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, 2005
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 1, 2005 the
Company had 79,292,118 shares of Common Stock outstanding, with a par value
of $.01 per share.
Page 1 of 34
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended June 30, 2005
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 31
Item 4 - Controls and Procedures 31
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 32
Item 2 - Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 33
Item 4 - Submission of Matters to a Vote of
Security Holders 33
Item 6 - Exhibits 33
Signatures 34
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
(in thousands, except per share amounts)
Net sales $ 444,834 $ 424,408 $ 851,809 $ 838,767
Cost of products sold 217,551 212,352 415,585 422,819
Gross profit 227,283 212,056 436,224 415,948
Selling, general and administrative expenses 146,376 134,158 284,924 267,220
Restructuring and other (income) costs (Note 9) (228) 333 40 1,057
Operating income 81,135 77,565 151,260 147,671
Other income and expenses:
Interest expense 4,446 5,854 10,773 11,801
Interest income (2,159) (1,215) (4,469) (1,889)
Other (income) expense, net (1,605) 575 (5,847) 798
Income before income taxes 80,453 72,351 150,803 136,961
Provision for income taxes 22,560 23,129 43,861 41,971
Income from continuing operations 57,893 49,222 106,942 94,990
(Loss) income from discontinued operations,
(Including gain on sale in the six months ended
June 30, 2004 of $43,031) (Note 6) -- (179) -- 42,885
Net income $ 57,893 $ 49,043 $ 106,942 $ 137,875
Earnings per common share - basic (Note 3)
Continuing operations $ 0.72 $ 0.61 $ 1.33 $ 1.18
Discontinued operations -- -- -- 0.54
Total earnings per common share - basic $ 0.72 $ 0.61 $ 1.33 $ 1.72
Earnings per common share - diluted (Note 3)
Continuing operations $ 0.71 $ 0.60 $ 1.31 $ 1.16
Discontinued operations -- -- -- 0.53
Total earnings per common share - diluted $ 0.71 $ 0.60 $ 1.31 $ 1.69
Cash dividends declared per common share $ 0.06000 $ 0.05250 $ 0.12000 $ 0.10500
Weighted average common shares outstanding (Note 3):
Basic 80,137 80,493 80,418 80,208
Diluted 81,608 82,089 81,941 81,796
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,
2005 2004
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 365,675 $ 506,369
Accounts and notes receivable-trade, net 264,637 238,873
Inventories, net (Notes 1 and 7) 224,224 213,709
Prepaid expenses and other current assets 92,592 97,458
Total Current Assets 947,128 1,056,409
Property, plant and equipment, net 378,114 407,527
Identifiable intangible assets, net 239,052 258,084
Goodwill, net 954,802 996,262
Other noncurrent assets 53,226 79,863
Total Assets $ 2,572,322 $ 2,798,145
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 87,847 $ 91,576
Accrued liabilities 154,802 179,765
Income taxes payable 61,475 60,387
Notes payable and current portion
of long-term debt 69,285 72,879
Total Current Liabilities 373,409 404,607
Long-term debt 658,077 779,940
Deferred income taxes 64,381 58,196
Other noncurrent liabilities 108,145 110,829
Total Liabilities 1,204,012 1,353,572
Minority interests in consolidated subsidiaries 603 600
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, 2005 and December 31, 2004 814 814
Capital in excess of par value 180,437 189,277
Retained earnings 1,223,593 1,126,262
Accumulated other comprehensive income (Note 2) 80,104 164,100
Treasury stock, at cost, 2.1 million shares at June 30, 2005
and 0.8 million at December 31, 2004 (117,241) (36,480)
Total Stockholders' Equity 1,367,707 1,443,973
Total Liabilities and Stockholders' Equity $ 2,572,322 $ 2,798,145
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,
2005 2004
(in thousands)
Cash flows from operating activities:
Income from continuing operations $ 106,942 $ 94,990
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 22,326 20,341
Amortization 4,717 4,223
Restructuring and other costs 40 1,057
Cash flows from discontinued operating activities -- (1,959)
Other, net (68,897) (7,150)
Net cash provided by operating activities 65,128 111,502
Cash flows from investing activities:
Capital expenditures (20,561) (25,468)
Acquisitions of businesses, net of cash acquired (15,933) (16,242)
Expenditures for identifiable intangible assets (96) --
Proceeds from sale of Gendex -- 102,500
Cash flows used in discontinued operations' investing activities -- (148)
Other, net 161 (1,354)
Net cash (used in) provided by investing activities (36,429) 59,288
Cash flows from financing activities:
Payments on long-term borrowings (48,249) (505)
Net change in short-term borrowings 5,037 1,631
Cash paid for treasury stock (115,416) (16,905)
Cash dividends paid (9,674) (8,374)
Proceeds from exercise of stock options 17,740 30,198
Realization of cross currency swap value 23,508 6,832
Net cash (used in) provided by financing activities (127,054) 12,877
Effect of exchange rate changes on cash and cash equivalents (42,339) (3,021)
Net (decrease) increase in cash and cash equivalents (140,694) 180,646
Cash and cash equivalents at beginning of period 506,369 163,755
Cash and cash equivalents at end of period $ 365,675 $ 344,401
See accompanying notes to unaudited interim consolidated condensed financial statements.
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2005
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial statements and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair statement of the results for interim periods have been
included. Results for interim periods should not be considered indicative of
results for a full year. These financial statements should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included in the Company's most recent Form 10-K filed March 16, 2005.
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, 2005,
the cost of $11.6 million or 5% and at December 31, 2004, the cost of $10.8
million or 5% 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 $1.9 million at June 30, 2005 and by $1.4 million at
December 31, 2004.
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 closely monitors intangible assets related to new technology for
indicators of impairment as these assets have more risk of becoming impaired.
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 $41.5 million during the six months ended June 30, 2005 to $954.8 million,
which was due primarily to the effects of foreign currency translation of
$56.1 million, partially offset by increases due to acquisition activity of
$14.6 million.
6
The Company performed the required impairment tests annually in the second
quarter of 2005 and no impairment was identified. This impairment assessment
includes an evaluation of approximately 20 reporting units. In addition to
minimum annual impairment tests, SFAS 142 also requires that impairment
assessments be made more frequently if events or changes in circumstances
indicate that the goodwill or indefinite-lived intangible assets might be
impaired. As the Company learns of such changes in circumstances through
periodic analysis of actual results or through the annual development of
operating unit business plans in the fourth quarter of each year, for
example, impairment assessments are performed as necessary.
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 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.
The Company offers cash rebates based on targeted sales increases to
customers who qualify. In accounting for these rebate programs, the Company
records an accrual as a reduction of net sales for the estimated rebate as
sales take place throughout the year in accordance with EITF 01-09, "
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)".
The Company establishes a provision recorded against revenue for product
returns in instances when incorrect products or quantities are inadvertently
shipped. In addition, the Company establishes provisions for costs or losses
that are expected with regard to returns for which revenue has been
recognized for event-driven circumstances relating to product quality issues,
complaints and / or other product specific issues.
