SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

(Amendment No. 1)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2008

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 incorporation or organization)                                      (I.R.S. Employer Identification No.)

 

221 West Philadelphia Street, York, PA                                                                                       17405-0872

(Address of principal executive offices)                                                                                           (Zip Code)

 

Registrant's telephone number, including area code: (717) 845-7511

Securities registered pursuant to Section 12(b) of the Act:

Title of each class                                                                                   Name of each exchange on which registered

Common Stock, par value $.01 per share                                                                   The Nasdaq Stock Market LLC                      

 

Securities registered pursuant to Section 12(g) of the Act:

None

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 if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 

Yes

 

 

No

X

 

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A.

 

 

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

 

 

The aggregate market value of the voting common stock held by non-affiliates of the registrant computed by reference to the closing price as of the last business day of the registrants most recently completed second quarter June 30, 2008, was $5,741,814,318.

        The number of shares of the registrant's Common Stock outstanding as of the close of business on April 30, 2009 was 148,528,582.

 

DOCUMENTS INCORPORATED BY REFERENCE

        Certain portions of the definitive Proxy Statement of DENTSPLY International Inc. to be used in connection with the 2009 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K/A to the extent provided herein. Except as specifically incorporated by reference herein the Proxy Statement is not deemed to be filed as part of this Annual Report on Form 10-K/A.


EXPLANATORY NOTE

 

       DENTSPLY  International, Inc. filed its Annual Report on Form 10-K for the year ended December 31, 2008 on February 20, 2009 (the "Original Form 10-K") with the Securities and Exchange Commission.  The Company is filing this Amendment No. 1 on Form 10-K/A to provide the signature page pursuant to Regulation D(2) of Form 10-K.  In the Original Form 10-K, the signature page was inadvertently omitted.  In connection with the filing of this Amendment, and as required by Rule 12b-15 of the Securities Exchange Act of 1934 (the "Exchange Act"), the Company is also filing new certifications of its principal executive officer and principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

       Unless otherwise set forth herein, this Amendment does not modify or update the disclosure in, or exhibits to, the Original Form 10-K or reflect events occuring after the filing of the Original Form 10-K.

 

PART I

Item 1. Business

 

The nature and geographic scope of the Company’s business subjects it to changing economic, competitive, regulatory and technological risks and uncertainties. In accordance with the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors, which, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. All forward-looking statements made by the Company are subject to risks and uncertainties and are not guarantees of future performance. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, performance and achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These statements are identified by the use of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate” or words of similar import.

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 and uncertainties discussed within Item 1A, Part I of this Annual Report on Form 10-K/A as filed on May 1, 2009. Investors are further cautioned that the risk factors in Item 1A, Part I of this Annual Report on Form 10-K/A may not be exhaustive and that many of these factors are beyond the Company’s ability to control or predict. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Company undertakes no duty and has no obligation to update forward-looking statements.

History and Overview

 

DENTSPLY International Inc. (“DENTSPLY” or the “Company”), a Delaware corporation, was created in 1899 as a manufacturer and distributor of artificial teeth, dental equipment and dental consumable products. Today, the Company continues to primarily focus on dental consumable products, dental laboratory products and dental specialty products.

 

DENTSPLY believes it is the world's largest designer, developer, manufacturer and marketer of a broad range of products for the dental market. The Company's worldwide headquarters and executive offices are located in York, Pennsylvania.

 

Sales of the Company's dental products accounted for approximately 97% of DENTSPLY's consolidated net sales, excluding precious metal content, for the year ended December 31, 2008. The remaining 3% of consolidated net sales are related to materials sold to the investment casting industry and various medical products. 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 to net sales, excluding precious metal content, is provided.

 

Through the year ended December 31, 2008, the Company conducted its business through four operating segments, all of which were primarily engaged in the design, manufacture and distribution of dental products in three principal categories: 1) dental consumable products, 2) dental laboratory products and 3) dental specialty products.

 

In addition to the United States (“U.S.”), the Company conducts its business in over 120 foreign countries, principally through its foreign subsidiaries. DENTSPLY has a long-established presence in Canada and in the European market, particularly in Germany, Switzerland, France, Italy and the United Kingdom. The Company also has a significant market presence in Central and South America, South Africa and the Pacific Rim. DENTSPLY has also established marketing activities in Moscow, Russia to serve the countries of the former Soviet Union.

 

For 2008, 2007 and 2006, the Company's net sales, excluding precious metal content, to customers outside the U.S., including export sales, accounted for approximately 62%, 59% and 58%, respectively. Reference is made to the information about the Company's U.S. and foreign sales by shipment origin set forth in Note 4, Segment and Geographic Information, to the consolidated financial statements in this Annual Report on Form 10-K/A.

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Principal Products

 

The worldwide professional dental industry encompasses the diagnosis, treatment and prevention of disease and ailments of the teeth, gums and supporting bone. DENTSPLY's principal dental product categories are dental consumable products, dental laboratory products and dental specialty products. These products are produced by the Company in the U.S. and internationally and are distributed throughout the world under some of the most well-established brand names and trademarks in the industry, including ANKYLOS®, AQUASIL(TM), AQUASIL ULTRA(TM), BIOPURE®, CAULK®, CAVITRON®, CERAMCO®, CERCON®, CITANEST®, DELTON®, DENTSPLY®, DETREY®, ELEPHANT®, ESTHET.X®, FRIADENT®, FRIALIT®, GENIE®, GOLDEN GATE®, IN-OVATION®, INTERACTIVE MYSTIQUE®, MAILLEFER®, MIDWEST®, NUPRO®, ORAQIX®, PEPGEN P-15®, POLOCAINE®, PRIME & BOND®, PROFILE®, PROTAPER®, RINN®, R&R®, SANI-TIP®, SEAL&PROTECT(TM), SHADEPILOT(TM), SULTAN®, THERMAFIL®, TRUBYTE®, XENO®, XIVE®, XYLOCAINE®, and ZHERMACK®.

 

Dental Consumable Products

 

Dental consumable products consist of dental sundries and small equipment used in dental offices in the treatment of patients. Sales of dental consumable products, excluding precious metal content, accounted for approximately 34%, 35% and 40% of the Company’s consolidated sales for the years ended December 31, 2008, 2007 and 2006, respectively.

 

DENTSPLY’s dental sundry products in the dental consumable products category include dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, tooth whiteners and topical fluoride. The Company manufactures thousands of different dental sundry consumable products marketed under more than one hundred brand names.

 

Small equipment products in the dental consumable products category consist of various durable goods used in dental offices for treatment of patients. DENTSPLY’s small equipment products include high and low speed handpieces, intraoral curing light systems, dental diagnostic systems and ultrasonic scalers and polishers.

 

Dental Laboratory Products

 

Dental laboratory products are used in the preparation of dental appliances by dental laboratories. Sales of dental laboratory products, excluding precious metal content, accounted for approximately 18%, 19% and 19% of the Company’s consolidated sales for each of the years ended December 31, 2008, 2007 and 2006, respectively.

 

DENTSPLY’s products in the dental laboratory products category include dental prosthetics, including artificial teeth, precious metal dental alloys, dental ceramics, and crown and bridge materials. Equipment in this category includes computer aided machining (CAM) ceramic systems and porcelain furnaces.

 

Dental Specialty Products

 

Dental specialty products are specialized treatment products used within the dental office and laboratory settings. Sales of dental specialty products, excluding precious metal content, accounted for approximately 45%, 43% and 38% of the Company’s consolidated sales for the years ended December 31, 2008, 2007 and 2006, respectively. DENTSPLY’s products in this category include endodontic (root canal) instruments and materials, implants and related products, bone grafting materials, 3D digital implantology and orthodontic appliances and accessories.

 

Markets, Sales and Distribution

 

DENTSPLY distributes approximately 56% of its dental products through domestic and foreign distributors, dealers and importers. However, certain highly technical products such as precious metal dental alloys, dental ceramics, crown and bridge porcelain products, endodontic instruments and materials, orthodontic appliances, implants, and bone substitute and grafting materials are sold directly to the dental laboratory or dental professional in some markets. During 2008, 2007 and 2006, one customer, Henry Schein Incorporated, a dental distributor, accounted for 11%, 12% and 11%, respectively, of DENTSPLY’s consolidated net sales. No other single customer represented ten percent or more of DENTSPLY’s consolidated net sales during 2008, 2007 or 2006.

 

Reference is made to the information about the Company's foreign and domestic operations and export sales set forth in Note 4, Segment and Geographic Information, to the consolidated financial statements in this Annual Report on Form 10-K/A.

 

Although many of its sales are made to distributors, dealers and importers, DENTSPLY focuses its marketing efforts on the dentists, dental hygienists, dental assistants, dental laboratories and dental schools who are the end users of its products.

 

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As part of this end-user “pull through” marketing approach, DENTSPLY employs approximately 2,700 highly trained, product-specific sales and technical staff to provide comprehensive marketing and service tailored to the particular sales and technical support requirements of the dealers and the end users. The Company conducts extensive distributor and end-user marketing programs and trains laboratory technicians and dentists in the proper use of its products, introducing them to the latest technological developments at its educational centers located throughout the world. The Company also maintains ongoing relationships with various dental associations and recognized worldwide opinion leaders in the dental field, although there is no assurance that these influential dental professionals will continue to support the Company’s products.

 

DENTSPLY believes that demand in a given geographic market for dental procedures and products vary according to the stage of social, economic, and technical development of the particular market. Geographic markets for DENTSPLY's dental products can be categorized into the following two stages of development:

 

The U.S., Canada, Western Europe, Japan, Australia, and certain other countries are highly developed markets that demand the most advanced dental procedures and products and have the highest level of expenditures on dental care. In these markets, the focus of dental care is increasingly upon preventive care and specialized dentistry. In addition to basic procedures such as the excavation and filling of cavities and tooth extraction and denture replacement, dental professionals perform an increasing volume of preventive and cosmetic procedures. These markets require varied and complex dental products, utilize sophisticated diagnostic and imaging equipment, and demand high levels of attention to protect against infection and patient cross-contamination.

 

In certain countries in Central America, South America, Eastern Europe, Pacific Rim, Middle East, and Africa, most dental care is often limited to the excavation and filling of cavities and other restorative techniques, reflecting more modest per capita expenditures for dental care. These markets demand diverse products such as high and low speed handpieces, restorative compounds, finishing devices, custom restorative devices, basic surgical instruments, bridgework and artificial teeth for dentures.

 

The Company offers products and equipment for use in markets at both of these stages of development. The Company believes that demand for more technically advanced products will increase as each of these markets develop. The Company also believes that its recognized brand names, high quality and innovative products, technical support services and strong international distribution capabilities position it well to take advantage of any opportunities for growth in all of the markets that it serves.

 

The Company believes that the market for its products will grow over the long-term based on the following factors:

 

Increasing worldwide population.

 

Growth of the population 65 or older – The percentage of the U.S., European, Japanese and other regions population over age 65 is expected to nearly double by the year 2030. In addition to having significant needs for dental care, the elderly are well positioned to pay for the required procedures since they control sizable amounts of discretionary income.

 

Natural teeth are being retained longer – Individuals with natural teeth are much more likely to visit a dentist in a given year than those without any natural teeth remaining.

 

The changing dental practice in North America and Western Europe – Dentistry in North America and Western Europe has been transformed from a profession primarily dealing with pain, infections and tooth decay to one with increased emphasis on preventive care and cosmetic dentistry.

 

Per capita and discretionary incomes are increasing in emerging nations – As personal incomes continue to rise in the emerging nations of the Pacific Rim, Commonwealth of Independent States (“CIS”) and Latin America, healthcare, including dental services, are a growing priority.

