Dentsply 10-Q1


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, 2013
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
 
17405-0872
(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 May 6, 2013, DENTSPLY International Inc. had 143,282,565 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 March 31,
 
2013
 
2012
 
 
 
 
Net sales
$
732,084

 
$
716,413

Cost of products sold
343,884

 
323,663

 
 
 
 
Gross profit
388,200

 
392,750

Selling, general and administrative expenses
293,677

 
304,353

Restructuring and other costs
665

 
1,237

 
 
 
 
Operating income
93,858

 
87,160

 
 
 
 
Other income and expenses:
 

 
 

Interest expense
15,221

 
15,782

Interest income
(2,175
)
 
(1,878
)
Other expense (income), net
2,918

 
65

 
 
 
 
Income before income taxes
77,894

 
73,191

Provision for income taxes
3,542

 
14,715

Equity in net loss of unconsolidated affiliated company
(1,779
)
 
(4,248
)
 
 
 
 
Net income
72,573

 
54,228

Less: Net income attributable to noncontrolling interests
888

 
944

 
 
 
 
Net income attributable to DENTSPLY International
$
71,685

 
$
53,284

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
0.50

 
$
0.38

Diluted
$
0.49

 
$
0.37

 
 
 
 
Weighted average common shares outstanding:
 

 
 

Basic
142,775

 
141,721

Diluted
145,099

 
143,984


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 March 31,
 
2013
 
2012
 
 
 
 
Net income
$
72,573

 
$
54,228

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
(94,142
)
 
133,633

Net gain (loss) on derivative financial instruments
28,118

 
(32,132
)
Net unrealized holding gain on available-for-sale securities
7,640

 
23,000

Pension liability adjustments
2,776

 
(222
)
Total other comprehensive income (loss)
(55,608
)
 
124,279

 
 
 
 
Total comprehensive income (loss)
16,965

 
178,507

 
 
 
 
Less: Comprehensive income (loss) attributable
 

 
 

to noncontrolling interests
181

 
2,284

 
 
 
 
Comprehensive income (loss) attributable to
 
 
 
DENTSPLY International
16,784

 
176,223

 


 



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)
 
March 31, 2013
 
December 31, 2012
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
56,203

 
$
80,132

Accounts and notes receivables-trade, net
468,537

 
442,412

Inventories, net
417,094

 
402,940

Prepaid expenses and other current assets
218,685

 
185,612

 
 
 
 
Total Current Assets
1,160,519

 
1,111,096

 
 
 
 
Property, plant and equipment, net
608,850

 
614,705

Identifiable intangible assets, net
805,646

 
830,642

Goodwill, net
2,167,241

 
2,210,953

Other noncurrent assets, net
159,872

 
204,901

 
 
 
 
Total Assets
$
4,902,128

 
$
4,972,297

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
148,715

 
$
165,290

Accrued liabilities
347,397

 
424,336

Income taxes payable
14,615

 
39,191

Notes payable and current portion of long-term debt
315,438

 
298,963

 
 
 
 
Total Current Liabilities
826,165

 
927,780

 
 
 
 
Long-term debt
1,207,722

 
1,222,035

Deferred income taxes
226,100

 
232,641

Other noncurrent liabilities
372,747

 
340,398

 
 
 
 
Total Liabilities
2,632,734

 
2,722,854

 
 
 
 
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, 2013 and December 31, 2012.
1,628

 
1,628

Capital in excess of par value
238,945

 
246,548

Retained earnings
2,881,126

 
2,818,461

Accumulated other comprehensive loss
(199,101
)
 
(144,200
)
Treasury stock, at cost, 19.7 million and 20.5 million shares at March 31, 2013 and December 31, 2012, respectively.
(689,096
)
 
(713,739
)
Total DENTSPLY International Equity
2,233,502

 
2,208,698

 
 
 
 
Noncontrolling interests
35,892

 
40,745

 
 
 
 
Total Equity
2,269,394

 
2,249,443

 
 
 
 
Total Liabilities and Equity
$
4,902,128

 
$
4,972,297

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

5



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Three Months Ended
March 31,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
72,573

 
$
54,228

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

 
 

Depreciation
20,416

 
20,209

Amortization
11,934

 
15,360

Amortization of deferred financing costs
1,296

 
1,196

Deferred income taxes
(11,793
)
 
3,690

Share-based compensation expense
5,434

 
4,222

Stock option income tax benefit
(603
)
 
(3,879
)
Equity in earnings from unconsolidated affiliates
1,779

 
4,248

Other non-cash (income) expense
(3,912
)
 
3,048

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
(36,209
)
 
(25,597
)
Inventories, net
(22,080
)
 
(34,006
)
Prepaid expenses and other current assets
4,085

 
(24,072
)
Other noncurrent assets, net
(598
)
 
15,954

Accounts payable
(10,928
)
 
11,528

Accrued liabilities
(7,559
)
 
(21,186
)
Income taxes
(21,196
)
 
10,545

Other noncurrent liabilities
33,447

 
(15,535
)
 
 
 
 
Net cash provided by operating activities
36,086

 
19,953

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(24,032
)
 
(18,642
)
Cash paid for acquisitions of businesses, net of cash acquired
(3,939
)
 

Payments on settlements of net investment hedges
(45,765
)
 

Expenditures for identifiable intangible assets
(205
)
 
(146
)
Purchase of Company-owned life insurance policies

 
(1,577
)
Proceeds from sale of property, plant and equipment, net
1,218

 
166

 
 
 
 
Net cash used in investing activities
(72,723
)
 
(20,199
)
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
Net change in short-term borrowings
16,133

 
11,155

Cash paid for treasury stock

 
(30,869
)
Cash dividends paid
(7,909
)
 
(7,847
)
Cash paid for contingent consideration on prior acquisitions

 
(1,781
)
Cash paid for acquisition of noncontrolling interests of consolidated subsidiary
(8,960
)
 

Proceeds from long-term borrowings

 
4,571

Repayments of long-term borrowings

 
(5,171
)
Proceeds from exercise of stock options
13,578

 
14,483

Excess tax benefits from share-based compensation
603

 
3,879

Interest received on derivatives with an other-than-insignificant financing element
464

 
613

Interest paid on derivatives with an other-than-insignificant financing element
(306
)
 
(1,413
)
 
 
 
 
Net cash provided by (used in) financing activities
13,603

 
(12,380
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(895
)
 
2,844

 
 
 
 
Net decrease in cash and cash equivalents
(23,929
)
 
(9,782
)
 
 
 
 
Cash and cash equivalents at beginning of period
80,132

 
77,128

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

 
$
67,346

 
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, 2011
$
1,628

 
$
229,687

 
$
2,535,709

 
$
(190,970
)
 
$
(727,977
)
 
$
1,848,077

 
$
36,074

 
$
1,884,151

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
53,284

 

 

 
53,284

 
944

 
54,228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 
122,939

 

 
122,939

 
1,340

 
124,279

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options

 
(5,227
)
 

 

 
19,709

 
14,482

 

 
14,482

Tax benefit from stock options exercised

 
3,879

 

 

 

 
3,879

 

 
3,879

Share based compensation expense

 
4,222

 

 

 

 
4,222

 

 
4,222

Funding of Employee Stock Ownership Plan

 
370

 

 

 
3,272

 
3,642

 

 
3,642

Treasury shares purchased

 

 

 

 
(30,869
)
 
(30,869
)
 

 
(30,869
)
RSU distributions

 
(8,147
)
 

 

 
4,910

 
(3,237
)
 

 
(3,237
)
RSU dividends

 
57

 
(57
)
 

 

 

 

 

Cash dividends ($0.0550 per share)

 

 
(7,802
)
 

 

 
(7,802
)
 

 
(7,802
)
Balance at March 31, 2012
$
1,628

 
$
224,841

 
$
2,581,134

 
$
(68,031
)
 
$
(730,955
)
 
$
2,008,617

 
$
38,358

 
$
2,046,975


 
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 loss

 

 

 
(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 ($0.0625 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


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, 2012.

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, 2012, 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.”

Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which was $15.0 million at March 31, 2013 and $14.5 million at December 31, 2012.

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 feature of the bonds has not been bifurcated from the underlying bonds as the feature 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 $84.7 million and $75.1 million at March 31, 2013 and December 31, 2012, respectively.  At March 31, 2013 and December 31, 2012, an unrealized holding gain of $25.5 million and $17.8 million, respectively, on available-for-sale securities, net of tax, had been recorded in AOCI. 

New Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities." The standard requires entities to disclose both gross and net information about instruments and transactions that are offset in the Consolidated Balance Sheet, as well as instruments and transactions that are subject to an enforceable master netting agreement or similar agreement. In January 2013,

8



The FASB issued ASU No. 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." The standard clarifies the scope of the disclosure to apply only to derivatives, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements as well as securities lending and borrowing transactions. The standard was effective January 1, 2013, with retrospective application required. The adoption of this standard did not have a material impact to the Company's financial statements. The Company adopted this accounting standard for the quarter ended March 31, 2013.

In July 2012, the FASB issued ASU No. 2012-02, "Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment." This newly issued accounting standard is intended to reduce the cost and complexity of the annual indefinite-lived intangible asset impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. Under the revised standard, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required; otherwise, no further testing is required. Prior to the issuance of the revised standard, an entity was required to perform step one of the impairment test at least annually by calculating and comparing the fair value of an indefinite-lived intangible asset to its carrying amount. Under the revised standard, if an entity determines that step one is necessary and the indefinite-lived intangible asset is less than its carrying amount, then step two of the test will continue to be required to measure the amount of the impairment loss, if any. This ASU is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard will not materially impact the Company's financial position or results of operations. The Company adopted this accounting standard for the quarter ended March 31, 2013.

In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." This newly issued accounting standard requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income in its entirety in the same period. For other amounts not required to be reclassified to net income in the same reporting period, a cross reference to other disclosures that provide additional detail about the reclassification amounts is required. Since the standard only impacts the disclosure requirements of AOCI and does not impact the accounting for accumulated comprehensive income, the standard did not have an impact on the Company's consolidated financial statements. The Company adopted this standard during the quarter ended March 31, 2013.

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 investments in a foreign entity, or step acquisition for a foreign entity. The adoption of this standard will not materially impact the Company's financial position or results of operations. The Company expects to adopt this accounting standard for the quarter ending March 31, 2014.

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, 2013 and 2012:

 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Stock option expense
$
2,128

 
$
2,381

RSU expense
2,933

 
1,546

Total stock based compensation expense
$
5,061

 
$
3,927

 
 
 
 
Total related tax benefit
$
1,287

 
$
1,231


At March 31, 2013, the remaining unamortized compensation cost related to non-qualified stock options is $18.5 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.9 years. At March 31, 2013, the

9



unamortized compensation cost related to RSU is $30.4 million, which will be expensed over the remaining restricted period of the RSU, or 1.9 years.

