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, 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 November 5, 2003 the
Company had 79,147,426 shares of Common Stock outstanding, with a par value
of $.01 per share.
Page 1 of 19
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended September 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 17
Item 4 - Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
(in thousands, except per share amounts)
Net sales $ 400,420 $ 366,037 $ 1,214,556 $ 1,101,918
Cost of products sold 209,186 187,105 628,141 569,074
Gross profit 191,234 178,932 586,415 532,844
Selling, general and administrative expenses 125,887 118,554 388,032 352,753
Restructuring and other (income) costs (Note 6) -- (778) -- (2,779)
Operating income 65,347 61,156 198,383 182,870
Other income and expenses:
Interest expense 6,104 6,811 18,655 21,476
Interest income (377) (183) (1,006) (603)
Other expense (income), net (1,525) 2,633 (2,614) 4,102
Income before income taxes 61,145 51,895 183,348 157,895
Provision for income taxes 19,831 16,129 59,549 52,213
Net income $ 41,314 $ 35,766 $ 123,799 $ 105,682
Earnings per common share (Note 3):
Basic $ 0.52 $ 0.46 $ 1.57 $ 1.35
Diluted 0.51 0.45 1.54 1.32
Cash dividends declared per common share $ 0.0525 $ 0.0460 $ 0.1445 $ 0.1380
Weighted average common shares outstanding:
Basic 78,999 78,247 78,712 78,120
Diluted 81,007 80,127 80,458 79,949
See accompanying notes to unaudited interim consolidated condensed financial statements.
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
September 30, December 31,
2003 2002
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 91,010 $ 25,652
Accounts and notes receivable-trade, net 242,937 221,262
Inventories, net (Notes 1 and 5) 230,054 214,492
Prepaid expenses and other current assets 79,813 79,595
Total Current Assets 643,814 541,001
Property, plant and equipment, net 359,425 313,178
Identifiable intangible assets, net 235,859 236,009
Goodwill, net 953,403 898,497
Other noncurrent assets 139,904 98,348
Total Assets $ 2,332,405 $ 2,087,033
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 81,312 $ 66,625
Accrued liabilities 171,996 190,783
Income taxes payable 131,699 103,787
Notes payable and current portion
of long-term debt 22,697 4,550
Total Current Liabilities 407,704 365,745
Long-term debt 783,392 769,823
Deferred income taxes 14,630 27,039
Other noncurrent liabilities 91,717 87,239
Total Liabilities 1,297,443 1,249,846
Minority interests in consolidated subsidiaries 607 1,259
Commitments and contingencies (Note 7)
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 September 30, 2003
and December 31, 2002 814 814
Capital in excess of par value 164,326 156,898
Retained earnings 843,378 730,971
Accumulated other comprehensive gain (Note 2) 68,851 1,624
Unearned ESOP compensation (760) (1,899)
Treasury stock, at cost, 2.3 million shares at September 30, 2003
and 3.0 million shares at December 31, 2002 (42,254) (52,480)
Total Stockholders' Equity 1,034,355 835,928
Total Liabilities and Stockholders' Equity $ 2,332,405 $ 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)
Nine Months Ended September 30,
--------------------------------
2003 2002
(in thousands)
Cash flows from operating activities:
Net income $ 123,799 $ 105,682
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 29,547 24,480
Amortization 7,387 7,661
Restructuring and other costs -- (2,779)
Other, net 6,070 (33,969)
Net cash provided by operating activities 166,803 101,075
Cash flows from investing activities:
Capital expenditures (55,509) (39,765)
Acquisitions of businesses, net of cash acquired (5,613) (50,390)
Expenditures for identifiable intangible assets (2,410) (1,110)
Proceeds from the redemption of preferred stock investment -- 15,000
Proceeds from bulk sale of precious metals inventory -- 6,754
Other, net 556 3,904
Net cash used in investing activities (62,976) (65,607)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of
deferred financing costs -- 156,715
Payments on long-term borrowings (50,026) (191,122)
Net change in short-term borrowings (1,750) (566)
Cash dividends paid (10,846) (10,757)
Proceeds from exercise of stock options 13,332 6,569
Other, net 7,320 (53)
Net cash used in financing activities (41,970) (39,214)
Effect of exchange rate changes on cash and cash equivalents 3,501 (6,069)
Net increase (decrease) in cash and cash equivalents 65,358 (9,815)
Cash and cash equivalents at beginning of period 25,652 33,710
Cash and cash equivalents at end of period $ 91,010 $ 23,895
See accompanying notes to unaudited interim consolidated condensed financial statements.
