UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2009

 

OR

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to _______________

 

Commission File Number 0-16211

 

DENTSPLY International Inc.

_____________________________________________________________________

(Exact name of registrant as specified in its charter)

 

Delaware                                                                                                                                                39-1434669

_____________________________________________________________________________________

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

incorporation or organization)                                                                                                           Identification No.)

 

221 West Philadelphia Street, York, PA                                                                                           17405-0872

_________________________________________________________________________________

(Address of principal executive offices)                                                                                           (Zip Code)

(717) 845-7511

(Registrant’s telephone number, including area code)

 

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

 

Yes

X

 

No

 

 

 

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

 

Yes

X

 

No

 

 

 

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

 

Large accelerated filer

X

 

Accelerated filer

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

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

 

Yes

 

 

No

X

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At October 28, 2009, DENTSPLY International Inc. (the “Company”) had 148,503,212 shares of Common Stock outstanding, with a par value of $.01 per share.

Page 1 of 41


 

DENTSPLY International Inc.

 

TABLE OF CONTENTS

 

 

 

Page No.

 

PART I - FINANCIAL INFORMATION

 

Item 1 - Financial Statements (unaudited)

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Consolidated Statement of Changes in Stockholders’ Equity

6

Notes to Unaudited Interim Condensed Consolidated

    Financial Statements

7

Item 2 - Management’s Discussion and Analysis of

    Financial Condition and Results of Operations

27

Item 3 - Quantitative and Qualitative Disclosures

    About Market Risk

38

Item 4 -

Controls and Procedures

38

 

 

PART II - OTHER INFORMATION

 

Item 1 -

Legal Proceedings

39

 

Item 1A -

Risk Factors

39

Item 2 - Unregistered Sales of Securities and Use of Proceeds                             40
Item 4 - Submission of Matters to a Vote of Security Holders  40

 

Item 6 -

Exhibits

40

 

Signatures

41

 

 

- 2 -

 


PART I – FINANCIAL INFORMATION

 

Item 1 – Financial Statements

 

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2009

 

 

2008

 

 

2009

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

531,032

 

$

529,953

 

$

1,591,197

 

$

1,685,582

Cost of products sold

 

258,051

 

 

249,770

 

 

764,276

 

 

804,670

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

272,981

 

 

280,183

 

 

826,921

 

 

880,912

Selling, general and administrative expenses

178,841

 

 

180,729

 

 

543,207

 

 

565,599

Restructuring, impairments and

other costs (Note 9)

 

1,210

 

 

 

18,539

 

 

 

5,905

 

 

 

20,202

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

92,930

 

 

80,915

 

 

277,809

 

 

295,111

 

 

 

 

 

 

 

 

 

 

 

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

5,456

 

 

9,284

 

 

16,877

 

 

25,437

Interest income

 

(858)

 

 

(4,669)

 

 

(4,326)

 

 

(14,564)

Other expense, net

 

480

 

 

1,030

 

 

1,326

 

 

4,100

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

87,852

 

 

75,270

 

 

263,932

 

 

280,138

Provision for income taxes

 

19,999

 

 

9,204

 

 

65,570

 

 

67,219

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

67,853

 

 

66,066

 

 

198,362

 

 

212,919

Less: Net gain (loss) attributable

 

 

 

 

 

 

 

 

 

 to the noncontrolling interests

 

370

 

 

19

 

 

(1,062)

 

 

45

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to DENTSPLY International

 

$

 

67,483

 

 

$

 

66,047

 

 

$

 

199,424

 

 

$

 

212,874

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share (Note 4):

 

 

 

 

 

 

 

 

 

 

-Basic

$

0.45

 

$

0.44

 

$

1.34

 

$

1.43

-Diluted

$

0.45

 

$

0.44

 

$

1.33

 

$

1.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

$

0.050

 

$

0.045

 

$

0.150

 

$

0.135

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (Note 4):

 

 

 

 

 

 

-Basic

 

148,547

 

 

148,775

 

 

148,546

 

 

149,186

-Diluted

 

150,638

 

 

151,697

 

 

150,077

 

 

152,137

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

 

- 3 -


 

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES

 

 

 

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

Assets

 

 

2009

 

 

2008

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

333,368

 

$

203,991

 

Short-term investments

 

 

37

 

 

258

 

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

 

 

356,976

 

 

319,260

 

Inventories, net (Note 7)

 

 

311,666

 

 

306,125

 

Prepaid expenses and other current assets

 

 

125,056

 

 

120,228

 

Total Current Assets

 

 

1,127,103

 

 

949,862

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

445,365

 

 

432,276

 

Identifiable intangible assets, net

 

 

119,344

 

 

103,718

 

Goodwill

 

 

1,308,824

 

 

1,277,026

 

Other noncurrent assets, net

 

 

66,473

 

 

67,518

 

Total Assets

 

$

3,067,109

 

$

2,830,400

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

98,125

 

$

104,329

 

Accrued liabilities

 

 

230,265

 

 

193,660

 

Income taxes payable

 

 

34,896

 

 

36,178

 

Notes payable and current portion

 

 

 

 

 

 

 

of long-term debt (Note 13)

 

 

240,366

 

 

25,795

 

Total Current Liabilities

 

 

603,652

 

 

359,962

 

 

 

 

 

 

 

 

 

Long-term debt (Note 13)

 

 

154,842

 

 

423,679

 

Deferred income taxes

 

 

77,838

 

 

69,049

 

Other noncurrent liabilities

 

 

328,326

 

 

318,297

 

Total Liabilities

 

 

1,164,658

 

 

1,170,987

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

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

shares issued

-

 

 

-

 

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

authorized; 162.8 million shares issued at

September 30, 2009 and December 31, 2008

 

 

1,628

 

 

1,628

 

Capital in excess of par value

 

 

195,781

 

 

187,154

 

Retained earnings

 

 

2,016,007

 

 

1,838,958

 

Accumulated other comprehensive income (Note 3)

 

 

95,139

 

 

39,612

 

Treasury stock, at cost, 14.3 million shares at September 30, 2009

and 14.2 million shares at December 31, 2008

(481,300)

 

 

(479,630)

 

Total DENTSPLY International Stockholders' Equity

 

 

1,827,255

 

 

1,587,722

 

Noncontrolling interests

 

 

75,196

 

 

71,691

 

Total Stockholders' Equity

 

 

1,902,451

 

 

1,659,413

Total Liabilities and Stockholders' Equity

 

$

3,067,109

 

$

2,830,400

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

- 4 -


DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

(In thousands)

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2009

2008

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

198,362

 

$

212,919

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

40,118

 

 

36,697

Amortization

 

 

9,227

 

 

6,703

Deferred income taxes

 

 

9,655

 

 

25,245

Share-based compensation expense

 

 

14,778

 

 

12,748

Restructuring, impairments and other costs

 

 

5,905

 

 

20,202

Stock option income tax benefit

 

 

(2,921)

 

 

(3,575)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Accounts and notes receivable-trade, net

 

 

(23,166)

 

 

(45,344)

Inventories, net

 

 

10,670

 

 

(25,918)

Prepaid expenses and other current assets

 

 

248

 

 

(2,176)

Accounts payable

 

 

(9,699)

 

 

6,838

Accrued liabilities

 

 

(4,325)

 

 

9,026

Income tax payable

 

 

(546)

 

 

(5,636)

Other, net

 

 

(2,942)

 

 

(10,886)

Net cash provided by operating activities

 

 

245,364

 

 

236,843

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(43,282)

 

 

(55,286)

Cash paid for acquisitions of businesses, net of cash acquired

 

 

(2,986)

 

 

(43,937)

Purchases of short-term investments

 

 

-

 

 

(154,568)

Liquidation of short-term investments

 

 

219

 

 

102,091

Expenditures for identifiable intangible assets

 

 

(128)

 

 

(2,201)

Proceeds from sale of property, plant and equipment, net

 

 

2,143

 

 

702

Net cash used in investing activities

 

 

(44,034)

 

 

(153,199)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Net change in short-term borrowings

 

 

(1,482)

 

 

1,033

Cash paid for treasury stock

 

 

(21,253)

 

 

(99,771)

Cash dividends paid

 

 

(22,383)

 

 

(20,231)

Proceeds from long-term borrowings

 

 

-

 

 

117,900

Payments on long-term borrowings

 

 

(57,150)

 

 

(205,613)

Proceeds from exercise of stock options

 

 

9,451

 

 

11,990

Excess tax benefits from share-based compensation

 

 

2,921

 

 

3,575

Net cash used in financing activities

 

 

(89,896)

 

 

(191,117)

Effect of exchange rate changes on cash and cash equivalents

 

 

17,943

 

 

(7,706)

Net increase (decrease) in cash and cash equivalents

 

 

129,377

 

 

(115,179)

Cash and cash equivalents at beginning of period

 

 

203,991

 

 

169,384

Cash and cash equivalents at end of period

 

$

333,368

 

$

54,205

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

 

 

- 5 -


 

 

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders' Equity

(In thousands)

(unaudited)

Accumulated

Total DENTSPLY

 

Capital in

Other

International

Non-

Total

 

Common

Excess of

Retained

Comprehensive

Treasury

Stockholders'

controlling

Stockholders'

 

Stock

Par Value

Earnings

Income (Loss)

Stock

Equity

Interests

Equity

 

Balance at December 31, 2007

$ 1,628

$ 173,084

$ 1,582,683

$ 145,819

$(387,108)

$ 1,516,106

$ 296

$ 1,516,402

 

Purchase of subsidiary shares from

   noncontrolling interest

-

-

-

-

-

-

71,931

71,931

 

Comprehensive Income:

 

 Net income

-

-

283,869

-

-

283,869

(599)

283,270

 

  Other comprehensive income (loss),

   net of tax:

 

 Foreign currency translation

 adjustment

-

-

-

(71,521)

-

(71,521)

63

(71,458)

 

Net loss on derivative

financial instruments

-

-

-

(13,986)

-

(13,986)

-

(13,986)

 

     Unrecognized losses and prior

     service cost, net

-

-

-

(20,700)

-

(20,700)

-

(20,700)

 

Comprehensive Income

177,662

(536)

177,126

 

Exercise of stock options

-

(7,268)

-

-

19,994

12,726

-

12,726

 

Tax benefit from stock options

exercised

-

3,910

-

-

-

3,910

-

3,910

 

Share based compensation expense

-

17,290

-

-

-

17,290

-

17,290

 

Funding of Employee Stock Option Plan

-

62

-

-

118

180

-

180

 

Treasury shares purchased

-

-

-

-

(112,634)

(112,634)

-

(112,634)

 

RSU dividends

-

76

(76)

-

-

-

-

-

 

Cash dividends ($0.185 per share)

-

-

(27,518)

-

-

(27,518)

-

(27,518)

 

Balance at December 31, 2008

$ 1,628

$ 187,154

$ 1,838,958

$ 39,612

$(479,630)

$ 1,587,722

$ 71,691

$ 1,659,413

 

Comprehensive Income:

 

 Net income

-

-

199,424

-

-

199,424

(1,062)

198,362

 

  Other comprehensive income (loss),

   net of tax:

 

 Foreign currency translation

 adjustment

-

-

-

76,518

-

76,518

4,567

81,085

 

Net loss on derivative financial

instruments

-

-

-

(21,422)

-

(21,422)

-

(21,422)

 

     Unrecognized losses and prior

     service cost, net

-

-

-

431

-

431

-

431

 

Comprehensive Income

254,951

3,505

258,456

 

Exercise of stock options

-

(8,724)

-

-

18,175

9,451

-

9,451

 

Tax benefit from stock options

exercised

-

2,921

-

-

-

2,921

-

2,921

 

Share based compensation expense

-

14,778

-

-

-

14,778

-

14,778

 

Funding of Employee Stock Option Plan

-

(61)

-

-

1,408

1,347

-

1,347

 

Adjustments from acquisitions

-

(388)

-

-

-

(388)

-

(388)

 

Treasury shares purchased

-

-

-

-

(21,253)

(21,253)

-

(21,253)

 

RSU dividends

-

101

(101)

-

-

-

-

-

 

Cash dividends ($0.15 per share)

-

-

(22,274)

-

-

(22,274)

-

(22,274)

 

Balance at September 30, 2009

$ 1,628

$195,781

$ 2,016,007

$ 95,139

$(481,300)

$ 1,827,255

$ 75,196

$ 1,902,451

 

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

 

 

 

- 6 -

 


 

DENTSPLY International Inc. and Subsidiaries

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying Unaudited Interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). The year-end condensed consolidating balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Results for interim periods should not be considered indicative of results for a full year.  These financial statements and related notes contain the accounts of DENTSPLY International Inc. and Subsidiaries (the “Company”) on a consolidated basis and should be read in conjunction with the Consolidated Financial Statements and Notes included in the Company’s most recent Annual Report on Form 10-K/A for the year ended December 31, 2008.

