Dentsply 10-Q3 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 September 30, 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
 
17405-2558
(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, 2014, DENTSPLY International Inc. had 141,529,741 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,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net sales
$
708,240

 
$
704,018

 
$
2,203,579

 
$
2,197,112

Cost of products sold
320,176

 
327,601

 
996,841

 
1,017,539

 
 
 
 
 
 
 
 
Gross profit
388,064

 
376,417

 
1,206,738

 
1,179,573

Selling, general and administrative expenses
275,980

 
269,165

 
859,943

 
852,763

Restructuring and other costs
2,503

 
2,231

 
4,538

 
5,065

 
 
 
 
 
 
 
 
Operating income
109,581

 
105,021

 
342,257

 
321,745

 
 
 
 
 
 
 
 
Other income and expenses:
 

 
 

 
 

 
 

Interest expense
12,665

 
11,442

 
35,418

 
38,170

Interest income
(1,391
)
 
(2,138
)
 
(4,570
)
 
(6,556
)
Other expense (income), net
791

 
1,581

 
1,754

 
8,723

 
 
 
 
 
 
 
 
Income before income taxes
97,516

 
94,136

 
309,655

 
281,408

Provision for income taxes
21,283

 
13,187

 
69,831

 
39,599

Equity in net (loss) income of unconsolidated affiliated company
(967
)
 
(83
)
 
(1,624
)
 
320

 
 
 
 
 
 
 
 
Net income
75,266

 
80,866

 
238,200

 
242,129

Less: Net (loss) income attributable to noncontrolling interests
(7
)
 
1,015

 
56

 
3,366

 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
75,273

 
$
79,851

 
$
238,144

 
$
238,763

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.53

 
$
0.56

 
$
1.68

 
$
1.67

Diluted
$
0.52

 
$
0.55

 
$
1.65

 
$
1.65

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
141,766

 
142,421

 
141,869

 
142,705

Diluted
144,286

 
144,698

 
144,289

 
144,952


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,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
75,266

 
$
80,866

 
$
238,200

 
$
242,129

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(198,622
)
 
140,374

 
(227,297
)
 
52,118

Net gain (loss) on derivative financial instruments
35,898

 
(31,997
)
 
38,095

 
(17,241
)
Net unrealized holding gain (loss) on available-for-sale securities
3,558

 
(1,916
)
 
(245
)
 
(10,905
)
Pension liability adjustments
3,865

 
(1,692
)
 
5,006

 
1,624

Total other comprehensive income (loss), net of tax
(155,301
)
 
104,769

 
(184,441
)
 
25,596

 
 
 
 
 
 
 
 
Total comprehensive (loss) income
(80,035
)
 
185,635

 
53,759

 
267,725

 
 
 
 
 
 
 
 
Less: Comprehensive (loss) income attributable
 

 
 

 
 

 
 

to noncontrolling interests
(252
)
 
2,666

 
(392
)
 
4,866

 
 
 
 
 
 
 
 
Comprehensive (loss) income attributable to
 
 
 
 
 
 
 
DENTSPLY International
$
(79,783
)
 
$
182,969

 
$
54,151

 
$
262,859

 


 


 


 



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, 2014
 
December 31, 2013
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
97,652

 
$
74,954

Accounts and notes receivables-trade, net
476,856

 
472,802

Inventories, net
422,485

 
438,559

Prepaid expenses and other current assets, net
260,708

 
157,487

 
 
 
 
Total Current Assets
1,257,701

 
1,143,802

 
 
 
 
Property, plant and equipment, net
606,924

 
637,172

Identifiable intangible assets, net
710,112

 
795,323

Goodwill, net
2,160,696

 
2,281,596

Other noncurrent assets, net
148,628

 
220,154

 
 
 
 
Total Assets
$
4,884,061

 
$
5,078,047

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
128,233

 
$
132,789

Accrued liabilities
443,516

 
339,308

Income taxes payable
47,567

 
14,446

Notes payable and current portion of long-term debt
115,253

 
309,862

 
 
 
 
Total Current Liabilities
734,569

 
796,405

 
 
 
 
Long-term debt
1,165,566

 
1,166,178

Deferred income taxes
215,482

 
238,394

Other noncurrent liabilities
272,200

 
299,096

 
 
