SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,2004
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 August 5, 2004 the
Company had 80,508,574 shares of Common Stock outstanding, with a par value
of $.01 per share.
Page 1 of 35
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended June 30, 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 22
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 32
Item 4 - Controls and Procedures 32
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 33
Item 2 - Changes in Securities and Use of Proceeds 33
Item 4 - Submission of Matters to a Vote of
Security Holders 34
Item 6 - Exhibits and Reports on Form 8-K 34
Signatures 35
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
(in thousands, except per share amounts)
Net sales $ 425,325 $ 394,478 $ 840,706 $ 765,714
Cost of products sold 212,424 196,403 422,948 384,877
Gross profit 212,901 198,075 417,758 380,837
Selling, general and administrative expenses 135,003 128,235 269,030 250,473
Restructuring and other costs (Note 9) 333 -- 1,057 --
Operating income 77,565 69,840 147,671 130,364
Other income and expenses:
Interest expense 5,854 6,454 11,801 12,548
Interest income (1,215) (360) (1,889) (626)
Other (income) expense, net 575 (565) 798 (1,075)
Income before income taxes 72,351 64,311 136,961 119,517
Provision for income taxes 23,129 20,861 41,971 38,628
Income from continuing operations 49,222 43,450 94,990 80,889
Income (loss) from discontinued operations,
(Including gain on sale in the six months ended
June 30, 2004 of $43,031) (Note 6) (179) 768 42,885 1,596
Net income $ 49,043 $ 44,218 $ 137,875 $ 82,485
Earnings per common share - basic (Note 3)
Continuing operations $ 0.61 $ 0.55 $ 1.18 $ 1.03
Discontinued operations -- 0.01 0.54 0.02
Total earnings per common share - basic $ 0.61 $ 0.56 $ 1.72 $ 1.05
Earnings per common share - diluted (Note 3)
Continuing operations $ 0.60 $ 0.54 $ 1.16 $ 1.01
Discontinued operations -- 0.01 0.53 0.02
Total earnings per common share - diluted $ 0.60 $ 0.55 $ 1.69 $ 1.03
Cash dividends declared per common share $ 0.05250 $ 0.04600 $ 0.10500 $ 0.09200
Weighted average common shares outstanding (Note 3):
Basic 80,493 78,688 80,208 78,566
Diluted 82,089 80,327 81,796 80,168
See accompanying notes to unaudited interim consolidated condensed financial statements.
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
June 30, December 31,
2004 2003
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 344,401 $ 163,755
Accounts and notes receivable-trade, net 245,439 241,385
Inventories, net (Notes 1 and 7) 203,179 205,587
Prepaid expenses and other current assets 89,576 88,463
Assets held for sale -- 28,262
Total Current Assets 882,595 727,452
Property, plant and equipment, net 376,225 376,211
Identifiable intangible assets, net 239,692 246,475
Goodwill, net 947,047 963,264
Other noncurrent assets 89,641 114,736
Noncurrent assets held for sale -- 17,449
Total Assets $ 2,535,200 $ 2,445,587
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 84,719 $ 86,338
Accrued liabilities 150,098 172,684
Income taxes payable 46,821 26,551
Notes payable and current portion
of long-term debt 23,322 21,973
Liabilities of discontinued operations -- 20,206
Total Current Liabilities 304,960 327,752
Long-term debt 771,345 790,202
Deferred income taxes 67,184 66,861
Other noncurrent liabilities 134,943 137,016
Noncurrent liabilities of discontinued operations -- 1,269
Total Liabilities 1,278,432 1,323,100
Minority interests in consolidated subsidiaries 181 418
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 June 30, 2004 and December 31, 2003 814 814
Capital in excess of par value 183,540 166,952
Retained earnings 1,019,033 889,601
Accumulated other comprehensive income (Note 2) 81,766 104,920
Unearned ESOP compensation -- (380)
Treasury stock, at cost, 0.9 million shares at June 30, 2004
and 2.1 million shares at December 31, 2003 (28,566) (39,838)
Total Stockholders' Equity 1,256,587 1,122,069
Total Liabilities and Stockholders' Equity $ 2,535,200 $ 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)
Six Months Ended June 30,
-----------------
2004 2003
(in thousands)
Cash flows from operating activities:
Income from continuing operations $ 94,990 $ 80,889
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 20,341 18,973
Amortization 4,223 4,605
Restructuring and other costs 1,057 --
Cash flows from discontinued operating activities (1,959) 1,075
Other, net (7,150) (10,003)
Net cash provided by operating activities 111,502 95,539
Cash flows from investing activities:
Capital expenditures (25,468) (38,795)
Acquisitions of businesses, net of cash acquired (16,242) (2,354)
Expenditures for identifiable intangible assets -- (2,160)
Proceeds from sale of Gendex 102,500 --
Cash flows used in discontinued operations' investing activities (148) (790)
Other, net (1,354) 385
Net cash provided by (used in) investing activities 59,288 (43,714)
Cash flows from financing activities:
Payments on long-term borrowings (505) (3,785)
Net change in short-term borrowings 1,631 (378)
Cash paid for treasury stock (16,905) --
Cash dividends paid (8,374) (7,217)
Proceeds from exercise of stock options 30,198 9,442
Other, net 6,832 3,791
Net cash provided by financing activities 12,877 1,853
Effect of exchange rate changes on cash and cash equivalents (3,021) 2,071
Net increase in cash and cash equivalents 180,646 55,749
Cash and cash equivalents at beginning of period 163,755 25,652
Cash and cash equivalents at end of period $ 344,401 $ 81,401
See accompanying notes to unaudited interim consolidated condensed financial statements.
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 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 June 30, 2004,
the cost of $12.2 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 $1.2 million at June 30, 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 $16.2 million during the six months ended June 30, 2004 to
$947.0 million, which was due primarily to the effects of foreign currency
translation.
