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, 2003
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.
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(Exact name of registrant as specified in its charter)
Delaware 39-1434669
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(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
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(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
( 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 5, 2003 the
Company had 78,988,720 shares of Common Stock outstanding, with a par value
of $.01 per share.
Page 1 of 22
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended June 30, 2003
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Statements of Income 3
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Unaudited Interim Consolidated Condensed
Financial Statements 6
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
Item 4 - Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 6 - Exhibits and Reports on Form 8-K 21
Signatures 22
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
(in thousands, except per share amounts)
Net sales $ 417,949 $ 381,013 $ 814,136 $ 735,881
Cost of products sold 212,839 196,473 418,955 381,969
Gross profit 205,110 184,540 395,181 353,912
Selling, general and administrative expenses 134,085 119,783 262,146 234,199
Restructuring and other (income) costs (Note 6) -- (44) -- (2,001)
Operating income 71,025 64,801 133,035 121,714
Other income and expenses:
Interest expense 6,457 7,611 12,551 14,665
Interest income (363) (167) (629) (420)
Other expense (income), net (552) 1,573 (1,090) 1,469
Income before income taxes 65,483 55,784 122,203 106,000
Provision for income taxes 21,265 18,964 39,718 36,084
Net income $ 44,218 $ 36,820 $ 82,485 $ 69,916
Earnings per common share (Note 3):
Basic $ 0.56 $ 0.47 $ 1.05 $ 0.90
Diluted 0.55 0.46 1.03 0.88
Cash dividends declared per common share $ 0.046 $ 0.046 $ 0.092 $ 0.092
Weighted average common shares outstanding:
Basic 78,688 78,163 78,566 78,056
Diluted 80,327 80,076 80,168 79,858
See accompanying notes to unaudited interim consolidated condensed financial statements.
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
June 30, December 31,
2003 2002
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 81,401 $ 25,652
Accounts and notes receivable-trade, net 243,813 221,262
Inventories, net (Notes 1 and 5) 229,592 214,492
Prepaid expenses and other current assets 82,489 79,595
Total Current Assets 637,295 541,001
Property, plant and equipment, net 348,971 313,178
Identifiable intangible assets, net 236,973 236,009
Goodwill, net 941,598 898,497
Other noncurrent assets 139,372 98,348
Total Assets $ 2,304,209 $ 2,087,033
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 79,512 $ 66,625
Accrued liabilities 174,470 190,783
Income taxes payable 120,230 103,787
Notes payable and current portion
of long-term debt 5,365 4,550
Total Current Liabilities 379,577 365,745
Long-term debt 824,971 769,823
Deferred income taxes 27,038 27,039
Other noncurrent liabilities 93,321 87,239
Total Liabilities 1,324,907 1,249,846
Minority interests in consolidated subsidiaries 1,320 1,259
Commitments and contingencies (Note 8)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued -- --
Common stock, $.01 par value; 100 million shares authorized;
81.4 million shares issued at June 30, 2003 and December 31, 2002 814 814
Capital in excess of par value 161,980 156,898
Retained earnings 806,216 730,971
Accumulated other comprehensive gain (Note 2) 55,199 1,624
Unearned ESOP compensation (1,140) (1,899)
Treasury stock, at cost, 2.5 million shares at June 30, 2003
and 3.0 million shares at December 31, 2002 (45,087) (52,480)
Total Stockholders' Equity 977,982 835,928
Total Liabilities and Stockholders' Equity $ 2,304,209 $ 2,087,033
See accompanying notes to unaudited interim consolidated condensed financial statements.
4
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30,
--------------------------------------
2003 2002
(in thousands)
Cash flows from operating activities:
Net income $ 82,485 $ 69,916
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 19,851 17,229
Amortization 5,136 5,220
Restructuring and other costs -- (2,001)
Other, net (11,933) (35,969)
Net cash provided by operating activities 95,539 54,395
Cash flows from investing activities:
Capital expenditures (39,585) (21,777)
Acquisitions of businesses, net of cash acquired (2,354) (49,428)
Expenditures for identifiable intangible assets (2,160) (750)
Proceeds from the redemption of preferred stock investment -- 15,000
Proceeds from bulk sale of precious metals inventory -- 6,754
Other, net 385 418
Net cash used in investing activities (43,714) (49,783)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of
deferred financing costs -- 132,523
Payments on long-term borrowings (3,785) (144,536)
Net change in short-term borrowings (378) 1,133
Cash dividends paid (7,217) (7,160)
Proceeds from exercise of stock options 9,442 5,343
Other, net 3,791 (53)
Net cash provided by (used in) financing activities 1,853 (12,750)
Effect of exchange rate changes on cash and cash equivalents 2,071 (7,886)
Net increase (decrease) in cash and cash equivalents 55,749 (16,024)
Cash and cash equivalents at beginning of period 25,652 33,710
Cash and cash equivalents at end of period $ 81,401 $ 17,686
See accompanying notes to unaudited interim consolidated condensed financial statements.