 
 
Total Liabilities
2,387,817

 
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 September 30, 2014 and December 31, 2013
1,628

 
1,628

Capital in excess of par value
227,027

 
255,272

Retained earnings
3,305,448

 
3,095,721

Accumulated other comprehensive loss
(253,055
)
 
(69,062
)
Treasury stock, at cost, 21.1 million and 20.5 million shares at September 30, 2014 and December 31, 2013, respectively
(785,940
)
 
(748,506
)
Total DENTSPLY International Equity
2,495,108

 
2,535,053

 
 
 
 
Noncontrolling interests
1,136

 
42,921

 
 
 
 
Total Equity
2,496,244

 
2,577,974

 
 
 
 
Total Liabilities and Equity
$
4,884,061

 
$
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)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
238,200

 
$
242,129

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

 
 

Depreciation
63,048

 
61,545

Amortization
36,430

 
34,700

Amortization of deferred financing costs
3,517

 
3,842

Deferred income taxes
4,635

 
(32,096
)
Share-based compensation expense
19,901

 
18,027

Restructuring and other costs - non-cash

 
843

Stock option income tax benefit
(365
)
 
(2,262
)
Equity in loss (earnings) from unconsolidated affiliates
1,624

 
(320
)
Other non-cash expense
3,589

 
3,422

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
(30,916
)
 
(65,455
)
Inventories, net
(5,753
)
 
(45,284
)
Prepaid expenses and other current assets, net
(12,411
)
 
26,137

Other noncurrent assets, net
245

 
992

Accounts payable
1,947

 
(25,099
)
Accrued liabilities
7,635

 
706

Income taxes
27,931

 
29,544

Other noncurrent liabilities
8,523

 
6,895

 
 
 
 
Net cash provided by operating activities
367,780

 
258,266

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(73,025
)
 
(73,500
)
Cash paid for acquisitions of businesses, net of cash acquired
(2,009
)
 
(3,939
)
Cash received from sale of business or product line
1,371

 

Cash received on derivatives contracts
4,871

 
9,172

Cash paid on derivatives contracts
(4,865
)
 
(95,667
)
Expenditures for identifiable intangible assets
(1,314
)
 
(1,049
)
Purchase of short-term investments
(2,271
)
 

Liquidation of short-term investments
1,136

 

Purchase of Company-owned life insurance policies
(900
)
 

Proceeds from sale of property, plant and equipment, net
601

 
3,092

 
 
 
 
Net cash used in investing activities
(76,405
)
 
(161,891
)
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
(Decrease) increase in short-term borrowings
(99,831
)
 
8,789

Cash paid for treasury stock
(70,757
)
 
(72,381
)
Cash dividends paid
(27,927
)
 
(25,895
)
Cash paid for acquisition of noncontrolling interests of consolidated subsidiary
(33
)
 
(8,960
)
Proceeds from long-term borrowings
114,070

 
174,628

Repayments on long-term borrowings
(198,991
)
 
(251,335
)
Proceeds from exercised stock options
18,733

 
48,350

Excess tax benefits from share-based compensation
365

 
2,262

Cash received on derivative contracts

 
21

Cash paid on derivative contracts

 
(129
)
 
 
 
 
Net cash used in financing activities
(264,371
)
 
(124,650
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(4,306
)
 
(1,199
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
22,698

 
(29,474
)
 
 
 
 
Cash and cash equivalents at beginning of period
74,954

 
80,132

 
 
 
 
Cash and cash equivalents at end of period
$
97,652

 
$
50,658

 
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

 

 
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 ($0.18750 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


 
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

 

 
238,144

 

 

 
238,144

 
56

 
238,200

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss

 

 

 
(178,463
)
 

 
(178,463
)
 
(448
)
 
(178,911
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interest

 
(35,814
)
 

 
(5,530
)
 

 
(41,344
)
 
(41,393
)
 
(82,737
)
Exercise of stock options

 
(3,274
)
 

 

 
22,007

 
18,733

 

 
18,733

Tax benefit from stock options exercised

 
365

 

 

 

 
365

 

 
365

Share based compensation expense

 
19,901

 

 

 

