SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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 August 5, 2001 the Company had 51,819,452 shares of Common Stock outstanding, with a par value of $.01 per share. Page 1 of 19 1
DENTSPLY INTERNATIONAL INC. FORM 10-Q For Quarter Ended June 30, 2001 INDEX Page No. PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (unaudited) Consolidated Condensed Statements of Income......................... 3 Consolidated Condensed Balance Sheets............................... 4 Consolidated Condensed Statements of Cash Flows..................... 5 Notes to Unaudited Interim Consolidated Condensed Financial Statements.......................................................... 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 13 Item 3 - Quantitative and Qualitative Disclosures About Market Risk................................................................ 16 PART II - OTHER INFORMATION Item 1 - Legal Proceedings........................................................... 17 Item 4 - Submission of Matters to a Vote of Security Holders.......... 18 Item 6 - Exhibits and Reports on Form 8-K............................. 18 Signatures............................................................... 19 2
<TABLE> DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited) <CAPTION> Three Months Ended June 30, Six Months Ended June 30, 2001 2000 2001 2000 (in thousands, except per share amounts) <S> <C> <C> <C> <C> Net sales $ 254,635 $ 224,788 $ 500,304 $ 438,744 Cost of products sold 120,908 106,357 236,763 209,838 Gross profit 133,727 118,431 263,541 228,906 Selling, general and administrative expenses 89,391 78,700 178,784 152,435 Restructuring costs (Note 6) -- -- 5,500 -- Operating income 44,336 39,731 79,257 76,471 Other income and expenses: Interest expense 4,296 2,679 7,877 5,679 Interest income (240) (452) (484) (841) Other (income) expense, net (888) 169 (23,720) 192 Income before income taxes 41,168 37,335 95,584 71,441 Provision for income taxes 13,764 12,708 33,854 24,622 Net income $ 27,404 $ 24,627 $ 61,730 $ 46,819 Earnings per common share (Note 3): Basic $ 0.53 $ 0.47 $ 1.19 $ 0.90 Diluted 0.52 0.47 1.18 0.89 Cash dividends declared per common share $ 0.06875 $ 0.06250 $ 0.13750 $ 0.12500 Weighted average common shares outstanding: Basic 51,748 51,912 51,695 52,113 Diluted 52,618 52,378 52,471 52,459 <FN> See accompanying notes to unaudited interim consolidated condensed financial statements. </FN> </TABLE> 3
<TABLE> DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited) <CAPTION> June 30, December 31, 2001 2000 (in thousands) <S> <C> <C> Assets Current Assets: Cash and cash equivalents $ 16,960 $ 15,433 Accounts and notes receivable-trade, net 136,452 133,643 Inventories, net (Notes 1 and 5) 154,672 133,304 Prepaid expenses and other current assets 41,871 43,074 Total Current Assets 349,955 325,454 Property, plant and equipment, net 185,515 181,341 Identifiable intangible assets, net 165,094 80,730 Costs in excess of fair value of net assets acquired, net 410,432 264,023 Other noncurrent assets 51,827 15,067 Total Assets $ 1,162,823 $ 866,615 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 45,063 $ 45,764 Accrued liabilities 101,220 88,058 Income taxes payable 36,015 33,522 Notes payable and current portion of long-term debt 1,480 794 Total Current Liabilities 183,778 168,138 Long-term debt 340,116 109,500 Deferred income taxes 25,257 16,820 Other noncurrent liabilities 46,642 47,226 Total Liabilities 595,793 341,684 Minority interests in consolidated subsidiaries 4,355 4,561 Commitments and contingencies (Note 8) 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 June 30, 2001 and December 31, 2000 543 543 Capital in excess of par value 152,945 151,899 Retained earnings 544,783 490,167 Accumulated other comprehensive loss (67,519) (49,296) Unearned ESOP compensation (4,179) (4,938) Treasury stock, at cost, 2.5 million shares at June 30, 2001 and 2.6 million at December 31, 2000 (63,898) (68,005) Total Stockholders' Equity 562,675 520,370 Total Liabilities and Stockholders' Equity $ 1,162,823 $ 866,615 <FN> See accompanying notes to unaudited interim consolidated condensed financial statements. </FN> </TABLE> 4
<TABLE> DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited) <CAPTION> Six Months Ended June 30, --------------------------------- 2001 2000 (in thousands) <S> <C> <C> Cash flows from operating activities: Net income $ 61,730 $ 46,819 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 12,999 11,932 Amortization 13,428 9,709 Restructuring and other costs 5,500 -- Gain on sale of business (23,121) -- Other, net 1,010 (3,812) Net cash provided by operating activities 71,546 64,648 Cash flows from investing activities: Acquisitions of businesses, net of cash acquired (201,691) 1,274 Additional consideration for prior purchased businesses (84,627) -- Capital expenditures (24,376) (13,510) Other, net 1,085 (865) Net cash used in investing activities (309,609) (13,101) Cash flows from financing activities: Proceeds from long-term borrowings, net of deferred financing costs 283,436 79,194 Payments on long-term borrowings (52,229) (102,868) (Decrease) increase in short-term borrowings (3,573) 1,088 Cash paid for treasury stock (875) (26,500) Cash dividends paid (7,101) (6,541) Other, net 5,068 2,279 Net cash provided by (used in) financing activities 224,726 (53,348) Effect of exchange rate changes on cash and cash equivalents 14,864 1,417 Net increase (decrease) in cash and cash equivalents 1,527 (384) Cash and cash equivalents at beginning of period 15,433 7,276 Cash and cash equivalents at end of period $ 16,960 $ 6,892 <FN> See accompanying notes to unaudited interim consolidated condensed financial statements. </FN> </TABLE> 5
