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 June 30, 2011

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, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” 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 Exchange Act).

Yes     ¨          No    x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  At July 25, 2011, DENTSPLY International Inc. had 141,330,451 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 Statements 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
30
     
Item 3
Quantitative and Qualitative Disclosures About Market Risk
47
     
Item 4
Controls and Procedures
47
     
PART II
OTHER INFORMATION
 
     
Item 1
Legal Proceedings
47
     
Item 1A
Risk Factors
47
     
Item 2
Unregistered Sales of Securities and Use of Proceeds
48
     
Item 4
Submission of Matters to a Vote of Security Holders
48
     
Item 5(a)
Other Information 48
     
Item 6
Exhibits
49
     
 
Signatures
50

 
- 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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net sales
  $ 609,443     $ 565,086     $ 1,179,946     $ 1,111,030  
Cost of products sold
    294,592       277,491       565,111       541,397  
                                 
Gross profit
    314,851       287,595       614,835       569,633  
Selling, general and administrative expenses
    210,984       182,383       411,751       370,417  
Restructuring and other costs
    6,863       243       7,496       4,923  
                                 
Operating income
    97,004       104,969       195,588       194,293  
                                 
Other income and expenses:
                               
Interest expense
    5,570       6,686       11,913       12,406  
Interest income
    (2,430 )     (827 )     (4,258 )     (1,614 )
Other expense (income), net
    1,434       722       1,504       1,667  
                                 
Income before income taxes
    92,430       98,388       186,429       181,834  
Provision for income taxes
    17,957       25,042       41,669       46,297  
Equity in net income of unconsolidated affilated company
    917       -       93       -  
                                 
Net income
    75,390       73,346       144,853       135,537  
Less: Net income attributable to noncontrolling interests
    1,154       960       1,533       1,308  
Net income attributable to DENTSPLY International
  $ 74,236     $ 72,386     $ 143,320     $ 134,229  
                                 
Earnings per common share:
                               
Basic
  $ 0.53     $ 0.50     $ 1.01     $ 0.92  
Diluted
  $ 0.52     $ 0.49     $ 1.00     $ 0.91  
                                 
Weighted average common shares outstanding:
                               
Basic
    141,052       144,779       141,331       145,772  
Diluted
    143,373       146,939       143,694       148,048  

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

 
- 3 -

 

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
Assets
           
Current Assets:
           
Cash and cash equivalents
  $ 671,710     $ 540,038  
Accounts and notes receivables-trade, net
    404,661       344,796  
Inventories, net
    337,200       308,738  
Prepaid expenses and other current assets
    138,842       121,473  
                 
Total Current Assets
    1,552,413       1,315,045  
                 
Property, plant and equipment, net
    442,957       423,105  
Identifiable intangible assets, net
    86,770       78,743  
Goodwill, net
    1,391,289       1,303,055  
Other noncurrent assets, net
    183,214       138,003  
                 
Total Assets
  $ 3,656,643     $ 3,257,951  
                 
Liabilities and Equity
               
Current Liabilities:
               
Accounts payable
  $ 113,870     $ 114,479  
Accrued liabilities
    283,616       224,745  
Income taxes payable
    24,440       13,113  
Notes payable and current portion of long-term debt
    8,500       7,754  
                 
Total Current Liabilities
    430,426       360,091  
                 
Long-term debt
    654,873       604,015  
Deferred income taxes
    81,324       72,489  
Other noncurrent liabilities
    408,787       311,444  
                 
Total Liabilities
    1,575,410       1,348,039  
                 
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 June 30, 2011 and December 31, 2010
    1,628       1,628  
Capital in excess of par value
    227,071       204,902  
Retained earnings
    2,449,463       2,320,350  
Accumulated other comprehensive income
    103,513       24,156  
Treasury stock, at cost, 21.5 million shares at June 30, 2011 and 21.0 million shares at December 31, 2010
    (739,445 )     (711,650 )
Total DENTSPLY International Equity
    2,042,230       1,839,386  
                 