The following table reflects the non-qualified stock option transactions from December 31, 2012 through March 31, 2013:
 
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, 2012
9,906

 
$
33.18

 
$
69,079

 
7,599

 
$
31.79

 
$
64,819

Granted
844

 
40.86

 
 

 
 

 
 

 
 

Exercised
(506
)
 
26.83

 
 

 
 

 
 

 
 

Cancelled
(4
)
 
43.91

 
 

 
 

 
 

 
 

Forfeited
(16
)
 
37.82

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2013
10,224

 
$
34.12

 
$
87,676

 
7,923

 
$
32.72

 
$
79,643


At March 31, 2013, the weighted average remaining contractual term of all outstanding options is 6.0 years and the weighted average remaining contractual term of exercisable options is 5.1 years.

The following table summarizes the unvested RSU transactions from December 31, 2012 through March 31, 2013:

(in thousands, except per share data)
Shares
 
Weighted Average
Grant Date
Fair Value
 
 
 
 
Balance at December 31, 2012
1,034

 
$
36.34

Granted
480

 
40.86

Vested
(232
)
 
32.49

Forfeited
(69
)
 
38.64

 
 
 
 
Balance at March 31, 2013
1,213

 
$
38.74


NOTE 3 – COMPREHENSIVE INCOME

  During the three months ended March 31, 2013, foreign currency translation adjustments included currency translation losses of $101.9 million and gains on the Company's loans designated as hedges of net investments of $8.5 million. During the three months ended March 31, 2012, foreign currency translation adjustments included currency translation gains of $127.0 million and gains on the Company's loans designated as hedges of net investments of $5.3 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 $75.8 million and $177.7 million at March 31, 2013 and December 31, 2012, respectively, were offset by losses of $114.9 million and $123.4 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.










10



Changes in AOCI, net of tax, by component for the three months ended March 31, 2013 and 2012:
(in thousands)
Foreign Currency Translation Adjustments
 
Gains and (Loss) on Derivative Financial Instruments
 
Net Unrealized Holding Gain on Available-for-Sale Securities
 
Pension Liability Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
54,302

 
$
(143,142
)
 
$
17,822

 
$
(73,182
)
 
$
(144,200
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(93,435
)
 
27,996

 
7,640

 
1,835

 
(55,964
)
 
 
 
 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive income (loss)

 
122

 

 
941

 
1,063

 
 
 
 
 
 
 
 
 
 
Net (decrease) increase in other comprehensive income
(93,435
)
 
28,118

 
7,640

 
2,776

 
(54,901
)
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2013
$
(39,133
)
 
$
(115,024
)
 
$
25,462

 
$
(70,406
)
 
$
(199,101
)

(in thousands)
Foreign Currency Translation Adjustments
 
Gains and (Loss) on Derivative Financial Instruments
 
Net Unrealized Holding (Loss) Gain on Available-for-Sale Securities
 
Pension Liability Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
(39,078
)
 
$
(117,390
)
 
$
(516
)
 
$
(33,986
)
 
$
(190,970
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
132,293

 
(31,593
)
 
23,000

 
(591
)
 
123,109

 
 
 
 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive income (loss)

 
(539
)
 

 
369

 
(170
)
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in other comprehensive income
132,293

 
(32,132
)
 
23,000

 
(222
)
 
122,939

 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2012
$
93,215

 
$
(149,522
)
 
$
22,484

 
$
(34,208
)
 
$
(68,031
)













11




Reclassification out of accumulated other comprehensive income (expense) for the three months ended March 31, 2013 and 2012:
(in thousands)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the
Statements of Operations
 
Three Months Ended March 31,
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
Gains and loss on derivative financial instruments
Interest rate swaps
 
$
(913
)
 
$
(905
)
 
Interest expense
Foreign exchange forward contracts
 
499

 
1,150

 
Cost of products sold
Foreign exchange forward contracts
 
(30
)
 
231

 
SG&A expenses
Commodity contracts
 
157

 
(46
)
 
Cost of products sold
 
 
(287
)
 
430

 
Net (loss) gain before tax
 
 
165

 
109

 
Tax benefit
 
 
$
(122
)
 
$
539

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension items
Prior service costs
 
$
34

 
$
37

 
(a)
Actuarial gains (losses)
 
(1,368
)
 
(556
)
 
(a)
 
 
(1,334
)
 
(519
)
 
Net loss before tax
 
 
393

 
150

 
Tax benefit
 
 
$
(941
)
 
$
(369
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(1,063
)
 
$
170

 
 
 
 
 
 
 
 
 
 
 
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (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, 2013 and 2012:


12



Basic Earnings Per Common Share Computation
Three Months Ended March 31,
(in thousands, except per share amounts)
2013
 
2012
 
 
 
 
Net income attributable to DENTSPLY International
$
71,685

 
$
53,284

 
 
 
 
Common shares outstanding
142,775

 
141,721

 
 
 
 
Earnings per common share - basic
$
0.50

 
$
0.38

 
 
 
 
Diluted Earnings Per Common Share Computation
 

 
 

(in thousands, except per share amounts)
 

 
 

 
 
 
 
Net income attributable to DENTSPLY International
$
71,685

 
$
53,284

 
 
 
 
Common shares outstanding
142,775

 
141,721

Incremental shares from assumed exercise of dilutive options from stock-based compensation awards
2,324

 
2,263

Total diluted shares outstanding
145,099

 
143,984

 
 
 
 
Earnings per common share - diluted
$
0.49

 
$
0.37


Options to purchase 3.5 million and 4.1 million shares of common stock that were outstanding during the three months ended March 31, 2013 and 2012, 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, 2013, the Company paid $9.0 million to purchase the remaining outstanding shares of a consolidated subsidiary. As a result of the transaction, the Company recorded a decrease in noncontrolling interest of $5.0 million and a reduction to additional paid in capital of $3.9 million for the excess of the purchase price above the carrying value of the noncontrolling interest.

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 89% of sales for both three months ended March 31, 2013 and 2012.

The operating businesses are combined into operating groups, which 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 measures 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. Additionally, the operating segments are measured on net third party sales, excluding precious metal content. A description of the services provided within each of the Company’s four reportable segments is provided below.

During the first quarter of 2013, the Company realigned certain implant and implant related businesses for multiple locations as a result of changes to the business structure. The segment information below reflects the revised structure for all periods shown.






13



Dental Consumable and Laboratory 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. This segment also includes the responsibility for the design, manufacture, sales and distribution of most dental laboratory products, excluding certain countries. This segment is also responsible for most of the Company’s non-dental business excluding medical products.

Orthodontics/Canada/Mexico/Japan

  This segment is responsible for the world-wide manufacturing, sales and distribution of the Company’s Orthodontic products. It also has responsibility for the sales and distribution of most of the Company’s dental products sold in Japan, Canada and Mexico.

Select Distribution Businesses

This segment includes responsibility for the sales and distribution for most of the Company's dental products sold in France, United Kingdom, Italy, Austria and certain other European countries, Middle Eastern countries, India and Africa. Operating margins of the segment are reflective of the intercompany transfer price of products manufactured by other operating segments.

Implants/Endodontics/Healthcare/Pacific Rim

This segment includes the responsibility for the design, manufacture, sales and distribution of most of the Company’s dental implant and related products. This segment also includes the responsibility for the design and manufacturing of Endodontic products and is responsible for the sales and distribution of the Company’s Endodontic products in the United States, Switzerland, and locations not covered by other selling divisions.  In addition, this segment is also responsible for sales and distribution of certain Endodontic products in Germany, Asia and other parts of the world. Additionally, this segment is responsible for the design and manufacture of certain dental consumables and dental laboratory products and the sales and distribution of most dental products sold in Brazil, Latin America (excluding Mexico), Australia and most of Asia (excluding India and Japan). This segment is also responsible for the world-wide design, manufacturing, sales and distribution of the Company's healthcare products (non-dental) throughout most of the world.

Significant interdependencies exist among the Company’s operations in certain geographic areas. Inter-group 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.

Generally, the Company evaluates performance of the segments based on the groups’ operating income, excluding restructuring and other costs, and net third party sales, excluding precious metal content.

The following tables set forth information about the Company’s segments for the three months ended March 31, 2013 and 2012:

Third Party Net Sales
 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Dental Consumable and Laboratory Businesses
$
264,629

 
$
255,134

Orthodontics/Canada/Mexico/Japan
71,335

 
70,355

Select Distribution Businesses
60,815

 
59,093

Implants/Endodontics/Healthcare/Pacific Rim
336,644

 
333,146

All Other (a)
(1,339
)
 
(1,315
)
Total
$
732,084

 
$
716,413

(a) Includes amounts recorded at Corporate headquarters.





14



Third Party Net Sales, Excluding Precious Metal Content
 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Dental Consumable and Laboratory Businesses
$
212,030

 
$
212,109

Orthodontics/Canada/Mexico/Japan
64,972

 
63,293

Select Distribution Businesses
60,717

 
58,933

Implants/Endodontics/Healthcare/Pacific Rim
336,269

 
332,605

All Other (b)
(1,339
)
 
(1,315
)
Total excluding precious metal content
672,649

 
665,625

Precious metal content
59,435

 
50,788

Total including precious metal content
$
732,084

 
$
716,413

(b) Includes amounts recorded at Corporate headquarters.

Inter-segment Net Sales
 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Dental Consumable and Laboratory Businesses
$
51,832

 
$
52,469

Orthodontics/Canada/Mexico/Japan
829

 
1,179

Select Distribution Businesses
1,291

 
394

Implants/Endodontics/Healthcare/Pacific Rim
34,023

 
34,039

All Other (c)
57,427

 
53,980

Eliminations
(145,402
)
 
(142,061
)
Total
$

 
$

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

Segment Operating Income (Loss)
 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Dental Consumable and Laboratory Businesses
$
61,750

 
$
63,345

Orthodontics/Canada/Mexico/Japan
1,863

 
(268
)
Select Distribution Businesses
(1,626
)
 
(1,440
)
Implants/Endodontics/Healthcare/Pacific Rim
63,851

 
65,383

All Other (d)
(31,315
)
 
(38,623
)
Segment operating income
94,523

 
88,397

 
 
 
 
Reconciling Items:
 

 
 

Restructuring and other costs
665

 
1,237

Interest expense
15,221

 
15,782

Interest income
(2,175
)
 
(1,878
)
Other expense (income), net
2,918

 
65

Income before income taxes
$
77,894

 
$
73,191

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

15



Assets
 
 
 
(in thousands)
March 31, 2013
 
December 31, 2012
 
 
 
 
Dental Consumable and Laboratory Businesses
$
967,097

 
$
1,007,307

Orthodontics/Canada/Mexico/Japan
282,711

 
294,348

Select Distribution Businesses
164,753

 
192,684

Implants/Endodontics/Healthcare/Pacific Rim
3,177,893

 
3,195,382

All Other (e)
309,674

 
282,576

Total
$
4,902,128

 
$
4,972,297

(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, 2013 and December 31, 2012, the cost of $7.6 million and $6.3 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, 2013 and December 31, 2012 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 $33.6 million and $32.6 million at March 31, 2013 and December 31, 2012, respectively.

