SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2005
Commission file number 0-16211
DENTSPLY International Inc.
(Exact name of registrant as specified in its charter)
Delaware 39-1434669
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
221 West Philadelphia Street, York, Pennsylvania 17405-0872
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (717) 845-7511
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting common stock held by non-affiliates of
the registrant computed by reference to the closing price as of the last
business day of the registrants most recently completed second quarter June 30,
2005, was $3,986,847,108.
The number of shares of the registrant's Common Stock outstanding as of the
close of business on March 10, 2006 was 79,020,253.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of DENTSPLY International
Inc. to be used in connection with the 2006 Annual Meeting of Stockholders (the
"Proxy Statement") are incorporated by reference into Part III of this Annual
Report on Form 10-K/A to the extent provided herein. Except as specifically
incorporated by reference herein the Proxy Statement is not deemed to be filed
as part of this Annual Report on Form 10-K/A.
Page 1 of 95
EXPLANATORY NOTE
We are filing the Amendment No. 1 on Form 10-K/A to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2005 to reflect the restatement
of the Company's consolidated balance sheets as of December 31, 2005 and 2004,
and the consolidated statements of cash flows for the years ended December 31,
2005 and 2004 as discussed in Note 18 ("Restatement of Financial Statements") of
the Notes to the Consolidated Financial Statements included in Item 15, Part IV
of this Amendment. As noted in Note 18, the Company's classification of time
deposits with original maturity dates at the date of purchase in excess of 90
days as cash equivalents was reassessed during the third quarter of 2006. It was
determined that due strictly to the original maturity date on the
acknowledgement of the deposit, that these time deposits were inappropriately
classified as cash equivalents, despite the fact that the time deposits held by
the Company are highly liquid deposits with a liquidity feature that provides
the Company with access to the full principal amount of the deposits generally
within a one to two day period. It was further determined that these time
deposits with original maturity dates at the date of purchase in excess of 90
days should be classified as short-term investments instead of cash equivalents,
and should be reflected as investing activities in the Company's statement of
cash flows. These reclassifications had no impact on total current assets, total
assets, total stockholder's equity, net income (loss), earnings (loss) per
share, or cash flows from operating activities.
Pursuant to Rule 12b-15 under the Securities and Exchange Act of 1934, as
amended, this Amendment No. 1 also contains Item 1 of Part I, as amended, Item 6
of Part II, as amended, Item 7 of Part II, as amended, Item 7A of Part II, as
amended, Item 8 of Part II, as amended, Item 9A of Part II, as amended, new
financial statement as identified in Item 15 of Part IV, as amended, and new
certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of
2002. The remaining Items contained within this Amendment consist of all other
Items originally contained in the Form 10-K and are included for the convenience
of the reader. The sections of the Form 10-K which were not amended are
unchanged and continue in full force and effect as originally filed. The
Amendment No. 1 speaks of the date of the original filing on the Form 10-K and
has not been updated to reflect events occurring subsequent to the original
filing date.
PART I
Item 1. Business
Certain statements made by the Company, including without limitation,
statements containing the words "plans", "anticipates", "believes", "expects",
or words of similar import may be deemed to be forward-looking statements and
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 and uncertainties discussed within Part I of this Annual Report
on Form 10-K/A as filed on November 7, 2006.
History and Overview
DENTSPLY International Inc. ("DENTSPLY" or the "Company"), a Delaware
corporation, was created by a merger of Dentsply International Inc. ("Old
Dentsply") and GENDEX Corporation in 1993. Old Dentsply, founded in 1899, was a
manufacturer and distributor of artificial teeth, dental equipment, and dental
consumable products. GENDEX, founded in 1983, was a manufacturer of dental x-ray
equipment and handpieces.
DENTSPLY is the world's largest designer, developer, manufacturer and
marketer of a broad range of products for the dental market. The Company's
worldwide headquarters and executive offices are located in York, Pennsylvania.
Through the year ended December 31, 2005, the Company operated within four
operating segments all of which were primarily engaged in the design,
manufacture and distribution of dental products in three principal categories:
1) Dental consumables, 2) Dental laboratory products, and 3) Specialty dental
products. In January 2006, the Company reorganized its operating group structure
by consolidating into three operating groups. These operating groups do not
align with the three principle product categories which are discussed in the
principle product section. Reporting under the new group structure will begin in
the first quarter of 2006. Sales of the Company's dental products accounted for
approximately 97.5% of DENTSPLY's consolidated sales for the year ended December
31, 2005. The remaining 2.5% of consolidated sales are primarily related to
materials sold to the investment casting industry.
The Company conducts its business in over 120 foreign countries,
principally through its foreign subsidiaries. DENTSPLY has a long-established
presence in Canada and in the European market, particularly in Germany,
Switzerland, France, Italy and the United Kingdom. The Company also has a
significant market presence in Central and South America including Brazil,
Mexico, Argentina, Colombia, and Chile; in South Africa; and in the Pacific Rim
including Japan, Australia, New Zealand, China (including Hong Kong), Thailand,
India, Philippines, Taiwan, Korea, Vietnam and Indonesia. DENTSPLY has also
established marketing activities in Moscow, Russia to serve the countries of the
former Soviet Union.
For 2005, 2004, and 2003, the Company's sales to customers outside the
United States, including export sales, accounted for approximately 59%, 60% and
58%, respectively, of consolidated net sales. Reference is made to the
information about the Company's United States and foreign sales by shipment
origin set forth in Note 4 of the Notes to Consolidated Financial Statements in
this Annual Report on Form 10-K/A.
As a result of the Company's significant international operations, DENTSPLY
is subject to fluctuations in exchange rates of various foreign currencies and
other risks associated with foreign trade. The impact of currency fluctuations
in any given period can be favorable or unfavorable. The impact of foreign
currency fluctuations on operating income are partially offset by sales in the
United States of products sourced from plants and third party suppliers located
overseas, principally in Germany and Switzerland. The Company enters into
forward foreign exchange contracts to selectively hedge assets, liabilities and
purchases denominated in foreign currencies. Reference is made to the
information regarding foreign exchange risk management activities set forth in
Quantitative and Qualitative Disclosure About Market Risk under Item 7A and Note
16 of the Notes to Consolidated Financial Statements in this Annual Report on
Form 10-K/A.
2
The success of the Company is largely dependent upon the continued strength
of dental markets and the general economic environments of the regions in which
it operates. Negative changes to these markets and economies could materially
impact the Company's results of operations and financial condition. In addition,
many of the Company's markets are affected by government reimbursement and
regulatory programs. Changes to these programs could have a positive or negative
impact on the Company's results.
Certain provisions of DENTSPLY's Certificate of Incorporation and By-laws
and of Delaware law could have the effect of making it difficult for a third
party to acquire control of DENTSPLY. Such provisions include the division of
the Board of Directors of DENTSPLY into three classes, with the three-year term
of a class expiring each year, a provision allowing the Board of Directors to
issue preferred stock having rights senior to those of the common stock and
certain procedural requirements which make it difficult for stockholders to
amend DENTSPLY's By-laws and call special meetings of stockholders. In addition,
members of DENTSPLY's management and participants in its Employee Stock
Ownership Plan collectively own approximately 10% of the outstanding common
stock of DENTSPLY.
Principal Products
The worldwide professional dental industry encompasses the diagnosis,
treatment and prevention of disease and ailments of the teeth, gums and
supporting bone. DENTSPLY's principal dental product categories are dental
consumables, dental laboratory products and dental specialty products. These
products are produced by the Company in the United States and internationally
and are distributed throughout the world under some of the most well-established
brand names and trademarks in the industry, including ANKYLOS(R), AQUASIL(TM),
AQUASIL ULTRA(TM), BIOPURE(TM), CAULK(R), CAVITRON(R), CERAMCO(R), CERCON(R),
CITANEST(R), DELTON(R), DENTSPLY(R), DETREY(R), ELEPHANT(R), ESTHET.X(R),
FRIADENT(R), FRIALIT(R), GAC ORTHOWORKS(TM), GOLDEN GATE(R), IN-OVATION(TM),
INTERACTIVE MYSTIQUE(TM), MAILLEFER(R), MIDWEST(R), NUPRO(R), ORAQIX(R), PEPGEN
P-15(TM), POLOCAINE(R), PRIME & BOND(R), PROFILE(R), PROTAPER(TM), RINN(R),
R&R(R), SANI-TIP(R), SEAL&PROTECT(TM), SHADEPILOT(TM), THERMAFIL(R), TRUBYTE(R),
XENO(R) and XYLOCAINE(R).
Dental Consumables. Consumable products consist of dental sundries used in
dental offices in the treatment of patients and small equipment used by the
dental professional. DENTSPLY's products in this category include dental
anesthetics, prophylaxis paste, dental sealants, impression materials,
restorative materials, bone grafting materials, tooth whiteners, and topical
fluoride. The Company manufactures thousands of different consumable products
marketed under more than one hundred brand names. Small equipment products
consist of various durable goods used in dental offices for treatment of
patients. DENTSPLY's small equipment products include high and low speed
handpieces, intraoral curing light systems and ultrasonic scalers and polishers.
Sales of general dental consumables accounted for approximately 36% and 34% of
the Company's consolidated sales for the years ended December 31, 2005 and 2004,
respectively.
Dental Laboratory Products. Laboratory products are used in dental laboratories
in the preparation of dental appliances. DENTSPLY's products in this category
include dental prosthetics, including artificial teeth, precious metal dental
alloys, dental ceramics, and crown and bridge materials. Equipment in this
category includes computer aided machining (CAM) ceramics systems and porcelain
furnaces. Sales of dental laboratory products accounted for approximately 28%
and 33% of the Company's consolidated sales for the years ended December 31,
2005 and 2004, respectively.
Dental Specialty Products. Specialty dental products are used for specific
purposes within the dental office and laboratory settings. DENTSPLY's products
in this category include endodontic (root canal) instruments and materials,
implants, and orthodontic appliances and accessories. Sales of specialty
products accounted for approximately 34% and 31% of the Company's consolidated
sales for the years ended December 31, 2005 and 2004, respectively.
3
Markets, Sales and Distribution
DENTSPLY distributes approximately 55% of its dental products through
domestic and foreign distributors, dealers and importers. However, certain
highly technical products such as precious metal dental alloys, dental ceramics,
crown and bridge porcelain products, endodontic instruments and materials,
orthodontic appliances, implants and bone substitute and grafting materials are
sold directly to the dental laboratory or dental professional in some markets.
During 2005, one customer, Henry Schein Incorporated, accounted for 11.1%
percent of DENTSPLY's consolidated net sales. No other single customer
represented ten percent or more of DENTSPLY's consolidated net sales during 2005
and no single customer represented ten percent or more of DENTSPLY's
consolidated net sales during 2004.
Reference is made to the information about the Company's foreign and
domestic operations and export sales set forth in Note 4 of the Notes to
Consolidated Financial Statements in this Annual Report on Form 10-K/A.
Although much of its sales are made to distributors, dealers, and
importers, DENTSPLY focuses its marketing efforts on the dentists, dental
hygienists, dental assistants, dental laboratories and dental schools who are
the end users of its products. As part of this end-user "pull through" marketing
approach, DENTSPLY employs approximately 1,800 highly trained, product-specific
sales and technical staff to provide comprehensive marketing and service
tailored to the particular sales and technical support requirements of the
dealers and the end users. The Company conducts extensive distributor and
end-user marketing programs and trains laboratory technicians and dentists in
the proper use of its products, introducing them to the latest technological
developments at its educational centers located throughout the world in key
dental markets. The Company also maintains ongoing relationships with various
dental associations and recognized worldwide opinion leaders in the dental
field, although there is no assurance that these influential dental
professionals will continue to support the Company's products.
DENTSPLY believes that demand in a given geographic market for dental
procedures and products, varies according to the stage of social, economic and
technical development of the particular market. Geographic markets for
DENTSPLY's dental products can be categorized into the following two stages of
development:
The United States, Canada, Western Europe, Japan, Australia and certain
other countries are highly developed markets that demand the most advanced
dental procedures and products and have the highest level of expenditures on
dental care. In these markets, the focus of dental care is increasingly upon
preventive care and specialized dentistry. In addition to basic procedures such
as the excavation and filling of cavities and tooth extraction and denture
replacement, dental professionals perform an increasing volume of preventive and
cosmetic procedures. These markets require varied and complex dental products,
utilize sophisticated diagnostic and imaging equipment, and demand high levels
of attention to protection against infection and patient cross-contamination.
In certain countries in Central America, South America, Eastern Europe, the
Pacific Rim, Middle East and Africa, most dental care is often limited to the
excavation and filling of cavities and other restorative techniques, reflecting
more modest per capita expenditures for dental care. These markets demand
diverse products such as high and low speed handpieces, restorative compounds,
finishing devices, custom restorative devices, basic surgical instruments,
bridgework and artificial teeth for dentures.
The Company offers products and equipment for use in markets at each of
these stages of development. The Company believes that as each of these markets
develop, demand for more technically advanced products will increase. The
Company also believes that its recognized brand names, high quality and
innovative products, technical support services and strong international
distribution capabilities position it well to take advantage of any
opportunities for growth in all of the markets that it serves.
4
The Company believes that the market for its products will grow based on
the following factors:
o Increasing worldwide population.
o Growth of the population 65 or older - The percentage of the United States,
European, Japanese and other regions population over age 65 is expected to
nearly double by the year 2030. In addition to having significant needs for
dental care, the elderly are well positioned to pay for the required
procedures since they control sizable amounts of discretionary income.
o Natural teeth are being retained longer - Individuals with natural teeth
are much more likely to visit a dentist in a given year than those without
any natural teeth remaining.
o The changing dental practice in the U.S. - Dentistry in North America has
been transformed from a profession primarily dealing with pain, infections
and tooth decay to one with increased emphasis on preventive care and
cosmetic dentistry.
o Per capita and discretionary incomes are increasing in emerging nations -
As personal incomes continue to rise in the emerging nations of the Pacific
Rim and Latin America, healthcare, including dental services, are a growing
priority.
o The Company's business is less susceptible than other industries to general
downturns in the economies in which it operates. Several of the products
the Company offers relate to dental procedures that are considered
necessary by patients regardless of the economic environment.
Product Development
Technological innovation and successful product development are critical to
strengthening the Company's prominent position in worldwide dental markets,
maintaining its leadership positions in product categories where it has a high
market share, and increasing market share in product categories where gains are
possible. While many of DENTSPLY's existing products undergo evolutionary
improvements, the Company also continues to successfully launch innovative
products that represent fundamental change. Its research centers throughout the
world employ approximately 350 scientists, Ph.D.'s, engineers, technicians and
support staff dedicated to research and product development. The Company
directly invested approximately 3% of net sales during the years ended December
31, 2005, 2004 and 2003, or $47.0 million, $44.6 million, and $43.3 million,
respectively, in connection with the development of new products and in the
improvement of existing products. In addition to the direct investment in
product development and improvement, the Company also invests in these
activities through acquisitions, by entering into licensing agreements and by
purchasing technologies developed by other third parties.
The benefits from the Company's advanced technology function, which was
established in 2004 to focus on new and emerging technologies in dentistry, were
evident in 2005 as discussed in the Overview section of Management's Discussion
and Analysis. The continued development of this function is a critical step in
meeting the Company's strategic goal of taking a leadership role in defining the
future of dentistry.
There can be no assurance that DENTSPLY will be able to continue to develop
innovative products or that regulatory approval of any new products will be
obtained, or that if such approvals are obtained, such products will be
favorably accepted in the marketplace. Additionally, there is no assurance that
entirely new technology or approaches to dental treatment will not be introduced
that could render the Company's current products obsolete.
Acquisition Activities
DENTSPLY believes that the dental products industry continues to
experience consolidation with respect to both product manufacturing and
distribution, although it continues to be fragmented creating a number of
acquisition opportunities. As a result, during the past five years, the Company
has made several acquisitions including three significant acquisitions made
during 2001. These acquisitions included the Degussa Dental Group, Friadent GmbH
and the dental injectable anesthetic assets of AstraZeneca. In addition to
these significant acquisitions, the Company has also continued to make smaller
acquisitions, including a group of three orthodontic companies acquired by the
Company during 2005. The Company continues to view acquisitions as a key part of
its growth strategy. These acquisition activities are intended to supplement the
5
Company's core growth and assure ongoing expansion of its business. In addition,
acquisitions have provided DENTSPLY with new technologies and additional product
and geographic breadth. The Company continues to be active in evaluating
potential acquisitions although there is no assurance that these efforts will
result in completed transactions as there are many factors that affect the
success of such activities. If the Company does succeed in acquiring a business
or product, there can be no assurance that the Company will achieve any of the
benefits that it might anticipate from such an acquisition and the attention and
effort devoted to the integration of an acquired business could divert
management's attention from normal business operations. If the Company makes
acquisitions, it may incur debt, assume contingent liabilities or create
additional expenses, any of which might adversely affect its financial results.
Any financing that the Company might need for acquisitions may only be available
to it on terms that restrict its business or that impose additional costs that
reduce its operating results.
Operating and Technical Expertise
DENTSPLY believes that its manufacturing capabilities are important to its
success. The manufacture of the Company's products requires substantial and
varied technical expertise. Complex materials technology and processes are
necessary to manufacture the Company's products. The Company continues to
automate its global manufacturing operations in order to remain a low cost
producer.
The Company has completed or is in progress of completing a number of key
initiatives around the world that are focused on helping the Company improve its
sales and operating margins.
o The Company formed Dentsply North America, which is a sales organization
that effectively combines the field and sales management functions for the
United States' distributor businesses.
o A Corporate Purchasing office was established to leverage the buying power
of Dentsply around the world and reduce the Company's product costs through
lower prices and reduced related overhead.
o The Company has centralized its warehousing and distribution in North
America and Europe. While the initial gains from this strategy have been
realized, ongoing efforts are in place to maximize additional opportunities
that can be gained through improving the Company's functional expertise in
supply chain management.
o The Company considers the implementation of lean manufacturing techniques
as a fundamental part of its supply chain strategy. With a focus on
reducing non-value added activities, over the last decade, numerous
manufacturing sites have dramatically reduced inventory levels, increased
space utilization and improved labor productivity. This was accomplished
while reducing manufacturing lead times and improving the Company's
delivery performance to dealers and end-users.
o DENTSPLY has seen improved productivity and cost reductions from the
operation of a North American Shared Services group. As a result, the
Company is currently in the process of finalizing the transition of certain
processes in Europe to a Shared Services group in Yverdon, Switzerland
which it expects to be fully implemented in 2006.
o Information technology initiatives are underway to generate enhanced
worldwide financial data; to standardize worldwide telecommunications;
implement improved manufacturing, customer relations management (CRM) and
financial accounting systems; and to train IT users to maximize the
capabilities of global systems.
o DENTSPLY continues to pursue opportunities to leverage its assets by
consolidating business units where appropriate and to optimize its
diversity of worldwide manufacturing capabilities.
o DENTSPLY is in the process of developing a new business system which will
provide a framework of best in class tools to help streamline decision
making, gain efficiencies and accelerate internal growth by setting
standards across all key areas of the business.
6
Financing
DENTSPLY's total long-term debt, including the current portion of long-term
debt, at December 31, 2005 was $680.9 million and the ratio of long-term debt to
total capitalization was 35.4%. This capitalization ratio is down from 54.4% at
December 31, 2001, the quarter in which the Degussa Dental acquisition was
completed. DENTSPLY defines total capitalization as the sum of total long-term
debt, including the current portion, plus total stockholders equity. DENTSPLY
may incur additional debt in the future, including, but not limited to, the
funding of additional acquisitions and capital expenditures. DENTSPLY's ability
to make payments on its indebtedness, and to fund its operations depends on its
future performance and financial results, which, to a certain extent, are
subject to general economic, financial, competitive, regulatory and other
factors and the interest rate environment that are beyond its control. Although
Management believes that the Company has and will continue to have sufficient
liquidity, there can be no assurance that DENTSPLY's business will generate
sufficient cash flow from operations in the future to service its debt and
operate its business.
The Company's cash and short-term investments decreased $71.8 million in
total during the year ended December 31, 2005 to $434.5 million. In 2005, the
Company repaid $60.1 million of maturing long-term borrowings and repurchased
$164.8 million in treasury stock. The Company continued to maintain significant
cash, cash equivalents and short-term investment balances during 2005 rather
than pre-pay debt, as a result of pre-payment penalties that would be incurred
in retiring both the debt and the related interest rate swap agreements.
Additionally, the Company has not repaid this debt prior to its due date due to
the low cost of the debt, net of earnings on the cash, cash equivalents and
short-term investments. The Company has $530.7 million of long-term borrowings
coming due in 2006. The Company intends to repay these debt obligations with
cash and cash equivalents and/or funds available to the Company from its
short-term investments and under the revolving credit facility. Any portion of
the debt that is repaid through the use of the revolving credit facility will be
contractually due in May 2010, upon the expiration of the facility, thus
effectively converting the maturity of the debt beyond 2006. The Company
currently intends to effectively refinance $119.9 million of the long-term
borrowings coming due in 2006 through use of the revolving credit facility.
DENTSPLY's existing borrowing documentation contains a number of covenants
and financial ratios which it is required to satisfy. The most restrictive of
these covenants pertain to asset dispositions, maintenance of certain levels of
net worth, and prescribed ratios of indebtedness to total capital and operating
income plus depreciation and amortization to interest expense. Any breach of any
such covenants or restrictions would result in a default under the existing
borrowing documentation that would permit the lenders to declare all borrowings
under such documentation to be immediately due and payable and, through cross
default provisions, would entitle DENTSPLY's other lenders to accelerate their
loans. DENTSPLY may not be able to meet its obligations under its outstanding
indebtedness in the event that any cross default provision is triggered. At
December 31, 2005, the Company was in compliance with these covenants.
Additional information about DENTSPLY's working capital, liquidity and
capital resources is provided in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Annual Report on Form
10-K/A.
Competition
The Company conducts its operations, both domestic and foreign, under
highly competitive market conditions. Competition in the dental products
industry is based primarily upon product performance, quality, safety and ease
of use, as well as price, customer service, innovation and acceptance by
professionals and technicians. DENTSPLY believes that its principal strengths
include its well-established brand names, its reputation for high-quality and
innovative products, its leadership in product development and manufacturing,
and its commitment to customer satisfaction.
The size and number of the Company's competitors vary by product line and
from region to region. There are many companies that produce some, but not all,
of the same types of products as those produced by the Company. Certain of
DENTSPLY's competitors may have greater resources than does the Company in
certain of its product offerings.
The worldwide market for dental supplies is highly competitive. There can
be no assurance that the Company will successfully identify new product
opportunities and develop and market new products successfully, or that new
products and technologies introduced by competitors will not render the
Company's products obsolete or noncompetitive.
7
Regulation
The Company's products are subject to regulation by, among other
governmental entities, the United States Food and Drug Administration (the
"FDA"). In general, if a dental "device" is subject to FDA regulation,
compliance with the FDA's requirements constitutes compliance with corresponding
state regulations. In order to ensure that dental products distributed for human
use in the United States are safe and effective, the FDA regulates the
introduction, manufacture, advertising, labeling, packaging, marketing and
distribution of, and record-keeping for such products. The introduction and
sale of dental products of the types produced by the Company are also subject to
government regulation in the various foreign countries in which they are
produced or sold. DENTSPLY believes that it is in substantial compliance with
the foreign regulatory requirements that are applicable to its products and
manufacturing operations.
Dental devices of the types sold by DENTSPLY are generally classified by
the FDA into a category that renders them subject only to general controls that
apply to all medical devices, including regulations regarding alteration,
misbranding, notification, record-keeping and good manufacturing practices.
DENTSPLY's facilities are subject to periodic inspection by the FDA to monitor
DENTSPLY's compliance with these regulations. There can be no assurance that the
FDA will not raise compliance concerns. Failure to satisfy FDA requirements can
result in FDA enforcement actions, including product seizure, injunction and/or
criminal or civil proceedings. In the European Union, DENTSPLY's products are
subject to the medical devices laws of the various member states which are based
on a Directive of the European Commission. Such laws generally regulate the
safety of the products in a similar way to the FDA regulations. DENTSPLY
products in Europe bear the CE sign showing that such products adhere to the
European regulations.
All dental amalgam filling materials, including those manufactured and sold
by DENTSPLY, contain mercury. Various groups have alleged that dental amalgam
containing mercury is harmful to human health and have actively lobbied state
and federal lawmakers and regulators to pass laws or adopt regulatory changes
restricting the use, or requiring a warning against alleged potential risks, of
dental amalgams. The FDA's Dental Devices Classification Panel, the National
Institutes of Health and the United States Public Health Service have each
indicated that no direct hazard to humans from exposure to dental amalgams has
been demonstrated. If the FDA were to reclassify dental mercury and amalgam
filling materials as classes of products requiring FDA pre-market approval,
there can be no assurance that the required approval would be obtained or that
the FDA would permit the continued sale of amalgam filling materials pending its
determination. In Europe, in particular in Scandinavia and Germany, the contents
of mercury in amalgam filling materials has been the subject of public
discussion. As a consequence, in 1994 the German health authorities required
suppliers of dental amalgam to amend the instructions for use for amalgam
filling materials to include a precaution against the use of amalgam for
children under eighteen years of age and to women of childbearing age. DENTSPLY
also manufactures and sells non-amalgam dental filling materials that do not
contain mercury.
Sources and Supply of Raw Materials and Finished Goods
All of the raw materials used by the Company in the manufacture of its
products are purchased from various suppliers and are available from numerous
sources. No single supplier accounts for a significant percentage of DENTSPLY's
raw material requirements.
There are a limited number of suppliers for the dental injectable
anesthetic products sold by the Company. While the Company had some supply
disruptions in 2005 and anticipates some supply disruptions in 2006, the Company
currently has contract manufacturing relationships for the supply of dental
injectable anesthetic product for most of the markets served by the Company.
There can be no assurance that the Company will be able to obtain an adequate
supply of its injectable anesthetic products in the future.
8
Intellectual Property
Products manufactured by DENTSPLY are sold primarily under its own
trademarks and trade names. DENTSPLY also owns and maintains more than 2,000
patents throughout the world and is licensed under a small number of patents
owned by others.
DENTSPLY's policy is to protect its products and technology through patents
and trademark registrations in the United States and in significant
international markets for its products. The Company carefully monitors trademark
use worldwide, and promotes enforcement of its patents and trademarks in a
manner that is designed to balance the cost of such protection against obtaining
the greatest value for the Company. DENTSPLY believes its patents and trademark
properties are important and contribute to the Company's marketing position but
it does not consider its overall business to be materially dependent upon any
individual patent or trademark.
Employees
As of December 31, 2005, the Company and its subsidiaries employed
approximately 8,000 employees. A small percentage of the Company's employees are
represented by labor unions. Hourly workers at the Company's Ransom & Randolph
facility in Maumee, Ohio are represented by Local No. 12 of the International
Union, United Automobile, Aerospace and Agriculture Implement Workers of America
under a collective bargaining agreement that expires on January 31, 2008. Hourly
workers at the Company's Midwest Dental Products facility in Des Plaines,
Illinois are represented by International Association of Machinists and
Aerospace Workers, AFL-CIO in Chicago under a collective bargaining agreement
that expires on May 31, 2006. In addition, approximately 35% of DeguDent
employees and 25% of DeTrey employees, two of the Company's German operating
units, are represented by labor unions. The Company provides pension and
postretirement benefits to many of these employees (see Note 14 to the
consolidated financial statements). The Company believes that its relationship
with its employees is good.
The Company's success is dependent upon its management and employees. The
loss of senior management employees or any failure to recruit and train needed
managerial, sales and technical personnel could have a material adverse effect
on the Company.
Environmental Matters
DENTSPLY believes that its operations comply in all material respects with
applicable environmental laws and regulations. Maintaining this level of
compliance has not had, and is not expected to have, a material effect on the
Company's capital expenditures or on its business.
Securities and Exchange Act Reports
DENTSPLY makes available free of charge through its website at
www.dentsply.com its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after such materials are filed with or furnished
to, the Securities and Exchange Commission.
The public may read and copy any materials the Company files with the SEC
at its Public Reference Room at the following address:
100 F Street, NE
Washington, D.C. 20549
The public may obtain information on the operation of this Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, since the Company is an
electronic filer, the public may access reports, the proxy and information
statements and other information filed or furnished by the Company at the
Internet site maintained by the SEC (http://www.sec.gov).
