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 31,2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-16211
DENTSPLY International Inc.
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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.)
221 West Philadelphia Street, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
( X ) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At May 5, 2004 the Company
had 80,538,205 shares of Common Stock outstanding, with a par value of $.01
per share.
Page 1 of 31
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended March 31, 2004
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 21
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 28
Item 4 - Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 29
Item 2 - Changes in Securities and Use of Proceeds 29
Item 6 - Exhibits and Reports on Form 8-K 30
Signatures 31
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
March 31,
2004 2003
(in thousands, except
per share amounts)
Net sales $ 415,381 $ 371,236
Cost of products sold 210,524 188,474
Gross profit 204,857 182,762
Selling, general and administrative expenses 134,027 122,238
Restructuring and other costs (Note 9) 724 --
Operating income 70,106 60,524
Other income and expenses:
Interest expense 5,947 6,094
Interest income (674) (266)
Other (income) expense, net 223 (510)
Income before income taxes 64,610 55,206
Provision for income taxes 18,842 17,767
Income from continuing operations 45,768 37,439
Income from discontinued operations, net of tax
(Including gain on sale in 2004 of $43,031) (Note 6) 43,064 828
Net income $ 88,832 $ 38,267
Earnings per common share - basic (Note 3)
Continuing operations $ 0.57 $ 0.48
Discontinued operations 0.54 0.01
Total earnings per common share - basic $ 1.11 $ 0.49
Earnings per common share - diluted (Note 3)
Continuing operations $ 0.56 $ 0.47
Discontinued operations 0.53 0.01
Total earnings per common share - diluted $ 1.09 $ 0.48
Cash dividends declared per common share $ 0.05250 $ 0.04600
Weighted average common shares outstanding (Note 3):
Basic 79,922 78,442
Diluted 81,501 80,007
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,
2004 2003
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 287,710 $ 163,755
Accounts and notes receivable-trade, net 248,387 241,385
Inventories, net (Notes 1 and 7) 207,836 205,587
Prepaid expenses and other current assets 89,711 88,463
Assets held for sale (Note 6) -- 28,262
Total Current Assets 833,644 727,452
Property, plant and equipment, net 374,567 376,211
Identifiable intangible assets, net 241,837 246,475
Goodwill, net 957,119 963,264
Other noncurrent assets 106,314 114,736
Noncurrent assets held for sale (Note 6) 1,802 17,449
Total Assets $ 2,515,283 $ 2,445,587
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 78,276 $ 86,338
Accrued liabilities 158,117 172,684
Income taxes payable 63,546 36,483
Notes payable and current portion
of long-term debt 22,763 21,973
Liabilities of discontinued operations (Note 6) -- 20,206
Total Current Liabilities 322,702 337,684
Long-term debt 787,467 790,202
Deferred income taxes 47,792 51,241
Other noncurrent liabilities 143,394 142,704
Noncurrent liabilities of discontinued operations (Note 6) -- 1,269
Total Liabilities 1,301,355 1,323,100
Minority interests in consolidated subsidiaries 313 418
Commitments and contingencies (Note 11)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued -- --
Common stock, $.01 par value; 200 million shares authorized;
81.4 million shares issued at March 31, 2004 and December 31, 2003 814 814
Capital in excess of par value 179,557 166,952
Retained earnings 974,211 889,601
Accumulated other comprehensive income 91,020 104,920
Unearned ESOP compensation -- (380)
Treasury stock, at cost, 1.2 million shares at March 31, 2004
and 2.1 million shares at December 31, 2003 (31,987) (39,838)
Total Stockholders' Equity 1,213,615 1,122,069
Total Liabilities and Stockholders' Equity $ 2,515,283 $ 2,445,587
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,
------------------
2004 2003
(in thousands)
Cash flows from operating activities:
Income from continuing operations $ 45,768 $ 37,439
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,883 9,364
Amortization 2,140 2,089
Restructuring and other costs 724 --
Cash flows from discontinued operating activities (2,665) (492)
Other, net (9,509) (5,360)
Net cash provided by operating activities 47,341 43,040
Cash flows from investing activities:
Capital expenditures (11,162) (17,968)
Acquisitions of businesses, net of cash acquired (16,000) (2,354)
Expenditures for identifiable intangible assets -- --
Proceeds from sale of Gendex 102,500 --
Cash flows used in discontinued operations' investing activities (357) (326)
Other, net (1,599) 92
Net cash provided by (used in) investing activities 73,382 (20,556)
Cash flows from financing activities:
Payments on long-term borrowings (574) (1,475)
Proceeds from long-term borrowings, net of
deferred financing costs -- 23
Net change in short-term borrowings 305 (224)
Cash paid for treasury stock (11,944) --
Cash dividends paid (4,159) (3,606)
Proceeds from exercise of stock options 21,915 2,156
Net cash provided by (used in) financing activities 5,543 (3,126)
Effect of exchange rate changes on cash and cash equivalents (2,311) 1,168
Net increase in cash and cash equivalents 123,955 20,526
Cash and cash equivalents at beginning of period 163,755 25,652
Cash and cash equivalents at end of period $ 287,710 $ 46,178
See accompanying notes to unaudited interim consolidated condensed financial statements.
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2004
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 15, 2004 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, 2004,
the cost of $12.4 million or 6% and at December 31, 2003, the cost of $11.4
million or 6% of inventories were determined by the last-in, first-out (LIFO)
method. The cost of other inventories was determined by the first-in,
first-out (FIFO) or average cost methods.
If the FIFO method had been used to determine the cost of the LIFO
inventories, the amounts at which net inventories are stated would be higher
than reported by $1.3 million at March 31, 2004 and by $1.0 million at
December 31, 2003.
Identifiable Finite-lived Intangible Assets
Identifiable finite-lived intangible assets, which primarily consist of
patents, trademarks and licensing agreements, are amortized on a
straight-line basis over their estimated useful lives. These assets are
reviewed for impairment whenever events or circumstances provide evidence
that suggest that the carrying amount of the asset may not be recoverable.
The Company performs ongoing impairment analysis on intangible assets related
to new technology. Impairment is based upon an evaluation of the identifiable
undiscounted cash flows. If impaired, the resulting charge reflects the
excess of the asset's carrying cost over its fair value.
Goodwill and Indefinite-Lived Intangible Assets
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets" which requires that an
annual impairment approach be applied to goodwill and indefinite-lived
intangible assets. The Company performs annual impairment tests based upon a
fair value approach rather than an evaluation of the undiscounted cash flows.
If impairment is identified under SFAS 142, the resulting charge is
determined by recalculating goodwill through a hypothetical purchase price
allocation of the fair value and reducing the current carrying value to the
extent it exceeds the recalculated goodwill. If impairment is identified on
indefinite-lived intangibles, the resulting charge reflects the excess of the
asset's carrying cost over its fair value. The Company's goodwill decreased
by $6.1 million during the three months ended March 31, 2004 to $957.1
million, which was due primarily to the effects of foreign currency
translation.
6
Derivative Financial Instruments
The Company records all derivative instruments on the balance sheet at
their fair value and changes in fair value are recorded each period in
current earnings or comprehensive income in accordance with Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities".
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. Additionally, the Company utilizes
interest rate swaps to convert floating rate debt to fixed rate, fixed rate
debt to floating rate, cross currency basis swaps to convert debt denominated
in one currency to another currency, and commodity swaps to fix its variable
raw materials costs.
Revenue Recognition
Revenue, net of related discounts and allowances, is recognized at the time
of shipment in accordance with shipping terms and as title and risk of loss
pass to customers. Net sales include shipping and handling costs collected
from customers in connection with the sale.
Certain of the Company's customers are offered cash rebate programs based
on targeted sales increases. The Company has three primary programs which
include the precious metal alloy rebate program, the Corporate general dental
practices program and the Corporate group dental practices program. These
rebate programs are developed to incent the customers to purchase product
quantities in excess of their previous year activity. Some programs are
tailored to a specific customer while others are based on generic guidelines
offered to a broad group of customers. In accounting for these rebate
programs, the Company records an accrual as a reduction of net sales for the
estimated rebate as sales take place throughout the year in accordance with
EITF 01-09, " Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)".
The Company establishes a provision recorded against revenue for product
returns in instances when incorrect products or quantities are inadvertently
shipped. In addition, the Company establishes provisions for costs or losses
that are expected with regard to returns for which revenue has been
recognized for event-driven circumstances relating to product quality issues,
complaints and / or other product specific issues.
Stock Compensation
The Company has stock-based employee compensation plans and applies the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for these plans. Under this method, no
compensation expense is recognized for fixed stock option plans, provided
that the exercise price is greater than or equal to the price of the stock at
the date of grant. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee
compensation.