 

The Company’s business is less susceptible than other industries to general downturns in the economies in which it operates. Many of the products the Company offers relate to dental procedures that are considered necessary by patients regardless of the economic environment. Specialty products and products that support discretionary dental procedures are the most susceptible to recessionary conditions.

 

 

 

 

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Product Development

 

Technological innovation and successful product development are critical to strengthening the Company’s prominent position in worldwide dental markets, maintaining its leadership positions in product categories where it has a high market share and increasing market share in product categories where gains are possible. While many of DENTSPLY’s existing products undergo evolutionary improvements, the Company also continues to successfully launch innovative products that represent fundamental change.

 

New advances in technology are also anticipated to have a significant influence on future products in dentistry. As a result, the Company pursues research and development initiatives to support this technological development, including partnerships and collaborations with various research institutions and dental schools. Through its own internal research centers as well as through its collaborations and partnerships with external research institutions and dental schools, the Company directly invested approximately $52.3 million, $46.8 million and $44.4 million for 2008, 2007 and 2006, respectively, in connection with the development of new products, improvement of existing products and advances in technology. The continued development of these areas is a critical step in meeting the Company's strategic goal as a leader in defining the future of dentistry.

 

In addition to the direct investment in product development and improvement, the Company also invests in these activities through acquisitions, by entering into licensing agreements and by purchasing technologies developed by third parties.

 

Acquisition Activities

 

DENTSPLY believes that the dental products industry continues to experience consolidation with respect to both product manufacturing and distribution, although it continues to be fragmented creating a number of acquisition opportunities. As a result, the Company has made several acquisitions in 2008, including a 60% ownership in Zhermack S.p.A., a dental consumable products manufacturer and distributor; E.S. Holding N.V., a manufacturer and sales and marketing organization of dental laboratory products; Dental Depot Lomberg B.V., a sales and marketing organization of orthodontic products; and Apollonia & Fama Impant S.r.l., a sales and marketing organization of dental implant products. The Company also purchased an additional interest in Materialise Dental in 2008. In 2007, the Company acquired one manufacturer of dental consumable products, one manufacturer of endodontic materials, two sales and marketing organizations for dental implant products, and one manufacturer of small dental diagnostic equipment.

 

The Company continues to view acquisitions as a key part of its growth strategy. These acquisition activities are intended to supplement the Company's core growth and assure ongoing expansion of its business, including new technologies, additional products, and geographic breadth.

 

Operating and Technical Expertise

 

DENTSPLY believes that its manufacturing capabilities are important to its success. The manufacture of the Company's products requires substantial and varied technical expertise. Complex materials technology and processes are necessary to manufacture the Company's products. The Company continues to automate its global manufacturing operations in order to remain a low cost producer.

 

Financing

 

DENTSPLY's total debt at December 31, 2008 and 2007 was $427.7 million and $482.3 million, respectively, and the ratios of long-term debt to total capitalization were 21.2% and 24.1%. DENTSPLY defines total capitalization as the sum of total long-term debt, including the current portion, plus total stockholders’ equity. DENTSPLY may incur additional debt in the future, including, but not limited to, the funding of additional acquisitions and capital expenditures.

 

The Company's cash, cash equivalents and short-term investments decreased by $112.1 million during the year ended December 31, 2008 to $204.2 million. In 2008, the Company’s net borrowings decreased by $54.6 million. This change included a net reduction in borrowings of $86.3 million during the year ended 2008, plus an increase of $31.7 million due to exchange rate fluctuations on debt denominated in foreign currencies. The Company also repurchased $112.6 million in treasury stock in 2008.

 

Additional information about DENTSPLY's working capital, liquidity and capital resources is provided in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K/A.

 

 

 

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Competition

 

The Company conducts its operations, both domestic and foreign, under highly competitive market conditions. Competition in the dental products industry is based primarily upon product performance, quality, safety and ease of use, as well as price, customer service, innovation and acceptance by professionals and technicians. DENTSPLY believes that its principal strengths include its well-established brand names, its reputation for high quality and innovative products, its leadership in product development and manufacturing, its commitment to customer satisfaction and support of the Company’s products by dental professionals.

 

The size and number of the Company's competitors vary by product line and from region to region. There are many companies that produce some, but not all, of the same types of products as those produced by the Company.

 

 Regulation

 

The Company's products are subject to regulation by, among other governmental entities, the U.S. Food and Drug Administration (the “FDA”). In general, if a dental “device” is subject to FDA regulation, compliance with the FDA's requirements constitutes compliance with corresponding state regulations. In order to ensure that dental products distributed for human use in the U.S. are safe and effective, the FDA regulates the introduction, manufacture, advertising, labeling, packaging, marketing and distribution of, and record-keeping for, such products. The introduction and sale of dental products of the types produced by the Company are also subject to government regulation in the various foreign countries in which they are produced or sold. DENTSPLY believes that it is in substantial compliance with the FDA and foreign regulatory requirements that are applicable to its products and manufacturing operations.

 

Dental devices of the types sold by DENTSPLY are generally classified by the FDA into a category that renders them subject only to general controls that apply to all medical devices, including regulations regarding alteration, misbranding, notification, record-keeping and good manufacturing practices. In the European Union, DENTSPLY's products are subject to the medical devices laws of the various member states, which are based on a Directive of the European Commission. Such laws generally regulate the safety of the products in a similar way to the FDA regulations. DENTSPLY products in Europe bear the CE mark showing that such products adhere to the European regulations.

 

All dental amalgam filling materials, including those manufactured and sold by DENTSPLY, contain mercury. Various groups have alleged that dental amalgam containing mercury is harmful to human health and have actively lobbied state and federal lawmakers and regulators to pass laws or adopt regulatory changes restricting the use, or requiring a warning against alleged potential risks, of dental amalgams. The FDA's Dental Devices Classification Panel, the National Institutes of Health and the U.S. Public Health Service have each indicated that no direct hazard to humans from exposure to dental amalgams has been demonstrated. In response to concerns raised by certain consumer groups regarding dental amalgam, in 2006 the FDA formed an advisory committee to review peer-reviewed scientific literature on the safety of dental amalgam. In Europe, particularly in Scandinavia and Germany, the contents of mercury in amalgam filling materials have been the subject of public discussion. As a consequence, in 1994 the German health authorities required suppliers of dental amalgam to amend the instructions for use for amalgam filling materials to include a precaution against the use of amalgam for children less than eighteen years of age and to women of childbearing age. Additionally, some groups have asserted that the use of dental amalgam should be prohibited because of concerns about environmental impact from the disposition of mercury within dental amalgam, which has resulted in the sale of mercury containing products being banned in Sweden and severely curtailed in Norway. DENTSPLY also manufactures and sells non-amalgam dental filling materials that do not contain mercury.

 

Sources and Supply of Raw Materials and Finished Goods

 

The Company manufactures the majority of the products sold by the Company. All of the raw materials used by the Company in the manufacture of its products are purchased from various suppliers and are typically available from numerous sources. No single supplier accounts for a significant percentage of DENTSPLY's raw material requirements. In addition to those products both manufactured and sold by the Company, some finished goods products sold by the Company are purchased from third party suppliers. Of these finished goods products purchased from third party suppliers, a significant portion of the Company’s injectable anesthetic products, orthodontic products and cutting instruments are purchased from a limited number of suppliers.

 

Intellectual Property

 

Products manufactured by DENTSPLY are sold primarily under its own trademarks and trade names. DENTSPLY also owns and maintains more than 2,000 patents throughout the world and is licensed under a small number of patents owned by others.

 

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DENTSPLY's policy is to protect its products and technology through patents and trademark registrations in the U.S. and in significant international markets for its products. The Company carefully monitors trademark use worldwide, and promotes enforcement of its patents and trademarks in a manner that is designed to balance the cost of such protection against obtaining the greatest value for the Company. DENTSPLY believes its patents and trademark properties are important and contribute to the Company's marketing position, but it does not consider its overall business to be materially dependent upon any individual patent or trademark.

 

Employees

 

As of December 31, 2008, the Company and its subsidiaries employed approximately 9,400 employees. A small percentage of the Company's employees are represented by labor unions. Hourly workers at the Company's Ransom & Randolph facility in Maumee, Ohio are represented by Local No. 12 of the International Union, United Automobile, Aerospace and Agriculture Implement Workers of America under a collective bargaining agreement that expires on January 31, 2012. Hourly workers at the Company's Midwest Dental Products facility in Des Plaines, Illinois are represented by International Association of Machinists and Aerospace Workers, AFL-CIO in Chicago under a collective bargaining agreement that expires on May 31, 2009. In Germany, approximately 45% of DeguDent employees, approximately 30% of Friadent employees, approximately 23% of VDW employees and approximately 30% of DeTrey employees are represented by labor unions. The Company provides pension and postretirement benefits to many of its employees (See Note 13, Benefits Plans, to the consolidated financial statements). The Company believes that its relationship with its employees is good.

 

Environmental Matters

 

DENTSPLY believes that its operations comply in all material respects with applicable environmental laws and regulations. Maintaining this level of compliance has not had, and is not expected to have, a material effect on the Company's capital expenditures or on its business.

 

Other Factors Affecting the Business

 

  The Company’s business is subject to quarterly fluctuations with net sales and operating profits historically being higher in the second and fourth quarters. The Company typically implements most of its price changes early in the fourth quarter or beginning of the year. These price changes, other marketing and promotional programs, the management of inventory levels by distributors and the implementation of strategic initiatives, may impact sales levels in a given period. Sales for the industry and the Company are generally strongest in the second and fourth calendar quarters and weaker in the first and third calendar quarters, due to the effects of the items noted above and due to the impact of summer holidays and vacations, particularly throughout Europe.

 

Securities and Exchange Act Reports

 

DENTSPLY makes available free of charge through its website at www.DENTSPLY.com its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials are filed with or furnished to, the Securities and Exchange Commission (“SEC”).

 

The public may read and copy any materials the Company files with the SEC at its Public Reference Room at the following address:

 

100 F Street, NE

Washington, D.C. 20549

 

The public may obtain information on the operation of this Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, since the Company is an electronic filer, the public may access reports, the proxy and information statements and other information filed or furnished by the Company at the Internet site maintained by the SEC (http://www.sec.gov).

 

 

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Item 1A. Risk Factors

 

Following are the significant risk factors that could materially impact DENTSPLY’s business. The order in which these factors appear should not be construed to indicate its relative importance or priority.

 

Negative changes could occur in the dental markets, the general economic environments, or government reimbursement or regulatory programs of the regions in which the Company operates.

 

The success of the Company is largely dependent upon the continued strength of dental markets and is also somewhat dependent upon the general economic environments of the regions in which it operates. Negative changes to these markets and economies could materially impact the Company's results of operations and financial condition. In addition, many of the Company's markets are affected by government reimbursement and regulatory programs. In certain markets, government and regulatory programs have a more significant impact than other markets. Changes to these programs could have a positive or negative impact on the Company's results.

 

Prolonged negative changes in domestic and global economic conditions may affect the Company’s suppliers, customers and consumers, which could harm the Company’s financial position.

 

Prolonged negative changes in domestic and global economic conditions or disruptions of either or both of the financial and credit markets may affect the Company’s supply chain and the customers and consumers of the Company’s products and may have a material adverse effect on the Company’s results of operations, financial condition and liquidity.

 

Due to the Company’s international operations, the Company is exposed to the risk of changes in interest and foreign exchange rates.

 

DENTSPLY, with its significant international operations, is subject to fluctuations in exchange rates of various foreign currencies and other risks associated with foreign trade and the impact of currency fluctuations in any given period can be favorable or unfavorable. The Company’s balance sheet includes debt and net investment hedges that are sensitive to movements in interest and foreign exchange rates. Changes in interest rates and foreign exchange rates may have an adverse effect on the Company’s statement of income.

