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, 2008

 

OR

 

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to _______________

 

Commission File Number 0-16211

 

DENTSPLY International Inc.

_____________________________________________________________________

(Exact name of registrant as specified in its charter)

 

Delaware                                                                       39-1434669

_____________________________________________________________________________________

(State or other jurisdiction of                                     (I.R.S. Employer

incorporation or organization)                                    Identification No.)

 

221 West Philadelphia Street, York, PA                  17405-0872

_________________________________________________________________________________

(Address of principal executive offices)                      (Zip Code)

 

(717) 845-7511

 

(Registrant’s telephone number, including area code)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

 

Yes

X

 

No

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

X

 

No

 

 

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

 

Large accelerated filer

X

 

Accelerated filer

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

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

 

Yes

 

 

No

X

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At July 29, 2008, DENTSPLY International Inc. (the “Company”) had 148,659,688 shares of Common Stock outstanding, with a par value of $.01 per share.

 

Page 1 of 36

 

DENTSPLY International Inc.

FORM 10-Q

 

For Quarter Ended June 30, 2008

 

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

21

 

Item 3 - Quantitative and Qualitative Disclosures

About Market Risk

31

 

Item 4 - Controls and Procedures

32

 

 

PART II - OTHER INFORMATION

 

Item 1 - Legal Proceedings

33

 

Item 1A - Risk Factors

34

 

Item 2 - Unregistered Sales of Securities and Use of Proceeds

34

 

Item 4 - Submission of Matters to a Vote of Security Holders

34

 

Item 5 – Other Information

35

 

Item 6 - Exhibits

35

 

Signatures

36

 

 

- 2 -

 

 

 

 

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2008

 

2007

 

2008

 

2007

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

Net sales

$ 594,847

 

$ 507,362

 

$ 1,155,629

 

$ 980,226

Cost of products sold

279,361

 

238,578

 

554,900

 

465,164

 

 

 

 

 

 

 

 

Gross profit

315,486

 

268,784

 

600,729

 

515,062

Selling, general and administrative expenses

200,867

 

172,084

 

384,869

 

336,161

Restructuring and other costs (Note 9)

1,458

 

3,207

 

1,662

 

4,197

 

 

 

 

 

 

 

 

Operating income

113,161

 

93,493

 

214,198

 

174,704

 

 

 

 

 

 

 

 

Other income and expenses:

 

 

 

 

 

 

 

Interest expense

7,901

 

5,209

 

16,153

 

9,665

Interest income

(4,685)

 

(6,995)

 

(9,895)

 

(13,496)

Other (income) expense, net

-

 

(347)

 

3,097

 

(557)

 

 

 

 

 

 

 

 

Income before income taxes

109,945

 

95,626

 

204,843

 

179,092

Provision for income taxes

31,297

 

30,193

 

58,015

 

55,187

 

 

 

 

 

 

 

 

Net income

$ 78,648

 

$ 65,433

 

$ 146,828

 

$ 123,905

 

 

 

 

 

 

 

 

Earnings per common share (Note 4):

 

 

 

 

 

 

 

-Basic

$ 0.53

 

$ 0.43

 

$             0.98

 

$             0.82

-Diluted

$ 0.52

 

$ 0.42

 

$             0.96

 

$             0.80

 

 

 

 

 

 

 

 

Cash dividends declared per common share

$ 0.045

 

$ 0.040

 

$           0.090

 

$           0.080

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (Note 4):

 

 

 

 

 

 

-Basic

148,851

 

152,000

 

149,394

 

152,016

-Diluted

151,790

 

154,873

 

152,371

 

154,723

 

 

 

 

 

 

 

 

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,

 

 

 

 

2008

 

2007

Assets

 

 

(in thousands)

 

Current Assets:

 

 

 

 

 

   Cash and cash equivalents

$

113,454

$

169,384

 

Short-term investments

 

 

309,797

 

146,939

 

Accounts and notes receivable-trade, net (Note 1)

 

 

371,489

 

307,622

 

Inventories, net (Note 7)

 

 

282,795

 

258,032

 

Prepaid expenses and other current assets

 

 

104,552

 

100,045

 

Total Current Assets

 

 

1,182,087

 

982,022

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

405,603

 

371,409

 

Identifiable intangible assets, net

 

 

76,347

 

76,167

 

Goodwill, net

 

 

1,178,627

 

1,127,420

 

Other noncurrent assets, net

 

 

150,544

 

118,551

 

