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