7
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 Six Months Ended
June 30, June 30,
2005 2004 2005 2004
(in thousands, except per share amounts)
Net income, as reported $ 57,893 $ 49,043 $ 106,942 $ 137,875
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (2,775) (3,221) (5,548) (6,472)
Pro forma net income $ 55,118 $ 45,822 $ 101,394 $ 131,403
Basic earnings per common share
As reported $ 0.72 $ 0.61 $ 1.33 $ 1.72
Pro forma under fair value based method $ 0.69 $ 0.57 $ 1.26 $ 1.64
Diluted earnings per common share
As reported $ 0.71 $ 0.60 $ 1.31 $ 1.69
Pro forma under fair value based method $ 0.68 $ 0.56 $ 1.24 $ 1.61
Stockholders' Equity
In December 2004 the Board of Directors approved a stock repurchase
program under which the Company may repurchase shares of stock in an amount
to maintain up to 3,000,000 shares of treasury stock. As a result of this
program, the Company repurchased 2,044,000 shares at an average cost per
share of $55.64 and a total cost of $113.7 million during the in the first
half of 2005. During 2005, the Company also settled on 30,000 shares that
were purchased in 2004 at a cost of $1.7 million. As of June 30, 2005, the
Company held 2,107,000 shares of treasury stock. The Company also received
proceeds of $17.7 million as a result of the exercise of 723,000 stock
options during the six months ended June 30, 2005.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R ("SFAS 123R"), "Share-Based Payment". This standard
eliminates the guidance of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and amends FASB
Statement No. 123, "Accounting for Stock Based Compensation" ("FAS 123"). The
standard requires that all public companies report share-based compensation
expense at the grant date fair value of the related share-based awards and no
longer permits companies to account for options under the intrinsic value
approach of APB 25. SFAS 123R, as amended by the SEC, is effective for annual
periods beginning after June 15, 2005. As the Company has accounted for stock
option grants under the APB 25 in the past, this statement is expected to
have a material impact on the Company's financial statements once effective
($0.14 to $0.16 per diluted share on an annualized basis). The Company is
currently assessing its compensation programs, its option valuation
techniques and assumptions, and the possible transition alternatives in order
to determine the full impact of adopting this standard.
8
In November 2004, the FASB issued Statement of Financial Accounting
Standards No 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4".
This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing", to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). Under ARB
No. 43, in certain circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs that were considered
to be unusually abnormal were required to be treated as period charges.
Under FASB No. 151, these charges are required to be treated as period
charges regardless of whether they meet the criterion of unusually abnormal.
Additionally, FASB No. 151 requires that allocation of fixed production
overhead to the cost of conversion be based on the normal capacity of the
production facilities. FASB No. 151 is effective for all fiscal years
beginning after June 15, 2005. The Company does not expect the application
of this standard to have a material impact on the Company's financial
statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Nonmonetary Assets an amendment of APB
Opinion No. 29". This statement amends Opinion 29 to eliminate the
exceptions that allowed for other than fair value measurement when similar
productive assets were exchanged, and replaced the exceptions with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. FASB Statement No 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The
Company does not expect the application of this statement to have a material
impact on the Company's financial statements.
On October 22, 2004, the American Jobs Creation Act of 2004 (the "AJCA")
was signed into law. The AJCA enacted a provision that provides the Company
with the opportunity to repatriate up to $500 million of reinvested earnings
and to claim a deduction equal to 85% of the repatriated amount. The Company
did not elect the benefit of this provision in 2004. The Company is
anticipating taking advantage of repatriating foreign earnings under Section
965 of the Internal Revenue Code, however, we are still finalizing our plans,
including the size and timing of any repatriation.
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,
2005 2004 2005 2004
(in thousands)
Net income $ 57,893 $ 49,043 $ 106,942 $ 137,875
Other comprehensive income:
Foreign currency translation adjustments (57,512) (7,243) (105,412) (18,224)
Unrealized gain on available-for-sale securities 46 26 60 49
Net gain (loss) on derivative financial
instruments 15,290 (2,037) 21,356 (4,979)
Total comprehensive income $ 15,717 $ 39,789 $ 22,946 $ 114,721
During the quarters ended June 30, 2005 and 2004, foreign currency
translation adjustments included net translation losses of $83.6 million and
$13.1 million, respectively, offset by gains of $26.1 million and $5.9
million, respectively, on the Company's loans designated as hedges of net
investments. During the six months ended June 30, 2005 and 2004, foreign
currency translation adjustments included net translation losses of $142.4
million and $28.0 million, respectively, offset by gains of $37.0 million and
$9.8 million, respectively, on the Company's loans designated as hedges of
net investments.
9
The balances included in accumulated other comprehensive income in the
consolidated balance sheets are as follows:
June 30, December 31,
2005 2004
(in thousands)
Foreign currency translation adjustments $ 74,004 $ 179,416
Net gain (loss) on derivative financial
instruments 8,717 (12,639)
Unrealized gain on available-for-sale securities 402 342
Minimum pension liability (3,019) (3,019)
$ 80,104 $ 164,100
The cumulative foreign currency translation adjustments included net
translation gains of $155.4 million and $297.9 million as of June 30, 2005
and December 31, 2004, respectively, offset by losses of $81.4 million and
$118.5 million, respectively, on loans designated as hedges of net
investments.
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,
2005 2004 2005 2004
(in thousands, except per share amounts)
Basic Earnings Per Common Share Computation
Income from continuing operations $ 57,893 $ 49,222 $106,942 $ 94,990
Income from discontinued operations -- (179) -- 42,885
Net income $ 57,893 $ 49,043 $106,942 $137,875
Common shares outstanding 80,137 80,493 80,418 80,208
Earnings per common share from continuing operations $ 0.72 $ 0.61 $ 1.33 $ 1.18
Earnings per common share from discontinued operations -- -- -- 0.54
Total earnings per common share - basic $ 0.72 $ 0.61 $ 1.33 $ 1.72
Diluted Earnings Per Common Share Computation
Income from continuing operations $ 57,893 $ 49,222 $106,942 $ 94,990
Income from discontinued operations -- (179) -- 42,885
Net income $ 57,893 $ 49,043 $106,942 $137,875
Common shares outstanding 80,137 80,493 80,418 80,208
Incremental shares from assumed exercise
of dilutive options 1,471 1,596 1,523 1,588
Total shares 81,608 82,089 81,941 81,796
Earnings per common share from continuing operations $ 0.71 $ 0.60 $ 1.31 $ 1.16
Earnings per common share from discontinued operations -- -- -- 0.53
Total earnings per common share - diluted $ 0.71 $ 0.60 $ 1.31 $ 1.69
10
Options to purchase 57,300 shares of common stock that were outstanding
during the quarter ended June 30, 2005 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, 2005 and 2004 were 57,300 and were 35,800, respectively.
NOTE 4 - BUSINESS ACQUISITIONS
Effective January 2005, the Company acquired all the outstanding capital
stock of GAC SA from the Gebroulaz Foundation. GAC SA is primarily a distributor
of orthodontic products with subsidiaries in Switzerland, France, Germany and
Norway. The Company purchased GAC SA primarily to further strengthen its
orthodontic business through the acquired company's presence in the orthodontic
market in Europe. Effective May 2005, the Company acquired the Assets of
Raintree Essix, L.L.C. ("Raintree"). Raintree is a brand leader for specialty
plastic sheets used in orthodontic treatment, as well as other accessories for
the orthodontic market. The Company purchased Raintree primarily to further
strengthen its orthodontic product offerings. Effective May 2005, the Company
acquired all the outstanding capital stock of Glenroe Technologies, Inc.
