None.
Not Applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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 declaredApproximately 97,108 holders of the Company’sour common stock as reported on the Nasdaq National Market:
Performance Graph
The information contained in the Performance Graph section shall not be deemed to be filed as part of this Annual Report and does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent we specifically incorporate the graph by reference.
The graph below compares DENTSPLY SIRONA Inc.'s’s cumulative 5-year total shareholder return on common stock with the cumulative total returns of the S&P 500 indexIndex and the S&P Health Care index. The graph tracks the performance of a $100 investment in DENTSPLY SIRONA’s Inc.’s common stock and in each index (with the reinvestment of all dividends) from December 31, 20122018 to December 31, 2017.2023. The S&P 500 Stock Index and the S&P Health Care Index are included for comparative purposes only. They do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of the stock involved, and they are not intended to forecast or be indicative of possible future performance of the Company’s common stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/18 | | 12/19 | | 12/20 | | 12/21 | | 12/22 | | 12/23 |
DENTSPLY SIRONA Inc. | 100.00 | | | 152.87 | | | 142.74 | | | 153.19 | | | 88.67 | | | 100.63 | |
S&P 500 | 100.00 | | | 131.49 | | | 155.68 | | | 200.37 | | | 164.08 | | | 207.21 | |
S&P Health Care | 100.00 | | | 120.82 | | | 137.07 | | | 172.89 | | | 169.51 | | | 172.99 | |
|
| | | | | | | | | | | | | | | | | |
| 12/12 | | 12/13 | | 12/14 | | 12/15 | | 12/16 | | 12/17 |
DENTSPLY SIRONA Inc. | 100.00 |
| | 123.10 |
| | 136.01 |
| | 156.20 |
| | 148.95 |
| | 170.79 |
|
S&P 500 | 100.00 |
| | 132.39 |
| | 150.51 |
| | 152.59 |
| | 170.84 |
| | 208.14 |
|
S&P Health Care | 100.00 |
| | 141.46 |
| | 177.30 |
| | 189.52 |
| | 184.42 |
| | 225.13 |
|
Item 6. Selected Financial Data
DENTSPLY SIRONA INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(in millions, except per share amounts, days and percentages)
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.
|
| | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016(a) | | 2015 | | 2014 | | 2013 |
| | | | | | | | | |
Statement of Operations Data: | | | | | | | | | |
Net sales | $ | 3,993.4 |
| | $ | 3,745.3 |
| | $ | 2,674.3 |
| | $ | 2,922.6 |
| | $ | 2,950.8 |
|
Net sales, excluding precious metal content (b) | 3,952.9 |
| | 3,681.0 |
| | 2,581.5 |
| | 2,792.7 |
| | 2,771.7 |
|
Gross profit | 2,188.5 |
| | 2,000.9 |
| | 1,517.2 |
| | 1,599.8 |
| | 1,577.4 |
|
Goodwill impairment | 1,650.9 |
| | — |
| | — |
| | — |
| | — |
|
Restructuring and other costs | 425.2 |
| | 23.2 |
| | 64.7 |
| | 11.1 |
| | 13.4 |
|
Operating (loss) income | (1,562.3 | ) | | 454.7 |
| | 375.2 |
| | 445.6 |
| | 419.2 |
|
(Loss) income before income taxes | (1,603.5 | ) | | 440.9 |
| | 329.7 |
| | 404.4 |
| | 369.3 |
|
Net (loss) income | (1,550.3 | ) | | 431.4 |
| | 251.1 |
| | 322.9 |
| | 318.2 |
|
Net (loss) income attributable to Dentsply Sirona | $ | (1,550.0 | ) | | $ | 429.9 |
| | $ | 251.2 |
| | $ | 322.9 |
| | $ | 313.2 |
|
| | | | | | | | | |
Net (loss) income per common share attributable to Dentsply Sirona: | | |
| | |
| | |
| | |
|
Basic | (6.76 | ) | | 1.97 |
| | 1.79 |
| | 2.28 |
| | 2.20 |
|
Diluted | (6.76 | ) | | 1.94 |
| | 1.76 |
| | 2.24 |
| | 2.16 |
|
| | | | | | | | | |
Cash dividends declared per common share | 0.350 |
| | 0.310 |
| | 0.290 |
| | 0.265 |
| | 0.250 |
|
| | | | | | | | | |
Weighted Average Common Shares Outstanding: | |
| | |
| | |
| | |
| | |
|
Basic | 229.4 |
| | 218.0 |
| | 140.0 |
| | 141.7 |
| | 142.7 |
|
Diluted | 229.4 |
| | 221.6 |
| | 142.5 |
| | 144.2 |
| | 145.0 |
|
| | | | | | | | | |
Balance Sheet Data: | |
| | |
| | |
| | |
| | |
|
Cash and cash equivalents | 320.6 |
| | 383.9 |
| | 284.6 |
| | 151.6 |
| | 75.0 |
|
Property, plant and equipment, net | 876.0 |
| | 799.8 |
| | 558.8 |
| | 588.8 |
| | 637.2 |
|
Goodwill and other intangibles, net | 7,339.9 |
| | 8,909.6 |
| | 2,588.3 |
| | 2,760.1 |
| | 3,076.9 |
|
Total assets | 10,374.5 |
| | 11,555.8 |
| | 4,402.9 |
| | 4,646.5 |
| | 5,073.6 |
|
Total debt, current and long-term portions (c) | 1,641.7 |
| | 1,532.2 |
| | 1,153.1 |
| | 1,261.9 |
| | 1,471.6 |
|
Equity | 6,627.9 |
| | 8,125.9 |
| | 2,339.4 |
| | 2,322.2 |
| | 2,578.0 |
|
Return on average equity | NM |
| | 8.2 | % | | 10.8 | % | | 13.2 | % | | 13.0 | % |
Total net debt to total capitalization (d) | 16.6 | % | | 12.4 | % | | 27.1 | % | | 32.3 | % | | 35.1 | % |
| | | | | | | | | |
Other Data: | |
| | |
| | |
| | |
| | |
|
Depreciation and amortization | $ | 316.4 |
| | $ | 271.7 |
| | $ | 122.9 |
| | $ | 129.1 |
| | $ | 127.9 |
|
Cash flows from operating activities | 601.9 |
| | 563.4 |
| | 497.4 |
| | 560.4 |
| | 417.8 |
|
Capital expenditures | 144.3 |
| | 125.0 |
| | 72.0 |
| | 99.6 |
| | 100.3 |
|
Interest expense (income), net | 35.9 |
| | 33.9 |
| | 53.7 |
| | 41.3 |
| | 41.5 |
|
Inventory days | 131 |
| | 113 |
| | 110 |
| | 113 |
| | 114 |
|
Receivable days | 61 |
| | 58 |
| | 54 |
| | 55 |
| | 56 |
|
Effective tax rate | 3.3 | % | | 2.2 | % | | 23.4 | % | | 20.1 | % | | 14.1 | % |
NM - Not meaningful
(a) Includes the results of the Sirona merger from February 29, 2016 through December 31, 2016. Information prior to February 29, 2016 refers to DENTSPLY International Inc only.
(b) 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.
(c) Total debt amounts shown are net of deferred financing costs.
(d) The Company defines net debt as total debt, including current and long-term portions less deferred financing costs, less cash and cash equivalents and total capitalization as the sum of net debt plus equity.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following Management’s Discussion and Analysis of Financial Conditions and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s operations and business environment. MD&A is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained in ItemsItem 8 and 15 of this Form 10-K. The following discussion includes forward-looking statements that involve certain risks and uncertainties. See Part I, Item IA (“Part Business-Forward-Looking1, “Business - Forward-Looking Statements and Associated Risks”) in the beginning of this Form 10-K. The MD&A includes the following sections:
•Business - a general description of Dentsply Sirona’s business and how performance is measured;
•Results of Operations - an analysis of the Company’s consolidated results of operations for the three years presented in the Consolidated Financial Statements;ended December 31, 2023 and 2022;
•Critical Accounting Policies and Estimates - a discussion of accounting policies that require critical judgments and estimates; and
•Liquidity and Capital Resources - an analysis of cash flows; debt and other obligations; off-balance sheet arrangements; and aggregate contractual obligations.
On February 29, 2016, DENTSPLY International Inc. merged with Sirona Dental Systems, Inc. (“Sirona”) to form Dentsply Sirona Inc. (the “Merger”) The accompanying financial information for the Company for the year ended December 31, 2016, include the results of operations for Sirona for the period February 29, 2016 to December 31, 2016.
References to the ”combined business” or the “combined businesses” are included below to provide comparisons of net sales performance from year to year as if the businesses were combined on January 1, 2015.
20172023 Operational Highlights
For the year ended December 31, 2017,2023,
•Net sales increased 1.1% compared to the prior year. On an organic basis (a Non-GAAP measure as defined under the heading “Key Performance Measurements” below) net sales increased 6.6% compared to2.2% for the year ended December 31, 2016. Net sales, excluding precious metal content, increased 7.4%2023 compared to the prior year. The increase in sales primarily reflects the impact of consolidating twelve months of Sirona’s sales in 2017 as compared to ten months of sales in 2016. For the year ended December 31, 2017, sales of our combined businesses (a non-US GAAP measure as referenced above), grew 1.6% on a constant currency basis including a benefit of 1.8% from net acquisitions. Net sales excluding precious metal content, were favorablynegatively impacted by approximately 1.0%1.1% due to the weakeningstrengthening of the U.S. dollar over the prior year period.
•Net loss was $132 million as compared to net loss of $950 million for the prior year primarily due to lower goodwill and intangible asset impairment charges of $307 million compared to $1,287 million in the prior year. Diluted loss per share was $0.62 per share compared to diluted loss per share of $4.41 in the prior year.
•Cash from operations was $377 million, as compared to $517 million in the prior year.
Company Profile
DENTSPLY SIRONA Inc. (“Dentsply Sirona” or the “Company”), is the world’s largest manufacturer of professional dental products and technologies, with a 137-year history of innovation and service to the dental industry and patients worldwide. Dentsply Sirona develops, manufactures, and markets a comprehensive solutions offering including dental equipment and dental consumable products under a strong portfolio of world class brands. The Company also manufactures and markets certain healthcare consumable products for continence care. Dentsply Sirona’s products provide innovative, high-quality and effective solutions to advance patient care and deliver better, safer and faster dentistry. Dentsply Sirona’s worldwide headquarters is located in Charlotte, North Carolina. The Company’s shares of common stock are listed in the United States on Nasdaq under the symbol XRAY.
BUSINESS
Effective April 1, 2023, the Company realigned its reporting structure due to certain organizational changes. As a result, the Company’s reportable segments changed from Technology & Equipment and Consumables to (i) Connected Technology Solutions, (ii) Essential Dental Solutions, (iii) Orthodontic and Implant Solutions, and (iv) Wellspect Healthcare. All comparative segment information and disaggregated revenue information has been recast to reflect the Company’s new segment structure and current period presentation.
Segment Descriptions
A description of the products and services provided within each of the Company’s four reportable segments is provided below.
Connected Technology Solutions
This segment includes the design, manufacture, and sales of the Company’s dental technology and equipment products. These products include the Equipment & Instruments and CAD/CAM product categories.
Essential Dental Solutions
This segment includes the development, manufacture, and sales of the Company’s value-added endodontic, restorative, and preventive consumable products and small equipment used in dental offices for the treatment of patients. Offerings in this segment also include specialized treatment products including products used in the creation of dental appliances.
Orthodontic and Implant Solutions
This segment includes the design, manufacture, and sales of the Company’s various digital implant systems and innovative dental implant products, digital dentures and dental professional directed aligner solutions. Offerings in this segment also include application of our digital services and technology, including those provided by DS Core, our cloud-based platform.
Wellspect Healthcare
This segment includes the design, manufacture, and sales of the Company’s innovative continence care solutions for both urinary and bowel management. This category consists mainly of urology catheters and other healthcare-related consumable products.
The impact of global economic conditions
Markets in several regions, particularly Europe, continue to experience varying degrees of recessionary pressures and face concerns about the systemic impacts of adverse economic conditions and geopolitical issues. Changes in economic conditions, supply chain constraints, higher energy costs, labor shortages, the conflict in Ukraine, and geopolitical tensions in the Middle East, have all contributed to a period of higher inflation across the industry and the regions in which the Company operates. As a result, the Company has experienced higher prices for certain raw materials, particularly for electronic components which have in some cases required incremental procurement costs such as brokers’ fees during the year, and consequently a negative impact on margins. Although these trends improved in most regions in the second half of 2023, we expect a continuation of inflationary pressure on the cost of both raw materials and wages into 2024, the effect of which will depend on the Company’s ability to successfully mitigate and offset the related impacts.
The deterioration in macroeconomic conditions has also negatively impacted demand for the Company’s products and may continue to do so in the future. Specifically, higher interest rates have put pressure on the ability and willingness of our customers to obtain financing for equipment purchases, which affects volumes for these products. The impact of macroeconomic declines and high interest rates has been particularly apparent in Germany, which accounts for 11% of the Company’s sales. Germany was in a recession for most of 2023, largely due to persistent high inflation and falling household spending. In Germany and in other markets, pressures on discretionary consumer spending have depressed demand for elective dental procedures including sales of implants products. Additionally, these trends lead to additional competitive pressure for lower-priced options for investments in new equipment by dental practices. The Company believes the challenging conditions in Germany are likely to persist into 2024, which may further impact the Company’s sales of products in this market.
In anticipation of a continued inflationary trend and potentially deteriorating macroeconomic environment, the Company has attempted to mitigate these pressures through the following actions, among others:
•Driving strategic procurement initiatives to leverage alternative sources of raw materials and transportation;
•Implementing cost-containment measures, as well as intensifying continuous improvement and restructuring programs in our manufacturing and distribution facilities and other areas of our business;
•Optimizing our customer management and implementing strategic investments in our commercial sales organization in key markets, particularly the United States; and
•Refining our focus on developing a winning portfolio with global scale to maximize market share in a competitive pricing environment.
As explained further in the Results of Operations section below, the Company has partially offset elevated costs in certain areas of the business with price increases during the year. Should the higher inflationary environment continue, the Company may be unable to raise the prices of our products and services sufficiently or may engage in other cost cutting measures to keep up with the rate of inflation which could have a material adverse effect on our results of operations and financial condition.
The impact of the Israel-Hamas war
The terrorist attacks by Hamas militants crossing the border from Gaza to Israel in October 2023 and the subsequent military response by the Israeli government resulted in significant unrest and uncertainty within that region, including the possibility that escalating violence and involvement of other terrorist groups from neighboring countries may further impact our employees and operations.
The Company’s operations in Israel consist of two manufacturing facilities for implants products, with one site in northern Israel and one in southern Israel, which employ approximately 300 associates. These facilities remain open and continue to operate. We may, however, determine to discontinue production for the safety of our employees, or we could face future production slowdowns or interruptions at either location due to the impacts of the war including personnel absences as a number of our employees have been called to active military duty, or due to other resource constraints such as the inability to source materials for production.
For the year ended December 31, 2023, net sales of products produced at these sites comprise approximately 3% of our consolidated net sales and 13% of the net sales attributed to our Orthodontic and Implant Solutions segment. Net assets within Israel total $197 million as of December 31, 2023, consisting primarily of acquired technology, cash, inventory, and property, plant and equipment associated with our operations in country. While the conflict did not have a material impact on results for the year ended December 31, 2023, the Company continues to monitor developments and prepare contingency plans to limit the potential disruption to our operations for the fiscal year 2024.
Additionally, the Company sells products from across our portfolio to distributors of dental products and direct to dental practices within Israel and its neighboring countries which may face reduced patient traffic and demand for our products in the near term. Net sales for products sold to our customers in Israel comprise less than 1% of our consolidated net sales for the year ended December 31, 2023.
While Israel does not constitute a material portion of our business, a significant escalation or expansion of the conflict’s current scope and economic disruption could result in loss of sales and market position, disrupt our supply chain, broaden inflationary costs including energy prices, and have a material adverse effect on our results of operations, including impairment of the net assets in Israel or the goodwill associated our Implants & Prosthetics reporting unit.
The impact of the war in Ukraine
In February 2022, because of the invasion of Ukraine by Russia, economic sanctions were imposed by the United States, the European Union, and certain other countries on Russian financial institutions and businesses. Due to the medical nature of our products, the current sanctions have not materially restricted the Company’s ability to continue selling many of our products to customers located in Russia. The Company also sources certain raw materials and components from Russia and Ukraine, and has taken actions to minimize any adverse impacts from disrupted supply chains related to these items. The Company’s operations in Ukraine consist primarily of R&D activities, which continue uninterrupted from other locations to focus on the safety of employees. Overall, the Company’s operations in Russia and Ukraine have not been materially impacted by the conflict, and consequently, the Company has not recorded any allowance for doubtful accounts, inventory reserves, or asset impairments through the year ended December 31, 2023 as a result of the conflict.
For the year ended December 31, 2017,2023, net income attributablesales in Russia and Ukraine were approximately 2% of our consolidated net sales, and net assets in these countries were $78 million. These net assets include $42 million of cash and cash equivalents held within Russia as of December 31, 2023. Due to Dentsply Sirona declined primarily ascurrency control measures imposed by the Russian government which include restrictions on the ability of companies to repatriate or otherwise remit cash from their Russian-based operations to locations outside of Russia, we may be limited in our ability to transfer this cash balance out of Russia without incurring substantial costs, if at all.
While neither Russia nor Ukraine constitutes a material portion of our business, a significant escalation or expansion of economic disruption or the conflict’s current scope could result ofin a non-cash goodwill impairment charge of $1,650.9 million and a non-cash intangible asset impairment charge of $346.7 million. The Company reported a net loss of $6.76 per share comparedsales, disrupt our supply chain, broaden inflationary costs, and have a material adverse effect on our results of operations.
For additional discussion of associated risks, refer to earnings per diluted share of $1.94 in the prior year. On an adjusted basis (a non-US GAAP measure as defined under the heading “Net Income attributablePart I, Item 1A, “Risk Factors” - Risks Related to Dentsply Sirona”), full year 2017 net income was similar to prior year and earnings per diluted share declined 4.3% to $2.66 from $2.78 in the prior year. The Company’s results reflect a significant earnings headwind from higher weighted average share count of approximately 4.9%, or $0.13 per diluted share and currency rate changes compared to the prior year of approximately 3.0%, or $0.05 per diluted share. These impacts were partially offset by $0.08 from the consolidation of an additional two months of Sirona earnings in 2017.Our International Operations.
During 2017, the Company deployed cash in excess of $632 million as it returned cash to shareholders through common share repurchases and dividend payments, as well as strengthened the business through acquisitions. During 2017, the Company completed multiple acquisitions, including purchased intangible assets, with an aggregate purchase price of $152.6 million, including the acquisition of Recherche Techniques Dentaires (RTD), the worldwide leader in endodontic posts and Healthdent the market leader in gutta-percha formulations. In addition, the Company repurchased $401.4 million of common shares outstanding in 2017 and paid dividends of $78.3 million.
In 2017, the Company continued integration activities to capture cost synergies. The Company received the necessary approvals to proceed with its current plans for German reorganization. Additionally, the Company completed the elimination of certain corporate redundancies and continued execution of country and manufacturing consolidation activities.
BUSINESS
The Company operates in two business segments, Technologies & Equipment and Consumables.
The Technologies & Equipment segment is responsible for the worldwide design, manufacture, sales and distribution of the Company’s Dental Technology & Equipment Products and Healthcare Consumable Products. These products includes dental implants, laboratory dental products, CAD/CAM systems, imaging systems, treatment centers as well as consumable medical device products.
The Consumables segment includes responsibility for the worldwide design, manufacture, sales and distribution of the Company’s Dental Consumable Products which include preventive, restorative, instruments, endodontic, and orthodontic dental products.
Principal Measurements
The principal measurements used by the Company in evaluating its business are: (1) constant currency sales growth by segment and geographic region; (2) internal sales growth by segment and geographic region; and (3) adjusted operating income and margins of each reportable segment, which excludes the impacts of purchase accounting, corporate expenses, and certain other items to enhance the comparability of results period to period. These principal measurements are not calculated in accordance with accounting principles generally accepted in the United States; therefore, these items represent non-US GAAP measures. These non-US GAAP measures 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.
The Company defines “constant currency” sales growth as the increase or decrease in net sales from period to period excluding precious metal content and the impact of changes in foreign currency exchange rates. This impact is calculated by comparing current-period revenues to prior-period revenues, with both periods converted at the U.S. dollar to local currency foreign exchange rate for each month of the prior period, for the currencies in which the Company does business. The Company defines “internal” sales growth as constant currency sales growth excluding the impacts of net acquisitions and divestitures, Merger accounting impacts and discontinued products.
Business Drivers
The primary drivers of internal growthorganic sales (as defined below) include macroeconomic factors, global dental market growth,industry demand, innovation and new product launches by the Company, as well as continued investments in sales and marketing resources to drive demand creation, including clinical education. Management believes that the Company’s ability to execute its strategies should allow it to grow faster than the underlying dental marketindustry over time. On a short termshort-term basis, sudden changes in strategythe macroeconomic environment, supply chain challenges, or changes in distributor inventory levels can impact internal growth.and have impacted the Company’s sales. Demand can also fluctuate based on the timing of dental trade shows where promotions are offered, major new product introductions, and variability in dental patient traffic, which can be exacerbated by seasonal or severe weather patterns, or other demographic disruptions such as global pandemics.
The Company has a focus on maximizing operational efficienciesexcellence on a global basis. The Company has expanded the use of technology as well as process improvement initiatives to enhance global efficiency. In addition, management continues to evaluate the worldwide consolidation and simplification of operations and functions as part of integration activities, to further reduce costs. While the current periodCompany continues consolidation initiatives which can have an adverse impact on reported results reflectin the unfavorable impact of integration related inefficiencies,short term, the Company believesexpects that the futurecontinued benefits from these global efficiency and integration initiativesefforts will improveoptimize its cost structure. Meanwhile, the cost structure and help mitigate the impacts of rising costs such as energy, employee benefits and regulatory oversight and compliance. The Company has targeted a cost reduction initiative of approximately $100 million expectedintends to be achieved over the next several years as the benefits of these initiatives, net of related investments, are realized over time. The Company expects that it will record restructuring charges, from timecontinue pursuing opportunities to time, associated with such initiatives. These restructuring charges could be material toexpand the Company’s consolidated financial statementsproduct and there can be no assurance thatsolutions offerings, technologies, and sales and service infrastructure through partnerships. Although the target adjusted operating income marginsprofessional dental market has experienced consolidation, it remains fragmented. Management believes there will continue to be achieved.
As announced in October 2016, the Company proposed plans in Germanyopportunities to reorganize and combine portions of its manufacturing, logistics and distribution networks within the Company’s two segments. As required under German law, the Company entered intoparticipate as a statutory co-determination process under which it collaborated with the appropriate labor groups to jointly define the infrastructure and staffing adjustments necessary to support this initiative. In 2017, the Company received all necessary approvals and is proceeding with its current plans. The Company estimates the cost of these initiatives to be approximately $65 million, primarily for severance related benefits for employees, which is expected to be incurred as actions are implemented over the next two years. The Company recorded costs of approximately $29 million associated with these plans. The Company estimates that the future annual savings related to these plans to beconsolidator in the range of $12 million and $14 million to be realized overindustry for the next one to three years. There is no assurance that future savings will be fully achieved. The Company continues to initiate similar actions in other regions of the world.foreseeable future.
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 the 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, healthcare consumable and dental technology products, they involve new technologies and there can be no assurance that commercialized products will be developed.
The Company’s business is subject to quarterly fluctuations of consolidatedin net sales and netoperating income. PriceAnnual price increases, promotional activities, as well as changes in inventory levels at distributors contribute to this fluctuation. The Company typically implements most of its price increases in October or January of a given year across most of its businesses. Distributor inventory levels tend to increase in the period leading up to a price increase and decline in the period following the implementation of a price increase. Required minimum purchase commitments under agreements with key distributors may increase, although these fluctuations are mitigated by limits on purchases ahead of these increases. Changes in distributors’ inventory levels in excess of retail demand. These net inventory changes have impacted the Company’s consolidated net sales and net income in the past and may continue to do so in the future, over a given period or multiple periods.future. In addition, the Company may from time to time engage in new distributor relationships that could cause quarterly fluctuations ofin consolidated net sales and netoperating income. Distributor inventory levels may fluctuate and may differ from the Company’s predictions,projections and market demand, resulting in the Company’s projectionsforecast of future results being different than expected. There can be no assurance that the Company’s dealersdistributors and customers will maintain levels of inventory or patterns of build and liquidation timing 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. Any of these fluctuations could be material to the Company’s consolidated financial statements. For more information about the drivers of our business and related risks, see Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.”
TheRestructuring Programs
On February 14, 2023, the Board of Directors of the Company had two exclusive distribution agreements with Patterson Companies, Inc. (“Patterson”) forapproved a plan to restructure the marketingCompany’s business to improve operational performance and sales of certain legacy Sirona products and equipmentdrive shareholder value creation, which is expected to result in the United StatesCompany incurring between $115 to $135 million in one-time charges and Canada. In orderachieving approximately $200 million in annual cost savings. For details on this plan including the nature of the non-recurring charges incurred during the year, refer to maintain exclusivity, certain purchase targets had to be achieved. In the fourth quarter of 2016, Patterson’s decision not to extend the exclusivity beyond September 2017 was announced. Following that announcement, in May 2017, the Company entered into a new three-year agreement with Patterson whereby Patterson would continue to distribute the Company’s equipment linesNote 18, Restructuring and Other Costs, in the United States on a non-exclusive basis. In the second quarterNotes to Consolidated Financial Statements in Item 8 of 2017, the Company also entered into two separate multi-year agreements with Henry Schein, Inc. (“Henry Schein”) for the distribution of the Company’s equipment lines in the United Statesthis Form 10-K, and Canada. While the agreement with Henry Schein with respect to the United States was effective September 1, 2017, the agreement relating to Canada was effective June 2017. The Company began shipping initial stocking orders for the equipment products to Henry Scheindiscussion under the agreementsheading “Material Trends in the second quarter of 2017 and continued through the balance of 2017. During the second quarter of 2017, the Company also modified its distribution agreement with Henry Schein with respect to the distribution of certain products in France. Based on the Company’s estimate, year-over-year changes in distributor inventories associated with these agreements positively impacted the Company’s reported sales for the full year of 2017 by approximately $23 million. Based on the Company’s estimate, distributor inventories increased during 2017 by approximately $26 million as compared to an increase of approximately $3 million during 2016. The increase in inventory levels was the result of the combination of lower equipment sales to end-users as well as higher than anticipated inventory levels held by distributors. The Company’s anticipated decrease in inventory levels held by distributors is projected to negatively impact the Company’s sales by approximately $40 million during 2018.Capital Resources” within MD&A.
The Company will continue to pursue opportunities to expand the Company’s product offerings, technologies and sales and service infrastructure through partnerships and 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.
Impact of Foreign Currencies and Interest Rates
Due to the Company’s significant international presence,global footprint, movements in foreign currency exchange and interest rates may have a material impact the Consolidated Statements of Operations.on its reported net sales and pre-tax income. With approximately two thirdstwo-thirds of the Company’s net sales located inoriginating from regions outside the United States,U.S, the Company’s consolidated net sales and results of operations are negatively impacted negatively by the strengthening, or positively impacted by the weakening, of the U.S. dollar. Additionally, movementsdollar compared to the primary currencies in certainwhich the Company operates.
While the Company employs financial instruments to hedge some of its transactional foreign exchange exposure, these activities do not insulate it completely from those exposures, particularly from the currency exposure arising from translation of non-U.S. dollar functional currency subsidiaries. During fiscal year 2023, both net sales and interest rates may unfavorably or favorablygross profit were adversely impacted due to the significant strengthening of the U.S. dollar against foreign currencies. The continued strength of the U.S. dollar could continue to adversely impact the Company’s results of operations, financial condition and liquidity.results.
Reclassification of Prior Year Amounts
Certain reclassifications have been made to prior years’ data in order to conform to current year presentation. During the quarter ended September 30, 2017, the Company realigned reporting responsibilities for multiple businesses, as a result of a retirement of one of the Company’s then Chief Operating Officers, into three operating segments. Furthermore, as a result of changes in the senior management level during the quarter ended December 31, 2017, the Company realigned reporting responsibilities into two operating segments. The segment information reflects the revised fourth quarter organizational structure for all periods shown.
RESULTS OF OPERATIONS
20172023 Compared to 20162022
Net Sales and Key Performance Measurements
The discussion below summarizes the Company’s sales growth which excludes precious metal content, into the following components: (1) impact of the Merger; and (2) the results of the “Combined Businesses” as if the businesses were merged on January 1, 2016. These disclosures ofCompany presents net sales growth providecomparing the reader with sales results on a comparable basis betweencurrent year periods to the prior year periods.
Management believes that In addition, the presentation ofCompany also presents the changes in net sales excluding precious metal content, provides useful information to investors becauseon an organic sales basis, which is a portion of Dentsply Sirona’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 Sirona 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 GAAPNon-GAAP measure. The Company providesdefines “organic sales” as the following reconciliation ofreported net sales toadjusted for: (1) net sales excluding precious metal content. The Company’s definitionsfrom acquired and calculationsdivested businesses recorded prior to the first anniversary of the acquisition or divestiture; (2) net sales excluding precious metal content,attributable to discontinued product lines in both the current and other operating measures derived usingprior year periods; and (3) the impact of foreign currency changes, which is calculated by translating current period net sales excluding precious metal content,using the comparable prior period’s currency exchange rates.
Our measure of organic sales may not necessarily be the same asdiffer from those used by other companies.
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
(in millions, except percentage amounts) | 2017 | | 2016 | | $ Change | | % Change |
| | | | | | | |
Net sales | $ | 3,993.4 |
| | $ | 3,745.3 |
| | $ | 248.1 |
| | 6.6 | % |
Less: Precious metal content of sales | 40.5 |
| | 64.3 |
| | (23.8 | ) | | (37.0 | %) |
Net sales, excluding precious metal content | $ | 3,952.9 |
| | $ | 3,681.0 |
| | $ | 271.9 |
| | 7.4 | % |
Netcompanies and should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with U.S. GAAP. Organic sales excluding precious metal content,is an important internal measure for the year ended December 31, 2017 were $3,952.9 million, an increaseCompany, and its senior management receives a monthly analysis of $271.9 million from the year ended December 31, 2016.operating results that includes organic sales. The increase in net sales, excluding precious metal content, reflects sales of $112.7 million as a resultperformance of the consolidation of two additional months of Sirona for the year end December 31, 2017 compared to the prior year period. This excludes approximately $4.0 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income. The increase in net sales, excluding precious metal content, was favorably impacted, basedCompany is measured on the Company’s estimate, by approximately $23 million as a result of net changes in equipment inventory levels in the current year as compared to the prior year at certain distributors in North America and Europe, that the Company believes is related to the transition in distribution strategy (see “Business Drivers” under this section for further detail). Based on the Company’s estimate, inventory held by these distributors increased by approximately $26 million during the current year compared to an increase of approximately $3 million in 2016. The inventory increase in 2017 was more than anticipated, in the Company’s assessment, as a result of lower equipment sales to end-users as well as higher than anticipated stocking of inventory by distributors in the U.S. The Company expects net sales during 2018 to be negatively impacted by approximately $40 million as a result of a planned reduction of inventory held at distributors.metric along with other performance metrics.
Sales related to precious metal content declined 37.0% during 2017, which was primarily due to the continued reduction in the use of precious metal alloys in dentistry.
For the year ended December 31, 2017, sales of our combined businesses grew 1.6% on a constant currency basis. This includes a benefit of 1.8% from net acquisitions, which leads to negative internal sales growth of 20 basis points. Net sales, excluding precious metal content, were favorably impacted by approximately 1.0% due to the weakening of the U.S. dollar over the prior year period. Based on the Company’s assessment, the internal sales growth was benefited by approximately 60 basis points as a result of the net changes in equipment inventory levels in the current year over the prior year as discussed above. A reconciliation of reported net sales to net sales, excluding precious metal content, of the combined business for the year ended December 31, 2017 and 2016, respectfully, is as follows:
|
| | | | | | | | | | | | | | | |
| | Year Ended | | | | |
| | December 31, | | |
(in millions, except percentage amounts) | | 2017 | | 2016 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 3,993.4 |
| | $ | 3,745.3 |
| | $ | 248.1 |
| | 6.6 | % |
Less: precious metal content of sales | | 40.5 |
| | 64.3 |
| | (23.8 | ) | | (37.0 | %) |
Net sales, excluding precious metal content | | 3,952.9 |
| | 3,681.0 |
| | 271.9 |
| | 7.4 | % |
Sirona net sales (a) | | — |
| | 160.7 |
| | (160.7 | ) | | NM |
|
Merger related adjustments (b) | | 4.0 |
| | 13.5 |
| | (9.5 | ) | | NM |
|
Elimination of intercompany net sales | | — |
| | (0.5 | ) | | 0.5 |
| | NM |
|
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 3,956.9 |
| | $ | 3,854.7 |
| | $ | 102.2 |
| | 2.6 | % |
(a) Represents Sirona sales for January and February 2016.
(b) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2017 and 2016 non-U.S. GAAP combined business results comparable.
NM - Not meaningful
Sales Growth by Region
Net sales, excluding precious metal content, for the year ended December 31, 2017 and 2016, respectfully, by geographic region is as follows:
|
| | | | | | | | | | | | | | | |
| | Year Ended | | | | |
| | December 31, | | | | |
(in millions, except percentage amounts) | | 2017 | | 2016 | | $ Change | | % Change |
| | | | | | | | |
United States | | $ | 1,366.8 |
| | $ | 1,306.4 |
| | $ | 60.4 |
| | 4.6 | % |
| | | | | | | | |
Europe | | 1,575.2 |
| | 1,421.7 |
| | 153.5 |
| | 10.8 | % |
| | | | | | | | |
Rest of World | | 1,010.9 |
| | 952.9 |
| | 58.0 |
| | 6.1 | % |
A reconciliation of reported net sales to net sales, excluding precious metal content, of the combined business by geographic region for the year ended December 31, 2017 and 2016, respectfully, is as follows:
|
| | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 |
(in millions) | | United States | | Europe | | Rest of World | | Total |
| | | | | | | | |
Net sales | | $ | 1,372.5 |
| | $ | 1,606.2 |
| | $ | 1,014.7 |
| | $ | 3,993.4 |
|
Less: precious metal content of sales | | 5.7 |
| | 31.0 |
| | 3.8 |
| | 40.5 |
|
Net sales, excluding precious metal content | | 1,366.8 |
| | 1,575.2 |
| | 1,010.9 |
| | 3,952.9 |
|
Merger related adjustments (a) | | 4.0 |
| | — |
| | — |
| | 4.0 |
|
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 1,370.8 |
| | $ | 1,575.2 |
| | $ | 1,010.9 |
| | $ | 3,956.9 |
|
(a) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2017 and 2016 non-U.S. GAAP combined business results comparable.
|
| | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2016 |
(in millions) | | United States | | Europe | | Rest of World | | Total |
| | | | | | | | |
Net sales | | $ | 1,311.6 |
| | $ | 1,463.2 |
| | $ | 970.5 |
| | $ | 3,745.3 |
|
Less: precious metal content of sales | | 5.2 |
| | 41.5 |
| | 17.6 |
| | 64.3 |
|
Net sales, excluding precious metal content | | 1,306.4 |
| | 1,421.7 |
| | 952.9 |
| | 3,681.0 |
|
Sirona net sales (a) | | 60.5 |
| | 59.4 |
| | 40.8 |
| | 160.7 |
|
Merger related adjustments (b) | | 11.9 |
| | 1.6 |
| | — |
| | 13.5 |
|
Elimination of intercompany net sales | | (0.1 | ) | | (0.4 | ) | | — |
| | (0.5 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 1,378.7 |
| | $ | 1,482.3 |
| | $ | 993.7 |
| | $ | 3,854.7 |
|
(a) Represents Sirona sales for January and February 2016
(b) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2016 and 2015 non-U.S. GAAP combined business results comparable.
United States
Reported net sales increased by 4.6% for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Reported net sales, excluding precious metal content, increased by 4.6% for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The increase in net sales, excluding precious metal content, was favorably impacted, based on the Company’s estimate, by approximately $42 million as a result of net changes in equipment inventory levels in the current year as compared to the prior year at two distributors in the United States related to the transition in distribution strategy (see “Business Drivers” under this section for further detail). This excludes approximately $4.0 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
For the year ended December 31, 2017, sales of our combined businesses declined 0.5% on a constant currency basis. This includes a benefit of 1.1% from net acquisitions and was unfavorably impacted by discontinued products by approximately 10 basis points, which results in a negative internal sales growth rate of 1.5%. The negative internal sales growth in this region was driven by lower demand in the Technologies & Equipment segment. Based on the Company’s assessment, the internal sales growth was benefited by approximately 3% as a result of the net changes in equipment inventory levels in the current year over the prior year as discussed above. The impact from net changes in inventory levels was entirely within the Technologies & Equipment segment.
Europe
Reported net sales increased by 9.8% for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Reported net sales, excluding precious metal content, increased by 10.8% for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The increase in net sales, excluding precious metal content, was unfavorably impacted, based on the Company’s estimate, by approximately $9 million as a result of net changes in equipment inventory levels in the current year as compared to the prior year at a certain distributor in Europe that the Company believes is related to the transition in distribution strategy (see “Business Drivers” under this section for further detail).
For the year ended December 31, 2017, sales of our combined businesses grew 4.1% on a constant currency basis. This includes a benefit of 2.3% from net acquisitions, which results in internal sales growth of 1.8%. Net sales, excluding precious metal content, were positively impacted by approximately 2.2% due to the weakening of the U.S. dollar over the prior year period. Internal sales growth in this region was primarily driven by higher demand in both segments. Based on the Company’s assessment, the internal sales growth was unfavorably impacted by approximately 50 basis points as a result of the net changes in equipment inventory levels in the current year over the prior year as discussed above. The impact from net changes in inventory levels was entirely within the Technologies & Equipment segment.
Rest of World
Reported net sales increased by 4.5% for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Reported net sales, excluding precious metal content, increased by 6.1% for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The increase in net sales, excluding precious metal content, was unfavorably impacted, based on the Company’s estimate, by approximately $10 million as a result of net changes in equipment inventory levels in the current year as compared to the prior year at a certain distributor in Canada that the Company believes is related to the transition in distribution strategy (see “Business Drivers” under this section for further detail).
For the year ended December 31, 2017, sales of our combined businesses grew 0.8% on a constant currency basis. This includes a benefit of 2.2% from net acquisitions, which results in negative internal sales growth of 1.4%. Net sales, excluding precious metal content, were positively impacted by approximately 0.9% due to the weakening of the U.S. dollar over the prior year period. The negative internal sales growth in this region was driven by lower demand in the Technologies & Equipment segment. Based on the Company’s assessment, the internal sales growth was unfavorably impacted by approximately 1% as a result of the net changes in equipment inventory levels in the current year over the prior year as discussed above. The impact from net changes in inventory levels was entirely within the Technologies & Equipment segment.
Gross Profit
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
(in millions, except percentage amounts) | 2017 | | 2016 | | $ Change | | % Change |
| | | | | | | |
Gross profit | $ | 2,188.5 |
| | $ | 2,000.9 |
| | $ | 187.6 |
| | 9.4 | % |
Gross profit as a percentage of net sales, including precious metal content | 54.8 | % | | 53.4 | % | | |
| | |
|
Gross profit as a percentage of net sales, excluding precious metal content | 55.4 | % | | 54.4 | % | | |
| | |
|
Gross profit as a percentage of net sales, excluding precious metal content, increased by 100 basis points for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Improvement in the gross profit rate for year ended December 31, 2017, were primarily driven by net reductions in the roll-off of merger-related fair value adjustments and expenses of approximately 150 basis points as compared to the year ended December 31, 2016. This increase was partially offset by approximately 50 basis points associated with the equipment businesses primarily as a result of lower sales related to the transition in distribution strategy as compared to the year ended December 31, 2016.
Operating Expenses
|
| | | | | | | | | | | | | | | |
| | Year Ended | | | | |
| | December 31, | | | | |
(in millions, except percentage amounts) | | 2017 | | 2016 | | $ Change | | % Change |
| | | | | | | | |
Selling, general and administrative expenses (“SG&A”) | | $ | 1,674.7 |
| | $ | 1,523.0 |
| | $ | 151.7 |
| | 10.0 | % |
Goodwill impairment | | 1,650.9 |
| | — |
| | 1,650.9 |
| | NM |
|
Restructuring and other costs | | 425.2 |
| | 23.2 |
| | 402.0 |
| | 1,732.8 | % |
| | | | | | | | |
SG&A as a percentage of net sales, including precious metal content | | 41.9 | % | | 40.7 | % | | |
| | |
|
SG&A as a percentage of net sales, excluding precious metal content | | 42.4 | % | | 41.4 | % | | |
| | |
|
SG&A Expenses
SG&A expenses, including research and development expenses, as a percentage of net sales, excluding precious metal content, for the year ended December 31, 2017 increased 100 basis points compared to the year ended December 31, 2016. The higher rate was primarily driven by increased professional service costs, biennial trade show and other selling events, unfavorable foreign currency and increased amortization and depreciation which unfavorably impacted the rate by approximately 100 basis points compared to the year ended December 31, 2016. In addition, the rate was also unfavorably impact by 80 basis points due to employment agreement costs related to the resignation of senior management compared to the year ended December 31, 2016. Partially offsetting these increases was a reduction in business combination related costs which favorably impacted the rate by 120 basis points as compared to the year ended December 31, 2016.
Goodwill impairment
For the year ended December 31, 2017, the Company recorded a goodwill impairment charge of $1,650.9 million. The charge is related to three reporting units in the Technologies & Equipment segment. For further information see Note 9, Goodwill and Intangible Assets, in the Notes to Audited Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K.
Restructuring and Other Costs
The Company recorded net restructuring and other costs of $425.2 million for the year ended December 31, 2017 compared to $23.2 million for the year ended December 31, 2016.
The Company recorded net restructuring expense of $55.4 million related to restructuring initiatives in Germany and organizational management changes announced during the fourth quarter. As announced in October 2016, the Company proposed plans in Germany to reorganize and combine portions of its manufacturing, logistics and distribution networks within the Company’s two segments. As required under German law, the Company entered into a statutory co-determination process under which it collaborated with the appropriate labor groups to jointly define the infrastructure and staffing adjustments necessary to support this initiative. In 2017, the Company received all necessary approvals and is proceeding with its current plans. The Company estimates the cost of these initiatives to be approximately $65 million, primarily for severance related benefits for employees, which is expected to be incurred as actions are implemented over the next two years. The Company recorded costs of approximately $29 million associated with these plans. The Company estimates that the future annual savings related to these plans to be in the range of $11 million to $14 million to be realized over the next one to three years. There is no assurance that future savings will be fully achieved.
During the year ended December 31, 2017, the Company recorded other costs of $369.8 million which consist of impairment charges of $346.7 million and legal settlements of $23.1 million. For further information on the impairment charges, see Note 9, Goodwill and Intangible Assets, in the Notes to the Audited Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K.
Other Income and Expenses
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
(in millions, except percentage amounts) | 2017 | | 2016 | | $ Change | | % Change |
| | | | | | | |
Net interest expense | $ | 35.9 |
| | $ | 33.9 |
| | $ | 2.0 |
| | 5.9 | % |
Other expense (income), net | 5.3 |
| | (20.1 | ) | | 25.4 |
| | NM |
|
Net interest and other expense | $ | 41.2 |
| | $ | 13.8 |
| | $ | 27.4 |
| |
|
|
NM - Not meaningful
Net Interest Expense
Net interest expense for the year ended December 31, 2017 increased $2.0 million as compared to the year ended December 31, 2016. Increased debt levels in 2017 partially offset by lower average interest rates when compared to the prior year resulted in an increase in net interest expense.
Other Expense (Income), Net
Other expense (income), net for the year ended December 31, 2017 increased $25.4 million compared to the year ended December 31, 2016. Other expense (income), net for the year ended December 31, 2017 includes foreign exchange loss of $1.7 million and $3.6 million of other non-operating expenses. Other income, net for the year ended December 31, 2016 was $20.1 million, comprised primarily of $10.3 million of foreign exchange gains, and $9.9 million of other non-operating income primarily due to legal settlements.
Income Taxes and Net Income
|
| | | | | | | | | | | |
| Year Ended December 31, | | |
(in millions, except per share and percentage amounts) | 2017 | | 2016 | | $ Change |
| | | | | |
Effective income tax rate | 3.3 | % | | 2.2 | % | | |
| | | | | |
Net (loss) income attributable to Dentsply Sirona | $ | (1,550.0 | ) | | $ | 429.9 |
| | $ | (1,979.9 | ) |
| | | | | |
Diluted earnings per common share | $ | (6.76 | ) | | $ | 1.94 |
| | |
|
Provision for Income Taxes
The Company’s effective tax rate for 2017 and 2016 was 3.3% and 2.2%, respectively. For the year ended December 31, 2017, income taxes were a net benefit of $53.2 million. During the year, the Company recorded the following discrete tax items, $20.5 million of excess tax benefit related to employee share based compensation, tax expense of $12.0 million related primarily to state valuation allowances, $ 3.6 million related to enacted statutory rate changes, $1.0 million related to other discrete tax matters and $20.1 million related to US Tax Reform. The Company also recorded a $ 99.1 million tax benefit related to the intangible asset impairment charge recorded during the twelve months ended December 31, 2017. Excluding these discrete tax items and adjusting pretax loss to exclude the pretax loss related to the impairment of the intangible assets and non-deductible goodwill impairment charge the Company’s effective tax rate was 7.54%. The effective tax rate was favorably impacted by the Company’s change in the mix of consolidated earnings. Further information regarding the details of income taxes is presented in Note 14, Income Taxes, in the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act" or "U.S. tax reform") was enacted. U.S. tax reform, among other things, reduces the U.S. federal income tax rate to 21% in 2018 from 35%, institutes a dividends received deduction for foreign earnings with a related tax for the deemed repatriation of unremitted foreign earnings and creates a new U.S. minimum tax on earnings of foreign subsidiaries. In addition, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for enactment effects of SAB 118 provides a measurement period of up to one year from the Act’s enactment date for companies to complete their accounting under Accounting Standards Codification No. 740 “Income Taxes”, (“ASC 740”). In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Act. The Company’s accounting for certain income tax effects is incomplete, but the Company has determined reasonable estimates for those effects. Accordingly, the Company has recognized a net provisional income tax charge of $20.1 million, which is included as a component of the income tax provision on the consolidated statement of income.
Based on information available, the Company estimated the cumulative undistributed foreign earnings to be approximately $1.1 billion and recorded a provisional estimate of $62.2 million of income tax expense related to the one-time deemed repatriation toll charge. There is still uncertainty as to the application of the Act, in particular as it relates to state income taxes. Further, the Company has not yet completed the analysis of the components of the computation, including the amount of the foreign earnings subject to U.S. income tax, and the portion of the foreign earnings held in cash or other specified assets. As of December 31, 2017, primarily due to the utilization of foreign tax credit carryforwards and certain other tax attributes the estimated cash liability for the deemed repatriation of foreign earnings is approximately $1.0 million. However, as the Company completes its analysis an additional liability could be recorded and the Company would elect to make installment payments as allowed under the Act.
As a result of the Act, the Company can repatriate the cumulative undistributed foreign earnings back to the U.S. when needed with minimal U.S. income tax consequences other than the one-time deemed repatriation toll charge. The Company is still evaluating whether to change its indefinite reinvestment assertion in light of the Act and consider that conclusion to be incomplete under SAB 118.
The remaining provisional amount is a benefit of $42.1 million relating to the remeasurement of the Company’s U.S. net deferred tax liabilities. For the Global Intangible Low Tax Income (“GILTI”) provision of the Act, a provisional estimate could not be made as the Company has not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred.
In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from, and interpretations by, U.S. regulatory and standard-setting bodies, anddiscloses changes in assumptions. In the subsequent period, provisional amounts will be adjusted for the effects, if any, of interpretative guidance issued after January 19, 2018, by the U.S. Department of the Treasury. The effects of the 2017 Tax Act may be subject to changes for items that were previously reported as provisional amounts, as well as any element of the 2017 Tax Act that a provisional estimate could not be made, and such changes could be material.
The Company’s effective income tax rate for 2017 included the net impact of restructuring program related costs and other costs, amortization of purchased intangible assets, business combination related costs and fair value adjustments, credit risk and fair value adjustments and income tax related adjustments which impacted income before income taxes and the provision for income taxes by $2,374.8 billion and $183.6 million, respectively.
The Company’s effective income tax rate for 2016 included the net impact of business combination related costs and fair value adjustments, amortization of purchased intangible assets, restructuring program related costs and other costs, credit risk and fair value adjustments and income tax related adjustments which impacted income before income taxes and the provision for income taxes by $340.3 million and $153.1 million, respectively.
Net (Loss) Income attributable to Dentsply Sirona
In addition to the results reported in accordance with US GAAP, the Company provides adjusted net (loss) income attributable to Dentsply Sirona and adjusted earnings per diluted common share (“adjusted EPS”). The Company discloses adjusted net income attributable to Dentsply Sironaorganic sales to allow investors to evaluate the performance of the Company’s operations exclusive of certainthe items listed above that may 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 intangible assets either purchased or acquired through a business combination.Company. The Company believes that this supplemental 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.
The adjusted net income attributable to Dentsply Sirona consists of net income attributable to Dentsply Sirona adjusted to exclude the following:
(1) Business combination related costs and fair value adjustments. These adjustments include costs related to integrating and consummating mergers and recently acquired businesses, as well as costs, gains and losses related to the disposal of businesses or significant product lines. In addition, this category includes the roll off to the consolidated statement of operations of fair value adjustments related to business combinations, except for amortization expense noted below. 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 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.
(3) Amortization of purchased intangible assets. This adjustment excludes the periodic amortization expense related to purchased intangible assets. Amortization expense has been excluded from adjusted net income attributed to Dentsply Sirona to allow investors to evaluate and understand operating trends excluding these large non-cash charges.
(4) Credit risk and fair value adjustments. These adjustments include both the cost and income impacts of adjustments in certain assets and liabilities including the Company’s pension obligations, 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.
(5) Certain fair value adjustments related to an unconsolidated affiliated company. This adjustment represents the fair value adjustment of the unconsolidated affiliated company’s convertible debt instrument held by the Company. The affiliate is 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 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 indicative of past and future performance of the Company and therefore are excluded for comparability purposes.
Adjusted earnings per diluted common share is calculated by dividing adjusted net income attributable to Dentsply Sirona by diluted weighted-average common shares outstanding. Adjusted net income attributable to Dentsply Sirona 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, 2017 |
(in millions, except per share amounts) | | Net Income (Loss) | | Per Diluted Common Share |
| | | | |
Net loss attributable to Dentsply Sirona | | $ | (1,550.0 | ) | | $ | (6.76 | ) |
Pre-tax non-US GAAP adjustments: | | | | |
Restructuring program related costs and other costs | | 2,119.3 |
| | |
Amortization of purchased intangible assets | | 189.0 |
| | |
Business combination related costs and fair value adjustments | | 38.5 |
| | |
Credit risk and fair value adjustments | | 5.0 |
| | |
Tax impact of the pre-tax non-US GAAP adjustments (a) | | (199.8 | ) | | |
Subtotal non-US GAAP adjustments | | 2,152.0 |
| | 9.26 |
|
Adjustment for calculating non-US GAAP net income per diluted common share (b) | | | | 0.09 |
|
Income tax related adjustments | | 16.2 |
| | 0.07 |
|
Adjusted non-US GAAP net income | | $ | 618.2 |
| | $ | 2.66 |
|
| | | | |
(a) The tax amount was calculated using the applicable statutory tax rate in the tax jurisdiction where the non-US GAAP adjustments were generated. |
(b) The Company had a net loss for the year ended December 31, 2017, but had net income on a non-US GAAP basis. The shares used in calculating diluted non-US GAAP net income per share includes the dilutive effect of common stock. |
Shares used in calculating diluted GAAP net loss per share | | | | 229.4 |
|
Shares used in calculating diluted non-US GAAP net income per share | | | | 232.7 |
|
|
| | | | | | | | |
| | Year Ended December 31, 2016 |
(in millions, except per share amounts) | | Net Income | | Per Diluted Common Share |
| | | | |
Net income attributable to Dentsply Sirona | | $ | 429.9 |
| | $ | 1.94 |
|
Pre-tax non-US GAAP adjustments: | | | | |
Business combination related costs and fair value adjustments | | 162.2 |
| | |
Amortization of purchased intangible assets | | 155.3 |
| | |
Restructuring program related costs and other costs | | 17.0 |
| | |
Credit risk and fair value adjustments | | 5.8 |
| | |
Tax impact of the pre-tax non-US GAAP adjustments (a) | | (79.6 | ) | | |
Subtotal non-US GAAP adjustments | | 260.7 |
| | 1.17 |
|
Income tax related adjustments | | (73.5 | ) | | (0.33 | ) |
Adjusted non-US GAAP net income | | $ | 617.1 |
| | $ | 2.78 |
|
(a) The tax amount was calculated using the applicable statutory tax rate in the tax jurisdiction where the non-US GAAP adjustments were generated.
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.trends.
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. 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.
|
| | | | | | | |
| | Year Ended December 31, 2017 |
(in millions, except percentage of net sales amount) | | Operating Income (Loss) | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | | |
Operating loss attributable to Dentsply Sirona | | $ | (1,562.3 | ) | | (39.5 | )% |
Restructuring program related costs and other costs | | 2,119.9 |
| | 53.6 | % |
Amortization of purchased intangible assets | | 189.0 |
| | 4.8 | % |
Business combination related costs and fair value adjustments | | 37.7 |
| | 0.9 | % |
Credit risk and fair value adjustments | | 7.1 |
| | 0.2 | % |
Adjusted non-US GAAP Operating Income | | $ | 791.4 |
| | 20.0 | % |
|
| | | | | | | |
| | Year Ended December 31, 2016 |
(in millions, except percentage of net sales amounts) | | Operating Income (Loss) | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | | |
Operating income attributable to Dentsply Sirona | | $ | 454.7 |
| | 12.4 | % |
Restructuring program related costs and other costs | | 161.8 |
| | 4.4 | % |
Amortization of purchased intangible assets | | 155.3 |
| | 4.2 | % |
Business combination related costs and fair value adjustments | | 27.1 |
| | 0.7 | % |
Credit risk and fair value adjustments | | 5.3 |
| | 0.1 | % |
Adjusted non-US GAAP Operating Income | | $ | 804.2 |
| | 21.8 | % |
Operating Segment Results
|
| | | | | | | | | | | | | | |
| | | | | | | |
Net Sales, Excluding Precious Metal Content | Year Ended December 31, | | | | |
(in millions, except percentage amounts) | 2017 | | 2016 | | $ Change | | % Change |
| | | | | | | |
Technologies & Equipment | $ | 2,160.3 |
| | $ | 1,986.4 |
| | $ | 173.9 |
| | 8.8 | % |
| | | |
| | | | |
Consumables | $ | 1,792.6 |
| | $ | 1,694.6 |
| | $ | 98.0 |
| | 5.8 | % |
|
| | | | | | | | | | | | | | |
| | | | | | | |
Segment Operating Income | Year Ended December 31, | | | | |
(in millions, except percentage amounts) | 2017 | | 2016 | | $ Change | | % Change |
| | | | | | | |
Technologies & Equipment | $ | 411.0 |
| | $ | 355.7 |
| | $ | 55.3 |
| | 15.5 | % |
| | | | | | | |
Consumables | $ | 487.1 |
| | $ | 445.3 |
| | $ | 41.8 |
| | 9.4 | % |
A reconciliation of reported net sales to netorganic sales excluding precious metal content, of the combined business by segment for the year ended December 31, 2017 and 2016, respectfully,2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 3,965 | | | $ | 3,922 | | | $ | 43 | | | 1.1 | % |
Unfavorable foreign exchange impact | | | | | | | | (1.1 | %) |
| | | | | | | | |
| | | | | | | | |
Organic sales | | | | | | | | 2.2 | % |
Percentages are based on actual values and may not recalculate due to rounding. |
| | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 |
(in millions) | | Technologies & Equipment | | Consumables | | Total |
| | | | | | |
Net sales | | $ | 2,200.8 |
| | $ | 1,792.6 |
| | $ | 3,993.4 |
|
Less: precious metal content of sales | | 40.5 |
| | — |
| | 40.5 |
|
Net sales, excluding precious metal content | | 2,160.3 |
| | 1,792.6 |
| | 3,952.9 |
|
Merger related adjustments (a) | | 4.0 |
| | — |
| | 4.0 |
|
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 2,164.3 |
| | $ | 1,792.6 |
| | $ | 3,956.9 |
|
(a) Represents an adjustment to reflect deferred subscriptionThe increase in organic sales was led by positive performance in the Essential Dental Solutions segment, primarily driven by price increases, and warranty revenue that was eliminated under business combination accounting standards to makepositive performance in the 2017Orthodontic and 2016 non-U.S. GAAP combined business results comparable.Implant Solutions segment, primarily driven by price increases and higher volumes of orthodontic aligners. These increases were partially offset by lower volumes in the Connected Technology Solutions segment.
|
| | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2016 |
(in millions) | | Technologies & Equipment | | Consumables | | Total |
| | | | | | |
Net sales | | $ | 2,050.5 |
| | $ | 1,694.8 |
| | $ | 3,745.3 |
|
Less: precious metal content of sales | | 64.1 |
| | 0.2 |
| | 64.3 |
|
Net sales, excluding precious metal content | | 1,986.4 |
| | 1,694.6 |
| | 3,681.0 |
|
Sirona net sales (a) | | 145.0 |
| | 15.7 |
| | 160.7 |
|
Merger related adjustments (b) | | 13.5 |
| | — |
| | 13.5 |
|
Elimination of intercompany net sales | | — |
| | (0.5 | ) | | (0.5 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 2,144.9 |
| | $ | 1,709.8 |
| | $ | 3,854.7 |
|
(a) Represents Sirona sales for January and February 2016Connected Technology Solutions
(b) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2017 and 2016 non-U.S. GAAP combined business results comparable.
Technologies & Equipment
ReportedA reconciliation of net sales increased by 7.3%to organic sales for the year ended December 31, 20172023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 1,169 | | | $ | 1,219 | | | $ | (50) | | | (4.1 | %) |
Unfavorable foreign exchange impact | | | | | | | | (1.3 | %) |
| | | | | | | | |
| | | | | | | | |
Organic sales | | | | | | | | (2.8 | %) |
Percentages are based on actual values and may not recalculate due to rounding.
The decrease in organic sales was primarily due to lower volumes of imaging and instrument products, particularly in the United States and Europe, due to the unfavorable macroeconomic environment and competitive pressure for imaging products. This trend of lower volumes for these products is expected to continue into 2024. These decreases were partially offset by sales of new CAD/CAM products. Sales of CAD/CAM products in the United States were also positively impacted by the timing of sales to distributors relative to the year ended December 31, 2022, as explained below in our discussion of net sales within the United States.
Essential Dental Solutions
A reconciliation of net sales to organic sales for the year ended December 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 1,468 | | | $ | 1,427 | | | $ | 41 | | | 2.8 | % |
Unfavorable foreign exchange impact | | | | | | | | (0.8 | %) |
| | | | | | | | |
| | | | | | | | |
Organic sales | | | | | | | | 3.6 | % |
Percentages are based on actual values and may not recalculate due to rounding.
The increase in organic sales was due to price increases across the segment and higher volumes of preventive consumable products, particularly in the United States, as well as the favorable impact of new product launches. These increases were partially offset by lower volumes of restorative and endodontic consumables products.
