Dentsply 10-Q3 2013


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, 2013
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, 2013, DENTSPLY International Inc.had 142,652,236 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
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Net sales
$
704,018

 
$
695,734

 
$
2,197,112

 
$
2,175,141

Cost of products sold
327,601

 
331,619

 
1,017,539

 
1,010,807

 
 
 
 
 
 
 
 
Gross profit
376,417

 
364,115

 
1,179,573

 
1,164,334

Selling, general and administrative expenses
269,165

 
260,352

 
852,763

 
860,740

Restructuring and other costs
2,231

 
15,097

 
5,065

 
18,862

 
 
 
 
 
 
 
 
Operating income
105,021

 
88,666

 
321,745

 
284,732

 
 
 
 
 
 
 
 
Other income and expenses:
 

 
 

 
 

 
 

Interest expense
11,442

 
13,948

 
38,170

 
44,053

Interest income
(2,138
)
 
(2,342
)
 
(6,556
)
 
(6,204
)
Other expense (income), net
1,581

 
1,279

 
8,723

 
2,324

 
 
 
 
 
 
 
 
Income before income taxes
94,136

 
75,781

 
281,408

 
244,559

Provision for income taxes
13,187

 
18,960

 
39,599

 
48,550

Equity in net (loss) earnings of unconsolidated affiliated company
(83
)
 
(2,529
)
 
320

 
(5,448
)
 
 
 
 
 
 
 
 
Net income
80,866

 
54,292

 
242,129

 
190,561

Less: Net income attributable to noncontrolling interests
1,015

 
928

 
3,366

 
3,148

 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
79,851

 
$
53,364

 
$
238,763

 
$
187,413

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.56

 
$
0.38

 
$
1.67

 
$
1.32

Diluted
$
0.55

 
$
0.37

 
$
1.65

 
$
1.30

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
142,421

 
141,843

 
142,705

 
141,767

Diluted
144,698

 
143,884

 
144,952

 
143,885


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
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Net income
$
80,866

 
$
54,292

 
$
242,129

 
$
190,561

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
140,374

 
104,168

 
52,118

 
58,893

Net (loss) gain on derivative financial instruments
(31,997
)
 
(11,214
)
 
(17,241
)
 
3,743

Net unrealized holding (loss) gain on available-for-sale securities
(1,916
)
 
15,373

 
(10,905
)
 
30,419

Pension liability adjustments
(1,692
)
 
44

 
1,624

 
1,710

Total other comprehensive income (loss), net of tax
104,769

 
108,371

 
25,596

 
94,765

 
 
 
 
 
 
 
 
Total comprehensive income
185,635

 
162,663

 
267,725

 
285,326

 
 
 
 
 
 
 
 
Less: Comprehensive income attributable
 

 
 

 
 

 
 

to noncontrolling interests
2,666

 
1,366

 
4,866

 
2,722

 
 
 
 
 
 
 
 
Comprehensive income attributable to
 
 
 
 
 
 
 
DENTSPLY International
$
182,969

 
$
161,297

 
$
262,859

 
$
282,604

 


 


 


 



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)
 
September 30, 2013
 
December 31, 2012
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
50,658

 
$
80,132

Accounts and notes receivables-trade, net
502,370

 
442,412

Inventories, net
448,277

 
402,940

Prepaid expenses and other current assets
151,840

 
185,612

 
 
 
 
Total Current Assets
1,153,145

 
1,111,096

 
 
 
 
Property, plant and equipment, net
628,509

 
614,705

Identifiable intangible assets, net
800,470

 
830,642

Goodwill, net
2,218,136

 
2,210,953

Other noncurrent assets, net
209,719

 
204,901

 
 
 
 
Total Assets
$
5,009,979

 
$
4,972,297

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
136,945

 
$
165,290

Accrued liabilities
335,745

 
424,336

Income taxes payable
33,923

 
39,191

Notes payable and current portion of long-term debt
270,948

 
298,963

 
 
 
 
