SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
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.
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 39-1434669
- -----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
570 West College Avenue, P. O. Box 872, York, PA 17405-0872
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 845-7511
----------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
( X ) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At November 5, 1999 the
Company had 52,799,555 shares of Common Stock outstanding, with a par value
of $.01 per share.
Page 1 of 22
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Exhibit Index at Page 21
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DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended September 30, 1999
--------------------
INDEX
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Page No.
--------
PART I - FINANCIAL INFORMATION (unaudited)
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets............ 3
Consolidated Condensed Statements of Income...... 4
Consolidated Condensed Statements of Cash Flows.. 5
Consolidated Condensed Statement of
Stockholders' Equity........................... 7
Notes to Unaudited Consolidated Condensed
Financial Statements........................... 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.... 13
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk................................ 18
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................... 19
Item 6 - Exhibits and Reports on Form 8-K............ 19
Signatures........................................... 20
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
September 30, December 31,
1999 1998
ASSETS ------------- ------------
Current assets: (in thousands)
Cash and cash equivalents $ 9,426 $ 8,690
Accounts and notes receivable-trade, net 132,085 134,218
Inventories 141,705 139,235
Prepaid expenses and other current assets 41,780 40,309
--------- ---------
Total Current Assets 324,996 322,452
Property, plant and equipment, net 180,798 158,998
Other noncurrent assets, net 20,853 67,799
Identifiable intangible assets, net 82,738 80,537
Costs in excess of fair value of net
assets acquired, net 272,787 265,536
--------- ---------
Total Assets $ 882,172 $ 895,322
LIABILITIES AND STOCKHOLDERS' EQUITY ========= =========
Current liabilities:
Accounts payable $ 34,816 $ 42,654
Accrued liabilities 85,180 99,427
Income taxes payable 44,493 36,025
Notes payable and current portion
of long-term debt 23,810 16,270
--------- ---------
Total Current Liabilities 188,299 194,376
Long-term debt 170,404 217,491
Deferred income taxes 15,710 18,803
Other liabilities 49,517 48,113
--------- ---------
Total Liabilities 423,930 478,783
--------- ---------
Minority interests in consolidated subsidiaries 2,529 2,738
Stockholders' equity: --------- ---------
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued
Common stock, $.01 par value; 100 million
shares authorized; 54.3 million shares
issued at September 30, 1999 and 54.3
million shares issued at December 31, 1998 543 543
Capital in excess of par value 151,530 152,871
Retained earnings 377,245 324,745
Accumulated other comprehensive income (loss) (34,233) (14,730)
Employee stock ownership plan reserve (7,218) (7,977)
Treasury stock, at cost, 1.4 million shares
at September 30, 1999 and 1.7 million shares
at December 31, 1998 (32,154) (41,651)
--------- ---------
Total Stockholders' Equity 455,713 413,801
---------
Total Liabilities and Stockholders' Equity $ 882,172 $ 895,322
========= =========
See accompanying notes to unaudited consolidated condensed financial
statements.
3
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DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except per share data)
Net sales $203,552 $196,995 $609,265 $574,827
Cost of products sold 97,242 93,884 291,911 272,528
-------- -------- -------- --------
Gross profit 106,310 103,111 317,354 302,299
Selling, general and
administrative expenses 71,656 71,162 211,996 203,477
Restructuring and other
costs - - - 29,000
-------- -------- -------- --------
Operating income 34,654 31,949 105,358 69,822
Interest expense 3,586 4,357 12,453 11,120
Interest income (207) (278) (705) (937)
Other (income) expense, net (457) 738 (1,366) 174
-------- -------- -------- --------
Income before income taxes 31,732 27,132 94,976 59,465
Provision for income taxes 11,046 9,505 33,572 22,257
-------- -------- -------- --------
Net income $ 20,686 $ 17,627 $ 61,404 $ 37,208
======== ======== ======== ========
Earnings per common share:
Basic $.39 $.33 $1.16 $.69
Diluted $.39 $.33 $1.16 $.69
Cash dividends declared
per common share .05625 .05125 .1688 .1538
Weighted average common
shares outstanding:
Basic 52,873 52,780 52,734 53,610
Diluted 53,035 52,936 52,915 53,902
See accompanying notes to unaudited consolidated condensed financial
statements.