Orthodontic and Implant Solutions
A reconciliation of net sales to organic sales for the year ended December 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 1,040 | | | $ | 1,006 | | | $ | 34 | | | 3.4 | % |
Unfavorable foreign exchange impact | | | | | | | | (1.7 | %) |
| | | | | | | | |
| | | | | | | | |
Organic sales | | | | | | | | 5.1 | % |
Percentages are based on actual values and may not recalculate due to rounding.
The increase in organic sales was primarily driven by higher volumes of both our in-office and direct-to-consumer orthodontic aligner solutions, particularly in the United States, coupled with an increase in the volume of implants and prosthetics products in the Rest of World, particularly in China. Organic sales also benefited from price increases for orthodontic aligners during the year. These increases were partially offset by lower volumes of implants and prosthetics products in the United States and Europe.
Wellspect Healthcare
A reconciliation of net sales to organic sales for the year ended December 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 288 | | | $ | 270 | | | $ | 18 | | | 6.6 | % |
Unfavorable foreign exchange impact | | | | | | | | (0.7 | %) |
| | | | | | | | |
| | | | | | | | |
Organic sales | | | | | | | | 7.3 | % |
Percentages are based on actual values and may not recalculate due to rounding.
The increase in organic sales was primarily driven by higher volumes across all regions, particularly in Europe, the favorable impact of new product launches and price increases.
Net Sales by Region
United States
A reconciliation of net sales to organic sales for the year ended December 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 1,437 | | | $ | 1,392 | | | $ | 45 | | | 3.2 | % |
Favorable foreign exchange impact | | | | | | | | 0.2 | % |
| | | | | | | | |
| | | | | | | | |
Organic sales | | | | | | | | 3.0 | % |
Percentages are based on actual values and may not recalculate due to rounding.
The increase in organic sales was driven primarily by price increases and higher demand for Essential Dental Solutions products and orthodontics aligners. This was partially offset by lower volumes of imaging, instruments and implants products. Organic sales were also positively affected by wholesale volumes for CAD/CAM products relative to the year ended December 31, 2022 due in part to timing of sales to distributors in prior year. The level of inventory for CAD/CAM units held by distributors at year end 2023 remained consistent with the beginning of 2023, compared to a reduction in distributor inventory levels of approximately $60 million in 2022. Distributor inventory levels for CAD/CAM products remained low as of December 31, 2023 relative to historical averages.
Europe
A reconciliation of net sales to organic sales for the year ended December 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 1,550 | | | $ | 1,559 | | | $ | (9) | | | (0.6 | %) |
Unfavorable foreign exchange impact | | | | | | | | (0.4 | %) |
| | | | | | | | |
| | | | | | | | |
Organic sales | | | | | | | | (0.2 | %) |
Percentages are based on actual values and may not recalculate due to rounding.
The decrease in organic sales was primarily driven by lower volumes of CAD/CAM, imaging, and instruments products because of unfavorable market and macroeconomic trends, particularly in Germany, partially offset by positive performance in the Wellspect Healthcare segment, price increases and higher volumes of orthodontic aligners.
Rest of World
A reconciliation of net sales to organic sales for the year ended December 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 978 | | | $ | 971 | | | $ | 7 | | | 0.7 | % |
Unfavorable foreign exchange impact | | | | | | | | (4.4 | %) |
| | | | | | | | |
| | | | | | | | |
Organic sales | | | | | | | | 5.1 | % |
Percentages are based on actual values and may not recalculate due to rounding.
The increase in organic sales was primarily driven by higher volumes of implant products, price increases and improved demand for Essential Dental Solutions products. Organic sales also benefited from higher volumes of certain Connected Technology Solutions products, including treatment centers and imaging. Additionally, local volume-based procurement policies in China, which were implemented in 2023 resulted in increased volumes of implants products, partially offset by price reductions.
Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Gross profit | | $ | 2,086 | | | $ | 2,127 | | | $ | (41) | | | (1.9 | %) |
| | | | | | | | |
Gross profit as a percentage of net sales | | 52.6 | % | | 54.2 | % | | (160) bps | | |
Percentages are based on actual values and may not recalculate due to rounding.
Gross profit declined due to higher manufacturing and input costs, an increase in warranty costs, and inventory obsolescence charges driven by the Company’s product rationalization initiatives. Margins were also negatively affected by foreign currency translation headwinds of $16 million.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Selling, general, and administrative expenses | | $ | 1,613 | | | $ | 1,589 | | | $ | 24 | | | 1.5 | % |
Research and development expenses | | 184 | | | 174 | | | 10 | | | 5.9 | % |
Goodwill and intangible asset impairments | | 307 | | | 1,287 | | | (980) | | | NM |
Restructuring and other costs | | 67 | | | 14 | | | 53 | | | NM |
| | | | | | | | |
SG&A as a percentage of net sales | | 40.7 | % | | 40.5 | % | | 20 bps | | |
R&D as a percentage of net sales | | 4.6 | % | | 4.4 | % | | 20 bps | | |
Percentages are based on actual values and may not recalculate due to rounding.
NM - Not meaningful
SG&A Expenses
SG&A expenses as a percentage of net sales increased in part due to higher headcount costs which were primarily due to incremental investments in the Company’s customer-facing roles, inflationary increases, and incentive compensation, partially offset by savings from the restructuring initiatives. Expenses were also negatively impacted by an increase in clinical education, travel, and trade event costs as more customer-related interactions have returned to in-person format. The overall increase in expenses was partially offset by a benefit from lower than expected severance costs due to a settlement, lower professional service costs, and lower advertising costs.
R&D Expenses
R&D expenses increased compared to the year ended December 31, 2016. Reported2022. The Company continues to prioritize ongoing investments in digital workflow solutions, product development initiatives, software development for improved collaboration, cloud connectivity of devices, and a clinical application suite. The Company expects to maintain a level of investment in R&D that is approximately 4% of annual net sales, excluding precious metal content, increased by $173.9 million or 8.8% for the year ended December 31, 2017 assales.
Goodwill and Intangible Asset Impairments
Goodwill and intangible asset impairments decreased compared to the year ended December 31, 2016. This increase reflects sales2022, due to a lower level of $98.6 million as a resultimpairment charges. For further details see Item 8, Note 11, Goodwill and Intangible Assets, in the Notes to the Consolidated Financial Statements of the inclusion of two additional months of Sirona forthis Form 10-K.
Restructuring and Other Costs
During the year ended December 31, 2017 compared2023, we recorded net expense of $67 million of Restructuring and other costs which consist primarily of charges associated with the restructuring plan announced in February 2023. For further details see Item 8, Note 18, Restructuring and Other Costs, in the Notes to the year ended December 31, 2016. Consolidated Financial Statements of this Form 10-K.
Segment Adjusted Operating Income
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) (a) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Connected Technology Solutions | | $ | 101 | | | $ | 161 | | | $ | (60) | | | (37.5 | %) |
| | | | | | | | |
Essential Dental Solutions | | 478 | | | 467 | | | 11 | | | 2.4 | % |
| | | | | | | | |
Orthodontic and Implant Solutions | | 156 | | | 193 | | | (37) | | | (19.3 | %) |
| | | | | | | | |
Wellspect Healthcare | | 87 | | | 73 | | | 14 | | | 19.9 | % |
Percentages are based on actual values and may not recalculate due to rounding.(a) See Note 6, Segment and Geographic Information, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for a reconciliation from segment adjusted operating income to consolidated U.S. GAAP income.
Connected Technology Solutions
The decrease in segment adjusted operating income is due to the organic sales decrease noted above, increased warranty costs, unfavorable impact from product mix, manufacturing and input cost inflation, and increased headcount primarily for key customer-facing roles. These increases were partially offset by reductions in professional services costs.
Essential Dental Solutions
The increase in net sales, excluding precious metal content, was favorably impacted, based on the Company’s estimate, by approximately $23 million as a result of net changes in equipment inventory levels in the current year as compared to the prior year at certain distributors in North America and Europe, that the Company believessegment adjusted operating income is related to the transition in distribution strategy (see “Business Drivers” under this section for further detail). Based on the Company’s estimate, inventory held by these distributors increased by approximately $26 million during the current year compared to an increase of approximately $3 million in 2016. The inventory increase in 2017 was more than anticipated, in the Company’s assessment, as a result of lower equipment sales to end-users as well as higher than anticipated stocking of inventory by distributors in the U.S. The Company expects net sales during 2018 to be negatively impacted by approximately $40 million as a result of a planned reduction of inventory held at distributors.
For the year ended December 31, 2017, sales of our combined businesses declined 0.1% on a constant currency basis. This includes a benefit of approximately 2.7% from net acquisitions, which results in negative internal sales growth of 2.8%. Net sales, excluding precious metal content, were favorably impacted by approximately 1.0% due to the weakening of the U.S. dollar as compared to the prior year. Sales decline was led by the U.S. and the Rest of World regions, partially offset by Europe. The negative internalorganic sales growth rate, based on the Company’s estimate, was favorably impacted by changes in equipment inventory levels in the current year as compared to the prior year at certain distributors related to the transition in distribution strategy.
The operating income increased $55.3 million or 15.5% for the year ended December 31, 2017 as compared to 2016 reflects the impact of the consolidation of two additional months of Sirona, and the savings from the Company’s global efficiency and integration program. Based on the Company’s assessment, operating income was favorably impacted by the change in net equipment inventory as discussed above.
Consumables
Reported net sales increased by 5.8% for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Reported net sales, excluding precious metal content, increased by $98.0 million or 5.8% for the year ended December 31, 2017 as compared to the year ended December 31, 2016. This increase reflects sales of $14.1 million as a result of the inclusion of two additional months of Sirona for the year ended December 31, 2017 compared to the year ended December 31, 2016.
For the year ended December 31, 2017, sales of our combined businesses grew 3.7% on a constant currency basis. This includes a benefit of 0.6% from net acquisitions which results in internal growth of 3.1%. Net sales, excluding precious metal content, were positively impacted by approximately 1.2% due to the weakening of the U.S. dollar over the prior year period. Sales growth in this segment reflects increased demand in the all regions.
The operating income increased $41.8 million or 9.4% for the year ended December 31, 2017 as compared to 2016. This increase was primarily driven by the increase in sales, favorable product mix andnoted above, the favorable impact of foreign currency.
RESULTS OF OPERATIONS
2016 Compared to 2015
Net Sales
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
(in millions, except percentage amounts) | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | |
Net sales | $ | 3,745.3 |
| | $ | 2,674.3 |
| | $ | 1,071.0 |
| | 40.0 | % |
Less: Precious metal content of sales | 64.3 |
| | 92.8 |
| | (28.5 | ) | | (30.7 | %) |
Net sales, excluding precious metal content | $ | 3,681.0 |
| | $ | 2,581.5 |
| | $ | 1,099.5 |
| | 42.6 | % |
Net sales, excluding precious metal content, for the year ended December 31, 2016 were $3,681.0 million,currency exchange partially offset by manufacturing and input cost inflation and an increase in SG&A expenses including an increase in headcount for customer-facing roles and trade event related expenses.
Orthodontic and Implant Solutions
The decrease in segment adjusted operating income is due to an increase in SG&A costs including increased headcount for key customer-facing roles particularly personnel supporting implants sales in the United States, the unfavorable impact of $1,099.5 millionforeign currency exchange, and manufacturing and input cost inflation, partially offset by the organic sales increase.
Wellspect Healthcare
The increase in segment adjusted operating income resulted from the year ended December 31, 2015,increase in organic sales noted above, as reported by legacy DENTSPLY. This excludes approximately $13.5 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
Sales related to precious metal content declined 30.7% during 2016, which was primarily related to the discontinued refinery product lines and to a lesser extent the continued reduction in the use of precious metal alloys in dentistry.
For the year ended December 31, 2016, sales of our combined businesses grew 3.6% on a constant currency basis. This includes a benefit of 1.7% from net acquisitions and was unfavorably impacted by discontinued products by approximately 50 basis points, which leads to internal growth of 2.4%. Net sales, excluding precious metal content, were negatively impacted by approximately 90 basis pointswell as margin improvements due to the strengthening of the U.S. dollar over the prior year period. A reconciliation of reported net salesfavorable manufacturing leverage from higher volumes, partially offset by unfavorable foreign currency translation.
Other Income and Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | $ Change | | % Change |
| | | | | | | | |
Interest expense, net | | $ | 81 | | | $ | 65 | | | $ | 16 | | | 24.2 | % |
Other expense (income), net | | 9 | | | 53 | | | (44) | | | NM |
Net interest and other expense | | $ | 90 | | | $ | 118 | | | $ | (28) | | | |
Percentages are based on actual values and may not recalculate due to net sales, excluding precious metal content, of the combined business for the year ended December 31, 2016 and 2015, respectfully, is as follows:
|
| | | | | | | | | | | | | | | |
| | Year Ended | | | | |
| | December 31, | | |
(in millions, except percentage amounts) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 3,745.3 |
| | $ | 2,674.3 |
| | $ | 1,071.0 |
| | 40.0 | % |
Less: precious metal content of sales | | 64.3 |
| | 92.8 |
| | (28.5 | ) | | (30.7 | %) |
Net sales, excluding precious metal content | | 3,681.0 |
| | 2,581.5 |
| | 1,099.5 |
| | 42.6 | % |
Sirona net sales (a) | | 160.7 |
| | 1,172.5 |
| | (1,011.8 | ) | | NM |
|
Merger related adjustments (b) | | 13.5 |
| | — |
| | 13.5 |
| | NM |
|
Elimination of intercompany net sales | | (0.5 | ) | | (2.3 | ) | | 1.8 |
| | NM |
|
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 3,854.7 |
| | $ | 3,751.7 |
| | $ | 103.0 |
| | 2.7 | % |
(a) Represents Sirona sales for January and February 2016, and the year ended December 31, 2015.
(b) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2016 and 2015 non-U.S. GAAP combined business results comparable.rounding.
NM - Not meaningful
Sales Growth by RegionInterest expense, net
Net sales, excluding precious metal content, for the year ended December 31, 2016 and 2015, respectfully, by geographic region is as follows:
|
| | | | | | | | | | | | | | | |
| | Year Ended | | | | |
| | December 31, | | | | |
(in millions, except percentage amounts) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
United States | | $ | 1,306.4 |
| | $ | 958.8 |
| | $ | 347.6 |
| | 36.3 | % |
| | | | | | | | |
Europe | | 1,421.7 |
| | 1,065.3 |
| | 356.4 |
| | 33.5 | % |
| | | | | | | | |
Rest of World | | 952.9 |
| | 557.4 |
| | 395.5 |
| | 71.0 | % |
A reconciliation of reported net sales to net sales, excluding precious metal content, of the combined business by geographic region for the year ended December 31, 2016 and 2015, respectfully, is as follows:
|
| | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2016 |
(in millions) | | United States | | Europe | | Rest of World | | Total |
| | | | | | | | |
Net sales | | $ | 1,311.6 |
| | $ | 1,463.2 |
| | $ | 970.5 |
| | $ | 3,745.3 |
|
Less: precious metal content of sales | | 5.2 |
| | 41.5 |
| | 17.6 |
| | 64.3 |
|
Net sales, excluding precious metal content | | 1,306.4 |
| | 1,421.7 |
| | 952.9 |
| | 3,681.0 |
|
Sirona net sales (a) | | 60.5 |
| | 59.4 |
| | 40.8 |
| | 160.7 |
|
Merger related adjustments (b) | | 11.9 |
| | 1.6 |
| | — |
| | 13.5 |
|
Elimination of intercompany net sales | | (0.1 | ) | | (0.4 | ) | | — |
| | (0.5 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 1,378.7 |
| | $ | 1,482.3 |
| | $ | 993.7 |
| | $ | 3,854.7 |
|
(a) Represents Sirona sales for January and February 2016
(b) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2016 and 2015 non-U.S. GAAP combined business results comparable.
|
| | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2015 |
(in millions) | | United States | | Europe | | Rest of World | | Total |
| | | | | | | | |
Net sales | | $ | 965.9 |
| | $ | 1,125.7 |
| | $ | 582.7 |
| | $ | 2,674.3 |
|
Less: precious metal content of sales | | 7.1 |
| | 60.4 |
| | 25.3 |
| | 92.8 |
|
Net sales, excluding precious metal content | | 958.8 |
| | 1,065.3 |
| | 557.4 |
| | 2,581.5 |
|
Sirona net sales (a) | | 406.4 |
| | 394.0 |
| | 372.1 |
| | 1,172.5 |
|
Elimination of intercompany net sales | | (0.1 | ) | | (2.2 | ) | | — |
| | (2.3 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 1,365.1 |
| | $ | 1,457.1 |
| | $ | 929.5 |
| | $ | 3,751.7 |
|
(a) Represents Sirona sales for the year ended December 31, 2015.
United States
Reported net sales, excluding precious metal content, increased by 36.3% for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase reflects sales of $352.3 million as a result of the Merger and other acquisitions, primarily the consolidation of the Sirona businesses for ten months. This excludes approximately $11.9 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
For the year ended December 31, 2016, sales of our combined businesses grew 1.0% on a constant currency basis. This includes a benefit of 2.3% from net acquisitions and was unfavorably impacted by discontinued products by approximately 40 basis points, which results in a negative internal sales growth rate of 0.9%. This was driven by lower sales in the Technologies & Equipment segment and was the result of lower purchases by a dealer compared to the prior period.
Europe
Reported net sales, excluding precious metal content, increased by 33.5% for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase reflects sales of $361.6 million as a result of the Merger and other acquisitions, primarily the consolidation of the Sirona businesses for ten months. This excludes approximately $1.6 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
For the year ended December 31, 2016, sales of our combined businesses grew 3.2% on a constant currency basis. This includes a benefit of 1.0% from net acquisitions and was unfavorably impacted by discontinued products by approximately 70 basis points, which results in internal growth of 2.9%. Net sales, excluding precious metal content, were negatively impacted by approximately 1.5% due to the strengthening of the U.S. dollar over the prior year period. Internal sales growth in this region was primarily driven by higher demand in the Consumables segment.
Rest of World
Reported net sales, excluding precious metal content, increased by 71.0% for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase reflects sales of $378.7 million as a result of the Merger and other acquisitions, primarily the consolidation of the Sirona businesses for ten months.
For the year ended December 31, 2016, sales of our combined businesses grew 8.2% on a constant currency basis. This includes a benefit of 1.9% from net acquisitions and was unfavorably impacted by discontinued products by approximately 30 basis points, which results in internal growth of 6.6%. Net sales, excluding precious metal content, were negatively impacted by approximately 1.2% due to the strengthening of the U.S. dollar over the prior year period. Internal sales growth in this region was driven by higher demand in both segments led by the Technologies & Equipment segment.
Gross Profit
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
(in millions, except percentage amounts) | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | |
Gross profit | $ | 2,000.9 |
| | $ | 1,517.2 |
| | $ | 483.7 |
| | 31.9 | % |
Gross profit as a percentage of net sales, including precious metal content | 53.4 | % | | 56.7 | % | | |
| | |
|
Gross profit as a percentage of net sales, excluding precious metal content | 54.4 | % | | 58.8 | % | | |
| | |
|
Gross profit as a percentage of net sales, excluding precious metal content, decreased by 440 basis points for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This decrease was the result of the roll-off of Merger related fair value adjustments, Sirona’s lower gross profit rate, and foreign currency, which negatively impacted the rate by 610 basis points. The decrease was partially offset by savings from the Company’s global efficiency and integration program and favorable product pricing during the year ended December 31, 2016 as compared to the year ended December 31, 2015.
Operating Expenses
|
| | | | | | | | | | | | | | | |
| | Year Ended | | | | |
| | December 31, | | | | |
(in millions, except percentage amounts) | | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
Selling, general and administrative expenses (“SG&A”) | | $ | 1,523.0 |
| | $ | 1,077.3 |
| | $ | 445.7 |
| | 41.4 | % |
Restructuring and other costs | | 23.2 |
| | 64.7 |
| | (41.5 | ) | | (64.1 | %) |
| | | | | | | | |
SG&A as a percentage of net sales, including precious metal content | | 40.7 | % | | 40.3 | % | | |
| | |
|
SG&A as a percentage of net sales, excluding precious metal content | | 41.4 | % | | 41.7 | % | | |
| | |
|
SG&A Expenses
SG&A expenses, including research and developing expenses, as a percentage of net sales, excluding precious metal content, for the year ended December 31, 2016 decreased 30 basis points compared to the year ended December 31, 2015. The decrease was primarily the result of Sirona’s lower operating expense rate and savings from the Company’s global efficiency and integration program, partially offset by increased amortization expense and other costs related to the Merger.
Restructuring and Other Costs
The Company recorded net restructuring and other costs of $23.2 million for the year ended December 31, 2016 compared to $64.7 million for the year ended December 31, 2015. In 2016, restructuring costs were related to the closure and consolidation of facilities in an effort to streamline the Company’s operations and better leverage the Company’s resources. In 2015, the Company reorganized portions of its laboratory business and associated manufacturing capabilities within the Consumables segment.
In October 2016, the Company announced proposed plans in Germany to reorganize and combine portions of its manufacturing, logistics and distribution networks within both of the Company’s segments. As required under German law, the Company has entered into a statutory co-determination process under which it will collaborate with the appropriate labor groups to jointly define the infrastructure and staffing adjustments necessary to support this initiative. The Company also initiated similar actions in other regions of the world. The Company estimates the cost of these initiatives to range up to $65 million, primarily for severance related benefits for employees, which is expected to be incurred as actions are implemented over the next two years.
Other Income and Expenses
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
(in millions, except percentage amounts) | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | |
Net interest expense | $ | 33.9 |
| | $ | 53.7 |
| | $ | (19.8 | ) | | (36.9 | %) |
Other income, net | (20.1 | ) | | (8.2 | ) | | (11.9 | ) | | NM |
|
Net interest and other expense | $ | 13.8 |
| | $ | 45.5 |
| | $ | (31.7 | ) | |
|
|
NM - Not meaningful
Net Interest Expense
Net interest expense for the year ended December 31, 2016 was $19.8 million lower2023 increased as compared to the year ended December 31, 2015. The decrease is a result of $15.5 million of costs incurred in 2015 related to a bond tender which was comprised of a bond premium and tender fees paid of $8.5 million and the acceleration of the discount on tendered bonds and other fees of $7.0 million. Excluding the bond tender expense, net interest expense was $4.2 million lower in 2016 as compared to 2015 due to lower average2022, driven primarily by higher interest rates on lower average debt levels during 2016.short-term and other borrowings.
Other Expense (Income)expense (income), Netnet
Other expense (income), net for the year ended December 31, 2016 improved $11.9 million2023 compared to the year ended December 31, 2015. Other expense (income), net for2022 was as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | $ Change |
| | | | | | |
Loss on sales or disposal of non-core businesses | | $ | — | | | $ | 3 | | | $ | (3) | |
Foreign exchange (gains) losses (a) | | (3) | | | 6 | | | (9) | |
Loss from equity method investments | | 4 | | | 36 | | | (32) | |
Defined benefit pension plan expenses | | 7 | | | 7 | | | — | |
Other non-operating loss | | 1 | | | 1 | | | — | |
Other expense (income), net | | $ | 9 | | | $ | 53 | | | $ | (44) | |
(a) Foreign exchange (gains) losses are primarily related to the revaluation of intercompany payables and loans.
Loss from equity method investments decreased compared to the year ended December 31, 2016 includes foreign exchange gain of $10.3 million and $9.9 million of other non-operating income primarily2022 due to the write-off in 2022 of the Company’s ownership position in a legal settlement. Other income, net forprivately-held dental investment company following impairment of underlying investments held by the year ended December 31, 2015investment company and the Company’s determination that the remaining investment was $8.2 million, comprised primarily of $5.2 million of foreign exchange gains, and $3.0 million of other non-operating income.not recoverable.
Income Taxes and Net IncomeLoss | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except per share data and percentages) | | 2023 | | 2022 | | $ Change |
| | | | | | |
Benefit for income taxes | | $ | (43) | | | $ | (105) | | | $ | 62 | |
| | | | | | |
Effective income tax rate | | 24.8 | % | | 9.9 | % | | |
| | | | | | |
Net loss attributable to Dentsply Sirona | | $ | (132) | | | $ | (950) | | | $ | 818 | |
| | | | | | |
Net loss per common share - diluted | | $ | (0.62) | | | $ | (4.41) | | | |
Percentages are based on actual values and may not recalculate due to rounding. |
| | | | | | | | | | | |
| Year Ended December 31, | | |
(in millions, except per share and percentage amounts) | 2016 | | 2015 | | $ Change |
| | | | | |
Effective income tax rate | 2.2 | % | | 23.4 | % | | |
| | | | | |
Net income attributable to Dentsply Sirona | $ | 429.9 |
| | $ | 251.2 |
| | $ | 178.7 |
|
| | | | | |
Diluted earnings per common share | $ | 1.94 |
| | $ | 1.76 |
| | |
|
Benefit for income taxes
Provision
We recorded an income tax benefit of $43 million and $105 million for Income Taxes
The Company’s effective tax rate for 2016 and 2015 was 2.2% and 23.4%, respectively. For the yearyears ended December 31, 2016, income taxes were a net expense of $9.5 million. During the year, the Company recorded a2023 and December 31, 2022, respectively. The decrease in tax benefit fromis primarily due to the releaseimpairment of a valuation allowance on previously unrecognized tax assets related to foreign interest deduction carryforwards of a non-U.S. legacy DENTSPLY subsidiary of approximately $72.6 million, resulting from the Merger. The Company alsogoodwill recorded $0.8 million of tax expense related to other discrete tax matters. Excluding the impact of these tax matters, the Company’s effective tax rate was 18.9%. The effective tax rate was favorably impacted by the Company’s change in the mix of consolidated earnings. 2022.
Further information regarding the details of income taxes is presented in Note 14,16, Income Taxes, in the Notes to Consolidated Financial Statements in Item 158 of this Form 10-K.
The Company’s effective income tax rate for 2016 included the net impact
2022 Compared to 2021
Discussion of business combination related costs and fair value adjustments, amortization of purchased intangible assets, restructuring program related costs and other costs, credit risk and fair value adjustments and income tax related adjustments which impacted income before income taxes and the provision for income taxes by $340.3 million and $153.1 million, respectively.
The Company’s effective income tax rate for 2015 included the net impact of restructuring program related costs and other costs, amortization of purchased intangible assets, business combination related costs and fair value adjustments, income tax related adjustments, credit risk and fair value adjustments and certain fair value adjustments related to an unconsolidated affiliated company which impacted income before income taxes and the provision for income taxes by $153.0 million and $33.5 million, respectively.
Net Income attributable to Dentsply Sirona
In addition to the results reported in accordance with US GAAP, the Company provides adjusted net income attributable to Dentsply Sirona and adjusted earnings per diluted common share (“adjusted EPS”). The Company discloses adjusted net income attributable to Dentsply Sirona to allow investors to evaluate the performance of 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 intangible assets either purchased or acquired through a business combination. 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, 2016 |
(in millions, except per share amounts) | | Net Income | | Per Diluted Common Share |
| | | | |
Net income attributable to Dentsply Sirona | | $ | 429.9 |
| | $ | 1.94 |
|
Pre-tax non-US GAAP adjustments: | | | | |
Business combination related costs and fair value adjustments | | 162.2 |
| | |
Amortization of purchased intangible assets | | 155.3 |
| | |
Restructuring program related costs and other costs | | 17.0 |
| | |
Credit risk and fair value adjustments | | 5.8 |
| | |
Tax impact of the pre-tax non-US GAAP adjustments (a) | | (79.6 | ) | | |
Subtotal non-US GAAP adjustments | | 260.7 |
| | 1.17 |
|
Income tax related adjustments | | (73.5 | ) | | (0.33 | ) |
Adjusted non-US GAAP net income | | $ | 617.1 |
| | $ | 2.78 |
|
(a) The tax amount was calculated using the applicable statutory tax rate in the tax jurisdiction where the non-US GAAP adjustments were generated.
|
| | | | | | | | |
| | Year Ended December 31, 2015 |
(in millions, except per share amounts) | | Net Income | | Per Diluted Common Share |
| | | | |
Net income attributable to Dentsply Sirona | | $ | 251.2 |
| | $ | 1.76 |
|
Pre-tax non-US GAAP adjustments: | | | | |
Restructuring program related costs and other costs | | 92.9 |
| | |
Amortization of purchased intangible assets | | 43.7 |
| | |
Business combination related costs and fair value adjustments | | 13.3 |
| | |
Credit risk and fair value adjustments | | 8.3 |
| | |
Certain fair value adjustments related to an unconsolidated affiliated company | | (2.8 | ) | | |
Tax impact of the pre-tax non-US GAAP adjustments (a) | | (39.8 | ) | | |
Subtotal non-US GAAP adjustments | | 115.6 |
| | 0.82 |
|
Income tax related adjustments | | 6.3 |
| | 0.04 |
|
Adjusted non-US GAAP net income | | $ | 373.1 |
| | $ | 2.62 |
|
(a) The tax amount was calculated using the applicable statutory tax rate in the tax jurisdiction where the non-US GAAP adjustments were generated.
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. 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.
|
| | | | | | | |
| | Year Ended December 31, 2016 |
(in millions, except percentage of net sales amount) | | Operating Income | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | | |
Operating income attributable to Dentsply Sirona | | $ | 454.7 |
| | 12.4 | % |
Business combination related costs and fair value adjustments | | 161.8 |
| | 4.4 | % |
Amortization of purchased intangible assets | | 155.3 |
| | 4.2 | % |
Restructuring program related costs and other costs | | 27.1 |
| | 0.7 | % |
Credit risk and fair value adjustments | | 5.3 |
| | 0.1 | % |
Adjusted non-US GAAP Operating Income | | $ | 804.2 |
| | 21.8 | % |
|
| | | | | | | |
| | Year Ended December 31, 2015 |
(in millions, except percentage of net sales amounts) | | Operating Income | | Percentage of Net Sales, Excluding Precious Metal Content |
| | | | |
Operating income attributable to Dentsply Sirona | | $ | 375.2 |
| | 14.5 | % |
Restructuring program related costs and other costs | | 81.1 |
| | 3.2 | % |
Amortization of purchased intangible assets | | 43.7 |
| | 1.7 | % |
Business combination related costs and fair value adjustments | | 13.1 |
| | 0.5 | % |
Credit risk and fair value adjustments | | $ | 8.0 |
| | 0.3 | % |
Adjusted non-US GAAP Operating Income | | $ | 521.1 |
| | 20.2 | % |
Operating Segment Results
|
| | | | | | | | | | | | | | |
| | | | | | | |
Net Sales, Excluding Precious Metal Content | Year Ended December 31, | | | | |
(in millions, except percentage amounts) | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | |
Technologies & Equipment | $ | 1,986.4 |
| | $ | 1,019.9 |
| | $ | 966.5 |
| | 94.8 | % |
| | | | | | | |
Consumables | $ | 1,694.6 |
| | $ | 1,561.6 |
| | $ | 133.0 |
| | 8.5 | % |
|
| | | | | | | | | | | | | | |
| | | | | | | |
Segment Operating Income | Year Ended December 31, | | | | |
(in millions, except percentage amounts) | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | |
Technologies & Equipment | $ | 355.7 |
| | $ | 159.1 |
| | $ | 196.6 |
| | 123.6 | % |
| | | | | | | |
Consumables | $ | 445.3 |
| | $ | 443.2 |
| | $ | 2.1 |
| | 0.5 | % |
NM- Not meaningful
A reconciliation of reported net sales to net sales, excluding precious metal content, of the combined business by segment for the year ended December 31, 20162022 as compared to December 31, 2021 was included in Part II, Item 7 “Management’s Discussion and 2015, respectfully,Analysis of Financial Condition and Results of Operations” in the Company’s Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 1, 2023. Effective April 1, 2023 the Company realigned its reporting structure due to certain organizational changes. As a result, the reportable segments changed from Technology & Equipment and Consumables to (i) Connected Technology Solutions, (ii) Essential Dental Solutions, (iii) Orthodontic and Implant Solutions, and (iv) Wellspect Healthcare. A discussion of the results of operations for the year ended December 31, 2022 as compared to December 31, 2021 for net sales and segment adjusted operating income based on the realigned segments is as follows:
presented below.
|
| | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2016 |
(in millions) | | Technologies & Equipment | | Consumables | | Total |
| | | | | | |
Net sales | | $ | 2,050.5 |
| | $ | 1,694.8 |
| | $ | 3,745.3 |
|
Less: precious metal content of sales | | 64.1 |
| | 0.2 |
| | 64.3 |
|
Net sales, excluding precious metal content | | 1,986.4 |
| | 1,694.6 |
| | 3,681.0 |
|
Sirona net sales (a) | | 145.0 |
| | 15.7 |
| | 160.7 |
|
Merger related adjustments (b) | | 13.5 |
| | — |
| | 13.5 |
|
Elimination of intercompany net sales | | — |
| | (0.5 | ) | | (0.5 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 2,144.9 |
| | $ | 1,709.8 |
| | $ | 3,854.7 |
|
(a) Represents SironaNet Sales by Segment
Connected Technology Solutions
A reconciliation of net sales for January and February 2016.
(b) Represents an adjustments to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2016 and 2015 non-U.S. GAAP combined business results comparable.
|
| | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2015 |
(in millions) | | Technologies & Equipment | | Consumables | | Total |
| | | | | | |
Net sales | | $ | 1,112.7 |
| | $ | 1,561.6 |
| | $ | 2,674.3 |
|
Less: precious metal content of sales | | 92.8 |
| | — |
| | 92.8 |
|
Net sales, excluding precious metal content | | 1,019.9 |
| | 1,561.6 |
| | 2,581.5 |
|
Sirona net sales (a) | | 1,060.4 |
| | 112.1 |
| | 1,172.5 |
|
Elimination of intercompany net sales | | — |
| | (2.3 | ) | | (2.3 | ) |
Non-US GAAP combined business, net sales, excluding precious metal content | | $ | 2,080.3 |
| | $ | 1,671.4 |
| | $ | 3,751.7 |
|
(a) Represents Sironaorganic sales for the year ended December 31, 2015.2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2022 | | 2021 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 1,219 | | | $ | 1,348 | | | $ | (129) | | | (9.6 | %) |
Unfavorable foreign exchange impact | | | | | | | | (8.8 | %) |
| | | | | | | | |
| | | | | | | | |
Organic sales | | | | | | | | (0.8 | %) |
Technologies & EquipmentPercentages are based on actual values and may not recalculate due to rounding.
ReportedThe decrease in organic sales was primarily due to the impact of ongoing global supply chain constraints and lower volumes due to product availability, particularly for certain products which rely on electronic components, as well as the impact of COVID-19 reducing demand in certain markets, particularly China. These decreases were partially offset by sales of new CAD/CAM products and higher volumes of treatment center and imaging products. Sales of CAD/CAM products in the United States were also negatively impacted by high distributor inventory levels at the start of fiscal year 2022 which were subsequently reduced throughout the year. The level of inventory for CAD/CAM units held by distributors was reduced by approximately $60 million during 2022, compared to a build in inventory levels of approximately $50 million in 2021, partly as a result of incremental incentives offered during the latter half of that period which did not recur in 2022.
Essential Dental Solutions
A reconciliation of net sales excluding precious metal content, increased by $966.5 millionto organic sales for the year ended December 31, 20162022 was as compared to the year ended December 31, 2015. The increase is a result of the Mergerfollows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2022 | | 2021 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 1,427 | | | $ | 1,516 | | | $ | (89) | | | (5.8 | %) |
Unfavorable foreign exchange impact | | | | | | | | (5.2 | %) |
| | | | | | | | |
| | | | | | | | |
Organic sales | | | | | | | | (0.6 | %) |
Percentages are based on actual values and other acquisitions, primarily the consolidation of the Sirona businesses for ten months. This excludes approximately $13.5 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred income.
For the year ended December 31, 2016, sales of our combined businesses grew 4.0% on a constant currency basis. This includes a benefit of 3.2% from net acquisitions and was unfavorably impacted by discontinued products by approximately 80 basis points, which results in internal growth of 1.6%. Net sales, excluding precious metal content, were favorably impacted by approximately 1%may not recalculate due to the strengthening of the U.S. dollar over the prior year period. Sales growthrounding.
The decrease in this segment reflects increased demand in the Rest of World region offset byorganic sales declineswas due to lower volumes for endodontic and restorative products, particularly in the United States which reflects lower purchasesand China, with sales volumes in the latter having been negatively impacted by a dealer comparedgovernment regulations stemming from the COVID-19 pandemic. This decrease was partially offset by higher volumes of preventive consumable products, as well as price increases across the segment.
Orthodontic and Implant Solutions
A reconciliation of net sales to the prior year period.
The operating income increaseorganic sales for the year ended December 31, 20162022 was as comparedfollows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2022 | | 2021 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 1,006 | | | $ | 1,064 | | | $ | (58) | | | (5.5 | %) |
Unfavorable foreign exchange impact | | | | | | | | (5.4 | %) |
Acquisitions | | | | | | | | 0.3 | % |
Divestitures and discontinued products | | | | | | | | (0.3 | %) |
Organic sales | | | | | | | | (0.1 | %) |
Percentages are based on actual values and may not recalculate due to 2015 reflectsrounding.
The decrease in organic sales was primarily driven by lower volumes of implants products, particularly in China during the second half of 2022, due to reduced demand in advance of the local volume based procurement program taking effect in 2023, as well as from the impact of the Merger.COVID-19 pandemic. This decrease was partially offset by higher volumes of orthodontic aligners, particularly in the United States and Europe, as well as price increases across the segment.
Wellspect Healthcare
Consumables
ReportedA reconciliation of net sales excluding precious metal content, increased by $133.0 millionto organic sales for the year ended December 31, 20162022 was as comparedfollows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2022 | | 2021 | | $ Change | | % Change |
| | | | | | | | |
Net sales | | $ | 270 | | | $ | 303 | | | $ | (33) | | | (11.0 | %) |
Unfavorable foreign exchange impact | | | | | | | | (11.3 | %) |
| | | | | | | | |
| | | | | | | | |
Organic sales | | | | | | | | 0.3 | % |
Percentages are based on actual values and may not recalculate due to rounding.
The increase in organic sales was primarily driven by higher volumes, primarily in Europe and Rest of World, mostly offset by the impact of a one-time price adjustment matter with the Italian government.
Segment Adjusted Operating Income
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) (a) | | 2022 | | 2021 | | $ Change | | % Change |
| | | | | | | | |
Connected Technology Solutions | | $ | 161 | | | $ | 267 | | | $ | (106) | | | (39.5 | %) |
| | | | | | | | |
Essential Dental Solutions | | 467 | | | 511 | | | (44) | | | (8.6 | %) |
| | | | | | | | |
Orthodontic and Implant Solutions | | 193 | | | 217 | | | (24) | | | (11.3 | %) |
| | | | | | | | |
Wellspect Healthcare | | 73 | | | 87 | | | (14) | | | (16.9 | %) |
Percentages are based on actual values and may not recalculate due to rounding.(a) See Note 6, Segment and Geographic Information, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for a reconciliation from segment adjusted operating income to consolidated U.S. GAAP income.
Connected Technology Solutions
The decrease in segment adjusted operating income was due to the year ended December 31, 2015. The increase isorganic sales decrease noted above, higher costs for raw materials, labor, and distribution costs in 2022 as a result of supply chain constraints, and higher headcount and professional services costs. These increases were partially offset by favorable product sales mix.
Essential Dental Solutions
The decrease in segment adjusted operating income was due to the Merger and other acquisitions, primarilyorganic sales decrease noted above, the consolidation of the Sirona businesses for ten months.
For the year ended December 31, 2016, sales of our combined businesses grew 3.2% on a constant currency basis. This includes an unfavorable impact of approximately 0.2% from net acquisitions, which resultsforeign currency translation, higher manufacturing and distribution costs.
Orthodontic and Implant Solutions
The decrease in internal growth of 3.4%. Net sales, excluding precious metal content, were negatively impacted by approximately 0.8%segment adjusted operating income was due to the strengtheningorganic sales decrease noted above, the unfavorable impact of foreign currency translation, higher manufacturing and distribution costs, and higher advertising costs, partially offset by the U.S. dollar over the prior year period. Sales growth occurred in all regions.improved profitability of orthodontics products from higher volumes and price increases.
Wellspect Healthcare
The decrease in segment adjusted operating income increase forwas due to the year ended December 31, 2016 as compared to 2015 reflects the savings from the Company’s global efficiency and integration program, as well as theunfavorable impact of foreign currency translation and higher manufacturing costs, partially offset by the Merger.organic sales increase noted above.
CRITICAL ACCOUNTING JUDGMENTSPOLICIES AND POLICIESESTIMATES
The preparation of the Company’s consolidated financial statements in conformity with USU.S. GAAP requires the Company to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements. The process of determining significant estimates is fact specific and takes into accountconsiders factors such as historical experience, current and expected economic conditions, product mix and in some cases, actuarial techniques. The Company evaluates these significant factors as facts and circumstances dictate. Some events as described below could cause results to differ significantly from those determined using estimates. The Company has identified the following accounting estimates as those which are critical to its business and results of operations.
Business Acquisitions
The Company acquires businesses as well as partial interests in businesses. Acquired businesses are accounted for using the acquisition method of accounting which requires the Company to record assets acquired and liabilities assumed at their respective fair values with the excess of the purchase price over estimated fair values recorded as goodwill. The assumptions made in determining the fair value of acquired assets and assumed liabilities as well as asset lives can materially impact the results of operations.
The Company obtains information during due diligence and through other sources to get respective fair values. Examples of factors and information that the Company uses to determine the fair values include: tangible and intangible asset evaluations and appraisals; evaluations of existing contingencies and liabilities and product line integration information. If the initial valuation for an acquisition is incomplete by the end of the quarter in which the acquisition occurred, the Company will record a provisional estimate in the financial statements. The provisional estimate will be finalized as soon as information becomes available but will only occur up to one year from the acquisition date.
Goodwill and Other Long-Lived Assets
Goodwill and Indefinite-Lived Intangible Assets
The Company follows the accounting standards for goodwill and indefinite-lived intangibles, which require an annual test for impairment to goodwill using a fair value approach. In addition to minimum annual impairment tests, the Company also requires that impairment assessments be made more frequently if events or changes in circumstances indicate that the goodwill or indefinite-lived assets might be impaired. If impairment related to goodwill is identified, the resulting charge is determined by recalculating goodwill through a hypothetical purchase price allocation of the fair value and reducing the current carrying value to the extent it exceeds the recalculated goodwill. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized.
Other Long-Lived Assets
Other long-lived assets, such as definite-lived intangible assets and fixed assets, are amortized or depreciated over their estimated useful lives. In accordance with US GAAP, these assets are reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amount of the asset may not be recoverable based upon an evaluation of the identifiable undiscounted cash flows. If impaired based on the identifiable undiscounted cash flows, the asset’s fair value is determined using the discounted cash flow and market participant assumptions. The resulting charge reflects the excess of the asset’s carrying cost over its fair value.
Impairment Assessment
Assessment of the potential impairment of goodwill and other long-livedindefinite-lived intangible 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 numeroussignificant assumptions and reflects management’s best estimates at a particular point in time. The dynamic economic environments in which the Company’s businesses operate and key economic and business assumptions with respect to projected selling prices, increased competition and introductions of new technologies can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time at which such impairments are recognized. If there are unfavorable changes in these assumptions, particularly changes in the Company’s discount rates, earnings multiplesrevenue growth rates, and future cash flows,operating margins, the Company may be required to recognize impairment charges.
In particular, the determination of fair value involves uncertainties around the forecasted cash flows as it requires management to make assumptions and apply judgment to estimate future business expectations. Those future expectations include, but are not limited to, distribution channel changes, impact from competition, and new product developments for these reporting units. The Company also considers the current and projected market and economic conditions for dental and medical device industries, both in the United States and globally, when determining its assumptions. Operating cash flow assumptions may also be impacted by assumptions regarding costs and benefits from restructuring initiatives, tax rates, foreign exchange rates, capital spending and working capital changes.
A change in any of these estimates and assumptions used in the annual test, as well as unfavorable changes in the overall markets served by these reporting units, among other factors, could have a negative material impact to the fair value of the reporting units and indefinite-lived intangible assets and could result in a future impairment charge. There can be no assurance that the Company’s future goodwill and indefinite-lived impairment testing will not result in a material adverse impact to the Company’s results of operations.
Information with respect to the Company’s significant accounting policies on goodwill and other long-livedindefinite-lived intangible assets are included in Note 1, Significant Accounting Policies, in the Notes to Consolidated Financial Statements in Item 158 of this Form 10-K.
Annual Goodwill
Goodwill Impairment Testing
represents the excess cost over the fair value of the identifiable net assets of business acquired. Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicatorsevents or circumstances indicate that the carrying value of impairment existgoodwill may be impaired, or if a decision is made to sell a business. The valuation date for annual impairment testing is April 30. Judgment is involved in determining if an indicator of impairment has occurred.occurred during the year. Such indicators may include a decline in expected cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, increased interest rates, or slower growth rates, among others. When testing goodwill for impairment, the Company may assess qualitative factors for its reporting units to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount including goodwill. Alternatively, the Company may bypass this qualitative assessment and perform the quantitative goodwill impairment test. It is important to note that fair values thatwhich could be realized in an actual transaction may differ from those used to evaluate the impairment of goodwill.
Goodwill is allocated among reporting units and evaluated for impairment at thethat level. The Company’s reporting unit level, which is defined asunits are either an operating segment or one level below anits operating segment. The Company has several reporting units contained within each operating segment.segments, as determined in accordance with U.S. GAAP.
The quantitative evaluation of impairment involves comparing the current fair value of each reporting unit to its net book value, including goodwill. The Company uses a discounted cash flow model (“DCF model”) as its valuation technique to estimatemeasure the current fair value offor its reporting units when testing for impairment, as management believes forecasted operating cash flows are the best indicator of such fair value. A number ofThe discounted cash flow model uses five- to ten- year forecasted cash flows plus a terminal value based on capitalizing the last period’s cash flows using a perpetual growth rate. The significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows includinginclude, but are not limited to the discount rates, revenue growth rates (including perpetual growth rates), and future sales growth, operating margin growth, benefits from restructuring initiatives, tax rates, capital spending, business initiatives, and working capital changes.percentages of the reporting unit’s business. These assumptions may vary significantly among the reporting units. Operating cash flow forecasts are based on approved business-unit operating plans for the early years and historical relationships and projections in later years. In the development of the forecasted cash flows, the Company applies revenue, gross profit, and operating expense assumptions taking into consideration historical trends as well as future expectations. The weighted average costrevenue growth rate assumptions were developed in consideration of capital (“WACC”) rate isfuture expectations which included, but were not limited to, distribution channel changes, impact from competition, and new product developments for these reporting units. Discount rates are estimated for geographic regions and applied to the reporting units located within the regions. These rates are developed based on market participant data, which included assumptions regarding the Company’s weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected cash flows. As part of the annual test, 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. The Company has not materially changed its methodology for goodwill impairment testing for the years presented. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of the Company’s recorded goodwill, differences in assumptions may have a material effect on the results of the Company’s impairment analysis.
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. The Company adopted Accounting Standards Update No. 2017-04, “Intangibles, Goodwill and Other” during the three months ended March 31, 2017.
Annual Indefinite-Lived Intangible Asset Impairment TestingAssets
Indefinite-lived intangible assets consist of tradenames, trademarks and in-process R&D and are not subject to amortization; instead, they are tested for impairment annually or more frequently if indicatorsevents or circumstances indicate that the carrying value of impairment existindefinite-lived intangible assets may be impaired 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.occurred during the year. Such indicators may include a decline in expected cash flow, projections, a significant adverse change in legal factors or in the business climate, unanticipated competition, increased interest rates, 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.
The fair value of acquired tradenames and trademarks is estimated by the use ofusing a relief from royalty method, which values 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 rate, which is based on the estimated rate applied against forecasted sales, is tax-effectedtax-affected 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 growth rates, perpetual revenue growth rates, 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.
Goodwill and Indefinite-Lived Intangible Asset Impairment Results
On April 1, 2023, the Company realigned its reporting structure due to certain organizational changes. Reporting units under the former structure were tested for impairment prior to the realignment, and no impairment was identified.
As a result of the realignment, the Company reallocated its goodwill to align its new reporting units which resulted from the change in its operating segments. Goodwill was reassigned to each of the new reporting units using a relative fair value approach. The Company performedassessed the required annualgoodwill of the new reporting units and its indefinite-lived intangible assets for impairment as of April 1, 2023. Based on this test, it was determined that the fair values of its reporting units and indefinite-lived intangible assets more likely than not exceeded their carrying values, resulting in no impairment.
For both the former and new structure goodwill impairment tests as of goodwill at April 30, 2017 on eleven reporting units. To determine1, 2023, the fair valuevalues of the Company’s reporting units the Company useswere computed using a discounted cash flow model with inputs developed using both internal and market-based support asdata.
In the quarter ended September 30, 2023, the Company identified indicators of a more likely than not impairment related to its valuation technique to measureConnected Technology Solutions reporting unit, which comprises all the Connected Technology Solutions segment. The decline in fair value for itsthis reporting units. The discounted cash flow model uses five- to ten-year forecasted cash flows plus a terminal value based on a multipleunit was driven by adverse macroeconomic factors because of earnings or by capitalizingweakened demand, particularly in European markets, and increased discount rates. Core underlying market interest rates, which serve as the last period’s cash flows using a perpetual growth rate. In the development of the forecasted cash flows, the Company applies revenue, gross profit, and operating expense assumptions taking into consideration historical trends as well as futures expectations. These future expectations include, but are not limited to, new product development and distribution channel changesbasis for the respective reporting units. The Company also considers the current and projected market conditions for dental and medical device industries, bothdiscount rate assumptions in the U.S. and globally, when determining its assumptions. The total forecasted cash flows were discounted based on a rangeour impairment models, rose by approximately 110 bps between 7.8% to 9.5%, which included assumptions regarding the Company’s weighted-average cost of capital. The use of estimates and the development of assumptions results in uncertainties around forecasted cash flows. A change in any of these estimates and assumptions could produce a different fair value, which could have a material impact on the Company’s results of operations.
Goodwill Testing Results
As a result of the annual impairment teststest and the interim test during the third quarter of goodwill2023. These factors contributed to reduced forecasted revenues, lower operating margins, and reduced expectations for future cash flows in conjunction with the preparationnear term, particularly demand for products which are commonly financed by end customers which are adversely impacted by an environment of higher interest rates. The higher inflationary environment also impacted the financial statementsdiscretionary spending behavior of our customers more generally, further reducing global demand for the three months ended June 30, 2017, the Company recorded a goodwill impairment chargecertain products in favor of $1,092.9 million related to the CAD/CAM, Imaging and Treatment Center equipment reporting units all within the Technologies & Equipment segment. The goodwill impairment charge was primarily driven by a change in forecasted sales and gross profit which resulted in a lower fair value for these reporting units.
For the Company’s reporting units that were not impaired, the Company applied a hypothetical sensitivity analysis. Had the WACC rate of each of these reporting units been hypothetically increased by 100 basis points at April 30, 2017, the fair value of those reporting units would still exceed net book value. If the fair value of each of these reporting units had been hypothetically reduced by 5% at April 30, 2017, the fair value of those reporting units would still exceed net book value. If the fair value of each of these reporting units had been hypothetically reduced by 10% at April 30, 2017, one reporting unit, within the Company’s Consumables segment, would have a fair value that would approximate net book value. Goodwill for that reporting unit totals $54.0 million at December 31, 2017. The Company did not identify any impairment triggers related to this reporting unit at December 31, 2017.
In preparing the financial statements for the year ended December 31, 2017, the Company identifiedcost options. As such, an impairment triggering event related to the CAD/CAM, Imaging and Treatment Center equipment reporting units. Forecasted revenues and operating margins for these reporting units were impacted by continued unfavorable developmentstest was performed in the marketplace which included an increase in competition. These developments resulted in significantly lower sales to end-users than expected in the fourththird quarter of 2017 in the North America and Rest of World regions as well as declines in expected gross profit rates which included the unfavorable impacts from changes in the foreign exchange rates. The impacts from foreign exchange rate changes were primarily driven by the strengthening of the euro versus the U.S. dollar as a result of the higher euro denominated costs and net assets associated with these reporting units as compared to the lower amount of euro denominated sales. While the Company considered unfavorable market developments and foreign exchange rate changes, in its April 30, 2017 assessment, the impact of these developments were at levels beyond those anticipated by the Company despite moving away from a non-exclusive distribution channel in the United States and the execution of new distribution agreements with Patterson Companies, Inc. and Henry Schein, Inc. in May and June of 2017. In addition to the unfavorable market and foreign exchange rate developments, the income tax rate forecast used in the annual goodwill test was unfavorably impacted by the recent tax legislation in the U.S. and other foreign jurisdictions. As a result the Company tested these reporting units for impairment in preparation of the financial statements for the year ended December 31, 2017 and determined that the goodwill associated with the CAD/CAM, Imaging and Treatment Center equipment reporting units, all within the Technologies & Equipment segment, was impaired. The impairment was the result of a change in forecasted sales and gross profit as well as changes in foreign exchange rates and the income tax rate.2023 (the “third quarter test”). As a result, the Company recorded a pre-tax goodwill impairment charge of $558.0 million for the three months ended December 31, 2017. The combinationSeptember 30, 2023 related to the Connected Technology Solutions reporting unit of impairment charges$291 million, resulting in a full write-off of the remaining goodwill balance for the secondConnected Technology Solutions segment. This charge was recorded in Goodwill and fourth quarters of 2017 resulted in a total goodwillintangible asset impairment charge of $1,650.9 million for the year ended December 31, 2017.
Slower net sales growth rates in the dental industry, continued weakness in end-user demand for the Company’s products as a resultConsolidated Statement of competition, an increase in discount rates, unfavorable changes in earnings multiples or a decline in future cash flow projections, foreign currency changes, unfavorable tax legislation among other factors, may cause a change in circumstances indicating that the carrying value of the Company’s goodwill may not be recoverable. There can be no assurance that the Company’s future goodwill impairment testing will not result in a charge to earnings.Operations.
Indefinite-lived and Definite-lived Intangible Assets Testing Results
The Company also assessed the annual impairment of indefinite-lived intangible assets as of April 30, 2017, which largely consists of acquired tradenames,Additionally, in conjunction with the annualthird quarter test, the Company tested the long-lived intangible assets related to the businesses within the Connected Technology Solutions reporting unit within the Connected Technology Solutions segment for impairment. The Company also identified an indicator of impairment tests of goodwill.for the indefinite-lived intangible assets within the Implants & Prosthetics reporting unit within the Orthodontic and Implant Solutions segment, and determined certain tradenames and trademarks were impaired. As a result, of the annual impairment tests of indefinite-lived intangible assets, the Company recorded anindefinite-lived intangible asset impairment chargecharges of $79.8$14 million and $2 million for the Connected Technology Solutions and Orthodontic and Implant Solutions segments, respectively, for the three months ended JuneSeptember 30, 20172023. The impairment charges were primarily driven by macroeconomic factors such as weakened demand, higher cost of capital, and cost inflation, which wasare contributing to reduced forecasted revenues. These charges were recorded in RestructuringGoodwill and other costs onintangible asset impairment in the Consolidated Statements of Operations. The impaired indefinite-lived intangibles assets are tradenames and trademarks related to the CAD/CAM and Imaging equipment reporting units. The impairment charge was primarily driven by a decline in forecasted sales. The assumptions and estimates used in determining the fair value of the indefinite-lived intangible assets contain uncertainties, and any changes to these assumptions and estimates could have a negative impact and result in a future impairment.
For the Company’s indefinite-lived assets that were not impaired, the Company applied a hypothetical sensitivity analysis. If the fair value of each of these indefinite-lived intangibles assets had been hypothetically reduced by 10% or the discount rate had been hypothetically increased by 50 basis points at April 30, 2017,As the fair value of these assets would still exceed their book value.
In preparing the financial statements for the year ended December 31, 2017, the Company, as result of the triggering event, tested the indefinite-lived intangible assets related to these reporting units for impairment As a result, the Company identified certain tradenames and trademarks related to the CAD/CAM, Imaging and Treatment Center equipment reporting units, all within the Technologies & Equipment segment, were impaired. The Company recorded an impairment chargeapproximate carrying value as of $266.9 million for the three months ended December 31, 2017 which was recorded in Restructuring and other cost on the Consolidated Statements of Operations. The Company recorded a total impairment charge for the year ended December 31, 2017 of $346.7 million related to indefinite-lived assets. The impairment charge was driven by a continuing2023, any further decline in forecasted sales. Thekey assumptions and estimates used in determining the fair value of the indefinite-lived intangible assets contain uncertainties, and any changes to these assumptions and estimates could have a negative impact and result in aadditional impairment in future impairment.periods.
Slower net sales growth ratesFor further information on our annual and interim tests, see Note 11, Goodwill and Intangible Assets, in the dental industry continued weaknessNotes to Consolidated Financial Statements in end-user demand for the Company’s products as a resultItem 8 of competition, an increase in discount rates, unfavorable changes in earnings multiples or a decline in future cash flow projections, foreign currency changes, unfavorable tax legislation among other factors, may cause a change in circumstances indicating that the carrying value of the Company’s indefinite-lived and definite-lived assets may not be recoverable. There can be no assurance that the Company’s future indefinite-lived asset impairment testing will not result in a charge to earnings.this Form 10-K.
Litigation
The Company and its subsidiaries are from time to time parties to lawsuits arising out of their respective operations. The Company records liabilities when a loss is probable and can be reasonably estimated. These estimates are typically in the form of ranges, and the Company records the liabilities at the low point of the ranges, when no other point within the ranges is a better estimate of the probable loss. The ranges established by management are based on analysis made by internal and external legal counsel based on information known at the time. If the Company determines a liability to be only reasonably possible, it considers the same information to estimate the possible exposure and discloses any material potential liability. These loss contingencies are monitored regularly for a change in fact or circumstance that would require an accrual adjustment. The Company believes it has 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 tax expense includes the U.S. and international income taxes plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemedconsidered to be permanently invested.
The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained on audit,upon examination by the taxing authorities based on the technical merits of the position.
Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. The Company establishes a valuation allowance for deferred tax assets for which realization is not likely. At December 31, 2017,2023, the Company has a valuation allowance of $3.0 billion$863 million against the benefit of certain deferred tax assets of foreign and domestic subsidiaries.
The Company’s tax positions are subject to ongoing examinations by the tax authorities. The Company operates within multiple taxing jurisdictions throughout the world and in the normal course of business is examined by taxing authorities in variousthose jurisdictions. The reversal of accruals isAdjustments to the uncertain tax positions are recorded when taxing authority examinations are completed, statutes of limitation are closed, orchanges in tax laws are changed.
The Company has accounted foroccur or as new information comes to light regarding the technical merits of the tax effects of The Tax Cuts and Jobs Act, enacted on December 22, 2017, on a provisional basis. The accounting for certain income tax effects is incomplete, but the Company has determined reasonable estimates for those effects. The Company’s reasonable estimates are included in the financial statements at December 31, 2017 and expects to complete the accounting during the one year measurement period from the enactment date.position.
