UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20152016
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 InternationalSIRONA 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 | | 17405-255817401-2991 |
(Address of principal executive offices) | | (Zip Code) |
(717) 845-7511
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | |
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At
July 21, 2015,28, 2016, DENTSPLY InternationalSIRONA Inc. had 139,808,237233,012,331 shares of Common Stock outstanding, with a par value of $.01 per share.
DENTSPLY InternationalSIRONA Inc.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
DENTSPLY INTERNATIONALSIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands,millions, except per share amounts)
(unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | | | | | | | |
Net sales | $ | 698,006 |
| | $ | 765,225 |
| | $ | 1,354,326 |
| | $ | 1,495,339 |
| $ | 1,022.0 |
| | $ | 698.0 |
| | $ | 1,794.6 |
| | $ | 1,354.3 |
|
Cost of products sold | 298,345 |
| | 340,756 |
| | 581,297 |
| | 676,665 |
| 495.1 |
| | 298.3 |
| | 848.8 |
| | 581.3 |
|
| | | | | | | | | | | | | | |
Gross profit | 399,661 |
| | 424,469 |
| | 773,029 |
| | 818,674 |
| 526.9 |
| | 399.7 |
| | 945.8 |
| | 773.0 |
|
Selling, general and administrative expenses | 274,979 |
| | 296,121 |
| | 545,212 |
| | 583,963 |
| 402.1 |
| | 275.0 |
| | 744.2 |
| | 545.2 |
|
Restructuring and other costs | 38,881 |
| | 1,242 |
| | 44,307 |
| | 2,035 |
| 3.6 |
| | 38.9 |
| | 7.7 |
| | 44.3 |
|
| | | | | | | | | | | | | | |
Operating income | 85,801 |
| | 127,106 |
| | 183,510 |
| | 232,676 |
| 121.2 |
| | 85.8 |
| | 193.9 |
| | 183.5 |
|
| | | | | | | | | | | | | | |
Other income and expenses: | |
| | |
| | |
| | |
| |
| | |
| | | | |
Interest expense | 9,824 |
| | 11,798 |
| | 20,492 |
| | 22,753 |
| 9.3 |
| | 9.8 |
| | 18.5 |
| | 20.5 |
|
Interest income | (660 | ) | | (1,744 | ) | | (1,402 | ) | | (3,179 | ) | (0.4 | ) | | (0.7 | ) | | (0.9 | ) | | (1.4 | ) |
Other expense (income), net | (376 | ) | | 575 |
| | 232 |
| | 963 |
| (11.5 | ) | | (0.3 | ) | | (14.9 | ) | | 0.2 |
|
| | | | | | | | | | | | | | |
Income before income taxes | 77,013 |
| | 116,477 |
| | 164,188 |
| | 212,139 |
| 123.8 |
| | 77.0 |
| | 191.2 |
| | 164.2 |
|
Provision for income taxes | 24,775 |
| | 26,096 |
| | 43,628 |
| | 48,548 |
| |
Provision (benefit) for income taxes | | 17.9 |
| | 24.8 |
| | (40.0 | ) | | 43.6 |
|
Equity in net loss of unconsolidated affiliated company | (8,174 | ) | | (367 | ) | | (12,541 | ) | | (657 | ) | — |
| | (8.1 | ) | | — |
| | (12.6 | ) |
| | | | | | | | | | | | | | |
Net income | 44,064 |
| | 90,014 |
| | 108,019 |
| | 162,934 |
| 105.9 |
| | 44.1 |
| | 231.2 |
| | 108.0 |
|
Less: Net (loss) income attributable to noncontrolling interests | (35 | ) | | 21 |
| | (42 | ) | | 63 |
| |
| | | | | | | | | | | | | | |
Net income attributable to DENTSPLY International | $ | 44,099 |
| | $ | 89,993 |
| | $ | 108,061 |
| | $ | 162,871 |
| |
Less: Net income (loss) attributable to noncontrolling interests | | 0.5 |
| | — |
| | 0.8 |
| | (0.1 | ) |
| | | | | | | | |
Net income attributable to Dentsply Sirona | | $ | 105.4 |
| | $ | 44.1 |
| | $ | 230.4 |
| | $ | 108.1 |
|
| | | | | | | | | | | | | | |
Earnings per common share: | |
| | |
| | |
| | |
| |
| | |
| | | | |
Basic | $ | 0.32 |
| | $ | 0.63 |
| | $ | 0.77 |
| | $ | 1.15 |
| $ | 0.45 |
| | $ | 0.32 |
| | $ | 1.13 |
| | $ | 0.77 |
|
Diluted | $ | 0.31 |
| | $ | 0.62 |
| | $ | 0.76 |
| | $ | 1.13 |
| $ | 0.44 |
| | $ | 0.31 |
| | $ | 1.11 |
| | $ | 0.76 |
|
| | | | | | | | | | | | | | |
Weighted average common shares outstanding: | |
| | |
| | |
| | |
| |
| | |
| | | | |
Basic | 139,813 |
| | 141,790 |
| | 140,054 |
| | 141,921 |
| 233.7 |
| | 139.8 |
| | 204.2 |
| | 140.1 |
|
Diluted | 142,262 |
| | 144,164 |
| | 142,521 |
| | 144,288 |
| 237.4 |
| | 142.3 |
| | 207.9 |
| | 142.5 |
|
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
DENTSPLY INTERNATIONALSIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)millions)
(unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | | | | | | | |
Net income | $ | 44,064 |
| | $ | 90,014 |
| | $ | 108,019 |
| | $ | 162,934 |
| $ | 105.9 |
| | $ | 44.1 |
| | $ | 231.2 |
| | $ | 108.0 |
|
| | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | |
Foreign currency translation adjustments | 75,972 |
| | (27,640 | ) | | (112,932 | ) | | (28,675 | ) | (92.8 | ) | | 76.0 |
| | 94.0 |
| | (112.9 | ) |
Net (loss) gain on derivative financial instruments | (16,824 | ) | | 440 |
| | 7,928 |
| | 2,197 |
| |
Net unrealized holding gain (loss) on available-for-sale securities | 39,416 |
| | (1,762 | ) | | 70,267 |
| | (3,803 | ) | |
Net gain (loss) on derivative financial instruments | | 8.5 |
| | (16.8 | ) | | (16.3 | ) | | 7.9 |
|
Net unrealized holding gain on available-for-sale securities | | — |
| | 39.4 |
| | — |
| | 70.3 |
|
Pension liability adjustments | (8 | ) | | 823 |
| | 1,409 |
| | 1,141 |
| 0.9 |
| | — |
| | 1.8 |
| | 1.4 |
|
Total other comprehensive income (loss), net of tax | 98,556 |
| | (28,139 | ) | | (33,328 | ) | | (29,140 | ) | (83.4 | ) | | 98.6 |
| | 79.5 |
| | (33.3 | ) |
| | | | | | | | | | | | | | |
Total comprehensive income | 142,620 |
| | 61,875 |
| | 74,691 |
| | 133,794 |
| 22.5 |
| | 142.7 |
| | 310.7 |
| | 74.7 |
|
| | | | | | | | | | | | | | |
Less: Comprehensive income (loss) attributable | |
| | |
| | |
| | |
| |
Less: Comprehensive income attributable | | |
| | |
| | | | |
to noncontrolling interests | (40 | ) | | (254 | ) | | 500 |
| | (140 | ) | 0.5 |
| | — |
| | 0.9 |
| | 0.5 |
|
| | | | | | | | | | | | | | |
Comprehensive income attributable to | | | | | | | | | | | | | | |
DENTSPLY International | $ | 142,660 |
| | $ | 62,129 |
| | $ | 74,191 |
| | $ | 133,934 |
| |
Dentsply Sirona | | $ | 22.0 |
| | $ | 142.7 |
| | $ | 309.8 |
| | $ | 74.2 |
|
|
|
| |
|
| |
|
| |
|
|
|
| |
|
| | | | |
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
DENTSPLY INTERNATIONALSIRONA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands,millions, except per share amounts)
(unaudited)
| | | June 30, 2015 | | December 31, 2014 | June 30, 2016 | | December 31, 2015 |
Assets | | | | | | |
Current Assets: | | | | | | |
Cash and cash equivalents | $ | 96,472 |
| | $ | 151,639 |
| $ | 311.6 |
| | $ | 284.6 |
|
Accounts and notes receivables-trade, net | 447,500 |
| | 426,606 |
| 637.2 |
| | 399.9 |
|
Inventories, net | 374,820 |
| | 387,095 |
| 523.1 |
| | 340.4 |
|
Prepaid expenses and other current assets, net | 351,538 |
| | 241,630 |
| 266.5 |
| | 171.8 |
|
| | | | | | |
Total Current Assets | 1,270,330 |
| | 1,206,970 |
| 1,738.4 |
| | 1,196.7 |
|
| | | | | | |
Property, plant and equipment, net | 568,036 |
| | 588,845 |
| 794.1 |
| | 558.8 |
|
Identifiable intangible assets, net | 616,669 |
| | 670,840 |
| 3,028.5 |
| | 600.7 |
|
Goodwill, net | 1,998,608 |
| | 2,089,339 |
| 5,794.7 |
| | 1,987.6 |
|
Other noncurrent assets, net | 43,113 |
| | 90,465 |
| 95.7 |
| | 59.1 |
|
| | | | | | |
Total Assets | $ | 4,496,756 |
| | $ | 4,646,459 |
| $ | 11,451.4 |
| | $ | 4,402.9 |
|
| | | | | | |
Liabilities and Equity | |
| | |
| |
| | |
|
Current Liabilities: | |
| | |
| |
| | |
|
Accounts payable | $ | 132,966 |
| | $ | 132,611 |
| $ | 227.1 |
| | $ | 133.6 |
|
Accrued liabilities | 296,280 |
| | 379,202 |
| 466.1 |
| | 310.1 |
|
Income taxes payable | 64,023 |
| | 28,948 |
| 19.5 |
| | 20.2 |
|
Notes payable and current portion of long-term debt | 119,704 |
| | 111,823 |
| 9.8 |
| | 12.1 |
|
| | | | | | |
Total Current Liabilities | 612,973 |
| | 652,584 |
| 722.5 |
| | 476.0 |
|
| | | | | | |
Long-term debt | 1,077,779 |
| | 1,150,084 |
| 1,171.8 |
| | 1,141.0 |
|
Deferred income taxes | 155,587 |
| | 165,551 |
| 849.8 |
| | 160.3 |
|
Other noncurrent liabilities | 334,128 |
| | 356,042 |
| 391.7 |
| | 286.2 |
|
| | | | | | |
Total Liabilities | 2,180,467 |
| | 2,324,261 |
| 3,135.8 |
| | 2,063.5 |
|
| | | | | | |
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 June 30, 2015 and December 31, 2014 | 1,628 |
| | 1,628 |
| |
Common stock, $.01 par value; | | 2.6 |
| | 1.6 |
|
400.0 million and 200.0 million shares authorized at June 30, 2016 and December 31, 2015, respectively | | | | |
264.5 million and 162.8 million shares issued at June 30, 2016 and December 31, 2015, respectively | | | | |
233.0 million and 140.1 million shares outstanding at June 30, 2016 and December 31, 2015, respectively. | | | | |
Capital in excess of par value | 225,002 |
| | 221,669 |
| 6,498.8 |
| | 237.8 |
|
Retained earnings | 3,468,364 |
| | 3,380,748 |
| 3,784.7 |
| | 3,591.0 |
|
Accumulated other comprehensive loss | (475,006 | ) | | (441,136 | ) | (514.6 | ) | | (594.0 | ) |
Treasury stock, at cost, 23.0 million and 21.9 million shares at June 30, 2015 and December 31, 2014, respectively | (905,118 | ) | | (841,630 | ) | |
Total DENTSPLY International Equity | 2,314,870 |
| | 2,321,279 |
| |
Treasury stock, at cost, 31.5 million and 22.7 million shares at June 30, 2016 and December 31, 2015, respectively | | (1,460.0 | ) | | (898.4 | ) |
Total Dentsply Sirona Equity | | 8,311.5 |
| | 2,338.0 |
|
| | | | | | |
Noncontrolling interests | 1,419 |
| | 919 |
| 4.1 |
| | 1.4 |
|
| | | | | | |
Total Equity | 2,316,289 |
| | 2,322,198 |
| 8,315.6 |
| | 2,339.4 |
|
| | | | | | |
Total Liabilities and Equity | $ | 4,496,756 |
| | $ | 4,646,459 |
| $ | 11,451.4 |
| | $ | 4,402.9 |
|
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
DENTSPLY INTERNATIONALSIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)millions)
(unaudited)
| | | Six months ended June 30, | Six Months Ended June 30, |
| 2015 | | 2014 | 2016 | | 2015 |
Cash flows from operating activities: | | | | | | |
| | | | | | |
Net income | $ | 108,019 |
| | $ | 162,934 |
| $ | 231.2 |
| | $ | 108.0 |
|
| | | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
| | |
|
Depreciation | 38,782 |
| | 42,325 |
| 55.1 |
| | 38.8 |
|
Amortization | 21,846 |
| | 24,493 |
| 65.6 |
| | 21.8 |
|
Amortization of deferred financing costs | 2,177 |
| | 2,285 |
| 2.1 |
| | 2.2 |
|
Deferred income taxes | 28,697 |
| | (4,893 | ) | (70.5 | ) | | 28.7 |
|
Share-based compensation expense | 11,830 |
| | 13,358 |
| 17.4 |
| | 11.8 |
|
Restructuring and other costs - non-cash | 45,814 |
| | — |
| 3.3 |
| | 45.8 |
|
Stock option income tax benefit | (8,822 | ) | | (349 | ) | |
Excess tax benefits from share-based compensation | | (8.8 | ) | | (8.8 | ) |
Equity in net loss from unconsolidated affiliates | 12,541 |
| | 657 |
| — |
| | 12.6 |
|
Other non-cash income | (13,725 | ) | | (9,110 | ) | (31.5 | ) | | (13.6 | ) |
Loss on disposal of property, plant and equipment | 481 |
| | — |
| 0.5 |
| | 0.5 |
|
Changes in operating assets and liabilities, net of acquisitions: | |
| | |
| |
| | |
|
Accounts and notes receivable-trade, net | (39,997 | ) | | (31,505 | ) | (82.8 | ) | | (40.0 | ) |
Inventories, net | 4,126 |
| | (22,427 | ) | 44.7 |
| | 4.1 |
|
Prepaid expenses and other current assets, net | 1,832 |
| | (6,068 | ) | (8.5 | ) | | 1.8 |
|
Other noncurrent assets, net | 720 |
| | 1,096 |
| 1.6 |
| | 0.7 |
|
Accounts payable | 4,938 |
| | 10,613 |
| 13.9 |
| | 4.9 |
|
Accrued liabilities | (17,678 | ) | | (6,228 | ) | (11.1 | ) | | (17.7 | ) |
Income taxes | (74 | ) | | 35,532 |
| (41.5 | ) | | (0.1 | ) |
Other noncurrent liabilities | 9,738 |
| | 7,532 |
| 7.4 |
| | 9.7 |
|
| | | | | | |
Net cash provided by operating activities | 211,245 |
| | 220,245 |
| 188.1 |
| | 211.2 |
|
| | | | | | |
Cash flows from investing activities: | |
| | |
| |
| | |
|
| | | | | | |
Capital expenditures | (33,434 | ) | | (48,831 | ) | (47.8 | ) | | (33.5 | ) |
Cash assumed in Sirona merger | | 522.3 |
| | — |
|
Cash paid for acquisitions of businesses, net of cash acquired | (3,305 | ) | | (2,009 | ) | (0.4 | ) | | (3.3 | ) |
Cash received from sale of business or product line | | 2.4 |
| | — |
|
Cash received on derivatives contracts | 14,267 |
| | 1,674 |
| 10.7 |
| | 14.3 |
|
Cash paid on derivatives contracts | (810 | ) | | (4,006 | ) | (3.6 | ) | | (0.8 | ) |
Expenditures for identifiable intangible assets | — |
| | (1,316 | ) | |
Purchase of short-term investments | — |
| | (1,135 | ) | |
Purchase of Company-owned life insurance policies | | (1.7 | ) | | — |
|
Proceeds from sale of property, plant and equipment, net | 303 |
| | 277 |
| 4.4 |
| | 0.3 |
|
| | | | | | |
Net cash used in investing activities | (22,979 | ) | | (55,346 | ) | |
Net cash provided by (used in) investing activities | | 486.3 |
| | (23.0 | ) |
| | | | | | |
Cash flows from financing activities: | |
| | |
| |
| | |
|
| | | | | | |
Increase (decrease) in short-term borrowings | 33,370 |
| | (38,087 | ) | |
(Decrease) increase in short-term borrowings | | (3.6 | ) | | 33.4 |
|
Cash paid for treasury stock | (98,975 | ) | | (54,586 | ) | (600.0 | ) | | (99.0 | ) |
Cash dividends paid | (19,640 | ) | | (18,453 | ) | (28.6 | ) | | (19.6 | ) |
Cash paid for acquisition of noncontrolling interests of consolidated subsidiary | (80,452 | ) | | (33 | ) | — |
| | (80.5 | ) |
Proceeds from long-term borrowings | | 79.9 |
| | — |
|
Repayments on long-term borrowings | (100,232 | ) | | (75,371 | ) | (127.5 | ) | | (100.2 | ) |
Proceeds from exercised stock options | 18,597 |
| | 12,736 |
| 20.4 |
| | 18.6 |
|
Excess tax benefits from share-based compensation | 8,822 |
| | 349 |
| 8.8 |
| | 8.8 |
|
| | | | | | |
Net cash used in financing activities | (238,510 | ) | | (173,445 | ) | (650.6 | ) | | (238.5 | ) |
| | | | | | |
Effect of exchange rate changes on cash and cash equivalents | (4,923 | ) | | 521 |
| 3.2 |
| | (4.8 | ) |
| | | | | | |
Net decrease in cash and cash equivalents | (55,167 | ) | | (8,025 | ) | |
Net increase (decrease) in cash and cash equivalents | | 27.0 |
| | (55.1 | ) |
| | | | | | |
Cash and cash equivalents at beginning of period | 151,639 |
| | 74,954 |
| 284.6 |
| | 151.6 |
|
| | | | | | |
Cash and cash equivalents at end of period | $ | 96,472 |
| | $ | 66,929 |
| $ | 311.6 |
| | $ | 96.5 |
|
| | | | |
Schedule of non-cash investing activities: | | | | |
Merger financed by common stock | | $ | 6,256.2 |
| | $ | — |
|
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
DENTSPLY INTERNATIONALSIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands)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 | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Dentsply Sirona Equity | | Noncontrolling Interests | | Total Equity |
Balance at December 31, 2013 | $ | 1,628 |
| | $ | 255,272 |
| | $ | 3,095,721 |
| | $ | (69,062 | ) | | $ | (748,506 | ) | | $ | 2,535,053 |
| | $ | 42,921 |
| | $ | 2,577,974 |
| |
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 | — |
| | — |
| | 162,871 |
| | — |
| | — |
| | 162,871 |
| | 63 |
| | 162,934 |
| — |
| | — |
| | 108.1 |
| | — |
| | — |
| | 108.1 |
| | (0.1 | ) | | 108.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss | — |
| | — |
| | — |
| | (23,407 | ) | | — |
| | (23,407 | ) | | (203 | ) | | (23,610 | ) | — |
| | — |
| | — |
| | (33.9 | ) | | — |
| | (33.9 | ) | | 0.5 |
| | (33.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Acquisition of noncontrolling interest | — |
| | (40,283 | ) | | — |
| | (5,530 | ) | | — |
| | (45,813 | ) | | (41,470 | ) | | (87,283 | ) | |
Exercise of stock options | — |
| | (2,204 | ) | | — |
| | — |
| | 14,940 |
| | 12,736 |
| | — |
| | 12,736 |
| — |
| | (4.7 | ) | | — |
| | — |
| | 23.3 |
| | 18.6 |
| | — |
| | 18.6 |
|
Tax benefit from stock options exercised | — |
| | 349 |
| | — |
| | — |
| | — |
| | 349 |
| | — |
| | 349 |
| — |
| | 8.8 |
| | — |
| | — |
| | — |
| | 8.8 |
| | — |
| | 8.8 |
|
Share based compensation expense | — |
| | 13,358 |
| | — |
| | — |
| | — |
| | 13,358 |
| | — |
| | 13,358 |
| — |
| | 11.8 |
| | — |
| | — |
| | — |
| | 11.8 |
| | — |
| | 11.8 |
|
Funding of Employee Stock Ownership Plan | — |
| | 1,535 |
| | — |
| | — |
| | 4,418 |
| | 5,953 |
| | — |
| | 5,953 |
| — |
| | 1.1 |
| | — |
| | — |
| | 3.6 |
| | 4.7 |
| | — |
| | 4.7 |
|
Treasury shares purchased | — |
| | — |
| | — |
| | — |
| | (54,586 | ) | | (54,586 | ) | | — |
| | (54,586 | ) | — |
| | — |
| | — |
| | — |
| | (99.0 | ) | | (99.0 | ) | | — |
| | (99.0 | ) |
RSU distributions | — |
| | (10,917 | ) | | — |
| | — |
| | 6,653 |
| | (4,264 | ) | | — |
| | (4,264 | ) | — |
| | (13.9 | ) | | — |
| | — |
| | 8.6 |
| | (5.3 | ) | | — |
| | (5.3 | ) |
RSU dividends | — |
| | 164 |
| | (164 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | 0.2 |
| | (0.2 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Cash dividends ($0.13250 per share) | — |
| | — |
| | (18,787 | ) | | — |
| | — |
| | (18,787 | ) | | — |
| | (18,787 | ) | |
Balance at June 30, 2014 | $ | 1,628 |
| | $ | 217,274 |
| | $ | 3,239,641 |
| | $ | (97,999 | ) | | $ | (777,081 | ) | | $ | 2,583,463 |
| | $ | 1,311 |
| | $ | 2,584,774 |
| |
Cash dividends ($0.145 per share) | | — |
| | — |
| | (20.2 | ) | | — |
| | — |
| | (20.2 | ) | | — |
| | (20.2 | ) |
Balance at June 30, 2015 | | $ | 1.6 |
| | $ | 225.0 |
| | $ | 3,468.4 |
| | $ | (475.0 | ) | | $ | (905.1 | ) | | $ | 2,314.9 |
| | $ | 1.3 |
| | $ | 2,316.2 |
|
| | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total DENTSPLY International Equity | | Noncontrolling Interests | | Total Equity | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Dentsply Sirona Equity | | Noncontrolling Interests | | Total Equity |
Balance at December 31, 2014 | $ | 1,628 |
| | $ | 221,669 |
| | $ | 3,380,748 |
| | $ | (441,136 | ) | | $ | (841,630 | ) | | $ | 2,321,279 |
| | $ | 919 |
| | $ | 2,322,198 |
| |
Balance at December 31, 2015 | | $ | 1.6 |
| | $ | 237.8 |
| | $ | 3,591.0 |
| | $ | (594.0 | ) | | $ | (898.4 | ) | | $ | 2,338.0 |
| | $ | 1.4 |
| | $ | 2,339.4 |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net income | — |
| | — |
| | 108,061 |
| | — |
| | — |
| | 108,061 |
| | (42 | ) | | 108,019 |
| — |
| | — |
| | 230.4 |
| | — |
| | — |
| | 230.4 |
| | 0.8 |
| | 231.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss | — |
| | — |
| | — |
| | (33,870 | ) | | — |
| | (33,870 | ) | | 542 |
| | (33,328 | ) | |
Other comprehensive income | | — |
| | — |
| | — |
| | 79.4 |
| | — |
| | 79.4 |
| | 0.1 |
| | 79.5 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock issuance related to Sirona merger | | 1.0 |
| | 6,253.4 |
| | — |
| | — |
| | — |
| | 6,254.4 |
| | 1.8 |
| | 6,256.2 |
|
Exercise of stock options | — |
| | (4,688 | ) | | — |
| | — |
| | 23,285 |
| | 18,597 |
| | — |
| | 18,597 |
| — |
| | (4.5 | ) | | — |
| | — |
| | 24.8 |
| | 20.3 |
| | — |
| | 20.3 |
|
Tax benefit from stock options exercised | — |
| | 8,822 |
| | — |
| | — |
| | — |
| | 8,822 |
| | — |
| | 8,822 |
| — |
| | 8.8 |
| | — |
| | — |
| | — |
| | 8.8 |
| | — |
| | 8.8 |
|
Share based compensation expense | — |
| | 11,830 |
| | — |
| | — |
| | — |
| | 11,830 |
| | — |
| | 11,830 |
| — |
| | 17.4 |
| | — |
| | — |
| | — |
| | 17.4 |
| | — |
| | 17.4 |
|
Funding of Employee Stock Ownership Plan | — |
| | 1,077 |
| | — |
| | — |
| | 3,650 |
| | 4,727 |
| | — |
| | 4,727 |
| — |
| | 2.1 |
| | — |
| | — |
| | 4.2 |
| | 6.3 |
| | — |
| | 6.3 |
|
Treasury shares purchased | — |
| | — |
| | — |
| | — |
| | (98,998 | ) | | (98,998 | ) | | — |
| | (98,998 | ) | — |
| | — |
| | — |
| | — |
| | (600.0 | ) | | (600.0 | ) | | — |
| | (600.0 | ) |
RSU distributions | — |
| | (13,878 | ) | | — |
| | — |
| | 8,575 |
| | (5,303 | ) | | — |
| | (5,303 | ) | — |
| | (16.5 | ) | | — |
| | — |
| | 9.4 |
| | (7.1 | ) | | — |
| | (7.1 | ) |
RSU dividends | — |
| | 170 |
| | (170 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | 0.3 |
| | (0.3 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Cash dividends ($0.14500 per share) | — |
| | — |
| | (20,275 | ) | | — |
| | — |
| | (20,275 | ) | | — |
| | (20,275 | ) | |
Balance at June 30, 2015 | $ | 1,628 |
| | $ | 225,002 |
| | $ | 3,468,364 |
| | $ | (475,006 | ) | | $ | (905,118 | ) | | $ | 2,314,870 |
| | $ | 1,419 |
| | $ | 2,316,289 |
| |
Cash dividends ($0.155 per share) | | — |
| | — |
| | (36.4 | ) | | — |
| | — |
| | (36.4 | ) | | — |
| | (36.4 | ) |
Balance at June 30, 2016 | | $ | 2.6 |
| | $ | 6,498.8 |
| | $ | 3,784.7 |
| | $ | (514.6 | ) | | $ | (1,460.0 | ) | | $ | 8,311.5 |
| | $ | 4.1 |
| | $ | 8,315.6 |
|
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
DENTSPLY InternationalSIRONA 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 StatesU.S. 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.US GAAP. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Results for interim periods should not be considered indicative of results for a full year. These financial statements and related notes contain the accounts of DENTSPLY InternationalSIRONA Inc. and Subsidiaries (“DENTSPLY”Dentsply Sirona” or the “Company”) on a consolidated basis and should be read in conjunction with the consolidated financial statements and notes included in the Company’sDENTSPLY International Inc.’s most recent Form 10-K for the year ended December 31, 2014.2015.