Inventories, net of inventory valuation reserves, consist of the following:
(in thousands)
March 31, 2013
 
December 31, 2012
 
 
 
 
Finished goods
$
255,768

 
$
248,870

Work-in-process
72,622

 
72,533

Raw materials and supplies
88,704

 
81,537

 
$
417,094

 
$
402,940


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, 2013 and 2012:

Defined Benefit Plans 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Service cost
$
3,723

 
$
2,978

Interest cost
2,477

 
2,691

Expected return on plan assets
(1,247
)
 
(1,225
)
Amortization of prior service cost
(34
)
 
(37
)
Amortization of net loss
1,280

 
498

Curtailments and settlement gains
(390
)
 

 
 
 
 
Net periodic benefit cost
$
5,809

 
$
4,905



16



Other Postemployment Benefit Plans
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Service cost
$
61

 
$
19

Interest cost
122

 
117

Amortization of net loss
88

 
58

 
 
 
 
Net periodic benefit cost
$
271

 
$
194


The following sets forth the information related to the contributions to the Company’s benefit plans for 2013:
(in thousands)
Pension
Benefits
 
Other
Postretirement
Benefits
 
 
 
 
Actual contributions through March 31, 2013
$
3,543

 
$
88

Projected for the remainder of the year
9,011

 
577

Total projected contributions
$
12,554

 
$
665


NOTE 9 – RESTRUCTURING AND OTHER COSTS

Restructuring Costs

During the three months ended March 31, 2013 and 2012, the Company recorded restructuring costs of $0.7 million and $1.3 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, 2013, the Company’s restructuring accruals were as follows:
 
Severance
(in thousands)
2011 and
Prior Plans
 
2012 Plans
 
2013 Plans
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
1,495

 
$
11,412

 
$

 
$
12,907

Provisions and adjustments

 
(12
)
 
58

 
46

Amounts applied
(333
)
 
(1,507
)
 

 
(1,840
)
Change in estimates

 
(516
)
 

 
(516
)
Balance at March 31, 2013
$
1,162

 
$
9,377

 
$
58

 
$
10,597

 
 
Lease/Contract Terminations
(in thousands)
2011 and
Prior Plans
 
2012 Plans
 
2013 Plans
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
792

 
$
682

 
$

 
$
1,474

Provisions and adjustments

 
28

 
331

 
359

Amounts applied
(35
)
 
(511
)
 
(140
)
 
(686
)
Balance at March 31, 2013
$
757

 
$
199

 
$
191

 
$
1,147



17



 
Other Restructuring Costs
(in thousands)
2012 Plans
 
2013 Plans
 
Total
 
 
 
 
 
 
Balance at December 31, 2012
$
94

 
$

 
$
94

Provisions and adjustments
507

 
266

 
773

Amounts applied
(520
)
 

 
(520
)
Balance at March 31, 2013
$
81

 
$
266

 
$
347


The following table provides the year-to-date changes in the restructuring accruals by segment:
(in thousands)
December 31,
2012
 
Provisions and
Adjustments
 
Amounts
Applied
 
Change in Estimate
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
9,132

 
$
532

 
$
(900
)
 
$
(516
)
 
$
8,248

Orthodontics/Canada/Mexico/Japan
361

 
123

 
(308
)
 

 
176

Select Distribution Businesses
222

 

 

 

 
222

Implants/Endodontics/Healthcare/Pacific Rim
4,760

 
523

 
(1,838
)
 

 
3,445

 
$
14,475

 
$
1,178

 
$
(3,046
)
 
$
(516
)
 
$
12,091


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 Not Designated as Hedging

The Company enters into derivative financial 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 forward foreign exchange contracts and cross currency basis swaps to hedge these risks. The Company's significant contracts outstanding as of March 31, 2013 are summarized in the tables that follow.

On December 20, 2012, the Company dedesignated 160.0 million Swiss francs of its net investment hedges and entered into 81.4 million Swiss francs of new cross currency basis swaps maturing December 27, 2013. The combination of these trades total 241.4 million Swiss francs and offset an inter-company Swiss franc note receivable at a U.S. dollar functional entity that was created by a net dividend of 241.4 million Swiss francs. The new 81.4 million Swiss franc swap has an original exchange rate of approximately .91 Swiss franc per U.S. dollar. The Company will pay three-month Swiss franc LIBOR minus 34.0 basis points and receive three-month U.S. dollar LIBOR. The dedesignated cross currency swaps mature in April 2013. On January 17, 2013, the Company extended the hedge to June 2015 with two new forward starting swaps totaling 160.0 million Swiss francs. These hedges were traded at an exchange rate of approximately .93 Swiss franc per U.S. dollar, which will result in net cash payments totaling $37.0 million in the second quarter of 2013. The Company will pay three-month Swiss franc LIBOR minus 22.1 basis points and receive three-month U.S. dollar LIBOR. The hedges amortize and are intended to offset currency revaluation of the Swiss franc note receivable for as long as it is outstanding. The change in the value of the swaps will be recorded in “Other expense (income), net” on the Consolidated Statements of Operations.
On January 10, 2013, the Company entered into 347.8 million euros of cross currency basis swaps maturing at various times between 2015 and 2018 to hedge a balance sheet liability resulting from a legal entity restructuring pursuant to the Company's

18



acquisitions integration plans. The hedges have an original exchange rate of approximately 1.32 U.S. dollar per euro and will offset currency revaluation of a euro denominated note payable by a U.S. dollar functional company for as long as it is outstanding. The Company will receive three-month Euro Inter-Bank Offered Rate ("EURIBOR") minus 33.2 basis points and pay three-month U.S. dollar LIBOR. The change in the value of the swaps will be recorded in “Other expense (income), net” on the Consolidated Statements of Operations.

Cash Flow Hedges

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 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 operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.

These foreign exchange forward contracts generally have maturities up to eighteen months and the counterparties to the transactions are typically large international financial institutions. The Company's significant contracts outstanding as of March 31, 2013 are summarized in the tables that follow.

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. As of March 31, 2013, 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 rates to an average fixed interest rate of 0.2% for a 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 rates to a fixed interest rate of 0.7% for a 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. The Company's significant contracts outstanding as of March 31, 2013 are summarized in the tables that follow.

Commodity Risk Management

The Company selectively enters into commodity swaps to effectively fix certain variable raw material costs. These swaps are used purely 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 operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.







19



The following tables summarize the notional amounts and fair value of the Company's cash flow hedges and non-designated derivatives at March 31, 2013:
Foreign Exchange Forward Contracts
 
Notional Amounts Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)  
 
2013
 
2014
 
March 31, 2013
 
 
 
 
 
 
 
Forward sale, 20.1 million Australian dollars
 
$
17,806

 
$
2,816

 
$
(620
)
Forward purchase, 7.6 million British pounds
 
(11,518
)
 

 
210

Forward sale, 44.8 million Canadian dollars
 
30,028

 
14,056

 
250

Forward purchase, 19.2 million Danish kroner
 
(3,299
)
 

 
(14
)
Forward sale, 200.1 million euros
 
180,007

 
76,927

 
(398
)
Forward purchase, 531.5 million Japanese yen
 
(461
)
 
(5,222
)
 
(2,625
)
Forward sale, 171.9 million Mexican pesos
 
13,924

 

 
(336
)
Forward purchase, 2.3 million Norwegian kroner
 
(394
)
 

 
(1
)
Forward sale, 16.4 million Polish zlotys
 
5,051

 

 
(62
)
Forward sale, 3.0 million Singapore dollars
 
2,389

 

 
(23
)
Forward sale, 7.8 billion South Korean won
 
7,042

 

 
15

Forward purchase, 1.4 billion Swedish kronor
 
(162,414
)
 
(45,595
)
 
6,133

Forward purchase, 49.8 million Swiss francs
 
(64,159
)
 
12,613

 
1,597

Forward sale, 50.6 million Taiwanese dollars
 
1,694

 

 
(12
)
Total foreign exchange forward contracts
 
$
15,696

 
$
55,595

 
$
4,114


Interest Rate Swaps
 
Notional Amounts Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)
 
2013
 
2014
 
2015
 
2016
 
2017 and Beyond
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Euro
 
$
908

 
$
926

 
$
926

 
$
926

 
$
1,158

 
$
(454
)
Japanese yen
 

 
133,360

 

 

 

 
204

Swiss francs
 

 

 

 
68,497

 

 
(1,137
)
Total interest rate swaps
 
$
908

 
$
134,286

 
$
926

 
$
69,423

 
$
1,158

 
$
(1,387
)

Commodity Swap Contracts
 
Notional Amounts Maturing
in the Year
 
Fair Value Net 
Asset (Liability)
(in thousands)
 
2013
 
2014
 
March 31, 2013
 
 
 
 
 
 
 
Silver swap - U.S. dollar
 
$
1,469

 
$
165

 
$
(160
)
Platinum swap - U.S. dollar
 
895

 

 
(3
)
Total commodity swap contracts
 
$
2,364

 
$
165

 
$
(163
)

Cross Currency Basis Swap
 
Notional Amounts Maturing in the Year
Fair Value Net
Asset (Liability)
(in thousands)
 
2013
 
2014
 
2015
 
2016
 
2017 and Beyond
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
797.6 million euro at $1.39 pay U.S. dollar three-month LIBOR receive three-month EURIBOR
 
$

 
$
576,778

 
$
111,346

 
$
111,569

 
$
223,138

$
(87,613
)
216.4 million Swiss franc at 1.10 pay Swiss franc three-month LIBOR receive U.S. dollar three-month LIBOR
 
79,035

 
105,380

 
43,611

 

 

(31,556
)
Total cross currency basis swap
 
$
79,035

 
$
682,158

 
$
154,957

 
$
111,569

 
$
223,138

$
(119,169
)

20




At March 31, 2013, deferred net gains on derivative instruments of $0.1 million, which were recorded in AOCI, are expected to be reclassified to current earnings during the next twelve 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 eighteen months. Overall, the derivatives designated as cash flow hedges are highly effective. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.

