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Dentsply 10-Q


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, 2012
OR
 
o    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   o

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   o

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  o
Non-accelerated filer  o
Smaller reporting company  o

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

Yes   o 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, 2012, DENTSPLY International Inc. had 141,749,263 shares of Common Stock outstanding, with a par value of $.01 per share.



DENTSPLY International Inc.

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
 
2012
 
2011
 
 
 
 
Net sales
$
716,413

 
$
570,503

Cost of products sold
323,663

 
270,519

 
 
 
 
Gross profit
392,750

 
299,984

Selling, general and administrative expenses
304,353

 
200,767

Restructuring and other costs
1,237

 
633

 
 
 
 
Operating income
87,160

 
98,584

 
 
 
 
Other income and expenses:
 

 
 

Interest expense
15,782

 
6,343

Interest income
(2,297
)
 
(1,828
)
Other expense (income), net
484

 
70

 
 
 
 
Income before income taxes
73,191

 
93,999

Provision for income taxes
14,715

 
23,712

Equity in net loss of unconsolidated affiliated company
(4,248
)
 
(824
)
 
 
 
 
Net income
54,228

 
69,463

Less: Net income attributable to noncontrolling interests
944

 
379

 
 
 
 
Net income attributable to DENTSPLY International
$
53,284

 
$
69,084

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
0.38

 
$
0.49

Diluted
$
0.37

 
$
0.48

 
 
 
 
Weighted average common shares outstanding:
 

 
 

Basic
141,721

 
141,614

Diluted
143,984

 
144,044


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

3



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)

 
Three Months Ended
March 31,
 
2012
 
2011
 
 
 
 
Net income
$
54,228

 
$
69,463

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
133,471

 
90,716

Net loss on derivative financial instruments
(32,132
)
 
(27,012
)
Net unrealized holding gain on available-for-sale securities
23,000

 
4,202

Pension liability adjustments
(60
)
 
(533
)
Total other comprehensive income (loss)
124,279

 
67,373

 
 
 
 
Total comprehensive income
178,507

 
136,836

 
 
 
 
Less: Comprehensive income attributable
 

 
 

to noncontrolling interests
2,284

 
3,643

 
 
 
 
Comprehensive income attributable to
 
 
 
DENTSPLY International
$
176,223

 
$
133,193

 


 



See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

4



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
March 31, 2012
 
December 31, 2011
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
67,346

 
$
77,128

Accounts and notes receivables-trade, net
461,352

 
427,709

Inventories, net
403,052

 
361,762

Prepaid expenses and other current assets
187,435

 
146,304

 
 
 
 
Total Current Assets
1,119,185

 
1,012,903

 
 
 
 
Property, plant and equipment, net
604,160

 
591,445

Identifiable intangible assets, net
998,538

 
791,100

Goodwill, net
2,109,451

 
2,190,063

Other noncurrent assets, net
183,727

 
169,887

 
 
 
 
Total Assets
$
5,015,061

 
$
4,755,398

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
163,419

 
$
149,117

Accrued liabilities
323,845

 
289,201

Income taxes payable
19,182

 
9,054

Notes payable and current portion of long-term debt
288,037

 
276,701

 
 
 
 
Total Current Liabilities
794,483

 
724,073

 
 
 
 
Long-term debt
1,481,217

 
1,490,010

Deferred income taxes
321,362

 
249,822

Other noncurrent liabilities
371,024

 
407,342

 
 
 
 
Total Liabilities
2,968,086

 
2,871,247

 
 
 
 
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; 162.7 million and 162.8 million shares issued at March 31, 2012 and December 31, 2011, respectively.
1,628

 
1,628

Capital in excess of par value
224,841

 
229,687

Retained earnings
2,581,134

 
2,535,709

Accumulated other comprehensive loss
(68,031
)
 
(190,970
)
Treasury stock, at cost, 21.0 million and 21.1 million shares at March 31, 2012 and December 31, 2011, respectively.
(730,955
)
 
(727,977
)
Total DENTSPLY International Equity
2,008,617

 
1,848,077

 
 
 
 
Noncontrolling interests
38,358

 
36,074

 
 
 
 
Total Equity
2,046,975

 
1,884,151

 
 
 
 
Total Liabilities and Equity
$
5,015,061

 
$
4,755,398


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

5


DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Three Months Ended
March 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
54,228

 
$
69,463

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation
20,209

 
15,200

Amortization
15,364

 
2,379

Amortization of deferred financing costs
1,196

 
—

Deferred income taxes
3,690

 
1,220

Share-based compensation expense
4,222

 
4,668

Restructuring and other costs - noncash
1,165

 
—

Stock option income tax benefit
(3,879
)
 
(4,371
)
Net interest expense on derivatives with an other-than-insignificant financing element
800

 
723

Equity in earnings from unconsolidated affiliates
4,248

 
824

Other non-cash expense
1,079

 
1,082

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
(25,597
)
 
(28,706
)
Inventories, net
(34,006
)
 
(14,727
)
Prepaid expenses and other current assets
(24,072
)
 
(5,745
)
Other noncurrent assets, net
15,954

 
1,123

Accounts payable
11,528

 
5,569

Accrued liabilities
(21,186
)
 
