SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-16211
DENTSPLY International Inc.
_____________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 39-1434669
_____________________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
221 West Philadelphia Street, York, PA 17405-0872
_________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(717) 845-7511
(Registrant’s telephone number, including area code)
Indicate by check mark 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 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 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 |
|
Smaller reporting company |
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). |
Yes |
|
|
No |
X |
|
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At April 30, 2009, DENTSPLY International Inc. (the “Company”) had 148,528,582 shares of Common Stock outstanding, with a par value of $.01 per share.
DENTSPLY International Inc.
FORM 10-Q
For Quarter Ended March 31, 2009
INDEX
|
Page No. |
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
|
Consolidated Condensed Statements of Income |
3 |
|
Consolidated Condensed Balance Sheets |
4 |
|
Consolidated Condensed Statements of Cash Flows |
5 |
|
Consolidated Statement of Changes in Equity |
6 |
Notes to Unaudited Interim Consolidated Condensed
|
Financial Statements |
7 |
Item 2 - Management’s Discussion and Analysis of
|
Financial Condition and Results of Operations |
25 |
Item 3 - Quantitative and Qualitative Disclosures
|
About Market Risk |
32 |
|
Item 4 - Controls and Procedures |
32 |
PART II - OTHER INFORMATION
|
Item 1 - Legal Proceedings |
33 |
|
Item 1A - Risk Factors |
34 |
|
Item 2 - Unregistered Sales of Securities and Use of Proceeds |
34 |
|
Item 4 - Submission of Matters to a Vote of Security Holders |
34 |
|
Item 6 - Exhibits |
34 |
Signatures |
35 |
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES |
|
||||
CONSOLIDATED CONDENSED STATEMENTS OF INCOME |
|
||||
(unaudited) |
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
||
|
|
|
2009 |
|
2008 |
|
|
|
(in thousands, except per share amounts) |
||
Net sales |
|
$ |
506,949 |
$ |
560,782 |
Cost of products sold |
|
|
239,980 |
|
275,539 |
|
|
|
|
|
|
Gross profit |
|
|
266,969 |
|
285,243 |
Selling, general and administrative expenses |
|
|
179,228 |
|
184,002 |
Restructuring, impairment and other costs (Note 8) |
1,570 |
|
204 |
||
|
|
|
|
|
|
Operating income |
|
|
86,171 |
|
101,037 |
|
|
|
|
|
|
Other income and expenses: |
|
|
|
|
|
Interest expense |
|
|
6,153 |
|
8,252 |
Interest income |
|
|
(1,956) |
|
(5,210) |
Other expense, net |
|
|
913 |
|
3,122 |
|
|
|
|
|
|
Income before income taxes |
|
|
81,061 |
|
94,873 |
Provision for income taxes |
|
|
21,131 |
|
26,718 |
|
|
|
|
|
|
Net income |
|
|
59,930 |
|
68,155 |
Less: Net Loss attributable to the |
|
|
|
|
|
noncontrolling interests |
|
|
(1,813) |
|
(25) |
Net income attributable to DENTSPLY International |
|
$ |
61,743 |
$ |
68,180 |
|
|
|
|
|
|
Earnings per common share (Note 4) |
|
|
|
|
|
- Basic |
|
$ |
0.42 |
$ |
0.45 |
- Diluted |
|
$ |
0.41 |
$ |
0.45 |
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
0.050 |
$ |
0.045 |
|
|
|
|
|
|
Weighted average common shares outstanding (Note 4): |
|
|
|
||
Basic |
|
|
148,514 |
|
149,945 |
Diluted |
|
|
149,705 |
|
152,983 |
|
|
|
|
|
|
See accompanying notes to Unaudited Interim Consolidated Condensed Financial Statements. |
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES |
|
|
|
|
|
CONSOLIDATED CONDENSED BALANCE SHEETS |
|
|
|
|
|
(unaudited) |
|
March 31 |
|
December 31, |
|
|
|
|
2009 |
|
2008 |
|
|
|
(in thousands) |
||
Assets |
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
Cash and cash equivalents |
$ |
226,299 |
$ |
203,991 |
|
Short-term investments |
|
187 |
|
258 |
|
Accounts and notes receivable-trade, net (Note 1) |
|
327,514 |
|
319,260 |
|
Inventories, net (Note 6) |
|
314,089 |
|
306,125 |
|
Prepaid expenses and other current assets |
|
116,800 |
|
120,228 |
|
Total Current Assets |
|
984,889 |
|
949,862 |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
416,393 |
|
432,276 |
|
Identifiable intangible assets, net |
|
124,958 |
|
103,718 |
|
Goodwill, net |
|
1,206,008 |
|
1,277,026 |
|
Other noncurrent assets, net |
|
28,541 |
|
67,518 |
Total Assets |
$ |
2,760,789 |
$ |
2,830,400 |
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
Accounts payable |
$ |
98,313 |
$ |
104,329 |
|
Accrued liabilities |
|
188,658 |
|
193,660 |
|
Income taxes payable |
|
31,119 |
|
36,178 |
|
Notes payable and current portion of long-term debt |
|
25,617 |
|
25,795 |
|
Total Current Liabilities |
|
343,707 |
|
359,962 |
|
|
|
|
|
|
|
Long-term debt |
|
460,842 |
|
423,679 |
|
Deferred income taxes |
|
59,031 |
|
69,049 |
|
Other noncurrent liabilities |
|
217,612 |
|
318,297 |
|
Total Liabilities |
|
1,081,192 |
|
1,170,987 |
|
|
|
|
|
|
|
Commitments and contingencies (Note 12) |
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity: |
|
|
|
|
|
Preferred stock, $.01 par value; .25 million shares authorized; |
|
|
|
|
|
no shares issued |
|
- |
|
- |
|
Common stock, $.01 par value; 200 million shares authorized; |
|
|
|
|
|
162.8 million shares issued at March 31, 2009 and December 31, 2008 |
1,628 |
|
1,628 |
|
|
Capital in excess of par value |
|
190,238 |
|
187,154 |
|
Retained earnings |
|
1,893,242 |
|
1,838,958 |
|
Accumulated other comprehensive income (Note 3) |
|
8,303 |
|
39,612 |
|
Treasury stock, at cost, 14.3 million shares at March 31, 2009 |
|
|
|
|
|
and 14.2 million shares at December 31, 2008 |
|
(479,265) |
|
(479,630) |
|
Total DENTSPLY International Stockholders' Equity |
|
1,614,146 |
|
1,587,722 |
|
|
|
|
|
|
|
