EX-13 17 e13.txt EXHIBIT 13 EXHIBIT 13 - Pages 9 through 47 of the Company's Annual Report to Shareholders for fiscal year 2002 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA
Year ended December 31, 2002 2001 2000 1999 1998 (dollars in thousands, except per share amounts) Statement of Income Data: Net sales $ 1,513,742 $1,132,968 $ 889,796 $ 836,438 $ 800,456 Net sales without precious metal content 1,326,653 1,082,323 889,796 836,438 800,456 Gross profit 732,899 568,520 462,771 430,972 415,286 Restructuring and other costs (income) (2,732) 5,073 (56) - 71,500 Operating income 256,500 176,045 161,422 147,229 67,216 Income before income taxes 220,985 185,127 151,796 138,019 55,101 Net income $ 147,952 $ 121,496 $ 101,016 $ 89,863 $ 34,825 Earnings per Common Share: Net income-basic $ 1.89 $ 1.56 $ 1.30 $ 1.14 $ 0.44 Net income-diluted 1.85 1.54 1.29 1.13 0.43 Cash dividends declared per common share $ 0.18400 $ 0.18333 $ 0.17083 $ 0.15417 $ 0.14000 Weighted Average Common Shares Outstanding: Basic 78,180 77,671 77,785 79,131 79,995 Diluted 79,994 78,975 78,560 79,367 80,396 Balance Sheet Data: Working capital $ 175,256 $ 125,726 $ 157,316 $ 138,448 $ 128,076 Total assets 2,087,033 1,798,151 866,615 863,730 895,322 Total debt 774,373 731,158 110,294 165,467 233,761 Stockholders' equity 835,928 609,519 520,370 468,872 413,801 Return on average stockholders' equity 20.5% 21.5% 20.4% 20.4% 8.3% Long-term debt to total capitalization 47.9% 54.3% 17.4% 23.7% 34.4% Other Data: Depreciation and amortization $ 43,859 $ 54,334 $ 41,359 $ 39,624 $ 37,474 Capital expenditures 57,454 49,337 28,425 33,386 31,430 Property, plant and equipment, net 313,178 240,890 181,341 180,536 158,998 Goodwill and other intangibles, net 1,134,506 1,012,160 344,753 349,421 346,073 Interest expense, net 27,385 18,256 6,797 12,252 11,532 Cash flows from operating activities 172,983 211,068 145,622 125,877 96,323 Inventory days 100 93 114 122 132 Receivable days 49 46 52 52 55 Income tax rate 33.0% 34.4% 33.5% 34.9% 36.8%
D16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements made by the Company, including without limitation, statements containing the words "plans", "anticipates", "believes", "expects", or words of similar import may be deemed to be forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements involve risks and uncertainties which may materially affect the Company's business and prospects, and should be read in conjunction with the risk factors and uncertainties discussed within Item I, Part I of the Company's Annual Report on Form 10-K. In January 2002, the Company acquired the partial denture business of Austenal Inc. ("Austenal"), and in 2001 the Company made three significant acquisitions. In January 2001, the Company acquired the outstanding shares of Friadent GmbH ("Friadent"), a global dental implant manufacturer and marketer. In March 2001, the Company acquired the dental injectible anaesthetic assets of AstraZeneca ("AZ Assets"). In October 2001, the Company acquired the Degussa Dental Group ("Degussa Dental"), a manufacturer and seller of dental products, including precious metal alloys, ceramics, dental laboratory equipment and chairside products. The details of these transactions are discussed in Note 3 to the Consolidated Financial Statements. The results of these acquired companies have been included in the consolidated financial statements since the dates of acquisition. These acquisitions, accounted for using the purchase method, significantly impact the comparability between years. A significant portion of DENTSPLY's net sales is comprised of sales of precious metals generated through its precious metal alloy product offerings. Due to the fluctuations of precious metal prices and because the precious metal content of the Company's sales is largely a pass-through to customers and has minimal effect on earnings, DENTSPLY reports sales both with and without precious metals to show the Company's performance independent of precious metal price volatility and to enhance comparability of performance between periods.Certain reclassifications have been made to prior years' data in order to conform to the current year presentation. RESULTS OF OPERATIONS, 2002 COMPARED TO 2001 Net Sales Net sales in 2002 increased $380.8 million, or 33.6%, to $1,513.7 million. Net sales, excluding precious metals, increased $244.3 million, or 22.6%, to $1,326.7 million. The growth in sales, excluding the precious metal content, was driven by internal growth of 6.8%, 14.6% growth from acquisitions and a 1.2% positive impact from currency translation as several major currencies strengthened against the U.S. dollar during the year. The sales growth in 2002, excluding precious metal content, in total and by region is as follows:
Sales Growth By Region (excluding precious metal content) ------------------------------------------------------------- Total United All Other Consolidated States Europe Regions Internal growth 6.8% 9.1% 5.4% 2.7% Acquisition growth 14.6% 4.5% 33.0% 16.3% Foreign currency translation 1.2% 0.1% 5.6% -2.0% 22.6% 13.7% 44.0% 17.0%
D16 Internal sales growth was strongest in the United States at 9.1%, while Europe grew 5.4% organically. The Company also continued to experience strong internal growth in the Pacific Rim and Asia (excluding Japan). Internal growth was most notable in implants, endodontics, orthodontics, other consumables, intra-oral cameras and digital x-ray systems. The laboratory side of the business was the weakest, particularly in Europe where economic conditions appear to be reducing demand for high-end procedures that are deferrable by the patient. **** Graph titled "2002 Geographic Sales" Information disclosed: % of Region Sales United States 45% Europe 37% Japan 5% Pacific Rim and Asia 3% Latin America 4% Other Regions 6% **** **** Graph titled "2002 Product Distribution" Information disclosed: % of Product Category Sales Consumables and Small Equipment 92% Heavy Equipment 6% Non-Dental 2% **** Internal sales growth for heavy equipment, including x-ray equipment and intra-oral cameras, was 8.5% in 2002 while internal sales growth for consumable and small equipment, including laboratory products, was 7.1%. These increases were offset slightly by softening sales of non-dental products. Gross Profit Gross profit was $732.9 million in 2002 compared to $568.5 million in 2001, an increase of $164.4 million, or 28.9%. Gross profit, including precious metals, represented 48.4% of net sales in 2002 compared to 50.2% in 2001. The decline in 2002 is due to the inclusion of the Degussa Dental business for a full year versus just one quarter in 2001 and the corresponding relatively high precious metal content of these sales. Gross profit for 2002, excluding precious metal content, represented 55.2% of net sales compared to 52.5% in 2001. The gross profit margin in 2002, excluding the precious metals pass through, benefited from new product introductions, a favorable product mix, and the integration and restructuring benefits related to acquisitions completed over the past several years. The 2001 period included the negative impact of the amortization of the Friadent and Degussa Dental inventory step-ups recorded in connecton with purchase price accounting. The Company continues to drive projects, including lean manufacturing, waste elimination and centralized warehousing, focused on improving our operating processes and product flows. These efforts not only strengthen our gross profit percentage and reduce inventory levels, but also improve our overall competitive advantage. D16 **** Graph titled "Gross Profit Percentage" Information disclosed: Gross Profit Year Percentage 1998 51.9% 1999 51.5% 2000 52.0% 2001 52.5% 2002 55.2% Footnote: Excludes precious metals content of net sales. **** Operating Expenses Selling, general and administrative ("SG&A") expense increased $91.7 million, or 23.7%, to $479.1 million in 2002 from $387.4 million in 2001. As a percentage of sales, including precious metals, SG&A expenses decreased to 31.7% compared to 34.2% in 2001. This decrease is mainly due to the discontinuation of goodwill and indefinite-lived intangible asset amortization in 2002, which in 2001 amounted to $17.8 million ($14.0 million, net of tax). As a percentage of sales, excluding precious metals, SG&A expenses increased to 36.1% compared to 35.8% in 2001. This increase was primarily driven by the inclusion of the Degussa Dental business, and its higher SG&A expense ratio (excluding precious metal content), for a full year versus one quarter in 2001, offset by the discontinuation of goodwill and indefinite-lived intangible asset amortization in 2002. This increase also included higher insurance and legal expenses in 2002. During 2002, the Company recorded restructuring and other income of $2.7 million ($1.8 million, net of tax), including $3.7 million which resulted from changes in estimates related to prior period restructuring initiatives, offset somewhat by a restructuring charge for the combination of the CeraMed and U.S. Friadent divisions of $1.7 million. In addition, the Company recognized a gain of $0.7 million related to the insurance settlement for fire damages sustained at the Company's Maillefer facility. The 2001 period included a restructuring charge of $5.5 million to improve efficiencies in Europe, Brazil and North America and $11.5 million of restructuring and other costs primarily related to the Degussa Dental acquisition and its integration with DENTSPLY. An additional cost of $2.4 million was recorded for a payment made at the point of regulatory filings related to Oraqix, a product for which the Company acquired rights in the AZ Asset acquisition. These charges were offset by a gain of $8.5 million related to the restructuring of the Company's U.K. pension arrangements and a gain of $5.8 million for an insurance settlement for equipment destroyed in the fire at the Company's Maillefer facility in Switzerland. The above items in 2001, on a net basis, amount to charges of $5.1 million ($3.5 million, net of tax) (see Note 14 to the Consolidated Financial Statements). **** Graph titled "Operating Income Percentage" Information disclosed: Operating Income Year Percentage 1998 8.4% 1999 17.6% 2000 18.1% 2001 16.3% 2002 19.3% Footnote: Excludes precious metals content of net sales. **** D16 Other Income and Expenses Net interest expense increased $9.1 million in 2002 due to higher debt levels associated with the acquisition activities in 2002 and 2001. Other income decreased $35.5 million in 2002, due primarily to income recognized in 2001 of $24.5 million ($15.1 million, net of tax) which included a $23.1 million gain from the sale of Infosoft, LLC and a $1.4 million minority interest benefit related to an intangible impairment charge included in restructuring and other costs. Other income and expense in 2002 also included a $4.7 million unfavorable change in currency transaction gain/loss resulting from the significant weakening of the U.S. dollar in 2002, a $1.1 million loss realized on the share exchange with PracticeWorks, Inc. and a net loss of $2.5 million on mark-to-market adjustment for the warrants received in the transaction. Also contributing to the decrease in other income in 2002 was a decrease of $0.8 million in accrued dividends related to the PracticeWorks, Inc. preferred stock prior to the time of the PracticeWorks share exchange. Earnings Income before income taxes in 2002 increased $35.9 million, or 19.4%, to $221.0 million from $185.1 million in 2001. The effective tax rate decreased to 33.0% in 2002 from 34.4% in 2001. Net income increased $26.5 million, or 21.8%, to $148.0 million in 2002 from $121.5 million in 2001. Fully diluted earnings per share were $1.85 in 2002, an increase of 20.1% from $1.54 in 2001. Net income in 2002 and 2001 included charges and income that affect the comparability between years as described above. RESULTS OF OPERATIONS, 2001 COMPARED TO 2000 Net Sales Net sales in 2001 increased $243.2 million, or 27.3%, to $1,133.0 million. Net sales, excluding precious metals, increased $192.5 million, or 21.6%, to $1,082.3 million. The growth in sales, excluding the precious metal content, was driven by internal growth of 6.2% and 17.1% growth from acquisitions, partially offset by a 1.7% negative impact from currency translation as the U.S. dollar strengthened against several major currencies during the year. The sales growth in 2001, excluding precious metal content, in total and by region is as follows:
Sales Growth By Region (excluding precious metal content) ------------------------------------------------------------- Total United All Other Consolidated States Europe Regions Internal growth 6.2% 7.4% 5.6% 3.0% Acquisition growth 17.1% 4.4% 40.9% 27.1% Foreign currency translation -1.7% 0.0% -2.4% -5.9% 21.6% 11.8% 44.1% 24.2%
Internal sales growth was strongest in the United States at 7.4%, while Europe grew 5.6% internally. The Company also continued to experience strong internal growth in the Pacific Rim and Asia (excluding Japan). Internal growth was most notable in endodontics, orthodontics, other consumables, intra-oral cameras and digital x-ray systems. D16 **** Graph titled "2001 Geographic Sales" Information disclosed: % of Region Sales United States 51% Europe 29% Japan 4% Pacific Rim and Asia 4% Latin America 5% Other Regions 7% **** **** Graph titled "2001 Product Distribution" Information disclosed: % of Product Category Sales Consumables and Small Equipment 90% Heavy Equipment 7% Non-Dental 3% **** Internal sales growth for heavy equipment, including x-ray equipment and intra-oral cameras, was 9.1%, while consumable and small equipment internal sales growth was 6.5%. These increases were offset slightly by softening sales of non-dental products in 2001. Gross Profit Gross profit was $568.5 million in 2001 compared to $462.8 million in 2000, an increase of $105.7 million, or 22.8%. Gross profit for 2001 represented 50.2% of net sales, or 52.5% excluding sales of precious metals, compared to 52.0% of net sales in 2000. There were no sales of precious metals in 2000. The gross profit margin, excluding precious metals, was benefited by a favorable product mix, restructuring and operational improvements during 2001. These benefits were offset by the negative impact of a stronger U.S. dollar and the negative impact of the amortization of the Friadent and Degussa Dental inventory step-ups recorded in connecton with the purchase accounting. Operating Expenses SG&A expense increased $86.0 million, or 28.5%, to $387.4 million in 2001 from $301.4 million in 2000. As a percentage of sales, SG&A expenses increased to 34.2% compared to 33.9% in 2000. As a percentage of sales without precious metal content, SG&A expenses were 35.8% in 2001. Acquisitions and higher research and development spending were the primary reasons for this increase. In addition, amortization of goodwill and indefinite-lived intangible assets increased to $17.8 million ($14.0 million, net of tax) from $10.2 million ($8.3 million, net of tax) in 2000, which contributed to the increase. During 2001, the Company recorded net restructuring and other costs of $5.1 million ($3.5 million, net of tax). The 2001 period included a restructuring charge of $5.5 million to improve efficiencies in Europe, Brazil and North America and $11.5 million of restructuring and other costs primarily related to the Degussa Dental acquisition and its integration with DENTSPLY. An additional cost of $2.4 million was recorded for a payment made at the point of regulatory filings related to Oraqix, a product for which the Company acquired rights in the AZ Asset acquisition. These charges were offset by a gain of $8.5 million related to the restructuring of the Company's U.K. pension arrangements and a gain of $5.8 million for an insurance settlement for equipment destroyed in the fire at the Company's Maillefer facility in Switzerland (see Note 14 to the Consolidated Financial Statements). D16 Other Income and Expenses Net interest expense increased $11.5 million in 2001 due to higher debt levels associated with the significant acquisition activity during 2001, offset somewhat by strong operating cash flow and lower interest rates. Other income of $27.3 million in 2001 compares with other expense of $2.8 million in 2000. The increase in 2001 was due primarily to income recognized in 2001 of $24.5 million ($15.1 million, net of tax) which included a $23.1 million gain related to the Company's sale of InfoSoft, LLC to PracticeWorks, Inc. and a $1.4 million minority interest benefit related to an intangible impairment charge included in restructuring and other costs. Also contributing to the increase in other income was $1.7 million of accrued dividends related to this preferred stock investment and $1.2 million of gains from foreign exchange transactions. The other expense in 2000 represented mainly losses on foreign exchange transactions. Earnings Income before income taxes in 2001 increased $33.3 million, or 21.9%, to $185.1 million from $151.8 million in 2000. The effective tax rate increased to 34.4% in 2001 from 33.5% in 2000. Net income increased $20.5 million, or 20.3%, to $121.5 million in 2001 from $101.0 million in 2000. Fully diluted earnings per share were $1.54 in 2001, an increase of 19.4% from $1.29 in 2000. Net income in 2001 and 2000 included charges and income that affect the comparability between years as described above. Net income and diluted earnings per common share for 2001 include additional goodwill amortization and interest costs related to the $84.6 million Tulsa earn-out payment and inventory step-up charges for Friadent and Degussa Dental during the year. FOREIGN CURRENCY Since approximately 50% of the Company's 2002 revenues have been generated in currencies other than the U.S. dollar, the value of the U.S. dollar in relation to those currencies affects the results of operations of the Company. The impact of currency fluctuations in any given period can be favorable or unfavorable. The impact of foreign currency fluctuations of European currencies on operating income is partially offset by sales in the U.S. of products sourced from plants and third party suppliers located overseas, principally in Germany, Switzerland, and the Netherlands. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES The Company has identified below the accounting estimates believed to be critical to its business and results of operations. These critical estimates represent those accounting policies that involve the most complex or subjective decisions or assessments. Goodwill and Other Long-Lived Assets Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets". This statement requires that the amortization of goodwill and indefinite-lived intangible assets be discontinued and instead an annual impairment approach be applied. The Company performed the transitional impairment tests upon adoption and the annual impairment tests during 2002, as required, and no impairment was identified. These impairment tests are based upon a fair value approach rather than an evaluation of the undiscounted cash flows. If impairment is identified under SFAS 142, the resulting charge is determined by recalculating goodwill through a hypothetical purchase price allocation of the fair value and reducing the current carrying value to the extent it exceeds the recalculated goodwill. If impairment is identified on indefinite-lived intangibles, the resulting charge reflects the excess of the asset's carrying cost over its fair value. D16 Other long-lived assets, such as identifiable intangible assets and fixed assets, are amortized or depreciated over their estimated useful lives. These assets are reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amount of the asset may not be recoverable with impairment being based upon an evaluation of the identifiable undiscounted cash flows. If impaired, the resulting charge reflects the excess of the asset's carrying cost over its fair value. If market conditions become less favorable, future cash flows, the key variable in assessing the impairment of these assets, may decrease and as a result the Company may be required to recognize impairment charges. Inventories Inventories are stated at the lower of cost or market. The cost of inventories is determined primarily by the first-in, first-out ("FIFO") or average cost methods, with a small portion being determined by the last-in, first-out ("LIFO") method. The Company establishes reserves for inventory estimated to be obsolete or unmarketable equal to the difference between the cost of inventory and estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those anticipated, additional inventory reserves may be required. Accounts Receivable The Company sells dental equipment and supplies primarily through a worldwide network of distributors, although certain product lines are sold directly to the end user. For customers on credit terms, the Company performs ongoing credit evaluation of those customers' financial condition and generally does not require collateral from them. The Company establishes allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, their ability to make required payments may become impaired, and increases in these allowances may be required. In addition, a negative impact on sales to those customers may occur. Income Taxes Income taxes are determined in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the difference between financial statements and tax bases of liabilities and assets using enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS 109 also provides for the recognition of deferred tax assets if it is more likely than not that the assets will be realized in future years. A valuation allowance has been established for deferred tax assets for which realization is not likely. In assessing the valuation allowance, the Company has considered future taxable income and ongoing tax planning strategies. Changes in these circumstances, such as a decline in future taxable income, may result in an additional valuation allowance being required. Except for certain earnings that the Company intends to reinvest indefinitely, provision has been made for the estimated U.S. federal income tax liabilities applicable to undistributed earnings of affiliates and associated companies. Judgement is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. If the outcome of these future tax consequences differs from our estimates the outcome could materially impact our financial position or our results of operations. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. We record accruals for the estimated outcomes of these audits and the accruals may change in the future due to the outcome of these audits. Litigation The Company and its subsidiaries are from time to time parties to lawsuits arising out of their respective operations. The Company records liabilities when a loss is probable and can be reasonably estimated. These estimates are based on an analysis made by internal and external legal counsel which considers information known at the time. The Company believes it has estimated any liabilities for probable losses well in the past; however, court decisions could cause liability to be incurred in excess of estimates. D16 LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities during 2002 were $173.0 million compared to $211.1 million during 2001. The 2001 cash flows benefited from a $29.1 million reduction in precious metal inventory acquired in the Degussa Dental acquisition. Excluding this reduction, cash flows from operating activities decreased by $9.0 million from 2001 to 2002. This decrease resulted primarily from restructuring outflows and payments of annual volume rebates for precious metal purchases, offset somewhat by higher operating earnings. **** Graph titled "Working Capital Management" Information disclosed: Inventory Receivable Year Days Days 1998 132 55 1999 122 52 2000 114 52 2001 93 46 2002 100 49 **** Investing activities, for the year ended December 31, 2002, include capital expenditures of $57.5 million. During 2003, the Company expects its capital expenditures to be approximately $70 million. This increase from 2002 is due largely to expenditures related to the construction of the Company's pharmaceutical manufacturing facility in Chicago, IL. Net acquisition activity for 2002 was $49.8 million, which primarily included cash paid to acquire Austenal of $21.1 million and additional net consideration of $24.7 million related to the purchases of Degussa Dental, the AZ Assets and Friadent. Additionally, in 2003, the Company expects to make the remaining payments of $18 million related to the Oraqix agreement and may be required to make a payment of up to $10 million for the final consideration related to the Degussa Dental purchase if an unfavorable ruling is received in arbitration (see Note 3 to the consolidated financial statements). The Company's long-term debt increased by $46.3 million in 2002 to $769.8 million. This net change included an increase of $136.6 million due to exchange rate fluctuations on non-U.S. dollar denominated debt. A portion of this debt qualifies as a hedge of the Company's net investments in certain foreign subsidiaries and the offset of this increase is reflected in "Accumulated other comprehensive gain (loss)". In addition, another portion of this debt is hedged by cross currency swaps, the value of which increased by $58.1 million in 2002 to an asset position of $52.3 million and is reflected in "Other noncurrent assets". As a result, the income statement impact of the change in currency related to the debt is completely offset by the income statement impact of changes in the fair values of the swaps. Excluding the exchange rate fluctuations, long-term debt was reduced by $90.3 million during 2002 from operating cash flows. During 2002, the Company's ratio of long-term debt to total capitalization decreased to 47.9% compared to 54.3% at December 31, 2001. Under its multi-currency revolving credit agreement, the Company is able to borrow up to $250 million through May 2006 ("the five-year facility") and $250 million through May 2003 ("the 364 day facility"). The 364-day facility terminates in May 2003, but may be extended, subject to certain conditions, for additional periods of 364 days. This revolving credit agreement is unsecured and contains various financial and other covenants. The Company also has available an aggregate $250 million under two commercial paper facilities; a $250 million U.S. facility and a $250 million U.S. dollar equivalent European facility ("Euro CP facility"). Under the Euro CP facility, borrowings can be denominated in Swiss francs, Japanese yen, Euros, British pounds and U.S. dollars. The 364-day facility serves as a back-up to these commercial paper facilities. The total available credit under the commercial paper facilities and the 364-day facility is $250 million. D16 The Company also has access to $83.2 million in uncommitted short-term financing under lines of credit from various financial institutions. Substantially all of these lines of credit have no major restrictions and are provided under demand notes between the Company and the lending institutions. In total, the Company had unused lines of credit of $420.9 million at December 31, 2002. Access to most of these available lines of credit is contingent upon the Company being in compliance with certain affirmative and negative covenants relating to its operations and financial condition. The most restrictive of these covenants pertain to asset dispositions, maintenance of certain levels of net worth, and prescribed ratios of indebtedness to total capital and operating income plus depreciation and amortization to interest expense. At December 31, 2002, the Company was in compliance with these covenants. The following table presents the Company's scheduled contractual cash obligations at December 31, 2002:
Less Than 1-4 5 Years Contractual Obligations 1 Year Years Or More Total (in thousands) Long-term debt $ 23,156 $706,429 $ 40,238 $769,823 Operating leases 75,542 23,493 12,394 111,429 $ 98,698 $729,922 $ 52,632 $881,252
The Company expects on an ongoing basis, to be able to finance 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. PENDING ACCOUNTING CHANGES In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations". It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. SFAS 143 is effective for the Company in 2003 and the effect of adoption is not expected to be material. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". The principal change resulting from this statement as compared to EITF 94-3 relates to more stringent requirements for the recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. This Statement also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Based on a preliminary assessment of this new standard, the Company believes that SFAS 146 may impact the timing of the recognition of future restructuring activities, whereby liabilities associated with the elements of the restructuring plan may need to be recognized at various dates subsequent to the commitment date rather than at the commitment date, which is the Company's current practice. D16 In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. In addtion, it clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The interpretation is effective on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002 and the Company has complied with these requirements. The Company is currently evaluating the impact of the application of this interpretation, but does not expect that FIN 45 will have a material impact on its financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FAS 123". This Statement amends Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The annual disclosure provisions of SFAS 148 are effective for annual periods ending after December 31, 2002 and the interim disclosure provisions are effective for the first interim period beginning after December 15, 2002. The Company has complied with these disclosure requirements and has elected not to adopt the fair value based accounting provisions of this new standard. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB 51". The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise should consolidate the variable interest entity (the "primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a variable interest entity make additional disclosures. Certain disclosure requirements of FIN 46 are effective for financial statements issued after January 31, 2003. The remaining provisions of FIN 46 are effective immediately for all variable interest entities created after January 31, 2003 and are effective beginning in the first interim or annual reporting period beginning after June 15, 2003 for all variable interest entities created before February 1, 2003. The Company has determined that the application of this standard will not have a material impact on its financial statements. D16 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information below provides information about the Company's market sensitive financial instruments and includes "forward-looking statements" that involve risks and uncertainties. Actual results could differ materially from those expressed in the forward-looking statements. The Company's major market risk exposures are changing interest rates, movements in foreign currency exchange rates and potential price volatility of commodities used by the Company in its manufacturing processes. The Company's policy is to manage interest rates through the use of floating rate debt and interest rate swaps to adjust interest rate exposures when appropriate, based upon market conditions. A portion of the Company's borrowings are denominated in foreign currencies which exposes the Company to market risk associated with exchange rate movements. The Company's policy generally is to hedge major foreign currency exposures through foreign exchange forward contracts. These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss. In order to limit the unanticipated earnings fluctuations from volatility in commodity prices, the Company selectively enters into commodity price swaps to convert variable raw material costs to fixed costs. The Company does not hold or issue derivative financial instruments for speculative or trading purposes. The Company is subject to other foreign exchange market risk exposure in addition to the risks on its financial instruments, such as possible impacts on its pricing and production costs, which are difficult to reasonably predict, and have therefore not been included in the table below. All items described are non-trading and are stated in U.S. dollars. Financial Instruments 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 estimates the fair value of its total long-term debt was $774.0 million versus its carrying value of $769.8 million as of December 31, 2002. The fair value approximated the carrying value since much of the Company's debt is variable rate and reflects current market rates. The fixed rate Eurobonds are effectively converted to variable rate as a result of an interest rate swap and the interest rates on revolving debt and commercial paper are variable and therefore the fair value of these instruments approximates their carrying values. The Company has fixed rate Swiss franc and Japanese yen denominated notes with estimated fair values that differ from their carrying values. At December 31, 2002, the fair value of these instruments was $235.6 million versus their carrying values of $231.4 million. The fair values differ from the carrying values due to lower market interest rates at December 31, 2002 versus the rates at issuance of the notes. The Company holds equity securities, classified as available-for-sale, within "Other noncurrent assets". The carrying value of these securities was $12.4 million which includes $7.9 million of unrealized losses which the Company deems to be temporary. In accordance with SFAS 115, the Company records the unrealized losses related to these securities within "Accumulated other comprehensive gain (loss)"until sold. Derivative Financial Instruments 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 floating rate debt to fixed rate, fixed rate debt to floating rate, cross currency basis swaps to convert debt denominated in one currency to another currency and commodity swaps to fix its variable raw materials. The Company also holds stock warrants which are