Total Current Liabilities
777,561

 
927,780

 
 
 
 
Long-term debt
1,164,794

 
1,222,035

Deferred income taxes
226,668

 
232,641

Other noncurrent liabilities
361,938

 
340,398

 
 
 
 
Total Liabilities
2,530,961

 
2,722,854

 
 
 
 
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, 2013 and December 31, 2012.
1,628

 
1,628

Capital in excess of par value
250,153

 
246,548

Retained earnings
3,030,252

 
2,818,461

Accumulated other comprehensive loss
(120,104
)
 
(144,200
)
Treasury stock, at cost, 20.6 million and 20.5 million shares at September 30, 2013 and December 31, 2012, respectively.
(723,488
)
 
(713,739
)
Total DENTSPLY International Equity
2,438,441

 
2,208,698

 
 
 
 
Noncontrolling interests
40,577

 
40,745

 
 
 
 
Total Equity
2,479,018

 
2,249,443

 
 
 
 
Total Liabilities and Equity
$
5,009,979

 
$
4,972,297

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

5



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Nine Months Ended
September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
242,129

 
$
190,561

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

 
 

Depreciation
61,545

 
59,509

Amortization
34,700

 
37,289

Amortization of deferred financing costs
3,842

 
5,749

Deferred income taxes
(32,096
)
 
(2,702
)
Share-based compensation expense
18,027

 
17,248

Restructuring and other costs - noncash
843

 
14,207

Stock option income tax benefit
(2,262
)
 
(11,201
)
Equity in (earnings) loss from unconsolidated affiliates
(320
)
 
5,448

Other non-cash expense (income)
3,422

 
(8,354
)
Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
(65,455
)
 
(41,943
)
Inventories, net
(45,284
)
 
(54,329
)
Prepaid expenses and other current assets
26,137

 
(23,798
)
Other noncurrent assets, net
992

 
(2,743
)
Accounts payable
(25,099
)
 
(11,557
)
Accrued liabilities
706

 
9,488

Income taxes
29,544

 
17,802

Other noncurrent liabilities
6,895

 
1,391

 
 
 
 
Net cash provided by operating activities
258,266

 
202,065

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(73,500
)
 
(64,859
)
Cash paid for acquisitions of businesses, net of cash acquired
(3,939
)
 

Cash received on derivatives
9,172

 

Cash paid on derivatives
(95,667
)
 
(14,221
)
Expenditures for identifiable intangible assets
(1,049
)
 
(196
)
Purchase of Company-owned life insurance policies

 
(1,577
)
Proceeds from sale of property, plant and equipment, net
3,092

 
553

 
 
 
 
Net cash used in investing activities
(161,891
)
 
(80,300
)
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
Net change in short-term borrowings
8,789

 
(115,468
)
Cash paid for treasury stock
(72,381
)
 
(38,839
)
Cash dividends paid
(25,895
)
 
(23,561
)
Cash paid for contingent consideration on prior acquisitions

 
(2,519
)
Cash paid for acquisition of noncontrolling interests of consolidated subsidiary
(8,960
)
 

Proceeds from long-term borrowings
174,628

 

Repayments of long-term borrowings
(251,335
)
 

Proceeds from exercise of stock options
48,350

 
24,830

Excess tax benefits from share-based compensation
2,262

 
11,201

Cash received on derivative contracts
21

 

Cash paid on derivative contracts
(129
)
 
(1,229
)
 
 
 
 
Net cash used in financing activities
(124,650
)
 
(145,585
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(1,199
)
 
2,767

 
 
 
 
Net decrease in cash and cash equivalents
(29,474
)
 
(21,053
)
 
 
 
 
Cash and cash equivalents at beginning of period
80,132

 
77,128

 
 
 
 
Cash and cash equivalents at end of period
$
50,658

 
$
56,075

 
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

6



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS 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, 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 income (expense)

 

 

 
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 ($0.1650 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


 
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, 2012
$
1,628

 
$
246,548

 
$
2,818,461

 
$
(144,200
)
 