9
Item 1A. Risk Factors
Following are the significant risk factors that could materially impact
DENTSPLY's business. These risk factors are also discussed in more detail and in
context throughout Part I, Item 1 of this Annual Report on Form 10-K/A.
The success of the Company is largely dependent upon the continued strength
of dental markets and the general economic environments of the regions in which
it operates. Negative changes to these markets and economies could materially
impact the Company's results of operations and financial condition. In addition,
many of the Company's markets are affected by government reimbursement and
regulatory programs. In certain markets, government and regulatory programs have
a more significant impact than other markets. Changes to these programs could
have a positive or negative impact on the Company's results.
DENTSPLY has identified new products as an important part of its growth
opportunities. There can be no assurance that DENTSPLY will be able to continue
to develop innovative products and that regulatory approval of any new products
will be obtained, or that if such approvals are obtained, such products will be
favorably accepted in the marketplace. Additionally, there is no assurance that
entirely new technology or approaches to dental treatment or competitor's new
products will not be introduced that could render the Company's products
obsolete.
The Company continues to view acquisitions as a key part of its growth
strategy. The Company continues to be active in evaluating potential
acquisitions although there is no assurance that these efforts will result in
completed transactions as there are many factors that affect the success of such
activities. If the Company does succeed in acquiring a business or product,
there can be no assurance that the Company will achieve any of the benefits that
it might anticipate from such an acquisition and the attention and effort
devoted to the integration of an acquired business could divert management's
attention from normal business operations. If the Company makes acquisitions, it
may incur debt, assume contingent liabilities or create additional expenses, any
of which might adversely affect its financial results. Any financing that the
Company might need for acquisitions may only be available to it on terms that
restrict its business or that impose additional costs that reduce its operating
results.
DENTSPLY's ability to make payments on its indebtedness, and to fund its
operations depends on its future performance and financial results, which, to a
certain extent, are subject to general economic, financial, competitive,
regulatory and other factors and the interest rate environment that are beyond
its control. Although Management believes that the Company has and will continue
to have sufficient liquidity, there can be no assurance that DENTSPLY's business
will generate sufficient cash flow from operations in the future to service its
debt and operate its business.
DENTSPLY's existing borrowing documentation contains a number of covenants
and financial ratios which it is required to satisfy. The most restrictive of
these covenants pertain to asset dispositions, maintenance of certain levels of
net worth, and prescribed ratios of indebtedness to total capital and operating
income plus depreciation and amortization to interest expense. Any breach of any
such covenants or restrictions would result in a default under the existing
borrowing documentation that would permit the lenders to declare all borrowings
under such documentation to be immediately due and payable and, through cross
default provisions, would entitle DENTSPLY's other lenders to accelerate their
loans. DENTSPLY may not be able to meet its obligations under its outstanding
indebtedness in the event that any cross default provision is triggered.
DENTSPLY, with its significant international operations, is subject to
fluctuations in exchange rates of various foreign currencies and other risks
associated with foreign trade and the impact of currency fluctuations in any
given period can be favorable or unfavorable.
DENTSPLY's business is subject to periodic review and inspection by the FDA
and similar foreign authorities to monitor DENTSPLY's compliance with the
regulations administered by such authorities. There can be no assurance that
these authorities will not raise compliance concerns. Failure to satisfy any
such requirements can result in governmental enforcement actions, including
possible product seizure, injunction and/or criminal or civil proceedings.
All dental amalgam filling materials, including those manufactured and sold
by DENTSPLY, contain mercury. The FDA's Dental Devices Classification Panel, the
National Institutes of Health and the United States Public Health Service have
each indicated that no direct hazard to humans from exposure to dental amalgams
has been demonstrated. If the FDA were to reclassify dental mercury and amalgam
filling materials as classes of products requiring FDA pre-market approval,
there can be no assurance that the required approval would be obtained or that
the FDA would permit the continued sale of amalgam filling materials pending its
determination.
10
The Company's success is dependent upon its management and employees. The
loss of senior management employees or any failure to recruit and train needed
managerial, sales and technical personnel could have a material adverse effect
on the Company.
Certain provisions of DENTSPLY's Certificate of Incorporation and By-laws
and of Delaware law could have the effect of making it difficult for a third
party to acquire control of DENTSPLY. Such provisions include the division of
the Board of Directors of DENTSPLY into three classes, with the three-year term
of a class expiring each year, a provision allowing the Board of Directors to
issue preferred stock having rights senior to those of the common stock and
certain procedural requirements which make it difficult for stockholders to
amend DENTSPLY's By-laws and call special meetings of stockholders. In addition,
members of DENTSPLY's management and participants in its Employee Stock
Ownership Plan collectively own approximately 10% of the outstanding common
stock of DENTSPLY.
ITEM 1B. Unresolved Staff Comments
None
11
Item 2. Properties
The following is a current list of DENTSPLY's principal manufacturing
and distribution locations as of December 31, 2005:
Leased
Location Function or Owned
United States:
Los Angeles, California (1) Manufacture and distribution of investment Leased
casting products
Yucaipa , California (2) Manufacture and distribution of dental Owned
laboratory products and dental ceramics
Lakewood, Colorado (2) Manufacture and distribution of bone grafting Leased
materials and hydroxylapatite plasma-feed coating
materials and distribution of dental implant poducts
Milford, Delaware (3) Manufacture of consumable dental products Owned
Des Plaines, Illinois (3) Manufacture and assembly of dental handpieces Leased
Elgin, Illinois (3) Manufacture of dental x-ray film holders, film Owned
mounts and accessories
Elgin, Illinois (3) Manufacture of dental x-ray film holders, film Leased
mounts and accessories
Maumee, Ohio (1) Manufacture and distribution of investment Owned
casting products
York, Pennsylvania (2) Manufacture and distribution of artificial teeth Owned
and other dental laboratory products;
York, Pennsylvania (3) Manufacture of small dental equipment and Owned
preventive dental products
Johnson City, Tennessee (1) Manufacture and distribution of endodontic Leased
instruments and materials
Bohemia, New York (2) Manufacture and distribution of orthodontic Leased
products and materials
Middletown, Pennsylvania (5) Distribution of Dental Products Leased
Foreign:
Catanduva, Brazil (1) Manufacture and distribution of dental Owned
anesthetic products
Petropolis, Brazil (1) Manufacture and distribution of artificial teeth Owned
and consumable dental products
Tianjin, China (2) Manufacture and distribution of dental products Leased
Plymouth, England (4) Manufacture of dental hand instruments Leased
Ivry Sur-Seine, France (4) Manufacture and distribution of investment Leased
casting products
Bohmte, Germany (4) Manufacture and distribution of dental Owned
laboratory products
12
Leased
Location Function or Owned
Hanau, Germany (4) Manufacture and distribution of precious metal Owned
dental alloys, dental ceramics and dental
implant products
Konstanz, Germany (4) Manufacture and distribution of consumable Owned
dental products
Mannheim, Germany (2) Manufacture and distribution of dental Owned
implant products
Munich, Germany (1) Manufacture and distribution of endodontic Owned
instruments and materials
Radolfzell, Germany (5) Distribution of dental products Leased
Rosbach, Germany (4) Manufacture and distribution of dental ceramics Owned
Nasu, Japan (2) Manufacture and distribution of precious metal Owned
dental alloys, consumable dental products and
orthodontic products
Hoorn, Netherlands (4) Manufacture and distribution of precious metal Owned
dental alloys and dental ceramics
Las Piedras, Puerto Rico (2) Manufacture of crown and bridge materials Owned
Ballaigues, Switzerland (1) Manufacture and distribution of endodontic Owned
instruments
Ballaigues, Switzerland (1) Manufacture and distribution of endodontic Owned
instruments, plastic components and
packaging material
Le Creux, Switzerland (1) Manufacture and distribution of endodontic Owned
instruments
(1)- These properties are included in the Australia/Latin
America/Endodontics/Non-Dental segment.
(2)- These properties are included in the U.S. Dental Laboratory
Business/Implants/Orthodontics/Japan/Asia segment.
(3)- These properties are included in the U.S. Consumable Business/Canada
segment.
(4)- These properties are included in the Dental Consumables - Europe, CIS,
Middle East, Africa/European Dental Laboratory Business.
(5)- These properties are distribution warehouses not managed by named segments.
In addition, the Company maintains sales and distribution offices at
certain of its foreign and domestic manufacturing facilities, as well as at
various other United States and international locations. Most of the various
sites around the world that are used exclusively for sales and distribution are
leased.
The Company also owns its corporate headquarters located in York,
Pennsylvania and a facility in Elk Grove Village Illinois that was the
anticipated manufacturing site for the dental pharmaceutical products discussed
in the Pharmaceutical Business section of Management's Discussion and Analysis
(MD&A). As discussed in the MD&A, the Company has made the decision to close
this facility, and as such it is no longer a principle manufacturing or
distribution site.
DENTSPLY believes that its properties and facilities are well maintained
and are generally suitable and adequate for the purposes for which they are
used.
13
Item 3. 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
and subsequently, 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 and
the Third Circuit reversed the decision of the District Court. The Company's
petition to the U.S. Supreme Court asking it to review the Third Circuit Court
decision was denied. The effect of this decision 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., which affects less
than 2.5% of the Company's net sales. While the Company believes its tooth
distribution practices do not violate the antitrust laws, the Company is
confident that it 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 appealed this decision to the Third Circuit and the Court
upheld the decision of the District Court in dismissing the Plaintiffs' damages
claims, with the exception of allowing the Plaintiffs to pursue a damage claim
based on a theory of resale price maintenance agreements between the Company and
its tooth dealers. The Plaintiffs have filed a petition with the U.S. Supreme
Court asking it to review this decision of the Third Circuit. 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 if 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 for which they
were not paid. 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 166 dentists have opted into the class action. As
the result of a recent decision by a California Appellate Court, the plaintiffs
have filed an appeal to convert the claim to an opt-out claim from its current
status as an opt-in claim. 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 up to their
policy limits.
14
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company as of March 10, 2006.
Name Age Position
Gerald K. Kunkle Jr. 59 Chairman of the Board and Chief Executive Officer
Bret W. Wise 45 President and Chief Operating Officer
Christopher T. Clark 44 Senior Vice President
William R. Jellison 48 Senior Vice President and Chief Financial Officer
Rudolf Lehner 48 Senior Vice President
Rachel P. McKinney 48 Senior Vice President
James G. Mosch 48 Senior Vice President
J. Henrik Roos 48 Senior Vice President
Brian M. Addison 51 Vice President, Secretary and General Counsel
Gerald K. Kunkle Jr. was elected Chairman of the Board on May 11, 2005 and
Chief Executive Officer of the Company effective January 1, 2004. Prior thereto,
Mr. Kunkle served as Vice Chairman of the Board since January 2004 and President
and Chief Operating Officer since January 1997. Prior to joining DENTSPLY, Mr.
Kunkle served as President of Johnson and Johnson's Vistakon Division, a
manufacturer and marketer of contact lenses, from January 1994 and, from early
1992 until January 1994, was President of Johnson and Johnson Orthopedics,
Inc., a manufacturer of orthopedic implants, fracture management products and
trauma devices.
Bret W. Wise was named President and Chief Operating Officer of the Company
effective January 1, 2006. Prior to that time, Mr. Wise was Executive Vice
President since January 10, 2005 and oversaw the Operating Groups headed by
Christopher Clark and Rudolf Lehner in addition to the Corporate Planning and
Business Development and Corporate Research and Development functions. Prior to
that time, he was Senior Vice President and Chief Financial Officer of the
Company since December 2002. Prior to that time, Mr. Wise was Senior Vice
President and Chief Financial Officer with Ferro Corporation of Cleveland, OH.
Prior to joining Ferro Corporation in 1999, Mr. Wise held the position of Vice
President and Chief Financial Officer at WCI Steel, Inc., of Warren, OH, from
1994 to 1999. Prior to joining WCI Steel, Inc., Mr. Wise was a partner with KPMG
LLP.
Christopher T. Clark was named Senior Vice President effective November 1,
2002 and oversees the following areas: Dentsply North America Sales
Organization; and the DENTSPLY Canada, DENTSPLY Pharmaceutical, DENTSPLY
Professional, Dentsply Rinn and L.D. Caulk operating units. Through December 31,
2004, he was responsible for the following areas: North American Group Marketing
and Administration; Alliance and Government Sales; and the Ransom and Randolph,
DENTSPLY Sankin, L.D. Caulk, and DeDent operating units. Prior to this
appointment, Mr. Clark served as Vice President and General Manager of the
Gendex operating unit since June 1999. Prior to that time, he served as Vice
President and General Manager of the Trubyte operating unit since July of 1996.
Prior to that, Mr. Clark was Director of Marketing of the Trubyte Operating Unit
since September 1992 when he started with the Company.
William R. Jellison was named Senior Vice President and Chief Financial
Officer of the Company effective January 10, 2005. In this position, he is also
responsible for Accounting, Treasury, Tax, Information Technology and Internal
Audit. Prior to that and through December 31, 2004 he was Senior Vice President
since November1, 2002, responsible for the following operating units: DENTSPLY
Asia, DENTSPLY Professional, Dentsply Endodontics, including Tulsa Dental
Products, Maillefer, and Vereinigte Dentalwerke ("VDW"). From the period April
1998 to November 1, 2002, Mr. Jellison served as Senior Vice President and Chief
Financial Officer of the Company. Prior to that time, Mr. Jellison held various
financial management positions including Vice President of Finance, Treasurer
and Corporate Controller for Donnelly Corporation of Holland, Michigan since
1980. Mr. Jellison is a Certified Management Accountant.
15
Rudolf Lehner was named Senior Vice President effective December 12, 2001
and oversees the following operating units: DeDent, DeguDent Germany, DeguDent
Austria, DENTSPLY France, DENTSPLY Italy, DENTSPLY Russia, DENTSPLY United
Kingdom, Elephant Dental and Middle East/Africa. Through December 31, 2004, he
was responsible for the following operating units: DeguDent Germany, DeguDent
Austria, DENTSPLY France, DENTSPLY Italy, DENTSPLY Russia, DENTSPLY United
Kingdom, Elephant Dental and Middle East/Africa. Prior to that time, Mr. Lehner
was Chief Operating Officer of Degussa Dental since mid-2000. From 1999 to mid
2000, he had the overall responsibilities for Sales & Marketing at Degussa
Dental. From 1994 to 1999, Mr. Lehner held the position of Chief Executive
Officer of Elephant Dental. From 1990 to 1994, he had overall responsibility for
international activities at Degussa Dental. Prior to that, Mr. Lehner held
various positions at Degussa Dental and its parent, Degussa AG, since starting
in 1984.
James G. Mosch was named Senior Vice President effective November 1, 2002
and oversees the following operating units: DENTSPLY Australia, DENTSPLY Brazil,
DENTSPLY Latin America, DENTSPLY Mexico, Maillefer, Ransom and Randolph, Tulsa
Dental Products and Vereinigte Dentalwerke ("VDW"). Through December 31, 2004,
he was responsible for the following operating units: DENTSPLY Pharmaceutical,
DENTSPLY Australia, DENTSPLY Brazil, DENTSPLY Canada, DENTSPLY Latin America and
DENTSPLY Mexico. Prior to this appointment, Mr. Mosch served as Vice President
and General Manager of the DENTSPLY Professional operating unit since July 1994
when he started with the Company.
Rachel P. McKinney was named Senior Vice President, Global Human Resources
effective December 25, 2005. Prior to that time, she was Vice President, Human
Resources since March of 2003. Prior to that time, she held leadership positions
in human resources at Compaq Computer Corporation, Burger King Corporation,
Miller Brewing Company, Air Product and Chemical Company and Aetna/Partners
National Health Plans.
J. Henrik Roos was named Senior Vice President effective June 1, 1999 and
oversees the following operating units: CeraMed, Dentsply Asia, Dentsply
Prosthetics, Dentsply Sankin, Friadent, GAC, GAC S.A., Glenroe and Raintree.
Through December 31, 2004, he was responsible for the following operating units:
CeraMed, Dentsply Prosthetics, Friadent and GAC. Prior to his Senior Vice
President appointment, Mr. Roos served as Vice President and General Manager of
the Company's Gendex division from June 1995 to June 1999. Prior to that, he
served as President of Gendex European operations in Frankfurt, Germany since
joining the Company in August 1993.
Brian M. Addison has been Vice President, Secretary and General Counsel of
the Company since January 1, 1998. Prior to that he was Assistant Secretary and
Corporate Counsel since December 1994. Prior to that he was a Partner at the
Harrisburg, Pennsylvania law firm of McNees, Wallace & Nurick, and prior to that
he was Senior Counsel at Hershey Foods Corporation.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information set forth under the caption "Supplemental Stock
Information" is filed as part of this Annual Report on Form 10-K/A.
In December 2004, the Board of Directors approved a stock repurchase
program under which the Company may repurchase shares of Company stock on the
open market in an amount to maintain up to 3,000,000 shares of treasury stock.
In September 2005, the Board of Directors increased the authorization to
repurchase shares under the stock repurchase program in an amount to maintain up
to 5,500,000 shares of treasury stock. The table below contains certain
information with respect to the repurchase of shares of the Company's common
stock during the quarter ended December 31, 2005.
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)
October 1-31, 2005 21.7 $ 1,163 $ 53.59 2,670.4
November 1-30, 2005 - - $ - 2,931.0
December 1-31, 2005 - - $ - 2,966.7
----- ------
21.7 $ 1,163 $ 53.59
Item 6. Selected Financial Data
The information set forth under the caption "Selected Financial Data" is
filed as part of this Annual Report on Form 10-K/A. The Company has restated the
consolidated balance sheets and statements of cash flows as of and for the years
ended December 31, 2005 and December 31, 2004. See note 18 of the consolidated
financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is filed as part of
this Annual Report on Form 10-K/A. The Company has restated the consolidated
balance sheets and statements of cash flows as of and for the years ended
December 31, 2005 and December 31, 2004. See note 18 of the consolidated
financial statements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The information set forth under the caption "Quantitative and Qualitative
Disclosure About Market Risk" is filed as part of this Annual Report on Form
10-K/A.
Item 8. Financial Statements and Supplementary Data
The information set forth under the captions "Management's Report on
Internal Control Over Financial Reporting," "Report of Independent Registered
Public Accounting Firm," "Consolidated Statements of Income," "Consolidated
Balance Sheets," "Consolidated Statements of Stockholders' Equity and
Comprehensive Income," "Consolidated Statements of Cash Flows," and "Notes to
Consolidated Financial Statements" is filed as part of this Annual Report on
Form 10-K/A. The Company has restated the consolidated balance sheets and
statements of cash flows as of and for the years ended December 31, 2005 and
December 31, 2004. See note 18 of the consolidated financial statements.
17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this
report were not effective because of the material weakness described in
Management's Report on Internal Control Over Financial Reporting.
(b) Management's Report on Internal Control Over Financial Reporting
Management's report on the Companys internal control over financial
reporting is included under Item 15(a)1 of this Annual Report on Form 10-K/A.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is also included under Item 15(a)1 of the Annual
Report on Form 10-K/A.
(c) Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial
reporting that occurred during the quarter ended December 31, 2005 that have
materially affected, or are likely to materially affect, its internal control
over financial reporting.
In order to remediate the material weakness in our internal control over
financial reporting with respect to the accounting for and disclosure of
short-term investments as soon as practicable, management is in the process of
designing, implementing and continuing to enhance controls to ensure the proper
presentation and disclosure of short-term investments on our consolidated
balance sheets and statements of cash flows.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information (i) set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K/A and (ii) set forth
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the 2006 Proxy Statement is incorporated
herein by reference.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics that applies
to the Chief Executive Officer and the Chief Financial Officer and substantially
all of the Company's management level employees. This Code of Business Conduct
and Ethics is provided as Exhibit 14 of the Company's Annual Report on Form 10-K
as filed on March 14, 2006.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in the
2006 Proxy Statement is incorporated herein by reference.
18
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" and "Securities Authorized for Issuance Under
Equity Compensation Plans" in the 2006 Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
No relationships or transactions are required to be reported.
Item 14. Principal Accountant Fees and Services
The information set forth under the caption "Relationship with Independent
Registered Public Accounting Firm" in the 2006 Proxy Statement is incorporated
herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this Report
1 Financial Statements
The following consolidated financial statements of the Company are
filed as part of this Annual Report on Form 10-K/A and are covered by
the Report of Independent Registered Public Accounting Firm also filed
as part of this report:
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income - Years ended December 31, 2005, 2004
and 2003
Consolidated Balance Sheets - December 31, 2005 (restated) and 2004
(restated)
Consolidated Statements of Stockholders' Equity and Comprehensive
Income - Years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows - Years ended December 31, 2005
(restated), 2004 (restated) and 2003
Notes to Consolidated Financial Statements
2 Financial Statement Schedule
The following financial statement schedule is filed as part of this
Annual Report on Form 10-K/A and is covered by the Report of
Independent Registered Public Accounting Firm:
Schedule II -- Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required to be included herein under the related instructions or
are inapplicable and, therefore, have been omitted.
19
3 Exhibits. The Exhibits listed below are filed or incorporated by reference as
part of the Company's Annual Report on Form 10-K as filed on March 14, 2006.
Exhibit
Number Description
3.1 Restated Certificate of Incorporation (10)
3.2 By-Laws, as amended (9)
4.1. (a) United States Commercial Paper Issuing and paying Agency
Agreement dated as of August 12,1999 between the Company and the
Chase Manhattan Bank. (7)
(b) United States Commercial Paper Dealer Agreement dated as of March 28,
2002 between the Company and Salomon Smith Barney Inc. (11)
(c) United States Commercial Paper Dealer Agreement dated as of April 30,
2002 between the Company and Credit Suisse First Boston Corporation. (11)
(d) Euro Commercial Paper Note Agreement dated as of July 18, 2002 between
the Company and Citibank International plc. (11) (e) Euro Commercial Paper
Dealer Agreement dated as of July 18, 2002 between the Company and
Citibank International plc and
Credit Suisse First Boston (Europe) Limited. (11)
4.2 (a) Note Agreement (governing Series A, Series B and Series C Notes) dated March 1, 2001 between the Company and Prudential
Insurance Company of America. (8)
(b) First Amendment to Note Agreement dated September 1, 2001 between the
Company and Prudential Insurance Company of America. (9)
4.3 5-Year Competitive Advance, Revolving Credit and Guaranty Agreements dated as of May 9, 2005 among the Company, the
Initial Lenders named therein, the banks named therein, Citibank N.A. as Administrative Agent, JPMorgan Chase Bank, N.A.
as Syndication Agent, Harris Trust and Savings Bank, Manufacturers and Traders Trust Company, and Wachovia Bank, N.A.
as Co-Documentation Agents, and Citigroup Global Markets, Inc. and J.P. Morgan Securities Inc. as Joint Lead Arrangers
and Joint Bookrunners. (9)
4.4 (a) Eurobonds Agency Agreement dated December 13, 2001 between the Company and Citibank, N.A. (9)
(b) Eurobond Subscription Agreement dated December 11, 2001 between the
Company and Credit Suisse First Boston (Europe) Limited, UBS AG, ABN
AMRO Bank N.V., First Union Securities, Inc.; and Tokyo-Mitsubishi
International plc (the Managers). (9)
(c) Pages 4 through 16 of the Company's Eurobond Offering Circular dated
December 11, 2001. (9) 10.1 1993 Stock Option Plan (2)
10.2 1998 Stock Option Plan (1)
10.3 2002 Amended and Restated Equity Incentive Plan
10.4 (a) Trust Agreement for the Company's Employee Stock Ownership Plan between the Company and T. Rowe Price Trust Company
dated as of November 1, 2000. (8)
(b) Plan Recordkeeping Agreement for the Company's Employee Stock
Ownership Plan between the Company and T. Rowe Price Trust Company
dated as of November 1, 2000. (8)
11 Employment Agreement dated January 1, 1996 between the Company and Thomas L. Whiting (4)*
11 Employment Agreement dated October 11,1996 between the Company and Gerald K. Kunkle Jr. (5)*
11 Employment Agreement dated April 20, 1998 between the Company and William R. Jellison (6)*
11 Employment Agreement dated September 10, 1998 between the Company and Brian M. Addison (6)*
11 Employment Agreement dated June 1, 1999 between the Company and J. Henrik Roos (7)*
10.10 Employment Agreement dated October 1, 2001 between the Company and Rudolf Lehner (9)*
10.11 Employment Agreement dated November 1, 2002 between the Company and Christopher T. Clark (11)*
10.12 Employment Agreement dated November 1, 2002 between the Company and James G. Mosch (11)*
10.13 Employment Agreement dated December 1, 2002 between the Company and Bret W. Wise (11)*
10.14 DENTSPLY International Inc. Directors' Deferred Compensation Plan effective January 1, 1997 (5)*
10.15 Board Compensation Arrangement
20
Exhibit
Number Description
10.16 Supplemental Executive Retirement Plan effective January 1, 1999 * (13)
10.17 Written Description of the Amended and Restated Incentive Compensation Plan
10.18 AZ Trade Marks License Agreement, dated January 18, 2001 between AstraZeneca AB and Maillefer Instruments
Holdings, S.A. (8)
10.19 Sale and Purchase Agreement of Gendex Equipment Business between the Company and Danaher Corporation Dated
December 11, 2003. (12)
10.20 (a) Precious metal inventory Purchase and Sale Agreement dated November 30, 2001 between Fleet Precious Metal Inc.
and the Company. (9)
(b) Precious metal inventory Purchase and Sale Agreement dated December
20, 2001 between JPMorgan Chase Bank and the Company. (9)
(c) Precious metal inventory Purchase and Sale Agreement dated December
20, 2001 between Mitsui & Co., Precious Metals Inc. and the Company.
(9)
10.21 Rental Contract between Hesta Beteiligungsgesellschaft GmbH and Dentsply DeTrey GmbH effective January 1, 2004. (13)
14 DENTSPLY International Inc. Code of Business Conduct and Ethics
21 Subsidiaries of the Company
23 Consent of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP
31 Section 302 Certification Statements
32 Section 906 Certification Statement
* Management contract or compensatory plan.
(1) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 333-56093).
(2) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 33-71792).
(3) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 33-79094).
(4) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, File No.
0-16211.
(5) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, File No.
0-16211.
(6) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, File No.
0-16211.
(7) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, File No.
0-16211.
(8) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, File No.
0-16211.
(9) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001, File No.
0-16211.
(10) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 333-101548).
(11) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002, File No.
0-16211.
(12) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003, File No.
0-16211.
(13) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2004, File No.
0-16211.
21
Loan Documents
The Company and certain of its subsidiaries have entered into various loan
and credit agreements and issued various promissory notes and guaranties of such
notes, listed below, the aggregate principal amount of which is less than 10% of
its assets on a consolidated basis. The Company has not filed copies of such
documents but undertakes to provide copies thereof to the Securities and
Exchange Commission supplementally upon request.
(1) Master Grid Note dated November 4, 1996 executed in favor of The
Chase Manhattan Bank in connection with a line of credit up to
$20,000,000 between the Company and The JPMorganChase Bank.
(2) Form of "comfort letters" to various foreign commercial lending
institutions having a lending relationship with one or more of the
Company's international subsidiaries.
22
SCHEDULE II
DENTSPLY INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2005
Additions
-----------------------------
Charged
Balance at (Credited) Charged to Write-offs Balance
Beginning To Costs Other Net of Translation at End
Description of Period And Expenses Accounts Recoveries Adjustment of Period
(in thousands)
Allowance for doubtful accounts:
For Year Ended December 31,
2003 18,492 569 (29) (4,771) 2,041 16,302
2004 16,302 2,126 (133) (1,997) 926 17,224
2005 17,224 2,063 (581) (2,884) (1,031) 14,791
Allowance for trade discounts:
For Year Ended December 31,
2003 1,091 1,494 19 (1,681) 139 1,062
2004 1,062 1,655 (24) (1,605) 70 1,158
2005 1,158 1,111 - (1,781) (20) 468
Inventory valuation reserves:
For Year Ended December 31,
2003 30,670 2,845 (22) (3,418) 3,037 33,112
2004 33,112 3,173 (2,357) (a) (7,308) 1,278 27,898
2005 27,898 1,994 (682) (2,360) (1,743) 25,107
Deferred tax asset valuation allowance:
For Year Ended December 31,
2003 5,956 5,764 - (2,596) 1,139 10,263
2004 10,263 11,951 - (375) 1,582 23,421
2005 23,421 19,928 - (604) (3,161) 39,584
(a) Related primarily to the sale of Gendex.
