Dentsply 10-Q3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 22, 2012, DENTSPLY International Inc. had 141,928,671 shares of Common Stock outstanding, with a par value of $.01 per share.
DENTSPLY International Inc.
TABLE OF CONTENTS
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 September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| | | | | | | |
Net sales | $ | 695,734 |
| | $ | 619,759 |
| | $ | 2,175,141 |
| | $ | 1,799,705 |
|
Cost of products sold | 331,619 |
| | 322,111 |
| | 1,010,807 |
| | 887,222 |
|
| | | | | | | |
Gross profit | 364,115 |
| | 297,648 |
| | 1,164,334 |
| | 912,483 |
|
Selling, general and administrative expenses | 260,352 |
| | 231,493 |
| | 860,740 |
| | 643,244 |
|
Restructuring and other costs | 15,097 |
| | 26,353 |
| | 18,862 |
| | 33,849 |
|
| | | | | | | |
Operating income | 88,666 |
| | 39,802 |
| | 284,732 |
| | 235,390 |
|
| | | | | | | |
Other income and expenses: | |
| | |
| | |
| | |
|
Interest expense | 14,488 |
| | 16,062 |
| | 44,854 |
| | 27,975 |
|
Interest income | (2,342 | ) | | (2,418 | ) | | (6,650 | ) | | (6,676 | ) |
Other expense (income), net | 739 |
| | 7,182 |
| | 1,969 |
| | 8,686 |
|
| | | | | | | |
Income before income taxes | 75,781 |
| | 18,976 |
| | 244,559 |
| | 205,405 |
|
Provision for (benefit from) income taxes | 18,960 |
| | (40,627 | ) | | 48,550 |
| | 1,042 |
|
Equity in net (loss) earnings of unconsolidated affiliated company | (2,529 | ) | | 1,597 |
| | (5,448 | ) | | 1,690 |
|
| | | | | | | |
Net income | 54,292 |
| | 61,200 |
| | 190,561 |
| | 206,053 |
|
Less: Net income attributable to noncontrolling interests | 928 |
| | 603 |
| | 3,148 |
| | 2,136 |
|
| | | | | | | |
Net income attributable to DENTSPLY International | $ | 53,364 |
| | $ | 60,597 |
| | $ | 187,413 |
| | $ | 203,917 |
|
| | | | | | | |
Earnings per common share: | |
| | |
| | |
| | |
|
Basic | $ | 0.38 |
| | $ | 0.43 |
| | $ | 1.32 |
| | $ | 1.44 |
|
Diluted | $ | 0.37 |
| | $ | 0.42 |
| | $ | 1.30 |
| | $ | 1.42 |
|
| | | | | | | |
Weighted average common shares outstanding: | |
| | |
| | |
| | |
|
Basic | 141,843 |
| | 141,349 |
| | 141,767 |
| | 141,337 |
|
Diluted | 143,884 |
| | 143,395 |
| | 143,885 |
| | 143,578 |
|
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| | | | | | | |
Net income | $ | 54,292 |
| | $ | 61,200 |
| | $ | 190,561 |
| | $ | 206,053 |
|
| | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation adjustments | 104,168 |
| | (279,384 | ) | | 58,893 |
| | (126,617 | ) |
Net (loss) gain on derivative financial instruments | (11,214 | ) | | 33,115 |
| | 3,743 |
| | (30,288 | ) |
Net unrealized holding gain (loss) on available-for-sale securities | 15,373 |
| | (9,136 | ) | | 30,419 |
| | (11,167 | ) |
Pension liability adjustments | 44 |
| | 2,370 |
| | 1,710 |
| | 337 |
|
Total other comprehensive income (loss) | 108,371 |
| | (253,035 | ) | | 94,765 |
| | (167,735 | ) |
| | | | | | | |
Total comprehensive income (loss) | 162,663 |
| | (191,835 | ) | | 285,326 |
| | 38,318 |
|
| | | | | | | |
Less: Comprehensive income (loss) attributable | |
| | |
| | |
| | |
|
to noncontrolling interests | 1,366 |
| | (4,098 | ) | | 2,722 |
| | 3,378 |
|
| | | | | | | |
Comprehensive income (loss) attributable to | | | | | | | |
DENTSPLY International | $ | 161,297 |
| | $ | (187,737 | ) | | 282,604 |
| | 34,940 |
|
|
|
| |
|
| |
|
| |
|
|
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Assets | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 56,075 |
| | $ | 77,128 |
|
Accounts and notes receivables-trade, net | 467,296 |
| | 427,709 |
|
Inventories, net | 415,922 |
| | 361,762 |
|
Prepaid expenses and other current assets | 189,685 |
| | 146,304 |
|
| | | |
Total Current Assets | 1,128,978 |
| | 1,012,903 |
|
| | | |
Property, plant and equipment, net | 602,670 |
| | 591,445 |
|
