XNAS:XRAY DENTSPLY International Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
OR
 
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to _______________
 
Commission File Number 0-16211
 
DENTSPLY International Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
39-1434669
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
 
221 West Philadelphia Street, York, PA
 
17405-0872
(Address of principal executive offices)
  
(Zip Code)
 
(717) 845-7511
(Registrant’s telephone number, including area code)

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

Yes   x No   o

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

Yes   x No   o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   

Yes   o No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  At July 27, 2012, DENTSPLY International Inc. had 141,784,960 shares of Common Stock outstanding, with a par value of $.01 per share.




DENTSPLY International Inc.

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net sales
$
762,994

 
$
609,443

 
$
1,479,407

 
$
1,179,946

Cost of products sold
355,525

 
294,592

 
679,188

 
565,111

 
 
 
 
 
 
 
 
Gross profit
407,469

 
314,851

 
800,219

 
614,835

Selling, general and administrative expenses
296,034

 
210,984

 
600,388

 
411,751

Restructuring and other costs
2,528

 
6,863

 
3,765

 
7,496

 
 
 
 
 
 
 
 
Operating income
108,907

 
97,004

 
196,066

 
195,588

 
 
 
 
 
 
 
 
Other income and expenses:
 

 
 

 
 

 
 

Interest expense
14,584

 
5,570

 
30,366

 
11,913

Interest income
(2,011
)
 
(2,430
)
 
(4,308
)
 
(4,258
)
Other expense (income), net
748

 
1,434

 
1,230

 
1,504

 
 
 
 
 
 
 
 
Income before income taxes
95,586

 
92,430

 
168,778

 
186,429

Provision for income taxes
14,875

 
17,957

 
29,590

 
41,669

Equity in net earnings (loss) of unconsolidated affiliated company
1,329

 
917

 
(2,919
)
 
93

 
 
 
 
 
 
 
 
Net income
82,040

 
75,390

 
136,269

 
144,853

Less: Net income attributable to noncontrolling interests
1,276

 
1,154

 
2,220

 
1,533

 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
80,764

 
$
74,236

 
$
134,049

 
$
143,320

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.57

 
$
0.53

 
$
0.95

 
$
1.01

Diluted
$
0.56

 
$
0.52

 
$
0.93

 
$
1.00

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
141,737

 
141,052

 
141,729

 
141,331

Diluted
143,863

 
143,373

 
143,908

 
143,694


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

3




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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net income
$
82,040

 
$
75,390

 
$
136,269

 
$
144,853

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(178,746
)
 
62,051

 
(45,275
)
 
152,767

Net gain (loss) on derivative financial instruments
47,089

 
(36,391
)
 
14,957

 
(63,403
)
Net unrealized holding (loss) gain on available-for-sale securities
(7,954
)
 
(6,233
)
 
15,046

 
(2,031
)
Pension liability adjustments
1,726

 
(1,500
)
 
1,666

 
(2,033
)
Total other comprehensive (loss) income
(137,885
)
 
17,927

 
(13,606
)
 
85,300

 
 
 
 
 
 
 
 
Total comprehensive (loss) income
(55,845
)
 
93,317

 
122,663

 
230,153

 
 
 
 
 
 
 
 
Less: Comprehensive (loss) income attributable
 

 
 

 
 

 
 

to noncontrolling interests
(928
)
 
3,833

 
1,356

 
7,476

 
 
 
 
 
 
 
 
Comprehensive (loss) income attributable to
 
 
 
 
 
 
 
DENTSPLY International
$
(54,917
)
 
$
89,484

 
121,307

 
222,677

 


 


 


 



See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

4




DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
June 30, 2012
 
December 31, 2011
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
53,210

 
$
77,128

Accounts and notes receivables-trade, net
462,233

 
427,709

Inventories, net
403,195

 
361,762

Prepaid expenses and other current assets
186,544

 
146,304

 
 
 
 
Total Current Assets
1,105,182

 
1,012,903

 
 
 
 
Property, plant and equipment, net
587,285

 
591,445

Identifiable intangible assets, net
947,747

 
791,100

Goodwill, net
2,036,084

 
2,190,063

Other noncurrent assets, net
194,458

 
169,887

 
 
 
 
Total Assets
$
4,870,756

 
$
4,755,398

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
145,850

 
$
149,117

Accrued liabilities
347,906

 
289,201

Income taxes payable
12,646

 
9,054

Notes payable and current portion of long-term debt
241,801

 
276,701

 
 
 
 
Total Current Liabilities
748,203

 
724,073

 
 
 
 
Long-term debt
1,482,783

 
1,490,010

Deferred income taxes
334,673

 
249,822

Other noncurrent liabilities
316,098

 
407,342

 
 
 
 
Total Liabilities
2,881,757

 
2,871,247

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity:
 

 
 

Preferred stock, $.01 par value; .25 million shares authorized; no shares issued

 

Common stock, $.01 par value; 200.0 million shares authorized; 162.8 million shares issued at June 30, 2012 and December 31, 2011.
1,628

 
1,628

Capital in excess of par value
230,862

 
229,687

Retained earnings
2,654,044

 
2,535,709

Accumulated other comprehensive loss
(203,712
)
 