("Glenroe"). Glenroe is a manufacturer of orthodontic accessory products
including elastic force materials, specialty plastics, and intricate molded
plastic parts, including NEOCLIPS, a new product used with DENTSPLY's newly
launched Interactive MYSTIQUE bracket (the world's first low friction
translucent ceramic bracket). The Company purchased Glenroe primarily to further
strengthen its orthodontic product offerings. The above described transactions
included aggregate payments at closing of approximately $15.9 million (net of
cash acquired of $2.9 million). Each transaction includes provisions for
possible additional payments based on the performance of the individual
businesses post closing (generally for three years). All of these acquired
companies are included in the "U.S. Dental Laboratory
Business/Implants/Orthodontics/Japan/Asia" operating segment.
The results of operations of the acquired companies are included in the
accompanying financial statements since the effective dates of the
transactions. The purchase price of these acquisitions has been allocated on
the basis of preliminary estimates of the fair values of assets acquired and
liabilities assumed. The current aggregate purchase price allocation for
these acquisitions is as follows:
Current assets $ 7,181
Property, plant and equipment 2,063
Identifiable intangible assets and goodwill 15,083
Other long-term assets 26
Total assets 24,353
Current liabilities (6,371)
Other long-term liabilities (2,049)
Total liabilities (8,420)
Net assets $ 15,933
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, 2005 and 2004.
The operating businesses are combined into operating groups which have
overlapping product offerings, geographical presence, customer bases,
distribution channels, and regulatory oversight. These operating groups are
considered the Company's reportable segments under SFAS 131 as the Company's
chief operating decision-maker regularly reviews financial results at the
operating group level and uses this information to manage the Company's
operations. 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.
11
In January 2005, the Company reorganized its operating group structure
consolidating into four operating groups from the five groups under the prior
management structure. The segment information below reflects this revised
structure for all periods shown.
A description of the activities provided within each of the Company's four
reportable segments follows:
U.S. Consumable Business/Canada
This business group includes responsibility for the design, manufacturing,
sales, and distribution for certain small equipment, chairside consumable
products and dental anesthetics in the U.S. and the sales and distribution of
all such Company products in Canada.
Dental Consumables - Europe, 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. In addition, the group has responsibility for the
design, manufacturing, sales, and distribution for certain small equipment
and chairside consumable products and certain specialty products in Europe,
Middle East, Africa and the CIS.
Australia/Latin America/Endodontics/Non-dental
This business group includes responsibility for the design, manufacture,
and/or sales and distribution of dental anesthetics, chairside consumable and
laboratory products in Brazil. It also has responsibility for the sales and
distribution of all Company dental products sold in Australia and Latin
America. This business group also includes the responsibility for the design
and manufacturing for endodontic products in the U.S., Switzerland and
Germany and is responsible for sales and distribution of all Company
endodontic products in the U.S., Canada, Switzerland, Benelux, Scandinavia,
and Eastern Europe, and certain endodontic products in Germany. This
business group is also responsible for the Company's non-dental business.
U.S. Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
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. The business is responsible for sales and distribution of all
Company products throughout Asia and Japan.
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 Company considers sales excluding precious metal content
as the appropriate sales measurement due to the fluctuations of precious
metal prices and due to the fact that the precious metal content is largely a
pass-through to customers and has minimal effect on earnings.
12
The following tables set forth information about the Company's operating
groups for the quarters and six month periods ended June 30, 2005 and 2004:
Third Party Net Sales
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
(in thousands)
U.S. Consumable Business / Canada $ 87,001 $ 82,792 $ 166,796 $ 156,154
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 133,965 141,102 254,364 290,089
Australia/Latin America/Endodontics/
Non-Dental 93,837 86,120 181,396 167,507
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 130,761 115,937 250,909 228,068
All Other (a) (730) (1,543) (1,656) (3,051)
Total $ 444,834 $ 424,408 $ 851,809 $ 838,767
Third Party Net Sales, excluding precious metal content
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
(in thousands)
U.S. Consumable Business / Canada $ 86,744 82,792 $ 166,310 $ 156,154
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 102,636 104,188 198,841 211,864
Australia/Latin America/Endodontics/
Non-Dental 93,324 85,610 180,491 166,690
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 118,786 102,134 226,110 200,113
All Other (a) (731) (1,543) (1,657) (3,051)
Total excluding Precious Metal Content 400,759 373,181 770,095 731,770
Precious Metal Content 44,075 51,227 81,714 106,997
Total including Precious Metal Content $ 444,834 $ 424,408 $ 851,809 $ 838,767
(a) Includes: operating expenses of two distribution warehouses not managed
by named segments, Corporate and inter-segment eliminations.
13
Intersegment Net Sales
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
(in thousands)
U.S. Consumable Business / Canada $ 81,654 $ 81,606 $ 152,224 $ 159,099
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 43,187 40,238 85,570 83,688
Australia/Latin America/Endodontics/
Non-Dental 17,840 16,278 34,807 29,479
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 11,373 8,923 20,914 17,026
All Other (a) 46,386 41,218 88,497 83,186
Eliminations (200,440) (188,263) (382,012) (372,478)
Total $ -- $ -- $ -- $ --
Segment Operating Income
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
(in thousands)
U.S. Consumable Business / Canada $ 24,133 $ 25,664 $ 43,671 $ 46,304
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 13,370 15,998 23,308 35,218
Australia/Latin America/Endodontics/
Non-Dental 38,249 36,554 77,328 71,077
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 22,502 14,358 39,767 28,340
All Other (a) (17,347) (14,676) (32,774) (32,211)
Segment Operating Income 80,907 77,898 151,300 148,728
Reconciling Items:
Restructuring and other (income) costs (228) 333 40 1,057
Interest Expense 4,446 5,854 10,773 11,801
Interest Income (2,159) (1,215) (4,469) (1,889)
Other (income) expense, net (1,605) 575 (5,847) 798
Income before income taxes $ 80,453 $ 72,351 $ 150,803 $ 136,961
(a) Includes: operating expenses of two distribution warehouses not managed
by named segments, Corporate and inter-segment eliminations.
14
Assets
June 30 December 31,
2005 2004
(in thousands)
U.S. Consumable Business / Canada $ 973,809 $ 982,086
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 628,718 713,592
Australia/Latin America/Endodontics/
Non-Dental 589,394 582,828
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 410,450 390,140
All Other (a) (30,049) 129,499
Total $ 2,572,322 $ 2,798,145
(a) Includes: operating expenses of two distribution warehouses not managed
by named segments, Corporate and inter-segment eliminations.
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.
