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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
---------------------
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.)
570 West College Avenue, P. O. Box 872, 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.
( X ) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At August 12, 1998 the Company
had 52,909,539 shares of Common Stock outstanding, with a par value of $.01 per
share.
Page 1 of 21
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Exhibit Index at Page 20
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DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended June 30, 1998
---------------
INDEX
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Page No.
--------
PART I - FINANCIAL INFORMATION (unaudited)
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets............ 3
Consolidated Condensed Statements of Income...... 4
Consolidated Condensed Statements of Cash Flows.. 5
Consolidated Condensed Statement of
Stockholders' Equity........................... 7
Notes to Unaudited Consolidated Condensed
Financial Statements........................... 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.... 13
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk................................ 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................... 18
Item 4 - Submission of Matters to a Vote of
Security Holders..................................
Item 6 - Exhibits and Reports on Form 8-K............ 18
Signatures........................................... 19
2
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
June 30, December 31,
1998 1997
ASSETS ------------ ------------
Current assets: (in thousands)
Cash and cash equivalents $ 6,772 $ 9,848
Accounts and notes receivable-trade, net 128,243 114,366
Inventories 152,557 124,748
Prepaid expenses and other current assets 33,881 28,065
--------- ---------
Total Current Assets 321,453 277,027
Property, plant and equipment, net 149,026 147,130
Other noncurrent assets, net 20,584 13,314
Identifiable intangible assets, net 102,381 103,513
Costs in excess of fair value of net
assets acquired, net 275,820 233,392
--------- ---------
Total Assets $ 869,264 $ 774,376
LIABILITIES AND STOCKHOLDERS' EQUITY ========= =========
Current liabilities:
Accounts payable $ 42,598 $ 38,942
Accrued liabilities 95,339 71,563
Income taxes payable 24,898 34,839
Notes payable and current portion
of long-term debt 37,251 24,005
--------- ---------
Total Current Liabilities 200,086 169,349
Long-term debt 171,700 105,505
Deferred income taxes 28,686 27,647
Other liabilities 49,316 43,954
--------- ---------
Total Liabilities 449,788 346,455
--------- ---------
Minority interests in consolidated subsidiaries 11,569 3,988
Stockholders' equity: --------- ---------
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued - -
Common stock, $.01 par value; 100 million
shares authorized; 54.3 million shares
issued at June 30, 1998 and 54.2 million
shares issued at December 31, 1997 543 542
Capital in excess of par value 152,924 150,738
Retained earnings 315,146 301,058
Accumulated other comprehensive income (20,379) (16,720)
Employee stock ownership plan reserve (9,117) (9,497)
Treasury stock, at cost, 1.3 million shares
at June 30, 1998 and .1 million shares
at December 31, 1997 (31,210) (2,188)
--------- ---------
Total Stockholders' Equity 407,907 423,933
--------- ---------
Total Liabilities and Stockholders' Equity $ 869,264 $ 774,376
========= =========
See accompanying notes to unaudited consolidated condensed financial statements.
3
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands, except per share data)
Net sales $197,126 $178,307 $377,832 $350,666
Cost of products sold 93,275 87,536 178,644 171,845
-------- -------- -------- --------
Gross profit 103,851 90,771 199,188 178,821
Selling, general and
administrative expenses 68,530 58,252 132,315 118,247
Restructuring and other
costs 29,000 - 29,000 -
-------- -------- -------- --------
Operating income 6,321 32,519 37,873 60,574
Interest expense 3,797 3,466 6,763 6,217
Interest income (441) (466) (659) (891)
Other (income) expense, net 908 180 (564) (1,905)
-------- -------- -------- --------
Income before income taxes 2,057 29,339 32,333 57,153
Provision for income taxes 1,473 11,496 12,752 22,386
-------- -------- -------- --------
Net income $ 584 $ 17,843 $ 19,581 $ 34,767
======== ======== ======== ========
Earnings per common share:
Basic $.01 $.33 $.36 $.65
Diluted $.01 $.33 $.36 $.64
Cash dividends declared
per common share .05125 .04625 .1025 .0925
Weighted average common shares outstanding:
Basic 53,942 53,890 54,032 53,869
Diluted 54,278 54,124 54,393 54,130
See accompanying notes to unaudited consolidated condensed financial statements.
