Dentsply 10-Q2 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 June 30, 2014
OR
 
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
 
17405-2558
(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 July 23, 2014, DENTSPLY International Inc. had 141,777,636 shares of Common Stock outstanding, with a par value of $.01 per share.



DENTSPLY International Inc.

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


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 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net sales
$
765,225

 
$
761,010

 
$
1,495,339

 
$
1,493,094

Cost of products sold
340,756

 
346,054

 
676,665

 
689,938

 
 
 
 
 
 
 
 
Gross profit
424,469

 
414,956

 
818,674

 
803,156

Selling, general and administrative expenses
296,121

 
289,921

 
583,963

 
583,598

Restructuring and other costs
1,242

 
2,169

 
2,035

 
2,834

 
 
 
 
 
 
 
 
Operating income
127,106

 
122,866

 
232,676

 
216,724

 
 
 
 
 
 
 
 
Other income and expenses:
 

 
 

 
 

 
 

Interest expense
11,798

 
11,507

 
22,753

 
26,728

Interest income
(1,744
)
 
(2,243
)
 
(3,179
)
 
(4,418
)
Other expense (income), net
575

 
4,223

 
963

 
7,141

 
 
 
 
 
 
 
 
Income before income taxes
116,477

 
109,379

 
212,139

 
187,273

Provision for income taxes
26,096

 
22,870

 
48,548

 
26,412

Equity in net (loss) income of unconsolidated affiliated company
(367
)
 
2,182

 
(657
)
 
403

 
 
 
 
 
 
 
 
Net income
90,014

 
88,691

 
162,934

 
161,264

Less: Net income attributable to noncontrolling interests
21

 
1,463

 
63

 
2,351

 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
89,993

 
$
87,228

 
$
162,871

 
$
158,913

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.63

 
$
0.61

 
$
1.15

 
$
1.11

Diluted
$
0.62

 
$
0.60

 
$
1.13

 
$
1.10

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
141,790

 
142,922

 
141,921

 
142,849

Diluted
144,164

 
145,133

 
144,288

 
145,107


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

3



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
90,014

 
$
88,691

 
$
162,934

 
$
161,264

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(27,640
)
 
5,886

 
(28,675
)
 
(88,256
)
Net gain (loss) on derivative financial instruments
440

 
(13,362
)
 
2,197

 
14,756

Net unrealized holding loss on available-for-sale securities
(1,762
)
 
(16,629
)
 
(3,803
)
 
(8,989
)
Pension liability adjustments
823

 
540

 
1,141

 
3,316

Total other comprehensive income (loss), net of tax
(28,139
)
 
(23,565
)
 
(29,140
)
 
(79,173
)
 
 
 
 
 
 
 
 
Total comprehensive income
61,875

 
65,126

 
133,794

 
82,091

 
 
 
 
 
 
 
 
Less: Comprehensive (loss) income attributable
 

 
 

 
 

 
 

to noncontrolling interests
(254
)
 
2,019

 
(140
)
 
2,200

 
 
 
 
 
 
 
 
Comprehensive income attributable to
 
 
 
 
 
 
 
DENTSPLY International
$
62,129

 
$
63,107

 
$
133,934

 
$
79,891

 


 


 


 



See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

4



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
June 30, 2014
 
December 31, 2013
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
66,929

 
$
74,954

Accounts and notes receivables-trade, net
503,972

 
472,802

Inventories, net
461,203

 
438,559

Prepaid expenses and other current assets, net
199,170

 
157,487

 
 
 
 
Total Current Assets
1,231,274

 
1,143,802

 
 
 
 
Property, plant and equipment, net
639,212

 
637,172

Identifiable intangible assets, net
765,105

 
795,323

Goodwill, net
2,278,798

 
2,281,596

Other noncurrent assets, net
157,984

 
220,154

 
 
 
 
Total Assets
$
5,072,373

 
$
5,078,047

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
143,562

 
$
132,789

Accrued liabilities
412,849

 
339,308

Income taxes payable
38,604

 
14,446

Notes payable and current portion of long-term debt
301,294

 
309,862

 
 