Noncontrolling interests
    39,003       70,526  
                 
Total Equity
    2,081,233       1,909,912  
                 
Total Liabilities and Equity
  $ 3,656,643     $ 3,257,951  
 
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

 
- 4 -

 

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
   
Six Months Ended
 
   
June 30,
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
             
Net income
  $ 144,853     $ 135,537  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    32,359       29,438  
Amortization
    4,736       4,771  
Deferred income taxes
    6,894       (57 )
Share-based compensation expense
    10,316       10,238  
Restructuring and other costs - noncash
    (787 )     363  
Excess tax benefits from share-based compensation
    (6,217 )     (4,666 )
Changes in operating assets and liabilities, net of acquisitions:
               
Accounts and notes receivable-trade, net
    (40,357 )     (28,487 )
Inventories, net
    (8,368 )     (9,111 )
Prepaid expenses and other current assets
    (1,927 )     (16,549 )
Accounts payable
    4,129       12,603  
Accrued liabilities
    9,051       4,183  
Income taxes payable
    12,942       4,913  
Other, net
    (2,660 )     7,292  
Net cash provided by operating activities
    164,964       150,468  
                 
Cash flows from investing activities:
               
                 
Capital expenditures
    (25,338 )     (18,897 )
Cash paid for acquisitions of businesses, net of cash acquired
    (20,087 )     (8,309 )
Expenditures for identifiable intangible assets
    (332 )     (255 )
Proceeds from sale of property, plant and equipment, net
    175       279  
                 
Net cash used in investing activities
    (45,582 )     (27,182 )
                 
Cash flows from financing activities:
               
                 
Net change in short-term borrowings
    (177 )     (5,237 )
Cash paid for treasury stock
    (79,500 )     (176,630 )
Cash dividends paid
    (14,312 )     (15,741 )
Cash paid for contingent consideration on prior acquisitions
    (1,780 )     -  
Cash paid for acquisition of noncontrolling interests of consolidated subsidiaries
    (16,431 )     -  
Proceeds from long-term borrowings
    38,254       250,000  
Repayments of long-term borrowings
    (2,403 )     (240,108 )
Proceeds from exercise of stock options
    33,993       25,845  
Excess tax benefits from share-based compensation
    6,217       4,666  
                 
Net cash used in financing activities
    (36,139 )     (157,205 )
                 
Effect of exchange rate changes on cash and cash equivalents
    48,429       (76,082 )
                 
Net increase(decrease) in cash and cash equivalents
    131,672       (110,001 )
                 
Cash and cash equivalents at beginning of period
    540,038       450,348  
                 
Cash and cash equivalents at end of period
  $ 671,710     $ 340,347  
 
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

 
- 5 -

 

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements 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, 2009
  $ 1,628     $ 195,495     $ 2,083,459     $ 83,542     $ (532,019 )   $ 1,832,105     $ 74,853     $ 1,906,958  
Comprehensive Income:
                                                               
Net income
    -       -       134,229       -       -       134,229       1,308       135,537  
Other comprehensive income (loss), net of tax:
                                                         
Foreign currency translation adjustments
    -       -       -       (204,568 )     -       (204,568 )     (10,465 )     (215,033 )
Net gain on derivative financial instruments
    -       -       -       63,672       -       63,672       -       63,672  
Pension liability adjustments
    -       -       -       1,676       -       1,676       -       1,676  
                                                                 
Comprehensive Income
                                            (4,991 )     (9,157 )     (14,148 )
                                                                 
Exercise of stock options
    -       (8,213 )     -       -       34,058       25,845       -       25,845  
Tax benefit from stock options exercised
    -       4,666       -       -       -       4,666       -       4,666  
Share based compensation expense
    -       10,238       -       -       -       10,238       -       10,238  
Funding of Employee Stock Ownership Plan
    -       207       -       -       1,132       1,339       -       1,339  
Treasury shares purchased
    -       -       -       -       (176,630 )     (176,630 )     -       (176,630 )
RSU distributions
    -       (4,234 )     -       -       2,856       (1,378 )     -       (1,378 )
RSU dividends
    -       78       (78 )     -       -       -       -       -  
Cash dividends ($0.10 per share)
    -       -       (15,480 )     -       -       (15,480 )     -       (15,480 )
Balance at June 30, 2010
  $ 1,628     $ 198,237     $ 2,202,130     $ (55,678 )   $ (670,603 )   $ 1,675,714     $ 65,696     $ 1,741,410  
                                                                 