Hedges of Net Investments in Foreign Operations

The Company has significant investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. Currently, the Company uses both non-derivative financial instruments, including foreign currency denominated debt held at the parent company level and derivative financial instruments to hedge some of this exposure. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the non-derivative and derivative financial instruments designated as hedges of net investments, which are included in AOCI.

At March 31, 2013 and December 31, 2012, the Company had Swiss franc-denominated and Japanese yen-denominated debt and cross currency basis swaps denominated in euro and Swiss franc to hedge the currency exposure related to a designated portion of the net assets of its European, Swiss and Japanese subsidiaries. The fair value of the cross currency interest rate swap agreements is the estimated amount the Company would (pay) receive at the reporting date, taking into account the effective interest rates, currency swap basis rates and foreign exchange rates. At March 31, 2013 and December 31, 2012, the estimated net fair values of the cross currency interest rate swap agreements was a liability of $7.5 million and a liability of $90.7 million, respectively, which are recorded in AOCI, net of tax effects. At March 31, 2013 and December 31, 2012, the accumulated translation gain (loss) on investments in foreign subsidiaries, primarily denominated in euros, Swiss francs, Japanese yen and Swedish kronor, net of these net investment hedges, were losses of $140.3 million and $71.4 million, respectively, which were included in AOCI, net of tax effects.

On January 17, 2013, the Company extended 295.5 million Swiss francs of cross currency basis swaps maturing in February, March and April 2013 with five new swaps totaling 295.5 million Swiss francs maturing in February 2016, March 2017 and April 2018. These net investment hedges were traded at an exchange rate of approximately .93 Swiss franc per U.S. dollar which results in net cash payments totaling $45.8 million in the first quarter of 2013 and $9.4 million in the second quarter of 2013. The Company will receive three-month U.S. dollar LIBOR and pay three-month Swiss franc LIBOR minus 31.6 basis points.

The following tables summarize the notional amounts and fair value of the Company's cross currency basis swaps that are designated as hedges of net investments in foreign operations at March 31, 2013:
Cross Currency Basis Swaps
 
Notional Amounts Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)
 
2013
 
2014
 
2015
 
2016
 
2017 and Beyond
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
432.5 million Swiss franc at 0.95 pay Swiss franc three-month LIBOR receive U.S. dollar three-month LIBOR
 
$

 
$
84,725

 
$
59,645

 
$
105,380

 
$
206,017

 
$
(1,593
)
618.0 million euro at $1.27 pay three-month EURIBOR receive U.S. dollar three-month LIBOR
 
792,523

 

 

 

 

 
(5,905
)
Total cross currency basis swaps
 
$
792,523

 
$
84,725

 
$
59,645

 
$
105,380

 
$
206,017

 
$
(7,498
)

Fair Value Hedges

Effective April 4, 2011, the Company entered into 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 a 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 in the income statement. At March 31, 2013, the estimated net fair value of these interest rate swaps was an asset of $4.0 million.

21




The following tables summarize the notional amounts and fair value of the Company's fair value hedges at March 31, 2013:
Interest Rate Swap
 
Notional Amounts Maturing in the Year
 
Fair Value Net
Asset (Liability)
(in thousands)
 
2014
 
2015
 
2016
 
March 31, 2013
 
 
 
 
 
 
 
 
 
U.S. dollar
 
$
45,000

 
$
60,000

 
$
45,000

 
$
3,964

Total interest rate swap
 
$
45,000

 
$
60,000

 
$
45,000

 
$
3,964


The following tables summarize the fair value and consolidated balance sheet location of the Company's derivatives at March 31, 2013 and December 31, 2012:
 
 
March 31, 2013
(in thousands)
 
Prepaid
Expenses
and Other
Current Assets
 
Other
Noncurrent
Assets, Net
 
Accrued
Liabilities
 
Other
Noncurrent
Liabilities
Designated as Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
5,291

 
$
945

 
$
2,980

 
$
457

Commodity contracts
 

 

 
163

 

Interest rate swaps
 
2,251

 
2,015

 
532

 
703

Cross currency basis swaps
 
22,447

 
7,983

 
37,928

 

Total
 
$
29,989

 
$
10,943

 
$
41,603

 
$
1,160

Not Designated as Hedges
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
3,949

 
$

 
$
2,634

 
$

DIO equity option contracts
 

 

 

 
180

Interest rate swaps
 

 

 
103

 
351

Cross currency basis swaps
 
7,012

 
2,811

 
42,256

 
86,736

Total
 
$
10,961

 
$
2,811

 
$
44,993

 
$
87,267


 
 
December 31, 2012
(in thousands)
 
Prepaid
Expenses
and Other
Current Assets
 
Other
Noncurrent
Assets, Net
 
Accrued
Liabilities
 
Other
Noncurrent
Liabilities
Designated as Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
2,353

 
$
65

 
$
2,243

 
$
844

Commodity contracts
 

 

 
95

 

Interest rate swaps
 
2,192

 
2,535

 
525

 
948

Cross currency basis swaps
 
8,191

 

 
97,281

 
1,588

Total
 
$
12,736

 
$
2,600

 
$
100,144

 
$
3,380

Not Designated as Hedges
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
6,652

 
$

 
$
1,353

 
$

DIO equity option contracts
 

 

 

 
153

Interest rate swaps
 

 

 
114

 
416

Cross currency basis swaps
 
537

 

 
40,026

 
55,858

Total
 
$
7,189

 
$

 
$
41,493

 
$
56,427


Balance Sheet Offsetting

Substantially all of the Company's derivative contracts are subject to netting arrangements, whereby the right to offset occurs in the event of default or termination in accordance with the terms of the arrangements with the counterparty. While these contracts

22



contain the enforceable right to offset through netting arrangements, the Company elects to present them on a gross basis in the Consolidated Balance Sheets.
Offsetting of financial assets and liabilities under netting arrangements at March 31, 2013 and December 31, 2012:
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
(in thousands)
 
Gross Amounts Recognized
 
Gross Amount Offset in the Consolidated Balance Sheets
 
Net Amounts Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received/Pledged
 
Net Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Derivative contracts
 
$
54,704

 
$

 
$
54,704

 
$
(41,634
)
 
$

 
$
13,070

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Derivative contracts
 
$
175,023

 
$

 
$
175,023

 
$
(41,634
)
 
$

 
$
133,389

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Derivative contracts
 
$
22,525

 
$

 
$
22,525

 
$
(17,098
)
 
$

 
$
5,427

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Derivative contracts
 
$
201,444

 
$

 
$
201,444

 
$
(17,098
)
 
$

 
$
184,346


The following tables summarize the statements of operations impact of the Company's cash flow hedges for the three months ended March 31, 2013 and 2012:
Three Months Ended March 31, 2013
 
 
 
 
 
 
Derivatives in Cash Flow Hedging
 
 
 
 
 
 
(in thousands)
 
Gain (Loss)
in AOCI
 
Classification
of Gains (Losses)
 
Effective Portion
Reclassified from
AOCI into Income
 
 
 
 
 
 
 
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

Total
 
$
4,384

 
 
 
$
(287
)
Derivatives in Cash Flow Hedging
 
 
 
 
(in thousands)
 
Classification of Gains (Losses)
 
Ineffective Portion Recognized in Income
 
 
 
 
 
Foreign exchange forward contracts
 
Other expense (income), net
 
$
(13
)
Commodity contracts
 
Interest expense
 
(14
)
Total
 
 
 
$
(27
)

23



Three Months Ended March 31, 2012
 
 
 
 
 
 
Derivatives in Cash Flow Hedging
 
 
 
 
 
 
(in thousands)
 
Gain (Loss)
in AOCI
 
Classification
of Gains (Losses)
 
Effective Portion
Reclassified from
AOCI into Income
 
 
 
 
 
 
 
Interest rate swaps
 
$
(672
)
 
Interest expense
 
$
(905
)
Foreign exchange forward contracts
 
(1,434
)
 
Cost of products sold
 
1,150

Foreign exchange forward contracts
 
(89
)
 
SG&A expenses
 
231

Commodity contracts
 
839

 
Cost of products sold
 
(46
)
Total
 
$
(1,356
)
 
 
 
$
430

Derivatives in Cash Flow Hedging
 
 
 
 
(in thousands)
 
Classification of Gains (Losses)
 
Ineffective Portion Recognized in Income
 
 
 
 
 
Foreign exchange forward contracts
 
Other expense (income), net
 
200

Commodity contracts
 
Interest expense
 
(17
)
Total
 
 
 
$
183


The following tables summarize the statements of operations impact of the Company's hedges of net investments for the three months ended March 31, 2013 and 2012:
Three Months Ended March 31, 2013
Derivatives in Net Investment Hedging
 
 
 
 
 
 
(in thousands)
 
Gain (Loss)
in AOCI
 
Classification
of Gains (Losses)
 
Gain (Loss)
Recognized
in Income
 
 
 
 
 
 
 
Cross currency basis swaps
 
$
39,885

 
Interest income
 
$
1,387

 
 
 
 
Interest expense
 
(1,603
)
Total
 
$
39,885

 
 
 
$
(216
)

Three Months Ended March 31, 2012
Derivatives in Net Investment Hedging
 
 
 
 
 
 
(in thousands)
 
Gain (Loss)
in AOCI
 
Classification
of Gains (Losses)
 
Gain (Loss)
Recognized
in Income
 
 
 
 
 
 
 
Cross currency basis swaps
 
$
(50,369
)
 
Interest income
 
$
771

 
 
 
 
Interest expense
 
(1,206
)
Total
 
$
(50,369
)
 
 
 
$
(435
)

The following tables summarize the statements of operations impact of the Company's hedges of fair value for the three and three months ended March 31, 2013 and 2012:
Derivatives in Fair Value Hedging
 
 
 
 
 
 
 
 
Classification
 
Three Months Ended March 31,
(in thousands)
 
of Gains (Losses)
 
2013
 
2012
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
62

 
$
839

Total
 
 
 
$
62

 
$
839




24



The following table summarizes the statements of operations impact of the Company's hedges not designated as hedging for the three months ended March 31, 2013 and 2012:
Derivatives Not Designated as Hedging
 
 
Classification
 
Three Months Ended March 31,
(in thousands)
 
of Gains (Losses)
 
2013
 
2012
 
 
 
 
 
 
 
Foreign exchange forward contracts (a)
 
Other expense (income), net
 
$
2,515

 
$
2,851

DIO equity option contracts
 
Other expense (income), net
 
(33
)
 
(273
)
Interest rate swaps
 
Interest expense
 
10

 
(41
)
Cross currency basis swaps (a)
 
Other expense (income), net
 
(25,432
)
 
18,545

Total
 
 
 
$
(22,940
)
 
$
21,082

(a) 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.

