Edgar Filing: DENTSPLY INTERNATIONAL INC /DE/

Dentsply 10-Q1 2014

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________

Commission File Number 0-16211

DENTSPLY International Inc.

(Exact name of registrant as specified in its charter)



Delaware		39-1434669
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)



221 West Philadelphia Street, York, PA		17405-0872
(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.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At April 29, 2014, DENTSPLY International Inc. had 141,792,228 shares of Common Stock outstanding, with a par value of $.01 per share.

DENTSPLY International Inc.

TABLE OF CONTENTS



		Page
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited)	3

	Consolidated Statements of Operations	3

	Consolidated Statements of Comprehensive Income	4

	Consolidated Balance Sheets	5

	Consolidated Statements of Cash Flows	6

	Consolidated Statements of Changes in Equity	7

	Notes to Unaudited Interim Consolidated Financial Statements	8

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4	Controls and Procedures	40

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	41

Item 1A	Risk Factors	41

Item 2	Unregistered Sales of Securities and Use of Proceeds	41

Item 6	Exhibits	42

	Signatures	42

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)



	Three Months Ended March 31,
	2014			2013

Net sales	$	730,114		$	732,084
Cost of products sold	335,909			343,884

Gross profit	394,205			388,200
Selling, general and administrative expenses	287,842			293,677
Restructuring and other costs	793			665

Operating income	105,570			93,858

Other income and expenses:
Interest expense	10,955			15,221
Interest income	(1,435		)	(2,175		)
Other expense (income), net	388			2,918

Income before income taxes	95,662			77,894
Provision for income taxes	22,452			3,542
Equity in net loss of unconsolidated affiliated company	(290		)	(1,779		)

Net income	72,920			72,573
Less: Net income attributable to noncontrolling interests	42			888

Net income attributable to DENTSPLY International	$	72,878		$	71,685

Earnings per common share:
Basic	$	0.51		$	0.50
Diluted	$	0.50		$	0.49

Weighted average common shares outstanding:
Basic	142,053			142,775
Diluted	144,453			145,099

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(unaudited)



	Three Months Ended March 31,
	2014			2013

Net income	$	72,920		$	72,573

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(1,035		)	(94,142		)
Net gain on derivative financial instruments	1,757			28,118
Net unrealized holding (loss) gain on available-for-sale securities	(2,041		)	7,640
Pension liability adjustments	318			2,776
Total other comprehensive income (loss), net of tax	(1,001		)	(55,608		)

Total comprehensive income	71,919			16,965

Less: Comprehensive income attributable
to noncontrolling interests	114			181

Comprehensive income attributable to
DENTSPLY International	$	71,805		$	16,784

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(unaudited)



	March 31, 2014			December 31, 2013
Assets
Current Assets:
Cash and cash equivalents	$	55,823		$	74,954
Accounts and notes receivables-trade, net	496,221			472,802
Inventories, net	455,074			438,559
Prepaid expenses and other current assets	195,205			157,487

Total Current Assets	1,202,323			1,143,802

Property, plant and equipment, net	642,318			637,172
Identifiable intangible assets, net	785,997			795,323
Goodwill, net	2,286,715			2,281,596
Other noncurrent assets, net	172,080			220,154

Total Assets	$	5,089,433		$	5,078,047

Liabilities and Equity
Current Liabilities:
Accounts payable	$	141,591		$	132,789
Accrued liabilities	398,881			339,308
Income taxes payable	23,829			14,446
Notes payable and current portion of long-term debt	403,145			309,862

Total Current Liabilities	967,446			796,405

Long-term debt	1,065,463			1,166,178
Deferred income taxes	236,269			238,394
Other noncurrent liabilities	295,657			299,096

Total Liabilities	2,564,835			2,500,073

Commitments and contingencies

Equity:
Preferred stock, $.01 par value; .25 million shares authorized; no shares issued	—			—
Common stock, $.01 par value; 200.0 million shares authorized; 162.8 million shares issued at March 31, 2014 and December 31, 2013.	1,628			1,628
Capital in excess of par value	211,467			255,272
Retained earnings	3,159,123			3,095,721
Accumulated other comprehensive loss	(75,665		)	(69,062		)
Treasury stock, at cost, 21.0 million and 20.5 million shares at March 31, 2014 and December 31, 2013, respectively.	(773,520		)	(748,506		)
Total DENTSPLY International Equity	2,523,033			2,535,053

Noncontrolling interests	1,565			42,921

Total Equity	2,524,598			2,577,974

Total Liabilities and Equity	$	5,089,433		$	5,078,047

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)



	Three Months Ended March 31,
	2014			2013
Cash flows from operating activities:

Net income	$	72,920		$	72,573

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	21,370			20,416
Amortization	12,569			11,935
Amortization of deferred financing costs	1,142			1,296
Deferred income taxes	(11,505		)	(11,793		)
Share-based compensation expense	5,786			5,434
Stock option income tax benefit	(69		)	(603		)
Equity loss from unconsolidated affiliates	290			1,779
Other non-cash (income) expense	(3,405		)	20,016
Changes in operating assets and liabilities, net of acquisitions:
Accounts and notes receivable-trade, net	(22,920		)	(37,637		)
Inventories, net	(15,180		)	(22,080		)
Prepaid expenses and other current assets	(5,751		)	10,638
Other noncurrent assets, net	1,465			2,232
Accounts payable	8,047			(10,928		)
Accrued liabilities	(21,901		)	(8,558		)
Income taxes	23,423			(21,196		)
Other noncurrent liabilities	(1,716		)	2,562