(15,861
)
Income taxes payable
10,545

 
11,516

Other noncurrent liabilities
(15,535
)
 
371

 
 
 
 
Net cash provided by operating activities
19,953

 
44,728

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(18,642
)
 
(11,774
)
Cash paid for acquisitions of businesses, net of cash acquired
—

 
(5,582
)
Expenditures for identifiable intangible assets
(146
)
 
(254
)
Purchase of Company-owned life insurance policies
(1,577
)
 
—

Proceeds from sale of property, plant and equipment, net
166

 
52

 
 
 
 
Net cash used in investing activities
(20,199
)
 
(17,558
)
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
Net change in short-term borrowings
11,155

 
3,403

Cash paid for treasury stock
(30,869
)
 
(73,679
)
Cash dividends paid
(7,847
)
 
(7,131
)
Cash paid for contingent consideration on prior acquisitions
(1,781
)
 
—

Cash paid for acquisition of noncontrolling interests of consolidated subsidiaries
—

 
(15,545
)
Proceeds from long-term borrowings
4,571

 
51,100

Repayments of long-term borrowings
(5,171
)
 
(1,951
)
Proceeds from exercise of stock options
14,483

 
22,171

Excess tax benefits from share-based compensation
3,879

 
4,371

Net interest payments on derivatives with an other-than-insignificant financing element
(800
)
 
(723
)
 
 
 
 
Net cash used in financing activities
(12,380
)
 
(17,984
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
2,844

 
26,040

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(9,782
)
 
35,226

 
 
 
 
Cash and cash equivalents at beginning of period
77,128

 
540,038

 
 
 
 
Cash and cash equivalents at end of period
$
67,346

 
$
575,264

 
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

6


DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATMENTS OF CHANGES IN EQUITY
(In thousands)
(unaudited)

 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total DENTSPLY
International
Equity
 
Noncontrolling
Interests
 
Total
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

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
—

 
—

 
69,084

 
—

 
—

 
69,084

 
379

 
69,463

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
 

 
 

 
 

 
64,109

 
 

 
64,109

 
3,264

 
67,373

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interest
—

 
21,463

 
—

 
—

 
—

 
21,463

 
(37,008
)
 
(15,545
)
Exercise of stock options
—

 
(6,450
)
 
—

 
—

 
28,622

 
22,172

 
—

 
22,172

Tax benefit from stock options exercised
—

 
4,371

 
—

 
—

 
—

 
4,371

 
—

 
4,371

Share based compensation expense
—

 
4,668

 
—

 
—

 
—

 
4,668

 
—

 
4,668

Funding of Employee Stock Ownership Plan
—

 
379

 
—

 
—

 
2,595

 
2,974

 
—

 
2,974

Treasury shares purchased
—

 
—

 
—

 
—

 
(73,679
)
 
(73,679
)
 
—

 
(73,679
)
RSU distributions
—

 
(5,630
)
 
—

 
—

 
3,473

 
(2,157
)
 
—

 
(2,157
)
RSU dividends
—

 
45

 
(45
)
 
—

 
—

 
—

 
—

 
—

Cash dividends ($0.05 per share)
—

 
—

 
(7,053
)
 
—

 
—

 
(7,053
)
 
—

 
(7,053
)
Balance at March 31, 2011
$
1,628

 
$
223,748

 
$
2,382,336

 
$
88,265

 
$
(750,639
)
 
$
1,945,338

 
$
37,161

 
$
1,982,499


 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total DENTSPLY
International
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2011
$
1,628

 
$
229,687

 
$
2,535,709

 
$
(190,970
)
 
$
(727,977
)
 
$
1,848,077

 
$
36,074

 
$
1,884,151

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
—

 
—

 
53,284

 
—

 
—

 
53,284

 
944

 
54,228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
—

 
—

 
—

 
122,939

 
—

 
122,939

 
1,340

 
124,279

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
—

 
(5,227
)
 
—

 
—

 
19,709

 
14,482

 
—

 
14,482

Tax benefit from stock options exercised
—

 
3,879

 
—

 
—

 
—

 
3,879

 
—

 
3,879

Share based compensation expense
—

 
4,222

 
—

 
—

 
—

 
4,222

 
—

 
4,222

Funding of Employee Stock Ownership Plan
—

 
370

 
—

 
—

 
3,272

 
3,642

 
—

 
3,642

Treasury shares purchased
—

 
—

 
—

 
—

 
(30,869
)
 
(30,869
)
 
—

 
(30,869
)
RSU distributions
—

 
(8,147
)
 
—

 
—

 
4,910

 
(3,237
)
 
—

 
(3,237
)
RSU dividends
—

 
57

 
(57
)
 
—

 
—

 
—

 
—

 
—

Cash dividends ($0.055 per share)
—

 
—

 
(7,802
)
 
—

 
—

 
(7,802
)
 
—

 
(7,802
)
Balance at March 31, 2012
$
1,628

 
$
224,841

 
$
2,581,134

 
$
(68,031
)
 
$
(730,955
)
 
$
2,008,617

 
$
38,358

 
$
2,046,975


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

7


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 consolidated 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, 2011.

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, 2011, except as may be indicated below:

Accounts and Notes Receivable-Trade, Net

The Company sells dental and certain healthcare products through a worldwide network of distributors and directly to end users.  For customers on credit terms, the Company performs ongoing credit evaluations 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 was $15.9 million at March 31, 2012 and $15.8 million at December 31, 2011.