$
(713,739
)
 
$
2,208,698

 
$
40,745

 
$
2,249,443

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
238,763

 

 

 
238,763

 
3,366

 
242,129

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 
24,096

 

 
24,096

 
1,500

 
25,596

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interest

 
(3,926
)
 

 

 

 
(3,926
)
 
(5,034
)
 
(8,960
)
Exercise of stock options

 
(5,569
)
 

 

 
53,919

 
48,350

 

 
48,350

Tax benefit from stock options exercised

 
2,262

 

 

 

 
2,262

 

 
2,262

Share based compensation expense

 
18,027

 

 

 

 
18,027

 

 
18,027

Funding of Employee Stock Ownership Plan

 
959

 

 

 
3,698

 
4,657

 

 
4,657

Treasury shares purchased

 

 

 

 
(72,381
)
 
(72,381
)
 

 
(72,381
)
RSU distributions

 
(8,378
)
 

 

 
5,015

 
(3,363
)
 

 
(3,363
)
RSU dividends

 
230

 
(230
)
 

 

 

 

 

Cash dividends ($0.1875 per share)

 

 
(26,742
)
 

 

 
(26,742
)
 

 
(26,742
)
Balance at September 30, 2013
$
1,628

 
$
250,153

 
$
3,030,252

 
$
(120,104
)
 
$
(723,488
)
 
$
2,438,441

 
$
40,577

 
$
2,479,018


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, 2012.

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, 2012, 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 $14.9 million at September 30, 2013 and $14.5 million at December 31, 2012.

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 $60.7 million and $75.1 million at September 30, 2013 and December 31, 2012, respectively.  At September 30, 2013 and December 31, 2012, an unrealized holding gain of $6.9 million and $17.8 million, respectively, on available-for-sale securities, net of tax, has been recorded in AOCI. 

Revisions in Classification

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




8



New Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” The standard requires entities to disclose both gross and net information about instruments and transactions that are offset in the Consolidated Balance Sheet, as well as instruments and transactions that are subject to an enforceable master netting agreement or similar agreement. In January 2013, The FASB issued ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The standard clarifies the scope of the disclosure to apply only to derivatives, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements as well as securities lending and borrowing transactions. The standard was effective January 1, 2013, with retrospective application required. The adoption of this standard did not have a material impact to the Company’s financial statements. The Company adopted this accounting standard during the quarter ended March 31, 2013.

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 adoption of this standard did not materially impact the Company’s financial position or results of operations. The Company adopted this accounting standard during the quarter ended March 31, 2013.

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This newly issued accounting standard requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income in its entirety in the same period. For other amounts not required to be reclassified to net income in the same reporting period, a cross reference to other disclosures that provide additional detail about the reclassification amounts is required. Since the standard only impacts the disclosure requirements of AOCI and does not impact the accounting for accumulated comprehensive income, the standard did not have an impact on the Company’s consolidated financial statements. The Company adopted this accounting standard during the quarter ended March 31, 2013.

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This newly issued accounting standard requires a cumulative translation adjustment (“CTA”)attached to the parent’s investment in a foreign entity should be released in a manner consistent with the derecognition guidance on investment entities. Thus the entire amount of CTA associated with the foreign entity would be released when there has been a sale of a subsidiary or group of net assets within a foreign entity and the sale represents a complete liquidation of the investment in the foreign entity, a loss of a controlling financial interest in an investment in a foreign entity, or step acquisition for a foreign entity. The adoption of this standard is not expected to materially impact the Company’s financial position or results of operations. The Company expects to adopt this accounting standard for the quarter ending March 31, 2014.

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of a Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The newly issued accounting standard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction losses or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefit. The adoption of this standard is not expected to materially impact the Company’s financial position or results of operations. The Company expects to adopt this accounting standard for the quarter ending March 31, 2014.