23
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Year ended December 31,
2005 2004 2003 2002 2001
(dollars in thousands, except per share amounts)
Statement of Income Data:
Net sales $ 1,715,135 $ 1,694,232 $ 1,567,994 $ 1,415,893 $ 1,044,252
Net sales without precious metal content 1,543,916 1,481,872 1,364,346 1,230,371 993,956
Gross profit 869,018 846,518 770,533 703,714 542,281
Restructuring, impairment and
other costs (income) 232,755 7,124 3,700 (2,732) 5,073
Operating income 72,922 295,130 267,983 249,452 170,209
Income before income taxes 71,038 274,155 251,196 214,090 179,522
Net income from continuing operations $ 45,413 $ 210,286 $ 169,853 $ 143,641 $ 117,714
Net income from discontinued operations - 42,879 4,330 4,311 3,782
------ ------- ------- ------- -------
Total net income $ 45,413 $ 253,165 $ 174,183 $ 147,952 $ 121,496
Earnings per common share - basic:
Continuing operations $ 0.57 $ 2.61 $ 2.16 $ 1.84 $ 1.51
Discontinued operations - 0.54 0.05 0.05 0.05
------ ------ ----- ----- -----
Total earnings per common share - basic $ 0.57 $ 3.15 $ 2.21 $ 1.89 $ 1.56
Earnings per common share - diluted
Continuing operations $ 0.56 $ 2.56 $ 2.11 $ 1.80 $ 1.49
Discontinued operations - 0.53 0.05 0.05 0.05
------ ------ ----- ----- -----
Total earnings per common share - diluted $ 0.56 $ 3.09 $ 2.16 $ 1.85 $ 1.54
Cash dividends declared per
common share $ 0.25000 $ 0.21750 $ 0.19700 $ 0.18400 $ 0.18333
Weighted Average Common Shares Outstanding:
Basic 79,595 80,387 78,823 78,180 77,671
Diluted 81,008 82,014 80,647 79,994 78,975
Balance Sheet Data:
Cash, cash equivalents
and short-term investments $ 434,525 $ 506,369 $ 163,755 $ 25,652 $ 33,710
Property, plant and equipment, net 316,218 399,880 371,990 313,178 240,890
Goodwill and other intangibles, net 1,001,827 1,261,993 1,213,960 1,134,506 1,012,160
Total assets 2,407,329 2,798,145 2,445,587 2,087,033 1,798,151
Total debt 682,316 852,819 812,175 774,373 731,158
Stockholders' equity 1,241,580 1,443,973 1,122,069 835,928 609,519
Return on average stockholders' equity 3.4% 19.7% 17.8% 20.5% 21.5%
Long-term debt to total capitalization 35.4% 37.1% 42.0% 48.0% 54.4%
Other Data:
Depreciation and amortization $ 50,560 $ 49,296 $ 45,661 $ 41,352 $ 51,512
Capital expenditures 45,293 52,036 73,157 55,476 47,529
Interest expense, net 8,768 19,629 24,205 27,389 18,256
Cash flows from operating activities 232,769 306,259 257,992 172,983 211,068
Inventory days 90 92 93 100 93
Receivable days 53 47 50 49 46
Income tax rate 36.1% 23.3% 32.4% 32.9% 34.4%
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements made by the Company, including without limitation,
statements in the Overview section below and other statements containing the
words "plans", "anticipates", "believes", "expects", or words of similar import
may be deemed to be forward-looking statements and 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 and uncertainties
discussed within Item I, Part I of this Annual Report on Form 10-K/A.
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 principal benchmarks used by the Company in evaluating its business
are: (1) internal growth in the United States, Europe and all other regions; (2)
operating margins of each segment, (3) the development, introduction and
contribution of innovative new products; (4) growth through acquisition; and (5)
continued focus on controlling costs and enhancing efficiency. The Company
defines "internal growth" as the increase in 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 have been acquired or divested.
Management believes that an average overall internal growth rate of 4-6% is
a long-term sustainable rate for the Company. This annualized growth rate
expectation typically includes approximately 1-2% of price increases. The
Company typically implements most of its price changes in the third or fourth
quarters of the year. These price changes and other marketing and promotional
programs, which are offered to customers from time to time, in the ordinary
course of business, may impact customer purchasing activity. During 2005, the
Company's overall internal growth was approximately 2.0% compared to 4.0% in
2004. Internal growth rates in the United States (43.9% of sales) and Europe
(36.5% of sales), the largest dental markets in the world, were 5.2% and
negative 2.7%, respectively during 2005 compared to 3.4% and 4.1%, respectively
for 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. The internal growth rate in all other regions
during 2005, which represents approximately 19.6% of sales, was 4.0%, compared
to 5.2% in 2004. Among the other regions, the Asian region, excluding Japan, 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 Germany.
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 market share. 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 affected.
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 2005, over 30 new products were introduced around the
world and the Company expects over 25 new products to be introduced in 2006. Of
specific note, in late 2004, the Company introduced Oraqix(R), a new
non-injectable 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 U.S. market. In
addition, during the second quarter of 2005, the Company introduced Interactive
Mystique, 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 the Mystique bracket. During the third quarter of 2005,
the Company introduced Cercon Arts, a software system for the Company's Cercon
product that allows the technician to develop copings from a stone model, and
provides better utilization of the Cercon materials. During the fourth quarter
of 2005, the Company introduced BioForce, a Nickel Titanium arch wire that
uniquely addresses the current trends in orthodontic treatment of low force,
25
reduced friction and shorter treatment time, all within one wire. The Company
also introduced Aquasil Ultra Digit during the fourth quarter of 2005, which is
a new delivery system for the Company's Aquasil impression material products
that is extremely user friendly, comes in a unit dose, and provides easier and
better placement of impression materials. Additionally, during the fourth
quarter of 2005, the Company introduced Cercon implant abutments that provide
superior cosmetics for implant users compared to traditional abutments.
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-Aventi. 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 acid attack, the ability to desensitize exposed dentin and
the ability to retard, or to inhibit the formation of staining on the enamel.
Also, during 2005, the Company entered into a long-term collaborative agreement
with IDMoS Dental Systems Limited, a wholly owned subsidiary of IDMoS, plc for
the commercialization of IDMoS' tooth caries detection and monitoring
technology. Under the agreement, DENTSPLY will have exclusive worldwide rights
to market products based on the technology and IDMoS will be responsible for
further development of the technology. The Company believes that IDMoS
technology will bring unique capabilities to preventive dentistry in the area of
caries detection and monitoring. The Company also believes that this technology
may have clinical benefits significantly beyond other devices and technologies
in the market today, including radiology. Although the Company believes 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 (see also Acquisition Activity in Part I, Item 1 of this Form
10-K/A). As further discussed in Note 3 to the Consolidated Financial
Statements, during 2005 the Company purchased GAC SA, Raintree Essix and Glenroe
Technologies. All three of the acquired companies specialize in the orthodontics
products market. These acquisitions increased full year 2005 sales by $24.1
million.
The Company also remains focused on reducing costs and achieving
operational efficiencies. 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.
PHARMACEUTICAL BUSINESS
As previously announced in early 2006, the Company made the decision to
close its Chicago based pharmaceutical manufacturing facility and to pursue the
outsourcing of the production of the injectable dental anesthetic products and
the non-injectable Oraqix(R) products that were to be produced at the plant. The
Company expects that the decision to shut down the anesthetics manufacturing
facility will immediately improve short and mid-term cash flows and eliminate
the uncertainty concerning FDA approval of the facility. While the Company had
supply disruptions in 2005 and anticipates some supply disruptions in 2006 in
relation to the supply of the injectable dental anesthetic products, the Company
currently has contract manufacturing relationships for the supply of the
injectable dental anesthetic products for most of the markets served by the
Company. As there are a limited number of suppliers for the injectable dental
anesthetic products sold by the Company, there can be no assurance that the
Company will be able to obtain an adequate supply of its injectable dental
anesthetic products in the future. The Company currently has supply agreements
in place for the supply of the non-injectable Oraqix(R) products and has not
experienced supply disruptions to date, nor does it anticipate supply
disruptions of the Oraqix(R) products in the future.
The following details in this section provide the history and background
related to the pharmaceutical manufacturing facility and DENTSPLY's anesthetics
business.
The Company completed construction of the dental anesthetic manufacturing
facility outside of Chicago in 2004. In early 2005, 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 facility began manufacturing and
26
releasing products to the market in the United Kingdom and Australia in the
second quarter of 2005. 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 injectable anesthetic products manufactured at
the facility. The FDA conducted a Pre-Approval Inspection in July 2005 and
identified items that needed to be addressed in connection with the U.S.
inspection and submission.
After the Company received the results of the FDA's Pre-Approval Inspection
in the third quarter of 2005, the Company conducted an extensive review of the
items identified by the FDA and developed action plans to address these items.
Included in this review were the expected time-line and costs for responding to
the FDA findings, the expected time required for FDA re-application and
approval, the expected ramp-up costs to achieve anticipated volumes for the
U.S., European and Japanese markets, and the extension of contract manufacturing
agreements to provide a supply of injectable anesthetic product until the
manufacturing facility could achieve full production under the revised timeline.
Based on this review, the Company concluded that the start-up of its
pharmaceutical manufacturing facility would be delayed, and did not expect to
begin producing injectable anesthetics at the facility for the U.S. and Japanese
markets until 2007. As a result of the Company's review and its changed
expectations, the Company concluded that the indefinite-lived injectable
anesthetic intangible asset acquired from AstraZeneca in 2001 became impaired in
the third quarter of 2005, resulting in a $131.3 million pre-tax charge ($111.6
million after tax) (see also Note 15 to the Consolidated Financial Statements).
This impairment did not impact the Company's needle-free Oraqix(R) product.
From the end of the third quarter of 2005 through December of 2005, the
Company continued to evaluate the actions necessary to address the items raised
in the FDA's pre-approval inspection. As of the end of the third quarter of
2005, the Company had anticipated that it would continue to manufacture products
at the plant for the U.K., Australia, and New Zealand markets, for which
regulatory approval had already been obtained. However, upon further evaluation,
the Company decided in December of 2005 to suspend manufacturing at the plant to
allow improvements identified in the Company's corrective action plan to be
made.
In conjunction with the evaluation of the actions necessary to address the
items raised in the FDA's pre-approval inspection, the Company also began to
evaluate strategic alternatives for the facility, including but not limited to a
potential shut-down of the dental anesthetics manufacturing facility and
obtaining long-term third party supply sources for both the injectable
anesthetic products and the Oraqix(R) product. In order to fully evaluate the
potential options at the Company's disposal with regard to a potential closure
and the disposition of the facility, the Company began a comprehensive internal
analysis of the assets that included initiating discussions with potential
buyers, and evaluating the possibility of obtaining extensions for the supply of
products from third party manufacturers.
Based on the outcome of the analyses performed by the Company, as well as
both strategic and financial considerations, in December of 2005 the Company
began to establish a plan for a course of action to shut down the manufacturing
facility, sell the manufacturing facility assets and begin negotiations with
third party manufacturers to obtain a long-term source of supply for the
anesthetic products.
After the Company made the decision to establish a plan for this
alternative course of action with regard to the manufacturing facility, an
extensive review was performed on the activities required to complete the
facility closure and the risk factors associated with those activities. Included
in those activities and risk factors were the activities to wind down operations
at the facility and to prepare the assets for eventual disposition, the pursuit
of a buyer for the assets, the expected time frame for the sale of the assets,
the pursuit of long-term ongoing contract manufacturing agreements to provide a
supply of injectable anesthetic product and the risks associated with being
unable to procure such long-term contracts. The Company also obtained an
independent third party appraisal of the indefinite-lived injectable anesthetic
intangible and the long-lived assets associated with the pharmaceutical
manufacturing facility, due to the sensitivity of the assumptions and the risks
associated with these assets. As a result of the Company's review, its changed
expectations and the review of the third party appraisal of the assets, it was
determined that an additional impairment of the indefinite-lived injectable
anesthetic intangible asset acquired from AstraZeneca in 2001, as well as an
impairment of the long-lived assets related to the manufacturing facility, had
occurred during the fourth quarter of 2005. Additional discussion of the
Company's review and changed expectations is provided in Note 15 to the
Consolidated Financial Statements. The impairment recorded by the Company in the
fourth quarter of 2005 was $99.5 million ($66.5 million after tax). This
impairment did not impact the Company's needle-free Oraqix(R) product.
27
Additionally, as a result of these activities, pre-tax restructuring
charges of $2.3 million ($1.5 million after tax) were also incurred related to
employee severance cost for which the Company was contractually obligated. The
Company also expects pre-tax restructuring charges in the range of $6 million
to $9 million in 2006 associated with the completion of the closure of the
facility. These costs primarily related to additional contract termination
costs, severance costs and utility costs during the shut down period (see also
Note 15 to the Consolidated Financial Statements).
FACTORS IMPACTING COMPARABILITY BETWEEN YEARS
Discontinued Operations
In February 2004, the Company sold its Gendex equipment business to Danaher
Corporation. Additionally, in the first quarter of 2004, the Company
discontinued production of dental needles. The sale of the Gendex business and
discontinuance of dental needle production have been accounted for as
discontinued operations pursuant to Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The
results of operations for all periods presented have been restated to reclassify
the results of operations for both the Gendex equipment and the dental needle
businesses as discontinued operations.
Revisions in Classification
Certain revisions of classification have been made to prior years' data in
order to conform to current year presentation.
The Company has revised its 2004 and 2003 cash flow statement
classifications to present realization of cross-currency swap value of $13.7
million and $10.7 million, respectively, into cash flows from investing
activities from cash flows from financing activities
RESULTS OF CONTINUING OPERATIONS, 2005 COMPARED TO 2004
Net Sales
The discussions below summarize the Company's sales growth, excluding
precious metal content, from internal growth and net acquisition growth and
highlights the impact of foreign currency translation. These disclosures of net
sales growth provide the reader with sales results on a comparable basis between
periods.
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 typically adjusted when the prices of underlying
precious metals change.
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.
Year Ended December 31,
2005 2004 2003
(in millions)
Net Sales $ 1,715.1 $ 1,694.2 $ 1,568.0
Precious Metal Content of Sales (171.2) (212.3) (203.7)
------ ------ ------
Net Sales Excluding Precious Metal Content $ 1,543.9 $ 1,481.9 $ 1,364.3
========= ========= =========
28
Net sales in 2005 increased $20.9 million, or 1.2%, to $1,715.1 million.
Net sales, excluding precious metal content, increased $62.0 million, or 4.2%,
to $1,543.9 million. Sales growth excluding precious metal content was comprised
of 2.0% internal growth, 1.6% related to acquisitions and 0.6% due to foreign
currency translation. The 2.0% internal growth was comprised of 5.2% in the
United States, a negative 2.7% in Europe and 4.0% for all other regions
combined.
The 5.2% internal sales growth, excluding precious metal content, in the
United States was driven by strong growth in the dental consumable and dental
specialty product categories, offset somewhat by lower sales in the dental
laboratory product category. In Europe, the negative 2.7% internal growth
resulted from lower sales in the dental laboratory category partially offset by
strong growth in the specialty dental and dental consumables product categories.
The decrease in the laboratory category was primarily related to reimbursement
changes in the German dental market prosthetic procedures which became effective
in 2005. The internal growth of 4.0% in all other regions was largely the result
of strong growth in the Asian and Latin American regions, partially offset by
lower sales growth in the Middle East, Australia and Canada.
Gross Profit
Gross profit was $869.0 million in 2005 compared to $846.5 million in 2004,
an increase of $22.5 million, or 2.7%. Gross profit, measured against sales
including precious metal content, represented 50.7% of net sales in 2005
compared to 50.0% in 2004. The gross profit for 2005, measured against sales
excluding precious metal content, represented 56.3% of net sales compared to
57.1% in 2004. This margin decline from 2005 to 2004 was due to the decrease in
the laboratory product sales in Europe as discussed previously and costs related
to the anesthetic manufacturing facility, partially 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") expenses, which include
research and development costs, increased $19.0 million, or 3.5%, to $563.3
million during 2005 from $544.3 million in 2004. The 3.5% increase in expenses
reflects additional SG&A expenses of $11.6 million from acquired companies and
increases from unfavorable translation impacts of approximately $2.5 million.
The unfavorable translation impacts were caused by higher average foreign
currency exchange rates for the full year of 2005 versus full year 2004 when
translating the expenses from the local currencies in which the Company's
subsidiaries conduct operations, into United States Dollars. SG&A expenses,
measured against sales including precious metal content, increased to 32.8%
compared to 32.1% in 2004. SG&A expenses, as measured against sales excluding
precious metal content, decreased to 36.5% compared to 36.7% in 2004. The higher
expense ratio in 2005 measured against sales including precious metal content is
primarily the result of lower precious metal sales in 2005 versus 2004 due to
the changes in the German reimbursements as previously discussed. The higher
expense level in 2004 measured against sales excluding precious metal content
was primarily related to higher litigation settlement costs, costs related to
the Sarbanes-Oxley compliance and costs related to the launch of the Oraqix(R)
product in 2004. In 2005, the Company continued to efficiently manage expenses,
which served to further reduce SG&A costs. These reductions were partially
offset by increased costs in 2005 related to the initiation of a global
tax project.
During 2005, the Company recorded restructuring and impairment costs of
$233.1 million ($179.6 million net of tax). This amount is primarily
attributable the impairment of the indefinite-lived injectable anesthetic
intangible acquired from AstraZeneca in 2001 as well as the impairment of the
fixed assets associated with the pharmaceutical manufacturing facility. This
impairment charge was recorded as a result of event driven impairment analyses
conducted in accordance with Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets", and Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets" (see also Note 15 to the Consolidated Financial
Statements). Included in the $232.8 million charge are restructuring charges of
$3.1 million that were recorded during 2005 primarily as a result of the
decision to shut down the anesthetics manufacturing facility in Chicago
Illinois. These costs were partially offset by a change in estimate of $1.2
million primarily related to the reversal of severance costs accrued in 2004
associated with the European Shared Services Center that were no longer
necessary. The Company anticipates the remaining costs to complete the shut down
of the pharmaceutical manufacturing facility will be approximately $6 million to
$9 million which will be expensed primarily during the first half of 2006 as the
related costs are incurred. The plans to shut down the pharmaceutical
manufacturing facility and other operational improvements are expected to
improve operating margin rates by 0.5% to 1.0% in 2006.
29
During 2004, the Company recorded restructuring and other costs of $7.1
million ($5.0 million net of tax). These costs were primarily related to the
creation of a European Shared Services Center in Yverdon, Switzerland, and 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. These plans are expected to be fully complete during 2006. In
addition, restructuring costs were incurred related to the closure of the
Company's European central warehouse in Nijmegan, The Netherlands, and transfer
of this function to a Company-operated facility in Radolfzell, Germany, which
was substantially completed during the first quarter of 2004. This transfer was
completed in an effort to improve customer service levels and reduce costs. The
Company also incurred additional charges 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 at the end of 2004.
The Company anticipates remaining restructuring costs to complete the
European Shared Services Center initiative of $0.5 million, related to employee
termination costs and other restructuring charges, which will be expensed as
incurred during 2006. The projected future annual expense reductions related to
the European Shared Services Center initiative are $1.5 million to $2.0 million
when fully implemented.
Other Income and Expenses
Net interest expense and other expenses were $1.9 million during 2005
compared to $21.0 million in 2004. The 2005 period included $8.8 million of net
interest expense, $6.7 million of currency transaction gains and $0.2 million of
other non-operating gains. The 2004 period included $19.6 million of net
interest expense, $1.2 million of currency transaction losses and $0.2 million
of other non-operating costs. The decrease in net interest expense was primarily
due to increased interest income generated from the Company's higher average
cash and short-term investment levels, lower average debt levels and the
effectiveness of the cross-currency interest rate swaps designated as net
investment hedges, put into place in the first and fourth quarters of 2005.
Income Taxes
The Company's effective tax rates for 2005 and 2004 were 36.1% and 23.3%,
respectively. Management believes that the operating tax rate for 2006 will be
in the range of 29.5% to 30%. During 2005, the Company recorded a tax charge of
$4.6 million from the repatriation under the American Jobs Creation Act of 2004,
a tax charge of $7.6 million related to the effects of foreign earnings, and a
tax benefit of $11.0 million from the release of deferred tax liabilities
related to the undistributed earnings of foreign earnings due to the
availability of foreign tax credits.
Earnings
Net income from continuing operations for 2005 of $45.4 million was a
decrease compared to net income from continuing operations of $210.3 million in
2004. The 2005 net income included pretax impairment and restructuring charges
primarily associated with the injectable anesthetic facility and
indefinite-lived intangible assets of $232.8 million ($178.9 million after-tax).
The negative impacts of the impairment and restructuring charges were partially
offset by net non-recurring benefits related to tax reorganization and
repatriation activities of $8.9 million. Income from continuing operations and
diluted earnings per share from continuing operations in 2004 included pretax
charges of $7.1 million ($5.0 million after tax), relating to restructuring
activities, and a net income tax benefit of $19.5 million, primarily related to
adjustments and settling audits of tax returns.
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.
There was no income from discontinued operations during 2005 and $42.9
million in 2004. Fully diluted earnings per share from discontinued operations
were $0.53 for 2004. The income from discontinued operations in 2004 was almost
entirely related to the gain realized on the sale of Gendex business.
30
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 the Company's 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 4 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. In
January 2006, the Company reorganized its operating group structure
consolidating into three operating groups. Segment information will be disclosed
under this new structure beginning in the first quarter of 2006.
U.S. Consumable Business/Canada
Net sales for this group were $342.3 million during 2005, a 7.1% increase
compared to $319.6 million in 2004. Internal growth was 6.3% and currency
translation added 0.8% to sales in 2005. The 6.3% internal growth rate was
primarily attributable to the chairside consumable products business and the
Oraqix(R) product, which is part of the dental anesthetics business.
Operating profit decreased $2.0 million during 2005 to $95.6 million
compared to $97.6 million in 2004. The decrease was related to non-capitalizable
costs associated with the 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.
During 2005, the Company recorded a $233.1 million ($179.6 million after
tax) impairment and restructuring charge against the indefinite-lived injectable
anesthetic assets and the long-lived assets associated with the pharmaceutical
manufacturing facility (see also Pharmaceutical Business section in the MD&A and
Note 15 to the Consolidated Financial Statements). This impairment does not
impact the Company's needle-free Oraqix(R) product.
Dental Consumables--Europe, CIS, Middle East, Africa/European Dental Laboratory
Business
Net sales for this group were $387.5 million during 2005, an 8.2% decrease
compared to $422.2 million in 2004. Internal growth was negative 8.2%. Changes
in German reimbursement programs related to prosthetic procedures, as discussed
earlier, resulted in lower sales in Germany during 2005 which was the primary
driver of the negative 8.2% internal sales growth rate.
Operating profit decreased $25.3 million during 2005 to $49.4 million from
$74.8 million in 2004. The reduction in operating profit was driven primarily by
lower sales and a negative mix shift, particularly in the German businesses.
Australia/Latin America/Endodontics/Non-dental
Net sales for this group increased $20.4 million during 2005, or 6.1%, to
$357.8 million from $337.4 million in 2004. Internal growth was 4.2% with
currency translation adding 1.9%. Solid growth was shown in the endodontic
business, the non-dental business and the Latin American businesses, offset
slightly by decreases in the Australian business.
Operating profit was $146.8 million during 2005, a $3.3 million increase
from $143.5 million in 2004. The increase was primarily related to the continued
strength of the endodontic business, offset slightly by decreases in Australia
and Brazil. Australia was negatively impacted by interruptions in the anesthetic
supply.
31
U.S. Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
Net sales for this group were $459.5 million during 2005, a 13.2% increase
compared to $406.0 million in 2004. Internal growth was 7.1%, currency
translation added 0.2% to sales in 2005, and 5.9% was added through
acquisitions. Significant growth in the implant, orthodontic, Japanese and Asian
businesses, were partially offset by weakness in the U.S. laboratory markets.
Operating profit increased $23.1 million during 2005 to $77.8 million from
$54.7 million in 2004. Operating profits increased year-over-year for all
businesses primarily due to the sales increases and reduced expenses. In
addition, operating profit benefited from currency translation.
RESULTS OF CONTINUING OPERATIONS, 2004 COMPARED TO 2003
Net Sales
Net sales in 2004 increased $126.2 million, or 8.1%, to $1,694.2 million.
Net sales, excluding precious metal content, increased $117.5 million, or 8.6%,
to $1,481.9 million. Sales growth excluding precious metal content was comprised
of 4.0% internal growth and 4.6% of foreign currency translation. The 4.0%
internal growth was comprised of 3.4% in the United States, 4.1% in Europe and
5.2% 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 products, offset by
negative growth in anesthetic products due to competitive pressures and in
equipment products within the dental laboratory category. In Europe, strong
internal sales growth in specialty dental products was offset by flat growth in
the dental consumable category. The internal growth of 5.2% in all other regions
was largely the result of strong growth in the Asian region, Canada and the
Middle East/Africa, offset by lower sales in Japan.
Gross Profit
Gross profit was $846.5 million in 2004 compared to $770.5 million in 2003,
an increase of $76.0 million, or 9.9%. Gross profit, measured against sales
including precious metal content, represented 50.0% of net sales in 2004
compared to 49.1% in 2003. The gross profit for 2004, measured against sales
excluding precious metal content, represented 57.1% of net sales compared to
56.5% in 2003. This margin improvement from 2003 to 2004 was due primarily to
favorable geographic and product mix shifts in addition to ongoing operational
improvements related to the Company's restructuring and process improvement
initiatives.
Operating Expenses
SG&A expense increased $45.4 million, or 9.1%, to $544.3 million during
2004 from $498.9 million in 2003. The 9.1% increase in expenses reflects
increases for the translation impact from a weaker U.S. dollar of approximately
$25.3 million. The unfavorable translation impacts were caused by higher average
foreign currency exchange rates for the full year of 2004 versus full year 2003
when translating the expenses from the local currencies in which the Company's
subsidiaries conduct operations, into United States Dollars. SG&A expenses,
measured against sales including precious metal content, increased to 32.1%
compared to 31.8% in 2003. SG&A expenses, as measured against sales excluding
precious metal content, increased to 36.7% compared to 36.6% in 2003. The higher
expense level in 2004 was primarily related to litigation settlement costs,
additional costs related to the Sarbanes-Oxley compliance and costs related to
the launch of the Oraqix(R) product. In addition, the Company continued to
efficiently manage expenses during 2005, which served to partially offset these
additional costs. Moving forward, as the Company leverages expenses, it expects
to reinvest a portion of these savings to further strengthen research and
development and selling activities.
During 2004, the Company recorded restructuring and other costs of $7.1
million ($5.0 million net of tax). These costs were primarily related to the
creation of a European Shared Services Center in Yverdon, Switzerland, and 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. These plans are expected to be fully complete during 2006. In
32
addition, restructuring costs were incurred related to the closure of the
Company's European central warehouse in Nijmegan, The Netherlands, and transfer
of this function to a Company-operated facility in Radolfzell, Germany, which
was substantially completed during the first quarter of 2004. This transfer was
completed in an effort to improve customer service levels and reduce costs. The
Company also incurred additional charges 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 at the end of 2004.
During 2003, the Company recorded restructuring and other costs of $3.7
million ($2.3 million net of tax). The largest portion of this was an impairment
charge related to certain investments made in emerging technologies that the
Company no longer viewed as recoverable. In addition, as noted above, in
December 2003, the Company commenced the consolidation of its U.S. laboratory
businesses and recorded a charge for a portion of the costs to complete the
consolidation (see Note 15 to the Consolidated Financial Statements).
