Dentsply 10-Q1 2014


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2014
OR
 
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to _______________
 
Commission File Number 0-16211
 
DENTSPLY International Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
39-1434669
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
 
221 West Philadelphia Street, York, PA
 
17405-0872
(Address of principal executive offices)
  
(Zip Code)
 
(717) 845-7511
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x No   o

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

Yes   x No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o

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

Yes   o No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  At April 29, 2014, DENTSPLY International Inc. had 141,792,228 shares of Common Stock outstanding, with a par value of $.01 per share.




DENTSPLY International Inc.

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements


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

 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
Net sales
$
730,114

 
$
732,084

Cost of products sold
335,909

 
343,884

 
 
 
 
Gross profit
394,205

 
388,200

Selling, general and administrative expenses
287,842

 
293,677

Restructuring and other costs
793

 
665

 
 
 
 
Operating income
105,570

 
93,858

 
 
 
 
Other income and expenses:
 

 
 

Interest expense
10,955

 
15,221

Interest income
(1,435
)
 
(2,175
)
Other expense (income), net
388

 
2,918

 
 
 
 
Income before income taxes
95,662

 
77,894

Provision for income taxes
22,452

 
3,542

Equity in net loss of unconsolidated affiliated company
(290
)
 
(1,779
)
 
 
 
 
Net income
72,920

 
72,573

Less: Net income attributable to noncontrolling interests
42

 
888

 
 
 
 
Net income attributable to DENTSPLY International
$
72,878

 
$
71,685

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
0.51

 
$
0.50

Diluted
$
0.50

 
$
0.49

 
 
 
 
Weighted average common shares outstanding:
 

 
 

Basic
142,053

 
142,775

Diluted
144,453

 
145,099


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

3




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

 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
Net income
$
72,920

 
$
72,573

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
(1,035
)
 
(94,142
)
Net gain on derivative financial instruments
1,757

 
28,118

Net unrealized holding (loss) gain on available-for-sale securities
(2,041
)
 
7,640

Pension liability adjustments
318

 
2,776

Total other comprehensive income (loss), net of tax
(1,001
)
 
(55,608
)
 
 
 
 
Total comprehensive income
71,919

 
16,965

 
 
 
 
Less: Comprehensive income attributable
 

 
 

to noncontrolling interests
114

 
181

 
 
 
 
Comprehensive income attributable to
 
 
 
DENTSPLY International
$
71,805

 
$
16,784

 


 



See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

4




DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
March 31, 2014
 
December 31, 2013
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
55,823

 
$
74,954

Accounts and notes receivables-trade, net
496,221

 
472,802

Inventories, net
455,074

 
438,559

Prepaid expenses and other current assets
195,205

 
157,487

 
 
 
 
Total Current Assets
1,202,323

 
1,143,802

 
 
 
 
Property, plant and equipment, net
642,318

 
637,172

Identifiable intangible assets, net
785,997

 
795,323

Goodwill, net
2,286,715

 
2,281,596

Other noncurrent assets, net
172,080

 
220,154

 
 
 
 
Total Assets
$
5,089,433

 
$
5,078,047

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
141,591

 
$
132,789

Accrued liabilities
398,881

 
339,308

Income taxes payable
23,829

 
14,446

Notes payable and current portion of long-term debt
403,145

 
309,862

 
 
 
 
Total Current Liabilities
967,446

 
796,405

 
 
 
 
Long-term debt
1,065,463

 
1,166,178

Deferred income taxes
236,269

 
238,394

Other noncurrent liabilities
295,657

 
299,096

 
 
 
 
Total Liabilities
2,564,835

 
2,500,073

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity:
 

 
 

Preferred stock, $.01 par value; .25 million shares authorized; no shares issued

 

Common stock, $.01 par value; 200.0 million shares authorized; 162.8 million shares issued at March 31, 2014 and December 31, 2013.
1,628

 
1,628

Capital in excess of par value
211,467

 
255,272

Retained earnings
3,159,123

 
3,095,721

Accumulated other comprehensive loss
(75,665
)
 
(69,062
)
Treasury stock, at cost, 21.0 million and 20.5 million shares at March 31, 2014 and December 31, 2013, respectively.
(773,520
)
 
(748,506
)
Total DENTSPLY International Equity
2,523,033

 
2,535,053

 
 
 
 
Noncontrolling interests
1,565

 
42,921

 
 
 
 
Total Equity
2,524,598

 
2,577,974

 
 