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2003
The accompanying unaudited interim consolidated condensed financial
statements reflect all adjustments (consisting only of normal recurring
adjustments, except as described in Note 6), 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 28, 2003 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 September 30,
2003 the cost of $12.2 million or 5% and at December 31, 2002, the cost of
$13.0 million or 6% of inventories were 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 September 30, 2003 by $0.7 million and by $0.8 million at
December 31, 2002.
Identifiable Finite-lived Intangible Assets
Identifiable finite-lived intangible assets, which primarily consist of
patents, trademarks and licensing agreements, are amortized on a
straight-line basis over their estimated useful lives, ranging from 5 to 40
years. These assets are reviewed for impairment whenever events or
circumstances provide evidence that suggest that the carrying amount of the
asset may not be recoverable. The Company performs ongoing impairment
analysis on intangible assets related to new technology. Impairment is based
upon an evaluation of the identifiable undiscounted cash flows. If impaired,
the resulting charge reflects the excess of the asset's carrying cost over
its fair value.
Goodwill and Indefinite-Lived Intangible Assets
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets" which requires that the
amortization of goodwill and indefinite-lived intangible assets be
discontinued and instead an annual impairment approach be applied. The
Company performs annual impairment tests based upon a fair value approach
rather than an evaluation of the undiscounted cash flows. If impairment is
identified under SFAS 142, the resulting charge is determined by
recalculating goodwill through a hypothetical purchase price allocation of
the fair value and reducing the current carrying value to the extent it
exceeds the recalculated goodwill. If impairment is identified on
indefinite-lived intangibles, the resulting charge reflects the excess of
the asset's carrying cost over its fair value. The Company's goodwill
increased by $54.9 million during the nine months ended September 30, 2003
to $953.4 million, which was due primarily to the effects of foreign
currency translation.
6
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 aggregate net fair value of the Company's
derivative instruments at September 30, 2003 and December 31, 2002 was $88.4
million and $54.2 million, respectively.
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. In
the third quarter of 2003, the Company exchanged a variable to fixed
interest rate swap that was designated as a hedge of a portion of its Swiss
franc denominated debt for a forward-starting variable to fixed interest
rate swap. This forward-starting interest rate swap will hedge future Swiss
franc variable rate debt that will arise upon the refinancing of maturing
fixed rate Swiss franc notes in 2005. Completion of the transaction allowed
the Company to pay down debt and will result in lower interest costs while
hedging a portion of the future interest rate risk.
