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, 2000
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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.)
570 West College Avenue, P. O. Box 872, York, PA 17405-0872
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(Address of principal executive offices) (Zip Code)
(717) 845-7511
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(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, 2000 the
Company had 51,500,956 shares of Common Stock outstanding, with a par value
of $.01 per share.
Page 1 of 20
Exhibit Index at Page 19
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DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended September 30, 2000
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Balance Sheets............ 3
Consolidated Condensed Statements of Income...... 4
Consolidated Condensed Statements of Cash Flows.. 5
Consolidated Condensed Statement of
Stockholders' Equity........................... 6
Notes to Unaudited Consolidated Condensed
Financial Statements........................... 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.... 11
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk................................ 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................... 17
Item 6 - Exhibits and Reports on Form 8-K............ 17
Signatures........................................... 18
2
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<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS (in thousands)
Current Assets
Cash and cash equivalents $ 8,160 $ 7,276
Accounts and notes receivable-trade, net 126,729 127,911
Inventories, net 138,459 135,480
Prepaid expenses and other current assets 38,158 44,001
--------- ---------
Total Current Assets 311,506 314,668
Property, plant and equipment, net 171,921 180,536
Other noncurrent assets, net 22,119 14,963
Identifiable intangible assets, net 82,170 80,374
Costs in excess of fair value of net
assets acquired, net 256,870 269,047
--------- ---------
Total Assets $ 844,586 $ 859,588
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 38,015 $ 40,467
Accrued liabilities 90,551 80,922
Income taxes payable 39,087 34,676
Notes payable and current portion
of long-term debt 13,301 20,155
--------- ---------
Total Current Liabilities 180,954 176,220
Long-term debt 112,906 145,312
Deferred income taxes 19,181 20,240
Other liabilities 44,230 46,445
--------- ---------
Total Liabilities 357,271 388,217
--------- ---------
Minority interests in consolidated subsidiaries 4,633 2,499
--------- ---------
Commitments and contingencies
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, 2000 and
December 31, 1999 543 543
Capital in excess of par value 151,542 151,509
Retained earnings 462,853 402,408
Accumulated other comprehensive loss (57,900) (43,209)
Employee stock ownership plan reserve (5,318) (6,458)
Treasury stock, at cost, 2.7 million shares
at September 30, 2000 and 1.5 million shares
at December 31, 1999 (69,038) (35,921)
--------- ---------
Total Stockholders' Equity 482,682 468,872
--------- ---------
Total Liabilities and Stockholders' Equity $ 844,586 $ 859,588
========= =========
<FN>
See accompanying notes to unaudited consolidated condensed financial statements
</FN>
</TABLE>
3
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<TABLE>
<CAPTION>
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 215,255 $ 203,552 $ 651,075 $ 609,265
Cost of products sold 102,952 97,242 309,779 291,911
--------- --------- --------- ---------
Gross profit 112,303 106,310 341,296 317,354
Selling, general and administrative expenses 74,166 71,656 226,688 211,996
--------- --------- --------- ---------
Operating income 38,137 34,654 114,608 105,358
Interest expense 2,538 3,586 8,217 12,453
Interest income (95) (207) (936) (705)
Other expense (income), net 925 (457) 1,117 (1,366)
--------- --------- --------- ---------
Income before income taxes 34,769 31,732 106,210 94,976
Provision for income taxes 11,434 11,046 36,056 33,572
--------- --------- --------- ---------
Net income $ 23,335 $ 20,686 $ 70,154 $ 61,404
========= ========= ========= =========
Earnings per common share:
Basic $ .45 $ .39 $ 1.35 $ 1.16
Diluted .45 .39 1.34 1.16
Cash dividends declared per common share $ .06250 $ .05625 $ .18750 $ .16880
Weighted average common shares outstanding:
Basic 51,665 52,873 51,963 52,734
Diluted 52,322 53,035 52,419 52,915
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
----------------
2000 1999
------ ------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 70,154 $ 61,404
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 17,762 15,599
Amortization 14,393 12,667
Other, net 8,429 (15,036)
--------- ---------
Net cash provided by operating activities 110,738 74,634