DENTSPLY INTERNATIONAL INC. NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS June 30, 2001 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 statement 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 Form 10-K filed March 20, 2001 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 June 30, 2001, the cost of $14.9 million or 10% of inventories was determined by the last-in, first-out (LIFO) method. At December 31, 2000, the cost of $14.0 million or 10% 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. Pre-tax income was $0.3 million lower in the six months ended June 30, 2001 and $0.2 million lower for the same period in 2000 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 June 30, 2001 by $0.1 million and lower than reported at December 31, 2000 by $0.2 million. NOTE 2 - COMPREHENSIVE INCOME The components of comprehensive income are as follows: <TABLE> <CAPTION> Three Months Ended June 30, Six Months Ended June 30, 2001 2000 2001 2000 (in thousands) <S> <C> <C> <C> <C> Net income $ 27,404 $ 24,627 $ 61,730 $ 46,819 Foreign currency translation adjustments (1,907) (811) (16,787) (5,085) Cumulative effect of change in accounting principle for derivative and hedging activities (SFAS 133) -- -- (503) -- Net loss on derivative financial instruments 538 -- (933) -- Total comprehensive income $ 26,035 $ 23,816 $ 43,507 $ 41,734 </TABLE> 6
The balances included in accumulated other comprehensive loss in the consolidated balance sheets are as follows: <TABLE> <CAPTION> June 30, December 31, 2001 2000 (in thousands) <S> <C> <C> Foreign currency translation adjustments $ (65,412) $ (48,625) Net loss on derivative financial instruments (1,436) - Minimum pension liability (671) (671) $ (67,519) $ (49,296) </TABLE> NOTE 3 - EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per common share: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 (in thousands, except per share amounts) <S> <C> <C> <C> <C> Basic EPS Computation Numerator (Income) $27,404 $24,627 $61,730 $46,819 Denominator: Common shares outstanding 51,748 51,912 51,695 52,113 Basic EPS $ 0.53 $ 0.47 $ 1.19 $ 0.90 Diluted EPS Computation Numerator (Income) $27,404 $24,627 $61,730 $46,819 Denominator: Common shares outstanding 51,748 51,912 51,695 52,113 Incremental shares from assumed exercise of dilutive options 870 466 776 346 Total shares 52,618 52,378 52,471 52,459 Diluted EPS $ 0.52 $ 0.47 $ 1.18 $ 0.89 </TABLE> Options to purchase 2,600 and 84,300 shares of common stock that were outstanding during the quarter ended June 30, 2001 and 2000, respectively, were not included in the computation of diluted earnings per share since the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Antidilutive options outstanding during the six months ended June 30, 2001 and 2000 were 36,600 and 579,200, respectively. NOTE 4 - BUSINESS ACQUISITIONS/DIVESTITURES In December 2000, the Company agreed to acquire all the outstanding shares of Friadent GmbH ("Friadent") for 220 million German marks or $106 million ($104.7 million, net of cash acquired). The acquisition closed in January 2001. Headquartered in Mannheim, Germany, Friadent is a major global dental implant manufacturer and marketer with subsidiaries in Germany, France, Denmark, Sweden, the United States, Switzerland, Brazil, and Belgium. 7
In December 2000, the Company agreed to sell InfoSoft, LLC to PracticeWorks, Inc. InfoSoft, LLC, a wholly owned subsidiary of the Company, develops and sells software and related products for dental practice management. PracticeWorks is the dental software management and dental claims processing company which was spun-off by Infocure Corporation (NASDAQ-INCX). The transaction closed in March 2001. In the transaction, the Company received 6.5% convertible preferred stock in PracticeWorks, with a fair value of $32 million, which is included in "Other noncurrent assets" on the balance sheet. These preferred shares are convertible into 9.8% of PracticeWorks common stock. If not previously converted, the preferred shares are redeemable for cash after 5 years. This sale has resulted in a $23.1 million pretax gain. The Company will measure recoverability on this investment on a periodic basis. In January 2001, the Company agreed to acquire the dental injectible anesthetic assets of AstraZeneca ("AZ"), including licensing rights to the dental trademarks, for $136.5 million and royalties on future sales of a new anesthetic product for scaling and root planing (Oraqix(TM)) that is currently in Stage III clinical trials. The $136.5 million