Dentsply 10-Q2 2015


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 June 30, 2015
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
July 21, 2015, DENTSPLY International Inc. had 139,808,237 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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net sales
$
698,006

 
$
765,225

 
$
1,354,326

 
$
1,495,339

Cost of products sold
298,345

 
340,756

 
581,297

 
676,665

 
 
 
 
 
 
 
 
Gross profit
399,661

 
424,469

 
773,029

 
818,674

Selling, general and administrative expenses
274,979

 
296,121

 
545,212

 
583,963

Restructuring and other costs
38,881

 
1,242

 
44,307

 
2,035

 
 
 
 
 
 
 
 
Operating income
85,801

 
127,106

 
183,510

 
232,676

 
 
 
 
 
 
 
 
Other income and expenses:
 

 
 

 
 

 
 

Interest expense
9,824

 
11,798

 
20,492

 
22,753

Interest income
(660
)
 
(1,744
)
 
(1,402
)
 
(3,179
)
Other expense (income), net
(376
)
 
575

 
232

 
963

 
 
 
 
 
 
 
 
Income before income taxes
77,013

 
116,477

 
164,188

 
212,139

Provision for income taxes
24,775

 
26,096

 
43,628

 
48,548

Equity in net loss of unconsolidated affiliated company
(8,174
)
 
(367
)
 
(12,541
)
 
(657
)
 
 
 
 
 
 
 
 
Net income
44,064

 
90,014

 
108,019

 
162,934

Less: Net (loss) income attributable to noncontrolling interests
(35
)
 
21

 
(42
)
 
63

 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
44,099

 
$
89,993

 
$
108,061

 
$
162,871

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.32

 
$
0.63

 
$
0.77

 
$
1.15

Diluted
$
0.31

 
$
0.62

 
$
0.76

 
$
1.13

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
139,813

 
141,790

 
140,054

 
141,921

Diluted
142,262

 
144,164

 
142,521

 
144,288


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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income
$
44,064

 
$
90,014

 
$
108,019

 
$
162,934

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
75,972

 
(27,640
)
 
(112,932
)
 
(28,675
)
Net (loss) gain on derivative financial instruments
(16,824
)
 
440

 
7,928

 
2,197

Net unrealized holding gain (loss) on available-for-sale securities
39,416

 
(1,762
)
 
70,267

 
(3,803
)
Pension liability adjustments
(8
)
 
823

 
1,409

 
1,141

Total other comprehensive income (loss), net of tax
98,556

 
(28,139
)
 
(33,328
)
 
(29,140
)
 
 
 
 
 
 
 
 
Total comprehensive income
142,620

 
61,875

 
74,691

 
133,794

 
 
 
 
 
 
 
 
Less: Comprehensive income (loss) attributable
 

 
 

 
 

 
 

to noncontrolling interests
(40
)
 
(254
)
 
500

 
(140
)
 
 
 
 
 
 
 
 
Comprehensive income attributable to
 
 
 
 
 
 
 
DENTSPLY International
$
142,660

 
$
62,129

 
$
74,191

 
$
133,934

 


 


 


 



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)
 
June 30, 2015
 
December 31, 2014
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
96,472

 
$
151,639

Accounts and notes receivables-trade, net
447,500

 
426,606

Inventories, net
374,820

 
387,095

Prepaid expenses and other current assets, net
351,538

 
241,630

 
 
 
 
Total Current Assets
1,270,330

 
1,206,970

 
 
 
 
Property, plant and equipment, net
568,036

 
588,845

Identifiable intangible assets, net
616,669

 
670,840

Goodwill, net
1,998,608

 
2,089,339

Other noncurrent assets, net
43,113

 
90,465

 
 
 
 
Total Assets
$
4,496,756

 
$
4,646,459

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
132,966

 
$
132,611

Accrued liabilities
296,280

 
379,202

Income taxes payable
64,023

 
28,948

Notes payable and current portion of long-term debt
119,704

 
111,823

 
 
 
 
Total Current Liabilities
612,973

 
652,584

 
 
 
 
Long-term debt
1,077,779

 
1,150,084

Deferred income taxes
155,587

 
165,551

Other noncurrent liabilities
334,128

 
356,042

 
 
 
 
Total Liabilities
2,180,467

 
2,324,261

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity:
 

 
 

Preferred stock, $1.00 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 June 30, 2015 and December 31, 2014
1,628