Noncontrolling interests |
|
65,451 |
|
71,691 |
|
Total Stockholders’Equity |
|
1,679,597 |
|
1,659,413 |
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity |
$ |
2,760,789 |
$ |
2,830,400 |
|
See accompanying notes to Unaudited Interim consolidated Condensed Financial Statements. |
|
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES |
|||||
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS |
|||||
(unaudited) |
Three Months Ended March 31, |
||||
2009 |
2008 |
||||
Cash flows from operating activities: |
|||||
Net income |
$ |
59,930 |
$ |
68,155 |
|
Adjustments to reconcile net income to net cash |
|||||
provided by operating activities: |
|||||
Depreciation |
12,930 |
12,021 |
|||
Amortization |
3,441 |
2,189 |
|||
Deferred income taxes |
(1,750) |
18,449 |
|||
Share based compensation expense |
|
|
4,789 |
|
4,093 |
Restructuring, impairment and other costs |
|
|
790 |
|
204 |
Stock option income tax benefit |
|
|
(592) |
|
(1,139) |
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
||
Accounts and notes receivable-trade, net |
|
|
(19,745) |
|
(32,753) |
Inventories, net |
|
|
(18,675) |
|
(6,203) |
Prepaid expenses and other current assets |
|
|
1,208 |
|
(5,480) |
Accounts payable |
|
|
(2,633) |
|
7,812 |
Accrued liabilities |
|
|
(27,325) |
|
(26,319) |
Income tax payable |
|
|
(1,824) |
|
(15,722) |
Other, net |
|
|
95 |
|
4,864 |
Net cash provided by operating activities |
|
|
10,639 |
|
30,171 |
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
Capital expenditures |
|
|
(14,183) |
|
(18,682) |
Cash paid for acquisitions of businesses and equity investments, net of cash acquired |
|
|
(574) |
|
(2,415) |
Purchases of short-term investments |
|
|
- |
|
(90,641) |
Liquidations of short-term investments |
|
|
58 |
|
- |
Proceeds from sale of property, plant and equipment, net |
|
17 |
|
486 |
|
Net cash used in investing activities |
|
|
(14,682) |
|
(111,252) |
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
Net change in short-term borrowings |
|
|
1,045 |
|
4,437 |
Cash paid for treasury stock |
|
|
(4,664) |
|
(87,824) |
Cash dividends paid |
|
|
(7,460) |
|
(6,803) |
Proceeds from long-term borrowings |
|
|
108,900 |
|
78,254 |
Payments on long-term borrowings |
|
|
(53,507) |
|
- |
Proceeds from exercise of stock options |
|
|
1,360 |
|
3,016 |
Excess tax benefits from share-based compensation |
|
|
592 |
|
1,139 |
Net cash provided by (used in) financing activities |
|
|
46,266 |
|
(7,781) |
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
(19,915) |
|
10,138 |
||
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
22,308 |
|
(78,724) |
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
203,991 |
|
169,384 |
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
226,299 |
$ |
90,660 |
See accompanying notes to Unaudited Interim Consolidated Condensed Financial Statements. |
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES |
|||||||||
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY |
|||||||||
(unaudited) |
|
|
|
Accumulated |
|
Total DENTSPLY |
|
|
|
|
|
Capital in |
|
Other |
|
International |
|
Total |
|
|
Common |
Excess of |
Retained |
Comprehensive |
Treasury |
Stockholders' |
Noncontrolling |
Stockholders' |
|
|
Stock |
Par Value |
Earnings |
Income (Loss) |
Stock |
Equity |
Interest |
Equity |
|
|
(in thousands) |
||||||||
Balance at December 31, 2007 |
$1,628 |
$173,084 |
$1,582,683 |
$145,819 |
$(387,108) |
$1,516,106 |
$296 |
$1,516,402 |
|
Purchase of subsidiary shares from noncontrolling interest |
- |
- |
- |
- |
- |
- |
71,931 |
71,931 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
Net income |
- |
- |
283,869 |
- |
- |
283,869 |
(599) |
283,270 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
||
Foreign currency translation adjustment |
- |
- |
- |
(71,521) |
- |
(71,521) |
63 |
(71,458) |
|
Unrealized loss on available-for-sale securities |
- |
- |
- |
- |
- |
- |
- |
- |
|
Net loss on derivative financial instruments |
- |
- |
- |
(13,986) |
- |
(13,986) |
- |
(13,986) |
|
Unrecognized losses and prior service cost, net |
- |
- |
- |
(20,700) |
- |
(20,700) |
- |
(20,700) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
177,662 |
(536) |
177,126 |
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
- |
(7,268) |
- |
- |
19,994 |
12,726 |
- |
12,726 |
|
Tax benefit from stock options exercised |
- |
3,910 |
- |
- |
- |
3,910 |
- |
3,910 |
|
Share based compensation expense |
- |
17,290 |
- |
- |
- |
17,290 |
- |
17,290 |
|
Funding of Employee Stock Option Plan |
- |
62 |
- |
- |
118 |
180 |
- |
180 |
|
Treasury shares purchased |
- |
- |
- |
- |
(112,634) |
(112,634) |
- |
(112,634) |
|
RSU dividends |
- |
76 |
(76) |
- |
- |
- |
- |
- |
|
Cash dividends ($0.185 per share) |
- |
- |
(27,518) |
- |
- |
(27,518) |
- |
(27,518) |
|
Balance at December 31, 2008 |
$1,628 |
$187,154 |
$1,838,958 |
$39,612 |
$(479,630) |
$1,587,722 |
$71,691 |
$1,659,413 |
|
Comprehensive Income: |
|||||||||
Net income |
- |
- |
61,743 |
- |
- |
61,743 |
(1,813) |
59,930 |
|
Other comprehensive income (loss), net of tax: |
|||||||||
Foreign currency translation adjustment |
- |
- |
- |
(75,758) |
- |
(75,758) |
(4,428) |
(80,186) |
|
Unrealized loss on available-for-sale securities |
- |
- |
- |
- |
- |
- |
- |
- |
|
Net loss on derivative financial instruments |
- |
- |
- |
42,471 |
- |
42,471 |
- |
42,471 |
|
Unrecognized losses and prior service cost, net |
- |
- |
- |
1,978 |
- |
1,978 |
1 |
1,979 |
|
Comprehensive Income |
30,434 |
(6,240) |
24,194 |
||||||
Exercise of stock options |
- |
(2,261) |
- |
- |
3,621 |
1,360 |
- |
1,360 |
|
Tax benefit from stock options exercised |
- |
592 |
- |
- |
- |
592 |
- |
592 |
|
Share based compensation expense |