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2003
The accompanying unaudited interim consolidated condensed financial
statements reflect all adjustments (consisting only of normal recurring
adjustments, except as described in Note 7) which in the opinion of
management are necessary for a fair statement of financial position, results
of operations and cash flows for the interim periods. These interim
financial statements conform to the requirements for interim financial
statements and consequently do not include all the disclosures normally
required by generally accepted accounting principles. Disclosures included
in the Company's most recent Form 10-K filed March 29, 2002 are updated
where appropriate.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. Intercompany accounts and transactions
are eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market. At June 30, 2003
the cost of $12.8 million or 6% and at December 31, 2002, the cost of $13.0
million or 6% 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.
If the FIFO method had been used to determine the cost of the LIFO
inventories, the amounts at which net inventories are stated would be higher
than reported at June 30, 2003 by $0.7 million and by $0.8 million at
December 31, 2002.
Derivative Financial Instruments
The Company follows Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS 138 and SFAS 149, which requires that all
derivative instruments be recorded on the balance sheet at their fair value
and that changes in fair value be recorded each period in current earnings
or comprehensive income.
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. Additionally, the Company utilizes
interest rate swaps to convert floating rate debt to fixed rate, fixed rate
debt to floating rate, cross currency basis swaps to convert debt
denominated in one currency to another currency and commodity swaps to
convert variable raw materials costs to fixed costs. The Company also holds
stock warrants which are considered derivative financial instruments as
defined under SFAS 133.
The Company has Euro, Swiss franc and Japanese yen denominated long-term
debt that qualifies as a hedge of its net investments in Europe, Switzerland
and Japan. As a result, the related exchange rate fluctuations affecting
debt are offset in "Accumulated other comprehensive gain (loss)". The
Company has Euro denominated debt which, through March 2003, was hedged by
cross currency swaps and fixed to variable rate interest rate swaps. In
March 2003, the Company amended its cross currency swap related to its
Eurobond debt by exchanging the final settlement of U.S. dollars for Euros
at a fixed rate of $0.90 in return for lower cash interest payments over the
remaining term of the swap. As a result of this exchange, the Company has
become economically exposed to the impact of exchange rates on the final
principal payment and, as of the date of the swap amendment, has designated
the principal as a hedge of its net investment in Euro region operations.
6
Stock Compensation
The Company has stock-based employee compensation plans and applies the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for these plans. Under this method, no
compensation expense is recognized for fixed stock option plans, provided
that the exercise price is greater than or equal to the price of the stock
at the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation", to stock-based employee
compensation.
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
(in thousands, except per share amounts)
Net income as reported $ 44,218 $ 36,820 $ 82,485 $ 69,916
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (2,724) (2,235) (5,418) (4,418)
Pro forma net income $ 41,494 $ 34,585 $ 77,067 $ 65,498
Basic earnings per common share
As reported $ 0.56 $ 0.47 $ 1.05 $ 0.90
Pro forma under fair value based method $ 0.53 $ 0.44 $ 0.98 $ 0.84
Diluted earnings per common share
As reported $ 0.55 $ 0.46 $ 1.03 $ 0.88
Pro forma under fair value based method $ 0.52 $ 0.43 $ 0.96 $ 0.82
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(in thousands)
Net income $ 44,218 $ 36,820 $ 82,485 $ 69,916
Other comprehensive income:
Foreign currency translation adjustments 25,007 60,467 48,503 55,528
Unrealized gain on available-for-sale securities 5,325 1,741 6,619 1,741
Net (loss) gain on derivative financial
instruments 140 (3,852) (1,547) (2,880)
Total comprehensive income $ 74,690 $ 95,176 $ 136,060 $ 124,305
7
The balances included in accumulated other comprehensive gain in the
consolidated balance sheets are as follows:
June 30, December 31,
2003 2002
(in thousands)
Foreign currency translation adjustments $ 62,051 $ 13,548
Net loss on derivative financial
instruments (7,530) (5,983)
Unrealized gain (loss) on available-for-sale securities 1,765 (4,854)
Minimum pension liability (1,087) (1,087)
$ 55,199 $ 1,624
NOTE 3 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(in thousands, except per share amounts)
Basic EPS Computation
Numerator (Income) $44,218 $36,820 $82,485 $69,916
Denominator:
Common shares outstanding 78,688 78,163 78,566 78,056
Basic EPS $ 0.56 $ 0.47 $ 1.05 $ 0.90
Diluted EPS Computation
Numerator (Income) $44,218 $36,820 $82,485 $69,916
Denominator:
Common shares outstanding 78,688 78,163 78,566 78,056
Incremental shares from assumed exercise
of dilutive options 1,639 1,913 1,602 1,802
Total shares 80,327 80,076 80,168 79,858
Diluted EPS $ 0.55 $ 0.46 $ 1.03 $ 0.88
Options to purchase 104,100 and 35,400 shares of common stock that were
outstanding during the quarter ended June 30, 2003 and 2002, respectively,
were not included in the computation of diluted earnings per share since the
options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive. Antidilutive
options outstanding during the six months ended June 30, 2003 and 2002 were
1.5 million and 71,400, respectively.