Identifiable intangible assets, net | 841,751 |
| | 791,100 |
|
Goodwill, net | 2,207,413 |
| | 2,190,063 |
|
Other noncurrent assets, net | 196,610 |
| | 169,887 |
|
| | | |
Total Assets | $ | 4,977,422 |
| | $ | 4,755,398 |
|
| | | |
Liabilities and Equity | |
| | |
|
Current Liabilities: | |
| | |
|
Accounts payable | $ | 137,669 |
| | $ | 149,117 |
|
Accrued liabilities | 373,005 |
| | 289,201 |
|
Income taxes payable | 18,206 |
| | 9,054 |
|
Notes payable and current portion of long-term debt | 411,840 |
| | 276,701 |
|
| | | |
Total Current Liabilities | 940,720 |
| | 724,073 |
|
| | | |
Long-term debt | 1,237,244 |
| | 1,490,010 |
|
Deferred income taxes | 319,834 |
| | 249,822 |
|
Other noncurrent liabilities | 318,757 |
| | 407,342 |
|
| | | |
Total Liabilities | 2,816,555 |
| | 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; 162.8 million shares issued at September 30, 2012 and December 31, 2011. | 1,628 |
| | 1,628 |
|
Capital in excess of par value | 241,844 |
| | 229,687 |
|
Retained earnings | 2,699,546 |
| | 2,535,709 |
|
Accumulated other comprehensive loss | (95,779 | ) | | (190,970 | ) |
Treasury stock, at cost, 20.8 million and 21.1 million shares at September 30, 2012 and December 31, 2011, respectively. | (725,168 | ) | | (727,977 | ) |
Total DENTSPLY International Equity | 2,122,071 |
| | 1,848,077 |
|
| | | |
Noncontrolling interests | 38,796 |
| | 36,074 |
|
| | | |
Total Equity | 2,160,867 |
| | 1,884,151 |
|
| | | |
Total Liabilities and Equity | $ | 4,977,422 |
| | $ | 4,755,398 |
|
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
Cash flows from operating activities: | | | |
| | | |
Net income | $ | 190,561 |
| | $ | 206,053 |
|
| | | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation | 59,509 |
| | 47,058 |
|
Amortization | 37,289 |
| | 16,830 |
|
Amortization of deferred financing costs | 5,749 |
| | — |
|
Deferred income taxes | (2,702 | ) | | (28,953 | ) |
Share-based compensation expense | 17,248 |
| | 15,659 |
|
Restructuring and other costs - noncash | 14,207 |
| | 725 |
|
Stock option income tax benefit | (11,201 | ) | | (6,704 | ) |
Net interest expense on derivatives with an other-than-insignificant financing element | 1,229 |
| | 2,687 |
|
Equity in earnings from unconsolidated affiliates | 5,448 |
| | (1,690 | ) |
Other non-cash expense | (8,354 | ) | | 3,266 |
|
Changes in operating assets and liabilities, net of acquisitions: | |
| | |
|
Accounts and notes receivable-trade, net | (41,943 | ) | | (27,005 | ) |
Inventories, net | (54,329 | ) | | (2,609 | ) |
Prepaid expenses and other current assets | (21,781 | ) | | (8,016 | ) |
Other noncurrent assets, net | (2,743 | ) | | (308 | ) |
Accounts payable | (11,557 | ) | | 4,668 |
|
Accrued liabilities | 6,242 |
| | 34,959 |
|
Income taxes payable | 17,802 |
| | (4,701 | ) |
Other noncurrent liabilities | 1,391 |
| | 2,913 |
|
| | | |
Net cash provided by operating activities | 202,065 |
| | 254,832 |
|
| | | |
Cash flows from investing activities: | |
| | |
|
| | | |
Capital expenditures | (64,859 | ) | | (45,458 | ) |
Cash paid for acquisitions of businesses, net of cash acquired | — |
| | (1,797,919 | ) |
Payments on settlements of net investment hedges | (14,221 | ) | | (2,462 | ) |
Expenditures for identifiable intangible assets | (196 | ) | | (337 | ) |
Purchase of Company-owned life insurance policies | (1,577 | ) | | — |
|
Proceeds from sale of property, plant and equipment, net | 553 |
| | 593 |
|
| | | |
Net cash used by investing activities | (80,300 | ) | | (1,845,583 | ) |
| | | |
Cash flows from financing activities: | |
| | |
|
| | | |
Net change in short-term borrowings | (115,468 | ) | | 413 |
|
Cash paid for treasury stock | (38,839 | ) | | (79,500 | ) |
Cash dividends paid | (23,561 | ) | | (21,512 | ) |
Cash paid for contingent consideration on prior acquisitions | (2,519 | ) | | (1,780 | ) |