Three Months Ended March 31,
2004 2003
(in thousands, except per share amounts)
Net income, as reported $ 88,832 $ 38,267
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (3,251) (2,694)
Pro forma net income $ 85,581 $ 35,573
Basic earnings per common share
As reported $ 1.11 $ 0.49
Pro forma under fair value based method $ 1.07 $ 0.45
Diluted earnings per common share
As reported $ 1.09 $ 0.48
Pro forma under fair value based method $ 1.05 $ 0.44
7
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three Months Ended
March 31,
2004 2003
(in thousands)
Net income $ 88,832 $ 38,267
Other comprehensive income:
Foreign currency translation adjustments (10,981) 23,496
Unrealized gain on available-for-sale securities 23 1,294
Net loss on derivative financial
instruments (2,942) (1,687)
Total comprehensive income $ 74,932 $ 61,370
During the period ended March 31, 2004, foreign currency translation
adjustments included translation losses of $14.9 million offset by gains of
$3.9 million on the Company's loans designated as hedges of net investments.
During the period ended March 31, 2003, the Company had translation gains of
$27.1 million offset by losses of $3.6 million on its loans designated as
hedges of net investments.
The balances included in accumulated other comprehensive income in the
consolidated balance sheets are as follows:
March 31, December 31,
2004 2003
(in thousands)
Foreign currency translation adjustments $ 98,551 $ 109,532
Net loss on derivative financial
instruments (6,495) (3,553)
Unrealized gain on available-for-sale securities 174 151
Minimum pension liability (1,210) (1,210)
$ 91,020 $ 104,920
The cumulative foreign currency translation adjustments included
translation gains of $178.2 million and $193.0 million as of March 31, 2004
and December 31, 2003, respectively, offset by losses of $79.6 million and
$83.5 million, respectively, on loans designated as hedges of net investments.
8
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,
2004 2003
(in thousands, except
per share amounts)
Basic Earnings Per Common Share Computation
Income from continuing operations $45,768 $37,439
Income from discontinued operations 43,064 828
Net income $88,832 $38,267
Common shares outstanding 79,922 78,442
Earnings per common share from continuing operations $ 0.57 $ 0.48
Earnings per common share from discontinued operations 0.54 0.01
Total earnings per common share - basic $ 1.11 $ 0.49
Diluted Earnings Per Common Share Computation Computation
Income from continuing operations $45,768 $37,439
Income from discontinued operations 43,064 828
Net income $88,832 $38,267
Common shares outstanding 79,922 78,442
Incremental shares from assumed exercise
of dilutive options 1,579 1,565
Total shares 81,501 80,007
Earnings per common share from continuing operations $ 0.56 $ 0.47
Earnings per common share from discontinued operations 0.53 0.01
Total earnings per common share - diluted $ 1.09 $ 0.48
Options to purchase 1.4 million and 1.6 million shares of common stock that
were outstanding during the quarter ended March 31, 2004 and 2003,
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.
NOTE 4 - BUSINESS ACQUISITIONS/DIVESTITURES
In March 2001, the Company acquired the dental injectible anesthetic
assets of AstraZeneca ("AZ Assets"). The total purchase price of this
transaction was composed of the following: an initial $96.5 million payment
which was made at closing in March 2001; a $20 million contingency payment
(including related accrued interest) associated with the first year sales of
injectible dental anesthetic which was paid during the first quarter of 2002.
9
In a separate agreement, as amended, the Company acquired the know-how,
patent and trademark rights to the non-injectible periodontal anesthetic
product known as Oraqix with a purchase price composed of the following: a
$2.0 million payment upon submission of a New Drug Application ("NDA") in the
U.S. and a Marketing Authorization Application ("MAA") in Europe for the
Oraqix product under development; payments of $6.0 million and $2.0 million
upon the approval of the NDA and MAA, respectively, for licensing rights; and
a $10.0 million prepaid royalty payment upon approval of both applications.
The $2.0 million payment related to the application filings was accrued and
classified within the restructuring and other costs line item during the
fourth quarter of 2001 and was paid during the first quarter of 2002. The MAA
was approved in Sweden, the European Union member reference state, and the
Company made the required $2.0 million payment to AstraZeneca in the second
quarter of 2003. The NDA application was approved in December 2003 and as a
result the remaining payments of $16.0 million became due and were accrued in
2003 and the payments were made in January 2004. These payments were
capitalized and will be amortized over the term of the licensing agreements.
NOTE 5 - SEGMENT INFORMATION
The Company follows Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for disclosing information
about reportable segments in financial statements. The Company has numerous
operating businesses covering a wide range of products and geographic
regions, primarily serving the professional dental market. Professional
dental products represented approximately 98% of sales for the periods ended
March 31, 2004 and 2003.
Operating businesses are organized into five operating groups, which have
overlapping product offerings, geographical presence, customer bases,
distribution channels, and regulatory oversight. In determining reportable
segments, the Company considers its operating and management structure and
the types of information subject to regular review by its chief operating
decision-maker. The accounting policies of the segments are consistent with
those described for the consolidated financial statements in the summary of
significant accounting policies (see Note 1). The Company measures segment
income for reporting purposes as net operating profit before restructuring,
interest and taxes. A description of the activities provided within each of
the Company's five reportable segments follows:
Dental Consumables - U.S. and Europe/Japan/Non-Dental
This business group includes responsibility for the design, manufacturing,
sales, and distribution for certain small equipment and chairside consumable
products in the U.S., Germany, Scandinavia, Iberia and Eastern Europe; the
design and manufacture of certain chairside consumable and laboratory
products in Japan, the sales and distribution of all Company products in
Japan; and the Company's non-dental business.
Endodontics/Professional Division Dental Consumables/Asia
This business group includes the responsibility for the design and
manufacturing for endodontic products in the U.S., Switzerland and Germany;
certain small equipment and chairside consumable products in the U.S.; and
laboratory products in China. The business is responsible for sales and
distribution of all Company products throughout Asia - except Japan; all
Company endodontic products in the U.S., Canada, Switzerland, Benelux,
Scandinavia, and Eastern Europe, and certain endodontic products in Germany;
and certain small equipment and chairside consumable products in the U.S.
Dental Consumables - United Kingdom, France, Italy, CIS, Middle East,
Africa/European Dental Laboratory Business
This business group includes responsibility for the design and manufacture
of dental laboratory products in Germany and the Netherlands and the sales
and distribution of these products in Europe, Eastern Europe, Middle East,
Africa and the CIS. The group also has responsibility for sales and
distribution of the Company's other dental products in France, United
Kingdom, Italy, Middle East, Africa and the CIS.
10
Australia/Canada/Latin America/U.S. Pharmaceutical
This business group includes responsibility for the design, manufacture,
sales and distribution of dental anesthetics in the U.S. and Brazil;
chairside consumable and laboratory products in Brazil. It also has
responsibility for the sales and distribution of all Company dental products
sold in Australia, Canada, Latin America and Mexico.
U.S. Dental Laboratory Business/Implants/Orthodontics
This business group includes the responsibility for the design,
manufacture, sales and distribution for laboratory products in the U.S. and
the sales and distribution of U.S. manufactured laboratory products in
certain international markets; the design, manufacture, world-wide sales and
distribution of the Company's dental implant and bone generation products;
and the world-wide sales and distribution of the Company's orthodontic
products.
Significant interdependencies exist among the Company's operations in
certain geographic areas. Inter-group sales are at prices intended to provide
a reasonable profit to the manufacturing unit after recovery of all
manufacturing costs and to provide a reasonable profit for purchasing
locations after coverage of marketing and general and administrative costs.
Generally, the Company evaluates performance of the operating groups based
on the groups' operating income and net third party sales excluding precious
metal content.