8
NOTE 4 - BUSINESS ACQUISITIONS/DIVESTITURES
In October 2001, the Company completed the acquisition of the Degussa
Dental Group ("Degussa Dental"). The Company paid 548 million Euros or $503
million at the closing date and paid 12.1 million Euros, or $11.4 million,
as a closing balance sheet adjustment in June 2002. An additional closing
balance sheet adjustment is subject to a dispute between the parties and is
in arbitration. The Company may be required to pay up to 10 million Euros
plus related interest costs for the final closing balance sheet adjustment
depending upon the outcome of the arbitration. Any payments would result in
additional purchase price.
In March 2001, the Company acquired the dental injectible anesthetic
assets of AstraZeneca ("AZ Assets"). The total purchase price of this
transaction was $136.5 million which was composed of the following: an
initial $96.5 million payment which was made at closing in March 2001; a $20
million contingency payment (including related accrued interest) associated
with the first year sales of injectible dental anesthetic which was paid
during the first quarter of 2002; a $2.0 million payment upon submission of
a New Drug Application ("NDA") in the U.S. and a Marketing Authorization
Application ("MAA") in Europe for the Oraqix product under development;
payments of $6.0 million and $2.0 million upon the approval of the NDA and
MAA, respectively, for licensing rights; and a $10.0 million prepaid royalty
payment upon approval of both applications. The $2.0 million payment related
to the application filings was accrued as current expense during the fourth
quarter of 2001 and was paid during the first quarter of 2002. The MAA has
been approved in Sweden, the European Union member reference state, and the
Company made the required $2.0 million payment to AstraZeneca in the second
quarter of 2003. The Company expects that the NDA applications will be
approved late in 2003, and as a result, it expects to make the remaining
payments totaling $16.0 million in 2003 or 2004. These payments will be
capitalized and amortized over the term of the licensing agreement.
NOTE 5 - INVENTORIES
Inventories consist of the following:
June 30, December 31,
2003 2002
(in thousands)
Finished goods $142,020 $134,989
Work-in-process 42,506 39,065
Raw materials and supplies 45,066 40,438
$229,592 $214,492
9
NOTE 6 - RESTRUCTURING AND OTHER COSTS
During the second quarter of 2002, the Company recorded a charge of $1.7
million for restructuring and other costs. The charge primarily related to
the elimination of duplicative functions created as a result of combining
the Company's Ceramed and U.S. Friadent divisions. Included in this charge
were severance costs of $0.6 million, lease/contract termination costs of
$0.9 million and $0.2 million of impairment charges on fixed assets that
were disposed of as a result of the restructuring plan. This restructuring
plan resulted in the elimination of approximately 35 administrative and
manufacturing positions in the United States and was substantially complete
as of December 31, 2002.
As part of combining Austenal with the Company, $4.4 million of
liabilities were established through purchase price accounting for the
restructuring of the acquired companies' operations, primarily in the United
States and Germany. Included in this liability were severance costs of $2.9
million, lease/contract termination costs of $1.4 million and other
restructuring costs of $0.1 million. This restructuring plan included the
elimination of approximately 75 administrative and manufacturing positions
in the United States and Germany, 22 of which remain to be eliminated as of
June 30, 2003. The Company anticipates that most aspects of this plan will
be completed by the first quarter of 2004.
The major components of the 2002 restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at June 30, 2003 are as follows:
Change
in Estimate
Amounts Recorded
Recorded Through
Through Amounts Change Amounts Purchase Balance
2002 Purchase Applied in Estimate Applied Accounting June 30,
Provisions Accounting 2002 2002 2003 2003 2003
Severance $ 541 $ 2,927 $ (530) $ (164) $ (638) $ 127 $ 2,263
Lease/contract terminations 895 1,437 (500) 120 (452) -- 1,500
Other restructuring costs 38 60 (60) (36) -- -- 2
Fixed asset impairment charges 195 -- (195) -- -- -- --
$ 1,669 $ 4,424 $(1,285) $ (80) $(1,090) $ 127 $ 3,765
In the fourth quarter of 2001, the Company recorded a charge of $12.3
million for restructuring and other costs. The charge included costs of
$6.0 million to restructure the Company's existing operations, primarily in
Germany, Japan and Brazil, as a result of the integration with Degussa
Dental. Included in this charge were severance costs of $2.1 million,
lease/contract termination costs of $1.1 million and other restructuring
costs of $0.2 million. In addition, the Company recorded $2.6 million of
impairment charges on fixed assets that will be disposed of as a result of
the restructuring plan. The remaining charge of $6.3 million involves
impairment charges on intangible assets. During 2002, primarily in the
second quarter, the Company reversed a net total of $1.0 million as a change
in estimate as it determined the costs to complete the plan were lower than
originally estimated. This restructuring plan included the elimination of
approximately 160 administrative and manufacturing positions in Germany,
Japan and Brazil, 8 of which remain to be eliminated as of June 30, 2003. As
part of these reorganization activities, some of these positions were
replaced with lower-cost outsourced services. The Company anticipates that
most aspects of this plan will be completed by the fourth quarter of 2003.