purchase price is composed of the following: an initial $96.5 million payment which was made at closing in March 2001; a $20 million contingency payment associated with sales of injectible dental anesthetic; a $10 million milestone payment upon submission of an Oraqix New Drug Application (NDA) in the U.S., and Marketing Authorization Application (MAA) in Europe; and a $10 million milestone payment upon approval of the NDA and MAA. In August 1996, the Company purchased a 51% interest in CeraMed Dental ("CeraMed") for $5 million with the right to acquire the remaining 49% interest. In March 2001, the Company entered into an agreement for an early buy out of the remaining 49% interest in CeraMed at a cost of $20 million with a potential contingent consideration ("earn-out") provision capped at $5 million. The acquisition of the remaining 49% was made on July 1, 2001. In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", the goodwill associated with this acquisition will not be amortized. The earn-out is based on future sales of CeraMed products during the August 1, 2001 to July 31, 2002 time frame with any additional pay out due on September 30, 2002. Certain assets of Tulsa Dental Products LLC were purchased in January 1996 for $75.1 million, plus $5.0 million paid in May 1999 related to earn-out provisions in the purchase agreement based on performance of the acquired business. The purchase agreement provided for an additional earn-out payment based upon the 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. The seller chose the two-year period ended December 31, 2000 and the final earn-out payment of $84.6 million was made in May 2001. In May 2001, the Company entered into an agreement to purchase Degussa Dental Group ("Degussa Dental"), a unit of Degussa AG, for 576 million euros or approximately $500 million. Degussa Dental is a global provider of dental materials to the professional dental products industry, specializing in precious metal dental alloys and ceramics. It is the world's second largest dental company and the market leader in Germany and Europe and the only significant non-domestic dental company in the Japanese market. Headquartered in Hanau-Wolfgang, Germany since 1992, Degussa Dental Group has modern production facilities throughout the world. This transaction is expected to close late in the third quarter or early in the fourth quarter of 2001. The acquisitions above 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. The preliminary purchase price allocations for Friadent and AZ are as follows: Friadent AZ Current assets $ 15,594 $ -- Property, plant and equipment 3,872 6,593 Identifiable intangible assets and costs in excess of fair value of net assets acquired 97,227 90,204 Other long-term assets 460 -- Current liabilities (12,259) -- $ 104,894 $ 96,797 8
Assuming that the acquisitions of Friadent and AZ had occurred on January 1, 2000, the results of operations would have approximated the following in comparison to the reported results: <TABLE> <CAPTION> As Reported Pro Forma with AZ and Friadent Six Months Ended June 30, Six Months Ended June 30, 2001 2000 2001 2000 <S> <C> <C> <C> <C> Net sales $ 500,304 $ 438,744 $ 508,093 $ 498,517 Net income 61,730 46,819 62,158 48,406 Earnings per common share Basic $ 1.19 $ 0.90 $ 1.20 $ 0.93 Diluted 1.18 0.89 1.18 0.92 </TABLE> NOTE 5 - INVENTORIES Inventories consist of the following: June 30, December 31, 2001 2000 (in thousands) Finished goods $ 98,452 $ 84,436 Work-in-process 26,150 22,102 Raw materials and supplies 30,070 26,766 $ 154,672 $ 133,304 NOTE 6 - RESTRUCTURING AND OTHER COSTS In the first quarter of 2001, the Company recorded a pre-tax charge of $5.5 million related to reorganizing certain functions within Europe, Brazil and North America. The primary objectives of this reorganization were to consolidate duplicative functions and to improve efficiencies within these regions and are expected to contribute to future earnings. Included in this charge were severance costs of $3.1 million and other costs of $2.4 million. The restructuring plan will result in the elimination of approximately 330 administrative and manufacturing positions in Brazil and Germany. Approximately 45 of these positions remain to be eliminated. The Company anticipates that most aspects of this plan will be completed, and the benefits of the restructuring will begin to be realized, by the first quarter of 2002. The major components of this restructuring charge and the remaining outstanding balances are as follows: Amounts Applied Balance 2001 During June 30, Provision 2001 2001 (in thousands) Severance $ 3,130 $ (873) $ 2,257 Other costs 2,370 - 2,370 $ 5,500 $ (873) $ 4,627 9