LIQUIDITY AND CAPITAL RESOURCES
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | 2023 | | 2022 | | $ Change |
| | | | | | |
Cash provided by (used in): | | | | | | |
Operating activities | | $ | 377 | | | $ | 517 | | | $ | (140) | |
Investing activities | | (89) | | | (138) | | | 49 | |
Financing activities | | (307) | | | (329) | | | 22 | |
Effect of exchange rate changes on cash and cash equivalents | | (12) | | | (24) | | | 12 | |
Net (decrease) increase in cash and cash equivalents | | $ | (31) | | | $ | 26 | | | $ | (57) | |
| | | | | | |
Cash flows fromprovided by operating activities decreased primarily because of changes in working capital including lower collections from sales during the year ended December 31, 2017current period, higher cost of sales and operating expenses, and timing of payments to vendors. These decreases in operating cash were $601.9 millionoffset by other changes in working capital including the impact of inventory levels remaining flat during the current period as compared to $563.4 million during the year ended December 31, 2016. Net income declined by $1,981.7 millionbuild in inventory in the period ended December 31, 2017 compared to the prior year, largely from non-cash impairments of goodwill and intangible assets totaling $1,997.6 million related to the Technologies & Equipment segment. Working capital consumed $149.3 million of operating cash flow in 2017 compared to $54.8 million consumed in 2016. Other non-cash charges increased approximately $116.3 million versus the prior year, largely driven by restructuring, management changes, amortization and legal settlements. The Company's cash and cash equivalents decreased by $63.3 million during the year ended December 31, 2017 to $320.6 million.
year. For the year ended December 31, 2017, on a constant currency basis,2023, the number of days for sales outstanding in accounts receivable increased by 34 days to 6159 days at December 31, 2023 as compared to 5855 days in 2016. On a constant currency basis,at December 31, 2022, and the number of days of sales in inventory increaseddecreased by 1811 days to 131126 days at December 31, 20172023 as compared to 113137 days at December 31, 2016.2022.
InvestingThe decrease in cash used in investing activities during 2017 included capital expenditureswas primarily due to higher cash received on derivative contract settlements of $144.3$26 million and acquisitionsproceeds of businesses$13 million from the sale of the Company’s minority investment in a provider of healthcare consumables. Capital expenditures were $149 million in both 2023 and intangible assets of $152.6 million.2022. The Company expectsestimates capital expenditures to be in the range of approximately $130$170 million to $140$200 million for the full year 2018.
Attwelve months ending December 31, 2017, the Company had authorization2024 and expects these investments to maintain upinclude implementation expenses for a new global Enterprise Resource Planning (“ERP”) system, equipment upgrades, and capacity expansion to 39.0support product innovation and consolidate operations for enhanced efficiencies.
The decrease in cash used in financing activities was primarily driven by higher net borrowings on short-term debt during 2023 of $190 million sharescompared to prior year, partially offset by higher capital returned to shareholders through increased share repurchases of treasury stock under its stock repurchase program as approved by the Board of Directors. Under this program, the Company purchased approximately 6.2 million shares, or approximately 2.7% of average diluted shares outstanding, during 2017 at a cost of $400.3 million for an average price of $64.40. As of December 31, 2017 and 2016, the Company held 37.7$150 million and 34.4increased dividends paid of $12 million. Primarily because of this activity, combined with an increase of $46 million shares of treasury stock, respectively. The Company also received proceeds of $82.3due to exchange rate fluctuations on debt denominated in foreign currencies, the Company’s total borrowings increased by a net $174 million primarily as a result of 2.3 million stock options exercised during the year ended December 31, 2017.2023.
During the year ended December 31, 2023, the Company repurchased approximately 8.8 million shares under its open market share repurchase plan for a cost of $300 million at a volume-weighted average price of $34.20. On February 14, 2018,November 7, 2023, the Board of Directors of the Company approved an increase into the authorized number of shares of common stock that may be repurchased under the share repurchase program for a total remaining authorization of $500.0$1.0 billion. At December 31, 2023, $1,440 million of shares of common stock.authorization remains available for future share repurchases. Additional share repurchases, if any, willmay be made through open market purchases, Rule 10b5-1 plans, accelerated share repurchases, privately negotiated transactions, or other transactions in such amounts and at such times as we deemthe Company considers appropriate based upon prevailing market and business conditions and other factors.
Total debt increased by $109.5 million for the year ended December 31, 2017. Dentsply Sirona's long-term debt, including the current portion, at December 31, 2017 and 2016 was $1,620.8 million and $1,522.1 million, respectively. The Company's long-term debt, including the current portion increased by a net of $98.7 million during the year ended December 31, 2017. This net change included a net increase in borrowings of $12.7 million, and a decrease of $111.4 million due to exchange rate fluctuations on debt denominated in foreign currencies. At December 31, 2017 there2023, the Company held 57.3 million shares of treasury stock.
The Company’s ratio of total net debt to total capitalization was $7.3as follows:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 |
| | | | |
Current portion of debt | | $ | 322 | | | $ | 118 | |
Long-term debt | | 1,796 | | | 1,826 | |
Less: Cash and cash equivalents | | 334 | | | 365 | |
Net debt | | $ | 1,784 | | | $ | 1,579 | |
| | | | |
Total equity | | 3,294 | | | 3,812 | |
Total capitalization | | $ | 5,078 | | | $ | 5,391 | |
| | | | |
Total net debt to total capitalization ratio | | 35.1 | % | | 29.3 | % |
At December 31, 2023, the Company had a total remaining borrowing capacity of $499 million under lines of credit, including lines available under its short-term arrangements and revolving credit facility. The Company’s borrowing capacity includes a $700 million multi-currency revolving credit facility that expires on May 12, 2028. The Company also has available an aggregate $500 million U.S. dollar commercial paper facility. The $700 million revolver serves as a back-up to the commercial paper facility, thus the total available credit under the commercial paper facility and the multi-currency revolving credit facility in the aggregate is $700 million. The Company had $225 million outstanding borrowings under the commercial paper facility at 2016, there were no outstanding borrowingsDecember 31, 2023 resulting in $475 million remaining available under the revolving credit and commercial paper facility.
During the year ended December 31, 2017, the Company's ratio of net debt to total capitalization increased to 16.6% compared to 12.4% at December 31, 2016. Dentsply Sirona 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 total equity.
facilities. The Company also has access to $500.0$44 million revolvingin uncommitted short-term financing under lines of credit facility through July 23, 2021.from various financial institutions. The facility is unsecuredlines of credit have no major restrictions and contains certain affirmativeare provided under demand notes between the Company and negative covenants relating to the operations and financial condition oflending institutions. At December 31, 2023, the Company. The most restrictive ofCompany has $20 million outstanding under these covenants pertain to asset dispositions and prescribed ratios of indebtedness to total capital and operating income plus depreciation and amortization to interest expense.short-term borrowing arrangements.
The Company’s multi-currency revolving credit facility, term loans and senior notes contain certain affirmative and negative covenants relating to the Company'sCompany’s operations and financial condition. These credit agreements contain 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 ratiosare: a ratio of total debt outstanding to total capital not to exceed the0.6, and a ratio of 0.6 to 1.0, and operating income excluding depreciation and amortization to interest expense of not less than 3.0 times, in each case, as such terms are defined in the relevant agreement. Any breach of any such covenants or ratios would result in a default under the existing debt agreements that would permit the lenders to declare all borrowings under such debt agreements to be immediately due and payable and, through cross default provisions, would entitle the Company'sCompany’s other lenders to accelerate their loans. At December 31, 2017,2023, the Company was in compliance with these covenants.
The Company also has access to $52.1 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, 2017, $13.6 million was outstanding under these short-term lines of credit. At December 31, 2017, the Company had total unused lines of credit related to the revolving credit agreement and the uncommitted short-term lines of credit of $531.2 million.
The Company expects on an ongoing basis to be able to finance operating cash requirements, includingrequirements, capital expenditures, in a range of $130 million to $140 million, stock repurchases,and debt service operating leases and potential future acquisitions, from the current cash, cash equivalents, and short-term investment balances, funds generatedcash flows from operations and amounts available under its existing borrowing facilities. The Company’s credit facilities which isare further discussed in Note 12,14, Financing Arrangements, toin the Consolidated Financial Statements in Part II, Item 15 in8 of this Form 10-K.
The Company intends to pay or refinance the current portion of long term debt due in 2018 utilizing cash or available credit. As noted in the Company's Consolidated Statements of Cash Flows in Item 15 in this Form 10-K, the Company has continued to generate strong cash flows from operations, which has beenheld by foreign subsidiaries for permanent reinvestment is generally used to finance the Company's activities.
At December 31, 2017, the majority of the Company’ssubsidiaries’ operating activities and future foreign investments. The Company can repatriate cash and cash equivalents were held outside of the United States. The majority of the Company’s excess free cash flow is generated outside of the United States. Most of the foreign excess free cash flow could be repatriated to the United States. The Company expectsStates, which could result in an adjustment to repatriate itsthe tax liability for foreign excess free cash flow (the amount in excesswithholding taxes, foreign and/or U.S. state income taxes, and the impact of capital investment and acquisition needs)foreign currency movements. At December 31, 2023, subject to current regulations, to fund ongoing operations and capital needs. Historically, the Company has generated more thanmanagement believed that sufficient operating cash flowsliquidity was available in the United States and expects this to fund domestic operations. Further,remain for the next twelve months. The Company has repatriated and expects on an ongoing basis, to be ablecontinue repatriating certain funds from its non-U.S. subsidiaries that are not needed to finance domesticlocal operations, however, these repatriation activities have not and international cash requirements, including capital expenditures, stock repurchases,are not expected to result in a significant incremental tax liability to the Company.
The Company continues to review its debt service, operating leasesportfolio and potential future acquisitions, from the funds generated from operations and amounts available under its existing credit facilities.
As a result of U.S. tax reform, $271.7 million of cash and cash equivalents held by the Company’s non-U.S. subsidiaries was subject to current taxmay refinance additional debt or add debt in the U.S. in 2017. As of December 31, 2017,near-term based on strategic capital management. The Company believes there is sufficient liquidity available for the Company had not repatriated any of these funds to the U.S. However, to the extent the Company repatriates these funds to the U.S., the Company will be required to pay income taxes in certain U.S. states and applicable foreign withholding taxes on those amounts during the period when such repatriation occurs.next twelve months.
Off Balance Sheet Arrangements
At December 31, 2017,2023, the Company held $40.3$30 million of precious metals on consignment from several financial institutions. Under these consignment arrangements, the financial institutions own the precious metal, and, accordingly, the Company does not report this consigned inventory as part of its inventory on the Consolidated Balance Sheet.Sheets. These consignment agreements allow the Company to acquire the precious metal at market rates at a point in time, which is approximately the same time, and for the same price as alloys are sold to the Company'sCompany’s customers. In the event thatIf 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. For additional details, see Item 7A “Quantitative and Qualitative Disclosure About Market Risk - Consignment Arrangements.”
Contractual Obligations
The following table presents the Company'sCompany’s scheduled contractual cash obligations at December 31, 2017:2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Within 1 Year | |
Years 2-3 | |
Years 4-5 | | Greater Than 5 Years | | Total |
(in millions) | | | | | |
| | | | | | | | | | |
Long-term borrowings, including finance leases | | $ | 77 | | | $ | 366 | | | $ | 269 | | | $ | 1,197 | | | $ | 1,909 | |
Operating leases | | 62 | | | 77 | | | 37 | | | 23 | | | 199 | |
Purchase commitments | | 193 | | | 136 | | | 6 | | | — | | | 335 | |
Interest on long-term borrowings, net of interest rate swap agreements | | 50 | | | 90 | | | 71 | | | 50 | | | 261 | |
Postemployment obligations | | 26 | | | 47 | | | 51 | | | 124 | | | 248 | |
Precious metal consignment agreements | | 30 | | | — | | | — | | | — | | | 30 | |
| | $ | 438 | | | $ | 716 | | | $ | 434 | | | $ | 1,394 | | | $ | 2,982 | |
|
| | | | | | | | | | | | | | | | | | | |
Contractual Obligations | Within 1 Year | |
Years 2-3 | |
Years 4-5 | | Greater Than 5 Years | | Total |
(in millions) | | | | |
| | | | |
| | | | | | | | | |
Long-term borrowings | $ | 9.2 |
| | $ | 244.1 |
| | $ | 298.9 |
| | $ | 1,073.9 |
| | $ | 1,626.1 |
|
Operating leases | 38.6 |
| | 56.2 |
| | 36.0 |
| | 35.3 |
| | 166.1 |
|
Interest on long-term borrowings, net of interest rate swap agreements | 27.3 |
| | 51.5 |
| | 45.0 |
| | 68.1 |
| | 191.9 |
|
Postemployment obligations | 18.7 |
| | 37.2 |
| | 39.8 |
| | 117.2 |
| | 212.9 |
|
Precious metal consignment agreements | 40.3 |
| | — |
| | — |
| | — |
| | 40.3 |
|
| $ | 134.1 |
| | $ | 389.0 |
| | $ | 419.7 |
| | $ | 1,294.5 |
| | $ | 2,237.3 |
|
Due to the uncertainty with respect to the timing of future cash flows associated with the Company'sCompany’s unrecognized tax benefits at December 31, 2017,2023, the Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority; therefore, $24.7$40 million of the unrecognized tax benefitbenefits has been excluded from the contractual obligations table above (Seeabove. See Note 14,16, Income Taxes, in the Notes to Consolidated Financial Statements in Item 158 of this Form 10-K).10-K.
Material Trends in Capital Resources
On February 14, 2023, the Board of Directors of the Company approved a plan to restructure the Company’s business to improve operational performance and drive shareholder value creation. The plan includes a restructuring of the business through a new operating model with five global business units, optimization of central functions and overall management infrastructure, and other efforts aimed at cost savings. The restructuring plan anticipates a reduction in the Company’s global workforce of approximately 8% to 10%, subject to co-determination processes with employee representative groups in countries where required. The plan is expected to be substantially completed in 2024 and result in approximately $200 million in annual cost savings. The reduction in headcount and cost savings related to this plan is expected to be offset as the Company makes additional investments in sales personnel, our new global ERP system, and other transformation initiatives.
As of December 31, 2023, in conjunction with this plan the Company has incurred $66 million in restructuring charges primarily related to employee transition, severance payments, employee benefits, and facility closure costs and $20 million in other non-recurring costs related to restructuring activities which mostly consist of consulting, legal and other professional service fees. The Company expects to incur between $115 to $135 million in one-time charges, comprising $80 to $100 million in restructuring expenditures and charges and $35 million in other non-recurring charges. The estimates of these charges and their timing are subject to several assumptions, including local law requirements in various jurisdictions and co-determination aspects in countries where required. Actual amounts may differ materially from estimates. In addition, the Company may incur other charges or cash expenditures in connection with this plan which are not currently contemplated. For further details refer to Note 18, Restructuring and Other Costs, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Beginning in the second quarter of 2022, the Company’s financial results have also been impacted by the costs associated with the internal investigation conducted and completed by the Audit and Finance Committee and subsequently, the external investigation by the SEC which is currently in progress. These costs have included legal expenses as well as third party accounting and other professional service fees in conjunction with the investigations and subsequent remediation activities. Additionally, the Company has incurred severance costs associated with its remedial personnel actions, as well as special one-time costs in connection with retention of key personnel. These costs totaled approximately $61 million for the year ended December 31, 2022, with additional costs of $19 million incurred for the year ended December 31, 2023. The costs in 2023 were offset by a $17 million gain from release of employee compensation accruals resulting from a settlement in the three months ended September 30, 2023. The Company expects that it will continue to incur legal defense costs into 2024 pertaining to the matters described in Note 21, Commitments and Contingencies, in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1, Significant Accounting Policies, in the Notes to Consolidated Financial Statements in Item 158 of 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
The Company’s major market risk exposures areinclude changing interest rates, movements in foreign currency exchange rates and potential price volatility of commodities used by the Company in its manufacturing processes. The Company’s policy is to manage risk of exposure to interest rates through the useusing a combination of fixed and floating rate debt andas well as interest rate swaps to adjust interest rate exposures when appropriate, based upon market conditions.swaps. The 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 institutions thereby minimizing the risk of credit loss. In order to limit the unanticipated earnings fluctuations from volatility in commodity prices, the Company selectively enters into commodity swaps to convert variable raw material costs to fixed costs. The Company does not hold or issue derivative financial instruments for speculative or trading purposes. The Company is subject to other foreign exchange market risk exposure in addition to the risks on its financial instruments, such as possible impacts on its pricing and production costs, which are difficult to reasonably predict, and have therefore not been included below.
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 Company hedges various currencies, primarily in euros, Swedish kronor Canadian dollars, British pounds,and Swiss francs, Japanese yen and Australian dollars.francs. 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 termlong-term foreign currency exchange risk. The Company accounts for the forward foreign exchange contracts as cash flow hedges.
The Company has numerous investments in foreign subsidiaries the most significant of which are denominated in euros, Swiss francs, Japanese yen and Swedish kronor. The net assets of these subsidiaries are exposed to volatility in currency exchange rates.
Currently, the Company uses both derivative and non-derivative financial instruments, including foreign currency denominated debt held at the parent company level 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, 2017,2023, a 10% strengtheningweakening of the U.S. dollar against all other currencies would improvedecrease the net fair value associated with the forward foreign exchange contracts by approximately $18.4$107 million.
Interest Rate Risk Management
The Company enters into financial instruments, including derivatives, that expose the Company to market risk related to changes in interest rates. The Company uses a combination of financial instruments, including long-term and short-term financing, variable-rate commercial paper and derivative interest rate swaps to convert a portion of its variablemanage the interest rate mix of our total debt to fixed interest rate debtportfolio and in the past, to convert fixed rate debt to variable rate debt. At December 31, 2017, the Company has one significant interest rate swap. This interest rate swap has notional amounts totaling 12.6 billion Japanese yen, and effectively converts the underlying variable interest rates to an average fixed interest raterelated overall cost of 0.9% for a term of five years, ending in September 2019. The interest rates on variable rate term loan debt are consistent with current market conditions; therefore, the fair value of this instrument approximates its carrying values.borrowing.
On January 2, 2018, the Company entered into a 245.6 million euro cross currency basis swap maturing in August 2021, that is designated as a hedge of net investments. This contract effectively converts the $295.7 million bond coupon from 4.1% to 1.7%, which will result in a net reduction of interest expense of approximately $7 million in 2018.
At December 31, 2017,2023, an increase of 1.0%1% in the interest rates on the variable interest rate instruments would increasedecrease the Company’s annualfair value associated with the derivative interest expenserate swaps by approximately $1.6$10 million.
Consignment Arrangements
The Company consignsholds on a consignment basis, from various financials institutions, the precious metals used in the production of precious metal dental alloy products from various financial institutions.products. Under these consignment arrangements, the banksfinancial institutions own the precious metal, and, accordingly, the Company does not report this consigned inventory on consignment as part of its inventory on the 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). These agreements are cancellable 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.
As precious metal prices fluctuate, the Company evaluates the impact of the precious metal price fluctuation on its target gross margins for precious metal dental alloy products and revisesmay revise the prices customers are charged for precious metal dental alloy products accordingly, depending upon the magnitude of the fluctuation.accordingly. While the Company does not separately invoice customers for the precious metal content of precious metal dental alloy products, the underlying 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, 2017,2023, the Company had approximately 43,10022,000 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 $40.3$30 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 the consigned precious metals inventory. At December 31, 2017,2023, the average annual rate charged by the consignor banks was 2.2%1.3%. These compensatory payments are considered to be a cost of the metals purchased and are recorded as part of the cost of products sold.
Item 8. Financial Statements and Supplementary Data
1.Financial Statements
The information set forth underfollowing consolidated financial statements of the captions Company are filed as part of this Form 10-K:
2.Financial Statement Schedule for the Years Ended December 31, 2023, 2022, and 2021.
The following financial statement schedule is filed as part of this Form 10-K and is covered by the Report of Independent Registered Public Accounting Firm | | | | | |
| Page |
Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 2023, 2022, and 2021. | |
| |
+
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The 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 accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that 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 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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect 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.
Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023. In making its assessment, management used the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its assessment, management concluded that, as of December 31, 2023, 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.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2023 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears herein.
| | | | | | | | | | | | | | |
/s/ | Simon D. Campion | | /s/ | Glenn G. Coleman |
| Simon D. Campion | | | Glenn G. Coleman |
| President and Chief Executive Officer | | | Executive Vice President and |
| | | | Chief Financial Officer |
| February 29, 2024 | | | February 29, 2024 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Dentsply Sirona Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Dentsply Sirona Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, of comprehensive income or loss, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes and financial statement schedule listed in the index appearing under Item 8 (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that 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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Annual and Interim Goodwill Impairment Assessments – Certain Reporting Units
As described inNotes 1 and 11 to the consolidated financial statements, the Company’s consolidated net goodwill balance was $2,438millionas of December 31, 2023, of which a portion relates to certain reporting units. Goodwill is tested for impairment at the reporting unit level annually as of April 1 of each year, or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired. Management performs impairment tests by comparing the fair value of each reporting unit to its carrying amount to determine if there is a potential impairment. On April 1, 2023, management realigned its reporting units due to a change in organizational structure. Reporting units under the former structure were tested for impairment prior to the realignment, and no impairment was identified. As a result of the realignment, the Company reallocated its goodwill to align its new reporting units which resulted from the change in its operating segments. Goodwill was reassigned to each of the new reporting units using a relative fair value approach. Management assessed the goodwill of the new reporting units and its indefinite-lived intangible assets for impairment as of April 1, 2023. Based on this test, it was determined that the fair values of its reporting units and indefinite-lived intangible assets more likely than not exceeded their carrying values, resulting in no impairment. In the third quarter of 2023, management identified indicators of a "more likely than not" impairment related to its Connected Technology Solutions reporting unit, which comprises all of the Connected Technology Solutions segment. The decline in fair value for this reporting unit was driven by adverse macroeconomic factors as a result of weakened demand, particularly in European markets, and increased discount rates. As a result of the interim test, management recorded a pre-tax goodwill impairment charge related to the Connected Technology Solutions reporting unit within the Connected Technology Solutions segment of $291 million. As disclosed by management, the Company uses a discounted cash flow model as its valuation technique to measure the fair value for its reporting units. The discounted cash flow model uses five- to ten-year forecasted cash flows plus a terminal value based on capitalizing the last period’s cash flows using a perpetual growth rate. The significant assumptions used by management in the application of the discounted cash flow model include, but are not limited to, the discount rates, revenue growth rates, perpetual revenue growth rates, and future operating margin percentages of the reporting unit’s business.
The principal considerations for our determination that performing procedures relating to the annual and interim goodwill impairment assessments of certain reporting units is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of the reporting units, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the discount rates, revenue growth rates, perpetual revenue growth rates, and future operating margin percentages for both the annual and interim assessments, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates of certain of the Company’s reporting units; evaluating the appropriateness of the discounted cash flow models; testing the completeness and accuracy of underlying data used in the discounted cash flow models; and evaluating the reasonableness of significant assumptions used by management related to the discount rates, revenue growth rates, perpetual revenue growth rates, and future operating margin percentages. Evaluating management’s assumptions related to revenue growth rates, perpetual revenue growth rates, and future operating margin percentages involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the Company’s discounted cash flow models and (ii) the reasonableness of the assumptions related to the discount rates and perpetual revenue growth rates.
| | | | | |
/s/ | PricewaterhouseCoopers LLP |
| PricewaterhouseCoopers LLP |
| Charlotte, North Carolina |
| February 29, 2024 |
We have served as the Company’s auditor since 2000.
DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
Net sales | $ | 3,965 | | | $ | 3,922 | | | $ | 4,231 | |
Cost of products sold | 1,879 | | | 1,795 | | | 1,884 | |
| | | | | |
Gross profit | 2,086 | | | 2,127 | | | 2,347 | |
| | | | | |
Selling, general, and administrative expenses | 1,613 | | | 1,589 | | | 1,551 | |
Research and development expenses | 184 | | | 174 | | | 171 | |
Goodwill and intangible asset impairments | 307 | | | 1,287 | | | — | |
Restructuring and other costs | 67 | | | 14 | | | 17 | |
| | | | | |
Operating (loss) income | (85) | | | (937) | | | 608 | |
| | | | | |
Other income and expenses: | | | | | |
Interest expense, net | 81 | | | 65 | | | 61 | |
Other expense (income), net | 9 | | | 53 | | | 2 | |
| | | | | |
(Loss) income before income taxes | (175) | | | (1,055) | | | 545 | |
| | | | | |
(Benefit) provision for income taxes | (43) | | | (105) | | | 134 | |
| | | | | |
Net (loss) income | (132) | | | (950) | | | 411 | |
| | | | | |
Less: Net income (loss) attributable to noncontrolling interests | — | | | — | | | — | |
| | | | | |
Net (loss) income attributable to Dentsply Sirona | $ | (132) | | | $ | (950) | | | $ | 411 | |
| | | | | |
Net (loss) income per common share attributable to Dentsply Sirona: | | | | | |
Basic | $ | (0.62) | | | $ | (4.41) | | | $ | 1.88 | |
Diluted | $ | (0.62) | | | $ | (4.41) | | | $ | 1.87 | |
| | | | | |
Weighted average common shares outstanding: | | | | | |
Basic | 212.0 | | | 215.5 | | | 218.4 | |
Diluted | 212.0 | | | 215.5 | | | 220.2 | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME OR LOSS
(in millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
Net (loss) income | $ | (132) | | | $ | (950) | | | $ | 411 | |
| | | | | |
Other comprehensive (loss) income, net of tax: | | | | | |
Foreign currency translation adjustments | 49 | | | (156) | | | (181) | |
Net (loss) gain on derivative financial instruments | (30) | | | 29 | | | 25 | |
| | | | | |
Pension liability adjustments | (27) | | | 91 | | | 26 | |
Total other comprehensive loss | (8) | | | (36) | | | (130) | |
| | | | | |
Total comprehensive (loss) income | (140) | | | (986) | | | 281 | |
| | | | | |
Less: Comprehensive (loss) income attributable to noncontrolling interests | — | | | — | | | (2) | |
| | | | | |
Comprehensive (loss) income attributable to Dentsply Sirona | $ | (140) | | | $ | (986) | | | $ | 283 | |
The accompanying notes are an integral part of these consolidated financial statements.
DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts) | | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| | | |
Assets | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 334 | | | $ | 365 | |
Accounts and notes receivable-trade, net | 695 | | | 632 | |
Inventories, net | 624 | | | 627 | |
Prepaid expenses and other current assets | 320 | | | 269 | |
Total Current Assets | 1,973 | | | 1,893 | |
| | | |
Property, plant and equipment, net | 800 | | | 761 | |
Operating lease right-of-use assets, net | 178 | | | 200 | |
Identifiable intangible assets, net | 1,705 | | | 1,903 | |
Goodwill, net | 2,438 | | | 2,688 | |
Other noncurrent assets | 276 | | | 198 | |
Total Assets | $ | 7,370 | | | $ | 7,643 | |
| | | |
Liabilities and Equity | | | |
Current Liabilities: | | | |
Accounts payable | $ | 305 | | | $ | 279 | |
Accrued liabilities | 749 | | | 727 | |
Income taxes payable | 49 | | | 46 | |
Notes payable and current portion of long-term debt | 322 | | | 118 | |
Total Current Liabilities | 1,425 | | | 1,170 | |
| | | |
Long-term debt | 1,796 | | | 1,826 | |
Operating lease liabilities | 125 | | | 149 | |
Deferred income taxes | 228 | | | 287 | |
Other noncurrent liabilities | 502 | | | 399 | |
Total Liabilities | 4,076 | | | 3,831 | |
| | | |
Commitments and contingencies (Note 21) | | | |
| | | |
Equity: | | | |
Preferred stock, $1.00 par value; 0.25 million shares authorized; no shares issued | — | | | — | |
Common stock, $0.01 par value; | 3 | | | 3 | |
400.0 million shares authorized at December 31, 2023 and 2022 | | | |
264.5 million shares issued at December 31, 2023 and 2022 | | | |
207.2 million and 215.2 million shares outstanding at December 31, 2023 and 2022, respectively | | | |
Capital in excess of par value | 6,643 | | | 6,629 | |
Retained earnings | 205 | | | 456 | |
Accumulated other comprehensive loss | (636) | | | (628) | |
Treasury stock, at cost, 57.3 million and 49.3 million shares at December 31, 2023 and 2022, respectively | (2,922) | | | (2,649) | |
Total Dentsply Sirona Equity | 3,293 | | | 3,811 | |
| | | |
Noncontrolling interests | 1 | | | 1 | |
Total Equity | 3,294 | | | 3,812 | |
Total Liabilities and Equity | $ | 7,370 | | | $ | 7,643 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
DENTSPLY SIRONA INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY |
(in millions, except per share amounts) | | | | | | | | | | | | | | | |
| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Dentsply Sirona Equity | | Noncontrolling Interests | | Total Equity |
| | | | | | | | | | | | | | | |
Balance at December 31, 2020 | $ | 3 | | | $ | 6,604 | | | $ | 1,198 | | | $ | (464) | | | $ | (2,409) | | | $ | 4,932 | | | $ | 3 | | | $ | 4,935 | |
Net income | — | | | — | | | 411 | | | — | | | — | | | 411 | | | — | | | 411 | |
Other comprehensive loss | — | | | — | | | — | | | (128) | | | — | | | (128) | | | (2) | | | (130) | |
| | | | | | | | | | | | | | | |
Exercise of stock options | — | | | 15 | | | — | | | — | | | 37 | | | 52 | | | — | | | 52 | |
Stock based compensation expense | — | | | 49 | | | — | | | — | | | — | | | 49 | | | — | | | 49 | |
Funding of employee stock purchase plan | — | | | 2 | | | — | | | — | | | 3 | | | 5 | | | — | | | 5 | |
Treasury shares purchased | — | | | — | | | — | | | — | | | (200) | | | (200) | | | — | | | (200) | |
Restricted stock unit distributions | — | | | (65) | | | — | | | — | | | 34 | | | (31) | | | — | | | (31) | |
Restricted stock unit dividends | — | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | |
Cash dividends declared ($0.43 per share) | — | | | — | | | (94) | | | — | | | — | | | (94) | | | — | | | (94) | |
Balance at December 31, 2021 | $ | 3 | | | $ | 6,606 | | | $ | 1,514 | | | $ | (592) | | | $ | (2,535) | | | $ | 4,996 | | | $ | 1 | | | $ | 4,997 | |
Net loss | — | | | — | | | (950) | | | — | | | — | | | (950) | | | — | | | (950) | |
Other comprehensive loss | — | | | — | | | — | | | (36) | | | — | | | (36) | | | — | | | (36) | |
| | | | | | | | | | | | | | | |
Exercise of stock options | — | | | 1 | | | — | | | — | | | 6 | | | 7 | | | — | | | 7 | |
Stock based compensation expense | — | | | 59 | | | — | | | — | | | — | | | 59 | | | — | | | 59 | |
Funding of employee stock purchase plan | — | | | 1 | | | — | | | — | | | 5 | | | 6 | | | — | | | 6 | |
Treasury shares purchased | — | | | — | | | — | | | — | | | (150) | | | (150) | | | — | | | (150) | |
Restricted stock unit distributions | — | | | (38) | | | — | | | — | | | 25 | | | (13) | | | — | | | (13) | |
| | | | | | | | | | | | | | | |
Cash dividends declared ($0.50 per share) | — | | | — | | | (108) | | | — | | | — | | | (108) | | | — | | | (108) | |
Balance at December 31, 2022 | $ | 3 | | | $ | 6,629 | | | $ | 456 | | | $ | (628) | | | $ | (2,649) | | | $ | 3,811 | | | $ | 1 | | | $ | 3,812 | |
Net loss | — | | | — | | | (132) | | | — | | | — | | | (132) | | | — | | | (132) | |
Other comprehensive loss | — | | | — | | | — | | | (8) | | | — | | | (8) | | | — | | | (8) | |
| | | | | | | | | | | | | | | |
Exercise of stock options | — | | | (1) | | | — | | | — | | | 1 | | | — | | | — | | | — | |
Stock based compensation expense | — | | | 46 | | | — | | | — | | | — | | | 46 | | | — | | | 46 | |
Funding of employee stock purchase plan | — | | | — | | | — | | | — | | | 6 | | | 6 | | | — | | | 6 | |
Treasury shares purchased | — | | | — | | | — | | | — | | | (303) | | | (303) | | | — | | | (303) | |
Restricted stock unit distributions | — | | | (32) | | | — | | | — | | | 23 | | | (9) | | | — | | | (9) | |
Restricted stock unit dividends | — | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | |
Cash dividends declared ($0.56 per share) | — | | | — | | | (118) | | | — | | | — | | | (118) | | | — | | | (118) | |
Balance at December 31, 2023 | $ | 3 | | | $ | 6,643 | | | $ | 205 | | | $ | (636) | | | $ | (2,922) | | | $ | 3,293 | | | $ | 1 | | | $ | 3,294 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | | | | | | | |
DENTSPLY SIRONA INC. AND SUBSIDIARIES | | | | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | |
(in millions) | Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
Cash flows from operating activities: | | | | | |
| | | | | |
Net (loss) income | $ | (132) | | | $ | (950) | | | $ | 411 | |
| | | | | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
Depreciation | 132 | | | 119 | | | 124 | |
Amortization of intangible assets | 211 | | | 209 | | | 222 | |
| | | | | |
| | | | | |
Goodwill impairment | 291 | | | 1,187 | | | — | |
Indefinite-lived intangible asset impairment | 16 | | | 100 | | | — | |
| | | | | |
Deferred income taxes | (130) | | | (228) | | | (25) | |
Stock based compensation expense | 46 | | | 59 | | | 48 | |
Restructuring and other costs | 33 | | | (10) | | | (17) | |
| | | | | |
| | | | | |
Equity in earnings from unconsolidated affiliates | 4 | | | 36 | | | 10 | |
| | | | | |
Other non-cash (income) expense | (5) | | | 60 | | | 24 | |
| | | | | |
| | | | | |
Loss (gain) on sale or disposal of non-strategic businesses and product lines | — | | | 3 | | | (14) | |
| | | | | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | |
Accounts and notes receivable-trade, net | (58) | | | 85 | | | (117) | |
Inventories, net | 6 | | | (141) | | | (64) | |
Prepaid expenses and other current assets | (58) | | | (33) | | | (32) | |
Other noncurrent assets | 4 | | | 1 | | | (10) | |
Accounts payable | 14 | | | 30 | | | (49) | |
Accrued liabilities | (16) | | | 4 | | | 117 | |
Income taxes | (11) | | | (15) | | | 17 | |
Other noncurrent liabilities | 30 | | | 1 | | | 12 | |
Net cash provided by operating activities | 377 | | | 517 | | | 657 | |
| | | | | |
Cash flows from investing activities: | | | | | |
| | | | | |
Cash paid for acquisitions of businesses and equity investments, net of cash acquired | — | | | — | | | (248) | |
| | | | | |
Cash received on sale of non-strategic businesses or product lines | 13 | | | — | | | 28 | |
| | | | | |
| | | | | |
| | | | | |
Capital expenditures | (149) | | | (149) | | | (142) | |
| | | | | |
| | | | | |
Cash received on derivative contracts | 39 | | | 13 | | | 2 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Proceeds from sale of property, plant and equipment | 7 | | | — | | | — | |
Other investing activities, net | 1 | | | (2) | | | 2 | |
Net cash used in investing activities | (89) | | | (138) | | | (358) | |
| | | | | |
Cash flows from financing activities: | | | | | |
| | | | | |
| | | | | |
Proceeds from long-term borrowings | — | | | 6 | | | 16 | |
| | | | | |
Repayments on long-term borrowings | (7) | | | (2) | | | (297) | |
Net borrowings (repayments) on short-term borrowings | 126 | | | (64) | | | 179 | |
| | | | | |
Proceeds from exercised stock options | — | | | 6 | | | 51 | |
| | | | | |
| | | | | |
| | | | | |
Cash paid for treasury stock | (300) | | | (150) | | | (200) | |
Cash dividends paid | (116) | | | (104) | | | (92) | |
Other financing activities, net | (10) | | | (21) | | | (36) | |
| | | | | |
Net cash used in financing activities | (307) | | | (329) | | | (379) | |
| | | | | |
| | | | | |
Effect of exchange rate changes on cash and cash equivalents | (12) | | | (24) | | | (19) | |
Net (decrease) increase in cash and cash equivalents | (31) | | | 26 | | | (99) | |
Cash and cash equivalents at beginning of period | 365 | | | 339 | | | 438 | |
Cash and cash equivalents at end of period | $ | 334 | | | $ | 365 | | | $ | 339 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Supplemental disclosures of cash flow information: | | | | | |
Interest paid, net of amounts capitalized | $ | 97 | | | $ | 70 | | | $ | 64 | |
Income taxes paid, net of refunds | 177 | | | 122 | | | 148 | |
Non-cash investing activities: | | | | | |
Change in accounts payable related to capital expenditures | $ | 6 | | | $ | (6) | | | $ | 19 | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
DENTSPLY SIRONA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
DENTSPLY SIRONA Inc. (“Dentsply Sirona” or the “Company”), is the world’s largest manufacturer of dental products and technologies, with a 137-year history of innovation and service to the dental industry and patients worldwide. The Company’s principal product categories include dental consumable products, dental equipment, dental technologies and continence care consumable products. The Company sells its products in over 150 countries under some of the most well-established brand names in the industry.
Basis of Presentation
The consolidated financial statements include the results of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. 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 the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ materially from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include deposits with banks as well as highly liquid time deposits with original maturities of ninety days or less. The balance as of December 31, 2023 includes $42 million of cash and cash equivalents located in Russia which is available for use in local operations but limited in its ability to be transferred out of the country due to control measures currently in place by the Russian government.
Short-term Investments
Short-term investments are highly liquid time deposits with original maturities greater than ninety days and with remaining maturities of one year or less.
Accounts Receivable
The Company recognizes a receivable when it has an unconditional right to payment, which represents the amount the Company expects to collect in a transaction. Payment terms are typically 30 days in the United States but may be longer in markets outside the U.S. In general, contracts containing significant financing components are not material to the Company’s financial statements.
The Company establishes an allowance for doubtful accounts based on an estimate of current expected credit losses resulting from the inability of its customers to make required payments. The allowance is determined based on a combination of factors, including the length of time that the receivable is past due, history of write-offs, and the Company’s knowledge of circumstances relating to specific customers’ ability to meet their financial obligations. The provision for doubtful accounts is included in Selling, general and administrative expenses (“SG&A”) in the Consolidated Statements of Operations. For customers on credit terms, the Company performs ongoing credit evaluation of those customers’ financial condition and generally does not require collateral from them. See Note 2, Revenue, for additional information on Accounts Receivable.
Inventories
Inventories are stated at the lower of cost and net realizable value. The cost of inventories is based upon the first-in, first-out method (“FIFO”) or average cost methods.
The Company establishes reserves for inventory estimated to be excess, obsolete or unmarketable based upon assumptions about future demand, market conditions, and expiration of products.
Valuation of Goodwill and Indefinite-Lived and Definite-Lived Intangible Assets
Goodwill
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired and liabilities assumed in a business combination. Goodwill is not subject to amortization but is tested for impairment at the reporting unit level annually in accordance with U.S. GAAP as of April 1 of each year, or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired. The Company performs impairment tests by comparing the fair value of each reporting unit to its carrying amount to determine if there is a potential impairment. If the carrying value of a reporting unit with goodwill exceeds its respective fair value, an impairment charge is recognized for the excess amount. Additional information related to the testing for goodwill impairment, including results of the annual test performed as of April 1, 2023 and the interim impairment assessment performed in the third quarter of 2023, is provided in Note 11, Goodwill and Intangible Assets.
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets consist primarily of tradenames and trademarks and in-process research and development (“R&D”) acquired in business combinations, and these are not subject to amortization. Valuations of indefinite-lived intangibles assets acquired in business combinations are based on information and assumptions available at the time of their acquisition, using income and market approaches to determine fair value. The Company conducts an impairment test in accordance with U.S. GAAP as of April 1 of each year, or more frequently if events or circumstances indicate that the carrying value of indefinite-lived intangible assets may be impaired. Potential impairment is identified by comparing the fair value of an intangible asset to its carrying value. Additional information related to the testing for indefinite-lived intangible asset impairment, including results of the annual test performed as of April 1, 2023 and the interim impairment assessment performed in the third quarter of 2023, is provided in Note 11, Goodwill and Intangible Assets.
Definite-Lived Intangible Assets
Definite-lived intangible assets primarily consist of patents, tradenames, trademarks, licensing agreements, developed technology, and customer relationships. The valuation of definite-lived intangibles assets acquired in business combinations is based on information and assumptions available at the time of acquisition, using income and market model approaches to determine fair value.
Identifiable definite-lived intangible assets are amortized on a basis that best reflects how their economic benefits are utilized over the life of the asset or on a straight-line basis if not materially different from actual utilization. The useful life is the period over which the asset is expected to contribute to the future cash flows of the Company. The Company uses the following useful lives for its definite-lived intangible assets:
| | | | | | | | |
Definite-Lived Intangible Asset Type | | Useful Life |
| | |
Patents | | Up to the date the patent expires |
Tradenames and trademarks | | Up to 20 years |
Licensing agreements | | Up to 20 years |
Customer relationships | | Up to 15 years |
Developed technology | | Up to 15 years |
When the expected useful life of an intangible is not known, the Company will estimate its useful life based on similar asset or asset groups, any legal, regulatory, or contractual provision that limits the useful life, the effect of economic factors, including obsolescence, demand, competition, and the level of maintenance expenditures required to obtain the expected future economic benefit from the asset.
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 all intangible assets, including those related to new and existing technologies, for indicators of impairment as these assets have more risk of becoming impaired. Impairment is based upon an initial evaluation of the identifiable undiscounted cash flows. If the initial evaluation identifies a potential impairment, a fair value of the asset 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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Assets acquired through acquisitions are recorded at fair value. The Company capitalizes costs incurred in the development or acquisition of software, whether for internal or external use, and expenses costs incurred in the preliminary project planning stage. Except for leasehold improvements, depreciation and amortization is computed by the straight-line method over the assets estimated useful lives:
| | | | | | | | |
Property, Plant and Equipment Assets Type | | Useful Life |
Buildings | 40 years |
Machinery and Equipment | 4 to 15 years |
Capitalized Software | 2 to 10 years |
Leasehold Improvements | Shorter of the estimated useful life or the term of the lease |
Maintenance and repairs are expensed as incurred; replacements and major improvements are capitalized. If events or circumstances exist which suggest that the carrying amount of the asset group may not be recoverable, the identifiable undiscounted cash flows of the asset group are compared to the carrying value of the asset. If the carrying value is in excess of the identifiable undiscounted cash flows, the excess of the asset group’s carrying cost over its fair value is recorded as an impairment charge.
Leases
The Company leases real estate, automobiles and equipment under various operating and finance leases. The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the implicit rate is not readily determinable in most of the Company’s lease agreements, the Company uses its estimated secured incremental borrowing rate, based on the information available, at commencement of the lease to determine the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Any new real estate and equipment operating lease agreements with lease and non-lease components, are accounted for as a single lease component; auto leases are accounted for as separate lease components.
The Company’s leases have remaining lease terms of approximately 1 year to 9 years. Many of the Company’s real estate and equipment leases have one or more options to renew, with terms that can extend primarily from 1 year to 3 years, which are not included in the initial lease term until considered reasonably certain of renewal. The Company does not have lease agreements with residual value guarantees, sale-and-leaseback terms, or material restrictive covenants. The Company does not have any material sublease arrangements. See Note 10, Leases for additional information.
Derivative Financial Instruments
The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, and assets and liabilities denominated in foreign currencies. Additionally, the Company manages exposures to changes in interest rates by utilizing interest rate swaps that have the effect of converting floating rate debt to fixed rate, or vice versa. The benefit or loss from interest rate swaps is recorded in Interest expense, net in the Company’s Consolidated Statements of Operations Consolidated Statementsconsistent with the classification of Comprehensive Income, Consolidated Balance Sheets, Consolidated Statementsinterest expense attributable to the underlying debt.
The Company records all derivative instruments at fair value and changes in fair value are recorded each period in the consolidated statements of Changesoperations or accumulated 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 flows from derivative instruments in Equity,the same category as the cash flows from the items being hedged. Should the Company enter into a derivative instrument that includes an other-than-insignificant financing element then all cash flows will be classified as financing activities in the Consolidated Statements of Cash Flows and Notes to Consolidated Financial Statements is filed, in Item 15 of this Form 10-K. Other informationas required by Item 8U.S. GAAP. See Note 19, Financial Instruments for additional information on derivative instruments.
Pension and Other Postemployment Benefits
Some of the employees of the Company and its subsidiaries are covered by government or Company-sponsored defined benefit plans and defined contribution plans. Additionally, certain salaried employee groups in the United States are covered by postemployment healthcare plans. Projected benefit obligations and net periodic costs for Company-sponsored defined benefit and postemployment benefit plans are based on an annual actuarial valuation that includes assessment of key assumptions relating to expected return on plan assets, discount rates, 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 periodic benefit costs associated with postemployment benefits. Changes in these assumptions can impact the Company’s earnings. 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 determined by actuaries. These assumptions include medical 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 17, Benefit Plans.
Accruals for Self-Insured Losses
The Company maintains insurance for certain risks, including workers’ compensation, 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, from time to time, are parties to lawsuits arising from operations. The Company records liabilities when a loss is probable and can be reasonably estimated. If these estimates are in the form of ranges, the Company records the liabilities at the most likely outcome within the range. If no point within the range represents a better estimate of the probable loss, then the low point in the range is accrued. The ranges established by management are based on analysis made by internal and external legal counsel who considers the best information known at the time. If the Company determines that a contingency is reasonably possible, it considers the same information to estimate the possible exposure and discloses any material potential liability. These loss contingencies are monitored regularly for a change in fact or circumstance that would require an accrual adjustment. Legal costs related to these lawsuits are expensed as incurred.
Foreign Currency Translation
The local currency of foreign operations is generally considered to be their functional currency. In the case of operations within highly inflationary economies, which for the Company include Argentina and Turkey, the Company remeasures the financial statements of entities in those countries with the U.S. dollar as the functional currency.
Adjustments resulting from the process of translating the financial statements of entities with foreign functional currencies into U.S. dollars are included in AOCI in the Consolidated Balance Sheets. During the year ended December 31, 2023, the Company had a translation gain of $78 million and a loss on its loans designated as hedges of net investments of $29 million. During the year ended December 31, 2022, the Company had a translation loss of $188 million and a gain on its loans designated as hedges of net investments of $32 million. During the year ended December 31, 2021, the Company had a translation loss of $225 million and a gain on its loans designated as hedges of net investments of $46 million.
Foreign currency gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included within Other expense (income), net in the Consolidated Statements of Operations. During the years ended December 31, 2023, 2022, and 2021, the Company had a net foreign currency gain of $3 million, loss of $6 million and gain of $12 million, respectively.
Revenue Recognition
Revenues are derived primarily from the sale of dental equipment and dental and healthcare consumable products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services in accordance with ASC 606-10, Revenues from Contracts with Customers. Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied; this occurs with the transfer of control of products and services to its customers, which for products generally occurs when title and risk of loss transfers to the customer, and for services generally occurs as the customer receives and consumes the benefit. Sales, value-added, and other taxes collected concurrent with revenue-producing activities are excluded from revenue.
Certain contracts with our customers include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment. The Company generally uses an observable price, typically average selling price, to determine the stand-alone selling price for separate performance obligations. The Company determines the stand-alone selling price, based on Company geographic sales locations’ database of pricing and discounting practices for the specific product or service when sold separately, and utilizes this data to arrive at average selling prices by product. In cases where an average selling price is not observable, the Company determines the stand-alone selling price using relevant information and applies suitable estimation methods including, but not limited to, the cost plus a margin approach. Revenue is then allocated proportionately, based on the determined stand-alone selling price, to each distinct performance obligation.
The Company exercises judgment in estimating variable consideration, which primarily includes volume discounts, sales rebates, and product returns. The Company adjusts the estimate of revenue at the earlier of when the most likely amount of consideration can be estimated, the amount expected to be received changes, or when the consideration becomes fixed. The Company estimates volume discounts by evaluating specific inputs and assumptions, including the individual customer’s historical and estimated future product purchases. Discounts are deducted from revenue at the time of sale or when the discount is offered, whichever is later. In estimating sales rebates, the Company evaluates inputs such as customer-specific trends, terms of the customers’ contracted rebate program, historical experience, and the forecasted performance of a customer and their expected level of achievement within the rebate programs. The accruals for these rebate programs are updated as actual results and updated forecasts impact the estimated achievement for customers within the rebate programs. When the Company gives customers the right to return eligible products and receive credit, returns are estimated based on an analysis of historical experience. However, returns of products, excluding warranty-related returns, are not material.
To the extent the transaction price includes variable consideration, the Company applies judgment in constraining the estimated variable consideration due to factors that may cause reversal of cumulative revenue recognized. The Company evaluates constraints based on its historical and projected experience with similar customer contracts.
For most of its products, the Company transfers control and recognizes revenue when products are shipped from the Company’s manufacturing facility or warehouse to the customer. For contracts with customers that contain destination shipping terms, revenue is not recognized until the goods are delivered to the agreed upon destination. As such, the Company’s performance obligations related to product sales are satisfied at a point in time as this is when the customer obtains the use of and substantially all of the benefit of the product.
The Company recognizes revenue from support and maintenance contracts, extended warranties, and other certain contract performance obligations over time based on the period of the contracts or as the services are performed, as the customer simultaneously receives and consumes the benefits provided by the Company’s performance of the services. In general, the total amount of revenue recognized over time is not material to the Company’s financial statements.
Depending on the terms of its contracts, the Company may defer the recognition of a portion of revenue on a relative stand-alone selling price basis when certain performance obligations are not yet satisfied. Consideration received from customers in advance of revenue recognition is classified as deferred revenue.
The Company has elected to account for shipping and handling activities as a fulfillment cost within the cost of products sold, and records shipping and handling costs collected from customers in net sales. The Company has adopted one practical expedient: relief from considering the existence of a significant financing component when the payment for the good or service is expected to be one year or less.
Additional information and disclosure regarding revenue recognition is provided in Note 2, Revenue.
Cost of Products Sold
Cost of products sold represents costs directly related to the manufacture and distribution of the Company’s products, and include costs of raw materials, packaging, direct labor, overhead, shipping and handling, warehousing and the depreciation of manufacturing, warehousing and distribution facilities and amortization of intangible assets. Overhead and related expenses include salaries, wages, employee benefits, utilities, lease costs, maintenance and property taxes.
Warranties
The Company provides manufacturer’s 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 sold in the Consolidated Statements of Operations. The Company’s warranty expense and warranty accrual were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Warranty Expense | | $ | 48 | | | $ | 27 | | | $ | 44 | |
Warranty Accrual | | 24 | | | 22 | | | 28 | |
Selling, General and Administrative Expenses
SG&A represents indirect costs associated with generating revenues and in managing the business of the Company. Such costs include advertising and marketing expenses, salaries, employee benefits, incentive compensation, travel, office expenses, lease costs, amortization of capitalized software developed for internal use, and depreciation of administrative facilities. Advertising costs are expensed as incurred.
Research and Development Costs
R&D costs, including internal labor costs, material costs, consulting expenses, and certain overheads, such as facilities and information technology costs directly attributable to R&D activities, are expensed in the period in which they are incurred. Software development costs related to software to be sold, leased, or otherwise marketed incurred prior to the attainment of technological feasibility are considered R&D and are expensed as incurred. Once technological feasibility is established, the cost of software developed for external use is capitalized until the product is available for general release to customers. Amortization of these costs are included in Cost of products sold over the estimated life of the products.
Stock Compensation
Stock-based compensation is measured at the grant date at fair value, 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.
Stock options granted become exercisable as determined by the grant agreement and expire ten years after the date of grant under these plans. Restricted Stock Units (“RSU”) vest as determined by the grant agreement and are subject to a service condition, which requires grantees to remain employed by the Company during the period following the date of grant. Under the terms of the RSUs, the vesting period is referred to as the restricted period. In addition to the service condition, certain granted RSUs are subject to performance requirements that can vary between the first year and up to the final year of the RSU award. If targeted performance is not met the RSU granted is adjusted to reflect the achievement level. Upon the expiration of the applicable restricted period and the satisfaction of all conditions imposed, the restrictions on RSUs will lapse, and shares of common stock will be issued as payment for each vested RSU. Upon death, disability or qualified retirement all awards become immediately exercisable for up to one year. Awards are expensed as compensation over their respective vesting periods or to the eligible retirement date if shorter. The Company records forfeitures on stock-based compensation as the participant terminates rather than estimating forfeitures.
Income Taxes
The Company’s tax expense includes U.S. and international income taxes plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not considered 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.
The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained upon examination by the taxing authorities based on the technical merits of the position.
The Company’s tax positions are subject to ongoing examinations by the tax authorities. The Company operates within multiple taxing jurisdictions throughout the world and in the normal course of business is examined by taxing authorities in those jurisdictions. Adjustments to the uncertain tax positions are recorded when taxing authority examinations are completed, statutes of limitation are closed, changes in tax laws occur or as new information comes to light regarding to the technical merits of the tax position.
Earnings Per Share
Basic earnings per share are calculated by dividing net earnings attributable to the Company’s shareholders by the weighted average number of shares outstanding for the period. Diluted earnings per share is calculated by dividing net earnings attributable to the Company’s shareholders 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, unless the impact of including these options is anti-dilutive.
Business Acquisitions
The Company acquires businesses as well as partial interests in businesses. Acquired businesses are accounted for using the acquisition method of accounting which requires the Company to record assets acquired and liabilities assumed at their respective fair values with the excess of the purchase price over estimated fair values recorded as goodwill.
The Company obtains information during due diligence and through other sources to establish respective fair values. Examples of factors and information that the Company uses to determine the fair values include: tangible and intangible asset valuations and appraisals, and evaluations of existing contingencies, liabilities, and product line information. If the initial valuation for an acquisition is incomplete by the end of the reporting period in which the acquisition occurred, the Company will record provisional estimates in the financial statements. The provisional estimates will be finalized as soon as information becomes available, but not later than one year from the acquisition date.
As part of purchase accounting for acquisitions, the Company values identified intangible assets using an income approach. Technology know-how is valued using an excess earnings method. Tradename and trademark assets are valued using a relief-from-royalty method. Non-compete agreements are valued using a with-and-without method. The Company applies judgment in estimating the fair value of intangible assets acquired, which involves the use of estimates and assumptions with respect to revenue growth rates, EBITDA margin percentages, royalty rate, technology obsolescence factors, useful lives of the assets and discount rates used in computing present values. In addition, the estimates of useful lives of these acquired intangibles are used to calculate depreciation and amortization expense.
For the year ended December 31, 2021, the Company incurred acquisition-related costs of $8 million, consisting primarily of legal and professional fees, which were recorded in SG&A expenses in the Consolidated Statements of Operations. These costs were not material for the years ended December 31, 2023 and 2022.
Investments in Unconsolidated Affiliates
Investments in non-consolidated affiliates, joint ventures and partnerships where the Company maintains significant influence over an entity but does not have control are accounted for using the equity method. The Company records the carrying value of these investments within other noncurrent assets in the Consolidated Balance Sheets and records the Company’s proportional share of the investees’ net earnings or losses within other expense (income). Investments in which the Company does not exercise significant influence are recorded at cost, and assessed for any other-than-temporary impairment when events or changes in circumstances indicate the carrying amount of the investment might not be recoverable.
On December 7, 2023, the Company sold its minority interest in a UK-based, privately-held provider of healthcare consumables for $13 million. Prior to the sale, the Company recorded a loss of $4 million in Other expense (income), net due to a forfeiture of accumulated earnings on the investment for declining its option to purchase the remaining ownership interest.
The Company's equity-method net losses were $4 million, $36 million, and $10 million for the years ended December 31, 2023, 2022, and 2021 respectively. Loss from equity method investments for the year ended December 31, 2022 includes $36 million recorded in Other expense (income), net in the Consolidated Statements of Operations for a write-off of the Company’s ownership position in a privately-held dental investment company following impairment of underlying investments held by the investment company and the Company’s determination that the remaining investment is not recoverable.
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 (loss) and comprehensive income (loss) attributed to the Company and NCI separately in the Consolidated Statements of Operations, and in the Consolidated Statements of Comprehensive Income.
Segment Reporting
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 market. The Company has four reportable segments and a description of the activities within these segments is included in ComputationNote 6, Segment and Geographic Information.
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 between market participants on the measurement date in current markets. The accounting guidance establishes a hierarchical disclosure framework associated with the level of Ratiospricing observability utilized in measuring financial instruments at fair value. The three broad levels defined by the fair value hierarchy are as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of Earningsthe reported date.
Level 2 - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. These financial instruments include derivative instruments whose fair value have been derived using a model where inputs to Fixed Charges filedthe model are directly observable in the market or can be derived principally from, or corroborated by observable market data.
Level 3 - Instruments that have little to no pricing observability as Exhibit 12.1of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
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 impacted by a number of 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 records its derivatives and contingent considerations on a recurring fair value basis.
The Company believes the carrying amounts of cash and cash equivalents, accounts receivable (net of allowance for doubtful accounts), prepaid expenses and other current assets, accounts payable, accrued liabilities, income taxes payable and notes payable approximate fair value due to the short-term nature of these instruments. The Company has presented the required disclosures in Note 20, Fair Value Measurement.
Non-Recurring Basis
When events or circumstances require an asset or liability to be measured at fair value that otherwise is generally recorded based on another valuation method, such as, net realizable value, the Company will utilize the valuation techniques described above. The Company records its business combinations and impairments on a non-recurring basis.
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. The new standard requirement to measure contract assets and contract liabilities acquired in a business combination at fair value differs from the current approach. The amendments in this update were effective for the fiscal years and interim periods ending after December 31, 2022. The Company adopted this accounting standard on January 1, 2023. The adoption of this standard did not materially impact the Company’s consolidated financial statements or related disclosures.
Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which requires public entities to disclose information about significant expenses in their reportable segment results on both an interim and annual basis. Public entities are required to disclose significant expense categories and amounts for each reportable segment. Significant expense categories are derived from expenses that are regularly reported to an entity’s chief operating decision-maker (“CODM”) and included in a segment’s reported measures of profit or loss. Public entities are also required to disclose the title and position of the CODM and explain how the CODM uses the reported measures of profit or loss to assess segment performance. This standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, early adoption is permitted and should be applied retrospectively for all prior periods presented in the consolidated financial statements. The Company is currently evaluating the impact on its consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which requires public entities to disclose additional income tax information, primarily related to the rate reconciliation and income taxes paid on an annual basis. The amendment in the ASU is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in this update are effective for annual periods beginning after December 15, 2024, early adoption is permitted and should be applied prospectively. The Company is currently evaluating the impact on its consolidated financial statements and related disclosures.
NOTE 2 - REVENUE
Revenues are derived primarily from the sale of dental equipment and dental and healthcare consumables products. Revenues are measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. For a description of the products and services provided within each of the Company’s four reportable segments see Note 6, Segment and Geographic Information.
Net sales disaggregated by product category were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Equipment & Instruments | | $ | 628 | | | $ | 678 | | | $ | 728 | |
CAD/CAM | | 541 | | | 541 | | | 620 | |
Connected Technology Solutions | | $ | 1,169 | | | $ | 1,219 | | | $ | 1,348 | |
| | | | | | |
Essential Dental Solutions | | $ | 1,468 | | | $ | 1,427 | | | $ | 1,516 | |
| | | | | | |
Orthodontics | | $ | 339 | | | $ | 297 | | | $ | 273 | |
Implants & Prosthetics | | 701 | | | 709 | | | 791 | |
Orthodontic and Implant Solutions | | $ | 1,040 | | | $ | 1,006 | | | $ | 1,064 | |
| | | | | | |
Wellspect Healthcare | | $ | 288 | | | $ | 270 | | | $ | 303 | |
| | | | | | |
Total net sales | | $ | 3,965 | | | $ | 3,922 | | | $ | 4,231 | |
Net sales disaggregated by geographic region were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
United States | | $ | 1,437 | | | $ | 1,392 | | | $ | 1,480 | |
Europe | | 1,550 | | | 1,559 | | | 1,675 | |
Rest of World | | 978 | | | 971 | | | 1,076 | |
| | | | | | |
Total net sales | | $ | 3,965 | | | $ | 3,922 | | | $ | 4,231 | |
Contract Assets and Liabilities
The Company generally does not have contract assets in the course of its business. Contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for customer aligner treatment where the performance obligation has not yet been fulfilled. The Company had deferred revenue of $91 million and $57 million recorded in Accrued liabilities and Other noncurrent liabilities, respectively, in the Consolidated Balance Sheets at December 31, 2023. The Company had deferred revenue of $91 million and $27 million recorded in Accrued liabilities and Other noncurrent liabilities, respectively, in the Consolidated Balance Sheets at December 31, 2022. The Company recognized $68 million of revenue during the twelve months ended December 31, 2023 which was previously deferred as of December 31, 2022. The Company recognized $59 million of revenue during the the twelve months ended December 31, 2022 which was previously deferred as of December 31, 2021. The Company expects to recognize a significant majority of the deferred revenue within the next twelve months.