--------- ---------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (12,474) 4,329
Additional consideration for prior purchased
business -- (5,000)
Property, plant and equipment additions (20,292) (20,617)
Other, net (1,337) 887
--------- ---------
Net cash used in investing activities (34,103) (20,401)
--------- ---------
Cash flows from financing activities:
Long-term debt repayment (121,777) (124,063)
Proceeds from long-term debt 90,236 70,336
(Decrease)increase in bank overdrafts and other
short-term borrowings (5,281) 7,961
Cash paid for treasury stock (38,367) --
Cash dividends paid (9,782) (8,884)
Other, net 6,423 5,563
--------- ---------
Net cash used in financing activities (78,548) (49,087)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents 2,797 (4,410)
--------- ---------
Net increase in cash and cash equivalents 884 736
Cash and cash equivalents at beginning of period 7,276 8,690
--------- ---------
Cash and cash equivalents at end of period $ 8,160 $ 9,426
========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 5,679 $ 10,538
Income taxes paid 27,450 23,847
Non-cash transactions:
Liabilities assumed from acquisitions $ 404 $ --
Issuance of treasury stock in connection with the
acquisition of certain assets -- 3,353
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
5
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<TABLE>
<CAPTION>
DENTSPLY INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Accumulated
Capital in Other Total
Common Excess of Retained Comprehensive ESOP Treasury Stockholders'
(in thousands) Stock Par Value Earnings Loss Reserve Stock Equity
----- --------- -------- ---- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 543 $ 151,509 $ 402,408 $(43,209) $(6,458) $(35,921) $ 468,872
Comprehensive Income:
Net income -- -- 70,154 -- -- -- 70,154
Other comprehensive income
Foreign currency translation
adjustments -- -- -- (14,691) -- -- (14,691)
---------
Comprehensive Income 55,463
Exercise of stock options and
warrants -- (433) -- -- -- 5,250 4,817
Tax benefit related to stock
options & warrants exercised -- 466 -- -- -- -- 466
Repurchase of 1.40 million shares
of common stock -- -- -- -- -- (38,367) (38,367)
Cash dividends declared, $.1875
per share -- -- (9,709) -- -- -- (9,709)
Net change in ESOP reserve -- -- -- -- 1,140 -- 1,140
------- --------- --------- -------- ------- -------- ---------
Balance at September 30, 2000 $ 543 $ 151,542 $ 462,853 $(57,900) $(5,318) $(69,038) $ 482,682
======= ========= ========= ======== ======= ======== =========
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
6
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DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
The accompanying unaudited 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 to the
requirements for interim financial statements and consequently do not include
all the disclosures normally required by generally accepted accounting
principles. Disclosures included in the Company's most recent 10-K filed
March 30, 2000 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.
Inventories
Inventories are stated at the lower of cost or market. At September 30,
2000 and December 31, 1999, the cost of $13.6 million or 10% and $15.5
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.
7
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NOTE 2 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Basic EPS Computation:
Numerator (Net Income) $23,335 $20,686 $70,154 $61,404
Denominator
Common shares outstanding 51,665 52,873 51,963 52,734
------- ------- ------- -------
Basic EPS $ .45 $ .39 $ 1.35 $ 1.16
======= ======= ======= =======
Diluted EPS Computation:
Numerator (Net Income) $23,335 $20,686 $70,154 $61,404
Denominator
Common shares outstanding 51,665 52,873 51,963 52,734
Incremental shares from
assumed exercise of dilutive
options and warrants 657 162 456 181
------- ------- ------- -------
Total shares 52,322 53,035 52,419 52,915
------- ------- ------- -------
Diluted EPS $ .45 $ .39 $ 1.34 $ 1.16
======= ======= ======= =======
</TABLE>
NOTE 3 - BUSINESS ACQUISITIONS
In July 2000, the Company purchased certain assets of Midwest
Orthodontic Manufacturing, LLC, based in Columbus, Indiana, in a cash
transaction valued at $600,000. Midwest Orthodontic Manufacturing (MOM)
produces a broad array of ancillary materials used in orthodontia from its
ISO 9002 certified Indiana facility, including elastics, retainer cases and
springs.
In July 2000, the Company purchased the assets of Darway Inc., of San
Mateo, California, in a cash transaction valued at $3.4 million. Darway
manufactures the patented Palodent Contoured Sectional Matrix System, which
is used by dentists to provide a means to contain filling material when the
restoration of a tooth requires removing tooth structure that faces an
adjacent tooth, the tongue or the cheek.
