XNAS:SIRO Sirona Dental Systems Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

or

 

¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from             to             

Commission file number 000-22673

Sirona Dental Systems, Inc.

(Exact name of registrant as specified in charter)

 

Delaware   11-3374812

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

30-30 47th Avenue, Suite 500, Long Island City,

New York

  11101
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (718) 482-2011

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  ¨

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  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

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

As of April 30, 2012, the number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, was 55,606,228.


Table of Contents

SIRONA DENTAL SYSTEMS, INC.

FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2012

Index

 

         Page  

Part I.

  Financial Information (Unaudited)      1   

Item 1.

  Financial Statements      1   
  Condensed Consolidated Balance Sheets as of March 31, 2012 and September 30, 2011      1   
  Condensed Consolidated Income Statements for the three and six months ended March 31, 2012 and 2011      3   
  Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income for the three and six months ended March 31, 2012 and 2011      4   
  Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and 2011      5   
  Notes to the Condensed Consolidated Financial Statements      7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      39   

Item 4.

  Controls and Procedures      39   

Part II.

  Other Information      40   

Item 1.

  Legal Proceedings      40   

Item 1A.

  Risk Factors      40   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      40   

Item 3.

  Defaults upon Senior Securities      40   

Item 4.

  Mine Safety Procedures      40   

Item 5.

  Other Information      40   

Item 6.

  Exhibits      43   

Signatures

       46   

Certifications

    

 

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Table of Contents
PART I FINANCIAL INFORMATION (UNAUDITED)

 

ITEM 1. FINANCIAL STATEMENTS

SIRONA DENTAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

     Financial
Statement
Notes
     March 31,
2012
     September 30,
2011
 
            (unaudited)         
            $’000s (except per share amounts)  

ASSETS

        

Current assets

        

Cash and cash equivalents

      $ 77,790      $ 345,859  

Accounts receivable, net of allowance for doubtful accounts of $2,044 and $1,868, respectively

        113,992        97,853  

Inventories, net

     5         100,568        93,028  

Deferred tax assets

     9         26,581        25,014  

Prepaid expenses and other current assets

        16,205        15,477  

Income tax receivable

     9         2,981        4,193  
     

 

 

    

 

 

 

Total current assets

        338,117        581,424  

Property, plant and equipment, net of accumulated depreciation and amortization of $120,907 and $111,832, respectively

        133,696        131,044  

Goodwill

     6         647,456        653,799  

Investments

        2,450        2,453  

Restricted cash

        —           655  

Intangible assets, net of accumulated amortization of $432,899 and $412,428, respectively

     6         319,236        346,442  

Other non-current assets

        9,550        2,884  

Deferred tax assets

     9         7,359        7,427  
     

 

 

    

 

 

 

Total assets

      $ 1,457,864      $ 1,726,128  
     

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Current liabilities

        

Trade accounts payable

      $ 42,985      $ 48,697  

Short-term debt and current portion of long-term debt

     7         2,562        368,403  

Income taxes payable

     9         13,006        6,811  

Deferred tax liabilities

     9         766        1,108  

Accrued liabilities and deferred income

        95,713        110,207  
     

 

 

    

 

 

 

Total current liabilities

        155,032        535,226  

Long-term debt

     8         75,000        —     

Deferred tax liabilities

     9         130,868        138,327  

Other non-current liabilities

        18,062        16,978  

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Pension related provisions

     12         49,126       49,677  

Deferred income

        45,000       50,000  
     

 

 

   

 

 

 

Total liabilities

        473,088       790,208  
     

 

 

   

 

 

 

Shareholders’ equity

       

Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)

        0        0   

Common stock ($0.01 par value; 95,000,000 shares authorized;

       

56,454,256 shares issued and 55,606,089 shares outstanding at Mar. 31, 2012;

56,292,420 shares issued and 55,815,323 shares outstanding at Sept. 30, 2011

        565       563  

Additional paid-in capital

        690,818       685,617  

Treasury stock (at cost)

       

848,167 shares held at cost at Mar. 31, 2012;

477,097 shares held at cost at Sept. 30, 2011

        (36,528     (19,749

Excess of purchase price over predecessor basis

        (49,103     (49,103

Retained earnings

        372,437       303,639  

Accumulated other comprehensive income

     4         3,211       11,309  
     

 

 

   

 

 

 

Total Sirona Dental Systems, Inc. shareholders’ equity

        981,400       932,276  
     

 

 

   

 

 

 

Noncontrolling interests

        3,376       3,644  
     

 

 

   

 

 

 

Total shareholders’ equity

        984,776       935,920  
     

 

 

   

 

 

 

Total liabilities and shareholders’ equity

      $ 1,457,864     $ 1,726,128  
     

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

SIRONA DENTAL SYSTEMS, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

     Financial
Statement

Notes
     Three months ended
March 31,
    Six months ended
March 31,
 
        2012     2011     2012     2011  
            $’000s (except per share
amounts)
    $’000s (except per share
amounts)
 

Revenue

      $ 231,864     $ 214,737     $ 489,980     $ 450,383  

Cost of sales

        107,215       99,048       226,548       204,280  
     

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

        124,649       115,689       263,432       246,103  

Selling, general and administrative expense

        72,667       70,581       146,313       133,904  

Research and development

        13,638       14,145       26,924       27,655  

Provision for doubtful accounts and notes receivable

        728       (47     767       21  

Net other operating income

        (2,500     (2,500     (5,000     (5,000
     

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

        40,116       33,510       94,428       89,523  

Loss/(gain) on foreign currency transactions, net

        1,350       (4,336     3,580       (5,097

(Gain)/loss on derivative instruments

     13         (2,936     (1,554     (2,500     81  

Interest expense, net

        1,014       929       1,917       1,879  

Other expense/(income)

        228       343       490       (523
     

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

        40,460       38,128       90,941       93,183  

Income tax provision

     9         9,305       8,388       20,916       20,500  
     

 

 

   

 

 

   

 

 

   

 

 

 

Net income

        31,155       29,740       70,025       72,683  

Less: Net income attributable to noncontrolling interests

        634       428       1,227       979  
     

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Sirona Dental Systems, Inc.

      $ 30,521     $ 29,312     $ 68,798     $ 71,704  
     

 

 

   

 

 

   

 

 

   

 

 

 

Income per share (attributable to Sirona Dental Systems, Inc. common shareholders):

     10            

- Basic

      $ 0.55     $ 0.53     $ 1.23     $ 1.29  

- Diluted

      $ 0.54     $ 0.51     $ 1.21     $ 1.26  

Weighted average shares - basic

        55,683,043       55,529,619       55,804,656       55,432,272  

Weighted average shares - diluted

        56,916,390       57,221,163       57,025,942       57,056,605  

The accompanying notes are an integral part of these financial statements.

 

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SIRONA DENTAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(UNAUDITED)

 

     Sirona Dental Systems, Inc. Shareholders              
     Common
share
capital
     Number  of
common

shares
issued and
outstanding
    Additional
paid-in
capital
    Treasury
Stock
    Excess of
purchase
price over
predecessor
basis
    Retained
earnings
     Accumulated
other
comprehensive
income/(loss)
    Total
Sirona
Dental
Systems, Inc.
Shareholders
    Noncontrolling
Interests
    Total  
     $’000s (except for amount of common shares issued)  

Balances as of September 30, 2010

   $ 553        55,305,581     $ 652,698     $ (284     (49,103   $ 181,846      $ 19,701     $ 805,411     $ 2,222     $ 807,633  

Issuance of common stock upon exercise of options

     5        435,500       4,709                4,714         4,714  

Stock compensation

          4,479                4,479         4,479  

Tax benefit of stock options exercised

          3,419                3,419         3,419  

Purchase of shares from noncontrolling interest

          —                   —          (487     (487

Comprehensive income:

                      

Net income

                71,704          71,704       979       72,683  

Cumulative translation adjustment

                   28,150       28,150       142       28,292  

Unrecognized elements of pension cost, net of tax

                   (201     (201       (201
  

 

 

      

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     —             —          —          —          71,704        27,949       99,653       1,121       100,774  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of March 31, 2011

   $ 558        55,741,081     $ 665,305     $ (284     (49,103   $ 253,550      $ 47,650     $ 917,676     $ 2,856     $ 920,532  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2011

   $ 563        55,815,323     $ 685,617     $ (19,749     (49,103   $ 303,639      $ 11,309     $ 932,276     $ 3,644     $ 935,920  

Issuance of common stock upon exercise of options and net effect of vesting of RSUs/PSUs

     2        161,836       1,664                1,666         1,666  

Purchase of treasury stock (at cost)

        (371,070       (16,779            (16,779       (16,779

Stock compensation

          4,290                4,290         4,290  

Tax benefit of stock options exercised

          (753              (753       (753

Dividend distribution to noncontrolling interest

                       (1,689     (1,689

Comprehensive income:

                      

Net income

                68,798          68,798       1,227       70,025  

Cumulative translation adjustment

                   (7,599     (7,599     194       (7,405

Unrecognized elements of pension cost, net of tax

                   171       171         171  

Net loss on derivative financial instruments (hedging)

                   (670     (670       (670
  

 

 

      

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     —           —          —          —          —          68,798        (8,098     60,700       1,421       62,121  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of March 31, 2012

   $ 565        55,606,089     $ 690,818     $ (36,528     (49,103   $ 372,437      $ 3,211     $ 981,400     $ 3,376     $ 984,776  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

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Table of Contents

SIRONA DENTAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Six months ended
March 31,
 
     2012     2011  
     $’000s  

Cash flows from operating activities

    

Net income

   $ 70,025     $ 72,683  

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

    

Depreciation and amortization

     38,460       38,957  

(Gain)/loss on derivative instruments

     (2,500     81  

Loss/(gain) on foreign currency transactions

     3,580       (5,097

Deferred income taxes

     (8,147     (7,250

Amortization of debt issuance cost

     351       597  

Share-based compensation expense

     4,290       4,479  

Changes in assets and liabilities

    

Accounts receivable

     (18,606     (27,467

Inventories

     (8,262     (13,280

Prepaid expenses and other current assets

     (6     9,803  

Restricted cash

     646       20  

Other non-current assets

     (234     (735

Trade accounts payable

     (5,431     3,957  

Accrued liabilities and deferred income

     (16,932     (20,663

Other non-current liabilities

     522       234  

Income taxes receivable

     1,208       (1,410

Income taxes payable

     6,140       (292
  

 

 

   

 

 

 

Net cash provided by operating activities

     65,104       54,617  

Cash flows from investing activities

    

Investment in property, plant and equipment

     (18,208     (23,618

Proceeds from sale of property, plant and equipment

     —          1  

Prepayments for other assets

     (4,612     —     

Purchase of intangible assets

     (72     (163

Purchase of long-term investments

     —          (44
  

 

 

   

 

 

 

Net cash used in investing activities

     (22,892     (23,824

The accompanying notes are an integral part of these financial statements.