 
19,901

 

 
19,901

Funding of Employee Stock Ownership Plan

 
1,535

 

 

 
4,418

 
5,953

 

 
5,953

Treasury shares purchased

 

 

 

 
(70,757
)
 
(70,757
)
 

 
(70,757
)
RSU distributions

 
(11,201
)
 

 

 
6,898

 
(4,303
)
 

 
(4,303
)
RSU dividends

 
243

 
(243
)
 

 

 

 

 

Cash dividends ($0.19875 per share)

 

 
(28,174
)
 

 

 
(28,174
)
 

 
(28,174
)
Balance at September 30, 2014
$
1,628

 
$
227,027

 
$
3,305,448

 
$
(253,055
)
 
$
(785,940
)
 
$
2,495,108

 
$
1,136

 
$
2,496,244


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 $11.2 million at September 30, 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 $65.5 million and $70.0 million at September 30, 2014 and December 31, 2013, respectively.  At September 30, 2014 and December 31, 2013, an unrealized holding gain of $12.5 million and $12.7 million, respectively, on available-for-sale securities, net of tax, has been recorded in AOCI. 

New Accounting Pronouncements

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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

8



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.

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This newly issued accounting standard changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This standard will have the impact of reducing the frequency of disposals reported as discontinued operations, by requiring such a disposal to represent a strategic shift that has or will have a major effect on entity’s operations and financial results. Additionally, existing provisions that prohibit an entity from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after a disposal are eliminated by this standard. The ASU also expands the disclosures for discontinued operations and requires new disclosures related to individually significant disposals that do not qualify as discontinued operations. This standard allows for early adoption and the Company expects to adopt this accounting standard no later than the quarter ended March 31, 2015. The adoption of this standard is not expected to materially impact the Company’s financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This newly issued accounting standard is intended to improve the reporting of revenue. The Company has not yet determined the impact from adoption of this new accounting pronouncement on the Company’s financial position or results of operations. The Company expects to adopt this accounting standard for the quarter ended March 31, 2017. Early adoption is not permitted.


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, 2014 and 2013:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Stock option expense
$
2,148

 
$
2,565

 
$
6,651

 
$
7,570

RSU expense
4,013

 
3,077

 
12,098

 
9,346

Total stock based compensation expense
$
6,161

 
$
5,642

 
$
18,749

 
$
16,916

 
 
 
 
 
 
 
 
Total related tax benefit
$
1,550

 
$
1,590

 
$
5,093

 
$
4,250


At September 30, 2014, the remaining unamortized compensation cost related to non-qualified stock options is $11.5 million, which will be expensed over the weighted average remaining vesting period of the options, or approximately 1.6 years. At September 30, 2014, the unamortized compensation cost related to RSU is $23.8 million, which will be expensed over the weighted average remaining restricted period of the RSU, or approximately 1.4 years.

The following table reflects the non-qualified stock option transactions from December 31, 2013 through September 30, 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
926

 
45.24

 
 

 
 

 
 

 
 

Exercised
(581
)
 
32.25

 
 

 
 

 
 

 
 

Cancelled
(5
)
 
45.15

 
 

 
 

 
 

 
 

Forfeited
(25
)
 
40.88

 
 

 
 

 
 

 
 

Balance at September 30, 2014
8,610

 
$
36.31

 
$
80,108

 
6,729

 
$
34.57

 
$
74,228


At September 30, 2014, the weighted average remaining contractual term of all outstanding options is approximately 5.5 years and the weighted average remaining contractual term of exercisable options is approximately 4.6 years.

The following table summarizes the unvested RSU transactions from December 31, 2013 through September 30, 2014:
(in thousands, except per share data)
Shares
 
Weighted Average
Grant Date
Fair Value
 
 
 
 
Balance at December 31, 2013
1,131

 
$
38.81

Granted
446

 
45.18

Vested
(279
)
 
36.59

Forfeited
(98
)
 