 
 
Total Liabilities and Equity
$
5,089,433

 
$
5,078,047

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

5



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Three Months Ended March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
72,920

 
$
72,573

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

 
 

Depreciation
21,370

 
20,416

Amortization
12,569

 
11,935

Amortization of deferred financing costs
1,142

 
1,296

Deferred income taxes
(11,505
)
 
(11,793
)
Share-based compensation expense
5,786

 
5,434

Stock option income tax benefit
(69
)
 
(603
)
Equity loss from unconsolidated affiliates
290

 
1,779

Other non-cash (income) expense
(3,405
)
 
20,016

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
(22,920
)
 
(37,637
)
Inventories, net
(15,180
)
 
(22,080
)
Prepaid expenses and other current assets
(5,751
)
 
10,638

Other noncurrent assets, net
1,465

 
2,232

Accounts payable
8,047

 
(10,928
)
Accrued liabilities
(21,901
)
 
(8,558
)
Income taxes
23,423

 
(21,196
)
Other noncurrent liabilities
(1,716
)
 
2,562

 
 
 
 
Net cash provided by operating activities
64,565

 
36,086

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(25,322
)
 
(24,032
)
Cash paid for acquisitions of businesses, net of cash acquired

 
(3,939
)
Cash received on derivatives
864

 

Cash paid on derivatives
(2,103
)
 
(45,765
)
Expenditures for identifiable intangible assets
(1,305
)
 
(205
)
Purchase of short-term investments
(1,144
)
 

Proceeds from sale of property, plant and equipment, net
168

 
1,218

 
 
 
 
Net cash used in investing activities
(28,842
)
 
(72,723
)
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
Net change in short-term borrowings
64,886

 
16,133

Cash paid for treasury stock
(40,395
)
 

Cash dividends paid
(8,979
)
 
(7,909
)
Cash paid for acquisition of noncontrolling interests of consolidated subsidiary
(33
)
 
(8,960
)
Repayments of long-term borrowings
(75,174
)
 

Proceeds from exercise of stock options
4,149

 
13,578

Excess tax benefits from share-based compensation
69

 
603

Cash received on derivative contracts

 
464

Cash paid on derivative contracts

 
(306
)
 
 
 
 
Net cash (used in) provided by financing activities
(55,477
)
 
13,603

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
623

 
(895
)
 
 
 
 
Net decrease in cash and cash equivalents
(19,131
)
 
(23,929
)
 
 
 
 
Cash and cash equivalents at beginning of period
74,954

 
80,132

 
 
 
 
Cash and cash equivalents at end of period
$
55,823

 
$
56,203

 
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, 2012
$
1,628

 
$
246,548

 
$
2,818,461

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

 
$
40,745

 
$
2,249,443

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
71,685

 

 

 
71,685

 
888

 
72,573

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive expense

 

 

 
(54,901
)
 

 
(54,901
)
 
(707
)
 
(55,608
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interest

 
(3,926
)
 

 

 

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

 
(2,444
)
 

 

 
16,022

 
13,578

 

 
13,578

Tax benefit from stock options exercised

 
603

 

 

 

 
603

 

 
603

Share based compensation expense

 
5,434

 

 

 

 
5,434

 

 
5,434

Funding of Employee Stock Ownership Plan

 
959

 

 

 
3,698

 
4,657

 

 
4,657

RSU distributions

 
(8,305
)
 

 

 
4,923

 
(3,382
)
 

 
(3,382
)
RSU dividends

 
76

 
(76
)
 

 

 

 

 

Cash dividends ($0.06250 per share)

 

 
(8,944
)
 

 

 
(8,944
)
 

 
(8,944
)
Balance at March 31, 2013
$
1,628

 
$
238,945

 
$
2,881,126

 
$
(199,101
)
 
$
(689,096
)
 
$
2,233,502

 
$
35,892

 
$
2,269,394


 
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, 2013
$
1,628

 
$
255,272

 
$
3,095,721

 
$
(69,062
)
 
$
(748,506
)
 
$
2,535,053

 
$
42,921

 
$
2,577,974

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
72,878

 

 

 
72,878

 
42

 
72,920

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive expense

 

 

 
(1,073
)
 

 
(1,073
)
 
72

 
(1,001
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interest

 
(40,283
)
 

 
(5,530
)
 

 
(45,813
)
 
(41,470
)
 
(87,283
)
Exercise of stock options

 
(533
)
 

 