4
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
-------------------
1998 1997
-------- --------
(in thousands)
Cash flows from operating activities:
Net income $ 19,582 $ 34,767
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 8,990 7,975
Amortization 9,340 8,046
Non-cash restructuring and other costs 29,000 -
Inventories (19,233) 1,355
Other, net (26,376) (17,709)
-------- --------
Net cash provided by operating activities 21,303 34,434
-------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (49,828) (58,510)
Property, plant and equipment additions (15,371) (17,096)
Other, net (498) 713
-------- --------
Net cash used in investing activities (65,697) (74,893)
-------- --------
Cash flows from financing activities:
Debt repayment (42,477) (30,842)
Proceeds from long-term debt 101,496 83,616
Increase (decrease) in bank overdrafts and
other short-term borrowings 15,228 (7,097)
Cash paid for treasury stock (31,210) (928)
Other, net (794) (1,291)
-------- --------
Net cash provided by financing activities 42,243 43,458
-------- --------
Effect of exchange rate changes on cash
and cash equivalents (925) (827)
-------- --------
Net increase (decrease) in cash and cash equivalents (3,076) 2,172
Cash and cash equivalents at beginning of period 9,848 5,619
-------- --------
Cash and cash equivalents at end of period $ 6,772 $ 7,791
======== ========
Supplemental disclosures of cash flow information:
Interest paid 4,932 3,898
Income taxes paid 24,096 20,909
Non-cash activities:
Liabilities assumed from acquisitions 23,347 28,057
Cancellation of loan and accounts
receivable from acquired subsidiaries - 2,900
Note receivable for inventory and fixed assets
associated with arbitration ruling terminating
the Implant Distribution Agreement - 6,814
See accompanying notes to unaudited consolidated condensed financial
statements. 5
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
(unaudited)
In January 1998, the Company purchased the assets of Blendax Professional Dental
Business ("Blendax") for $6.1 million. In March 1998, the Company purchased the
assets of InfoSoft, Inc. ("InfoSoft") for $8.6 million. In April and May of
1998, the Company purchased a 67% majority interest in GAC ("GAC") for $22.7
million. In May 1998, the Company purchased the capital stock of Crescent Dental
Manufacturing ("Crescent") for $5.2 million and also the capital stock of Herpo
Productos Dentarios Ltda. ("Herpo") for $7.4 million. In conjunction with the
acquisitions, liabilities were assumed as follows:
Blendax InfoSoft GAC Crescent Herpo
-------- -------- -------- -------- --------
Estimated fair value
of assets acquired $ 6,711 $ 10,530 $ 36,475 $ 5,868 $ 13,842
Cash paid for assets
or capital stock (6,112) (8,618) (22,740) (5,214) (7,395)
-------- -------- -------- -------- --------
Liabilities assumed $ 599 $ 1,912 $ 13,735 $ 654 $ 6,447
======== ======== ======== ======== ========
In January 1997, the Company purchased the assets of DW Industries, Inc. ("DW")
for $16.3 million and all of the capital stock of Laboratoire SPAD, S.A.
("SPAD") for $36.0 million. In March 1997, the Company purchased all of the
capital stock of New Image Industries, Inc. ("New Image") for $10.9 million. In
conjunction with the acquisitions, liabilities were assumed as follows:
DW SPAD New Image
-------- -------- ---------
Fair value of assets acquired $ 16,629 $ 42,571 $ 32,123
Cash paid for assets (16,253) (35,992) (10,858)
-------- -------- --------
Liabilities assumed $ 376 $ 6,579 $ 21,265
======== ======== ========
See accompanying notes to unaudited consolidated condensed financial statements.