The Company performed the required annual impairment tests in the second
quarter of 2004 and no impairment was identified. This impairment assessment
was based upon a review of 22 reporting units.
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. In accounting
for these rebate programs, the Company records an accrual throughout the
year as a reduction of net sales for the estimated rebate as sales take
place 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 June 30, Six Months Ended June 30,
2004 2003 2004 2003
(in thousands, except per share amounts)
Net income, as reported $ 49,043 $ 44,218 $ 137,875 $ 82,485
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (3,221) (2,724) (6,472) (5,418)
Pro forma net income $ 45,822 $ 41,494 $ 131,403 $ 77,067
Basic earnings per common share
As reported $ 0.61 $ 0.56 $ 1.72 $ 1.05
Pro forma under fair value based method $ 0.57 $ 0.53 $ 1.64 $ 0.98
Diluted earnings per common share
As reported $ 0.60 $ 0.55 $ 1.69 $ 1.03
Pro forma under fair value based method $ 0.56 $ 0.52 $ 1.61 $ 0.96
7
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
(in thousands)
Net income $ 49,043 $ 44,218 $ 137,875 $ 82,485
Other comprehensive income:
Foreign currency translation adjustments (7,243) 25,007 (18,224) 48,503
Unrealized gain on available-for-sale securities 26 5,325 49 6,619
Net gain (loss) on derivative financial
instruments (2,037) 140 (4,979) (1,547)
Total comprehensive income $ 39,789 $ 74,690 $ 114,721 $ 136,060
During the quarter and the six months ended June 30, 2004, foreign
currency translation adjustments included translation losses of $13.1
million and $28.0 million, respectively, offset by gains of $5.9 million and
$9.8 million, respectively, on the Company's loans designated as hedges of
net investments. During the quarter and the six months ended June 30, 2003,
the Company had translation gains of $36.0 million and $63.1 million,
respectively, offset by losses of $11.0 million and $14.6 million,
respectively, 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:
June 30, December 31,
2004 2003
(in thousands)
Foreign currency translation adjustments $ 91,308 $ 109,532
Net loss on derivative financial
instruments (8,532) (3,553)
Unrealized gain on available-for-sale securities 200 151
Minimum pension liability (1,210) (1,210)
$ 81,766 $ 104,920
The cumulative foreign currency translation adjustments included
translation gains of $165.0 million and $193.0 million as of June 30, 2004
and December 31, 2003, respectively, offset by losses of $73.7 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
(in thousands, except per share amounts)
Basic Earnings Per Common Share Computation
Income from continuing operations $ 49,222 $ 43,450 $ 94,990 $ 80,889
Income (loss) from discontinued operations (179) 768 42,885 1,596
Net income $ 49,043 $ 44,218 $137,875 $ 82,485
Common shares outstanding 80,493 78,688 80,208 78,566
Earnings per common share from continuing operations $ 0.61 $ 0.55 $ 1.18 $ 1.03
Earnings per common share from discontinued operations -- 0.01 0.54 0.02
Total earnings per common share - basic $ 0.61 $ 0.56 $ 1.72 $ 1.05
Diluted Earnings Per Common Share Computation
Income from continuing operations $ 49,222 $ 43,450 $ 94,990 $ 80,889
Income (loss) from discontinued operations (179) 768 42,885 1,596
Net income $ 49,043 $ 44,218 $137,875 $ 82,485
Common shares outstanding 80,493 78,688 80,208 78,566
Incremental shares from assumed exercise
of dilutive options 1,596 1,639 1,588 1,602
Total shares 82,089 80,327 81,796 80,168
Earnings per common share from continuing operations $ 0.60 $ 0.54 $ 1.16 $ 1.01
Earnings per common share from discontinued operations -- 0.01 0.53 0.02
Total earnings per common share - diluted $ 0.60 $ 0.55 $ 1.69 $ 1.03
Options to purchase 104,100 shares of common stock that were outstanding
during the quarter ended June 30, 2003 were not included in the computation
of diluted earnings per share since the options' exercise prices were
greater than the average market price of the common shares and, therefore,
the effect would be antidilutive. Antidilutive options outstanding during
the six months ended June 30, 2004 and 2003 were 35,800 and were 1.5
million, respectively.
