10-K 1 dentsply201210-k.htm 10-K Dentsply 2012 10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
   
FORM 10-K
   
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the fiscal year ended December 31, 2012
Commission File Number 0-16211
   
DENTSPLY International Inc.
(Exact name of registrant as specified in its charter)
  
Delaware
39-1434669
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
221 West Philadelphia Street, York, PA
17405-0872
(Address of principal executive offices)
(Zip Code)
   
Registrant's telephone number, including area code:  (717) 845-7511
   
Securities registered pursuant to Section 12(b) of the Act:
       
Title of each class
Name of each exchange on which registered
Common Stock, par value $.01 per share
The NASDAQ Stock Market LLC
   
Securities registered pursuant to Section 12(g) of the Act: None
        
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
 
Yes   x     No   o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 

Yes   o     No   x
   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x     No   o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes   x     No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes   o     No   x
   
The aggregate market value of the voting common stock held by non-affiliates of the registrant computed by reference to the closing price as of the last business day of the registrants most recently completed second quarter June 30, 2012, was $5,576,831,322.
    
The number of shares of the registrant's Common Stock outstanding as of the close of business on February 14, 2013 was 142,849,900.
       
DOCUMENTS INCORPORATED BY REFERENCE
    
Certain portions of the definitive Proxy Statement of DENTSPLY International Inc. (the “Proxy Statement”) to be used in connection with the 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K to the extent provided herein.  Except as specifically incorporated by reference herein the Proxy Statement is not deemed to be filed as part of this Form 10-K.

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DENTSPLY International Inc.
  Table of Contents
 
 
 
 
 
PART I
 
 
 
Page
 
Item 1
 
Business
 
 
 
 
 
 
Item 1A
 
Risk Factors
 
 
 
 
 
 
Item 1B
 
Unresolved Staff Comments
 
 
 
 
 
 
Item 2
 
Properties
 
 
 
 
 
 
Item 3
 
Legal Proceedings
 
 
 
Executive Officers of the Registrant
 
 
 
 
 
 
 
Item 4
 
Not Applicable
 
 
 
 
 
 
PART II
 
 
 
 
 
Item 5
 
Market for Registrant's Common Equity, Related Stockholder
 
 
 
 
Matters and Issuer Purchases of Equity Securities
 
 
 
 
 
 
Item 6
 
Selected Financial Data
 
 
 
 
 
 
Item 7
 
Management's Discussion and Analysis of Financial Condition and
 
 
 
 
Results of Operations
 
 
 
 
 
 
Item 7A
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
 
Item 8
 
Financial Statements and Supplementary Data
 
 
 
 
 
 
Item 9
 
Changes In and Disagreements With Accountants on Accounting
 
 
 
 
and Financial Disclosure
 
 
 
 
 
 
Item 9A
 
Controls and Procedures
 
 
 
 
 
 
Item 9B
 
Other Information
 
 
 
 
 
 
PART III
 
 
 
 
 
Item 10
 
Directors, Executive Officers and Corporate Governance
 
 
 
 
 
 
Item 11
 
Executive Compensation
 
 
 
 
 
 
Item 12
 
Security Ownership of Certain Beneficial Owners and Management
 
 
 
 
and Related Stock Matters
 
 
 
 
 
 
Item 13
 
Certain Relationships and Related Transactions and Director
 
 
 
 
Independence
 
 
 
 
 
 
Item 14
 
Principal Accountant Fees and Services
 
 
 
 
 
 
PART IV
 
 
 
 
 
Item 15
 
Exhibits and Financial Statement Schedule
 

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PART I

FORWARD-LOOKING STATEMENTS

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

PART I

Item 1. Business

History and Overview

DENTSPLY, a Delaware corporation which dates its history to 1899, believes it is the world's largest designer, developer, manufacturer and marketer of a broad range of consumable dental products for the professional dental market. The Company also manufactures and markets other consumable medical device products. The Company's principal product categories are dental consumable products, dental laboratory products, dental specialty products and consumable medical device products. The Company's worldwide headquarters and executive offices are located in York, Pennsylvania.

Consolidated net sales, excluding precious metal content, of the Company's dental products accounted for approximately 88% of DENTSPLY's consolidated net sales, excluding precious metal content, for the year ended December 31, 2012. The remaining consolidated net sales, excluding precious metal content, is related to consumable medical device products and materials sold to the investment casting industry. The presentation of net sales, excluding precious metal content, is considered a measure not calculated in accordance with generally accepted accounting principles in the United States of America (“US GAAP”), and is therefore considered a non-US GAAP measure. This non-US GAAP measure is discussed further in “Management's Discussion and Analysis of Financial Condition and Results of Operations” and a reconciliation of net sales to net sales, excluding precious metal content, is provided.

Throughout 2012, the Company conducted its business through four operating segments. During the first quarter of 2012, the Company realigned reporting responsibilities for multiple locations as a result of changes to the management structure. All of the Company's segments are primarily engaged in the design, manufacture and distribution of dental and medical products in four principal product categories: 1) dental consumable products 2) dental laboratory products 3) dental specialty products and 4) consumable medical device products.

The Company conducts its business in the United States of America (“U.S.”), as well as in over 120 foreign countries, principally through its foreign subsidiaries. DENTSPLY has a long-established presence in the European market, particularly in Germany, Sweden, Switzerland, France, Italy and the United Kingdom as well as in Canada . The Company also has a significant market presence in the countries of the Commonwealth of Independent States ("CIS"), Central and South America and the Pacific Rim.

Geographic Information

For 2012, 2011 and 2010, the Company's net sales, excluding precious metal content, to customers outside the U.S., including export sales, accounted for approximately 67%, 66% and 63%, respectively, of consolidated net sales, excluding precious metal content. Reference is made to the information about the Company's U.S. and foreign sales by shipment origin set forth in Note 4, Segment and Geographic Information, to the consolidated financial statements in this Form 10-K.





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Segment Information

Information regarding the Company's operating segments for the years ended December 31, 2012, 2011 and 2010 can be found in Note 4, Segment and Geographic Information, to the consolidated financial statements in this Form 10-K.

Principal Products

The worldwide professional dental industry encompasses the diagnosis, treatment and prevention of disease and ailments of the teeth, gums and supporting bone. DENTSPLY's principal dental product categories are dental consumable products, dental laboratory products and dental specialty products. Additionally, the Company's consumable medical device products provide for urological and surgical applications. These products are produced by the Company in the U.S. and internationally and are distributed throughout the world under some of the most well-established brand names and trademarks in the industry, including ANKYLOS, AQUASIL, AQUASIL ULTRA, ASTRA TECH, ATLANTIS, BELLOVAC ABT, CALIBRA, CAULK, CAVITRON, CERAMCO, CERCON, CITANEST, DELTON, DENTSPLY, DETREY, DYRACT, ECLIPSE, ELEPHANT, ESTHET.X, FRIADENT, FRIALIT, GENIE, GOLDEN GATE, IN-OVATION, INTERACTIVE MYSTIQUE, LOFRIC, MAILLEFER, MIDWEST, NUPRO, ORAQIX, OSSEOSPEED, PEPGEN P-15, POLOCAINE, PORTRAIT, PRIME & BOND, PROFILE, PROTAPER, RINN, SANI-TIP, SHADEPILOT, STYLUS, SULTAN, SUREFIL, THERMAFIL, TRUBYTE, WELLSPECT, XENO, XIVE, XYLOCAINE and ZHERMACK .

Dental Consumable Products

Dental consumable products consist of dental sundries and small equipment used in dental offices for the treatment of patients. Net sales of dental consumable products, excluding precious metal content, accounted for approximately 28%, 33% and 35% of the Company's consolidated net sales, excluding precious metal content, for the years ended December 31, 2012, 2011 and 2010, respectively.

DENTSPLY's dental sundry products in the dental consumable products category include dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, tooth whiteners and topical fluoride. The Company manufactures thousands of different dental sundry consumable products marketed under more than one hundred brand names.

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

Dental Laboratory Products

Dental laboratory products are used in the preparation of dental appliances by dental laboratories. Net sales of dental laboratory products, excluding precious metal content, accounted for approximately 11%, 14% and 16% of the Company's consolidated net sales, excluding precious metal content, for the years ended December 31, 2012, 2011 and 2010, respectively.

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

Dental Specialty Products

Dental specialty products are specialized treatment products used within the dental office and laboratory settings. Net sales of dental specialty products, excluding precious metal content, accounted for approximately 48%, 46% and 46% of the Company's consolidated net sales, excluding precious metal content, for the years ended December 31, 2012, 2011 and 2010, respectively. DENTSPLY's products in this category include endodontic (root canal) instruments and materials, implants and related products, bone grafting materials, 3D digital implantology, dental lasers and orthodontic appliances and accessories.

Consumable Medical Device Products

Consumable medical device products consist mainly of urological products including catheters, certain surgical products, medical drills and other non-medical products. Net sales of consumable medical device products, excluding precious metal content, accounted for approximately 13%, 7% and 3% of the Company's consolidated net sales, excluding precious metal content, for the years ended December 31, 2012, 2011 and 2010, respectively.


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Markets, Sales and Distribution

The Company believes that the market for its products will grow over the long-term based on the following factors:

Increasing worldwide population.

Growth of the population 65 or older - The percentage of the U.S., European, Japanese and other regions population over age 65 is expected to nearly double by the year 2030. In addition to having significant needs for dental care and healthcare, the elderly in these regions are well positioned to pay for the required procedures since they control sizable amounts of discretionary income.

Natural teeth are being retained longer - Individuals with natural teeth are much more likely to visit a dentist in a given year than those without any natural teeth remaining.

The changing dental practice in North America and Western Europe - Dentistry in North America and Western Europe has been transformed from a profession primarily dealing with pain, infections and tooth decay to one with increased emphasis on preventive care and cosmetic dentistry.

The demands for patient comfort and ease of product use and handling.

Per capita and discretionary incomes are increasing in emerging nations - As personal incomes continue to rise in the emerging nations of the Pacific Rim, CIS and Latin America, healthcare, including dental services, is a growing priority. Many surveys indicate the middle class population will expand significantly within these emerging markets.

The Company's business is less susceptible than other industries to general downturns in the economies in which it operates. Many of the products the Company offers relate to dental procedures and health conditions that are considered necessary by patients regardless of the economic environment. Dental specialty products and products that support discretionary dental procedures are the most susceptible to recessionary conditions.

DENTSPLY believes that demand in a given geographic market for its dental and medical products vary according to the stage of social, economic and technical development of the particular market. Geographic markets for DENTSPLY's dental and medical products can be categorized into the following two stages of development:

Developed Markets
The U.S., Canada, Western Europe, Japan, Australia and certain other countries are highly developed markets that demand the most advanced dental and health products and have the highest level of expenditures for dental and medical care. These markets account for approximately 80% to 85% of the Company's net sales. In these markets, dental care is increasingly focused upon preventive care and specialized dentistry, in addition to basic procedures, such as excavation of teeth and filling of cavities, tooth extraction and denture replacement. These markets require varied and complex dental products, utilize sophisticated diagnostic and imaging equipment and demand high levels of attention to protect against infection and patient cross-contamination. A broader segment of the population in these markets can afford higher end treatments in both dental and medical care.

Developing Markets
In certain countries in Central America, South America, Eastern Europe, Pacific Rim, Middle East and Africa, most dental care is often limited to excavation of teeth and filling of cavities and other restorative techniques, reflecting more modest per capita expenditures for dental and medical care. These markets account for approximately 15% to 20% of the Company's net sales. These markets demand diverse products and broader alternatives to address patient and professional needs. However, there is also a portion of the population in these markets that receive excellent dental and medical care similar to that received in developed countries. As such our higher end products are actively sold into all of these regions.

The Company offers products and equipment for use in markets at both of these stages of development. The Company believes that demand for more technically advanced products will increase as each of these markets develop. The Company also believes that its recognized brand names, high quality and innovative products, technical support services and strong international distribution capabilities position it well, to benefit from opportunities in virtually any market.



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Dental

DENTSPLY distributes approximately half of its dental products through distributors and importers. However, certain highly technical products such as precious metal dental alloys, dental ceramics, crown and bridge porcelain products, endodontic instruments and materials, orthodontic appliances, implants, and bone substitute and grafting materials are sold directly to the dental laboratory or dental professionals in some markets. During 2012, the Company did not have any single customer that represented ten percent or more of DENTSPLY's consolidated net sales. In both 2011 and 2010, one customer, Henry Schein Incorporated, a dental distributor, accounted for 11% of DENTSPLY's consolidated net sales. No other single customer, represented ten percent or more of DENTSPLY's consolidated net sales during 2011 or 2010.