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

 

The accounting policies of Company, as applied in the interim condensed consolidated financial statements presented herein are substantially the same as presented in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2008, except as indicated below:

 

Accounts and Notes Receivable-Trade

 

Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $21.8 million and $19.4 million at September 30, 2009 and December 31, 2008, respectively.

 

Business Acquisitions

 

During the first quarter of 2009, the Company adopted the new accounting guidance for business combinations. The new guidance establishes principles and requirements for transactions that represent business combinations to be accounted for under the acquisition method. It provides guidance regarding the recognition and measurement of assets acquired, liabilities assumed, goodwill, noncontrolling interest in the acquiree and financial statement disclosure requirements. Additionally, it provides guidance for identifying a business combination, measuring the acquisition date and defining the measurement period for adjusting provisional amounts recorded. The implementation of this standard did not impact the Company’s net income attributable to DENTSPLY International.

 

Noncontrolling Interests

 

On January 1, 2009, the Company adopted the new accounting guidance for reporting noncontrolling interest (“NCI”) in a subsidiary. As a result, the Company reported NCI as a separate component of Stockholders’ Equity in the Condensed Consolidated Balance Sheet. Additionally, the Company reported the portion of net income and comprehensive income (loss) attributed to the Company and NCI separately in the Condensed Consolidated Statement of Operations. The Company also included a separate column for NCI in the Consolidated Statement of Changes in Equity. All related disclosures have been adjusted accordingly. Prior year amounts associated with NCI in the financial statements and accompanied footnotes have been retrospectively adjusted to conform to the adoption. The implementation of this new standard did not impact the Company’s net income attributable to DENTSPLY International in the current or prior period.

 

Fair Value Measurement

 

   During the first quarter of 2009, the Company adopted the new guidance for fair value measurement. The new guidance changed the effective date for recognizing and disclosing the fair value for non-financial assets and liabilities except for items recognized or disclosed in the financial statements on a recurring basis. The implementation of this new guidance did not impact the Company’s financial statements in the current or prior periods. The new guidance also required additional disclosure about the fair value of financial instruments for interim reporting periods in addition to annual financial statements. The Company has disclosed the required information in Note 13, Financing Arrangements.

 

FASB Accounting Standards Codification

 

     In June 2009, the FASB issued The FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States. All guidance contained in the Codification carries an equal level of authority. On the effective date, the Codification

- 7 -


will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has updated all of its disclosures to be consistent with the Codification and has determined that the implementation of the Codification did not have a significant impact on its financial results.

 

Subsequent Events

 

    In May 2009, a new accounting guidance was issued for disclosures about subsequent events. The new guidance requires the Company to disclose the date through which it has evaluated subsequent events and whether the date represents the date the financial statements were issued or were available to be issued. The Company has evaluated subsequent events through October 29, 2009, which is the date the financial statements have been filed with the SEC.

 

Recent Accounting Pronouncements

 

 In December 2008, the Financial Accounting Standards Board (“FASB”) issued new guidance for disclosures about postretirement benefit plans (“the Plans”). The objective of this new guidance is to provide financial statement users additional information concerning the Plans’ investment policies and strategies and how allocation decisions are made. Additionally, disclosures are to be made concerning categories of the Plans’ assets, the valuation technique used in regard to the fair value measurement of the Plans’ assets and concentrations of risk within the Plans’ assets. The new guidance is effective for fiscal years ending after December 15, 2009 with early application permitted. The revised disclosures are not required to be applied to earlier periods that are presented for comparative periods. The Company is currently evaluating the impact of adopting this standard on its disclosures.

 

In June 2009, the FASB issued new accounting guidance for the transfer of financial assets and the effects of a transfer on its financial position, financial performance and cash flows. The new guidance eliminates the use of qualified special purpose entities, clarifies the derecognition criteria for a transfer accounted for as a sale, and expands the disclosure requirements among other things. The new guidance is effective for fiscal years beginning after November 15, 2009 and must be applied prospectively to new transfers of financial assets. The Company believes this new guidance will not have a material impact on its financial statements.

 

In June 2009, the FASB issued new accounting guidance for variable interest entities. The new guidance includes: (1) the elimination of the exemption from consolidation for qualifying special purpose entities, (2) a new approach for determining the primary beneficiary of a variable interest entity (“VIE”), which requires that the primary beneficiary have both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, and (3) the requirement to continually reassess who should consolidate a VIE. The new guidance is effective for annual reporting periods that begin after November 15, 2009 and applies to all existing and new VIEs. The Company is currently evaluating the impact of adopting this new guidance.

 

Revisions in Classification  

 

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

 

NOTE 2 – STOCK COMPENSATION

 

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

 

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

- 8 -


 

 

The Company continues to use the Black-Scholes option-pricing model to estimate the fair value of the non-qualified stock options. The assumptions used to calculate the fair value of the awards granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.

 

The following table represents total stock based compensation expense and the tax related benefit for the three and nine months ended September 30, 2009 and 2008:

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

(in millions)

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Stock option expense

$

3.1

$

2.9

$

9.0

$

8.6

RSU expense

 

 

1.6

 

1.1

 

4.8

 

3.2

Total stock based compensation expense

$

4.7

$

4.0

$

13.8

$

11.8

 

 

 

 

 

 

 

Total related tax benefit

$

1.4

$

1.1

$

4.0

$

2.9

 

The remaining unamortized compensation cost related to non-qualified stock options is $16.3 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.3 years. The unamortized compensation cost related to RSUs is $10.5 million, which will be expensed over the remaining restricted period of the RSUs, or 1.5 years.

 

The following table reflects the non-qualified stock option transactions from December 31, 2008 through September 30, 2009:

 

Outstanding

Exercisable

Weighted

Weighted

Average

Aggregate

Average

Aggregate

(in thousands,

Exercise

Intrinsic

Exercise

Intrinsic

except per share data)

Shares

Price

Value

Shares

Price

Value

December 31, 2008

11,285

$

26.75

$

41,428

8,185

$

24.71

$

37,796

Granted

169

 

28.04

 

 

 

Exercised

(599)

 

15.77

 

 

 

Forfeited

(172)

 

32.24

 

 

 

September 30, 2009

10,683

$

27.30

$

88,845

7,652

$

25.50

$

72,450

 

 

The weighted average remaining contractual term of all outstanding options is 6.1 years and the weighted average remaining contractual term of exercisable options is 4.6 years.

 

 

- 9 -

 


The following table summarizes the unvested restricted stock unit and restricted stock unit dividend transactions from December 31, 2008 through September 30, 2009:

 

Unvested Restricted Stock and Stock Dividend Units

Weighted Average

Grant Date

(in thousands, except per share data)

Shares

Fair Value

Unvested at December 31, 2008

400

$

36.11

Granted

298

 

 

26.39

Vested

(2)

 

 

26.23

Forfeited

(20)

 

 

32.88

Unvested at September 30, 2009

676

$

31.96

 

NOTE 3 – COMPREHENSIVE INCOME

 

The changes to balances included in accumulated other comprehensive income (“AOCI”) in the consolidated balance sheets are as follows:

 

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in thousands)

2009

2008

2009

2008

Net income

$

67,853

$

66,066

$

198,362

$

212,919

Other comprehensive income:

Foreign currency translation adjustments,

net of tax

69,933

(160,667)

81,085

(62,846)

Amortization of unrecognized (gains) losses and prior year service cost, net of tax

(697)

(871)

431

(990)

Pension liability adjustments

-

(395)

-

3,318

Net (loss) gain on derivative

financial instruments, net of tax

(29,053)

69,126

(21,422)

6,481

Total other comprehensive income (loss),

net of tax

40,183

(92,807)

60,094

(54,037)

Total Comprehensive income

108,036

(26,741)

258,456

158,882

Less: Comprehensive income attributable

to the noncontrolling interests

3,692

19

3,505

45

Comprehensive income attributable

to DENTSPLY International

$

104.344

$

(26,760)

$

254,951

$

158.837

 

During the quarter ended September 30, 2009, foreign currency translation adjustments included currency translation gains of $81.3 million partially offset by losses of $7.7 million on the Company’s loans designated as hedges of net investments. During the quarter ended September 30, 2008, foreign currency translation adjustments included currency translation losses of $166.4 million partially offset by gains of $5.8 million on the Company’s loans designated as hedges of net investments. During the nine months ended September 30, 2009, foreign currency translation adjustments included currency translation gains of $86.9 million offset by losses of $2.3 million on the Company’s loans designated as hedges of net investments. During the nine months ended September 30, 2008, foreign currency translation adjustments included currency translation losses of $58.3 million and losses of $4.5 million on the Company’s loans designated as hedges of net investments. These foreign currency translation adjustments were offset by net gains on derivatives financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.

 

 

- 10 -

 


The balances included in AOCI in the consolidated balance sheets are as follows:

 

September 30,

December 31,

(in thousands)

2009

2008

Foreign currency translation adjustments

$

246,068

$

169,550

Unrecognized losses and prior service cost, net

(29,667)

(30,098)

Net loss on derivative financial instruments

(121,262)

(99,840)

$

95,139

$

39,612

 

The cumulative foreign currency translation adjustments included translation gains of $356.9 million and $278.1 million as of September 30, 2009 and December 31, 2008, respectively, offset by losses of $110.8 million and $108.5 million, respectively, on loans designated as hedges of net investments. These foreign currency translation adjustments were offset by net losses on derivatives financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.

 

NOTE 4 - EARNINGS PER COMMON SHARE

 

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

 

 

Basic Earnings Per Common Share Computation

Three Months Ended

Nine Months Ended

(in thousands, except per share amounts)

September 30,

September 30,

2009

2008

2009

2008

Net income attributable to DENTSPLY

International

$

67,483

$

66,047

$

199,424

$

212,874

Common shares outstanding

148,547

148,775

148,546

149,186

Earnings per common share - basic

$

0.45

$

0.44

$

1.34

$

1.43

Diluted Earnings Per Common Share Computation

(in thousands, except per share amounts)

Net income attributable to DENTSPLY

International

$

67,483

$

66,047

$

199,424

$

212,874

Common shares outstanding

148,547

148,775

148,546

149,186

Incremental shares from assumed

exercise of dilutive options

2,091

2,922

1,531

2,951

Total shares

150,638

151,697

150,077

152,137

Earnings per common share - diluted

$

0.45

$

0.44

$

1.33

$

1.40

 

 

         Options to purchase 1.5 million and 4.5 million shares of common stock that were outstanding during the three and nine months ended September 30, 2009, respectively, were not included in the computation of diluted earnings per share since the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Antidilutive shares during the three and nine months ended September 30, 2008, were 1.3 million and 1.4 million, respectively.  

 

NOTE 5 - BUSINESS ACQUISITIONS

 

During the first nine months of 2009, the Company paid $3.0 million, net of cash acquired, primarily related to a payment for an additional purchase price related to an acquisition completed in 2007. The payment was related to provisions in the purchase agreement that allow for additional payments based on the post closing performance of the individual business.

 

 

- 11 -

 


NOTE 6 - SEGMENT INFORMATION

 

The Company has numerous operating businesses covering a wide range of products and geographic regions, primarily serving the professional dental market. Professional dental products represented approximately 97% of sales for the periods ended September 30, 2009 and 2008.

 

The operating businesses are combined into operating groups, which have overlapping product offerings, geographical presence, customer bases, distribution channels, and regulatory oversight. These operating groups are considered the Company’s reportable segments as the Company’s chief operating decision-maker regularly reviews financial results at the operating group level and uses this information to manage the Company’s operations. The accounting policies of the groups are consistent with those described in the Company’s most recently filed Annual Report on Form10-K/A in the summary of significant accounting policies. The Company measures segment income for reporting purposes as net operating income before restructuring, impairments and other cost, interest expense, interest income, other (income) expense and taxes.

