F O C U S D E N T S P L Y 2 0 1 4 A N N U A L R E P O R T W O R L D H E A D Q U A R T E R S Susquehanna Commerce Center 221 West Philadelphia Street Suite 60W York, PA 17405 717.845.7511 d e n t s p l y . c o m 2 0 1 4 A N N U A L R E P O R T Across the global business, our Associates are joining forces to enhance our customer value proposition, build on our strengths and create efficiencies to reinvest for growth. FINANCIAL HIGHLIGHTS I N T H O U S A N D S , E X C E P T F O R P E R S H A R E D ATA Y E A R E N D E D D E C E M B E R 3 1 , IN COME STATEMENT DATA 2 01 4 2 01 3 2 01 2 2011 Net Sales Net Sales Excluding Precious Metal Content Net Income Attributable to dentsply International Earnings Per Common Share – Diluted Adjusted Earnings Per Common Share – Diluted 1, 2, 3, 4, 5 Cash Dividends Declared Per Common Share FIN AN CIA L POSITION Cash and Cash Equivalents Total Debt Total Equity $ $ $ $ $ $ $ $ $ 2,922,620 2,792,676 322,854 2.24 2.50 0.265 2 01 4 151,639 1,265,713 2,322,198 $ $ $ $ $ $ $ $ $ 2,950,770 2,771,728 313,192 2.16 2.35 0.250 2 01 3 74,954 1,476,040 2,577,974 $ $ $ $ $ $ $ $ $ 2,928,429 2,714,698 314,213 2.18 2.22 0.220 2 01 2 80,132 1,520,998 2,249,443 $ $ $ $ $ $ $ $ $ 2,537,718 2,332,589 244,520 1.70 2.03 0.205 2011 77,128 1,766,711 1,884,151 1 2014 – Excludes amortization of purchased intangibles, net of tax, of $33.6 million; after-tax acquisition and restructuring and other costs of $10.5 million; after-tax gain on credit risk adjustments to outstanding derivatives of $0.5 million; after-tax gain on fair value adjustment related to an unconsolidated affiliated company of $1.2 million and income tax related adjustments of $4.3 million. These items had a negative impact of $0.26 on earnings per diluted common share. 2 2013 – Excludes amortization of purchased intangible assets, net of tax, of $32.3 million; after-tax acquisition and restructuring and other costs of $15.6 million; after-tax loss on credit risk adjustments to outstanding derivatives of $2.3 million; after-tax gain on fair value adjustment related to an unconsolidated affiliated company of $1.2 million and income tax related adjustments of $21.0 million. These items had a negative impact of $0.19 on earnings per diluted common share. 3 2012 – Excludes amortization of purchased intangible assets, net of tax, of $33.6 million; after-tax acquisition and restructuring and other costs of $27.9 million; after-tax loss on fair value adjustment related to an unconsolidated affiliated company of $2.9 million; after-tax orthodontic business continuity costs of $0.6 million and income tax related adjustments of $60.0 million. These items had a negative impact of $0.04 on earnings per diluted common share. 4 2011 – Excludes after-tax acquisition and restructuring and other costs of $74.1 million; amortization of purchased intangible assets, net of tax, of $14.4 million; after-tax orthodontic business continuity costs of $2.1 million; after-tax loss on credit risk adjustment to outstanding derivatives of $0.8 million; after-tax gain on the fair value adjustment related to an unconsolidated affiliated company of $2.5 million and income tax related adjustments of $41.1 million. These items had a negative impact of $0.33 on earnings per diluted common share. 5 Adjusted earnings per diluted share is a non-GAAP measure that excludes certain items. For a reconciliation of U.S. GAAP results to this non-GAAP measure, refer to Item 7 of our 2014 annual report on Form 10-K. DIRECTORS AND OFFICERS board of directors Bret W. Wise 54 Chairman, Chief Executive Officer DENTSPLY INTERNATIONAL INC. director since 2006 Michael C. Alfano, D.M.D., Ph.D. 67 Executive Vice President Emeritus NEW YORK UNIVERSITY director since 2001 Eric K. Brandt 52 Executive Vice President, Chief Financial Officer BROADCOM CORPORATION director since 2004 Paula H. Cholmondeley 67 Former Vice President SAPPI FINE PAPER director since 2001 Michael J. Coleman 71 Chairman COOL MEDIA CONSULTANTS director since 1991 Willie A. Deese 59 Executive Vice President MERCK & CO., INC. President MERCK MANUFACTURING DIVISION director since 2011 officers and management Bret W. Wise Chairman, Chief Executive Officer Christopher T. Clark President, Chief Financial Officer James G. Mosch Executive Vice President, Chief Operating Officer Robert J. Size Senior Vice President Albert J. Sterkenburg Senior Vice President Markus Boehringer Operating Vice President Steven E. Jenson Operating Vice President Thomas G. Leonardi Operating Vice President William E. Newell Operating Vice President Teresa A. Dolan, D.M.D., M.P.H. Vice President, Chief Clinical Officer Derek W. Leckow Vice President, Investor Relations William F. Hecht 72 Chairman, Chief Executive Officer and President, Retired PPL CORPORATION director since 2001 Leslie A. Jones 75 Chairman and Senior Vice President, Retired DENTSPLY INTERNATIONAL INC. director since 1983 Francis J. Lunger 69 Chairman, Chief Executive Officer and President, Retired MILLIPORE CORPORATION director since 2005 John L. Miclot 56 President and Chief Executive Officer LINGUAFLEX, INC. director since 2010 John C. Miles II 73 Chairman and Chief Executive Officer, Retired DENTSPLY INTERNATIONAL INC. director since 1990 Andrew M. Lichkus, Ph.D. Vice President, Chief Technology Officer Maureen J. MacInnis Vice President, Chief Human Resources Officer James P. McNulty Vice President, Global Supply Chain Charles K. Pigott Vice President, Quality and Regulatory Affairs Deborah M. Rasin Vice President, Secretary and General Counsel William E. Reardon Vice President, Treasurer William J. Schlageter IV Vice President, Chief Information Officer Richard M. Wagner Vice President, Corporate Controller Robert J. Winters Vice President, Tax world headquarters dentsply International Inc. World Headquarters Susquehanna Commerce Center 221 West Philadelphia Street, Suite 60W York, pa 17405 Phone (717) 845-7511 independent registered public accounting firm PricewaterhouseCoopers LLP Two Commerce Square, Suite 1700 2001 Market Street Philadelphia, pa 19103-7042 Phone (267) 330-3000 stock listing nasdaq’s National Market Symbol: xray annual meeting The 2015 Annual Meeting will be held on Wednesday, May 20, at 9:30 a.m. at: dentsply International Inc. World Headquarters Susquehanna Commerce Center 221 West Philadelphia Street, Suite 60W York, pa 17405 investor relations, form 10-k and other information If you would like to receive our Investor Package, or a copy of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission, or be placed on the Company’s mailing list, please contact: Derek Leckow Vice President, Investor Relations dentsply International Inc. Susquehanna Commerce Center 221 West Philadelphia Street, Suite 60W York, pa 17405 Phone (717) 849-7863 Fax (717) 849-4756 Email: investor@dentsply.com trademarks All brand names used in this report are owned by or licensed trademarks of dentsply International Inc., or its subsidiaries. transfer agent and registrar If your stock certificate is lost, stolen or destroyed, or if you change your address, please contact the Shareholder Services Department at: American Stock Transfer & Trust Company 6201 15th Ave. Brooklyn, New York, ny 11219 www.amstock.com Toll-free (800) 937-5449 Certain statements made in this Annual Report, including, without limitation, statements regarding future sales and development of products and markets, may be deemed to be forward-looking statements that involve risks and uncertainties. Such statements are made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with prior descriptions of risk factors by the Company, including specifically the risk factors discussed within the Company's Annual Report on Form 10-K for the year ended December 31, 2014. Such factors could cause actual results to differ materially from those expressed in any forward-looking statements contained in this Annual Report. SHAREHOLDER INFORMATION FOCUS 2014 DENTSPLY ANNUAL REP ORT DENTSPLY set new records for adjusted earnings and operating cash flow in 2014, which grew 6 percent and 34 percent, respectively. The Company grew revenues organically in all three of our challenging. This requires continued investment in the business for geographic regions, and adjusted operating margins improved to both growth and effectiveness, coupled with an increasing ability 18.4 percent, an increase of 80 basis points compared to 2013. to deploy capital to reward our shareholders. In 2014, we returned This helped drive free cash flow of $461 million, a 45 percent year- over $200 million to shareholders through dividends and share over-year improvement, and a record by more than $125 million. repurchases, a 31 percent increase compared to 2013. In February This was a strong performance given the headwinds we faced in 2015, we also announced a 9 percent increase to our dividend. the European market, which represented 45 percent of our sales volume, and speaks to our team’s ability to execute even in difficult market conditions. We have a unique opportunity to create shareholder value by maximizing the efficiency of our global platform and reinvesting to capitalize on the long-term growth prospects of our markets. Our performance was driven in part by modestly improving Dental consumables represent a stable growth market, and conditions in the U.S. market, but more so by our focus on leveraging costs and investments through a broad-based efficiency DENTSPLY remains well positioned to take advantage of positive demographic trends that continue to influence dental markets. program launched at the beginning of the year. This initiative is These include population growth, an aging group of dental designed to improve profitability and return-on-capital metrics, consumers in developed markets who tend to utilize more dental and we anticipate continuing benefits as we move through the treatment over time, and increasing demand for dental treatment next several years. in emerging markets where per capita discretionary incomes Although there is tremendous uncertainty about the direction of many international markets, especially Europe, we are focused on creating shareholder value in all market conditions – strong or are rising. 1 DEAR FELLOW SHAREHOLDERSBret W. Wise Chairman and Chief Executive OfficerChristopher T. Clark President and Chief Financial OfficerJames G. Mosch Executive Vice President and Chief Operating Officer FOCUS 2014 DENTSPLY ANNUAL REP ORT To put the opportunity into perspective, DENTSPLY has At DENTSPLY, we have historically operated utilizing a local experienced tremendous growth over the past 20 years, moving business model with numerous manufacturing subsidiaries from approximately $500 million in sales in 1994 to nearly functioning as independent businesses. Although this model $3.0 billion in 2014. Through an aggressive growth strategy that has served us well, it has prevented us from fully leveraging included numerous acquisitions, we welcomed many outstanding our earnings potential given the size and complexity of our businesses, with great Associates, to the DENTSPLY organization global business. during this period. Today, we are the world’s largest manufacturer of professional dental consumables, with a combined sales organization of over 3,500 individuals. Still, we have less than a 20 percent share of the estimated $18 billion global dental consumables market, offering ample room for future growth. To help us do so, we have sharpened our focus on efficiency by launching a global program designed to address these opportunities. Across the global business, our Associates are joining forces to enhance our customer value proposition, build on our strengths and create efficiencies to reinvest for growth. PERCENT OF 2014 SALES BY REGION EXCLUDING PRECIOUS METAL CONTENT on customers With sales in more than 120 countries, our 3,500-member sales team keeps us close to the professionals who rely on our product solutions to serve their patients' needs. NORTH AMERICA 37% EUROPE & CIS 45% ASIA 6% JAPAN 3% MIDDLE EAST & AFRICA 3% LATIN AMERICA 4% PERCENT OF 2014 SALES BY PRODU CT LINE EXCLUDING PRECIOUS METAL CONTENT 10% 13% 28% 49% 2 AUSTRALIA 2% on products DENTSPLY's portfolio represents unparalleled product depth and encompasses some of the most well- established brands in the market. CHAIRSIDE CONSUMABLES Restorative, Preventive MEDICAL Urology, Surgery, Instruments SPECIALTIES Implants, Endodontics, Orthodontics PROSTHETICS Artificial Teeth, Denture Bases, Crown and Bridge, CAD/CAM FOCUS 2014 DENTSPLY ANNUAL REP ORT These efforts are designed to allow us to take full advantage of new market opportunities and reach our performance goals. Specifically, we established plans to expand our operating margins from 17.6 percent in 2013 to 20 percent in 2017, improve asset management and improve return on invested capital (ROIC) to a target range of 12 to 15 percent. We made good progress against these targets in 2014, growing operating margins significantly and improving our ROIC to 11.6 percent. We are focused on several key operational and strategic opportunities that are driving DENTSPLY forward. We have begun to improve our procurement process from a traditionally local, disaggregated activity to an integrated, global strategic process. We have already obtained value in lower costs and improved terms, and expect even greater benefits as this effort accelerates in 2015. We also began planning to move from managing our businesses on a local divisional basis to a global strategic business unit focus. This transition will facilitate a much more effective use of global platforms for research, branding, manufacturing and asset deployment. Another area of emphasis is the effectiveness of our local selling units, where we are increasing the coordination of our sales forces to meet customer needs while reducing overhead costs and redeploying cost savings toward investments that further increase value for our customers. The timing of our global initiative is both opportune and urgent. With such an uncertain global economic forecast, we simply cannot maintain the status quo and trust that we will achieve sufficient growth. The outlook for Europe remains cloudy, and today we face extreme international currency volatility and economic conditions that are challenging across many regions in the world. The U.S. has been showing some signs of improvement, which we expect to continue, providing an important growth opportunity in the near term. While we can’t control our markets, we can control how we perform within the conditions of those markets. We believe the focus of our plan will not only strengthen our near- to intermediate- term results, but also provide a reinvestment platform to deliver stronger long-term value to our customers and shareholders. The reinvestment platform we envision will fund initiatives to maximize our innovation efforts through new product launches, invest in the expertise of our sales force, and deliver broader value to clinicians through expansion of our clinical education programs. “Our leadership team is actively engaged in redesigning global processes and implementing significant change throughout the organization, helping to create a sustainable platform to drive future value.” ADJ UST ED EARNI NGS per share* 14 13 12 11 $2.50 $2.35 $2.22 $2.03 * See footnotes 1–5 on inside front cover O PE RATING CASH F LOW in millions $560 $418 $370 $393 RET URN O N INVEST ED CAPITAL 11.6% 9.6% 9.9% 9.0% CASH RETU RNED TO SHAREHOLDER S in millions $200.6 $152.9 $70.3 $108.1 14 13 12 11 14 13 12 11 14 13 12 11 3 FOCUS 2014 DENTSPLY ANNUAL REP ORT Transforming DENTSPLY will take time, energy, resources – and inspires us to consider all of the great possibilities the future focus. It would be impossible to accomplish this task without our holds for DENTSPLY. I also thank you, our shareholders, for energetic and knowledgeable team of Associates. Our leadership your confidence in DENTSPLY. Rest assured that our focus is on team is actively engaged in redesigning global processes and positioning our Company for sustainable value creation over the implementing significant change throughout the organization, long term. helping to create a sustainable platform to drive future value. The important decisions and actions of our Associates today will define the future of DENTSPLY. I have great confidence in those who are setting us on this path toward success. In closing, I would like to thank our Board of Directors for their advice and counsel. I especially want to thank and recognize Bret W. Wise our longest-standing Director, Leslie Jones, who is retiring after Chairman and Chief Executive Officer 32 years of Board service. Les forged his career with DENTSPLY more than 50 years ago and served in many important leadership roles, including Chairman of our Board from 1996 to 1998. Over April 2015 the years, Les helped shape our global business, and his vision on patients DENTSPLY helps dental professionals focus on patients’ needs across a lifetime of oral health. HEALTHY TOOTH AESTHETICS OF THE TOOTH SAVING THE TOOTH TOOTH LOSS Preventive Orth odontic Resto rative Endodonti c Im pl ant s Prost het ics 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 Commission File Number 0-16211 DENTSPLY International Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 221 West Philadelphia Street, York, PA (Address of principal executive offices) 39-1434669 (I.R.S. Employer Identification No.) 17405-2558 (Zip Code) Registrant’s telephone number, including area code: (717) 845-7511 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, par value $.01 per share Name of each exchange on which registered The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:2) No (cid:3) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:3) No (cid:2) 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 (cid:2) No (cid:3) 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 (cid:2) No (cid:3) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. □ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer (cid:2) 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 (cid:3) No (cid:2) The aggregate market value of the voting common stock held by non-affiliates of the registrant computed by reference to the the registrants most recently completed second quarter June 30, 2014, was the last business day of closing price as of $6,713,171,065. The number of shares of the registrant’s Common Stock outstanding as of the close of business on February 10, 2015 was 140,351,339. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the definitive Proxy Statement of DENTSPLY International Inc. (the ‘‘Proxy Statement’’) to be used in connection with the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K to the extent provided herein. Except as specifically incorporated by reference herein the Proxy Statement is not deemed to be filed as part of this Form 10-K. DENTSPLY International Inc. Table of Contents PART I Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4 Not Applicable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stock Matters . . Item 13 Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . Item 14 Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 1 9 16 17 18 19 19 20 22 23 43 45 45 45 45 46 46 46 46 46 Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 PART IV i PART I FORWARD-LOOKING STATEMENTS ‘‘plan,’’ ‘‘intend,’’ ‘‘project,’’ ‘‘believe,’’ statements ‘‘anticipate,’’ This report contains information that may constitute ‘‘forward-looking statements’’ within the meaning of the Litigation Reform Act of 1995. Private Securities ‘‘could,’’ Generally, the use of terms such as ‘‘may,’’ ‘‘expect,’’ ‘‘estimate,’’ ‘‘forecast,’’ ‘‘assumes’’ and similar expressions identify forward-looking statements. All that address operating performance, events or developments that DENTSPLY International Inc. (‘‘DENTSPLY’’ or the ‘‘Company’’) expects or anticipates will occur in the future are forward-looking statements. Forward-looking statements are based on management’s current expectations and beliefs, and are inherently susceptible in circumstances that could cause actual results to differ materially from the Company’s historical experience and our present expectations or projections. These risks and uncertainties include, but are not those described in Part I, Item 1A (‘‘Risk Factors’’) and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission. The Company undertakes no duty and has no obligation to update forward-looking statements as a result of future events or developments. to uncertainty, and changes limited to, risks, PART I Item 1. Business History and Overview DENTSPLY, a Delaware corporation which dates its history to 1899, believes it is the world’s largest designer, developer, manufacturer and marketer of a broad range of consumable dental products for the professional dental market. The Company also manufactures and markets device other The products. Company’s principal product categories are dental consumable products, dental laboratory products, dental specialty products and consumable medical device products. The Company’s worldwide headquarters and executive offices are located in York, Pennsylvania. consumable medical Consolidated net sales, excluding precious metal content, of the Company’s dental products accounted for approximately 88% of DENTSPLY’s consolidated net sales, excluding precious metal content, for the year ended December 31, 2014. The remaining consolidated net is primarily sales, excluding precious metal content, 1 related to consumable medical device products, materials sold to the investment casting industry, and the refining of certain precious metals. The presentation of net sales, excluding precious metal content, is considered a measure not calculated in accordance with accounting principles generally accepted in the United States of America (‘‘US GAAP’’), and is therefore considered a non-US GAAP measure. This non-US GAAP measure is discussed further in ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and a reconciliation of net sales to net sales, excluding precious metal content, is provided. Throughout 2014, the Company conducted its business through three operating segments. During the first quarter of 2014, the Company realigned reporting responsibilities for multiple locations as a result of changes to the management structure which changed operating segments from four segments in 2013 to three segments in 2014. All of the Company’s segments are primarily engaged in the design, manufacture and distribution of dental and medical products in four consumable principal product products 2) dental laboratory products 3) dental specialty products and 4) consumable medical device products. categories: 1) dental The Company conducts its business in the United States of America (‘‘U.S.’’), as well as in over 120 foreign countries, principally through its foreign subsidiaries. DENTSPLY has a long-established presence in the European market, particularly in Germany, Sweden, France, the United Kingdom (‘‘UK’’), Switzerland and Italy, as well as in Canada. The Company also has a significant market presence in the countries of the Commonwealth of Independent States (‘‘CIS’’), Central and South America, region and the Pacific Rim. the Middle-East Geographic Information sales, including For 2014, 2013 and 2012, the Company’s net sales, excluding precious metal content, to customers outside accounted the U.S., for export respectively, of approximately 66%, 67% and 67%, consolidated net sales, excluding precious metal content. Reference is made to the information about the Company’s U.S. and foreign sales by shipment origin set forth in Note 5, Segment and Geographic Information, to the consolidated financial statements in this Form 10-K. Segment Information Information regarding the Company’s operating segments for the years ended December 31, 2014, 2013 and 2012 can be found in Note 5, Segment and Geographic Information, to the consolidated financial statements in this Form 10-K. Small equipment products in the dental consumable products category consist of various durable goods used in dental offices for the treatment of patients. DENTSPLY’s small equipment products include dental handpieces, intraoral curing light systems, dental diagnostic systems and ultrasonic scalers and polishers. Principal Products dental professional The worldwide industry encompasses the diagnosis, treatment and prevention of disease and ailments of the teeth, gums and supporting bone. DENTSPLY’s principal dental product categories are dental consumable products, dental laboratory products and the Company’s consumable medical device products provide for urological and surgical applications. These products products. Additionally, specialty dental are produced by the Company in the U.S. and internationally and are distributed throughout the world under some of the most well-established brand names and trademarks in these industries, including ANKYLOS, AQUASIL ULTRA, ARTICADENT, ASTRA TECH, ATLANTIS, CALIBRA, CAULK, CAVITRON, CERAMCO, CERCON, Dental Laboratory Products Dental sales of dental laboratory products are used in the laboratories. preparation of dental appliances by dental Net laboratory products, excluding precious metal content, accounted for approximately 10%, 10% and 11% of the Company’s consolidated net sales, excluding precious metal content, for the years ended December 31, 2014, 2013 and 2012, respectively. in the dental DENTSPLY’s products laboratory products category include dental prosthetics, including teeth, precious metal dental alloys, dental artificial ceramics and crown and bridge materials. Equipment in this category includes computer aided design and machining (CAD/CAM) ceramic systems and porcelain furnaces. CITANEST, DELTON, DENTSPLY, DETREY, DYRACT, Dental Specialty Products ELEPHANT, ESTHET.X, IN-OVATION, INTERACTIVE MYSTIQUE, LOFRIC, MAILLEFER, MIDWEST, NUPRO, PALODENT ORAQIX, ORIGO, OSSEOSPEED, PLUS, PEPGEN P-15, PORTRAIT, PRIME & BOND, PROFILE, PROTAPER, RECIPROC, RINN, SANI-TIP, SENSE, STYLUS, SULTAN, TRIODENT MATRIX THERMAFIL, SYSTEMS, TRUBYTE, WAVEONE, WELLSPECT, XENO, XIVE, XYLOCAINE and ZHERMACK. SUREFIL, Dental Consumable Products Dental consumable products consist of value added dental supplies and devices and small equipment used in dental offices for the treatment of patients. Net sales of dental consumable products, excluding precious metal content, accounted for approximately 28% of the Company’s consolidated net sales, excluding precious metal content, for each of the years ended December 31, 2014, 2013 and 2012. DENTSPLY’s dental supplies and devices in the dental consumable products category include dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, tooth whiteners and topical fluoride. The Company manufactures thousands of different dental consumable products marketed under more than one hundred brand names. 2 Dental specialty products are specialized treatment products used within the dental office and laboratory settings. Net sales of dental specialty products, excluding precious metal content, accounted for approximately 49%, 49% and 48% of the Company’s consolidated net sales, excluding precious metal content, for the years ended December 31, 2014, 2013 and 2012, respectively. DENTSPLY’s products in this category include endodontic implants and instruments and materials, (root canal) related products, bone grafting materials, 3D digital scanning and treatment planning software, dental and orthodontic appliances and accessories. Consumable Medical Device Products Consumable medical device products consist mainly of urology catheters, certain surgical products, medical drills and other products. Net sales of consumable medical device products, excluding precious metal content, accounted for approximately 13%, 13% and 13% of the Company’s consolidated net sales, excluding precious metal ended content, December 31, 2014, 2013 and 2012, respectively. years the for Markets, Sales and Distribution The Company believes that its products will grow over the long-term based on the following factors: the market for • • • • • • • Increasing worldwide population. Aging mix of population in developed countries — The U.S., Europe, Japan and other regions have aging population with significant the needs for dental care and healthcare, elderly in these regions are well positioned to pay for the required procedures since they control discretionary income. amounts of sizable are teeth retained Natural being longer — Individuals with natural teeth are much more likely to visit a dentist in a given teeth than those without any natural year remaining. has The changing dental practice in North America in these and Western Europe — Dentistry from a transformed been regions profession pain, dealing with primarily infections and tooth decay to one with increased emphasis on preventive care and cosmetic dentistry. The demands for patient comfort and ease of product use and handling. capita and discretionary Per incomes are increasing in emerging markets — As personal incomes continue to rise in the emerging the Pacific Rim, CIS and Latin nations of America, obtaining healthcare, including dental services, is a growing priority. Many surveys indicate the middle class population will expand significantly within these emerging markets. The Company’s business is less susceptible than many other industries to general downturns in the economies in which it operates. Many of the products the Company offers relate to dental procedures and health conditions that are considered necessary by patients regardless of the economic environment. Dental specialty products support products discretionary dental procedures are the most susceptible to changes in economic conditions. that and DENTSPLY believes that demand in a given geographic market for its dental and medical products vary according to the stage of social, economic and technical particular market. of Geographic markets for DENTSPLY’s dental and medical products can be categorized into the following two stages of development: development the Developed Markets The U.S., Canada, Western Europe, Japan, Australia and certain other countries are highly developed markets that demand the most advanced dental and health products and have the highest level of expenditures for dental and medical care. These markets account for approximately 80% to 85% of the Company’s net sales. In these markets, dental care is increasingly focused upon preventive care and specialized dentistry, in addition to basic procedures, such as excavation of teeth and filling of cavities, tooth extraction and denture replacement. These markets require varied and complex dental products, utilize sophisticated diagnostic and imaging equipment and demand high levels of attention to protect against infection and patient cross-contamination. A broader segment of the population in these markets can afford higher end treatments in both dental and medical care. Emerging Markets per cavities and other In certain countries for approximately 15% to 20% of in Central America, South America, Eastern Europe, Pacific Rim, Middle East and Africa, most dental care is often limited to excavation of restorative teeth and filling of techniques, capita reflecting more modest expenditures for dental and medical care. These markets account the Company’s net sales. The Company markets products with a diverse price including dual-brand range alternatives to address patient and professional needs. However, there is also a portion of the population in these markets that receive a level of dental and medical care similar to that received in developed countries. As such, many of our premium products are actively sold into these regions. The Company offers products and equipment for use in markets at both of these stages of development. The Company believes that demand for more technically advanced products will increase as each of these markets develop. The Company also believes that its recognized brand names, high quality innovative products, clinical strong support education, technical services and 3 international distribution capabilities position it well to benefit from opportunities in virtually any market. DENTSPLY employs approximately 3,600 highly trained, product-specific sales and technical staff to provide comprehensive marketing and service tailored to the particular sales and technical support requirements of its distributors, dealers and the end-users. Dental DENTSPLY distributes approximately half of its dental products through third-party distributors. Certain highly technical products such as precious metal dental alloys, dental ceramics, crown and bridge porcelain products, and materials, orthodontic endodontic appliances, implants, and bone substitute and grafting materials are often sold directly to the dental laboratory or dental professionals in some markets. No single customer represented ten percent or more of DENTSPLY’s consolidated net sales for the periods presented. instruments ‘‘pull through’’ marketing approach, Although many of its dental sales are made to distributors, dealers and importers, DENTSPLY focuses its marketing efforts on the dentists, dental hygienists, dental assistants, dental laboratories and dental schools which are the end-users of its products. As part of this the end-user Company conducts extensive distributor, dealer and end-user marketing programs. Additionally, the Company trains laboratory technicians, dental hygienists, dental assistants and dentists in the proper use of its products them to the and introduces technological latest developments at its educational courses conducted throughout the world. The Company also maintains ongoing consulting and educational relationships with various dental associations and recognized worldwide opinion leaders in the dental field. Medical The Company’s urology products are sold directly in approximately 15 countries throughout Europe and North America, and through distributors in approximately 20 additional markets. The Company’s largest markets include the UK, Germany and France. Key customers include urologists, urology nurses, general practitioners and direct-to-patients. Historical reimbursement levels within Europe have been higher for intermittent catheters which explain a greater penetration of single-use catheter products in that market. In the U.S., which the Company considers an reimbursement important growth market, the environment has improved since 2008 as the infection control cost benefits of disposable catheters gain acceptance among payers. The Company’s surgery products are sold directly in approximately 13 countries and through distributors in approximately 20 additional markets. The Company’s largest markets include Australia, Norway and the UK. Key surgeons, hospital nurses, physiotherapists, hospital purchasing departments and medical supply distributors. customers include The Company also maintains ongoing consulting and educational relationships with various medical associations and recognized worldwide opinion leaders in this field. Product Development to keeping market Innovation and successful product development are critical leadership position in key product categories and growing market share in other products categories while strengthening the Company’s prominence in the dental and medical markets that it serves. While many of DENTSPLY’s existing products undergo brand extensions, the Company also continues to focus efforts on successfully launching innovative products that represent fundamental change. this technological development, New advances in technology are also anticipated to have a significant influence on future products in dentistry the and in select areas of healthcare. As a result, Company pursues research and development initiatives to support including collaborations with external research institutions, dental and medical schools. Through its own internal research centers as well as through its collaborations with external research institutions, dental and medical schools, the Company directly invested $80.8 million, $85.1 million and $85.4 million in 2014, 2013 and 2012, respectively, in connection with the development of new products, improvement of existing products and advances in technology. The year-over-year comparison for 2014 versus 2013 was foreign currency impacted by translation, which decreased reported expense variations. The continued development of these areas is a critical step in meeting the Company’s strategic goal as a leader in defining the future of dentistry and in select areas in health care. In addition to the direct in product development and improvement, the Company also invests in these activities through acquisitions, and by entering investment 4 into licensing agreements with third parties as well as purchasing technologies developed by third parties. Acquisition Activities DENTSPLY believes that the dental products industry continues to experience consolidation with respect to both product manufacturing and distribution, although it remains fragmented thereby creating a number of acquisition opportunities. DENTSPLY also seeks to expand its position in consumable medical device products through acquisitions. The Company views acquisitions as a key part of its growth strategy. These acquisition activities are intended to supplement the Company’s core growth and assure ongoing expansion of including new technologies, additional products, organizational strength and geographic breadth. its business, Operating and Technical Expertise believes DENTSPLY that to its manufacturing The success. its important are capabilities the Company’s products manufacturing processes of expertise. and varied technical require substantial Complex materials are technology necessary to manufacture the Company’s products. The Company global to manufacturing operations in order to improve quality and customer service and lower costs. and processes endeavors automate its Financing Information about DENTSPLY’s working capital, in liquidity resources ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in this Form 10-K. provided capital and is Competition The Company its operations, both conducts domestic and foreign, under highly competitive market conditions. Competition in the dental and medical products industries is based primarily upon product performance, quality, safety and ease of use, as well as price, customer service, innovation and acceptance by clinicians, technicians and patients. DENTSPLY believes that its principal strengths include its well-established reputation for high quality and brand names, innovative product development and manufacturing, its global sales force, the breadth of its product line and distribution network, its products, leadership its in its commitment to customer satisfaction and support of the Company’s products by dental and medical professionals. The size and number of the Company’s competitors vary by product line and from region to region. There are many companies that produce some, but not all, of the same types of products as those produced by the Company. Regulation The sale and development, manufacture, distribution of the Company’s products are subject to comprehensive governmental regulation both within and outside the United States. The following sections describe certain, but not all, of the significant regulations that apply to the Company. For a description of the risks related to the regulations that the Company is subject to, please refer to ‘‘Item 1A. Risk Factors.’’ Certain of the Company’s products are classified as medical devices under the United States Food, Drug, and Cosmetic Act (the ‘‘FDCA’’). The FDCA requires these products, when sold in the United States, to be safe and effective for their intended use and to comply with the regulations administered by the United States Food and Drug Administration (‘‘FDA’’). Certain medical device products are also regulated by comparable agencies in non-U.S. countries in which they are produced or sold. regarding Dental and medical devices of the types sold by DENTSPLY are generally classified by the FDA into a renders them subject only to general category that including controls that apply to all medical devices, misbranding, alteration, regulations notification, record-keeping and good manufacturing practices. In the European Union, DENTSPLY’s products are subject to the medical devices laws of the various member states, which are based on a Directive of the European Commission. Such laws generally regulate the safety of the products in a similar way to the FDA regulations. DENTSPLY products in Europe bear the CE mark showing that such products adhere to European regulations. All dental amalgam filling materials, including those manufactured and sold by DENTSPLY, contain mercury. Various groups have alleged that dental amalgam containing mercury is harmful to human health and have actively lawmakers and regulators to pass laws or adopt regulatory changes restricting the use, or requiring a warning against alleged lobbied state and federal 5 there risks, of dental amalgams. The FDA, potential the National Institutes of Health and the U.S. Public Health are no each indicated that Service have demonstrated direct adverse health effects due to exposure to dental amalgam. In response to concerns raised by certain consumer groups regarding dental amalgam, the FDA formed an advisory committee in 2006 to review peer-reviewed scientific literature on the safety of dental amalgam. In July 2009, the FDA concluded its review of dental amalgam, confirming its use as a safe and effective restorative material. Also, as a result of this review, the FDA classified amalgam and its component parts, elemental mercury and powder alloy, as a Class II medical device. Previously there was no classification for encapsulated amalgam, and dental mercury (Class I) and alloy (Class II) were classified separately. This new regulation places encapsulated amalgam in the same class of devices as most other restorative materials, including composite and gold fillings, and makes amalgam subject to special controls by FDA. In that respect, the FDA recommended that certain information about dental amalgam be provided, which includes information indicating that dental amalgam releases low levels of mercury vapor, and that studies on people ages six and over as well as FDA estimated exposures of children under six, have not indicated any adverse health risk associated with the use of dental amalgam. After the FDA issued this regulation, several petitions were filed asking the FDA to its position. Another advisory panel was reconsider these petitions. established by the FDA to consider Hearings in December 2010. The FDA has taken no action as of the filing date of this Form 10-K from the 2010 advisory panel meeting. panel were advisory held the of In Europe, particularly in Scandinavia and Germany, the contents of mercury in amalgam filling materials have been the subject of public discussion. As a consequence, in 1994 the German health authorities required suppliers of dental amalgam to amend the instructions for use of amalgam filling materials to include a precaution against the use of amalgam for children less than eighteen years of age and to women of childbearing age. Additionally, some groups have asserted that the use of dental amalgam should be prohibited because of concerns about environmental from the disposition of mercury within dental amalgam, which has resulted in the sale of mercury containing products being banned In the in Sweden and severely curtailed in Norway. the Environmental Protection Agency United States, impact proposed in September 2014 certain effluent limitation guidelines and standards under the Clean Water Act to help cut discharges of mercury-containing dental amalgam to the environment. The rule would require affected dentists to use best available technology (amalgam separators) and other best management practices to control mercury discharges to publicly-owned treatment works. The Company strongly recommends adherence to the American Dental Association’s Best Management Practices for Amalgam Waste and includes this in every package of dental amalgam. DENTSPLY also manufactures and sells non-amalgam dental filling materials that do not contain mercury. companies intermediaries The Company is also subject to the United States Foreign Corrupt Practices Act and similar anti-bribery laws applicable in non-United States jurisdictions that generally from and their prohibit improperly offering or paying anything of value to non- United States government officials for the purpose of obtaining or retaining business. Some of our customer the United States are with relationships outside of governmental entities and therefore may be subject to such anti-bribery laws. In the sale, delivery and servicing of our products outside of the United States, we must also comply with various export control and trade embargo those administered by the Department of Treasury’s Office of Foreign Assets Control (‘‘OFAC’’) and the Department of Industry and Security (‘‘BIS’’) Commerce’s Bureau of which may require licenses or other authorizations for transactions relating to certain countries and/or with certain individuals the United States identified by government. Despite our internal compliance program, our policies and procedures may not always protect us from reckless or committed by our criminal acts employees or agents. Violations of these requirements are including punishable by criminal or civil substantial fines and imprisonment. regulations, sanctions, including laws and The Company is subject to laws and regulations governing data privacy, including in the United States, the Health Insurance Portability and Accountability Act of 1996 (‘‘HIPAA’’) as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, which restricts the use and disclosure of personal health information, mandates the adoption of standards relating to the privacy and security of individually identifiable health information and requires us to report certain individually identifiable health breaches of unsecured, information. 