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 an initial $96.5 million payment which was made
at closing in March 2001 and 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
June 30, 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 and
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 the quarters and six month periods ended June 30, 2004 and 2003:
Third Party Net Sales
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 75,406 $ 70,710 $144,708 $135,090
Endodontics/Professional Division
Dental Consumables/Asia 103,619 95,944 202,977 185,500
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 122,022 111,443 251,258 219,401
Australia/Canada/Latin America/
U.S. Pharmaceutical 31,415 30,404 58,878 55,601
U.S. Dental Laboratory Business/
Implants/Orthodontics 88,256 80,973 174,646 160,830
All Other (a) 4,607 5,004 8,239 9,292
Total $425,325 $394,478 $840,706 $765,714
11
Third Party Net Sales, excluding precious metal content
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 72,861 $ 67,787 $139,697 $128,439
Endodontics/Professional Division
Dental Consumables/Asia 102,205 95,206 200,232 183,717
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 84,798 79,244 172,115 148,675
Australia/Canada/Latin America/
U.S. Pharmaceutical 31,099 29,705 58,434 54,650
U.S. Dental Laboratory Business/
Implants/Orthodontics 78,218 71,252 154,075 140,311
All Other (a) 4,606 5,004 8,238 9,292
Total excluding Precious Metal Content 373,787 348,198 732,791 665,084
Precious Metal Content 51,538 46,280 107,915 100,630
Total including Precious Metal Content $425,325 $394,478 $840,706 $765,714
Intersegment Net Sales
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 57,281 $ 52,870 $ 112,059 $ 98,393
Endodontics/Professional Division
Dental Consumables/Asia 42,708 41,533 81,629 79,539
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 22,233 20,603 45,677 42,141
Australia/Canada/Latin America/
U.S. Pharmaceutical 10,200 8,431 19,437 15,622
U.S. Dental Laboratory Business/
Implants/Orthodontics 8,255 9,994 15,511 17,127
All Other (a) 39,967 38,948 81,932 79,881
Eliminations (180,644) (172,379) (356,245) (332,703)
Total $ -- $ -- $ -- $ --
12
Segment Operating Income
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 22,115 $ 19,454 $ 41,163 $ 35,621
Endodontics/Professional Division
Dental Consumables/Asia 40,882 39,232 79,843 76,266
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 9,566 7,959 21,583 13,596
Australia/Canada/Latin America/
U.S. Pharmaceutical 4,021 3,861 6,931 6,135
U.S. Dental Laboratory Business/
Implants/Orthodontics 13,991 11,129 27,374 21,999
All Other (a) (12,677) (11,795) (28,166) (23,253)
Segment Operating Income 77,898 69,840 148,728 130,364
Reconciling Items:
Restructuring and other costs 333 -- 1,057 --
Interest Expense 5,854 6,454 11,801 12,548
Interest Income (1,215) (360) (1,889) (626)
Other (income) expense, net 575 (565) 798 (1,075)
Income before income taxes $ 72,351 $ 64,311 $ 136,961 $ 119,517
Assets
June 30, December 31,
2004 2003
(in thousands)
Dental Consumables - U.S. and Europe/
Japan/Non-dental $ 194,901 $ 187,248
Endodontics/Professional Division
Dental Consumables/Asia 1,224,896 1,215,723
Dental Consumables - UK, France, Italy, CIS,
Middle East, Africa/European Dental
Laboratory Business 573,655 590,208
Australia/Canada/Latin America/
U.S. Pharmaceutical 280,061 256,299
U.S. Dental Laboratory Business/
Implants/Orthodontics 303,561 311,782
All Other (a) (41,874) (115,673)
Total $ 2,535,200 $ 2,445,587
(a) Includes: one operating division 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
On February 27, 2004, the Company sold the assets and related liabilities
of the Gendex business to Danaher Corporation for $102.5 million cash, plus
the assumption of certain pension liabilities. Although the sales agreement
contained a provision for a post-closing adjustment to the purchase price
based on changes in certain balance sheet accounts, no such adjustments were
necessary. This transaction resulted in a pre-tax gain of $72.9 million
($43.0 million after-tax). Gendex is a manufacturer of dental x-ray
equipment and accessories and intraoral cameras. The sale of Gendex narrows
the Company's product lines to focus primarily on dental consumables.
During the first quarter of the year 2004, the Company discontinued the
operations of the Company's dental needle business.
The Gendex business and the dental needle business are distinguishable as
separate components of the Company in accordance with Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets". 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
(in thousands)
Net sales $ 524 $23,471 $17,435 $48,422
Gain on sale of Gendex -- -- 72,943 --
Income (loss) before income taxes (including gain on
sale in the six months ended June 30, 2004) (268) 1,173 72,841 2,686
NOTE 7 - INVENTORIES
Inventories consist of the following:
June 30, December 31,
2004 2003
(in thousands)
Finished goods $121,433 $123,290
Work-in-process 41,750 41,997
Raw materials and supplies 39,996 40,300
$203,179 $205,587
14
NOTE 8 - BENEFIT PLANS
The components of the net periodic benefit cost for the Company's benefit
plans are as follows:
Other Postretirement
Pension Benefits Benefits
--------------------- -------------------
Three Months Ended Three Months Ended
June 30, June 30,
2004 2003 2004 2003
(in thousands)
Service cost $ 1,056 $ 948 $ 68 $ 134
Interest cost 1,491 1,304 170 413
Expected return on plan assets (802) (745) (172) (390)
Net amortization and deferral 162 136 116 239
Net periodic benefit cost $ 1,907 $ 1,643 $ 182 $ 396
Other Postretirement
Pension Benefits Benefits
------------------ -------------------
Six Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
(in thousands)
Service cost $ 2,249 $ 1,996 $ 135 $ 169
Interest cost 2,949 2,557 341 522
Expected return on plan assets (1,635) (1,478) (343) (493)
Net amortization and deferral 351 275 232 302
Net periodic benefit cost $ 3,914 $ 3,350 $ 365 $ 500
Information related to the funding of the Company's benefit plans for
2004 is as follows:
Other
Pension Postretirement
Benefits Benefits
(in thousands)
Actual, June 30, 2004 $2,459 $ 860
Projected for the remainder of the year 2,470 185
Total for year $4,929 $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
$0.4 million for severance costs, $0.1 million of lease/contract termination
costs and $0.6 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, 20 of which remain
to be eliminated as of June 30, 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
substantially complete by December 31, 2004. The major components of these
charges and the remaining outstanding balances at June 30, 2004 are as
follows:
Amounts Amounts Balance
2003 Applied 2004 Applied June 30,
Provisions 2003 Provisions 2004 2004
(in thousands)
Severance $ 908 $ (49) $ 340 $ (918) $ 281
Lease/contract
terminations 562 (410) 82 (138) 96
Other restructuring
costs 27 (27) 635 (635) --
Intangible and other asset
impairment charges 3,000 (3,000) -- -- --
$ 4,497 $(3,486) $ 1,057 $(1,691) $ 377
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 June 30, 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 June 30,
Provisions Accounting 2002 2002 2003 2003 2004 2004
(in thousands)
Severance $ 541 $ 2,927 $ (530) $ (164) $ (988) $ (878) $ (572) $ 336
Lease/contract
terminations 895 1,437 (500) 120 (665) (245) (217) 825
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) $ (789) $ 1,163
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 as a reduction 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 and $0.2
million fixed asset impairment charges. 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 are as follows:
Amounts Amounts Balance
2003 Applied 2004 Applied June 30,
Provisions 2003 Provisions 2004 2004
(in thousands)
Severance $ 405 $ -- $ 72 $ (477) $--
Other restructuring costs 300 (300) 125 (125) --
Fixed asset impairment charges 520 (520) 246 (246) --
Goodwill impairment charges 360 (360) -- -- --
$ 1,585 $(1,180) $ 443 $ (848) $--
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.