- |
4,789 |
- |
- |
- |
4,789 |
- |
4,789 |
|
Funding of Employee Stock Option Plan |
- |
(70) |
- |
- |
1,408 |
1,338 |
- |
1,338 |
|
Treasury shares purchased |
- |
- |
- |
- |
(4,664) |
(4,664) |
- |
(4,664) |
|
RSU dividends |
- |
34 |
(34) |
- |
- |
- |
- |
- |
|
Cash dividends ($0.05 per share) |
- |
- |
(7,425) |
- |
- |
(7,425) |
- |
(7,425) |
|
Balance at March 31, 2009 |
$1,628 |
$190,238 |
$1,893,242 |
$8,303 |
$(479,265) |
$1,614,146 |
$65,451 |
$1,679,597 |
|
See accompanying notes to Unaudited Interim Consolidated Condensed Financial Statements. |
DENTSPLY International Inc. and Subsidiaries
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2009
The accompanying Unaudited Interim Consolidated Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Results for interim periods should not be considered indicative of results for a full year. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s most recent Form 10-K/A filed May 1, 2009.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of DENTSPLY International Inc., as applied in the consolidated interim financial statements presented herein, are substantially the same as presented on pages 52 through 58 of the Annual Report Form 10-K/A for the fiscal year ended December 31, 2008, except as indicated below:
Accounts and Notes Receivable-Trade
Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $19.2 million and $19.4 million at March 31, 2009 and December 31, 2008, respectively.
Business Acquisitions
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R) (“SFAS 141(R)”), “Business Combinations.” It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company has adopted SFAS 141(R) in the first quarter of fiscal year 2009.
On April 1, 2009, the FASB issued FASB Staff Position (“FSP”) No. SFAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies,” which amends and clarifies SFAS 141(R) to address application issues raised by preparers, auditors and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The FSP is effective for fiscal years ending after December 15, 2008. The Company has adopted the FSP in the first quarter of fiscal year 2009.
Noncontrolling Interests
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (“SFAS 160”), “Noncontrolling Interests (“NCI”) in Consolidated Financial Statements.” This statement amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Company adopted SFAS 160 on January 1, 2009 and retrospectively reclassed NCI to equity in the Condensed Balance Sheet, retrospectively included NCI in consolidated net income and consolidated comprehensive income, and provided other applicable disclosures. The implementation of SFAS 160 did not impact the Company’s net income attributable to DENTSPLY International in the current or prior periods.
Fair Value Measurement
On February 12, 2008, the FASB issued FASB Staff Position No. SFAS 157-2, “Effective Date of FASB Statement No. 157,” which amends SFAS 157 by delaying its effective date by one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore, beginning on January 1, 2008, this standard applies prospectively to new fair value measurements of financial instruments and recurring fair value measurements of non-financial assets and non-financial liabilities. The Company has adopted SFAS 157-2 in the first quarter of fiscal year 2009. The implementation of SFAS 157-2 did not impact the Company’s financial statements in the current or prior periods.
Revisions in Classification
Certain revisions of classification have been made to prior years' data in order to conform to current year presentation.
New Accounting Pronouncements
On December 31, 2008, the FASB issued FASB Staff Position No. SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which amends SFAS 132(R) by providing guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The FSP is effective for fiscal years ending after December 15, 2009 with early application permitted. Upon initial application, the provisions of this staff position are not required for earlier periods that are presented for comparative periods. The Company is currently evaluating the impact of adopting this staff position on its disclosures.
NOTE 2 – STOCK COMPENSATION
The Company maintains the 2002 Equity Incentive Plan (the “Plan”) under which it may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSU”) and stock appreciation rights, collectively referred to as “Awards.” Awards are granted at exercise prices that are equal to the closing stock price on the date of grant. The Company authorizes grants of 14,000,000 shares of common stock, plus any unexercised portion of cancelled or terminated stock options granted under the DENTSPLY International Inc. 1993, 1998, and 2002 Plans, subject to adjustment as follows: each January, if 7% of the total outstanding common shares of the Company exceed 14,000,000, the excess becomes available for grant under the Plan. No more than 2,000,000 shares may be awarded as restricted stock and restricted stock units, and no key employee may be granted restricted stock units in excess of 150,000 shares of common stock in any calendar year.
Stock 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 when they become immediately exercisable upon death, disability or qualified retirement. Restricted stock units vest 100% on the third anniversary of the date of grant and are subject to a service condition, which requires grantees to remain employed by the Company during the three year period following the date of grant. In addition to the service condition, certain key executives are subject to performance requirements. It is the Company’s practice to issue shares from treasury stock when options are exercised.
