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Dentsply 10-Q1


UNITED STATES
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, 2013
OR
 
o    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 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   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   x No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   

Yes   o 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 May 6, 2013, DENTSPLY International Inc. had 143,282,565 shares of Common Stock outstanding, with a par value of $.01 per share.



DENTSPLY International Inc.

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)

 
Three Months Ended March 31,
 
2013
 
2012
 
 
 
 
Net sales
$
732,084

 
$
716,413

Cost of products sold
343,884

 
323,663

 
 
 
 
Gross profit
388,200

 
392,750

Selling, general and administrative expenses
293,677

 
304,353

Restructuring and other costs
665

 
1,237

 
 
 
 
Operating income
93,858

 
87,160

 
 
 
 
Other income and expenses:
 

 
 

Interest expense
15,221

 
15,782

Interest income
(2,175
)
 
(1,878
)
Other expense (income), net
2,918

 
65

 
 
 
 
Income before income taxes
77,894

 
73,191

Provision for income taxes
3,542

 
14,715

Equity in net loss of unconsolidated affiliated company
(1,779
)
 
(4,248
)
 
 
 
 
Net income
72,573

 
54,228

Less: Net income attributable to noncontrolling interests
888

 
944

 
 
 
 
Net income attributable to DENTSPLY International
$
71,685

 
$
53,284

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
0.50

 
$
0.38

Diluted
$
0.49

 
$
0.37

 
 
 
 
Weighted average common shares outstanding:
 

 
 

Basic
142,775

 
141,721

Diluted
145,099

 
143,984


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

3



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)

 
Three Months Ended March 31,
 
2013
 
2012
 
 
 
 
Net income
$
72,573

 
$
54,228

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
(94,142
)
 
133,633

Net gain (loss) on derivative financial instruments
28,118

 
(32,132
)
Net unrealized holding gain on available-for-sale securities
7,640

 
23,000

Pension liability adjustments
2,776

 
(222
)
Total other comprehensive income (loss)
(55,608
)
 
124,279

 
 
 
 
Total comprehensive income (loss)
16,965

 
178,507

 
 
 
 
Less: Comprehensive income (loss) attributable
 

 
 

to noncontrolling interests
181

 
2,284

 
 
 
 
Comprehensive income (loss) attributable to
 
 
 
DENTSPLY International
16,784

 
176,223

 


 



See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

4



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
March 31, 2013
 
December 31, 2012
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
56,203

 
$
80,132

Accounts and notes receivables-trade, net
468,537

 
442,412

Inventories, net
417,094

 
402,940

Prepaid expenses and other current assets
218,685

 
185,612

 
 
 
 
Total Current Assets
1,160,519

 
1,111,096

 
 
 
 
Property, plant and equipment, net
608,850

 
614,705

Identifiable intangible assets, net
805,646

 
830,642

Goodwill, net
2,167,241

 
2,210,953

Other noncurrent assets, net
159,872

 
204,901

 
 
 
 
Total Assets
$
4,902,128

 
$
4,972,297

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
148,715

 
$
165,290

Accrued liabilities
347,397

 
424,336

Income taxes payable
14,615

 
39,191

Notes payable and current portion of long-term debt
315,438

 
298,963

 
 
 
 
Total Current Liabilities
826,165

 
927,780

 
 
 
 
Long-term debt
1,207,722

 
1,222,035

Deferred income taxes
226,100

 
232,641

Other noncurrent liabilities
372,747

 
340,398

 
 
 
 
Total Liabilities
2,632,734

 
2,722,854

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity:
 

 
 

Preferred stock, $.01 par value; .25 million shares authorized; no shares issued
—

 
—

Common stock, $.01 par value; 200.0 million shares authorized; 162.8 million shares issued at March 31, 2013 and December 31, 2012.
1,628

 
1,628

Capital in excess of par value
238,945

 
246,548

Retained earnings
2,881,126

 
2,818,461

Accumulated other comprehensive loss
(199,101
)
 
(144,200
)
Treasury stock, at cost, 19.7 million and 20.5 million shares at March 31, 2013 and December 31, 2012, respectively.
(689,096
)
 
(713,739
)
Total DENTSPLY International Equity
2,233,502

 
2,208,698

 
 
 
 
Noncontrolling interests
35,892

 
40,745

 
 
 
 
Total Equity
2,269,394

 
2,249,443

 
 
 
 
Total Liabilities and Equity
$
4,902,128

 
$
4,972,297

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

5


DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Three Months Ended
March 31,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
72,573

 
$
54,228

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation
20,416

 
20,209

Amortization
11,934

 
15,360

Amortization of deferred financing costs
1,296

 
1,196

Deferred income taxes
(11,793
)
 
3,690

Share-based compensation expense
5,434

 
4,222

Stock option income tax benefit
(603
)
 
(3,879
)
Equity in earnings from unconsolidated affiliates
1,779

 
4,248

Other non-cash (income) expense
(3,912
)
 
3,048

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
(36,209
)
 
(25,597
)
Inventories, net
(22,080
)
 
(34,006
)
Prepaid expenses and other current assets
4,085

 
(24,072
)
Other noncurrent assets, net
(598
)
 
15,954

Accounts payable
(10,928
)
 
11,528

Accrued liabilities
(7,559
)
 
(21,186
)
Income taxes
(21,196
)
 
10,545

Other noncurrent liabilities
33,447

 
(15,535
)
 