 

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SIRONA DENTAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Six months ended
March 31,
 
     2012     2011  
     $’000s  

Cash flows from financing activities

    

Repayments of short-term and long-term debt

     (433,093     —     

Proceeds from borrowings

     141,783       —     

Purchase of treasury stock

     (16,779     —     

Debt issuance cost

     (2,765     —     

Dividend distributions to noncontrolling interest

     (1,689     (487

Common shares issued under share based compensation plans

     1,664       4,709  

Tax effect of common shares issued under share based compensation plans

     (1,067     4,135  
  

 

 

   

 

 

 

Net cash (used in)/provided by financing activities

     (311,946     8,357  

Change in cash and cash equivalents

     (269,734     39,150  

Effect of exchange rate change on cash and cash equivalents

     1,665       9,219  

Cash and cash equivalents at beginning of period

     345,859       251,767  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 77,790     $ 300,136  
  

 

 

   

 

 

 

Supplemental information

    

Interest paid

   $ 1,215     $ 2,050  

Interest capitalized

     192       277  

Income taxes paid

     22,794       24,798  

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. General

The Company and its Operations

Sirona Dental Systems, Inc. (“Sirona,” the “Company,” “we,” “us,” and “our” refer to Sirona Dental Systems, Inc. and its consolidated subsidiaries) is the leading manufacturer of high-quality, technologically advanced dental equipment, and is focused on developing, manufacturing and marketing innovative systems and solutions for dentists around the world. We offer a broad range of products across all major segments of the dental technology market including CEREC and our other CAD/CAM systems, digital intra oral and 2D and 3D panoramic imaging systems, treatment centers and instruments. The Company acquired Schick Technologies, Inc. (“Schick”) in 2006, in a transaction accounted for as a reverse acquisition (the “Exchange”), further expanding our global presence and product offerings and strengthening our research and development capabilities. Sirona has served equipment dealers and dentists worldwide for more than 130 years. The Company’s headquarters are located in Long Island City, New York with its primary facility located in Bensheim, Germany, as well as other support, manufacturing, assembling, and sales and service facilities located around the globe.

Basis of Presentation

These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Preparation of the interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions related to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the reporting date and the reported amounts of revenues and expenses for the interim period. Actual results could differ from those estimates. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information not misleading. The year-end condensed consolidated balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

In the opinion of management, all adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the Company’s financial position as of March 31, 2012, and the results of operations and cash flows for the six months ended March 31, 2012 and 2011, respectively, as applicable to interim periods have been made. The results of operations for the six months ended March 31, 2012 are not necessarily indicative of the operating results for the full fiscal year or future periods.

All amounts are reported in thousands of U.S. Dollars ($), except per share amounts or as otherwise disclosed.

Fiscal year

The Company’s fiscal year is October 1 to September 30.

Principles of consolidation

The consolidated financial statements include, after eliminating inter-company transactions and balances, the accounts of Sirona Dental Systems, Inc. and its subsidiaries. The Company applies the equity method of accounting for investments in associated companies over which the Company has significant influence but does not have effective control.

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2. Recently Issued Accounting Pronouncements

Not Yet Adopted

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires that all non-owner changes in shareholders’ equity be presented either (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive statements. ASU 2011-05 is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011, which corresponds to the Company’s fiscal year beginning October 1, 2012, with early adoption permitted. The Company will be required to change its presentation of comprehensive income but has not yet decided which method it will apply.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which simplifies how entities test goodwill for impairment. An entity is now granted the option to first assess qualitative factors to determine whether events or circumstances exist leading to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount without having to immediately perform a two-step impairment test. If an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, the two-step impairment test becomes unnecessary. Otherwise, the two-step impairment test would apply. The option is also granted to skip the qualitative assessment and proceed directly with the regular two-step test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which corresponds to the Company’s fiscal year beginning October 1, 2012, with early adoption permitted. Early adoption is also permitted for annual and interim impairment tests performed as of a date before September 15, 2011, if any entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company decided against early adoption for the fiscal year ending September 30, 2011, since the goodwill impairment testing was substantially completed prior to this date. The Company is evaluating the potential impact of future adoption.

 

3. Employee Share-Based Compensation

ASC 718, Compensation – Stock Compensation, requires that all share based compensation arrangements, including grants of stock option awards to employees, be recognized based on the estimated fair value of the share-based payment award.

Equity Incentive Plan

Stock options, restricted stock shares, restricted stock units (“RSU”), and performance-based stock units (“PSU”) have been issued to employees, directors, and consultants under the Company’s 2006 Equity Incentive Plan (“2006 Plan”). The 2006 Plan provides for granting in total up to 4,550,000 stock options, incentive stock, restricted stock, RSU’s, and PSU’s. The 2006 Plan received stockholder approval at the Company’s Annual Meeting of Stockholders held on February 27, 2007, and was amended on February 25, 2009. To cover the exercise of options and vesting of RSU’s and PSU’s, the Company generally issues new shares from its authorized but unissued share pool. As of March 31, 2012, 1,047,482 shares were available for future grant under the 2006 Plan.

Restricted and Performance-Based Stock Units

In the six months ended March 31, 2012, the Company granted 184,200 RSU’s on November 22, 2011, with a value of $40.03, the closing price at the date of the grant.

RSU’s and PSU’s generally vest in annual tranches over a period of three to four years. The PSU’s were granted to three executive officers of the Company and vest three years from the date of the grant provided the Company achieves earnings targets specified in the grant. All grants expire ten years after the date of the grant. RSU’s and PSU’S do not have voting rights or rights to dividends prior to vesting. The value of each RSU and PSU grant is determined by the closing price at the date of grant. Share-based compensation expense for the entire award is recognized straight-line over the service period of the last separately vesting tranche of the award.

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Stock Options

In the six months ended March 31, 2012, the Company granted 209,375 stock options on November 22, 2011, under the 2006 Plan with a weighted average exercise price of $40.03 and weighted average fair value of $14.15 at the grant date. Grants generally vest over four years. All grants expire ten years after the date of the grant.

The fair value of options granted under the 2006 Plan were estimated using the Black-Scholes option pricing model using assumptions in the following table. The exercise price is equal to the fair market value of Sirona’s stock at the grant date. Expected volatility is based on the Company’s history stock price volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the day of grant and has a term equal to the expected life of the option. The expected life represents the period of time the options are expected to be outstanding based on anticipated grantee behavior. The expected dividend yield is based on the Company’s history of not paying regular dividends in the past and the Company’s current intention not to pay dividends in the foreseeable future.

 

     Six months
ended
March 31,
2012
 

Expected Volatility

     39.17

Risk-free rate

     0.91

Expected term

     5 years   

Expected dividends

     —     

Compensation Costs

The following table summarizes compensation expense charged to income for stock-based compensation and additional information for the three and six months ended March 31, 2012:

 

     Three months ended March 31,      Six months ended March 31,  
     2012      2011      2012      2011  
Compensation Expense    $’000s      $’000s  

Cost of sales

   $ 26      $ 37      $ 58      $ 73  

Selling, general and administrative

     2,143        2,492        4,163        4,314  

Research and development

     28        39        69        92  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,197      $ 2,568      $ 4,290      $ 4,479  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     Three months
ended
    Six months
ended
 
     March 31,
2012
    March 31,
2012
 
     $’000s (except
where noted)
    $’000s (except
where noted)
 

Additional Information

    

Tax Information

    

Income tax benefit recognized for share-based compensation

   $ (631   $ (1,233

Tax benefit realized from option exercises

   $ (1,188   $ (1,963

Future Costs

    

Total compensation cost to be recognized in future periods related to outstanding non-vested share-based compensation awards

     $ 20,319  

Weighted-average period expected for recognition of cost (in years)

       2.9  

Restricted and Performance-Based Stock Unit Activity

The following is a summary of Sirona’s RSU and PSU activity for the six months ended March 31, 2012:

 

     Six months ended March 31, 2012  
     Restricted stock units      Performance-based stock
units
 
     Number
of shares
    Weighted
average
market
price at
grant
     Number
of shares
     Weighted
average
market
price at
grant
 

Outstanding at beginning of period

     462,465     $ 36.99        12,800      $ 36.78  

Reclass

     (200     36.78        200        36.78  

Granted

     184,200       40.04        —           —     

Vested

     (61,148     34.45        —           —     

Forfeited

     (14,933     43.21        —           —     
  

 

 

      

 

 

    

Outstanding at end of period

     570,384       38.06        13,000        36.78  
  

 

 

      

 

 

    

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Stock Option Activity

The following is a summary of Sirona’s stock option activity for the six months ended March 31, 2012:

 

     Six months ended  
     March 31, 2012  
     Number of
options
    Weighted
average
exercise price
 

Outstanding at beginning of period

     2,207,312     $ 15.05  

Granted

     209,375       40.03  

Exercised

     (125,401     13.28  

Forfeited

     (17,314     21.36  
  

 

 

   

Outstanding at end of period

     2,273,972       17.39  
  

 

 

   

thereof vested and exercisable

     1,717,428    
                   $’000s          

Intrinsic value of options exercised

     $ 4,240  

Total fair value of options vested

     $ 1,383  

Aggregate intrinsic value of exercisable stock options

     $ 61,610  

Weighted average remaining contractual life (in years)

       4.7  

 

4. Accumulated Other Comprehensive Income

 

     For the three months ended March 31,  
     2012  
     Cumulative
translation
adjustments
    Unrecognized
elements of
pension cost
    Net (loss)/gain
from hedging
instruments
    Total  
     $’000s  

Balance at beginning of period

   $ (14,234   $ (4,448   $ (439   $ (19,121

Current increase / (decrease)

     22,642       (109       22,533  

Income tax (expense) / benefit

       30         30  

Changes in fair value of derivatives

         (231     (231
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 8,408     $ (4,527   $ (670   $ 3,211  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     For the three months ended March 31,  
     2011  
     Cumulative
translation
adjustments
     Unrecognized
elements of
pension cost
    Net (loss)/gain
from hedging
instruments
     Total  
     $’000s  

Balance at beginning of period

   $ 9,962      $ (2,192   $ —         $ 7,770  

Current increase / (decrease)

     39,984        (143        39,841  

Income tax (expense) / benefit

        39          39  
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 49,946      $ (2,296   $ —         $ 47,650  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     For the six months ended March 31,  
     2012  
     Cumulative
translation
adjustments
    Unrecognized
elements of
pension cost
    Net (loss)/gain
from hedging
instruments
    Total  
     $’000s  

Balance at beginning of period

   $ 16,007     $ (4,698   $ —        $ 11,309  

Current increase / (decrease)

     (7,599     236         (7,363

Income tax (expense) / benefit

       (65       (65

Changes in fair value of derivatives

         (670     (670
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 8,408     $ (4,527   $ (670   $ 3,211  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the six months ended March 31,  
     2011  
     Cumulative
translation
adjustments
     Unrecognized
elements of
pension cost
    Net (loss)/gain
from hedging
instruments
     Total  
     $’000s  

Balance at beginning of period

   $ 21,965      $ (2,264   $ —         $ 19,701  

Current increase / (decrease)

     27,981        (44        27,937  

Income tax (expense) / benefit

        12          12  
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 49,946      $ (2,296   $ —         $ 47,650  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