In the fourth quarter of 2000, the Company recorded a pre-tax charge of $2.7 million related to the reorganization of its French and Latin American businesses. The primary focus of the reorganization is consolidation of operations in these regions in order to eliminate duplicative functions. The Company anticipates that this plan will increase operational efficiencies and contribute to future earnings. Included in this charge were severance costs of $2.3 million and other costs of $0.4 million. The restructuring will result in the elimination of approximately 40 administrative positions, mainly in France. Approximately 25 of these positions remain to be eliminated. The Company anticipates that most aspects of this plan will be completed, and the benefits of the restructuring will begin to be realized, by the end of 2001. The major components of this restructuring charge and the remaining outstanding balances are as follows: Amounts Amounts Applied Applied Balance 2000 During During June 30, Provision 2000 2001 2001 (in thousands) Severance $ 2,299 $ (611) $ (618) $ 1,070 Other costs 403 - (22) 381 $ 2,702 $ (611) $ (640) $ 1,451 NOTE 7 - DERIVATIVES Adoption of SFAS 133 Statement of Financial Accounting Standards No. 133 ("SFAS 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, was adopted effective January 1, 2001, and as required, the Company recognized a cumulative adjustment for the change in accounting principle. This adjustment increased other current liabilities by $1.1 million and resulted in a cumulative loss, reflected in current earnings of $0.3 million ($0.2 million, net of tax), and a reduction in other comprehensive income of $0.8 million ($0.5 million, net of tax). The cumulative loss on adoption of SFAS 133 recognized in the income statement was recorded in "Other (income) expense, net" and was considered immaterial for presentation as a cumulative effect of a change in accounting principle. 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. A portion of the Company's borrowings and certain 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 non-U.S. dollar-denominated-debt as a means of hedging some of this risk. Substantially all of the Company's long-term debt is variable-rate, which exposes the Company to earnings fluctuations from changing interest rates. In order to adjust these interest rate exposures, the Company's policy is to manage interest rates through the use of interest rate swaps when appropriate, based upon market conditions. The manufacturing of some of the Company's products requires a significant volume of commodities with potentially volatile prices. In order to limit the unanticipated earnings fluctuations from such volatility in commodity prices, the Company selectively enters into commodity price swaps to convert variable raw material costs to fixed costs. 10
Cash Flow Hedges The Company enters into forward exchange contracts to hedge the foreign currency exposure of its anticipated purchases of certain inventory from Japan. The forward contracts that are used in this program mature in twelve months or less. The Company generally hedges between 33% and 67% of its anticipated purchases. The Company uses interest rate swaps to convert a portion of its variable-rate debt to fixed-rate debt. In January 2000, the Company entered into an interest rate swap agreement with notional amounts totaling 50 million Swiss francs which converts a portion of the Company's variable rate Swiss franc financing to a fixed rate of 3.4% for a period of three years. In February 2001, the Company entered into interest rate swap agreements with notional amounts totaling 130 million Swiss francs which converts a portion of the Company's variable rate financing to an average fixed rate of 3.3% for an average period of four years. The Company selectively enters into commodity price swaps to convert variable raw material costs to fixed. In August 2000, the Company entered into a commodity price swap agreement with notional amounts totaling 270,000 troy ounces of silver bullion throughout calendar year 2001. The average fixed rate of this agreement is $5.10 per troy ounce. The Company generally hedges between 33% and 67% of its projected annual silver needs. For the period ended June 30, 2001, the Company recognized a net loss of $0.4 million in "Other expense (income), net" of the income statement, which represented the total ineffectiveness of all cash flow hedges. As of June 30, 2001, $1.0 million of deferred net losses on derivative instruments accumulated in other comprehensive income are expected to be reclassified to current earnings during the next twelve months. Transactions and events that are expected to occur over the next twelve months that will necessitate such a reclassification include: the sale of inventory that includes previously hedged purchases made in Japanese yen; the sale of inventory that includes previously hedged purchases of silver; and amortization of a portion of the net deferred loss on interest rate swaps terminated as part of a swap restructuring in February 2001, which is being amortized over the remaining term of the underlying loan being hedged. 