Although many of its dental sales are made to distributors, dealers and importers, DENTSPLY focuses its marketing efforts on the dentists, dental hygienists, dental assistants, dental laboratories and dental schools which are the end-users of its products. As part of this end-user “pull through” marketing approach, DENTSPLY employs approximately 3,650 highly trained, product-specific sales and technical staff to provide comprehensive marketing and service tailored to the particular sales and technical support requirements of the distributors, dealers and the end-users. The Company conducts extensive distributor, dealer and end-user marketing programs. Additionally, the Company trains laboratory technicians, dental hygienists, dental assistants and dentists in the proper use of its products and introduces them to the latest technological developments at its educational courses conducted throughout the world. The Company also maintains ongoing relationships with various dental associations and recognized worldwide opinion leaders in the dental field, although there is no assurance that these influential dental professionals will continue to support the Company's products in the future.

Medical

The Company's urology products business operates directly in 15 countries throughout Europe and North America, with distributors in 22 additional markets. The largest markets include Germany, UK, France and Italy. Sales channels target urologists, urology nurses, general practitioners and direct-to-patients.

The surgery products business operates directly in 11 countries throughout Europe and Australia, with distributors in 25 additional markets. The largest markets include UK, Italy and Australia. Sales channels target surgeons, hospital nurses, physiotherapists, hospital purchasing departments and medical supply distributors.

Historical reimbursement levels within Europe are higher for hydrophilic catheters which explain a greater patient usage of hydrophilic products in that market. In the U.S., the reimbursement environment has improved since 2008 as the infection control cost benefits of disposable catheters gain acceptance among payers.

The Company also maintains ongoing relationships with various medical associates, professional and key opinion leaders to help promote our products, although there are no assurances that they will continue to support the Company's products in the future.

Product Development

Technological innovation and successful product development are critical to strengthening the Company's prominent position in the dental and medical markets that it serves. It is also required to maintain and grow its leadership positions in product categories where it has a high market share and to grow market share in other product categories. While many of DENTSPLY's existing products undergo brand extensions, the Company also continues to focus efforts on successfully launching innovative products that represent fundamental change.

New advances in technology are also anticipated to have a significant influence on future products in dentistry and in select areas of healthcare.  As a result, the Company pursues research and development initiatives to support this technological development, including collaborations with external research institutions, dental and medical schools.  Through its own internal research centers as well as through its collaborations with external research institutions, dental and medical schools, the Company directly invested $85.4 million, $66.7 million and $49.4 million in 2012, 2011 and 2010, respectively, in connection with the development of new products, improvement of existing products and advances in technology.  The continued development of these areas is a critical step in meeting the Company's strategic goal as a leader in defining the future of dentistry and in select areas in health care. 

In addition to the direct investment in product development and improvement, the Company also invests in these activities through acquisitions, and by entering into licensing agreements with third parties as well as purchasing technologies developed by third parties.

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Acquisition Activities

DENTSPLY believes that the dental products industry continues to experience consolidation with respect to both product manufacturing and distribution, although it remains fragmented thereby creating a number of acquisition opportunities. DENTSPLY also seeks to expand its position in consumable medical device products through acquisitions.

The Company views acquisitions as a key part of its growth strategy. These acquisition activities are intended to supplement the Company's core growth and assure ongoing expansion of its business, including new technologies, additional products and geographic breadth.

Operating and Technical Expertise

DENTSPLY believes that its manufacturing capabilities are important to its success. The manufacturing process of the Company's products requires substantial and varied technical expertise. Complex materials technology and processes are necessary to manufacture the Company's products. The Company continues to automate its global manufacturing operations in order to lower costs.

Financing

Information about DENTSPLY's working capital, liquidity and capital resources is provided in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K.

Competition

The Company conducts its operations, both domestic and foreign, under highly competitive market conditions. Competition in the dental and medical products industries is based primarily upon product performance, quality, safety and ease of use, as well as price, customer service, innovation and acceptance by professionals, technicians and patients. DENTSPLY believes that its principal strengths include its well-established brand names, its reputation for high quality and innovative products, its leadership in product development and manufacturing, its commitment to customer satisfaction and support of the Company's products by dental and medical professionals.

The size and number of the Company's competitors vary by product line and from region to region. There are many companies that produce some, but not all, of the same types of products as those produced by the Company.

 Regulation

The Company's products are subject to regulation by, among other governmental entities, the U.S. Food and Drug Administration (the “FDA”). In general, if a dental or medical “device” is subject to FDA regulation, compliance with the FDA's requirements constitutes compliance with corresponding state regulations. In order to ensure that dental and medical products distributed for human use in the U.S. are safe and effective, the FDA regulates the introduction, manufacture, advertising, labeling, packaging, marketing and distribution of, and record-keeping for, such products. The introduction and sale of dental and medical products of the types produced by the Company are also subject to government regulation in the various foreign countries in which they are produced or sold. DENTSPLY believes that it is in substantial compliance with the FDA and foreign regulatory requirements that are applicable to its products and manufacturing operations.

Dental and medical devices of the types sold by DENTSPLY are generally classified by the FDA into a category that renders them subject only to general controls that apply to all medical devices, including regulations regarding alteration, misbranding, notification, record-keeping and good manufacturing practices. In the European Union, DENTSPLY's products are subject to the medical devices laws of the various member states, which are based on a Directive of the European Commission. Such laws generally regulate the safety of the products in a similar way to the FDA regulations. DENTSPLY products in Europe bear the CE mark showing that such products adhere to European regulations.

All dental amalgam filling materials, including those manufactured and sold by DENTSPLY, contain mercury.  Various groups have alleged that dental amalgam containing mercury is harmful to human health and have actively lobbied state and federal lawmakers and regulators to pass laws or adopt regulatory changes restricting the use, or requiring a warning against alleged potential risks, of dental amalgams.  The FDA's Dental Devices Classification Panel, the National Institute of Health and the U.S. Public Health Service have each indicated that no direct hazard to humans from exposure to dental amalgams has been demonstrated.  In response to concerns raised by certain consumer groups regarding dental amalgam, the FDA formed an advisory committee in 2006 to review peer-reviewed scientific literature on the safety of dental amalgam.  In July 2009, the FDA concluded its review

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of dental amalgam, confirming its use as a safe and effective restorative material.  Also, as a result of this review, the FDA classified amalgam and its component parts, elemental mercury and powder alloy, as a Class II medical device.  Previously there was no classification for encapsulated amalgam and dental mercury (Class I) and alloy (Class II) were classified separately.  This new regulation places encapsulated amalgam in the same class of devices as most other restorative materials, including composite and gold fillings, and makes amalgam subject to special controls by FDA.  In that respect, FDA recommended that certain information about dental amalgam be provided, which includes information indicating that dental amalgam releases low levels of mercury vapor, that studies on people age six and over and FDA estimated exposures of children under six, have not indicated any adverse health risk associated with the use of dental amalgam.   After the FDA issued this regulation, several petitions were filed asking the FDA to reconsider its position.  Another advisory panel was established by the FDA to consider these petitions.  Hearings of the advisory panel were held in December 2010.  The FDA has taken no action as of the filing date of this Form 10-K from this latest advisory panel meeting.

In Europe, particularly in Scandinavia and Germany, the contents of mercury in amalgam filling materials have been the subject of public discussion. As a consequence, in 1994 the German health authorities required suppliers of dental amalgam to amend the instructions for use of amalgam filling materials to include a precaution against the use of amalgam for children less than eighteen years of age and to women of childbearing age. Additionally, some groups have asserted that the use of dental amalgam should be prohibited because of concerns about environmental impact from the disposition of mercury within dental amalgam, which has resulted in the sale of mercury containing products being banned in Sweden and severely curtailed in Norway. DENTSPLY also manufactures and sells non-amalgam dental filling materials that do not contain mercury.

Sources and Supply of Raw Materials and Finished Goods

The Company manufactures the majority of the products sold by the Company. Most of the raw materials used by the Company in the manufacture of its products are purchased from various suppliers and are typically available from numerous sources. No single supplier accounts for more than 10% of DENTSPLY's requirements.

Intellectual Property

Products manufactured by DENTSPLY are sold primarily under its own trademarks and trade names. DENTSPLY also owns and maintains more than 2,500 patents throughout the world and is licensed under a small number of patents owned by others.

DENTSPLY's policy is to protect its products and technology through patents and trademark registrations both in the U.S. and in significant international markets. The Company carefully monitors trademark use worldwide and promotes enforcement of its patents and trademarks in a manner that is designed to balance the cost of such protection against obtaining the greatest value for the Company. DENTSPLY believes its patents and trademark properties are important and contribute to the Company's marketing position but it does not consider its overall business to be materially dependent upon any individual patent or trademark.

Employees

As of December 31, 2012, the Company and its subsidiaries employed approximately 11,900 employees. Of these employees, approximately 3,500 were employed in the United States and 8,400 in countries outside of the United States. Less than 5% of employees in the United States are covered by collective bargaining agreements. Some employees outside of the United States are covered by collective bargaining, union contract or other similar type program. The Company believes that it has a positive relationship with its employees.

Environmental Matters

DENTSPLY believes that its operations comply in all material respects with applicable environmental laws and regulations. Maintaining this level of compliance has not had, and is not expected to have, a material effect on the Company's capital expenditures or on its business.

Other Factors Affecting the Business

Approximately two-thirds of the Company's sales are located in regions outside the U.S., and the Company's consolidated net sales can be impacted negatively by the strengthening or positively by the weakening of the U.S. dollar. Additionally, movements in certain foreign exchange rates may unfavorably or favorably impact the Company's results of operations, financial condition and liquidity.

The Company's business is subject to quarterly fluctuations of consolidated net sales and net income. The Company typically

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implements most of its price changes in the beginning of the first or fourth quarter. Price changes, other marketing and promotional programs as well as the management of inventory levels by distributors and the implementation of strategic initiatives, may impact sales levels in a given period. Sales for the industry and the Company are generally strongest in the second and fourth calendar quarters and weaker in the first and third calendar quarters, due to the effects of the items noted above and due to the impact of summer holidays and vacations, particularly throughout Europe.

The Company maintains short lead times within its manufacturing, as such, the backlog on products is not material to the financial statements.

Securities and Exchange Act Reports

The U.S. Securities and Exchange Commission (“SEC”) maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company files annual reports, quarterly reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934, as amended (“Exchange Act”). The public may read and copy any materials the Company files with the SEC at its Public Reference Room at the following address:

The Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549

The public may obtain information on the operation of this Public Reference Room by calling the SEC at 1-800-SEC-0330.

DENTSPLY also makes available free of charge through its website at www.DENTSPLY.com its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are filed with or furnished to the SEC.




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Item 1A. Risk Factors

The following are the significant risk factors that could materially impact DENTSPLY's business, financial condition or future results. The order in which these factors appear should not be construed to indicate their relative importance or priority.

Negative changes could occur in the dental markets, the general economic environments, or government reimbursement or regulatory programs of the regions in which the Company operates.

The success of the Company is largely dependent upon the continued strength of dental markets and is also somewhat dependent upon the general economic environments of the regions in which DENTSPLY operates. Negative changes to these markets and economies could materially impact the Company's results of operations and financial condition. In addition, many of the Company's markets are affected by government reimbursement and regulatory programs. In certain markets, particularly in the European Union, government and regulatory programs have a more significant impact than other markets. Changes to these programs could have a positive or negative impact on the Company's results.

Prolonged negative economic conditions in domestic and global markets may adversely affect the Company's suppliers and customers and consumers, which could harm the Company's financial position.

Prolonged negative changes in domestic and global economic conditions or disruptions of either or both of the financial and credit markets may affect the Company's supply chain and the customers and consumers of the Company's products and may have a material adverse effect on the Company's results of operations, financial condition and liquidity.

Due to the Company's international operations, the Company is exposed to the risk of changes in foreign exchange rates.

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

Volatility in the capital markets or investment vehicles could limit the Company's ability to access capital or could raise the cost of capital.
 

Although the Company continues to have positive operating cash flow, a disruption in the credit markets may reduce sources of liquidity available to the Company. The Company relies on multiple financial institutions to provide funding pursuant to existing and/or future credit agreements, and those institutions may not be able to provide funding in a timely manner, or at all, when required by the Company. The cost of or lack of available credit could impact the Company's ability to develop sufficient liquidity to maintain or grow the Company, which in turn may adversely affect the Company's businesses and results of operations, financial condition and liquidity.

The Company also manages cash and cash equivalents and short-term investments through various institutions. There may be a risk of loss on investments based on the volatility of the underlying instruments that would not allow the Company to recover the full principal of its investments.

The Company may not be able to access or renew its precious metal consignment facilities resulting in a liquidity constraint equal to the fair market value of the precious metal value of inventory and would subject the Company to inventory valuation risk as the value of the precious metal inventory fluctuates resulting in greater volatility to reported earnings.