5. Inventories, net

 

     March 31,     September 30,  
     2012     2011  
     $’000s  

Finished goods

   $ 64,212     $ 59,929  

Work in progress

     15,551       15,761  

Raw materials

     36,349       32,918  
  

 

 

   

 

 

 
     116,112       108,608  

Inventory reserve

     (15,544     (15,580
  

 

 

   

 

 

 
   $ 100,568     $ 93,028  
  

 

 

   

 

 

 

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

6. Intangible Assets and Goodwill

 

            Accumulated         
     Gross      amortization      Net  
     $’000s  

As of March 31, 2012

        

Patents & Licenses

   $ 138,530      $ 79,749      $ 58,781  

Trademarks

     129,433        578        128,855  

Technologies and dealer relationships

     443,831        352,572        91,259  

In-process research & development

     40,341        —           40,341  
  

 

 

    

 

 

    

 

 

 
     752,135        432,899        319,236  

Goodwill

     647,456        —           647,456  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 1,399,591      $ 432,899      $ 966,692  
  

 

 

    

 

 

    

 

 

 
     Gross      Accumulated
amortization
     Net  
     $’000s  

As of September 30, 2011

        

Patents & Licenses

   $ 140,136      $ 74,482      $ 65,654  

Trademarks

     130,706        528        130,178  

Technologies and dealer relationships

     447,687        337,418        110,269  

In-process research & development

     40,341        —           40,341  
  

 

 

    

 

 

    

 

 

 
     758,870        412,428        346,442  

Goodwill

     653,799        —           653,799  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 1,412,669      $ 412,428      $ 1,000,241  
  

 

 

    

 

 

    

 

 

 

The change in the value of goodwill from September 30, 2011 to March 31, 2012 is mainly attributable to (i) foreign currency fluctuations, with an impact of $ (6,313), and (ii) a reduction in goodwill by $ (30) as a result of tax benefits received subsequent to the Exchange for options that were vested and included in the determination of purchase price at the time of that acquisition.

Aside from normal amortization for the current fiscal year, the change in the value of intangible assets, excluding goodwill, from September 30, 2011 to March 31, 2012 is mainly attributable to foreign currency fluctuations, with an impact of $ (2,963).

IPR&D, with a fair value of $40.3 million, represents a single project. The remaining estimated cost to complete the project was $0.6 million as of March 31, 2012. The project is 95% through the development phase; the remaining steps prior to product release are beta testing and regulatory approvals. The percentage of completion for the full project is 90%, and we anticipate project completion in 2012.

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

7. Short-Term Debt and Current Portion of Long-Term Debt

The components of short-term debt are as follows:

 

     March 31,      September 30,  
     2012      2011  
     $’000s  

Prior Senior Term Loans (Tranches A1/A2, variable rate repayable in November 2011)

   $ —         $ 364,817  

Actual interest rate as of September 30, 2011 - Tranche A1: 0.69%

     

Actual interest rate as of September 30, 2011 - Tranche A2: 1.81%

     

Accrued interest on long-term debt

     265        —     

Other short-term debt

     2,297        3,586  
  

 

 

    

 

 

 
   $ 2,562      $ 368,403  
  

 

 

    

 

 

 

 

8. Long-Term Debt

The components of long-term debt are as follows:

 

     March 31,      September 30,  
     2012      2011  
     $’000s  

New Senior Term Loan (“Facility A” Term Loan, variable rate)repayable in two installments in November 2015 and November 2016

   $ 75,265      $ —     

Actual interest rate as of March 31, 2012: 2.10%

     
  

 

 

    

 

 

 
     75,265        —     

Less current portion

     265        —     
  

 

 

    

 

 

 
   $ 75,000      $      
  

 

 

    

 

 

 

Senior Term Loans

New Senior Facilities Agreement

On November 14, 2011, the Company entered into a new senior facilities agreement (the “New Senior Facilities Agreement”) with Sirona Dental Systems, Inc. and all significant subsidiaries of Sirona as original borrowers and original guarantors. As of November 16, 2011, Sirona fully repaid its obligations under the Prior Senior Facilities Agreement. Initial borrowings under the New Senior Facilities Agreement were used to retire the outstanding borrowings under the Company’s previous credit facilities.

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The New Senior Facilities Agreement includes: (1) a term loan in an aggregate principal amount of $75 million (the “Facility A Term Loan”) available to Sirona or Schick NY, as borrower; (2) a 120 million Euro revolving credit facility (“Revolving Facility B”) available to Sirona Dental Systems GmbH and Sirona Dental Services GmbH, as initial borrowers; and (3) a $100 million revolving credit facility (“Revolving Facility C”) available to Sirona or Schick NY, as initial borrowers. The Revolving Facility B is available for borrowing in Euro or any other freely available currency agreed to by the facility agent. The facilities are made available on an unsecured basis. Subject to certain limitations, each European guarantor guarantees the performance of each European borrower, except itself, and each U.S. guarantor guarantees the performance of each U.S. borrower, except itself. There are no cross-border guarantees.

Of the amount borrowed under the Facility A Term Loan, 30% is due on November 16, 2015, and the balance is due on November 16, 2016. The loans under the New Senior Facilities Agreement bear interest of EURIBOR, for Euro-denominated loans, and LIBOR for the other loans, plus an initial margin of 160, 85 and 110 basis points for the Facility A Term Loan, Revolving Facility B and Revolving Facility C, respectively.

The New Senior Facilities Agreement contains a margin ratchet. Pursuant to this provision, which will apply from March 31, 2012 onwards, the applicable margin will vary depending on the Company’s leverage multiple (i.e. the ratio of consolidated total net debt to consolidated adjusted EBITDA as defined in the new Senior Facilities Agreement) between 160 basis points and 215 basis points for the Facility A Term Loan, 85 basis points and 140 basis points for the Revolving Facility B, and 110 basis points and 165 basis points for the Revolving Facility C.

The New Senior Facilities Agreement contains restrictive covenants that limit Sirona’s ability to make loans, to incur additional indebtedness, and to make disposals, subject to agreed-upon exceptions. The Company has agreed to certain financial debt covenants in relation to the financing. The covenants stipulate that the Company must maintain certain ratios in respect of consolidated total net debt to consolidated adjusted EBITDA. If the Company breaches these covenants, the loans will be become repayable on demand.

On November 16, 2011, Sirona entered into 5-year payer interest rate swaps to fully hedge its 3-month LIBOR exposure for the Facility A Term Loan. The terms of the swap reflect the term structure of the underlying loan. The effective nominal interest rate is 1.2775% plus the applicable margin. Settlement of the swaps is required on a quarterly basis.

Debt issuance costs of $2.8 million were incurred in relation to the financing in November 2011 and have been capitalized as deferred charges and are amortized using the effective interest method over the term of the loans.

Prior Senior Facilities Agreement

On November 22, 2006, Sirona Dental Systems, Inc. entered into a Senior Facilities Agreement (the “Prior Senior Facilities Agreement”) as original guarantor, with all significant subsidiaries of Sirona as original borrowers and original guarantors. Initial borrowings under the Prior Senior Facilities Agreement plus excess cash were used to retire the outstanding borrowings under the Company’s previous credit facilities.

The senior debt repayment tranche originally scheduled for November 24, 2011 was repaid on November 16, 2011 in connection with the Company’s New Senior Facilities Agreement, discussed above. At the Company’s current Debt Cover Ratio, the loans under the Prior Senior Facilities Agreement bore interest of EURIBOR, for Euro-denominated loans, and LIBOR for the other loans, plus a margin of 45 basis points for both. For additional information on the Prior Senior Facilities Agreement, see Part I, Item 7 of the Company’s 2011 Annual Report on Form 10-K.

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

9. Income Taxes

For the first six months of fiscal year 2012, an estimated effective tax rate of 23% has been applied, compared to an estimated effective tax rate of 22% for the first six months of fiscal year 2011 and an effective tax rate for fiscal year 2011 of 22.4%.

The Company’s effective tax rate may vary significantly from period to period, and can be influenced by many factors. These factors include, but are not limited to, changes in the mix of earnings in countries with differing statutory tax rates (including as a result of business acquisitions and dispositions), changes in the valuation of deferred tax assets and liabilities, the results of audits and examinations of previously filed tax returns, tax planning initiatives, tax characteristics of income, as well as the timing and deductibility of expenses for tax purposes. The Company’s effective tax rate differs from the United States federal statutory rate of 35% primarily as a result of lower effective tax rates on certain earnings outside of the United States. The distribution of lower-taxed foreign earnings to the U.S. would generally increase the Company’s effective tax rate.

With limited exception, the Company and its subsidiaries are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by taxing authorities for tax returns filed with respect to periods prior to fiscal year 2005.

The company makes no provision for deferred U.S. income taxes on undistributed foreign earnings because as of March 31, 2012, it remained management’s intention to continue to indefinitely reinvest such earnings in foreign operations. In making this determination, the Company also evaluates its expected cash requirements in the United States. These earnings relate to ongoing operations and, as of March 31, 2012, the approximate amount of undistributed foreign earnings amounted to $228 million. Because of the availability of U.S. foreign tax credits as well as other factors, it is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.

 

10. Income per Share

The computation of basic and diluted income per share is as follows:

 

     Three months ended March 31,      Six months ended March 31,  
     2012      2011      2012      2011  
     $’000s (except for share amounts)      $’000s (except for share amounts)  

Net income attributable to Sirona Dental Systems, Inc. common shareholders

   $ 30,521      $ 29,312      $ 68,798      $ 71,704  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - basic

     55,683,043        55,529,619        55,804,656        55,432,272  

Dilutive effect of stock-based compensation

     1,233,347        1,691,544        1,221,286        1,624,333  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - diluted

     56,916,390        57,221,163        57,025,942        57,056,605  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share

           

Basic

   $ 0.55      $ 0.53      $ 1.23      $ 1.29  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.54      $ 0.51      $ 1.21      $ 1.26  
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no stock options excluded from the computation of diluted earnings per share for the three and six months ended March 31, 2012 and March 31, 2011.

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

11. Product warranty

The following table provides the changes in the product warranty accrual for the three and six months ended March 31, 2012 and 2011:

 

     Three months ended March 31,     Six months ended March 31,  
     2012     2011     2012     2011  
     $’000s     $’000s  

Balance at beginning of the period

   $ 8,785     $ 8,458     $ 8,735     $ 8,972  

Accruals for warranties issued during the period

     5,137       4,928       9,540       9,032  

Warranty settlements made during the period

     (5,054     (5,256     (9,082     (9,726

Translation adjustment

     235       424       (90     276  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of the period

   $ 9,103     $ 8,554     $ 9,103     $ 8,554  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

12. Pension Plans

Components of net periodic benefit costs are as follows:

 

     Three months ended March 31,     Six months ended March 31,  
     2012     2011     2012     2011  
     $’000s     $’000s  

Service cost, net

   $ 53     $ 65     $ 108     $ 129  

Interest cost

     613       608       1,244       1,213  

Amortization of actuarial gains

     (77     (40     (157     (80
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 589     $ 633     $ 1,195     $ 1,262  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

13. Derivative Instruments and Hedging Strategies

Our operations are exposed to market risks from changes in foreign currency exchange rates and interest rates. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives.