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. Hedges of Net Investments in Foreign Operations The Company has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to the volatility in currency exchange rates. Currently, the Company uses nonderivative financial instruments (at the parent company level) to hedge some of this exposure. The translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the parent company's debt obligations. At June 30, 2001, the Company had Swiss franc-denominated debt (at the parent company level) to hedge the currency exposure related to the net assets of its Swiss subsidiaries. For the period ended June 30, 2001, $7.6 million of net gains related to the Swiss franc-denominated debt were included in the Company's foreign currency translation adjustment. Other As of June 30, 2001, the Company had recorded the fair value of derivative instrument liabilities of $0.2 million in "Accrued liabilities" and $0.2 million in "Other noncurrent liabilities" on the balance sheet. In accordance with SFAS 52, "Foreign Currency Translation", the Company utilizes long-term intercompany loans to eliminate foreign currency transaction exposures of certain foreign subsidiaries. Net gains or losses related to these long-term intercompany loans, those for which settlement is not planned or anticipated in the foreseeable future, are included in the Company's foreign currency translation adjustment. 11
NOTE 8 - 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 or liquidity. 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 filed Motions for Summary Judgment in all of the above cases. The Court denied the Motion for Summary Judgment regarding the Department of Justice action, granted the Motion on the lack of standing of the patient class action and granted the Motion on lack of standing of the laboratory class action to pursue damage claims. After the Court's decision, in an attempt to avoid the effect of the Court's ruling, the attorneys for the laboratory class action filed a new Complaint naming Dentsply and its dealers as co-conspirators with respect to Dentsply's distribution policy. Dentsply has filed a Motion to Dismiss this re-filed action. Four private party class actions on behalf of indirect purchasers have been filed in California. These cases are based on allegations similar to those in the Department of Justice case. In response to the Company's Motion, these cases have been consolidated in one Judicial District in Los Angeles. It is the Company's position that the conduct and activities of the Trubyte Division do not violate the antitrust laws. NOTE 9 - OTHER EVENTS On January 25, 2001, a fire broke out in one of the Company's Swiss manufacturing facilities. The fire caused severe damage to a building and to most of the equipment it contained. The Company is in the process of assessing all the damages and potential losses related to this fire and has filed several insurance claims, including a claim under its business interruption policy. The claims process is lengthy and its outcome cannot be predicted with certainty; however, the Company anticipates that all or most of the financial loss incurred from this fire will be recovered under its various insurance policies. 12
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, 2000. RESULTS OF OPERATIONS Quarter Ended June 30, 2001 Compared to Quarter Ended June 30, 2000 For the quarter ended June 30, 2001, net sales increased $29.8 million, or 13.3%, to $254.6 million, up from $224.8 million in the same period of 2000. Base business sales (internal sales growth exclusive of acquisitions/divestitures and the impact of currency translation) grew 5.2%. This growth was achieved over both large equipment and consumable (which includes small equipment) product categories. The impact of currency translation had a negative effect of 2.6% on the second quarter results compared to the comparable period in 2000 due to the further strengthening of the U.S. dollar against most global currencies while acquisitions in 2001, net of divestiture, had a positive 10.7% impact on net sales growth. Sales in the United States for the second quarter grew 12.1%. Base business sales growth in the U.S., up 7.5%, was the result of increases in both consumable and large equipment lines. Strong growth was achieved in teeth, endodontics, orthodontics, intraoral cameras and digital x-ray systems. Acquisitions, net of divestitures, added 4.6% to net sales in the U.S. during the second quarter. European sales, including the Commonwealth of Independent States ("C.I.S."), increased 18.2% during the second quarter of 2001. European base business sales increased 1.1%. Currency translation had a negative 5.8% effect on the quarter in Europe. Acquisitions added 22.9% to European sales during the quarter. While equipment base business sales in Europe were strong, the consumable and small equipment base business sales growth in Europe was soft due mainly to the Maillefer fire and a difficult transition into the European central warehouse. Asia (excluding Japan) base business sales increased 9.7% as the Asian dental markets remained solid. Latin American base business sales declined 1.4% during the second quarter 2001, primarily due to a recession in Brazil and Argentina, the two key Latin American markets. In addition, a sales policy change in pricing and terms has had a short-term impact on business in Brazil. Sales in the rest of the world grew 16.4%: 3.3% from base business primarily in Africa, Japan and Australia; less 4.5% from the impact of currency translation plus 17.6% from acquisitions. Gross profit grew 12.9% in the