Marketable Securities

The Company’s marketable securities consist of corporate convertible bonds 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. Changes in fair value are reported in accumulated other comprehensive income (“AOCI”).

 The convertible feature of the bonds has not been bifurcated from the underlying bonds 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 was equal to the face value of the bonds issued, and therefore, the Company has not recorded any bond premium or discount on acquiring the bonds.  The fair value of the bonds was $82.3 million and $47.8 million at March 31, 2012 and December 31, 2011, respectively.  At March 31, 2012 and December 31, 2011 an unrealized holding gain of $32.0 million and $11.5 million, respectively, on available-for-sale securities, net of tax, had been recorded in AOCI. 

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) amended its rules regarding the presentation of comprehensive income.  The objective of this amendment is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  Specifically, this amendment requires that all non-owner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income

8


or in two separate but consecutive statements.  The new rules will become effective during interim and annual periods beginning after December 15, 2011, with the exception of the requirement to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements, which has been deferred pending further deliberation by the FASB.  Because the standard only impacts the presentation of comprehensive income and does not impact what is included in comprehensive income, the standard will not have a significant impact on the Company's consolidated financial statements. The Company adopted this accounting standard during the quarter ended March 31, 2012.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment”("ASU"). This newly issued accounting standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a "qualitative" assessment to determine whether further impairment testing is necessary. Under the revised standard, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required; otherwise, no further testing is required. Prior to the issuance of the revised standard, an entity was required to perform step one of the impairment test at least annually by calculating and comparing the fair value of a reporting unit to its carrying amount. Under the revised standard, if an entity determines that step one is necessary and the fair value of the reporting unit is less than its carrying amount, then step two of the test will continue to be required to measure the amount of the impairment loss, if any. These amendments do not change the current guidance for testing other indefinite-lived intangible assets for impairment. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard will not impact the Company’s financial position or results of operations. The Company expects to adopt this standard for the quarter ended June 30, 2012 when the annual goodwill impairment testing is completed.

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 months ended March 31, 2012 and 2011:

 
Three Months Ended
(in thousands)
2012
 
2011
Stock option expense
$
2,381

 
$
2,338

RSU expense
1,546

 
2,051

Total stock based compensation expense
$
3,927

 
$
4,389

 
 
 
 
Total related tax benefit
$
1,231

 
$
1,253


At March 31, 2012, the remaining unamortized compensation cost related to non-qualified stock options is $21.8 million, which will be expensed over the weighted average remaining vesting period of the options, or 2.0 years. At March 31, 2012, the unamortized compensation cost related to RSU is $22.8 million, which will be expensed over the remaining restricted period of the RSU, or 1.9 years.














9


The following table reflects the non-qualified stock option transactions from December 31, 2011 through March 31, 2012:

 
Outstanding
 
Exercisable
(in thousands, except per share data)
Shares
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Shares
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
December 31, 2011
10,148

 
$
31.23

 
$
51,402

 
8,049

 
$
30.06

 
$
50,365

Granted
1,236

 
38.74

 
 

 
 

 
 

 
 

Exercised
(622
)
 
23.27

 
 

 
 

 
 

 
 

Cancelled
(14
)
 
38.48

 
 

 
 

 
 

 
 

Forfeited
(21
)
 
36.37

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2012
10,727

 
$
32.54

 
$
86,449

 
7,870

 
$
30.94

 
$
77,353


At March 31, 2012 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 5.1 years.

The following table summarizes the unvested RSU transactions from December 31, 2011 through March 31, 2012:

(in thousands, except per share data)
Shares
 
Weighted Average
Grant Date
Fair Value
December 31, 2011
897

 
$
32.50

Granted
396

 
38.74

Vested
(238
)
 
26.24

Forfeited
(19
)
 
35.74

 
 
 
 
March 31, 2012
1,036

 
$
36.26


NOTE 3 – COMPREHENSIVE INCOME

During the quarter ended March 31, 2012, foreign currency translation adjustments included currency translation gains of $126.8 million and gains on the Company’s loans designated as hedges of net investments of $5.3 million.  During the quarter ended March 31, 2011, foreign currency translation adjustments included currency translation gains of $86.4 million and gains of $1.0 million on the Company’s loans designated as hedges of net investments.  These foreign currency translation adjustments were offset by movements on derivative 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:

(in thousands)
March 31, 2012
 
December 31, 2011
 
 
 
 
Foreign currency translation adjustments
$
94,915

 
$
(37,216
)
Net loss on derivative financial instruments
(149,522
)
 
(117,390
)
Net unrealized holding gains on available-for-sale securities
22,484

 
(516
)
Pension liability adjustments
(34,046
)
 
(33,986
)
Foreign currency translation related to acquisition of noncontrolling interests
(1,862
)
 
(1,862
)
 
$
(68,031
)
 
$
(190,970
)




10


The cumulative foreign currency translation adjustments included translation gains of $223.1 million and $96.3 million at March 31, 2012 and December 31, 2011, respectively, partially offset by losses of $128.2 million and $133.5 million, respectively, on loans designated as hedges of net investments.  These foreign currency translation adjustments were offset by movements 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 non-qualified stock options and RSU 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, 2012 and 2011:

