SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
( ) 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.
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(Exact name of registrant as specified in its charter)
Delaware 39-1434669
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
221 West Philadelphia Street, York, PA 17405-0872
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(Address of principal executive offices) (Zip Code)
(717) 845-7511
(Registrant's telephone number, including area code)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [X] No [ ]
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] 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 May 5, 2006 the Company had
78,948,764 shares of Common Stock outstanding, with a par value of $.01 per
share.
Page 1 of 35
EXPLANATORY NOTE
We are filing the Amendment No. 1 on Form 10-Q/A to our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2006 to reflect the restatement of the
Company's consolidated balance sheets as of March 31, 2006 and December 31,
2005, and the consolidated statements of cash flows for the three months ended
March 31, 2006 and 2005 as discussed in Note 11 ("Restatement of Financial
Statements") of the Notes to the Consolidated Financial Statements included in
Item 1, Part I of this Amendment. As noted in Note 11, the Company's
classification of time deposits with original maturity dates at the time of
purchase in excess of 90 days as cash equivalents was reassessed during the
third quarter of 2006. It was determined that due strictly to the original
maturity date on the acknowledgement of the deposit, that these time deposits
were inappropriately classified as cash equivalents, despite the fact that the
time deposits held by the Company are highly liquid deposits with a liquidity
feature that provides the Company with access to the full principal amount of
the deposits within generally a one to two day period. It was further determined
that these time deposits with original maturity dates at the date of purchase in
excess of 90 days should be classified as short-term investments instead of cash
equivalents, and should be reflected as investing activities in the Company's
statement of cash flows. These reclassifications had no impact on total current
assets, total assets, total stockholder's equity, net income (loss), earnings
(loss) per share, or cash flows from operating activities.
Except for Items 1, 2 and 4 of Part I, no other information included in
this Form 10-Q/A is being amended by this Amendment. The remaining Items
contained within this Amendment consist of all other Items originally contained
in the Form 10-Q and are included for the convenience of the reader. This
Amendment continues to speak as of the date of the original filing of the Form
10-Q and the Company has not updated the disclosure in the Amendment to speak as
of any later date.
DENTSPLY INTERNATIONAL INC.
FORM 10-Q/A
For Quarter Ended March 31, 2006
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Statements of Income 4
Consolidated Condensed Balance Sheets (Restated, see note 11) 5
Consolidated Condensed Statements of Cash Flows (Restated,
see note 11) 6
Notes to Unaudited Interim Consolidated Condensed
Financial Statements (As Revised, see note 11) 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations (As Revised,
see note 11) 25
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 32
Item 4 - Controls and Procedures (As Revised, see note 11) 32
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 33
Item 1A - Risk Factors 33
Item 2 - Unregistered Sales of Securities and Use of Proceeds 34
Item 6 - Exhibits 34
Signatures 35
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
March 31,
2006 2005
------- -------
(in thousands, except per share amounts)
Net sales $ 430,996 $ 406,975
Cost of products sold 210,860 198,034
------- -------
Gross profit 220,136 208,941
Selling, general and administrative expenses 145,431 138,548
Restructuring costs (Note 8) 4,697 268
------- -------
Operating income 70,008 70,125
Other income and expenses:
Interest expense 2,094 6,327
Interest income (2,781) (2,310)
Other income, net (514) (4,242)
------ -------
Income before income taxes 71,209 70,350
Provision for income taxes 21,205 21,301
------ ------
Net income $ 50,004 $ 49,049
======== ========
Earnings per common share - (Note 3):
-Basic $ 0.63 $ 0.61
-Diluted $ 0.62 $ 0.60
Cash dividends declared per common share $ 0.070 $ 0.060
Weighted average common shares outstanding (Note 3):
Basic 78,999 80,703
Diluted 80,530 82,289
See accompanying notes to unaudited interim consolidated condensed financial
statements.
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
March 31, December 31,
2006 2005
As Restated As Restated
------- -------
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 260,595 $ 433,984
Short-term investments 152,124 541
Accounts and notes receivable-trade, net 275,106 254,822
Inventories, net (Notes 1 and 6) 226,442 208,179
Prepaid expenses and other current assets 149,859 132,517
------- -------
Total Current Assets 1,064,126 1,030,043
Property, plant and equipment, net 309,825 316,218
Identifiable intangible assets, net 67,707 68,600
Goodwill, net 945,461 933,227
Other noncurrent assets 55,035 59,241
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Total Assets $ 2,442,154 $ 2,407,329
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 88,408 $ 82,317
Accrued liabilities 143,595 159,846
Income taxes payable 68,477 86,859
Notes payable and current portion
of long-term debt 477,787 412,212
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Total Current Liabilities 778,267 741,234
Long-term debt 186,861 270,104
Deferred income taxes 43,757 42,912
Other noncurrent liabilities 123,610 111,311
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Total Liabilities 1,132,495 1,165,561
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Minority interests in consolidated subsidiaries 183 188
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Commitments and contingencies (Note 10)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued - -
Common stock, $.01 par value; 200 million shares authorized;
81.4 million shares issued at March 31, 2006 and December 31, 2005 814 814
Capital in excess of par value 169,197 170,607
Retained earnings 1,196,318 1,151,856
Accumulated other comprehensive income (Note 2) 63,794 56,454
Treasury stock, at cost, 2.2 million shares at March 31, 2006 and
2.5 million shares at December 31, 2005 (120,647) (138,151)
-------- --------
Total Stockholders' Equity 1,309,476 1,241,580
--------- ---------
Total Liabilities and Stockholders' Equity $ 2,442,154 $ 2,407,329
=========== ===========
See accompanying notes to unaudited interim consolidated condensed financial statements.
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
2006 2005
As Restated As Restated
------- -------
(in thousands)
Cash flows from operating activities:
Net Income $ 50,004 $ 49,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,064 11,100
Amortization 2,031 2,332
Share-based compensation expense 4,295 -
Restructuring and other costs 4,697 268
Other, net (59,712) (37,781)
------- -------
Net cash provided by operating activities 11,379 24,968
Cash flows from investing activities:
Capital expenditures (9,139) (8,548)
Acquisitions of businesses, net of cash acquired (3,309) (5,854)
Expenditures for identifiable intangible assets (15) (96)
Realization of swap value - 3,416
Purchases of short-term investments (150,711) (82,568)
Liquidations of short-term investments 540 13,689
Other, net 87 2,896
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Net cash used in investing activities (162,547) (77,065)
Cash flows from financing activities:
Payments on long-term borrowings (34,503) (47,370)
Net change in short-term borrowings 6,726 1,717
Cash paid for treasury stock (8,109) (31,109)
Cash dividends paid (5,520) (4,839)
Proceeds from exercise of stock options 13,500 12,920
Excess tax benefits from share-based compensation 1,130 -
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Net cash used in financing activities (26,776) (68,681)
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Effect of exchange rate changes on cash and cash equivalents 4,555 (12,086)
------- -------
Net decrease in cash and cash equivalents (173,389) (132,864)
Cash and cash equivalents at beginning of period 433,984 403,541
------- -------
Cash and cash equivalents at end of period $ 260,595 $ 270,677
========= =========
See accompanying notes to unaudited interim consolidated condensed financial statements.
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2006
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. The year-end condensed 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 should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in the Company's
most recent Form 10-K/A filed November 8, 2006.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. Intercompany accounts and transactions are
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported amounts of revenue
and expense during the reporting period. Actual results could differ from those
estimates, if different assumptions are made or if different conditions exist.
Cash and Cash Equivalents
Cash and cash equivalents include deposits with banks as well as highly
liquid time deposits with original maturities at the date of purchase of 90 days
or less.
Short-Term Investments
Short-term investments are highly liquid time deposits with original
maturities at the date of purchase greater than 90 days and with remaining days
to maturity of approximately one year.
Accounts and Notes Receivable-Trade
The Company sells dental equipment and supplies both through a worldwide
network of distributors and directly to end users. For customers on credit
terms, the Company performs ongoing credit evaluation 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.
Accounts and notes receivable-trade are stated net of these allowances which
were $15.6 million and $15.3 million at March 31, 2006 and December 31, 2005,
respectively.
Certain of the Company's customers are offered cash rebates based on
targeted sales increases. In accounting for these rebate programs, the Company
records an accrual as a reduction of net sales for the estimated rebate as sales
take place throughout the year in accordance with Emerging Issues Task Force
("EITF") 01-09, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)".
Inventories
Inventories are stated at the lower of cost or market. At March 31, 2006
and December 31, 2005, the cost of $12.4 million, or 5%, and $10.3 million, or
5%, respectively, of inventories 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. The Company establishes reserves for
inventory estimated to be obsolete or unmarketable equal to the difference
between the cost of inventory and estimated market value based upon assumptions
about future demand and market conditions.
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, 2006 and December 31, 2005 by $2.9 million and $2.6 million,
respectively.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived
Assets
Assessment of the potential impairment of goodwill, indefinite-lived
intangible assets and other long-lived assets is an integral part of the
Company's normal ongoing review of operations. Testing for potential impairment
of these assets is significantly dependent on numerous assumptions and reflects
management's best estimates at a particular point in time. The dynamic economic
environments in which the Company's businesses operate and key economic and
business assumptions with respect to projected selling prices, increased
competition and introductions of new technologies can significantly affect the
outcome of impairment tests. Estimates based on these assumptions may differ
significantly from actual results. Changes in factors and assumptions used in
assessing potential impairments can have a significant impact on both the
existence and magnitude of impairments, as well as the time at which such
impairments are recognized. If there are unfavorable changes in these
environments or assumptions, future cash flows, the key variable in assessing
the impairment of these assets, may decrease and as a result the Company may be
required to recognize impairment charges. Future changes in the environment and
the economic outlook for the assets being evaluated could also result in
additional impairment charges being recognized. Information with respect to the
Company's significant accounting policies on long-lived assets for each category
of long-lived asset is discussed below.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Except for leasehold improvements, depreciation for financial
reporting purposes is computed by the straight-line method over the
following estimated useful lives: buildings - generally 40 years and
machinery and equipment - 4 to 15 years. The cost of leasehold improvements
is amortized over the shorter of the estimated useful life or the term of
the lease. Maintenance and repairs are charged to operations; replacements
and major improvements are capitalized. These assets are reviewed for
impairment whenever events or circumstances suggest that the carrying
amount of the asset may not be recoverable in accordance with Statement of
Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for
the Impairment or Disposal of Long-Lived Assets". Impairment is based upon
an evaluation of the identifiable undiscounted cash flows. If impaired, the
resulting charge reflects the excess of the asset's carrying cost over its
fair value.
Identifiable Finite-lived Intangible Assets
Identifiable finite-lived intangible assets, which primarily consist of
patents, trademarks and licensing agreements, are amortized on a
straight-line basis over their estimated useful lives. These assets are
reviewed for impairment whenever events or circumstances suggest that the
carrying amount of the assets may not be recoverable in accordance with
SFAS No. 144. The Company closely monitors intangible assets related to new
technology for indicators of impairment, as these assets have more risk of
becoming impaired. Impairment is based upon an evaluation of the
identifiable undiscounted cash flows. If impaired, the resulting charge
reflects the excess of the asset's carrying cost over its fair value.