Net cash provided by operating activities	64,565			36,086

Cash flows from investing activities:

Capital expenditures	(25,322		)	(24,032		)
Cash paid for acquisitions of businesses, net of cash acquired	—			(3,939		)
Cash received on derivatives	864			—
Cash paid on derivatives	(2,103		)	(45,765		)
Expenditures for identifiable intangible assets	(1,305		)	(205		)
Purchase of short-term investments	(1,144		)	—
Proceeds from sale of property, plant and equipment, net	168			1,218

Net cash used in investing activities	(28,842		)	(72,723		)

Cash flows from financing activities:

Net change in short-term borrowings	64,886			16,133
Cash paid for treasury stock	(40,395		)	—
Cash dividends paid	(8,979		)	(7,909		)
Cash paid for acquisition of noncontrolling interests of consolidated subsidiary	(33		)	(8,960		)
Repayments of long-term borrowings	(75,174		)	—
Proceeds from exercise of stock options	4,149			13,578
Excess tax benefits from share-based compensation	69			603
Cash received on derivative contracts	—			464
Cash paid on derivative contracts	—			(306		)

Net cash (used in) provided by financing activities	(55,477		)	13,603

Effect of exchange rate changes on cash and cash equivalents	623			(895		)

Net decrease in cash and cash equivalents	(19,131		)	(23,929		)

Cash and cash equivalents at beginning of period	74,954			80,132

Cash and cash equivalents at end of period	$	55,823		$	56,203

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

(unaudited)



	Common Stock		Capital in Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total DENTSPLY International Equity			Noncontrolling Interests			Total Equity
Balance at December 31, 2012	$	1,628	$	246,548		$	2,818,461		$	(144,200	)	$	(713,739	)	$	2,208,698		$	40,745		$	2,249,443

Net income	—		—			71,685			—			—			71,685			888			72,573

Other comprehensive expense	—		—			—			(54,901		)	—			(54,901		)	(707		)	(55,608		)

Acquisition of noncontrolling interest	—		(3,926		)	—			—			—			(3,926		)	(5,034		)	(8,960		)
Exercise of stock options	—		(2,444		)	—			—			16,022			13,578			—			13,578
Tax benefit from stock options exercised	—		603			—			—			—			603			—			603
Share based compensation expense	—		5,434			—			—			—			5,434			—			5,434
Funding of Employee Stock Ownership Plan	—		959			—			—			3,698			4,657			—			4,657
RSU distributions	—		(8,305		)	—			—			4,923			(3,382		)	—			(3,382		)
RSU dividends	—		76			(76		)	—			—			—			—			—
Cash dividends ($0.06250 per share)	—		—			(8,944		)	—			—			(8,944		)	—			(8,944		)
Balance at March 31, 2013	$	1,628	$	238,945		$	2,881,126		$	(199,101	)	$	(689,096	)	$	2,233,502		$	35,892		$	2,269,394



	Common Stock		Capital in Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total DENTSPLY International Equity			Noncontrolling Interests			Total Equity
Balance at December 31, 2013	$	1,628	$	255,272		$	3,095,721		$	(69,062	)	$	(748,506	)	$	2,535,053		$	42,921		$	2,577,974

Net income	—		—			72,878			—			—			72,878			42			72,920

Other comprehensive expense	—		—			—			(1,073		)	—			(1,073		)	72			(1,001		)

Acquisition of noncontrolling interest	—		(40,283		)	—			(5,530		)	—			(45,813		)	(41,470		)	(87,283		)
Exercise of stock options	—		(533		)	—			—			4,682			4,149			—			4,149
Tax benefit from stock options exercised	—		69			—			—			—			69			—			69
Share based compensation expense	—		5,786			—			—			—			5,786			—			5,786
Funding of Employee Stock Ownership Plan	—		1,535			—			—			4,418			5,953			—			5,953
Treasury shares purchased	—		—			—			—			(40,395		)	(40,395		)	—			(40,395		)
RSU distributions	—		(10,461		)	—			—			6,281			(4,180		)	—			(4,180		)
RSU dividends	—		82			(82		)	—			—			—			—			—
Cash dividends ($0.06625 per share)	—		—			(9,394		)	—			—			(9,394		)	—			(9,394		)
Balance at March 31, 2014	$	1,628	$	211,467		$	3,159,123		$	(75,665	)	$	(773,520	)	$	2,523,033		$	1,565		$	2,524,598

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

DENTSPLY International Inc. and Subsidiaries

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the United States Securities and Exchange Commission (“SEC”). The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Results for interim periods should not be considered indicative of results for a full year. These financial statements and related notes contain the accounts of DENTSPLY International Inc. and Subsidiaries (“DENTSPLY” or the “Company”) on a consolidated basis and should be read in conjunction with the consolidated financial statements and notes included in the Company’s most recent Form 10-K for the year ended December 31, 2013.