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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
(in thousands, except per share amounts)
Net income as reported $ 41,314 $ 35,766 $ 123,799 $ 105,682
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (2,791) (2,357) (8,209) (6,775)
Pro forma net income $ 38,523 $ 33,409 $ 115,590 $ 98,907
Basic earnings per common share
As reported $ 0.52 $ 0.46 $ 1.57 $ 1.35
Pro forma under fair value based method $ 0.49 $ 0.43 $ 1.47 $ 1.27
Diluted earnings per common share
As reported $ 0.51 $ 0.45 $ 1.54 $ 1.32
Pro forma under fair value based method $ 0.48 $ 0.42 $ 1.44 $ 1.24
7
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
(in thousands)
Net income $ 41,314 $ 35,766 $ 123,799 $ 105,682
Other comprehensive income:
Foreign currency translation adjustments 9,888 (11,521) 58,391 44,007
Unrealized gain on available-for-sale securities 1,250 (678) 7,869 1,063
Net (loss) gain on derivative financial
instruments 2,514 (2,157) 967 (5,037)
Total comprehensive income $ 54,966 $ 21,410 $ 191,026 $ 145,715
The balances included in accumulated other comprehensive gain in the
consolidated balance sheets are as follows:
September 30, December 31,
2003 2002
(in thousands)
Foreign currency translation adjustments $ 71,939 $ 13,548
Net loss on derivative financial
instruments (5,016) (5,983)
Unrealized gain (loss) on available-for-sale securities 3,015 (4,854)
Minimum pension liability (1,087) (1,087)
$ 68,851 $ 1,624
8
NOTE 3 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
(in thousands, except per share amounts)
Basic EPS Computation
Numerator (Income) $41,314 $35,766 $ 123,799 $ 105,682
Denominator:
Common shares outstanding 78,999 78,247 78,712 78,120
Basic EPS $ 0.52 $ 0.46 $ 1.57 $ 1.35
Diluted EPS Computation
Numerator (Income) $41,314 $35,766 $ 123,799 $ 105,682
Denominator:
Common shares outstanding 78,999 78,247 78,712 78,120
Incremental shares from assumed exercise
of dilutive options 2,008 1,880 1,746 1,829
Total shares 81,007 80,127 80,458 79,949
Diluted EPS $ 0.51 $ 0.45 $ 1.54 $ 1.32
Options to purchase 53,500 and 51,000 shares of common stock that were
outstanding during the quarter ended September 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 nine months ended
September 30, 2003 and 2002 were 104,300 and 87,000, respectively.
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.
9
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 late 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:
September 30, December 31,
2003 2002
(in thousands)
Finished goods $ 142,205 $ 134,989
Work-in-process 43,010 39,065
Raw materials and supplies 44,839 40,438
$ 230,054 $ 214,492
NOTE 6 - RESTRUCTURING AND OTHER COSTS
In January 2001, the Company suffered a fire at its Maillefer facility in
Switzerland. The fire caused severe damage to a building and to most of the
equipment it contained. During the third quarter of 2002, the Company
received insurance proceeds for settlement of the damages caused to the
building. These proceeds resulted in the Company recognizing a net gain on
the damaged building of approximately $0.7 million.
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 company's 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, 20 of which remain to be eliminated as of
September 30, 2003. The Company anticipates that most aspects of this plan
will be completed by the first quarter of 2004.
10
The major components of the 2002 restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at September 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 September 30,
Provisions Accounting 2002 2002 2003 2003 2003
Severance $ 541 $ 2,927 $ (530) $ (164) $ (683) $ 127 $ 2,218
Lease/contract terminations 895 1,437 (500) 120 (555) - 1,397
Other restructuring costs 38 60 (60) (36) - - 2
Fixed asset impairment charges 195 - (195) - - - -
$ 1,669 $ 4,424 $(1,285) $ (80) $(1,238) $ 127 $ 3,617
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, 5 of which remain to be eliminated as of September 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.
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, 13 of
which remain to be eliminated as of September 30, 2003. The Company
anticipates that most aspects of this plan will be completed by the end of
2003 or early in 2004.
11
The major components of the 2001 restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at September 30, 2003 are as follows:
Change Change
in Estimate in Estimate
Amounts Recorded Recorded
Recorded Through Through
Through Amounts Amounts Change Purchase Amounts Purchase Balance
2001 Purchase Applied Applied in Estimate Accounting Applied Accounting September 30,
Provisions Accounting 2001 2002 2002 2002 2003 2003 2003
Severance $ 5,270 $ 11,929 $ (1,850) $(6,257) $ (655) $ (174) $ (995) $(530) $6,738
Lease/contract terminations 1,682 1,071 (563) (579) (721) 203 (259) - 834
Other restructuring costs 897 1,062 - (552) (759) 458 (149) (287) 670
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 $(1,403) $(817) $8,242
During the first six months of 2003, the Company recorded pretax charges
of $9.6 million related primarily to accounting for inventory, receivables
and prepaid expenses at three locations impacted by integration activities
following the completion of acquisitions in 2001 and reversed to income $6.8
million of reserves primarily as a result of an independent evaluation
related to its accounting practices for establishing reserves.