 

In January 2009, the Company moved several locations between segments which resulted in a change to the management structure and helped the Company gain operating efficiencies and effectiveness. The segment information below reflects this revised structure for all periods shown.

 

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

 

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

 

France, United Kingdom, Italy and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses

 

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

 

Canada/Latin America/Endodontics/Orthodontics

 

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

 

Dental Laboratory Business/Implants/Non-Dental

 

This business group includes the responsibility for the design, manufacture, sales and distribution for most laboratory products, excluding certain countries mentioned previously, and the design, manufacture, and/or sales and distribution of the Company’s dental implant products and bone substitute/grafting materials, excluding sales and distribution of implants and bone substitute/grafting materials in the United States; Italy, Austria, and certain other Eastern European countries; Asia; and Australia. This business group is also responsible for most of the Company’s non-dental business.

 

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

 

- 12 -


 

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

 

The following tables set forth information about the Company’s operating groups for the three and nine months ended September 30, 2009 and 2008:

 

Third Party Net Sales

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in thousands)

2009

2008

2009

2008

U.S., Germany, and Certain Other

European Regions Consumable

Businesses

 

$

142,983

$

126,525

$

407,495

$

371,589

France, U.K., Italy, and Certain Other European Countries, CIS,

 

Middle East, Africa, Pacific Rim

Businesses

108,493

106,724

323,810

349,311

Canada/Latin America/Endodontics/

Orthodontics

149,907

155,634

451,893

477,983

Dental Laboratory Business/

Implants/Non-Dental

130,462

141,715

409,983

489,507

All Other (a)

(813)

(645)

(1,984)

(2,808)

Total

$

531,032

$

529,953

$

1,591,197

$

1,685,582

 

Third Party Net sales, excluding precious metal content

 

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

 

 

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in thousands)

2009

2008

2009

2008

U.S., Germany, and Certain Other

European Regions Consumable

Businesses

$

142,983

$

126,525

$

407,495

$

371,589

France, U.K., Italy, and Certain Other

     European Countries, CIS, Middle East,

 

Africa, Pacific Rim Businesses

100,304

99,541

298,724

325,441

Canada/Latin America/Endodontics/

Orthodontics

149,219

154,868

449,815

475,310

Dental Laboratory Business/

Implants/Non-Dental

101,954

107,797

317,158

357,075

All Other (a)

(813)

(645)

(1,984)

(2,808)

Total excluding precious metal content

493,647

488,086

1,471,208

1,526,607

Precious metal content

37,385

41,867

119,989

158,975

Total including precious metal content

$

531,032

$

529,953

$

1,591,197

$

1,685,582

 

(a) Includes: amounts recorded at Corporate headquarters.

 

- 13 -


 

Inter-segment Net Sales

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in thousands)

2009

2008

2009

2008

U.S., Germany, and Certain Other

    European Regions Consumable

Businesses

$

27,759

$

34,310

$

74,488

$

99,025

France, U.K., Italy, and Certain Other

     European Countries, CIS,

 

Middle East, Africa, Pacific Rim

    Businesses

2,590

3,740

9,037

12,556

Canada/Latin America/Endodontics/

Orthodontics

24,424

26,205

77,241

81,033

Dental Laboratory Business/

Implants/Non-Dental

25,477

26,502

75,403

83,449

All Other (a)

42,914

40,879

124,261

136,553

Eliminations

(123,164)

(131,636)

(360,430)

(412,616)

Total

$

-

$

-

$

-

$

-

 

 

Segment Operating Income

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in thousands)

2009

2008

2009

2008

U.S., Germany, and Certain Other

European Regions Consumable

Businesses

$

49,034

 

$

50,455

 

$

125,780

 

$

138,403

France, U.K., Italy, and Certain Other

    European Countries, CIS,

 

 

 

 

 

 

 

 

 

 

 

Middle East, Africa, Pacific Rim

Businesses

3,637

 

 

1,873

 

 

10,531

 

 

9,432

Canada/Latin America/Endodontics/

 

 

 

 

 

 

 

 

 

 

Orthodontics

39,543

 

 

46,841

 

 

135,068

 

 

153,181

Dental Laboratory Business/

 

 

 

 

 

 

 

 

 

Implants/Non-Dental

19,138

 

 

25,608

 

 

65,959

 

 

92,410

All Other (b)

(17,212)

 

 

(25,323)

 

 

(53,624)

 

 

(78,113)

Segment Operating Income

94,140

 

 

99,454

 

 

283,714

 

 

315,313

 

 

 

 

 

 

 

 

 

 

Reconciling Items:

 

 

 

 

 

 

 

 

 

 

Restructuring, impairments and other costs

(1,210)

 

 

(18,539)

 

 

(5,905)

 

 

(20,202)

Interest expense

(5,456)

 

 

(9,284)

 

 

(16,877)

 

 

(25,437)

Interest income

858

 

 

4,669

 

 

4,326

 

 

14,564

Other expense, net

(480)

 

 

(1,030)

 

 

(1,326)

 

 

(4,100)

Income before income taxes

$

87,852

 

$

75,270

 

$

263,932

 

$

280,138

 

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

 

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

 

- 14 -


Assets

 

 

 

 

 

 

September 30,

 

 

December 31,

(in thousands)

 

2009

 

 

2008

 

 

 

U.S., Germany, and Certain Other European

Regions Consumable Businesses

$

576,034

 

$

556,125

France, U.K., Italy, and Certain Other European

    Countries, CIS,

 

 

 

 

Middle East, Africa, Pacific Rim

Businesses

390,737

 

 

385,050

Canada/Latin America/Endodontics/

 

 

 

 

Orthodontics

 

779,231

 

 

763,479

Dental Laboratory Business/

 

 

 

 

Implants/Non-Dental

 

994,660

 

 

942,504

All Other (a)

 

326,447

 

 

183,242

Total

$

3,067,109

 

$

2,830,400

 

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

 

NOTE 7 - INVENTORIES

 

Inventories are stated at the lower of cost or market. At September 30, 2009 and December 31, 2008, the cost of $9.3 million, or 3.0%, and $9.6 million, or 3.1%, respectively, of inventories was determined by the last-in, first-out (“LIFO”) method. The cost of other inventories was determined by the first-in, first-out (“FIFO”) or average cost methods. The Company establishes reserves for inventory estimated to be obsolete or unmarketable equal to the difference between the cost of inventory and estimated market value based upon assumptions about future demand and market conditions. The inventory valuation reserves were $32.7 million and $28.4 million as of September 30, 2009 and December 31, 2008, respectively.

 

If the FIFO method had been used to determine the cost of LIFO inventories, the amounts at which net inventories are stated would be higher than reported at September 30, 2009 and December 31, 2008 by $3.7 million and $3.5 million, respectively.

 

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

 

September 30,

December 31,

(in thousands)

2009

2008

Finished goods

$

191,501

$

184,226

Work-in-process

55,345

58,123

Raw materials and supplies

64,820

63,776

$

311,666

$

306,125

 

 

 

- 15 -

 


NOTE 8 - BENEFIT PLANS

 

The following sets forth the components of net periodic benefit cost of the Company’s benefit plans and for the Company’s other postretirement employee benefit plans for the three and nine months ended September 30, 2009 and September 30, 2008, respectively:

 

Defined Benefit Plans

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

(in thousands)

 

 

2009

 

 

2008

 

 

2009

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

2,144

 

$

1,920

 

$

6,211

 

$

5,336

Interest cost

 

 

2,059

 

 

1,638

 

 

5,957

 

 

6,073

Expected return on plan assets

 

 

(1,012)

 

 

(1,022)

 

 

(2,951)

 

 

(3,387)

Amortization of transition obligation

 

61

 

 

59

 

 

177

 

 

183

Amortization of prior service cost 

 

34

 

 

85

 

 

103

 

 

174

Amortization of net loss (gain)

 

 

423

 

 

(12)

 

 

1,241

 

 

50

Settlement gain

 

 

-

 

 

(2,313)

 

 

-

 

 

(2,313)

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

3,709

 

$

355

$

10,738

 

$

6,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Postretirement Plans

 

 

 

 

 

 

 

 

 

Three Months Ended

Nine Months Ended

 

 

 

September 30,

September 30,

(in thousands)

 

 

2009

 

 

2008

 

 

2009

 

 

2008

 

 

 

 

Service cost

 

$

13

$

12

$

40

$

37

Interest cost

 

 

156

163

467

476

Amortization of net loss

 

 

50

52

151

126

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

219

 

$

227

 

$

658

 

$

639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following sets forth the information related to the funding of the Company’s benefit plans for 2009:

 

 

 

 

 

 

 

Other

 

 

 

Pension

 

 

Postretirement

(in thousands)

 

 

Benefits

 

 

Benefits

 

 

 

 

 

 

Actual, September 30, 2009

 

$

7,845

$

489

Projected for the remainder of the year

 

2,337

 

596

Total for year

 

$

10,182

 

$

1,085

 

 

 

- 16 -

 


NOTE 9 – RESTRUCTURING, IMPAIRMENT AND OTHER COSTS

 

Restructuring Costs

 

During the three months ended September 30, 2009 and September 30, 2008, the Company recorded net restructuring costs of $0.0 million and $0.9 million, respectively. During the nine months ended September 30, 2009 and September 30, 2008, the Company recorded restructuring costs of $4.3 million and $1.7 million, respectively. These costs are recorded in “Restructuring, impairments and other costs” in the statement of operations and the associated liabilities are recorded in accrued liabilities in the condensed consolidated balance sheet. These costs consist of employee severance benefits, payments due to contracts terminations and other restructuring costs.

 

During 2009 and 2008, the Company initiated several restructuring plans primarily related to the integration, reorganization and closure or consolidation of certain production and selling facilities in order to better leverage the Company’s resources by minimizing costs and obtaining operational efficiencies.

 

As of September 30 2009, the Company’s restructuring accruals were as follows:

 

Severance

2007 and

(in thousands)

Prior Plans

2008 Plans

2009 Plans

Total

Balance, December 31, 2008

$

664

$

2,806

$

-

$

3,470

Provisions and adjustments

(183)

2,454

1,698

3,969

Amounts applied

(77)

(203)

(954)

(1,234)

Balance, September 30, 2009

$

404

$

5,057

$

744

$

6,205

Lease/Contract Terminations

2007 and

(in thousands)

Prior Plans

Total

Balance, December 31, 2008

$

1,271

$

1,271

Provisions and adjustments

(339)

(339)

Amounts applied

(38)

(38)

Balance, September 30, 2009

$

894

$

894

Other Restructuring Costs

2007 and

(in thousands)

Prior Plans

2008 Plans

2009 Plans

Total

Balance, December 31, 2008

$

108

$

56

$

-

$

164

Provisions and adjustments

112

545

6

663

Amounts applied

(150)

(592)

(6)

(748)

Balance, September 30, 2009

$

70

$

9

$

-

$

79

 

   

 

- 17 -

 


The following table provides the year-to-date changes in the restructuring accruals by segment:

 

December 31,

Provisions and

Amounts

September 30,

(in thousands)

2008

Adjustments

Applied

2009

 

United States, Germany, and Certain

Other European Regions

Consumable Businesses

$

1,286

$

(118)

$

(289)

$

879

France, U.K., Italy, and Certain Other

European Countries, CIS, Middle East,

Africa, Pacific Rim Businesses

190

225

(314)

101

Canada/Latin America/

Endodontics/Orthodontics

178

314

(448)

44

Dental Laboratory Business/

Implants/Non-Dental

3,251

3,633

(731)

6,153

All Other (a)

-

239

(238)

1

$

4,905

$

4,293

$

(2,020)

$

7,178

 

Impairments and Other Costs

 

During the three months ended September 30, 2009 and September 30, 2008, the Company recorded other costs of $1.2 million and $17.6 million, respectively. During the nine months ended September 30, 2009 and September 30, 2008 the Company recorded other costs of $1.6 million and $18.5 million, respectively. Other costs for the three months ended September 30, 2009 and September 30, 2008 included costs primarily related to legal matters discussed in Note 14, Commitments and Contingencies. These other costs are reflected in “Restructuring, impairments and other costs” in the statement of operations.