In addition, 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". As a result, 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,
2005 2004 2005 2004
(in thousands)
Net sales $ -- $ 524 $ -- $17,435
Gain on sale of Gendex -- -- -- 72,943
(Loss) income before income taxes (including gain on
sale in the six months ended June 30, 2004) -- (268) -- 72,841
15
NOTE 7 - INVENTORIES
Inventories consist of the following:
June 30, December 31,
2005 2004
(in thousands)
Finished goods $137,564 $130,150
Work-in-process 42,281 42,427
Raw materials and supplies 44,379 41,132
$224,224 $213,709
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,
2005 2004 2005 2004
(in thousands)
Service cost $ 1,379 $ 1,611 $ (35) $ 68
Interest cost 1,905 2,015 (184) 170
Expected return on plan assets (910) (1,507) -- --
Net amortization and deferral 279 234 116 (56)
Net periodic benefit cost $ 2,653 $ 2,353 $ (103) $ 182
Other Postretirement
Pension Benefits Benefits
------------------------- ---------------------
Six Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
(in thousands)
Service cost $ 2,874 $ 2,249 $ 67 $ 135
Interest cost 3,468 2,949 356 341
Expected return on plan assets (1,851) (1,635) -- --
Net amortization and deferral 557 351 (223) (111)
Net periodic benefit cost $ 5,048 $ 3,914 $ 200 $ 365
16
Information related to the funding of the Company's benefit plans for 2005
is as follows:
Other
Pension Postretirement
Benefits Benefits
(in thousands)
Actual, June 30, 2005 $3,461 $ 549
Projected for the remainder of the year 3,529 626
Total for year $6,990 $1,175
NOTE 9 - RESTRUCTURING AND OTHER COSTS
During the third and fourth quarters of 2004, the Company recorded
restructuring and other costs of $5.7 million. These costs were primarily
related to the creation of a European Shared Services Center in Yverdon,
Switzerland, which resulted in the identification of redundant personnel in
the Company's European accounting functions. In addition, these costs related
to the consolidation of certain sales/customer service and distribution
facilities in Europe and Japan. The primary objective of these restructuring
initiatives is to improve operational efficiencies and to reduce costs within
the related businesses. Included in this charge were severance costs of $4.8
million and lease/contract termination costs of $0.9 million. In addition,
during the six months ended June 30, 2005, the Company recorded income of
$0.1 million ($0.3 million during the quarter ended June 30, 2005) related
primarily to adjustments to the severance provisions. The plans include the
elimination of approximately 115 administrative and manufacturing positions
primarily in Germany. Certain of these positions need to be replaced at the
Shared Services Center and therefore the net reduction in positions is
expected to be approximately 65. These plans are expected to be complete by
the first quarter of 2006. As of June 30, 2005, approximately 45 of these
positions have been eliminated. The major components of these charges and the
remaining outstanding balances at June 30, 2005 are as follows:
Amounts Amounts Balance
2004 Applied 2005 Applied June 30,
Provisions 2004 Provisions 2005 2005
(in thousands)
Severance $ 4,877 $ (583) $ (147) $ (1,212) $ 2,935
Lease/contract
terminations 881 - - (231) 650
$ 5,758 $ (583) $ (147) $ (1,443) $ 3,585
17
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. During 2004, the Company recorded charges of $1.4 million ($0.3
million and $1.1 million during the quarter and six months ended June 30,
2004, respectively) for additional severance, lease termination and other
restructuring costs incurred during the period related to these plans. In
addition, during the six months ended June 30, 2005, the Company incurred
$0.2 million ($0.1 million during the quarter ended June 30, 2005) of costs
related to these plans. These restructuring plans resulted in the elimination
of approximately 70 administrative and manufacturing positions primarily in
the United States. Certain of these positions needed to be replaced at the
consolidated site and therefore the net reduction in positions is expected to
be approximately 25. These plans were substantially complete as of June 30,
2005. The major components of these charges and the remaining outstanding
balances at June 30, 2005 are as follows:
Amounts Amounts Amounts Balance
2003 Applied 2004 Applied 2005 Applied June 30,
Provisions 2003 Provisions 2004 Provisions 2005 2005
(in thousands)
Severance $ 908 $ (49) $ 451 $(1,083) $ 29 $ (149) $ 107
Lease/contract
terminations 562 (410) 13 (165) -- -- --
Other restructuring
costs 27 (27) 922 (852) 96 (161) 5
Intangible and other asset
impairment charges 3,000 (3,000) -- -- 62 (62) --
$ 4,497 $(3,486) $ 1,386 $(2,100) $ 187 $ (372) $ 112
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.
Certain of the Company's 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 derivative
instruments and 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 major impact on the Company's earnings,
depending upon its interest rate exposure. As a result, the Company manages
its interest rate exposure with the use of interest rate swaps, when
appropriate, based upon market conditions.
The manufacturing of some of the Company's products requires the use of
commodities which are subject to market fluctuations. In order to limit the
unanticipated earnings changes from such market fluctuations, the Company
selectively enters into commodity price swaps for certain materials used in
the production of its products. Additionally, the Company uses
non-derivative methods, such as the precious metal consignment agreement to
effectively hedge commodity risks.
18
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, 2005, 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 at a fixed rate of 4.2% for a term of seven years
started in March 2005.
The Company selectively enters into commodity price swaps to effectively
fix certain variable raw material costs. At June 30, 2005, the Company had
swaps in place to purchase 900 troy ounces of platinum bullion for use in the
production of its impression material products. The average fixed rate of
this agreement is $846.50 per troy ounce. In addition the Company had swaps
in place to purchase 124,200 troy ounces of silver bullion for use in the
production of its amalgam products at an average fixed rate of $6.50 per troy
ounce. The Company generally hedges up to 80% of its projected annual
platinum and silver 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 and typically hedge up to 80% of the
specific transactions.
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 with no net
impact to the income statement. As of June 30, 2005 and December 31, 2004,
the accumulated fair value of the interest rate swap was $12.8 million and
$14.7 million, respectively, and was recorded in Prepaid Expenses and Other
Current Assets and Other Noncurrent Assets. The notional amount of the
underlying Eurobond was increased by a corresponding amount at June 30, 2005
and December 31, 2004.
19
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, completely
offsetting the impact of the change in exchange rates on the Eurobonds that
were also recorded in the income statement. 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, included 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. As a result of this amendment,
the Company became economically exposed to the impact of exchange rates on
the Euro 350 million Eurobonds and designated the Eurobonds as a hedge of net
investment, on the date of the amendment and thus the impact of translation
changes related to the final principal payment are recorded in accumulated
other comprehensive income.
Additionally, the cross-currency element of the integrated transaction
continued to be marked-to-market in the income statement (completely offset
by the corresponding change in the Eurobonds) through June 2005 when the
Company also terminated this component of the integrated transaction. Upon
termination, the Company realized the remaining $20.1 million of accumulated
value of the swap. The termination of the cross-currency basis swap resulted
in the Company becoming exposed to variable Euro interest rate risk for the
remaining term of the bond.
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 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, 2005 and December 31, 2004, 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. At June
30, 2005 and December 31, 2004, the accumulated translation gains on
investments in foreign subsidiaries, primarily denominated in Euros, Swiss
francs and Japanese yen, net of these debt hedges, were $74.0 million and
$179.4 million, respectively, which was included in Accumulated Other
Comprehensive income.
Other
The aggregate net fair value of the Company's derivative instruments at
June 30, 2005 and December 31, 2004 was $27.8 million and $36.0 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 ".
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.
20
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. The Department of Justice appealed this decision to the U.S.
Third Circuit Court of Appeals. A panel of three Judges of the Third Circuit
Court issued its decision on February 22, 2005 and reversed the decision of
the District Court. The effect of this decision, if it withstands any appeal
challenge by the Company, will be the issuance of an injunction requiring
DENTSPLY to discontinue its policy of not allowing its tooth dealers to take
on new competitive teeth lines. This decision relates only to the
distribution of artificial teeth sold in the U.S. The Company filed a
petition with the Third Circuit requesting a rehearing of this decision by
the full Third Circuit Court, which petition was denied. The Company plans
to file a petition with the U.S. Supreme Court asking it to hear an appeal of
the Third Circuit Court decision. While the Company believes its tooth
distribution practices do not violate the antitrust laws, we are confident
that we can continue to develop this business regardless of the final legal
outcome.