Goodwill and Indefinite-Lived Intangible Assets
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS No. 142"), "Goodwill and Other Intangible Assets", which requires
that at least an annual impairment test be applied to goodwill and
indefinite-lived intangible assets. The Company performs impairment tests
on at least an annual basis using a fair value approach rather than an
evaluation of the undiscounted cash flows. If impairment is identified on
goodwill under SFAS No. 142, the resulting charge is determined by
recalculating goodwill through a hypothetical purchase price allocation of
the fair value and reducing the current carrying value to the extent it
exceeds the recalculated goodwill. If impairment is identified on
indefinite-lived intangibles, the resulting charge reflects the excess of
the asset's carrying cost over its fair value.
The Company performs the required annual impairment assessments,
typically in the second quarter of each year, with the assessment including
an evaluation of approximately 25 reporting units. In addition to the
annual impairment test, SFAS No. 142 also requires that impairment
assessments be made more frequently if events or changes in circumstances
indicate that the goodwill or indefinite-lived intangible assets might be
impaired. As the Company learns of such changes in circumstances through
periodic analysis of actual events or through the annual development of
operating unit business plans in the fourth quarter of each year or
otherwise, impairment assessments are performed as necessary.
Derivative Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities", on January 1, 2001. This standard, as amended by SFAS No. 138 and
149, requires that all derivative instruments be recorded on the balance sheet
at their fair value and that changes in fair value be recorded each period in
current earnings or comprehensive income.
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 floating rate debt to fixed rate, fixed rate debt to
floating rate, cross currency basis swaps to convert debt denominated in one
currency to another currency, and commodity swaps to fix its variable raw
materials costs.
Pension and Other Postretirement Benefits
Substantially all of the employees of the Company and its subsidiaries are
covered by government or Company-sponsored defined benefit or defined
contribution plans. Additionally, certain union and salaried employee groups in
the United States are covered by a postretirement healthcare plan. Costs for
Company-sponsored plans are based on expected return on plan assets, discount
rates, employee compensation increase rates and health care cost trends.
Expected return on plan assets, discount rates, and health care cost trend
assumptions are particularly important when determining the Company's benefit
obligations and net periodic benefit costs associated with postretirement
benefits. Changes in these assumptions can impact the Company's pretax earnings.
In determining the cost of postretirement benefits, certain assumptions are
established annually to reflect market conditions and plan experience to
appropriately reflect the expected costs as actuarially determined. These
assumptions include medical inflation trend rates, discount rates, employee
turnover and mortality rates. The Company predominantly uses liability durations
in establishing its discount rates, which are observed from indices of
high-grade corporate bond yields in the respective economic regions of the
plans. The expected return on plan assets is the weighted average long-term
expected return based upon asset allocations and historic average returns for
the markets where the assets are invested, principally in foreign locations.
Revenue Recognition
Revenue, net of related discounts and allowances, is recognized when the
earnings process is complete. This occurs when products are shipped to or
received by the customer in accordance with the terms of the agreement, title
and risk of loss have been transferred, collectibility is probable and pricing
is fixed or determinable. Net sales include shipping and handling costs
collected from customers in connection with the sale.
A significant portion of the Company's net sales is comprised of sales of
precious metals generated through its precious metal alloy product offerings. As
the precious metal content of the Company's sales is largely a pass-through to
customers, the Company uses its cost of precious metal purchased as a proxy for
the precious metal content of sales, as the precious metal content of sales is
not separately tracked and invoiced to customers. The Company believes that it
is reasonable to use the cost of precious metal content purchased in this manner
since precious metal alloy sale prices are typically adjusted when the prices of
underlying precious metals change. The precious metals content of sales was
$47.2 million and $37.7 million for the three months ended March 31, 2006 and
2005, respectively.
Stock Compensation
The Company has stock options outstanding under three stock option plans
(1993 Plan, 1998 Plan and 2002 Amended and Restated Plan ("the 2002 Plan")).
Further grants can only be made under the 2002 Plan. Under the 1993 and 1998
Plans, a committee appointed by the Board of Directors granted to key employees
and directors of the Company options to purchase shares of common stock at an
exercise price determined by such committee, but not less than the fair market
value of the common stock on the date of grant. Options generally expire ten
years after the date of grant under these plans and grants become exercisable
over a period of three years after the date of grant at the rate of one-third
per year, except that they become immediately exercisable upon death, disability
or retirement.
The 2002 Plan authorized grants of 7.0 million shares of common stock,
(plus any unexercised portion of canceled or terminated stock options granted
under the DENTSPLY International Inc. 1993 and 1998 Plans), subject to
adjustment as follows: each January, if 7% of the outstanding common shares of
the Company exceed 7.0 million, the excess becomes available for grant under the
Plan. The 2002 Plan enables the Company to grant "incentive stock options"
("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, to key employees of the Company, and "non-qualified stock options"
("NSOs") which do not constitute ISOs to key employees and non-employee
directors of the Company. The 2002 Plan also enables the Company to grant stock
which is subject to certain forfeiture risks and restrictions ("Restricted
Stock"), stock delivered upon vesting of units ("Restricted Stock Units") and
stock appreciation rights ("SARs"). ISOs and NSOs are collectively referred to
as "Options". Options, Restricted Stock, Restricted Stock Units and Stock
Appreciation Rights are collectively referred to as "Awards". Grants of equity
compensation to key employees are solely discretionary with the Board of
Directors of the Company. Awards generally expire ten years from date of grant
and become exercisable over a period of three years after the date of grant at
the rate of one-third per year, except that they become immediately exercisable
upon death, disability or retirement. Such awards are granted at exercise prices
not less than the fair market value of the common stock on the grant date.
Future option grants may only be made under the 2002 Plan, which will
include the unexercised portion of canceled or terminated options granted under
the 1993 or 1998 Plans. The number of shares available for grant under the 2002
plan as of March 31, 2006 was 3,975,000 shares. Each non-employee director
receives an automatic grant of NSOs to purchase 9,000 shares of common stock on
the date he or she becomes a non-employee director and an additional 9,000
options on the third anniversary of the date of the non-employee director was
last granted an option.
Effective January 1, 2006, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123 (revised 2004) ("SFAS No. 123R"),
"Share-Based Payment", requiring that compensation cost relating to share-based
payment transactions be recognized in the financial statements. The cost is
measured at the grant date, based on the calculated fair value of the award, and
is recognized as an expense over the employee's requisite service period
(generally the vesting period of the equity awards). The compensation cost is
only to be recognized for the portion of the awards that are expected to vest.
Prior to January 1, 2006, the Company accounted for share-based compensation to
employees in accordance with Accounting Principles Board Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees", and related
interpretations. The Company also followed the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation", as amended by Statement of Financial
Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure". The Company adopted SFAS No. 123R using
the modified prospective method and, accordingly, our unaudited consolidated
condensed financial statements as of and for the first quarter ended March 31,
2006 reflect the impact of adopting SFAS No. 123R. Also in accordance with the
modified prospective method of adoption, the financial statement amounts for
periods prior to January 1, 2006 presented in this Form 10-Q/A have not been
restated to reflect the fair value method of recognizing compensation cost
relating to non-qualified stock options.
In addition to the requirement to recognize compensation cost for those
awards granted subsequent to the adoption of SFAS No. 123R, SFAS No. 123R also
requires that stock-based compensation be recognized for stock-based awards
granted prior to the adoption of SFAS No. 123R, but not yet vested as of the
date of adoption. This compensation cost is based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS No. 148 and SFAS
No. 123. Accordingly, the compensation cost recognized by the Company during the
quarter ended March 31, 2006 included both the compensation cost associated with
stock-based awards granted during the quarter, as well as compensation cost
associated with any unvested shares as of December 31, 2005.
The total compensation cost related to non-qualified stock options
recognized in the operating results for the quarter ended March 31, 2006 was
$4.3 million, including the cost for stock-based awards granted prior to January
1, 2006, but not yet vested as of that date. These costs were included in the
cost of products sold and selling, general and administrative expenses. The
associated future income tax benefit recognized during the three months ended
March 31, 2006 was $1.1 million. The remaining unamortized compensation cost
related to 3,603,000 non-qualified stock options is $27.3 million which will be
expensed over the weighted average remaining vesting period of the options, or
1.7 years. Cash received from stock option exercises for the three months ended
March 31, 2006, was $13.5 million. It is the Company's policy to issue shares
from treasury stock when options are exercised. The estimated cash tax benefit
to be realized for the options exercised in the three months ended March 31,
2006, is $2.6 million. The aggregate intrinsic value of stock options exercised
in the three months ended March 31, 2006, was $8.2 million and for the balance
of outstanding stock options was $114.3 million.
The fair value of each option award is estimated on the date of grant using
the Black-Scholes option-pricing model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of short-term traded options
that have no vesting restrictions and are fully transferable, and requires the
input of certain assumptions that require an element of judgment on the part of
management to determine. The significant assumptions that require the use of
management's judgment include the expected stock price volatility and the
expected life of the option. For the quarters ended March 31, 2006 and 2005, the
Company has relied on observations of both historical volatility trends as well
as implied future volatility derived from traded options of the Company with
features similar to those of the options being valued. In determining the
expected life of the option grants, the Company has observed the actual terms of
prior grants with similar characteristics, the actual vesting schedule of the
grants and has assessed the term of grants still being held by each optionee
group.
In addition to the assumptions noted previously, the Black-Scholes option
pricing model also requires the input of the expected dividend yield of the
underlying equity instrument and the risk-free interest rate for a period that
coincides with the expected life of the option. The expected dividend yield is
based on the dividend rates at the time the option is issued. The risk-free rate
for the expected life of the option is based on the U.S. treasury yield curve in
effect at the time of grant. The following table sets forth the assumptions used
to determine compensation cost for our non-qualified stock options consistent
with the requirements of SFAS No. 123R:
Weighted Average
Three Months
Ended March 31,
2006
----
Per share fair value $ 14.94
Expected dividend yield 0.49%
Risk-free interest rate 4.66%
Expected volatility 21%
Expected life (years) 4.74
Under APB No. 25, there was no compensation cost recognized for the
Company's non-qualified stock options awarded in the quarter ended March 31,
2005, as these non-qualified stock options had an exercise price equal to the
market value of the underlying stock at the grant date. The following table sets
forth pro forma information as if compensation cost had been determined
consistent with the requirements of SFAS No. 123 for the quarter ended March 31,
2005:
Three Months Ended
March 31,
2005
----
(in thousands, except per share amounts)
Net income, as reported $ 49,049
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (2,773)
------
Pro forma net income $ 46,276
========
Basic earnings per common share
As reported $ 0.61
Pro forma under fair value based method $ 0.57
Diluted earnings per common share
As reported $ 0.60
Pro forma under fair value based method $ 0.56
The following sets forth fair value per share information, including
related assumptions, used to determine compensation cost consistent with the
requirements of SFAS No. 123:
Weighted Average
Three Months
Ended March 31,
2005
----
Per share fair value $ 14.56
Expected dividend yield 0.45%
Risk-free interest rate 5.03%
Expected volatility 20%
Expected life (years) 5.50
The following is a summary of the status of the Plans as of March 31, 2006
and changes during the quarter then ended:
Outstanding Exercisable
------------------ ------------------
Weighted Weighted Available
Average Average for
Exercise Exercise Grant
Shares Price Shares Price Shares
December 31, 2005 6,930,447 $ 40.14 4,626,109 $ 33.85 4,025,030
Granted 76,300 56.86 (76,300)
Exercised (372,927) 33.86 -
Expired/Canceled (26,154) 49.72 26,154
------- ------
March 31, 2006 6,607,666 $ 40.65 4,331,363 $ 34.08 3,974,884
========= =========
The weighted average remaining contractual term of all outstanding options
is 6.8 years and the weighted average remaining contractual term of exercisable
options is 5.7 years.