                           
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, 2010
  $ 1,628     $ 204,902     $ 2,320,350     $ 24,156     $ (711,650 )   $ 1,839,386     $ 70,526     $ 1,909,912  
Comprehensive Income:
                                                               
Net income
    -       -       143,320       -       -       143,320       1,533       144,853  
Other comprehensive income (loss), net of tax:
                                                         
Foreign currency translation adjustments
    -       -       -       146,824       -       146,824       5,943       152,767  
Net loss on derivative financial instruments
    -       -       -       (63,403 )     -       (63,403 )     -       (63,403 )
Net unrealized holding gains on available-for-sale adjustments
    -       -       -       (2,031 )     -       (2,031 )     -       (2,031 )
Pension liability adjustments
    -       -       -       (2,033 )     -       (2,033 )     -       (2,033 )
                                                                 
Comprehensive Income
                                            222,677       7,476       230,153  
                                                                 
Acquistion of noncontrolling interest
    -       22,394       -       -       -       22,394       (38,825 )     (16,431 )
Exercise of stock options
    -       (11,578 )     -       -       45,571       33,993       -       33,993  
Tax benefit from stock options exercised
    -       6,217       -       -       -       6,217       -       6,217  
Share based compensation expense
    -       10,362       -       -       -       10,362       -       10,362  
Funding of Employee Stock Ownership Plan
    -       379       -       -       2,595       2,974       -       2,974  
Treasury shares purchased
    -       -       -       -       (79,500 )     (79,500 )     -       (79,500 )
Dividends paid by noncontrolling interest
    -       -       -               -       -       (174 )     (174 )
RSU distributions
    -       (5,696 )     -       -       3,539       (2,157 )     -       (2,157 )
RSU dividends
    -       91       (91 )     -       -       -       -       -  
Cash dividends ($0.10 per share)
    -       -       (14,116 )     -       -       (14,116 )     -       (14,116 )
Balance at June 30, 2011
  $ 1,628     $ 227,071     $ 2,449,463     $ 103,513     $ (739,445 )   $ 2,042,230     $ 39,003     $ 2,081,233  
 
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 United States 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, 2010.

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, 2010, except as may be indicated below:

Accounts and Notes Receivable-Trade, Net

The Company sells dental products through a worldwide network of distributors and directly to end users.  For customers on credit terms, the Company performs ongoing credit evaluation of those customers' financial condition and generally does not require collateral from them.  The Company establishes allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments based on historical averages of aged receivable balances and the Company’s experience in collecting those balances, customer specific circumstances, as well as changes in the economic and political environments.  The Company records a provision for doubtful accounts, which is included in “Selling, general and administrative expenses.”

Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $10.8 million and $9.6 million at June 30, 2011 and December 31, 2010, respectively.

Litigation

The Company and its subsidiaries are from time to time parties to lawsuits arising out of their respective operations.  The Company records liabilities when a loss is probable and can be reasonably estimated.  These estimates are typically in the form of ranges, and the Company records the liabilities at the low point of the ranges, when no other point within the ranges are a better estimate of the probable loss.  The ranges established by management are based on analysis made by internal and external legal counsel who considers information known at the time.  If the Company determines a liability to be only reasonably possible, it considers the same information to estimate the possible exposure and will disclose any material potential liability.  These loss contingencies are monitored regularly for a change in fact or circumstance that would require an accrual adjustment.  The Company believes it has estimated liabilities for probable losses appropriately in the past; however, the unpredictability of litigation and court decisions could cause a liability to be incurred in excess of estimates.  Legal costs related to these lawsuits are expensed as incurred.