 
 
Total Current Liabilities
896,309

 
796,405

 
 
 
 
Long-term debt
1,065,881

 
1,166,178

Deferred income taxes
231,005

 
238,394

Other noncurrent liabilities
294,404

 
299,096

 
 
 
 
Total Liabilities
2,487,599

 
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 June 30, 2014 and December 31, 2013
1,628

 
1,628

Capital in excess of par value
217,274

 
255,272

Retained earnings
3,239,641

 
3,095,721

Accumulated other comprehensive loss
(97,999
)
 
(69,062
)
Treasury stock, at cost, 21.0 million and 20.5 million shares at June 30, 2014 and December 31, 2013, respectively
(777,081
)
 
(748,506
)
Total DENTSPLY International Equity
2,583,463

 
2,535,053

 
 
 
 
Noncontrolling interests
1,311

 
42,921

 
 
 
 
Total Equity
2,584,774

 
2,577,974

 
 
 
 
Total Liabilities and Equity
$
5,072,373

 
$
5,078,047

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

5


DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
162,934

 
$
161,264

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation
42,325

 
41,743

Amortization
24,493

 
23,434

Amortization of deferred financing costs
2,285

 
2,592

Deferred income taxes
(4,893
)
 
(8,564
)
Share-based compensation expense
13,358

 
12,023

Stock option income tax benefit
(349
)
 
(1,122
)
Equity in loss (earnings) from unconsolidated affiliates
657

 
(403
)
Other non-cash (income) expense
(9,110
)
 
11,480

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
(31,505
)
 
(72,324
)
Inventories, net
(22,427
)
 
(40,700
)
Prepaid expenses and other current assets, net
(6,068
)
 
26,364

Other noncurrent assets, net
1,096

 
845

Accounts payable
10,613

 
(11,143
)
Accrued liabilities
(6,228
)
 
(2,051
)
Income taxes
35,532

 
(17,670
)
Other noncurrent liabilities
7,532

 
6,100

 
 
 
 
Net cash provided by operating activities
220,245

 
131,868

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(48,831
)
 
(46,151
)
Cash paid for acquisitions of businesses, net of cash acquired
(2,009
)
 
(3,939
)
Cash received on derivatives contracts
1,674

 
7,499

Cash paid on derivatives contracts
(4,006
)
 
(94,843
)
Expenditures for identifiable intangible assets
(1,316
)
 
(963
)
Purchase of short-term investments
(1,135
)
 
—

Proceeds from sale of property, plant and equipment, net
277

 
2,209

 
 
 
 
Net cash used in investing activities
(55,346
)
 
(136,188
)
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
Net change in short-term borrowings
(38,087
)
 
40,450

Cash paid for treasury stock
(54,586
)
 
(62,278
)
Cash dividends paid
(18,453
)
 
(16,928
)
Cash paid for acquisition of noncontrolling interests of consolidated subsidiary
(33
)
 
(8,960
)
Payments on long-term borrowings
(75,371
)
 
—

Proceeds from exercised stock options
12,736

 
31,213

Excess tax benefits from share-based compensation
349

 
1,122

Cash received on derivative contracts
—

 
25

Cash paid on derivative contracts
—

 
(80
)
 
 
 
 
Net cash used in financing activities
(173,445
)
 
(15,436
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
521

 
(3,349
)
 
 
 
 
Net decrease in cash and cash equivalents
(8,025
)
 
(23,105
)
 
 
 
 
Cash and cash equivalents at beginning of period
74,954

 
80,132

 
 
 
 
Cash and cash equivalents at end of period
$
66,929

 
$
57,027

 
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

6


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
—

 
—

 
158,913

 
—

 
—

 
158,913

 
2,351

 
161,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
—

 
—

 
—

 
(79,022
)
 
—

 
(79,022
)
 
(151
)
 
(79,173
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interest
—

 
(3,926
)
 