In addition, SFAS No. 123R amended SFAS No. 95 ("SFAS No. 95"), "Statement
of Cash Flows", to require that excess tax benefits from exercised options be
reported as a financing cash inflow rather than as a reduction of taxes paid.
Prior to the adoption of SFAS No. 123R, the Company recorded all tax benefits
from deductions in excess of compensation expense as an operating cash flow in
accordance with SFAS No. 95. Upon the adoption of SFAS No. 123R on January 1,
2006, the Company began to reflect the tax benefits from deductions in excess of
compensation expense as an inflow from financing activities in the Statement of
Cash Flows rather than as an operating cash flow as in prior periods. As the
Company has adopted SFAS No. 123R using the modified prospective method, no
adjustment has been made to the prior year periods reported in this Form 10-Q/A.
Revisions in Classification
Certain revisions in classification have been made to prior years' data in
order to conform to the current year presentation.
The Company has revised its 2005 cash flow statement classification to
present the realization of the cross-currency swap value into cash flows from
investing activities from cash flows from financing activities as previously
disclosed in the Company's 10-K filing.
New Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 154 ("SFAS No. 154"), "Accounting
Changes and Error Corrections." SFAS No. 154 requires retroactive application of
a voluntary change in accounting principle to prior period financial statements
unless it is impracticable. SFAS No. 154 also requires that a change in method
of depreciation, amortization or depletion for long-lived, non-financial assets
be accounted for as a change in accounting estimate that is affected by a change
in accounting principle. SFAS No. 154 replaces APB Opinion No. 20, "Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements ". SFAS No. 154 is effective for fiscal years beginning after
December 15, 2005. The adoption of this standard has not had a material impact
on the Company's financial statements, nor does the Company expect this standard
to have a material impact on the Company's financial statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments", which eliminates the exemption from applying SFAS
No. 133 to interests in securitized financial assets so that similar instruments
are accounted for similarly regardless of the form of the instruments. SFAS No.
155 also allows the election of fair value measurement at acquisition, at
issuance, or when a previously recognized financial instrument is subject to a
remeasurement event. Adoption is effective for all financial instruments
acquired or issued after the beginning of the first fiscal year that begins
after September 15, 2006. Early adoption is permitted. The Company does not
expect the application of this standard to have a material impact on the
Company's financial statements.
In March 2006, the FASB issued an exposure draft that seeks to make
improvements to Statement of Financial Accounting Standards No. 132R ("SFAS No.
132R"), "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans". The proposed amendment would not alter the basic approach
to measuring plan assets, benefit obligations, or net periodic benefit cost
(expense). Major changes to SFAS No. 132R proposed in the amendment include 1)
the recognition of an asset or liability for the overfunded or underfunded
status of a defined benefit plan, 2) the recognition of actuarial gains and
losses and prior service costs and credits in other comprehensive income, 3)
measurement of plan assets and benefit obligations as of the employer's balance
sheet date, rather than at interim measurement dates as currently allowed, and
4) disclosure of additional information concerning actuarial gains and losses
and prior service costs and credits recognized in other comprehensive income.
The amendment's requirement for public companies to recognize on their balance
sheet the asset or liability associated with the overfunded or underfunded
status of a defined benefits pension plan would take effect for years ending
after December 15, 2006. Companies would be required to synchronize their
measurement dates to the end of their fiscal years beginning after December 31,
2006.
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three Months Ended
March 31,
2006 2005
---- ----
(in thousands)
Net income $ 50,004 $ 49,049
Other comprehensive income:
Foreign currency translation adjustments 14,106 (47,900)
Unrealized gain on available-for-sale securities 137 14
Net gain (loss) on derivative financial
instruments (6,903) 6,066
------ -----
Total comprehensive income $ 57,344 $ 7,229
======== =======
During the quarter ended March 31, 2006, foreign currency translation
adjustments included currency translation gains of $18.1 million and partially
offset by losses of $4.0 million on the Company's loans designated as hedges of
net investments. During the quarter ended March 31, 2005, foreign currency
translation adjustments included translation losses of $58.8 million, partially
offset by gains of $10.9 million on the Company's loans designated as hedges of
net investments.
The balances included in accumulated other comprehensive income in the
consolidated balance sheets are as follows:
March 31, December 31,
2006 2005
---- ----
(in thousands)
Foreign currency translation adjustments $ 70,320 $ 56,214
Net gain on derivative financial
instruments 8,409 15,312
Unrealized gain on available-for-sale securities 501 364
Minimum pension liability (15,436) (15,436)
------- -------
$ 63,794 $ 56,454
======== ========
The cumulative foreign currency translation adjustments included
translation gains of $146.0 million and $127.9 million as of March 31, 2006 and
December 31, 2005, respectively, offset by losses of $75.7 million and $71.7
million, respectively, on loans designated as hedges of net investments.
NOTE 3 - EARNINGS PER COMMON SHARE
The dilutive effect of outstanding options and restricted stock is
reflected in diluted earnings per share by application of the treasury stock
method, which in the current period includes consideration of stock-based
compensation required by SFAS No. 123R. The following table sets forth the
computation of basic and diluted earnings per common share:
Three Months Ended
March 31,
2006 2005
---- ----
(in thousands, except
per share amounts)
Basic Earnings Per Common Share Computation
Net income $50,004 $49,049
Common shares outstanding 78,999 80,703
Earnings per common share - basic $ 0.63 $ 0.61
Diluted Earnings Per Common Share Computation
Net income $50,004 $49,049
Common shares outstanding 78,999 80,703
Incremental shares from assumed exercise
of dilutive options 1,531 1,586
----- -----
Total shares 80,530 82,289
Earnings per common share - diluted $ 0.62 $ 0.60
There were no options to purchase shares of common stock outstanding during
the quarters ended March 31, 2006 and 2005 that had an anti-dilutive effect on
the computation of diluted earnings per share.
NOTE 4 - BUSINESS ACQUISITIONS
Effective February 2006, the Company acquired all the outstanding capital
stock of Prident International, Inc. ("Prident") for consideration of
approximately $2.7 million. The purchase agreement provides for an additional
earn-out payment based upon the operating performance of the business during the
five-year period ending in February 2011. If these financial operating targets
are met, this earn-out would be between 4% and 8% of the cumulative sales for
the five years ended February 2011. Prident was primarily operating as an
off-shore dental laboratory. The results of operations of Prident are included
in the accompanying financial statements since the effective date of the
transaction. The purchase price has been allocated on the basis of preliminary
estimates of the fair values of assets acquired and liabilities assumed. The
Company purchased Prident primarily to provide its U.S. laboratory customers
with a broader offering of services in order to provide them with an alternative
to current offshore services.
In addition to the acquisition of Prident, the Company also acquired a
small distributor of implant products in Italy for consideration of 0.5 million
Euros (approximately $0.6 million).
NOTE 5 - SEGMENT INFORMATION
The Company follows Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 131 establishes standards for disclosing information
about reportable segments in financial statements. The Company has numerous
operating businesses covering a wide range of products and geographic regions,
primarily serving the professional dental market. Professional dental products
represented approximately 98% of sales for the periods ended March 31, 2006 and
2005.
The operating businesses are combined into operating groups which have
overlapping product offerings, geographical presence, customer bases,
distribution channels, and regulatory oversight. These operating groups are
considered the Company's reportable operating segments under SFAS No. 131 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 for the consolidated financial statements in the summary of
significant accounting policies (see Note 1). The Company measures segment
income for reporting purposes as operating profit before restructuring, interest
and taxes. A description of the services provided within each of the Company's
three reportable segments is provided below.
In January 2006, the Company reorganized its operating group structure into
three operating groups from the four groups under the prior management
structure, as a result of certain organizational changes in the first quarter
of 2006. The reportable operating segment information below reflects this
revised structure for all periods shown.
A description of the activities provided within each of the Company's three
reportable operating segments follows:
U.S., Europe, CIS, Middle East, Africa Consumable Business/Canada
This business group includes responsibility for the design, manufacturing,
sales, and distribution for certain small equipment, chairside consumable
products and dental anesthetics in the U.S., Europe, the Commonwealth of
Independent States ("CIS"), Middle East, Africa and the sales and distribution
of substantially all Company products in Canada. This business group also has
responsibility for the sales and distribution of endodontic products in the U.K.
and endodontic and laboratory products in France, Italy, Middle East, Africa,
and the CIS.
Australia/Latin America/Endodontics/Non-dental
This business group includes responsibility for the design, manufacture,
and/or sales and distribution of dental anesthetics, chairside consumable and
laboratory products in Brazil. This business group also has responsibility for
the sales and distribution of all Company dental products sold in Australia and
Latin America. Additionally, this business group includes the responsibility for
the design and manufacturing for endodontic products, and is responsible for
sales and distribution of all Company endodontic products in the U.S., Canada,
Switzerland, Benelux, Scandinavia, and Eastern Europe, and certain endodontic
products in Germany. This business group is also responsible for the Company's
non-dental business.
Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
This business group includes the responsibility for the design and
manufacture of laboratory products in the U.S., Puerto Rico, Germany, The
Netherlands and China, and for the sales and distribution for these products in
the U.S., Germany, Austria, the U.K., Benelux, Scandinavia, Iberia, Eastern
Europe, and certain products in Italy. Additionally, this business group is
responsible for the design, manufacture, worldwide sales and distribution of
substantially all of the Company's dental implant and bone generation products
and the worldwide sales and distribution of the Company's orthodontic products.
This business group is also responsible for sales and distribution of all
Company products throughout Asia and Japan.
Significant interdependencies exist among the Company's operations in
certain geographic areas. Inter-group sales are at prices intended to provide a
reasonable profit to the manufacturing unit after recovery of all manufacturing
costs and to provide a reasonable profit for purchasing locations after coverage
of marketing and general and administrative costs.
Generally, the Company evaluates performance of the operating groups based
on the groups' operating income and net third party sales excluding precious
metal content.
The following tables set forth information about the Company's operating
groups for the quarters ended March 31, 2006 and 2005:
Third Party Net Sales
---------------------
Three Months Ended
March 31,
2006 2005
---- ----
(in thousands)
U.S., Europe, CIS, Middle East, Africa
Consumable Business/ Canada $ 139,890 $ 141,676
Australia/Latin America/Endodontics/
Non-Dental $ 89,610 $ 87,559
Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia $ 202,322 $ 178,667
All Other (a) (826) (927)
---- ----
Total $ 430,996 $ 406,975
========= =========
(a) Includes: operating expenses of one distribution warehouse not managed by
named segments, Corporate and inter-segment eliminations.