NOTE 7 - 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. In August, the Federal District Court judge who heard the
government's case issued a decision finding that the Company did not violate
the antitrust laws as asserted by the Department of Justice. On October 14,
2003, the Company was notified by the Department of Justice that it has
filed a notice of appeal of the decision of the District Court.
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 September 30, 2003 Compared To Quarter Ended September 30, 2002
Net Sales
Net sales for the quarter ended September 30, 2003 increased $34.4
million, or 9.4%, to $400.4 million compared to $366.0 million in the prior
year. Net sales, excluding precious metals, increased $29.6 million, or
9.1%, to $353.7 million compared to $324.1 million in 2002. Sales growth
excluding precious metals was comprised of 3.9% internal growth, 5.1%
foreign currency translation and 0.1% for net acquisitions/divestitures. The
3.9% of internal growth was comprised of 6.2% in Europe, 4.0% in the United
States and 0.2% for all other regions combined. Internal growth for the
dental business was 4.1% excluding precious metals.
The internal sales growth, excluding precious metal content, was highest
in Europe at 6.2%, with strong growth in endodontics, implants and other
chairside consumable products. In the United States internal sales growth
was 4.0% with strong sales gains in endodontic and orthodontic products
offset by a softening in sales to dental laboratories and non-dental
products. Net base business sales, excluding precious metal content, in all
other regions increased 0.2% in the third quarter of 2003 including strong
sales in Canada, Africa, and the Middle East, offset by a decline in Asia.
Gross Profit
Gross profit was $191.2 million in the third quarter of 2003 compared to
$178.9 million in the comparable period of 2002, an increase of $12.3
million, or 6.9%. Gross profit, including precious metals, represented
47.8% of net sales in the third quarter of 2003 compared to 48.9% in 2002.
Gross profit, excluding precious metals, for the third quarter of 2003
represented 54.1% of net sales compared to 55.2% in 2002. These
fluctuations in the gross profit percentage reflect changes in the product
and geographic mix of net sales in the quarter.
Operating Expenses
Selling, general and administrative ("SG&A") expenses increased $7.3
million, or 6.2%, to $125.9 million in the third quarter of 2003 from $118.6
million in the comparable period of 2002. The 6.2% increase in expenses was
nearly all attributable to the impact of currency translation reflecting a
weaker U.S. dollar in 2003. SG&A expenses increased only 0.4% in the third
quarter of 2003 at constant exchange rates for both periods. As a percentage
of sales, including precious metals, SG&A expenses represented 31.4% of net
sales in the third quarter of 2003, down from 32.4% in the third quarter of
2002. As a percentage of sales, excluding precious metals, SG&A expenses
represented 35.6% of net sales in the third quarter of 2003, down from 36.6%
in the third quarter of 2002.
13
The third quarter of 2002 included a restructuring gain of $0.8 million
($0.5 million, net of tax) primarily from an insurance settlement for a fire
at one of DENTSPLY's European facilities. No restructuring activity was
recorded during the third quarter of 2003.
Other Income and Expenses
Net interest and other expenses were $4.2 million compared to $9.3
million in the 2002 quarter. The 2003 period includes $5.7 million of net
interest expense, exchange gains of approximately $1.0 million, and net
other income of approximately $0.5 million. The 2002 period includes net
interest expense of $6.6 million, exchange losses of approximately $1.0
million, and net other losses of $1.7 million.
Earnings
The effective tax rate was 32.4% in the third quarter of 2003 compared to
31.1% in the comparable period of 2002. Net income increased $5.5 million,
or 15.5%, to $41.3 million in the third quarter of 2003 from $35.8 million
in the comparable period of 2002. Fully diluted earnings per share were
$0.51 in the third quarter of 2003, an increase of 13.3% from $0.45 in the
comparable period in 2002.