 
 
 
Net cash provided by operating activities
36,086

 
19,953

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(24,032
)
 
(18,642
)
Cash paid for acquisitions of businesses, net of cash acquired
(3,939
)
 
—

Payments on settlements of net investment hedges
(45,765
)
 
—

Expenditures for identifiable intangible assets
(205
)
 
(146
)
Purchase of Company-owned life insurance policies
—

 
(1,577
)
Proceeds from sale of property, plant and equipment, net
1,218

 
166

 
 
 
 
Net cash used in investing activities
(72,723
)
 
(20,199
)
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
Net change in short-term borrowings
16,133

 
11,155

Cash paid for treasury stock
—

 
(30,869
)
Cash dividends paid
(7,909
)
 
(7,847
)
Cash paid for contingent consideration on prior acquisitions
—

 
(1,781
)
Cash paid for acquisition of noncontrolling interests of consolidated subsidiary
(8,960
)
 
—

Proceeds from long-term borrowings
—

 
4,571

Repayments of long-term borrowings
—

 
(5,171
)
Proceeds from exercise of stock options
13,578

 
14,483

Excess tax benefits from share-based compensation
603

 
3,879

Interest received on derivatives with an other-than-insignificant financing element
464

 
613

Interest paid on derivatives with an other-than-insignificant financing element
(306
)
 
(1,413
)
 
 
 
 
Net cash provided by (used in) financing activities
13,603

 
(12,380
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(895
)
 
2,844

 
 
 
 
Net decrease in cash and cash equivalents
(23,929
)
 
(9,782
)
 
 
 
 
Cash and cash equivalents at beginning of period
80,132

 
77,128

 
 
 
 
Cash and cash equivalents at end of period
$
56,203

 
$
67,346

 
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

6


DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands)
(unaudited)

 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total DENTSPLY
International
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2011
$
1,628

 
$
229,687

 
$
2,535,709

 
$
(190,970
)
 
$
(727,977
)
 
$
1,848,077

 
$
36,074

 
$
1,884,151

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
—

 
—

 
53,284

 
—

 
—

 
53,284

 
944

 
54,228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
—

 
—

 
—

 
122,939

 
—

 
122,939

 
1,340

 
124,279

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
—

 
(5,227
)
 
—

 
—

 
19,709

 
14,482

 
—

 
14,482

Tax benefit from stock options exercised
—

 
3,879

 
—

 
—

 
—

 
3,879

 
—

 
3,879

Share based compensation expense
—

 
4,222

 
—

 
—

 
—

 
4,222

 
—

 
4,222

Funding of Employee Stock Ownership Plan
—

 
370

 
—

 
—

 
3,272

 
3,642

 
—

 
3,642

Treasury shares purchased
—

 
—

 
—

 
—

 
(30,869
)
 
(30,869
)
 
—

 
(30,869
)
RSU distributions
—

 
(8,147
)
 
—

 
—

 
4,910

 
(3,237
)
 
—

 
(3,237
)
RSU dividends
—

 
57

 
(57
)
 
—

 
—

 
—

 
—

 
—

Cash dividends ($0.0550 per share)
—

 
—

 
(7,802
)
 
—

 
—

 
(7,802
)
 
—

 
(7,802
)
Balance at March 31, 2012
$
1,628

 
$
224,841

 
$
2,581,134

 
$
(68,031
)
 
$
(730,955
)
 
$
2,008,617

 
$
38,358

 
$
2,046,975


 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total DENTSPLY
International
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2012
$
1,628

 
$
246,548

 
$
2,818,461

 
$
(144,200
)
 
$
(713,739
)
 
$
2,208,698

 
$
40,745

 
$
2,249,443

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
—

 
—

 
71,685

 
—

 
—

 
71,685

 
888

 
72,573

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
—

 
—

 
—

 
(54,901
)
 
—

 
(54,901
)
 
(707
)
 
(55,608
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interest
—

 
(3,926
)
 
—

 
—

 
—

 
(3,926
)
 
(5,034
)
 
(8,960
)
Exercise of stock options
—

 
(2,444
)
 
—

 
—

 
16,022

 
13,578

 
—

 
13,578

Tax benefit from stock options exercised
—

 
603

 
—

 
—

 
—

 
603

 
—

 
603

Share based compensation expense
—

 
5,434

 
—

 
—

 
—

 
5,434

 
—

 
5,434

Funding of Employee Stock Ownership Plan
—

 
959

 
—

 
—

 
3,698

 
4,657

 
—

 
4,657

RSU distributions
—

 
(8,305
)
 
—

 
—

 
4,923

 
(3,382
)
 
—

 
(3,382
)
RSU dividends
—

 
76

 
(76
)
 
—

 
—

 
—

 
—

 
—

Cash dividends ($0.0625 per share)
—

 
—

 
(8,944
)
 
—

 
—

 
(8,944
)
 
—

 
(8,944
)
Balance at March 31, 2013
$
1,628

 
$
238,945

 
$
2,881,126

 
$
(199,101
)
 
$
(689,096
)
 
$
2,233,502

 
$
35,892

 
$
2,269,394


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

7


DENTSPLY International Inc. and Subsidiaries

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the United States Securities and Exchange Commission (“SEC”).  The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP. 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 and related notes contain the accounts of DENTSPLY International Inc. and Subsidiaries (“DENTSPLY” or the “Company”) on a consolidated basis and should be read in conjunction with the consolidated financial statements and notes included in the Company’s most recent Form 10-K for the year ended December 31, 2012.