6 The U.S. Federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal health care program, such as Medicare or Medicaid. The Physician Payments Sunshine Provisions of the Patient Protection and Affordable Care Act require the Company to record all transfers of value to physicians and teaching hospitals and to report this data to the Centers for Medicare and Medicaid Services for public disclosure. Similar reporting requirements have also been enacted in several states, and an increasing number of countries worldwide either have adopted or are considering similar laws requiring transparency of interactions with health care professionals. The Company believes it is in substantial compliance with the laws and regulations that regulate its business. Sources and Supply of Raw Materials and Finished Goods The Company manufactures the majority of the products sold by the Company. Most of the raw materials used by the Company in the manufacture of its products are purchased from various suppliers and are typically available from numerous sources. No single supplier accounts for more than 10% of DENTSPLY’s supply requirements. Intellectual Property Products manufactured by DENTSPLY are sold primarily under its own trademarks and trade names. DENTSPLY also owns and maintains more than 2,500 patents throughout the world and is licensed under a number of patents owned by others. trademark DENTSPLY’s policy is to protect its products and technology through patents and trademark registrations both in the U.S. and in significant international markets. The Company use carefully monitors worldwide and promotes enforcement of its patents and trademarks in a manner that is designed to balance the cost of such protection against obtaining the greatest value for the Company. DENTSPLY believes its patents and trademark properties are important and contribute to the Company’s marketing position but it does not consider its overall business to be materially dependent upon any individual patent or trademark. 7 Employees At December 31, 2014, the Company and its subsidiaries employed approximately 11,600 employees. Of these employees, approximately 3,400 were employed in the United States and 8,200 in countries outside of the United States. Less than 5% of employees in the United States are covered by collective bargaining agreements. the employees United States are covered by collective bargaining, union contract or other similar type program. The Company believes that it generally has a positive relationship with its employees. outside Some of Environmental Matters DENTSPLY believes that its operations comply in all material respects with applicable environmental laws and regulations. Maintaining this level of compliance has not had, and is not expected to have, a material effect on the Company’s capital expenditures or on its business. Other Factors Affecting the Business Approximately two-thirds of the Company’s sales are located in regions outside the U.S., and the Company’s consolidated net sales can be impacted negatively by the strengthening or positively by the weakening of the U.S. dollar. Additionally, movements in certain foreign exchange rates may unfavorably or favorably impact the Company’s results of operations, financial condition and liquidity as a number of the Company’s manufacturing and distribution operations are located outside of the U.S. The Company’s business is subject to quarterly fluctuations of consolidated net sales and net income. The Company typically implements most of its price changes in the beginning of the first or fourth quarter. changes, other marketing and promotional Price programs as well as the management of inventory levels by distributors and the implementation of strategic initiatives, may impact sales levels in a given period. Sales for the industry and the Company are generally strongest in the second and fourth calendar quarters and weaker in the first and third calendar quarters, due to the effects of the items noted above and due to the impact of holidays and vacations, particularly throughout Europe. The Company tries to maintain short lead times the backlog on to the financial such, is generally not material within its manufacturing, as products statements. The public may obtain information on the operation of this Public Reference Room by calling the SEC at 1-800-SEC-0330. DENTSPLY also makes available free of charge through its website at www.DENTSPLY.com its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of reasonably practicable after such materials are filed with or furnished to the SEC. the Exchange Act as soon as Securities and Exchange Act Reports including the Company, The U.S. Securities and Exchange Commission (‘‘SEC’’) maintains a website that contains reports, proxy information and information statements, and other regarding issuers, file that electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company files annual reports, quarterly reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934, as amended (‘‘Exchange Act’’). The public may read and copy any materials the Company files with the SEC at its Public Reference Room at the following address: The Securities and Exchange Commission 100 F Street, NE Washington, D.C. 20549 8 Item 1A. Risk Factors The following are the significant risk factors that could materially impact DENTSPLY’s business, financial condition or future results. The order in which these factors appear should not be construed to indicate their relative importance or priority. Negative changes could occur in the dental or medical device markets, the general economic environments, or government reimbursement or regulatory programs of the regions in which the Company operates. The success of the Company is largely dependent upon the continued strength of dental and medical device markets and is also somewhat dependent upon the general economic environments of the regions in which DENTSPLY operates. Negative changes to these markets and economies could materially impact the Company’s results of operations and financial condition. In many markets, dental reimbursement is largely out of pocket for the consumer and thus utilization rates can vary For significantly depending on economic growth. instance, data suggests that the utilization of dental services by working age adults in the U.S. may have declined over the last several years. Additionally, there is also uncertainty as to what impact the Affordable Care Act may have on dental utilization in the U.S. In certain markets, particularly in the European Union, government and regulatory programs have a more significant impact than in other markets. Changes to these programs could have a positive or negative impact on the Company’s results. Prolonged negative economic conditions in domestic and global markets may adversely affect the Company’s suppliers and customers and consumers, which could harm the Company’s financial position. Prolonged negative changes in domestic and global economic conditions or disruptions of either or both of the financial and credit markets may affect the chain and the customers and Company’s consumers of the Company’s products and may have a material adverse effect on the Company’s results of operations, financial condition and liquidity. supply favorably impact the weakening of impact the consolidated statements of operations. With approximately two-thirds of the Company’s sales located in regions outside the U.S., the Company’s consolidated net sales are impacted negatively by the strengthening or the U.S. dollar. positively by Additionally, movements in certain foreign exchange rates may unfavorably or the Company’s results of operations, financial condition and liquidity as a and number distribution operations are located outside of the U.S. Changes in exchange rates may have a negative effect on the Company’s customers’ access to credit as well as on the underlying strength of particular economies and dental markets. Although the Company uses certain financial instruments to attempt to mitigate market fluctuations in foreign exchange rates, there can the Company’s manufacturing of be no assurance that such measures will be effective or that they will not create additional financial obligations on the Company. Volatility in the capital markets or investment vehicles could limit the Company’s ability to access capital or could raise the cost of capital. Although the Company continues to have positive operating cash flow, a disruption in the credit markets may reduce sources of liquidity available to the Company. institutions to The Company relies on multiple financial provide funding pursuant to existing and/or future credit agreements, and those institutions may not be able to provide funding in a timely manner, or at all, when required by the Company. The cost of or lack of available credit could impact the Company’s ability to develop sufficient liquidity to maintain or grow the Company, which in turn may adversely affect the Company’s businesses and results of operations, financial condition and liquidity. The Company also manages cash and cash equivalents and short-term investments through various institutions. There may be a risk of loss on investments based on the volatility of the underlying instruments that would not allow the Company to recover the full principal of its investments. Due to the Company’s international operations, the Company is exposed to the risk of changes in foreign exchange rates. Due to the international nature of DENTSPLY’s business, movements in foreign exchange rates may The Company may not be able to access or renew its precious metal consignment resulting in a liquidity constraint equal to the fair market value of the precious metal value of inventory and would subject the Company to inventory valuation risk as the value of the facilities 9 precious metal volatility to reported earnings. inventory fluctuates resulting in greater The Company’s quarterly operating results and market price for the Company’s common stock may be volatile. DENTSPLY experiences fluctuations in quarterly sales and earnings due to a number of factors, many of which are substantially outside of the Company’s control, including but not limited to: • • • • • • • • • • The timing of new product introductions by DENTSPLY and its competitors; Timing of industry trade shows; Changes in customer inventory levels; Developments in government reimbursement policies; Changes in customer preferences and product mix; The Company’s ability to supply products to meet customer demand; Fluctuations in manufacturing costs; Changes in income tax laws and incentives which could create adverse tax consequences; Fluctuations in currency exchange rates; and General economic conditions, as well as those specific related industries. healthcare and the to As a result, the Company may fail to meet the expectations of securities analysts and investors, which could cause its stock price to decline. Quarterly fluctuations generally result in net sales and operating profits historically being higher in the second and fourth quarters. The Company typically implements most of its price changes early in the fourth quarter or beginning of the year. These price changes, other marketing and promotional programs, which are offered to customers from time to time in the ordinary course of business, the management of inventory levels by distributors and the implementation of strategic initiatives, may impact sales levels in a given period. Net sales and operating profits generally have been lower in the first and third quarters, primarily due not only to increased sales in the quarters preceding these quarters, but also due to the impact of holidays and vacations, particularly throughout Europe. 10 In addition to fluctuations in quarterly earnings, a variety of other factors may have a significant impact on the market price of DENTSPLY’s common stock causing volatility. These factors include, but are not limited to, the publication of earnings estimates or other research reports and speculation in the press or investment community; changes in the Company’s industry and competitors; the Company’s financial condition and cash flows; any future issuances of DENTSPLY’s common stock, which may include primary offerings for cash, stock splits, in connection with business acquisitions, issuances restricted stock and the grant or exercise of stock options from time to time; general market and economic conditions; and any outbreak or escalation of hostilities in geographical areas in which the Company does business. Also, the NASDAQ National Market (‘‘NASDAQ’’) can experience extreme price and volume fluctuations that can be unrelated or disproportionate to the operating performance of the companies listed on the NASDAQ. Broad market and industry factors may negatively affect the market price of the Company’s operating common performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against if instituted, could companies. This type of litigation, result of diversion and costs substantial management’s attention and resources, which could harm the Company’s business. regardless actual stock, of in a The dental and medical device supplies markets are highly competitive and there is no guarantee that the Company can compete successfully. successfully, or that new products The worldwide markets for dental and medical products are highly competitive. There can be no assurance that the Company will successfully identify new product opportunities and develop and market new products and technologies introduced by competitors will not render the Company’s products obsolete or noncompetitive. Additionally, the size and number of the Company’s competitors vary by product line and from region to region. There are many companies that produce some, but not all, of the same types of products as those produced by the Company. Certain of DENTSPLY’s competitors may have greater than the Company. In addition, the Company is exposed to the risk that its customers may introduce private label, generic, or low cost products that compete lower price points. with the Company’s products at its competitors or resources If these competitors’ products capture significant market share or result in a decrease in market prices overall, this could have a negative impact on the Company’s results of operations and financial condition. The Company may be unable to develop innovative products or obtain regulatory approval for new products. The market for DENTSPLY’s products is characterized by rapid and significant technological change, evolving industry standards and new product introductions. There can be no assurance that DENTSPLY’s products will not become noncompetitive or obsolete as a result of such factors or that we will be able to generate any economic return on the Company’s in product development. If the Company’s products or technologies become noncompetitive or obsolete, DENTSPLY’s business could be negatively affected. investment or DENTSPLY has identified new products as an important part of its growth opportunities. There can be no assurance that DENTSPLY will be able to continue to develop innovative products and that regulatory approval of any new products will be obtained from applicable U.S. regulatory authorities, or that if such approvals are obtained, such products will be favorably accepted in the marketplace. there is no assurance that entirely new Additionally, technology or approaches treatment or to dental competitors’ new products will not be introduced that could render the Company’s products obsolete. international government or DENTSPLY’s business is subject to extensive, complex and changing laws, regulations and orders that failure to comply with could subject us to civil or criminal penalties or other liabilities. by are administered orders which DENTSPLY is subject to extensive laws, regulations various and international, federal and state governmental authorities, including, among others, the FDA, the Office of Foreign Assets Control of the United States Department of the Treasury (‘‘OFAC’’), the Bureau of Industry and Security of the United States Department of Commerce (‘‘BIS’’), the United States Federal Trade Commission, the United States Department of Justice and other similar domestic and foreign authorities. These regulations include, but are not limited to, the U.S. Foreign Corrupt Practices Act and similar the Physician Payments Sunshine Act, regulations concerning the environmental supply of regulations and regulations relating to trade, import and international anti-bribery laws, conflict minerals, various export controls and economic sanctions. Such laws, regulations and orders may be complex and are subject to change. Compliance with the numerous applicable existing and new laws, regulations and orders could require us to incur substantial regulatory compliance costs. Although the Company has implemented policies and procedures to comply with applicable laws, regulations and orders, there can be no assurance that governmental authorities will not raise compliance concerns or perform audits to confirm compliance with such laws, regulations and orders. Failure to comply with applicable laws, regulations in a range of governmental or orders could result including fines or penalties, enforcement injunctions and/or criminal or other civil proceedings. Any such actions could result in higher than anticipated costs or lower than anticipated revenue and could have a material adverse effect on the Company’s reputation, business, financial condition and results of operations. actions, In 2012, the Company received subpoenas from the United States Attorney’s Office for the Southern District of Indiana (the ‘‘USAO’’) and from OFAC requesting documents and information related to compliance with export controls and economic sanctions regulations by certain of its subsidiaries. The Company also voluntarily contacted OFAC and BIS regarding compliance with export controls and economic sanctions regulations by certain other business units of the Company identified in review by the Company. The an ongoing internal Company is cooperating with the USAO, OFAC and BIS with respect to these matters. The Company may fail to realize the expected benefits of its cost reduction and restructuring efforts. In order to operate more efficiently and control costs, the Company may announce from time to time restructuring plans, including workforce reductions, global facility consolidations and other cost reduction initiatives that are intended to generate operating expense or cost of goods sold savings through direct and indirect overhead expense reductions as well as other savings. The Company has targeted adjusted operating income margins to expand to 20% as the benefits of time. Due to the these initiatives are realized over complexities inherent in implementing these types of cost reduction and restructuring activities, the Company may fail to realize expected efficiencies and benefits, or may experience a delay in realizing such efficiencies and benefits, and its operations and business could be 11 disrupted. Company management may be required to divert their focus to managing these disruptions, and the implementation may require the agreement of Company’s labor unions. Risks associated with these actions and other workforce management issues include delays in implementation of anticipated workforce in reductions, additional unexpected costs, changes restructuring plans that increase or decrease the number of impact on the Company’s relationship with labor unions, adverse effects on employee morale, and the failure to meet operational targets due to the loss of employees, any of which may impair the Company’s ability to achieve anticipated cost reductions or may otherwise harm its business, and could have a material adverse effect on its competitive position, results of operations, cash flows or financial condition. affected, negative employees The Company may be unable to obtain a supply for certain finished goods purchased from third parties. A significant portion of the Company’s injectable anesthetic products, orthodontic products, certain dental cutting instruments, catheters, nickel titanium products and certain other products and raw materials are purchased from a limited number of suppliers and in certain cases single source suppliers, some of which may also compete with the Company. As there are a limited number of suppliers for these products, there can be no assurance that the Company will be able to obtain an adequate supply of these products and raw materials in the future. Any delays in delivery of or shortages in these products could interrupt and delay manufacturing of the Company’s products and result in the cancellation of orders for these products. In addition, these suppliers could discontinue the manufacture or supply of these products to the Company at any time or supply products to competitors. DENTSPLY may not be able to identify and integrate alternative sources of supply in a timely fashion or at all. Any transition to alternate suppliers may result in delays in shipment and increased expenses and may limit the Company’s ability to deliver products to customers. If the Company is unable to develop reasonably priced alternative sources in a timely manner, or if the Company encounters delays or other difficulties in the supply or manufacturing of such products and other materials internally or from third parties, the Company’s business and results of operations may be harmed. DENTSPLY may be unable to obtain necessary product approvals and marketing clearances. DENTSPLY must obtain certain approvals and from governmental authorities, marketing clearances 12 including the FDA and similar health authorities in foreign countries to manufacture, market and sell its products. regulate the marketing, These regulatory agencies manufacturing, labeling, packaging, advertising, sale and distribution of medical devices, including the export of medical devices to foreign countries. The regulatory review process which must be completed prior to marketing a new medical device may delay or hinder a product’s timely entry into the marketplace. There can be no assurance that the review or approval process for these products by the FDA or any other applicable governmental authority will occur in a timely fashion, if at all, or that additional regulations will not be adopted or current regulations amended in such a manner as will adversely affect the Company. The FDA also oversees the content of advertising and marketing materials relating to medical devices which have received FDA clearance. Delays or failure to receive the necessary product approvals from governmental authorities could negatively impact DENTSPLY’s operations. There also can be no assurance that regulatory agencies may not disallow the use of certain raw material components, which could have a negative impact on the Company’s ability to manufacture, market and sell particular products or product lines. Inventories maintained by the Company’s customers may fluctuate from time to time. The Company relies in part on its predictions of dealer and customer inventory levels in projecting future demand levels and financial results. These inventory levels may fluctuate, and may differ from the Company’s predictions, resulting in the Company’s projections of future results being different than expected. There can be no assurance that the Company’s dealers and customers will maintain levels of inventory in accordance with the Company’s predictions or past history, or that the timing of customers’ inventory build or liquidation will be in accordance with the Company’s predictions or past history. Changes in or interpretations of, tax rules, operat- ing structures, country profitability mix and regulations may adversely affect the Company’s effective tax rates. The Company is a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Unanticipated changes in the Company’s tax rates could affect its future results of operations. The Company’s future effective tax rates could be unfavorably affected by factors such as changes in, or interpretation of, tax rules and regulations in the jurisdictions in which the Company does business, by structural changes in the Company’s businesses, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes in the valuation of the Company’s deferred tax assets and liabilities. The Company’s expansion through acquisition involves risks and may not result in the expected benefits. The Company continues to view acquisitions as a key part of its growth strategy. The Company continues to be active in evaluating potential acquisitions although there is no assurance that these efforts will result in completed transactions as there are many factors that affect the success of such activities. If the Company does succeed in acquiring a business or product, there can be no assurance that the Company will achieve any of the benefits that it might anticipate from such an acquisition and the attention and effort devoted to the integration of could divert management’s an acquired business attention from normal business operations. the Company makes acquisitions, it may incur debt, assume contingent liabilities and/or additional risks, or create additional expenses, any of which might adversely affect its financial results. Any financing that the Company might need for acquisitions may only be available on terms that restrict its business or that impose additional costs that reduce its operating results. If Challenges may be asserted against the Company’s products due to real or perceived quality or health issues. The Company manufactures and sells a wide portfolio of dental and medical device products. While the Company endeavors to ensure that its products are safe and effective, there can be no assurance that there may not be challenges from time to time regarding the real or perceived quality or health impact of the Company’s products or certain raw material components of the Company’s products. All dental amalgam filling materials, including those manufactured and sold by DENTSPLY, contain mercury. Some groups have asserted that amalgam should be discontinued because of its mercury that disposal of mercury containing products may be harmful to the environment. If governmental authorities elect to place restrictions or significant regulations on the sale and/or disposal of dental amalgam, that could have an adverse impact on content and/or 13 left over the Company’s sales of dental amalgam. DENTSPLY also manufactures and sells non-amalgam dental filling materials that do not contain mercury but that may contain bisphenol-A, commonly called BPA. BPA is found in many everyday items, such as plastic bottles, foods, detergents and toys, and may be found in certain dental composite materials or sealants either as a by-product of other ingredients that have degraded, or as a trace material from the manufacture of other ingredients used in such composites or sealants. The FDA currently allows the use of BPA in dental materials, medical devices, and food packaging. Nevertheless, public reports and concerns regarding the potential hazards of dental amalgam or of BPA could contribute to a perceived safety risk for the Company’s products that contain mercury or BPA. Adverse publicity about the quality or safety of our products, whether or not ultimately based on fact, may have an adverse effect on our brand, reputation and operating results. Issues related to the quality and safety of the Company’s products, ingredients or packaging could cause a product recall or discontinuation resulting in harm to the Company’s reputation and negatively impacting the Company’s operating results. The Company’s products generally maintain a good reputation with customers and end-users. Issues related to quality and safety of products, ingredients or packaging, could jeopardize the Company’s image and reputation. Negative publicity related to these types of concerns, whether valid or not, might negatively impact demand for the Company’s products or cause production and delivery disruptions. The Company may need to recall or discontinue products if they become unfit for use. In addition, the Company could potentially be subject to litigation or government action, which could result in payment of fines or damages. Cost associated with these potential actions could negatively affect the Company’s operating results, financial condition and liquidity. The Company’s Orthodontics business is subject to risk. that is subject The Company sources a substantial portion of its orthodontic products from a Japanese supplier under an agreement to periodic renewal. The Company also has established alternative sources of supply. The market for orthodontic products is highly to significant negative price competitive and subject pressure. Changes in or interpretations of, accounting principles could result in unfavorable charges to operations. interprets or The Company prepares its consolidated financial statements in accordance with US GAAP. These principles are subject to interpretation by the SEC and various formed to interpret and create appropriate bodies accounting principles. Market conditions have prompted accounting standard setters to issue new guidance which accounting seeks further instruments, to pronouncements structures or to issue new transactions as well as standards expanding disclosures. It is possible that future accounting standards the Company would be required to adopt could change the current accounting treatment applied to the Company’s consolidated financial statements and such changes could have a material adverse effect on the Company’s business, results of operations, financial condition and liquidity. to revise financial related If the Company’s goodwill or intangible assets become impaired, the Company may be required to record a significant charge to earnings. are upon assets dependent Under US GAAP, the Company reviews its goodwill and intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Additionally, goodwill is required to be tested for impairment at least annually. The valuations used to determine the fair values used to test goodwill or various intangible assumptions and reflect management’s best estimates. Net sales growth, discount rates, earnings multiples and future cash flows are critical assumptions used to determine these fair values. Slower net sales growth rates in the dental or medical device industries, an increase in discount rates, unfavorable changes in earnings multiples or a decline in future cash flows, among other factors, may cause a change in circumstances indicating that the carrying value of the Company’s goodwill or intangible assets may not be recoverable. The Company may be required to record a significant charge to earnings in the financial statements during the period in which any impairment of the Company’s goodwill or intangible assets is determined. The Company faces the inherent risk of litigation and claims. The Company’s business involves a risk of product liability and other legal actions or claims, including possible recall actions affecting the Company’s products. The primary risks to which the Company is types of 14 exposed are related to those products manufactured by the Company. The Company has insurance policies, including product liability insurance, covering these risks in amounts that are considered adequate; however, the Company cannot provide assurance that the maintained coverage is sufficient to cover future claims or that the coverage will be available in adequate amounts or at a reasonable cost. Also, other types of claims asserted against the Company may not be covered by insurance. A successful claim brought against the Company in excess of available insurance, or another type of claim which is uninsured or that results in significant adverse publicity against the Company, could harm its business and overall cash flows of the Company. Various parties, including the Company, own and maintain patents and other intellectual property rights applicable to the dental and medical device fields. Although the Company believes it operates in a manner that does not infringe upon any third party intellectual property rights, it is possible that a party could assert that one or more of the Company’s products infringe upon such party’s intellectual property and force the Company to pay damages and/or discontinue the sale of certain products. Increasing exposure to markets outside of the U.S. and Europe. We anticipate that sales outside of the U.S. and Europe will continue to expand and account for a significant portion of DENTSPLY’s revenue. Operating in such locations is subject to a number of uncertainties, including, but not limited to, the following: • • • • • • • • • • Economic and political instability; Import or export licensing requirements; Additional compliance-related risks; Trade restrictions; Product registration requirements; Longer payment cycles; Changes in regulatory requirements and tariffs; Fluctuations in currency exchange rates; Potentially adverse tax consequences; and Potentially weak protection of property rights. intellectual The Company’s success is dependent upon its management and employees. disruptions or data loss and the resulting adverse effect on the Company’s operations and financial results. and employees. The Company’s success is dependent upon its management senior management employees or failure to recruit and train needed managerial, sales and technical personnel, could have a material adverse effect on the Company. loss of The The Company may be unable to sustain the operational and technical expertise that is key to its success. that believes DENTSPLY its manufacturing capabilities are important to its success. The manufacture the Company’s products requires substantial and of varied technical expertise. Complex materials technology and processes are necessary to manufacture the Company’s products. There can be no assurance that the Company will be able to maintain the necessary operational and technical expertise that is key to its success. A large number of the Company’s products are manufactured in single manufacturing facilities. the Although Company maintains multiple manufacturing facilities, a large number of the products manufactured by the Company are manufactured in facilities that are the sole source of such products. As there are a limited number of alternative suppliers for these products, any disruption at a particular Company increased manufacturing facility could lead to delays, expenses, and may damage the Company’s business and results of operations. The Company relies heavily on information and technology to operate its business networks, and any disruption to its technology infrastructure or the Internet could harm the Company’s operations. and server- through DENTSPLY operates many aspects of its business including financial reporting and customer relationship management web-based technologies, and stores various types of data on such servers or with third-parties who may in turn store it on servers or in the ‘‘cloud’’. Any disruption to the Internet or to the Company’s or its service providers’ global technology infrastructure, insecure coding, ‘‘Acts of God,’’ attempts to penetrate networks, data leakage and human error, could pose a threat to the Company’s operations. While DENTSPLY has invested and continues in information technology risk management and disaster recovery plans, these measures fully insulate the Company from technology cannot including malware, to invest The Company may not generate sufficient cash flow to service its debt, pay its contractual obligations and operate the business. DENTSPLY’s ability to make payments on its indebtedness and contractual obligations, and to fund its operations depends on its future performance and financial results, which, to a certain extent, are subject to general economic, financial, competitive, regulatory and other factors and the interest rate environment that are beyond its control. Although senior management believes that the Company has and will continue to have sufficient liquidity, there can be no assurance that DENTSPLY’s business will generate cash flow from operations in the future to service its debt, pay its contractual obligations and operate its business. sufficient The Company may not be able to repay its outstanding debt in the event that cross default provisions are triggered due to a breach of loan covenants. existing borrowing DENTSPLY’s documentation contains a number of covenants and financial ratios, which it is required to satisfy. Any breach of any such covenants or restrictions, the most restrictive of which pertain to asset dispositions, maintenance of certain levels of net worth, and prescribed ratios of indebtedness to total capital and operating income excluding depreciation and amortization of interest expense, would result in a default under the existing borrowing documentation that would permit the lenders to declare all borrowings under such documentation to be immediately due and payable through cross default provisions, would entitle and, DENTSPLY’s other loans. DENTSPLY may not be able to meet its obligations under its outstanding indebtedness in the event that any cross default provisions are triggered. to accelerate their lenders DENTSPLY has a significant amount of indebted- ness. A breach of the covenants under DENTSPLY’s debt instruments outstanding from time to time could result in an event of default under the applicable agreement. The Company has debt securities outstanding of approximately $1.3 billion. DENTSPLY also has the ability to incur up to $500 million of indebtedness under the Revolving Credit Facility and may incur significantly more indebtedness in the future. 15 DENTSPLY’s level of indebtedness and related debt service obligations could have negative consequences including: • • • making it more difficult for the Company to satisfy its obligations with respect to its indebtedness; requiring DENTSPLY to dedicate significant cash to the payment of flow from operations principal and interest on its indebtedness, which would reduce the funds the Company has available for other purposes, including working capital, capital expenditures and acquisitions; and reducing DENTSPLY’s flexibility in planning for or reacting to changes in its business and market conditions. DENTSPLY’s current indebtedness contains a number of covenants and financial ratios, which it is required to satisfy. Under the agreements governing the DENTSPLY 4.11% Senior Notes due 2016, the Company will be required to maintain a ratio of consolidated debt to consolidated EBITDA of less than or equal to 3.50 to 1.00. The Company may need to reduce the amount of its indebtedness outstanding from time to time in order to comply with such ratio, but no assurance can be given that DENTSPLY will be able to do so. DENTSPLY’s failure to maintain such ratio or a breach of the other covenants under its debt instruments outstanding from time to time could result in an event of default under the applicable agreement. Such a default may allow the creditors to accelerate the related indebtedness and may result in the indebtedness to which a acceleration of any other cross-acceleration or cross-default provision applies. Changes in our credit ratings or macroeconomic impacts on credit markets may increase our cost of capital and limit financing options. We utilize the short and long-term debt markets to obtain capital from time to time. Adverse changes in our credit ratings may result in increased borrowing costs for future long-term debt or short-term borrowing facilities which may in turn limit financing options, including our access to the unsecured borrowing market. We may also flexibility. be subject to additional restrictive covenants that would reduce our In addition, macroeconomic conditions, such as continued or increased volatility or disruption in the credit markets, would adversely affect our ability to refinance existing debt or obtain additional financing to support operations or to fund new acquisitions or capital-intensive internal initiatives. Certain provisions in the Company’s governing documents, and of Delaware law, may make it more difficult for a third party to acquire DENTSPLY. Certain provisions of DENTSPLY’s Certificate of Incorporation and By-laws and of Delaware law could have the effect of making it difficult for a third party to acquire control of DENTSPLY. Such provisions include, among others, a provision allowing the Board of Directors to issue preferred stock having rights senior to those of the common stock and certain procedural requirements which make it difficult to amend for DENTSPLY’s By-laws and call special meetings of stockholders. In addition, members of DENTSPLY’s management and participants in its Employee Stock Ownership Plan (‘‘ESOP’’) collectively own approximately 4% of the outstanding common stock of DENTSPLY. Delaware law imposes some restrictions on mergers and other business combinations between the Company and any holder of 15% or more of the Company’s outstanding common stock. stockholders The Company’s results could be negatively impacted by a natural disaster or similar event. The Company operates in more than 120 countries and its and its suppliers’ manufacturing facilities are located in multiple locations around the world. Any natural or other disaster in such a location could result in serious harm to the Company’s business and consolidated results of operations. Any insurance maintained by the Company may not be adequate to cover our losses resulting business disasters interruptions, and our emergency response plans may not be effective in preventing or minimizing losses in the future. from such other or Item 1B. Unresolved Staff Comments None. 16 Item 2. Properties The following is a listing of DENTSPLY’s principal manufacturing and distribution locations at December 31, 2014: Location United States: Milford, Delaware(1) Sarasota, Florida(2) Des Plaines, Illinois(1) Waltham, Massachusetts(2) Maumee, Ohio(2) Lancaster, Pennsylvania(1) York, Pennsylvania(2) York, Pennsylvania(1) Johnson City, Tennessee(2) Foreign: Hasselt, Belgium(2) Catanduva, Brazil(3) Petropolis, Brazil(3) Shanghai, China(2) Tianjin, China(3) Ivry Sur-Seine, France(2) Bohmte, Germany(2) Hanau, Germany(2) Konstanz, Germany(1) Mannheim, Germany(2) Munich, Germany(2) Radolfzell, Germany(4) Rosbach, Germany(2) Badia Polesine, Italy(1) Otawara, Japan(2) Mexicali, Mexico(2) Hoorn, Netherlands(2) HA Soest, Netherlands(2) Katikati, New Zealand(1) Warsaw, Poland(1) Las Piedras, Puerto Rico(2) Mölndal, Sweden(2)(3) Ballaigues, Switzerland(2) Function Leased or Owned Manufacture of dental consumable products Manufacture of orthodontic accessory products Manufacture and assembly of dental handpieces Manufacture and distribution of dental implant products Manufacture and distribution of investment casting products Distribution of dental products Manufacture and distribution of artificial teeth and other dental laboratory products Manufacture of small dental equipment, bone grafting products, and preventive dental products Manufacture and distribution of endodontic instruments and materials Manufacture and distribution of dental products Manufacture and distribution of dental anesthetic products Manufacture and distribution of artificial teeth, dental consumable products and endodontic material Manufacture and distribution of dental laboratory products Manufacture and distribution of dental products Manufacture and distribution of investment casting products Manufacture and distribution of dental laboratory products Manufacture and distribution of precious metal dental alloys, dental ceramics and dental implant products Manufacture and distribution of dental consumable products Manufacture and distribution of dental implant products Manufacture and distribution of endodontic instruments and materials Distribution of dental products Manufacture and distribution of dental ceramics Manufacture and distribution of dental consumable products Manufacture and distribution of precious metal dental alloys, dental consumable products and orthodontic products Manufacture and distribution of orthodontic products and materials Distribution of precious metal dental alloys and dental ceramics and refinery of precious metals Distribution of orthodontic products Manufacture of dental consumable products Manufacture and distribution of dental consumable products Manufacture of crown and bridge materials Manufacture and distribution of dental medical devices Manufacture and distribution of endodontic instruments, plastic components and packaging material implant products and consumable Owned Owned Leased Leased Owned Leased Owned Owned Leased Owned Owned Owned Leased Leased Leased Owned Owned Owned Owned/Leased Owned Leased Owned Owned/Leased Owned Leased Owned Leased Leased Owned Owned Owned Owned (1) (2) (3) (4) These properties are included in the Dental Consumable and Certain International Businesses segment. These properties are included in the Dental Specialty and Laboratory and Certain Global Distribution Businesses segment. These properties are included in the Healthcare and Emerging Markets Businesses segment. This property is a distribution warehouse not managed by named segments. 17 In addition, the Company maintains sales and distribution offices at certain of its foreign and domestic manufacturing facilities, as well as at various other U.S. and international locations. The Company maintains offices in Toronto, Mexico City, Paris, Rome, Weybridge, Mölndal, Hong Kong and Melbourne and other locations. Most of these sites around the international world that are used exclusively for sales and distribution are leased. The Company also owns its corporate headquarters located in York, Pennsylvania. DENTSPLY believes that its properties and facilities are well maintained and are generally suitable and adequate for the purposes for which they are used. Item 3. Legal Proceedings Incorporated by reference to Part II, Item 8, Note 19, Commitments and Contingencies, to the Consolidated Financial Statements in this Form 10-K. 18 Executive Officers of the Registrant The following table sets forth certain information regarding the executive officers of the Company as of February 20, 2015. Name Bret W. Wise . . . . . . . . . . . . . . . . . . Christopher T. Clark . . . . . . . . . . . . . . James G. Mosch . . . . . . . . . . . . . . . . Robert J. Size . . . . . . . . . . . . . . . . . . Albert J. Sterkenburg . . . . . . . . . . . . . Deborah M. Rasin . . . . . . . . . . . . . . . Age 54 53 57 56 51 48 Position Chairman of the Board and Chief Executive Officer President and Chief Financial Officer Executive Vice President and Chief Operating Officer Senior Vice President Senior Vice President Vice President, Secretary and General Counsel Bret W. Wise has served as Chairman of the Board the Company since and Chief Executive Officer of January 1, 2007 and also served as President in 2007 and 2008. Prior to that time, Mr. Wise served as President and in 2006, as Executive Vice Chief Operating Officer President in 2005 and Senior Vice President and Chief Financial Officer from December 2002 through December 2004. Prior to that time, Mr. Wise was Senior Vice President and Chief Financial Officer with Ferro Corporation of Cleveland, OH (1999 − 2002), Vice President and Chief Financial Officer at WCI Steel, Inc., of Warren, OH, (1994 − 1999) and prior to that he was a partner with KPMG LLP. During 2012, Mr. Wise was elected a member of the Board of Directors of the Pall Corporation. Christopher T. Clark has served as President and Chief Financial Officer of the Company since April 8, 2013. He also served as President and Chief Operating Officer from 2009 through April 2013 and as Executive Vice President and Chief Operating Officer in 2007 and 2008. Prior to that time, Mr. Clark served as Senior Vice President (2003 − 2006), as Vice President and General Manager of DENTSPLY’s global imaging business (1999 − 2002), as Vice President and General Manager of the Prosthetics Division (1996 − 1999), and as Director of Marketing Division (1992 − 1996). Prior to September 1992, Mr. Clark held various brand management positions with Proctor & Gamble. DENTSPLY’S Prosthetics of James G. Mosch has served as Chief Operating Officer since April 8, 2013 and as Executive Vice President since January 1, 2009. Prior to that time, he served as Senior Vice President (2003 − 2009) and as Vice President and General Manager of DENTSPLY’s Professional division, beginning in July 1994 when he started with the 19 Company. Prior to 1994, Mr. Mosch served in general management and marketing positions with Baxter International and American Hospital Supply Corporation. Robert J. Size has served as Senior Vice President since January 1, 2007. Prior to that, Mr. Size served as a Vice President (2006) and as Vice President and General Manager of DENTSPLY’s Caulk division beginning June 2003 through December 31, 2005. Prior to that time, he was the Chief Executive Officer and President of Superior MicroPowders and held various cross-functional and international leadership positions with The Cookson Group. Albert J. Sterkenburg, D.D.S. has served as Senior Vice President since January 1, 2009. Prior to that, Dr. Sterkenburg served as Vice President (2006 − 2009), Vice President and General Manager of the DeguDent division (2003 − 2006) and Vice President and General Manager of the VDW division beginning in 2000. Prior to that served in marketing and general management roles at Johnson & Johnson. time, he Deborah M. Rasin has served as Vice President, Secretary and General Counsel of the Company since March 7, 2011. Prior to that, she served since 2006 as Vice President, General Counsel and Secretary of Samsonite Corporation, where she oversaw all legal, compliance and corporate governance matters of a Delaware-incorporated global consumer goods company. Prior to joining Samsonite, Ms. Rasin served as a senior corporate attorney at General Motors Corporation, and as an associate at various law firms. Ms. Rasin received her J.D. from Harvard Law School in 1992. international Item 4. Mine Safety Disclosure Not Applicable. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Quarterly Stock Market and Dividend Information The Company’s common stock is traded on the NASDAQ National Market under the symbol ‘‘XRAY.’’ The following table shows, for the periods indicated, the high, low, closing sale prices and cash dividends declared of the Company’s common stock as reported on the NASDAQ National Market: Market Range of Common Stock High Low Period-end Closing Price 2014 . . . . . . . . . . . . . . . . . . . . . First Quarter Second Quarter . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . First Quarter Second Quarter . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . $49.13 48.38 48.54 56.25 $43.63 44.21 45.37 50.99 $42.99 43.85 45.12 43.83 $39.36 39.90 40.81 42.99 $46.04 47.35 45.60 53.27 $42.44 40.96 43.41 48.48 Cash Dividend Declared $0.06625 0.06625 0.06625 0.06625 $0.06250 0.06250 0.06250 0.06250 Approximately 52,830 holders of the Company’s common stock are ‘‘street name’’ or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions. In addition, the Company estimates, based on information supplied by its transfer agent, that there are 305 holders of record of the Company’s common stock. Stock Repurchase Program The Board of Directors has authorized the Company to repurchase shares under its stock repurchase program in an amount up to 34.0 million shares of common stock. The table below contains certain information with respect to the repurchase of shares of the Company’s common stock during the quarter ended December 31, 2014: Period (in thousands, except per share amounts) October 1 − 31, 2014 . . . . . . . . . . . . . . . November 1 − 30, 2014 . . . . . . . . . . . . . December 1 − 31, 2014 . . . . . . . . . . . . . Total Number of Shares Purchased 275.3 960.7 512.1 1,748.1 Average Price Paid Per Share Total Cost of Shares Purchased Number of Shares that May Yet be Purchased Under the Share Repurchase Program $48.27 52.87 55.37 $52.88 $13,288 50,790 28,356 $92,434 12,801.5 12,155.7 12,068.5 20 Stock Authorized for Issuance Under Equity Compensation Plans The following table provides information about the Company’s common stock that may be issued under equity compensation plans at December 31, 2014: Plan Category Securities to Be Issued Upon Exercise of Outstanding Options Weighted Average Exercise Price per Share Securities Available for Future Issuance (in thousands, except share price) Equity compensation plans approved by security holders . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,800.8 8,800.8 $37.50 $37.50 8,240.2 8,240.2 Performance Graph The following graph compares the Company’s cumulative total stockholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the NASDAQ Composite Index, the Standard & Poor’s S&P 500 Index and the Standard & Poor’s S&P Health Care Index. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among DENTSPLY International Inc., the NASDAQ Composite Index, the S&P 500 Index, and the S&P Health Care Index $250 $230 $210 $190 $170 $150 $130 $110 $90 $70 $50 12/09 12/10 12/11 12/12 12/13 12/14 DENTSPLY International Inc. NASDAQ Composite S&P 500 S&P Health Care * $100 invested on 12/31/09 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. 12/09 12/10 12/11 12/12 12/13 12/14 DENTSPLY International Inc. . . . . . . . . . . . NASDAQ Composite . . . . . . . . . . . . . . . S&P 500 . . . . . . . . . . . . . . . . . . . . . . . S&P Health Care . . . . . . . . . . . . . . . . . . 100.00 100.00 100.00 100.00 97.75 117.61 115.06 102.90 100.69 118.70 117.49 116.00 114.64 139.00 136.30 136.75 141.12 196.83 180.44 193.45 155.91 223.74 205.14 242.46 21 Item 6. Selected Financial Data DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA The following selected financial data is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements, including the notes thereto, and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ included elsewhere in this Form 10-K. 2014 Year ended December 31, 2012 2011(a) 2013 2010 (in thousands, except per share amounts, days and percentages) Statement of Operations Data: Net sales . . . . . . . . . . . . . . . . . . . . . $2,922,620 Net sales, excluding precious metal $2,950,770 $2,928,429 $2,537,718 $2,221,014 content(b) . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . Restructuring and other costs . . . . . . . . Operating income . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . Net income attributable to DENTSPLY 2,792,676 1,599,789 11,083 445,600 404,373 322,913 2,771,728 1,577,412 13,356 419,166 369,335 318,161 2,714,698 1,556,387 25,717 381,939 330,679 318,489 2,332,589 1,273,440 35,865 300,728 256,111 247,446 2,031,757 1,130,158 10,984 380,273 357,656 267,335 International . . . . . . . . . . . . . . . . . $ 322,854 $ 313,192 $ 314,213 $ 244,520 $ 265,708 Earnings per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . $ 2.28 2.24 Cash dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . $ 0.265 $ $ $ 2.20 2.16 0.250 $ $ $ 2.22 2.18 0.220 $ $ $ 1.73 1.70 0.205 $ $ $ 1.85 1.82 0.200 Weighted Average Common Shares Outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . Balance Sheet Data: 141,714 144,219 142,663 144,965 141,850 143,945 141,386 143,553 143,980 145,985 Cash and cash equivalents . . . . . . . . . . $ 151,639 588,845 Property, plant and equipment, net . . . . 2,760,179 Goodwill and other intangibles, net . . . . 4,650,265 . . . . . . . . . . . . . . . . . . . Total assets Total debt, current and long-term $ 74,954 637,172 3,076,919 5,078,047 $ 80,132 614,705 3,041,595 4,972,297 $ 77,128 591,445 2,981,163 4,755,398 $ 540,038 423,105 1,381,798 3,257,951 portions . . . . . . . . . . . . . . . . . . . . Equity . . . . . . . . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . Total net debt to total capitalization(c) . . . 1,265,713 2,322,198 1,476,040 2,577,974 1,520,998 2,249,443 1,766,711 1,884,151 611,769 1,909,912 13.2% 32.4% 13.0% 35.2% 15.2% 39.0% 12.9% 47.3% 13.9% 3.6% Other Data: Depreciation and amortization . . . . . . . $ 129,077 560,401 Cash flows from operating activities . . . . 99,578 . . . . . . . . . . . . . Capital expenditures 41,318 Interest expense (income), net . . . . . . . 113 Inventory days . . . . . . . . . . . . . . . . . 55 Receivable days . . . . . . . . . . . . . . . . . 20.1% Effective tax rate . . . . . . . . . . . . . . . . $ 127,903 417,848 100,345 41,502 114 56 14.1% $ 129,199 369,685 92,072 48,091 106 53 2.7% $ 85,035 393,469 71,186 35,577 100 54 4.3% $ 65,912 377,461 44,236 20,835 100 54 25.0% (a) (b) (c) Includes the results of the Astra Tech acquisition from September 1, 2011 through December 31, 2011. The presentation of net sales, excluding precious metal content, is considered a measure not calculated in accordance with US GAAP, and is therefore considered a non-US GAAP measure. The Company defines net debt as total debt, including current and long-term portions, less cash and cash equivalents and total capitalization as the sum of net debt plus equity. 22 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following Management’s Discussion and Analysis of Financial Conditions and Results of Operations (‘‘MD&A’’) is intended to help the reader understand the Company’s operations and business environment. MD&A is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and Notes Statements contained in Item 8 of this Form 10-K. The following that discussion includes involve See ‘‘Forward-Looking Statements’’ in the beginning of this Form 10-K. The MD&A includes the following sections: forward-looking statements uncertainties. risks to Consolidated Financial certain and • • • Full year 2014 earnings per diluted share of $2.24 increased from $2.16 in the prior year. On an adjusted basis (a non-GAAP measure), full year 2014 earnings per diluted share of $2.50 grew 6.4% from $2.35 from the prior year. the year Operating margin ended for December 31, 2014 was 15.3%, an increase of 110 basis points as compared to 14.2% for the year ended December 31, 2013. Adjusted operating margin (a non-US GAAP measure) for the year ended December 31, 2014 was 18.4%, an improvement of 80 basis points over the prior year. Operating cash flow improved 34%. For the year ended December 31, 2014, cash from operations was $560.4 million as compared to $417.8 million for ended December 31, 2013. year the BUSINESS • • • • general Business — a of DENTSPLY’s business and how performance is measured; description the Results of Operations — an analysis of Company’s consolidated results of operations for the consolidated financial statements; presented three years the in Critical Accounting Estimates — a discussion of accounting critical judgments and estimates; and policies require that Liquidity and Capital Resources — an analysis of cash flows; debt and other obligations; and aggregate contractual obligations. 2014 Operational Highlights • For the year ended December 31, 2014, sales, excluding precious metal content increased 0.8% compared to prior year. Foreign currency exchange rates had a negative impact of 1.0% during the year, reducing the growth of the Company. Total the year ended December 31, 2014, including precious metal content, decreased 1.0% compared to 2013. A significant drop in the price of gold during the year and the negative impact of foreign currency exchange resulted in the negative sales growth for the year. sales for a it is is Inc. DENTSPLY the world’s International leading manufacturer and distributor of dental and other consumable medical device products. The Company largest manufacturer of believes consumable dental products for the professional dental market. For over 115 years, DENTSPLY’s commitment to innovation and professional collaboration has enhanced and small its portfolio of branded consumables equipment. Headquartered in the United States, the Company has global operations with sales in more than 120 countries. The Company also has strategically located to better serve its distribution centers to enable it customers and increase its operating efficiency. While the United States and Europe are the Company’s largest markets, all major markets worldwide. the Company serves Principal Measurements The principal measurements used by the Company in evaluating its business are: (1) internal sales growth by geographic region; (2) constant currency sales growth by geographic region; (3) adjusted operating margins of each reportable segment including product pricing and cost controls; introduction and the development, contribution of innovative new products; and (5) sales growth through acquisition. (4) The Company defines ‘‘internal sales growth’’ as the increase or decrease in net sales from period to period, 23 excluding (1) precious metal content; (2) the impact of changes in currency exchange rates; and (3) net acquisition sales growth. The Company also tracks internal sales growth of continuing product lines as this is more reflective of the ongoing strength of the Company’s performance. The Company defines ‘‘net acquisition sales growth’’ as the net sales, excluding precious metal content, for a period of twelve months following the transaction date of businesses that have been acquired, less the net sales, excluding precious metal content, for a period of twelve months prior to the transaction date of businesses that have been divested. The Company defines ‘‘constant currency sales growth’’ as internal sales growth plus net acquisition sales growth. internal growth includes The primary drivers of global dental market growth, innovation and new products launched by the Company, and continued investments in sales and marketing resources, including clinical education. Management believes that over time, the Company’s ability to execute its strategies allows it to grow at a modest premium to the growth rate of the underlying dental market. Management further believes that the global dental market has generally in the past and should over time in the future grow at a premium to underlying economic growth rates. Considering all of these factors, the Company assumes that the long-term growth rate for the dental market will range from 3% to 6% on average and that the Company targets a slight premium to market growth. Over the past several years, growth in the global dental and other healthcare markets have been restrained by lower economic growth in Western Europe and certain other markets compared to historical averages and, accordingly, market growth rates, and the Company’s internal growth rate remains uncertain in the near term. The Company’s business is subject to quarterly fluctuations of consolidated net sales and net income. The Company typically implements most of its price changes at the beginning of the first or fourth quarters. changes, other marketing and promotional Price programs as well as the management of inventory levels by distributors and the implementation of strategic initiatives, may impact sales levels in a given period. efficiencies. Management The Company also has a focus on maximizing operational to evaluate the consolidation of operations or functions to reduce costs. In addition, the Company remains focused on enhancing efficiency through expanded use of initiatives. The technology and process improvement continues Company believes that the benefits from these initiatives will improve the cost structure and help offset areas of rising costs such as energy, employee benefits and regulatory oversight and compliance. In connection with these efforts, the Company targets adjusted operating income margins to expand to 20% as the benefits of these initiatives are realized over time. In addition, the Company expects that it will record restructuring charges, from time to time, associated with such initiatives. These restructuring charges could be material to the Company’s consolidated financial statements and there can be no assurance that the target adjusted operating income margins will be achieved. Consistent with these efforts, the Company announced during 2014 that it is proposing steps in Germany to reorganize elements of its laboratory business and associated manufacturing capabilities. The laboratory Company seeks to realign its portfolio of products, with increased focus on innovative prosthetics materials while deemphasizing its CAD/CAM equipment business. As required under German law, the Company continues to participate in a statutory co-determination process under which it is collaborating with the appropriate labor groups to jointly define the infrastructure and staffing adjustments necessary to support this initiative. Product innovation is a key component of the Company’s overall growth strategy. New advances in technology are anticipated to have a significant influence on future products in dentistry and consumable medical device markets in which the Company operates. As a result, the Company continues to pursue research and development initiatives to support technological development, including collaborations with various research institutions and dental schools. In addition, the Company licenses and purchases technologies developed by third parties. Although the Company believes these activities will lead to new innovative dental and consumable medical device products, they involve new technologies and there can be no assurance that commercialized products will be developed. The Company will continue to pursue opportunities to expand the Company’s product offerings through acquisitions. Although the professional dental and the consumable medical device markets in which the Company operates have experienced consolidation, they remain fragmented. Management believes that there will continue to be adequate opportunities to participate as a consolidator in the industry for the foreseeable future. 24 Impact of Foreign Currencies and Interest Rates Due to the international nature of DENTSPLY’s business, movements in foreign exchange and interest rates may impact the Consolidated Statements of Operations. With more than 65% of the Company’s net sales located in regions outside the U.S., the Company’s consolidated net sales are impacted negatively by the strengthening or positively impacted by the weakening of the U.S. dollar. This impact is anticipated to be significant in 2015 compared to 2014 due to a dramatic weakening of the euro in the latter half of 2014 and early 2015 and the strengthening of the Swiss franc in early 2015. Additionally, movements in certain foreign exchange and interest rates may unfavorably or favorably impact the Company’s results of operations, financial condition and liquidity. Reclassification of Prior Year Amounts Certain reclassifications have been made to prior year’s data in order to conform to current year presentation. Specifically, during the first quarter of 2014, for the Company realigned reporting responsibilities to the multiple locations as a result of management segment structure. information reflects the revised structure for all periods shown. changes The reporting RESULTS OF OPERATIONS 2014 Compared to 2013 Net Sales The discussion below summarizes the Company’s sales growth, excluding precious metal content, into the following components: sales (1) growth, which includes internal sales growth and net foreign currency acquisition sales growth, and (2) constant currency translation. These disclosures of net sales growth provide the reader with sales results on a comparable basis between periods. Management believes that the presentation of net sales, excluding precious metal content, provides useful information to investors because a significant portion of DENTSPLY’s net sales is comprised of sales of precious metals generated through sales of the Company’s precious metal dental alloy products, which are used by third parties to construct crown and bridge materials. Due to the fluctuations of precious metal prices and because the cost of the precious metal content of the Company’s sales is largely passed through to customers and has minimal effect on earnings, DENTSPLY reports net sales both with and without precious metal content to show the Company’s performance independent of precious metal price volatility and to enhance comparability of performance between periods. The Company uses its cost of precious metal purchased as a proxy for the precious metal content of sales, as the precious metal content of sales is not separately tracked and invoiced to customers. The Company believes that it is reasonable to use the cost of precious metal content purchased in this manner since precious metal dental alloy sale prices are typically adjusted when the prices of underlying precious metals change. The presentation of net sales, excluding precious metal content, is considered a measure not calculated in accordance with US GAAP, and is therefore considered a non-US GAAP measure. The Company provides the following reconciliation of net sales to net sales, excluding precious metal content. The Company’s definitions and sales, excluding precious metal calculations of net content, and other operating measures derived using net sales, excluding precious metal content, may not necessarily be the same as those used by other companies. Year Ended December 31, 2014 2013 $ Change % Change (in millions, except percentage amounts) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Precious metal content of sales . . . . . . . . . . . . . . . . Net sales, excluding precious metal content . . . . . . . . . . . $2,922.6 129.9 $2,792.7 $2,950.8 179.1 $2,771.7 $(28.2) (49.2) $ 21.0 (1.0%) (27.5%) 0.8% During 2014, net sales, excluding precious metal content increased $21.0 million from 2013. The 0.8% increase in net sales, excluding precious metal content, included constant currency sales growth of 1.8%. The constant currency sales growth was comprised of internal sales growth of 1.2% and acquisition sales growth of 0.6%. The decline of precious metal content of sales from the year ago period was primarily due to the continuing reduction in the use of precious metal alloys in dentistry. 25 Constant Currency Sales Growth The following table includes growth rates for net sales, excluding precious metal content. Internal sales growth . . . . . . . . . . . . . . . . . . . . . . . . . Net acquisition sales growth . . . . . . . . . . . . . . . . . . . . . Constant currency sales growth . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2014 United States 0.7% 0.3% 1.0% Europe 0.1% 0.1% 0.2% All Other Regions 4.2% 2.4% 6.6% Worldwide 1.2% 0.6% 1.8% United States During 2014, net sales, excluding precious metal content, increased by 1.0% on a constant currency basis. Internal sales growth was led by increased sales in the dental consumables product category, partially offset by lower sales in the dental laboratory product category, as well as lower sales of a consumable medical device product that was in-sourced by a customer and was discontinued late in the year as the product line was sold to this customer. Europe During 2014, net sales, excluding precious metal content, increased by 0.2% on a constant currency basis compared to 2013. Internal sales growth in Europe was muted as the result of a substantial and continuing decline in sales within the CIS countries, due to economic and political instability in those markets. Excluding sales in the CIS region, constant currency sales growth would have been 1.8% led by increased sales in the dental specialty, dental consumables and consumable medical device product categories partially offset by the dental laboratory product category. All Other Regions During 2014, net sales, excluding precious metal content, increased 6.6% on a constant currency basis. The internal sales and acquisition sales growth was led by the dental specialty and consumable medical device product categories and was strongest in Pacific Rim and Middle East regions. Year Ended December 31, Gross Profit (in millions, except percentage amounts) Gross profit Gross profit as a percentage of net sales, including precious . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 2013 $ Change % Change $1,599.8 $1,577.4 $22.4 1.4% metal content . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.7% 53.5% Gross profit as a percentage of net sales, excluding precious metal content . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57.3% 56.9% Gross profit as a percentage of net sales, excluding precious metal content, increased 40 basis points during 2014 compared to 2013. The increase in the gross profit rate was primarily the result of net favorable pricing compared to the prior year. Expenses Year Ended December 31, Selling, General and Administrative (‘‘SG&A’’) Expenses (in millions, except percentages) SG&A expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SG&A expenses as a percentage of net sales, including 2014 2013 $ Change % Change $1,143.1 $1,144.9 $(1.8) (0.2%) precious metal content . . . . . . . . . . . . . . . . . . . . . . . 39.1% 38.8% SG&A expenses as a percentage of net sales, excluding precious metal content . . . . . . . . . . . . . . . . . . . . . . . 40.9% 41.3% 26 SG&A expenses as a percentage of net sales, excluding precious metal content, improved 40 basis points as compared to 2013. The rate decline is primarily due to cost reduction initiatives and expense controls in a number of businesses, as well as higher expenses recorded in the first three months of 2013 relating to trade shows. Year Ended December 31, Restructuring and Other Costs (in millions, except percentages) Restructuring and other costs . . . . . . . . . . . . . . . . . . . . 2014 2013 $ Change % Change $11.1 $13.4 $(2.3) (17.2%) The Company recorded net restructuring and other costs of $11.1 million in 2014 compared to $13.4 million in 2013. In 2014, restructuring costs of $9.9 million related to the closure and consolidation of facilities in an effort to streamline the Company’s operations and better leverage the Company’s resources. Restructuring and other costs also includes expense of $1.2 million related to net legal settlements. In 2013, restructuring costs of $12.0 million related to the closure and consolidation of facilities in an effort to streamline the Company’s operations and better leverage the Company’s resources. Restructuring and other costs also includes net expense of $1.4 million related to an impairment of previously acquired technology partially offset by a net gain on legal settlements. Year Ended December 31, Other Income and Expenses (in millions, except percentages) Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . Other expense (income), net . . . . . . . . . . . . . . . . . . . . . Net interest and other expense . . . . . . . . . . . . . . . . . . . 2014 2013 $ Change % Change $41.3 (0.1) $41.2 $41.5 8.3 $49.8 $(0.2) (8.4) $(8.6) (0.5%) (0.1%) Net Interest Expense for the Net year interest expense ended December 31, 2014 was $0.2 million lower in comparison to the year ended December 31, 2013. The net decrease is a result of a $4.4 million decrease in interest expense due to lower average debt levels in 2014 and higher income of $0.4 million miscellaneous compared to the prior year, largely offset by $4.6 million decrease recorded on net investment hedges due to lower average hedge amounts and interest rates on hedge contracts compared to 2013. in investment investment income Other Expense (Income), Net the year ended December 31, 2013. Other income, net for the year ended December 31, 2014 was $0.1 million, comprised primarily of $1.1 million of interest and non-cash income relating to fair value adjustments on cross currency basis swaps not designated as hedges that offset currency risk on intercompany loans, $2.5 million of currency transaction losses, and $1.4 million of other non-operating income. Other expense, net for the year ended December 31, 2013 was $8.3 million, comprised primarily of $6.9 million of interest and non-cash charges relating to fair value adjustments on cross currency basis swaps not designated as hedges that offset currency risk on intercompany loans, $2.1 million of currency Other expense (income), net for the year ended December 31, 2014 improved $8.4 million compared to transaction non-operating income. losses, and $0.7 million of other 27 Income Taxes and Net Income (in millions, except per share amounts) Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2014 2013 $ Change 20.1% 14.1% Equity in net (loss) income of unconsolidated affiliated company . . . . . . . $ (0.3) Net income attributable to noncontrolling interests . . . . . . . . . . . . . . . Net income attributable to DENTSPLY International . . . . . . . . . . . . . . . Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.1 $322.9 $ 2.24 $ 1.0 $ 5.0 $313.2 $ 2.16 $(1.3) $(4.9) $ 9.7 Provision for Income Taxes The Company’s effective tax rate for 2014 and 2013 was 20.1% and 14.1%, respectively. The Company’s effective tax rate for 2014 was unfavorably impacted by the Company’s change in the mix of consolidated earnings. Additionally, during 2014 the Company recorded a tax benefit from the release of valuation loss allowances unrecognized previously tax on carryforwards and other deferred tax assets of approximately $8.3 million, a tax benefit of $1.4 million related to statutory tax rate changes and $4.5 million of unfavorable tax effects related to prior year tax matters. The Company’s effective tax rate for 2013 was favorably impacted by the Company’s post-acquisition restructuring Equity in net (loss) income of unconsolidated affili- ated company The Company’s 17% ownership investment of DIO Corporation (‘‘DIO’’) resulted in a net loss of $0.3 million on an after-tax basis for the year ended December 31, 2014 and net earnings of $1.0 million on an after-tax basis for the year ended December 31, 2013. The equity earnings of DIO include the result of mark-to-market changes related to the derivative accounting for the convertible bonds issued by DIO to DENTSPLY. The Company’s portion of the mark-to-market gains recorded through DIO’s net income was approximately $1.2 million the years ended December 31, 2014 for each of and 2013. activities, the recording of tax benefits of $9.4 million Net income attributable to noncontrolling interests related to U.S. federal legislative changes enacted in January 2013 relating to 2012, a tax benefit of $2.2 million for the release of a valuation allowance and $10.3 million of benefits related to prior year tax matters. Further information regarding the details of income taxes is presented in Note 14, Income Taxes, to the consolidated financial statements in this Form 10-K. The Company’s effective income tax rate for 2014 The portion of consolidated net income attributable to noncontrolling interests decreased $4.9 million for the year ended December 31, 2014 compared to the same period in 2013 as a result of the contractual purchase of the remaining shares of a noncontrolling interest effective January 1, 2014. The Company anticipates the cash outflow for this purchase to be in the first quarter of 2015. includes the impact of amortization on purchased Net income attributable to DENTSPLY International intangibles assets, acquisition related activities, restructuring and other costs, income related to credit risk adjustments on outstanding derivatives as well as various income tax adjustments which impacted income before income taxes and the provision for income taxes by $63.2 million and $23.9 million, respectively. In 2013, the Company’s effective tax rate included the impact of amortization of purchased intangible assets, integration and restructuring and other costs as well as various income tax adjustments which impacted income before taxes and the provision for income taxes by $72.9 million and $43.7 million, respectively. the performance of In addition to the results reported in accordance the Company provides adjusted net with US GAAP, income attributable to DENTSPLY International and adjusted earnings per diluted common share (‘‘adjusted EPS’’). The Company discloses adjusted net income attributable to DENTSPLY International to allow investors to evaluate the Company’s operations exclusive of certain items that impact the comparability of results from period to period and may not be indicative of past or future performance of the normal operations of the Company and certain large non-cash charges related to purchased intangible assets. The Company believes that this information is helpful in understanding underlying operating trends and cash flow generation. 28 Adjusted net income and adjusted EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes adjusted net income and adjusted EPS and the performance of the Company is measured on this basis along with other performance metrics. The adjusted net income attributable to DENTSPLY International consists of net income attributable to DENTSPLY International adjusted to exclude the net of tax impact of the following: (1) Business combination related costs. These adjustments include costs related to integrating and consummating recently acquired businesses and costs, gains and losses related to the disposal of businesses or product lines. These items are irregular in timing and as such may not be indicative of past and future performance of the Company and are therefore excluded to allow investors to better understand underlying operating trends. (2) Restructuring, restructuring program related costs and other costs. These adjustments include costs related to the implementation of restructuring initiatives as well as certain other costs. These costs can include, but are not limited to, severance costs, facility closure costs, lease and contract terminations costs, related professional service costs, duplicate facility and labor costs associated with specific restructuring initiatives, as well as, legal settlements and impairments of assets. These items are irregular in timing, amount and impact to the Company’s financial performance. As such, these items may not be indicative of past and future performance of the Company and are therefore excluded for the purpose of understanding underlying operating trends. the excludes purchased (3) Amortization of adjustment intangible assets. This periodic amortization expense related to purchased intangible assets. Beginning in 2011, the Company began recording large non-cash charges related to the values attributed to purchased intangible assets. As such, amortization expense has been excluded from adjusted net income attributed to DENTSPLY International to allow investors to evaluate and understand operating trends excluding these large non-cash charges. (4) Income related to credit risk and fair value adjustments. These adjustments include both the cost 29 and income impacts of adjustments in certain assets and liabilities that are recorded through net income which are due solely to the changes in fair value and credit risk. These items can be variable and driven more by market conditions than the Company’s operating performance. As such, these items may not be indicative of past and future performance of the Company and therefore are excluded for comparability purposes. fair the (5) Certain fair value adjustments related to an unconsolidated affiliated company. This adjustment represents the value unconsolidated affiliated company’s convertible debt the Company. The affiliate is instrument held by accounted for under the equity method of accounting. The fair value adjustment is driven by open market pricing of the affiliate’s equity instruments, which has a high adjustment of degree of variability and may not be indicative of the operating performance of the affiliate or the Company. (6) Income tax related adjustments. These adjustments include both income tax expenses and income tax benefits that are representative of income tax adjustments mostly related to prior periods, as well as the final settlement of income tax audits, and discrete tax items resulting from the implementation of restructuring initiatives. These adjustments are irregular in timing and amount and may significantly impact the Company’s operating performance. As such, these items may not be the indicative of past and future performance of Company and therefore are excluded for comparability purposes. Adjusted earnings per diluted common share is calculated by dividing adjusted net income attributable to DENTSPLY International by diluted weighted-average common shares outstanding. Adjusted net income attributable to DENTSPLY International and adjusted earnings per diluted common share are considered measures not calculated in accordance with US GAAP, and therefore are non-US GAAP measures. These non-US GAAP measures may differ from other companies. Income tax related adjustments may include the impact to adjust the interim effective income tax rate to the expected annual effective tax rate. The non-US GAAP financial information should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with US GAAP. Year Ended December 31, 2014 Net Income Per Diluted Common Share (in thousands, except per share amounts) Net income attributable to DENTSPLY International . . . . . . . . . . . . . . . . . . . . Amortization of purchased intangible assets, net of tax . . . . . . . . . . . . . . . . Restructuring and other costs, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition related activities, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . Credit risk and fair value adjustments to outstanding derivatives, net of tax . . . . Gain on fair value adjustment related to an unconsolidated affiliated company, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax related adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted non-US GAAP earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $322,854 33,614 8,506 1,952 (451) (1,190) (4,325) $360,960 $ 2.24 0.23 0.06 0.01 — (0.01) (0.03) $ 2.50 Year Ended December 31, 2013 Net Income Per Diluted Common Share (in thousands, except per share amounts) Net income attributable to DENTSPLY International . . . . . . . . . . . . . . . . . . . . Amortization of purchased intangible assets, net of tax . . . . . . . . . . . . . . . . Restructuring and other costs, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition related activities, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . Credit risk and fair value adjustments to outstanding derivatives, net of tax . . . . Gain on fair value adjustment related to an unconsolidated affiliated company, $313,192 32,309 9,721 5,890 2,339 net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax related adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted non-US GAAP earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,200) (21,054) $341,197 $ 2.16 0.22 0.07 0.04 0.02 (0.01) (0.15) $ 2.35 Adjusted Operating Income and Margin The performance of the Company is measured on this Adjusted operating income and margin is another important internal measure for the Company. Operating income in accordance with US GAAP is adjusted for the items noted above which are excluded on a pre-tax basis to arrive at adjusted operating income, a non-US GAAP measure. The adjusted operating margin is calculated by dividing adjusted operating income by net sales, excluding precious metal content. Senior management receives a monthly analysis of operating results that includes adjusted operating income. basis along with the adjusted non-US GAAP earnings noted above as well as other performance metrics. Adjusted operating income is considered a measure not calculated in accordance with accounting principles generally accepted in the United States; therefore, it is a non-US GAAP measure. This non-US GAAP measure may differ from other companies and should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with US GAAP. (in thousands, except percentage of net sales amount) Operating income attributable to DENTSPLY International . . . . . . . . . . . . . . . . Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition related activities Adjusted non-US GAAP Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Year Ended December 31, 2014 Percentage of Net Sales, Excluding Precious Metal Content 16.0% 1.8% 0.4% 0.2% 18.4% Operating Income (Loss) $445,600 47,914 12,463 6,827 $512,804 (in thousands, except percentage of net sales amount) Operating income attributable to DENTSPLY International . . . . . . . . . . . . . . . . Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition related activities Adjusted non-US GAAP Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2013 Percentage of Net Sales, Excluding Precious Metal Content 15.1% 1.7% 0.5% 0.3% 17.6% Operating Income (Loss) $419,166 46,221 14,639 8,778 $488,804 Operating Segment Results customer presence, geographic The Company’s operating businesses are combined into operating groups, which have overlapping product offerings, bases, distribution channels and regulatory oversight. These considered the Company’s operating groups reportable segments as the Company’s chief operating decision-maker regularly reviews financial results at the operating group level and uses this information to these manage the Company’s operations. Each of are and regions. geographic operating groups covers a wide range of product categories product categories and geographic regions often overlap across the groups. Further information regarding the details of each group is presented in Note 5, Segment and Geographic Information, to the consolidated financial statements in this Form 10-K. The management of each The group is evaluated for performance and incentive compensation purposes on net third party sales, excluding precious metal content, and segment operating income. Net Sales, Excluding Precious Metal Content (in millions, except percentages) Dental Consumable and Certain International Businesses . . . Dental Specialty and Laboratory and Certain Global Year Ended December 31, 2014 2013 $ Change % Change $ 689.5 $ 656.2 $ 33.3 5.1% Distribution Businesses . . . . . . . . . . . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . . . $1,556.1 $ 551.1 $1,587.0 $ 532.7 $(30.8) $ 18.4 (1.9%) 3.5% Segment Operating Income (in millions, except percentages) Dental Consumable and Certain International Businesses . . . Dental Specialty and Laboratory and Certain Global Year Ended December 31, 2014 2013 $ Change % Change $235.6 $217.9 $17.7 8.1% Distribution Businesses . . . . . . . . . . . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . . . $287.7 $ 39.7 $293.4 $ 25.6 $ (5.7) $14.1 (1.9%) 55.1% Dental Consumable and Certain International Businesses operating income was primarily the result of sales growth and improved gross margins within these businesses. Net sales, excluding precious metal content, increased $33.3 million, or 5.1%, during 2014 as compared to 2013. On a constant currency basis, net sales, excluding precious metals, increased 5.5% primarily due to higher demand across all businesses. Operating income improved $17.7 million or 8.1% during 2014 compared to 2013. The improvement in 31 Dental Specialty and Laboratory and Certain Global Distribution Businesses Net sales, excluding precious metal content, decreased $30.9 million, or 1.9%, during 2014 compared to 2013. Sales declined on a constant currency basis by 1.0%. The negative constant currency growth was primarily the result of decreased sales in the dental laboratory businesses. Operating income decreased $5.7 million or 1.9% during 2014 compared to 2013 as a result of decreased sales. Healthcare and Emerging Markets Businesses Net sales, excluding precious metal content, increased $18.4 million, or 3.5%, during 2014 compared to 2013. Sales increased by 5.3% on a constant currency basis. The favorable constant currency growth was the result of improved market demand in both the healthcare and emerging markets businesses. Operating income improved by $14.1 million in 2014 compared to 2013. The increase in operating income was primarily the result of sales growth, an the healthcare improved operating expense rate for business and improved gross profit rate in the emerging markets businesses. RESULTS OF OPERATIONS 2013 Compared to 2012 Net Sales (in millions, except percentage amounts) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Precious metal content of sales . . . . . . . . . . . . . . . . Net sales, excluding precious metal content . . . . . . . . . . . $2,771.7 Year Ended December 31, 2013 2012 $ Change % Change $2,950.8 179.1 $2,928.4 213.7 $2,714.7 $ 22.4 (34.6) $ 57.0 0.8% (16.2%) 2.1% During 2013, net sales, excluding precious metal content increased $57.0 million from 2012. The 2.1% increase in net sales, excluding precious metal content, included constant currency sales growth of 2.0%. The constant currency sales growth was comprised of internal Constant Currency Sales Growth sales growth of 1.9% and acquisition sales growth of 0.1%. Precious metal content of sales declined compared to the same period in 2012, primarily as a result of a decline in use of precious metal alloys in dentistry. The following table includes growth rates for net sales, excluding precious metal content. Internal sales growth . . . . . . . . . . . . . . . . . . . . . . . . . Net acquisition sales growth . . . . . . . . . . . . . . . . . . . . . Constant currency sales growth . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2013 United States 3.8% —% 3.8% Europe 0.2% 0.2% 0.4% All Other Regions Worldwide 2.7% (0.1%) 2.6% 1.9% 0.1% 2.0% United States During 2013, net sales, excluding precious metal content, increased by 3.8% on a constant currency basis. The increase was primarily due to internal sales growth in consumables product dental categories. and dental specialty increase in net sales, excluding precious metal content, was primarily driven by an increase in consumable medical products, partially offset by lower sales of dental specialty products when compared to the year ago period. Europe During 2013, net sales, excluding precious metal content, increased by 0.4% on a constant currency basis, including 0.2% of net acquisition sales growth. The All Other Regions During 2013, net sales, excluding precious metal content, increased 2.6% on a constant currency basis. The internal sales growth was 2.7%, driven by increased sales across all product categories. 32 Gross Profit (in millions, except percentage amounts) Gross profit Gross profit as a percentage of net sales, including precious . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2013 2012 $ Change % Change $1,577.4 $1,556.4 $21.0 1.3% metal content . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.5% 53.1% Gross profit as a percentage of net sales, excluding precious metal content . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56.9% 57.3% Gross profit as a percentage of net sales, excluding precious metal content, decreased 40 basis points during 2013 compared to 2012. The margin rate decline was primarily the impact of the medical device federal excise tax mandated by the Affordable Care Act that became effective January 1, 2013. Expenses Selling, General and Administrative (‘‘SG&A’’) Expenses (in millions, except percentage amounts) SG&A expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SG&A expenses as a percentage of net sales, including Year Ended December 31, 2013 2012 $ Change % Change $1,144.9 $1,148.7 $(3.8) (0.3%) precious metal content . . . . . . . . . . . . . . . . . . . . . . . 38.8% 39.2% SG&A expenses as a percentage of net sales, excluding precious metal content . . . . . . . . . . . . . . . . . . . . . . . 41.3% 42.3% SG&A expenses as a percentage of net sales, excluding precious metal content, improved 100 basis points as compared to 2012 primarily as a result cost savings across a number of businesses and synergies from the integration activities of recent acquisitions. Restructuring and Other Costs (in millions, except percentage amount) Restructuring and other costs . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2013 2012 $ Change % Change $13.4 $25.7 $(12.3) (47.9%) The Company recorded net restructuring and other costs of $13.4 million in 2013 compared to $25.7 million in 2012. In 2013, restructuring costs of $12.0 million related to the closure and consolidation of facilities in an effort to streamline the Company’s operations and better leverage the Company’s resources. Restructuring and other costs also includes net expense of $1.4 million related to an impairment of previously acquired technology partially offset by a net gain on legal settlements. In 2012, restructuring and other costs of $25.7 million included restructuring cost of $17.8 million related to the implant integration activity as well as the closure and consolidation of facilities in an effort to streamline the Company’s operations and better leverage the Company’s resources. Restructuring and other costs also included $5.2 million related to impairment of previously acquired technologies. Other Income and Expenses (in millions, except percentage amounts) Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest and other expense . . . . . . . . . . . . . . . . . . . 2013 2012 $ Change % Change $41.5 8.3 $49.8 $48.1 3.2 $51.3 $(6.6) 5.1 $(1.5) (13.7%) NM Year Ended December 31, NM — Not meaningful 33 Net Interest Expense for the Net year interest expense ended December 31, 2013 was $6.6 million lower compared to the year ended December 31, 2012. The net decrease is a result of lower average debt levels in 2013 compared to interest the same period in 2012 and positive net recorded on net investment hedges due to lower average interest rates on euro and Swiss franc hedge contracts compared to the prior year period. The net decrease was partially offset by lower investment income due to lower investment balances, lower interest rates and a lower coupon rate on convertible bonds. the year ended December 31, 2012. Other expense (income), net for the year ended December 31, 2013 was $8.3 million, comprised primarily of $6.9 million of interest expense and fair value adjustments on cross currency basis swaps not designated as hedges that offset currency risk on intercompany loans, and $2.1 million of currency transaction losses offset by $0.7 million of other non-operating income. Other expense (income), net for the year ended December 31, 2012 was $3.2 million, including $2.7 million of currency transaction losses and $0.5 million of non-operating expenses. Other Expense, Net Other expense (income), net for the year ended December 31, 2013 was $5.1 million higher compared to Income Taxes and Net Income (in millions, except per share and percentage amounts) Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in net income (loss) of unconsolidated affiliated company . . . . . . . Net income attributable to noncontrolling interests . . . . . . . . . . . . . . . Net income attributable to DENTSPLY International . . . . . . . . . . . . . . . Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2013 2012 $ Change 14.1% 2.7% $ 1.0 $ 5.0 $313.2 $ 2.16 $ (3.3) $ 4.3 $314.2 $ 2.18 $ 4.3 $ 0.7 $(1.0) Provision for Income Taxes The Company’s effective tax rate for 2013 and 2012 was 14.1% and 2.7%, respectively. The Company’s effective tax rate for 2013 was favorably impacted by the Company’s post-acquisition restructuring activities, the recording of tax benefits of $9.4 million related to U.S. federal legislative changes enacted in January 2013 relating to 2012, a tax benefit of $2.2 million for the release of a valuation allowance and $10.3 million of benefits related to prior year tax matters. During 2012, the Company entered into various legal entity restructuring activities to complete the integration of the Astra Tech business acquired in August 2011. In addition to the specific tax integration of the Astra Tech subsidiaries with legacy DENTSPLY subsidiaries, the Company also realigned much of its foreign legal entity structure to better align operations and cash management activities. As a part of this restructuring, the Company was able to capture an overall net benefit from $49.6 million will be realized over the next several years after 2012. Also, the Company recognized $12.0 million of tax benefit from a reduction in foreign tax rates and separately recorded a valuation allowance on previously recognized assets of $10.4 million. Further information regarding the details of income taxes is presented in Note 14, Income Taxes, to the consolidated financial statements in this Form 10-K. In 2013, the Company’s effective tax rate included the impact of amortization of purchased intangible assets, integration and restructuring and other costs as well as various income tax adjustments which impacted income before taxes and the provision for income taxes by $72.9 million and $43.7 million, respectively. In 2012, the Company’s effective tax rate included the impact of amortization of purchased intangible assets, integration and restructuring and other costs as well as various income tax adjustments which impacted income before taxes and the provision for income taxes by $91.7 million anticipated tax losses of $57.7 million. Most of the cash and $90.0 million, respectively. flow benefit from this tax matter, including utilization of an existing credit carryforward of approximately 34 Equity in net income (loss) of unconsolidated affiliated company The Company’s 17% ownership investment of DIO Corporation (‘‘DIO’’) resulted in a net earnings of $1.0 million on an after-tax basis for 2013. The equity earnings of DIO includes the result of mark-to-market changes related to the derivative accounting for the convertible bonds issued by DIO to DENTSPLY. The Company’s portion of the mark-to-market net gain incurred by DIO was approximately $1.2 million. In 2012, equity in net loss in DIO was $3.3 million on an after-tax basis, which includes the Company’s portion of the mark-to-market net loss incurred by DIO of approximately $3.1 million. Net income attributable to noncontrolling interests The portion of consolidated net income attributable to noncontrolling interests increased $0.7 million from 2013 to 2012 primarily due to increased sales and earnings by such entities. Net income attributable to DENTSPLY International In addition to the results reported in accordance the Company provides adjusted net with US GAAP, the performance of income attributable to DENTSPLY International and adjusted earnings per diluted common share (‘‘adjusted income EPS’’). The Company discloses adjusted net attributable to DENTSPLY International to allow investors to evaluate the Company’s operations exclusive of certain items that impact the comparability of results from period to period and may not be indicative of past or future performance of the normal operations of the Company and certain large non-cash charges related to purchased intangible assets. The Company believes that this information is helpful in understanding underlying operating trends and cash flow generation. Adjusted net income and adjusted EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes adjusted net income and adjusted EPS and the performance of the Company is measured on this basis along with other performance metrics. Year Ended December 31, 2013 Net Income Per Diluted Common Share (in thousands, except per share amounts) Net income attributable to DENTSPLY International . . . . . . . . . . . . . . . . . . . . Amortization of purchased intangible assets, net of tax . . . . . . . . . . . . . . . . Restructuring and other costs, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition related activities, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . Credit risk and fair value adjustments to outstanding derivatives, net of tax . . . . Gain on fair value adjustment at an unconsolidated affiliated company, net $313,192 32,309 9,721 5,890 2,339 of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax related adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted non-US GAAP earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,200) (21,054) $341,197 $ 2.16 0.22 0.07 0.04 0.02 (0.01) (0.15) $ 2.35 Year Ended December 31, 2012 Net Income Per Diluted Common Share (in thousands, except per share amounts) Net income attributable to DENTSPLY International . . . . . . . . . . . . . . . . . . . . Amortization of purchased intangible assets, net of tax . . . . . . . . . . . . . . . . Restructuring and other costs, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition related activities, net of tax Loss on fair value adjustment at an unconsolidated affiliated company, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Orthodontics business continuity costs, net of tax . . . . . . . . . . . . . . . . . . . . Income tax related adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted non-US GAAP earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $314,213 33,612 18,549 9,299 2,927 600 (59,992) $319,208 $ 2.18 0.23 0.13 0.07 0.02 — (0.41) $ 2.22 35 Adjusted Operating Income and Margin Adjusted operating income and margin is another important internal measure for the Company. Operating income in accordance with US GAAP is adjusted for the items noted above which are excluded on a pre-tax basis to arrive at adjusted operating income, a non-US GAAP measure. The adjusted operating margin is calculated by dividing adjusted operating income by net sales, excluding precious metal content. Senior management receives a monthly analysis of operating results that includes adjusted operating income. The performance of the Company is measured on this basis along with the adjusted non-US GAAP earnings noted above as well as other performance metrics. Adjusted operating income is considered a measure not calculated in accordance with accounting principles generally accepted in the United States; therefore, it is a non-US GAAP measure. This non-US GAAP measure may differ companies and should not be considered in isolation from, or as a substitute for, in financial of measures accordance with US GAAP. performance from other prepared (in thousands, except percentage of net sales amounts) Operating income attributable to DENTSPLY International . . . . . . . . . . . . . . . . Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition related activities Adjusted non-US GAAP Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands, except percentage of net sales amounts) Operating income attributable to DENTSPLY International . . . . . . . . . . . . . . . . Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and other costs Acquisition related activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Orthodontics business continuity costs . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted non-US GAAP Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2013 Percentage of Net Sales, Excluding Precious Metal Content 15.1% 1.7% 0.5% 0.3% 17.6% Operating Income (Loss) $419,166 46,221 14,639 8,778 $488,804 Year Ended December 31, 2012 Percentage of Net Sales, Excluding Precious Metal Content 14.1% 1.8% 1.0% 0.6% —% 17.5% Operating Income (Loss) $381,939 49,745 27,103 14,164 920 $473,871 Operating Segment Results customer presence, geographic The Company’s operating businesses are combined into operating groups, which have overlapping product offerings, bases, distribution channels and regulatory oversight. These considered the Company’s operating groups reportable segments as the Company’s chief operating decision-maker regularly reviews financial results at the operating group level and uses this information to these manage the Company’s operations. Each of are operating groups covers a wide range of product categories and geographic regions. The product categories and geographic regions often overlap across the groups. Further information regarding the details of each group is presented in Note 5, Segment and Geographic Information, to the consolidated financial statements in this Form 10-K. The management of each group is evaluated for performance and incentive compensation purposes on net third party sales, excluding precious metal content, and segment operating income. 36 Year Ended December 31, 2013 2012 $ Change % Change $ 656.2 $ 633.4 $22.8 3.6% 1.1% 3.4% Net Sales, Excluding Precious Metal Content (in millions, except percentage amounts) Dental Consumable and Certain International Businesses . . . Dental Specialty and Laboratory and Certain Global Distribution Businesses . . . . . . . . . . . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . . . $1,587.0 $ 532.7 $1,570.0 $ 515.0 $17.0 $17.7 Year Ended December 31, 2013 2012 $ Change % Change Segment Operating Income (in millions, except percentage amounts) Dental Consumable and Certain International Businesses . . . Dental Specialty and Laboratory and Certain Global $217.9 $216.8 Distribution Businesses . . . . . . . . . . . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . . . $293.4 $ 25.6 $286.4 $ 21.9 $1.1 $7.0 $3.7 0.5% 2.4% 16.9% Dental Consumable and Certain International Businesses Net sales, excluding precious metal content, increased $22.8 million, or 3.6%, during 2013 as compared to 2012. Sales on a constant currency basis increased by 3.0%. Operating income increased $1.1 million during 2013 compared to 2012. The improvement in operating income was primarily the result of sales growth. Dental Specialty and Laboratory and Certain Global Distribution Businesses Net sales, excluding precious metal content, increased $17.0 million, or 1.1%, during 2013 compared to 2012. Sales grew on a constant currency basis by 1.1%. The constant currency growth was primarily the result of increased sales in the specialty dental businesses despite a decline in implant sales. Operating income increased $7.0 million during 2013 compared to 2012. Modest operating income improvements were primarily driven by the dental specialty businesses. Healthcare and Emerging Markets Businesses Net sales, excluding precious metal content, increased $17.7 million, or 3.4%, during 2013 compared to 2012. Sales increased by 3.7% on a constant currency basis. The constant currency growth was primarily the result of increased sales in the healthcare businesses and in certain emerging markets. Operating income improved by $3.7 million, or 16.9%, in 2013 compared to 2012. The improvement in operating income was primarily the result of sales growth. CRITICAL ACCOUNTING JUDGMENTS AND POLICIES results requires could differ The preparation of the Company’s consolidated financial statements in conformity with US GAAP requires the Company to make estimates and assumptions about future events that affect the amounts reported in the statements and accompanying consolidated financial cannot be notes. Future events and their effects determined with absolute certainty. Therefore, the the exercise of determination of estimates judgment. Actual from those estimates, and such differences may be material to the consolidated financial The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix and in some cases, actuarial techniques. The Company evaluates facts and circumstances these significant dictate. Some events as described below could cause results to differ significantly from those determined using estimates. The Company has identified the following accounting estimates as those which are critical to its business and results of operations. statements. factors as Business Acquisitions The Company acquires businesses as well as partial interests in businesses. Acquired businesses are accounted for using the acquisition method of accounting which requires the Company to record assets acquired and liabilities assumed at their respective fair values with the excess of the purchase price over estimated fair values 37 recorded as goodwill. in The determining the fair value of acquired assets and assumed liabilities as well as asset lives can materially impact the results of operations. assumptions made The Company obtains information during due diligence and through other sources to get respective fair values. Examples of factors and information that the Company uses to determine the fair values include: tangible and intangible asset evaluations and appraisals; evaluations of existing contingencies and liabilities and product the initial valuation for an acquisition is incomplete by the end of the quarter the record a provisional estimate in the Company will financial statements. The provisional estimate will be finalized as soon as information becomes available but will only occur up to one year from the acquisition date. in which the acquisition occurred, line integration information. If Goodwill and Other Long-Lived Assets Goodwill and Indefinite-Lived Assets the Company also requires The Company follows the accounting standards for goodwill and indefinite-lived intangibles, which require an annual test for impairment to goodwill using a fair value impairment In addition to minimum annual approach. impairment that tests, assessments be made more frequently if events or changes in circumstances indicate that the goodwill or indefinite-lived assets might be impaired. If impairment is identified, the resulting charge is related to goodwill determined a goodwill hypothetical purchase price allocation of the fair value and reducing the current carrying value to the extent it exceeds the recalculated goodwill. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. recalculating through by Other Long-Lived Assets their lives. Other estimated useful long-lived assets, such as definite-lived intangible assets and fixed assets, are amortized or depreciated over In accordance with US GAAP, these assets are reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amount of the asset may not be recoverable based upon an evaluation of impaired the identifiable undiscounted cash flows. based on the identifiable undiscounted cash flows, the asset’s fair value is determined using the discounted cash flow and market participant assumptions. The resulting charge reflects the excess of the asset’s carrying cost over its fair value. If Impairment Assessment Assessment of the potential impairment of goodwill and other long-lived assets is an integral part of the Company’s normal ongoing review of operations. Testing for potential impairment of these assets is significantly dependent on numerous assumptions and reflects management’s best estimates at a particular point in time. The dynamic economic environments in which the Company’s businesses operate and key economic and business assumptions with respect to projected selling prices, increased competition and introductions of new technologies can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time at which such impairments are recognized. If there are assumptions, particularly changes in the Company’s discount rates, earnings multiples and future cash flows, the Company may be required to recognize impairment charges. Information with respect to the Company’s significant accounting policies on goodwill and other long-lived assets are included in Note 1, Significant Accounting Policies, to the consolidated financial statements in this Form 10-K. unfavorable changes these in Annual Goodwill Impairment Testing Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicators of impairment exist or if a decision is made to sell a business. testing is The valuation date for annual impairment April 30. is involved in determining if an Judgment indicator of impairment has occurred. Such indicators may include a decline in expected cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition or slower growth rates, among others. It is important to note that fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of goodwill. Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. The Company has reporting units contained within each operating segment. several The evaluation of impairment involves comparing the current fair value of each reporting unit to its net including goodwill. The Company uses a book value, 38 vary rates, capital impairment, as management believes discounted cash flow model (‘‘DCF model’’) to estimate the current fair value of its reporting units when testing forecasted for operating cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to including future sales forecast operating cash flows, from growth, operating margin growth, benefits restructuring initiatives, spending, tax business initiatives, and working capital changes. These assumptions may the reporting units. Operating cash flow forecasts are based on approved business-unit operating plans the early years and historical relationships and projections in later years. The weighted average cost of capital (‘‘WACC’’) rate is estimated for geographic regions and applied to the reporting units located within the regions. its The Company methodology testing for the years presented. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the recorded goodwill, relative size of differences in assumptions may have a material effect on the results of the Company’s impairment analysis. the Company’s not materially for goodwill significantly impairment changed among has for If the WACC rate of above as well as for one reporting unit in the Healthcare and Emerging Markets Business segment based on current year financial performance. The review did not result in any impairment of the reporting units’ respective goodwill balances. Assumptions used in the calculations of fair value were substantially consistent with those at these two April 30, 2014. reporting units had been hypothetically increased by 100 basis points at December 31, 2014, the fair value of these two reporting units would still exceed net book value. If the fair value of these two reporting units had been hypothetically reduced by 5%, the reporting unit within the Healthcare and Emerging Markets Businesses segment would have had a net book value exceeding its fair value by approximately $0.4 million. If the fair value of these reporting units had been hypothetically reduced by 10% at December 31, 2014, the reporting unit within Healthcare and Emerging Markets Businesses segment would have had a net book value exceeding fair value by approximately $4.0 million and the reporting unit within the Dental Specialties and Laboratory and Certain Global Distribution Business segment would have had a fair value exceeding approximately $5.1 million. Goodwill for the two reporting units totals $139.0 million at December 31, 2014. value book net by its The performance of the Company’s 2014 annual impairment test did not result in any impairment of the Company’s goodwill. The WACC rates utilized in the 2014 analysis ranged from 8.6% to 14.0%. Had the WACC rate of each of the Company’s reporting units been hypothetically increased by 100 basis points at April 30, 2014, the fair value of those reporting units would still exceed net book value. If the fair value of each of the Company’s reporting units had been hypothetically reduced by 5% at April 30, 2014, the fair value of those reporting units would still exceed net book value. If the fair value of each of the Company’s reporting units had been hypothetically reduced by 10% at April 30, 2014, due to competitive conditions, one reporting unit within the Dental Specialties and Laboratory and Certain Global Distribution Business segment would have a net book approximately value $5.9 million. Goodwill totals $122.7 million at April 30, 2014. To the extent that future operating results of this reporting unit do not meet the forecasted cash flows the Company can provide no assurance that a future goodwill impairment charge would not be incurred. value by this reporting unit exceeding its fair for Should the Company’s analysis in the future indicate an increase in discount rates or a degradation in the overall markets served by these reporting units, it could result in impairment of the carrying value of goodwill to its implied fair value. There can be no assurance that the Company’s future goodwill impairment testing will not result in a charge to earnings. Annual Testing Indefinite-Lived Intangible Asset Impairment assets consist Indefinite-lived of intangible tradenames and are not subject to amortization; instead, impairment annually or more they are tested for frequently if indicators of impairment exist or if a decision is made to sell a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a decline in expected cash flows, a significant adverse change in legal in the business climate, unanticipated competition or slower growth rates, among others. It is important to note that fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of indefinite-lived assets. factors or At December 31, 2014, the Company updated its goodwill impairment testing for the reporting unit noted The fair value of acquired tradenames is estimated by the use of a relief from royalty method, which values 39 an indefinite-lived intangible asset by estimating the royalties saved through the ownership of an asset. Under this method, an owner of an indefinite-lived intangible asset determines the arm’s length royalty that likely would have been charged if the owner had to license the asset from a third party. The royalty, which is based on the is estimated rate applied against tax-effected and discounted at present value using a discount rate commensurate with the relative risk of achieving the cash flow attributable to the asset. Management judgment is necessary to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates. Royalty rates used are consistent with those assumed for the original purchase accounting valuation. Other assumptions are consistent with those applied to goodwill impairment testing. forecasted sales, The performance of the Company’s 2014 annual impairment test did not result in any impairment of the Company’s indefinite-lived assets. If the fair value of each of the Company’s indefinite-lived intangible assets had been hypothetically reduced by 10% or the discount rate had been hypothetically increased by 50 basis points, at December 31, 2014, the fair value of these assets would still exceed their book value. Should the Company’s analysis in the future indicate an increase in discount rates or a degradation in the use of the tradenames, it could result in impairment of the carrying value of the indefinite-lived assets to its implied fair value. There can be no assurance that the Company’s future indefinite-lived asset impairment testing will not result in a charge to earnings. Litigation accrual adjustment. The Company believes it has appropriately estimated liabilities for probable losses in the past; however, the unpredictability of litigation and court decisions could cause a liability to be incurred in excess of estimates. Legal costs related to these lawsuits are expensed as incurred. Income Taxes Income taxes are determined using the liability method of accounting for income taxes. The Company’s income tax expense includes the U.S. and international taxes plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. the financial The Company applies a recognition threshold and measurement attribute for statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. The Company establishes a valuation allowance for deferred tax assets for which realization is not the Company has a valuation allowance of $253.2 million against the benefit of certain deferred tax assets of foreign and domestic subsidiaries. likely. At December 31, 2014, The Company and its subsidiaries are from time to time parties to lawsuits arising out of their respective operations. The Company records liabilities when a loss is probable and can be reasonably estimated. These estimates are typically in the form of ranges, and the Company records the liabilities at the low point of the ranges, when no other point within the ranges are a better estimate of the probable loss. The ranges established by management are based on analysis made counsel based on by the Company information known at determines a liability to be only reasonably possible, it considers the same information to estimate the possible exposure and discloses any material potential liability. These loss contingencies are monitored regularly for a change in fact or circumstance that would require an legal the time. internal and external If The Company operates within multiple taxing jurisdictions and in the normal course of business is examined in various jurisdictions. The reversal of accruals is recorded when examinations are completed, statutes of limitation are closed or tax laws are changed. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities during the year ended December 31, 2014 were $560.4 million compared to $417.8 million during the year ended December 31, 2013. Net income increased $4.8 million in the period ended December 31, 2014. Working capital sources were $64.3 million, an increase of $153.7 million compared to a use of $89.4 million in 2013. The increase in working capital is driven by $69.5 million due to lower taxes paid, $46.4 million in inventory reductions and 40 $39.7 million improvement in accounts receivable. The Company’s cash and cash equivalents increased by $76.6 million during the year ended December 31, 2014 to $151.6 million. For the year ended December 31, 2014, the number of days for sales outstanding in accounts receivable decreased by one day to 55 days as compared to 56 days in 2013. On a constant currency basis, the number of days of sales in inventory decreased by one day to 113 days at December 31, 2014 as compared to 114 days at December 31, 2013. Investing activities during 2014 include capital expenditures of $99.6 million. Investments of $8.6 million are partially offset by the sale of a non-core product lines for $6.5 million. At December 31, 2014, the Company had authorization to maintain up to 34.0 million shares of treasury stock under its stock repurchase program as approved by the Board of Directors. Under this program, the Company purchased approximately 3.3 million shares, or approximately 2.3% of average diluted shares outstanding, during 2014 at an average price of $49.88. As of December 31, 2014 and 2013, the Company held stock, 21.9 and 20.5 million shares of respectively. The Company also received proceeds of $49.0 million primarily as a result of 1.5 million stock options exercised during the year ended December 31, 2014. treasury Total debt decreased by $210.3 million for the year ended December 31, 2014. DENTSPLY’s long-term debt, including the current portion, at December 31, 2014 and 2013 was $1,262.7 million and $1,370.8 million, respectively. The Company’s long-term debt, including the current portion decreased by a net of $108.1 million during the year ended December 31, 2014. This net change included a net decrease in borrowings of $86.2 million, and a decrease of $21.9 million due to exchange rate fluctuations on debt denominated in foreign currencies. The decrease in long term borrowings reflects the payment of $75.0 million of Private Placement notes and the first annual Term Loan payment of $8.8 million. The Company’s short-term debt decrease reflects the payment of $101.9 million of short-term commercial paper, which was not drawn at December 31, 2014. During the year ended December 31, 2014, the Company’s ratio of net debt to total capitalization 35.3% at 32.4% compared decreased December 31, 2013. DENTSPLY defines net debt as total to to debt, including current and long-term portions, less cash and cash equivalents and total capitalization as the sum of net debt plus total equity. In February 2014, the Company paid the first required payment of $75.0 million under the Private Placement Notes by issuing commercial paper. The second required payment of $100.0 million is due in February 2015 and has been classified as current on the balance sheet. The Company intends to use available cash, commercial paper and the revolving credit facilities to pay the 2015 payment. The Company paid the first annual principal payment of $8.8 million representing a 5% mandatory principal amortization due in each of the first six years under the terms of the Term Loan with a final maturity of August 26, 2020. The second annual installment in the amount of $8.8 million will be due in August 2015 and has been classified as current on the balance sheet. On July 23, 2014, the Company entered into an Amended and Extended Revolving Credit Agreement to replace the 2011 Revolving Credit Agreement dated August 27, 2011, that had provided for a multi-currency revolving credit facility in an aggregate amount of up to $500.0 million through July 27, 2016. The new Credit Agreement provides for a new five year, $500.0 million multi-currency revolving credit facility through July 23, 2019 (the ‘‘Facility’’) to provide working capital from time to time for the Company and for other general corporate purposes. The Facility is unsecured and contains certain affirmative and negative covenants relating to the Company’s operations and financial condition, including prescribed leverage and interest coverage ratios. The Facility contains customary events of default. Upon the occurrence of an event of default, all outstanding borrowings under the Credit Agreement may be accelerated and become immediately due and payable. The Company aggregate $500.0 million under a U.S. dollar commercial paper facility. The five-year revolver serves as a back-up to the commercial paper facility, thus the total available credit under the multi-currency revolving credit facilities in the aggregate is $500.0 million. At December 31, 2014, both the multi-currency revolving credit facility and the commercial paper facility were unused. commercial available facility paper also and has the an On September 29, 2014, the Company entered into to replace the maturing a Samurai Loan Agreement Samurai Loan Agreement dated August 27, 2011, in an 41 aggregate amount of Japanese yen 12.6 billion, through September 29, 2014. The new Samurai Loan Agreement provides for a new five-year, Japanese yen 12.6 billion term loan through September 30, 2019 (the ‘‘Samurai Loan’’). The Samurai Loan is designated as a net investment hedge. The Samurai Loan is unsecured and contains certain affirmative and negative covenants relating to the Company’s operations and financial condition, including prescribed leverage and interest coverage ratios. The Samurai Loan contains customary events of default. Upon the occurrence of an event of default, all outstanding borrowings under the Samurai Loan may be accelerated and become immediately due and payable. The Company also has access to $63.4 million in uncommitted short-term financing under lines of credit from various financial institutions. The lines of credit have no major restrictions and are provided under demand notes between the Company and the lending institutions. At December 31, 2014, $3.0 million was outstanding under these short-term lines of credit. At December 31, 2014, the Company had total unused lines of credit related to the revolving credit agreement and the uncommitted short-term lines of credit of $560.6 million. These financial institutions. At December 31, 2014, the Company held $56.8 million of precious metals on consignment from several consignment agreements allow the Company to acquire the precious in time, which is rates at a point metal at market approximately the same time, and for the same price as alloys are sold to the Company’s customers. In the event that the financial institutions would discontinue offering these consignment arrangements, and if the Company could not obtain other comparable arrangements, the Company may be required to obtain third party financing to fund an ownership position to maintain precious metal inventory at operational levels. The following table presents the Company’s scheduled contractual cash obligations at December 31, 2014: Contractual Obligations (in thousands) . . . . . . . . . . Long-term borrowings Operating leases . . . . . . . . . . . . . . Interest on long-term borrowings, net of interest rate swap agreements . . Postemployment obligations . . . . . . . Cross currency basis swaps . . . . . . . . Precious metal consignment agreements . . . . . . . . . . . . . . . . Other commitments . . . . . . . . . . . . Less Than 1 Year 1 − 3 Years 3 − 5 Years Greater Than 5 Years Total $109,830 37,711 $458,792 50,136 $131,203 29,158 $562,887 11,250 $1,262,712 128,255 34,677 10,526 2,683 56,794 88,935 59,117 21,928 — — — 43,750 27,737 — — — 52,379 78,390 — — — 189,923 138,581 2,683 56,794 88,935 $341,156 $589,973 $231,848 $704,906 $1,867,883 Due to the uncertainty with respect to the timing of leases and potential future acquisitions, from the current future cash flows associated with the Company’s cash, cash equivalents and short-term investment unrecognized tax benefits at December 31, 2014, the balances, funds generated from operations and amounts Company is unable to make reasonably reliable estimates available under its existing credit facilities, which is further of the period of cash settlement with the respective discussed in Note 12, Financing Arrangements, to the therefore, $30.7 million of taxing authority; the unrecognized tax benefit has been excluded from the contractual obligations table above (See Note 14, Income Taxes, to the consolidated financial statements in this Form 10-K). The Company expects on an ongoing basis to be able to finance cash requirements, including capital to a expenditures $120.0 million, stock repurchases, debt service, operating $100.0 million range of in consolidated financial statements. The Company intends to pay or refinance the current portion of long term debt due in 2015 utilizing available cash, commercial paper and the revolving credit facilities. As noted in the Company’s Consolidated Statements of Cash Flows in this Form 10-K, the Company continues to generate strong cash flows from operations, which is used to finance the Company’s activities. 42 the majority of At December 31, 2014, the Company’s cash and cash equivalents were held outside of the United States. Most of these balances could be repatriated to the United States, however, under current law, potentially may be subject to U.S. federal income tax, less applicable foreign tax credits. The Company expects to repatriate its foreign excess free cash flow (the amount investment and acquisition needs), in excess of capital subject to fund on going regulations, to current operations and capital needs. Historically, the Company has generated more than sufficient operating cash flows in the United States to fund domestic operations. Further, the Company expects on an ongoing basis, to be able to finance domestic and international cash requirements, including capital expenditures, stock repurchases, debt service, operating leases and potential future acquisitions, from the funds generated from operations and amounts available under its existing credit facilities. The Company intends to finance the purchase of the remaining shares of a noncontrolling interest for approximately 73.5 million euros and the current portion of long-term debt due in 2015 utilizing available cash commercial paper and the revolving credit facilities. NEW ACCOUNTING PRONOUNCEMENTS Refer to Note 1, Significant Accounting Policies, to the Consolidated Financial Statements in this Form 10-K for a discussion of recent accounting guidance and pronouncements. Item 7A. Quantitative and Qualitative Disclosure About Market Risk QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK and price rates volatility potential The Company’s major market risk exposures are changing interest rates, movements in foreign currency exchange of commodities used by the Company in its manufacturing processes. The Company’s policy is to manage interest rates through the use of floating rate debt and interest rate exposures when rate swaps interest to adjust appropriate, based upon market The conditions. Company employs foreign currency denominated debt and currency swaps which serve to partially offset the Company’s exposure on its net investments in subsidiaries denominated in foreign currencies. The Company’s policy generally is to hedge major foreign currency transaction exposures through foreign exchange forward contracts. These contracts are entered into with major financial into commodity swaps institutions thereby minimizing the risk of credit loss. In order to limit the unanticipated earnings fluctuations the Company in commodity prices, from volatility selectively enters to convert variable raw material costs to fixed costs. The Company does not hold or issue derivative financial instruments for speculative or trading purposes. The Company is subject to other risk exposure in addition to the risks on its financial instruments, such as possible impacts on its pricing and production costs, which are difficult to reasonably predict, and have therefore not been included below. foreign exchange market Foreign Exchange Risk Management 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. The Company primarily uses forward foreign exchange contracts and cross currency basis swaps to hedge these risks. 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. These cash flow hedges have maturities of six to 18 months and do not change the underlying long term foreign currency exchange risk. The Company accounts for the forward foreign exchange contracts as cash flow hedges. uses both non-derivative The Company has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. Currently, the Company financial including foreign currency denominated instruments, debt held at the parent company level, cross currency basis swaps and foreign exchange forward contracts to hedge some of this exposure. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the non-derivative and derivative financial instruments designated as hedges of net investment. At December 31, 2014, a 10% strengthening of the U.S. dollar against all other currencies would improve the net fair value associated with the forward foreign exchange contracts and the cross currency basis swaps by approximately $33.6 million. 43 Interest Rate Risk Management Off Balance Sheet Arrangements amounts swaps has notional The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt and to convert fixed rate debt to variable rate debt. At December 31, 2014, the Company has three groups of significant interest rate swaps. One of the groups of totaling 12.5 billion Japanese yen, and effectively converts the underlying variable interest rates to an average fixed interest rate of 0.9% for a term of five years, ending in September 2019. 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. Another swap has a notional amount of $105.0 million to effectively convert the underlying fixed interest rate of 4.1% on a portion of the Company’s $250.0 million Private Placement Notes to variable rate for a term of five years, ending February 2016. The interest rates on variable rate term loan debt and commercial paper are consistent with current market conditions, therefore the fair value of these instruments approximates their carrying values. At December 31, 2014, an increase of 1.0% in the interest rates on the variable interest rate instruments would increase the Company’s interest expense by approximately $3.2 million. 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. At December 31, 2014, the Company had swaps in place to purchase 1,068 troy ounces of platinum bullion for use in production at an average fixed rate of $1,306 per troy ounce. In addition, the Company had swaps in place to purchase 58,206 troy ounces of silver bullion for use in production at an average fixed rate of $18 per troy ounce. At December 31, 2014, a 10% increase in commodity prices would reduce the fair value liability associated with the commodity swaps by approximately $0.2 million. 