6
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Accumulated
Capital in Other Total
Common Excess of Retained Comprehensive Treasury Stockholders'
Stock Par Value Earnings Income ESOP Reserve Stock Equity
(in thousands) ------ ----------- -------- ------------- ------------ --------- ------------
Balance at December 31, 1997 $ 542 $150,738 $301,058 $(16,720) $ (9,497) $ (2,188) $423,933
Exercise of stock options and
warrants 1 1,308 - - - 2,188 3,497
Tax benefit related to stock
options and warrants exercised - 878 - - - - 878
Cash dividends declared, $.05125
per share - - (5,493) - - - (5,494)
Repurchase of 1,280,000 shares
of common stock - - - - - (31,210) (31,210)
Foreign currency translation
adjustments - - - (3,659) - - (3,659)
Net change in ESOP reserve - - - - 380 - 380
Net income - - 19,581 - - - 19,582
------ -------- -------- -------- -------- -------- --------
Balance at June 30, 1998 $ 543 $152,924 $315,146 $(20,379) $ (9,117) $(31,210) $407,907
====== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated condensed financial statements.
7
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------
JUNE 30, 1998
-------------
The accompanying interim consolidated condensed financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which
in the opinion of management are necessary for a fair presentation of financial
position, results of operations and cash flows for the interim periods. These
interim financial statements conform with the requirements for interim financial
statements and consequently do not include all the disclosures normally required
by generally accepted accounting principles.
Disclosures are updated where appropriate.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated condensed financial statements include the accounts of
DENTSPLY International Inc. (the "Company") and its subsidiaries. Minority
interests in net income of consolidated subsidiaries are not material and are
included in other (income) expense, net.
Inventories
- -----------
Inventories are stated at the lower of cost or market. At June 30, 1998 and
December 31, 1997, the cost of $17.9 million or 12% and $14.9 million or 12%,
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 method.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Except for leasehold improvements, depreciation for financial
reporting purposes is computed by the straight-line method over the following
estimated useful lives: buildings - generally 40 years; and machinery and
equipment - 4 to 15 years. The cost of leasehold improvements is amortized over
the shorter of the estimated useful life or the term of the lease. For income
tax purposes, depreciation is computed using various methods.
Derivatives
- -----------
The Company's only involvement with derivative financial instruments is
forward contracts to hedge certain assets and liabilities denominated in foreign
currencies, or swap agreements which convert current floating interest debt to
fixed rates.
8
NOTE 2 - EARNINGS PER COMMON SHARE
- ----------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). This
Statement simplifies the standards for computing earnings per share ("EPS") and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement of all
entities with complex capital structures. SFAS 128 also requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. As required, the
Company adopted SFAS 128 in the fourth quarter of 1997; accordingly, all per
share amounts have been restated to reflect basic and diluted EPS. All shares
held by the DENTSPLY Employee Stock Ownership Plan are considered outstanding
and are included in the earnings per common share computation.
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Basic EPS Computation ------- ------- ------- -------
Numerator(Income) $ 584 $17,843 $19,581 $34,767
------- ------- ------- -------
Denominator:
Common shares outstanding 53,942 53,890 54,032 53,869
------- ------- ------- -------
Basic EPS $ 0.01 $ 0.33 $ 0.36 $ 0.65
======= ======= ======= =======
Diluted EPS Computation
Numerator(Income) $ 584 $17,843 $19,581 $34,767
------- ------- ------- -------
Denominator:
Common shares outstanding 53,942 53,890 54,032 53,869
Incremental shares from assumed
exercise of dilutive options
and warrants 336 234 361 261
------- ------- ------- -------
Total shares 54,278 54,124 54,393 54,130
------- ------- ------- -------
Diluted EPS $ 0.01 $ 0.33 $ 0.36 $ 0.64
======= ======= ======= =======
NOTE 3 - BUSINESS ACQUISITIONS
- ------------------------------
In January 1998, the Company purchased the assets of Blendax Professional
Dental Business from Procter & Gamble in a cash transaction valued at
approximately DM13 million or $7 million. Blendax is a distributor doing
business principally in Germany, Austria and the United Kingdom. The Blendax
product line consists of rotary cutting instruments, impression materials,
composite filling material and fluoride rinses and gels.