considered derivative financial instruments as defined under SFAS No. 133. Foreign Exchange Risk Management The Company enters into forward foreign exchange contracts to selectively hedge assets and liabilities denominated in foreign currencies. Market value gains and losses are recognized in income currently and the resulting gains or losses offset foreign exchange gains or losses recognized on the foreign currency assets and liabilities hedged. Determination of hedge activity is based upon market conditions, the magnitude of the foreign currency assets and liabilities and perceived risks. The Company's significant contracts outstanding as of December 31, 2002 are summarized in the table that follows. These foreign exchange contracts generally have maturities of less than twelve months and counterparties to the transactions are typically large international financial institutions. D16 Interest Rate Risk Management The Company enters into interest rate swaps to convert floating rate debt to fixed rate, fixed rate debt to floating rate, and cross currency basis swaps to convert debt denominated in one currency to another currency. In July 1998, the Company entered into interest rate swap agreements with notional amounts totaling $80.0 million converting a portion of its variable rate financing to fixed rate debt. These U.S. dollar swaps were terminated in February 2001 at a cost of $1.2 million. In January 2000 and February 2001, the Company entered into interest rate swap agreements with notional amounts totaling 180 million Swiss francs converting a portion of the Company's variable rate financing to fixed rate debt. These agreements effectively convert the underlying debt's interest rate to an average fixed rate of 3.3% for an average period of 4 years. In February 2002, the Company entered into interest rate swap agreements with notional amounts totaling 12.6 billion Japanese yen converting a portion of its variable rate financing to fixed rate debt. These agreements effectively convert the underlying debt's interest rate to an average fixed rate of 1.6% for a term of ten years. As part of this transaction, the Company offset a portion of its Swiss franc swaps (115 million Swiss francs) by entering into reverse swap agreements with identical terms. In December 2001, the Company entered into a series of fixed to variable rate swaps to convert its fixed rate 5.75% coupon Eurobonds into variable debt, currently at 4.4%. Additionally, the Company entered into a series of freestanding Euro to U.S. dollar cross currency basis swaps to effectively convert the Eurobonds and related interest expense to U.S. dollars, currently at 2.8%. The fair value of these swap agreements is the estimated amount the Company would receive (pay) at the reporting date, taking into account the effective interest rates and foreign exchange rates. At December 31, 2002, the estimated net fair values of the swap agreements was $52.3 million. Commodity Price Risk Management The Company selectively enters into commodity price swaps to effectively fix certain variable raw material costs. In November 2001, the Company entered into a commodity price swap agreement with notional amounts totaling 270,000 troy ounces of silver bullion throughout calendar year 2002. The average fixed rate of this agreement was $4.20 per troy ounce. In November, 2002, the Company entered into a commodity price swap agreement with notional amounts totaling 300,000 troy ounces of silver bullion to hedge forecasted purchases throughout calendar year 2003. The average fixed rate of this agreement is $4.65 per troy ounce. At December 31, 2002, the estimated fair value was $14,000. As of December 31, 2002, the Company had leased $59.3 million of precious metals. Under this arrangement the Company leases fixed quantities of precious metals which are used in producing alloys and pays a lease rate (a percent of the value of the leased inventory) to the lessor. These precious metal leases are accounted for as operating leases and the lease fee is recorded in "Cost of products sold". The terms of the leases are less than one year and the average lease rate at December 31, 2002 was 2.5%. The Company's objective for using these operating lease arrangements to supply its precious metals needs is to free up working capital and to limit the Company's exposure to commodity price volatility. D16
EXPECTED MATURITY DATES DECEMBER 31, 2002 2008 and Carrying Fair 2003 2004 2005 2006 2007 beyond Value Value (dollars in thousands) Notes Payable and Current Portion of Long-term Debt: U.S. dollar denominated $ 3,487 $ - $ - $ - $ - $ - $ 3,487 $ 3,487 Average interest rate 2.48% 2.48% Australian dollar denominated 143 - - - - - 143 143 Average interest rate 8.75% 8.75% Denmark krone denominated 62 - - - - - 62 62 Average interest rate 6.50% 6.50% Euro denominated 138 - - - - - 138 138 Average interest rate 6.00% 6.00% Japanese yen denominated 720 - - - - - 720 720 Average interest rate 2.00% 2.00% ----------------------------------------------------------------------------------- 4,550 - - - - - 4,550 4,550 2.76% 2.76% Long Term Debt: U.S. dollar denominated - 154 22 - - - 176 176 Average interest rate 5.46% 5.64% 5.48% Swiss franc denominated - - 40,238 145,432 40,238 - 225,908 229,753 Average interest rate 4.49% 3.63% 4.49% 3.94% Japanese yen denominated 19,914 18,441 18,222 105,776 - - 162,353 162,695 Average interest rate 1.26% 1.43% 1.41% 0.56% 0.84% Euro denominated 1,701 - - 378,144 - - 379,845 379,845 Average interest rate 5.99% 5.75% 5.75% Thai baht denominated 1,113 - - - - - 1,113 1,113 Average interest rate 2.75% 2.75% Chile peso denominated 428 - - - - - 428 428 Average interest rate 6.80% 6.80% ----------------------------------------------------------------------------------- 23,156 18,595 58,482 629,352 40,238 - 769,823 774,010 1.78% 1.46% 3.53% 4.39% 4.49% 4.18% Foreign Exchange Forward Contracts: Forward purchase, 1.8 billion Japanese yen 14,606 - - - - - 596 596 Forward purchase, 30.8 million Swiss francs 21,916 - - - - - 311 311 Forward purchase, 7.3 million Canadian dollar 4,812 - - - - - (97) (97) Forward sales, 3.2 million Euro 3,105 - - - - - (54) (54) Interest Rate Swaps: Interest rate swaps - U.S. dollar, terminated 2/2001 (58) (33) (21) - - - (112) (112) Interest rate swaps - Japanese yen - - - - - 105,777 (7,882) (7,882) Average interest rate 1.6% Interest rate swaps - Swiss francs - - - 47,026 - - (2,861) (2,861) Average interest rate 3.4% Interest rate swaps - Euro - - - 367,290 - - 10,854 10,854 Average interest rate 4.4% Basis swap - Euro-U.S. Dollar - - - 315,000 - - 52,290 52,290 Average interest rate 2.8% Silver Swap - U.S. dollar 1,394 - - - - - 14 14
D16 Management's Financial Responsibility The management of DENTSPLY International Inc. is responsible for the preparation and integrity of the consolidated financial statements and all other information contained in this Annual Report. The financial statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management's informed estimates and judgments. In fulfilling its responsibility for the integrity of financial information, management has established a system of internal accounting controls supported by written policies and procedures. This provides reasonable assurance that assets are properly safeguarded and accounted for and that transactions are executed in accordance with management's authorization and recorded and reported properly. The financial statements have been audited by our independent accountants, PricewaterhouseCoopers LLP, whose unqualified report is presented below. The independent accountants perform audits of the financial statements in accordance with generally accepted auditing standards, which includes consideration of the system of internal accounting controls to determine the nature, timing and extent of audit procedures to be performed. The Audit and Information Technology Committee (the "Committee") of the Board of Directors, consisting solely of outside Directors, meets with the independent accountants with and without management to review and discuss the major audit findings, internal control matters and quality of financial reporting. The independent accountants also have access to the Committee to discuss auditing and financial reporting matters with or without management present. /s/John C. Miles II /s/Gerald K. Kunkle /s/Bret W. Wise John C. Miles II Gerald K. Kunkle Bret W. Wise Chairman and President and Senior Vice Chief Executive Officer Chief Operating Officer President and Chief Financial Officer Report of Independent Accountants To the Board of Directors and Stockholders of DENTSPLY International Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of DENTSPLY International Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Notes 1 and 8 to the consolidated financial statements, on January 1, 2002 the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". /s/ PricewaterhouseCoopers LLP Philadelphia, PA January 23, 2003 D16 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 2002 2001 2000 (in thousands, except per share amounts) Net sales (Note 4) $1,513,742 $1,132,968 $ 889,796 Cost of products sold 780,843 564,448 427,025 Gross profit 732,899 568,520 462,771 Selling, general and administrative expenses 479,131 387,402 301,405 Restructuring and other costs (income) (Note 14) (2,732) 5,073 (56) Operating income 256,500 176,045 161,422 Other income and expenses: Interest expense 29,238 19,358 7,659 Interest income (1,853) (1,102) (862) Other expense (income), net (Note 5) 8,130 (27,338) 2,829 Income before income taxes 220,985 185,127 151,796 Provision for income taxes (Note 12) 73,033 63,631 50,780 Net income $ 147,952 $ 121,496 $ 101,016 Earnings per common share (Note 2): Basic $ 1.89 $ 1.56 $ 1.30 Diluted 1.85 1.54 1.29 Cash dividends declared per common share $ 0.18400 $ 0.18333 $ 0.17083 Weighted average common shares outstanding (Note 2): Basic 78,180 77,671 77,785 Diluted 79,994 78,975 78,560 The accompanying notes are an integral part of these financial statements.
D16 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001 (in thousands) Assets Current Assets: Cash and cash equivalents $ 25,652 $ 33,710 Accounts and notes receivable-trade, net (Note 1) 221,262 191,534 Inventories, net (Notes 1 and 6) 214,492 197,454 Prepaid expenses and other current assets 79,595 61,545 Total Current Assets 541,001 484,243 Property, plant and equipment, net (Notes 1 and 7) 313,178 240,890 Identifiable intangible assets, net (Notes 1 and 8) 236,009 248,890 Goodwill, net (Notes 1 and 8) 898,497 763,270 Other noncurrent assets 98,348 60,858 Total Assets $ 2,087,033 $ 1,798,151 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 66,625 $ 69,904 Accrued liabilities (Note 9) 190,783 194,357 Income taxes payable 103,787 86,622 Notes payable and current portion of long-term debt (Note 10) 4,550 7,634 Total Current Liabilities 365,745 358,517 Long-term debt (Note 10) 769,823 723,524 Deferred income taxes 27,039 32,526 Other noncurrent liabilities 87,239 73,628 Total Liabilities 1,249,846 1,188,195 Minority interests in consolidated subsidiaries 1,259 437 Commitments and contingencies (Note 16) Stockholders' Equity: Preferred stock, $.01 par value; .25 million shares authorized; no shares issued -- -- Common stock, $.01 par value; 200 million shares authorized; 81.4 million shares issued at December 31, 2002 and December 31, 2001 814 814 Capital in excess of par value 156,898 152,916 Retained earnings 730,971 597,414 Accumulated other comprehensive gain (loss) 1,624 (77,388) Unearned ESOP compensation (1,899) (3,419) Treasury stock, at cost, 3.0 million shares at December 31, 2002 and 3.5 million shares at December 31, 2001 (52,480) (60,818) Total Stockholders' Equity 835,928 609,519 Total Liabilities and Stockholders' Equity $ 2,087,033 $ 1,798,151 The accompanying notes are an integral part of these financial statements.
D16 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Unearned Total Capital in Other ESOP Stock- Common Excess of Retained Comprehensive Compensa- Treasury holders' Stock Par Value Earnings Gain (Loss) tion Stock Equity (in thousands) Balance at December 31, 1999 $ 543 $ 151,509 $ 402,408 $ (43,209) $ (6,458) $ (35,921) $ 468,872 Comprehensive Income: Net income -- -- 101,016 -- -- -- 101,016 Other comprehensive loss, net of tax: Foreign currency translation adjustment -- -- -- (5,416) -- -- (5,416) Minimum pension liability adjustment -- -- -- (671) -- -- (671) Comprehensive Income 94,929 Exercise of stock options -- (583) -- -- -- 8,008 7,425 Tax benefit from stock options exercised -- 973 -- -- -- -- 973 Repurchase of common stock, at cost -- -- -- -- -- (40,092) (40,092) Cash dividends ($0.17083 per share) -- -- (13,257) -- -- -- (13,257) Decrease in unearned ESOP compensation -- -- -- -- 1,520 -- 1,520 Balance at December 31, 2000 543 151,899 490,167 (49,296) (4,938) (68,005) 520,370 Comprehensive Income: Net income -- -- 121,496 -- -- -- 121,496 Other comprehensive loss, net of tax: Foreign currency translation adjustment -- -- -- (26,566) -- -- (26,566) Cumulative effect of change in accounting principle for derivative and hedging activities (SFAS 133) -- -- -- (503) -- -- (503) Net loss on derivative financial instruments -- -- -- (810) -- -- (810) Minimum pension liability adjustment -- -- -- (213) -- -- (213) Comprehensive Income 93,404 Exercise of stock options -- (45) -- -- -- 8,062 8,017 Tax benefit from stock options exercised -- 1,333 -- -- -- -- 1,333 Repurchase of common stock, at cost -- -- -- -- -- (875) (875) Cash dividends ($0.18333 per share) -- -- (14,249) -- -- -- (14,249) Decrease in unearned ESOP compensation -- -- -- -- 1,519 -- 1,519 Three-for-two common stock split 271 (271) -- -- -- -- -- Balance at December 31, 2001 814 152,916 597,414 (77,388) (3,419) (60,818) 609,519 Comprehensive Income: Net income -- -- 147,952 -- -- -- 147,952 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment -- -- -- 88,739 -- -- 88,739 Unrealized loss on available-for-sale securities -- -- -- (4,854) -- -- (4,854) Net loss on derivative financial instruments -- -- -- (4,670) -- -- (4,670) Minimum pension liability adjustment -- -- -- (203) -- -- (203) Comprehensive Income 226,964 Exercise of stock options -- 715 -- -- -- 8,338 9,053 Tax benefit from stock options exercised -- 3,320 -- -- -- -- 3,320 Cash dividends ($0.184 per share) -- -- (14,395) -- -- -- (14,395) Decrease in unearned ESOP compensation -- -- -- -- 1,520 -- 1,520 Fractional share payouts -- (53) -- -- -- -- (53) Balance at December 31, 2002 $ 814 $ 156,898 $ 730,971 $ 1,624 $ (1,899) $ (52,480) $ 835,928 The accompanying notes are an integral part of these financial statements.
D16 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, --------------------------------------------------- 2002 2001 2000 (in thousands) Cash flows from operating activities: Net income $ 147,952 $ 121,496 $ 101,016 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 34,032 25,219 22,024 Amortization 9,827 29,115 19,335 Deferred income taxes (6,019) 6,451 4,249 Restructuring and other (income) costs (2,732) 5,073 (56) Other non-cash costs (income) 9,281 (3,849) 815 Gain on sale of business -- (23,121) -- Loss on disposal of property, plant and equipment 1,703 54 482 Non-cash ESOP compensation 1,520 1,519 1,520 Changes in operating assets and liabilities, net of acquisitions and divestitures: Accounts and notes receivable-trade, net (13,946) (3,709) (9,218) Inventories, net (8,940) 14,763 (1,216) Prepaid expenses and other current assets (1,515) 47 (1,526) Accounts payable (7,275) 9,180 1,492 Accrued liabilities (12,732) 28,704 7,018 Income taxes 17,833 4,295 (834) Other, net 3,994 (4,169) 521 Net cash provided by operating activities 172,983 211,068 145,622 Cash flows from investing activities: Acquisitions of businesses, net of cash acquired (49,805) (812,523) (14,995) Expenditures for identifiable intangible assets (3,309) (4,265) (1,423) Proceeds from bulk sale of precious metals inventory 6,754 41,814 -- Insurance proceeds received for fire-destroyed equipment 2,535 8,980 -- Redemption of preferred stock 15,000 -- -- Proceeds from sale of property, plant and equipment 1,777 645 215 Capital expenditures (57,454) (49,337) (28,425) Net cash used in investing activities (84,502) (814,686) (44,628) Cash flows from financing activities: Proceeds from long-term borrowings, net of deferred financing costs 100,244 1,435,175 114,341 Payments on long-term borrowings (190,589) (819,186) (149,390) (Decrease) increase in short-term borrowings (3,666) 7,511 (18,389) Proceeds from exercise of stock options and warrants 9,053 8,017 7,425 Cash paid for treasury stock -- (875) (40,092) Cash dividends paid (14,358) (14,228) (13,004) Proceeds from the termination of a pension plan -- 8,486 -- Fractional share payout (53) -- -- Net cash (used in) provided by financing activities (99,369) 624,900 (99,109) Effect of exchange rate changes on cash and cash equivalents 2,830 (3,005) 2,130 Net (decrease) increase in cash and cash equivalents (8,058) 18,277 4,015 Cash and cash equivalents at beginning of period 33,710 15,433 11,418 Cash and cash equivalents at end of period $ 25,652 $ 33,710 $ 15,433 The accompanying notes are an integral part of these financial statements.