Total Assets

 

$

2,993,208

$

2,675,569

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

94,413

$

82,321

 

Accrued liabilities

 

 

195,043

 

189,405

 

Income taxes payable

 

 

31,251

 

39,441

 

Notes payable and current portion

 

 

 

 

 

 

of long-term debt

 

 

4,854

 

1,244

 

Total Current Liabilities

 

 

325,561

 

312,411

 

 

 

 

 

 

 

 

Long-term debt

 

 

576,649

 

482,063

 

Deferred income taxes

 

 

69,727

 

60,547

 

Other noncurrent liabilities

 

 

411,744

 

304,146

 

Total Liabilities

 

 

1,383,681

 

1,159,167

 

 

 

 

 

 

 

 

Minority interests in consolidated subsidiaries

 

 

337

 

296

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

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

-

 

-

 

Common stock, $.01 par value; 200 million shares authorized;

 

 

 

 

 

 

162.8 million shares issued at June 30, 2008 and December 31, 2007 

1,628

 

1,628

 

Capital in excess of par value

 

 

180,196

 

173,084

 

Retained earnings

 

 

1,716,083

 

1,582,683

 

Accumulated other comprehensive income (Note 3)

 

 

184,615

 

145,819

 

Treasury stock, at cost, 14.0 million shares at June 30, 2008 and

 

 

 

 

 

12.0 million shares at December 31, 2007

 

 

(473,332)

 

(387,108)

 

Total Stockholders' Equity

 

 

1,609,190

 

1,516,106

Total Liabilities and Stockholders' Equity

 

$

2,993,208

$

2,675,569

 

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,

 

 

 

2008

 

2007

 

 

 

(in thousands)

Cash flows from operating activities:

 

 

 

 

 

Net income

 

 

$ 146,828

 

 $123,905

Adjustments to reconcile net income to net cash

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

Depreciation

 

 

23,943

 

21,505

Amortization

 

 

4,363

 

3,847

Deferred income taxes

 

 

18,542

 

17,346

Share-based compensation expense

 

 

8,404

 

7,124

Restructuring and other costs

 

 

1,662

 

4,197

Stock option income tax benefit

 

 

(2,008)

 

(3,659)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

Accounts and notes receivable-trade, net

 

 

(49,711)

 

(25,988)

Inventories, net

 

 

(10,283)

 

(11,453)

Prepaid expenses and other current assets

 

 

(5,314)

 

(5,422)

Accounts payable

 

 

9,179

 

5,573

Accrued liabilities

 

 

(597)

 

(8,851)

Income tax payable

 

 

(9,754)

 

25,132

Other, net

 

 

3771

 

1,818

Net cash provided by operating activities

 

 

139,025

 

155,074

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

 

(36,574)

 

(21,159)

Cash paid for acquisitions of businesses and equity investment

 

 

(2,415)

 

(26,223)

Purchases of short-term investments

 

 

(147,434)

 

(109,233)

Liquidation of short-term investments

 

 

12

 

67

Expenditures for identifiable intangible assets

 

 

(2,191)

 

(3,003)

Proceeds from sale of property, plant and equipment, net

 

 

799

 

236

Net cash used in investing activities

 

 

(187,803)

 

(159,315)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in short-term borrowings

 

 

3,488

 

1,636

Cash paid for treasury stock

 

 

(95,467)

 

(44,222)

Cash dividends paid

 

 

(13,517)

 

(12,976)

Proceeds from long-term borrowings

 

 

77,799

 

149,548

Payments on long-term borrowings

 

 

-

 

(117,161)

Proceeds from exercise of stock options

 

 

5,741

 

26,312

Excess tax benefits from share-based compensation

 

 

2,008

 

3,659

Net provided (used in) by cash financing activities

 

 

(19,948)

 

6,796

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

12,796

 

1,814

Net (decrease) increase in cash and cash equivalents

 

 

(55,930)

 

4,369

Cash and cash equivalents at beginning of period

 

 

169,384

 

65,064

Cash and cash equivalents at end of period

 

 

$ 113,454

 

$ 69,433

 

See accompanying notes to Unaudited Interim Consolidated Condensed Financial Statements.

- 5 -

 

DENTSPLY International Inc.

 

NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

June 30, 2008

     The accompanying Unaudited Interim Consolidated Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Results for interim periods should not be considered indicative of results for a full year.  These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s most recent Form 10-K filed February 25, 2008.