The following tables set forth information about the Company's operating
groups for March 31, 2004 and 2003:
Third Party Net Sales
Three Months Ended March 31,
2004 2003
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 69,302 $ 64,380
Endodontics/Professional Division
Dental Consumables/Asia 99,358 89,556
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 129,236 107,958
Australia/Canada/Latin America/
U.S. Pharmaceutical 27,463 25,197
U.S. Dental Laboratory Business/
Implants/Orthodontics 86,390 79,857
All Other (a) 3,632 4,288
Total $415,381 $371,236
11
Third Party Net Sales, excluding precious metal content
Three Months Ended March 31,
2004 2003
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 66,836 $ 60,652
Endodontics/Professional Division
Dental Consumables/Asia 98,027 88,511
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 87,317 69,431
Australia/Canada/Latin America/
U.S. Pharmaceutical 27,335 24,945
U.S. Dental Laboratory Business/
Implants/Orthodontics 75,857 69,059
All Other (a) 3,632 4,288
Total 359,004 316,886
Precious Metal Content 56,377 54,350
Total including Precious Metal Content $415,381 $371,236
Intersegment Net Sales
Three Months Ended March 31,
2004 2003
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 54,778 $ 45,523
Endodontics/Professional Division
Dental Consumables/Asia 38,921 38,006
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 23,444 21,538
Australia/Canada/Latin America/
U.S. Pharmaceutical 9,237 7,191
U.S. Dental Laboratory Business/
Implants/Orthodontics 7,256 7,133
All Other (a) 41,965 40,933
Eliminations (175,601) (160,324)
Total $ -- $ --
12
Segment Operating Income
Three Months Ended March 31,
2004 2003
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 19,048 $ 16,167
Endodontics/Professional Division
Dental Consumables/Asia 38,961 37,034
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 12,017 5,637
Australia/Canada/Latin America/
U.S. Pharmaceutical 2,910 2,274
U.S. Dental Laboratory Business/
Implants/Orthodontics 13,383 10,870
All Other (a) (15,489) (11,458)
Segment Operating Income 70,830 60,524
Reconciling Items:
Restructuring and other costs (income) 724 --
Interest Expense 5,947 6,094
Interest Income (674) (266)
Other (income) expense, net 223 (510)
Income before income taxes $ 64,610 $ 55,206
Assets
March 31, December 31,
2004 2003
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 190,611 $ 187,248
Endodontics/Professional Division
Dental Consumables/Asia 1,218,533 1,215,723
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 581,464 590,208
Australia/Canada/Latin America/
U.S. Pharmaceutical 275,941 256,299
U.S. Dental Laboratory Business/
Implants/Orthodontics 311,294 311,782
All Other (a) (62,560) (115,673)
Total $ 2,515,283 $ 2,445,587
(a) Includes: two operating divisions not managed by named segments,
operating expenses of two distribution warehouses not managed by named
segments, Corporate and inter-segment eliminations.
13
NOTE 6 - DISCONTINUED OPERATIONS
During the fourth quarter of the year ended December 31, 2003, the
Company's management and board of directors made the decision to divest of its
Gendex equipment business. The sale of Gendex narrows the Company's product
lines to focus primarily on dental consumables. Gendex is a manufacturer of
dental x-ray equipment and accessories and intraoral cameras. On December 11,
2003, the Company entered into a definitive agreement to sell the assets and
related liabilities of the Gendex business to Danaher Corporation for $102.5
million cash, plus the assumption of certain pension liabilities. The
agreement also contains a provision for a post-closing adjustment to the
purchase price based on changes in certain balance sheet accounts. The
transaction closed on February 27, 2004. This transaction resulted in a
pre-tax gain of $72.9 million ($43.0 million after-tax).
Also during the fourth quarter of the year ended December 31, 2003, the
Company's management and board of directors made a decision to discontinue
the operations of the Company's dental needle business.
The Gendex business and the dental needle business are distinguishable as
separate components of the Company in accordance with Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets". The Gendex business and the needle business
were classified as held for sale at December 31, 2003 in accordance with SFAS
144. The statements of operations and related financial statement disclosures
for all prior years have been restated to present the Gendex business and
needle business as discontinued operations separate from continuing
operations.
Discontinued operations net revenue and income before income taxes for the
periods presented were as follows:
Three Months Ended March 31,
----------------------------
2004 2003
(in thousands)
Net sales $16,911 $24,951
Gain on sale of Gendex 72,943 --
Income before income taxes
(including gain on sale in 2004) 73,109 1,513
The following assets and liabilities are reclassified as held for sale for
the periods presented as follows:
March 31, December 31,
2004 2003
(in thousands)
Accounts and notes receivable-trade, net $ -- $10,626
Inventories, net -- 16,848
Prepaid expenses and other current assets -- 788
Current assets of discontinued operations held for sale $ -- $28,262
Property, plant and equipment, net $ 1,802 $ 7,656
Identifiable intangible assets, net -- 4,022
Goodwill, net -- 5,771
Noncurrent assets of discontinued operations held for sale $ 1,802 $17,449
Accounts payable $ -- $10,021
Accrued liabilities -- 10,185
Current liabilities of discontinued operations $ -- $20,206
Other noncurrent liabilities $ -- $ 1,269
Noncurrent liabilities of discontinued operations $ -- $ 1,269
14
NOTE 7 - INVENTORIES
Inventories consist of the following:
March 31, December 31,
2004 2003
(in thousands)
Finished goods $125,365 $123,290
Work-in-process 41,099 41,997
Raw materials and supplies 41,372 40,300
$207,836 $205,587
NOTE 8 - BENEFIT PLANS
The components of the net periodic benefit cost for the Company's benefit
plans are as follows:
Other Postretirement
Pension Benefits Benefits
-------------------------------- -----------------------------
Three Months Ended March 31, Three Months Ended March 31,
2004 2003 2004 2003
(in thousands)
Service cost $ 638 $ 549 $ 67 $ 35
Interest cost 934 789 171 109
Expected return on plan assets (128) (127) (171) (103)
Net amortization and deferral 117 84 116 63
Net periodic benefit cost $ 1,561 $ 1,295 $ 183 $ 104
Information related to the funding of the Company's benefit plans for 2004
is as follows:
Other
Pension Postretirement
Benefits Benefits
(in thousands)
Actual, March 31, 2004 $ 644 $ 527
Projected for the remainder of the year 2,473 518
Total for year $3,117 $1,045
15
NOTE 9 - RESTRUCTURING AND OTHER COSTS
During the fourth quarter of 2003, the Company recorded restructuring and
other costs of $4.5 million. These costs were primarily related to impairment
charges recorded to certain investments in emerging technologies. The
products related to these technologies were abandoned and therefore these
assets were no longer viewed as being recoverable. In addition, certain costs
were associated with the restructuring or consolidation of the Company's
operations, primarily its U.S. laboratory businesses and the closure of its
European central warehouse in Nijmegan, The Netherlands. Included in this
charge were severance costs of $0.9 million, lease/contract termination costs
of $0.6 million and intangible and other asset impairment charges of $3.0
million. In addition, during 2004, the Company recorded additional charges,
incurred during the period, related to these plans of $0.2 million for
severance costs, $0.1 million of lease/contract termination costs and $0.4
million of other restructuring costs. This restructuring plan will result in
the elimination of approximately 65 administrative and manufacturing
positions primarily in the United States, 35 of which remain to be eliminated
as of March 31, 2004. Certain of these positions will need to be replaced at
the consolidated site and therefore the net reduction in positions is
expected to be approximately 25. This plan is expected to be complete by
December 31, 2004. The major components of these charges and the remaining
outstanding balances at March 31, 2004 are as follows:
Amounts Amounts Balance
2003 Applied 2004 Applied March 31,
Provisions 2003 Provisions 2004 2004
Severance $ 908 $ (49) $ 186 $ (396) $ 649
Lease/contract
terminations 562 (410) 82 (138) 96
Other restructuring
costs 27 (27) 456 (250) 206
Intangible and other asset
impairment charges 3,000 (3,000) -- -- --
$ 4,497 $(3,486) $ 724 $ (784) $ 951
During the second quarter of 2002, the Company recorded a charge of $1.7
million for restructuring and other costs. The charge primarily related to
the elimination of duplicative functions created as a result of combining the
Company's Ceramed and U.S. Friadent divisions. Included in this charge were
severance costs of $0.6 million, lease/contract termination costs of $0.9
million and $0.2 million of impairment charges on fixed assets that will be
disposed of as a result of the restructuring plan. This restructuring plan
resulted in the elimination of approximately 35 administrative and
manufacturing positions in the United States and was substantially complete
as of December 31, 2002.
As part of combining Austenal with the Company in 2002, $4.4 million of
liabilities were established through purchase accounting for the
restructuring of the acquired company's operations, primarily in the United
States and Germany. Included in this liability were severance costs of $2.9
million, lease/contract termination costs of $1.4 million and other
restructuring costs of $0.1 million. During 2003, the Company reversed a
total of $1.1 million, which was recorded to goodwill, as a change in
estimate as it determined the costs to complete the plan were lower than
originally estimated. This restructuring plan included the elimination of
approximately 75 administrative and manufacturing positions in the United
States and Germany. This plan was substantially complete at March 31, 2004.