Amounts recorded in AOCI related to cash flow hedging instruments for the three months ended March 31, 2013 and 2012:
 
 
Three Months Ended March 31,
(in thousands, net of tax)
 
2013
 
2012
 
 
 
 
 
Beginning balance
 
$
(17,481
)
 
$
(12,737
)
 
 
 
 
 
Changes in fair value of derivatives
 
3,507

 
(668
)
Reclassifications to earnings from equity
 
122

 
(539
)
Total activity
 
3,629

 
(1,207
)
 
 
 
 
 
Ending balance
 
$
(13,852
)
 
$
(13,944
)

Amounts recorded in AOCI related to hedges of net investments in foreign operations for the three months ended March 31, 2013 and 2012:
 
 
Three Months Ended March 31,
(in thousands, net of tax)
 
2013
 
2012
 
 
 
 
 
Beginning balance
 
$
(71,358
)
 
$
(143,730
)
 
 
 
 
 
Foreign currency translation adjustment
 
(101,939
)
 
126,808

Changes in fair value of:
 
 
 
 
Foreign currency debt
 
8,504

 
5,324

Derivative hedge instruments
 
24,489

 
(30,926
)
Total activity
 
(68,946
)
 
101,206

 
 
 
 
 
Ending balance
 
$
(140,304
)
 
$
(42,524
)

NOTE 11 – FAIR VALUE MEASUREMENT

The Company records financial instruments at fair value with unrealized gains and losses related to certain financial instruments reflected in AOCI on the Consolidated Balance Sheets.  In addition, the Company recognizes certain liabilities at fair value.  The Company applies the market approach for recurring fair value measurements.  Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. The Company believes the carrying amounts of cash and cash equivalents, accounts receivable (net of allowance for doubtful accounts), prepaid expenses and other current assets, accounts payable, accrued liabilities, income taxes payable and notes payable approximate fair value due to the short-term nature of these instruments.  The Company estimated the fair value

25



and carrying value of total long-term debt, including the current portion, was $1,501.0 million and $1,458.4 million, respectively, at March 31, 2013.   At December 31, 2012, the Company estimated the fair value and carrying value, including the current portion, was $1,515.2 million and $1,472.9 million respectively.  The interest rate on the $450.0 million Senior Notes, the $300.0 million Senior Notes, and the $250.0 million PPN are fixed rates of 4.1%, 2.8% and 4.1%, respectively, and their fair value is based on the interest rates as of March 31, 2013. The interest rates on variable rate term loan debt and commercial paper are consistent with current market conditions, therefore the fair value of these instruments approximates their carrying values.

The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at March 31, 2013 and December 31, 2012, which are classified as “Cash and cash equivalents,” “Prepaid expenses and other current assets,” “Other noncurrent assets, net,” “Accrued liabilities,” and “Other noncurrent liabilities” in the Consolidated Balance Sheets.  Financial assets and liabilities that are recorded at fair value as of the balance sheet date are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 
March 31, 2013
(in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Interest rate swaps
$
4,266

 
$

 
$
4,266

 
$

Cross currency basis swaps
40,253

 

 
40,253

 

Foreign exchange forward contracts
10,185

 

 
10,185

 

DIO Corporate convertible bonds
84,695

 

 

 
84,695

Total assets
$
139,399

 
$

 
$
54,704

 
$
84,695

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Interest rate swaps
$
1,689

 
$

 
$
1,689

 
$

Commodity forward purchase contracts
163

 

 
163

 

Cross currency basis swaps
166,920

 

 
166,920

 

Foreign exchange forward contracts
6,071

 

 
6,071

 

Long term debt
153,992

 

 
153,992

 

DIO equity option contracts
180

 

 

 
180

Total liabilities
$
329,015

 
$

 
$
328,835

 
$
180


 
December 31, 2012
(in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Interest rate swaps
$
4,727

 
$

 
$
4,727

 
$

Cross currency basis swaps
8,728

 

 
8,728

 

Foreign exchange forward contracts
9,070

 

 
9,070

 

DIO Corporate convertible bonds
75,143

 

 

 
75,143

Total assets
$
97,668

 
$

 
$
22,525

 
$
75,143

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Interest rate swaps
$
2,003

 
$

 
$
2,003

 
$

Commodity contracts
95

 

 
95

 

Cross currency basis swaps
194,753

 

 
194,753

 

Foreign exchange forward contracts
4,440

 

 
4,440

 

Long term debt
154,560

 

 
154,560

 

DIO equity option contracts
153

 

 

 
153

Total liabilities
$
356,004

 
$

 
$
355,851

 
$
153



26



Derivative valuations are based on observable inputs to the valuation model including interest rates, foreign currency exchange rates, future commodities prices and credit risks.  The commodity contracts, certain interest rate swaps and foreign exchange forward contracts are considered cash flow hedges and certain cross currency interest rate swaps are considered hedges of net investments in foreign operations as discussed in Note 10, Financial Instruments and Derivatives.

The Company uses the income method valuation technique to estimate the fair value of the DIO corporate bonds.  The significant unobservable inputs for valuing the corporate bonds are DIO Corporation’s stock volatility factor of approximately 40% and corporate bond rating which implies an approximately 15% discount rate on the valuation model.  Significant observable inputs used to value the corporate bonds include foreign exchange rates and DIO Corporation’s period-ending market stock price.

The Company has valued the DIO equity option contracts using a Monte Carlo simulation which uses several estimates and probability assumptions by management including the future stock price, the stock price as a multiple of DIO earnings and the probability of the sellers to reduce their shares held by selling into the open market.  The fair value of equity option contracts are reported in “Other noncurrent liabilities,” on the Consolidated Balance Sheets and changes in the fair value are reported in “Other expense (income), net” in the Consolidated Statements of Operations.

The following table presents a reconciliation of the Company’s Level 3 holdings measured at fair value on a recurring basis using unobservable inputs:
(in thousands)
DIO Corporate
Convertible
Bonds
 
DIO Equity
Options
Contracts
 
 
 
 
Balance at December 31, 2012
$
75,143

 
$
(153
)
Unrealized gain:
 

 
 

Reported in AOCI, pretax
12,016

 

Unrealized loss:
 

 
 

Reported in other expense (income), net

 
(32
)
Effects of exchange rate changes
(2,464
)
 
5

Balance at March 31, 2013
$
84,695

 
$
(180
)

For the three months ended March 31, 2013, there were no purchases, issuances or transfers of Level 3 financial instruments.

NOTE 12 – INCOME TAXES

Uncertainties in Income Taxes

The Company recognizes in the consolidated financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.

It is reasonably possible that certain amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date of the Company’s consolidated financial statements. Final settlement and resolution of outstanding tax matters in various jurisdictions during the next twelve months could include unrecognized tax benefits of approximately $0.3 million.  In addition, expiration of statutes of limitation in various jurisdictions during the next twelve months could include unrecognized tax benefits of approximately $0.8 million.














27



NOTE 13 – GOODWILL AND INTANGIBLE ASSETS

A reconciliation of changes in the Company’s goodwill is as follows:
(in thousands)
Dental Consumable and Laboratory Businesses
 
Orthodontics/Canada/Mexico/Japan
 
Select Distribution Businesses
 
Implants/Endodontics/Healthcare/Pacific Rim
 
Total
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
488,206

 
$
102,065

 
$
92,473

 
$
1,528,209

 
$
2,210,953

Business unit transfer

 
(4,364
)
 
(13,770
)
 
18,134

 

Effects of exchange rate changes
(6,008
)
 
(2,765
)
 
(2,085
)
 
(32,854
)
 
(43,712
)
Balance at March 31, 2013
$
482,198

 
$
94,936

 
$
76,618

 
$
1,513,489

 
$
2,167,241




Identifiable definite-lived and indefinite-lived intangible assets consist of the following:
 
March 31, 2013
 
December 31, 2012
(in thousands) 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Patents
$
178,917

 
$
(83,749
)
 
$
95,168

 
$
179,512

 
$
(81,390
)
 
$
98,122

Trademarks
81,627

 
(33,744
)
 
47,883

 
83,073

 
(33,129
)
 
49,944

Licensing agreements
30,677

 
(19,294
)
 
11,383

 
30,695

 
(18,966
)
 
11,729

Customer relationships
479,087

 
(57,030
)
 
422,057

 
491,859

 
(50,632
)
 
441,227

Total definite-lived
$
770,308

 
$
(193,817
)
 
$
576,491

 
$
785,139

 
$
(184,117
)
 
$
601,022

 
 
 
 
 
 
 
 
 
 
 
 
Trademarks and In-process R&D
$
229,155

 
$

 
$
229,155

 
$
229,620

 
$

 
$
229,620

 
 
 
 
 
 
 
 
 
 
 
 
Total identifiable intangible assets
$
999,463

 
$
(193,817
)
 
$
805,646

 
$
1,014,759

 
$
(184,117
)
 
$
830,642


NOTE 14 – COMMITMENTS AND CONTINGENCIES

Litigation

On June 18, 2004, Marvin Weinstat, DDS and Richard Nathan, DDS filed a class action suit in San Francisco County, California alleging that the Company misrepresented that its Cavitron® ultrasonic scalers are suitable for use in oral surgical procedures. The Complaint seeks a recall of the product and refund of its purchase price to dentists who have purchased it for use in oral surgery. The Court certified the case as a class action in June 2006 with respect to the breach of warranty and unfair business practices claims. The class that was certified is defined as California dental professionals who, at any time during the period beginning June 18, 2000 through September 14, 2012, purchased and used one or more Cavitron® ultrasonic scalers for the performance of oral surgical procedures on their patients, which Cavitrons® were accompanied at sale by Directions for Use that “Indicated” Cavitron® use for “periodontal debridement for all types of periodontal disease.” The case is pending in the San Francisco County Court. A Class Notice was mailed beginning September 14, 2012.

On December 12, 2006, a Complaint was filed by Carole Hildebrand, DDS and Robert Jaffin, DDS in the Eastern District of Pennsylvania (the Plaintiffs subsequently added Dr. Mitchell Goldman as a named class representative).  The case was filed by the same law firm that filed the Weinstat case in California.  The Complaint asserts putative class action claims on behalf of dentists located in New Jersey and Pennsylvania. The Complaint seeks damages and asserts that the Company's Cavitron® ultrasonic scaler was negligently designed and sold in breach of contract and warranty arising from misrepresentations about the potential uses of the product because it cannot assure the delivery of potable or sterile water. Following dismissal of the case for lack of jurisdiction, the plaintiffs filed a second complaint under the name of Dr. Hildebrand's corporate practice. The Company's motion to dismiss this new complaint was denied and the case will now proceed under the name “Center City Periodontists.”