Allowance for Doubtful Accounts
Accounts and notes receivable-trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $17 million and $14 million at December 31, 2023 and 2022, respectively. For the years ended December 31, 2023 and 2022, changes to the provision for doubtful accounts including write-offs of accounts receivable that were previously reserved were insignificant. Changes to this Form 10-K.provision are included in Selling, general, and administrative expenses in the Consolidated Statements of Operations.
Item 9. ChangesNOTE 3 - STOCK COMPENSATION
The Company maintains the 2016 Omnibus Incentive Plan (the “Plan”) under which it may grant non-qualified stock options (“NQSOs”), incentive stock options, restricted stock, RSUs and stock appreciation rights, collectively referred to as “Awards.” Awards are granted at exercise prices that are equal to the closing stock price on the date of grant. The Company authorized grants under the Plan of 25 million shares of common stock, plus any unexercised portion of canceled or terminated stock options granted under the legacy DENTSPLY International Inc. 2010 and 2002 Equity Incentive Plans, as amended, and under the legacy Sirona Dental Systems, Inc. 2015 and 2006 Equity Incentive Plans, as amended. Each restricted stock and RSU issued is counted as a reduction of 3.09 shares of common stock available to be issued under the Plan. No key employee may be granted awards in excess of 1 million shares of common stock in any calendar year. The number of shares available for grant under the 2016 Plan at December 31, 2023 is 12 million.
The amounts of stock compensation expense recorded in the Company’s Consolidated Statements of Operations for the years ended December 31, 2023, 2022 and Disagreements with Accountants on Accounting2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Cost of products sold | | $ | 4 | | | $ | 3 | | | $ | 3 | |
Selling, general, and administrative expense | | 36 | | | 53 | | | 44 | |
Research and development expense | | 4 | | | 3 | | | 2 | |
Restructuring and other costs | | 2 | | | — | | | — | |
Total stock based compensation expense | | $ | 46 | | | $ | 59 | | | $ | 49 | |
| | | | | | |
Related deferred income tax benefit | | $ | 8 | | | $ | 7 | | | $ | 6 | |
The Company uses the Black-Scholes option-pricing model to estimate the fair value of each option awarded. The average assumptions used to determine compensation cost for the Company’s NQSOs issued were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | | | | | |
Weighted average fair value per share | | $ | 12.64 | | | $ | 14.06 | | | $ | 15.90 | |
Expected dividend yield | | 1.45 | % | | 1.09 | % | | 0.68 | % |
Risk-free interest rate | | 4.27 | % | | 2.23 | % | | 0.79 | % |
Expected volatility | | 35.8 | % | | 32.7 | % | | 31.5 | % |
Expected life (years) | | 4.76 | | 5.20 | | 5.08 |
The total intrinsic value of options exercised for the year ended December 31, 2023 was insignificant. The total intrinsic value of options exercised for the years ended December 31, 2022 and Financial Disclosure2021 was $1 million and $16 million, respectively.
None.The NQSO transactions for the year ended December 31, 2023 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding | | Exercisable | | Expected to Vest |
(in millions, except per share amounts) | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| | | | | | | | | | | | | | | | | | |
December 31, 2022 | | 3.0 | | | $ | 51.64 | | | $ | — | | | 1.9 | | | $ | 52.43 | | | $ | — | | | 1.1 | | | $ | 50.21 | | | $ | — | |
Granted | | 0.7 | | | 38.67 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Exercised | | — | | | 39.77 | | | | | | | | | | | | | | | |
Cancelled | | (0.7) | | | 51.08 | | | | | | | | | | | | | | | |
Forfeited | | (0.4) | | | 52.10 | | | | | | | | | | | | | | | |
December 31, 2023 | | 2.6 | | | $ | 48.11 | | | $ | 1 | | | 1.6 | | | $ | 52.55 | | | $ | — | | | 1.0 | | | $ | 41.41 | | | $ | 1 | |
There were 1 million NQSOs unvested at December 31, 2023. The remaining unamortized compensation cost related to NQSOs is $9 million, which will be expensed over the weighted average remaining vesting period of the options, which is 2.0 years.
The weighted average remaining contractual term of all outstanding options, exercisable options and options expected to vest are 5.7 years, 3.6 years and 8.8 years, respectively.
Information about NQSOs outstanding for the year ended December 31, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding | | Exercisable |
| | Number Outstanding at December 31, 2023 | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price | | Number Exercisable at December 31, 2023 | | Weighted Average Exercise Price |
Range of Exercise Prices | | | | | |
(in millions, except per share amounts and life) | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
30.01 | | - | 40.00 | | 0.8 | | | 9.1 | | $ | 37.13 | | | — | | | $ | 30.97 | |
40.01 | | - | 50.00 | | 0.6 | | | 3.7 | | 47.32 | | | 0.6 | | | 47.50 | |
50.01 | | - | 60.00 | | 0.9 | | | 4.7 | | 55.29 | | | 0.7 | | | 55.44 | |
60.01 | | - | 70.00 | | 0.3 | | | 2.5 | | 62.33 | | | 0.3 | | | 62.29 | |
| | | | 2.6 | | | | | | | 1.6 | | | |
The unvested RSU transactions for the year ended December 31, 2023 were as follows: | | | | | | | | | | | | | | |
| | Unvested Restricted Stock Units |
| | Shares | | Weighted Average Grant Date Fair Value |
| | |
(in millions, except per share amounts) | | |
| | | | |
Unvested at December 31, 2022 | | 4.4 | | | $ | 45.63 | |
Granted | | 1.7 | | | 40.91 | |
| | | | |
Vested | | (0.8) | | | 40.04 | |
Forfeited | | (1.7) | | | 49.19 | |
Unvested at December 31, 2023 | | 3.6 | | | $ | 42.95 | |
The weighted average grant date fair value of RSUs granted for the years ended December 31, 2022 and 2021 were $39.73 and $63.61, respectively. The unamortized compensation cost related to RSUs is $57 million, which will be expensed over the remaining weighted average restricted period of the RSUs, which is 1.9 years.
The total fair value of shares vested for the years ended December 31, 2023, 2022 and 2021 was $42 million, $49 million and $76 million, respectively.
Item 9A. ControlsNOTE 4 - EARNINGS PER COMMON SHARE
The computation of basic and Proceduresdiluted earnings (loss) per common share for the years ended December 31 were as follows:
| | | | | | | | | | | | | | | | | | | | |
Basic Earnings (Loss) Per Common Share | | |
(in millions, except per share amounts) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Net (loss) income attributable to Dentsply Sirona | | $ | (132) | | | $ | (950) | | | $ | 411 | |
| | | | | | |
Weighted average common shares outstanding | | 212.0 | | | 215.5 | | | 218.4 | |
| | | | | | |
Earnings (loss) per common share - basic | | $ | (0.62) | | | $ | (4.41) | | | $ | 1.88 | |
| | | | | | |
Diluted Earnings (Loss) Per Common Share | | |
(in millions, except per share amounts) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Net (loss) income attributable to Dentsply Sirona | | $ | (132) | | | $ | (950) | | | $ | 411 | |
| | | | | | |
Weighted average common shares outstanding | | 212.0 | | | 215.5 | | | 218.4 | |
Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards | | — | | | — | | | 1.8 | |
Total weighted average diluted shares outstanding | | 212.0 | | | 215.5 | | | 220.2 | |
| | | | | | |
Earnings (loss) per common share - diluted | | $ | (0.62) | | | $ | (4.41) | | | $ | 1.87 | |
| | | | | | |
Weighted average shares excluded from diluted common shares outstanding due to reported net loss | | 1.1 | | | 0.5 | | | — | |
| | | | | | |
Weighted average shares excluded from diluted common shares outstanding due to antidilutive nature | | 3.0 | | | 3.6 | | | 1.0 | |
NOTE 5 - COMPREHENSIVE (LOSS) INCOME
AOCI includes cumulative foreign currency translation adjustments related to consolidation of the Company’s foreign subsidiaries, fair value adjustments related to the Company’s derivative financial instruments, and actuarial gains and losses related to the Company’s pension plans. These changes are recorded in AOCI net of tax. For the years ended December 31, 2023, 2022 and 2021, these tax adjustments were $166 million, $100 million and $168 million, respectively, primarily related to foreign currency translation adjustments.
The cumulative foreign currency translation adjustments included translation losses of $360 million and $438 million at December 31, 2023 and 2022, respectively, and included losses of $113 million and $84 million, at December 31, 2023 and 2022, respectively, on loans designated as hedges of net investments.
Changes in AOCI, net of tax, by component for the years ended December 31, 2023 and 2022 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign Currency Translation Gain (Loss) | | Gain (Loss) on Cash Flow Hedges | | Gain (Loss) on Net Investment and Fair Value Hedges | | | | Pension Liability Gain (Loss) | | Total |
| | | | | | | | | | | | |
Balance, net of tax, at December 31, 2022 | | $ | (522) | | | $ | (17) | | | $ | (73) | | | | | $ | (16) | | | $ | (628) | |
Other comprehensive income (loss) before reclassifications and tax impact | | 2 | | | — | | | (45) | | | | | (34) | | | (77) | |
Tax benefit | | 47 | | | — | | | 11 | | | | | 8 | | | 66 | |
Other comprehensive income (loss), net of tax, before reclassifications | | $ | 49 | | | $ | — | | | $ | (34) | | | | | $ | (26) | | | $ | (11) | |
Amounts reclassified from accumulated other comprehensive income, net of tax | | — | | | 4 | | | — | | | | | (1) | | | 3 | |
Net increase (decrease) in other comprehensive income | | 49 | | | 4 | | | (34) | | | | | (27) | | | (8) | |
| | | | | | | | | | | | |
Balance, net of tax, at December 31, 2023 | | $ | (473) | | | $ | (13) | | | $ | (107) | | | | | $ | (43) | | | $ | (636) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign Currency Translation Gain (Loss) | | Gain (Loss) on Cash Flow Hedges | | Gain (Loss) on Net Investment and Fair Value Hedges | | | | Pension Liability Gain (Loss) | | Total |
| | | | | | | | | | | | |
Balance, net of tax, at December 31, 2021 | | $ | (366) | | | $ | (16) | | | $ | (103) | | | | | $ | (107) | | | $ | (592) | |
Other comprehensive (loss) income before reclassifications and tax impact | | (127) | | | (1) | | | 39 | | | | | 116 | | | 27 | |
Tax expense | | (29) | | | — | | | (9) | | | | | (30) | | | (68) | |
Other comprehensive (loss) income, net of tax, before reclassifications | | $ | (156) | | | $ | (1) | | | $ | 30 | | | | | $ | 86 | | | $ | (41) | |
Amounts reclassified from accumulated other comprehensive income, net of tax | | — | | | — | | | — | | | | | 5 | | | 5 | |
Net (decrease) increase in other comprehensive income | | (156) | | | (1) | | | 30 | | | | | 91 | | | (36) | |
| | | | | | | | | | | | |
Balance, net of tax, at December 31, 2022 | | $ | (522) | | | $ | (17) | | | $ | (73) | | | | | $ | (16) | | | $ | (628) | |
Reclassification out of AOCI to the Consolidated Statements of Operations for the years ended December 31, 2023, 2022 and 2021 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | Amounts Reclassified from AOCI | Affected Line Item in the Consolidated Statements of Operations |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | | | | |
|
| | | | | | | |
| | | | | | | | | |
Gain (Loss) on derivative financial instruments: |
Interest rate swaps | | $ | (3) | | | $ | (3) | | | $ | (4) | | Interest expense, net |
Foreign exchange forward contracts | | (1) | | | 3 | | | (3) | | Cost of products sold |
| | | | | | | |
| | | | | | | |
Net loss before tax | | $ | (4) | | | $ | — | | | $ | (7) | | |
Tax impact | | — | | | — | | | — | | (Benefit) provision for income taxes |
Net loss after tax | | $ | (4) | | | $ | — | | | $ | (7) | | | | |
| | | | | | | | | |
|
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | |
Amortization of defined benefit pension and other postemployment benefit items: |
Amortization of prior service benefits | | $ | 1 | | | $ | 1 | | | $ | 1 | | (a) |
| | | | | | | |
Amortization of net actuarial losses | | — | | | (8) | | | (12) | | (a) |
Net income (loss) before tax | | $ | 1 | | | $ | (7) | | | $ | (11) | | |
Tax impact | | — | | | 2 | | | 3 | | (Benefit) provision for income taxes |
Net income (loss) after tax | | $ | 1 | | | $ | (5) | | | $ | (8) | | |
| | | | | | | | | |
Total reclassifications for the period | | $ | (3) | | | $ | (5) | | | $ | (15) | | | | |
| | | | | | | | | |
(a) Conclusion RegardingThese AOCI components are included in the Effectivenesscomputation of Disclosure Controlsnet periodic benefit cost for the years ended December 31, 2023, 2022 and Procedures2021, respectively.
NOTE 6 - SEGMENT AND GEOGRAPHIC INFORMATION
Effective April 1, 2023 the Company realigned its reporting structure due to certain organizational changes. The Company realigned its reportable segments to reflect changes in how the Company manages its operations, specifically the level at which its chief operating decision maker (“CODM”) regularly reviews operating results and allocates resources. As a result, the reportable segments changed from Technology & Equipment and Consumables to (i) Connected Technology Solutions, (ii) Essential Dental Solutions, (iii) Orthodontic and Implant Solutions, and (iv) Wellspect Healthcare.
The Company has four operating segments that are organized primarily by product. They generally have overlapping geographical presence, customer bases, distribution channels, and regulatory oversight with the exception of Wellspect Healthcare, which has a more discrete market and regulatory environment specific to the industry for medical devices. These operating segments which also form the Company’s reportable segments, are identified in accordance with how the Company’s CODM regularly reviews financial results and uses this information to evaluate the Company’s performance and allocate resources.
The Company evaluates performance of the segments based on the net sales and adjusted operating income. Segment adjusted operating income is defined as operating income before income taxes and before certain corporate headquarters unallocated costs, goodwill and intangible asset impairments, restructuring and other costs, interest expense, net, other expense (income), net, amortization of intangible assets and depreciation resulting from the fair value step-up of property, plant, and equipment from business combinations. Asset and other balance sheet information are not reported to the CODM.
A description of the products and services provided within each of the Company’s four reportable segments is provided below.
Connected Technology Solutions
This segment includes the design, manufacture and sales of the Company’s dental technology and equipment products. These products include the Equipment & Instruments and CAD/CAM product categories.
Equipment & Instruments
The Equipment & Instruments product category consists of basic and high-tech dental equipment such as imaging equipment, motorized dental handpieces, treatment centers, and other instruments for dental practitioners and specialists. Imaging equipment serves as a key point of entry to the Company’s digital workflow offerings and consists of a broad range of diagnostic imaging systems for 2D or 3D, panoramic, and intraoral applications, as well as cone-beam computed tomography systems (“CBCT”). Treatment centers comprise a broad range of products from basic dental chairs to sophisticated chair-based units with integrated diagnostic, hygienic and ergonomic functionalities, as well as specialist centers used in preventive treatment and for training purposes. This product group also includes other lab equipment, such as amalgamators, mixing machines and porcelain furnaces.
CAD/CAM
Dental CAD/CAM technologies are products designed for dental offices to support numerous digital workflows for procedures such as dental restorations through integrations with DS Core, our cloud-based platform. This product category includes intraoral scanners, 3-D printers, mills, and certain software and services, as well as a full-chairside economical restoration of esthetic ceramic dentistry offering called CEREC. A full-chairside offering enables dentists to practice same day or single visit dentistry.
Essential Dental Solutions
This segment includes the development, manufacture and sales of the Company’s value-added endodontic, restorative, and preventive consumable products and small equipment used in dental offices for the treatment of patients. Offerings in this segment also include specialized treatment products including products used in the creation of dental appliances.
Essential Dental Solutions products are designed to operate in an integrated system to provide solutions for high-tech dental procedures. The endodontic products include motorized endodontic handpieces, files, sealers, irrigation needles and other tools or single-use solutions which support root canal procedures. The restorative products include dental ceramics and other materials used in prosthetic restorations including crowns and veneers.
The preventive products include small equipment products such as curing light systems, dental diagnostic systems and ultrasonic scalers and polishers, as well as other dental supplies including dental anesthetics, prophylaxis paste, dental sealants and impression materials.
Orthodontic and Implant Solutions
This segment includes the design, manufacture, and sales of the Company’s various digital implant systems and innovative dental implant products, digital dentures and dental professional directed aligner solutions. Offerings in this segment also include application of our digital services and technology, including those provided by DS Core, our cloud-based platform.
Orthodontics
The Orthodontics product category includes SureSmile, an aligner solution provided through clinician offices, and Byte, a direct-to-consumer aligner solution. The Orthodontics product category also includes a High Frequency Vibration technology device known as VPro or as HyperByte within Byte’s product offering, as well as the new SureSmile Simulator which uses intraoral scanners and our DS Core platform to create a 3D visualization of patient outcomes. SureSmile aligner solutions include whitening kits and retainers. Byte aligner solutions include Byte Plus with in-office intraoral scanning for treatment planning. The aligner offerings also include software technology that enables aligner treatment planning and seamless connectivity of a digital workflow from diagnostics through treatment delivery.
Implants & Prosthetics
The Implants & Prosthetics product category includes technology to support the Company’s digital workflows for implant systems, a portfolio of innovative dental implant products, digital dentures, crown and bridge porcelain products, bone regenerative and restorative solutions, treatment planning software and educational programs. The Implants & Prosthetics product category is supported by key technologies including custom abutments, advanced tapered immediate load screws and regenerative bone growth factor. Offerings in this category also include dental prosthetics such as artificial teeth and precious metal dental alloys.
Wellspect Healthcare
This segment includes the design, manufacture, and sales of the Company’s innovative continence care solutions for both urinary and bowel management. This category consists mainly of urology catheters and other healthcare-related consumable products.
The Company’s management, withsegment information for the participationyears ended December 31 was as follows:
| | | | | | | | | | | | | | | | | | | | |
Net Sales | | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Connected Technology Solutions | | $ | 1,169 | | | $ | 1,219 | | | $ | 1,348 | |
Essential Dental Solutions | | 1,468 | | | 1,427 | | | 1,516 | |
Orthodontic and Implant Solutions | | 1,040 | | | 1,006 | | | 1,064 | |
Wellspect Healthcare | | 288 | | | 270 | | | 303 | |
Total net sales | | $ | 3,965 | | | $ | 3,922 | | | $ | 4,231 | |
| | | | | | | | | | | | | | | | | | | | |
Depreciation and Amortization | | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Connected Technology Solutions | | $ | 176 | | | $ | 172 | | | $ | 185 | |
Essential Dental Solutions | | 33 | | | 31 | | | 41 | |
Orthodontic and Implant Solutions | | 97 | | | 90 | | | 83 | |
Wellspect Healthcare | | 18 | | | 21 | | | 24 | |
All Other (a) | | 19 | | | 14 | | | 14 | |
Total | | $ | 343 | | | $ | 328 | | | $ | 347 | |
(a) Includes amounts recorded at corporate headquarters.
| | | | | | | | | | | | | | | | | | | | |
Segment Adjusted Operating Income | | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Connected Technology Solutions | | $ | 101 | | | $ | 161 | | | $ | 267 | |
Essential Dental Solutions | | 478 | | | 467 | | | 511 | |
Orthodontic and Implant Solutions | | 156 | | | 193 | | | 217 | |
Wellspect Healthcare | | 87 | | | 73 | | | 87 | |
Segment adjusted operating income | | $ | 822 | | | $ | 894 | | | $ | 1,082 | |
| | | | | | |
Reconciling items (income) expense: | | | | | | |
All other (a) | | 319 | | | 318 | | | 229 | |
Goodwill and intangible asset impairments | | 307 | | | 1,287 | | | — | |
Restructuring and other costs | | 67 | | | 14 | | | 17 | |
Interest expense, net | | 81 | | | 65 | | | 49 | |
Other expense (income), net | | 9 | | | 53 | | | 14 | |
Amortization of intangible assets | | 211 | | | 209 | | | 222 | |
Depreciation resulting from the fair value step-up of property, plant, and equipment from business combinations | | 3 | | | 3 | | | 6 | |
(Loss) income before income taxes | | $ | (175) | | | $ | (1,055) | | | $ | 545 | |
(a) Includes the results of unassigned corporate headquarters costs.
Geographic Information
The following tables set forth information about the Company’s significant operations by geographic areas, for the years ended December 31, 2023, 2022, and 2021. Net sales reported below represent revenues from external customers in those respective countries based on the destination of shipments.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Net sales | | | | | | |
United States | | $ | 1,437 | | | $ | 1,393 | | | $ | 1,484 | |
Germany | | 431 | | | 447 | | | 482 | |
| | | | | | |
Other Foreign | | 2,097 | | | 2,082 | | | 2,265 | |
Total net sales | | $ | 3,965 | | | $ | 3,922 | | | $ | 4,231 | |
Property, plant and equipment, net, represents those long-lived assets held by the operating businesses located in the respective geographic areas.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Property, plant, and equipment, net | | | | | | |
United States | | $ | 194 | | | $ | 174 | | | $ | 166 | |
Germany | | 260 | | | 275 | | | 309 | |
Sweden | | 105 | | | 98 | | | 107 | |
Other Foreign | | 241 | | | 214 | | | 191 | |
Total property, plant, and equipment, net | | $ | 800 | | | $ | 761 | | | $ | 773 | |
Product and Customer Information
For information on the Company’s net sales by product category comprising each of the reportable segments, see Note 2, Revenue.
Concentration Risk
Customers that accounted for 10% or more of net sales or accounts receivable for the years ended December 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | |
| | % of net sales | | % of accounts receivable | | % of net sales | | % of accounts receivable | |
| | | | | | | | | |
Henry Schein, Inc. | | 14 | % | | 11 | % | | 11 | % | | 15 | % | |
Patterson Companies, Inc. | | N/A | | 10 | % | | N/A | | 12 | % | |
For the year ended December 31, 2021, no customer accounted for 10% or more of consolidated net sales or consolidated accounts receivable.
NOTE 7 - OTHER EXPENSE (INCOME), NET
Other expense (income), net, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Foreign exchange transaction (gain) loss | | $ | (3) | | | $ | 6 | | | $ | (12) | |
Other expense (income), net | | 12 | | | 47 | | | 14 | |
Total other expense (income), net | | $ | 9 | | | $ | 53 | | | $ | 2 | |
The Company’s equity-method net losses were $4 million, $36 million, and $10 million for the years ended December 31, 2023, 2022, and 2021, respectively. Loss from equity method investments for the year ended December 31, 2022 includes $36 million recorded in Other expense (income), net in the Consolidated Statements of Operations for a write-off of the Company’s Chief Executive Officerownership position in a privately-held dental investment company following impairment of underlying investments held by the investment company and Chief Financial Officer, evaluated the effectivenessCompany’s determination that the remaining investment is not recoverable.
On February 1, 2021, the Company disposed of an investment casting business previously included as part of the Company’s disclosure controls and procedures (as definedformer Consumables segment in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actexchange for a cash receipt of 1934, as amended) as$19 million. The divestiture resulted in a pre-tax gain 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 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$13 million recorded in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specifiedOther expense (income), net in the SEC’s rules and forms and that it is accumulated and communicated to management, includingConsolidated Statements of Operations for the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Report on Internal Control Over Financial Reporting
Management’s report on the Company’s internal control over financial reporting is included under 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 the quarteryear ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.2021.
Item 9B. Other Information
Not Applicable
PART III
Item 10. Directors, Executive Officers and Corporate GovernanceNOTE 8 - INVENTORIES, NET
Inventories, net were as follows: | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 |
| | | | |
Raw materials and supplies | | $ | 185 | | | $ | 169 | |
Work-in-process | | 77 | | | 77 | |
Finished goods | | 362 | | | 381 | |
| | | | |
| | | | |
Inventories, net | | $ | 624 | | | $ | 627 | |
The information required under this item is set forthCompany’s inventory reserve was $107 million and $83 million at December 31, 2023 and 2022, respectively. Inventories are stated at the lower of cost and net realizable value.
NOTE 9 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, were as follows: | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 |
| | | | |
Land | | $ | 49 | | | $ | 48 | |
Buildings and improvements | | 568 | | | 546 | |
Machinery and equipment | | 964 | | | 963 | |
Capitalized software | | 446 | | | 400 | |
Construction in progress | | 138 | | | 116 | |
| | $ | 2,165 | | | $ | 2,073 | |
Less: Accumulated depreciation and amortization | | 1,365 | | | 1,312 | |
Property, plant and equipment, net | | $ | 800 | | | $ | 761 | |
NOTE 10 - LEASES
The net present value of finance and operating lease right-of-use assets and liabilities were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
(in millions, except percentages) | | Location in the Consolidated Balance Sheets | | 2023 | | 2022 |
| | | | | | |
Assets | | | | | | |
Finance leases | | Property, plant, and equipment, net | | $ | 1 | | | $ | 1 | |
Operating leases | | Operating lease right-of-use assets, net | | 178 | | | 200 | |
Total right-of-use assets | | | | $ | 179 | | | $ | 201 | |
| | | | | | |
Liabilities | | | | | | |
Current liabilities | | | | | | |
Finance leases | | Notes payable and current portion of long-term debt | | $ | — | | | $ | 1 | |
Operating leases | | Accrued liabilities | | 56 | | | 54 | |
Noncurrent liabilities | | | | | | |
Finance leases | | Long-term debt | | 1 | | | 1 | |
Operating leases | | Operating lease liabilities | | 125 | | | 149 | |
Total lease liabilities | | | | $ | 182 | | | $ | 205 | |
| | | | | | |
Supplemental information: | | | | |
Weighted-average discount rate | | | | |
Finance leases | | | | 4.2 | % | | 3.5 | % |
Operating leases | | | | 3.9 | % | | 3.5 | % |
| | | | | | |
Weighted-average remaining lease term in years | | | | |
Finance leases | | | | 5.2 | | 4.1 |
Operating leases | | | | 4.5 | | 5.1 |
The lease cost recognized in the 2018 Proxy Statement, which is incorporated herein by reference.Consolidated Statements of Operations were as follows: | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
(in millions) | | | 2023 | | 2022 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Operating lease cost | | | $ | 67 | | | $ | 68 | |
Short-term lease cost | | | — | | | 1 | |
Variable lease cost | | | 15 | | | 12 | |
Total lease cost | | | $ | 82 | | | $ | 81 | |
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 allcontractual maturity dates of the Company’s management level employees. A copyremaining lease liabilities as of the Code of Business Conduct and Ethics is available in the Investor Relations section of the Company’s website at www.dentsplysirona.com. The Company intends to disclose any amendment to its Code of Business Conduct and Ethics that relates to any 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 executive officer, principal financial 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.dentsplysirona.com, within four business days following the date of such amendment or waiver.December 31, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Finance Leases | | Operating Leases | | Total |
| | | | | | |
2024 | | $ | — | | | $ | 62 | | | $ | 62 | |
2025 | | 1 | | | 45 | | | 46 | |
2026 | | — | | | 32 | | | 32 | |
2027 | | — | | | 21 | | | 21 | |
2028 | | — | | | 16 | | | 16 | |
2029 and beyond | | — | | | 23 | | | 23 | |
Total lease payments | | $ | 1 | | | $ | 199 | | | $ | 200 | |
Less imputed interest | | — | | | 18 | | | 18 | |
Present value of lease liabilities | | $ | 1 | | | $ | 181 | | | $ | 182 | |
Item 11. Executive Compensation
The supplemental cash flow information required under this item is set forth in the 2018 Proxy Statement, which is incorporated herein by reference.for leases were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| | | | | | |
Operating cash flows paid for operating leases | | $ | 68 | | | $ | 66 | | | $ | 65 | |
| | | | | | |
| | | | | | |
Right-of-use assets obtained in exchange for new lease liabilities: | | | | | | |
Finance leases | | $ | — | | | $ | — | | | $ | 1 | |
Operating leases | | 36 | | | 57 | | | 79 | |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersNOTE 11 - GOODWILL AND INTANGIBLE ASSETS
The information requiredCompany assesses both goodwill and indefinite-lived intangible assets for impairment annually as of April 1 or more frequently if events or changes in circumstances indicate the asset might be impaired.
On April 1, 2023, the Company realigned its reporting units due to a change in organizational structure. Reporting units under the former structure were tested for impairment prior to the realignment, and no impairment was identified.
As a result of the realignment, the Company reallocated its goodwill to align its new reporting units which resulted from the change in its operating segments. Goodwill was reassigned to each of the new reporting units using a relative fair value approach. The Company assessed the goodwill of the new reporting units and its indefinite-lived intangible assets for impairment as of April 1, 2023. Based on this item is set forthtest, it was determined that the fair values of its reporting units and indefinite-lived intangible assets more likely than not exceeded their carrying values, resulting in no impairment.
For both the former and new structure goodwill impairment tests as of April 1, 2023, the fair values of reporting units were computed using a discounted cash flow model with inputs developed using both internal and market-based data.
Third Quarter 2023 Impairment
In the quarter ended September 30, 2023, the Company identified indicators of a more likely than not impairment related to its Connected Technology Solutions reporting unit, which comprises all the Connected Technology Solutions segment. The decline in fair value for this reporting unit was driven by adverse macroeconomic factors because of weakened demand, particularly in European markets, and increased discount rates. Core underlying market interest rates, which serve as the basis for the discount rate assumptions in our impairment models, rose by approximately 110 bps between the annual impairment test and the interim test during the third quarter of 2023. These factors contributed to reduced forecasted revenues, lower operating margins, and reduced expectations for future cash flows in the 2018 Proxynear term, particularly in relation to demand for products which are commonly financed by end customers and are therefore adversely impacted by an environment of higher interest rates. The higher inflationary environment has also impacted the discretionary spending behavior of our customers more generally, further reducing global demand for certain products in favor of lower cost options. As such, an impairment test was performed in the third quarter of 2023 (the “third quarter test”).
During the third quarter test, the fair value of the Connected Technology Solutions reporting unit was computed using a discounted cash flow model with inputs developed using both internal and market-based data. The discounted cash flow model uses ten-year forecasted cash flows plus a terminal value based on capitalizing the last period’s cash flows using a perpetual growth rate. Significant assumptions used in the discounted cash flow model included, but were not limited to, a discount rate of 11.5%, revenue growth rates (including perpetual growth rates), and operating margin percentages of the reporting unit’s business. As a result, the Company recorded a pre-tax goodwill impairment charge for the three months ended September 30, 2023 related to the Connected Technology Solutions reporting unit of $291 million, resulting in a full write-off of the remaining goodwill balance for the Connected Technology Solutions segment. This charge was recorded in Goodwill and intangible asset impairment in the Consolidated Statement of Operations.
Additionally, in conjunction with the third quarter test, the Company tested the long-lived intangible assets related to the businesses within the Connected Technology Solutions reporting unit within the Connected Technology Solutions segment for impairment. The Company also identified an indicator of impairment for the indefinite-lived intangible assets within the Implants & Prosthetics reporting unit within the Orthodontic and Implant Solutions segment, and determined certain tradenames and trademarks were impaired. These indefinite-lived intangible assets were evaluated for impairment using an income approach, specifically a relief from royalty method. Significant assumptions used in the relief from royalty method included, but were not limited to, discount rates (ranging from 11.5% to 16.5%) revenue growth rates (including perpetual growth rates), and royalty rates. As a result, the Company recorded indefinite-lived intangible asset impairment charges of $14 million and $2 million for the Connected Technology Solutions and Orthodontic and Implant Solutions segments, respectively, for the three months ended September 30, 2023. The impairment charge was primarily driven by macroeconomic factors such as weakened demand, higher cost of capital, and cost inflation, which is incorporated herein by reference.are contributing to reduced forecasted revenues. These charges were recorded in Goodwill and intangible asset impairment in the Consolidated Statements of Operations.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required under this item is presentedcarrying values of indefinite-lived intangible assets impaired in the 2018 Proxy Statement,third quarter of 2023 were $215 million and $23 million for the Connected Technology Solutions and Orthodontic and Implant Solutions segments, respectively, as of December 31, 2023. As the fair value of these indefinite-lived intangible assets continues to approximate carrying value as of December 31, 2023, any further decline in key assumptions could result in additional impairments in future periods.
As of December 31, 2023, the Company considered qualitative and quantitative factors to determine whether any events or changes in circumstances had resulted in the likelihood that the goodwill or indefinite-lived intangible assets may have become more likely than not impaired during the fourth quarter of 2023 and concluded there were no such indicators.
Any deviation in actual financial results compared to the forecasted financial results or valuation assumptions used in the annual or interim tests, a decline in equity valuations, increases in interest rates, or changes in the use of intangible assets, among other factors, could have a material adverse effect to the fair value of either the reporting units or indefinite-lived intangibles assets and could results in a future impairment charge. There can be no assurance that the Company’s future asset impairment testing will not result in a material charge to earnings.
2022 Annual Goodwill and Indefinite-Lived Intangibles Impairment and Testing
In the third and fourth quarters of 2022, the Company experienced adverse macroeconomic factors because of weakened global demand, higher cost of capital, unfavorable foreign currency impacts, and increased raw material, supply chain, and service costs, which contributed to reduced forecasted revenues, lower operating margins, and reduced expectations for future cash flows. As a result, the Company identified indicators of a more likely than not impairment related to its former Digital Dental Group and former Equipment & Instruments reporting units within the former Technologies & Equipment segment and certain indefinite-lived intangible assets, within these former reporting units as well as the former Consumables reporting unit within the former Consumables segment.
The fair values of the two former reporting units above were computed using a discounted cash flow model with inputs developed using both internal and market-based data. The discounted cash flow model uses five- to ten- year forecasted cash flows plus a terminal value based on capitalizing the last period’s cash flows using a perpetual growth rate. The Company’s significant assumptions in the discounted cash flow models include, but are not limited to, the discount rate of 11.0%, revenue growth rates (including perpetual growth rates), operating margin percentages, and net working capital changes of the reporting unit’s business. These assumptions were developed in consideration of current market conditions and future expectations which include, but were not limited to, distribution channel changes, impact from competition, and new product developments. The Company also considered current and projected market and economic conditions. As a result, the Company recorded a pre-tax goodwill impairment charge related to the former Digital Dental Group and former Equipment & Instruments reporting units within the former Technologies & Equipment segment of $1,100 million and $87 million, respectively, for the three months ended September 30, 2022. This charge was recorded in Goodwill and intangible asset impairment in the Consolidated Statements of Operations.
The fair values of intangible assets were computed using either an income approach, specifically a relief from royalty method, or a qualitative assessment. The Company’s significant assumptions in the relief from royalty method include, but were not limited to, discount rates ranging from 11.0% to 12.5%, revenue growth rates (including perpetual growth rates) and royalty rates. As a result, the Company recorded impairment charges for its indefinite-lived intangible assets of $66 million and $28 million for the former Digital Dental Group and former Equipment & Instruments reporting units, respectively, within the former Technologies & Equipment segment, and a $6 million charge for the former Consumables reporting unit within the former Consumables segment, for the year ended December 31, 2022. This charge was recorded in Goodwill and intangible asset impairment in the Consolidated Statements of Operations.
2021 Annual Goodwill and Indefinite-Lived Intangibles Impairment and Testing
The Company performed the required annual impairment tests of goodwill and indefinite-lived intangibles as of April 1, 2021 consistent with the valuation approaches described above, which did not result in any impairment for the year ended December 31, 2021.
A reconciliation of changes in the Company’s goodwill by reportable segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Technologies & Equipment | | Consumables | | Connected Technology Solutions | | Essential Dental Solutions | | Orthodontic and Implant Solutions | | Wellspect Healthcare | | Total |
| | | | | | | | | | | | | | |
Balance at December 31, 2022 | | | | | | | | | | | | | | |
Goodwill | | 5,902 | | | 866 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,768 | |
Accumulated impairment losses | | (4,080) | | | — | | | — | | | — | | | — | | | — | | | (4,080) | |
Goodwill, net December 31, 2022 | | $ | 1,822 | | | $ | 866 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,688 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Translation | | 9 | | | 4 | | | — | | | — | | | — | | | — | | | 13 | |
| | | | | | | | | | | | | | |
Balance at March 31, 2023 | | | | | | | | | | | | | | |
Goodwill | | $ | 5,911 | | | $ | 870 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,781 | |
Accumulated impairment losses | | (4,080) | | | — | | | — | | | — | | | — | | | — | | | (4,080) | |
Goodwill, net March 31, 2023 | | $ | 1,831 | | | $ | 870 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,701 | |
| | | | | | | | | | | | | | |
Realignment of goodwill | | (1,831) | | | (870) | | | 293 | | | 835 | | | 1,303 | | | 270 | | | $ | — | |
Translation | | — | | | — | | | — | | | 1 | | | (5) | | | 6 | | | 2 | |
Goodwill, net June 30, 2023 | | $ | — | | | $ | — | | | $ | 293 | | | $ | 836 | | | $ | 1,298 | | | $ | 276 | | | $ | 2,703 | |
| | | | | | | | | | | | | | |
Impairment | | — | | | — | | | (291) | | | — | | | — | | | — | | | (291) | |
Translation | | — | | | — | | | (2) | | | 4 | | | 25 | | | (1) | | | 26 | |
| | | | | | | | | | | | | | |
Balance at December 31, 2023 | | | | | | | | | | | | | | |
Goodwill | | $ | — | | | $ | — | | | $ | 291 | | | $ | 840 | | | $ | 1,323 | | | $ | 275 | | | $ | 2,729 | |
Accumulated Impairment Losses | | — | | | — | | | (291) | | | — | | | — | | | — | | | (291) | |
Balance at December 31, 2023 | | $ | — | | | $ | — | | | $ | — | | | $ | 840 | | | $ | 1,323 | | | $ | 275 | | | $ | 2,438 | |
|
| | | | | | | | | | | | | | |
Identifiable definite-lived and indefinite-lived intangible assets at were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 |
(in millions) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | | | | | | | | |
Developed technology and patents | | $ | 1,697 | | | $ | (1,006) | | | $ | 691 | | | $ | 1,658 | | | $ | (848) | | | $ | 810 | |
Tradenames and trademarks | | 271 | | | (102) | | | 169 | | | 273 | | | (96) | | | 177 | |
Licensing agreements | | 30 | | | (27) | | | 3 | | | 30 | | | (26) | | | 4 | |
Customer relationships | | 1,070 | | | (680) | | | 390 | | | 1,057 | | | (600) | | | 457 | |
Total definite-lived | | $ | 3,068 | | | $ | (1,815) | | | $ | 1,253 | | | $ | 3,018 | | | $ | (1,570) | | | $ | 1,448 | |
| | | | | | | | | | | | |
Indefinite-lived tradenames and trademarks | | 447 | | | — | | | 447 | | | 450 | | | — | | | 450 | |
In-process R&D (a) | | 5 | | | — | | | 5 | | | 5 | | | — | | | 5 | |
Total indefinite-lived | | 452 | | | — | | | 452 | | | 455 | | | — | | | 455 | |
| | | | | | | | | | | | |
Total identifiable intangible assets | | $ | 3,520 | | | $ | (1,815) | | | $ | 1,705 | | | $ | 3,473 | | | $ | (1,570) | | | $ | 1,903 | |
(a) Intangible assets acquired in a business combination that are in-process and used in R&D activities are considered indefinite-lived until the completion or abandonment of the R&D efforts. The useful life and amortization of those assets will be determined once the R&D efforts are completed.
Amortization expense for definite-lived intangible assets for the years ended December 31, 2023, 2022 and 2021 was $211 million, $209 million and $222 million, respectively. The estimated annual amortization expense related to these intangible assets for each of the five succeeding calendar years is incorporated herein by reference.$212 million, $219 million, $143 million, $124 million and $128 million for 2024, 2025, 2026, 2027 and 2028, respectively.
During the second quarter of 2021, the Company purchased certain developed technology rights for an initial payment of $3 million. The purchase consideration also includes contingent payments of $17 million to be made upon reaching certain regulatory and commercial milestones, which were not yet considered probable at December 31, 2023.
NOTE 12 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets were as follows: | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 |
| | | | |
Prepaid expenses | | $ | 113 | | | $ | 104 | |
Value-added tax receivable | | 61 | | | 53 | |
Deposits | | 33 | | | 24 | |
Other current assets | | 113 | | | 88 | |
Prepaid expenses and other current assets | | $ | 320 | | | $ | 269 | |
Item 14. Principal Accounting FeesNOTE 13 - ACCRUED LIABILITIES
Accrued liabilities were as follows: | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 |
| | | | |
Payroll, commissions, bonuses, other cash compensation and employee benefits | | $ | 161 | | | $ | 156 | |
Sales and marketing programs | | 68 | | | 65 | |
Reserve for distributor rebates | | 151 | | | 163 | |
Restructuring costs | | 37 | | | 7 | |
Accrued vacation and holidays | | 32 | | | 32 | |
Professional and legal costs | | 25 | | | 27 | |
Current portion of derivatives | | 18 | | | 19 | |
General insurance | | 11 | | | 12 | |
Warranty liabilities | | 24 | | | 22 | |
Third party royalties | | 5 | | | 7 | |
Deferred income | | 91 | | | 84 | |
Accrued interest | | 9 | | | 9 | |
| | | | |
Accrued property taxes | | 6 | | | 6 | |
Current operating lease liabilities | | 56 | | | 54 | |
| | | | |
Other | | 55 | | | 64 | |
Accrued liabilities | | $ | 749 | | | $ | 727 | |
NOTE 14 - FINANCING ARRANGEMENTS
Short-Term Debt
Short-term debt was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 |
| | Principal | | Interest | | Principal | | Interest |
(in millions except percentages) | | Balance | | Rate | | Balance | | Rate |
| | | | | | | | |
| | | | | | | | |
Corporate commercial paper facility | | $ | 225 | | | 5.8 | % | | $ | 95 | | | 5.1 | % |
Other short-term borrowings | | 20 | | | 4.9 | % | | 22 | | | 4.6 | % |
Add: Current portion of long-term debt | | 77 | | | | | 1 | | | |
| | | | | | | | |
Total short-term debt | | $ | 322 | | | | | $ | 118 | | | |
| | | | | | | | |
Maximum month-end short-term debt outstanding during the year | | $ | 399 | | | | | $ | 395 | | | |
Average amount of short-term debt outstanding during the year | | 284 | | | | | 289 | | | |
Weighted-average interest rate on short-term debt at year-end | | | | 5.7 | % | | | | 5.0 | % |
Short-Term Borrowings
On May 12, 2023, the Company entered into a five-year senior unsecured multi-currency revolving facility, for an aggregate principal amount of $700 million that expires on May 12, 2028. This new facility replaced the prior $700 million five-year senior unsecured multi-currency revolving facility that was scheduled to expire on July 26, 2024. The Company also has a $500 million commercial paper program. The $700 million multi-currency revolving credit facility serves as a back-up to the commercial paper facility, thus the total available credit under the commercial paper facility and Servicesthe multi-currency revolving credit facility in the aggregate is $700 million. The Company had outstanding borrowings of $225 million and $95 million under the commercial paper facility at December 31, 2023 and December 31, 2022, respectively, and no outstanding borrowings under the multi-currency revolving credit facility. The Company also has access to $44 million in uncommitted short-term financing under lines of credit from various financial institutions, the availability of which is reduced by other short-term borrowings of $20 million.
At December 31, 2023, the Company had $499 million borrowings available under unused lines of credit, including lines available under its short-term arrangements and revolving credit agreement.
Long-Term Debt
Long-term debt was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 |
| | Principal | | Interest | | Principal | | Interest |
(in millions except percentages) | | Balance | | Rate | | Balance | | Rate |
| | | | | | | | |
| | | | | | | | |
Private placement notes 70 million euros due October 2024 | | $ | 77 | | | 1.0 | % | | $ | 75 | | | 1.0 | % |
Private placement notes 25 million Swiss franc due December 2025 | | 30 | | | 0.9 | % | | 27 | | | 0.9 | % |
Private placement notes 97 million euros due December 2025 | | 107 | | | 2.1 | % | | 104 | | | 2.1 | % |
Private placement notes 26 million euros due February 2026 | | 29 | | | 2.1 | % | | 28 | | | 2.1 | % |
Private placement notes 58 million Swiss franc due August 2026 | | 69 | | | 1.0 | % | | 63 | | | 1.0 | % |
Private placement notes 106 million euros due August 2026 | | 117 | | | 2.3 | % | | 114 | | | 2.3 | % |
Private placement notes 70 million euros due October 2027 | | 77 | | | 1.3 | % | | 75 | | | 1.3 | % |
Private placement notes 8 million Swiss franc due December 2027 | | 9 | | | 1.0 | % | | 8 | | | 1.0 | % |
Private placement notes 15 million euros due December 2027 | | 17 | | | 2.2 | % | | 16 | | | 2.2 | % |
Private placement notes 140 million Swiss franc due August 2028 | | 166 | | | 1.2 | % | | 151 | | | 1.2 | % |
Private placement notes 70 million euros due October 2029 | | 77 | | | 1.5 | % | | 75 | | | 1.5 | % |
Fixed rate senior notes 750 million due June 2030 | | 750 | | | 3.3 | % | | 750 | | | 3.3 | % |
Private placement notes 70 million euros due October 2030 | | 77 | | | 1.6 | % | | 75 | | | 1.6 | % |
Private placement notes 45 million euros due February 2031 | | 50 | | | 2.5 | % | | 48 | | | 2.5 | % |
Private placement notes 65 million Swiss franc due August 2031 | | 77 | | | 1.3 | % | | 70 | | | 1.3 | % |
Private placement notes 12.6 billion Japanese yen due September 2031 | | 89 | | | 1.0 | % | | 96 | | | 1.0 | % |
Private placement notes 70 million euros due October 2031 | | 77 | | | 1.7 | % | | 75 | | | 1.7 | % |
Other borrowings, various currencies and rates | | 14 | | | | | 21 | | | |
Hedge accounting fair value adjustment(a) | | (28) | | | | | (35) | | | |
| | $ | 1,881 | | | | | $ | 1,836 | | | |
Less: Current portion | | | | | | | | |
(included in “Notes payable and current portion of long-term debt” in the Consolidated Balance Sheets) | | 77 | | | | | 1 | | | |
Less: Long-term portion of deferred financing costs | | 8 | | | | | 9 | | | |
Long-term portion | | $ | 1,796 | | | | | $ | 1,826 | | | |
(a) Represents the fair value of interest rate swap agreements entered into on a portion of the outstanding senior notes.
The information required under this item is set forthCompany’s multi-currency revolving credit facility, term loans and senior notes contain certain affirmative and negative covenants relating to the Company’s operations and financial condition. At December 31, 2023, the Company was in the 2018 Proxy Statement, which is incorporated herein by reference.compliance with all debt covenants.
PART IV
Item 15. Exhibits and Financial Statement Schedule
| |
(a) | Documents filed as part of this Report |
The following consolidated financial statementscontractual maturity dates of the Company are filedCompany’s long-term borrowings as part of this Form 10-K:December 31, 2023 were as follows:
| | | | | | | | |
(in millions) | | |
2024 | | $ | 77 | |
2025 | | 148 | |
2026 | | 218 | |
2027 | | 103 | |
2028 | | 166 | |
2029 and beyond | | 1,197 | |
| | $ | 1,909 | |
Interest expense, net includes interest income of $16 million, $11 million and $3 million for the years ended December 31, 2023, 2022 and 2021, respectively, primarily relating to interest-bearing cash equivalents and customer financing for our direct-to-consumer aligner solutions.
|
| |
| Page |
Management’s Report on Internal Control Over Financial Reporting | |
Report of Independent Registered Public Accounting Firm | |
Consolidated Statements of Operations - Years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Comprehensive Income - Years ended December 31, 2017, 2016 and 2015 | |
Consolidated Balance Sheets - December 31, 2017 and 2016 | |
Consolidated Statements of Changes in Equity - Years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Cash Flows - Years ended December 31, 2017, 2016 and 2015 | |
Notes to Consolidated Financial Statements | |
Quarterly Financial Information (Unaudited) | |
| |
2. | Financial Statement Schedule for the Years Ended December 31, 2017, 2016, and 2015. |
The following financial statement schedule is filed as part of this Form 10-K and is covered by the Report of Independent Registered Public Accounting Firm:
|
| |
| Page |
Schedule II — Valuation and Qualifying Accounts for the Years Ended December 31, 2017, 2016, and 2015. | |
| |
NOTE 15 - EQUITY
AllOn November 7, 2023, the Board of Directors approved an increase to the authorized share repurchase program of $1.0 billion. Share repurchases may be made through open market purchases, Rule 10b5-1 plans, accelerated share repurchases, privately negotiated transactions or other schedules for which provision is madetransactions in such amounts and at such times as the applicable accounting regulationsCompany considers appropriate based upon prevailing market and business conditions and other factors. At December 31, 2023, the Company had authorization to repurchase $1.44 billion in shares of the Securities and Exchange Commission are not required to be included hereincommon stock remaining under the related instructions or are inapplicable and, therefore, have been omitted.share repurchase program.
On March 3, 2023, the Company entered into an Accelerated Share Repurchase Agreement (“ASR Agreement”) with a financial institution to repurchase the Company’s common stock. The Exhibits listed below are filed or incorporated by referenceCompany repurchased shares under the ASR Agreement as part of the Company’s Form 10-K.share repurchase program described above. In 2023, the Company repurchased approximately 3.1 million shares delivered during March 2023 at a volume-weighted average price of $38.74 representing $120 million of the total anticipated repurchase. In April 2023, an additional 0.8 million shares were delivered upon the final settlement of the ASR Agreement resulting in a total of 3.9 million shares repurchased under the agreement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share amounts) | | Initial Delivery | | Final Settlement |
Agreement Date | Amount Paid | | Shares Received | Price per share | Value of Shares as a % of Contract Value | | Settlement Date | Total Shares Received | Average Price per Share |
March 3, 2023 | $ | 150 | | | 3.1 | $ | 38.74 | | 80 | % | | April 28, 2023 | 3.9 | $ | 38.55 | |
|
| | |
Exhibit
Number
| | Description |
| | Agreement and Plan of Merger, dated as of September 15, 2015, by and among DENTSPLY International Inc., Sirona Dental Systems, Inc. and Dawkins Merger Sub Inc. (14) |
| | Amended and Restated Certificate of Incorporation (17) |
| | Fifth Amended and Restated By-Laws, dated as of February 14, 2018 (22) |
4.1 | | 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)) (3) |
| | 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.) (13) |
4.2 | | United States Commercial Paper Dealer Agreement dated as of August 18, 2011 between the Company and J.P. Morgan Securities LLC (13) |
| | 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 (13) |
|
| | |
| | $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 (13) |
| | First Amendment to the $500.0 Million Credit Agreement dated as of July 1, 2015 between the Company and the Subsidiary Borrowers party (15) |
| | Second Amendment to the $500.0 Million Credit Agreement dated November 30, 2015 between the Company and Subsidiary Borrowers party (15) |
| | $250.0 Million Private Placement Note Purchase Agreement, due February 19, 2016 dated as of October 16, 2009 (7) |
4.5 | | 65.0 Million Swiss Franc Term Loan Agreement, due March 1, 2012 dated as of February 24, 2010 (8) |
| | First Amendment to the 65.0 Million Swiss Franc Term Loan Agreement dated May 21, 2010 between the Company, the Lenders, and PNC Bank National Association, as Agent (15) |
| | 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 (9) |
| | Third Amendment to the 65.0 Million Swiss Franc Term Loan Agreement dated November 30, 2015 (15) |
| | $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 (12) |
| | First Amendment to the $175.0 Million Credit Agreement dated November 30, 2015 between the Company and PNC Bank, National Association as Administrative Agent and the Lenders Party thereto (15) |
| | Form of Indenture (10) |
| | Supplemental Indenture, dated August 23, 2011 between DENTSPLY International Inc., as Issuer and Wells Fargo, National Association, as Trustee (11) |
| | 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 (13) |
| | First Amendment to 12.55 Billion Japanese Yen Term Loan Agreement dated December 18, 2015 between the Company and Bank of Tokyo-Mitsubishi UFJ, LTD (15) |
| | United States Commercial Paper issuing and paying Agency Agreement dated as of November 4, 2014, between the Company and U.S. Bank N.A. (13) |
| | Note Purchase Agreement, dated December 11, 2015, by and among the Company and the purchasers listed in Schedule A thereto (15) |
| | Note Purchase Agreement, dated October 27, 2016, by and among the Company and the purchasers listed in Schedule A thereto (17) |
| | 2002 Amended and Restated Equity Incentive Plan* (5) |
| | Restricted Stock Unit Deferral Plan* (15) |
10.4 | | 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 (1) |
| | 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 (1) |
| | DENTSPLY Supplemental Saving Plan Agreement dated as of December 10, 2007* (5) |
| | Amended and Restated Employment Agreement entered February 19, 2008 between the Company and James G. Mosch* (5) |
| | Amended and Restated Employment Agreement entered January 1, 2009 between the Company’s subsidiary, DeguDent GMBH and Albert Sterkenburg* (6) |
| | DENTSPLY International Inc. Directors’ Deferred Compensation Plan effective January 1, 1997, amended January 1, 2009* (6) |
| | Board Compensation Arrangement* (Filed herewith) |
| | Supplemental Executive Retirement Plan effective January 1, 1999, as amended January 1, 2009* (6) |
| | Incentive Compensation Plan, amended and restated* (9) |
| | AZ Trade Marks License Agreement, dated January 18, 2001 between AstraZeneca AB and Maillefer Instruments Holdings, S.A. (1) |
|
| | |
10.18 | | Precious metal inventory Purchase and Sale Agreement dated November 30, 2001, as amended October 10, 2006 between Bank of Nova Scotia and the Company (4) |
| | Precious metal inventory Purchase and Sale Agreement dated December 20, 2001 between JPMorgan Chase Bank and the Company (2) |
| | Precious metal inventory Purchase and Sale Agreement dated December 20, 2001 between Mitsui & Co., Precious Metals Inc. and the Company (2) |
| | Precious metal inventory Purchase and Sale Agreement dated January 30, 2002 between Commerzbank AG (formerly known as Dresdner Bank AG), Frankfurt, and the Company (5) |
| | 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 (12) |
| | Precious metal inventory Purchase and Sale Agreement dated April 29, 2013 between The Toronto-Dominion Bank and the Company (12) |
| | Executive Change in Control Plan for foreign executives, as amended December 31, 2008* (7) |
| | 2010 Equity Incentive Plan, amended and restated (15) |
| | Employment Agreement, dated December 11, 2015, between DENTSPLY International Inc. and Bret W. Wise* (15) |
| | Employment Agreement, dated February 12, 2016, between DENTSPLY SIRONA Inc. and Christopher T. Clark* (17) |
| | Employment Agreement, dated February 12, 2016, between DENTSPLY SIRONA Inc. and Ulrich Michel* (17) |
| | DENTSPLY SIRONA Inc. 2016 Omnibus Incentive Plan, as amended and restated effective February 14, 2018 (Filed herewith) |
| | Employment Agreement, dated December 11, 2015, between DENTSPLY International Inc., Sirona Dental Systems, Inc. and Jeffrey T. Slovin* (17) |
| | Amended and Restated U.S. Distributorship Agreement, dated May 31, 2012, by and between Patterson Companies, Inc. and Sirona Dental Systems, Inc. (16) |
| | Amended and Restated U.S. CAD-CAM Distributorship Agreement, dated May 31, 2012, by and between Patterson Companies, Inc. and Sirona Dental Systems GmbH (16) |
| | Sirona Dental Systems, Inc. Equity Incentive Plan, as Amended* (17) |
| | Sirona Dental Systems, Inc. 2015 Long-Term Incentive Plan* (17) |
| | Employment Agreement, dated September 27, 2017, between DENTSPLY SIRONA and Mark Thierer* (18) |
| | Employment Agreement, dated September 27, 2017, between DENTSPLY SIRONA and Robert Size* (19) |
| | Employment Agreement, dated October 10, 2017, between DENTSPLY SIRONA and Nicholas W. Alexos* (20) |
| | Employment Agreement, dated October 10, 2017, between DENTSPLY SIRONA and Keith Ebling* (Filed herewith) |
| | Employment Agreement, dated February 12, 2018, between DENTSPLY SIRONA and Donald M. Casey Jr* (21) |
| | Form of DENTSPLY SIRONA Inc. Indemnification Agreement (22) |
| | Form of Option Grant Notice Under the DENTSPLY SIRONA Inc 2016 Omnibus Incentive Plan as amended and restated (22) |
| | Form of Restricted Share Unit Grant Notice Under the DENTSPLY SIRONA Inc. 2016 Omnibus Incentive Plan as amended and restated (22) |
| | Form of Performance Restricted Share Unit Grant Notice Under the DENTSPLY SIRONA Inc. 2016 Omnibus Incentive Plan as amended and restated (22) |
| | Employment Agreement, dated May 5, 2016, between DENTSPLY SIRONA and Maureen J. MacInnis* (Filed herewith) |
| | 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) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2000, File 0-16211. |
| |
(2) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2001, File 0-16211. |
| |
(3) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2002, File 0-16211. |
| |
(4) | 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. |
| |
(5) | 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. |
| |
(6) | 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. |
| |
(7) | 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. |
| |
(8) | 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. |
| |
(9) | 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. |
| |
(10) | Incorporated by reference to exhibit included in the Company’s Registration Statement on Form S-3 dated August 15, 2011 (No. 333-176307). |
| |
(11) | Incorporated by reference to exhibit included in the Company’s Form 8-K dated August 29, 2011, 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, 2013, File no. 0-16211. |
| |
(13) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2014, File no. 0-16211. |
| |
(14) | Incorporated by reference to exhibit included in the Company’s Form 8-K dated September 16, 2015, 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, 2015, File no. 0-16211. |
| |
(16) | Incorporated by reference to exhibit included in the Form 8-K/A, filed by Sirona Dental Systems, Inc. on July 12, 2012 (File no 000-22673). |
| |
(17) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2016, File no. 0-16211. |
| |
(18) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated October 2, 2017, File no. 0-16211. |
| |
(19) | Incorporated by reference to exhibit included in the Company’s Form 10-Q for the quarterly period ended September 30, 2017, File no. 0-16211. |
| |
(20) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated November 3, 2017, File no.0-16211. |
| |
(21) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated January 17, 2018, File no.0-16211. |
| |
(22) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated February 15, 2018, File no.0-16211. |
SCHEDULE II
DENTSPLY SIRONA INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 and 2015
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Additions | | | | | | |
(in millions) | | 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 | | | | | | |
| | | | | | | | | | | | |
Allowance for doubtful accounts: | | | | | | | | | | |
| | | | | | | | |
For Year Ended December 31, | | | | | | | | |
2015 | | $ | 8.8 |
| | $ | 4.3 |
| | $ | 1.4 |
| | $ | (2.2 | ) | | $ | (1.6 | ) | | $ | 10.7 |
|
2016 | | 10.7 |
| | 9.2 |
| | 4.3 |
| | (2.5 | ) | | 1.0 |
| | 22.7 |
|
2017 | | 22.7 |
| | 6.6 |
| | (2.6 | ) | | (4.8 | ) | | 0.5 |
| | 22.4 |
|
| | | | | | | | | | | | |
Deferred tax asset valuation allowance: | | |
| | |
| | |
| | |
|
| | | | | | | | |
For Year Ended December 31, | | |
| | |
| | |
| | |
|
2015 | | $ | 253.3 |
| | $ | 26.7 |
| | $ | — |
| | $ | — |
| | $ | (5.7 | ) | | $ | 274.3 |
|
2016 | | 274.3 |
| | (99.9 | ) | | 8.5 |
| | — |
| | (0.2 | ) | | 182.7 |
|
2017 | | 182.7 |
| | 2,829.8 |
| | — |
| | — |
| | 2.3 |
| | 3,014.8 |
|
Management’s Report on Internal Control Over Financial Reporting
The managementASR Agreement was accounted for as an initial delivery of common shares in a treasury stock transaction on March 6, 2023 of $121 million and a forward contract indexed to the Company’s common stock for an amount of common shares that was determined on the final settlement date. The forward contract met all applicable criteria for equity classification and was not accounted for as a derivative instrument for the quarter ended March 31, 2023. Therefore, the value of the forward contract of $30 million was recorded in Capital in excess of par value at March 31, 2023. Upon final settlement in April 2023, this amount was subsequently recorded as Treasury Stock in the Consolidated Balance Sheets. The initial delivery and final settlement of common stock reduced the weighted average common shares outstanding for both basic and diluted earnings per share. The forward contract did not impact the weighted average common shares outstanding for diluted earnings per share.