Under SFAS 123(R), the Company continues to use the Black-Scholes option-pricing model to estimate the fair value of the non-qualified stock options. The assumptions used to calculate the fair value of the awards granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.
The following table represents total stock based compensation expense and the tax related benefit for the three months ended March 31, 2009 and 2008:
|
|
|
Three Months Ended March 31 |
||
|
|
|
2009 |
|
2008 |
|
|
|
(in millions) |
||
Stock option expense |
|
$ |
2.9 |
$ |
2.8 |
RSU expense |
|
|
1.5 |
|
1.0 |
Total stock based compensation expense |
$ |
4.4 |
$ |
3.8 |
|
|
|
|
|
|
|
Total related tax benefit |
$ |
1.1 |
$ |
1.1 |
The remaining unamortized compensation cost related to non-qualified stock options is $19.8 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.7 years. The unamortized compensation cost related to RSUs is $12.2 million, which will be expensed over the remaining restricted period of the RSUs, or 1.9 years.
The following table reflects the non-qualified stock options transactions from December 31, 2008 through March 31, 2009:
|
Outstanding |
|
Exercisable |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
Average |
|
Aggregate |
|
|
|
Exercise |
|
Intrinsic |
|
|
|
Exercise |
|
Intrinsic |
|
Shares |
|
Price |
|
Value |
|
Shares |
|
Price |
|
Value |
|
(in thousands, except per share data) |
||||||||||
December 31, 2008 |
11,285 |
$ |
26.75 |
$ |
41,428 |
|
8,185 |
$ |
24.71 |
$ |
37,796 |
Granted |
35 |
|
22.27 |
|
|
|
|
|
|
|
|
Exercised |
(118) |
|
11.50 |
|
|
|
|
|
|
|
|
Forfeited |
(50) |
|
31.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
11,152 |
$ |
26.87 |
$ |
31,594 |
|
8,128 |
$ |
24.95 |
$ |
29,939 |
The weighted average remaining contractual term of all outstanding options is 6.1 years and the weighted average remaining contractual term of exercisable options is 5.0 years.
The following table summarizes the unvested restricted stock unit and restricted stock unit dividend transactions from December 31, 2008 through March 31, 2009:
|
|
Unvested Restricted Stock Units |
||
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
Grant Date |
|
|
Shares |
|
Fair Value |
|
|
(in thousands, except per share amounts) |
||
Unvested at December 31, 2008 |
|
400 |
$ |
36.11 |
Granted |
|
279 |
|
26.21 |
Vested |
|
(2) |
|
26.23 |
Forfeited |
|
(6) |
|
34.42 |
|
|
|
|
|
Unvested at March 31, 2009 |
|
671 |
$ |
32.05 |
NOTE 3 – COMPREHENSIVE INCOME
The balances included in accumulated other comprehensive income in the consolidated balance sheets are as follows:
|
|
|
Three Months Ended March 31, |
||
|
|
|
2009 |
|
2008 |
|
|
|
(in thousands) |
||
Net income |
$ |
59,930 |
$ |
68,155 |
|
Other comprehensive income: |
|
|
|
|
|
Foreign currency translation adjustments, net of tax |
|
(80,186) |
|
100,699 |
|
Amortization of unrecognized losses and prior year service cost, net of tax |
|
1,979 |
|
(327) |
|
Net gain (loss) on derivative financial instruments, net of tax |
|
42,471 |
|
(78,812) |
|
Total other comprehensive income, net of tax |
|
(35,736) |
|
21,560 |
|
|
|
|
|
|
|
Total Comprehensive income |
|
24,194 |
|
89,715 |
|
|
|
|
|
|
|
Comprehensive income attributable to the noncontrolling interest |
|
(6,240) |
|
(25) |
|
|
|
|
|
|
|
Comprehensive income attributable to DENTSPLY International |
$ |
30,434 |
$ |
89,740 |
During the quarter ended March 31, 2009, foreign currency translation adjustments included currency translation losses of $89.9 million and gains of $9.7 million on the Company’s loans designated as hedges of net investments. During the quarter ended March 31, 2008, foreign currency translation adjustments included currency translation gains of $116.9 million partially offset by losses of $16.2 million on the Company’s loans designated as hedges of net investments. These foreign currency translation adjustments were offset by net gains on derivatives financial instruments, which are discussed in Note 9, Financial Instruments and Derivatives.
The balances included in accumulated other comprehensive income in the consolidated balance sheets are as follows:
|
|
|
March 31, |
|
December 31, |
|
|
|
2009 |
|
2008 |
|
|
|
(in thousands) |
||
Foreign currency translation adjustments |
$ |
93,792 |
$ |
169,550 |
|
Unrecognized losses and prior service cost, net |
|
(28,120) |
|
(30,098) |
|
Net loss on derivative financial instruments |
|
(57,369) |
|
(99,840) |
|
|
|
$ |
8,303 |
$ |
39,612 |
The cumulative foreign currency translation adjustments included translation gains of $192.6 million and $278.1 million as of March 31, 2009 and December 31, 2008, respectively, offset by losses of $98.8 million and $108.5 million, respectively, on loans designated as hedges of net investments. These foreign currency translation adjustments were offset by net gains on derivatives financial instruments, which are discussed in Note 9, Financial Instruments and Derivatives.