Other Income and Expenses
Net interest expense and other expenses were $21.0 million during 2004
compared to $16.8 million in 2003. The 2004 period included $19.6 million of net
interest expense, $1.2 million of currency transaction losses and $0.2 million
of other non-operating costs. The 2003 period included $24.2 million of net
interest expense, $0.3 million of currency transaction gains and $7.1 million of
other non-operating income, which included gains on the PracticeWorks common
stock and warrants sold in the fourth quarter of 2003 of $7.4 million ($4.7
million net of tax). The decrease in net interest expense was primarily due to
increased interest income generated from the Company's higher average cash and
short-term investment levels.
Income Taxes
The effective tax rate decreased to 23.3% in 2004 from 32.4% in 2003.
During 2004, the Company recorded a tax benefit of $19.5 million primarily from
the reversal of previously accrued taxes from the settlement of prior years'
domestic and foreign tax audits, benefits of additional R&D credits and other
adjustments. The impact of this benefit on the effective tax rate for 2004 was
7.1%.
Earnings
Income from continuing operations increased $40.4 million, or 23.8%, to
$210.3 million in 2004 from $169.9 million in 2003. Fully diluted earnings per
share from continuing operations were $2.56 in 2004, an increase of 21.3% from
$2.11 in 2003. Income from continuing operations and diluted earnings per share
from continuing operations in 2004 included the benefit of the tax adjustments
($19.5 million or $0.24 per share) and the restructuring and other costs ($5.0
million or $0.06 per share) described above. In addition, income from continuing
operations and diluted earnings per share from continuing operations in 2003
included the gain on the sale of the PracticeWorks securities ($4.7 million or
$0.06 per share) and the restructuring and other costs ($2.3 million or $0.03
per share) described above.
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 during 2004 and $4.3
million in 2003. Fully diluted earnings per share from discontinued operations
were $0.53 and $0.05 for 2004 and 2003, respectively. The income from
discontinued operations in 2004 was almost entirely related to the gain realized
on the sale of Gendex business.
33
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 the Company's 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 4 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. In
January 2006, the Company reorganized its operating group structure
consolidating into three operating groups. Segment information will be disclosed
under this new structure beginning in the first quarter of 2006.
U.S. Consumable Business/Canada
Net sales for this group were $319.6 million in 2004, a 3.5% increase
compared to $308.8 million in 2003. Internal growth was 2.7% and currency
translation added 0.8% to sales in 2004. The U.S. consumables and Canadian
businesses had the highest growth in the group, which was offset by lower sales
in the U.S. Pharmaceutical business.
Operating profit decreased $0.5 million during 2004 to $97.6 million from
$98.1 million in 2003. The operating losses of the U.S. Pharmaceutical business
were partially offset by the growth of the U.S. Consumable and Canadian
businesses. Operating profit also benefited slightly from currency translation.
Dental Consumables--Europe, CIS, Middle East, Africa/European Dental Laboratory
Business
Net sales for this group were $422.2 million in 2004, an increase of $48.4
million, or 13.0%, compared to $373.8 million in 2003. Internal growth was 2.7%
and currency translation added 10.3% to sales in 2004. The sales growth was
driven by the Europe, Middle East, and African consumable businesses, offset by
lower sales in the European Dental Laboratory businesses, primarily in Germany,
and lower sales in the United Kingdom consumables business.
Operating profit increased $18.4 million in 2004 to $74.8 million from
$56.4 million in 2003. The operating profit improvement was primarily related to
the sales growth and lower SG&A expenses as a percentage of sales. In addition,
operating profit benefited from currency translation.
Australia/Latin America/Endodontics/Non-dental
Net sales for this group increased $24.0 million during 2004, or 7.7%, to
$337.4 million compared to $313.4 million in 2003. Internal growth was 4.6% and
currency translation added 3.1%. The higher internal sales growth was primarily
driven by sales growth of the Australian, Endodontic and Non-dental businesses,
offset by lower sales in the Latin American businesses.
Operating profit was $143.5 million in 2004, a $12.9 million increase from
$130.6 million in 2003. This increase was driven by improved sales and higher
margins in the international operations in the group. In addition, operating
profit benefited from currency translation.
U.S. Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
Net sales for this group was $406.0 million in 2004, a 9.7% increase
compared to $370.1 million in 2003. Internal growth was 6.2% and currency
translation added 3.5% to sales in 2004. The internal growth increase was
primarily due to strong growth in the orthodontics and dental implants
businesses, offset by slower growth in the U.S. dental laboratory business and
negative growth in the Japanese business.
Operating profit increased $9.4 million during 2004, to $54.7 million from
$45.3 million in 2003. This increase was driven by improved sales of the
orthodontics and dental implants businesses and lower SG&A expenses at the U.S.
dental laboratory business. In addition, operating profit benefited from
currency translation.
34
FOREIGN CURRENCY
Since approximately 55% of the Company's 2005 revenues were generated in
currencies other than the U.S. dollar, the value of the U.S. dollar in relation
to those currencies affects the results of operations of the Company. The impact
of currency fluctuations in any given period can be favorable or unfavorable.
The impact of foreign currency fluctuations of European currencies on operating
income is partially offset by sales in the U.S. of products sourced from plants
and third party suppliers located overseas, principally in Germany and
Switzerland. On a net basis, net income benefited from changes in currency
translation in 2005 and 2004 compared to prior years.
CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES
The Company has identified below the accounting estimates believed to be
critical to its business and results of operations. These critical estimates
represent those accounting policies that involve the most complex or subjective
decisions or assessments.
Goodwill and Other Long-Lived Assets
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets" which requires that at
least an annual impairment test be applied to goodwill and indefinite-lived
intangible assets. The Company performs impairment tests on at least an annual
basis using a fair value approach rather than an evaluation of the undiscounted
cash flows. If impairment related to goodwill 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.
Other long-lived assets, such as identifiable intangible assets and fixed
assets, are amortized or depreciated over their estimated useful lives. In
accordance with Statement of Financial Accounting Standards No. 144 ("SFAS
144"), "Accounting for the Impairment or Disposal of Long-Lived Assets", 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 with impairment being 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.
Assessment of the potential impairment of goodwill, indefinite-lived
intangible assets and long-lived assets is an integral part of the Company's
normal ongoing review of operations. Testing for potential impairment of these
assets is significantly dependent on numerous assumptions and reflects
management's best estimates at a particular point in time. The dynamic economic
environments in which the Company's businesses operate and key economic and
business assumptions with respect to projected selling prices, increased
competition and introductions of new technologies can significantly affect the
outcome of impairment tests. Estimates based on these assumptions may differ
significantly from actual results. Changes in factors and assumptions used in
assessing potential impairments can have a significant impact on both the
existence and magnitude of impairments, as well as the time at which such
impairments are recognized. If there are unfavorable changes in these
environments or assumptions, future cash flows, the key variable in assessing
the impairment of these assets, may decrease and as a result the Company may be
required to recognize impairment charges. Future changes in the environment and
the economic outlook for the assets being evaluated could also result in
additional impairment charges being recognized. Information with respect to the
Company's significant accounting policies on long-lived assets is included in
Note 1 to the Consolidated Financial Statements.
Inventories
Inventories are stated at the lower of cost or market. The cost of
inventories is determined primarily by the first-in, first-out ("FIFO") or
average cost methods, with a small portion being determined by the last-in,
first-out ("LIFO") method. The Company establishes reserves for inventory
estimated to be obsolete or unmarketable equal to the difference between the
cost of inventory and estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those anticipated, additional inventory reserves may be required.
35
Accounts Receivable
The Company sells dental equipment and supplies both through a worldwide
network of distributors and directly to end users. For customers on credit
terms, the Company performs ongoing credit evaluation of those customers'
financial condition and generally does not require collateral from them. The
Company establishes allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, their
ability to make required payments may become impaired, and increases in these
allowances may be required. In addition, a negative impact on sales to those
customers may occur.
Accruals for Product Returns, Customer Rebates and Product Warranties
The Company makes provisions for customer returns, customer rebates and for
product warranties at the time of sale. These accruals are based on past
history, projections of customer purchases and sales and expected product
performance in the future. Because the actual results for product returns,
rebates and warranties are dependent in part on future events, these matters
require the use of estimates. The Company has a long history of product
performance in the dental industry and thus has an extensive knowledge base from
which to draw in measuring these estimates.
Income Taxes
Income taxes are determined using the liability method of accounting for
income taxes in accordance with Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, tax expense
includes US and international income taxes plus the provision for US taxes on
undistributed earnings of international subsidiaries not deemed to be
permanently invested.
Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effect of such temporary
differences is reported as deferred income taxes. Deferred tax assets are
recognized if it is more likely than not that the assets will be realized in
future years. The Company establishes a valuation allowance for deferred tax
assets for which realization is not likely. As of December 31, 2005, the Company
recorded a valuation allowance of $39.5 million against the benefit of certain
net operating loss carryforwards of foreign and domestic subsidiaries.
The Company operates within multiple taxing jurisdictions and in the normal
course of business is examined in various jurisdictions. Tax accruals related to
the estimated outcome of these examinations are recorded in accordance with
Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies"
("SFAS 5"). The reversal of the accruals is recorded when examinations are
completed, statutes of limitation close or tax laws change.
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. During the quarter
ended December 31, 2005, the Company completed its evaluation of the
repatriation provision and will reinvest approximately $345 million of foreign
earnings in the United States. As a result, the Company recognized $4.6 million,
net of available foreign tax credits, of related tax expense for the
repatriation plan.
36
Pension and Other Postretirement Benefits
Substantially all of the employees of the Company and its subsidiaries are
covered by government or Company-sponsored defined benefit or defined
contribution plans. Additionally, certain union and salaried employee groups in
the United States are covered by a postretirement healthcare plan. Costs for
Company-sponsored plans are based on expected return on plan assets, discount
rates, employee compensation increase rates and health care cost trends.
Expected return on plan assets, discount rates, and health care cost trend
assumptions are particularly important when determining the Company's benefit
obligations and net periodic benefit costs associated with postretirement
benefits. Changes in these assumptions can impact the Company's pretax earnings.
In determining the cost of postretirement benefits, certain assumptions are
established annually to reflect market conditions and plan experience to
appropriately reflect the expected costs as actuarially determined. These
assumptions include medical inflation trend rates, discount rates, employee
turnover and mortality rates. The Company predominantly uses liability durations
in establishing its discount rates, which are observed from indices of
high-grade corporate bond yields in the respective economic regions of the
plans. The expected return on plan assets is the weighted average long-term
expected return based upon asset allocations and historic average returns for
the markets where the assets are invested, principally in foreign locations.
Additional information related to the impact of changes in these assumptions is
provided in Note 14 to the Consolidated Financial Statements.
Derivative Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", on
January 1, 2001. This standard, as amended by SFAS 138 and 149, requires that
all derivative instruments be recorded on the balance sheet at their fair value
and that changes in fair value be recorded each period in current earnings or
comprehensive income.
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.
Litigation
The Company and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company records liabilities when
a loss is probable and can be reasonably estimated. These estimates made by
management are based on an analysis made by internal and external legal counsel
which considers information known at the time. The Company believes it has
estimated any liabilities for probable losses well in the past; however, the
unpredictability of court decisions could cause liability to be incurred in
excess of estimates. Legal costs related to these lawsuits are expensed as
incurred.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities during the year ended December 31,
2005 were $232.8 million compared to $306.3 million during the year ended
December 31, 2004. The decrease of $73.5 million was primarily the result of an
increase in overall working capital primarily caused by an increase in accounts
receivable of $31.6 million, an increase in inventories of $7.4 million, a
decrease in accounts payable of $6.7 million and a decrease in accrued
liabilities of $14.5 million. The increase in accounts receivable was primarily
caused by the record low accounts receivable levels at the end of 2004 compared
to more normalized levels in 2005. The increase in inventories was mainly
attributable to an increase in the required on hand inventory levels in line
with the increase in sales. The decrease in accounts payable was due primarily
to the timing of payments made in 2005 versus 2004. The decrease in accrued
liabilities was primarily attributable to the payment of certain non-recurring
liabilities in the first quarter of 2005 that were accrued as of December 31,
2004.
Investing activities during 2005 include capital expenditures of $45.3
million. The Company expects that capital expenditures will range from $55
million to $60 million in 2006. Additionally, during 2005, the Company had
expenditures related to the acquisition of identifiable intangible assets of
$3.5 million. Acquisition-related activity for the year ended December 31, 2005
was
37
$18.1 million which was primarily due to the acquisitions of GAC SA, Raintree
Essix, L.L.C. and Glenroe Technologies, Inc. (see Note 3 to the Consolidated
Financial Statements).
In December 2004, the Board of Directors approved a stock repurchase
program under which the Company may repurchase shares of Company stock on the
open market in an amount to maintain up to 3,000,000 shares of treasury stock.
In September 2005, the Board of Directors increased the authorization to
repurchase shares under the stock repurchase program in an amount to maintain up
to 5,500,000 shares of treasury stock. Under this program, the Company purchased
approximately 3,002,000 shares during 2005 at an average price of $54.85. As of
December 31, 2005, the Company held 2,533,000 shares of treasury stock. The
Company also received proceeds of $31.8 million as a result of the exercise of
1,226,000 stock options during the year ended December 31, 2005.
The Company's long-term borrowings decreased by a net of $170.5 million
during the year ended December 31, 2005. This net change included a decrease of
$112.4 million due to exchange rate fluctuations on debt denominated in foreign
currencies, changes in the value of interest rate swaps, net repayments of $60.1
million during the year, and an increase of $2.0 million as a result of
long-term debt assumed from acquired companies. During the year ended December
31, 2005, the Company's ratio of long-term debt to total capitalization
decreased to 35.4% compared to 37.1% 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
December 31, 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 $500 million with $106.4 million outstanding under the multi-currency
facility and $6.7 million outstanding under the commercial paper facilities at
December 31, 2005.
The Company also has access to $49.2 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 December 31, 2005, the Company had total unused lines of credit related
to the revolving credit agreement and the uncommitted short-term lines of credit
of $436.2 million.
At December 31, 2005, the Company held $64.8 million of precious metals on
consignment from several financial institutions. These consignment agreements
allow the Company to acquire the precious metal at market rates at a point in
time which is 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.
The Company's cash and short-term investments decreased $71.8 million in
total during the year ended December 31, 2005 to $434.5 million. In 2005, the
Company repaid $60.1 million of maturing long-term borrowings and repurchased
$164.8 million of treasury stock. The Company continued to maintain significant
cash and short-term investment balances during 2005 rather than pre-pay debt, as
a result of pre-payment penalties that would be incurred in retiring both the
debt and the related interest rate swap agreements. Additionally, the Company
has not repaid this debt due to the low cost of the debt, net of earnings on the
cash and short-term investments. The Company has $530.7 million of long-term
borrowings coming due in 2006. The Company intends to repay these debt
obligations with cash and/or funds available to the Company from its cash and
cash equivalents, short-term investments and under the revolving credit
facility. Any portion of the debt that is repaid through the use of the
revolving credit facility will be contractual due in May 2010, upon the
expiration of the facility, thus effectively converting the maturity of the debt
beyond 2006. The Company currently intends to effectively refinance $119.9
million of the long-term borrowings coming due in 2005 through use of the
revolving credit facility.
38
The following table presents the Company's scheduled contractual cash
obligations at December 31, 2005:
Greater
Less Than 1-3 3-5 Than
Contractual Obligations 1 Year Years Years 5 Years Total
(in thousands)
Long-term borrowings $ 410,779 $ 43,767 $ 226,337 $ - $680,883
Operating leases 20,175 20,383 7,966 5,275 53,799
Interest on long-term borrowings, net
of interest rate swap agreements 2,362 (35,657) (17,924) 12,015 (39,204)
Postretirement obligations 6,673 13,574 14,635 41,817 76,699
Precious metal consignment agreements 64,845 - - 0 64,845
-------- -------- -------- -------- ------
$ 504,834 $ 42,067 $ 231,014 $ 59,107 $837,022
========= ========= ========= ======== ========
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 current cash and
short-term investment balances, funds generated from operations and amounts
available under its existing credit facilities.
39
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("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" ("SFAS 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 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 will use
the modified prospective transition method, utilizing the Black-Scholes option
pricing model for the calculation of the fair value of its employee stock
options. Under the modified prospective method, stock option awards that are
granted, modified or settled after January 1, 2006 will be measured and
accounted for in accordance with SFAS 123(R). Compensation cost for stock option
awards granted prior to, but not vested, as of January 1, 2006 would be based
on the grant date attributes originally used to value those awards for pro forma
purposes under SFAS 123.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4"
("SFAS 151"). 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 SFAS
151, these charges are required to be treated as period charges regardless of
whether they meet the criterion of unusually abnormal. Additionally, SFAS 151
requires that allocation of fixed production overhead to the cost of conversion
be based on the normal capacity of the production facilities. SFAS 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" ("SFAS 153"). 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. SFAS 153 is effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The application of this statement
did not have a material impact on the Company's financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 requires retroactive application of a
voluntary change in accounting principle to prior period financial statements
unless it is impracticable. SFAS 154 also requires that a change in method of
depreciation, amortization or depletion for long-lived, non-financial assets be
accounted for as a change in accounting estimate that is affected by a change in
accounting principle. SFAS 154 replaces APB Opinion No. 20, "Accounting Changes"
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements".
SFAS 154 is effective for fiscal years beginning after December 15, 2005. The
Company will adopt the provisions of SFAS 154 as of January 1, 2006 and does not
expect that its adoption will have a material impact on its financial
statements.
40
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information below provides information about the Company's market
sensitive financial instruments and includes "forward-looking statements" that
involve risks and uncertainties. Actual results could differ materially from
those expressed in the forward-looking statements. The Company's major market
risk exposures are changing interest rates, movements in foreign currency
exchange rates and potential price volatility of commodities used by the Company
in its manufacturing processes. The Company's policy is to manage interest rates
through the use of floating rate debt and interest rate swaps to adjust interest
rate exposures when appropriate, based upon market conditions. The Company
employs foreign currency denominated debt and currency swaps which serve to
partially offset the Company's exposure on its net investments in subsidiaries
denominated in foreign currencies. 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 order to limit the unanticipated
earnings fluctuations from volatility in commodity prices, the Company
selectively enters into commodity price swaps to convert variable raw material
costs to fixed costs. The Company does not hold or issue derivative financial
instruments for speculative or trading purposes. The Company is subject to other
foreign exchange market risk exposure in addition to the risks on its financial
instruments, such as possible impacts on its pricing and production costs, which
are difficult to reasonably predict, and have therefore not been included in the
table below. All items described are non-trading and are stated in U.S. dollars.
Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The Company
believes the carrying amounts of cash and cash equivalents, short-term
investments, accounts receivable (net of allowance for doubtful accounts),
prepaid expenses and other current assets, accounts payable, accrued
liabilities, income taxes payable and notes payable approximate fair value due
to the short-term nature of these instruments. The Company estimates the fair
value of its total long-term debt was $682.6 million versus its carrying value
of $680.9 million as of December 31, 2005. The fair value approximated the
carrying value since much of the Company's debt is variable rate and reflects
current market rates. The fixed rate Eurobonds are effectively converted to
variable rate as a result of an interest rate swap and the interest rates on
revolving debt and commercial paper are variable and therefore the fair value of
these instruments approximates their carrying values. The Company has fixed rate
Swiss franc denominated notes with estimated fair values that differ from their
carrying values. At December 31, 2005, the fair value of these instruments was
$147.4 million versus their carrying values of $145.7 million. The fair values
differ from the carrying values due to lower market interest rates at December
31, 2005 versus the rates at issuance of the notes.
Derivative Financial Instruments
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.
Foreign Exchange Risk Management The Company enters into forward
foreign exchange contracts to selectively hedge assets and liabilities
denominated in foreign currencies. Market value gains and losses are
recognized in income currently and the resulting gains or losses offset
foreign exchange gains or losses recognized on the foreign currency assets
and liabilities hedged. Determination of hedge activity is based upon
market conditions, the magnitude of the foreign currency assets and
liabilities and perceived risks. The Company's significant contracts
outstanding as of December 31, 2005 are summarized in the table that
follows. These foreign exchange contracts generally have maturities of less
than twelve months and the counterparties to the transactions are typically
large international financial institutions.
The Company has numerous investments in foreign subsidiaries. The net
assets of these subsidiaries are exposed to volatility in currency exchange
rates. Currently, the Company uses both non-derivative financial
instruments, including foreign currency denominated debt held at the parent
company level and long-term intercompany loans, for which settlement is not
planned or anticipated in the foreseeable future and derivative financial
instruments to hedge some of this exposure. Translation gains and losses
related to the net assets of the foreign subsidiaries are offset by gains
and losses in the non-derivative and derivative financial instruments
designated as hedges of net investments, which are included in accumulated
other comprehensive income.
At December 31, 2005 and 2004, the Company had Euro-denominated, Swiss
franc-denominated, and Japanese yen-denominated debt and cross-currency
interest rate swaps (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 December 31, 2005 and 2004, the
accumulated translation gains on investments in foreign subsidiaries,
primarily denominated in Euros, Swiss francs and Japanese yen, net of these
net investment debt hedges, were $56.2 million and $179.4 million,
respectively, which were included in accumulated other comprehensive
income.
41
Interest Rate Risk Management The Company uses interest rate swaps to
convert a portion of its variable rate debt to fixed rate debt. As of
December 31, 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 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. The other swap,
effective March, 2005, has a notional amount of 65 million Swiss francs,
and effectively converts the underlying variable interest rates to a fixed
rate of 4.2% for a term of seven years.
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 Euro
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) Euro-denominated financing; and (b) a
cross-currency basis swap which converted this variable rate
Euro-denominated financing to variable rate U.S. dollar-denominated
financing.
The Euro 350 million interest rate swap agreement was designated as a
fair value hedge of the Euro 350 million in fixed rate debt pursuant to
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). In accordance with SFAS No. 133, the interest
rate swap and underlying Eurobond have been marked-to-market via the income
statement. As of December 31, 2005 and 2004, the accumulated fair value of
the interest rate swap was $5.3 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 December 31, 2005 and 2004.
From inception through the first quarter of 2003, the cross-currency
element of the integrated transaction was not designated as a hedge and
changes in the fair value of the cross-currency element of the integrated
transaction were marked-to-market in the income statement, offsetting the
impact of the change in exchange rates on the Eurobonds that were also
recorded in the income statement. 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 $0.90) 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 4.29% on $315 million 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.
No gain or loss was recognized upon the amendment of the cross-currency
element of the integrated transaction, as the interest rate of 4.29% was
established to ensure that the fair value of the cash flow streams before
and after amendment were equivalent. As a result of the amendment, the
Company became economically exposed to the impact of exchange rates on the
final principal payment on the Euro 350 million Eurobonds and designated
the Euro 350 million 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.
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 of 2005. In June 2005,
the Company terminated the cross-currency element of the integrated
transaction in response to the rapid rise in USD short-term interest rates,
converting the debt back into a euro variable instrument. Upon termination,
the Company realized the remaining $20.1 million of accumulated value of
the swap. At December 31, 2004, the accumulated fair value of the
cross-currency element of the integrated transaction was $14.7 million,
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 December 31, 2004.
42
In the first quarter of 2005, the Company entered into cross-currency
interest rate swaps with a notional principal value of CHF 457 million
paying 3 month Swiss Franc Libor and receiving 3 month U.S. dollar Libor on
$384.4 million. These cross-currency swaps are designated as a net
investment hedge of the Swiss net assets. Additionally, in the fourth
quarter of 2005, the Company entered into cross-currency interest rate
swaps with a notional principal value of EUR 358 million paying 3 month
Euro Libor and receiving 3 month U.S. dollar Libor on $419.7 million.
These cross-currency swaps are designated as a net investment hedge of
the Euro denominated net assets. The interest rate differential is
recognized in earnings as it is accrued, the foreign currency revaluation
is recorded in Accumulated Other Comprehensive Income, net of tax effects.
The fair value of these swap agreements is the estimated amount the
Company would receive (pay) at the reporting date, taking into account the
effective interest rates and foreign exchange rates. As of December 31,
2005 and 2004, the estimated net fair values of the swap agreements were
$29.2 million and $35.7 million, respectively.
Commodity Price Risk Management The Company selectively enters into
commodity price swaps to effectively fix certain variable raw material
costs. These swaps are used purely to stabilize the cost of components used
in the production of certain of the Company's products. The Company
generally accounts for the commodity swaps as cash flow hedges under SFAS
133. As a result, the Company records the fair value of the swap primarily
through other comprehensive income based on the tested effectiveness of the
commodity swap. Realized gains or losses in Accumulated Other Comprehensive
Income are released and recorded to costs of products sold as the products
associated with the commodity swaps are sold.
Off Balance Sheet Arrangements
Consignment Arrangements
The Company consigns the precious metals used in the production of precious
metal alloy products from various financial institutions. Under these
consignment arrangements, the banks own the precious metal, and, accordingly,
the Company does not report this consigned inventory as part of its inventory on
its consolidated balance sheet. These agreements are cancelable by either party
at the end of each consignment period; however because the Company has access to
numerous financial institutions with excess capacity, consignment needs created
by cancellations can be shifted among the other institutions. The consignment
agreements allow the Company to take ownership of the metal at approximately the
same time customer orders are received and to closely match the price of the
metal acquired to the price charged to the customer (i.e., the price charged to
the customer is largely a pass through).
As precious metal prices fluctuate, the Company evaluates the impact of the
precious metal price fluctuation on its target gross margins for precious metal
alloy products and revises the prices customers are charged for precious metal
alloy products accordingly, depending upon the magnitude of the fluctuation.
While the Company does not separately invoice customers for the precious metal
content of precious metal alloy products, the underlying precious metal content
is the primary component of the cost and sales price of the precious metal alloy
products. For practical purposes, if the precious metal prices go up or down by
a small amount, the Company will not immediately modify prices, as long as the
cost of precious metals embedded in the Company's precious metal alloy price
closely approximates the market price of the precious metal. If there is a
significant change in the price of precious metals, the Company adjusts the
price for the precious metal alloys, maintaining its margin on the products.
At December 31, 2005, the Company had 130,026 troy ounces of precious
metal, primarily gold, platinum and palladium, on consignment for periods of
less than one year with a market value of $64.8 million. Under the terms of the
consignment agreements, the Company also makes compensatory payments to the
consignor banks based on a percentage of the value of the consigned precious
metals inventory. At December 31, 2005, the average annual rate charged by the
consignor banks was 1.0%. These compensatory payments are considered to be a
cost of the metals purchased and are recorded as part of the cost of products
sold.