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of the Company, as applied in the interim consolidated financial statements presented herein are substantially the same as presented in the Company’s Form 10-K for the year ended December 31, 2013, except as may be indicated below:

Accounts and Notes Receivable

The Company sells dental and certain healthcare products through a worldwide network of distributors and directly to end users. For customers on credit terms, the Company performs ongoing credit evaluations of those customers’ financial condition and generally does not require collateral from them. The Company establishes allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments based on historical averages of aged receivable balances and the Company’s experience in collecting those balances, customer specific circumstances, as well as changes in the economic and political environments. The Company records a provision for doubtful accounts, which is included in “Selling, general and administrative expenses” on the Consolidated Statements of Operations.

Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $12.4 million at March 31, 2014 and $14.7 million at December 31, 2013.

Marketable Securities

The Company’s marketable securities consist of corporate convertible bonds that are classified as available-for-sale in “Other noncurrent assets, net” on the Consolidated Balance Sheets as the instruments mature in December 2015. The Company determined the appropriate classification at the time of purchase and will re-evaluate such designation as of each balance sheet date. In addition, the Company reviews the securities each quarter for indications of possible impairment. If an impairment is identified, the determination of whether the impairment is temporary or other-than-temporary requires significant judgment. The primary factors that the Company considers in making this judgment include the extent and time the fair value of each investment has been below cost and the existence of a credit loss. If a decline in fair value is judged other-than-temporary, the basis of the securities is written down to fair value and the amount of the write-down is included as a realized loss in the Consolidated Statement of Operations. Changes in fair value are reported in accumulated other comprehensive income (“AOCI”).

The convertible element of the bonds has not been bifurcated from the underlying bonds as the element does not contain a net-settlement feature, nor would the Company be able to achieve a hypothetical net-settlement that would substantially place the Company in a comparable cash settlement position. As such, the derivative is not accounted for separately from the bond. The cash paid by the Company was equal to the face value of the bonds issued, and therefore, the Company has not recorded any bond premium or discount on acquiring the bonds. The fair value of the bonds was $67.2 million and $70.0 million at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014 and December 31, 2013, an unrealized holding gain of $10.7 million and $12.7 million, respectively, on available-for-sale securities, net of tax, has been recorded in AOCI.

Revisions in Classification

Certain revisions in classification have been made to prior year’s data in order to conform to current year presentation.

New Accounting Pronouncements

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This newly issued accounting standard requires a cumulative translation adjustment (“CTA”)attached to the parent’s investment in a foreign entity should be released in a manner consistent with the derecognition guidance on investment entities. Thus the entire amount of CTA associated with the foreign entity would be released when there has been a sale of a subsidiary or group of net assets within a foreign entity and the sale represents a complete liquidation of the investment in the foreign entity, a loss of a controlling financial interest in an investment in a foreign entity, or step acquisition for a foreign entity. The Company adopted this accounting standard for the quarter ended March 31, 2014. The adoption of this standard did not materially impact the Company’s financial position or results of operations.

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The newly issued accounting standard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction losses or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefit. The Company adopted this accounting standard for the quarter ended March 31, 2014. The adoption of this standard did not materially impact the Company’s financial position or results of operations.

NOTE 2 – STOCK COMPENSATION

The following table represents total stock based compensation expense for non-qualified stock options, restricted stock units (“RSU”) and the tax related benefit for the three months ended March 31, 2014 and 2013:



	Three Months Ended
(in thousands)	2014		2013

Stock option expense	$	1,674	$	2,128
RSU expense	3,719		2,933
Total stock based compensation expense	$	5,393	$	5,061

Total related tax benefit	$	1,564	$	1,287

At March 31, 2014, the remaining unamortized compensation cost related to non-qualified stock options is $15.6 million, which will be expensed over the weighted average remaining vesting period of the options, or approximately 2.0 years. At March 31, 2014, the unamortized compensation cost related to RSU is $31.1 million, which will be expensed over the weighted average remaining restricted period of the RSU, or approximately 1.8 years.

The following table reflects the non-qualified stock option transactions from December 31, 2013 through March 31, 2014:



	Outstanding						Exercisable
(in thousands, except per share data)	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Shares	Weighted Average Exercise Price		Aggregate Intrinsic Value

Balance at December 31, 2013	8,295		$	35.04	$	111,450	6,225	$	33.67	$	92,200
Granted	851		45.11
Exercised	(125	)	33.10
Cancelled	(4	)	45.15
Forfeited	(7	)	38.72
Balance at March 31, 2014	9,010		$	36.02	$	90,324	7,092	$	34.35	$	82,916

At March 31, 2014, the weighted average remaining contractual term of all outstanding options is approximately 5.8 years and the weighted average remaining contractual term of exercisable options is approximately 4.9 years.