 

NOTE 10 – FINANCIAL INSTRUMENTS AND DERIVATIVES

 

On January 1, 2009, the Company adopted the new accounting guidance for expanded disclosures about derivative instruments and hedging activities. As a result the Company has expanded its disclosures about its strategies, objectives and risks for using derivative instruments. In addition, the Company has disclosed the fair value of derivative instruments and their gains and losses in tabular format as required. The adoption of this new guidance did not have a material impact on the Company’s financial statements.

 

Derivative Instruments and Hedging Activities

 

The Company's activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates, interest rates and commodity prices. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company's operating results and equity.

 

Certain of the Company's inventory purchases are denominated in foreign currencies, which expose the Company to market risk associated with exchange rate movements. The Company's policy generally is to hedge major foreign currency transaction exposures through foreign exchange forward contracts. These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss. In addition, the Company's investments in foreign subsidiaries are denominated in foreign currencies, which create exposures to changes in exchange rates. The Company uses debt and derivatives denominated in the applicable foreign currency as a means of hedging a portion of this risk.

 

With the Company’s significant level of variable interest rate long-term debt and net investment hedges, changes in the interest rate environment can have a major impact on the Company’s earnings, depending upon its interest rate exposure. As a result, the Company manages its interest rate exposure with the use of interest rate swaps, when appropriate, based upon market conditions.

 

The manufacturing of some of the Company’s products requires the use of commodities, which are subject to market fluctuations. In order to limit the unanticipated impact on earnings from such market fluctuations, the Company selectively enters into commodity swaps for certain materials used in the production of its products. Additionally, the Company uses non-derivative methods, such as the precious metal consignment agreements to effectively hedge commodity risks.

- 18 -


 

Cash Flow Hedges

 

The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt. As of September 30, 2009, the Company has three groups of significant variable interest rate to fixed rate interest rate swaps. One of the groups of swaps has notional amounts totaling 12.6 billion Japanese yen, and effectively converts the underlying variable interest rates to an average fixed interest rate of 1.6% for a term of ten years, ending in September 2012. Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rates to a fixed interest rate of 4.2% for a term of seven years, ending in September 2012. A third group of swaps has a notional amount of $150.0 million, and effectively converts the underlying variable interest rates to a fixed interest rate of 3.9% for a term of two years, ending March 2010. The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes.

 

The Company selectively enters into commodity swaps to effectively fix certain variable raw material costs. At September 30, 2009, the Company had swaps in place to purchase 948 troy ounces of platinum bullion for use in the production of its impression material products. The average fixed rate of this agreement is $1,240 per troy ounce. In addition, the Company had swaps in place to purchase 85,428 troy ounces of silver bullion for use in the production of its amalgam products at an average fixed rate of $14 per troy ounce.

 

The Company enters into forward exchange contracts to hedge the foreign currency exposure of its anticipated purchases of certain inventory. In addition, exchange contracts are used by certain of the Company's subsidiaries to hedge intercompany inventory purchases, which are denominated in non-local currencies. The forward contracts that are used in these programs typically mature in twelve months or less. For these derivatives which qualify as hedges of future anticipated cash flows, the effective portion of changes in fair value is temporarily deferred in AOCI and then recognized in earnings when the hedged item affects earnings.

 

Hedges of Net Investments in Foreign Operations

 

The Company has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. Currently, the Company uses non-derivative financial instruments, including foreign currency denominated debt held at the parent company level and derivative financial instruments to hedge some of this exposure. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the non-derivative and derivative financial instruments designated as hedges of net investments.

 

In the first quarter of 2005, the Company entered into cross currency interest rate swaps with a notional principal value of Swiss francs 457.5 million paying three month Swiss franc London Inter-Bank Offered Rate (“LIBOR”) and receiving three month U.S. dollar LIBOR on $384.4 million. In the first quarter of 2006, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 55.5 million paying three month Swiss franc LIBOR and receiving three month U.S. dollar LIBOR on $42.0 million. In the fourth quarter of 2006, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 80.4 million paying three month Swiss franc LIBOR and receiving three month U.S. dollar LIBOR on $64.4 million. In the first quarter of 2007, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 56.6 million paying three month Swiss franc LIBOR and receiving three month U.S. dollar LIBOR on $46.3 million. Additionally, in the fourth quarter of 2005, the Company entered into cross currency interest rate swaps with a notional principal value of Euro 358.0 million paying three month Euro LIBOR and receiving three month U.S. dollar LIBOR on $419.7 million. In the first quarter of 2009, the Company terminated Swiss francs 57.5 million cross currency swap at a fair value of zero. In the second and third quarters of 2009, the Company amended certain of its Swiss franc and Euro cross currency interest rate swaps to extend their maturity dates for an additional three years. Specifically, a total of Swiss francs 300 million have been extended to March and April of 2013 and a total of Euro 250 million have been extended to December 2013. The Swiss franc and Euro cross currency interest rate swaps are designated as net investment hedges of the Swiss and Euro denominated net assets. The interest rate differential is recognized in the earnings as interest income or interest expense as it is accrued, the foreign currency revaluation is recorded in AOCI, net of tax effects.

 

The fair value of these cross currency interest rate swap agreements is the estimated amount the Company would (pay)/ receive at the reporting date, taking into account the effective interest rates and foreign exchange rates. As of September 30, 2009, the estimated net fair values of the swap agreements were negative $186.8 million, which are recorded in AOCI, net of tax effects, and as other noncurrent liabilities and other noncurrent assets.

 

- 19 -


At September 30, 2009, the Company had Euro-denominated, Swiss franc-denominated, and Japanese yen-denominated debt and cross currency interest rate swaps (at the parent company level) to hedge the currency exposure related to a designated portion of the net assets of its European, Swiss and Japanese subsidiaries. At September 30, 2009 and 2008, the accumulated translation gains on investments in foreign subsidiaries, primarily denominated in Euros, Swiss francs and Japanese yen, net of these net investment hedges, were $130.8 million and $101.4 million, respectively, which are included in AOCI, net of tax effects.

 

The following tables summarize the fair value of the Company’s derivatives at September 30, 2009.

 

 

Notional Amounts

 

 

Fair Value (Liability) Asset

Foreign Exchange Forward Contracts

 

2009

 

 

2010

 

 

2009

(in thousands)

 

 

 

 

 

 

 

 

Forward sale, 9.9 million Australian dollars

$

7,230

 

$

1,504

 

$

(324)

Forward purchase, 6.2 million British pounds

 

(3,506)

 

 

(6,441)

 

 

(6)

Forward sale, 14.3 million Canadian dollars

 

2,901

 

 

10,482

 

 

(1,202)

Forward purchase, 75.5 million Swiss francs

 

(72,840)

 

 

-

 

 

2,753

Forward sale, 5.7 million Danish Krone

 

1,118

 

 

-

 

 

10

Forward purchase, 8.8 million Euros

 

(16,317)

 

 

3,359

 

 

431

Forward sale, 45.7 million Japanese yen

 

9,075

 

 

(8,566)

 

 

1,010

Forward sale, 93.4 million Mexican Pesos

 

6,923

 

 

-

 

 

100

Forward sale, 10.0 million Taiwanese dollars

 

310

 

 

-

 

 

(9)

Total Foreign Exchange Forward Contracts

$

(65,106)

 

$

338

 

$

2,763

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

 

Fair Value Liability

Interest Rate Swaps

 

 

2009

 

 

2010

 

 

2011

 

 

2012

 

2013 and Beyond

 

 

2009

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro

 

$

366

 

$

2,101

 

$

1,383

 

$

1,383

$

5,880

 

$

(876)

Japanese yen

 

 

-

 

 

-

 

 

-

 

 

139,996

 

-

 

 

(3,364)

Swiss francs

 

 

-

 

 

-

 

 

-

 

 

62,739

 

-

 

 

(4,968)

US dollars

 

 

-

 

 

150,000

 

 

-

 

 

-

 

-

 

 

(2,229)

 

Total Interest Rate Swaps

$

366

 

$

152,101

 

$

1,383

 

$

204,118

$

5,880

 

$

(11,437)

 

 

 

 

Notional Amount

 

 

Fair Value Liability

Cross Currency Basis Swaps

 

 

2009

 

 

2010

 

 

2011

 

 

2012

 

2013 and Beyond

 

 

2009

(in thousands)

 

 

 

Swiss franc 592.5 million @

   1.21 pay CHF 3mo. LIBOR

   rec. USD 3mo. LIBOR

$

-

 

$

150,090

 

$

77,603

 

$

54,631

$

289,563

 

$

(83,060)

Euros 358.0 million @ $1.17

pay EUR 3mo. LIBOR rec.

USD 3mo. LIBOR

 

 

-

 

 

158,201

 

 

-

 

 

-

 

366,206

 

 

(103,765)

Total Cross Currency

Basis Swaps

$

-

$

308,291

$

77,603

$

54,631

$

655,769

$

(186,825)

 

 

 

- 20 -

 


 

 

 

 

Notional Amount

 

 

Fair Value Asset

 

Commodity Contracts

 

 

2009

 

 

2010

 

 

2011

 

 

2012

 

2013 and Beyond

 

 

2009

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Silver Swap - U.S. dollar

 

$

(713)

 

$

(449)

 

$

-

 

$

-

$

-

 

$

244

 

Platinum Swap - U.S. dollar

 

 

(723)

 

 

(452)

 

 

-

 

 

-

 

-

 

 

46

 

Total Commodity Contracts

 

$

(1,436)

 

$

(901)

 

$

-

 

$

-

$

-

 

$

290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2009, $3.9 million of deferred net losses on derivative instruments recorded in AOCI are expected to be reclassified to current earnings during the next twelve months. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases and interest rate swaps. The maximum term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable interest rate debt) is eighteen months. Overall, the derivatives designated as cash flow hedges are highly effective. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company’s policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.

 

The following tables summarize the fair value and balance sheet location of the Company’s derivatives:

 

 

 

 

Balance Sheet

 

 

 

Asset Derivatives Designated as Hedging Instruments

 

 

Classification

 

 

2009

(in thousands)

 

 

 

 

 

 

Foreign exchange contracts

 

 

Other current assets (a)

 

$

1,222

Foreign exchange contracts

 

 

Other noncurrent assets, net

 

3

Commodity contracts

 

 

Other current assets (a)

 

 

290

Total Asset Derivatives Designated as Hedging Instruments

 

 

 

$

1,515

 

 

 

 

 

 

 

Asset Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

 

Foreign exchange contracts

 

 

Other current assets (a)

 

$

3,423

 

 

 

 

 

 

 

Total asset derivatives

 

 

 

 

$

4,938

 

 

(a)

Reported on the Condensed Consolidated Balance Sheet within “Prepaid expenses and other current assets.”