In the first quarter of 2001, the Company recorded a charge of $5.5
million related to reorganizing certain functions within Europe, Brazil and
North America. The primary objectives of this reorganization were to
consolidate duplicative functions and to improve efficiencies within these
regions. Included in this charge were severance costs of $3.1 million,
lease/contract termination costs of $0.6 million and other restructuring
costs of $0.8 million. In addition, the Company recorded $1.0 million of
impairment charges on fixed assets that will be disposed of as a result of
the restructuring plan. This restructuring plan resulted in the elimination
of approximately 310 administrative and manufacturing positions in Brazil
and Germany. As part of these reorganization activities, some of these
positions were replaced with lower-cost outsourced services. During the
first quarter of 2002, this plan was substantially completed and the
remaining accrual balances of $1.9 million were reversed as a change in
estimate.
10
As part of combining Friadent and Degussa Dental with the Company, $14.1
million of liabilities were established through purchase price accounting
for the restructuring of the acquired companies' operations in Germany,
Brazil, the United States and Japan. Included in this liability were
severance costs of $11.9 million, lease/contract termination costs of $1.1
million and other restructuring costs of $1.1 million. This restructuring
plan included the elimination of approximately 200 administrative and
manufacturing positions in Germany, Brazil and the United States, 26 of
which remain to be eliminated as of June 30, 2003. The Company anticipates
that most aspects of this plan will be completed during 2003.
The major components of the 2001 restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at June 30, 2003 are as follows:
Change
in Estimate
Amounts Recorded
Recorded Through
Through Amounts Amounts Change Purchase Amounts Balance
2001 Purchase Applied Applied in Estimate Accounting Applied June 30,
Provisions Accounting 2001 2002 2002 2002 2003 2003
Severance $ 5,270 $ 11,929 $ (1,850) $ (6,257) $ (655) $ (174) $ (650) $ 7,613
Lease/contract terminations 1,682 1,071 (563) (579) (721) 203 (174) 919
Other restructuring costs 897 1,062 -- (552) (759) 458 (264) 842
Fixed asset impairment charges 3,634 -- (3,634) 223 (747) 524 -- --
Intangible asset impairment charges 6,291 -- (6,291) -- -- -- -- --
$ 17,774 $ 14,062 $(12,338) $ (7,165) $ (2,882) $ 1,011 $ (1,088) $ 9,374
In the second quarter of 1998, the Company rationalized and restructured
its worldwide laboratory business, primarily for the closure of the
Company's German tooth manufacturing facility. All major aspects of the plan
were completed in 1999, except for the disposition of the property and plant
located in Dreieich, Germany, which has been written-down to its estimated
fair value, but which has not yet been sold. During the second quarter of
2002, the carrying value of this property was written-up by $0.5 million to
reflect the Company's revised estimate of its fair value.
NOTE 7 - ACCOUNTING CHARGES AND RESERVE REVERSALS
The Company recorded pretax charges of $5.5 million in the second quarter
and total pretax charges of $9.6 million in the six month period of 2003,
related primarily to accounting for inventory, receivables and prepaid
expenses at three locations impacted by integration activities following the
completion of acquisitions in 2001. The largest portion of these charges
relate to an inventory adjustment at one of these divisions, confirmed by a
physical inventory that the Company initiated and completed in the second
quarter. Also in the second quarter, the Company conducted an independent
evaluation of its accounting practices for establishing reserves. As a
result of this evaluation, the Company identified and reversed to income
$4.4 million of reserves that should have been reversed in prior periods or
were erroneously established. In the first quarter of 2003, the Company
reversed $2.4 million of product return reserves that were recorded in
excess of appropriate amounts. The impact of the establishment and reversal
of these reserves was not material to the results of operations in prior
periods and will not be material to the results of operations in 2003.
11
NOTE 8 - COMMITMENTS AND CONTINGENCIES
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes it is
remote that pending litigation to which DENTSPLY is a party will have a
material adverse effect upon its consolidated financial position or results
of operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and
conduct undertaken by the Company's Trubyte Division with respect to the
distribution of artificial teeth and related products. On January 5, 1999,
the Department of Justice filed a complaint against the Company in the U.S.
District Court in Wilmington, Delaware alleging that the Company's tooth
distribution practices violate the antitrust laws and seeking an order for
the Company to discontinue its practices. Three follow on private class
action suits on behalf of dentists, laboratories and denture patients in
seventeen states, respectively, who purchased Trubyte teeth or products
containing Trubyte teeth, were filed and transferred to the U.S. District
Court in Wilmington, Delaware. The class action filed on behalf of the
dentists has been dismissed by the plaintiffs. The private party suits seek
damages in an unspecified amount. The Court has granted the Company's
motion on the lack of standing of the laboratory and patient class actions
to pursue damage claims. Four private party class actions on behalf of
indirect purchasers were filed in California state court. These cases are
based on allegations similar to those in the Department of Justice case. In
response to the Company's motion, these cases have been consolidated in one
Judicial District in Los Angeles. A similar private party action has been
filed in Florida. On August 8, 2003, the Federal District Court judge who
heard the government's case issued a decision finding that the Company has
not violated the antitrust laws as asserted by the Department of Justice.
The government has thirty (30) days to file an appeal from the entering of
the District Judge's decision.