The Company's quarterly operating results and market price for the Company's common stock may be volatile.

DENTSPLY experiences fluctuations in quarterly sales and earnings due to a number of factors, many of which are substantially outside of the Company's control, including:

The timing of new product introductions by DENTSPLY and its competitors;
Timing of industry tradeshows;
Developments in government reimbursement policies;
Changes in customer preferences and product mix;
The Company's ability to supply products to meet customer demand;
Fluctuations in manufacturing costs;

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Changes in income tax laws and incentives which could create adverse tax consequences;
Fluctuations in currency exchange rates; and
General economic conditions, as well as those specific to the healthcare and related industries.

As a result, the Company may fail to meet the expectations of securities analysts and investors, which could cause its stock price to decline. The quarterly fluctuations generally result in net sales and operating profits historically being higher in the second and fourth quarters. The Company typically implements most of its price changes early in the fourth quarter or beginning of the year. These price changes, other marketing and promotional programs, which are offered to customers from time to time in the ordinary course of business, the management of inventory levels by distributors and the implementation of strategic initiatives, may impact sales levels in a given period. Net sales and operating profits generally have been lower in the first and third quarters, primarily due not only to increased sales in the quarters preceding these quarters, but also due to the impact of summer holidays and vacations, particularly throughout Europe.

In addition to fluctuations in quarterly earnings, a variety of other factors may have a significant impact on the market price of DENTSPLY's common stock causing volatility. These factors include, but are not necessarily limited to, the publication of earnings estimates or other research reports and speculation in the press or investment community; changes in the Company's industry and competitors; the Company's financial condition and cash flows; any future issuances of DENTSPLY's common stock, which may include primary offerings for cash, stock splits, issuances in connection with business acquisitions, restricted stock and the grant or exercise of stock options from time to time; general market and economic conditions; and any outbreak or escalation of hostilities in geographical areas the Company does business.

Also, the NASDAQ National Market (“NASDAQ”) can experience extreme price and volume fluctuations that can be unrelated or disproportionate to the operating performance of the companies listed on the NASDAQ. Broad market and industry factors may negatively affect the market price of the Company's common stock, regardless of actual operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against companies. This type of litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources, which could harm the Company's business.

The dental supplies market is highly competitive and there is no guarantee that the Company can compete successfully.

The worldwide market for dental supplies is highly competitive. There can be no assurance that the Company will successfully identify new product opportunities and develop and market new products successfully, or that new products and technologies introduced by competitors will not render the Company's products obsolete or noncompetitive. Additionally, the size and number of the Company's competitors vary by product line and from region to region. There are many companies that produce some, but not all, of the same types of products as those produced by the Company. Certain of DENTSPLY's competitors may have greater resources than the Company.

The Company may be unable to develop innovative products or obtain regulatory approval for new products.

The market for DENTSPLY's products is characterized by rapid and significant technological change, evolving industry standards and new product introductions. There can be no assurance that DENTSPLY's products will not become noncompetitive or obsolete as a result of such factors or that we will be able to generate any economic return on the Company's investment in product development. If the Company's products or technologies become noncompetitive or obsolete, DENTSPLY's business could be negatively affected.

DENTSPLY has identified new products as an important part of its growth opportunities. There can be no assurance that DENTSPLY will be able to continue to develop innovative products and that regulatory approval of any new products will be obtained from applicable U.S. or international government or regulatory authorities, or that if such approvals are obtained, such products will be favorably accepted in the marketplace. Additionally, there is no assurance that entirely new technology or approaches to dental treatment or competitors' new products will not be introduced that could render the Company's products obsolete.
 
DENTSPLY may be unable to obtain necessary product approvals and marketing clearances.

DENTSPLY must obtain certain approvals and marketing clearances from governmental authorities, including the FDA and similar health authorities in foreign countries to market and sell its products. These regulatory agencies regulate the marketing, manufacturing, labeling, packaging, advertising, sale and distribution of medical devices, including the export of medical devices to foreign countries.

11



The regulatory review process which must be completed prior to marketing a new medical device may delay or hinder a product's timely entry into the marketplace. There can be no assurance that the review or approval process for these products by the FDA or any other applicable governmental authority will occur in a timely fashion, if at all, or that additional regulations will not be adopted or current regulations amended in such a manner as will adversely affect the Company. The FDA also oversees the content of advertising and marketing materials relating to medical devices which have received FDA clearance. Delays or failure to receive the necessary product approvals from governmental authorities could negatively impact DENTSPLY's operations.

DENTSPLY's business is subject to extensive, complex and changing laws, regulations and orders that failure to comply with could subject us to civil or criminal penalties or other liabilities.

DENTSPLY is subject to extensive laws, regulations and orders which are administered by various international, federal and state governmental authorities, including, among others, the FDA, the Office of Foreign Assets Control of the United States Department of the Treasury ("OFAC"), the Bureau of Industry and Security of the United States Department of Commerce ("BIS"), the United States Federal Trade Commission, the United States Department of Justice and other similar domestic and foreign authorities. These regulations include, but are not limited to, the U.S. Foreign Corrupt Practices Act and similar international anti-bribery laws, the Physician Payments Sunshine Act, regulations concerning the supply of conflict minerals, various environmental regulations and regulations relating to trade, import and export controls and economic sanctions.  Such laws, regulations and orders may be complex and are subject to change. 

Compliance with the numerous applicable existing and new laws, regulations and orders could require us to incur substantial regulatory compliance costs.  Although the Company has implemented policies and procedures to comply with applicable laws, regulations and orders, there can be no assurance that governmental authorities will not raise compliance concerns or perform audits to confirm compliance with such laws, regulations and orders. Failure to comply with applicable laws, regulations or orders could result in a range of governmental enforcement actions, including fines or penalties, injunctions and/or criminal or other civil proceedings. Any such actions could result in higher than anticipated costs or lower than anticipated revenue and could have a material adverse effect on the Company's reputation, business, financial condition and results of operations.

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

Challenges may be asserted against the Company's dental amalgam product.

All dental amalgam filling materials, including those manufactured and sold by DENTSPLY, contain mercury. Some groups have asserted that amalgam should be discontinued because of its mercury content and/or that disposal of mercury containing products may be harmful to the environment. If governmental authorities elect to place restrictions or significant regulations on the sale and/or disposal of dental amalgam, that could have an adverse impact on the Company's sales of dental amalgam. DENTSPLY also manufactures and sells non-amalgam dental filling materials that do not contain mercury.

The Company may be unable to obtain a supply for certain finished goods purchased from third parties.

A significant portion of the Company's injectable anesthetic products, orthodontic products, certain dental cutting instruments, catheters, nickel titanium products and certain other products and raw materials are purchased from a limited number of suppliers and in certain cases single source suppliers, some of which may also compete with the Company. As there are a limited number of suppliers for these products, there can be no assurance that the Company will be able to obtain an adequate supply of these products and raw materials in the future. Any delays in delivery of or shortages in these products could interrupt and delay manufacturing of the Company's products and result in the cancellation of orders for these products. In addition, these suppliers could discontinue the manufacture or supply of these products to the Company at any time or supply products to competitors. DENTSPLY may not be able to identify and integrate alternative sources of supply in a timely fashion or at all. Any transition to alternate suppliers may result in delays in shipment and increased expenses and may limit the Company's ability to deliver products to customers. If the Company is unable to develop reasonably priced alternative sources in a timely manner, or if the Company encounters delays or other difficulties in the supply or manufacturing of such products and other materials internally or from third parties, the Company's business and results of operation may be harmed.





12



The Company has lost customers of its Orthodontics business due to the disruption in its ability to source certain orthodontic products from its key supplier located in Japan's evacuation area.
    
One of the Company's key suppliers, which was the source of certain orthodontic products comprising approximately 9% of the Company's 2010 consolidated net sales, excluding precious metal content, was located in the zone that was evacuated following the March 2011 tsunami in Japan.  The supplier lost access to its facility and as a result, product supply was severely disrupted through the remainder of 2011. The supplier gradually restored operations in 2012. Although the Company had secured limited alternative sources of supply during the shortage, there is no assurance that customers who turned to other sources of products during the Company's period of product shortages will return to the Company's products.

The Company's expansion through acquisition involves risks and may not result in the expected benefits.

The Company continues to view acquisitions as a key part of its growth strategy. The Company continues to be active in evaluating potential acquisitions although there is no assurance that these efforts will result in completed transactions as there are many factors that affect the success of such activities. If the Company does succeed in acquiring a business or product, there can be no assurance that the Company will achieve any of the benefits that it might anticipate from such an acquisition and the attention and effort devoted to the integration of an acquired business could divert management's attention from normal business operations. If the Company makes acquisitions, it may incur debt, assume contingent liabilities or create additional expenses, any of which might adversely affect its financial results. Any financing that the Company might need for acquisitions may only be available on terms that restrict its business or that impose additional costs that reduce its operating results.

The Company may fail to successfully integrate Astra Tech or realize the benefits of the acquisition.

The success of the Company's acquisition of Astra Tech depends upon its ability to realize anticipated benefits from integrating Astra Tech's business into its operations. The Company's ongoing business could be disrupted and management's attention diverted due to integration planning activities and as a result of the actual integration of the two companies following the acquisition. The Company may fail to realize the anticipated benefits of the integration on a timely basis, or at all.

Changes in or interpretations of, accounting principles could result in unfavorable charges to operations.

The Company prepares its consolidated financial statements in accordance with US GAAP. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. Market conditions have prompted accounting standard setters to issue new guidance which further interprets or seeks to revise accounting pronouncements related to financial instruments, structures or transactions as well as to issue new standards expanding disclosures. It is possible that future accounting standards the Company would be required to adopt could change the current accounting treatment applied to the Company's consolidated financial statements and such changes could have a material adverse effect on the Company's business, results of operations, financial condition and liquidity.

If the Company's goodwill or intangible assets become impaired, the Company may be required to record a significant charge to earnings.

Under US GAAP, the Company reviews its goodwill and intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Additionally, goodwill is required to be tested for impairment at least annually. The valuations used to determine the fair values used to test goodwill or intangible assets are dependent upon various assumptions and reflect management's best estimates. Net sales growth, discount rates, earnings multiples and future cash flows are critical assumptions used to determine these fair values. Slower net sales growth rates in the dental industry, an increase in discount rates, unfavorable changes in earnings multiples or a decline in future cash flows, among other factors, may cause a change in circumstances indicating that the carrying value of the Company's goodwill or intangible assets may not be recoverable. The Company may be required to record a significant charge to earnings in the financial statements during the period in which any impairment of the Company's goodwill or intangible assets is determined.

Changes in or interpretations of, tax rules, operating structures, country profitability mix and regulations may adversely affect the Company's effective tax rates.

The Company is a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Unanticipated changes in the Company's tax rates could affect its future results of operations. The Company's future effective tax rates could be unfavorably affected by changes in, or interpretation of, tax rules and regulations in the jurisdictions in which the Company does business, by structural changes in the Company's businesses, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes

13



in the valuation of the Company's deferred tax assets and liabilities.


The Company faces the inherent risk of litigation and claims.

The Company's business involves a risk of product liability and other types of legal actions or claims, including possible recall actions affecting the Company's products. The primary risks to which the Company is exposed are related to those products manufactured by the Company. The Company has insurance policies, including product liability insurance, covering these risks in amounts that are considered adequate; however, the Company cannot provide assurance that the maintained coverage is sufficient to cover future claims or that the coverage will be available in adequate amounts or at a reasonable cost. Also, other types of claims asserted against the Company may not be covered by insurance. A successful claim brought against the Company in excess of available insurance, or another type of claim which is uninsured or that results in significant adverse publicity against the Company, could harm its business and overall cash flows of the Company.

Various parties, including the Company, own and maintain patents and other intellectual property rights applicable to the dental field. Although the Company believes it operates in a manner that does not infringe upon any third party intellectual property rights, it is possible that a party could assert that one or more of the Company's products infringe upon such party's intellectual property and force the Company to pay damages and/or discontinue the sale of certain products.

Increasing exposure to markets outside of the U.S. and Europe.

We anticipate that sales outside of the U.S. and Europe will continue to expand and account for a significant portion of DENTSPLY's revenue. Operating in such locations is subject to a number of uncertainties, including, but not limited to, the following:

Economic and political instability;
Import or export licensing requirements;
Trade restrictions;
Product registration requirements;
Longer payment cycles;
Changes in regulatory requirements and tariffs;
Fluctuations in currency exchange rates;
Potentially adverse tax consequences; and
Potentially weak protection of intellectual property rights.

The Company's success is dependent upon its management and employees.