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 the Court held oral argument in April 2005. 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. The Judge has entered an Order granting class
certification, as an Opt-in class (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) 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 Notice of the class action was sent on February 23,
2005 to the approximately 29,000 dentists licensed to practice in California
during the relevant period and a total of 168 dentists have opted into the
class action. 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. The Company's primary level insurance carrier has confirmed
coverage for the breach of warranty claims in this matter.
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 herein and within the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.
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 all other
regions; (2) the development, introduction and contribution 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 average overall internal growth rate of 4-6% is
a long-term sustainable rate for the Company. During the first six months of
2005, the Company's overall internal growth was 1.2% compared to 4.0% for the
full year 2004. Our internal growth rates in the United States (43% of sales)
and Europe (37% of sales), the largest dental markets in the world, were 5.7%
and negative 5.3%, respectively during the first six months of 2005 compared
to 3.4% and 4.1%, respectively for the full year 2004. As discussed further
within the Results of Continuing Operations, the lower sales in Europe were
primarily due to issues related to a new dental reimbursement program
effective in 2005 in Germany, the Company's most significant market in this
region. Our internal growth rate in all other regions during the first half
of 2005, which represents approximately 20% of our sales, was 4.3%, compared
to 5.2% for the full year 2004. Among the other regions, the Asian region,
has historically been one of our highest growth markets and management
believes it represents a long-term growth opportunity for the industry and
the Company. Also within the other region is the Japanese market, which
represents the third largest dental market in the world behind the United
States and Europe. Although Japan's dental market growth has been weak in
the past few years, as it closely parallels its economic growth, the Company
also views this market as an important long-term growth opportunity, both in
terms of a recovery in the Japanese economy and the opportunity to increase
our market share. During the second quarter of 2005, the Company has seen
positive signs in this market, as it experienced strong internal
growth in Japan for the quarter. There can be no assurance that the Company's
assumptions concerning the growth rates in its markets or the dental market
generally will be correct and if such rates are less than expected, the
Company's projected growth rates and results of operations may be adversely
effected.
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. During 2004, approximately 25 new products were introduced
around the world and the Company expects approximately 20 new products to be
introduced in 2005. Of specific note, in late 2004, the Company introduced
Oraqix(R), its new non-injectible anesthetic gel for use in scaling and root
planing procedures and BioPure MTAD, a new irrigant used in root canal
procedures. In the first quarter of 2005, the Company introduced Calamus, a
unique obturation delivery system used in root canal procedures and Xeno IV, the
Company's first introduction of single component self etching adhesive
technology to the US market. In addition, during the second quarter of 2005, we
introduced Interactive Mystique. This is the world's first low friction
translucent ceramic orthodontic bracket. It has a clear interactive clip called
Neoclip, which can be rapidly placed and removed from Mystique, our ceramic
bracket.
22
New advances in technology are anticipated to have a significant influence
on future products in dentistry. As a result, the Company has pursued
several research and development initiatives to support this development.
Specifically, the Company continues to work on product activities with the
Georgia Institute of Technology's Research Institute and Doxa AB to pursue
potential new advances in dentistry. In addition, the Company licenses and
purchases technologies developed by other third parties. Specifically, in
2004, the Company purchased the rights to a unique compound called SATIF from
Sanofi-Aventis. The Company is currently working to develop products based on
this technology and believes that this compound will provide such benefits to
future products as greater protection against enamel caries, the ability to
desensitize exposed dentin and the ability to retard, or to inhibit the
formation of staining on the enamel. Although we believe these activities
will lead to new innovative dental products, they involve new technologies
and there can be no assurance that commercialized products will be developed.
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. As further discussed in Note 4 to the Consolidated
Condensed Financial Statements, during the first six months of 2005 the
Company purchased GAC SA, Raintree Essix and Glenroe Technologies. All three
of the acquired companies specialize in the orthodontics products market. The
Company expects these acquisitions to increase full year 2005 sales by
approximately $25 million.
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. In addition, the Company remains focused on
enhancing efficiency through expanded use of technology and process
improvement initiatives. 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.
The Company completed construction of a dental anesthetic filling plant
outside Chicago in 2004. Earlier this year the plant received the approval
and validation of the manufacturing practices by the Medicines and
Healthcare products Regulatory Agency ("MHRA"), the agency responsible for
drug product approvals in the United Kingdom, and which is accepted by
Ireland, Australia and New Zealand. As a result, the Plant began releasing
products to the market in the United Kingdom and Australia in the second
quarter of this year. The Company made a submission to the Food and Drug
Administration ("FDA") in spring 2005 to obtain the necessary facility
approval to sell in the United States the injectible anesthetic products
manufactured at the plant. The FDA conducted a Pre-Approval Inspection in
July 2005 and identified items that need to be addressed in connection with
the U.S. inspection and submission. The Company is working to address such
items and anticipates that resubmission for approval to the FDA will be made
in early 2006, with approval expected by the end of 2006. Additionally, the
Company plans to communicate with the MHRA regarding these items, as well as
the Company's action plans. The Company cannot predict with certainty the
timing of approval by the FDA or the response of the MHRA. The Company has
had contract manufacturing relationships with AstraZeneca, which it is in
the process of renewing, for supply of product in the markets intended to be
supplied by the plant until the Company obtains the necessary approvals.
While that supply has been adequate to date, there can be no assurance that
the Company will be able to obtain an adequate supply of its injectible
anesthetic products in the future in the event that the requisite approvals
are not timely received from the FDA or maintained in each market served by
the Company.
23
RESULTS OF CONTINUING OPERATIONS, QUARTER ENDED JUNE 30, 2005 COMPARED TO
QUARTER ENDED JUNE 30, 2004
Net Sales
The discussions below summarize the Company's sales growth, excluding
precious metals, 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.
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 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,
2005 2004
(in millions)
Net Sales $ 444.8 $ 424.4
Precious Metal Content of Sales (44.0) (51.2)
Net Sales Excluding Precious Metal Content $ 400.8 $ 373.2
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 adjusted when the prices of
underlying precious metals change.
Net sales for the quarter ended June 30, 2005 increased $20.4 million, or
4.8%, from the same period in 2004 to $444.8 million. Net sales, excluding
precious metal content, increased $27.6 million, or 7.4%, to $400.8 million.
Sales growth excluding precious metal content was comprised of 3.9% of
internal growth and 2.2% of foreign currency translation and 1.3% related to
acquisitions. The 3.9% internal growth was comprised of 4.7% in the United
States, 1.8% in Europe and 5.9% for all other regions combined.
The internal sales growth, excluding precious metal content, in the United
States was driven by strong growth in specialty dental and dental consumable
product categories, offset somewhat by lower sales in the dental laboratory
product category. In Europe, the low internal growth resulted from lower
sales in the dental laboratory category offset by strong growth in the
specialty dental category. Similar to the first quarter, the decrease in the
laboratory category was primarily related to reimbursement issues in the
German dental market caused by the slow implementation of a new dental
reimbursement program for prosthetic procedures which became effective in
2005. The prosthetic area of the German dental market has improved in the
second quarter compared to the first quarter as the dentists, laboratories,
insurance companies and patients have become more familiar with the new
reimbursement program and the backlog of requested procedures is being
reduced. Although we expect that the German market will continue to improve
throughout the year, we anticipate that the market in Germany will be lower
in 2005 than 2004, which is negatively impacting the European internal growth
for 2005. The internal growth of 5.9% in all other regions was largely the
result of strong growth in the Asian and Middle East/Africa regions and
Japan, partially offset by lower sales in Canada.