Third Party Net Sales, excluding precious metal content
-------------------------------------------------------
Three Months Ended
March 31,
2006 2005
---- ----
(in thousands)
U.S., Europe, CIS, Middle East, Africa
Consumable Business/ Canada $ 139,204 141,246
Australia/Latin America/Endodontics/
Non-Dental 89,134 87,167
Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 156,248 141,850
All Other (a) (825) (947)
---- ----
Total excluding Precious Metal Content 383,761 369,316
Precious Metal Content 47,235 37,659
------ ------
Total including Precious Metal Content $ 430,996 $ 406,975
========= =========
Intersegment Net Sales
----------------------
Three Months Ended
March 31,
2006 2005
---- ----
(in thousands)
U.S., Europe, CIS, Middle East, Africa
Consumable Business/ Canada $ 28,645 $ 30,748
Australia/Latin America/Endodontics/
Non-Dental 17,266 16,579
Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 9,059 6,704
All Other (a) 30,023 33,998
Eliminations (84,993) (88,029)
------- -------
Total $ - $ -
======== ========
(a) Includes: operating expenses of one distribution warehouse not managed by
named segments, Corporate and inter-segment eliminations.
Segment Operating Income
------------------------
Three Months Ended
March 31,
2006 2005
---- ----
(in thousands)
U.S., Europe, CIS, Middle East, Africa
Consumable Business/ Canada $ 29,755 $ 26,878
Australia/Latin America/Endodontics/
Non-Dental 38,631 39,079
Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 28,081 20,275
All Other (a) (21,762) (15,839)
------- -------
Segment Operating Income 74,705 70,393
Reconciling Items:
Restructuring and other costs 4,697 268
Interest Expense 2,094 6,327
Interest Income (2,781) (2,310)
Other (income) expense, net (514) (4,242)
---- ------
Income before income taxes $ 71,209 $ 70,350
======== ========
Assets
------
March 31, December 31,
2006 2005
---- ----
(in thousands)
U.S., Europe, CIS, Middle East, Africa
Consumable Business/ Canada $ 467,377 $ 458,938
Australia/Latin America/Endodontics/
Non-Dental 578,347 566,798
Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 801,498 766,410
All Other (a) 594,932 615,183
------- -------
Total $ 2,442,154 $ 2,407,329
=========== ===========
(a) Includes: operating expenses of one distribution warehouse not managed by
named segments, Corporate and inter-segment eliminations.
NOTE 6 - INVENTORIES
Inventories consist of the following:
March 31, December 31,
2006 2005
---- ----
(in thousands)
Finished goods $ 138,372 $ 127,569
Work-in-process 42,848 40,887
Raw materials and supplies 45,222 39,723
------ ------
$ 226,442 $ 208,179
========= =========
NOTE 7 - BENEFIT PLANS
The components of the net periodic benefit cost for the Company's benefit
plans are as follows:
Other Postretirement
Pension Benefits Benefits
------------------------------ -----------------------------
Three Months Ended Three Months Ended
March 31, March 31,
2006 2005 2006 2005
---- ---- ---- ----
(in thousands)
Service cost $ 1,582 $ 1,495 $ 23 $ 102
Interest cost 1,443 1,563 196 540
Expected return on plan assets (909) (941) - -
Net amortization and deferral 326 278 (119) (339)
--- --- ---- ----
Net periodic benefit cost $ 2,442 $ 2,395 $ 100 $ 303
======= ======= ===== =====
Information related to the funding of the Company's benefit plans for 2006
is as follows:
Other
Pension Postretirement
Benefits Benefits
-------- --------
(in thousands)
Actual, March 31, 2006 $ 1,456 $ 173
Projected for the remainder of the year 4,505 930
----- ---
Total for year $ 5,961 $ 1,103
======= =======
NOTE 8 - RESTRUCTURING COSTS
During the fourth quarter of 2005, the Company recorded restructuring costs
of $2.4 million, primarily related to the decision to shut down the
pharmaceutical manufacturing facility outside of Chicago. In addition, these
costs related to the consolidation of certain U.S. production facilities in
order to better leverage the Company's resources. The primary objective of these
initiatives is to reduce costs and obtain operational efficiencies. The charges
recorded in 2005 were severance costs. In addition, during the quarter ended
March 31, 2006, the Company recorded charges of $4.6 million for additional
severance costs, contract termination costs and other restructuring costs. The
other restructuring costs were primarily costs incurred during the shut down
phase of the pharmaceutical manufacturing facility closure such as utilities,
maintenance and consulting expenses. The plans include the elimination of
approximately 130 administrative and manufacturing positions, all within the
U.S., with 54 of these positions having been eliminated as of March 31, 2006.
These plans are expected to be substantially completed by the end of 2006. The
major components of these charges and the remaining outstanding balances at
March 31, 2006 are as follows:
Amounts Amounts Balance
2005 Applied 2006 Applied March 31,
Provisions 2005 Provisions 2006 2006
(in thousands)
Severance $ 2,400 $ - $ 996 $ (1,212) $ 2,184
Lease/contract
terminations - - 184 (184) -
Other restructuring
costs - - 3,454 (3,454) -
------- --- ------- ------- -------
$ 2,400 $ - $ 4,634 $ (4,850) $ 2,184
======= === ======= ======== =======
During the third and fourth quarters of 2004, the Company recorded
restructuring and other costs of $5.8 million. These costs were primarily
related to the creation of a European Shared Services Center in Yverdon,
Switzerland, which resulted in the identification of redundant personnel in the
Company's European accounting functions. In addition, these costs related to the
consolidation of certain sales/customer service and distribution facilities in
Europe and Japan. The primary objective of these restructuring initiatives is to
improve operational efficiencies and to reduce costs within the related
businesses. Included in this charge were severance costs of $4.9 million and
lease/contract termination costs of $0.9 million. In addition, during the
quarters ended March 31, 2006 and 2005, respectively, the Company recorded
charges of $0.1 and $0.2 million for additional severance costs incurred during
the period related to these plans. The plans include the elimination of
approximately 105 administrative and manufacturing positions primarily in
Germany. Certain of these positions need to be replaced at the European Shared
Services Center and therefore the net reduction in positions is expected to be
approximately 55. These plans are expected to be complete by the end of 2006. As
of March 31, 2006, approximately 35 of these positions have been eliminated. The
major components of these charges and the remaining outstanding balances at
March 31, 2006 are as follows:
Amounts Change Amounts Amounts Balance
2004 Applied 2005 in Estimate Applied 2006 Applied March 31,
Provisions 2004 Provisions 2005 2005 Provisions 2006 2006
---------- ---- ---------- ---- ---- ---------- ---- ----
(in thousands)
Severance $ 4,877 $ (583) $ 322 $ (1,168) $(1,740) $ 63 $ (79) $ 1,692
Lease/contract
terminations 881 - 190 - (435) - (69) 567
--- ---- --- ----- ---- --- --- ---
$ 5,758 $ (583) $ 512 $ (1,168) $(2,175) $ 63 $ (148) $ 2,259
======= ====== ===== ======== ======= ==== ====== =======
NOTE 9 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 potentially adverse effects that these market risks may have on the
Company's operating results.
Certain of the Company's inventory purchases are denominated in foreign
currencies which exposes the Company to market risk associated with exchange
rate movements. The Company's policy generally is to hedge major foreign
currency transaction exposures through foreign exchange forward contracts. These
contracts are entered into with major financial institutions thereby minimizing
the risk of credit loss. In addition, the Company's investments in foreign
subsidiaries are denominated in foreign currencies, which creates exposures to
changes in exchange rates. The Company uses debt denominated in the applicable
foreign currency as a means of hedging a portion of this risk.
With the Company's significant level of long-term debt, changes in the
interest rate environment can have a major impact on the Company's earnings,
depending upon its interest rate exposure. As a result, the Company manages its
interest rate exposure with the use of interest rate swaps, when appropriate,
based upon market conditions.
The manufacturing of some of the Company's products requires the use of
commodities which are subject to market fluctuations. In order to limit the
unanticipated earnings changes from such market fluctuations, the Company
selectively enters into commodity price swaps for certain materials used in the
production of its products. Additionally, the Company uses non-derivative
methods, such as the precious metal consignment agreement to effectively hedge
commodity risks.
Cash Flow Hedges
The Company uses interest rate swaps to convert a portion of its variable
rate debt to fixed rate debt. As of March 31, 2006, the Company has two groups
of significant variable rate to fixed rate interest rate swaps. One of the
groups of swaps was entered into in February 2002, has notional amounts totaling
12.6 billion Japanese yen, and effectively converts the underlying variable
interest rates to an average fixed rate of 1.6% for a term of ten years. The
other swap, effective March, 2005, has a notional amount of 65 million Swiss
francs, and effectively converts the underlying variable interest rates to a
fixed rate of 4.2% for a term of seven years.
The Company selectively enters into commodity price swaps to effectively
fix certain variable raw material costs. While the Company did not have any
swaps in place for the purchase of raw materials at March 31, 2006, the Company
generally hedges up to 80% of its projected annual platinum needs related to
these products.
The Company enters into forward exchange contracts to hedge the foreign
currency exposure of its anticipated purchases of certain inventory from Japan.
In addition, exchange contracts are used by certain of the Company's
subsidiaries to hedge intercompany inventory purchases which are denominated in
non-local currencies. The forward contracts that are used in these programs
mature in twelve months or less. The Company generally hedges up to 80% of its
anticipated purchases from the supplying locations.
As of March 31, 2006, $0.4 million of deferred net losses on derivative
instruments recorded in accumulated other comprehensive income are expected to
be reclassified to current earnings during the next twelve months. This
reclassification is primarily due to the sale of inventory that includes
previously hedged purchases. The maximum term over which the Company is hedging
exposures to variability of cash flows (for all forecasted transactions,
excluding interest payments on variable-rate debt) is eighteen months. Overall,
the derivatives designated as cash flow hedges are nearly 100% effective.
Fair Value Hedges
The Company uses interest rate swaps to convert a portion of its fixed rate
debt to variable rate debt. In December 2001, the Company issued 350 million in
Eurobonds at a fixed rate of 5.75% maturing in December 2006 to partially
finance the Degussa Dental acquisition. Coincident with the issuance of the
Eurobonds, the Company entered into two integrated transactions: (a) an interest
rate swap agreement with notional amounts totaling Euro 350 million which
converted the 5.75% fixed rate Euro-denominated financing to a variable rate
(based on the London Interbank Borrowing Rate) Euro-denominated financing; and
(b) a cross-currency basis swap which converted this variable rate
Euro-denominated financing to variable rate U.S. dollar-denominated financing.
The Euro 350 million interest rate swap agreement was designated as a fair
value hedge of the Euro 350 million in fixed rate debt pursuant to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". In accordance
with SFAS No. 133, the interest rate swap and underlying Eurobond have been
marked-to-market via the income statement. As of March 31, 2006 and December 31,
2005, the accumulated fair value of the interest rate swap was $3.2 million and
$5.3 million, respectively, and was recorded in Prepaid expenses and other
current assets and Other noncurrent assets. The notional amount of the
underlying Eurobond was increased by a corresponding amount at March 31, 2006
and December 31, 2005.
From inception through the first quarter of 2003, the cross-currency
element of the integrated transaction was not designated as a hedge and changes
in the fair value of the cross-currency element of the integrated transaction
were marked-to-market in the income statement, offsetting the impact of the
change in exchange rates on the Eurobonds that were also recorded in the income
statement. In the first quarter of 2003, the Company amended the cross-currency
element of the integrated transaction to realize the $ 51.8 million of
accumulated value of the cross-currency swap. The amendment eliminated the final
payment (at a fixed rate of $.90) of $315 million by the Company in exchange for
the final payment of Euro 350 million by the counterparty in return for the
counterparty paying the Company 4.29% on $315 million for the remaining term of
the agreement, or approximately $14.0 million on an annual basis. Other cash
flows associated with the cross-currency element of the integrated transaction,
included the Company's obligation to pay on $315 million LIBOR plus
approximately 1.34% and the counterparty's obligation to pay on Euro 350 million
LIBOR plus approximately 1.47%, remained unchanged by the amendment.