9



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, 2013 and 2012:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Stock option expense
$
2,565

 
$
3,027

 
$
7,570

 
$
8,706

RSU expense
3,077

 
2,839

 
8,637

 
7,480

Total stock based compensation expense
$
5,642

 
$
5,866

 
$
16,207

 
$
16,186

 
 
 
 
 
 
 
 
Total related tax benefit
$
1,590

 
$
1,692

 
$
4,250

 
$
4,406


At September 30, 2013, the remaining unamortized compensation cost related to non-qualified stock options is $13.1 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.5 years. At September 30, 2013, the unamortized compensation cost related to RSU is $20.8 million, which will be expensed over the weighted average remaining restricted period of the RSU, or 1.5 years.

The following table reflects the non-qualified stock option transactions from December 31, 2012 through September 30, 2013:
 
Outstanding
 
Exercisable
(in thousands, except per share data)
Shares
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Shares
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
9,906

 
$
33.18

 
$
69,079

 
7,599

 
$
31.79

 
$
64,819

Granted
922

 
40.93

 
 

 
 

 
 

 
 

Exercised
(1,707
)
 
28.32

 
 

 
 

 
 

 
 

Cancelled
(34
)
 
42.82

 
 

 
 

 
 

 
 

Forfeited
(133
)
 
38.88

 
 

 
 

 
 

 
 

Balance at September 30, 2013
8,954

 
$
34.79

 
$
78,895

 
6,810

 
$
33.41

 
$
69,780


At September 30, 2013, 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 4.9 years.

The following table summarizes the unvested RSU transactions from December 31, 2012 through September 30, 2013:
(in thousands, except per share data)
Shares
 
Weighted Average
Grant Date
Fair Value
 
 
 
 
Balance at December 31, 2012
1,034

 
$
36.34

Granted
505

 
40.91

Vested
(243
)
 
32.71

Forfeited
(128
)
 
38.82

Balance at September 30, 2013
1,168

 
$
38.80


NOTE 3 – COMPREHENSIVE INCOME

 During the quarter ended September 30, 2013, foreign currency translation adjustments included currency translation gains of $141.4 million and losses on the Company’s loans designated as hedges of net investments of $2.7 million.  During the quarter ended September 30, 2012, foreign currency translation adjustments included currency translation losses of $106.5 million and gains of $2.8 million on the Company’s loans designated as hedges of net investments.  During the nine months ended September 30, 2013, foreign currency translation adjustments included currency gains of $40.8 million and gains on the Company’s loans designated as hedges of net investments of $9.8 million. 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

10



hedges of net investments of $1.3 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 cumulative foreign currency translation adjustments included translation gains of $218.5 million and $177.7 million at September 30, 2013 and December 31, 2012, respectively, were offset by losses of $113.6 million and $123.4 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.

Changes in AOCI, net of tax, by component for the nine months ended September 30, 2013 and 2012:
(in thousands)
Foreign Currency Translation Adjustments
 
Gains and (Loss) on Derivative Financial Instruments
 
Net Unrealized Holding Gain (Loss) on Available-for-Sale Securities
 
Pension Liability Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
54,302

 
$
(143,142
)
 
$
17,822

 
$
(73,182
)
 
$
(144,200
)
Other comprehensive income (loss) before reclassifications
50,618

 
(17,970
)
 
(10,905
)
 
(1,195
)
 
20,548

Amounts reclassified from accumulated other comprehensive income (loss)

 
729

 

 
2,819

 
3,548

Net increase (decrease) in other comprehensive income
50,618

 
(17,241
)
 
(10,905
)
 
1,624

 
24,096

Balance at September 30, 2013
$
104,920

 
$
(160,383
)
 
$
6,917

 
$
(71,558
)
 
$
(120,104
)

(in thousands)
Foreign Currency Translation Adjustments
 
Gains and (Loss) on Derivative Financial Instruments
 
Net Unrealized Holding (Loss) Gain on Available-for-Sale Securities
 
Pension Liability Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
(39,078
)
 
$
(117,390
)
 
$
(516
)
 
$
(33,986
)
 