(190,970
)
Treasury stock, at cost, 21.0 million and 21.1 million shares at June 30, 2012 and December 31, 2011, respectively.
(731,253
)
 
(727,977
)
Total DENTSPLY International Equity
1,951,569

 
1,848,077

 
 
 
 
Noncontrolling interests
37,430

 
36,074

 
 
 
 
Total Equity
1,988,999

 
1,884,151

 
 
 
 
Total Liabilities and Equity
$
4,870,756

 
$
4,755,398


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

5



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Six Months Ended
June 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
136,269

 
$
144,853

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

 
 

Depreciation
40,357

 
32,359

Amortization
28,014

 
4,736

Amortization of deferred financing costs
2,391

 

Deferred income taxes
(4,432
)
 
6,894

Share-based compensation expense
11,029

 
10,316

Restructuring and other costs - noncash
2,105

 
(787
)
Stock option income tax benefit
(5,163
)
 
(6,217
)
Net interest expense on derivatives with an other-than-insignificant financing element
1,135

 
1,545

Equity in earnings from unconsolidated affiliates
2,919

 
(93
)
Other non-cash expense
(4,237
)
 
(955
)
Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
(41,461
)
 
(40,357
)
Inventories, net
(47,034
)
 
(8,368
)
Prepaid expenses and other current assets
(19,455
)
 
(1,927
)
Other noncurrent assets, net
(3,497
)
 
(4,519
)
Accounts payable
(1,320
)
 
4,129

Accrued liabilities
(3,244
)
 
9,051

Income taxes payable
5,423

 
12,942

Other noncurrent liabilities
3,596

 
2,907

 
 
 
 
Net cash provided by operating activities
103,395

 
166,509

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(42,986
)
 
(25,338
)
Cash paid for acquisitions of businesses, net of cash acquired

 
(20,087
)
Payments on settlements of net investment hedges
(14,221
)
 

Expenditures for identifiable intangible assets
(188
)
 
(332
)
Purchase of Company-owned life insurance policies
(1,577
)
 

Proceeds from sale of property, plant and equipment, net
465

 
175

 
 
 
 
Net cash used in investing activities
(58,507
)
 
(45,582
)
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
Net change in short-term borrowings
(35,181
)
 
(177
)
Cash paid for treasury stock
(38,840
)
 
(79,500
)
Cash dividends paid
(15,706
)
 
(14,312
)
Cash paid for contingent consideration on prior acquisitions
(1,781
)
 
(1,780
)
Cash paid for acquisition of noncontrolling interests of consolidated subsidiaries

 
(16,431
)
Proceeds from long-term borrowings

 
38,254

Repayments of long-term borrowings

 
(2,403
)
Payment on terminated derivative instruments

 

Proceeds from exercise of stock options
20,066

 
33,993

Excess tax benefits from share-based compensation
5,163

 
6,217

Net interest payments on derivatives with an other-than-insignificant financing element
(1,135
)
 
(1,545
)
 
 
 
 
Net cash used in financing activities
(67,414
)
 
(37,684
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(1,392
)
 
48,429

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(23,918
)
 
131,672

 
 
 
 
Cash and cash equivalents at beginning of period
77,128

 
540,038

 
 
 
 
Cash and cash equivalents at end of period
$
53,210

 
$
671,710

 
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

6



DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATMENTS OF CHANGES IN EQUITY
(In thousands)
(unaudited)

 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total DENTSPLY
International
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2010
$
1,628

 
$
204,902

 
$
2,320,350

 
$
24,156

 
$
(711,650
)
 
$
1,839,386

 
$
70,526

 
$
1,909,912

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
143,320

 

 

 
143,320

 
1,533

 
144,853

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
 

 
 

 
 

 
79,357

 
 

 
79,357

 
5,943

 
85,300

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interest

 
22,394

 

 

 

 
22,394

 
(38,825
)
 
(16,431
)
Exercise of stock options

 
(11,578
)
 

 

 
45,571

 
33,993

 

 
33,993

Tax benefit from stock options exercised

 
6,217

 

 

 

 
6,217

 

 
6,217

Share based compensation expense

 
10,362

 

 

 

 
10,362

 

 
10,362

Funding of Employee Stock Ownership Plan

 
379

 

 

 
2,595

 
2,974

 

 
2,974

Treasury shares purchased

 

 

 

 
(79,500
)
 
(79,500
)
 

 
(79,500
)
Dividends paid by noncontrolling interest

 

 

 

 

 

 
(174
)
 
(174
)
RSU distributions

 
(5,696
)
 

 

 
3,539

 
(2,157
)
 

 
(2,157
)
RSU dividends

 
91

 
(91
)
 

 

 

 

 

Cash dividends ($0.10 per share)

 

 
(14,116
)
 

 

 
(14,116
)
 

 
(14,116
)
Balance at June 30, 2011
$
1,628

 
$
227,071

 
$
2,449,463

 
$
103,513

 
$
(739,445
)
 
$
2,042,230

 
$
39,003

 
$
2,081,233


 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total DENTSPLY
International
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2011
$
1,628

 
$
229,687

 
$
2,535,709

 
$
(190,970
)
 
$
(727,977
)
 