The Company's success is dependent upon its management and employees. The loss of senior management employees or failure to recruit and train needed managerial, sales and technical personnel, could have a material adverse effect on the Company.

The Company may be unable to sustain the operational and technical expertise that is key to its success.

DENTSPLY believes that its manufacturing capabilities are important to its success. The manufacture of the Company's products requires substantial and varied technical expertise. Complex materials technology and processes are necessary to manufacture the Company's products. There can be no assurance that the Company will be able to maintain the necessary operational and technical expertise that is key to its success.

The Company may not generate sufficient cash flow to service its debt, pay its contractual obligations and operate the business.

DENTSPLY's ability to make payments on its indebtedness and contractual obligations, and to fund its operations depends on its future performance and financial results, which, to a certain extent, are subject to general economic, financial, competitive, regulatory and other factors and the interest rate environment that are beyond its control. Although senior management believes that the Company has and will continue to have sufficient liquidity, there can be no assurance that DENTSPLY's business will generate sufficient cash flow from operations in the future to service its debt, pay its contractual obligations and operate its business.

The Company may not be able to repay its outstanding debt in the event that cross default provisions are triggered due to a breach of loan covenants.


14



DENTSPLY's existing borrowing documentation contains a number of covenants and financial ratios, which it is required to satisfy. The most restrictive of these covenants pertains to asset dispositions, maintenance of certain levels of net worth, and prescribed ratios of indebtedness to total capital and operating income excluding depreciation and amortization of interest expense. Any breach of any such covenants or restrictions would result in a default under the existing borrowing documentation that would permit the lenders to declare all borrowings under such documentation to be immediately due and payable and, through cross default provisions, would entitle DENTSPLY's other lenders to accelerate their loans. DENTSPLY may not be able to meet its obligations under its outstanding indebtedness in the event that any cross default provisions are triggered.

After closing the Astra Tech acquisition, DENTSPLY has a significant amount of indebtedness. A breach of the covenants under DENTSPLY's debt instruments outstanding from time to time could result in an event of default under the applicable agreement.

In connection with the financing of the acquisition of Astra Tech, the Company incurred additional debt of approximately $1.2 billion. As a consequence, after closing the Acquisition, DENTSPLY has a significant amount of indebtedness. DENTSPLY also has the ability to incur up to $500 million of indebtedness under the Revolving Credit Facility and may incur significantly more indebtedness in the future.

DENTSPLY's level of indebtedness and related debt service obligations could have negative consequences including:

making it more difficult for the Company to satisfy its obligations with respect to its indebtedness;
requiring DENTSPLY to dedicate significant cash flow from operations to the payment of principal and interest on its indebtedness, which would reduce the funds the Company has available for other purposes, including working capital, capital expenditures and acquisitions; and
reducing DENTSPLY's flexibility in planning for or reacting to changes in its business and market conditions.

DENTSPLY's current indebtedness contains a number of covenants and financial ratios, which it is required to satisfy. Under the agreements governing the DENTSPLY's 4.11% Senior Notes due 2016, the Company will be required to maintain a ratio of consolidated debt to consolidated EBITDA of less than or equal to 3.50 to 1.00. The Company may need to reduce the amount of its indebtedness outstanding from time to time in order to comply with such ratio, but no assurance can be given that DENTSPLY will be able to do so. DENTSPLY's failure to maintain such ratio or a breach of the other covenants under its debt instruments outstanding from time to time could result in an event of default under the applicable agreement. Such a default may allow the creditors to accelerate the related indebtedness and may result in the acceleration of any other indebtedness to which a cross-acceleration or cross-default provision applies.

Certain provisions in the Company's governing documents may make it more difficult for third party offerors to acquire DENTSPLY.

Certain provisions of DENTSPLY's Certificate of Incorporation and By-laws and of Delaware law could have the effect of making it difficult for a third party to acquire control of DENTSPLY. Such provisions include, among others, the division of the Board of Directors of DENTSPLY into three classes, with the three-year term of a class expiring each year, a provision allowing the Board of Directors to issue preferred stock having rights senior to those of the common stock and certain procedural requirements which make it difficult for stockholders to amend DENTSPLY's By-laws and call special meetings of stockholders. In addition, members of DENTSPLY's management and participants in its Employee Stock Ownership Plan (“ESOP”) collectively own approximately 4% of the outstanding common stock of DENTSPLY.

Issues related to the quality and safety of the Company's products, ingredients or packaging could cause a product recall resulting in harm to the Company's reputation and negatively impacting the Company's operating results.

The Company's products generally maintain a good reputation with customers and end-users. Issues related to quality and safety of products, ingredients or packaging, could jeopardize the Company's image and reputation. Negative publicity related to these types of concerns, whether valid or not, might negatively impact demand for the Company's products or cause production and delivery disruptions. The Company may need to recall products if they become unfit for use. In addition, the Company could potentially be subject to litigation or government action, which could result in payment of fines or damages. Cost associated with these potential actions could negatively affect the Company's operating results, financial condition and liquidity.

The Company relies heavily on information and technology to operate its business networks, and any disruption to its technology infrastructure or the internet could harm the Company's operations.

DENTSPLY operates many aspects of its business including financial reporting and customer relationship management through

15



server- and web-based technologies, and stores various types of data on such servers or with third-parties who may in turn store it on servers or in the “cloud”. Any disruption to the internet or to the Company's or its service providers' global technology infrastructure, including malware, insecure coding, “Acts of God,” attempts to penetrate networks, data leakage and human error, could pose a threat to the Company's operations. While DENTSPLY has invested and continues to invest in information technology risk management and disaster recovery plans, these measures cannot fully insulate the Company from technology disruptions or data loss and the resulting adverse effect on the Company's operations and financial results.

Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

The following is a listing of DENTSPLY's principal manufacturing and distribution locations as of December 31, 2012:

Location
 
Function
 
Leased
or Owned
 
 
 
 
 
United States:
 
 
 
 
Milford, Delaware (1)
 
Manufacture of dental consumable products
 
Owned
 
 
 
 
 
Sarasota, Florida (2)
 
Manufacture of orthodontic accessory products
 
Owned
 
 
 
 
 
Des Plaines, Illinois (1)
 
Manufacture and assembly of dental handpieces
 
Leased
 
 
 
 
 
Elgin, Illinois (1)
 
Manufacture of dental x-ray film holders, film
 
Owned/Leased
 
 
mounts and accessories
 
 
 
 
 
 
 
Waltham, Massachusetts (4)
 
Manufacture and distribution of dental implant products
 
Leased
 
 
 
 
 
Bohemia, New York (2)
 
Manufacture and distribution of orthodontic
 
Leased
 
 
products and materials
 
 
 
 
 
 
 
Maumee, Ohio (4)
 
Manufacture and distribution of investment casting products
 
Owned
 
 
 
 
 
Lancaster, Pennsylvania (5)
 
Distribution of dental products
 
Leased
 
 
 
 
 
York, Pennsylvania (1)
 
Manufacture and distribution of artificial teeth
 
Owned
 
 
and other dental laboratory products
 
 
 
 
 
 
 
York, Pennsylvania (1)
 
Manufacture of small dental equipment, bone grafting
 
Owned
 
 
products, and preventive dental products
 
 
 
 
 
 
 
Johnson City, Tennessee (4)
 
Manufacture and distribution of endodontic
 
Leased
 
 
instruments and materials
 
 
 
 
 
 
 
Foreign:
 
 
 
 
Hasselt, Belgium (4)
 
Manufacture and distribution of dental products
 
Owned
 
 
 
 
 
Leuven, Belgium (4)
 
Manufacture and distribution of 3D digital implantology
 
Leased
 
 
 
 
 
Catanduva, Brazil (4)
 
Manufacture and distribution of dental anesthetic products
 
Owned
 
 
 
 
 
Petropolis, Brazil (4)
 
Manufacture and distribution of artificial teeth,
 
Owned
 
 
dental consumable products and endodontic material
 
 
 
 
 
 
 
Shanghai, China (1)
 
Manufacture and distribution of dental laboratory products
 
Leased
 
 
 
 
 
Tianjin, China (4)
 
Manufacture and distribution of dental products
 
Leased
 
 
 
 
 
Ivry Sur-Seine, France (3)
 
Manufacture and distribution of investment casting products
 
Leased

16



 
 
 
 
 
Bohmte, Germany (1)
 
Manufacture and distribution of dental laboratory products
 
Owned
 
 
 
 
 
Hanau, Germany (1)
 
Manufacture and distribution of precious metal dental
 
Owned
 
 
alloys, dental ceramics and dental implant products
 
 
 
 
 
 
 
Konstanz, Germany (1)
 
Manufacture and distribution of dental consumable products
 
Owned
 
 
 
 
 
Mannheim, Germany (4)
 
Manufacture and distribution of dental implant products
 
Owned/Leased
 
 
 
 
 
Munich, Germany (4)
 
Manufacture and distribution of endodontic
 
Owned
 
 
instruments and materials
 
 
 
 
 
 
 
Radolfzell, Germany (5)
 
Distribution of dental products
 
Leased
 
 
 
 
 
Rosbach, Germany (1)
 
Manufacture and distribution of dental ceramics
 
Owned
 
 
 
 
 
Badia Polesine, Italy (1)
 
Manufacture and distribution of dental consumable products
 
Owned/Leased
 
 
 
 
 
Otawara, Japan (2)
 
Manufacture and distribution of precious metal dental
 
Owned
 
 
alloys, dental consumable products and orthodontic products
 
 
 
 
 
 
 
Mexicali, Mexico (2)
 
Manufacture and distribution of orthodontic
 
Leased
 
 
products and materials
 
 
 
 
 
 
 
Hoorn, Netherlands (1)
 
Manufacture and distribution of precious metal
 
Owned
 
 
dental alloys and dental ceramics
 
 
 
 
 
 
 
HA Soest, Netherlands (2)
 
Distribution of orthodontic products
 
Leased
 
 
 
 
 
Warsaw, Poland (1)
 
Manufacture and distribution of dental consumable products
 
Owned
 
 
 
 
 
Las Piedras, Puerto Rico (1)
 
Manufacture of crown and bridge materials
 
Owned
 
 
 
 
 
Mölndal, Sweden (4)
 
Manufacture and distribution of dental implant products and
 
Owned
 
 
consumable medical devices
 
 
 
 
 
 
 
Ballaigues, Switzerland (4)
 
Manufacture and distribution of endodontic
 
Owned
 
 
instruments, plastic components and packaging  material
 
 

(1)
These properties are included in the Dental Consumables and Laboratory segment.
(2)
These properties are included in the Orthodontics/Canada/Mexico/Japan segment.
(3)
These properties are included in the Select Distribution segment.
(4)
These properties are included in the Implants/Endodontics/Healthcare/Pacific Rim segment.
(5)
This property is a distribution warehouse not managed by named segments.

In addition, the Company maintains sales and distribution offices at certain of its foreign and domestic manufacturing facilities, as well as at various other U.S. and international locations.  The Company maintains offices in Toronto, Mexico City, Paris, Rome, Weybridge, Mölndal, Hong Kong and Melbourne and other international locations.  Most of these sites around the world that are used exclusively for sales and distribution are leased.

The Company also owns its corporate headquarters located in York, Pennsylvania.

DENTSPLY believes that its properties and facilities are well maintained and are generally suitable and adequate for the purposes for which they are used.

Item 3.  Legal Proceedings

Incorporated by reference to Part II, Item 8, Note 17, Commitments and Contingencies, to the Consolidated Financial Statements in this Form 10-K.

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Executive Officers of the Registrant

The following table sets forth certain information regarding the executive officers of the Company as of February 24, 2013.

Name
 
Age
 
Position
 
 
 
 
 
Bret W. Wise
 
52
 
Chairman of the Board and Chief Executive Officer
Christopher T. Clark
 
51
 
President and Chief Operating Officer  
William R. Jellison
 
55
 
Senior Vice President and Chief Financial Officer  
James G. Mosch
 
55
 
Executive Vice President  
Robert J. Size
 
54
 
Senior Vice President  
Albert J. Sterkenburg
 
49
 
Senior Vice President
Deborah M. Rasin
 
46
 
Vice President, Secretary and General Counsel

Bret W. Wise has served as Chairman of the Board and Chief Executive Officer of the Company since January 1, 2007 and also served as President in 2007 and 2008.  Prior to that time, Mr. Wise served as President and Chief Operating Officer in 2006, as Executive Vice President in 2005 and Senior Vice President and Chief Financial Officer from December 2002 through December 2004.  Prior to that time, Mr. Wise was Senior Vice President and Chief Financial Officer with Ferro Corporation of Cleveland, OH (1999 - 2002),  Vice President and Chief Financial Officer at WCI Steel, Inc., of Warren, OH,  (1994 - 1999) and prior to that he was a partner with KPMG LLP.  During 2012, Mr. Wise was elected a member of the Board of Directors of the Pall Corporation.  Mr. Wise is a Certified Public Accountant.