16
The major components of the 2002 restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at March 31, 2004 are as follows:
Change
in Estimate
Amounts Recorded
Recorded Through
Through Amounts Change Amounts Purchase Amounts Balance
2002 Purchase Applied in Estimate Applied Accounting Applied March 31,
Provisions Accounting 2002 2002 2003 2003 2004 2004
Severance $ 541 $ 2,927 $ (530) $ (164) $ (988) $ (878) $ (452) $ 456
Lease/contract
terminations 895 1,437 (500) 120 (665) (245) (105) 937
Other restructuring
costs 38 60 (60) (36) - - - 2
Fixed asset
impairment charges 195 - (195) - - - - -
$1,669 $ 4,424 $(1,285) $ (80) $(1,653) $(1,123) $ (557) $1,395
During the fourth quarter 2003, the Company made the decision to
discontinue the operations of its dental needle business. The business
consists of one manufacturing location which ceased operations on March 31,
2004. As a result of this decision, the Company recorded a charge in the
fourth quarter of 2003 of $1.6 million included in income from discontinued
operations. Included in this charge were severance costs of $0.4 million,
fixed asset impairment charges of $0.5 million, $0.4 million of impairment
charges related to goodwill and other restructuring costs of $0.3 million. In
addition, during 2004, the Company recorded additional charges, incurred
during the period, related to this closing of $0.1 million for severance
costs and $0.1 million of other restructuring costs. This plan resulted in
the elimination of approximately 55 administrative and manufacturing
positions in the United States. This plan was substantially complete at March
31, 2004. The major components of these charges and the remaining outstanding
balances at March 31, 2004 are as follows:
Amounts Amounts Balance
2003 Applied 2004 Applied March 31,
Provisions 2003 Provisions 2004 2004
Severance $ 405 $ -- $ 78 $ -- $ 483
Other restructuring costs 300 (300) 125 (125) --
Fixed asset impairment charges 520 (520) -- -- --
Goodwill impairment charges 360 (360) -- -- --
$ 1,585 $(1,180) $ 203 $ (125) $ 483
NOTE 10 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's activities expose it to a variety of market risks which
primarily include the risks related to the effects of changes in foreign
currency exchange rates, interest rates and commodity prices. These financial
exposures are monitored and managed by the Company as part of its overall
risk-management program. The objective of this risk management program is to
reduce the potentially adverse effects that these market risks may have on
the Company's operating results.
A portion of the Company's borrowings and certain inventory purchases are
denominated in foreign currencies which exposes the Company to market risk
associated with exchange rate movements. The Company's policy generally is
to hedge major foreign currency transaction exposures through foreign
exchange forward contracts. These contracts are entered into with major
financial institutions thereby minimizing the risk of credit loss. In
addition, the Company's investments in foreign subsidiaries are denominated
in foreign currencies, which creates exposures to changes in exchange rates.
The Company uses debt denominated in the applicable foreign currency as a
means of hedging a portion of this risk.
17
With the Company's significant level of long-term debt, changes in the
interest rate environment can have a significant impact on the Company's
earnings, depending upon its interest rate exposure. As a result, the Company
manages its interest rate exposure with the use of interest rate swaps, when
appropriate, based upon market conditions.
The manufacturing of some of the Company's products requires the use of
commodities which are subject to market fluctuations. In order to limit the
unanticipated earnings fluctuations from such market fluctuations, the
Company selectively enters into commodity price swaps, primarily for silver,
used in the production of dental amalgam. Additionally, the Company uses
non-derivative methods, such as the precious metal consignment agreement to
effectively hedge commodity risks.
Cash Flow Hedges
The Company uses interest rate swaps to convert a portion of its variable
rate debt to fixed rate debt. As of March 31, 2004, the Company has two
groups of significant variable rate to fixed rate interest rate swaps. One
of the groups of swaps was entered into in January 2000 and February 2001,
has a notional amount totaling 180 million Swiss francs, and effectively
converts the underlying variable interest rates on the debt to a fixed rate
of 3.3% for a period of approximately four years. The other significant
group of swaps entered into in February 2002, has notional amounts totaling
12.6 billion Japanese yen, and effectively converts the underlying variable
interest rates to an average fixed rate of 1.6% for a term of ten years. As
part of entering into the Japanese yen swaps in February 2002, the Company
entered into reverse swap agreements with the same terms to offset 115
million of the 180 million of Swiss franc swaps. Additionally, in the third
quarter of 2003, the Company exchanged the remaining portion of the Swiss
franc swaps, 65 million Swiss francs, for a forward-starting variable to
fixed interest rate swap. Completion of this exchange allowed the Company to
pay down debt and the forward-starting interest rate swap locks in the rate
of borrowing for future Swiss franc variable rate debt, that will arise upon
the maturity of the Company's fixed rate Swiss franc notes in 2005, at 4.2%
for a term of seven years.
The Company selectively enters into commodity price swaps to effectively
fix certain variable raw material costs. In April 2004, the Company entered
into a commodity price swap agreement with notional amounts totaling 80,000
troy ounces of silver bullion, used in the production of its amalgam
products, to hedge forecasted purchases throughout the remainder of calendar
year 2004. The average fixed rate of this agreement is $5.95 per troy ounce.
The Company generally hedges between 33% and 67% of its projected annual
silver needs related to these products. Additionally, in April 2004, the
Company entered into a commodity price swap agreement with notional amounts
totaling 1,200 troy ounces of platinum bullion, used in the production of its
impression material products, to hedge forecasted purchases throughout the
remainder of calendar year 2004. The average fixed rate of this agreement is
$781.00 per troy ounce. The Company generally hedges between 33% and 67% of
its projected annual platinum needs related to these products.
The Company enters into forward exchange contracts to hedge the foreign
currency exposure of its anticipated purchases of certain inventory from
Japan. The forward contracts that are used in this program mature in twelve
months or less. The Company generally hedges between 33% and 67% of its
anticipated purchases from Japan.
Fair Value Hedges
The Company uses interest rate swaps to convert a portion of its fixed rate
debt to variable rate debt. In December 2001, the Company issued 350 million
in Eurobonds at a fixed rate of 5.75% maturing in December 2006 to partially
finance the Degussa Dental acquisition. Coincident with the issuance of the
Eurobonds, the Company entered into two integrated transactions: (a) an
interest rate swap agreement with notional amounts totaling Euro 350 million
which converted the 5.75% fixed rate Euro-denominated financing to a variable
rate (based on the London Interbank Borrowing Rate ("LIBOR"))
Euro-denominated financing; and (b) a cross-currency basis swap which
converted this variable rate Euro-denominated financing to variable rate U.S.
dollar-denominated financing.
The Euro 350 million interest rate swap agreement was designated as a fair
value hedge of the Euro 350 million in fixed rate debt pursuant to SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133). In accordance with SFAS No. 133, the interest rate swap and underlying
Eurobond have been marked-to-market via the income statement. As of March
31, 2004 and December 31, 2003, the accumulated fair value of the interest
rate swap was $19.0 million and $14.1 million, respectively, and was recorded
in Other Noncurrent Assets. The notional amount of the underlying Eurobond
was increased by a corresponding amount at March 31, 2004 and December 31,
2003.
18
From inception through the first quarter of 2003, the cross-currency
element of the integrated transaction was not designated as a hedge and
changes in the fair value of the cross-currency element of the integrated
transaction were marked-to-market in the income statement, offsetting the
impact of the change in exchange rates on the Eurobonds that were also
recorded in the income statement. As of March 31, 2004 and December 31, 2003,
the accumulated fair value of the cross-currency element of the integrated
transaction was $49.4 million and $56.6 million, respectively, and was
recorded in Other Noncurrent Assets. The notional amount of the underlying
Eurobond was increased by a corresponding amount at March 31, 2004 and
December 31, 2003. See Hedges of Net Investments in Foreign Operations below
for further information related to the cross-currency element of the
integrated transaction.
Hedges of Net Investments in Foreign Operations
The Company has numerous investments in foreign subsidiaries. The net
assets of these subsidiaries are exposed to volatility in currency exchange
rates. Currently, the Company uses both non-derivative financial
instruments, including foreign currency denominated debt held at the parent
company level and long-term intercompany loans, for which settlement is not
planned or anticipated in the foreseeable future and derivative financial
instruments to hedge some of this exposure. Translation gains and losses
related to the net assets of the foreign subsidiaries are offset by gains and
losses in the non-derivative and derivative financial instruments designated
as hedges of net investments.
At March 31, 2004 and December 31, 2003, the Company had Euro-denominated,
Swiss franc-denominated and Japanese yen-denominated debt (at the parent
company level) to hedge the currency exposure related to a designated portion
of the net assets of its European, Swiss and Japanese subsidiaries. During
2003, the Company designated its Euro-denominated debt as a hedge of a
portion of the net assets of its European subsidiaries, due to the change in
the cross-currency element of the integrated transaction discussed below. At
March 31, 2004 and December 31, 2003, the accumulated translation gains and
losses related to foreign currency denominated-debt included in Accumulated
Other Comprehensive income (loss) were $79.6 million and $83.5 million,
respectively.