40.86

Balance at September 30, 2014
1,200

 
$
41.52











10



NOTE 3 – COMPREHENSIVE INCOME

 During the quarter ended September 30, 2014, foreign currency translation adjustments included currency translation losses of $201.8 million and gains on the Company’s loans designated as hedges of net investments of $9.0 million.  During the quarter ended September 30, 2013, foreign currency translation adjustments included currency translation gains of $141.4 million and losses of $2.7 million on the Company’s loans designated as hedges of net investments.  During the nine months ended September 30, 2014, foreign currency translation adjustments included currency translation losses of $227.2 million and gains on the Company’s loans designated as hedges of net investments of $5.9 million. During the nine months ended September 30, 2013, foreign currency translation adjustments included currency translation gains of $40.8 million and gains on the Company’s loans designated as hedges of net investments of $9.8 million. These foreign currency translation adjustments were partially 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 $17.1 million and $249.9 million at September 30, 2014 and December 31, 2013, respectively, were offset by losses of $103.0 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 nine months ended September 30, 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
(221,319
)
 
4,498

 
27,619

 
(245
)
 
3,611

 
(185,836
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
5,978

 

 

 
1,395

 
7,373

Net (decrease) increase in other comprehensive income
(221,319
)
 
10,476

 
27,619

 
(245
)
 
5,006

 
(178,463
)
Foreign currency translation related to acquisition of noncontrolling interests
(5,530
)
 

 

 

 

 
(5,530
)
Balance at September 30, 2014
$
(85,857
)
 
$
(11,277
)
 
$
(123,495
)
 
$
12,484

 
$
(44,910
)
 
$
(253,055
)


11



(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
50,618

 
(3,562
)
 
(14,408
)
 
(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

 
(2,833
)
 
(14,408
)
 
(10,905
)
 
1,624

 
24,096

Balance at September 30, 2013
$
104,920

 
$
(20,314
)
 
$
(140,069
)
 
$
6,917

 
$
(71,558
)
 
$
(120,104
)

Reclassifications out of accumulated other comprehensive income (expense) to the Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013:

(in thousands)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the
Statements of Operations
 
Three Months Ended September 30,
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
Gains and (losses) on derivative financial instruments:
Interest rate swaps
 
$
(929
)
 
$
(924
)
 
Interest expense
Foreign exchange forward contracts
 
(2,191
)
 
460

 
Cost of products sold
Foreign exchange forward contracts
 
(16
)
 
(27
)
 
SG&A expenses
Commodity contracts
 
(95
)
 
(190
)
 
Cost of products sold
 
 
(3,231
)
 
(681
)
 
Net loss before tax
 
 
1,320

 
156

 
Tax benefit
 
 
$
(1,911
)
 
$
(525
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$
33

 
$
34

 
(a)
Amortization of net actuarial losses
 
(678
)
 
(1,380
)
 
(a)
 
 
(645
)
 
(1,346
)
 
Net loss before tax
 
 
193

 
394

 
Tax benefit
 
 
$
(452
)
 
$
(952
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(2,363
)
 
$
(1,477
)
 
 
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the three months ended September 30, 2014 and 2013 (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,
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
Gains and (losses) on derivative financial instruments:
Interest rate swaps
 
$
(2,785
)
 
$
(2,755
)
 
Interest expense
Foreign exchange forward contracts
 
(5,487
)
 
1,589

 
Cost of products sold
Foreign exchange forward contracts
 
(174
)
 
(67
)
 
SG&A expenses
Commodity contracts
 
(498
)
 
12

 
Cost of products sold
 
 
(8,944
)
 
(1,221
)
 
Net loss before tax
 
 
2,966

 
492

 
Tax benefit
 
 
$
(5,978
)
 
$
(729
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$
102

 
$
101

 
(b)
Amortization of net actuarial losses
 
(2,116
)
 
(4,104
)
 
(b)
 
 
(2,014
)
 
(4,003
)
 
Net loss before tax
 
 
619

 
1,184

 
Tax benefit
 
 
$
(1,395
)
 
$
(2,819
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(7,373
)
 
$
(3,548
)
 
 
 
 
(b) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the nine months ended September 30, 2014 and 2013 (see Note 8, Benefit Plans, for additional details).