Christopher T. Clark has served as Chief Operating Officer of the Company since January 1, 2007, also serving as President since January 1, 2009 and as Executive Vice President in 2007 and 2008.  Prior to that time, Mr. Clark served as Senior Vice President (2003 - 2005), as Vice President and General Manager of DENTSPLY’s global imaging business (1999 - 2002), as Vice President and General Manager of the Prosthetics Division (1996 - 1999), and as Director of Marketing of DENTSPLY’S Prosthetics Division  (1992 - 1996).  Prior to September 1992, Mr. Clark held various brand management positions with Proctor & Gamble.

William R. Jellison has served as Senior Vice President and Chief Financial Officer of the Company since January 2005, a position he also held from April 1998 until November 2002.  From November 2002 until January 2005, Mr. Jellison served as a Senior Vice President with operating responsibilities.  Prior to April 1998, Mr. Jellison held various financial management positions including Vice President of Finance, Treasurer and Corporate Controller for Donnelly Corporation of Holland, Michigan since 1980.
 
James G. Mosch has served as Executive Vice President since January 1, 2009, and prior to that as Senior Vice President since 2003.  Prior to that, Mr. Mosch served as Vice President and General Manager of DENTSPLY’s Professional division, beginning in July 1994 when, he started with the Company.  Prior to 1994, Mr. Mosch served in general management and marketing positions with Baxter International and American Hospital Supply Corporation.

Robert J. Size has served as Senior Vice President since January 1, 2007.  Prior to that, Mr. Size served as a Vice President (2006) and as Vice President and General Manager of DENTSPLY’s Caulk division beginning June 2003 through December 31, 2005.  Prior to that time, he was the Chief Executive Officer and President of Superior MicroPowders and held various cross-functional and international leadership positions with The Cookson Group.

Albert J. Sterkenburg, D.D.S. has served as Senior Vice President since January 1, 2009.  Prior to that, Dr. Sterkenburg served as Vice President (2006 - 2009), Vice President and General Manager of the DeguDent division (2003 - 2006) and Vice President and General Manager of the VDW division beginning in 2000.  Prior to that time, he served in marketing and general management roles at Johnson & Johnson.

Deborah M. Rasin has served as Vice President, Secretary and General Counsel of the Company since March 7, 2011.  Prior to that, she served since 2006 as Vice President, General Counsel and Secretary of Samsonite Corporation, where she oversaw all legal, compliance and corporate governance matters of a Delaware-incorporated global consumer goods company.  Prior to joining Samsonite, Ms. Rasin served as a senior corporate attorney at General Motors Corporation, and as an associate at various international law firms.  Ms. Rasin received her J.D. from Harvard Law School in 1992.

Item 4.  Removed and Reserved

18






19



PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Quarterly Stock Market and Dividend Information

The Company's common stock is traded on the NASDAQ National Market under the symbol “XRAY.” The following table shows, for the periods indicted, the high, low, closing sale prices and cash dividends declared of the Company's common stock as reported on the NASDAQ National Market:
 
Market Range of Common Stock
 
Period-end
Closing
Price
 
Cash
Dividend
Declared
 
High
 
Low
 
 
2012
 
 
 
 
 
 
 
First Quarter
$
40.32

 
$
34.77

 
$
40.13

 
$
0.055

Second Quarter
41.38

 
35.88

 
37.81

 
0.055

Third Quarter
39.27

 
35.04

 
38.14

 
0.055

Fourth Quarter
40.82

 
35.83

 
39.61

 
0.055

 
 
 
 
 
 
 
 
2011
 

 
 

 
 

 
 

First Quarter
$
38.49

 
$
34.00

 
$
36.99

 
$
0.050

Second Quarter
40.16

 
34.76

 
38.08

 
0.050

Third Quarter
39.94

 
30.41

 
30.69

 
0.050

Fourth Quarter
40.37

 
28.35

 
34.99

 
0.055

 
The Company estimates, based on information supplied by its transfer agent, that there are 352 holders of record of the Company’s common stock. Approximately 65,900 holders of the Company’s common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

Stock Repurchase Program

The Board of Directors has authorized the Company to repurchase shares under its stock repurchase program in an amount up to 34.0 million shares of common stock.  The table below contains certain information with respect to the repurchase of shares of the Company's common stock during the quarter ended December 31, 2012:

(in thousands, except per share amounts)
 
 
 
 
 
Number of
Shares that
May Yet be
Purchased
Under the Share
Repurchase
Program
Period
 
Total Number
of Shares
Purchased
 
Average Price
Paid Per
Share
 
Total Cost
of Shares
Purchased
 
 
 
 
 
 
 
 
 
 
October 1-31, 2012
 

 
$

 
$

 
13,209.1

November 1-30, 2012
 

 

 

 
13,374.7

December 1-31, 2012
 

 

 

 
13,546.8

 
 

 
$

 
$

 
 










20



Stock Authorized for Issuance Under Equity Compensation Plans

The following table provides information about the Company's common stock that may be issued under equity compensation plans at December 31, 2012:

(in thousands, except share price)
 
 
 
 
 
Plan Category
Securities to Be Issued Upon Exercise of Outstanding Options
 
Weighted Average Exercise Price per Share
 
Securities Available for Future Issuance
 
 
 
 
 
 
Equity compensation plans approved by security holders
10,940
 
$
33.48

 
10,468
Total
10,940
 
$
33.48

 
10,468

21




Performance Graph

The following graph compares the Company’s cumulative total stockholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the NASDAQ Composite Index, the Standard & Poor’s S&P 500 Index and the Standard & Poor’s S&P Health Care Index.


 
12/07
 
12/08
 
12/09
 
12/10
 
12/11
 
12/12
DENTSPLY International Inc.
100.00

 
63.07

 
79.06

 
77.28

 
79.60

 
90.63

NASDAQ Composite
100.00

 
59.03

 
82.25

 
97.32

 
98.63

 
110.78

S&P 500
100.00

 
63.00

 
79.67

 
91.67

 
93.61

 
108.59

S&P Health Care
100.00

 
77.19

 
92.40

 
95.08

 
107.18

 
126.35


22




Item 6.  Selected Financial Data

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(in thousands, except per share amounts, days and percentages)
 
Year ended December 31,
 
2012
 
2011 (a)
 
2010
 
2009
 
2008
 
 
 
 
 
 
 
 
 
 
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
2,928,429

 
$
2,537,718

 
$
2,221,014

 
$
2,159,378

 
$
2,191,465

Net sales, excluding precious metal content
2,714,698

 
2,332,589

 
2,031,757

 
1,990,666

 
1,991,542

Gross profit
1,556,387

 
1,273,440

 
1,130,158

 
1,106,363

 
1,147,900

Restructuring and other costs
25,717

 
35,865

 
10,984

 
6,890

 
32,355

Operating income
381,939

 
300,728

 
380,273

 
381,243

 
380,461

Income before income taxes
330,679

 
256,111

 
357,656

 
363,356

 
354,873

Net Income
318,489

 
247,446

 
267,335

 
274,412

 
283,270

Net income attributable to DENTSPLY International
$
314,213

 
$
244,520

 
$
265,708

 
$
274,258

 
$
283,869

 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

 
 

Basic
$
2.22

 
$
1.73

 
$
1.85

 
$
1.85

 
$
1.90

Diluted
$
2.18

 
$
1.70

 
$
1.82

 
$
1.83

 
$
1.87

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.220

 
$
0.205

 
$
0.200

 
$
0.200

 
$
0.185

 
 
 
 
 
 
 
 
 
 
Weighted Average Common Shares Outstanding:
 

 
 

 
 

 
 

 
 

Basic
141,850

 
141,386

 
143,980

 
148,319

 
149,069

Diluted
143,945

 
143,553

 
145,985

 
150,102

 
151,679

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
80,132

 
$
77,128

 
$
540,038

 
$
450,348

 
$
204,249

Property, plant and equipment, net
614,705

 
591,445

 
423,105

 
439,619

 
432,276

Goodwill and other intangibles, net
3,041,595

 
2,981,163

 
1,381,798

 
1,401,682

 
1,380,744

Total assets
4,972,297

 
4,755,398

 
3,257,951

 
3,087,932

 
2,830,400

Total debt, current and long-term portions
1,520,998

 
1,766,711

 
611,769

 
469,325

 
449,474

Equity
2,249,443

 
1,884,151

 
1,909,912

 
1,906,958

 
1,659,413

Return on average equity
15.2
%
 
12.9
%
 
13.9
%
 
15.4
%
 
17.9
%
Total net debt to total capitalization (b)
39.0
%
 
47.3
%
 
3.6
%
 
1.0
%
 
12.9
%
 
 
 
 
 
 
 
 
 
 
Other Data:
 

 
 

 
 

 
 

 
 

Depreciation and amortization
$
129,199

 
$
85,035

 
$
65,912

 
$
65,175

 
$
56,929

Cash flows from operating activities
369,685

 
393,469

 
377,461

 
362,489

 
335,981

Capital expenditures
92,072

 
71,186

 
44,236

 
56,481

 
76,440

Interest expense (income), net
48,091

 
35,577

 
20,835

 
16,864

 
15,438

Inventory days
106

 
100

 
100

 
99

 
103

Receivable days
53

 
54

 
54

 
55

 
54

Effective tax rate
2.7
%
 
4.3
%
 
25.0
%
 
24.5
%
 
20.2
%
(a) Includes the results of the Astra Tech acquisition from September 1, 2011 through December 31, 2011.
(b)The Company defines net debt as total debt, including current and long-term portions, less cash and cash equivalents and total capitalization as the sum of net debt plus equity.

23




Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following Management’s Discussion and Analysis of Financial Conditions and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s operations and business environment.  MD&A is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.  The following discussion includes forward-looking statements that involve certain risks and uncertainties.  See “Forward-Looking Statements” in the beginning of this Form 10-K.  The MD&A includes the following sections:
 
Business – a general description of DENTSPLY’s business and how performance is measured;
Results of Operations – an analysis of the Company’s consolidated results of operations for the three years presented in the consolidated financial statements;
Critical Accounting Estimates – a discussion of accounting policies that require critical judgments and estimates; and
Liquidity and Capital Resources – an analysis of cash flows; debt and other obligations; and aggregate contractual obligations.

Significant Developments in 2012

For the year ended December 31, 2012, sales grew by 15.4% on a US GAAP reported basis and grew 16.4%, excluding precious metal content. The sales growth excluding precious metal content was driven by acquisition growth of 16.2%, while internal growth added 4.0%, and currency translation was negative 3.8%. This internal growth was comprised of growth in the United States of 3.6%, Europe of 2.6% and rest of world of 7.2%.

During 2012 the Company established DENTSPLY Implants, combining the Astra Tech implant business and the Company's implant brands.  This new business enables DENTSPLY to offer a complete product line of all implant choices and solutions throughout most of the world under the DENTSPLY Implants platform. 

The Company branded the former Astra Tech medical business as Wellspect Healthcare.

BUSINESS

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

Principal Measurements

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

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


24



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

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

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

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

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

Impact of the Natural Disaster in Japan and Orthodontic Recovery

 The Company's Orthodontic and Japanese businesses have been negatively impacted as a result of the natural disaster that occurred in Japan in March of 2011. The impact for the year ended December 31, 2012 on the Company's sales of orthodontic products was a slight increase in net sales and earnings as compared with 2011, resulting in a positive $0.01 impact to the period's year-over-year earnings per diluted share.

Impact of Foreign Currencies

Due to the international nature of DENTSPLY's business, movements in foreign exchange rates may impact the consolidated statements of operations. With 65% to 70% of the Company's net sales located in regions outside the U.S., the Company's consolidated net sales are impacted negatively by the strengthening or positively by the weakening of the U.S. dollar. Additionally, movements in certain foreign exchange rates may unfavorably or favorably impact the Company's results of operations, financial condition and liquidity.

Reclassification of Prior Year Amounts

Certain reclassifications have been made to prior years' data in order to conform to current year presentation. Specifically, during the first quarter of 2012, the Company realigned reporting responsibilities for multiple locations as a result of changes to the management structure. The segment information below reflects the revised structure for all periods shown.

RESULTS OF OPERATIONS

2012 Compared to 2011

Net Sales

The discussion below summarizes the Company’s sales growth, excluding precious metal content, into the following components: (1) constant currency, which includes internal growth and acquisition growth, and (2) foreign currency

25



translation.  These disclosures of net sales growth provide the reader with sales results on a comparable basis between periods.