$
1,848,077

 
$
36,074

 
$
1,884,151

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
134,049

 

 

 
134,049

 
2,220

 
136,269

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss

 

 

 
(12,742
)
 

 
(12,742
)
 
(864
)
 
(13,606
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options

 
(7,158
)
 

 

 
27,224

 
20,066

 

 
20,066

Tax benefit from stock options exercised

 
5,163

 

 

 

 
5,163

 

 
5,163

Share based compensation expense

 
11,029

 

 

 

 
11,029

 

 
11,029

Funding of Employee Stock Ownership Plan

 
370

 

 

 
3,272

 
3,642

 

 
3,642

Treasury shares purchased

 

 

 

 
(38,840
)
 
(38,840
)
 

 
(38,840
)
RSU distributions

 
(8,344
)
 

 

 
5,068

 
(3,276
)
 

 
(3,276
)
RSU dividends

 
115

 
(115
)
 

 

 

 

 

Cash dividends ($0.11 per share)

 

 
(15,599
)
 

 

 
(15,599
)
 

 
(15,599
)
Balance at June 30, 2012
$
1,628

 
$
230,862

 
$
2,654,044

 
$
(203,712
)
 
$
(731,253
)
 
$
1,951,569

 
$
37,430

 
$
1,988,999


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

7



DENTSPLY International Inc. and Subsidiaries

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the United States Securities and Exchange Commission (“SEC”).  The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Results for interim periods should not be considered indicative of results for a full year. These financial statements and related notes contain the accounts of DENTSPLY International Inc. and Subsidiaries (“DENTSPLY” or the “Company”) on a consolidated basis and should be read in conjunction with the consolidated financial statements and notes included in the Company’s most recent Form 10-K for the year ended December 31, 2011.

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of the Company, as applied in the interim consolidated financial statements presented herein are substantially the same as presented in the Company’s Form 10-K for the year ended December 31, 2011, except as may be indicated below:

Accounts and Notes Receivable

The Company sells dental and certain healthcare products through a worldwide network of distributors and directly to end users.  For customers on credit terms, the Company performs ongoing credit evaluations of those customers' financial condition and generally does not require collateral from them.  The Company establishes allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments based on historical averages of aged receivable balances and the Company’s experience in collecting those balances, customer specific circumstances, as well as changes in the economic and political environments.  The Company records a provision for doubtful accounts, which is included in “Selling, general and administrative expenses.”

Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which was $13.7 million at June 30, 2012 and $15.8 million at December 31, 2011.

Marketable Securities

The Company’s marketable securities consist of corporate convertible bonds that are classified as available-for-sale in “Other noncurrent assets, net” on the consolidated balance sheets as the instruments mature in December 2015. The Company determined the appropriate classification at the time of purchase and will re-evaluate such designation as of each balance sheet date. In addition, the Company reviews the securities each quarter for indications of possible impairment. Once identified, the determination of whether the impairment is temporary or other-than-temporary requires significant judgment. The primary factors that the Company considers in classifying the impairment include the extent and time the fair value of each investment has been below cost and the existence of a credit loss. If a decline in fair value is judged other-than-temporary, the basis of the securities is written down to fair value and the amount of the write-down is included as a realized loss. Changes in fair value are reported in accumulated other comprehensive income (“AOCI”).

 The convertible feature of the bonds has not been bifurcated from the underlying bonds as the feature does not contain a net-settlement feature, nor would the Company be able to achieve a hypothetical net-settlement that would substantially place the Company in a comparable cash settlement position.  As such, the derivative is not accounted for separately from the bond.  The cash paid by the Company was equal to the face value of the bonds issued, and therefore, the Company has not recorded any bond premium or discount on acquiring the bonds.  The fair value of the bonds was $68.4 million and $47.8 million at June 30, 2012 and December 31, 2011, respectively.  At June 30, 2012 and December 31, 2011, an unrealized holding gain of $22.0 million and $11.5 million, respectively, on available-for-sale securities, net of tax, had been recorded in AOCI. 

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) amended its rules regarding the presentation of comprehensive income.  The objective of this amendment is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  Specifically, this amendment requires that all non-owner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income

8



or in two separate but consecutive statements.  The new rules will become effective during interim and annual periods beginning after December 15, 2011, with the exception of the requirement to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements, which has been deferred pending further deliberation by the FASB.  Because the standard only impacts the presentation of comprehensive income and does not impact what is included in comprehensive income, the standard will not have a significant impact on the Company's consolidated financial statements. The Company adopted this accounting standard during the quarter ended March 31, 2012.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment”("ASU"). This newly issued accounting standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a "qualitative" assessment to determine whether further impairment testing is necessary. Under the revised standard, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required; otherwise, no further testing is required. Prior to the issuance of the revised standard, an entity was required to perform step one of the impairment test at least annually by calculating and comparing the fair value of a reporting unit to its carrying amount. Under the revised standard, if an entity determines that step one is necessary and the fair value of the reporting unit is less than its carrying amount, then step two of the test will continue to be required to measure the amount of the impairment loss, if any. These amendments do not change the current guidance for testing other indefinite-lived intangible assets for impairment. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted this standard for the quarter ended June 30, 2012 and it did not impact the Company’s financial position or results from operations.

