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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 September 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 November 5, 1998 the Company
had 52,495,539 shares of Common Stock outstanding, with a par value of $.01 per
share.
Page 1 of 22
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Exhibit Index at Page 21
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DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended September 30, 1998
--------------------
INDEX
-----
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................................ 18
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................... 19
Item 6 - Exhibits and Reports on Form 8-K............ 19
Signatures........................................... 20
2
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
September 30, December 31,
1998 1997
ASSETS ------------ ------------
Current assets: (in thousands)
Cash and cash equivalents $ 10,262 $ 9,848
Accounts and notes receivable-trade, net 127,439 114,366
Inventories 159,662 124,748
Prepaid expenses and other current assets 31,930 28,065
--------- ---------
Total Current Assets 329,293 277,027
Property, plant and equipment, net 159,307 147,130
Other noncurrent assets, net 20,135 13,314
Identifiable intangible assets, net 100,850 103,513
Costs in excess of fair value of net
assets acquired, net 279,916 233,392
--------- ---------
Total Assets $ 889,501 $ 774,376
LIABILITIES AND STOCKHOLDERS' EQUITY ========= =========
Current liabilities:
Accounts payable $ 40,091 $ 38,942
Accrued liabilities 102,703 71,563
Income taxes payable 25,948 34,839
Notes payable and current portion
of long-term debt 30,591 24,005
--------- ---------
Total Current Liabilities 199,333 169,349
Long-term debt 178,569 105,505
Deferred income taxes 30,229 27,647
Other liabilities 47,820 43,954
--------- ---------
Total Liabilities 455,951 346,455
--------- ---------
Minority interests in consolidated subsidiaries 11,456 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 September 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 330,082 301,058
Accumulated other comprehensive income (11,049) (16,720)
Employee stock ownership plan reserve (8,357) (9,497)
Treasury stock, at cost, 1.8 million shares
at September 30, 1998 and .1 million shares
at December 31, 1997 (42,049) (2,188)
--------- ---------
Total Stockholders' Equity 422,094 423,933
--------- ---------
Total Liabilities and Stockholders' Equity $ 889,501 $ 774,376
========= =========
See accompanying notes to unaudited consolidated condensed financial statements.
3
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands, except per share data)
Net sales $196,995 $172,674 $574,827 $523,340
Cost of products sold 93,884 84,872 272,528 256,717
-------- -------- -------- --------
Gross profit 103,111 87,802 302,299 266,623
Selling, general and
administrative expenses 71,162 57,914 203,477 176,161
Restructuring and other
costs - - 29,000 -
-------- -------- -------- --------
Operating income 31,949 29,888 69,822 90,462
Interest expense 4,357 3,074 11,120 9,291
Interest income (278) (234) (937) (1,125)
Other (income) expense, net 738 327 174 (1,578)
-------- -------- -------- --------
Income before income taxes 27,132 26,721 59,465 83,874
Provision for income taxes 9,505 10,465 22,257 32,851
-------- -------- -------- --------
Net income $ 17,627 $ 16,256 $ 37,208 $ 51,023
======== ======== ======== ========
Earnings per common share:
Basic $.33 $.30 $.69 $.95
Diluted $.33 $.30 $.69 $.94
Cash dividends declared
per common share $ .05125 $ .05125 $ .15375 $ .14375
Weighted average common shares outstanding:
Basic 52,780 53,979 53,610 53,906
Diluted 52,936 54,282 53,902 54,183
See accompanying notes to unaudited consolidated condensed financial statements.