 

Volatility in the capital markets or investment vehicles could limit our ability to access capital.

  

Although the Company has had continued solid operating cash flow, the disruption in the credit markets may reduce sources of liquidity available to us. The Company relies on multiple financial institutions to provide funding pursuant to existing and/or future credit agreements, and those institutions may not be able to provide funding in a timely manner, or at all, when the Company requires it. The cost of or lack of available credit could impact our ability to develop sufficient liquidity to maintain or grow our business, which in turn may adversely affect the Company’s businesses and results of operations.

 

The Company also manages cash and cash equivalents and short-term investments through various institutions. There may be a risk of loss on investments based on the volatility of the underlying instruments that will not allow the Company to recover the full principal of its investments.

 

The market price for the Company’s common stock may be volatile.

 

DENTSPLY experiences fluctuations in quarterly earnings. As a result, the Company may fail to meet or exceed the expectations of securities analysts and investors, which could cause its stock price to decline. The Company’s business is subject to quarterly fluctuations with net sales and operating profits historically being higher in the second and fourth quarters. The Company typically implements most of its price changes in the beginning of the fourth quarter or beginning of the year. These price changes, other marketing and promotional programs, which are offered to customers from time to time in the ordinary course of business, the management of inventory levels by distributors and the implementation of strategic initiatives, may impact sales levels in a given period. Net sales and operating profits generally have been lower in the first and third quarters, primarily due not only to increased sales in the quarters preceding the first and third quarters, but also due to the impact of summer holidays and vacations, particularly throughout Europe.

 

In addition to fluctuations in quarterly earnings, a variety of other factors may have a significant impact on the market price of DENTSPLY’s common stock causing volatility. These factors include, but are not necessarily limited to, the publication of earnings estimates or other research reports and speculation in the press or investment community; changes in the Company’s industry and competitors; the Company’s financial condition and cash flows; any future issuances of DENTSPLY’s common stock, which may include primary offerings for cash, stock splits, issuances in connection with business acquisitions, restricted stock and the grant or exercise of stock options from time to time; general market and economic conditions; and any outbreak or escalation of hostilities in areas the Company does business.

 

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Also, the NASDAQ National Market can experience extreme price and volume fluctuations that can be unrelated or disproportionate to the operating performance of the companies listed on the NASDAQ. Broad market and industry factors may negatively affect the market price of the Company’s common stock, regardless of actual operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which could harm the Company’s business.

 

The dental supplies market is highly competitive, and there is no guarantee that the Company can compete successfully.

 

The worldwide market for dental supplies is highly competitive. There can be no assurance that the Company will successfully identify new product opportunities and develop and market new products successfully, or that new products and technologies introduced by competitors will not render the Company's products obsolete or noncompetitive. Additionally, the size and number of the Company's competitors vary by product line and from region to region. There are many companies that produce some, but not all, of the same types of products as those produced by the Company. Certain of DENTSPLY's competitors may have greater resources than does the Company.

 

The Company may be unable to develop innovative products or obtain regulatory approval for new products.

 

       DENTSPLY has identified new products as an important part of its growth opportunities. There can be no assurance that DENTSPLY will be able to continue to develop innovative products and that regulatory approval of any new products will be obtained, or that if such approvals are obtained, such products will be favorably accepted in the marketplace. Additionally, there is no assurance that entirely new technology or approaches to dental treatment or competitors’ new products will not be introduced that could render the Company's products obsolete.

 

The Company may fail to comply with regulations issued by the FDA and similar foreign regulatory agencies.

 

DENTSPLY's business is subject to periodic review and inspection by the FDA and similar foreign authorities to monitor DENTSPLY's compliance with the regulations administered by such authorities. There can be no assurance that these authorities will not raise compliance concerns. Failure to satisfy any such requirements can result in governmental enforcement actions, including possible product seizure, injunction and/or criminal or civil proceedings.

 

All dental amalgam filling materials, including those manufactured and sold by DENTSPLY, contain mercury. The FDA's Dental Devices Classification Panel, the National Institutes of Health and the U.S. Public Health Service have each indicated that no direct hazard to humans from exposure to dental amalgams has been demonstrated. If the FDA were to reclassify dental mercury and amalgam filling materials as classes of products requiring FDA pre-market approval, there can be no assurance that the required approval would be obtained or that the FDA would permit the continued sale of amalgam filling materials pending its determination.

 

Also, some groups have asserted that disposal of mercury containing products may be harmful to the environment. If governmental authorities elect to place restrictions or significant regulations on the disposal of dental amalgam, that could have an adverse impact on the Company’s sales of dental amalgam.

 

The Company may be unable to obtain a supply for certain finished goods purchased from third parties.

 

A significant portion of the Company’s injectible anesthetic products, orthodontic products and cutting instruments are purchased from a limited number of suppliers. As there are a limited number of suppliers for these products, there can be no assurance that the Company will be able to obtain an adequate supply of these products in the future.

 

The Company’s expansion through acquisition involves risks and may not result in the expected benefits.

 

The Company continues to view acquisitions as a key part of its growth strategy. The Company continues to be active in evaluating potential acquisitions although there is no assurance that these efforts will result in completed transactions as there are many factors that affect the success of such activities. If the Company does succeed in acquiring a business or product, there can be no assurance that the Company will achieve any of the benefits that it might anticipate from such an acquisition and the attention and effort devoted to the integration of an acquired business could divert management’s attention from normal business operations. If the Company makes acquisitions, it may incur debt, assume contingent liabilities or create additional expenses, any of which might adversely affect its financial results. Any financing that the Company might need for acquisitions may only be available to it on terms that restrict its business or that impose additional costs that reduce its operating results.

 

- 9 -

 

 


 

Changes in, or interpretations of, accounting principles could result in unfavorable accounting charges.

 

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on the Company’s reported results and may even retroactively affect previously reported activity.

 

        The Company’s accounting principles have recently been changed by changes in the accounting principles for accounting for business combinations and related goodwill. In December 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 141 (revised 2007), (“SFAS 141(R)”), “Business Combinations,” which changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition related restructuring liabilities, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141(R) will change the Company’s accounting treatment for business combinations on a prospective basis beginning in the first quarter of 2009.

 

If the Company’s goodwill or amortizable intangible assets become impaired, the Company may be required to record a significant charge to earnings.

 

Under U.S. GAAP, the Company reviews its goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of the Company’s goodwill or amortizable intangible assets may not be recoverable include a decline in market capitalization or future cash flows, and slower growth rates in the dental industry. The Company may be required to record a significant charge to earnings in the Company’s financial statements during the period in which any impairment of the Company’s goodwill or amortizable intangible assets is determined, resulting in an impact on the Company’s results of operations.

 

Changes in, or interpretations of, tax rules, structures, country profitability mix and regulations may adversely affect the Company’s effective tax rates.

 

The Company is a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Unanticipated changes in the Company’s tax rates could affect its future results of operations. The Company’s future effective tax rates could be unfavorably affected by changes in, or interpretation of, tax rules and regulations in the jurisdictions in which the Company does business, structural changes in the Company’s businesses, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes in the valuation of the Company’s deferred tax assets and liabilities.

 

The Company faces the inherent risk of litigation.

 

The Company’s business involves a risk of product liability and other claims, and from time to time the Company is named as a defendant in these cases. The primary risks to which the Company is exposed are related to those products manufactured by the Company. The Company has insurance policies, including product liability insurance, covering these risks in amounts that are considered adequate; however, the Company cannot provide assurance that the maintained coverage is sufficient to cover future claims or that the coverage will be available in adequate amounts or at a reasonable cost. A successful claim brought against the Company in excess of available insurance, or any claim that results in significant adverse publicity against the Company, could harm its business and overall cash flows of the Company. Various parties, including the Company, own and maintain patents and other intellectual property rights applicable to the dental field. Although the Company believes it operates in a manner that does not infringe upon any third party intellectual property rights, it is possible that a party could assert that one or more of the Company’s products infringe upon such party’s intellectual property and force the Company to discontinue the sale of certain products.

 

The Company's success is dependent upon its management and employees.

 

The Company's success is dependent upon its management and employees. The loss of senior management employees or any failure to recruit and train needed managerial, sales and technical personnel, could have a material adverse effect on the Company.

 

- 10 -

 

 


The Company may be unable to sustain the operational and technical expertise that is key to its success.

 

DENTSPLY believes that its manufacturing capabilities are important to its success. The manufacture of the Company's products requires substantial and varied technical expertise. Complex materials technology and processes are necessary to manufacture the Company's products. There can be no assurance that the Company will be able to maintain the necessary operational and technical expertise that is key to its success.

 

The Company may not generate sufficient cash flow to service its debt, pay its contractual obligations and operate the business.

 

DENTSPLY's ability to make payments on its indebtedness and contractual obligations, and to fund its operations depends on its future performance and financial results, which, to a certain extent, are subject to general economic, financial, competitive, regulatory and other factors and the interest rate environment that are beyond its control. Although Management believes that the Company has and will continue to have sufficient liquidity, there can be no assurance that DENTSPLY's business will generate sufficient cash flow from operations in the future to service its debt, pay its contractual obligations and operate its business.

 

The Company may not be able to repay its outstanding debt in the event that cross default provisions are triggered due to a breach of loan covenants.

 

DENTSPLY's existing borrowing documentation contains a number of covenants and financial ratios, which it is required to satisfy. 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 excluding depreciation and amortization of interest expense. Any breach of any such covenants or restrictions would result in a default under the existing borrowing documentation that would permit the lenders to declare all borrowings under such documentation to be immediately due and payable and, through cross default provisions, would entitle DENTSPLY's other lenders to accelerate their loans. DENTSPLY may not be able to meet its obligations under its outstanding indebtedness in the event that any cross default provision is triggered.

 

Certain provisions in the Company’s governing documents may discourage third party offers to acquire DENTSPLY that might otherwise result in the Company’s stockholders receiving a premium over the market price of their shares.

 

Certain provisions of DENTSPLY's Certificate of Incorporation and By-laws and of Delaware law could have the effect of making it difficult for a third party to acquire control of DENTSPLY. Such provisions include the division of the Board of Directors of DENTSPLY into three classes, with the three-year term of a class expiring each year, a provision allowing the Board of Directors to issue preferred stock having rights senior to those of the common stock and certain procedural requirements which make it difficult for stockholders to amend DENTSPLY's By-laws and call special meetings of stockholders. In addition, members of DENTSPLY's management and participants in its Employee Stock Ownership Plan (“ESOP”) collectively own approximately 5% of the outstanding common stock of DENTSPLY.

 

ITEM 1B.