NOTE 2 – STOCK COMPENSATION

The following table represents total stock based compensation expense for non-qualified stock options, restricted stock units (“RSU”) and the tax related benefit for the three and six months ended June 30, 2012 and 2011:

 
Three Months Ended
 
Six Months Ended
(in thousands)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Stock option expense
$
3,298

 
$
3,035

 
$
5,679

 
$
5,373

RSU expense
3,094

 
2,296

 
4,640

 
4,347

Total stock based compensation expense
$
6,392

 
$
5,331

 
$
10,319

 
$
9,720

 
 
 
 
 
 
 
 
Total related tax benefit
$
1,916

 
$
1,620

 
$
2,935

 
$
2,872


At June 30, 2012, the remaining unamortized compensation cost related to non-qualified stock options is $19.1 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.8 years. At June 30, 2012, the unamortized compensation cost related to RSU is $20.4 million, which will be expensed over the remaining restricted period of the RSU, or 1.7 years.


















9



The following table reflects the non-qualified stock option transactions from December 31, 2011 through June 30, 2012:
 
Outstanding
 
Exercisable
(in thousands, except per share data)
Shares
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Shares
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
10,148

 
$
31.23

 
$
51,402

 
8,049

 
$
30.06

 
$
50,365

Granted
1,307

 
38.72

 
 

 
 

 
 

 
 

Exercised
(862
)
 
23.29

 
 

 
 

 
 

 
 

Cancelled
(25
)
 
41.15

 
 

 
 

 
 

 
 

Forfeited
(38
)
 
36.15

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
10,530

 
$
32.77

 
$
61,728

 
7,720

 
$
31.20

 
$
58,418


At June 30, 2012 the weighted average remaining contractual term of all outstanding options is 6.0 years and the weighted average remaining contractual term of exercisable options is 5.0 years.

The following table summarizes the unvested RSU transactions from December 31, 2011 through June 30, 2012:

(in thousands, except per share data)
Shares
 
Weighted Average
Grant Date
Fair Value
 
 
 
 
December 31, 2011
897

 
$
32.50

Granted
413

 
38.71

Vested
(244
)
 
26.28

Forfeited
(25
)
 
35.67

 
 
 
 
June 30, 2012
1,041

 
$
36.34


NOTE 3 – COMPREHENSIVE INCOME

During the quarter ended June 30, 2012, foreign currency translation adjustments included currency translation losses of $175.3 million and losses on the Company’s loans designated as hedges of net investments of $1.3 million.  During the quarter ended June 30, 2011, foreign currency translation adjustments included currency translation gains of $52.4 million and gains of $9.7 million on the Company’s loans designated as hedges of net investments.  During the six months ended June 30, 2012, foreign currency translation adjustments included currency losses of $48.5 million and gains on the Company's loans designated as hedges of net investments of $4.1 million. During the six months ended June 30, 2011, foreign currency translation adjustments included currency translation gains of $142.1 million and gains on the Company's loans designated as hedges as investments of $10.7 million. These foreign currency translation adjustments were offset by movements on derivative financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.

The balances included in AOCI, net of tax, in the consolidated balance sheets are as follows:

(in thousands)
June 30, 2012
 
December 31, 2011
 
 
 
 
Foreign currency translation adjustments
$
(83,489
)
 
$
(39,078
)
Net loss on derivative financial instruments
(102,433
)
 
(117,390
)
Net unrealized holding gains (losses) on available-for-sale securities
14,530

 
(516
)
Pension liability adjustments
(32,320
)
 
(33,986
)
 
$
(203,712
)
 
$
(190,970
)



10



The cumulative foreign currency translation adjustments included translation gains of $47.8 million and $96.3 million at June 30, 2012 and December 31, 2011, respectively, was more than offset by losses of $129.4 million and $133.5 million, respectively, on loans designated as hedges of net investments.  These foreign currency translation adjustments were partially offset by movements on derivatives financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.

NOTE 4 - EARNINGS PER COMMON SHARE

The dilutive effect of outstanding non-qualified stock options and RSU is reflected in diluted earnings per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2012 and 2011:

 
Three Months Ended
 
Six Months Ended
Basic Earnings Per Common Share Computation
 
 
 
 
 
 
 
(in thousands, except per share amounts)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
80,764

 
$
74,236

 
$
134,049

 
$
143,320

 
 
 
 
 
 
 
 
Common shares outstanding
141,737

 
141,052

 
141,729

 
141,331

 
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.57

 
$
0.53

 
$
0.95

 
$
1.01

 
 
 
 
 
 
 
 
Diluted Earnings Per Common Share Computation
 

 
 

 
 

 
 

(in thousands, except per share amounts)
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Net income attributable to DENTSPLY International
$
80,764

 
$
74,236

 
$
134,049

 
$
143,320

 
 
 
 
 
 
 
 
Common shares outstanding
141,737

 
141,052

 
141,729

 
141,331

Incremental shares from assumed exercise of dilutive options from stock-based compensation awards
2,126

 
2,321

 
2,179

 
2,363

Total shares
143,863

 
143,373

 
143,908

 
143,694

 
 
 
 
 
 
 
 
Earnings per common share - diluted
$
0.56

 
$
0.52

 
$
0.93

 
$
1.00


Options to purchase 3.8 million and 4.1 million shares of common stock that were outstanding during the three and six months ended June 30, 2012, respectively, were not included in the computation of diluted earnings per share since the exercise prices for these options were greater than the average market price of the common shares and, therefore, the effect would be antidilutive.  There were 3.0 million and 3.4 million antidilutive shares of common stock outstanding during the three and six months ended June 30, 2011, respectively.