On February 29, 2016, DENTSPLY International Inc. merged with Sirona Dental Systems, Inc. (“Sirona”) to form DENTSPLY SIRONA Inc. The accompanying unaudited interim Consolidated Statements of Operations for the three and six months ended June 30, 2016 include the results of operations for Sirona for the period February 29, 2016 to June 30, 2016. The accompanying unaudited interim Consolidated Balance Sheets at June 30, 2016 includes Sirona’s acquired assets and assumed liabilities. See Note 5, Business Combinations, for additional information about the merger.
Reference throughout this Form 10-Q to “DENTSPLY”, or the “Company” refers to financial information and transactions of DENTSPLY International Inc. prior to February 29, 2016 and DENTSPLY SIRONA Inc, or the “Company”, thereafter.
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’sDENTSPLY’s Form 10-K for the year ended December 31, 2014,2015, except as may be indicated below:
Accounts and Notes Receivable
The Company records a provision for doubtful accounts, which is included in “Selling,Selling, general and administrative expenses”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 $9.2$19.2 millionat at June 30, 20152016 and $8.8$10.7 million at December 31, 2014.2015.
Marketable Securities
The Company’s marketable securities consistCompany accounts for its direct investment in the DIO Corporation (“DIO”) using the cost-basis method of corporate convertible bonds that are classified as available-for-sale in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets as the instruments mature in December 2015. The Company determined the appropriate classification at the time of purchase and will re-evaluate such designation as of each balance sheet date. In addition, the Company reviews the securities each quarter for indications of possible impairment. If an impairment is identified, the determination of whether the impairment is temporary or other-than-temporary requires significant judgment. The primary factors that the Company considers in making this judgment include the extent and timeaccounting. At June 30, 2016, the fair value of eachthe direct investment has been below cost and the existence of a credit loss. If a decline in fair value is judged other-than-temporary, the basis of the securities is written down to fair value and the amount of the write-down is included as a realized loss in the Consolidated Statement of Operations. Changes in fair value are reported in accumulated other comprehensive income (“AOCI”).
The convertible element of the bonds has not been bifurcated from the underlying bonds as the element does not contain a net-settlement feature, nor would the Company be able to achieve a hypothetical net-settlement that would substantially place the Company in a comparable cash settlement position. As such, the derivative is not accounted for separately from the bond. The cash paid by the Company was equal to the face value of the bonds issued, and therefore, the Company has not recorded any bond premium or discount on acquiring the bonds. The fair value of the bonds was $153.6 million and $57.7 million at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015 and December 31, 2014, a cumulative unrealized holding gain of $70.3 million and $8.5 million, respectively, on available-for-sale securities, net of tax, has been recorded in AOCI. As this investment is held by a euro-denominated subsidiary of the Company, the investment’s value is also impacted by changing foreign currency rates which accounts for the remaining difference between the period end values and the change in cumulative gain.$79.8 million.
New Accounting Pronouncements
In AprilMay 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 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, 2017. Early adoption is not permitted. On April 1,July 9, 2015, the FASB proposedissued ASU No. 2015-14, deferring the effective date by one year to annual reporting periods beginning after December 15, 2017. Early adoption is permitted. In April 2016, the FASB issued ASU No. 2016-10, which clarifies the “identifying performance obligations and licensing implementations guidance” aspects of Topic 606. In May 2016, the FASB issued ASU No. 2016-11, which amends and or rescinds certain aspects of the Accounting Standards Codification (“ASC”) to reflect the requirements under Topic 606. Additionally, the FASB issued ASU No. 2016-12, which clarifies the criteria for assessing collectibility, permits an entity to elect an accounting policy to exclude from the transaction price amounts collected from customers
for all sales taxes, and provides a practical expedient that permits an entity to reflect the aggregate effect of all contract modifications that occur before the beginning of the earliest period presented in accordance with Topic 606. The proposal has not been ratified.Company expects to adopt these accounting standards for the quarter ended March 31, 2018. The Company is currently assessing the impact that ASU No. 2014-09these pronouncements may have on theirits financial positions,position, results of operations, cash flows and disclosures, as well as the transition method theyit will use to adopt the guidanceguidance.
In JanuaryJuly 2015, the FASB issued ASU No. 2015-01,2015-11, “Simplifying Income Statement Presentation by Eliminating the ConceptMeasurement of Extraordinary Items”Inventory.” This newly issued accounting standard eliminatesrequires 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 generally acceptedthis update are the last-in, first-out (“LIFO”) and retail inventory methods of accounting principles the concept of Extraordinary items, events or transactions that are unusual in nature and occur infrequently.for inventory. The amendments in this updatestandard are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015.2016 and for interim periods within fiscal years beginning after December 15, 2017. Prospective application is required for presentation purposes. The Company is currently assessing the impact that this pronouncements may have on its financial position and early adoption is permitted.disclosures.
In September 2015, the FASB issued ASU No. 2015-16, “Simplifying Accounting for Measurement Period Adjustments.” This 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 Company adopted this accounting standard for the quarter ended March 31, 2016. The adoption of this standard isdid not expected tomaterially impact the Company’s financial position or results of operations.
In AprilNovember 2015, the FASB issued ASU No. 2015-03, “Simplifying2015-17, “Balance Sheet Classification of Deferred Taxes.” This accounting standard seeks to simplify the Presentationaccounting related to deferred income taxes. Current US GAAP requires an entity to separate deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) into current and noncurrent amounts for each tax jurisdiction based on the classification of Debt Issuance Costs.the related asset or liability for financial reporting. DTAs and DTLs not related to assets and liabilities for financial reporting are classified based on the expected reversal date. The new standard requires DTAs or DTLs for each tax jurisdictions to be classified as noncurrent in a classified statement of financial position. The adoption of this standard is required for interim and fiscal periods ending after December 15, 2016 and is permitted to be adopted prospectively or retrospectively. The Company is currently assessing the impact that this standard may have on its financial position and disclosures.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This newly issued accounting standard seeks to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information as well as to improve and achieve convergence of the FASB and International Accounting Standards Board (“IASB”) standards on the accounting for financial instruments. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. It also requires enhanced disclosures about those investments and reduces the number of items that debt issuance costs relatedare recognized in other comprehensive income. The adoption of this standard is required for interim and fiscal periods ending after December 15, 2017 and should be applied by means of a cumulative-effect adjustment to a recognized debt liability be presented in the balance sheet as a direct reductionof the beginning of the fiscal year of adoption. The Company is currently assessing the impact that this standard may have on its financial position, results of operations, cash flows and disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases.” This newly issued accounting standard seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Current US GAAP does not require lessees to recognize assets and liabilities arising from operating leases on the balance sheet. This standard also provides guidance from the carrying amountlessees prospective on how to determine if a lease is an operating lease or a financing lease and the differences in accounting for each. The adoption of that debt liability. Retrospective application is required. The amendments in this standard are effectiveis required for interim and fiscal years, and interim periods within those fiscal years, beginningending after December 15, 2015.2018 and it is required to be applied retrospectively using the modified retrospective approach. Early adoption is permitted. The Company adoptedis currently assessing the impact that this standard duringwill have on its financial position, results of operations, cash flows and disclosures.
In March 2016, the second quarterFASB issued ASU No. 2016-09, “Stock Compensation.” This newly issued accounting standard seeks to simplify the accounting for all entities that issue share-based payment awards to their employees. The primary areas of 2015, applying retrospective applicationchange include accounting for income taxes, cash flow statement classification of excess tax benefits and employee taxes paid when an employer withholds shares, accounting for forfeitures and tax withholding requirements. The adoption of this standard is required for interim and fiscal periods ending after December 15, 2016. Early adoption is permitted. Amendments related to the periods presented in this Form 10-Q. The following istiming of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures should be applied using a summarymodified retrospective transition method by means of a cumulative-effect adjustment to equity as of the adjustment tobeginning of the financial statement line items impacted by this accounting update:
|
| | | | | | | | | | | |
December 31, 2014 |
(in thousands) | | As Reported | | | | |
Consolidated Balance Sheet Line Item | | Balance | | Adjustment | | Adjusted Balance |
Other noncurrent assets, net | | $ | 94,271 |
| | (3,806 | ) | | $ | 90,465 |
|
Notes payable and current portion of long-term debt | | 112,831 |
| | (1,008 | ) | | 111,823 |
|
Long-term debt | | 1,152,882 |
| | (2,798 | ) | | 1,150,084 |
|
| | | | | | |
|
| | | | | | | | | | | |
March 31, 2015 |
(in thousands) | | As Reported | | | | |
Consolidated Balance Sheet Line Item | | Balance | | Adjustment | | Adjusted Balance |
Other noncurrent assets, net | | $ | 61,254 |
| | (3,568 | ) | | $ | 57,686 |
|
Notes payable and current portion of long-term debt | | 247,631 |
| | (948 | ) | | 246,683 |
|
Long-term debt | | 1,078,823 |
| | (2,620 | ) | | 1,076,203 |
|
| | | | | | |
period
in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement should be applied prospectively. The Company is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.
NOTE 2 – STOCK COMPENSATION
The following table represents total stock based compensation expense for non-qualified stock options, restricted stock units (“RSU”) and the tax related benefit for the three and six months ended June 30, 20152016 and 2014:2015.
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 | |
(in millions) | | | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | | | | | | | | |
Stock option expense | $ | 2,330 |
| | $ | 2,829 |
| | $ | 3,775 |
| | $ | 4,503 |
| | $ | 3.4 |
| | $ | 2.3 |
| | $ | 5.5 |
| | $ | 3.8 |
|
RSU expense | 4,272 |
| | 4,366 |
| | 7,408 |
| | 8,085 |
| | 8.7 |
| | 4.3 |
| | 11.1 |
| | 7.4 |
|
Total stock based compensation expense | $ | 6,602 |
| | $ | 7,195 |
| | $ | 11,183 |
| | $ | 12,588 |
| | $ | 12.1 |
| | $ | 6.6 |
| | $ | 16.6 |
| | $ | 11.2 |
|
| | | | | | | | | | | | | | | |
Total related tax benefit | $ | 1,838 |
| | $ | 1,979 |
| | $ | 3,385 |
| | $ | 3,543 |
| | $ | 2.8 |
| | $ | 1.8 |
| | $ | 4.1 |
| | $ | 3.4 |
|
For the three and six months ended June 30, 2016, stock compensation expense of $12.1 million and $16.6 million, respectively, of which, $11.9 million and $16.3 million, respectively, was recorded in Selling, general and administrative expenses and $0.2 million and $0.3 million, respectively, was recorded in Cost of products sold on the Consolidated Statements of Operations. For the three and six months ended June 30, 2015, stock compensation expense of $6.6 million and $11.2 million, respectively, of which $6.4 million and $10.8$10.9 million, respectively, was recorded in Selling, general and administrative expense and $0.2 million and $0.3 million, respectively, was recorded in Cost of products sold on the Consolidated Statement of Operations. For the three and six months ended June 30, 2014, stock compensation expense of $7.2 million and $12.6 million, respectively, of which, $7.0 million and $12.2 million, respectively, was recorded in Selling, general and administrative expense and $0.2 million and $0.4 million, respectively, was recorded in Cost of products sold on the Consolidated StatementStatements of Operations.
At June 30, 2015, the remaining unamortized compensation cost related to non-qualified stock options is $13.7 million, which will be expensed over the weighted average remaining vesting period of the options, or approximately 1.8 years. At June 30, 2015, the unamortized compensation cost related to RSU is $26.5 million, which will be expensed over the weighted average remaining restricted period of the RSU, or approximately 1.5 years.
NOTE 3 – COMPREHENSIVE INCOME
During the quarter ended June 30, 20152016, foreign currency translation adjustments included currency translation lossesgains of $74.9$91.4 million and losses of $1.6 million on the Company’s loans designated as hedges of net investments of $0.4 million.investments. During the quarter ended June 30, 20142015, foreign currency translation adjustments included currency translation losses of $20.6$74.9 million and losses of $1.2$0.4 million on the Company’s loans designated as hedges of net investments. During the six months ended June 30, 2016, foreign currency translation adjustments included currency translation gains of $107.2 million and losses of $13.3 million on the Company’s loans designated as hedges of net investments. During the six months ended June 30, 2015, foreign currency translation adjustments included currency translation losses of $113.7 million and losses of $1.2 million on the Company’s loans designated as hedges of net investmentsinvestments. These amounts are recorded in AOCI, net of $1.2 million. During the six months endedany related tax adjustments. At June 30, 2014,2016 and December 31, 2015, the cumulative tax adjustments were $185.5 million and $169.3 million, respectively, primarily related to foreign currency translation adjustments included currency translation losses of $19.7 million and losses on the Company’s loans designated as hedges of net investments of $3.2 million.adjustments.
The cumulative foreign currency translation adjustments included translation losses of $230.7200.3 million and $117.1$307.5 million at June 30, 20152016 and December 31, 2014,2015, respectively, and cumulative losses on loans designated as hedges of net investments of $96.7107.0 million and $95.493.7 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.
Changes in AOCI, net of tax, by component for the six months ended June 30, 20152016 and 2014:2015:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Foreign Currency Translation Adjustments | | Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges | | Gain and (Loss) on Derivative Financial Instruments Designated as Net Investment Hedges | | Net Unrealized Holding Gain (Loss) on Available-for-Sale Securities | | Pension Liability Adjustments | | Total |
| | | | | | | | | | | |
Balance at December 31, 2014 | $ | (212,490 | ) | | $ | (10,825 | ) | | $ | (112,728 | ) | | $ | 8,481 |
| | $ | (113,574 | ) | | $ | (441,136 | ) |
Other comprehensive income (loss) before reclassifications | (114,891 | ) | | 18,446 |
| | (2,345 | ) | | 70,267 |
| | — |
| | (28,523 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | (8,173 | ) | | — |
| | — |
| | 2,826 |
| | (5,347 | ) |
Net (decrease) increase in other comprehensive income | (114,891 | ) | | 10,273 |
| | (2,345 | ) | | 70,267 |
| | 2,826 |
| | (33,870 | ) |
| | | | | | | | | | | |
Balance at June 30, 2015 | $ | (327,381 | ) | | $ | (552 | ) | | $ | (115,073 | ) | | $ | 78,748 |
| | $ | (110,748 | ) | | $ | (475,006 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign Currency Translation Adjustments | | Gain (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges | | Gain (Loss) on Derivative Financial Instruments Designated as Net Investment Hedges | | Pension Liability Adjustments | | Total |
| | | | | | | | | | |
Balance at December 31, 2015 | | $ | (401.2 | ) | | $ | (1.2 | ) | | $ | (110.2 | ) | | $ | (81.4 | ) | | $ | (594.0 | ) |
Other comprehensive income (loss) before reclassifications and tax impact | | 86.0 |
| | (4.6 | ) | | (17.2 | ) | | — |
| | 64.2 |
|
Tax benefit | | 7.9 |
| | 1.7 |
| | 6.6 |
| | — |
| | 16.2 |
|
Other comprehensive income (loss), net of tax, before reclassifications | | 93.9 |
| | (2.9 | ) | | (10.6 | ) | | — |
| | 80.4 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | | — |
| | (2.8 | ) | | — |
| | 1.8 |
| | (1.0 | ) |
Net increase (decrease) in other comprehensive income | | 93.9 |
| | (5.7 | ) | | (10.6 | ) | | 1.8 |
| | 79.4 |
|
Balance at June 30, 2016 | | $ | (307.3 | ) | | $ | (6.9 | ) | | $ | (120.8 | ) | | $ | (79.6 | ) | | $ | (514.6 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Foreign Currency Translation Adjustments | | Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges | | Gain and (Loss) on Derivative Financial Instruments Designated as Net Investment Hedges | | Net Unrealized Holding Gain (Loss)on Available-for-Sale Securities | | Pension Liability Adjustments | | Total |
| | | | | | | | | | | |
Balance at December 31, 2013 | $ | 140,992 |
| | $ | (21,753 | ) | | $ | (151,114 | ) | | $ | 12,729 |
| | $ | (49,916 | ) | | $ | (69,062 | ) |
Other comprehensive income (loss) before reclassifications | (22,942 | ) | | (2,717 | ) | | 849 |
| | (3,803 | ) | | 197 |
| | (28,416 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 4,065 |
| | — |
| | — |
| | 944 |
| | 5,009 |
|
Net (decrease) increase in other comprehensive income | (22,942 | ) | | 1,348 |
| | 849 |
| | (3,803 | ) | | 1,141 |
| | (23,407 | ) |
Foreign currency translation related to acquisition of noncontrolling interests | (5,530 | ) | | — |
| | — |
| | — |
| | — |
| | (5,530 | ) |
Balance at June 30, 2014 | $ | 112,520 |
| | $ | (20,405 | ) | | $ | (150,265 | ) | | $ | 8,926 |
| | $ | (48,775 | ) | | $ | (97,999 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign Currency Translation Adjustments | | Gain (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges | | Gain (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 (loss) income before reclassifications and tax impact | | (107.3 | ) | | 21.0 |
| | (3.4 | ) | | 101.4 |
| | — |
| | 11.7 |
|
Tax expense | | (7.6 | ) | | (2.6 | ) | | 1.0 |
| | (31.1 | ) | | — |
| | (40.3 | ) |
Other comprehensive (loss) income, net of tax, before reclassifications | | (114.9 | ) | | 18.4 |
| | (2.4 | ) | | 70.3 |
| | — |
| | (28.6 | ) |
Amounts reclassified from accumulated other comprehensive (loss) income | | — |
| | (8.2 | ) | | — |
| | — |
| | 2.9 |
| | (5.3 | ) |
Net (decrease) increase in other comprehensive income | | (114.9 | ) | | 10.2 |
| | (2.4 | ) | | 70.3 |
| | 2.9 |
| | (33.9 | ) |
Balance at June 30, 2015 | | $ | (327.4 | ) | | $ | (0.6 | ) | | $ | (115.1 | ) | | $ | 78.8 |
| | $ | (110.7 | ) | | $ | (475.0 | ) |
Reclassifications out of accumulated other comprehensive income (expense) to the Consolidated Statements of Operations for the three and six months ended June 30, 20152016 and 2015:2014:
| | (in thousands) | | | | | | |
(in millions) | | | | | | |
Details about AOCI Components | | Amounts Reclassified from AOCI | | Affected Line Item in the Statements of Operations | | Amounts Reclassified from AOCI | | Affected Line Item in the Consolidated Statements of Operations |
| Three Months Ended June 30, | | | Three Months Ended June 30, | |
| 2015 | | 2014 | | | 2016 | | 2015 | |
| | | | | | | | | | |
Gains and (losses) on derivative financial instruments: | |
Gain (loss) on derivative financial instruments: | | Gain (loss) on derivative financial instruments: |
Interest rate swaps | | $ | (1,074 | ) | | $ | (929 | ) | | Interest expense | | $ | (0.9 | ) | | $ | (1.1 | ) | | Interest expense |
Foreign exchange forward contracts | | 6,839 |
| | (1,651 | ) | | Cost of products sold | | 2.1 |
| | 6.8 |
| | Cost of products sold |
Foreign exchange forward contracts | | 181 |
| | (58 | ) | | SG&A expenses | | — |
| | 0.2 |
| | SG&A expenses |
Commodity contracts | | (121 | ) | | (158 | ) | | Cost of products sold | | 0.2 |
| | (0.1 | ) | | Cost of products sold |
| | 5,825 |
| | (2,796 | ) | | Net gain (loss) before tax | |
| | (1,189 | ) | | 819 |
| | Tax (expense) benefit | |
Net gain before tax | | | 1.4 |
| | 5.8 |
| |
|
Tax impact | | | (0.1 | ) | | (1.2 | ) | | Provision (benefit) for income taxes |
Net gain after tax | | | $ | 1.3 |
| | $ | 4.6 |
| |
|
| | $ | 4,636 |
| | $ | (1,977 | ) | | Net of tax | | | | | |
| | | | | | | | | | |
Amortization of defined benefit pension and other postemployment benefit items: | Amortization of prior service benefits | | $ | 34 |
| | $ | 35 |
| | (a) | | $ | 0.1 |
| | $ | — |
| | (a) |
Amortization of net actuarial losses | | (2,015 | ) | | (721 | ) | | (a) | | (1.4 | ) | | (2.0 | ) | | (a) |
| | (1,981 | ) | | (686 | ) | | Net loss before tax | |
| | 572 |
| | 213 |
| | Tax benefit | |
| | $ | (1,409 | ) | | $ | (473 | ) | | Net of tax | |
Net loss before tax | | | (1.3 | ) | | (2.0 | ) | |
|
Tax impact | | | 0.4 |
| | 0.6 |
| | Provision (benefit) for income taxes |
Net loss after tax | | | $ | (0.9 | ) | | $ | (1.4 | ) | |
|
| | | | | | | | | | |
Total reclassifications for the period | | $ | 3,227 |
| | $ | (2,450 | ) | | | $ | 0.4 |
| | $ | 3.2 |
| |
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the three months ended June 30, 20152016 and 20142015 (see Note 8,, Benefit Plans, for additional details).
| | (in thousands) | | | | | | |
(in millions) | | | | | | |
Details about AOCI Components | | Amounts Reclassified from AOCI | | Affected Line Item in the Statements of Operations | | Amounts Reclassified from AOCI | | Affected Line Item in the Consolidated Statements of Operations |
| Six Months Ended June 30, | | | Six Months Ended June 30, | |
| 2015 | | 2014 | | | 2016 | | 2015 | |
| | | | | | | | | | |
Gains and (losses) on derivative financial instruments: | |
Gain (loss) on derivative financial instruments: | | Gain (loss) on derivative financial instruments: |
Interest rate swaps | | $ | (2,040 | ) | | $ | (1,856 | ) | | Interest expense | | $ | (2.0 | ) | | $ | (2.0 | ) | | Interest expense |
Foreign exchange forward contracts | | 10,726 |
| | (3,296 | ) | | Cost of products sold | | 5.2 |
| | 10.7 |
| | Cost of products sold |
Foreign exchange forward contracts | | 344 |
| | (157 | ) | | SG&A expenses | | 0.1 |
| | 0.4 |
| | SG&A expenses |
Commodity contracts | | (250 | ) | | (403 | ) | | Cost of products sold | | (0.1 | ) | | (0.3 | ) | | Cost of products sold |
| | 8,780 |
| | (5,712 | ) | | Net gain (loss) before tax | |
| | (607 | ) | | 1,647 |
| | Tax (expense) benefit | |
Net gain before tax | | | 3.2 |
| | 8.8 |
| |
Tax impact | | | (0.4 | ) | | (0.6 | ) | | Provision (benefit) for income taxes |
Net gain after tax | | | $ | 2.8 |
| | $ | 8.2 |
| |
| | $ | 8,173 |
| | $ | (4,065 | ) | | Net of tax | | | | | |
| | | | | | | | | | |
Amortization of defined benefit pension and other postemployment benefit items: | Amortization of prior service benefits | | $ | 68 |
| | $ | 69 |
| | (a) | | $ | 0.1 |
| | $ | 0.1 |
| | (a) |
Amortization of net actuarial losses | | (4,041 | ) | | (1,439 | ) | | (a) | | (2.6 | ) | | (4.1 | ) | | (a) |
| | (3,973 | ) | | (1,370 | ) | | Net loss before tax | |
| | 1,147 |
| | 426 |
| | Tax benefit | |
| | $ | (2,826 | ) | | $ | (944 | ) | | Net of tax | |
Net loss before tax | | | (2.5 | ) | | (4.0 | ) | |
Tax impact | | | 0.7 |
| | 1.1 |
| | Provision (benefit) for income taxes |
Net loss after tax | | | $ | (1.8 | ) | | $ | (2.9 | ) | |
| | | | | | | | | | |
Total reclassifications for the period | | $ | 5,347 |
| | $ | (5,009 | ) | | | $ | 1.0 |
| | $ | 5.3 |
| |
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the six months ended June 30, 20152016 and 20142015 (see Note 8, Benefit Plans, for additional details).