No gain or loss was recognized upon the amendment of the cross currency
element of the integrated transaction, as the interest rate of 4.29% was
established to ensure that the fair value of the cash flow streams before and
after amendment were equivalent. As a result of the amendment, the Company
became economically exposed to the impact of exchange rates on the final
principal payment on the Euro 350 million Eurobonds and designated the Euro 350
million Eurobonds as a hedge of net investment, on the date of the amendment and
thus the impact of translation changes related to the final principal payment
are recorded in accumulated other comprehensive income.
In June 2005, the Company terminated the cross currency element of the
integrated transaction in response to the rapid rise in USD short-term interest
rates, converting the debt back into a Euro variable instrument. At termination
in June, 2005, the accumulated fair value of the cross-currency element of the
integrated transaction was $20.2 million and was received in cash.
Hedges of Net Investments in Foreign Operations
The Company has numerous investments in foreign subsidiaries. The net
assets of these subsidiaries are exposed to volatility in currency exchange
rates. Currently, the Company uses non-derivative financial instruments,
including foreign currency denominated debt held at the parent company level and
long-term intercompany loans, for which settlement is not planned or anticipated
in the foreseeable future and derivative financial instruments to hedge some of
this exposure. Translation gains and losses related to the net assets of the
foreign subsidiaries are offset by gains and losses in the non-derivative and
derivative financial instruments designated as hedges of net investments.
In the first quarter of 2005, the Company entered into cross currency
interest rate swaps with a notional principal value of Swiss francs 457.5
million paying 3 month Swiss franc Libor and receiving 3 month U.S. dollar Libor
on $384.4 million. In the first quarter of 2006, the Company entered into
additional cross currency interest rate swaps with a notional principal value of
Swiss francs 55.5 million paying 3 month Swiss franc Libor and receiving 3 month
U.S. dollar Libor on $42.0 million. Additionally, in the fourth quarter of 2005,
the Company entered into cross currency interest rate swaps with a notional
principal value of Euro 358 million paying 3 month Euro Libor and receiving 3
month U.S. dollar Libor on $419.6 million. The Swiss franc and Euro cross
currency interest rate swaps are designated as net investment hedges of the
Swiss and Euro denominated net assets. The interest rate differential is
recognized in earnings as it is accrued, the foreign currency revaluation is
recorded in accumulated other comprehensive income, net of tax effects.
The fair value of these swap agreements is the estimated amount the Company
would receive (pay) at the reporting date, taking into account the effective
interest rates and foreign exchange rates. As of March 31, 2006 and December 31,
2005, the estimated net fair values of the swap agreements were $18.3 million
and $32.8 million, respectively.
At March 31, 2006 and December 31, 2005, the Company had Euro-denominated,
Swiss franc-denominated, and Japanese yen-denominated debt and cross currency
interest rate swaps (at the parent company level) to hedge the currency exposure
related to a designated portion of the net assets of its European, Swiss, and
Japanese subsidiaries. At March 31, 2006 and December 31, 2005, the accumulated
translation gains on investments in foreign subsidiaries, primarily denominated
in Euros, Swiss francs and Japanese yen, net of these net investment debt
hedges, were $70.3 million and $56.2 million, respectively, which was included
in accumulated other comprehensive income.
Other
The aggregate net fair value of the Company's derivative instruments at
March 31, 2006 and December 31, 2005 was $16.4 million and $29.2 million,
respectively.
In accordance with SFAS 52, "Foreign Currency Translation", the Company
utilizes long-term intercompany loans, for which settlement is not planned or
anticipated in the foreseeable future, to eliminate foreign currency transaction
exposures of certain foreign subsidiaries. Net gains or losses related to these
long-term intercompany loans are included in accumulated other comprehensive
income.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes it is unlikely
that pending litigation to which DENTSPLY is a party will have a material
adverse effect upon its consolidated financial position or results of
operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and conduct
undertaken by the Company's Trubyte Division with respect to the distribution of
artificial teeth and related products. On January 5, 1999, the Department of
Justice filed a Complaint against the Company in the U.S. District Court in
Wilmington, Delaware alleging that the Company's tooth distribution practices
violate the antitrust laws and seeking an order for the Company to discontinue
its practices. The trial in the government's case was held in April and May 2002
and subsequently, the Judge entered a decision that the Company's tooth
distribution practices do not violate the antitrust laws. The Department of
Justice appealed this decision and the Third Circuit Court of Appeals reversed
the decision of the District Court. The Company's petition to the U.S. Supreme
Court asking it to review the Third Circuit Court decision was denied. The
District Court, upon the direction of the Court of Appeals, has issued an
injunction preventing DENTSPLY from taking action to prevent its tooth dealers
from adding new competitive teeth lines. This decision relates only to the
distribution of artificial teeth sold in the U.S. While the Company believes
its tooth distribution practices do not violate the antitrust laws, the Company
is confident that it can continue to develop this business regardless of the
outcome of this case.
Subsequent to the filing of the Department of Justice Complaint in 1999,
several private party class actions were filed based on allegations similar to
those in the Department of Justice case, on behalf of laboratories, and denture
patients in seventeen states who purchased Trubyte teeth or products containing
Trubyte teeth. These cases were transferred to the U.S. District Court in
Wilmington, Delaware. The private party suits seek damages in an unspecified
amount. The Court has granted the Company's Motion on the lack of standing of
the laboratory and patient class actions to pursue damage claims. The Plaintiffs
in the laboratory case appealed this decision to the Third Circuit and the Court
upheld the decision of the District Court in dismissing the Plaintiffs' damages
claims, with the exception of allowing the Plaintiffs to pursue a damage claim
based on a theory of resale price maintenance agreements between the Company and
its tooth dealers. The Plaintiffs have filed a petition with the U.S. Supreme
Court asking it to review this decision of the Third Circuit. Also, private
party class actions on behalf of indirect purchasers were filed in California
and Florida state courts. The California and Florida cases have been dismissed
by the Plaintiffs following the decision by the Federal District Court Judge
issued in August 2003.
On March 27, 2002, a Complaint was filed in Alameda County, California (which
was transferred to Los Angeles County) by Bruce Glover, D.D.S. alleging, inter
alia, breach of express and implied warranties, fraud, unfair trade practices
and negligent misrepresentation in the Company's manufacture and sale of
Advance(R) cement. The Complaint seeks damages in an unspecified amount for
costs incurred in repairing dental work in which the Advance(R) product
allegedly failed. The Judge has entered an Order granting class certification,
as an Opt-in class (this means that after Notice of the class action is sent to
possible class members, a party will have to determine if they meet the class
definition and take affirmative action in order to join the class) on the claims
of breach of warranty and fraud. In general, the Class is defined as California
dentists who purchased and used Advance(R) cement and were required, because of
failures of the cement, to repair or reperform dental procedures for which they
were not paid. The Notice of the class action was sent on February 23, 2005 to
the approximately 29,000 dentists licensed to practice in California during the
relevant period and a total of 166 dentists have opted into the class action. As
the result of a recent decision by a California Appellate Court, the plaintiffs
have filed an appeal to convert the claim to an opt-out claim from its current
status as an opt-in claim. The Advance(R) cement product was sold from 1994
through 2000 and total sales in the United States during that period were
approximately $5.2 million. The Company's primary level insurance carrier has
confirmed coverage for the breach of warranty claims in this matter up to their
policy limits.
NOTE 11 - RESTATEMENT OF FINANCIAL STATEMENTS
During the third quarter of 2006, the Company reassessed its classification
of time deposits with original maturity dates at the date of purchase in excess
of 90 days as cash equivalents. It was determined that due strictly to the
original maturity date on the acknowledgement of the deposit, that these time
deposits were inappropriately classified as cash equivalents, despite the fact
that the time deposits held by the Company are highly liquid deposits with a
liquidity feature that provides the Company with access to the full principal
amount of the deposits within generally a one to two day period. It was further
determined that these time deposits with original maturity dates at the date of
purchase in excess of 90 days should be classified as short-term investments
instead of cash equivalents, and should be reflected as investing activities in
the Company's statement of cash flows.
As a result, the Company has restated its accompanying consolidated balance
sheets as of March 31, 2006 and December 31, 2005 and the accompanying
consolidated statements of cash flows for the three months ended March 31, 2006
and 2005. These restatements had no impact on the Company's total current
assets, total assets, total stockholder's equity, net income (loss), earnings
(loss) per share, or cash flows from operating activities.
Following is a summary of the effects of the correction of the error on the
Company's consolidated balance sheets as of March 31, 2006 and December 31,
2005.
March 31, 2006 December 31, 2005
-------------------------- ---------------------------
Balance Sheet As previously As previously
reported As Restated reported As Restated
(In thousands)
Cash and cash equivalents $ 412,719 $ 260,595 $ 434,525 $ 433,984
Short-term investments $ - $ 152,124 $ - $ 541
--------- --------- --------- ---------
Total cash, cash equivalents
and short-term investments $ 412,719 $ 412,719 $ 434,525 $ 434,525
========= ========= ========= =========
Following is a summary of the effects of the correction of the error on the
Company's statements of cash flows for the three months ended March 31, 2006 and
2005.
Three months ended March 31, 2006 Three months ended March 31, 2005
--------------------------------- ---------------------------------
Statements of Cash Flows As previously As previously
reported As Restated reported As Restated
(In thousands)
Cash flows from Investing Activities:
Purchases of short-term investments $ - $(150,711) $ - $ (82,568)
Liquidations of short-term investments $ - $ 540 $ - $ 13,689
Net cash flows from investing activities $ (12,376) $(162,547) $ (8,186) $ (77,065)
Effect of exchange rate changes on cash
and cash equivalents $ 5,967 $ 4,555 $ (17,768) $ (12,086)
Net (decrease) increase in cash or cash
equivalents $ (21,806) $(173,389) $ (69,667) $(132,864)
Cash and cash equivalents at beginning
of period $ 434,525 $ 433,984 $ 506,369 $ 403,541
Cash and cash equivalents at end of period $ 412,719 $ 260,595 $ 436,702 $ 270,677
DENTSPLY INTERNATIONAL INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made by the Company, including without limitation,
statements containing the words "plans", "anticipates", "believes", "expects",
or words of similar import constitute forward-looking statements which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that forward-looking statements
involve risks and uncertainties which may materially affect the Company's
business and prospects, and should be read in conjunction with the risk factors
discussed herein and within the Company's most recent Annual Report on Form
10-K/A for the year ended December 31, 2005.
OVERVIEW
Dentsply International Inc. is the world's largest manufacturer of
professional dental products. The Company is headquartered in the United States,
and operates in more than 120 other countries, principally through its foreign
subsidiaries. While the United States and Europe are the Company's largest
markets, the Company serves all of the major professional dental markets
worldwide.