NOTE 5 – BUSINESS ACQUISITIONS

On August 31, 2011, the Company acquired 100% of the outstanding common shares of Astra Tech, a leading developer, manufacturer and marketer of dental implants, customized implant abutments and consumable medical devices in the urology and surgery market segments.

The Astra Tech acquisition was recorded in accordance with the business combinations provisions of US GAAP.  The Company has preliminarily valued tangible and identifiable intangible assets acquired based on their estimated fair values.  The Company is in the process of completing the valuation of identifiable assets acquired and liabilities assumed and, therefore, the fair values set forth below are subject to adjustment upon finalizing the valuations. In addition, completion of the valuation may impact the assessment of the net deferred tax liability currently recognized with any adjustment resulting in a corresponding change to goodwill. The amount of these potential adjustments could be significant.

The following table summarizes the preliminary fair value of identifiable assets and liabilities assumed at the date of the Astra Tech acquisition. This table has been updated during the first six months of 2012 to reflect the refined estimates of fair value. The primary change resulted in an increase to identifiable intangible assets relating to customer relationships and a corresponding

11



reduction to goodwill.

(in thousands)
 
 
 
Inventory
$
84,659

Other Current assets
140,462

Property, plant and equipment
178,495

Identifiable intangible assets
986,300

Goodwill
824,357

Other long-term assets
13,438

Total assets
2,227,711

 
 
Current liabilities
106,983

Long-term liabilities
329,937

Total liabilities
436,920

 
 
Net assets
$
1,790,791


Other current assets consist primarily of trade accounts receivable of $101.2 million.  Current liabilities assumed are primarily comprised of accrued and other current liabilities of $80.0 million and trade accounts payable of $27.0 million.  Long-term liabilities assumed are primarily comprised of noncurrent deferred tax liabilities of $280.6 million and pension obligations of $49.3 million.

Inventory held by Astra Tech includes a fair value adjustment of $32.8 million.  The Company expensed this amount by December 31, 2011 as the acquired inventory was sold.

Property, plant and equipment includes a fair value adjustment of $28.7 million and consists of land, buildings, plant and equipment.  Depreciable lives range 40 years for buildings and from 5 to 15 years for plant and equipment.

The preliminary fair values assigned to identifiable intangible assets were determined through the use of the income approach, specifically the relief from royalty method and the multi-period excess earnings method. Both valuation methods rely on management’s judgments, including expected future cash flows resulting from existing customer relationships, customer attrition rates, contributory effects of other assets utilized in the business, peer group cost of capital and royalty rates as well as other factors. The valuation of tangible assets was derived using the combination of the income approach, the market approach and the cost approach. Significant judgments used in valuing tangible assets include estimated reproduction or replacement cost, useful lives of assets, estimated selling prices, costs to complete and reasonable profit.
       
Useful lives for identifiable intangible assets were determined based upon the remaining useful economic lives of the identifiable intangible assets that are expected to contribute to future cash flows.  The acquired identifiable intangible assets are being amortized on a straight-line basis over their expected useful lives.

Identifiable intangible assets acquired consist of the following:
(in thousands, except for useful life)
Amount
 
Useful Life
(in years)
 
 
 
 
Customer relationships
$
636,900

 
17.5 - 20
Developed technology and patents
116,500

 
10
Trade names and trademarks
229,100

 
Indefinite
In-process research and development
3,800

 
Total
$
986,300

 
 

The $824.4 million of goodwill is attributable to the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed. The goodwill recognized is primarily attributable to cost savings and other synergies that the Company expects to realize through operational efficiencies.  All of the goodwill has been assigned to the Company's Implants/Endodontics/Healthcare/Pacific Rim segment and is not expected to be deductible for tax purposes.

12




The following unaudited pro forma financial information reflects the consolidated results of operations of the Company had the Astra Tech acquisition occurred on January 1, 2010.  These amounts were calculated after conversion to US GAAP, applying the Company’s accounting policies and adjusting Astra Tech’s results to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment, inventory and intangible assets had been applied from January 1, 2010, together with the consequential tax effects at the statutory rate.  These adjustments also reflect the additional interest expense incurred on the debt to finance the acquisition.
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
(in thousands, except per share data)
2011
 
2011
 
 
 
 
Net sales
$
763,659

 
$
1,479,567

Net income attributable to DENTSPLY
$
71,932

 
$
141,510

Diluted earnings per common share
$
0.50

 
$
0.98


The pro forma financial information is based on the Company's preliminary assignment of purchase price and therefore subject to adjustment upon finalizing the purchase price assignment. The Astra Tech financial information has been compiled in a manner consistent with the accounting policies adopted by DENTSPLY. Pro forma results do not include any anticipated synergies or other anticipated benefits of the acquisition. Accordingly, the unaudited pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition occurred on January 1, 2010.  While the Company completed other transactions during the pro forma periods presented above, these transactions were immaterial to the Company’s net sales and net income attributable to DENTSPLY.