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

 

The accounting policies of DENTSPLY International Inc., as applied in the consolidated interim financial statements presented herein, are substantially the same as presented on pages 51 through 56 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2007, except as indicated below:

 

Accounts and Notes Receivable-Trade

 

Accounts and notes receivables - trade are stated net of allowances for doubtful accounts and trade discounts, which were $18.7 million and $18.9 million at June 30, 2008 and December 31, 2007, respectively.

 

Fair Value Measurement

 

In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements,” which requires the Company to define fair value, establish a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and expand disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

 

On February 12, 2008, the FASB issued FASB Staff Position No. SFAS 157-2, “Effective Date of FASB Statement No. 157,” which amends SFAS 157 by delaying its effective date by one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore, beginning on January 1, 2008, this standard applies prospectively to new fair value measurements of financial instruments and recurring fair value measurements of non-financial assets and non-financial liabilities. On January 1, 2009, the standard will also apply to all other fair value measurements. The Company has adopted SFAS 157 and has presented the required disclosures in Note 12, Fair Value Measurement.

 

Fair Value Option

 

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This will allow entities the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective for financial statements issued for fiscal years ending after November 15, 2007. While SFAS 159 became effective for the Company’s 2008 fiscal year, the Company did not elect the fair value measurement option for any of the Company’s financial assets or liabilities not already recorded at fair value.

 

New Accounting Pronouncements

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R) (“SFAS 141(R)”), “Business Combinations.” It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company will adopt SFAS 141(R) in the first quarter of fiscal year 2009 and is currently evaluating the impact the adoption will have on the Company’s financial statements.

- 6 -

 

       In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements.” This statement amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company will adopt SFAS 160 in the first quarter of fiscal year 2009 and is currently evaluating the impact the adoption will have on the Company’s financial statements.

 

       In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS 161”), ”Disclosures about Derivative Instruments and Hedging Activities.” SFAS 161 is effective for fiscal years beginning after December 15, 2008. This statement amends and expands the disclosure requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging.” The Company will adopt SFAS 161 in the first quarter of fiscal year 2009 and is currently evaluating the impact the adoption will have on the Company’s financial statements.

 

       In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (“SFAS 162”), ”The Hierarchy of Generally Accepted Accounting Principles.” This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles.

        

NOTE 2 – STOCK COMPENSATION  

 

The Company maintains the 2002 Equity Incentive Plan (the “Plan”) under which it may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSU”) and stock appreciation rights, collectively referred to as “Awards.” Awards are granted at exercise prices that approximate the fair market value of the common stock on the grant date. The Plan authorized grants of 14,000,000 shares of common stock, plus any unexercised portion of cancelled or terminated stock options granted under the DENTSPLY International Inc. 1993 and 1998 Plans, subject to adjustment as follows: each January, if 7% of the total outstanding common shares of the Company exceed 14,000,000, the excess becomes available for grant under the Plan. No more than 2,000,000 shares may be awarded as restricted stock and restricted stock units, and no key employee may be granted restricted stock units in excess of 150,000 shares of common stock in any calendar year.

 

Stock options generally expire ten years after the date of grant under these plans and grants become exercisable over a period of three years after the date of grant at the rate of one-third per year, except when they become immediately exercisable upon death, disability or qualified retirement. Restricted stock units vest 100% on the third anniversary of the date of grant and are subject to a service condition, which requires grantees to remain employed by the Company during the three year period following the date of grant. In addition to the service condition, certain key executives are subject to performance requirements. It is the Company’s practice to issue shares from treasury stock when options are exercised.

 

Under SFAS 123(R), the Company continues to use the Black-Scholes option-pricing model to estimate the fair value of each award. The assumptions used to calculate the fair value of the awards granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.

 

The following table represents total stock based compensation expense and the tax related benefit for the three and six months ended June 30, 2008 and 2007:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2008

 

 

2007

 

 

2008

 

 

2007

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Stock option expense

$

2.9

 

$

3.1

 

$

5.7

 

$

6.2

RSU expense

 

1.1

 

 

0.5

 

 

2.1

 

 

0.8

Total stock based compensation expense

$

4.0

 

$

3.6

 

$

7.8

 

$

7.0

 

 

 

 

 

 

 

 

 

 

 

 

Total related tax benefit

$

0.7

 

$

0.9

 

$

1.8

 

$

1.8

 

- 7 -

 

The remaining unamortized compensation cost related to non-qualified stock options is $16.7 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.3 years. The unamortized compensation cost related to RSUs is $9.6 million, which will be expensed over the remaining restricted period of the RSUs, or 2.1 years.