The principal benchmarks used by the Company in evaluating its business
are: (1) internal growth in the United States, Europe and all other regions; (2)
operating margins of each segment, (3) the development, introduction and
contribution of innovative new products; (4) growth through acquisition; and (5)
continued focus on controlling costs and enhancing efficiency. The Company
defines "internal growth" as the increase in net sales from period to period,
excluding precious metal content, the impact of changes in currency exchange
rates, and the net sales, for a period of twelve months following the
transaction date, of businesses that have been acquired or divested.
Management believes that an average overall internal growth rate of 4-6% is
a long-term sustainable rate for the Company. This annualized growth rate
expectation typically includes approximately 1-2% of price increases. The
Company typically implements most of its price changes in the third or fourth
quarters of the year. These price changes and other marketing and promotional
programs, which are offered to customers from time to time, in the ordinary
course of business, may impact customer purchasing activity. During the quarter
ended March 31, 2006, the Company's overall internal growth was approximately
6.4% compared to 2.0% for the full year 2005. Internal growth rates in the
United States (42.7% of sales) and Europe (38.1% of sales), the largest dental
markets in the world, were 1.2% and 13.2%, respectively during the first three
months of 2006 compared to 5.2% and negative 2.7%, respectively for the full
year 2005. As discussed further within the Results of Continuing Operations, the
lower sales in Europe during 2005 were primarily due to issues related to a new
dental reimbursement program which became effective January 1, 2005 in Germany,
the Company's most significant market in this region. The internal growth rate
in all other regions during the quarter ended March 31, 2006, which represents
approximately 19.2% of sales, was 4.9%, compared to 4.0 % for the full year
2005. Among the other regions, the Asian region, excluding Japan, has
historically been one of our highest growth markets and management believes it
represents a long-term growth opportunity for the industry and the Company. Also
within the other regions is the Japanese market, which represents the third
largest dental market in the world behind the United States and Germany.
Although Japan's dental market growth has been weak in the past few years, as it
closely parallels its economic growth, the Company also views this market as an
important long-term growth opportunity, both in terms of a recovery in the
Japanese economy and the opportunity to increase market share. There can be no
assurance that the Company's assumptions concerning the growth rates in its
markets or the dental market generally will be correct and if such rates are
less than expected, the Company's projected growth rates and results of
operations may be adversely effected.
Product innovation is a key component of the Company's overall growth
strategy. Historically, the Company has introduced in excess of twenty new
products each year. During 2005, over 30 new products were introduced around the
world and the Company expects over 25 new products to be introduced in 2006. Of
specific note, during 2006, the Company has introduced Cercon Eye(R), which is a
stand-alone optical scanner that is used in conjunction with Cercon Art(R),
which was introduced during 2005. The Cercon Eye(R) unit scans dies and models
for crowns, bridges and abutments with a scan time of less than twenty seconds
per unit and a precision of approximately ten microns or less. During 2006, the
Company also introduced two new ultrasonic scaling systems: Cavitron Plus(R) and
Cavitron Jet(R), which contains an air polishing unit. Both of these systems
bring tremendous improvement over previous designs such as increased power,
cordless foot pedal controls, diagnostic display panel and improved ergonomics.
The Company will also
be launching two new orthodontic products during the second quarter of 2006:
In-Ovation-L(R) and Crys Cera(R). In-Ovation-L(R) is the first interactive,
twin, self-ligating lingual bracket system. This system provides the aesthetics
of a traditional lingual system with the ability to provide passive/no-friction
treatment early in the process and active/increased friction in the later
stages, thus providing for accelerated treatment. Crys Cera(R) is a ceramic
buccal tube that is composed of a unique ceramic that mimicks the
characteristics of enamel, thus preventing erosion and wear on the tooth
opposing the tooth to which the device has been bonded.
New advances in technology are anticipated to have a significant influence
on future products in dentistry. As a result, the Company has pursued several
research and development initiatives to support this development. Specifically,
the Company continues to work on product activities with the Georgia Institute
of Technology's Research Institute to pursue potential new advances in
dentistry. In addition, the Company licenses and purchases technologies
developed by other third parties. Specifically, in 2004, the Company purchased
the rights to a unique compound called SATIF from Sanofi-Aventis. The Company is
currently working to develop products based on this technology and believes that
this compound will provide such benefits to future products as greater
protection against acid attack, the ability to desensitize exposed dentin and
the ability to retard, or to inhibit the formation of staining on the enamel.
Also, during 2005, the Company entered into a long-term collaborative agreement
with IDMoS Dental Systems Limited, a wholly owned subsidiary of IDMoS, plc for
the commercialization of IDMoS' tooth caries detection and monitoring
technology. Under the agreement, DENTSPLY will have exclusive worldwide rights
to market products based on the technology and IDMoS will be responsible for
further development of the technology. The Company believes that IDMoS
technology will bring unique capabilities to preventive dentistry in the area of
caries detection and monitoring. The Company also believes that this technology
may have clinical benefits significantly beyond other devices and technologies
in the market today, including radiology. Although the Company believe these
activities will lead to new innovative dental products, they involve new
technologies and there can be no assurance that commercialized products will be
developed.
Although the professional dental market in which the Company operates has
experienced consolidation, it is still a fragmented industry. The Company
continues to focus on opportunities to expand the Company's product offerings
through acquisitions. Management believes that there will continue to be
adequate opportunities to participate as a consolidator in the industry for the
foreseeable future. As further discussed in Note 4 to the Unaudited Consolidated
Condensed Financial Statements, during 2006 the Company purchased Prident
International, Inc. in order to provide the Company's U.S. laboratory customers
with a broader offering of services in order to provide them with an alternative
to current offshore services.
The Company also remains focused on reducing costs and achieving
operational efficiencies. Management expects to continue to consolidate
operations or functions and reduce the cost of those operations and functions
while improving service levels. In addition, the Company remains focused on
enhancing efficiency through expanded use of technology and process improvement
initiatives. The Company believes that the benefits from these opportunities
will improve the cost structure and offset areas of rising costs such as energy,
benefits, regulatory oversight and compliance and financial reporting.
As previously announced in early 2006, the Company made the decision to
close its Chicago based pharmaceutical manufacturing facility and to pursue the
outsourcing of the production of the injectable dental anesthetic products and
the non-injectable Oraqix(R) products that were to be produced at the plant. The
Company expects that the decision to shut down the anesthetics manufacturing
facility will immediately improve short and mid-term cash flows and eliminate
the uncertainty concerning FDA approval of the facility. While the Company had
supply disruptions in 2005 and anticipates some supply disruptions in 2006 in
relation to the supply of the injectable dental anesthetic products, the Company
currently has contract manufacturing relationships for the supply of the
injectable dental anesthetic products for most of the markets served by the
Company. As there are a limited number of suppliers for the injectable dental
anesthetic products sold by the Company, there can be no assurance that the
Company will be able to obtain an adequate supply of its injectable dental
anesthetic products in the future. The Company currently has supply agreements
in place for the supply of the non-injectable Oraqix(R) products and has not
experienced supply disruptions to date, nor does it anticipate supply
disruptions of the Oraqix(R) products in the future.
The Company is pursuing the sale of the facility and the machinery and
equipment associated with the facility and has classified these assets as held
for sale with the expectation that the assets will be sold within one year.
These assets are included in "Prepaid expenses and other current assets" on the
Unaudited Consolidated Condensed Balance Sheet as of March 31, 2006.
Additionally, as a result of the decision to shut down the pharmaceutical
manufacturing facility, during the quarter ended March 31, 2006, the Company
recorded pre-tax charges of $4.6 million for severance costs, contract
termination costs and other restructuring costs associated with the closure of
the facility (See also Note 8 to the Unaudited Consolidated Condensed Financial
Statements). These charges are in addition to the pre-tax restructuring charges
of $2.3 million that were recorded in the fourth quarter of 2005 related to
employee severance cost for which the Company was contractually obligated. The
Company expects pre-tax restructuring charges in the range of $3 million to $5
million for the remainder of 2006, most of which will be incurred in the second
quarter with the remaining costs being incurred in the third and fourth quarters
or until the assets are sold. These costs are primarily related to additional
contract termination costs, severance costs and utility costs during the shut
down period.
RESULTS OF OPERATIONS, QUARTER ENDED MARCH 31, 2006 COMPARED TO QUARTER ENDED
MARCH 31, 2005
Net Sales
The discussions below summarize the Company's sales growth, excluding
precious metals, from internal growth and net acquisition growth and highlights
the impact of foreign currency translation. These disclosures of net sales
growth provide the reader with sales results on a comparable basis between
periods.
As the presentation of net sales excluding precious metal content could be
considered a measure not calculated in accordance with generally accepted
accounting principles (a non-GAAP measure), the Company provides the following
reconciliation of net sales to net sales excluding precious metal content. Our
definitions and calculations of net sales excluding precious metal content and
other operating measures derived using net sales excluding precious metal
content may not necessarily be the same as those used by other companies.
Three Months Ended
March 31,
2006 2005
---- ----
(in millions)
Net Sales $ 431.0 $ 407.0
Precious Metal Content of Sales (47.2) (37.7)
----- -----
Net Sales Excluding Precious Metal Content $ 383.8 $ 369.3
======= =======
Management believes that the presentation of net sales excluding precious
metal content provides useful information to investors because a significant
portion of DENTSPLY's net sales is comprised of sales of precious metals
generated through sales of the Company's precious metal alloy products, which
are used by third parties to construct crown and bridge materials. Due to the
fluctuations of precious metal prices and because the precious metal content of
the Company's sales is largely a pass-through to customers and has minimal
effect on earnings, DENTSPLY reports sales both with and without precious metal
content to show the Company's performance independent of precious metal price
volatility and to enhance comparability of performance between periods. The
Company uses its cost of precious metal purchased as a proxy for the precious
metal content of sales, as the precious metal content of sales is not separately
tracked and invoiced to customers. The Company believes that it is reasonable to
use the cost of precious metal content purchased in this manner since precious
metal alloy sale prices are adjusted when the prices of underlying precious
metals change.
Net sales for the quarter ended March 31, 2006 increased $24.0 million, or
5.9%, from the same period in 2005 to $431.0 million. Net sales, excluding
precious metal content, increased $14.5 million, or 3.9%, to $383.8 million.
Sales growth excluding precious metal content was comprised of 6.4% of internal
growth and negative 3.5% of foreign currency translation and 1.0% related to
acquisitions. The 6.4% internal growth was comprised of 1.2% in the United
States, 13.2% in Europe and 4.9% for all other regions combined.
The internal sales growth, excluding precious metal content, in the United
States was a result of moderate growth in specialty dental (endodontic, implant
and orthodontic products) and the dental laboratory product categories offset
somewhat by lower sales in the dental consumable product category. The sales in
the dental consumables product category were negatively impacted by nonrecurring
inventory purchases during the first quarter of 2005. In Europe, the internal
sales growth, excluding precious metal content, was driven by the strong sales
growth in the dental specialty and dental laboratory categories. The increase in
the laboratory category was primarily related to the reimbursement issues
experienced during 2005 as a result of reimbursement changes for prosthetic
procedures in the German dental market which became effective in 2005. The
internal growth of 4.9% in all other regions was largely the result of strong
growth in the Asia, Latin America, Middle East and Japan regions primarily
driven by sales growth in the dental specialty category, offset by lower sales
in the Canadian and Australian regions. The lower sales in the Australian region
were due to the impact of shortages of injectable pharmaceutical products as a
result of the decision to shut down the pharmaceutical manufacturing facility as
previously discussed.