NOTE 6 - SEGMENT INFORMATION

The Company has numerous operating businesses covering a wide range of dental and certain healthcare products and geographic regions, primarily serving the professional dental market. Professional dental products represented approximately 89% and 97% of sales for the three months ended June 30, 2012 and 2011, respectively, and 89% and 97% of sales for the six months ended June 30, 2012 and 2011, respectively.

The operating businesses are combined into operating groups, which have overlapping product offerings, geographical presence, customer bases, distribution channels, and regulatory oversight. These operating groups are considered the Company’s reportable segments as the Company’s chief operating decision-maker regularly reviews financial results at the operating group level and uses this information to manage the Company’s operations. The accounting policies of the groups are consistent with those described in the Company’s most recently filed Form 10-K in the summary of significant accounting policies.  The Company measures segment income for reporting purposes as operating income before restructuring and other costs, interest expense, interest income, other income and expenses and income taxes.

During the first quarter of 2012 the Company realigned reporting responsibilities for multiple locations as a result of changes to the management structure. These changes also helped the Company gain operating efficiencies and effectiveness. The segment information below reflects the revised structure for all periods shown.

Dental Consumable and Laboratory Businesses

This business group includes responsibility for the design, manufacturing, sales and distribution of certain small equipment and chairside consumable products in the United States, Germany and certain other European regions.  It also has responsibility for the sales and distribution of certain Endodontic products in Germany. This business group also includes the responsibility for the design, manufacture, sales and distribution of most dental laboratory products, excluding certain countries. This business group is also responsible for most of the Company’s non-dental business excluding healthcare products.

Orthodontics/Canada/Mexico/Japan

  This business group is responsible for the world-wide manufacturing, sales and distribution of the Company’s Orthodontic products. It also has responsibility for the sales and distribution of most of the Company’s dental products sold in Japan, Canada and Mexico.



13




Select Distribution Businesses

This business group includes responsibility for the sales and distribution for most of the Company's dental products sold in France, United Kingdom, Italy, Austria and certain other European countries, Middle Eastern countries, India and Africa.

Implants/Endodontics/Healthcare/Pacific Rim

This business group includes the responsibility for the design, manufacture, sales and distribution of most of the Company’s dental implant and related products. This business group also includes the responsibility for the design and manufacturing of Endodontic products and is responsible for the sales and distribution of the Company’s Endodontic products in the United States, Switzerland, and locations not covered by other selling divisions.  In addition, this business group is also responsible for sales and distribution of certain Endodontic products in Germany, Asia and other parts of the world. Additionally, this business group is responsible for the design and manufacture of certain dental consumables and dental laboratory products and the sales and distribution of most dental products sold in Brazil, Latin America (excluding Mexico), Australia and most of Asia (excluding India and Japan). This business group is also responsible for the world-wide design, manufacturing, sales and distribution of the Company's healthcare products (non-dental) throughout most of the world.

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

Generally, the Company evaluates performance of the operating groups based on the groups’ operating income, excluding restructuring and other costs, and net third party sales, excluding precious metal content.

The following tables set forth information about the Company’s operating groups for the three and six months ended June 30, 2012 and 2011:

Third Party Net Sales
 
Three Months Ended
 
Six Months Ended
(in thousands)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
258,786

 
$
246,062

 
$
505,717

 
$
477,182

Orthodontics/Canada/Mexico/Japan
86,317

 
85,728

 
159,219

 
174,174

Select Distribution Businesses
78,433

 
82,892

 
151,684

 
157,058

Implants/Endodontics/Healthcare/Pacific Rim
342,312

 
196,399

 
666,956

 
374,213

All Other (a)
(2,854
)
 
(1,638
)
 
(4,169
)
 
(2,681
)
Total
$
762,994

 
$
609,443

 
$
1,479,407

 
$
1,179,946

(a) Includes amounts recorded at Corporate headquarters.


















14




Third Party Net Sales, Excluding Precious Metal Content
 
Three Months Ended
 
Six Months Ended
(in thousands)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
206,862

 
$
214,181

 
$
414,346

 
$
415,289

Orthodontics/Canada/Mexico/Japan
77,037

 
77,433

 
142,878

 
157,908

Select Distribution Businesses
77,130

 
80,490

 
148,783

 
152,530

Implants/Endodontics/Healthcare/Pacific Rim
340,305

 
193,523

 
662,268

 
367,949

All Other (a)
(2,854
)
 
(1,638
)
 
(4,169
)
 
(2,681
)
Total excluding precious metal content
698,480

 
563,989

 
1,364,106

 
1,090,995

Precious metal content
64,514

 
45,454

 
115,301

 
88,951

Total including precious metal content
$
762,994

 
$
609,443

 
$
1,479,407

 
$
1,179,946

(a) Includes amounts recorded at Corporate headquarters.