Nine Months Ended September 30, 2003 Compared To Nine Months Ended September
30, 2002
Net Sales
Net sales for the nine months ended September 30, 2003 increased $112.7
million, or 10.2%, to $1,214.6 million compared to $1,101.9 million in the
prior year. Net sales, excluding precious metals, increased $102.3 million,
or 10.6%, to $1,067.2 million compared to $964.9 million in 2002. Sales
growth excluding precious metals was comprised of 4.4% internal growth, 6.3%
foreign currency translation less 0.1% for net acquisitions/divestitures.
The 4.4% of internal growth was comprised of 7.0% in Europe, 4.0% in the
United States and 1.2% for all other regions combined. Internal growth for
the dental business was 4.6% excluding precious metals.
The internal sales growth, excluding precious metal content, was highest
in Europe at 7.0%, with strong growth in endodontics, implants, and other
chairside consumable products. In the United States internal sales growth
was 4.0% with strong sales gains in endodontic and orthodontic products
offset by a softening in sales to dental laboratories and non-dental
products. The internal sales growth, excluding precious metal content, in
all other regions was 1.2%, which was depressed by the SARS crisis in Asia.
Gross Profit
Gross profit was $586.4 million in the first nine months of 2003 compared
to $532.8 million in the comparable period of 2002, an increase of $53.6
million, or 10.1%. Gross profit, including precious metals, represented
48.3% of net sales in the first nine months of 2003 compared to 48.4% in
2002. Gross profit, excluding precious metal content, for the first nine
months of 2003 represented 54.9% of net sales compared to 55.2% in 2002.
Gross profit was affected in the first nine months of 2003 by charges of
$8.7 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") and the reversal into income of $4.7 million in reserves
("Reserve Reversals").
Operating Expenses
SG&A expenses increased $35.2 million, or 10.0%, to $388.0 million in the
first nine months of 2003 from $352.8 million in the comparable period of
2002. The 10.0% increase in expenses, as reported, reflects increases for
the translation impact from a weaker U.S. dollar. SG&A expenses increased
2.7% in the first nine months of 2003 at constant exchange rates for both
periods. As a percentage of sales, including precious metals, SG&A expenses
represented 31.9% of net sales in the first nine months of 2003 compared to
32.0% in the comparable period of 2002. As a percentage of sales, excluding
precious metals, SG&A expenses represented 36.4% of net sales in the first
nine months of 2002 compared to 36.6% in the comparable period of 2002.
SG&A was also affected in the first nine months of 2003 by Charges of $0.9
million and Reserve Reversals of $2.1 million.
14
During the first nine months of 2002, the Company recorded restructuring
and other income of $2.8 million ($1.9 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. In addition the
third quarter of 2002 included a $0.7 million gain from an insurance
settlement for a fire at one of DENTSPLY's European facilities. No
restructuring activity was recorded during the first nine months of 2003.
Other Income and Expenses
Net interest and other expenses were $15.0 million for the nine months
ended September 30, 2003 compared to $25.0 million in the 2002 period. The
2003 period includes $17.6 million of net interest expense, exchange gains
of approximately $1.5 million, and net other income of approximately $1.1
million. The 2002 period includes net interest expense of $20.9 million,
exchange losses of approximately $3.4 million, and net other losses of $0.7
million.
Earnings
The effective tax rate was 32.5% in the first nine months of 2003
compared to 33.1% in the comparable period of 2002. Net income increased
$18.1 million, or 17.1%, to $123.8 million in the first nine months of 2003
from $105.7 million in the comparable period of 2002. Earnings for the 2003
period also benefited from the positive impact of currency translation.