In September 2000, the Company purchased the assets of San Diego Swiss
Machining, Inc.'s ultrasonic dental tip business in a cash transaction valued
at $7.25 million. Headquartered in Chula Vista, California, this company
produces and distributes a proprietary line of ultrasonic instrument tips
used to shape and clean root canals during endodontic therapy.
8
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In September 2000, the Company paid $2.4 million for a 51% interest in
ESP, LLC (ESP). ESP will manufacture and market the Chimal product lines of
lotions and creams to the worldwide dental, medical, automotive, cosmetology,
industrial and food markets. The Chimal skin shield contains ingredients that
bond to the skin, and seal out irritants such as chemicals and solvents while
sealing in natural moisturizers.
Subsequent to the quarter ended September 30, 2000, the Company acquired
certain assets of PreVest, Inc.(PreVest) from PVI, Inc., in a cash
transaction valued at approximately $2 million. Headquartered in Cleveland,
OH, PreVest is a multi-industry manufacturer of investment powders produced
for the precision casting of nearly all metal alloys.
Also subsequent to the quarter ended September 30, 2000, the Company
entered into an agreement in principal whereby it will acquire all of the issued
and outstanding shares of Pro-Dex, Inc. (Pro-Dex) in a stock transaction valued
at approximately $30 million. The transaction is expected to be completed in the
first quarter of 2001. It is subject to due diligence by the parties, regulatory
approval, approval by Pro-Dex shareholders and the Company's Board of Directors,
completion of a definitive agreement, and other customary closing conditions.
Pro-Dex, Inc. is a Colorado-based holding company with operations specializing
in the manufacturing and marketing of infection control and preventive products,
miniature pneumatic (air) motors and handpieces used in dental, medical and
industrial applications and motion control products.
These acquisitions were accounted for under the purchase method of
accounting; accordingly, the results of their operations are included in the
accompanying financial statements since the respective dates of the
acquisitions. The purchase prices plus direct acquisition costs have been
allocated on the basis of estimated fair values at the dates of acquisition,
pending final determination of the fair value of certain acquired assets and
liabilities.
NOTE 4 - INVENTORIES
Inventories consist of the following:
September 30, December 31,
2000 1999
---- ----
(in thousands)
Finished goods $ 81,836 $ 77,786
Work-in-process 25,636 25,519
Raw materials and supplies 30,987 32,175
-------- --------
$138,459 $135,480
Pre-tax income was $.4 million lower in the nine months ended September
30, 2000 and $.4 million lower for the same period in 1999 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 higher than reported
at September 30, 2000 by $.04 million and lower than reported at December 31,
1999 by $.3 million.
9
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NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30, December 31,
2000 1999
---- ----
Assets, at cost: (in thousands)
Land $ 13,622 $ 15,405
Buildings and improvements 82,524 86,148
Machinery and equipment 164,435 155,735
Construction in progress 10,389 9,836
-------- --------
270,970 267,124
Less: Accumulated depreciation 99,049 86,588
-------- --------
$171,921 $180,536
NOTE 6 - RESTRUCTURING AND OTHER COSTS
In 1998, the Company recorded restructuring charges related to the
closure of its German tooth manufacturing facility and the discontinuance of
its New Image division's intra-oral camera business. The activity related to
these restructurings was disclosed in the Company's most recent Form 10-K
filed March 30, 2000 (Note 15). There was no material activity related to
these restructurings during the period ended September 30, 2000. The
liability outstanding at September 30, 2000 related to these restructurings
was $1.7 million.
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.
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. Three follow on private class
action suits on behalf of dentists, laboratories and denture patients in
seventeen states, respectively, who purchased Trubyte teeth or products
containing Trubyte teeth were filed and transferred to 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. The class action
filed on behalf of the dentists has been dismissed by the plaintiffs. The
private party suits seek damages in an unspecified amount. The Company has
filed motions for summary judgment in all of the above cases. Four private
party class actions on behalf of indirect purchasers were filed in California
state court recently. These cases are based on allegations similar to those
in the Department of Justice case. The Company has filed petitions to remove
such actions to the federal court. It is the Company's position that the
conduct and activities of the Trubyte Division do not violate the antitrust
laws.