 
Three Months Ended
Basic Earnings Per Common Share Computation
 
 
 
(in thousands, except per share amounts)
2012
 
2011
Net income attributable to DENTSPLY International
$
53,284

 
$
69,084

 
 
 
 
Common shares outstanding
141,721

 
141,614

 
 
 
 
Earnings per common share - basic
$
0.38

 
$
0.49

 
 
 
 
Diluted Earnings Per Common Share Computation
 

 
 

(in thousands, except per share amounts)
 

 
 

 
 
 
 
Net income attributable to DENTSPLY International
$
53,284

 
$
69,084

 
 
 
 
Common shares outstanding
141,721

 
141,614

Incremental shares from assumed exercise of dilutive options from stock-based compensation awards
2,263

 
2,430

Total shares
143,984

 
144,044

 
 
 
 
Earnings per common share - diluted
$
0.37

 
$
0.48


Options to purchase 4.1 million shares of common stock that were outstanding during the three months ended March 31, 2012, were not included in the computation of diluted earnings per share since the exercise prices for these options were greater than the average market price of the common shares and, therefore, the effect would be antidilutive.  There were 4.3 million antidilutive shares of common stock outstanding during the three months ended March 31, 2011.

NOTE 5 – BUSINESS ACQUISITIONS

On August 31, 2011, the Company acquired 100% of the outstanding common shares of 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.

The Astra Tech acquisition was recorded in accordance with the business combinations provisions of US GAAP.  The Company has preliminarily valued tangible and identifiable intangible assets acquired based on their estimated fair values.  The Company is in the process of completing the valuation of identifiable assets acquired and liabilities assumed and, therefore, the fair values set forth below are subject to adjustment upon finalizing the valuations. In addition, completion of the valuation may impact the assessment of the net deferred tax liability currently recognized with any adjustment resulting in a corresponding change to goodwill. The amount of these potential adjustments could be significant.

The following table summarizes the preliminary fair value of identifiable assets and liabilities assumed at the date of the Astra Tech acquisition. This table has been updated during the first quarter of 2012 to reflect the refined estimates of fair value. The primary change resulted in an increase to customer relationship intangible assets and a corresponding reduction to goodwill.


11


(in thousands)
 
 
 
Inventory
$
84,659

Other Current assets
140,462

Property, plant and equipment
178,495

Identifiable intangible assets
985,400

Goodwill
825,020

Other long-term assets
13,438

Total assets
2,227,474

Current liabilities
106,984

Long-term liabilities
329,700

Total liabilities
436,684

Net assets
$
1,790,790


Other current assets consist primarily of trade accounts receivable of $101.2 million.  Current liabilities assumed are primarily comprised of accrued and other current liabilities of $80.0 million and trade accounts payable of $27.0 million.  Long-term liabilities assumed are primarily comprised of noncurrent deferred tax liabilities of $280.4 million and pension obligations of $49.3 million.

Inventory held by Astra Tech includes a fair value adjustment of $32.8 million.  The Company expensed this amount by December 31, 2011 as the acquired inventory was sold.

Property, plant and equipment includes a fair value adjustment of $28.7 million and consists of land, buildings, plant and equipment.  Depreciable lives range 40 years for buildings and from 5 to 15 years for plant and equipment.

The preliminary fair values assigned to intangible assets were determined through the use of the income approach, specifically the relief from royalty method and the multi-period excess earnings method. Both valuation methods rely on management’s judgments, including expected future cash flows resulting from existing customer relationships, customer attrition rates, contributory effects of other assets utilized in the business, peer group cost of capital and royalty rates as well as other factors. The valuation of tangible assets was derived using the combination of the income approach, the market approach and the cost approach. Significant judgments used in valuing tangible assets include estimated reproduction or replacement cost, useful lives of assets, estimated selling prices, costs to complete and reasonable profit.
       
Useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute to future cash flows.  The acquired intangible assets are being amortized on a straight-line basis over their expected useful lives.

Intangible assets acquired consist of the following:

(in thousands, except for useful life)
Amount
 
Useful Life
(in years)
Customer relationships
$
636,000

 
17.5 - 20
Developed technology and patents
116,500

 
10
Trade names and trademarks
229,100

 
Indefinite
In-process research and development
3,800

 
—
Total
$
985,400

 
 

The $825.0 million of goodwill is attributable to the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. The goodwill recognized is primarily attributable to cost savings and other synergies that the Company expects to realize through operational efficiencies.  All of the goodwill has been assigned to the Company's Implants/Endodontics/Healthcare/Pacific Rim segment and is not expected to be deductible for tax purposes.

The following unaudited pro forma financial information reflects the consolidated results of operations of the Company had the Astra Tech acquisition occurred on January 1, 2010.  These amounts were calculated after conversion to US GAAP, applying

12


the Company’s accounting policies and adjusting Astra Tech’s results to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment, inventory and intangible assets had been applied from January 1, 2010, together with the consequential tax effects at the statutory rate.  These adjustments also reflect the additional interest expense incurred on the debt to finance the acquisition.