4
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
-------------------
1998 1997
-------- --------
Cash flows from operating activities: (in thousands)
Net income $ 37,208 $ 51,023
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 13,053 11,699
Amortization 14,791 12,500
Non-cash restructuring and other costs 29,000 -
Cash expended on restructuring (1,125) -
Inventories (22,320) 4,095
Other, net (19,978) (16,932)
-------- --------
Net cash provided by operating activities 50,629 62,385
-------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (49,943) (77,392)
Property, plant and equipment additions (24,925) (23,017)
Other, net (496) 413
-------- --------
Net cash used in investing activities (75,364) (99,996)
-------- --------
Cash flows from financing activities:
Debt repayment (45,092) (66,180)
Proceeds from long-term debt 113,322 111,366
Increase (decrease) in bank overdrafts and
other short-term borrowings 5,865 (2,442)
Cash paid for treasury stock (42,049) (928)
Other, net (2,747) (925)
-------- --------
Net cash provided by financing activities 29,299 40,891
-------- --------
Effect of exchange rate changes on cash
and cash equivalents (4,150) (1,064)
-------- --------
Net increase (decrease) in cash and cash equivalents 414 2,216
Cash and cash equivalents at beginning of period 9,848 5,619
-------- --------
Cash and cash equivalents at end of period $ 10,262 $ 7,835
======== ========
Supplemental disclosures of cash flow information:
Interest paid 7,918 6,439
Income taxes paid 31,092 30,571
Non-cash activities:
Liabilities assumed from acquisitions 22,885 33,163
Cancellation of loan and accounts
receivable from acquired subsidiaries - 4,310
Note receivable for inventory and fixed assets
associated with arbitration ruling terminating
the Implant Distribution Agreement - 144
Non-cash implant termination costs applied
against the restructuring reserve 2,770 -
Non-cash write-down of property, plant and
equipment 5,973
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 $ 10,651 $ 35,979 $ 5,781 $ 13,842
Cash paid for assets
or capital stock (6,112) (8,618) (22,740) (5,214) (7,395)
-------- -------- -------- -------- --------
Liabilities assumed $ 599 $ 2,033 $ 13,239 $ 567 $ 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
July 1997, the Company purchased certain assets of EFOS Corporation ("EFOS") for
$15.0 million and all of the capital stock of SIMFRA S.A. ("SIMFRA") for $3.9
million. In conjunction with the acquisitions, liabilities were assumed as
follows:
DW SPAD New Image EFOS SIMFRA
-------- -------- --------- -------- -------
Fair value of assets
acquired $ 17,838 $ 43,453 $ 31,973 $ 15,025 $ 6,827
Cash paid for assets (16,253) (35,992) (10,860) (14,988) (3,860)
-------- -------- -------- -------- -------
Liabilities assumed $ 1,585 $ 7,461 $ 21,113 $ 37 $ 2,967
======== ======== ======== ======== =======
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
Comprehensive Income:
Net income 37,208 37,208
Other comprehensive income
Foreign currency translation
adjustments 5,671 5,671
--------
Comprehensive Income 42,879
--------
Exercise of stock options and
warrants 1 1,308 - - - 2,188 3,497
Tax benefit related to stock
options and warrants exercised - 878 - - - - 878
Repurchase of 1,764,000 shares
of common stock - - - - - (42,049) (42,049)
Net change in ESOP reserve - - - - 1,140 - 1,140
Cash dividends declared, $.05125
per share - - (8,184) - - - (8,184)
------ -------- -------- -------- -------- ------- --------
Balance at September 30, 1998 $ 543 $152,924 $330,082 $(11,049) $ (8,357) $(42,049) $422,094
====== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated condensed financial statements.
7
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------
SEPTEMBER 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 September 30,
1998 and December 31, 1997, the cost of $17.1 million or 11% 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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Basic EPS Computation ------- ------- ------- -------
Numerator(Income) $17,627 $16,256 $37,208 $51,023
------- ------- ------- -------
Denominator:
Common shares outstanding 52,780 53,979 53,610 53,906
------- ------- ------- -------
Basic EPS $ 0.33 $ 0.30 $ 0.69 $ 0.95
======= ======= ======= =======
Diluted EPS Computation
Numerator(Income) $17,627 $16,256 $37,208 $51,023
------- ------- ------- -------
Denominator:
Common shares outstanding 52,780 53,979 53,610 53,906
Incremental shares from assumed
exercise of dilutive options
and warrants 156 303 292 277
------- ------- ------- -------
Total shares 52,936 54,282 53,902 54,183
------- ------- ------- -------
Diluted EPS $ 0.33 $ 0.30 $ 0.69 $ 0.94
======= ======= ======= =======
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 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:
September 30, December 31,
1998 1997
------------ ------------
(in thousands)
Finished goods $ 86,617 $ 63,987
Work-in-process 28,701 24,844
Raw materials and supplies 44,344 35,917
-------- --------
$159,662 $124,748
======== ========
Pre-tax income was $.5 million and $.3 million lower in the nine months
ended September 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 September 30, 1998 and December 31,
1997 by $.8 million and $1.3 million, respectively.