10
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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, 1999.
RESULTS OF OPERATIONS
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
For the quarter ended September 30, 2000, net sales increased $11.7 million,
or 5.7%, to $215.3 million, up from $203.6 million in the same period of
1999. Base business sales (internal sales growth exclusive of
acquisition/divestitures and the impact of currency translation) grew 8.7%.
The impact of currency translation had a significant negative effect of 3.1%
on the third quarter results compared to the comparable period in 1999 due to
the strengthening of the U.S. dollar against the major European currencies
while acquisitions in 2000, net of divestitures in 1999, had a positive 0.1%
impact on net sales growth.
Sales in the United States for the third quarter grew 9.7%. Base business
sales growth was greatest in ultrasonic and x-ray equipment and consumable
product categories.
European base business sales, including the Commonwealth of Independent
States, increased 5.0%. This, however, was offset by the impact of currency
translation, which had a negative 12.1% effect on European sales in the
quarter. Sales in Germany of laboratory consumables and ultrasonic equipment
continued to rebound compared to the prior year quarter offset somewhat by
sluggish sales of x-ray equipment throughout Europe.
Base business sales in Asia (excluding Japan) and Latin America increased
13.9%. The impact of currency translation had no effect on the quarter in
Asia/Latin America. Asia's base business sales grew 12.8% as the Asian
economy continued to stabilize. Base business sales in Latin America grew
14.5% during the third quarter of 2000.
Sales in the rest of the world (including Japan) grew 3.9%: 6.8% from base
business sales primarily in the Middle East/Africa and Japan; less 2.9% from
the impact of currency translation.
11
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Gross profit grew $6.0 million or 5.6% in the third quarter due to higher
sales. The 2000 third quarter gross profit percentage remained unchanged at
52.2% compared to the third quarter of 1999, as the strong U.S. dollar
increased the cost of U.S. dollar denominated purchases for non-U.S.
locations.
Selling, general and administrative (SG&A) expenses increased $2.5 million,
or 3.5%. As a percentage of sales, expenses decreased from 35.2% in the
third quarter of 1999 to 34.4% for the same period of 2000. Expenses
increased primarily due to additional sales and marketing expenses and
increased legal expenses, offset somewhat by foreign exchange rates. Sales
and marketing expenses are expected to run higher than 1999 as new
telemarketing and field sales representatives continue to be brought on
board.
Net interest expense decreased $0.9 million in the third quarter of 2000 due
to lower debt in 2000 and savings resulting from lower rate Swiss debt. Other
(income) expense was unfavorable compared to 1999 by $1.4 million due mainly
to an increase in currency transaction losses in 2000 of $0.3 million, other
income of $0.4 million in 1999 due to a favorable settlement of a disputed
lease commitment in the United Kingdom, an increase in other expense in 2000
of $0.2 million for minority interest reflecting profitability for the
CeraMed business, and the write-down of a fixed asset in 2000 for $0.3
million.
Income before income taxes increased $3.0 million, or 9.6% to $34.8 million
from $31.7 million in the third quarter of 1999. The effective tax rate for
operations was lowered to 32.9% in the third quarter of 2000 compared to
34.8% in the third quarter of 1999 reflecting savings from federal, state and
foreign tax planning activities. Net income increased $2.6 million, or 12.8%,
from the third quarter of 1999 due to higher sales, lower expenses as a
percentage of net sales, lower net interest expense, and a lower income tax
rate. Basic and diluted earnings per common share increased from $.39 in
1999 to $.45 in 2000, or 15.4%.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
For the nine months ended September 30, 2000, net sales increased $41.8
million, or 6.9%, to $651.1 million, up from $609.3 million in the same
period of 1999. The impact of currency translation had a significant
negative effect of 2.9% on the first nine months of 2000 sales compared to
the comparable period in 1999 due to the strengthening of the U.S. dollar
against the major European currencies while acquisitions, net of divestitures
in 1999, had a negative 0.1% impact on net sales growth. Base business sales
growth was 9.9% for the first nine months.
Sales in the United States grew 10.6%, with strong growth in ultrasonic and
x-ray equipment, and throughout the consumable categories.