 
Three Months Ended
March 31,
(in thousands, except per share data)
2011
 
 
Net sales
$
713,235

Net income attributable to DENTSPLY
$
69,445

Diluted earnings per common share
$
0.48


The pro forma financial information is based on the Company's preliminary assignment of purchase price and therefore subject to adjustment upon finalizing the purchase price assignment. The Astra Tech financial information has been compiled in a manner consistent with the accounting policies adopted by DENTSPLY. Pro forma results do not include any anticipated synergies or other anticipated benefits of the acquisition. Accordingly, the unaudited pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition occurred on January 1, 2010.  While the Company completed other transactions during the pro forma periods presented above, these transactions were immaterial to the Company’s net sales and net income attributable to DENTSPLY.

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 89% and 97% of sales for the three months ended March 31, 2012 and 2011, respectively.

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.

During the three months ended March 31, 2012, the Company realigned reporting responsibilities for multiple locations as a result of changes to the management structure. These changes also helped the Company gain operating efficiencies and effectiveness. The segment information below reflects the revised structure for all periods shown.

Dental Consumable and Laboratory 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. This business group also includes the responsibility for the design, manufacture, sales and distribution of most dental laboratory products, excluding certain countries. This business group is also responsible for most of the Company’s non-dental business excluding healthcare products.

Orthodontics/Canada/Mexico/Japan

  This business group is responsible for the world-wide manufacturing, sales and distribution of the Company’s Orthodontic products. It also has responsibility for the sales and distribution of most of the Company’s dental products sold in Japan, Canada and Mexico.

Select Distribution Businesses

This business group includes responsibility for the sales and distribution for most of the Company's dental products sold in France, United Kingdom, Italy, Austria and certain other European countries, Middle Eastern countries and Africa.


13


Implants/Endodontics/Healthcare/Pacific Rim

This business group includes the responsibility for the design, manufacture, sales and distribution of most of the Company’s dental implant and related products. This business group also includes the responsibility for the design and manufacturing of Endodontic products and is responsible for the sales and distribution of the Company’s Endodontic products in the United States, Switzerland, and locations not covered by other selling divisions.  In addition, this business group is also responsible for sales and distribution of certain Endodontic products in Germany, Asia and other parts of the world. Additionally, this business group is responsible for the design and manufacture of certain dental consumables and dental laboratory products and the sales and distribution of most dental products sold in Brazil, Latin America (excluding Mexico), Australia and most of Asia (excluding Japan). This business group is also responsible for the world-wide design, manufacturing, sales and distribution of the Company's healthcare products (non-dental) throughout most of the world.

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 months ended March 31, 2012 and 2011:

Third Party Net Sales
 
Three Months Ended
(in thousands)
2012
 
2011
 
 
 
 
Dental Consumable and Laboratory Businesses
$
246,931

 
$
231,120

Orthodontics/Canada/Mexico/Japan
72,902

 
88,446

Select Distribution Businesses
68,226

 
69,575

Implants/Endodontics/Healthcare/Pacific Rim
329,668

 
182,406

All Other (a)
(1,314
)
 
(1,044
)
Total
$
716,413

 
$
570,503

(a) Includes amounts recorded at Corporate headquarters.

Third Party Net Sales, Excluding Precious Metal Content
 
Three Months Ended
(in thousands)
2012
 
2011
 
 
 
 
Dental Consumable and Laboratory Businesses
$
207,484

 
$
201,108

Orthodontics/Canada/Mexico/Japan
65,841

 
80,475

Select Distribution Businesses
66,628

 
67,449

Implants/Endodontics/Healthcare/Pacific Rim
326,986

 
179,017

All Other (a)
(1,314
)
 
(1,044
)
Total excluding precious metal content
665,625

 
527,005

Precious metal content
50,788

 
43,498

Total including precious metal content
$
716,413

 
$
570,503

(a) Includes amounts recorded at Corporate headquarters.






14



Inter-segment Net Sales
 
Three Months Ended
(in thousands)
2012
 
2011
 
 
 
 
Dental Consumable and Laboratory Businesses
$
48,980

 
$
48,427

Orthodontics/Canada/Mexico/Japan
1,179

 
984

Select Distribution Businesses
396

 
345

Implants/Endodontics/Healthcare/Pacific Rim
35,740

 
35,985

All Other (a)
67,137

 
64,520

Eliminations
(153,432
)
 
(150,261
)
Total
$
—

 
$
—

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

Segment Operating Income
 
Three Months Ended
(in thousands)
2012
 
2011
 
 
 
 
Dental Consumable and Laboratory Businesses
$
61,470

 
$
55,983

Orthodontics/Canada/Mexico/Japan
366

 
9,278

Select Distribution Businesses
(1,453
)
 
(99
)
Implants/Endodontics/Healthcare/Pacific Rim
66,625

 
54,381

All Other (a)
(38,611
)
 
(20,326
)
Segment operating income
88,397

 
99,217

 
 
 
 
Reconciling Items:
 

 
 

Restructuring and other costs
1,237

 
633

Interest expense
15,782

 
6,343

Interest income
(2,297
)
 
(1,828
)
Other expense (income), net
484

 
70

Income before income taxes
$
73,191

 
$
93,999

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

Assets
 
 
 
(in thousands)
March 31, 2012
 
December 31, 2011
 
 
 
 
Dental Consumable and Laboratory Businesses
$
1,064,801

 
$
1,180,001

Orthodontics/Canada/Mexico/Japan
271,614

 
328,376

Select Distribution Businesses
203,290

 
159,210

Implants/Endodontics/Healthcare/Pacific Rim
3,232,374

 
2,890,880

All Other (a)
242,982

 
196,931

Total
$
5,015,061

 
$
4,755,398

(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 March 31, 2012 and December 31, 2011, the cost of $7.1 million, or

15


2.0% of inventories, respectively, 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. 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, 2012 and December 31, 2011 by $5.5 million and $5.6 million, respectively.