24
Gross Profit
Gross profit was $227.3 million for the quarter ended June 30, 2005
compared to $212.1 million in 2004, an increase of $15.2 million, or 7.2%.
Gross profit, measured against sales including precious metal content,
represented 51.1% of net sales in 2005 compared to 50.0% in 2004. The gross
profit for the second quarter of 2005, measured against sales excluding
precious metal content, represented 56.7% of net sales compared to 56.8% in
2004. This slight margin decline from 2005 to 2004 was due to the decrease in
the laboratory product sales in Europe as discussed above and start-up costs
related to the new anesthetic facility, offset by the impact of new products
and manufacturing improvements in many of the Company's businesses.
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $12.2
million, or 9.1%, to $146.4 million during the three months ended June 30,
2005 from $134.2 million in 2004. The 9.1% increase in expenses reflects
increases for the translation impact from a weaker U.S. dollar of
approximately $3.1 million. SG&A expenses, measured against sales including
precious metal content, increased to 32.9% in 2005 compared to 31.6% in 2004.
SG&A expenses, as measured against sales excluding precious metal content,
increased to 36.5% in 2005 compared to 35.9% in 2004. The higher expense
ratio in 2005 primarily resulted from higher expense ratios related to the
acquired businesses and costs related to the biennial International Dental Show
("IDS"), in addition to the lower sales level.
During the quarter ended June 30, 2005, the Company recorded restructuring
and other income of $0.2 million. This amount included income of $0.3 million
recorded for severance provision adjustments related to the consolidation of
certain sales/customer service facilities in Europe and the formation of a
European Shared Services Center in Yverdon, Switzerland. The primary
objective of these restructuring initiatives is to improve operational
efficiencies and to reduce costs within the related businesses. These plans
are expected to be fully complete by the first quarter of 2006. The Company
also incurred additional charges of $0.1 million related to the consolidation
of its U.S. laboratory businesses, which was initiated in the fourth quarter
of 2003. The Company made the decision to consolidate the United States
laboratory businesses in order to improve operational efficiencies, to
broaden customer penetration and to strengthen customer service. This plan
was substantially complete as of June 30, 2005 (See also Note 9 to the
Consolidated Condensed Financial Statements).
The Company anticipates the remaining costs to complete these restructuring
initiatives will be approximately $0.7 million which will be expensed during
the remainder of 2005 as the related costs are incurred. These plans are
projected to result in future annual expense reductions of $4 to $6 million
when fully implemented in 2006.
Other Income and Expenses
Net interest and other expenses was $0.7 million during the three months
ended June 30, 2005 compared to $5.2 million in 2004. The 2005 period
included $2.3 million of net interest expense, $1.1 million of currency
transaction gains and $0.5 million of other nonoperating costs. 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 decrease in net interest expense was primarily due to increased interest
income generated from the Company's higher average cash levels and lower debt
levels in addition to the positive impact of cross currency interest rate
swaps put into place in the first quarter of 2005.
Income Taxes/Earnings
The Company's effective tax rate for the quarter ended June 30, 2005
decreased to 28.0% from 32.0% for the same period in 2004. The effective rate
for 2005 is reflective of net tax benefits of $1.8 million from the reversal
of previously accrued taxes from the settlement of prior years' tax audits.
Income from continuing operations increased $8.7 million, or 17.6%, to
$57.9 million in 2005 from $49.2 million in 2004. Fully diluted earnings per
share from continuing operations were $0.71 in 2005, an increase of 18.3%
from $0.60 in 2004.
25
Operating Segment Results
In January 2005, the Company reorganized its operating group structure
consolidating into four operating groups from the five groups under the prior
management structure. These four operating groups are managed by four Senior
Vice Presidents and represent our 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 Financial Statements. The management
of each group is evaluated for performance and incentive compensation
purposes on net third party sales, excluding precious metal content and
segment operating income.
U.S. Consumable Business/Canada
Net sales for this group were $86.7 million during the quarter ended June
30, 2005, a 4.8% increase compared to $82.8 million in 2004. Internal
growth was 3.8% and currency translation added 1.0% to sales in 2005. The
chairside consumable products business and the Oraqix product within the
dental anesthetics business, were the strongest portions of this group offset
by a decrease in the Canadian business due primarily to a warehouse
consolidation by a large dealer in that market.
Operating profit decreased $1.6 million during the three months ended June
30, 2005 to $24.1 million compared to $25.7 million in 2004. The decrease was
primarily related to non-capitalizable costs associated with the new
pharmaceutical plant in Chicago, partially offset by strong margins on
improved sales in the chairside consumable products business. In addition,
operating profit benefited slightly from currency translation.
Dental Consumables--Europe, CIS, Middle East, Africa/European Dental
Laboratory Business
Net sales for this group were $102.6 million during the quarter ended June
30, 2005, a 1.5% decrease compared to $104.2 million in 2004. Internal
growth was negative 4.6% with currency translation adding 3.1%. Changes in
German reimbursement programs related to prosthetic procedures, as discussed
earlier, resulted in slower sales in Germany during the 2005 quarter which
was the primary driver of the negative 4.6% internal sales growth. Although
the Company believes that the German dental market will improve as the
dentists, laboratories, insurance companies and patients become more familiar
with the new reimbursement program, we expect that the market in Germany will
be lower than 2004 levels, which will negatively impact the group's internal
growth for 2005.
Operating profit decreased $2.6 million during the three months ended June
30, 2005 to $13.4 million from $16.0 million in 2004. The reduction in
operating profit was driven primarily by lower sales, particularly in the
German businesses. In addition, operating profit benefited from currency
translation.
Australia/Latin America/Endodontics/Non-dental
Net sales for this group increased $7.7 million during the quarter ended
June 30, 2005, or 9.0%, to $93.3 million from $85.6 million in 2004. Internal
growth was 5.9% with currency translation adding 3.1%. Strong growth
continued in the group's endodontic businesses offset slightly by decreases
in the Australian and Brazilian businesses.
Operating profit was $38.2 million during the second quarter of 2005, a
$1.6 million increase from $36.6 million in 2004. The increase was primarily
related to the continued strength of the endodontic business offset by
decreases in the Australian and Brazilian businesses. In addition, operating
profit benefited from currency translation.
26
U.S. Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
Net sales for this group was $118.8 million during the three months ended
June 30, 2005, a 16.3% increase compared to $102.1 million in 2004. Internal
growth was 10.0%, currency translation added 1.6% to sales in 2004, and 4.7%
was added through acquisitions. Significant growth in the orthodontic,
implant and Japanese businesses was supported by solid growth in the Asian
business, offset by weakness in the U.S. laboratory market.
Operating profit increased $8.1 million during the three months ended June
30, 2005 to $22.5 million from $14.4 million in 2004. The increase in operating
profits was driven primarily by the sales growth in the implant, orthodontics
and Asian businesses. In addition, operating profit benefited from currency
translation.
RESULTS OF CONTINUING OPERATIONS, SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2004
Net Sales
The following is a reconciliation of net sales to net sales excluding
precious metal content.
Six Months Ended
June 30,
2005 2004
(in millions)
Net Sales $ 851.8 $ 838.8
Precious Metal Content of Sales (81.7) (107.0)
Net Sales Excluding Precious Metal Content $ 770.1 $ 731.8
Net sales for the six months ended June 30, 2005 increased $13.0 million,
or 1.6%, from the same period in 2004 to $851.8 million. Net sales, excluding
precious metal content, increased $38.3 million, or 5.2%, to $770.1 million.