4
<PAGE>
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
-------------------
1999 1998
-------- --------
Cash flows from operating activities: (in thousands)
Net income $ 61,404 $ 37,208
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 15,599 13,053
Amortization 12,667 14,791
Non-cash restructuring and other costs --- 29,000
Other, net (15,036) (43,423)
-------- --------
Net cash provided by operating activities 74,634 50,629
-------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired 4,329 (46,421)
Additional consideration for prior purchased
business (5,000) (3,522)
Property, plant and equipment additions (20,617) (24,925)
Other, net 887 (496)
-------- --------
Net cash used in investing activities (20,401) (75,364)
-------- --------
Cash flows from financing activities:
Debt repayment (124,063) (45,092)
Proceeds from long-term debt 70,336 113,322
Increase in bank overdrafts and other
short-term borrowings 7,961 5,865
Cash paid for treasury stock --- (42,049)
Cash dividends paid (8,884) (8,262)
Other, net 5,563 5,515
-------- --------
Net cash (used in) provided by financing activities (49,087) 29,299
-------- --------
Effect of exchange rate changes on cash
and cash equivalents (4,410) (4,150)
-------- --------
Net increase in cash and cash equivalents 736 414
Cash and cash equivalents at beginning of period 8,690 9,848
-------- --------
Cash and cash equivalents at end of period $ 9,426 $ 10,262
======== ========
See accompanying notes to unaudited consolidated condensed financial
statements.
5
<PAGE>
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
(unaudited)
Nine Months Ended
September 30,
-------------------
1999 1998
-------- --------
Supplemental disclosures of cash flow information:
Interest paid $ 10,538 $ 7,918
Income taxes paid 23,847 31,092
Non-cash transactions:
Liabilities assumed from acquisitions - 22,885
Issuance of treasury stock in connection with
the acquisition of certain assets 3,353 -
Supplemental disclosures of non-cash transactions (in thousands):
In January 1998, the Company purchased the assets of Blendax Professional
Dental Business ("Blendax"). In March 1998, the Company purchased the assets
of InfoSoft, Inc. ("InfoSoft"). In April and May of 1998, the Company
purchased a 67% majority interest in GAC ("GAC"). In May 1998, the Company
purchased the capital stock of Crescent Dental Manufacturing ("Crescent") and
also the capital stock of Herpo Productos Dentarios Ltda. ("Herpo"). In
conjunction with the acquisitions, liabilities were assumed as follows:
Blendax InfoSoft GAC Crescent Herpo
-------- -------- -------- -------- --------
Estimated fair value
of assets acquired $ 6,711 $ 10,651 $ 35,979 $ 5,781 $ 13,842
Cash paid for assets
or capital stock (6,112) (8,618) (22,740) (5,214) (7,395)
-------- -------- -------- -------- --------
Liabilities assumed $ 599 $ 2,033 $ 13,239 $ 567 $ 6,447
======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated condensed financial
statements.
6
<PAGE>
<TABLE>
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
<CAPTION>
Accumulated
Capital in Other Total
Common Excess of Retained Comprehensive Treasury Stockholders'
Stock Par Value Earnings Income(Loss) ESOP Reserve Stock Equity
(in thousands) ------ ----------- -------- ------------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 543 $152,871 $324,745 $(14,730) $ (7,977) $(41,651) $413,801
Comprehensive Income:
Net income 61,404 61,404
Other comprehensive income
Foreign currency translation
adjustments (19,503) (19,503)
--------
Comprehensive Income 41,901
Exercise of stock options and
warrants (1,794) 5,875 4,081
Tax benefit related to stock
options and warrants exercised 722 722
Reissuance of treasury stock (269) 3,622 3,353
Net change in ESOP reserve 759 759
Cash dividends declared, $.1688
per share (8,904) (8,904)
------ -------- -------- -------- -------- -------- --------
Balance at September 30, 1999 $ 543 $151,530 $377,245 $(34,233) $ (7,218) $(32,154) $455,713
====== ======== ======== ======== ======== ======== ========
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
7
<PAGE>
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------
SEPTEMBER 30, 1999
------------------
The accompanying interim consolidated condensed financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
which in the opinion of management are necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods. These interim financial statements conform with the requirements
for interim financial statements and consequently do not include all the
disclosures normally required by generally accepted accounting principles.
