Unassociated Document
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 March 31, 2010

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 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 has submitted electronically and posted on its corporate website, if any every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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 April 26, 2010, DENTSPLY International Inc. had 146,352,495 shares of Common Stock outstanding, with a par value of $.01 per share.

 
 

 

DENTSPLY International Inc.

TABLE OF CONTENTS

   
Page
PART I
FINANCIAL INFORMATION
 
     
Item 1
Financial Statements (unaudited)
 
     
 
Consolidated Statements of Operations
3
     
 
Consolidated Balance Sheets
4
     
 
Consolidated Statements of Cash Flows
5
     
 
Consolidated Statement of Changes in Equity
6
     
 
Notes to Unaudited Interim Consolidated Financial Statements
7
     
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
     
Item 3
Quantitative and Qualitative Disclosures About Market Risk
34
     
Item 4
Controls and Procedures
35
     
PART II
OTHER INFORMATION
 
     
Item 1
Legal Proceedings
36
     
Item 1A
Risk Factors
36
     
Item 2
Unregistered Sales of Securities and Use of Proceeds
36
     
Item 4
Submission of Matters to a Vote of Security Holders
36
     
Item 6
Exhibits
36
     
 
Signatures
37
     

 
- 2 - -

 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)

   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
             
Net sales
  $ 545,944     $ 506,949  
Cost of products sold
    263,906       241,217  
                 
Gross profit
    282,038       265,732  
Selling, general and administrative expenses
    188,034       177,987  
Restructuring and other costs
    4,680       1,570  
                 
Operating income
    89,324       86,175  
                 
Other income and expenses:
               
Interest expense
    5,720       6,153  
Interest income
    (787 )     (1,956 )
Other expense, net
    945       917  
                 
Income before income taxes
    83,446       81,061  
Provision for income taxes
    21,255       21,131  
                 
Net income
    62,191       59,930  
Less: Net income (loss) attributable to the noncontrolling interests
    348       (1,813 )
Net income attributable to DENTSPLY International
  $ 61,843     $ 61,743  
                 
Earnings per common share:
               
Basic
  $ 0.42     $ 0.42  
Diluted
  $ 0.41     $ 0.41  
                 
Cash dividends declared per common share
  $ 0.05     $ 0.05  
                 
Weighted average common shares outstanding:
               
Basic
    146,776       148,514  
Diluted
    149,294       149,705  

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

 
- 3 - -

 

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)

   
March 31,
   
December 31,
 
   
2010
   
2009
 
Assets
           
Current Assets:
           
Cash and cash equivalents
  $ 405,017     $ 450,348  
Accounts and notes receivables-trade, net
    355,030       348,684  
Inventories, net
    301,198       291,640  
Prepaid expenses and other current assets
    117,209       127,124  
                 
Total Current Assets
    1,178,454       1,217,796  
                 
Property, plant and equipment, net
    420,779       439,619  
Identifiable intangible assets, net
    83,515       89,086  
Goodwill, net
    1,279,103       1,312,596  
Other noncurrent assets, net
    24,896       28,835  
                 
Total Assets
  $ 2,986,747     $ 3,087,932  
                 
Liabilities and Equity
               
Current Liabilities:
               
Accounts payable
  $ 108,118     $ 100,847  
Accrued liabilities
    196,890       249,169  
Income taxes payable
    3,481       12,366  
Notes payable and current portion of long-term debt
    18,946       82,174  
                 
Total Current Liabilities
    327,435       444,556  
                 
Long-term debt
    457,565       387,151  
Deferred income taxes
    70,166       72,524  
Other noncurrent liabilities
    248,963       276,743  
                 
Total Liabilities
    1,104,129       1,180,974  
                 
Commitments and contingencies
               
                 
Equity:
               
Preferred stock, $.01 par value; .25 million shares authorized; no shares issued
    -       -  
Common stock, $.01 par value; 200.0 million shares authorized; 162.8 million shares issued at
March 31, 2010 and December 31, 2009  
    1,628       1,628  
Capital in excess of par value
    194,806       195,495  
Retained earnings
    2,137,952       2,083,459  
Accumulated other comprehensive income  
    34,607       83,542  
Treasury stock, at cost, 16.5 million shares at March 31, 2010 and 15.8 million
shares at December 31, 2009
    (557,805 )     (532,019 )
Total DENTSPLY International Equity
    1,811,188       1,832,105  
                 