28




The Company does not believe a loss is probable related to the above litigation. Further a reasonable estimate of a possible range of loss cannot be made.   In the event that one or more of these matters is unfavorably resolved, it is possible the Company's results from operations could be materially impacted.

In 2012, the Company has received subpoenas from the United States Attorney's Office for the Southern District of Indiana (the “USAO”) and from the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) requesting documents and information related to compliance with export controls and economic sanctions regulations by certain of its subsidiaries. The Company has voluntarily contacted OFAC and the Bureau of Industry and Security of the United States Department of Commerce (“BIS”), in connection with these matters as well as regarding compliance with export controls and economic sanctions regulations by certain other business units of the Company identified in connection with an ongoing internal review by the Company. The Company is cooperating with the USAO, OFAC and BIS with respect to these matters.

At this stage of the inquiries, the Company is unable to predict the ultimate outcome of these matters or what impact, if any, the outcome of these matters might have on the Company's consolidated financial position, results of operations or cash flows. Violations of export control or economic sanctions laws or regulations could result in a range of governmental enforcement actions, including fines or penalties, injunctions and/or criminal or other civil proceedings, which actions could have a material adverse effect on the Company's reputation, business, financial condition and results of operations. At this time, no claims have been made against the Company.

In addition to the matters disclosed above, the Company is, from time to time, subject to a variety of litigation and similar proceedings incidental to its business.  These legal matters primarily involve claims for damages arising out of the use of the Company's products and services and claims relating to intellectual property matters, employment matters, tax matters, commercial disputes, competition and sales and trading practices, personal injury and insurance coverage.  The Company may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, or representations, warranties or indemnities provided in connection with, divested businesses.  Some of these lawsuits may include claims for punitive and consequential, as well as compensatory damages.  Based upon the Company's experience, current information and applicable law, it does not believe that these proceedings and claims will have a material adverse effect on its consolidated results of operations, financial position or liquidity. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to the Company's business, financial condition, results of operations or liquidity.

While the Company maintains general, products, property, workers' compensation, automobile, cargo, aviation, crime, fiduciary and directors' and officers' liability insurance up to certain limits that cover certain of these claims, this insurance may be insufficient or unavailable to cover such losses.  In addition, while the Company believes it is entitled to indemnification from third parties for some of these claims, these rights may also be insufficient or unavailable to cover such losses.

Purchase Commitments

From time to time, the Company enters into long-term inventory purchase commitments with minimum purchase requirements for raw materials and finished goods to ensure the availability of products for production and distribution.  These commitments may have a significant impact on levels of inventory maintained by the Company.



29



DENTSPLY International Inc. and Subsidiaries

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

This report contains information that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, the use of terms such as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,” and similar expressions identify forward-looking statements. All statements that address operating performance, events or developments that DENTSPLY International Inc. (“DENTSPLY” or the “Company”) expects or anticipates will occur in the future are forward-looking statements. Forward-looking statements are based on management's current expectations and beliefs, and are inherently susceptible to uncertainty, risks, and changes in circumstances that could cause actual results to differ materially from the Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I, Item 1A (“Risk Factors”) of the Company's Form 10-K for the year ended December 31, 2012 and those described from time to time in our future reports filed with the Securities and Exchange Commission. The Company undertakes no duty and has no obligation to update forward-looking statements as a result of future events or developments.

OVERVIEW

Quarter Highlights

DENTSPLY achieved record net sales for the first quarter ended March 31, 2013. Net sales grew 2.2% on a reported basis, and 1.1% excluding precious metal content. The sales growth, excluding precious metal content, was primarily internal growth as currency translation was negative by 0.6%. Sales growth was negatively impacted by two fewer selling days during the quarter compared with the first quarter of 2012.

First quarter 2013 earnings per diluted share was $0.49 compared with $0.38 in the prior year quarter. The increase was due in large part to the inclusion of acquisition related expenses in the prior year quarter. Adjusted earnings per share, a non-GAAP measure, were $0.52 in both the 2013 and 2012 periods.

The Company is proceeding with the integration of its dental implant businesses, with two additional selling organizations, Germany and France, combined in the first quarter. Investments made in combining and training the sales force in these two markets reduced sales during the quarter, but is expected to have a favorable impact on sales force execution in the future. Integration of country sales force organizations is now nearly complete, with only two additional countries remaining which are expected to be combined in the second quarter of 2013.

DENTSPLY's balance sheet improved compared to the same period in the prior year, reflecting a net debt to total capitalization ratio of 39% at March 31, 2013 compared to 45% at March 31, 2012.

Operating cash flow in the first quarter 2013 was $36.1 million versus $20.0 million for the first quarter 2012.

Company Profile

DENTSPLY International Inc. is a leading manufacturer and distributor of dental and other consumable medical device products.  The Company believes it is the world's largest manufacturer of consumable dental products for the professional dental market.  For over 110 years, DENTSPLY's commitment to innovation and professional collaboration has enhanced its portfolio of branded consumables and small equipment.  Headquartered in the United States, the Company has global operations with sales in more than 120 countries. The Company also has strategically located distribution centers to enable it to better serve its customers and increase its operating efficiency. While the United States and Europe are the Company's largest markets, the Company serves all major markets worldwide.

Principal Products

The Company has four principal product categories: 1) Dental Consumable Products; 2) Dental Laboratory Products; 3) Dental Specialty Products; and 4) Consumable Medical Device Products.

Dental consumable products consist of dental sundries and small equipment used in dental offices in the treatment of patients. The Company manufactures a wide variety of different dental sundry consumable products marketed under more than one hundred brand names.  DENTSPLY’s dental sundry products within this category include dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, tooth whiteners and topical fluoride.  Small equipment products in the dental

30



consumable category consist of various durable goods used in dental offices for treatment of patients.  DENTSPLY’s small equipment products include high and low speed handpieces, intraoral curing light systems, dental diagnostic systems, and ultrasonic scalers and polishers.

DENTSPLY's products in the dental laboratory products category include dental prosthetics, including artificial teeth, precious metal dental alloys, dental ceramics and crown and bridge materials. Equipment in this category includes computer aided machining (CAM) ceramic systems and porcelain furnaces.

Dental specialty products are specialized treatment products used within the dental office and laboratory settings.  DENTSPLY's products in this category include endodontic (root canal) instruments and materials, implants and related products, bone grafting materials, 3D digital implantology, dental lasers and orthodontic appliances and accessories.

Consumable medical device products consist mainly of urological products including catheters, certain surgical products, medical drills and other non-medical products.

Principal Measurements

The principal measurements used by the Company in evaluating its business are: (1) internal growth by geographic region; (2) constant currency growth by geographic region; (3) operating margins of each reportable segment including product pricing and cost controls; (4) the development, introduction and contribution of innovative new products; and (5) growth through acquisition.

The Company defines “internal growth” as the increase or decrease in net sales from period to period, excluding (1) precious metal content; (2) the impact of changes in currency exchange rates; and (3) net acquisition growth. The Company defines “net acquisition growth” as the net sales for a period of twelve months following the transaction date of businesses that have been acquired, less the net sales for a period of twelve months prior to the transaction date of businesses that have been divested. The Company defines “constant currency growth” as internal growth plus net acquisition growth.

Management believes that internal growth in the range of 3% to 6% is a long-term targeted rate for the Company. The internal growth rate may vary outside of this range based on economic conditions. Historical trends show that growth in the dental industry generally performs better than the overall economy; however, it typically lags the economic trend going into and coming out of slower growth or recessionary periods. Over the past several years, growth in the global dental markets has been restrained by lower market growth in Western Europe compared to historical averages.  There can be no assurance that the Company's assumptions concerning the growth rates in its markets will continue in the future.  If such rates are less than expected, the Company's projected growth rates and results of operations may be adversely affected.

Price changes, other marketing and promotional programs offered to customers from time to time, the management of inventory levels by distributors and the implementation of strategic initiatives may impact sales and inventory levels in a given period.

The Company has a focus on minimizing costs and achieving operational efficiencies. Management continues to evaluate the consolidation of operations or functions to reduce costs. In addition, the Company remains focused on enhancing efficiency through expanded use of technology and process improvement initiatives. The Company believes that the benefits from these initiatives will improve the cost structure and help offset areas of rising costs such as energy, employee benefits and regulatory oversight and compliance.

Product innovation is a key component of the Company's overall growth strategy. New advances in technology are anticipated to have a significant influence on future products in dentistry and consumable medical device markets in which the Company operates. As a result, the Company continues to pursue research and development initiatives to support technological development, including collaborations with various research institutions and dental schools. In addition, the Company licenses and purchases technologies developed by third parties. Although the Company believes these activities will lead to new innovative dental and consumable medical device products, they involve new technologies and there can be no assurance that commercialized products will be developed.

The Company will continue to pursue opportunities to expand the Company's product offerings through acquisitions. Although the professional dental and the consumable medical device markets in which the Company operates has experienced consolidation, it is still a fragmented industry. Management believes that there will continue to be adequate opportunities to participate as a consolidator in the industry for the foreseeable future, however it will be very focused in the near-term on the integration of its recent acquisitions and associated debt reduction.


31




Impact of Foreign Currencies

Due to the international nature of DENTSPLY's business, movements in foreign exchange rates may impact the consolidated statements of operations. With approximately two-thirds of the Company's sales located in regions outside the United States, the Company's consolidated net sales are impacted negatively by the strengthening or positively by the weakening of the U.S. dollar against various foreign currencies. Additionally, movements in certain foreign exchange rates may unfavorably or favorably impact the Company's results of operations, financial condition and liquidity.

Reclassification of Prior Year Amounts

During the first quarter of 2013, the Company realigned certain implant and implant related businesses for multiple locations as a result of changes to the business structure. The segment information below reflects the revised structure for all periods shown.

RESULTS OF OPERATIONS, QUARTER ENDED MARCH 31, 2013 COMPARED TO QUARTER ENDED MARCH 31, 2012

Net Sales

Management believes that the presentation of net sales, excluding precious metal content, provides useful information to investors because a significant portion of DENTSPLY’s net sales is comprised of sales of precious metals generated through sales of the Company’s precious metal dental alloy products, which are used by third parties to construct crown and bridge materials.  Due to the fluctuations of precious metal prices and because the precious metal content of the Company’s sales is largely a pass-through to customers and has minimal effect on earnings, DENTSPLY reports net sales both with and without precious metal content to show the Company’s performance independent of precious metal price volatility and to enhance comparability of performance between periods.  The Company uses its cost of precious metal purchased as a proxy for the precious metal content of sales, as the precious metal content of sales is not separately tracked and invoiced to customers.  The Company believes that it is reasonable to use the cost of precious metal content purchased in this manner since precious metal dental alloy sale prices are typically adjusted when the prices of underlying precious metals change.