9
In March 1998, the Company purchased the assets of InfoSoft Inc. for $8.6
million. Located in White Marsh, Maryland, the primary business of InfoSoft is
the development and sale of full-featured, practice management software.
InfoSoft is also the number one dental practice-management claims processor in
America.
In the April and May of 1998, the Company purchased a 67% majority
interest in GAC International Inc. for approximately $22.7 million. Located in
Islip, New York, GAC provides a full line of high quality orthodontic products.
In May 1998, the Company purchased 100% of the capital stock of Crescent
Dental Manufacturing Co. for $5.2 million. Located in Lyons, Illinois, Crescent
has a diverse product offering and is one of the leading American manufacturers
of prophy cups and brushes, amalgamators and other professional dental equipment
and supplies.
In May 1998, the Company also purchased 100% of the capital stock of Herpo
Productos Dentarios Ltda. for $7.4 million. Located in Rio de Janeiro, Brazil,
Herpo has a broad product line focusing on alginate impression materials,
artificial teeth and dental anesthetics. Herpo operates several production
facilities in Rio de Janeiro and Bonsucesso, Brazil, including a modern dental
anesthetic production plant.
NOTE 4 - INVENTORIES
- --------------------
Inventories consist of the following:
June 30, December 31,
1998 1997
------------ ------------
(in thousands)
Finished goods $ 84,232 $ 63,987
Work-in-process 27,514 24,844
Raw materials and supplies 40,811 35,917
-------- --------
$152,557 $124,748
======== ========
Pre-tax income was $.3 million and $.2 million lower in the six months
ended June 30, 1998 and 1997 as a result of using the LIFO method compared to
the first-in, first-out (FIFO) method. If the FIFO method had been used to
determine the cost of the LIFO inventories, the amounts at which net inventory
is stated would be lower than reported at June 30, 1998 and December 31, 1997 by
$1.0 million and $1.3 million, respectively.
10
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment consist of the following:
June 30, December 31,
1998 1997
------------ ------------
Assets, at cost: (in thousands)
Land $ 11,821 $ 15,045
Buildings and improvements 68,020 68,009
Machinery and equipment 126,794 117,243
Construction in progress 16,109 11,856
-------- --------
222,744 212,153
Less: Accumulated depreciation 73,718 65,023
-------- --------
$149,026 $147,130
======== ========
NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
- -----------------------------------------
The increases from December 31, 1997 in notes payable and current portion
of long-term debt ($13.2 million) and long-term debt ($66.2 million) were
primarily due to utilization of the Company's credit facilities for the
acquisition of Blendax, InfoSoft, GAC, Crescent and Herpo (see Note 3),along
with the repurchase of 1.3 million shares of the Company's common stock.
NOTE 7 - COMPREHENSIVE INCOME
- -----------------------------
As of January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires the
Company's currency translation adjustments, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income.
Total comprehensive income amounted to $15,922 and $26,384 for the periods
ending June 30, 1998 and 1997, respectively. The following are the components of
comprehensive income:
Six Months Ended
June 30,
---------------------
1998 1997
-------- --------
(in thousands)
Net income $ 19,581 $ 34,767
Foreign currency translation adjustments (3,659) (8,383)
-------- --------
Comprehensive income $ 15,922 $ 26,384
======== ========
11
The component of accumulated other comprehensive income is represented by
foreign currency translation adjustments as follows:
Accumulated Other
Comprehensive Income
-------------------------
June 30, December 31,
1998 1997
-------- ---------
(in thousands)
Foreign currency translation adjustments $(20,379) $(16,720)
NOTE 8 - RESTRUCTURING AND OTHER COSTS
- --------------------------------------
In the second quarter of 1998, the Company recorded a pre-tax charge of $29
million for restructuring and other costs. This charge included costs of $26
million to rationalize and restructure the Company's worldwide laboratory
business (primarily for the closure of the Company's German tooth manufacturing
facility). The remaining $3 million of the charge was recorded to cover
termination costs associated with its former implant products. Included in the
$26 million restructuring charge are costs to cover severance, the write-down of
property, plant and equipment, and tooth product rationalization. The principal
actions involve the closure of the Company's Dreieich, Germany tooth facility
and rationalization of certain tooth products in Europe, North America and
Australia. The Company anticipates the restructuring will reduce production
costs and increase operational efficiencies, contributing to future earnings.