10
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment consist of the following:
September 30, December 31,
1998 1997
------------ ------------
Assets, at cost: (in thousands)
Land $ 12,645 $ 15,045
Buildings and improvements 71,366 68,009
Machinery and equipment 136,292 117,243
Construction in progress 18,877 11,856
-------- --------
239,180 212,153
Less: Accumulated depreciation 79,873 65,023
-------- --------
$159,307 $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 ($6.6 million) and long-term debt ($73.0 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 1.8 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 $42,879 and $42,816 for the periods
ending September 30, 1998 and 1997, respectively. The following are the
components of comprehensive income:
Nine Months Ended
September 30,
---------------------
1998 1997
-------- --------
(in thousands)
Net income $ 37,208 $ 51,023
Foreign currency translation adjustments 5,671 (8,207)
-------- --------
Comprehensive income $ 42,879 $ 42,816
======== ========
11
The component of accumulated other comprehensive income is represented by
foreign currency translation adjustments as follows:
Accumulated Other
Comprehensive Income
-----------------------------
September 30, December 31,
1998 1997
------------- ------------
(in thousands)
Foreign currency translation adjustments $(11,049) $(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.
At September 30, 1998, $26.7 million remained in the restructuring accrual.
Through the third quarter 1998, the Company has paid approximately $1.1 million
for legal and professional service fees and employee related costs for the
German workforce. During this same period, the reserve has also been reduced by
approximately $2.8 million for non-cash implant termination costs and
approximately $6.0 million for a non-cash write down of property, plant and
equipment.
The major components of the restructuring reserve are as follows:
Severance $12,000
Write-down of property, plant and equipment (net) 7,000
Less non-cash reduction in reserve (6,000)
Implant termination costs 3,000
Less non-cash reduction in reserve (2,800)
Other 7,000
Less payments applied for closure of Dreieich,
Germany facility (1,100)
---------
Reserve balance $19,100
=========
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 1997 Form 10-K filing
with the Securities and Exchange Commission under the section entitled Factors
That May Affect Future Results.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
For the quarter ended September 30, 1998, net sales increased $24.3 million, or
14.1%, to $197.0 million, up from $172.7 million in the same period of 1997.
Acquisitions, net of divestitures, accounted for 9.4% of the sales growth for
the quarter. Base business sales were up 4.7% with a base business sales
increase of nearly 8% in the U.S., offset by a decline of 1.3% in Europe
including a significant drop in sales to the Commonwealth of Independent States
(C.I.S.) and a drop in German laboratory business sales, and a decline of 3.8%
in the Pacific Rim and Latin America. Exchange rate fluctuations in Europe, Asia
and Latin America had a negligible impact on sales in the third quarter. Sales
in the Pacific Rim and Latin America were adversely impacted by the downturn in
the Asian and Latin American economies and the termination of distributors in
Taiwan, Korea, Colombia and Chile which have been replaced by newly established
local DENTSPLY subsidiaries in the second and the third quarters of 1998. Base
business sales growth in other territories was strong but was partially offset
by the adverse impact of the translation effect of the strong U.S. dollar.
Gross profit increased $15.3 million, or 17.4%, to $103.1 million from $87.8
million in the third quarter of 1997 as a result of higher net sales and an
increase in the gross profit percentage in the third quarter of 1998. As a
percentage of sales, gross profit increased from 50.8% in the third quarter of
1997 to 52.3% in the same period of 1998. Favorable product and geographical mix
and operational improvements all contributed to the improved percentage.
Selling, general and administrative expenses increased $13.2 million, or 22.9%.
As a percentage of sales, expenses increased from 33.5% in the third quarter of
1997 to 36.1% for the same period of 1998. This increase resulted from a bad
debt provision of $3.0 million, principally for the customers in the C.I.S.;
increased selling efforts both in the U.S. and overseas, as many of the new
sales and distribution locations ramp up; worldwide cost of the new information
technology installations (all locations should be year 2000 compliant by the
third quarter of 1999); and the impact from acquisitions including direct
selling operations such as GAC.