 
1,628

Capital in excess of par value
225,002

 
221,669

Retained earnings
3,468,364

 
3,380,748

Accumulated other comprehensive loss
(475,006
)
 
(441,136
)
Treasury stock, at cost, 23.0 million and 21.9 million shares at June 30, 2015 and December 31, 2014, respectively
(905,118
)
 
(841,630
)
Total DENTSPLY International Equity
2,314,870

 
2,321,279

 
 
 
 
Noncontrolling interests
1,419

 
919

 
 
 
 
Total Equity
2,316,289

 
2,322,198

 
 
 
 
Total Liabilities and Equity
$
4,496,756

 
$
4,646,459

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

5



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Six months ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
108,019

 
$
162,934

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

 
 

Depreciation
38,782

 
42,325

Amortization
21,846

 
24,493

Amortization of deferred financing costs
2,177

 
2,285

Deferred income taxes
28,697

 
(4,893
)
Share-based compensation expense
11,830

 
13,358

Restructuring and other costs - non-cash
45,814

 

Stock option income tax benefit
(8,822
)
 
(349
)
Equity in net loss from unconsolidated affiliates
12,541

 
657

Other non-cash income
(13,725
)
 
(9,110
)
Loss on disposal of property, plant and equipment
481

 

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
(39,997
)
 
(31,505
)
Inventories, net
4,126

 
(22,427
)
Prepaid expenses and other current assets, net
1,832

 
(6,068
)
Other noncurrent assets, net
720

 
1,096

Accounts payable
4,938

 
10,613

Accrued liabilities
(17,678
)
 
(6,228
)
Income taxes
(74
)
 
35,532

Other noncurrent liabilities
9,738

 
7,532

 
 
 
 
Net cash provided by operating activities
211,245

 
220,245

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(33,434
)
 
(48,831
)
Cash paid for acquisitions of businesses, net of cash acquired
(3,305
)
 
(2,009
)
Cash received on derivatives contracts
14,267

 
1,674

Cash paid on derivatives contracts
(810
)
 
(4,006
)
Expenditures for identifiable intangible assets

 
(1,316
)
Purchase of short-term investments

 
(1,135
)
Proceeds from sale of property, plant and equipment, net
303

 
277

 
 
 
 
Net cash used in investing activities
(22,979
)
 
(55,346
)
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
Increase (decrease) in short-term borrowings
33,370

 
(38,087
)
Cash paid for treasury stock
(98,975
)
 
(54,586
)
Cash dividends paid
(19,640
)
 
(18,453
)
Cash paid for acquisition of noncontrolling interests of consolidated subsidiary
(80,452
)
 
(33
)
Repayments on long-term borrowings
(100,232
)
 
(75,371
)
Proceeds from exercised stock options
18,597

 
12,736

Excess tax benefits from share-based compensation
8,822

 
349

 
 
 
 
Net cash used in financing activities
(238,510
)
 
(173,445
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(4,923
)
 
521

 
 
 
 
Net decrease in cash and cash equivalents
(55,167
)
 
(8,025
)
 
 
 
 
Cash and cash equivalents at beginning of period
151,639

 
74,954

 
 
 
 
Cash and cash equivalents at end of period
$
96,472

 
$
66,929

 
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, 2013
$
1,628

 
$
255,272

 
$
3,095,721

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

 
$
42,921

 
$
2,577,974

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
162,871

 

 

 
162,871

 
63

 
162,934

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss

 

 

 
(23,407
)
 

 
(23,407
)
 
(203
)
 
(23,610
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interest

 
(40,283
)
 

 
(5,530
)
 

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

 
(2,204
)
 

 

 
14,940

 
12,736

 

 
12,736

Tax benefit from stock options exercised

 
349

 

 

 

 
349

 

 
349

Share based compensation expense

 
13,358

 

 

 

 
13,358

 

 
13,358

Funding of Employee Stock Ownership Plan

 
1,535

 

 

 
4,418

 
5,953

 

 
5,953

Treasury shares purchased

 

 

 

 
(54,586
)
 
(54,586
)
 

 
(54,586
)
RSU distributions

 
(10,917
)
 

 

 
6,653

 
(4,264
)
 

 
(4,264
)
RSU dividends

 
164

 
(164
)
 

 

 

 

 

Cash dividends ($0.13250 per share)

