fourth quarter. Despite this current decline in value of the
PracticeWorks' warrants, we remain comfortable with the earnings guidance we
have provided for 2002 year-end of $1.80 - $1.82 per share of fully diluted
common stock.
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
Nine Months Ended September 30, 2002
For the nine months ended September 30, 2002, cash flows from operating
activities were $101.1 million compared to $118.0 million for the nine months
ended September 30, 2001. The decrease of $16.9 million results primarily
from payments of annual volume rebates for precious metal purchases and
restructuring outflows, offset by higher operating earnings.
Investing activities for the nine months ended September 30, 2002 include
capital expenditures of $39.8 million. Net acquisition activity for the nine
months ended September 30, 2002 was $51.1 million (see Note 4 to the
condensed consolidated financial statements). During the fourth quarter of
2002, the Company expects to make a payment of approximately $10 million for
the purchase of the Degussa Dental headquarters building in Hanau, Germany.
Additionally, early in 2003, the Company expects to make a payment of up to
$10 million for the final consideration related to the Degussa Dental
purchase.
The Company's current ratio was 1.4 with working capital of $138.0 million
at September 30, 2002. This compares with a current ratio of 1.4 and working
capital of $125.7 million at December 31, 2001.
18
The Company's long-term debt increased by $49.4 million from December 31,
2001 to $773.0 million. This net change included an increase of approximately
$90 million due to exchange rate fluctuations on non-U.S. dollar denominated
debt. A portion of this debt is hedging the Company's net investments in certain
foreign locations and the offset of this increase is reflected in other
comprehensive income. In addition, a portion of this debt is hedged by cross
currency swaps, the value of which is reflected in other noncurrent assets, and
therefore the income statement impact of the related debt change is offset by
the income statement impact of changes in the fair values of the swaps.
Excluding the exchange fluctuations, long-term debt was reduced by approximately
$40 million during 2002. The resulting long-term debt to total capitalization at
September 30, 2002 was 50.6% 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 2003 ("the 364 day facility"). The 364-day facility
terminates in May 2003, but may be extended, subject to certain conditions,
for additional periods of 364 days. This revolving credit agreement is
unsecured and contains various financial and other covenants. The Company
also has available an aggregate $250 million under two commercial paper
facilities; a $250 million U.S. facility and a $250 million U.S. dollar
equivalent European facility ("Euro CP facility"). Under the Euro CP
facility, borrowings can be denominated in Swiss francs, Japanese yen, Euros,
British pounds and U.S. dollars. The 364-day facility serves as a back-up to
these commercial paper facilities. The total available credit under the
commercial paper facilities and the 364-day facility is $250 million.
The Company also has access to $77.7 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 $382.3 million at
September 30, 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 September 30, 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.
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).
19
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.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity." The principal change resulting
from this statement as compared to EITF 94-3 relates to more stringent
requirements for the recognition of a liability for a cost associated with an
exit or disposal activity. This Statement requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. Based on a preliminary assessment of this new standard, the
Company believes that SFAS 146 may impact the timing of the recognition of
future restructuring activities, whereby liabilities associated with the
elements of the restructuring plan may need to be recognized at various dates
subsequent to the commitment date rather than at the commitment date, which
is the Company's current practice.
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.
20
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.
Item 4 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation
of the Company's management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure
controls and procedures. Based on that evaluation, the CEO and CFO have
concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
Changes in Internal Controls
Subsequent to the date of our evaluation, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect the internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
21
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
remote 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. 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 Court has granted the Company's motion
on the lack of standing of the laboratory and patient class actions to pursue
damage claims. 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 has been filed in
Florida. The trial in the government's case was held in April and May 2002,
the post-trial briefing occurred during the summer and the final arguments
were made in September of 2002. It is unlikely a decision will be made by
the Court until late in 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
99 Chief Executive Officer and Chief Financial Officer Certification
Statements.
(b) Reports on Form 8-K - None.
22
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 13, 2002 /s/ John C. Miles II
Date John C. Miles II
Chairman and
Chief Executive Officer
November 13, 2002 /s/ William R. Jellison
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
23
Section 302 Certifications Statement
I, John C. Miles II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dentsply
International;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ John C. Miles II
Chairman and Chief Executive Officer
24
Section 302 Certifications Statement
I, William R. Jellison, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dentsply
International;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ William R. Jellison
Senior Vice President and Chief Financial Officer
25
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of DENTSPLY International Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
John C. Miles II, Chief Executive Officer and Chairman of the Board of
Directors of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best
of my knowledge and belief:
(1) The Report fully complies with the requirements of Sections 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company as of the date of the Report.
/s/ John C. Miles II
John C. Miles II
Chief Executive Officer and
Chairman of the Board of Directors
November 13, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of DENTSPLY International Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
William R. Jellison, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(3) The Report fully complies with the requirements of Sections 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(4) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company as of the date of the Report.
/s/ William R. Jellison
William R. Jellison
Chief Financial Officer
November 13, 2002