Noncontrolling interests
    71,430       74,853  
                 
Total Equity
    1,882,618       1,906,958  
                 
Total Liabilities and Equity
  $ 2,986,747     $ 3,087,932  

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

 
- 4 - -

 

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
             
Net income
  $ 62,191     $ 59,930  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    15,265       12,930  
Amortization
    2,524       3,441  
Deferred income taxes
    (3,745 )     (1,750 )
Share-based compensation expense
    5,223       4,789  
Restructuring and other costs - noncash
    363       328  
Excess tax benefits from share-based compensation
    (1,898 )     (592 )
Changes in operating assets and liabilities, net of acquisitions:
               
Accounts and notes receivable-trade, net
    (15,530 )     (19,745 )
Inventories, net
    (14,472 )     (18,675 )
Prepaid expenses and other current assets
    (5,729 )     1,208  
Accounts payable
    9,195       (2,633 )
Accrued liabilities
    (12,519 )     (26,863 )
Income taxes payable
    (6,801 )     (1,824 )
Other, net
    2,477       95  
                 
Net cash provided by operating activities
    36,544       10,639  
                 
Cash flows from investing activities:
               
                 
Capital expenditures
    (8,030 )     (14,183 )
Cash paid for acquisitions of businesses, net of cash acquired
    (7,687 )     (574 )
Liquidation of short-term investments
    -       58  
Expenditures for identifiable intangible assets
    (107 )     -  
Proceeds from sale of property, plant and equipment, net
    113       17  
                 
Net cash used in investing activities
    (15,711 )     (14,682 )
                 
Cash flows from financing activities:
               
                 
Net change in short-term borrowings
    (2,124 )     1,045  
Cash paid for treasury stock
    (41,423 )     (4,664 )
Cash dividends paid
    (7,409 )     (7,460 )
Proceeds from long-term borrowings
    311,834       108,900  
Payments on long-term borrowings
    (299,215 )     (53,507 )
Proceeds from exercise of stock options
    7,403       1,360  
Excess tax benefits from share-based compensation
    1,898       592  
                 
Net cash (used in) provided by financing activities
    (29,036 )     46,266  
                 
Effect of exchange rate changes on cash and cash equivalents
    (37,128 )     (19,915 )
                 
Net (decrease) increase in cash and cash equivalents
    (45,331 )     22,308  
                 
Cash and cash equivalents at beginning of period
    450,348       203,991  
                 
Cash and cash equivalents at end of period
  $ 405,017     $ 226,299  

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

 
- 5 - -

 

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
(In thousands)
(unaudited)                    
Accumulated
                         
         
Capital in
         
Other
         
Total DENTSPLY
             
   
Common
   
Excess of
   
Retained
   
Comprehensive
   
Treasury
   
International
   
Noncontrolling
   
Total
 
   
Stock
   
Par Value
   
Earnings
   
Income (Loss)
   
Stock
   
Equity
   
Interests
   
Equity
 
                                                 
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
    -       -       61,743       -       -       61,743       (1,813 )     59,930  
Other comprehensive income (loss), net of tax:
                                                               
Foreign currency translation adjustments
    -       -       -       (75,758 )     -       (75,758 )     (4,428 )     (80,186 )
 Net loss on derivative financial instruments
    -       -       -       42,471       -       42,471       -       42,471  
 Unrecognized losses and prior service pension cost, net
    -       -       -       1,978       -       1,978       1       1,979  
                                                                 
Comprehensive Income
                                            30,434       (6,240 )     24,194  
                                                                 