 
4,682

 
4,149

 

 
4,149

Tax benefit from stock options exercised

 
69

 

 

 

 
69

 

 
69

Share based compensation expense

 
5,786

 

 

 

 
5,786

 

 
5,786

Funding of Employee Stock Ownership Plan

 
1,535

 

 

 
4,418

 
5,953

 

 
5,953

Treasury shares purchased

 

 

 

 
(40,395
)
 
(40,395
)
 

 
(40,395
)
RSU distributions

 
(10,461
)
 

 

 
6,281

 
(4,180
)
 

 
(4,180
)
RSU dividends

 
82

 
(82
)
 

 

 

 

 

Cash dividends ($0.06625 per share)

 

 
(9,394
)
 

 

 
(9,394
)
 

 
(9,394
)
Balance at March 31, 2014
$
1,628

 
$
211,467

 
$
3,159,123

 
$
(75,665
)
 
$
(773,520
)
 
$
2,523,033

 
$
1,565

 
$
2,524,598


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, 2013.

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, 2013, 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” on the Consolidated Statements of Operations.

Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $12.4 million at March 31, 2014 and $14.7 million at December 31, 2013.

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 element of the bonds has not been bifurcated from the underlying bonds as the element 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 $67.2 million and $70.0 million at March 31, 2014 and December 31, 2013, respectively.  At March 31, 2014 and December 31, 2013, an unrealized holding gain of $10.7 million and $12.7 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 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 Company adopted this accounting standard for the quarter ended March 31, 2014. The adoption of this standard did not materially impact the Company’s financial position or results of operations.

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an 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 Company adopted this accounting standard for the quarter ended March 31, 2014. The adoption of this standard did not materially 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 months ended March 31, 2014 and 2013:
 
Three Months Ended
(in thousands)
2014
 
2013
 
 
 
 
Stock option expense
$
1,674

 
$
2,128

RSU expense
3,719

 
2,933

Total stock based compensation expense
$
5,393

 
$
5,061

 
 
 
 
Total related tax benefit
$
1,564

 
$
1,287


At March 31, 2014, the remaining unamortized compensation cost related to non-qualified stock options is $15.6 million, which will be expensed over the weighted average remaining vesting period of the options, or approximately 2.0 years. At March 31, 2014, the unamortized compensation cost related to RSU is $31.1 million, which will be expensed over the weighted average remaining restricted period of the RSU, or approximately 1.8 years.

The following table reflects the non-qualified stock option transactions from December 31, 2013 through March 31, 2014:
 
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, 2013
8,295

 
$
35.04

 
$
111,450

 
6,225

 
$
33.67

 
$
92,200

Granted
851

 
45.11

 
 

 
 

 
 

 
 

Exercised
(125
)
 
33.10

 
 

 
 

 
 

 
 

Cancelled
(4
)
 
45.15

 
 

 
 

 
 

 
 

Forfeited
(7
)
 
38.72

 
 

 
 

 
 

 
 

Balance at March 31, 2014
9,010

 
$
36.02

 
$
90,324

 
7,092

 
$
34.35

 
$
82,916


At March 31, 2014, the weighted average remaining contractual term of all outstanding options is approximately 5.8 years and the weighted average remaining contractual term of exercisable options is approximately 4.9 years.



9



The following table summarizes the unvested RSU transactions from December 31, 2013 through March 31, 2014:
(in thousands, except per share data)
Shares
 
Weighted Average
Grant Date
Fair Value
 
 
 
 
Balance at December 31, 2013
1,131

 
$
38.81

Granted
427

 
45.11

Vested
(261
)
 
36.61

Forfeited
(84
)
 
40.78

Balance at March 31, 2014
1,213

 
$
41.36


NOTE 3 – COMPREHENSIVE INCOME

 During the quarter ended March 31, 2014, foreign currency translation adjustments included currency translation gains of $0.8 million and losses on the Company’s loans designated as hedges of net investments of $1.9 million.  During the quarter ended March 31, 2013, foreign currency translation adjustments included currency translation losses of $101.9 million and gains of $8.5 million on the Company’s loans designated as hedges of net investments.  