Sales growth excluding precious metal content was comprised of 1.2% of
internal growth and 2.7% of foreign currency translation and 1.3% related to
acquisitions. The 1.2% internal growth was comprised of 5.7% in the United
States, negative 5.3% in Europe and 4.3% for all other regions combined.
The internal sales growth, excluding precious metal content, in the United
States was driven by strong growth in specialty dental and dental consumable
product categories, offset somewhat by lower sales in the dental laboratory
product category. In Europe, the negative internal growth was driven by the
lower sales in the dental laboratory category, partially offset by strong
growth in the specialty dental category. The decrease in the laboratory
category was primarily related to reimbursement issues in the German dental
market. The internal growth of 4.3% in all other regions was largely the
result of strong growth in the Asian and Middle East/Africa regions, offset
by lower sales in Canada.
Gross Profit
Gross profit was $436.2 million for the six months ended June 30, 2005
compared to $415.9 million in 2004, an increase of $20.3 million, or 4.9%.
Gross profit, measured against sales including precious metal content,
represented 51.2% of net sales in 2005 compared to 49.6% in 2004. The gross
profit for the first half of 2005, measured against sales excluding precious
metal content, represented 56.6% of net sales compared to 56.8% in 2004. This
slight margin decline from 2005 to 2004 was driven by the decrease in the
laboratory product sales in Europe and start-up costs related to the new
anesthetic facility, offset by the impact of new products and manufacturing
improvements in many of the Company's businesses.
27
Operating Expenses
SG&A expense increased $17.7 million, or 6.6%, to $284.9 million during the
six months ended June 30, 2005 from $267.2 million in 2004. The 6.6%
increase in expenses reflects increases for the translation impact from a
weaker U.S. dollar of approximately $7.4 million. SG&A expenses, measured
against sales including precious metal content, increased to 33.4% in 2005
compared to 31.9% in 2004. SG&A expenses, as measured against sales excluding
precious metal content, increased to 37.0% in 2005 compared to 36.5% in 2004.
The higher expense ratio in 2005 primarily resulted from higher expense
ratios related to the acquired businesses, costs associated with the
Sarbanes-Oxley compliance and costs related to the biennial International
Dental Show ("IDS"), in addition to the lower sales level.
During the six months ended June 30, 2005, the Company recorded
restructuring and other costs of $0.1 million, which included income of $0.1
million for severance provision adjustments related to the consolidation of
certain sales/customer service facilities in Europe and the formation of a
European Shared Services Center and $0.2 million of additional charges
related to the consolidation of its U.S. laboratory businesses (See also Note
9 to the Consolidated Condensed Financial Statements).
Other Income and Expenses
Net interest and other expenses were $0.5 million during the six months
ended June 30, 2005 compared to $10.7 million in 2004. The 2005 period
included $6.3 million of net interest expense, $5.9 million of currency
transaction gains and $0.1 million of other nonoperating costs. 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
increase in currency transaction gains during 2005 was primarily the result
of a transaction involving the transfer of intangible assets between legal
entities with different functional currencies. Exchange transaction gains or
losses occur from movement of foreign currency rates between the date of the
transaction and the date of final financial settlement. The decrease in net
interest expense was primarily due to increased interest income generated
from the Company's higher average cash levels and lower debt levels in
addition to the positive impact of cross currency interest rate swaps put
into place in the first quarter of 2005.
Income Taxes/Earnings
The Company's effective tax rate for the six months ended June 30, 2005
decreased to 29.1% from 30.6% for the same period in 2004. The effective rate
for the 2005 and 2004 periods are reflective of net tax benefits of $2.1 million
and $1.2 million, respectively, from the reversal of previously accrued taxes
from the settlement of prior years' tax audits.
Income from continuing operations increased $11.9 million, or 12.6%, to
$106.9 million in 2005 from $95.0 million in 2004. Fully diluted earnings per
share from continuing operations were $1.31 in 2005, an increase of 12.9%
from $1.16 in 2004.
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.
Income from discontinued operations was $42.9 million and $0.53 per diluted
share for the six months ended June 30, 2004, which was almost entirely
related to the gain realized on the sale of Gendex business.
28
Operating Segment Results
U.S. Consumable Business/Canada
Net sales for this group were $166.3 million during the six months ended
June 30, 2005, a 6.5% increase compared to $156.2 million in 2004. Internal
growth was 5.6% and currency translation added 0.9% to sales in 2005. The
chairside consumable products business and the Oraqix product within the
dental anesthetics business, were the strongest portions of this group
driving the 5.6% internal growth.
Operating profit decreased $2.6 million during the six months ended June
30, 2005 to $43.7 million compared to $46.3 million in 2004. The decrease was
primarily related to non-capitalizable costs associated with the new
pharmaceutical plant in Chicago, partially offset by strong margins on
improved sales in the chairside consumable products business. In addition,
operating profit benefited slightly from currency translation.
Dental Consumables--Europe, CIS, Middle East, Africa/European Dental
Laboratory Business
Net sales for this group were $198.8 million during the six months ended
June 30, 2005, a 6.1% decrease compared to $211.9 million in 2004. Internal
growth was negative 10.8% with currency translation adding 4.7%. Changes in
German reimbursement programs related to prosthetic procedures, as discussed
earlier, resulted in slower sales in Germany during the first six months of
2005 which was the primary driver of the negative 10.8% internal sales
growth. Although the Company believes that the German dental market will
improve as the dentists, laboratories, insurance companies and patients
become more familiar with the new reimbursement program, we expect that the
market in Germany will be lower than the 2004 levels.
Operating profit decreased $11.9 million during the six months ended June
30, 2005 to $23.3 million from $35.2 million in 2004. The reduction in
operating profit was driven primarily by lower sales, particularly in the
German businesses. In addition, operating profit benefited from currency
translation.
Australia/Latin America/Endodontics/Non-dental
Net sales for this group increased $13.8 million during the six months
ended June 30, 2005, or 8.3%, to $180.5 million from $166.7 million in 2004.
Internal growth was 5.4% with currency translation adding 2.9%. Continued solid
growth was shown in the endodontic business along with strong growth in the
non-dental business and strong growth throughout the Latin American businesses,
excluding Brazil, offset slightly by decreases in the Australian business.
Operating profit was $77.3 million during the first six months of 2005, a
$6.2 million increase from $71.1 million in 2004. The increase was primarily
related to the continued strength of the endodontic business. The non-dental
business also improved this group's operating profit offset somewhat by the
Australian and Brazilian businesses. In addition, operating profit benefited
from currency translation.
U.S. Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
Net sales for this group was $226.1 million during the six months ended
June 30, 2005, a 13.0% increase compared to $200.1 million in 2004. Internal
growth was 6.2%, currency translation added 2.0% to sales in 2004, and 4.8%
was added through acquisitions. Significant growth in the implant,
orthodontic and Asian businesses was supported by solid growth in the
Japanese business, offset by weakness in the U.S. laboratory markets.
Operating profit increased $11.5 million during the six months ended June 30,
2005 to $39.8 million from $28.3 million in 2004. The increase in operating
profits was driven primarily by the sales growth in the implant, orthodontics
and Asian businesses. In addition, operating profit benefited from currency
translation.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the Company's disclosure in its 2004
Annual Report on Form 10-K filed March 16, 2005.