 

 

 

 

Balance Sheet

 

 

 

Liability Derivatives Designated as Hedging Instruments

 

 

Classification

 

 

2009

(in thousands)

 

 

 

 

 

 

Interest rate contracts

 

 

Accrued liabilities

 

$

7,141

Interest rate contracts

 

 

Other noncurrent liabilities

 

 

3,420

Foreign exchange contracts

 

 

Accrued liabilities

 

 

1,350

Foreign exchange contracts

 

 

Other noncurrent liabilities

 

 

6

Cross currency interest rate swaps

 

 

Accrued liabilities

 

 

24,262

Cross currency interest rate swaps

 

 

Other noncurrent liabilities

 

 

162,563

Total liability derivatives designated as hedging instruments

$

198,742

 

- 21 -


 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

Liability Derivatives Not Designated as Hedging Instruments

 

 

Classification

 

 

2009

Interest rate contracts

 

 

Other noncurrent liabilities

 

$

876

Foreign exchange contracts

 

 

Accrued liabilities

 

 

529

Total liability derivatives not designated as hedging instruments

 

 

 

 

$

1,405

Total liability derivatives

 

 

 

 

$

200,147

 

 

 

 

 

 

 

 

 

The following table summarizes the income statement impact of the Company’s cash flow hedges for the three and nine months ended September 30, 2009:

 

Three Months Ended September 30,

Derivatives in Cash Flow

 

 

 

 

 

 

 

 

(Loss) Gain

Hedging Relationships

 

 

(Loss) Gain

 

 

Statement of Operations

 

 

Reclassified from

(in thousands)

 

 

in AOCI (a)

 

 

Classification

 

 

AOCI into income (b)

Interest rate contracts

 

$

(2,051)

 

 

Interest expense

 

$

(2,252)

Foreign exchange contracts

 

 

(243)

 

 

Cost of products sold

 

 

(302)

Foreign exchange contracts

 

 

(449)

 

 

SG&A expenses

 

 

240

Commodity contracts

 

 

343

 

 

Cost of products sold

 

 

(190)

Total

 

$

(2,400)

 

 

 

 

$

(2,504)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

Derivatives in Cash Flow

 

 

 

 

 

 

 

 

(Loss) Gain

Hedging Relationships

 

 

(Loss) Gain

 

 

Statement of Operations

 

 

Reclassified from

(in thousands)

 

 

in AOCI (a)

 

 

Classification

 

 

AOCI into income (b)

Interest rate contracts

 

$

(3,425)

 

 

Interest expense

 

$

(5,594)

Foreign exchange contracts

 

 

(501)

 

 

Cost of products sold

 

 

1,106

Foreign exchange contracts

 

 

431

 

 

SG&A expenses

 

 

434

Commodity contracts

 

 

1,465

 

 

Cost of products sold

 

 

(1,095)

Total

 

$

(2,030)

 

 

 

 

$

(5,149)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

Derivatives in Cash Flow

 

 

Statement of

 

 

(Loss) Gain

 

Loss

Hedging Relationships

 

 

Operations

 

 

Recognized

 

Recognized

(in thousands)

 

 

Classification

 

 

in Income (c)

 

in Income (c)

Interest rate contracts

 

 

Other expense, net

 

$

(54)

$

(155)

Foreign exchange contracts

 

 

Interest expense

 

 

(54)

 

(235)

Foreign exchange contracts

 

 

Interest expense

 

 

13

 

(35)

Commodity contracts

 

 

Interest expense

 

 

(9)

 

(38)

Total

 

 

 

 

$

(104)

$

(463)

 

 

 

 

 

 

 

 

 

(a) Amount of gain or (loss) reported in AOCI, effective portion.

(b) Amount of gain or (loss) reclassed from AOCI into income, effective portion only.

(c) Amount of gain or (loss) recognized in income, ineffective portion and amount excluded from effectiveness testing.

- 22 -


 

 

The following tables summarize the statement of operations impact of the Company’s hedges of net investment for the three and nine months end September 30, 2009:

 

Three Months Ended September 30,

Derivatives in Net Investment

 

 

 

 

 

Statement of

 

 

Gain (Loss)

Hedging Relationships

 

 

 

 

 

Operations

 

 

Recognized

(in thousands)

 

 

Loss in AOCI (a)

 

 

Classification

 

 

in Income (b)

Cross currency interest rate swaps

 

$

(25,826)

 

 

Interest Income

 

$

190

Cross currency interest rate swaps

 

 

(21,525)

 

 

Interest Expense

 

 

(896)

Total

 

$

(47,351)

 

 

 

 

$

(706)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

Derivatives in Net Investment

 

 

 

 

 

Statement of

 

 

Gain (Loss)

Hedging Relationships

 

 

 

 

 

Operations

 

 

Recognized

(in thousands)

 

 

Loss in AOCI (a)

 

 

Classification

 

 

in Income (b)

Cross currency interest rate swaps

 

$

(12,911)

 

 

Interest Income

 

$

1,402

Cross currency interest rate swaps

 

 

(25,054)

 

 

Interest Expense

 

 

(3,340)

Total

 

$

(37,965)

 

 

 

 

$

(1,938)

 

 

 

 

 

 

 

 

 

 

 

The following tables summarize the statement of operations impact of the Company’s hedges not designated as hedging for the three and nine months end September 30, 2009:

 

Derivatives Not Designated as Hedging

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

Instruments under Hedging

 

 

Statement of

 

 

Gain (Loss)

 

Loss

Relationship

 

 

Operations

 

 

Recognized in

 

Recognized in

(in thousands)

 

 

Classification

 

 

Income (b)

 

Income (b)

Foreign exchange contracts

 

 

Other expense, net

 

$

2,485

$

(13,428)

Interest rate contracts

 

 

Other expense, net

 

 

-

 

(2)

Interest rate contracts

 

 

Interest Expense

 

 

(124)

 

(390)

 

 

 

 

 

$

2,361

$

(13,820)

 

(a) Amount of loss reported in AOCI, effective portion.

(b) Amount of gain or (loss) recognized in income, ineffective portion and amount excluded from effectiveness testing.

 

Amounts recorded in AOCI related to cash flow hedging instruments follow:

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

(in thousands, net of tax)

 

 

2009

 

 

2008

 

 

2009

 

 

2008

Beginning balance

 

$

(6,005)

 

$

345

 

$

(7,874)

 

$

(1,573)

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value of derivatives

 

 

(1,506)

 

 

(2,444)

 

 

(1,152)

 

 

(411)

Reclassifications to earnings from equity

 

 

1,526

 

 

(407)

 

 

3,041

 

 

(522)

Total activity

 

 

20

 

 

(2,851)

 

 

1,889

 

 

(933)

Ending balance

 

$

(5,985)

 

$

(2,506)

 

$

(5,985)

 

$

(2,506)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 23-


Amounts recorded in AOCI related to hedges of net investments in foreign operations follow:

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

(in thousands, net of tax)

 

 

2009

 

 

2008

 

 

2009

 

 

2008

Beginning balance

 

$

93,272

 

$

190,074

 

$

77,585

 

$

156,790

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

74,264

 

 

(166,398)

 

 

78,776

 

 

(58,311)

Changes in fair value of:

 

 

 

 

 

 

 

 

 

 

 

 

foreign currency debt

 

 

(7,673)

 

 

5,752

 

 

(2,260)

 

 

(4,488)

derivative hedge instruments

 

 

(29,073)

 

 

71,977

 

 

(23,311)

 

 

7,414

Total activity

 

 

37,518

 

 

(88,669)

 

 

53,205

 

 

(55,385)

Ending balance

 

$

130,790

 

$

101,405

 

$

130,790

 

$

101,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 11 – FAIR VALUE MEASUREMENT

 

The Company records financial instruments at fair value with unrealized gains and losses related to certain financial instruments reflected in AOCI on the Condensed Consolidated Balance Sheets. In addition, the Company recognizes certain liabilities at fair value. The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair value.

 

The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2009 and December 31, 2008, which are classified as “Cash and cash equivalents,” “Other noncurrent assets, net,” “Accrued liabilities,” and “Other noncurrent liabilities.” Financial assets and liabilities that are recorded at fair value as of the balance sheet date are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

 

 

 

 

As of September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

333,368

 

$

333,368

 

$

-

 

$

-

 

Commodity forward purchase contracts

 

 

290

 

 

-

 

 

290

 

 

-

 

Foreign exchange forward contracts

 

 

4,648

 

 

-

 

 

4,648

 

 

-

 

 

Total assets

 

$

338,306

 

$

333,368

 

$

4,938

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

11,437

 

$

-

 

$

11,437

 

$

-

 

Cross currency interest rate swaps

 

 

186,825

 

 

-

 

 

186,825

 

 

-

 

Foreign exchange forward contracts

 

 

1,885

 

 

-

 

 

1,885

 

 

-

 

 

Total liabilities

 

$

200,147

 

$

-

 

$

200,147

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 24 -

 


 

 

 

 

 

 

As of December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

203,991

 

$

203,991

 

$

-

 

$

-

 

Interest Rate Swaps

 

 

2

 

 

-

 

 

2

 

 

-

 

Foreign exchange forward contracts

 

 

2,053

 

 

-

 

 

2,053

 

 

-

 

 

Total assets

 

$

206,046

 

$

203,991

 

$

2,055

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

12,529

 

$

-

 

$

12,529

 

$

-

 

Commodity forward purchase contracts

 

 

1,931

 

 

-

 

 

1,931

 

 

-

 

Cross currency interest rate swaps

 

 

148,935

 

 

-

 

 

148,935

 

 

-

 

 

Total liabilities

 

$

163,395

 

$

-

 

$

163,395

 

$

 

-

 

Derivative valuations are based on observable inputs to the valuation model including interest rates, foreign currency exchange rates, future commodities prices and credit risks.

 

The commodity forward purchase contracts, interest rate swaps, and foreign exchange forward contracts are considered cash flow hedges and cross currency interest rate swaps are considered hedge of net investments in foreign operations as discussed in Note 10, Financial Instruments and Derivatives.

 

NOTE 12 – UNCERTAINITIES IN INCOME TAXES

 

The Company recognizes in the consolidated financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.

 

During the quarter-ended September 30, 2009, the resolution of outstanding tax matters, including finalization of audits, reduced income taxes by approximately $5.6 million.

 

It is reasonably possible that certain amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date of the Company’s consolidated financial statements. Final settlement and resolution of outstanding tax matters in various jurisdictions during the next twelve months could include unrecognized tax benefits of approximately $1.6 million, of which, $0.8 million will have no impact upon the effective income tax rate. Expiration of statutes of limitation in various jurisdictions could include unrecognized tax benefits of approximately $0.6 million.

 

NOTE 13 - FINANCING ARRANGEMENTS  

 

In the second quarter of 2009, the Company’s U.S. dollar denominated private placement note, U.S. dollar commercial paper facility, and multi-currency revolving credit agreement were classified as short-term liabilities as they mature within the next twelve months. Notes payable and current portion of long-term debt, as classified on the condensed consolidated balance sheets, amounted to $240.4 million and $25.8 million at September 30, 2009 and December 31, 2008, respectively.

 

The Company estimates the fair value and carrying value of its total debt was $395.2 million as of September 30, 2009. The fair value of the Company’s long-term debt equaled its carrying value as the Company’s debt is variable interest rate and reflects current market rates. The interest rates on private placement notes, revolving debt and commercial paper are variable and therefore the fair value of these instruments approximates their carrying values.

 

NOTE 14 - COMMITMENTS AND CONTINGENCIES

 

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 in May 2006, preventing DENTSPLY from taking action to restrict its tooth dealers in the U.S. from adding new competitive teeth lines.

 

- 25-


 

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. The Third Circuit has proposed scheduling oral arguments in January 2010. 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 practices, including the 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.

 

As of September 30, 2009, a reasonable estimate of a range of losses related to the current litigation noted above cannot be made.

 

On November 21, 2008, Guidance Endodontics LLC filed a complaint in the U.S. District Court of New Mexico asserting claims against DENTSPLY arising principally out of a breach of a manufacturing and supply contract between the parties. Prior to trial, Guidance had claimed its damages were $1.2 million. The case went to trial in late September and early October 2009. On October 9, 2009, a jury returned a verdict against DENTSPLY, in the amount of approximately $4.0 million for compensatory and $40.0 million in punitive damages. The Company believes that this decision is not supported by the facts in the case or the applicable law and intends to vigorously pursue all available options to challenge it. DENTSPLY does not believe the outcome of this matter will have a material adverse effect on its financial position.

 

Purchase Commitments

 

From time to time, the Company enters into long-term inventory purchase commitments with minimum purchase requirements for raw materials and finished goods to ensure the availability of products for production and distribution. These commitments may have a significant impact on levels of inventory maintained by the Company.

 

NOTE 15 – SUBSEQUENT EVENTS

 

On October 16, 2009, the Company entered into a Note Purchase Agreement with a group of initial purchasers, providing for the issuance by the Company on a delayed basis, no later than February 19, 2010, of $250.0 million aggregate principal amount of fixed rate 4.11% Senior Notes with an average maturity of five years and a final maturity in six years, through a private placement. The net proceeds after deducting fees and expenses of the loan are $250.0 million. The proceeds will be used to refinance the March 15, 2010 $150.0 million U.S. Private Placement Note and general corporate purposes. The obligations of the Company and the lenders are subject to the terms and conditions of the Note Purchase Agreement.

 

 

- 26 -

 


DENTSPLY International Inc. and Subsidiaries  Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The nature and geographic scope of the DENTSPLY International Inc. and Subsidiaries (the “Company”) 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 the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2008. Investors are further cautioned that the risk factors in Item 1A, Part I of the Company’s 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 and manufacturer of professional dental products. The Company is headquartered in the United States of America (“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.

Principal Products

 

The Company has three main product categories: 1) Dental Consumable Products; 2) Dental Laboratory Products; and 3) Dental Specialty Products.