The cumulative foreign currency translation adjustments included translation gains of $245.2 million and $249.9 million at March 31, 2014 and December 31, 2013, respectively, were offset by losses of $110.8 million and $108.9 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 three months ended March 31, 2014 and 2013:
(in thousands)
Foreign Currency Translation Adjustments
 
Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges
 
Gain and (Loss) on Derivative Financial Instruments Designated as Net Investment Hedges
 
Net Unrealized Holding Gain (Loss) on Available-for-Sale Securities
 
Pension Liability Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
140,992

 
$
(21,753
)
 
$
(151,114
)
 
$
12,729

 
$
(49,916
)
 
$
(69,062
)
Other comprehensive income (loss) before reclassifications
(1,107
)
 
642

 
(976
)
 
(2,041
)
 
(154
)
 
(3,636
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
2,091

 

 

 
472

 
2,563

Net increase (decrease) in other comprehensive income
(1,107
)
 
2,733

 
(976
)
 
(2,041
)
 
318

 
(1,073
)
Foreign currency translation related to acquisition of noncontrolling interests
(5,530
)
 

 

 

 

 
(5,530
)
Balance at March 31, 2014
$
134,355

 
$
(19,020
)
 
$
(152,090
)
 
$
10,688

 
$
(49,598
)
 
$
(75,665
)


10



(in thousands)
Foreign Currency Translation Adjustments
 
Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges
 
Gain and (Loss) on Derivative Financial Instruments Designated as Net Investment Hedges
 
Net Unrealized Holding Gain (Loss)on Available-for-Sale Securities
 
Pension Liability Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
54,302

 
$
(17,481
)
 
$
(125,661
)
 
$
17,822

 
$
(73,182
)
 
$
(144,200
)
Other comprehensive income (loss) before reclassifications
(93,435
)
 
3,507

 
24,489

 
7,640

 
1,835

 
(55,964
)
Amounts reclassified from accumulated other comprehensive (loss) income

 
122

 

 

 
941

 
1,063

Net (decrease) increase in other comprehensive income
(93,435
)
 
3,629

 
24,489

 
7,640

 
2,776

 
(54,901
)
Balance at March 31, 2013
$
(39,133
)
 
$
(13,852
)
 
$
(101,172
)
 
$
25,462

 
$
(70,406
)
 
$
(199,101
)

Reclassification out of accumulated other comprehensive income (expense) to the Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013:

(in thousands)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the
Statements of Operations
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
Gains and (losses) on derivative financial instruments:
Interest rate swaps
 
$
(926
)
 
$
(913
)
 
Interest expense
Foreign exchange forward contracts
 
(1,646
)
 
499

 
Cost of products sold
Foreign exchange forward contracts
 
(99
)
 
(30
)
 
SG&A expenses
Commodity contracts
 
(246
)
 
157

 
Cost of products sold
 
 
(2,917
)
 
(287
)
 
Net (loss) gain before tax
 
 
826

 
165

 
Tax benefit (expense)
 
 
$
(2,091
)
 
$
(122
)
 
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
 
(719
)
 
(1,368
)
 
(a)
 
 
(685
)
 
(1,334
)
 
Net loss before tax
 
 
213

 
393

 
Tax benefit
 
 
$
(472
)
 
$
(941
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(2,563
)
 
$
(1,063
)
 
 
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the three months ended March 31, 2014 and 2013 (see Note 8, Benefit Plans, for additional details).







11



NOTE 4 – EARNINGS PER COMMON SHARE

The dilutive effect of outstanding non-qualified stock options and RSU is reflected in diluted earnings per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2014 and 2013:

Basic Earnings Per Common Share Computation
Three Months Ended
(in thousands, except per share amounts)
2014
 
2013
 
 
 
 
Net income attributable to DENTSPLY International
$
72,878

 
$
71,685

 
 
 
 
Weighted average common shares outstanding
142,053

 
142,775

 
 
 
 
Earnings per common share - basic
$
0.51

 
$
0.50

 
 
 
 
Diluted Earnings Per Common Share Computation
 

 
 

(in thousands, except per share amounts)
 

 
 

 
 
 
 
Net income attributable to DENTSPLY International
$
72,878

 
$
71,685

 
 
 
 
Weighted average common shares outstanding
142,053

 
142,775

Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards
2,400

 
2,324

Total weighted average diluted shares outstanding
144,453

 
145,099

 
 
 
 
Earnings per common share - diluted
$
0.50

 
$
0.49


Options to purchase 1.5 million and 3.5 million shares of common stock that were outstanding during the three months ended March 31, 2014 and 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.