Cash paid for acquisition of noncontrolling interests of consolidated subsidiaries | — |
| | (16,431 | ) |
Proceeds from long-term borrowings | — |
| | 1,446,414 |
|
Repayments of long-term borrowings | — |
| | (251,336 | ) |
Payment on terminated derivative instruments | — |
| | (34,628 | ) |
Proceeds from exercise of stock options | 24,830 |
| | 36,293 |
|
Excess tax benefits from share-based compensation | 11,201 |
| | 6,704 |
|
Net interest payments on derivatives with an other-than-insignificant financing element | (1,229 | ) | | (2,687 | ) |
| | | |
Net cash (used) provided by financing activities | (145,585 | ) | | 1,081,950 |
|
| | | |
Effect of exchange rate changes on cash and cash equivalents | 2,767 |
| | 50,629 |
|
| | | |
Net decrease in cash and cash equivalents | (21,053 | ) | | (458,172 | ) |
| | | |
Cash and cash equivalents at beginning of period | 77,128 |
| | 540,038 |
|
| | | |
Cash and cash equivalents at end of period | $ | 56,075 |
| | $ | 81,866 |
|
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
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 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 | — |
| | — |
| | 203,917 |
| | — |
| | — |
| | 203,917 |
| | 2,136 |
| | 206,053 |
|
| | | | | | | | | | | | | | | |
Other comprehensive income | |
| | |
| | |
| | (168,977 | ) | | |
| | (168,977 | ) | | 1,242 |
| | (167,735 | ) |
| | | | | | | | | | | | | | | |
Acquisition of noncontrolling interest | — |
| | 22,439 |
| | — |
| | (1,862 | ) | | — |
| | 20,577 |
| | (37,008 | ) | | (16,431 | ) |
Exercise of stock options | — |
| | (12,439 | ) | | — |
| | — |
| | 48,982 |
| | 36,543 |
| | — |
| | 36,543 |
|
Tax benefit from stock options exercised | — |
| | 6,704 |
| | — |
| | — |
| | — |
| | 6,704 |
| | — |
| | 6,704 |
|
Share based compensation expense | — |
| | 15,410 |
| | — |
| | — |
| | — |
| | 15,410 |
| | — |
| | 15,410 |
|
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 | — |
| | (5,707 | ) | | — |
| | — |
| | 3,550 |
| | (2,157 | ) | | — |
| | (2,157 | ) |
RSU dividends | — |
| | 137 |
| | (137 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Cash dividends ($0.15 per share) | — |
| | — |
| | (21,185 | ) | | — |
| | — |
| | (21,185 | ) | | — |
| | (21,185 | ) |
Balance at September 30, 2011 | $ | 1,628 |
| | $ | 231,825 |
| | $ | 2,502,945 |
| | $ | (146,683 | ) | | $ | (736,023 | ) | | $ | 1,853,692 |
| | $ | 36,722 |
| | $ | 1,890,414 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive 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 | — |
| | — |
| | 187,413 |
| | — |
| | — |
| | 187,413 |
| | 3,148 |
| | 190,561 |
|
| | | | | | | | | | | | | | | |
Other comprehensive loss | — |
| | — |
| | — |
| | 95,191 |
| | — |
| | 95,191 |
| | (426 | ) | | 94,765 |
|
| | | | | | | | | | | | | | | |
Exercise of stock options | — |
| | (8,449 | ) | | — |
| | — |
| | 33,279 |
| | 24,830 |
| | — |
| | 24,830 |
|
Tax benefit from stock options exercised | — |
| | 11,201 |
| | — |
| | — |
| | — |
| | 11,201 |
| | — |
| | 11,201 |
|
Share based compensation expense | — |
| | 17,248 |
| | — |
| | — |
| | — |
| | 17,248 |
| | — |
| | 17,248 |
|
Funding of Employee Stock Ownership Plan | — |
| | 370 |
| | — |
| | — |
| | 3,272 |
| | 3,642 |
| | — |
| | 3,642 |
|
Treasury shares purchased | — |
| | — |
| | — |
| | — |
| | (38,839 | ) | | (38,839 | ) | | — |
| | (38,839 | ) |
RSU distributions | — |
| | (8,386 | ) | | — |
| | — |
| | 5,097 |
| | (3,289 | ) | | — |
| | (3,289 | ) |
RSU dividends | — |
| | 173 |
| | (173 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Cash dividends ($0.165 per share) | — |
| | — |
| | (23,403 | ) | | — |
| | — |
| | (23,403 | ) | | — |
| | (23,403 | ) |
Balance at September 30, 2012 | $ | 1,628 |
| | $ | 241,844 |
| | $ | 2,699,546 |
| | $ | (95,779 | ) | | $ | (725,168 | ) | | $ | 2,122,071 |