12
DENTSPLY INTERNATIONAL INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made by the Company, 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
materially affect the Company's business and prospects, and should be read
in conjunction with the risk factors discussed within the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
A significant portion of DENTSPLY's net sales is comprised of sales of
precious metals generated through its precious metal alloy product
offerings. Due to the fluctuations of precious metal prices and because the
precious metal content of the Company's sales is largely a pass-through to
customers and has minimal effect on earnings, DENTSPLY reports sales both
with and without precious metals to show the Company's performance
independent of precious metal price volatility and to enhance comparability
of performance between periods.
RESULTS OF OPERATIONS
Quarter Ended June 30, 2003 Compared To Quarter Ended June 30, 2002
Net Sales
Net sales for the quarter ended June 30, 2003 increased $36.9 million, or
9.7%, to $417.9 million compared to $381.0 million in the prior year. Net
sales, excluding precious metals, increased $36.5 million, or 10.9%, to
$371.7 million compared to $335.2 million in 2002. The growth in sales,
excluding the precious metal content, was driven by internal growth of 4.1%,
a 6.9% positive impact from currency translation as several major currencies
strengthened against the U.S. dollar during the second quarter of 2003, less
0.1% for divestitures. The internal growth rate for the dental business was
4.5%. The sales growth in the second quarter of 2003, excluding precious
metal content, in total and by region is as follows:
Sales Growth By Region
(excluding precious metal content)
------------------------------------------------------------
Total United All Other
Consolidated States Europe Regions
Internal growth 4.1% 2.9% 9.8% -1.5%
Divestitures -0.1% -0.4% 0.0% 0.0%
Foreign currency translation 6.9% 0.2% 19.4% 4.0%
Total Sales Growth 10.9% 2.7% 29.2% 2.5%
The internal sales growth was strongest in Europe at 9.8%, with
exceptional growth in endodontics and implants, while the United States had
internal sales growth of 2.9%. Strong sales gains in endodontic and
orthodontic products was offset by a softening in sales to dental
laboratories in the United States. Net base business sales in all other
regions declined 1.5% in the second quarter of 2003 including sales declines
in the Pacific Rim and Asia, resulting from Severe Acute Respiratory
Syndrome ("SARS"), and sales declines in the Middle East, including the
impact of the war in Iraq
The internal sales growth of 4.5% for the dental business was led by
consumables and small equipment, offset by softening sales of heavy
equipment, including x-ray equipment, intra-oral cameras and Cercon machines.
13
Three factors negatively impacted internal sales growth during the
quarter: (1) the sales of Cercon machines in the U.S. slowed sharply from
the year earlier launch quarter, (2) SARS had a severe impact in several key
Asian countries causing a decline in dental visits, and (3) European sales
of heavy equipment dropped sharply as a result of high demand for the new
digital panoramic x-ray machine (Orthoralix 9200 DDE) that was previewed at
the IDS meeting at the end of March, 2003, sharply reducing sales of the
prior version of this product. Due to limited resources to produce the new
digital panoramic x-ray machine, shipments did not commence until July,
2003. These three events reduced overall dental internal sales growth in
the quarter by nearly 2%.
Gross Profit
Gross profit was $205.1 million in the second quarter of 2003 compared to
$184.5 million in the comparable period of 2002, an increase of $20.6
million, or 11.2%. Gross profit, including precious metals, represented
49.1% of net sales in the second quarter of 2003 compared to 48.4% in 2002.
Gross profit for the second quarter of 2003 represented 55.2% of net sales,
excluding precious metal content, compared to 55.1% in 2002. Gross profit
was affected in the second quarter of 2003 by charges of $4.6 million
related primarily to adjustments for inventory, accounts receivable and
prepaid expenses at three divisions that had been impacted by integration
activities following the completion of acquisitions in 2001 ("Charges").
The impact of these Charges was partially offset by the reversal into income
of $2.3 million in reserves that should have been reversed in prior periods
or were erroneously established ("Reserve Reversals"). These Reserve
Reversals resulted from an independent evaluation of reserves that the
Company initiated during the quarter.
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $14.3
million, or 11.9%, to $134.1 million in the second quarter of 2003 from
$119.8 million in the comparable period of 2002. The 11.9% increase in
expenses, as reported, included increases for the translation impact from a
weaker U.S. dollar. SG&A expenses increased 3.8% in the second quarter of
2003 at constant exchange rates for both periods. As a percentage of sales,
including precious metals, SG&A expenses represented 32.1% of net sales in
the second quarter of 2003 compared to 31.4% in the second quarter of 2002.
As a percentage of sales, excluding precious metals, SG&A expenses
represented 36.1% of net sales in the second quarter of 2002 compared to
35.7% in the second quarter of 2002. SG&A was also affected in the second
quarter of 2003 by Charges of $0.9 million and Reserve Reversals of $2.1
million.
Other Income and Expenses
Net interest expense decreased $1.4 million in the second quarter of 2003
due primarily to lower variable interest rates. Other income increased $2.1
million in the second quarter of 2003, including a favorable change of $3.5
million on currency transactions offset somewhat by an unfavorable change
related to the valuation of the PracticeWorks, Inc. warrants. On July 21,
2003, Eastman Kodak Company announced that they entered into an agreement to
acquire PracticeWorks, Inc. If the transaction is completed under the terms
announced, the Company will realize a net pretax gain of $6 million to $7
million.