 

The following table summarizes the non-qualified stock options transactions from December 31, 2007 through June 30, 2008:

 

 

Outstanding

 

Exercisable

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

Aggregate

 

 

 

Average

 

Aggregate

 

 

 

Exercise

 

Intrinsic

 

 

 

Exercise

 

Intrinsic

 

Shares

 

Price

 

Value

 

Shares

 

Price

 

Value

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007

10,314

$

26.41

$

192,333

 

7,378

$

22.46

$

166,664

Granted

92

 

39.64

 

 

 

 

 

 

 

 

Exercised

(298)

 

19.29

 

 

 

 

 

 

 

 

Forfeited

(101)

 

34.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2008

10,007

$

26.66

$

114,801

 

7,234

$

22.76

$

104,346

 

The weighted average remaining contractual term of all outstanding options is 6.1 years and the weighted average remaining contractual term of exercisable options is 5.1 years.

 

The following table summarizes the unvested restricted stock units and restricted stock units dividend transactions from December 31, 2007 through June 30, 2008:

 

 

Unvested Restricted Stock Units

 

 

 

 

Weighted Average

 

 

 

 

Grant Date

 

Shares

 

 

Fair Value

 

(in thousands, except per share data)

 

 

Unvested at December 31, 2007

211

 

$

30.99

Granted

211

 

 

41.12

Exercised

(1)

 

 

30.80

Vested

(3)

 

 

42.10

Forfeited

(11)

 

 

34.57

 

 

 

 

 

Unvested at June 30, 2008

407

 

$

36.08

 

 

- 8 -

 

NOTE 3 – COMPREHENSIVE INCOME

 

The components of comprehensive income, net of tax, are as follows:

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2008

 

 

2007

 

 

2008

 

 

2007

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

$

78,648

 

$

65,433

 

$

146,828

 

$

123,905

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

(2,852)

 

 

14,168

 

 

97,847

 

 

27,536

Unrealized loss on available-for-sale securities

-

 

 

(41)

 

 

-

 

 

(138)

Amortization of unrecognized losses and

 

 

 

 

 

 

 

 

 

 

prior year service cost, net

 

208

 

 

150

 

 

(119)

 

 

401

Change in assumptions for the Company’s

 

 

 

 

 

 

 

 

 

benefit plans

 

3,713

 

 

-

 

 

3,713

 

 

-

Net gain (loss) on derivative financial instruments

16,167

 

 

(163)

 

 

(62,645)

 

 

(5,855)

Total comprehensive income

$

95,884

 

$

79,547

 

$

185,624

 

$

145,849

 

During the quarter ended June 30, 2008, foreign currency translation adjustments included currency translation losses of $8.8 million and gains of $5.9 million on the Company’s loans designated as hedges of net investments. During the quarter ended June 30, 2007, foreign currency translation adjustments included currency translation gains of $10.1 million and gains of $4.1 million on the Company’s loans designated as hedges of net investments. During the six months ended June 30, 2008, foreign currency translation adjustments included currency translation gains of $108.1 million and losses of $10.3 million on the Company’s loans designated as hedges of net investments. During the six months ended June 30, 2007, foreign currency translation adjustments included currency translation gains of $24.7 million and gains of $2.8 million on the Company’s loans designated as hedges of net investments. These foreign currency translation adjustments were offset by net gains and losses on derivatives financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.

 

The balances included in accumulated other comprehensive income in the consolidated balance sheets are as follows:

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2008

 

 

2007

 

 

 

(in thousands)

 

 

 

 

 

 

 

Foreign currency translation adjustments

$

338,918

 

$

241,071

Unrecognized losses and prior service cost, net

 

(5,804)

 

 

(9,398)

Net loss on derivative financial instruments

 

(148,499)

 

 

(85,854)

 

 

$

184,615

 

$

145,819

 

 

The cumulative foreign currency translation adjustments included translation gains of $439.2 million and $331.1 million as of June 30, 2008 and December 31, 2007, respectively, offset by losses of $100.3 million and $90.0 million, respectively, on loans designated as hedges of net investments. These foreign currency translation adjustments were offset by net losses on derivative financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.