The following table summarizes the unvested RSU transactions from December 31, 2013 through March 31, 2014:



(in thousands, except per share data)	Shares		Weighted Average Grant Date Fair Value

Balance at December 31, 2013	1,131		$	38.81
Granted	427		45.11
Vested	(261	)	36.61
Forfeited	(84	)	40.78
Balance at March 31, 2014	1,213		$	41.36

NOTE 3 – COMPREHENSIVE INCOME

During the quarter ended March 31, 2014, foreign currency translation adjustments included currency translation gains of $0.8 million and losses on the Company’s loans designated as hedges of net investments of $1.9 million. During the quarter ended March 31, 2013, foreign currency translation adjustments included currency translation losses of $101.9 million and gains of $8.5 million on the Company’s loans designated as hedges of net investments.

The cumulative foreign currency translation adjustments included translation gains of $245.2 million and $249.9 million at March 31, 2014 and December 31, 2013, respectively, were offset by losses of $110.8 million and $108.9 million, respectively, on loans designated as hedges of net investments. These foreign currency translation adjustments were partially offset by movements on derivatives financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.

Changes in AOCI, net of tax, by component for the three months ended March 31, 2014 and 2013:



(in thousands)	Foreign Currency Translation Adjustments			Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges			Gain and (Loss) on Derivative Financial Instruments Designated as Net Investment Hedges			Net Unrealized Holding Gain (Loss) on Available-for-Sale Securities			Pension Liability Adjustments			Total

Balance at December 31, 2013	$	140,992		$	(21,753	)	$	(151,114	)	$	12,729		$	(49,916	)	$	(69,062	)
Other comprehensive income (loss) before reclassifications	(1,107		)	642			(976		)	(2,041		)	(154		)	(3,636		)
Amounts reclassified from accumulated other comprehensive income (loss)	—			2,091			—			—			472			2,563
Net increase (decrease) in other comprehensive income	(1,107		)	2,733			(976		)	(2,041		)	318			(1,073		)
Foreign currency translation related to acquisition of noncontrolling interests	(5,530		)	—			—			—			—			(5,530		)
Balance at March 31, 2014	$	134,355		$	(19,020	)	$	(152,090	)	$	10,688		$	(49,598	)	$	(75,665	)



(in thousands)	Foreign Currency Translation Adjustments			Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges			Gain and (Loss) on Derivative Financial Instruments Designated as Net Investment Hedges			Net Unrealized Holding Gain (Loss)on Available-for-Sale Securities		Pension Liability Adjustments			Total

Balance at December 31, 2012	$	54,302		$	(17,481	)	$	(125,661	)	$	17,822	$	(73,182	)	$	(144,200	)
Other comprehensive income (loss) before reclassifications	(93,435		)	3,507			24,489			7,640		1,835			(55,964		)
Amounts reclassified from accumulated other comprehensive (loss) income	—			122			—			—		941			1,063
Net (decrease) increase in other comprehensive income	(93,435		)	3,629			24,489			7,640		2,776			(54,901		)
Balance at March 31, 2013	$	(39,133	)	$	(13,852	)	$	(101,172	)	$	25,462	$	(70,406	)	$	(199,101	)

Reclassification out of accumulated other comprehensive income (expense) to the Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013:



(in thousands)
Details about AOCI Components	Amounts Reclassified from AOCI						Affected Line Item in the Statements of Operations
	Three Months Ended March 31,
	2014			2013

Gains and (losses) on derivative financial instruments:
Interest rate swaps	$	(926	)	$	(913	)	Interest expense
Foreign exchange forward contracts	(1,646		)	499			Cost of products sold
Foreign exchange forward contracts	(99		)	(30		)	SG&A expenses
Commodity contracts	(246		)	157			Cost of products sold
	(2,917		)	(287		)	Net (loss) gain before tax
	826			165			Tax benefit (expense)
	$	(2,091	)	$	(122	)	Net of tax

Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits	$	34		$	34		(a)
Amortization of net actuarial losses	(719		)	(1,368		)	(a)
	(685		)	(1,334		)	Net loss before tax
	213			393			Tax benefit
	$	(472	)	$	(941	)	Net of tax

Total reclassifications for the period	$	(2,563	)	$	(1,063	)

(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the three months ended March 31, 2014 and 2013 (see Note 8, Benefit Plans, for additional details).

NOTE 4 – EARNINGS PER COMMON SHARE

The dilutive effect of outstanding non-qualified stock options and RSU is reflected in diluted earnings per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2014 and 2013:



Basic Earnings Per Common Share Computation	Three Months Ended
(in thousands, except per share amounts)	2014		2013

Net income attributable to DENTSPLY International	$	72,878	$	71,685

Weighted average common shares outstanding	142,053		142,775

Earnings per common share - basic	$	0.51	$	0.50

Diluted Earnings Per Common Share Computation
(in thousands, except per share amounts)

Net income attributable to DENTSPLY International	$	72,878	$	71,685

Weighted average common shares outstanding	142,053		142,775
Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards	2,400		2,324
Total weighted average diluted shares outstanding	144,453		145,099

Earnings per common share - diluted	$	0.50	$	0.49

Options to purchase 1.5 million and 3.5 million shares of common stock that were outstanding during the three months ended March 31, 2014 and 2013, respectively, were not included in the computation of diluted earnings per common share since the options’ exercise price were greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

NOTE 5 – BUSINESS ACQUISITIONS

During the three months ended March 31, 2014, the Company recorded a liability for the purchase of the remaining shares of one variable interest entity. The amount is preliminary and is based on the Company’s best estimate of this obligation, which is subject to contractual adjustments. As a result, the Company recorded a reduction to additional paid in capital for the excess of the purchase price above the carrying value of the noncontrolling interest. The Company expects to finalize the transaction in 2014.