Earnings
Income before income taxes for the three months ended June 30, 2003,
increased $9.7 million, or 17.4%, to $65.5 million from $55.8 million in the
comparable period of 2002. Income before income taxes in the second quarter
of 2003 included $5.5 million of Charges ($3.7 million after tax) partially
offset by $4.4 million of Reserve Reversals ($3.0 million after tax). The
impact of the Reserve Reversals was not material to the results of
operations in prior periods and will not be material to the results of
operations in 2003. Earnings for the 2003 quarter also benefited from the
positive impact of currency translation.
The effective tax rate was 32.5% in the second quarter of 2003 compared
to 34.0% in the comparable period of 2002. Net income increased $7.4
million, or 20.1%, to $44.2 million in the second quarter of 2003 from $36.8
million in the comparable period of 2002. Fully diluted earnings per share
were $0.55 in the second quarter of 2003, an increase of 19.6% from $0.46 in
the comparable period in 2002
14
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Net Sales
Net sales for the six months ended June 30, 2003 increased $78.2 million,
or 10.6%, to $814.1 million compared to $735.9 million in the prior year.
Net sales, excluding precious metals, increased $72.7 million, or 11.3%, to
$713.5 million compared to $640.8 million in 2002. The growth in sales,
excluding the precious metal content, was driven by internal growth of 4.6%,
a 7.0% positive impact from currency translation as several major currencies
strengthened against the U.S. dollar during the first six months of 2003,
less 0.2% for divestitures. The internal growth rate for the dental business
was 4.9%. The sales growth in the first six months of 2003, excluding
precious metal content, in total and by region is as follows:
Sales Growth By Region
(excluding precious metal content)
------------------------------------------------------------
Total United All Other
Consolidated States Europe Regions
Internal growth 4.6% 4.0% 7.4% 1.7%
Divestitures -0.2% -0.2% -0.4% -0.1%
Foreign currency translation 7.0% 0.2% 20.1% 2.7%
Total Sales Growth 11.4% 4.0% 27.1% 4.3%
The internal sales growth was strongest in Europe at 7.4%, with strong
growth in endodontics and implants, while the United States had internal
sales growth of 4.0%, up 4.2% for dental products. Strong sales gains in
endodontic and orthodontic products was offset by a softening in sales to
dental laboratories in the United States. Net sales in all other regions
included internal sales growth of 5.5% in the Pacific Rim and Asia. This
increase was tempered by the impact of SARS.
The internal sales growth of 4.9% for the dental business was led by
consumables and small equipment, offset by softening sales of heavy
equipment, including x-ray equipment, intra-oral cameras and Cercon Machines.
The principal factors that negatively impacted base business growth
during the first six months of 2003 were: (1) the sales of Cercon machines
in the U.S. slowed sharply in the second quarter from the year earlier
launch, (2) SARS had a severe impact in several key Asian countries causing
a decline in dental visits in the second quarter, and (3) European sales of
heavy equipment dropped sharply as a result of high demand for the new
digital panoramic x-ray machine (Orthoralix 9200 DDE) that was previewed at
the IDS meeting at the end of March, 2003, sharply reducing sales of the
prior version of this product . Due to limited resources to produce the new
digital panoramic x-ray machine, shipments did not commence until July,
2003.
Gross Profit
Gross profit was $395.2 million in the first half of 2003 compared to
$353.9 million in the comparable period of 2002, an increase of $41.3
million, or 11.7%. Gross profit, including precious metals, represented
48.5% of net sales in the first six months of 2003 compared to 48.1% in
2002. Gross profit for the first six months of 2003 represented 55.4% of net
sales, excluding precious metal content, compared to 55.2% in 2002. Gross
profit was affected in the first half of 2003 by charges of $8.7 million and
reserve reversals totaling $4.7 million, including the reversal in the first
quarter of 2003 of $2.4 million of product return reserves that were
recorded in excess of appropriate amounts.
15
Operating Expenses
SG&A expense increased $27.9 million, or 11.9%, to $262.1 million in the
first six months of 2003 from $234.2 million in the comparable period of
2002. The 11.9% increase in expenses, as reported, included increases for
the translation impact from a weaker U.S. dollar. SG&A expenses increased
3.9% in the first six months of 2003 at constant exchange rates for both
periods. As a percentage of sales, including precious metals, SG&A expenses
represented 32.2% of net sales in the first six months of 2003 compared to
31.8% in the comparable period of 2002. As a percentage of sales, excluding
precious metals, SG&A expenses represented 36.7% of net sales in the first
six months of 2002 compared to 36.5% in the comparable period of 2002. SG&A
was also affected in the first half of 2003 by charges of $0.9 million and
reserve reversals of $2.1 million.
No restructuring activity was recorded during the first six months of
2003. During the first six months of 2002, the Company recorded
restructuring and other income of $2.0 million ($1.3 million, net of tax),
as certain prior period restructuring initiatives in Europe, Brazil, and
North America were completed at a lower cost than initially recorded.