Disclosures are updated where appropriate.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated condensed financial statements include the accounts of
DENTSPLY International Inc. (the "Company") and its subsidiaries. Minority
interests in net income of consolidated subsidiaries are not material and are
included in other (income) expense, net.
Inventories
- -----------
Inventories are stated at the lower of cost or market. At September 30,
1999 and December 31, 1998, the cost of $15.7 million or 11% and $15.3
million or 11%, 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 method.
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. For
income tax purposes, depreciation is computed using various methods.
Derivatives
- -----------
The Company's only involvement with derivative financial instruments is
forward contracts to hedge certain assets and liabilities denominated in
foreign currencies and swap agreements which convert current floating
interest debt to fixed rates.
8
<PAGE>
NOTE 2 - EARNINGS PER COMMON SHARE
- ----------------------------------
The following table sets forth the computation of basic and diluted
earnings per common share:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Basic EPS Computation: ------- ------- ------- -------
- --------------------- (in thousands, except per share data)
Numerator(Income) $20,686 $17,627 $61,404 $37,208
------- ------- ------- -------
Denominator:
Common shares outstanding 52,873 52,780 52,734 53,610
------- ------- ------- -------
Basic EPS $ 0.39 $ 0.33 $ 1.16 $ 0.69
======= ======= ======= =======
Diluted EPS Computation:
- -----------------------
Numerator(Income) $20,686 $17,627 $61,404 $37,208
------- ------- ------- -------
Denominator:
Common shares outstanding 52,873 52,780 52,734 53,610
Incremental shares from assumed
exercise of dilutive options
and warrants 162 156 181 292
------- ------- ------- -------
Total shares 53,035 52,936 52,915 53,902
------- ------- ------- -------
Diluted EPS $ 0.39 $ 0.33 $ 1.16 $ 0.69
======= ======= ======= =======
NOTE 3 - INVENTORIES
- --------------------
Inventories consist of the following:
September 30, December 31,
1999 1998
------------- ------------
(in thousands)
Finished goods $ 81,763 $ 75,637
Work-in-process 26,470 27,632
Raw materials and supplies 33,472 35,966
-------- --------
$141,705 $139,235
======== ========
Pre-tax income was $.4 million lower in the nine months ended September
30, 1999 and $.5 million lower for the same period in 1998 as a result of
using the LIFO method compared to the first-in, first-out (FIFO) method. If
the FIFO method had been used to determine the cost of the LIFO inventories,
the amounts at which net inventories are stated would be lower than reported
at September 30, 1999 and December 31, 1998 by $.6 million and $1.0 million,
respectively.
9
<PAGE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment consist of the following:
September 30, December 31,
1999 1998
------------- ------------
Assets, at cost: (in thousands)
Land $ 16,690 $ 12,315
Buildings and improvements 86,590 74,966
Machinery and equipment 151,825 138,644
Construction in progress 16,819 13,262
-------- --------
271,924 239,187
Less: Accumulated depreciation 91,126 80,189
-------- --------
$180,798 $158,998
======== ========
NOTE 5 - NOTES PAYABLE AND CURRENT PORTION OF LONG-TERM DEBT
- ------------------------------------------------------------
The increase from December 31, 1998 in notes payable and current portion
of long-term debt ($7.5 million) was primarily due to the maturing of
long-term debt.
NOTE 6 - RESTRUCTURING AND OTHER COSTS
- --------------------------------------
In the second quarter of 1998, the Company recorded a pre-tax charge of
$29.0 million for restructuring and other costs. This charge included costs
of $26.0 million to rationalize and restructure the Company's worldwide
laboratory business, primarily for the closure of the Company's German tooth
manufacturing facility. The remaining $3.0 million of the charge was
recorded to cover termination costs associated with its former implant
products business. Included in the $26.0 million restructuring charge are
costs to cover severance, the write-down of property, plant and equipment,
and tooth product rationalization. The principal actions involve the closure
of the Company's Dreieich, Germany tooth facility and rationalization of
certain tooth products in Europe, North America and Australia. The Company
anticipates the restructuring will reduce production costs and increase
operational efficiencies, contributing to future earnings. The restructuring
results in the elimination of approximately 275 administrative and
manufacturing positions, mostly in Germany. The closure of the German tooth
facility was completed in the first quarter of 1999 with benefits of the
restructuring expected to begin early in 2000.