44 Consignment Arrangements financial institutions. Under The Company consigns the precious metals used in the production of precious metal dental alloy products from various these consignment arrangements, the banks own the precious metal, and, accordingly, the Company does not report this consigned inventory as part of its inventory on its consolidated balance sheet. These agreements are cancelable by either party at the end of each consignment period, which typically run for a period of one to nine months; however, because the Company typically has access to numerous financial institutions with excess capacity, consignment needs created by cancellations can be shifted among the other institutions. The consignment agreements allow the Company to take ownership of the metal at approximately the same time customer orders are received and to closely match the price of the metal acquired to the price charged to the customer (i.e., the price charged to the customer is largely a pass through). the impact of As precious metal prices fluctuate, the Company evaluates the precious metal price fluctuation on its target gross margins for precious metal dental alloy products and revises the prices customers are charged for precious metal dental alloy products accordingly, depending upon the magnitude of the fluctuation. While the Company does not separately the precious metal content of invoice customers for the underlying precious metal dental alloy products, precious metal content is the primary component of the cost and sales price of the precious metal dental alloy products. For practical purposes, if the precious metal prices go up or down by a small amount, the Company will not immediately modify prices, as long as the cost of precious metals embedded in the Company’s precious metal dental alloy price closely approximates the market price of the precious metal. If there is a significant change in the price of precious metals, the Company adjusts the price for the precious metal dental alloys, maintaining its margin on the products. At December 31, 2014, the Company had 79,375 troy ounces of precious metal, primarily gold, platinum, palladium and silver on consignment for periods of less than one year with a market value of $56.8 million. Under the terms of the consignment agreements, the Company also makes compensatory payments to the consignor banks based on a percentage of the value of At precious metals the December 31, 2014, the average annual rate charged by consigned inventory. the consignor banks was 0.4%. These compensatory payments are considered to be a cost of the metals the cost of purchased and are recorded as part of products sold. Item 8. Financial Statements and Supplementary Data Firm,’’ Statements forth under ‘‘Consolidated ‘‘Consolidated The information set the captions ‘‘Management’s Report on Internal Control Over Financial ‘‘Report of Independent Registered Public Reporting,’’ of Accounting Operations,’’ of Comprehensive Income,’’ ‘‘Consolidated Balance Sheets,’’ in Equity,’’ ‘‘Consolidated Statements of Changes ‘‘Consolidated Statements of Cash Flows,’’ and ‘‘Notes to Consolidated Financial Statements’’ is filed, in Item 15 in this Form 10-K. Other information required by Item 8 is included in ‘‘Computation of Ratios of Earnings to Fixed Charges’’ filed as Exhibit 12.1 to this Form 10-K. Statements Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures (a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures The Company’s management, with the participation the Company’s Chief Executive Officer and Chief of the Financial Officer, evaluated the effectiveness of Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report were effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that it is accumulated and including the Chief communicated to management, Executive Officer as appropriate to allow timely decisions regarding required disclosure. Financial Officer, and Chief (b) Management’s Report on Internal Control Over Financial Reporting Management’s report on the Company’s internal included under reporting is financial control over Item 15(a)(1) of this Form 10-K. (c) Changes in Internal Control Over Financial Reporting There have been no changes in the Company’s internal controls over financial reporting that occurred during quarter ended December 31, 2014 that have materially affected, or are likely to materially affect, its internal control over financial reporting. Item 9B. Other Information Not applicable. 45 PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation The information set forth under the caption ‘‘Report in the 2015 Proxy on Executive Compensation’’ Statement is incorporated herein by reference. forth under The information (i) set the caption ‘‘Executive Officers of the Registrant’’ in Part I of this Form 10-K and (ii) set forth under the captions ‘‘Election of Directors’’ and ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’ in the 2015 Proxy Statement is incorporated herein by reference. Code of Ethics at www.DENTSPLY.com. The Company has a Code of Business Conduct and Ethics that applies to the Chief Executive Officer, Chief Financial Officer and the Board of Directors and substantially all of the Company’s management level employees. A copy of the Code of Business Conduct and Ethics is available in the Investor Relations section of the Company’s website The Company intends to disclose any amendment to its Code relates to any of Business Conduct and Ethics that element enumerated in Item 406(b) of Regulation S-K, and any waiver from a provision of the Code of Business Conduct and Ethics granted to any director, principal financial officer, principal executive officer, principal accounting officer, or any of the Company’s other executive officers, in the Investor Relations section of the Company’s website at www.DENTSPLY.com, within four business days following the date of such amendment or waiver. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters forth under The information set the caption ‘‘Security Ownership of Certain Beneficial Owners and Management’’ and ‘‘Securities Authorized for Issuance Under Equity Compensation Plans’’ in the 2015 Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions and Director Independence The information required under this item is presented in the 2015 Proxy Statement, which is incorporated herein by reference. Item 14. Principal Accounting Fees and Services The information set forth under the caption ‘‘Relationship with Independent Registered Public Accounting Firm’’ in the 2015 Proxy Statement is incorporated herein by reference. 46 Consolidated Statements of Changes in Equity — Years ended December 31, 2014, 2013 and 2012 Consolidated Statements of Cash Flows — Years ended December 31, 2014, 2013 and 2012 Notes to Consolidated Financial Statements Quarterly Financial Information (Unaudited) 2. Financial Statement Schedule The financial following statement schedule is filed as part of this Form 10-K and is covered by the Report of Independent Registered Public Accounting Firm: Schedule II — Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required to be included herein under the related instructions or are inapplicable and, therefore, have been omitted. PART IV Item 15. Exhibits and Financial State- ment Schedule (a) Documents filed as part of this Report 1. Financial Statements The following financial statements of the Company are filed as part of this Form 10-K: consolidated Management’s Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations — Years ended December 31, 2014, 2013 and 2012 Consolidated Statements of Comprehensive Income — Years ended December 31, 2014, 2013 and 2012 Consolidated Balance Sheets — December 31, 2014 and 2013 47 3. Exhibits The Exhibits listed below are filed or incorporated by reference as part of the Company’s Form 10-K. Exhibit Number 3.1 3.2 4.1(a) Restated Certificate of Incorporation(16) By-Laws, as amended(16) Description United States Commercial Paper Dealer Agreement dated as of March 28, 2002 between the Company and Citigroup Global Markets Inc. (formerly known as Salomon Smith Barney Inc.) (formerly Exhibit 4.1(b))(6) (b) First Amendment to the United States Commercial Paper Dealer Agreement dated as of March 28, 2002 between the Company and Citigroup Global Markets Inc. (formerly known as Salomon Smith Barney Inc.) (Filed herewith) 4.2(a) United States Commercial Paper Dealer Agreement dated as of August 18, 2011 between the Company and J.P. Morgan Securities LLC (Filed herewith) (b) First Amendment to the United States Commercial Paper Dealer Agreement dated as of August 18, 2011 between the Company and J.P. Morgan Securities LLC (Filed herewith) 4.3 $500.0 Million Credit Agreement, dated as of July 23, 2014 final maturity in July 23, 2019, by and among the Company, the subsidiary borrowers party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A. as administrative agent, Citibank N.A. as Syndication Agent, Bank of Tokyo-Mitsubishi UFJ, LTD and Wells Fargo Bank, N.A., Commerzbank AG, and HSBC Bank USA N.A. as co-documentation agents, and J.P. Morgan Securities LLC and Citibank Global Markets Inc., as Joint Bookrunners and Joint Lead Arrangers (Filed herewith) 4.4 $250.0 Million Private Placement Note Purchase Agreement, due February 19, 2016 dated as of October 16, 2009(10) 4.5(a) 65.0 Million Swiss Franc Term Loan Agreement, due March 1, 2012 dated as of February 24, 2010(11) (b) Second Amendment to the 65.0 Million Swiss Franc Term Loan Agreement dated August 31, 2011 due September 1, 2016, between the Company, the Lenders, and PNC Bank, National Association, as Agent (formerly Exhibit 4.8)(12) 4.10 4.11 4.12 4.14 4.15 10.1 10.2 10.3 10.4(a) $175.0 Million Credit Agreement dated August 26, 2013 among DENTSPLY International Inc., PNC Bank, National Association as Administrative Agent and the Lenders Party thereto(16) Form of Indenture(13) Supplemental Indenture, dated August 23, 2011 between DENTSPLY International Inc., as Issuer and Wells Fargo, National Association, as Trustee(14) 12.55 Billion Japanese Yen Term Loan Agreement between the Company and Bank of Tokyo dated September 22, 2014 due September 28, 2019, between the Company, The Bank of Tokyo-Mitsubishi UFJ, LTD as Sole Lead Arranger, Development Bank of Japan, Inc. as Co-Arranger, The Bank of Tokyo-Mitsubishi UFJ, LTD, as Administrative Agent (Filed herewith) United States Commercial Paper issuing and paying Agency Agreement dated as of November 4, 2014, between the Company and U.S. Bank N.A. (Filed herewith) 1998 Stock Option Plan(1) 2002 Amended and Restated Equity Incentive Plan(8) Restricted Stock Unit Deferral Plan(7) Trust Agreement for the Company’s Employee Stock Ownership Plan between the Company and T. Rowe Price Trust Company dated as of November 1, 2000(3) (b) Plan Recordkeeping Agreement for the Company’s Employee Stock Ownership Plan between the Company and T. Rowe Price Trust Company dated as of November 1, 2000(3) 10.5 10.6 10.7 DENTSPLY Supplemental Saving Plan Agreement dated as of December 10, 2007(8) Amended and Restated Employment Agreement entered February 19, 2008 between the Company and Bret W. Wise*(8) Amended and Restated Employment Agreement entered February 19, 2008 between the Company and Christopher T. Clark*(8) 48 Exhibit Number 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 Description Amended and Restated Employment Agreement entered February 19, 2008 between the Company and James G. Mosch*(8) Amended and Restated Employment Agreement entered February 19, 2008 between the Company and Robert J. Size*(8) Amended and Restated Employment Agreement entered January 1, 2009 between the Company’s subsidiary, DeguDent GMBH and Albert Sterkenburg*(9) DENTSPLY International Inc. Directors’ Deferred Compensation Plan effective January 1, 2007, as amended*(9) Board Compensation Arrangement*(15) Supplemental Executive Retirement Plan effective January 1, 1999, as amended January 1, 2008*(9) Incentive Compensation Plan, amended and restated*(12) AZ Trade Marks License Agreement, dated January 18, 2001 between AstraZeneca AB and Maillefer Instru- ments Holdings, S.A.(3) 10.18(a) Precious metal inventory Purchase and Sale Agreement dated November 30, 2001, as amended October 10, 2006 between Bank of Nova Scotia and the Company(7) (b) (c) (e) (f) (g) 10.19 10.20 10.21 12.1 21.1 23.1 31.1 31.2 32 Precious metal inventory Purchase and Sale Agreement dated December 20, 2001 between JPMorgan Chase Bank and the Company(4) Precious metal inventory Purchase and Sale Agreement dated December 20, 2001 between Mitsui & Co., Precious Metals Inc. and the Company(4) Precious metal inventory Purchase and Sale Agreement dated January 30, 2002 between Com- merzbankAG, Frankfurt, and the Company(8) Precious metal inventory Purchase and Sale Agreement dated December 6, 2010, as amended February 8, 2013 between HSBC Bank USA, National Association and the Company(16) Precious metal inventory Purchase and Sale Agreement dated April 29, 2013 between The Toronto- Dominion Bank and the Company(16) Executive Change in Control Plan for foreign executives, as amended December 31, 2008*(10) 2010 Equity Incentive Plan, amended and restated(12) Employment Agreement between the Company and Deborah M. Rasin*(12) Computation of Ratio of Earnings to Fixed Charges (Filed herewith) Subsidiaries of the Company (Filed herewith) Consent of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP Section 302 Certification Statement Chief Executive Officer Section 302 Certification Statements Chief Financial Officer Section 906 Certification Statement 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 * Management contract or compensatory plan. (1) (2) Incorporated by reference to exhibit included in the Company’s Registration Statement on Form S-8 dated June 4, 1998 (No. 333-56093). Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 1999, File No. 0-16211. 49 (3) (4) (5) (6) (7) (8) (9) Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2000, File No. 0-16211. Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2001, File No. 0-16211. Incorporated by reference to exhibit included in the Company’s Registration Statement on Form S-8 dated November 27, 2002 (No. 333-101548). Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2002, File No. 0-16211. Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2006, File no. 0-16211. Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2007, File No. 0-16211. Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2008, File No. 0-16211. (10) Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2009, File no. 0-16211. (11) Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2010, File no. 0-16211. (12) Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2011, File no. 0-16211. (13) Incorporated by reference to exhibit included in the Company’s Registration Statement on Form S-3 dated August 15, 2011 (No. 333-176307). (14) Incorporated by reference to exhibit included in the Company’s Form 8-K dated August 29, 2011, File no. 0-16211. (15) Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2012, File no. 0-16211. (16) Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2013, File no. 0-16211. 50 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 and 2012 Additions Balance at Beginning of Period Charged (Credited) To Costs And Expenses Charged to Other Accounts Write-offs Net of Recoveries Translation Adjustment Balance at End of Period Description (in thousands) Allowance for doubtful accounts: For Year Ended December 31, 2012 . . . . . . . . . . . . . . . $ 14,905 $ 2,409 $ 115 $(3,798) $ 2013 . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . 13,647 14,213 2,949 (1,688) (231) 532 (2,521) (2,428) Deferred tax asset valuation allowance: For Year Ended December 31, 16 369 (1,846) $ 13,647 14,213 8,783 2012 . . . . . . . . . . . . . . . $ 71,758 $107,995 $ — $ — $ (54) $179,699 2013 . . . . . . . . . . . . . . . 179,699 2014 . . . . . . . . . . . . . . . 228,846 49,251 28,671 — — — — (104) (4,270) 228,846 253,247 51 Management’s Report on Internal Control Over Financial Reporting financial financial reporting includes The management of the Company is responsible for establishing and maintaining adequate internal control over reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended. The Company’s reporting is a process financial internal control over designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A Company’s internal control over those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the the transactions and dispositions of Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of Company’s assets that could have a material effect on the financial statements. the assets of statements Because of its inherent limitations, internal control over reporting may not prevent or detect financial misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making its assessment, management used the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the its Treadway Commission assessment management of December 31, 2014, the Company’s internal control over financial reporting was effective based on the criteria established in Internal Control — Integrated Framework (2013) issued by the COSO. Based that, (‘‘COSO’’). concluded on as The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has an been audited by independent registered public accounting firm, as stated in their report, which appears herein. PricewaterhouseCoopers LLP, /s/ Bret W. Wise Bret W. Wise Chairman of the Board and Chief Executive Officer February 20, 2015 /s/ Christopher T. Clark Christopher T. Clark President and Chief Financial Officer February 20, 2015 52 Report of Independent Registered Public Accounting Firm the financial evaluating financial statements, assessing the accounting principles used and significant estimates made by management, and statement overall presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. records A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that in (i) pertain to the maintenance of the reasonable detail, accurately and fairly the transactions and dispositions of that provide company; transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. reflect the assets of reasonable assurance that, (ii) Because of its inherent limitations, internal control over reporting may not prevent or detect financial misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. To the Board of Directors and Stockholders of DENTSPLY International Inc. In addition, Inc. and its for each of In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of DENTSPLY International subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for statement these financial schedule, for maintaining effective internal control over financial the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting, appearing under Item 15(a)(1). Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the statements and financial reporting and for its assessment of /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Harrisburg, Pennsylvania February 20, 2015 53 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2014 2013 2012 (in thousands, except per share amounts) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,922,620 $2,950,770 $2,928,429 Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,322,831 1,373,358 1,372,042 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,599,789 1,577,412 Selling, general and administrative expenses . . . . . . . . . . . . . . . . . 1,143,106 1,144,890 Restructuring and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,083 445,600 13,356 419,166 Other income and expenses: Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in net (loss) income of unconsolidated affiliated company . . . . 46,910 (5,592) (91) 404,373 81,120 (340) 49,625 (8,123) 8,329 369,335 52,150 976 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322,913 318,161 Less: Net income attributable to noncontrolling interests . . . . . . . . . 59 4,969 1,556,387 1,148,731 25,717 381,939 56,851 (8,760) 3,169 330,679 8,920 (3,270) 318,489 4,276 Net income attributable to DENTSPLY International . . . . . . . . . . . . $ 322,854 $ 313,192 $ 314,213 Earnings per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.28 2.24 $ $ 2.20 2.16 $ $ 2.22 2.18 Weighted average common shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,714 144,219 142,663 144,965 141,850 143,945 The accompanying notes are an integral part of these financial statements. 54 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, 2014 2013 2012 (in thousands) Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 322,913 $318,161 $318,489 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments . . . . . . . . . . . . . . . . . (354,138) Net gain (loss) on derivative financial instruments . . . . . . . . . . . . Net unrealized holding (loss) gain on available-for-sale securities . . . Pension liability adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 49,314 (4,248) (63,658) Total other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . (372,730) 88,931 (29,725) (5,093) 23,266 77,379 Total comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . (49,817) 395,540 93,775 (25,752) 18,338 (39,196) 47,165 365,654 Less: Comprehensive (loss) income attributable to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (597) 7,210 4,671 Comprehensive (loss) income attributable to DENTSPLY International. . $ (49,220) $388,330 $360,983 The accompanying notes are an integral part of these financial statements. 55 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2014 2013 (in thousands) Assets Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 151,639 $ 74,954 Accounts and notes receivable-trade, net . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 426,606 387,095 241,630 472,802 438,559 157,487 Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,206,970 1,143,802 Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Identifiable intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588,845 670,840 637,172 795,323 Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,089,339 2,281,596 Other noncurrent assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,271 220,154 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,650,265 $5,078,047 Liabilities and Equity Current Liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 132,611 $ 132,789 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes payable and current portion of long-term debt . . . . . . . . . . . . . . . . . . Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379,202 28,948 112,831 653,592 339,308 14,446 309,862 796,405 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,152,882 1,166,178 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,551 356,042 238,394 299,096 Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,328,067 2,500,073 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 December 31, 2014 and 2013 . . . . . . . . . . . . . . . . . . . . 1,628 Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,669 1,628 255,272 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,380,748 3,095,721 Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (441,136) (69,062) Treasury stock, at cost, 21.9 million and 20.5 million shares at December 31, 2014 and 2013, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (841,630) (748,506) Total DENTSPLY International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,321,279 2,535,053 Noncontrolling Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 919 42,921 Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,322,198 2,577,974 Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,650,265 $5,078,047 The accompanying notes are an integral part of these financial statements. 56 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands) Balance at December 31, 2011 . . . . . . . Net income . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . Acquisition of noncontrolling interest . . . Exercise of stock options . . . . . . . . . . . Tax benefit from stock options exercised . . Share based compensation expense . . . . Funding of Employee Stock Ownership Plan . . . . . . . . . . . . . . . . . . . . . Treasury shares purchased . . . . . . . . . . RSU distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU dividends Cash dividends ($0.220 per share) . . . . . Balance at December 31, 2012 . . . . . . . Net income . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . Acquisition of noncontrolling interest Exercise of stock options . . . . . . . . . . . Tax benefit from stock options exercised . . Share based compensation expense . . . . Funding of Employee Stock Ownership Plan . . . . . . . . . . . . . . . . . . . . . Treasury shares purchased . . . . . . . . . . RSU distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU dividends . . . . . Cash dividends ($0.250 per share) Balance at December 31, 2013 . . . . . . . Net income . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . Acquisition of noncontrolling interest . . . Exercise of stock options . . . . . . . . . . . Tax benefit from stock options exercised . . Share based compensation expense . . . . Funding of Employee Stock Ownership Plan . . . . . . . . . . . . . . . . . . . . . Treasury shares purchased . . . . . . . . . . RSU distributions . . . . . . . . . . . . . . . RSU dividends . . . . . . . . . . . . . . . . . . . . . Cash dividends ($0.265 per share) Balance at December 31, 2014 . . . . . . . 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 $1,628 $229,687 $2,535,709 $(190,970) $(727,977) $1,848,077 $ 36,074 $1,884,151 — — — — — — — 314,213 — — 314,213 4,276 318,489 — — (10,482) 13,009 22,187 — — — — — 46,770 — — — — — — 44,665 — — 46,770 — 34,183 13,009 22,187 395 — — — — 47,165 — 34,183 13,009 22,187 — — — — — $1,628 370 — (8,453) 230 — $246,548 — — — (230) (31,231) $2,818,461 — — — — — $(144,200) 3,271 (38,837) 5,139 — — $(713,739) 3,641 (38,837) (3,314) — (31,231) $2,208,698 — — — — — $ 40,745 3,641 (38,837) (3,314) — (31,231) $2,249,443 — — — — — — — 313,192 — — 313,192 4,969 318,161 — (3,926) (7,317) 2,406 25,099 — — — — — 75,138 — — — — — — 74,230 — — 75,138 (3,926) 66,913 2,406 25,099 2,241 (5,034) — — — 77,379 (8,960) 66,913 2,406 25,099 — — — — — $1,628 959 — (8,795) 298 — $255,272 — — — (298) (35,634) $3,095,721 — — — — — $ (69,062) 3,698 (118,024) 5,329 — — $(748,506) 4,657 (118,024) (3,466) — (35,634) $2,535,053 — — — — — $ 42,921 4,657 (118,024) (3,466) — (35,634) $2,577,974 — 322,854 — — 322,854 59 322,913 — — — — — — — (42,012) (9,654) 2,093 25,428 — — — — — — — — — — $1,628 1,535 — (11,315) 322 — $221,669 — — — (322) (37,505) $3,380,748 (366,544) (5,530) — — — — — — — — $(441,136) — — 58,678 — — (366,544) (47,542) 49,024 2,093 25,428 (656) (41,405) — — — 4,418 (163,192) 6,972 — — $(841,630) 5,953 (163,192) (4,343) — (37,505) $2,321,279 — — — — — 919 $ (367,200) (88,947) 49,024 2,093 25,428 5,953 (163,192) (4,343) — (37,505) $2,322,198 The accompanying notes are an integral part of these financial statements. 57 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangible and other assets . . . . . . . . . . . . . . . Amortization of deferred financing costs . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share based compensation expense . . . . . . . . . . . . . . . . . . . . Restructuring and other costs - non-cash . . . . . . . . . . . . . . . . . Stock option income tax benefit . . . . . . . . . . . . . . . . . . . . . . . Equity in earnings (loss) from unconsolidated affiliates . . . . . . . . . Other non-cash expense (income) . . . . . . . . . . . . . . . . . . . . . . Loss on disposal of property, plant and equipment . . . . . . . . . . . Changes in operating assets and liabilities, net of acquisitions: Accounts and notes receivable-trade, net . . . . . . . . . . . . . . . . Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . Cash flows from investing activities: Cash paid for acquisitions of businesses and equity investments . . . . Proceeds from the sale of businesses . . . . . . . . . . . . . . . . . . . . . Purchases of short term time deposits . . . . . . . . . . . . . . . . . . . . . Liquidation of short term time deposits . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of company owned life insurance policies . . . . . . . . . . . . Cash received on derivative contracts . . . . . . . . . . . . . . . . . . . . . Cash paid on derivative contracts . . . . . . . . . . . . . . . . . . . . . . . . Expenditures for identifiable intangible assets . . . . . . . . . . . . . . . . Proceeds from sale of property, plant and equipment . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities: Proceeds from long-term borrowings, net of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on long-term borrowings . . . . . . . . . . . . . . . . . . . . . . (Decrease) increase in short-term borrowings . . . . . . . . . . . . . . . . Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . Excess tax benefits from share based compensation . . . . . . . . . . . . Cash paid for contingent consideration on prior acquisitions . . . . . . Cash paid for acquisition of noncontrolling interests of consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash received on derivative contracts . . . . . . . . . . . . . . . . . . . . . Cash paid on derivative contracts . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes on cash and cash equivalents. . Net increase (decrease) in cash and cash equivalents . . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . Cash and cash equivalents at end of period . . . . . . . . . . . . . . Supplemental disclosures of cash flow information: Year Ended December 31, 2013 2012 2014 $ 322,913 $ 318,161 $ 318,489 81,163 47,914 4,607 17,484 25,428 5,818 (2,093) 340 9,850 492 7,196 21,032 (16,101) 4,882 10,043 (12,218) 22,441 9,210 560,401 (8,566) 6,525 (2,271) 1,136 (99,578) (900) 67,207 (96,472) (6,189) 415 (138,693) 114,342 (199,180) (101,850) 49,024 2,093 — (33) (163,192) (37,387) — — (336,183) (8,840) 76,685 74,954 $ 151,639 81,639 46,264 4,984 (29,156) 25,099 14,008 (2,406) (976) 19,760 685 (32,532) (25,367) 26,929 (1,065) (36,728) (4,187) (458) 13,192 417,846 (66,247) — — — (100,345) (1,500) 10,784 (104,880) (1,076) 3,033 (260,231) 174,628 (251,383) 57,261 66,913 2,406 — (8,960) (118,024) (34,874) 7 (49,659) (161,685) (1,108) (5,178) 80,132 $ 74,954 79,456 49,743 7,045 (65,527) 22,187 20,229 (13,009) 3,270 (15,564) 808 (12,591) (36,792) (15,126) 853 12,843 (976) 22,105 (7,758) 369,685 (4,861) — — — (92,072) (1,577) — (14,221) (3,329) 1,039 (115,021) — — (228,912) 34,183 13,009 (2,519) — (38,837) (31,425) — (1,108) (255,609) 3,949 3,004 77,128 $ 80,132 Interest paid, net of amounts capitalized . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,821 $ 48,675 $ 50,469 $ 49,832 $ 60,166 $ 109,544 The accompanying notes are an integral part of these financial statements. 58 DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Description of Business Inc. DENTSPLY International (‘‘DENTSPLY’’ or the ‘‘Company’’), designs, develops, manufactures and markets a broad range of consumable dental products for the professional dental market. The Company also manufactures and markets consumable medical device products consisting mainly of urological catheters and certain surgical products. The Company’s principal product categories are dental consumable products, dental laboratory products, dental specialty products and consumable medical device products. The Company distributes its products in over 120 countries under some of the most well established brand names in the industry. Use of Estimates of The financial statements preparation in conformity with accounting principles generally accepted in the United States of America (‘‘US GAAP’’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements. the financial Principles of Consolidation of The Company the Company. The consolidated financial statements include the accounts also consolidates all variable interest entities (‘‘VIE’’) where the Company has determined that it has the power to direct the activities that most significantly impact the VIE’s economic performance and shares in either the significant risks or rewards of the VIE. The Company continually reassesses its VIE to determine if consolidation is appropriate. All significant intercompany accounts and transactions are eliminated in consolidation. owned companies, Investments in non-consolidated affiliates (20 − 50 percent and partnerships as well as less than 20 percent ownership positions where the Company maintains significant influence over the subsidiary) are accounted for using the equity method. ventures joint Cash and cash equivalents include deposits with banks as well as highly liquid time deposits with maturities at the date of purchase of ninety days or less. Short-term Investments Short-term investments are highly liquid time deposits with original maturities at the date of purchase greater than ninety days and with remaining maturities of one year or less. Accounts and Notes Receivable-Trade The Company sells dental and certain medical products through a worldwide network of distributors and directly to end users. For customers on credit terms, the Company performs ongoing credit evaluation of those customers’ financial condition and generally does not require collateral from them. The Company establishes allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company records a provision for doubtful accounts, which is included in ‘‘Selling, general and administrative expenses’’ in the Consolidated Statements of Operations. Accounts receivable — trade is stated net of these allowances that were $8.8 million and $14.2 million at December 31, 2014 and 2013, respectively. For the years ended December 31, 2014 and 2013, the Company wrote-off $2.4 million and $2.5 million, respectively, of accounts receivable that were previously reserved. The Company reduced the provision for doubtful accounts by $1.7 million and increased the provision by $2.9 million during 2014 and 2013, respectively. The remaining change in the allowance is related to foreign currency translation. Inventories respectively, of Inventories are stated at the lower of cost or market. At December 31, 2014 and 2013, the cost of $6.3 million inventories was and $6.5 million, determined by the last-in, first-out (‘‘LIFO’’) method. The cost of other inventories was determined by the first-in, first-out (‘‘FIFO’’) or average cost methods. The Company establishes reserves for inventory estimated to be obsolete or unmarketable equal to the difference between the cost 59 of inventory and estimated market value based upon assumptions and market conditions. demand future about If the FIFO method had been used to determine the cost of LIFO inventories, the amounts at which net inventories are stated would be higher than reported at December 31, 2014 and 2013 by $6.1 million and $5.9 million, respectively. Valuation of Goodwill and Other Long-Lived Assets and competition introductions environments Assessment of the potential impairment of goodwill and other long-lived assets is an integral part of the Company’s normal ongoing review of operations. Testing impairment of these assets is significantly for potential dependent on assumptions and reflects management’s best estimates at a particular point in time. The dynamic economic in which the Company’s businesses operate and key economic and business to projected selling prices, assumptions with respect increased new of technologies can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impact on the impairments can have a significant existence and magnitude of impairments, as well as the time at which such impairments are recognized. If there are unfavorable changes in these assumptions, future cash flows, a key variable in assessing the impairment of these assets, may decrease and as a result the Company may be required to recognize impairment charges. Future changes in the environment and the economic outlook in the assets being evaluated could also result for additional impairment charges being recognized. The following information outlines the Company’s significant accounting policies on long-lived assets by type. Goodwill Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired and liabilities is not assumed in a business combination. Goodwill is tested for impairment annually, amortized. Goodwill second quarter, or when during the Company’s impairment exist. The Company indications of potential impairment the existence of potential for monitors throughout the year. This impairment assessment includes an evaluation of various reporting units, which is an operating segment or one reporting level below the operating segment. The Company performs impairment tests using a fair value approach. The Company compares the fair value of each reporting unit to its carrying amount to determine if there is potential goodwill impairment. If impairment is identified on goodwill, the resulting charge is determined by recalculating goodwill through a hypothetical purchase price allocation of the fair value and reducing the current carrying value to the extent it exceeds the recalculated goodwill. In addition, The Company’s fair value approach involves using a discounted cash flow model with market-based support as its valuation technique to measure the fair value for its reporting units. The discounted cash flow model uses five-year forecasted cash flows plus a terminal value the based on a multiple of earnings. Company applies gross profit and operating expense assumptions consistent with its historical trends. The total cash flows were discounted based on market participant data, which included the Company’s weighted-average cost of capital. The Company considered the current market conditions when determining its assumptions. Lastly, the Company reconciled the aggregate fair values of its reporting units to its market capitalization, which included a reasonable control premium based on market conditions. Additional information related to the testing for goodwill impairment is provided in Note 9, Goodwill and Intangible Assets. Indefinite-Lived Intangible Assets assets subject intangible Indefinite-lived consist of to amortization. tradenames and are not Valuations of identifiable intangibles assets acquired are based on information and assumptions available at the time of acquisition, using income and market model approaches to determine fair value. In-process research and development assets are not subject to amortization until the product associated with the research and development is substantially complete and is a viable life to amortize the product. At that time, the useful intangible asset is determined by identifying the period in which substantially all the cash flows are expected to be generated and the asset is moved to definite-lived. These assets are reviewed for impairment annually or whenever events or circumstances suggest that the carrying amount of the asset may not be recoverable. The Company uses an income approach, more specifically a relief from royalty method. Significant management judgment is necessary to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates. Royalty rates used are consistent with the original purchase accounting those assumed for 60 valuation. Other assumptions are consistent with those applied to goodwill impairment testing. If the carrying value exceeds the fair value, an impairment loss in the amount equal to the excess is recognized. Identifiable Definite-Lived Intangible Assets Identifiable definite-lived intangible assets, which primarily consist of patents, trademarks, brand names, non-compete agreements and licensing agreements, are amortized on a straight-line basis over their estimated lives. Valuations of identifiable intangibles assets useful acquired are based on information and assumptions available at the time of acquisition, using income and market model approaches to determine fair value. indicators of These assets are reviewed for impairment whenever events or circumstances suggest that the carrying amount of the asset may not be recoverable. The Company closely monitors certain intangible assets related to new and existing technologies for impairment as these assets have more risk of becoming impaired. Impairment is based upon an initial evaluation of the the initial identifiable undiscounted cash flows. evaluation identifies a potential impairment, a fair value is determined by using a discounted cash flows valuation. If impaired, the resulting charge reflects the excess of the asset’s carrying cost over its fair value. If Property, Plant and Equipment useful following for financial Property, plant and equipment are stated at cost, net leasehold of accumulated depreciation. Except improvements, depreciation for reporting purposes is computed by the straight-line method over lives: estimated the buildings — generally 40 years and machinery and leasehold equipment — 4 to 15 years. The cost of the improvements is amortized over the lease. estimated useful Maintenance and repairs are expensed as incurred to the statement of operations; and major improvements are capitalized. These asset groups are or reviewed circumstances suggest that the carrying amount of the asset group may not be recoverable. Impairment is based upon an evaluation of the identifiable undiscounted cash flows. If impaired, the resulting charge reflects the excess of the asset group’s carrying cost over its fair value. impairment whenever the shorter of the term of replacements life or events for Marketable Securities The Company’s marketable securities consist of debt instruments that are classified as available-for-sale in 61 ‘‘Prepaid expenses and other current assets’’ or ‘‘other noncurrent assets, net’’ on the Consolidated Balance Sheets based on instrument maturity. 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 indications of possible for securities each quarter the determination of impairment. Once identified, whether or temporary impairment 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. the is Derivative Financial Instruments of or operations accumulated The Company records all derivative instruments on the consolidated balance sheet at fair value and changes in fair value are recorded each period in the consolidated statements other comprehensive income (‘‘AOCI’’). The Company classifies derivative assets and liabilities as current when the remaining term of the derivative contract is one year or less. The Company has elected to classify the cash flow from derivative instruments in the same category as the cash flows from the items being hedged. Should the Company enter into a derivative instrument that included an other-than-insignificant then all cash flows will be classified as financing activities on the Consolidated Statements of Cash Flows as required by US GAAP. financing element The derivative Company financial employs instruments to hedge certain anticipated transactions, firm commitments, and assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert floating rate debt to fixed rate, fixed rate debt to floating rate, cross currency basis swaps to convert debt denominated in one currency to another currency, and commodity swaps to fix its variable raw materials costs. Pension and Other Postemployment Benefits are Some of the employees of the Company and its subsidiaries or Company-sponsored defined benefit plans. Many of the employees have available to them defined contribution plans. Additionally, certain union and salaried employee government covered by in costs rates, States benefit benefit defined periodic associated healthcare the United are plans. covered Costs groups by postemployment for and Company-sponsored postemployment benefit plans are based on expected return on plan assets, discount employee compensation increase rates and health care cost trends. Expected return on plan assets, discount rates and health care cost trend assumptions are particularly important when determining the Company’s benefit obligations and net with postemployment benefits. Changes in these assumptions can impact the Company’s earnings before income taxes. In determining the cost of postemployment benefits, certain assumptions are established annually to reflect market conditions and plan experience to appropriately reflect the expected costs as actuarially determined. These assumptions inflation trend rates, discount rates, employee turnover and mortality rates. The Company predominantly uses liability durations in establishing its discount rates, which are observed from indices of high-grade corporate bond yields in the respective economic regions of the plans. The expected return on plan assets is the weighted average long-term expected return based upon asset allocations and historic average returns for the markets where the assets are invested, principally in foreign locations. The Company reports the funded status of its defined benefit pension and other postemployment benefit plans on its consolidated balance sheets as a net liability or asset. Additional information related to the impact of changes in these assumptions is provided in Note 15, Benefit Plans. include medical Accruals for Self-Insured Losses general The Company maintains insurance for certain risks, including workers’ liability, compensation, product liability and vehicle liability, and is self-insured for employee related healthcare benefits. The Company accrues for the expected costs associated with these risks by considering historical claims experience, demographic factors, severity factors and other relevant information. Costs are recognized in the period the claim is incurred, and the financial statement accruals include an estimate of claims incurred but not yet reported. The Company has stop-loss coverage to limit its exposure to any significant exposure on a per claim basis. Litigation The Company and its subsidiaries are from time to time parties to lawsuits arising out of their respective operations. The Company records liabilities when a loss is 62 probable and can be reasonably estimated. These estimates are typically in the form of ranges, and the Company records the liabilities at the low point of the ranges, when no other point within the ranges are a better estimate of the probable loss. The ranges established by management are based on analysis made legal counsel who considers by internal and external information known at the Company the time. determines a liability to be only reasonably possible, it considers the same information to estimate the possible exposure and discloses any material potential liability. These loss contingencies are monitored regularly for a change in fact or circumstance that would require an it has accrual adjustment. The Company believes estimated liabilities for probable losses appropriately in the past; however, the unpredictability of litigation and court decisions could cause a liability to be incurred in excess of estimates. Legal costs related to these lawsuits If are expensed as incurred. Foreign Currency Translation The functional currency for foreign operations, except for those in highly inflationary economies, generally has been determined to be the local currency. Assets and liabilities of foreign subsidiaries are translated at foreign exchange rates on the balance sheet date; revenue and expenses are translated at the average year-to-date foreign exchange rates. The effects of these translation adjustments are reported in Equity within AOCI of the consolidated balance sheets. During the year ended December 31, 2014, the Company had gains of $13.5 million on its loans designated as hedges of net investments and translation losses of $366.9 million. During the year ended December 31, 2013, the Company had gains of $14.5 million on its loans designated as hedges of net investments and translation gains of $72.2 million. Foreign exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved and remeasurement adjustments in countries with highly inflationary economies are included in income. Net foreign exchange transaction losses of $1.3 million, $9.0 million and $2.7 million in 2014, 2013, and 2012, respectively, are included in ‘‘Other expense (income), net’’ on the Consolidated Statements of Operations. Revenue Recognition Revenue, net of related discounts and allowances, is recognized when the earnings process is complete. This occurs when products are shipped to or received by the customer in accordance with the terms of the agreement, title and risk of loss have been transferred, collectability is reasonably assured and pricing is fixed or determinable. Net sales include shipping and handling costs collected from customers in connection with the sale. Sales taxes, taxes value added taxes and other similar collected from customers in connection with the sale are recorded by the Company on a net basis and are not included in the consolidated statement of operations. types of Certain of the Company’s customers are offered cash rebates based on targeted sales increases. Estimates of rebates are based on the forecasted performance of the customer and their expected level of achievement within the rebate programs. In accounting for these rebate programs, the Company records an accrual as a reduction of net sales as sales take place over the period the rebate is earned. The Company updates the accruals for these rebate programs as actual results and updated related expenses include salaries, wages, employee benefits, utilities, lease costs, maintenance and property taxes. Warranties The Company provides warranties on certain equipment products. Estimated warranty costs are accrued when sales are made to customers. Estimates for warranty costs are based primarily on historical warranty claim experience. Warranty costs are included in ‘‘Cost of products in the Consolidated Statements of Operations. sold’’ Selling, General and Administrative Expenses and Selling, general administrative expenses represent costs incurred in generating revenues and in managing the business of the Company. Such costs include advertising and other marketing expenses, salaries, employee benefits, incentive compensation, research and development, travel, office expenses, lease and capitalized costs, depreciation of administrative facilities. amortization software of forecasts impact the estimated achievement for Research and Development Costs customers within the rebate programs. A portion of the Company’s net sales is comprised of sales of precious metals generated through its precious metal dental alloy product offerings. As the precious metal content of the Company’s sales is largely a pass-through to customers, the Company uses its cost of precious metal purchased as a proxy for the precious metal content of sales, as the precious metal content of sales is not separately tracked and invoiced to customers. The Company believes that it is reasonable to use the cost of precious metal content purchased in this manner since precious metal alloy sale prices are typically adjusted when the prices of underlying precious metals change. The precious metals content of sales was $129.9 million, $179.1 million and $213.7 million for 2014, 2013 and 2012, respectively. Cost of Products Sold Cost of products sold represents costs directly related to the manufacture and distribution of the Company’s products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and handling, warehousing and the depreciation of manufacturing, warehousing and distribution facilities. Overhead and In addition, Research and development (‘‘R&D’’) costs relate primarily to internal costs for salaries and direct overhead expenses. the Company contracts with outside vendors to conduct R&D activities. All such R&D costs are charged to expense when incurred. The Company capitalizes the costs of equipment that have general R&D uses and expenses such equipment that is solely for specific R&D projects. The depreciation expense related to this capitalized equipment is included in the Company’s R&D costs. R&D costs are included in ‘‘Selling, general and administrative expenses’’ in the Consolidated to Statements $80.8 million, $85.1 million and $85.4 million for 2014, 2013 and 2012, respectively. Operations amounted and of Stock Compensation The Company recognizes the compensation cost relating to share-based payment transactions in the financial statements. The cost of share-based payment transactions is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity awards). The compensation cost is only recognized for the portion of the awards that are expected to vest. 63 Income Taxes of on earnings The Company’s tax expense includes U.S. and income taxes plus the provision for U.S. international taxes international undistributed subsidiaries not deemed to be permanently invested. Tax credits and other incentives reduce tax expense in the year the credits are claimed. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. The Company establishes a valuation allowance for deferred tax assets for which realization is not likely. If line information. in which the acquisition occurred, liabilities and product the initial valuation for an acquisition is incomplete by the end of the the quarter Company will record a provisional estimate in the financial statements. The provisional estimate will be finalized as soon as information becomes available but will only occur up to one year from the acquisition date. Equity Method Investments Investments in partnerships, joint ventures and less-than-majority-owned subsidiaries in which the Company has significant influence are accounted for under the equity method. the financial The Company applies a recognition threshold and measurement attribute for statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Equity investments are carried at original cost adjusted for the proportionate share of the investees’ income, losses and distributions. The Company assesses the carrying value of its equity investments when an indicator of a loss in value is present and records a loss in value of the investment when the assessment indicates that an other-than-temporary decline in the investment exists. Earnings Per Share Basic earnings per share are calculated by dividing net earnings by the weighted average number of shares outstanding for the period. Diluted earnings per share is calculated by dividing net earnings by the weighted average number of shares outstanding for the period, adjusted for the effect of an assumed exercise of all dilutive options outstanding at the end of the period. Business Acquisitions The Company acquires businesses as well as partial interests in businesses. Acquired businesses are accounted for using the acquisition method of accounting which requires the Company to record assets acquired and liabilities assumed at their respective fair values with the excess of the purchase price over estimated fair values in The recorded as goodwill. determining the fair value of acquired assets and assumed liabilities as well as asset lives can materially impact the results of operations. assumptions made information during due The Company obtains diligence and through other to establish respective fair values. Examples of factors and information that the Company uses to determine the fair values include: tangible and intangible asset evaluations and appraisals; evaluations of existing contingencies and sources The Company classifies its equity in net earnings of unconsolidated affiliates in the Consolidated Statements of Operations under the title of ‘‘Equity in net (loss) income of unconsolidated affiliated company.’’ Noncontrolling Interests The Company reports noncontrolling interest (‘‘NCI’’) in a subsidiary as a separate component of Equity in the Consolidated Balance Sheets. Additionally, the Company reports the portion of net income and comprehensive income (loss) attributed to the Company and NCI separately in the Consolidated Statements of Operations. The Company also includes a separate column for NCI in the Consolidated Statements of Changes in Equity. Variable Interest Entities The Company consolidates all VIE where the Company has determined that it has the power to direct the activities that most significantly impact the VIE’s economic performance and shares in either the significant risks or rewards of the VIE. The Company continually reassesses VIE to determine if consolidation is appropriate. 64 Segment Reporting Professional The Company has numerous operating businesses covering a wide range of products and geographic regions, primarily serving the professional dental market and to a lesser extent the consumable medical device represented dental market. approximately 88%, 88% and 89% of sales for each of the years ended 2014, 2013 and 2012, respectively. The Company has and a description of the activities within these segments is included and Geographic Information. reportable segments in Note Segment products three 5, During the first quarter of 2014, the Company realigned reporting responsibilities for multiple locations as a result of changes to the management structure. The segment information reflects the revised structure for all periods shown. Fair Value Measurement Recurring Basis The Company records certain financial assets and liabilities at fair value in accordance with the accounting guidance, which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction the measurement date. The accounting guidance establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels defined by the fair value hierarchy are as follows: between market participants on Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reported date. Level 2 — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable reported date. The nature of these financial include, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from, or corroborated by observable market data. instruments Level 3 — Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are fair measured using management’s best estimate of 65 value, where the inputs into the determination of fair value require significant management judgment or estimation. impacted by a number of The degree of judgment utilized in measuring the fair value of certain financial assets and liabilities generally correlates to the level of pricing observability. Pricing observability is factors, including the type of financial instrument. Financial assets and liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial assets and liabilities rarely traded or not quoted will generally have less, or no pricing observability and a higher degree of judgment utilized in measuring fair value. The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Additionally, the Company considers its credit risks and its counterparties’ credit risks when determining the fair values of its financial assets and liabilities. The Company has presented the required disclosures in Note 18, Fair Value Measurement. Non-Recurring Basis When events or circumstances require an asset or liability to be fair valued that otherwise is generally recorded based on another valuation method, such as, net the Company will utilize the valuation techniques described above. realizable value, New Accounting Pronouncements In March 2013, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update (‘‘ASU’’) No. 2013-05, ‘‘Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.’’ This newly issued accounting standard requires a cumulative translation adjustment (‘‘CTA’’) attached to the parent’s investment in a foreign entity should be released in a manner consistent with the derecognition guidance on investment entities. Thus the entire amount of CTA associated with the foreign entity would be released when there has been a sale of a subsidiary or group of net assets within a prohibit an entity from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after a disposal are eliminated by this standard. The ASU also expands the disclosures for discontinued operations and requires new disclosures related to individually significant disposals that do not qualify as discontinued operations. This standard allows for early adoption and the Company expects to adopt this accounting standard no later than the quarter ended March 31, 2015. The adoption of this standard is not expected to materially impact the Company’s financial position or results of operations. In May 2014, the FASB issued ASU No. 2014-09, ‘‘Revenue from Contracts with Customers (Topic 606)’’ that seeks to provide a single, comprehensive revenue recognition model for all contracts with customers that improve comparability within industries, across industries and across capital markets. Under this standard, an entity should recognize revenue for the transfer of goods or services equal to the amount it expects to be entitled to receive for those goods or services. Enhanced disclosure requirements regarding the nature, timing and uncertainty of revenue and related cash flows exist. To assist entities in applying the standard, a five step model for recognizing and measuring revenue from contracts with customers has been introduced. Entities have the option to apply the new guidance retrospectively to each prior reporting period presented (full retrospective approach) or retrospectively with a cumulative effect adjustment to retained earnings for initial application of the guidance at the date of initial adoption (modified retrospective method). The Company expects to adopt this accounting standard for the quarter ended March 31, 2017. Early adoption is not permitted. The Company is currently assessing the impact that ASU No. 2014-09 may have on their financial positions, results of operations, cash flows and disclosures, as well as, the transition method they will use to adopt the guidance. foreign entity and the sale represents a complete liquidation of the investment in the foreign entity, a loss interest in an investment in a of a controlling financial foreign entity, or step acquisition for a foreign entity. The Company adopted this accounting standard for the quarter ended March 31, 2014. The adoption of this standard did not impact the Company’s financial position or results of operations. of Taxes 740): (Topic Presentation In July 2013, the FASB issued ASU No. 2013-11, an ‘‘Income Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.’’ The newly issued accounting standard requires the netting of unrecognized tax benefits for a loss or other against a deferred tax asset carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available tax carryforwards that would be utilized, rather than only against the that unrecognized tax benefit. The Company adopted this accounting standard for the quarter ended March 31, 2014. The adoption of this standard did not materially impact the Company’s financial position or results of operations. same-jurisdiction carryforwards created losses other are by or In April 2014, the FASB issued ASU No. 2014-08, ‘‘Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.’’ This newly issued accounting standard changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This standard will have the impact of reducing the frequency of disposals reported as discontinued operations, by requiring such a disposal to represent a strategic shift that has or will have a major effect on entity’s operations and results. Additionally, existing provisions that financial 66 NOTE 2 — EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per common share: Net income attributable to DENTSPLY International Shares Earnings per common share (in thousands, except for per share amounts) Year Ended December 31, 2014 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Incremental shares from assumed exercise of dilutive options . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $322,854 $322,854 Year Ended December 31, 2013 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Incremental shares from assumed exercise of dilutive options . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $313,192 $313,192 Year Ended December 31, 2012 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Incremental shares from assumed exercise of dilutive options . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $314,213 $314,213 141,714 2,505 144,219 142,663 2,302 144,965 141,850 2,095 143,945 $2.28 $2.24 $2.20 $2.16 $2.22 $2.18 common stock Options to purchase 1.0 million, 2.3 million and 4.1 million shares of that were outstanding during the years ended 2014, 2013 and 2012, respectively, were not included in the computation of diluted earnings per common share since the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. certain derivative financial instruments, net unrealized holding gain on available-for-sale securities and pension liability adjustments and prior service costs, net are recorded in AOCI. These changes are recorded in AOCI net of any related tax adjustments. For the years ended December 31, 2014, 2013 and 2012, these tax adjustments were $195.4 million, $205.1 million and $185.6 million, respectively, primarily related to foreign currency translation adjustments. The currency cumulative translation foreign adjustments included translation losses of $117.1 million and translation gains of $249.9 million at December 31, 2014 and 2013, respectively, and were offset by losses of $95.4 million and $108.9 million, respectively, on loans designated as hedges of net investments. NOTE 3 — COMPREHENSIVE INCOME AOCI foreign to includes related currency the Company’s translation adjustments foreign subsidiaries, net of the related changes in certain financial instruments hedging these foreign currency investments. In addition, changes in the Company’s fair value of 67 Changes in AOCI, net of tax, by component for the years ended December 31, 2014, 2013 and 2012: Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges Foreign Currency Translation Adjustments Gain and (Loss) on Derivative Financial Instruments Net Unrealized Holding Gain (Loss) on Available- for-Sale Securities Pension Liability Adjustments Total (in thousands) Balance At December 31, 2013 . . . $ 140,992 Other comprehensive (loss) income $(21,753) $(151,114) $12,729 $ (49,916) $ (69,062) before reclassifications Amounts reclassified from . . . . . . . (347,952) 3,988 38,386 (4,248) (65,485) (375,311) accumulated other comprehensive income (loss) . . . . . . . . . . . . . . Net (decrease) increase in other — 6,940 — — 1,827 8,767 comprehensive income . . . . . . (347,952) 10,928 38,386 (4,248) (63,658) (366,544) Foreign currency translation related to acquisition of noncontrolling interest . . . . . . . . . . . . . . . . . (5,530) — — — — (5,530) Balance at December 31, 2014 . . . . $(212,490) $(10,825) $(112,728) $ 8,481 $(113,574) $(441,136) Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges Foreign Currency Translation Adjustments Gain and (Loss) on Derivative Financial Instruments Net Unrealized Holding Gain (Loss) on Available- for-Sale Securities Pension Liability Adjustments Total (in thousands) Balance At December 31, 2012 . . . $ 54,302 Other comprehensive income (loss) $(17,481) $(125,661) $17,822 $(73,182) $(144,200) before reclassifications Amounts reclassified from . . . . . . . 86,690 (6,234) (25,453) (5,093) 19,478 69,388 accumulated other comprehensive income (loss) . . . . . . . . . . . . . . Net increase (decrease) in other — 1,962 — — 3,788 5,750 comprehensive income . . . . . . 86,690 (4,272) (25,453) (5,093) 23,266 75,138 Balance at December 31, 2013 . . . . $140,992 $(21,753) $(151,114) $12,729 $(49,916) $ (69,062) 68 Reclassification out of accumulated other comprehensive income (loss) for the years ended December 31, 2014, 2013 and 2012: Details about AOCI Components (in thousands) Gains and (loss) on derivative financial instruments: Amounts Reclassified from AOCI Year Ended December, 31 2013 2014 2012 Affected Line Item in the Statements of Operations Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . $ (3,704) (6,362) Foreign exchange forward contracts . . . . . . . . . . . (95) Foreign exchange forward contracts . . . . . . . . . . . (526) Commodity contracts . . . . . . . . . . . . . . . . . . . . $(3,681) 1,184 (147) (288) $(3,611) Interest expense 8,029 Cost of products sold 779 SG&A expenses 136 Cost of products sold (10,687) 3,747 $ (6,940) (2,932) 970 $(1,962) Net tax 5,333 (loss) gain before (484) Tax benefit (expense) $ 4,849 Net of tax Amortization of defined benefit pension and other postemployment benefit items: Amortization of prior service benefits . . . . . . . . . . $ Amortization of net actuarial losses 124 (2,774) (2,650) 823 $ (1,827) Total reclassifications for the period . . . . . . . . . . . . . $ (8,767) . . . . . . . . . . . $ 141 (5,532) (5,391) 1,603 $(3,788) $(5,750) $ 138(a) (1,956)(a) (1,818) Net loss before tax Tax benefit $(1,278) Net of tax $ 3,571 540 (a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the years ended December 31, 2014, 2013, and 2012, respectively (see Note 15, Benefit Plans, for additional details). NOTE 4 — BUSINESS COMBINATIONS New Zealand-based manufacturer. Total purchase price Business Combinations 2014 Transactions this obligation, which is Effective January 1, 2014, the Company recorded a liability for the contractual purchase of the remaining shares of one noncontrolling interest. The amount is preliminary and is based on the Company’s best estimate of to contractual adjustments. As a result, the Company recorded a reduction to additional paid in capital for the excess of the purchase price above the carrying value of the noncontrolling interest. The Company anticipates the cash outflow for this purchase to be in 2015. subject In addition during 2014 the Company had one acquisition and divestitures of two non-core product lines. These transactions were immaterial to the Company’s net sales and net income attributable to DENTSPLY. 2013 Transactions In November 2013, the Company purchased a Hong Kong-based direct dental selling organization and certain assets of a professional dental consumable 69 related to these two acquisitions was $61.5 million. The Company recorded $51.4 million in goodwill related to the difference between the fair value of assets acquired and liabilities assumed and the consideration given for the acquisitions. The results of operations for these business have been included in the accompanying financial statements as of the effective date of the respective transactions. These transactions were immaterial to the Company’s net sales and net income attributable to DENTSPLY. Additionally during the year, the Company paid $9.0 million to purchase the remaining outstanding shares of a consolidated subsidiary. As a result of the transaction, the Company recorded a decrease in noncontrolling interest of $5.0 million and a reduction to additional paid in capital of $3.9 million for the excess of the purchase price above the carrying value of the noncontrolling interest. 2012 Transactions The acquisition related activity for the year ended December 31, 2012 was $7.4 million, which was related to one acquisition and one earn-out payment for a prior period acquisition. The results of operations for this acquisition have been included in the accompanying financial statements as of the respective transactions. This transaction was immaterial to the Company’s net sales and net income attributable to DENTSPLY. the effective date of Investment in Affiliates On December 9, 2010, the Company purchased an initial ownership interest of 17% of the outstanding shares of DIO Corporation (‘‘DIO’’). The Company accounts for the ownership in DIO under the equity method of accounting as it has significant influence over DIO. In addition, on December 9, 2010, the Company invested $49.7 million in the corporate convertible bonds of DIO, which may be converted into common shares at accounts for the remaining difference between the period end values and the change in cumulative gain year over year. NOTE 5 — SEGMENT AND GEOGRAPHIC INFORMATION are The operating businesses combined into operating groups, which generally have overlapping product offerings, geographical presence, customer bases, distribution channels, and regulatory oversight. These operating groups are considered the Company’s reportable segments as the Company’s chief operating decision-maker regularly reviews financial results at the operating group level and uses this information to manage the Company’s operations. The accounting the segments are consistent with those policies of described in the Company’s most recently filed Form 10-K any time. The contractual maturity of the bonds are in in the summary of significant accounting policies. The December 2015. The bonds are designated by the Company evaluates performance of the segments based Company as available-for-sale securities which are on the groups’ net third party sales, excluding precious reported in, ‘‘Prepaid expenses and other current assets,’’ metal content, and segment income. The Company on the Consolidated Balance Sheets and the changes in defines net third party sales excluding precious metal fair value are reported in AOCI. At December 31, 2013, content as the Company’s net sales excluding the this investment was reported in ‘‘Other noncurrent assets, precious metal cost within the products sold, and this is net,’’ on the Consolidated Balance Sheets. The considered a non-US GAAP measure. The Company’s convertible feature of the bonds has not been bifurcated exclusion of precious metal content in the measurement from the underlying bonds as the feature does not of net third party sales enhances comparability of contain a net-settlement feature, nor would the Company performance between periods as it excludes the 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 bonds. The cash paid by the Company was equal to the face value of the bonds issued by DIO, and therefore, the Company had not recorded any bond premium or discount on acquiring the bonds. The fair value of the DIO bonds was $57.7 million and $70.0 million at December 31, 2014 and 2013, respectively. For the year ended December 31, 2014, a cumulative unrealized holding gain of $8.5 million on available-for-sale securities, net of tax, had been recorded in AOCI. For the year ended December 31, 2013, a cumulative unrealized holding gain of $12.7 million was recorded on available-for-sale securities, net of tax in the year ended December 31, 2012 a AOCI. For cumulative unrealized holding gain of $17.8 million was recorded on available-for-sale securities, net of tax, in AOCI. As this investment is held by a euro-denominated subsidiary of the Company, the investment’s value is also impacted by changing foreign currency rates which fluctuating market prices of the precious metal content. The Company defines segment income as net operating income before restructuring and other costs, interest expense, interest income, other expense (income), net and provision for income taxes. A description of the products and services provided within each of the Company’s three reportable segments is provided below. Significant interdependencies exist among the Company’s operations in certain geographic areas. Inter-segment sales are at prices intended to provide a reasonable profit to the manufacturing unit after recovery of all manufacturing costs and to provide a reasonable profit for purchasing locations after coverage of marketing and general and administrative costs. During the first quarter of 2014, the Company realigned reporting responsibilities for multiple locations as a result of changes to the management structure. The segment information below reflects the revised structure for all periods shown. 70 Dental Consumable and Certain International Businesses for It also has responsibilities This segment includes responsibility for the design and manufacture of the Company’s chairside consumable products. sales and distribution of certain small equipment and chairside consumable products in the United States, Germany and certain other European regions as well as responsibility for the sales and distribution of certain endodontic products In in Germany and certain other European regions. addition, this segment has responsibilities for sales and distribution of chairside consumable, endodontic and dental laboratory products in Australia. Dental Specialty and Laboratory and Certain Global Distribution Businesses This segment includes responsibility for the design, the manufacture, sales and distribution of most of Company’s including specialty endodontic, orthodontic and implant products, in most is regions of In addition, the world. products, segment dental this the design, manufacture, responsible for sales and distribution of most of the Company’s dental laboratory products. This segment is also responsible for the sales and distribution of most of the Company’s other dental products, including most dental consumables, within certain European regions as well as Japan, Canada and Mexico, and the design, manufacture, worldwide distribution and sales of certain non-dental products, excluding urological and surgery-related products. Healthcare and Emerging Markets Businesses is responsible for sales and distribution of the worldwide This segment design, manufacture, the Company’s healthcare products, primarily urological and surgery-related products, throughout most of the world. This segment also includes the responsibility for the sales the Company’s dental and distribution of most of products, including most dental consumables, sold in Eastern Europe, Middle Latin America, Asia (excluding Japan) and Africa. East, South America, The following table sets forth information about the Company’s segments for the years ended December 31, 2014, 2013 and 2012. Third Party Net Sales (in thousands) Dental Consumable and Certain International Businesses . . . . . . . . . Dental Specialty and Laboratory and Certain Global Distribution Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . . . . . . . . . All Other(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 2013 2012 $ 689,799 $ 656,564 $ 633,847 1,685,104 551,775 (4,058) 1,764,752 533,639 (4,185) 1,781,807 516,446 (3,671) $2,922,620 $2,950,770 $2,928,429 (a) Includes amounts recorded at Corporate headquarters. Third Party Net Sales, Excluding Precious Metal Content (in thousands) Dental Consumable and Certain International Businesses . . . . . . . . . Dental Specialty and Laboratory and Certain Global Distribution Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . . . . . . . . . All Other(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net sales, excluding precious metal content . . . . . . . . . . . . . . Precious metal content of sales . . . . . . . . . . . . . . . . . . . . . . . . . Total net sales, including precious metal content . . . . . . . . . . . . . . 2014 2013 2012 $ 689,478 $ 656,206 $ 633,387 1,556,143 551,114 (4,058) $2,792,677 129,943 $2,922,620 1,586,979 532,728 (4,185) $2,771,728 179,042 $2,950,770 1,569,963 515,019 (3,671) $2,714,698 213,731 $2,928,429 (b) Includes amounts recorded at Corporate headquarters. 71 Intersegment Net Sales (in thousands) Dental Consumable and Certain International Businesses . . . . . . . . . Dental Specialty and Laboratory and Certain Global Distribution Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . . . . . . . . . All Other(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 2013 2012 $ 119,248 $ 122,975 $ 122,459 184,105 12,893 239,200 (555,446) — $ 188,501 13,584 243,127 (568,187) — $ 179,819 14,150 221,867 (538,295) — $ (c) Includes amounts recorded at Corporate headquarters and one distribution warehouse not managed by named segments. Depreciation and Amortization (in thousands) Dental Consumable and Certain International Businesses . . . . . . . . . Dental Specialty and Laboratory and Certain Global Distribution Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . . . . . . . . . All Other(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 2013 2012 $ 17,287 $ 16,324 $ 16,071 73,469 32,097 6,224 72,573 32,863 6,143 67,507 36,966 8,655 $129,077 $127,903 $129,199 (d) Includes amounts recorded at Corporate headquarters. Segment Operating Income (in thousands) Dental Consumable and Certain International Businesses . . . . . . . . . Dental Specialty and Laboratory and Certain Global Distribution 2014 2013 2012 $235,555 $217,901 $216,822 Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . . . . . . . . . 287,731 39,726 293,412 25,601 286,434 21,870 Segment Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $563,012 $536,914 $525,126 Reconciling Items: All Other operating loss(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,329 11,083 46,910 (5,592) (91) 104,392 13,356 49,625 (8,123) 8,329 117,470 25,717 56,851 (8,760) 3,169 Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $404,373 $369,335 $330,679 (e) Includes results of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments. 72 Capital Expenditures (in thousands) Dental Consumable and Certain International Businesses . . . . . . . . . Dental Specialty and Laboratory and Certain Global Distribution Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . . . . . . . . . All Other(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 2013 2012 $12,455 $ 12,458 $ 9,818 69,190 9,393 8,540 $99,578 64,084 18,484 5,319 $100,345 62,729 14,510 5,015 $92,072 (f) Includes capital expenditures of Corporate headquarters. Assets (in thousands) Dental Consumable and Certain International Businesses . . . . . . . . . . . . . . . . . . . Dental Specialty and Laboratory and Certain Global Distribution Businesses . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . All Other(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 2013 $ 661,260 3,037,979 822,237 128,789 $4,650,265 $ 683,965 3,364,190 925,742 104,150 $5,078,047 (g) Includes assets of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments. Geographic Information The following table sets forth information about the Company’s operations in different geographic areas for the years ended December 31, 2014, 2013 and 2012. Net sales reported below represent revenues for shipments made by operating businesses located in the country or territory identified, including export sales. Property, plant and equipment, net, represents those long-lived assets held by the operating businesses located in the respective geographic areas. United States Germany Sweden Other Foreign Consolidated (in thousands) 2014 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $1,015,868 170,805 Property, plant and equipment, net . . . . . . . . 2013 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $1,011,646 158,673 Property, plant and equipment, net . . . . . . . . 2012 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 993,980 148,950 Property, plant and equipment, net . . . . . . . . $541,787 109,262 $ 48,853 103,857 $1,316,112 204,921 $2,922,620 588,845 $559,109 129,685 $ 57,504 134,083 $1,322,511 214,731 $2,950,770 637,172 $546,092 122,310 $ 54,507 133,502 $1,333,850 209,943 $2,928,429 614,705 Product and Customer Information The following table presents net sales information by product category: (in thousands) Dental consumables products . . . . . . . . . . . . . . . . . . . . . . . . . . Dental laboratory products . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dental specialty products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumable medical device products . . . . . . . . . . . . . . . . . . . . . Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 December 31, 2013 2012 $ 787,917 408,981 1,364,399 361,323 $2,922,620 $ 777,935 472,080 1,347,417 353,338 $2,950,770 $ 768,098 511,850 1,313,035 335,446 $2,928,429 73 Dental consumable products consist of value added dental supplies and small equipment products used in dental offices for the treatment of patients. DENTSPLY’s products in this category include dental anesthetics, infection control products, prophylaxis paste, dental sealants, impression materials, restorative materials, bone grafting materials, tooth whiteners and topical fluoride. The Company manufactures thousands of different consumable products marketed under more than a hundred brand names. Small equipment products consist of various durable goods used in dental offices for treatment of patients. DENTSPLY’s small equipment products include dental handpieces, intraoral curing light systems and ultrasonic scalers and polishers. Dental laboratory products are used in dental laboratories in the preparation of dental appliances. DENTSPLY’s products in this category include dental teeth, precious metal prosthetics, crown and bridge dental alloys, dental including artificial ceramics, materials, and equipment products used in laboratories consisting of computer aided design and machining (CAD/CAM) ceramic systems and porcelain furnaces. Dental specialty products are specialized treatment products used within the dental office and laboratory settings. DENTSPLY’s products in this category include endodontic instruments and materials, implants and related products, bone grafting material, 3D digital scanning and treatment planning software, dental lasers and orthodontic appliances and accessories. canal) (root Consumable medical device products consist mainly of urology catheters, certain surgical products, medical drills and other non-medical products. For the years 2014, 2013, and 2012, the Company did not have any single customer represented ten percent or more of DENTSPLY’s consolidated net sales. Third party export sales from the U.S. are less than ten percent of consolidated net sales. that NOTE 6 — OTHER EXPENSE (INCOME), NET Other expense (income), net, consists of the following: (in thousands) Foreign exchange transaction losses . . . . . . . . . . . . . . . . . . . . . . Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other expense (income), net . . . . . . . . . . . . . . . . . . . . . . December 31, 2014 2013 2012 $ 1,342 (1,433) $ (91) $8,982 (653) $8,329 $2,679 490 $3,169 Foreign exchange transaction losses for the year ended December 31, 2014, included approximately $1.1 million of interest income and fair value gains on non-designated hedges. For exchange transaction losses for the year ended December 31, 2013, included approximately $6.9 million of interest expense and fair value losses on non-designated hedges, respectively. Foreign exchange transaction losses for the year ended December 31, 2012, included approximately $1.3 million of interest expense on non-designated hedges. NOTE 7 — INVENTORIES, NET Inventories, net, consist of the following: December 31, 2014 2013 (in thousands) Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Raw materials and supplies $253,333 58,329 75,433 Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $387,095 $285,271 67,718 85,570 $438,559 The Company’s inventory valuation reserve was $34.1 million and $34.2 million at December 31, 2014 and 2013, respectively. 74 NOTE 8 — PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net, consist of the following: (in thousands) Assets, at cost: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net December 31, 2014 2013 $ 41,809 392,151 854,074 82,365 1,370,399 781,554 $ 588,845 $ 47,616 427,826 907,541 59,583 1,442,566 805,394 $ 637,172 NOTE 9 — GOODWILL AND INTANGIBLE ASSETS The Company performed the required annual impairment tests of goodwill at April 30, 2014 on fifteen reporting units. To determine the fair value of the reporting units, Company’s the Company uses a discounted cash flow model with market-based support as its valuation technique to measure the fair value for its reporting units. The discounted cash flow model uses five-year forecasted cash flows plus a terminal value based on a multiple of earnings. the Company applies gross margin and operating expense assumptions consistent with historical trends. The total cash flows were discounted based on a range between 8.6% to 14.0%, which included assumptions regarding the Company’s weighted-average cost of capital. The In addition, the Company Company considered the current market conditions both and globally, when determining its in the U.S. assumptions. reconciled the Lastly, aggregated fair values of its reporting units to its market capitalization, which included a reasonable control premium based on market conditions. As a result of the annual impairment tests of goodwill, no impairment was identified. The Company has no accumulated goodwill impairment. Impairments of identifiable definite-lived and indefinite-lived intangible assets for the years ended December 31, 2013 and 2012 were $2.0 million and $5.2 million, in ‘‘Restructuring and other costs’’ on the Consolidated Statements of Operations. respectively, included and are A reconciliation of changes in the Company’s goodwill by segment and in total are as follows (the segment information below reflects the current structure for all periods shown): Dental Consumable and Certain International Businesses Dental Specialty and Laboratory and Certain Global Distribution Businesses Healthcare and Emerging Markets Businesses Total (in thousands) Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . $285,844 42,998 — (3,798) Acquisition activity . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment of provisional amounts on prior acquisitions . . Effect of exchange rate changes . . . . . . . . . . . . . . . . . $1,569,164 9,901 610 (3,549) $355,945 — — 24,481 $2,210,953 52,899 610 17,134 Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . $325,044 $1,576,126 $380,426 $2,281,596 Acquisition activity . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment of provisional amounts on prior acquisitions . . Effect of exchange rate changes . . . . . . . . . . . . . . . . . 3,737 — (5,804) — (898) (161,064) — — (28,228) 3,737 (898) (195,096) Balance, at December 31, 2014 . . . . . . . . . . . . . . . . . . . $322,977 $1,414,164 $352,198 $2,089,339 75 Identifiable definite-lived and indefinite-lived intangible assets consist of the following: December 31, 2014 December 31, 2013 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount (in thousands) Patents . . . . . . . . . . . . . . . . . . . . $175,186 75,645 Trademarks . . . . . . . . . . . . . . . . . 34,638 Licensing agreements . . . . . . . . . . . 452,882 Customer relationships . . . . . . . . . . Total definite-lived . . . . . . . . . . . . . $738,351 Trademarks and In-process R&D . . . . $192,577 Total identifiable intangible assets . . . $930,928 38,592 11,832 348,179 (37,053) (22,806) (104,703) $ (95,526) $ 79,660 $ 181,847 $ (91,736) (35,994) (20,992) (82,381) $(260,088) $478,263 $ 796,827 $(231,103) $ — $192,577 $ 229,599 $ $(260,088) $670,840 $1,026,426 $(231,103) 85,922 31,950 497,108 $ 90,111 49,928 10,958 414,727 $565,724 — $229,599 $795,323 Amortization expense for identifiable definite-lived intangible assets for 2014, 2013 and 2012 was $47.9 million, $46.2 million and $49.7 million, respectively. The annual estimated amortization expense related to these intangible assets for each of the five succeeding fiscal years is $45.4 million, $44.3 million, $43.3 million, $41.9 million and $41.7 million for 2015, 2016, 2017, 2018 and 2019, respectively. NOTE 10 — PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following: (in thousands) Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets NOTE 11 — ACCRUED LIABILITIES Accrued liabilities consist of the following: December 31, 2014 2013 $ 78,744 33,852 57,698 16,031 55,305 $241,630 $ 86,929 36,129 — 15,868 18,561 $157,487 December 31, 2014 2013 (in thousands) Payroll, commissions, bonuses, other cash compensation and employee benefits . . . . General insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional and legal costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warranty liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued vacation and holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third party royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment due on noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $113,792 13,096 40,201 14,864 9,258 3,956 3,482 27,846 10,873 9,523 88,935 11,953 31,423 $379,202 $114,278 12,178 38,514 14,855 8,608 3,608 4,922 29,944 11,494 54,367 — 12,624 33,916 $339,308 76 NOTE 12 — FINANCING ARRANGEMENTS Short-Term Debt Short-term debt consisted of the following: December 31, 2014 2013 (in thousands except percentage amounts) Bank overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . Corporate commercial paper facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brazil short-term loans Other short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: Current portion of long-term debt Total short-term debt . . . . . . . . . . . . . . . . . . . . Interest Rate —% —% 2.4% 3.9% Principal Balance $ 10 — 1,279 1,712 109,830 $112,831 2014 Maximum month-end short-term debt outstanding during the year . . . . . . . . . . . . . . . . . . . . . . . $445,160 Average amount of short-term debt outstanding during the year . . . . . . . . . . . . . . . . . . . . . . . 270,011 Weighted-average interest rate on short-term debt at Interest Rate 1.0% 0.3% 2.8% 1.8% Principal Balance $ 1,429 101,900 1,314 563 204,656 $309,862 2013 $417,065 318,817 year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8% 1.6% Short-Term Borrowings borrowings The Company has a $500.0 million commercial paper facility. At December 31, 2014, there were no outstanding At December 31, 2013, the amount outstanding under this facility was $101.9 million. The Company has a $500.0 million five-year revolving credit agreement that expires in July 2019, that serves as back-up credit to this facility. under this Long-Term Debt Long-term debt consisted of the following: commercial paper facility. Amounts outstanding under the commercial paper facility, if any, reduce amounts available under the revolving credit agreement. Average outstanding issued commercial paper during 2014 was $85.7 million. The Company classified the commercial paper as short-term debt, reflecting the Company’s intent to repay over the next year. December 31, 2014 2013 Principal Balance Interest Rate Principal Balance Interest Rate (in thousands except percentage amounts) Private placement notes $250 million due February 2016 . . . . . . . . . . . . . . . . . . . . . . . . $ 175,689 4.1% $ 252,370 Fixed rate senior notes $300 million due August 2016 . . . . . . . . . . . . . . . . . . . . . . . . . 299,861 Term loan Swiss francs denominated due September 2016 . . . . . . . . . . . . . . . . . . . . . . . 65,399 Term loan Japanese yen denominated due September 2019 . . . . . . . . . . . . . . . . . . . . . . . Term loan $175 million due August 2020 . . . . . . . . Fixed rate senior notes $450 million due August 2021 . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowings, various currencies and rates . . . . . Less: Current portion (included in ‘‘Notes payable and current portion of long-term debt’’ on the Consolidated Balance Sheets) . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term portion . . . . . . . . . . . . . . . . . . . . . . . 