NOTE 4 - EARNINGS PER COMMON SHARE
The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted earnings per common share:
|
|
Three Months Ended March 31, |
|||
|
|
2009 |
|
2008 |
|
|
|
(in thousands, except per share amounts) |
|||
Basic Earnings Per Common Share Computation |
|
|
|
|
|
Net income attributable to DENTSPLY International |
$ |
61,743 |
$ |
68,180 |
|
Common shares outstanding |
|
148,514 |
|
149,945 |
|
|
|
|
|
|
|
Earnings per common share – basic |
$ |
0.42 |
$ |
0.45 |
|
|
|
|
|
|
|
Diluted Earnings Per Common Share Computation |
|
|
|
|
|
Net income attributable to DENTSPLY International |
$ |
61,743 |
$ |
68,180 |
|
Common shares outstanding |
|
148,514 |
|
149,945 |
|
Incremental shares from assumed exercise of dilutive options |
|
1,191 |
|
3,038 |
|
Total shares |
|
149,705 |
|
152,983 |
|
Earnings per common share - diluted |
$ |
0.41 |
$ |
0.45 |
Options to purchase 8.1 million shares of common stock that were outstanding during the quarter ended March 31, 2009, 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. There were 1.4 million antidilutive shares outstanding during the three months ended March 31, 2008.
NOTE 5 - SEGMENT INFORMATION
The Company follows Statement of Financial Accounting Standards No. 131 ("SFAS 131"), “Disclosures about Segments of an Enterprise and Related Information.” SFAS 131 establishes standards for disclosing information about reportable segments in financial statements. The Company has numerous operating businesses covering a wide range of products and geographic regions, primarily serving the professional dental market. Professional dental products represented approximately 97% of sales for the periods ended March 31, 2009 and 2008.
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 groups are consistent with those described in the most recently filed 10-K/A Consolidated Financial Statements in the summary of significant accounting policies. The Company measures segment income for reporting purposes as net operating profit before restructuring, interest and taxes.
In January 2009, the Company moved several locations between segments, which resulted in a change to the management structure, to leverage operating efficiencies. The segment information below reflects this revised structure for all periods shown.
United States, Germany, and Certain Other European Regions Consumable Businesses
This business group includes responsibility for the design, manufacturing, sales and distribution for certain small equipment and chairside consumable products in the United States, Germany, and certain other European regions. It also has responsibility for the sales and distribution of certain small equipment and chairside products in other regions, and for certain Endodontic products in Germany.
France, United Kingdom, Italy and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses
This business group includes responsibility for the sales and distribution for certain small equipment, chairside consumable products, certain laboratory products and certain Endodontic products in France, United Kingdom, Italy, the Commonwealth of Independent States (“CIS”), Middle East, Africa, Asia (excluding Japan), Japan and Australia, as well as the sale and distribution of implant products and bone substitute/grafting materials in Italy, Asia and Australia. This business group also
includes the responsibility for sales and distribution for certain laboratory products, implant products and bone substitution/grafting materials for Austria. It also is responsible for sales and distribution for certain small equipment and chairside consumable products, certain laboratory products, implant products and bone substation/grafting materials in certain other European countries. In addition this business group includes the manufacturing and sale of Orthodontic products and certain laboratory products, and the sales and distribution of implant products in Japan, and the manufacturing of certain laboratory and certain Endodontic products in Asia.
Canada/Latin America/Endodontics/Orthodontics
This business group includes responsibility for the design, manufacture, and/or sales and distribution of certain small equipment, chairside consumable products, certain laboratory products and Endodontic products in Brazil. It also has responsibility for the sales and distribution of most of the Company’s dental products sold in Latin America and Canada. This business group also includes the responsibility for the design and manufacturing for Endodontic products in the United States, Switzerland and Germany and is responsible for sales and distribution of Company Endodontic products in the United States, Canada, Switzerland, Benelux, Scandinavia, Austria, Latin America and Eastern Europe, and for certain Endodontic products in Germany. This business group is also responsible for the world-wide sales and distribution as well as some manufacturing of the Company’s Orthodontic products, except for Japan. In addition, this business group is also responsible for sales and distribution in the United States for implant and bone substitute/grafting materials and the sales and distribution of implants in Brazil. This business group is also responsible for manufacture, sales and distribution of certain products in the Company’s non-dental business.
Dental Laboratory Business/Implants/Non-Dental
This business group includes the responsibility for the design, manufacture, sales and distribution for most laboratory products, excluding certain countries mentioned previously, and the design, manufacture, and/or sales and distribution of the Company’s dental implant products and bone substitute/grafting materials, excluding sales and distribution of implants and bone substitute/grafting materials in the United States; Italy, Austria, and certain other Eastern European countries; Asia; and Australia as well as implant products in Brazil and Japan. This business group is also responsible for most of the Company’s non-dental business.
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, excluding restructuring, impairment and other costs, and net third party sales, excluding precious metal content.
The following tables set forth information about the Company’s operating groups for the three months ended March 31, 2009 and 2008:
Third Party Net Sales |
|
Three Months Ended March 31, |
||
|
|
2009 |
|
2008 |
|
|
(in thousands) |
||
United States, Germany, and Certain Other European Regions Consumable Businesses |
$ |
124,913 |
$ |
120,555 |
|
|
|
|
|
France, United Kingdom, Italy, and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses |
|
100,805 |
|
112,216 |
|
|
|
|
|
Canada/Latin America/Endodontics/ |
|
|
|
|
Orthodontics |
|
144,680 |
|
153,798 |
|
|
|
|
|
Dental Laboratory Business/ |
|
|
|
|
Implants/Non-Dental |
|
137,341 |
|
175,456 |
|
|
|
|
|
All Other (a) |
|
(790) |
|
(1,243) |
Total |
$ |
506,949 |
$ |
560,782 |
Third Party Net sales, excluding precious metal content
The presentation of net sales, excluding precious metal content, is considered a measure not calculated in accordance with generally accepted accounting principles (“GAAP”), and is therefore considered a non-GAAP measure. This non-GAAP measure is discussed further in “Management's Discussion and Analysis of Financial Condition and Results of Operations” and a reconciliation of net sales, excluding precious metal content, to net sales is provided below.