29
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 2005
Cash flows from operating activities during the six months ended June 30,
2005 was $65.1 million compared to $111.5 million during 2004. The decrease
of $46.4 million results primarily from unfavorable working capital changes,
most notably with respect to receivables and inventories. Also contributing
to this decline, was the payment of a patent litigation settlement and
decreased tax benefits related to a lower level of stock option exercise
activity versus the prior year, offset somewhat by higher earnings.
Investing activities during the first six months of 2005 include capital
expenditures of $20.6 million. The Company expects that capital expenditures
will range from $55 million to $60 million for the full year of 2005.
Acquisition-related activity for the period ended June 30, 2005 was $16.0
million which was primarily related to the acquisitions of GAC SA, Raintree
Essix and Glenroe Technologies (see Note 4 to the Consolidated Condensed
Financial Statements).
In December 2004 the Board of Directors approved a stock repurchase program
under which the Company may repurchase shares of stock in an amount to
maintain up to 3,000,000 shares of treasury stock. As a result of this
program, the Company repurchased 2,044,000 shares at an average cost per
share of $55.64 and a total cost of $113.7 million during the in the first
half of 2005. During 2005, the Company also settled on 30,000 shares that
were purchased in 2004 at a cost of $1.7 million. As of June 30, 2005, the
Company held 2,107,000 shares of treasury stock. The Company also received
proceeds of $17.7 million as a result of the exercise of 723,000 stock
options during the six months ended June 30, 2005.
The Company's long-term borrowings decreased by a net of $130.3 million
during the period ended June 30, 2005. This net change included debt payments
of $48.2 million with the remaining decrease being primarily related to
exchange rate fluctuations on debt denominated in foreign currencies and
changes in the value of interest rate swaps. During the period ended June 30,
2005, the Company's ratio of long-term debt to total capitalization decreased
to 32.5% compared to 35.1% at December 31, 2004.
Under its multi-currency revolving credit agreement, the Company is able to
borrow up to $500 million through May 2010. This facility is unsecured and
contains certain affirmative and negative covenants relating to its
operations and financial condition. The most restrictive of these covenants
pertain to asset dispositions and prescribed ratios of indebtedness to total
capital and operating income plus depreciation and amortization to interest
expense. At June 30, 2005, the Company was in compliance with these
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, 2005.
The Company also has access to $53.2 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.
At June 30, 2005, the Company had unused lines of credit related to the
revolving credit agreement and the uncommitted short-term lines of credit of
$440.3 million.
At June 30,2005, the Company held $63.8 million of precious metals on
consignment from several financial institutions. These consignment
agreements 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 third
party financing to fund an ownership position in the required precious metal
inventory levels.
30
The Company's cash balance was $365.7 million at June 30, 2005. The Company
has accumulated cash to this level rather than reduce debt due to pre-payment
penalties that would be incurred in retiring debt and the related interest
rate swap agreements in addition to the low cost of this debt, net of
earnings on the cash. The Company anticipates that cash will build throughout
2005, subject to any uses of cash for acquisitions, stock purchases and
potential debt prepayment.
There have been no material changes to the Company's scheduled contractual
cash obligations disclosed in its 2004 Annual Report on Form 10-K filed March
16, 2005. 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.
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, 2004.
Item 4 - 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
were effective 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.
There have been no changes in the Company's internal control over financial
reporting that occurred during the quarter ended June 30, 2005 that have
materially affected, or are likely to materially affect, our internal control
over financial reporting. The Company is currently centralizing its
transaction accounting processing in Europe into our European Shared Services
Center and has brought in three locations during the first six months of 2005
and expects the remaining European locations to be complete by the first
quarter of 2006.
31
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. The Department of Justice appealed this decision to the U.S.
Third Circuit Court of Appeals. A panel of three Judges of the Third Circuit
Court issued its decision on February 22, 2005 and reversed the decision of
the District Court. The effect of this decision, if it withstands any appeal
challenge by the Company, will be the issuance of an injunction requiring
DENTSPLY to discontinue its policy of not allowing its tooth dealers to take
on new competitive teeth lines. This decision relates only to the
distribution of artificial teeth sold in the U.S. The Company filed a
petition with the Third Circuit requesting a rehearing of this decision by
the full Third Circuit Court, which petition was denied. The Company plans
to file a petition with the U.S. Supreme Court asking it to hear an appeal of
the Third Circuit Court decision. While the Company believes its tooth
distribution practices do not violate the antitrust laws, we are confident
that we can continue to develop this business regardless of the final legal
outcome.
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 the Court held oral argument in April 2005. 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. The Judge has entered an Order granting class
certification, as an Opt-in class (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) 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 Notice of the class action was sent on February 23,
2005 to the approximately 29,000 dentists licensed to practice in California
during the relevant period and a total of 168 dentists have opted into the
class action. 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. The Company's primary level insurance carrier has confirmed
coverage for the breach of warranty claims in this matter.
32
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
In December 2004 the Board of Directors approved a stock repurchase program
under which the Company may repurchase shares of stock in an amount to
maintain up to 3,000,000 shares of treasury stock. During the quarter ended
June 30, 2005, the Company had the following activity with respect to this
repurchase program:
Number Of
Shares That
May be Purchased
Total Number Total Cost Average Price Under The Share
Of Shares Of Shares Paid Per Repurchase
Period Purchased Purchased Share Program
(in thousands, except per share amounts)
April 1-30, 2005 175.0 $ 9,503 $ 54.30 2,268.0
May 1-31, 2005 802.3 44,475 55.43 1,579.0
June 1-30, 2005 545.0 30,328 55.65 893.0
1,522.3 $ 84,306 $ 55.38
Item 4 - Submission of Matters to a Vote of Security Holders
(a) On May 11, 2005, the Company held its 2005 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 I Directors:
Nominee Votes For Votes Withheld
Dr. Michael C. Alfano 74,438,898 761,991
Eric K. Brandt 74,681,378 519,511
William F. Hect 74,307,995 892,894
Francis J. Lunger 74,683,572 517,317
2. Proposal to ratify the appointment of PricewaterhouseCoopers LLP,
independent registered public accounting firm, to audit the
financial statements of the Company and to audit the Company's
internal control over financial reporting for the year ending
December 31, 2005:
Votes For: 74,690,866
Votes Against: 466,376
Abstentions: 43,646
3. Proposal to approve the Amended and Restated Dentsply International
Inc. 2002 Equity Incentive Plan:
Votes For: 47,389,533
Votes Against: 18,182,055
Abstentions: 783,953
Broker Non-Votes: 8,845,348
Item 6 - Exhibits
(a) Exhibits
31 Section 302 Certification Statements.
32 Section 906 Certification Statement.
33
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 5, 2005 /s/ Gerald K. Kunkle, Jr.
Date Gerald K. Kunkle, Jr.
Chairman and
Chief Executive Officer
August 5, 2005 /s/ William R. Jellison
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
34
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 and
internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles:
(c) 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
(d) 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 5, 2005
/s/ Gerald K. Kunkle, Jr.
----------------------------------
Chairman and Chief Executive Officer
Exhibit 31.2
Section 302 Certifications Statement
I, William R. Jellison, 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 and
internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles:
(c) 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
(d) 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 5, 2005
/s/ William R. Jellison
--------------------------------
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, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), We,
Gerald K. Kunkle, Jr., Chief Executive Officer and Chairman of the Board
of Directors of the Company and William R. Jellison, 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
Chairman of the Board of Directors
/s/ William R. Jellison
William R. Jellison
Senior Vice President and
Chief Financial Officer
August 5, 2005