In the first quarter of 2003, the Company amended the cross-currency
element of the integrated transaction to realize the $ 51.8 million of
accumulated value of the cross-currency swap. The amendment eliminated the
final payment (at a fixed rate of $.90) of $315 million by the Company in
exchange for the final payment of Euro 350 million by the counterparty in
return for the counterparty paying the Company LIBOR plus 4.29% for the
remaining term of the agreement or approximately $14.0 million on an annual
basis. Other cash flows associated with the cross-currency element of the
integrated transaction, including the Company's obligation to pay on $315
million LIBOR plus approximately 1.34% and the counterparty's obligation to
pay on Euro 350 million LIBOR plus approximately 1.47%, remained unchanged by
the amendment. Additionally, the cross-currency element of the integrated
transaction continues to be marked-to-market.
No gain or loss was recognized upon the amendment of the cross currency
element of the integrated transaction, as the interest rate of LIBOR plus
4.29% was established to ensure that the fair value of the cash flow streams
before and after amendment were equivalent.
Since, as a result of the amendment, the Company became economically
exposed to the impact of exchange rates on the final principal payment on the
Euro 350 million Eurobonds, the Company designated the Euro 350 million
Eurobonds as a hedge of net investment, on the date of the amendment. Since
March 2003, the effect of currency on the Euro 350 million Eurobonds of $30.5
million has been recorded as part of "Accumulated other comprehensive income".
Other
The aggregate net fair value of the Company's derivative instruments at
March 31, 2004 and December 31, 2003 was $59.8 million and $63.1 million,
respectively.
In accordance with SFAS 52, "Foreign Currency Translation", the Company
utilizes long-term intercompany loans, for which settlement is not planned or
anticipated in the foreseeable future, to eliminate foreign currency
transaction exposures of certain foreign subsidiaries. Net gains or losses
related to these long-term intercompany loans are included in "Accumulated
other comprehensive income ".
19
NOTE 11- COMMITMENTS AND CONTINGENCIES
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes it is
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. The trial in the government's case
was held in April and May 2002. On August 14, 2003, the Judge entered a
decision that the Company's tooth distribution practices do not violate the
antitrust laws. On October 14, 2003, the Department of Justice appealed this
decision to the U.S. Third Circuit Court of Appeals. The parties are
proceeding in the appeal under the briefing schedule issued by the Third
Circuit.
Subsequent to the filing of the Department of Justice Complaint in 1999,
several private party class actions were filed based on allegations similar
to those in the Department of Justice case, on behalf of laboratories, and
denture patients in seventeen states who purchased Trubyte teeth or products
containing Trubyte teeth. These cases were transferred to the U.S. District
Court in Wilmington, Delaware. The private party suits seek damages in an
unspecified amount. The Court has granted the Company's Motion on the lack
of standing of the laboratory and patient class actions to pursue damage
claims. The Plaintiffs in the laboratory case filed a petition with the Third
Circuit to hear an interlocutory appeal of this decision, which petition was
granted on March 26, 2004. Also, private party class actions on behalf of
indirect purchasers were filed in California and Florida state courts. The
California and Florida cases have been dismissed by the Plaintiffs following
the decision by the Federal District Court Judge issued in August 2003.
On March 27, 2002, a Complaint was filed in Alameda County, California
(which was transferred to Los Angeles County) by Bruce Glover, D.D.S.
alleging, inter alia, breach of express and implied warranties, fraud, unfair
trade practices and negligent misrepresentation in the Company's manufacture
and sale of Advance(R) cement. The Complaint seeks damages in an unspecified
amount for costs incurred in repairing dental work in which the Advance(R)
product allegedly failed. In September 2003, the Plaintiff filed a Motion
for class certification, which the Company opposed. Oral arguments were held
in December 2003, and in January 2004, the Judge entered an Order granting
class certification only on the claims of breach of warranty and fraud. In
general, the Class is defined as California dentists who purchased and used
Advance(R) cement and were required, because of failures of the cement, to
repair or reperform dental procedures. The Company has filed a Writ of
Mandate in the appellate court seeking reversal of the class certification
and briefing is underway. The Advance(R) cement product was sold from 1994
through 2000 and total sales in the United States during that period were
approximately $5.2 million.
NOTE 12 - ACCOUNTING CHARGES AND RESERVE REVERSALS
In the first and second quarters of 2003, the Company recorded pretax
charges of $4.1 million and $5.5 million, respectively, related primarily to
adjustments to inventory, accounts receivable, and prepaid expense accounts
at one division in the United States and two international subsidiaries. All
of these operating units had been involved in integrating one or more of the
acquisitions completed in 2001. Of the $9.6 million in total pretax charges
recorded in the first and second quarters of 2003, $2.4 million were
determined to be properly recorded as changes in estimate, $0.4 million were
determined to be errors between the first and second quarters of 2003, and
the remaining $6.8 million ($4.6 million after tax) were determined to be
errors relating to prior periods ("Charge Errors"). The Charge Errors
included $3.0 million related to inaccurate reconciliations and valuation of
inventory, $2.0 million related to inaccurate reconciliations and valuation
of accounts receivable, $1.3 million related to unrecoverable prepaid
expenses and $0.5 million related to other accounts.
In addition to the aforementioned, in the first and second quarters of
2003, the Company determined that $4.8 million in reserves reversed in 2003
and $4.1 million of reserves reversed in 2001 and 2002 should have been
reversed in earlier years or had been erroneously established ("Reserve
Errors"). The Reserve Errors occurred in 2000 through 2002 and related
primarily to asset valuation accounts and accrued liabilities, including (on
a pre-tax basis) $5.1 million related to product return provisions, $1.1
million related to bonus accruals, $0.8 million related to product
warranties, $0.7 million related to inventory valuation and $1.2 million
related to other accounts.
If the above described errors had been recorded in the proper periods, net
income would have been higher by $1.7 million ($0.02 per diluted share) in
the first quarter of 2003.
20
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, 2003.
OVERVIEW
Dentsply International Inc. is the world's largest manufacturer of
professional dental products. The Company is headquartered in the United
States, and operates in more than 120 other countries, principally through
its foreign subsidiaries. While the United States and Europe are the
Company's largest markets, the Company serves all of the major professional
dental markets worldwide.
The Company monitors numerous benchmarks in evaluating its business,
including: (1) internal growth in the United States, Europe and the Pacific
Rim; (2) the development and introduction of innovative new products; (3)
growth through acquisition; and (4) continued focus on controlling costs and
enhancing efficiency. We define "internal growth" as the increase in our net
sales from period to period, excluding precious metal content, the impact of
changes in currency exchange rates, and the net sales, for a period of twelve
months following the transaction date, of businesses that we have acquired or
divested.
Management believes that an internal growth rate of 5-6% is a long-term
sustainable rate for the Company. During the three months ended March 31,
2004, the Company's overall internal growth was 6.0%. Our internal growth
rate in the United States, the largest dental market in the world and which
represents approximately 42% of our sales, slowed to 2.0% in the first
quarter of 2004, due in part to weak laboratory equipment sales. Management
expects that the sales growth will improve in the Company's laboratory
product category in the United States throughout 2004, which may result in an
improved internal growth rate over the period. In contrast to the United
States, the rate of internal growth in the first quarter of 2004 in Europe,
which represents approximately 40% of our sales, was 11.0%, due largely to
strong growth in implant and endodontic products. Management anticipates
continued strong growth in Europe during the remainder of 2004, although the
rate may slow from that reported for the first quarter. Our internal growth
rate in all other regions, which represents approximately 18% of our sales,
was 6.4% due largely to strong growth in the Asian region, excluding Japan.
Although a small component of our business (approximately 4% of sales), the
Asian region, excluding Japan, has historically been one of the highest
growth regions for the Company and management believes it represents a
long-term growth opportunity for the industry and the Company. Japan
represents the third largest dental market in the world behind the United
States and Europe. Japan's dental market growth has been weak as it closely
parallels its economic growth. The Company also views the Japanese market as
an important growth opportunity, both in terms of a recovery in the Japanese
economy and the opportunity to increase our market share.
Product innovation is an important element of the Company's growth
strategy. Management plans include an acceleration of investment in research
and development of approximately 20% in 2004 to support new and innovative
products and technology. Management believes that the Company's strategy of
being a lead innovator in the industry is an important element to the
long-term success of the Company.
Although the professional dental market in which the Company operates has
experienced consolidation, it is still a fragmented industry. The Company
continues to focus on opportunities to expand the Company's product offerings
through acquisition. Management believes that there will continue to be
adequate opportunities to participate as a consolidator in the industry for
the foreseeable future.
21
The Company also remains focused on reducing costs and improving
competitiveness. Management expects to continue to consolidate operations or
functions and reduce the cost of those operations and functions while
improving service levels. The Company believes that the benefits from these
opportunities will improve the cost structure and offset areas of rising
costs such as energy, benefits, regulatory oversight and compliance and
financial reporting in the United States.