second quarter due to higher sales. The 52.5% second quarter 2001 gross profit percentage was lower than the 52.7% gross profit percentage for the second quarter of 2000. This decline was due mainly to the negative impact of a stronger U.S. dollar in 2001 and costs associated with acquisitions. Selling, general and administrative (SG&A) expense increased $10.7 million, or 13.6%. As a percentage of sales, expenses increased slightly from 35.0% in the second quarter of 2000 to 35.1% for the same period of 2001 due to recent acquisitions. SG&A spending, excluding acquisitions, represented 34.8% of sales during the second quarter of 2001 compared to 35.1% for the same period in 2000. This decrease is mainly due to lower legal expenses. Net interest expense increased $1.8 million in the second quarter of 2001 due to higher debt levels in 2001 to finance the Friadent and AstraZeneca acquisitions and the Tulsa earn-out, offset somewhat by strong operating cash flow and savings in interest expense resulting from further utilization of lower rate Swiss debt in the second quarter of 2001. Other income increased $1.1 million in the second quarter of 2001 from favorable currency transaction fluctuations and the preferred stock dividends due from PracticeWorks resulting from the sale of InfoSoft, LLC ("InfoSoft") in the first quarter of 2001. 13
The effective tax rate for operations was lowered to 33.5% in the second quarter of 2001 compared to 34.0% in the second quarter of 2000 reflecting savings from federal, state and foreign tax planning activities. Net income increased $2.8 million, or 11.3% from the second quarter of 2000 and diluted earnings per common share were $0.52, an increase of 10.6% from $0.47 in the second quarter of 2000, including a negative $.02 per common share impact for amortization and interest associated with the Tulsa earn-out payment made in May, 2001. Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 Net sales for the six months ended June 30, 2001 were $61.6 million, or 14.0%, above the comparable period in 2000, including 10.3% for acquisitions. Excluding acquisitions and the InfoSoft divestiture, base business net sales for the six months ended June 30, 2001 were up 6.1% at 2001 actual exchange rates for both periods (constant exchange rates), up 3.7% at reported exchange rates. This growth was achieved over both large equipment and consumable (which includes small equipment) product categories. The impact of currency had a 2.4% negative impact as the U.S. dollar remained strong against most global currencies adversely affecting the comparison to the prior year. Sales in the United States for the first half grew 11.8%. Base business growth in the U.S., up 8.0%, was achieved across both consumable and equipment lines. Notable growth was achieved in endodontics, orthodontics, intraoral cameras and digital x-rays systems. Acquisitions, net of divestitures, added 3.8% to net sales in the U.S. during the first half of 2001. European sales, including C.I.S., increased 18.7% during the first six months of 2001. European base business sales increased 2.7%. Currency translation had a negative 5.0% effect on the same period. Acquisitions added 21.0% to European sales during the first six months of 2001. While equipment base business sales in Europe were strong, the consumable and small equipment base business sales growth in Europe was soft due mainly to the Maillefer fire and a difficult transition into the European central warehouse. Asia (excluding Japan) base business sales increased 12.7% as the Asian dental markets remained solid. Latin American base business sales decreased 0.2% during the first half of 2001 primarily due to a recession in Brazil and Argentina, the two key Latin American markets. In addition, a sales policy change in pricing and terms has had a short-term impact business in Brazil. Sales in the rest of the world grew 24.7%: 4.8% from base business primarily in Africa, Japan, and Australia; less 4.9% from the impact of currency translation plus 24.8% from acquisitions. Gross profit grew 15.1% in the first six months of 2001 due to higher sales. The 52.7% first half 2001 gross profit percentage was higher than the 52.5% gross profit percentage for the first half of 2000. Gross profit margins benefited from restructuring and operational improvements and a favorable product mix offset somewhat by the negative impact of a strong U.S. dollar and costs associated with acquisitions, including the amortization of inventory step-up in 2001. Selling, general and administrative (SG&A) expenses increased $26.3 million, or 17.3%. As a percentage of sales, expenses increased from 34.7% in the first six months of 2000 to 35.7% for the same period of 2001. The recent acquisitions accounted for 0.8 percentage points of the rate increase. The increased SG&A spending also includes the additional sales and marketing expenses due to the North American sales conference held in February 2001 which brought together 700 Dentsply field sales people at one venue and the bi-annual International Dental Society (IDS) meeting held in Cologne, Germany in March, 2001. Net interest expense increased $2.6 