 

Dental consumable products consist of dental sundries and small equipment used in dental offices by general practitioners in the treatment of patients. DENTSPLY’s dental sundry products in the dental consumable category include dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, tooth whiteners and topical fluoride. The Company manufactures a wide variety of different dental sundry consumable products marketed under more than one hundred brand names. Small equipment products in the dental consumable 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 are used in the preparation of dental appliances by dental laboratories. DENTSPLY’s products in the dental laboratory category include dental prosthetics, including artificial teeth, precious metal dental alloys, dental ceramics, and crown and bridge materials. This category also includes fabricated dental appliances, computer aided design software and centralized manufacturing of frameworks. Equipment in this category includes computer aided machining ceramic systems and porcelain furnaces.

 

Dental specialty products are specialized treatment products used within the dental office and laboratory settings. DENTSPLY’s products in this category include endodontic instruments and materials, implants and related products, bone grafting materials, and orthodontic appliances and accessories.

 

 

 

 

- 27 -

 


Key Measurements

 

The principal measurements used by the Company in evaluating its business are: (1) internal growth in the U.S., Europe and all other regions; (2) constant currency growth in the U.S., Europe and all other regions; (3) operating margins of each reportable segment; (4) the development, introduction and contribution of innovative new products; (5) growth through acquisition; and (6) 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. The Company defines “constant currency growth” as internal growth plus acquisition growth.

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. 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. 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.

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.

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.

 

Company’s Response to Economic Conditions  

 

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 and inventory levels in a given period. Due to the current economic conditions, the overall dental market has been negatively impacted by inventory reductions in its distribution channels, particularly in certain emerging market regions.

 

Additionally, the current conditions of the economy have negatively impacted the Company’s gross profit rate. Unfavorable product and geographic sales mix, unfavorable overhead absorption and movements in foreign currencies are the key factors that have affected the Company’s gross profits. The Company continues to manage these negative factors to the extent possible.

 

Due to the international nature of DENTSPLY’s business, movements in foreign exchange rates may impact the statement of income. With approximately 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. As discussed further under regional sales and the segment descriptions, the Company was negatively impacted by the movements in currencies.

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 controlling operating costs. Management will continue to evaluate the consolidation of 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 initiatives will improve the cost structure and offset areas of rising costs such as energy, employee benefits, and regulatory oversight and compliance.

 

 

- 28 -

 


The Company initiated several restructuring plans that included global headcount reductions and business consolidations and reorganizations in late 2008 and the first half of 2009. The Company will begin to realize the cost savings associated with these restructuring plans in 2009 and expects to realize the full cost savings associated with these restructuring plans in 2010. (See also Note 9, Restructuring, Impairments and Other Costs, to the Unaudited Interim Consolidated Condensed Financial Statements.)

RESULTS OF OPERATIONS, QUARTER ENDED SEPTEMBER 30, 2009 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2008

 

Net Sales

 

Management believes that the presentation of net sales, excluding precious metal content, provides useful information to investors because a portion of DENTSPLY’s net sales is comprised of sales of precious metals generated through sales of the Company’s precious metal 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, as 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 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 generally accepted accounting principles in the United States of America (“US GAAP”), and is therefore considered a non-US 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.

 

Three Months Ended

September 30,

(in millions)

2009

2008

$ Change

% Change

Net sales

$

531.0

$

530.0

$

1.0

0.2%

Less: Precious metal content of sales

37.4

 

41.9

 

 

(4.5)

 

(10.7)%

Net sales, excluding precious metal content

$

493.6

$

488.1

 

$

5.5

 

1.1%

 

 

Net sales, excluding precious metal content, for the three months ended September 30, 2009 was $493.6 million, an increase of 1.1% over prior year third quarter. The change in net sales was driven by constant currency growth of 2.5%, partially offset by currency translation, which reduced sales by 1.4%. The constant currency sales growth was comprised of acquisition growth of 4.0%, offset by internal growth of negative 1.5%. Sales for dental products grew on a constant currency basis by 3.6%. Internal growth was negative 0.3% for dental products.

 

Constant Currency and Internal Sales Growth

 

United States

 

Net sales, excluding precious metal content, decreased 1.6% in the United States in the third quarter on a constant currency basis, including 1.0% acquisition growth and internal growth of negative 2.6%. The negative internal growth was primarily driven by the lower sales in dental laboratory and non-dental products and a lower level of inventory purchased by dealers ahead of the October 1, 2009 price increase as compared to 2008.

 

Europe

 

Net sales, excluding precious metal content, in Europe improved by 5.8% on a constant currency basis due to acquisitions completed in 2008. Internal growth was negative 1.1% primarily due to lower sales in the CIS and lower sales in non-dental products throughout the region. Dental specialty products in Europe, excluding the CIS, experienced strong internal sales growth during the quarter.

 

 

 

- 29 -

 


All Other Regions

 

Net sales, excluding precious metal content, in the other regions of the world increased by 4.6% on a constant currency basis primarily related to acquisitions completed in 2008. Internal growth was flat. The Company experienced strong internal growth in dental consumables products offset primarily by lower sales of dental laboratory products.

 

Gross Profit

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

(in millions)

 

 

2009

 

 

2008

 

 

$ Change

 

% Change

 

 

 

 

 

 

Gross Profit

 

$

273.0

 

$

280.2

 

$

(7.2)

 

(2.6)%

Gross Profit as a percentage of net

 

 

 

 

 

 

 

 

 

 

 

sales, including precious metal content

 

 

51.4%

 

 

52.9%

 

 

 

 

 

Gross Profit as a percentage of net

 

 

 

 

 

 

 

 

 

 

 

sales, excluding precious metal content

 

 

55.3%

 

 

57.4%

 

 

 

 

 

 

Gross profit as a percentage of net sales, excluding precious metal content, decreased 2.1 percentage points for the three months ended September 30, 2009 compared to 2008. The decrease is due to lower sales volumes and dealer inventory reductions, unfavorable product and geographic sales mix, adverse movements in foreign currencies and lower production volumes as a result of lower sales volumes and dealer inventory reductions. The resulting impact of unfavorable manufacturing overhead absorption left more costs in inventory which will mostly be rolled off during the fourth quarter. Additionally, acquisitions completed in 2008 negatively impacted gross profit as a percentage of net sales.

 

Operating Expenses

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

(in millions)

 

 

2009

 

 

2008

 

 

$ Change

 

% Change

 

 

 

 

 

 

Selling, general and administrative expenses

   (“SG&A”)

 

$

178.8

 

$

180.7

 

$

(1.9)

 

(1.0)%

Restructuring, impairments and other costs

 

$

1.2

 

$

18.5

 

$

(17.3)

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

SG&A as a percentage of net

 

 

 

 

 

 

 

 

 

 

 

sales, including precious metal content

 

 

33.7%

 

 

34.1%

 

 

 

 

 

SG&A as a percentage of net

 

 

 

 

 

 

 

 

 

 

 

sales, excluding precious metal content

 

 

36.2%

 

 

37.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NM-not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

SG&A Expenses

 

SG&A expenses, measured against sales, excluding precious metal content, decreased to 36.2% in 2009 from 37.0% in 2008. On a constant currency basis, and despite inclusion of costs of businesses acquired in 2008, SG&A expenses were also lower in 2009 when compared to 2008. Expenses continued to be tightly controlled as the Company focuses on reducing discretionary costs and various fixed costs to maintain an efficient cost structure in a difficult economic environment.

 

Restructuring, Impairments and Other Costs, Net

 

During the three months ended September 30, 2009, the Company recorded restructuring, impairments and other costs of $1.2 million. These costs are related to legal matters, new and ongoing restructuring plans to reduce operational costs through consolidation of facilities, global headcount reduction and business re-organizations. In 2008, the Company incurred costs of $18.5 million primarily related to legal settlements. (See also Note 9, Restructuring, Impairments and Other Costs, of the Notes to Unaudited Interim Condensed Consolidated Financial Statements).

 

- 30 -


Other Expense and Income, Net

 

 

 

Three Months Ended

 

 

 

 

 

 

September 30,

 

 

 

(in millions)

 

 

2009

 

 

2008

 

 

Change

 

 

 

 

 

 

 

 

 

 

Net interest expense

 

$

4.6

 

$

4.6

 

$

(0.0)

Other expense, net

 

 

0.5

 

 

1.0

 

 

(0.5)

Net interest and other expense

 

$

5.1

 

$

5.6

 

$

(0.5)

 

Net Interest Expense

 

Net interest expense for the three months ended September 30, 2009 was flat compared with the prior period as significantly lower variable interest rates and lower average debt balances were offset by lower interest rates earned on investments. Interest expense was $3.8 million lower as Euro interest rates were 360 basis points lower and commercial paper outstanding was $149.3 million lower than the prior year quarter. Interest income decreased $3.8 million as the interest rates on Euro investment balances were 400 basis points lower and the Euro investment balance was lower by $71.9 million in the current year than the prior year.

 

Other Expense, Net

 

Other expense in the 2009 period included approximately $0.6 million of currency transaction losses and $0.1 million of other non-operating income. The 2008 period included $0.7 million of currency transaction losses and $0.3 million of other non-operating costs.

 

Income Taxes and Net Income

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

(in millions, except per share data)

 

 

2009

 

 

2008

 

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

Effective income tax rates

 

 

22.8%

 

 

12.2%

 

 

 

 

 

 

Net income attributable to DENTSPLY International

 

 

$

67.5

 

 

$

66.0

 

 

$

1.5

 

2.3%

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

- Diluted

 

$

0.45

 

$

0.44

 

 

 

 

 

 

 

The Company’s effective tax rate for the three months ended September 30, 2009 increased to 22.8% from 12.2% for the same period in 2008. Both periods were impacted by settlements with taxing authorities and statute closures, which favorably impacted the effective tax rate by $5.6 million and $10.0 million for the three months ended September 30, 2009 and 2008, respectively. In aggregate, the effective tax rate for the three months ended September 30, 2009 and 2008 was favorably benefited by $2.6 million or 2.9 percentage points and $8.2 million or 10.9 percentage points, respectively.

 

For the period ending September 30, 2009, net income attributable to DENTSPLY International increased $1.5 million, or 2.3%, to $67.5 million. Fully diluted earnings per share were $0.45 in the third quarter 2009, an increase of 2.3% from $0.44 in the third quarter 2008. Net income attributable to DENTSPLY International for the third quarter of 2009 included acquisition related activity, net of tax and non-controlling interest, of $0.1 million, restructuring, impairments and other costs, net of tax and non-controlling interest, of $0.8 million or $0.01 per diluted share, and a net tax reduction of $2.6 million due to tax related adjustments or $0.02 per diluted share. Net income for the third quarter of 2008, included restructuring, impairments and other costs, net of tax, of $11.4 million, or $0.07 per diluted share, and a net tax reduction of $8.2 million due to tax related adjustments or $0.05 per diluted share.

 

- 31 -


Operating Segment Results

 

Third Party Net Sales, excluding precious metal content

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

(in millions)

 

 

2009

 

 

2008

 

 

$ Change

 

% Change

 

 

 

 

 

 

U.S., Germany, and Certain Other European

 

 

 

 

 

 

 

 

 

 

Regions Consumable Businesses

 

$

143.0

 

$

126.5

 

$

16.5

 

13.0%

 

 

 

 

 

 

 

 

 

 

 

 

France, U.K., Italy, and Certain Other

 

 

 

 

 

 

 

 

 

 

 

European Countries, CIS, Middle East,

 

Africa, Pacific Rim Businesses

 

$

100.3

 

$

99.5

 

$

0.8

 

0.8%

 

 

 

 

 

 

 

 

 

 

 

 

Canada/Latin America/Endodontics/

 

 

 

 

 

 

 

 

 

 

 

Orthodontics

 

$

149.2

 

$

154.9

 

$

(5.7)

 

(3.7)%

 

 

 

 

 

 

 

 

 

 

 

 

Dental Laboratory Business/

 

 

 

 

 

 

 

 

 

 

 

Implants/Non-Dental

 

$

102.0

 

$

107.8

 

$

(5.8)

 

(5.4)%

 

Segment Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

(in millions)

 

 

2009

 

 

2008

 

 

$ Change

 

% Change

 

 

 

 

 

 

U.S., Germany, and Certain Other European

 

 

 

 

 

 

 

 

 

 

Regions Consumable Businesses

 

$

49.0

 

$

50.5

 

$

(1.5)

 

(3.0)%

 

 

 

 

 

 

 

 

 

 

 

 

France, U.K., Italy, and Certain Other

 

 

 

 

 

 

 

 

 

 

 

European Countries, CIS, Middle East,

 

Africa, Pacific Rim Businesses

 

$

3.6

 

$

1.9

 

$

1.7

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

Canada/Latin America/Endodontics/

 

 

 

 

 

 

 

 

 

 

 

Orthodontics

 

$

39.5

 

$

46.8

 

$

(7.3)

 

(15.6)%

 

 

 

 

 

 

 

 

 

 

 

 

Dental Laboratory Business/

 

 

 

 

 

 

 

 

 

 

 

Implants/Non-Dental

 

$

19.1

 

$

25.6

 

$

(6.5)

 

(25.4)%

 

 

 

 

 

 

 

 

 

 

 

 

NM-not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

       Net sales, excluding precious metal content, increased 13.0% during the three months ended September 30, 2009 compared to 2008. On a constant currency basis, sales increased 13.6% due largely to the results of an acquisition completed in 2008. Sales growth in the third quarter of 2009 was partially muted by lower dealer inventory stocking ahead of the Company’s October 1 price increases compared with 2008 activity.