The restructuring results in the elimination of approximately 275 administrative
and manufacturing positions, mostly in Germany. The closure of the German tooth
facility should be complete by the second quarter of 1999 with benefits of the
restructuring beginning to be realized by the end of 1999. Negotiations with the
German Works Council and internal management plans are being finalized to ensure
a timely implementation of the restructuring plan.
The major components of the restructuring charge are as follows:
Severance $12,000
Write-down of property, plant and equipment
to net realizable value 7,000
Implant termination costs 3,000
Other 7,000
-------
$29,000
12
DENTSPLY INTERNATIONAL INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Any statements released by the Company that are forward-looking, including
without limitation, statements containing the words "plans", "anticipates",
"believes", "expects", or words of similar import constitute forward-looking
statements which are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements involve risks and uncertainties which may affect the
Company's business and prospects, including economic, competitive, governmental,
technological and other factors discussed in the Company's filings with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
For the quarter ended June 30, 1998, net sales increased $18.8 million, or
10.6%, to $197.1 million, up from $178.3 million in the same period of 1997.
Acquisitions net of divestitures contributed 6.7% growth to the quarter. Base
sales were up 5.8% with base sales increases of nearly 10% in the U.S., 3.2% in
Europe (despite a significant drop in the German laboratory business) and (7.5%)
in the Pacific Rim and Latin America. Exchange rates also negatively impacted
sales by nearly 2% in the quarter due to the strong U.S. dollar. Sales in the
Pacific Rim and Latin America were adversely impacted by the Asian economy and
the termination of distributors in Taiwan, Korea, Colombia and Chile which will
be replaced by newly established local DENTSPLY subsidiaries by the end of the
third quarter 1998. Base business sales growth in other territories was strong
but was largely offset by the adverse impact of the translation effect of the
strong U.S. dollar.
Gross profit increased $13.1 million, or 14.4%, to $103.9 million from $90.8
million in the second quarter of 1997 as a result of higher net sales and an
increase in the gross profit percentage in the second quarter of 1998. As a
percentage of sales, gross profit increased from 50.9% in the second quarter of
1997 to 52.7% in the same period of 1998. Favorable product and geographical
mix, operational improvements and the elimination of implant products all
contributed to the improved percentage.
Selling, general and administrative expenses increased $10.3 million, or 17.6%.
As a percentage of sales, expenses increased from 32.7% in the second quarter of
1997 to 34.8% for the same period of 1998. This increase resulted from:
increased selling efforts both in the U.S. and overseas, as many of the new
sales and distribution locations ramp up; worldwide cost of our new information
technology installations (all locations should be year 2000 compliant by the
second quarter of 1999); bad debt expense for receivables with discontinued
distributors and those in emerging countries; and the impact from acquisitions
(including some direct selling operations such as GAC).
Restructuring and other costs of $29 million were recorded in the second quarter
of 1998. The major component of the charge includes costs of $26 million to
rationalize and restructure the Company's worldwide laboratory business
(primarily for the closure of the Company's German tooth manufacturing
facility). The following costs are included in the $26
13
million: severance, $12 million; write-down of property plant and equipment, $7
million; and tooth discontinuance and other costs of $7 million. The remaining
$3 million of the charge was recorded to cover termination costs associated with
the Company's former implant products. The restructuring is expected to be
complete by the end of 1999. The after-tax cash flow of the charge is expected
to be approximately $10-12 million, most of which should occur in 1999.
Other expenses increased $0.7 million in the second quarter of 1998 due
primarily to unfavorable currency fluctuations in Europe and Asia.