 

 

- 9 -

NOTE 4 - EARNINGS PER COMMON SHARE

 

The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted earnings per common share:

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2008

 

2007

 

2008

 

2007

 

(in thousands, except per share amounts)

Basic Earnings Per Common Share Computation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$ 78,648

 

$ 65,433

 

$ 146,828

 

$ 123,905

 

 

 

 

 

 

 

 

Common shares outstanding

148,851

 

152,000

 

149,394

 

152,016

 

 

 

 

 

 

 

 

Earnings per common share - basic

$ 0.53

 

$ 0.43

 

$ 0.98

 

$ 0.82

Diluted Earnings Per Common Share Computation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$ 78,648

 

$ 65,433

 

$ 146,828

 

$ 123,905

 

 

 

 

 

 

 

 

Common shares outstanding

148,851

 

152,000

 

149,394

 

152,016

Incremental shares from assumed exercise

 

 

 

 

 

 

 

of dilutive options

2,939

 

2,873

 

2,977

 

2,707

Total shares

151,790

 

154,873

 

152,371

 

154,723

 

 

 

 

 

 

 

 

Earnings per common share - diluted

$ 0.52

 

$ 0.42

 

$ 0.96

 

$ 0.80

 

Options to purchase 1.3 million and 1.4 million shares of common stock that were outstanding during the three and six months ended June 30, 2008, 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 shares during the three and six months ended June 30, 2007, were 1.4 million and 1.6 million, respectively.

 

NOTE 5 - BUSINESS ACQUISITIONS

 

One of the Company’s 2005 acquisitions and one of the Company’s 2007 acquisitions included provisions for possible additional payments based on the post closing performance of the individual businesses. During the first six months of 2008, the Company paid $2.4 million in additional purchase price under these agreements.

 

NOTE 6 - SEGMENT INFORMATION

 

The Company follows Statement of Financial Accounting Standards No. 131 ("SFAS 131"), “Disclosures about Segments of an Enterprise and Related Information.” SFAS 131 establishes standards for disclosing information about reportable segments in financial statements. The Company has numerous operating businesses covering a wide range of products and geographic regions, primarily serving the professional dental market. Professional dental products represented approximately 97% and 97% of sales for the periods ended June 30, 2008 and 2007, respectively.

 

The operating businesses are combined into operating groups, which have overlapping product offerings, geographical presence, customer bases, distribution channels, and regulatory oversight. These operating groups are considered the Company’s reportable segments under SFAS 131 as the Company’s chief operating decision-maker regularly reviews financial results at the operating group level and uses this information to manage the Company’s operations. The accounting policies of the groups are consistent with those described in the most recently filed 10-K Consolidated Financial Statements in the summary of significant accounting policies. The Company measures segment income for reporting purposes as net operating profit before restructuring, interest and taxes.

 

United States, Germany, and Certain Other European Regions Consumables Businesses

 

This business group includes responsibility for the design, manufacturing, sales, and distribution for certain small equipment and chairside consumable products in the United States, Germany, and certain other European regions.

 

- 10 -

France, United Kingdom, Italy, CIS, Middle East, Africa, Pacific Rim Businesses

 

This business group includes responsibility for the sales and distribution for chairside consumable products and certain small equipment, certain laboratory products, and certain Endodontic products in France, United Kingdom, Italy, the Commonwealth of Independent States (“CIS”), Middle East, Africa, Asia (excluding Japan), Japan and Australia, as well as the sale and distribution of implant products and bone substitute/grafting materials in Italy, Asia and Australia. This business group also includes the manufacturing and sale of Orthodontic products, the manufacturing of certain laboratory products in Japan, and the manufacturing of certain laboratory and certain Endodontic products in Asia.

 

Canada/Latin America/Endodontics/Orthodontics

 

This business group includes responsibility for the design, manufacture, and/or sales and distribution of chairside consumable and laboratory products in Brazil. It also has responsibility for the sales and distribution of most Company dental products sold in Latin America and Canada. This business group also includes the responsibility for the design and manufacturing for Endodontic products in the United States, Switzerland and Germany and is responsible for sales and distribution of certain Company Endodontic products in the United States, Canada, Switzerland, Benelux, Scandinavia, and Eastern Europe, and certain Endodontic products in Germany. This business group is also responsible for the world-wide sales and distribution, excluding Japan, as well as some manufacturing of the Company’s Orthodontic products. This business group is also responsible for sales and distribution in the United States for implant and bone substitute/grafting materials and the distribution of implants in Brazil.