—

 
—

 
—

 
(3,926
)
 
(5,034
)
 
(8,960
)
Exercise of stock options
—

 
(3,937
)
 
—

 
—

 
35,150

 
31,213

 
—

 
31,213

Tax benefit from stock options exercised
—

 
1,122

 
—

 
—

 
—

 
1,122

 
—

 
1,122

Share based compensation expense
—

 
12,023

 
—

 
—

 
—

 
12,023

 
—

 
12,023

Funding of Employee Stock Ownership Plan
—

 
959

 
—

 
—

 
3,698

 
4,657

 
—

 
4,657

Treasury shares purchased
—

 
—

 
—

 
—

 
(62,278
)
 
(62,278
)
 
—

 
(62,278
)
RSU distributions
—

 
(8,342
)
 
—

 
—

 
4,959

 
(3,383
)
 
—

 
(3,383
)
RSU dividends
—

 
151

 
(151
)
 
—

 
—

 
—

 
—

 
—

Cash dividends ($0.1250 per share)
—

 
—

 
(17,832
)
 
—

 
—

 
(17,832
)
 
—

 
(17,832
)
Balance at June 30, 2013
$
1,628

 
$
244,598

 
$
2,959,391

 
$
(223,222
)
 
$
(732,210
)
 
$
2,250,185

 
$
37,911

 
$
2,288,096


 
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
—

 
—

 
162,871

 
—

 
—

 
162,871

 
63

 
162,934

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
—

 
—

 
—

 
(23,407
)
 
—

 
(23,407
)
 
(203
)
 
(23,610
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interest
—

 
(40,283
)
 
—

 
(5,530
)
 
—

 
(45,813
)
 
(41,470
)
 
(87,283
)
Exercise of stock options
—

 
(2,204
)
 
—

 
—

 
14,940

 
12,736

 
—

 
12,736

Tax benefit from stock options exercised
—

 
349

 
—

 
—

 
—

 
349

 
—

 
349

Share based compensation expense
—

 
13,358

 
—

 
—

 
—

 
13,358

 
—

 
13,358

Funding of Employee Stock Ownership Plan
—

 
1,535

 
—

 
—

 
4,418

 
5,953

 
—

 
5,953

Treasury shares purchased
—

 
—

 
—

 
—

 
(54,586
)
 
(54,586
)
 
—

 
(54,586
)
RSU distributions
—

 
(10,917
)
 
—

 
—

 
6,653

 
(4,264
)
 
—

 
(4,264
)
RSU dividends
—

 
164

 
(164
)
 
—

 
—

 
—

 
—

 
—

Cash dividends ($0.1325 per share)
—

 
—

 
(18,787
)
 
—

 
—

 
(18,787
)
 
—

 
(18,787
)
Balance at June 30, 2014
$
1,628

 
$
217,274

 
$
3,239,641

 
$
(97,999
)
 
$
(777,081
)
 
$
2,583,463

 
$
1,311

 
$
2,584,774


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

7


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 $12.1 million at June 30, 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 $64.3 million and $70.0 million at June 30, 2014 and December 31, 2013, respectively.  At June 30, 2014 and December 31, 2013, an unrealized holding gain of $8.9 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.




8


New Accounting Pronouncements

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This newly issued accounting standard changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This standard will have the impact of reducing the frequency of disposals reported as discontinued operations, by requiring such a disposal to represent a strategic shift that has or will have a major effect on entity’s operations and financial results. Additionally, existing provisions that prohibit an entity from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after a disposal are eliminated by this standard. The ASU also expands the disclosures for discontinued operations and requires new disclosures related to individually significant disposals that do not qualify as discontinued operations. This standard allows for early adoption and the Company expects to adopt this accounting standard no later than the quarter ended March 31, 2015. The adoption of this standard is not expected to materially impact the Company’s financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This newly issued accounting standard is intended to improve the reporting of revenue. The Company has not yet determined the impact from adoption of this new accounting pronouncement on the Company’s financial position or results of operations. The Company expects to adopt this accounting standard for the quarter ended March 31, 2017. Early adoption is not permitted.