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 six months ended June 30, 20152016 and 20142015:
| | Basic Earnings Per Common Share Computation | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
(in thousands, except per share amounts) | 2015 | | 2014 | | 2015 | | 2014 | |
(in millions, except per share amounts) | | | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | | | | | | | | |
Net income attributable to DENTSPLY International | $ | 44,099 |
| | $ | 89,993 |
| | $ | 108,061 |
| | $ | 162,871 |
| |
Net income attributable to Dentsply Sirona | | | $ | 105.4 |
| | $ | 44.1 |
| | $ | 230.4 |
| | $ | 108.1 |
|
| | | | | | | | | | | | | | | |
Weighted average common shares outstanding | 139,813 |
| | 141,790 |
| | 140,054 |
| | 141,921 |
| | 233.7 |
| | 139.8 |
| | 204.2 |
| | 140.1 |
|
| | | | | | | | | | | | | | | |
Earnings per common share - basic | $ | 0.32 |
| | $ | 0.63 |
| | $ | 0.77 |
| | $ | 1.15 |
| | $ | 0.45 |
| | $ | 0.32 |
| | $ | 1.13 |
| | $ | 0.77 |
|
| | | | | | | | | | | | | | | |
Diluted Earnings Per Common Share Computation | |
| | |
| | |
| | |
| | |
| | |
| | | | |
(in thousands, except per share amounts) | |
| | |
| | |
| | |
| |
(in millions, except per share amounts) | | | |
| | |
| | | | |
| | | | | | | | | | | | | | | |
Net income attributable to DENTSPLY International | $ | 44,099 |
| | $ | 89,993 |
| | $ | 108,061 |
| | $ | 162,871 |
| |
Net income attributable to Dentsply Sirona | | | $ | 105.4 |
| | $ | 44.1 |
| | $ | 230.4 |
| | $ | 108.1 |
|
| | | | | | | | | | | | | | | |
Weighted average common shares outstanding | 139,813 |
| | 141,790 |
| | 140,054 |
| | 141,921 |
| | 233.7 |
| | 139.8 |
| | 204.2 |
| | 140.1 |
|
Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards | 2,449 |
| | 2,374 |
| | 2,467 |
| | 2,367 |
| | 3.7 |
| | 2.5 |
| | 3.7 |
| | 2.4 |
|
Total weighted average diluted shares outstanding | 142,262 |
| | 144,164 |
| | 142,521 |
| | 144,288 |
| | 237.4 |
| | 142.3 |
| | 207.9 |
| | 142.5 |
|
| | | | | | | | | | | | | | | |
Earnings per common share - diluted | $ | 0.31 |
| | $ | 0.62 |
| | $ | 0.76 |
| | $ | 1.13 |
| | $ | 0.44 |
| | $ | 0.31 |
| | $ | 1.11 |
| | $ | 0.76 |
|
The calculation of weighted average diluted common shares outstanding excludes stock options and RSURSUs of 0.80.5 million and 1.00.8 million shares of common stock that were outstanding during the three and six months ended June 30, 20152016, respectively, because their effect would be antidilutive.
On February 29, 2016, in conjunction with the merger, the Company increased the authorized number of common shares to 400.0 million.
NOTE 5 – BUSINESS COMBINATIONS
EffectiveOn February 29, 2016, DENTSPLY merged with Sirona in an all-stock transaction and the registrant was renamed DENSTPLY SIRONA Inc. In connection with the merger, each former share of Sirona common stock issued and outstanding immediately prior to February 29, 2016, was converted to 1.8142 shares of DENTSPLY common stock. The Company issued approximately 101.8 million shares of DENTSPLY common stock to former shareholders of Sirona common stock, representing approximately 42% of the approximately 242.2 million of the total shares of DENTSPLY common stock outstanding on the merger date.
DENTSPLY was determined to be the accounting acquirer. In this all-stock transaction, only DENTSPLY common stock was transferred and DENTSPLY shareholders received approximately 58% of the voting interest of the combined company, and the Sirona shareholders received approximately 42% of the voting interest. Additional indicators included the combined company’s eleven Board of Directors which includes six members of the former DENTSPLY board, and five members of the former Sirona board, as well as DENTSPLY’s financial size.
The Company changed its name to DENTSPLY SIRONA Inc. and the common stock continues to trade on the NASDAQ under the ticker “XRAY”.
The merger combines leading platforms in consumables, equipment, and technologies which creates complimentary end to end solutions to meet customer needs and improve patient care. The combined company is positioned to capitalize on key industry trends to drive growth, including accelerating adoption of digital dentistry.
The following table summarizes the consideration transferred:
|
| | | | | | | | |
(in millions, except per share amount)* | | | | |
| | | | |
Sirona common shares outstanding at February 29, 2016 | | 56.1 |
| | |
Exchange ratio | | 1.8142 |
| | |
DENTSPLY common stock issued for consideration | | 101.8 |
| | |
DENTSPLY common stock per share price at February 26, 2016 | | $ | 60.67 |
| | |
Fair value of DENTSPLY common stock issued to Sirona shareholders | | | | $ | 6,173.8 |
|
Fair value of vested portion of Sirona share-based awards outstanding - 1.5 million | | | | |
at February 29, 2016 | | | | 82.4 |
|
Total acquisition consideration | | | | $ | 6,256.2 |
|
*Table may not foot due to rounding
The merger was recorded in accordance with US GAAP pursuant to the provisions of ASC Topic 805, Business Combinations. The Company has performed a preliminary valuation analysis of identifiable assets acquired and liabilities assumed and allocated the consideration based on the preliminary fair values of those identifiable assets acquired and liabilities assumed, but there may be material changes as the valuation is finalized. In addition, completion of the valuation may impact the assessment of the net deferred tax liability currently recognized with any adjustment resulting in a corresponding change to goodwill. The amount of these potential adjustments could be significant.
The following table summarizes the preliminary fair value of identifiable assets acquired and liabilities assumed at the date of the merger:
|
| | | | |
(in millions) | | |
| | |
Cash and cash equivalents | | $ | 522.3 |
|
Trade receivables | | 143.0 |
|
Inventory | | 220.7 |
|
Prepaid expenses and other current assets | | 109.4 |
|
Property, plant and equipment | | 237.1 |
|
Identifiable intangible assets | | 2,435.0 |
|
Goodwill | | 3,754.6 |
|
Other long-term assets | | 10.9 |
|
Total assets | | 7,433.0 |
|
Accounts payable | | 68.0 |
|
Other current liabilities | | 191.0 |
|
Debt | | 57.5 |
|
Deferred income taxes | | 766.9 |
|
Other long-term liabilities | | 93.4 |
|
Total liabilities | | 1,176.8 |
|
Total identifiable net assets | | $ | 6,256.2 |
|
Inventory held by Sirona includes a fair value adjustment of $72.0 million. The Company expensed this amount by June 30, 2016 as the acquired inventory was sold.
Property, plant and equipment includes a fair value adjustment of $33.6 million, and consists of land, buildings, plant and equipment. Depreciable lives range from 25 to 50 years for buildings and from 3 to 10 years for plant and equipment.
Deferred income for service contracts previously recorded by Sirona now includes a fair value adjustment which reduced Other current liabilities by $17.3 million. The consequence is that this amount cannot be recognized as revenue under US GAAP.
Weighted average useful lives for intangible assets were determined based upon the useful economic lives of the intangible assets that are expected to contribute to future cash flows. The acquired definite-lived intangible assets are being amortized on a straight-line basis over their expected useful lives.
Intangible assets acquired consist of the following:
|
| | | | | | |
(in millions, except for useful life) | | | | Weighted Average |
| | | | Useful Life |
| | Amount | | (in years) |
| | | | |
Customer relationships | | $ | 495.0 |
| | 14 |
Developed technology and patents | | 1,035.0 |
| | 12 |
Trade names and trademarks | | 905.0 |
| | Indefinite |
Total | | $ | 2,435.0 |
| | |
The fair values assigned to intangible assets were determined through the use of the income approach, specifically the relief from royalty method was used to fair value the developed technology and patents and tradenames and trademarks and the multi-period excess earnings method was used to fair value customer relationships. Both valuation methods rely on management’s judgments, including expected future cash flows resulting from existing customer relationships, customer attrition rates, contributory effects of other assets utilized in the business, peer group cost of capital and royalty rates as well as other factors. The valuation of tangible assets was derived using a combination of the income approach, the market approach and the cost approach. Significant judgments used in valuing tangible assets include estimated reproduction or replacement cost, weighted average useful lives of assets, estimated selling prices, costs to complete and reasonable profit.
The $3,754.6 million of goodwill is attributable to the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. Goodwill is considered to represent the value associated with workforce and synergies the two Companies anticipate realizing as a combined company. Goodwill of $3,642.0 million has been assigned to the Company's Technologies segment and $112.6 million has been assigned to the Company’s Dental and Healthcare Consumables segment. The goodwill is not expected to be deductible for tax purposes.
Sirona contributed net sales of $438.3 million and operating income of $102.4 million to the Company's Consolidated Statements of Operations during the period from February 29, 2016 to June 30, 2016 and is primarily included in the Technologies segment.
The following unaudited pro forma financial information reflects the consolidated results of operations of the Company had the merger occurred on January 1, 2014,2015. Sirona’s financial information has been compiled in a manner consistent with the accounting policies adopted by DENTSPLY. The unaudited pro forma financial information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the merger occurred on January 1, 2015, nor are they indicative of any future results.
|
| | | | | | | | | | | | | | | | |
| | Pro forma - unaudited |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
(in millions, except per share amount) | | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Net sales | | $ | 1,022.0 |
| | $ | 1,001.8 |
| | $ | 1,962.2 |
| | $ | 1,905.0 |
|
Net income attributable to Dentsply Sirona | | $ | 141.2 |
| | $ | 81.5 |
| | $ | 234.9 |
| | $ | 175.9 |
|
Diluted earnings per common share | | $ | 0.59 |
| | $ | 0.33 |
| | $ | 0.99 |
| | $ | 0.72 |
|
The pro forma financial information is based on the Company's preliminary assignment of consideration given and therefore subject to adjustment. These pro forma amounts were calculated after applying the Company’s accounting policies and adjusting Sirona’s results to reflect adjustments that are directly attributable to the merger. These adjustments mainly include additional intangible asset amortization, depreciation, inventory fair value adjustments, transaction costs and taxes that would have been charged assuming the fair value adjustments had been applied from January 1, 2015, together with the consequential tax effects at the statutory rate. Pro forma results do not include any anticipated synergies or other benefits of the merger.
For the six months ended June 30, 2016, in connection with the merger, the Company recordedhas incurred $31.4 million of transaction related costs, primarily amounts paid to third party advisers, legal and banking fees, which are included in Selling, general and administrative expenses in the Consolidated Statements of Operations.
On June 27, 2016, the Company announced a liability for the contractual purchasedefinitive agreement to acquire all of the remainingoutstanding shares of one variable interest entity.privately held MIS Implants Technologies Ltd. (“MIS”), a dental implant systems manufacturer headquartered in northern Israel, for $375.0 million in cash. MIS is a growing and profitable manufacturer of dental implant systems with annual sales of approximately $80.0 million. The company is a leader in the value segment of the market, selling its products under the MIS brand through a wide distribution network that includes a direct sales force, reaching over 65 countries. The Company paid this obligation duringexpects to close the first quarteracquisition by the end of 2015.2016 upon successful completion of pre-closing conditions and routine governmental clearances.
NOTE 6 – SEGMENT INFORMATION
The Company has numerous operating businesses covering a wide range of dental consumable products, dental technology products and certain healthcare products and geographic regions, primarily serving the professional dental market. Professional dental products represented approximately 92% of net sales for the three and six months ended June 30, 2016 and 88% of net sales for the three and six months ended June 30, 2015 and 2014, respectively.2015.
The operating businesses are combined into two 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’sDENTSPLY’s most recently filed Form 10-K, in the summary of significant accounting policies.
The Company evaluates performance of the segments based on the groups’ net third party sales, excluding precious metal content, and segment adjusted operating 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, which is considered a measure not calculated in accordance with US GAAP, and this is therefore 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 definesalso evaluates segment income as netperformance based on each segment’s adjusted operating income after the assignment ofbefore provision for income taxes and interest. Segment adjusted operating income is defined as operating income before income taxes and before certain direct corporate headquarter unallocated costs, and before restructuring and other costs, interest expense, interest income, other expense (income), net, amortization of intangible assets and provision fordepreciation resulting from the fair value step-up of property, plant and equipment from acquisitions. The Company’s segment adjusted operating income taxes.is considered a non-US GAAP measure. A description of the products and services provided within each of the Company’s threetwo 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, 20152016 quarter, the Company realigned reporting responsibilities for multiple locations as a result of changes tothe merger and changed the management structure. The segment information below reflects the revised structure for all periods shown.
Dental Consumables, Endodontic and Dental Laboratory BusinessesHealthcare Consumables
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 theworldwide design, manufacture, sales and distribution of most of the Company’s preventive, restorative, instruments, endodontic, and laboratory dental laboratoryproducts, as well as consumable medical device 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 BusinessesTechnologies
This segment is responsible for the worldwide design, manufacture, sales and distribution of the Company’s healthcare products, primarily urologicaldental implants, CAD/CAM systems, imaging systems, treatment centers 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.products.
The following tables set forth information about the Company’s segments for the three and six months ended June 30, 20152016 and 20142015:
Third Party Net Sales
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | |
Dental Consumables, Endodontic and Dental Laboratory Businesses | $ | 317,376 |
| | $ | 346,264 |
| | $ | 627,693 |
| | $ | 685,545 |
|
Healthcare, Orthodontic and Implant Businesses | 252,845 |
| | 279,696 |
| | 488,838 |
| | 544,107 |
|
Select Developed and Emerging Markets Businesses | 127,785 |
| | 139,265 |
| | 237,795 |
| | 265,687 |
|
Total net sales | $ | 698,006 |
| | $ | 765,225 |
| | $ | 1,354,326 |
| | $ | 1,495,339 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in millions) | | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Dental and Healthcare Consumables | | $ | 543.8 |
| | $ | 510.9 |
| | $ | 1,032.7 |
| | $ | 991.0 |
|
Technologies | | 478.2 |
| | 187.1 |
| | 761.9 |
| | 363.3 |
|
Total net sales | | $ | 1,022.0 |
| | $ | 698.0 |
| | $ | 1,794.6 |
| | $ | 1,354.3 |
|
Third Party Net Sales, Excluding Precious Metal Content
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | |
Dental Consumables, Endodontic and Dental Laboratory Businesses | $ | 301,299 |
| | $ | 319,978 |
| | $ | 593,390 |
| | $ | 625,050 |
|
Healthcare, Orthodontic and Implant Businesses | 252,665 |
| | 279,478 |
| | 488,476 |
| | 543,681 |
|
Select Developed and Emerging Markets Businesses | 120,734 |
| | 131,442 |
| | 224,379 |
| | 251,350 |
|
Total net sales, excluding precious metal content | 674,698 |
| | 730,898 |
| | 1,306,245 |
| | 1,420,081 |
|
Precious metal content of sales | 23,308 |
| | 34,327 |
| | 48,081 |
| | 75,258 |
|
Total net sales, including precious metal content | $ | 698,006 |
| | $ | 765,225 |
| | $ | 1,354,326 |
| | $ | 1,495,339 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in millions) | | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Dental and Healthcare Consumables | | $ | 526.7 |
| | $ | 487.8 |
| | $ | 997.5 |
| | $ | 943.3 |
|
Technologies | | 478.0 |
| | 186.9 |
| | 761.7 |
| | 362.9 |
|
Total net sales, excluding precious metal content | | 1,004.7 |
| | 674.7 |
| | 1,759.2 |
| | 1,306.2 |
|
Precious metal content of sales | | 17.3 |
| | 23.3 |
| | 35.4 |
| | 48.1 |
|
Total net sales, including precious metal content | | $ | 1,022.0 |
| | $ | 698.0 |
| | $ | 1,794.6 |
| | $ | 1,354.3 |
|
Inter-segment Net Sales
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in thousands) | 2015 | | 2014 | | 2015 | | 2,014 |
| | | | | | | |
Dental Consumables, Endodontic and Dental Laboratory Businesses | $ | 89,324 |
| | $ | 93,642 |
| | $ | 173,213 |
| | $ | 183,100 |
|
Healthcare, Orthodontic and Implant Businesses | 1,578 |
| | 1,970 |
| | 3,352 |
| | 4,431 |
|
Select Developed and Emerging Markets Businesses | 3,437 |
| | 2,722 |
| | 6,313 |
| | 6,239 |
|
All Other (a) | 67,116 |
| | 75,860 |
| | 132,166 |
| | 150,482 |
|
Eliminations | (161,455 | ) | | (174,194 | ) | | (315,044 | ) | | (344,252 | ) |
Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in millions) | | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Dental and Healthcare Consumables | | $ | 58.2 |
| | $ | 55.9 |
| | $ | 113.5 |
| | $ | 108.0 |
|
Technologies | | 2.1 |
| | 1.6 |
| | 3.5 |
| | 3.3 |
|
All Other (a) | | 74.0 |
| | 67.1 |
| | 142.7 |
| | 132.2 |
|
Eliminations | | (134.3 | ) | | (124.6 | ) | | (259.7 | ) | | (243.5 | ) |
Total | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
(a) Includes amounts recorded at one distribution warehouse not managed by named segments.
Segment Adjusted Operating Income (Loss) | | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 | |
(in millions) | | | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | | | | | | | | |
Dental Consumables, Endodontic and Dental Laboratory Businesses | $ | 110,787 |
| | $ | 117,976 |
| | $ | 214,193 |
| | $ | 224,745 |
| |
Healthcare, Orthodontic and Implant Businesses | 27,906 |
| | 32,049 |
| | 54,435 |
| | 56,574 |
| |
Select Developed and Emerging Markets Businesses | (3,464 | ) | | (1,211 | ) | | (7,350 | ) | | (2,503 | ) | |
Segment operating income | 135,229 |
| | 148,814 |
| | 261,278 |
| | 278,816 |
| |
Dental and Healthcare Consumables | | | $ | 151.7 |
| | $ | 125.8 |
| | $ | 282.4 |
| | $ | 239.1 |
|
Technologies | | | 112.1 |
| | 21.7 |
| | 165.9 |
| | 42.6 |
|
Segment adjusted operating income before income taxes and interest | | | 263.8 |
| | 147.5 |
| | 448.3 |
| | 281.7 |
|
| | | | | | | | | | | | | | | |
Reconciling Items (income) expense: | |
| | |
| | |
| | |
| |
Reconciling items (income) expense: | | | |
| | |
| | | | |
All Other (b) | 10,547 |
| | 20,466 |
| | 33,461 |
| | 44,105 |
| | 93.8 |
| | 11.4 |
| | 178.9 |
| | 31.2 |
|
Restructuring and other costs | 38,881 |
| | 1,242 |
| | 44,307 |
| | 2,035 |
| | 3.6 |
| | 38.9 |
| | 7.7 |
| | 44.3 |
|
Interest expense | 9,824 |
| | 11,798 |
| | 20,492 |
| | 22,753 |
| | 9.3 |
| | 9.8 |
| | 18.5 |
| | 20.5 |
|
Interest income | (660 | ) | | (1,744 | ) | | (1,402 | ) | | (3,179 | ) | | (0.4 | ) | | (0.7 | ) | | (0.9 | ) | | (1.4 | ) |
Other expense (income), net | (376 | ) | | 575 |
| | 232 |
| | 963 |
| | (11.5 | ) | | (0.3 | ) | | (14.9 | ) | | 0.2 |
|
Amortization of intangible assets | | | 43.8 |
| | 10.9 |
| | 65.6 |
| | 21.8 |
|
Depreciation resulting from the fair value step-up of property, plant and equipment from business combinations | | | 1.4 |
| | 0.5 |
| | 2.2 |
| | 0.9 |
|
Income before income taxes | $ | 77,013 |
| | $ | 116,477 |
| | $ | 164,188 |
| | $ | 212,139 |
| | $ | 123.8 |
| | $ | 77.0 |
| | $ | 191.2 |
| | $ | 164.2 |
|
(b) Includes the results of unassigned Corporate headquarter costs, inter-segment eliminations and one distribution warehouse not managed by named segments.
Assets
|
| | | | | | | |
(in thousands) | June 30, 2015 | | December 31, 2014 |
| | | |
Dental Consumables, Endodontic and Dental Laboratory Businesses | $ | 1,360,187 |
| | $ | 1,358,018 |
|
Healthcare, Orthodontic and Implant Businesses | 2,508,278 |
| | 2,655,622 |
|
Select Developed and Emerging Markets Businesses | 352,866 |
| | 369,844 |
|
All Other (c) | 275,425 |
| | 262,975 |
|
Total | $ | 4,496,756 |
| | $ | 4,646,459 |
|
|
| | | | | | | | |
(in millions) | | June 30, 2016 | | December 31, 2015 |
| | | | |
Dental and Healthcare Consumables | | $ | 2,160.5 |
| | $ | 1,776.5 |
|
Technologies | | 7,068.4 |
| | 951.2 |
|
All Other (c) | | 2,222.5 |
| | 1,675.2 |
|
Total | | $ | 11,451.4 |
| | $ | 4,402.9 |
|
(c) Includes the assets of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments.
For the three and six months ended June 30, 2016, two customers accounted for more than ten percent of consolidated net sales for the period and more than ten percent of the consolidated accounts receivable balance at the period ended.
NOTE 7 – INVENTORIES
Inventories are stated at the lower of cost or market. The cost of inventories determined by the last-in, first-out (“LIFO”) method at June 30, 20152016 and December 31, 20142015 were $7.07.6 million and $6.3$8.1 million, respectively. The cost of other inventories
was determined by the first-in, first-out (“FIFO”) or average cost methods. If the FIFO method had been used to determine the cost of LIFO inventories, the amounts at which net inventories are stated would be higher than reported at June 30, 20152016 and December 31, 20142015 by $6.26.5 million and $6.1$6.6 million, respectively.
Inventories, net of inventory valuation reserves, consist of the following:
| | (in thousands) | June 30, 2015 | | December 31, 2014 | |
(in millions) | | | June 30, 2016 | | December 31, 2015 |
| | | | | | | |
Finished goods | $ | 242,921 |
| | $ | 253,333 |
| | $ | 327.5 |
| | $ | 218.2 |
|
Work-in-process | 59,858 |
| | 58,329 |
| | 76.4 |
| | 52.3 |
|
Raw materials and supplies | 72,041 |
| | 75,433 |
| | 119.2 |
| | 69.9 |
|
Inventories, net | $ | 374,820 |
| | $ | 387,095 |
| | $ | 523.1 |
| | $ | 340.4 |
|
The inventory valuation reserves were $36.361.2 million and $34.136.3 million at June 30, 20152016 and December 31, 2014,2015, respectively.
NOTE 8 – BENEFIT PLANS
The following sets forth the components of net periodic benefit cost of the Company’s defined benefit plans and for the Company’s other postemployment benefit plans for the three and six months ended June 30, 20152016 and 20142015:
| | Defined Benefit Plans | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 | |
(in millions) | | | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | | | | | | | | |
Service cost | $ | 4,343 |
| | $ | 3,549 |
| | $ | 8,691 |
| | $ | 7,101 |
| | $ | 3.9 |
| | $ | 4.3 |
| | $ | 7.7 |
| | $ | 8.7 |
|
Interest cost | 1,843 |
| | 2,861 |
| | 3,697 |
| | 5,726 |
| | 2.0 |
| | 1.8 |
| | 3.8 |
| | 3.7 |
|
Expected return on plan assets | (1,399 | ) | | (1,391 | ) | | (2,777 | ) | | (2,777 | ) | | (1.2 | ) | | (1.4 | ) | | (2.4 | ) | | (2.8 | ) |
Amortization of prior service credit | (35 | ) | | (35 | ) | | (69 | ) | | (69 | ) | | (0.1 | ) | | — |
| | (0.1 | ) | | (0.1 | ) |
Amortization of net actuarial loss | 1,963 |
| | 709 |
| | 3,947 |
| | 1,417 |
| | 1.3 |
| | 2.0 |
| | 2.5 |
| | 4.0 |
|
Net periodic benefit cost | $ | 6,715 |
| | $ | 5,693 |
| | $ | 13,489 |
| | $ | 11,398 |
| | $ | 5.9 |
| | $ | 6.7 |
| | $ | 11.5 |
| | $ | 13.5 |
|
| | Other Postemployment Benefit Plans | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 | |
(in millions) | | | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | | | | | | | | |
Service cost | $ | 88 |
| | $ | 44 |
| | $ | 177 |
| | $ | 89 |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.2 |
| | $ | 0.2 |
|
Interest cost | 144 |
| | 140 |
| | 288 |
| | 280 |
| | 0.1 |
| | 0.2 |
| | 0.3 |
| | 0.3 |
|
Amortization of net actuarial loss | 43 |
| | 12 |
| | 85 |
| | 22 |
| | 0.1 |
| | — |
| | 0.1 |
| | 0.1 |
|
Net periodic benefit cost | $ | 275 |
| | $ | 196 |
| | $ | 550 |
| | $ | 391 |
| | $ | 0.3 |
| | $ | 0.3 |
| | $ | 0.6 |
| | $ | 0.6 |
|
The following sets forth the information related to the contributions to the Company’s benefit plans for 2015:2016:
| | (in thousands) | Pension Benefits | | Other Postemployment Benefits | |
(in millions) | | | Pension Benefits | | Other Postemployment Benefits |
| | | | | | | |
Actual contributions through June 30, 2015 | $ | 5,559 |
| | $ | 192 |
| |
Actual contributions through June 30, 2016 | | | $ | 6.6 |
| | $ | 0.1 |
|
Projected contributions for the remainder of the year | 5,945 |
| | 449 |
| | 8.1 |
| | 0.6 |
|
Total projected contributions | $ | 11,504 |
| | $ | 641 |
| | $ | 14.7 |
| | $ | 0.7 |
|
17The Company predominantly uses liability durations in establishing its discount rates, which are observed from indices of high-grade corporate bond yield curves in the respective economic regions of the plan. During the first quarter of 2016, the Company changed the method utilized to estimate the service cost and interest cost components of net periodic benefit costs for the Company’s major defined benefit pension plans in Germany, Switzerland and for all defined benefit pension and other postemployment healthcare plans in the United States. Historically, the Company estimated the service cost and interest cost components using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at
the beginning of the period. The Company has elected to use a spot rate approach for the estimation of these components of benefit cost by applying the specific spot rates along the yield curve to the relevant projected cash flows, as the Company believes this provides a better estimate of service and interest costs. The Company considers this a change in estimate and, accordingly, will account for it prospectively starting in 2016. This change does not affect the measurement of the Company’s total benefit obligation.