Gross Profit
Gross profit was $220.1 million for the first three months of 2006 compared
to $208.9 million in 2005, an increase of $11.2 million, or 5.4%. Gross profit,
measured against sales including precious metal content, represented 51.1% of
net sales in 2006 compared to 51.3% in 2005. The gross profit for the first
quarter of 2006, measured against sales excluding precious metal content,
represented 57.4% of net sales compared to 56.6% in 2005. This increase in the
gross profit percentage from 2005 to 2006 was due to shifts in the product and
geographic mix and the Company's decision to close its Chicago-based
pharmaceutical manufacturing facility. The product and geographic mix was
primarily caused by the increase in the laboratory product sales in Europe as
discussed above.
Operating Expenses
Selling, general and administrative ("SG&A") expense increased $6.9
million, or 5.0%, to $145.4 million during the three months ended March 31, 2006
from $138.5 million during the same period in 2005. SG&A expenses, measured
against sales including precious metal content, decreased to 33.7% in 2006
compared to 34.0% in 2005. The decrease in the SG&A expenses, as measured
against sales including precious metal content, decreased primarily as a result
of the increase in the precious metals component of sales. SG&A expenses, as
measured against sales excluding precious metal content, increased to 37.9% in
2006 compared to 37.5% in 2005. The higher expense level in 2006 was primarily
attributable to the expensing of stock-based compensation as a result of the
adoption of SFAS No. 123R on January 1, 2006. The increase from stock-based
compensation was partially offset by lower costs as a result of the decision to
shut down the pharmacteutical manufacturing facility outside of Chicago and
favorable impact from a stronger U.S. dollar. The favorable translation impacts
were caused by weaker average foreign currency exchange rates for the first
quarter of 2006 versus the first quarter of 2005 when translating the expenses
from the local currencies in which the Company's subsidiaries conduct
operations, into U.S. dollars.
During the quarter ended March 31, 2006, the Company recorded restructuring
and other costs of $4.7 million. These costs were primarily for additional costs
incurred during the period related to the decision to shut down the
pharmaceutical manufacturing facility in Chicago, Illinois. The Company
anticipates the remaining costs to complete the shut down of the pharmaceutical
manufacturing facility will be approximately $3 million to $5 million which will
be expensed primarily during 2006, as the related costs are incurred. These
plans are expected to be fully complete by the end of 2006. The Company also
incurred additional costs related to the consolidation of certain U.S.
production facilities initiated in the fourth quarter of 2005 in order to better
leverage the Company's resources. This plan is expected to be fully completed by
the end of 2006 with anticipated remaining costs to complete of approximately
$0.8 million (See also Note 8 to the Unaudited Consolidated Condensed Financial
Statements). The closure of the pharmaceutical manufacturing facility, the
consolidation of the U.S. production facilities and other operational
improvements are expected to improve operating margin rates by 0.5% to 1.0% in
2006.
Other Income and Expenses
Net interest and other income was $1.2 million during the three months
ended March 31, 2006 compared to $0.2 million during the same period in 2005.
The 2006 period included $0.7 million of net interest income, $0.8 million of
currency transaction gains and $0.3 million of other non-operating costs. The
2005 period included $4.0 million of net interest expense, $4.8 million of
currency transaction gains and $0.6 million of other non-operating costs. The
decrease in currency transaction gains from 2005 to 2006 was primarily the
result of a transaction involving the transfer in 2005 of intangible assets
between legal entities with different functional currencies that occurred during
the first quarter of 2005. Exchange transaction gains or losses occur from
movement of foreign currency rates between the date of the transaction and the
date of final financial settlement. The change from net interest expense in 2005
to net interest income in 2006 was primarily due to a decrease in interest
expense as a result of the Company's lower average debt levels and the
effectiveness of the cross currency interest rate swaps designated as net
investment hedges. The cross currency interest rate swaps were put into place in
three parts: one part late in the first quarter of 2005, one part during the
fourth quarter of 2005 and one part during the first quarter of 2006.
Income Taxes/Earnings
The Company's effective tax rate for the period ended March 31, 2006
decreased to 29.8% from 30.3% for the same period in 2005. The effective rates
for the 2006 and 2005 periods are reflective of one time tax benefits of $0.1
million and $0.3 million, respectively, primarily from the reversal of
previously accrued taxes related to the settlement of prior years' domestic and
foreign tax audits.
Net income increased $1.0 million, or 1.9%, to $50.0 million in 2006 from
$49.0 million in 2005. Fully diluted earnings per share were $0.62 in 2006, an
increase of 3.3% from $0.60 in 2005. Net income in the first quarter of 2006
included the after tax impact from both the expensing of stock options of $3.2
million, or $0.04 per diluted share, and from restructuring costs of $3.1
million, or $0.04 per diluted share.
Operating Segment Results
In January 2006, the Company reorganized its operating group structure into
three operating groups from the four groups under the prior management
structure. These three operating groups are managed by three Senior Vice
Presidents and represent our operating segments. Each of these operating groups
covers a wide range of product categories and geographic regions. The product
categories and geographic regions often overlap across the groups. Further
information regarding the details of each group is presented in Note 5 of the
Unaudited Consolidated Condensed Financial Statements. The Senior Vice
Presidents of each group are evaluated for performance and incentive
compensation purposes on net third party sales, excluding precious metal
content, and segment operating income.
U.S., Europe, CIS, Middle East, Africa Consumable Business/Canada
Net sales for this group were $139.2 million during the quarter ended March
31, 2006, a 1.4% decrease compared to $141.2 million in 2005. Internal growth
was a positive 2.1% and currency translation deducted 3.5% from sales in 2006.
While strong internal growth was shown in the European, CIS, Middle East, and
African businesses, they were partially offset by soft sales growth in the U.S.
and decreases in the Canadian business.
Operating profit increased $2.9 million during the three months ended March
31, 2006 to $29.8 million compared to $26.9 million in 2005. The increase was
primarily related to the elimination of the prior year's non-capitalized costs
associated with the pharmaceutical plant in Chicago. In addition, operating
profits were decreased slightly from currency translation.
Australia/Latin America/Endodontics/Non-dental
Net sales for this group increased $1.9 million during the quarter ended
March 31, 2006, or 2.3%, to $89.1 million from $87.2 million in 2005. Internal
growth was 3.4% with currency translation deducting 1.1%. Strong growth was
shown in the non-dental businesses along with continued growth in the endodontic
and Latin American businesses, offset slightly by weakness in the Australian
business due to the impact of shortages of injectable pharmaceutical products as
a result of the decision to shut down the pharmaceutical manufacturing facility
as previously discussed.
Operating profit was $38.6 million during the first quarter of 2006, a $0.5
million decrease from $39.1 million in 2005. The decrease was primarily related
to the Australian and Latin American businesses, offset by the strength of the
endodontic business and continued growth of the non-dental businesses. In
addition, operating profit was negatively impacted from currency translation.
Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
Net sales for this group were $156.2 million during the three months ended
March 31, 2006, a 10.1% increase compared to $141.9 million in 2005. Internal
growth was 12.5%, currency translation deducted 5.0% from sales in 2006, and
2.6% was added through acquisitions. Significant growth occurred in the implant,
orthodontic, laboratory, and Asian businesses with slightly improved growth in
the Japanese business.
Operating profit increased $7.8 million during the three months ended March
31, 2006 to $28.1 million from $20.3 million in 2005. The increase in operating
profits was driven primarily by the sales growth in the implant, orthodontics,
laboratory, and Asian businesses. In addition, operating profit was negatively
impacted from currency translation.
CRITICAL ACCOUNTING POLICIES
As discussed in the in the Stock Compensation section of Note 1 to the
Unaudited Consolidated Condensed Financial Statements, the Company adopted SFAS
No. 123R on January 1, 2006. The adoption of this pronouncement had a material
impact on the Companies financial statements.
There have been no other material changes to the Company's disclosure in
its 2005 Annual Report on Form 10-K/A filed November 8, 2006.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 2006
Cash flow from operating activities during the three months ended March 31,
2006 was $11.4 million compared to $25.0 million during the same period of 2005.
The decrease resulted from a $23 million negative impact from the payment of
taxes associated with the 2005 repatriation of earnings and decreased tax
benefits related to stock option exercises. The decrease in tax benefits from
stock option exercises was the result of the adoption of SFAS No. 123R on
January 1, 2006 which requires that current period excess tax benefits from the
exercise of stock options be classified as cash inflows from financing
activities as opposed to operating cash flows, as was the case in prior periods.
Aside from these decreases, cash flows benefited from higher earnings and lower
payments of accrued liabilities in the first quarter of 2006 than in the first
quarter of 2005.
Investing activities during the first quarter of 2006 include capital
expenditures of $9.1 million. The Company expects that capital expenditures will
range from $55 million to $60 million for the full year of 2006.
Acquisition-related activity for the period ended March 31, 2006 was $3.3
million which was primarily related to the acquisition of Prident International,
Inc. (see Note 4 to the Unaudited Consolidated Condensed Financial Statements).
In December 2004, the Board of Directors approved a stock repurchase
program under which the Company may repurchase shares of Company stock on the
open market in an amount to maintain up to 3,000,000 shares of treasury stock.
In September 2005, the Board of Directors increased the authorization to
repurchase shares under the stock repurchase program in an amount to maintain up
to 5,500,000 share of treasury stock. Under this program, the Company purchased
approximately 147,000 shares during the first quarter of 2006 at an average
price of $55.27. As of March 31, 2006, the Company held 2,215,000 shares of
treasury stock. The Company also received proceeds of $13.5 million as a result
of the exercise of 389,000 stock options during the quarter ended March 31,
2006.
The Company's long-term borrowings decreased by a net of $24.4 million
during the three months ended March 31, 2006. This net change included net
repayments of $34.5 million during the quarter and an increase of $10.1 million
due to exchange rate fluctuations on debt denominated in foreign currencies and
changes in the value of interest rate swaps. During the three months ended March
31, 2006, the Company's ratio of long-term debt to total capitalization
decreased to 33.4% compared to 35.4% at December 31, 2005.
Under its multi-currency revolving credit agreement, the Company is able to
borrow up to $500 million through May 2010. This facility is unsecured and
contains certain affirmative and negative covenants relating to its operations
and financial condition. The most restrictive of these covenants pertain to
asset dispositions and prescribed ratios of indebtedness to total capital and
operating income plus depreciation and amortization to interest expense. At
March 31, 2006, the Company was in compliance with these covenants. The Company
also has available an aggregate $250 million under two commercial paper
facilities; a $250 million U.S. facility and a $250 million U.S. dollar
equivalent European facility ("Euro CP facility"). Under the Euro CP facility,
borrowings can be denominated in Swiss francs, Japanese yen, Euros, British
pounds sterling and U.S. dollars. The multi-currency revolving credit facility
serves as a back-up to these commercial paper facilities. The total available
credit under the commercial paper facilities and the multi-currency facility in
the aggregate is $500 million with $106.7 million outstanding under the
multi-currency facility and $15.1 million outstanding under the commercial paper
facilities at March 31, 2006.
The Company also has access to $50.9 million in uncommitted short-term
financing under lines of credit from various financial institutions. The lines
of credit have no major restrictions and are provided under demand notes between
the Company and the lending institutions. At March 31, 2006, $8.2 million is
outstanding under these short-term lines of credit.
