10-Q


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 September 30, 2015
OR
 
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to _______________
 
Commission File Number 0-16211
 
DENTSPLY International Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
39-1434669
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
 
221 West Philadelphia Street, York, PA
 
17405-2558
(Address of principal executive offices)
  
(Zip Code)
 
(717) 845-7511
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x No   o

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

Yes   x No   o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
 
Yes   o No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  At
October 27, 2015, DENTSPLY International Inc. had 139,866,493 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 millions, except per share amounts)
(unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net sales
$
648.9

 
$
708.2

 
$
2,003.2

 
$
2,203.6

Cost of products sold
279.4

 
320.1

 
860.7

 
996.9

 
 
 
 
 
 
 
 
Gross profit
369.5

 
388.1

 
1,142.5

 
1,206.7

Selling, general and administrative expenses
264.3

 
276.0

 
809.5

 
859.9

Restructuring and other costs
6.6

 
2.5

 
50.9

 
4.5

 
 
 
 
 
 
 
 
Operating income
98.6

 
109.6

 
282.1

 
342.3

 
 
 
 
 
 
 
 
Other income and expenses:
 

 
 

 
 

 
 

Interest expense
9.6

 
12.7

 
30.1

 
35.4

Interest income
(0.4
)
 
(1.4
)
 
(1.8
)
 
(4.6
)
Other expense (income), net
(3.8
)
 
0.8

 
(3.6
)
 
1.8

 
 
 
 
 
 
 
 
Income before income taxes
93.2

 
97.5

 
257.4

 
309.7

Provision for income taxes
19.6

 
21.2

 
63.2

 
69.9

Equity in net income (loss) of unconsolidated affiliated company
10.8

 
(1.0
)
 
(1.7
)
 
(1.6
)
 
 
 
 
 
 
 
 
Net income
84.4

 
75.3

 
192.5

 
238.2

Less: Net (loss) income attributable to noncontrolling interests
(0.1
)
 

 
(0.1
)
 
0.1

 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
84.5

 
$
75.3

 
$
192.6

 
$
238.1

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.60

 
$
0.53

 
$
1.38

 
$
1.68

Diluted
$
0.59

 
$
0.52

 
$
1.35

 
$
1.65

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
139.8

 
141.8

 
140.0

 
141.9

Diluted
142.4

 
144.3

 
142.5

 
144.3


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

3




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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income
$
84.4

 
$
75.3

 
$
192.5

 
$
238.2

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(37.7
)
 
(198.6
)
 
(150.6
)
 
(227.3
)
Net gain on derivative financial instruments
1.1

 
35.9

 
9.0

 
38.1

Net unrealized holding (loss) gain on available-for-sale securities
(78.8
)
 
3.6

 
(8.5
)
 
(0.2
)
Pension liability adjustments
2.9

 
3.8

 
4.3

 
5.0

Total other comprehensive income (loss), net of tax
(112.5
)
 
(155.3
)
 
(145.8
)
 
(184.4
)
 
 
 
 
 
 
 
 
Total comprehensive income
(28.1
)
 
(80.0
)
 
46.7

 
53.8

 
 
 
 
 
 
 
 
Less: Comprehensive (loss) income attributable
 

 
 

 
 

 
 

to noncontrolling interests

 
(0.3
)
 
0.5

 
(0.4
)
 
 
 
 
 
 
 
 
Comprehensive (loss) income attributable to
 
 
 
 
 
 
 
DENTSPLY International
$
(28.1
)
 
$
(79.7
)
 
$
46.2

 
$
54.2

 


 


 


 



See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

4



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
(unaudited)
 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
236.4

 
$
151.6

Accounts and notes receivables-trade, net
429.8

 
426.6

Inventories, net
361.3

 
387.1

Prepaid expenses and other current assets, net
180.6

 
241.7

 
 
 
 
Total Current Assets
1,208.1

 
1,207.0

 
 
 
 
Property, plant and equipment, net
555.2

 
588.9

Identifiable intangible assets, net
600.4

 
670.8

Goodwill, net
1,984.3

 
2,089.3

Other noncurrent assets, net
54.2

 
90.5

 
 
 
 
Total Assets
$
4,402.2

 
$
4,646.5

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
137.5

 
$
132.6

Accrued liabilities
309.1

 
379.2

Income taxes payable
33.6

 
29.0

Notes payable and current portion of long-term debt
453.2

 
111.8

 
 
 
 
Total Current Liabilities
933.4

 
652.6

 
 
 
 
Long-term debt
701.9

 
1,150.1

Deferred income taxes
152.9

 
165.6

Other noncurrent liabilities
332.5

 
356.0

 
 
 
 
Total Liabilities
2,120.7

 
2,324.3

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity:
 

 
 

Preferred stock, $1.00 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 September 30, 2015 and December 31, 2014
1.6

 
1.6

Capital in excess of par value
232.0

 
221.7

Retained earnings
3,542.7

 
3,380.7

Accumulated other comprehensive loss
(587.5
)
 
(441.1
)
Treasury stock, at cost, 23.0 million and 21.9 million shares at September 30, 2015 and December 31, 2014, respectively
(908.7
)
 
(841.6
)
Total DENTSPLY International Equity
2,280.1

 
2,321.3

 
 
 
 
Noncontrolling interests
1.4

 
0.9

 
 
 
 
Total Equity
2,281.5

 
2,322.2

 
 
 
 
Total Liabilities and Equity
$
4,402.2

 
$
4,646.5

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

5



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
192.5

 
$
238.2

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

 
 

Depreciation
61.6

 
63.1

Amortization
32.8

 
36.4

Amortization of deferred financing costs
3.3

 
3.5

Deferred income taxes
39.2

 
4.6

Share-based compensation expense
19.5

 
19.9

Restructuring and other costs - non-cash
37.8

 

Stock option income tax benefit
(10.0
)
 
(0.4
)
Equity in net loss from unconsolidated affiliates
1.7

 
1.6

Other non-cash income
(10.0
)
 
3.6

Loss on disposal of property, plant and equipment
0.6

 

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
(27.9
)
 
(30.9
)
Inventories, net
10.1

 
(5.7
)
Prepaid expenses and other current assets, net
(7.0
)
 
(12.4
)
Other noncurrent assets, net
4.1

 
0.3

Accounts payable
11.2

 
1.9

Accrued liabilities
4.6

 
7.6

Income taxes
(7.2
)
 
27.9

Other noncurrent liabilities
14.1

 
8.5

 
 
 
 
Net cash provided by operating activities
371.0

 
367.7

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(51.7
)
 
(73.0
)
Cash paid for acquisitions of businesses, net of cash acquired
(3.3
)
 
(2.0
)
Cash received from sale of business or product line

 
1.4

Cash received on derivatives contracts
22.4

 
4.9

Cash paid on derivatives contracts
(0.8
)
 
(4.9
)
Expenditures for identifiable intangible assets

 
(1.3
)
Purchase of short-term investments

 
(2.3
)
Liquidation of short-term investments

 
1.1

Proceeds from redemption of Corporate Bonds
47.7

 

Purchase of Company-owned life insurance policies
(1.4
)
 
(0.9
)
Proceeds from sale of property, plant and equipment, net
0.3

 
0.6

 
 
 
 
Net cash provided by (used in) investing activities
13.2

 
(76.4
)
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
Increase (decrease) in short-term borrowings
0.9

 
(99.8
)
Cash paid for treasury stock
(112.7
)
 
(70.8
)
Cash dividends paid
(29.9
)
 
(27.9
)
Cash paid for acquisition of noncontrolling interests of consolidated subsidiary
(80.4
)
 

Proceeds from long-term borrowings

 
114.1

Repayments on long-term borrowings
(109.1
)
 
(199.0
)
Proceeds from exercised stock options
27.2

 
18.7

Excess tax benefits from share-based compensation
10.0

 
0.4

 
 
 
 
Net cash used in financing activities
(294.0
)
 
(264.3
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(5.4
)
 
(4.3
)
 
 
 
 
Net increase in cash and cash equivalents
84.8

 
22.7

 
 
 
 
Cash and cash equivalents at beginning of period
151.6

 
75.0

 
 
 
 
Cash and cash equivalents at end of period
$
236.4

 
$
97.7

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

6



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In millions)
(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, 2013
$
1.6

 
$
255.3

 
$
3,095.7

 
$
(69.1
)
 
$
(748.5
)
 
$
2,535.0

 
$
42.9

 
$
2,577.9

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
238.1

 

 

 
238.1

 
0.1

 
238.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss

 

 

 
(178.5
)
 

 
(178.5
)
 
(0.4
)
 
(178.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interest

 
(35.8
)
 

 
(5.5
)
 

 
(41.3
)
 
(41.4
)
 
(82.7
)
Exercise of stock options

 
(3.3
)
 

 

 
22.0

 
18.7

 

 
18.7

Tax benefit from stock options exercised

 
0.4

 

 

 

 
0.4

 

 
0.4

Share based compensation expense

 
19.9

 

 

 

 
19.9

 

 
19.9

Funding of Employee Stock Ownership Plan

 
1.5

 

 

 
4.4

 
5.9

 

 
5.9

Treasury shares purchased

 

 

 

 
(70.7
)
 
(70.7
)
 

 
(70.7
)
RSU distributions

 
(11.2
)
 

 

 
6.9

 
(4.3
)
 

 
(4.3
)
RSU dividends

 
0.2

 
(0.2
)
 

 

 

 

 

Cash dividends ($0.19875 per share)

 

 
(28.2
)
 

 

 
(28.2
)
 

 
(28.2
)
Balance at September 30, 2014
$
1.6

 
$
227.0

 
$
3,305.4

 
$
(253.1
)
 
$
(785.9
)
 
$
2,495.0

 
$
1.2

 
$
2,496.2


 
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, 2014
$
1.6

 
$
221.7

 
$
3,380.7

 
$
(441.1
)
 
$
(841.6
)
 
$
2,321.3

 
$
0.9

 
$
2,322.2

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
192.6

 

 

 
192.6

 
(0.1
)
 
192.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) gain

 

 

 
(146.4
)
 

 
(146.4
)
 
0.6

 
(145.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options

 
(6.2
)
 

 

 
33.2

 
27.0

 

 
27.0

Tax benefit from stock options exercised

 
10.0

 

 

 

 
10.0

 

 
10.0

Share based compensation expense

 
19.4

 

 

 

 
19.4

 

 
19.4

Funding of Employee Stock Ownership Plan

 
1.1

 

 

 
3.7

 
4.8

 

 
4.8

Treasury shares purchased

 

 

 

 
(112.7
)
 
(112.7
)
 

 
(112.7
)
RSU distributions

 
(14.3
)
 

 

 
8.7

 
(5.6
)
 

 
(5.6
)
RSU dividends

 
0.3

 
(0.3
)
 

 

 

 

 

Cash dividends ($0.21750 per share)

 

 
(30.3
)
 

 

 
(30.3
)
 

 
(30.3
)
Balance at September 30, 2015
$
1.6

 
$
232.0

 
$
3,542.7

 
$
(587.5
)
 
$
(908.7
)
 
$
2,280.1

 
$
1.4

 
$
2,281.5


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 accounting principles generally accepted in the United States of America. 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, 2014, as revised on Form 8-K filed October 28, 2015.

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, as for the year ended December 31, 2014, as revised on Form 8-K filed October 28, 2015, except as may be indicated below:

Accounts and Notes Receivable

The Company records a provision for doubtful accounts, which is included in “Selling, general and administrative expenses” in the Consolidated Statements of Operations.

Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $10.0 million at September 30, 2015 and $8.8 million at December 31, 2014.

Marketable Securities

The Company’s marketable securities consisted of DIO Corporation (“DIO”) corporate convertible bonds that were classified as available-for-sale in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets as the instruments were to mature in December 2015. Changes in the fair value of the bonds were reported in accumulated other comprehensive income (“AOCI”).

During the three months ended September 30, 2015, the Company sold the convertible bonds at face value for $47.7 million. As a result of the sale, the Company recorded an unrealized holding loss, net of tax, of $4.8 million for the nine months ended September 30, 2015, in the Consolidated Statements of Comprehensive Income. The fair value of the convertible bonds was $57.7 million at December 31, 2014 and included a cumulative unrealized holding gain of $8.5 million on available-for-sale securities, net of tax, which was recorded in AOCI.

As part of the disposition of the convertible bonds, the Company requested to relinquish its two board seats on the DIO Board of Directors. Subsequent to September 30, 2015, the Company no longer has representation on the DIO Board of Directors and as a result the Company no longer has significant influence on the operations of DIO. The Company will begin accounting for the remaining direct investment using the cost-basis method of accounting effective in the fourth quarter of 2015.

New Accounting Pronouncements

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

8



as discontinued operations. This Company adopted this accounting standard for the quarter ended March 31, 2015. The adoption of this standard did not materially impact the Company’s financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” that seeks to provide a single, comprehensive revenue recognition model for all contracts with customers that improve comparability within industries, across industries and across capital markets. Under this standard, an entity should recognize revenue for the transfer of goods or services equal to the amount it expects to be entitled to receive for those goods or services. Enhanced disclosure requirements regarding the nature, timing and uncertainty of revenue and related cash flows exist. To assist entities in applying the standard, a five step model for recognizing and measuring revenue from contracts with customers has been introduced. Entities have the option to apply the new guidance retrospectively to each prior reporting period presented (full retrospective approach) or retrospectively with a cumulative effect adjustment to retained earnings for initial application of the guidance at the date of initial adoption (modified retrospective method). The Company expects to adopt this accounting standard for the quarter ended March 31, 2018. Early adoption is not permitted. On April 1, 2015, the FASB proposed deferring the effective date by one year to annual reporting periods beginning after December 15, 2017. The proposal was approved on July 9, 2015. The Company is currently assessing the impact that ASU No. 2014-09 may have on their financial positions, results of operations, cash flows and disclosures, as well as, the transition method they will use to adopt the guidance.