D16 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2002 2001 2000 (in thousands) Supplemental disclosures of cash flow information: Interest paid $25,545 $15,967 $ 7,434 Income taxes paid 55,913 47,215 39,064 Supplemental disclosures of non-cash transactions: Receipt of convertible preferred stock in connection with the sale of a business -- 32,000 -- Receipt of common stock and stock warrants in exchange for convertible preferred stock 18,582 -- --
The company assumed liabilities in conjunction with the following acquisitions:
Fair Value Cash Paid for of Assets Assets or Liabilities Date Acquired Acquired Capital Stock Assumed (in thousands) Austenal, Inc. January 2002 $ 35,330 $ 21,065 $ 14,265 Degussa Dental Group October 2001 665,531 519,191 146,340 CeraMed Dental (remaining 49%) July 2001 20,000 20,000 - Tulsa Dental Products (earn-out payment) May 2001 84,627 84,627 - Dental injectible anesthetic assets of AstraZeneca March 2001 130,469 119,347 11,122 Friadent GmbH January 2001 128,356 97,749 30,607 Aggregate 2000 acquisitions Various 2000 16,665 16,227 438 The accompanying notes are an integral part of these financial statements.
D16 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Description of Business DENTSPLY designs, develops, manufactures and markets a broad range of products for the dental market. The Company believes that it is the world's leading manufacturer and distributor of dental prosthetics, precious metal dental alloys, dental ceramics, endodontic instruments and materials, prophylaxis paste, dental sealants, ultrasonic scalers and crown and bridge materials; the leading United States manufacturer and distributor of dental x-ray equipment, dental handpieces, intraoral cameras, dental x-ray film holders, film mounts and bone substitute/grafting materials; and a leading worldwide manufacturer or distributor of dental injectable anesthetics, impression materials, orthodontic appliances, dental cutting instruments and dental implants. The Company distributes its dental products in over 120 countries under some of the most well established brand names in the industry. DENTSPLY is committed to the development of innovative, high-quality, cost effective new products for the dental market. Principles of Consolidation The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. Intercompany accounts and transactions are eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates, if different assumptions are made or if different conditions exist. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Accounts and Notes Receivable-Trade The Company sells dental equipment and supplies primarily through a worldwide network of distributors, although certain product lines are sold directly to the end user. For customers on credit terms, the Company performs ongoing credit evaluation of those customers' financial condition and generally does not require collateral from them. The Company establishes allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Accounts and notes receivable-trade are stated net of these allowances which were $18.5 million and $12.6 million at December 31, 2002 and 2001, respectively. Certain of the Company's larger distributors are offered cash rebates based on targeted sales increases. The Company records an accrual based on its projected cash rebate obligations. Inventories Inventories are stated at the lower of cost or market. At December 31, 2002 and 2001, the cost of $13.0 million, or 6%, and $23.6 million, or 12%, respectively, of inventories was determined by the last-in, first-out ("LIFO") method. The cost of other inventories was determined by the first-in, first-out ("FIFO") or average cost methods. The Company establishes reserves for inventory estimated to be obsolete or unmarketable equal to the difference between the cost of inventory and estimated market value based upon assumptions about future demand and market conditions. 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 December 31, 2002 and December 31, 2001 by $0.8 million and $2.3 million, respectively. D16 Property, Plant and Equipment Property, plant and equipment are stated at cost, net of accumulated depreciation. Except for leasehold improvements, depreciation for financial reporting purposes is computed by the straight-line method over the following estimated useful lives: buildings - generally 40 years and machinery and equipment - 4 to 15 years. The cost of leasehold improvements is amortized over the shorter of the estimated useful life or the term of the lease. Maintenance and repairs are charged to operations; replacements and major improvements are capitalized. These assets are reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amount of the asset may not be recoverable. Impairment is based upon an evaluation of the identifiable undiscounted cash flows. If impaired, the resulting charge reflects the excess of the asset's carrying cost over its fair value. Identifiable Finite-lived Intangible Assets Identifiable finite-lived intangible assets, which primarily consist of patents, trademarks and licensing agreements, are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 40 years. These assets are reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amount of the asset may not be recoverable. Impairment is based upon an evaluation of the identifiable undiscounted cash flows. If impaired, the resulting charge reflects the excess of the asset's carrying cost over its fair value. Goodwill and Indefinite-Lived Intangible Assets Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets". This statement requires that the amortization of goodwill and indefinite-lived intangible assets be discontinued and instead an annual impairment approach be applied. The Company performed the transitional impairment tests upon adoption and the annual impairment tests during 2002, as required, and no impairment was identified. These impairment tests are based upon a fair value approach rather than an evaluation of the undiscounted cash flows. If impairment is identified under SFAS 142, the resulting charge is determined by recalculating goodwill through a hypothetical purchase price allocation of the fair value and reducing the current carrying value to the extent it exceeds the recalculated goodwill. If impairment is identified on indefinite-lived intangibles, the resulting charge reflects the excess of the asset's carrying cost over its fair value. Derivative Financial Instruments The Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", on January 1, 2001. This standard, as amended by SFAS 138, requires that all derivative instruments be recorded on the balance sheet at their fair value and that changes in fair value be recorded each period in current earnings or comprehensive income. 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 floating rate debt to fixed rate, fixed rate debt to floating rate, cross currency basis swaps to convert debt denominated in one currency to another currency and commodity swaps to fix its variable raw materials. The Company also holds stock warrants which are considered derivative financial instruments as defined under SFAS No. 133. Litigation The Company and its subsidiaries are from time to time parties to lawsuits arising out of their respective operations. The Company records liabilities when a loss is probable and can be reasonably estimated. These estimates are based on an analysis made by internal and external legal counsel which considers information known at the time. D16 Foreign Currency Translation The functional currency for foreign operations, except for those in highly inflationary economies, has been determined to be the local currency. Assets and liabilities of foreign subsidiaries are translated at exchange rates on the balance sheet date; revenue and expenses are translated at the average year-to-date rates of exchange. The effects of these translation adjustments are reported in a separate component of stockholders' equity. Exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved and translation adjustments in countries with highly inflationary economies are included in income. Exchange losses of $3.5 million in 2002 and $2.7 million in 2000 and exchange gains of $1.2 million in 2001 are included in "Other expense (income), net". Revenue Recognition Revenue, net of related discounts and allowances, is recognized when product is shipped and risk of loss has transferred to the customer. Net sales includes shipping and handling costs collected from customers in connection with the sale. A significant portion of the Company's net sales is comprised of sales of precious metals generated through its precious metal alloy product offerings. The precious metals content of sales was $187.1 million and $50.6 million for 2002 and 2001, respectively. There were no sales of precious metals in 2000. Warranties The Company provides warranties on certain equipment products. Estimated warranty costs are accrued when sales are made to customers. Estimates for warranty costs are based primarily on historical warranty claim experience. Research and Development Costs Research and development ("R&D") costs relate primarily to internal costs for salaries and direct overhead costs. In addition, the Company sometimes contracts with outside vendors to conduct R&D activities. All such R&D costs are charged to expense when incurred. The Company capitalizes the costs of equipment that has general R&D uses and expenses such equipment that is solely for specific R&D projects. The depreciation related to this capitalized equipment is included in the Company's R&D costs. R&D costs are included in "Selling, general and administrative expenses" and amounted to approximately $41.6 million, $28.3 million and $20.4 million for 2002, 2001 and 2000, respectively. Income Taxes Income taxes are determined in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the difference between financial statements and tax bases of liabilities and assets using enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS 109 also provides for the recognition of deferred tax assets if it is more likely than not that the assets will be realized in future years. A valuation allowance has been established for deferred tax assets for which realization is not likely. Earnings Per Share Basic earnings per share is calculated by dividing net earnings by the weighted average number of shares outstanding for the period. Diluted earnings per share is calculated by dividing net earnings by the weighted average number of shares outstanding for the period, adjusted for the effect of an assumed exercise of all dilutive options outstanding at the end of the period. D16 Stock Compensation The Company has stock-based employee compensation plans which are described more fully in Note 11. The Company applies the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for stock compensation plans. Under this method, no compensation expense is recognized for fixed stock option plans, provided that the exercise price is greater than or equal to the price of the stock at the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation.
Year Ended December 31, 2002 2001 2000 (in thousands, except per share amounts) Net income as reported $ 147,952 $ 121,496 $ 101,016 Deduct: Stock-based employee compensation expense determined under fair value method, net of related tax (9,576) (6,137) (4,614) Pro forma net income $ 138,376 $ 115,359 $ 96,402 Basic earnings per common share As reported $ 1.89 $ 1.56 $ 1.30 Pro forma under fair value based method $ 1.77 $ 1.49 $ 1.24 Diluted earnings per common share As reported $ 1.85 $ 1.54 $ 1.29 Pro forma under fair value based method $ 1.73 $ 1.46 $ 1.23
Other Comprehensive Income (Loss) Other comprehensive income (loss) includes foreign currency translation adjustments related to the Company's foreign subsidiaries, net of the related changes in certain financial instruments hedging these foreign currency investments. In addition, changes in the fair value of the Company's available-for-sale investment securities and certain derivative financial instruments and changes in its minimum pension liability are recorded in other comprehensive income (loss). These adjustments are recorded in other comprehensive income (loss) net of any related tax effects. For the years ended 2002 and 2000 these adjustments were net of tax benefits of $32.9 million and $1.1 million, respectively. For the year ended 2001, these adjustments were net of tax liabilities of $5.6 million. The balances included in accumulated other comprehensive gain (loss) in the consolidated balance sheets are as follows: December 31, 2002 2001 (in thousands) Foreign currency translation adjustments $ 13,548 $(75,191) Net loss on derivative financial instruments (5,983) (1,313) Unrealized loss on available-for-sale securities (4,854) -- Minimum pension liability (1,087) (884) $ 1,624 $(77,388) Reclassifications Certain reclassifications have been made to prior years' data in order to conform to the current year presentation. D16 Pending Accounting Changes In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations". It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. SFAS 143 is effective for the Company in 2003 and the effect of adoption is not expected to be material. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". The principal change resulting from this statement as compared to EITF 94-3 relates to more stringent requirements for the recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. This Statement also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Based on a preliminary assessment of this new standard, the Company believes that SFAS 146 may impact the timing of the recognition of future restructuring activities, whereby liabilities associated with the elements of the restructuring plan may need to be recognized at various dates subsequent to the commitment date rather than at the commitment date, which is the Company's current practice. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. In addtion, it clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The interpretation is effective on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002 and the Company has complied with these requirements. The Company is currently evaluating the impact of the application of this interpretation, but does not expect that FIN 45 will have a material impact on its financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FAS 123". This Statement amends Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The annual disclosure provisions of SFAS 148 are effective for annual periods ending after December 31, 2002 and the interim disclosure provisions are effective for the first interim period beginning after December 15, 2002. The Company has complied with these disclosure requirements and has elected not to adopt the fair value based accounting provisions of this new standard. D16 In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB 51". The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise should consolidate the variable interest entity (the "primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a variable interest entity make additional disclosures. Certain disclosure requirements of FIN 46 are effective for financial statements issued after January 31, 2003. The remaining provisions of FIN 46 are effective immediately for all variable interest entities created after January 31, 2003 and are effective beginning in the first interim or annual reporting period beginning after June 15, 2003 for all variable interest entities created before February 1, 2003. The Company has determined that the application of this standard will not have a material impact on its financial statements. . NOTE 2 - EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per common share:
Income Shares Per Share (Numerator) (Denominator) Amount (in thousands, except per share amounts) Year Ended December 31, 2002 Basic EPS $147,952 78,180 $ 1.89 Incremental shares from assumed exercise of dilutive options - 1,814 Diluted EPS $147,952 79,994 $ 1.85 Year Ended December 31, 2001 Basic EPS $121,496 77,671 $ 1.56 Incremental shares from assumed exercise of dilutive options - 1,304 Diluted EPS $121,496 78,975 $ 1.54 Year Ended December 31, 2000 Basic EPS $101,016 77,785 $ 1.30 Incremental shares from assumed exercise of dilutive options - 775 Diluted EPS $101,016 78,560 $ 1.29
Options to purchase 0.1 million and 1.4 million shares of common stock that were outstanding during the years ended 2002 and 2000, respectively, were not included in the computation of diluted earnings per share since the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. D16 NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES Acquisitions All acquisitions completed in 2002, 2001 and 2000 were accounted for under the purchase method of accounting; accordingly, the results of the operations acquired are included in the accompanying financial statements for the periods subsequent to the respective dates of the acquisitions. The purchase prices were allocated on the basis of estimates of the fair values of assets acquired and liabilities assumed. In January 2002, the Company acquired the partial denture business of Austenal Inc. ("Austenal") in a cash transaction valued at approximately $21.1 million, including debt assumed. Previously headquartered in Chicago, Illinois, Austenal manufactured dental laboratory products and was the world leader in the manufacture and sale of systems used by dental laboratories to fabricate partial dentures. The purchase price plus direct acquisition costs have been allocated on the basis of estimated fair values at the dates of acquisition, pending final determination of the fair value of certain acquired assets and liabilities. The preliminary purchase price allocation for Austenal is as follows (in thousands): Current assets $ 6,896 Property, plant and equipment 999 Identifiable intangible assets and goodwill 22,838 Other long-term assets 4,597 Current liabilities (13,193) Other long-term liabilities (1,072) $ 21,065 Pro forma financial information has not been presented for Austenal since its effect would not be significant. In October 2001, the Company completed the acquisition of Degussa Dental Group ("Degussa Dental"), a unit of Degussa AG, pursuant to the May 2001 Sale and Purchase Agreement. The preliminary purchase price for Degussa Dental was 548 million Euros or $503 million, which was paid at closing. The preliminary purchase price was subject to increase or decrease, based on certain working capital levels of Degussa Dental as of October 1, 2001. In June 2002, the Company made a partial payment of 12.1 million Euros, or $11.4 million, as a closing balance sheet adjustment. An additional closing balance sheet adjustment is subject to a dispute between the parties and is in arbitration. The Company may be required to pay up to $10 million for the final closing balance sheet adjustment depending upon the outcome of the arbitration. Any payments would result in additional purchase price. Previously headquartered in Hanau-Wolfgang, Germany, Degussa Dental manufactured and sold dental products, including precious metal alloys, ceramics and dental laboratory equipment, and chairside products. In January 2001, the Company agreed to acquire the dental injectible anesthetic assets of AstraZeneca ("AZ Assets"), including permanent, exclusive and royalty-free licensing rights to the dental products and tradenames, for $136.5 million and royalties on future sales of a new anesthetic product for scaling and root planing, Oraqix(TM) ("Oraqix"), that was in Stage III clinical trials at the time of the agreement. The $136.5 million purchase price is composed of the following: an initial $96.5 million payment which was made at closing in March 2001; a $20 million contingency payment (including related accrued interest) associated with the first year sales of injectible dental anesthetic which was paid during the first quarter of 2002; a $2.0 million payment upon submission of a New Drug Application ("NDA") in the U.S. and a Marketing Authorization Application ("MAA") in Europe for the Oraqix product under development; payments of $6.0 million and $2.0 million upon the approval of the NDA and MAA, respectively, for licensing rights; and a $10.0 million prepaid royalty payment upon approval of both applications. Under the terms of the agreement, the $2.0 million payment related to the application filings was accrued during the fourth quarter of 2001 and was paid during the first quarter of 2002. Because the Oraqix product had not received regulatory approvals for its use, this payment was considered to be research and development costs and was expensed as incurred. The Company expects that the regulatory applications will be approved during 2003, and as a result, it expects to make the remaining payments of $18.0 million during the year. These payments will be capitalized and amortized over the term of the licensing agreement. D16 In January 2001, the Company acquired the outstanding shares of Friadent GmbH ("Friadent") for 220 million German marks or $106 million ($105 million, net of cash acquired). During the first quarter of 2002, the Company received cash of 16.5 million German marks or approximately $7.3 million, representing a final balance sheet adjustment. As a result of this closing balance sheet adjustment, goodwill was reduced by approximately $7.3 million. Previously headquartered in Mannheim, Germany, Friadent was a major global dental implant manufacturer and marketer with subsidiaries in Germany, France, Denmark, Sweden, the United States, Switzerland, Brazil, and Belgium. The respective purchase prices plus direct acquisition costs for Degussa Dental, Friadent and the AZ Assets have been allocated on the basis of estimated fair values at the dates of acquisition. The purchase price allocations for these acquisitions are as follows:
Degussa Dental Friadent AZ Assets (in thousands) Current assets $ 166,124 $ 16,244 $ -- Property, plant and equipment 71,641 4,184 878 Identifiable intangible assets and goodwill 413,725 104,484 129,591 Other long-term assets 14,041 3,444 -- Current liabilities (104,642) (27,553) (11,122) Other long-term liabilities (41,698) (3,054) -- $ 519,191 $ 97,749 $ 119,347
In August 1996, the Company purchased a 51% interest in CeraMed Dental ("CeraMed") for $5 million with the right to acquire the remaining 49% interest. In March 2001, the Company entered into an agreement for an early buy out of the remaining 49% interest in CeraMed at a cost of $20 million, which was made in July 2001, with a potential contingent consideration ("earn-out") provision capped at $5 million. The earn-out was based on future sales of CeraMed products during the August 1, 2001 to July 31, 2002 time frame, with any additional pay out due on September 30, 2002. The Company was not required to make a payment under this earn-out provision. Certain assets of Tulsa Dental Products LLC were purchased in January 1996 for $75.1 million, plus $5.0 million paid in May 1999 related to earn-out provisions in the purchase agreement based on performance of the acquired business. The purchase agreement provided for an additional earn-out payment based upon the operating performance of the Tulsa Dental business for one of the three two-year periods ending December 31, 2000, December 31, 2001 or December 31, 2002, as selected by the seller. The seller chose the two-year period ended December 31, 2000 and the final earn-out payment of $84.6 million was made in May 2001 resulting in an increase in goodwill. During 2000, the Company completed five acquisitions with an aggregate purchase price of of $16.7 million. D16 Divestitures In March 2001, the Company sold InfoSoft, LLC to PracticeWorks Inc. ("PracticeWorks"). InfoSoft, LLC was the wholly owned subsidiary of the Company, that developed and sold software and related products for dental practice management. In the transaction, the Company received 6.5% convertible preferred stock in PracticeWorks, with a fair value of $32 million. This sale resulted in a $23.1 million pretax gain which was included in "Other expense (income), net". The Company recorded this preferred stock investment and subsequent accrued dividends to "Other noncurrent assets". In June 2002, the Company completed a transaction with PracticeWorks to exchange the accumulated balance of this preferred stock investment for a combination of $15.0 million of cash, 1.0 million shares of PracticeWorks' common stock valued at $15.0 million and 450,000 seven-year term stock warrants issued by PracticeWorks, valued at $3.6 million, based on the Black-Scholes option pricing model. The transaction resulted in a loss to the Company of $1.1 million, which is included in "Other expense (income), net". The exchange provided the Company with immediate cash, as well as, improved liquidity on its investment in PracticeWorks, while also providing additional market appreciation potential if PracticeWorks' business and stock price perform positively. As a result of the transaction, the Company no longer receives preferred stock dividends. The common stock has been classified as available-for-sale and any fair value adjustments to this investment are reflected in "Accumulated other comprehensive gain (loss)" until sold. The warrants are classified as derivative financial instruments as defined under SFAS No. 133 and any fair value adjustments in these holdings are reflected in current income each quarter. For the year ended December 31, 2002, the unrealized loss on the stock warrants was $2.5 million. These unrealized losses were included in "Other expense (income), net". D16 NOTE 4 - SEGMENT AND GEOGRAPHIC INFORMATION The Company follows Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 establishes standards for disclosing information about reportable segments in financial statements. The Company has numerous operating businesses covering a wide range of products and geographic regions, primarily serving the professional dental market. Professional dental products represented approximately 98%, 97% and 95% of sales in 2002, 2001 and 2000, respectively. Accordingly, all operating businesses are aggregated into one reportable segment for purposes of SFAS 131. six The Company's operations are structured to achieve consolidated objectives. As a result, significant interdependencies exist among the Company's operations in different geographic areas. Intercompany sales of manufacturing materials between areas are at prices which, in general, provide a reasonable profit after coverage of all manufacturing costs. Intercompany sales of finished goods are at prices intended to provide a reasonable profit for purchasing locations after coverage of marketing and general and administrative costs. The following table sets forth information about the Company's operations in different geographic areas for 2002, 2001 and 2000. Net sales reported below represent revenues for shipments made by operating businesses located in the country or territory identified, including export sales. Assets reported represent those held by the operating businesses located in the respective geographic areas.
United Other States Germany Foreign Consolidated (in thousands) 2002 Net sales $ 738,831 $ 333,691 $ 441,220 $ 1,513,742 Long-lived assets 186,674 100,744 114,780 402,198 2001 Net sales $ 627,480 $ 160,347 $ 345,141 $ 1,132,968 Long-lived assets 138,380 66,756 91,584 296,720 2000 Net sales $ 560,692 $ 57,989 $ 271,115 $ 889,796 Long-lived assets 87,314 42,049 66,519 195,882
The following table presents sales information by product category: Year Ended December 31, 2002 2001 2000 (in thousands) Consumables and small equipment $1,390,522 $1,016,062 $ 769,740 Heavy equipment 90,231 81,913 76,374 Non-dental 32,989 34,993 43,682 $1,513,742 $1,132,968 $ 889,796 Third party export sales from the United States are less than ten percent of consolidated net sales. No customers accounted for more than ten percent of consolidated net sales in 2002. In 2001, one customer, a distributor, accounted for 11% of consolidated net sales. In 2000, two customers, both distributors, accounted for 14% and 10% of consolidated net sales. D16 NOTE 5 - OTHER EXPENSE (INCOME) Other expense (income), net consists of the following:
Year Ended December 31, ----------------------------- 2002 2001 2000 Foreign exchange transaction losses (gains) $ 3,489 $ (1,177) $ 2,695 Gain on sale of InfoSoft, LLC -- (23,121) -- Unrealized losses on stock warrants 2,471 -- -- Preferred stock dividend income (929) (1,710) -- Loss on preferred stock conversion 1,056 -- -- Minority interests 364 (1,265) (215) Other 1,679 (65) 349 $ 8,130 $(27,338) $ 2,829
NOTE 6 - INVENTORIES Inventories consist of the following: December 31, 2002 2001 (in thousands) Finished goods $134,989 $119,030 Work-in-process 39,065 35,539 Raw materials and supplies 40,438 42,885 $214,492 $197,454 NOTE 7 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: December 31, 2002 2001 (in thousands) Assets, at cost: Land $ 34,746 $ 19,752 Buildings and improvements 160,566 114,202 Machinery and equipment 274,915 238,157 Construction in progress 28,368 20,566 498,595 392,677 Less: Accumulated depreciation 185,417 151,787 $313,178 $240,890 D16 NOTE 8 - GOODWILL AND INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets". This statement requires that the amortization of goodwill and indefinite-lived intangible assets be discontinued and instead an annual impairment test approach be applied. The impairment tests are required to be performed transitionally upon adoption and annually thereafter (or more often if adverse events occur) and are based upon a fair value approach rather than an evaluation of the undiscounted cash flows. If goodwill impairment is identified, the resulting charge is determined by recalculating goodwill through a hypothetical purchase price allocation of the fair value and reducing the current carrying value to the extent it exceeds the recalculated goodwill. If impairment is identified on indefinite-lived intangibles, the resulting charge reflects the excess of the asset's carrying cost over its fair value. Other intangible assets with finite lives will continue to be amortized over their useful lives. The Company performed the transitional impairment tests and the annual impairment tests during 2002, as required by SFAS 142, and no impairment was identified. In addition, as part of the adoption of the standard, the Company assessed and identified intangible assets which were deemed indefinite-lived. In accordance with SFAS 142, prior period amounts have not been restated. The following table presents prior year reported amounts adjusted to eliminate the amortization of goodwill and indefinite-lived intangible assets.