 

 
(18,787
)
 

 

 
(18,787
)
 

 
(18,787
)
Balance at June 30, 2014
$
1,628

 
$
217,274

 
$
3,239,641

 
$
(97,999
)
 
$
(777,081
)
 
$
2,583,463

 
$
1,311

 
$
2,584,774


 
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, 2014
$
1,628

 
$
221,669

 
$
3,380,748

 
$
(441,136
)
 
$
(841,630
)
 
$
2,321,279

 
$
919

 
$
2,322,198

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
108,061

 

 

 
108,061

 
(42
)
 
108,019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss

 

 

 
(33,870
)
 

 
(33,870
)
 
542

 
(33,328
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options

 
(4,688
)
 

 

 
23,285

 
18,597

 

 
18,597

Tax benefit from stock options exercised

 
8,822

 

 

 

 
8,822

 

 
8,822

Share based compensation expense

 
11,830

 

 

 

 
11,830

 

 
11,830

Funding of Employee Stock Ownership Plan

 
1,077

 

 

 
3,650

 
4,727

 

 
4,727

Treasury shares purchased

 

 

 

 
(98,998
)
 
(98,998
)
 

 
(98,998
)
RSU distributions

 
(13,878
)
 

 

 
8,575

 
(5,303
)
 

 
(5,303
)
RSU dividends

 
170

 
(170
)
 

 

 

 

 

Cash dividends ($0.14500 per share)

 

 
(20,275
)
 

 

 
(20,275
)
 

 
(20,275
)
Balance at June 30, 2015
$
1,628

 
$
225,002

 
$
3,468,364

 
$
(475,006
)
 
$
(905,118
)
 
$
2,314,870

 
$
1,419

 
$
2,316,289


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 accounting principles generally accepted in the United States of America. 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, 2014.

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, 2014, except as may be indicated below:

Accounts and Notes Receivable

The Company records a provision for doubtful accounts, which is included in “Selling, general and administrative expenses” in the Consolidated Statements of Operations.

Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $9.2 million at June 30, 2015 and $8.8 million at December 31, 2014.

Marketable Securities

The Company’s marketable securities consist of corporate convertible bonds that are classified as available-for-sale in “Prepaid expenses and other current assets” 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 $153.6 million and $57.7 million at June 30, 2015 and December 31, 2014, respectively.  At June 30, 2015 and December 31, 2014, a cumulative unrealized holding gain of $70.3 million and $8.5 million, respectively, on available-for-sale securities, net of tax, has been recorded in AOCI.  As this investment is held by a euro-denominated subsidiary of the Company, the investment’s value is also impacted by changing foreign currency rates which accounts for the remaining difference between the period end values and the change in cumulative gain.

New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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

8



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 Company adopted this accounting standard for the quarter ended March 31, 2015. The adoption of this standard did not 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)” that seeks to provide a single, comprehensive revenue recognition model for all contracts with customers that improve comparability within industries, across industries and across capital markets. Under this standard, an entity should recognize revenue for the transfer of goods or services equal to the amount it expects to be entitled to receive for those goods or services. Enhanced disclosure requirements regarding the nature, timing and uncertainty of revenue and related cash flows exist. To assist entities in applying the standard, a five step model for recognizing and measuring revenue from contracts with customers has been introduced. Entities have the option to apply the new guidance retrospectively to each prior reporting period presented (full retrospective approach) or retrospectively with a cumulative effect adjustment to retained earnings for initial application of the guidance at the date of initial adoption (modified retrospective method). The Company expects to adopt this accounting standard for the quarter ended March 31, 2017. Early adoption is not permitted. On April 1, 2015, the FASB proposed deferring the effective date by one year to annual reporting periods beginning after December 15, 2017. The proposal has not been ratified. The Company is currently assessing the impact that ASU No. 2014-09 may have on their financial positions, results of operations, cash flows and disclosures, as well as, the transition method they will use to adopt the guidance

In January 2015, the FASB issued ASU No. 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” This newly issued accounting standard eliminates from generally accepted accounting principles the concept of Extraordinary items, events or transactions that are unusual in nature and occur infrequently. The amendments in this update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Prospective application and early adoption is permitted. The adoption of this standard is not expected to impact the Company’s financial position or results of operations.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This newly issued accounting standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability. Retrospective application is required. The amendments in this standard are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company adopted this standard during the second quarter of 2015, applying retrospective application to the periods presented in this Form 10-Q. The following is a summary of the adjustment to the financial statement line items impacted by this accounting update:

December 31, 2014
(in thousands)
 
As Reported
 
 
 
 
Consolidated Balance Sheet Line Item
 
Balance
 
Adjustment
 
Adjusted Balance
Other noncurrent assets, net
 
$
94,271

 
(3,806
)
 
$
90,465

Notes payable and current portion of long-term debt
 
112,831

 
(1,008
)
 
111,823

Long-term debt
 
1,152,882

 
(2,798
)
 
1,150,084

 
 
 
 
 
 
 
March 31, 2015
(in thousands)
 
As Reported
 
 
 
 
Consolidated Balance Sheet Line Item
 
Balance
 
Adjustment
 
Adjusted Balance
Other noncurrent assets, net
 
$
61,254

 
(3,568
)
 
$
57,686

Notes payable and current portion of long-term debt
 
247,631

 
(948
)
 
246,683

Long-term debt
 
1,078,823

 
(2,620
)
 
1,076,203

 
 
 
 
 
 
 








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 six months ended June 30, 2015 and 2014:
 
Three Months Ended
 
Six Months Ended
(in thousands)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Stock option expense
$
2,330

 
$
2,829

 
$
3,775

 
$
4,503

RSU expense
4,272

 
4,366

 
7,408

 
8,085

Total stock based compensation expense
$
6,602

 
$
7,195

 
$
11,183

 
$
12,588

 
 
 
 
 
 
 
 
Total related tax benefit
$
1,838

 
$
1,979

 
$
3,385

 
$
3,543


For the three and six months ended June 30, 2015, stock compensation expense of $6.6 million and $11.2 million, respectively, of which, $6.4 million and $10.8 million, respectively, was recorded in Selling, general and administrative expense and $0.2 million and $0.3 million, respectively, was recorded in Cost of products sold on the Consolidated Statement of Operations. For the three and six months ended June 30, 2014, stock compensation expense of $7.2 million and $12.6 million, respectively, of which, $7.0 million and $12.2 million, respectively, was recorded in Selling, general and administrative expense and $0.2 million and $0.4 million, respectively, was recorded in Cost of products sold on the Consolidated Statement of Operations.

At June 30, 2015, the remaining unamortized compensation cost related to non-qualified stock options is $13.7 million, which will be expensed over the weighted average remaining vesting period of the options, or approximately 1.8 years. At June 30, 2015, the unamortized compensation cost related to RSU is $26.5 million, which will be expensed over the weighted average remaining restricted period of the RSU, or approximately 1.5 years.

NOTE 3 – COMPREHENSIVE INCOME

During the quarter ended June 30, 2015, foreign currency translation adjustments included currency translation losses of $74.9 million and losses on the Company’s loans designated as hedges of net investments of $0.4 million.  During the quarter ended June 30, 2014, foreign currency translation adjustments included currency translation losses of $20.6 million and losses of $1.2 million on the Company’s loans designated as hedges of net investments.  During the six months ended June 30, 2015, foreign currency translation adjustments included currency translation losses of $113.7 million and losses on the Company’s loans designated as hedges of net investments of $1.2 million. During the six months ended June 30, 2014, foreign currency translation adjustments included currency translation losses of $19.7 million and losses on the Company’s loans designated as hedges of net investments of $3.2 million.

The cumulative foreign currency translation adjustments included translation losses of $230.7 million and $117.1 million at June 30, 2015 and December 31, 2014, respectively, and losses on loans designated as hedges of net investments of $96.7 million and $95.4 million, respectively.  These foreign currency translation adjustments were partially offset by movements on derivative financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.


