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of the Company, as applied in the interim consolidated financial statements presented herein are substantially the same as presented in the Company’s Form 10-K for the year ended December 31, 2012, except as may be indicated below:

Accounts and Notes Receivable

The Company sells dental and certain healthcare products through a worldwide network of distributors and directly to end users.  For customers on credit terms, the Company performs ongoing credit evaluations 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 based on historical averages of aged receivable balances and the Company’s experience in collecting those balances, customer specific circumstances, as well as changes in the economic and political environments.  The Company records a provision for doubtful accounts, which is included in “Selling, general and administrative expenses.”

Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which was $15.0 million at March 31, 2013 and $14.5 million at December 31, 2012.

Marketable Securities

The Company’s marketable securities consist of corporate convertible bonds that are classified as available-for-sale in “Other noncurrent assets, net” on the Consolidated Balance Sheets as the instruments mature in December 2015. The Company determined the appropriate classification at the time of purchase and will re-evaluate such designation as of each balance sheet date. In addition, the Company reviews the securities each quarter for indications of possible impairment. If an impairment is identified, the determination of whether the impairment is temporary or other-than-temporary requires significant judgment. The primary factors that the Company considers in making this judgment include the extent and time the fair value of each investment has been below cost and the existence of a credit loss. If a decline in fair value is judged other-than-temporary, the basis of the securities is written down to fair value and the amount of the write-down is included as a realized loss in the consolidated statement of operations. Changes in fair value are reported in accumulated other comprehensive income (“AOCI”).

 The convertible feature of the bonds has not been bifurcated from the underlying bonds as the feature does not contain a net-settlement feature, nor would the Company be able to achieve a hypothetical net-settlement that would substantially place the Company in a comparable cash settlement position.  As such, the derivative is not accounted for separately from the bond.  The cash paid by the Company was equal to the face value of the bonds issued, and therefore, the Company has not recorded any bond premium or discount on acquiring the bonds.  The fair value of the bonds was $84.7 million and $75.1 million at March 31, 2013 and December 31, 2012, respectively.  At March 31, 2013 and December 31, 2012, an unrealized holding gain of $25.5 million and $17.8 million, respectively, on available-for-sale securities, net of tax, had been recorded in AOCI. 

New Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities." The standard requires entities to disclose both gross and net information about instruments and transactions that are offset in the Consolidated Balance Sheet, as well as instruments and transactions that are subject to an enforceable master netting agreement or similar agreement. In January 2013,

8


The FASB issued ASU No. 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." The standard clarifies the scope of the disclosure to apply only to derivatives, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements as well as securities lending and borrowing transactions. The standard was effective January 1, 2013, with retrospective application required. The adoption of this standard did not have a material impact to the Company's financial statements. The Company adopted this accounting standard for the quarter ended March 31, 2013.

In July 2012, the FASB issued ASU No. 2012-02, "Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment." This newly issued accounting standard is intended to reduce the cost and complexity of the annual indefinite-lived intangible asset impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. Under the revised standard, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required; otherwise, no further testing is required. Prior to the issuance of the revised standard, an entity was required to perform step one of the impairment test at least annually by calculating and comparing the fair value of an indefinite-lived intangible asset to its carrying amount. Under the revised standard, if an entity determines that step one is necessary and the indefinite-lived intangible asset is less than its carrying amount, then step two of the test will continue to be required to measure the amount of the impairment loss, if any. This ASU is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard will not materially impact the Company's financial position or results of operations. The Company adopted this accounting standard for the quarter ended March 31, 2013.

In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." This newly issued accounting standard requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income in its entirety in the same period. For other amounts not required to be reclassified to net income in the same reporting period, a cross reference to other disclosures that provide additional detail about the reclassification amounts is required. Since the standard only impacts the disclosure requirements of AOCI and does not impact the accounting for accumulated comprehensive income, the standard did not have an impact on the Company's consolidated financial statements. The Company adopted this standard during the quarter ended March 31, 2013.

In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." This newly issued accounting standard requires a cumulative translation adjustment ("CTA")attached to the parent's investment in a foreign entity should be released in a manner consistent with the derecognition guidance on investment entities. Thus the entire amount of CTA associated with the foreign entity would be released when there has been a sale of a subsidiary or group of net assets within a foreign entity and the sale represents a complete liquidation of the investment in the foreign entity, a loss of a controlling financial interest in an investments in a foreign entity, or step acquisition for a foreign entity. The adoption of this standard will not materially impact the Company's financial position or results of operations. The Company expects to adopt this accounting standard for the quarter ending March 31, 2014.

NOTE 2 – STOCK COMPENSATION

The following table represents total stock based compensation expense for non-qualified stock options, restricted stock units (“RSU”) and the tax related benefit for the three months ended March 31, 2013 and 2012:

 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Stock option expense
$
2,128

 
$
2,381

RSU expense
2,933

 
1,546

Total stock based compensation expense
$
5,061

 
$
3,927

 
 
 
 
Total related tax benefit
$
1,287

 
$
1,231


At March 31, 2013, the remaining unamortized compensation cost related to non-qualified stock options is $18.5 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.9 years. At March 31, 2013, the

9


unamortized compensation cost related to RSU is $30.4 million, which will be expensed over the remaining restricted period of the RSU, or 1.9 years.