| | $ | 38,796 |
| | $ | 2,160,867 |
|
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
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
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 $16.3 million at September 30, 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. If an impairment is identified, the determination of whether the impairment is temporary or other-than-temporary requires significant judgment. The primary factors that the Company considers in making this judgment 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 in the consolidated statement of operations. 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 $91.2 million and $47.8 million at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 and December 31, 2011, an unrealized holding gain of $29.9 million and a unrealized holding loss of $0.5 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 or in two separate but consecutive statements. The new rules became 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 does 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 ("ASU") No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment”. 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 Company adopted this standard for the quarter ended June 30, 2012 and it did not impact the Company’s financial position or results from operations.
In July 2012, the FASB issued ASU No. 2012-02, "Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment". This newly issued accounting standard is intended to reduce the cost and complexity of the annual indefinite-lived intangible asset 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 an indefinite-lived intangible asset 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 an indefinite-lived intangible asset to its carrying amount. Under the revised standard, if an entity determines that step one is necessary and the indefinite-lived intangible asset 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. This ASU is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. The Company expects to adopt this standard for the quarter ended March 31, 2013. The adoption of this standard will not impact the Company's financial position or results of operations.
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 nine months ended September 30, 2012 and 2011:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
| | | | | | | |
Stock option expense | $ | 3,027 |
| | $ | 2,833 |
| | $ | 8,706 |
| | $ | 8,206 |
|
RSU expense | 2,839 |
| | 2,204 |
| | 7,480 |
| | 6,551 |
|
Total stock based compensation expense | $ | 5,866 |
| | $ | 5,037 |
| | $ | 16,186 |
| | $ | 14,757 |
|
| | | | | | | |
Total related tax benefit | $ | 1,692 |
| | $ | 1,430 |
| | $ | 4,406 |
| | $ | 4,302 |
|
At September 30, 2012, the remaining unamortized compensation cost related to non-qualified stock options is $16.3 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.6 years. At September 30, 2012, the unamortized compensation cost related to RSU is $17.8 million, which will be expensed over the remaining restricted period of the RSU, or 1.5 years.
The following table reflects the non-qualified stock option transactions from December 31, 2011 through September 30, 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 | 1,343 |
| | 38.63 |
| | |
| | |
| | |
| | |
|
Exercised | (1,047 | ) | | 23.72 |
| | |
| | |
| | |
| | |
|
Cancelled | (35 | ) | | 41.84 |
| | |
| | |
| | |
| | |
|
Forfeited | (63 | ) | | 36.43 |
| | |
| | |
| | |
| | |
|
| | | | | | | | | | | |
September 30, 2012 | 10,346 |
| | $ | 32.88 |
| | $ | 62,151 |
| | 7,546 |
| | $ | 31.32 |
| | $ | 58,445 |
|
At September 30, 2012, the weighted average remaining contractual term of all outstanding options is 5.8 years and the weighted average remaining contractual term of exercisable options is 4.8 years.