NOTE 5 – BUSINESS ACQUISITIONS

During the three months ended March 31, 2014, the Company recorded a liability for the purchase of the remaining shares of one variable interest entity. The amount is preliminary and is based on the Company’s best estimate of this obligation, which is subject to contractual adjustments. As a result, the Company recorded a reduction to additional paid in capital for the excess of the purchase price above the carrying value of the noncontrolling interest. The Company expects to finalize the transaction in 2014.

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 89% of sales for the three months ended March 31, 2014 and 2013, respectively.

The operating businesses are combined into operating groups, which generally 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’s segments are measured on net third party sales, excluding precious metal content and segment income for reporting purposes. Net sales excluding precious metal content are the Company’s net sales excluding the precious metal cost within the products sold, and are considered a non-US GAAP measure. The Company’s exclusion of precious metal content in the measurement of net third party sales enhances comparability of performance between periods as it excludes the fluctuating

12



market prices of the precious metal content. The Company defines 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. Generally, the Company evaluates performance of the segments based on the groups’ segment income and net third party sales, excluding precious metal content. A description of the products and services provided within each of the Company’s three reportable segments is provided below.

Significant interdependencies exist among the Company’s operations in certain geographic areas. Inter-segment 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.

During the three months ended March 31, 2014, the Company realigned reporting responsibilities for multiple locations as a result of changes to the management structure. The segment information below reflects the revised structure for all periods shown.

Dental Consumable 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 and certain other European regions as well as chairside consumable, endodontic and dental laboratory products in Australia.

Dental Specialty and Laboratory Businesses

This segment includes responsibility for the design, manufacture, sales and distribution of most of the Company’s dental specialty products, including endodontic, orthodontic and implant products, in most regions of the world. In addition, this segment is responsible for the design, manufacture, sales and distribution of most of the Company’s dental laboratory products. This segment is also responsible for the sales and distribution of most of the Company’s other dental products within certain European regions as well as Japan, Canada and Mexico, and the design, manufacture, worldwide distribution and sales of certain non-dental products, excluding urological and surgery-related products.

Healthcare and Emerging Markets Businesses

This segment is responsible for the worldwide design, manufacturing, sales and distribution of the Company’s healthcare products, primarily urological and surgery-related products, throughout most of the world. This segment also includes the responsibility for the sales and distribution of most of the Company’s dental products sold in Eastern Europe, Middle East, South America, Latin America, Asia (excluding Japan) and Africa.

The following tables set forth information about the Company’s segments for the three months ended March 31, 2014 and 2013:

Third Party Net Sales
 
Three Months Ended
(in thousands)
2014
 
2013
 
 
 
 
Dental Consumable Businesses
$
173,976

 
$
163,707

Dental Specialty and Laboratory Businesses
432,407

 
447,977

Healthcare and Emerging Markets Businesses
124,946

 
121,739

All Other (a)
(1,215
)
 
(1,339
)
Total net sales
$
730,114

 
$
732,084

(a) Includes amounts recorded at Corporate headquarters.









13



Third Party Net Sales, Excluding Precious Metal Content
 
Three Months Ended
(in thousands)
2014
 
2013
 
 
 
 
Dental Consumable Businesses
$
173,914

 
$
163,609

Dental Specialty and Laboratory Businesses
391,681

 
388,916

Healthcare and Emerging Markets Businesses
124,802

 
121,463

All Other (b)
(1,215
)
 
(1,339
)
Total net sales, excluding precious metal content
689,182

 
672,649

Precious metal content of sales
40,932

 
59,435

Total net sales, including precious metal content
$
730,114

 
$
732,084

(b) Includes amounts recorded at Corporate headquarters.

Inter-segment Net Sales
 
Three Months Ended
(in thousands)
2014
 
2013
 
 
 
 
Dental Consumable Businesses
$
28,601

 
$
30,230

Dental Specialty and Laboratory Businesses
50,231

 
42,965

Healthcare and Emerging Markets Businesses
3,306

 
3,114

All Other (c)
60,785

 
57,427

Eliminations
(142,923
)
 
(133,736
)
Total
$

 
$

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

Segment Operating Income (Loss)
 
Three Months Ended
(in thousands)
2014
 
2013
 
 
 
 
Dental Consumable Businesses
$
58,509

 
$
54,315

Dental Specialty and Laboratory Businesses
73,913

 
69,678

Healthcare and Emerging Markets Businesses
4,724

 
1,466

All Other (d)
(30,783
)
 
(30,936
)
Segment operating income
106,363

 
94,523

 
 
 
 
Reconciling Items:
 

 
 