Unresolved Staff Comments

 

None

 

- 11 -

 

 


Item 2. Properties

 

The following is a listing of DENTSPLY's principal manufacturing and distribution locations as of December 31, 2008:

 

Location

Function

Leased

or Owned

United States:

Milford, Delaware (1)

Manufacture of dental consumable products

Owned

 

 

 

Bradenton, Florida (3)

Manufacture of orthodontic accessory products

Leased

 

 

 

Baldwin, Georgia (3)

Manufacture of orthodontic accessory products

Leased

 

 

 

Des Plaines, Illinois (1)

Manufacture and assembly of dental handpieces

Leased

 

 

 

Elgin, Illinois (1)

Manufacture of dental x-ray film holders, film

Owned/Leased

 

mounts and accessories

 

 

 

 

Englewood, New Jersey (1)

Distribution of dental consumable products

Leased

 

 

 

Hackensack, New Jersey (1)

Distribution of dental consumable products

Leased

 

 

 

Bohemia, New York (3)

Manufacture and distribution of orthodontic

Leased

 

products and materials

 

 

 

 

Maumee, Ohio (4)

Manufacture and distribution of investment

Owned

 

casting products

 

 

 

 

Middletown, Pennsylvania (1)

Distribution of dental products

Leased

 

 

 

York, Pennsylvania (4)

Manufacture and distribution of artificial teeth

Owned

 

and other dental laboratory products

 

 

 

 

York, Pennsylvania (1)

Manufacture of small dental equipment, bone grafting

Owned

 

products, and preventive dental products

 

 

 

 

Johnson City, Tennessee (3)

Manufacture and distribution of endodontic

Leased

 

instruments and materials

 

 

 

 

Foreign:

 

 

Beringen, Belgium (4)

Manufacture and distribution of dental products

Owned/Leased

 

 

 

Leuven, Belgium (4)

Manufacture and distribution of 3D digital implantology

Leased

 

 

 

Catanduva, Brazil (3)

Manufacture and distribution of dental

Owned

 

anesthetic products

 

 

 

 

Petropolis, Brazil (3)

Manufacture and distribution of artificial teeth

Owned

 

and dental consumable products

 

 

 

 

Shanghai, China (4)

Manufacture and distribution of dental products

Leased

 

 

 

Tianjin, China (2)

Manufacture and distribution of dental products

Leased

 

 

 

 

 

 

 

 

- 12 -

 

 


 

Ivry Sur-Seine, France (4)

Manufacture and distribution of investment casting

 

Leased

 

products

 

 

 

 

Bohmte, Germany (4)

Manufacture and distribution of dental

Owned

 

laboratory products

 

 

 

 

Hanau, Germany (4)

Manufacture and distribution of precious metal dental

Owned

 

alloys, dental ceramics and dental implant products

 

 

 

 

Konstanz, Germany (1)

Manufacture and distribution of dental consumable

Owned

 

products

 

 

 

 

Mannheim, Germany (4)

Manufacture and distribution of dental

Owned/Leased

 

implant products

 

 

 

 

Munich, Germany (3)

Manufacture and distribution of endodontic

Owned

 

instruments and materials

 

 

 

 

Radolfzell, Germany (5)

Distribution of dental products

Leased

 

 

 

Rosbach, Germany (4)

Manufacture and distribution of dental ceramics

Owned

 

 

 

Badia Polesine, Italy (1)

Manufacture and distribution of dental consumable

Owned/Leased

 

products

 

 

 

 

Nasu, Japan (2)

Manufacture and distribution of precious metal dental

Owned

 

alloys, dental consumable products and orthodontic

 

 

products

 

 

 

 

Hoorn, Netherlands (4)

Manufacture and distribution of precious metal

Owned

 

dental alloys and dental ceramics

 

 

 

 

HA Soest, Netherlands (3)

Distribution of orthodontic products

Leased

 

 

 

Warsaw, Poland (1)

Manufacture and distribution of dental consumable

Owned

 

products

 

 

 

 

Las Piedras, Puerto Rico (4)

Manufacture of crown and bridge materials

Owned

 

 

 

Ballaigues, Switzerland (3)

Manufacture and distribution of endodontic

Owned

 

instruments, plastic components and packaging material

 

 

 

 

Le Creux, Switzerland (3)

 

Manufacture and distribution of endodontic

instruments

Owned

 

 

(1)

These properties are included in the United States, Germany, and Certain Other European Regions Consumable Businesses segment.

(2)

These properties are included in the France, United Kingdom, Italy, CIS, Middle East, Africa, Pacific Rim Businesses segment.

(3)

These properties are included in the Canada/Latin America/Endodontics/Orthodontics segment.

(4)

These properties are included in the Global Dental Laboratory Business/Implants/Non-Dental segment.

(5)

This property is a distribution warehouse not managed by named segments.

 

 

- 13 -

 

 


In addition, the Company maintains sales and distribution offices at certain of its foreign and domestic manufacturing facilities, as well as at various other U.S. and international locations. The Company maintains offices in Toronto, Mexico City, Paris, Rome, Weybridge, Hong Kong and Melbourne. Most of these various sites around the world that are used exclusively for sales and distribution are leased.

 

The Company also owns its corporate headquarters located in York, Pennsylvania.

 

DENTSPLY believes that its properties and facilities are well maintained and are generally suitable and adequate for the purposes for which they are used.

 

Item 3. Legal Proceedings

 

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 violated the antitrust laws and seeking an order for the Company to discontinue its practices. This case has been concluded and the District Court, upon the direction of the Court of Appeals, issued an injunction preventing DENTSPLY from taking action to restrict its tooth dealers in the U.S. from adding new competitive teeth lines.

 

Subsequent to the filing of the Department of Justice Complaint in 1999, a private party putative class action was filed based on allegations similar to those in the Department of Justice case, on behalf of dental laboratories who purchased Trubyte teeth or products containing Trubyte teeth. The District Court granted the Company’s Motion on the lack of standing of the laboratory class action to pursue damage claims. The Plaintiffs appealed this decision to the Third Circuit and the Court largely upheld the decision of the District Court in dismissing the Plaintiffs’ damages claims against DENTSPLY, with the exception of allowing the Plaintiffs to pursue a damage claim based on a theory of resale price maintenance between the Company and its tooth dealers. The Plaintiffs then filed an amended complaint in the District Court asserting that DENTSPLY and its tooth dealers, and the dealers among themselves, engaged in a conspiracy to violate the antitrust laws. The District Court has granted the Motions filed by DENTSPLY and the dealers, to dismiss Plaintiffs’ claims, except for the resale price maintenance claims. The Plaintiffs have appealed the dismissal of these claims to the Third Circuit. Also pending is a case filed by a manufacturer of a competitive tooth line seeking unspecified damages alleged to have been incurred as a result of the Company’s tooth distribution practice found to be a violation of the antitrust law.

 

On June 18, 2004, Marvin Weinstat, DDS and Richard Nathan, DDS filed a class action suit in San Francisco County, California alleging that the Company misrepresented that its Cavitron® ultrasonic scalers are suitable for use in oral surgical procedures. The Complaint seeks a recall of the product and refund of its purchase price to dentists who have purchased it for use in oral surgery. The Court certified the case as a class action in June 2006 with respect to the breach of warranty and unfair business practices claims. The class is defined as California dental professionals who purchased and used one or more Cavitron® ultrasonic scalers for the performance of oral surgical procedures. The Company filed a motion for decertification of the class and this motion was granted. Plaintiffs have appealed the decertification of the class to the California Court of Appeals.

 

On December 12, 2006, a Complaint was filed by Carole Hildebrand, DDS and Robert Jaffin, DDS in the Eastern District of PA. The case was filed by the same law firm that filed the Weinstat case in California. The Complaint asserts putative class action claims on behalf of dentists located in New Jersey and Pennsylvania. The Complaint seeks damages and asserts that the Company’s Cavitron® ultrasonic scaler was negligently designed and sold in breach of contract and warranty arising from misrepresentations about the potential uses of the product because it cannot assure the delivery of potable or sterile water. Plaintiffs have filed their Motion for class certification to which the Company has filed its response.

 

- 14 -

 

 


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

 

Not applicable.

 

Executive Officers of the Registrant

 

The following table sets forth certain information regarding the executive officers of the Company as of May 1, 2009.

 

Name

Age

Position

 

Bret W. Wise

48

Chairman of the Board and Chief Executive Officer

Christopher T. Clark

47

President and Chief Operating Officer

 

William R. Jellison

51

Senior Vice President and Chief Financial Officer

 

James G. Mosch

51

Executive Vice President

 

Robert J. Size

50

Senior Vice President

 

Albert Sterkenburg

45

Senior Vice President

 

Brian M. Addison

54

Vice President, Secretary and General Counsel

 

 

Bret W. Wise was named Chairman of the Board and Chief Executive Officer of the Company effective January 1, 2009. In January 2007, Mr. Wise was named Chairman of the Board, Chief Executive Officer and President of the Company. Prior to that time, Mr. Wise was President and Chief Operating Officer since January 2006 and Executive Vice President since January 2005. During his tenure as Executive Vice President, Mr. Wise oversaw two of DENTSPLY’s operating groups including all business unit products that are sold through distributors in the U.S., Europe and Canada, and the laboratory business units in Europe. In addition he had direct responsibility for corporate research and business development activities. Prior to that time, he was Senior Vice President and Chief Financial Officer of the Company since November 2002. Prior to that time, Mr. Wise was Senior Vice President and Chief Financial Officer with Ferro Corporation of Cleveland, OH. Prior to joining Ferro Corporation in 1999, Mr. Wise held the position of Vice President and Chief Financial Officer at WCI Steel, Inc., of Warren, OH, from 1994 to 1999. Prior to joining WCI Steel, Inc., Mr. Wise was a partner with KPMG LLP. Mr. Wise is a Certified Public Accountant.

 

Christopher T. Clark was named President and Chief Operating Officer of the Company effective January 1, 2009. In January 2007, Mr. Clark was named Executive Vice President and Chief Operating Officer of the Company. Prior to that time, Mr. Clark was Senior Vice President since January 2003, with operating responsibilities over both manufacturing operations and selling organizations located in the U.S., Europe and Japan. Prior to that appointment, Mr. Clark served as Vice President and General Manager of DENTSPLY’s global imaging business since June 1999, with operations in the U.S., Germany and Italy, serving markets worldwide. Prior to that time, he served as Vice President and General Manager of the Prosthetics Division since July of 1996. Prior to that, Mr. Clark was Director of Marketing of the Prosthetics Division since September 1992 when he started with the Company.

 

William R. Jellison was named Senior Vice President and Chief Financial Officer of the Company effective January 2005. In this position, he is responsible for Accounting, Treasury, Tax and Internal Audit. Prior to that time he was Senior Vice President since November 2002, with operating responsibilities over both manufacturing operations and selling organizations located in the U.S., Europe and Asia. From the period April 1998 to November 2002, Mr. Jellison served as Senior Vice President and Chief Financial Officer of the Company. Prior to that time, Mr. Jellison held various financial management positions including Vice President of Finance, Treasurer and Corporate Controller for Donnelly Corporation of Holland, Michigan since 1980. Mr. Jellison is a Certified Management Accountant. James G. Mosch was named Executive Vice President effective January 2009, and continues his operating responsibilities over both manufacturing operations and selling organizations located in the U.S., Europe, Australia, Brazil, Latin America and Mexico. In January 2007, he assumed responsibility for business development. Through December 2004, he was also responsible for the Company’s selling location in Canada. Prior to this appointment, Mr. Mosch served as Vice President and General Manager of the DENTSPLY Professional operating unit since July 1994 when he started with the Company.

 

Robert J. Size was named Senior Vice President effective January 1, 2007, with operating responsibilities over both manufacturing operations and selling organizations located in the U.S. and Europe, as well as the DENTSPLY North America (DNA) sales organization and centralized distribution. Prior to this appointment, Mr. Size served as Vice President and General Manager of the Caulk division since June 2003 and was named Vice President in January 2006, with responsibility for the Caulk, DeTrey and Rinn operating units. Prior to that time, he was the CEO and President of Superior MicroPowders and held various cross-functional and international leadership positions with The Cookson Group.

 

- 15 -

 

 


Albert Sterkenburg was named Senior Vice President effective January 1, 2009, which adds the implant franchise to his current responsibilities. He continues his operating responsibilities over both manufacturing operations and selling organizations located in the U.S., Europe and Asia. Prior to this appointment, Dr. Sterkenburg served as the Vice President and General Manger of the VDW division since 2000, Vice President and General Manger of Degudent division since 2003, and was named Franchise Vice President of the Global Prosthetics group in 2006. Prior to that time, he had served in marketing and general management roles at Johnson & Johnson.