The following table summarizes the unvested RSU transactions from December 31, 2011 through September 30, 2012:
|
| | | | | | |
(in thousands, except per share data) | Shares | | Weighted Average Grant Date Fair Value |
| | | |
December 31, 2011 | 897 |
| | $ | 32.50 |
|
Granted | 422 |
| | 38.66 |
|
Vested | (245 | ) | | 26.33 |
|
Forfeited | (34 | ) | | 35.87 |
|
| | | |
September 30, 2012 | 1,040 |
| | $ | 36.34 |
|
NOTE 3 – COMPREHENSIVE INCOME
During the quarter ended September 30, 2012, foreign currency translation adjustments included currency translation gains of $106.5 million and losses on the Company’s loans designated as hedges of net investments of $2.8 million. During the quarter ended September 30, 2011, foreign currency translation adjustments included currency translation losses of $256.1 million and losses of $21.9 million on the Company’s loans designated as hedges of net investments. During the nine months ended September 30, 2012, foreign currency translation adjustments included currency translation gains of $58.0 million and gains on the Company's loans designated as hedges of net investments of $1.3 million. During the nine months ended September 30, 2011, foreign currency translation adjustments included currency translation losses of $115.4 million and losses on the Company's loans designated as hedges as investments of $11.2 million. 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) | September 30, 2012 | | December 31, 2011 |
| | | |
Foreign currency translation adjustments | $ | 20,241 |
| | $ | (39,078 | ) |
Net loss on derivative financial instruments | (113,647 | ) | | (117,390 | ) |
Net unrealized holding gains (losses) on available-for-sale securities | 29,903 |
| | (516 | ) |
Pension liability adjustments | (32,276 | ) | | (33,986 | ) |
| $ | (95,779 | ) | | $ | (190,970 | ) |
The cumulative foreign currency translation adjustments included translation gains of $154.4 million and $96.3 million at September 30, 2012 and December 31, 2011, respectively, was offset by losses of $132.3 million and $133.5 million, respectively, on loans designated as hedges of net investments. These foreign currency translation adjustments were partially 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 and nine months ended September 30, 2012 and 2011:
|
| | | | | | | | | | | | | | | |
Basic Earnings Per Common Share Computation | Three Months Ended | | Nine Months Ended |
(in thousands, except per share amounts) | 2012 | | 2011 | | 2012 | | 2011 |
| | | | | | | |
Net income attributable to DENTSPLY International | $ | 53,364 |
| | $ | 60,597 |
| | $ | 187,413 |
| | $ | 203,917 |
|
| | | | | | | |
Common shares outstanding | 141,843 |
| | 141,349 |
| | 141,767 |
| | 141,337 |
|
| | | | | | | |
Earnings per common share - basic | $ | 0.38 |
| | $ | 0.43 |
| | $ | 1.32 |
| | $ | 1.44 |
|
| | | | | | | |
Diluted Earnings Per Common Share Computation | |
| | |
| | |
| | |
|
(in thousands, except per share amounts) | |
| | |
| | |
| | |
|
| | | | | | | |
Net income attributable to DENTSPLY International | $ | 53,364 |
| | $ | 60,597 |
| | $ | 187,413 |
| | $ | 203,917 |
|
| | | | | | | |
Common shares outstanding | 141,843 |
| | 141,349 |
| | 141,767 |
| | 141,337 |
|
Incremental shares from assumed exercise of dilutive options from stock-based compensation awards | 2,041 |
| | 2,046 |
| | 2,118 |
| | 2,241 |
|
Total shares | 143,884 |
| | 143,395 |
| | 143,885 |
| | 143,578 |
|
| | | | | | | |
Earnings per common share - diluted | $ | 0.37 |
| | $ | 0.42 |
| | $ | 1.30 |
| | $ | 1.42 |
|
Options to purchase 3.8 million and 4.1 million shares of common stock that were outstanding during the three and nine months ended September 30, 2012, respectively, were not included in the computation of diluted earnings per share since the exercise prices for these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. There were 3.2 million and 3.5 million antidilutive shares of common stock outstanding during the three and nine months ended September 30, 2011, respectively.
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 acquisition was recorded in accordance with the business combinations provisions of US GAAP.
The following table summarizes the final fair value of identifiable assets and liabilities assumed at the date of the acquisition. This table has been updated during the first nine months of 2012 to reflect the final fair value. The final valuation change resulted in increases to identifiable intangible assets relating mostly to customer relationships and deferred tax liabilities with a decrease to goodwill. The Company determined that it was not necessary to retroactively revise prior period financial statements as the changes were not material to the Company's consolidated financial statements.
|
| | | |
(in thousands) | |
| |
Inventory | $ | 84,659 |
|
Other Current assets | 141,261 |
|
Property, plant and equipment | 178,495 |
|
Identifiable intangible assets | 844,100 |
|
Goodwill | 947,150 |
|
Other long-term assets | 14,963 |
|
Total assets | 2,210,628 |
|
| |
Current liabilities | 107,243 |
|
Long-term liabilities | 312,595 |
|
Total liabilities | 419,838 |
|
| |
Net assets | $ | 1,790,790 |
|
Other current assets consist primarily of trade accounts receivable of $101.9 million. Current liabilities assumed are primarily comprised of accrued and other current liabilities of $80.1 million and trade accounts payable of $27.1 million. Long-term liabilities assumed are primarily comprised of noncurrent deferred tax liabilities of $263.3 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.