 

       Operating income decreased $1.5 million during the three months ended September 30, 2009 compared to 2008. The decrease was primarily attributable to unfavorable product and geographic sales mix, negative currency translation and lower production at manufacturing facilities.

- 32-


France, United Kingdom, Italy, CIS, Austria, Central and Eastern Europe, Middle East, Africa, Pacific Rim Businesses

 

Net sales, excluding precious metal content, increased 0.8% during the three months ended September 30, 2009 compared to 2008. On a constant currency basis, sales increased 1.5%. The increase was largely the result of an acquisition completed in 2008.

 

Operating income increased $1.7 million during the three months ended September 30, 2009 compared to 2008, driven primarily by expense reductions across the segment.

 

Canada/Latin America/Endodontics/Orthodontics

 

Net sales, excluding precious metal content, decreased 3.7% during the three months ended September 30, 2009 compared to 2008. On a constant currency basis, sales decreased by 1.7% mainly due to lower sales of non-dental products.

 

Operating income decreased $7.3 million during the three months ended September 30, 2009 compared to 2008. The decrease was driven by lower sales and unfavorable manufacturing overhead absorption. This group also had a negative impact from movements in foreign currency exchange rates.

 

Dental Laboratory Business/Implants/Non-Dental

 

Net sales, excluding precious metal content, decreased 5.4% during the three months ended September 30, 2009 compared to 2008. On a constant currency basis, sales decreased 3.6%. Net sales, excluding precious metal content, were negatively impacted by weakness in the dental laboratory and non-dental businesses as well as the unfavorable impact of currency translation across the segment.

 

Operating income decreased $6.5 million during the three months ended September 30, 2009 compared to 2008, which was impacted by lower sales and unfavorable manufacturing overhead absorption.

 

RESULTS OF OPERATIONS, NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2008

 

Net Sales

Nine Months Ended

September 30,

(in millions)

2009

2008

$ Change

% Change

Net sales

$

1,591.2

$

1,685.6

$

(94.4)

(5.6)%

Less: Precious metal content of sales

120.0

159.0

 

(39.0)

 

(24.5)%

Net sales, excluding precious metal content

$

1,471.2

$

1,526.6

 

$

(55.4)

 

(3.6)%

 

Net sales, excluding precious metal content, for the nine months ended September 30, 2009 were $1,471.2 million, 3.6% lower than the prior year. Net sales growth on a constant currency basis was 1.2%. The constant currency sales growth was comprised of acquisition growth of 4.3%, partially offset by internal growth of negative 3.1%. Sales of dental products increased by 2.0% on a constant currency basis. Internal growth for dental products was negative 2.1% as a result of a softer dental market and dealer inventory reductions.

 

Constant Currency and Internal Sales Growth

 

United States

 

Net sales, excluding precious metal content, decreased 2.1% in the United States on a constant currency basis, including 1.1% acquisition growth and internal growth of negative 3.2%. The lower sales were driven by continued softness in the economy, significantly lower sales of non-dental products and dealer inventory reductions within the Company’s dental business.

 

- 33 -

 


Europe

 

Net sales, excluding precious metal content, in Europe improved by 3.5% on a constant currency basis driven by acquisitions completed in 2008. Internal growth was negative 3.9%, primarily due to the decline in non-dental products and lower sales in the CIS, which was affected by negative foreign exchange movements and customer liquidity constraints, partially offset by dental specialty products in the rest of Europe.

 

All Other Regions

 

Net sales, excluding precious metal content, in the other regions of the world increased by 2.9% on a constant currency basis primarily related to acquisitions completed in 2008. Internal growth was negative 1.2%. The region experienced internal growth in dental specialty products offset by continued softness in other dental products.

 

Gross Profit

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

(in millions)

 

 

2009

 

 

2008

 

 

$ Change

 

% Change

 

 

 

 

 

 

Gross Profit

 

$

826.9

 

$

880.9

 

$

(54.0)

 

(6.1)%

Gross Profit as a percentage of net

 

 

 

 

 

 

 

 

 

 

 

sales, including precious metal content

 

 

52.0%

 

 

52.3%

 

 

 

 

 

Gross Profit as a percentage of net

 

 

 

 

 

 

 

 

 

 

 

sales, excluding precious metal content

 

 

56.2%

 

 

57.7%

 

 

 

 

 

 

 

Gross profit as a percentage of net sales, excluding precious metal content, decreased 1.5 percentage points for the nine months ended September 30, 2009 compared to 2008. The decrease is the result of unfavorable product and geographic sales mix, unfavorable manufacturing overhead absorption and movements in foreign currencies. Additionally, acquisitions completed in 2008 negatively impacted gross profit as a percentage of net sales.

 

Operating Expenses

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

(in millions)

 

 

2009

 

 

2008

 

 

$ Change

 

% Change

 

 

 

 

 

 

Selling, general and administrative expenses ("SG&A")

$

543.2

 

$

565.6

 

$

(22.4)

 

(4.0)%

Restructuring and other costs, net

 

$

5.9

 

$

20.2

 

$

(14.3)

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

SG&A as a percentage of net

 

 

 

 

 

 

 

 

 

 

 

sales, including precious metal content

 

 

34.1%

 

 

33.6%

 

 

 

 

 

SG&A as a percentage of net

 

 

 

 

 

 

 

 

 

 

 

sales, excluding precious metal content

 

 

36.9%

 

 

37.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NM-not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

SG&A Expenses

 

SG&A measured against sales, excluding precious metal content, decreased to 36.9% in 2009 from 37.0% in 2008. On a constant currency basis and despite inclusion of costs of businesses acquired in 2008 and costs related to the 2009 International Dental Show, SG&A expenses were slightly lower in 2009 when compared to 2008. Expenses continued to be tightly controlled as the Company focuses on reducing discretionary costs and various fixed costs to maintain an efficient cost structure in a difficult economic environment.

 

 

- 34 -

 


Restructuring, Impairments and Other Costs, Net

 

During the nine months ended September 30, 2009, the Company recorded restructuring, impairments and other costs of $5.9 million. These costs are related to legal matters, new and ongoing restructuring plans to reduce operational costs through consolidation of facilities, global headcount reduction and business re-organizations. In 2008, the Company incurred costs of $20.2 million primarily related to legal settlements. (See also Note 9, Restructuring, Impairments and Other Costs, of the Notes to Unaudited Interim Condensed Consolidated Financial Statements).

 

Other Expense and Income, Net

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

September 30,

 

 

 

(in millions)

 

 

2009

 

 

2008

 

 

Change

 

 

 

 

 

 

 

 

 

 

Net interest expense

 

$

12.6

 

$

10.9

 

$

1.7

Other expense, net

 

 

1.3

 

 

4.1

 

 

(2.8)

Net interest and other expense

 

$

13.9

 

$

15.0

 

$

(1.1)

 

Net Interest Expense

 

The change in net interest expense for the nine months ended September 30, 2009 compared with the prior period was mainly the result of significantly lower Euro interest rates and lower debt average balances combined with stronger U.S. dollar average exchange rates. Interest expense decreased $8.5 million on lower average debt and interest rates.  Interest income decreased $10.2 million on lower average investment balances, lower interest rates on Euro investment balances, which were 360 basis points lower in the current year than the prior year and the stronger U.S. dollar against the Euro.

 

Other Expense, Net

 

Other expense in the 2009 period included approximately $0.9 million of currency transaction losses and $0.4 million of other non-operating costs. The 2008 period included $3.0 million of currency transaction losses and $1.1 million of other non-operating costs.

 

Income Taxes and Net Income

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

(in millions, except per share data)

 

 

2009

 

 

2008

 

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

Effective income tax rates

 

 

24.8%

 

 

24.0%

 

 

 

 

 

Net income attributable to

DENTSPLY International

 

 

$

199.4

 

 

$

212.9

 

 

$

(13.5)

 

(6.3)%

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

- Diluted

 

$

1.33

 

$

1.40

 

 

 

 

 

 

The Company’s effective tax rate for the nine months ended September 30, 2009 increased to 24.8% from 24.0% for the same period in 2008. Both periods were impacted by settlements with taxing authorities and statute closures, which in total decreased the effective tax rate for the nine months ended September 30, 2009 and 2008 by $2.1 million or 0.8 percentage points and $6.5 million or 2.3 percentage points, respectively.

 

For the period ending September 30, 2009, net income attributable to DENTSPLY International decreased $13.5 million, or negative 6.3% to $199.4 million. Fully diluted earnings per share were $1.33 for the nine months ended September 30, 2009, a decrease of 5.0% from $1.40 for the nine months ended September 30, 2008. Net income attributable to DENTSPLY International for the nine months ended September 30, 2009 included restructuring, impairment and other costs, net of tax and non-controlling interest, of $1.8 million or $0.01 per diluted share, acquisition related activity, net of tax and non-controlling interest,  of $4.0 million or $0.02 per diluted share, and a net tax reduction of $2.1 million due to tax related adjustments or $0.01 per diluted share. Net income for the nine months ended September 30, 2008, included restructuring, impairment and other costs, net of tax, of $12.4 million or $0.08 per diluted share, a benefit of $1.1 million or $0.01 per diluted share for non-performance risk loss on derivatives and a net tax reduction of $6.5 million due to tax related adjustments or $0.04 per diluted share.

 

- 35 -


 

Operating Segment Results

 

Third Party Net Sales, excluding precious metal content

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

(in millions)

 

 

2009

 

 

2008

 

 

$ Change

 

% Change

 

 

 

 

 

 

U.S., Germany, and Certain Other European

 

 

 

 

 

 

 

 

 

 

 

Regions Consumable Businesses

 

$

407.5

 

$

371.6

 

$

35.9

 

9.7%

 

 

 

 

 

 

 

 

 

 

 

 

France, U.K., Italy, and Certain Other

 

 

 

 

 

 

 

 

 

 

 

European Countries, CIS, Middle East,

 

Africa, Pacific Rim Businesses

 

$

298.7

 

$

325.4

 

$

(26.7)

 

(8.2)%

 

 

 

 

 

 

 

 

 

 

 

 

Canada/Latin America/Endodontics/

 

 

 

 

 

 

 

 

 

 

 

Orthodontics

 

$

449.8

 

$

475.3

 

$

(25.5)

 

(5.4)%

 

 

 

 

 

 

 

 

 

 

 

 

Dental Laboratory Business/

 

 

 

 

 

 

 

 

 

 

 

Implants/Non-Dental

 

$

317.2

 

$

357.1

 

$

(39.9)

 

(11.2)%

 

 

Segment Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

 

(in millions)

 

 

2009

 

 

2008

 

 

$ Change

 

% Change

 

 

 

 

 

 

U.S., Germany, and Certain Other European

 

 

 

 

 

 

 

Regions Consumable Businesses

 

$

125.8

$

138.4

$

(12.6)

(9.1)%

 

 

 

 

 

 

 

 

 

 

 

 

France, U.K., Italy, and Certain Other

 

 

 

 

 

 

 

 

 

 

 

European Countries, CIS, Middle East,

 

 

 

 

Africa, Pacific Rim Businesses

 

$

10.5 

 

$

9.4 

 

$

1.1 

 

11.7% 

 

 

 

 

 

 

 

 

 

 

 

 

Canada/Latin America/Endodontics/

 

 

 

 

 

 

 

 

 

 

 

Orthodontics

 

$

135.1

 

$

153.2

 

$

(18.1)

 

(11.8)%

 

 

 

 

 

 

 

 

 

 

 

 

Dental Laboratory Business/

 

 

 

 

 

 

 

 

 

 

 

Implants/Non-Dental

 

$

66.0

 

$

92.4

 

$

(26.4)

 

(28.6)%

 

 

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

 

Net sales, excluding precious metal content, increased 9.7% during the nine months ended September 30, 2009 compared to 2008. On a constant currency basis, sales increased 11.6%, which was driven primarily by acquisition growth.