104,705 166,250 448,965 1,843 $1,262,712 4.1% 2.8% 1.1% 1.0% 1.4% 4.1% 2.8% 1.1% 0.9% 1.4% 4.1% 299,775 72,829 119,213 175,000 448,809 2,838 $1,370,834 109,830 $1,152,882 204,656 $1,166,178 77 2019 (the ‘‘Facility’’) to provide working capital from time to time for the Company and for other general corporate purposes. The Facility is unsecured and contains certain affirmative and negative covenants relating to the Company’s operations and financial condition, including prescribed leverage and interest coverage ratios. The Facility contains customary events of default. Upon the occurrence of an event of default, all outstanding borrowings under the Credit Agreement may be accelerated and become immediately due and payable. At December 31, 2014, there were no outstanding borrowings, in the form of issued commercial paper, under the multi-currency revolving facility. On September 29, 2014, the Company entered into a Samurai Loan Agreement to replace the maturing Samurai Loan Agreement dated August 27, 2011, in an aggregate amount of Japanese yen 12.6 billion, through September 29, 2014. The new Samurai Loan Agreement provides for a new five year, Japanese yen 12.6 billion term loan through September 30, 2019 (the ‘‘Samurai Loan’’). The Samurai Loan is designated as a net investment hedge. The Samurai Loan is unsecured and contains certain affirmative and negative covenants relating to the Company’s operations and financial condition, including prescribed leverage and interest coverage ratios. The Samurai Loan contains customary events of default. Upon the occurrence of an event of default, all outstanding borrowings under the Samurai Loan may be accelerated and become immediately due and payable. The term loans and private placement notes (‘‘PPN’’) contain certain affirmative and negative covenants relating to the Company’s operations and financial condition. At December 31, 2014, the Company was in compliance with all debt covenants. At December 31, 2014, the Company had $560.6 million borrowings available under unused lines of credit, its short-term arrangements and revolving credit agreement. including lines available under The Company has a $500.0 million five-year revolving credit agreement with participation from twelve banks, which expires in July 2019. The revolving credit agreement contains a number of covenants and two financial ratios, which the Company is required to satisfy. The most restrictive of these covenants pertain to asset dispositions and prescribed ratios of indebtedness to total capital and operating income excluding depreciation and amortization to interest expense. A breach of any such covenants or restrictions would result in a default under the existing borrowing documentation that would permit the lenders such documentation to be immediately due and payable and, through cross default provisions, would entitle the Company’s other lenders to accelerate their loans. At December 31, 2014, the Company was in compliance with these covenants. to declare all borrowings under In February 2014, the Company paid the first required payment of $75.0 million under the Private Placement Notes by issuing commercial paper. The second required payment is due in February 2015; accordingly, $100.0 million has been classified as current on the Consolidated Balance Sheets. The Company intends to use available cash, commercial paper and the revolving credit facilities to pay the 2015 payment. The Company paid the first annual principal amortization of $8.8 million representing a 5% mandatory principal amortization due in each of the first six years under the terms of the $175.0 million Term Loan with a final maturity of August 26, 2020. An amount of $8.8 million will be due in August 2015 and has been classified as current on the Consolidated Balance Sheets. On July 23, 2014, the Company entered into an Amended and Extended Revolving Credit Agreement to replace the 2011 Revolving Credit Agreement dated August 27, 2011, that had provided for a multi-currency revolving credit facility in an aggregate amount of up to $500 million through July 27, 2016. The new Credit Agreement provides for a new five year, $500 million multi-currency revolving credit facility through July 23, 78 The table below reflects the contractual maturity dates of the various borrowings at December 31, 2014: (in thousands) 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 and beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 109,830 449,910 8,882 8,918 122,285 562,887 $1,262,712 NOTE 13 — EQUITY program, At December 31, 2014, the Company had authorization to maintain up to 34.0 million shares of treasury stock under its stock repurchase program as approved by the Board of Directors. Under its stock repurchase purchased the 3,271,628 shares and 2,685,796 shares during 2014 and 2013, respectively, at an average price of $49.88 and $43.94, respectively. The Company held 21.9 million and 20.5 million of treasury stock shares at December 31, 2014 and 2013, respectively. During 2014, the Company repurchased of $163.2 million. The Company also received proceeds of outstanding Company shares value at a $49.0 million primarily as a result of 1.5 million stock options exercised during the year ended December 31, repurchased 2014. During outstanding shares at a value of $118.0 million. The Company also received proceeds of $66.9 million primarily as a result of 2.3 million stock options exercised the Company 2013, during the year ended December 31, 2013. It is the Company’s practice to issue shares from treasury stock when options are exercised. The tax benefit realized for the options exercised during the year ended December 31, 2014 and 2013 is $2.1 million and $2.4 million, respectively. The following table represents total outstanding shares for the years ended December 31: Common Shares Treasury Shares Outstanding Shares (in thousands) Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . Shares issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of common stock at cost. . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . Shares issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of common stock at cost. . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . Shares issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of common stock at cost. . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . 162,776 — — 162,776 — — 162,776 — — 162,776 (21,144) 1,688 (998) (20,454) 2,605 (2,686) (20,535) 1,875 (3,272) (21,932) 141,632 1,688 (998) 142,322 2,605 (2,686) 142,241 1,875 (3,272) 140,844 The Company maintains the 2010 Equity Incentive options granted under the DENTSPLY International Inc. Plan (the ‘‘Plan’’) under which it may grant non-qualified 2002 Equity Incentive Plan, as amended, subject to stock options (‘‘NQSO’’), incentive stock options, adjustment as follows: each January, if 7% of the total restricted stock, restricted stock units (‘‘RSU’’) and stock outstanding common shares of the Company exceed appreciation rights, collectively referred to as ‘‘Awards.’’ 13.0 million, the excess becomes available for grant under Awards are granted at exercise prices that are equal to the Plan. No more than 2.5 million shares may be the closing stock price on the date of grant. The awarded as restricted stock and RSU, and no key authorized Company of common stock, plus any 13.0 million shares of unexercised portion of cancelled or terminated stock grants under Plan the employee may be granted restricted stock and RSU in excess of approximately 0.2 million shares of common 79 stock in any calendar year. The number of shares available for grant under the 2010 Plan at December 31, 2014 is 8.2 million. Stock options granted become exercisable over a period of three years after the date of grant at the rate of one-third per year and generally expire ten years after the date of grant under these plans. RSU vest 100% on the third anniversary of the date of grant and are subject to a service condition, which requires grantees to remain employed by the Company during the three-year period following the date of grant. Under the terms of the RSU, the three-year period is referred to as the restricted period. RSU and the rights under the award may not be or sold, otherwise disposed of during the three-year restricted transferred, assigned, donated, pledged to vesting. period prior In addition to the service condition, certain key executives are granted RSU subject to performance requirements during the first year of the RSU award. If actual performance against the goals is not met the the RSU granted is adjusted to reflect achievement level. Upon the expiration of the applicable restricted period and the satisfaction of all conditions imposed, all restrictions imposed on RSU will lapse, and one share of common stock will be issued as payment for each vested RSU. All awards become immediately exercisable upon death, disability or qualified retirement. Awards are expensed as their respective vesting periods or to the eligible retirement date if shorter. compensation over The following table represents total stock based compensation expense and the tax related benefit for the years ended: (in thousands) Stock option expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stock based compensation expense . . . . . . . . . . . . . . . . . . . Related deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . December 31, 2014 2013 2012 $ 8,838 15,399 $24,237 $ 6,744 $10,554 13,059 $23,613 $ 6,057 $11,126 9,644 $20,770 $ 5,775 There were 1.8 million non-qualified stock options unvested at December 31, 2014. The remaining unamortized compensation cost related to non-qualified stock options is $9.4 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.3 years. The unamortized compensation cost related to RSU is $19.9 million, which will be expensed over the remaining weighted average restricted period of the RSU, or 1.2 years. The Company uses the Black-Scholes option-pricing model to estimate the fair value of each option awarded. The following table sets forth the average assumptions used to determine compensation cost for the Company’s NQSO issued during the years ended: Weighted average fair value per share . . . . . . . . . . . . . . . . . . . . Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected life (years) 2014 $9.41 0.59% 1.61% 21.6% 5.13 December 31, 2013 $9.30 0.53% 0.87% 24.7% 4.98 2012 $8.91 0.57% 0.93% 26.0% 5.10 The total intrinsic value of options exercised for the years ended December 31, 2014, 2013 and 2012 was $28.8 million, $34.3 million and $21.1 million, respectively. 80 The following table summarizes the NQSO transactions for the year ended December 31, 2014: (in thousands, except per share amounts) December 31, 2013 . . . . . . . . Granted . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . Cancelled . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . December 31, 2014 . . . . . . . . Shares 8,295 929 (1,539) (4) (58) 7,623 Outstanding Weighted Average Exercise Price $35.04 45.27 31.89 45.04 41.26 $36.87 Aggregate Intrinsic Value Shares Exercisable Weighted Average Exercise Price Aggregate Intrinsic Value $111,450 6,225 $33.67 $ 92,200 $124,988 5,775 $35.05 $105,210 The weighted average remaining contractual term of all outstanding options is 5.6 years and the weighted average remaining contractual term of exercisable options is 4.7 years. The following table summarizes information about NQSO outstanding for the year ended December 31, 2014: Number Outstanding at December 31, 2014 Range of Exercise Prices (in thousands, except per share amounts and life) 20.01 − 30.00 . . . . . 30.01 − 40.00 . . . . . 40.01 − 50.00 . . . . . 1,288 3,839 2,496 7,623 Outstanding Weighted Average Remaining Contractual Life (in years) Weighted Average Exercise Price Number Exercisable at December 31, 2014 Exercisable 3.3 5.6 6.9 5.6 $26.54 35.87 43.75 $36.87 1,288 3,453 1,034 5,775 Weighted Average Exercise Price $26.54 35.57 43.93 $35.05 The following table summarizes the unvested RSU transactions for the year ended December 31, 2014: (in thousands, except per share amounts) Unvested at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unvested at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unvested Restricted Stock Units Weighted Average Grant Date Fair Value $38.81 45.20 36.60 40.90 $41.55 Shares 1,131 447 (282) (119) 1,177 81 NOTE 14 — INCOME TAXES The components of income before income taxes from operations are as follows: (in thousands) United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 $ 59,628 344,745 $404,373 December 31, 2013 $ 58,383 310,952 $369,335 2012 $ 67,668 263,011 $330,679 The components of the provision for income taxes from operations are as follows: (in thousands) Current: U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. state . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred: U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. state . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 December 31, 2013 2012 $(12,771) (295) 76,702 $ 63,636 $ 32,250 (9,861) (4,905) $ 17,484 $ 81,120 $ 10,340 4,660 66,306 $ 81,306 $(28,941) (1,377) 1,162 $(29,156) $ 52,150 $ 23,412 2,788 69,954 $ 96,154 $(128,832) 11,730 29,868 $ (87,234) 8,920 $ The reconciliation of the U.S. federal statutory tax rate to the effective rate for the years ended is as follows: Statutory U. S. federal income tax rate . . . . . . . . . . . . . . Effect of: State income taxes, net of federal benefit . . . . . . . . . . . Federal benefit of R&D and foreign tax credits . . . . . . . . Tax effect of international operations . . . . . . . . . . . . . . Net effect of tax audit activity . . . . . . . . . . . . . . . . . . Tax effect of enacted statutory rate changes . . . . . . . . . Federal tax on unremitted earnings of certain foreign subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance adjustments . . . . . . . . . . . . . . . . Tax effect of enacted U.S. federal legislation . . . . . . . . . Foreign outside basis differences . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rate on operations . . . . . . . . . . . . . . 2014 35.0% 0.7 (10.5) (3.2) 3.1 (0.3) (0.1) (2.1) — — (2.5) 20.1% December 31, 2013 35.0% 0.7 (5.9) (10.2) 1.9 0.1 — (0.6) (2.6) (1.5) (2.8) 14.1% 2012 35.0% 0.7 (7.2) (7.4) (0.6) (3.7) 0.1 12.0 — (26.5) 0.3 2.7% 82 The tax effect of significant temporary differences giving rise to deferred tax assets and liabilities are as follows: December 31, 2014 December 31, 2013 Deferred Tax Asset Deferred Tax Liability Deferred Tax Asset (in thousands) Commission and bonus accrual . . . . . . . . . . . . . . . . . . . Employee benefit accruals . . . . . . . . . . . . . . . . . . . . . . Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . Insurance premium accruals . . . . . . . . . . . . . . . . . . . . . Miscellaneous accruals . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized losses included in AOCI . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . . . . Product warranty accruals . . . . . . . . . . . . . . . . . . . . . . Foreign tax credit and R&D carryforward . . . . . . . . . . . . . Restructuring and other cost accruals . . . . . . . . . . . . . . . Sales and marketing accrual . . . . . . . . . . . . . . . . . . . . . Taxes on unremitted earnings of foreign subsidiaries . . . . . . Tax loss carryforwards and other tax attributes . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,939 47,567 21,018 — 4,791 11,084 33,902 26,837 — 1,186 104,805 1,703 6,830 — 320,187 (253,247) $ 332,602 $ — $ — — 338,714 — — — — 41,425 — — — — 2,120 — — $382,259 5,793 46,740 21,941 — 4,402 10,089 35,734 32,908 — 1,069 48,450 956 5,768 — 389,614 (228,846) $ 374,618 Deferred Tax Liability $ — — — 374,240 — — — — 49,368 — — — — 2,506 — — $426,114 Deferred tax assets and liabilities are included in the following Consolidated Balance Sheet line items: December 31, 2014 2013 (in thousands) Assets Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent assets, net $ 78,744 41,882 $ 86,929 104,385 Liabilities Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes 4,732 165,551 4,416 238,394 The Company has $104.4 million of foreign tax December 31, 2014 are tax benefits totaling credit carryforwards at December 31, 2014, of which $236.6 million, before valuation allowances, for the tax $43.6 million will expire in 2023 and $60.8 million will loss carryforwards. expire in 2024. The Company has recorded $164.1 million of The deferred tax asset recorded during 2012 for valuation allowance to offset the tax benefit of net foreign outside basis differences in a wholly owned operating losses and $89.1 million of valuation allowance subsidiary was realized as a deduction for U.S. income tax for other deferred tax assets. The Company has recorded purposes during 2013. The deferred tax asset remaining these valuation allowances due to the uncertainty that at December 31, 2014 is now reflected as a U.S. federal these assets can be realized in the future. income tax loss carryforward of $170.7 million which will expire in 2033. The Company also has tax loss carryforwards related to certain foreign and domestic subsidiaries of approximately $1.0 billion at December 31, 2014, of which $504.8 million expires at various times through 2034 and $505.0 million may be carried forward indefinitely. Included in deferred income tax assets at Federal and state tax loss carryforwards that result from the exercise of employee stock options are not recorded on the Company’s Consolidated Balance Sheets. These tax loss carryforwards are accounted for as a credit to additional paid-in capital when realized through a reduction in income taxes payable. The amount incurred for tax loss carryforwards, both federal and state, at 83 December 31, 2014 and 2013 was $14.5 million and $17.2 million, respectively. The Company has provided federal income taxes on certain undistributed earnings of its foreign subsidiaries that the Company anticipates will be repatriated. Deferred federal income taxes have not been provided on $1.3 billion of cumulative earnings of foreign subsidiaries that the Company has determined to be permanently reinvested. It is not practicable to estimate the amount of tax that might be payable on these permanently reinvested earnings. Tax Contingencies the financial The Company applies a recognition threshold and measurement attribute for statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The total amount of gross unrecognized tax benefits at December 31, 2014 is approximately $30.7 million, of this total, approximately $18.5 million represents the amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate. It is reasonably possible that certain amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date of the Company’s consolidated financial statements. Final settlement and resolution of outstanding tax matters in various jurisdictions during the next twelve months could include unrecognized tax benefits of approximately $15.0 million. Of this total, approximately $3.7 million represents the amount of unrecognized tax benefits that, if recognized would affect the effective income tax rate. In addition, expiration of statutes of limitation in various jurisdictions during the next 12 months could include unrecognized tax benefits of approximately $0.8 million. The total amount of accrued interest and penalties were $8.9 million and $7.9 million at December 31, 2014 and 2013, respectively. The Company has consistently recognized in its classified interest and penalties consolidated financial statements as income taxes based on the accounting policy election of the Company. During the years ended December 31, 2014 and 2013, the Company recognized income tax expense of $1.9 million and $1.7 million respectively, related to interest and penalties. During the year ended December 31, 2012, the Company recognized income tax benefit in the amount of $0.9 million related to interest and penalties. jurisdictions The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign include the jurisdictions. The significant U.S., Germany, Sweden and Switzerland. The Company has substantially concluded all U.S. federal income tax matters for years through 2010. The company is currently under audit for the tax year 2011. The tax years 2012 and 2013 are audit adjustments. The Company has concluded audits in Germany through the tax year 2008 and is currently the years 2009 through 2011. The under audit Company is under audit in Sweden for the tax year 2013. The taxable years that remain open for Sweden are 2009 through 2013. The taxable years that remain open for Switzerland are 2004 through 2013. to future potential subject tax for The Company had the following activity recorded for unrecognized tax benefits: December 31, 2014 2013 2012 (in thousands) Unrecognized tax benefits at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross change for prior period positions Gross change for current year positions . . . . . . . . . . . . . . . . . . . . . Decrease due to settlements and payments . . . . . . . . . . . . . . . . . . . Decrease due to statute expirations . . . . . . . . . . . . . . . . . . . . . . . . Increase due to effect of foreign currency translation . . . . . . . . . . . . . Decrease due to effect from foreign currency translation . . . . . . . . . . $17,997 5,083 179 (249) (568) — (624) Unrecognized tax benefits at end of period . . . . . . . . . . . . . . . . . . . . $21,818 $12,264 2,471 4,517 — (1,381) 126 — $17,997 $14,956 (3,029) 268 — — 69 — $12,264 84 NOTE 15 — BENEFIT PLANS Defined Contribution Plans The Service defined limits. The DENTSPLY Employee Stock Ownership Plan (‘‘ESOP’’) and 401(k) plans are designed to have contribution allocations of eligible compensation, with a targeted 3% going into the ESOP in Company stock and a targeted 3% going into the 401(k) as a non-elective contribution in cash. The Company sponsors an employee 401(k) savings plan for its U.S. workforce to which enrolled participants may contribute up to Internal Revenue a non-contributory defined contribution plan that covers substantially all of the U.S. based non-union employees of the Company. All future ESOP allocations will come from a combination of forfeited shares and shares acquired in the open market. The share allocation will be accounted at fair value at the point of allocation, which is normally year-end. In addition to these plans, the Company also maintains various other U.S. and non-U.S. defined contribution and non-qualified deferred compensation forfeitures, were plans. The annual expense, net of $25.4 million, $25.8 million and $26.1 million for 2014, 2013 and 2012, respectively. ESOP is Defined Benefit Plans The Company maintains a number of separate contributory and non-contributory qualified defined benefit pension plans for certain union and salaried employee groups in the United States. Pension benefits for salaried plans are based on salary and years of service; hourly plans are based on negotiated benefits and years of service. Annual contributions to the pension plans are to satisfy minimum funding requirements. sufficient Pension plan assets are held in trust and consist mainly of common stock and fixed income investments. The Company’s funding policy for its U.S. plans is to make contributions that are necessary to maintain the plans on a sound actuarial basis and to meet the minimum funding standards prescribed by law. The Company may, at its discretion, contribute amounts in excess of the minimum required contribution. the Company In addition to the U.S. plans, maintains defined benefit pension plans for certain employees in Austria, France, Germany, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland and Taiwan. These plans provide benefits based upon age, years of service and remuneration. Other foreign plans are not significant individually or in the aggregate. Substantially all of the German and Sweden plans are unfunded book 85 reserve plans. Most employees and retirees outside the U.S. are covered by government health plans. Defined Benefit Pension Plan Assets The investments. and fixed income The primary investment strategy is to ensure that the assets of the plans, along with anticipated future contributions, will be invested in order that the benefit entitlements of employees, pensioners and beneficiaries covered under the plan can be met when due with high probability. Pension plan assets consist mainly of common stock target allocations for defined benefit plan assets are 30% to 65% equity securities, 30% to 65% fixed income securities, 0% to 15% real estate, and 0% to 25% in all other investments. Equity securities include investments in companies located both in and outside the U.S. Equity securities do not include common stock of the include corporate Company. Fixed income securities bonds industries, companies government bonds, mortgage notes and pledge letters. Other types of investments include investments in mutual funds, common trusts, insurance contracts, hedge funds and real estate. These plan assets are not recorded on the Company’s Consolidated Balance Sheet as they are held in trust or other off-balance sheet investment vehicles. from diversified types of of investment The defined benefit pension plan assets in the U.S. are held in trust and the investment policies of the plans are generally to invest the plans assets in equities and fixed income investments. The objective is to achieve a long-term rate of return in excess of 4% while at the same time mitigating the impact of risk associated with investment categories that are expected to yield greater than average returns. In accordance with the investment policies of the U.S. plans, the plans assets were invested in the following investment categories: interest-bearing cash, registered investment companies funds), common/collective trusts, master (e.g. mutual trust investment accounts and insurance company general accounts. The investment objective is for assets to be invested in a manner consistent with the fiduciary standards of the Employee Retirement Income Security Act of 1974, as amended (‘‘ERISA’’). Japan, Norway, France, Germany, The defined benefit pension plan assets maintained the in Austria, Netherlands, Switzerland and Taiwan all have separate investment policies but generally have an objective to achieve a long-term rate of return in excess of 4% while at the same time mitigating the impact of investment risk associated with investment categories that are expected to yield greater than average returns. In accordance with the investment policies for the plans outside the U.S., the plans’ assets were invested in the following investment interest-bearing cash, U.S. and foreign categories: equities, (primarily corporate and government bonds), insurance company contracts, real estate and hedge funds. foreign fixed income securities Postemployment Healthcare The Company sponsors postemployment healthcare plans that cover certain union and salaried employee groups in the U.S. and is contributory, with retiree contributions adjusted annually to limit the Company’s contribution for participants who retired after June 1, 1985. The plans for postemployment healthcare have no plan assets. The Company also sponsors unfunded non-contributory postemployment medical plans for a limited number of union employees and their spouses and retirees of a discontinued operation. Reconciliations of changes in the defined benefit and postemployment healthcare plans’ benefit obligations, fair value of assets and statement of funded status are as follows: Pension Benefits December 31, Other Postemployment Benefits December 31, 2014 2013 2014 2013 (in thousands) Change in Benefit Obligation Benefit obligation at beginning of year . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost Participant contributions . . . . . . . . . . . . . . . . . . . . . . Actuarial losses (gains) . . . . . . . . . . . . . . . . . . . . . . . Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions/Divestitures . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan curtailments and settlements . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 359,416 13,982 11,104 3,984 114,412 71 — (54,376) 2,582 (292) (14,008) $ 355,766 14,863 9,901 3,968 (20,727) — 30 8,248 (524) (1,669) (10,440) $ 11,936 249 530 467 1,444 — — — — — (712) Benefit obligation at end of year . . . . . . . . . . . . . . . . . . $ 436,875 $ 359,416 $ 13,914 Change in Plan Assets Fair value of plan assets at beginning of year . . . . . . . . . . Actual return on assets . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employer contributions Participant contributions . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 143,165 13,560 (14,825) 11,658 3,984 (14,008) $ 124,884 9,658 2,377 12,718 3,968 (10,440) $ — — — 245 467 (712) $ 14,218 234 464 515 (2,708) 11 — — — — (798) $ 11,936 $ — — — 283 515 (798) Fair value of plan assets at end of year . . . . . . . . . . . . . . $ 143,534 $ 143,165 $ — $ — Funded status at end of year . . . . . . . . . . . . . . . . . . . . $(293,341) $(216,251) $(13,914) $(11,936) 86 The amounts recognized in the accompanying Consolidated Balance Sheets, net of tax effects, are as follows: Location On The Consolidated Balance Sheet (in thousands) . . Other noncurrent assets, net Other noncurrent assets, net Deferred tax asset . . . . . . . . . Other noncurrent assets, net Total assets . . . . . . . . . . . . Current liabilities . . . . . . . . . . Accrued liabilities Other noncurrent liabilities Deferred tax liability . . . . . . . . Deferred income taxes . . . Other noncurrent liabilities Total liabilities . . . . . . . . . . Accumulated other comprehensive income . . . . Net amount recognized . . . . . Accumulated other comprehensive loss Amounts recognized in AOCI consist of: Pension Benefits December 31, Other Postemployment Benefits December 31, 2014 2013 2014 2013 $ — $ $ 12 $ 43,067 23 19,618 $ 43,079 $ 19,641 (5,097) (211,177) (644) $(293,899) $(216,918) (4,916) (288,437) (546) 1,162 $ 1,162 (627) (13,287) — $(13,914) $ — 605 605 (491) (11,445) — $(11,936) 111,725 48,957 $(139,095) $(148,320) 1,848 $(10,904) 961 $(10,370) Pension Benefits Other Postemployment Benefits December 31, December 31, 2014 2013 2014 2013 (in thousands) Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . Before tax AOCI Less: Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $156,447 (2,201) $154,246 42,521 Net of tax AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . $111,725 $70,615 (2,684) $67,931 18,974 $48,957 $3,002 8 $3,010 1,162 $1,848 $1,557 9 $1,566 605 $ 961 Information for pension plans with an accumulated benefit obligation in excess of plan assets: December 31, 2014 2013 (in thousands) Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $435,124 397,159 141,771 $357,459 330,215 141,186 Components of net periodic benefit cost: (in thousands) Service cost . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . Amortization of prior service (credit) cost . . . . . . . . . . . . . . . . . . . . . . . Amortization of net actuarial loss . . . . . Curtailment and settlement loss (gains) . . Pension Benefits Other Postemployment Benefits 2014 2013 2012 2014 2013 2012 $13,982 11,104 (5,402) $14,863 9,901 (4,998) $12,178 10,600 (4,727) $249 530 — $ 234 464 — (126) 2,775 74 (133) 5,150 (1,600) (138) 1,995 (303) 1 — — 2 303 — $195 490 — — 264 — Net periodic benefit cost . . . . . . . . . . . $22,407 $23,183 $19,605 $780 $1,003 $949 87 Other changes in plan assets and benefit obligations recognized in AOCI: (in thousands) Net actuarial loss (gain) . . . . . . . . . . . . Net prior service cost (credit) . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . Total recognized in AOCI . . . . . . . . . . . Total recognized in net periodic benefit Pension Benefits Other Postemployment Benefits 2014 2013 2012 2014 2013 2012 $ 88,607 357 (2,649) $ 86,315 $(23,364) (37) (5,017) $(28,418) $55,662 (161) (1,857) $53,644 $1,445 — (1) $1,444 $(2,709) 11 (305) $(3,003) $1,601 — (264) $1,337 cost and AOCI . . . . . . . . . . . . . . . . $108,722 $ (5,235) $73,249 $2,224 $(2,000) $2,286 The estimated net loss, prior service cost and transition obligation for the defined benefit plans that will be into net periodic benefit cost over the next fiscal year are $8.2 million. There will be an amortized from AOCI immaterial amount of estimated net loss and prior service credit for the other postemployment plans that will be amortized from AOCI into net periodic benefit cost over the next fiscal year. The amounts in AOCI that are expected to be amortized as net expense (income) during fiscal year 2015 are as follows: (in thousands) Amount of net prior service (credit) cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount of net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension Benefits $ (129) 8,331 Other Postemployment Benefits $ 2 168 The weighted average assumptions used to determine benefit obligations for the Company’s plans, principally in foreign locations, at December 31, 2014, 2013 and 2012 are as follows: Pension Benefits Other Postemployment Benefits 2014 2013 2012 2014 2013 2012 Discount rate . . . . . . . . . . . . . Rate of compensation increase. . . Health care cost trend pre 65 . . . Health care cost trend post 65 . . . Ultimate health care cost trend . . Years until trend is reached pre 65 . . . . . . . . . . . . . . . . Years until ultimate trend is reached post 65 . . . . . . . . . . 1.8% 2.6% n/a n/a n/a n/a n/a 3.2% 2.7% n/a n/a n/a n/a n/a 2.8% 2.7% n/a n/a n/a n/a n/a 4.3% n/a 8.0% 7.0% 5.0% 8.0 7.0 4.8% n/a 8.5% 7.5% 5.0% 8.0 8.0 3.5% n/a 8.0% 8.0% 5.0% 7.0 7.0 88 The weighted average assumptions used to determine net periodic benefit cost for the Company’s plans, principally in foreign locations, for the years ended December 31, 2014, 2013 and 2012 are as follows: Discount rate . . . . . . . . . . . . . Expected return on plan assets . . Rate of compensation increase . . Health care cost trend . . . . . . . . Ultimate health care cost trend . . Years until ultimate trend is Pension Benefits Other Postemployment Benefits 2014 2013 2012 2014 2013 2012 3.2% 3.8% 2.7% n/a n/a 2.8% 4.3% 2.7% n/a n/a 4.0% 4.1% 2.8% n/a n/a 4.8% n/a n/a 8.5% 5.0% 3.5% n/a n/a 8.5% 5.0% 4.0% n/a n/a 8.0% 5.0% reached. . . . . . . . . . . . . . . . 8.0 Measurement Date . . . . . . . . . . 12/31/2014 12/31/2013 12/31/2012 12/31/2014 12/31/2013 8.0 n/a n/a n/a 7.0 12/31/2012 To develop the assumptions for return on assets, the expected long-term rate of the Company considered the current level of expected returns on risk free investments (primarily U.S. government bonds), the historical level of the risk premium associated with the other asset classes in which the assets are invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocations to develop the assumptions for the expected long-term rate of return on assets. Assumed health care cost trend rates have an impact on the amounts reported for postemployment benefits. An ongoing one percentage point change in assumed healthcare cost trend rates would have had the following effects for the year ended December 31, 2014: (in thousands) Effect on total of service and interest cost components . . . . . . . . . . . . . . . . . . Effect on postemployment benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . $ 229 2,680 $ (169) (2,058) Other Postemployment Benefits 1% Increase 1% Decrease 89 Fair Value Measurements of Plan Assets The fair value of the Company’s pension plan assets at December 31, 2014 is presented in the table below by asset category. Approximately 81% of the total plan assets are categorized as Level 1, and therefore, the values assigned to these pension assets are based on quoted prices available in active markets. For the other category levels, a description of the valuation is provided in Note 1, Significant Accounting Policies, under the ‘‘Fair Value Measurement’’ heading. Total December 31, 2014 Level 2 Level 1 Level 3 (in thousands) Assets Category Cash and cash equivalents Equity securities: . . . . . . . . . . . . . . . . . . . . $ 9,613 $ 9,613 $ U. S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,065 38,090 1,065 38,090 Fixed income securities: Fixed rate bonds(a) . . . . . . . . . . . . . . . . . . . . . . . . 53,427 53,427 Other types of investments: — — — — Mutual funds(b) . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mutual funds . . . . . . . . . . . . . . . . . . . . Common trusts(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . Hedge funds Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,783 10,311 9,542 15,518 1,847 338 $143,534 3,783 10,311 — — — — $116,289 — — 9,542 3,615 — — $13,157 Total December 31, 2013 Level 2 Level 1 (in thousands) Assets Category Cash and cash equivalents Equity securities: . . . . . . . . . . . . . . . . . . . . $ 15,231 $ 15,231 $ U. S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . . . 929 37,904 929 37,904 Fixed income securities: Fixed rate bonds(a) . . . . . . . . . . . . . . . . . . . . . . . . 51,066 51,066 Other types of investments: — — — — Mutual funds(b) . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mutual funds . . . . . . . . . . . . . . . . . . . . Common trusts(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance contracts Hedge funds . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,367 8,906 10,100 13,240 2,046 376 $143,165 3,367 8,906 — — — — $117,403 — — 6,802 3,739 — — $10,541 $ — — — — — — — 11,903 1,847 338 $14,088 Level 3 $ — — — — — — 3,298 9,501 2,046 376 $15,221 (a) (b) (c) This category includes fixed income securities invested primarily in Swiss bonds, foreign bonds denominated in Swiss francs, foreign currency bonds, mortgage notes and pledged letters. This category includes mutual funds balanced between moderate-income generation and moderate capital appreciation with investment allocations of approximately 50% equities and 50% fixed income investments. This category includes common/collective funds with investments in approximately 65% equities and 35% in fixed income investments. 90 The following table provides a reconciliation from December 31, 2013 to December 31, 2014 for the plans assets categorized as Level 3. During the year ended December 31, 2014, $3.4 million assets were transferred in or out of the Level 3 category. (in thousands) Balance at December 31, 2013 . . . . . . . . . . . Actual return on plan assets: Relating to assets still held at the reporting date . . . . . . . . . . . . . . . . . . . . . . . Relating to assets sold during the period . . Purchases, sales and settlements, net . . . . . Transfers in and/or (out) . . . . . . . . . . . . . . Effect of exchange rate changes . . . . . . . . . Balance at December 31, 2014 . . . . . . . . . . . Changes within Level 3 Category for Year Ended December 31, 2014 Common Trust Insurance Contracts Hedge Funds Real Estate Total $ 3,298 $ 9,501 $2,046 $376 $15,221 — 169 (83) (3,384) — $ — 3,382 — 652 — (1,632) $11,903 11 — — — (210) $1,847 — — — — (38) $338 3,393 169 569 (3,384) (1,880) $14,088 The following tables provide a reconciliation from December 31, 2012 to December 31, 2013 for the plans assets categorized as Level 3. No assets were transferred in or out of the Level 3 category during the year ended December 31, 2013. (in thousands) Balance at December 31, 2012 . . . . . . . . . . . Actual return on plan assets: Relating to assets still held at the reporting date . . . . . . . . . . . . . . . . . . . . . . . Relating to assets sold during the period . . . . . . . Purchases, sales and settlements, net Effect of exchange rate changes . . . . . . . . . Changes within Level 3 Category for Year Ended December 31, 2013 Common Trust Insurance Contracts Hedge Funds Real Estate Total $2,708 $8,334 $1,311 $367 $12,720 409 99 82 — 421 — 637 109 82 — 596 57 — — — 9 912 99 1,315 175 Balance at December 31, 2013 . . . . . . . . . . . $3,298 $9,501 $2,046 $376 $15,221 Fair values for Level 3 assets are determined as Real Estate: Investment is stated by its appraised value. follows: Common Trusts and Hedge Funds: The investments are valued using the net asset value provided by the administrator of the trust or fund, which is based on the fair value of the underlying securities. Cash Flows Insurance Contracts: The value of the asset represents the mathematical reserve of the insurance policies and is calculated by the insurance firms using their own assumptions. In 2015, the Company expects to make contributions and direct benefit payments of $11.4 million to its defined benefit pension plans and $0.6 million to its postemployment medical plans. 91 Estimated Future Benefit Payments (in thousands) 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 − 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension Benefits $ 9,885 10,477 10,211 13,069 13,444 75,590 Other Postemployment Benefits $ 641 624 616 627 597 2,800 The above table reflects the total employer contributions and benefits expected to be paid from the plan and does not include the participants’ share of the cost. NOTE 16 — RESTRUCTURING AND OTHER COSTS Restructuring Costs Restructuring costs of $9.9 million, $12.0 million and $17.8 million for 2014, 2013 and 2012, respectively, are reflected in ‘‘Restructuring and other costs’’ in the Consolidated Statement of Operations and the associated liabilities are recorded in ‘‘Accrued liabilities’’ and ‘‘Other noncurrent liabilities’’ in the Consolidated Balance Sheets. These costs consist of employee severance benefits, payments due under operating contracts, and other restructuring costs. During 2014, the Company initiated several restructuring plans primarily related to closing locations as a result of integration activities to better leverage the Company’s resources by reducing costs and obtaining operational efficiencies. These restructuring costs were offset by changes in estimates of $3.0 million, related to adjustments to the cost of initiatives in prior years. During 2013 the Company initiated several restructuring plans primarily related to closing locations as a result of integration activities as the Company realigned certain implant and implant related businesses to better leverage the Company’s resources by reducing costs and obtaining operational efficiencies. These restructuring costs were offset by changes in estimates of $2.3 million, related to adjustments to the cost of initiatives in prior years. During 2012, the Company initiated several restructuring plans primarily related to the closure and/or consolidation of certain production and selling facilities in Europe to better leverage the Company’s resources by reducing costs and obtaining operational efficiencies. These restructuring costs were offset by changes in estimates of $0.8 million related to adjustments to the cost of initiatives in prior years. At December 31, 2014, the Company’s restructuring accruals were as follows: (in thousands) Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . Provisions and adjustments . . . . . . . . . . . . . . . . . . . . Amounts applied . . . . . . . . . . . . . . . . . . . . . . . . . . Change in estimates . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . Severances 2012 and Prior Plans $1,282 178 (900) (387) $ 173 2013 Plans 2014 Plans Total $ 5,764 352 (4,309) (1,029) $ 778 $ — 7,603 (2,080) (461) $ 5,062 $ 7,046 8,133 (7,289) (1,877) $ 6,013 92 (in thousands) Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . Provisions and adjustments . . . . . . . . . . . . . . . . . . . . Amounts applied . . . . . . . . . . . . . . . . . . . . . . . . . . Change in estimates . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . (in thousands) Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . Provisions and adjustments . . . . . . . . . . . . . . . . . . . . Amounts applied . . . . . . . . . . . . . . . . . . . . . . . . . . Change in estimates . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . Lease/Contract Terminations 2012 and Prior Plans 2013 Plans 2014 Plans Total $ 748 11 (132) (92) $ 535 $ 98 226 (211) (113) $ — $ — 1,779 (113) (30) $1,636 $ 846 2,016 (456) (235) $2,171 Other Restructuring Costs 2012 and Prior Plans 2013 Plans 2014 Plans Total $ 58 41 (74) — $ 25 $ 658 57 (407) (308) $ — $ — 2,672 (1,002) (621) $ 1,049 $ 716 2,770 (1,483) (929) $ 1,074 The following table provides the cumulative amounts for the provisions and adjustments and amounts applied for all the plans by segment: December 31, 2013 Provisions and Adjustments Amounts Applied Change in Estimates December 31, 2014 (in thousands) Dental Consumable and Certain International Businesses . . . . . $ 656 $ 4,242 $(1,017) $ (418) $3,463 Dental Specialty and Laboratory and Certain Global Distribution Businesses . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . All Other . . . . . . . . . . . . . . . . 6,333 1,245 374 Total . . . . . . . . . . . . . . . . . . $8,608 $12,919 7,163 (6,349) (2,254) 4,893 1,154 360 (1,260) (602) $(9,228) (304) (65) 835 67 $(3,041) $9,258 At December 31, 2013, the Company’s restructuring accruals were as follows: (in thousands) Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . Provisions and adjustments . . . . . . . . . . . . . . . . . . . . Amounts applied . . . . . . . . . . . . . . . . . . . . . . . . . . Change in estimates . . . . . . . . . . . . . . . . . . . . . . . . 2011 and Prior Plans $ 1,495 — (1,069) (24) Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . $ 402 Severances 2012 Plans 2013 Plans Total $11,412 1,314 (9,832) (2,014) $ 880 $ — 8,615 (2,615) (236) $ 5,764 $ 12,907 9,929 (13,516) (2,274) $ 7,046 93 Lease/Contract Terminations 2011 and Prior Plans 2012 Plans 2013 Plans Total (in thousands) Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . Provisions and adjustments . . . . . . . . . . . . . . . . . . . . Amounts applied . . . . . . . . . . . . . . . . . . . . . . . . . . Change in estimates . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . $ 792 — (136) — $ 656 $ 682 77 (626) (41) $ 92 $ — 1,999 (1,887) (14) 98 $ $ 1,474 2,076 (2,649) (55) $ 846 (in thousands) Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts applied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Restructuring Costs 2012 Plans 2013 Plans Total $ 94 957 (994) 1 $ 58 $ — 1,383 (716) (9) $ 658 $ 94 2,340 (1,710) (8) $ 716 The following table provides the cumulative amounts for the provisions and adjustments and amounts applied for all the plans by segment: December 31, 2012 Provisions and Adjustments Amounts Applied Change in Estimates December 31, 2013 (in thousands) Dental Consumable and Certain International Businesses . . . . . $ 1,537 $ 12 $ (378) $ (515) $ 656 Dental Specialty and Laboratory and Certain Global Distribution Businesses . . . . . . . . . . . . . Healthcare and Emerging Markets Businesses . . . . . . . . All Other . . . . . . . . . . . . . . . . 