Marketable Securities

The Company’s marketable securities consist of debt instruments that are classified as available-for-sale in “Other noncurrent assets, net” on the consolidated balance sheets as the instruments mature in December 2015. The Company determined the appropriate classification at the time of purchase and will re-evaluate such designation as of each balance sheet date. In addition, the Company reviews the securities each quarter for indications of possible impairment. Once identified, the determination of whether the impairment is temporary or other-than-temporary requires significant judgment. The primary factors that the Company considers in classifying the impairment include the extent and time the fair value of each investment has been below cost and the existence of a credit loss. If a decline in fair value is judged other-than-temporary, the basis of the securities is written down to fair value and the amount of the write-down is included as a realized loss.

 
- 7 -

 

On December 9, 2010, the Company invested $49.7 million in the corporate convertible bonds of DIO Corporation (“DIO”), which may be converted into common shares after a one year period.  The bonds are designated by the Company as available-for-sale securities which are reported in, “Other noncurrent assets, net,” on the consolidated balance sheets and the changes in fair value are reported in accumulated other comprehensive income (“AOCI”).  The convertible feature of the bond has not been bifurcated from the underlying bond as the feature does not contain a net-settlement feature, nor would the Company be able to achieve a hypothetical net-settlement that would substantially place the Company in a comparable cash settlement position.  As such, the derivative is not accounted for separately from the bond.  The cash paid by the Company is equal to the face value of the bonds issued by DIO, and therefore, the Company has not recorded any bond premium or discount on acquiring the bonds.  The fair value of the DIO bond was $67.5 million and $66.0 million at June 30, 2011 and December 31, 2010, respectively.  At June 30, 2011 and December 31, 2010, $9.0 million and $11.0 million, respectively, of unrealized holding gains on available-for-sale securities, net of tax, have been recorded in AOCI. The contractual maturity of the bond is in December 2015.

Revenue Recognition

Certain of the Company’s customers are offered cash rebates based on targeted sales increases.  Estimates of rebates are based on the forecasted performance of the customer and their expected level of achievement within the rebate programs.  In accounting for these rebate programs, the Company records an accrual as a reduction of net sales as sales take place over the period the rebate is earned.  The Company revises the accruals for these rebate programs as actual results and revised forecasts impact the estimated achievement for customers within the rebate programs.

Revisions in Classification

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

NOTE 2 – STOCK COMPENSATION

The following table represents total stock based compensation expense for non-qualified stock options, restricted stock units (“RSU”) and the tax related benefit for the three and six months ended June 30, 2011 and 2010:

   
Three Months Ended
   
Six Months Ended
 
(in thousands)
 
2011
   
2010
   
2011
   
2010
 
Stock option expense
  $ 3,035     $ 2,937     $ 5,373     $ 5,836  
RSU expense
    2,296       1,757       4,347       3,768  
Total stock based compensation expense
  $ 5,331     $ 4,694     $ 9,720     $ 9,604  
                                 
Total related tax benefit
  $ 1,620     $ 1,507     $ 2,872     $ 2,897  

The remaining unamortized compensation cost related to non-qualified stock options is $16.9 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 $14.0 million, which will be expensed over the remaining restricted period of the RSU, or 2.1 years.

 
- 8 -

 

The following table reflects the non-qualified stock option transactions from December 31, 2010 through June 30, 2011:

   
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, 2010
    10,636     $ 29.07     $ 66,722       8,815     $ 28.58     $ 61,450  
Granted
    1,474       36.74                                  
Exercised
    (1,502 )     22.64                                  
Cancelled
    (36 )     45.15                                  
Forfeited
    (53 )     31.72                                  
                                                 
June 30, 2011
    10,519     $ 30.99     $ 81,928       7,377     $ 29.76     $ 68,681  

The weighted average remaining contractual term of all outstanding options is 6.2 years and the weighted average remaining contractual term of exercisable options is 5.0 years.