NOTE 6 – SEGMENT INFORMATION

The Company has numerous operating businesses covering a wide range of dental and certain healthcare products and geographic regions, primarily serving the professional dental market. Professional dental products represented approximately 88% and 89% of sales for the three months ended March 31, 2014 and 2013, respectively.

The operating businesses are combined into operating groups, which generally have overlapping product offerings, geographical presence, customer bases, distribution channels, and regulatory oversight. These operating groups are considered the Company’s reportable segments as the Company’s chief operating decision-maker regularly reviews financial results at the operating group level and uses this information to manage the Company’s operations. The accounting policies of the segments are consistent with those described in the Company’s most recently filed Form 10-K in the summary of significant accounting policies. The Company’s segments are measured on net third party sales, excluding precious metal content and segment income for reporting purposes. Net sales excluding precious metal content are the Company’s net sales excluding the precious metal cost within the products sold, and are considered a non-US GAAP measure. The Company’s exclusion of precious metal content in the measurement of net third party sales enhances comparability of performance between periods as it excludes the fluctuating

market prices of the precious metal content. The Company defines segment income for reporting purposes as net operating income before restructuring and other costs, interest expense, interest income, other expense (income), net and provision for income taxes. Generally, the Company evaluates performance of the segments based on the groups’ segment income and net third party sales, excluding precious metal content. A description of the products and services provided within each of the Company’s three reportable segments is provided below.

Significant interdependencies exist among the Company’s operations in certain geographic areas. Inter-segment sales are at prices intended to provide a reasonable profit to the manufacturing unit after recovery of all manufacturing costs and to provide a reasonable profit for purchasing locations after coverage of marketing and general and administrative costs.

During the three months ended March 31, 2014, the Company realigned reporting responsibilities for multiple locations as a result of changes to the management structure. The segment information below reflects the revised structure for all periods shown.

Dental Consumable Businesses

This segment includes responsibility for the design, manufacturing, sales and distribution of certain small equipment and chairside consumable products in the United States, Germany and certain other European regions. It also has responsibility for the sales and distribution of certain endodontic products in Germany and certain other European regions as well as chairside consumable, endodontic and dental laboratory products in Australia.

Dental Specialty and Laboratory Businesses

This segment includes responsibility for the design, manufacture, sales and distribution of most of the Company’s dental specialty products, including endodontic, orthodontic and implant products, in most regions of the world. In addition, this segment is responsible for the design, manufacture, sales and distribution of most of the Company’s dental laboratory products. This segment is also responsible for the sales and distribution of most of the Company’s other dental products within certain European regions as well as Japan, Canada and Mexico, and the design, manufacture, worldwide distribution and sales of certain non-dental products, excluding urological and surgery-related products.

Healthcare and Emerging Markets Businesses

This segment is responsible for the worldwide design, manufacturing, sales and distribution of the Company’s healthcare products, primarily urological and surgery-related products, throughout most of the world. This segment also includes the responsibility for the sales and distribution of most of the Company’s dental products sold in Eastern Europe, Middle East, South America, Latin America, Asia (excluding Japan) and Africa.

The following tables set forth information about the Company’s segments for the three months ended March 31, 2014 and 2013:

Third Party Net Sales



	Three Months Ended
(in thousands)	2014			2013

Dental Consumable Businesses	$	173,976		$	163,707
Dental Specialty and Laboratory Businesses	432,407			447,977
Healthcare and Emerging Markets Businesses	124,946			121,739
All Other (a)	(1,215		)	(1,339		)
Total net sales	$	730,114		$	732,084

(a) Includes amounts recorded at Corporate headquarters.

Third Party Net Sales, Excluding Precious Metal Content



	Three Months Ended
(in thousands)	2014			2013

Dental Consumable Businesses	$	173,914		$	163,609
Dental Specialty and Laboratory Businesses	391,681			388,916
Healthcare and Emerging Markets Businesses	124,802			121,463
All Other (b)	(1,215		)	(1,339		)
Total net sales, excluding precious metal content	689,182			672,649
Precious metal content of sales	40,932			59,435
Total net sales, including precious metal content	$	730,114		$	732,084

(b) Includes amounts recorded at Corporate headquarters.