FACTORS IMPACTING COMPARABILITY BETWEEN PERIODS
Accounting Charges and Reserve Reversals
In the first and second quarters of 2003, the Company recorded pretax
charges of $4.1 million and $5.5 million, respectively, related primarily to
adjustments to inventory, accounts receivable, and prepaid expense accounts
at one division in the United States and two international subsidiaries. All
of these operating units had been involved in integrating one or more of the
acquisitions completed in 2001. Of the $9.6 million in total pretax charges
recorded in the first and second quarters of 2003, $2.4 million were
determined to be properly recorded as changes in estimate, $0.4 million were
determined to be errors between the first and second quarters of 2003, and
the remaining $6.8 million ($4.6 million after tax) were determined to be
errors relating to prior periods ("Charge Errors"). The Charge Errors
included $3.0 million related to inaccurate reconciliations and valuation of
inventory, $2.0 million related to inaccurate reconciliations and valuation
of accounts receivable, $1.3 million related to unrecoverable prepaid
expenses and $0.5 million related to other accounts.
In addition to the aforementioned, in the first and second quarters of
2003, the Company determined that $4.8 million in reserves reversed in 2003
and $4.1 million of reserves reversed in 2001 and 2002 should have been
reversed in earlier years or had been erroneously established ("Reserve
Errors"). The Reserve Errors occurred in 2000 through 2002 and related
primarily to asset valuation accounts and accrued liabilities, including (on
a pre-tax basis) $5.1 million related to product return provisions, $1.1
million related to bonus accruals, $0.8 million related to product
warranties, $0.7 million related to inventory valuation and $1.2 million
related to other accounts.
If the above described errors had been recorded in the proper periods, net
income would have been higher by $1.7 million ($0.02 per diluted share) in
the first quarter of 2003.
Discontinued Operations
In December 2003, the Company entered into an agreement to sell its Gendex
equipment business to Danaher Corporation. Additionally, the Company
announced to its dental needle customers that it was discontinuing production
of dental needles. The sale of the Gendex business and discontinuance of
dental needle production have been accounted for as discontinued operations
pursuant to Statement of Financial Accounting Standard No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". The results of
operations for all periods presented have been restated to reclassify the
results of operations for both the Gendex equipment and the dental needle
businesses as discontinued operations.
RESULTS OF CONTINUING OPERATIONS, QUARTER ENDED MARCH 31, 2004 COMPARED TO
QUARTER ENDED MARCH 31, 2003
Net Sales
The discussions below summarize the Company's sales growth, excluding
precious metal content, from internal growth and net acquisition growth and
highlights the impact of foreign currency translation. These disclosures of
net sales growth provide the reader with sales results on a comparable basis
between periods.
22
As the presentation of net sales excluding precious metal content could be
considered a measure not calculated in accordance with generally accepted
accounting principles (a so-called non-GAAP measure), the Company provides
the following reconciliation of net sales to net sales excluding precious
metal content. Our definitions and calculations of net sales excluding
precious metal content and other operating measures derived using net sales
excluding precious metal content may not necessarily be the same as those
used by other companies.
Three Months Ended
March 31,
2004 2003
(in millions)
Net Sales $ 415.4 $ 371.2
Precious Metal Content of Sales (56.4) (54.3)
Net Sales Excluding Precious Metal Content $ 359.0 $ 316.9
Management believes that the presentation of net sales excluding precious
metal content provides useful information to investors because a significant
portion of DENTSPLY's net sales is comprised of sales of precious metals
generated through sales of the Company's precious metal alloy products, which
are used by third parties to construct crown and bridge materials.
Due to the fluctuations of precious metal prices and because the precious
metal content of the Company's sales is largely a pass-through to customers
and has minimal effect on earnings, DENTSPLY reports sales both with and
without precious metal content to show the Company's performance independent
of precious metal price volatility and to enhance comparability of
performance between periods.
The Company uses its cost of precious metal purchased as a proxy for the
precious metal content of sales, as the precious metal content of sales is
not separately tracked and invoiced to customers. The Company believes that
it is reasonable to use the cost of precious metal content purchased in this
manner since precious metal alloy sale prices are generally adjusted when the
prices of underlying precious metals change.
Net sales during the quarter ended March 31, 2004 increased $44.2 million,
or 11.9%, over 2003 to $415.4 million. Net sales, excluding precious metal
content, increased $42.1 million, or 13.3%, to $359.0 million. Sales growth,
excluding precious metal content,- was comprised of 6.0% internal growth and
7.3% foreign currency translation. The 6.0% internal growth was comprised of
11.0% in Europe, 2.0% in the United States and 6.4% for all other regions
combined.
The internal sales growth during the first quarter of 2004, excluding
precious metal content, was highest in Europe with strong growth in dental
implant, endodontic and dental laboratory products. In the United States,
strong internal sales growth in endodontic and preventive products was offset
by negative internal growth in dental laboratory products. The Company
experienced positive growth in dental laboratory consumable products but was
offset by negative growth in dental laboratory equipment products. The
internal growth of 6.4% in all other regions was largely the result of strong
growth in the Asian region, excluding Japan.
Gross Profit
Gross profit was $204.9 million for the quarter ended March 31, 2004
compared to $182.8 million in 2003, an increase of $22.1 million, or 12.1%.
Gross profit, including precious metal content, represented 49.3% of net
sales in 2004 compared to 49.2% in 2003. The gross profit for 2004, excluding
precious metal content, represented 57.1% of net sales compared to 57.7% in
2003. Gross profit as reported would have been higher by $1.7 million in 2003
had the Charge Errors and Reserve Errors been recorded in the proper periods.
The decrease in the gross profit percentage excluding precious metal content
from 2003 to 2004 was due in part to startup costs that were incurred in the
pharmaceutical plant in Chicago as the media and the stability trials were
being conducted and duplicate costs that were incurred with the relocation of
the distribution facility in Europe where two facilities were operating at
the same time. In addition, lower overhead absorption due to reduced
production levels compared to the prior year, the negative currency impact of
intercompany sourcing transactions and slight product mix and geographic mix
changes contributed to the decline.
23
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $11.8
million, or 9.6%, to $134.0 million during the first quarter of 2004 from
$122.2 million in 2003. The 9.6% increase in expenses, as reported, reflects
increases for the translation impact from a weaker U.S. dollar of
approximately $9.7 million. As a percentage of sales, including precious
metal content, SG&A expenses decreased to 32.3% compared to 32.9% in 2003. As
a percentage of sales, excluding precious metal content, SG&A expenses
decreased to 37.3% compared to 38.6% in 2003. SG&A would have been lower by
$0.8 million in 2003 had the Charge Errors and Reserve Errors been recorded
in the proper periods. The continued leveraging of expenses was the primary
reason for the percentage decrease in SG&A expenses from 2003 to 2004.
During 2004, the Company recorded restructuring and other costs of $0.7
million. These costs were primarily related to the costs incurred in the
closure of the Company's European central warehouse in Nijmegan, The
Netherlands and transfer of such function to a Company-owned facility in
Radolfzell, Germany, and additional charges related to the consolidation of
its U.S. laboratory businesses which was initiated in the fourth quarter of
2003. The Company anticipates the remaining costs to complete these
restructuring initiatives will be approximately $1.5 million during the
remainder of 2004, which will be expensed as the costs are incurred. The
transfer of the European warehouse is an effort to improve customer service
levels and reduce costs. This relocation was substantially complete at March
31, 2004. The Company made the decision to consolidate the laboratory
businesses in order to improve operational efficiencies, to broaden customer
penetration and to strengthen customer service. This plan is expected to be
complete in late 2004. These plans are projected to result in future annual
expense reductions of approximately $2.0 million, beginning in the second
half of 2004.
Other Income and Expenses
Net interest expense and other expenses were $5.5 million during the period
ended March 31, 2004 compared to $5.3 million in 2003. The 2004 period
included $5.3 million of net interest expense, $0.2 million of currency
transaction gains and $0.4 million of other nonoperating costs. The 2003
period included $5.8 million of net interest expense, $0.6 million of
currency transaction losses; offset by a $1.2 million mark-to-market gain on
the PracticeWorks warrants, which were subsequently sold in October 2003 when
Eastman Kodak purchased PracticeWorks.
Earnings
The effective tax rate decreased to 29.2% for the period ended March 31,
2004 from 32.2% in 2003. The 2004 period includes a benefit of $1.2 million
resulting from the resolution of a tax audit in a foreign jurisdiction and
submission of additional credits both related to prior periods. This benefit
reduced the effective tax rate by 1.9% during the three months ended March
31, 2004.
Income from continuing operations increased $8.4 million, or 22.2%, to
$45.8 million during the first quarter of 2004 from $37.4 million in 2003.
Fully diluted earnings per share from continuing operations during the 2004
period were $0.56, an increase of 19.1% from $0.47 in 2003. Had the Charge
Errors and Reserve Errors described above been recorded in the proper
periods, income from continuing operations would have been higher by $1.7
million ($0.02 per diluted share) in the 2003 period.