Exercise of stock options
    -       (2,261 )     -       -       3,621       1,360       -       1,360  
Tax benefit from stock options exercised
    -       592       -       -       -       592       -       592  
Share based compensation expense
    -       4,789       -       -       -       4,789       -       4,789  
Funding of Employee Stock Option Plan
    -       (70 )     -       -       1,408       1,338       -       1,338  
Treasury shares purchased
    -       -       -       -       (4,664 )     (4,664 )     -       (4,664 )
RSU dividends
    -       34       (34 )     -       -       -       -       -  
Cash dividends ($0.05 per share)
    -       -       (7,425 )     -       -       (7,425 )     -       (7,425 )
Balance at March 31, 2009
  $ 1,628     $ 190,238     $ 1,893,242     $ 8,303     $ (479,265 )   $ 1,614,146     $ 65,451     $ 1,679,597  
 
                     
Accumulated
                         
         
Capital in
         
Other
         
Total DENTSPLY
             
   
Common
   
Excess of
   
Retained
   
Comprehensive
   
Treasury
   
International
   
Noncontrolling
   
Total
 
   
Stock
   
Par Value
   
Earnings
   
Income (Loss)
   
Stock
   
Equity
   
Interests
   
Equity
 
                                                 
Balance at December 31, 2009
  $ 1,628     $ 195,495     $ 2,083,459     $ 83,542     $ (532,019 )   $ 1,832,105     $ 74,853     $ 1,906,958  
Comprehensive Income:
                                                               
Net income
    -       -       61,843       -       -       61,843       348       62,191  
Other comprehensive income (loss), net of tax:
                                                               
Foreign currency translation adjustments
    -       -       -       (73,422 )     -       (73,422 )     (3,771 )     (77,193 )
Net loss on derivative financial instruments
    -       -       -       23,724       -       23,724       -       23,724  
Unrecognized losses and prior service pension cost, net
    -       -       -       763       -       763       -       763  
                                                                 
Comprehensive Income
                                            12,908       (3,423 )     9,485  
                                                                 
Exercise of stock options
    -       (4,372 )     -       -       11,775       7,403       -       7,403  
Tax benefit from stock options exercised
    -       1,898       -       -       -       1,898       -       1,898  
Share based compensation expense
    -       5,223       -       -       -       5,223       -       5,223  
Funding of Employee Stock Option Plan
    -       206       -       -       1,132       1,338       -       1,338  
Treasury shares purchased
    -       -       -       -       (41,423 )     (41,423 )     -       (41,423 )
RSU distributions
    -       (3,678 )     -       -       2,730       (948 )     -       (948 )
RSU dividends
    -       34       (34 )     -       -       -       -       -  
Cash dividends ($0.05 per share)
    -       -       (7,316 )     -       -       (7,316 )     -       (7,316 )
Balance at March 31, 2010
  $ 1,628     $ 194,806     $ 2,137,952     $ 34,607     $ (557,805 )   $ 1,811,188     $ 71,430     $ 1,882,618  

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

 
- 6 - -

 

DENTSPLY International Inc. and Subsidiaries

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim 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 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 (DENTSPLY or 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 Form 10-K for the year ended December 31, 2009.

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of the Company, as applied in the interim consolidated financial statements presented herein are substantially the same as presented in the Company’s Form 10-K for the year ended December 31, 2009, except as may be 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 $12.7 million and $13.3 million at March 31, 2010 and December 31, 2009, respectively.

Variable Interest Entities

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance for variable interest entities (“VIE”).  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 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 Company adopted this guidance on January 1, 2010, and the adoption did not have a material impact on the Company’s financial position and results of operations.

The Company consolidates all VIE where the Company has determined that it has the power to direct the activities that most significantly impact the VIE’s economic performance and shares in either the significant risks or rewards of the VIE.  The Company continually reassesses VIE to determine if consolidation is appropriate.

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 authorized grants under the plan of 14.0 million 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 14.0 million, the excess becomes available for grant under the Plan.  No more than 2.0 million shares may be awarded as restricted stock and RSU, and no key employee may be granted restricted stock and RSU in excess of approximately 0.2 million 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.  RSU 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. Similar to stock options, RSU become immediately exercisable upon death, disability or qualified retirement.  It is the Company’s practice to issue shares from treasury stock when options are exercised.