Inter-segment Net Sales



	Three Months Ended
(in thousands)	2014			2013

Dental Consumable Businesses	$	28,601		$	30,230
Dental Specialty and Laboratory Businesses	50,231			42,965
Healthcare and Emerging Markets Businesses	3,306			3,114
All Other (c)	60,785			57,427
Eliminations	(142,923		)	(133,736		)
Total	$	—		$	—

Segment Operating Income (Loss)



	Three Months Ended
(in thousands)	2014			2013

Dental Consumable Businesses	$	58,509		$	54,315
Dental Specialty and Laboratory Businesses	73,913			69,678
Healthcare and Emerging Markets Businesses	4,724			1,466
All Other (d)	(30,783		)	(30,936		)
Segment operating income	106,363			94,523

Reconciling Items:
Restructuring and other costs	793			665
Interest expense	10,955			15,221
Interest income	(1,435		)	(2,175		)
Other expense (income), net	388			2,918
Income before income taxes	$	95,662		$	77,894

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

Assets



(in thousands)	March 31, 2014		December 31, 2013

Dental Consumable Businesses	$	699,477	$	699,386
Dental Specialty and Laboratory Businesses	3,380,841		3,404,604
Healthcare and Emerging Markets Businesses	932,147		869,907
All Other (e)	76,968		104,150
Total	$	5,089,433	$	5,078,047

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

NOTE 7 – INVENTORIES

Inventories are stated at the lower of cost or market. At March 31, 2014 and December 31, 2013, the cost of $7.4 million and $6.5 million, respectively, was determined by the last-in, first-out (“LIFO”) method. The cost of other inventories was determined by the first-in, first-out (“FIFO”) or average cost methods. If the FIFO method had been used to determine the cost of LIFO inventories, the amounts at which net inventories are stated would be higher than reported at March 31, 2014 and December 31, 2013 by $6.2 million and $5.9 million, respectively.

The Company establishes reserves for inventory estimated to be obsolete or unmarketable. Assumptions about future demand and market conditions are considered when estimating these reserves. The inventory valuation reserves were $37.6 million and $34.2 million at March 31, 2014 and December 31, 2013, respectively.

Inventories, net of inventory valuation reserves, consist of the following:



(in thousands)	March 31, 2014		December 31, 2013

Finished goods	$	286,141	$	285,271
Work-in-process	72,874		67,718
Raw materials and supplies	96,059		85,570
Inventories, net	$	455,074	$	438,559

NOTE 8 – BENEFIT PLANS

The following sets forth the components of net periodic benefit cost of the Company’s defined benefit plans and for the Company’s other postemployment benefit plans for the three months ended March 31, 2014 and 2013:



Defined Benefit Plans	Three Months Ended
(in thousands)	2014			2013

Service cost	$	3,552		$	3,723
Interest cost	2,866			2,477
Expected return on plan assets	(1,387		)	(1,247		)
Amortization of prior service credit	(34		)	(34		)
Amortization of net actuarial loss	707			1,280
Curtailments and settlement gains	—			(390		)
Net periodic benefit cost	$	5,704		$	5,809



Other Postemployment Benefit Plans	Three Months Ended
(in thousands)	2014		2013

Service cost	$	44	$	61
Interest cost	140		122
Amortization of net actuarial loss	12		88
Net periodic benefit cost	$	196	$	271

The following sets forth the information related to the contributions to the Company’s benefit plans for 2014:



(in thousands)	Pension Benefits		Other Postemployment Benefits

Actual contributions through March 31, 2014	$	3,671	$	75
Projected contributions for the remainder of the year	8,940		427
Total projected contributions	$	12,611	$	502

NOTE 9 – RESTRUCTURING AND OTHER COSTS

Restructuring Costs

During the three months ended March 31, 2014 and 2013, the Company recorded net restructuring costs of $0.8 million and $0.7 million, respectively. These costs are recorded in “Restructuring and other costs” in the Consolidated Statements of Operations and the associated liabilities are recorded in “Accrued liabilities” in the Consolidated Balance Sheets.

At March 31, 2014, the Company’s restructuring accruals were as follows:



	Severance
(in thousands)	2012 and Prior Plans			2013 Plans			2014 Plans			Total

Balance at December 31, 2013	$	1,282		$	5,764		$	—		$	7,046
Provisions	44			3			1,505			1,552
Amounts applied	(564		)	(2,154		)	(2		)	(2,720		)
Change in estimates	—			(700		)	—			(700		)
Balance at March 31, 2014	$	762		$	2,913		$	1,503		$	5,178



	Lease/Contract Terminations
(in thousands)	2012 and Prior Plans			2013 Plans			2014 Plans		Total

Balance at December 31, 2013	$	748		$	98		$	—	$	846
Provisions	11			58			33		102
Amounts applied	(45		)	(163		)	—		(208		)
Change in estimate	(14		)	109			—		95
Balance at March 31, 2014	$	700		$	102		$	33	$	835



	Other Restructuring Costs
(in thousands)	2012 and Prior Plans			2013 Plans			2014 Plans		Total

Balance at December 31, 2013	$	58		$	658		$	—	$	716
Provisions	—			15			2		17
Amounts applied	(43		)	(124		)	—		(167		)
Change in estimate	1			(53		)	—		(52		)
Balance at March 31, 2014	$	16		$	496		$	2	$	514

The following table provides the year-to-date changes in the restructuring accruals by segment:



(in thousands)	December 31, 2013		Provisions		Amounts Applied			Change in Estimates			March 31, 2014

Dental Consumable Businesses	$	656	$	940	$	(36	)	$	—		$	1,560
Dental Specialty and Laboratory Businesses	6,333		227		(2,259		)	(657		)	3,644
Healthcare and Emerging Markets Businesses	1,245		504		(491		)	—			1,258
All Other	374		—		(309		)	—			65
Total	$	8,608	$	1,671	$	(3,095	)	$	(657	)	$	6,527

NOTE 10 – FINANCIAL INSTRUMENTS AND DERIVATIVES

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 volatility that these market risks may have on the Company’s operating results and equity. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert variable rate debt to fixed rate debt and to convert fixed rate debt to variable rate debt, cross currency basis swaps to convert debt denominated in one currency to another currency and commodity swaps to fix certain variable raw material costs.

Derivative Instruments Designated as Hedging

Cash Flow Hedges

The following table summarizes the notional amounts of cash flow hedges by derivative instrument type at March 31, 2014 and the notional amounts expected to mature during the next 12 months, with a discussion of the various cash flow hedges by derivative instrument type following the table:



	Aggregate Notional Amount		Aggregate Notional Amount Maturing within 12 Months

(in thousands)

Foreign exchange forward contracts	$	388,046	$	292,884
Interest rate swaps	195,150		121,621
Commodity contracts	2,234		2,234
Total derivative instruments designated as cash flow hedges	$	585,430	$	416,739

Foreign Exchange Risk Management

The Company uses a layered hedging program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings of the consolidated Company. The Company accounts for the designated foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the tested effectiveness of the foreign exchange forward contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is deemed ineffective and is reported currently in “Other expense (income), net” on the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operating activities on the Consolidated Statements of Cash Flows. The Company hedges various currencies, with the most significant activity occurring in euros, Swedish kronor, Canadian dollars, and Swiss francs.

These foreign exchange forward contracts generally have maturities up to 18 months and the counterparties to the transactions are typically large international financial institutions.

Interest Rate Risk Management

The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt. At March 31, 2014, the Company has two groups of significant interest rate swaps. One of the groups of swaps has notional amounts totaling 12.6 billion Japanese yen, and effectively converts the underlying variable interest rate to a fixed interest rate of 0.2% for an initial term of three years, ending in September 2014. Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rate to a fixed interest rate of 0.7% for an initial term of five years, ending in September 2016.

The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes. Any cash flows associated with these instruments are included in cash from operating activities on the Consolidated Statements of Cash Flows.

Commodity Risk Management

The Company enters into precious metal commodity swap contracts to effectively fix certain variable raw material costs typically for up to 18 months. These swaps are used to stabilize the cost of components used in the production of certain of the Company’s products. The Company generally accounts for the commodity swaps as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the tested effectiveness of the commodity swaps. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is deemed ineffective and is reported currently in “Interest expense” on the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operating activities on the Consolidated Statements of Cash Flows.

The following tables summarize the amount of gains (losses) recorded in AOCI in the Consolidated Balance Sheets and income (expense) in the Company’s Consolidated Statements of Operations related to all cash flow hedges for the quarters ended March 31, 2014 and 2013:



March 31, 2014
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Effective Portion Reclassified from AOCI into Income (Expense)			Ineffective Portion Recognized in Income (Expense)

(in thousands)

Effective Portion:
Interest rate swaps	$	(387	)	Interest expense	$	(926	)
Foreign exchange forward contracts	1,067			Cost of products sold	(1,646		)
Foreign exchange forward contracts	(10		)	SG&A expenses	(99		)
Commodity contracts	101			Cost of products sold	(246		)

Ineffective Portion:
Foreign exchange forward contracts				Other expense (income), net				$	106
Commodity contracts				Interest expense				(13		)
Total in cash flow hedging	$	771			$	(2,917	)	$	93



March 31, 2013
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Effective Portion Reclassified from AOCI into Income (Expense)			Ineffective Portion Recognized in Income (Expense)

(in thousands)

Effective Portion:
Interest rate swaps	$	191		Interest expense	$	(913	)
Foreign exchange forward contracts	4,022			Cost of products sold	499
Foreign exchange forward contracts	187			SG&A expenses	(30		)
Commodity contracts	(16		)	Cost of products sold	157

Ineffective Portion:
Foreign exchange forward contracts				Other expense (income), net				$	(13	)
Commodity contracts				Interest expense				(14		)
Total for cash flow hedging	$	4,384			$	(287	)	$	(27	)

Overall, the derivatives designated as cash flow hedges are considered to be highly effective. At March 31, 2014, the Company expects to reclassify $6.0 million of deferred net losses on cash flow hedges recorded in AOCI to the Consolidated Statement of Operations during the next 12 months. This reclassification is primarily due to the sale of inventory that includes hedged purchases and recognized interest expense on interest rate swaps. The maximum term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable interest rate debt) is 18 months.

For the roll forward of derivative instruments designated as cash flow hedges in AOCI see Note 3, Comprehensive Income.