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.
17
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 June 30, 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. In addition, exchange contracts are used by certain of the Company's
subsidiaries to hedge intercompany inventory purchases which are denominated
in non-local currencies. The forward contracts that are used in these
programs mature in twelve months or less. The Company generally hedges
between 33% and 67% of its anticipated purchases from the supplying
locations.
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 June 30, 2004 and December 31, 2003, the accumulated fair value of the
interest rate swap was $12.0 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 June 30, 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 June 30, 2004 and December 31, 2003,
the accumulated fair value of the cross-currency element of the integrated
transaction was $40.2 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 June 30, 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 June 30, 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 June 30, 2004 and December 31, 2003, the accumulated translation
losses related to foreign currency denominated-debt included in Accumulated
other comprehensive income were $73.7 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 has
resulted in losses $27.7 million which has been recorded as part of
"Accumulated other comprehensive income".
Other
The aggregate net fair value of the Company's derivative instruments at
June 30, 2004 and December 31, 2003 was $47.2 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
unlikely that pending litigation to which DENTSPLY is a party will have a
material adverse effect upon its consolidated financial position or results
of operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and
conduct undertaken by the Company's Trubyte Division with respect to the
distribution of artificial teeth and related products. On January 5, 1999
the Department of Justice filed a Complaint against the Company in the U.S.
District Court in Wilmington, Delaware alleging that the Company's tooth
distribution practices violate the antitrust laws and seeking an order for
the Company to discontinue its practices. The trial in the government's
case was held in April and May 2002. On August 14, 2003, the Judge entered a
decision that the Company's tooth distribution practices do not violate the
antitrust laws. On October 14, 2003, the Department of Justice appealed this
decision to the U.S. Third Circuit Court of Appeals. The parties have
submitted their briefs and a hearing is scheduled in September 2004.
Subsequent to the filing of the Department of Justice Complaint in 1999,
several private party class actions were filed based on allegations similar
to those in the Department of Justice case, on behalf of laboratories, and
denture patients in seventeen states who purchased Trubyte teeth or products
containing Trubyte teeth. These cases were transferred to the U.S. District
Court in Wilmington, Delaware. The private party suits seek damages in an
unspecified amount. The Court has granted the Company's Motion on the lack
of standing of the laboratory and patient class actions to pursue damage
claims. The Plaintiffs in the laboratory case have appealed this decision to
the Third Circuit and briefs of the parties have been submitted. 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 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
challenged the certification of a class in higher courts, but such
challenges have been unsuccessful. In July, the Court issued a decision
that the class would be opt-in, as proposed by the Company, rather than
opt-out (this means that after Notice of the class action is sent to
possible class members, a party will have to determine they meet the class
definition and take affirmative action in order to join the class). 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.
20
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 lower by $0.4 million (less than $0.01 per diluted
share) in the second quarter of 2003 and higher in the six month period
ended June 30, 2003 by $1.3 million ($0.02 per diluted share).
Based on a qualitative and quantitative analysis, the Company concluded
that these errors were not material to the financial statements of the
respective prior periods, and as a result, these prior period financial
statements were not restated.
21
DENTSPLY INTERNATIONAL INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made by the Company, including without limitation,
statements containing the words "plans", "anticipates", "believes",
"expects", or words of similar import constitute forward-looking statements
which are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements involve risks and uncertainties which may
materially affect the Company's business and prospects, and should be read
in conjunction with the risk factors discussed 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 first six months ended June 30,
2004, the Company's overall internal growth was approximately 5.0% compared
to 4.6% for the first six months of 2003. Our internal growth rates in the
United States and Europe, the largest dental markets in the world, were 3.1%
and 6.5%, respectively during the six months ended June 30, 2004. Our
internal growth rate in all other regions during the six months ended June
30, 2004, which represents approximately 18% of our sales, was 6.3%, 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 a key component of the Company's overall growth
strategy. Historically, the company has introduced in excess of twenty new
products each year. Through six months of 2004, thirteen new products have
been introduced around the world and an equivalent number of new products
are scheduled for introduction during the balance of the year.
New advances in technology are anticipated to have a significant
influence on future products in dentistry. In anticipation of this, the
company has accelerated its investment in research and development in 2004
to support this development. As a part of the development strategy, the
Company recently entered into a five-year agreement with the Georgia
Institute of Technology's Research Institute to pursue potential new
advances in dentistry. This is consistent with the Company's strategy of
being the leading innovator in the industry.
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.
22
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 lower by $0.4 million (less than $0.01 per
diluted share) in the second quarter of 2003 and higher in the six month
period ended June 30, 2003 by $1.3 million ($0.02 per diluted share).
Based on a qualitative and quantitative analysis, the Company concluded
that these errors were not material to the financial statements of the
respective prior periods, and as a result, these prior period financial
statements were not restated.
Discontinued Operations
In February 2004, the Company sold its Gendex equipment business to
Danaher Corporation. Additionally, in the first quarter of 2004 the Company
discontinued 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 JUNE 30, 2004 COMPARED TO
QUARTER ENDED JUNE 30, 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.