The Company is exposed to interest rate risk associated with fluctuations in the interest rates on its variable interest rate debt. These fluctuations can have a significant impact on the Company’s earnings, depending upon its interest rate exposure. In order to manage this risk, the Company enters into interest rate swap agreements, when appropriate, based upon market conditions.

Although the U.S. Dollar is Sirona’s reporting currency, its functional currency varies depending on the country of operation, which exposes the Company to market risk associated with foreign currency exchange rate movements. The Company’s policy generally is to hedge major foreign currency transaction exposure through foreign exchange forward contracts.

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Cash Flow Hedges

The Company uses interest rate swaps to convert a portion of its debt’s variable interest rate to a fixed interest rate. These swaps are designated as hedging instruments under ASC 815. Interest rate swaps have been established for 100% of the interest until November 2016. The interest rate swaps fix the LIBOR element of interest payable on 100% of the principal amount of the Facility A Term Loan for defined three month interest periods over the entire term of the loan. The defined interest rates fixed for each three month interest period range from 1.270% to 1.285%. Settlement of the swaps is required on a quarterly basis. The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes.

The Euro is the functional currency for many of Sirona’s subsidiaries, including its primary sales and manufacturing operations in Germany. During the periods under review, the U.S. Dollar/Euro exchange rate fluctuated significantly, thereby impacting Sirona’s financial results. In order to manage foreign currency exposures, the Company enters into foreign exchange forward contracts (USD, AUD, and JPY). The Company enters into forward contracts that are considered to be economic hedges but which are not considered hedging instruments under ASC 815. As of March 31, 2012, these contracts had notional amounts totaling $58.0 million. These agreements are relatively short-term (generally six months).

The fair value carrying amount of the Company’s derivative instruments at March 31, 2012 is described in Note 14 Fair Value Measurements.

The following tables summarize the impact of gains and losses from the fair value changes of the Company’s derivative instruments reported in our condensed consolidated statement of income for the six months ended March 31, 2012 and 2011 were as follows:

Derivatives Designated as Cash Flow Hedging

 

     For the three months ended March 31,      For the six months ended March 31,  
     2012      2011      2012      2011  
     Amount of (Gain)/Loss Recognized in
Accumulated Other Comprehensive  Income
     Amount of (Gain)/Loss Recognized in
Accumulated Other Comprehensive  Income
 
     $’000s      $’000s  

Interest rate swap contracts

   $ 231      $ —         $ 670        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

          For the three months ended March 31,      For the six months ended March 31,  
          2012      2011      2012      2011  
     

Location of

(Gain)/Loss
Recognized in
Income on

Derivative

   Ineffective portion Recognized in Income      Ineffective portion Recognized in Income  
          $’000s      $’000s  

Interest rate swap contracts

   Loss on derivative instruments, net    $ —         $ —         $ 1        —     
     

 

 

    

 

 

    

 

 

    

 

 

 

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Derivatives Not Designated as Hedging Instruments

 

    
          For the three months ended March 31,     For the six months ended March 31,  
          2012     2011     2012     2011  
     

Location of
(Gain)/Loss
Recognized in
Income on
Derivative

   Amount of
(Gain)/Loss
Recognized in
Income on
Derivative
    Amount of
(Gain)/Loss
Recognized in
Income on
Derivative
    Amount of
(Gain)/Loss
Recognized in
Income on
Derivative
    Amount of
(Gain)/Loss
Recognized in
Income on
Derivative
 
          $’000s     $’000s  

Foreign exchange contracts

   (Gain)/loss on derivative instruments, net      (2,936     (1,554     (2,501     81  
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ (2,936   $ (1,554   $ (2,501     81  
     

 

 

   

 

 

   

 

 

   

 

 

 

 

14. Fair Value Measurements

The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures, for assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and the credit risk of the Company and counterparties to the arrangement.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement. ASC 820 establishes and prioritizes the following three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

 

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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Assets/Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and September 30, 2011:

 

     March 31, 2012  
     Quoted
Prices
in Active
Markets for
Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Total  
            Interest     Foreign
Exchange
             
     $’000s  

Assets

           

Derivative Assets

   $ —         $ —        $ 1,204     $ —        $ 1,204  

Liabilities

           

Derivative Liabilities

     —           (670     (354     —          (1,024

Business Acquisition-related liabilities

     —           —          —          (11,071     (11,071
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ —         $ (670   $ 850     $ (11,071   $ (10,891
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
      September 30, 2011  
     Quoted
Prices

in Active
Markets for
Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Total  
            Interest     Foreign
Exchange
             
     $’000s  

Assets

           

Cash Equivalents

(money market funds)

   $ 157      $ —        $ —        $ —        $ 157  

Derivative Assets

     —           —          121       —          121  

Liabilities

           

Derivative Liabilities

     —           —          (1,828     —          (1,828

Business Acquisition-related liabilities

     —           —          —          (10,560     (10,560
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 157      $ —        $ (1,707   $ (10,560   $ (12,110
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The change in the fair value of the business acquisition-related liabilities was $0.2 million and $0.5 million and was recorded in other (income)/expense in the income statement for the three and six months ended March 31, 2012, respectively.

In the Company’s March 31, 2012 and September 30, 2011 Condensed Consolidated Balance Sheet, derivative assets and derivative liabilities are classified as prepaid expenses and other current assets and accrued liabilities and deferred income, respectively.

The Company did not elect the fair value option for any other eligible financial instruments.

Fair value of financial instruments

Financial instruments consist of cash, cash equivalents, accounts receivable, accounts payable, foreign currency forward contracts, interest rate swaps, and certain liabilities related to business acquisitions primarily resulting from earn-out features. The carrying amounts of cash, cash equivalents, accounts receivable and accounts payable approximate their respective fair values because of the short maturity and nature of these items. The fair value of the foreign currency forward contracts and interest rate swaps is determined by the estimated cash flows of those contracts and swaps. The fair values of the acquisition-related liabilities are based on discounted valuations of commercial assumptions made by Company management of stipulations governed in the underlying purchase agreements.

 

15. Segment Reporting

The following tables reflect the results of the Company’s reportable segments under the Company’s management reporting system. The segment performance measure used to monitor segment performance is gross profit (“Segment Performance Measure”) excluding the impact of the acquisition of control of the Sirona business by Sirona Holdings Luxco S.C.A. (“Luxco”) – the former controlling shareholder, a Luxembourg-based holding entity owned by funds managed by Madison Dearborn Partners (“MDP”); Beecken Petty O’Keefe and management of Sirona through a leveraged buyout transaction on June 30, 2005 (the “MDP Transaction”); and the Exchange. This measure is considered by management to better reflect the performance of each segment as it eliminates the need to allocate centrally incurred costs and significant purchase accounting impacts that the Company does not believe are representative of the performance of the segments. Furthermore, the Company monitors performance geographically by region. As the Company manages its business on both a product and a geographical basis, U.S. GAAP requires segmental disclosure based on product information.

 

21


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SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     Three months ended
March 31,
    Six months ended
March 31,
 
     2012     2011     2012     2011  
     $’000s     $’000s  

Revenue External

        

Dental CAD/CAM Systems

   $ 85,561     $ 77,010     $ 169,787     $ 160,384  

Imaging Systems

     74,844       72,285       169,279       148,550  

Treatment Centers

     46,442       41,199       97,701       90,962  

Instruments

     24,684       23,890       52,717       49,967  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     231,531       214,384       489,484       449,863  
  

 

 

   

 

 

   

 

 

   

 

 

 

Electronic center and corporate

     333       353       496       520  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 231,864     $ 214,737     $ 489,980     $ 450,383  
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue Internal

        

Dental CAD/CAM Systems

   $ —        $ —        $ —        $ —     

Imaging Systems

     7       3       12       8  

Treatment Centers

     3       13       5       17  

Instruments

     3,065       2,508       5,962       5,216  

Intercompany elimination

     (3,075     (2,524     (5,979     (5,241
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Electronic center and corporate

     6,098       6,327       12,440       12,229  

Intercompany elimination

     (6,098     (6,327     (12,440     (12,229
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue Total

        

Dental CAD/CAM Systems

   $ 85,561     $ 77,010     $ 169,787     $ 160,384  

Imaging Systems

     74,851       72,288       169,291       148,558  

Treatment Centers

     46,444       41,212       97,705       90,979  

Instruments

     27,749       26,399       58,679       55,183  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     234,605       216,909       495,462       455,104  
  

 

 

   

 

 

   

 

 

   

 

 

 

Electronic center and corporate

     6,431       6,680       12,936       12,749  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 241,036     $ 223,589     $ 508,398     $ 467,853  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment performance measure

        

Dental CAD/CAM Systems

   $ 59,870     $ 55,159     $ 119,612     $ 114,195  

Imaging Systems

     42,601       42,353       96,673       88,487  

Treatment Centers

     18,819       16,426       39,371       38,473  

Instruments

     12,046       12,012       25,449       24,723  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     133,336       125,950       281,105       265,878  
  

 

 

   

 

 

   

 

 

   

 

 

 

Electronic center and corporate

     2,336       2,682       4,618       5,097  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 135,672     $ 128,632     $ 285,723     $ 270,975  
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization expense

        

Dental CAD/CAM Systems

   $ 2,363     $ 1,937     $ 4,508     $ 3,734  

Imaging Systems

     1,377       1,503       2,939       2,871  

Treatment Centers

     1,828       1,683       3,723       3,202  

Instruments

     929       807       1,864       1,570  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     6,497       5,930       13,034       11,377  
  

 

 

   

 

 

   

 

 

   

 

 

 

Electronic center and corporate

     668       288       1,089       568  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 7,165     $ 6,218     $ 14,123     $ 11,945  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Reconciliation of the results of the segment performance measure to the consolidated statements of operations

The following table and discussion provide a reconciliation of the total results of operations of the Company’s business segments under management reporting to the consolidated financial statements. The differences shown between management reporting and U.S. GAAP for the six months ended March 31, 2012 and 2011 are mainly due to the impact of purchase accounting. Purchase accounting effects are not included in gross profit as the Company does not believe these to be representative of the performance of each segment.

Inter-segment transactions are based on amounts which management believes are approximate to the amounts of transactions with unrelated third parties.