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.
Property, plant and equipment includes a fair value adjustment of $28.7 million and consists of land, buildings, plant and equipment. Depreciable lives are estimated at 40 years for buildings and range from 5 to 15 years for plant and equipment.
The fair values assigned to identifiable 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.
Useful lives for identifiable intangible assets were determined based upon the remaining useful economic lives of the identifiable intangible assets that are expected to contribute to future cash flows. The acquired identifiable intangible assets are being amortized on a straight-line basis over their expected useful lives.
Identifiable intangible assets acquired consist of the following:
|
| | | | | |
(in thousands, except for useful life) | Amount | | Useful Life (in years) |
| | | |
Customer relationships | $ | 494,700 |
| | 15 - 18 |
Developed technology and patents | 116,500 |
| | 10 |
Trade names and trademarks | 229,100 |
| | Indefinite |
In-process research and development | 3,800 |
| | — |
Total | $ | 844,100 |
| | |
The $947.2 million of goodwill is attributable to the excess of the purchase price over the fair value of the net tangible and identifiable 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 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 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 September 30, | | Nine Months Ended September 30, |
(in thousands, except per share data) | 2011 | | 2011 |
| | | |
Net sales | $ | 707,683 |
| | $ | 2,184,998 |
|
Net income attributable to DENTSPLY | $ | 52,903 |
| | $ | 195,602 |
|
Diluted earnings per common share | $ | 0.37 |
| | $ | 1.36 |
|
The pro forma financial information is based on the Company's final assignment of purchase price of the fair value of identifiable assets acquired and liabilities assumed. 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 dental and certain healthcare products and geographic regions, primarily serving the professional dental market. Professional dental products represented approximately 88% and 93% of sales for the three months ended September 30, 2012 and 2011, respectively, and 89% and 95% of sales for the nine months ended September 30, 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 first quarter of 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, India and Africa.
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 India and 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 and nine months ended September 30, 2012 and 2011:
Third Party Net Sales
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
| | | | | | | |
Dental Consumable and Laboratory Businesses | $ | 236,473 |
| | $ | 245,682 |
| | $ | 742,190 |
| | $ | 722,864 |
|
Orthodontics/Canada/Mexico/Japan | 81,390 |
| | 71,377 |
| | 240,609 |
| | 245,550 |
|
Select Distribution Businesses | 68,397 |
| | 70,770 |
| | 212,585 |
| | 220,276 |
|
Implants/Endodontics/Healthcare/Pacific Rim | 309,941 |
| | 232,611 |
| | 984,393 |
| | 614,376 |
|
All Other (a) | (467 | ) | | (681 | ) | | (4,636 | ) | | (3,361 | ) |
Total | $ | 695,734 |
| | $ | 619,759 |
| | $ | 2,175,141 |
| | $ | 1,799,705 |
|
(a) Includes amounts recorded at Corporate headquarters.
Third Party Net Sales, Excluding Precious Metal Content
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
| | | | | | | |
Dental Consumable and Laboratory Businesses | $ | 199,786 |
| | $ | 203,307 |
| | $ | 614,133 |
| | $ | 618,596 |
|
Orthodontics/Canada/Mexico/Japan | 73,305 |
| | 62,665 |
| | 216,183 |
| | 220,573 |
|
Select Distribution Businesses | 66,644 |
| | 68,648 |
| | 207,930 |
| | 213,627 |
|
Implants/Endodontics/Healthcare/Pacific Rim | 307,853 |
| | 229,812 |
| | 977,617 |
| | 605,312 |
|
All Other (a) | (467 | ) | | (681 | ) | | (4,637 | ) | | (3,362 | ) |
Total excluding precious metal content | 647,121 |
| | 563,751 |
| | 2,011,226 |
| | 1,654,746 |
|
Precious metal content | 48,613 |
| | 56,008 |
| | 163,915 |
| | 144,959 |
|
Total including precious metal content | $ | 695,734 |
| | $ | 619,759 |
| | $ | 2,175,141 |
| | $ | 1,799,705 |
|
(a) Includes amounts recorded at Corporate headquarters.