The Company establishes reserves for inventory in order to present the net realizable value.  The inventory valuation reserves were $37.0 million and $35.1 million at March 31, 2012 and December 31, 2011, respectively.

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

(in thousands)
March 31, 2012
 
December 31, 2011
 
 
 
 
Finished goods
$
239,062

 
$
218,814

Work-in-process
75,748

 
66,952

Raw materials and supplies
88,242

 
75,996

 
$
403,052

 
$
361,762


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 months ended March 31, 2012 and 2011:

Defined Benefit Plans 
Three Months Ended
(in thousands)
2012
 
2011
 
 
 
 
Service cost
$
2,978

 
$
2,434

Interest cost
2,691

 
2,187

Expected return on plan assets
(1,225
)
 
(1,216
)
Amortization of prior service cost
(37
)
 
20

Amortization of net loss
498

 
383

 
 
 
 
Net periodic benefit cost
$
4,905

 
$
3,808


Other Postretirement Plans
Three Months Ended
(in thousands)
2012
 
2011
 
 
 
 
Service cost
$
19

 
$
16

Interest cost
117

 
138

Amortization of net loss
58

 
49

 
 
 
 
Net periodic benefit cost
$
194

 
$
203














16



The following sets forth the information related to the contributions to the Company’s benefit plans for 2012:

(in thousands)
Pension
Benefits
 
Other
Postretirement
Benefits
 
 
 
 
Actual contributions through March 31, 2012
$
3,404

 
$
178

Projected for the remainder of the year
8,782

 
800

Total for year
$
12,186

 
$
978



NOTE 9 – RESTRUCTURING AND OTHER COSTS

Restructuring Costs

During the three months ended March 31, 2012, the Company recorded restructuring costs of $1.3 million.  These costs primarily related to employee severance.  During the three months ended March 31, 2011, the Company recorded restructuring costs of less than $0.1 million, related to employee severance costs.  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.

During 2012, 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 March 31, 2012, the Company’s restructuring accruals were as follows:

 
Severance
(in thousands)
2010 and
Prior Plans
 
2011 Plans
 
2012 Plans
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
3,380

 
$
635

 
$
—

 
$
4,015

Provisions and adjustments
—

 
—

 
1,169

 
1,169

Amounts applied
(387
)
 
(74
)
 
(157
)
 
(618
)
Balance at March 31, 2012
$
2,993

 
$
561

 
$
1,012

 
$
4,566

 
 
Lease/Contract Terminations
(in thousands)
2010 and
Prior Plans
 
Total
 
 
 
 
Balance at December 31, 2011
$
1,011

 
$
1,011

Provisions and adjustments
—

 
—

Amounts applied
(44
)
 
(44
)
Balance at March 31, 2012
$
967

 
$
967


 
Other Restructuring Costs
(in thousands)
2010 and
Prior Plans
 
2012 Plans
 
Total
 
 
 
 
 
 
Balance at December 31, 2011
$
34

 
$
—

 
$
34

Provisions and adjustments
—

 
153

 
153

Amounts applied
—

 
—

 
—

Balance at March 31, 2012
$
34

 
$
153

 
$
187


17



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

(in thousands)
December 31,
2011
 
Provisions and
Adjustments
 
Amounts
Applied
 
March 31,
2012
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
3,601

 
$
205

 
$
(386
)
 
$
3,420

Orthodontics/Canada/Mexico/Japan
240

 
—

 
(14
)
 
226

Implants/Endodontics/Healthcare/Pacific Rim
1,219

 
1,117

 
(262
)
 
2,074

 
$
5,060

 
$
1,322

 
$
(662
)
 
$
5,720


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. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert variable rate debt to fixed rate debt and to convert fixed rate debt to variable rate debt, cross currency basis swaps to convert debt denominated in one currency to another currency and commodity swaps to fix its variable raw materials.

Derivative instruments not designated as hedging

The Company enters into derivative financial instruments to hedge the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in “Other expense (income), net” on the consolidated statements of operations. The Company primarily uses forward foreign exchange contracts and cross currency basis swaps to hedge these risks. The Company's significant contracts outstanding as of March 31, 2012 are summarized in the tables that follow.
 
The Company wrote DIO equity option contracts ("equity options") to the original sellers of the DIO investment for the remaining DIO common shares held by the sellers. The equity options provide the sellers the ability to require the Company to purchase their remaining shares on hand at a price based on an agreed-upon formula at specific time frames in the future. The sellers are also allowed to sell their remaining shares on the open market. Changes in the fair value of the equity options are reported in “Other expense (income), net” on the consolidated statements of operations. This derivative is further discussed in Note 11, Fair Value Measurement.