 

     Three months ended
March 31,
    Six months ended
March 31,
 
     2012     2011     2012     2011  
     $’000s     $’000s  

Revenue

        

Total segments (external)

   $ 231,531     $ 214,384     $ 489,484     $ 449,863  

Electronic center and corporate

     333       353       496       520  
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated revenue

     231,864       214,737       489,980       450,383  

Depreciation and amortization

        

Total segments

     6,497       5,930       13,034       11,377  

Differences management reporting vs. US GAAP, electronic center and corporate

     12,708       13,820       25,426       27,580  
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated depreciation and amortization

     19,205       19,750       38,460       38,957  

Segment performance measure

        

Total segments

     133,336       125,950       281,105       265,878  

Differences management reporting vs. US GAAP, electronic center and corporate

     (8,687     (10,261     (17,673     (19,775
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated gross profit

     124,649       115,689       263,432       246,103  

Selling, general and administrative expense

     72,667       70,581       146,313       133,904  

Research and development

     13,638       14,145       26,924       27,655  

Provision for doubtful accounts and notes receivable

     728       (47     767       21  

Net other operating income

     (2,500     (2,500     (5,000     (5,000

Loss/(gain) on foreign currency transaction , net

     1,350       (4,336     3,580       (5,097

(Gain)/loss on derivative instruments

     (2,936     (1,554     (2,500     81  

Interest expense, net

     1,014       929       1,917       1,879  

Other expense/(income)

     228       343       490       (523
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

   $ 40,460     $ 38,128     $ 90,941     $ 93,183  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

SIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Concentration of Revenue

A substantial portion of our revenue comes from two distributors accounting for more than 10% of revenues. Patterson Companies, Inc. (“Patterson”) accounted for 27% and 28% of our total revenues for the six months ended March 31, 2012 and 2011, respectively. Henry Schein, Inc. (“Henry Schein”) accounted for 17% and 18% of our total revenues for the six months ended March 31, 2012 and 2011, respectively. Together, these two customers represented 44% and 46% of our total revenues for the six months ended March 31, 2012 and 2011, respectively. The accounts receivable from these two customers totaled $ 56,764 and $ 60,015 for the six months ended March 31, 2012 and 2011, respectively. These revenues were earned across all segments, with a significant portion of revenues with Patterson being earned in the CAD/CAM segment. No other customer accounted for more than 10% of revenues.

 

24


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the Condensed Consolidated Financial Statements included elsewhere in this Report and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth in “Results of Operations” in this Item and elsewhere in this Report. All amounts are reported in thousands of U.S. Dollars ($), except as otherwise disclosed.

This report contains forward-looking statements that involve risk and uncertainties. All statements, other than statements of historical facts, included in this report regarding the Company, its financial position, products, business strategy and plans and objectives of management of the Company for future operations, are forward-looking statements. When used in this report, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “objectives,” “plans” and similar expressions, or the negatives thereof or variations thereon or comparable terminology as they relate to the Company, its products or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of various factors, including, but not limited to, those contained in the “Risk Factors” set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. All forward looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligation to update or revise forward-looking statements which may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events other than required by law.

Overview

Sirona Dental Systems Inc. (“Sirona”, the “Company”, “we”, “us”, and “our” refer to Sirona Dental Systems, Inc. and its consolidated subsidiaries) is the leading manufacturer of high-quality, technologically advanced dental equipment, and is focused on developing, manufacturing and marketing innovative systems and solutions for dentists around the world. The Company is uniquely positioned to benefit from several trends in the global dental industry, such as technological innovation, increased use of CAD/CAM systems in restorative dentistry, the shift to digital imaging, favorable demographic trends and growing patient focus on dental health and cosmetic appearance. The Company has its headquarters in Long Island City, New York and its largest facility in Bensheim, Germany.

Sirona has a long tradition of innovation in the dental industry. The Company introduced the first dental electric drill approximately 130 years ago, the first dental X-ray unit approximately 100 years ago, the first dental computer-aided design/computer-aided manufacturing (CAD/CAM) system 27 years ago, and numerous other significant innovations in dentistry. Sirona continues to make significant investments in research and development (“R&D”), and its track record of innovative and profitable new products continues today with numerous product launches including: the Orthophos XG 3D imaging unit (launched in March 2011), Sinius treatment center (launched in March 2011); CEREC 4.0 software (launched in March 2011); the Galileos and CEREC combination (launched in September 2009), the CEREC AC unit (launched in January 2009), the Galileos Compact 3D imaging system (launched in July 2008), the TENEO treatment center (launched in July 2008) and the CAD/CAM milling unit MC XL (launched in fiscal year 2007).

Sirona manages its business on both a product and geographic basis and has four segments: Dental CAD/CAM Systems, Imaging Systems, Treatment Centers, and Instruments. Sirona has the broadest product portfolio in the industry, and is capable of fully outfitting and integrating a dental practice. Products from each category are marketed in all geographical sales regions.

The Company’s business has grown substantially over the past five years, driven by numerous high-tech product introductions, a continued expansion of its global sales and service infrastructure, strong relationships with key distribution partners, namely Patterson and Henry Schein, and an international dealer network. Due to the international nature of the Company’s business, movements in global foreign exchange rates have a significant effect on financial results.

The U.S. market is the largest individual market for Sirona, followed by Germany. Between fiscal years 2004 and 2011, the Company increased U.S. revenues from $88.2 million to $255.9 million, driven by innovative products, particularly in the CAD/CAM and imaging segments and the Exchange. Patterson made a payment of $100 million to Sirona in July 2005 in exchange for the exclusive distribution rights for CAD/CAM products in the U.S. and Canada until 2017 (the “Patterson exclusivity payment”). The amount received was recorded as deferred income and is being recognized on a straight-line basis commencing at the beginning of the extension of the exclusivity period in fiscal year 2008.

 

25


Table of Contents

In addition to strong U.S. market growth, Sirona has pursued expansion in non-U.S. and non-German markets. Between fiscal years 2004 and 2011, the Company increased revenues in non-U.S. and non-German markets from $190.9 million to $469.0 million. To support this growth, Sirona expanded its local presence and distribution channels by establishing sales and service locations e.g. in Japan, Australia, China, Korea, Italy, and France. The expansion helped to increase market share but also contributed to higher SG&A expenses.

Fiscal year 2011 was a successful year for Sirona. We posted solid revenue growth, with exceptionally strong performance in Germany on the heels of a successful International Dental Show (“IDS”) in Cologne, Germany and a trade-in program for CAD/CAM products. In addition, Sirona’s new product introductions demonstrate our continued focus on innovation and the benefits we accrue from our industry-leading investments in R&D. These factors, plus our ongoing initiatives to expand our global sales and service infrastructure, resulted in strong financial performance for the fiscal year. Revenues in international markets increased 20.5% on a constant currency basis, with particularly strong performance in Europe, led by Germany, and Asia-Pacific. Revenues in the U.S. grew 6.8%. In fiscal year 2011, our net income and our operating cash flow benefitted from this strong revenue growth, but also from operating margin expansion and lower interest expense.

For the six months ended March 31, 2012, revenues increased 10.7% on a constant currency basis over a very strong first half of fiscal year 2011, where revenues grew 14.9% constant currency. Revenues were particularly strong in the Imaging segment as well as in the non-U.S., non-European markets. The resulting $17.3 million gross profit increase was partially offset by a $12.4 million increase in SG&A expenses. The major driver of the increase in SG&A expenses was the continued strategic expansion of our sales and service infrastructure in key growth markets. SG&A expenses in the first half of the prior year were below the average for the full fiscal year due to the continuous build out of our infrastructure throughout the prior year. As a result, operating income increased 5%.

Significant Factors that Affect Sirona’s Results of Operations

The MDP Transaction and the Exchange

On June 30, 2005, Sirona Holdings Luxco S.C.A. (“Luxco”), a Luxembourg-based holding entity owned by funds managed by Madison Dearborn Partners, Beecken Petty O’Keefe, management and employees of Sirona, obtained control over the Sirona business. The transaction was effected by using new legal entities, Sirona Holding GmbH (formerly Blitz 05-118 GmbH) and its wholly owned subsidiary Sirona Dental Services GmbH, to acquire 100% of the interest in Sirona Dental Systems Beteiligungs- und Verwaltungs GmbH, the former parent of the Sirona business through a leveraged buy-out transaction (the “MDP Transaction”). In May 2011, Luxco sold all of its remaining 9,747,480 shares of Sirona common stock pursuant to an underwritten follow-on public offering.

The assets and liabilities acquired in the MDP Transaction and the Exchange were partially stepped up to fair value, and a related deferred tax liability was recorded. The excess of the total purchase price over the fair value of the net assets acquired, including IPR&D, which were expensed at the date of closing of the MDP Transaction and the Exchange, was allocated to goodwill and is subject to periodic impairment testing.

Sirona’s cost of goods sold, R&D, selling, general and administrative (“SG&A”) expense and operating results have been and will continue to be materially affected by depreciation and amortization costs resulting from the step-up to fair value of Sirona’s assets and liabilities.

Fluctuations in U.S. Dollar/Euro Exchange Rate

Although the U.S. Dollar is Sirona’s reporting currency, its functional currencies vary depending on the country of operation. For the six months ended March 31, 2012, approximately 42% of Sirona’s revenue and approximately 70% of its expenses were in Euro. During the periods under review, the U.S. Dollar/Euro exchange rate has fluctuated significantly, thereby impacting Sirona’s financial results. Between October 1, 2010 and March 31, 2012, the U.S. Dollar/Euro exchange rate used to calculate items included in Sirona’s financial statements varied from a low of $1.2662 to a high of $1.4858. Sirona has entered into foreign exchange forward contracts to manage foreign currency exposure. The Company does not apply hedge accounting to such contracts. As of March 31, 2012, these contracts had notional amounts totaling $58.0 million. As these agreements are relatively short-term (generally six months), continued fluctuation in the U.S. Dollar/Euro exchange rate could materially affect Sirona’s results of operations.

 

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Certain revenue information above and under “Results of Operations” below is presented on a constant currency basis. This information is a non-GAAP financial measure. Sirona supplementally presents revenue on a constant currency basis because it believes this information facilitates a comparison of Sirona’s operating results from period to period without regard to changes resulting solely from fluctuations in currency rates. Sirona calculates constant currency revenue growth by comparing current period revenues to prior period revenues with both periods converted at the U.S. Dollar/Euro average foreign exchange rate for each month of the current period. The average exchange rates for the three and six months ended March 31, 2012, were $1.31098 and $1.33027, respectively, and varied from $1.28975 to $1.37045. For the three and six months ended March 31, 2011, an average quarterly exchange rate converting Euro denominated revenues into U.S. Dollars of $1.36709 and $1.36368, respectively, was applied.

Loans made to Sirona under both the Prior Senior Facilities Agreement entered into on November 22, 2006, and the New Senior Facilities Agreement entered into on November 14, 2011, are denominated in the functional currency of the respective borrowers. See “Liquidity and Capital Resources” for a discussion of our Senior Facilities Agreements. However, intra-group loans are denominated in the functional currency of only one of the parties to the loan agreements. Where intra-group loans are of a long-term investment nature, the potential non-cash fluctuations in exchange rates are reflected within other comprehensive income. These fluctuations may be significant in any period due to changes in the exchange rates between the Euro and the U.S. Dollar.

Fluctuations in Quarterly Operating Results

Sirona’s quarterly operating results have varied in the past and are likely to vary in the future. These variations result from a number of factors, many of which are substantially outside its control, including:

 

   

the timing of new product introductions by us and our competitors;

 

   

timing of industry tradeshows, particularly the IDS;

 

   

changes in relationships with distributors;

 

   

developments in government reimbursement policies;

 

   

changes in product mix;

 

   

our ability to supply products to meet customer demand;

 

   

fluctuations in manufacturing costs;

 

   

tax incentives;

 

   

currency fluctuations; and

 

   

general economic conditions, as well as those specific to the healthcare industry and related industries.