Discontinued Operations
The Company entered into an agreement to sell its Gendex equipment business
to Danaher Corporation in December 2003, and completed the transaction in the
first quarter of 2004. Also in December 2003, the Company announced to its
dental needle customers that it was discontinuing production of dental
needles. Accordingly, the Gendex equipment and needle businesses have been
reported as discontinued operations for all periods presented.
Income from discontinued operations was $43.1 million during the quarter
ended March 31, 2004 and $0.8 million for the same period in 2003. Fully
diluted earnings per share from discontinued operations were $0.53 and $0.01
for the periods ended March 31, 2004 and 2002, respectively. The income from
discontinued operations in 2004 was almost entirely related to the gain
realized on the sale of Gendex business.
24
Operating Segment Results
The Company has five operating groups, managed by five Senior Vice
Presidents which equate to its operating segments. Each of these operating
groups covers a wide range of product categories and geographic regions. The
product categories and geographic regions often overlap across the groups.
Further information regarding the details of each group is presented in Note
5 of the Consolidated Condensed Financial Statements. The management of each
group is evaluated for performance and incentive compensation purposes on
third party net sales, excluding precious metal content, and segment
operating income.
Dental Consumables--U.S. and Europe/Japan/Non-dental
Net sales for this group was $66.8 million during the quarter ended March
31, 2004, a 10.2% increase compared to $60.7 million in 2003. Internal
growth was 3.9% and currency translation added 6.3% to sales in 2004. The
European consumables business had the highest growth in the group, which was
offset by slower sales growth in the United States and lower sales in the
Japanese market.
Operating profit increased $2.8 million during the three months ended March
31, 2004 to $19.0 million from $16.2 million in 2003. Sales growth in the
European dental consumable business and the leveraging of SG&A expenses in
the European dental consumable and Japanese businesses were the most
significant contributors to the increase. Operating profit also benefited
from currency translation. Operating profit would have been lower by $2.4
million in 2003 if the Reserve Errors had been recorded in the proper period.
Endodontics/Professional Division Dental Consumables/Asia
Net sales for this group increased $9.5 million during the three months
ended March 31, 2004, or 10.8%, up from $88.5 million in 2003. Internal
growth was 8.6% and currency translation added 2.2% to 2004 sales. Sales
growth was strong in all the businesses of the group.
Operating profit was $38.9 million during the quarter ended March 31, 2004,
an increase of $1.9 million from $37.0 million in 2003. This increase was
driven by continued sales growth in the group's businesses, offset somewhat
by higher SG&A expenses in the Asian business and a lower gross profit margin
in the group due in part to the negative currency impact of intercompany
sourcing transactions. In addition, operating profit benefited from currency
translation. Operating profit would have been higher by $0.1 million in 2003
if the Reserve Errors had been recorded in the proper period.
Dental Consumables--United Kingdom, France, Italy, CIS, Middle East,
Africa/European Dental Laboratory Business
Net sales for this group was $87.3 million during the period ended March
31, 2004, a 25.8% increase compared to $69.4 million in 2003. Internal growth
was 9.8% and currency translation added 16.0% to sales in 2004. The primary
reason for the sales growth was strong sales performance in the European
dental laboratory business and the CIS and Africa dental consumables
businesses.
Operating profit increased $6.4 million during the three months ended March
31, 2004 to $12.0 million from $5.6 million in 2003. The operating profit
improvement was primarily related to the sales growth and the leveraging of
SG&A expenses in the European dental laboratory business. In addition,
operating profit benefited from currency translation. Operating profit would
have been higher by $1.4 million in 2003 if the Charge Errors and Reserve
Errors had been recorded in the proper period.
Australia/Canada/Latin America/U.S. Pharmaceutical
Net sales for this group increased $2.4 million during the quarter ended
March 31, 2004, or 9.6%, compared to $24.9 million in 2003. Internal growth
was negative 3.4% and currency translation added 13.0% to 2004 sales. The
negative internal growth rate was primarily due to negative growth in the
Latin American business, specifically in Brazil and Mexico, due to economic
challenges in the region. These decreases were partially offset by strong
growth in the Australian and Canadian businesses.
Operating profit was $2.9 million during the first quarter of 2004, a $0.6
million increase from $2.3 million in 2003. This increase was driven by
improved sales, gross profit margins and the leveraging of SG&A expenses in
the Australian and Canadian businesses, offset by negative sales trends in
the Latin American business. In addition, operating profit benefited from
currency translation. Operating profit would have been higher by $1.0 million
in 2003 if the Charge Errors and Reserve Errors had been recorded in the
proper period.
25
U.S. Dental Laboratory Business/Implants/Orthodontics
Net sales for this group were $75.9 million during the three months ended
March 31, 2004, a 9.8% increase compared to $69.1 million in 2003. Internal
growth was 5.6% and currency translation added 4.2% to sales in 2004. The
internal growth increase was primarily due to strong growth in the
orthodontics and dental implants businesses, offset by negative growth in the
U.S. dental laboratory business.
Operating profit increased $2.5 million during the three months ended March
31, 2004 to $13.4 million from $10.9 million in 2003. This increase was
driven by improved sales and improved gross profit margins in the orthodontic
and dental implant businesses and the leveraging of SG&A expenses in the
dental implant business. In addition, operating profit benefited from
currency translation. Operating profit would have been higher by $2.4 million
in 2003 if the Charge Errors and Reserve Errors had been recorded in the
proper period.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the Company's disclosure in its 2003
Annual Report on Form 10-K filed March 15, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 2004
Cash flows from operating activities during the three months ended March
31, 2004 were $47.3 million compared to $43.0 million during the same period
in 2003. The increase of $4.3 million results primarily from increased
earnings and deferred taxes offset by unfavorable working capital changes
versus the prior year.
Investing activities for the three months ended March 31, 2004 include
capital expenditures of $11.2 million. The Company expects that capital
expenditures will range from $60 million to $65 million for the full year
2004. Acquisition activity for the three months ended March 31, 2004 was
$16.0 million which was related to the final payments due to AstraZeneca upon
the approval of Oraqix by the Food and Drug Administration in the United
States (see Note 4 to the Consolidated Condensed Financial Statements).
Additionally, in February 2004, the Company completed the sale of its Gendex
equipment business and received cash proceeds of $102.5 million.
In December 2003, the Board of Directors authorized the repurchase of up to
1.0 million shares of common stock for the year ended December 31, 2004 on
the open market, with authorization expiring at the end of the year. During
the first quarter of 2004, the Company repurchased 0.3 million shares at an
average cost per share of $43.43 and a total cost of $11.9 million (see also
Part II, Item 2 of this Form 10-Q). In addition, the Company received
proceeds of $21.8 million as a result of the exercise of 1.2 million stock
options during the three months ended March 31, 2004.
The Company's long-term debt decreased by $2.7 million during the three
months ended March 31, 2004 to $787.5 million. This change included a net
decrease of $2.1 million due to exchange rate fluctuations on debt
denominated in foreign currencies and changes in the value of interest rate
swaps, and net repayments of $0.6 million made during the period. During the
three months ended March 31, 2004, the Company's ratio of long-term debt to
total capitalization decreased to 39.4% compared to 41.3% at December 31,
2003.
Under its multi-currency revolving credit agreement, the Company is able to
borrow up to $250 million through May 2006 ("the five-year facility") and
$250 million through May 2004 ("the 364 day facility"). The 364-day facility
terminates in May 2004, but may be extended, subject to certain conditions,
for additional periods of 364 days. The Company intends to extend this
agreement, but at lesser amounts upon its expiration. 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 in the aggregate is $250
million and no debt was outstanding under these facilities at March 31, 2004.
26
The Company also has access to $75.0 million in uncommitted short-term
financing under lines of credit from various financial institutions. The
lines of credit have no major restrictions and are provided under demand
notes between the Company and the lending institutions.
The Company had unused lines of credit of $436.0 million available at March
31, 2004 contingent upon the Company's compliance with certain affirmative
and negative covenants relating to its operations and financial condition.
The most restrictive of these covenants pertain to asset dispositions,
maintenance of certain levels of net worth, and prescribed ratios of
indebtedness to total capital and operating income plus depreciation and
amortization to interest expense. At March 31, 2004, the Company was in
compliance with these covenants.
Upon acquiring Degussa Dental in October 2001, Dentsply management changed
Degussa Dental's practice of holding a long position in precious metals used
in the production of precious metal alloy products, to holding the precious
metal on a consignment basis from various financial institutions. In
connection with this change in practice, the Company sold certain precious
metals to various financial institutions in the fourth quarter of 2001 for a
value of $41.8 million and in the first quarter of 2002 for a value of $6.8
million. These transactions effectively transferred the price risk on the
precious metals to the financial institutions and allow the Company to
acquire the precious metal at approximately the same time and for the same
price as alloys are sold to the Company's customers. In the event that the
financial institutions would discontinue offering these consignment
arrangements, and if the Company could not obtain other comparable
arrangements, the Company may be required to obtain financing to fund an
ownership position in the required precious metal inventory levels. At March
31, 2004, the value of the consigned precious metals held by the Company was
$73.0 million.