10







Changes in AOCI, net of tax, by component for the six months ended June 30, 2015 and 2014:
(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, 2014
$
(212,490
)
 
$
(10,825
)
 
$
(112,728
)
 
$
8,481

 
$
(113,574
)
 
$
(441,136
)
Other comprehensive income (loss) before reclassifications
(114,891
)
 
18,446

 
(2,345
)
 
70,267

 

 
(28,523
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
(8,173
)
 

 

 
2,826

 
(5,347
)
Net (decrease) increase in other comprehensive income
(114,891
)
 
10,273

 
(2,345
)
 
70,267

 
2,826

 
(33,870
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2015
$
(327,381
)
 
$
(552
)
 
$
(115,073
)
 
$
78,748

 
$
(110,748
)
 
$
(475,006
)

(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
(22,942
)
 
(2,717
)
 
849

 
(3,803
)
 
197

 
(28,416
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
4,065

 

 

 
944

 
5,009

Net (decrease) increase in other comprehensive income
(22,942
)
 
1,348

 
849

 
(3,803
)
 
1,141

 
(23,407
)
Foreign currency translation related to acquisition of noncontrolling interests
(5,530
)
 

 

 

 

 
(5,530
)
Balance at June 30, 2014
$
112,520

 
$
(20,405
)
 
$
(150,265
)
 
$
8,926

 
$
(48,775
)
 
$
(97,999
)











11






Reclassifications out of accumulated other comprehensive income (expense) to the Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014:

(in thousands)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the
Statements of Operations
 
Three Months Ended June 30,
 
 
2015
 
2014
 
 
 
 
 
 
 
 
Gains and (losses) on derivative financial instruments:
Interest rate swaps
 
$
(1,074
)
 
$
(929
)
 
Interest expense
Foreign exchange forward contracts
 
6,839

 
(1,651
)
 
Cost of products sold
Foreign exchange forward contracts
 
181

 
(58
)
 
SG&A expenses
Commodity contracts
 
(121
)
 
(158
)
 
Cost of products sold
 
 
5,825

 
(2,796
)
 
Net gain (loss) before tax
 
 
(1,189
)
 
819

 
Tax (expense) benefit
 
 
$
4,636

 
$
(1,977
)
 
Net of tax
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$
34

 
$
35

 
(a)
Amortization of net actuarial losses
 
(2,015
)
 
(721
)
 
(a)
 
 
(1,981
)
 
(686
)
 
Net loss before tax
 
 
572

 
213

 
Tax benefit
 
 
$
(1,409
)
 
$
(473
)
 
Net of tax
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
3,227

 
$
(2,450
)
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the three months ended June 30, 2015 and 2014 (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
 
Six Months Ended June 30,
 
 
2015
 
2014
 
 
 
 
 
 
 
 
Gains and (losses) on derivative financial instruments:
Interest rate swaps
 
$
(2,040
)
 
$
(1,856
)
 
Interest expense
Foreign exchange forward contracts
 
10,726

 
(3,296
)
 
Cost of products sold
Foreign exchange forward contracts
 
344

 
(157
)
 
SG&A expenses
Commodity contracts
 
(250
)
 
(403
)
 
Cost of products sold
 
 
8,780

 
(5,712
)
 
Net gain (loss) before tax
 
 
(607
)
 
1,647

 
Tax (expense) benefit
 
 
$
8,173

 
$
(4,065
)
 
Net of tax
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$
68

 
$
69

 
(a)
Amortization of net actuarial losses
 
(4,041
)
 
(1,439
)
 
(a)
 
 
(3,973
)
 
(1,370
)
 
Net loss before tax
 
 
1,147

 
426

 
Tax benefit
 
 
$
(2,826
)
 
$
(944
)
 
Net of tax
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
5,347

 
$
(5,009
)
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the six months ended June 30, 2015 and 2014 (see Note 8, Benefit Plans, for additional details).





























13




NOTE 4 – EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2015 and 2014:
Basic Earnings Per Common Share Computation
Three Months Ended
 
Six Months Ended
(in thousands, except per share amounts)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
44,099

 
$
89,993

 
$
108,061

 
$
162,871

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
139,813

 
141,790

 
140,054

 
141,921

 
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.32

 
$
0.63

 
$
0.77

 
$
1.15

 
 
 
 
 
 
 
 
Diluted Earnings Per Common Share Computation
 

 
 

 
 

 
 

(in thousands, except per share amounts)
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
44,099

 
$
89,993

 
$
108,061

 
$
162,871

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
139,813

 
141,790

 
140,054

 
141,921

Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards
2,449

 
2,374

 
2,467

 
2,367

Total weighted average diluted shares outstanding
142,262

 
144,164

 
142,521

 
144,288

 
 
 
 
 
 
 
 
Earnings per common share - diluted
$
0.31

 
$
0.62

 
$
0.76

 
$
1.13


The calculation of weighted average diluted shares outstanding excludes stock options and RSU of 0.8 million and 1.0 million shares of common stock that were outstanding during the three and six months ended June 30, 2015, respectively, because their effect would be antidilutive.