10
<PAGE>
The major components of the charge and remaining accruals follow:
Non-Cash Cash Balance
Amounts Amounts September 30,
Provision Applied Applied 1999
--------- -------- ------- -------------
(in thousands)
Severance $13,400 $ 700 $11,300 $ 1,400
Write-down of property,
plant and equipment 6,000 6,000 - -
Implant termination costs 3,000 2,800 200 -
Other 6,600 1,300 2,600 2,700
------- ------- ------- -------
$29,000 $10,800 $14,100 $ 4,100
======= ======= ======= =======
In the fourth quarter of 1998, the Company recorded a pre-tax charge of
$42.5 million for restructuring the New Image business. This charge includes
the write-off of intangibles, including goodwill associated with the
business, write-off of discontinued products, write-down of fixed assets and
other assets, and severance and other costs associated with the
discontinuance of the New Image division in Carlsbad, California. As part of
the restructuring, certain intraoral camera products will be sold and
supported by the Gendex Dental X-ray division in Des Plaines, Illinois. The
restructuring includes the elimination of approximately 115 administrative
and manufacturing positions in California. The restructuring was
substantially completed at September 30, 1999. The facility in California
was closed at the end of the first quarter of 1999.
<PAGE>
The major components of the charge and remaining accruals follow:
Non-Cash Cash Balance
Amounts Amounts September 30,
Provision Applied Applied 1999
--------- -------- ------- -------------
(in thousands)
Write-off of intangibles
including goodwill $33,200 $33,200 $ - $ -
Discontinued products 3,800 3,800 - -
Write-down of fixed assets 1,500 1,500 - -
Severance 1,000 - 1,000 -
Write-down of other assets 700 700 - -
Other costs 2,300 - 600 1,700
------- ------- ------- -------
$42,500 $39,200 $ 1,600 $ 1,700
======= ======= ======= =======
NOTE 7 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes that
pending litigation to which DENTSPLY is a party will not have a material
adverse effect upon its consolidated financial position or results of
operations.
11
<PAGE>
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. Two follow on private class action
suits on behalf of dentists and laboratories, respectively, who purchased
Trubyte teeth were filed and are pending in the U.S. District Court in
Wilmington, Delaware. These cases have been assigned to the same judge who
is handling the Department of Justice action. A third follow on private class
action suit was filed on September 8, 1999 in the Supreme Court of the State
of New York, County of New York on behalf of patients in seventeen (17)
states who purchased artificial teeth. It is the Company's position that the
conduct and activities of the Trubyte Division do not violate the antitrust
laws.
12
<PAGE>
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 set forth in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
For the quarter ended September 30, 1999, net sales increased $6.6 million,
or 3.3%, to $203.6 million, up from $197.0 million in the same period of
1998.
Base business sales grew 4.0% in the third quarter and were negatively
impacted by a soft dental market in Europe, weak equipment sales especially
within Germany and U.S. dealer inventory adjustments. Acquisitions,
partially offset by the New Image divestiture, accounted for an additional
1.3% of net sales growth. The impact of translation had a negative 2.0%
effect on the third quarter results compared to 1998 due to the devalued
Brazilian Real and the strengthening of the U.S. dollar against the major
European currencies.
Sales in the United States grew 5.0%, including 2.1% from acquisitions, a
decrease of 1.9% from the New Image restructuring and 4.8% from base
business. Base business growth in x-ray equipment and consumables was
partially offset by sales declines in handpiece and ultrasonic equipment in
the third quarter.
European sales, including the Commonwealth of Independent States (CIS),
declined 3.5% mainly due to softness in the European dental market. The
acquisition of Vereingte Dentalwerke (VDW) increased European sales by 3.8%
offset by base business sales which were down 2.8% and the impact of
translation which had a negative 4.5% effect on third quarter sales.
Asia (excluding Japan) and Latin America sales grew 0.1% as sales from base
business and acquisitions were primarily offset by the devaluation of the
Brazilian Real. Asia's base business grew 14.4% as the Asian economy
continued to stabilize, while translation had a positive 2.8% impact. Base
business in Latin America grew 12.0% in local currency, due mainly to the
improvement of the Brazilian economy and strong growth in the orthodontic
product line. The impact of translation was negative 17.7% in Latin America
due primarily to the Brazilian Real devaluation in January 1999.