Income before income taxes decreased $27.3 million due to the $29.0 million of
restructuring and other costs. Without these costs, income before income taxes
increased $1.7 million, or 5.9%. The effective tax rate for operations was
lowered to 37.3% in the second quarter of 1998 compared to 39.2% in the second
quarter of 1997 reflecting improvement from tax planning activities instituted
in late 1997. Net income decreased $17.3 million due to the after tax cost of
$18.9 million for the restructuring and other costs. Without these costs, net
income increased $1.6 million, or 8.9%, from the second quarter of 1997 due to
higher sales and strong gross profit margin along with a lower provision for
income taxes in the second quarter of 1998. Reported basic and diluted earnings
per common share were $.01 in 1998 compared to $.33 in the second quarter of
1997 including $.35 for restructuring and other costs in 1998. Without these
costs, basic and diluted earnings per common share increased from $.33 in 1997
to $.36 in 1998, or 9.1%.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
For the six months ended June 30, 1998, net sales increased $27.1 million, or
7.7%, to $377.8 million, up from $350.7 million in the same period of 1997. The
increase resulted from strong sales growth in the United States both from base
business and from acquisitions, net of divestitures. European sales increased
modestly while sales in the Pacific Rim and Latin America were adversely
impacted by the following: the Asian economy; the termination of distributors in
Taiwan, Korea, Colombia and Chile which will be replaced by newly established
local DENTSPLY subsidiaries by the end of the third quarter 1998; and the impact
of a strong U.S. dollar.
Gross profit increased $20.4 million, or 11.4%, to $199.2 million from $178.8
million in the first six months of 1997. As a percentage of sales, gross profit
increased from 51.0% in the first six months of 1997 to 52.7% in the same period
of 1998. Favorable product and geographical mix, operational improvements and
the elimination of implant products all contributed to the improved percentage.
Selling, general and administrative expense increased $14.1 million, or 11.9%.
As a percentage of sales, expenses increased from 33.7% in the first six months
of 1997 to 35.0% for the same period of 1998. The largest part of the percentage
increase in expenses was from businesses acquired during the last twelve months,
from higher expenses in the first six months of 1998 to upgrade information
systems in the United States and Europe to be year 2000 compliant and from bad
debt expense associated with termination of distributors in countries where
these distributors are being replaced with local DENTSPLY subsidiaries.
Restructuring and other costs of $29 million were recorded in the second quarter
of 1998, as previously described.
14
Other income decreased $1.3 million in the first six months of 1998 due
primarily to unfavorable currency fluctuations in Europe and Asia.
Income before income taxes decreased $24.8 million due to the $29.0 million of
restructuring and other costs. Without these costs, income before income taxes
increased $4.2 million, or 7.3%. The effective tax rate for operations was
lowered to 37.3% in the first six months of 1998 compared to 39.2% in the first
six months of 1997 reflecting improvement from tax planning activities. Net
income decreased $15.2 million due to the after tax cost of $18.9 million for
restructuring and other costs. Without these costs, net income increased $3.7
million, or 10.5% in the first six months of 1998 compared to 1997 due to higher
sales and an improvement in gross profit percentage, and a lower provision for
income taxes in the first six months of 1998.
Reported basic and diluted earnings per common share were $.36 in 1998 compared
to $.65 basic earnings per share and $.64 diluted earnings per share in the
first six months of 1997. Earnings per share for the first six months of 1998
included $.35 for restructuring and other costs. Without these costs, basic
earnings per common share increased from $.65 in 1997 to $.71 in 1998 or 9.2%
and diluted earnings per share increased from $.64 in 1997 to $.71 in 1998 or
10.9%.
LIQUIDITY AND CAPITAL RESOURCES
In January 1998, the Company acquired the assets of Blendax for approximately $7
million. In March 1998, the Company purchased the assets of InfoSoft for $8.6
million. In the April and May of 1998, the Company purchased a 67% majority
interest in GAC International Inc. for approximately $22.7 million. In May 1998,
the Company purchased 100% of the capital stock of Crescent Dental Manufacturing
Co. for $5.2 million. In May 1998, the Company also purchased 100% of the
capital stock of Herpo Productos Dentarios Ltda. for $7.4 million. In June 1998,
the Company repurchased 1.28 million shares of its common stock for $31.2
million. These transactions were funded from the Company's existing $175.0
million Bank Revolving Loan Facility and short-term bank borrowings along with
cash flows from operations.