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

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

 
Year Ended December 31,
 
 
 
 
(in millions)
2012
 
2011
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Net sales
$
2,928.4

 
$
2,537.7

 
$
390.7

 
15.4
%
Less: Precious metal content of sales
213.7

 
205.1

 
8.6

 
4.2
%
Net sales, excluding precious metal content
$
2,714.7

 
$
2,332.6

 
$
382.1

 
16.4
%

In 2012, net sales, excluding precious metal content increased $382.1 million from 2011. The 16.4% increase in net sales, excluding precious metal content, included constant currency growth of 20.2%, and currency translation, which decreased net sales, excluding precious metal content, by 3.8%.   The constant currency sales growth was comprised of internal growth of 4.0% and acquisition growth of 16.2%.

Constant Currency Sales Growth

The following table includes growth rates for net sales, excluding precious metal content.

 
Year Ended December 31, 2012
 
United 
States
 
Europe
 
All Other
Regions
 
Worldwide
 
 
 
 
 
 
 
 
Internal growth
3.6
%
 
2.6
%
 
7.2
%
 
4.0
%
Net acquisition growth
10.2
%
 
24.9
%
 
8.7
%
 
16.2
%
Constant currency sales growth
13.8
%
 
27.5
%
 
15.9
%
 
20.2
%
 
 
 
 
 
 
 
 
Internal growth excluding the Japanese market and Orthodontic business was substantially the same and varied by no more than one percentage point in any region.

United States

During 2012, net sales, excluding precious metal content, increased by 13.8% on a constant currency basis, including 10.2% of acquisition growth. The internal growth rate was 3.6% due to increased demand across all product categories.

Europe

During 2012, net sales, excluding precious metal content, increased by 27.5% on a constant currency basis, including 24.9% of acquisition growth. The internal growth rate was 2.6% and was primarily driven by sales growth in the dental specialty, dental consumable and consumable medical device products partially offset by decreased demand for precious metal alloy products within the dental laboratory products category.

26




All Other Regions

During 2012, net sales, excluding precious metal content, increased 15.9% on a constant currency basis, which includes 8.7% of acquisition growth. The internal growth was 7.2%, driven by sales growth in all dental product categories.

Gross Profit

 
Year Ended December 31,
 
 
 
 
(in millions)
2012
 
2011
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Gross profit
$
1,556.4

 
$
1,273.4

 
$
283.0

 
22.2
%
Gross profit as a percentage of net sales, including precious metal content
53.1
%
 
50.2
%
 
 

 
 

Gross profit as a percentage of net sales, excluding precious metal content
57.3
%
 
54.6
%
 
 

 
 


Gross profit as a percentage of net sales, excluding precious metal content, increased 2.7% during 2012 compared to 2011.  The gross profit rate was positively impacted by improved product pricing, favorable product mix primarily associated with recent acquisitions as well as a favorable rate impact from changes in foreign currency translation rates offset by higher manufacturing costs. In 2011, the gross profit rate was negatively impacted by approximately two percentage points from expensing inventory for the fair value adjustments associated with acquisitions.

Expenses

Selling, General and Administrative (“SG&A”) Expenses

 
Year Ended December 31,
 
 
 
 
(in millions)
2012
 
2011
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
SG&A expenses
$
1,148.7

 
$
936.8

 
$
211.9

 
22.6
%
SG&A expenses as a percentage of net sales, including precious metal content
39.2
%
 
36.9
%
 
 

 
 

SG&A expenses as a percentage of net sales, excluding precious metal content
42.3
%
 
40.2
%
 
 

 
 


SG&A expenses as a percentage of net sales, excluding precious metal content, was 2.1% higher than in 2011. Increased SG&A expenses as a percent of net sales, excluding precious metal content, was a result of the higher expense rate of the Astra Tech business and $30.9 million of amortization primarily associated with 2011 acquisitions as well as key global marketing events.

Restructuring and Other Costs

 
Year Ended December 31,
 
 
 
 
(in millions)
2012
 
2011
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Restructuring and other costs
$
25.7

 
$
35.9

 
$
(10.2
)
 
(28.4
%)

The Company recorded net restructuring and other costs of $25.7 million in 2012 compared to $35.9 million in 2011. In 2012, restructuring cost of $17.8 million were related to the implant integration activity as well as the closure and consolidation of facilities in an effort to streamline the Company's operations and better leverage the Company's resources. Restructuring and other costs also include $5.2 million related to an impairment of previously acquired technology.

In 2011, these costs were related to expenses associated with the acquisition of Astra Tech of $18.0 million, legal settlement cost of $12.6 million as well as restructuring costs primarily related to the orthodontic business. Also, the Company recorded

27



certain other costs of $1.5 million related to an impairment of an intangible asset.

The benefits associated with the 2011 and 2012 restructuring plans were immaterial to the current period. The Company estimates the future annual savings related to these plans to be in the range of $10 million to $15 million to be realized over the next three to five years. There is no assurance that future savings will be fully achieved.

Other Income and Expenses

 
Year Ended December 31,
 
 
(in millions)  
2012
 
2011
 
$ Change
 
 
 
 
 
 
Net interest expense   
$
48.1

 
$
35.6

 
$
12.5

Other expense, net  
3.2

 
9.0

 
(5.8
)
Net interest and other expense
$
51.3

 
$
44.6

 
$
6.7


Net Interest Expense

The change in net interest expense in 2012 compared to 2011 was primarily the result of higher average debt levels and lower cash levels as a result of financing the $1.8 billion Astra Tech acquisition in 2011. Interest expense increased $13.0 million over 2011.
Other Expense, Net
Other expense in the 2012 period included approximately $2.7 million of currency transaction losses and $0.5 million of other non-operating expense. Other expense in the 2011 period included approximately $1.7 million of currency transaction losses, $2.9 million of interest rate swap terminations, $3.8 million of Treasury rate lock ineffectiveness, and $0.6 million of other non-operating expense.

Income Taxes and Net Income

 
Year Ended December 31,
 
 
(in millions, except per share amounts)
2012
 
2011
 
$ Change
 
 
 
 
 
 
Effective income tax rate
2.7
%
 
4.3
%
 
 
 
 
 
 
 
 
Equity in net income (loss) of unconsolidated affiliated company
$
(3.3
)
 
$
2.4

 
$
(5.7
)
 
 
 
 
 
 
Net income attributable to noncontrolling interests
$
4.3

 
$
2.9

 
$
1.4

 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
314.2

 
$
244.5

 
$
69.7

 
 
 
 
 
 
Diluted earnings per common share
$
2.18

 
$
1.70

 
 


Provision for Income Taxes

During 2012, the Company entered into various legal entity restructuring activities to complete the integration of the Astra Tech business acquired in August 2011.  In addition to the specific tax integration of the Astra Tech subsidiaries with legacy DENTSPLY subsidiaries, the Company also realigned much of its foreign legal entity structure to better align operations and cash management activities.  As a part of this restructuring, the Company was able to capture an overall net benefit from anticipated tax losses of $57.7 million. Most of the cash flow benefit from this tax matter, including utilization of an existing credit carryforward of approximately $49.6 million will be realized over the next several years. Also, the Company recognized $12.0 million of tax benefit from a reduction in foreign tax rates and separately recorded a valuation allowance on previously recognized assets of $10.4 million. During 2011, the Company recorded a tax benefit from the release of a valuation allowance on previously unrecognized tax loss carryforwards of approximately $46.7 million. Further information regarding the details of income taxes is presented in Note 12, Income Taxes, to the consolidated financial statements in this Form 10-K.

28




The Company's effective tax rate for 2012 and 2011 was 2.7% and 4.3%, respectively. In 2012, the Company's effective tax rate included the impact of amortization of purchased intangible assets, integration and restructuring and other costs as well as various income tax adjustments which impacted income before taxes and the provisions for income taxes by $91.7 million and $90.0 million, respectively. In 2011, the Company's effective income tax rate included the impact of acquisition related activity, restructuring and other costs, amortization on purchased intangibles from acquisitions and the release of the valuation allowance and various income tax adjustments, which impacted income before income taxes and the provision for income taxes by $123.8 million and $75.4 million, respectively.

Equity in net income (loss) of unconsolidated affiliated company

The Company's 17% ownership investment of DIO Corporation resulted in a net loss of $3.3 million on an after-tax basis for 2012. The equity earnings of DIO includes the result of mark-to-market changes related to the derivative accounting for the convertible bonds issued by DIO to DENTSPLY. The Company's portion of the mark-to-market net loss incurred by DIO was approximately $3.1 million. In 2011, equity in net income was $2.4 million on an after-tax basis and the Company's portion of the mark-to-market net gain incurred by DIO was approximately $2.2 million.

Net income attributable to noncontrolling interests

The portion of consolidated net income attributable to noncontrolling interests increased $1.4 million from 2012 to 2011 due to higher earnings. 

Net income attributable to DENTSPLY International

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

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

 
Year Ended December 31, 2012
(in thousands, except per share amounts)
Net Income
 
Per Diluted
Common Share
 
 
 
 
Net income attributable to DENTSPLY International
$
314,213

 
$
2.18

Amortization on purchased intangible assets, net of tax
33,612

 
0.23

Restructuring and other costs, net of tax
18,549

 
0.13

Acquisition related activities, net of tax
9,299

 
0.07

Loss on fair value adjustment at an unconsolidated affiliated company, net of tax
2,927

 
0.02

Orthodontic business continuity costs, net of tax
600

 

Income tax related adjustments
(59,992
)
 
(0.41
)
Adjusted non-US GAAP earnings
$
319,208

 
$
2.22



29



 
Year Ended December 31, 2011
(in thousands, except per share amounts)
Net Income
 
Per Diluted
Common Share
 
 
 
 
Net income attributable to DENTSPLY International
$
244,520

 
$
1.70

Acquisition related activities, net of tax
62,723

 
0.44

Amortization on purchased intangible assets, net of tax
14,428

 
0.10

Restructuring and other costs, net of tax
11,395

 
0.08

Orthodontic business continuity costs, net of tax
2,128

 
0.01

Credit risk adjustment to outstanding derivatives, net of tax
(783
)
 

Gain on fair value adjustment at an unconsolidated affiliated company, net of tax
(2,486
)
 
(0.02
)
Income tax related adjustments
(41,053
)
 
(0.28
)
Adjusted non-US GAAP earnings
$
290,872

 
$
2.03


Operating Segment Results
 
The Company’s operating businesses are combined into operating groups, which have overlapping product offerings, geographic presence, customer bases, distribution channels and regulatory oversight.  These operating groups are considered the Company’s reportable segments as the Company’s chief operating decision-maker regularly reviews financial results at the operating group level and uses this information to manage the Company’s operations.  Each of these operating groups covers a wide range of product categories and geographic regions.  The product categories and geographic regions often overlap across the groups.  Further information regarding the details of each group is presented in Note 4, Segment and Geographic Information, to the consolidated financial statements in this Form 10-K.  The management of each group is evaluated for performance and incentive compensation purposes on net third party sales, excluding precious metal content, and segment operating income.

Net Sales, Excluding Precious Metal Content
 
 
 
 
 
 
 
(in millions)
Year Ended December 31,
 
 
 
 
  
2012
 
2011
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
792.0

 
$
794.7

 
$
(2.7
)
 
(0.3
%)
 
 
 
 

 
 
 
 
Orthodontics/Canada/Mexico/Japan
$
297.9

 
$
289.5

 
$
8.4

 
2.9
 %
 
 
 
 

 
 
 
 
Select Distribution Businesses
$
288.3

 
$
292.1

 
$
(3.8
)
 
(1.3
%)
 
 
 
 
 
 
 
 
Implants/Endodontics/Healthcare/Pacific Rim
$
1,340.1

 
$
961.3

 
$
378.8

 
39.4
 %

Segment Operating Income (Loss)
 
 
 
 
 
 
 
(in millions)
Year Ended December 31,
 
 
 
 
  
2012
 
2011
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
227.9

 
$
210.2

 
$
17.7

 
8.4
 %
 
 
 
 
 
 
 
 
Orthodontics/Canada/Mexico/Japan
$
16.6

 
$
15.8

 
$
0.8

 
5.1
 %
 
 
 
 
 
 
 
 
Select Distribution Businesses
$
(0.3
)
 
$
2.5

 
$
(2.8
)
 
(112.0
%)
 
 
 
 
 
 
 
 
Implants/Endodontics/Healthcare/Pacific Rim
$
282.4

 
$
210.9

 
$
71.5

 
33.9
 %





30



Dental Consumable and Laboratory Businesses
 
Net sales, excluding precious metal content, decreased $2.7 million during the year ended December 31, 2012 as compared to 2011.  On a constant currency basis, net sales, excluding precious metals content, increased 2.6%, which was driven primarily by increased sales in the dental consumable businesses partially offset by lower sales in the dental laboratory businesses.