9


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 and six months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Six Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Stock option expense
$
2,829

 
$
2,876

 
$
4,503

 
$
5,005

RSU expense
4,366

 
3,337

 
8,085

 
6,269

Total stock based compensation expense
$
7,195

 
$
6,213

 
$
12,588

 
$
11,274

 
 
 
 
 
 
 
 
Total related tax benefit
$
1,979

 
$
1,788

 
$
3,543

 
$
2,865


At June 30, 2014, the remaining unamortized compensation cost related to non-qualified stock options is $13.6 million, which will be expensed over the weighted average remaining vesting period of the options, or approximately 1.8 years. At June 30, 2014, the unamortized compensation cost related to RSU is $27.4 million, which will be expensed over the weighted average remaining restricted period of the RSU, or approximately 1.6 years.

The following table reflects the non-qualified stock option transactions from December 31, 2013 through June 30, 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
920

 
45.23

 
 

 
 

 
 

 
 

Exercised
(390
)
 
32.63

 
 

 
 

 
 

 
 

Cancelled
(5
)
 
45.15

 
 

 
 

 
 

 
 

Forfeited
(24
)
 
41.01

 
 

 
 

 
 

 
 

Balance at June 30, 2014
8,796

 
$
36.20

 
$
98,117

 
6,906

 
$
34.48

 
$
88,889


At June 30, 2014, the weighted average remaining contractual term of all outstanding options is approximately 5.7 years and the weighted average remaining contractual term of exercisable options is approximately 4.8 years.


The following table summarizes the unvested RSU transactions from December 31, 2013 through June 30, 2014:
(in thousands, except per share data)
Shares
 
Weighted Average
Grant Date
Fair Value
 
 
 
 
Balance at December 31, 2013
1,131

 
$
38.81

Granted
443

 
45.16

Vested
(272
)
 
36.69

Forfeited
(97
)
 
40.88

Balance at June 30, 2014
1,205

 
$
41.45










10


NOTE 3 – COMPREHENSIVE INCOME

 During the quarter ended June 30, 2014, foreign currency translation adjustments included currency translation losses of $20.6 million and losses on the Company’s loans designated as hedges of net investments of $1.2 million.  During the quarter ended June 30, 2013, foreign currency translation adjustments included currency translation gains of $1.3 million and gains of $4.0 million on the Company’s loans designated as hedges of net investments.  During the six months ended June 30, 2014, foreign currency translation adjustments included currency translation losses of $19.7 million and losses on the Company’s loans designated as hedges of net investments of $3.2 million. During the six months ended June 30, 2013, foreign currency translation adjustments included currency translation losses of $100.6 million and gains on the Company’s loans designated as hedges of net investments of $12.5 million. These foreign currency translation adjustments were offset by movements on derivative financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.

The cumulative foreign currency translation adjustments included translation gains of $224.6 million and $249.9 million at June 30, 2014 and December 31, 2013, respectively, were offset by losses of $112.1 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 six months ended June 30, 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
(22,942
)
 
(2,717
)
 
849

 
(3,803
)
 
197

 
(28,416
)
Amounts reclassified from accumulated other comprehensive income (loss)
—

 
4,065

 
—

 
—

 
944

 
5,009

Net (decrease) increase in other comprehensive income
(22,942
)
 
1,348

 
849

 
(3,803
)
 
1,141

 
(23,407
)
Foreign currency translation related to acquisition of noncontrolling interests
(5,530
)
 
—

 
—

 
—

 
—

 
(5,530
)
Balance at June 30, 2014
$
112,520

 
$
(20,405
)
 
$
(150,265
)
 
$
8,926

 
$
(48,775
)
 
$
(97,999
)


11


(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
(88,105
)
 
(1,503
)
 
16,056

 
(8,989
)
 
1,439

 
(81,102
)
Amounts reclassified from accumulated other comprehensive income (loss)
—