 

Global Dental Laboratory Business/Implants/Non-Dental

 

This business group includes the responsibility for the design, manufacture, world-wide sales and distribution for laboratory products, excluding certain laboratory products mentioned earlier, and the design, manufacture, and/or sales and distribution of the Company’s dental implant products and bone substitute/grafting materials, excluding sales and distribution of implants and bone substitute/grafting materials in the United States, Italy, Asia, Australia and sales and distribution of implants in Brazil. This business group is also responsible for the Company’s non-dental business.

 

Significant interdependencies exist among the Company’s operations in certain geographic areas. Inter-group sales are at prices intended to provide a reasonable profit to the manufacturing unit after recovery of all manufacturing costs and to provide a reasonable profit for purchasing locations after coverage of marketing and general and administrative costs.

 

Generally, the Company evaluates performance of the operating groups based on the groups’ operating income, excluding restructuring and other costs, and net third party sales, excluding precious metal content.

 

- 11 -

The following tables set forth information about the Company’s operating groups for the three and six months ended June 30, 2008 and 2007:

 

Third Party Net Sales

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2008

 

2007

 

2008

 

2007

 

(in thousands)

U.S., Germany, and Certain Other European

 

 

 

 

 

 

Regions Consumable Businesses

$ 126,378

 

$ 106,221

 

$ 248,906

 

$ 206,634

France, U.K., Italy, CIS, Middle East,

 

 

 

 

 

 

 

Africa, Pacific Rim Businesses

118,776

 

98,005

 

220,344

 

184,710

Canada/Latin America/Endodontics/

 

 

 

 

 

 

 

Orthodontics

168,551

 

149,374

 

322,349

 

284,453

Global Dental Laboratory Business/

 

 

 

 

 

 

 

Implants/Non-Dental

182,063

 

154,703

 

366,194

 

306,743

All Other (a)

(921)

 

(941)

 

(2,164)

 

(2,314)

Total

$ 594,847

 

$ 507,362

 

$ 1,155,629

 

$ 980,226

 

The presentation of net sales, excluding precious metal content, is considered a measure not calculated in accordance with generally accepted accounting principles (“GAAP”), and is therefore considered a non-GAAP measure. This non-GAAP measure is discussed further in “Management's Discussion and Analysis of Financial Condition and Results of Operations” and a reconciliation of net sales, excluding precious metal content, to net sales is provided below.

 

Third Party Net Sales, excluding precious metal content

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2008

 

2007

 

2008

 

2007

 

(in thousands)

U.S., Germany, and Certain Other European

 

 

 

 

 

 

 

Regions Consumable Businesses

$ 126,378

 

$ 106,221

 

$ 248,906

 

$ 206,634

France, U.K., Italy, CIS, Middle East,

 

 

 

 

 

 

 

Africa, Pacific Rim Businesses

112,675

 

92,029

 

207,919

 

172,063

Canada/Latin America/Endodontics/

 

 

 

 

 

 

 

Orthodontics

167,545

 

148,496

 

320,442

 

282,479

Global Dental Laboratory Business/

 

 

 

 

 

 

 

Implants/Non-Dental

136,595

 

116,303

 

263,418

 

226,512

All Other (a)

(921)

 

(941)

 

(2,164)

 

(2,314)

Total excluding Precious Metal Content

542,272

 

462,108

 

1,038,521

 

885,374

Precious Metal Content

52,575

 

45,254

 

117,108

 

94,852

Total including Precious Metal Content

$ 594,847

 

$ 507,362

 

$ 1,155,629

 

$ 980,226

 

(a) Includes: amounts recorded at Corporate headquarters.

- 12 -

 

Inter-segment Net Sales

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2008

 

2007

 

2008

 

2007

 

(in thousands)

U.S., Germany, and Certain Other European

 

 

 

 

 

 

 

Regions Consumable Businesses

$      33,057

 

$      35,480

 

$      62,402

 

$       72,368

France, U.K., Italy, CIS, Middle East,

 

 

 

 

 

 

 

Africa, Pacific Rim Businesses

1,493

 

4,053

 

2,633

 

6,374

Canada/Latin America/Endodontics/

 

 

 

 

 

 

 

Orthodontics

29,720

 

23,293

 

54,828

 

44,819

Global Dental Laboratory Business/

 

 

 

 

 

 

 

Implants/Non-Dental

24,026

 

22,976

 

46,692

 

48,368

All Other (a)

49,308

 

36,279

 

95,673

 

72,201

Eliminations

(137,604)

 

(122,081)

 

(262,228)

 

(244,130)

Total

$                -

 