Cash Flow Hedges

Foreign Exchange Risk Management
 
The Company uses a layered hedging program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings of the consolidated Company. The Company accounts for the foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contract primarily through AOCI based on the tested effectiveness of the foreign exchange forward contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the consolidated statements of operations in the same period that the hedged transaction is recorded. Any time value component of the hedge fair value is deemed ineffective and will be reported currently in “Other expense (income), net” on the consolidated statements of operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.
 
These foreign exchange forward contracts generally have maturities up to eighteen months and the counterparties to the transactions are typically large international financial institutions. The Company's significant contracts outstanding as of March 31,

18


2012 are summarized in the tables that follow.

Interest Rate Risk Management
 
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, 2012, the Company has two groups of significant 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 0.2% for a term of three- years, ending in September 2014. 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 0.7% for a term of five- years, ending in September 2016.
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's significant contracts outstanding as of March 31, 2012 are summarized in the tables that follow.
Commodity Risk Management
 
The Company selectively enters into commodity swaps to effectively fix certain variable raw material costs. These swaps are used purely to stabilize the cost of components used in the production of certain of the Company's products. The Company generally accounts for the commodity swaps as cash flow hedges. As a result, the Company records the fair value of the swap primarily through AOCI based on the tested effectiveness of the commodity swap. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the consolidated statements of operations in the same period that the hedged transaction is recorded. Any time value component of the hedge fair value is deemed ineffective and will be reported currently in “Interest expense” in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.
At March 31, 2012, the Company had swaps in place to purchase 834 troy ounces of platinum bullion for use in production at an average fixed rate of $1,497 per troy ounce.  In addition, the Company had swaps in place to purchase 97,250 troy ounces of silver bullion for use in production at an average fixed rate of $28 per troy ounce.
 
The following tables summarize the notional amounts and fair value of the Company's cash flow hedges and non-designated derivatives at March 31, 2012:

Foreign Exchange Forward Contracts
 
Notional Amounts Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)  
 
2012
 
2013
 
March 31, 2012
 
 
 
 
 
 
 
Forward sale, 12.1 million Australian dollars
 
$
9,443

 
$
2,721

 
$
(134
)
Forward purchase, 7.5 million British pounds
 
(11,729
)
 
(197
)
 
265

Forward sale, 39.7 million Canadian dollars
 
26,062

 
13,882

 
449

Forward purchase, 22.2 million Danish kroner
 
(3,970
)
 
—

 
(29
)
Forward sale, 91.6 million euros
 
40,912

 
81,079

 
2,169

Forward purchase, 0.3 billion Japanese yen
 
1,342

 
(5,229
)
 
(268
)
Forward sale, 160.7 million Mexican pesos
 
12,541

 
—

 
207

Forward purchase, 19.4 million Norwegian kroner
 
(3,413
)
 
—

 
(21
)
Forward sale, 3.7 million Polish zlotys
 
1,196

 
—

 
(33
)
Forward sale, 2.6 million Singapore dollars
 
2,071

 
—

 
49

Forward sale, 5.6 billion South Korean won
 
4,914

 
—

 
77

Forward purchase, 1.0 billion Swedish kronor
 
(105,035
)
 
(48,487
)
 
2,554

Forward sale, 16.5 million Swiss francs
 
4,461

 
13,468

 
(258
)
Forward sale, 77.1 million Taiwanese dollars
 
2,615

 
—

 
32

Total foreign exchange forward contracts
 
$
(18,590
)
 
$
57,237

 
$
5,059



19


Interest Rate Swaps
 
Notional Amounts Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)
 
2012
 
2013
 
2014
 
2015
 
2016 and Beyond
 
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Euro
 
$
944

 
$
1,259

 
$
963

 
$
963

 
$
2,167

 
$
(591
)
Japanese yen
 
—

 
—

 
151,490

 
—

 
—

 
495

Swiss francs
 
—

 
—

 
—

 
—

 
71,990

 
(842
)
Total interest rate swaps
 
$
944

 
$
1,259

 
$
152,453

 
$
963

 
$
74,157

 
$
(938
)

Commodity Swap Contracts
 
Notional Amounts Maturing
in the Year
 
Fair Value Net 
Asset (Liability)
(in thousands)
 
2012
 
2013
 
March 31, 2012
 
 
 
 
 
 
 
Silver swap - U.S. dollar
 
$
2,801

 
$
376

 
$
397

Platinum swap - U.S. dollar
 
1,272

 
101

 
124

Total commodity contracts
 
$
4,073

 
$
477

 
$
521


Cross Currency Basis Swap
 
Notional Amounts
Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)
 
2014
 
March 31, 2012
 
 
 
 
 
Euro 449.8 million @ $1.45  pay USD 3 mth. LIBOR receive EUR 3 mth. EURIBOR
 
$
599,694

 
$
(49,844
)
Total cross currency basis swaps
 
$
599,694

 
$
(49,844
)

At March 31, 2012, deferred net gains on derivative instruments of $2.5 million, which were recorded in AOCI, are expected to be reclassified to current earnings during the next twelve months. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases and interest rate swaps. The maximum term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable interest rate debt) is eighteen months. Overall, the derivatives designated as cash flow hedges are highly effective. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.