European base business sales, including the Commonwealth of Independent
States, increased 4.9%. This, however, was offset by the impact of currency
translation on European sales, which had a negative 10.1% effect on the first
nine months of 2000, and a negative impact of 0.5% from divestitures in 1999.
12
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Sales in Asia (excluding Japan) and Latin America increased 16.7% as the
18.0% increase in base business sales was offset slightly by the impact of
currency translation, which had a negative 1.3% effect on the first nine
months. Asia's base business grew 30.1% as the Asian economy continued to
stabilize. Prior year Asian sales were impacted by returns from over extended
dealers in India. The Asian base business sales increase was 20.5% without
India. Base business sales in Latin America grew 12.7%, offset by a decline
of 2.2% due to currency translation.
Sales in the rest of the world grew 9.4%: 10.6% from base business sales
primarily in Canada, Middle East/Africa and Australia; less 0.2% from a 1999
divestiture and less 1.0% from the impact of currency translation.
Gross profit grew $23.9 million, or 7.5%, in the first nine months of 2000
due to higher sales and a gross margin rate improvement. The 2000 first nine
months gross profit percentage was 52.4% compared to 52.1% for the first nine
months of 1999.
SG&A expenses increased $14.7 million, or 6.9%. As a percentage of sales,
expenses remained unchanged, representing 34.8% of net sales for the first
nine months of 2000 and the prior year comparable period. Expenses increased
due to research and deveopment activities, expansion of telemarketing and
field sales forces and legal expenses. The first nine months of 2000
included an increase of $4.0 million in legal expenses, primarily for
litigation with the Justice Department, defense of endodontic patents and
litigation related to the disposable air/water syringe tips.
Net interest expense decreased $4.5 million in the first nine months of 2000
due to lower debt in 2000 and savings resulting from lower rate Swiss debt.
Other (income) expense was unfavorable to 1999 by $2.5 million, including an
increase of $0.6 million in currency transaction losses during the first nine
months of 2000. Other income recorded during the first nine months of 1999
included $0.8 million related to the divestiture of medical businesses in
1994 and 1996, and $0.4 million due to a favorable settlement of a disputed
lease commitment in the United Kingdom. In addition, other expense during
the first nine months of 2000 included higher minority interest of $0.2
million reflecting the profitability of the CeraMed business and a loss from
the write-down of a fixed asset of $0.3 million.
For the nine months ended September 30, 2000, income before income taxes
increased $11.2 million, or 11.8% to $106.2 million from $95.0 million in the
first nine months of 1999. The effective tax rate for operations was lowered
to 33.9% in the first nine months of 2000 compared to 35.3% in the first nine
months of 1999 reflecting savings from federal, state and foreign tax
planning activities.
Net income increased $8.7 million, or 14.2%, from the first nine months of
1999 due to higher sales, higher gross profit percentage, lower interest
expense, and a lower income tax rate; partially offset by the unfavorable
fluctuation in other (income) expense. Basic earnings per common share
increased from $1.16 in 1999 to $1.35 in 2000, or 16.4%. Diluted earnings
per common share increased from $1.16 in 1999 to $1.34 in 2000, or 15.5%.
13
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LIQUIDITY AND CAPITAL RESOURCES
In December 1999, the Board of Directors authorized a stock buyback program
for 2000 to purchase up to 1.0 million shares of common stock on the open
market or in negotiated transactions. In March 2000, the Board of Directors
made an amendment to this program which increased the number of shares to 4.0
million. During the first nine months of 2000, the Company repurchased 1.4
million shares of its common stock for $38.4 million. The timing and amounts
of any additional purchases will depend upon many factors, including market
conditions and the Company's business and financial condition.
The Company's current ratio was 1.7 with working capital of $130.6 million at
September 30, 2000. This compares with a current ratio of 1.8 and working
capital of $138.4 million at December 31, 1999.
The company's long-term debt decreased $32.4 million from December 31, 1999
to $112.9 million. The resulting long-term debt to total capitalization at
September 30, 2000 was 19.0% compared to 23.7% at December 31, 1999. At the
beginning of the first quarter, the Company converted approximately $60
million under its revolving credit agreement to Swiss francs. This enabled
the Company to not only reduce its interest expense by 2.5% to 3.5% but also
allowed the Company to naturally hedge its Swiss franc exposure on its
investments in Switzerland. The Company expects on an ongoing basis, 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 and commercial paper facilities.