|
|
Three Months Ended March 31, |
||
|
|
2009 |
|
2008 |
|
|
(in thousands) |
||
United States, Germany, and Certain Other European Regions Consumable Businesses |
$ |
124,913 |
$ |
120,555 |
|
|
|
|
|
France, United Kingdom, Italy, and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses |
|
93,077 |
|
103,914 |
|
|
|
|
|
Canada/Latin America/Endodontics/ |
|
|
|
|
Orthodontics |
|
144,039 |
|
152,896 |
|
|
|
|
|
Dental Laboratory Business/ |
|
|
|
|
Implants/Non-Dental |
|
104,411 |
|
120,126 |
All Other (a) |
|
(790) |
|
(1,243) |
Total excluding Precious Metal Content |
|
465,650 |
|
496,248 |
Precious Metal Content |
|
41,299 |
|
64,534 |
Total including Precious Metal Content |
$ |
506,949 |
$ |
560,782 |
Intersegment Net Sales |
|
Three Months Ended March 31, |
||
|
|
2009 |
|
2008 |
|
|
(in thousands) |
||
United States, Germany, and Certain Other European Regions Consumable Businesses |
$ |
23,080 |
$ |
30,437 |
|
|
|
|
|
France, United Kingdom, Italy, and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses |
|
3,384 |
|
4,215 |
|
|
|
|
|
Canada/Latin America/Endodontics/Orthodontics |
|
28,598 |
|
25,108 |
|
|
|
|
|
Dental Laboratory Business/ |
|
|
|
|
Implants/Non-Dental |
|
24,382 |
|
27,692 |
|
|
|
|
|
All Other (b) |
|
38,326 |
|
46,364 |
Eliminations |
|
(117,770) |
|
(133,816) |
Total |
$ |
- |
$ |
- |
(a) Includes: amounts recorded at Corporate headquarters.
(b) Includes: amounts recorded at Corporate headquarters and one distribution warehouse not managed by named segments.
Segment Operating Income |
|
Three Months Ended March 31, |
||
|
|
2009 |
|
2008 |
|
|
(in thousands) |
||
United States, Germany, and Certain Other European Regions Consumable Businesses |
$ |
33,922 |
$ |
43,128 |
|
|
|
|
|
France, United Kingdom, Italy, and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses |
|
2,709 |
|
2,010 |
|
|
|
|
|
Canada/Latin America/Endodontics/Orthodontics |
|
50,058 |
|
51,278 |
|
|
|
|
|
Dental Laboratory Business/ |
|
|
|
|
Implants/Non-Dental |
|
22,448 |
|
31,718 |
All Other (a) |
|
(21,396) |
|
(26,893) |
Segment Operating Income |
|
87,741 |
|
101,241 |
Reconciling Items: |
|
|
|
|
Restructuring, impairments and other costs |
|
(1,570) |
|
(204) |
Interest expense |
|
(6,153) |
|
(8,252) |
Interest income |
|
1,956 |
|
5,210 |
Other (income) expense, net |
|
(913) |
|
(3,122) |
Income before income taxes |
$ |
81,061 |
$ |
94,873 |
Assets |
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
(in thousands) |
||||
United States, Germany, and Certain Other European Regions Consumable Businesses |
$ |
547,821 |
$ |
556,125 |
|
|
|
|
|
France, United Kingdom, Italy, and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses |
|
362,450 |
|
385,050 |
|
|
|
|
|
Canada/Latin America/Endodontics/Orthodontics |
|
761,997 |
|
763,479 |
|
|
|
|
|
Dental Laboratory Business/ |
|
|
|
|
Implants/Non-Dental |
|
909,959 |
|
942,504 |
All Other (b) |
|
178,562 |
|
183,242 |
Total |
$ |
2,760,789 |
$ |
2,830,400 |
(a) Includes: the results of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments.
(b) Includes: assets of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments.
NOTE 6 - INVENTORIES
Inventories are stated at the lower of cost or market. At March 31, 2009 and December 31, 2008, the cost of $11.2 million, or 3.6%, and $9.6 million, or 3.1%, 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. The inventory valuation reserves were $29.4 million and $28.4 million as of March 31, 2009 and December 31, 2008, respectively.
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 March 31, 2009 and December 31, 2008 by $3.6 million and $3.5 million, respectively.
Inventories, net of inventory valuation reserves, consist of the following:
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
||
Finished goods |
$ |
187,619 |
$ |
184,226 |
Work-in-process |
|
55,660 |
|
58,123 |
Raw materials and supplies |
|
70,810 |
|
63,776 |
|
$ |
314,089 |
$ |
306,125 |
NOTE 7 - BENEFIT PLANS
The following sets forth the components of net periodic benefit cost of the Company’s benefit plans and for the Company’s other postretirement employee benefit plans for the three months ended March 31, 2009 and March 31, 2008, respectively:
|
|
|
|
Other Post Retirement |
||||
|
|
Pension Benefits |
|
Benefits |
||||
|
|
Three Months Ended March 31, |
|
Three Months Ended March 31, |
||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
(in thousands) |
|
(in thousands) |
||||
Service cost |
$ |
2,006 |
$ |
1,806 |
$ |
13 |
$ |
12 |
Interest cost |
|
1,919 |
|
2,248 |
|
156 |
|
156 |
Expected return on assets |
|
(958) |
|
(1,158) |
|
- |
|
- |
Amortization of transition obligation |
57 |
|
61 |
|
- |
|
- |
|
Amortization of prior service cost |
|
34 |
|
46 |
|
- |
|
- |
Amortization of net loss |
|
403 |
|
73 |
|
50 |
|
37 |
Net periodic benefit cost |
$ |
3,461 |
$ |
3,076 |
$ |
219 |
$ |
205 |
The following sets forth the information related to the funding of the Company’s benefit plans for 2009:
|
|
Pension Benefits |
|
Other Post Retirement Benefits |
|
|
(in thousands) |
||
Actual, March 31, 2009 |
$ |
2,354 |
$ |
67 |
Projected for the remainder of the year |
|
5,921 |
|
1,017 |
Total for year |
$ |
8,275 |
$ |
1,084 |
NOTE 8 – RESTRUCTURING, IMPAIRMENT AND OTHER COSTS
Restructuring Costs
Restructuring costs of $1.2 million for the three months ended March 31, 2009 are recorded in Restructuring, Impairment and Other Costs in the income statement and the associated liabilities are recorded in accrued liabilities and other non-current liabilities in the consolidated condensed balance sheet. These costs consist of employee severance benefits, payments due under operating contracts and other restructuring costs.