NOTE 5 – BUSINESS COMBINATIONS

Effective January 1, 2014, the Company recorded a liability for the contractual purchase of the remaining shares of one variable interest entity. The Company paid this obligation during the first quarter of 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 net sales for the three and six months ended June 30, 2015 and 2014, 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 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 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 after the assignment of certain direct corporate costs and 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.


14



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 March 31, 2015 quarter, 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, Endodontic and Dental Laboratory 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 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 design, manufacture, worldwide distribution and sales of certain non-dental products, excluding urological and surgery-related products

Healthcare, Orthodontic and Implant 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 responsibility for the design, manufacture, sales and distribution of orthodontic and implant products, in most regions of the world. Additionally, segment is also responsible for the sales and distribution of most of the Company’s other dental products, including most dental consumables within Canada.

Select Developed and Emerging Markets Businesses

This segment has responsibilities for sales and distribution of chairside consumable, endodontic and dental laboratory products within certain European regions, Japan and Australia. 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 including Mexico, Asia and Africa.

The following tables set forth information about the Company’s segments for the three and six months ended June 30, 2015 and 2014:

Third Party Net Sales
 
Three Months Ended
 
Six Months Ended
(in thousands)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
$
317,376

 
$
346,264

 
$
627,693

 
$
685,545

Healthcare, Orthodontic and Implant Businesses
252,845

 
279,696

 
488,838

 
544,107

Select Developed and Emerging Markets Businesses
127,785

 
139,265

 
237,795

 
265,687

Total net sales
$
698,006

 
$
765,225

 
$
1,354,326

 
$
1,495,339


Third Party Net Sales, Excluding Precious Metal Content
 
Three Months Ended
 
Six Months Ended
(in thousands)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
$
301,299

 
$
319,978

 
$
593,390

 
$
625,050

Healthcare, Orthodontic and Implant Businesses
252,665

 
279,478

 
488,476

 
543,681

Select Developed and Emerging Markets Businesses
120,734

 
131,442

 
224,379

 
251,350

Total net sales, excluding precious metal content
674,698

 
730,898

 
1,306,245

 
1,420,081

Precious metal content of sales
23,308

 
34,327

 
48,081

 
75,258

Total net sales, including precious metal content
$
698,006

 
$
765,225

 
$
1,354,326

 
$
1,495,339


15



Inter-segment Net Sales
 
Three Months Ended
 
Six Months Ended
(in thousands)
2015
 
2014
 
2015
 
2,014
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
$
89,324

 
$
93,642

 
$
173,213

 
$
183,100

Healthcare, Orthodontic and Implant Businesses
1,578

 
1,970

 
3,352

 
4,431

Select Developed and Emerging Markets Businesses
3,437

 
2,722

 
6,313

 
6,239

All Other (a)
67,116

 
75,860

 
132,166

 
150,482

Eliminations
(161,455
)
 
(174,194
)
 
(315,044
)
 
(344,252
)
Total
$

 
$

 
$

 
$

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

Segment Operating Income (Loss)
 
Three Months Ended
 
Six Months Ended
(in thousands)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
$
110,787

 
$
117,976

 
$
214,193

 
$
224,745

Healthcare, Orthodontic and Implant Businesses
27,906

 
32,049

 
54,435

 
56,574

Select Developed and Emerging Markets Businesses
(3,464
)
 
(1,211
)
 
(7,350
)
 
(2,503
)
Segment operating income
135,229

 
148,814

 
261,278

 
278,816

 
 
 
 
 
 
 
 
Reconciling Items (income) expense:
 

 
 

 
 

 
 

All Other (b)
10,547

 
20,466

 
33,461

 
44,105

Restructuring and other costs
38,881

 
1,242

 
44,307

 
2,035

Interest expense
9,824

 
11,798

 
20,492

 
22,753

Interest income
(660
)
 
(1,744
)
 
(1,402
)
 
(3,179
)
Other expense (income), net
(376
)
 
575

 
232

 
963

Income before income taxes
$
77,013

 
$
116,477

 
$
164,188

 
$
212,139

(b) Includes the results of unassigned Corporate headquarter costs, inter-segment eliminations and one distribution warehouse not managed by named segments.