Operating income increased $17.7 million during the year ended December 31, 2012 compared to 2011. Operating income was positively impacted by an increase in gross profit of approximately $10 million despite unfavorable currency translation of approximately $13 million, the increase was mainly the result of product mix. SG&A expenses decreased approximately $7 million, primarily due to favorable currency translation.

Orthodontics/Canada/Mexico/Japan

Net sales, excluding precious metal content, increased $8.4 million, or 2.9%, during the year ended December 31, 2012 compared to 2011. On a constant currency basis, net sales, excluding precious metal content, increased 5.0%. The increase was due to the recovery of the orthodontics business and sales growth in Canada.

Operating income increased $0.8 million during the year ended December 31, 2012 compared to 2011. Gross profit increased $1 million mainly due to higher sales despite approximately $2 million of unfavorable currency translation. SG&A expenses were unchanged as compared to 2011, including favorable foreign currency translation and expenses related to the relaunch of the orthodontics businesses.

Select Distribution Businesses

Net sales, excluding precious metal content, decreased $3.8 million, or 1.3%, during the year ended December 31, 2012 compared to 2011. On a constant currency basis, net sales, excluding precious metal content, increased by 7.0% primarily driven by sales demand in all dental product categories with the largest increase in dental specialty products.

Operating income decreased $2.8 million during the year ended December 31, 2012 compared to 2011. Gross profit decreased approximately $6 million primarily due to unfavorable currency translation. SG&A expenses decreased by approximately $3 million, primarily due to favorable foreign currency translation offset by increased selling expense.

Implants/Endodontics/Healthcare/Pacific Rim

Net sales, excluding precious metal content, increased $378.8 million, or 39.4%, during the year ended December 31, 2012 compared to 2011. On a constant currency basis, net sales, excluding precious metal content, increased 43.2% over prior year mostly as a result of the full year of Astra Tech financial results. The 2011 net sales, excluding precious metal content, only included four months of Astra Tech financial results. On a constant currency basis, net sales, excluding precious metal content grew in all businesses.

Operating income increased $71.5 million, or 33.9% during the year ended December 31, 2012 compared to 2011. Gross margin increased approximately $289 million primarily due to acquisitions partially offset by approximately $41 million of unfavorable foreign currency translation. SG&A expenses increased approximately $217 million primarily due to acquisitions and favorable foreign currency translation of approximately $26 million.

RESULTS OF OPERATIONS

2011 Compared to 2010

Net Sales

 
Year Ended December 31,
 
 
 
 
(in millions)
2011
 
2010
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Net sales
$
2,537.7

 
$
2,221.0

 
$
316.7

 
14.3
%
Less: Precious metal content of sales
205.1

 
189.2

 
15.9

 
8.4
%
Net sales, excluding precious metal content
$
2,332.6

 
$
2,031.8

 
$
300.8

 
14.8
%

31



The 14.8% increase in net sales, excluding precious metal content, included constant currency growth of 11.2%, and currency translation, which increased net sales, excluding precious metal content, by 3.6%.   The constant currency sales growth was comprised of internal growth of 0.4% and acquisition growth of 10.8%. Excluding sales in the Japanese market and Orthodontic business, the internal growth rate was 3.9% in 2011.

Constant Currency Sales Growth

The following tables includes growth rates for net sales, excluding precious metal content.

 
Year Ended December 31, 2011
 
United 
States
 
Europe
 
All Other
Regions
 
Worldwide
 
 
 
 
 
 
 
 
Internal growth
(0.4
)%
 
(0.4
)%
 
3.0
%
 
0.4
%
Net acquisition growth
5.3
 %
 
18.3
 %
 
6.4
%
 
10.8
%
Constant currency sales growth
4.9
 %
 
17.9
 %
 
9.4
%
 
11.2
%
 
 
 
 
 
 
 
 

United States

During 2011, net sales, excluding precious metal content, increased by 4.9% in the U. S. on a constant currency basis, including 5.3% of acquisition growth. Excluding the Orthodontic business, the internal growth rate was 3.6% due primarily to increases in dental consumable, non-dental product and dental specialty sales, partially offset by lower dental laboratory product sales. Internal growth was significantly impacted by product supply disruption in the Orthodontic business.

Europe

During 2011, net sales, excluding precious metal content, increased by 17.9% on a constant currency basis, including 18.3% of acquisition growth. Excluding the Orthodontic business, the internal growth rate was a positive 2.2% and was primarily driven by growth in the dental specialty, dental consumable and non-dental products and growth in the CIS markets partially offset by dental laboratory products. The increase in sales was further offset by lower volumes in precious metal alloy products. Internal growth was impacted by product supply disruption in the Orthodontic business.

All Other Regions

During 2011, net sales, excluding precious metal content, increased 9.4% on a constant currency basis, which includes 6.4% of acquisition growth. Excluding the Japanese market and Orthodontic business, internal growth was 7.8%, driven primarily by growth in dental specialty and dental consumable products, partially offset by lower sales in dental laboratory products.

Gross Profit

 
Year Ended December 31,
 
 
 
 
(in millions)
2011
 
2010
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Gross profit
$
1,273.4

 
$
1,130.2

 
$
143.2

 
12.7
%
Gross profit as a percentage of net sales, including precious metal content
50.2
%
 
50.9
%
 
 

 
 

Gross profit as a percentage of net sales, excluding precious metal content
54.6
%
 
55.6
%
 
 

 
 


Gross profit as a percentage of net sales, excluding precious metal content, declined 1% during 2011 compared to 2010.  The gross profit rate was negatively impacted by approximately two percentage points from the expensing of inventory fair value adjustments associated with acquisitions and from foreign exchange transaction impacts. These impacts were partially offset by favorable product mix from the Astra Tech acquisition and product price increases.



32



Expenses

Selling, General and Administrative (“SG&A”) Expenses

 
Year Ended December 31,
 
 
 
 
(in millions)
2011
 
2010
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
SG&A expenses
$
936.8

 
$
738.9

 
$
197.9

 
26.8
%
SG&A expenses as a percentage of net sales, including precious metal content
36.9
%
 
33.3
%
 
 

 
 

SG&A expenses as a percentage of net sales, excluding precious metal content
40.2
%
 
36.4
%
 
 

 
 


The increase in SG&A expenses as a percentage of net sales, excluding precious metal content, was 3.8% higher than in 2010. The increase included approximately a full percentage point for acquisition related expenses, legal and other charges in the year.  The rate also increased by approximately two percentage points to support the higher cost structure of recent acquisitions and costs to support our orthodontic business as it experienced a significant supply disruption caused by the natural disaster in Japan (also referred to hereafter as “Orthodontic business continuity costs”).  The Company also had higher expenses in support of its strong new product launches occurring in many key categories throughout the year.

Restructuring and Other Costs

 
Year Ended December 31,
 
 
 
 
(in millions)
2011
 
2010
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Restructuring and other costs
$
35.9

 
$
11.0

 
$
24.9

 
226.4
%

The Company recorded net restructuring and other costs of $35.9 million in 2011 compared to $11.0 million in 2010. These costs were related to expenses associated with the acquisition of Astra Tech of $18.0 million, legal settlement cost of $12.6 million as well as restructuring costs primarily related to the orthodontic business. Also, the Company recorded certain other costs of $1.5 million related to an impairment of previously acquired technology. Additionally in 2011, the Company incurred certain other costs of $5.2 million of which $3.7 million was related to legal matters and an impairment of an intangible asset. In 2010, the Company incurred $5.8 million in restructuring costs related to several plans.

The 2010 and 2011 restructuring plans and ongoing benefits associated with these plans were immaterial to the current period as well as future periods. While certain restructuring plans continue to be executed, the future benefits of these plans on the Company's financial results would be immaterial in the period realized.

Other Income and Expenses

 
Year Ended December 31,
 
 
(in millions)  
2011
 
2010
 
$ Change
 
 
 
 
 
 
Net interest expense   
$
35.6

 
$
20.8

 
$
14.8

Other expense, net  
9.0

 
1.8

 
7.2

Net interest and other expense
$
44.6

 
$
22.6

 
$
22.0


Net Interest Expense

The change in net interest expense in 2011 compared to 2010 was primarily the result of higher average debt levels in the U.S., and lower cash levels resulting from financing the $1.8 billion Astra Tech acquisition utilizing cash of $650.0 million and new debt of $1.2 billion. Interest expense increased $19.2 million due to higher debt levels as a result of the acquisitions and stock repurchases combined with stronger average euro and Swiss franc exchange rates and higher average euro interest rates on the Company's net investment hedges. Interest income increased $5.2 million on interest earned on an investment in convertible

33



bonds and a positive impact relating to credit risk on derivatives versus the prior year. Average interest rates on euro investment balances were 50 basis points higher in the current year than the prior year and the U.S. dollar was 5% weaker against the euro. The impact of the Company's net investment hedges typically move in the opposite direction of currency movements, reducing some of the volatility caused by movement in exchange rates on the Company's income and equity.
Other Expense, Net

Other expense in the 2011 period included approximately $1.7 million of currency transaction losses, $2.9 million of interest rate swap terminations, $3.8 million of Treasury rate lock ineffectiveness, and $0.6 million of other non-operating expense. The 2010 period included approximately $3.3 million of currency transaction losses and $1.5 million of other non-operating income.

Income Taxes and Net Income

 
Year Ended December 31,
 
 
(in millions, except per share amounts)
2011
 
2010
 
$ Change
 
 
 
 
 
 
Effective income tax rate
4.3
%
 
25.0
%
 
 
 
 
 
 
 
 
Equity in net income (loss) of unconsolidated affiliated company
$
2.4

 
$
(1.1
)
 
$
3.5

 
 
 
 
 
 
Net income attributable to noncontrolling interests
$
2.9

 
$
1.6

 
$
1.3

 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
244.5

 
$
265.7

 
$
(21.2
)
 
 
 
 
 
 
Diluted earnings per common share
$
1.70

 
$
1.82

 
 

 
Provision for Income Taxes

During 2011, the Company recorded a tax benefit from the release of a valuation allowance on previously unrecognized tax loss carryforwards of approximately $46.7 million. In addition, the effective tax rate was favorably impacted by the Company's change in the mix of consolidated earnings.

The Company's effective income tax rates for 2011 and 2010 were 4.3% and 25.0%, respectively. In 2011, the Company's effective income tax rate included the impact of acquisition related activity, restructuring and other costs, amortization on purchased intangibles from acquisitions and the release of the valuation allowance and various income tax adjustments, which impacted income before income taxes and the provision for income taxes by $123.8 million and $75.4 million, respectively. In 2010, the Company's effective income tax rate included the impact of restructuring and other costs, acquisition related activity, provisions for a credit risk adjustment to outstanding derivatives and various income tax adjustments, which impacted income before income taxes and the provision for income taxes by $14.9 million and $3.3 million, respectively.

Equity in net income (loss) of unconsolidated affiliated company

The Company's 17% ownership investment of DIO Corporation on December 9, 2010 resulted in a net income of $2.4 million on an after-tax basis for 2011. The equity earnings of DIO includes the result of mark-to-market changes related to the derivative accounting for the convertible bonds issued by DIO to DENTSPLY. The Company's portion of the mark-to-market net gain incurred by DIO was approximately $2.2 million. The 2010, equity loss of $1.1 million on an after-tax basis was primarily the result of the mark-to-market loss incurred by DIO.

Net income attributable to noncontrolling interests

The portion of consolidated net income attributable to noncontrolling interests increased $1.3 million from 2010 to 2011, due to higher earnings in 2011. 