 
203

 
—

 
—

 
1,877

 
2,080

Net (decrease) increase in other comprehensive income
(88,105
)
 
(1,300
)
 
16,056

 
(8,989
)
 
3,316

 
(79,022
)
Balance at June 30, 2013
$
(33,803
)
 
$
(18,781
)
 
$
(109,605
)
 
$
8,833

 
$
(69,866
)
 
$
(223,222
)

Reclassification out of accumulated other comprehensive income (expense) to the Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013:

(in thousands)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the
Statements of Operations
 
Three Months Ended June 30,
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
Gains and (losses) on derivative financial instruments:
Interest rate swaps
 
$
(929
)
 
$
(918
)
 
Interest expense
Foreign exchange forward contracts
 
(1,651
)
 
631

 
Cost of products sold
Foreign exchange forward contracts
 
(58
)
 
(10
)
 
SG&A expenses
Commodity contracts
 
(158
)
 
45

 
Cost of products sold
 
 
(2,796
)
 
(252
)
 
Net (loss) gain before tax
 
 
819

 
171

 
Tax benefit (expense)
 
 
$
(1,977
)
 
$
(81
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$
35

 
$
33

 
(a)
Amortization of net actuarial losses
 
(721
)
 
(1,357
)
 
(a)
 
 
(686
)
 
(1,324
)
 
Net loss before tax
 
 
213

 
392

 
Tax benefit
 
 
$
(473
)
 
$
(932
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(2,450
)
 
$
(1,013
)
 
 
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the three months ended June 30, 2014 and 2013 (see Note 8, Benefit Plans, for additional details).




12


(in thousands)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the
Statements of Operations
 
Six Months Ended June 30,
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
Gains and (losses) on derivative financial instruments:
Interest rate swaps
 
$
(1,856
)
 
$
(1,830
)
 
Interest expense
Foreign exchange forward contracts
 
(3,296
)
 
1,129

 
Cost of products sold
Foreign exchange forward contracts
 
(157
)
 
(40
)
 
SG&A expenses
Commodity contracts
 
(403
)
 
202

 
Cost of products sold
 
 
(5,712
)
 
(539
)
 
Net (loss) gain before tax
 
 
1,647

 
336

 
Tax benefit (expense)
 
 
$
(4,065
)
 
$
(203
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$
69

 
$
67

 
(b)
Amortization of net actuarial losses
 
(1,439
)
 
(2,725
)
 
(b)
 
 
(1,370
)
 
(2,658
)
 
Net loss before tax
 
 
426

 
781

 
Tax benefit
 
 
$
(944
)
 
$
(1,877
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(5,009
)
 
$
(2,080
)
 
 
 
 
(b) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the six months ended June 30, 2014 and 2013 (see Note 8, Benefit Plans, for additional details).































13


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 and six months ended June 30, 2014 and 2013:

Basic Earnings Per Common Share Computation
Three Months Ended
 
Six Months Ended
(in thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
89,993

 
$
87,228

 
$
162,871

 
$
158,913

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
141,790

 
142,922

 
141,921

 
142,849

 
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.63

 
$
0.61

 
$
1.15

 
$
1.11

 
 
 
 
 
 
 
 
Diluted Earnings Per Common Share Computation
 

 
 

 
 

 
 

(in thousands, except per share amounts)
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
89,993

 
$
87,228

 
$
162,871

 
$
158,913

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
141,790

 
142,922

 
141,921

 
142,849

Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards
2,374

 
2,211

 
2,367

 
2,258

Total weighted average diluted shares outstanding
144,164

 
145,133

 
144,288

 
145,107

 
 
 
 
 
 
 
 
Earnings per common share - diluted
$
0.62

 
$
0.60

 
$
1.13

 
$
1.10


The calculation of weighted average diluted shares outstanding excludes options to purchase 1.0 million and 1.4 million shares of common stock that were outstanding during the three and six months ended June 30, 2014, respectively, because their effect would be antidilutive. There were 2.9 million and 3.5 million antidilutive shares of common stock outstanding during the three and six months ended June 30, 2013, respectively.