The presentation of net sales, excluding precious metal content, is considered a measure not calculated in accordance with the generally accepted accounting principles in the United States (“US GAAP”), and is therefore considered a non-US GAAP measure.  The Company provides the following reconciliation of net sales to net sales, excluding precious metal content.  The Company’s definitions and calculations of net sales, excluding precious metal content, and other operating measures derived using net sales, excluding precious metal content, may not necessarily be the same as those used by other companies.

 
Three Months Ended
 
 
 
 
 
March 31,
 
 
(in millions)
2013
 
2012
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Net sales
$
732.1

 
$
716.4

 
$
15.7

 
2.2
%
Less: precious metal content of sales
59.5

 
50.8

 
8.7

 
17.1
%
Net sales, excluding precious metal content
$
672.6

 
$
665.6

 
$
7.0

 
1.1
%

Net sales, excluding precious metal content, for the three months ended March 31, 2013 was $672.6 million, an increase of 1.1% over the first quarter of 2012.  The change in net sales, excluding precious metal content, was primarily a result of the 1.6% of internal growth partially offset by foreign currency translation.   

Constant Currency and Internal Sales Growth

The following table includes growth rates for net sales, excluding precious metal content, for the three months ended March 31, 2013 compared with the three months ended March 31, 2012.


32



 
Three Months Ended March 31, 2013
 
United
States
 
Europe
 
All Other
Regions
 
Worldwide
 
 
 
 
 
 
 
 
Internal sales growth
1.9
%
 
0.8
%
 
2.9
%
 
1.6
%
Acquisition sales growth
%
 
0.2
%
 
%
 
0.1
%
Constant currency sales growth
1.9
%
 
1.0
%
 
2.9
%
 
1.7
%

United States

Net sales, excluding precious metal content, increased by 1.9% in the first quarter of 2013 as compared to the first quarter of 2012 on a constant currency basis, led by internal sales growth in dental specialty, consumable medical device and dental laboratory products.  

Europe

Net sales, excluding precious metal content, increased by 1.0% in the first quarter of 2013 on a constant currency basis, including 0.8% of internal sales growth. The internal growth was driven by increased demand for dental specialty, dental consumable and consumable medical device products partially offset by decreased sales of dental laboratory products and lower implant volumes in Germany due to the integration of the implant businesses.

All Other Regions

Net sales, excluding precious metal content, in the other regions of the world increased by 2.9% in the first quarter of 2013 on a constant currency basis, as a result of internal sales growth primarily due to the increased demand for dental specialty, dental laboratory and consumable medical device products.

Gross Profit
 
Three Months Ended
 
 
 
 
 
March 31,
 
 
 
 
(in millions)
2013
 
2012
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Gross profit
$
388.2

 
$
392.8

 
$
(4.6
)
 
(1.2
%)
Gross profit as a percentage of net sales, including precious metal content
53.0
%
 
54.8
%
 
 

 
 

Gross profit as a percentage of net sales, excluding precious metal content
57.7
%
 
59.0
%
 
 

 
 


Gross profit as a percentage of net sales, excluding precious metal content, decreased by 1.3 percentage points for the three months ended March 31, 2013 compared to the same quarter of 2012.  The margin rate was primarily impacted by the medical device federal excise tax as implemented by the Affordable Care Act, unfavorable sales mix, including lower implant sales, and higher manufacturing costs including the effect of foreign currency changes, partially offset by pricing and efficiency improvements.

Operating Expenses
 
Three Months Ended
 
 
 
 
 
March 31,
 
 
 
 
(in millions)
2013
 
2012
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Selling, general and administrative expenses (“SG&A”)
$
293.7

 
$
304.4

 
$
(10.7
)
 
(3.5
%)
Restructuring and other costs
$
0.7

 
$
1.2

 
$
(0.5
)
 
NM

 
 
 
 
 
 
 
 
SG&A as a percentage of net sales, including precious metal content
40.1
%
 
42.5
%
 
 

 
 

SG&A as a percentage of net sales, excluding precious metal content
43.7
%
 
45.7
%
 
 

 
 

NM – Not meaningful

33




SG&A Expenses

SG&A expenses as a percentage of net sales, excluding precious metal content, decreased in the quarter ended March 31, 2013 by 2.0 percentage points when compared to the same quarter of 2012. This was primarily due to higher expenses recorded in the first quarter of 2012 relating to the integration of acquisitions as well as expense controls across all businesses.

Restructuring and Other Costs

During the three months ended March 31, 2013, the Company recorded net restructuring and other costs of $0.7 million.   In the same period of 2012, the Company incurred costs of $1.2 million. (See also Note 9, Restructuring and Other Costs, of the Notes to Unaudited Interim Consolidated Financial Statements).

Other Income and Expense
 
Three Months Ended
March 31,
 
 
(in millions)
2013
 
2012
 
Change
 
 
 
 
 
 
Net interest expense
$
13.0

 
$
13.9

 
$
(0.9
)
Other expense (income), net
2.9

 
0.1

 
2.8

Net interest and other expense
$
15.9

 
$
14.0

 
$
1.9


Net Interest Expense

Net interest expense for the three months ended March 31, 2013 was $0.9 million lower compared to the three months ended March 31, 2012. The net decrease is a result of lower average debt levels in 2013 compared to the prior year period, partially offset by non-cash fair value adjustments of $2.7 million related to cross currency basis swaps designated as net investment hedges and credit risk adjustment on the total hedge portfolio fair value.

Other Expense (Income), Net

Other expense (income), net in the three months ended March 31, 2013 was $2.9 million, comprised primarily of $1.1 million of net interest and $1.8 million of fair value adjustments on cross currency basis swaps hedging intercompany loans. Other expense (income), net in the three months ended March 31, 2012 was $0.1 million including $0.4 million of currency transaction losses.

Income Taxes and Net Income
  
 
Three Months Ended
March 31,
 
 
(in millions, except per share data)
2013
 
2012
 
$ Change
 
 
 
 
 
 
Effective income tax rate
4.5
%
 
20.1
%
 
 
 
 
 
 
 
 
Equity in net loss of unconsolidated affiliated company
$
(1.8
)
 
$
(4.2
)
 
$
2.4

 
 
 
 
 
 
Net income attributable to noncontrolling interests
$
0.9

 
$
0.9

 
$

 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
71.7

 
$
53.3

 
$
18.4

 
 
 
 
 
 
Earnings per common share - diluted
$
0.49

 
$
0.37

 
 

 
 
 
 
 
 
NM – Not meaningful





34



 Provision for Income Taxes

The Company's effective tax rate for the first three months of 2013 and 2012 were 4.5% and 20.1%, respectively. During the first three months of 2013, the Company recorded a tax benefit of $9.4 million related to U.S. federal legislative changes enacted in January 2013, relating to 2012, a benefit of $1.4 million related to the settlement of various tax matters and a benefit of $1.9 million related to prior year tax matters.

The Company’s effective income tax rate for 2013 includes the impact of amortization on purchased intangibles assets, income related to credit risk adjustments on outstanding derivatives, integration and restructuring and other costs and various income tax adjustments which impacted income before income taxes and the provision for income taxes by $19.3 million and $17.7 million, respectively.  

In 2012, the Company’s effective income tax rate included the impact of amortization on purchased intangibles assets, integration and restructuring and other costs and various income tax adjustments which impacted income before income taxes and the provision for income taxes by $25.5 million and $8.0 million, respectively.

Equity in net (loss) income of unconsolidated affiliated company

The Company’s 17% ownership investment of DIO Corporation resulted in a net loss of $1.8 million and $4.2 million on an after-tax basis for the three months ended March 31, 2013 and 2012, respectively.  The equity earnings of DIO includes the result of mark-to-market changes related to the derivative accounting for the convertible bonds issued by DIO to DENTSPLY.  The Company's portion of the mark-to-market net loss incurred by DIO for the three months ended March 31, 2013 and 2012 was approximately $1.9 million and $4.5 million, respectively.

Net Income attributable to DENTSPLY International

In addition to the results reported in accordance with US GAAP, the Company provides adjusted net income attributable to DENTSPLY International and adjusted earnings per diluted common share.  These adjusted amounts consist of US GAAP amounts excluding, net of tax (1) acquisition related costs, (2) restructuring and other costs, including legal settlements, (3) amortization of purchased intangible assets, (4) Orthodontic business continuity costs, (5) income related to credit risk and fair value adjustments, (6) certain fair value adjustments at an unconsolidated affiliated company, and (7) income tax related adjustments. Adjusted earnings per diluted common share is calculated by dividing adjusted net income attributable to DENTSPLY International by diluted weighted-average common shares outstanding. Adjusted net income attributable to DENTSPLY International and adjusted earnings per diluted common share are considered measures not calculated in accordance with US GAAP, and therefore are non-US GAAP measures.  These non-US GAAP measures may differ from other companies. Income tax related adjustments may include the impact to adjust the interim effective income tax rate to the expected annual effective tax rate.

The Company believes that the presentation of adjusted net income attributable to DENTSPLY International and adjusted earnings per diluted common share provides important supplemental information to management and investors seeking to understand the Company's financial condition and results of operations.  The non-US GAAP financial information should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with US GAAP.