Restructuring and other costs
793

 
665

Interest expense
10,955

 
15,221

Interest income
(1,435
)
 
(2,175
)
Other expense (income), net
388

 
2,918

Income before income taxes
$
95,662

 
$
77,894

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









14



Assets
(in thousands)
March 31, 2014
 
December 31, 2013
 
 
 
 
Dental Consumable Businesses
$
699,477

 
$
699,386

Dental Specialty and Laboratory Businesses
3,380,841

 
3,404,604

Healthcare and Emerging Markets Businesses
932,147

 
869,907

All Other (e)
76,968

 
104,150

Total
$
5,089,433

 
$
5,078,047

(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 March 31, 2014 and December 31, 2013, the cost of $7.4 million and $6.5 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 March 31, 2014 and December 31, 2013 by $6.2 million and $5.9 million, respectively.

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 $37.6 million and $34.2 million at March 31, 2014 and December 31, 2013, respectively.

Inventories, net of inventory valuation reserves, consist of the following:
(in thousands)
March 31, 2014
 
December 31, 2013
 
 
 
 
Finished goods
$
286,141

 
$
285,271

Work-in-process
72,874

 
67,718

Raw materials and supplies
96,059

 
85,570

Inventories, net
$
455,074

 
$
438,559


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 months ended March 31, 2014 and 2013:

Defined Benefit Plans 
Three Months Ended
(in thousands)
2014
 
2013
 
 
 
 
Service cost
$
3,552

 
$
3,723

Interest cost
2,866

 
2,477

Expected return on plan assets
(1,387
)
 
(1,247
)
Amortization of prior service credit
(34
)
 
(34
)
Amortization of net actuarial loss
707

 
1,280

Curtailments and settlement gains

 
(390
)
Net periodic benefit cost
$
5,704

 
$
5,809



15



Other Postemployment Benefit Plans
Three Months Ended
(in thousands)
2014
 
2013
 
 
 
 
Service cost
$
44

 
$
61

Interest cost
140

 
122

Amortization of net actuarial loss
12

 
88

Net periodic benefit cost
$
196

 
$
271


The following sets forth the information related to the contributions to the Company’s benefit plans for 2014:
(in thousands)
Pension
Benefits
 
Other
Postemployment Benefits
 
 
 
 
Actual contributions through March 31, 2014
$
3,671

 
$
75

Projected contributions for the remainder of the year
8,940

 
427

Total projected contributions
$
12,611

 
$
502


NOTE 9 – RESTRUCTURING AND OTHER COSTS

Restructuring Costs

During the three months ended March 31, 2014 and 2013, the Company recorded net restructuring costs of $0.8 million and $0.7 million, respectively. These costs are recorded in “Restructuring and other costs” in the Consolidated Statements of Operations and the associated liabilities are recorded in “Accrued liabilities” in the Consolidated Balance Sheets.

At March 31, 2014, the Company’s restructuring accruals were as follows:
 
Severance
(in thousands)
2012 and
Prior Plans
 
2013 Plans
 
2014 Plans
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
1,282

 
$
5,764

 
$

 
$
7,046

Provisions
44

 
3

 
1,505

 
1,552

Amounts applied
(564
)
 
(2,154
)
 
(2
)
 
(2,720
)
Change in estimates

 
(700
)
 

 
(700
)
Balance at March 31, 2014
$
762

 
$
2,913

 
$
1,503

 
$
5,178

 
 
Lease/Contract Terminations
(in thousands)
2012 and
Prior Plans
 
2013 Plans
 
2014 Plans
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
748

 
$
98

 
$

 
$
846

Provisions
11

 
58

 
33

 
102

Amounts applied
(45
)
 
(163
)
 

 
(208
)
Change in estimate
(14
)
 
109

 

 
95

Balance at March 31, 2014
$
700

 
$
102

 
$
33

 
$
835



16



 
Other Restructuring Costs
(in thousands)
2012 and
Prior Plans
 
2013 Plans
 
2014 Plans
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
58

 
$
658

 
$

 
$
716

Provisions

 
15

 
2

 
17

Amounts applied
(43
)
 
(124
)
 

 
(167
)
Change in estimate
1

 
(53
)
 

 
(52
)
Balance at March 31, 2014
$
16

 
$
496

 
$
2

 
$
514


The following table provides the year-to-date changes in the restructuring accruals by segment:
(in thousands)
December 31,
2013
 