$
(190,970
)
Other comprehensive income before reclassifications
59,319

 
6,702

 
30,419

 
610

 
97,050

Amounts reclassified from accumulated other comprehensive (loss) income

 
(2,959
)
 

 
1,100

 
(1,859
)
Net increase in other comprehensive income
59,319

 
3,743

 
30,419

 
1,710

 
95,191

Balance at September 30, 2012
$
20,241

 
$
(113,647
)
 
$
29,903

 
$
(32,276
)
 
$
(95,779
)















11



Reclassification out of accumulated other comprehensive income (expense) for the three and nine months ended September 30, 2013 and 2012:
(in thousands)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the
Statements of Operations
 
Three Months Ended September 30,
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
Gains and (loss) on derivative financial instruments:
Interest rate swaps
 
$
(924
)
 
$
(899
)
 
Interest expense
Foreign exchange forward contracts
 
460

 
1,976

 
Cost of products sold
Foreign exchange forward contracts
 
(27
)
 
264

 
SG&A expenses
Commodity contracts
 
(190
)
 
40

 
Cost of products sold
 
 
(681
)
 
1,381

 
Net (loss) gain before tax
 
 
156

 
(137
)
 
Tax benefit (expense)
 
 
$
(525
)
 
$
1,244

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$
34

 
$
34

 
(a)
Amortization of net actuarial losses
 
(1,380
)
 
(544
)
 
(a)
 
 
(1,346
)
 
(510
)
 
Net loss before tax
 
 
394

 
148

 
Tax benefit
 
 
$
(952
)
 
$
(362
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(1,477
)
 
$
882

 
 
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the three months ended September 30, 2013 and 2012 (see Note 8, Benefit Plans, for additional details)


12



(in thousands)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the
Statements of Operations
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
Gains and (loss) on derivative financial instruments:
Interest rate swaps
 
$
(2,755
)
 
$
(2,701
)
 
Interest expense
Foreign exchange forward contracts
 
1,589

 
4,968

 
Cost of products sold
Foreign exchange forward contracts
 
(67
)
 
721

 
SG&A expenses
Commodity contracts
 
12

 
90

 
Cost of products sold
 
 
(1,221
)
 
3,078

 
Net (loss) gain before tax
 
 
492

 
(119
)
 
Tax benefit (expense)
 
 
$
(729
)
 
$
2,959

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$
101

 
$
104

 
(b)
Amortization of net actuarial losses
 
(4,104
)
 
(1,651
)
 
(b)
 
 
(4,003
)
 
(1,547
)
 
Net loss before tax
 
 
1,184

 
447

 
Tax benefit
 
 
$
(2,819
)
 
$
(1,100
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(3,548
)
 
$
1,859

 
 
 
 
(b) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the nine months ended September 30, 2013 and 2012 (see Note 8, Benefit Plans, for additional details)

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, 2013 and 2012:

Basic Earnings Per Common Share Computation
Three Months Ended
 
Nine Months Ended
(in thousands, except per share amounts)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
79,851

 
$
53,364

 
$
238,763

 
$
187,413

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
142,421

 
141,843

 
142,705

 
141,767

 
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.56

 
$
0.38

 
$
1.67

 
$
1.32

 
 
 
 
 
 
 
 
Diluted Earnings Per Common Share Computation
 

 
 

 
 

 
 

(in thousands, except per share amounts)
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
79,851

 
$
53,364

 
$
238,763

 
$
187,413

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
142,421

 
141,843

 
142,705

 
141,767

Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards
2,277

 
2,041

 
2,247

 
2,118

Total weighted average diluted shares outstanding
144,698

 
143,884

 
144,952

 
143,885

 
 
 
 
 
 
 
 
Earnings per common share - diluted
$
0.55

 
$
0.37

 
$
1.65

 
$
1.30


13




Options to purchase 2.1 million and 2.7 million shares of common stock that were outstanding during the three and nine months ended September 30, 2013, respectively, were not included in the computation of diluted earnings per common share since the options’ exercise price were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. There were 3.8 million and 4.1 million antidilutive shares of common stock outstanding during the three and nine months ended September 30, 2012, respectively.