NOTE 9 – RESTRUCTURING AND OTHER COSTS
Restructuring Costs
During the three and six months ended June 30, 2016 , the Company recorded net restructuring costs and other costs of $3.6 million and $7.7 million, respectively. During the three and six months ended June 30, 2015, the Company recorded net restructuring costs and other costs of $38.9 million and $44.3 million, respectively. On May 22,During 2015, the Company announced that it reorganized portions of its laboratory business and associated manufacturing capabilities within the Dental and Healthcare Consumables Endodontics and Dental Laboratory Businesses segment. During the June 2015 quarter, the Company recorded $31.0 million of costs that consist primarily of employee severance benefits related to these and other similar actions. Also during the three and six months ended June 30, 2015, the Company recorded restructuring costs of $2.7 million and $7.5 million, respectively, within the Healthcare, Orthodontic and Implant Businesses segment primarily related to the global efficiency initiative During the three and six months ended June 30, 2014, the Company recorded net restructuring and other costs of $1.2 million and $2.0 million. These costs are recorded in “RestructuringRestructuring and other costs”costs in the Consolidated Statements of Operations and the associated liabilities are recorded in “Accrued liabilities”Accrued liabilities in the Consolidated Balance Sheets.
At June 30, 20152016, the Company’s restructuring accruals were as follows:
| | | Severance | | Severance |
(in thousands) | 2013 and Prior Plans | | 2014 Plans | | 2015 Plans | | Total | |
(in millions) | | | 2014 and Prior Plans | | 2015 Plans | | 2016 Plans | | Total |
| | | | | | | | | | | | | | | |
Balance at December 31, 2014 | $ | 951 |
| | $ | 5,062 |
| | $ | — |
| | $ | 6,013 |
| |
Balance at December 31, 2015 | | | $ | 1.5 |
| | $ | 34.6 |
| | $ | — |
| | $ | 36.1 |
|
Provisions | 81 |
| | 431 |
| | 40,958 |
| | 41,470 |
| | — |
| | 2.4 |
| | 3.1 |
| | 5.5 |
|
Amounts applied | (635 | ) | | (3,084 | ) | | (3,542 | ) | | (7,261 | ) | | (0.8 | ) | | (11.1 | ) | | (0.4 | ) | | (12.3 | ) |
Change in estimates | (76 | ) | | (74 | ) | | (547 | ) | | (697 | ) | | (0.1 | ) | | (0.2 | ) | | — |
| | (0.3 | ) |
Balance at June 30, 2015 | $ | 321 |
| | $ | 2,335 |
| | $ | 36,869 |
| | $ | 39,525 |
| |
Balance at June 30, 2016 | | | $ | 0.6 |
| | $ | 25.7 |
| | $ | 2.7 |
| | $ | 29.0 |
|
| | | Lease/Contract Terminations | | Lease/Contract Terminations |
(in thousands) | 2013 and Prior Plans | | 2014 Plans | | 2015 Plans | | Total | |
(in millions) | | | 2014 and Prior Plans | | 2015 Plans | | 2016 Plans | | Total |
| | | | | | | | | | | | | | | |
Balance at December 31, 2014 | $ | 535 |
| | $ | 1,636 |
| | $ | — |
| | $ | 2,171 |
| |
Balance at December 31, 2015 | | | $ | 0.7 |
| | $ | 3.4 |
| | $ | — |
| | $ | 4.1 |
|
Provisions | — |
| | 12 |
| | 270 |
| | 282 |
| | — |
| | 0.8 |
| | — |
| | 0.8 |
|
Amounts applied | (105 | ) | | (384 | ) | | — |
| | (489 | ) | | (0.3 | ) | | (0.5 | ) | | — |
| | (0.8 | ) |
Change in estimates | — |
| | (10 | ) | | — |
| | (10 | ) | | — |
| | (0.3 | ) | | — |
| | (0.3 | ) |
Balance at June 30, 2015 | $ | 430 |
| | $ | 1,254 |
| | $ | 270 |
| | $ | 1,954 |
| |
Balance at June 30, 2016 | | | $ | 0.4 |
| | $ | 3.4 |
| | $ | — |
| | $ | 3.8 |
|
| | | Other Restructuring Costs | | Other Restructuring Costs |
(in thousands) | 2013 and Prior Plans | | 2014 Plans | | 2015 Plans | | Total | |
(in millions) | | | 2014 and Prior Plans | | 2015 Plans | | 2016 Plans | | Total |
| | | | | | | | | | | | | | | |
Balance at December 31, 2014 | $ | 25 |
| | $ | 1,049 |
| | $ | — |
| | $ | 1,074 |
| |
Balance at December 31, 2015 | | | $ | 0.3 |
| | $ | 0.6 |
| | $ | — |
| | $ | 0.9 |
|
Provisions | 2 |
| | 168 |
| | 577 |
| | 747 |
| | — |
| | 0.7 |
| | — |
| | 0.7 |
|
Amounts applied | (2 | ) | | (799 | ) | | (227 | ) | | (1,028 | ) | | (0.3 | ) | | (0.9 | ) | | — |
| | (1.2 | ) |
Change in estimate | — |
| | 28 |
| | — |
| | 28 |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
Balance at June 30, 2015 | $ | 25 |
| | $ | 446 |
| | $ | 350 |
| | $ | 821 |
| |
Balance at June 30, 2016 | | | $ | — |
| | $ | 0.3 |
| | $ | — |
| | $ | 0.3 |
|
The following table provides the year-to-date changes in the restructuring accruals by segment:
|
| | | | | | | | | | | | | | | | | | | |
(in thousands) | December 31, 2014 | | Provisions | | Amounts Applied | | Change in Estimates | | June 30, 2015 |
| | | | | | | | | |
Dental Consumables, Endodontic and Dental Laboratory Businesses | $ | 5,272 |
| | $ | 31,522 |
| | $ | (3,941 | ) | | $ | — |
| | $ | 32,853 |
|
Healthcare, Orthodontic and Implant Businesses | 3,828 |
| | 7,517 |
| | (4,558 | ) | | (679 | ) | | 6,108 |
|
Select Developed and Emerging Markets Businesses | 91 |
| | 1,719 |
| | (177 | ) | | — |
| | 1,633 |
|
All Other | 67 |
| | 1,741 |
| | (102 | ) | | — |
| | 1,706 |
|
Total | $ | 9,258 |
| | $ | 42,499 |
| | $ | (8,778 | ) | | $ | (679 | ) | | $ | 42,300 |
|
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | December 31, 2015 | | Provisions | | Amounts Applied | | Change in Estimates | | June 30, 2016 |
| | | | | | | | | | |
Dental and Healthcare Consumables | | $ | 35.7 |
| | $ | 4.2 |
| | $ | (10.9 | ) | | $ | (0.3 | ) | | $ | 28.7 |
|
Technologies | | 4.3 |
| | 2.1 |
| | (3.0 | ) | | (0.1 | ) | | 3.3 |
|
All Other | | 1.1 |
| | 0.7 |
| | (0.4 | ) | | (0.3 | ) | | 1.1 |
|
Total | | $ | 41.1 |
| | $ | 7.0 |
| | $ | (14.3 | ) | | $ | (0.7 | ) | | $ | 33.1 |
|
NOTE 10 – FINANCIAL INSTRUMENTS AND DERIVATIVES
Derivative Instruments and Hedging Activities
The Company’s activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates, interest rates and commodity prices. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company’s operating results and equity. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert variable rate debt to fixed rate debt and to convert fixed rate debt to variable rate debt, cross currency basis swaps to convert debt denominated in one currency to another currency and commodity swaps to fix certain variable raw material costs.
Derivative Instruments Designated as Hedging
Cash Flow Hedges
The following table summarizes the notional amounts of cash flow hedges by derivative instrument type at June 30, 20152016 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 | | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months |
| | |
(in thousands) | | |
(in millions) | | | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months |
| | | | | |
Foreign exchange forward contracts | | $ | 337,017 |
| | $ | 253,842 |
| |
Interest rate swaps | | 172,169 |
| | — |
| | 188.1 |
| | 66.5 |
|
Commodity contracts | | 1,396 |
| | 1,396 |
| | 0.2 |
| | 0.2 |
|
Total derivative instruments designated as cash flow hedges | | $ | 510,582 |
| | $ | 255,238 |
| | $ | 504.8 |
| | $ | 307.4 |
|
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 onin 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 “OtherOther expense (income), net” onnet 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 onin 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 June 30, 2015,2016, 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 0.9% for an intialinitial 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%1.8% 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 onin the Consolidated Statements of Cash Flows.
Commodity Risk Management
The Company enters into precious metal commodity swap contracts to effectively fix certain variable raw material costs typically for up to 18 months. These swaps are used to stabilize the cost of components used in the production of certain of the Company’s products. The Company generally accounts for the commodity swaps as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the tested effectiveness of the commodity swaps. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released
and recorded onin 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” onInterest 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 onin 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 June 30, 20152016 and 2014:
2015:
|
| | | | | | | | | | | | | | |
June 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 thousands) | | | | |
| | | | | | | | |
Effective Portion: | | | | | | | | |
Interest rate swaps | | $ | (58 | ) | | Interest expense | | $ | (1,074 | ) | | $ | — |
|
Foreign exchange forward contracts | | (2,069 | ) | | Cost of products sold | | 6,839 |
| | — |
|
Foreign exchange forward contracts | | (139 | ) | | SG&A expenses | | 181 |
| | — |
|
Commodity contracts | | (96 | ) | | Cost of products sold | | (121 | ) | | — |
|
| | | | | | | | |
Ineffective Portion: | | | | | | | | |
Foreign exchange forward contracts | | — |
| | Other expense (income), net | | — |
| | (160 | ) |
Commodity contracts | | — |
| | Interest expense | | — |
| | (4 | ) |
Total in cash flow hedging | | $ | (2,362 | ) | | | | $ | 5,825 |
| | $ | (164 | ) |
| | June 30, 2014 | |
June 30, 2016 | | June 30, 2016 |
| | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into Income (Expense) | | Ineffective Portion Recognized in Income (Expense) | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into Income (Expense) | | Ineffective Portion Recognized in Income (Expense) |
| | |
(in thousands) | | |
(in millions) | | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into Income (Expense) | | Ineffective Portion Recognized in Income (Expense) |
| | | | | | | |
Effective Portion: | | | | | | | |
Interest rate swaps | | $ | (149 | ) | | Interest expense | | $ | (929 | ) | | $ | — |
| | $ | (0.3 | ) | | Interest expense | | $ | (0.9 | ) | | $ | — |
|
Foreign exchange forward contracts | | (4,636 | ) | | Cost of products sold | | (1,651 | ) | | — |
| | 1.8 |
| | Cost of products sold | | 2.1 |
| | — |
|
Foreign exchange forward contracts | | 45 |
| | SG&A expenses | | (58 | ) | | — |
| | 0.1 |
| | SG&A expenses | | — |
| | — |
|
Commodity contracts | | 101 |
| | Cost of products sold | | (158 | ) | | — |
| | 0.3 |
| | Cost of products sold | | 0.2 |
| | — |
|
| | | | | | | | | | | | |
Ineffective Portion: | | | | | | | | | | | | |
Foreign exchange forward contracts | | — |
| | Other expense (income), net | | — |
| | (151 | ) | | — |
| | Other expense (income), net | | — |
| | (0.1 | ) |
Commodity contracts | | — |
| | Interest expense | | — |
| | (11 | ) | |
Total for cash flow hedging | | $ | (4,639 | ) | | $ | (2,796 | ) | | $ | (162 | ) | |
Total in cash flow hedging | | | $ | 1.9 |
| | $ | 1.4 |
| | $ | (0.1 | ) |
|
| | | | | | | | | | | | | | |
June 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 | | (2.1 | ) | | Cost of products sold | | 6.8 |
| | — |
|
Foreign exchange forward contracts | | (0.1 | ) | | SG&A expenses | | 0.2 |
| | — |
|
Commodity contracts | | (0.1 | ) | | Cost of products sold | | (0.1 | ) | | — |
|
| | | | | | | | |
Ineffective Portion: | | | | | | | | |
Foreign exchange forward contracts | | — |
| | Other expense (income), net | | — |
| | (0.2 | ) |
Total for cash flow hedging | | $ | (2.4 | ) | | | | $ | 5.8 |
| | $ | (0.2 | ) |
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 six months ended June 30, 20152016 and 2014:2015:
| | June 30, 2015 | |
June 30, 2016 | | June 30, 2016 |
| | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into Income (Expense) | | Ineffective Portion Recognized in Income (Expense) | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into Income (Expense) | | Ineffective Portion Recognized in Income (Expense) |
| | |
(in thousands) | | |
(in millions) | | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into Income (Expense) | | Ineffective Portion Recognized in Income (Expense) |
| | | | | | | |
Effective Portion: | | | | | | | |
Interest rate swaps | | $ | (1,239 | ) | | Interest expense | | $ | (2,040 | ) | | $ | — |
| | $ | (1.5 | ) | | Interest expense | | $ | (2.0 | ) | | $ | — |
|
Foreign exchange forward contracts | | 22,018 |
| | Cost of products sold | | 10,726 |
| | — |
| | (3.1 | ) | | Cost of products sold | | 5.2 |
| | — |
|
Foreign exchange forward contracts | | 324 |
| | SG&A expenses | | 344 |
| | — |
| | (0.2 | ) | | SG&A expenses | | 0.1 |
| | — |
|
Commodity contracts | | (96 | ) | | Cost of products sold | | (250 | ) | | — |
| | 0.2 |
| | Cost of products sold | | (0.1 | ) | | — |
|
| | | | | | | | | | | | |
Ineffective Portion: | | | | | | | | | | | | |
Foreign exchange forward contracts | | — |
| | Other expense (income), net | | — |
| | 167 |
| | — |
| | Other expense (income), net | | — |
| | (0.1 | ) |
Commodity contracts | | — |
| | Interest expense | | — |
| | (8 | ) | |
Total in cash flow hedging | | $ | 21,007 |
| | $ | 8,780 |
| | $ | 159 |
| | $ | (4.6 | ) | | $ | 3.2 |
| | $ | (0.1 | ) |
| | June 30, 2014 | |
June 30, 2015 | | June 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) | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into Income (Expense) | | Ineffective Portion Recognized in Income (Expense) |
| | |
(in thousands) | | |
(in millions) | | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into Income (Expense) | | Ineffective Portion Recognized in Income (Expense) |
| | | | | | | |
Effective Portion: | | | | | | | |
Interest rate swaps | | $ | (537 | ) | | Interest expense | | $ | (1,856 | ) | | $ | — |
| | $ | (1.2 | ) | | Interest expense | | $ | (2.0 | ) | | $ | — |
|
Foreign exchange forward contracts | | (3,569 | ) | | Cost of products sold | | (3,296 | ) | | — |
| | 22.0 |
| | Cost of products sold | | 10.7 |
| | — |
|
Foreign exchange forward contracts | | 35 |
| | SG&A expenses | | (157 | ) | | — |
| | 0.3 |
| | SG&A expenses | | 0.4 |
| | — |
|
Commodity contracts | | 203 |
| | Cost of products sold | | (403 | ) | | — |
| | (0.1 | ) | | Cost of products sold | | (0.3 | ) | | — |
|
| | | | | | | | | | | | |
Ineffective Portion: | | | | | | | | | | | | |
Foreign exchange forward contracts | | — |
| | Other expense (income), net | | — |
| | (45 | ) | | — |
| | Other expense (income), net | | — |
| | 0.2 |
|
Commodity contracts | | — |
| | Interest expense | | — |
| | (24 | ) | |
Total for cash flow hedging | | $ | (3,868 | ) | | $ | (5,712 | ) | | $ | (69 | ) | | $ | 21.0 |
| | $ | 8.8 |
| | $ | 0.2 |
|
Overall, the derivatives designated as cash flow hedges are considered to be highly effective. At June 30, 2015,2016, the Company expects to reclassify $9.6$1.0 million of deferred net gainslosses 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 .exposure. The derivative instruments consist of foreign exchange forward contracts and cross currency basis swaps.contracts. 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 onin 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 onin the Consolidated Statements of Cash Flows.
The following table summarizes the notional amounts of hedges of net investments by derivative instrument type at June 30, 20152016 and the notional amounts expected to mature during the next 12 months:
| | | | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months | | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months |
| | |
(in thousands) | | |
(in millions) | | | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months |
| | | | | |
Foreign exchange forward contracts | | $ | 420,892 |
| | $ | 236,079 |
| |
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 onin the Consolidated Balance Sheets and other income (expense) onin the Company’s Consolidated Statements of Operations related to the hedges of net investments for the three months ended June 30, 20152016 and 2014:2015:
| | June 30, 2015 | |
June 30, 2016 | | June 30, 2016 |
| | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) |
| | |
(in thousands) | | |
(in millions) | | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) |
| | | | | |
Effective Portion: | | | | | |
Foreign exchange forward contracts | | $ | (15,819 | ) | | Other expense (income), net | | $ | 1,191 |
| | $ | 13.2 |
| | Other expense (income), net | | $ | 2.2 |
|
Total for net investment hedging | | $ | (15,819 | ) | | $ | 1,191 |
| | $ | 13.2 |
| | $ | 2.2 |
|
| | June 30, 2014 | |
June 30, 2015 | | June 30, 2015 |
| | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) |
| | |
(in thousands) | | |
(in millions) | | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) |
| | | | | |
Effective Portion: | | | | | |
Cross currency basis swaps | | $ | 1,572 |
| | Interest income | | $ | 674 |
| |
| | | | Interest expense | | (384 | ) | |
Foreign exchange forward contracts | | 1,272 |
| | Other expense (income), net | | (73 | ) | | $ | (15.8 | ) | | Other expense (income), net | | $ | 1.2 |
|
Total for net investment hedging | | $ | 2,844 |
| | $ | 217 |
| | $ | (15.8 | ) | | $ | 1.2 |
|
The following table summarizestables summarize the amount of gains (losses) recorded in AOCI onin the Consolidated Balance Sheets and other income (expense) onin the Company’s Consolidated StatementStatements of Operations related to the hedges of net investments for the six months ended June 30, 20152016 and 2014:2015:
| | June 30, 2015 | |
June 30, 2016 | | June 30, 2016 |
| | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) |
| | |
(in thousands) | | |
(in millions) | | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) |
| | | | | |
Effective Portion: | | | | | |
Foreign exchange forward contracts | | $ | (3,320 | ) | | Other expense (income), net | | $ | 855 |
| | $ | (17.2 | ) | | Other expense (income), net | | $ | 4.7 |
|
Total for net investment hedging | | $ | (3,320 | ) | | $ | 855 |
| | $ | (17.2 | ) | | $ | 4.7 |
|
| | June 30, 2014 | |
June 30, 2015 | | June 30, 2015 |
| | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) |
| | |
(in thousands) | | |
(in millions) | | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income (Expense) |
| | | | | |
Effective Portion: | | | | | |
Cross currency basis swaps | | $ | (3,087 | ) | | Interest income | | $ | 1,351 |
| |
| | | | Interest expense | | 157 |
| |
Foreign exchange forward contracts | | 4,341 |
| | Other expense (income), net | | 175 |
| | $ | (3.3 | ) | | Other expense (income), net | | $ | 0.9 |
|
Total for net investment hedging | | $ | 1,254 |
| | $ | 1,683 |
| | $ | (3.3 | ) | | $ | 0.9 |
|
Fair Value Hedges
The Company usesused interest rate swaps to convert a portion of its fixed interest rate debt to variable interest rate debt. The Company hashad 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, endingthe debt and interest rate swap matured in February 2016. The notional value of the swaps will declinedeclined proportionately as portions of the PPN mature.matured. These interest rate swaps arewere designated as fair value hedges of the interest rate risk associated with the hedged portion of the fixed rate PPN. Accordingly, the Company will carrycarried the portion of the hedged debt at fair value, with the change in debt and swaps offsetting each other onin the Consolidated Statements of Operations. Any cash flows associated with these instruments arewere included in operating activities onin the Consolidated Statements of Cash Flows.
The following table summarizes the notional amounts of fair value hedges by derivative instrument type at June 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 thousands) | | |
| | | | |
Interest rate swaps | | $ | 45,000 |
| | $ | 45,000 |
|
The following tables summarize the amount of income (expense) recorded onin the Company’s Consolidated Statements of Operations related to the hedges of fair value for the three and six months ended June 30, 20152016 and 2014:2015:
| | | | Consolidated Statements of Operations Location | | | | | | | Consolidated Statements of Operations Location | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | | 2015 | | 2014 | | 2015 | | 2014 | |
(in millions) | | | Consolidated Statements of Operations Location | | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | | | | | | | | | |
Interest rate swaps | | Interest expense | | $ | 41 |
| | $ | 133 |
| | $ | 158 |
| | $ | 220 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.2 |
|
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 “OtherOther expense (income), net” onnet 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 onin 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 onin 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 onin 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 June 30, 20152016 and the notional amounts expected to mature during the next 12 months:
|
| | | | | | | | |
| | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months |
| | |
(in thousands) | | |
| | | | |
Foreign exchange forward contracts | | $ | 478,338 |
| | $ | 478,338 |
|
Interest rate swaps | | 2,213 |
| | 805 |
|
Total for instruments not designated as hedges | | $ | 480,551 |
| | $ | 479,143 |
|
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. |
| | | | | | | | |
| | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months |
| | |
(in millions) | | |
| | | | |
Foreign exchange forward contracts | | $ | 780.2 |
| | $ | 614.5 |
|
Interest rate swaps | | 1.4 |
| | 0.8 |
|
Total for instruments not designated as hedges | | $ | 781.6 |
| | $ | 615.3 |
|
The following table summarizes the amounts of gains (losses) recorded onin the Company’s Consolidated Statements of Operations related to the economic hedges not designated as hedging for the three and six months ended June 30, 20152016 and 2014:2015:
| | | | Consolidated Statements of Operations Location | | Gain (Loss) Recognized | | Consolidated Statements of Operations Location | | Gain (Loss) Recognized |
| | Three Months Ended June 30, | | Three Months Ended June 30, |
(in thousands) | | 2015 | | 2014 | |
(in millions) | | | Consolidated Statements of Operations Location | | 2016 | | 2015 |
| | | | | | | | |
Foreign exchange forward contracts (a) | | Other expense (income), net | | $ | (766 | ) | | $ | (716 | ) | | $ | 9.0 |
| | $ | (0.8 | ) |
DIO equity option contracts | | Other expense (income), net | | 102 |
| | 90 |
| | Other expense (income), net | | — |
| | 0.1 |
|
Interest rate swaps | | Interest expense | | 1 |
| | (16 | ) | |
Cross currency basis swaps (a) | | Other expense (income), net | | (603 | ) | | (4,005 | ) | | Other expense (income), net | | — |
| | (0.6 | ) |
Total for instruments not designated as hedges | | $ | (1,266 | ) | | $ | (4,647 | ) | | $ | 9.0 |
| | $ | (1.3 | ) |
(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 “OtherOther expense (income), net” onnet in the Consolidated Statements of Operations.
| | | | Consolidated Statements of Operations Location | | Gain (Loss) Recognized | | Consolidated Statements of Operations Location | | Gain (Loss) Recognized |
| | Six Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | | 2015 | | 2014 | |
(in millions) | | | Consolidated Statements of Operations Location | | 2016 | | 2015 |
| | | | | | | | |
Foreign exchange forward contracts (a) | | Other expense (income), net | | $ | 7,789 |
| | $ | (5,157 | ) | | $ | (7.4 | ) | | $ | 7.8 |
|
DIO equity option contracts | | Other expense (income), net | | 107 |
| | (138 | ) | | Other expense (income), net | | — |
| | 0.1 |
|
Interest rate swaps | | Interest expense | | (2 | ) | | (27 | ) | |
Cross currency basis swaps (a) | | Other expense (income), net | | (1,825 | ) | | (3,180 | ) | | Other expense (income), net | | — |
| | (1.8 | ) |
Total for instruments not designated as hedges | | $ | 6,069 |
| | $ | (8,502 | ) | | $ | (7.4 | ) | | $ | 6.1 |
|
(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 “OtherOther expense (income), net” onnet in the Consolidated Statements of Operations.
During March 2016, the Company established hedges totaling 316.5 million euros to offset a euro denominated intercompany note receivable at a U.S. dollar functional entity. The change in the value of the hedges resulted in a $12.1 million loss, which were offset by the changes in the value of the euro denominated intercompany note receivable at a U.S. dollar functional entity.