Other Income and Expenses
Net interest expense decreased $2.3 million in the first six months of
2003 due primarily to lower variable interest rates. Other income increased
$2.6 million in the first six months of 2003, including a favorable currency
transaction net gain of $3.1 million offset somewhat by an unfavorable net
fluctuation of $0.4 million in income from PracticeWorks, Inc.
Earnings
Income before income taxes for the six months ended June 30, 2003,
increased $16.2 million, or 15.3%, to $122.2 million from $106.0 million in
the comparable period of 2002. Income before income taxes in the prior year
period included $2.0 million of restructuring income. Income before income
taxes in the first half of 2003 included $9.6 million of charges ($6.5
million after tax) partially offset by reserve reversals of $6.8 million
($4.6 million after tax). The impact of the establishment and reversal of
these reserves was not material to the results of operations in prior
periods and will not be material to the results of operations in 2003.
Earnings for the 2003 period also benefited from the positive impact of
currency translation.
The effective tax rate was 32.5% in the first six months of 2003 compared
to 34.0% in the comparable period of 2002. Net income increased $12.6
million, or 18.0%, to $82.5 million in the first six months of 2003 from
$69.9 million in the comparable period of 2002. Fully diluted earnings per
share were $1.03 in the first six months of 2003, an increase of 17.0% from
$0.88 in the comparable period in 2002.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the Company's disclosure in its
2002 Annual Report on Form 10-K filed March 28, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 2003
Cash flows from operating activities during the six months ended June 30,
2003 were $95.5 million compared to $54.4 million during the six months
ended June 30, 2002. The increase of $41.1 million results primarily from
increased earnings and more favorable working capital changes versus the
prior year specifically with respect to inventories and accounts payable.
Investing activities, for the period ended June 30, 2003, include capital
expenditures of $39.6 million. The Company expects capital expenditures for
2003 to be approximately $70 million, which is largely driven by
expenditures related to the construction of the Company's pharmaceutical
manufacturing facility in Chicago, IL. Net acquisition activity for the
first six months of 2003 was $4.5 million which relates to the purchase of
one of the Company's suppliers and a payment related to the Oraqix
agreement. Additionally, during late 2003 or early 2004, the Company expects
to make the remaining payments totaling $16 million related to the Oraqix
agreement and may be required to make a payment of up to 10 million Euros
plus related interest costs for the final consideration related to the
Degussa Dental purchase if an unfavorable ruling is received in arbitration
(see Note 4 to the condensed consolidated financial statements).
16
The Company's long-term debt increased by $55.2 million during the first
half of 2003 to $825.0 million. This net change included an increase of
$59.0 million due to exchange rate fluctuations on non-U.S. dollar
denominated debt and changes in interest rate swaps related to this debt
(see Note 1 to the condensed consolidated financial statements). Excluding
the exchange rate and interest rate swap changes, long-term debt was reduced
by $3.8 million during the first half of 2003. During the period ended June
30, 2003, the Company's ratio of long-term debt to total capitalization
decreased to 45.8% compared to 47.9% at December 31, 2002.
Under its multi-currency revolving credit agreement, the Company is able
to borrow up to $250 million through May 2006 ("the five-year facility") and
$250 million through May 2004 ("the 364 day facility"). The 364-day facility
terminates in May 2004, but may be extended, subject to certain conditions,
for additional periods of 364 days. This revolving credit agreement is
unsecured and contains various financial and other covenants. The Company
also has available an aggregate $250 million under two commercial paper
facilities; a $250 million U.S. facility and a $250 million U.S. dollar
equivalent European facility ("Euro CP facility"). Under the Euro CP
facility, borrowings can be denominated in Swiss francs, Japanese yen,
Euros, British pounds and U.S. dollars. The 364-day facility serves as a
back-up to these commercial paper facilities. The total available credit
under the commercial paper facilities and the 364-day facility in the
aggregate is $250 million and no debt was outstanding under these facilities
at June 30, 2003.
The Company also has access to $83.0 million in uncommitted short-term
financing under lines of credit from various financial institutions.
Substantially all of these lines of credit have no major restrictions and
are provided under demand notes between the Company and the lending
institutions.
In total, the Company had unused lines of credit of $427.0 million at
June 30, 2003. Access to most of these available lines of credit is
contingent upon the Company being in compliance with certain affirmative and
negative covenants relating to its operations and financial condition. The
most restrictive of these covenants pertain to asset dispositions,
maintenance of certain levels of net worth, and prescribed ratios of
indebtedness to total capital and operating income plus depreciation and
amortization to interest expense. At June 30, 2003, the Company was in
compliance with these covenants.
There have been no material changes to the Company's scheduled
contractual cash obligations disclosed in its 2002 Annual Report on Form
10-K filed March 28, 2003. In the fourth quarter of 2003, the Company has
approximately $20 million of Japanese yen denominated borrowings which will
mature. The Company expects to either retire or roll over these borrowings,
depending upon the interest rate scenario and also its cash position in that
jurisdiction at the time of maturity.