For the nine months ended September 30, 2000, cash flows from operating
activities were $110.7 million compared to $74.6 million for the nine months
ended September 30, 1999. The 1999 cash flows from operating activities
included $12.3 million of negative cash flows associated with the two
restructurings recorded in 1998. The increase of $36.1 million results
primarily from higher earnings, decreases in prepaid expenses and other
current assets and increases in accrued liabilities offset by increases in
inventories and accounts receivables.
Investing activities for the nine months ended September 30, 2000 include
acquisitions of businesses of $12.5 and capital expenditures of $20.3 million.
Certain assets of Tulsa Dental Products LLC were purchased in January 1996
for $75.1 million plus $5.0 million in May 1999 related to contingent
consideration (earn-out) provisions in the purchase agreement based on
performance of the acquired business. The agreement provides for an
additional earn-out payment based on the future operating performance of the
Tulsa Dental business for one of the three two-year periods ending December
31, 2000, December 31, 2001 or December 31, 2002, as selected by the seller.
Based on current performance, this earn-out is estimated to be approximately
$70-80 million. Such an earn-out would negatively impact net income annually,
beginning when the contingent payment is recognized, by approximately $5.7
million and earnings per share by approximately $.11 due to additional
goodwill amortization and increased borrowing costs.
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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. This statement, as amended, is required to be
adopted effective January 1, 2001. The adoption of FASB 133 will result in
the recognition of a cumulative adjustment as of January 1, 2001 for the
change in accounting principle. Based on the Company's derivative positions
at September 30, 2000, this adjustment is expected to increase noncurrent
assets by approximately $1.7 million and other comprehensive income, net of
tax, by approximately $1.0 million. The Company does not expect this
statement to have a significant impact on future net income as its derivative
instruments are held primarily for hedging purposes, and the Company
considers the resulting hedges to be highly effective under FASB 133. Any
changes in the composition of the Company's derivative instrument portfolio
or changes in the market values of these instruments between now and the end
of 2000 could have an impact on the cumulative adjustment to other
comprehensive income.
In March 2000, FASB issued FASB Interpretation (FIN) 44, "Accounting for
Certain Transactions involving Stock Compensation", which clarifies the
application of Accounting Principles Board Opinion 25 for certain issues. The
interpretation was generally effective July 1, 2000, except for certain
provisions which were effective after December 15, 1998. The adoption of FIN
44 did not have a material impact on the Company's financial statements.
In October 2000, the Emerging Issues Task Force (EITF) of FASB issued EITF
00-10 "Accounting for Shipping and Handling Fees and Costs" and EITF 00-14
"Accounting for Certain Sales Incentives". EITF 00-10 addresses the income
statement classification for shipping and handling fees and costs. EITF
00-14 addresses recognition, measurement, and income statement classification
for certain sales incentives including discounts, coupons, rebates, and free
products or services. The Company is currently examining its practices in
light of this interpretive guidance and does not expect a material impact
from the application of EITF 00-10 and EITF 00-14 beginning in the fourth
quarter of 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, which addresses principles of revenue
recognition. The Company has examined its revenue recognition practices in
light of this interpretive guidance and it does not expect a material impact
from the application of SAB 101 beginning in the fourth quarter of 2000.
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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 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.
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, 1999.
16
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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. Three follow on private class
action suits on behalf of dentists, laboratories and denture patients in
seventeen states, respectively, who purchased Trubyte teeth or products
containing Trubyte teeth were filed and transferred to 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. The class action
filed on behalf of the dentists has been dismissed by the plaintiffs. The
private party suits seek damages in an unspecified amount. The Company has
filed motions for summary judgment in all of the above cases. Four private
party class actions on behalf of indirect purchasers were filed in California
state court recently. These cases are based on allegations similar to those
in the Department of Justice case. The Company has filed petitions to remove
such actions to the federal court. 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
quarter ended September 30, 2000.
17
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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 14, 2000 /s/ John C. Miles II
------------------- -----------------------------------
Date John C. Miles II
Chairman and
Chief Executive Officer
November 14, 2000 /s/ William R. Jellison
------------------- -----------------------------------
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Number Description Sequential Page No.
27 Financial Data Schedule 20
(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)
19