In January 2015, the FASB issued ASU No. 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” This newly issued accounting standard eliminates from generally accepted accounting principles the concept of Extraordinary items, events or transactions that are unusual in nature and occur infrequently. The amendments in this update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Prospective application and early adoption is permitted. The adoption of this standard is not expected to impact the Company’s financial position or results of operations.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This newly issued accounting standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability. Retrospective application is required. The amendments in this standard are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company adopted this standard during the second quarter of 2015, applying retrospective application to the periods presented below. The following is a summary of the adjustment to the financial statement line items impacted by this accounting update:
December 31, 2014
(in millions)
 
As Reported
 
 
 
 
Consolidated Balance Sheet Line Item
 
Balance
 
Adjustment
 
Adjusted Balance
Other noncurrent assets, net
 
$
94.3

 
$
(3.8
)
 
$
90.5

Notes payable and current portion of long-term debt
 
112.8

 
(1.0
)
 
111.8

Long-term debt
 
1,152.9

 
(2.8
)
 
1,150.1

 
 
 
 
 
 
 
March 31, 2015
(in millions)
 
As Reported
 
 
 
 
Consolidated Balance Sheet Line Item
 
Balance
 
Adjustment
 
Adjusted Balance
Other noncurrent assets, net
 
$
61.3

 
$
(3.6
)
 
$
57.7

Notes payable and current portion of long-term debt
 
247.6

 
(0.9
)
 
246.7

Long-term debt
 
1,078.8

 
(2.6
)
 
1,076.2

 
 
 
 
 
 
 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This newly issued accounting standard requires that an entity measure inventory at the lower of cost or net realizable value, as opposed to the lower of cost or market value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Excluded from this update are the Last In First Out (“LIFO”) and retail inventory methods of accounting for inventory. The amendments in this standard are effective for fiscal years beginning after December 15, 2016 and for interim periods within fiscal years beginning after December 15, 2017. Prospective application is required for presentation purposes. The adoption of this standard is not expected to impact the Company’s financial position or results of operations.


9



In September 2015, the FASB issued 2015-16, “Simplifying Accounting for Measurement Period Adjustments.” This newly issued accounting standard seeks to simplify the accounting related to Business Combinations. Current US GAAP requires retrospective adjustment for provisional amounts recognized during the measurement periods when facts and circumstances that existed at the measurement date, if known, would have affected the measurement of the accounts initially recognized. This standard eliminates the requirement for retrospective adjustments and requires adjustments to the Financial Statements as needed in current period earnings for the full effect of changes. The adoption of this standard is required for interim and fiscal periods ending after December 15, 2015 and is not permitted to be adopted retrospectively. As such, the Company will incorporate this standard into the accounting and reporting for all future business combinations that take place once the standard becomes effective.
NOTE 2 – STOCK COMPENSATION

The following table represents total stock based compensation expense for non-qualified stock options, restricted stock units (“RSU”) and the tax related benefit for the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Stock option expense
 
$
2.3

 
$
2.2

 
$
6.0

 
$
6.6

RSU expense
 
5.1

 
4.0

 
12.5

 
12.1

Total stock based compensation expense
 
$
7.4

 
$
6.2

 
$
18.5

 
$
18.7

 
 
 
 
 
 
 
 
 
Total related tax benefit
 
$
2.1

 
$
1.6

 
$
5.5

 
$
5.1


For the three and nine months ended September 30, 2015, stock compensation expense of $7.4 million and $18.5 million, respectively, of which, $7.1 million and $18.0 million, respectively, was recorded in Selling, general and administrative expense and $0.3 million and $0.5 million, respectively, was recorded in Cost of products sold in the Consolidated Statement of Operations. For the three and nine months ended September 30, 2014, stock compensation expense of $6.2 million and $18.7 million, respectively, of which, $6.0 million and $18.2 million, respectively, was recorded in Selling, general and administrative expense and $0.2 million and $0.5 million, respectively, was recorded in Cost of products sold in the Consolidated Statement of Operations.

At September 30, 2015, the remaining unamortized compensation cost related to non-qualified stock options is $11.5 million, which will be expensed over the weighted average remaining vesting period of the options, or approximately 1.5 years. At September 30, 2015, the unamortized compensation cost related to RSU is $24.8 million, which will be expensed over the weighted average remaining restricted period of the RSU, or approximately 1.3 years.

NOTE 3 – COMPREHENSIVE INCOME

During the quarter ended September 30, 2015, foreign currency translation adjustments included currency translation gains of $2.3 million and gains on the Company’s loans designated as hedges of net investments of $0.5 million.  During the quarter ended September 30, 2014, foreign currency translation adjustments included currency translation gains of $201.8 million and gains of $9.0 million on the Company’s loans designated as hedges of net investments.  During the nine months ended September 30, 2015, foreign currency translation adjustments included currency translation losses of $150.4 million and losses on the Company’s loans designated as hedges of net investments of $0.8 million. During the nine months ended September 30, 2014, foreign currency translation adjustments included currency translation gains of $227.2 million and gains on the Company’s loans designated as hedges of net investments of $5.9 million. These amounts are recorded in AOCI, net of any related tax adjustments. At September 30, 2015 and December 31, 2014, these tax adjustments were $185.5 million and $195.4 million, respectively, primarily related to foreign currency translation adjustments.

The cumulative foreign currency translation adjustments included translation losses of $267.5 million and $117.1 million at September 30, 2015 and December 31, 2014, respectively, and losses on loans designated as hedges of net investments of $96.2 million and $95.4 million, respectively.  These foreign currency translation adjustments were partially offset by movements on derivative financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.







10





Changes in AOCI, net of tax, by component for the nine months ended September 30, 2015 and 2014:
(in millions)
 
Foreign Currency Translation Adjustments
 
Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges
 
Gain and (Loss) on Derivative Financial Instruments Designated as Net Investment Hedges
 
Net Unrealized Holding Gain (Loss) on Available-for-Sale Securities
 
Pension Liability Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
 
$
(212.5
)
 
$
(10.8
)
 
$
(112.7
)
 
$
8.5

 
$
(113.6
)
 
$
(441.1
)
Other comprehensive income (loss) before reclassifications
 
(151.2
)
 
15.4

 
4.4

 
(4.8
)
 

 
(136.2
)
Amounts reclassified from accumulated other comprehensive income (loss)
 

 
(10.8
)
 

 
(3.7
)
 
4.3

 
(10.2
)
Net (decrease) increase in other comprehensive income
 
(151.2
)
 
4.6

 
4.4

 
(8.5
)
 
4.3

 
(146.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2015
 
$
(363.7
)
 
$
(6.2
)
 
$
(108.3
)
 
$

 
$
(109.3
)
 
$
(587.5
)

(in millions)
 
Foreign Currency Translation Adjustments
 
Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges
 
Gain and (Loss) on Derivative Financial Instruments Designated as Net Investment Hedges
 
Net Unrealized Holding Gain (Loss)on Available-for-Sale Securities
 
Pension Liability Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
$
141.0

 
$
(21.8
)
 
$
(151.1
)
 
$
12.7

 
$
(49.9
)
 
$
(69.1
)
Other comprehensive income (loss) before reclassifications
 
(221.3
)
 
4.5

 
27.5

 
(0.2
)
 
3.6

 
(185.9
)
Amounts reclassified from accumulated other comprehensive income (loss)
 

 
6.0

 

 

 
1.4

 
7.4

Net (decrease) increase in other comprehensive income
 
(221.3
)
 
10.5

 
27.5

 
(0.2
)
 
5.0

 
(178.5
)
Foreign currency translation related to acquisition of noncontrolling interests
 
(5.5
)
 

 

 

 

 
(5.5
)
Balance at September 30, 2014
 
$
(85.8
)
 
$
(11.3
)
 
$
(123.6
)
 
$
12.5

 
$
(44.9
)
 
$
(253.1
)













11




Reclassifications out of accumulated other comprehensive income (expense) to the Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014:
(in millions)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the Consolidated Statements of Operations
 
Three Months Ended September 30,
 
 
2015
 
2014
 
 
 
 
 
 
 
 
Gains and (losses) on derivative financial instruments:
Interest rate swaps
 
$
(1.1
)
 
$
(1.0
)
 
Interest expense
Foreign exchange forward contracts
 
3.8

 
(2.2
)
 
Cost of products sold
Foreign exchange forward contracts
 
0.1

 

 
SG&A expenses
 
 
2.8

 
(3.2
)
 
Net gain (loss) before tax
 
 
(0.2
)
 
1.3

 
Tax (expense) benefit
 
 
$
2.6

 
$
(1.9
)
 
Net of tax
 
 
 
 
 
 
 
Net unrealized holding gain (loss) on available-for-sale securities:
Available-for-sale securities
 
$
(5.1
)
 
$

 
Other expense (income), net
 
 
1.4

 

 
Tax expense
 
 
$
(3.7
)
 
$

 
Net of tax
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$

 
$

 
(a)
Amortization of net actuarial losses
 
(2.0
)
 
(0.7
)
 
(a)
 
 
(2.0
)
 
(0.7
)
 
Net loss before tax
 
 
0.6

 
0.2

 
Tax benefit
 
 
$
(1.4
)
 
$
(0.5
)
 
Net of tax
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
1.2

 
$
(2.4
)
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the three months ended September 30, 2015 and 2014 (see Note 8, Benefit Plans, for additional details).


12



(in millions)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the Consolidated Statements of Operations
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
 
 
 
 
 
 
 
Gains and (losses) on derivative financial instruments:
Interest rate swaps
 
$
(3.1
)
 
$
(2.8
)
 
Interest expense
Foreign exchange forward contracts
 
14.5

 
(5.5
)
 
Cost of products sold
Foreign exchange forward contracts
 
0.5

 
(0.2
)
 
SG&A expenses
Commodity contracts
 
(0.3
)
 
(0.5
)
 
Cost of products sold
 
 
11.6

 
(9.0
)
 
Net gain (loss) before tax
 
 
(0.8
)
 
3.0

 
Tax (expense) benefit
 
 
$
10.8

 
$
(6.0
)
 
Net of tax
 
 
 
 
 
 
 
Net unrealized holding gain (loss) on available-for-sale securities:
Available-for-sale securities
 
$
(5.1
)
 
$

 
Other expense (income), net
 
 
1.4

 

 
Tax expense
 
 
$
(3.7
)
 
$

 
Net of tax
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$
0.1

 
$
0.1

 
(a)
Amortization of net actuarial losses
 
(6.1
)
 
(2.1
)
 
(a)
 
 
(6.0
)
 
(2.0
)
 
Net loss before tax
 
 
1.7

 
0.6

 
Tax benefit
 
 
$
(4.3
)
 
$
(1.4
)
 
Net of tax
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
6.5

 
$
(7.4
)
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the nine months ended September 30, 2015 and 2014 (see Note 8, Benefit Plans, for additional details).
























13



NOTE 4 – EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2015 and 2014:
Basic Earnings Per Common Share Computation
 
Three Months Ended
 
Nine Months Ended
(in millions, except per share amounts)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
 
$
84.5

 
$
75.3

 
$
192.6

 
$
238.1

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
139.8

 
141.8

 
140.0

 
141.9

 
 
 
 
 
 
 
 
 
Earnings per common share - basic
 
$
0.60

 
$
0.53

 
$
1.38

 
$
1.68

 
 
 
 
 
 
 
 
 
Diluted Earnings Per Common Share Computation
 
 

 
 

 
 

 
 

(in millions, except per share amounts)
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
 
$
84.5

 
$
75.3

 
$
192.6

 
$
238.1

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
139.8

 
141.8

 
140.0

 
141.9

Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards
 
2.6

 
2.5

 
2.5

 
2.4

Total weighted average diluted shares outstanding
 
142.4

 
144.3

 
142.5

 
144.3

 
 
 
 
 
 
 
 
 
Earnings per common share - diluted
 
$
0.59

 
$
0.52

 
$
1.35

 
$
1.65


The calculation of weighted average diluted common shares outstanding excludes stock options and RSU of 0.8 million and 1.0 million shares of common stock that were outstanding during the three and nine months ended September 30, 2015, respectively, because their effect would be antidilutive. There were 0.9 million and 1.2 million antidilutive shares of common stock outstanding during the three and nine months ended September 30, 2014, respectively.

NOTE 5 – BUSINESS COMBINATIONS

Effective January 1, 2014, the Company recorded a liability for the contractual purchase of the remaining shares of one variable interest entity. The Company paid this obligation during the first quarter of 2015.

On September 15, 2015, the Company and Sirona Dental Systems, Inc. (“Sirona”) announced that the Board of Directors of both companies had unanimously approved a definitive Agreement and Plan of Merger (the “Merger Agreement”) under which the companies will combine in an all-stock merger of equals. Sirona develops, manufactures and markets several lines of dental products including CAD/CAM restoration systems, digital intra-oral, panoramic and 3D imaging systems, dental treatment centers and instruments. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, a wholly-owned subsidiary of the Company will merge with and into Sirona, with Sirona surviving as a wholly-owned subsidiary of the Company. Upon completion of the merger, the Company's name will be changed to DENTSPLY SIRONA Inc. Subject to the terms and conditions of the Merger Agreement, if the merger is completed, each outstanding share of Sirona common stock will be converted into the right to receive 1.8142 shares of common stock of the Company, with cash paid in lieu of any fractional shares of common stock of the Company that a Sirona stockholder would otherwise have been entitled to receive.

The Merger Agreement contains certain termination rights for both the Company and Sirona, including if the merger is not consummated on or before March 15, 2016 (which is subject to extension under certain circumstances but generally not beyond December 15, 2016) and if the approval of the stockholders of either the Company or Sirona is not obtained.  The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, including termination of the Merger Agreement by the Company or Sirona as a result of an adverse change in the recommendation of the other party’s board of directors, (i) the Company may be required to pay a termination fee of $280.0 million to Sirona and Sirona may be required to pay a termination fee of $205.0 million to the Company and (ii) either company may be required to reimburse the other company for merger-related expenses of up to $15.0 million.


14



The transaction, which is expected to be completed in the first quarter of 2016, is subject to the receipt of regulatory approvals and other customary closing conditions, including the approval of shareholders of both DENTSPLY and Sirona. For additional information related to the merger refer to the Company's Registration Statement on Form S-4 which was filed with the SEC on October 29, 2015.

NOTE 6 – SEGMENT INFORMATION

The Company has numerous operating businesses covering a wide range of dental and certain healthcare products and geographic regions, primarily serving the professional dental market. Professional dental products represented approximately 88% of net sales for both the three and nine months ended September 30, 2015 and 2014.

The operating businesses are combined into operating groups, which generally have overlapping product offerings, geographical presence, customer bases, distribution channels, and regulatory oversight. These operating groups are considered the Company’s reportable segments as the Company’s chief operating decision-maker regularly reviews financial results at the operating group level and uses this information to manage the Company’s operations. The accounting policies of the segments are consistent with those described in the Company’s most recently filed Form 10-K, as revised on Form 8-K filed October 28, 2015, in the summary of significant accounting policies. The Company evaluates performance of the segments based on the groups’ net third party sales, excluding precious metal content, and segment income. The Company defines net third party sales excluding precious metal content as the Company’s net sales excluding the precious metal cost within the products sold, and this is considered a non-US GAAP measure. The Company’s exclusion of precious metal content in the measurement of net third party sales enhances comparability of performance between periods as it excludes the fluctuating market prices of the precious metal content. The Company defines segment income as net operating income after the assignment of certain direct corporate costs and before restructuring and other costs, interest expense, interest income, other expense (income), net and provision for income taxes. A description of the products and services provided within each of the Company’s three reportable segments is provided below.

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

During the March 31, 2015 quarter, the Company realigned reporting responsibilities for multiple locations as a result of changes to the management structure. The segment information below reflects the revised structure for all periods shown.