35



 
Three Months Ended March 31, 2013
(in thousands, except per share amounts)
Net Income
 
Per Diluted
Common Share
 
 
 
 
Net income attributable to DENTSPLY International
$
71,685

 
$
0.49

Amortization of purchased intangible assets, net of tax
8,376

 
0.06

Credit risk and fair value adjustments to outstanding derivatives, net of tax
2,734

 
0.02

Loss on fair value adjustments at an unconsolidated affiliated company, net of tax
1,928

 
0.01

Acquisition related activities, net of tax
1,353

 
0.01

Restructuring and other costs, including legal settlements, net of tax  
539

 

Income tax related adjustments
(11,388
)
 
(0.08
)
Rounding

 
0.01

Adjusted non-US GAAP earnings
$
75,227

 
$
0.52

 
Three Months Ended March 31, 2012
(in thousands, except per share amounts)
Net Income
 
Per Diluted
Common Share
 
 
 
 
Net income attributable to DENTSPLY International
$
53,284

 
$
0.37

Amortization of purchased intangible assets, net of tax
10,982

 
0.08

Acquisition related activities, net of tax
4,797

 
0.03

Loss on fair value adjustments at an unconsolidated affiliated company, net of tax
4,655

 
0.03

Restructuring and other costs, net of tax  
1,164

 
0.01

Orthodontics business continuity costs, net of tax
408

 

Income tax related adjustments
(35
)
 

Adjusted non-US GAAP earnings
$
75,255

 
$
0.52


Operating Segment Results

Third Party Net Sales, Excluding Precious Metal Content
 
Three Months Ended
 
 
 
 
 
March 31,
 
 
(in millions)
2013
 
2012
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
212.0

 
$
212.1

 
$
(0.1
)
 
 %
 
 
 
 
 
 
 
 
Orthodontics/Canada/Mexico/Japan
$
65.0

 
$
63.3

 
$
1.7

 
2.7
 %
 
 
 
 
 
 
 
 
Select Distribution Businesses
$
60.7

 
$
58.9

 
$
1.8

 
3.1
 %
 
 
 
 
 
 
 
 
Implants/Endodontics/Healthcare/Pacific Rim
$
336.3

 
$
332.6

 
$
3.7

 
1.1
 %









36



Segment Operating Income
 
Three Months Ended
 
 
 
 
 
March 31,
 
 
(in millions)
2013
 
2012
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
61.8

 
$
63.3

 
$
(1.5
)
 
(2.4
%)
 
 
 
 
 
 
 
 
Orthodontics/Canada/Mexico/Japan
$
1.9

 
$
(0.3
)
 
$
2.2

 
NM

 
 
 
 
 
 
 
 
Select Distribution Businesses
$
(1.6
)
 
$
(1.4
)
 
$
(0.2
)
 
(14.3
%)
 
 
 
 
 
 
 
 
Implants/Endodontics/Healthcare/Pacific Rim
$
63.9

 
$
65.4

 
$
(1.5
)
 
(2.3
%)
NM – Not meaningful

Dental Consumable and Laboratory Businesses

Net sales, excluding precious metal content, decreased $0.1 million during the three months ended March 31, 2013 compared to 2012.  On a constant currency basis, net sales, excluding precious metal content, was flat as compared to the same period in 2012.  Growth in dental consumables was offset as a result of lower sales in the dental laboratory businesses primarily in Europe.

Operating income decreased $1.5 million for the three months ended March 31, 2013 compared to 2012 due to higher SG&A expenses primarily due to lower than expected sales growth in the dental laboratory businesses in Europe.

Orthodontics/Canada/Mexico/Japan

Net sales, excluding precious metal content, increased $1.7 million, or 2.7% during the three months ended March 31, 2013 compared to 2012. On a constant currency basis, net sales, excluding precious metal content, increased 5.6% due to stronger dental specialty product sales primarily in the orthodontic businesses, partially offset by decreased sales in Canada.

Operating income increased $2.2 million compared to the same year ago period primarily due to improved operating leverage in the orthodontic business as it recovered from a supply outage in 2011 and 2012 .

Select Distribution Businesses

Net sales, excluding precious metal content, increased $1.8 million, or 3.1% during the three months ended March 31, 2013 compared to 2012.  On a constant currency basis, net sales, excluding precious metal content, increased 3.7% when compared to the same period of 2012.  The growth was primarily related to increased demand in dental specialty and dental consumable products.

Operating income decreased $0.2 million during the three months ended March 31, 2013 compared to 2012.  Gross profit increased $0.5 million due to sales volume which was offset by higher SG&A expenses in emerging markets during the three months ended March 31, 2013 compared to 2012.

Implants/Endodontics/Healthcare/Pacific Rim

Net sales, excluding precious metal content, increased $3.7 million, or 1.1%, during the three months ended March 31, 2013 compared to 2012.  On a constant currency basis, net sales, excluding precious metal content, increased 1.7% primarily driven by sales growth across the segment except for implants, which was impacted by lower implant volumes in Germany due to the integration of the implant businesses.

Operating income for the three months ended March 31, 2013 decreased $1.5 million or 2.3%, compared to 2012. Gross profit decreased $7.0 million as result of product mix, which was mostly driven by lower implant sales partially offset by lower SG&A expenses including synergies from recent acquisitions.





37



CRITICAL ACCOUNTING POLICIES

There have been no significant material changes to the critical accounting policies as disclosed in the Company’s Form 10-K for the year ended December 31, 2012.

LIQUIDITY AND CAPITAL RESOURCES

Three months ended March 31, 2013

Cash flow from operating activities during the three months ended March 31, 2013 was $36.1 million compared to $20.0 million during the three months ended March 31, 2012. Net income during the quarter increased by $18.3 million to $72.6 million in the period ended March 31, 2013. Depreciation and amortization expense for the quarter was $3.2 million lower than the prior year period. Working capital improved by $5.8 million in the current quarter versus the prior year first quarter as reductions in inventory of $11.9 million were offset by higher accounts receivable of $10.6 million and higher net accruals of $4.5 million. On a constant currency basis, as of March 31, 2013, reported days for inventory increased by 4 days to 110 days and accounts receivable increased by 6 days to 59 days, respectively, as compared to December 31, 2012.

Investing activities during the first three months of 2013 include capital expenditures of $24.0 million and the settlement and renewal of Swiss franc net investment hedges totaling $45.8 million. The Company expects capital expenditures to be approximately $120.0 million for the full year 2013. Financing activities included the buyout of minority shareholders of a consolidated subsidiary for $9.0 million.

At March 31, 2013, the Company had authorization to maintain up to 34.0 million shares of treasury stock under the stock repurchase program as approved by the Board of Directors. As of March 31, 2013, the Company held 19.7 million shares of treasury stock. The Company received proceeds of $13.6 million as a result of the exercise of 0.5 million of stock options during the three months ended March 31, 2013.

The Company's total borrowings increased by a net of $2.1 million during the three months ended March 31, 2013. This change included an increase of $16.0 million in short-term commercial paper and a decrease of $13.9 million due to exchange rate fluctuations on debt denominated in foreign currencies. At March 31, 2013, the Company's ratio of total net debt to total capitalization was 39.3% compared to 39.0% at December 31, 2012. The Company defines net debt as total debt, including current and long-term portions, less cash and cash equivalents and total capitalization as the sum of net debt plus equity.

Under its five-year multi-currency revolving credit agreement, the Company is able to borrow up to $500.0 million through July 27, 2016. The facility is unsecured and contains certain affirmative and negative covenants relating to the operations and financial condition of the Company. The most restrictive of these covenants pertain to asset dispositions and prescribed ratios of indebtedness to total capital and operating income plus depreciation and amortization to interest expense. At March 31, 2013, the Company was in compliance with these covenants. The Company also has available an aggregate $500.0 million under a U.S. dollar commercial paper facility. The five-year revolver serve as a back-up to the commercial paper facility, thus the total available credit under the commercial paper facility and the multi-currency revolving credit facilities in the aggregate is $500.0 million. At March 31, 2013, outstanding borrowings were $60.0 million under the multi-currency revolving facility.

The Company also has access to $75.7 million in uncommitted short-term financing under lines of credit from various financial institutions. The lines of credit have no major restrictions and are provided under demand notes between the Company and the lending institutions. At March 31, 2013, the Company had $4.8 million outstanding under these short-term lines of credit. At March 31, 2013, the Company had total unused lines of credit related to the revolving credit agreement and the uncommitted short-term lines of credit of $511.0 million.

At March 31, 2013, the Company held $112.3 million of precious metals on consignment from several financial institutions. The consignment agreements allow the Company to acquire the precious metal at market rates at a point in time which is approximately the same time and for the same price as alloys are sold to the Company's customers. In the event that the financial institutions would discontinue offering these consignment arrangements, and if the Company could not obtain other comparable arrangements, the Company may be required to obtain third party financing to fund an ownership position in the required precious metal inventory levels.

At March 31, 2013, the majority of the Company's cash and cash equivalents were held outside of the United States. Most of these balances could be repatriated to the United States, however, under current law, would potentially be subject to U.S. federal income tax, less applicable foreign tax credits. Historically, the Company has generated more than sufficient operating cash flows in the United States to fund domestic operations. Further, the Company expects on an ongoing basis, to be able to finance domestic

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and international cash requirements, including capital expenditures, stock repurchases, debt service, operating leases and potential future acquisitions, from the funds generated from operations and amounts available under its existing credit facilities. The Company intends to finance the current portion of long-term debt due in 2013 utilizing the available commercial paper and the revolving credit facilities.

There have been no material changes to the Company's scheduled contractual cash obligations disclosed in its Form 10-K for the year ended December 31, 2012.

NEW ACCOUNTING PRONOUNCEMENTS

Refer to Part 1, Item 1, Note 1, Significant Accounting Policies, to the Unaudited Interim Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

There have been no significant material changes to the market risks as disclosed in the Company’s Form 10-K for the year ended December 31, 2012.

Item 4 – Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report were effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that it is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting that occurred during the most recent quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Reference to Part I, Item 1, Note 14, Commitments and Contingencies, to the Unaudited Interim Consolidated Financial Statements.

Item 1A – Risk Factors

There have been no significant material changes to the risk factors as disclosed in the Company’s Form 10-K for the year ended December 31, 2012.

Item 2 – Unregistered Sales of Securities and Use of Proceeds

At March 31, 2013, the Company had authorization to maintain up to 34.0 million shares of treasury stock under the stock repurchase program as approved by the Board of Directors.  During the quarter ended March 31, 2013, the Company had the following activity with respect to this repurchase program:

(in thousands, except per share amounts)
 
 
 
 
 
 
Period
 
Total Number
of Shares
Purchased
 
Average Price
Paid Per
Share
 
Total Cost
of Shares
Purchased
 
Number of
Shares that
May be Purchased
Under the Share
Repurchase
Program
 
 
 
 
 
 
 
 
 
January 1, 2013 to January 31, 2013
 

 
$

 
$

 
13,836.0

February 1, 2013 to February 28, 2013
 

 

 

 
14,121.0

March 1, 2013 to March 31, 2013
 

 

 

 
14,330.0

 
 

 
$

 
$

 
 


Item 6 – Exhibits

Exhibit Number
 
Description
31
 
Section 302 Certification Statements
32
 
Section 906 Certification Statements
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Extension Labels Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DENTSPLY International Inc.

/s/
Bret W. Wise
 
May 9, 2013
 
Bret W. Wise
 
Date
 
Chairman of the Board and
 
 
 
Chief Executive Officer
 
 


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/s/
Christopher T. Clark
 
May 9, 2013
 
Christopher T. Clark
 
Date
 
President and
 
 
 
Chief Financial Officer
 
 

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