23
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
June 30,
2004 2003
(in millions)
Net Sales $ 425.3 $ 394.5
Precious Metal Content of Sales (51.5) (46.3)
Net Sales Excluding Precious Metal Content $ 373.8 $ 348.2
Management believes that the presentation of net sales excluding precious
metal content provides useful information to investors because a significant
portion of DENTSPLY's net sales is comprised of sales of precious metals
generated through sales of the Company's precious metal alloy products,
which are used by third parties to construct crown and bridge materials. Due
to the fluctuations of precious metal prices and because the precious metal
content of the Company's sales is largely a pass-through to customers and
has minimal effect on earnings, DENTSPLY reports sales both with and without
precious metal content to show the Company's performance independent of
precious metal price volatility and to enhance comparability of performance
between periods. The Company uses its cost of precious metal purchased as a
proxy for the precious metal content of sales, as the precious metal content
of sales is not separately tracked and invoiced to customers. The Company
believes that it is reasonable to use the cost of precious metal content
purchased in this manner since precious metal alloy sale prices are
generally adjusted when the prices of underlying precious metals change.
Net sales during the quarter ended June 30, 2004 increased $30.8 million,
or 7.8%, over 2003 to $425.3 million. Net sales, excluding precious metal
content, increased $25.6 million, or 7.3%, to $373.8 million. Sales growth,
excluding precious metal content, was comprised of 4.0% internal growth and
3.3% foreign currency translation. The 4.0% internal growth was comprised
of 4.3% in the United States, 2.5% in Europe and 6.2% for all other regions
combined.
The internal sales growth, excluding precious metal content, in the
United States was impacted by strong growth in orthodontic products, offset
by weak growth in dental laboratory equipment and certain other dental
consumables. In Europe, internal growth was primarily driven by strong
growth in endodontic products and other chairside consumables, offset by
weak growth in the dental laboratory category. Management believes the
internal growth rate in Europe was partially impacted by our distributors
buying forward during the first quarter in anticipation of transitional
difficulties related to the move of our European distribution operations. In
addition, the international dental show in Europe held in the second quarter
of 2003 resulted in strong sales during that period which we believe had a
negative influence on the 2004 internal growth rate. The internal growth of
6.3% in all other regions was largely the result of strong growth in the
Asian region, excluding Japan, Canada, the Middle East and Africa.
Gross Profit
Gross profit was $212.9 million for the quarter ended June 30, 2004
compared to $198.1 million in 2003, an increase of $14.8 million, or 7.5%.
Gross profit, measured against sales including precious metal content,
represented 50.1% of net sales in 2004 compared to 50.2% in 2003. The gross
profit for 2004, measured against sales excluding precious metal content,
represented 57.0% of net sales compared to 56.9% in 2003. Gross profit as
reported would have been higher by $1.0 million in 2003 had the Charge
Errors and Reserve Errors been recorded in the proper periods.
24
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $6.8
million, or 5.3%, to $135.0 million during the second quarter of 2004 from
$128.2 million in 2003. The 5.3% increase in expenses reflects increases
for the translation impact from a weaker U.S. dollar of approximately $4.5
million. SG&A expenses, measured against sales including precious metal
content, decreased to 31.7% compared to 32.5% in 2003. SG&A expenses,
measured against sales excluding precious metal content, decreased to 36.1%
compared to 36.8% in 2003. SG&A would have been higher by $1.6 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 the second quarter of 2004, the Company recorded restructuring and
other costs of $0.3 million. These costs were primarily related to costs
incurred in the consolidation of its U.S. laboratory businesses which was
initiated in the fourth quarter of 2003.
Other Income and Expenses
Net interest expense and other expenses were $5.2 million during the
quarter ended June 30, 2004 compared to $5.5 million in 2003. The 2004
period included $4.6 million of net interest expense, $1.0 million of
currency transaction losses and $0.4 million of other nonoperating income.
The 2003 period included $6.1 million of net interest expense, $1.2 million
of currency transaction gains and $0.6 million of other nonoperating costs.
The decrease in net interest expense was primarily due to increased interest
income generated from the Company's higher cash levels.
Earnings
The effective tax rate decreased to 32.0% for the quarter ended June 30,
2004 from 32.4% in 2003.
Income from continuing operations increased $5.7 million, or 13.3%, to
$49.2 million during the second quarter of 2004 from $43.5 million in 2003.
Fully diluted earnings per share from continuing operations during the 2004
period were $0.60, an increase of 11.1% from $0.54 in 2003. Had the Charge
Errors and Reserve Errors described above been recorded in the proper
periods, income from continuing operations would have been lower by $0.4
million (less than $0.01 per diluted share) in the 2003 period.
Discontinued Operations
In February 2004, the Company sold its Gendex equipment business to
Danaher Corporation. Also in the first quarter of 2004, the Company
discontinued production of dental needles. Accordingly, the Gendex
equipment and needle businesses have been reported as discontinued
operations for all periods presented.
The loss from discontinued operations was $0.2 million during the quarter
ended June 30, 2004 compared to income of $0.8 million for the same period
in 2003. Fully diluted earnings per share from discontinued operations was
a loss of less than $0.01 for the quarter ended June 30, 2004 and income of
$0.01 for the same period in 2003.
Operating Segment Results
The Company has five operating groups, managed by five Senior Vice
Presidents that 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.
25
Dental Consumables--U.S. and Europe/Japan/Non-dental
Net sales for this group was $72.9 million during the quarter ended June
30, 2004, a 7.5% increase compared to $67.8 million in 2003. Internal
growth was 3.6% and currency translation added 3.9% to sales in 2004. The
European Consumables business had the highest growth in the group, which was
offset by lower sales in the Japanese market.
Operating profit increased $2.6 million during the three months ended
June 30, 2004 to $22.1 million in 2003. Sales growth in the European dental
consumable business and the leveraging of SG&A expenses in the European and
U.S. dental consumable businesses were the most significant contributors to
the increase. Operating profit would have been lower by $0.3 million in
2003 if the Charge Errors and Reserve Errors had been recorded in the proper
period.