Dental Consumables, Endodontic and Dental Laboratory Businesses

This segment includes responsibility for the design and manufacture of the Company’s chairside consumable products. It also has responsibilities for sales and distribution of certain small equipment and chairside consumable products in the United States, Germany and certain other European regions as well as responsibility for the sales and distribution of certain endodontic products in Germany and certain other European regions. In addition, this segment is responsible for the design, manufacture, sales and distribution of most of the Company’s dental laboratory products. This segment is also responsible for the design, manufacture, worldwide distribution and sales of certain non-dental products, excluding urological and surgery-related products.

Healthcare, Orthodontic and Implant Businesses

This segment is responsible for the worldwide design, manufacture, sales and distribution of the Company’s healthcare products, primarily urological and surgery-related products, throughout most of the world. This segment also includes responsibility for the design, manufacture, sales and distribution of orthodontic and implant products, in most regions of the world. Additionally, segment is also responsible for the sales and distribution of most of the Company’s other dental products, including most dental consumables within Canada.

Select Developed and Emerging Markets Businesses

This segment has responsibilities for sales and distribution of chairside consumable, endodontic and dental laboratory products within certain European regions, Japan and Australia. This segment also includes the responsibility for the sales and distribution of most of the Company’s dental products, including most dental consumables, sold in Eastern Europe, Middle East, South America, Latin America including Mexico, Asia and Africa.




15



The following tables set forth information about the Company’s segments for the three and nine months ended September 30, 2015 and 2014:

Third Party Net Sales
 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
 
$
306.4

 
$
323.7

 
$
934.0

 
$
1,009.2

Healthcare, Orthodontic and Implant Businesses
 
226.2

 
246.7

 
715.1

 
790.9

Select Developed and Emerging Markets Businesses
 
116.3

 
137.8

 
354.1

 
403.5

Total net sales
 
$
648.9

 
$
708.2

 
$
2,003.2

 
$
2,203.6


Third Party Net Sales, Excluding Precious Metal Content
 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
 
$
292.7

 
$
304.3

 
$
886.1

 
$
929.4

Healthcare, Orthodontic and Implant Businesses
 
226.1

 
246.6

 
714.6

 
790.3

Select Developed and Emerging Markets Businesses
 
110.5

 
130.7

 
334.9

 
382.0

Total net sales, excluding precious metal content
 
629.3

 
681.6

 
1,935.6

 
2,101.7

Precious metal content of sales
 
19.6

 
26.6

 
67.6

 
101.9

Total net sales, including precious metal content
 
$
648.9

 
$
708.2

 
$
2,003.2

 
$
2,203.6


Inter-segment Net Sales
 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
 
$
82.8

 
$
83.6

 
$
256.0

 
$
266.7

Healthcare, Orthodontic and Implant Businesses
 
2.0

 
1.2

 
5.3

 
5.7

Select Developed and Emerging Markets Businesses
 
3.4

 
3.4

 
9.7

 
9.7

All Other (a)
 
51.8

 
58.8

 
161.5

 
182.0

Eliminations
 
(140.0
)
 
(147.0
)
 
(432.5
)
 
(464.1
)
Total
 
$

 
$

 
$

 
$

(a) Includes amounts recorded at one distribution warehouse not managed by named segments.


16



Segment Operating Income (Loss)
 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
 
$
107.9

 
$
100.8

 
$
322.1

 
$
325.6

Healthcare, Orthodontic and Implant Businesses
 
28.0

 
26.9

 
82.5

 
83.5

Select Developed and Emerging Markets Businesses
 
(3.3
)
 
(1.7
)
 
(10.7
)
 
(4.2
)
Segment operating income
 
132.6

 
126.0

 
393.9

 
404.9

 
 
 
 
 
 
 
 
 
Reconciling Items (income) expense:
 
 

 
 

 
 

 
 

All Other (b)
 
27.4

 
13.9

 
60.9

 
58.1

Restructuring and other costs
 
6.6

 
2.5

 
50.9

 
4.5

Interest expense
 
9.6

 
12.7

 
30.1

 
35.4

Interest income
 
(0.4
)
 
(1.4
)
 
(1.8
)
 
(4.6
)
Other expense (income), net
 
(3.8
)
 
0.8

 
(3.6
)
 
1.8

Income before income taxes
 
$
93.2

 
$
97.5

 
$
257.4

 
$
309.7

(b) Includes the results of unassigned Corporate headquarter costs, inter-segment eliminations and one distribution warehouse not managed by named segments.

Assets
(in millions)
 
September 30, 2015
 
December 31, 2014
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
 
$
1,333.9

 
$
1,358.0

Healthcare, Orthodontic and Implant Businesses
 
2,457.2

 
2,655.6

Select Developed and Emerging Markets Businesses
 
348.0

 
369.8

All Other (c)
 
263.1

 
263.1

Total
 
$
4,402.2

 
$
4,646.5

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

NOTE 7 – INVENTORIES

Inventories are stated at the lower of cost or market.  The cost of inventories determined by the last-in, first-out (“LIFO”) method at September 30, 2015 and December 31, 2014 were $8.7 million and $6.3 million, respectively. The cost of other inventories was determined by the first-in, first-out (“FIFO”) or average cost methods. If the FIFO method had been used to determine the cost of LIFO inventories, the amounts at which net inventories are stated would be higher than reported at September 30, 2015 and December 31, 2014 by $6.4 million and $6.1 million, respectively.

Inventories, net of inventory valuation reserves, consist of the following:
(in millions)
 
September 30, 2015
 
December 31, 2014
 
 
 
 
 
Finished goods
 
$
236.9

 
$
253.3

Work-in-process
 
52.9

 
58.4

Raw materials and supplies
 
71.5

 
75.4

Inventories, net
 
$
361.3

 
$
387.1


The inventory valuation reserves were $37.6 million and $34.1 million at September 30, 2015 and December 31, 2014, respectively.





17



NOTE 8 – BENEFIT PLANS

The following sets forth the components of net periodic benefit cost of the Company’s defined benefit plans and for the Company’s other postemployment benefit plans for the three and nine months ended September 30, 2015 and 2014:

Defined Benefit Plans 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Service cost
 
$
4.3

 
$
3.4

 
$
13.0

 
$
10.5

Interest cost
 
1.8

 
2.7

 
5.5

 
8.5

Expected return on plan assets
 
(1.3
)
 
(1.3
)
 
(4.1
)
 
(4.1
)
Amortization of prior service credit
 

 

 
(0.1
)
 
(0.1
)
Amortization of net actuarial loss
 
1.9

 
0.6

 
5.9

 
2.0

Net periodic benefit cost
 
$
6.7

 
$
5.4

 
$
20.2

 
$
16.8


Other Postemployment Benefit Plans
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Service cost
 
$
0.1

 
$
0.1

 
$
0.3

 
$
0.2

Interest cost
 
0.1

 
0.1

 
0.5

 
0.4

Amortization of net actuarial loss
 
0.1

 

 
0.1

 

Net periodic benefit cost
 
$
0.3

 
$
0.2

 
$
0.9

 
$
0.6


The following sets forth the information related to the contributions to the Company’s benefit plans for 2015:
(in millions)
 
Pension
Benefits
 
Other
Postemployment Benefits
 
 
 
 
 
Actual contributions through September 30, 2015
 
$
8.0

 
$
0.3

Projected contributions for the remainder of the year
 
3.5

 
0.3

Total projected contributions
 
$
11.5

 
$
0.6


NOTE 9 – RESTRUCTURING AND OTHER COSTS

Restructuring Costs

During the three and nine months ended September 30, 2015, the Company recorded net restructuring costs and other costs of $6.6 million and $50.9 million, respectively. On May 22, 2015, the Company announced that it reorganized portions of its laboratory business and associated manufacturing capabilities within the Dental Consumables, Endodontics and Dental Laboratory Businesses segment. During the nine months ended September 2015 , the Company recorded $34.0 million of costs that consist primarily of employee severance benefits related to these and other similar actions. Also during the nine months ended September 30, 2015, the Company recorded restructuring costs of $10.2 million within the Healthcare, Orthodontic and Implant Businesses segment primarily related to the global efficiency initiative During the three and nine months ended September 30, 2014, the Company recorded net restructuring and other costs of $2.5 million and $4.5 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.










18



At September 30, 2015, the Company’s restructuring accruals were as follows:
 
 
Severance
(in millions)
 
2013 and
Prior Plans
 
2014 Plans
 
2015 Plans
 
Total
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
 
$
0.9

 
$
5.1

 
$

 
$
6.0

Provisions
 
0.1

 
0.5

 
44.8

 
45.4

Amounts applied
 
(0.6
)
 
(3.4
)
 
(11.3
)
 
(15.3
)
Change in estimates
 
(0.1
)
 
(0.2
)
 
(1.3
)
 
(1.6
)
Balance at September 30, 2015
 
$
0.3

 
$
2.0

 
$
32.2

 
$
34.5


 
 
Lease/Contract Terminations
(in millions)
 
2013 and
Prior Plans
 
2014 Plans
 
2015 Plans
 
Total
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
 
$
0.5

 
$
1.7

 
$

 
$
2.2

Provisions
 

 

 
1.1

 
1.1

Amounts applied
 
(0.2
)
 
(0.5
)
 
(0.4
)
 
(1.1
)
Change in estimates
 

 

 

 

Balance at September 30, 2015
 
$
0.3

 
$
1.2

 
$
0.7

 
$
2.2


 
 
Other Restructuring Costs
(in millions)
 
2013 and
Prior Plans
 
2014 Plans
 
2015 Plans
 
Total
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
 
$

 
$
1.1

 
$

 
$
1.1

Provisions
 

 
0.2

 
2.6

 
2.8

Amounts applied
 

 
(0.8
)
 
(1.9
)
 
(2.7
)
Change in estimate
 

 
(0.1
)
 

 
(0.1
)
Balance at September 30, 2015
 
$

 
$
0.4

 
$
0.7

 
$
1.1


The following table provides the year-to-date changes in the restructuring accruals by segment:
(in millions)
 
December 31,
2014
 
Provisions
 
Amounts
Applied
 
Change in Estimates
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
 
$
5.3

 
$
34.7

 
$
(10.2
)
 
$
(1.0
)
 
$
28.8

Healthcare, Orthodontic and Implant Businesses
 
3.8

 
11.7

 
(8.1
)
 
(0.7
)
 
6.7

Select Developed and Emerging Markets Businesses
 
0.1

 
1.1

 
(0.4
)
 

 
0.8

All Other
 
0.1

 
1.8

 
(0.4
)
 

 
1.5

Total
 
$
9.3

 
$
49.3

 
$
(19.1
)
 
$
(1.7
)
 
$
37.8


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

19



derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert variable rate debt to fixed rate debt and to convert fixed rate debt to variable rate debt, cross currency basis swaps to convert debt denominated in one currency to another currency and commodity swaps to fix certain variable raw material costs.

Derivative Instruments Designated as Hedging

Cash Flow Hedges

The following table summarizes the notional amounts of cash flow hedges by derivative instrument type at September 30, 2015 and the notional amounts expected to mature during the next 12 months, with a discussion of the various cash flow hedges by derivative instrument type following the table:
 
 
Aggregate
 Notional
 Amount
 
Aggregate Notional Amount Maturing within 12 Months
 
 
 
(in millions)
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
330.1

 
$
246.6

Interest rate swaps
 
171.3

 
66.7

Commodity contracts
 
1.2

 
1.0

Total derivative instruments designated as cash flow hedges
 
$
502.6

 
$
314.3


Foreign Exchange Risk Management

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

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

Interest Rate Risk Management

The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt. At September 30, 2015, the Company has two significant exposures hedged with interest rate contracts. One exposure is hedged with derivative contracts having notional amounts totaling 12.6 billion Japanese yen, which effectively converts the underlying variable interest rate debt facility to a fixed interest rate of 0.2% for an initial term of five years ending September 2019. Another exposure hedged with derivative contracts has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rate of a Swiss franc denominated loan to a fixed interest rate of 0.7% for an initial term of five years, ending in September 2016.

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






20



Commodity Risk Management

The Company enters into precious metal commodity swap contracts to effectively fix certain variable raw material costs typically for up to 18 months. These swaps are used to stabilize the cost of components used in the production of certain 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 in 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” in the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operating activities in the Consolidated Statements of Cash Flows.

The following tables summarize the amount of gains (losses) recorded in AOCI in the Consolidated Balance Sheets and income (expense) in the Company’s Consolidated Statements of Operations related to all cash flow hedges for the three months ended September 30, 2015 and 2014:

September 30, 2015
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Effective Portion Reclassified from AOCI into Income (Expense)
 
Ineffective Portion Recognized in Income (Expense)
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(0.1
)
 
Interest expense
 
$
(1.1
)
 
$

Foreign exchange forward contracts
 
(2.9
)
 
Cost of products sold
 
3.8

 

Foreign exchange forward contracts
 

 
SG&A expenses
 
0.1

 

Commodity contracts
 
(0.2
)
 
Cost of products sold
 

 

 
 
 
 
 
 
 
 
 
Ineffective Portion:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 

 
Other expense (income), net
 

 
(0.5
)
Total in cash flow hedging
 
$
(3.2
)
 
 
 
$
2.8

 
$
(0.5
)

September 30, 2014
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Effective Portion Reclassified from AOCI into Income (Expense)
 
Ineffective Portion Recognized in Income (Expense)
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
0.3

 
Interest expense
 
$
(1.0
)
 
$

Foreign exchange forward contracts
 
7.5

 
Cost of products sold
 
(2.2
)
 

Foreign exchange forward contracts
 
0.3

 
SG&A expenses
 

 

Commodity contracts
 
(0.3
)
 
Cost of products sold
 

 

 
 
 
 
 
 
 
 
 
Ineffective Portion:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 

 
Other expense (income), net
 

 
(1.0
)
Total for cash flow hedging
 
$
7.8

 
 
 
$
(3.2
)
 
$
(1.0
)






21



The following tables summarize the amount of gains (losses) recorded in AOCI in the Consolidated Balance Sheets and income (expense) in the Company’s Consolidated Statements of Operations related to all cash flow hedges for the nine months ended September 30, 2015 and 2014:

September 30, 2015
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Effective Portion Reclassified from AOCI into Income (Expense)
 
Ineffective Portion Recognized in Income (Expense)
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(1.4
)
 
Interest expense
 
$
(3.1
)
 
$

Foreign exchange forward contracts
 
19.1

 
Cost of products sold
 
14.5

 

Foreign exchange forward contracts
 
0.3

 
SG&A expenses
 
0.5

 

Commodity contracts
 
(0.2
)
 
Cost of products sold
 
(0.3
)
 

 
 
 
 
 
 
 
 
 
Ineffective Portion:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 

 
Other expense (income), net
 

 
(0.3
)
Total in cash flow hedging
 
$
17.8

 
 
 
$
11.6

 
$
(0.3
)

September 30, 2014
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Effective Portion Reclassified from AOCI into Income (Expense)
 
Ineffective Portion Recognized in Income (Expense)
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(0.2
)
 
Interest expense
 
$
(2.8
)
 
$

Foreign exchange forward contracts
 
3.9

 
Cost of products sold
 
(5.5
)
 

Foreign exchange forward contracts
 
0.3

 
SG&A expenses
 
(0.2
)
 

Commodity contracts
 
(0.1
)
 
Cost of products sold
 
(0.5
)
 

Total for cash flow hedging
 
$
3.9

 
 
 
$
(9.0
)
 
$


Overall, the derivatives designated as cash flow hedges are considered to be highly effective. At September 30, 2015, the Company expects to reclassify $3.3 million of deferred net gains on cash flow hedges recorded in AOCI to the Consolidated Statements of Operations during the next 12 months. This reclassification is primarily due to the sale of inventory that includes hedged purchases and recognized interest expense on interest rate swaps. The 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 typically 18 months.