13



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, 2014 and 2013:

Basic Earnings Per Common Share Computation
Three Months Ended
 
Nine Months Ended
(in thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
75,273

 
$
79,851

 
$
238,144

 
$
238,763

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
141,766

 
142,421

 
141,869

 
142,705

 
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.53

 
$
0.56

 
$
1.68

 
$
1.67

 
 
 
 
 
 
 
 
Diluted Earnings Per Common Share Computation
 

 
 

 
 

 
 

(in thousands, except per share amounts)
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
75,273

 
$
79,851

 
$
238,144

 
$
238,763

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
141,766

 
142,421

 
141,869

 
142,705

Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards
2,520

 
2,277

 
2,420

 
2,247

Total weighted average diluted shares outstanding
144,286

 
144,698

 
144,289

 
144,952

 
 
 
 
 
 
 
 
Earnings per common share - diluted
$
0.52

 
$
0.55

 
$
1.65

 
$
1.65


The calculation of weighted average diluted shares outstanding excludes options to purchase 0.9 million and 1.2 million shares of common stock that were outstanding during the three and nine months ended September 30, 2014, respectively, because their effect would be antidilutive. There were 2.1 million and 2.7 million antidilutive shares of common stock outstanding during the three and nine months ended September 30, 2013, respectively.

NOTE 5 – BUSINESS ACQUISITIONS

Effective January 1, 2014, the Company recorded a liability for the contractual 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 anticipates the cash outflow for this purchase to be later in 2014 or early in 2015.

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 in each of the three month periods ended September 30, 2014 and 2013, and 88% of sales for the nine month periods ended September 30, 2014 and 2013.

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 evaluates performance of the segments based on the groups’ net third party sales, excluding precious metal content, and segment income. The Company defines net third party sales excluding precious metal content as the Company’s net sales excluding the precious metal cost within the products sold, and this is considered a non-US GAAP measure. The

14



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 market prices of the precious metal content. The Company defines segment income as net operating income before restructuring and other costs, interest expense, interest income, other expense (income), net and provision for income taxes. 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 first quarter of 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 Consumables and Certain International Businesses

This segment includes responsibility for the design and manufacture of the Company’s chairside consumable products. It also has responsibilities for sales and distribution of certain small equipment and chairside consumable products in the United States, Germany and certain other European regions as well as responsibility for the sales and distribution of certain endodontic products in Germany and certain other European regions. In addition, this segment has responsibilities for sales and distribution of chairside consumable, endodontic and dental laboratory products in Australia.

Dental Specialty and Laboratory and Certain Global Distribution 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, including most dental consumables, 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, manufacture, 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, including most dental consumables, 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 and nine months ended September 30, 2014 and 2013:

Third Party Net Sales
 
Three Months Ended
 
Nine Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Dental Consumable and Certain International Businesses
$
182,885

 
$
172,382

 
$
540,601

 
$
506,777

Dental Specialty and Laboratory and Certain Global Distribution Businesses
387,005

 
403,200

 
1,262,067

 
1,309,304

Healthcare and Emerging Markets Businesses
139,521

 
129,551

 
404,314

 
384,344

All Other (a)
(1,171
)
 
(1,115
)
 
(3,403
)
 
(3,313
)
Total net sales
$
708,240

 
$
704,018

 
$
2,203,579

 
$
2,197,112

(a) Includes amounts recorded at Corporate headquarters.







15



Third Party Net Sales, Excluding Precious Metal Content
 
Three Months Ended
 
Nine Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Dental Consumable and Certain International Businesses
$
182,811

 
$
172,300

 
$
540,363

 
$
506,505

Dental Specialty and Laboratory and Certain Global Distribution Businesses
360,600

 
368,915

 
1,160,911

 
1,171,218

Healthcare and Emerging Markets Businesses
139,344

 
129,324

 
403,794

 
383,619

All Other (b)
(1,171
)
 
(1,115
)
 
(3,403
)
 
(3,313
)
Total net sales, excluding precious metal content
681,584

 
669,424

 
2,101,665

 
2,058,029

Precious metal content of sales
26,656

 
34,594

 
101,914

 
139,083

Total net sales, including precious metal content
$
708,240

 
$
704,018

 
$
2,203,579

 
$
2,197,112

(b) Includes amounts recorded at Corporate headquarters.