The following table summarizes the unvested RSU transactions from December 31, 2010 through June 30, 2011:

         
Weighted Average
 
         
Grant Date
 
(in thousands, except per share data)
 
Shares
   
Fair Value
 
Unvested at December 31, 2010
    744     $ 32.43  
Granted
    353       36.69  
Vested
    (174 )     41.04  
Forfeited
    (16 )     29.97  
                 
Unvested at June 30, 2011
    907     $ 32.48  

NOTE 3 – COMPREHENSIVE INCOME

The changes to balances included in AOCI, net of tax, in the consolidated balance sheets for the three and six months ended June 30, 2011 and 2010 are as follows:
 
   
Three Months Ended
   
Six Months Ended
 
(in thousands)
 
2011
   
2010
   
2011
   
2010
 
Net income
  $ 75,390     $ 73,346     $ 144,853     $ 135,537  
Other comprehensive income:
                               
Foreign currency translation adjustments
    62,051       (137,840 )     152,767       (215,033 )
Net (loss) gain on derivative financial instruments
    (36,391 )     39,948       (63,403 )     63,672  
Net unrealized holding losses on available-for-sale securities
    (6,233 )     -       (2,031 )     -  
Amortization of unrecognized losses and prior year service pension cost
    (1,500 )     913       (2,033 )     1,676  
Total other comprehensive income (loss)
    17,927       (96,979 )     85,300       (149,685 )
                                 
Total comprehensive income (loss)
    93,317       (23,633 )     230,153       (14,148 )
                                 
Comprehensive income (loss) attributable to the noncontrolling interests
    3,833       (5,734 )     7,476       (9,157 )
                                 
Comprehensive income (loss) attributable to DENTSPLY International
  $ 89,484     $ (17,899 )   $ 222,677     $ (4,991 )
 
During the quarter ended June 30, 2011, foreign currency translation adjustments included currency translation gains of $52.4 million and gains on the Company’s loans designated as hedges of net investments of $9.7 million.  During the quarter ended June 30, 2010, foreign currency translation adjustments included currency translation losses of $134.2 million and losses on the Company’s loans designated as hedges of net investments of $3.6 million.  During the six months ended June 30, 2011, foreign currency translation adjustments included currency translation gains of $142.1 million and gains on the Company’s loans designated as hedges of net investments of $10.7 million.  During the six months ended June 30, 2010, foreign currency translation adjustments included currency translation losses of $212.3 million and losses on the Company’s loans designated as hedges of net investments of $2.7 million.  These foreign currency translation adjustments were offset by net gains on derivative financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.
 
 
- 9 -

 

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

   
June 30,
   
December 31,
 
(in thousands)
 
2011
   
2010
 
Foreign currency translation adjustments
  $ 317,421     $ 170,597  
Net loss on derivative financial instruments
    (190,051 )     (126,648 )
Net unrealized holding gains on available-for-sale securities
    8,998       11,029  
Pension liability adjustments
    (32,855 )     (30,822 )
    $ 103,513     $ 24,156  

The cumulative foreign currency translation adjustments included translation gains of $447.0 million and $294.6 million at June 30, 2011 and December 31, 2010, respectively, partially offset by losses of $129.6 million and $124.0 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 for the three and six months ended June 30, 2011 and 2010:

   
Three Months Ended
   
Six Months Ended
 
Basic Earnings Per Common Share Computation
                       
(in thousands, except per share amounts)
 
2011
   
2010
   
2011
   
2010
 
                         
Net income attributable to DENTSPLY International
  $ 74,236     $ 72,386     $ 143,320     $ 134,229  
                                 
Common shares outstanding
    141,052       144,779       141,331       145,772  
                                 
Earnings per common share - basic
  $ 0.53     $ 0.50     $ 1.01     $ 0.92  
                                 
Diluted Earnings Per Common Share Computation
                               
(in thousands, except per share amounts)
                               
                                 
Net income attributable to DENTSPLY International
  $ 74,236     $ 72,386     $ 143,320     $ 134,229  
                                 
Common shares outstanding
    141,052       144,779       141,331       145,772  
Incremental shares from assumed exercise of dilutive options from stock-based compensation awards
    2,321       2,160       2,363       2,276  
Total shares
    143,373       146,939       143,694       148,048  
                                 
Earnings per common share - diluted
  $ 0.52     $ 0.49     $ 1.00     $ 0.91  

 
- 10 -

 

Options to purchase 3.0 million and 3.4 million shares of common stock that were outstanding during the three and six months ended June 30, 2011, 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 3.1 million and 3.2 million antidilutive shares of common stock outstanding during the three and six months ended June 30, 2010, respectively.