Net income attributable to DENTSPLY International

In addition to the results reported in accordance with US GAAP, the Company provides adjusted net income attributable to

34



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

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

 
Year Ended December 31, 2011
(in thousands, except per share amounts)
Net Income
 
Per Diluted
Common Share
 
 
 
 
Net income attributable to DENTSPLY International
$
244,520

 
$
1.70

Acquisition related activities, net of tax and noncontrolling interests
62,723

 
0.44

Amortization on purchased intangible assets, net of tax
14,428

 
0.10

Restructuring and other costs, net of tax and noncontrolling interests
11,395

 
0.08

Orthodontic business continuity costs, net of tax
2,128

 
0.01

Credit risk adjustment to outstanding derivatives, net of tax
(783
)
 

Gain on fair value adjustment at an unconsolidated affiliated company, net of tax
(2,486
)
 
(0.02
)
Income tax related adjustments
(41,053
)
 
(0.28
)
Adjusted non-US GAAP earnings
$
290,872

 
$
2.03


 
Year Ended December 31, 2010
(in thousands, except per share amounts)
Net Income
 
Per Diluted
Common Share
 
 
 
 
Net income attributable to DENTSPLY International
$
265,708

 
$
1.82

Restructuring and other costs, net of tax and noncontrolling interests
7,138

 
0.05

Amortization on purchased intangible assets, net of tax
5,990

 
0.04

Acquisition related activities, net of tax and noncontrolling interests
2,152

 
0.01

Loss on derivative at an unconsolidated affiliated company
1,131

 
0.01

Income tax related adjustments
1,073

 
0.01

Credit risk adjustment to outstanding derivatives, net of tax
732

 

Adjusted non-US GAAP earnings
$
283,924

 
$
1.94














35



Operating Segment Results
 
Net Sales, Excluding Precious Metal Content
 
 
 
 
 
 
 
(in millions)
Year Ended December 31,
 
 
 
 
  
2011
 
2010
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
794.7

 
$
750.9

 
$
43.8

 
5.8
 %
 
 
 
 

 
 
 
 
Orthodontics/Canada/Mexico/Japan
$
289.5

 
$
332.0

 
$
(42.5
)
 
(12.8
%)
 
 
 
 

 
 
 
 
Select Distribution Businesses
$
292.1

 
$
264.7

 
$
27.4

 
10.4
 %
 
 
 
 
 
 
 
 
Implants/Endodontics/Healthcare/Pacific Rim
$
961.3

 
$
687.4

 
$
273.9

 
39.8
 %

Segment Operating Income
 
 
 
 
 
 
 
(in millions)
Year Ended December 31,
 
 
 
 
  
2011
 
2010
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
210.2

 
$
208.9

 
$
1.3

 
0.6
 %
 
 
 
 
 
 
 
 
Orthodontics/Canada/Mexico/Japan
$
15.8

 
$
42.1

 
$
(26.3
)
 
(62.5
%)
 
 
 
 
 
 
 
 
Select Distribution Businesses
$
2.5

 
$
12.2

 
$
(9.7
)
 
(79.5
%)
 
 
 
 
 
 
 
 
Implants/Endodontics/Healthcare/Pacific Rim
$
210.9

 
$
209.4

 
$
1.5

 
0.7
 %

Dental Consumable and Laboratory Businesses

Net sales, excluding precious metal content, increased $43.8 million, or 5.8% during the year ended December 31, 2011 compared to 2010.  On a constant currency basis, net sales, excluding precious metals content, increased 4.0%, which was driven by increased demand in dental consumables business.

Operating income increased $1.3 million during the year ended December 31, 2011 compared to 2010. Operating income was positively impacted by gross profit of approximately $13 million, which was a result of higher net sales and favorable foreign currency translation partially offset by unfavorable product mix in the dental laboratory business. Additionally, SG&A expenses increased approximately $12 million from 2010, primarily due to increased selling expenses and unfavorable foreign currency translation.

Orthodontics/Canada/Mexico/Japan

Net sales, excluding precious metal content, decreased $42.5 million, or 12.8%, respectively, during the year ended December 31, 2011 compared to 2010. Net sales, excluding precious metal content, were negatively impacted by the Orthodontics business as a result of the natural disaster in Japan.

Operating income decreased $26.3 million during the year ended December 31, 2011 compared to 2010. Gross profit decreased $17 million mainly due to lower orthodontic sales. SG&A expenses increase $9 million mostly due to the Orthodontic business continuity costs during the period of lower sales activity, higher marketing and selling expenses for product launches, and the negative impact impact of foreign currency translation.

Select Distribution Businesses

Net sales, excluding precious metal content, increased $27.4 million, or 10.4%, during the year ended December 31, 2011 compared to 2010. On a constant currency basis, net sales, excluding precious metal content, increased by 5.7% primarily driven

36



by sales growth in dental specialty products.

Operating income decreased $9.7 million during the year ended December 31, 2011 compared to 2010. Gross profit increased $2 million due to favorable currency translation partially offset by unfavorable sales mix within the segment and negative foreign currency transaction impact. SG&A expenses increased $11 million compared to 2010, which was mainly due to unfavorable currency translation and higher marketing and selling expenses particularly in emerging markets.

Implants/Endodontics/Healthcare/Pacific Rim

Net sales, excluding precious metal content, increased $273.9 million, or 39.8%, during the year ended December 31, 2011 compared to 2010. On a constant currency basis, net sales, excluding precious metal content, increased 34.7% primarily driven by the Astra Tech acquisition.

Operating income increased $1.5 million during the year ended December 31, 2011 compared to 2010. Gross profit increased $143 million which was primarily attributed to the acquisition of Astra Tech and favorable currency translation. Gross profit was negatively impacted by $33 million from the expensing of inventory fair value adjustment associated with the Astra Tech acquisition. SG&A expenses increased $141 million, which included $9 million of acquisition related costs for Astra Tech. Additionally, increased SG&A expenses also include operating expenses for the Astra Tech business and the negative impact of foreign currency translation.

CRITICAL ACCOUNTING JUDGMENTS AND POLICIES

The preparation of the Company's consolidated financial statements in conformity with US GAAP requires the Company to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix and in some cases, actuarial techniques. The Company evaluates these significant factors as facts and circumstances dictate. Some events as described below could cause results to differ significantly from those determined using estimates. The Company has identified the following accounting estimates as those which are critical to its business and results of operations.

Business Acquisitions

The Company acquires businesses as well as partial interests in businesses. Acquired businesses are accounted for using the acquisition method of accounting which requires the Company to record assets acquired and liabilities assumed at their respective fair values with the excess of the purchase price over estimated fair values recorded as goodwill. The assumptions made in determining the fair value of acquired assets and assumed liabilities as well as asset lives can materially impact the results of operations.

The Company obtains information during due diligence and through other sources to get respective fair values. Examples of factors and information that the Company uses to determine the fair values include: tangible and intangible asset evaluations and appraisals; evaluations of existing contingencies and liabilities and product line integration information. If the initial valuation for an acquisition is incomplete by the end of the quarter in which the acquisition occurred, the Company will record a provisional estimate in the financial statements. The provisional estimate will be finalized as soon as information becomes available but will only occur up to one year from the acquisition date.

Goodwill and Other Long-Lived Assets

Goodwill and Indefinite-Lived Assets

The Company follows the accounting standards for goodwill and indefinite-lived intangibles, which require an annual test for impairment to goodwill using a fair value approach. In addition to minimum annual impairment tests, the Company also requires that impairment assessments be made more frequently if events or changes in circumstances indicate that the goodwill or indefinite-lived assets might be impaired. If impairment related to goodwill 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 the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized.

37



Other Long-Lived Assets

Other long-lived assets, such as definite-lived intangible assets and fixed assets, are amortized or depreciated over their estimated useful lives. In accordance with US GAAP, 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 based upon an evaluation of the identifiable undiscounted cash flows. If impaired based on the identifiable undiscounted cash flows, the asset's fair value is determined using the discounted cash flow and market participant assumptions. The resulting charge reflects the excess of the asset's carrying cost over its fair value.

Impairment Assessment

Assessment of the potential impairment of goodwill and other long-lived assets is an integral part of the Company's normal ongoing review of operations. Testing for potential impairment of these assets is significantly dependent on numerous assumptions and reflects management's best estimates at a particular point in time. The dynamic economic environments in which the Company's businesses operate and key economic and business assumptions with respect to projected selling prices, increased competition and introductions of new technologies can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time at which such impairments are recognized. If there are unfavorable changes in these assumptions, particularly changes in the Company's discount rates, earnings multiples and future cash flows, the Company may be required to recognize impairment charges. Information with respect to the Company's significant accounting policies on goodwill and other long-lived assets are included in Note 1, Significant Accounting Policies, to the consolidated financial statements in this Form 10-K.

Annual Goodwill Impairment Testing

Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicators of impairment exist or if a decision is made to sell a business. The valuation date for annual impairment testing is April 30. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a decline in expected cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition or slower growth rates, among others. It is important to note that fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of goodwill.

Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. The Company has several reporting units contained within each operating segment.

The evaluation of impairment involves comparing the current fair value of each reporting unit to its net book value, including goodwill. The Company uses a discounted cash flow model ("DCF model") to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted operating cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including future sales growth, operating margin growth, benefits from restructuring initiatives, tax rates, capital spending, business initiatives, and working capital changes. These assumptions may vary significantly among the reporting units. Operating cash flow forecasts are based on approved business-unit operating plans for the early years and historical relationships and projections in later years. The weighted average cost of capital ("WACC") rate is estimated for geographic regions and applied to the reporting units located within the regions. The Company has not materially changed its methodology for goodwill impairment testing for the years presented. Due to the many variables inherent in the estimation of a reporting unit's fair value and the relative size of the Company's recorded goodwill, differences in assumptions may have a material effect on the results of the Company's impairment analysis.

The performance of the Company's 2012 annual impairment tests did not result in any impairment of the Company's goodwill. The WACC rates utilized in the 2012 analysis ranged from 8.5% to 10.5%. Excluding the Company's Healthcare reporting unit discussed below, if the fair value of each of the Company's other reporting units had been hypothetically reduced by 5% at April 30, 2012 the fair value of those reporting units would still exceed their net book value. If the fair value of each of the Company's reporting units been hypothetically reduced by 10% at April 30, 2012, one reporting unit within the Implants/Endodontics/Healthcare/Pacific Rim segment would have a net book value exceeding its fair value by less than $1.0 million. Goodwill for this reporting unit totals $24.1 million. Had the WACC rate of each of the Company's reporting units been hypothetically increased by 50 basis points at April 30, 2012, the fair value of all reporting units except for the Company's Healthcare reporting unit would still exceed their net book value. The Company's Healthcare reporting unit, a component of the Implants/Endodontics/Healthcare/Pacific Rim operating segment, was created as a part of the Astra Tech acquisition on August 31, 2011. At the date of acquisition, the fair value of the business equaled book value with goodwill for the reporting unit totaling $279.0 million. Given the limited

38



time since the acquisition date, the reporting unit fair value approximates the book value of the reporting unit.

Should the Company's analysis in the future indicate an increase in discount rates or a degradation in the overall markets served by these reporting units, it could result in impairment of the carrying value of goodwill to its implied fair value. There can be no assurance that the Company's future goodwill impairment testing will not result in a charge to earnings.

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 typically in the form of ranges, and the Company records the liabilities at the low point of the ranges, when no other point within the ranges are a better estimate of the probable loss. The ranges established by management are based on analysis made by internal and external legal counsel who consider information known at the time. If the Company determines a liability to be only reasonably possible, it considers the same information to estimate the possible exposure and discloses any material potential liability. These loss contingencies are monitored regularly for a change in fact or circumstance that would require an accrual adjustment. The Company believes it has estimated liabilities for probable losses well in the past; however, the unpredictability of litigation and court decisions could cause a liability to be incurred in excess of estimates. Legal costs related to these lawsuits are expensed as incurred.

Income Taxes

Income taxes are determined using the liability method of accounting for income taxes. The Company's tax expense includes the U.S. and international income taxes plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested.

The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.

Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. The Company establishes a valuation allowance for deferred tax assets for which realization is not likely. As of December 31, 2012, the Company recorded a valuation allowance of $179.7 million against the benefit of certain deferred tax assets of foreign and domestic subsidiaries.

The Company operates within multiple taxing jurisdictions and in the normal course of business is examined in various jurisdictions. The reversal of accruals is recorded when examinations are completed, statutes of limitation are closed or tax laws are changed.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows from operating activities during the year ended December 31, 2012 were $369.7 million compared to $393.5 million during the year ended December 31, 2011. Net income increased $71.0 million in the period ended December 31, 2012, which was due to improved operational performance and an additional benefit from a non-cash tax item. Increased net income was offset by working capital uses of $111.7 million in 2012 when compared to 2011, largely from higher inventory and lower accrued liabilities somewhat offset by deferred taxes.  The Company's cash, cash equivalents and short-term investments increased by $3.0 million during the year ended December 31, 2012 to $80.1 million. 

For the year ended December 31, 2012, the number of days for sales outstanding in accounts receivable improved by one day to 53 days as compared to 54 days in 2011. On a constant currency basis, the number of days of sales in inventory increased by six days at 106 and 100 days for the years ended December 31, 2012 and 2011, respectively, most of the increase was associated with Orthodontic products as supply was replenished.

Investing activities during 2012 include capital expenditures of $92.1 million. Investments of $7.4 million relate to the acquisition of a business and contingent payments on previous acquisitions.

At December 31, 2012, the Company had authorization to maintain up to 34.0 million shares of treasury stock under its stock repurchase program as approved by the Board of Directors. Under this program, the Company purchased approximately 1.0 million shares, or approximately 0.7% of average diluted shares outstanding, during 2012 at an average price of $38.90. As of December