The Company's cash increased $55.7 million during the six months ended
June 30, 2003 to $81.4 million. The Company has built cash rather than
reduce its debt due to the favorable investment rates that can be received
on the cash invested versus the carrying cost of its debt and penalties that
would be incurred in retiring debt and the related interest rate swap
agreements at this time. The Company anticipates that cash will continue to
build throughout the remainder of 2003.
The Company expects on an ongoing basis, to be able to finance cash
requirements, including capital expenditures, stock repurchases, debt
service, operating leases and potential future acquisitions, from the funds
generated from operations and amounts available under its existing credit
facilities.
17
NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities, an interpretation of ARB 51". The primary objectives of this
interpretation are to provide guidance on the identification of entities for
which control is achieved through means other than through voting rights
("variable interest entities") and how to determine when and which business
enterprise should consolidate the variable interest entity (the "primary
beneficiary"). This new model for consolidation applies to an entity which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance
that entity's activities without receiving additional subordinated financial
support from other parties. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a variable interest entity make additional disclosures. Certain
disclosure requirements of FIN 46 are effective for financial statements
issued after January 31, 2003. The remaining provisions of FIN 46 are
effective immediately for all variable interest entities created after
January 31, 2003 and are effective beginning in the first interim or annual
reporting period beginning after June 15, 2003 for all variable interest
entities created before February 1, 2003. The Company does not have variable
interest entities as defined by this interpretation and therefore it is not
material to the Company's financial statements.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". The statement amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Specifically, the statement clarifies under what circumstances
a contract with an initial net investment meets the characteristic of a
derivative. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
SFAS No. 149 is effective for contracts entered into or modified after June
30, 2003. The Application of this standard will not have a material impact
on the Company's financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ("SFAS 150"), " Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. The Company does not expect that this new standard will have a
material impact on its financial statements.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no significant material changes to the market risks as
disclosed in the Company's Annual Report on Form 10-K filed for the year
ending December 31, 2002.
18
Item 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as of the end of the period covered by
this report have been designed and are functioning effectively to provide
reasonable assurance that the information required to be disclosed by the
Company in reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. The Company believes that a
controls system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the controls system are met, and
no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting. The Company has initiated and
completed an independent evaluation of its accounting practices for
establishing reserves. As a result of this evaluation, the Company is
revising certain procedures for identifying and estimating reserves to
improve the accuracy of its accounting for loss contingencies.
19
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 it is
remote that pending litigation to which DENTSPLY is a party will have a
material adverse effect upon its consolidated financial position or results
of operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and
conduct undertaken by the Company's Trubyte Division with respect to the
distribution of artificial teeth and related products. On January 5, 1999,
the Department of Justice filed a complaint against the Company in the U.S.
District Court in Wilmington, Delaware alleging that the Company's tooth
distribution practices violate the antitrust laws and seeking an order for
the Company to discontinue its practices. Three follow on private class
action suits on behalf of dentists, laboratories and denture patients in
seventeen states, respectively, who purchased Trubyte teeth or products
containing Trubyte teeth, were filed and transferred to the U.S. District
Court in Wilmington, Delaware. The class action filed on behalf of the
dentists has been dismissed by the plaintiffs. The private party suits seek
damages in an unspecified amount. The Court has granted the Company's
motion on the lack of standing of the laboratory and patient class actions
to pursue damage claims. Four private party class actions on behalf of
indirect purchasers were filed in California state court. These cases are
based on allegations similar to those in the Department of Justice case. In
response to the Company's motion, these cases have been consolidated in one
Judicial District in Los Angeles. A similar private party action has been
filed in Florida. On August 8, 2003, the Federal District Court judge who
heard the government's case issued a decision finding that the Company has
not violated the antitrust laws as asserted by the Department of Justice.
The government has thirty (30) days to file an appeal from the entering of
the District Judge's decision.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) On May 13, 2003, the Company held its 2003 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 II Directors:
Nominee Votes For Votes Withheld Broker Non-votes
Leslie A. Jones 61,295,336 1,360,998 N/A
Gary K. Kunkle, Jr. 61,506,416 1,149,918 N/A
Betty Jane Scheihing 61,502,585 1,153,749 N/A
Edgar H. Schollmaier 60,903,635 1,752,699 N/A
2. Proposal to ratify the appointment of PricewaterhouseCoopers LLP,
independent accountants, to audit the books and accounts of the
Company for the year ending December 31, 2003:
Votes For: 60,057,837
Votes Against: 2,577,871
Abstentions: 14,527
Broker Non-Votes: 6,099
(d) Not applicable.
20
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31 Section 302 Certification Statements.
32 Section 906 Certification Statement.
(b) Reports on Form 8-K
On July 30, 2003, the Company filed a Form 8-K, under item 12,
furnishing the press release issued on that date regarding its
second-quarter 2003 sales and earnings.
On August 6, 2003, the Company filed a Form 8-K, under item 12,
furnishing a transcript of its July 31, 2003 conference call regarding
the Company's discussion of its second-quarter 2003 sales and earnings.
21
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 14, 2003 /s/ John C. Miles II
Date John C. Miles II
Chairman and
Chief Executive Officer
August 14, 2003 /s/ Bret W. Wise
Date Bret W. Wise
Senior Vice President and
Chief Financial Officer
22