The following table reflects the non-qualified stock option transactions from December 31, 2012 through March 31, 2013:
 
Outstanding
 
Exercisable
(in thousands, except per share data)
Shares
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Shares
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
9,906

 
$
33.18

 
$
69,079

 
7,599

 
$
31.79

 
$
64,819

Granted
844

 
40.86

 
 

 
 

 
 

 
 

Exercised
(506
)
 
26.83

 
 

 
 

 
 

 
 

Cancelled
(4
)
 
43.91

 
 

 
 

 
 

 
 

Forfeited
(16
)
 
37.82

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2013
10,224

 
$
34.12

 
$
87,676

 
7,923

 
$
32.72

 
$
79,643


At March 31, 2013, the weighted average remaining contractual term of all outstanding options is 6.0 years and the weighted average remaining contractual term of exercisable options is 5.1 years.

The following table summarizes the unvested RSU transactions from December 31, 2012 through March 31, 2013:

(in thousands, except per share data)
Shares
 
Weighted Average
Grant Date
Fair Value
 
 
 
 
Balance at December 31, 2012
1,034

 
$
36.34

Granted
480

 
40.86

Vested
(232
)
 
32.49

Forfeited
(69
)
 
38.64

 
 
 
 
Balance at March 31, 2013
1,213

 
$
38.74


NOTE 3 – COMPREHENSIVE INCOME

  During the three months ended March 31, 2013, foreign currency translation adjustments included currency translation losses of $101.9 million and gains on the Company's loans designated as hedges of net investments of $8.5 million. During the three months ended March 31, 2012, foreign currency translation adjustments included currency translation gains of $127.0 million and gains on the Company's loans designated as hedges of net investments of $5.3 million. These foreign currency translation adjustments were offset by movements on derivative financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.

The cumulative foreign currency translation adjustments included translation gains of $75.8 million and $177.7 million at March 31, 2013 and December 31, 2012, respectively, were offset by losses of $114.9 million and $123.4 million, respectively, on loans designated as hedges of net investments.  These foreign currency translation adjustments were partially offset by movements on derivatives financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.










10


Changes in AOCI, net of tax, by component for the three months ended March 31, 2013 and 2012:
(in thousands)
Foreign Currency Translation Adjustments
 
Gains and (Loss) on Derivative Financial Instruments
 
Net Unrealized Holding Gain on Available-for-Sale Securities
 
Pension Liability Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
54,302

 
$
(143,142
)
 
$
17,822

 
$
(73,182
)
 
$
(144,200
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(93,435
)
 
27,996

 
7,640

 
1,835

 
(55,964
)
 
 
 
 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive income (loss)
—

 
122

 
—

 
941

 
1,063

 
 
 
 
 
 
 
 
 
 
Net (decrease) increase in other comprehensive income
(93,435
)
 
28,118

 
7,640

 
2,776

 
(54,901
)
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2013
$
(39,133
)
 
$
(115,024
)
 
$
25,462

 
$
(70,406
)
 
$
(199,101
)

(in thousands)
Foreign Currency Translation Adjustments
 
Gains and (Loss) on Derivative Financial Instruments
 
Net Unrealized Holding (Loss) Gain on Available-for-Sale Securities
 
Pension Liability Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
(39,078
)
 
$
(117,390
)
 
$
(516
)
 
$
(33,986
)
 
$
(190,970
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
132,293

 
(31,593
)
 
23,000

 
(591
)
 
123,109

 
 
 
 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive income (loss)
—

 
(539
)
 
—

 
369

 
(170
)
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in other comprehensive income
132,293

 
(32,132
)
 
23,000

 
(222
)
 
122,939

 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2012
$
93,215

 
$
(149,522
)
 
$
22,484

 
$
(34,208
)
 
$
(68,031
)













11



Reclassification out of accumulated other comprehensive income (expense) for the three months ended March 31, 2013 and 2012:
(in thousands)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the
Statements of Operations
 
Three Months Ended March 31,
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
Gains and loss on derivative financial instruments
Interest rate swaps
 
$
(913
)
 
$
(905
)
 
Interest expense
Foreign exchange forward contracts
 
499

 
1,150

 
Cost of products sold
Foreign exchange forward contracts
 
(30
)
 
231

 
SG&A expenses
Commodity contracts
 
157

 
(46
)
 
Cost of products sold
 
 
(287
)
 
430

 
Net (loss) gain before tax
 
 
165

 
109

 
Tax benefit
 
 
$
(122
)
 
$
539

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension items
Prior service costs
 
$
34

 
$
37

 
(a)
Actuarial gains (losses)
 
(1,368
)
 
(556
)
 
(a)
 
 
(1,334
)
 
(519
)
 
Net loss before tax
 
 
393

 
150

 
Tax benefit
 
 
$
(941
)
 
$
(369
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(1,063
)
 
$
170

 
 
 
 
 
 
 
 
 
 
 
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 8, Benefit Plans for additional details)

NOTE 4 – EARNINGS PER COMMON SHARE

The dilutive effect of outstanding non-qualified stock options and RSU 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 for the three months ended March 31, 2013 and 2012:


12


Basic Earnings Per Common Share Computation
Three Months Ended March 31,
(in thousands, except per share amounts)
2013
 
2012
 
 
 
 
Net income attributable to DENTSPLY International
$
71,685

 
$
53,284

 
 
 
 