Provisions
 
Amounts
Applied
 
Change in Estimates
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
Dental Consumable Businesses
$
656

 
$
940

 
$
(36
)
 
$

 
$
1,560

Dental Specialty and Laboratory Businesses
6,333

 
227

 
(2,259
)
 
(657
)
 
3,644

Healthcare and Emerging Markets Businesses
1,245

 
504

 
(491
)
 

 
1,258

All Other
374

 

 
(309
)
 

 
65

Total
$
8,608

 
$
1,671

 
$
(3,095
)
 
$
(657
)
 
$
6,527



17



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 Designated as Hedging

Cash Flow Hedges

The following table summarizes the notional amounts of cash flow hedges by derivative instrument type at March 31, 2014 and the notional amounts expected to mature during the next 12 months, with a discussion of the various cash flow hedges by derivative instrument type following the table:
 
 
Aggregate
 Notional
 Amount
 
Aggregate Notional Amount Maturing within 12 Months
 
 
 
(in thousands)
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
388,046

 
$
292,884

Interest rate swaps
 
195,150

 
121,621

Commodity contracts
 
2,234

 
2,234

Total derivative instruments designated as cash flow hedges
 
$
585,430

 
$
416,739


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 designated 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 operating activities on the Consolidated Statements of Cash Flows. The Company hedges various currencies, with the most significant activity occurring in euros, Swedish kronor, Canadian dollars, and Swiss francs.

These foreign exchange forward contracts generally have maturities up to 18 months and the counterparties to the transactions are typically large international financial institutions.

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. At March 31, 2014, 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 rate to a fixed interest rate of 0.2% for an initial 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 rate to a fixed interest rate of 0.7% for an initial term of five years, ending in September 2016.


18



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. Any cash flows associated with these instruments are included in cash from operating activities on the Consolidated Statements of Cash Flows.

Commodity Risk Management

The Company enters into precious metal commodity swap contracts to effectively fix certain variable raw material costs typically for up to 18 months. These swaps are used 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 through AOCI based on the tested effectiveness of the commodity swaps. 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 “Interest expense” 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 operating activities on the Consolidated Statements of Cash Flows.

The following tables summarize the amount of gains (losses) recorded in AOCI in the Consolidated Balance Sheets and income (expense) in the Company’s Consolidated Statements of Operations related to all cash flow hedges for the quarters ended March 31, 2014 and 2013:

March 31, 2014
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Effective Portion Reclassified from AOCI into Income (Expense)
 
Ineffective Portion Recognized in Income (Expense)
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(387
)
 
Interest expense
 
$
(926
)
 
 
Foreign exchange forward contracts
 
1,067

 
Cost of products sold
 
(1,646
)
 
 
Foreign exchange forward contracts
 
(10
)
 
SG&A expenses
 
(99
)
 
 
Commodity contracts
 
101

 
Cost of products sold
 
(246
)
 
 
 
 
 
 
 
 
 
 
 
Ineffective Portion:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
 
 
Other expense (income), net
 
 
 
$
106

Commodity contracts
 
 
 
Interest expense
 
 
 
(13
)
Total in cash flow hedging
 
$
771

 
 
 
$
(2,917
)
 
$
93



19



March 31, 2013
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Effective Portion Reclassified from AOCI into Income (Expense)
 
Ineffective Portion Recognized in Income (Expense)
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
191

 
Interest expense
 
$
(913
)
 
 
Foreign exchange forward contracts
 
4,022

 
Cost of products sold
 
499

 
 
Foreign exchange forward contracts
 
187

 
SG&A expenses
 
(30
)
 
 
Commodity contracts
 
(16
)
 
Cost of products sold
 
157

 
 
 
 
 
 
 
 
 
 
 
Ineffective Portion:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
 
 
Other expense (income), net
 
 
 
$
(13
)
Commodity contracts
 
 
 
Interest expense
 
 
 
(14
)
Total for cash flow hedging
 
$
4,384

 
 
 
$
(287
)
 
$
(27
)

Overall, the derivatives designated as cash flow hedges are considered to be highly effective. At March 31, 2014, the Company expects to reclassify $6.0 million of deferred net losses on cash flow hedges recorded in AOCI to the Consolidated Statement of Operations during the next 12 months. This reclassification is primarily due to the sale of inventory that includes hedged purchases and recognized interest expense on interest rate swaps. The maximum term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable interest rate debt) is 18 months.

For the roll forward of derivative instruments designated as cash flow hedges in AOCI see Note 3, Comprehensive Income.