 
- 7 - -

 

At the date of grant, the Company uses 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 months ended March 31, 2010 and 2009:

(in millions)
 
2010
   
2009
 
     
           
Stock option expense
  $ 2.9     $ 2.9  
RSU expense  
    2.0       1.5  
Total stock based compensation expense
  $ 4.9     $ 4.4  
     
               
Total related tax benefit
  $ 1.4     $ 1.1  

The remaining unamortized compensation cost related to non-qualified stock options is $16.0 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.8 years. The unamortized compensation cost related to RSU is $11.6 million, which will be expensed over the remaining restricted period of the RSU, or 1.9 years.

The following table reflects the non-qualified stock option transactions from December 31, 2009 through March 31, 2010:

   
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, 2009
    12,038     $ 28.34     $ 94,148       8,682     $ 26.78     $ 80,839  
Granted
    18       34.30                                  
Exercised
    (393 )     18.86                                  
Forfeited
    (25 )     36.57                                  
                                                 
March 31, 2010
    11,638     $ 28.64     $ 84,074       8,337     $ 27.17     $ 71,859  

The weighted average remaining contractual term of all outstanding options is 6.3 years and the weighted average remaining contractual term of exercisable options is 4.8 years.

The following table summarizes the unvested restricted stock unit and RSU dividend transactions from December 31, 2009 through March 31, 2010:

   
Unvested Restricted Stock and Stock Dividend Units
 
         
Weighted Average
 
         
Grant Date
 
(in thousands, except per share data)
 
Shares
   
Fair Value
 
             
Unvested at December 31, 2009
    662     $ 31.94  
Granted
    236       32.80  
Vested
    (199 )     31.22  
Forfeited
    (6 )     32.46  
                 
Unvested at March 31, 2010
    693     $ 32.44  

 
- 8 - -

 

NOTE 3 – COMPREHENSIVE INCOME

The changes to balances included in accumulated other comprehensive income (“AOCI”), net of tax, in the consolidated balance sheets for the three months ended March 31, 2010 and 2009 are as follows:

(in thousands)
 
2010
   
2009
 
             
Net income
  $ 62,191     $ 59,930  
Other comprehensive (loss) income:
               
Foreign currency translation adjustments
    (77,193 )     (80,186 )
Net gain on derivative financial instruments
    23,724       42,471  
Amortization of unrecognized losses and prior year service pension cost
    763       1,979  
Total other comprehensive loss
    (52,706 )     (35,736 )
                 
Total comprehensive income
    9,485       24,194  
                 
Comprehensive loss attributable to the noncontrolling interests
    (3,423 )     (6,240 )
                 
Comprehensive income attributable to DENTSPLY International
  $ 12,908     $ 30,434  

During the quarter ended March 31, 2010, foreign currency translation adjustments included currency translation losses of $81.2 million partially offset by gains of $4.0 million on the Company’s loans designated as hedges of net investments.  During the quarter ended March 31, 2009, foreign currency translation adjustments included currency translation losses of $89.9 million partially offset by gains of $9.7 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.

The balances included in AOCI, net of tax, in the consolidated balance sheets are as follows:

   
March 31,
   
December 31,
 
(in thousands)
 
2010
   
2009
 
             
Foreign currency translation adjustments
  $ 146,694     $ 220,116  
Net loss on derivative financial instruments
    (90,076 )     (113,800 )
Unrecognized losses and prior year service pension cost
    (22,011 )     (22,774 )
    $ 34,607     $ 83,542  

The cumulative foreign currency translation adjustments included translation gains of $253.5 million and $327.8 million as of March 31, 2010 and December 31, 2009, respectively, offset by losses of $106.8 million and $107.7 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.

 
- 9 - -

 

NOTE 4 - EARNINGS PER COMMON SHARE

The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2010 and 2009:

Basic Earnings Per Common Share Computation
           
(in thousands, except per share amounts)
 
2010
   
2009
 
             
Net income attributable to DENTSPLY International
  $ 61,843     $ 61,743  
                 
Common shares outstanding
    146,776       148,514  
                 
Earnings per common share - basic
  $ 0.42     $ 0.42  
                 
Diluted Earnings Per Common Share Computation
               
(in thousands, except per share amounts)
               
                 
Net income attributable to DENTSPLY International
  $ 61,843     $ 61,743  
                 
Common shares outstanding
    146,776       148,514  
Incremental shares from assumed exercise of dilutive options
    2,518       1,191  
Total shares
    149,294       149,705  
                 
Earnings per common share - diluted
  $ 0.41     $ 0.41  

Options to purchase 3.0 million shares of common stock that were outstanding during the three months ended March 31, 2010, 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.  There were 8.1 million antidilutive shares of common stock outstanding during the three months ended March 31, 2009.