43
EXPECTED MATURITY DATES
(represents notional amounts for derivative financial instruments)
December 31, 2005
2011 and Carrying Fair
2006 2007 2008 2009 2010 beyond Value Value
(dollars in thousands)
Financial Instruments
Notes Payable:
U.S. dollar denominated $ 1,049 $ - $ - $ - $ - $ - $ 1,049 $ 1,049
Average interest rate 2.53% 2.53%
Denmark krone denominated 26 - - - - - 26 26
Average interest rate 6.00% 6.00%
Euro denominated 171 - - - - - 171 171
Average interest rate 2.94% 2.94%
Japanese yen denominated 187 - - - - - 187 187
Average interest rate 1.38% 1.38%
------------------------------------------------------------------------------------
1,433 - - - - - - 1,433 1,433
2.49% 2.49%
Current Portion of
Long-term Debt:
U.S. dollar denominated 439 - - - - - 439 439
Average interest rate 4.29% 4.29%
Swiss franc denominated 103,412 - - - - - 103,412 104,215
Average interest rate 4.77% 4.77%
Euro denominated 306,928 - - - - - 306,928 306,928
Average interest rate 5.74% 5.74%
-----------------------------------------------------------------------------------
410,779 - - - - - 410,779 411,582
5.49% 5.49%
Long Term Debt:
U.S. dollar denominated - 78 53 14 6,700 - 6,844 6,844
Average interest rate 6.79% 7.16% 8.28% 4.35% 4.41%
Swiss franc denominated 42,273 - - - - 42,273 43,146
Average interest rate 4.49% 4.49%
Japanese yen denominated - 1,364 - - 106,359 - 107,723 107,723
Average interest rate 0.03% 0.42% 0.41%
Euro denominated - - - 113,264 - 113,264 113,264
Average interest rate 5.75% 5.75%
-----------------------------------------------------------------------------------
- 43,714 53 14 226,323 - 270,104 270,977
4.35% 7.16% 8.28% 3.20% 3.39%
Derivative Financial Instruments
Foreign Exchange
Forward Contracts:
Forward sale, 9.2 million
Australian dollars 3,886 - - - - - 70 70
Forward purchase, 1.8 million
Canadian dollars (1,542) - - - - - 13 13
Forward sale, 2.2 billion
Japanese yen 18,780 - - - - - 52 52
Forward sale, 14.3 million
Mexican Pesos 1,348 - - - - - (38) (38)
Forward sale, 22.0 million
Canadian dollars 18,900 - - - - - (140) (140)
Forward purchase, 1.2 billion
Japanese yen (10,412) - - - - - (145) (145)
Forward purchase, 1.0 million
Swiss francs (776) - - - - - (16) (16)
Interest Rate Swaps:
Interest rate swaps - Japanese yen - - - - - 106,359 (2,999) (2,999)
Average interest rate 1.6%
Interest rate swaps - Swiss francs - - - - - 49,407 (5,971) (5,971)
Average interest rate 4.2%
Interest rate swaps - Euro 419,348 - - - - - 5,316 5,316
Average interest rate 3.9%
Cross-Currency Basis Swaps:
Swiss franc 457.5 million @ 1.19 - - - - 384,380 - 36,630 36,630
pay CHF 3mo. Libor rec. USD 3mo. Libor -3.38%
Euros 358.0 million @ $1.17 - - - - 419,685 - (3,811) (3,811)
pay EUR 3mo. Libor rec. USD 3mo. Libor -1.87%
44
Management's Report on Internal Control Over Financial Reporting (restated)
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company's internal
control over financial reporting is designed 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. A company's internal control over financial reporting
includes those policies and procedures that pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness of internal control over financial reporting to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management of the Company has assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005. In making its
assessment of internal control over financial reporting, management used the
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a control deficiency, or combination of control
deficiencies, that results in a more than remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
The following material weakness has been identified by management in its
assessment of the effectiveness of the Company's internal control over financial
reporting. As of December 31, 2005, the Company did not maintain effective
controls over the complete and accurate presentation and disclosure of
short-term investments. Specifically, the Company's controls over the
completeness and accuracy of short-term investments in the consolidated balance
sheet and the related cash flows from the purchase and sale of short-term
investments in the consolidated statement of cash flows were not effective. This
control deficiency resulted in the restatement of the Company's 2005 and 2004
annual consolidated financial statements and the interim consolidated financial
statements for the first and second quarters of 2006 and all quarters of 2005
and an audit adjustment to the interim consolidated financial statements for the
third quarter of 2006. In addition, this control deficiency could result in a
misstatement of cash and cash equivalents, short-term investments and cash flows
from investing activities that would result in a material misstatement to annual
or interim consolidated financial statements that would not be prevented or
detected. Accordingly, the Company's management has determined that this control
deficiency constitutes a material weakness.
Management previously concluded that the Company maintained effective
internal control over financial reporting as of December 31, 2005. However,
management has subsequently determined that the material weakness described
above existed as of dateYear2005Day31Month12lstransDecember 31, 2005. As a
result, management has concluded that we did not maintain effective internal
control over financial reporting as of datelstransMonth12Day31Year2005December
31, 2005 based on criteria established in Internal Control - Integrated
Framework issued by the COSO. Accordingly, we have restated our report on
internal control over financial reporting.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
/s/ Gerald K. Kunkle, Jr. /s/William R. Jellison
Gerald K. Kunkle, Jr. William R. Jellison
Chairman and Senior Vice President and
Chief Executive Officer Chief Financial Officer
March 10, 2006, except for the restatement discussed in Note 18 to the
consolidated financial statements and the matter discussed in the penultimate
paragraph of Management's Report on Internal Control Over Financial Reporting,
as to which the date is November 6, 2006.
45
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of DENTSPLY International Inc.
We have completed integrated audits of DENTSPLY International Inc.'s 2005
and 2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2005 and an audit of its 2003
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements and financial statement schedules
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of DENTSPLY International, Inc. and its subsidiaries at
December 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 18 to the consolidated financial statements, the
Company restated its 2005 and 2004 consolidated financial statements.
Internal control over financial reporting
Also, we have audited, management's assessment, included in "Management's
Report on Internal Control Over Financial Reporting" appearing under Item
15(a)1, that DENTSPLY International Inc. did not maintain effective internal
control over financial reporting as of December 31, 2005, because of the effect
of not maintaining effective controls over the presentation and disclosure of
short-term investments, based on criteria established in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
46
A company's internal control over financial reporting is a process
designed 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. A company's internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment. As of December 31, 2005, the Company did not maintain
effective controls over the complete and accurate presentation and disclosure of
short-term investments. Specifically, the Company's controls over the
completeness and accuracy of short-term investments in the consolidated balance
sheet and the related cash flows from the purchase and sale of short-term
investments in the consolidated statement of cash flows were not effective. This
control deficiency resulted in the restatement of the Company's 2005 and 2004
annual consolidated financial statements and the interim consolidated financial
statements for the first and second quarters of 2006 and all quarters of 2005
and an audit adjustment to the interim consolidated financial statements for the
third quarter of 2006. In addition, this control deficiency could result in a
misstatement of cash and cash equivalents, short-term investments and cash flows
from investing activities that would result in a material misstatement to annual
or interim consolidated financial statements that would not be prevented or
detected. Accordingly, the Company's management has determined that this control
deficiency constitutes a material weakness. This material weakness was
considered in evaluating the nature, timing and extent of audit tests applied in
our audit of the 2005 consolidated financial statements, and our opinion
regarding the effectiveness of the Company's internal control over financial
reporting does not affect our opinion on those consolidated financial
statements.
Management and we previously concluded that the Company maintained
effective internal control over financial reporting as of December 31, 2005.
However, management has subsequently determined that the material weakness
described above existed as of December 31, 2005. Accordingly, Management's
Report on Internal Control Over Financial Reporting has been restated and our
present opinion on internal control over financial reporting, as presented
herein, is different from that expressed in our previous report.
In our opinion, management's assessment that DENTSPLY International Inc.
did not maintain effective internal control over financial reporting as of
December 31, 2005, is fairly stated, in all material respects, based on criteria
outlined in Internal Control--Integrated Framework issued by the COSO. Also, in
our opinion, because of the effects of the material weakness described above on
the achievement of the objectives of the control criteria, DENTSPLY
International Inc. has not maintained effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in
"Internal Control--Integrated Framework" issued by the COSO.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 10, 2006, except for the restatement discussed in Note 18 to the
consolidated financial statements and the matter discussed in the penultimate
paragraph of Management's Report on Internal Control Over Financial Reporting,
as to which the date is November 6, 2006.
47
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2005 2004 2003
(in thousands, except per share amounts)
Net sales (Note 4) $ 1,715,135 $ 1,694,232 $ 1,567,994
Cost of products sold 846,117 847,714 797,461
------- ------- -------
Gross profit 869,018 846,518 770,533
Selling, general and administrative expenses 563,341 544,264 498,850
Restructuring and impairment costs (Note 15) 232,755 7,124 3,700
------- ----- -----
Operating income 72,922 295,130 267,983
Other income and expenses:
Interest expense 17,773 25,098 26,079
Interest income (9,005) (5,469) (1,874)
Other (income) expense, net (Note 5) (6,884) 1,346 (7,418)
------ ----- ------
Income before income taxes 71,038 274,155 251,196
Provision for income taxes (Note 13) 25,625 63,869 81,343
-- ------ ------ ------
Income from continuing operations 45,413 210,286 169,853
Income from discontinued operations, net of tax (Note 6) - 42,879 4,330
------ ------ -----
Net income $ 45,413 $ 253,165 $ 174,183
========= ========= =========
Earnings per common share - basic (Note 2)
Continuing operations $ 0.57 $ 2.61 $ 2.16
Discontinued operations - 0.54 0.05
---- ---- ----
Total earnings per common share - basic $ 0.57 $ 3.15 $ 2.21
====== ====== ======
Earnings per common share - diluted (Note 2)
Continuing operations $ 0.56 $ 2.56 $ 2.11
Discontinued operations - 0.53 0.05
---- ---- ----
Total earnings per common share - diluted $ 0.56 $ 3.09 $ 2.16
====== ====== ======
Cash dividends declared per common share $ 0.25000 $ 0.21750 $ 0.19700
Weighted average common shares outstanding (Note 2):
Basic 79,595 80,387 78,823
Diluted 81,008 82,014 80,647
The accompanying notes are an integral part of these financial statements.
48
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2005 2004
(As Restated) (As Restated)
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 433,984 $ 403,541
Short-term investments 541 102,828
Accounts and notes receivable-trade, net (Note 1) 254,822 238,873
Inventories, net (Notes 1 and 7) 208,179 213,709
Prepaid expenses and other current assets (Notes 13 and 16) 132,517 97,458
------- ------
Total Current Assets 1,030,043 1,056,409
Property, plant and equipment, net (Notes 1 and 8) 316,218 399,880
Identifiable intangible assets, net (Notes 1 and 9) 68,600 265,731
Goodwill, net (Notes 1 and 9) 933,227 996,262
Other noncurrent assets (Notes 13, 14 and 16) 59,240 79,863
------ ------
Total Assets $2,407,329 $ 2,798,145
========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 82,317 $ 91,576
Accrued liabilities (Note 10) 159,846 179,765
Income taxes payable 86,859 60,387
Notes payable and current portion
of long-term debt (Note 11) 412,212 72,879
------- ------
Total Current Liabilities 741,234 404,607
Long-term debt (Note 11) 270,104 779,940
Deferred income taxes 42,912 58,196
Other noncurrent liabilities (Note 14) 111,311 110,829
------- -------
Total Liabilities 1,165,561 1,353,572
Minority interests in consolidated subsidiaries 188 600
--- ---
Commitments and contingencies (Note 17)
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 December 31, 2005 and December 31, 2004 814 814
Capital in excess of par value 170,607 189,277
Retained earnings 1,151,856 1,126,262
Accumulated other comprehensive income 56,454 164,100
Treasury stock, at cost, 2.5 million shares at December 31, 2005
and 0.8 million shares at December 31, 2004 (138,151) (36,480)
-------- -------
Total Stockholders' Equity 1,241,580 1,443,973
--------- ---------
Total Liabilities and Stockholders' Equity $ 2,407,329 $ 2,798,145
=========== ===========
The accompanying notes are an integral part of these financial statements.
49
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated
Capital in Other Unearned Total
Common Excess of Retained Comprehensive ESOP Treasury Stockholders'
Stock Par Value Earnings Income Compensation Stock Equity
(in thousands)
Balance at December 31, 2002 $ 814 $156,898 $ 730,971 $ 1,624 $ (1,899) $ (52,480) $ 835,928
Comprehensive Income:
Net income - - 174,183 - - - 174,183
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - - 95,984 - - 95,984
Unrealized gain on available-for-sale
securities - - - 5,005 - - 5,005
Net gain on derivative financial
instruments - - - 2,430 - - 2,430
Minimum pension liability adjustment - - - (123) - - (123)
Comprehensive Income 277,479
Exercise of stock options - 4,229 - - - 12,642 16,871
Tax benefit from stock options exercised - 5,825 - - - - 5,825
Cash dividends ($0.197 per share) - - (15,553) - - - (15,553)
Decrease in unearned ESOP compensation - - - - 1,519 - 1,519
---- ------- ------- ------- ----- ------- -----
Balance at December 31, 2003 814 166,952 889,601 104,920 (380) (39,838) 1,122,069
Comprehensive Income:
Net income - - 253,165 - - - 253,165
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - - 69,884 - - 69,884
Unrealized gain on available-for-sale
securities - - - 191 - - 191
Net loss on derivative financial
instruments - - - (9,086) - - (9,086)
Minimum pension liability adjustment - - - (1,809) - - (1,809)
Comprehensive Income 312,345
Exercise of stock options - 4,257 - - - 41,061 45,318
Tax benefit from stock options exercised - 18,068 - - - - 18,068
Treasury shares purchased - - - - - (37,703) (37,703)
Cash dividends ($0.2175 per share) - - (16,504) - - - (16,504)
Decrease in unearned ESOP compensation - - - - 380 - 380
---- ------- ------- ------- ----- ------- -----
Balance at December 31, 2004 814 189,277 1,126,262 164,100 - (36,480) 1,443,973
Comprehensive Income:
Net income - - 45,413 - - - 45,413
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - - (123,202) - - (123,202)
Unrealized gain on available-for-sale
securities - - - 22 - - 22
Net gain on derivative financial
instruments - - - 27,951 - - 27,951
Minimum pension liability adjustment - - - (12,417) - - (12,417)
Comprehensive Income (Loss) (62,233)
Exercise of stock options - (31,313) - - - 63,089 31,776
Tax benefit from stock options exercised - 12,643 - - - - 12,643
Treasury shares purchased - - - - - (164,760) 164,760)
Cash dividends ($0.250 per share) - - (19,819) - - - (19,819)
---- ------- ------- ------- ----- -------- ----------
Balance at December 31, 2005 $ 814 $ 170,607 $1,151,856 $ 56,454 $ - $(138,151) $ 1,241,580
===== ========= ========== ======== ====== ========= ===========
The accompanying notes are an integral part of these financial statements.
50
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------
2005 2004 2003
(in thousands)
Cash flows from operating activities:
Net income from continuing operations $ 45,413 $ 210,286 $ 169,853
-------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 42,031 40,841 36,897
Amortization 8,529 8,455 8,764
Deferred income taxes (91,777) 7,058 32,411
Restructuring and impairment costs 232,755 7,124 3,700
Other non-cash income (2,017) (394) (1,173)
Loss on disposal of property, plant and equipment 1,506 958 459
Gain on sale of PracticeWorks securities - - (5,806)
Non-cash ESOP compensation - 380 1,519
Changes in operating assets and liabilities, net of
acquisitions and divestitures:
Accounts and notes receivable-trade, net (31,589) 16,061 (4,899)
Inventories, net (7,460) 4,103 15,197
Prepaid expenses and other current assets (4,230) (765) 4,894
Other noncurrent assets (854) 1,643 (2,803)
Accounts payable (6,784) (1,386) 16,538
Accrued liabilities (14,465) 5,756 (26,561)
Income taxes 54,045 27,584 (271)
Other noncurrent liabilities 7,666 2,828 2,146
Cash flows (used in) provided by
discontinued operating activities - (24,273) 7,127
------- ------- -----
Net cash provided by operating activities 232,769 306,259 257,992
------- ------- -------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (18,097) (17,165) (15,038)
Expenditures for identifiable intangible assets (3,473) (7,573) (5,836)
Proceeds from sale of Gendex - 102,500 -
Proceeds from sale of PracticeWorks securities - - 23,506
Proceeds from sale of property, plant and equipment 555 1,788 2,959
Capital expenditures (45,293) (52,036) (73,157)
Purchases of short-term investments (148,546) (142,867) -
Liquidations of short-term investments 241,264 48,103 -
Other - (1,756) -
Realization of cross-currency swap value 23,836 13,664 10,736
Cash flows used in discontinued
operations' investing activities - (148) (1,811)
------- ------ ------
Net cash (used in) provided by investing activities 50,246 (55,490) (58,641)
------- ------ -------
Cash flows from financing activities:
Proceeds from long-term borrowings, net
of deferred financing costs - - 634
Payments on long-term borrowings (60,105) (22,151) (70,738)
(Decrease) increase in short-term borrowings (141) 624 (3,277)
Proceeds from exercise of stock options 31,776 45,318 16,871
Cash paid for treasury stock (164,760) (37,703) -
Cash dividends paid (19,141) (15,823) (14,999)
------- ------- -------
Net cash used in financing activities (212,371) (29,735) (71,509)
-------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (40,201) 18,752 10,261
------- ------ ------
Net increase (decrease) in cash and cash equivalents 30,443 239,786 138,103
Cash and cash equivalents at beginning of period 403,541 163,755 25,652
------- ------- ------
Cash and cash equivalents at end of period $ 433,984 $ 403,541 $ 163,755
========= ========= =========
The accompanying notes are an integral part of these financial statements.
51
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2005 2004 2003
(in thousands)
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized $ 19,864 $ 24,836 $ 25,796
Income taxes paid $ 62,291 $ 44,952 $ 57,733
The accompanying notes are an integral part of these financial statements.
52
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
DENTSPLY designs, develops, manufactures and markets a broad range of
products for the dental market. The Company believes that it is the world's
leading manufacturer and distributor of dental prosthetics, precious metal
dental alloys, dental ceramics, endodontic instruments and materials,
prophylaxis paste, dental sealants, ultrasonic scalers and crown and bridge
materials; the leading United States manufacturer and distributor of dental
handpieces, dental x-ray film holders, film mounts and bone substitute/grafting
materials; and a leading worldwide manufacturer or distributor of dental
injectable anesthetics, impression materials, orthodontic appliances, dental
cutting instruments and dental implants. The Company distributes its dental
products in over 120 countries under some of the most well established brand
names in the industry.
DENTSPLY is committed to the development of innovative, high-quality, cost
effective products for the dental market.
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenue and expense
during the reporting period. Actual results could differ from those estimates,
if different assumptions are made or if different conditions exist.
Cash and Cash Equivalents
Cash and cash equivalents include deposits with banks as well as highly
liquid time deposits with original maturities at the date of purchase of ninety
days or less.
Short-term Investments
Short-term investments are highly liquid time deposits with original
maturities at the date of purchase greater than ninety days and with remaining
maturities of approximately one year.
Accounts and Notes Receivable-Trade
The Company sells dental equipment and supplies both through a worldwide
network of distributors and directly to end users. For customers on credit
terms, the Company performs ongoing credit evaluation of those customers'
financial condition and generally does not require collateral from them. The
Company establishes allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Accounts and notes receivable-trade are stated net of these allowances which
were $14.8 million and $17.2 million at December 31, 2005 and 2004,
respectively. The Company recorded provisions for doubtful accounts, included in
"Selling, general and administrative expenses", of approximately $2.1 million,
$2.1 million and $0.6 million for 2005, 2004 and 2003, respectively.
Certain of the Company's customers are offered cash rebates based on
targeted sales increases. 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)".
53
Inventories
Inventories are stated at the lower of cost or market. At December 31, 2005
and 2004, the cost of $10.3 million, or 5%, and $10.8 million, or 5%,
respectively, of inventories was determined by the last-in, first-out ("LIFO")
method. The cost of other inventories was determined by the first-in, first-out
("FIFO") or average cost methods. The Company establishes reserves for inventory
estimated to be obsolete or unmarketable equal to the difference between the
cost of inventory and estimated market value based upon assumptions about future
demand and market conditions.
If the FIFO method had been used to determine the cost of LIFO inventories,
the amounts at which net inventories are stated would be higher than reported at
December 31, 2005 and December 31, 2004 by $2.6 million and $1.4 million,
respectively.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived
Assets
Assessment of the potential impairment of goodwill, indefinite-lived
intangible assets and other long-lived assets is an integral part of the
Company's normal ongoing review of operations. Testing for potential impairment
of these assets is significantly dependent on numerous assumptions and reflects
management's best estimates at a particular point in time. The dynamic economic
environments in which the Company's businesses operate and key economic and
business assumptions with respect to projected selling prices, increased
competition and introductions of new technologies can significantly affect the
outcome of impairment tests. Estimates based on these assumptions may differ
significantly from actual results. Changes in factors and assumptions used in
assessing potential impairments can have a significant impact on both the
existence and magnitude of impairments, as well as the time at which such
impairments are recognized. If there are unfavorable changes in these
environments or assumptions, future cash flows, the key variable in assessing
the impairment of these assets, may decrease and as a result the Company may be
required to recognize impairment charges. Future changes in the environment and
the economic outlook for the assets being evaluated could also result in
additional impairment charges being recognized. Information with respect to the
Company's significant accounting policies on long-lived assets for each category
of long-lived asset is discussed below.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Except for leasehold improvements, depreciation for financial
reporting purposes is computed by the straight-line method over the
following estimated useful lives: buildings - generally 40 years and
machinery and equipment - 4 to 15 years. The cost of leasehold improvements
is amortized over the shorter of the estimated useful life or the term of
the lease. Maintenance and repairs are charged to operations; replacements
and major improvements are capitalized. These assets are reviewed for
impairment whenever events or circumstances suggest that the carrying
amount of the asset may not be recoverable in accordance with Statement of
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets". 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.
As a result of changes in events and circumstances surrounding the
indefinite-lived injectable anesthetic intangible asset acquired from
AstraZeneca in 2001 and the assets associated with the pharmaceutical
manufacturing facility, additional impairment analyses were conducted
during the third and fourth quarters of 2005, resulting in impairment
charges being recorded in both quarters (see Note 15 - RESTRUCTURING AND
IMPAIRMENT COSTS (INCOME)).
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 suggest that the
carrying amount of the asset may not be recoverable in accordance with SFAS
144. 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.
54
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 at
least an annual impairment test be applied to goodwill and indefinite-lived
intangible assets. The Company performs impairment tests on at least an
annual basis using a fair value approach rather than an evaluation of the
undiscounted cash flows. If impairment is identified on goodwill 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 performed the required annual impairment tests in the
second quarter of 2005 and no impairment was identified. This impairment
assessment included an evaluation of approximately 20 reporting units. In
addition to the annual impairment test, 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 events or through the
annual development of operating unit business plans in the fourth quarter
of each year or otherwise, impairment assessments are performed as
necessary.
As a result of changes in events and circumstances surrounding the
indefinite-lived injectable anesthetic intangible asset acquired from
AstraZeneca in 2001 and the assets associated with the pharmaceutical
manufacturing facility, additional impairment analyses were conducted
during the third and fourth quarters of 2005, resulting in impairment
charges being recorded in both quarters (see Note 15 - RESTRUCTURING
AND IMPAIRMENT COSTS (INCOME)).
Derivative Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", on
January 1, 2001. This standard, as amended by SFAS 138 and 149, requires that
all derivative instruments be recorded on the balance sheet at their fair value
and that changes in fair value be recorded each period in current earnings or
Accumulated Other Comprehensive Income.
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.
Pension and Other Postretirement Benefits
Substantially all of the employees of the Company and its subsidiaries are
covered by government or Company-sponsored defined benefit or defined
contribution plans. Additionally, certain union and salaried employee groups in
the United States are covered by a postretirement healthcare plan. Costs for
Company-sponsored plans are based on expected return on plan assets, discount
rates, employee compensation increase rates and health care cost trends.
Expected return on plan assets, discount rates, and health care cost trend
assumptions are particularly important when determining the Company's benefit
obligations and net periodic benefit costs associated with postretirement
benefits. Changes in these assumptions can impact the Company's pretax earnings.
In determining the cost of postretirement benefits, certain assumptions are
established annually to reflect market conditions and plan experience to
appropriately reflect the expected costs as actuarially determined. These
assumptions include medical inflation trend rates, discount rates, employee
turnover and mortality rates. The Company predominantly uses liability durations
in establishing its discount rates, which are observed from indices of
high-grade corporate bond yields in the respective economic regions of the
plans. The expected return on plan assets is the weighted average long-term
expected return based upon asset allocations and historic average returns for
the markets where the assets are invested, principally in foreign locations.
Additional information related to the impact of changes in these assumptions is
provided in Note 14 to the Consolidated Financial Statements.
55
Litigation
The Company and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company records liabilities when
a loss is probable and can be reasonably estimated. These estimates are made by
management based on an analysis made by internal and external legal counsel
which considers information known at the time. Legal costs related to these
lawsuits are expensed as incurred.
Foreign Currency Translation
The functional currency for foreign operations, except for those in highly
inflationary economies, has been determined to be the local currency.
Assets and liabilities of foreign subsidiaries are translated at exchange
rates on the balance sheet date; revenue and expenses are translated at the
average year-to-date rates of exchange. The effects of these translation
adjustments are reported in stockholders' equity within accumulated other
comprehensive income. During the year ended December 31, 2005, the Company had
translation losses of $172.3 million, partially offset by gains of $49.1 million
on its loans designated as hedges of net investments. During the years ended
December 31, 2004 and 2003, the Company had translation gains of $104.9 million
and $153.0 million, respectively, partially offset by losses of $35.0 million
and $57.0 million, respectively, on its loans designated as hedges of net
investments.
Exchange gains and losses arising from transactions denominated in a
currency other than the functional currency of the entity involved and
translation adjustments in countries with highly inflationary economies are
included in income. Exchange gains of $6.7 million and $0.3 million in 2005 and
2003, respectively, and exchange losses of $1.2 million in 2004 are included in
"Other expense (income), net".
Revenue Recognition
Revenue, net of related discounts and allowances, is recognized when the
earnings process is complete. This occurs when products are shipped to or
received by the customer in accordance with the terms of the agreement, title
and risk of loss have been transferred, collectibility is probable and pricing
is fixed or determinable. Net sales include shipping and handling costs
collected from customers in connection with the sale.
A significant portion of the Company's net sales is comprised of sales of
precious metals generated through its precious metal alloy product offerings. As
the precious metal content of the Company's sales is largely a pass-through to
customers, 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 typically adjusted when the prices of
underlying precious metals change. The precious metals content of sales was
$171.2 million, $212.3 million and $203.7 million for 2005, 2004 and 2003,
respectively.
Warranties
The Company provides warranties on certain equipment products. Estimated
warranty costs are accrued when sales are made to customers. Estimates for
warranty costs are based primarily on historical warranty claim experience.
Research and Development Costs
Research and development ("R&D") costs relate primarily to internal costs
for salaries and direct overhead costs. In addition, the Company contracts with
outside vendors to conduct R&D activities. All such R&D costs are charged to
expense when incurred. The Company capitalizes the costs of equipment that have
general R&D uses and expenses such equipment that is solely for specific R&D
projects. The depreciation related to this capitalized equipment is included in
the Company's R&D costs. R&D costs are included in "Selling, general and
administrative expenses" and amounted to approximately $47.0 million, $44.6
million and $43.3 million for 2005, 2004 and 2003, respectively.
56
Income Taxes
Income taxes are determined using the liability method of accounting for
income taxes in accordance with Statement of Financial Accounting Standards No.
109 ("SFAS 109"). Under SFAS 109, tax expense includes US and international
income taxes plus the provision for US taxes on undistributed earnings of
international subsidiaries not deemed to be permanently invested. Tax credits
and other incentives reduce tax expense in the year the credits are claimed.
Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effect of such temporary
differences is reported as deferred income taxes. Deferred tax assets are
recognized if it is more likely than not that the assets will be realized in
future years. The Company establishes a valuation allowance for deferred tax
assets for which realization is not likely.
The Company accounts for income tax contingencies in accordance with the
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies".
Earnings Per Share
Basic earnings per share is calculated by dividing net earnings by the
weighted average number of shares outstanding for the period. Diluted earnings
per share is calculated by dividing net earnings by the weighted average number
of shares outstanding for the period, adjusted for the effect of an assumed
exercise of all dilutive options outstanding at the end of the period.
Stock Compensation
The Company has stock-based employee compensation plans which are described
more fully in Note 12 - STOCKHOLDERS' EQUITY . The Company applies the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees", and related interpretations in
accounting for stock compensation 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 (see also discussion of SFAS
123R in New Accounting Pronouncements).
Year Ended December 31,
2005 2004 2003
(in thousands, except per share amounts)
Net income as reported $ 45,413 $ 253,165 $ 174,183
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (13,784) (11,668) (11,062)
------- ------- -------
Pro forma net income $ 31,629 $ 241,497 $ 163,121
======== ========= =========
Basic earnings per common share
As reported $ 0.57 $ 3.15 $ 2.21
Pro forma under fair value based method $ 0.40 $ 3.00 $ 2.07
Diluted earnings per common share
As reported $ 0.56 $ 3.09 $ 2.16
Pro forma under fair value based method $ 0.39 $ 2.95 $ 2.02
APB 25
Basic 79,595 80,387 78,823
Diluted 81,008 82,014 80,647
SFAS 123
Basic 79,595 80,387 78,823
Diluted 81,115 81,994 80,705
57
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes foreign currency translation
adjustments related to the Company's foreign subsidiaries, net of the related
changes in certain financial instruments hedging these foreign currency
investments. In addition, changes in the fair value of the Company's
available-for-sale investment securities and certain derivative financial
instruments and changes in its minimum pension liability are recorded in other
comprehensive income (loss). These changes are recorded in other comprehensive
income (loss) net of any related tax effects. For the years ended December 31,
2005, 2004 and 2003, these adjustments were net of tax effects of $48.1 million,
$32.0 million and $29.1 million, respectively, primarily related to foreign
currency translation adjustments.