Endodontics/Professional Division Dental Consumables/Asia
Net sales for this group increased $7.0 million during the three months
ended June 30, 2004, or 7.4%, up from $95.2 million in 2003. Internal
growth was 6.2% and currency translation added 1.2% to 2004 sales. Sales
growth was highest in the Endodontics and Asian businesses offset by slower
sales growth in the Professional Division business.
Operating profit was $40.9 million during the quarter ended June 30,
2004, an increase of $1.7 million from $39.2 million in 2003. This increase
was driven by continued sales growth in the group's businesses, offset
somewhat by the higher SG&A expenses in the Asian and Endodontics
businesses. In addition, operating profit benefited from currency
translation. Operating profit would have been lower by $0.8 million in 2003
if the Charge Errors and 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 $84.8 million during the quarter ended June
30, 2004, a 7.0% increase compared to $79.2 million in 2003. Internal
growth was flat with currency translation adding to the overall growth in
sales. The sales growth was strong in the Italian, Middle East, Africa and
French consumable businesses, offset by decreases in the European Dental
Laboratory businesses.
Operating profit increased $1.6 million during the three months ended
June 30, 2004 to $9.6 million from $8.0 million in 2003. The operating
profit improvement was driven primarily by improved gross profit margins of
the Italian and French dental consumable businesses and improved leveraging
of SG&A expenses by the European Dental Laboratory businesses and the
Italian and French dental consumable businesses. In addition, operating
profit benefited from currency translation. Operating profit would have
been lower by $1.6 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 $1.4 million during the quarter ended
June 30, 2004, or 4.7%, from $29.7 million in 2003. Internal growth was
2.3% and currency translation added 2.4% to 2004 sales. The increase in
sales was primarily due to the strong growth of the Canadian and Latin
American businesses offset by the lower sales of the Australian and U.S.
Pharmaceutical businesses.
Operating profit was $4.0 million during the second quarter of 2004, a
$0.2 million increase from $3.8 million in 2003. The increase was driven by
improved gross profit margins and the leveraging of SG&A expenses by the
Australian business, improved gross margins in the Latin American business,
specifically Brazil, offset by negative sales and increased SG&A expense at
the U.S. Pharmaceutical business. Operating profit would have been higher
by $0.1 million in 2003 if the Charge Errors and Reserve Errors had been
recorded in the proper period.
26
U.S. Dental Laboratory Business/Implants/Orthodontics
Net sales for this group were $78.2 million during the three months ended
June 30, 2004, a 9.8% increase compared to $71.3 million in 2003. Internal
growth was 7.7% and currency translation added 2.1% to sales in 2004. The
internal growth increase was primarily due to strong growth in the
orthodontics business.
Operating profit increased $2.9 million during the three months ended
June 30, 2004 to $14.0 million from $11.1 million in 2003. This increase
was driven by improved sales and improved gross profit margins in the
orthodontic business as well as improved leveraging of SG&A expenses in the
orthodontic and U.S. Dental Laboratory businesses. In addition, operating
profit benefited from currency translation. Operating profit would have
been higher by $2.3 million in 2003 if the Charge Errors and Reserve Errors
had been recorded in the proper period.
RESULTS OF CONTINUING OPERATIONS, SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO
QUARTER ENDED JUNE 30, 2003
Net Sales
The following is a reconciliation of net sales to net sales excluding
precious metal content.
Six Months Ended
June 30,
2004 2003
(in millions)
Net Sales $ 840.7 $ 765.7
Precious Metal Content of Sales (107.9) (100.6)
Net Sales Excluding Precious Metal Content $ 732.8 $ 665.1
Net sales during the six months ended June 30, 2004 increased $75.0
million, or 9.8%, over 2003 to $840.7 million. Net sales, excluding precious
metal content, increased $67.7 million, or 10.2%, to $732.8 million. Sales
growth, excluding precious metal content, was comprised of 4.9% internal
growth and 5.3% foreign currency translation. The 4.9% internal growth was
comprised of 3.1% in the United States, 6.5% in Europe and 6.3% for all
other regions combined.
The internal sales growth, excluding precious metal content, in the
United States was impacted by strong growth in orthodontic and endodontic
products, offset by weak growth in dental laboratory equipment and certain
other dental consumables. In Europe strong internal sales growth in
endodontic and implant products was offset by flat growth in the dental
laboratory category. The internal growth of 6.3% in all other regions was
largely the result of strong growth in the Asian region, excluding Japan,
Canada, the Middle East and Africa.
Gross Profit
Gross profit was $417.8 million for the six month ended June 30, 2004
compared to $380.8 million in 2003, an increase of $37.0 million, or 9.7%.
Gross profit, measured against sales including precious metal content,
represented 49.7% of net sales in both 2004 and 2003. The gross profit for
2004, measured against sales excluding precious metal content, represented
57.0% of net sales compared to 57.3% in 2003. Gross profit as reported would
have been higher by $2.7 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.
27
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $18.5
million, or 7.4%, to $269.0 million during the first six months of 2004 from
$250.5 million in 2003. The 7.4% increase in expenses reflects increases
for the translation impact from a weaker U.S. dollar of approximately $14.1
million. SG&A expenses, measured against sales including precious metal
content, decreased to 32.0% compared to 32.7% in 2003. SG&A expenses, as
measured against sales excluding precious metal content, decreased to 36.7%
compared to 37.7% in 2003. SG&A would have been higher 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 $1.1
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 this 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 transfer of the European warehouse is an effort to improve
customer service levels and reduce costs. This relocation was substantially
complete during the first quarter of 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 substantially completed by the end of
2004. The Company anticipates the remaining costs to complete this
restructuring initiative will be approximately $1.5 million during the
remainder of 2004, which will be expensed as the costs are incurred. 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 $10.7 million during the six
months ended June 30, 2004 compared to $10.8 million in 2003. The 2004
period included $9.9 million of net interest expense, $0.7 million of
currency transaction losses and $0.1 million of other nonoperating costs.