The Company's cash increased $124.0 million during the three months ended
March 31, 2004 to $287.7 million. The Company has continued to accumulate
cash in 2004 rather than reduce debt due to pre-payment penalties that would
be incurred in retiring debt and the related interest rate swap agreements.
The Company anticipates that cash will continue to build throughout the
remainder of 2004, subject to any uses of cash for acquisitions.
There have been no material changes to the Company's scheduled contractual
cash obligations disclosed in its 2003 Annual Report on Form 10-K filed March
15, 2004. 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 PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities, an interpretation of ARB 51". The primary objectives of this
interpretation are to provide guidance on the identification of entities for
which control is achieved through means other than through voting rights
("variable interest entities") and how to determine when and which business
enterprise should consolidate the variable interest entity (the "primary
beneficiary"). This new model for consolidation applies to an entity which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial
support from other parties. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a variable interest entity make additional disclosures. Certain
disclosure requirements of FIN 46 are effective for financial statements
issued after January 31, 2003. The remaining provisions of FIN 46 are
effective immediately for all variable interests in entities created after
January 31, 2003. Adoption of this provision did not have an effect on the
Company. In December 2003, the FASB released a revised version of FIN 46, FIN
46R, to clarify certain aspects of FIN 46 and to provide certain entities
with exemptions from the requirements of FIN 46. FIN 46R requires the
application of either FIN 46 or FIN 46R to all Special Purpose Entities
("SPE's") created prior to February 1, 2003 at the end of the first interim
or annual reporting period ending after December 15, 2003. Adoption of this
provision did not have an effect on the Company. FIN 46R will be applicable
to all non-SPE entities created prior to February 1, 2003 at the end of the
first interim or annual reporting period ending after March 15, 2004. The
application of this portion of FIN 46R did not have a material impact on the
Company's financial statements.
27
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ("SFAS 150"), " Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Adoption of the provisions of SFAS No. 150
in the third quarter of 2003 related to mandatorily redeemable financial
instruments had no effect on the Company's financial statements. In November
2003, the FASB issued FSP No. 150-3, "Effective Date, Disclosures and
Transition for Mandatorily Redeemable Financial Instruments of Certain
Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests under FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("FSP
150-3"). For public companies, FSP 150-3 deferred the provisions of SFAS 150
related to classification and measurement of certain mandatorily redeemable
noncontrolling interests issued prior to November 5, 2003. For mandatorily
redeemable noncontrolling interests issued after November 5, 2003, SFAS 150
applies without any deferral. The provisions of SFAS 150 related to
mandatorily redeemable noncontrolling interests, have not had a material
impact on the Company's financial statements.
In January 2004, the FASB released FASB Staff Position ("FSP") No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", requires a
company to consider current changes in applicable laws when measuring its
postretirement benefit costs and accumulated postretirement benefit
obligation. However, because of uncertainties of the effect of the provisions
of the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Act") on plan sponsors and certain accounting issues raised by the Act,
FSP 106-1 allows plan sponsors to elect a one-time deferral of the accounting
for the Act. The Company is electing the deferral provided by FSP 106-1 to
analyze the impact of the Act on prescription drug coverage provided to a
limited number of retirees from one of its business units. The Company does
not expect the Act to have a material impact on the Company's Postretirement
benefits liabilities or the Company's financial statements.
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, 2003.
Item 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures as of the end of the period covered by this report
have been designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Company in
reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. The Company believes that a controls system, no
matter how well designed and operated, cannot provide absolute assurance that
the objectives of the controls system are met, and no evaluation of controls
can provide absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
28
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. The trial in the government's case
was held in April and May 2002. On August 14, 2003, the Judge entered a
decision that the Company's tooth distribution practices do not violate the
antitrust laws. On October 14, 2003, the Department of Justice appealed this
decision to the U.S. Third Circuit Court of Appeals. The parties are
proceeding in the appeal under the briefing schedule issued by the Third
Circuit.
Subsequent to the filing of the Department of Justice Complaint in 1999,
several private party class actions were filed based on allegations similar
to those in the Department of Justice case, on behalf of laboratories, and
denture patients in seventeen states who purchased Trubyte teeth or products
containing Trubyte teeth. These cases were transferred to the U.S. District
Court in Wilmington, Delaware. The private party suits seek damages in an
unspecified amount. The Court has granted the Company's Motion on the lack
of standing of the laboratory and patient class actions to pursue damage
claims. The Plaintiffs in the laboratory case filed a petition with the Third
Circuit to hear an interlocutory appeal of this decision, which petition was
granted on March 26, 2004. Also, private party class actions on behalf of
indirect purchasers were filed in California and Florida state courts. The
California and Florida cases have been dismissed by the Plaintiffs following
the decision by the Federal District Court Judge issued in August 2003.
On March 27, 2002, a Complaint was filed in Alameda County, California
(which was transferred to Los Angeles County) by Bruce Glover, D.D.S.
alleging, inter alia, breach of express and implied warranties, fraud, unfair
trade practices and negligent misrepresentation in the Company's manufacture
and sale of Advance(R) cement. The Complaint seeks damages in an unspecified
amount for costs incurred in repairing dental work in which the Advance(R)
product allegedly failed. In September 2003, the Plaintiff filed a Motion
for class certification, which the Company opposed. Oral arguments were held
in December 2003, and in January 2004, the Judge entered an Order granting
class certification only on the claims of breach of warranty and fraud. In
general, the Class is defined as California dentists who purchased and used
Advance(R) cement and were required, because of failures of the cement, to
repair or reperform dental procedures. The Company has filed a Writ of
Mandate in the appellate court seeking reversal of the class certification
and briefing is underway. The Advance(R) cement product was sold from 1994
through 2000 and total sales in the United States during that period were
approximately $5.2 million.
Item 2 - Changes in Securities and Use of Proceeds
In December 2003, the Board of Directors authorized the repurchase of up to
1.0 million shares of common stock for the year ended December 31, 2004 on
the open market, with authorization expiring at the end of the year. During
the first quarter of 2004, the Company had the following activity with
respect to this repurchase program:
Number Of
Shares That
May Yet Be
Total Number Total Cost Average Price Purchased
Of Shares Of Shares Paid Per Under The
Period Purchased Purchased Share Program
(in thousands, except per share amounts)
January, 2004 -- $ -- $ -- 1,000
February, 2004 176 7,610 43.24 824
March, 2004 99 4,334 43.78 725
275 $11,944 $ 43.43
29
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31 Section 302 Certification Statements.
32 Section 906 Certification Statement.
(b) Reports on Form 8-K
On April 28, 2004, the Company filed a Form 8-K, under item 12, furnishing
the press release issued on April 27, 2004 regarding its first quarter
2004 sales and earnings.
On April 29, 2004, the Company filed a Form 8-k, under Item 4, disclosing
that it had dismissed the independent accountants of the Dentsply
International Inc. 401(k) Savings Plan.
On May 4, 2004, the Company filed a Form 8-K, under item 12, furnishing a
transcript of its April 28, 2004 conference call regarding the Company's
discussion of its first quarter 2004 sales and earnings.
30
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 10, 2004 /s/ Gerald K. Kunkle, Jr.
Date Gerald K. Kunkle, Jr.
Vice Chairman and
Chief Executive Officer
May 10, 2004 /s/ Bret W. Wise
Date Bret W. Wise
Senior Vice President and
Chief Financial Officer
31
Exhibit 31.1
Section 302 Certifications Statement
I, Gerald K. Kunkle, Jr., certify that:
1. I have reviewed this Form 10-Q of DENTSPLY International Inc;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal controls over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 10, 2004
/s/ Gerald K. Kunkle, Jr.
Vice Chairman and Chief Executive Officer
Exhibit 31.2
Section 302 Certifications Statement
I, Bret W. Wise, certify that:
1. I have reviewed this Form 10-Q of DENTSPLY International Inc;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal controls over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 10, 2004
/s/ Bret W. Wise
Senior Vice President and Chief Financial Officer
Exhibit 32
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 March 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), We,
Gerald K. Kunkle, Jr., Chief Executive Officer and Vice Chairman of the Board
of Directors of the Company and Bret W. Wise, Senior Vice President and 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 our 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/ Gerald K. Kunkle, Jr.
Gerald K. Kunkle, Jr.
Chief Executive Officer and
Vice Chairman of the Board of Directors
/s/ Bret W. Wise
Bret W. Wise
Senior Vice President and
Chief Financial Officer
May 10, 2004