 

Operating income decreased $12.6 million during the nine months ended September 30, 2009 compared to 2008. Operating income was negatively affected by unfavorable product and geographic sales mix and currency translation. In addition, the decrease was partially attributable to the roll-off of inventory step-up related to an acquisition completed in late 2008. The segment, excluding an acquisition completed in 2008, reduced operating expenses during the nine months ended September 30, 2009 when compared to the same period in 2008.

 

- 36 -


France, United Kingdom, Italy, CIS, Austria, Central and Eastern Europe, Middle East, Africa, Pacific Rim Businesses

 

Net sales, excluding precious metal content, decreased 8.2% during the nine months ended September 30, 2009 compared to 2008, of which negative 6.6% was the result of currency translation. On a constant currency basis, sales were negative 1.6% due to lower sales mainly in the CIS partially offset by acquisitions and growth in the Pacific Rim.

 

Operating income increased $1.1 million during the nine months ended September 30, 2009 compared to 2008. The increase was driven primarily by increased profits in the Pacific Rim operations and expense reductions in several geographies, partially offset by lower sales volumes, mainly in the CIS.

 

Canada/Latin America/Endodontics/Orthodontics

 

Net sales, excluding precious metal content, decreased 5.4% during the nine months ended September 30, 2009 compared to 2008, of which negative 4.7% was the result of currency translation. On a constant currency basis, sales decreased by 0.7% driven by a decrease in non-dental products partially offset by growth in Orthodontics and acquisitions.

 

Operating income decreased $18.1 million during the nine months ended September 30, 2009 compared to 2008. The decrease was driven primarily by lower sales in non-dental products, unfavorable absorption and the negative impact from foreign currency transactions.

 

Dental Laboratory Business/Implants/Non-Dental

 

Net sales, excluding precious metal content, decreased 11.2% during the nine months ended September 30, 2009 compared to 2008, of which negative 6.3% was the result of currency translation. On a constant currency basis, sales were negative 4.8%. The primary driver of the lower sales was weakness in the dental laboratory and implants businesses and reduced sales in the non-dental business partially offset by acquisition growth.

 

Operating income decreased $26.4 million during the nine months ended September 30, 2009 compared to 2008, primarily as a result of lower sales, unfavorable product sales mix and currency translation.

 

CRITICAL ACCOUNTING POLICIES

        As discussed in Note 1, Significant Accounting Policies, of the Notes to Unaudited Interim Condensed Consolidated Financial Statements, the Company adopted four new accounting standards since January 1, 2009.

 

There have been no other material changes to the Company’s disclosure in its Annual Report on Form 10-K/A for the year ended December 31, 2008.

 

LIQUIDITY AND CAPITAL RESOURCES

Nine months ended September 30, 2009

 

Cash flow from operating activities during the nine months ended September 30, 2009 was $245.4 million compared to $236.8 million during the same period of 2008. Net income from continuing operations decreased by $14.6 million to $198.4 million. Improvements in working capital for 2009 were the primary reason for the increase in cash from operations. Inventory and accounts receivable balances on a constant currency basis were positive contributors to the change in cash flow, while foreign exchange impacts resulted in higher absolute dollar balances and reported days in each category. Reductions in accounts payable and accruals largely offset the improvements from inventory and accounts receivable.

 

Investing activities during the first nine months of 2009 include capital expenditures of $43.3 million.

 

At September 30, 2009, the Company had authorization to maintain up to 17,000,000 shares of treasury stock under the stock repurchase program as approved by the Board of Directors. Under this program, the Company purchased 723,700 shares for $21.3 million during the first nine months of 2009 at an average price of $29.37. As of September 30, 2009, the Company held 14.3 million shares of treasury stock. The Company also received proceeds of $9.5 million as a result of the exercise of 658,867 stock options during the nine months ended September 30, 2009.

 

The Company’s long-term borrowings decreased by a net of $54.3 million during the nine months ended September 30, 2009. This change included net repayments of $57.2 million during the first nine months and an increase of $2.9 million due to exchange rate fluctuations on debt denominated in foreign currencies. At September 30, 2009, the Company’s ratio of long-term debt to total capitalization decreased to 7.4% compared to 21.2% at December 31, 2008. Also in that same period, the Company’s cash, cash equivalents and short-term investments have increased from $204.2 million to $333.4 million.

- 37 -


      Under its multi-currency revolving credit agreement, the Company is able to borrow up to $500.0 million through May 2010. This facility is unsecured and contains certain affirmative and negative covenants relating to its operations and financial condition. The most restrictive of these covenants pertain to asset dispositions and prescribed ratios of indebtedness to total capital and operating income plus depreciation and amortization to interest expense. At September 30, 2009, the Company was in compliance with these covenants. The Company also has available an aggregate $250.0 million under a U.S. dollar commercial paper facility. The multi-currency revolving credit facility serves as a back-up to the commercial paper facility. The total available credit under the commercial paper facility and the multi-currency facility in the aggregate is $500.0 million with $62.7 million outstanding under the multi-currency facility.

 

The Company’s debt instruments that are supported by the multi-currency revolving credit facility and a private placement note have been re-classified as current until the Company replaces the May 2010 maturing facility. Management’s intent is to replace the maturing facility, at least in part, in the first or second quarter of next year.

 

The Company entered into a Note Purchase Agreement (“Note”) with a group of initial purchasers through a private placement, providing for the issuance by the Company on a delayed basis, no later than February 19, 2010, of $250.0 million aggregate principal amount of fixed rate 4.11% Senior Notes with an average maturity of five years and a final maturity in six years. This Note is unsecured and contains certain affirmative and negative covenants relating to its operations and financial condition of the Company similar in substance to the existing $150.0 million U.S. Private Placement Note (“U.S. Note”) maturing March 15, 2010. The purpose of the new Note is to refinance the existing U.S. Note at maturity as well as for general corporate purposes.

 

The Company also has access to $67.2 million in uncommitted short-term financing under lines of credit from various financial institutions. The lines of credit have no major restrictions and are provided under demand notes between the Company and the lending institutions. At September 30, 2009, $21.7 million is outstanding under these short-term lines of credit. At September 30, 2009, the Company had total unused lines of credit related to the revolving credit agreement and the uncommitted short-term lines of credit of $480.7 million.

 

At September 30, 2009, the Company held $87.0 million of precious metals on consignment from several financial institutions. These consignment agreements allow the Company to acquire the precious metal at market rates at a point in time, which is approximately the same time and for the same price as alloys are sold to the Company’s customers. In the event that the financial institutions would discontinue offering these consignment arrangements, and if the Company could not obtain other comparable arrangements, the Company may be required to obtain third party financing to fund an ownership position in the required precious metal inventory levels.

 

There have been no other material changes to the Company’s scheduled contractual cash obligations disclosed in its Annual Report on Form 10-K/A for the year ended December 31, 2008. The Company expects on an ongoing basis, to be able to finance cash requirements, including capital expenditures, stock repurchases, debt service, operating leases and potential future acquisitions, from the funds generated from operations and amounts available under its existing credit facilities.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

    Refer to Note 1, Significant Accounting Policies, of the Notes to Unaudited Interim Condensed Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

 

There have been no significant material changes to the market risks as disclosed in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2008.

 

Item 4 - Controls and Procedures

 

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 and Exchange Act of 1934, as amended) as of the end of the period covered by this report were effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that it is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting that occurred during the most recent quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

- 38 -


PART II – OTHER INFORMATION

 

Item 1 - 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 in May 2006, 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. The Third Circuit has proposed scheduling oral arguments in January 2010. 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 practices, including the 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.

 

On November 21, 2008, Guidance Endodontics LLC filed a complaint in the U.S. District Court of New Mexico asserting claims against DENTSPLY arising principally out of a breach of a manufacturing and supply contract between the parties. Prior to trial, Guidance had claimed its damages were $1.2 million. The case went to trial in late September and early October 2009. On October 9, 2009, a jury returned a verdict against DENTSPLY, in the amount of approximately $4.0 million for compensatory and $40.0 million in punitive damages. The Company believes that this decision is not supported by the facts in the case or the applicable law and intends to vigorously pursue all available options to challenge it. Dentsply does not believe the outcome of this matter will have a material adverse effect on its financial position.

 

Item 1A – Risk Factors

 

There have been no significant material changes to the risks factors as disclosed in the Company’s Annual Report on Form 10-K/A for the year ending December 31, 2008.

 

 

- 39 -

 


Item 2 - Unregistered Sales of Securities and Use of Proceeds

 

At September 30, 2009, the Company had authorization to maintain up to 17,000,000 shares of treasury stock under the stock repurchase program as approved by the Board of Directors. During the quarter ended September 30, 2009, the Company had the following activity with respect to this repurchase program:

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

Shares that

 

 

 

 

 

 

 

 

 

 

May be Purchased

 

 

Total Number

 

 

Average Price

 

 

Total Cost

 

Under the Share

 

 

of Shares

 

 

Paid Per

 

 

of Shares

 

Repurchase

Period

 

Purchased

 

 

Share

 

 

Purchased

 

Program

 

 

 

 

 

 

 

 

 

 

 

July 1-31, 2009

22.9

$

28.89

$

661.5

2,827.9

August 1-31, 2009

 

161.9

33.76

5,467.6

2,808.9

September 1-30, 2009

 

161.8

33.04

5,345.3

2,686.8

 

346.6

 

$

33.11

$

11,474.4

 

 

 

 

Item 4 - Submission of Matters to Vote of Security Holders

 

There were no matters submitted to security holders for vote during the quarter ended September 30, 2009.

 

Item 6 - Exhibits

 

Exhibit Number

 

31 Section 302 Certification Statements.
32 Section 906 Certification Statements.

99.1

Incorporated by reference to exhibit included in Form 8-K filed on October 21, 2009.

101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

- 40 -

 


Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

DENTSPLY International Inc.

 

 

/s/

Bret W. Wise

 

October 29, 2009

 

Bret W. Wise

 

Date

 

Chairman of the Board and

 

 

 

Chief Executive Officer

 

 

 

 

/s/

William R. Jellison

 

October 29, 2009

 

William R. Jellison

 

Date

 

Senior Vice President and

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

- 41 -

 

 

Exhibit 31.1

 

Section 302 Certifications Statement

 

I, Bret W. Wise, certify that:

 

 

1.

I have reviewed this Form 10-Q of DENTSPLY International Inc;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles:

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: October 29, 2009

 

/s/

Bret W. Wise

 

Bret W. Wise

 

Chairman of the Board and

 

Chief Executive Officer

 

 

 

 

Exhibit 31.2

 

Section 302 Certifications Statement

 

I, William R. Jellison, certify that:

 

 

1.

I have reviewed this Form 10-Q of DENTSPLY International Inc;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles:

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: October 29, 2009

 

/s/

William R. Jellison

 

William R. Jellison

 

Senior Vice President and

 

Chief Financial Officer

 

 

 

Exhibit 32

 

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of DENTSPLY International Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), We, Bret W. Wise, Chairman of the Board of Director, and Chief Executive Officer of the Company and William R. Jellison, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge and belief:

 

 

(1)

The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company as of the date of the Report.

 

 

/s/

Bret W. Wise

 

Bret W. Wise

 

Chairman of the Board and

 

Chief Executive Officer

 

 

/s/

William R. Jellison

 

William R. Jellison

 

Senior Vice President and

 

Chief Financial Officer

 

 

October 29, 2009