Sales in the rest of the world grew 17.2%. This resulted from 6.0% growth
from acquisitions; 6.5% from base business growth primarily in Canada and
Middle East/Africa (MEA); and 4.7% from the impact of translation.
Gross profit increased $3.2 million, or 3.1%, to $106.3 million from $103.1
million in the third quarter of 1998, but decreased slightly as a percentage
of sales from 52.3% in the third quarter of 1998 to 52.2% in the
13
<PAGE>
same period of 1999. Purchase price accounting adjustments related to the
acquisition of VDW negatively impacted the third quarter 1999 gross profit.
Selling, general and administrative (SG&A) expenses increased $0.5 million,
or 0.7%. As a percentage of sales, expenses decreased from 36.1% in the
third quarter of 1998 to 35.2% for the same period of 1999. A bad debt
provision of $3.0 million was recorded in the third quarter of 1998,
principally for customers in the CIS. Exclusive of the bad debt provision,
SG&A expenses increased $2.8 million or 4.1%. The increase is primarily due
to operating expenses for VDW which was acquired in December 1998; and legal
expenses in 1999 for litigation with the Justice Department and defense of
certain endodontic patents.
Net interest expense decreased $0.7 million in the third quarter of 1999 due
to lower interest expense as a result of lower average debt levels during the
third quarter of 1999.
Other income increased $1.2 million in the third quarter of 1999 due to
transaction exchange gains as the U.S. dollar strengthened against the major
European currencies in the third quarter of 1999 compared to 1998. Also
included in other income for 1999 is $0.4 million due to a favorable
settlement of a disputed lease commitment in the U.K.
Income before income taxes increased $4.6 million, or 17.0%, to $31.7 million
from $27.1 million in the third quarter of 1998. The effective tax rate for
operations was lowered to 35.1% in the third quarter of 1999 compared to
35.3% in the third quarter of 1998 reflecting savings from federal, state and
foreign tax planning activities. Net income increased $3.1 million, or 17.4%,
from the third quarter of 1998 due to higher sales, lower expenses as a
percentage of net sales, lower net interest expense, the increase in other
income, and a lower provision for income tax. Basic and diluted earnings per
common share increased from $.33 in 1998 to $.39 in 1999, or 18.2%.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
For the nine months ended September 30, 1999, net sales increased $34.5
million, or 6.0%, to $609.3 million, up from $574.8 million in the same
period of 1998. The increase resulted from moderate sales growth in the
United States and Latin America both from base business and from
acquisitions, net of divestitures. European sales were flat and included
increases for acquisitions offset by the negative impact of a soft dental
market and translation. Sales in the Pacific Rim were adversely impacted by
inventory returns of $1.4 million from dealers in India during the first half
of 1999. Sales in the rest of the world increased from strong base business
sales and from acquisitions. Overall, translation negatively impacted net
sales by 1.2% during the first nine months of 1999, due largely to the
devaluation of the Brazilian Real.
Gross profit increased $15.1 million, or 5.0%, to $317.4 million from $302.3
million in the first nine months of 1998. As a percentage of sales, gross
profit decreased from 52.6% in the first nine months of 1998 to 52.1% in the
same period of 1999. Costs associated with moving the remaining
manufacturing operations for New Image and Germany's tooth manufacturing
facility negatively impacted performance in the first half in addition to
purchase price accounting adjustments related to the acquisition of VDW and
lower margins associated with GAC, the Company's orthodontics distribution
business acquired in the second quarter of 1998.
Selling, general and administrative expense increased $8.5 million, or 4.2%.
As a percentage of sales, expenses decreased from 35.4% in the first
14
<PAGE>
nine months of 1998 to 34.8% for the same period of 1999. This percentage
decrease included a reduction in bad debt expense and a $1.1 million benefit
from the curtailment of the Dreieich Pension Plan in Germany, resulting from
the restructuring in 1998.
Restructuring and other costs of $29 million were recorded in the second
quarter of 1998.
Net interest expense increased $1.6 million during the first nine months of
1999 due to increased interest expense on higher debt incurred during the
first half of 1999 to finance 1998 acquisitions and the stock repurchase
program in 1998.
Other income increased $1.5 million in the first nine months of 1999 due to
transaction exchange gains as the U.S. dollar strengthened against the major
European currencies.