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

Hedges of Net Investments in Foreign Operations

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

22




The following table summarizes the notional amounts of hedges of net investments by derivative instrument type at September 30, 2015 and the notional amounts expected to mature during the next 12 months:

 
 
Aggregate
 Notional
 Amount
 
Aggregate Notional Amount Maturing within 12 Months
 
 
 
(in millions)
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
409.9

 
$
226.2


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

The following tables summarize the amount of gains (losses) recorded in AOCI in the Consolidated Balance Sheets and other income (expense) in the Company’s Consolidated Statements of Operations related to the hedges of net investments for the three months ended September 30, 2015 and 2014:

September 30, 2015
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Recognized in Income (Expense)
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
9.5

 
Other expense (income), net
 
$
2.0

Total for net investment hedging
 
$
9.5

 
 
 
$
2.0


September 30, 2014
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Recognized in Income (Expense)
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
Cross currency basis swaps
 
$
22.4

 
Interest income
 
$
0.5

 
 
 
 
Interest expense
 
(1.7
)
Foreign exchange forward contracts
 
21.2

 
Other expense (income), net
 
0.5

Total for net investment hedging
 
$
43.6

 
 
 
$
(0.7
)
















23



The following table summarizes the amount of gains (losses) recorded in AOCI in the Consolidated Balance Sheets and other income (expense) in the Company’s Consolidated Statement of Operations related to the hedges of net investments for the nine months ended September 30, 2015 and 2014:

September 30, 2015
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Recognized in Income (Expense)
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
6.1

 
Other expense (income), net
 
$
2.8

Total for net investment hedging
 
$
6.1

 
 
 
$
2.8


September 30, 2014
 
 
Gain (Loss) in AOCI
 
Consolidated Statements of Operations Location
 
Recognized in Income (Expense)
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Effective Portion:
 
 
 
 
 
 
Cross currency basis swaps
 
$
19.3

 
Interest income
 
$
1.9

 
 
 
 
Interest expense
 
(1.6
)
Foreign exchange forward contracts
 
25.5

 
Other expense (income), net
 
0.7

Total for net investment hedging
 
$
44.8

 
 
 
$
1.0


Fair Value Hedges

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

The following table summarizes the notional amounts of fair value hedges by derivative instrument type at September 30, 2015 and the notional amounts expected to mature during the next 12 months:
 
 
Aggregate
 Notional
 Amount
 
Aggregate Notional Amount Maturing within 12 Months
 
 
 
(in millions)
 
 
 
 
 
 
 
Interest rate swaps
 
$
45.0

 
$
45.0


The following tables summarize the amount of income (expense) recorded in the Company’s Consolidated Statements of Operations related to the hedges of fair value for the three and nine months ended September 30, 2015 and 2014:
 
 
Consolidated Statements of Operations Location
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
0.1

 
$
(0.1
)
 
$
0.2

 
$
0.1




24



Derivative Instruments Not Designated as Hedges

The Company enters into derivative instruments with the intent to partially mitigate 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” in the Consolidated Statements of Operations. The Company primarily uses foreign exchange forward contracts and cross currency basis swaps to hedge these risks. Any cash flows associated with the foreign exchange forward contracts and interest rate swaps not designated as hedges are included in cash from operating activities in the Consolidated Statements of Cash Flows. Any cash flows associated with the cross currency basis swaps not designated as hedges are included in investing activities in the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, in which case the cash flows will be classified as financing activities in the Consolidated Statements of Cash Flows.

The following tables summarize the aggregate notional amounts of the Company’s economic hedges not designated as hedges by derivative instrument types at September 30, 2015 and the notional amounts expected to mature during the next 12 months:
 
 
Aggregate
 Notional
 Amount
 
Aggregate Notional Amount Maturing within 12 Months
 
 
 
(in millions)
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
428.5

 
$
423.3

Interest rate swaps
 
2.0

 
0.8

Total for instruments not designated as hedges
 
$
430.5

 
$
424.1


The Company had a Swiss franc denominated cross currency basis swaps to offset an intercompany Swiss franc note receivable at a U.S. dollar functional entity. The hedge matured during the second quarter of 2015 to coincide with the repayment of the note.

The following table summarizes the amounts of gains (losses) recorded in the Company’s Consolidated Statements of Operations related to the economic hedges not designated as hedging for the three and nine months ended September 30, 2015 and 2014:
 
 
Consolidated Statements of Operations Location
 
Gain (Loss) Recognized
 
 
 
Three Months Ended September 30,
(in millions)
 
 
2015
 
2014
 
 
 
 
 
 
 
Foreign exchange forward contracts (a)
 
Other expense (income), net
 
$
(4.1
)
 
$
36.8

Cross currency basis swaps (a)
 
Other expense (income), net
 

 
(40.6
)
Total for instruments not designated as hedges
 
 
 
$
(4.1
)
 
$
(3.8
)
 (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 which are recorded in “Other expense (income), net” in the Consolidated Statements of Operations.
 
 
Consolidated Statements of Operations Location
 
Gain (Loss) Recognized
 
 
 
Nine Months Ended September 30,
(in millions)
 
 
2015
 
2014
 
 
 
 
 
 
 
Foreign exchange forward contracts (a)
 
Other expense (income), net
 
$
3.7

 
$
31.6

DIO equity option contracts
 
Other expense (income), net
 
0.1

 
(0.2
)
Cross currency basis swaps (a)
 
Other expense (income), net
 
(1.8
)
 
(43.8
)
Total for instruments not designated as hedges
 
 
 
$
2.0

 
$
(12.4
)
(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 which are recorded in “Other expense (income), net” in the Consolidated Statements of Operations.




25



Consolidated Balance Sheets Location of Derivative Fair Values

The following tables summarize the fair value and consolidated balance sheet location of the Company’s derivatives at September 30, 2015 and December 31, 2014:
 
 
September 30, 2015
(in millions)
 
Prepaid
Expenses
and Other
Current Assets, Net
 
Other
Noncurrent
Assets, Net
 
Accrued
Liabilities
 
Other
Noncurrent
Liabilities
Designated as Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
25.4

 
$
4.7

 
$
1.1

 
$
1.1

Commodity contracts
 

 

 
0.2

 

Interest rate swaps
 
0.2

 

 
1.4

 
0.1

Total
 
$
25.6

 
$
4.7

 
$
2.7

 
$
1.2

 
 
 
 
 
 
 
 
 
Not Designated as Hedges
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
5.1

 
$

 
$
4.1

 
$

Total
 
$
5.1

 
$

 
$
4.1

 
$


 
 
December 31, 2014
(in millions)
 
Prepaid
Expenses
and Other
Current Assets, Net
 
Other
Noncurrent
Assets, Net
 
Accrued
Liabilities
 
Other
Noncurrent
Liabilities
Designated as Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
28.1

 
$
12.5

 
$
2.7

 
$
1.7

Commodity contracts
 

 

 
0.2

 

Interest rate swaps
 
0.6

 
0.1

 
0.6

 
0.4

Total
 
$
28.7

 
$
12.6

 
$
3.5

 
$
2.1

 
 
 
 
 
 
 
 
 
Not Designated as Hedges
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
4.8

 
$

 
$
4.8

 
$

DIO equity option contracts
 

 

 

 
0.1

Interest rate swaps
 

 

 

 
0.1

Cross currency basis swaps
 
2.7

 

 

 

Total
 
$
7.5

 
$

 
$
4.8

 
$
0.2


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 contain the enforceable right to offset through netting arrangements with the same counterparty, the Company elects to present them on a gross basis in the Consolidated Balance Sheets.










26



Offsetting of financial assets and liabilities under netting arrangements at September 30, 2015:
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
(in millions)
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
35.2

 
$

 
$
35.2

 
$
(7.6
)
 
$

 
$
27.6

Interest rate swaps
 
0.2

 

 
0.2

 

 

 
0.2

Total Assets
 
$
35.4

 
$

 
$
35.4

 
$
(7.6
)
 
$

 
$
27.8


 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
(in millions)
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
6.2

 
$

 
$
6.2

 
$
(6.2
)
 
$

 
$

Commodity contracts
 
0.2

 

 
0.2

 

 

 
0.2

Interest rate swaps
 
1.6

 

 
1.6

 
(1.4
)
 

 
0.2

Total Liabilities
 
$
8.0

 
$

 
$
8.0

 
$
(7.6
)
 
$

 
$
0.4


Offsetting of financial assets and liabilities under netting arrangements at December 31, 2014:
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
(in millions)
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
45.4

 
$

 
$
45.4

 
$
(7.8
)
 
$

 
$
37.6

Interest rate swaps
 
0.7

 

 
0.7

 
(0.2
)
 

 
0.5

Cross currency basis swaps
 
2.7

 

 
2.7

 
(1.1
)
 

 
1.6

Total Assets
 
$
48.8

 
$

 
$
48.8

 
$
(9.1
)
 
$

 
$
39.7



27



 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
(in millions)
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
9.2

 
$

 
$
9.2

 
$
(8.2
)
 
$

 
$
1.0

Commodity contracts
 
0.2

 

 
0.2

 

 

 
0.2

DIO equity option contracts
 
0.1

 

 
0.1

 

 

 
0.1

Interest rate swaps
 
1.2

 

 
1.2

 
(1.0
)
 

 
0.2

Total Liabilities
 
$
10.7

 
$

 
$
10.7

 
$
(9.2
)
 
$

 
$
1.5



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 in 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 and carrying value of total long-term debt, including the current portion, was $1,178.1 million and $1,152.0 million, respectively at September 30, 2015.  At December 31, 2014, the Company estimated the fair value and carrying value, including the current portion, was $1,286.2 million and $1,258.9 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 September 30, 2015. 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 September 30, 2015 and December 31, 2014, which are classified as “Cash and cash equivalents,” “Prepaid expenses and other current assets, net,” “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.


28



 
 
September 30, 2015
(in millions)
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
0.2

 
$

 
$
0.2

 
$

Foreign exchange forward contracts
 
35.2

 

 
35.2

 

Total assets
 
$
35.4

 
$

 
$
35.4

 
$

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Interest rate swaps
 
$
1.6

 
$

 
$
1.6

 
$

Commodity contracts
 
0.2

 

 
0.2

 

Foreign exchange forward contracts
 
6.2

 

 
6.2

 

Long-term debt
 
45.2

 

 
45.2

 

Total liabilities
 
$
53.2

 
$

 
$
53.2

 
$


 
 
December 31, 2014
(in millions)
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
0.8

 
$

 
$
0.8

 
$

Cross currency basis swaps
 
2.7

 

 
2.7

 

Foreign exchange forward contracts
 
45.4

 

 
45.4

 

DIO Corporation convertible bonds
 
57.7

 

 

 
57.7

Total assets
 
$
106.6

 
$

 
$
48.9

 
$
57.7

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Interest rate swaps
 
$
1.1

 
$

 
$
1.1

 
$

Commodity contracts
 
0.2

 

 
0.2

 

Foreign exchange forward contracts
 
9.2

 

 
9.2

 

Long-term debt
 
106.1

 

 
106.1

 

DIO equity option contracts
 
0.1

 

 

 
0.1

Total liabilities
 
$
116.7

 
$

 
$
116.6

 
$
0.1


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

The Company used the income method valuation technique to estimate the fair value of the DIO Corporation convertible bonds.  The significant unobservable inputs for valuing the corporate bonds were both the DIO Corporation’s stock volatility factor of approximately 40% and corporate bond rating which implied approximately an 8.73% discount rate on the valuation model.  Significant observable inputs used to value the corporate bonds included foreign exchange rates and DIO Corporation’s period-ending market stock price. During the three months ended September 30, 2015, the Company sold the DIO convertible bonds.










29



The following table presents a rollforward of the Company’s Level 3 holdings measured at fair value on a recurring basis using unobservable inputs:
(in millions)
 
DIO Corporation
Convertible
Bonds
 
DIO Equity
Options
Contracts
 
 
 
 
 
Balance at December 31, 2014
 
$
57.7

 
$
(0.1
)
Sales, gross
 
(47.7
)
 


Unrealized loss:
 
 

 
 

Reported in AOCI, pretax
 
(10.0
)
 

Realized gain:
 
 

 
 

Reported in other expense (income), net
 

 
0.1

Balance at September 30, 2015
 
$

 
$


For the three and nine months ended September 30, 2015, the Company sold all Level 3 investments. There were no additional purchases, issuances or transfers of Level 3 financial instruments in 2015.


NOTE 12 – INCOME TAXES

Uncertainties in Income Taxes

The Company recognizes in the interim 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 12 months of the reporting date of the Company’s interim 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 $2.1 million. Of this total, approximately $0.7 million represents the amount of unrecognized tax benefits that, if recognized would affect the effective income tax rate. In addition, expiration of statutes of limitation in various jurisdictions during the next 12 months could include unrecognized tax benefits of approximately $0.4 million.

NOTE 13 – FINANCING ARRANGEMENTS

During the quarter ended March 31, 2015, the Company paid the second required payment of $100.0 million under the Private Placement Notes “PPN” by issuing commercial paper at that time. The final required payment of $75.0 million due in February 2016 has been classified as current in the Consolidated Balance Sheets.

During the quarter ended September 30, 2015, the Company paid the second required payment of $8.8 million under the PNC Term Loan. The third annual installment under the terms of the PNC Term Loan, in the amount of $8.8 million will be due in August 2016 has been classified as current in the Consolidated Balance Sheets.

At September 30, 2015, there were no outstanding borrowings, in the form of issued commercial paper, under the current $500.0 million multi-currency revolving credit facility.