Common shares outstanding
142,775

 
141,721

 
 
 
 
Earnings per common share - basic
$
0.50

 
$
0.38

 
 
 
 
Diluted Earnings Per Common Share Computation
 

 
 

(in thousands, except per share amounts)
 

 
 

 
 
 
 
Net income attributable to DENTSPLY International
$
71,685

 
$
53,284

 
 
 
 
Common shares outstanding
142,775

 
141,721

Incremental shares from assumed exercise of dilutive options from stock-based compensation awards
2,324

 
2,263

Total diluted shares outstanding
145,099

 
143,984

 
 
 
 
Earnings per common share - diluted
$
0.49

 
$
0.37


Options to purchase 3.5 million and 4.1 million shares of common stock that were outstanding during the three months ended March 31, 2013 and 2012, respectively, were not included in the computation of diluted earnings per common share since the options' exercise price were greater than the average market price of the common shares and, therefore, the effect would be antidilutive.  

NOTE 5 – BUSINESS ACQUISITIONS

During the three months ended March 31, 2013, the Company paid $9.0 million to purchase the remaining outstanding shares of a consolidated subsidiary. As a result of the transaction, the Company recorded a decrease in noncontrolling interest of $5.0 million and a reduction to additional paid in capital of $3.9 million for the excess of the purchase price above the carrying value of the noncontrolling interest.

NOTE 6 – SEGMENT INFORMATION

The Company has numerous operating businesses covering a wide range of dental and certain healthcare products and geographic regions, primarily serving the professional dental market. Professional dental products represented approximately 89% of sales for both three months ended March 31, 2013 and 2012.

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 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 in the Company’s most recently filed Form 10-K in the summary of significant accounting policies.  The Company measures segment income for reporting purposes as net operating income before restructuring and other costs, interest expense, interest income, other expense (income), net and provision for income taxes. Additionally, the operating segments are measured on net third party sales, excluding precious metal content. A description of the services provided within each of the Company’s four reportable segments is provided below.

During the first quarter of 2013, the Company realigned certain implant and implant related businesses for multiple locations as a result of changes to the business structure. The segment information below reflects the revised structure for all periods shown.






13


Dental Consumable and Laboratory Businesses

This segment includes responsibility for the design, manufacturing, sales and distribution of 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 Endodontic products in Germany. This segment also includes the responsibility for the design, manufacture, sales and distribution of most dental laboratory products, excluding certain countries. This segment is also responsible for most of the Company’s non-dental business excluding medical products.

Orthodontics/Canada/Mexico/Japan

  This segment is responsible for the world-wide manufacturing, sales and distribution of the Company’s Orthodontic products. It also has responsibility for the sales and distribution of most of the Company’s dental products sold in Japan, Canada and Mexico.

Select Distribution Businesses

This segment includes responsibility for the sales and distribution for most of the Company's dental products sold in France, United Kingdom, Italy, Austria and certain other European countries, Middle Eastern countries, India and Africa. Operating margins of the segment are reflective of the intercompany transfer price of products manufactured by other operating segments.

Implants/Endodontics/Healthcare/Pacific Rim

This segment includes the responsibility for the design, manufacture, sales and distribution of most of the Company’s dental implant and related products. This segment also includes the responsibility for the design and manufacturing of Endodontic products and is responsible for the sales and distribution of the Company’s Endodontic products in the United States, Switzerland, and locations not covered by other selling divisions.  In addition, this segment is also responsible for sales and distribution of certain Endodontic products in Germany, Asia and other parts of the world. Additionally, this segment is responsible for the design and manufacture of certain dental consumables and dental laboratory products and the sales and distribution of most dental products sold in Brazil, Latin America (excluding Mexico), Australia and most of Asia (excluding India and Japan). This segment is also responsible for the world-wide design, manufacturing, sales and distribution of the Company's healthcare products (non-dental) throughout most of the world.

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 segments based on the groups’ operating income, excluding restructuring and other costs, and net third party sales, excluding precious metal content.

The following tables set forth information about the Company’s segments for the three months ended March 31, 2013 and 2012:

Third Party Net Sales
 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Dental Consumable and Laboratory Businesses
$
264,629

 
$
255,134

Orthodontics/Canada/Mexico/Japan
71,335

 
70,355

Select Distribution Businesses
60,815

 
59,093

Implants/Endodontics/Healthcare/Pacific Rim
336,644

 
333,146

All Other (a)
(1,339
)
 
(1,315
)
Total
$
732,084

 
$
716,413

(a) Includes amounts recorded at Corporate headquarters.





14


Third Party Net Sales, Excluding Precious Metal Content
 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Dental Consumable and Laboratory Businesses
$
212,030

 
$
212,109

Orthodontics/Canada/Mexico/Japan
64,972

 
63,293

Select Distribution Businesses
60,717

 
58,933

Implants/Endodontics/Healthcare/Pacific Rim
336,269

 
332,605

All Other (b)
(1,339
)
 
(1,315
)
Total excluding precious metal content
672,649

 
665,625

Precious metal content
59,435

 
50,788

Total including precious metal content
$
732,084

 
$
716,413

(b) Includes amounts recorded at Corporate headquarters.