Income before income taxes increased $35.5 million, including the $29.0
million of restructuring and other costs recorded in the second quarter of
1998. Without these costs, income before income taxes increased $6.5
million, or 7.4%. The effective tax rate for operations was lowered to 35.5%
in the first nine months of 1999 compared to 36.7% in the first nine months
of 1998 reflecting the benefits of tax planning activities. Net income
increased $24.2 million including the after tax impact of $18.9 million for
restructuring and other costs. Without these costs, net income increased
$5.3 million, or 9.5% in the first nine months of 1999 compared to 1998 due
to higher sales, lower expenses as a percentage of sales, favorable currency
fluctuations, and a lower provision for income taxes offset somewhat by a
lower gross profit percentage in the first nine months of 1999.
Basic and diluted earnings per common share were $1.16 in 1999 compared to
$.69 per share in the first nine months of 1998. Earnings per share for the
first nine months of 1998 included $.35 for restructuring and other costs.
Without these costs, basic and diluted earnings per common share increased
from $1.04 in 1998 to $1.16 in 1999 or 11.5%.
LIQUIDITY AND CAPITAL RESOURCES
Investing activities for the nine months ended September 30, 1999 include
capital expenditures of $20.6 million.
The Company's current ratio was 1.7 with working capital of $136.7 million at
September 30, 1999. This compares with a current ratio of 1.7 and working
capital of $128.1 million at December 31, 1998.
The Company expects to be able to finance cash requirements, including
capital expenditures, stock repurchases, debt service, and possible future
acquisitions, from the funds generated from operations and amounts available
under the existing Bank Revolving Loan Facility. During the third quarter,
the Company secured a $200 million Commercial Paper Facility. This facility
was initially used to pay down existing bank debt and going forward will help
to minimize the Company's overall cost of capital. At September 30, 1999,
the Company had secured $50 million from this facility.
For the nine months ended September 30, 1999, cash flows from operating
activities were $74.6 million which included $12.3 million of negative cash
flows associated with the two restructurings recorded in 1998, compared to
$50.6 million for the nine months ended September 30, 1998.
Without the negative cash flows related to these restructurings, cash flows
from operating activities during 1999 were $86.9 million. The increase of
15
<PAGE>
$24.0 million results primarily from increased earnings, decreases in
inventory and increases in income taxes payable offset by decreases in
accrued liabilities.
NEW STANDARDS
Statement of Financial Accounting Standards No. 133 ("FASB 133"), "Accounting
for Derivative Instruments and Hedging Activities," was issued by the
Financial Accounting Standards Board (FASB) in June 1998. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires recognition of all derivatives as either
assets or liabilities on the balance sheet and measurement of those
instruments at fair value. If certain conditions are met, a derivative may
be designated specifically as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment referred to as a fair value hedge, (b) a hedge of the exposure to
variability in cash flows of a forecasted transaction (a cash flow hedge), or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security,
or a forecasted transaction.
This statement was originally required to be adopted effective January 1,
2000; however, in June 1999 FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133", which delays the effective date to January
1, 2001. The Company has not yet determined the effect of adopting FASB 133.
YEAR 2000
The following discussion contains Year 2000 Readiness Disclosures under the
Year 2000 Information and Readiness Disclosures Act.
An issue affecting DENTSPLY and all other companies is whether computer
systems and applications will recognize and process data for the Year 2000
and beyond. The Year 2000 issue arose because many existing computer
programs use only the last two digits to refer to a year. These computer
programs do not recognize a year that begins with "20" instead of "19". The
inability of many computer applications to interpret the Year 2000
correctly may cause potential business disruptions affecting all aspects of
normal operations. The Year 2000 issue has global ramifications affecting
not only the Company's operations but also the operations of the Company's
suppliers, vendors and customers.
In 1995, the Company commenced an upgrade of its information technology
("IT") systems for all of its locations. A primary software was chosen to
upgrade the Company's computerized business application systems to world
class standards and also enable the Company to become Year 2000 compliant.
The upgrade included necessary hardware and software improvements, training,
data conversion, systems testing and implementation.