The balances included in accumulated other comprehensive income in the
consolidated balance sheets are as follows:
December 31,
2005 2004
(in thousands)
Foreign currency translation adjustments $ 56,214 $ 179,416
Net gain/(loss) on derivative financial
instruments 15,312 (12,639)
Unrealized gain (loss) on available-for-sale securities 364 342
Minimum pension liability (15,436) (3,019)
------- ------
$ 56,454 $ 164,100
======== =========
The cumulative foreign currency translation adjustments included
translation gains of $129.0 million and $297.9 million as of December 31, 2005
and 2004, respectively, offset by losses of $72.8 million and $118.5 million,
respectively, on loans designated as hedges of net investments.
Revisions in Classification
Certain revisions in classification have been made to prior years' data in
order to conform to the current year presentation.
The Company has revised its 2004 and 2003 cash flow statement
classifications to present realization of cross-currency swap value of $13.7
million and $10.7 million, respectively, into cash flows from investing
activities from cash flows from financing activities
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" ("SFAS 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 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 will use the modified prospective transition
method, utilizing the Black-Scholes option pricing model for the calculation of
the fair value of its employee stock options. Under the modified prospective
method, stock option awards that are granted, modified or settled after January
1, 2006 will be measured and accounted for in accordance with SFAS 123(R).
Compensation cost for stock option awards granted prior to, but not vested, as
of January 1, 2006 would be based on the grant date attributes originally used
to value those awards for pro forma purposes under SFAS 123.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4"
("SFAS 151"). 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 SFAS
151, these charges are required to be treated as period charges regardless of
whether they meet the criterion of unusually abnormal. Additionally, SFAS 151
requires that allocation of fixed production overhead to the cost of conversion
be based on the normal capacity of the production facilities. SFAS 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.
58
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Nonmonetary Assets an amendment of APB Opinion
No. 29" ("SFAS 153"). This statement amends APB Opinion No. 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. SFAS 153 is effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The application of this statement
did not have a material impact on the Company's financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 requires retroactive application of a
voluntary change in accounting principle to prior period financial statements
unless it is impracticable. SFAS 154 also requires that a change in method of
depreciation, amortization or depletion for long-lived, non-financial assets be
accounted for as a change in accounting estimate that is affected by a change in
accounting principle. SFAS 154 replaces APB Opinion No. 20, "Accounting Changes"
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements".
SFAS 154 is effective for fiscal years beginning after December 15, 2005. The
Company will adopt the provisions of SFAS 154 as of January 1, 2006 and does not
expect that its adoption will have a material impact on its financial
statements.
NOTE 2 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
Earnings per common share
-----------------------------------
Income From Income From
Continuing Discontinued Net Continuing Discontinued
Operations Operations Income Shares Operations Operations Total
(in thousands, except per share amounts)
Year Ended December 31, 2005
Basic $ 45,413 $ - $ 45,413 79,595 $ 0.57 $ - $ 0.57
Incremental shares from
assumed exercise of
dilutive options - - - 1,413
-------- ------- ------- ------
Diluted $ 45,413 $ - $ 45,413 81,008 $ 0.56 $ - $ 0.56
======== ======= ======== ======
Year Ended December 31, 2004
Basic $ 210,286 $ 42,879 $ 253,165 80,387 $ 2.61 $ 0.54 $ 3.15
Incremental shares from
assumed exercise of
dilutive options - - - 1,627
-------- ------- -------- ------
Diluted $ 210,286 $ 42,879 $ 253,165 82,014 $ 2.56 $ 0.53 $ 3.09
========= ======= ======== ======
Year Ended December 31, 2003
Basic $ 169,853 $ 4,330 $ 174,183 78,823 $ 2.16 $ 0.05 $ 2.21
Incremental shares from
assumed exercise of
dilutive options - - - 1,824
-------- ------- -------- ------
Diluted $ 169,853 $ 4,330 $ 174,183 80,647 $ 2.11 $ 0.05 $ 2.16
======== ====== ======== ======
Options to purchase 2.2 million, 1.0 million and 1.4 million shares of
common stock that were outstanding during the years ended 2005, 2004 and 2003,
respectively, were not included in the computation of diluted earnings per share
since the options' exercise prices were greater than the average market price of
the common shares and, therefore, the effect would be antidilutive.
59
NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES
Acquisitions
The Company accounts for all acquisitions under the purchase method of
accounting; accordingly, the results of the operations acquired are included in
the accompanying financial statements for the periods subsequent to the
respective dates of the acquisitions. The purchase prices are allocated on the
basis of estimates of the fair values of assets acquired and liabilities
assumed.
In March 2001, the Company acquired the know-how, patent and trademark
rights to the non-injectable anesthetic product known as Oraqix(R) with a
purchase price composed of the following: a $2.0 million payment upon submission
of a New Drug Application ("NDA") in the U.S. and a Marketing Authorization
Application ("MAA") in Europe for the Oraqix(R) product under development;
payments of $6.0 million and $2.0 million upon the approval of the NDA and MAA,
respectively, for licensing rights; and a $10.0 million prepaid royalty payment
upon approval of both applications. The $2.0 million payment related to the
application filings was accrued and classified within the restructuring and
other costs line item during the fourth quarter of 2001 and was paid during the
first quarter of 2002. The MAA was approved in Sweden, the European Union member
reference state, and the Company made the required $2.0 million payment to
AstraZeneca in the second quarter of 2003. The NDA application was approved in
December 2003 and as a result the remaining payments of $16.0 million became due
and were accrued in 2003 and the payments were made in January 2004. These
payments were capitalized and will be amortized over the term of the licensing
agreements.
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. In 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. In May 2005, the Company also
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 $18.1 million (net of
cash acquired of $2.7 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
estimates of the fair values of assets acquired and liabilities assumed. The
current aggregate purchase price allocation for these acquisitions is as
follows:
(in thousands)
Current assets $ 6,033
Property, plant and equipment 2,063
Identifiable intangible assets and goodwill 17,094
Other long-term assets 26
------
Total assets 25,216
------
Current liabilities (5,070)
Other long-term liabilities (2,049)
------
Total liabilities (7,119)
------
Net assets $ 18,097
========
60
Divestitures
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. 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, dental laboratory products, and specialty dental products.
NOTE 4 - SEGMENT AND GEOGRAPHIC INFORMATION
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 in 2005, 2004 and 2003.
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 - SIGNIFICANT ACCOUNTING POLICIES).
The Company measures segment income for reporting purposes as net operating
profit before restructuring, impairment, interest and taxes. A description of
the services provided within each of the Company's four reportable segments is
provided below. The disclosure below reflects the Company's segment reporting
structure through December 31, 2005. In January 2006, the Company reorganized
its operating group structure consolidating into three operating groups. Segment
information will be disclosed under this new structure beginning in the first
quarter of 2006.
A description of the activities 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, the 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, the 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.
61
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.
The following table sets forth information about the Company's operating
groups for 2005, 2004 and 2003.
Third Party Net Sales
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 343,310 $ 319,665 $ 308,827
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 505,675 577,426 520,850
Australia/Latin America/Endodontics/
Non-Dental 359,870 339,130 315,399
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 509,439 461,320 424,659
All Other (a) (3,159) (3,309) (1,741)
--------- --------- ----------
Total $ 1,715,135 $ 1,694,232 $ 1,567,994
============ =========== ===========
Third Party Net Sales, excluding precious metal content
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 342,254 $ 319,647 $ 308,827
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 387,484 422,198 373,822
Australia/Latin America/Endodontics/
Non-Dental 357,848 337,380 313,345
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 459,489 405,956 370,093
All Other (a) (3,159) (3,309) (1,741)
--------- --------- ----------
Total excluding Precious Metal Content 1,543,916 1,481,872 1,364,346
Precious Metal Content 171,219 212,361 203,648
--------- --------- ----------
Total including Precious Metal Content $1,715,135 $ 1,694,233 $ 1,567,994
========== =========== ===========
(a) Includes: operating expenses of two distribution warehouses not managed
by named segments, Corporate and inter-segment eliminations.
62
Intersegment Net Sales
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 314,070 $ 316,462 $ 309,367
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 161,290 164,205 145,791
Australia/Latin America/Endodontics/
Non-Dental 65,076 56,500 54,651
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 40,743 34,609 35,609
All Other (a) 165,497 161,520 161,930
--------- --------- ----------
Total Intersegment Net Sales 746,676 733,296 707,348
Eliminations (746,676) (733,296) (707,348)
--------- --------- ----------
Total $ - $ - $ -
========= ========= ==========
Depreciation and Amortization
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 10,089 $ 7,958 $ 6,956
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 13,949 13,697 12,228
Australia/Latin America/Endodontics/
Non-Dental 11,382 10,635 9,682
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 9,719 11,628 10,910
All Other (a) 5,421 5,378 5,885
--------- --------- ---------
Total $ 50,560 $ 49,296 $ 45,661
========= ========= =========
(a) Includes: operating expenses of two distribution warehouses not managed
by named segments, Corporate and inter-segment eliminations.
63
Segment Operating Income
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 95,598 $ 97,584 $ 98,121
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 49,437 74,756 56,408
Australia/Latin America/Endodontics/
Non-Dental 146,768 143,472 130,618
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 77,797 54,743 45,310
All Other (a) (63,923) (68,301) (58,774)
--------- --------- ---------
Segment Operating Income 305,677 302,254 271,683
Reconciling Items:
Restructuring and impairment costs (b) 232,755 7,124 3,700
Interest Expense 17,773 25,098 26,079
Interest Income (9,005) (5,469) (1,874)
Other (income) expense, net (6,884) 1,346 (7,418)
--------- --------- ---------
Income before income taxes $ 71,038 $ 274,155 $ 251,196
========= ========= =========
Assets
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada (b) $ 179,516 $ 360,977 $ 309,995
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 607,346 713,592 669,876
Australia/Latin America/Endodontics/
Non-Dental 566,281 582,828 573,693
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia (b) 380,691 390,140 411,299
All Other (a) 673,495 750,608 480,724
--------- --------- ---------
Total $ 2,407,329 $ 2,798,145 $ 2,445,587
========= ========= =========
(a) Includes: operating expenses of two distribution warehouses not managed
by named segments, Corporate and inter-segment eliminations.
(b) During 2005, the Company recorded a $233.1 million ($179.6 million
after tax) impairment and restructuring charge against the
indefinite-lived injectable anesthetic asset and the long-lived
pharmaceutical manufacturing facility assets. Of this charge, $209.9
million ($166.1 million after tax) was recorded in the U.S. Consumable
Business/Canada, and the remaining $23.3 million ($13.5 million after
tax) was recorded in the U.S. Dental Laboratory
Business/Implants/Orthodontics/Japan/Asia. This impairment does not
impact the Company's needle-free Oraqix(R) product.
64
Capital Expenditures
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 18,002 $ 23,581 $ 36,493
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 5,834 8,327 9,195
Australia/Latin America/Endodontics/
Non-Dental 10,393 10,888 10,819
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 5,747 6,356 7,190
All Other (a) 5,317 2,884 9,460
--------- --------- ----------
Total $ 45,293 $ 52,036 $ 73,157
========= ========= =========
(a) Includes: one operating division not managed by named segments,
operating expenses of two distribution warehouses not managed by named
segments, Corporate and inter-segment eliminations.
Geographic Information
The following table sets forth information about the Company's operations
in different geographic areas for 2005, 2004 and 2003. Net sales reported below
represent revenues for shipments made by operating businesses located in the
country or territory identified, including export sales. Assets reported
represent those held by the operating businesses located in the respective
geographic areas.
United Other
States Germany Foreign Consolidated
(in thousands)
2005
Net sales $ 756,627 $ 365,984 $ 592,524 $ 1,715,135
Long-lived assets 150,085 104,997 136,511 391,593
2004
Net sales $ 727,875 $ 436,047 $ 530,310 $ 1,694,232
Long-lived assets 204,807 125,897 136,511 467,215
2003
Net sales $ 705,309 $ 395,170 $ 467,515 $ 1,567,994
Long-lived assets 213,607 121,481 129,059 464,147
65
Product and Customer Information
Year Ended December 31,
2005 2004 2003
(in thousands)
Dental consumables $ 618,909 $ 578,128 $ 554,172
Dental laboratory products 473,942 559,278 521,079
Specialty dental products 580,509 520,001 459,193
Non-dental 41,775 36,825 33,550
--------- --------- ---------
$ 1,715,135 $ 1,694,232 $1,567,994
Dental consumable products consist of dental sundries and small equipment
products used in dental offices in the treatment of patients. DENTSPLY's
products in this category include dental injectable anesthetics, prophylaxis
paste, dental sealants, impression materials, restorative materials, bone
grafting materials, tooth whiteners and topical fluoride. The Company
manufactures thousands of different consumable products marketed under more than
a hundred brand names. Small equipment products consist of various durable goods
used in dental offices for treatment of patients. DENTSPLY's small equipment
products include high and low speed handpieces, intraoral curing light systems
and ultrasonic scalers and polishers.
Dental laboratory products are used in dental laboratories in the
preparation of dental appliances. DENTSPLY's products in this category include
dental prosthetics, including artificial teeth, precious metal dental alloys,
dental ceramics, and crown and bridge materials and equipment products used in
laboratories consisting of computer aided machining (CAM) ceramics systems and
porcelain furnaces.
Specialty dental products are used for specific purposes within the dental
office and laboratory settings. DENTSPLY's products in this category include
endodontic (root canal) instruments and materials, dental implants, and
orthodontic appliances and accessories.
Non-dental products are comprised primarily of investment casting materials
that are used in the production of jewelry, golf club heads and other casted
products.
One customer, Henry Schein, Incorporated, accounted for more than ten
percent of consolidated net sales in 2005, accounting for 11.1% of all sales. No
customers accounted for more than ten percent of consolidated net sales in 2004
or 2003. Third party export sales from the United States are less than ten
percent of consolidated net sales.
NOTE 5 - OTHER (INCOME) EXPENSE
Other (income) expense, net consists of the following:
Year Ended December 31,
----------------------------------------------
2005 2004 2003
(in thousands)
Foreign exchange transaction (gains) losses $(6,668) $ 1,179 $ (263)
(Gain) loss on PracticeWorks securities - - (7,395)
Minority interests (372) 223 (312)
Other 156 (56) 552
------ ------ ------
$(6,884) $ 1,346 $(7,418)
======= ======= =======
66
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, dental laboratory
products, and specialty dental products.
During the first quarter of the year 2004, the Company discontinued the
operations of the Company's dental needle business.
The Gendex business and the dental needle business are distinguishable as
separate components of the Company in accordance with Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets". The Gendex business and the needle business were
classified as held for sale at December 31, 2003 in accordance with SFAS 144.
The statements of operations and related financial statement disclosures for all
prior years have been restated to present the Gendex business and needle
business as discontinued operations separate from continuing operations.
Discontinued operations net revenue and income before income taxes for the
periods presented were as follows:
Year Ended December 31,
2005 2004 2003
(in thousands)
Net sales $ - $ 17,519 $ 106,313
Gain on sale of Gendex - 72,943 -
Income before income taxes (including gain on
sale in 2004) - 72,803 7,329
NOTE 7 - INVENTORIES
Inventories consist of the following:
December 31,
2005 2004
(in thousands)
Finished goods $127,569 $130,150
Work-in-process 40,887 42,427
Raw materials and supplies 39,723 41,132
------ ------
$208,179 $213,709
======== ========
67
NOTE 8- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
2005 2004
(in thousands)
Assets, at cost:
Land $ 41,938 $47,355
Buildings and improvements 194,443 197,029
Machinery and equipment 327,708 331,409
Construction in progress 10,402 73,447
------ ------
574,491 649,240
Less: Accumulated depreciation 258,273 249,360
------- -------
$316,218 $399,880
======== ========
NOTE 9 - GOODWILL AND INTANGIBLE ASSETS
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets". This statement requires
that the amortization of goodwill and indefinite-lived intangible assets be
discontinued and instead an annual impairment test approach be applied. The
impairment tests are required to be performed annually (or more often if events
or changes in circumstances indicate that the goodwill or indefinite-lived
intangible assets might be impaired) and are based upon a fair value approach
rather than an evaluation of undiscounted cash flows. If goodwill impairment is
identified, the resulting charge is determined by recalculating goodwill through
a hypothetical purchase price allocation of the fair value and reducing the
current carrying value to the extent it exceeds the recalculated goodwill. If
impairment is identified on indefinite-lived intangibles, the resulting charge
reflects the excess of the asset's carrying cost over its fair value. Other
intangible assets with finite lives will continue to be amortized over their
useful lives.
The Company performed the required annual impairment tests of goodwill and
indefinite-lived intangible assets in the second quarter of 2005 and no
impairment was identified. This impairment assessment included 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.
As a result of changes in events and circumstances surrounding the
indefinite-lived injectable intangible asset, an event driven impairment
analysis was performed at the end of the third quarter of 2005 resulting in the
recording of an impairment charge. The Company continued to monitor this asset
in conjunction with the other assets associated with the Company's injectable
anesthetic business throughout the fourth quarter of 2005, and as a result of
additional event driven impairment analyses performed in December of 2005,
additional impairment charges were recorded (see Note 15 - RESTRUCTURING AND
IMPAIRMENT COSTS (INCOME)).
68
The table below presents the net carrying values of goodwill and
identifiable intangible assets.
December 31,
2005 2004
(in thousands)
Goodwill $ 933,227 $ 996,262
========= =========
Indefinite-lived identifiable intangible assets:
Trademarks $ 4,080 $ 4,080
Licensing agreements - 178,610
Finite-lived identifiable intangible assets 64,520 83,041
------ ------
Total identifiable intangible assets $ 68,600 $ 265,731
======== =========
A reconciliation of changes in the Company's goodwill is as follows:
December 31,
2005 2004
(in thousands)
Balance, beginning of the year $ 996,262 $ 963,264
Acquisition activity 16,275 509
Changes to purchase price allocation (9,481) (9,446)
Effects of exchange rate changes (69,829) 41,935
------- ------
Balance, end of the year $ 933,227 $ 996,262
========= =========
The change in the net carrying value of goodwill in 2005 was primarily due
to foreign currency translation adjustments, three acquisitions and changes to
the purchase price allocations of the Degussa Dental, GAC, and Friadent
acquisitions. The purchase price allocation changes were primarily related to
the reversal of preacquisition tax contingencies due to expiring statutes. The
change in the net carrying value of goodwill in 2004 was primarily due to
foreign currency translation adjustments, changes to the purchase price
allocations of the Degussa Dental and Friadent acquisitions and a small
acquisition. The purchase price allocation changes were primarily related to the
reversal of preacquisition tax contingencies due to expiring statutes.
The decrease in indefinite-lived licensing agreements was due to the impairment
of these assets. These intangible assets relate exclusively to the royalty-free
licensing rights to AstraZeneca's anesthetic trademarks and related products
(see Note 15 - RESTRUCTURING AND IMPAIRMENT COSTS (INCOME)). The change in
finite-lived identifiable intangible assets was due primarily to amortization
for the period, the purchase of new technology and foreign currency translation
adjustments.
Goodwill by reportable segment is as follows:
December 31,
2005 2004
(in thousands)
U.S. Consumable Business / Canada $ 86,155 $ 86,155
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory 333,503 381,379
Business
Australia/Latin America/Endodontics/
Non-Dental 173,523 170,730
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 340,046 357,998
------- --------
Total $ 933,227 $ 996,262
========= =========
69
Finite-lived identifiable intangible assets consist of the following:
December 31, 2005 December 31, 2004
--------------------------------------------- ------------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
(in thousands)
Patents $ 54,467 $ (39,643) $ 14,824 $56,330 $ (37,394) $ 18,936
Trademarks 33,913 (9,486) 24,427 36,782 (8,598) 28,184
Licensing agreements 30,158 (10,622) 19,536 31,960 (10,308) 21,652
Other 18,928 (13,195) 5,733 23,643 (9,374) 14,269
------ ------- ----- ------ ------ ------
$ 137,467 $ (72,946) $ 64,520 $ 148,715 $ (65,674) $ 83,041
========= ========= ======== ========= ========= ========
Amortization expense for finite-lived identifiable intangible assets for
2005, 2004 and 2003 was $8.5 million, $8.5 million and $8.8 million,
respectively. The annual estimated amortization expense related to these
intangible assets for each of the five succeeding fiscal years is $6.9 million,
$6.0 million, $5.6 million, $5.4 million and $4.3 million for 2006, 2007, 2008,
2009 and 2010, respectively.
NOTE 10 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
2005 2004
(in thousands)
Payroll, commissions, bonuses, other
cash compensation and employee benefits $ 54,294 $ 57,738
General insurance 17,441 15,844
Sales and marketing programs 17,429 15,757
Professional and legal costs 13,559 21,840
Restructuring and other costs (Note 15) 4,871 6,224
Warranty liabilities 3,536 3,681
Other (a) 48,716 58,681
------ ------
$159,846 $179,765
======== ========
(a) - The decrease in other liabilities was primarily caused by the impact
of translation due to the strengthening of the dollar during 2005 against most
of the local currencies in which the Company's subsidiaries conduct business. As
a result of this strengthening of the dollar, the impact of translation on other
accrued liabilities was approximately $3.1 million. Additionally, due to lower
debt levels, interest rate swaps, and the timing of interest payments, the
accrued interest was approximately $2.1 million lower in 2005 than in 2004.
70
A reconciliation of changes in the Company's warranty liability for 2005
and 2004 is as follows:
December 31,
2005 2004
(in thousands)
Balance, beginning of the year $ 3,681 $ 3,629
Accruals for warranties issued during the year 1,367 2,010
Accruals related to pre-existing warranties 291 (460)
Warranty settlements made during the year (1,551) (1,635)
Effects of exchange rate changes (252) 137
------- ------
Balance, end of the year $ 3,536 $ 3,681
======= =======
NOTE 11 - FINANCING ARRANGEMENTS
Short-Term Borrowings
Short-term bank borrowings amounted to $1.4 million and $1.5 million at
December 31, 2005 and 2004, respectively. The weighted average interest rates of
these borrowings were 2.5% and 3.3% at December 31, 2005 and 2004, respectively.
Unused lines of credit for short-term financing at December 31, 2005 and 2004
were $49.2 million and $52.5 million, respectively. Substantially all other
short-term borrowings were classified as long-term as of December 31, 2005 and
2004, reflecting the Company's intent and ability to refinance these obligations
beyond one year and are included in the table below. The unused lines of credit
have no major restrictions and are provided under demand notes between the
Company and the lending institution. Interest is charged on borrowings under
these lines of credit at various rates, generally below prime or equivalent
money rates.
Long-Term Borrowings
December 31,
2005 2004
(in thousands)
$250 million multi-currency revolving credit agreement expiring May 2006,
Japanese yen 12.6 billion at 0.56% $ - $ 122,463
$500 million multi-currency revolving credit agreement expiring May 2010,
Japanese yen 12.6 billion at 0.42% 106,359 -
Prudential Private Placement Notes, Swiss franc denominated, 56.3 million
(84.4 million at December 2004) at 4.56% and 55.0 million (82.5 million at
December 2004) at 4.42% maturing March 2007, 80.4 million at 4.96% maturing
October 2006 145,662 216,762
ABN Private Placement Note, Japanese yen 6.2 billion at 1.39% maturing December 2005 - 20,285
Euro 350.0 million Eurobonds at 5.75% maturing December 2006 419,348 489,151
$250 million commercial paper facility rated A/2-P/2 U.S. dollar borrowings 6,700 -
Other borrowings, various currencies and rates 2,814 2,625
------- -------
680,883 851,286
Less: Current portion (included in notes payable and current portion of long-term debt) 410,779 71,346
------- -------
$ 270,104 $ 779,940
========= =========
The Company has $530.7 million of long-term borrowings coming due in 2006.
The Company intends to repay these debt obligations with cash and/or funds
available to the Company from its cash and cash equivalents, short-term
investments or under the revolving credit facility. Any portion of the debt that
is repaid through the use of the revolving credit facility will be contractual
due in May 2010, upon the expiration of the facility, thus effectively
converting the maturity of the debt beyond 2006. The Company currently intends
to effectively refinance $119.9 million of the long-term borrowings coming due
in 2005 through use of the revolving credit facility.
71
The table below reflects the contractual maturity dates of the various
borrowings at December 31, 2005 (in thousands). The individual borrowings under
the revolving credit agreement are structured to mature on a quarterly basis but
because the Company has the intent and ability to extend them until the
expiration date of the agreement, these borrowings are considered contractually
due in May 2010.
2006 $410,779
2007 $ 43,714
2008 $ 53
2009 $ 14
2010 $226,323
2011 and beyond -
-------
$680,883
========
The Company utilizes interest rate swaps to convert the variable rate
Japanese yen-denominated debt under the revolving facility to fixed rate debt.
In addition, swaps are used to convert the fixed rate Eurobond to variable rate
financing. The Company's use of interest rate swaps is further described in Note
16 - "Financial Instruments and Derivatives".
The Company has a $500 million revolving credit agreement with
participation from thirteen banks. The revolving credit agreements contain a
number of covenants and two financial ratios which the Company is required to
satisfy. 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. Any breach of any such
covenants or restrictions would result in a default under the existing borrowing
documentation that would permit the lenders to declare all borrowings under such
documentation to be immediately due and payable and, through cross default
provisions, would entitle the Company's other lenders to accelerate their loans.
At December 31, 2005, the Company was in compliance with these covenants. The
Company pays a facility fee of 0.10 % annually on the amount of the commitment
under the $500 million five year facility. The entire $500 million revolving
credit agreement has a usage fee of 0.10 % annually if utilization exceeds 50%
of the total available facility. Interest rates on amounts borrowed under the
facility will depend on the maturity of the borrowing, the currency borrowed,
the interest rate option selected, and the Company's long-term credit rating
from Moody's and Standard and Poors.
The Company has complementary U.S. dollar and Euro multicurrency commercial
paper facilities totaling $250 million which have utilization, dealer, and
annual appraisal fees which on average cost 0.11% annually. The $500 million
revolving credit facility acts as back-up credit to this commercial paper
facility. The total available credit under the commercial paper facilities and
the revolving credit facility is $250 million. Outstanding commercial paper
obligations at December 31, 2005 were $6.7 million.
In March 2001, the Company issued Series A and B private placement notes to
Prudential Capital Group totaling Swiss francs 166.9 million at an average rate
of 4.49% with six year final maturities. The notes were issued to finance the
acquisition of the AZ Assets. In October 2001, the Company issued a Series C
private placement note to Prudential Capital Group for Swiss francs 80.4 million
at a rate of 4.96% with a five year final maturity. The series A and B notes
were also amended in October 2001 to increase the interest rate by 30 basis
points, reflecting the Company's higher leverage. The private placement notes
contain a number of covenants and two financial ratios which the Company is
required to satisfy. The most restrictive of these covenants pertain to asset
dispositions, maintenance of certain levels of net worth, and prescribed ratios
of indebtedness to total capital and operating income plus depreciation and
amortization to interest expense. In December 2001, the Company issued a private
placement note through ABN AMRO for Japanese yen 6.2 billion at a rate of 1.39%
with a four year final maturity. The Series C note and the ABN note were issued
to partially finance the Degussa Dental acquisition. The Company has completely
retired the ABN note and has made the initial mandatory prepayment under series
A and B notes.
In December 2001, the Company issued Euro 350 million Eurobonds with a
coupon of 5.75%, maturing December 2006 at an effective yield of 5.89%. These
bonds were issued to partially finance the Degussa Dental acquisition.
At December 31, 2005, the Company had total unused lines of credit,
including lines available under its short-term arrangements and revolving credit
agreement, of $436.2 million.
72
NOTE 12 - STOCKHOLDERS' EQUITY
In December 2004, the Board of Directors approved a stock repurchase
program under which the Company may repurchase shares of Company stock on the
open market in an amount to maintain up to 3,000,000 shares of treasury stock.