For the years ended December 31, 2023, 2022 and 2021, the Company repurchased outstanding shares of common stock at a cost of $300 million, $150 million and $200 million, respectively. For the year ended December 31, 2023, the treasury stock transactions resulted in an excise tax accrual of $3 million for public company stock repurchases established by the Inflation Reduction Act of 2022.
For the year ended December 31, 2023, stock options exercised and the proceeds received at exercise were not significant. For the years ended December, 31, 2022 and 2021, the Company received proceeds of $6 million and $51 million, respectively, primarily as a result of stock options exercised in the amount of 0.1 million and 1.1 million in each of the years, respectively. It is the Company’s practice to issue shares from treasury stock when stock options are exercised and RSUs vest.
Total outstanding shares of common stock and treasury stock were as follows: | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Shares of Common Stock | | Shares of Treasury Stock | | Outstanding Shares |
| | | | | | |
Balance at December 31, 2020 | | 264.5 | | | (45.8) | | | 218.7 | |
| | | | | | |
Shares of treasury stock issued | | — | | | 2.2 | | | 2.2 | |
Repurchase of common stock at an average cost of $57.47 | | — | | | (3.5) | | | (3.5) | |
| | | | | | |
Balance at December 31, 2021 | | 264.5 | | | (47.1) | | | 217.4 | |
| | | | | | |
Shares of treasury stock issued | | — | | | 0.9 | | | 0.9 | |
Repurchase of common stock at an average cost of $48.22 | | — | | | (3.1) | | | (3.1) | |
| | | | | | |
Balance at December 31, 2022 | | 264.5 | | | (49.3) | | | 215.2 | |
Shares of treasury stock issued | | — | | | 0.8 | | | 0.8 | |
Repurchase of common stock at an average cost of $34.20 | | — | | | (8.8) | | | (8.8) | |
| | | | | | |
Balance at December 31, 2023 | | 264.5 | | | (57.3) | | | 207.2 | |
NOTE 16 - INCOME TAXES
The components of (loss) income before income taxes were as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
United States | | $ | (6) | | | $ | (531) | | | $ | 51 | |
Foreign | | (169) | | | (524) | | | 494 | |
Total (loss) income before income taxes | | $ | (175) | | | $ | (1,055) | | | $ | 545 | |
The components of the (benefit) provision for income taxes from operations were as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Current: | | | | | | |
U.S. federal | | $ | 1 | | | $ | 1 | | | $ | 1 | |
U.S. state | | — | | | 4 | | | 4 | |
Foreign | | 86 | | | 118 | | | 154 | |
Total | | $ | 87 | | | $ | 123 | | | $ | 159 | |
| | | | | | |
Deferred: | | | | | | |
U.S. federal | | $ | 4 | | | $ | (145) | | | $ | 10 | |
U.S. state | | (3) | | | (17) | | | 2 | |
Foreign | | (131) | | | (66) | | | (37) | |
Total | | $ | (130) | | | $ | (228) | | | $ | (25) | |
| | | | | | |
Total (benefit) provision for income taxes | | $ | (43) | | | $ | (105) | | | $ | 134 | |
The reconciliation of the U.S. federal statutory tax rate to the effective rate were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions, except percentages) | | 2023 | | 2022 | | 2021 |
| | | | | | | | | |
Statutory U.S. federal income tax rate | | $ | (37) | | 21.0 | % | | $ | (222) | | 21.0 | % | | $ | 114 | | 21.0 | % |
Effect of: | | | | | | | | | |
State income taxes, net of federal benefit | | (2) | | 1.4 | | | (11) | | 1.0 | | | 4 | | 0.8 | |
Federal benefit of R&D and foreign tax credits | | (17) | | 10.0 | | | (8) | | 0.8 | | | (5) | | (0.9) | |
US other permanent differences | | 5 | | (2.7) | | | 9 | | (0.9) | | | 2 | | 0.4 | |
Tax effect of international operations | | (65) | | 37.2 | | | (5) | | 0.5 | | | 2 | | 0.3 | |
Global Intangible Low Taxed Income (GILTI) | | 12 | | (7.0) | | | 20 | | (1.9) | | | 13 | | 2.4 | |
Foreign Derived Intangible Income (FDII) | | (9) | | 5.2 | | | (8) | | 0.8 | | | (7) | | (1.3) | |
Net effect of tax audit activity | | (6) | | 3.2 | | | 15 | | (1.4) | | | 9 | | 1.6 | |
Tax effect of enacted statutory rate changes on Non-U.S. jurisdictions | | 1 | | (0.4) | | | (3) | | 0.3 | | | 10 | | 1.9 | |
Federal tax on unremitted earnings of certain foreign subsidiaries | | 2 | | (0.9) | | | 1 | | (0.1) | | | (1) | | (0.2) | |
Valuation allowance adjustments | | 5 | | (3.2) | | | (9) | | 0.8 | | | (9) | | (1.7) | |
Tax effect of impairment of goodwill and intangibles | | 60 | | (34.6) | | | 114 | | (10.8) | | | — | | — | |
Other | | 8 | | (4.4) | | | 2 | | (0.2) | | | 2 | | 0.3 | |
| | | | | | | | | |
Effective income tax rate on operations | | $ | (43) | | 24.8 | % | | $ | (105) | | 9.9 | % | | $ | 134 | | 24.6 | % |
The tax effect of significant temporary differences giving rise to deferred tax assets and liabilities were as follows: | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 |
| | | | | |
Deferred tax assets | | | | | |
Employee benefit accruals | | $ | 55 | | | $ | 55 | | |
Inventory | | 15 | | | 9 | | |
Miscellaneous accruals | | 51 | | | 37 | | |
Other | | 44 | | | 48 | | |
Lease right-of-use liability | | 46 | | | 48 | | |
Net unrealized gains/losses included in AOCI | | 36 | | | — | | |
Foreign tax credit and R&D carryforward | | 43 | | | 40 | | |
Tax loss carryforwards and other tax attributes | | 948 | | | 654 | | |
Total deferred tax assets | | $ | 1,238 | | | $ | 891 | | |
Less: Valuation allowances | | (863) | | | (645) | | |
Total deferred tax assets, net | | $ | 375 | | | $ | 246 | | |
| | | | | |
Deferred tax liabilities | | | | | |
Identifiable intangible assets | | $ | (298) | | | $ | (325) | | |
Property, plant and equipment | | (38) | | | (41) | | |
Lease right-of-use asset | | (46) | | | (47) | | |
Net unrealized gains/losses included in AOCI | | — | | | (13) | | |
Taxes on unremitted earnings of foreign subsidiaries | | (8) | | | (6) | | |
Total deferred tax liabilities | | (390) | | | (432) | | |
Net deferred tax liabilities | | $ | (15) | | | $ | (186) | | |
| | | | | |
Deferred tax assets and liabilities are included in the following Consolidated Balance Sheets line items at December 31 were as follows:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 |
| | | | |
Assets | | | | |
Other noncurrent assets | | $ | 213 | | | $ | 101 | |
Liabilities | | | | |
Deferred income taxes | | $ | 228 | | | $ | 287 | |
The Company has $40 million of foreign tax credit carryforwards at December 31, 2023, of which $33 million will expire in 2025 and $7 million will expire at various times from 2028 through 2031.
The Company has tax loss carryforwards related to certain foreign and domestic subsidiaries of approximately $3,889 million at December 31, 2023, of which $3,671 million expires at various times through 2043 and $218 million may be carried forward indefinitely. These are reflected as deferred income tax assets at December 31, 2023, comprising of tax benefits of $873 million and $74 million, before valuation allowances, related to tax loss carryforwards and disallowed interest carryforwards, respectively. As of December 31, 2022 the Company’s deferred tax assets included $601 million of tax loss carryforwards and $53 million of disallowed interest carryforwards. The increase in tax loss carryforwards in 2023 is primarily a result of impairment losses.
At December 31, 2023, the Company has recorded $791 million of valuation allowance to offset the tax benefit of net operating losses, $40 million to offset the tax benefit of foreign tax credits, and $32 million of valuation allowance for other deferred tax assets. The Company has recorded these valuation allowances due to the uncertainty that these assets can be realized in the future. The increase in the valuation allowance is attributable to the increase in the tax loss carryforwards generated in 2023 as there is uncertainty that these assets can be realized in the future.
The Company has provided $8 million of withholding taxes on certain undistributed earnings of its foreign subsidiaries that the Company anticipates will be repatriated. Undistributed earnings of foreign subsidiaries and related companies that are considered to be permanently invested amounted to $2,303 million at December 31, 2023 and $2,492 million at December 31, 2022.
Tax Contingencies
The total amount of gross unrecognized tax benefits at December 31, 2023 is approximately $136 million, including interest of which, approximately $40 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. Expiration of statutes of limitations in various jurisdictions during the next twelve months could include unrecognized tax benefits of approximately $1 million, which, if recognized, would affect the effective income tax rate.
The total amount of accrued interest and penalties were $4 million and $6 million at December 31, 2023 and 2022, respectively. The Company has consistently classified interest and penalties recognized in its consolidated financial statements as income taxes based on the accounting policy election of the Company. The Company recognized a tax benefit of $2 million for the years ended December 31, 2023 and 2022 related to interest and penalties.
The increase in unrecognized tax benefits in 2023 is primarily related to a gain generated from an internal debt structuring in 2023. If this benefit was recognized, it would result in a reduction to deferred tax assets related to tax loss carryforwards, with an equal and offsetting reduction to the valuation allowance. Thus, the release of this reserve would not impact the effective tax rate.
The Company is responsible for establishingsubject to U.S. federal income tax as well as income tax of multiple state and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.foreign jurisdictions. The 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 accounting principles generally accepted insignificant jurisdictions include the United States, Germany, Sweden and Switzerland. The Company has concluded all U.S. federal income tax matters for years through 2014 with the Internal Revenue Service (“IRS”). The Company is currently under audit for the tax years 2015 and 2016. For additional information on the IRS audit, see Note 21, Commitments and Contingencies. The Company concluded audits in Germany through the tax year 2014 and is currently under audit for the years 2015 through 2017. The tax years 2018 through 2021 are subject to future potential audit adjustments in Germany.
The activity recorded for unrecognized tax benefits were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Unrecognized tax benefits at beginning of period | | $ | 49 | | | $ | 34 | | | $ | 27 | |
Gross change for prior-period positions | | 1 | | | 12 | | | 6 | |
Gross change for current year positions | | 95 | | | 4 | | | 2 | |
| | | | | | |
| | | | | | |
Decrease due to settlements and payments | | (9) | | | — | | | — | |
Decrease due to statute expirations | | (4) | | | — | | | — | |
| | | | | | |
Decrease due to effect from foreign currency translation | | — | | | (1) | | | (1) | |
| | | | | | |
Unrecognized tax benefits at end of period | | $ | 132 | | | $ | 49 | | | $ | 34 | |
NOTE 17 - BENEFIT PLANS
Defined Contribution Plans
The Company maintains both U.S. and non-U.S. employee defined contribution plans. The primary U.S. plan, the Dentsply Sirona Inc. 401(k) Savings Plan (the “Plan”), allows eligible employees to contribute a portion of America. A Company’s internal control over financial reporting includes those policies and procedures that pertaintheir cash compensation to the maintenanceplan on a tax-deferred basis, and in most cases, the Company provides a matching contribution. The Plan includes various investment funds. The Company may make a non-elective discretionary cash contribution of records3% of compensation to participant accounts. Additionally, each eligible participant who elects to contribute to the Plan will receive a matching contribution of 100% on the first 1% contributed and 50% on the next 5% contributed for a total maximum matching contribution of 3.5%. In addition to the primary U.S. plan, the Company also maintains various other U.S. and non-U.S. defined contribution and non-qualified deferred compensation plans. The annual expenses, net of forfeitures, were $43 million, $41 million and $39 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Defined Benefit Plans
The Company maintains defined benefit pension plans for certain employees in Austria, France, Germany, Indonesia, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, Taiwan, and the United States. These plans provide benefits based upon age, years of service and remuneration. Substantially all the German and Swedish plans are unfunded book reserve plans. Most employees and retirees outside the United States are covered by government health plans.
The Company predominantly derives its discount rates by applying the specific spot rates along the yield curve to the relevant projected cash flows; or, in markets where there is an absence of a sufficiently deep corporate bond market, it uses liability durations in establishing its discount rates, which are observed from indices of high-grade corporate or government bond yield in the respective economic regions of the plan. For the large defined benefits pension plans, the Company uses a spot rate approach for the estimation of the Service cost and Interest cost components of benefit cost by applying the specific spot rates along the yield curve to the relevant projected cash flows.
Significant changes in the retirement plan benefit obligations for the year ended December 31, 2023 include a $35 million actuarial loss primarily attributable to the decrease in discount rates, the effect of which is slightly offset by the change in inflation and salary increase assumptions in some plans. The changes also include a $3 million actuarial loss due to plan experience different than anticipated.
Significant changes in the retirement plan benefit obligations for the year ended December 31, 2022 include a $162 million actuarial gain primarily attributable to the increase in discount rates, the effect of which is slightly offset by the change in inflation and salary increase assumptions in some plans. The changes also include a $1 million actuarial gain due to demographic assumption changes and a $14 million actuarial loss due to plan experience different than anticipated.
Defined Benefit Pension Plan Assets
The primary investment strategy is to ensure that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assuranceplans, along with anticipated future contributions, will be invested in order that transactionsthe 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 and fixed income investments. The 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 types of investments. Equity securities include investments in companies located both in and outside the United States. Equity securities in the defined benefit pension plans do not include Company common stock contributed directly by the Company. Fixed income securities include corporate bonds of companies from diversified industries, government bonds, mortgage notes and pledge letters. Other types of investments include investments in mutual funds, insurance contracts, hedge funds and real estate. These plan assets are not recorded in the Company’s Consolidated Balance Sheet as necessarythey are held in trust or other off-balance sheet investment vehicles.
The defined benefit pension plan assets maintained in Austria, Germany, Norway, the Netherlands, Switzerland and Taiwan all have separate investment policies but generally have an objective to permit preparationachieve a long-term rate of financial statementsreturn in excess of 2% 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 generally accepted accounting principles,the investment policies, the plans’ assets were invested in the following investment categories: interest-bearing cash, U.S. and that receiptsforeign equities, foreign fixed income securities (primarily corporate and expendituresgovernment bonds), insurance company contracts, real estate and hedge funds.
Reconciliation of changes in the defined benefit obligations, fair value of assets and statement of funded status were as follows: | | | | | | | | | | | | | | |
| | | | |
| | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 |
| | | | |
Change in Benefit Obligation | | | | |
Benefit obligation at beginning of year | | $ | 440 | | | $ | 619 | |
Service cost | | 10 | | | 12 | |
Interest cost | | 14 | | | 5 | |
Participant contributions | | 4 | | | 4 | |
Actuarial losses (gains) | | 38 | | | (149) | |
| | | | |
| | | | |
Effect of exchange rate changes | | 26 | | | (35) | |
| | | | |
Plan curtailments and settlements | | — | | | (1) | |
Benefits paid | | (21) | | | (15) | |
Benefit obligation at end of year | | $ | 511 | | | $ | 440 | |
| | | | |
Change in Plan Assets | | | | |
Fair value of plan assets at beginning of year | | $ | 182 | | | $ | 212 | |
Actual return on assets | | 10 | | | (28) | |
Plan settlements | | — | | | (1) | |
| | | | |
Effect of exchange rate changes | | 17 | | | (5) | |
Employer contributions | | 15 | | | 15 | |
Participant contributions | | 4 | | | 4 | |
Benefits paid | | (21) | | | (15) | |
Fair value of plan assets at end of year | | $ | 207 | | | $ | 182 | |
| | | | |
Funded status at end of year | | $ | (304) | | | $ | (258) | |
The amounts recognized in the accompanying Consolidated Balance Sheets, net of tax effects, were as follows: | | | | | | | | | | | | | | | | | | | | |
| | Location In The | | Year Ended December 31, |
(in millions) | | Consolidated Balance Sheets | | 2023 | | 2022 |
| | | | | | |
Other noncurrent assets, net | | Other noncurrent assets | | $ | 5 | | | $ | 9 | |
Deferred tax asset | | Other noncurrent assets | | 11 | | | 6 | |
Total assets | | | | $ | 16 | | | $ | 15 | |
| | | | | | |
Current liabilities | | Accrued liabilities | | $ | (11) | | | $ | (10) | |
Other noncurrent liabilities | | Other noncurrent liabilities | | (298) | | | (257) | |
Deferred tax liability | | Deferred income taxes | | (2) | | | (5) | |
Total liabilities | | | | $ | (311) | | | $ | (272) | |
| | | | | | |
Accumulated other comprehensive income | | Accumulated other comprehensive loss | | 36 | | | 7 | |
Net amount recognized | | | | $ | (259) | | | $ | (250) | |
Amounts recognized in AOCI were as follows: | | | | | | | | | | | | | | |
| | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 |
| | | | |
Net actuarial loss | | $ | 48 | | | $ | 12 | |
Net prior service cost | | (3) | | | (4) | |
Before tax AOCI | | $ | 45 | | | $ | 8 | |
Less: Deferred taxes | | 9 | | | 1 | |
Net of tax AOCI | | $ | 36 | | | $ | 7 | |
Information for pension plans with a projected or accumulated benefit obligation in excess of plan assets were as follows: | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 |
| | | | |
Projected benefit obligation | | $ | 323 | | | $ | 283 | |
Accumulated benefit obligation | | 310 | | | 272 | |
Fair value of plan assets | | 15 | | | 15 | |
Components of net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Location in the Consolidated Statements of Operations |
(in millions) | | 2023 | | 2022 | | 2021 | |
| | | | | | | | |
Service cost | | $ | 4 | | | $ | 5 | | | $ | 7 | | | Cost of products sold |
Service cost | | 6 | | | 7 | | | 10 | | | Selling, general and administrative expenses |
Interest cost | | 14 | | | 5 | | | 3 | | | Other expense (income), net |
Expected return on plan assets | | (6) | | | (4) | | | (4) | | | Other expense (income), net |
| | | | | | | | |
Amortization of prior service credit | | (1) | | | (1) | | | (1) | | | Other expense (income), net |
Amortization of net actuarial loss | | — | | | 8 | | | 12 | | | Other expense (income), net |
Acquisitions/Divestitures | | — | | | — | | | 1 | | | Other expense (income), net |
Curtailment and settlement gains | | — | | | (1) | | | (1) | | | Other expense (income), net |
| | | | | | | | |
Net periodic benefit cost | | $ | 17 | | | $ | 19 | | | $ | 27 | | | |
Other changes in plan assets and benefit obligations recognized in AOCI were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Net actuarial losses (gains) | | $ | 37 | | | $ | (125) | | | $ | (36) | |
| | | | | | |
| | | | | | |
Amortization | | 1 | | | (7) | | | (11) | |
Total recognized in AOCI | | $ | 38 | | | $ | (132) | | | $ | (47) | |
Total recognized in net periodic benefit cost and AOCI | | $ | 55 | | | $ | (113) | | | $ | (20) | |
Assumptions
The weighted average assumptions used to determine benefit obligations for the Company’s plans, principally in foreign locations were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | | | | | |
Interest crediting rate | | 2.3 | % | | 2.5 | % | | 1.3 | % |
Discount rate | | 2.6 | % | | 3.2 | % | | 1.1 | % |
Rate of compensation increase | | 2.5 | % | | 2.6 | % | | 2.6 | % |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The weighted average assumptions used to determine net periodic benefit cost for the Company’s plans, principally in foreign locations were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | | | | | |
Interest crediting rate | | 2.5 | % | | 1.3 | % | | 1.3 | % |
Discount rate | | 3.2 | % | | 1.1 | % | | 0.6 | % |
Expected return on plan assets | | 3.2 | % | | 2.2 | % | | 2.2 | % |
Rate of compensation increase | | 2.6 | % | | 2.6 | % | | 2.4 | % |
Measurement date | | 12/31/2023 | | 12/31/2022 | | 12/31/2021 |
To develop the assumptions for the expected long-term rate of return on assets, the Company considered the current level of expected returns on risk free investments (primarily U.S. government bonds), the historical level of the Companyrisk premium associated with the other asset classes in which the assets are being made only in accordance with authorizationsinvested and the expectations for future returns of management and directorseach 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 the Company; and provide reasonable assurance regarding prevention or timely detectionreturn on assets.
Fair Value Measurements of unauthorized acquisition, use, or dispositionPlan Assets
The fair value of the Company’s pension plan assets that could have a material effect onat December 31, 2023 and 2022 are presented in the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect 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.
Managementtable below by asset category. Approximately 84% of the Company has assessedtotal plan assets are categorized as Level 1, as the effectivenessvalues assigned to these pension assets are based on quoted prices available in active markets. For the other category levels, a description of the Company’s internal control over financial reporting asvaluation is provided in Note 1, Significant Accounting Policies, under the “Fair Value Measurement” heading.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets Category | | | | | | | | |
Cash and cash equivalents | | $ | 7 | | | $ | 7 | | | $ | — | | | $ | — | |
Equity securities: | | | | | | | | |
| | | | | | | | |
International | | 63 | | | 63 | | | — | | | — | |
Fixed income securities: | | | | | | | | |
Fixed rate bonds (a) | | 84 | | | 84 | | | — | | | — | |
Other types of investments: | | | | | | | | |
Mutual funds (b) | | 19 | | | 19 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
Insurance contracts | | 26 | | | — | | | — | | | 26 | |
Hedge funds | | 7 | | | — | | | — | | | 7 | |
Real estate | | 1 | | | — | | | — | | | 1 | |
Total | | $ | 207 | | | $ | 173 | | | $ | — | | | $ | 34 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets Category | | | | | | | | |
Cash and cash equivalents | | $ | 15 | | | $ | 15 | | | $ | — | | | $ | — | |
Equity securities: | | | | | | | | |
| | | | | | | | |
International | | 49 | | | 49 | | | — | | | — | |
Fixed income securities: | | | | | | | | |
Fixed rate bonds (a) | | 67 | | | 67 | | | — | | | — | |
Other types of investments: | | | | | | | | |
Mutual funds (b) | | 17 | | | 17 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
Insurance contracts | | 24 | | | — | | | — | | | 24 | |
Hedge funds | | 9 | | | — | | | — | | | 9 | |
Real estate | | 1 | | | — | | | — | | | 1 | |
Total | | $ | 182 | | | $ | 148 | | | $ | — | | | $ | 34 | |
(a) 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.
(b) 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.
A reconciliation from December 31, 2017. In making its assessment, management used2021 to December 31, 2023 for the criteria established in Internal Control - Integrated Framework (2013) issuedplan assets categorized as Level 3 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Insurance Contracts | | Hedge Funds | | Real Estate | | Total |
| | | | | | | | |
Balance at December 31, 2021 | | $ | 34 | | | $ | 11 | | | $ | 1 | | | $ | 46 | |
Actual return on plan assets: | | | | | | | | |
Relating to assets still held at the reporting date | | (5) | | | (1) | | | — | | | (6) | |
| | | | | | | | |
| | | | | | | | |
Purchases, sales and settlements, net | | (2) | | | (1) | | | — | | | (3) | |
| | | | | | | | |
Effect of exchange rate changes | | (3) | | | — | | | — | | | (3) | |
Balance at December 31, 2022 | | $ | 24 | | | $ | 9 | | | $ | 1 | | | $ | 34 | |
Actual return on plan assets: | | | | | | | | |
Relating to assets still held at the reporting date | | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | |
| | | | | | | | |
| | | | | | | | |
Purchases, sales and settlements, net | | (1) | | | (3) | | | — | | | (4) | |
| | | | | | | | |
Effect of exchange rate changes | | 1 | | | 1 | | | — | | | 2 | |
Balance at December 31, 2023 | | $ | 26 | | | $ | 7 | | | $ | 1 | | | $ | 34 | |
Fair values for Level 3 assets are determined as follows:
Insurance Contracts: The value of the asset represents the mathematical reserve of the insurance policies and is calculated by the Committee of Sponsoring Organizationsinsurance firms using their own assumptions.
Hedge Funds: The investments are valued using the net asset value provided by the administrator of the Treadway Commission (“COSO”). Based on its assessment management concluded that, as of December 31, 2017, the Company’s internal control over financial reporting was effectivefund, which is based on the criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
The effectivenessfair value of the Company’s internal control over financial reporting asunderlying securities.
Real Estate: Investment is stated by its appraised value.
Cash Flows
In 2024, the Company expects to make employer contributions of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears herein.$18 million to its defined benefit pension plans.
|
| | | | |
/s/ | Donald M. Casey, Jr. | | /s/ | Nicholas W. Alexos |
| Donald M. Casey, Jr. | | | Nicholas W. Alexos |
| Chief Executive Officer | | | Executive Vice President and |
| | | | Chief Financial Officer |
| March 15, 2018 | | | March 15, 2018 |
Estimated Future Benefit Payments
Report of Independent Registered Public Accounting Firm
ToTotal benefits expected to be paid from the Board of Directors and Stockholders
of DENTSPLY SIRONA Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the consolidated financial statements, including the related notes, as listedplans in the index appearing under Item 15 (a)(1) and the financial statement schedule listed in the index appearing under Item 15(a)(2), of DENTSPLY SIRONA Inc. and its subsidiaries (collectively referred tofuture are as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2017 based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).follows: | | | | | | | | |
(in millions) | | Pension Benefits |
| | |
2024 | | $ | 26 | |
2025 | | 27 | |
2026 | | 26 | |
2027 | | 27 | |
2028 | | 24 | |
2029-2033 | | 124 | |
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of theiroperations and theircash flows for each of the three years in the period ended December 31, 2017in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in 2017 due to the adoption of Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting, appearing under Item 15(a)(1). Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that 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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect 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.
|
| |
/s/ | PricewaterhouseCoopers LLP |
| PricewaterhouseCoopers LLP |
| Harrisburg, Pennsylvania |
| March 15, 2018 |
We have served as the Company’s auditor since 2000.
DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
Net sales | $ | 3,993.4 |
| | $ | 3,745.3 |
| | $ | 2,674.3 |
|
Cost of products sold | 1,804.9 |
| | 1,744.4 |
| | 1,157.1 |
|
| | | | | |
Gross profit | 2,188.5 |
| | 2,000.9 |
| | 1,517.2 |
|
Selling, general and administrative expenses | 1,674.7 |
| | 1,523.0 |
| | 1,077.3 |
|
Goodwill impairment | 1,650.9 |
| | — |
| | — |
|
Restructuring and other costs | 425.2 |
| | 23.2 |
| | 64.7 |
|
| | | | | |
Operating (loss) income | (1,562.3 | ) | | 454.7 |
| | 375.2 |
|
| | | | | |
Other income and expenses: | |
| | |
| | |
|
Interest expense | 38.3 |
| | 35.9 |
| | 55.9 |
|
Interest income | (2.4 | ) | | (2.0 | ) | | (2.2 | ) |
Other expense (income), net | 5.3 |
| | (20.1 | ) | | (8.2 | ) |
| | | | | |
(Loss) income before income taxes | (1,603.5 | ) | | 440.9 |
| | 329.7 |
|
(Benefit) provision for income taxes | (53.2 | ) | | 9.5 |
| | 77.0 |
|
Equity in net loss of unconsolidated affiliated company | — |
| | — |
| | (1.6 | ) |
| | | | | |
Net (loss) income | (1,550.3 | ) | | 431.4 |
| | 251.1 |
|
| | | | | |
Less: Net (loss) income attributable to noncontrolling interests | (0.3 | ) | | 1.5 |
| | (0.1 | ) |
| | | | | |
Net (loss) income attributable to Dentsply Sirona | $ | (1,550.0 | ) | | $ | 429.9 |
| | $ | 251.2 |
|
| | | | | |
Net (loss) income per common share attributable to Dentsply Sirona: | |
| | |
| | |
|
Basic | $ | (6.76 | ) | | $ | 1.97 |
| | $ | 1.79 |
|
Diluted | $ | (6.76 | ) | | $ | 1.94 |
| | $ | 1.76 |
|
| | | | | |
Weighted average common shares outstanding: | |
| | |
| | |
|
Basic | 229.4 |
| | 218.0 |
| | 140.0 |
|
Diluted | 229.4 |
| | 221.6 |
| | 142.5 |
|
| | | | | |
Dividends declared per common share: | $ | 0.35 |
| | $ | 0.31 |
| | $ | 0.29 |
|
The accompanying notes are an integral part of these consolidated financial statements.
DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
Net (loss) income | $ | (1,550.3 | ) | | $ | 431.4 |
| | $ | 251.1 |
|
| | | | | |
Other comprehensive income (loss), net of tax: | | | | | |
Foreign currency translation adjustments | 386.3 |
| | (90.5 | ) | | (188.1 | ) |
Net (loss) gain on derivative financial instruments | (20.2 | ) | | (8.6 | ) | | 12.1 |
|
Net unrealized holding gain (loss) on available-for-sale securities | 44.3 |
| | — |
| | (8.5 | ) |
Pension liability adjustments | 4.6 |
| | (13.8 | ) | | 32.2 |
|
Total other comprehensive income (loss) | 415.0 |
| | (112.9 | ) | | (152.3 | ) |
| | | | | |
Total comprehensive (loss) income | (1,135.3 | ) | | 318.5 |
| | 98.8 |
|
| | | | | |
Less: Comprehensive (loss) income attributable to noncontrolling interests | — |
| | 0.3 |
| | 0.5 |
|
| | | | | |
Comprehensive (loss) income attributable to Dentsply Sirona | $ | (1,135.3 | ) | | $ | 318.2 |
| | $ | 98.3 |
|
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| | | |
Assets | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 320.6 |
| | $ | 383.9 |
|
Accounts and notes receivable-trade, net | 746.2 |
| | 636.0 |
|
Inventories, net | 623.1 |
| | 517.1 |
|
Prepaid expenses and other current assets | 312.6 |
| | 206.5 |
|
Total Current Assets | 2,002.5 |
| | 1,743.5 |
|
| | | |
Property, plant and equipment, net | 876.0 |
| | 799.8 |
|
Identifiable intangible assets, net | 2,800.7 |
| | 2,957.6 |
|
Goodwill, net | 4,539.2 |
| | 5,952.0 |
|
Other noncurrent assets, net | 156.1 |
| | 102.9 |
|
Total Assets | $ | 10,374.5 |
| | $ | 11,555.8 |
|
| | | |
Liabilities and Equity | |
| | |
|
Current Liabilities: | |
| | |
|
Accounts payable | $ | 284.4 |
| | $ | 223.0 |
|
Accrued liabilities | 585.8 |
| | 462.7 |
|
Income taxes payable | 54.2 |
| | 60.8 |
|
Notes payable and current portion of long-term debt | 30.1 |
| | 21.1 |
|
Total Current Liabilities | 954.5 |
| | 767.6 |
|
| | | |
Long-term debt | 1,611.6 |
| | 1,511.1 |
|
Deferred income taxes | 718.0 |
| | 751.7 |
|
Other noncurrent liabilities | 462.5 |
| | 399.5 |
|
Total Liabilities | 3,746.6 |
| | 3,429.9 |
|
| | | |
Commitments and contingencies |
|
| |
|
|
| | | |
Equity: | |
| | |
|
Preferred stock, $1.00 par value; .25 million shares authorized; no shares issued | — |
| | — |
|
Common stock, $.01 par value; | 2.6 |
| | 2.6 |
|
400.0 million shares authorized at December 31, 2017 and 2016 | | | |
264.5 million shares issued at December 31, 2017 and 2016 | | | |
226.8 million and 230.1 million shares outstanding at December 31, 2017 and 2016, respectively | | | |
Capital in excess of par value | 6,543.9 |
| | 6,516.7 |
|
Retained earnings | 2,316.2 |
| | 3,948.0 |
|
Accumulated other comprehensive loss | (291.0 | ) | | (705.7 | ) |
Treasury stock, at cost, 37.7 million and 34.4 million shares at December 31, 2017 and 2016, respectively | (1,955.4 | ) | | (1,647.3 | ) |
Total Dentsply Sirona Equity | 6,616.3 |
| | 8,114.3 |
|
Noncontrolling interests | 11.6 |
| | 11.6 |
|
Total Equity | 6,627.9 |
| | 8,125.9 |
|
Total Liabilities and Equity | $ | 10,374.5 |
| | $ | 11,555.8 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
DENTSPLY SIRONA INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY |
(in millions) | | | | | | | | | | | | | | | |
| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Dentsply Sirona Equity | | Noncontrolling Interests | | Total Equity |
| | | | | | | | | | | | | | | |
Balance at December 31, 2014 | $ | 1.6 |
| | $ | 221.7 |
| | $ | 3,380.7 |
| | $ | (441.1 | ) | | $ | (841.6 | ) | | $ | 2,321.3 |
| | $ | 0.9 |
| | $ | 2,322.2 |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net income | — |
| | — |
| | 251.2 |
| | — |
| | — |
| | 251.2 |
| | (0.1 | ) | | 251.1 |
|
| | | | | | | | | | | | | | | |
Other comprehensive (loss) income | — |
| | — |
| | — |
| | (152.9 | ) | | — |
| | (152.9 | ) | | 0.6 |
| | (152.3 | ) |
| | | | | | | | | | | | | | | |
Exercise of stock options | — |
| | (8.2 | ) | | — |
| | — |
| | 43.4 |
| | 35.2 |
| | — |
| | 35.2 |
|
Tax benefit from stock options exercised | — |
| | 11.6 |
| | — |
| | — |
| | — |
| | 11.6 |
| | — |
| | 11.6 |
|
Stock based compensation expense | — |
| | 25.6 |
| | — |
| | — |
| | — |
| | 25.6 |
| | — |
| | 25.6 |
|
Funding of Employee Stock Ownership Plan | — |
| | 1.1 |
| | — |
| | — |
| | 3.6 |
| | 4.7 |
| | — |
| | 4.7 |
|
Treasury shares purchased | — |
| | — |
| | — |
| | — |
| | (112.7 | ) | | (112.7 | ) | | — |
| | (112.7 | ) |
RSU distributions | — |
| | (14.3 | ) | | — |
| | — |
| | 8.9 |
| | (5.4 | ) | | — |
| | (5.4 | ) |
RSU dividends | — |
| | 0.3 |
| | (0.3 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Cash dividends | — |
| | — |
| | (40.6 | ) | | — |
| | — |
| | (40.6 | ) | | — |
| | (40.6 | ) |
| | | | | | | | | | | | |
|
| | |
Balance at December 31, 2015 | $ | 1.6 |
| | $ | 237.8 |
| | $ | 3,591.0 |
| | $ | (594.0 | ) | | $ | (898.4 | ) | | $ | 2,338.0 |
| | $ | 1.4 |
| | $ | 2,339.4 |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net income | — |
| | — |
| | 429.9 |
| | — |
| | — |
| | 429.9 |
| | 1.5 |
| | 431.4 |
|
| | | | | | | | | | | | | | | |
Other comprehensive loss | — |
| | — |
| | — |
| | (111.7 | ) | | — |
| | (111.7 | ) | | (1.2 | ) | | (112.9 | ) |
| | | | | | | | | | | | | | | |
Acquisition of noncontrolling interest | — |
| | (0.1 | ) | | — |
| | — |
| | — |
| | (0.1 | ) | | (0.3 | ) | | (0.4 | ) |
Common stock issuance related to Sirona merger | 1.0 |
| | 6,255.2 |
| | — |
| | — |
| | — |
| | 6,256.2 |
| | 10.2 |
| | 6,266.4 |
|
Exercise of stock options | — |
| | (10.8 | ) | | — |
| | — |
| | 48.1 |
| | 37.3 |
| | — |
| | 37.3 |
|
Tax benefit from stock options exercised | — |
| | 16.1 |
| | — |
| | — |
| | — |
| | 16.1 |
| | — |
| | 16.1 |
|
Stock based compensation expense | — |
| | 41.3 |
| | — |
| | — |
| | — |
| | 41.3 |
| | — |
| | 41.3 |
|
Funding of Employee Stock Ownership Plan | — |
| | 2.1 |
| | — |
| | — |
| | 4.3 |
| | 6.4 |
| | — |
| | 6.4 |
|
Treasury shares purchased | — |
| | — |
| | — |
| | — |
| | (815.1 | ) | | (815.1 | ) | | — |
| | (815.1 | ) |
RSU distributions | — |
| | (25.5 | ) | | — |
| | — |
| | 13.8 |
| | (11.7 | ) | | — |
| | (11.7 | ) |
RSU dividends | — |
| | 0.6 |
| | (0.6 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Cash dividends | — |
| | — |
| | (72.3 | ) | | — |
| | — |
| | (72.3 | ) | | — |
| | (72.3 | ) |
| | | | | | | | | | | | | | | |
Balance at December 31, 2016 | $ | 2.6 |
| | $ | 6,516.7 |
| | $ | 3,948.0 |
| | $ | (705.7 | ) | | $ | (1,647.3 | ) | | $ | 8,114.3 |
| | $ | 11.6 |
| | $ | 8,125.9 |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net loss | — |
| | — |
| | (1,550.0 | ) | | — |
| | — |
| | (1,550.0 | ) | | (0.3 | ) | | (1,550.3 | ) |
| | | | | | | | | | | | | | | |
Other comprehensive income | — |
| | — |
| | — |
| | 414.7 |
| | — |
| | 414.7 |
| | 0.3 |
| | 415.0 |
|
| | | | | | | | | | | | | | | |
Exercise of stock options | — |
| | 6.9 |
| | — |
| | — |
| | 75.0 |
| | 81.9 |
| | — |
| | 81.9 |
|
Stock based compensation expense | — |
| | 48.0 |
| | — |
| | — |
| | — |
| | 48.0 |
| | — |
| | 48.0 |
|
Reclassification on adoption of ASU No.2016-09 (see Note 1) | — |
| | 1.0 |
| | (1.0 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Funding of Employee Stock Ownership Plan | — |
| | 3.3 |
| | — |
| | — |
| | 3.3 |
| | 6.6 |
| | — |
| | 6.6 |
|
Treasury shares purchased | — |
| | — |
| | — |
| | — |
| | (400.3 | ) | | (400.3 | ) | | — |
| | (400.3 | ) |
RSU distributions | — |
| | (32.6 | ) | | — |
| | — |
| | 13.9 |
| | (18.7 | ) | | — |
| | (18.7 | ) |
RSU dividends | — |
| | 0.6 |
| | (0.6 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Cash dividends | — |
| | — |
| | (80.2 | ) | | — |
| | — |
| | (80.2 | ) | | — |
| | (80.2 | ) |
| | | | | | | | | | | | | | | |
Balance at December 31, 2017 | $ | 2.6 |
| | $ | 6,543.9 |
| | $ | 2,316.2 |
| | $ | (291.0 | ) | | $ | (1,955.4 | ) | | $ | 6,616.3 |
| | $ | 11.6 |
| | $ | 6,627.9 |
|
| | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | |
DENTSPLY SIRONA INC. AND SUBSIDIARIES | | | | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | |
(in millions) | Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Cash flows from operating activities: | | | | | |
| | | | | |
Net (loss) income | $ | (1,550.3 | ) | | $ | 431.4 |
| | $ | 251.1 |
|
| | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
|
Depreciation | 127.3 |
| | 116.6 |
| | 79.1 |
|
Amortization of intangible assets | 189.1 |
| | 155.1 |
| | 43.8 |
|
Amortization of deferred financing costs | 2.6 |
| | 4.5 |
| | 11.3 |
|
Goodwill impairment | 1,650.9 |
| | — |
| | — |
|
Indefinite-lived intangible asset impairment | 346.7 |
| | — |
| | — |
|
Deferred income taxes | (143.8 | ) | | (110.1 | ) | | 27.4 |
|
Stock based compensation expense | 48.0 |
| | 41.3 |
| | 25.6 |
|
Restructuring and other costs - non-cash | 64.7 |
| | 9.7 |
| | 43.3 |
|
Stock option income tax benefit | — |
| | (12.7 | ) | | (11.6 | ) |
Equity in earnings from unconsolidated affiliates | — |
| | — |
| | 1.6 |
|
Other non-cash expense (income) | 9.9 |
| | (32.0 | ) | | (13.1 | ) |
Loss on disposal of property, plant and equipment | 1.6 |
| | 2.8 |
| | 0.8 |
|
Changes in operating assets and liabilities, net of acquisitions: | |
| | |
| | |
|
Accounts and notes receivable-trade, net | (63.4 | ) | | (75.1 | ) | | (0.9 | ) |
Inventories, net | (62.9 | ) | | 65.4 |
| | 32.1 |
|
Prepaid expenses and other current assets | (75.0 | ) | | (32.4 | ) | | (9.5 | ) |
Other noncurrent assets | (3.7 | ) | | 2.6 |
| | 3.3 |
|
Accounts payable | 44.2 |
| | 7.2 |
| | 8.8 |
|
Accrued liabilities | 28.3 |
| | (12.2 | ) | | (4.7 | ) |
Income taxes | (20.5 | ) | | (7.7 | ) | | (8.1 | ) |
Other noncurrent liabilities | 8.2 |
| | 9.0 |
| | 17.1 |
|
| | | | | |
Net cash provided by operating activities | 601.9 |
| | 563.4 |
| | 497.4 |
|
| | | | | |
Cash flows from investing activities: | |
| | |
| | |
|
| | | | | |
Cash paid for acquisitions of businesses and equity investments | (145.9 | ) | | (341.8 | ) | | (54.0 | ) |
Proceeds from the sale of businesses | — |
| | 6.1 |
| | — |
|
Purchases of short term time deposits | (2.5 | ) | | (6.8 | ) | | — |
|
Proceeds from redemption of long-term corporate bonds | — |
| | — |
| | 47.7 |
|
Capital expenditures | (144.3 | ) | | (125.0 | ) | | (72.0 | ) |
Cash assumed in Sirona merger | — |
| | 522.3 |
| | — |
|
Purchase of company owned life insurance policies | (0.9 | ) | | (1.7 | ) | | (1.4 | ) |
Cash received on derivative contracts | 6.5 |
| | 20.1 |
| | 30.7 |
|
Cash paid on derivative contracts | — |
| | (17.1 | ) | | (6.3 | ) |
Expenditures for identifiable intangible assets | (6.7 | ) | | (1.1 | ) | | — |
|
Proceeds from sale of property, plant and equipment | 7.4 |
| | 5.0 |
| | 0.4 |
|
| | | | | |
Net cash (used in) provided by investing activities | (286.4 | ) | | 60.0 |
| | (54.9 | ) |
| | | | | |
Cash flows from financing activities: | |
| | |
| | |
|
| | | | | |
Proceeds from long-term borrowings, net of deferred financing costs | 3.1 |
| | 1,220.6 |
| | 152.9 |
|
Payments on long-term borrowings | (16.7 | ) | | (877.5 | ) | | (267.5 | ) |
Increase (decrease) in short-term borrowings | 10.2 |
| | (44.1 | ) | | (2.2 | ) |
Proceeds from exercise of stock options | 82.3 |
| | 41.0 |
| | 35.5 |
|
Excess tax benefits from stock based compensation | — |
| | 12.7 |
| | 11.6 |
|
Cash paid for acquisition of noncontrolling interests of consolidated subsidiaries | — |
| | (0.4 | ) | | (80.5 | ) |
Cash paid for treasury stock | (401.4 | ) | | (813.9 | ) | | (112.7 | ) |
Cash dividends paid | (78.3 | ) | | (64.6 | ) | | (40.0 | ) |
| | | | | |
Net cash used in financing activities | (400.8 | ) | | (526.2 | ) | | (302.9 | ) |
| | | | | |
Effect of exchange rate changes on cash and cash equivalents | 22.0 |
| | 2.1 |
| | (6.6 | ) |
| | | | | |
Net (decrease) increase in cash and cash equivalents | (63.3 | ) | | 99.3 |
| | 133.0 |
|
| | | | | |
Cash and cash equivalents at beginning of period | 383.9 |
| | 284.6 |
| | 151.6 |
|
| | | | | |
Cash and cash equivalents at end of period | $ | 320.6 |
| | $ | 383.9 |
| | $ | 284.6 |
|
| | | | | |
Schedule of non-cash investing activities: | | | | | |
Merger financed by common stock | $ | — |
| | $ | 6,256.2 |
| | $ | — |
|
| | | | | |
Supplemental disclosures of cash flow information: | |
| | |
| | |
|
Interest paid, net of amounts capitalized | $ | 37.0 |
| | $ | 36.7 |
| | $ | 54.9 |
|
Income taxes paid | $ | 122.7 |
| | $ | 112.3 |
| | $ | 71.4 |
|
The accompanying notes are an integral part of these consolidated financial statements.
DENTSPLY SIRONA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 118 - SIGNIFICANT ACCOUNTING POLICIESRESTRUCTURING AND OTHER COSTS
DescriptionRestructuring and other costs for the years ended December 31, 2023, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
Affected Line Item in the Consolidated Statements of Operations | | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Cost of products sold | | $ | 4 | | | $ | — | | | $ | (3) | |
Selling, general, and administrative expenses | | 3 | | | — | | | 6 | |
Restructuring and other costs | | 67 | | | 14 | | | 17 | |
| | | | | | |
Total Restructuring and other costs | | $ | 74 | | | $ | 14 | | | $ | 20 | |
Restructuring and other costs of Business
DENTSPLY SIRONA Inc. (“Dentsply Sirona” or the “Company”), is the world’s largest manufacturer of professional dental products and technologies, with a 130-year history of innovation and service to the dental industry and patients worldwide. Dentsply Sirona develops, manufactures, and markets a comprehensive solutions offering including dental and oral health products as well as other consumable healthcare products under a strong portfolio of world class brands. The Company’s principal product categories are dental consumable products, dental equipment, healthcare consumable products and dental technologies. The Company distributes its products$67 million recorded in over 120 countries under some of the most well established brand names in the industry.
On February 29, 2016, DENTSPLY International Inc. merged with Sirona Dental Systems, Inc. (“Sirona”) to form DENTSPLY SIRONA Inc. (the “Merger”). The Consolidated Statements of Operations for the year ended December 31, 2017 include2023 consisted primarily of employee severance benefits and other restructuring costs related to the resultsplan approved by the Board of operations for Sirona forDirectors of the periodCompany on February 29, 201614, 2023. This plan seeks to December 31, 2016.restructure the Company’s business to improve operational performance and drive shareholder value creation through a new operating model with four operating segments, optimization of central functions and overall management infrastructure, and other efforts aimed at cost savings. The accompanying Consolidated Balance Sheets at December 31, 2016 includes Sirona’s acquired assets and assumed liabilities. See Note 4, Business Combinations, for additional information about the Merger.
Unless otherwise stated herein, reference throughout this Form 10-K to “Dentsply Sirona”, or the “Company” refers to financial information and transactions of DENTSPLY International Inc. (“DENTSPLY”) prior to February 29, 2016 and to financial information and transactions of DENTSPLY SIRONA Inc., thereafter.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally acceptedrestructuring plan anticipates a reduction in the United StatesCompany’s global workforce of America (“US GAAP”) requires managementapproximately 8% to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates, and such differences may be material10%, subject to the consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company. All significant intercompany accounts and transactionsco-determination processes with employee representative groups in countries where required which are eliminated in consolidation.
Investments in non-consolidated affiliates (20-50 percent owned companies, joint ventures 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.
Cash and Cash Equivalents
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
now substantially complete. The Company sells dentalexpects to incur between $115 and certain medical products$135 million in non-recurring charges, comprising $80 to $100 million in restructuring expenditures and equipment through a worldwide networkcharges, primarily related to employee transition, severance payments, employee benefits and facility closure costs, and $35 million in other non-recurring costs which mostly consist of distributorsconsulting, legal and directlyother professional service fees. The plan is expected 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.be substantially completed by mid-2024. 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 netestimates of these allowances that were $22.4 millioncharges and $22.7 million at December 31, 2017their timing are subject to several assumptions, including local law requirements in various jurisdictions and 2016, respectively. For the years ended December 31, 2017 and 2016, the Company wrote-off $4.8 million and $2.5 million, respectively, of accounts receivable that were previously reserved. The Company increased the provision for doubtful accounts by $6.6 million and $9.2 million during 2017 and 2016, respectively.
Inventories
Inventories are stated at the lower of cost and net realizable value. At December 31, 2017 and 2016, the cost of $12.4 million and $8.6 million, respectively, of inventories was determined by the last-in, first-out (“LIFO”) method. The cost of remaining inventories was determined by the first-in, first-out (“FIFO”) or average cost methods.
If the FIFO method had been used to determine the cost of LIFO inventories, theco-determination aspects in countries where required. Actual amounts at which net inventories are stated would be higher than reported at December 31, 2017 and 2016 by $10.6 million and $6.8 million, respectively.
The Company establishes reserves for inventory estimated to be obsolete or unmarketable equal to the difference between the cost of inventory and estimated market value based upon assumptions about future demand and market conditions.
Valuation of Goodwill and Other Long-Lived Assets
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 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 significantlymaterially from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time at which such impairments are recognized. If there are unfavorable changes in these assumptions, 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 for the assets being evaluated could also result in 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 assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually, during the Company’s second quarter, or when indications of potential impairment exist. The Company monitors for the existence of potential impairment 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.
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 based on a multiple of earnings.estimates. In addition, the Company applies gross profit and operating expense assumptions consistentmay incur other charges or cash expenditures in connection with its historical trends. this plan which are not currently contemplated.
The total cash flows were discounted based on market participant data, which includedliabilities associated with the Company’s weighted-average costrestructuring plans are recorded in Accrued liabilities and Other noncurrent liabilities in the Consolidated Balance Sheets. Activity in the Company’s restructuring accruals at December 31, 2023 was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Severance |
(in millions) | | 2021 and Prior Plans | | 2022 Plans | | 2023 Plans | | Total |
| | | | | | | | |
Balance at December 31, 2022 | | $ | 4 | | | $ | 3 | | | $ | — | | | $ | 7 | |
Provisions and adjustments | | — | | | 2 | | | 62 | | | 64 | |
Amounts applied | | (2) | | | (3) | | | (24) | | | (29) | |
Change in estimates | | — | | | (2) | | | (1) | | | (3) | |
Balance at December 31, 2023 | | $ | 2 | | | $ | — | | | $ | 37 | | | $ | 39 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Other Restructuring Costs |
(in millions) | | 2021 and Prior Plans | | 2022 Plans | | 2023 Plans | | Total |
| | | | | | | | |
Balance at December 31, 2022 | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
Provisions and adjustments | | 1 | | | — | | | 9 | | | 10 | |
Amounts applied | | (1) | | | — | | | (8) | | | (9) | |
Change in estimates | | — | | | — | | | (1) | | | (1) | |
Balance at December 31, 2023 | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
The cumulative amounts for the provisions and adjustments and amounts applied for all the plans by segment were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | December 31, 2022 | | Provisions and Adjustments | | Amounts Applied | | Change in Estimates | | December 31, 2023 |
| | | | | | | | | | |
Connected Technology Solutions | | $ | 3 | | | $ | 18 | | | $ | (8) | | | $ | — | | | $ | 13 | |
Essential Dental Solutions | | 4 | | | 25 | | | (10) | | | (2) | | | 17 | |
Orthodontic and Implant Solutions | | 1 | | | 16 | | | (7) | | | (1) | | | 9 | |
Wellspect Healthcare | | — | | | 5 | | | (3) | | | (1) | | | 1 | |
All Other | | — | | | 10 | | | (10) | | | — | | | — | |
Total | | $ | 8 | | | $ | 74 | | | $ | (38) | | | $ | (4) | | | $ | 40 | |
The Company’s restructuring accruals at December 31, 2022 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Severances |
(in millions) | | 2020 and Prior Plans | | 2021 Plans | | 2022 Plans | | Total |
| | | | | | | | |
Balance at December 31, 2021 | | $ | 5 | | | $ | 9 | | | $ | — | | | $ | 14 | |
Provisions and adjustments | | 1 | | | 1 | | | 9 | | | 11 | |
Amounts applied | | (3) | | | (6) | | | (5) | | | (14) | |
Change in estimates | | (2) | | | (1) | | | (1) | | | (4) | |
Balance at December 31, 2022 | | $ | 1 | | | $ | 3 | | | $ | 3 | | | $ | 7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Other Restructuring Costs |
(in millions) | | 2020 and Prior Plans | | 2021 Plans | | 2022 Plans | | Total |
| | | | | | | | |
Balance at December 31, 2021 | | $ | 4 | | | $ | — | | | $ | — | | | $ | 4 | |
Provisions and adjustments | | 1 | | | 2 | | | 2 | | | 5 | |
Amounts applied | | (4) | | | (2) | | | (1) | | | (7) | |
Change in estimates | | (1) | | | — | | | — | | | (1) | |
Balance at December 31, 2022 | | $ | — | | | $ | — | | | $ | 1 | | | $ | 1 | |
The cumulative amounts for the provisions and adjustments and amounts applied for all the plans by segment were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | December 31, 2021 | | Provisions and Adjustments | | Amounts Applied | | Change in Estimates | | December 31, 2022 |
| | | | | | | | | | |
Connected Technology Solutions | | $ | 7 | | | $ | 5 | | | $ | (5) | | | $ | (4) | | | $ | 3 | |
Essential Dental Solutions | | 5 | | | 4 | | | (5) | | | — | | | 4 | |
Orthodontic and Implant Solutions | | 5 | | | 2 | | | (5) | | | (1) | | | 1 | |
Wellspect Healthcare | | 1 | | | 1 | | | (2) | | | — | | | — | |
All Other | | — | | | 4 | | | (4) | | | — | | | — | |
Total | | $ | 18 | | | $ | 16 | | | $ | (21) | | | $ | (5) | | | $ | 8 | |
NOTE 19 - FINANCIAL INSTRUMENTS AND DERIVATIVES
Derivative Instruments and Hedging Activities
The Company’s operations expose it to a variety of capital. The Company consideredmarket risks, which primarily include 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 informationrisks related to the testing for goodwill impairment is providedeffects of changes in Note 9 Goodwill and Intangible Assets.
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets consist of tradenames and are not subject to amortization. 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 product. At that time, the useful life to amortize the 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, royaltyforeign currency exchange rates and appropriate discountinterest rates. Royalty rates usedThese financial exposures are consistent with those assumed for the original purchase accounting 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 agreementsmonitored and licensing agreements, are amortized on a straight-line basis over their estimated useful lives. The useful life is the period over which the asset is expected to contribute to the future cash flows of the Company. The Company uses the following guidance to determine the useful life of certain intangible assets:
|
| | |
Intangible Asset Type | | Life |
| | |
Patents | | Up to date patent expires |
Trademarks | | Up to 20 years |
Licensing agreements | | Up to 20 years |
Customer relationships | | Up to 15 years |
When the expected life is not known,managed by the Company will estimateas part of its overall risk management program. The objective of this risk management program is to reduce the useful life basedvolatility that these market risks may have on similar asset or asset groups, any legal, regulatory, or contractual provision that limits the useful life, the effect of economic factors, including obsolescence, demand, competition,Company’s operating results and the level of maintenance expenditures required to obtain the expected future economic benefit from the asset. 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.
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 all intangible assets including those related to new and existing technologies for indicators of impairment as these assets have more risk of becoming impaired. Impairment is based upon an initial evaluation of the identifiable undiscounted cash flows. If the initial 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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, with the exception of assets acquired through acquisitions, which are recorded at fair value, net of accumulated depreciation. Except for leasehold improvements, depreciation for financial reporting purposes is computed by the straight-line method over the following estimated useful lives: generally 40 years for buildings and 4 to 15 years for machinery and equipment. The cost of leasehold improvements is amortized over the shorter of the estimated useful life or the term of the lease. Maintenance and repairs are expensed as incurred to the statement of operations; replacements and major improvements are capitalized. These asset groups are reviewed for impairment whenever events or 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.
Derivative Financial Instruments
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 of operations or accumulated 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 financing element then all cash flows will be classified as financing activities in the Consolidated Statements of Cash Flows as required by US GAAP.
The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, andor assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert floatingfixed rate debt to fixed rate.
Pension and Other Postemployment Benefits
Some of the employees of the Company and its subsidiaries are covered by governmentinto variable rate debt or Company-sponsored defined benefit plans. Many of the employees have available to them defined contribution plans. Additionally, certain union and salaried employee groups in the United States are covered by postemployment healthcare plans. Costs for Company-sponsored defined benefit and postemployment benefit plans are based on expected return on plan assets, discount rates, 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 periodic benefit costs associated 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 include medical inflation trend rates, discount rates, employee turnover and mortality rates.vice versa. The Company predominantly uses liability durations in establishing its discount rates, which are observed from indicesdoes not hold derivative instruments for trading or speculative purposes.
The following summarizes the notional amounts of high-grade corporate bond yields incash flow hedges, hedges of net investments, fair value hedges, and derivative instruments not designated as hedges for accounting purposes, by derivative instrument type at December 31, 2023 and the respective economic regions ofnotional amounts expected to mature during 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.next 12 months:
| | | | | | | | | | | | | | |
| | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months |
| | |
(in millions) | | |
| | | | |
Cash Flow Hedges | | | | |
Foreign exchange forward contracts | | $ | 23 | | | $ | 23 | |
| | | | |
| | | | |
Total derivative instruments designated as cash flow hedges | | $ | 23 | | | $ | 23 | |
| | | | |
Hedges of Net Investments | | | | |
Foreign exchange forward contracts | | $ | 890 | | | $ | 88 | |
Cross currency basis swaps | | 295 | | | — | |
Total derivative instruments designated as hedges of net investments | | $ | 1,185 | | | $ | 88 | |
| | | | |
Fair Value Hedges | | | | |
Foreign exchange forward contracts | | $ | 24 | | | $ | 24 | |
Interest rate swaps | | 250 | | | — | |
Total derivative instruments designated as fair value hedges | | $ | 274 | | | $ | 24 | |
| | | | |
Derivative Instruments not Designated as Hedges | | | | |
Foreign exchange forward contracts | | $ | 658 | | | $ | 658 | |
| | | | |
Total derivative instruments not designated as hedges | | $ | 658 | | | $ | 658 | |
Accruals for Self-Insured Losses
Cash Flow Hedges
Foreign Exchange Risk Management
The Company maintains insurance for certain risks, including workers’ compensation, general liability, product liabilityhedges select anticipated foreign currency cash flows to reduce volatility in both cash flows and vehicle liability, and is self-insured for employee related healthcare benefits.reported earnings. 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 ondesignates certain foreign exchange forward contracts as cash flow hedges. As 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 probable and can be reasonably estimated. These estimates are typically in the form of ranges, andresult, the Company records the liabilities at the low pointfair value of the ranges, when no other point withincontracts through AOCI based on the ranges are a better estimateassessed effectiveness of the probable loss.foreign exchange forward contracts. The ranges established by management are basedCompany measures the effectiveness of cash flow hedges of anticipated transactions on analysis made by internal and external legal counsel who considers information known ata spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the time. If the Company determines a liability to be only reasonably possible, it considers the same information to estimate the possible exposure and discloses any material potential liability. These loss contingencies are monitored regularly for aspot-to-spot change in fact or circumstance that would require an accrual adjustment. The Company believes it has estimated liabilities for probable losses appropriatelythe derivative fair value will be deferred in the past; however, the unpredictability of litigationAOCI and court decisions could cause a liability to be incurred in excess of estimates. Legal costs related to these lawsuits 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.