Inter-segment Net Sales
 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Dental Consumable and Laboratory Businesses
$
51,832

 
$
52,469

Orthodontics/Canada/Mexico/Japan
829

 
1,179

Select Distribution Businesses
1,291

 
394

Implants/Endodontics/Healthcare/Pacific Rim
34,023

 
34,039

All Other (c)
57,427

 
53,980

Eliminations
(145,402
)
 
(142,061
)
Total
$
—

 
$
—

(c) Includes amounts recorded at Corporate headquarters and one distribution warehouse not managed by named segments.

Segment Operating Income (Loss)
 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Dental Consumable and Laboratory Businesses
$
61,750

 
$
63,345

Orthodontics/Canada/Mexico/Japan
1,863

 
(268
)
Select Distribution Businesses
(1,626
)
 
(1,440
)
Implants/Endodontics/Healthcare/Pacific Rim
63,851

 
65,383

All Other (d)
(31,315
)
 
(38,623
)
Segment operating income
94,523

 
88,397

 
 
 
 
Reconciling Items:
 

 
 

Restructuring and other costs
665

 
1,237

Interest expense
15,221

 
15,782

Interest income
(2,175
)
 
(1,878
)
Other expense (income), net
2,918

 
65

Income before income taxes
$
77,894

 
$
73,191

(d) Includes the results of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments.

15


Assets
 
 
 
(in thousands)
March 31, 2013
 
December 31, 2012
 
 
 
 
Dental Consumable and Laboratory Businesses
$
967,097

 
$
1,007,307

Orthodontics/Canada/Mexico/Japan
282,711

 
294,348

Select Distribution Businesses
164,753

 
192,684

Implants/Endodontics/Healthcare/Pacific Rim
3,177,893

 
3,195,382

All Other (e)
309,674

 
282,576

Total
$
4,902,128

 
$
4,972,297

(e) Includes the assets of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments.

NOTE 7 – INVENTORIES

Inventories are stated at the lower of cost or market.  At March 31, 2013 and December 31, 2012, the cost of $7.6 million and $6.3 million, respectively, 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. 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, 2013 and December 31, 2012 by $6.1 million and $5.9 million, respectively.

The Company establishes reserves for inventory estimated to be obsolete or unmarketable. Assumptions about future demand and market conditions are considered when estimating these reserves. The inventory valuation reserves were $33.6 million and $32.6 million at March 31, 2013 and December 31, 2012, respectively.

Inventories, net of inventory valuation reserves, consist of the following:
(in thousands)
March 31, 2013
 
December 31, 2012
 
 
 
 
Finished goods
$
255,768

 
$
248,870

Work-in-process
72,622

 
72,533

Raw materials and supplies
88,704

 
81,537

 
$
417,094

 
$
402,940


NOTE 8 – BENEFIT PLANS

The following sets forth the components of net periodic benefit cost of the Company’s defined benefit plans and for the Company’s other postemployment benefit plans for the three months ended March 31, 2013 and 2012:

Defined Benefit Plans 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Service cost
$
3,723

 
$
2,978

Interest cost
2,477

 
2,691

Expected return on plan assets
(1,247
)
 
(1,225
)
Amortization of prior service cost
(34
)
 
(37
)
Amortization of net loss
1,280

 
498

Curtailments and settlement gains
(390
)
 
—

 
 
 
 
Net periodic benefit cost
$
5,809

 
$
4,905



16


Other Postemployment Benefit Plans
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Service cost
$
61

 
$
19

Interest cost
122

 
117

Amortization of net loss
88

 
58

 
 
 
 
Net periodic benefit cost
$
271

 
$
194


The following sets forth the information related to the contributions to the Company’s benefit plans for 2013:
(in thousands)
Pension
Benefits
 
Other
Postretirement
Benefits
 
 
 
 
Actual contributions through March 31, 2013
$
3,543

 
$
88

Projected for the remainder of the year
9,011

 
577

Total projected contributions
$
12,554

 
$
665


NOTE 9 – RESTRUCTURING AND OTHER COSTS

Restructuring Costs

During the three months ended March 31, 2013 and 2012, the Company recorded restructuring costs of $0.7 million and $1.3 million, respectively.  These costs are recorded in “Restructuring and other costs” in the Consolidated Statements of Operations and the associated liabilities are recorded in "Accrued liabilities" in the Consolidated Balance Sheets.

At March 31, 2013, the Company’s restructuring accruals were as follows:
 
Severance
(in thousands)
2011 and
Prior Plans
 
2012 Plans
 
2013 Plans
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
1,495

 
$
11,412

 
$
—

 
$
12,907

Provisions and adjustments
—

 
(12
)
 
58

 
46

Amounts applied
(333
)
 
(1,507
)
 
—

 
(1,840
)
Change in estimates
—

 
(516
)
 
—

 
(516
)
Balance at March 31, 2013
$
1,162

 
$
9,377

 
$
58

 
$
10,597

 
 
Lease/Contract Terminations
(in thousands)
2011 and
Prior Plans
 
2012 Plans
 
2013 Plans
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
792

 
$
682

 
$
—

 
$
1,474

Provisions and adjustments
—

 
28

 
331

 
359

Amounts applied
(35
)
 
(511
)
 
(140
)
 
(686
)
Balance at March 31, 2013
$
757

 
$
199

 
$
191

 
$
1,147



17


 
Other Restructuring Costs
(in thousands)
2012 Plans
 
2013 Plans
 
Total
 
 
 
 
 
 
Balance at December 31, 2012
$
94

 
$
—

 
$
94

Provisions and adjustments
507

 
266

 
773

Amounts applied
(520
)
 