NOTE 5 – BUSINESS ACQUISITIONS

During the nine months ended September 30, 2013, the Company paid $9.0 million to purchase the remaining outstanding shares of a consolidated subsidiary. As a result of the transaction, the Company recorded a decrease in noncontrolling interest of $5.0 million and a reduction to additional paid in capital of $3.9 million for the excess of the purchase price above the carrying value of the noncontrolling interest.

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% of sales for both the three months ended September 30, 2013 and 2012, and 88% and 89% of sales for the nine months ended September 30, 2013 and 2012, 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 segments 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 net operating income before restructuring and other costs, interest expense, interest income, other expense (income), net and provision for income taxes. Additionally, the operating segments are measured on net third party sales, excluding precious metal content. A description of the services provided within each of the Company’s four reportable segments is provided below.

During the first nine months of 2013, the Company realigned certain implant and implant related businesses as a result of changes to the business structure. The segment information below reflects the revised structure for all periods shown.

Dental Consumable and Laboratory Businesses

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

Orthodontics/Canada/Mexico/Japan

This segment is responsible for the worldwide 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 segment 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. Operating margins of the segment are reflective of the intercompany transfer price of products manufactured by other operating segments.

Implants/Endodontics/Healthcare/Pacific Rim

This segment includes the responsibility for the design, manufacture, sales and distribution of most of the Company’s dental implant and related products. This segment 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 segment is also responsible for sales and distribution of

14



certain Endodontic products in Germany, Asia and other parts of the world. Additionally, this segment 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 segment is also responsible for the worldwide 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 segments 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 segments for the three and nine months ended September 30, 2013 and 2012:

Third Party Net Sales
 
Three Months Ended
 
Nine Months Ended
(in thousands)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
242,281

 
$
244,215

 
$
761,691

 
$
765,186

Orthodontics/Canada/Mexico/Japan
71,298

 
78,761

 
224,712

 
232,310

Select Distribution Businesses
66,012

 
59,498

 
192,941

 
182,344

Implants/Endodontics/Healthcare/Pacific Rim
325,542

 
313,729

 
1,021,082

 
999,939

All Other (a)
(1,115
)
 
(469
)
 
(3,314
)
 
(4,638
)
Total
$
704,018

 
$
695,734

 
$
2,197,112

 
$
2,175,141

(a) Includes amounts recorded at Corporate headquarters.

Third Party Net Sales, Excluding Precious Metal Content
 
Three Months Ended
 
Nine Months Ended
(in thousands)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
214,634

 
$
204,230

 
$
645,015

 
$
627,536

Orthodontics/Canada/Mexico/Japan
64,758

 
70,675

 
203,629

 
207,883

Select Distribution Businesses
65,914

 
59,387

 
192,612

 
181,911

Implants/Endodontics/Healthcare/Pacific Rim
325,233

 
313,295

 
1,020,086

 
998,532

All Other (b)
(1,115
)
 
(467
)
 
(3,313
)
 
(4,637
)
Total excluding precious metal content
669,424

 
647,120

 
2,058,029

 
2,011,225

Precious metal content
34,594

 
48,614

 
139,083

 
163,916

Total including precious metal content
$
704,018

 
$
695,734

 
$
2,197,112

 
$
2,175,141

(b) Includes amounts recorded at Corporate headquarters.