Assetsreleased 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 on the Consolidated Balance Sheets. During the year ended December 31, 2017, the Company had losses of $48.5 million on its loans designated as hedges of net investments and translation gains of $434.5 million. During the year ended December 31, 2016, the Company had gains of $15.6 million on its loans designated as hedges of net investments and translation losses of $109.4 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 loss of $1.7 million in 2017, and gains of $10.2 million and $5.2 million in 2016 and 2015, respectively, are included in Other expense (income), netrecorded in the Consolidated Statements of Operations.
Revenue Recognition
Revenue, net of related discounts and allowances,Operations in the same period that the hedged transaction is recognized when the earnings process is complete. This occurs when products are shipped to or received by the customer in accordance with the termsrecorded. The time-value component of the agreement, title and riskfair value of loss have been transferred, collectibilitythe derivative 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, value added taxes and other similar types of taxes collected from customers in connection with the sale are recorded by the Companyreported on a netstraight-line basis and are not included in the Consolidated Statement of Operations.
The Company offers discounts to its customers and distributors if certain conditions are met. Discounts are primarily based on the volume of products purchased or targeted to be purchased by the individual customer or distributor. Discounts are deducted from revenue at the time of sale or when the discount is offered, whichever is later. The Company estimates volume discounts based on the individual customer’s historical and estimated future product purchases. Returns of products, excluding warranty related returns, are infrequent and insignificant.
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 forecasts impact the estimated achievement for 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 $40.5 million, $64.3 million and $92.8 million for 2017, 2016 and 2015, respectively.
Revenue Recognition related to Multiple Deliverables
Sales revenue arrangements can consist of multiple deliverables of its product and service offerings. Additionally, certain products offerings, primarily dental technology products, may contain embedded software that functions together with the product to deliver the product’s essential functionality. Amounts received from customers in advance of product shipment are classified as deferred income until the revenue can be recognized in accordance with the Company’s revenue recognition policy.
Services: Service revenue is generally recognized ratably over the contract term as the specified services are performed. Amounts received from customers in advance of rendering of services are classified as deferred income until the revenue can be recognized upon rendering of those services.
Extended Warranties: The Company offers its customers an option to purchase extended warranties on certain products. The Company recognizes revenue on these extended warranty contracts ratably over the life of the contract. The costs associated with these extended warranty contracts are recognized when incurred.
Multiple-Element Arrangements: Arrangements with customers may include multiple deliverables, including any combination of equipment, services and extended warranties. The deliverables included in the Company’s multiple-element arrangements are separated into more than one unit of accounting when (i) the delivered equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in the control of the Company. Arrangement consideration is then allocated to each unit, delivered or undelivered, based on the relative selling price of each unit of accounting based first on vendor-specific objective evidence, if it exists, and then based on estimated selling price.
Vendor-specific objective: In most instances, products are sold separately in stand-alone arrangements. Services are also sold separately through renewals of contracts with varying periods. The Company determines vendor-specific objective based on its pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or stand-alone prices for the service element(s).
Estimated Selling Price:Represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When vendor-specific objective evidence does not exist for all elements, the Company determines estimated selling price for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on its pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining estimated selling price. After separating the elements into their specific units of accounting, total arrangement consideration is allocated to each unit of accounting according to the nature of the revenue as described above and application of the relative selling price method. Total recognized revenue is limited to the amount not contingent upon future transactions.
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 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 sold in the Consolidated Statements of Operations. During 2016, the Company’s warranty expense and accrual increased as a result of the Merger. The following table presents the Company’s warranty expense and warranty accrual at December 31:
|
| | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Warranty Expense | | $ | 25.7 |
| | $ | 25.2 |
| | $ | 6.0 |
|
Warranty Accrual | | 11.8 |
| | 11.2 |
| | 3.8 |
|
Selling, General and Administrative Expenses
Selling, general and 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 costs, amortization of capitalized software and depreciation of administrative facilities. Advertising cost are expensed as incurred.
Research and Development Costs
Research and development (“R&D”) costs relate primarily to internal costs for salaries and direct overhead expenses. In addition, 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 includedOperations in the Company’s R&D costs. Software development costs incurred prior to the attainment of technological feasibility are considered R&D and are expensed as incurred. Once technological feasibilityperiod which it is established, software development costs are capitalized until the product is available for general release to customers. Amortization ofapplicable. Any cash flows associated with these costsinstruments are included in Costoperating activities in the Consolidated Statements of products soldCash Flows.
These foreign exchange forward contracts generally have maturities up to 18 months, which is the period over which the Company is hedging exposures to variability of cash flows and the counterparties to the transactions are typically large international financial institutions.
Interest Rate Risk Management
The Company enters into interest rate swap contracts 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 operating activities in the Consolidated Statements of Cash Flows.
On May 26, 2020, the Company paid $31 million to settle the $150 million notional Treasury rate lock contract, which partially hedged the interest rate risk of the $750 million senior unsecured notes. This loss is amortized over the estimatedten-year life of the products. R&D costsnotes. As of December 31, 2023 and December 31, 2022, $19 million and $23 million, respectively, of this loss is remaining to be amortized from AOCI in future periods.
AOCI Release
Overall, the derivatives designated as cash flow hedges are includedhighly effective for accounting purposes. At December 31, 2023, the Company expects to reclassify $3 million of deferred net losses on cash flow hedges recorded in Selling, general and administrative expensesAOCI in the Consolidated Statements of Operations and amounted to $151.7 million, $128.5 million and $74.9 million for 2017, 2016 and 2015, respectively.during the next 12 months. For the rollforward of derivative instruments designated as cash flow hedges in AOCI see Note 5, Comprehensive (Loss) Income.
Stock CompensationHedges of Net Investments in Foreign Operations
The Company recognizes the compensation cost relating to stock-based payment transactions in the financial statements. The cost of stock-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.
Income Taxes
The Company’s tax expense includes U.S. and international income taxes plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. 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.
The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.
The Company has accounted for the tax effectssignificant investments in foreign subsidiaries. The net assets of The Tax Cuts and Jobs Act, enacted on December 22, 2017, on a provisional basis. The accounting for certain income tax effects is incomplete, but the Company has determined reasonable estimates for those effects. The Company’s reasonable estimatesthese subsidiaries are includedexposed to volatility in the financial statements at December 31, 2017 and expects to complete the accounting during the one year measurement period from the enactment date.
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
currency exchange rates. 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 acquiredemploys both derivative and liabilities assumed at their respective fair values with the excess of the purchase price over estimated fair values recorded as goodwill. The assumptions made in determining the fair value of acquired assets and assumed liabilities as well as asset lives can materially impact the results of operations.
The Company obtains information during due diligence and through other sources to 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 liabilities and product line information. If the initial valuation for an acquisition is incomplete by the end of the quarter in which the acquisition occurred, the Company will record a provisional estimate in the financial statements. The provisional estimate will be finalized as soon as information becomes available, but will only occur up to one year from the acquisition date.
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 (loss) 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.
Segment Reporting
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 market. Professional dental products and equipment represented approximately 92%, 92% and 89% of sales for each of the years ended 2017, 2016 and 2015, respectively. The Company has two reportable segments and a description of the activities within these segments is included in Note 5, Segment and Geographic Information.
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 between market participants on 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:
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 instruments 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.
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 measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
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 impacted by a number of 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 realizable value, the Company will utilize the valuation techniques described above.
Reclassification of Prior Years Amounts
Certain reclassifications have been made to prior years’ data in order to conform to current year presentation. During the quarter ended September 30, 2017, the Company realigned reporting responsibilities for multiple businesses, as a result of a retirement of one of the Company’s then Chief Operating Officers, into three operating segments. Furthermore, as a result of changes in the senior management level during the quarter ended December 31, 2017, the Company realigned reporting responsibilities into two operating segments. The segment information below reflects the revised fourth quarter organizational structure for all periods shown.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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). On July 9, 2015, the FASB issued ASU No. 2015-14, deferring the effective date by one year to annual reporting periods beginning after December 15, 2017. Early adoption is permitted. In April 2016, the FASB issued ASU No. 2016-10, which clarifies the “identifying performance obligations and licensing implementations guidance” aspects of Topic 606. In May 2016, the FASB issued ASU No. 2016-11, which amends and or rescinds certain aspects of the Accounting Standards Codification (“ASC”) to reflect the requirements under Topic 606. Additionally, the FASB issued ASU No. 2016-12, which clarifies the criteria for assessing collectibility, permits an entity to elect an accounting policy to exclude from the transaction price amounts collected from customers for all sales taxes, and provides a practical expedient that permits an entity to reflect the aggregate effect of all contract modifications that occur before the beginning of the earliest period presented in accordance with Topic 606. In December 2016, the FASB issued ASU No. 2016-20, which clarifies several additional aspects of Topic 606 including contract modifications and performance obligations. The Company will adopt these accounting standards on January 1, 2018. The Company has completed its analysis of revenue areas that will be impacted by the adoption of this standard. The primary areas affected are the Company’s promotional and customer loyalty programs. The Company will adopt using a modified retrospective approach. Under this method, the Company will recognize the cumulative effect of adopting this guidance as an adjustment to the opening balance of retained earnings. The Company expects the adjustment to retained earnings to be less than $6 million, with immaterial impacts to our net income on an ongoing basis. There will be no significant impact to the Company’s internal controls as a result of adoption. Prior periods will not be retrospectively adjusted.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This newly issued accounting standard requires that an entity measure inventory at the lower of cost or net realizable value, as opposed to the lower of cost or market value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Excluded from this update are the Last In First Out (“LIFO”) and retail inventory methods of accounting for inventory. The amendments in this standard are effective for fiscal years beginning after December 15, 2016 and for interim periods within fiscal years beginning after December 15, 2017. Prospective application is required for presentation purposes. The Company adopted this accounting standard for the quarter ended March 31, 2017 and it did not materially impact the Company’s financial position or results of operations.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” This accounting standard seeks to simplify the accounting related to deferred income taxes. Current US GAAP requires an entity to separate deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) into current and noncurrent amounts for each tax jurisdiction based on the classification of the related asset or liability for financial reporting. DTAs and DTLs not related to assets and liabilities for financial reporting are classified based on the expected reversal date. The new standard requires DTAs or DTLs for each tax jurisdictions to be classified as noncurrent in a classified statement of financial position. The Company adopted this accounting standard for the quarter ended March 31, 2017, applying retrospective application to the December 31, 2016, Consolidated Balance Sheet presented in this Form 10-Q. At adoption, the Company reclassified certain deferred charges on the December 31, 2016 Consolidated Balance Sheet. During the quarter ended June 30, 2017, upon further review of these deferred charges, the Company determined that an error was made in the reclassification of certain deferred charges on the December 31, 2016 Consolidated Balance Sheet. As a result the Company corrected the presentation to the December 31, 2016 Consolidated Balance Sheet to increase “Prepaid expenses and other current assets” by $33.0 million and decrease “Deferred income taxes” and “Other noncurrent assets, net” by $28.2 million and $4.8 million, respectively. The Company determined that the error was not material to the Company’s financial position in the periods covered. The adoption of this standard is reflected below in the summary of the classification adjustments, including the correction for the error noted above, by financial statement line item:
|
| | | | | | | | | | | | | | |
(in millions) | | | | December 31, 2016 | | Classification | | December 31, 2016 |
| | Deferred Tax Assets | | As Reported | | Adjustment | | Revised |
Consolidated Balance Sheet Item | | and Liabilities | | Balance | | As Revised | | Balance |
Prepaid expenses and other current assets | | Current DTAs | | $ | 345.6 |
| | $ | (139.1 | ) | | $ | 206.5 |
|
Other noncurrent assets, net | | Noncurrent DTAs | | 64.1 |
| | 38.8 |
| | 102.9 |
|
Income taxes payable | | Current DTLs | | 64.2 |
| | (3.4 | ) | | 60.8 |
|
Deferred income taxes | | Noncurrent DTLs | | 848.6 |
| | (96.9 | ) | | 751.7 |
|
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This newly issued accounting standard seeks to enhance the reporting model fornon-derivative financial instruments to provide users of financial statements with more decision-useful information as well as to improve and achieve convergence of the FASB and International Accounting Standards Board (“IASB”) standards on the accounting for financial instruments. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. It also requires enhanced disclosures about those investments and reduces the number of items that are recognized in other comprehensive income. The adoptionhedge a portion of this standard is required for interimexposure. The derivative instruments consist of foreign exchange forward contracts and fiscal periods ending after December 15, 2017cross-currency basis swaps. The non-derivative instruments consist of foreign currency denominated debt held at the parent company level. Translation gains and should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently assessing the impact that this standard may have on its financial position, results of operations, cash flows and disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases.” This newly issued accounting standard seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities in the balance sheet and disclosing key information about leasing arrangements. Current US GAAP does not require lessees to recognize assets and liabilities arising from operating leases in the balance sheet. This standard also provides guidance from the lessees prospective on how to determine if a lease is an operating lease or a financing lease and the differences in accounting for each. The adoption of this standard is required for interim and fiscal periods ending after December 15, 2018 and it is required to be applied retrospectively using the modified retrospective approach. Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.
In March 2016, the FASB issued ASU No. 2016-09, “Stock Compensation.” This accounting standard seeks to simplify the accounting for all entities that issue stock-based payment awards to their employees. The primary areas of change include accounting for income taxes, cash flow statement classification of excess tax benefits and employee taxes paid when an employer withholds shares, accounting for forfeitures and tax withholding requirements. Amendmentslosses related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity asnet assets of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paidforeign subsidiaries are offset by gains and losses in the statementaforementioned instruments, which are designated as hedges of cash flows when an employer withholds shares to meetnet investments and the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficienciesintrinsic value changes in the income statement should be applied prospectively. The Company adopted this accounting standard for the quarter ended March 31, 2017. For the year ended December 31, 2017, the Companythese instruments are recorded $20.5 million of excess tax benefit related to employee share-based compensation as a component of income tax expense which impacted the current year tax provision. The Company elected to record forfeitures on stock-based compensation as the participant terminates rather than estimating forfeitures. As result of election to actual-basis forfeitures, the Company recorded a cumulative-effect adjustment of $1.0 million,AOCI, net of tax to “Capital in Excess of Par Value” and “Retained Earnings” in the Consolidated Statements of Changes in Equity related to prior year’s estimated forfeitures. In addition, the Company elected to adopt the cash flow classification of excess tax benefits on a prospective basis.effects. The adoption of this standard did not materially impact the Company’s financial position, results of operations, cash flows, or disclosures.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows.” This newly issued accounting standard seeks to clarify the presentation of eight specific cash flow issues in order to reduce diversity in practice. The topics of clarification include debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interest in securitization transactions, and separately identifiable cash flows. The amendments in this update are effective for interim and fiscal periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied using a retrospective transition method to each period presented. The adoption of this standard will not materially impact the Company’s presentation of its Consolidated Statements of Cash Flows.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes.” This newly issued accounting standard seeks to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current US GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to a third party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in US GAAP. ASU No. 2016-16 eliminates this exception. The amendments in this update are effective for interim and fiscal periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations.” This newly issued accounting standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisition or disposal of assets or businesses. The amendments in this update provide a screen to determine when a set of assets is not a business. The screen requires that when substantially alltime-value component of the fair value of the gross assets acquired (or disposed of)derivative instruments is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. The amendments in this update are effective for interim and fiscal periods beginning after December 15, 2017. Early adoption is permitted under certain conditions. The amendments in this update should be applied prospectively. The Company is currently assessing the impact that this standard will on its financial position, results of operations, cash flows and disclosures.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles, Goodwill and Other.” This newly issued accounting standard seeks to simplify the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test which requires business to perform procedures to determine the fair value of its assets and liabilities at the impairment testing date. Under this amendment, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in this update are required for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The amendments in this update should be applied prospectively. As permitted by the accounting standard, the Company early adopted this accounting standard during the three months ended March 31, 2017. For the year ended December 31, 2017, the Company assessed its goodwill impairment under this new standard and recorded an impairment charge of $1,650.9 million For further information, see Note 9, Goodwill and Intangibles Assets.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits.” This newly issued accounting standard is primarily intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments in this update require an employer to report the service cost component of net periodic benefit cost in operating income, while the interest cost, amortization, return on assets and any settlement or curtailment expense will be reported below operating income. More specifically, the service cost will be reported in the same line item as other compensation costs arising from the services rendered by the pertinent employee during the period. The amendments in this update are required for annual and interim periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued. The amendments in this update should be applied retrospectively for the presentation of the components of net periodic benefit cost and net periodic postretirement benefit cost in the income statement. The Company is currently assessing the impact that this standard will have on its results of operations and disclosures.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation.” This newly issued accounting standard provides clarity and reduces both diversity in practice as well cost and complexity when applying Topic 718 “Stock Compensation” as it relates to changes in terms or conditions of share based payments. The amendments in this update provide guidance about what changes to a share based payment should be considered substantive and therefore require modification accounting. More specifically, this update requires entities to apply modification accounting unless the modified awards fair value, vesting conditions and award classification as an equity or liability instrument all remain the same as the original award. The amendments in this update are required for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for reporting periods for which financial statements have not been issued. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The Company is currently assessing the impact that this standard will have on its results of operations, financial position, cash flows and disclosures.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging.” This newly issued accounting standard improves the financial reporting and disclosure of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this update make improvements to simplify the application of the hedge accounting guidance in current GAAP based on the feedback received from preparers, auditors, users and other stakeholders. More specifically, this update expands and refines hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update are required for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this update. The amended presentation and disclosure guidance is required only prospectively. The Company is currently assessing the impact that this standard will have on its results of operations, financial position, cash flows and disclosures.
NOTE 2 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted (loss) earnings per common share:
|
| | | | | | | | | | |
(in millions, except for per share amounts) | | Net (loss) income attributable to Dentsply Sirona | | Shares | | (Loss) earnings per common share |
| | | | | | |
Year Ended December 31, 2017 | | | | | | |
Basic | | (1,550.0 | ) | | 229.4 |
| | $ | (6.76 | ) |
Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards | |
|
| | — |
| | |
|
| | | | | | |
Diluted | | (1,550.0 | ) | | 229.4 |
| | $ | (6.76 | ) |
| | | | | | |
Year Ended December 31, 2016 | | |
| | |
| | |
|
Basic | | 429.9 |
| | 218.0 |
| | $ | 1.97 |
|
Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards | |
|
| | 3.6 |
| | |
|
| | | | | | |
Diluted | | 429.9 |
| | 221.6 |
| | $ | 1.94 |
|
| | | | | | |
Year Ended December 31, 2015 | | |
| | |
| | |
|
Basic | | 251.2 |
| | 140.0 |
| | $ | 1.79 |
|
Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards | |
|
| | 2.5 |
| | |
|
| | | | | | |
Diluted | | 251.2 |
| | 142.5 |
| | $ | 1.76 |
|
The calculation of weighted average diluted shares outstanding excludes stock options and restricted stock units (“RSUs”) of 4.3 million, 0.6 million and 0.9 million shares of common stock that were outstanding during the years ended December 31, 2017, 2016 and 2015, respectively, were excluded from the computation of diluted earnings per common share since their effect would be antidilutive.
NOTE 3 - COMPREHENSIVE INCOME
AOCI includes foreign currency translation adjustments related to the Company’s foreign subsidiaries, net of the related changes in certain financial instruments hedging these foreign currency investments. In addition, changes in the Company’s fair value of certain derivative financial instruments, 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, 2017, 2016 and 2015, these tax adjustments were $203.8 million, $166.4 million and $169.3 million, respectively, primarily related to foreign currency translation adjustments.
The cumulative foreign currency translation adjustments included translation gain of $22.1 million and translation loss of $412.4 million at December 31, 2017 and 2016, respectively, and which included losses of $126.6 million and $78.1 million, at December 31, 2017 and 2016, respectively, on loans designated as hedges of net investments.
Changes in AOCI by component for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign Currency Translation (Loss) Gain | | (Loss) and Gain on Derivative Financial Instruments Designated as Cash Flow Hedges | | (Loss) and Gain on Derivative Financial Instruments | | Net Unrealized Holding Gain (Loss) on Available-for-Sale Securities | | Pension Liability (Loss) Gain | | Total |
| | | | | | | | | | | | |
Balance, net of tax, at December 31, 2016 | | $ | (490.5 | ) | | $ | (3.2 | ) | | $ | (116.8 | ) | | $ | — |
| | $ | (95.2 | ) | | $ | (705.7 | ) |
Other comprehensive income (loss) before reclassifications and tax impact | | 354.6 |
| | (14.7 | ) | | (14.1 | ) | | 45.0 |
| | (1.0 | ) | | 369.8 |
|
Tax benefit (expense) | | 31.4 |
| | 2.7 |
| | 3.3 |
| | (0.7 | ) | | 0.7 |
| | 37.4 |
|
Other comprehensive income (loss), net of tax, before reclassifications | | 386.0 |
| | (12.0 | ) | | (10.8 | ) | | 44.3 |
| | (0.3 | ) | | 407.2 |
|
Amounts reclassified from accumulated other comprehensive income, net of tax | | — |
| | 2.6 |
| | — |
| | — |
| | 4.9 |
| | 7.5 |
|
Net increase (decrease) in other comprehensive income | | 386.0 |
| | (9.4 | ) | | (10.8 | ) | | 44.3 |
| | 4.6 |
| | 414.7 |
|
Balance, net of tax, at December 31, 2017 | | $ | (104.5 | ) | | $ | (12.6 | ) | | $ | (127.6 | ) | | $ | 44.3 |
| | $ | (90.6 | ) | | $ | (291.0 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign Currency Translation (Loss) Gain | | (Loss) and Gain on Derivative Financial Instruments Designated as Cash Flow Hedges | | (Loss) and Gain on Derivative Financial Instruments | | Pension Liability (Loss) Gain | | Total |
| | | | | | | | | | |
Balance, net of tax, at December 31, 2015 | | $ | (401.2 | ) | | $ | (1.2 | ) | | $ | (110.2 | ) | | $ | (81.4 | ) | | $ | (594.0 | ) |
Other comprehensive (loss) income before reclassifications and tax impact | | (71.4 | ) | | (0.8 | ) | | (13.2 | ) | | (25.4 | ) | | (110.8 | ) |
Tax (expense) benefit | | (17.9 | ) | | 0.5 |
| | 6.6 |
| | 7.9 |
| | (2.9 | ) |
Other comprehensive income (loss), net of tax, before reclassifications | | (89.3 | ) | | (0.3 | ) | | (6.6 | ) | | (17.5 | ) | | (113.7 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | | — |
| | (1.7 | ) | | — |
| | 3.7 |
| | 2.0 |
|
Net (decrease) increase in other comprehensive income | | (89.3 | ) | | (2.0 | ) | | (6.6 | ) | | (13.8 | ) | | (111.7 | ) |
Balance, net of tax, at December 31, 2016 | | $ | (490.5 | ) | | $ | (3.2 | ) | | $ | (116.8 | ) | | $ | (95.2 | ) | | $ | (705.7 | ) |
Reclassification out of accumulated other comprehensive income (loss) for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | | | | |
(in millions) | | | | | | | |
Details about AOCI Components | | Amounts Reclassified from AOCI | Affected Line Item in the Statements of Operations |
| Year Ended December, 31 |
| 2017 | | 2016 | | 2015 |
| | | | | | | | | |
Realized foreign currency gain on liquidation of foreign subsidiary: |
Foreign currency translation adjustment | | $ | — |
| | $ | — |
| | $ | 1.2 |
| Other expense (income), net |
| | | | | | | | | |
(Loss) gain on derivative financial instruments: |
Interest rate swaps | | $ | (2.3 | ) | | $ | (2.9 | ) | | $ | (10.1 | ) | Interest expense |
Foreign exchange forward contracts | | (3.0 | ) | | 4.8 |
| | 18.0 |
| Cost of products sold |
Foreign exchange forward contracts | | — |
| | 0.1 |
| | 0.6 |
| SG&A expenses |
Commodity contracts | | — |
| | (0.1 | ) | | (0.5 | ) | Cost of products sold |
Net (loss) gain before tax | | (5.3 | ) | | 1.9 |
| | 8.0 |
| |
Tax impact | | 2.7 |
| | (0.2 | ) | | 1.2 |
| (Benefit) provision for income taxes |
Net (loss) gain after tax | | $ | (2.6 | ) | | $ | 1.7 |
| | $ | 9.2 |
| | | |
| | | | | | | | | |
Realized gain on available-for-sale securities: |
Available -for-sale-securities | | $ | — |
| | $ | — |
| | $ | 5.1 |
| Other expense (income), net |
Tax impact | | — |
| | — |
| | (1.4 | ) | (Benefit) provision for income taxes |
Net gain after tax | | $ | — |
| | $ | — |
| | $ | 3.7 |
| |
| | | | | | | | | |
Amortization of defined benefit pension and other postemployment benefit items: |
Amortization of prior service benefits | | $ | 0.2 |
| | $ | 0.2 |
| | $ | 0.2 |
| (a) |
Amortization of net actuarial losses | | (7.0 | ) | | (5.3 | ) | | (8 | ) | (a) |
Net loss before tax | | (6.8 | ) | | (5.1 | ) | | (7.8 | ) | |
Tax impact | | 1.9 |
| | 1.4 |
| | 2.2 |
| (Benefit) provision for income taxes |
Net loss after tax | | $ | (4.9 | ) | | $ | (3.7 | ) | | $ | (5.6 | ) | |
| | | | | | | | | |
Total reclassifications for the period | | $ | (7.5 | ) | | $ | (2.0 | ) |
| $ | 8.5 |
| | | |
| | | | | | | | | |
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the years ended December 31, 2017, 2016, and 2015, respectively (see Note 15, Benefit Plans, for additional details).
NOTE 4 - BUSINESS COMBINATIONS
Business Combinations
2017 Transactions
During the quarter ended June 30, 2017, the Company acquired RTD, a privately-held France-based manufacturer of endodontic posts for $132.0 million which is subject to final purchase price adjustments. At December 31, 2017, the Company recorded $83.4 million in goodwill related to the fair value of assets acquired and liabilities assumed and the consideration given for the acquisition. Goodwill is considered to represent the value associated with workforce and synergies the two companies anticipate realizing as a combined company. The goodwill is not expected to be deductible for tax purposes. Intangible assets acquired consist of the following:
|
| | | | | | |
(in millions, except for useful life) | | | | Weighted Average |
| | | | Useful Life |
| | Amount | | (in years) |
| | | | |
Customer relationships | | $ | 18.1 |
| | 15 |
Developed technology and patents | | 22.4 |
| | 15 |
Trade names and trademarks | | 8.5 |
| | Indefinite |
Total | | $ | 49.0 |
| | |
The results of operation for this business have been included in the accompanying financial statements as of the effective date of the transaction. The purchase price has been assigned on the basis of the fair values of assets acquired and liabilities assumed. This transaction was not material to the Company’s net sales and net loss attributable to Dentsply Sirona for the year ended December 31, 2017.
2016 Transactions
On February 29, 2016, DENTSPLY merged with Sirona in an all-stock transaction and the registrant was renamed DENTSPLY SIRONA Inc. and the common stock continues to trade on the Nasdaq under the ticker “XRAY”. In connection with the Merger, each former share of Sirona common stock issued and outstanding immediately prior to February 29, 2016, was converted to 1.8142 shares of DENTSPLY common stock. The Company issued approximately 101.8 million shares of DENTSPLY common stock to former shareholders of Sirona common stock, representing approximately 42% of the approximately 242.2 million total shares of DENTSPLY common stock outstanding on the Merger date.
DENTSPLY was determined to be the accounting acquirer. In this all-stock transaction, only DENTSPLY common stock was transferred and DENTSPLY shareholders received approximately 58% of the voting interest of the combined company, and the Sirona shareholders received approximately 42% of the voting interest. Additional indicators included the combined company’s eleven Board of Directors which includes six members of the former DENTSPLY board, and five members of the former Sirona board, as well as DENTSPLY’s financial size.
The Merger combines leading platforms in consumables, equipment, and technologies which creates complimentary end to end solutions to meet customer needs and improve patient care. The combined company seeks to capitalize on key industry trends to drive growth, including accelerating adoption of digital dentistry.
The following table summarizes the consideration transferred:
|
| | | | | | | | |
(in millions, except per share amount)* | | | | |
| | | | |
Sirona common stock outstanding at February 29, 2016 | | 56.1 |
| | |
Exchange ratio | | 1.8142 |
| | |
DENTSPLY common stock issued for consideration | | 101.8 |
| | |
DENTSPLY common stock per share price at February 26, 2016 | | $ | 60.67 |
| | |
Fair value of DENTSPLY common stock issued to Sirona shareholders | | | | $ | 6,173.8 |
|
Fair value of vested portion of Sirona stock-based awards outstanding - 1.5 million | | | | |
at February 29, 2016 | | | | 82.4 |
|
Total acquisition consideration | | | | $ | 6,256.2 |
|
*Table may not foot due to rounding
The Merger was recorded in accordance with US GAAP pursuant to the provisions of ASC Topic 805, Business Combinations. The Company performed a valuation analysis of identifiable assets acquired and liabilities assumed and allocated the consideration based on the final fair values of those identifiable assets acquired and liabilities assumed, there were no material changes to the preliminary valuation.
The following table summarizes the final fair value of identifiable assets acquired and liabilities assumed at the date of the Merger:
|
| | | | |
(in millions) | | |
| | |
Cash and cash equivalents | | $ | 522.3 |
|
Trade receivables | | 143.0 |
|
Inventory | | 220.7 |
|
Prepaid expenses and other current assets | | 111.1 |
|
Property, plant and equipment | | 237.1 |
|
Identifiable intangible assets | | 2,435.0 |
|
Goodwill | | 3,758.1 |
|
Other long-term assets | | 6.9 |
|
Total assets | | 7,434.2 |
|
Accounts payable | | 68.0 |
|
Other current liabilities | | 197.9 |
|
Debt | | 57.5 |
|
Deferred income taxes | | 749.1 |
|
Other long-term liabilities | | 95.3 |
|
Total liabilities | | 1,167.8 |
|
Noncontrolling interest | | 10.2 |
|
Total identifiable net assets | | $ | 6,256.2 |
|
Inventory held by Sirona included a fair value adjustment of $72.0 million. The Company expensed this amount through June 30, 2016 as the acquired inventory was sold.
Property, plant and equipment includes a fair value adjustment of $33.6 million, and consists of land, buildings, plant and equipment. Depreciable lives range from 25 to 50 years for buildings and from 3 to 10 years for plant and equipment.
Deferred income for service contracts previously recorded by Sirona now includes a fair value adjustment which reduced other current liabilities by $17.3 million. The consequence is that this amount cannot be recognized as revenue under US GAAP.
Weighted average useful lives for intangible assets were determined based upon the useful economic lives of the intangible assets that are expected to contribute to future cash flows. The acquired definite-lived intangible assets are being amortized on a straight-line basis over their expected useful lives. Intangible assets acquired consist of the following:
|
| | | | | | |
(in millions, except for useful life) | | | | Weighted Average |
| | | | Useful Life |
| | Amount | | (in years) |
| | | | |
Customer relationships | | $ | 495.0 |
| | 14 |
Developed technology and patents | | 1,035.0 |
| | 12 |
Trade names and trademarks | | 905.0 |
| | Indefinite |
Total | | $ | 2,435.0 |
| | |
The fair values assigned to intangible assets were determined through the use of the income approach, specifically the relief from royalty method was used to fair value the developed technology and patents and tradenames and trademarks and the multi-period excess earnings method was used to fair value customer relationships. Both valuation methods rely on management’s judgments, including expected future cash flows resulting from existing customer relationships, customer attrition rates, contributory effects of other assets utilized in the business, peer group cost of capital and royalty rates as well as other factors. The valuation of tangible assets was derived using a combination of the income approach, the market approach and the cost approach. Significant judgments used in valuing tangible assets include estimated reproduction or replacement cost, weighted average useful lives of assets, estimated selling prices, costs to complete and reasonable profit.
The $3,758.1 million of goodwill is attributable to the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. Goodwill is considered to represent the value associated with workforce and synergies the two companies anticipate realizing as a combined company. Goodwill of $3,615.3 million has been assigned to the Company's Technologies & Equipment segment and $142.8 million has been assigned to the Company’s Consumables segment. The goodwill is not expected to be deductible for tax purposes.
Sirona contributed net sales of $1,220.2 million and operating loss of $1,543.1 million to the Company’s Consolidated Statements of Operations during the period January 1, 2017 to December 31, 2017. The operating loss includes a goodwill impairment charge of $1,650.9 million and an indefinite-lived intangible asset impairment charge of $346.7 million. Sirona contributed net sales of $1,039.9 million and operating income of $227.2 million to the Company's Consolidated Statements of Operations during the period from February 29, 2016 to December 31, 2016 which is primarily included in the Technologies & Equipment segment.
The following unaudited pro forma financial information reflects the consolidated results of operations of the Company had the Merger occurred on January 1, 2015. Sirona’s financial information has been compiled in a manner consistent with the accounting policies adopted by DENTSPLY. The following unaudited pro forma financial information for the year ended December 31, 2016 and 2015, has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the Merger occurred on January 1, 2015, nor is it indicative of any future results.
|
| | | | | | | | |
| | Pro forma - unaudited |
| | Year Ended |
(in millions, except per share amount) | | 2016 | | 2015 |
| | | | |
Net sales | | $ | 3,916.0 |
| | $ | 3,830.0 |
|
Net income attributable to Dentsply Sirona | | $ | 437.0 |
| | $ | 388.5 |
|
Diluted earnings per common share | | $ | 1.85 |
| | $ | 1.58 |
|
The pro forma financial information is based on the Company's preliminary assignment of consideration given and therefore subject to adjustment. These pro forma amounts were calculated after applying the Company’s accounting policies and adjusting Sirona’s results to reflect adjustments that are directly attributable to the Merger. These adjustments mainly include additional intangible asset amortization, depreciation, inventory fair value adjustments, transaction costs and taxes that would have been charged assuming the fair value adjustments had been applied from January 1, 2015, together with the consequential tax effects at the statutory rate. Pro forma results do not include any anticipated synergies or other benefits of the Merger.
For the year ended December 31, 2016, in connection with the Merger, the Company has incurred $29.9 million of transaction related costs, primarily amounts paid to third party advisers, legal and banking fees, which are included in Selling, general and administrative expenses in the Consolidated Statements of Operations.
In September 2016, the Company finalized the acquisitions of MIS Implants Technologies Ltd., a dental implant systems manufacturer headquartered in northern Israel and a small acquisition of a healthcare consumable business. Total purchase price related to these two acquisitions was $341.4 million, net of cash acquired of $66.9 million. At December 31, 2016, the Company recorded $204.6 million in goodwill related to the difference between the fair value of assets acquired and liabilities assumed and the consideration given for the acquisitions. Intangible assets acquired consist of the following:
|
| | | | | | |
(in millions, except for useful life) | | | | Weighted Average |
| | | | Useful Life |
| | Amount | | (in years) |
| | | | |
Customer relationships | | $ | 91.3 |
| | 15 |
Developed technology and patents | | 37.4 |
| | 15 |
Trade names and trademarks | | 25.3 |
| | Indefinite |
Total | | $ | 154.0 |
| | |
The results of operations for these businesses have been included in the accompanying financial statements as of the effective date of the respective transactions. The purchase prices have been assigned on the basis of preliminary estimates of the fair values of assets acquired and liabilities assumed. These transactions (other than the Merger) were not material to the Company’s net sales and net income attributable to Dentsply Sirona for the year ended December 31, 2016.
2015 Transactions
In October 2015, the Company purchased a South American-based manufacturer of dental laboratory products for $51.1 million. The Company recorded $31.3 million of 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 this business have been included in the accompanying financial statements as of the effective date of the respective transactions. This transaction was immaterial to the Company’s net sales and net income attributable to Dentsply Sirona.
Investment in Affiliates
On December 9, 2010, the Company purchased an initial ownership interest of 17% of the outstanding shares of DIO Corporation (“DIO”). In addition, on December 9, 2010, the Company invested $49.7 million in the corporate convertible bonds of DIO, which were permitted to be converted into common shares at any time. The bonds were designated by the Company as available-for-sale securities which are reported in, Prepaid expenses and other current assets, in the Consolidated Balance Sheets at December 31, 2014 and the changes in fair value were reported in AOCI. The contractual maturity of the bonds was December 2015. The Company had recorded the ownership in DIO under the equity method of accounting as it had significant influence over DIO.
In September 2015, the Company sold the bonds at face value. The Company recorded an unrealized holding loss, net of tax, of $4.8 million for the year ended December 31, 2015, in the Consolidated Statements of Comprehensive Income. As a result of sale of the bonds, the Company recorded $3.7 million, net of tax, of realized foreign currency gains in Other expense (income), net in the Consolidated Statements of Operations in the applicable period. Any cash flows associated with these instruments are included in investing activities in the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, for which all cash flows are classified as financing activities in the year ended December 31, 2015. Consolidated Statements of Cash Flows.
The fair value of the DIO bonds was $57.7 millionforeign exchange forward contracts and cross-currency basis swaps is the estimated amount the Company would receive or pay at December 31, 2015the reporting date, considering the effective interest rates, and a cumulative unrealized holding gainforeign exchange rates. The effective portion of $8.5 million wasthe change in the value of these derivatives is recorded in available-for-sale securities,AOCI, net of tax effects.
On July 2, 2021, the Company entered into a cross-currency basis swap of a notional amount of $300 million, which matures on June 3, 2030. The cross-currency basis swap is designated as a hedge of net investments. This contract effectively converts a portion of the $750 million bond coupon from 3.3% to 1.7%, which will result in AOCI.a net reduction of Other expense (income), net.
AtOn May 25, 2021, the Company re-established its euro net investment hedge portfolio by entering into eight foreign exchange forward contracts, each with a notional amount of 10 million euro. The original contracts have quarterly maturity dates through March 2023 and the Company entered into additional foreign exchange contracts as individual contracts within the portfolio matured. As of December 31, 2016,2023, the euro net investment hedge portfolio has an aggregate notional value of 160 million euro with maturity dates through December 2025.
On July 20, 2023, the Company no longer has representation on the DIO Board of Directors andentered into a Swiss franc foreign exchange forward contract designated as a result the Company no longer has significant influence on the operationsnet investment hedge. The foreign exchange forward contract had a notional amount of DIO. In addition, the buyers of the convertible bonds exercised the conversion rights600 million Swiss francs. This net investment hedge was settled in September 2023 which resulted in DIO issuing additional shares and diluting the Company’s ownership position to 13%. Ascash receipts totaling $32 million. The Company subsequently entered into Swiss franc foreign exchange contracts designated as a resultnet investment hedge with a total notional amount of these changes the Company used the cost-basis method600 million Swiss francs. This portfolio of accounting for the remaining direct investment.contracts has semi-annual maturity dates through July 2028.
Fair Value Hedges
For the year ended December 31, 2017, theForeign Exchange Risk Management
The Company has reclassified the securityintercompany loans denominated in Swedish kronor that are exposed to volatility in currency exchange rates. The Company employs derivative financial instruments to hedge these exposures. The Company accounts for these designated foreign exchange forward contracts as available-for-sale. At December 31, 2017 the fair value is $54.4 million which is recorded in Prepaid expense and other current assetshedges. The Company measures the effectiveness of fair value 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 Consolidated Balance Sheets. The unrealized gain of $45.0 million isderivative fair value will be recorded in Other comprehensive income,expense (income), net of tax, in the Consolidated Statements of Comprehensive Income.Operations. The book valuetime-value component of the Company’s direct investment in DIO is $9.4 million and $8.2 million at December 31, 2017 and 2016, respectively. At December 31, 2016, the fair value of the direct investmentderivative is $63.4 million. reported on a straight-line basis in Other expense (income), net in the Consolidated Statements of Operations in the applicable period. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows.
Interest Rate Risk Management
On March 12, 2018,July 1, 2021, the Company entered into an agreementvariable interest rate swaps with a notional amount of $250 million, which effectively converted a portion of the underlying fixed rate of 3.3% on the $750 million Senior Notes due June 2030 to sell this investment.a variable interest rate. Of the $250 million notional amount, $100 million has a term of five-years maturing on June 1, 2026 and $150 million has a term of nine years maturing on March 1, 2030.
On February 13, 2024, the Company paid $9 million to settle the variable interest rate swap with a notional amount of $100 million which was originally set to mature on June 1, 2026. This closure of the interest rate swap will result in a loss of $8 million being amortized over the remaining life of the Senior Notes due June 2030.
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 liabilities that are denominated in a non-functional currency. The Company primarily uses foreign exchange forward contracts to hedge these risks. 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 in the Consolidated Statements of Operations. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows.
Derivative Instrument Activity
The effect of derivative hedging instruments on the Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2023 | | | | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
(in millions) | | Cost of products sold | | Interest expense, net | | Other (income) expense, net | | | | Cost of products sold | | Interest expense, net | | Other (income) expense, net | | Cost of products sold | | Interest expense, net | | Other (income) expense, net |
| | | | | | | | | | | | | | | | | | | | |
Total amounts of line items presented in the Consolidated Statements of Operations in which the effects of cash flow, net investment or fair value hedges are recorded | | $ | 1,879 | | | $ | 81 | | | $ | 9 | | | | | $ | 1,795 | | | $ | 65 | | | $ | 53 | | | $ | 1,884 | | | $ | 61 | | | $ | 2 | |
| | | | | | | | | | | | | | | | | | | | |
(Gain) loss on Cash Flow Hedges | | | | | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 1 | | | $ | — | | | $ | — | | | | | $ | (3) | | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | — | |
Interest rate swaps | | — | | | 3 | | | — | | | | | — | | | 3 | | | — | | | — | | | 4 | | | — | |
| | | | | | | | | | | | | | | | | | | | |
(Gain) loss on Hedges of Net Investment | | | | | | | | | | | | | | | | | | | | |
Cross currency basis swaps | | $ | — | | | $ | — | | | $ | (5) | | | | | $ | — | | | $ | — | | | $ | (5) | | | $ | — | | | $ | — | | | $ | (6) | |
Foreign exchange forward contracts | | — | | | — | | | (12) | | | | | — | | | — | | | (2) | | | — | | | — | | | (1) | |
| | | | | | | | | | | | | | | | | | | | |
(Gain) loss on Fair Value Hedges: | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | — | | | $ | 11 | | | $ | — | | | | | $ | — | | | $ | 1 | | | $ | — | | | $ | — | | | $ | (1) | | | $ | — | |
Foreign exchange forward contracts | | — | | | — | | | — | | | | | — | | | — | | | (27) | | | — | | | — | | | (24) | |
| | | | | | | | | | | | | | | | | | | | |
(Gain) loss on Derivative Instruments not Designated as Hedges | | | | | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | — | | | $ | — | | | $ | 8 | | | | | $ | — | | | $ | — | | | $ | (4) | | | $ | — | | | $ | — | | | $ | 9 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain or (Loss) Recognized in AOCI | | | | Amount of Gain or (Loss) Reclassified from AOCI into Income |
| | Year Ended December 31, | | Consolidated Statements of Operations Location | | Year Ended December 31, |
(in millions) | | 2023 | | 2022 | | 2021 | | | 2023 | | | | 2022 | | 2021 |
| | | | | | | | | | | | | | | | |
Cash Flow Hedges | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | — | | | $ | (1) | | | $ | 3 | | | Cost of products sold | | $ | (1) | | | | | $ | 3 | | | $ | (3) | |
Interest rate swaps | | — | | | — | | | — | | | Interest expense, net | | (3) | | | | | (3) | | | (4) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Hedges of Net Investments | | | | | | | | | | | | | | | | |
Cross currency basis swaps | | $ | (18) | | | $ | 30 | | | $ | 13 | | | Other expense (income), net | | $ | — | | | | | $ | — | | | $ | — | |
Foreign exchange forward contracts | | (29) | | | 11 | | | 10 | | | Other expense (income), net | | — | | | | | — | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Fair Value Hedges | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | — | | | $ | — | | | $ | — | | | Other expense (income), net | | $ | — | | | | | $ | — | | | $ | — | |
Foreign exchange forward contracts | | 2 | | | (2) | | | (1) | | | Interest expense, net | | — | | | | | — | | | — | |
Consolidated Balance Sheets Location of Derivative Fair Values
The fair value and the location of the Company’s derivatives in the Consolidated Balance Sheets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2023 |
(in millions) | | Prepaid Expenses and Other Current Assets | | Other Noncurrent Assets | | | | Other Noncurrent Liabilities |
| | | | | | | | |
Designated as Hedges: | | | | | | | | |
Foreign exchange forward contracts | | $ | 3 | | | $ | — | | | $ | 4 | | | $ | 47 | |
| | | | | | | | |
Interest rate swaps | | — | | | — | | | 9 | | | 19 | |
Cross currency basis swaps | | 4 | | | 4 | | | — | | | — | |
Total | | $ | 7 | | | $ | 4 | | | $ | 13 | | | $ | 66 | |
| | | | | | | | |
Not Designated as Hedges: | | | | | | | | |
Foreign exchange forward contracts | | $ | 5 | | | $ | — | | | $ | 5 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | 5 | | | $ | — | | | $ | 5 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
(in millions) | | Prepaid Expenses and Other Current Assets | | Other Noncurrent Assets | | Accrued Liabilities | | Other Noncurrent Liabilities |
| | | | | | | | |
Designated as Hedges: | | | | | | | | |
Foreign exchange forward contracts | | $ | 32 | | | $ | 3 | | | $ | 5 | | | $ | 2 | |
| | | | | | | | |
Interest rate swaps | | — | | | — | | | 9 | | | 25 | |
Cross currency basis swaps | | 4 | | | 22 | | | — | | | — | |
Total | | $ | 36 | | | $ | 25 | | | $ | 14 | | | $ | 27 | |
| | | | | | | | |
Not Designated as Hedges: | | | | | | | | |
Foreign exchange forward contracts | | $ | 3 | | | $ | — | | | $ | 5 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | 3 | | | $ | — | | | $ | 5 | | | $ | — | |
Balance Sheet Offsetting
Substantially all the Company’s derivative contracts are subject to netting arrangements; whereby the right to offset occurs in the event of default or termination in accordance with the terms of the 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 in the Consolidated Balance Sheets.
Offsetting of financial assets and liabilities under netting arrangements at December 31, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in millions) | | Gross Amounts Recognized | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount |
| | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 8 | | | $ | — | | | $ | 8 | | | $ | (5) | | | $ | — | | | $ | 3 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cross currency basis swaps | | 8 | | | — | | | 8 | | | (4) | | | — | | | 4 | |
| | | | | | | | | | | | |
Total assets | | $ | 16 | | | $ | — | | | $ | 16 | | | $ | (9) | | | $ | — | | | $ | 7 | |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 56 | | | $ | — | | | $ | 56 | | | $ | (7) | | | $ | — | | | $ | 49 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Interest rate swaps | | 28 | | | — | | | 28 | | | (2) | | | — | | | 26 | |
| | | | | | | | | | | | |
Total liabilities | | $ | 84 | | | $ | — | | | $ | 84 | | | $ | (9) | | | $ | — | | | $ | 75 | |
Offsetting of financial assets and liabilities under netting arrangements at December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in millions) | | Gross Amounts Recognized | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount |
| | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 38 | | | $ | — | | | $ | 38 | | | $ | (7) | | | $ | — | | | $ | 31 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cross currency basis swaps | | 26 | | | — | | | 26 | | | (12) | | | — | | | 14 | |
Total assets | | $ | 64 | | | $ | — | | | $ | 64 | | | $ | (19) | | | $ | — | | | $ | 45 | |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 12 | | | $ | — | | | $ | 12 | | | $ | (10) | | | $ | — | | | $ | 2 | |
Interest rate swaps | | 34 | | | — | | | 34 | | | (9) | | | — | | | 25 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total liabilities | | $ | 46 | | | $ | — | | | $ | 46 | | | $ | (19) | | | $ | — | | | $ | 27 | |
NOTE 20 - FAIR VALUE MEASUREMENT
The estimated fair value and carrying value of the Company’s total debt was $2,018 million and $2,118 million, respectively, at December 31, 2023. At December 31, 2022, the estimated the fair value and carrying value was $1,769 million and $1,944 million, respectively. The fair value of long-term debt is based on recent trade information in the financial markets of the Company’s public debt or is determined by discounting future cash flows using interest rates available at December 31, 2023 to companies with similar credit ratings for issues with similar terms and maturities. It is considered a Level 2 fair value measurement for disclosure purposes.
Assets and liabilities measured at fair value on a recurring basis
The Company’s financial assets and liabilities set forth by level within the fair value hierarchy that were accounted for at fair value on a recurring basis were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2023 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Cross currency interest rate swaps | | $ | 8 | | | $ | — | | | $ | 8 | | | $ | — | |
Foreign exchange forward contracts | | 8 | | | — | | | 8 | | | — | |
| | | | | | | | |
Total assets | | $ | 16 | | | $ | — | | | $ | 16 | | | $ | — | |
| | | | | | | | |
Liabilities | | | | | | | | |
Interest rate swaps | | $ | 28 | | | $ | — | | | $ | 28 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
Foreign exchange forward contracts | | 56 | | | — | | | 56 | | | — | |
| | | | | | | | |
Contingent considerations on acquisitions | | 4 | | | — | | | — | | | 4 | |
| | | | | | | | |
Total liabilities | | $ | 88 | | | $ | — | | | $ | 84 | | | $ | 4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Cross currency interest rate swaps | | $ | 26 | | | $ | — | | | $ | 26 | | | $ | — | |
Foreign exchange forward contracts | | 38 | | | — | | | 38 | | | — | |
| | | | | | | | |
| | | | | | | | |
Total assets | | $ | 64 | | | $ | — | | | $ | 64 | | | $ | — | |
| | | | | | | | |
Liabilities | | | | | | | | |
Interest rate swaps | | $ | 34 | | | $ | — | | | $ | 34 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
Foreign exchange forward contracts | | 12 | | | — | | | 12 | | | — | |
| | | | | | | | |
Contingent considerations on acquisitions | | 4 | | | — | | | — | | | 4 | |
| | | | | | | | |
Total liabilities | | $ | 50 | | | $ | — | | | $ | 46 | | | $ | 4 | |
Derivative valuations are based on observable inputs to the valuation model including interest rates, foreign currency exchange rates, and credit risks. The Company utilizes interest rates swaps and foreign exchange forward contracts that are considered cash flow hedges. In addition, the Company at times employs certain cross currency interest rate swaps and foreign exchange forward contracts that are considered hedges of net investment in foreign operations. Both types of designated derivative instruments are further discussed in Note 19, Financial Instruments and Derivatives.
Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3)
The Company’s Level 3 liabilities at December 31, 2023 are related to earn-out obligations from acquisitions and licensing arrangements. The following table presents a reconciliation of the Company’s Level 3 holdings measured at fair value on a recurring basis using unobservable inputs:
| | | | | | | | | | | | |
| | | | | | |
(in millions) | | Level 3 | | | | |
| | | | | | |
Balance, December 31, 2021 | | $ | 10 | | | | | |
| | | | | | |
| | | | | | |
Payments | | (6) | | | | | |
| | | | | | |
Balance, December 31, 2022 | | $ | 4 | | | | | |
| | | | | | |
| | | | | | |
Payments | | — | | | | | |
| | | | | | |
Balance, December 31, 2023 | | $ | 4 | | | | | |
There were no additional purchases or transfers of Level 3 financial instruments in 2023 and 2022.
NOTE 521 - SEGMENTCOMMITMENTS AND GEOGRAPHIC INFORMATIONCONTINGENCIES
Contingencies
On June 7, 2018, and August 9, 2018, two putative class action suits were filed, and later consolidated, in the Supreme Court of the State of New York, County of New York claiming that the Company and certain individual defendants, violated U.S. securities laws (the “State Court Action”) by making material misrepresentations and omitting required information in the December 4, 2015 registration statement filed with the SEC in connection with the 2016 merger of Sirona Dental Systems Inc. (“Sirona”) with DENTSPLY International Inc. (the “Merger”). The operating businessesamended complaint alleges that the defendants failed to disclose, among other things, that a distributor had purchased excessive inventory of legacy Sirona products and that three distributors of the Company’s products had been engaging in anticompetitive conduct. The plaintiffs seek to recover damages on behalf of a class of former Sirona shareholders who exchanged their shares for shares of the Company’s stock in the Merger. On September 26, 2019, the Court granted the Company’s motion to dismiss all claims and a judgment dismissing the case was subsequently entered. On February 4, 2020, the Court denied plaintiffs’ post-judgment motion to vacate or modify the judgment and to grant them leave to amend their complaint. The plaintiffs appealed the dismissal and the denial of the post-judgment motion to the Supreme Court of the State of New York, Appellate Division, First Department, and the Company cross-appealed select rulings in the Court’s decision dismissing the action. The plaintiffs’ appeals and the Company’s cross-appeal were consolidated and argued on January 12, 2021. On February 2, 2021, the Appellate Division issued its decision upholding the dismissal of the State Court Action with prejudice on statute of limitations grounds. The Plaintiffs did not appeal the Appellate Division decision.
On December 19, 2018, a related putative class action was filed in the U.S. District Court for the Eastern District of New York against the Company and certain individual defendants. The plaintiff makes similar allegations and asserts the same claims as those asserted in the State Court Action. In addition, the plaintiff alleges that the defendants violated U.S. securities laws by making false and misleading statements in quarterly and annual reports and other public statements between February 20, 2014, and August 7, 2018. The plaintiff asserts claims on behalf of a putative class consisting of (a) all purchasers of the Company’s stock during the period February 20, 2014 through August 7, 2018 and (b) former shareholders of Sirona who exchanged their shares of Sirona stock for shares of the Company’s stock in the Merger. The Company moved to dismiss the amended complaint on August 15, 2019. The plaintiff filed its second amended complaint on January 22, 2021, and the Company filed a motion to dismiss the second amended complaint on March 8, 2021, with briefing on the motion fully submitted on May 21, 2021. The Company’s motion to dismiss was denied in a ruling by the Court on March 29, 2023 and the Company’s answer to the second amended complaint was filed on May 12, 2023. On September 29, 2023, the plaintiff filed a motion for class certification. The Company’s opposition to the plaintiff’s motion for class certification was filed on February 8, 2024, with briefing on the plaintiff’s motion to be fully completed by April 10, 2024.
On June 2, 2022, the Company was named as a defendant in a putative class action filed in the U.S. District Court for the Southern District of Ohio captioned City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. Casey, Jr. et al., No. 2:22-cv-02371 (S.D. Ohio), and on July 28, 2022, the Company was named as a defendant in a putative class action filed in the U.S. District Court for the Southern District of New York captioned San Antonio Fire and Police Pension Fund v. Dentsply Sirona Inc. et al., No. 1:22-cv-06339 (together, the “Securities Litigation”). The complaints in the Securities Litigation are combinedsubstantially similar and both allege that, during the period from June 9, 2021 through May 9, 2022, the Company, Mr. Donald M. Casey Jr., the Company’s former Chief Executive Officer, and Mr. Jorge Gomez, the Company’s former Chief Financial Officer, violated U.S. securities laws by, among other things, making materially false and misleading statements or omissions, including regarding the manner in which the Company recognized revenue tied to distributor rebate and incentive programs. On March 27, 2023, the Court in the Southern District of Ohio ordered the transfer of the putative class action to the Southern District of New York (the “Court”). On June 1, 2023, the Court consolidated the two separate actions under case No. 1:22-cv-06339 and appointed the City of Birmingham Retirement and Relief System, the El Paso Firemen & Policemen’s Pension Fund, and the Wayne County Employees’ Retirement System as Lead Plaintiffs for the putative class. Lead Plaintiffs filed an amended class action complaint on July 28, 2023 (the “Amended Complaint”). In addition to asserting the same claims against the Company, Mr. Casey, and Mr. Gomez, the Amended Complaint added the Company’s former Chief Accounting Officer, Mr. Ranjit S. Chadha, as a defendant (collectively, “Defendants”). On October 10, 2023, Defendants filed a motion to dismiss the Amended Complaint. Lead Plaintiffs’ opposition to Defendants’ motion to dismiss was filed on December 8, 2023, and Defendants’ reply was filed on January 8, 2024. The motion to dismiss is still pending.
In addition to the Securities Litigation, as previously disclosed, the Company voluntarily contacted the SEC following the Company’s announcement on May 10, 2022, of the Audit and Finance Committee’s internal investigation. The Company continues to cooperate with the SEC regarding this matter.
Separately, on July 13, 2023, Dentsply Sirona stockholder George Presura filed a shareholder derivative suit in the Delaware Court of Chancery captioned George Presura, Derivatively on Behalf of Nominal Defendant Dentsply Sirona Inc. v. Donald M. Casey Jr. et al. and Dentsply Sirona, Inc., No. 2023-0708-NAC (the “Derivative Litigation”). The complaint, filed derivatively on behalf of the Company, asserts claims against current and former members of the Company’s Board of Directors and current and former executive officers, including Messrs. Casey and Gomez. The derivative complaint in this case contains allegations similar to those in the Securities Litigation, and it alleges that during the period from June 9, 2021 through July 13, 2023, various of the defendants breached fiduciary duties, committed corporate waste, and misappropriated information to conduct insider trading by making materially false and misleading statements or omissions regarding the Company’s recognition of revenue tied to distributor rebate and incentive programs and distributor inventory levels. On August 4, 2023, the Delaware Court of Chancery stayed the Derivative Litigation until the earlier of a public announcement of a settlement of the Securities Litigation or a resolution of the pending motion to dismiss in the Securities Litigation.
On March 21, 2023, Mr. Carlo Gobbetti filed a claim in the Milan Chamber of Arbitration against Dentsply Sirona Italia S.r.l. (“DSI”), Italy, a wholly owned subsidiary of the Company, seeking a total of €28 million for the alleged failure to pay a portion of the purchase price pursuant to a Share Purchase Agreement, dated October 8, 2012 (the “SPA”), in which Sirona Dental Systems, S.r.l., which at the time of the SPA’s execution was a wholly-owned subsidiary of Sirona Dental Systems, Inc., acquired all of the shares of MHT S.p.A., an Italian corporation, from Mr. Gobbetti, and various other sellers. Sirona Dental Systems S.r.l. merged into two operating groups,Dentsply Italia S.r.l. in 2018 (the surviving entity is now Dentsply Sirona Italia S.r.l.). In connection with the closing of that transaction, SIRONA Dental Systems GmbH paid an amount equal to €7 million into an escrow account (the “Escrow Account”). The proceeds of the Escrow Account were to be released to Mr. Gobbetti and the other sellers upon the satisfaction of certain conditions, including the delivery by July 2013 of a new prototype of an MHT S.p.A. camera which generally have overlapping geographical presence, customer bases, distribution channels,had to meet certain specifications. Mr. Gobbetti claims that he is entitled to receive the €7 million outstanding balance of the purchase price under the SPA, plus €21 million for damages incurred as a consequence of the failure to make the payment. Mr. Gobbetti claims that he has a right to receive the full purchase price under the SPA even if the conditions set out in the SPA to deliver a prototype of the MHT S.p.A. camera by July 2013 were not met. On May 15, 2023, DSI filed its initial statement of defense denying that Mr. Gobbetti and regulatory oversight. Certain reclassificationsthe other sellers were entitled to receive the funds deposited in the Escrow Account and further disputing the allegations. Following the constitution of the arbitral tribunal, hearings were held on September 13, 2023 and January 19, 2024, to illustrate and discuss their respective positions. The Parties were also permitted to further develop their arguments in one additional round of defensive briefs. On January 29, 2024, the Parties filed a statement setting out their final pleadings. The Arbitral Court eventually decided that the procedural issues raised by DSI (jurisdiction, capacity to be sued) will be considered together with the merits and granted the Parties final deadlines to file their respective final briefs (March 29, 2024) and replies (April 15, 2024). The final hearing has been scheduled for May 8, 2024.