Fully diluted earnings per share were $1.54 in the first nine months of
2003, an increase of 16.7% from $1.32 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
Nine Months Ended September 30, 2003
Cash flows from operating activities during the nine months ended
September 30, 2003 were $166.8 million compared to $101.1 million during the
nine months ended September 30, 2002. The increase of $65.7 million results
primarily from increased earnings and more favorable working capital changes
versus the prior year specifically with respect to inventories, accounts
payable and income taxes.
Investing activities, for the period ended September 30, 2003, include
capital expenditures of $55.5 million. The Company expects capital
expenditures for 2003 to be approximately $75 million to $80 million, and
may be slightly higher due to accelerated expenditures related to the
pharmaceutical manufacturing facility in Chicago, IL. Net acquisition
activity for the nine months ended September 30, 2003 was $8.0 million which
relates to the purchase of one of the Company's suppliers, additional
investments in non-wholly owned subsidiaries and a payment related to the
Oraqix agreement. 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). In
addition, during the fourth quarter, the Company has received $23.5 million
in proceeds from its common stock and warrant holdings in PracticeWorks as a
result of the Kodak acquisition. As a result of this transaction, the
Company expects to recognize a one-time pretax gain of approximately $5.8
million in the fourth quarter of 2003.
The Company's long-term debt increased by $13.6 million during the nine
months ended September 30, 2003 to $783.4 million. This net change included
an increase of $82.2 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, and a
reclassification to short-term debt of $18.6 million, long-term debt was
reduced by $50.0 million during the first nine months of 2003. During the
period ended September 30, 2003, the Company's ratio of long-term debt to
total capitalization decreased to 43.1% compared to 47.9% at December 31,
2002.
15
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 September 30, 2003.
The Company also has access to $84.0 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 $471.0 million at
September 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 September 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 $18.6 million of Japanese yen denominated borrowings which
will mature. The Company expects to retire this debt upon maturity.
The Company's cash increased $65.3 million during the nine months ended
September 30, 2003 to $91.0 million. The Company has accumulated cash rather
than reduce its debt due to pre-payment penalties that would be incurred in
retiring debt and the related interest rate swap agreements. 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.
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 interests in entities created after
January 31, 2003. For all variable interests in entities created before
February 1, 2003, FIN 46 is effective in the first reporting period ending
after December 15, 2003, as deferred by FASB Staff Position ("FSP") 46-e,
"Effective Date of Interpretation 46 ("FIN 46"), for Certain Interests Held
by a Public Entity". The Company is currently evaluating the impact of this
interpretation on its financial statements.
16
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.
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 revised
certain procedures for identifying and estimating reserves to improve the
accuracy of its accounting for loss contingencies.
17
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes 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. In August, the Federal District Court judge who heard the
government's case issued a decision finding that the Company did not violate
the antitrust laws as asserted by the Department of Justice. On October 14,
2003, the Company was notified by the Department of Justice that it has
filed a notice of appeal of the decision of the District Court.
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 September 3, 2003, the Company filed a Form 8-K, under item 5. The
Company disclosed that the Department of Justice had sixty (60) days to
appeal the District Court Judge's decision in the Department's antitrust
case against the Company's artificial tooth distribution practices
rather than thirty (30) days as disclosed in its second quarter 2003
Form 10-Q.
On October 14, 2003, the Company filed a Form 8-K, under item 5. The
Company disclosed that the Department of Justice had filed a notice of
appeal from the decision of the District Court Judge in the Department's
antitrust case against the Company's artificial tooth distribution
practices.
On October 21, 2003, the Company filed a Form 8-K, under item 12,
furnishing the press release issued on that date regarding its third
quarter 2003 sales and earnings.
On October 27, 2003, the Company filed a Form 8-K, under item 12,
furnishing a transcript of its October 22, 2003 conference call
regarding the Company's discussion of its third quarter 2003 sales and
earnings.
18
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENTSPLY INTERNATIONAL INC.
November 10, 2003 /s/ John C. Miles II
Date John C. Miles II
Chairman and
Chief Executive Officer
November 10, 2003 /s/ Bret W. Wise
Date Bret W. Wise
Senior Vice President and
Chief Financial Officer
19