—

 
(520
)
Balance at March 31, 2013
$
81

 
$
266

 
$
347


The following table provides the year-to-date changes in the restructuring accruals by segment:
(in thousands)
December 31,
2012
 
Provisions and
Adjustments
 
Amounts
Applied
 
Change in Estimate
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
9,132

 
$
532

 
$
(900
)
 
$
(516
)
 
$
8,248

Orthodontics/Canada/Mexico/Japan
361

 
123

 
(308
)
 
—

 
176

Select Distribution Businesses
222

 
—

 
—

 
—

 
222

Implants/Endodontics/Healthcare/Pacific Rim
4,760

 
523

 
(1,838
)
 
—

 
3,445

 
$
14,475

 
$
1,178

 
$
(3,046
)
 
$
(516
)
 
$
12,091


NOTE 10 – FINANCIAL INSTRUMENTS AND DERIVATIVES

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. 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 variable rate debt to fixed rate debt and to convert fixed rate debt to variable rate debt, cross currency basis swaps to convert debt denominated in one currency to another currency and commodity swaps to fix certain variable raw material costs.

Derivative Instruments Not Designated as Hedging

The Company enters into derivative financial instruments to hedge the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in “Other expense (income), net” on the Consolidated Statements of Operations. The Company primarily uses forward foreign exchange contracts and cross currency basis swaps to hedge these risks. The Company's significant contracts outstanding as of March 31, 2013 are summarized in the tables that follow.

On December 20, 2012, the Company dedesignated 160.0 million Swiss francs of its net investment hedges and entered into 81.4 million Swiss francs of new cross currency basis swaps maturing December 27, 2013. The combination of these trades total 241.4 million Swiss francs and offset an inter-company Swiss franc note receivable at a U.S. dollar functional entity that was created by a net dividend of 241.4 million Swiss francs. The new 81.4 million Swiss franc swap has an original exchange rate of approximately .91 Swiss franc per U.S. dollar. The Company will pay three-month Swiss franc LIBOR minus 34.0 basis points and receive three-month U.S. dollar LIBOR. The dedesignated cross currency swaps mature in April 2013. On January 17, 2013, the Company extended the hedge to June 2015 with two new forward starting swaps totaling 160.0 million Swiss francs. These hedges were traded at an exchange rate of approximately .93 Swiss franc per U.S. dollar, which will result in net cash payments totaling $37.0 million in the second quarter of 2013. The Company will pay three-month Swiss franc LIBOR minus 22.1 basis points and receive three-month U.S. dollar LIBOR. The hedges amortize and are intended to offset currency revaluation of the Swiss franc note receivable for as long as it is outstanding. The change in the value of the swaps will be recorded in “Other expense (income), net” on the Consolidated Statements of Operations.
On January 10, 2013, the Company entered into 347.8 million euros of cross currency basis swaps maturing at various times between 2015 and 2018 to hedge a balance sheet liability resulting from a legal entity restructuring pursuant to the Company's

18


acquisitions integration plans. The hedges have an original exchange rate of approximately 1.32 U.S. dollar per euro and will offset currency revaluation of a euro denominated note payable by a U.S. dollar functional company for as long as it is outstanding. The Company will receive three-month Euro Inter-Bank Offered Rate ("EURIBOR") minus 33.2 basis points and pay three-month U.S. dollar LIBOR. The change in the value of the swaps will be recorded in “Other expense (income), net” on the Consolidated Statements of Operations.

Cash Flow Hedges

Foreign Exchange Risk Management

The Company uses a layered hedging program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings of the consolidated Company. The Company accounts for the foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the tested effectiveness of the foreign exchange forward contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is deemed ineffective and is reported currently in “Other expense (income), net” on the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.

These foreign exchange forward contracts generally have maturities up to eighteen months and the counterparties to the transactions are typically large international financial institutions. The Company's significant contracts outstanding as of March 31, 2013 are summarized in the tables that follow.

Interest Rate Risk Management

The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt. As of March 31, 2013, the Company has two groups of significant 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 interest rate of 0.2% for a term of three years, ending in September 2014. Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rates to a fixed interest rate of 0.7% for a term of five years, ending in September 2016.

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's significant contracts outstanding as of March 31, 2013 are summarized in the tables that follow.

Commodity Risk Management

The Company selectively enters into commodity 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. As a result, the Company records the fair value of the contracts primarily through AOCI based on the tested effectiveness of the commodity swaps. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is deemed ineffective and is reported currently in “Interest expense” on the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.







19


The following tables summarize the notional amounts and fair value of the Company's cash flow hedges and non-designated derivatives at March 31, 2013:
Foreign Exchange Forward Contracts
 
Notional Amounts Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)  
 
2013
 
2014
 
March 31, 2013
 
 
 
 
 
 
 
Forward sale, 20.1 million Australian dollars
 
$
17,806

 
$
2,816

 
$
(620
)
Forward purchase, 7.6 million British pounds
 
(11,518
)
 
—

 
210

Forward sale, 44.8 million Canadian dollars
 
30,028

 
14,056

 
250

Forward purchase, 19.2 million Danish kroner
 
(3,299
)
 
—

 
(14
)
Forward sale, 200.1 million euros
 
180,007

 
76,927

 
(398
)
Forward purchase, 531.5 million Japanese yen
 
(461
)
 
(5,222
)
 