Inter-segment Net Sales
 
Three Months Ended
 
Six Months Ended
(in thousands)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
58,486

 
$
55,636

 
$
112,887

 
$
111,006

Orthodontics/Canada/Mexico/Japan
1,054

 
953

 
2,233

 
1,937

Select Distribution Businesses
2,974

 
3,729

 
6,292

 
7,477

Implants/Endodontics/Healthcare/Pacific Rim
42,409

 
43,756

 
80,748

 
81,798

All Other (a)
56,329

 
55,458

 
110,309

 
106,835

Eliminations
(161,252
)
 
(159,532
)
 
(312,469
)
 
(309,053
)
Total
$

 
$

 
$

 
$

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

Segment Operating Income
 
Three Months Ended
 
Six Months Ended
(in thousands)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
63,295

 
$
61,536

 
$
124,764

 
$
117,519

Orthodontics/Canada/Mexico/Japan
3,897

 
4,314

 
4,263

 
13,593

Select Distribution Businesses
138

 
587

 
(850
)
 
445

Implants/Endodontics/Healthcare/Pacific Rim
77,224

 
63,188

 
143,383

 
117,613

All Other (a)
(33,119
)
 
(25,758
)
 
(71,729
)
 
(46,086
)
Segment operating income
111,435

 
103,867

 
199,831

 
203,084

 
 
 
 
 
 
 
 
Reconciling Items:
 

 
 

 
 

 
 

Restructuring and other costs
(2,528
)
 
(6,863
)
 
(3,765
)
 
(7,496
)
Interest expense
(14,584
)
 
(5,570
)
 
(30,366
)
 
(11,913
)
Interest income
2,011

 
2,430

 
4,308

 
4,258

Other expense (income), net
(748
)
 
(1,434
)
 
(1,230
)
 
(1,504
)
Income before income taxes
$
95,586

 
$
92,430

 
$
168,778

 
$
186,429

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

15



Assets
 
 
 
(in thousands)
June 30, 2012
 
December 31, 2011
 
 
 
 
Dental Consumable and Laboratory Businesses
$
1,012,143

 
$
1,180,001

Orthodontics/Canada/Mexico/Japan
286,997

 
328,376

Select Distribution Businesses
207,377

 
168,500

Implants/Endodontics/Healthcare/Pacific Rim
3,102,736

 
2,881,591

All Other (a)
261,503

 
196,930

Total
$
4,870,756

 
$
4,755,398

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

NOTE 7 - INVENTORIES

Inventories are stated at the lower of cost or market.  At June 30, 2012 and December 31, 2011, the cost of $8.6 million, or 2.1% and $7.1 million, or 2.1% of inventories, respectively, was determined using the last-in, first-out (“LIFO”) method. The cost of the remaining inventories was determined using the first-in, first-out (“FIFO”) or average cost methods. If the FIFO method had been used to determine the cost of LIFO inventories, the amounts at which net inventories are stated would be higher than reported at June 30, 2012 and December 31, 2011 by $5.7 million and $5.6 million, respectively.

The Company establishes reserves for inventory in order to present the net realizable value.  The inventory valuation reserves were $34.9 million and $35.1 million at June 30, 2012 and December 31, 2011, respectively.

Inventories, net of inventory valuation reserves, consist of the following:
(in thousands)
June 30, 2012
 
December 31, 2011
 
 
 
 
Finished goods
$
246,432

 
$
218,814

Work-in-process
67,810

 
66,952

Raw materials and supplies
88,953

 
75,996

 
$
403,195

 
$
361,762


NOTE 8 - BENEFIT PLANS

The following sets forth the components of net periodic benefit cost of the Company’s defined benefit plans and for the Company’s other postretirement employee benefit plans for the three and six months ended June 30, 2012 and 2011:

Defined Benefit Plans 
Three Months Ended
 
Six Months Ended
(in thousands)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Service cost
$
3,032

 
$
2,578

 
$
6,010

 
$
5,012

Interest cost
2,627

 
2,305

 
5,318

 
4,492

Expected return on plan assets
(1,189
)
 
(1,290
)
 
(2,414
)
 
(2,506
)
Amortization of prior service cost
(33
)
 
21

 
(70
)
 
41

Amortization of net loss
494

 
405

 
992

 
788

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
4,931

 
$
4,019

 
$
9,836

 
$
7,827



16



Other Postretirement Plans
Three Months Ended
 
Six Months Ended
(in thousands)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Service cost
$
18

 
$
16

 
$
37

 
$
32

Interest cost
118

 
139

 
235

 
277

Amortization of net loss
57

 
49

 
115

 
98

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
193

 
$
204

 
$
387

 
$
407


The following sets forth the information related to the contributions to the Company’s benefit plans for 2012:
(in thousands)
Pension
Benefits
 
Other
Postretirement
Benefits
 
 
 
 
Actual contributions through June 30, 2012
$
6,386

 
$
416

Projected for the remainder of the year
6,095

 
562

Total for year
$
12,481

 
$
978



NOTE 9 – RESTRUCTURING AND OTHER COSTS

Restructuring Costs

During the three and six months ended June 30, 2012, the Company recorded restructuring costs of $2.1 million and $3.5 million, respectively.  These costs primarily related to employee severance.  During the three and six months ended June 30, 2011, the Company recorded restructuring costs of $0.7 million, related to employee severance costs.  These costs are recorded in “Restructuring and other costs” in the consolidated statements of operations and the associated liabilities are recorded in "Accrued liabilities" in the consolidated balance sheets.