The 2003 period included $11.9 million of net interest expense, $0.6 million
of currency transaction gains and $0.5 million of other nonoperating income.
The decrease in net interest expense was primarily due to increased interest
income generated from the Company's higher cash levels.
Earnings
The effective tax rate decreased to 30.6% for the six months ended June
30, 2004 from 32.3% 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. These benefits reduced the effective tax rate by 0.9% during the
six months ended June 30, 2004. The Company operates within multiple taxing
jurisdictions and is subject to audit in these jurisdictions. Accruals are
recorded for the estimated outcomes of these audits and adjustments to these
accruals may need to be recorded in the future due to the outcome of these
audits or due to the expiration of the related statutes of limitations.
Income from continuing operations increased $14.1 million, or 17.4%, to
$95.0 million during the first six months of 2004 from $80.9 million in
2003. Fully diluted earnings per share from continuing operations during the
2004 period were $1.16, an increase of 14.9% from $1.01 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 $1.3
million ($0.02 per diluted share) in the 2003 period.
Discontinued Operations
Income from discontinued operations was $42.9 million during the six
months ended June 30, 2004 and $1.6 million for the same period in 2003.
Fully diluted earnings per share from discontinued operations were $0.53 and
$0.02 for the periods ended June 30, 2004 and 2003, respectively. The income
from discontinued operations in 2004 was almost entirely related to the gain
realized on the sale of Gendex business.
28
Operating Segment Results
Dental Consumables--U.S. and Europe/Japan/Non-dental
Net sales for this group was $140.0 million for the six months ended June
30, 2004, an 8.8% increase compared to $128.4 million in 2003. Internal
growth was 3.7% and currency translation added 5.1% to sales in 2004. The
European consumables business had the highest growth in the group, which was
offset lower sales in the Japanese market.
Operating profit increased $5.5 million during the six months ended June
30, 2004 to $41.2 million from $35.7 million in 2003. Sales growth in the
European dental consumable business and the leveraging of SG&A expenses by
the European and U.S. dental consumables businesses were the most
significant contributors to the increase. Operating profit also benefited
from currency translation. Operating profit would have been lower by $2.7
million in 2003 if the Charge Errors and Reserve Errors had been recorded in
the proper period.
Endodontics/Professional Division Dental Consumables/Asia
Net sales for this group increased $16.5 million during the six months
ended June 30, 2004, or 9.0%, up from $183.7 million in 2003. Internal
sales growth was 7.3% and currency translation added 1.7% to 2004 sales.
Sales growth was strong in the Endodontics and Asian businesses.
Operating profit was $79.8 million during the six months ended June 30,
2004, an increase of $3.5 million from $76.3 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 and Endodontics businesses.
In addition, operating profit benefited from currency translation. Operating
profit would have been lower by $0.7 million in 2003 if the Charge Errors
and 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 $172.1 million for the six months ended June
30, 2004, an increase of $23.4 million, a 15.8% increase compared to $148.7
million in 2003. Internal growth was 4.4% and currency translation added
11.4% to sales in 2004. The sales growth was driven by strong growth in the
Italian, French, Middle East and Africa consumable businesses, offset by
flat growth in the European Dental Laboratory businesses.
Operating profit increased $8.0 million for the six months ended June 30,
2004 to $21.6 million from $13.6 million in 2003. The operating profit
improvement was primarily related to the sales growth and the leveraging of
SG&A expenses by the businesses in the group. In addition, operating profit
benefited from currency translation. Operating profit would have been lower
by $0.2 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 $3.8 million during the six months
ended June 30, 2004, or 6.9%, compared to $54.7 million in 2003. Internal
growth was flat and currency translation added the overall growth to 2004
sales. The sales growth was primarily driven by negative sales growth of
the U.S Pharmaceutical and Latin American business, specifically in Brazil
and Mexico, offset by the strong sales growth of the Canadian business.
Operating profit was $6.9 million during the six months ended June 30,
2004, a $0.8 million increase from $6.1 million in 2003. This increase was
driven by improved sales, gross profit margins and leveraging of SG&A
expenses by the Australian and Canadian businesses, offset by decreasing
margins and higher SG&A expenses at the U.S. Pharmaceutical business. In
addition, operating profit benefited from currency translation. Operating
profit would have been higher by $1.1 million in 2003 if the Charge Errors
and Reserve Errors had been recorded in the proper period.
29
U.S. Dental Laboratory Business/Implants/Orthodontics
Net sales for this group was $154.1 million for the six months ended
June 30, 2004, a 9.8% increase compared to $140.3 million in 2003. Internal
growth was 6.7% and currency translation added 3.1% to sales in 2004. The
internal growth increase was primarily due to strong growth in the
orthodontics and dental implants businesses, offset by slower growth in the
U.S. dental laboratory business.
Operating profit increased $5.4 million during the six months ended June
30, 2004, to $27.4 million from $22.0 million in 2003. This increase was
driven by improved sales of the orthodontics and dental implants businesses
and reduced SG&A expenses at the U.S. dental laboratory business. In
addition, operating profit benefited from currency translation. Operating
profit would have been higher by $4.7 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
Six Months Ended June 30, 2004
Cash flows from operating activities during the six months ended June 30,
2004 were $111.5 million compared to $95.5 million during the same period in
2003. The increase of $16.0 million results primarily from increased
earnings versus the prior year.
Investing activities for the six months ended June 30, 2004 include
capital expenditures of $25.5 million. The Company expects that capital
expenditures will be approximately $60 million for the full year 2004.