NOTE 5 – BUSINESS ACQUISITIONS

The acquisition related activity for the three months ended March 31, 2010 of $7.7 million, net of cash acquired, was related to two acquisitions and one earn-out payment on an acquisition from 2008. The purchase agreement for one acquisition provides for an additional payment to be made based upon the operating performance of the business; however, the Company does not expect the additional payment to be material to the financial statements. The results of operations for the two businesses have been included in the accompanying financial statements since the effective date of the respective transaction. The purchase prices have been allocated on the basis of preliminary estimates of the fair values of assets acquired and liabilities assumed.  The Company expects to finalize the purchase price allocations for the two acquisitions in the second quarter of 2010, and does not expect the adjustments to be material to the financial statements.  As of March 31, 2010, the Company has recorded a total of $4.3 million in goodwill related to the unallocated portions of the respective purchase prices, and all of this goodwill is associated with the Canada/Latin America/Endodontics/Orthodontics segment.

As discussed in Note 1, Significant Accounting Policies, the Company adopted the new accounting guidance for VIE.  The adoption has not changed the Company’s prior conclusion that all current VIE should be consolidated.  Under the new accounting guidance for VIE, the Company believes it is the primary beneficiary for all the VIE since the Company directs the activities that most significantly impacts the economic performance of the VIE and has the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE.  The consolidation of the VIE net assets is immaterial to the Company’s financial position with most of the net assets recorded in goodwill and identifiable intangible assets.

 
- 10 - -

 

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 March 31, 2010 and 2009.

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 Form10-K in the summary of significant accounting policies.  The Company measures segment income for reporting purposes as operating income before restructuring and other costs, interest expense, interest income, other income and expenses and income taxes.

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 France, 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; France, 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.

 
- 11 - -

 

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

The following tables set forth information about the Company’s operating groups for the three months ended March 31, 2010 and 2009:

Third Party Net Sales
(in thousands)
 
2010
   
2009
 
       
U.S., Germany and Certain Other
European Regions Consumable Businesses
  $ 134,974     $ 124,913  
France, U.K., Italy and Certain Other
European Countries, CIS, Middle East,
Africa, Pacific Rim Businesses
    110,285       105,128  
Canada/Latin America/Endodontics/
Orthodontics
    156,620       144,680  
Dental Laboratory Business/
Implants/Non-Dental
    145,111       133,018  
All Other (a)
    (1,046 )     (790 )
Total
  $ 545,944     $ 506,949  

Third Party Net Sales, Excluding Precious Metal Content
(in thousands)
 
2010
   
2009
 
       
U.S., Germany and Certain Other
European Regions Consumable Businesses
  $ 134,974     $ 124,913  
France, U.K., Italy and Certain Other
European Countries, CIS, Middle East,
Africa, Pacific Rim Businesses
    102,209       97,400  
Canada/Latin America/Endodontics/
Orthodontics
    156,030       144,039  
Dental Laboratory Business/
Implants/Non-Dental
    105,319       100,088  
All Other (a)
    (1,046 )     (790 )
Total excluding precious metal content
    497,486       465,650  
Precious metal content
    48,458       41,299  
Total including precious metal content
  $ 545,944     $ 506,949  

(a) Includes amounts recorded at Corporate headquarters.