NOTE 5 – BUSINESS ACQUISITIONS

Effective January 1, 2014, the Company recorded a liability for the contractual 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 anticipates the cash outflow for this purchase to be later 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% of sales in each of the three months ended June 30, 2014 and 2013, respectively, and 88% and 89% of sales for the six months ended June 30, 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 evaluates performance of the segments based on the groups’ net third party sales, excluding precious metal content, and segment income. The Company defines net third party sales excluding precious metal content as the Company’s net sales excluding the precious metal cost within the products sold, and this is considered a non-US GAAP measure. The

14


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 as net operating income before restructuring and other costs, interest expense, interest income, other expense (income), net and provision for income taxes. 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 first quarter of 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 Consumables and Certain International Businesses

This segment includes responsibility for the design and manufacture of the Company’s chairside consumable products. It also has responsibilities for sales and distribution of certain small equipment and chairside consumable products in the United States, Germany and certain other European regions as well as responsibility for the sales and distribution of certain endodontic products in Germany and certain other European regions. In addition, this segment has responsibilities for sales and distribution of chairside consumable, endodontic and dental laboratory products in Australia.

Dental Specialty and Laboratory and Certain Global Distribution 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, including most dental consumables, 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, manufacture, 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, including most dental consumables, 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 and six months ended June 30, 2014 and 2013:

Third Party Net Sales
 
Three Months Ended
 
Six Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Dental Consumable and Certain International Businesses
$
183,741

 
$
170,688

 
$
357,716

 
$
334,395

Dental Specialty and Laboratory and Certain Global Distribution Businesses
442,655

 
458,128

 
875,062

 
906,105

Healthcare and Emerging Markets Businesses
139,848

 
133,054

 
264,794

 
254,793

All Other (a)
(1,019
)
 
(860
)
 
(2,233
)
 
(2,199
)
Total net sales
$
765,225

 
$
761,010

 
$
1,495,339

 
$
1,493,094

(a) Includes amounts recorded at Corporate headquarters.







15




Third Party Net Sales, Excluding Precious Metal Content
 
Three Months Ended
 
Six Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Dental Consumable and Certain International Businesses
$
183,638

 
$
170,596

 
$
357,552

 
$
334,205

Dental Specialty and Laboratory and Certain Global Distribution Businesses
408,631

 
413,386

 
800,312

 
802,302

Healthcare and Emerging Markets Businesses
139,648

 
132,833

 
264,450

 
254,296

All Other (b)
(1,019
)
 
(860
)
 
(2,233
)
 
(2,199
)
Total net sales, excluding precious metal content
730,898

 
715,955

 
1,420,081

 
1,388,604

Precious metal content of sales
34,327

 
45,055

 
75,258

 
104,490

Total net sales, including precious metal content
$
765,225

 
$
761,010

 
$
1,495,339

 
$
1,493,094

(b) Includes amounts recorded at Corporate headquarters.

Inter-segment Net Sales
 
Three Months Ended
 
Six Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Dental Consumable and Certain International Businesses
$
32,209

 
$
31,372

 
$
60,810

 
$
61,602

Dental Specialty and Laboratory and Certain Global Distribution Businesses
50,487

 
49,472

 
100,718

 
92,437

Healthcare and Emerging Markets Businesses
2,639

 
3,464

 
5,945

 
6,577

All Other (c)
62,484

 
60,238

 
123,268

 
117,665

Eliminations
(147,819
)
 
(144,546
)
 
(290,741
)
 
(278,281
)
Total
$
—

 
$
—

 
$
—

 
$
—

(c) Includes amounts recorded at Corporate headquarters and one distribution warehouse not managed by named segments.