 

Brian M. Addison has been Vice President, Secretary and General Counsel of the Company since January 1, 1998. Prior to that, he was Assistant Secretary and Corporate Counsel since December 1994. Prior to that he was a Partner at the Harrisburg, Pennsylvania law firm of McNees, Wallace & Nurick, and prior to that he was Senior Counsel at Hershey Foods Corporation.

 

- 16 -

 

 


PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The information set forth under the caption “Supplemental Stock Information” is filed as part of this Annual Report on Form 10-K/A.

 

The Board of Directors has authorized the Company to repurchase shares under its stock repurchase program in an amount up to 17,000,000 shares of treasury stock. The table below contains certain information with respect to the repurchase of shares of the Company's common stock during the quarter ended December 31, 2008.

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

Shares That May

 

Total

 

Average

 

 

 

Be Purchased

 

Number

 

Price

 

Total Cost

 

Under The Share

 

of Shares

 

Paid Per

 

of Shares

 

Repurchase

Period

Purchased

 

Share

 

Purchased

 

Program

 

(in thousands, except per share amounts)

October 1-31, 2008

-

$

-

$

-

 

3,190.1

 

November 1-30, 2008

450.0

 

28.58

 

12,863.2

 

2,751.6

 

December 1-31, 2008

-

 

-

 

-

 

2,751.6

 

 

450.0

$

28.58

$

12,863.2

 

 

 

 

 

- 17 -

 

 


Performance Graph

 

          The following graph compares the Company’s cumulative total stockholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the NASDAQ Composite Index, the Standard & Poor’s Health Care Index and the Standard & Poor’s 500 Index.


 

 

12/03

12/04

12/05

12/06

12/07

12/08

DENTSPLY International Inc

100

124.96

119.93

134.01

202.97

128.00

NASDAQ Composite

100

110.08

112.88

126.51

138.13

80.47

S&P 500

100

110.88

116.33

134.70

142.10

89.53

S&P Health Care

100

101.68

108.24

116.40

124.72

96.27

 

 

- 18 -

 

 


 

 

 

 

Item 6. Selected Financial Data

 

The information set forth under the caption “Selected Financial Data” is filed as part of this Annual Report on Form 10-K/A.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is filed as part of this Annual Report on Form 10-K/A.

 

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

 

The information set forth under the caption “Quantitative and Qualitative Disclosure about Market Risk” is filed as part of this Annual Report on Form 10-K/A.

 

Item 8. Financial Statements and Supplementary Data

 

The information set forth under the captions “Management’s Report on Internal Control Over Financial Reporting,” “Report of Independent Registered Public Accounting Firm,” “Consolidated Statements of Income,” “Consolidated Balance Sheets,” “Consolidated Statements of Stockholders' Equity,” “Consolidated Statements of Cash Flows,” and “Notes to Consolidated Financial Statements” is filed as part of this Annual Report on Form 10-K/A.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

Not applicable.

 

Item 9A. Controls and Procedures

 

(a)

Conclusion Regarding the Effectiveness 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 defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report were effective.

 

(b) Management’s Report on Internal Control Over Financial Reporting

 

Management’s report on the Company’s internal control over financial reporting is included under Item 15(a)(1) of this Annual Report on Form 10-K/A.

 

(c) Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting that occurred during the year ended December 31, 2008 that have materially affected, or are likely to materially affect, its internal control over financial reporting.

 

Item 9B. Other Information

 

Not applicable.

 

- 19 -

 

 


 

 

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The information (i) set forth under the caption “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K/A and (ii) set forth under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2009 Proxy Statement is incorporated herein by reference.

 

Code of Ethics

 

The Company has adopted a Code of Business Conduct and Ethics that applies to the Chief Executive Officer and the Chief Financial Officer and substantially all of the Company's management level employees. This Code of Business Conduct and Ethics is provided as Exhibit 14 of the Company’s Annual Report on Form 10-K as filed on February 20, 2009.

 

Item 11. Executive Compensation  

 

The information set forth under the caption “Executive Compensation” in the 2009 Proxy Statement is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” in the 2009 Proxy Statement is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions and Director Independence

 

The information required under this item number is presented in the 2009 Proxy Statement, which is incorporated herein by reference.

 

Item 14. Principal Accounting Fees and Services

 

The information set forth under the caption “Relationship with Independent Registered Public Accounting Firm” in the 2009 Proxy Statement is incorporated herein by reference.

 

- 20 -

 

 


PART IV

Item 15. Exhibits and Financial Statement Schedule  

 

(a)

Documents filed as part of this Report

 

1

Financial Statements

 

The following consolidated financial statements of the Company are filed as part of this Annual Report on Form 10-K/A:

 

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Income - Years ended December 31, 2008, 2007 and 2006

Consolidated Balance Sheets - December 31, 2008 and 2007

Consolidated Statements of Stockholders' Equity and Comprehensive Income - Years ended December 31, 2008, 2007 and 2006

Consolidated Statements of Cash Flows - Years ended December 31, 2008, 2007 and 2006

Notes to Consolidated Financial Statements

 

2

Financial Statement Schedule

 

The following financial statement schedule is filed as part of this Annual Report on Form 10-K/A and is covered by the Report of Independent Registered Public Accounting Firm:

 

Schedule II -- Valuation and Qualifying Accounts.

 

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required to be included herein under the related instructions or are inapplicable and, therefore, have been omitted.

 

3

Exhibits

 

The Exhibits listed below are filed or incorporated by reference as part of the Company’s Annual Report on Form 10-K as filed on February 20, 2009.

 

Exhibit

 

Number

Description

3.1

 

Restated Certificate of Incorporation (1)

3.2

 

By-Laws, as amended

4.1

(a)

U.S. Commercial Paper Issuing and paying Agency Agreement dated as of August 12, 1999 between the Company and the Chase Manhattan Bank (2)

 

(b)

U.S. Commercial Paper Dealer Agreement dated as of March 28, 2002 between the Company and Salomon Smith Barney Inc. (3)

 

(c)

Japanese Yen Term Loan Agreement, due March 28, 2012 dated as of July 31, 2008

4.2

(a)

Floating Rate Senior Notes Agreement, due March 13, 2010 dated as of March 13, 2007 (4)

4.3

(a)

5-Year Competitive Advance, Revolving Credit and Guaranty Agreements dated as of May 9, 2005 among the Company, the Initial Lenders named therein, the banks named therein, Citibank N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. as Syndication Agent, Harris Trust and Savings Bank, Manufacturers and Traders Trust Company, and Wachovia Bank, N.A. as Co-Documentation Agents, and Citigroup Global Markets, Inc. and J.P. Morgan Securities Inc. as Joint Lead Arrangers and Joint Bookrunners. (5)

10.1

 

1998 Stock Option Plan (6)*

10.2

 

2002 Amended and Restated Equity Incentive Plan (4)*

10.3

 

Restricted Stock Unit Deferral Plan (8)*

10.4

(a)

Trust Agreement for the Company's Employee Stock Ownership Plan between the Company and T. Rowe Price Trust Company dated as of November 1, 2000 (7)*

 

(b)

Plan Recordkeeping Agreement for the Company's Employee Stock Ownership Plan between the Company and T. Rowe Price Trust Company dated as of November 1, 2000 (7)*

 

- 21 -


 

10.5

DENTSPLY Supplemental Saving Plan Agreement dated as of December 10, 2007 (4)*

10.6

 

Amended and Restated Employment Agreement entered February 19, 2008 between the Company and Bret W. Wise (4)*

10.7

 

Amended and Restated Employment Agreement entered February 19, 2008 between the Company and Christopher T. Clark (4)*

10.8

 

Amended and Restated Employment Agreement entered February 19, 2008 between the Company and William R. Jellison (4)*

10.9

 

Amended and Restated Employment Agreement entered February 19, 2008 between the Company and Brian M. Addison (4)*

10.10

 

Amended and Restated Employment Agreement entered February 19, 2008 between the Company and James G. Mosch (4)*

10.11

 

Amended and Restated Employment Agreement entered February 19, 2008 between the Company and Robert J. Size (4)*

10.12

 

Amended and Restated Employment Agreement entered January 1, 2009 between the Company’s subsidiary, DeguDent GMBH and Albert Sterkenburg*

10.13

 

DENTSPLY International Inc. Directors' Deferred Compensation Plan effective January 1, 2009, as amended*

10.14

 

Board Compensation Arrangement (4)*

10.15

 

Supplemental Executive Retirement Plan effective January 1, 2009, as amended*

10.16

 

Written Description of the Amended and Restated Incentive Compensation Plan*

10.17

 

AZ Trade Marks License Agreement, dated January 18, 2001 between AstraZeneca AB and Maillefer Instruments Holdings, S.A. (7)

10.18

(a)

Precious metal inventory Purchase and Sale Agreement dated November 30, 2001, as amended October 10, 2006 between Bank of Nova Scotia and the Company (8)

 

(b)

Precious metal inventory Purchase and Sale Agreement dated December 20, 2001 between JPMorgan Chase Bank and the Company (9)

 

(c)

Precious metal inventory Purchase and Sale Agreement dated December 20, 2001 between Mitsui & Co., Precious Metals Inc. and the Company (9)

(d)

Precious metal inventory Purchase and Sale Agreement dated December 15, 2005 between ABN AMRO NV, Australian Branch and the Company (8)

 

(e)

Precious metal inventory Purchase and Sale Agreement dated January 30, 2002 between Dresdner Bank AG, Frankfurt, and the Company (4)

14

 

DENTSPLY International Inc. Code of Business Conduct and Ethics

21.1

 

Subsidiaries of the Company

23.1

 

Consent of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP

31

 

Section 302 Certification Statements

32

 

Section 906 Certification Statement

 

*

Management contract or compensatory plan.

 

(1)

Incorporated by reference to exhibit included in the Company's Registration Statement on Form S-8 (No. 333-101548).

(2)

Incorporated by reference to exhibit included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, File No. 0-16211.

(3)

Incorporated by reference to exhibit included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, File No. 0-16211.

(4)

Incorporated by reference to exhibit included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007, File No. 0-16211.

(5)

Incorporated by reference to exhibit included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, File No. 0-16211.

(6)

Incorporated by reference to exhibit included in the Company's Registration Statement on Form S-8 (No. 333-56093).

(7)

Incorporated by reference to exhibit included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, File No. 0-16211.

(8)

Incorporated by reference to exhibit included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 0-16211.

(9)

Incorporated by reference to exhibit included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, File No. 0-16211.

 

- 22 -


 

 

SCHEDULE II

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VALUATION AND QUALIFYING ACCOUNTS

 

 

 

FOR THE THREE YEARS ENDED DECEMBER 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

 

 

 

 

 

Charged

 

 

 

 

 

 

 

Balance at

(Credited)

Charged to

 

Write-offs

 

 

Balance

 

Beginning

To Costs

Other

 

Net of

 

Translation

at End

Description

of Period

And Expenses

Accounts

 

Recoveries

 

Adjustment

of Period

 

(in thousands)

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Year Ended December 31,

 

 

 

 

 

 

2006

$ 14,791

$ 2,148

$ (416)

 

$ (1,516)

 

$ 1,176

$ 16,183

2007

16,183

2,854

(182)

 

(1,927)

 

1,650

18,578

2008

18,578

3,674

(348)

 

(1,705)

 

(1,350)

18,849

 

 

 

 

 

 

 

 

 

Inventory valuation reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Year Ended December 31,

 

 

 

 

 

 

2006

$ 25,107

$ 2,211

$ (341)

 

$ (2,180)

 

$ 1,508

$ 26,305

2007

26,305

3,134

(449)

 

(4,525)

 

1,725

26,190

2008

26,190

3,261

1,938

 

(1,981)

 

(1,019)

28,389

 

 

 

 

 

 

 

 

 

Deferred tax asset valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Year Ended December 31,

 

 

 

 

 

 

2006

$ 35,984

$ 12,006

$ -

 

$ (813)

 

$ 2,202

$ 49,379

2007

49,379

7,076

-

 

(11,124)

(a)

4,919

50,250

2008

50,250

603

-

 

(13,203)

(b)

(909)

36,741

 

 

(a)

The significant increase for write-offs during 2007 is the result of a restructuring project, where-in net operating losses subject to a full valuation allowance are not available for future use.