In September 2005, the Board of Directors increased the authorization to
repurchase shares under the stock repurchase program in an amount to maintain up
to 5,500,000 shares of treasury stock. Under this program, the Company purchased
3,002,000 shares during 2005 at an average price of $54.85. As of December 31,
2005 and 2004, the Company held 2,533,000 and 757,000 shares of treasury stock,
respectively. The Company also received proceeds of $31.8 million as a result of
the exercise of 1,226,000 stock options during the year ended December 31, 2005.
The Company has stock options outstanding under three stock option plans
(1993 Plan, 1998 Plan and 2002 Amended and Restated Plan). Further grants can
only be made under the 2002 Plan. Under the 1993 and 1998 Plans, a committee
appointed by the Board of Directors granted to key employees and directors of
the Company options to purchase shares of common stock at an exercise price
determined by such committee, but not less than the fair market value of the
common stock on the date of grant. Options generally expire ten years after the
date of grant under these plans and grants become exercisable over a period of
three years after the date of grant at the rate of one-third per year, except
that they become immediately exercisable upon death, disability or retirement.
The 2002 Plan authorized grants of 7.0 million shares of common stock,
(plus any unexercised portion of canceled or terminated stock options granted
under the DENTSPLY International Inc. 1993 and 1998 Stock Option Plans), subject
to adjustment as follows: each January, if 7% of the outstanding common shares
of the Company exceed 7.0 million, the excess becomes available for grant under
the Plan. The 2002 Plan enables the Company to grant "incentive stock options"
("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, to key employees of the Company, and "non-qualified stock options"
("NSOs") which do not constitute ISOs to key employees and non-employee
directors of the Company. The 2002 Plan also enables the Company to grant stock
which is subject to certain forfeiture risks and restrictions ("Restricted
Stock"), stock delivered upon vesting of units ("Restricted Stock Units") and
stock appreciation rights ("SARs"). ISOs and NSOs are collectively referred to
as "Options". Options, Restricted Stock, Restricted Stock Units and Stock
Appreciation Rights are collectively referred to as "Awards". Grants of equity
compensation to key employees are solely discretionary with the Board of
Directors of the Company. Awards generally expire ten years from date of grant
and become exercisable over a period of three years after the date of grant at
the rate of one-third per year, except that they become immediately exercisable
upon death, disability or retirement. Such awards are granted at exercise prices
not less than the fair market value of the common stock on the grant date.
Future option grants may only be made under the 2002 Plan, which will
include the unexercised portion of canceled or terminated options granted under
the 1993 or 1998 Plans. The number of shares available for grant under the 2002
plan as of December 31, 2005 was 4,025,000 shares. Each non-employee director
receives an automatic grant of NSOs to purchase 9,000 shares of common stock on
the date he or she becomes a non-employee director and an additional 9,000
options on the third anniversary of the date on which the non-employee director
was last granted an option.
73
The following is a summary of the status of the Plans as of December 31,
2005, 2004 and 2003 and changes during the years ending on those dates:
Outstanding Exercisable
-------------------- --------------------
Weighted Weighted Available
Average Average for
Exercise Exercise Grant
Shares Price Shares Price Shares
December 31, 2002 7,691,589 $ 24.50 4,649,889 $ 18.99 7,253,405
Authorized (Lapsed) - 177,882
Granted 1,434,300 43.84 (1,434,300)
Exercised (829,155) 19.30 -
Expired/Canceled (119,277) 29.38 119,277
--------- ---------
December 31, 2003 8,177,457 28.35 5,225,300 22.22 6,116,264
Authorized (Lapsed) - 8,100
Granted 1,127,799 53.61 (1,127,799)
Exercised (2,117,484) 21.03 -
Expired/Canceled (252,817) 26.57 252,817
--------- ---------
December 31, 2004 6,934,955 34.76 4,498,889 27.99 5,249,382
Authorized (Lapsed) - 36,900
Granted 1,330,482 55.36 (1,330,482)
Exercised (1,265,760) 25.40 -
Expired/Canceled (69,230) 62.74 69,230
--------- ---------
December 31, 2005 6,930,447 $ 40.14 4,626,109 $ 33.85 4,025,030
========= =========
The following table summarizes information about stock options outstanding
under the Plans at December 31, 2005:
Options Outstanding Options Exercisable
-------------------------------- -----------------------
Weighted
Number Average Number
Outstanding Remaining Weighted Exercisable Weighted
at Contractual Average at Average
Exercise Price December 31 Life Exercise December 31 Exercise
Range 2005 (in years) Price 2005 Price
$10.01 - $15.00 52,300 0.7 $ 14.28 52,300 $ 14.28
15.01 - 20.00 794,635 3.3 16.36 794,635 16.36
20.01 - 25.00 604,950 4.8 24.76 604,950 24.76
25.01 - 30.00 18,345 5.6 28.81 18,345 28.81
30.01 - 35.00 724,162 5.5 31.17 724,162 31.17
35.01 - 40.00 1,095,518 6.4 36.94 1,075,017 36.95
40.01 - 45.00 1,319,178 7.4 44.19 875,189 44.23
45.01 - 50.00 54,600 8.0 48.60 21,638 48.40
50.01 - 60.00 2,266,759 9.1 55.13 459,873 54.95
--------- -------
6,930,447 6.9 $ 40.14 4,626,109 $ 33.85
========= =========
74
The Company uses the Black-Scholes option pricing model to value option
awards. The per share weighted average fair value of stock options and the
weighted average assumptions used to determine these values are as follows:
Year Ended December 31,
2005 2004 2003
---- ---- ----
Per share fair value $ 15.07 $ 13.46 $ 14.85
Expected dividend yield 0.50% 0.44% 0.48%
Risk-free interest rate 4.40% 3.56% 3.36%
Expected volatility 20% 20% 31%
Expected life (years) 5.50 5.50 5.50
The Black-Scholes option pricing model was developed for tradable options
with short exercise periods and is therefore not necessarily an accurate measure
of the fair value of compensatory stock options.
The rollforward of the common shares and the treasury shares outstanding is
as follows:
Common Treasury Outstanding
Shares Shares Shares
(in thousands)
Balance at December 31, 2002 81,388 (2,990) 78,398
Exercise of stock options - 853 853
------ ------ ------
Balance at December 31, 2003 81,388 (2,137) 79,251
Exercise of stock options - 2,165 2,165
Repurchase of common stock at cost - (785) (785)
------ ------ ------
Balance at December 31, 2004 81,388 (757) 80,631
Exercise of stock options - 1,226 1,226
Repurchase of common stock at cost - (3,002) (3,002)
------ ------ ------
Balance at December 31, 2005 81,388 (2,533) 78,855
====== ====== ======
75
NOTE 13 - INCOME TAXES
The components of income before income taxes from continuing operations are
as follows:
Year Ended December 31,
2005 2004 2003
---- ---- ----
(in thousands)
United States ("U.S.") $ 53,473 $111,779 $113,994
Foreign 17,565 162,376 137,202
------ ------- -------
$ 71,038 $274,155 $251,196
======== ======== ========
The components of the provision for income taxes from continuing operations
are as follows:
Year Ended December 31,
2005 2004 2003
---- ---- ----
(in thousands)
Current:
U.S. federal $ 62,892 $ 20,706 $ 28,693
U.S. state 2,717 197 1,941
Foreign 51,793 35,908 18,298
------ ------ ------
Total 117,402 56,811 48,932
Deferred:
U.S. federal (63,821) 2,556 12,077
U.S. state (1,129) 479 2,466
Foreign (26,827) 4,023 17,868
------ ------ ------
Total (91,777) 7,058 32,411
------ ------ ------
$ 25,625 $ 63,869 $ 81,343
======== ======== ========
The reconcilation of the U.S. federal statutory tax rate to the effective
rate is as follows:
Year Ended December 31,
2005 2004 2003
Statutory federal income tax rate 35.0% 35.0% 35.0%
Effect of:
State income taxes, net of federal benefit 2.5 0.2 1.1
Federal benefit of R&D credits (2.4) (1.5) (0.2)
Tax effect of international operations 10.7 (6.3) (5.0)
Net effect of tax audit activity 7.2 (2.0) -
Federal benefit of extraterritorial income
exclusion (2.6) (0.9) (0.9)
Federal tax on unremitted earnings of certain
foreign subsidiaries (15.6) 1.0 2.5
Section 965 Repatriation 6.6 - -
Other (5.3) (2.2) (0.1)
Effective income tax rate on continuing operations 36.1% 23.3% 32.4%
76
The tax effect of temporary differences giving rise to deferred tax assets
and liabilities are as follows:
December 31, 2005 December 31, 2004
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
(in thousands)
Employee benefit accruals $2,142 $10,341 $2,722 $10,230
Product warranty accruals 890 - 860 -
Insurance premium accruals 5,957 - 6,016 -
Commission and bonus accrual 1,993 - (1,361) -
Sales and marketing accrual 1,768 - 1,819 -
Restructuring and other cost accruals 1,047 - 636 738
Differences in financial reporting and tax basis for:
Inventory 14,937 - 6,161 -
Property, plant and equipment - (7,120) - (35,872)
Identifiable intangible assets - (61,373) - (67,925)
Unrealized losses (gains) included in other
comprehensive income 23,857 2,663 9,163 62,795
Miscellaneous Accruals 7,693 - 10,070 -
Other 22,087 15,532 2,401 9,740
Taxes on unremitted earnings of foreign subsidiaries - (7,374) - (18,379)
Discontinued Operations - - 25 (34)
Foreign tax credit carryforward - 15,700 - -
Tax loss carryforwards - 40,974 - 24,107
Valuation allowance for tax loss carryforwards - (39,584) - (23,421)
------- ------- ------- -------
$ 82,371 $ (30,241) $ 38,512 $ (38,021)
======== ========= ======== =========
Current and noncurrent deferred tax assets and liabilities are included in
the following balance sheet captions:
December 31,
2005 2004
(in thousands)
Prepaid expenses and other current assets $ 82,371 $40,369
Income taxes payable - (1,857)
Other noncurrent assets 12,671 20,175
Deferred income taxes (42,912) (58,196)
77
The Company's effective tax rate for 2005 was 36.1%. During 2005, the
Company recorded a tax cost of $4.6 million from the repatriation under the
American Jobs Creation Act of 2004, a tax cost of $7.6 million related to the
effects of foreign earnings, and a tax benefit of $11.0 million from the release
of deferred tax liabilities related to the undistributed earnings of foreign
earnings due to the availability of foreign tax credits.
The Company operates within multiple taxing jurisdictions and in the normal
course of business is examined in various jurisdictions. Tax accruals related to
the estimated outcome of these examinations are recorded in accordance with
Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies"
("SFAS 5"). The reversal of the accruals is recorded when examinations are
completed, statutes of limitation close or tax laws change.
The Company has $15.7 million of foreign tax credit carryforwards which
will expire in 2015.
Certain foreign and domestic subsidiaries of the Company have tax loss
carryforwards of $214.3 million at December 31, 2005, of which $137.7 million
expire through 2025 and $76.6 million may be carried forward indefinitely. The
tax benefit of certain tax loss carryforwards has been offset by a valuation
allowance as of December 31, 2005, because it is uncertain whether the benefits
will be realized in the future. The valuation allowance at December 31, 2005 and
2004 was $39.6 million and $23.4 million, respectively.
The Company has provided federal income taxes on certain undistributed
earnings of its foreign subsidiaries that the Company anticipates will be
repatriated. Deferred federal income taxes have not been provided on $35 million
of cumulative earnings of foreign subsidiaries that the Company has determined
to be permanently reinvested. It is not practicable to estimate the amount of
tax that might be payable on these permanently reinvested earnings.
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. During the quarter
ended December 31, 2005, the Company completed its evaluation of the
repatriation provision and will reinvest approximately $345 million of foreign
earnings in the United States. As a result, the Company recognized $4.6 million,
net of available foreign tax credits, of related tax expense for the
repatriation plan.
There was no pretax income from discontinued operations and no income tax
expense related to discontinued operations for the year ended December 31, 2005.
The pretax income from discontinued operations for the years ended December
31, 2004 and 2003 was $72.8 million and $7.3 million, respectively. The income
tax expense related to discontinued operations for the years ended December 31,
2004 and 2003 was $29.9 million and $3.0 million, respectively.
NOTE 14 - BENEFIT PLANS
Substantially all of the employees of the Company and its subsidiaries are
covered by government or Company-sponsored benefit plans. Total costs for
Company-sponsored defined benefit, defined contribution and employee stock
ownership plans amounted to $17.7 million in 2005, $11.7 million in 2004 and
$13.5 million in 2003.
Defined Contribution Plans
The DENTSPLY Employee Stock Ownership Plan ("ESOP") is a non-contributory
defined contribution plan that covers substantially all of the United States
based non-union employees of the Company. Contributions to the ESOP are expected
to be $4.3 million for 2005 (to be contributed in Q1 2006), and were $0.4
million for 2004 and $2.2 million for 2003. Beginning in 2005, annual
contributions to the ESOP are made in the first quarter of the subsequent
year based upon Covered Compensation at a rate determined annually by the
Board of Directors. Prior to 2005, the Company made annual contributions to the
ESOP of not less than the amounts required to service ESOP debt, which was
extinguished in 2004. In connection with the refinancing of ESOP debt in March
1994, the Company agreed to make additional cash contributions totaling at least
$0.6 million through 2003. Dividends received by the ESOP on allocated shares
are either reinvested in participants' accounts or passed through to Plan
participants, at the participant's election. Most ESOP shares were initially
pledged as collateral for its debt. As the debt was repaid, shares were released
from collateral and allocated to active employees based on the proportion of
debt service paid in the year. At December 31, 2005, the ESOP held 5.0 million
shares, all of which were allocated to plan participants as the ESOP debt was
fully repaid in 2004. Shares acquired prior to December 31, 1992 are accounted
for in accordance with Statement of Position ("SOP") 76-3, "Accounting Practices
for Certain Employee Stock Ownership Plans". Accordingly, all shares held by the
ESOP are considered outstanding and are included in the earnings per common
share computations.
78
The ESOP loan was extinguished on March 31, 2004. All future allocations
will come from a combination of forfeited shares and shares acquired in the open
market. The Company has targeted future ESOP allocations at 6% of Covered
Compensation. The share allocation will be accounted at fair value at the point
of allocation, each year-end, in accordance with SOP 93-6, "Employers'
Accounting for Employee Stock Ownership Plans". The 2005 annual expense, net of
forfeitures, is $4.3 million based on the year-end share price of $53.69.
The Company sponsors an employee 401(k) savings plan for its United States
workforce to which enrolled participants may contribute up to IRS defined
limits.
Defined Benefit Plans
The Company maintains a number of separate contributory and
non-contributory qualified defined benefit pension plans and other
postretirement medical plans for certain union and salaried employee groups in
the United States. Pension benefits for salaried plans are based on salary and
years of service; hourly plans are based on negotiated benefits and years of
service. Annual contributions to the pension plans are sufficient to satisfy
legal funding requirements. Pension plan assets are held in trust and consist
mainly of common stock and fixed income investments.
The Company maintains defined benefit pension plans for its employees in
Germany, Japan, The Netherlands, and Switzerland. These plans provide benefits
based upon age, years of service and remuneration. Substantially all of the
German plans are unfunded book reserve plans. Other foreign plans are not
significant individually or in the aggregate. Most employees and retirees
outside the United States are covered by government health plans.
Postretirement Healthcare
The plans for postretirement healthcare have no plan assets. The
postretirement healthcare plan covers certain union and salaried employee groups
in the United States and is contributory, with retiree contributions adjusted
annually to limit the Company's contribution for participants who retired after
June 1, 1985. The Company also sponsors unfunded non-contributory postretirement
medical plans for a limited number of union employees and their spouses and
retirees of a discontinued operation.
79
Reconciliations of changes in the above plans' benefit obligations, fair
value of assets, and statement of funded status are as follows:
Other Postretirement
Pension Benefits Benefits
--------------------------------- -----------------------------
December 31, December 31,
2005 2004 2005 2004
(in thousands)
Reconciliation of Benefit Obligation
Benefit obligation at beginning of year $ 151,431 $ 122,567 $ 11,611 $ 12,200
Service cost 5,425 4,790 79 130
Interest cost 5,905 5,927 678 685
Participant contributions 1,765 1,583 700 705
Actuarial (gains) losses 12,289 11,688 (1,086) 61
Amendments (138) 238 - -
Divestitures 2,066 (924) - -
Effects of exchange rate changes (19,633) 10,938 - -
Benefits paid (7,263) (5,376) (1,665) (2,170)
------ ------ ------ ------
Benefit obligation at end of year $ 151,847 $ 151,431 $ 10,317 $ 11,611
========= ========= ======== ========
Reconciliation of Plan Assets
Fair value of plan assets at beginning of year $ 70,993 $ 60,108 $ - $ -
Actual return on assets 4,642 2,439 - -
Effects of exchange rate changes (8,732) 5,090 - -
Employer contributions 6,932 7,149 965 1,465
Participant contributions 1,765 1,583 700 705
Benefits paid (7,243) (5,376) (1,665) (2,170)
------ ------ ------ ------
Fair value of plan assets at end of year $ 68,357 $ 70,993 $ - $ -
======== ========= ======== ========
Reconciliation of Funded Status
Actuarial present value of projected
benefit obligations $ 151,847 $ 151,431 $ 10,317 $ 11,611
Plan assets at fair value 68,357 70,993 - -
------- ------ ------- -------
Funded status (83,490) (80,438) (10,317) (11,611)
Unrecognized transition obligation 939 1,336 - -
Unrecognized prior service cost 564 865 (1,071) (1,756)
Unrecognized net actuarial loss (gain) 27,970 20,371 2,376 3,736
-------- -------- ------- -------
Net amount recognized $ (54,017) $ (57,866) $ (9,012) $ (9,631)
========= ========= ======== ========
80
The amounts recognized in the accompanying Consolidated Balance Sheets are
as follows:
Other Postretirement
Pension Benefits Benefits
-------------------------- -------------------------
December 31, December 31,
2005 2004 2005 2004
(in thousands)
Other noncurrent assets $ 1,634 $ 14,269 $ - $ -
Other noncurrent liabilities (77,131) (77,076) (9,012) (9,631)
Accumulated other
comprehensive loss 21,480 4,941 - -
-------- -------- ------- -------
Net amount recognized $ (54,017) $ (57,866) $ (9,012) $ (9,631)
========= ========= ======== ========
December 31,
2005 2004
(in thousands)
Accumulated benefit obligation $ 141,538 $ 141,077
Increase in other
comprehensive loss 16,539 3,118
Information for pension plans with an accumulated benefit obligation in
excess of plan assets:
December 31,
2005 2004
(in thousands)
Projected benefit obligation $ 151,847 $ 99,910
Accumulated benefit obligation 141,538 89,566
Fair value of plan assets 68,357 18,885
Components of the net periodic benefit cost for the plans are as follows:
Other Postretirement
Pension Benefits Benefits
---------------------------------------- ---------------------------------------
2005 2004 2003 2005 2004 2003
(in thousands)
Service cost $ 5,425 $ 4,823 $ 4,137 $ 79 $ 130 $ 235
Interest cost 5,905 5,936 5,358 678 685 726
Expected return on plan assets (3,491) (3,474) (3,018) - - -
Net amortization and deferral 946 549 576 (411) (430) (265)
------ ------ ------ ---- ---- ----
Net periodic benefit cost $ 8,785 $ 7,834 $ 7,053 $ 346 $ 385 $ 696
======= ======= ======= ===== ===== =====
The weighted average assumptions used to determine benefit obligations for
the Company's plans, principally in foreign locations, are as follows:
Other Postretirement
Pension Benefits Benefits
---------------------------------------- ---------------------------------------
2005 2004 2003 2005 2004 2003
Discount rate 3.7% 4.3% 5.0% 5.5% 6.0% 6.0%
Rate of compensation increase 2.0% 2.1% 3.0% n/a n/a n/a
Initial health care cost trend n/a n/a n/a 9.5% 9.5% 9.5%
Ultimate health care cost trend n/a n/a n/a 5.0% 5.0% 5.0%
Years until ultimate trend is reached n/a n/a n/a 8.0 8.0 9.0
81
The weighted average assumptions used to determine net periodic benefit
cost for the Company's plans, principally in foreign locations, are as follows:
Other Postretirement
Pension Benefits Benefits
---------------------------------------- ---------------------------------------
2005 2004 2003 2005 2004 2003
Discount rate 4.3% 5.0% 5.1% 6.0% 6.0% 6.8%
Expected return on plan assets 5.4% 5.6% 5.5% n/a n/a n/a
Rate of compensation increase 2.0% 2.0% 3.0% n/a n/a n/a
Initial health care cost trend n/a n/a n/a 9.5% 9.5% 10.0%
Ultimate health care cost trend n/a n/a n/a 5.0% 5.0% 5.0%
Years until ultimate trend is reached n/a n/a n/a 9.0 9.0 10.0
Measurement Date 12/31/2005 12/31/2004 12/31/2003 12/31/2005 12/31/2004 12/31/2003
Assumed health care cost trend rates have an impact on the amounts
reported for postretirement benefits. A one percentage point change in assumed
healthcare cost trend rates would have the following effects for the year ended
December 31, 2005:
Other Postretirement
Benefits
-------------------------
1% Increase 1% Decrease
(in thousands)
Effect on total of service and interest cost components $ 59 $ (51)
Effect on postretirement benefit obligation $770 $(680)
Plan Assets:
The weighted average asset allocations of the plans at December 31, 2005
and 2004 by asset category are as follows:
Target December 31,
Allocation 2005 2004
---- ----
Equity 30%-65% 32% 31%
Debt 30%-65% 59% 57%
Real estate 0%-15% 3% 6%
Other 0%-15% 6% 6%
---- ----
Total 100% 100%
==== ====
Equity securities do not include Company stock of Dentsply International
Inc. The expected return on plan assets is the weighted average long-term
expected return based upon asset allocations and historic average returns for
the markets where the assets are invested, principally in foreign locations.
Cash Flows:
The Company expects to contribute $0.3 million to its U.S. defined benefit
pension plans, $1.1 million to its postretirement medical plans, and $6.3
million to its other postretirement benefit plans in 2006.
Estimated Future Benefit Payments
Other Postretirement
Pension Benefits Benefits
---------------- -------------------
(in thousands)
2006 $ 5,569 $ 1,104
2007 5,919 1,090
2008 5,517 1,048
2009 5,761 992
2010 6,907 975
------ -----
2011-2015 37,337 4,480
====== =====
82
NOTE 15 - RESTRUCTURING AND IMPAIRMENT COSTS (INCOME)
Restructuring and Impairment Costs (Income)
Restructuring and Impairment costs (income) consists of the following:
Year Ended December 31,
2005 2004 2003
(in thousands)
Restructuring and other costs $ 3,095 $ 7,144 $ 4,497
Reversal of restructuring charges due to
changes in estimates (1,168) (20) (797)
Impairment of Pharmaceutical assets 230,828 - -
--------- ------- -------
Total restructuring and impairment costs $ 232,755 $ 7,124 $ 3,700
========= ======= =======
Impairment of Indefinite-Lived Injectable Anesthetic Intangible Asset and
Long-Lived Pharmaceutical Manufacturing Assets
During the third and fourth quarters of 2005, the Company recorded $233.1
million ($179.6 million after tax) of impairment and restructuring charges
against the injectable anesthetic assets and the pharmaceutical manufacturing
facility outside of Chicago. This charge was a result of the in-depth analysis
performed upon the receipt of the results of the Food and Drug Administration's
(FDA's) Pre-Approval Inspection of the pharmaceutical manufacturing facility
during the third quarter of 2005, and the Company's decision in the fourth
quarter of 2005 to pursue the outsourcing of the manufacturing of the dental
anesthetic products and cease construction of the pharmaceutical manufacturing
facility (see also "Pharmaceutical Business" section in the MD&A). These
impairments did not impact the Company's needle-free Oraqix(R) product.
During the third quarter of 2005, the Company received the results of the
Food and Drug Administration's (FDA's) Pre-Approval Inspection of its
pharmaceutical manufacturing facility located outside of Chicago. This facility
was built to manufacture the Company's injectable anesthetic product, which was
part of the assets acquired from AstraZeneca in 2001. The Company conducted an
extensive review of the items identified by the FDA and developed action plans
to address these items. Included in this review were the expected time-line and
costs for responding to the FDA findings, the expected time required for FDA
re-application and approval, the expected ramp-up costs to achieve anticipated
volumes for the U.S., European and Japanese markets, and the extension of
contract manufacturing agreements to provide a supply of injectable anesthetic
product until the plant could achieve full production under the revised
timeline. As a result of this review, the Company concluded that the start-up of
its pharmaceutical manufacturing facility would be delayed, and did not expect
to begin producing injectable anesthetics at the facility for the U.S. and
Japanese markets until 2007.
The Company also concluded that the receipt of the FDA's Pre-Approval
Inspection Report and the results of the extensive review constituted a
triggering event for performance of an event-driven impairment assessment
conducted in accordance with SFAS 142 for the indefinite-lived injectable
anesthetic intangible asset and in accordance with SFAS 144 for the long-lived
assets related to the Pharmaceutical manufacturing facility outside of Chicago,
and the Oraqix(R) definite-lived intangible asset. In performing the SFAS 142
and SFAS 144 impairment tests, the Company formulated its best estimate of cash
flows from the respective assets taking into consideration (1) the Company's
projected sales and manufacturing cost projections for the injectable anesthetic
products (2) current and projected market share for the injectable anesthetic
products and (3) the costs to complete the production facility. Additionally,
due to the delay in obtaining FDA approval and the market impact, the Company
increased the risk-adjusted discount rate used in the SFAS 142 impairment test
to reflect the increased risk of the business caused by this delay. As a result
of the changes made to the event-driven impairment analysis model in the third
quarter of 2005 to address the results of the FDA's Pre-Approval Inspection and
the Company's extensive review and action plans, the discounted cash flows
associated with the indefinite lived injectable anesthetic intangible asset were
less than the carrying value of approximately $158 million. Thus, the Company
wrote-down the value of the indefinite-lived intangible asset by $131.3 million
($111.6 million after tax) during the third quarter of 2005. The third quarter
analysis did not reflect or cause an impairment of the Pharmaceutical
manufacturing facility or the definite-lived intangible asset associated with
Oraqix(R), which were tested as an asset group under SFAS 144 on an undiscounted
basis, due to the Company's plans at the time to produce the injectable and
Oraqix(R) products in the Chicago based manufacturing facility .
83
From the end of the third quarter of 2005 through December of 2005, the
Company continued to evaluate the actions necessary to address the items raised
in the FDA's pre-approval inspection. As of the end of the third quarter of
2005, the Company had anticipated that it would continue to manufacture products
at the plant for the U.K., Australia, and New Zealand markets, for which
regulatory approval had already been obtained. However, upon further evaluation,
the Company decided in December to suspend manufacturing at the plant to allow
improvements identified in the Company's corrective action plan to be made.
In conjunction with the evaluation of the actions necessary to address the
items raised in the FDA's pre-approval inspection, the Company also began to
evaluate strategic alternatives to obtaining FDA approval, including but not
limited to a potential shut-down of the dental anesthetics manufacturing
facility and obtaining long-term third party supply sources for both the
injectable anesthetic products and the Oraqix(R) product. In order to fully
evaluate the potential options at the Company's disposal with regard to a
potential closure and the disposition of the facility, the Company began a
comprehensive internal analysis of the pharmaceutical assets that included
initiating discussions with potential buyers, and evaluating the possibility of
obtaining extensions for the supply of products.
Based on the outcome of the analyses performed by the Company, as well as
both strategic and financial considerations, in December 2005 the Company began
to establish a plan for a course of action to shut down the manufacturing
facility, sell the manufacturing facility assets and begin negotiations to
obtain a long-term source of supply for the anesthetic products.