Except as noted above, no specific amounts of damages have been madealleged in these lawsuits. The Company will continue to prior years’ dataincur legal fees in orderconnection with these pending cases, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations. The expense of continuing to conformdefend such litigation may be significant. The Company intends to current year presentation. During the quarter ended September 30, 2017,defend these lawsuits vigorously, but there can be no assurance that the Company realigned reporting responsibilitieswill be successful in any defense. If any of the lawsuits are decided adversely, the Company may be liable for multiple businesses,significant damages directly or under our indemnification obligations, which could adversely affect our business, results of operations and cash flows. At this stage, the Company is unable to assess whether any material loss or adverse effect is reasonably possible as a result of these lawsuits or estimate the range of any potential loss.
The Internal Revenue Service (“IRS”) conducted an examination of the U.S. federal income tax returns for tax years 2012 through 2014. In February 2019, the IRS issued to the Company a retirement“30-day letter” and a Revenue Agent’s Report (“RAR”), relating to the Company’s worthless stock deduction in 2013 in the amount of one$546 million. The RAR disallows the deduction and, after adjusting the Company’s net operating loss carryforward, asserts that the Company is entitled to a refund of $5 million for 2012, has no tax liability for 2013, and owes a deficiency of $17 million in tax for 2014, excluding interest. In accordance with ASC 740, the Company recorded the tax benefit associated with the worthless stock deduction in the Company’s 2012 financial statements. In March 2019, the Company submitted a formal protest disputing on multiple grounds the proposed taxes. The Company and its advisors discussed its position with the IRS Independent Office of Appeals (the “Appeals Office”) in October 2020, and in November 2020 submitted a supplemental response to questions raised by the Appeals Office. During the first quarter of 2023, after an extended review by the Appeals Office, the Company received a notice from the IRS, allowing the Company’s worthless stock deduction for tax year 2013. As a result, the Company received a refund of $5 million for tax year 2012 with no further adjustments to the 2013 or 2014 tax return.
The IRS is conducting an examination of our U.S. federal income tax returns for the tax years 2015 through 2016. The Company received a Notice of Proposed Adjustment in April 2023 and a Revenue Agent Report in January 2024 from the IRS examination team proposing an adjustment related to an internal reorganization completed in 2016 with respect to the integration of certain operations of Sirona Dental Systems, Inc. following its acquisition in 2016. Although the proposed adjustment does not result in any additional federal income tax liability for the internal reorganization, if sustained, the proposed adjustment would result in the Company owing additional federal income taxes on a distribution of $451 million related to a stock redemption that occurred after the internal reorganization was completed in 2016. The amount of additional federal income taxes due for 2016 is approximately $2 million, excluding interest. The proposed adjustment, if sustained, would also result in a loss of foreign tax credits carried forward to later tax years. We believe that we accurately reported the federal income tax consequences of the internal restructuring and stock redemption in our tax returns and will submit an administrative protest with the IRS Independent Office of Appeals contesting the examination team’s proposed adjustments. We intend to vigorously defend our reported positions and believe that it is more likely than not that our position will be sustained. The Company has not accrued a liability relating to the proposed tax adjustments. However, the outcome of this dispute involves a number of uncertainties, including those relating to the application of the Internal Revenue Code and other federal income tax authorities and judicial precedent. Accordingly, there can be no assurance that the dispute with the IRS will be resolved favorably.
The Company intends to vigorously defend its positions and pursue related appeals, where appropriate, in the above-described pending matters.
In addition to the matters disclosed above, the Company is, from time to time, subject to a variety of litigation and similar proceedings incidental to its business. These legal matters primarily involve claims for damages arising out of the use of the Company’s then Chief Operating Officers, into three operating segments. Furthermore,products and services and claims relating to intellectual property matters including patent 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 because of past or future acquisitions or as a result of changesliabilities retained from, or representations, warranties or indemnities provided in connection with, divested businesses. Some of these lawsuits may include claims for punitive, consequential, and compensatory damages. Except as otherwise noted, the Company generally cannot predict the eventual outcomes, the timing of the ultimate resolutions, or the eventual loss, fines or penalties related to these pending matters. 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 senior management level duringevent of unexpected further developments, it is possible that the quarter endedultimate 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.
While the Company maintains general, product, property, workers’ compensation, automobile, cargo, aviation, crime, fiduciary and directors’ and officers’ liability insurance up to certain limits that cover certain of these claims, this insurance may be insufficient or unavailable to cover such losses. In addition, while the 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.
Commitments
Purchase Commitments
The Company has certain non-cancelable future commitments primarily related to long-term supply contracts for key components and raw materials. At December 31, 2017, the Company realigned reporting responsibilities into two operating segments. The segment information below reflects the revised fourth quarter organizational structure for all periods shown. No goodwill was reallocated and2023, non-cancelable purchase commitments are as follows:
| | | | | | | | |
(in millions) | | |
| | |
| | |
2024 | | $ | 193 | |
2025 | | 77 | |
2026 | | 59 | |
2027 | | 6 | |
2028 | | — | |
Thereafter | | — | |
Total | | $ | 335 | |
Off-Balance Sheet Arrangements
As of December 31, 2023, we had no changematerial off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in the numbersections above.
Indemnification
In the normal course of reporting units as a result of the change in segments.
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 informationbusiness to manage the Company’s operations. The Company evaluates performance of the segments based on the groups’ net third party sales, excluding precious metal content, and segment adjusted operating income. The Company defines net third party sales excluding precious metal content as the Company’s net sales excluding the precious metal cost within the products sold, which is considered a measure not calculated in accordance with US GAAP, and is therefore considered a non-US GAAP measure. Management believes that the presentation of net sales, excluding precious metal content, provides useful information to investors because a portion of Dentsply Sirona’s net sales is comprised offacilitate 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 Sirona 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 Company’s exclusion of precious metal content in the measurement of net third party sales enhances comparability of performance between periods as it excludes the fluctuating market prices of the precious metal content. The Company also evaluates segment performance based on each segment’s adjusted operating income before provision for income taxes and interest. Segment adjusted operating income is defined as operating income before income taxes and before certain corporate headquarter unallocated costs, restructuring and other costs, interest expense, interest income, other expense (income), net, amortization of intangible assets and depreciation resulting from the fair value step-up of property, plant and equipment from acquisitions. The Company’s segment adjusted operating income is considered a non-US GAAP measure. A description of theour products and services, we indemnify certain parties: customers, vendors, lessors, and other parties with respect to certain matters, including, but not limited to, services to be provided by us and intellectual property infringement claims made by third parties. In addition, we have indemnification agreements with our directors and our executive officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. Several of these agreements limit the time within eachwhich an indemnification claim can be made and the amount of the Company’s two operating segmentsclaim.
It is provided below.
Technologies & Equipment
This segment includes responsibility for the worldwide design, manufacture, sales and distributionnot possible to make a reasonable estimate of the Company’s Dental Technologymaximum potential amount under these indemnification agreements due to the unique facts and Equipment Productscircumstances involved in each agreement. Additionally, we have a limited history of prior indemnification claims and Healthcare Consumable Products. These products includes dental implants, laboratory dental products, CAD/CAM systems, imaging systems, treatment centersthe payments made under such agreements have not had a material effect on our results of operations, cash flows or financial position. Except as wellnoted in the “Contingencies” section herein, as consumable medical device products.
Consumables
This segment is responsible for the worldwide design, manufacture, sales and distribution of the Company’s Dental Consumable Products which include preventive, restorative, instruments, endodontic, and orthodontic dental products.
The following table sets forth information about the Company’s segments for the years ended December 31, 2017, 20162023, we did not have any material indemnification claims that were probable or reasonably possible. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and 2015.could have a material adverse effect on our results of operations or cash flows in a particular period.
|
| | | | | | | | | | | | |
Third Party Net Sales | | | | | | |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Technologies & Equipment | | $ | 2,200.8 |
| | $ | 2,050.5 |
| | $ | 1,112.7 |
|
Consumables | | 1,792.6 |
| | 1,694.8 |
| | 1,561.6 |
|
Total net sales | | $ | 3,993.4 |
| | $ | 3,745.3 |
| | $ | 2,674.3 |
|
|
| | | | | | | | | | | | |
Third Party Net Sales, Excluding Precious Metal Content | | | | | | |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Technologies & Equipment | | $ | 2,160.3 |
| | $ | 1,986.4 |
| | $ | 1,019.9 |
|
Consumables | | 1,792.6 |
| | 1,694.6 |
| | 1,561.6 |
|
Total net sales, excluding precious metal content | | $ | 3,952.9 |
| | $ | 3,681.0 |
| | $ | 2,581.5 |
|
Precious metal content of sales | | 40.5 |
| | 64.3 |
| | 92.8 |
|
Total net sales, including precious metal content | | $ | 3,993.4 |
| | $ | 3,745.3 |
| | $ | 2,674.3 |
|
SCHEDULE II
DENTSPLY SIRONA INC. AND SUBSIDIARIES |
| | | | | | | | | | | | |
Depreciation and Amortization | | | | | | |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Technologies & Equipment | | $ | 257.5 |
| | $ | 218.1 |
| | $ | 75.9 |
|
Consumables | | 57.5 |
| | 52.6 |
| | 38.9 |
|
All Other (a) | | 1.4 |
| | 1.0 |
| | 8.1 |
|
Total | | $ | 316.4 |
| | $ | 271.7 |
| | $ | 122.9 |
|
| |
(a) | Includes amounts recorded at Corporate headquarters. |
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2023, 2022, and 2021 |
| | | | | | | | | | | | |
Segment Operating Income (Loss) | | | | | | |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Technologies & Equipment | | $ | 411.0 |
| | $ | 355.7 |
| | $ | 159.1 |
|
Consumables | | 487.1 |
| | 445.3 |
| | 443.2 |
|
Segment adjusted operating income before income taxes and interest | | $ | 898.1 |
| | $ | 801.0 |
| | $ | 602.3 |
|
| | | | | | |
Reconciling Items (income) expense: | | |
| | |
| | |
|
All Other (a) | | 189.0 |
| | 162.8 |
| | 116.9 |
|
Restructuring and other costs | | 425.2 |
| | 23.2 |
| | 64.7 |
|
Goodwill Impairment | | 1,650.9 |
| | — |
| | — |
|
Interest expense | | 38.3 |
| | 35.9 |
| | 55.9 |
|
Interest income | | (2.4 | ) | | (2.0 | ) | | (2.2 | ) |
Other expense (income), net | | 5.3 |
| | (20.1 | ) | | (8.2 | ) |
Amortization of intangible assets | | 189.1 |
| | 155.3 |
| | 43.7 |
|
Depreciation resulting from the fair value step-up of property, plant and equipment from business combinations | | 6.2 |
| | 5.0 |
| | 1.8 |
|
Income before income taxes | | $ | (1,603.5 | ) | | $ | 440.9 |
| | $ | 329.7 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Additions | | | | | | |
Description | | 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 |
| | | | | | |
(in millions) | | | | | | |
| | | | | | | | | | | | |
Allowance for doubtful accounts: | | | | | | | | | | |
| | | | | | | | |
For the Year Ended December 31, | | | | | | | | |
2021 | | $ | 18 | | | $ | 2 | | | $ | (3) | | | $ | (2) | | | $ | (2) | | | $ | 13 | |
2022 | | 13 | | | 7 | | | (2) | | | (3) | | | (1) | | | 14 | |
2023 | | 14 | | | 6 | | | (1) | | | (3) | | | 1 | | | 17 | |
| | | | | | | | | | | | |
Inventory valuation reserve: | | | | | | | | | | |
| | | | | | | | | | | | |
For the Year Ended December 31, | | | | | | | | |
2021 | | $ | 117 | | | $ | 17 | | | $ | — | | | $ | (41) | | | $ | (7) | | | $ | 86 | |
2022 | | 86 | | | 20 | | | — | | | (17) | | | (7) | | | 82 | |
2023 | | 82 | | | 39 | | | — | | | (18) | | | 4 | | | 107 | |
| | | | | | | | | | | | |
Deferred tax asset valuation allowance: | | | | | | | | |
| | | | | | | | |
For the Year Ended December 31, | | | | | | | | |
2021 | | $ | 287 | | | $ | (10) | | | $ | — | | | $ | (3) | | | $ | (7) | | | $ | 267 | |
2022 (a) | | 267 | | | 3 | | | 382 | | | (1) | | | (6) | | | 645 | |
2023 | | 645 | | | 279 | | | 4 | | | (70) | | | 5 | | | 863 | |
(a) Includes results of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments.
|
| | | | | | | | | | | | |
Capital Expenditures | | | | | | |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Technologies & Equipment | | $ | 98.6 |
| | $ | 73.7 |
| | $ | 22.1 |
|
Consumables | | 37.6 |
| | 42.2 |
| | 39.1 |
|
All Other (a) | | 8.1 |
| | 9.1 |
| | 10.8 |
|
Total | | $ | 144.3 |
| | $ | 125.0 |
| | $ | 72.0 |
|
(a) Includes capital expenditures of Corporate headquarters.
|
| | | | | | | | |
Assets | | | | |
(in millions) | | 2017 | | 2016 |
| | | | |
Technologies & Equipment | | $ | 8,130.6 |
| | $ | 9,667.0 |
|
Consumables | | 1,965.1 |
| | 1,445.1 |
|
All Other (a) | | 278.8 |
| | 443.7 |
|
Total | | $ | 10,374.5 |
| | $ | 11,555.8 |
|
(a) Includes results 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 operationsincrease charged to other accounts represents an increase in different geographic areas for the years ended December 31, 2017, 2016 and 2015. 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-liveddeferred tax assets held by the operating businesses located in the respective geographic areas.
|
| | | | | | | | | | | | | | | | | | | |
(in millions) | United States | | Germany | | Sweden | | Other Foreign | | Consolidated |
| | | | | | | | | |
2017 | | | | | | | | | |
Net sales | $ | 1,376.5 |
| | $ | 493.3 |
| | $ | 52.4 |
| | $ | 2,071.2 |
| | $ | 3,993.4 |
|
Property, plant and equipment, net | 202.0 |
| | 331.5 |
| | 103.4 |
| | 239.1 |
| | 876.0 |
|
| | | | | | | | | |
2016 | |
| | |
| | | | |
| | |
|
Net sales | $ | 1,383.0 |
| | $ | 617.0 |
| | $ | 53.2 |
| | $ | 1,692.1 |
| | $ | 3,745.3 |
|
Property, plant and equipment, net | 192.5 |
| | 244.1 |
| | 82.5 |
| | 280.7 |
| | 799.8 |
|
| | | | | | | | | |
2015 | |
| | |
| | | | |
| | |
|
Net sales | $ | 1,027.4 |
| | $ | 472.8 |
| | $ | 42.3 |
| | $ | 1,131.8 |
| | $ | 2,674.3 |
|
Property, plant and equipment, net | 178.5 |
| | 92.1 |
| | 92.3 |
| | 195.9 |
| | 558.8 |
|
Product and Customer Information
The following table presents net sales information by product category:
|
| | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Dental consumables products | | $ | 1,769.7 |
| | $ | 1,770.3 |
| | $ | 1,671.1 |
|
Dental technology and equipment products | | 1,895.7 |
| | 1,658.6 |
| | 687.7 |
|
Healthcare consumable products | | 328.0 |
| | 316.4 |
| | 315.5 |
|
Total net sales | | $ | 3,993.4 |
| | $ | 3,745.3 |
| | $ | 2,674.3 |
|
Dental Consumable Products
Dental consumable products consist of value added dental supplies and small equipment used in dental offices for the treatment of patients. It also includes specialized treatment products used within the dental office and laboratory settings including products used in the preparation of dental appliances by dental laboratories.
Dentsply Sirona’s dental supplies include endodontic (root canal) instruments and materials, dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, tooth whiteners and topical fluoride. Small equipment products include dental handpieces, intraoral curing light systems, dental diagnostic systems and ultrasonic scalers and polishers.
The Company’s products used in the dental laboratories include dental prosthetics, including artificial teeth, precious metal dental alloys, dental ceramics and crown and bridge materials. Dental laboratory equipment products include porcelain furnaces.
Dental Technology and Equipment Products
Dental technology products consist of high-tech state-of-art dental implants and related scanning equipment and treatment software, orthodontic appliances for dental practitioners and specialist and dental laboratories. The product category also includes basic and high-tech dental equipment such as treatment centers, imaging equipment and computer aided design and machining “CAD/CAM” systems equipment for dental practitioners and laboratories. The Company offers the broadest line of products to fully outfit a dental practitioner’s office.
Treatment centers comprise a broad range of products from basic dentist chairs to sophisticated chair-based units with integrated diagnostic, hygiene and ergonomic functionalities, as well as specialist centers used in preventative treatment and for training purposes. Imaging systems consist of a broad range of diagnostic imaging systems for 2D or 3D, panoramic, and intra-oral applications. Dental CAD/CAM Systems are products designed for dental offices and laboratories used for dental restorations, which includes several types of restorations, such as inlays, onlays, veneers, crowns, bridges, copings and bridge frameworks made from ceramic, metal or composite blocks. This product line also includes high-tech CAD/CAM techniques of CEramic REConstruction, or CEREC equipment. This equipment allows for in-office application that enables dentists to produce high quality restorations from ceramic material and insert them into the patient’s mouth during a single appointment. CEREC has a number of advantages compared to the traditional out-of-mouth pre-shaped restoration method, as CEREC does not requirere-establishment of Luxembourg net operating loss carryforwards for which a physical model, restorations can be createdcorresponding increase to the valuation allowance was also recorded, with no net impact to tax expense.
Item 9. Changes in the dentist’s office and the procedure can be completed in a single visit.Disagreements with Accountants on Accounting and Financial Disclosure
Healthcare Consumable ProductsNone.
Healthcare consumable products consist mainly of urology catheters, certain surgical products, medical drills and other non-medical products.
Concentration Risk
For the year ended December 31, 2017, one customer accounted for approximately 15% of consolidated net sales. At December 31, 2017, two customers each accounted for approximately 14% and 15% of the consolidated accounts receivable balance. For the year ended December 31, 2016, two customers accounted for approximately 12% each of consolidated net sales. At December 31, 2016, one customer accounted for 17% of the consolidated accounts receivable balance. For the year ended December 31, 2015, the Company had one customer that accounted for approximately 11% percent of consolidated net sales. At December 31, 2015, there were no customers that accounted for ten percent or more of the consolidated accounts receivable balance. For the years ended December 31, 2017, 2016 and 2015, third party export sales from the U.S. were less than ten percent of consolidated net sales.
NOTE 6 - OTHER EXPENSE (INCOME), NET
Other expense (income), net, consists of the following:
|
| | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Foreign exchange transaction loss (gain) | | $ | 1.7 |
| | $ | (10.2 | ) | | $ | (5.2 | ) |
Other expense (income), net | | 3.6 |
| | (9.9 | ) | | (3.0 | ) |
Total other expense (income), net | | $ | 5.3 |
| | $ | (20.1 | ) | | $ | (8.2 | ) |
NOTE 7 - INVENTORIES, NET
Inventories are stated at the lower of cost and net realizable value. The cost of inventories determined by the last-in, first-out (“LIFO”) method at December 31, 2017, and December 31, 2016, were $12.4 million and $8.6 million, respectively. The cost of remaining inventories was determined by using the first-in, first-out (“FIFO”) or average cost methods. If the FIFO method had been used to determine the cost of LIFO inventories, the amount at which net inventories are stated would be higher than reported at December 31, 2017 and December 31, 2016 by $10.6 million and $6.8 million, respectively.
Inventories, net of inventory valuation reserve, consist of the following:
|
| | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 |
| | | | |
Finished goods | | $ | 387.6 |
| | $ | 311.3 |
|
Work-in-process | | 90.4 |
| | 77.1 |
|
Raw materials and supplies | | 145.1 |
| | 128.7 |
|
Inventories, net | | $ | 623.1 |
| | $ | 517.1 |
|
The Company’s inventory valuation reserve was $71.7 million and $37.5 million at December 31, 2017 and 2016, respectively.
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT, NETItem 9A. Controls and Procedures
Property, plantConclusion Regarding the Effectiveness of Disclosure Controls and equipment, net, consist ofProcedures
The Company’s management, with the
following |
| | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 |
| | | | |
Assets, at cost: | | | | |
Land | | $ | 58.7 |
| | $ | 52.8 |
|
Buildings and improvements | | 554.7 |
| | 500.4 |
|
Machinery and equipment | | 1,367.5 |
| | 1,218.8 |
|
Construction in progress | | 91.6 |
| | 82.9 |
|
| | 2,072.5 |
| | 1,854.9 |
|
Less: Accumulated depreciation | | 1,196.5 |
| | 1,055.1 |
|
Property, plant and equipment, net | | $ | 876.0 |
| | $ | 799.8 |
|
NOTE 9 - GOODWILL AND INTANGIBLE ASSETS
The Company performed the required annual impairment tests of goodwill at April 30, 2017 on eleven reporting units. To determine the fair valueparticipation of the Company’s reporting units,Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of 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. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of December 31, 2023, 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 uses a discounted cash flow model with market-based supportin reports filed or submitted under the Securities Exchange Act of 1934, as its valuation technique to measureamended, is recorded, processed, summarized and reported, within the fair value for its reporting units. The discounted cash flow model uses five- to ten-year forecasted cash flows plus a terminal value based on a multiple of earnings or by capitalizing the last period’s cash flows using a perpetual growth rate. In the development of the forecasted cash flows, the Company applies revenue, gross profit, and operating expense assumptions taking into consideration historical trends as well as futures expectations. These future expectations include, but are not limited to, new product development and distribution channel changes for the respective reporting units. The Company also considers the current and projected market conditions for dental and medical device industries, bothtime periods specified in the U.S.SEC’s rules and globally, when determining its assumptions. The total forecasted cash flows were discounted basedforms and that it is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on a range between 7.8% to 9.5%, which included assumptions regarding the Company’s weighted-average costInternal Control Over Financial Reporting and Report of capital. The use of estimates and the development of assumptions results in uncertainties around forecasted cash flows. A change in any of these estimates and assumptions could produce a different fair value, which could have a material impactIndependent Registered Public Accounting Firm
Management’s report on the Company’s results of operations.
Unfavorable developments in the market for the dental or medical device industries, an increase in discounts rates, unfavorable changes in earnings multiples or a decline in future cash flow projections, among other factors, may cause a change in circumstances indicating that the carry value of the indefinite-lived assets and goodwill within the Company’sinternal control over financial reporting units may not be recoverable.
As a result of updating the estimates and assumptions following recent changes in circumstances, and in connection with the annual impairment tests of goodwill and the preparationreport of our independent registered public accounting firm on the effectiveness of our internal control over financial statements for the three months ended June 30, 2017, the Company determined that the goodwill associated with the CAD/CAM, Imaging and Treatment Center equipment reporting units were impaired. As a result, the Company recorded a goodwill impairment chargeare included under Item 8 of $1,092.9 million. The CAD/CAM, Imaging and Treatment Center reporting units are all within the Technologies & Equipment segment.this Form 10-K.
The goodwill impairment charge that was takenChanges in the second quarter of 2017 was primarily driven by unfavorableInternal Control Over Financial Reporting
There have been no changes in estimates and assumptions used to forecast discounted cash flows, including lower forecasted revenues and operating margin rates, which resulted in a lower fair value for the CAD/CAM, Imaging and Treatment Center equipment reporting units. The forecasted revenues and operating margin rates were negatively impacted by recent unfavorable developments in the marketplace. These developments included significantly lower retail sales for the fiscal quarter ended April 2017 reported by the Company’s exclusive North America equipment distributor in May 2017, significant acceleration of sales declines in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2017, and the executionDecember 31, 2023 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Remediation of new distribution agreements with Patterson Companies, Inc. and Henry Schein, Inc.Previously Reported Material Weaknesses in May and June 2017. The Company also observed an increase in competition, unfavorable changesInternal Control over Financial Reporting
As previously described in the end-user business model as well as changes in channels of distribution forExplanatory Note to the Company and its competitors.
In preparing the financial statementsCompany’s Annual Report on Form 10-K for the year ended December 31, 2017,2021, as amended and filed on November 7, 2022, and the Company’s Current Report on Form 8-K filed August 2, 2023, the Company identified an impairment triggering event relatedfour material weaknesses in internal control over financial reporting and has devoted substantial resources to the CAD/CAM, Imaging and Treatment Center equipment reporting units. Forecasted revenues and operating margins for these reporting units were impacted by continued unfavorable developmentsimplementation of remediation efforts, as described most recently in the marketplace which included an increase in competition. These developments resulted in significantly lower sales to end-users than expected inCompany’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023. During the fourth quarter of 2017 in the North America and Rest of World regions as well as declines in expected gross profit rates which included the unfavorable impacts from changes in the foreign exchange rates. The impacts from foreign exchange rate changes were primarily driven by the strengthening of the euro versus the U.S. dollar as a result of the higher euro denominated costs and net assets associated with these reporting units as compared to the lower amount of euro denominated sales. While2023, the Company considered unfavorable market developmentshas successfully completed the testing and foreign exchange rate changes, in its April 30, 2017 assessment,evaluation necessary to conclude that, as of December 31, 2023, the impact of these developments were at levels beyond those anticipated by the Company despite moving away from a non-exclusive distribution channel in the United States and the execution of new distribution agreements with Patterson Companies, Inc. and Henry Schein, Inc. in May and June of 2017. In addition to the unfavorable market and foreign exchange rate developments, the income tax rate forecast used in the annual goodwill test was unfavorably impacted by the recent tax legislation in the U.S. and other foreign jurisdictions. As a result the Company tested these reporting units for impairment in preparation of the financial statements forpreviously identified material weaknesses have been remediated.
Item 9B. Other Information
Rule 10b5-1 Trading Plans
During the year ended December 31, 2017 and determined that2023, none of the goodwill associated withCompany’s directors or executive officers (as defined in Rule 16a-1(f) under the CAD/CAM, Imaging and Treatment Center equipment reporting units, all within the Technologies & Equipment segment, was impaired. The impairment was the result of a change in forecasted sales and gross profit as well as changes in foreign exchange rates and the income tax rate. As a result, the Company recorded a goodwill impairment charge of $558.0 millionExchange Act) adopted or terminated any contract, instruction or written plan for the three months ended December 31, 2017. The combinationpurchase or sale of impairment charges forCompany securities that was intended to satisfy the second and fourth quartersaffirmative defense conditions of 2017 resultedRule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” as defined in a total goodwill impairment chargeItem 408(c) of $1,650.9 million for the year ended December 31, 2017.Regulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdiction that Prevent Inspections
The estimates of discounted future cash flows include significant management assumptions such as revenue growth rates, operating margins, weighted average cost of capital, and future economic and market conditions affecting the dental and medical device industries. Any changes to these assumptions and estimates could have a negative impact on the fair value of these reporting units and may result in further impairment. The goodwill impairment charge is not expected to result in future cash expenditures.
The Company also assessed the annual impairment of indefinite-lived intangible assets as of April 30, 2017, which largely consists of acquired tradenames, in conjunction with the annual impairment tests of goodwill. As a result of the annual impairment tests of indefinite-lived intangible assets, the Company recorded an impairment charge of $79.8 million for the three months ended June 30, 2017 which was recorded in Restructuring and other cost on the Consolidated Statements of Operations. The impaired indefinite-lived intangible assets are tradenames and trademarks related to the CAD/CAM and Imaging equipment reporting units. The impairment charge was driven by a decline in forecasted sales. The assumptions and estimates used in determining the fair value of the indefinite-lived intangible assets contain uncertainties, and any changes to these assumptions and estimates could have a negative impact and result in a future impairment.
In preparing the financial statements for the year ended December 31, 2017, the Company, as result of the triggering event, tested the indefinite-lived intangible assets related to these reporting units for impairment. As a result, the Company identified that certain tradenames and trademarks related to the CAD/CAM, Imaging and Treatment Center equipment reporting units, all within the Technologies & Equipment segment, were impaired. The Company recorded an impairment charge of $266.9 million for the three months ended December 31, 2017 which was recorded in Restructuring and other cost on the Consolidated Statements of Operations. The combination of impairment charges for the second and fourth quarters of 2017 resulted in a total impairment charge for the year ended December 31, 2017 of $346.7 million related to indefinite-lived assets. The impairment charge was driven by a continuing decline in forecasted sales. The assumptions and estimates used in determining the fair value of the indefinite-lived intangible assets contain uncertainties, and any changes to these assumptions and estimates could have a negative impact and result in a future impairment.
In conjunction with the goodwill and indefinite-lived intangibles impairment tests at both April 30, 2017 and December 31, 2017, the Company utilized its best estimate of future revenue growth, operating margin rates and income tax rate. Given the market place uncertainty associated with the new distribution agreements, continued weakness in end-user demand for the Company’s products as a result of competition, further developments in tax legislation that could impact the income tax rates and unfavorable changes in foreign exchange rates, these estimates could vary significantly in the future, which may result in an impairment charge at that time.
There were no impairments of identifiable definite-lived and indefinite-lived intangible assets for the year ended December 31, 2016. Impairments of identifiable definite-lived and indefinite-lived intangible assets for the year ended December 31, 2015 were $3.7 million. Impairments of intangible assets are included in Restructuring and other costs in the Consolidated Statements of Operations.
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):Not Applicable
|
| | | | | | | | | | | | |
(in millions) | | Technologies & Equipment | | Consumables | | Total |
| | | | | | |
Balance at December 31, 2015 | | $ | 1,366.6 |
| | $ | 621.0 |
| | $ | 1,987.6 |
|
Merger related additions | | 3,634.0 |
| | 142.8 |
| | 3,776.8 |
|
Acquisition activity | | 204.6 |
| | — |
| | 204.6 |
|
Adjustment of provisional amounts on prior acquisitions | | 1.6 |
| | — |
| | 1.6 |
|
Effect of exchange rate changes | | (13.5 | ) | | (5.1 | ) | | (18.6 | ) |
Balance at December 31, 2016 | | $ | 5,193.3 |
| | $ | 758.7 |
| | $ | 5,952.0 |
|
Acquisition activity | | — |
| | 87.5 |
| | 87.5 |
|
Adjustment of provisional amounts on prior acquisitions | | (19.2 | ) | | — |
| | (19.2 | ) |
Impairment | | (1,650.9 | ) | | — |
| | (1,650.9 | ) |
Effect of exchange rate changes | | 137.4 |
| | 32.4 |
| | 169.8 |
|
Balance, at December 31, 2017 | | $ | 3,660.6 |
| | $ | 878.6 |
| | $ | 4,539.2 |
|
Identifiable definite-lived and indefinite-lived intangible assets consist of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
(in millions) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | | | | | | | | |
Patents | | $ | 1,385.5 |
| | $ | (305.0 | ) | | $ | 1,080.5 |
| | $ | 1,189.5 |
| | $ | (177.3 | ) | | $ | 1,012.2 |
|
Trademarks | | 76.4 |
| | (46.5 | ) | | 29.9 |
| | 65.3 |
| | (38.7 | ) | | 26.6 |
|
Licensing agreements | | 31.2 |
| | (24.8 | ) | | 6.4 |
| | 33.5 |
| | (26.7 | ) | | 6.8 |
|
Customer relationships | | 1,109.1 |
| | (272.0 | ) | | 837.1 |
| | 1,004.8 |
| | (181.2 | ) | | 823.6 |
|
Total definite-lived | | $ | 2,602.2 |
| | $ | (648.3 | ) | | $ | 1,953.9 |
| | $ | 2,293.1 |
| | $ | (423.9 | ) | | $ | 1,869.2 |
|
| | | | | | | | | | | | |
Trademarks and In-process R&D | | $ | 846.8 |
| | $ | — |
| | $ | 846.8 |
| | $ | 1,088.4 |
| | $ | — |
| | $ | 1,088.4 |
|
| | | | | | | | | | | | |
Total identifiable intangible assets | | $ | 3,449.0 |
| | $ | (648.3 | ) | | $ | 2,800.7 |
| | $ | 3,381.5 |
| | $ | (423.9 | ) | | $ | 2,957.6 |
|
PART III
Amortization expense for identifiable definite-lived intangible assets for 2017, 2016 and 2015 was $189.1 million, $155.1 million and $43.8 million, respectively. The annual estimated amortization expense related to these intangible assets for each of the five succeeding fiscal years is $189.9 million, $189.5 million, $189.3 million, $183.4 million and $171.8 million for 2018, 2019, 2020, 2021 and 2022, respectively. For the year ended December 31, 2017, the Company recorded an impairment charge of $346.7 million related to indefinite-lived trademarks.
NOTE 10 - PREPAID EXPENSES AND OTHER CURRENT ASSETSItem 10. Directors, Executive Officers and Corporate Governance
Prepaid expensesThe information required under this item will be included under the captions “Election of Directors” and other current assets consist“Corporate Governance” in our Proxy Statement for the 2024 Annual Meeting of Stockholders (the “2024 Proxy Statement”) and is incorporated herein by reference.
Code of Ethics
The Company has a Code of Ethics and Business Conduct that applies to the Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and the Board of Directors and substantially all of the following:
|
| | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 |
| | | | |
Prepaid expenses | | 100.3 |
| | 69.5 |
|
Available-for-sale securities | | 54.4 |
| | — |
|
Deposits | | 37.2 |
| | 39.4 |
|
Fair value of derivatives | | 3.9 |
| | 14.1 |
|
Other current assets | | 116.8 |
| | 83.5 |
|
Prepaid expenses and other current assets | | $ | 312.6 |
| | $ | 206.5 |
|
NOTE 11 - ACCRUED LIABILITIES
Accrued liabilities consistCompany’s management level employees. A copy of the following:Code of Ethics and Business Conduct is available in the Investors section of the Company’s website at www.dentsplysirona.com. The Company intends to disclose any amendment to its Code of Ethics and Business Conduct that relates to any element enumerated in Item 406(b) of Regulation S-K, and any waiver from a provision of the Code of Ethics and Business Conduct granted to any director, principal executive officer, principal financial officer, principal accounting officer, or any of the Company’s other executive officers, in the Investors section of the Company’s website at www.dentsplysirona.com, within four business days following the date of such amendment or waiver.
Item 11. Executive Compensation
The information required under this item will be included under the captions “Directors’ Compensation,” “Executive Compensation” and “Human Resources Committee Interlocks and Insider Participation” in our 2024 Proxy Statement and is incorporated herein by reference except as to information required pursuant to Item 402(v) of Regulation S-K relating to pay versus performance.
|
| | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 |
| | | | |
Payroll, commissions, bonuses, other cash compensation and employee benefits | | $ | 171.4 |
| | $ | 143.4 |
|
Sales and marketing programs | | 105.8 |
| | 102.0 |
|
Restructuring costs | | 60.3 |
| | 27.4 |
|
Accrued vacation and holidays | | 42.8 |
| | 37.5 |
|
Professional and legal costs | | 31.5 |
| | 20.2 |
|
Current portion of derivatives | | 17.4 |
| | 2.7 |
|
General insurance | | 15.0 |
| | 15.0 |
|
Warranty liabilities | | 11.8 |
| | 11.2 |
|
Third party royalties | | 10.7 |
| | 10.4 |
|
Deferred income | | 8.9 |
| | 14.1 |
|
Accrued interest | | 9.4 |
| | 8.1 |
|
Accrued travel expenses | | 7.8 |
| | 6.9 |
|
Accrued property taxes | | 7.3 |
| | 6.4 |
|
Other | | 85.7 |
| | 57.4 |
|
Accrued liabilities | | $ | 585.8 |
| | $ | 462.7 |
|
NOTE 12 - FINANCING ARRANGEMENTSItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Short-Term Debt
Short-term debt consisted of the following:
|
| | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | Principal | | Interest | | Principal | | Interest |
(in millions except percentage amounts) | | Balance | | Rate | | Balance | | Rate |
| | | | | | | | |
Corporate commercial paper facility | | $ | 7.3 |
| | 1.9 | % | | — |
| | — | % |
Brazil short-term loans | | 0.3 |
| | 11.2 | % | | $ | 1.5 |
| | 15.0 | % |
China short-term loans | | 9.7 |
| | 0.4 | % | | 6.8 |
| | 3.5 | % |
Other short-term loans | | 3.6 |
| | 1.3 | % | | 1.8 |
| | 3.1 | % |
Add: Current portion of long-term debt | | 9.2 |
| | | | 11.0 |
| | |
Total short-term debt | | $ | 30.1 |
| | | | $ | 21.1 |
| | |
| | | | | | | | |
| | 2017 | | | | 2016 | | |
Maximum month-end short-term debt outstanding during the year | | $ | 54.4 |
| | | | $ | 49.0 |
| | |
Average amount of short-term debt outstanding during the year | | 24.9 |
| | | | 15.5 |
| | |
Weighted-average interest rate on short-term debt at year-end | | | | 1.6 | % | | | | 13.4 | % |
Short-Term Borrowings
The Company has a $500.0 million commercial paper facility. At December 31, 2017, there was $7.3 million outstanding and at December 31, 2016, there was no outstanding borrowingsinformation required under this facility. The average balance outstanding for the commercial paper facility during the year ended December 31, 2017 was $0.9 million.
Long-Term Debt
Long-term debt consisted of the following:
|
| | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | Principal | | Interest | | Principal | | Interest |
(in millions except percentage amounts) | | Balance | | Rate | | Balance | | Rate |
| | | | | | | | |
Term loan 12.6 billion Japanese yen denominated due September 2019 | | 111.4 |
| | 0.7 | % | | 107.5 |
| | 0.7 | % |
Term loan $175.0 million due August 2020 | | 140.0 |
| | 2.6 | % | | 148.8 |
| | 2.1 | % |
Fixed rate senior notes $450 million due August 2021 | | 295.7 |
| | 4.1 | % | | 295.7 |
| | 4.1 | % |
Private placement notes 70.0 million euros due October 2024 | | 84.0 |
| | 1.0 | % | | 73.8 |
| | 1.0 | % |
Private placement notes 25.0 million Swiss franc due December 2025 | | 25.6 |
| | 0.9 | % | | 24.5 |
| | 0.9 | % |
Private placement notes 97.0 million euros due December 2025 | | 116.5 |
| | 2.1 | % | | 102.2 |
| | 2.1 | % |
Private placement notes 26.0 million euros due February 2026 | | 31.2 |
| | 2.1 | % | | 27.4 |
| | 2.1 | % |
Private placement notes 58.0 million Swiss franc due August 2026 | | 59.5 |
| | 1.0 | % | | 57.0 |
| | 1.0 | % |
Private placement notes 106.0 million euros due August 2026 | | 127.3 |
| | 2.3 | % | | 111.7 |
| | 2.3 | % |
Private placement notes 70.0 million euros due October 2027 | | 84.0 |
| | 1.3 | % | | 73.7 |
| | 1.3 | % |
Private placement notes 7.5 million Swiss franc due December 2027 | | 7.7 |
| | 1.0 | % | | 7.4 |
| | 1.0 | % |
Private placement notes 15.0 million euros due December 2027 | | 18.0 |
| | 2.2 | % | | 15.8 |
| | 2.2 | % |
Private placement notes 140.0 million Swiss franc due August 2028 | | 143.6 |
| | 1.2 | % | | 137.6 |
| | 1.2 | % |
Private placement notes 70.0 million euros due October 2029 | | 84.1 |
| | 1.5 | % | | 73.8 |
| | 1.5 | % |
Private placement notes 70.0 million euros due October 2030 | | 84.1 |
| | 1.6 | % | | 73.7 |
| | 1.6 | % |
Private placement notes 45.0 million euros due February 2031 | | 54.0 |
| | 2.5 | % | | 47.4 |
| | 2.5 | % |
Private placement notes 65.0 million Swiss franc due August 2031 | | 66.7 |
| | 1.3 | % | | 63.9 |
| | 1.3 | % |
Private placement notes 70.0 million euros due October 2031 | | 84.1 |
| | 1.7 | % | | 73.8 |
| | 1.7 | % |
Other borrowings, various currencies and rates | | 8.6 |
| | | | 12.5 |
| | |
| | $ | 1,626.1 |
| | | | $ | 1,528.2 |
| | |
Less: Current portion | | | | | | | | |
(included in “Notes payable and current portion of long-term debt” in the Consolidated Balance Sheets) | | 9.2 |
| | | | 11.0 |
| | |
Less: Long-term portion of deferred financing costs | | 5.3 |
| | | | 6.1 |
| | |
Long-term portion | | $ | 1,611.6 |
| | | | $ | 1,511.1 |
| | |
On August 26, 2017, the Company paid the third annual principal amortization of $8.8 million representing a 5% mandatory principal amortization due in each of the first six yearsitem will be included under the termscaption “Principal Beneficial Owners of the $175.0 million Term Loan with a final maturity of August 26, 2020. An amount of $8.8 millionShares” in our 2024 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required under this item will be due in August 2018 and has been classified as current in the Consolidated Balance Sheets. The Company intends to use available cash, commercial paper and the revolving credit facilities to pay the 2018 Term Loan payment.
At December 31, 2017, the Company had $531.2 million borrowings available under unused lines of credit, including lines available under its short-term arrangements and revolving credit agreement.
The Company’s revolving credit facility, term loans and senior notes contain certain affirmative and negative covenants relating to the Company's operations and financial condition. At December 31, 2017, the Company was in compliance with all debt covenants.
The table below reflects the contractual maturity dates of the various borrowings at December 31, 2017:
|
| | | |
(in millions) | |
| |
2018 | $ | 9.2 |
|
2019 | 120.9 |
|
2020 | 123.2 |
|
2021 | 296.4 |
|
2022 | 2.5 |
|
2023 and beyond | 1,073.9 |
|
| $ | 1,626.1 |
|
NOTE 13 - EQUITY
At December 31, 2017, the Company had authorization to maintain up to 39.0 million shares of treasury stock under its stock repurchase program as approved by the Board of Directors on September 21, 2016. During 2017, 2016 and 2015, the Company repurchased outstanding shares of common stock at a cost of $400.3 million, $815.1 million and $112.7 million, respectively. For the years ended December 31, 2017, 2016 and 2015, the Company received proceeds of $82.3 million, $41.0 million and $35.5 million, respectively, primarily as a result of stock options exercised in the amount of 2.3 million, 1.2 million and 1.1 million in each of the years, respectively. It is the Company’s practice to issue shares from treasury stock when options are exercised. The Company has 1.3 million common shares availableincluded under the current share repurchase program. The tax benefit realized for the options exercised during the year ended December 31, 2016,captions “Certain Relationships and 2015 is $16.1 millionRelated Party Transactions” and $11.6 million, respectively.
On February 14, 2018, the Board of Directors of the Company approved an increase“Corporate Governance” in the authorized number of shares of common stock that may be repurchased under the share repurchase program for a total remaining authorization of $500.0 million of shares of common stock. Additional share repurchases, if any, will be made through open market purchases, Rule 10b5-1 plans, accelerated share repurchases, privately negotiated transactions or other transactions in such amounts and at such times as the Company deems appropriate based upon prevailing market and business conditions and other factors.
The following table represents total outstanding shares of common stock and treasury stock for the years ended December 31:
|
| | | | | | | | | |
(in millions) | | Shares of Common Stock | | Shares of Treasury Stock | | Outstanding Shares |
| | | | | | |
Balance at December 31, 2014 | | 162.8 |
| | (21.9 | ) | | 140.9 |
|
Shares of treasury stock issued | | — |
| | 1.3 |
| | 1.3 |
|
Repurchase of common stock at an average cost of $52.50 | | — |
| | (2.1 | ) | | (2.1 | ) |
| | | | | | |
Balance at December 31, 2015 | | 162.8 |
| | (22.7 | ) | | 140.1 |
|
Common stock issuance related to Merger | | 101.7 |
| | — |
| | 101.7 |
|
Shares of treasury stock issued | | — |
| | 1.7 |
| | 1.7 |
|
Repurchase of common stock at an average cost of $60.78 | | — |
| | (13.4 | ) | | (13.4 | ) |
| | | | | | |
Balance at December 31, 2016 | | 264.5 |
| | (34.4 | ) | | 230.1 |
|
Shares of treasury stock issued | | — |
| | 2.9 |
| | 2.9 |
|
Repurchase of common stock at an average cost of $64.40 | | — |
| | (6.2 | ) | | (6.2 | ) |
| | | | | | |
Balance at December 31, 2017 | | 264.5 |
| | (37.7 | ) | | 226.8 |
|
The Company maintains the 2016 Omnibus Incentive Plan (the “Plan”) under which it may grant non-qualified stock options (“NQSOs”), incentive stock options, restricted stock, restricted stock units (“RSUs”) and stock appreciation rights, collectively referred to as “Awards.” Awards are granted at exercise prices that are equal to the closing stock price on the date of grant. The Company authorized grants under the Plan of 25.0 million shares of common stock, plus any unexercised portion of canceled or terminated stock options granted under the legacy DENTSPLY International Inc. 2010 and 2002 Equity Incentive Plans, as amended, and under the legacy Sirona Dental Systems, Inc. 2015 and 2006 Equity Incentive Plans, as amended. For each restricted stock and RSU issued, it is counted as a reduction of 3.09 shares of common stock available to be issued under the Plan. No key employee may be granted awards in excess of 1.0 million shares of common stock in any calendar year. The number of shares available for grant under the 2016 Plan at December 31, 2017 is 33.7 million.
Stock options granted become exercisable as determined by the grant agreement and expire ten years after the date of grant under these plans. RSUs vest as determined by the grant agreement and are subject to a service condition, which requires grantees to remain employed by the Company during the period following the date of grant. Under the terms of the RSUs, the vesting period is referred to as the restricted period. RSUs and the rights under the award may not be sold, assigned, transferred, donated, pledged or otherwise disposed of during the restricted period prior to vesting. In addition to the service condition, certain key executives are granted RSUs subject to performance requirements that can vary between the first year and up to the final year of the RSU award. If targeted performance is not met the RSU granted is adjusted to reflect the achievement level. Upon the expiration of the applicable restricted period and the satisfaction of all conditions imposed, the restrictions on RSUs will lapse, and one share of common stock will be issued as payment for each vested RSU. Upon death, disability or qualified retirement all awards become immediately exercisable for up to one year. Awards are expensed as compensation over their respective vesting periods or to the eligible retirement date if shorter. The Company records forfeitures on stock-based compensation as the participant terminates rather than estimating forfeitures.
The following table represents total stock based compensation expense and the tax related benefit for the years ended:
|
| | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Stock option expense | | $ | 15.4 |
| | $ | 10.6 |
| | $ | 8.1 |
|
RSU expense | | 31.2 |
| | 29.1 |
| | 16.2 |
|
Total stock based compensation expense | | $ | 46.6 |
| | $ | 39.7 |
| | $ | 24.3 |
|
| | | | | | |
Related deferred income tax benefit | | $ | 8.4 |
| | $ | 10.9 |
| | $ | 7.1 |
|
For the years ended December 31, 2017, 2016, and 2015, stock compensation expense of $46.6 million, $39.7 million and $24.3 million, respectively, was recorded in the Consolidatedour 2024 Proxy Statement of Operations. For the years ended December 31, 2017, 2016, and 2015, $45.7 million, $39.1 million and $23.6 million, respectively, was recorded in Selling, general and administrative expense and $0.7 million, $0.6 million and $0.7 million, respectively, was recorded in Cost of products sold.
There were 1.3 million non-qualified stock options unvested at December 31, 2017. The remaining unamortized compensation cost related to non-qualified stock options is $6.6 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.6 years. The unamortized compensation cost related to RSUs is $26.5 million, which will be expensed over the remaining weighted average restricted period of the RSUs, or 1.3 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 NQSOs issued during the years ended:
|
| | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
Weighted average fair value per share | | $ | 13.83 |
| | $ | 12.78 |
| | $ | 10.87 |
|
Expected dividend yield | | 0.57 | % | | 0.52 | % | | 0.51 | % |
Risk-free interest rate | | 2.11 | % | | 1.54 | % | | 1.59 | % |
Expected volatility | | 20.0 | % | | 20.8 | % | | 20.3 | % |
Expected life (years) | | 5.95 |
| | 6.14 |
| | 5.68 |
|
The total intrinsic value of options exercised for the years ended December 31, 2017, 2016 and 2015 was $65.2 million, $38.3 million and $22.3 million, respectively.
The total fair value of shares vested for the years ended December 31, 2017, 2016 and 2015 was $44.7 million, $34.8 million and $22.7 million, respectively.
The following table summarizes the NQSO transactions for the year ended December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding | | Exercisable |
(in millions, except per share amounts) | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| | | | | | | | | | | | |
December 31, 2016 | | 8.4 |
| | $ | 39.22 |
| | $ | 155.9 |
| | 6.7 |
| | $ | 36.03 |
| | $ | 144.9 |
|
Granted | | 1.0 |
| | 61.78 |
| | |
| | |
| | |
| | |
|
Exercised | | (2.3 | ) | | 35.70 |
| | |
| | |
| | |
| | |
|
Forfeited | | (0.1 | ) | | 55.22 |
| | |
| | |
| | |
| | |
|
December 31, 2017 | | 7.0 |
| | $ | 43.43 |
| | $ | 157.0 |
| | 5.4 |
| | $ | 38.74 |
| | $ | 144.9 |
|
The weighted average remaining contractual term of all outstanding options is 5.3 years and the weighted average remaining contractual term of exercisable options is 4.3 years.
The following table summarizes information about NQSOs outstanding for the year ended December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | |
| | | | Outstanding | | Exercisable |
(in millions, except per share amounts and life) | | Number Outstanding at December 31, | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price | | Number Exercisable at December 31, | | Weighted Average Exercise Price |
Range of | | | | | |
Exercise Prices | | 2017 | | | | 2017 | |
| | | | | | | | | | | | |
5.01 |
| - | 10.00 | | 0.2 |
| | 0.9 | | $ | 6.56 |
| | 0.2 |
| | $ | 6.56 |
|
10.01 |
| - | 20.00 | | 0.1 |
| | 1.0 | | 12.56 |
| | 0.1 |
| | 12.56 |
|
20.01 |
| - | 30.00 | | 0.4 |
| | 1.7 | | 25.26 |
| | 0.4 |
| | 25.26 |
|
30.01 |
| - | 40.00 | | 2.6 |
| | 3.5 | | 36.63 |
| | 2.6 |
| | 36.63 |
|
40.01 |
| - | 50.00 | | 1.5 |
| | 5.7 | | 43.90 |
| | 1.4 |
| | 43.68 |
|
50.01 |
| - | 60.00 | | 1.2 |
| | 7.5 | | 54.11 |
| | 0.6 |
| | 53.14 |
|
60.01 |
| - | 70.00 | | 1.0 |
| | 8.9 | | 62.01 |
| | 0.1 |
| | 61.08 |
|
| | | | 7.0 |
| | 5.3 | | $ | 43.43 |
| | 5.4 |
| | $ | 38.74 |
|
The following table summarizes the unvested RSU transactions for the year ended December 31, 2017:
|
| | | | | | | |
| | Unvested Restricted Stock Units |
| | Shares | | Weighted Average Grant Date Fair Value |
| | |
(in millions, except per share amounts) | | |
| | | | |
Unvested at December 31, 2016 | | 1.9 |
| | $ | 49.55 |
|
Granted | | 0.6 |
| | 61.66 |
|
Vested | | (0.7 | ) | | 44.89 |
|
Forfeited | | (0.1 | ) | | 55.49 |
|
Unvested at December 31, 2017 | | 1.7 |
| | $ | 56.05 |
|
NOTE 14 - INCOME TAXES
The components of income before income taxes from operations are as follows:
|
| | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
United States | | $ | (145.0 | ) | | $ | 28.9 |
| | $ | 26.8 |
|
Foreign | | (1,458.5 | ) | | 412.0 |
| | 302.9 |
|
| | $ | (1,603.5 | ) | | $ | 440.9 |
| | $ | 329.7 |
|
The components of the provision for income taxes from operations are as follows: |
| | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Current: | | | | | | |
U.S. federal | | $ | 1.7 |
| | $ | 2.3 |
| | $ | (3.0 | ) |
U.S. state | | 5.9 |
| | 5.6 |
| | 1.7 |
|
Foreign | | 83.0 |
| | 111.7 |
| | 50.9 |
|
Total | | $ | 90.6 |
| | $ | 119.6 |
| | $ | 49.6 |
|
| | | | | | |
Deferred: | | |
| | |
| | |
|
U.S. federal | | $ | 2.8 |
| | $ | 27.6 |
| | $ | 44.3 |
|
U.S. state | | 11.4 |
| | 1.3 |
| | 0.3 |
|
Foreign | | (158.0 | ) | | (139.0 | ) | | (17.2 | ) |
Total | | $ | (143.8 | ) | | $ | (110.1 | ) | | $ | 27.4 |
|
| | | | | | |
| | $ | (53.2 | ) | | $ | 9.5 |
| | $ | 77.0 |
|
The reconciliation of the U.S. federal statutory tax rate to the effective rate for the years ended is as follows:
|
| | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
Statutory U. S. federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Effect of: | |
| | |
| | |
|
State income taxes, net of federal benefit | (0.1 | ) | | 1.1 |
| | 0.4 |
|
Federal benefit of R&D and foreign tax credits | 2.8 |
| | (12.6 | ) | | (11.2 | ) |
Tax effect of international operations | 3.6 |
| | (3.9 | ) | | (6.4 | ) |
Net effect of tax audit activity | (0.6 | ) | | (0.6 | ) | | (0.4 | ) |
Tax effect of enacted statutory rate changes on Non-US Jurisdictions | (0.2 | ) | | (0.2 | ) | | 0.2 |
|
Federal tax on unremitted earnings of certain foreign subsidiaries | — |
| | 0.1 |
| | 2.5 |
|
Valuation allowance adjustments | (0.7 | ) | | (16.3 | ) | | 0.2 |
|
U.S. tax reform - net impacts | (1.2 | ) | | — |
| | — |
|
Tax effect of Impairment of Goodwill and Intangibles | (37.4 | ) | | — |
| | — |
|
Other | 2.1 |
| | (0.4 | ) | | 3.1 |
|
| | | | | |
Effective income tax rate on operations | 3.3 | % | | 2.2 | % | | 23.4 | % |
The tax effect of significant temporary differences giving rise to deferred tax assets and liabilities are as follows:
|
| | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
(in millions) | | Deferred Tax Asset | | Deferred Tax Liability | | Deferred Tax Asset | | Deferred Tax Liability |
| | | | | | | | |
Commission and bonus accrual | | $ | 5.4 |
| | $ | — |
| | $ | 8.4 |
| | $ | — |
|
Employee benefit accruals | | 62.7 |
| | — |
| | 71.5 |
| | — |
|
Inventory | | 11.6 |
| | — |
| | 9.0 |
| | — |
|
Identifiable intangible assets | | — |
| | 880.1 |
| | — |
| | 1,011.8 |
|
Insurance premium accruals | | 3.7 |
| | — |
| | 5.5 |
| | — |
|
Miscellaneous accruals | | 17.4 |
| | — |
| | 16.0 |
| | — |
|
Other | | 10.7 |
| | — |
| | 19.6 |
| | — |
|
Unrealized losses included in AOCI | | 46.3 |
| | — |
| | 17.5 |
| | — |
|
Property, plant and equipment | | — |
| | 55.0 |
| | — |
| | 54.8 |
|
Product warranty accruals | | 1.1 |
| | — |
| | 1.6 |
| | — |
|
Foreign tax credit and R&D carryforward | | 69.0 |
| | — |
| | 137.9 |
| | — |
|
Restructuring and other cost accruals | | 6.2 |
| | — |
| | — |
| | 8.1 |
|
Sales and marketing accrual | | 5.9 |
| | — |
| | 8.0 |
| | — |
|
Taxes on unremitted earnings of foreign subsidiaries | | — |
| | 2.7 |
| | — |
| | 2.1 |
|
Tax loss carryforwards and other tax attributes | | 3,038.4 |
| | — |
| | 274.5 |
| | — |
|
Valuation allowance | | (3,014.8 | ) | | — |
| | (182.7 | ) | | — |
|
| | $ | 263.6 |
| | $ | 937.8 |
| | $ | 386.8 |
| | $ | 1,076.8 |
|
Deferred tax assets and liabilities are included in the following Consolidated Balance Sheet line items:
|
| | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 |
| | | | |
Assets | | | | |
Other noncurrent assets, net | | 43.8 |
| | 61.7 |
|
Liabilities | | | | |
Deferred income taxes | | 718.0 |
| | 751.7 |
|
The Company has $69.0 million of foreign tax credit carryforwards at December 31, 2017, of which $69.0 million will expire in 2025.
The Company has tax loss carryforwards related to certain foreign and domestic subsidiaries of approximately $12.0 billion at December 31, 2017, of which $11.8 billion expires at various times through 2037 and $171.6 million may be carried forward indefinitely. This is a significant increase from the Company’s accumulated losses at December 31, 2016. The increase of these losses primarily relate to the impact of the US GAAP impairment on various Denstsply Sirona’s holding companies recorded in 2017. These losses are subject to recapture for statutory purposes should the overall investment value of these company’s increase in the future. Included in deferred income tax assets at December 31, 2017 are tax benefits totaling $3.0 billion, before valuation allowances, for the tax loss carryforwards.
The Company has recorded $3.0 billion of valuation allowance to offset the tax benefit of net operating losses and $10.8 million of valuation allowance for other deferred tax assets. The Company has recorded these valuation allowances due to the uncertainty that these assets can be realized in the future.
As of December 31, 2017, a deferred tax asset of $24.2 million, related to a non-US tax attribute, has been recognized. This benefit is a result of an agreement that has been filed to combine the profits and losses of certain entities, effective January 1, 2019.
The Company has provided $2.7 million of withholding taxes on certain undistributed earnings of its foreign subsidiaries that the Company anticipates will be repatriated.
Tax Contingencies
The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.
The total amount of gross unrecognized tax benefits at December 31, 2017 is approximately $24.7 million, of this total, approximately $23.5 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 are not expected to be significant.
The total amount of accrued interest and penalties were $3.5 million and $2.8 million at December 31, 2017 and 2016, respectively. The Company has consistently classified interest and penalties recognized in its consolidated financial statements as income taxes based on the accounting policy election of the Company. During the year ended December 31, 2017, the Company recognized income tax expense of $0.5 million , related to interest and penalties. During the years ended December 31, 2016 and 2015, the Company recognized income tax benefit of $3.4 million and $2.0 million respectively, related to interest and penalties.
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The significant jurisdictions include the U.S., Germany, Sweden and Switzerland. The Company has substantially concluded all U.S. federal income tax matters for years through 2011. The Company is currently under audit for the tax years 2012 and 2013. The tax years 2014 through 2016 are subject to future potential tax audit adjustments. The Company has concluded audits in Germany through the tax year 2011 and is currently under audit for the years 2012 through 2014. The taxable years that remain open for Sweden are 2012 through 2016. The taxable years that remain open for Switzerland are 2007 through 2016.incorporated herein by reference.