Year Ended December 31, 2002 2001 2000 (in thousands, except per share amounts) Reported net income $ 147,952 $ 121,496 $ 101,016 Add: amortization adjustment, net of related tax -- 13,963 8,319 Adjusted net income $ 147,952 $ 135,459 $ 109,335 Reported basic earnings per share $ 1.89 $ 1.56 $ 1.30 Add: amortization adjustment -- 0.18 0.11 Adjusted basic earnings per share $ 1.89 $ 1.74 $ 1.41 Reported diluted earnings per share $ 1.85 $ 1.54 $ 1.29 Add: amortization adjustment -- 0.18 0.11 Adjusted diluted earnings per share $ 1.85 $ 1.72 $ 1.40
The table below presents the net carrying values of goodwill and identifiable intangible assets. The indefinite-lived intangible-lived assets were designated as such as of January 1, 2002; however, the Company has shown the value of these assets at December 31, 2001 for comparative purposes. December 31, 2002 2001 (in thousands) Goodwill $898,497 $763,270 Indefinite-lived identifiable intangible assets: Trademarks $ 4,080 $ 4,080 Licensing agreements 149,254 118,979 Finite-lived identifiable intangible assets 82,675 125,831 Total identifiable intangible assets $236,009 $248,890 D16 A reconciliation of changes in the Company's goodwill is as follows: December 31, 2002 2001 (in thousands) Balance, beginning of the year $ 763,270 $ 264,023 Acquisition activity 68,201 545,239 Divestitures -- (5,948) Impairment charges -- -- Amortization -- (15,423) Effects of exchange rate changes 67,026 (24,621) Balance, end of the year $ 898,497 $ 763,270 The change in the net carrying value of goodwill was primarily related to the goodwill associated with the acquisition of Austenal purchased in January 2002, purchase price adjustments related to the Degussa Dental acquisition, the closing balance sheet adjustment received in the Friadent acquisition (see Note 3) and foreign currency translation adjustments. The increase in indefinite-lived licensing agreements was due to final purchase price adjustments related to the AZ Asset acquisition and foreign currency translation adjustments. These intangible assets relate to the royalty-free licensing rights to AstraZeneca's dental products and tradenames. The change in finite-lived identifiable intangible assets was due primarily to the finalization of the valuations of the intangible assets acquired in the Degussa Dental acquisition which were previously based on estimates and foreign currency translation adjustments. Finite-lived identifiable intangible assets consist of the following:
December 31, 2002 December 31, 2001 -------------------------------------- ---------------------------------------- Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount (in thousands) Patents $ 53,902 $ (30,015) $ 23,887 $ 64,514 $ (27,866) $ 36,648 Trademarks 37,145 (6,608) 30,537 59,610 (5,630) 53,980 Licensing agreements 23,730 (6,411) 17,319 29,405 (14,877) 14,528 Other 26,151 (15,219) 10,932 44,961 (24,286) 20,675 $ 140,928 $ (58,253) $ 82,675 $ 198,490 $ (72,659) $ 125,831
Amortization expense for goodwill and indefinite-lived intangible assets for 2001 and 2000 was $17.8 million and $10.2 million, respectvely. Amortization expense for finite-lived identifiable intangible assets for 2002, 2001 and 2000 was $9.8 million, $11.3 million and $9.1 million, respectively. The annual estimated amortization expense related to these intangible assets for each of the five succeeding fiscal years is $9.8 million, $8.7 million, $7.5 million, $6.8 million and $5.9 million for 2003, 2004, 2005, 2006 and 2007, respectively. D16 NOTE 9 - ACCRUED LIABILITIES Accrued liabilities consist of the following: December 31, 2002 2001 (in thousands) Payroll, commissions, bonuses and other cash compensation $ 44,490 $ 39,139 Employee benefits 13,181 15,458 General insurance 14,965 13,886 Sales and marketing programs 19,401 21,533 Restructuring and other costs 18,043 24,497 Earn-out related to the AZ Asset purchase -- 20,622 Warranty liabilities 8,576 7,951 Other 72,127 51,271 $190,783 $194,357 A reconciliation of changes in the Company's warranty liability for 2002 is as follows: Warranty Liability December 31, 2002 (in thousands) Balance, beginning of the year $ 7,951 Accruals for warranties issued during the year 5,381 Accruals related to pre-existing warranties (1,654) Warranty settlements made during the year (3,705) Effects of exchange rate changes 603 Balance, end of the year $ 8,576 D16 NOTE 10 - FINANCING ARRANGEMENTS Short-Term Borrowings Short-term bank borrowings amounted to $3.2 million and $3.5 million at December 31, 2002 and 2001, respectively. The weighted average interest rates of these borrowings were 2.5% and 3.3% at December 31, 2002 and 2001, respectively. Unused lines of credit for short-term financing at December 31, 2002 and 2001 were $80.0 million and $66.9 million, respectively. Substantially all short-term borrowings were classified as long-term as of December 31, 2002 and 2001, reflecting the Company's intent and ability to refinance these obligations beyond one year and are included in the table below. Substantially all unused lines of credit have no major restrictions and are provided under demand notes between the Company and the lending institution. Interest is charged on borrowings under these lines of credit at various rates, generally below prime or equivalent money rates. Long-Term Borrowings
December 31, 2002 2001 (in thousands) $250 million multi-currency revolving credit agreement expiring May 2006, Japanese yen 12.6 billion at 0.56%, Swiss francs 65.0 million at 1.25% $152,803 $147,028 $250 million multi-currency revolving credit agreement expiring May 2003 -- 55,338 Prudential Private Placement Notes, Swiss franc denominated, 84.4 million at 4.56% and 82.5 million at 4.42% maturing March 2007, 80.4 million at 4.96% maturing October 2006 178,881 147,489 ABN Private Placement Note, Japanese yen 6.2 billion at 1.39% maturing December 2005 52,562 47,527 Euro 350.0 million Eurobonds at 5.75% maturing December 2006 378,144 303,563 $250 million commercial paper facility rated A/2-P/2 U.S. dollar borrowings -- 6,650 Other borrowings, various currencies and rates 8,836 20,061 771,226 727,656 Less: Current portion (included in notes payable and current portion of long-term debt) 1,403 4,132 $769,823 $723,524
The table below reflects the contractual maturity dates of the various borrowings at December 31, 2002 (in thousands). The borrowings contractually due in 2003 have been classified as long-term due to the Company's intent and ability to renew or refinance these obligations beyond 2003. The individual borrowings under the revolving credit agreement are structured to mature on a quarterly basis but because the Company has the intent and ability to extend them until the expiration date of the agreement, these borrowings are considered contractually due in May 2006. 2003 $ 23,156 2004 18,595 2005 58,482 2006 629,352 2007 40,238 2008 and thereafter -- $769,823 D16 In July 1998, the Company entered into interest rate swap agreements with notional amounts totaling $80.0 million converting a portion of its variable rate financing to fixed rate debt. These U.S. dollar swaps were terminated in February 2001 at a cost of $1.2 million. In January 2000 and February 2001, the Company entered into interest rate swap agreements with notional amounts totaling 180 million Swiss francs converting a portion of the Company's variable rate financing to fixed rate debt. These agreements effectively convert the underlying debt's interest rate to an average fixed rate of 3.3% for an average period of 4 years. In February 2002, the Company entered into interest rate swap agreements with notional amounts totaling 12.6 billion Japanese yen converting a portion of its variable rate financing to fixed rate debt. These agreements effectively convert the underlying debt's interest rate to an average fixed rate of 1.6% for a term of ten years. As part of this transaction, the Company offset a portion of its Swiss franc swaps (115 million Swiss francs) by entering into reverse swap agreements with identical terms. In December 2001, the Company entered into a series of fixed to variable rate swaps to convert its fixed rate 5.75% coupon Eurobonds into variable debt, currently at 4.4%. Additionally, the Company entered into a series of freestanding Euro to U.S. dollar cross currency basis swaps to effectively convert the Eurobonds and related interest expense to U.S. dollar, currently at 2.8%. In May 2001, the Company replaced and increased its multiple revolving credit agreements with a single agreement providing a total available credit of $500 million with participation from thirteen banks. The revolving credit agreements contain certain affirmative and negative covenants as to the operations and financial condition of the Company, the most restrictive of which pertain to asset dispositions, maintenance of certain levels of net worth, and prescribed ratios of indebtedness to total capital and operating income plus depreciation and amortization to interest expense. The Company pays a facility fee of 0.125 % annually on the amount of the commitment under the $250 million five year facility ("facility B") and 0.10 % annually under the $250 million 364-day facility ("facility A"). Interest rates on amounts borrowed under the facility will depend on the maturity of the borrowing, the currency borrowed, the interest rate option selected, and the Company's long-term credit rating from Moody's and Standard and Poors. The $250 million facility A may be extended, subject to certain conditions, for additional periods of 364 days, which the Company intends to extend annually. The entire $500 million revolving credit agreement has a usage fee of 0.125 % annually if utilization exceeds 50% of the total available facility. The Company has complementary U.S. dollar and Euro multicurrency commercial paper facilities totaling $250 million which have utilization, dealer, and annual appraisal fees which on average cost 0.11 % annually. The $250 million facility A acts as back-up credit to this commercial paper facility. The total available credit under the commercial paper facilities and the facility A is $250 million. The short-term commercial paper borrowings were classified as long-term, as of December 31, 2001, reflecting the Company's intent and ability to renew these obligations beyond 2002. There were no outstanding commercial paper obligations at December 31, 2002. In March 2001, the Company issued Series A and B private placement notes to Prudential Capital Group totaling Swiss francs 166.9 million ($100 million) at an average rate of 4.49% with six year final maturities. The notes were issued to finance the acquisition of the AZ Assets. In October 2001, the Company issued a Series C private placement note to Prudential Capital Group for Swiss francs 80.4 million ($50 million) at a rate of 4.96% with a five year final maturity. The series A and B notes were also amended to increase the interest rate by 30 basis points, reflecting the Company's higher leverage. In December 2001, the Company issued a private placement note through ABN AMRO for Japanese yen 6.2 billion ($50 million) at a rate of 1.39% with a four year final maturity. The Series C note and the ABN note were issued to partially finance the Degussa Dental acquisition. In December 2001, the Company issued 350 million Eurobonds with a coupon of 5.75%, maturing December 2006 at an effective yield of 5.89%. These bonds were issued to partially finance the Degussa Dental acquisition. At December 31, 2002, the Company had total unused lines of credit, including lines available under its short-term arrangements, of $420.9 million. D16 NOTE 11 - STOCKHOLDERS' EQUITY The Board of Directors authorized the repurchase of 1.5 million and 6.0 million shares of common stock for the years ended December 31, 2001 and 2000, respectively, on the open market or in negotiated transactions. Each of these authorizations to repurchase shares expired on December 31 of the respective years. The Company repurchased 37,500 shares for $0.9 million and 2.2 million shares for $40.1 million in 2001 and 2000, respectively. No share repurchases were made during 2002. A former Chairman of the Board holds options to purchase 45,000 shares of common stock at an exercise price of $14.83, which was equal to the market price on the date of grant. The options are exercisable at any time through January 2004. The Company has stock options outstanding under three stock option plans (1993 Plan, 1998 Plan and 2002 Plan). Further grants can be made under the 1998 and 2002 Plans. Under the1993 Plan, a committee appointed by the Board of Directors granted to key employees and directors of the Company options to purchase shares of common stock at an exercise price determined by such committee, but not less than the fair market value of the common stock on the date of grant. Options generally expire ten years after the date of grant under the 1993 Planand grants become exercisable over a period of three years after the date of grant at the rate of one-third per year, except that they become immediately exercisable upon death, disability or retirement. The 1998 Plan authorized grants of 6.5 million shares of common stock, plus shares not granted under the 1993 Plan at the time of adoption of the 1998 Plan (as noted above, no further grants can be made under the 1993 Plan). The 1998 Plan enables the Company to grant "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, to key employees of the Company, and "non-qualified stock options" ("NSOs") which do not constitute ISOs to key employees and non-employee directors of the Company. Grants of options to key employees are solely discretionary with the Board of Directors of the Company. ISOs and NSOs generally expire ten years from date of grant and become exercisable over a period of three years after the date of grant at the rate of one-third per year, except that they become immediately exercisable upon death, disability or retirement. Such options are granted at exercise prices not less than the fair market value of the common stock on the grant date. The 2002 Plan authorized grants of 7.0 milion shares of common stock, (plus any unexercised portion of canceled or terminated stock options granted under the DENTSPLY International Inc. 1993 and 1998 Stock Option Plans), subject to adjustment as follows: each January, if 7% of the outstanding common shares of the Company exceed 7.0 million, the excess becomes available for grant under the Plan. The 2002 Plan enables the Company to grant "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, to key employees of the Company, and "non-qualified stock options" ("NSOs") which do not constitute ISOs to key employees and non-employee directors of the Company. Grants of options to key employees are solely discretionary with the Board of Directors of the Company. ISOs and NSOs generally expire ten years from date of grant and become exercisable over a period of three years after the date of grant at the rate of one-third per year, except that they become immediately exercisable upon death, disability or retirement. Such options are granted at exercise prices not less than the fair market value of the common stock on the grant date. It is intended that grants will be made under the 1998 Plan until the shares authorized under that Plan are fully utilized. Then option grants will only be made under the 2002 Plan, which will include the unexercised portion of canceled or terminated options granted under the 1993 or 1998 Plans. Each non-employee director receives an automatic grant of NSOs to purchase 9,000 shares of common stock on the date he or she becomes a non-employee director and an additional 9,000 options on the third anniversary of the date of the non-employee director was last granted an option. D16 The following is a summary of the status of the Plans as of December 31, 2002, 2001 and 2000 and changes during the years ending on those dates:
Outstanding Exercisable --------------------------------- ---------------------------------- Weighted Weighted Available Average Average for Exercise Exercise Grant Shares Price Shares Price Shares December 31, 1999 5,067,368 $ 15.72 2,401,523 $ 14.95 4,436,916 Authorized (Lapsed) - 15,957 Granted 1,377,600 24.43 (1,377,600) Exercised (501,531) 14.75 - Expired/Canceled (151,194) 16.65 151,194 December 31, 2000 5,792,243 17.85 2,989,478 15.64 3,226,467 Authorized (Lapsed) - (83,444) Granted 1,605,900 30.43 (1,605,900) Exercised (497,813) 16.01 - Expired/Canceled (167,087) 18.47 167,087 December 31, 2001 6,733,243 20.97 3,732,179 16.76 1,704,210 Authorized (Lapsed) - 7,023,106 Granted 1,574,550 36.91 (1,574,550) Exercised (515,565) 17.33 - Expired/Canceled (100,639) 19.08 100,639 December 31, 2002 7,691,589 $ 24.50 4,649,889 $ 18.99 7,253,405
The following table summarizes information about stock options outstanding under the Plans at December 31, 2002:
Options Outstanding Options Exercisable ---------------------------------------------------- ----------------------------------- Weighted Number Average Number Outstanding Remaining Weighted Exercisable Weighted at Contractual Average at Average December 31 Life Exercise December 31 Exercise Exercise Price Range 2002 (in years) Price 2002 Price $10.01 - $15.00 738,515 2.1 $ 13.34 738,515 $ 13.34 15.01 - 20.00 2,596,019 6.1 16.52 2,577,019 16.51 20.01 - 25.00 1,341,693 7.8 24.59 856,343 24.60 25.01 - 30.00 86,750 8.5 27.89 25,850 27.92 30.01 - 35.00 1,383,012 8.9 31.22 452,162 31.17 35.01 - 40.00 1,545,600 9.9 36.96 - - 7,691,589 7.3 $ 24.50 4,649,889 $ 18.99