Due to the variations which Sirona has experienced in its quarterly operating results, it does not believe that period-to-period comparisons of results of operations of Sirona are necessarily meaningful or reliable as indicators of future performance.

Effective Tax Rate

Sirona’s effective tax rate may vary significantly from period to period and, as a global enterprise, can be influenced by many factors. These factors include, but are not limited to, changes in the mix of earnings in countries with differing statutory tax rates (including the result of business acquisitions and dispositions), changes in the valuation of deferred tax assets and liabilities, the results of audits and examinations of previously filed tax returns, tax planning initiatives, tax characteristics of income, changes in exchange rates, as well as the timing and deductibility of expenses for tax purposes. The Company’s effective tax rate differs from the U.S. federal statutory rate of 35% primarily as a result of lower effective tax rates on certain earnings outside of the Unites States.

 

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The Company makes no provision for deferred U.S. income taxes on undistributed foreign earnings because, as of March 31, 2012, it remained management’s intention to continue to indefinitely reinvest such earnings in foreign operations. The distribution of lower-taxed foreign earnings to the U.S. would generally increase the Company’s effective tax rate.

Results of Operations

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Revenue

Revenue for the three months ended March 31, 2012 was $231.9 million, an increase of $17.1 million, or 8.0%, as compared with the three months ended March 31, 2011. On a constant currency basis, adjusting for the fluctuations in the U.S. Dollar/Euro exchange rate, total revenue increased by 11.1%. By segment, Treatment Centers increased 12.7% (up 17.5% on a constant currency basis), CAD/CAM Systems increased 11.1% (up 13.7% on a constant currency basis), Imaging Systems increased 3.5% (up 6.0% on a constant currency basis), and Instruments increased 3.3% (up 7.7% on a constant currency basis).

We continue to benefit from solid demand for our innovative products and from our increased global sales and service infrastructure. Our products enable dental professionals to improve their clinical results and to increase the profitability of their practices.

Treatment Center as well as CAD/CAM segment revenues benefited from robust growth in many international markets. Imaging Systems revenues faced a challenging year-over-year comparison, since revenues increased 22.2% on a constant currency basis during the same period in the prior year and were particularly strong in the U.S. market. Instrument revenues were up, benefiting from high-volume projects in several international markets.

Revenue in the U.S. for the three months ended March 31, 2012 was up 4.9% compared to the prior year period. Revenue outside the U.S. increased by 9.2%. On a constant currency basis, adjusting for the fluctuations in the U.S. Dollar/Euro exchange rate, these revenues increased by 13.7%. Revenue growth was particularly strong in non-U.S., non-European markets, led by the Asia-Pacific region.

Revenue growth on a constant currency basis was mainly volume driven. Prices in general remained stable, with the exception of pricing pressure and product mix shifts in the 2D and 3D panoramic imaging product lines.

Cost of Sales

Cost of sales for the three months ended March 31, 2012 was $107.2 million, an increase of $8.2 million, or 8.2%, as compared with the three months ended March 31, 2011. Gross profit as a percentage of revenue was 53.8% compared to 53.9% in the prior year period. Cost of sales included amortization and depreciation expense resulting from the step-up to fair values of tangible and intangible assets of $11.0 million as well as non-cash share-based compensation expense of $0.03 million for the three months ended March 31, 2012 compared to amortization and depreciation expense resulting from the step-up to fair values of tangible and intangible assets of $12.5 million and non-cash share-based compensation expense of $0.04 million for the three months ended March 31, 2011. Excluding these amounts, cost of sales as a percentage of revenue was 41.5% for the three months ended March 31, 2012 compared with 40.3% for the three months ended March 31, 2011. Therefore, gross profit as a percentage of revenue was 58.5%, compared to 59.7% in the prior year period. The decrease in the gross profit margin was mainly due to product mix.

Gross Profit

We use gross profit, excluding the impact of the MDP Transaction, the Exchange, and non-cash share-based compensation expense, to monitor segment performance. By segment, gross profit increased in the three months ended March 31, 2012 compared to the three months ended March 31, 2011 as follows: Treatment Centers 14.6%, CAD/CAM Systems 8.5%, Imaging Systems 0.6%, and Instruments 0.3%. The increase in the Treatment Center segment gross profit as well as the gross profit margin was mainly driven by higher volume and a favorable product mix compared to the same prior-

 

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year period. The CAD/CAM segment gross profit margin was below the prior year whereas the absolute gross profit increased due to higher volume. Product mix in our Imaging Systems segment, i.e. solid growth in our 2D and XG 3D product lines, led to a decrease in the gross profit margin. Gross profit for the Instruments segment was on prior year level, with a gross profit margin below the prior year. This decrease in gross profit margin was driven by volume projects. For more information, see Note 15 to our condensed consolidated financial statements for revenues and gross profit by segment for each of the fiscal periods under report.

Selling, General and Administrative

For the three months ended March 31, 2012, SG&A expense was $72.7 million, an increase of $2.1 million, or 3.0%, as compared with the three months ended March 31, 2011. During the quarter, we continued to implement our strategy to invest in the expansion of our sales and service infrastructure to capitalize on opportunities to gain market share and to build up our presence in key growth markets. These investments resulted in increased revenues, particularly in international markets. SG&A expense included amortization and depreciation resulting from the step-up to fair values of tangible and intangible assets of $0.7 million as well as non-cash share-based compensation expense in the amount of $2.1 million for the three months ended March 31, 2012, compared with $0.7 million and $2.5 million, respectively, for the three months ended March 31, 2011. Excluding these amounts, as a percentage of revenue, SG&A expense decreased to 30.1% for the three months ended March 31, 2012, as compared with 31.4% for the three months ended March 31, 2011. SG&A expenses for the three months ended March 31, 2011, included expenses for the biennial IDS in Cologne.

Research and Development

R&D expense for the three months ended March 31, 2012, was $13.6 million, slightly below the prior year.

R&D expense included non-cash share-based compensation expense in the amount of $0.03 million for the three months ended March 31, 2012, compared with $0.04 million for the three months ended March 31, 2011. Excluding this amount, as a percentage of revenue, R&D expense decreased to 5.9% for the three months ended March 31, 2012, compared to 6.6% for the three months ended March 31, 2011.

Net Other Operating Income

Net other operating income for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was as follows:

 

     Three months ended March 31,  
     2012      2011  
     $ millions  

Income resulting from the amortization of the deferred income related to the Patterson exclusivity payment

   $ 2.5      $ 2.5  
  

 

 

    

 

 

 

Loss/(Gain) on Foreign Currency Transactions

The loss on foreign currency transactions for the three months ended March 31, 2012 amounted to $1.4 million and compares to a gain of $4.3 million for the three months ended March 31, 2011. The components of these results are as follows:

 

     Three months ended March 31,  
     2012     2011  
     $ millions  

Unrealized non-cash foreign exchange (gain) from translation adjustment of deferred income related to the Patterson exclusivity payment

   $ (1.7   $ (3.9

Unrealized non-cash foreign exchange (gain) on short-term intra-group loans

     (2.3     (4.3

Loss on other foreign currency transactions

     5.4       3.9  
  

 

 

   

 

 

 
   $ 1.4     $ (4.3
  

 

 

   

 

 

 

 

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Gain on Derivative Instruments

The gain of $2.9 million on derivative instruments for the three months ended March 31, 2012 compared to a gain of $1.6 million for the three months ended March 31, 2011. In both periods, the gain related to unrealized non-cash gains on foreign currency hedges.

Interest Expense

Net interest expense for the three months ended March 31, 2012, was $1.0 million, compared to $0.9 million for the three months ended March 31, 2011. The slight increase resulted from higher interest rates, largely offset by lower overall debt levels.

Income Tax Provision

For the three months ended March 31, 2012 and 2011, Sirona recorded a profit before income taxes of $40.5 million and $38.1 million, respectively. The estimated effective tax rate applied for these periods was 23% and 22%, respectively, compared to an actual effective tax rate of 22.4% in fiscal year 2011. The income tax provision for the three months ended March 31, 2012 and 2011, was $9.3 million and $8.4 million, respectively. The estimated effective tax rate is primarily driven by the expected mix of earnings across different countries.

Net Income

Net income for the three months ended March 31, 2012 was $31.2 million, an increase of $1.4 million, as compared with the three months ended March 31, 2011. Major influencing factors on net income were the increase in revenues and gross profit and lower amortization, which was partly offset by an increase in SG&A expense due to continued investments in the expansion of our global sales and service infrastructure, and a higher estimated effective tax rate. Net income for the three months ended March 31, 2012 included amortization and depreciation expense resulting from the step-up to fair values of intangible and tangible assets related to past business combinations (i.e. the Exchange and the MDP Transaction - deal related amortization and depreciation) of $11.7 million ($9.0 million net of tax), unrealized, non-cash foreign currency gain on the deferred income from the Patterson exclusivity payment of $1.7 million ($1.3 million net of tax), and gain on the revaluation of short-term intra-group loans of $2.3 million ($1.8 million net of tax).

Sirona’s net income for the three months ended March 31, 2011 included deal related amortization and depreciation of assets acquired in past business combinations of $13.2 million ($10.3 million net of tax), currency revaluation gains on the Patterson exclusivity payment of $3.9 million ($3.0 million after tax), and a gain on the revaluation of short-term intra-group loans of $4.3 million ($3.4 million net of tax).

Share-based compensation expense was $2.2 million ($1.7 million net of tax) for the three months ended March 31, 2012 compared to $2.6 million ($2.0 million net of tax) in the prior year period.

Six Months Ended March 31, 2012 Compared to Six Months Ended March 31, 2011

Revenue

Revenue for the six months ended March 31, 2012 was $490.0 million, an increase of $39.6 million, or 8.8%, as compared with the six months ended March 31, 2011. On a constant currency basis, adjusting for the fluctuations in the U.S. Dollar/Euro exchange rate, total revenue increased by 10.7%. By segment, Imaging Systems increased 14.0% (up 15.4% on a constant currency basis), Treatment Centers increased 7.4% (up 10.1% on a constant currency basis), CAD/CAM Systems increased 5.9% (up 7.5% on a constant currency basis), and Instruments increased 5.5% (up 8.1% on a constant currency basis).

We continue to benefit from solid demand for our innovative products and from our increased global sales and service infrastructure. Our products enable dental professionals to improve their clinical results and to increase the profitability of their practices.

Imaging Systems revenues continued to show strong growth, driven by robust demand for our 3D and 2D Orthophos products, with sales particularly strong in international markets. Treatment Center revenues benefited from robust growth in

 

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many international markets. CAD/CAM Systems revenue growth was particularly strong in non-U.S., non-European markets and faced a challenging comparison, as the first quarter in fiscal year 2011 benefited from a very successful trade-in program in Germany. Instrument revenues were up, benefiting from high-volume projects in several international markets.