Consolidated Balance Sheets Location of Derivative Fair Values
The following tables summarize the fair value and consolidated balance sheetthe location of the Company’s derivatives in the Consolidated Balance Sheets at June 30, 20152016 and December 31, 2014:2015:
| | | | June 30, 2015 | | June 30, 2016 |
(in thousands) | | Prepaid Expenses and Other Current Assets, Net | | Other Noncurrent Assets, Net | | Accrued Liabilities | | Other Noncurrent Liabilities | |
(in millions) | | | Prepaid Expenses and Other Current Assets, Net | | Other Noncurrent Assets, Net | | Accrued Liabilities | | Other Noncurrent Liabilities |
Designated as Hedges | | Prepaid Expenses and Other Current Assets, Net | | Other Noncurrent Assets, Net | | Accrued Liabilities | | Other Noncurrent Liabilities | |
| | | | | | | | | |
Foreign exchange forward contracts | | $ | 32,398 |
| | $ | 1,833 |
| | $ | 1,490 |
| | $ | 2,675 |
| | $ | 9.4 |
| | $ | 1.2 |
| | $ | 11.8 |
| | $ | 0.4 |
|
Commodity contracts | | — |
| | — |
| | 152 |
| | — |
| |
Interest rate swaps | | 324 |
| | 282 |
| | 1,164 |
| | 742 |
| | — |
| | — |
| | 0.5 |
| | 1.2 |
|
Total | | $ | 32,722 |
| | $ | 2,115 |
| | $ | 2,806 |
| | $ | 3,417 |
| | $ | 9.4 |
| | $ | 1.2 |
| | $ | 12.3 |
| | $ | 1.6 |
|
| | | | | | | | | | | | | | | | |
Not Designated as Hedges | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 7,273 |
| | $ | — |
| | $ | 3,465 |
| | $ | — |
| | $ | 8.0 |
| | $ | 3.7 |
| | $ | 2.6 |
| | $ | — |
|
Interest rate swaps | | — |
| | — |
| | 51 |
| | 77 |
| |
Total | | $ | 7,273 |
| | $ | — |
| | $ | 3,516 |
| | $ | 77 |
| | $ | 8.0 |
| | $ | 3.7 |
| | $ | 2.6 |
| | $ | — |
|
| | | | December 31, 2014 | | December 31, 2015 |
(in thousands) | | Prepaid Expenses and Other Current Assets, Net | | Other Noncurrent Assets, Net | | Accrued Liabilities | | Other Noncurrent Liabilities | |
(in millions) | | | Prepaid Expenses and Other Current Assets, Net | | Other Noncurrent Assets, Net | | Accrued Liabilities | | Other Noncurrent Liabilities |
Designated as Hedges | | Prepaid Expenses and Other Current Assets, Net | | Other Noncurrent Assets, Net | | Accrued Liabilities | | Other Noncurrent Liabilities | |
| | | | | | | | | |
Foreign exchange forward contracts | | $ | 28,036 |
| | $ | 12,542 |
| | $ | 2,740 |
| | $ | 1,707 |
| | $ | 23.0 |
| | $ | 7.9 |
| | $ | 6.9 |
| | $ | 0.4 |
|
Commodity contracts | | — |
| | — |
| | 233 |
| | — |
| | — |
| | — |
| | 0.1 |
| | — |
|
Interest rate swaps | | 617 |
| | 135 |
| | 575 |
| | 377 |
| | 0.1 |
| | — |
| | 1.0 |
| | 0.2 |
|
Total | | $ | 28,653 |
| | $ | 12,677 |
| | $ | 3,548 |
| | $ | 2,084 |
| | $ | 23.1 |
| | $ | 7.9 |
| | $ | 8.0 |
| | $ | 0.6 |
|
| | | | | | | | | | | | | | | | |
Not Designated as Hedges | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 4,798 |
| | $ | — |
| | $ | 4,764 |
| | $ | — |
| | $ | 5.0 |
| | $ | — |
| | $ | 3.0 |
| | $ | — |
|
DIO equity option contracts | | — |
| | — |
| | — |
| | 115 |
| |
Interest rate swaps | | — |
| | — |
| | 63 |
| | 129 |
| |
Cross currency basis swaps | | 2,683 |
| | — |
| | — |
| | — |
| |
Total | | $ | 7,481 |
| | $ | — |
| | $ | 4,827 |
| | $ | 244 |
| | $ | 5.0 |
| | $ | — |
| | $ | 3.0 |
| | $ | — |
|
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 onin the Consolidated Balance Sheets.
Offsetting of financial assets and liabilities under netting arrangements at June 30, 20152016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in thousands) | | Gross Amounts Recognized | | Gross Amount Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount |
| | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 41,504 |
| | $ | — |
| | $ | 41,504 |
| | $ | (9,363 | ) | | $ | — |
| | $ | 32,141 |
|
Interest rate swaps | | 606 |
| | — |
| | 606 |
| | (173 | ) | | — |
| | 433 |
|
Total Assets | | $ | 42,110 |
| | $ | — |
| | $ | 42,110 |
| | $ | (9,536 | ) | | $ | — |
| | $ | 32,574 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in thousands) | | Gross Amounts Recognized | | Gross Amount Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 7,630 |
| | $ | — |
| | $ | 7,630 |
| | $ | (7,630 | ) | | $ | — |
| | $ | — |
|
Commodity contracts | | 152 |
| | — |
| | 152 |
| | — |
| | — |
| | 152 |
|
Interest rate swaps | | 2,034 |
| | — |
| | 2,034 |
| | (1,906 | ) | | — |
| | 128 |
|
Total Liabilities | | $ | 9,816 |
| | $ | — |
| | $ | 9,816 |
| | $ | (9,536 | ) | | $ | — |
| | $ | 280 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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 | | $ | 22.3 |
| | $ | — |
| | $ | 22.3 |
| | $ | (6.8 | ) | | $ | — |
| | $ | 15.5 |
|
Total Assets | | $ | 22.3 |
| | $ | — |
| | $ | 22.3 |
| | $ | (6.8 | ) | | $ | — |
| | $ | 15.5 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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 | | $ | 14.8 |
| | $ | — |
| | $ | 14.8 |
| | $ | (6.0 | ) | | $ | — |
| | $ | 8.8 |
|
Interest rate swaps | | 1.7 |
| | — |
| | 1.7 |
| | (0.8 | ) | | — |
| | 0.9 |
|
Total Liabilities | | $ | 16.5 |
| | $ | — |
| | $ | 16.5 |
| | $ | (6.8 | ) | | $ | — |
| | $ | 9.7 |
|
Offsetting of financial assets and liabilities under netting arrangements at December 31, 2014:2015:
| | | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in thousands) | | Gross Amounts Recognized | | Gross Amount Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount | |
(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 | | $ | 45,377 |
| | $ | — |
| | $ | 45,377 |
| | $ | (7,797 | ) | | $ | — |
| | $ | 37,580 |
| | $ | 35.9 |
| | $ | — |
| | $ | 35.9 |
| | $ | (7.4 | ) | | $ | — |
| | $ | 28.5 |
|
Interest rate swaps | | 751 |
| | — |
| | 751 |
| | (274 | ) | | — |
| | 477 |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | — |
| | 0.1 |
|
Cross currency basis swaps | | 2,683 |
| | — |
| | 2,683 |
| | (1,067 | ) | | — |
| | 1,616 |
| |
Total Assets | | $ | 48,811 |
| | $ | — |
| | $ | 48,811 |
| | $ | (9,138 | ) | | $ | — |
| | $ | 39,673 |
| | $ | 36.0 |
| | $ | — |
| | $ | 36.0 |
| | $ | (7.4 | ) | | $ | — |
| | $ | 28.6 |
|
| | | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in thousands) | | Gross Amounts Recognized | | Gross Amount Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount | |
(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 | | $ | 9,208 |
| | $ | — |
| | $ | 9,208 |
| | $ | (8,186 | ) | | $ | — |
| | $ | 1,022 |
| | $ | 10.3 |
| | $ | — |
| | $ | 10.3 |
| | $ | (6.3 | ) | | $ | — |
| | $ | 4.0 |
|
Commodity contracts | | 235 |
| | — |
| | 235 |
| | — |
| | — |
| | 235 |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | — |
| | 0.1 |
|
DIO equity option contracts | | 115 |
| | — |
| | 115 |
| | — |
| | — |
| | 115 |
| |
Interest rate swaps | | 1,145 |
| | — |
| | 1,145 |
| | (952 | ) | | — |
| | 193 |
| | 1.2 |
| | — |
| | 1.2 |
| | (1.1 | ) | | — |
| | 0.1 |
|
Total Liabilities | | $ | 10,703 |
| | $ | — |
| | $ | 10,703 |
| | $ | (9,138 | ) | | $ | — |
| | $ | 1,565 |
| | $ | 11.6 |
| | $ | — |
| | $ | 11.6 |
| | $ | (7.4 | ) | | $ | — |
| | $ | 4.2 |
|
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 onin 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 $1,195.31,202.3 million and $1,161.51,181.5 million, respectively at June 30, 20152016. At December 31, 2014,2015, the Company estimated the fair value and carrying value, including the current portion, was $1,286.21,160.7 million and $1,258.91,150.2 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 June 30, 20152016. 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 June 30, 20152016 and December 31, 2014,2015, which are classified as “CashCash and cash equivalents,” “Prepaid Prepaid expenses and other current assets, net,” “Other Other noncurrent assets, net,” “Accrued Accrued liabilities,” and “OtherOther noncurrent liabilities”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.
| | | June 30, 2015 | | June 30, 2016 |
(in thousands) | Total | | Level 1 | | Level 2 | | Level 3 | |
(in millions) | | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | |
Interest rate swaps | $ | 606 |
| | $ | — |
| | $ | 606 |
| | $ | — |
| |
Foreign exchange forward contracts | 41,504 |
| | — |
| | 41,504 |
| | — |
| | 22.3 |
| | — |
| | 22.3 |
| | — |
|
DIO Corporation convertible bonds | 153,613 |
| | — |
| | — |
| | 153,613 |
| |
Total assets | $ | 195,723 |
| | $ | — |
| | $ | 42,110 |
| | $ | 153,613 |
| | $ | 22.3 |
| | $ | — |
| | $ | 22.3 |
| | $ | — |
|
| | | | | | | | | | | | | | | |
Liabilities | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Interest rate swaps | $ | 2,034 |
| | $ | — |
| | $ | 2,034 |
| | $ | — |
| | $ | 1.7 |
| | $ | — |
| | $ | 1.7 |
| | $ | — |
|
Commodity contracts | 152 |
| | — |
| | 152 |
| | — |
| |
Foreign exchange forward contracts | 7,630 |
| | — |
| | 7,630 |
| | — |
| | 14.8 |
| | — |
| | 14.8 |
| | — |
|
Long-term debt | 45,326 |
| | — |
| | 45,326 |
| | — |
| |
Contingent considerations on acquisitions | | | 7.5 |
| | — |
| | — |
| | 7.5 |
|
Total liabilities | $ | 55,142 |
| | $ | — |
| | $ | 55,142 |
| | $ | — |
| | $ | 24.0 |
| | $ | — |
| | $ | 16.5 |
| | $ | 7.5 |
|
| | | December 31, 2014 | | December 31, 2015 |
(in thousands) | Total | | Level 1 | | Level 2 | | Level 3 | |
(in millions) | | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | |
Interest rate swaps | $ | 752 |
| | $ | — |
| | $ | 752 |
| | $ | — |
| | $ | 0.1 |
| | $ | — |
| | $ | 0.1 |
| | $ | — |
|
Cross currency basis swaps | 2,683 |
| | — |
| | 2,683 |
| | — |
| |
Foreign exchange forward contracts | 45,376 |
| | — |
| | 45,376 |
| | — |
| | 35.9 |
| | — |
| | 35.9 |
| | — |
|
DIO Corporation convertible bonds | 57,698 |
| | — |
| | — |
| | 57,698 |
| |
Total assets | $ | 106,509 |
| | $ | — |
| | $ | 48,811 |
| | $ | 57,698 |
| | $ | 36.0 |
| | $ | — |
| | $ | 36.0 |
| | $ | — |
|
| | | | | | | | | | | | | | | |
Liabilities | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Interest rate swaps | $ | 1,144 |
| | $ | — |
| | $ | 1,144 |
| | $ | — |
| | $ | 1.2 |
| | $ | — |
| | $ | 1.2 |
| | $ | — |
|
Commodity contracts | 233 |
| | — |
| | 233 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
|
Foreign exchange forward contracts | 9,211 |
| | — |
| | 9,211 |
| | — |
| | 10.3 |
| | — |
| | 10.3 |
| | — |
|
Long-term debt | 106,023 |
| | — |
| | 106,023 |
| | — |
| | 45.1 |
| | — |
| | 45.1 |
| | — |
|
DIO equity option contracts | 115 |
| | — |
| | — |
| | 115 |
| |
Total liabilities | $ | 116,726 |
| | $ | — |
| | $ | 116,611 |
| | $ | 115 |
| | $ | 56.7 |
| | $ | — |
| | $ | 56.7 |
| | $ | — |
|
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 uses the income method valuation techniqueCompany’s Level 3 liabilities are related to estimate the fair valueearn-out obligations on prior acquisitions that were assumed as part of the DIO Corporation convertible bonds. The significant unobservable inputs for valuing the corporate bonds are both the DIO Corporation’s stock volatility factor of approximately 40% and corporate bond rating which implies approximately a 8.73% discount rate on the valuation model. Significant observable inputs used to value the corporate bonds include foreign exchange rates and DIO Corporation’s period-ending market stock price.
The Company has valued the DIO equity option contracts using a Monte Carlo simulation which uses several estimates and probability assumptions by management including the future stock price, the stock price as a multiple of DIO earnings and the probability of the sellers to reduce their shares held by selling into the open market. The fair value of equity option contracts are reported in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets and changes in the fair value are reported in “Other expense (income), net” in the Consolidated Statements of Operations.
merger with Sirona. The following table presents a rollforwardreconciliation of the Company’s Level 3 holdings measured at fair value on a recurring basis using unobservable inputs:
|
| | | | | | | |
(in thousands) | DIO Corporation Convertible Bonds | | DIO Equity Options Contracts |
| | | |
Balance at December 31, 2014 | $ | 57,698 |
| | $ | (115 | ) |
Unrealized gain: | |
| | |
|
Reported in AOCI, pretax | 101,351 |
| | — |
|
Unrealized gain: | |
| | |
|
Reported in other expense (income), net | — |
| | 107 |
|
Effects of exchange rate changes | (5,436 | ) | | 8 |
|
Balance at June 30, 2015 | $ | 153,613 |
| | $ | — |
|
|
| | | | |
| | |
(in millions) | | |
| | |
Balance, February 29, 2016 | | $ | 7.6 |
|
Unrealized gain: | | |
Reported in Other expense (income), net | | 0.1 |
|
Effect of exchange rate changes | | (0.2 | ) |
Balance at June 30, 2016 | | $ | 7.5 |
|
For the six months ended June 30, 2015,2016, there were no other purchases, issuances or transfers of Level 3 financial instruments.
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 $2.2 million. Of this total, approximately $0.9 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.are not expected to be significant.
Other Tax Matters
ForDuring the first six months of 2016, the Company recorded a tax benefit from the release of a valuation allowance of approximately $78.6 million as a result of the merger related to previously unrecognized tax assets on foreign interest deduction carryforwards of a non-U.S. legacy DENTSPLY subsidiary. In addition, for the three and six months ended June 30, 2015,2016, the Company recorded $3.1$4.1 million and $0.5 million of tax expense related to prior yearother discrete tax matters. In addition, the Company’s effective tax rate was unfavorably impacted by the Company’s change in the mix of consolidated earnings.
NOTE 13 – FINANCING ARRANGEMENTS
During the quarter ended March 31, 2015,
On February 19, 2016, the Company paidissued the second required paymentfollowing: 11.0 million euros aggregate principal amount bearing interest of $100.02.05%, Series F Senior Notes due February 19, 2026; 15.0 million undereuros aggregate principal amount bearing interest of 2.05%, Series G Senior Notes due February 19, 2026; and 45.0 million euros aggregate principal amount bearing interest of 2.45%, Series H Senior Notes due February 19, 2031. Proceeds from the Private PlacementSenior Notes “PPN” by issuing commercial paper. Thewere used to pay the final required payment of $75.0 million due inunder the $250.0 million PPN that matured on February 19, 2016.
On March 16, 2016, the Company terminated the Sirona Senior Facilities Agreement and repaid the $52.5 million Facility A Term Loan that was set to mature November 16, 2016.
Effective June 30, 2016, the Company amended and extended its $500 million multicurrency revolving credit facility for an additional year thorough July 23, 2021. In addition, certain non-extending members of the bank group were replaced with existing and new lenders. The Company has been classified as current onaccess to the Consolidated Balance Sheets.full $500 million through July 23, 2021. 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.
The second annual installment underCompany’s revolving credit facility, term loans and Senior Notes contain certain affirmative and negative covenants relating to the terms ofCompany's operations and financial condition. At June 30, 2016, the PNC Term LoanCompany was in the amount of $8.8 million will be due in August 2015 and has been classified as current on the Consolidated Balance Sheets.compliance with all debt covenants.
At June 30, 2015,2016, there was $30.0 million inwere no outstanding borrowings, in the form of issued commercial paper, under the current $500.0 million multi-currency revolving credit facility and is classified as current on the Consolidated Balance Sheets.
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 June 30, 2015, the Company was in compliance with all debt covenants.facility.
At June 30, 2015,2016, the Company had $526$552 million of borrowing available under lines of credit, including lines available under its 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, 20152016 on 1620 reporting units. As discussed in Note 6, Segment Information, effective in the first quarter of 2015,2016, 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%6.7% to 12.5%14.7%, 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 Companyassumptions and 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, 2015,2016, 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 by reportable segment is as follows:
|
| | | | | | | | | | | | | | | |
(in thousands) | Dental Consumables, Endodontic and Dental Laboratory Businesses | | Healthcare, Orthodontic and Implant Businesses | | Select Developed and Emerging Markets Businesses | | Total |
| | | | | | | |
Balance at December 31, 2014 | $ | 565,714 |
| | $ | 1,394,398 |
| | $ | 129,227 |
| | $ | 2,089,339 |
|
Effects of exchange rate changes | (6,268 | ) | | (76,509 | ) | | (7,954 | ) | | (90,731 | ) |
Balance at June 30, 2015 | $ | 559,446 |
| | $ | 1,317,889 |
| | $ | 121,273 |
| | $ | 1,998,608 |
|
|
| | | | | | | | | | | | |
(in millions) | | Dental and Healthcare Consumables | | Technologies | | Total |
| | | | | | |
Balance at December 31, 2015 | | $ | 956.6 |
| | $ | 1,031.0 |
| | $ | 1,987.6 |
|
Merger related additions | | 112.6 |
| | 3,642.0 |
| | 3,754.6 |
|
Adjustments of provisional amounts on prior acquisitions | | 1.6 |
| | — |
| | 1.6 |
|
Effects of exchange rate changes | | 19.0 |
| | 31.9 |
| | 50.9 |
|
Balance at June 30, 2016 | | $ | 1,089.8 |
| | $ | 4,704.9 |
| | $ | 5,794.7 |
|
Identifiable definite-lived and indefinite-lived intangible assets consist of the following:
| | | June 30, 2015 | | December 31, 2014 | | June 30, 2016 | | December 31, 2015 |
(in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | |
(in millions) | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | | | | | | | | | | | | | | | | | | | |
Patents | $ | 165,615 |
| | $ | (91,135 | ) | | $ | 74,480 |
| | $ | 175,186 |
| | $ | (95,526 | ) | | $ | 79,660 |
| |
Patents and developed technology | | | $ | 1,227.2 |
| | $ | (131.0 | ) | | $ | 1,096.2 |
| | $ | 164.8 |
| | $ | (95.0 | ) | | $ | 69.8 |
|
Trademarks | 68,271 |
| | (38,027 | ) | | 30,244 |
| | 75,645 |
| | (37,053 | ) | | 38,592 |
| | 68.5 |
| | (38.4 | ) | | 30.1 |
| | 67.0 |
| | (36.0 | ) | | 31.0 |
|
Licensing agreements | 34,071 |
| | (23,629 | ) | | 10,442 |
| | 34,638 |
| | (22,806 | ) | | 11,832 |
| | 33.9 |
| | (26.0 | ) | | 7.9 |
| | 33.7 |
| | (24.9 | ) | | 8.8 |
|
Customer relationships | 433,627 |
| | (114,086 | ) | | 319,541 |
| | 452,882 |
| | (104,703 | ) | | 348,179 |
| | 952.6 |
| | (154.1 | ) | | 798.5 |
| | 437.7 |
| | (125.4 | ) | | 312.3 |
|
Total definite-lived | $ | 701,584 |
| | $ | (266,877 | ) | | $ | 434,707 |
| | $ | 738,351 |
| | $ | (260,088 | ) | | $ | 478,263 |
| | $ | 2,282.2 |
| | $ | (349.5 | ) | | $ | 1,932.7 |
| | $ | 703.2 |
| | $ | (281.3 | ) | | $ | 421.9 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Indefinite-lived Trademarks and In-process R&D | $ | 181,962 |
| | $ | — |
| | $ | 181,962 |
| | $ | 192,577 |
| | $ | — |
| | $ | 192,577 |
| | $ | 1,095.8 |
| | $ | — |
| | $ | 1,095.8 |
| | $ | 178.8 |
| | $ | — |
| | $ | 178.8 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Total identifiable intangible assets | $ | 883,546 |
| | $ | (266,877 | ) | | $ | 616,669 |
| | $ | 930,928 |
| | $ | (260,088 | ) | | $ | 670,840 |
| | $ | 3,378.0 |
| | $ | (349.5 | ) | | $ | 3,028.5 |
| | $ | 882.0 |
| | $ | (281.3 | ) | | $ | 600.7 |
|
During the three and six months ended June 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.Judgment on the express warranty cause of action, which was denied. The Court has rescheduled a hearing toheld four days of hearings during January and February 2016 on plaintiffs’ class certification motion. The Court has scheduled further hearings in the matter for August 2016.
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 intendsfiled a motion for summary judgment in December 2015. In April 2016, the Court granted the Company’s motion for summary judgment, which disposes of all remaining claims against the Company in the matter. The plaintiffs filed a notice of appeal in May 2016 and the matter has been assigned by the Court of Appeals for mediation in September 2016. The Company will continue to vigorously defend itselfitself.
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 litigation.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 plaintiffs subsequently withdrew the two cases in December 2015 and April 2016.
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, financial position or liquidity could be materially impacted.
In 2012, the Company received subpoenas from the United StatesU. S. 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 StatesU. S. 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. InOn August 2014,24, 2015, the Company entered into aan extension of the tolling agreement with OFAC, under whichoriginally entered into in August 2014, such that the statute of limitations for any violations by the Company is now tolled until September 1, 2015.2016. 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
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.
DENTSPLY InternationalSIRONA 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 InternationalSIRONA Inc. (“DENTSPLY”Dentsply Sirona” 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'sDENTSPLY International Inc.’s Form 10-K for the year ended December 31, 20142015 and those described from time to time in our future reports filed with the U. S. 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.
On February 29, 2016, DENTSPLY International Inc. merged with Sirona Dental Systems, Inc. (“Sirona”) to form DENTSPLY SIRONA Inc. The accompanying unaudited interim financial information for the three and six months ended June 30, 2016, include the results of operations for Sirona for the period February 29, 2016 to June 30, 2016.
References to the “combined businesses” are included below to provide comparisons of net sales performance year over year as if the businesses were combined on January 1, 2015.
OVERVIEW
Highlights
For the three months ended June 30, 2015,2016, the Company reported a sales increase of 46.4%, which primarily reflects the impact of consolidating three months of Sirona’s revenues. For the three month period ended June 30, 2016, sales of our combined businesses grew 3.4% on a constant currency basis. This includes a benefit of 1.5% from net acquisitions and was unfavorably impacted by discontinued products by approximately 50 basis points, which leads to internal growth of 2.4%.
On a geographic basis, the combined businesses generated constant currency sales growth of 3.6% for the period, including 3.3%3.8% in the United States, 1.9%negative 0.4% in Europe and 7.9%8.6% in the Rest of World region. Sales, excluding precious metal content, declined by 7.7%, including 10.9% of negative currency translation compared toregion for the three monthsmonth period ended June 30, 2014.
Gross profit rate for the three months ended June 30, 2015 increased 110 basis points to 59.2% from 58.1% for the three months ended June 30, 2014.
Operating margin for the three months ended June 30, 2015 was 12.7% compared to 17.4% in2016. In the prior year period, sales within the Technologies segment, particularly in Europe, reflect the strong performance related to the biennial International Dental show.
Second quarter reflecting operating improvements that were2016 earnings per diluted share of $0.44 increased 42% from $0.31 in the second quarter of 2015, which largely reflects the impact of consolidating three months of Sirona’s results, partially offset by chargesthe higher weighted average common shares outstanding and costs associated with restructuring initiatives in the current period. Adjusted operating marginmerger. On an adjusted basis (a non-US GAAP measure) for, second quarter 2016 earnings per diluted share of $0.76 grew 4% from $0.73, also reflecting the impact of consolidating three months ended June 30, 2015 was 21.1%, a 180 basis point improvementof Sirona’s results, offset by the increase in common shares outstanding from the prior year period.
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.merger.
Company Profile
DENTSPLY International Inc. is a leading manufacturer and distributor of dental and other consumable medical device products. The Company believes itDentsply Sirona is the world’s largest manufacturer of consumableprofessional dental products for the professional dental market. For over 115 years, DENTSPLY’s commitment toand technologies, with a 130-year history of innovation and professional collaboration has enhanced itsservice to the dental industry and patients worldwide. Dentsply Sirona develops, manufactures, and markets a comprehensive solutions offering including dental and oral health products as well as other consumable medical devices under a strong portfolio of branded consumablesworld class brands. As The Dental Solutions Company™, Dentsply Sirona’s products provide innovative, high-quality and small equipment. Headquarteredeffective solutions to advance patient care and deliver better, safer and faster dentistry. Dentsply Sirona’s global headquarters is located in York, Pennsylvania, and the international headquarters is based in Salzburg, Austria. The Company’s shares are listed in the United States on NASDAQ under 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.symbol XRAY.