(2,625
)
Forward sale, 171.9 million Mexican pesos
 
13,924

 
—

 
(336
)
Forward purchase, 2.3 million Norwegian kroner
 
(394
)
 
—

 
(1
)
Forward sale, 16.4 million Polish zlotys
 
5,051

 
—

 
(62
)
Forward sale, 3.0 million Singapore dollars
 
2,389

 
—

 
(23
)
Forward sale, 7.8 billion South Korean won
 
7,042

 
—

 
15

Forward purchase, 1.4 billion Swedish kronor
 
(162,414
)
 
(45,595
)
 
6,133

Forward purchase, 49.8 million Swiss francs
 
(64,159
)
 
12,613

 
1,597

Forward sale, 50.6 million Taiwanese dollars
 
1,694

 
—

 
(12
)
Total foreign exchange forward contracts
 
$
15,696

 
$
55,595

 
$
4,114


Interest Rate Swaps
 
Notional Amounts Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)
 
2013
 
2014
 
2015
 
2016
 
2017 and Beyond
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Euro
 
$
908

 
$
926

 
$
926

 
$
926

 
$
1,158

 
$
(454
)
Japanese yen
 
—

 
133,360

 
—

 
—

 
—

 
204

Swiss francs
 
—

 
—

 
—

 
68,497

 
—

 
(1,137
)
Total interest rate swaps
 
$
908

 
$
134,286

 
$
926

 
$
69,423

 
$
1,158

 
$
(1,387
)

Commodity Swap Contracts
 
Notional Amounts Maturing
in the Year
 
Fair Value Net 
Asset (Liability)
(in thousands)
 
2013
 
2014
 
March 31, 2013
 
 
 
 
 
 
 
Silver swap - U.S. dollar
 
$
1,469

 
$
165

 
$
(160
)
Platinum swap - U.S. dollar
 
895

 
—

 
(3
)
Total commodity swap contracts
 
$
2,364

 
$
165

 
$
(163
)

Cross Currency Basis Swap
 
Notional Amounts Maturing in the Year
Fair Value Net
Asset (Liability)
(in thousands)
 
2013
 
2014
 
2015
 
2016
 
2017 and Beyond
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
797.6 million euro at $1.39 pay U.S. dollar three-month LIBOR receive three-month EURIBOR
 
$
—

 
$
576,778

 
$
111,346

 
$
111,569

 
$
223,138

$
(87,613
)
216.4 million Swiss franc at 1.10 pay Swiss franc three-month LIBOR receive U.S. dollar three-month LIBOR
 
79,035

 
105,380

 
43,611

 
—

 
—

(31,556
)
Total cross currency basis swap
 
$
79,035

 
$
682,158

 
$
154,957

 
$
111,569

 
$
223,138

$
(119,169
)

20



At March 31, 2013, deferred net gains on derivative instruments of $0.1 million, which were recorded in AOCI, 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 hedged purchases and recognized interest expense on interest rate swaps. The maximum term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable interest rate debt) is eighteen months. Overall, the derivatives designated as cash flow hedges are highly effective. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.

Hedges of Net Investments in Foreign Operations

The Company has significant 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 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 AOCI.

At March 31, 2013 and December 31, 2012, the Company had Swiss franc-denominated and Japanese yen-denominated debt and cross currency basis swaps denominated in euro and Swiss franc to hedge the currency exposure related to a designated portion of the net assets of its European, Swiss and Japanese subsidiaries. The fair value of the 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, currency swap basis rates and foreign exchange rates. At March 31, 2013 and December 31, 2012, the estimated net fair values of the cross currency interest rate swap agreements was a liability of $7.5 million and a liability of $90.7 million, respectively, which are recorded in AOCI, net of tax effects. At March 31, 2013 and December 31, 2012, the accumulated translation gain (loss) on investments in foreign subsidiaries, primarily denominated in euros, Swiss francs, Japanese yen and Swedish kronor, net of these net investment hedges, were losses of $140.3 million and $71.4 million, respectively, which were included in AOCI, net of tax effects.

On January 17, 2013, the Company extended 295.5 million Swiss francs of cross currency basis swaps maturing in February, March and April 2013 with five new swaps totaling 295.5 million Swiss francs maturing in February 2016, March 2017 and April 2018. These net investment hedges were traded at an exchange rate of approximately .93 Swiss franc per U.S. dollar which results in net cash payments totaling $45.8 million in the first quarter of 2013 and $9.4 million in the second quarter of 2013. The Company will receive three-month U.S. dollar LIBOR and pay three-month Swiss franc LIBOR minus 31.6 basis points.

The following tables summarize the notional amounts and fair value of the Company's cross currency basis swaps that are designated as hedges of net investments in foreign operations at March 31, 2013:
Cross Currency Basis Swaps
 
Notional Amounts Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)
 
2013
 
2014
 
2015
 
2016
 
2017 and Beyond
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
432.5 million Swiss franc at 0.95 pay Swiss franc three-month LIBOR receive U.S. dollar three-month LIBOR
 
$
—

 
$
84,725

 
$
59,645

 
$
105,380

 
$
206,017

 
$
(1,593
)
618.0 million euro at $1.27 pay three-month EURIBOR receive U.S. dollar three-month LIBOR
 
792,523

 
—

 
—

 
—

 
—

 
(5,905
)
Total cross currency basis swaps
 
$
792,523

 
$
84,725

 
$
59,645

 
$
105,380