Hedges of Net Investments in Foreign Operations

The Company has significant investments in foreign subsidiaries the most significant of which are denominated in euros, Swiss francs, Japanese yen and Swedish kronor. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. To hedge a portion of this exposure the Company employs both derivative and non-derivative financial instruments. The derivative instruments consist of foreign exchange forward contracts and cross currency basis swaps. The non-derivative instruments consist of foreign currency denominated debt held at the parent company level. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in derivative and non-derivative financial instruments designated as hedges of net investments, which are included in AOCI. Any cash flows associated with these instruments are included in investing activities on the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, in which case all cash flows will be classified as financing activities on the Consolidated Statements of Cash Flows.

The following table summarizes the notional amounts of hedges of net investments by derivative instrument type at March 31, 2014 and the notional amounts expected to mature during the next 12 months:

 
 
Aggregate
 Notional
 Amount
 
Aggregate Notional Amount Maturing within 12 Months
 
 
 
(in thousands)
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
180,466

 
$
115,718

Cross currency basis swaps
 
489,253

 
90,950

Total derivative instruments designated as net investment hedges
 
$
669,719

 
$
206,668


On February 14, 2014, the Company dedesignated 449.8 million euros of foreign exchange forward contracts that were previously designated as net investment hedges. The change in the value of the dedesignated hedges will be recorded in “Other expense (income), net” on the Consolidated Statement of Operations and will offset the change in the value of non-designated euro denominated cross currency basis swaps as further noted in the section below titled Derivative Instruments Not Designated as Hedges.

20




On March 25, 2014, the Company entered into additional foreign exchange forward contracts designated as hedges of net investment with a notional amount of 25.0 million euros.

The fair value of the cross currency basis swaps and foreign exchange forward contracts is the estimated amount the Company would receive or pay at the reporting date, taking into account the effective interest rates, cross currency swap basis rates and foreign exchange rates. The effective portion of the change in the value of these derivatives is recorded in AOCI, net of tax effects.

The following tables summarize the amount of gains (losses) recorded in AOCI on the Consolidated Balance Sheets and income (expense) on the Company’s Consolidated Statements of Operations related to the hedges of net investments for the quarters ended March 31, 2014 and 2013:

March 31, 2014
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Recognized in Income (Expense)
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
Cross currency basis swaps
 
$
(4,660
)
 
Interest income
 
$
677

 
 
 
 
Interest expense
 
541

Foreign exchange forward contracts
 
3,068

 
Other expense (income), net
 
248

Total for net investment hedging
 
$
(1,592
)
 
 
 
$
1,466


March 31, 2013
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Recognized in Income (Expense)
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
Cross currency basis swaps
 
$
39,885

 
Interest income
 
$
1,387

 
 
 
 
Interest expense
 
(1,603
)
Total for net investment hedging
 
$
39,885

 
 
 
$
(216
)

Fair Value Hedges

The Company uses interest rate swaps to convert a portion of its fixed interest rate debt to variable interest rate debt. The Company has a group of U.S. dollar denominated interest rate swaps with an initial total notional value of $150.0 million to effectively convert the underlying fixed interest rate of 4.1% on the Company’s $250.0 million Private Placement Notes (“PPN”) to variable rate for an initial term of five years, ending February 2016. The notional value of the swaps will decline proportionately as portions of the PPN mature. These interest rate swaps are designated as fair value hedges of the interest rate risk associated with the hedged portion of the fixed rate PPN. Accordingly, the Company will carry the portion of the hedged debt at fair value, with the change in debt and swaps offsetting each other on the Consolidated Statements of Operations. Any cash flows associated with these instruments are included in operating activities on the Consolidated Statements of Cash Flows.

The following table summarizes the notional amounts of fair value hedges by derivative instrument type at March 31, 2014 and the notional amounts expected to mature during the next 12 months:

 
 
Aggregate
 Notional
 Amount
 
Aggregate Notional Amount Maturing within 12 Months
 
 
 
(in thousands)
 
 
 
 
 
 
 
Interest rate swaps
 
$
105,000

 
$
60,000


21



The following tables summarize the amount of income (expense) recorded on the Company’s Consolidated Statements of Operations related to the hedges of fair value for the quarters ended March 31, 2014 and 2013:

 
 
Consolidated Statements of Operations Location
 
Income (Expense) Recognized
 
 
 
Three months ended March 31,
(in thousands)
 
 
2014
 
2013