Inter-segment Net Sales
 
Three Months Ended
 
Nine Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Dental Consumable and Certain International Businesses
$
29,296

 
$
30,154

 
$
90,106

 
$
91,757

Dental Specialty and Laboratory and Certain Global Distribution Businesses
42,689

 
47,161

 
143,407

 
139,598

Healthcare and Emerging Markets Businesses
3,851

 
3,611

 
9,797

 
10,188

All Other (c)
58,751

 
61,214

 
182,019

 
178,880

Eliminations
(134,587
)
 
(142,140
)
 
(425,329
)
 
(420,423
)
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)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Dental Consumable and Certain International Businesses
$
69,135

 
$
61,946

 
$
193,791

 
$
176,124

Dental Specialty and Laboratory and Certain Global Distribution Businesses
57,504

 
62,125

 
211,033

 
211,561

Healthcare and Emerging Markets Businesses
9,834

 
6,239

 
24,517

 
16,328

All Other (d)
(24,389
)
 
(23,058
)
 
(82,546
)
 
(77,203
)
Segment operating income
112,084

 
107,252

 
346,795

 
326,810

 
 
 
 
 
 
 
 
Reconciling Items:
 

 
 

 
 

 
 

Restructuring and other costs
2,503

 
2,231

 
4,538

 
5,065

Interest expense
12,665

 
11,442

 
35,418

 
38,170

Interest income
(1,391
)
 
(2,138
)
 
(4,570
)
 
(6,556
)
Other expense (income), net
791

 
1,581

 
1,754

 
8,723

Income before income taxes
$
97,516

 
$
94,136

 
$
309,655

 
$
281,408

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







16



Assets
(in thousands)
September 30, 2014
 
December 31, 2013
 
 
 
 
Dental Consumable and Certain International Businesses
$
684,089

 
$
683,965

Dental Specialty and Laboratory and Certain Global Distribution Businesses
3,133,070

 
3,364,190

Healthcare and Emerging Markets Businesses
862,659

 
925,742

All Other (e)
204,243

 
104,150

Total
$
4,884,061

 
$
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.  The cost of inventories determined by the last-in, first-out (“LIFO”) method at September 30, 2014 and December 31, 2013 were $6.8 million and $6.5 million, respectively. 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, 2014 and December 31, 2013 by $6.1 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 $37.5 million and $34.2 million at September 30, 2014 and December 31, 2013, respectively.

Inventories, net of inventory valuation reserves, consist of the following:
(in thousands)
September 30, 2014
 
December 31, 2013
 
 
 
 
Finished goods
$
273,773

 
$
285,271

Work-in-process
66,831

 
67,718

Raw materials and supplies
81,881

 
85,570

Inventories, net
$
422,485

 
$
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 and nine months ended September 30, 2014 and 2013:

Defined Benefit Plans 
Three Months Ended
 
Nine Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Service cost
$
3,371

 
$
3,728

 
$
10,473

 
$
11,113

Interest cost
2,742

 
2,486

 
8,468

 
7,408

Expected return on plan assets
(1,339
)
 
(1,252
)
 
(4,117
)
 
(3,729
)
Amortization of prior service credit
(33
)
 
(34
)
 
(102
)
 
(101
)
Amortization of net actuarial loss
699

 
1,292

 
2,116

 
3,840

Curtailments and settlement gains

 
(680
)
 

 
(1,305
)
Net periodic benefit cost
$
5,440

 
$
5,540

 
$
16,838

 
$
17,226



17



Other Postemployment Benefit Plans
Three Months Ended
 
Nine Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Service cost
$
97

 
$
61

 
$
187

 
$
184

Interest cost
118

 
122

 
398

 
364

Amortization of net actuarial (gain) loss
(21
)
 
88

 

 
264

Net periodic benefit cost
$
194

 
$
271

 
$
585

 
$
812


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 September 30, 2014
$
8,967

 
$
196

Projected contributions for the remainder of the year
3,310

 
306

Total projected contributions
$
12,277

 
$
502


NOTE 9 – RESTRUCTURING AND OTHER COSTS

Restructuring Costs

During the three and nine months ended September 30, 2014, the Company recorded net restructuring costs of $2.5 million and $4.5 million, respectively. During the three and nine months ended September 30, 2013, the Company recorded net restructuring costs of $2.4 million and $5.2 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 September 30, 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
$