$                -

 

$               -

 

$                 -

 

Segment Operating Income

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2008

 

2007

 

2008

 

2007

 

(in thousands)

U.S., Germany, and Certain Other European

 

 

 

 

 

 

 

Regions Consumable Businesses

$ 44,881

 

$ 37,869

 

$ 88,235

 

$ 71,802

France, U.K., Italy, CIS, Middle East,

 

 

 

 

 

 

 

Africa, Pacific Rim Businesses

4,263

 

4,141

 

5,579

 

4,718

Canada/Latin America/Endodontics/

 

 

 

 

 

 

 

Orthodontics

55,061

 

45,088

 

106,340

 

87,555

Global Dental Laboratory Business/

 

 

 

 

 

 

 

Implants/Non-Dental

36,310

 

28,893

 

68,495

 

57,527

All Other (b)

(25,896)

 

(19,291)

 

(52,789)

 

(42,701)

Segment Operating Income

114,619

 

96,700

 

215,860

 

178,901

 

 

 

 

 

 

 

 

Reconciling Items:

 

 

 

 

 

 

 

Restructuring and other costs

(1,458)

 

(3,207)

 

(1,662)

 

(4,197)

Interest Expense

(7,901)

 

(5,209)

 

(16,153)

 

(9,665)

Interest Income

4,685

 

6,995

 

9,895

 

13,496

Other income (expense), net

-

 

347

 

(3,097)

 

557

Income before income taxes

$ 109,945

 

$ 95,626

 

$ 204,843

 

$ 179,092

 

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

 

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

 

- 13 -

 

Assets

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

2008

 

 

2007

 

 

(in thousands)

 

 

 

 

 

 

U.S., Germany, and Certain Other European

 

 

 

 

 

Regions Consumable Businesses

$

415,297

 

$

382,913

France, U.K., Italy, CIS, Middle East,

 

 

 

 

 

Africa, Pacific Rim Businesses

 

344,680

 

 

315,531

Canada/Latin America/Endodontics/

 

 

 

 

 

Orthodontics

 

785,835

 

 

715,300

Global Dental Laboratory Business/

 

 

 

 

 

Implants/Non-Dental

 

961,632

 

 

898,043

All Other (a)

 

485,764

 

 

363,782

Total

$

2,993,208

 

$

2,675,569

 

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

 

NOTE 7 - INVENTORIES

 

Inventories are stated at the lower of cost or market. At June 30, 2008 and December 31, 2007, the cost of $10.3 million, or 3.7%, and $10.6 million, or 4.1%, respectively, of inventories was determined by the last-in, first-out (“LIFO”) method. The cost of other inventories was determined by the first-in, first-out (“FIFO”) or average cost methods. The Company establishes reserves for inventory estimated to be obsolete or unmarketable equal to the difference between the cost of inventory and estimated market value based upon assumptions about future demand and market conditions. The inventory valuation reserves were $30.7 million and $26.2 million as of June 30, 2008 and December 31, 2007, respectively.

 

If the FIFO method had been used to determine the cost of LIFO inventories, the amounts at which net inventories are stated would be higher than reported at June 30, 2008 and December 31, 2007 by $5.3 million and $4.4 million, respectively.

 

Inventories, net of inventory valuation reserves, consist of the following:

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2008

 

 

2007

 

 

 

(in thousands)

 

 

 

 

 

 

 

Finished goods

 

$

161,670

 

$

155,402

Work-in-process

 

 

56,771

 

 

49,622

Raw materials and supplies

 

 

64,354

 

 

53,008

 

 

$

282,795

 

$

258,032

 

 

 

 

 

 

 

 

 

 

- 14 -

NOTE 8 - BENEFIT PLANS

 

The following sets forth the components of net periodic benefit cost of the Company’s benefit plans and for the Company’s other postretirement employee benefit plans for the three and six months ended June 30, 2008 and June 30, 2007, respectively:

 

Defined Benefit Plans

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2008

 

2007

 

2008

 

2007

 

 

(in thousands)

Service cost

 

$    1,610

 

$    1,635

 

$    3,416

 

$    3,314

Interest cost

 

2,187

 

1,650

 

4,435

 

3,431

Expected return on plan assets

 

(1,207)

 

(895)

 

(2,365)

 

(2,000)

Amortization of transition obligation

63

 

54

 

124

 

107

Amortization of prior service cost

43

 

24

 

89

 

61

Amortization of net loss

 

(11)

 

314

 