Hedges of Net Investments in Foreign Operations

The Company has significant investments in foreign subsidiaries the most significant of which are denominated in euros, Swiss francs, Japanese yen and Swedish kronor. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. To hedge a portion of this exposure the Company employs both derivative and non-derivative financial instruments. The derivative instruments consist of foreign exchange forward contracts and cross currency basis swaps. The non-derivative instruments consist of foreign currency denominated debt held at the parent company level. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in derivative and non-derivative financial instruments designated as hedges of net investments, which are included in AOCI. Any cash flows associated with these instruments are included in investing activities on the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, in which case all cash flows will be classified as financing activities on the Consolidated Statements of Cash Flows.

The following table summarizes the notional amounts of hedges of net investments by derivative instrument type at March 31, 2014 and the notional amounts expected to mature during the next 12 months:



	Aggregate Notional Amount		Aggregate Notional Amount Maturing within 12 Months

(in thousands)

Foreign exchange forward contracts	$	180,466	$	115,718
Cross currency basis swaps	489,253		90,950
Total derivative instruments designated as net investment hedges	$	669,719	$	206,668

On February 14, 2014, the Company dedesignated 449.8 million euros of foreign exchange forward contracts that were previously designated as net investment hedges. The change in the value of the dedesignated hedges will be recorded in “Other expense (income), net” on the Consolidated Statement of Operations and will offset the change in the value of non-designated euro denominated cross currency basis swaps as further noted in the section below titled Derivative Instruments Not Designated as Hedges.

On March 25, 2014, the Company entered into additional foreign exchange forward contracts designated as hedges of net investment with a notional amount of 25.0 million euros.

The fair value of the cross currency basis swaps and foreign exchange forward contracts is the estimated amount the Company would receive or pay at the reporting date, taking into account the effective interest rates, cross currency swap basis rates and foreign exchange rates. The effective portion of the change in the value of these derivatives is recorded in AOCI, net of tax effects.

The following tables summarize the amount of gains (losses) recorded in AOCI on the Consolidated Balance Sheets and income (expense) on the Company’s Consolidated Statements of Operations related to the hedges of net investments for the quarters ended March 31, 2014 and 2013:



March 31, 2014
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Recognized in Income (Expense)

(in thousands)

Effective Portion:
Cross currency basis swaps	$	(4,660	)	Interest income	$	677
				Interest expense	541
Foreign exchange forward contracts	3,068			Other expense (income), net	248
Total for net investment hedging	$	(1,592	)		$	1,466



March 31, 2013
	Gain (Loss) in AOCI		Consolidated Statements of Operations Location	Recognized in Income (Expense)

(in thousands)

Effective Portion:
Cross currency basis swaps	$	39,885	Interest income	$	1,387
			Interest expense	(1,603		)
Total for net investment hedging	$	39,885		$	(216	)

Fair Value Hedges

The Company uses interest rate swaps to convert a portion of its fixed interest rate debt to variable interest rate debt. The Company has a group of U.S. dollar denominated interest rate swaps with an initial total notional value of $150.0 million to effectively convert the underlying fixed interest rate of 4.1% on the Company’s $250.0 million Private Placement Notes (“PPN”) to variable rate for an initial term of five years, ending February 2016. The notional value of the swaps will decline proportionately as portions of the PPN mature. These interest rate swaps are designated as fair value hedges of the interest rate risk associated with the hedged portion of the fixed rate PPN. Accordingly, the Company will carry the portion of the hedged debt at fair value, with the change in debt and swaps offsetting each other on the Consolidated Statements of Operations. Any cash flows associated with these instruments are included in operating activities on the Consolidated Statements of Cash Flows.

The following table summarizes the notional amounts of fair value hedges by derivative instrument type at March 31, 2014 and the notional amounts expected to mature during the next 12 months:



	Aggregate Notional Amount		Aggregate Notional Amount Maturing within 12 Months

(in thousands)

Interest rate swaps	$	105,000	$	60,000

The following tables summarize the amount of income (expense) recorded on the Company’s Consolidated Statements of Operations related to the hedges of fair value for the quarters ended March 31, 2014 and 2013:



	Consolidated Statements of Operations Location	Income (Expense) Recognized
		Three months ended March 31,
(in thousands)		2014		2013

Interest rate swaps	Interest expense	$	87	$	62

Derivative Instruments Not Designated as Hedges

The Company enters into derivative instruments to hedge the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in “Other expense (income), net” on the Consolidated Statements of Operations. The Company primarily uses foreign exchange forward contracts and cross currency basis swaps to hedge these risks. Any cash flows associated with the foreign exchange forward contracts and interest rate swaps not designated as hedges are included in cash from operating activities on the Consolidated Statements of Cash Flows. Any cash flows associated with the cross currency basis swaps not designated as hedges are included in investing activities on the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, in which case the cash flows will be classified as financing activities on the Consolidated Statements of Cash Flows.

The following tables summarize the aggregate notional amounts of the Company’s economic hedges not designated as hedges by derivative instrument types at March 31, 2014 and the notional amounts expected to mature during the next 12 months:



	Aggregate Notional Amount	Aggregate Notional Amount Maturing within 12 Months

(in thousands)