Principal ProductsBusiness
The Company has four principal product categories: 1)operates in two business segments, Dental Consumable Products; 2) Dental Laboratory Products; 3) Dental Specialty Products; and 4) Consumable Medical Device Products.Healthcare Consumables and Technologies.
The Dental consumable products consist of dental supplies and devices and small equipment used in dental officesHealthcare Consumables segment includes responsibility for the treatmentworldwide design, manufacture, sales and distribution of patients. The Company manufactures thousands of differentthe Company’s preventive, restorative, instruments, endodontic, and laboratory dental products, as well as 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 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.medical device products.
Dental specialty products are specializedThe Technologies segment is responsible for the worldwide design, manufacture, sales and distribution of the Company’s dental implants, CAD/CAM systems, imaging systems, treatment products used within the dental officecenters 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 segment and geographic region; (2) internal sales growth by segment and geographic region; and (3) adjusted operating income and margins of each reportable segment, including product pricingwhich excludes the impacts of purchase accounting, corporate expenses, and cost controls; (4)certain other items to enhance the development, introductioncomparability of results period to period. These principal measurements are not calculated in accordance with accounting principles generally accepted in the United States; therefore, these items represent non-US GAAP (“non-US GAAP”) measures. These non-US GAAP measures may differ from other companies and contributionshould not be considered in isolation from, or as a substitute for, measures of innovative new products; and (5) sales growth through acquisition.financial performance prepared in accordance with US GAAP.
The Company defines “internal“constant currency sales growth” as the increase or decrease in net sales from period to period excluding (1) precious metal content; (2)content and the impact of changes in foreign currency exchange rates; and (3) net acquisition sales growth. The Company also tracks internal sales growth of continuing product lines as thisrates. This impact is more reflectivecalculated by comparing current-period revenues to prior-period revenues, with both periods converted at the U.S. dollar to local currency average foreign exchange rate for each month of the ongoing strength ofprior period, for the Company’s performance.currencies in which the Company does business. The Company defines “net acquisition“internal 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 “constantconstant currency sales growth” as internal sales growth plusexcluding the impacts of net acquisition sales growth.acquisitions and divestitures, merger accounting impacts and discontinued products.
Business Drivers
The primary drivers of internal growth includesinclude macroeconomic factors, global dental market growth, innovation and new products launchedproduct launches by the Company, andas well as 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 offaster than 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. Managementefficiencies on a global basis. The Company has expanded the use of technology as well as process improvement initiatives to enhance global efficiency. In addition, 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 areasmitigate the impacts 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% as the benefits of these initiatives are realized over time. In addition, the
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 continue to 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.
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 the 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, technologies and sales and service infrastructure through partnerships and 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’sDentsply Sirona’s business, movements in foreign exchange and interest rates may impact the Consolidated Statements of Operations. With more than 60%approximately two thirds of the Company’s net sales located in regions outside the U.S.,United States, 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. For the six months ended June 30, 2016, net sales, excluding precious metal content, were unfavorably impacted by approximately 1.9% and earnings per diluted common share by approximately $0.03 due to movements in foreign currency exchange rates.
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, 20152016 quarter, the Company realigned reporting responsibilities for multiple locations as a result of changes tothe merger and changed the management reporting structure. The segment information reflects the revised structure for all periods shown.
RESULTS OF OPERATIONS, QUARTER ENDED JUNE 30, 20152016 COMPARED TO QUARTER ENDED JUNE 30, 20142015
Net Sales
The discussion below summarizes the Company’s sales growth excludingwhich excludes precious metal content, into the following components: (1) constant currency sales growth, which includes internal sales growth and net acquisition sales growth,impact of the merger; and (2) foreign currency translation.the results of the “combined businesses” as if the businesses were merged on January 1, 2015. 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’sDentsply Sirona’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, DENTSPLYDentsply Sirona 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”),GAAP, and is therefore considered a non-US GAAP measure. The Company provides the following reconciliation of net sales to net sales, excluding precious metal content. The Company’s definitions and calculations of net sales, excluding precious metal content, and other operating measures derived using net sales, excluding precious metal content, may not necessarily be the same as those used by other companies.
| | | Three Months Ended | | | | | | Three Months Ended | | | | |
| June 30, | | | | June 30, | | |
(in millions) | 2015 | | 2014 | | $ Change | | % Change | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | | | | | | | | |
Net sales | $ | 698.0 |
| | $ | 765.2 |
| | $ | (67.2 | ) | | (8.8 | %) | | $ | 1,022.0 |
| | $ | 698.0 |
| | $ | 324.0 |
| | 46.4 | % |
Less: precious metal content of sales | 23.3 |
| | 34.3 |
| | (11.0 | ) | | (32.1 | %) | | 17.3 |
| | 23.3 |
| | (6.0 | ) | | (25.8 | %) |
Net sales, excluding precious metal content | $ | 674.7 |
| | $ | 730.9 |
| | $ | (56.2 | ) | | (7.7 | %) | | $ | 1,004.7 |
| | $ | 674.7 |
| | $ | 330.0 |
| | 48.9 | % |
Net sales, excluding precious metal content, for the three months ended June 30, 20152016 were $674.7$1,004.7 million, a decreasean increase of $56.2$330.0 million from the second quarter of 2014. The change2015, as reported by legacy DENTSPLY. This excludes approximately $1.6 million of revenue that was eliminated in net sales, excluding precious metal content, was primarily a result of 10.9% of unfavorable foreign currency translation. Excluding the impact of foreign currency translation, net sales, excluding precious metal content, grew 3.2%. fair value purchase accounting adjustments to deferred income.
Sales related to precious metal content declined 32.1%25.8% in the quarter, reflectingwhich was primarily related to the continuing reduction indiscontinued refinery product lines.
For the usethree month period ended June 30, 2016, sales of our combined businesses grew 3.4% on a constant currency basis. This includes a benefit of 1.5% from net acquisitions and was unfavorably impacted by discontinued products by approximately 50 basis points, which leads to internal growth of 2.4%. Net sales, excluding precious metal alloys, whichcontent, were negatively impacts bothimpacted by approximately 70 basis points due to the strengthening of the U.S. dollar over the prior year period. A reconciliation of reported net sales to net sales, excluding precious metal alloycontent, of the combined business for the three month period ended June 30, 2016 and also the refinery product lines.2015, respectfully, is as follows:
Constant Currency and Internal Sales Growth
The following table includes growth rates |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | June 30, | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 1,022.0 |
| | $ | 698.0 |
| | $ | 324.0 |
| | 46.4 | % |
Less: precious metal content of sales | | 17.3 |
| | 23.3 |
| | (6.0 | ) | | (25.8 | %) |
Net sales, excluding precious metal content | | 1,004.7 |
| | 674.7 |
| | 330.0 |
| | 48.9 | % |
Sirona net sales (a) | | — |
| | 306.1 |
| | (306.1 | ) | | NM |
|
Merger related adjustments (b) | | 1.6 |
| | — |
| | 1.6 |
| | NM |
|
Elimination of intercompany net sales | | — |
| | (0.7 | ) | | 0.7 |
| | NM |
|
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 1,006.3 |
| | $ | 980.1 |
| | $ | 26.2 |
| | 2.7 | % |
(a) Represents Sirona sales for netthe quarter ended June 30, 2015.
(b) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2016 and 2015 non-U.S. GAAP combined business results comparable.
NM - Not meaningful
Sales Growth by Region
Net sales, excluding precious metal content, for the three months ended June 30, 2016 and 2015, compared with respectfully, by geographic region is as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | June 30, | | | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
United States | | $ | 365.9 |
| | $ | 250.1 |
| | $ | 115.8 |
| | 46.3 | % |
| | | | | | | | |
Europe | | 382.2 |
| | 279.0 |
| | 103.2 |
| | 37.0 | % |
| | | | | | | | |
Rest of World | | 256.6 |
| | 145.6 |
| | 111.0 |
| | 76.2 | % |
A reconciliation of reported net sales to net sales, excluding precious metal content, of the combined business by geographic region for the three monthsmonth period ended June 30, 2014.2016 and 2015, respectfully, is as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | June 30, 2016 |
(in millions) | | United States | | Europe | | Rest of World | | Total |
| | | | | | | | |
Net sales | | $ | 367.2 |
| | $ | 392.4 |
| | $ | 262.4 |
| | $ | 1,022.0 |
|
Less: precious metal content of sales | | 1.3 |
| | 10.2 |
| | 5.8 |
| | 17.3 |
|
Net sales, excluding precious metal content | | 365.9 |
| | 382.2 |
| | 256.6 |
| | 1,004.7 |
|
Merger related adjustments (a) | | 1.1 |
| | 0.5 |
| | — |
| | 1.6 |
|
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 367.0 |
| | $ | 382.7 |
| | $ | 256.6 |
| | $ | 1,006.3 |
|
(a) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2016 and 2015 non-U.S. GAAP combined business results comparable.
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2015 |
| United States | | Europe | | Rest of World | | Worldwide |
| | | | | | | |
Internal sales growth | 3.3 | % | | 1.9 | % | | 7.9 | % | | 3.6 | % |
Net acquisition (divestiture) sales growth | (0.6 | %) | | (0.4 | )% | | (0.4 | %) | | (0.4 | )% |
Constant currency sales growth | 2.7 | % | | 1.5 | % | | 7.5 | % | | 3.2 | % |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | June 30, 2015 |
(in millions) | | United States | | Europe | | Rest of World | | Total |
| | | | | | | | |
Net sales | | $ | 252.1 |
| | $ | 292.9 |
| | $ | 153.0 |
| | $ | 698.0 |
|
Less: precious metal content of sales | | 2.0 |
| | 13.9 |
| | 7.4 |
| | 23.3 |
|
Net sales, excluding precious metal content | | 250.1 |
| | 279.0 |
| | 145.6 |
| | 674.7 |
|
Sirona net sales (a) | | 103.5 |
| | 106.5 |
| | 96.1 |
| | 306.1 |
|
Elimination of intercompany net sales | | — |
| | (0.7 | ) | | — |
| | (0.7 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 353.6 |
| | $ | 384.8 |
| | $ | 241.7 |
| | $ | 980.1 |
|
(a) Represents Sirona sales for the quarter ended June 30, 2015.
United States
NetReported net sales, excluding precious metal content, increased by 2.7%46.3% in the second quarter of 2016 as compared to the second quarter of 2015. This increase reflects sales of $112.4 million as a result of the consolidation of the Sirona businesses for three months. This excludes approximately $1.1 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
For the three month period ended June 30, 2016, sales of our combined businesses grew 3.8% on a constant currency basis. This includes a benefit of 3.2% from net acquisitions and was unfavorably impacted by discontinued products by approximately 60 basis points, which results in internal growth of 1.2%. This was driven by higher demand in the Dental and Healthcare Consumables segment.
Europe
Reported net sales, excluding precious metal content, increased by 37.0% in the second quarter of 2016 as compared to the second quarter of 2015. This increase reflects sales of $104.0 million as a result of the consolidation of the Sirona businesses for three months. This excludes approximately $0.5 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
For the three month period ended June 30, 2016, sales of our combined businesses declined 40 basis points on a constant currency basis. This includes an unfavorable impact of discontinued products of approximately 70 basis points, which results in internal growth of 0.3%. Net sales, excluding precious metal content, were negatively impacted by approximately 20 basis points due to the strengthening of the U.S. dollar over the prior year period. Growth in the Dental and Healthcare Consumables segment was offset by lower sales in the Technologies segment. In the prior year period, sales within the Technologies segment reflect the strong growth in the 2015 period due to higher demand after the biennial International Dental show.
Rest of World
Reported net sales, excluding precious metal content, increased by 76.2% in the second quarter of 20152016 as compared to the second quarter of 2014. Internal2015. This increase reflects sales growth was 3.3% inof $103.4 million as a result of the period, led by sales growth in dental consumable product categories.consolidation of the Sirona businesses for three months.
Europe
For the three month period ended June 30, 2016, sales of our combined businesses grew 8.6% on a constant currency basis. This includes a benefit of 1.3% from net acquisitions and was unfavorably impacted by discontinued products by approximately 20 basis points, which results in internal growth of 7.5%. Net sales, excluding precious metal content, increasedwere negatively impacted by 1.5% on a constant currency sales growth basis in the second quarter of 2015 as comparedapproximately 2.4% due to the first quarterstrengthening of 2014.the U.S. dollar over the prior year period. Internal sales growth was 1.9% in the period, primarily the result of sales growth in the dental specialty and dental consumables product categories partially offset by continued contraction in the CIS region and weaker sales of dental laboratory products.
Rest of World
Net sales, excluding precious metal content, increased region was driven by 7.5% on a constant currency salescomparable growth basis in the second quarter of 2015 as compared to the second quarter of 2014. The increase in internal sales growth of 7.9% was led by the dental specialty product category.both segments.
Gross Profit
| | | Three Months Ended | | | | | | Three Months Ended | | | | |
| June 30, | | | | | | June 30, | | | | |
(in millions) | 2015 | | 2014 | | $ Change | | % Change | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | | | | | | | | |
Gross profit | $ | 399.7 |
| | $ | 424.5 |
| | $ | (24.8 | ) | | (5.8 | %) | | $ | 526.9 |
| | $ | 399.7 |
| | $ | 127.2 |
| | 31.8 | % |
| | | | | | | | | | | | | | | |
Gross profit as a percentage of net sales, including precious metal content | 57.3 | % | | 55.5 | % | | |
| | |
| | 51.6 | % | | 57.3 | % | | |
| | |
|
Gross profit as a percentage of net sales, excluding precious metal content | 59.2 | % | | 58.1 | % | | |
| | |
| | 52.4 | % | | 59.2 | % | | |
| | |
|
Gross profit as a percentage of net sales, excluding precious metal content, increaseddecreased by 110680 basis points for the quarter ended June 30, 20152016 as compared to the same three month period ended June 30, 2014.2015. The increase inroll-off of merger related fair value adjustments and the impact of Sirona’s lower gross profit rate negatively impacted the gross profit rate by approximately 830 basis points, which was primarily due topartially offset by savings from the global efficiency program and favorable product mixpricing during the quarter ended June 30, 2016 as well as favorable foreign currency transactions including the effects of the Company’s hedging program compared to the three months ended June 30, 2014.2015 quarter.
Operating Expenses
|
| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| June 30, | | | | |
(in millions) | 2015 | | 2014 | | $ Change | | % Change |
| | | | | | | |
Selling, general and administrative expenses (“SG&A”) | $ | 275.0 |
| | $ | 296.1 |
| | $ | (21.1 | ) | | (7.1 | %) |
Restructuring and other costs | 38.9 |
| | 1.2 |
| | 37.7 |
| | NM |
|
| | | | | | | |
SG&A as a percentage of net sales, including precious metal content | 39.4 | % | | 38.7 | % | | |
| | |
|
SG&A as a percentage of net sales, excluding precious metal content | 40.8 | % | | 40.5 | % | | |
| | |
|
NM - Not meaningful |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | June 30, | | | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Selling, general and administrative expenses (“SG&A”) | | $ | 402.1 |
| | $ | 275.0 |
| | $ | 127.1 |
| | 46.2 | % |
Restructuring and other costs | | 3.6 |
| | 38.9 |
| | (35.3 | ) | | (90.7 | %) |
| | | | | | | | |
SG&A as a percentage of net sales, including precious metal content | | 39.3 | % | | 39.4 | % | | |
| | |
|
SG&A as a percentage of net sales, excluding precious metal content | | 40.0 | % | | 40.8 | % | | |
| | |
|
SG&A Expenses
SG&A expenses, including research and developing expenses, as a percentage of net sales, excluding precious metal content, for the quarter ended June 30, 2015 increased 302016 decreased 80 basis points compared to the quarter ended June 30, 2014.2015. The increasedecrease was primarily due to higher professional fees during the current periodresult of Sirona’s lower operating expense rate and savings from the global efficiency program, partially offset by increased amortization expense and other costs related to the global efficiency initiative.merger.
Restructuring and Other Costs
The Company recorded net restructuring and other costs of $3.6 million for the three months ended June 30, 2016 compared to $38.9 million for the three months ended June 30, 2015 compared to $1.2 million for the three months ended June 30, 2014. On May 22,2015. In 2015, the Company announced that it reorganized portions of its laboratory business and associated manufacturing capabilities within the Dental and Healthcare Consumables Endodonticssegment.
Other Income and Dental Laboratory Businesses segment. During the June 2015 quarter, the Company recorded $31.0 million of costs that consist primarily of employee severance benefits related to these and other similar actions. Also during the three and six months ended June 30, 2015, the Company recorded restructuring costs of $2.7 million and $7.5 million, respectively, within the Healthcare, Orthodontic and Implant Businesses segment primarily related to the global efficiency initiative. The Company expects additional restructuring plans during 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 $25 million to $30 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.Expense
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
(in millions) | | 2016 | | 2015 | | Change |
| | | | | | |
Net interest expense | | $ | 8.9 |
| | $ | 9.1 |
| | $ | (0.2 | ) |
Other expense (income), net | | (11.5 | ) | | (0.3 | ) | | (11.2 | ) |
Net interest and other expense | | $ | (2.6 | ) | | $ | 8.8 |
| | $ | (11.4 | ) |
Other Income and Expense
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
(in millions) | 2015 | | 2014 | | Change |
| | | | | |
Net interest expense | $ | 9.2 |
| | $ | 10.1 |
| | $ | (0.9 | ) |
Other expense (income), net | (0.4 | ) | | 0.6 |
| | (1.0 | ) |
Net interest and other expense | $ | 8.8 |
| | $ | 10.7 |
| | $ | (1.9 | ) |
Net Interest Expense
Net interest expense for the three months ended June 30, 20152016 was $0.9$0.2 million lower compared to the three months ended June 30, 2014.2015. The net decrease is a result of lower average interest rates and lower average debt levels in 20152016 compared to the prior year period.period resulting in a decrease of $0.5 million in interest expense.
Other Expense (Income), Net
Other expense (income), net in the second quarter of 2015 was $1.0 million favorable compared tofor the three months ended June 30, 2014.2016 was income of $11.5 million, comprised primarily of currency transaction gains of $13.2 million principally due to the United Kingdom Brexit referendum impacts on foreign currency denominated intercompany balances at June 30, 2016, partially offset by non-operating expense of $1.7 million. Other expense (income), net in the second quarter of 2015 of $0.4 million is comprised primarily of $1.2 million of income on net investment hedges offset by $0.8 of currency transaction losses. Other expense (income), net infor the three months ended June 30, 20142015 was income of $0.6$0.3 million, is comprised primarily of $0.2$1.1 million of interest and non-cash charges relating to fair value adjustments and $0.4non-operating income offset by $0.8 million of other expense.currency transaction gains.
Income Taxes and Net Income
| | | Three Months Ended June 30, | | | | Three Months Ended June 30, | | |
(in millions, except per share data) | 2015 | | 2014 | | $ Change | | 2016 | | 2015 | | $ Change |
| | | | | | | | | | | |
Provision (benefit) for income taxes | | | $ | 17.9 |
| | $ | 24.8 |
| | $ | (6.9 | ) |
| | | | | | | |
Effective income tax rate | 32.2 | % | | 22.4 | % | | | | 14.5 | % | | 32.2 | % | | |
| | | | | | �� | | | | | |
Equity in net loss of unconsolidated affiliated company | $ | (8.2 | ) | | $ | (0.4 | ) | | $ | (7.8 | ) | |
Equity in net income (loss) of unconsolidated affiliated company | | | $ | — |
| | $ | (8.1 | ) | | $ | 8.1 |
|
| | | | | | | | | | | |
Net income attributable to DENTSPLY International | $ | 44.1 |
| | $ | 90.0 |
| | $ | (45.9 | ) | |
Net income attributable to Dentsply Sirona | | | $ | 105.4 |
| | $ | 44.1 |
| | $ | 61.3 |
|
| | | | | | | | | | | |
Earnings per common share - diluted | $ | 0.31 |
| | $ | 0.62 |
| | |
| | $ | 0.44 |
| | $ | 0.31 |
| | |
|
| | | | | | |
Provision for Income Taxes
The Company’s effective tax rate for the second quarter of 2015 and 2014 was 32.2% and 22.4%, respectively. InFor the three months ended June 30, 2015, the2016, income taxes were a net expense of $17.9 million. The Company recorded $3.1$2.1 million of tax expensebenefit related to prior yeardiscrete tax matters. In additionmatters during the quarter. Excluding these tax matters, the Company’s effective tax rate was unfavorably16.1%. The effective tax rate was favorably impacted by the Company’s change in the mix of consolidated earnings.
The Company’s effective income tax rate for the second quarter of 20152016 included the net impact of restructuring, restructuring programbusiness combination related costs and other costs,fair value adjustments, amortization of purchased intangible assets, credit risk and fair value adjustments and income tax related adjustments, which impacted income before income taxes and the provision for income taxes by $56.5 million and $5.7 million, respectively.
In the second quarter of 2014, the Company’s effective income tax rate included the net impact of amortization of purchased intangible assets, business combination related costs, income tax related adjustments, restructuring, restructuring program related costs and other costs and credit risk and fair value adjustments which impacted income before income taxes and the provision for income taxes by $13.5$111.9 million and $3.0$36.4 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 $8.2 million and $0.4 million on an after-tax basis forIn the second quarter of 2015, the Company’s effective income tax rate included the net impact of restructuring program related costs and 2014,other costs, credit risk and fair value adjustments, amortization of purchased intangible assets and income tax related adjustments which impacted income before income taxes and the provision for income taxes by $56.9 million and $5.8 million, 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 second quarter of 2015 was approximately $8.4 million. For the second quarter of 2014, the mark-to-market net income recorded through DIO’s net income was approximately $0.8 million.
Net Income attributable to DENTSPLY InternationalDentsply Sirona
In addition to the results reported in accordance with US GAAP, the Company provides adjusted net income attributable to DENTSPLY InternationalDentsply Sirona and adjusted earnings per diluted common share (“adjusted EPS”). The Company discloses adjusted net income attributable to DENTSPLY InternationalDentsply Sirona 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 intangible assets either purchased intangible assets.or acquired through a business combination. 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 InternationalDentsply Sirona consists of net income attributable to DENTSPLY InternationalDentsply Sirona adjusted to exclude the net of tax impact of the following:
(1) Business combination related costs and fair value adjustments. These adjustments include costs related to integrating and consummating mergers and recently acquired businesses, andas well as costs, gains and losses related to the disposal of businesses or product lines. In addition, this category includes the roll off to the consolidated statement of operations of fair value adjustments related to business combinations, except for amortization expense noted below. 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, amortizationAmortization 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.
|
| | | | | | | |
| Three Months Ended June 30, 2015 |
(in thousands, except per share amounts) | Net Income | | Per Diluted Common Share |
| | | |
Net income attributable to DENTSPLY International | $ | 44,099 |
| | $ | 0.31 |
|
Restructuring, restructuring program related costs and other costs, net of tax | 36,946 |
| | 0.26 |
|
Certain fair value adjustments related to an unconsolidated affiliated company, net of tax | 8,288 |
| | 0.06 |
|
Amortization of purchased intangible assets, net of tax | 7,644 |
| | 0.05 |
|
Income tax related adjustments | 5,037 |
| | 0.04 |
|
Credit risk and fair value adjustments, net of tax | 1,304 |
| | 0.01 |
|
Adjusted non-US GAAP earnings | $ | 103,318 |
| | $ | 0.73 |
|
|
| | | | | | | |
| Three Months Ended June 30, 2014 |
(in thousands, except per share amounts) | Net Income | | Per Diluted Common Share |
| | | |
Net income attributable to DENTSPLY International | $ | 89,993 |
| | $ | 0.62 |
|
Amortization of purchased intangible assets, net of tax | 8,319 |
| | 0.06 |
|
Income tax related adjustments | 1,045 |
| | 0.01 |
|
Restructuring, restructuring program related costs and other costs, net of tax | 943 |
| | 0.01 |
|
Business combination related costs, net of tax | 380 |
| | — |
|
Credit risk and fair value adjustments, net of tax | (177 | ) | | — |
|
Certain fair value adjustments related to an unconsolidated affiliated company, net of tax | (832 | ) | | (0.01 | ) |
Adjusted non-US GAAP earnings | $ | 99,671 |
| | $ | 0.69 |
|
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.
|
| | | | | | |
| Three Months Ended |
| June 30, 2015 |
(in thousands, except percentage of net sales amount) | Operating Income (Loss) | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | |
Operating income attributable to DENTSPLY International | $ | 85,801 |
| | 12.7 | % |
Restructuring, restructuring program related costs and other costs | 43,873 |
| | 6.5 | % |
Amortization of purchased intangible assets | 10,939 |
| | 1.6 | % |
Credit risk and fair value adjustments | 2,006 |
| | 0.3 | % |
Adjusted non-US GAAP Operating Income | $ | 142,619 |
| | 21.1 | % |
|
| | | | | | |
| Three Months Ended |
| June 30, 2014 |
(in thousands, except percentage of net sales amount) | Operating Income (Loss) | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | |
Operating income attributable to DENTSPLY International | $ | 127,106 |
| | 17.4 | % |
Amortization of purchased intangible assets | 11,961 |
| | 1.6 | % |
Restructuring, restructuring program related costs and other costs | 1,280 |
| | 0.2 | % |
Business combination related costs | 618 |
| | 0.1 | % |
Adjusted non-US GAAP Operating Income | $ | 140,965 |
| | 19.3 | % |
Operating Segment Results
Third Party Net Sales, Excluding Precious Metal Content
|
| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| June 30, | | |
(in millions) | 2015 | | 2014 | | $ Change | | % Change |
| | | | | | | |
Dental Consumables, Endodontic and Dental Laboratory Businesses | $ | 301.3 |
| | $ | 320.0 |
| | $ | (18.7 | ) | | (5.8 | %) |
| | | | | | | |
Healthcare, Orthodontic and Implant Businesses | 252.7 |
| | 279.5 |
| | (26.8 | ) | | (9.6 | %) |
| | | | | | | |
Select Developed and Emerging Markets Businesses | 120.7 |
| | 131.4 |
| | (10.7 | ) | | (8.1 | %) |
Segment Operating Income (Loss)
|
| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| June 30, | | |
(in millions) | 2015 | | 2014 | | $ Change | | % Change |
| | | | | | | |
Dental Consumables, Endodontic and Dental Laboratory Businesses | $ | 110.8 |
| | $ | 118.0 |
| | $ | (7.2 | ) | | (6.1 | %) |
| | | | | | | |
Healthcare, Orthodontic and Implant Businesses | 27.9 |
| | 32.0 |
| | (4.1 | ) | | (12.8 | %) |
| | | | | | | |
Select Developed and Emerging Markets Businesses | (3.5 | ) | | (1.2 | ) | | (2.3 | ) | | NM |
|
NM - Not meaningful
Dental Consumables, Endodontic and Dental Laboratory Businesses
Net sales, excluding precious metal content, decreased $18.7 million, or 5.8% for the three months ended June 30, 2015 as compared to the same period in 2014. On a constant currency basis, net sales, excluding precious metal content, increased 1.5% as compared to 2014, led primarily by the Dental Consumables businesses.