D16 The Company uses the Black-Scholes option pricing model to value option awards. The per share weighted average fair value of stock options and the weighted average assumptions used to determine these values are as follows: Year Ended December 31, 2002 2001 2000 Per share fair value $ 12.69 $ 11.47 $ 9.01 Expected dividend yield 0.50% 0.61% 0.75% Risk-free interest rate 3.35% 5.01% 5.37% Expected volatility 34% 33% 32% Expected life (years) 5.50 5.50 5.50 The Black-Scholes option pricing model was developed for tradable options with short exercise periods and is therefore not necessarily an accurate measure of the fair value of compensatory stock options. NOTE 12 - INCOME TAXES The components of income before income taxes are as follows: Year Ended December 31, 2002 2001 2000 (in thousands) United States ("U.S.") $121,901 $136,135 $120,149 Foreign 99,084 48,992 31,647 $220,985 $185,127 $151,796 The components of the provision for income taxes are as follows: Year Ended December 31, 2002 2001 2000 (in thousands) Current: U.S. federal $ 46,919 $ 44,237 $ 34,291 U.S. state 2,520 1,331 1,330 Foreign 29,613 11,612 10,910 Total 79,052 57,180 46,531 Deferred: U.S. federal (5,164) 13,813 7,356 U.S. state (590) 1,141 669 Foreign (265) (8,503) (3,776) Total (6,019) 6,451 4,249 $ 73,033 $ 63,631 $ 50,780 D16 The reconcilation of the U.S. federal statutory tax rate to the effective rate is as follows:
Year Ended December 31, 2002 2001 2000 Statutory federal income tax rate 35.0 % 35.0 % 35.0 % Effect of: State income taxes, net of federal benefit 0.6 0.9 0.9 Nondeductible amortization of goodwill - 1.0 1.2 Foreign earnings at various rates (4.1) (2.7) (2.3) Foreign tax credit - (0.8) (0.5) Foreign losses with no tax benefit 1.9 0.5 0.8 Extraterritorial income (1.1) (0.9) (1.0) Tax exempt income - - (0.7) Other 0.7 1.4 0.1 Effective income tax rate 33.0 % 34.4 % 33.5 %
D16 The tax effect of temporary differences giving rise to deferred tax assets and liabilities are as follows:
December 31, 2002 December 31, 2001 Current Noncurrent Current Noncurrent Asset Asset Asset Asset (Liability) (Liability) (Liability) (Liability) (in thousands) Employee benefit accruals $ 1,795 $ 10,090 $ 1,725 $ 7,711 Product warranty accruals 2,018 -- 2,055 -- Facility relocation accruals 360 217 107 217 Insurance premium accruals 4,029 -- 4,145 -- Restructuring and other cost accruals 7,573 13,921 3,025 5,602 Differences in financial reporting and tax basis for: Inventory 7,106 -- 5,418 -- Property, plant and equipment -- (30,605) -- (23,866) Identifiable intangible assets -- (39,353) -- (16,151) Unrealized losses (gains) included in other comprehensive income -- 18,324 (2,054) (4,210) Other 18,638 5,515 13,159 3,199 Tax loss carryforwards in foreign jurisdictions -- 9,521 -- 2,864 Valuation allowance for tax loss carryforwards -- (5,342) -- (2,864) $ 41,519 $(17,712) $ 27,580 $(27,498)
Current and noncurrent deferred tax assets and liabilities are included in the following balance sheet captions: December 31, 2002 2001 (in thousands) Prepaid expenses and other current assets $ 42,096 $ 29,069 Income taxes payable (577) (1,489) Other noncurrent assets 9,327 5,028 Deferred income taxes (27,039) (32,526) D16 Certain foreign subsidiaries of the Company have tax loss carryforwards of $54.0 million at December 31, 2002, of which $18.6 million expire through 2010 and $35.4 million may be carried forward indefinitely. The tax benefit of these tax loss carryforwards has been partially offset by a valuation allowance. The valuation allowance of $5.3 million and $2.9 million at December 31, 2002 and 2001, respectively, relates to foreign tax loss carryforwards for which realizability is uncertain. The change in the valuation allowances for 2002 and 2001 results primarily from the generation of additional foreign tax loss carryforwards. The Company has provided for the potential repatriation of certain undistributed earnings of its foreign subsidiaries and considers earnings above the amounts on which tax has been provided to be permanently reinvested. Income taxes have not been provided on $260 million of undistributed earnings of foreign subsidiaries, which will continue to be reinvested. If remitted as dividends, these earnings could become subject to additional tax, however such repatriation is not anticipated. Any additional amount of tax is not practical to estimate, however, the Company believes that U.S. foreign tax credits would largely eliminate any U.S. tax payable. NOTE 13 - BENEFIT PLANS Substantially all of the employees of the Company and its subsidiaries are covered by government or Company-sponsored benefit plans. Total costs for Company-sponsored defined benefit, defined contribution and employee stock ownership plans amounted to $11.5 million in 2002, $7.9 million in 2001 and $5.1 million in 2000. Defined Contribution Plans The DENTSPLY Employee Stock Ownership Plan ("ESOP") is a non-contributory defined contribution plan that covers substantially all of the United States based non-union employees of the Company. Contributions to the ESOP were $2.2 million for 2002 and $2.1 million for both 2001 and 2000. The Company makes annual contributions to the ESOP of not less than the amounts required to service ESOP debt. In connection with the refinancing of ESOP debt in March 1994, the Company agreed to make additional cash contributions totaling at least $0.6 million through 2003. Dividends received by the ESOP on allocated shares are either reinvested in participants' accounts or passed through to Plan participants, at the participant's election. Most ESOP shares were initially pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active employees based on the proportion of debt service paid in the year. At December 31, 2002, the ESOP held 7.7 million shares, of which 7.3 million were allocated to plan participants and 0.4 million shares were unallocated and pledged as collateral for the ESOP debt. Unallocated shares were acquired prior to December 31, 1992 and are accounted for in accordance with Statement of Position 76-3. Accordingly, all shares held by the ESOP are considered outstanding and are included in the earnings per common share computations. The Company sponsors an employee 401(k) savings plan for its United States workforce to which enrolled participants may contribute up to IRS defined limits. Defined Benefit Plans The Company maintains a number of separate contributory and non-contributory qualified defined benefit pension plans and other postretirement medical plans for certain union and salaried employee groups in the United States. Pension benefits for salaried plans are based on salary and years of service; hourly plans are based on negotiated benefits and years of service. Annual contributions to the pension plans are sufficient to satisfy legal funding requirements. Pension plan assets are held in trust and consist mainly of common stock and fixed income investments. The Company maintains defined benefit pension plans for its employees in Germany, Japan, The Netherlands, and Switzerland. These plans provide benefits based upon age, years of service and remuneration. The German plans are unfunded book reserve plans. Other foreign plans are not significant individually or in the aggregate. Most employees and retirees outside the United States are covered by government health plans. Postretirement Healthcare The plans for postretirement healthcare have no plan assets. The postretirement healthcare plan covers certain union and salaried employee groups in the United States and is contributory, with retiree contributions adjusted annually to limit the Company's contribution for participants who retired after June 1, 1985. The Company also sponsors unfunded non-contributory postretirement medical plans for a limited number of union employees and their spouses and retirees of a discontinued operation. D16 Reconciliations of changes in the above plans' benefit obligations, fair value of assets, and statement of funded status are as follows:
Other Postretirement Pension Benefits Benefits ---------------------------- ------------------------------ December 31, December 31, 2002 2001 2002 2001 (in thousands) Reconciliation of Benefit Obligation Benefit obligation at beginning of year $ 81,134 $ 60,781 $ 7,877 $ 7,552 Service cost 3,428 1,877 419 205 Interest cost 4,464 3,548 833 539 Participant contributions 972 813 442 391 Actuarial losses 2,877 1,561 2,537 268 Amendments -- -- -- -- Acquisitions -- 19,540 -- -- Effects of exchange rate changes 14,955 (3,126) -- -- Benefits paid (4,119) (3,860) (1,373) (1,078) Benefit obligation at end of year $ 103,711 $ 81,134 $ 10,735 $ 7,877 Reconciliation of Plan Assets Fair value of plan assets at beginning of year $ 43,348 $ 41,183 $ -- $ -- Actual return on assets (10) (471) -- -- Acquisitions -- 4,751 -- -- Effects of exchange rate changes 7,716 (1,395) -- -- Employer contributions 3,331 2,327 931 687 Participant contributions 972 813 442 391 Benefits paid (4,119) (3,860) (1,373) (1,078) Fair value of plan assets at end of year $ 51,238 $ 43,348 $ -- $ -- Reconciliation of Funded Status Actuarial present value of projected benefit obligations $ 103,711 $ 81,134 $ 10,735 $ 7,877 Plan assets at fair value 51,238 43,348 -- -- Funded status (52,473) (37,786) (10,735) (7,877) Unrecognized transition obligation 1,581 1,590 -- -- Unrecognized prior service cost 590 678 34 -- Unrecognized net actuarial loss (gain) 7,499 1,482 25 (2,450) Net amount recognized $ (42,803) $ (34,036) $ (10,676) $ (10,327)
D16 The amounts recognized in the accompanying Consolidated Balance Sheets are as follows:
Other Postretirement Pension Benefits Benefits ------------------------- ----------------------- December 31, December 31, 2002 2001 2002 2001 (in thousands) Other noncurrent liabilities $(55,063) $(43,589) $(10,676) $(10,327) Other noncurrent assets 10,498 8,669 -- -- Accumulated other comprehensive loss 1,762 884 -- -- Net amount recognized $(42,803) $(34,036) $(10,676) $(10,327)
The aggregate benefit obligation for those plans where the accumulated benefit obligation exceeded the fair value of plan assets was $55.1 million and $43.6 million at December 31, 2002 and 2001, respectively. Components of the net periodic benefit cost for the plans are as follows:
Other Postretirement Pension Benefits Benefits ----------------------------------- ---------------------------------- 2002 2001 2000 2002 2001 2000 (in thousands) Service cost $ 3,428 $ 1,877 $ 1,960 $ 419 $ 205 $ 182 Interest cost 4,464 3,548 3,072 833 539 542 Expected return on plan assets (2,706) (2,525) (2,020) -- -- -- Net amortization and deferral 445 287 (2,368) 27 (63) 174 Net periodic benefit cost $ 5,631 $ 3,187 $ 644 $ 1,279 $ 681 $ 898
The weighted average assumptions used in accounting for the Company's plans, principally in foreign locations, are as follows:
Other Postretirement Pension Benefits Benefits ------------------------------------------- ------------------------------------------ 2002 2001 2000 2002 2001 2000 Discount rate 5.1% 5.4% 5.7% 6.8% 7.3% 7.0% Expected return on plan assets 5.5% 5.0% 5.7% n/a n/a n/a Rate of compensation increase 3.0% 2.5% 3.5% n/a n/a n/a Initial health care cost trend n/a n/a n/a 10.0% 7.0% 7.0% Ultimate health care cost trend n/a n/a n/a 5.0% 7.0% 7.0% Years until ultimate trend is reached n/a n/a n/a 10.0 n/a n/a
Assumed health care cost trend rates have an impact on the amounts reported for postretirement benefits. A one percentage point change in assumed healthcare cost trend rates would have the following effects for the year ended December 31, 2002:
Other Postretirement Benefits --------------------------- 1% Increase 1% Decrease (in thousands) Effect on total of service and interest cost components $ 123 $ (154) Effect on postretirement benefit obligation 1,001 (836)
D16 NOTE 14 - RESTRUCTURING AND OTHER COSTS (INCOME) Restructuring and other costs (income) consists of the following:
Year Ended December 31, 2002 2001 2000 (in thousands) Restructuring and other costs $ 1,669 $ 17,774 $ 2,702 Reversal of restructuring charges due to changes in estimates (3,687) (802) -- Gain on pension plan termination -- (8,486) -- Gain on insurance settlement associated with fire (714) (5,758) -- Costs related to the Oraqix agreement -- 2,345 -- German property settlement -- -- (2,758) Total restructuring and other costs (income) $ (2,732) $ 5,073 $ (56)
On January 25, 2001, the Company suffered a fire at its Maillefer facility in Switzerland. The fire caused severe damage to a building and to most of the equipment it contained. During the third quarter of 2002, the Company received insurance proceeds for settlement of the damages caused to the building. These proceeds resulted in the Company recognizing a net gain on the damaged building of approximately $0.7 million. The Company also received insurance proceeds on the destroyed equipment during the fourth quarter of 2001 and recorded the related disposal gains of $5.8 million during that period. During the second quarter of 2002, the Company recorded a charge of $1.7 million for restructuring and other costs. The charge primarily related to the elimination of duplicative functions created as a result of combining the Company's Ceramed and U.S. Friadent divisions. Included in this charge were severance costs of $0.6 million, lease/contract termination costs of $0.9 million and $0.2 million of impairment charges on fixed assets that will be disposed of as a result of the restructuring plan. This restructuring plan resulted in the elimination of approximately 35 administrative and manufacturing positions in the United States and was substantially complete as of December 31, 2002. As part of combining Austenal with the Company, $4.4 million of liabilities were established through purchase price accounting for the restructuring of the acquired companies' operations, primarily in the United States and Germany. Included in this liability were severance costs of $2.9 million, lease/contract termination costs of $1.4 million and other restructuring costs of $0.1 million. This restructuring plan will result in the elimination of approximately 90 administrative and manufacturing positions in the United States and Germany, 50 of which remain to be eliminated as of December 31, 2002. The Company anticipates that most aspects of this plan will be completed by the fourth quarter of 2003. The major components of the 2002 restructuring charges and the amounts recorded through purchase price accounting and the remaining outstanding balances at December 31, 2002 are as follows:
Amounts Recorded Through Amounts Change Balance 2002 Purchase Applied in Estimate December 31, Provisions Accounting 2002 2002 2002 Severance $ 541 $ 2,927 $ (530) $ (164) $ 2,774 Lease/contract terminations 895 1,437 (500) 120 1,952 Other restructuring costs 38 60 (60) (36) 2 Fixed asset impairment charges 195 -- (195) -- -- $ 1,669 $ 4,424 $(1,285) $ (80) $ 4,728
D16 The Company's subsidiary in the United Kingdom restructured its pension plans in the fourth quarter of 2001, simplifying its structure by consolidating its two separate defined contribution plans into one plan and terminating the other plan. An unallocated surplus of approximately $8.5 million existed in the terminated plan. As a result, these unallocated funds reverted back to the Company. As discussed in Note 3, the Company agreed in 2001 to a payment of $2.0 million to AstraZeneca related to the submission of the Oraqix product New Drug Application in the U.S. and a Marketing Authorization Application in Europe. Under the terms of the agreement, this payment and related estimated application costs were accrued during the fourth quarter of 2001. In the fourth quarter of 2001, the Company recorded a charge of $12.3 million for restructuring and other costs. The charge included costs of $6.0 million to restructure the Company's existing operations, primarily in Germany, Japan and Brazil, as a result of the integration with Degussa Dental. Included in this charge were severance costs of $2.1 million, lease/contract termination costs of $1.1 million and other restructuring costs of $0.2 million. In addition, the Company recorded $2.6 million of impairment charges on fixed assets that will be disposed of as a result of the restructuring plan. The remaining charge of $6.3 million involves impairment charges on intangible assets. During 2002, the Company determined that the costs to complete this plan were lower than originally estimated and as a result $1.0 million of these costs were reversed as a change in estimate. This restructuring plan will result in the elimination of approximately 160 administrative and manufacturing positions in Germany, Japan and Brazil, 10 of which remain to be eliminated as of December 31, 2002. As part of these reorganization activities, some of these positions were replaced with lower-cost outsourced services. The Company anticipates that most aspects of this plan will be completed by the first quarter of 2003. In the first quarter of 2001, the Company recorded a charge of $5.5 million related to reorganizing certain functions within Europe, Brazil and North America. The primary objectives of this reorganization were to consolidate duplicative functions and to improve efficiencies within these regions. Included in this charge were severance costs of $3.1 million, lease/contract termination costs of $0.6 million and other restructuring costs of $0.8 million. In addition, the Company recorded $1.0 million of impairment charges on fixed assets that will be disposed of as a result of the restructuring plan. This restructuring plan resulted in the elimination of approximately 310 administrative and manufacturing positions in Brazil and Germany. As part of these reorganization activities, some of these positions were replaced with lower-cost outsourced services. During the first quarter of 2002, this plan was substantially completed and the remaining accrual balances of $1.9 million were reversed as a change in estimate. As part of combining Friadent and Degussa Dental with the Company, $14.1 million of liabilities were established through purchase price accounting for the restructuring of the acquired companies' operations in Germany, Brazil, the United States and Japan. Included in this liability were severance costs of $11.9 million, lease/contract termination costs of $1.1 million and other restructuring costs of $1.1 million. This restructuring plan will result in the elimination of approximately 200 administrative and manufacturing positions in Germany, Brazil and the United States, 38 of which remain to be eliminated as of December 31, 2002. The Company anticipates that most aspects of this plan will be completed during 2003. The major components of the 2001 restructuring charges and the amounts recorded through purchase price accounting and the remaining outstanding balances at December 31, 2002 are as follows:
Change Amounts in Estimate Recorded Recorded Through Amounts Amounts Change Through Balance 2001 Purchase Applied Applied in Estimate Purchase December 31, Provisions Accounting 2001 2002 2002 Accounting 2002 Severance $ 5,270 $ 11,929 $ (1,850) $ (6,257) $ (655) $ (174) $ 8,263 Lease/contract terminations 1,682 1,071 (563) (579) (721) 203 1,093 Other restructuring costs 897 1,062 -- (552) (759) 458 1,106 Fixed asset impairment charges 3,634 -- (3,634) 223 (747) 524 -- Intangible asset impairment charges 6,291 -- (6,291) -- -- -- -- $ 17,774 $ 14,062 $ (12,338) $ (7,165) $ 2,882 $ 1,011 $ 10,462
D16 In the fourth quarter of 2000, the Company recorded a pre-tax charge of $2.7 million related to the reorganization of its French and Latin American businesses. The primary focus of the reorganization was consolidation of operations in these regions in order to eliminate duplicative functions. The restructuring plan resulted in the elimination of approximately 40 administrative positions, mainly in France. The Company also added positions as a result of these reorganization activities. During 2002, the Company determined that the costs to complete this plan were lower than originally estimated, and as a result, $0.2 million of these costs were reversed as a change in estimate. As of December 31, 2002, this plan was substantially complete. During the fourth quarter of 2000, the Company recorded a settlement of $2.8 million related to a claim against the German government in connection with the confiscation and subsequent sale of a property formally owned by the Company in Berlin, Germany. In the second quarter of 1998, the Company rationalized and restructured its worldwide laboratory business, primarily for the closure of the Company's German tooth manufacturing facility. All major aspects of the plan were completed in 1999, except for the disposition of the property and plant located in Dreieich, Germany, which has been written-down to its estimated fair value, but which has not yet been sold. During 2002, the carrying value of this property was written-up by $0.5 million to reflect the Company's revised estimate of its fair value. In the fourth quarter of 1998, the Company recorded a restructuring charge of $42.5 million related to the discontinuance of the intra-oral camera business at the Company's New Image division located in Carlsbad, California. The charge included the write-off of certain intangible assets, including goodwill associated with the business, write-off of discontinued products, write-down of fixed assets and other assets, and severance and other costs associated with the discontinuance of the New Image division and closure of its facility. During 2001 this plan was completed and the remaining accrual balances of $0.8 million were reversed as a change in estimate. NOTE 15 - FINANCIAL INSTRUMENTS AND DERIVATIVES Fair Value of Financial Instruments 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 estimates the fair value of its total long-term debt was $774.0 million versus its carrying value of $769.8 million as of December 31, 2002. The fair value approximated the carrying value since much of the Company's debt is variable rate and reflects current market rates. The fixed rate Eurobonds are effectively converted to variable rate as a result of an interest rate swap and the interest rates on revolving debt and commercial paper are variable and therefore the fair value of these instruments approximates their carrying values. The Company has fixed rate Swiss franc and Japanese yen denominated notes with estimated fair values that differ from their carrying values. At December 31, 2002, the fair value of these instruments was $235.6 million versus their carrying values of $231.4 million. The fair values differ from the carrying values due to lower market interest rates at December 31, 2002 versus the rates at issuance of the notes. The Company holds equity securities, classified as available-for-sale, within "Other noncurrent assets". The carrying value of these securities was $12.4 which includes $7.9 million of unrealized losses which the Company deems to be temporary. In accordance with SFAS 115, the Company records the unrealized losses related to these securities within "Accumulated other comprehensive gain (loss)" until sold. 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 potentially adverse effects that these market risks may have on the Company's operating results. D16 A portion of the Company's borrowings and certain inventory purchases are denominated in foreign currencies which exposes the Company to market risk associated with exchange rate movements. The Company's policy generally is to hedge major foreign currency transaction exposures through foreign exchange forward contracts. These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss. In addition, the Company's investments in foreign subsidiaries are denominated in foreign currencies, which creates exposures to changes in exchange rates. The Company uses debt denominated in the applicable foreign currency as a means of hedging a portion of this risk. With the Company's significant level of long-term debt, changes in the interest rate environment can have a major impact on the Company's earnings, depending upon its interest rate exposure. As a result, the Company manages its interest rate exposure with the use of interest rate swaps, when appropriate, based upon market conditions. The manufacturing of some of the Company's products requires a significant volume of commodities with potentially volatile prices. In order to limit the unanticipated earnings fluctuations from such volatility in commodity prices, the Company selectively enters into commodity price swaps to convert variable raw material costs to fixed costs. Cash Flow Hedges The Company uses interest rate swaps to convert a portion of its variable rate debt to fixed rate debt. In January 2000 and February 2001, the Company entered into interest rate swap agreements with notional amounts totaling 180 million Swiss francs converting a portion of the Company's variable rate financing to fixed rate debt. These agreements effectively convert the underlying debt's interest rate to an average fixed rate of to 3.3% for an average period of 4 years. In February 2002, the Company entered into interest rate swap agreements with notional amounts totaling 12.6 billion Japanese yen converting a portion of its variable rate financing to fixed rate debt. These agreements effectively convert the underlying debt's interest rate to an average fixed rate of 1.6% for a term of ten years. As part of this transaction, the Company offset a portion of its Swiss franc swaps (115 million Swiss francs) by entering into reverse swap agreements with identical terms. The Company selectively enters into commodity price swaps to effectively fix certain variable raw material costs. In November 2001, the Company entered into a commodity price swap agreement with notional amounts totaling 270,000 troy ounces of silver bullion throughout calendar year 2002. The average fixed rate of this agreement was$4.20 per troy ounce. In November 2002, the Company entered into a commodity price swap agreement with notional amounts totaling 300,000 troy ounces of silver bullion to hedge forecasted purchases throughout calendar year 2003. The average fixed rate of this agreement is $4.65 per troy ounce. The Company generally hedges between 33% and 67% of its projected annual silver needs. The Company enters into forward exchange contracts to hedge the foreign currency exposure of its anticipated purchases of certain inventory from Japan. The forward contracts that are used in this program mature in twelve months or less. The Company generally hedges between 33% and 67% of its anticipated purchases from Japan. During 2002 and 2001, the Company recognized a net losses of $0.1 million and $0.4 million, respectively, in "Other expense (income), net", which represented the total ineffectiveness of all cash flow hedges. As of December 31, 2002, $0.6 million of deferred net gains on derivative instruments recorded in "Accumulated other comprehensive gain (loss)" are expected to be reclassified to current earnings during the next twelve months. Transactions and events that are expected to occur over the next twelve months that will necessitate such a reclassification include the sale of inventory that includes previously hedged purchases of silver and purchases made in Japanese yen. The maximum term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable-rate debt) is eighteen months. D16 Fair Value Hedges The Company uses interest rate swaps to convert a portion of its fixed rate debt to variable rate debt. In addition, cross currency basis swaps are used to convert debt denominated in one currency to another currency. In December 2001, the Company completed two integrated transactions where it entered into an interest rate swap agreement with notional amounts totalling Euro 350 million which converted its 5.75% coupon, fixed rate Eurobond financing into variable rate Euro denominated financing and it then entered into a cross currency basis swap which converted this variable based Euro denominated financing to variable based U.S. dollar financing at a current rate of 2.8%. Hedges of Net Investments in Foreign Operations The Company has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to the volatility in currency exchange rates. Currently, the Company uses non-derivative financial instruments (debt at the parent company level) to hedge some of this exposure. The translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the parent company's debt obligations. At December 31, 2002, the Company had Swiss franc denominated and Japenese yen denominated debt (at the parent company level) to hedge the currency exposure related to the net assets of its Swiss and Japanese subsidiaries. The translation gains and losses related to this foreign currency denominated debt are included in "Accumulated other comprehensive gain (loss)". Other The Company holds stock warrants which are classified as derivative financial instruments as defined under SFAS No. 133. These warrant holdings are valued under a Black-Scholes option pricing model and any fair value adjustments are reflected in current income each quarter until sold. For the year ended December 31, 2002, the unrealized loss on the stock warrants was $2.5 million. These unrealized losses were included in "Other expense (income), net". As of December 31, 2002, the Company had recorded the fair value of derivative instrument assets of $4.6 million in "Prepaid expenses and other current assets" and $59.7 million in "Other noncurrent assets" on the balance sheet. The Company recorded the fair value of derivative instrument liabilities of $2.3 million in "Accrued liabilites" and $7.9 million in "Other noncurrent liabilities" on the balance sheet. In accordance with SFAS 52, "Foreign Currency Translation", the Company utilizes long-term intercompany loans to eliminate foreign currency transaction exposures of certain foreign subsidiaries. Net gains or losses related to these long-term intercompany loans, those for which settlement is not planned or anticipated in the foreseeable future, are included in the Company's "Accumulated other comprehensive gain (loss)" on the balance sheet. NOTE 16 - COMMITMENTS AND CONTINGENCIES Leases The Company leases automobiles and machinery and equipment and certain office warehouse, and manufacturing facilities under non-cancelable operating leases. These leases generally require the Company to pay insurance, taxes and other expenses related to the leased property. Total rental expense for all non-precious metals operating leases was $18.4 million for 2002, $12.7 million for 2001, and $10.5 million for 2000. Rental commitments, principally for real estate (exclusive of taxes, insurance and maintenance), automobiles and office equipment are as follows (in thousands): 2003 $ 16,233 2004 11,506 2005 7,636 2006 4,351 2007 3,313 2008 and thereafter 9,081 $ 52,120 D16 As of December 31, 2002, the Company had leased $59.3 million of precious metals. Under this arrangement the Company leases fixed quantities of precious metals which are used in producing alloys and pays a lease rate (a percent of the value of the leased inventory) to the lessor. These precious metal leases are accounted for as operating leases and the lease fee is recorded in "Cost of products sold". The terms of the leases are less than one year and the average lease rate at December 31, 2002 was 2.5%. The Company's objective for using these operating lease arrangements to supply its precious metals needs is to free up working capital and reduce the Company's exposure to commodity price volatility. Litigation DENTSPLY and its subsidiaries are from time to time parties to lawsuits arising out of their respective operations. The Company believes it is remote that pending litigation to which DENTSPLY is a party will have a material adverse effect upon its consolidated financial position or results of operations. In June 1995, the Antitrust Division of the United States Department of Justice initiated an antitrust investigation regarding the policies and conduct undertaken by the Company's Trubyte Division with respect to the distribution of artificial teeth and related products. On January 5, 1999, the Department of Justice filed a complaint against the Company in the U.S. District Court in Wilmington, Delaware alleging that the Company's tooth distribution practices violate the antitrust laws and seeking an order for the Company to discontinue its practices. Three follow on private class action suits on behalf of dentists, laboratories and denture patients in seventeen states, respectively, who purchased Trubyte teeth or products containing Trubyte teeth, were filed and transferred to the U.S. District Court in Wilmington, Delaware. The class action filed on behalf of the dentists has been dismissed by the plaintiffs. The private party suits seek damages in an unspecified amount. The Court has granted the Company's motion on the lack of standing of the laboratory and patient class actions to pursue damage claims. Four private party class actions on behalf of indirect purchasers were filed in California state court. These cases are based on allegations similar to those in the Department of Justice case. In response to the Company's motion, these cases have been consolidated in one Judicial District in Los Angeles. A similar private party action has been filed in Florida. The trial in the government's case was held in April and May 2002, the post-trial briefing occurred during the summer and the final arguments were made in September of 2002. The case is pending a decision by the Federal District Court Judge who heard the case. It is the Company's position that the conduct and activities of the Trubyte division do not violate the antitrust laws. Other The Company has no material non-cancelable purchase commitments. The Company has employment agreements with its executive officers. These agreements generally provide for salary continuation for a specified number of months under certain circumstances. If all of the employees under contract were to be terminated by the Company without cause (as defined in the agreements), the Company's liability would be approximately $14.0 million at December 31, 2002. D16 NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year (in thousands, except per share amounts) 2002 Net sales $ 354,868 $ 381,013 $ 366,037 $ 411,824 $ 1,513,742 Gross profit 169,372 184,540 178,932 200,055 732,899 Operating income 56,913 64,801 61,156 73,630 256,500 Net income 33,096 36,820 35,766 42,270 147,952 Earnings per common share-basic $ 0.4246 $ 0.4711 $ 0.4571 $ 0.5397 $ 1.8925 Earnings per common share-diluted 0.4157 0.4598 0.4464 0.5276 1.8495 Cash dividends declared per common share 0.04600 0.04600 0.04600 0.04600 0.18400 2001 Net sales $ 245,695 $ 254,676 $ 253,528 $ 379,069 $ 1,132,968 Gross profit 129,669 133,597 132,241 173,013 568,520 Operating income 34,340 43,762 43,827 54,116 176,045 Net income 34,326 27,404 25,919 33,847 121,496 Earnings per common share-basic $ 0.4431 $ 0.3530 $ 0.3334 $ 0.4347 $ 1.5642 Earnings per common share-diluted 0.4373 0.3472 0.3275 0.4264 1.5384 Cash dividends declared per common share 0.04583 0.04583 0.04583 0.04584 0.18333
D16 Supplemental Stock Information The common stock of the Company is traded on the NASDAQ National Market under the symbol "XRAY". The following table sets forth high, low and closing sale prices of the Company's common stock for the periods indicated as reported on the NASDAQ National Market:
Market Range of Common Stock Period-end Cash Closing Dividend High Low Price Declared 2002 First Quarter $ 37.93 $ 31.60 $ 37.06 $0.04600 Second Quarter 40.95 35.25 36.91 0.04600 Third Quarter 43.50 31.25 40.17 0.04600 Fourth Quarter 43.10 31.89 37.20 0.04600 2001 First Quarter $ 26.67 $ 21.67 $ 24.33 $0.04583 Second Quarter 31.07 23.33 29.57 0.04583 Third Quarter 31.63 26.01 30.63 0.04583 Fourth Quarter 34.69 28.62 33.47 0.04584 2000 First Quarter $ 19.25 $ 15.42 $ 18.92 $0.04167 Second Quarter 21.75 16.75 20.54 0.04167 Third Quarter 24.92 19.67 23.29 0.04167 Fourth Quarter 28.92 20.59 26.08 0.04582 All amounts reflect the 3-for-2 stock split effective January 31, 2002.
The Company estimates, based on information supplied by its transfer agent, that there are approximately 25,000 holders of common stock, including 489 holders of record. D16