Revenue in the U.S. for the six months ended March 31, 2012 was up 3.4% compared to the prior year period. Revenue outside the U.S. increased by 11.0%. On a constant currency basis, adjusting for the fluctuations in the U.S. Dollar/Euro exchange rate, these revenues increased by 13.7%. Revenue growth was particularly strong in non-U.S., non-European markets, led by the Asia-Pacific region.

Revenue growth on a constant currency basis was mainly volume driven. Prices in general remained stable, with the exception of pricing pressure and product mix shifts in the 2D and 3D panoramic imaging product lines.

Cost of Sales

Cost of sales for the six months ended March 31, 2012 was $226.5 million, an increase of $22.3 million, or 10.9%, as compared with the six months ended March 31, 2011. Gross profit as a percentage of revenue was 53.8% compared to 54.6% in the prior year period. Cost of sales included amortization and depreciation expense resulting from the step-up to fair values of tangible and intangible assets of $22.3 million as well as non-cash share-based compensation expense of $0.1 million for the six months ended March 31, 2012 compared to amortization and depreciation expense resulting from the step-up to fair values of tangible and intangible assets of $24.9 million and non-cash share-based compensation expense of $0.1 million for the six months ended March 31, 2011. Excluding these amounts, cost of sales as a percentage of revenue was 41.7% for the six months ended March 31, 2012 compared with 39.8% for the six months ended March 31, 2011, and therefore gross profit as a percentage of revenue was 58.3% compared to 60.2% in the prior year period. The decrease in the gross profit margin was mainly due to product mix in all segments.

Gross Profit

We use gross profit, excluding the impact of the MDP Transaction, the Exchange, and non-cash share-based compensation expense, to monitor segment performance. By segment, gross profit increased in the six months ended March 31, 2012 compared to the six months ended March 31, 2011 as follows: Imaging Systems 9.3%, CAD/CAM Systems 4.7%, Instruments 2.9%, and Treatment Centers 2.3%. The increase in gross profit in all segments benefited from volume growth. In all segments, gross profit margins decreased, mainly due to product mix. For more information, see Note 15 to our condensed consolidated financial statements for revenues and gross profit by segment for each of the fiscal periods under report.

Selling, General and Administrative

For the six months ended March 31, 2012, SG&A expense was $146.3 million, an increase of $12.4 million, or 9.3%, as compared with the six months ended March 31, 2011. In the first half of the fiscal year, we continued to implement our strategy to invest in the expansion of our sales and service infrastructure to capitalize on opportunities to gain market share and to build up our presence in key growth markets. SG&A expense included amortization and depreciation resulting from the step-up to fair values of tangible and intangible assets of $1.4 million as well as non-cash share-based compensation expense in the amount of $4.2 million for the six months ended March 31, 2012, compared with $1.3 million and $4.3 million, respectively, for the six months ended March 31, 2011. Excluding these amounts, as a percentage of revenue, SG&A expense increased slightly to 28.7% for the six months ended March 31, 2012, as compared with 28.4% for the six months ended March 31, 2011.

Research and Development

R&D expense for the six months ended March 31, 2012, was $26.9 million, a decrease of $0.7 million, or 2.6%, as compared with the six months ended March 31, 2011. The decrease of R&D expense was primarily driven by the timing of individual projects.

R&D expense included non-cash share-based compensation expense in the amount of $0.1 million for the six months ended March 31, 2012, compared with $0.1 million for the six months ended March 31, 2011. Excluding this amount, as a percentage of revenue, R&D expense decreased to 5.5% for the six months ended March 31, 2012, compared to 6.1% for the six months ended March 31, 2011.

 

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Net Other Operating Income

Net other operating income for the six months ended March 31, 2012 compared to the six months ended March 31, 2011 was as follows:

 

     Six months ended March 31,  
     2012      2011  
     $ millions  

Income resulting from the amortization of the deferred income related to the Patterson exclusivity payment

   $ 5.0      $ 5.0  
  

 

 

    

 

 

 

Loss/(gain) on Foreign Currency Transactions

The loss on foreign currency transactions for the six months ended March 31, 2012 amounted to $3.6 million and compares to a gain of $5.1 million for the six months ended March 31, 2011. The components of these results are as follows:

 

     Six months ended March 31,  
     2012      2011  
     $ millions  

Unrealized non-cash foreign exchange loss/(gain) from translation adjustment of deferred income related to the Patterson exclusivity payment

   $ 0.8      $ (2.5

Unrealized non-cash foreign exchange loss(gain) on short-term intra-group loans

     1.0        (3.0

Loss on other foreign currency transactions

     1.8        0.4  
  

 

 

    

 

 

 
   $ 3.6      $ (5.1
  

 

 

    

 

 

 

(Gain)/Loss on Derivative Instruments

The gain of $2.5 million on derivative instruments for the six months ended March 31, 2012 compared to a loss of $0.1 million for the six months ended March 31, 2011. In both periods, the gain and loss related to unrealized non-cash gains and losses on foreign currency hedges.

 

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Interest Expense

Net interest expense for the six months ended March 31, 2012, was $1.9 million, compared to $1.9 million for the six months ended March 31, 2011. Interest expense remained at prior-year levels despite increasing interest rates due to lower overall debt levels in the current fiscal period.

Income Tax Provision

For the six months ended March 31, 2012 and 2011, Sirona recorded a profit before income taxes of $90.9 million and $93.2 million, respectively. The estimated effective tax rate applied for these periods was 23% and 22%, respectively, compared to an actual effective tax rate of 22.4% in fiscal year 2011. The income tax provision for the six months ended March 31, 2012 and 2011, was $20.9 and $20.5 million, respectively. The estimated effective tax rate is primarily driven by the expected mix of earnings across different countries.

Net Income

Net income for the six months ended March 31, 2012 was $70.0 million, a decrease of $2.7 million, as compared with the six months ended March 31, 2011. Major influencing factors on net income were the increase in revenues and gross profit and lower amortization, which was more than offset by an increase in SG&A expense due to continued investments in the expansion of our global sales and service infrastructure, foreign currency transaction losses, and a higher estimated effective tax rate. Net income for the six months ended March 31, 2012 included amortization and depreciation expense resulting from the step-up to fair values of intangible and tangible assets related to past business combinations (i.e. the Exchange and the MDP Transaction - deal related amortization and depreciation) of $23.7 million ($18.2 million net of tax), unrealized, non-cash foreign currency loss on the deferred income from the Patterson exclusivity payment of $0.8 million ($0.6 million net of tax), and loss on the revaluation of short-term intra-group loans of $1.0 million ($0.8 million net of tax).

Sirona’s net income for the six months ended March 31, 2011 included deal related amortization and depreciation of assets acquired in past business combinations of $26.3 million ($20.5 million net of tax), currency revaluation gains on the Patterson exclusivity payment of $2.5 million ($1.9 million after tax), and a gain on the revaluation of short-term intra-group loans of $3.0 million ($2.3 million net of tax).

Share-based compensation expense was $4.3 million ($3.3 million net of tax) for the six months ended March 31, 2012 compared to $4.5 million ($3.5 million net of tax) in the prior year period.

 

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Liquidity and Capital Resources

Historically, Sirona’s principal uses of cash, apart from operating requirements, including research and development expenses, have been for interest payments, debt repayment, and acquisitions. Operating capital expenditures typically are approximately equal to operating depreciation (excluding any effects from the increased amortization and depreciation expense resulting from the step-up to fair values of Sirona’s and Schick’s assets and liabilities required under purchase accounting). These expenditures may temporarily exceed operating depreciation for larger-scale infrastructure and other investment activities that the Company may undertake from time to time. The Company also uses cash for occasional purchases of treasury shares pursuant to stock repurchase programs. Sirona believes that its operating cash flows, available cash, and available financing will be sufficient to fund its working capital needs, research and development expenses, and anticipated capital expenditures for the foreseeable future.

Cash and cash equivalents held by our foreign subsidiaries generally are not subject to restrictions prohibiting such amounts from being available in the United States. Undistributed foreign earnings as of March 31, 2012 amounted to approximately $228 million. The distribution of lower-taxed foreign earnings to the United States, however, would generally increase our effective tax rate. It is management’s intention to continue to indefinitely reinvest such earnings in foreign operations.

On November 14, 2011, the Company entered into a new senior facilities agreement (the “New Senior Facilities Agreement’) with Sirona Dental Systems, Inc. and all significant subsidiaries of Sirona as original borrowers and original guarantors, and as of November 16, 2011, Sirona fully repaid its obligations under the Prior Senior Facilities Agreement. Initial borrowings under the New Senior Facilities Agreement were used to retire the outstanding borrowings under the Company’s previous credit facilities. Please see “New Senior Facilities Agreement” within this section and Note 8 to our consolidated financial statements for a complete description of this New Senior Facilities Agreement.

The New Senior Facilities Agreement contains restrictive covenants that limit Sirona’s ability to make loans, to incur additional indebtedness, and to make disposals, subject to agreed exceptions. The Company has agreed to certain financial debt covenants in relation to the financing. The covenants stipulate that the Company must maintain certain ratios in respect of consolidated total net debt to consolidated adjusted EBITDA. If the Company breaches any of the covenants, the loans will become repayable on demand.

The financial covenants require that the Company maintain a debt coverage ratio (“Debt Cover Ratio”) of consolidated total net debt to consolidated adjusted EBITDA (“Consolidated Adjusted EBITDA”), determined on the basis of the last twelve months, of no more than 3.00 to 1. The Company is required to determine its compliance with the covenants as of September 30 and March 31. As calculated in accordance with the New Senior Facilities Agreement, the Company did not have any net debt after the repayment of balances drawn under the Revolving Facility B in the second quarter of fiscal year 2012, and its Debt Cover Ratio was not meaningful in the absence of net debt:

 

     March 31, 2012  
     $’000s  

Consolidated Total Net Debt

   $ (228

Consolidated Adjusted EBITDA

   $ 266,099  

Debt Cover Ratio

     not meaningful   

as set by covenants (less than or equal to)

     3.00  

 

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Cash Flows

 

     Six months ended March 31,  
     2012     2011  
     $’000s  

Net cash provided by operating activities

   $ 65,104     $ 54,617  

Net cash used in investing activities

     (22,892     (23,824

Net cash (used in)/provided by financing activities

     (311,946     8,357  
  

 

 

   

 

 

 

(Decrease)/increase in cash during the period

   $ (269,734   $ 39,150  
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

Net cash provided by operating activities represents net cash from operations, returns on investments, and payments for interest and taxation.

Net cash provided by operating activities was $65.1 million for the six months ended March 31, 2012 compared to $54.6 million for the six months ended March 31, 2011. The primary contributing factor to the increase in cash provided by operating cash flows in the six months ended March 31, 2012 was improved working capital performance and slightly lower tax payments.