(b)

The write-offs during 2008 are the result of a restructuring project, tax audit closures and expired tax losses. 

 

 

 

 

 

 

 

 

- 23 -

 

 


DENTSPLY INTERNATIONAL INC AND SUBSIDIARIES

 

 

 

 

SELECTED FINANCIAL DATA

 

 

 

 

 

Year ended December 31,

 

2008

 

2007

 

2006

 

2005

 

2004

 

(in thousands, except per share amounts)

Statement of Income Data:

 

 

 

 

 

 

 

 

 

Net sales

$ 2,193,723

 

$ 2,009,833

 

$1,810,496

 

$ 1,715,135

 

$ 1,694,232

Net sales, excluding precious metal content

1,993,800

 

1,819,899

 

1,623,074

 

1,542,711

 

1,481,083

Gross profit

1,151,944

 

1,040,783

 

929,011

 

869,018

 

846,518

Restructuring, impairment and

 

 

 

 

 

 

 

 

 

other costs (income)

32,355

 

10,527

 

7,807

 

232,755

(a)

7,124

Operating income

380,421

 

354,891

 

314,794

 

7 2,922

 

295,130

Income before income taxes

355,472

 

358,135

 

314,837

 

71,038

 

274,155

Net income from continuing operations

$ 283,869

 

$ 259,654

 

$ 223,718

 

$ 45,413

 

$ 210,286

Net income from discontinued operations (b)

-

 

-

 

-

 

-

 

42,879

Total net income

$ 283,869

 

$ 259,654

 

$ 223,718

 

$ 45,413

 

$ 253,165

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

$ 1.90

 

$ 1.71

 

$ 1.44

 

$ 0.29

 

$ 1.31

Discontinued operations

-

 

-

 

-

 

-

 

0.27

Total earnings per common share - basic

$ 1.90

 

$ 1.71

 

$ 1.44

 

$ 0.29

 

$ 1.58

 

 

 

 

 

 

 

 

 

 

Earnings per common share - diluted:

 

 

 

 

 

 

 

 

 

Diluted

$ 1.87

 

$ 1.68

 

$ 1.41

 

$ 0.28

 

$ 1.28

Discontinued operations

-

 

-

 

-

 

-

 

0.26

Total earnings per common share - diluted

$ 1.87

 

$ 1.68

 

$ 1.41

 

$ 0.28

 

$ 1.54

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per

 

 

 

 

 

 

 

 

 

common share

$ 0.18500

 

$ 0.16500

 

$ 0.14500

 

$ 0.12500

 

$ 0.10875

Weighted Average Common Shares Outstanding: 

 

 

 

 

 

 

 

 

Basic

149,069

 

151,707

 

155,229

 

159,191

 

160,775

Diluted

151,679

 

154,721

 

158,271

 

162,017

 

164,028

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

Cash, cash equivalents

 

 

 

 

 

 

 

 

 

and short-term investments

$ 204,249

 

$ 316,323

 

$ 65,143

 

$ 434,525

 

$ 506,369

Property, plant and equipment, net

432,276

 

371,409

 

329,616

 

316,218

 

399,880

Goodwill and other intangibles, net

1,380,744

 

1,203,587

 

1,063,030

 

1,001,827

 

1,261,993

Total assets

2,830,400

 

2,675,569

 

2,181,350

 

2,410,373

 

2,798,145

Total debt and notes payable

449,474

 

483,307

 

370,156

 

682,316

 

852,819

Stockholders' equity

1,587,722

 

1,516,106

 

1,273,835

 

1,246,596

 

1,443,973

Return on average stockholders' equity

18.3%

 

18.6%

 

17.8%

 

3.4%

 

19.7%

Long-term debt to total capitalization

21.2%

 

24.1%

 

22.4%

 

35.3%

 

37.1%

Other Data:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

$ 56,929

 

$ 50,289

 

$ 47,434

 

$ 50,560

 

$ 49,296

Cash flows from operating activities

335,981

 

387,697

 

271,855

 

232,769

 

306,259

Capital expenditures

76,440

 

64,163

 

50,616

 

45,293

 

52,036

Interest expense (income), net

15,438

 

(2,645)

 

(1,683)

 

8,768

 

19,629

Inventory days

100

 

95

 

96

 

90

 

92

Receivable days

54

 

51

 

57

 

53

 

47

Operational tax rate (c)

25.9%

 

30.4%

 

30.6%

 

29.4%

 

30.0%

(a)

The Company recorded $230.8 million of impairment and restructuring charges related to the closing of the pharmaceutical manufacturing facility outside of Chicago.

(b)

The Company sold the assets and related liabilities of the Gendex business in 2004.

(c)

Operational tax rate is considered a non-GAAP measure, refer to reconciliation in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-K/A.

- 24 -


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The nature and geographic scope of the Company’s business subjects it to changing economic, competitive, regulatory and technological risks and uncertainties. In accordance with the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors, which, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. All forward-looking statements made by the Company are subject to risks and uncertainties and are not guarantees of future performance. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, performance and achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These statements are identified by the use of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate” or words of similar import.

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 and uncertainties discussed within Item 1A, Part I of this Annual Report on Form 10-K/A as filed on May 1, 2009. Investors are further cautioned that the risk factors in Item 1A, Part I of this Annual Report on Form 10-K/A may not be exhaustive and that many of these factors are beyond the Company’s ability to control or predict. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Company undertakes no duty and has no obligation to update forward-looking statements.

OVERVIEW

 

DENTSPLY International Inc. believes it is the world's largest designer, developer, manufacturer and marketer of professional dental products. The Company is headquartered in the United States ("U.S.") and operates in more than 120 other countries, principally through its foreign subsidiaries. The Company also has strategically located distribution centers to enable it to better serve its customers and increase its operating efficiency. While the U.S. and Europe are the Company's largest markets, the Company serves all of the major professional dental markets worldwide.

The principal benchmarks used by the Company in evaluating its business are: (1) internal growth in the U.S., Europe and all other regions; (2) operating margins of each reportable segment; (3) the development, introduction and contribution of innovative new products; (4) growth through acquisition; and (5) continued focus on controlling costs and enhancing efficiency. The Company defines “internal growth” as the increase or decrease in net sales from period to period, excluding (1) precious metal content; (2) the impact of changes in currency exchange rates; and (3) the net sales, for a period of twelve months following the transaction date, of businesses that have been acquired or divested.

Management believes that an average overall internal growth rate of 4-6% is a long-term sustainable rate for the Company. The internal growth rate may vary outside of this range based on weaker or stronger economic conditions. Management expects the Company to operate below this range in the near future due to the current adverse economic conditions; however, history shows that growth in the dental industry typically performs better than the overall economy. Management expects this trend to continue in light of the current economic environment, although to a lesser degree. The Company typically implements most of its price changes in the beginning of the fourth quarter or beginning of the year. These price changes, other marketing and promotional programs offered to customers from time to time, the management of inventory levels by distributors and the implementation of strategic initiatives, may impact sales levels in a given period.

During 2008, the Company's overall internal growth was approximately 3.8% compared to 6.4% in 2007. The decrease in internal growth rate in the U.S. (37.8% of sales) was (0.9%) in 2008 compared to 4.2% in 2007. The internal growth rate in Europe (41.2% of sales) was 7.0% in 2008 compared to 7.3% in 2007. The internal growth rate in all other regions (21.0% of sales) was 7.0% in 2008 compared to 9.4% in 2007. There can be no assurance that the Company’s assumptions concerning the growth rates in its markets or the dental market generally will continue in the future. If such rates are less than expected, the Company’s projected growth rates and results of operations may be adversely affected.

Due to the international nature of DENTSPLY’s business, movements in global foreign exchange rates may impact the statement of income. With over 60% of the Company’s sales located in regions outside the U.S., the Company’s sales are significantly impacted by the strengthening or weakening of the U.S. dollar.

Product innovation is a key component of the Company's overall growth strategy. New advances in technology are anticipated to have a significant influence on future products in dentistry. As a result, the Company continues to pursue several research and development initiatives to support this technological development, including partnerships and collaborations with various research institutions and dental schools. In addition, the Company licenses and purchases technologies developed by third parties. Although the Company believes these activities will lead to new innovative dental products, they involve new technologies and there can be no assurance that commercialized products will be developed.

- 25 -


Although the professional dental market in which the Company operates has experienced consolidation, it is still a fragmented industry. The Company continues to focus on opportunities to expand the Company’s product offerings through acquisition. Management believes that there will continue to be adequate opportunities to participate as a consolidator in the industry for the foreseeable future (See also Acquisition Activity in Part I, Item 1 of this Annual Report on Form 10-K/A). As further discussed in Note 3, Business Acquisitions, to the consolidated financial statements, during 2008, the Company purchased several businesses.

 

The Company has always maintained its focus on minimizing costs and achieving operational efficiencies. In response to the recent credit crisis and the recessionary economic conditions, management is concentrating on cost containment that focuses the business on creating and maintaining operational and financial flexibility through control of both fixed and variable costs. Management expects to continue to consolidate operations or functions and reduce the cost of those operations and functions while improving service levels. In addition, the Company remains focused on enhancing efficiency through expanded use of technology and process improvement initiatives. The Company believes that the benefits from these opportunities will improve the cost structure and offset areas of rising costs such as energy, employee benefits, and regulatory oversight and compliance.

 

FACTORS IMPACTING COMPARABILITY BETWEEN YEARS

 

Adoption of SFAS 157, Fair Value Measurement

 

In 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157, (“SFAS 157”) Fair Value Measurement, which requires the Company to define fair value, establish a framework for measuring fair value in accordance with U.S. generally accepted accounting principles (“GAAP”), and expand disclosures about fair value measurements. As part of the provisions, the Company is required to determine the impact of credit risk on its financial instruments recorded at fair value. As a result, the Company recognized pretax income of $1.8 million during 2008.

 

Revisions in Classification

 

Certain revisions in classification have been made to prior years' data in order to conform to current year presentation.

 

RESULTS OF CONTINUING OPERATIONS, 2008 COMPARED TO 2007

 

Net Sales

 

The discussion below summarizes the Company’s total sales growth, excluding precious metal content, into the following components: (1) internal growth; (2) net acquisition growth; and (3) the impact of foreign currency translation. These disclosures of net sales growth provide the reader with sales results on a comparable basis between periods.

 

Management believes that the presentation of net sales, excluding precious metal content, provides useful information to investors because a significant portion of DENTSPLY’s net sales is comprised of sales of precious metals generated through sales of the Company’s precious metal dental alloy products, which are used by third parties to construct crown and bridge materials. 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 metal content to show the Company’s performance independent of precious metal price volatility and to enhance comparability of performance between periods. The Company uses its cost of precious metal purchased as a proxy for the precious metal content of sales, since the precious metal content of sales is not separately tracked and invoiced to customers. The Company believes that it is reasonable to use the cost of precious metal content purchased in this manner since precious metal dental alloy sale prices are typically adjusted when the prices of underlying precious metals change.