Effective July 1, 2015, the Company amended the multi-currency revolving credit facility to extend the maturity date by one year until July 23, 2020. The Company is able to borrow up to $500.0 million through July 23, 2019 and up to $452.0 million through July 23, 2020. The Company’s revolving credit facility, term loans and PPN contain certain affirmative and negative covenants relating to the Company's operations and financial condition. At September 30, 2015, the Company was in compliance with all debt covenants.

At September 30, 2015, the Company had $553.4 million of borrowing available under lines of credit, including lines available under its short-term arrangements and revolving credit agreement.

On October 29, 2015, the Company announced the commencement of a tender offer to purchase for cash up to $150.0 million aggregate principle of its outstanding 4.125% Notes due August 2021.  Concurrent with this tender offer, the Company intends to arrange new unsecured debt financing in an amount sufficient to fund the total consideration payable pursuant to the tender offer. 

30



The total consideration payable is estimated at $160.3 million, which includes the cost of the early tender premium under the existing note agreement and fees.  Should the Company not be able to secure new debt financing sufficient to satisfy the tender offer, the Company intends to use available funds, borrowings available under lines of credit, including lines available under short term arrangements and revolving credit agreement.




NOTE 14 – GOODWILL AND INTANGIBLE ASSETS

The Company performed the required annual impairment tests of goodwill as of April 30, 2015 on 16 reporting units. As discussed in Note 6, Segment Information, effective in the first quarter of 2015, the Company realigned reporting responsibilities for multiple locations.  For any realignment that resulted in reporting unit changes, the Company applied the relative fair value method to determine the reallocation of goodwill of the associated reporting units.

To determine the fair value of the Company’s reporting units, the Company uses a discounted cash flow model with market-based support as its valuation technique to measure the fair value for its reporting units. The discounted cash flow model uses five-year forecasted cash flows plus a terminal value based on a multiple of earnings. In addition, the Company applies gross margin and operating expense assumptions consistent with historical trends. The total cash flows were discounted based on a range between 7.6% to 12.5%, which included assumptions regarding the Company’s weighted-average cost of capital. The Company considered the current market conditions both in the U.S. and globally, when determining its assumptions. Lastly, the Company reconciled the aggregated fair values of its reporting units to its market capitalization, which included a reasonable control premium based on market conditions. As a result of the annual impairment tests of goodwill, no impairment was identified.

In addition, the Company assessed the annual impairment of indefinite-lived intangible assets as of April 30, 2015, which largely consists of acquired tradenames, in conjunction with the annual impairment tests of goodwill. The performance of the Company’s annual impairment test did not result in any impairment of the Company’s indefinite-lived assets.

A reconciliation of changes in the Company’s goodwill is as follows:
(in millions)
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
 
Healthcare, Orthodontic and Implant Businesses
 
Select Developed and Emerging Markets Businesses
 
Total
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
 
$
565.7

 
$
1,394.4

 
$
129.2

 
$
2,089.3

Effects of exchange rate changes
 
(6.5
)
 
(86.4
)
 
(12.1
)
 
(105.0
)
Balance at September 30, 2015
 
$
559.2

 
$
1,308.0

 
$
117.1

 
$
1,984.3





















31




Identifiable definite-lived and indefinite-lived intangible assets consist of the following:
 
 
September 30, 2015
 
December 31, 2014
(in millions) 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
 
$
165.3

 
$
(93.2
)
 
$
72.1

 
$
175.2

 
$
(95.5
)
 
$
79.7

Trademarks
 
64.1

 
(35.1
)
 
29.0

 
75.6

 
(37.1
)
 
38.5

Licensing agreements
 
34.0

 
(24.4
)
 
9.6

 
34.6

 
(22.8
)
 
11.8

Customer relationships
 
429.7

 
(120.2
)
 
309.5

 
452.9

 
(104.7
)
 
348.2

Total definite-lived
 
$
693.1

 
$
(272.9
)
 
$
420.2

 
$
738.3

 
$
(260.1
)
 
$
478.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived Trademarks and In-process R&D
 
$
180.2

 
$

 
$
180.2

 
$
192.6

 
$

 
$
192.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Total identifiable intangible assets
 
$
873.3

 
$
(272.9
)
 
$
600.4

 
$
930.9

 
$
(260.1
)
 
$
670.8


During the nine months ended September 30, 2015, the Company impaired a trademark for $3.7 million that was held in the Dental Consumable, Endodontics and Dental Laboratory Businesses segment which was recorded in “Restructuring and other costs” in the Consolidated Statements of Operations.





NOTE 15 – 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 by Directions for Use that “Indicated” Cavitron® use for “periodontal debridement for all types of periodontal disease.” The case went to trial in September 2013, and on January 22, 2014, the San Francisco Superior Court issued its decision in the Company’s favor, rejecting all of the plaintiffs’ claims. The plaintiffs have appealed the Superior Court’s decision, and the appeal is now pending. The Company is defending against this appeal.

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 grant of a Company Motion and dismissal of the case for lack of jurisdiction, the plaintiffs filed a second complaint under the name of Dr. Hildebrand’s corporate practice, Center City Periodontists, asserting the same allegations (this case is now proceeding under the name “Center City Periodontists”). The plaintiffs moved to have the case certified as a class action, to which the Company has objected and filed its brief. The Court subsequently granted a Motion filed by the Company and dismissed plaintiffs’ New Jersey Consumer Fraud and negligent design claims, leaving only a breach of express warranty claim, in response to which the Company has filed a Motion for Summary Judgment. The Court has rescheduled a hearing to January 2016 on plaintiffs’ class certification motion.


32



On January 20, 2014, the Company was served with a qui tam complaint filed by two former and one current employee of the Company under the Federal False Claims Act and equivalent state and city laws. The lawsuit was previously under seal in the U.S. District Court for the Eastern District of Pennsylvania. The complaint alleges, among other things, that the Company engaged in various illegal marketing activities, and thereby caused dental and other healthcare professionals to file false claims for reimbursement with Federal and State governments. The relators seek injunctive relief, fines, treble damages, and attorneys’ fees and costs. On January 27, 2014, the United States filed with the Court a notice that it had elected not to intervene in the qui tam action at this time. The United States’ notice indicated that the named state and city co-plaintiffs had authorized the United States to communicate to the Court that they also had decided not to intervene at this time. These non-intervention decisions do not prevent the qui tam relators from litigating this action, and the United States and/or the named states and/or cities may seek to intervene in the action at a later time. On September 4, 2014, the Company’s motion to dismiss the complaint was granted in part and denied in part. The Company intends to vigorously defend itself in the litigation.

On October 2, 2015 and October 5, 2015, the Company and its wholly-owned subsidiary Dawkins Merger Sub Inc. (“Merger Sub”) were served with two separate putative class action complaints filed in the Court of Chancery of the State of Delaware by purported stockholders of Sirona Dental Systems, Inc. (“Sirona”) against the members of Sirona’s Board of Directors, the Company, and Merger Sub. The complaints allege that the Company and Merger Sub aided and abetted and/or assisted Sirona’s Board members in breaching their fiduciary duties to Sirona’s stockholders in connection with the Agreement and Plan of Merger entered into between the Company and Sirona on September 15, 2015. The Company intends to vigorously defend itself in this litigation.

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 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 internal review by the Company. On August 24, 2015, the Company entered into an extension of the tolling agreement originally entered into in August 2014, such that the statute of limitations is now tolled until September 1, 2016. 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 including patent infringement, 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, 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


33



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.

34



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,” “assumes,” 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, 2014 , as revised on Form 8-K filed October 28, 2015, 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

Highlights

For the three months ended September 30, 2015, the Company reported internal sales growth of 1.7% for the period, including 1.6% in the United States, 0.3% in Europe and 4.8% in the Rest of World region. Sales, excluding precious metal content, declined by 7.7%, including 9.1% of negative currency translation compared to the three months ended September 30, 2014. Internal growth was negatively impacted by approximately 0.5% in the quarter as a result of product line discontinuations associated with the Company’s global efficiency program.

Gross profit rate for the three months ended September 30, 2015 increased 180 basis points to 58.7% from 56.9% for the three months ended September 30, 2014. Operating margin for the three months ended September 30, 2015 was 15.7% compared to 16.1% in the prior year quarter, reflecting operating improvements that were offset by charges associated with restructuring initiatives in the current period. Adjusted operating margin (a non-US GAAP measure) for the three months ended September 30, 2015 was 20.9%, a 220 basis point improvement from the prior year period.

Operating cash flow for the three months ended September 30, 2015 was $159.7 million compared to $147.5 million for the three months ended September 30, 2015.

On September 15, 2015, the Company announced a “merger of equals” with Sirona Dental Systems, Inc. Sirona develops, manufactures and markets several lines of dental products including CAD/CAM restoration systems, digital intra-oral. panoramic and 3D imaging systems, dental treatment centers and instruments. The transaction is expected to be finalized during the first quarter of 2016. Please see Note 5, Business Combinations, for additional information.

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 115 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 supplies and devices and small equipment used in dental offices for the treatment of patients. The Company manufactures thousands of different dental consumable products marketed under more than one hundred brand names. DENTSPLY’s dental supplies and devices in the dental consumable products category include dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, tooth whiteners and topical fluoride.   Small

35



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

Dental laboratory products are used in the preparation of dental appliances by dental laboratories. 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 design and machining (CAD/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 scanning and treatment planning software, dental and orthodontic appliances and accessories.

Consumable medical device products consist mainly of urology catheters, certain surgical products, medical drills and other products.

Principal Measurements

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

The Company defines “internal sales 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 sales growth. The Company also tracks internal sales growth of continuing product lines as this is more reflective of the ongoing strength of the Company’s performance. The Company defines “net acquisition sales growth” as the net sales, excluding precious metal content, for a period of twelve months following the transaction date of businesses that have been acquired, less the net sales, excluding precious metal content, for a period of twelve months prior to the transaction date of businesses that have been divested. The Company defines “constant currency sales growth” as internal sales growth plus net acquisition sales growth.

The primary drivers of internal growth includes global dental market growth, innovation and new products launched by the Company, and continued investments in sales and marketing resources, including clinical education. Management believes that over time, the Company’s ability to execute its strategies allows it to grow at a modest premium to the growth rate of the underlying dental market. Management further believes that the global dental market has generally in the past and should over time in the future grow at a premium to underlying economic growth rates. Considering all of these factors, the Company assumes that the long-term growth rate for the dental market will range from 3% to 6% on average and that the Company targets a slight premium to market growth. Over the past several years, growth in the global dental and other healthcare markets have been restrained by lower economic growth in Western Europe and certain other markets compared to historical averages and, accordingly, market growth rates, and the Company’s internal growth rate remains uncertain in the near term.

The Company’s business is subject to quarterly fluctuations of consolidated net sales and net income. The Company typically implements most of its price changes at the beginning of the first or fourth quarters. Price changes, other marketing and promotional programs as well as the management of inventory levels by distributors and the implementation of strategic initiatives, may impact sales levels in a given period.

The Company also has a focus on maximizing 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 global efficiency initiatives will improve the cost structure and help offset areas of rising costs such as energy, employee benefits and regulatory oversight and compliance. In connection with these efforts, the Company targets adjusted operating income margins to expand to 20%, net of reinvestments, as the benefits of these initiatives are realized over time. In addition, the Company expects that it will record restructuring charges, from time to time, associated with such initiatives. These restructuring charges could be material to the Company’s consolidated financial statements and there can be no assurance that the target adjusted operating income margins will be achieved. Consistent with these efforts, the Company announced on May 22, 2015 that it reorganized portions of its laboratory business and associated manufacturing capabilities within the Dental Consumables, Endodontics and Dental Laboratory Businesses segment. The realignment of the laboratory business is designed to increase emphasis on innovative prosthetics materials while exiting portions of the laboratory equipment and fabrication businesses.


36



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 have experienced consolidation, they remain fragmented. Management believes that there will continue to be adequate opportunities to participate as a consolidator in the industry for the foreseeable future.

Impact of Foreign Currencies and Interest Rates

Due to the international nature of DENTSPLY’s business, movements in foreign exchange and interest rates may impact the Consolidated Statements of Operations. With more than 60% of the Company’s net sales located in regions outside the U.S., the Company’s consolidated net sales are impacted negatively by the strengthening or positively impacted by the weakening of the U.S. dollar. This impact is anticipated to be significant in 2015 compared to 2014 due to a dramatic weakening of the euro in the latter half of 2014 and early 2015 and the strengthening of the Swiss franc in early 2015. Additionally, movements in certain foreign exchange and interest rates may unfavorably or favorably impact the Company’s results of operations, financial condition and liquidity.

Reclassification of Prior Year Amounts

Certain reclassifications have been made to prior year’s data in order to conform to current year presentation. Specifically, during the March 31, 2015 quarter, the Company realigned reporting responsibilities for multiple locations as a result of changes to the management reporting structure. The segment information reflects the revised structure for all periods shown.

RESULTS OF OPERATIONS, QUARTER ENDED SEPTEMBER 30, 2015 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2014

Net Sales

The discussion below summarizes the Company’s sales growth, excluding precious metal content, into the following components: (1) constant currency sales growth, which includes internal sales growth and net acquisition sales growth, and (2) foreign currency translation.  These disclosures of net sales growth provide the reader with sales results on a comparable basis between periods.

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 cost of the precious metal content of the Company’s sales is largely passed 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.


37



 
 
Three Months Ended
 
 
 
 
 
 
September 30,
 
 
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Net sales
 
$
648.9

 
$
708.2

 
$
(59.3
)
 
(8.4
%)
Less: precious metal content of sales
 
19.6

 
26.6

 
(7.0
)
 
(26.3
%)
Net sales, excluding precious metal content
 
$
629.3

 
$
681.6

 
$
(52.3
)
 
(7.7
%)

Net sales, excluding precious metal content, for the three months ended September 30, 2015 were $629.3 million, a decrease of $52.3 million from the third quarter of 2014.  The change in net sales, excluding precious metal content, was primarily a result of 9.1% of unfavorable foreign currency translation. Excluding the impact of foreign currency translation, net sales, excluding precious metal content, grew 1.4% despite being negatively impacted due to business interruption from damage suffered as a result of an explosion near the Company’s facility in Tianjin, China on August 12, 2015. Sales related to precious metal content declined 27.0% in the quarter, reflecting both the negative impact of foreign currency translation and the decline in the use of precious metal alloys, which negatively impacts both the precious metal alloy and also the refinery product lines.

Constant Currency and Internal Sales Growth

The following table includes growth rates for net sales, excluding precious metal content, for the three months ended September 30, 2015 compared with the three months ended September 30, 2014.