Operating income decreased $7.2 million, for the three months ended June 30, 2015 as compared to 2014. The decrease in operating income was primarily the result of negative foreign currency translation and certain expense related to the Company’s restructuring programs offset by improved gross profit within the Dental Consumables and Endodontic businesses.
Healthcare, Orthodontic and Implant Businesses
Net sales, excluding precious metal content, decreased $26.8 million, or 9.6% for the three months ended June 30, 2015 compared to 2014. On a constant currency basis, net sales, excluding precious metal content, increased 2.8% as compared to 2014 primarily led by the Implant and Healthcare businesses.
Operating income decreased $4.1 million or 12.8%, compared to 2014, primarily the result of the negative impact of foreign currency partially offset by operating improvements in the Implant and Healthcare businesses.
Select Developed and Emerging Markets Businesses
Net sales, excluding precious metal content, decreased $10.7 million, or 8.1% for the three months ended June 30, 2015 as compared to 2014. On a constant currency basis, net sales, excluding precious metal content, increased 8.1% as compared to 2014. The increase is the result of positive growth in all businesses within the segment.
Operating income declined by $2.3 million during the three months ended June 30, 2015 as compared to 2014 primarily as a result of lower gross profit rates on sales due to foreign currency transaction impacts.
RESULTS OF OPERATIONS, SIX MONTHS ENDED JUNE 30, 2015 COMPARED TO SIX MONTHS ENDED JUNE 30, 2014
Net Sales
|
| | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| June 30, | | | | |
(in millions) | 2015 | | 2014 | | $ Change | | % Change |
| | | | | | | |
Net sales | $ | 1,354.3 |
| | $ | 1,495.3 |
| | $ | (141.0 | ) | | (9.4 | %) |
Less: precious metal content of sales | 48.1 |
| | 75.3 |
| | (27.2 | ) | | (36.1 | %) |
Net sales, excluding precious metal content | $ | 1,306.2 |
| | $ | 1,420.0 |
| | $ | (113.8 | ) | | (8.0 | )% |
Net sales, excluding precious metal content, for the six months ended June 30, 2015 was $1,306.2 million, a decrease of $113.8 million or 8.0% compared to the six months ended June 30, 2014. The change in net sales, excluding precious metal content, was a result of 10.2% from unfavorable foreign currency translation. Excluding the impact of foreign currency translation, net sales, excluding precious metal content grew 2.2% compared to the six months ended June 30, 2014. Sales related to precious metal content declined 36% for the six month period, reflecting the continuing reduction 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 six months ended June 30, 2015 compared with the six months ended June 30, 2014.
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2015 |
| United States | | Europe | | Rest of World | | Worldwide |
| | | | | | | |
Internal sales growth | 3.9 | % | | 0.4 | % | | 5.0 | % | | 2.5 | % |
Net acquisition (divestiture) sales growth | (0.7 | )% | | 0.1 | % | | (0.4 | )% | | (0.3 | )% |
Constant currency sales growth | 3.2 | % | | 0.5 | % | | 4.6 | % | | 2.2 | % |
United States
Net sales, excluding precious metal content, increased by 3.2% on a constant currency sales growth basis for the six months ended June 30, 2015 as compared to the same six month period of 2014. Internal sales growth was 3.9% for the six month period led by increased sales in the dental consumable product category.
Europe
Net sales, excluding precious metal content, increased by 0.5% on a constant currency sales growth basis for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014. Internal sales growth was 0.4% for the six 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.
Rest of World
Net sales, excluding precious metal content, increased by 4.6% on a constant currency sales growth basis for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014. Internal sales growth of 5.0% was led by the dental specialty products category.
Gross Profit
|
| | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| June 30, | | | | |
(in millions) | 2015 | | 2014 | | $ Change | | % Change |
| | | | | | | |
Gross profit | $ | 773.0 |
| | $ | 818.7 |
| | $ | (45.7 | ) | | (5.6 | %) |
| | | | | | | |
Gross profit as a percentage of net sales, including precious metal content | 57.1 | % | | 54.7 | % | | |
| | |
|
Gross profit as a percentage of net sales, excluding precious metal content | 59.2 | % | | 57.6 | % | | |
| | |
|
Gross profit as a percentage of net sales, excluding precious metal content, increased 160 basis points for the six month period ended June 30, 2015 compared to the six months ended June 30, 2014. The increase in the gross profit rate was primarily due to favorable product mix as well as favorable foreign currency transactions including the effects of the Company’s hedging program compared to the six months ended June 30, 2014.
Operating Expenses
|
| | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| June 30, | | | | |
(in millions) | 2015 | | 2014 | | $ Change | | % Change |
| | | | | | | |
Selling, general and administrative expenses (“SG&A”) | $ | 545.2 |
| | $ | 584.0 |
| | $ | (38.8 | ) | | (6.6 | %) |
Restructuring and other costs | 44.3 |
| | 2.0 |
| | 42.3 |
| | NM |
|
| | | | | | | |
SG&A as a percentage of net sales, including precious metal content | 40.3 | % | | 39.1 | % | | |
| | |
|
SG&A as a percentage of net sales, excluding precious metal content | 41.7 | % | | 41.1 | % | | |
| | |
|
NM - Not meaningful
SG&A Expenses
SG&A expenses as a percentage of net sales, excluding precious metal content, increased 60 basis points in the six months ended June 30, 2015 when compared to the same period ended June 30, 2014. The increase was primarily due to biennial trade shows and higher professional fees related to the operating margin improvement initiative in the current period.
Restructuring and Other Costs
The Company recorded net restructuring and other costs of $44.3 million for the six months ended June 30, 2015 compared to $2.0 million for the six months ended June 30, 2014. The increase of $42.3 million is related to restructuring plans discussed in the summary of results for the three months ended June 30, 2015.
Other Income and Expense
|
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
(in millions) | 2015 | | 2014 | | Change |
| | | | | |
Net interest expense | $ | 19.1 |
| | $ | 19.6 |
| | $ | (0.5 | ) |
Other expense (income), net | 0.2 |
| | 1.0 |
| | (0.8 | ) |
Net interest and other expense | $ | 19.3 |
| | $ | 20.6 |
| | $ | (1.3 | ) |
Net Interest Expense
Net interest expense for the six months ended June 30, 2015 was $0.5 million lower compared to the six months ended June 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 balance of cross currency basis swaps designated as net investment hedges generating lower interest income of $1.4 million versus the prior year six month period.
Other Expense (Income), Net
Other expense (income), net for the six months ended June 30, 2015 was $0.8 million lower compared to the six months ended June 30, 2014. Other expense (income), net for the six months ended June 30, 2015 was $0.2 million, comprised of $0.9 million of net interest income net investment hedges, $0.5 million of currency transaction losses and $0.6 million of other expense. Other expense (income), net for the six months ended June 30, 2014 was $1.0 million, primarily consisting of $0.7 million of currency transaction losses.
Income Taxes and Net Income
|
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
(in millions, except per share data) | 2015 | | 2014 | | $ Change |
| | | | | |
Effective income tax rate | 26.6 | % | | 22.9 | % | | |
| | | | | |
Equity in net loss of unconsolidated affiliated company | $ | (12.5 | ) | | $ | (0.7 | ) | | $ | (11.8 | ) |
| | | | | |
Net income attributable to DENTSPLY International | $ | 108.1 |
| | $ | 162.9 |
| | $ | (54.8 | ) |
| | | | | |
Earnings per common share - diluted | $ | 0.76 |
| | $ | 1.13 |
| | |
|
| | | | | |
Provision for Income Taxes
The Company’s effective tax rate for the six month period of 2015 and 2014 was 26.6% and 22.9%, respectively. In the six months ended June 30, 2015, the Company recorded $2.8 million of tax expense related to prior year tax matters. In addition, 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 six 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 $77.6 million and $11.6 million, respectively.
In the first six months of 2014, the Company’s effective income tax rate included the net impact of amortization of purchased intangible assets, business combination related costs, restructuring, restructuring program related costs and other 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 $29.1 million and $5.7 million, respectively.
Equity in net (loss) income of unconsolidated affiliated company
The Company’s 17% ownership investment of DIO Corporation (“DIO”) resulted in a net loss of $12.5 million and $0.7 million on an after-tax basis for the six months ended June 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 six months of 2015 was approximately $12.9 million. For the six months ended June 30, 2014, the mark-to-market net income recorded through DIO’s net income was approximately $1.1 million.
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 InternationalDentsply Sirona 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 InternationalDentsply Sirona by diluted weighted-average common shares outstanding. Adjusted net income attributable to DENTSPLY InternationalDentsply Sirona 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.
|
| | | | | | | |
| Six Months Ended June 30, 2015 |
(in thousands, except per share amounts) | Net Income | | Per Diluted Common Share |
| | | |
Net income attributable to DENTSPLY International | $ | 108,061 |
| | $ | 0.76 |
|
Restructuring, restructuring program related costs and other costs, net of tax | 41,406 |
| | 0.29 |
|
Amortization of purchased intangible assets, net of tax | 15,257 |
| | 0.11 |
|
Certain fair value adjustments related to an unconsolidated affiliated company, net of tax | 12,875 |
| | 0.09 |
|
Income tax related adjustments | 5,473 |
| | 0.04 |
|
Credit risk and fair value adjustments, net of tax | 3,280 |
| | 0.02 |
|
Business combination related costs, net of tax | 599 |
| | — |
|
Adjusted non-US GAAP earnings | $ | 186,951 |
| | $ | 1.31 |
|
|
| | | | | | | |
| Six Months Ended June 30, 2014 |
(in thousands, except per share amounts) | Net Income | | Per Diluted Common Share |
| | | |
Net income attributable to DENTSPLY International | $ | 162,871 |
| | $ | 1.13 |
|
Amortization of purchased intangible assets, net of tax | 17,231 |
| | 0.12 |
|
Income tax related adjustments | 2,942 |
| | 0.02 |
|
Business combination related costs, net of tax | 2,346 |
| | 0.02 |
|
Restructuring, restructuring program related costs and other costs, net of tax | 1,588 |
| | 0.01 |
|
Credit risk and fair value adjustments, net of tax | (801 | ) | | (0.01 | ) |
Certain fair value adjustments related to an unconsolidated affiliated company, net of tax | (1,035 | ) | | (0.01 | ) |
Adjusted non-US GAAP earnings | $ | 185,142 |
| | $ | 1.28 |
|
|
| | | | | | | | |
| | Three Months Ended |
| | June 30, 2016 |
(in millions, except per share amounts) | | Net Income | | Per Diluted Common Share |
| | | | |
Net income attributable to Dentsply Sirona | | $ | 105.4 |
| | $ | 0.44 |
|
Business combination related costs and fair value adjustments, net of tax | | 46.4 |
| | 0.20 |
|
Amortization of purchased intangible assets, net of tax | | 31.0 |
| | 0.13 |
|
Restructuring program related costs and other costs, net of tax | | 3.0 |
| | 0.01 |
|
Credit risk and fair value adjustments, net of tax | | 1.3 |
| | 0.01 |
|
Income tax related adjustments | | (6.2 | ) | | (0.03 | ) |
Adjusted non-US GAAP earnings | | $ | 180.9 |
| | $ | 0.76 |
|
|
| | | | | | | | |
| | Three Months Ended |
| | June 30, 2015 |
(in millions, except per share amounts) | | Net Income | | Per Diluted Common Share |
| | | | |
Net income attributable to Dentsply Sirona | | $ | 44.1 |
| | $ | 0.31 |
|
Restructuring program related costs and other costs, net of tax | | 37.0 |
| | 0.26 |
|
Certain fair value adjustments related to an unconsolidated affiliated company, net of tax | | 8.3 |
| | 0.06 |
|
Amortization of purchased intangible assets, net of tax | | 7.6 |
| | 0.05 |
|
Income tax related adjustments | | 5.0 |
| | 0.04 |
|
Credit risk and fair value adjustments, net of tax | | 1.3 |
| | 0.01 |
|
Business combination related costs and fair value adjustments, net of tax | | 0.3 |
| | — |
|
Adjusted non-US GAAP earnings | | $ | 103.6 |
| | $ | 0.73 |
|
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. 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.
|
| | | | | | | |
| | Three Months Ended |
| | June 30, 2016 |
(in millions) | | Operating Income | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | | |
Operating income attributable to Dentsply Sirona | | $ | 121.2 |
| | 12.1 | % |
Business combination related costs and fair value adjustments | | 62.0 |
| | 6.2 | % |
Amortization of purchased intangible assets | | 43.6 |
| | 4.3 | % |
Restructuring program related costs and other costs | | 4.3 |
| | 0.4 | % |
Credit risk and fair value adjustments | | 1.3 |
| | 0.1 | % |
Adjusted non-US GAAP Operating Income | | $ | 232.4 |
| | 23.1 | % |
|
| | | | | | | |
| | Three Months Ended |
| | June 30, 2015 |
(in millions) | | Operating Income | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | | |
Operating income attributable to Dentsply Sirona | | $ | 85.8 |
| | 12.7 | % |
Restructuring program related costs and other costs | | 43.9 |
| | 6.5 | % |
Amortization of purchased intangible assets | | 10.9 |
| | 1.6 | % |
Credit risk and fair value adjustments | | 2.0 |
| | 0.3 | % |
Business combination related costs and fair value adjustments | | 0.4 |
| | 0.1 | % |
Adjusted non-US GAAP Operating Income | | $ | 143.0 |
| | 21.2 | % |
Operating Segment Results
Third Party Net Sales, Excluding Precious Metal Content
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | June 30, | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Dental and Healthcare Consumables | | $ | 526.7 |
| | $ | 487.8 |
| | $ | 38.9 |
| | 8.0 | % |
| | | | | | | | |
Technologies | | 478.0 |
| | 186.9 |
| | 291.1 |
| | NM |
|
NM - Not meaningful
Segment Operating Income
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | June 30, | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Dental and Healthcare Consumables | | $ | 151.7 |
| | $ | 125.8 |
| | $ | 25.9 |
| | 20.6 | % |
| | | | | | | | |
Technologies | | 112.1 |
| | 21.7 |
| | 90.4 |
| | NM |
|
NM - Not meaningful
A reconciliation of reported net sales to net sales, excluding precious metal content, of the combined business by segment for the three month period ended June 30, 2016 and 2015, respectfully, is as follows:
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | June 30, 2016 |
(in millions) | | Dental and Healthcare Consumables | | Technologies | | Total |
| | | | | | |
Net sales | | $ | 543.8 |
| | $ | 478.2 |
| | $ | 1,022.0 |
|
Less: precious metal content of sales | | 17.1 |
| | 0.2 |
| | 17.3 |
|
Net sales, excluding precious metal content | | 526.7 |
| | 478.0 |
| | 1,004.7 |
|
Merger related adjustments (a) | | — |
| | 1.6 |
| | 1.6 |
|
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 526.7 |
| | $ | 479.6 |
| | $ | 1,006.3 |
|
(a) ) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2016 and 2015 non-U.S. GAAP combined business results comparable.
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | June 30, 2015 |
(in millions) | | Dental and Healthcare Consumables | | Technologies | | Total |
| | | | | | |
Net sales | | $ | 510.9 |
| | $ | 187.1 |
| | $ | 698.0 |
|
Less: precious metal content of sales | | 23.1 |
| | 0.2 |
| | 23.3 |
|
Net sales, excluding precious metal content | | 487.8 |
| | 186.9 |
| | 674.7 |
|
Sirona net sales (a) | | 26.8 |
| | 279.3 |
| | 306.1 |
|
Elimination of intercompany net sales | | (0.7 | ) | | — |
| | (0.7 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 513.9 |
| | $ | 466.2 |
| | $ | 980.1 |
|
(a) Represents Sirona sales for the quarter ended June 30, 2015.
Dental and Healthcare Consumables
Reported net sales, excluding precious metal content, increased by 8.0% in the second quarter of 2016 as compared to the second quarter of 2015. This increase reflects sales of $28.4 million as a result of the consolidation of the Sirona businesses for three months.
For the three month period ended June 30, 2016, sales of our combined businesses grew 3.4% on a constant currency basis. This includes a benefit of approximately 60 basis points from net acquisitions and was unfavorably impacted by discontinued products by approximately 1.0%, which results in internal growth of 3.8%. Net sales, excluding precious metal content, were negatively impacted by approximately 1.0% due to the strengthening of the U.S. dollar over the prior year period. Sales growth across all regions was led by the Rest of World region.
The operating income increase for the three months ended June 30, 2016 as compared to 2015 reflects the savings from the global efficiency program, as well as the impact of the merger.
Technologies
Reported net sales, excluding precious metal content, increased $291.1 million in the second quarter of 2016 as compared to the second quarter of 2015. This increase is due to the consolidation of the Sirona businesses for three months. This excludes approximately $1.6 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
For the three month period ended June 30, 2016, sales of our combined businesses grew 3.3% on a constant currency basis. This includes a benefit of 2.5% from net acquisitions which results in internal growth of 80 basis points. Net sales, excluding precious metal content, were negatively impacted by approximately 40 basis points due to the strengthening of the U.S. dollar over the prior year period. Sales growth in this segment reflects increased demand in the Rest of World region offset by sales declines in Europe which reflects the strong performance in the prior year related to the biennial International Dental show.
The operating income increase for the three months ended June 30, 2016 as compared to 2015 reflects the impact of the merger.
RESULTS OF OPERATIONS, SIX MONTHS ENDED JUNE 30, 2016 COMPARED TO SIX MONTHS ENDED JUNE 30, 2015
Net Sales
|
| | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30, | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 1,794.6 |
| | $ | 1,354.3 |
| | $ | 440.3 |
| | 32.5 | % |
Less: precious metal content of sales | | 35.4 |
| | 48.1 |
| | (12.7 | ) | | (26.4 | %) |
Net sales, excluding precious metal content | | $ | 1,759.2 |
| | $ | 1,306.2 |
| | $ | 453.0 |
| | 34.7 | % |
Net sales, excluding precious metal content, for the six months ended June 30, 2016 were $1,759.2 million, an increase of $453.0 million from the second quarter of 2015, as reported by legacy DENTSPLY. The consolidation of Sirona since the merger date contributed sales of $448.7 million for the six months ended June 30, 2016. This excludes approximately $10.4 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
Sales related to precious metal content declined 26.4% for the six months ended June 30, 2016, which was primarily related to the discontinued refinery product lines.
For the six month period ended June 30, 2016, sales of our combined businesses grew 4.9% on a constant currency basis. This includes a benefit of 1.5% from net acquisitions and was unfavorably impacted by discontinued products by approximately 60 basis points, which leads to internal growth of 4.0%. Net sales, excluding precious metal content, were negatively impacted by approximately 1.6% due to the strengthening of the U.S. dollar over the prior year period. A reconciliation of reported net sales to net sales, excluding precious metal content, of the combined business for the six month period ended June 30, 2016 and 2015, respectfully, is as follows:
|
| | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30, | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 1,794.6 |
| | $ | 1,354.3 |
| | $ | 440.3 |
| | 32.5 | % |
Less: precious metal content of sales | | 35.4 |
| | 48.1 |
| | (12.7 | ) | | (26.4 | %) |
Net sales, excluding precious metal content | | 1,759.2 |
| | 1,306.2 |
| | 453.0 |
| | 34.7 | % |
Sirona net sales (a) | | 160.7 |
| | 563.4 |
| | (402.7 | ) | | NM |
|
Merger related adjustments (b) | | 10.4 |
| | — |
| | 10.4 |
| | NM |
|
Elimination of intercompany net sales | | (0.4 | ) | | (1.2 | ) | | 0.8 |
| | NM |
|
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 1,929.9 |
| | $ | 1,868.4 |
| | $ | 61.5 |
| | 3.3 | % |
(a) Represents Sirona sales for January and February 2016, and the six months ended June 30, 2015.
(b) ) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2016 and 2015 non-U.S. GAAP combined business results comparable.
NM - Not meaningful
Sales Growth by Region
Net sales, excluding precious metal content, for the six months ended June 30, 2016 and 2015, respectfully, by geographic region is as follows:
|
| | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30, | | | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
United States | | $ | 644.4 |
| | $ | 488.7 |
| | $ | 155.7 |
| | 31.9 | % |
| | | | | | | | |
Europe | | 682.1 |
| | 545.1 |
| | 137.0 |
| | 25.1 | % |
| | | | | | | | |
Rest of World | | 432.7 |
| | 272.4 |
| | 160.3 |
| | 58.8 | % |
A reconciliation of reported net sales to net sales, excluding precious metal content, of the combined business by geographic region for the six month period ended June 30, 2016 and 2015, respectfully, is as follows:
|
| | | | | | | | | | | | | | | | |
| | Six Months Ended |
| | June 30, 2016 |
(in millions) | | United States | | Europe | | Rest of World | | Total |
| | | | | | | | |
Net sales | | $ | 647.0 |
| | $ | 703.6 |
| | $ | 444.0 |
| | $ | 1,794.6 |
|
Less: precious metal content of sales | | 2.6 |
| | 21.5 |
| | 11.3 |
| | 35.4 |
|
Net sales, excluding precious metal content | | 644.4 |
| | 682.1 |
| | 432.7 |
| | 1,759.2 |
|
Sirona net sales (a) | | 60.5 |
| | 59.4 |
| | 40.8 |
| | 160.7 |
|
Merger related adjustments (b) | | 9.9 |
| | 0.5 |
| | — |
| | 10.4 |
|
Elimination of intercompany net sales | | (0.1 | ) | | (0.3 | ) | | — |
| | (0.4 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 714.7 |
| | $ | 741.7 |
| | $ | 473.5 |
| | $ | 1,929.9 |
|
(a) Represents Sirona sales for January and February 2016.
(b) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2016 and 2015 non-U.S. GAAP combined business results comparable.
|
| | | | | | | | | | | | | | | | |
| | Six Months Ended |
| | June 30, 2015 |
(in millions) | | United States | | Europe | | Rest of World | | Total |
| | | | | | | | |
Net sales | | $ | 492.9 |
| | $ | 575.0 |
| | $ | 286.4 |
| | $ | 1,354.3 |
|
Less: precious metal content of sales | | 4.2 |
| | 29.9 |
| | 14.0 |
| | 48.1 |
|
Net sales, excluding precious metal content | | 488.7 |
| | 545.1 |
| | 272.4 |
| | 1,306.2 |
|
Sirona net sales (a) | | 184.7 |
| | 198.7 |
| | 180.0 |
| | 563.4 |
|
Elimination of intercompany net sales | | (0.1 | ) | | (1.1 | ) | | — |
| | (1.2 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 673.3 |
| | $ | 742.7 |
| | $ | 452.4 |
| | $ | 1,868.4 |
|
(a) Represents Sirona sales for the six months ended June 30, 2015.
United States
Reported net sales, excluding precious metal content, for the six months ended June 30, 2016, increased by 31.9% as compared to the six months ended June 30, 2015. This increase reflects sales of $154.5 million as a result of the consolidation of the Sirona businesses since the merger date. This excludes approximately $9.9 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
For the six month period ended June 30, 2016, sales of our combined businesses grew 6.2% on a constant currency basis. This includes a benefit of 3.4% from net acquisitions and was unfavorably impacted by discontinued products by approximately 50 basis points, which results in internal growth of 3.3%. Both segments generated comparable positive internal sales growth for the six months ended June 30, 2016.
Europe
Reported net sales, excluding precious metal content, for the six months ended June 30, 2016, increased by 25.1% as compared to the six months ended June 30, 2015. This increase reflects sales of $143.5 million as a result of the consolidation of the Sirona businesses since the merger date. This excludes approximately $0.5 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
For the six month period ended June 30, 2016, sales of our combined businesses grew 1.5% on a constant currency basis. This includes an unfavorable impact of discontinued products of approximately 80 basis points, which results in internal growth of 2.3%. Net sales, excluding precious metal content, were negatively impacted by approximately 1.7% due to the strengthening of the U.S. dollar over the prior year period. Growth in this region was driven by the Dental and Healthcare Consumables segment.
Rest of World
Reported net sales, excluding precious metal content, for the six months ended June 30, 2016, increased by 58.8% as compared to the six months ended June 30, 2015. This increase reflects sales of $150.7 million as a result of the consolidation of the Sirona businesses since the merger date.