NOTE 5 – BUSINESS ACQUISITIONS

The acquisition related activity for the six months ended June 30, 2011 of $38.3 million, net of cash acquired, was related to five acquisitions and two earn-out payments for acquisitions completed during or prior to 2010.
 
The purchase agreements for certain acquisitions made during the six months ended June 30, 2011 provide for additional payments to be made based upon the operating performance of the respective business.  The initial fair value for contingent consideration arrangements for transactions entered into during the six months ended June 30, 2011 was $10.7 million, and further discussed in Note 11, Fair Value Measurements.
 
The results of operations for these businesses have been included in the accompanying financial statements as of the effective date of the respective transactions. The purchase prices have been assigned on the basis of preliminary estimates of the fair values of assets acquired and liabilities assumed.  At June 30, 2011, the Company has recorded a total of $23.5 million in goodwill related to the difference between the fair value of assets acquired and liabilities assumed and the consideration given. The goodwill is primarily associated with the Canada/Latin America/Endodontics/Orthodontics segment.
 
In addition, during the second quarter 2011, the Company signed a definitive agreement with AstraZeneca Plc. to acquire Astra Tech AB (“Astra Tech”), a leading developer, manufacturer and marketer of dental implants, customized implant abutments and consumable medical devices in the urology and surgery market segments.  Astra Tech recorded approximately $535 million in worldwide revenue in 2010.  The purchase price for the transaction is approximately $1.8 billion.  The Company expects to use the available cash on hand and committed financing to fund the purchase of this business.  The transaction is subject to regulatory approval and customary closing conditions and is expected to close in 2011.

For the three and six months ended June 30, 2011, in connection with pending or completed acquisitions, the Company has incurred $6.3 million and $6.7 million, respectively, of transaction related costs, primarily banking fees and amounts paid to third party advisers.

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 three and six months ended June 30, 2011 and 2010.

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 Form 10-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 of 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 of 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.

 
- 11 -

 

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 of 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 of implant and bone substitute/grafting materials, sales and distribution of implants in Brazil, sales of dental lasers and 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 of 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; 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.

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 and six months ended June 30, 2011 and 2010:

Third Party Net Sales

   
Three Months Ended
   
Six Months Ended
 
(in thousands)
 
2011
   
2010
   
2011
   
2010
 
U.S., Germany and Certain Other European Regions Consumable Businesses
  $ 151,513     $ 137,245     $ 292,580     $ 272,219  
France, U.K., Italy and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses
    140,249       121,601       264,938       231,886  
Canada/Latin America/Endodontics/ Orthodontics
    176,493       170,715       343,352       327,335  
Dental Laboratory Business/Implants/Non-Dental
    142,826       136,265       281,757       281,375  
All Other (a)
    (1,638 )     (740 )     (2,681 )     (1,785 )
Total
  $ 609,443     $ 565,086     $ 1,179,946     $ 1,111,030  

(a) Includes amounts recorded at Corporate headquarters

 
- 12 -

 

Third Party Net Sales, Excluding Precious Metal Content

   
Three Months Ended
   
Six Months Ended
 
(in thousands)
 
2011
   
2010
   
2011
   
2010
 
U.S., Germany and Certain Other European Regions Consumable Businesses
  $ 151,513     $ 137,245     $ 292,580     $ 272,219  
France, U.K., Italy and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses
    129,447       112,037       243,970       214,107  
Canada/Latin America/Endodontics/Orthodontics
    175,702       170,011       341,817       326,041  
Dental Laboratory Business/Implants/Non-Dental
    108,966       100,256       215,309       205,574  
All Other (a)
    (1,638 )     (741 )     (2,681 )     (1,786 )
Total excluding precious metal content
    563,990       518,808       1,090,995       1,016,155  
Precious mental content
    45,453       46,278       88,951       94,875  
Total including precious metal content
  $ 609,443     $ 565,086     $ 1,179,946     $ 1,111,030  