Net Cash Used in Investing Activities

Net cash used in investing activities represents cash used for capital expenditures in the normal course of operating activities, financial investments, acquisitions and long-lived asset disposals. The primary contributors to the investing cash outflow in the six months ended March 31, 2012 were capital expenditures in the course of normal operating activities. For the six months ended March 31, 2011, net cash used in investing activities represented capital expenditures in the course of normal operating activities as well as for the construction of the Center of Innovation in Bensheim, Germany.

Net Cash (Used in) / Provided by Financing Activities

Net cash used in financing activities was $311.9 million for the six months ended March 31, 2012, compared to net cash provided by financing activities of $8.4 million for the six months ended March 31, 2011. Net cash used in financing activities in the six months ended March 31, 2012 results from repayment of our prior senior term loans in November 2011, partly offset by proceeds from borrowings under new senior term loans and revolving facilities. Net cash used in financing activities in the six months ended March 31, 2011 primarily relates to exercises of options previously granted in the Company’s stock-based compensation activities.

Capital Resources

Senior Facilities Agreement

New Senior Facilities Agreement

On November 14, 2011, the Company entered into the New Senior Facilities Agreement with Sirona Dental Systems, Inc. and all significant subsidiaries of Sirona as original borrowers and original guarantors. As of November 16, 2011, Sirona fully repaid its obligations under the Prior Senior Facilities Agreement. Initial borrowings under the New Senior Facilities Agreement were used to retire the outstanding borrowings under the Company’s previous credit facilities.

The New Senior Facilities Agreement includes: (1) a term loan in an aggregate principal amount of $75 million (the “Facility A Term Loan”) available to Sirona or Schick NY, as borrower; (2) a 120 million Euro revolving credit facility (“Revolving Facility B”) available to Sirona Dental Systems GmbH and Sirona Dental Services GmbH, as initial borrowers;

 

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and (3) a $100 million revolving credit facility (“Revolving Facility C”) available to Sirona or Schick NY, as initial borrowers. The Revolving Facility B is available for borrowing in Euro or any other freely available currency agreed to by the facility agent. The facilities are made available on an unsecured basis. Subject to certain limitations, each European guarantor guarantees the performance of each European borrower, except itself, and each U.S. guarantor guarantees the performance of each U.S. borrower, except itself. There are no cross-border guarantees.

Of the amount borrowed under the Facility A Term Loan, 30% is due on November 16, 2015, and the balance is due on November 16, 2016. The loans under the New Senior Facilities Agreement bear interest of EURIBOR, for Euro-denominated loans, and LIBOR for the other loans, plus an initial margin of 160, 85 and 110 basis points for the Facility A Term Loan, Revolving Facility B and Revolving Facility C, respectively.

The New Senior Facilities Agreement contains a margin ratchet. Pursuant to this provision, which will apply from March 31, 2012 onwards, the applicable margin will vary depending on the Company’s leverage multiple (i.e. the ratio of consolidated total net debt to consolidated adjusted EBITDA as defined in the new Senior Facilities Agreement) between 160 basis points and 215 basis points for the Facility A Term Loan, 85 basis points and 140 basis points for the Revolving Facility B, and 110 basis points and 165 basis points for the Revolving Facility C.

The New Senior Facilities Agreement contains restrictive covenants that limit Sirona’s ability to make loans, to incur additional indebtedness, and to make disposals, subject to agreed-upon exceptions. The Company has agreed to certain financial debt covenants in relation to the financing. The covenants stipulate that the Company must maintain certain ratios in respect of consolidated total net debt to consolidated adjusted EBITDA. If the Company breaches these covenants, the loans will be become repayable on demand.

On November 16, 2011, Sirona entered into 5-year payer interest rate swaps to fully hedge its 3-month LIBOR exposure for the Facility A Term Loan. The terms of the swap reflect the term structure of the underlying loan. The effective nominal interest rate is 1.2775% plus the applicable margin. Settlement of the swaps is required on a quarterly basis.

Debt issuance costs of $2.8 million were incurred in relation to the financing in November 2011 and have been capitalized as deferred charges and are amortized using the effective interest method over the term of the loans.

Prior Senior Facilities Agreement

On November 22, 2006, Sirona Dental Systems, Inc. entered into a Senior Facilities Agreement (the “Prior Senior Facilities Agreement”) as original guarantor, with all significant subsidiaries of Sirona as original borrowers and original guarantors. Initial borrowings under the Prior Senior Facilities Agreement plus excess cash were used to retire the outstanding borrowings under the Company’s previous credit facilities.

The senior debt repayment tranche originally scheduled for November 24, 2011 was repaid on November 16, 2011 in connection with the Company’s New Senior Facilities Agreement, discussed above. At the Company’s current Debt Cover Ratio, the loans under the Prior Senior Facilities Agreement bore interest of EURIBOR, for Euro-denominated loans, and LIBOR for the other loans, plus a margin of 45 basis points for both. For additional information on the Prior Senior Facilities Agreement, see Part I, Item 7 of the Company’s 2011 Annual Report on Form 10-K.

 

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Other Financial Data

 

     Three months ended March 31,      Six months ended March 31,  
     2012      2011      2012      2011  
     $’000s      $’000s  

Net income attributable to Sirona Dental Systems, Inc.

   $ 30,521      $ 29,312      $ 68,798      $ 71,704  

Net interest expense

     1,014        929        1,917        1,879  

Provision for income taxes

     9,305        8,388        20,916        20,500  

Depreciation

     7,165        6,218        14,123        11,945  

Amortization

     12,040        13,532        24,337        27,012  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 60,045      $ 58,379      $ 130,091      $ 133,040  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA is a non-GAAP financial measure that is reconciled to net income, its most directly comparable U.S. GAAP measure, in the accompanying financial tables. EBITDA is defined as net earnings before interest, taxes, depreciation, and amortization. Sirona’s management utilizes EBITDA as an operating performance measure in conjunction with U.S. GAAP measures, such as net income and gross margin calculated in conformity with U.S. GAAP. EBITDA should not be considered in isolation or as a substitute for net income prepared in accordance with U.S. GAAP. There are material limitations associated with making the adjustments to Sirona’s earnings to calculate EBITDA and using this non-GAAP financial measure. For instance, EBITDA does not include:

 

   

interest expense, and because Sirona has borrowed money in order to finance its operations, interest expense is a necessary element of its costs and ability to generate revenue;

 

   

depreciation and amortization expense, and because Sirona uses capital and intangible assets, depreciation and amortization expense is a necessary element of its costs and ability to generate revenue; and

 

   

tax expense, and because the payment of taxes is part of Sirona’s operations, tax expense is a necessary element of costs and impacts Sirona’s ability to operate.

In addition, other companies may define EBITDA differently. EBITDA, as well as the other information in this filing, should be read in conjunction with Sirona’s consolidated financial statements and footnotes.

In addition to EBITDA, the accompanying financial tables also set forth certain supplementary information that Sirona believes is useful for investors in evaluating Sirona’s underlying operations. This supplemental information includes gains/losses recorded in the periods presented which relate to the early extinguishment of debt, share based compensation, revaluation of the U.S. Dollar-denominated exclusivity payment and borrowings where the functional currency is the Euro, and the Exchange. Sirona’s management believes that these items are either nonrecurring or non-cash in nature, and should be considered by investors in assessing Sirona’s financial condition, operating performance and underlying strength.

Sirona’s management uses EBITDA together with this supplemental information as an integral part of its reporting and planning processes and as one of the primary measures to, among other things:

 

  (i) monitor and evaluate the performance of Sirona’s business operations;

 

  (ii) facilitate management’s internal comparisons of the historical operating performance of Sirona’s business operations;

 

  (iii) facilitate management’s external comparisons of the results of its overall business to the historical operating performance of other companies that may have different capital structures and debt levels;

 

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  (iv) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and

 

  (v) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.

Sirona believes that EBITDA and the supplemental information provided is useful to investors as it provides them with disclosures of Sirona’s operating results on the same basis as that used by Sirona’s management.

Supplemental Information

 

     Three months ended March 31,     Six months ended March 31,  
     2012     2011     2012      2011  
     $’000s     $’000s  

Share-based compensation

   $ 2,197     $ 2,568     $ 4,290      $ 4,479  

Unrealized, non-cash (gain)/loss on revaluation of the carrying value of the $-denominated exclusivity fee

     (1,742     (3,878     761        (2,470

Unrealized, non-cash (gain)/loss on revaluation of the carrying value of short-term intra-group loans

     (2,303     (4,347     1,044        (3,001
  

 

 

   

 

 

   

 

 

    

 

 

 
   $ (1,848   $ (5,657   $ 6,095      $ (992
  

 

 

   

 

 

   

 

 

    

 

 

 

Recent Accounting Pronouncements Not Yet Adopted

Please see Note 2 to the unaudited condensed consolidated financial statements for any discussions of recently issued accounting pronouncements that have not yet been adopted.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the Company’s market risk as reported under Part II, Item 7A in its Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer (principal executive officer) and chief financial officer (principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of March 31, 2012. Based upon this evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2012, the Company’s disclosure controls and procedures are effective. Our disclosure controls and procedures are designed to ensure that information relating to the Company, including our consolidated subsidiaries, that is required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Commission’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2012, has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

PART II

 

ITEM 1. LEGAL PROCEEDINGS

There are currently no material legal proceedings pending.

 

ITEM 1A. RISK FACTORS

There are no material changes from risk factors as previously disclosed by the Company in Part I, Item 1A of its Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The number and average price of shares repurchased during the three months ended March 31, 2012 are set forth in the table below:

 

Period

   Total Number
of Shares
Purchased
     Average
Price Paid
per Share
     Total Number
of Shares
Purchased as
Part of a
Publicly
Announced
Program (1)
     Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Program
 
     $’000s (except per share amounts)  

January 1 - January 31, 2012

     —           —           —           73,515  

February 1 - February 29, 2012

     99,426        47.22        99,426        68,820  

March 1 - March 31, 2012

     103,413        48.96        103,413        63,757  
  

 

 

       

 

 

    
     202,839           202,839     
  

 

 

       

 

 

    

 

(1) In August 2011, the Company’s Board of Directors announced a stock repurchase program to purchase up to an aggregate of $100,000,000 of its common stock in open market or privately-negotiated transactions effective through September 2014. The Company is not obligated to acquire any particular amount of common stock and may suspend the program at any time at its discretion without prior notice.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

The following Exhibits are included in this report:

 

Exhibit No.

  

Item Title

31.1      Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2      Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1      Section 1350 Certification of Chief Executive Officer.
32.2      Section 1350 Certification of Chief Financial Officer.
101.INS    XBRL Instance Document*
101.SCH    XBRL Taxonomy Extension Schema Document*
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB    XBRL Extension Labels Linkbase Document*
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document*

 

* Attached as Exhibit 101 to this report are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2012 and September 30, 2011, (ii) Condensed Consolidated Statements of Income for the six months ended March 31, 2012 and 2011, (iii) Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the six months ended March 31, 2012 and 2011, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and 2011, and (v) Notes to Consolidated Condensed Financial Statements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.


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SIGNATURE

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

Date: May 4, 2012

 

Sirona Dental Systems, Inc.
By:  

/s/ Simone Blank

 

Simone Blank, Executive Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

(Duly authorized signatory)

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