15




Inter-segment Net Sales
 
Three Months Ended
 
Nine Months Ended
(in thousands)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
21,413

 
$
23,049

 
$
128,153

 
$
132,370

Orthodontics/Canada/Mexico/Japan
1,022

 
989

 
2,788

 
3,221

Select Distribution Businesses
311

 
345

 
1,816

 
1,139

Implants/Endodontics/Healthcare/Pacific Rim
36,328

 
34,059

 
102,739

 
106,283

All Other (c)
121,453

 
109,138

 
178,880

 
163,118

Eliminations
(180,527
)
 
(167,580
)
 
(414,376
)
 
(406,131
)
Total
$

 
$

 
$

 
$

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

Segment Operating Income (Loss)
 
Three Months Ended
 
Nine Months Ended
(in thousands)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
62,575

 
$
58,975

 
$
183,508

 
$
181,261

Orthodontics/Canada/Mexico/Japan
1,901

 
4,678

 
8,792

 
7,639

Select Distribution Businesses
833

 
(790
)
 
(1,463
)
 
(3,250
)
Implants/Endodontics/Healthcare/Pacific Rim
65,211

 
65,546

 
213,972

 
214,333

All Other (d)
(23,268
)
 
(24,646
)
 
(77,999
)
 
(96,389
)
Segment operating income
107,252

 
103,763

 
326,810

 
303,594

 
 
 
 
 
 
 
 
Reconciling Items:
 

 
 

 
 

 
 

Restructuring and other costs
2,231

 
15,097

 
5,065

 
18,862

Interest expense
11,442

 
13,948

 
38,170

 
44,053

Interest income
(2,138
)
 
(2,342
)
 
(6,556
)
 
(6,204
)
Other expense (income), net
1,581

 
1,279

 
8,723

 
2,324

Income before income taxes
$
94,136

 
$
75,781

 
$
281,408

 
$
244,559

(d) Includes the results of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments.
Assets
 
 
 
(in thousands)
September 30, 2013
 
December 31, 2012
 
 
 
 
Dental Consumable and Laboratory Businesses
$
879,460

 
$
1,007,307

Orthodontics/Canada/Mexico/Japan
306,699

 
294,348

Select Distribution Businesses
183,987

 
192,684

Implants/Endodontics/Healthcare/Pacific Rim
3,424,913

 
3,195,382

All Other (e)
214,920

 
282,576

Total
$
5,009,979

 
$
4,972,297

(e) 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, 2013 and December 31, 2012, the cost of $8.1 million and $6.3 million, respectively, was determined by the last-in, first-out (“LIFO”) method. The cost of other inventories was determined by the first-in, first-out (“FIFO”) or average cost methods. 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, 2013 and December 31, 2012 by $6.0 million and $5.9 million, respectively.

16




The Company establishes reserves for inventory estimated to be obsolete or unmarketable. Assumptions about future demand and market conditions are considered when estimating these reserves. The inventory valuation reserves were $35.3 million and $32.6 million at September 30, 2013 and December 31, 2012, respectively.

Inventories, net of inventory valuation reserves, consist of the following:
(in thousands)
September 30, 2013
 
December 31, 2012
 
 
 
 
Finished goods
$
281,363

 
$
248,870

Work-in-process
72,909

 
72,533

Raw materials and supplies
94,005

 
81,537

 
$
448,277

 
$
402,940


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 postemployment benefit plans for the three and nine months ended September 30, 2013 and 2012:

Defined Benefit Plans 
Three Months Ended
 
Nine Months Ended
(in thousands)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Service cost
$
3,728

 
$
3,004

 
$
11,113

 
$
9,014

Interest cost
2,486

 
2,608

 
7,408

 
7,926

Expected return on plan assets
(1,252
)
 
(1,180
)
 
(3,729
)
 
(3,594
)
Amortization of prior service benefit
(34
)
 
(34
)
 
(101
)
 
(104
)
Amortization of net actuarial loss
1,292

 
486

 
3,840

 
1,478

Curtailments and settlement gains
(680
)
 

 
(1,305
)
 

Net periodic benefit cost
$
5,540

 
$
4,884

 
$
17,226

 
$
14,720


Other Postemployment Benefit Plans
Three Months Ended
 
Nine Months Ended
(in thousands)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Service cost
$
61

 
$
18

 
$
184

 
$
55

Interest cost
122

 
117

 
364

 
352

Amortization of net actuarial loss
88

 
58

 
264

 
173

Net periodic benefit cost
$
271

 
$
193

 
$
812

 
$
580