During 2012, the Company initiated several restructuring plans primarily related to the integration, reorganization and closure or consolidation of certain production and selling facilities in order to better leverage the Company’s resources by minimizing costs and obtaining operational efficiencies.

At June 30, 2012, the Company’s restructuring accruals were as follows:
 
Severance
(in thousands)
2010 and
Prior Plans
 
2011 Plans
 
2012 Plans
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
3,380

 
$
1,281

 
$

 
$
4,661

Provisions and adjustments

 
546

 
2,383

 
2,929

Amounts applied
(689
)
 
(452
)
 
(929
)
 
(2,070
)
Balance at June 30, 2012
$
2,691

 
$
1,375

 
$
1,454

 
$
5,520

 
 
Lease/Contract Terminations
(in thousands)
2010 and
Prior Plans
 
2012 Plans
 
Total
 
 
 
 
 
 
Balance at December 31, 2011
$
1,011

 
$

 
$
1,011

Provisions and adjustments

 
254

 
254

Amounts applied
(147
)
 
(27
)
 
(174
)
Balance at June 30, 2012
$
864

 
$
227

 
$
1,091



17



 
Other Restructuring Costs
(in thousands)
2010 and
Prior Plans
 
2012 Plans
 
Total
 
 
 
 
 
 
Balance at December 31, 2011
$
34

 
$

 
$
34

Provisions and adjustments

 
276

 
276

Amounts applied

 
(123
)
 
(123
)
Balance at June 30, 2012
$
34

 
$
153

 
$
187


The following table provides the year-to-date changes in the restructuring accruals by segment:
(in thousands)
December 31,
2011
 
Provisions and
Adjustments
 
Amounts
Applied
 
June 30, 2012
 
 
 
 
 
 
 
 
Dental Consumable and Laboratory Businesses
$
3,601

 
$
628

 
$
(1,006
)
 
$
3,223

Orthodontics/Canada/Mexico/Japan
240

 
826

 
(282
)
 
784

Implants/Endodontics/Healthcare/Pacific Rim
1,865

 
2,005

 
(1,079
)
 
2,791

 
$
5,706

 
$
3,459

 
$
(2,367
)
 
$
6,798


NOTE 10 – FINANCIAL INSTRUMENTS AND DERIVATIVES

Derivative Instruments and Hedging Activities

The Company's activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates, interest rates and commodity prices. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company's operating results and equity. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert variable rate debt to fixed rate debt and to convert fixed rate debt to variable rate debt, cross currency basis swaps to convert debt denominated in one currency to another currency and commodity swaps to fix certain variable raw material costs.

Derivative instruments not designated as hedging

The Company enters into derivative financial instruments to hedge the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in “Other expense (income), net” on the consolidated statements of operations. The Company primarily uses forward foreign exchange contracts and cross currency basis swaps to hedge these risks. The Company's significant contracts outstanding as of June 30, 2012 are summarized in the tables that follow.
 
The Company wrote DIO equity option contracts ("equity options") to the original sellers of the DIO investment for the remaining DIO common shares held by the sellers. The equity options provide the sellers the ability to require the Company to purchase their remaining shares on hand at a price based on an agreed-upon formula at specific time frames in the future. The sellers are also allowed to sell their remaining shares on the open market. Changes in the fair value of the equity options are reported in “Other expense (income), net” on the consolidated statements of operations. This derivative is further discussed in Note 11, Fair Value Measurement.

Cash Flow Hedges

Foreign Exchange Risk Management
 
The Company uses a layered hedging program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings of the consolidated Company. The Company accounts for the foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contract primarily through AOCI based on the tested effectiveness of the foreign exchange forward contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the consolidated statements of operations in the

18



same period that the hedged transaction is recorded. Any time value component of the hedge fair value is deemed ineffective and will be reported currently in “Other expense (income), net” on the consolidated statements of operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.
 
These foreign exchange forward contracts generally have maturities up to eighteen months and the counterparties to the transactions are typically large international financial institutions. The Company's significant contracts outstanding as of June 30, 2012 are summarized in the tables that follow.

Interest Rate Risk Management
 
The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt. As of June 30, 2012, the Company has two groups of significant interest rate swaps. One of the groups of swaps has notional amounts totaling 12.6 billion Japanese yen, and effectively converts the underlying variable interest rates to an average fixed interest rate of 0.2% for a term of three years, ending in September 2014. Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rates to a fixed interest rate of 0.7% for a term of five years, ending in September 2016.
The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes. The Company's significant contracts outstanding as of June 30, 2012 are summarized in the tables that follow.
Commodity Risk Management
 
The Company selectively enters into commodity swaps to effectively fix certain variable raw material costs. These swaps are used purely to stabilize the cost of components used in the production of certain of the Company's products. The Company generally accounts for the commodity swaps as cash flow hedges. As a result, the Company records the fair value of the swap primarily through AOCI based on the tested effectiveness of the commodity swap. The Company measures the effectiveness of cash flow hedges of antic