 
Three Months Ended September 30, 2015
 
United
States
 
Europe
 
Rest of World
 
Worldwide
 
 
 
 
 
 
 
 
Internal sales growth
1.6
 %
 
0.3
%
 
4.8
%
 
1.7
%
Net acquisition (divestiture) sales growth
(0.2
%)
 
(0.3
%)
 
(0.6
%)
 
(0.3
%)
Constant currency sales growth
1.4
 %
 
%
 
4.2
 %
 
1.4
 %

United States

Net sales, excluding precious metal content, increased by 1.4% on a constant currency basis in the third quarter of 2015 as compared to the third quarter of 2014. Internal sales growth was 1.6% in the period, led by sales growth in the dental consumable product category. Internal growth in the quarter was negatively impacted by approximately 1.0% as a result of product line discontinuation associated with the Company’s global efficiency program.

Europe

Net sales, excluding precious metal content, were unchanged on a constant currency sales growth basis in the third quarter of 2015 as compared to the third quarter of 2014. Internal sales growth was 0.3% in the period, primarily the result of sales growth in the dental consumable product category partially offset by weaker sales of the dental laboratory product category. Internal growth in the quarter was negatively impacted by approximately 0.3% as a result of product line discontinuation associated with the Company’s global efficiency program.

Rest of World

Net sales, excluding precious metal content, increased by 4.2% on a constant currency sales growth basis in the third quarter of 2015 as compared to the third quarter of 2014. Internal sales growth was 4.8% in the period, led by the dental consumable and dental specialty product categories, partially offset by lower sales in China due to a temporary loss in service of our manufacturing and warehouse facilities in Tianjin, China. 








38



Gross Profit
 
 
Three Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Gross profit
 
$
369.5

 
$
388.1

 
$
(18.6
)
 
(4.8
%)
 
 
 
 
 
 
 
 
 
Gross profit as a percentage of net sales, including precious metal content
 
56.9
%
 
54.8
%
 
 

 
 

Gross profit as a percentage of net sales, excluding precious metal content
 
58.7
%
 
56.9
%
 
 

 
 


Gross profit as a percentage of net sales, excluding precious metal content, increased by 180 basis points for the quarter ended September 30, 2015 as compared to the same three month period ended September 30, 2014. The increase in the gross profit rate was primarily due to the favorable impact of foreign currency as well as benefits from the Company’s global efficiency program and favorable product mix when compared to the three months ended September 30, 2014.

Operating Expenses
 
 
Three Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses (“SG&A”)
 
$
264.3

 
$
276.0

 
$
(11.7
)
 
(4.2
%)
Restructuring and other costs
 
6.6

 
2.5

 
4.1

 
NM

 
 
 
 
 
 
 
 
 
SG&A as a percentage of net sales, including precious metal content
 
40.7
%
 
39.0
%
 
 

 
 

SG&A as a percentage of net sales, excluding precious metal content
 
42.0
%
 
40.5
%
 
 

 
 

NM - Not meaningful

SG&A Expenses

SG&A expenses as a percentage of net sales, excluding precious metal content, for the quarter ended September 30, 2015 increased 150 basis points compared to the quarter ended September 30, 2014. The increase in the current period was primarily related to higher professional fees including $4.9 million of expense related to the Sirona merger and higher compensation expense due to investments in personnel within certain businesses.

Restructuring and Other Costs

The Company recorded net restructuring and other costs of $6.6 million for the three months ended September 30, 2015 compared to $2.5 million for the three months ended September 30, 2014. The increase of $4.1 million is related to restructuring plans associated with the Company’s global efficiency program and discussed more fully in the summary of results for the nine months ended September 30, 2015.

Other Income and Expense
 
 
Three Months Ended September 30,
 
 
(in millions)
 
2015
 
2014
 
Change
 
 
 
 
 
 
 
Net interest expense
 
$
9.2

 
$
11.3

 
$
(2.1
)
Other expense (income), net
 
(3.8
)
 
0.8

 
(4.6
)
Net interest and other expense
 
$
5.4

 
$
12.1

 
$
(6.7
)






39



Net Interest Expense

Net interest expense for the three months ended September 30, 2015 was $2.1 million lower compared to the three months ended September 30, 2014. The net decrease is a result of lower average debt levels in 2015 compared to the prior year period, partially offset by lower interest income during the period.

Other Expense (Income), Net

Other expense (income), net for the three months ended September 30, 2015 was $4.6 million favorable compared to the three months ended September 30, 2014. Other expense (income), net in the third quarter of 2015 was income of $3.8 million, comprised primarily of $2.0 million of income on net investment hedges and $2.7 million of currency transaction gains, partially offset by $0.8 million of other expense. Other expense (income), net in the three months ended September 30, 2014 was expense of $0.8 million, comprised primarily of income of $0.7 million related to interest and non-cash fair value adjustments on cross currency basis swaps not designated as hedges that offset currency risk on intercompany loans, offset by $0.8 million of currency transaction losses and $0.7 million of other expense.

Income Taxes and Net Income
 
 
Three Months Ended September 30,
 
 
(in millions, except per share data)
 
2015
 
2014
 
$ Change
 
 
 
 
 
 
 
Effective income tax rate
 
21.0
%
 
21.8
%
 
 
 
 
 
 
 
 
 
Equity in net income (loss) of unconsolidated affiliated company
 
$
10.8

 
$
(1.0
)
 
$
11.8

 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
 
$
84.5

 
$
75.3

 
$
9.2

 
 
 
 
 
 
 
Earnings per common share - diluted
 
$
0.59

 
$
0.52

 
 

 
 
 
 
 
 
 

Provision for Income Taxes

The Company’s effective tax rate for the third quarter of 2015 and 2014 was 21.0% and 21.8%, respectively.

The Company’s effective income tax rate for the third quarter of 2015 included the net impact of restructuring, restructuring program related costs and other costs, amortization of purchased intangible assets, income tax related adjustments and credit risk and fair value adjustments which impacted income before income taxes and the provision for income taxes by $27.2 million and $7.6 million, respectively.

In the third quarter of 2014, the Company’s effective income tax rate included the net impact of amortization of purchased intangible assets, restructuring, restructuring program related costs and other costs, business combination related costs, credit risk and fair value adjustments and income tax related adjustments which impacted income before income taxes and the provision for income taxes by $19.0 million and $5.3 million, respectively.

Equity in net income (loss) of unconsolidated affiliated company

The Company’s 17% ownership investment of DIO Corporation (“DIO”) resulted in a net income of $10.8 million and a net loss of $1.0 million on an after-tax basis for the third quarter of 2015 and 2014, respectively.  The equity earnings of DIO include 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 loss recorded through DIO’s net income for the third quarter of 2015 was approximately $10.8 million. For the third quarter of 2014, the mark-to-market loss recorded through DIO’s net income was approximately $0.2 million. During the three months ended September 30, 2015, the Company sold the DIO convertible bonds. As part of the disposition of the convertible bonds, the Company requested to relinquish its two board seats on the DIO Board of Directors. Subsequent to September 30, 2015, the Company no longer has representation on the DIO Board of Directors and as a result the Company no longer has significant influence on the operations of DIO. The Company will begin accounting for the remaining direct investment using the cost-basis method of accounting effective in the fourth quarter of 2015.




40



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 (“adjusted EPS”). The Company discloses adjusted net income attributable to DENTSPLY International to allow investors to evaluate the performance of the Company’s operations exclusive of certain items that impact the comparability of results from period to period and may not be indicative of past or future performance of the normal operations of the Company and certain large non-cash charges related to purchased intangible assets. The Company believes that this information is helpful in understanding underlying operating trends and cash flow generation.

Adjusted net income and adjusted EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes adjusted net income and adjusted EPS and the performance of the Company is measured on this basis along with other performance metrics.

The adjusted net income attributable to DENTSPLY International consists of net income attributable to DENTSPLY International adjusted to exclude the net of tax impact of the following:

(1) Business combination related costs. These adjustments include costs related to integrating and consummating recently acquired businesses and costs, gains and losses related to the disposal of businesses or product lines. These items are irregular in timing and as such may not be indicative of past and future performance of the Company and are therefore excluded to allow investors to better understand underlying operating trends.
(2) Restructuring, restructuring program related costs and other costs. These adjustments include costs related to the implementation of restructuring initiatives as well as certain other costs. These costs can include, but are not limited to, severance costs, facility closure costs, lease and contract terminations costs, related professional service costs, duplicate facility and labor costs associated with specific restructuring initiatives, as well as, legal settlements and impairments of assets. These items are irregular in timing, amount and impact to the Company’s financial performance. As such, these items may not be indicative of past and future performance of the Company and are therefore excluded for the purpose of understanding underlying operating trends.
(3) Amortization of purchased intangible assets. This adjustment excludes the periodic amortization expense related to purchased intangible assets. Beginning in 2011, the Company began recording large non-cash charges related to the values attributed to purchased intangible assets. As such, amortization expense has been excluded from adjusted net income attributed to DENTSPLY International to allow investors to evaluate and understand operating trends excluding these large non-cash charges.
(4) Credit risk and fair value adjustments. These adjustments include both the cost and income impacts of adjustments in certain assets and liabilities including the Company’s pension obligations, that are recorded through net income which are due solely to the changes in fair value and credit risk. These items can be variable and driven more by market conditions than the Company’s operating performance. As such, these items may not be indicative of past and future performance of the Company and therefore are excluded for comparability purposes.
(5) Certain fair value adjustments related to an unconsolidated affiliated company. This adjustment represents the fair value adjustment of the unconsolidated affiliated company’s convertible debt instrument held by the Company. The affiliate is accounted for under the equity method of accounting. The fair value adjustment is driven by open market pricing of the affiliate’s equity instruments, which has a high degree of variability and may not be indicative of the operating performance of the affiliate or the Company.
(6) Income tax related adjustments. These adjustments include both income tax expenses and income tax benefits that are representative of income tax adjustments mostly related to prior periods, as well as the final settlement of income tax audits, and discrete tax items resulting from the implementation of restructuring initiatives. These adjustments are irregular in timing and amount and may significantly impact the Company’s operating performance. As such, these items may not be indicative of past and future performance of the Company and therefore are excluded for comparability purposes.
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 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.

41




 
 
Three Months Ended September 30, 2015
(in millions, except per share amounts)
 
Net Income
 
Per Diluted
Common Share
 
 
 
 
 
Net income attributable to DENTSPLY International
 
$
84.5

 
$
0.59

Restructuring, restructuring program related costs and other costs, net of tax  
 
12.6

 
0.09

Amortization of purchased intangible assets, net of tax
 
7.6

 
0.05

Business combination related costs, net of tax
 
4.9

 
0.03

Credit risk and fair value adjustments, net of tax
 
0.8

 
0.01

Income tax related adjustments
 
(2.3
)
 
(0.02
)
Certain fair value adjustments related to an unconsolidated affiliated company, net of tax
 
(14.6
)
 
(0.10
)
Rounding
 

 
0.01

Adjusted non-US GAAP earnings
 
$
93.5

 
$
0.66


 
 
Three Months Ended September 30, 2014
(in millions, except per share amounts)
 
Net Income
 
Per Diluted
Common Share
 
 
 
 
 
Net income attributable to DENTSPLY International
 
$
75.3

 
$
0.52

Amortization of purchased intangible assets, net of tax
 
8.4

 
0.06

Restructuring, restructuring program related costs and other costs, net of tax  
 
2.5

 
0.02

Business combination related costs, net of tax
 
1.4

 
0.01

Credit risk and fair value adjustments, net of tax
 
0.8

 
0.01

Income tax related adjustments
 
0.6

 

Certain fair value adjustments related to an unconsolidated affiliated company, net of tax
 
0.3

 

Adjusted non-US GAAP earnings
 
$
89.3

 
$
0.62


Adjusted Operating Income and Margin

Adjusted operating income and margin is another important internal measure for the Company. Operating income in accordance with US GAAP is adjusted for the items noted above which are excluded on a pre-tax basis to arrive at adjusted operating income, a non-US GAAP measure. The adjusted operating margin is calculated by dividing adjusted operating income by net sales, excluding precious metal content.

Senior management receives a monthly analysis of operating results that includes adjusted operating income. The performance of the Company is measured on this basis along with the adjusted non-US GAAP earnings noted above as well as other performance metrics. Adjusted operating income is considered a measure not calculated in accordance with accounting principles generally accepted in the United States; therefore, it is a non-US GAAP measure. This non-US GAAP measure may differ from other companies and should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with US GAAP.


42



 
 
Three Months Ended
 
 
September 30, 2015
(in millions)
 
Operating Income
 
Percentage of Net Sales, Excluding Precious Metal Content
 
 
 
 
 
Operating income attributable to DENTSPLY International
 
$
98.6

 
15.7
%
Restructuring, restructuring program related costs and other costs
 
15.5

 
2.5
%
Amortization of purchased intangible assets
 
10.9

 
1.7
%
Business combination related costs
 
4.9

 
0.8
%
Credit risk and fair value adjustments
 
2.0

 
0.3
%
Adjusted non-US GAAP Operating Income
 
$
131.9

 
21.0
%
 
 
Three Months Ended
 
 
September 30, 2014
(in millions)
 
Operating Income
 
Percentage of Net Sales, Excluding Precious Metal Content
 
 
 
 
 
Operating income attributable to DENTSPLY International
 
$
109.6

 
16.1
%
Amortization of purchased intangible assets
 
11.9

 
1.8
%
Restructuring, restructuring program related costs and other costs
 
3.7

 
0.5
%
Business combination related costs
 
2.0

 
0.3
%
Adjusted non-US GAAP Operating Income
 
$
127.2

 
18.7
%

Operating Segment Results

Third Party Net Sales, Excluding Precious Metal Content
 
 
Three Months Ended
 
 
 
 
 
 
September 30,
 
 
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
 
$
292.7

 
$
304.3

 
$
(11.6
)
 
(3.8
%)
 
 
 
 
 
 
 
 
 
Healthcare, Orthodontic and Implant Businesses
 
226.1

 
246.6

 
(20.5
)
 
(8.3
%)
 
 
 
 
 
 
 
 
 
Select Developed and Emerging Markets Businesses
 
110.5

 
130.7

 
(20.2
)
 
(15.5
%)

Segment Operating Income (Loss)
 
 
Three Months Ended
 
 
 
 
 
 
September 30,
 
 
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
 
$
107.9

 
$
100.8

 
$
7.1

 
7.0
%
 
 
 
 
 
 
 
 
 
Healthcare, Orthodontic and Implant Businesses
 
28.0

 
26.9

 
1.1

 
4.1
%
 
 
 
 
 
 
 
 
 
Select Developed and Emerging Markets Businesses
 
(3.3
)
 
(1.7
)
 
(1.6
)
 
NM

NM - Not meaningful

43




Dental Consumables, Endodontic and Dental Laboratory Businesses

Net sales, excluding precious metal content, decreased $11.6 million, or 3.8% for the three months ended September 30, 2015 as compared to the same period in 2014.  On a constant currency basis, net sales, excluding precious metal content, increased 1.3% as compared to 2014, led primarily by the Dental Consumables businesses and partially offset by the Dental Laboratory businesses.