Acquisition activity for the six months ended June 30, 2004 was $16.2
million which was primarily 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 six months of 2004, the Company repurchased 0.4 million
shares at an average cost per share of $45.02 and a total cost of $16.9
million (see also Part II, Item 2 of this Form 10-Q). In addition, the
Company received proceeds of $30.2 million as a result of the exercise of
1.6 million stock options during the six months ended June 30, 2004.
The Company's long-term debt decreased by $18.9 million during the six
months ended June 30, 2004 to $771.3 million. This change included a net
decrease of $18.4 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 $0.5 million made during the period. During the
six months ended June 30, 2004, the Company's ratio of long-term debt to
total capitalization decreased to 38.0% 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
$125 million through May 2005 ("the 364 day facility"). The 364-day facility
terminates in May 2005, but may be extended, subject to certain conditions,
for additional periods of 364 days. This revolving credit agreement is
unsecured and contains various financial and other covenants. The Company
also has available an aggregate $250 million under two commercial paper
facilities; a $250 million U.S. facility and a $250 million U.S. dollar
equivalent European facility ("Euro CP facility"). Under the Euro CP
facility, borrowings can be denominated in Swiss francs, Japanese yen,
Euros, British pounds and U.S. dollars. The multi-currency revolving credit
facility serves as a back-up to these commercial paper facilities. The
total available credit under the commercial paper facilities and the
multi-currency facility in the aggregate is $250 million and no debt was
outstanding under the commercial paper facilities at June 30, 2004.
30
The Company also has access to $74.0 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 $316.0 million available at
June 30, 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 June 30, 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 June 30, 2004, the value of the consigned precious metals held by the
Company was $61.5 million.
The Company's cash increased $180.6 million during the six months ended
June 30, 2004 to $344.4 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 and stock
purchases.
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 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 elected 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. In May 2004, FASB released FSP 106-2 "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." This FSP provides final guidance on the
accounting for the effects of the Act for employers that sponsor
postretirement health care plans that provide prescription drug benefits.
The FSB also requires those employers to provide certain disclosures
regarding the effect of the federal subsidy provided by the Act. FSB 106-2
superceded FSB 106-1 when it became effective on July 1, 2004. 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.
31
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.
32
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes it is
unlikely that pending litigation to which DENTSPLY is a party will have a
material adverse effect upon its consolidated financial position or results
of operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and
conduct undertaken by the Company's Trubyte Division with respect to the
distribution of artificial teeth and related products. On January 5, 1999
the Department of Justice filed a Complaint against the Company in the U.S.
District Court in Wilmington, Delaware alleging that the Company's tooth
distribution practices violate the antitrust laws and seeking an order for
the Company to discontinue its practices. The trial in the government's
case was held in April and May 2002. On August 14, 2003, the Judge entered a
decision that the Company's tooth distribution practices do not violate the
antitrust laws. On October 14, 2003, the Department of Justice appealed this
decision to the U.S. Third Circuit Court of Appeals. The parties have
submitted their briefs and a hearing is scheduled in September 2004.
Subsequent to the filing of the Department of Justice Complaint in 1999,
several private party class actions were filed based on allegations similar
to those in the Department of Justice case, on behalf of laboratories, and
denture patients in seventeen states who purchased Trubyte teeth or products
containing Trubyte teeth. These cases were transferred to the U.S. District
Court in Wilmington, Delaware. The private party suits seek damages in an
unspecified amount. The Court has granted the Company's Motion on the lack
of standing of the laboratory and patient class actions to pursue damage
claims. The Plaintiffs in the laboratory case have appealed this decision to
the Third Circuit and briefs of the parties have been submitted. 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 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
challenged the certification of a class in higher courts, but such
challenges have been unsuccessful. In July, the Court issued a decision
that the class would be opt-in, as proposed by the Company, rather than
opt-out (this means that after Notice of the class action is sent to
possible class members, a party will have to determine they meet the class
definition and take affirmative action in order to join the class). 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 six months ended June 30, 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 - $ - $ - 1,000.0
February, 2004 176.0 7,610 43.24 824.0
March, 2004 99.0 4,334 43.78 725.0
April, 2004 - - - 725.0
May, 2004 25.5 1,222 47.92 699.5
June, 2004 75.0 3,739 49.85 624.5
375.5 $ 16,905 $ 45.02
33
Item 4 - Submission of Matters to a Vote of Security Holders
(a) On May 10, 2004, the Company held its 2004 Annual Meeting of
stockholders.
(b) Not applicable.
(c) The following matters were voted upon at the Annual Meeting, with the
results indicated:
1. Election of Class III Directors:
Nominee Votes For Votes Withheld
Paula H. Cholmondeley 70,275,866 1,641,432
Michael J. Coleman 70,923,625 993,673
John C. Miles II 70,675,972 1,241,326
W. Keith Smith 69,849,230 2,068,068
2. Proposal to ratify the appointment of PricewaterhouseCoopers LLP,
independent accountants, to audit the books and accounts of the
Company for the year ending December 31, 2004:
Votes For: 70,386,265
Votes Against: 1,499,917
Abstentions: 31,116
(d) Not applicable.
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 July 26, 2004, the Company filed a Form 8-K, under item 12,
furnishing the press release issued on July 26, 2004 regarding its
second quarter 2004 sales and earnings.
On August 2, 2004, the Company filed a Form 8-K, under item 12,
furnishing a transcript of its July 27, 2004 conference call regarding
the Company's discussion of its second quarter 2004 sales and earnings.
34
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENTSPLY INTERNATIONAL INC.
August 9, 2004 /s/ Gerald K. Kunkle, Jr.
Date Gerald K. Kunkle, Jr.
Vice Chairman and
Chief Executive Officer
August 9, 2004 /s/ Bret W. Wise
Date Bret W. Wise
Senior Vice President and
Chief Financial Officer
35
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: August 9, 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: August 9, 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 June 30, 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
August 9, 2004