The Company concluded that this action constituted another triggering event
for performance of an event-driven impairment assessment conducted in accordance
with SFAS 142 for the remaining indefinite-lived injectable anesthetic
intangible assets and in accordance with SFAS 144 for the long-lived assets
related to the pharmaceutical manufacturing facility, and the Oraqix(R)
definite-lived intangible asset. As part of the event-driven impairment
assessment, the Company reviewed the asset grouping, which had historically
included the indefinite-lived injectable intangible asset, the Oraqix(R)
definite-lived intangible asset and the long-lived assets associated with the
pharmaceutical manufacturing facility. The Company reviewed this asset grouping
to determine if the grouping was still appropriate in light of the Company's
changed expectations in regards to the pharmaceutical manufacturing facility
that was the common link between the assets in the group. As a result of the
Company's review, the Company concluded that due to the change in expectations
with regards to the pharmaceutical manufacturing facility, the Company could no
longer consider the assets as an asset group as defined by SFAS 144, as the
pharmaceutical manufacturing facility was no longer feasible. As a result, the
Company began to evaluate each asset on a stand alone basis in accordance with
SFAS 142 and SFAS 144.
In performing the SFAS 142 and SFAS 144 impairment tests, the Company
formulated its best estimate of cash flows from the respective assets taking
into consideration (1) the Company's projected sales for the injectable
anesthetic products and the Oraqix(R) products, (2) projected costs to purchase
the future supply of the injectable anesthetic products and Oraqix(R) products
from external suppliers (3) current and projected market share for the
injectable anesthetic products and Oraqix(R) products (4) the costs to shut-down
the production facility and (5) projected cash flow associated with the sale of
the assets. Additionally, as a result of risk factors associated with the
procurement of long-term supply contracts for the injectable anesthetic
products, the Company increased the risk-adjusted discount rate used in the SFAS
142 impairment test to reflect the increased risk to the business. The Company
also obtained an independent third party appraisal of the indefinite-lived
injectable anesthetic intangible and the long-lived assets associated with the
pharmaceutical manufacturing facility due to the sensitivity of the assumptions
and the risks associated with these assets. As a result of the Company's review
and its changed expectations, as well as the Company's review of the third party
appraisal of the assets, it was determined that an additional impairment of the
indefinite-lived injectable anesthetic intangible asset acquired from
AstraZeneca in 2001, as well as an impairment of the long-lived assets related
to the manufacturing facility, had occurred during the fourth quarter of 2005.
The impairment recorded by the Company in the fourth quarter of 2005 was $99.5
million ($66.5 million after tax). This impairment did not impact the Company's
needle-free Oraqix(R) product.
Additionally, as a result of the Company's decision to begin the
establishment of a plan to shut down of the manufacturing facility, pre-tax
restructuring charges of $2.3 million ($1.5 million after tax) were also
recorded related to employee severance cost for which the Company was
contractually obligated. The Company also expects pre-tax restructuring charges
in the range of $6 million to $9 million in 2006 associated with the completion
of the closure of the facility. These costs primarily related to additional
contract termination costs, severance costs and utility costs during the shut
down period.
84
The aggregate carrying value of the indefinite-lived intangible asset, the
definite-lived Oraqix(R) intangible asset and the long-lived assets related to
the pharmaceutical manufacturing facility, prior to the impairment charges, was
approximately $253.9 million. After the impairment charge of $157.5 million to
the indefinite-lived injectable anesthetic intangible, the impairment of $71.2
million to the definite-lived assets associated with the manufacturing facility,
negative impact of exchange of $0.8 million, capital expenditures of $8.7
million and depreciation of $1.5 million, the aggregate carrying value of the
assets is $31.6 million. As previously noted, the impairment charges did not
affect the Oraqix(R) definite-lived intangible assets, which are part of the
Company's Pharmaceutical division within the U.S. Consumable/ Canada Business
segment.
Restructuring
During the fourth quarter of 2005, the Company recorded restructuring costs
of $2.4 million. These costs were primarily related to the decision to shut down
the Pharmaceutical manufacturing facility outside of Chicago as discussed
previously. In addition, these costs related to the consolidation of certain
U.S. production facilities in order to better leverage the Company's resources.
The primary objective of these initiatives is to reduce costs and obtain
operational efficiencies. The charges recorded in 2005 were severance costs. The
plans include the elimination of approximately 130 administrative and
manufacturing positions, all within the U.S. These plans are expected to be
substantially completed by the end of 2006. None of these positions had been
eliminated as of December 31, 2005. The major components of these charges and
the remaining outstanding balances at December 31, 2005 are as follows:
Amounts Balance
2005 Applied December 31,
Provisions 2005 2005
(in thousands)
Severance 2,400 - 2,400
------- ---- -------
$ 2,400 $ - $ 2,400
======= ==== =======
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 $4.9 million and
lease/contract termination costs of $0.9 million. During 2005, the Company
recorded additional charges of $0.5 million related to severance and
lease/contract termination contracts which were required to be expensed as
incurred. Additionally, during 2005, the Company reversed $1.2 million as a
change in estimate, as it determined the costs to complete the plan were lower
than originally estimated. The plans include the elimination of approximately
110 administrative and manufacturing positions primarily in Germany. These plans
are expected to be complete during 2006. As of December 31, 2005, approximately
40 of these positions remained to be eliminated. The major components of these
charges and the remaining outstanding balances at December 31, 2005 are as
follows:
Amounts Change Amounts Balance
2004 Applied 2005 in Estimate Applied December 31,
Provisions 2004 Provisions 2005 2005 2005
(in thousands)
Severance $ 4,877 $ (583) $ 322 $ (1,168) $(1,740) $ 1,708
Lease/contract
terminations 881 - 190 - (435) 636
------ ----- ---- ------- ------- ------
$ 5,758 $ (583) $ 512 $ (1,168) $(2,175) $ 2,344
======= ====== ===== ======== ======= =======
During the fourth quarter of 2003, the Company recorded restructuring and
other costs of $4.5 million. These costs were primarily related to impairment
charges recorded to certain investments in emerging technologies. The products
related to these technologies were abandoned and therefore these assets were no
longer viewed as being recoverable. In addition, certain costs were associated
with the restructuring or consolidation of the Company's operations, primarily
its U.S. laboratory businesses and the closure of its European central warehouse
in Nijmegan, The Netherlands. Included in this charge were severance costs of
$0.9 million, lease/contract termination costs of $0.6 million and intangible
and other asset impairment charges of $3.0 million. In addition, during 2005 and
2004, the Company recorded charges of $0.2 million and $1.4 million,
respectively, for additional severance, lease termination and other
restructuring costs incurred during the period related to these plans. These
restructuring plans will result in the elimination of approximately 70
85
administrative and manufacturing positions primarily in the United States, 2 of
which remain to be eliminated as of December 31, 2005. Certain of these
positions will need to be replaced at the consolidated site and therefore the
net reduction in positions is expected to be approximately 25. These plans were
substantially complete by December 31, 2005. The major components of these
charges and the remaining outstanding balances at December 31, 2005 are as
follows:
Amounts Amounts Amounts Balance
2003 Applied 2004 Applied 2005 Applied December 31,
Provisions 2003 Provisions 2004 Provisions 2005 2005
(in thousands)
Severance $ 908 $ (49) $ 451 $ (1,083) $ 17 $ (117) $ 127
Lease/contract
terminations 562 (410) 13 (165) - - -
Other restructuring
costs 27 (27) 922 (852) 104 (174) -
Intangible and other asset
impairment charges 3,000 (3,000) - - 62 (62) -
----- ------ ----- ------ --- ---- ----
$ 4,497 $ (3,486) $ 1,386 $ (2,100) $ 183 $ (353) $ 127
======= ======== ======= ======== ===== ====== =====
As part of combining Austenal with the Company in 2002, $4.4 million of
liabilities were established through purchase accounting for the restructuring
of the acquired company's operations, primarily in the United States and
Germany. Included in this liability were severance costs of $2.9 million,
lease/contract termination costs of $1.4 million and other restructuring costs
of $0.1 million. During 2003 and 2004, the Company reversed a total of $1.3
million, which was recorded to goodwill, as a change in estimate as it
determined the costs to complete the plan were lower than originally estimated.
This restructuring plan included the elimination of approximately 75
administrative and manufacturing positions in the United States and Germany.
This plan was substantially complete at March 31, 2004.
In the fourth quarter of 2001, the Company recorded a charge of $12.3
million for restructuring and other costs. The charge included costs of $6.0
million to restructure the Company's existing operations, primarily in Germany,
Japan and Brazil, as a result of the integration with Degussa Dental. Included
in this charge were severance costs of $2.1 million, lease/contract termination
costs of $1.1 million and other restructuring costs of $0.2 million. In
addition, the Company recorded $2.6 million of impairment charges on fixed
assets that were disposed of as a result of the restructuring plan. The
remaining charge of $6.3 million involves impairment charges on intangible
assets. During 2002 and 2003 the Company reversed a net total of $1.0 million
and $0.8 million, respectively, as a change in estimate as it determined the
costs to complete the plan were lower than originally estimated. This
restructuring plan resulted in the elimination of approximately 160
administrative and manufacturing positions in Germany, Japan and Brazil. As part
of these reorganization activities, some of these positions were replaced with
lower-cost outsourced services. This plan was complete at December 31, 2003.
During the fourth quarter 2003, the Company made the decision to
discontinue the operations of its dental needle business. The business consists
of one manufacturing location which ceased operations on March 31, 2004. As a
result of this decision, the Company recorded a charge in the fourth quarter of
2003 of $1.6 million as a reduction in income from discontinued operations.
Included in this charge were severance costs of $0.4 million, fixed asset
impairment charges of $0.5 million, $0.4 million of impairment charges related
to goodwill and other restructuring costs of $0.3 million. In addition, during
the year ended December 31, 2004, the Company recorded charges of $0.5 million
for additional severance, other restructuring costs and fixed asset impairment
charges incurred during the period related to this closing. This plan resulted
in the elimination of approximately 55 administrative and manufacturing
positions in the United States. This plan was substantially complete at March
31, 2004.
86
NOTE 16 - FINANCIAL INSTRUMENTS AND DERIVATIVES
Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The Company
believes the carrying amounts of cash and cash equivalents, short-term
investments, accounts receivable (net of allowance for doubtful accounts),
prepaid expenses and other current assets, accounts payable, accrued
liabilities, income taxes payable and notes payable approximate fair value due
to the short-term nature of these instruments. The Company estimates the fair
value of its total long-term debt was $682.6 million versus its carrying value
of $680.9 million as of December 31, 2005. The fair value approximated the
carrying value since much of the Company's debt is variable rate and reflects
current market rates. The fixed rate Eurobonds are effectively converted to
variable rate as a result of an interest rate swap and the interest rates on
revolving debt and commercial paper are variable and therefore the fair value of
these instruments approximates their carrying values. The Company has fixed rate
Swiss franc denominated notes with estimated fair values that differ from their
carrying values. At December 31, 2005, the fair value of these instruments was
$147.4 million versus their carrying values of $145.7 million. The fair values
differ from the carrying values due to lower market interest rates at December
31, 2005 versus the rates at issuance of the notes.
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 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.
Cash Flow Hedges
The Company uses interest rate swaps to convert a portion of its variable
rate debt to fixed rate debt. As of December 31, 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 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. The other swap, effective March, 2005, has a notional amount of 65
million Swiss francs, and effectively converts the underlying variable interest
rates to a fixed rate of 4.2% for a term of seven years.
The Company selectively enters into commodity price swaps to effectively
fix certain variable raw material costs. While the Company did not have any
swaps in place for the purchase of raw materials at December 31, 2005, the
Company generally hedges up to 80% of its projected annual platinum needs
related to these products.
87
The Company enters into forward exchange contracts to hedge the foreign
currency exposure of its anticipated purchases of certain inventory from Japan.
In addition, exchange contracts are used by certain of the Company's
subsidiaries to hedge intercompany inventory purchases which are denominated in
non-local currencies. The forward contracts that are used in these programs
mature in twelve months or less. The Company generally hedges up to 80% of its
anticipated purchases from the supplying locations.
As of December 31, 2005, $0.1 million of deferred net gains on derivative
instruments recorded in accumulated other comprehensive income are expected to
be reclassified to current earnings during the next twelve months. This
reclassification is primarily due to the sale of inventory that includes
previously hedged purchases. The maximum term over which the Company is hedging
exposures to variability of cash flows (for all forecasted transactions,
excluding interest payments on variable-rate debt) is eighteen months. Overall,
the derivatives designated as cash flow hedges are nearly 100% effective.
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 Euro 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) Euro-denominated financing;
and (b) a cross-currency basis swap which converted this variable rate
Euro-denominated financing to variable rate U.S. dollar-denominated financing.
The Euro 350 million interest rate swap agreement was designated as a fair
value hedge of the Euro 350 million in fixed rate debt pursuant to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133).
In accordance with SFAS No. 133, the interest rate swap and underlying Eurobond
have been marked-to-market via the income statement. As of December 31, 2005 and
2004, the accumulated fair value of the interest rate swap was $5.3 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 December 31, 2005
and 2004.
From inception through the first quarter of 2003, the cross-currency
element of the integrated transaction was not designated as a hedge and changes
in the fair value of the cross-currency element of the integrated transaction
were marked-to-market in the income statement, offsetting the impact of the
change in exchange rates on the Eurobonds that were also recorded in the income
statement. 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 4.29% on $315 million 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.
No gain or loss was recognized upon the amendment of the cross-currency
element of the integrated transaction, as the interest rate of 4.29% was
established to ensure that the fair value of the cash flow streams before and
after amendment were equivalent. As a result of the amendment, the Company
became economically exposed to the impact of exchange rates on the final
principal payment on the Euro 350 million Eurobonds and designated the Euro 350
million 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.
In June 2005, the Company terminated the cross-currency element of the
integrated transaction in response to the rapid rise in U.S. Dollar short-term
interest rates, converting the debt back into a Euro variable instrument. At
termination in June, 2005 and at December 31, 2004, the accumulated fair value
of the cross-currency element of the integrated transaction was $20.2 million
received in cash and $33.0 million, recorded in Prepaid Expenses and Other
Current Assets and Other Noncurrent Assets, respectively.
88
In the first quarter of 2005, the Company entered into cross-currency
interest rate swaps with a notional principal value of Swiss Franc 457 million
paying 3 month Swiss franc Libor and receiving 3 month U.S. dollar Libor on
$384.4 million. The cross-currency swaps are designated as net investment hedge
of the Swiss net assets. In the fourth quarter of 2005, the Company entered into
cross currency interest rate swaps with a notional principal value of Euro 358
million paying 3 month Euro Libor and receiving 3 month U.S. dollar Libor on
$419.6 million. The cross-currency swaps are designated as net investment hedge
of the Swiss and Euro denominated net assets. The interest rate differential is
recognized in earnings as it is accrued, the foreign currency revaluation is
recorded in accumulated other comprehensive income, net of tax effects.
The fair value of these swap agreements is the estimated amount the Company
would receive (pay) at the reporting date, taking into account the effective
interest rates and foreign exchange rates. As of December 31, 2005 and 2004, the
estimated net fair values of the swap agreements were $29.2 million and $35.7
million, respectively.
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 December 31, 2005 and 2004, the Company had Euro-denominated, Swiss
franc-denominated, and Japanese yen-denominated debt and cross-currency interest
rate swaps (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 December 31, 2005 and 2004, the accumulated translation gains
on investments in foreign subsidiaries, primarily denominated in Euros, Swiss
francs and Japanese yen, net of these net investment debt hedges, were $58.4
million and $179.4 million, respectively, which was included in accumulated
other comprehensive income.
Other
As of December 31, 2005, the Company had recorded assets representing the
fair value of derivative instruments of $5.3 million in "Prepaid expenses and
other current assets" and $36.6 million in "Other noncurrent assets" and
liabilities representing the fair value of derivative instruments of $3.1
million in "Accrued liabilities" and $9.7 million in "Other noncurrent
liabilities".
In accordance with SFAS 52, "Foreign Currency Translation", the Company
utilizes long-term intercompany loans to eliminate foreign currency transaction
exposures of certain foreign subsidiaries. Net gains or losses related to these
long-term intercompany loans, those for which settlement is not planned or
anticipated in the foreseeable future, are included accumulated other
comprehensive income.
89
NOTE 17 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases automobiles and machinery and equipment and certain
office, warehouse, and manufacturing facilities under non-cancelable operating
leases. These leases generally require the Company to pay insurance, taxes and
other expenses related to the leased property. Total rental expense for all
operating leases was $23.0 million for 2005, $22.0 million for 2004 and $20.7
million for 2003.
Rental commitments, principally for real estate (exclusive of taxes,
insurance and maintenance), automobiles and office equipment are as follows (in
thousands):
2006 $ 20,175
2007 11,935
2008 8,448
2009 4,844
2010 3,122
2011 and thereafter 5,275
--------
$ 53,799
========
Litigation
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
and subsequently, 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 and
the Third Circuit reversed the decision of the District Court. The Company's
petition to the U.S. Supreme Court asking it to review the Third Circuit Court
decision was denied. The effect of this decision 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., which affects less
than 2.5% of the Company's net sales. While the Company believes its tooth
distribution practices do not violate the antitrust laws, the Company is
confident that it 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 appealed this decision to the Third Circuit and the Court
upheld the decision of the District Court in dismissing the Plaintiffs' damages
claims, with the exception of allowing the Plaintiffs to pursue a damage claim
based on a theory of resale price maintenance agreements between the Company and
its tooth dealers. The Plaintiffs have filed a petition with the U.S. Supreme
Court asking it to review this decision of the Third Circuit. 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,
90
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 if 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 for which they
were not paid. 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 166 dentists have opted into the class action. As
the result of a recent decision by a California Appellate Court, the plaintiffs
have filed an appeal to convert the claim to an opt-out claim from its current
status as an opt-in claim. 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 up to their
policy limits.
Other
The Company has no material non-cancelable purchase commitments.
The Company has employment agreements with its executive officers. These
agreements generally provide for salary continuation for a specified number of
months under certain circumstances. If all of the employees under contract were
to be terminated by the Company without cause (as defined in the agreements),
the Company's liability would be approximately $12.8 million at December 31,
2005.
NOTE 18 - RESTATEMENT OF FINANCIAL STATEMENTS
During the third quarter of 2006, the Company reassessed its classification
of time deposits with original maturity dates at the date of purchase in excess
of 90 days as cash equivalents. It was determined that due strictly to the
original maturity dates on the acknowledgements of the deposits, that these time
deposits were inappropriately classified as cash equivalents, despite the fact
that the time deposits held by the Company are highly liquid deposits with a
liquidity feature that provides the Company with access to the full principal
amount of the deposits generally within a one to two day period. It was further
determined that these time deposits with original maturity dates at the date of
purchase in excess of 90 days should be classified as short-term investments
instead of cash equivalents, and should be reflected as investing activities in
the Company's statement of cash flows.
As a result, the Company has restated its accompanying consolidated balance
sheets as of December 31, 2005 and 2004 and the accompanying consolidated
statements of cash flows for the years ended December 31, 2005 and 2004. These
restatements had no impact on the Company's total current assets, total assets,
total stockholder's equity, net income (loss), earnings (loss) per share, or
cash flows from operating activities.
Following is a summary of the effects of the correction of the error on the
Company's consolidated balance sheets as of December 31, 2005 and 2004.
December 31, 2005 December 31, 2004
--------------------------- ---------------------------
Balance Sheet As previously As previously
reported As Restated reported As Restated
--------------------------- ---------------------------
Cash and cash equivalents $ 434,525 $ 433,984 $ 506,369 $ 403,541
Short-term investments $ - $ 541 $ - $ 102,828
--------------------------- ---------------------------
Total cash, cash equivalents
and short-term investments $ 434,525 $ 434,525 $ 506,369 $ 506,369
========= ========= ========= =========
Following is a summary of the effects of the correction of the error on the
Company's statements of cash flows for the years ended December 31, 2005 and
2004.
Twelve months ended Twelve months ended
December 31, 2005 December 31, 2004
---------------------------- ---------------------------
Statements of Cash Flows As previously As previously
reported As Restated reported As Restated
---------------------------- ---------------------------
Cash flows from Investing Activities:
Purchases of short-term investments $ - $ (148,546) $ - $ (142,867)
Liquidations of short-term investments $ - $ 241,264 $ - $ 48,103
Net cash flows from investing activities $ (42,472) $ 50,246 $ 39,274 $ (55,490)
Effect of exchange rate changes on
cash and cash equivalents $ (49,770) $ (40,202) $ 26,816 $ 18,753
Net (decrease) increase in cash or
cash equivalents $ (71,844) $ 30,443 $ 342,614 $ 239,786
Cash and cash equivalents at beginning
of period $ 506,369 $ 403,541 $ 163,755 $ 163,755
Cash and cash equivalents at end of period $ 434,525 $ 433,984 $ 506,369 $ 403,541
91
NOTE 19 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Dentsply International Inc.
Quarterly Financial Information (Unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
(in thousands, except per share amounts)
2005
Net sales from continuing operations $ 406,975 $ 444,834 $ 415,964 $ 447,362 $ 1,715,135
Gross profit from continuing operations 208,941 227,283 209,002 223,792 869,018
Operating income from continuing operations 70,125 81,135 (56,633) (21,705) 72,922
Net income from continuing operations 49,049 57,893 (60,805) (724) 45,413
Net income from discontinued operations - - - - -
------ ------ ------- -------- ----------
Net income $49,049 $57,893 $ (60,805) $ (724) $ 45,413
======= ======= ========= ========= ===========
Earnings per common share - basic
Continuing operations $ 0.61 $ 0.72 $ (0.77) $ (0.01) $ 0.57 (a)
Discontinued operations - - - - -
---- ---- ----- ----- -----
Total earnings per common share $ 0.61 $ 0.72 $ (0.77) $ (0.01) $ 0.57
====== ====== ======= ======= ======
Earnings per common share - diluted
Continuing operations $ 0.60 $ 0.71 $ (0.77) $ (0.01) $ 0.56 (a)
Discontinued operations - - - - -
---- ---- ----- ----- -----
Total earnings per common share $ 0.60 $ 0.71 $ (0.77) $ (0.01) $ 0.56
====== ====== ======= ======= ======
Cash dividends declared per common share $0.0600 $0.0600 $0.0600 $ 0.0700 $ 0.2500
2004
Net sales from continuing operations $ 414,359 $ 424,408 $ 389,965 $ 465,500 $ 1,694,232
Gross profit from continuing operations 203,892 212,056 198,516 232,054 846,518
Operating income from continuing operations 70,106 77,565 68,111 79,348 295,130
Net income from continuing operations 45,768 49,222 46,343 68,953 210,286
Net income from discontinued operations 43,064 (179) 340 (346) 42,879
------ ------- ------- ------- ---------
Net income $88,832 $ 49,043 $ 46,683 $ 68,607 $ 253,165
======= ========= ========= ========= ===========
Earnings per common share - basic
Continuing operations $ 0.57 $ 0.61 $ 0.58 $ 0.85 $ 2.61
Discontinued operations 0.54 - - - 0.54
---- ---- ----- ----- -----
Total earnings per common share $ 1.11 $ 0.61 $ 0.58 $ 0.85 $ 3.15
====== ====== ====== ====== ======
Earnings per common share - diluted
Continuing operations $ 0.56 $ 0.60 $ 0.57 $ 0.83 $ 2.56
Discontinued operations 0.53 - - - 0.53
---- ---- ----- ----- -----
Total earnings per common share $ 1.09 $ 0.60 $ 0.57 $ 0.83 $ 3.09
====== ====== ====== ====== ======
Cash dividends declared per common share $0.0525 $0.0525 $0.0525 $ 0.0600 $ 0.2175
(a) - As a result of the net loss in the third and fourth quarters of 2005,
options to purchase 1,324,000 and 1,299,000 shares of common stock,
respectively, that were outstanding at the end of each quarter were not
included in the computation of diluted income/(loss) per share due to their
antidilutive effects on the income/(loss) per share.
Sales excluding precious metal content were $369.3 million, $400.8 million,
$373.5 million and $400.3 million, respectively, for the first, second, third
and fourth quarters of 2005. Sales excluding precious metal content were $358.6
million, $373.2 million, $345.2 million and $404.9 million, respectively, for
the first, second, third and fourth quarters of 2004. This measurement could be
considered a non-GAAP measure as discussed further in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
92
Supplemental Stock Information
The common stock of the Company is traded on the NASDAQ National Market
under the symbol "XRAY". The following table sets forth high, low and closing
sale prices of the Company's common stock for the periods indicated as reported
on the NASDAQ National Market:
Cash
Dividend
Market Range of Common Stock Period-end Declared
Closing Per Common
High Low Price Share
2005
First Quarter $ 58.40 $ 51.66 $ 54.41 $0.06000
Second Quarter 57.93 52.68 54.00 0.06000
Third Quarter 55.94 50.85 54.02 0.06000
Fourth Quarter 58.44 50.73 53.69 0.07000
2004
First Quarter $ 45.44 $ 41.75 $ 44.33 $0.05250
Second Quarter 52.26 44.09 52.10 0.05250
Third Quarter 52.91 46.30 51.94 0.05250
Fourth Quarter 56.84 50.02 56.20 0.06000
2003
First Quarter $ 37.95 $ 32.10 $ 34.79 $0.04600
Second Quarter 41.10 32.35 40.96 0.04600
Third Quarter 47.05 40.41 44.84 0.05250
Fourth Quarter 47.40 41.85 45.17 0.05250
The Company estimates, based on information supplied by its transfer agent,
that there are approximately 57,516 holders of common stock, including 505
holders of record.
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:/s/ Gerald K. Kunkle, Jr.
-----------------------------
Gerald K. Kunkle, Jr.
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Gerald K. Kunkle, Jr. November 6, 2006
- ---------------------------- --------------------
Gerald K. Kunkle, Jr. Date
Chairman of the Board, Director, and
Chief Executive Officer
(Principal Executive Officer)
/s/ William R. Jellison November 6, 2006
- ------------------------- --------------------
William R. Jellison Date
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ John C. Miles II November 6, 2006
- ------------------------- --------------------
John C. Miles II Date
Director
/s/ Dr. Michael C. Alfano November 6, 2006
- ------------------------- --------------------
Dr. Michael C. Alfano Date Director
/s/ Eric K. Brandt November 6, 2006
- ------------------------- --------------------
Eric K. Brandt Date
Director
/s/ Paula H. Cholmondeley November 6, 2006
- ------------------------- --------------------
Paula H. Cholmondeley Date
Director
94
/s/ Michael J. Coleman November 6, 2006
- ------------------------- --------------------
Michael J. Coleman Date
Director
/s/ William F. Hecht November 6, 2006
- ------------------------- --------------------
William F. Hecht Date
Director
/s/ Leslie A. Jones November 6, 2006
- ------------------------- --------------------
Leslie A. Jones Date
Director
/s/ Wendy L. Dixon November 6, 2006
- ------------------------- --------------------
Wendy L. Dixon Date
Director
/s/ Francis J. Lunger November 6, 2006
- ------------------------- --------------------
Francis J. Lunger Date
Director
/s/ W. Keith Smith November 6, 2006
- ------------------------- --------------------
W. Keith Smith Date Director Date
95
Exhibit 31.2
Section 302 Certifications Statement
I, William R. Jellison, certify that:
1. I have reviewed this Form 10-K/A of DENTSPLY International Inc;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e) 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 controls over financial reporting, or
caused such internal controls over financial reporting to be
designed under their 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;
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: November 6, 2006
/s/ William R. Jellison
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 Annual Report of DENTSPLY International Inc. (the
"Company") on Form 10-K/A for the year ending December 31, 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
November 6, 2006
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-71792, 33-89786, 333-56093, and 333-101548) and
Registration Statement on Form S-3 (No. 333-76089) of DENTSPLY International
Inc. of our report dated March 10, 2006, except for the restatement discussed in
Note 18 to the consolidated financial statements and the matter discussed in the
penultimate paragraph of Management's Report on Internal Control Over Financial
Reporting, as to which the date is November 6, 2006, relating to the financial
statements, financial statement schedule, management's assessment of the
effectiveness of internal control over financial reporting and the effectiveness
of internal control over financial reporting, which appears in this Form 10-K/A.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 6, 2006
Exhibit 31.1
Section 302 Certifications Statement
I, Gerald K. Kunkle, certify that:
1. I have reviewed this Form 10-K/A of DENTSPLY International Inc;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e) 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 controls over financial reporting, or
caused such internal controls over financial reporting to be
designed under their 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;
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: November 6, 2006
/s/ Gerald K. Kunkle
Gerald K. Kunkle
Chief Financial Officer and
Chairman of the Board of Directors