12,938 11,692 (16,475) (1,822) 6,333 Total . . . . . . . . . . . . . . . . . . $14,475 $14,345 $(17,875) $(2,337) — — 1,950 691 (705) (317) — — 1,245 374 $8,608 Other Costs For the year ended December 31, 2014, the Company recorded other costs of $1.2 million, which were primarily the result of legal settlements. For the year ended December 31, 2013, the Company recorded other costs of $1.4 million, which included $2.4 million impairments of certain previously acquired technologies offset by income from legal settlements. For the year ended December 31, 2012, the Company recorded other costs of $7.9 million, including $5.2 million impairments of certain previously acquired technologies and the impact of the U.S. presidential executive order updating trade sanctions. On October 9, 2012, President Obama issued an executive order making it illegal for non-U.S. subsidiaries of U.S. companies to engage in certain transactions involving Iran without a license. The Company reserved appropriate allowances against accounts receivable in its controlled foreign subsidiaries and has discontinued such sales activities. There can be no assurance as to when such sales may be resumed to this region. NOTE 17 — FINANCIAL INSTRUMENTS AND DERIVA- TIVES 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, rates and commodity prices. These financial interest exposures are monitored and managed by the Company 94 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, Derivative Instruments Designated as Hedging Cash Flow Hedges 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. The following table summarizes the notional amounts of cash flow hedges by derivative instrument type at December 31, 2014 and the notional amounts expected to mature during the next 12 months, with a discussion of the various cash flow hedges by derivative instrument type following the table: (in thousands) Foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total derivative instruments designated as cash flow hedges . . . . . . . . . . . . . Aggregate Notional Amount $359,864 170,103 2,228 $532,195 Aggregate Notional Amount Maturing within 12 Months $273,380 — 2,228 $275,608 Foreign Exchange Risk Management currencies, with the most significant activity occurring in The Company uses a layered hedging program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings of the consolidated Company. The Company accounts for the designated foreign exchange forward contracts as euros, Swedish kronor, Canadian dollars, and Swiss francs. These foreign exchange forward contracts generally have maturities up to 18 months and the counterparties to the transactions are typically large international cash flow hedges. As a result, the Company records the financial institutions. fair value of the contracts primarily through AOCI based on the tested effectiveness of the foreign exchange forward contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is deemed ineffective and is reported currently in ‘‘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 operating activities on the Consolidated Statements of Cash Flows. The Company hedges various Interest Rate Risk Management The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt. At December 31, 2014, the Company has two groups of significant interest rate swaps. On September 29, 2014, the Company replaced the maturing 12.6 billion Japanese yen variable interest rate debt facility with a new variable rate facility for the same amount. In addition, the Company settled existing swaps that converted the underlying variable interest rate on the matured facility and issued new interest rate swaps with notional amounts totaling 12.6 billion Japanese yen, which effectively converts the underlying variable interest rate on the new facility to a fixed interest rate of 0.9% for a term of five-years ending September 2019. Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest 95 rate of a Swiss franc denominated loan to a fixed interest rate of 0.7% for an initial term of five years, ending in September 2016. into interest The Company enters rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes. Any cash flows associated with these instruments are included in cash from operating activities on the Consolidated Statements of Cash Flows. Commodity Risk Management The Company enters into precious metal commodity swap contracts to effectively fix certain variable raw material costs typically for up to 18 months. These swaps are used to stabilize the cost of components used in the production of certain products. The Company generally accounts for the commodity swaps as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the tested effectiveness of the commodity swaps. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is deemed ineffective and is reported currently in ‘‘Interest expense’’ 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 operating activities on the Consolidated Statements of Cash Flows. The following tables summarize the amount of gains (losses) recorded in AOCI in the Consolidated Balance Sheets and income (expense) in the Company’s Consolidated Statements of Operations related to all cash flow hedges for the years ended December 31, 2014 and 2013: (in thousands) Effective Portion: Interest rate swaps . . . . . . . . . . . . . Foreign exchange forward contracts . . . Foreign exchange forward contracts . . . . . . . . . . . . . . Commodity contracts Ineffective Portion: Foreign exchange forward contracts . . . . . . . . . . . . . . Commodity contracts Total in cash flow hedging . . . . . . . December 31, 2014 Gain (Loss) in AOCI Consolidated Statements of Operations Location Effective Portion Reclassified from AOCI into Income (Expense) Ineffective Portion Recognized in Income (Expense) $ (668) 4,324 518 (243) Interest expense Cost of products sold SG&A expenses Cost of products sold — Other expense (income), net — Interest expense $3,931 $ (3,704) (6,362) (95) (526) — — $(10,687) December 31, 2013 — — — — $ 28 (29) $ (1) Gain (Loss) in AOCI Consolidated Statements of Operations Location Effective Portion Reclassified from AOCI into Income (Expense) Ineffective Portion Recognized in Income (Expense) (in thousands) Effective Portion: Interest rate swaps . . . . . . . . . . . . . Foreign exchange forward contracts . . . Foreign exchange forward contracts . . . . . . . . . . . . . . Commodity contracts Ineffective Portion: Foreign exchange forward contracts . . . . . . . . . . . . . . Commodity contracts Total for cash flow hedging . . . . . . . $ (166) Interest expense (6,550) Cost of products sold (294) SG&A expenses (1,004) Cost of products sold — Other expense (income), net — Interest expense $(8,014) $(3,681) 1,184 (147) (288) — — $(2,932) — — — — $666 (56) $610 96 Overall, the derivatives designated as cash flow hedges are considered to be highly effective. At December 31, 2014, the Company expects to reclassify $0.6 million of deferred net losses on cash flow hedges recorded in AOCI to the Consolidated Statements of Operations during the next 12 months. The term over which the Company is hedging exposures to variability of forecasted transactions, excluding cash flows (for all interest payments on variable interest is typically 18 months. rate debt) For the instruments rollforward of derivative designated as cash flow hedges in AOCI see Note 3, Comprehensive Income. Hedges of Net Investments in Foreign Operations The Company has significant investments in foreign are subsidiaries denominated in euros, Swiss francs, Japanese yen and the most of which significant consist of Swedish kronor. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. To hedge a portion of this exposure the Company employs both instruments. The derivative and non-derivative financial derivative instruments foreign exchange forward contracts and cross currency basis swaps. The non-derivative instruments consist of foreign currency denominated debt held at the parent company level. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in instruments derivative designated as hedges of net investments, which are included in AOCI. Any cash flows associated with these instruments are included in investing activities on the for Consolidated Statements of Cash Flows except derivative an other-than-insignificant financing element, in which case all cash flows will be classified as financing activities on the Consolidated Statements of Cash Flows. and non-derivative instruments financial include that The following table summarizes the notional amounts of hedges of net investments by derivative instrument type at December 31, 2014 and the notional amounts expected to mature during the next 12 months: (in thousands) Foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . . . . . $418,194 $237,532 Aggregate Notional Amount Aggregate Notional Amount Maturing within 12 Months On February 14, 2014, the Company de-designated foreign exchange forward 449.8 million euros of that were previously designated as net contracts investment hedges. The change in the value of the de-designated hedges will be recorded in ‘‘Other expense (income), net’’ on the Consolidated Statements of Operations and will offset the change in the value of non-designated euro denominated cross currency basis swaps as further noted in the section below titled Derivative Instruments Not Designated as Hedges. On September 4, 2014, the Company settled net investment hedges totaling 432.5 million Swiss francs. The settled hedge instruments were cross currency basis through swaps had maturities periodically that April 2018. The Company replaced these hedges with totaling new foreign exchange forwards 258.1 million Swiss francs, which have layered maturity dates from December 2014 through September 2016. These settled net investment hedges resulted in cash receipts totaling $0.1 million during September 2014. contracts, the Company would receive or pay at The fair value of the cross currency basis swaps and foreign exchange forward contracts is the estimated the amount reporting date, taking into account the effective interest rates, cross currency swap basis rates and foreign exchange rates. The effective portion of the change in the value of these derivatives is recorded in AOCI, net of tax effects. 97 The following tables summarize the amount of gains (losses) recorded in AOCI on the Consolidated Balance Sheets and income (expense) on the Company’s Consolidated Statements of Operations related to the hedges of net investments for the year ended December 31, 2014 and 2013: December 31, 2014 Gain (Loss) in AOCI Consolidated Statements of Operations Location Recognized in Income (Expense) (in thousands) Effective Portion: Cross currency basis swaps . . . . . . . . . . . . . . . . $19,340 Foreign exchange forward contracts . . . . . . . . . . Total for net investment hedging . . . . . . . . . . . 43,043 $62,383 Interest income Interest expense Other expense (income), net $ 1,852 (1,569) 1,274 $ 1,557 December 31, 2013 Gain (Loss) in AOCI Consolidated Statements of Operations Location Recognized in Income (Expense) (in thousands) Effective Portion: Cross currency basis swaps . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange forward contracts $(36,035) (5,419) Interest income Interest expense Other expense (income), net Total for net investment hedging . . . . . . . . . . . $(41,454) $4,771 1,432 284 $6,487 Fair Value Hedges The Company uses interest rate swaps to convert a portion of its fixed interest rate debt to variable interest rate debt. The Company has a group of U.S. dollar denominated interest rate swaps with an initial total notional value of $150.0 million to effectively convert the underlying fixed interest rate of 4.1% on the Company’s $250.0 million Private Placement Notes to variable rate for an initial term of five years, ending February 2016. The notional value of the swaps will (‘‘PPN’’) decline proportionately as portions of the PPN mature. These interest rate swaps are designated as fair value hedges of the interest rate risk associated with the hedged portion of the fixed rate PPN. Accordingly, the Company will carry the portion of the hedged debt at fair value, with the change in debt and swaps offsetting each other on the Consolidated Statements of Operations. Any cash flows associated with these instruments are included in operating activities on the Consolidated Statements of Cash Flows. The following table summarizes the notional amounts of fair value hedges by derivative instrument type at December 31, 2014 and the notional amounts expected to mature during the next 12 months: (in thousands) Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,000 $60,000 Aggregate Notional Amount Aggregate Notional Amount Maturing within 12 Months 98 The following tables summarize the amount of income (expense) recorded on the Company’s Consolidated Statements of Operations related to the hedges of fair value for the years ended December 31, 2014 and 2013: (in thousands) Interest rate swaps . . . . . . . . . . . . . . . . . . . Interest expense Consolidated Statements of Operations Location Income (Expense) Recognized Twelve Months Ended December 31, 2014 $224 2013 $320 Derivative Instruments Not Designated as Hedges The Company enters into derivative instruments with the intent to partially mitigate the foreign exchange revaluation risk associated with recorded assets and that are denominated in a non-functional liabilities 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 foreign exchange forward contracts and cross currency basis swaps to hedge these risks. Any cash flows associated with the foreign exchange forward contracts and interest rate swaps not designated as hedges are included in cash from operating activities on the Consolidated Statements of Cash Flows. Any cash flows associated with the cross currency basis swaps not designated as hedges are included in investing activities on the Consolidated Statements of Cash Flows include an except for derivative instruments that other-than-insignificant financing element, in which case the cash flows will be classified as financing activities on the Consolidated Statements of Cash Flows. The following tables summarize the aggregate notional amounts of the Company’s economic hedges not designated as hedges by derivative instrument types at December 31, 2014 and the notional amounts expected to mature during the next 12 months: (in thousands) Foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency basis swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total for instruments not designated as hedges . . . . . . . . . . . . . . . Aggregate Notional Amount $408,582 2,480 41,639 $452,701 Aggregate Notional Amount Maturing within 12 Months $408,582 874 41,639 $451,095 The Company maintains Swiss franc denominated cross currency basis swaps to offset an intercompany Swiss franc note receivable at a U.S. dollar functional entity. The hedge declines each quarter to coincide with expected repayments of the note. At December 31, 2014, the remaining notional value of the cross currency swaps was 41.4 million Swiss francs. intercompany On February 14, 2014, a series of U.S. dollar denominated receivables were transferred from a euro functional entity to a U.S. dollar functional entity at which point the underlying foreign by currency totaling non-designated revaluation that was currency hedged swaps cross note risk 449.8 million euro was eliminated. As a result, the Company de-designated an offsetting amount of 449.8 million euro of net investment hedges. The change in the value of the de-designated net investment hedges will be recorded in ‘‘Other expense (income), net’’ on the Consolidated Statements of Operations. December 15, 2014, the Company settled offsetting economic hedges totaling 449.8 million euros and $650.0 million U.S. dollars. The settled hedges were both cross currency basis swaps and foreign exchange forward contracts that matured December 2014. The settlement of these economic hedges resulted in net cash payments totaling $35.4 million during December 2014. 99 The following table summarizes the amounts of gains (losses) recorded on the Company’s Consolidated the years ended Statements of Operations related to the economic hedges not designated as hedging for December 31, 2014 and 2013: Consolidated Statements of Operations Location (in thousands) Foreign exchange forward contracts(a) . . . . . . . . Other expense (income), net DIO equity option contracts . . . . . . . . . . . . . . . Other expense (income), net Interest rate swaps . . . . . . . . . . . . . . . . . . . . . Cross currency basis swaps(a) . . . . . . . . . . . . . . Other expense (income), net Interest expense Total for instruments not designated as hedges . . Gain (Loss) Recognized Twelve Months Ended December 31, 2014 2013 $ 33,193 11 (35) (50,163) $(16,994) $ 6,733 17 6 15,483 $22,239 (a) The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances which are recorded in ‘‘Other expense (income), net’’ on the Consolidated Statements of Operations. Consolidated Balance Sheets Location of Derivative Fair Values The following tables summarize the fair value and consolidated balance sheet location of the Company’s derivatives at December 31, 2014 and December 31, 2013: Designated as Hedges (in thousands) Foreign exchange forward contracts . . . . . . . . . . . . . . . . Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Designated as Hedges Foreign exchange forward contracts . . . . . . . . . . . . . . . . DIO equity option contracts . . . . . . . . . . . . . . . . . . . . . Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency basis swaps . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid Expenses and Other Current Assets, Net $28,036 — 617 $28,653 $ 4,798 — — 2,683 $ 7,481 December 31, 2014 Other Noncurrent Assets, Net Accrued Liabilities Other Noncurrent Liabilities $12,542 — 135 $12,677 $ $ — — — — — $2,740 233 575 $3,548 $4,764 — 63 — $4,827 $1,707 — 377 $2,084 $ — 115 129 — $ 244 100 Designated as Hedges (in thousands) Foreign exchange forward contracts . . . . . . . . . . . . . . . . Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency basis swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Not Designated as Hedges Foreign exchange forward contracts . . . . . . . . . . . . . . . . DIO equity option contracts . . . . . . . . . . . . . . . . . . . . . Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency basis swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Prepaid Expenses and Other Current Assets, Net $1,517 — 789 530 $2,836 $3,128 — — — $3,128 December 31, 2013 Other Noncurrent Assets, Net Accrued Liabilities Other Noncurrent Liabilities $ 255 1 1,617 — $1,873 $ — — — — $ — $10,280 434 466 2,223 $13,403 $ 2,328 — 85 38,551 $40,964 $ 940 1 419 16,413 $17,773 $ — 142 256 1,941 $ 2,339 Balance Sheet Offsetting all of Substantially the Company’s derivative contracts are subject to netting arrangements, whereby the right to offset occurs in the event of default or the termination in accordance with the terms of arrangements with the counterparty. While these contracts contain the enforceable right to offset through netting arrangements with the same counterparty, the Company elects to present them on a gross basis on the Consolidated Balance Sheets. Offsetting of financial assets and liabilities under netting arrangements at December 31, 2014: Gross Amounts Not Offset in the Consolidated Balance Sheets Gross Amount Offset in the Consolidated Balance Sheets Net Amounts Presented in the Consolidated Balance Sheets Gross Amounts Recognized Financial Instruments Cash Collateral Received/ Pledged Net Amount (in thousands) Assets Foreign exchange forward contracts . . . . . . . . . . . . Interest rate swaps . . . . . . . Cross currency basis swaps . . Total Assets . . . . . . . . . . . . . $45,377 751 2,683 $48,811 $— — — $— $45,377 751 2,683 $48,811 $(7,797) (274) (1,067) $(9,138) $— — — $— $37,580 477 1,616 $39,673 101 Gross Amounts Not Offset in the Consolidated Balance Sheets Gross Amount Offset in the Consolidated Balance Sheets Net Amounts Presented in the Consolidated Balance Sheets Gross Amounts Recognized Financial Instruments Cash Collateral Received/ Pledged Net Amount (in thousands) Liabilities Foreign exchange forward contracts . . . . . . . . . . . . Commodity contracts . . . . . DIO equity option contracts . . Interest rate swaps . . . . . . . Total Liabilities . . . . . . . . . . . . $ 9,208 235 115 1,145 $10,703 $— — — — $— $ 9,208 235 115 1,145 $10,703 $(8,186) — — (952) $(9,138) $— — — — $— $1,022 235 115 193 $1,565 Offsetting of financial assets and liabilities under netting arrangements at December 31, 2013: Gross Amounts Not Offset in the Consolidated Balance Sheets Gross Amount Offset in the Consolidated Balance Sheets Net Amounts Presented in the Consolidated Balance Sheets Gross Amounts Recognized Financial Instruments Cash Collateral Received/ Pledged Net Amount (in thousands) Assets Foreign exchange forward contracts . . . . . . . . . . . . Commodity contracts . . . . . Interest rate swaps . . . . . . . Cross currency basis swaps . . Total Assets . . . . . . . . . . . . . $4,900 1 2,406 530 $7,837 $— — — — $— $4,900 1 2,406 530 $7,837 $(4,641) (1) (1,979) (530) $(7,151) $— — — — $— $259 — 427 — $686 Gross Amounts Not Offset in the Consolidated Balance Sheets Gross Amount Offset in the Consolidated Balance Sheets Net Amounts Presented in the Consolidated Balance Sheets Gross Amounts Recognized Financial Instruments Cash Collateral Received/ Pledged Net Amount (in thousands) Liabilities Foreign exchange forward contracts . . . . . . . . . . . . Commodity contracts . . . . . DIO equity option contracts . . Interest rate swaps . . . . . . . Cross currency basis swaps . . Total Liabilities . . . . . . . . . . . . $13,548 435 142 1,226 59,128 $74,479 $13,548 435 142 1,226 59,128 $74,479 $(3,467) (1) — (62) (3,621) $(7,151) $— — — — — $— $10,081 434 142 1,164 55,507 $67,328 $— — — — — $— 102 NOTE 18 — FAIR VALUE MEASUREMENT in AOCI instruments The Company records financial instruments at fair value with unrealized gains and losses related to certain financial the reflected Consolidated Balance Sheets. In addition, the Company recognizes certain liabilities at fair value. The Company recurring fair value applies the market approach for measurements. Accordingly, utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. the Company on The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. The Company believes the carrying amounts of cash and cash equivalents, accounts receivable (net of allowance for doubtful accounts), prepaid expenses and other current assets, accounts income taxes payable and payable, accrued liabilities, current including notes payable approximate fair value due to the short-term nature of these instruments. The Company estimated the fair value and carrying value of its total long-term debt, portion, was $1,290.0 million and $1,262.7 million, respectively, at the December 31, 2014. At December 31, 2013, Company estimated the fair value and carrying value was $1,387.7 million and $1,370.8 million, respectively. The interest rate on the $450.0 million Senior Notes, the $300.0 million Senior Notes, and the $250.0 million Private Placement Notes are fixed rates of 4.1%, 2.8% and 4.1%, respectively, and their fair value is based on the interest rates at December 31, 2014. The interest rates on variable rate term loan debt and commercial paper are consistent with current market conditions, therefore the fair value of these instruments approximates their carrying values. The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at December 31, 2014 and 2013, which are classified as ‘‘Cash and cash equivalents,’’ ‘‘Prepaid expenses and other current assets,’’ ‘‘Long-Term investments,’’ ‘‘Other noncurrent assets, net,’’ ‘‘Accrued liabilities,’’ and ‘‘Other noncurrent liabilities’’ on the Consolidated Balance Sheets. Financial assets and liabilities that are recorded at fair value as of the balance sheet date are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. December 31, 2014 Total Level 1 Level 2 Level 3 (in thousands) Assets Interest rate swaps . . . . . . . . . . . . . . . . . . . . . Cross currency interest rate swaps . . . . . . . . . . . . Foreign exchange forward contracts . . . . . . . . . . Corporate convertible bonds . . . . . . . . . . . . . . . $ 752 2,683 45,376 57,698 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $106,509 Liabilities Interest rate swaps . . . . . . . . . . . . . . . . . . . . . Commodity forward purchase contracts . . . . . . . . Foreign exchange forward contracts . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . DIO equity option contracts . . . . . . . . . . . . . . . . $ 1,144 233 9,211 106,023 115 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . $116,726 $— — — — $— $— — — — — $— $ 752 2,683 45,376 — $ 48,811 $ 1,144 233 9,211 106,023 — $116,611 $ — — — 57,698 $57,698 $ $ — — — — 115 115 103 December 31, 2013 Total Level 1 Level 2 Level 3 (in thousands) Assets Interest rate swaps . . . . . . . . . . . . . . . . . . . . . Commodity forward purchase contracts . . . . . . . . Cross currency interest rate swaps . . . . . . . . . . . . Foreign exchange forward contracts . . . . . . . . . . Corporate convertible bonds . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Interest rate swaps . . . . . . . . . . . . . . . . . . . . . Commodity forward purchase contracts . . . . . . . . Cross currency interest rate swaps . . . . . . . . . . . . Foreign exchange forward contracts . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . DIO equity option contracts . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . $ 2,406 1 530 4,900 70,019 $ 77,856 $ 1,226 435 59,128 13,548 152,370 142 $226,849 $— — — — — $— $— — — — — $— $— $ 2,406 1 530 4,900 — $ 7,837 $ 1,226 435 59,128 13,548 152,370 — $226,707 $ — — — — 70,019 $70,019 $ $ — — — — — 142 142 Derivative valuations are based on observable inputs to the valuation model including interest rates, foreign currency exchange rates, future commodities prices and credit risks. The commodity contracts, certain interest rate swaps and foreign exchange forward contracts are considered cash flow hedges and certain cross currency rate swaps are considered hedges of net interest investment in foreign operations as discussed in Note 17, Financial Instruments and Derivatives. The Company uses the income method valuation technique to estimate the fair value of the corporate bonds. The significant unobservable inputs for valuing the corporate bonds are DIO Corporation’s stock volatility factor of approximately 40% and corporate bond rating which implies an approximately 9.4% discount rate on the valuation model. Significant observable inputs used to value the corporate bonds include foreign exchange rates and DIO Corporation’s period-ending market stock price. The Company has valued the DIO equity option contracts using a Monte Carlo simulation which uses several estimates and probability assumptions by management including the future stock price, the stock price as a multiple of DIO earnings and the probability of the sellers to reduce their shares held by selling into the open market. Changes in the fair value of the DIO equity option contracts are reported in ‘‘Other expense (income), net’’ on the Consolidated Statements of Operations. For the years ended December 31, 2014 and 2013, there were no purchases, issuances or transfers of Level 3 financial instruments. 104 The following table presents a reconciliation of the Company’s Level 3 holdings measured at fair value on a recurring basis using unobservable inputs: Corporate Convertible Bonds DIO Equity Options Contracts (in thousands) Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75,143 $(153) Unrealized loss: Reported in AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,592) — Unrealized gain: Reported in other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,468 $70,019 17 (6) $(142) Unrealized loss: Reported in AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,450) $ — Unrealized gain: Reported in other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (7,871) 11 16 Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $57,698 $(115) NOTE 19 — COMMITMENTS AND CONTINGENCIES Leases The Company leases automobiles and machinery and equipment and certain office, warehouse and manufacturing facilities under non-cancelable leases. The leases generally require the Company to pay insurance, taxes and other expenses related to the leased property. Total rental expense for all operating leases was $37.4 million, $39.7 million and $42.3 million for 2014, 2013 and 2012, respectively. Rental commitments, principally for real estate (exclusive of taxes, insurance and maintenance), automobiles and office equipment are as follows: (in thousands) 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,583 26,246 19,418 15,047 11,256 10,755 $117,305 Litigation On June 18, 2004, Marvin Weinstat, DDS and Richard Nathan, DDS filed a class action suit in San Francisco County, California alleging that the Company misrepresented that its Cavitron(cid:5) ultrasonic scalers are suitable for use in oral surgical procedures. The Complaint seeks a recall of the product and refund of its purchase price to dentists who have purchased it for use in oral surgery. The Court certified the case as a class action in June 2006 with respect to the breach of warranty and unfair business practices claims. The class that was certified is defined as California dental professionals who, at any time during the period beginning June 18, 2000 through September 14, 2012, purchased and used one or more Cavitron(cid:5) ultrasonic scalers for the performance of oral surgical procedures on their patients, which Cavitrons(cid:5) were accompanied by Directions for Use that ‘‘Indicated’’ Cavitron(cid:5) use for ‘‘periodontal debridement for all types of periodontal disease.’’ The case went to trial in September 2013, and on January 22, 2014, the San Francisco Superior Court issued its decision in the Company’s favor, rejecting all of the plaintiffs’ claims. The 105 plaintiffs have appealed the Superior Court’s decision, and the appeal is now pending. The Company intends to defend against this appeal. of (the that District Pennsylvania and asserts seeks damages On December 12, 2006, a Complaint was filed by Carole Hildebrand, DDS and Robert Jaffin, DDS in the Plaintiffs Eastern subsequently added Dr. Mitchell Goldman as a named class representative). The case was filed by the same law firm that filed the Weinstat case in California. The Complaint asserts putative class action claims on behalf of dentists located in New Jersey and Pennsylvania. The Complaint the Company’s Cavitron(cid:5) ultrasonic scaler was negligently designed and sold in breach of contract and warranty arising from misrepresentations about the potential uses of the product because it cannot assure the delivery of potable or sterile water. Following grant of a Company Motion and dismissal of the case for lack of jurisdiction, the plaintiffs filed a second complaint under the name of Dr. Hildebrand’s practice, Center City Periodontists, asserting the same allegations (this case is now proceeding under ‘‘Center City Periodontists’’). The plaintiffs moved to have the case certified as a class action, to which the Company has objected and filed its brief. The Court subsequently granted a Motion filed by the Company and dismissed plaintiffs’ New Jersey Consumer Fraud and negligent design claims, leaving only a breach of express warranty claim, in response to which the Company has filed a Motion for Summary Judgment. The Court has scheduled a hearing in early March 2015 on plaintiffs’ class certification motion. the name corporate that things, On January 20, 2014, the Company was served with a qui tam complaint filed by two former and one current employee of the Company under the Federal False Claims Act and equivalent state and city laws. The lawsuit was previously under seal in the U.S. District Court for the Eastern District of Pennsylvania. The complaint alleges, among other the Company engaged in various illegal marketing activities, and thereby caused dental and other healthcare professionals to file false claims reimbursement with Federal and State governments. The relators seek injunctive relief, fines, fees and costs. On treble damages, and attorneys’ January 27, 2014, the United States filed with the Court a notice that it had elected not to intervene in the qui tam action at this time. The United States’ notice indicated that the named state and city co-plaintiffs had authorized the United States to communicate to the Court that they for also had decided not to intervene at this time. These non-intervention decisions do not prevent the qui tam relators from litigating this action, and the United States and/or the named states and/or cities may seek to intervene in the action at a later time. On September 4, 2014, the Company’s motion to dismiss the complaint was granted in part and denied in part. The Company intends to vigorously defend itself in the litigation. The Company does not believe a loss is probable related to the above litigation. Further a reasonable estimate of a possible range of loss cannot be made. In the event is unfavorably resolved, it is possible the Company’s results from operations could be materially impacted. that one or more of these matters (‘‘OFAC’’) requesting documents In 2012, the Company received subpoenas from the United States Attorney’s Office for the Southern District of Indiana (the ‘‘USAO’’) and from the Office of Foreign Assets Control of the United States Department of the Treasury and information related to compliance with export controls its and economic sanctions regulations by certain of subsidiaries. The Company has voluntarily contacted OFAC and the Bureau of Industry and Security of the in United States Department of Commerce (‘‘BIS’’), connection with these matters as well as regarding compliance with export controls and economic sanctions regulations by certain other business units of the Company identified in connection with an internal review by the Company. The Company is cooperating with the USAO, OFAC and BIS with respect to these matters. At this stage of the inquiries, the Company is unable to predict the ultimate outcome of these matters or what impact, if any, the outcome of these matters might have on the Company’s consolidated financial position, results of operations or cash flows. Violations of export control or economic sanctions laws or regulations could result in a range of governmental enforcement actions, including fines or penalties, injunctions and/or criminal or other civil proceedings, which actions could have a material adverse effect on the Company’s reputation, business, financial condition and results of operations. At this time, no claims have been made against the Company. In addition to the matters disclosed above, the Company is, from time to time, subject to a variety of litigation and similar proceedings to its business. These legal matters primarily involve claims for the Company’s damages arising out of products and services and claims relating to intellectual the use of incidental 106 patent including property matters infringement, employment matters, tax matters, commercial disputes, competition and sales and trading practices, personal injury and insurance coverage. The Company may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, representations, warranties or indemnities provided in these connection with, divested businesses. Some of lawsuits may and punitive consequential, as well as compensatory damages. Based upon the Company’s experience, current information and applicable law, it does not believe that these proceedings and claims will have a material adverse effect on its consolidated results of operations, financial position or liquidity. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to the Company’s business, financial condition, results of operations or liquidity. include claims for While the Company maintains general, products, property, workers’ compensation, automobile, cargo, aviation, crime, fiduciary and directors’ and officers’ liability insurance up to certain limits that cover certain of these claims, insurance may be insufficient or unavailable to cover such losses. In addition, while the this Company believes it is entitled to indemnification from third parties for some of these claims, these rights may also be insufficient or unavailable to cover such losses. Purchase and Other Commitments From time to time, the Company enters into commitments with purchase long-term inventory minimum purchase requirements for raw materials and finished goods to ensure the availability of products for production and distribution. These commitments may inventory have a significant maintained by the Company. impact on levels of The Company has employment agreements with its executive officers. These agreements generally provide for salary continuation for a specified number of months under certain circumstances. If all of the employees under contract were to be terminated by the Company without cause, as defined in the agreements, the Company’s liability would be approximately $16.7 million at December 31, 2014. The Company is required to complete the purchase of the remaining shares of one noncontrolling interest, acquired in 2008, during 2015. The final purchase price is subject to adjustment but is currently expected to be approximately 73.5 million euros. 107 NOTE 20 — QUARTERLY FINANCIAL INFORMATION (UNAUDITED) DENTSPLY INTERNATIONAL INC. Quarterly Financial Information (Unaudited) (in thousands, except per share amounts) 2014 Net sales . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . Net income attributable to DENTSPLY International . . . . . . . . . . Earnings per common share − basic . . . . Earnings per common share − diluted . . . Cash dividends declared per common First Quarter Second Quarter Third Quarter Fourth Quarter Rounding Total Year $730,114 394,205 105,570 $765,225 424,469 127,106 $708,240 388,064 109,581 $719,041 393,051 103,343 $ — $2,922,620 1,599,789 445,600 — — 72,878 0.51 0.50 $ $ 89,993 0.63 0.62 $ $ 75,273 0.53 0.52 $ $ 84,710 0.60 0.59 $ $ — $0.01 $0.01 322,854 2.28 2.24 $ $ share . . . . . . . . . . . . . . . . . . . . . . $0.06625 $0.06625 $0.06625 $0.06625 $ — $ 0.26500 2013 Net sales . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . Net income attributable to DENTSPLY International . . . . . . . . . . Earnings per common share − basic . . . . Earnings per common share − diluted . . . Cash dividends declared per common $732,084 388,200 93,858 $761,010 414,956 122,866 $704,018 376,417 105,021 $753,658 397,839 97,421 $ — $2,950,770 1,577,412 419,166 — — 71,685 0.50 0.49 $ $ 87,228 0.61 0.60 $ $ 79,851 0.56 0.55 $ $ 74,428 0.52 0.51 $ $ — $0.01 $0.01 313,192 2.20 2.16 $ $ share . . . . . . . . . . . . . . . . . . . . . . $ 0.0625 $ 0.0625 $ 0.0625 $ 0.0625 $ — $ 0.2500 Net sales, excluding precious metal content, were $689.2 million, $730.9 million, $681.6 million and $691.0 million, respectively, for the first, second, third and fourth quarters of 2014. Net sales, excluding precious metal content, were $672.6 million, $716.0 million, $669.4 million and $713.7 million, respectively, for the first, second, third and fourth quarters of 2013. This measurement should be considered a non-US GAAP measure as discussed further in Management’s Discussion and Analysis of Financial Condition and Results of Operations. 108 Pursuant to the requirements of Section 13(a) or 15(d) 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. SIGNATURES DENTSPLY INTERNATIONAL INC. By: /s/ Bret W. Wise Bret W. Wise Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Bret W. Wise Bret W. Wise Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Christopher T. Clark Christopher T. Clark President and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Dr. Michael C. Alfano Dr. Michael C. Alfano Director /s/ Eric K. Brandt Eric K. Brandt Director /s/ Paula H. Cholmondeley Paula H. Cholmondeley Director /s/ Michael J. Coleman Michael J. Coleman Director /s/ Willie A. Deese Willie A. Deese Director /s/ William F. Hecht William F. Hecht Director /s/ Leslie A. Jones Leslie A. Jones Director /s/ Francis J. Lunger Francis J. Lunger Director /s/ /s/ John L. Miclot John L. Miclot Director John C. Miles II John C. Miles II Director 109 February 20, 2015 Date February 20, 2015 Date February 20, 2015 Date February 20, 2015 Date February 20, 2015 Date February 20, 2015 Date February 20, 2015 Date February 20, 2015 Date February 20, 2015 Date February 20, 2015 Date February 20, 2015 Date February 20, 2015 Date Across the global business, our Associates are joining forces to enhance our customer value proposition, build on our strengths and create efficiencies to reinvest for growth. FINANCIAL HIGHLIGHTS I N T H O U S A N D S , E X C E P T F O R P E R S H A R E D ATA Y E A R E N D E D D E C E M B E R 3 1 , IN COME STATEMENT DATA 2 01 4 2 01 3 2 01 2 2011 Net Sales Net Sales Excluding Precious Metal Content Net Income Attributable to dentsply International Earnings Per Common Share – Diluted Adjusted Earnings Per Common Share – Diluted 1, 2, 3, 4, 5 Cash Dividends Declared Per Common Share FIN AN CIA L POSITION Cash and Cash Equivalents Total Debt Total Equity $ $ $ $ $ $ $ $ $ 2,922,620 2,792,676 322,854 2.24 2.50 0.265 2 01 4 151,639 1,265,713 2,322,198 $ $ $ $ $ $ $ $ $ 2,950,770 2,771,728 313,192 2.16 2.35 0.250 2 01 3 74,954 1,476,040 2,577,974 $ $ $ $ $ $ $ $ $ 2,928,429 2,714,698 314,213 2.18 2.22 0.220 2 01 2 80,132 1,520,998 2,249,443 $ $ $ $ $ $ $ $ $ 2,537,718 2,332,589 244,520 1.70 2.03 0.205 2011 77,128 1,766,711 1,884,151 1 2014 – Excludes amortization of purchased intangibles, net of tax, of $33.6 million; after-tax acquisition and restructuring and other costs of $10.5 million; after-tax gain on credit risk adjustments to outstanding derivatives of $0.5 million; after-tax gain on fair value adjustment related to an unconsolidated affiliated company of $1.2 million and income tax related adjustments of $4.3 million. These items had a negative impact of $0.26 on earnings per diluted common share. 2 2013 – Excludes amortization of purchased intangible assets, net of tax, of $32.3 million; after-tax acquisition and restructuring and other costs of $15.6 million; after-tax loss on credit risk adjustments to outstanding derivatives of $2.3 million; after-tax gain on fair value adjustment related to an unconsolidated affiliated company of $1.2 million and income tax related adjustments of $21.0 million. These items had a negative impact of $0.19 on earnings per diluted common share. 3 2012 – Excludes amortization of purchased intangible assets, net of tax, of $33.6 million; after-tax acquisition and restructuring and other costs of $27.9 million; after-tax loss on fair value adjustment related to an unconsolidated affiliated company of $2.9 million; after-tax orthodontic business continuity costs of $0.6 million and income tax related adjustments of $60.0 million. These items had a negative impact of $0.04 on earnings per diluted common share. 4 2011 – Excludes after-tax acquisition and restructuring and other costs of $74.1 million; amortization of purchased intangible assets, net of tax, of $14.4 million; after-tax orthodontic business continuity costs of $2.1 million; after-tax loss on credit risk adjustment to outstanding derivatives of $0.8 million; after-tax gain on the fair value adjustment related to an unconsolidated affiliated company of $2.5 million and income tax related adjustments of $41.1 million. These items had a negative impact of $0.33 on earnings per diluted common share. 5 Adjusted earnings per diluted share is a non-GAAP measure that excludes certain items. For a reconciliation of U.S. GAAP results to this non-GAAP measure, refer to Item 7 of our 2014 annual report on Form 10-K. DIRECTORS AND OFFICERS board of directors Bret W. Wise 54 Chairman, Chief Executive Officer DENTSPLY INTERNATIONAL INC. director since 2006 Michael C. Alfano, D.M.D., Ph.D. 67 Executive Vice President Emeritus NEW YORK UNIVERSITY director since 2001 Eric K. Brandt 52 Executive Vice President, Chief Financial Officer BROADCOM CORPORATION director since 2004 Paula H. Cholmondeley 67 Former Vice President SAPPI FINE PAPER director since 2001 Michael J. Coleman 71 Chairman COOL MEDIA CONSULTANTS director since 1991 Willie A. Deese 59 Executive Vice President MERCK & CO., INC. President MERCK MANUFACTURING DIVISION director since 2011 officers and management Bret W. Wise Chairman, Chief Executive Officer Christopher T. Clark President, Chief Financial Officer James G. Mosch Executive Vice President, Chief Operating Officer Robert J. Size Senior Vice President Albert J. Sterkenburg Senior Vice President Markus Boehringer Operating Vice President Steven E. Jenson Operating Vice President Thomas G. Leonardi Operating Vice President William E. Newell Operating Vice President Teresa A. Dolan, D.M.D., M.P.H. Vice President, Chief Clinical Officer Derek W. Leckow Vice President, Investor Relations William F. Hecht 72 Chairman, Chief Executive Officer and President, Retired PPL CORPORATION director since 2001 Leslie A. Jones 75 Chairman and Senior Vice President, Retired DENTSPLY INTERNATIONAL INC. director since 1983 Francis J. Lunger 69 Chairman, Chief Executive Officer and President, Retired MILLIPORE CORPORATION director since 2005 John L. Miclot 56 President and Chief Executive Officer LINGUAFLEX, INC. director since 2010 John C. Miles II 73 Chairman and Chief Executive Officer, Retired DENTSPLY INTERNATIONAL INC. director since 1990 Andrew M. Lichkus, Ph.D. Vice President, Chief Technology Officer Maureen J. MacInnis Vice President, Chief Human Resources Officer James P. McNulty Vice President, Global Supply Chain Charles K. Pigott Vice President, Quality and Regulatory Affairs Deborah M. Rasin Vice President, Secretary and General Counsel William E. Reardon Vice President, Treasurer William J. Schlageter IV Vice President, Chief Information Officer Richard M. Wagner Vice President, Corporate Controller Robert J. Winters Vice President, Tax world headquarters dentsply International Inc. World Headquarters Susquehanna Commerce Center 221 West Philadelphia Street, Suite 60W York, pa 17405 Phone (717) 845-7511 independent registered public accounting firm PricewaterhouseCoopers LLP Two Commerce Square, Suite 1700 2001 Market Street Philadelphia, pa 19103-7042 Phone (267) 330-3000 stock listing nasdaq’s National Market Symbol: xray annual meeting The 2015 Annual Meeting will be held on Wednesday, May 20, at 9:30 a.m. at: dentsply International Inc. World Headquarters Susquehanna Commerce Center 221 West Philadelphia Street, Suite 60W York, pa 17405 investor relations, form 10-k and other information If you would like to receive our Investor Package, or a copy of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission, or be placed on the Company’s mailing list, please contact: Derek Leckow Vice President, Investor Relations dentsply International Inc. Susquehanna Commerce Center 221 West Philadelphia Street, Suite 60W York, pa 17405 Phone (717) 849-7863 Fax (717) 849-4756 Email: investor@dentsply.com trademarks All brand names used in this report are owned by or licensed trademarks of dentsply International Inc., or its subsidiaries. transfer agent and registrar If your stock certificate is lost, stolen or destroyed, or if you change your address, please contact the Shareholder Services Department at: American Stock Transfer & Trust Company 6201 15th Ave. Brooklyn, New York, ny 11219 www.amstock.com Toll-free (800) 937-5449 Certain statements made in this Annual Report, including, without limitation, statements regarding future sales and development of products and markets, may be deemed to be forward-looking statements that involve risks and uncertainties. Such statements are made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with prior descriptions of risk factors by the Company, including specifically the risk factors discussed within the Company's Annual Report on Form 10-K for the year ended December 31, 2014. Such factors could cause actual results to differ materially from those expressed in any forward-looking statements contained in this Annual Report. SHAREHOLDER INFORMATION F O C U S D E N T S P L Y 2 0 1 4 A N N U A L R E P O R T W O R L D H E A D Q U A R T E R S Susquehanna Commerce Center 221 West Philadelphia Street Suite 60W York, PA 17405 717.845.7511 d e n t s p l y . c o m 2 0 1 4 A N N U A L R E P O R T