Hedges of Net Investments in Foreign Operations

The Company has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. Currently, the Company uses both non-derivative financial instruments, including foreign currency denominated debt held at the parent company level and derivative financial instruments to hedge some of this exposure. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the non-derivative and derivative financial instruments designated as hedges of net investments, which are included in AOCI.
 
At March 31, 2012 and December 31, 2011, the Company had Swiss franc-denominated and Japanese yen-denominated debt and cross currency basis swaps denominated in euro and Swiss franc to hedge the currency exposure related to a designated portion of the net assets of its European, Swiss and Japanese subsidiaries. The fair value of the cross currency interest rate swap agreements is the estimated amount the Company would (pay) receive at the reporting date, taking into account the effective interest rates and foreign exchange rates. As of March 31, 2012 and December 31, 2011, the estimated net fair values of the cross currency interest rate swap agreements was a liability of $162.0 million and a liability of $111.9 million, respectively, which are recorded in AOCI, net of tax effects. At March 31, 2012 and December 31, 2011, the accumulated translation gain (loss) on investments in foreign subsidiaries, primarily denominated in euros, Swiss francs, Japanese yen and Swedish krona, net of these net investment hedges, were $49.2 million in losses and $134.2 million in losses, respectively, which were included in AOCI, net of tax effects.

20


 












The following tables summarize the notional amounts and fair value of the Company's cross currency basis swaps that are designated as hedges of net investments in foreign operations at March 31, 2012:
Cross Currency Basis Swaps
 
Notional Amounts Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)
 
2012
 
2013
 
2014
 
March 31, 2012

 
 
 
 
 
 
 
 
 
Swiss franc 592.5 million @ $1.12 pay CHF 3 mth. LIBOR rec. USD 3 mth. LIBOR
 
$
62,687

 
$
504,486

 
$
89,046

 
$
(125,313
)
Euro 618.0 million @ $1.27 pay EUR 3 mth. EURIBOR rec. USD 3 mth. LIBOR
 
—

 
824,010

 
—

 
(36,706
)
Total cross currency basis swaps
 
$
62,687

 
$
1,328,496

 
$
89,046

 
$
(162,019
)

Fair Value Hedges
 
Effective April 4, 2011, the Company entered into a group of U.S. dollar denominated interest rate swaps with an initial total notional value of $150.0 million to effectively convert the underlying fixed interest rate of 4.1% on the Company's $250.0 million Private Placement Notes ("PPN") to variable rate for a term of five years, ending February 2016. The notional value of the swaps will decline proportionately as portions of the PPN mature. These interest rate swaps are designated as fair value hedges of the interest rate risk associated with the hedged portion of the fixed rate PPN. Accordingly, the Company will carry the portion of the hedged debt at fair value, with the change in debt and swap offsetting each other in the income statement. At March 31, 2012, the estimated net fair value of these interest rate swaps was $4.8 million.
 
The following tables summarize the notional amounts and fair value of the Company's fair value hedges at March 31, 2012:
 
Interest Rate Swap
 
Notional Amounts Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)
 
2014
 
2015
 
2016 and Beyond
 
March 31, 2012
 
 
 
 
 
 
 
 
 
U.S. dollars
 
$
45,000

 
$
60,000

 
$
45,000

 
$
4,757

Total interest rate swaps
 
$
45,000

 
$
60,000

 
$
45,000

 
$
4,757


The following tables summarize the fair value and consolidated balance sheet location of the Company's derivatives at March 31, 2012 and December 31, 2011:


21


 
 
March 31, 2012
(in thousands)
 
Prepaid
Expenses
and Other
Current Assets
 
Other
Noncurrent
Assets, Net
 
Accrued
Liabilities
 
Other
Noncurrent
Liabilities
Designated as Hedges
 
 
 
 
Foreign exchange forward contracts
 
$
3,880

 
$
380

 
$
1,210

 
$
332

Commodity contracts
 
521

 
—

 
—

 
—

Interest rate swaps
 
2,521

 
3,223

 
—

 
1,334

Cross currency basis swaps
 
—

 
4,160

 
70,671

 
95,508

Total
 
$
6,922

 
$
7,763

 
$
71,881

 
$
97,174

Not Designated as Hedges
 
 

 
 

 
 

 
 

Foreign exchange forward contracts
 
$
3,428

 
$
—

 
$
1,087

 
$
—

DIO equity option contracts
 
—

 
—

 
—

 
706

Interest rate swaps
 
—

 
—

 
112

 
479

Cross currency basis swaps
 
—

 
—

 
—

 
49,844

Total
 
$
3,428

 
$
—

 
$
1,199

 
$
51,029


 
 
December 31, 2011
(in thousands)
 
Prepaid
Expenses
and Other
Current Assets
 
Other
Noncurrent
Assets, Net
 
Accrued
Liabilities
 
Other
Noncurrent
Liabilities
Designated as Hedges
 
 
 
 
Foreign exchange forward contracts
 
$
5,464

 
$
896

 
$
641

 
$
107

Commodity contracts
 
—

 
15

 
257

 
2

Interest rate swaps
 
2,539

 
3,160

 
—

 
1,050

Cross currency basis swaps
 
—

 
19,838

 
13,790

 
117,974

Total
 
$
8,003

 
$
23,909

 
$
14,688

 
$
119,133

Not Designated as Hedges