For the six month period ended June 30, 2016, sales of our combined businesses grew 8.6% on a constant currency basis. This includes a benefit of 1.3% from net acquisitions and was unfavorably impacted by discontinued products by approximately 30 basis points, which results in internal growth of 7.6%. Net sales, excluding precious metal content, were negatively impacted by approximately 3.9% due to the strengthening of the U.S. dollar over the prior year period. Both segments generated comparable positive internal sales growth for the six months ended June 30, 2016.
Gross Profit
|
| | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30, | | | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Gross profit | | $ | 945.8 |
| | $ | 773.0 |
| | $ | 172.8 |
| | 22.4 | % |
| | | | | | | | |
Gross profit as a percentage of net sales, including precious metal content | | 52.7 | % | | 57.1 | % | | |
| | |
|
Gross profit as a percentage of net sales, excluding precious metal content | | 53.8 | % | | 59.2 | % | | |
| | |
|
Gross profit as a percentage of net sales, excluding precious metal content, decreased by 540 basis points for the six months ended June 30, 2016 as compared to the same six month period ended June 30, 2015. The roll-off of merger related fair value adjustments and the impact of Sirona’s lower gross profit rate negatively impacted the gross profit rate by approximately 720 basis points, partially offset by savings from the global efficiency program and favorable product pricing during the six months ended June 30, 2016 as compared to the June 30, 2015 period.
Operating Expenses
|
| | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30, | | | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Selling, general and administrative expenses (“SG&A”) | | $ | 744.2 |
| | $ | 545.2 |
| | $ | 199.0 |
| | 36.5 | % |
Restructuring and other costs | | 7.7 |
| | 44.3 |
| | (36.6 | ) | | (82.6 | %) |
| | | | | | | | |
SG&A as a percentage of net sales, including precious metal content | | 41.5 | % | | 40.3 | % | | |
| | |
|
SG&A as a percentage of net sales, excluding precious metal content | | 42.3 | % | | 41.7 | % | | |
| | |
|
SG&A Expenses
SG&A expenses, including research and development expenses, as a percentage of net sales, excluding precious metal content, for the six months ended June 30, 2016 increased 60 basis points compared to the six months ended June 30, 2015. Merger and integration related expenses, including amortization expense, for the six months ended June 30, 2016 negatively impacted the rate by approximately 320 basis points, partially offset by Sirona’s lower operating expense rate and savings from the global efficiency program.
Restructuring and Other Costs
The Company recorded net restructuring and other costs of $7.7 million for the six months ended June 30, 2016 compared to $44.3 million for the six months ended June 30, 2015. In 2015, the Company reorganized portions of its laboratory business and associated manufacturing capabilities within the Dental and Healthcare Consumables segment.
Other Income and Expense
|
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
(in millions) | | 2016 | | 2015 | | Change |
| | | | | | |
Net interest expense | | $ | 17.6 |
| | $ | 19.1 |
| | $ | (1.5 | ) |
Other expense (income), net | | (14.9 | ) | | 0.2 |
| | (15.1 | ) |
Net interest and other expense | | $ | 2.7 |
| | $ | 19.3 |
| | $ | (16.6 | ) |
Net Interest Expense
Net interest expense for the six months ended June 30, 2016 was $1.5 million lower compared to the six months ended June 30, 2015. The net decrease is a result of lower average interest rates and lower average debt levels in 2016 compared to the prior year period resulting in a decrease of $2.0 million in interest expense.
Other Expense (Income), Net
Other expense (income), net for the six months ended June 30, 2016 was income of $14.9 million, comprised primarily of currency transaction gains of $10.9 million principally due to the United Kingdom Brexit referendum impacts on foreign currency denominated intercompany balances at June 30, 2016, and non-operating income of $4.0 million including a $5.7 million gain on the sale of a business in the March 2016 quarter. Other expense (income), net in the six months ended June 30, 2015 was expense of $0.2 million, comprised of $0.4 million of currency transaction gains offset by $0.6 million of non-operating expenses.
Income Taxes and Net Income
|
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
(in millions, except per share data) | | 2016 | | 2015 | | $ Change |
| | | | | | |
Provision (benefit) for income taxes | | $ | (40.0 | ) | | $ | 43.6 |
| | NM |
|
| | | | | | |
Effective income tax rate | | NM |
| | 26.6 | % | | |
| | | | | | |
Equity in net income (loss) of unconsolidated affiliated company | | $ | — |
| | $ | (12.6 | ) | | $ | 12.6 |
|
| | | | | | |
Net income attributable to Dentsply Sirona | | $ | 230.4 |
| | $ | 108.1 |
| | $ | 122.3 |
|
| | | | | | |
Earnings per common share - diluted | | $ | 1.11 |
| | $ | 0.76 |
| | |
|
| | | | | | |
NM - Not meaningful
Provision for Income Taxes
For the six months ended June 30, 2016, income taxes were a net benefit of $40.0 million. During the first six months the Company recorded a tax benefit from the release of a valuation allowance on previously unrecognized tax assets related to foreign
interest deduction carryforwards of a non-U.S. legacy DENTSPLY subsidiary of approximately $78.6 million, resulting from the merger. The Company also recorded $4.6 million of tax expense related to other discrete tax matters. Excluding the impact of these tax matters, the Company’s effective tax rate was 17.8%. In addition, the effective tax rate was favorably impacted by the Company’s change in the mix of consolidated earnings.
The Company’s effective income tax rate for the first six months of 2016 included the net impact of business combination related costs and fair value adjustments, amortization of purchased intangible assets, restructuring program related costs and other costs, credit risk and fair value adjustments and income tax related adjustments which impacted income before income taxes and the benefit for income taxes by $203.8 million and $130.9 million, respectively.
In the first six months of 2015, the Company’s effective income tax rate included the net impact of 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 $78.6 million and $11.9 million, respectively.
Net Income attributable to Dentsply Sirona
In addition to the results reported in accordance with US GAAP, the Company provides adjusted net income attributable to Dentsply Sirona and adjusted earnings per diluted common share (“adjusted EPS”). The Company discloses adjusted net income attributable to Dentsply Sirona 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 intangible assets either purchased or acquired through a business combination. 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.
|
| | | | | | | | |
| | Six Months Ended |
| | June 30, 2016 |
(in millions, except per share amounts) | | Net Income | | Per Diluted Common Share |
| | | | |
Net income attributable to Dentsply Sirona | | $ | 230.4 |
| | $ | 1.11 |
|
Business combination related costs and fair value adjustments, net of tax | | 100.6 |
| | 0.48 |
|
Amortization of purchased intangible assets, net of tax | | 46.5 |
| | 0.22 |
|
Credit risk and fair value adjustments, net of tax | | 2.0 |
| | 0.01 |
|
Restructuring program related costs and other costs, net of tax | | 1.7 |
| | 0.01 |
|
Income tax related adjustments | | (77.9 | ) | | (0.37 | ) |
Adjusted non-US GAAP earnings | | $ | 303.3 |
| | $ | 1.46 |
|
|
| | | | | | | | |
| | Six Months Ended |
| | June 30, 2015 |
(in millions, except per share amounts) | | Net Income | | Per Diluted Common Share |
| | | | |
Net income attributable to Dentsply Sirona | | $ | 108.1 |
| | $ | 0.76 |
|
Restructuring program related costs and other costs, net of tax | | 41.4 |
| | 0.29 |
|
Amortization of purchased intangible assets, net of tax | | 15.3 |
| | 0.11 |
|
Certain fair value adjustments related to an unconsolidated affiliated company, net of tax | | 12.8 |
| | 0.09 |
|
Income tax related adjustments | | 5.5 |
| | 0.04 |
|
Credit risk and fair value adjustments, net of tax | | 3.3 |
| | 0.02 |
|
Business combination related costs and fair value adjustments, net of tax | | 1.3 |
| | 0.01 |
|
Adjusted non-US GAAP earnings | | $ | 187.7 |
| | $ | 1.32 |
|
Adjusted Operating Income and Margin
Adjusted operating income and margin is considered aanother important internal measure not calculatedfor the Company. Operating income in accordance with accounting principles generally accepted inUS GAAP is adjusted for the United States; therefore, it isitems 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. 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.
|
| | | | | | |
| Six Months Ended |
| June 30, 2015 |
(in thousands, except percentage of net sales amount) | Operating Income (Loss) | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | |
Operating income attributable to DENTSPLY International | $ | 183,510 |
| | 14.0 | % |
Restructuring, restructuring program related costs and other costs | 50,313 |
| | 3.8 | % |
Amortization of purchased intangible assets | 21,845 |
| | 1.7 | % |
Credit risk and fair value adjustments | 4,031 |
| | 0.3 | % |
Business combination related costs | 788 |
| | 0.1 | % |
Adjusted non-US GAAP Operating Income | $ | 260,487 |
| | 19.9 | % |
|
| | | | | | | |
| | Six Months Ended |
| | June 30, 2016 |
(in millions) | | Operating Income | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | | |
Operating income attributable to Dentsply Sirona | | $ | 193.9 |
| | 11.0 | % |
Business combination related costs and fair value adjustments | | 130.8 |
| | 7.4 | % |
Amortization of purchased intangible assets | | 65.4 |
| | 3.7 | % |
Restructuring program related costs and other costs | | 9.2 |
| | 0.5 | % |
Credit risk and fair value adjustments | | 2.6 |
| | 0.1 | % |
Adjusted non-US GAAP Operating Income | | $ | 401.9 |
| | 22.7 | % |
|
| | | | | | |
| Six Months Ended |
| June 30, 2014 |
(in thousands, except percentage of net sales amount) | Operating Income (Loss) | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | |
Operating income attributable to DENTSPLY International | $ | 232,676 |
| | 16.4 | % |
Amortization of purchased intangible assets | 24,536 |
| | 1.7 | % |
Business combination related costs | 3,553 |
| | 0.2 | % |
Restructuring, restructuring program related costs and other costs | 2,189 |
| | 0.2 | % |
Adjusted non-US GAAP Operating Income | $ | 262,954 |
| | 18.5 | % |
|
| | | | | | | |
| | Six Months Ended |
| | June 30, 2015 |
(in millions) | | Operating Income | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | | |
Operating income attributable to Dentsply Sirona | | $ | 183.5 |
| | 14.0 | % |
Restructuring program related costs and other costs | | 50.3 |
| | 3.9 | % |
Amortization of purchased intangible assets | | 21.9 |
| | 1.7 | % |
Credit risk and fair value adjustments | | 4.0 |
| | 0.3 | % |
Business combination related costs and fair value adjustments | | 1.8 |
| | 0.1 | % |
Adjusted non-US GAAP Operating Income | | $ | 261.5 |
| | 20.0 | % |
Operating Segment Results
Third Party Net Sales, Excluding Precious Metal Content
|
| | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| June 30, | | |
(in millions) | 2015 | | 2014 | | $ Change | | % Change |
| | | | | | | |
Dental Consumables, Endodontic and Dental Laboratory Businesses | $ | 593.4 |
| | $ | 625.1 |
| | $ | (31.7 | ) | | (5.1 | %) |
| | | | | | | |
Healthcare, Orthodontic and Implant Businesses | 488.5 |
| | 543.7 |
| | (55.2 | ) | | (10.2 | %) |
| | | | | | | |
Select Developed and Emerging Markets Businesses | 224.4 |
| | 251.3 |
| | (26.9 | ) | | (10.7 | %) |
Segment Operating Income (Loss)
|
| | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| June 30, | | |
(in millions) | 2015 | | 2014 | | $ Change | | % Change |
| | | | | | | |
Dental Consumables, Endodontic and Dental Laboratory Businesses | $ | 214.2 |
| | $ | 224.7 |
| | $ | (10.5 | ) | | (4.7 | %) |
| | | | | | | |
Healthcare, Orthodontic and Implant Businesses | 54.4 |
| | 56.6 |
| | (2.2 | ) | | (3.9 | )% |
| | | | | | | |
Select Developed and Emerging Markets Businesses | (7.4 | ) | | (2.5 | ) | | (4.9 | ) | | NM |
|
|
| | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30, | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Dental and Healthcare Consumables | | $ | 997.5 |
| | $ | 943.3 |
| | $ | 54.2 |
| | 5.7 | % |
| | | | | | | | |
Technologies | | 761.7 |
| | 362.9 |
| | 398.8 |
| | NM |
|
NM - Not meaningful
Dental Consumables, Endodontic and Dental Laboratory Businesses
Segment Operating Income
|
| | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30, | | |
(in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Dental and Healthcare Consumables | | $ | 282.4 |
| | $ | 239.1 |
| | $ | 43.3 |
| | 18.1 | % |
| | | | | | | | |
Technologies | | 165.9 |
| | 42.6 |
| | $ | 123.3 |
| | NM |
|
NM - Not meaningful
Net
A reconciliation of reported net sales to net sales, excluding precious metal content, decreased $31.7 million, or 5.1%of the combined business by segment for the six month period ended June 30, 2016 and 2015, respectfully, is as follows:
|
| | | | | | | | | | | | |
| | Six Months Ended |
| | June 30, 2016 |
(in millions) | | Dental and Healthcare Consumables | | Technologies | | Total |
| | | | | | |
Net sales | | $ | 1,032.7 |
| | $ | 761.9 |
| | $ | 1,794.6 |
|
Less: precious metal content of sales | | 35.2 |
| | 0.2 |
| | 35.4 |
|
Net sales, excluding precious metal content | | 997.5 |
| | 761.7 |
| | 1,759.2 |
|
Sirona net sales (a) | | 15.7 |
| | 145.0 |
| | 160.7 |
|
Merger related adjustments (b) | | — |
| | 10.4 |
| | 10.4 |
|
Elimination of intercompany net sales | | (0.4 | ) | | — |
| | (0.4 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 1,012.8 |
| | $ | 917.1 |
| | $ | 1,929.9 |
|
(a) Represents Sirona sales for January and February 2016.
(b) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2016 and 2015 non-U.S. GAAP combined business results comparable.
|
| | | | | | | | | | | | |
| | Six Months Ended |
| | June 30, 2015 |
(in millions) | | Dental and Healthcare Consumables | | Technologies | | Total |
| | | | | | |
Net sales | | $ | 991.0 |
| | $ | 363.3 |
| | $ | 1,354.3 |
|
Less: precious metal content of sales | | 47.7 |
| | 0.4 |
| | 48.1 |
|
Net sales, excluding precious metal content | | 943.3 |
| | 362.9 |
| | 1,306.2 |
|
Sirona net sales (a) | | 52.5 |
| | 510.9 |
| | 563.4 |
|
Elimination of intercompany net sales | | (1.2 | ) | | — |
| | (1.2 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 994.6 |
| | $ | 873.8 |
| | $ | 1,868.4 |
|
(a) Represents Sirona sales for the six months ended June 30, 2015 compared to the same period in 2014. On a constant currency basis,2015.
Dental and Healthcare Consumables
Reported net sales, excluding precious metal content, increased 1.9%by 5.7% as compared to the same period in 2014six months ended June 30, 2015. This increase reflects sales of $39.4 million as a result of the consolidation of the Sirona businesses since the merger date.
For the six month period ended June 30, 2016, sales of our combined businesses grew 3.8% on a constant currency basis. This includes a benefit of approximately 60 basis points from net acquisitions and was unfavorably impacted by discontinued products by approximately 110 basis points, which results in internal growth of 4.3%. Net sales, excluding precious metal content, were negatively impacted by approximately 1.9% due to the strengthening of the U.S. dollar over the prior year period. Sales growth in all regions was led by the dental consumable product businesses.Rest of World region.
OperatingThe operating income decreased $10.5 millionincrease for the six months ended June 30, 20152016 as compared to 2014. The decrease2015 reflects improved margins in operating income was primarilyDental Consumables, savings from the resultglobal efficiency program, as well as the impact of decreased sales.the merger.
Healthcare, Orthodontic and Implant BusinessesTechnologies
Reported net sales, excluding precious metal content, increased $398.8 million as compared to the the six months ended June 30, 2015. This increase reflects sales of $409.3 million as a result of the consolidation of the Sirona businesses since the merger date. This excludes approximately $10.4 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
For the six month period ended June 30, 2016, sales of our combined businesses grew 6.2% on a constant currency basis. This includes a benefit of 2.6% from net acquisitions which results in internal growth of 3.6%. Net sales, excluding precious metal content, decreased $55.2 million, or 10.2%were negatively impacted by approximately 1.3% due to the strengthening of the U.S. dollar over the prior year period. Sales growth in all regions was led by the Rest of World region.
The operating income increase for the six months ended June 30, 2015 compared to 2014. On a constant currency basis, net sales, excluding precious metal content, increased 1.8%2016 as compared to 2015 reflects the same period in 2014 due to increased sales growth inimpact of the Healthcare and Implants businesses.
Operating income decreased $2.2 million compared to the same period in 2014. Gross profit rate improvements in the Implant and Healthcare businesses were more than offset by foreign currency translation.
Select Developed and Emerging Markets Businesses
Net sales, excluding precious metal content, decreased $26.9 million, or 10.7% for the six months ended June 30, 2015 compared to 2014. On a constant currency basis, net sales, excluding precious metal content, increased 3.9% when compared to the same period of 2014. The increase was led by strong growth in Asia and Latin America.
Operating income decreased $4.9 million during the six months ended June 30, 2015 compared to 2014 primarily as a result of lower gross profit rates in all businesses due to foreign currency transaction impacts.merger.
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, 2014.2015.
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 20152016 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 20152016 analysis ranged from 7.6%6.7% to 12.5%14.7%. Had the WACC rate of each of the Company's reporting units been hypothetically increased by 100 basis points at April 30, 2015,2016, 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, 2015,2016, 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,2016, one reporting unit, within each of the Company’s three segments,Technologies segment, 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 $62.4$66.0 million at June 30, 2015. Goodwill for the reporting unit within the Dental Consumables, Endodontic and Dental Laboratory Businesses segment totals $120.0 million. Goodwill for the reporting unit within the Select Developed and Emerging Markets Businesses segment totals $16.0 million.2016. 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.
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 20152016 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, 2015,2016, the fair value of these assets would still exceed their book value.
LIQUIDITY AND CAPITAL RESOURCES
Six months ended June 30, 20152016
Cash flow from operating activities during the six months ended June 30, 20152016 was $211.2$188.1 million compared to $220.2$211.2 million during the six months ended June 30, 2014.2015. The year over year decrease in the first six months’ cash from operations of $9.0 million was primarily related to working capital changesincreases in accounts receivable accrued liabilities and income taxes, offset partially by improvements in inventorymerger transaction related fees and net income, after adjusting for non cash items.integration costs. The Company’s cash and cash equivalents decreasedincreased by $55.2$27.0 million to $96.5$311.6 million during the six months ended June 30, 2015, which were used to fund debt repayments.2016.
For the six months ended June 30, 2015,2016, the number of days of sales outstanding in accounts receivable increased by threetwo days to 5856 days as compared to 5554 days at December 31, 2014.2015. On a constant currency basis, the number of days of sales in inventory increased by twothree days to 115113 days at June 30, 20152016 as compared to 113110 days at December 31, 2014.2015.
The cash outflows forprovided by investing activities during the first six months of 20152016 included cash acquired in the merger of Sirona of $522.3 million partially offset by capital expenditures of $34.1 million and the purchase of minority shares in a business for $80.4$47.9 million. The Company expects capital expenditures to be in the range of approximately $90.0$110.0 million to $100.0$125.0 million for the full year 2015.2016.
At June 30, 2015,2016, 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 1.99.8 million shares
during the first six months of 20152016 for $99.0$600.0 million. As of June 30, 2015,2016, the Company held 23.031.5 million shares of treasury stock. The Company received proceeds of $18.8$20.4 million as a result of the exercise of 0.6 million of stock options during the six months ended June 30, 2015.2016.
The Company's total borrowings decreasedincreased by a net $66.5$28.4 million during the six months ended June 30, 2015,2016, which includes an increase of $2.1$22.0 million due to exchange rate fluctuations on debt denominated in foreign currencies. At June 30, 2015,2016, the Company's ratio of total net debt to total capitalization was 32.2%9.5% compared to 32.3%27.1% at December 31, 2014.2015. 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, 20152016, the Company paidissued the second required paymentfollowing: 11.0 million euros aggregate principal amount bearing interest of $100.0 million under the Private Placement2.05%, Series F Senior Notes due February 2016 by issuing commercial paper. The19, 2026; 15.0 million euros aggregate principal amount bearing interest of 2.05%, Series G Senior Notes due February 19, 2026; and 45.0 million euros aggregate principal amount bearing interest of 2.45%, Series H Senior Notes due February 19, 2031. Proceeds from the aforementioned Senior Notes were used to pay the final required payment of $75.0 million under the $250.0 million Private Placement Notes is due inmaturing February 19, 2016.
On March 16, 2016, the Company terminated Sirona’s Senior Facilities Agreement and has been classified as current onrepaid the Consolidated Balance Sheet.$52.5 million Facility A Term Loan that was set to mature November 16, 2016.
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, 2020.2015, the Company paid the second required payment of $8.8 million under the PNC Term Loan. The secondthird annual installment in the amount of $8.8 million will be due in August 20152016 and has been classified as current onin the Consolidated Balance Sheet.
Effective June 30, 2016, the Company exercised its option to amended and extend its $500.0 million five-year multi-currency revolving credit agreement to replace certain lenders and extend the maturity date by one year to July 23, 2021. 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, 2020.2021. 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 June 30, 2015,2016, 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 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 June 30, 2015,2016, there were no outstanding borrowings were $30.0 million under the multi-currency revolving facility.
The Company also has access to $62.1$51.2 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 June 30, 2015,2016, the Company had $6.0$0.1 million outstanding under these short-term lines of credit. At June 30, 2015,2016, the Company had total unused lines of credit related to the revolving credit agreement and the uncommitted short-term lines of credit of $526.0$552.0 million.
At June 30, 2015,2016, the Company held $58.5$40.3 million of precious metals on consignment from several financial institutions. The consignment agreements allow the Company to acquire the precious metal at market rates at a point in time which is approximately the same time and for the same price as alloys are sold to the Company's customers. In the event that the financial institutions would discontinue offering these consignment arrangements, and if the Company could not obtain other comparable arrangements, the Company may be required to obtain third party financing to fund an ownership position in the required precious metal inventory levels.
At June 30, 2015, the majority2016, approximately $242.5 million 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 20152016 utilizing the available commercial paper and the revolving credit facilities as well as other sources of credit.
On June 27, 2016, the Company announced a definitive agreement to acquire all of the outstanding shares of privately held MIS Implants Technologies Ltd. (“MIS”) for $375.0 million in cash. The Company expects to close the acquisition by the end
of 2016 upon successful completion of pre-closing conditions and routine governmental clearances, and plans to satisfy the purchase price with a mix of available cash, credit facilities and/or new debt.
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, 2014.2015.
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, 2014.2015.
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 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 the quarter ended June 30, 20152016, that have materially affected, or are likely to materially affect, its internal control over financial reporting. In connection with the merger with Sirona during the quarter ended March 31, 2016, management has documented and is in the process of testing Sirona’s internal controls over financial reporting, and will incorporate Sirona into its annual assessment of internal control over financial reporting for the Company’s year ending December 31, 2016.
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
ThereExcept as set forth in the Company’s Form 10-Q for the quarter ended March 31, 2016, 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, 2014.2015.
Item 2 – Unregistered Sales of Securities and Use of Proceeds
Issuer Purchases of Equity Securities
At June 30, 20152016, 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.Directors on March 31, 2011. During the quarter ended June 30, 20152016, the Company had the following activity with respect to this repurchase program:
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(in thousands, except per share amounts) | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Cost of Shares Purchased | | Number of Shares that May be Purchased Under the Share Repurchase Program |
| | | | | | | | |
April 1, 2015 to April 30, 2015 | | 76.1 |
| | $ | 50.87 |
| | $ | 3,870.1 |
| | 11,039.2 |
|
May 1, 2015 to May 31, 2015 | | 55.9 |
| | 51.77 |
| | 2,895.2 |
| | 11,032.8 |
|
June 1, 2015 to June 30, 2015 | | 68.2 |
| | 52.49 |
| | 3,582.4 |
| | 11,032.8 |
|
| | 200.2 |
| | $ | 51.68 |
| | $ | 10,347.7 |
| |
|
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(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 |
| | | | | | | | |
April 1, 2016 to April 30, 2016 | | — |
| | — |
| | — |
| | 3.7 |
|
May 1, 2016 to May 31, 2016 | | 1.1 |
| | $ | 61.50 |
| | $ | 70.0 |
| | 2.7 |
|
June 1, 2016 to June 30, 2016 | | 0.5 |
| | 62.91 |
| | 30.0 |
| | 2.5 |
|
| | 1.6 |
| | $ | 61.92 |
| | $ | 100.0 |
| |
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Item 6 – Exhibits
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Exhibit Number | | Description |
3.2 | | By-Laws Amended and Restated |
4.3 (a) | | First Amendment to the $500.0 Million Credit Agreement dated as of July 23, 2014 between the Company and the Subsidiary Borrowers party thereto |
10.3 | | Restricted Stock Unit Deferral Plan |
10.14 | | Board of Directors Compensation Arrangement |
10.20 | | 2010 Equity Incentive Plan, Amended and Restated |
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 undersigned.authorized.
DENTSPLY InternationalSIRONA Inc.
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| | | |
/s/ | Bret W. WiseJeffrey T. Slovin | | July 30, 2015August 5, 2016 |
| Bret W. WiseJeffrey T. Slovin | | Date |
| Chairman of the Board and | | |
| Chief Executive Officer | | |
|
| | | |
/s/ | Christopher T. ClarkUlrich Michel | | July 30, 2015August 5, 2016 |
| Christopher T. ClarkUlrich Michel | | Date |
| Executive Vice President and | | |
| Chief Financial Officer | | |