13
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 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. At September 30, 1998, $19.1 million remained in the
restructuring accrual. Through the third quarter 1998 the Company has paid
approximately $1.1 million for legal and professional service fees, and employee
related costs for the German workforce. The reserve has been reduced by
approximately $2.8 million for non-cash implant restructuring costs and
approximately $6.0 million for a non-cash write down of property, plant and
equipment. 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.
Interest expense increased $1.3 million in the third quarter of 1998 due to
increased interest expense on debt incurred to finance acquisitions and the
stock repurchase program. Other expenses increased $0.4 million in the third
quarter of 1998 due primarily to unfavorable currency fluctuations in Europe,
Asia and Latin America.
Income before income taxes increased $0.4 million, or 1.5%. The effective tax
rate for operations was lowered to 35.0% in the third quarter of 1998 compared
to 39.2% in the third quarter of 1997 reflecting savings from federal, state and
foreign tax planning activities. Net income increased $1.4 million, or 8.4%,
from the third quarter of 1997 due to higher sales and a strong gross profit
margin along with a lower provision for income taxes in the third quarter of
1998 partially offset by the growth in expenses. Basic and diluted earnings per
common share increased from $.30 in 1997 to $.33 in 1998, or 10.0%.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
For the nine months ended September 30, 1998, net sales increased $51.5 million,
or 9.8%, to $574.8 million, up from $523.3 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 being adversely impacted by a decline in sales for the German
laboratory business. Sales in the Pacific Rim and Latin America were adversely
impacted by the following: the Asian and Latin American economies; the
termination of distributors in Taiwan, Korea, Colombia and Chile which have been
replaced by newly established local DENTSPLY subsidiaries in the second and
third quarters of 1998; and the impact of a strong U.S. dollar.
Gross profit increased $35.7 million, or 13.4%, to $302.3 million from $266.6
million in the first nine months of 1997. As a percentage of sales, gross profit
increased from 50.9% in the first nine months of 1997 to 52.6% 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.
14
Selling, general and administrative expense increased $27.3 million, or 15.5%.
As a percentage of sales, expenses increased from 33.7% in the first nine months
of 1997 to 35.4% 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 nine months of 1998 to upgrade information
systems in the United States and Europe; and from bad debt provisions,
principally for customers in the C.I.S. and for the termination of distributors
in countries where those distributors were replaced with local DENTSPLY
subsidiaries.
Restructuring and other costs of $29 million were recorded in the second quarter
of 1998, as previously described.
Interest expense increased $1.8 million in the first nine months of 1998 due to
interest expense on debt incurred to finance acquisitions and the stock
repurchase program. Other income decreased $1.8 million in the first nine months
of 1998 due primarily to unfavorable currency fluctuations in Europe, Asia and
Latin America.
Income before income taxes decreased $24.4 million due to the $29.0 million of
restructuring and other costs. Without these costs, income before income taxes
increased $4.5 million, or 5.5%. The effective tax rate for operations was
lowered to 36.7% in the first nine months of 1998 compared to 39.2% in the first
nine months of 1997 reflecting improvement from tax planning activities. Net
income decreased $13.8 million due to the after tax cost of $18.9 million for
restructuring and other costs. Without these costs, net income increased $5.1
million, or 10.0% in the first nine months of 1998 compared to 1997 due to
higher sales and an improvement in gross profit percentage, and a lower
effective tax rate for the company in the first nine months of 1998.
Reported basic and diluted earnings per common share were $.69 in 1998 compared
to $.95 basic earnings per share and $.94 diluted earnings per share in the
first nine months of 1997. Earnings per share for the first nine months of 1998
included $.35 for restructuring and other costs. Without these costs, basic
earnings per common share increased from $.95 in 1997 to $1.04 in 1998 or 9.5%
and diluted earnings per share increased from $.94 in 1997 to $1.04 in 1998 or
10.6%.
LIQUIDITY AND CAPITAL RESOURCES
Investing activities for the nine months ended September 30, 1998 include
capital expenditures of $24.9 million and acquisitions of $49.9 million.