62

 

598

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$      2,685

 

$      2,782

 

$     5,761

 

$      5,511

 

Other Postretirement Plans 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2008

 

2007

 

2008

 

2007

 

 

(in thousands)

Service cost

 

$  13

 

$ 16

 

$   25

 

$   32

Interest cost

 

157

 

130

 

313

 

261

Expected return on plan assets

 

-

 

-

 

-

 

-

Amortization of transition obligation

-

 

-

 

-

 

-

Amortization of prior service cost

-

 

(96)

 

-

 

(193)

Amortization of net loss

 

37

 

31

 

74

 

62

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$ 207

 

$ 81

 

$ 412

 

$ 162

 

The following sets forth the information related to the funding of the Company’s benefit plans for 2008:

 

Other

Pension

Postretirement

Benefits

Benefits

(in thousands)

Actual, June 30, 2008

 

$

4,654

 

$

403

Projected for the remainder of the year

 

4,177

 

 

662

Total for year

 

$

8,831

 

$

1,065

 

 

 

 

 

 

 

 

NOTE 9 - RESTRUCTURING AND OTHER COSTS

 

Restructuring Costs

 

Restructuring accruals of $1.6 million for the six months ended June 30, 2008 are reflected in accrued liabilities and other non-current liabilities in the consolidated condensed balance sheets and the associated costs are recorded in restructuring and other costs in the income statements. The accruals consist of employee severance benefits, payments due under operating contracts, and other restructuring costs. For further information regarding the Company’s restructuring plans and the associated accruals, refer to Note 14, Restructuring, Impairment and Other Costs in the Notes to Consolidated Financial Statements appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The Company does not expect any additional significant expenses related to any existing restructuring plans. The Company did not initiate any new restructuring plans for the three months or six months ended June 30, 2008.

 

- 15 -

 

As of June 30, 2008, the Company’s restructuring accruals were as follows:

 

 

 

 

 

 

Severance

 

 

 

 

 

2006 and

 

 

 

 

 

 

 

 

 

 

 

Prior Plans

 

 

2007 Plans

 

 

Total

 

 

 

(in thousands)

Balance, December 31, 2007

 

$

1,617

 

$

925

 

$

2,542

 

Provisions

 

 

173

 

 

8

 

 

181

 

Amounts applied

 

 

(755)

 

 

(801)

 

 

(1,556)

 

Change in estimate

 

 

(147)

 

 

-

 

 

(147)

Balance, June 30, 2008

 

$

888

 

$

132

 

$

1,020

 

 

 

 

 

 

Lease/contract terminations

 

 

 

 

 

2006 and

 

 

 

 

 

 

 

 

 

 

 

Prior Plans

 

 

2007 Plans

 

 

Total

 

 

 

(in thousands)

Balance, December 31, 2007

 

$

252

 

$

-

 

$

252

 

Provisions

 

 

-

 

 

165

 

 

165

 

Amounts applied

 

 

(61)

 

 

(165)

 

 

(226)

 

Change in estimate

 

 

-

 

 

-

 

 

-

Balance, June 30, 2008

 

$

191

 

$

-

 

$

191

 

 

 

 

 

 

Other restructuring costs

 

 

 

 

 

2006 and

 

 

 

 

 

 

 

 

 

 

 

Prior Plans

 

 

2007 Plans

 

 

Total

 

 

 

(in thousands)

Balance, December 31, 2007

 

$

206

 

$

52

 

$

258

 

Provisions

 

 

312

 

 

515

 

 

827

 

Amounts applied

 

 

(283)

 

 

(164)

 

 

(447)

 

Change in estimate

 

 

(160)

 

 

(92)

 

 

(252)

Balance, June 30, 2008

 

$

75

 

$

311

 

$

386

 

The following table provides the cumulative amounts for the provision, amounts applied, and changes in estimates for all the plans by segment:

 

 

 

December 31,

 

 

Amounts

 

Change

 

June 30,

 

 

 

2007

 

Provisions

 

applied

 

in estimate

 

2008

 

 

(in thousands)

United States, Germany, and Certain

 

 

 

 

 

 

 

 

 

 

Other European Regions

 

 

 

 

 

 

 

 

 

 

Consumable Businesses

$

234

$

326

$

(289)

$

-

$

271

France, United Kingdom, Italy, CIS, Middle

 

 

 

 

 

 

 

 

East, Africa, Pacific Rim Businesses

 

220

 

1

 

(3)

 

-

 

218