 
- 12 - -

 

Inter-segment Net Sales
(in thousands)
 
2010
   
2009
 
       
U.S., Germany and Certain Other
European Regions Consumable Businesses
  $ 26,217     $ 23,080  
France, U.K., Italy and Certain Other
European Countries, CIS, Middle East,
Africa, Pacific Rim Businesses
    3,619       3,384  
Canada/Latin America/Endodontics/
Orthodontics
 
  25,320       28,598  
Dental Laboratory Business/
Implants/Non-Dental
    26,680       26,956  
All Other (a)
    44,003       38,326  
Eliminations
    (125,839 )     (120,344 )
Total
  $ -     $ -  

Segment Operating Income
(in thousands)
 
2010
   
2009
 
       
U.S., Germany and Certain Other
European Regions Consumable Businesses
  $ 44,861     $ 33,922  
France, U.K., Italy and Certain Other
European Countries, CIS, Middle East,
Africa, Pacific Rim Businesses
    (129 )     2,900  
Canada/Latin America/Endodontics/
Orthodontics
    48,022       50,058  
Dental Laboratory Business/
Implants/Non-Dental
    22,462       22,257  
All Other (b)
    (21,212 )     (21,392 )
Segment operating income
    94,004       87,745  
Reconciling Items:
               
Restructuring and other costs
    (4,680     (1,570
Interest expense
    (5,720     (6,153
Interest income
    787       1,956  
Other expense, net
    (945     (917
Income before income taxes
  $ 83,446     $ 81,061  

(a) Includes amounts recorded at Corporate headquarters and one distribution warehouse not managed by named segments.
(b) Includes results of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments.
 

 
- 13 - -

 

Assets
           
   
March 31,
   
December 31,
 
(in thousands)
 
2010
   
2009
 
       
U.S., Germany and Certain Other European
           
Regions Consumable Businesses
  $ 594,274     $ 602,272  
France, U.K., Italy and Certain Other European
               
Countries, CIS, Middle East, Africa,
               
Pacific Rim Businesses
    372,012       388,831  
Canada/Latin America/Endodontics/
               
Orthodontics
    839,298       809,924  
Dental Laboratory Business/
               
Implants/Non-Dental
    932,312       973,764  
All Other (a)
    248,851       313,141  
Total
  $ 2,986,747     $ 3,087,932  
 
(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 March 31, 2010 and December 31, 2009, the cost of $8.7 million, or 2.9%, and $7.8 million, or 2.7%, 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 $32.8 million and $31.9 million as of March 31, 2010 and December 31, 2009, 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 March 31, 2010 and December 31, 2009 by $4.3 million and $4.0 million, respectively.

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

   
March 31,
   
December 31,
 
(in thousands)
 
2010
   
2009
 
             
Finished goods
  $ 181,232     $ 178,721  
Work-in-process
    54,383       53,056  
Raw materials and supplies
    65,583       59,863  
    $ 301,198     $ 291,640  

 
- 14 - -

 

NOTE 8 - BENEFIT PLANS

The following sets forth the components of net periodic benefit cost of the Company’s benefit plans and for the Company’s other postretirement employee benefit plans for the three months ended March 31, 2010 and 2009, respectively:
 
Defined Benefit Plans
     
(in thousands)
 
2010
   
2009
 
             
Service cost
  $ 2,015     $ 2,006  
Interest cost
    2,143       1,919  
Expected return on plan assets
    (1,152 )     (958 )
Amortization of transition obligation
    31       57  
Amortization of prior service cost
    20       34  
Amortization of net loss
    241       403  
                 
Net periodic benefit cost
  $ 3,298     $ 3,461  


Other Postretirement Plans
     
(in thousands)
 
2010
   
2009
 
             
Service cost
  $ 14     $ 13  
Interest cost
    153       156  
Amortization of net loss
    69       50  
                 
Net periodic benefit cost
  $ 236     $ 219  

The following sets forth the information related to the funding of the Company’s benefit plans for 2010:

   
       
Other
 
   
 
Pension
   
Postretirement
 
(in thousands)  
 
Benefits
   
Benefits
 
   
           
Actual at March 31, 2010  
  $ 1,933     $ (61 )
Projected for the remainder of the year
    6,708       1,168  
Total for year  
  $ 8,641     $ 1,107  

NOTE 9 – RESTRUCTURING AND OTHER COSTS

Restructuring Costs

During the three months ended March 31, 2010 and 2009, the Company recorded restructuring costs of $0.8 million and $1.2 million, respectively.  These costs are recorded in “Restructuring and other costs” in the consolidated statements of operations and the associated liabilities are recorded in accrued liabilities in the consolidated balance sheets.  These costs primarily consist of employee severance costs.