 

The presentation of net sales, excluding precious metal content, is considered a measure not calculated in accordance with GAAP, and is therefore considered a non-GAAP measure. The Company provides the following reconciliation of net sales to net sales, excluding precious metal content. The Company’s definitions and calculations of net sales, excluding precious metal content, and other operating measures derived using net sales, excluding precious metal content, may not necessarily be the same as those used by other companies.

 

 

 

Year Ended December 31,

 

 

 

 

 

 

2008

 

2007

 

$ Change

 

% Change

 

 

(in millions)

 

Net Sales

 

$ 2,193.7

 

$ 2,009.8

 

$ 183.9

 

9.2%

Less: precious metal content of net sales

 

199.9

 

189.9

 

10.0

 

5.3%

Net sales, excluding precious metal content

 

$ 1,993.8

 

$ 1,819.9

 

$ 173.9

 

9.6%

 

- 26 -

 


 

The net sales growth, excluding precious metal content, of 9.6% was comprised of 3.8% of internal growth, 3.7% of foreign currency translation and 2.1% related to acquisitions. The 3.8% internal growth was comprised of (0.9%) in the U.S., 7.0% in Europe and 7.0% for all other regions combined.

 

Internal Sales Growth

 

United States

 

The decrease in internal sales growth of (0.9%), excluding precious metal content, in the U.S. was negatively impacted by the supply issues with injectible anesthetics and softness in dental consumables businesses and in the dental specialty businesses in the fourth quarter, as the economy in the U.S. contracted.

Europe

 

In Europe, the internal sales growth of 7.0%, excluding precious metal content, was driven by strong performance in the dental specialty businesses and growth in the dental consumables businesses partially offset by softness in the dental laboratory businesses due to lower equipment and alloy product sales.

 

All Other Regions

 

During 2008, the internal growth of 7.0%, excluding precious metal content, was largely the result of strong growth in the dental specialty category. Asia, Australia, the Middle East and Latin America experienced strong growth.

 

Gross Profit

 

 

Year Ended December 31,

 

 

 

 

 

2008

 

2007

 

$ Change

 

% Change

 

(in millions)

 

 

Gross profit

$ 1,151.9

 

$ 1,040.8

 

$ 111.1

 

10.7%

Gross profit as a percentage of net

 

 

 

 

 

 

 

sales, including precious metal content

52.5%

 

51.8%

 

 

 

 

Gross profit as a percentage of net

 

 

 

 

 

 

 

sales, excluding precious metal content

57.8%

 

57.2%

 

 

 

 

 

The 2008 gross profit as a percentage of net sales, excluding precious metal content, was favorably impacted by product pricing, product mix and operational improvements.

 

Expenses

 

Selling, General and Administrative (“SG&A”) Expenses  

 

 

Year Ended December 31,

 

 

 

 

 

2008

 

2007

 

$ Change

 

% Change

 

(in millions)

 

 

SG&A expenses

$ 739.2

 

$ 675.4

 

$ 63.8

 

9.4%

SG&A expenses as a percentage of net

 

 

 

 

 

 

 

sales, including precious metal content

33.7%

 

33.6%

 

 

 

 

SG&A expenses as a percentage of net

 

 

 

 

 

 

 

sales, excluding precious metal content

37.1%

 

37.1%

 

 

 

 

 

The 9.4% increase in SG&A expenses reflects additional SG&A expenses of $15.7 million from acquired companies and increases from currency translation of approximately $24.6 million. The remaining increase in SG&A expenses is primarily a result of increased expenditures to support growth in the dental specialty businesses and higher growth regions as well as continued investment in research and development.

 

- 27 -


Restructuring, Impairment and Other Costs

 

 

Year Ended December 31,

 

 

 

 

 

2008

 

2007

 

$ Change

 

% Change

 

(in millions)

 

 

Restructuring, impairment and other costs

$ 32.4

 

$ 10.5

 

$ 21.9

 

NM

 

During 2008, the Company recorded net restructuring, impairment and other costs of $32.4 million. The Company recorded costs of $24.2 million related to legal settlements and impairments of long-lived assets. Additionally, the Company initiated several restructuring plans primarily related to the closure and consolidation of certain production and selling facilities in the U.S., Europe and Asia in order to better leverage the Company’s resources by reducing costs and obtaining operational efficiencies. These restructuring plans included charges of $5.9 million. Additionally, the Company expensed $2.3 million for the fair value of in-process research and development associated with acquired businesses (See Note 14, Restructuring, Impairment and Other Costs, to the consolidated financial statements).

 

During 2007, the Company recorded net restructuring, impairment and other costs of $10.5 million. Several restructuring plans were initiated during 2007, primarily related to the closure and consolidation of certain production and selling facilities in the U.S., Europe, Asia and South America in order to better leverage the Company’s resources by reducing costs and obtaining operational efficiencies. These restructuring plans included charges of $5.4 million. Additionally, the Company also recorded a total of $5.0 million in expenses related to several legal claims and $0.1 million of impairments of long-lived assets.

 

Other Expense and Income, Net

 

 

 

Year Ended December 31,

 

 

 

2008

 

2007

 

$ Change

 

 

(in millions)

Net interest expense (income)

 

$ 15.4

 

$ (2.6)

 

$ 18.0

Other expense (income), net

 

9.5

 

(0.6)

 

10.1

Net interest and other expense (income)

$ 24.9

 

$ (3.2)

 

$ 28.1

 

Net Interest Expense (Income)

 

The change from net interest income in 2007 to net interest expense in 2008 was mainly the result of the sharp divergence of lower U.S. dollar interest rates versus increased Euro and Swiss franc interest rates, combined with weaker U.S. dollar average exchange rates against both currencies. This resulted in net interest expense in 2008 versus net interest income in 2007 on the Euro and Swiss franc net investment hedges executed in the form of cross currency swaps. The impact of the Company’s net investment hedges typically move in the opposite direction of currency movements, reducing some of the volatility caused by movement in exchange rates on the Company’s income and equity. Partially offsetting the net investment hedge impact was higher average investment balances in Euros and lower average interest rates on U.S. dollar debt.

 

Other Expense (Income), Net

 

Other Expense (Income), net, in the 2008 period included $8.9 million of currency transaction losses and $0.6 million of other non-operating losses. The 2007 period included $0.5 million of currency transaction gains and $0.1 million of other non-operating gains. Currency exchange rate volatility was extremely high, especially during the fourth quarter of 2008, and global currencies weakened versus the U.S. dollar. The Company incurred transaction losses, mostly in the fourth quarter of 2008, on settlement of intercompany and third party transactions.

 

- 28 -

 

 


Income Taxes and Net Income

 

Year Ended December 31,

 

 

 

2008

 

2007

 

$ Change

 

(dollars in millions, except per share data)

Income tax rates

20.1%

 

27.5%

 

 

Net income

$ 283.9

 

$ 259.7

 

$ 24.2

Fully diluted earnings

 

 

 

 

 

per common share

$ 1.87

 

$ 1.68

 

 

 

Income Taxes

 

Management believes that the presentation of an operational tax rate, excluding certain one-time charges, provides useful information to investors to allow a better comparison between reporting periods. The presentation of an operational tax rate is considered a measure not calculated in accordance with GAAP, and is therefore considered a non-GAAP measure. The Company provides the following reconciliation of its effective tax rate, a GAAP measure, to the Company’s operational tax rate, a non-GAAP measure. The Company’s definitions and calculations of its operating tax rate may not necessarily be the same as those used by other companies.

 

 

 

 

 

Percentage

 

Pre-tax

 

Income

 

of Pre-tax

Twelve Months Ended December 31, 2008

Income

 

Taxes

 

Income

 

(in thousands)

 

 

As reported – GAAP operating results

$ 355,472

 

$ (71,603)

 

20.1%

Provisions of SFAS157, net of tax

(1,839)

 

710

 

 

Restructuring and other costs

30,069

 

(11,294)

 

 

In-process research & development

1,623

 

(629)

 

 

Income tax related adjustments

 

 

(17,055)

 

 

As adjusted – non-GAAP operating results

$ 385,325

 

$ (99,871)

 

25.9%

 

 

 

 

 

 

Percentage

 

Pre-tax

 

Income

 

of Pre-tax

Twelve Months Ended December 31, 2007

Income

 

Taxes

 

Income

 

(in thousands)

 

 

As reported – GAAP operating results

$ 358,135

 

$ (98,481)

 

27.5%

Restructuring and other costs

10,527

 

(3,852)

 

 

Income tax related adjustments

 

 

(9,893)

 

 

As adjusted – non-GAAP operating results

$ 368,662

 

$ (112,226)

 

30.4%

 

The Company’s effective tax rates for 2008 and 2007 were 20.1% and 27.5%, respectively. The Company’s operating tax rates for 2008 and 2007 were 25.9% and 30.4%, respectively. The Company benefited from various tax adjustments of $17.1 million and $9.9 million in 2008 and 2007, respectively. The 2008 and 2007 tax related adjustments primarily resulted from payments and settlements and expiration of statutes.

Net Income

Fully diluted earnings per share from continuing operations during 2008 were $1.87 compared to $1.68 during the same period in 2007. Net income in 2008 includes an after tax impact from restructuring costs and charges related to in-process research and development of $19.8 million, or $0.13 per diluted share, a net tax benefit of $17.1 million, or $0.11 per diluted share due to tax related adjustments, and an after tax impact from provisions of a SFAS 157 adjustment of $1.1 million, or $0.01 per diluted share. Net income for 2007 includes an after tax impact from restructuring costs of $6.7 million, or $0.04 per diluted share and a net tax benefit of $9.9 million, or $0.06 per diluted share due to tax related adjustments.

 

Operating Segment Results

 

In January 2007, the Company reorganized its operating group structure expanding into four operating groups from the three groups under the prior management structure. These operating groups are considered the Company’s reportable segments under  SFAS131 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. Each of these operating groups covers a wide range of product categories and geographic regions.

- 29 -


The product categories and geographic regions often overlap across the groups. Further information regarding the details of each group is presented in Note 4, Segment and Geographic Information, to the consolidated financial statements. The management of each group is evaluated for performance and incentive compensation purposes on net third party sales, excluding precious metal content, and segment operating income.

 

Net Sales, excluding precious metal content

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

2008

 

2007

 

$ Change

 

% Change

 

 

(in millions) 

 

 

United States, Germany, and Certain Other

 

 

 

 

 

 

 

 

European Regions Consumable Businesses

 

$ 466.4

 

$ 433.9

 

$ 32.5

 

7.5%

 

 

 

 

 

 

 

 

 

France, United Kingdom, Italy, CIS, Middle

 

 

 

 

 

 

 

 

East, Africa, Pacific Rim Businesses

 

$ 403.6

 

$ 352.0

 

$ 51.6

 

14.7%

 

 

 

 

 

 

 

 

 

Canada/Latin America/Endodontics/

 

 

 

 

 

 

 

 

Orthodontics

 

$ 628.9

 

$ 583.9

 

$ 45.0

 

7.7%

 

 

 

 

 

 

 

 

 

Global Dental Laboratory Business/

 

 

 

 

 

 

 

 

Implants/Non-Dental

 

$ 498.1

 

$ 453.7

 

$ 44.4

 

9.8%

 

Segment Operating Income

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

2008

 

2007

 

$ Change

 

% Change

 

 

(in millions)

 

 

United States, Germany, and Certain Other

 

 

 

 

 

 

 

 

European Regions Consumable Businesses

 

$ 162.9

 

$ 138.9

 

$ 24.0

 

17.3%

 

 

 

 

 

 

 

 

 

France, United Kingdom, Italy, CIS, Middle

 

 

 

 

 

 

 

 

East, Africa, Pacific Rim Businesses

 

$ 9.3

 

$ 7.2

 

$ 2.1

 

29.2%

 

 

 

 

 

 

 

 

 

Canada/Latin America/Endodontics/

 

 

 

 

 

 

 

 

Orthodontics

 

$ 200.1

 

$ 180.9

 

$ 19.2

 

10.6%

Global Dental Laboratory Business/

 

 

 

 

 

 

 

 

Implants/Non-Dental

 

$ 128.4

 

$ 115.3

 

$ 13.1

 

11.4%

 

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

 

Net sales, excluding precious metal content, increased 7.5% during the year ended December 31, 2008 compared to 2007. This increase was driven by acquisition related growth and positive currency translation. Supply issues with injectible anesthetics as well as softness in the U.S. dental consumables businesses in the fourth quarter due to a weakening economy hindered the growth within the segment.