million in the first half of 2001 due to higher debt levels in 2001 to finance the Friadent and AstraZeneca acquisitions and the Tulsa earn-out, offset somewhat by strong operating cash flow and savings in interest expense resulting from further utilization of lower rate Swiss debt in the first quarter of 2001. Other income increased $23.9 million in the first six months of 2001 reflecting the net gain on the sale of SoftDent. Net income increased $14.9 million, or 31.8% from the first half of 2000 including a $13.6 million after tax gain on the sale of InfoSoft and a $3.8 million after tax charge for restructuring recorded in the first quarter of 2001. Without the restructuring charge and the gain on the sale of InfoSoft, net income was $51.9 million, up 10.9% from the first half of 2000, and diluted earnings per common share were $0.99, an increase of 11.2% from $0.89 in the first half of 2001, including a negative $.02 per common share impact from the Tulsa earn-out payment made in May 2001. This increase was due to higher sales, higher gross profit margin, and lower income tax rate, offset slightly by higher expenses as a percent of sales and higher interest expense in the first half of 2001. 14
Quarter Ending September 30, 2001 In the third quarter of 2001, the Company plans to expense two $5 million R&D milestone payments associated with the regulatory filings for ORAQIX , a revolutionary gel based dental anesthetic. These expenditures are part of the AstraZeneca dental anesthetic acquisition payments. We expect these payments will be made late in the fourth quarter of 2001, however, the expense will be recognized in the 3rd quarter of this year when the regulatory filings are made. This charge will result in a one-time $0.17 per share negative impact, which reflects only a small income tax benefit. The Company also expects to generate a pre-tax gain of approximately $8.5 to $9.5 million in the third quarter related to the restructuring of its UK pension arrangements. This is expected to have a one-time earnings-per-share benefit of approximately $0.10 to $0.11 in the third quarter and a corresponding cash benefit in the third quarter or fourth quarter of 2001. LIQUIDITY AND CAPITAL RESOURCES For the six months ended June 30, 2001, cash flows from operating activities were $71.5 million compared to $64.6 million for the six months ended June 30, 2000. The increase of $6.9 million results primarily from higher earnings, increases in accrued liabilities and deferred income taxes offset by an increase in inventory. Investing activities for the six months ended June 30, 2001 include capital expenditures of $24.4 million. In December 2000, the Board of Directors authorized a stock buyback program for 2001 to purchase up to 1.0 million shares of common stock on the open market or in negotiated transactions. During the first half of 2001, the Company repurchased 25,000 shares of its common stock for $0.9 million. The Company does not plan to make any additional purchases of its common stock under this program in 2001. The Company's current ratio was 1.9 with working capital of $166.2 million at June 30, 2001. This compares with a current ratio of 1.9 and working capital of $157.3 million at December 31, 2000. The Company had acquisition activity during the six months ended June 30, 2001 that has resulted or will result in significant cash outlays. In January 2001, the Company completed the acquisition of Friadent GmbH ("Friadent") for 220 million German marks or $106 million ($104.7, net of cash acquired). In March 2001, the Company completed the acquisition of the dental injectible anesthetic assets of AstraZeneca ("AZ"), including licensing rights to the dental trademarks, for $96.5 million, with potential additional payments of $40 million to be made at future dates. Additionally, in March 2001, the Company entered into an agreement for an early buy out of the remaining 49% interest in CeraMed Dental at a cost of $20 million with a potential earn-out provision capped at $5 million. The $20 million payment was made on July 1, 2001 and the earn-out is based on future sales. In May 2001, the Company also made an earn-out payment of $84.6 million related to its 1996 purchase of Tulsa Dental Products LLC. The earn-out is based on provisions in the purchase agreement related to the operating performance of the acquired business. In May 2001, the Company entered into an agreement to purchase Degussa Dental Group ("Degussa Dental"), a unit of Degussa AG, for 576 million euros or approximately $500 million. This transaction is expected to close late in the third quarter or early in the fourth quarter of 2001. These transactions are discussed in Note 4 of the Notes to Unaudited Interim Consolidated Condensed Financial Statements. In order to fund these transactions, the Company completed a $100 million five year average life private placement of debt, denominated in Swiss francs at an average interest rate of 4.5% with a major insurance company in March 2001. In May 2001 the Company also replaced and expanded its revolving credit agreements to $500 million from its previous level of $300 million. Additionally, the Company intends to fund the Degussa Dental transaction primarily through a long-term eurobond debt offering which is expected to be finalized late in the third quarter of 2001. The Company's long-term debt increased $230.6 million from December 31, 2000 to $340.1 million due to the acquisitions that closed through June 30, 2001. The resulting long-term debt to total capitalization at June 30, 2001 was 37.7% compared to 17.4% at December 31, 2000. The Company expects on an ongoing basis, to be able to finance cash requirements, including capital expenditures, stock repurchases, debt service, and potential future acquisitions, from the funds generated from operations and amounts available under its existing credit facilities. 15
NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133 ("SFAS 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, was adopted effective January 1, 2001, and as required, the Company recognized a cumulative adjustment for the change in accounting principle. This adjustment increased other current liabilities by $1.1 million and resulted in a cumulative loss, reflected in current earnings of $0.3 million ($0.2 million, net of tax), and a reduction in other comprehensive income of $0.8 million ($0.5 million, net of tax). 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 SFAS 133. In June 2001 FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets". SFAS 141 addresses financial accounting and reporting for business combinations. Specifically, effective for business combinations occurring after July 1, 2001, it eliminates the use of the pooling method of accounting and requires all business combinations to be accounted for under the purchase method. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. The primary change related to this new standard is that the amortization of goodwill and intangible assets with indefinite useful lives will be discontinued and instead an annual impairment approach will be applied. Except for such intangibles acquired after July 1, 2001 (in which case, amortization will not be recognized at all), the Company will discontinue amortization on these intangible assets effective January 1, 2002. The Company expects this change in accounting to have a positive impact on earnings per share of approximately $0.20 to $0.25 beginning in 2002. 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 have adopted the Euro as the functional currency effective January 1, 2001. At this time, the Company does not expect the reasonably 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, 2000. 16
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 or liquidity. 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 filed Motions for Summary Judgment in all of the above cases. The Court denied the Motion for Summary Judgment regarding the Department of Justice action, granted the Motion on the lack of standing of the patient class action and granted the Motion on lack of standing of the laboratory class action to pursue damage claims. After the Court's decision, in an attempt to avoid the effect of the Court's ruling, the attorneys for the laboratory class action filed a new Complaint naming Dentsply and its dealers as co-conspirators with respect to Dentsply's distribution policy. Dentsply has filed a Motion to Dismiss this re-filed action. Four private party class actions on behalf of indirect purchasers have been filed in California. These cases are based on allegations similar to those in the Department of Justice case. In response to the Company's Motion, these cases have been consolidated in one Judicial District in Los Angeles. It is the Company's position that the conduct and activities of the Trubyte Division do not violate the antitrust laws. 17
Item 4 - Submission of Matters to a Vote of Security Holders (a) On May 23, 2001, the Company held its 2001 Annual Meeting of stockholders. (b) Not applicable. (c) The following matters were voted upon at the Annual Meeting, with the results indicated: 1. Election of Class III Directors: Votes Broker Nominee Votes For Withheld Non-Votes Michael J. Coleman 35,332,705 11,649,904 N/A John C. Miles II 41,352,401 5,630,208 N/A W. Keith Smith 46,164,416 818,193 N/A 2. Proposal to ratify the appointment of PricewaterhouseCoopers LLP, independent accountants, to audit the books and accounts of the Company for the year ending December 31, 2001: Votes For:46,640,345 Votes Against: 289,751 Abstentions: 52,513 Broker Non-Votes: N/A (d) Not applicable. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 3.2 By-Laws, as amended 10.1 Degussa Dental Group Sale and Purchase Agreement, dated May 28/29, 2001 between Degussa AG (Seller) and Dentsply Hanau GmbH & Co. KG, Dentsply Research & Development Corporation and Dentsply EU S.a.r.l. (Purchasers and subsidiaries of the Company). (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended June 30, 2001. 18
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. August 14, 2001 /s/ John C. Miles II Date John C. Miles II Chairman and Chief Executive Officer August 14, 2001 /s/ William R. Jellison Date William R. Jellison Senior Vice President and Chief Financial Officer 19