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 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.
From June through September 1998, the Company repurchased 1.76 million shares of
its common stock for $42.0 million. These transactions were funded from the
Company's existing loan facility along with cash flows from operations.
15
The Company's current ratio was 1.7 with working capital of $130.0 million at
September 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
acquisitions and higher inventory levels as new distributor locations were added
and also increased due to higher than required production in Germany. 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 nine months ended September 30, 1998, cash flows from operating
activities were $50.6 million compared to $62.4 million for the nine months
ended September 30, 1997. The decrease of $11.8 million results primarily from
increases in inventories.
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
An issue affecting DENTSPLY and all other companies is whether computer systems
and applications will recognize and process data for the Year 2000 and beyond.
The Year 2000 issue arose because many existing computer programs use only the
last two digits to refer to a year. These computer programs do not recognize a
year that begins with "20" instead of "19". The inability of many computer
applications to interpret the Year 2000 correctly may cause potential business
disruptions affecting all aspects of normal operations. The Year 2000 issue has
global ramifications affecting not only the Company's operations but also the
operations of the Company's suppliers, vendors and customers.
In 1995, the Company commenced an upgrade of its information technology ("IT")
systems for all of its locations. A primary software was chosen to upgrade the
Company's computerized business application systems to world class standards and
also enable the Company to become Year 2000 compliant. The upgrade included
necessary hardware and software improvements, training, data conversion, systems
testing and implementation, and Year 2000 compliance.
Most of the identification, planning, and development phases of the Year 2000
project have been completed. The Company is in the process of implementing the
information system upgrade with an anticipated completion date of mid-1999. Work
has been completed on 75% of North American, Latin American and Asian systems,
as well as 60% of European systems. To date, the Company has spent approximately
$10.2 million for the IT project. An additional $5.3 million of spending is
anticipated for the remainder of
16
1998 and 1999. These costs encompass the total upgrade of the Company's
manufacturing, distribution and financial reporting systems. The Company has not
deferred other IT projects due to its Year 2000 initiative, but rather, the Year
2000 initiative has been part of the upgrade of its current IT system. Possible
Year 2000 issues that are not covered by the IT upgrade are being addressed
separately and may require software replacement, reprogramming or other remedial
action. The Company is engaged in a program to identify affected systems and
applications and to develop a plan to correct any issues in the most effective
manner. The Company is in the process of formulating contingency plans to the
extent necessary in fiscal 1999.
The Year 2000 initiative presents a number of uncertainties including the status
and planning of third parties. Since the Year 2000 initiative has many elements
and consequences that cannot be foreseen, there can be no assurance that
unforeseen consequences will not arise. The Company is in the process of
assessing its risk regarding its vulnerability to any failures posed by
significant suppliers and customers. The risk-assessment involves a company-wide
initiative promoting two-way communication with suppliers and customers to
determine suppliers' and customers' Year 2000 readiness and contingency
planning.
The Company's Year 2000 remediation efforts along with the information system
upgrade are funded from the Company's operating cash flows and its borrowing
facilities. The following table contains historical and estimated future costs
of the total IT system upgrade, which includes the Year 2000 initiative.
Infrastructure and daily IT-related operating expenses have been excluded from
the reported costs.
Project Costs Anticipated
To Date Future Costs
------------- ------------
(in thousands)
Capital Expenditures $ 5,974 $ 2,618
Expenses 4,220 2,649
-------- --------
Total $ 10,194 $ 5,267
======== ========
17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Not required.
18
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.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and conduct
undertaken by the Company's Trubyte Division with respect to the distribution of
artificial teeth and related products. This matter remains pending with the
Department of Justice. It is the Company's position that the conduct and
activities of the Trubyte Division do not violate federal antitrust laws.
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 September 30, 1998.
19
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.
November 11, 1998 /s/ John C. Miles II
- ----------------- ----------------------------------
Date John C. Miles II
Chairman and
Chief Executive Officer
November 11, 1998 /s/ William R. Jellison
- ----------------- ----------------------------------
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
20
EXHIBIT INDEX
-------------
Number Description Sequential Page No.
------ ----------- -------------------
27 Financial Data Schedule 22
(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)
21