During 2009, the Company initiated several restructuring plans primarily related to the integration, reorganization and closure or consolidation of certain production and selling facilities in order to better leverage the Company’s resources by minimizing costs and obtaining operational efficiencies.
As of March 31, 2009, the Company’s restructuring accruals were as follows:
|
|
Severance |
|||||||
|
|
2007 and |
|
|
|
|
|
|
|
|
|
Prior Plans |
|
2008 Plans |
|
2009 Plans |
|
Total |
|
|
|
(in thousands) |
|||||||
Balance, December 31, 2008 |
$ |
664 |
$ |
2,806 |
$ |
- |
$ |
3,470 |
|
Provisions |
|
28 |
|
- |
|
838 |
|
866 |
|
Amounts applied |
|
(66) |
|
- |
|
(35) |
|
(101) |
|
Balance, March 31, 2009 |
$ |
626 |
$ |
2,806 |
$ |
803 |
$ |
4,235 |
|
|
Lease/contract terminations |
||
|
|
2007 and |
|
|
|
|
Prior Plans |
|
Total |
|
|
(in thousands) |
||
Balance, December 31, 2008 |
$ |
87 |
$ |
87 |
Provisions |
|
- |
|
- |
Amounts applied |
|
(15) |
|
(15) |
Balance, March 31, 2009 |
$ |
72 |
$ |
72 |
|
|
Other restructuring costs |
||||
|
|
2007 and |
|
|
|
|
|
|
Prior Plans |
|
2008 Plans |
|
Total |
|
|
(in thousands) |
||||
Balance, December 31, 2008 |
$ |
108 |
$ |
56 |
$ |
164 |
Provisions |
|
83 |
|
265 |
|
348 |
Amounts applied |
|
(112) |
|
(284) |
|
(396) |
Balance, March 31, 2009 |
$ |
79 |
$ |
37 |
$ |
116 |
The following table provides the cumulative amounts for all the plans by segment:
|
|
December 31, |
|
|
|
Amounts |
|
March 31, |
|
|
2008 |
|
Provisions |
|
applied |
|
2009 |
|
|
(in thousands) |
||||||
United States, Germany and Certain |
|
|
|
|
|
|
|
|
Other European Regions |
|
|
|
|
|
|
|
|
Consumables Businesses |
$ |
102 |
$ |
210 |
$ |
(268) |
$ |
44 |
France, United Kingdom, Italy, and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses |
|
190 |
|
181 |
|
(61) |
|
310 |
Canada, Latin America/ |
|
|
|
|
|
|
|
|
Endodontics/Orthodontics |
|
178 |
|
361 |
|
(54) |
|
485 |
Dental Laboratory Business/ |
|
|
|
|
|
|
|
|
Implants/Non-Dental |
|
3,251 |
|
151 |
|
(129) |
|
3,273 |
All Other (a) |
|
- |
|
311 |
|
- |
|
311 |
Total Balance, December 31, 2008 |
$ |
3,721 |
$ |
1,214 |
$ |
(512) |
$ |
4,423 |
|
(a) |
Includes: amounts recorded at Corporate headquarters |
Impairments and Other Costs
Other costs of $0.4 million for 2009 included costs primarily related to impairments of long-term assets and legal matters. These other costs are reflected in Restructuring, Impairment and Other Costs in the income statement. Legal settlements are further discussed in Note 12, Commitments and Contingencies.
NOTE 9 – FINANCIAL INSTRUMENTS AND DERIVATIVES
The Company has adopted the Statement of Financial Accounting Standards No. 161 (“SFAS 161”),”Disclosures about Derivative Instruments and Hedging Activities.” SFAS 161 is effective for fiscal years beginning after December 15, 2008 and amends and expands the disclosure requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging.” The Company’s expanded disclosures are included below.
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 volatility that these market risks may have on the Company's operating results and equity.
Certain of the Company's inventory purchases are denominated in foreign currencies, which expose 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 create exposures to changes in exchange rates. The Company uses debt and derivatives denominated in the applicable foreign currency as a means of hedging a portion of this risk.
With the Company’s significant level of variable rate long-term debt and net investment hedges, 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 impact on earnings from such market fluctuations, the Company selectively enters into commodity swaps for certain materials used in the production of its products. Additionally, the Company uses non-derivative methods, such as the precious metal consignment agreements to effectively hedge commodity risks.
Cash Flow Hedges
The Company uses interest rate swaps to convert a portion of its variable rate debt to fixed rate debt. As of March 31, 2009, the Company has three groups of significant variable rate to fixed rate interest rate swaps. One of the groups of swaps 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, ending in March 2012. Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rates to a fixed rate of 4.2% for a term of seven years, ending in March 2012. A third group of swaps has a notional amount of $150.0 million, and effectively converts the underlying variable interest rates to a fixed rate of 3.9% for a term of two years, ending March 2010. The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes.
The Company selectively enters into commodity swaps to effectively fix certain variable raw material costs. At March 31, 2009, the Company had swaps in place to purchase 1,905 troy ounces of platinum bullion for use in the production of its impression material products. The average fixed rate of this agreement is $1,392 per troy ounce. In addition, the Company had swaps in place to purchase 164,475 troy ounces of silver bullion for use in the production of its amalgam products at an average fixed rate of $14 per troy ounce.
The Company enters into forward exchange contracts to hedge the foreign currency exposure of its anticipated purchases of certain inventory. 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 typically mature in twelve months or less. For these derivatives which qualify as hedges of future anticipated cash flows, the effective portion of changes in fair value is temporarily deferred in accumulated OCI and then recognized in earnings when the hedged item affects earnings.