Inter-segment Net Sales
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
| | | | | | | |
Dental Consumable and Laboratory Businesses | $ | 55,093 |
| | $ | 53,637 |
| | $ | 167,980 |
| | $ | 164,643 |
|
Orthodontics/Canada/Mexico/Japan | 989 |
| | 972 |
| | 3,221 |
| | 2,909 |
|
Select Distribution Businesses | 2,608 |
| | 4,432 |
| | 8,899 |
| | 11,909 |
|
Implants/Endodontics/Healthcare/Pacific Rim | 35,468 |
| | 37,597 |
| | 116,216 |
| | 119,395 |
|
All Other (a) | 52,809 |
| | 51,325 |
| | 163,118 |
| | 158,160 |
|
Eliminations | (146,967 | ) | | (147,963 | ) | | (459,434 | ) | | (457,016 | ) |
Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
(a) Includes amounts recorded at Corporate headquarters and one distribution warehouse not managed by named segments.
Segment Operating Income
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
| | | | | | | |
Dental Consumable and Laboratory Businesses | $ | 59,721 |
| | $ | 54,191 |
| | $ | 184,486 |
| | $ | 171,710 |
|
Orthodontics/Canada/Mexico/Japan | 5,268 |
| | (1,437 | ) | | 9,531 |
| | 12,156 |
|
Select Distribution Businesses | 83 |
| | 1,145 |
| | (797 | ) | | 1,503 |
|
Implants/Endodontics/Healthcare/Pacific Rim | 63,337 |
| | 38,593 |
| | 206,750 |
| | 156,293 |
|
All Other (a) | (24,646 | ) | | (26,337 | ) | | (96,376 | ) | | (72,423 | ) |
Segment operating income | 103,763 |
| | 66,155 |
| | 303,594 |
| | 269,239 |
|
| | | | | | | |
Reconciling Items: | |
| | |
| | |
| | |
|
Restructuring and other costs | 15,097 |
| | 26,353 |
| | 18,862 |
| | 33,849 |
|
Interest expense | 14,488 |
| | 16,062 |
| | 44,854 |
| | 27,975 |
|
Interest income | (2,342 | ) | | (2,418 | ) | | (6,650 | ) | | (6,676 | ) |
Other expense (income), net | 739 |
| | 7,182 |
| | 1,969 |
| | 8,686 |
|
Income before income taxes | $ | 75,781 |
| | $ | 18,976 |
| | $ | 244,559 |
| | $ | 205,405 |
|
(a) Includes the results of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments.
|
| | | | | | | |
Assets | | | |
(in thousands) | September 30, 2012 | | December 31, 2011 |
| | | |
Dental Consumable and Laboratory Businesses | $ | 1,032,321 |
| | $ | 1,180,001 |
|
Orthodontics/Canada/Mexico/Japan | 297,524 |
| | 328,376 |
|
Select Distribution Businesses | 205,985 |
| | 168,500 |
|
Implants/Endodontics/Healthcare/Pacific Rim | 3,179,994 |
| | 2,881,591 |
|
All Other (a) | 261,598 |
| | 196,930 |
|
Total | $ | 4,977,422 |
| | $ | 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 September 30, 2012 and December 31, 2011, inventories with a cost of $8.6 million, or 2.1% and $7.1 million, or 2.1%, respectively, were 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 September 30, 2012 and December 31, 2011 by $5.6 million and $5.6 million, respectively.
The Company establishes reserves for inventory in order to present inventories at net realizable value. The inventory valuation reserves were $34.7 million and $35.1 million at September 30, 2012 and December 31, 2011, respectively.