Operating income increased $7.1 million, for the three months ended September 30, 2015 as compared to 2014. The increase in operating income was primarily the result of improved gross profit in the Dental Consumables and Endodontic businesses, excluding the impact of foreign currency translation.

Healthcare, Orthodontic and Implant Businesses

Net sales, excluding precious metal content, decreased $20.5 million, or 8.3% for the three months ended September 30, 2015 compared to 2014. On a constant currency basis, net sales, excluding precious metal content, increased 2.0% as compared to 2014 primarily led by the Implant and Healthcare businesses.

Operating income increased $1.1 million or 4.1%, compared to 2014, primarily the result of gross profit improvements in the Implant businesses, excluding the impact of foreign currency translation.

Select Developed and Emerging Markets Businesses

Net sales, excluding precious metal content, decreased $20.2 million, or 15.5% for the three months ended September 30, 2015 as compared to 2014.  On a constant currency basis, net sales, excluding precious metal content, increased 0.4% as compared to 2014. The increase is the result of positive growth in the Emerging Markets businesses, partially offset by the Select Developed Markets businesses.

Operating income declined by $1.6 million during the three months ended September 30, 2015 as compared to 2014 primarily as a result of increased operating expenses in the Emerging Markets businesses, excluding the impact of foreign currency translation.

RESULTS OF OPERATIONS, NINE MONTHS ENDED SEPTEMBER 30, 2015 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2014

Net Sales
 
 
Nine Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,003.2

 
$
2,203.6

 
$
(200.4
)
 
(9.1
%)
Less: precious metal content of sales
 
67.6

 
101.9

 
(34.3
)
 
(33.7
%)
Net sales, excluding precious metal content
 
$
1,935.6

 
$
2,101.7

 
$
(166.1
)
 
(7.9
%)

Net sales, excluding precious metal content, for the nine months ended September 30, 2015 was $1,935.6 million, a decrease of $166.1 million or 7.9% compared to the nine months ended September 30, 2014.  The change in net sales, excluding precious metal content, reflects 9.9% unfavorable foreign currency translation.  Excluding the impact of foreign currency translation, net sales, excluding precious metal content grew 2.0% compared to the nine months ended September 30, 2014. Sales related to precious metal content declined 33.7% for the nine month period, reflecting the decline in the use of precious metal alloys, which negatively impacts both the precious metal alloy and also the refinery product lines.

Constant Currency and Internal Sales Growth

The following table includes growth rates for net sales, excluding precious metal content, for the nine months ended September 30, 2015 compared with the nine months ended September 30, 2014.

44



 
Nine Months Ended September 30, 2015
 
United
States
 
Europe
 
Rest of World
 
Worldwide
 
 
 
 
 
 
 
 
Internal sales growth
3.1
 %
 
0.4
%
 
5.0
%
 
2.3
%
Net acquisition (divestiture) sales growth
(0.5
%)
 
(0.1
%)
 
(0.5
%)
 
(0.3
%)
Constant currency sales growth
2.6
 %
 
0.3
%
 
4.5
 %
 
2.0
 %

United States

Net sales, excluding precious metal content, increased by 2.6% on a constant currency sales growth basis for the nine months ended September 30, 2015 as compared to the same nine month period of 2014. Internal sales growth was 3.1% for the nine month period led by increased sales in the dental consumable product category. Internal growth for the nine months ended was negatively impacted by approximately 0.6% as a result of product line discontinuation associated with the Company’s global efficiency program.

Europe

Net sales, excluding precious metal content, increased by 0.3% on a constant currency sales growth basis for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. Internal sales growth was 0.4% for the nine month period led by increased sales in the dental specialty and dental consumable product categories, partially offset by continued contraction in the CIS region and weaker dental laboratory product sales. Internal growth for the nine months ended was negatively impacted by approximately 0.4% as a result of product line discontinuation associated with the Company’s global efficiency program.

Rest of World

Net sales, excluding precious metal content, increased by 4.5% on a constant currency sales growth basis for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. Internal sales growth of 5.0% was led by the dental specialty products category.

Gross Profit
 
 
Nine Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Gross profit
 
$
1,142.5

 
$
1,206.7

 
$
(64.2
)
 
(5.3
%)
 
 
 
 
 
 
 
 
 
Gross profit as a percentage of net sales, including precious metal content
 
57.0
%
 
54.8
%
 
 

 
 

Gross profit as a percentage of net sales, excluding precious metal content
 
59.0
%
 
57.4
%
 
 

 
 


Gross profit as a percentage of net sales, excluding precious metal content, increased 160 basis points for the nine month period ended September 30, 2015 compared to the nine months ended September 30, 2014. The increase in the gross profit rate was primarily due to the favorable impact of foreign currency as well as benefits from the Company’s global efficiency program and favorable pricing effects when compared to the nine months ended September 30, 2014.











45




Operating Expenses
 
 
Nine Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses (“SG&A”)
 
$
809.5

 
$
859.9

 
$
(50.4
)
 
(5.9
%)
Restructuring and other costs
 
50.9

 
4.5

 
46.4

 
NM

 
 
 
 
 
 
 
 
 
SG&A as a percentage of net sales, including precious metal content
 
40.4
%
 
39.0
%
 
 

 
 

SG&A as a percentage of net sales, excluding precious metal content
 
41.8
%
 
40.9
%
 
 

 
 

NM - Not meaningful

SG&A Expenses

SG&A expenses as a percentage of net sales, excluding precious metal content, increased 90 basis points in the nine months ended September 30, 2015 when compared to the same period ended September 30, 2014. The increase was primarily due to higher professional fees mostly related to the operating margin improvement initiative, merger expenses, as well as biennial trade shows, partially offset by the savings from the margin improvement initiative program and legal settlements.

Restructuring and Other Costs

The Company recorded net restructuring and other costs of $50.9 million for the nine months ended September 30, 2015 compared to $4.5 million for the nine months ended September 30, 2014. On May 22, 2015, the Company announced that it reorganized portions of its laboratory business and associated manufacturing capabilities within the Dental Consumables, Endodontics and Dental Laboratory Businesses segment. During the nine months ended September 30, 2015, the Company recorded $34.0 million of costs that consist primarily of employee severance benefits related to these and other similar actions. Also during the nine months ended September 30, 2015, the Company recorded restructuring costs of $10.2 million within the Healthcare, Orthodontic and Implant Businesses segment primarily related to the global efficiency initiative. The Company expects additional restructuring plans during the remainder of 2015 primarily related to this initiative. Additional future costs expected to be incurred during the remainder of 2015 associated with enacted plans are estimated to range from $8 million to $12 million, primarily related to employee severance benefits. The Company estimates the future annual savings related to these plans will be in the range of $25 million and $32 million to be realized over the next three to five years. There is no assurance that future savings will be fully achieved.

Other Income and Expense
 
 
Nine Months Ended September 30,
 
 
(in millions)
 
2015
 
2014
 
Change
 
 
 
 
 
 
 
Net interest expense
 
$
28.3

 
$
30.8

 
$
(2.5
)
Other expense (income), net
 
(3.6
)
 
1.8

 
(5.4
)
Net interest and other expense
 
$
24.7

 
$
32.6

 
$
(7.9
)

Net Interest Expense

Net interest expense for the nine months ended September 30, 2015 was $2.5 million lower compared to the nine months ended September 30, 2014. The net decrease is a result of lower average debt levels in 2015 compared to the prior year period, partially offset by lower interest income during the period.

Other Expense (Income), Net

Other expense (income), net for the nine months ended September 30, 2015 was $5.4 million lower compared to the nine months ended September 30, 2014. Other expense (income), net for the nine months ended September 30, 2015 was income of $3.6 million, comprised of income of $3.5 million from interest and non-cash fair value adjustments on cross currency basis swaps not designated as hedges that offset currency risk on intercompany loans and $1.5 million of currency transaction gains, partially

46



offset by $1.3 million of other expense. Other expense (income), net for the nine months ended September 30, 2014 was expense of $1.8 million, comprised income of $0.8 million from interest and non-cash fair value adjustments on cross currency basis swaps not designated as hedges that offset currency risk on intercompany loans, offset by $1.4 million of currency transaction losses and $1.2 million of other expense.

Income Taxes and Net Income
 
 
Nine Months Ended September 30,
 
 
(in millions, except per share data)
 
2015
 
2014
 
$ Change
 
 
 
 
 
 
 
Effective income tax rate
 
24.6
%
 
22.6
%
 
 
 
 
 
 
 
 
 
Equity in net loss of unconsolidated affiliated company
 
$
(1.7
)
 
$
(1.6
)
 
$
(0.1
)
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
 
$
192.6

 
$
238.1

 
$
(45.5
)
 
 
 
 
 
 
 
Earnings per common share - diluted
 
$
1.35

 
$
1.65

 
 

 
 
 
 
 
 
 

Provision for Income Taxes

The Company’s effective tax rate for the nine month period of 2015 and 2014 was 24.6% and 22.6%, respectively. The Company’s effective tax rate was unfavorably impacted by the Company’s change in the mix of consolidated earnings.

The Company’s effective income tax rate for the first nine months of 2015 includes the net impact of restructuring, restructuring program related costs and other costs, amortization of purchased intangible assets, credit risk and fair value adjustments, business combination related costs and income tax related adjustments which impacted income before income taxes and the provision for income taxes by $104.7 million and $19.3 million, respectively.

In the first nine months of 2014, the Company’s effective income tax rate included the net impact of amortization of purchased intangible assets, restructuring, restructuring program related costs and other costs, business combination related costs, credit risk and fair value adjustments, and income tax related adjustments which impacted income before income taxes and the provision for income taxes by $48.1 million and $11.0 million, respectively.

Equity in net loss of unconsolidated affiliated company

The Company’s 17% ownership investment of DIO Corporation (“DIO”) resulted in a net loss of $1.7 million and $1.6 million on an after-tax basis for the nine months ended September 30, 2015 and 2014, respectively.  The equity earnings of DIO include 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 loss recorded through DIO’s net income for the first nine months of 2015 was approximately $2.4 million. For the nine months ended September 30, 2014, the mark-to-market net income recorded through DIO’s net income was approximately $0.9 million. During the three months ended September 30, 2015, the Company sold the DIO convertible bonds. As part of the disposition of the convertible bonds, the Company requested to relinquish its two board seats on the DIO Board of Directors. Subsequent to September 30, 2015, the Company no longer has representation on the DIO Board of Directors and as a result the Company no longer has significant influence on the operations of DIO. The Company will begin accounting for the remaining direct investment using the cost-basis method of accounting effective in the fourth quarter of 2015.

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 (“adjusted EPS”). The Company discloses adjusted net income attributable to DENTSPLY International to allow investors to evaluate the performance of the Company’s operations exclusive of certain items that impact the comparability of results from period to period and may not be indicative of past or future performance of the normal operations of the Company and certain large non-cash charges related to purchased intangible assets. The Company believes that this information is helpful in understanding underlying operating trends and cash flow generation.


47



Adjusted net income and adjusted EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes adjusted net income and adjusted EPS and the performance of the Company is measured on this basis along with other performance metrics.

The adjusted net income attributable to DENTSPLY International consists of net income attributable to DENTSPLY International adjusted to exclude the net of tax impact of the following:

(1) Business combination related costs. These adjustments include costs related to integrating and consummating recently acquired businesses and costs, gains and losses related to the disposal of businesses or product lines. These items are irregular in timing and as such may not be indicative of past and future performance of the Company and are therefore excluded to allow investors to better understand underlying operating trends.
(2) Restructuring, restructuring program related costs and other costs. These adjustments include costs related to the implementation of restructuring initiatives as well as certain other costs. These costs can include, but are not limited to, severance costs, facility closure costs, lease and contract terminations costs, related professional service costs, duplicate facility and labor costs associated with specific restructuring initiatives, as well as, legal settlements and impairments of assets. These items are irregular in timing, amount and impact to the Company’s financial performance. As such, these items may not be indicative of past and future performance of the Company and are therefore excluded for the purpose of understanding underlying operating trends.
(3) Amortization of purchased intangible assets. This adjustment excludes the periodic amortization expense related to purchased intangible assets. Beginning in 2011, the Company began recording large non-cash charges related to the values attributed to purchased intangible assets. As such, amortization expense has been excluded from adjusted net income attributed to DENTSPLY International to allow investors to evaluate and understand operating trends excluding these large non-cash charges.
(4) Credit risk and fair value adjustments. These adjustments include both the cost and income impacts of adjustments in certain assets and liabilities including the Company’s pension obligations, that are recorded through net income which are due solely to the changes in fair value and credit risk. These items can be variable and driven more by market conditions than the Company’s operating performance. As such, these items may not be indicative of past and future performance of the Company and therefore are excluded for comparability purposes.
(5) Certain fair value adjustments related to an unconsolidated affiliated company. This adjustment represents the fair value adjustment of the unconsolidated affiliated company’s convertible debt instrument held by the Company. The affiliate is accounted for under the equity method of accounting. The fair value adjustment is driven by open market pricing of the affiliate’s equity instruments, which has a high degree of variability and may not be indicative of the operating performance of the affiliate or the Company.
(6) Income tax related adjustments. These adjustments include both income tax expenses and income tax benefits that are representative of income tax adjustments mostly related to prior periods, as well as the final settlement of income tax audits, and discrete tax items resulting from the implementation of restructuring initiatives. These adjustments are irregular in timing and amount and may significantly impact the Company’s operating performance. As such, these items may not be indicative of past and future performance of the Company and therefore are excluded for comparability purposes.
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 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.


48



 
 
Nine Months Ended September 30, 2015
(in millions, except per share amounts)
 
Net Income
 
Per Diluted
Common Share
 
 
 
 
 
Net income attributable to DENTSPLY International
 
$
192.6

 
$
1.35

Restructuring, restructuring program related costs and other costs, net of tax
 
53.9

 
0.38

Amortization of purchased intangible assets, net of tax
 
22.9

 
0.16

Business combination related costs, net of tax
 
5.5

 
0.04

Credit risk and fair value adjustments, net of tax
 
4.1

 
0.03

Income tax related adjustments
 
3.1

 
0.02

Certain fair value adjustments related to an unconsolidated affiliated company, net of tax
 
(1.7
)
 
(0.01
)
Adjusted non-US GAAP earnings
 
$
280.4

 
$
1.97

 
 
Nine Months Ended September 30, 2014
(in millions, except per share amounts)
 
Net Income
 
Per Diluted
Common Share
 
 
 
 
 
Net income attributable to DENTSPLY International
 
$
238.1

 
$
1.65

Amortization of purchased intangible assets, net of tax
 
25.7

 
0.18

Restructuring, restructuring program related costs and other costs, net of tax
 
4.1

 
0.03

Business combination related costs, net of tax
 
3.8

 
0.02

Income tax related adjustments
 
3.5

 
0.02

Credit risk and fair value adjustments, net of tax
 

 

Certain fair value adjustments related to an unconsolidated affiliated company, net of tax
 
(0.8
)
 

Adjusted non-US GAAP earnings
 
$
274.4

 
$
1.90


Adjusted Operating Income and Margin

Adjusted operating income and margin is another important internal measure for the Company. Operating income in accordance with US GAAP is adjusted for the items noted above which are excluded on a pre-tax basis to arrive at adjusted operating income, a non-US GAAP measure. The adjusted operating margin is calculated by dividing adjusted operating income by net sales, excluding precious metal content.