(a) Includes amounts recorded at Corporate headquarters

Inter-segment Net Sales

   
Three Months Ended
   
Six Months Ended
 
(in thousands)
 
2011
   
2010
   
2011
   
2010
 
U.S., Germany and Certain Other European Regions Consumable Businesses
  $ 30,541     $ 30,846     $ 58,299     $ 57,063  
France, U.K., Italy and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses
    4,971       5,037       9,440       8,656  
Canada/Latin America/Endodontics/Orthodontics
    37,037       29,357       68,511       54,677  
Dental Laboratory Business/Implants/Non-Dental
    29,217       30,915       57,004       57,595  
All Other (a)
    55,458       45,081       106,835       89,084  
Eliminations
    (157,224 )     (141,236 )     (300,089 )     (267,075 )
Total
  $ -     $ -     $ -     $ -  

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

 
- 13 -

 

Segment Operating Income

   
Three Months Ended
   
Six Months Ended
 
(in thousands)
 
2011
   
2010
   
2011
   
2010
 
U.S., Germany and Certain Other European Regions Consumable Businesses
  $ 53,701     $ 49,654     $ 100,046     $ 94,515  
France, U.K., Italy and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses
    3,902       5,536       3,333       5,407  
Canada/Latin America/Endodontics/Orthodontics
    50,128       49,141       99,945       97,163  
Dental Laboratory Business/Implants/Non-Dental
    21,856       22,494       45,806       44,957  
All Other (a)
    (25,720 )     (21,613 )     (46,046 )     (42,826 )
Segment operating income
    103,867       105,212       203,084       199,216  
                                 
Reconciling Items:
                               
Restructuring and other costs
    (6,863 )     (243 )     (7,496 )     (4,923 )
Interest expense
    (5,570 )     (6,686 )     (11,913 )     (12,406 )
Interest income
    2,430       827       4,258       1,614  
Other expense (income), net
    (1,434 )     (722 )     (1,504 )     (1,667 )
Income before income taxes
  $ 92,430     $ 98,388     $ 186,429     $ 181,834  

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

Assets
           
   
June 30,
   
December 31,
 
(in thousands)
 
2011
   
2010
 
U.S., Germany and Certain Other European Regions Consumable Businesses
  $ 623,586     $ 578,770  
France, U.K., Italy and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses
    416,013       390,572  
Canada/Latin America/Endodontics/Orthodontics
    996,465       932,126  
Dental Laboratory Business/Implants/Non-Dental
    1,083,938       995,090  
All Other (a)
    536,641       361,393  
Total
  $ 3,656,643     $ 3,257,951  

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

NOTE 7 - INVENTORIES

Inventories are stated at the lower of cost or market.  At June 30, 2011 and December 31, 2010, the cost of $9.0 million, or 2.7%, and $6.9 million, or 2.2%, respectively, of inventories was determined using the last-in, first-out (“LIFO”) method. The cost of the remaining inventories was determined using the first-in, first-out (“FIFO”) or average cost methods.
 
 
- 14 -

 

If the FIFO method had been used to determine the cost of LIFO inventories, the amounts at which net inventories are stated would be higher than reported at June 30, 2011 and December 31, 2010 by $4.4 million and $4.9 million, respectively.
 
The Company establishes reserves for inventory in order to present the net realizable value.  The inventory valuation reserves were $37.7 million and $35.5 million at June 30, 2011 and December 31, 2010, respectively.
 
Inventories, net of inventory valuation reserves, consist of the following:

   
June 30,
   
December 31,
 
(in thousands)
 
2011
   
2010
 
             
Finished goods
  $ 198,735     $ 189,343  
Work-in-process
    64,704       57,272  
Raw materials and supplies
    73,761       62,123  
    $ 337,200     $ 308,738  

NOTE 8 - BENEFIT PLANS

The following sets forth the components of net periodic benefit cost of the Company’s defined benefit plans and for the Company’s other postretirement employee benefit plans for the three and six months ended June 30, 2011 and 2010:

Defined Benefit Plans
 
Three Months Ended
   
Six Months Ended
 
(in thousands)
 