At March 31, 2006, the Company had total unused lines of credit related to
the revolving credit agreement and the uncommitted short-term lines of credit of
$420.9 million.
At March 31, 2006, the Company held $73.2 million of precious metals on
consignment from several financial institutions. These consignment agreements
allow the Company to acquire the precious metal at market rates at a point in
time which is approximately the same time and for the same price as alloys are
sold to the Company's customers. In the event that the financial institutions
would discontinue offering these consignment arrangements, and if the Company
could not obtain other comparable arrangements, the Company may be required to
obtain third party financing to fund an ownership position in the required
precious metal inventory levels.
The Company's cash and cash equivalents and short-term investments
decreased $21.8 million in total during the three months ended March 31, 2006 to
$412.7 million. In the first quarter of 2006, the Company repaid $34.5 million
of maturing long-term borrowings and repurchased $8.1 million of treasury stock.
The Company continued to maintain significant cash, cash equivalents and
short-term investment balances during the first quarter of 2006 rather than
pre-pay debt, as a result of pre-payment penalties that would be incurred in
retiring both the debt and the related interest rate swap agreements.
Additionally, the Company has not repaid this debt due to the low cost of the
debt, net of earnings on the cash, cash equivalents and short-term investments.
The Company has $532.9 million of long-term borrowings coming due for payment
during the next twelve months. The Company intends to repay these debt
obligations with cash and/or funds available to the Company from its cash and
cash equivalents, short-term investments and under the revolving credit
facility. Any portion of the debt that is repaid through the use of the
revolving credit facility will be contractually due in May 2010, upon the
expiration of the facility, thus effectively converting the maturity of the debt
beyond March of 2007. The Company currently intends to effectively refinance
$63.6 million of the long-term borrowings coming due in 2006 through use of the
revolving credit facility.
There have been no material changes to the Company's scheduled contractual
cash obligations disclosed in its 2005 Annual Report on Form 10-K/A filed
November 8, 2006. The Company expects on an ongoing basis, to be able to finance
cash requirements, including capital expenditures, stock repurchases, debt
service, operating leases and potential future acquisitions, from the funds
generated from operations and amounts available under its existing credit
facilities.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 154 ("SFAS No. 154"), "Accounting
Changes and Error Corrections." SFAS No. 154 requires retroactive application of
a voluntary change in accounting principle to prior period financial statements
unless it is impracticable. SFAS No. 154 also requires that a change in method
of depreciation, amortization or depletion for long-lived, non-financial assets
be accounted for as a change in accounting estimate that is affected by a change
in accounting principle. SFAS No. 154 replaces APB Opinion No. 20, "Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements ". SFAS No. 154 is effective for fiscal years beginning after
December 15, 2005. The adoption of this standard has not had a material impact
on the Company's financial statements, nor does the Company expect this standard
to have a material impact on the Company's financial statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments", which eliminates the exemption from applying SFAS
No. 133 to interests in securitized financial assets so that similar instruments
are accounted for similarly regardless of the form of the instruments. SFAS No.
155 also allows the election of fair value measurement at acquisition, at
issuance, or when a previously recognized financial instrument is subject to a
remeasurement event. Adoption is effective for all financial instruments
acquired or issued after the beginning of the first fiscal year that begins
after September 15, 2006. Early adoption is permitted. The Company does not
expect the application of this standard to have a material impact on the
Company's financial statements.
In March 2006, the FASB issued an exposure draft that seeks to make
improvements to Statement of Financial Accounting Standards No. 132R ("SFAS No.
132R"), "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans". The proposed amendment would not alter the basic approach
to measuring plan assets, benefit obligations, or net periodic benefit cost
(expense). Major changes to SFAS No. 132R proposed in the amendment include 1)
the recognition of an asset or liability for the overfunded or underfunded
status of a defined benefit plan, 2) the recognition of actuarial gains and
losses and prior service costs and credits in other comprehensive income, 3)
measurement of plan assets and benefit obligations as of the employer's balance
sheet date, rather than at interim measurement dates as currently allowed, and
4) disclosure of additional information concerning actuarial gains and losses
and prior service costs and credits recognized in other comprehensive income.
The amendment's requirement for public companies to recognize on their balance
sheet the asset or liability associated with the overfunded or underfunded
status of a defined benefits pension plan would take effect for years ending
after December 15, 2006. Companies would be required to synchronize their
measurement dates to the end of their fiscal years beginning after December 31,
2006.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no significant material changes to the market risks as
disclosed in the Company's Annual Report on Form 10-K/A filed for the year
ending December 31, 2005.
Item 4 - Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and
Exchange Act of 1934, as amended) as of the end of the period covered by this
report were not effective because of the material weakness in internal control
over financial reporting described below.
Material Weakness in Internal Control Over Financial Reporting
As of March 31, 2006, the Company did not maintain effective controls over
the complete and accurate presentation and disclosure of short-term investments.
Specifically, the Company's controls over the completeness and accuracy of
short-term investments in the consolidated balance sheet and the related cash
flows from the purchase and sale of short-term investments in the consolidated
statement of cash flows were not effective. This control deficiency resulted in
the restatement of the Company's 2005 and 2004 annual consolidated financial
statements and the interim consolidated financial statements for the first and
second quarters of 2006 and all quarters of 2005. In addition, this control
deficiency could result in a misstatement of cash and cash equivalents,
short-term investments and cash flows from investing activities that would
result in a material misstatement to annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly, the Company's
management has determined that this control deficiency constitutes a material
weakness.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal controls over
financial reporting that occurred during the three months ended March 31, 2006
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. The Company is currently
centralizing its transaction accounting processing in Europe into our European
Shared Services Center and expects all European locations to be complete by the
end of 2006.
In order to remediate the material weakness in the Company's internal
control over financial reporting with respect to the presentation and disclosure
of short-term investments as soon as practicable, management is in the process
of designing, implementing and continuing to enhance controls to ensure the
proper presentation and disclosure of short-term investments on our consolidated
balance sheets and statements of cash flows.
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes it is unlikely
that pending litigation to which DENTSPLY is a party will have a material
adverse effect upon its consolidated financial position or results of
operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and conduct
undertaken by the Company's Trubyte Division with respect to the distribution of
artificial teeth and related products. On January 5, 1999, the Department of
Justice filed a Complaint against the Company in the U.S. District Court in
Wilmington, Delaware alleging that the Company's tooth distribution practices
violate the antitrust laws and seeking an order for the Company to discontinue
its practices. The trial in the government's case was held in April and May 2002
and subsequently, the Judge entered a decision that the Company's tooth
distribution practices do not violate the antitrust laws. The Department of
Justice appealed this decision and the Third Circuit Court of Appeals reversed
the decision of the District Court. The Company's petition to the U.S. Supreme
Court asking it to review the Third Circuit Court decision was denied. The
District Court, upon the direction of the Court of Appeals, has issued an
injunction preventing DENTSPLY from taking action to prevent its tooth dealers
from adding new competitive teeth lines. This decision relates only to the
distribution of artificial teeth sold in the U.S. While the Company believes
its tooth distribution practices do not violate the antitrust laws, the Company
is confident that it can continue to develop this business regardless of the
outcome of this case.
Subsequent to the filing of the Department of Justice Complaint in 1999,
several private party class actions were filed based on allegations similar to
those in the Department of Justice case, on behalf of laboratories, and denture
patients in seventeen states who purchased Trubyte teeth or products containing
Trubyte teeth. These cases were transferred to the U.S. District Court in
Wilmington, Delaware. The private party suits seek damages in an unspecified
amount. The Court has granted the Company's Motion on the lack of standing of
the laboratory and patient class actions to pursue damage claims. The Plaintiffs
in the laboratory case appealed this decision to the Third Circuit and the Court
upheld the decision of the District Court in dismissing the Plaintiffs' damages
claims, with the exception of allowing the Plaintiffs to pursue a damage claim
based on a theory of resale price maintenance agreements between the Company and
its tooth dealers. The Plaintiffs have filed a petition with the U.S. Supreme
Court asking it to review this decision of the Third Circuit. Also, private
party class actions on behalf of indirect purchasers were filed in California
and Florida state courts. The California and Florida cases have been dismissed
by the Plaintiffs following the decision by the Federal District Court Judge
issued in August 2003.
On March 27, 2002, a Complaint was filed in Alameda County, California (which
was transferred to Los Angeles County) by Bruce Glover, D.D.S. alleging, inter
alia, breach of express and implied warranties, fraud, unfair trade practices
and negligent misrepresentation in the Company's manufacture and sale of
Advance(R) cement. The Complaint seeks damages in an unspecified amount for
costs incurred in repairing dental work in which the Advance(R) product
allegedly failed. The Judge has entered an Order granting class certification,
as an Opt-in class (this means that after Notice of the class action is sent to
possible class members, a party will have to determine if they meet the class
definition and take affirmative action in order to join the class) on the claims
of breach of warranty and fraud. In general, the Class is defined as California
dentists who purchased and used Advance(R) cement and were required, because of
failures of the cement, to repair or reperform dental procedures for which they
were not paid. The Notice of the class action was sent on February 23, 2005 to
the approximately 29,000 dentists licensed to practice in California during the
relevant period and a total of 166 dentists have opted into the class action. As
the result of a recent decision by a California Appellate Court, the plaintiffs
have filed an appeal to convert the claim to an opt-out claim from its current
status as an opt-in claim. The Advance(R) cement product was sold from 1994
through 2000 and total sales in the United States during that period were
approximately $5.2 million. The Company's primary level insurance carrier has
confirmed coverage for the breach of warranty claims in this matter up to their
policy limits.
Item 1A - Risk Factors
There have been no significant material changes to the risks factors as
disclosed in the Company's Annual Report on Form 10-K/A filed for the year
ending December 31, 2005.
Item 2 - Unregistered Sales of Securities and Use of Proceeds
In December 2004, the Board of Directors approved a stock repurchase
program under which the Company may repurchase shares of Company stock on the
open market in an amount to maintain up to 3,000,000 shares of treasury stock.
In September 2005, the Board of Directors increased the authorization to
repurchase shares under the stock repurchase program in an amount to maintain up
to 5,500,000 share of treasury stock. During the quarter ended March 31, 2006,
the Company had the following activity with respect to this repurchase program:
Number Of
Shares That
May be Purchased
Total Number Total Cost Average Price Under The Share
of Shares of Shares Paid Per Repurchase
Period Purchased Purchased Share Program
------ --------- --------- ----- -------
(in thousands, except per share amounts)
January 1-31, 2006 - $ - $ - 3,091.9
February 1-28, 2006 121.7 6,685.6 54.94 3,073.2
March 1-31, 2006 25.0 1,423.0 56.92 3,285.4
---- -------
146.7 $ 8,108.6 $ 55.27
===== =========
Item 6 - Exhibits
31 Section 302 Certification Statements.
32 Section 906 Certification Statement.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DENTSPLY INTERNATIONAL INC.
November 8, 2006 /s/ Gerald K. Kunkle, Jr.
Date Gerald K. Kunkle, Jr.
Chairman and
Chief Executive Officer
November 8, 2006 /s/ William R. Jellison
Date William R. Jellison
Senior Vice President and
Chief Financial Officer