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 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.
In the first quarter of 2005, the Company entered into cross currency interest rate swaps with a notional principal value of Swiss francs 457.5 million paying three month Swiss franc Libor and receiving three month U.S. dollar Libor on $384.4 million. In the first quarter of 2006, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 55.5 million paying three month Swiss franc Libor and receiving three month U.S. dollar Libor on $42.0 million. In the fourth quarter of 2006, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 80.4 million paying three month Swiss franc Libor and receiving three month U.S. dollar Libor on $64.4 million. In the first quarter of 2007, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 56.6 million paying three month Swiss franc Libor and receiving three month U.S. dollar Libor on $46.3 million. Additionally, in the fourth quarter of 2005, the Company entered into cross currency interest rate swaps with a notional principal value of Euro 358.0 million paying three month Euro Libor and receiving three month U.S. dollar Libor on $419.7 million. In the first quarter of 2009, the Company terminated Swiss francs 57.5 million cross currency swap at a fair value of zero. The Swiss franc and Euro cross currency interest rate swaps are designated as net investment hedges of the Swiss and Euro denominated net assets. The interest rate differential is recognized in the earnings as interest income or interest expense as it is accrued, the foreign currency revaluation is recorded in accumulated other comprehensive income, net of tax effects.
The fair value of these cross currency interest rate swap agreements is the estimated amount the Company would (pay)/ receive at the reporting date, taking into account the effective interest rates and foreign exchange rates. As of March 31, 2009, the estimated net fair values of the swap agreements were negative $82.4 million, which are recorded in accumulated other comprehensive income, net of tax effects, other noncurrent liabilities and other noncurrent assets.
At March 31, 2009, 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 March 31, 2009 and 2008, the accumulated translation gains on investments in foreign subsidiaries, primarily denominated in Euros, Swiss francs and Japanese yen, net of these net investment hedges, were $42.7 million and $179.9 million, respectively, which are included in accumulated other comprehensive income, net of tax effects.
The tables below summarize the Company’s derivatives at March 31, 2009. The fair value of all derivatives is based on quarter-end currency rates.
|
|
Notional Amounts |
|
Fair Value Asset (Liability) |
||
Foreign Exchange Forward Contracts |
|
2009 |
|
2010 |
|
2009 |
|
|
(in thousands) |
||||
Forward sale, 7.8 million Australian dollars |
$ |
5,406 |
$ |
- |
$ |
(186) |
Forward purchase, 0.8 million British pounds |
(1,054) |
|
- |
|
(45) |
|
Forward sale, 0.4 million Canadian dollars |
|
302 |
|
- |
|
2 |
Forward sale, 1.7 billion Japanese yen |
|
17,242 |
|
- |
|
333 |
Forward purchase, 0.5 billion Japanese yen |
(4,953) |
|
- |
|
(65) |
|
Forward sale, 97.3 million Mexican Pesos |
|
6,875 |
|
- |
|
(141) |
Forward sale, 5.6 million Danish Krone |
|
989 |
|
- |
|
5 |
Forward sale, 20.6 million Taiwanese dollars |
607 |
|
- |
|
(5) |
|
Forward purchase, 14.3 million Euros |
|
(18,937) |
|
- |
|
613 |
Forward purchase, 7.5 million Swiss francs |
(6,574) |
|
- |
|
(3) |
|
Forward purchase, 7.1 million British pounds |
(8,992) |
|
(1,178) |
|
52 |
|
Forward purchase, 16.0 million Canadian dollars |
11,175 |
|
1,485 |
|
504 |
|
Forward purchase, 1.7 million Japanese yen |
(16,508) |
|
(749) |
|
(365) |
|
Forward purchase, 6.0 million Euro |
|
6,858 |
|
1,079 |
|
60 |
Total Foreign Exchange Forward Contracts |
$ |
(7,564) |
$ |
637 |
$ |
759 |
|
|
Notional Amount |
|
Fair Value Asset (Liability) |
||||||||
Interest Rate Swaps |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 and Beyond |
|
2009 |
|
|
(in thousands) |
||||||||||
Euro |
$ |
906 |
$ |
1,739 |
$ |
1,249 |
$ |
1,249 |
$ |
5,310 |
$ |
(824) |
Japanese yen |
- |
- |
- |
126,365 |
- |
(2,634) |
||||||
Swiss francs |
- |
- |
- |
56,848 |
- |
(5,073) |
||||||
U.S. dollars |
- |
|
150,000 |
|
- |
|
- |
|
- |
|
(2,635) |
|
Total Interest Rate Swaps |
$ |
906 |
$ |
151,739 |
$ |
1,249 |
$ |
184,462 |
$ |
5,310 |
$ |
(11,166) |
|
|
Notional Amount |
|
Fair Value Asset (Liability) |
||||||||
Cross Currency Basis Swaps |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 and Beyond |
|
2009 |
|
|
(in thousands) |
||||||||||
Swiss franc 592.5 million @ 1.14 pay CHF 3mo. Libor rec. USD 3mo. Libor |
$ |
- |
$ |
398,373 |
$ |
70,317 |
$ |
49,501 |
$ |
- |
$ |
(29,561) |
Euros 358.0 million @ $1.18 pay EUR 3mo. Libor rec. USD 3mo. Libor |
|
- |
|
473,580 |
|
- |
|
- |
|
- |
|
(52,878) |
Total Cross Currency Basis Swaps |
$ |
- |
$ |
871,953 |
$ |
70,317 |
$ |
49,501 |
$ |
- |
$ |
(82,439) |
|
|
Notional Amount |
|
Fair Value Asset (Liability) |
||||||||
Commodity Contracts |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 and Beyond |
|
2009 |
|
|
(in thousands) |
||||||||||
Silver Swap – U.S. dollar |
$ |