2011
   
2010
   
2011
   
2010
 
                         
Service cost
  $ 2,578     $ 1,918     $ 5,012     $ 3,933  
Interest cost
    2,305       2,014       4,492       4,157  
Expected return on plan assets
    (1,290 )     (1,116 )     (2,506 )     (2,268 )
Amortization of transition obligation
    -       28       -       59  
Amortization of prior service cost
    21       24       41       44  
Amortization of net loss
    405       234       788       475  
                                 
Net periodic benefit cost
  $ 4,019     $ 3,102     $ 7,827     $ 6,400  
 
Other Postretirement Plans
 
Three Months Ended
   
Six Months Ended
 
(in thousands)
 
2011
   
2010
   
2011
   
2010
 
                         
Service cost
  $ 16     $ 15     $ 32     $ 29  
Interest cost
    139       153       277       306  
Amortization of net loss
    49       68       98       137  
                                 
Net periodic benefit cost
  $ 204     $ 236     $ 407     $ 472  

 
- 15 -

 

The following sets forth the information related to the contributions to the Company’s benefit plans for 2011:

         
Other
 
   
Pension
   
Postretirement
 
(in thousands)
 
Benefits
   
Benefits
 
             
Actual at June 30, 2011
  $ 5,319     $ 169  
Projected for the remainder of the year
    4,806       930  
Total for year
  $ 10,125     $ 1,099  

NOTE 9 – RESTRUCTURING AND OTHER COSTS

Other Costs
 
During the three and six months ended June 30, 2011, the Company recorded other costs of $6.2 million and $6.8 million, respectively, which were primarily related to Astra Tech acquisition costs.  For the six months ended June 30, 2010, other costs were $3.9 million and were primarily related to several legal matters.  These other costs are reflected in “Restructuring and other costs” in the consolidated statements of operations.
 
Restructuring Costs
 
The Company recorded restructuring costs of $0.7 million for both the three and six months ended June 30, 2011.  During the three and six months ended June 30, 2010, the Company recorded restructuring costs of $0.2 million and $1.0 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 the second quarter of 2011, as a result of the impact of the Japan natural disaster as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q, the Company initiated a restructuring plan related to the Orthodontic business.  The restructuring plan addressed overhead costs related to the business and will reduce those costs as the Orthodontic business is impacted by the lack of product supply.  The Company recorded $1.4 million of charges in the second quarter of 2011 for this new plan.  In addition to the restructuring charges, the Company incurred approximately $0.7 million of selling, general and administrative expenses related to costs of maintaining the critical Orthodontic business processes and structures during the lack of product supply.

Partially offsetting the charges for the Orthodontic restructuring plan, the Company recorded income of $0.7 million during the second quarter of 2011 for adjustments to 2010 plans and 2009 and prior plans.  These adjustments were primarily related to revised estimates of severance costs.
 
During 2010, 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.

At June 30, 2011, the Company’s restructuring accruals were as follows:

   
Severance
 
   
2009 and
                   
(in thousands)
 
Prior Plans
   
2010 Plans
   
2011 Plans
   
Total
 
Balance at December 31, 2010
  $ 2,878     $ 5,260       -     $ 8,138  
Provisions and adjustments
    (156 )     (646 )     1,392       590  
Amounts applied
    (759 )     (1,446 )     -       (2,205 )
Balance at June 30, 2011
  $ 1,963     $ 3,168       1,392     $ 6,523  

 
- 16 -

 

   
Lease/Contract Terminations
 
   
2009 and
             
(in thousands)
 
Prior Plans
   
2010 Plans
   
Total
 
                   
Balance at December 31, 2010
  $ 996       -     $ 996  
Provisions and adjustments
    1       (113 )     (112 )
Amounts applied
    (261 )     113       (148 )
Balance at June 30, 2011
  $ 736       -     $ 736  
             
   
Other Restructuring Costs
 
   
2009 and
                 
(in thousands)
 
Prior Plans
   
2010 Plans
   
Total
 
                   
Balance at December 31, 2010
  $ 57     $ -     $ 57  
Provisions and adjustments