During 2010 and 2009, 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.

 
- 15 - -

 
 
As of March 31, 2010, the Company’s restructuring accruals were as follows:
 
   
Severance
 
   
2008 and
                   
(in thousands)
 
Prior Plans
   
2009 Plans
   
2010 Plans
   
Total
 
                         
Balance at December 31, 2009
  $ 5,302     $ 3,240     $ -     $ 8,542  
Provisions and adjustments
    (25 )     -       642       617  
Amounts applied
    (1,350 )     (909 )     (385 )     (2,644 )
Balance at March 31, 2010
  $ 3,927     $ 2,331     $ 257     $ 6,515  

   
Lease/Contract Terminations
 
   
2008 and
       
(in thousands)
 
Prior Plans
   
Total
 
             
Balance at December 31, 2009
  $ 1,125     $ 1,125  
Provisions and adjustments
    -       -  
Amounts applied
    -       -  
Balance at March 31, 2010
  $ 1,125     $ 1,125  

   
Other Restructuring Costs
       
   
2008 and
                   
(in thousands)
 
Prior Plans
   
2009 Plans
   
2010 Plans
   
Total
 
                         
Balance at December 31, 2009
  $ 112     $ 16     $ -     $ 128  
Provisions and adjustments
    9       77       55       141  
Amounts applied
    (47 )     (88 )     -       (135 )
Balance at March 31, 2010
  $ 74     $ 5     $ 55     $ 134  

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

   
December 31,
   
Provisions and
   
Amounts
   
March 31,
 
(in thousands)
 
2009
   
Adjustments
   
Applied
   
2010
 
 
                       
United States, Germany and Certain Other
European Regions Consumable Businesses
  $ 1,278     $ 462     $ (202 )   $ 1,538  
France, U.K., Italy and Certain Other
European Countries, CIS, Middle East,
Africa, Pacific Rim Businesses
    84       124       (124 )     84  
Canada/Latin America/Endodontics/
Orthodontics
    639       (2 )     (637 )     -  
Dental Laboratory Business/
Implants/Non-Dental
    7,794       174       (1,816 )     6,152  
    $ 9,795     $ 758     $ (2,779 )   $ 7,774  

Other Costs

During the three months ended March 31, 2010 and 2009, the Company recorded other costs of $3.9 million and $0.4 million, respectively.  Other costs for the three months ended March 31, 2010 and 2009 are primarily related to impairments of long-term assets and several legal matters.  These other costs are reflected in “Restructuring and other costs” in the consolidated statements of operations.
 
- 16 - -

 
NOTE 10 – FINANCIAL INSTRUMENTS AND DERIVATIVES

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 foreign currency 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 foreign currency 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.

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 March 31, 2010, the Company has two groups of significant variable interest rate to fixed 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 which had a notional amount of $150.0 million, and effectively converted underlying variable interest rates to a fixed interest rate of 3.9% for a term of two years, matured on March 15, 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 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.

The Company selectively enters into commodity swaps to effectively fix certain variable raw material costs.  At March 31, 2010, the Company had swaps in place to purchase 303 troy ounces of platinum bullion for use in the production of its impression material products.  The average fixed rate of this agreement is $1,196 per troy ounce.  In addition, the Company had swaps in place to purchase 57,366 troy ounces of silver bullion for use in the production of its amalgam products at an average fixed rate of $16 per troy ounce.
 
 
- 17 - -

 
 
The following tables summarize the fair value of the Company’s cash flow hedges at March 31, 2010.
 
   
Notional Amounts
   
Fair Value
(Liability) Asset
 
Foreign Exchange Forward Contracts
 
2009
   
2010
   
2010
 
(in thousands)
                 
                   
Forward sale, 12.0 million Australian dollars
  $ 10,043     $ 944     $ (586 )
Forward sale, 3.6 million Brazilian reais
    1,997       -       (75