 

Operating income increased $24.0 million during the year ended December 31, 2008 compared to 2007. The increase was due to improved margins due to favorable product mix across most of the segment and acquisitions.

 

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

 

Net sales, excluding precious metal content, increased 14.7%, including the favorable impact of currency translation, during the year ended December 31, 2008 compared to 2007. Strong growth occurred across many regions within the segment.

 

Operating income increased $2.1 million during the year ended December 31, 2008 compared to 2007. The increase in income was related to sales growth and leveraging of expenses.

- 30 -


Canada/Latin America/Endodontics/Orthodontics

 

Net sales, excluding precious metal content, increased 7.7%, including acquisition growth and favorable currency translation, during the year ended December 31, 2008 compared to 2007. Strong growth occurred in the Orthodontic, Endodontic and Latin American businesses.

 

Operating income increased $19.2 million during the year ended December 31, 2008 compared to 2007. The increase in operating income was driven primarily by sales growth and leveraging of expenses.

 

Global Dental Laboratory Business/Implants/Non-Dental

 

Net sales, excluding precious metal content, increased 9.8%, including favorable impact of currency translation, during the year ended December 31, 2008 compared to 2007. Strong growth occurred in the Implants business and from acquisition related activity.

 

Operating income increased $13.1 million during the year ended December 31, 2008 compared to 2007. The increase in operating income was driven primarily by sales growth in the Implants business and leveraging of expenses in the global dental laboratory businesses.

 

RESULTS OF CONTINUING OPERATIONS, 2007 COMPARED TO 2006

 

Net Sales

 

The discussion below summarizes the Company’s sales growth, excluding precious metal content, from internal growth and net acquisition growth and highlights the impact of foreign currency translation. These disclosures of net sales growth provide the reader with sales results on a comparable basis between periods.

 

 

 

Year Ended December 31,

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

 

(in millions)

 

Net sales

 

$ 2,009.8

 

$ 1,810.5

 

$ 199.3

 

11.0%

Less: precious metal content of net sales

 

189.9

 

187.4

 

2.5

 

1.3%

Net sales, excluding precious metal content

 

$ 1,819.9

 

$ 1,623.1

 

$ 196.8

 

12.1%

 

The net sales growth, excluding precious metal content, of 12.1% was comprised of 6.4% of internal growth, 4.1% of foreign currency translation and 1.6% related to acquisitions. The 6.4% internal growth was comprised of 4.2% in the U.S., 7.3% in Europe and 9.4% for all other regions combined.

 

Internal Sales Growth

 

United States

 

The internal sales growth of 4.2%, excluding precious metal content, in the U.S. was a result of continued growth in the dental specialty category, and improved growth in the dental laboratory and dental consumable product categories.

 

Europe

 

In Europe, the internal sales growth of 7.3%, excluding precious metal content, was driven by the continued strong sales growth in the dental specialty category and partially offset by lower internal growth in the dental consumables and dental laboratory categories. Additionally, the Company believes that a significant contraction in the alloy products market occurred, in part, due to the dramatic increase in the price of alloy metals and to the shift toward all ceramic products in the past few years.

 

All Other Regions

 

The internal growth of 9.4% in all other regions was largely the result of strong growth in the dental specialty category. In addition, during 2007, the Pacific Rim, Canada, Middle East and Australia regions experienced strong internal growth.

 

- 31 -

 

 


Gross Profit

 

 

Year Ended December 31,

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

(in millions)

 

 

Gross profit

$ 1,040.8

 

$ 929.0

 

$ 111.8

 

12.0%

Gross profit as a percentage of net

 

 

 

 

 

 

 

sales, including precious metal content

51.8%

 

51.3%

 

 

 

 

Gross profit as a percentage of net

 

 

 

 

 

 

 

sales, excluding precious metal content

57.2%

 

57.2%

 

 

 

 

 

The 2007 gross profit as a percentage of net sales, excluding precious metal content, was unfavorably impacted by recent business acquisitions and unfavorable purchase price variances related to the weakening U.S. dollar, offset by cost improvements through the Company’s lean manufacturing initiatives.

 

Expenses

 

Selling, General and Administrative Expenses

 

 

Year Ended December 31,

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

(in millions)

 

 

SG&A expenses

$ 675.4

 

$ 606.4

 

$ 69.0

 

11.4%

SG&A expenses as a percentage of net

 

 

 

 

 

 

 

sales, including precious metal content

33.6%

 

33.5%

 

 

 

 

SG&A expenses as a percentage of net

 

 

 

 

 

 

 

sales, excluding precious metal content

37.1%

 

37.4%

 

 

 

 

 

The 11.4% increase in SG&A expenses reflects additional SG&A expenses of $9.4 million from acquired companies and increases from unfavorable currency translation impacts of approximately $25.7 million. The remaining increase in SG&A expenses is primarily a result of increased sales and marketing expenditures to support growth in the dental specialty businesses and higher growth regions, partially offset by lower stock compensation expense as a result of accelerated vesting in 2006. SG&A expenses as a percentage of net sales, excluding precious metal content, decreased from 37.4% in 2006 to 37.1% in 2007. The 2007 expense ratio was favorably impacted by lower stock based compensation and improved leverage on the investments in strategic initiatives.

 

Restructuring, Impairment and Other Costs

 

 

Year Ended December 31,

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

(in millions)

 

 

Restructuring, impairment and other costs

$ 10.5

 

$ 7.8

 

$ 2.7

 

34.6%

 

During 2007, the Company recorded net restructuring, impairment and other costs of $10.5 million. The Company initiated several restructuring plans primarily related to the closure and consolidation of certain production and selling facilities in the U.S., Europe, Asia and South America in order to better leverage the Company’s resources by reducing costs and obtaining operational efficiencies. These restructuring plans included charges of $5.4 million. Additionally, the Company also recorded a total of $5.0 million in expenses related to several legal claims and $0.1 million of impairments of long-lived assets. (See also Note 14, Restructuring, Impairment and Other Costs, to the consolidated financial statements).

 

During 2006, the Company recorded net restructuring, impairment and other costs of $7.8 million. The net costs of $7.8 million were primarily for additional restructuring costs incurred related to the decision to shut down the pharmaceutical manufacturing facility in Chicago, Illinois and costs related to the consolidation of certain U.S. and European selling and production facilities. These restructuring costs were partially offset by the gain of $2.9 million on the sale of the assets previously associated with the pharmaceutical manufacturing facility, which the Company had announced in early 2006 that it would be closing. Additionally, these costs were further offset by the gain of $1.0 million on the sale of assets associated with a German manufacturing facility, which was closed down in 1998 as part of a restructuring plan.

 

- 32 -


Other Expense and Income, Net

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

$ Change

 

 

(in millions)

Net interest (income) expense

 

$ (2.6)

 

$ (1.6)

 

$ (1.0)

Other expense (income), net

 

(0.6)

 

1.6

 

(2.2)

Net interest & other (income) expense

$ (3.2)

 

$       -

 

$ (3.2)

 

Net Interest (Income) Expense

 

The change in net interest income in 2007 compared to 2006 was mainly the result of lower average debt and investment levels following the Euro 350.0 million Eurobond maturity in December, 2006, offset somewhat by higher average interest rates. In addition, higher average interest rates on Euro and Swiss franc basis swaps combined with weaker U.S. dollar average exchange rates against both currencies resulted in lower net interest received on the Company’s net investment hedges (See also Note 5, Other (Expense) Income, to the consolidated financial statements).

 

Other Expense and Income, Net

 

Other (Income) Expense in the 2007 period included $0.5 million of currency transaction gains and $0.1 million of other non-operating gains. The 2006 period included $0.1 million of currency transaction losses and $1.5 million of other non-operating losses.

 

Income Taxes and Net Income

 

Year Ended December 31,

 

 

 

2007

 

2006

 

$ Change

 

(in millions, except per share data)

Income tax rates

27.5%

 

28.9%

 

 

Net income

$ 259.7

 

$ 223.7

 

$ 36.0

Fully diluted earnings

 

 

 

 

 

per common share

$ 1.68

 

$ 1.41

 

 

 

Income Taxes

 

The Company provides the following reconciliation of its effective tax rate, a GAAP measure, to the Company’s operational tax rate, a non-GAAP measure.

 

 

 

 

 

 

Percentage

 

Pre-tax

 

Income

 

of Pre-tax

Twelve Months Ended December 31, 2007

Income

 

Taxes

 

Income

 

(in thousands)

 

 

As reported – GAAP operating results

$ 358,135

 

$   (98,481)

 

27.5%

Restructuring and other costs

10,527

 

(3,852)

 

 

Income tax related adjustments

 

 

(9,893)

 

 

As adjusted – non-GAAP operating results

$ 368,662

 

$ (112,226)

 

30.4%

 

 

 

 

 

 

Percentage

 

Pre-tax

 

Income

 

of Pre-tax

Twelve Months Ended December 31, 2006

Income

 

Taxes

 

Income

 

(in thousands)

 

 

As reported – GAAP operating results

$ 314,835

 

$ (91,119)

 

28.9%

Restructuring and other costs

7,807

 

(2,790)

 

 

Income tax related adjustments

 

 

(4,765)

 

 

As adjusted – non-GAAP operating results

$ 322,642

 

$ (98,674)

 

30.6%

 

- 33 -


The Company’s effective tax rates for 2007 and 2006 were 27.5% and 28.9%, respectively. The Company’s operating tax rates for 2007 and 2006 were 30.4% and 30.6%, respectively. The Company benefited from various tax adjustments of $9.9 million and $4.8 million in 2007 and 2006, respectively (see also Note 12, Income Taxes, to the consolidated financial statements).

 

Net Income

 

Fully diluted earnings per share from continuing operations during 2007 were $1.68 compared to $1.41 during the same period in 2006. Net income for the 2007 period included the after tax impact from restructuring costs of $6.7 million, or $0.04 per diluted share and a net tax benefit of $9.9 million, or $0.06 per diluted share due to tax related adjustments. The net income for the 2006 period included the after tax impact from restructuring costs of $5.0 million, or $0.03 per diluted share and a net tax benefit of $4.8 million, or $0.03 per diluted share due to tax related adjustments.

Operating Segment Results

In January 2007, the Company reorganized its operating group structure into four operating groups from the three groups under the prior management structure. 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. Each of these operating groups covers a wide range of product categories and geographic regions. The product categories and geographic regions often overlap across the groups. Further information regarding the details of each group is presented in Note 4, Segment and Geographic Information, to the consolidated financial statements. The management of each group is evaluated for performance and incentive compensation purposes on net third party sales, excluding precious metal content, and segment operating income.

 

Net Sales, excluding precious metal content

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

 

(in millions)

 

 

United States, Germany, and Certain Other

 

 

 

 

 

 

 

 

European Regions Consumable Businesses

 

$ 433.9

 

$ 395.0

 

$ 38.9

 

9.8%

 

 

 

 

 

 

 

 

 

France, United Kingdom, Italy, CIS, Middle