Assets
(in thousands)
June 30, 2015
 
December 31, 2014
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
$
1,360,187

 
$
1,358,018

Healthcare, Orthodontic and Implant Businesses
2,508,278

 
2,655,622

Select Developed and Emerging Markets Businesses
352,866

 
369,844

All Other (c)
275,425

 
262,975

Total
$
4,496,756

 
$
4,646,459

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












16



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 June 30, 2015 and December 31, 2014 were $7.0 million and $6.3 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 June 30, 2015 and December 31, 2014 by $6.2 million and $6.1 million, respectively.



Inventories, net of inventory valuation reserves, consist of the following:
(in thousands)
June 30, 2015
 
December 31, 2014
 
 
 
 
Finished goods
$
242,921

 
$
253,333

Work-in-process
59,858

 
58,329

Raw materials and supplies
72,041

 
75,433

Inventories, net
$
374,820

 
$
387,095


The inventory valuation reserves were $36.3 million and $34.1 million at June 30, 2015 and December 31, 2014, respectively.

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 six months ended June 30, 2015 and 2014:

Defined Benefit Plans 
Three Months Ended
 
Six Months Ended
(in thousands)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Service cost
$
4,343

 
$
3,549

 
$
8,691

 
$
7,101

Interest cost
1,843

 
2,861

 
3,697

 
5,726

Expected return on plan assets
(1,399
)
 
(1,391
)
 
(2,777
)
 
(2,777
)
Amortization of prior service credit
(35
)
 
(35
)
 
(69
)
 
(69
)
Amortization of net actuarial loss
1,963

 
709

 
3,947

 
1,417

Net periodic benefit cost
$
6,715

 
$
5,693

 
$
13,489

 
$
11,398


Other Postemployment Benefit Plans
Three Months Ended
 
Six Months Ended
(in thousands)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Service cost
$
88

 
$
44

 
$
177

 
$
89

Interest cost
144

 
140

 
288

 
280

Amortization of net actuarial loss
43

 
12

 
85

 
22

Net periodic benefit cost
$
275

 
$
196

 
$
550

 
$
391


The following sets forth the information related to the contributions to the Company’s benefit plans for 2015:
(in thousands)
Pension
Benefits
 
Other
Postemployment Benefits
 
 
 
 
Actual contributions through June 30, 2015
$
5,559

 
$
192

Projected contributions for the remainder of the year
5,945

 
449

Total projected contributions
$
11,504

 
$
641



17




NOTE 9 – RESTRUCTURING AND OTHER COSTS

Restructuring Costs

During the three and six months ended June 30, 2015, the Company recorded net restructuring costs and other costs of $38.9 million and $44.3 million, respectively. On May 22, 2015, the Company announced that it reorganized portions of its laboratory business and associated manufacturing capabilities within the Dental Consumables, Endodontics and Dental Laboratory Businesses segment. During the June 2015 quarter, the Company recorded $31.0 million of costs that consist primarily of employee severance benefits related to these and other similar actions. Also during the three and six months ended June 30, 2015, the Company recorded restructuring costs of $2.7 million and $7.5 million, respectively, within the Healthcare, Orthodontic and Implant Businesses segment primarily related to the global efficiency initiative During the three and six months ended June 30, 2014, the Company recorded net restructuring and other costs of $1.2 million and $2.0 million. 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 June 30, 2015, the Company’s restructuring accruals were as follows:
 
Severance
(in thousands)
2013 and
Prior Plans
 
2014 Plans
 
2015 Plans
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
951

 
$
5,062

 
$

 
$
6,013

Provisions
81

 
431

 
40,958

 
41,470

Amounts applied
(635
)
 
(3,084
)
 
(3,542
)
 
(7,261
)
Change in estimates
(76
)
 
(74
)
 
(547
)
 
(697
)
Balance at June 30, 2015
$
321

 
$
2,335

 
$
36,869

 
$
39,525


 
Lease/Contract Terminations
(in thousands)
2013 and
Prior Plans
 
2014 Plans
 
2015 Plans
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
535

 
$
1,636

 
$

 
$
2,171

Provisions

 
12

 
270

 
282

Amounts applied
(105
)
 
(384
)
 

 
(489
)
Change in estimates

 
(10
)
 

 
(10
)
Balance at June 30, 2015
$
430

 
$
1,254

 
$
270

 
$
1,954


 
Other Restructuring Costs
(in thousands)