Inventories, net of inventory valuation reserves, consist of the following:
|
| | | | | | | |
(in thousands) | September 30, 2012 | | December 31, 2011 |
| | | |
Finished goods | $ | 259,263 |
| | $ | 218,814 |
|
Work-in-process | 69,264 |
| | 66,952 |
|
Raw materials and supplies | 87,395 |
| | 75,996 |
|
| $ | 415,922 |
| | $ | 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 and nine months ended September 30, 2012 and 2011:
|
| | | | | | | | | | | | | | | |
Defined Benefit Plans | Three Months Ended | | Nine Months Ended |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
| | | | | | | |
Service cost | $ | 3,004 |
| | $ | 2,799 |
| | $ | 9,014 |
| | $ | 7,811 |
|
Interest cost | 2,608 |
| | 2,453 |
| | 7,926 |
| | 6,945 |
|
Expected return on plan assets | (1,180 | ) | | (1,350 | ) | | (3,594 | ) | | (3,856 | ) |
Amortization of prior service cost | (34 | ) | | 20 |
| | (104 | ) | | 61 |
|
Amortization of net loss | 486 |
| | 407 |
| | 1,478 |
| | 1,195 |
|
| | | | | | | |
Net periodic benefit cost | $ | 4,884 |
| | $ | 4,329 |
| | $ | 14,720 |
| | $ | 12,156 |
|
|
| | | | | | | | | | | | | | | |
Other Postretirement Plans | Three Months Ended | | Nine Months Ended |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
| | | | | | | |
Service cost | $ | 18 |
| | $ | 16 |
| | $ | 55 |
| | $ | 48 |
|
Interest cost | 117 |
| | 137 |
| | 352 |
| | 414 |
|
Amortization of net loss | 58 |
| | 49 |
| | 173 |
| | 147 |
|
| | | | | | | |
Net periodic benefit cost | $ | 193 |
| | $ | 202 |
| | $ | 580 |
| | $ | 609 |
|
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 September 30, 2012 | $ | 9,451 |
| | $ | 630 |
|
Projected for the remainder of the year | 3,221 |
| | 348 |
|
Total projected contributions | $ | 12,672 |
| | $ | 978 |
|
NOTE 9 – RESTRUCTURING AND OTHER COSTS
Restructuring Costs
During the three and nine months ended September 30, 2012, the Company recorded restructuring costs of $10.0 million and $13.4 million, respectively. 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. During the three and nine months ended September 30, 2011, the Company recorded restructuring costs of $0.8 million and $1.5 million, respectively, 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.
At September 30, 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 |
| | $ | 1,281 |
| | $ | — |
| | $ | 4,661 |
|
Provisions and adjustments | — |
| | 564 |
| | 11,847 |
| | 12,411 |
|
Amounts applied | (1,000 | ) | | (982 | ) | | (2,414 | ) | | (4,396 | ) |
Balance at September 30, 2012 | $ | 2,380 |
| | $ | 863 |
| | $ | 9,433 |
| | $ | 12,676 |
|
|
| | | | | | | | | | | |
| Lease/Contract Terminations |
(in thousands) | 2010 and Prior Plans | | 2012 Plans | | Total |
| | | | | |
Balance at December 31, 2011 | $ | 1,011 |
| | $ | — |
| | $ | 1,011 |
|
Provisions and adjustments | — |
| | 296 |
| | 296 |
|
Amounts applied | (189 | ) | | (127 | ) | | (316 | ) |
Balance at September 30, 2012 | $ | 822 |
| | $ | 169 |
| | $ | 991 |
|
|
| | | | | | | | | | | |
| Other Restructuring Costs |
(in thousands) | 2010 and Prior Plans | | 2012 Plans | | Total |
| | | | | |
Balance at December 31, 2011 | $ | 34 |
| | $ | — |
| | $ | 34 |
|
Provisions and adjustments | — |
| | 728 |
| | 728 |
|
Amounts applied | — |
| | (722 | ) | | (722 | ) |
Balance at September 30, 2012 | $ | 34 |
| | $ | 6 |
| | $ | 40 |
|
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 | | September 30, 2012 |
| | | | | | | |
Dental Consumable and Laboratory Businesses | $ | 3,601 |
| | $ | 8,938 |
| | $ | (1,389 | ) | | $ | 11,150 |
|
Orthodontics/Canada/Mexico/Japan | 240 |
| | 1,118 |
| | (951 | ) | | 407 |
|
Implants/Endodontics/Healthcare/Pacific Rim | 1,865 |
| | 3,379 |
| | (3,094 | ) | | 2,150 |
|
| $ | 5,706 |
| | $ | 13,435 |
| | $ | (5,434 | ) | | $ | 13,707 |
|
Other Costs
Other costs for the three and nine months ended September 30, 2012, were $5.1 million and $5.5 million, respectively. The other costs included impairments of certain previously acquired technologies, the impact of the U.S. presidential executive order updating trade sanctions and settlement of legal matters. On October 9, 2012, President Obama issued an executive order making it illegal for non-U.S. subsidiaries of U.S. companies to engage in certain transactions involving Iran without a license. The Company has reserved appropriate allowances against accounts receivable of its controlled foreign subsidiaries and have discontinued such sales. There can be no assurance as to when such sales may be resumed to this region. During the three and nine months ended September 30, 2011, the Company recorded other costs of $25.5 million and $32.3 million, respectively, which were related to the Astra Tech acquisition, legal settlement costs and impairments of certain previously acquired technology.
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 certain variable raw material costs.
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 September 30, 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 contracts 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. The time value component of the fair value of the derivative is deemed ineffective and is 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 September 30, 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 September 30, 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 September 30, 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 contracts primarily