Senior management receives a monthly analysis of operating results that includes adjusted operating income. The performance of the Company is measured on this basis along with the adjusted non-US GAAP earnings noted above as well as other performance metrics. Adjusted operating income is considered a measure not calculated in accordance with accounting principles generally accepted in the United States; therefore, it is a non-US GAAP measure. This non-US GAAP measure may differ from other companies and should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with US GAAP.


49



 
 
Nine Months Ended
 
 
September 30, 2015
(in millions)
 
Operating Income
 
Percentage of Net Sales, Excluding Precious Metal Content
 
 
 
 
 
Operating income attributable to DENTSPLY International
 
$
282.1

 
14.6
%
Restructuring, restructuring program related costs and other costs
 
65.7

 
3.4
%
Amortization of purchased intangible assets
 
32.8

 
1.7
%
Credit risk and fair value adjustments
 
6.0

 
0.3
%
Business combination related costs
 
5.7

 
0.3
%
Adjusted non-US GAAP Operating Income
 
$
392.3

 
20.3
%
 
 
Nine Months Ended
 
 
September 30, 2014
(in millions)
 
Operating Income
 
Percentage of Net Sales, Excluding Precious Metal Content
 
 
 
 
 
Operating income attributable to DENTSPLY International
 
$
342.3

 
16.3
%
Amortization of purchased intangible assets
 
36.4

 
1.7
%
Restructuring, restructuring program related costs and other costs
 
5.9

 
0.3
%
Business combination related costs
 
5.6

 
0.3
%
Adjusted non-US GAAP Operating Income
 
$
390.2

 
18.6
%

Operating Segment Results

Third Party Net Sales, Excluding Precious Metal Content
 
 
Nine Months Ended
 
 
 
 
 
 
September 30,
 
 
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
 
$
886.1

 
$
929.4

 
$
(43.3
)
 
(4.7
%)
 
 
 
 
 
 
 
 
 
Healthcare, Orthodontic and Implant Businesses
 
714.6

 
790.3

 
(75.7
)
 
(9.6
%)
 
 
 
 
 
 
 
 
 
Select Developed and Emerging Markets Businesses
 
334.9

 
382.0

 
(47.1
)
 
(12.3
%)

Segment Operating Income (Loss)
 
 
Nine Months Ended
 
 
 
 
 
 
September 30,
 
 
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Dental Consumables, Endodontic and Dental Laboratory Businesses
 
$
322.1

 
$
325.6

 
$
(3.5
)
 
(1.1
%)
 
 
 
 
 
 
 
 
 
Healthcare, Orthodontic and Implant Businesses
 
82.5

 
83.5

 
(1.0
)
 
(1.2
%)
 
 
 
 
 
 
 
 
 
Select Developed and Emerging Markets Businesses
 
(10.7
)
 
(4.2
)
 
(6.5
)
 
NM

NM - Not meaningful

50




Dental Consumables, Endodontic and Dental Laboratory Businesses

Net sales, excluding precious metal content, decreased $43.3 million, or 4.7% for the nine months ended September 30, 2015 compared to the same period in 2014.  On a constant currency basis, net sales, excluding precious metal content, increased 1.7% as compared to the same period in 2014 as a result of sales growth in the Dental Consumable businesses partially offset by Dental Laboratory businesses.

Operating income decreased $3.5 million, or 1.1%, for the nine months ended September 30, 2015 compared to 2014. The decrease in operating income was primarily the result of negative foreign currency translation and expenses related to the announced reorganization of the Dental Laboratory businesses.

Healthcare, Orthodontic and Implant Businesses

Net sales, excluding precious metal content, decreased $75.7 million, or 9.6% for the nine months ended September 30, 2015 compared to 2014. On a constant currency basis, net sales, excluding precious metal content, increased 1.9% as compared to the same period in 2014 due to increased sales growth in the Implants and Healthcare businesses.

Operating income decreased $1.0 million, or 1.2%, compared to the same period in 2014. The decrease was primarily the result of negative foreign currency translation.

Select Developed and Emerging Markets Businesses

Net sales, excluding precious metal content, decreased $47.1 million, or 12.3% for the nine months ended September 30, 2015 compared to 2014.  On a constant currency basis, net sales, excluding precious metal content, increased 2.7% when compared to the same period of 2014.  The increase was led by growth in the Emerging Markets businesses.

Operating income decreased $6.5 million during the nine months ended September 30, 2015 compared to 2014 primarily as a result of increased operating expenses in the Emerging Markets businesses, excluding the impact of foreign currency translation.

CRITICAL ACCOUNTING POLICIES

Except as noted below, there have been no other significant material changes to the critical accounting policies as disclosed in the Company’s Form 10-K for the year ended December 31, 2014, as revised on Form 8-K filed October 28, 2015.

Annual Goodwill Impairment Testing

Goodwill

Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicators of impairment exist or if a decision is made to sell a business. The valuation date for annual impairment testing is April 30.

The performance of the Company's 2015 annual impairment test did not result in any impairment of the Company's goodwill. The weighted average cost of capital (“ WACC”) rates utilized in the 2015 analysis ranged from 7.6% to 12.5%. Had the WACC rate of each of the Company's reporting units been hypothetically increased by 100 basis points at April 30, 2015, the fair value of those reporting units would still exceed net book value.  If the fair value of each of the Company's reporting units had been hypothetically reduced by 5% at April 30, 2015, the fair value of those reporting units would still exceed net book value. If the fair value of each of the Company's reporting units had been hypothetically reduced by 10% at April 30, 2015, three reporting units, one reporting unit within each of the Company’s three segments, would have a fair value that would approximate net book value. Goodwill for the reporting unit within the Healthcare, Orthodontic and Implant Businesses segment totals $65.3 million at September 30, 2015. Goodwill for the reporting unit within the Dental Consumables, Endodontic and Dental Laboratory Businesses segment totals $119.8 million. Goodwill for the reporting unit within the Select Developed and Emerging Markets Businesses segment totals $12.1 million. To the extent that future operating results of the reporting units do not meet the forecasted cash flows the Company can provide no assurance that a future goodwill impairment charge would not be incurred.






51



Indefinite-Lived Assets

Indefinite-lived intangible assets consist of tradenames and are not subject to amortization; instead, they are tested for impairment annually or more frequently if indicators of impairment exist or if a decision is made to sell a business. The valuation date for annual impairment testing is April 30.

The performance of the Company’s 2015 annual impairment test did not result in any impairment of the Company’s indefinite-lived assets. If the fair value of each of the Company’s indefinite-lived intangibles assets had been hypothetically reduced by 10% or the discount rate had been hypothetically increased by 50 basis points at April 30, 2015, the fair value of these assets would still exceed their book value.

LIQUIDITY AND CAPITAL RESOURCES

Nine months ended September 30, 2015

Cash flow from operating activities during the nine months ended September 30, 2015 was $371.0 million compared to $367.8 million during the nine months ended September 30, 2014. The year over year increase in the first nine months’ cash from operations of $3.2 million was primarily related to changes in working capital offset partially by lower net income, after adjusting for non-cash items. The Company’s cash and cash equivalents increased by $84.8 million to $236.4 million during the nine months ended September 30, 2015.

For the nine months ended September 30, 2015, the number of days of sales outstanding in accounts receivable increased by five days to 60 days as compared to 55 days at December 31, 2014. On a constant currency basis, the number of days of sales in inventory increased by two days to 115 days at September 30, 2015 as compared to 113 days at December 31, 2014.

The cash provided by investing activities during the first nine months of 2015 included proceeds from the redemption of corporate bonds of $47.7 million and settlements of derivative contracts of $22.4 million, partially offset by capital expenditures of $51.7 million. The Company expects capital expenditures to be in the range of approximately $65.0 million to $80.0 million for the full year 2015. Financing cash flows includes a payment of $80.4 million for the purchase of the remaining minority shares in a business.

At September 30, 2015, 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. Under this program, the Company repurchased 2.1 million shares during the first nine months of 2015 for $112.7 million. As of September 30, 2015, the Company held 23.0 million shares of treasury stock. The Company received proceeds of $27.2 million as a result of the exercise of 0.8 million of stock options during the nine months ended September 30, 2015.

The Company's total borrowings decreased by a net $106.9 million during the nine months ended September 30, 2015, which includes an increase of $1.2 million due to exchange rate fluctuations on debt denominated in foreign currencies. At September 30, 2015, the Company's ratio of total net debt to total capitalization was 28.7% compared to 32.3% at December 31, 2014. 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.

On February 19, 2015 the Company paid the second required payment of $100.0 million under the Private Placement Notes due February 2016 by issuing commercial paper at that time. The final required payment of $75.0 million under the Private Placement Notes is due in February 2016 and has been classified as current in the Consolidated Balance Sheet.

The Company is obligated to pay annual principal amortization of $8.8 million representing a 5% mandatory principal amortization due in each of the first six years under the terms of the PNC Term Loan with a final maturity of August 25, 2020. On August 26, 2015, the Company paid the second required payment of $8.8 million under the PNC Term Loan. The third annual installment in the amount of $8.8 million will be due in August 2016 and has been classified as current in the Consolidated Balance Sheet.

Under its five-year multi-currency revolving credit agreement, the Company is able to borrow up to $500.0 million through July 23, 2019, and up to $452.0 million through July 23, 2020. 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 September 30, 2015, 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 serves as a

52



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 September 30, 2015, there were no outstanding borrowings under the multi-currency revolving facility.

The Company also has access to $56.4 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 September 30, 2015, the Company had $3.0 million outstanding under these short-term lines of credit. At September 30, 2015, the Company had total unused lines of credit related to the revolving credit agreement and the uncommitted short-term lines of credit of $553.4 million.

At September 30, 2015, the Company held $47.8 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 September 30, 2015, 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 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 2015 utilizing the available commercial paper and the revolving credit facilities as well as other sources of credit.

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, 2014, as revised on Form 8-K filed October 28, 2015.

On October 29, 2015, the Company announced the commencement of a tender offer to purchase for cash up to $150.0 million aggregate principle of its outstanding 4.125% Notes due August 2021.  Concurrent with this tender offer, the Company intends to arrange new unsecured debt financing in an amount sufficient to fund the total consideration payable pursuant to the tender offer.  The total consideration payable is estimated at $160.3 million, which includes the cost of the early tender premium under the existing note agreement and fees.  Should the Company not be able to secure new debt financing sufficient to satisfy the tender offer, the Company intends to use available funds, borrowings available under lines of credit, including lines available under short term arrangements and revolving credit agreement.

The Company continues to review its debt portfolio and may refinance additional debt in the near-term as interest rates remain at historically low levels.

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, 2014, as revised on Form 8-K filed October 28, 2015.

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 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

53



be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, 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 quarter ended September 30, 2015 that have materially affected, or are likely to materially affect, its internal control over financial reporting.



54



PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Reference to Part I, Item 1, Note 15, Commitments and Contingencies, to the Unaudited Interim Consolidated Financial Statements.

Item 1A – Risk Factors

Except as noted below, 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, 2014, as revised on Form 8-K filed October 28, 2015.

The proposed business combination transaction between the Company and Sirona Dental Systems, Inc. may present certain risks to the Company's business and operations.

On September 15, 2015 the Company and Sirona Dental Systems, Inc. (“Sirona”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for a “merger of equals” business combination transaction. Pursuant to the terms of the Merger Agreement, which was approved by the boards of directors of the Company and Sirona, each outstanding share of Sirona common stock will be converted into the right to receive 1.8142 shares of Company common stock.  The Company expects the transaction, which is subject to the adoption of the Merger Agreement by Sirona's stockholders, the approval of the issuance of the Company common stock and the adoption of the Company’s amended and restated certificate of incorporation by the Company’s stockholders, as well as obtaining certain regulatory clearances and the satisfaction or waiver of the closing conditions contained in the Merger Agreement, to close in the first quarter of 2016.

The merger may present certain risks to the Company’s business and operations prior to the closing of the merger, including, among other things, risks that:

uncertainties associated with the merger may cause a loss of management personnel and other key employees which could adversely affect the future business and operations of the Company or the combined company after the merger;
failure to complete the merger could negatively impact the stock prices and the future business and financial results of the Company; and
the merger agreement contains provisions that could discourage a potential competing acquiror of the Company.

In addition, certain risks may continue to exist after the closing of the merger, including, among other things, risks that:

any delay in completing the merger may reduce or eliminate the benefits expected to be achieved thereunder;
the merger is subject to the receipt of consents and clearances from domestic and foreign regulatory authorities that may impose conditions that could have an adverse effect on the Company or the combined company after the merger or, if not obtained, could prevent completion of the merger;
the combined company may be unable to integrate successfully the businesses of the Company and Sirona and realize the anticipated benefits of the merger;
the merger may not be accretive and may cause dilution to the combined company’s adjusted earnings per share, which may negatively affect the market price of the combined company’s common stock;
the future results of the combined company will suffer if the combined company does not effectively manage its expanded operations following the merger; and
the combined company is expected to incur substantial expenses related to the merger and the integration of the Company and Sirona.

These risks, as they relate to the Company as part of the combined company and additional risks associated with the merger, are described in more detail under the heading “Risk Factors” in the preliminary joint proxy statement/prospectus contained in the Company’s Registration Statement on Form S-4, which was filed with the Securities and Exchange Commission on October 29, 2015.





55



Item 2 – Unregistered Sales of Securities and Use of Proceeds

Issuer Purchases of Equity Securities

At September 30, 2015, 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 September 30, 2015, the Company had the following activity with respect to this repurchase program:

(in millions, 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
 
 
 
 
 
 
 
 
 
July 1, 2015 to July 31, 2015
 
0.2

 
$
56.72

 
$
8.7

 
11.1

August 1, 2015 to August 31, 2015
 
0.1

 
56.37

 
2.8

 
11.0

September 1, 2015 to September 30, 2015
 

 
53.55

 
2.2

 
11.0

 
 
0.3

 
$
56.12

 
$
13.7

 




56



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, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


DENTSPLY International Inc.

/s/
Bret W. Wise
 
October 30, 2015
 
Bret W. Wise
 
Date
 
Chairman of the Board and
 
 
 
Chief Executive Officer
 
 

/s/
Christopher T. Clark
 
October 30, 2015
 
Christopher T. Clark
 
Date
 
President and
 
 
 
Chief Financial Officer
 
 

57