Segment Operating Income (Loss)
 
Three Months Ended
 
Six Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Dental Consumable and Certain International Businesses
$
66,147

 
$
59,863

 
$
124,656

 
$
114,178

Dental Specialty and Laboratory and Certain Global Distribution Businesses
79,616

 
79,758

 
153,529

 
149,436

Healthcare and Emerging Markets Businesses
9,959

 
8,623

 
14,683

 
10,089

All Other (d)
(27,374
)
 
(23,209
)
 
(58,157
)
 
(54,145
)
Segment operating income
128,348

 
125,035

 
234,711

 
219,558

 
 
 
 
 
 
 
 
Reconciling Items:
 

 
 

 
 

 
 

Restructuring and other costs
1,242

 
2,169

 
2,035

 
2,834

Interest expense
11,798

 
11,507

 
22,753

 
26,728

Interest income
(1,744
)
 
(2,243
)
 
(3,179
)
 
(4,418
)
Other expense (income), net
575

 
4,223

 
963

 
7,141

Income before income taxes
$
116,477

 
$
109,379

 
$
212,139

 
$
187,273

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





16




Assets
(in thousands)
June 30, 2014
 
December 31, 2013
 
 
 
 
Dental Consumable and Certain International Businesses
$
706,509

 
$
683,965

Dental Specialty and Laboratory and Certain Global Distribution Businesses
3,346,528

 
3,364,190

Healthcare and Emerging Markets Businesses
932,438

 
925,742

All Other (e)
86,898

 
104,150

Total
$
5,072,373

 
$
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.  The cost of inventories determined by the last-in, first-out (“LIFO”) method at June 30, 2014 and December 31, 2013 were $7.7 million and $6.5 million, respectively. 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 June 30, 2014 and December 31, 2013 by $6.1 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 $37.4 million and $34.2 million at June 30, 2014 and December 31, 2013, respectively.

Inventories, net of inventory valuation reserves, consist of the following:
(in thousands)
June 30, 2014
 
December 31, 2013
 
 
 
 
Finished goods
$
293,776

 
$
285,271

Work-in-process
75,929

 
67,718

Raw materials and supplies
91,498

 
85,570

Inventories, net
$
461,203

 
$
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 and six months ended June 30, 2014 and 2013:

Defined Benefit Plans 
Three Months Ended
 
Six Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Service cost
$
3,549

 
$
3,662

 
$
7,101

 
$
7,385

Interest cost
2,861

 
2,445

 
5,726

 
4,922

Expected return on plan assets
(1,391
)
 
(1,230
)
 
(2,777
)
 
(2,477
)
Amortization of prior service credit
(35
)
 
(33
)
 
(69
)
 
(67
)
Amortization of net actuarial loss
709

 
1,269

 
1,417

 
2,549

Curtailments and settlement gains
—

 
(235
)
 
—

 
(625
)
Net periodic benefit cost
$
5,693

 
$
5,878

 
$
11,398

 
$
11,687



17


Other Postemployment Benefit Plans
Three Months Ended
 
Six Months Ended
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Service cost
$
44

 
$
61

 
$
89

 
$
123

Interest cost
140

 
122

 
280

 
243

Amortization of net actuarial loss
12

 
88

 
22

 
176

Net periodic benefit cost
$
196

 
$
271

 
$
391

 
$
542


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 June 30, 2014
$
6,508

 
$
121

Projected contributions for the remainder of the year
6,059

 
381

Total projected contributions
$
12,567

 
$
502


NOTE 9 – RESTRUCTURING AND OTHER COSTS

Restructuring Costs

During the three and six months ended June 30, 2014, the Company recorded net restructuring costs of $1.2 million and $2.0 million, respectively. During the three and six months ended June 30, 2013, the Company recorded net restructuring costs of $2.1 million and $2.8 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 June 30, 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
109

 
243

 
3,210

 
3,562

Amounts applied
(601
)
 
(3,270
)
 
(388
)
 
(4,259
)
Change in estimates
(313
)
 
(770
)
 
(7
)
 
(1,090
)
Balance at June 30, 2014
$
477

 
$
1,967

 
$
2,815

 
$
5,259