Investing activities for the six months ended June 30, 1998 include capital
expenditures of $15.4 million.
The Company's current ratio was 1.6 with working capital of $121.4 million at
June 30, 1998. This compares with a current ratio of 1.6 and working capital of
$107.7 million at December 31, 1997. Working capital increased due to higher
inventory levels as new distributor locations were added and higher production
in Germany than required to meet sales. Inventory levels should improve slightly
by year end.
The Company expects to be able to finance cash requirements, including capital
expenditures, stock repurchases, debt service, and possible future acquisitions,
from the funds generated from operations and amounts available under the
existing Bank Revolving Loan Facility.
For the six months ended June 30, 1998, cash flows from operating activities
were $21.3 million compared to $34.4 million for the six months ended June 30,
1997. The decrease of $13.1 million results primarily from increases in
inventories.
15
In July of 1998, the Company entered into interest rate swap agreements totaling
$80 million which converts the Company's variable rate financing to fixed rates.
The average fixed rate of these agreements is 5.7% and fixes the rate for an
average of 5 years.
IMPACT OF INFLATION
The Company has generally offset the impact of inflation on wages and the cost
of purchased materials by improving operating efficiencies and increasing
selling prices to the extent permitted by market conditions.
YEAR 2000
The Company has conducted a comprehensive review of its computer systems to
identify the systems that are affected by the "Year 2000" issue. In 1995, the
Company commenced a year 2000 conversion project for all of its locations to
address necessary software upgrades, training, data conversion, testing and
implementation. The Company will incur internal staff costs as well as
consulting and other expenses to complete the project by the anticipated date of
mid-1999. The Company does not expect the amounts required to be expensed during
the project to have a material effect on its financial position or results of
operations.
16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Not required.
17
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes that pending
litigation to which DENTSPLY is a party will not have a material adverse effect
upon its consolidated financial position or results of operations.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) On May 20, 1998, the Company held its 1998 Annual Meeting of
Stockholders.
(b) Not applicable.
(c) The following matters were voted upon at the Annual Meeting, with the
results indicated:
1. Election of Class III Directors:
Votes Broker
Nominee Votes For Withheld Non-Votes
------- ---------- -------- ---------
Michael J. Coleman 44,880,360 615,397 N/A
John C. Miles II 44,561,308 934,449 N/A
Arthur A. Dugoni 44,878,075 617,682 N/A
W. Keith Smith 44,912,485 583,272 N/A
2. Proposal to approve the Dentsply International Inc. 1998 Stock
Option Plan.
Votes For: 33,863,224 Votes Against: 7,039,758
Abstentions: 213,050 Broker Non-Votes: 4,379,725
3. Proposal to ratify the appointment of KPMG Peat Marwick LLP,
independent certified accountants, to audit the books and accounts
of the Company for the year ending December 31,1998:
Votes For: 45,347,400 Votes Against: 97,152
Abstentions: 51,205 Broker Non-Votes: N/A
(d) Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed herewith:
---------
Number Description
------ -----------
27 Financial Data Schedule (pursuant to Item 601(c)(1)(iv) of
Regulation S-K, this exhibit shall not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of 1934,
as amended)
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1998.
18
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENTSPLY INTERNATIONAL INC.
August 13, 1998 /s/ John C. Miles II
- -------------------- -----------------------------------
Date John C. Miles II
Vice Chairman and
Chief Executive Officer
August 13, 1998 /s/ William R. Jellison
- -------------------- -----------------------------------
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
19
EXHIBIT INDEX
-------------
Number Description Sequential Page No.
------ ----------- -------------------
27 Financial Data Schedule 21
(pursuant to Item 601(c)(1)(iv) of
Regulation S-K, this exhibit shall
not be deemed filed for purposes
of Section 18 of the Securities
Exchange Act of 1934, as amended)
20