The identification, planning, and development phases of the Year 2000 project
have been completed. The Company has been in the process of implementing and
testing the information system upgrades worldwide, with work being
substantially complete. To date, the Company has spent approximately $17.5
million for the IT project. An additional $.7 million of spending is
anticipated for the remainder of the information system's upgrade. These
costs encompass the total upgrade of the Company's
manufacturing, distribution and financial reporting systems. The Company has
not deferred other IT projects due to its Year 2000 initiative, but
16
<PAGE>
rather, the Year 2000 initiative has been part of the upgrade of its current
IT system. Possible Year 2000 issues that are not covered by the IT upgrade
are being addressed separately and may require software
replacement, reprogramming or other remedial action. The Company has been
engaged in a program and an audit review process to identify affected systems
and applications and to develop a plan to correct any issues in the most
effective manner. Based on this audit review, the Company does not expect to
see any significant changes in these systems and applications. The Company is
in the process of formulating contingency plans to the extent necessary in
fiscal 1999.
The Year 2000 initiative presents a number of uncertainties including the
status and planning of third parties. The Company has surveyed its
significant customers and vendors as to their Year 2000 compliance. Based on
the nature of their responses, the Company is developing contingency plans as
appropriate. However, the Company has no means of assuring that external
customers and vendors will be Year 2000 compliant. The inability of third
parties to complete their Year 2000 resolution process in a timely fashion
could materially impact the Company.
The Company's Year 2000 remediation efforts along with the information system
upgrade are funded from the Company's operating cash flows and its borrowing
facilities. The following table contains historical and estimated future
costs of the total IT system upgrade, which includes the Year 2000
initiative. Infrastructure and daily IT-related operating expenses have been
excluded from the reported costs.
Project Costs Anticipated
To Date Future Costs
------------- ------------
(in thousands)
Capital Expenditures $ 9,292 $ 453
Expenses 8,243 214
-------- --------
Total $ 17,535 $ 667
======== ========
EURO CURRENCY CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union (the "participating countries") established fixed conversion rates
between their legacy currencies and the newly established Euro currency.
The legacy currencies will remain legal tender in the participating countries
between January 1, 1999 and January 1, 2002 (the "transition period").
Starting January 1, 2002 the European Central Bank will issue
Euro-denominated bills and coins for use in cash transactions. On or before
July 1, 2002, the legacy currencies of participating countries will no longer
be legal tender for any transactions.
The Company's various operating units which are affected by the Euro
conversion intend to keep their books in their respective legacy currency
through a portion of the three year transition period. At this time, the
Company does not expect the reasonable foreseeable consequences of the Euro
conversion to have material adverse effects on the Company's business,
operations or financial condition.
IMPACT OF INFLATION
The Company has generally offset the impact of inflation on wages and the
cost of purchased materials by reducing operating costs and increasing
selling prices to the extent permitted by market conditions.
17
<PAGE>
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 filed for the year
ending December 31, 1998.
18
<PAGE>
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 that
pending litigation to which DENTSPLY is a party will not 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. Two follow on private class action
suits on behalf of dentists and laboratories, respectively, who purchased
Trubyte teeth were filed and are pending in the U.S. District Court in
Wilmington, Delaware. These cases have been assigned to the same judge who
is handling the Department of Justice action. A third follow on private class
action suit was filed on September 8, 1999 in the Supreme Court of the State
of New York, County of New York on behalf of patients in seventeen (17)
states who purchased artificial teeth. It is the Company's position that the
conduct and activities of the Trubyte Division do not violate the antitrust
laws.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed herewith:
---------
Number Description
------ -----------
27 Financial Data Schedule (pursuant to Item 601(c)(1)(iv)
of Regulation S-K, this exhibit shall not be deemed
filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended)
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the
period ended September 30, 1999.
19
<PAGE>
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 15, 1999 /s/ John C. Miles II
- ----------------- ----------------------------------
Date John C. Miles II
Chairman and
Chief Executive Officer
November 15, 1999 /s/ William R. Jellison
- ----------------- ----------------------------------
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
20
<PAGE>
EXHIBIT INDEX
-------------
Number Description Sequential Page No.
------ ----------- -------------------
27 Financial Data Schedule 22
(pursuant to Item 601(c)(1)(iv) of
Regulation S-K, this exhibit shall
not be deemed filed for purposes
of Section 18 of the Securities
Exchange Act of 1934, as amended)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF DENTSPLY INTERNATIONAL
INC. AT SEPTEMBER 30, 1999 AND FOR THE FISCAL QUARTER THEN ENDED, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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