The Company had the following activity recorded for unrecognized tax benefits:
|
| | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Unrecognized tax benefits at beginning of period | | $ | 10.8 |
| | $ | 12.1 |
| | $ | 21.9 |
|
Gross change for prior period positions | | 8.6 |
| | (2.0 | ) | | (7.6 | ) |
Gross change for current year positions | | 0.3 |
| | 2.2 |
| | 0.2 |
|
Decrease due to settlements and payments | | — |
| | (1.3 | ) | | (0.5 | ) |
Decrease due to statute expirations | | — |
| | — |
| | (0.2 | ) |
Increase due to effect of foreign currency translation | | 1.3 |
| | — |
| | — |
|
Decrease due to effect from foreign currency translation | | — |
| | (0.2 | ) | | (1.7 | ) |
| | | | | | |
Unrecognized tax benefits at end of period | | $ | 21.0 |
| | $ | 10.8 |
| | $ | 12.1 |
|
U.S. Federal Legislative Changes
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act" or "U.S. tax reform") was enacted. U.S. tax reform, among other things, reduces the U.S. federal income tax rate to 21% in 2018 from 35%, institutes a dividends received deduction for foreign earnings with a related tax for the deemed repatriation of unremitted foreign earnings and creates a new U.S. minimum tax on earnings of foreign subsidiaries. In addition, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for enactment effects of SAB 118 provides a measurement period of up to one year from the Act’s enactment date for companies to complete their accounting under Accounting Standards Codification No. 740 “Income Taxes”, (“ASC 740”). In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Act. The Company’s accounting for certain income tax effects is incomplete, but the Company has determined reasonable estimates for those effects. Accordingly, the Company has recognized a net provisional income tax charge of $20.1 million, which is included as a component of the income tax provision on the consolidated statement of income.
Based on information available, the Company estimated the cumulative undistributed foreign earnings to be approximately $1.1 billion and recorded a provisional estimate of $62.2 million of income tax expense related to the one-time deemed repatriation toll charge. There is still uncertainty as to the application of the Act, in particular as it relates to state income taxes. Further, the Company has not yet completed the analysis of the components of the computation, including the amount of the foreign earnings subject to U.S. income tax, and the portion of the foreign earnings held in cash or other specified assets. As of December 31, 2017, primarily due to the utilization of foreign tax credit carryforwards and certain other tax attributes the estimated cash liability for the deemed repatriation of foreign earnings is approximately $1.0 million. However, as the Company completes its analysis an additional liability could be recorded and the Company would elect to make installment payments as allowed under the Act.
As a result of the Act, the Company can repatriate the cumulative undistributed foreign earnings back to the U.S. when needed with minimal U.S. income tax consequences other than the one-time deemed repatriation toll charge. The Company is still evaluating whether to change its indefinite reinvestment assertion in light of the Act and consider that conclusion to be incomplete under SAB 118.
The remaining provisional amount is a benefit of $42.1 million relating to the remeasurement of the Company’s U.S. net deferred tax liabilities. For the Global Intangible Low Tax Income (“GILTI”) provision of the Act, a provisional estimate could not be made as the Company has not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred.
In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from, and interpretations by, U.S. regulatory and standard-setting bodies, and changes in assumptions. In the subsequent period, provisional amounts will be adjusted for the effects, if any, of interpretative guidance issued after January 19, 2018, by the U.S. Department of the Treasury. The effects of the 2017 Tax Act may be subject to changes for items that were previously reported as provisional amounts, as well as any element of the 2017 Tax Act that a provisional estimate could not be made, and such changes could be material.
NOTE 15 - BENEFIT PLANS
Defined Contribution Plans
The Company maintains both U.S. and non-U.S. employee defined contribution plans to help employees save for retirement. The primary U.S. plan, the Dentsply Sirona Inc. 401(k) Savings and Employee Stock Ownership Plan (the "Plan"), allows eligible employees to contribute a portion of their cash compensation to the plan on a tax-deferred basis, and in most cases, the Company provides a matching contribution. The Plan includes various investment funds, including common stock of the Company. Effective January 1, 2018, Dentsply Sirona will no longer contribute the Company’s common stock to the Plan, and participants will no longer be allowed to contribute to the Company’s common stock under the Plan. The common stock contribution is being replaced by a discretionary cash contribution that is initially targeted to be 3% of compensation. Each eligible participant who elects to defer to the Plan will receive a matching contribution of one hundred percent (100%) on the first one percent (1%) contributed and fifty percent (50%) on the next five percent (5%) contributed for a total maximum matching contribution of 3.5%. In addition to the primary U.S. plan, the Company also maintains various other U.S. and non-U.S. defined contribution and non-qualified deferred compensation plans. The annual expenses, net of forfeitures, were $33.4 million, $28.0 million and $24.9 million for for the years ended 2017, 2016 and 2015, respectively.
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 sufficient to satisfy minimum funding requirements. 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.
In addition to the U.S. plans, the Company 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 Swedish plans are unfunded book reserve plans. Most employees and retirees outside the U.S. are covered by government health plans.
The Company predominantly uses liability durations in establishing its discount rates, which are observed from indices of high-grade corporate bond yield curves in the respective economic regions of the plan. During the first quarter of 2016, the Company changed the method utilized to estimate the service cost and interest cost components of net periodic benefit costs for the Company’s major defined benefit pension plans in Germany and Switzerland and for all defined benefit pension and other postemployment healthcare plans in the United States. Historically, the Company estimated the service cost and interest cost components using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. The Company has elected to use a spot rate approach for the estimation of these components of benefit cost by applying the specific spot rates along the yield curve to the relevant projected cash flows, as the Company believes this provides a better estimate of service and interest costs. The Company considers this a change in estimate and, accordingly, accounted for it prospectively. This change does not affect the measurement of the Company’s total benefit obligation.
Defined Benefit Pension Plan Assets
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 and fixed income investments. The 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 types of investments. Equity securities include investments in companies located both in and outside the U.S. Equity securities in the defined benefit pension plans do not include Company common stock contributed directly by the Company. Fixed income securities include corporate bonds of companies from diversified industries, 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 in the Company’s Consolidated Balance Sheet as they are held in trust or other off-balance sheet investment vehicles.
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 investment 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 (e.g. mutual funds), common/collective trusts, master 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”).
The defined benefit pension plan assets maintained in Austria, France, Germany, Norway, the 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 categories: interest-bearing cash, U.S. and foreign equities, foreign fixed income securities (primarily corporate and government bonds), insurance company contracts, real estate and hedge funds.
In Germany, Sirona traditionally had an unfunded defined benefit pension plan whose benefits are based primarily on years of service and wage and salary group. This plan is closed to new participants. Sirona replaced its unfunded defined benefit pension plan in Germany with a defined contribution plan. All new hires now receive defined contributions to a pension plan based on a percentage of the employee’s eligible compensation. However, due to grandfathering provisions for certain existing employees hired before the new defined contribution plan was introduced, the Company continues to be obligated to provide pension benefits which are at a minimum equal to benefits that would have been available under the terms of the traditional defined benefit plans (the “Grandfathered Benefit”). The Grandfathered Benefit and contributions to the Sirona pension plan made for those employees are included in the disclosures for defined benefit plans. The Company accounts for the Grandfathered Benefit by recognizing the higher of the defined contribution obligation or the defined benefit obligation for the minimum benefit.
The Sirona plan assets in Germany consist of insurance policies with a guaranteed minimum return by the insurance company and an excess profit participation feature for a portion of the benefits. Sirona pays the premiums on the insurance policies, but does not manage the investment of the funds. The insurance company makes all decisions on investment of funds, including the allocation to asset groups. The fair value of the plan assets which include equity securities, fixed-income investments, and others is based on the cash surrender values reported by the insurance company.
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:
|
| | | | | | | | | | | | | | | | |
| | | | | | Other Postemployment |
| | Pension Benefits | | Benefits |
| | December 31, | | December 31, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | |
Change in Benefit Obligation | | | | | | | | |
Benefit obligation at beginning of year | | $ | 473.1 |
| | $ | 378.9 |
| | $ | 16.1 |
| | $ | 14.1 |
|
Service cost | | 15.7 |
| | 15.7 |
| | 0.4 |
| | 0.3 |
|
Interest cost | | 6.5 |
| | 8.0 |
| | 0.6 |
| | 0.6 |
|
Participant contributions | | 4.1 |
| | 3.8 |
| | 0.3 |
| | 0.3 |
|
Actuarial losses (gains) | | 9.1 |
| | 26.8 |
| | (0.2 | ) | | 1.4 |
|
Plan amendments | | 0.4 |
| | 0.3 |
| | — |
| | — |
|
Acquisitions/Divestitures | | — |
| | 76.3 |
| | — |
| | — |
|
Effect of exchange rate changes | | 50.4 |
| | (14.2 | ) | | — |
| | — |
|
Plan curtailments and settlements | | (0.2 | ) | | (8.5 | ) | | — |
| | — |
|
Benefits paid | | (13.6 | ) | | (14.0 | ) | | (1.3 | ) | | (0.6 | ) |
Benefit obligation at end of year | | $ | 545.5 |
| | $ | 473.1 |
| | $ | 15.9 |
| | $ | 16.1 |
|
| | | | | | | | |
Change in Plan Assets | | |
| | |
| | |
| | |
|
Fair value of plan assets at beginning of year | | $ | 156.8 |
| | $ | 142.0 |
| | $ | — |
| | $ | — |
|
Actual return on assets | | 12.4 |
| | 6.5 |
| | — |
| | — |
|
Plan settlements | | (0.2 | ) | | (8.0 | ) | | — |
| | — |
|
Acquisitions/Divestitures | | — |
| | 12.7 |
| | — |
| | — |
|
Effect of exchange rate changes | | 8.8 |
| | (2.4 | ) | | — |
| | — |
|
Employer contributions | | 17.4 |
| | 16.2 |
| | 1.0 |
| | 0.3 |
|
Participant contributions | | 4.1 |
| | 3.8 |
| | 0.3 |
| | 0.3 |
|
Benefits paid | | (13.6 | ) | | (14.0 | ) | | (1.3 | ) | | (0.6 | ) |
Fair value of plan assets at end of year | | $ | 185.7 |
| | $ | 156.8 |
| | $ | — |
| | $ | — |
|
| | | | | | | | |
Funded status at end of year | | $ | (359.8 | ) | | $ | (316.3 | ) | | $ | (15.9 | ) | | $ | (16.1 | ) |
The amounts recognized in the accompanying Consolidated Balance Sheets, net of tax effects, are as follows: |
| | | | | | | | | | | | | | | | | | |
| | | | Pension Benefits | | Other Postemployment Benefits |
| | Location On The | | December 31, | | December 31, |
(in millions) | | Consolidated Balance Sheet | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | |
Other noncurrent assets, net | | Other noncurrent assets, net | | $ | — |
| | $ | 0.1 |
| | $ | — |
| | $ | — |
|
Deferred tax asset | | Other noncurrent assets, net | | 34.8 |
| | 31.7 |
| | 0.8 |
| | 1.4 |
|
Total assets | | | | $ | 34.8 |
| | $ | 31.8 |
| | $ | 0.8 |
| | $ | 1.4 |
|
| | | | | | | | | | |
Current liabilities | | Accrued liabilities | | (8.7 | ) | | (6.9 | ) | | (0.7 | ) | | (0.7 | ) |
Other noncurrent liabilities | | Other noncurrent liabilities | | (351.1 | ) | | (309.5 | ) | | (15.2 | ) | | (15.4 | ) |
Deferred tax liability | | Deferred income taxes | | (0.6 | ) | | (0.5 | ) | | — |
| | — |
|
Total liabilities | | | | $ | (360.4 | ) | | $ | (316.9 | ) | | $ | (15.9 | ) | | $ | (16.1 | ) |
| | | | | | | | | | |
Accumulated other comprehensive income | | Accumulated other comprehensive loss | | 86.2 |
| | 82.3 |
| | 2.5 |
| | 2.2 |
|
Net amount recognized | | | | $ | (239.4 | ) | | $ | (202.8 | ) | | $ | (12.6 | ) | | $ | (12.5 | ) |
Amounts recognized in AOCI consist of:
|
| | | | | | | | | | | | | | | | |
| | | | | | Other Postemployment |
| | Pension Benefits | | Benefits |
| | December 31, | | December 31, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | |
Net actuarial loss | | $ | 121.7 |
| | $ | 115.3 |
| | $ | 3.3 |
| | $ | 3.5 |
|
Net prior service cost | | (1.3 | ) | | (1.8 | ) | | — |
| | — |
|
Before tax AOCI | | $ | 120.4 |
| | $ | 113.5 |
| | $ | 3.3 |
| | $ | 3.5 |
|
Less: Deferred taxes | | 34.2 |
| | 31.2 |
| | 0.8 |
| | 1.3 |
|
Net of tax AOCI | | $ | 86.2 |
| | $ | 82.3 |
| | $ | 2.5 |
| | $ | 2.2 |
|
Information for pension plans with an accumulated benefit obligation in excess of plan assets: |
| | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 |
| | | | |
Projected benefit obligation | | $ | 517.0 |
| | $ | 458.7 |
|
Accumulated benefit obligation | | 491.7 |
| | 427.2 |
|
Fair value of plan assets | | 160.0 |
| | 142.3 |
|
Components of net periodic benefit cost:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Postemployment Benefits |
(in millions) | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | | |
Service cost | | $ | 15.7 |
| | $ | 15.7 |
| | $ | 17.1 |
| | $ | 0.4 |
| | $ | 0.3 |
| | $ | 0.4 |
|
Interest cost | | 6.5 |
| | 8.0 |
| | 7.3 |
| | 0.6 |
| | 0.6 |
| | 0.6 |
|
Expected return on plan assets | | (4.0 | ) | | (5.1 | ) | | (5.4 | ) | | — |
| | — |
| | — |
|
Amortization of prior service credit | | (0.2 | ) | | (0.2 | ) | | (0.2 | ) | | — |
| | — |
| | — |
|
Amortization of net actuarial loss | | 6.9 |
| | 5.1 |
| | 7.8 |
| | 0.1 |
| | 0.2 |
| | 0.2 |
|
Curtailment and settlement loss (gains) | | — |
| | 1.2 |
| | (0.8 | ) | | — |
| | — |
| | — |
|
Net periodic benefit cost | | $ | 24.9 |
| | $ | 24.7 |
| | $ | 25.8 |
| | $ | 1.1 |
| | $ | 1.1 |
| | $ | 1.2 |
|
Other changes in plan assets and benefit obligations recognized in AOCI:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Postemployment Benefits |
(in millions) | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | | |
Net actuarial loss (gain) | | $ | 13.3 |
| | $ | 20.3 |
| | $ | (48.6 | ) | | $ | (0.2 | ) | | $ | 1.4 |
| | $ | (0.4 | ) |
Net prior service cost (credit) | | 0.3 |
| | 0.4 |
| | (0.3 | ) | | — |
| | — |
| | — |
|
Amortization | | (6.7 | ) | | (4.9 | ) | | (7.6 | ) | | (0.1 | ) | | (0.2 | ) | | (0.2 | ) |
Total recognized in AOCI | | $ | 6.9 |
| | $ | 15.8 |
| | $ | (56.5 | ) | | $ | (0.3 | ) | | $ | 1.2 |
| | $ | (0.6 | ) |
Total recognized in net periodic benefit cost and AOCI | | $ | 31.8 |
| | $ | 40.5 |
| | $ | (30.7 | ) | | $ | 0.8 |
| | $ | 2.3 |
| | $ | 0.6 |
|
The expected amounts of net loss, prior service cost and transition obligation for defined benefit plans and other postemployment benefit plans in AOCI that are expected to be amortized as net expense (income) during fiscal year 2018 are as follows:
|
| | | | | | | | |
(in millions) | | Pension Benefits | | Other Postemployment Benefits |
| | | | |
Amount of net prior service credit | | $ | (0.1 | ) | | $ | — |
|
Amount of net loss | | 6.5 |
| | 0.2 |
|
Total amount to be amortized out of AOCI in 2018 | | $ | 6.4 |
| | $ | 0.2 |
|
Assumptions
The assumptions used to determine benefit obligations and net periodic benefit cost for the Company’s plans are similar for both U.S. and foreign plans.
The weighted average assumptions used to determine benefit obligations for the Company’s plans, principally in foreign locations, at December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Postemployment Benefits |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | | |
Discount rate | | 1.6 | % | | 1.6 | % | | 2.1 | % | | 3.8 | % | | 4.4 | % | | 4.7 | % |
Rate of compensation increase | | 2.5 | % | | 2.6 | % | | 2.5 | % | | n/a |
| | n/a |
| | n/a |
|
Health care cost trend pre 65 | | n/a |
| | n/a |
| | n/a |
| | 7.9 | % | | 7.8 | % | | 7.6 | % |
Health care cost trend post 65 | | n/a |
| | n/a |
| | n/a |
| | 8.8 | % | | 8.5 | % | | 8.2 | % |
Ultimate health care cost trend | | n/a |
| | n/a |
| | n/a |
| | 4.4 | % | | 4.5 | % | | 5.0 | % |
Years until trend is reached pre 65 | | n/a |
| | n/a |
| | n/a |
| | 9.0 |
| | 9.0 |
| | 9.0 |
|
Years until ultimate trend is reached post 65 | | n/a |
| | n/a |
| | n/a |
| | 9.0 |
| | 9.0 |
| | 9.0 |
|
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, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Postemployment Benefits |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | | |
Discount rate | | 1.6 | % | | 2.1 | % | | 1.8 | % | | 4.4 | % | | 4.7 | % | | 4.3 | % |
Expected return on plan assets | | 2.9 | % | | 3.3 | % | | 3.7 | % | | n/a |
| | n/a |
| | n/a |
|
Rate of compensation increase | | 2.6 | % | | 2.5 | % | | 2.6 | % | | n/a |
| | n/a |
| | n/a |
|
Health care cost trend | | n/a |
| | n/a |
| | n/a |
| | 7.9 | % | | 7.8 | % | | 8.5 | % |
Ultimate health care cost trend | | n/a |
| | n/a |
| | n/a |
| | 4.4 | % | | 4.5 | % | | 5.0 | % |
Years until ultimate trend is reached | | n/a |
| | n/a |
| | n/a |
| | 9.0 |
| | 9.0 |
| | 8.0 |
|
| | | | | | | | | | | | |
Measurement Date | | 12/31/2017 |
| | 12/31/2016 |
| | 12/31/2015 |
| | 12/31/2017 |
| | 12/31/2016 |
| | 12/31/2015 |
|
To develop the assumptions for the expected long-term rate of return on assets, 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, 2017:
|
| | | | | | | | |
| | Other Postemployment Benefits |
(in millions) | | 1% Increase | | 1% Decrease |
| | | | |
Effect on total of service and interest cost components | | $ | 0.2 |
| | $ | (0.2 | ) |
Effect on postemployment benefit obligation | | 2.9 |
| | (2.3 | ) |
Fair Value Measurements of Plan Assets
The fair value of the Company’s pension plan assets at December 31, 2017 is presented in the table below by asset category. Approximately 73% 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.
|
| | | | | | | | | | | | | | | | |
| | December 31, 2017 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets Category | | | | | | | | |
Cash and cash equivalents | | $ | 18.2 |
| | $ | 18.2 |
| | $ | — |
| | $ | — |
|
Equity securities: | | |
| | |
| | |
| | |
|
International | | 53.0 |
| | 53.0 |
| | — |
| | — |
|
Fixed income securities: | | |
| | |
| | |
| | |
|
Fixed rate bonds (a) | | 48.5 |
| | 48.5 |
| | — |
| | — |
|
Other types of investments: | | |
| | |
| | |
| | |
|
Mutual funds (b) | | 16.3 |
| | 16.3 |
| | — |
| | — |
|
Common trusts (c) | | 13.3 |
| | — |
| | 13.3 |
| | — |
|
Insurance contracts | | 29.0 |
| | — |
| | — |
| | 29.0 |
|
Hedge funds | | 7.1 |
| | — |
| | — |
| | 7.1 |
|
Real estate | | 0.3 |
| | — |
| | — |
| | 0.3 |
|
Total | | $ | 185.7 |
| | $ | 136.0 |
| | $ | 13.3 |
| | $ | 36.4 |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2016 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets Category | | | | | | | | |
Cash and cash equivalents | | $ | 11.5 |
| | $ | 11.5 |
| | $ | — |
| | $ | — |
|
Equity securities: | | |
| | |
| | |
| | |
|
International | | 39.1 |
| | 39.1 |
| | — |
| | — |
|
Fixed income securities: | | |
| | |
| | |
| | |
|
Fixed rate bonds (a) | | 52.6 |
| | 52.6 |
| | — |
| | — |
|
Other types of investments: | | |
| | |
| | |
| | |
|
Mutual funds (b) | | 14.3 |
| | 14.3 |
| | — |
| | — |
|
Common trusts (c) | | 9.9 |
| | — |
| | 9.9 |
| | — |
|
Insurance contracts | | 25.1 |
| | — |
| | — |
| | 25.1 |
|
Hedge funds | | 4.0 |
| | — |
| | — |
| | 4.0 |
|
Real estate | | 0.3 |
| | — |
| | — |
| | 0.3 |
|
Total | | $ | 156.8 |
| | $ | 117.5 |
| | $ | 9.9 |
| | $ | 29.4 |
|
| |
(a) | 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. |
| |
(b) | 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. |
| |
(c) | This category includes common/collective funds with investments in approximately 65% equities and 35% in fixed income investments. |
The following table provides a reconciliation from December 31, 2016 to December 31, 2017 for the plan assets categorized as Level 3. During the year ended December 31, 2017, no assets were transferred in or out of the Level 3 category.
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
(in millions) | | Insurance Contracts | | Hedge Funds | | Real Estate | | Total |
| | | | | | | | |
Balance at December 31, 2016 | | $ | 25.1 |
| | $ | 4.0 |
| | $ | 0.3 |
| | $ | 29.4 |
|
Actual return on plan assets: | | |
| | |
| | |
| | |
|
Relating to assets still held at the reporting date | | 0.8 |
| | 0.2 |
| | — |
| | 1.0 |
|
Acquisitions/Divestitures | | — |
| | — |
| | — |
| | — |
|
Purchases, sales and settlements, net | | (0.3 | ) | | 2.7 |
| | — |
| | 2.4 |
|
Transfers in and/or (out) | | — |
| | — |
| | — |
| | — |
|
Effect of exchange rate changes | | 3.4 |
| | 0.2 |
| | — |
| | 3.6 |
|
Balance at December 31, 2017 | | $ | 29.0 |
| | $ | 7.1 |
| | $ | 0.3 |
| | $ | 36.4 |
|
The following tables provide a reconciliation from December 31, 2015 to December 31, 2016 for the plan assets categorized as Level 3. During the year ended December 31, 2016, $0.2 million assets were transferred out of the Level 3 category.
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
(in millions) | | Insurance Contracts | | Hedge Funds | | Real Estate | | Total |
| | | | | | | | |
Balance at December 31, 2015 | | $ | 10.3 |
| | $ | 3.2 |
| | $ | 0.3 |
| | $ | 13.8 |
|
Actual return on plan assets: | | |
| | |
| | |
| | |
|
Relating to assets still held at the reporting date | | 2.1 |
| | — |
| | — |
| | 2.1 |
|
Acquisitions/Divestitures | | 12.7 |
| | — |
| | — |
| | 12.7 |
|
Purchases, sales and settlements, net | | 1.0 |
| | 0.9 |
| | — |
| | 1.9 |
|
Transfers in and/or out | | (0.2 | ) | | — |
| | — |
| | (0.2 | ) |
Effect of exchange rate changes | | (0.8 | ) | | (0.1 | ) | | — |
| | (0.9 | ) |
Balance at December 31, 2016 | | $ | 25.1 |
| | $ | 4.0 |
| | $ | 0.3 |
| | $ | 29.4 |
|
Fair values for Level 3 assets are determined as 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.
Real Estate: Investment is stated by its appraised value.
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.
Cash Flows
In 2018, the Company expects to make contributions and direct benefit payments of $15.9 million to its defined benefit pension plans and $0.7 million to its postemployment medical plans.
Estimated Future Benefit Payments
|
| | | | | | | | |
(in millions) | | Pension Benefits | | Other Postemployment Benefits |
| | | | |
2018 | | $ | 18.0 |
| | $ | 0.7 |
|
2019 | | 16.6 |
| | 0.6 |
|
2020 | | 19.4 |
| | 0.6 |
|
2021 | | 18.7 |
| | 0.6 |
|
2022 | | 19.9 |
| | 0.6 |
|
2023-2027 | | 114.0 |
| | 3.2 |
|
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 $55.4 million, $20.9 million and $61.4 million for the year ended 2017, 2016 and 2015, 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.
As announced in October 2016, the Company proposed plans in Germany to reorganize and combine portions of its manufacturing, logistics and distribution networks within the Company’s two segments. As required under German law, the Company entered into a statutory co-determination process under which it collaborated with the appropriate labor groups to jointly define the infrastructure and staffing adjustments necessary to support this initiative. In 2017, the Company received all necessary approvals and is proceeding with its current plans. The Company estimates the cost of these initiatives to be approximately $65 million, primarily for severance related benefits for employees, which is expected to be incurred as actions are implemented over the next two years. For the year ended December 31, 2017 the Company recorded costs of approximately $29 million associated with these plans.
During 2015, the Company announced that it reorganized portions of its laboratory business and associated manufacturing capabilities within the Technologies & Equipment segment. During the year ended December 31, 2015, the Company recorded $52.2 million of costs that consist primarily of employee severance benefits related to these and other similar actions. Also during the year ended December 31, 2015, the Company recorded restructuring costs of $1.4 million within the Consumables segment that consists primarily of employee severance benefits related to the global efficiency initiative. These restructuring costs were offset by changes in estimates of $6.6 million, related to adjustments to the cost of initiatives in prior years. Other costs associated with 2015 plans of $7.4 million and $9.1 million were recorded in Cost of products sold and Selling, general and administrative expenses, respectfully, in the Consolidated Statements of Operations.
At December 31, 2017, the Company’s restructuring accruals were as follows:
|
| | | | | | | | | | | | | | | | |
| | Severances |
(in millions) | | 2015 and Prior Plans | | 2016 | | 2017 | | Total |
| | | | | | | | |
Balance at December 31, 2016 | | $ | 20.6 |
| | $ | 8.2 |
| | $ | — |
| | $ | 28.8 |
|
Provisions and adjustments | | 0.6 |
| | — |
| | 50.6 |
| | 51.2 |
|
Amounts applied | | (10.4 | ) | | (5.8 | ) | | (4.2 | ) | | (20.4 | ) |
Change in estimates | | (4.8 | ) | | (0.7 | ) | | 1.8 |
| | (3.7 | ) |
Balance at December 31, 2017 | | $ | 6.0 |
| | $ | 1.7 |
| | $ | 48.2 |
| | $ | 55.9 |
|
|
| | | | | | | | | | | | | | | | |
| | Lease/Contract Terminations |
(in millions) | | 2015 and Prior Plans | | 2016 | | 2017 | | Total |
| | | | | | | | |
Balance at December 31, 2016 | | $ | 2.7 |
| | $ | 0.3 |
| | $ | — |
| | $ | 3.0 |
|
Provisions and adjustments | | 0.7 |
| | — |
| | 0.5 |
| | 1.2 |
|
Amounts applied | | (2.3 | ) | | (0.3 | ) | | (0.3 | ) | | (2.9 | ) |
Change in estimates | | (0.5 | ) | | (0.2 | ) | | — |
| | (0.7 | ) |
Balance at December 31, 2017 | | $ | 0.6 |
| | $ | (0.2 | ) | | $ | 0.2 |
| | $ | 0.6 |
|
|
| | | | | | | | | | | | | | | | |
| | Other Restructuring Costs |
(in millions) | | 2015 and Prior Plans | | 2016 | | 2017 | | Total |
| | | | | | | | |
Balance at December 31, 2016 | | $ | 0.5 |
| | $ | 0.2 |
| | $ | — |
| | $ | 0.7 |
|
Provisions and adjustments | | 2.4 |
| | 2.0 |
| | 3.0 |
| | 7.4 |
|
Amounts applied | | (1.5 | ) | | (2.0 | ) | | (1.3 | ) | | (4.8 | ) |
Change in estimates | | 0.5 |
| | — |
| | — |
| | 0.5 |
|
Balance at December 31, 2017 | | $ | 1.9 |
| | $ | 0.2 |
| | $ | 1.7 |
| | $ | 3.8 |
|
The following table provides the cumulative amounts for the provisions and adjustments and amounts applied for all the plans by segment:
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | December 31, 2016 | | Provisions and Adjustments | | Amounts Applied | | Change in Estimates | | December 31, 2017 |
| | | | | | | | | | |
Technologies & Equipment | | $ | 22.1 |
| | $ | 44.2 |
| | $ | (17.5 | ) | | $ | (1.9 | ) | | $ | 46.9 |
|
Consumables | | 10.3 |
| | 13.8 |
| | (9.3 | ) | | (1.5 | ) | | 13.3 |
|
All Other | | 0.1 |
| | 1.8 |
| | (1.3 | ) | | (0.5 | ) | | 0.1 |
|
Total | | $ | 32.5 |
| | $ | 59.8 |
| | $ | (28.1 | ) | | $ | (3.9 | ) | | $ | 60.3 |
|
At December 31, 2016, the Company’s restructuring accruals were as follows:
|
| | | | | | | | | | | | | | | | |
| | Severances |
(in millions) | | 2014 and Prior Plans | | 2015 Plans | | 2016 Plans | | Total |
| | | | | | | | |
Balance at December 31, 2015 | | $ | 1.5 |
| | $ | 34.6 |
| | $ | — |
| | $ | 36.1 |
|
Provisions and adjustments | | — |
| | 4.7 |
| | 11.4 |
| | 16.1 |
|
Amounts applied | | (0.8 | ) | | (18.5 | ) | | (2.8 | ) | | (22.1 | ) |
Change in estimates | | (0.1 | ) | | (0.8 | ) | | (0.4 | ) | | (1.3 | ) |
Balance at December 31, 2016 | | $ | 0.6 |
| | $ | 20.0 |
| | $ | 8.2 |
| | $ | 28.8 |
|
|
| | | | | | | | | | | | | | | | |
| | Lease/Contract Terminations |
(in millions) | | 2014 and Prior Plans | | 2015 Plans | | 2016 Plans | | Total |
| | | | | | | | |
Balance at December 31, 2015 | | $ | 0.8 |
| | $ | 3.4 |
| | $ | — |
| | $ | 4.2 |
|
Provisions and adjustments | | — |
| | 5.4 |
| | 0.5 |
| | 5.9 |
|
Amounts applied | | (0.4 | ) | | (3.3 | ) | | (0.2 | ) | | (3.9 | ) |
Change in estimates | | (0.2 | ) | | (3.0 | ) | | — |
| | (3.2 | ) |
Balance at December 31, 2016 | | $ | 0.2 |
| | $ | 2.5 |
| | $ | 0.3 |
| | $ | 3.0 |
|
|
| | | | | | | | | | | | | | | | |
| | Other Restructuring Costs |
(in millions) | | 2014 and Prior Plans | | 2015 Plans | | 2016 Plans | | Total |
| | | | | | | | |
Balance at December 31, 2015 | | $ | 0.3 |
| | $ | 0.6 |
| | $ | — |
| | $ | 0.9 |
|
Provisions and adjustments | | 0.1 |
| | 3.1 |
| | 0.5 |
| | 3.7 |
|
Amounts applied | | (0.2 | ) | | (3.0 | ) | | (0.3 | ) | | (3.5 | ) |
Change in estimates | | — |
| | (0.4 | ) | | — |
| | (0.4 | ) |
Balance at December 31, 2016 | | $ | 0.2 |
| | $ | 0.3 |
| | $ | 0.2 |
| | $ | 0.7 |
|
The following table provides the cumulative amounts for the provisions and adjustments and amounts applied for all the plans by segment:
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | December 31, 2015 | | Provisions and Adjustments | | Amounts Applied | | Change in Estimates | | December 31, 2016 |
| | | | | | | | | | |
Technologies & Equipment | | $ | 30.9 |
| | $ | 15.5 |
| | $ | (20.1 | ) | | $ | (4.2 | ) | | $ | 22.1 |
|
Consumables | | 9.2 |
| | 9.9 |
| | (8.5 | ) | | (0.3 | ) | | 10.3 |
|
All Other | | 1.1 |
| | 0.3 |
| | (0.9 | ) | | (0.4 | ) | | 0.1 |
|
Total | | $ | 41.2 |
| | $ | 25.7 |
| | $ | (29.5 | ) | | $ | (4.9 | ) | | $ | 32.5 |
|
Other Costs
For the year ended December 31, 2017, the Company recorded other costs of $369.8 million, which consist of impairment charges of $346.7 million and legal settlements of $23.1 million. For further information on the impairment charges, see Note 9, Goodwill and Intangible Assets.
For the year ended December 31, 2016, the Company recorded other costs of $2.3 million, which were primarily related to legal costs.
For the year ended December 31, 2015, the Company recorded other costs of $3.3 million, which included $4.2 million of impairments of fixed assets and intangibles offset by income from legal settlements.
NOTE 17 - FINANCIAL INSTRUMENTS AND DERIVATIVES
Derivative Instruments and Hedging Activities
The Company’s activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates, interest rates and commodity prices. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company’s operating results and equity. The Company currently employs foreign currency forward contracts and cross currency basis swap contracts financial instruments to hedge certain anticipated transactions or assets and liabilities denominated in foreign currencies. Additionally, the Company currently utilizes interest rate swaps to convert variable rate debt to fixed rate debt.
Derivative Instruments Designated as Hedging
Cash Flow Hedges
The following table summarizes the notional amounts of cash flow hedges by derivative instrument type at December 31, 2017 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:
|
| | | | | | | | |
| | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months |
| | |
(in millions) | | |
| | | | |
Foreign exchange forward contracts | | $ | 372.3 |
| | $ | 295.2 |
|
Interest rate swaps | | 111.4 |
| | — |
|
Total derivative instruments designated as cash flow hedges | | $ | 483.7 |
| | $ | 295.2 |
|
Foreign Exchange Risk Management
The Company uses a layered hedging program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings of the consolidated Company. The Company accounts for the designated foreign exchange forward contracts 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 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 in 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 excluded and is reported in Other expense (income), net in 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 in the Consolidated Statements of Cash Flows. The Company hedges various currencies, primarily in euros, Swedish kronor, Canadian dollars, British pounds, Swiss francs, Japanese yen and Australian dollars.
These foreign exchange forward contracts generally have maturities up to 18 months and the counterparties to the transactions are typically large international financial institutions.
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, 2017, the Company has one significant exposure hedged with interest rate contracts. The exposure is hedged with derivative contracts having notional amounts totaling 12.6 billion Japanese yen, which effectively converts the underlying variable interest rate debt facility to a fixed interest rate of 0.9% for a term of five years ending September 2019.
The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes. Any cash flows associated with these instruments are included in cash from operating activities in the Consolidated Statements of Cash Flows.
Cash Flow Hedge Activity
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, 2017, 2016 and 2015:
|
| | | | | | | | | | | | | | |
| | December 31, 2017 |
(in millions) | | (Loss) Gain Recognized in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into (Expense) Income | | Ineffective Portion Recognized in Expense |
| | | | | | | | |
Effective Portion: | | | | | | | | |
Interest rate swaps | | $ | (0.1 | ) | | Interest expense | | $ | (2.3 | ) | | $ | — |
|
Foreign exchange forward contracts | | (14.6 | ) | | Cost of products sold | | (3.0 | ) | | — |
|
| | | | | | | | |
Ineffective Portion: | | | | | | | | |
Foreign exchange forward contracts | | $ | — |
| | Other expense (income), net | | $ | — |
| | $ | (0.9 | ) |
Total in cash flow hedging | | $ | (14.7 | ) | | | | $ | (5.3 | ) | | $ | (0.9 | ) |
|
| | | | | | | | | | | | | | |
| | December 31, 2016 |
(in millions) | | (Loss) Gain Recognized in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into (Expense) Income | | Ineffective Portion Recognized in Expense |
| | | | | | | | |
Effective Portion: | | | | | | | | |
Interest rate swaps | | $ | (0.4 | ) | | Interest expense | | $ | (2.9 | ) | | $ | — |
|
Foreign exchange forward contracts | | (0.3 | ) | | Cost of products sold | | 4.8 |
| | — |
|
Foreign exchange forward contracts | | (0.2 | ) | | SG&A expenses | | 0.1 |
| | — |
|
Commodity contracts | | 0.1 |
| | Cost of products sold | | (0.1 | ) | | — |
|
| | | | | | | | |
Ineffective Portion: | | | | | | | | |
Foreign exchange forward contracts | | $ | — |
| | Other expense (income), net | | $ | — |
| | $ | (0.6 | ) |
Total for cash flow hedging | | $ | (0.8 | ) | | | | $ | 1.9 |
| | $ | (0.6 | ) |
|
| | | | | | | | | | | | | | |
| | December 31, 2015 |
(in millions) | | (Loss) Gain Recognized in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into (Expense) Income | | Ineffective Portion Recognized in Expense |
| | | | | | | | |
Effective Portion: | | | | | | | | |
Interest rate swaps | | $ | (1.4 | ) | | Interest expense (a) | | $ | (10.1 | ) | | $ | — |
|
Foreign exchange forward contracts | | 23.3 |
| | Cost of products sold | | 18.0 |
| | — |
|
Foreign exchange forward contracts | | 0.5 |
| | SG&A expenses | | 0.6 |
| | — |
|
Commodity contracts | | (0.3 | ) | | Cost of products sold | | (0.5 | ) | | — |
|
| | | | | | | | |
Ineffective Portion: | | | | | | | | |
Foreign exchange forward contracts | | $ | — |
| | Other expense (income), net | | — |
| | $ | (0.7 | ) |
Total for cash flow hedging | | $ | 22.1 |
| | | | $ | 8.0 |
| | $ | (0.7 | ) |
(a) The Company reclassified $6.0 million of losses into earnings due to the discontinuance of a cash flow hedge because a portion of the forecasted transaction will no longer occur.
Overall, the derivatives designated as cash flow hedges are considered to be highly effective for accounting purposes. At December 31, 2017, the Company expects to reclassify $8.1 million of deferred net losses on cash flow hedges recorded in AOCI in the Consolidated Statements of Operations during the next 12 months. The term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable interest rate debt) is typically 18 months.
For the rollforward of derivative instruments 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 subsidiaries the most significant of which are denominated in euros, Swiss francs, Japanese yen and 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 derivative and non-derivative financial instruments. The derivative instruments consist of 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 derivative and non-derivative financial instruments designated as hedges of net investments, which are included in AOCI. The time value component of the fair value of the derivative is excluded and is reported in Other expense (income), net in the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in investing activities in the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, in which case all cash flows will be classified as financing activities in the Consolidated Statements of Cash Flows.
On January 2, 2018, the Company entered into a 245.6 million euro cross currency basis swap maturing in August 2021, that was designated as a hedge of net investments. This contract effectively converts the $295.7 million bond coupon from 4.1% to 1.7%, which will result in a net reduction of interest expense of approximately $7 million in 2018.
The following table summarizes the notional amounts of hedges of net investments by derivative instrument type at December 31, 2017 and the notional amounts expected to mature during the next 12 months:
|
| | | | | | | | |
| | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months |
| | |
(in millions) | | |
| | | | |
Foreign exchange forward contracts | | $ | 622.3 |
| | $ | 311.1 |
|
The fair value of the foreign exchange forward contracts and cross currency basis swaps is the estimated amount the Company would receive or pay at the 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.
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 the hedges of net investments for the year ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | |
| | December 31, 2017 |
| | Loss Recognized in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income |
| | | |
(in millions) | | | |
| | | | | | |
Effective Portion: | | | | | | |
Foreign exchange forward contracts | | $ | (14.1 | ) | | Other expense (income), net | | $ | 3.7 |
|
Total for net investment hedging | | $ | (14.1 | ) | | | | $ | 3.7 |
|
|
| | | | | | | | | | |
| | December 31, 2016 |
| | Loss Recognized in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income |
| | | |
(in millions) | | | |
| | | | | | |
Effective Portion: | | | | | | |
Foreign exchange forward contracts | | $ | (13.2 | ) | | Other expense (income), net | | $ | 6.7 |
|
Total for net investment hedging | | $ | (13.2 | ) | | | | $ | 6.7 |
|
|
| | | | | | | | | | |
| | December 31, 2015 |
| | Gain Recognized in AOCI | | Consolidated Statements of Operations Location | | Recognized in Income |
| | | |
(in millions) | | | |
| | | | | | |
Effective Portion: | | | | | | |
Foreign exchange forward contracts | | $ | 4.5 |
| | Interest expense | | $ | 4.1 |
|
Total for net investment hedging | | $ | 4.5 |
| | | | $ | 4.1 |
|
Fair Value Hedges
The Company used interest rate swaps to convert a portion of its fixed interest rate debt to variable interest rate debt. The Company had 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 (“PPN”) to variable rate, the debt and interest rate swap matured in February 2016. The notional value of the swaps declined proportionately as portions of the PPN matured. These interest rate swaps were designated as fair value hedges of the interest rate risk associated with the hedged portion of the fixed rate PPN. Accordingly, the Company carried the portion of the hedged debt at fair value, with the change in debt and swaps offsetting each other in the Consolidated Statements of Operations. Any cash flows associated with these instruments were included in operating activities in the Consolidated Statements of Cash Flows.
The following tables summarize the amount of income (expense) recorded in the Company’s Consolidated Statements of Operations related to the hedges of fair value for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | | | | |
| | Consolidated Statements of Operations Location | | | Income (Expense) Recognized |
| | | | Twelve Months Ended December 31, |
(in millions) | | | | 2017 | | 2016 | | 2015 |
| | | | | | | | | |
Interest rate swaps | | Interest expense | | | $ | — |
| | $ | — |
| | $ | 0.3 |
|
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 liabilities that are denominated in a non-functional currency. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in Other expense (income), net in 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 in 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 in the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, in which case the cash flows will be classified as financing activities in 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, 2017 and the notional amounts expected to mature during the next 12 months:
|
| | | | | | | | |
| | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months |
| | |
(in millions) | | |
| | | | |
Foreign exchange forward contracts | | $ | 369.3 |
| | $ | 369.3 |
|
Interest rate swaps | | 0.2 |
| | 0.2 |
|
Total for instruments not designated as hedges | | $ | 369.5 |
| | $ | 369.5 |
|
Derivative Instruments not Designated as Hedges Activity
The following table summarizes the amounts of gains (losses) recorded in the Company’s Consolidated Statements of Operations related to the economic hedges not designated as hedging for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | | | |
| | Consolidated Statements of Operations Location | | (Loss) Gain Recognized |
| | | Twelve Months Ended December 31, |
(in millions) | | | 2017 | | 2016 | | 2015 |
| | | | | | | | |
Foreign exchange forward contracts (a) | | Other expense (income), net | | $ | (7.7 | ) | | $ | (0.6 | ) | | $ | 6.3 |
|
DIO equity option contracts | | Other expense (income), net | | — |
| | — |
| | 0.1 |
|
Cross currency basis swaps (a) | | Other expense (income), net | | — |
| | — |
| | (1.8 | ) |
Total for instruments not designated as hedges | | | | $ | (7.7 | ) | | $ | (0.6 | ) | | $ | 4.6 |
|
(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 in 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, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | |
| | December 31, 2017 |
(in millions) | | Prepaid Expenses and Other Current Assets, Net | | Other Noncurrent Assets, Net | | Accrued Liabilities | | Other Noncurrent Liabilities |
Designated as Hedges | | | | |
| | | | | | | | |
Foreign exchange forward contracts | | $ | 1.4 |
| | $ | — |
| | $ | 13.4 |
| | $ | 4.5 |
|
Interest rate swaps | | — |
| | — |
| | 0.3 |
| | 0.1 |
|
Total | | $ | 1.4 |
| | $ | — |
| | $ | 13.7 |
| | $ | 4.6 |
|
| | | | | | | | |
Not Designated as Hedges | | |
| | |
| | |
| | |
|
| | | | | | | | |
Foreign exchange forward contracts | | $ | 3.4 |
| | $ | — |
| | $ | 3.7 |
| | $ | — |
|
Total | | $ | 3.4 |
| | $ | — |
| | $ | 3.7 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2016 |
(in millions) | | Prepaid Expenses and Other Current Assets, Net | | Other Noncurrent Assets, Net | | Accrued Liabilities | | Other Noncurrent Liabilities |
Designated as Hedges | | | | |
| | | | | | | | |
Foreign exchange forward contracts | | $ | 12.8 |
| | $ | 0.6 |
| | $ | 1.0 |
| | $ | — |
|
Interest rate swaps | | — |
| | — |
| | 0.2 |
| | 0.3 |
|
Total | | $ | 12.8 |
| | $ | 0.6 |
| | $ | 1.2 |
| | $ | 0.3 |
|
| | | | | | | | |
Not Designated as Hedges | | |
| | |
| | |
| | |
|
| | | | | | | | |
Foreign exchange forward contracts | | $ | 1.3 |
| | $ | — |
| | $ | 1.5 |
| | $ | — |
|
Total | | $ | 1.3 |
| | $ | — |
| | $ | 1.5 |
| | $ | — |
|
Balance Sheet Offsetting
Substantially all of the Company’s derivative contracts are subject to netting arrangements, whereby the right to offset occurs in the event of default or termination in accordance with the terms of the 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 in the Consolidated Balance Sheets.
Offsetting of financial assets and liabilities under netting arrangements at December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in millions) | | Gross Amounts Recognized | | Gross Amount Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount |
| | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 4.8 |
| | $ | — |
| | $ | 4.8 |
| | $ | (3.9 | ) | | $ | — |
| | $ | 0.9 |
|
Total Assets | | $ | 4.8 |
| | $ | — |
| | $ | 4.8 |
| | $ | (3.9 | ) | | $ | — |
| | $ | 0.9 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in millions) | | Gross Amounts Recognized | | Gross Amount Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 21.6 |
| | $ | — |
| | $ | 21.6 |
| | $ | (3.8 | ) | | $ | — |
| | $ | 17.8 |
|
Interest rate swaps | | 0.4 |
| | — |
| | 0.4 |
| | (0.1 | ) | | — |
| | 0.3 |
|
Total Liabilities | | $ | 22.0 |
| | $ | — |
| | $ | 22.0 |
| | $ | (3.9 | ) | | $ | — |
| | $ | 18.1 |
|
Offsetting of financial assets and liabilities under netting arrangements at December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in millions) | | Gross Amounts Recognized | | Gross Amount Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount |
| | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 14.7 |
| | $ | — |
| | $ | 14.7 |
| | $ | (2.8 | ) | | $ | — |
| | $ | 11.9 |
|
Total Assets | | $ | 14.7 |
| | $ | — |
| | $ | 14.7 |
| | $ | (2.8 | ) | | $ | — |
| | $ | 11.9 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in millions) | | Gross Amounts Recognized | | Gross Amount Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 2.5 |
| | $ | — |
| | $ | 2.5 |
| | $ | (2.5 | ) | | $ | — |
| | $ | — |
|
Interest rate swaps | | 0.5 |
| | — |
| | 0.5 |
| | (0.3 | ) | | — |
| | 0.2 |
|
Total Liabilities | | $ | 3.0 |
| | $ | — |
| | $ | 3.0 |
| | $ | (2.8 | ) | | $ | — |
| | $ | 0.2 |
|
NOTE 18 - FAIR VALUE MEASUREMENTItem 14. Principal Accounting Fees and Services
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company recordsinformation required under this item will be included under the caption “Ratification of Appointment of Independent Registered Public Accountants” in our 2024 Proxy Statement and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedule
a.Documents filed as part of this Report
1.Financial Statements:
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm (PCAOB ID 238)
Consolidated Statements of Operations for the years ended December 31, 2023, 2022, and 2021
Consolidated Statements of Comprehensive Income or Loss for the years ended December 31, 2023, 2022, and 2021
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Equity for the years ended December 31, 2023, 2022, and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021
Notes to Consolidated Financial Statements
2.Financial Statement Schedules:
The following financial instruments at fair value with unrealized gainsstatement schedule is included in this report: Schedule II - Valuation and losses related to certain financial instruments reflected in AOCIQualifying Accounts for the Years Ended December 31, 2023, 2022, and 2021.
All other schedules for which provision is made in the Consolidated Balance Sheets. In addition, the Company has recognized certain liabilities at fair value. The Company applies the market approach for recurring fair value measurements. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. The Company believes the carrying amounts of cash and cash equivalents, accounts receivable (net of allowance for doubtful accounts), prepaid expenses and other current assets, accounts payable, accrued liabilities, income taxes payable and notes payable approximate fair value due to the short-term nature of these instruments. The Company estimated the fair value and carrying value of its total long-term debt, including current portion, was $1,629.9 million and $1,620.8 million, respectively, at December 31, 2017. At December 31, 2016, the Company estimated the fair value and carrying value was $1,525.7 million and $1,522.2 million, respectively. The interest rate on the outstanding principalapplicable accounting regulations of the $450.0 million Senior Notes is a fixed rate of 4.1%Securities and Exchange Commission are not required to be included herein under the fair value is based on interest rates at December 31, 2017. For additional details on interest rates of long term debt, please see Note 12, Financing Arrangements. The variable interest rate on the Japanese yen term loan is consistent with current market conditions,related instructions or are inapplicable and, therefore, the fair value approximates the loan’s carrying value.have been omitted.
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, 2017 and 2016.3.Exhibits
|
| | | | | | | | | | | | | | | | |
| | December 31, 2017 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets | | | | | | | | |
Foreign exchange forward contracts | | $ | 4.8 |
| | $ | — |
| | $ | 4.8 |
| | $ | — |
|
Available-for-sale security | | 54.4 |
| | — |
| | 54.4 |
| | — |
|
Total assets | | $ | 59.2 |
| | $ | — |
| | $ | 59.2 |
| | $ | — |
|
| | | | | | | | |
Liabilities | | |
| | |
| | |
| | |
|
Interest rate swaps | | $ | 0.4 |
| | $ | — |
| | $ | 0.4 |
| | $ | — |
|
Foreign exchange forward contracts | | 21.6 |
| | — |
| | 21.6 |
| | — |
|
Contingent considerations on acquisitions | | 8.6 |
| | — |
| | — |
| | 8.6 |
|
Total liabilities | | $ | 30.6 |
| | $ | — |
| | $ | 22.0 |
| | $ | 8.6 |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2016 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets | | | | | | | | |
Foreign exchange forward contracts | | $ | 14.7 |
| | — |
| | $ | 14.7 |
| | — |
|
Total assets | | $ | 14.7 |
| | $ | — |
| | $ | 14.7 |
| | $ | — |
|
| | | | | | | | |
Liabilities | | |
| | |
| | |
| | |
|
Interest rate swaps | | $ | 0.5 |
| | $ | — |
| | $ | 0.5 |
| | $ | — |
|
Foreign exchange forward contracts | | 2.5 |
| | — |
| | 2.5 |
| | — |
|
Contingent considerations on acquisitions | | 7.6 |
| | — |
| | — |
| | 7.6 |
|
Total liabilities | | $ | 10.6 |
| | $ | — |
| | $ | 3.0 |
| | $ | 7.6 |
|
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 Company utilizes commodity contracts, certain interest rates swaps and foreign exchange forward contracts that are considered cash flow hedges. In addition, the Company at times employs certain cross currency interest rate swaps and forward exchange contracts that are considered hedges of net investment in foreign operations. Both types of designated derivative instruments are further discussed in Note 17, Financial Instruments and Derivatives.
Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The Company’s Level 3 liabilities at December 31, 2017Exhibits listed below are related to earn-out obligations on prior acquisitions that were assumedfiled or incorporated by reference as part of the merger with Sirona. The following table presents a reconciliation of the Company’s Level 3 holdings measured at fair value on a recurring basis using unobservable inputs:Form 10-K.
| | | | | | | | |
Exhibit Number | | Description |
| | Agreement and Plan of Merger, dated as of September 15, 2015, by and among DENTSPLY International Inc., Sirona Dental Systems, Inc. and Dawkins Merger Sub Inc. (8) |
| | Equity Purchase Agreement, dated as of December 31, 2020, by and among Dentsply Sirona Inc., Straight Smile, LLC, the members of Straight Smile, LLC and Member Representative SSB, LLC (25) |
3.1 | | Second Amended and Restated Certificate of Incorporation (10) |
| | Certificate of Amendment to Second Amended and Restated Certificate of Incorporation of Dentsply Sirona Inc., dated as of May 23, 2018 (14) |
| | Seventh Amended and Restated By-laws of DENTSPLY SIRONA Inc. (35) |
4.1 | | 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)) (2) |
| | 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.) (7) |
4.2 | | United States Commercial Paper Dealer Agreement dated as of August 18, 2011 between the Company and J.P. Morgan Securities LLC (7) |
| | 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 (7) |
| | $700 Million Credit Agreement, dated as of July 27, 2018 final maturity in July 26, 2024, 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, and Wells Fargo Bank, N.A., Commerzbank AG, New York Branch, MUFG Bank, Ltd., Unicredit Bank AG New York Branch, and TD Bank, N.A. as co-documentation agents, and J.P. Morgan Chase Bank, N.A. and Citibank, N.A., as Joint Bookrunners and Joint Lead Arrangers (15) |
| | Description of the Registrant’s Securities (22) |
| | |
|
| | | | |
| | |
(in millions) | | Level 3 |
| | |
Balance, February 29, 2016 | | $ | 7.1 |
|
Unrealized gain: | | |
Reported in Other expense (income), net | | 0.7 |
|
Effect of exchange rate changes | | (0.2 | ) |
Balance, December 31, 2016 | | $ | 7.6 |
|
Unrealized gain: | | |
Reported in Other expense (income), net | | 0.1 |
|
Effect of exchange rate changes | | 0.9 |
|
Balance at December 31, 2017 | | $ | 8.6 |
|
| | | | | | | | |
Exhibit Number | | Description |
| | Form of Indenture (5) |
| | Supplemental Indenture, dated August 23, 2011 between DENTSPLY International Inc., as Issuer and Wells Fargo, National Association, as Trustee (6) |
4.7 | | 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 (7) |
| | First Amendment to 12.55 Billion Japanese Yen Term Loan Agreement dated December 18, 2015 between the Company and Bank of Tokyo-Mitsubishi UFJ, LTD (9) |
| | United States Commercial Paper issuing and paying Agency Agreement dated as of November 4, 2014, between the Company and U.S. Bank N.A. (7) |
| | Note Purchase Agreement, dated December 11, 2015, by and among the Company, Metropolitan Life Insurance Company, Prudential Retirement Insurance and Annuity Company, C.M. Life Insurance Company, The Northwestern Mutual Life Insurance Company, The Lincoln National Life Insurance Company, Manulife Life Insurance Company, Manufacturers Life Reinsurance Limited, Nationwide Life Insurance Company, United of Omaha Life Insurance Company and the other purchasers listed in Schedule A thereto (9) |
| | Note Purchase Agreement, dated October 27, 2016, by and among the Company, Metropolitan Life Insurance Company, New York Life Insurance Company, Nationwide Life Insurance Company, The Northwestern Mutual Life Insurance Company, Massachusetts Mutual Life Insurance Company, Allianz Life Insurance Company of North America, Hartford Life and Accident Insurance Company, The Lincoln National Life Insurance Company, The Guardian Life Insurance Company of America, Great-West Life & Annuity Insurance Company, The Prudential Insurance Company of America, and the other purchasers listed in Schedule A thereto (10) |
| | Note Purchase Agreement, dated June 24, 2019, by and among the Company and Brighthouse Life Insurance Company, Metlife Insurance K.K., The Northwestern Mutual Life Insurance Company, Hartford Fire Insurance Company, and Hartford Life and Accident Insurance Company. (19) |
| | Indenture, dated as of May 26, 2020, between DENTSPLY SIRONA Inc. and Wells Fargo Bank, National Association. (23) |
| | First Supplemental Indenture, dated as of May 26, 2020, between DENTSPLY SIRONA Inc. and Wells Fargo Bank, National Association. (23) |
| | Form of 3.250% Notes due 2030 (included in Exhibit 4.13). (23) |
| | Consent Memorandum, dated August 11, 2022, by and among DENTSPLY SIRONA Inc., the Subsidiary Borrowers from time to time party thereto, the lender parties thereto and JPMorgan Chase Bank, N.A., as administrative agent. (32) |
| | Note Purchase Agreement Amendment and Consent, dated August 26, 2022, by and among DENTSPLY SIRONA Inc. and each of the holders of Notes parties thereto, with respect to that certain Note Purchase Agreement, dated December 11, 2015, by and among the Issuers and the holders of Notes set forth therein. (32) |
| | Note Purchase and Guarantee Agreement Amendment and Consent, dated August 26, 2022, by and among DENTSPLY SIRONA Inc., Sirona Dental Services GmbH and each of the holders of Notes parties thereto, with respect to that certain Note Purchase Agreement and Guarantee Agreement, dated October 27, 2016, by and among the Issuers and the holders of Notes set forth therein. (32) |
| | Note Purchase Agreement Amendment and Consent, dated August 26, 2022, by and among DENTSPLY SIRONA Inc. and each of the holders of Notes parties thereto, with respect to that certain Note Purchase Agreement, dated June 24, 2019, by and among the Issuers and the holders of Notes set forth therein. (32) |
| | Consent Memorandum, dated September 14, 2022, by and among DENTSPLY SIRONA Inc., the Subsidiary Borrowers from time to time party thereto, the lender parties thereto and JPMorgan Chase Bank, N.A., as administrative agent. (32) |
| | Consent Memorandum, dated November 4, 2022, by and among DENTSPLY SIRONA Inc., the Subsidiary Borrowers from time to time party thereto, the lender parties thereto and JPMorgan Chase Bank, N.A., as administrative agent. (32) |
| | Note Purchase Agreement Amendment No. 2 and Consent, dated November 5, 2022, by and among DENTSPLY SIRONA Inc and each of the holders of Notes parties thereto, with respect to that certain Note Purchase Agreement, dated December 11, 2015, by and among the Issuers and the holders of Notes set forth therein. (32) |
There were no additional purchases, issuances or transfers of Level 3 financial instruments in 2017 and 2016.
Assets Measured at Fair Value on a Non-Recurring Basis
For the year ended December 31, 2017, the Company recorded impairments of $1,650.9 million related to goodwill and $346.7 million related to indefinite-lived intangible assets for the CAD/CAM, Imaging and Treatment Center equipment reporting units. The carrying value of $1,980.6 million of goodwill related to these reporting units represents the estimated fair value as determined in the December 31, 2017 valuation. The carrying value of $1,998.8 million of identifiable intangible assets were also related to these reporting units and represents the estimated fair value as determined in the December 31, 2017 valuation. The valuation technique and inputs, which used Level 3 unobservable inputs, as well as further details on the impairment are disclosed in Note 9, Goodwill and Intangible Assets.
The following tables set forth by level within the fair value hierarchy certain of the Company’s goodwill and identifiable intangible assets that were measured at fair value on a non-recurring basis at December 31, 2017.
|
| | | | | | | | | | | | | | | | |
| | December 31, 2017 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets | | | | | | | | |
Identifiable intangible assets, net | | $ | 1,998.8 |
| | $ | — |
| | $ | — |
| | $ | 1,998.8 |
|
Goodwill, net | | 1,980.6 |
| | — |
| | — |
| | 1,980.6 |
|
Total assets | | $ | 3,979.4 |
| | $ | — |
| | $ | — |
| | $ | 3,979.4 |
|
NOTE 19 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases automobiles machinery, 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 $28.3 million, $33.3 million and $30.4 million for 2017, 2016 and 2015, respectively.
Rental commitments, principally for real estate (exclusive of taxes, insurance and maintenance), automobiles and office equipment are as follows: | | | | | | | | |
Exhibit Number | | Description |
| | Note Purchase and Guarantee Agreement Amendment No. 2 and Consent, dated November 5, 2022, by and among DENTSPLY SIRONA Inc, Sirona Dental Services GmbH and each of the holders of Notes parties thereto, with respect to that certain Note Purchase Agreement and Guarantee Agreement, dated October 27, 2016, by and among the Issuers and the holders of Notes set forth therein. (32) |
| | Note Purchase Agreement Amendment No. 2 and Consent, dated November 5, 2022, by and among DENTSPLY SIRONA Inc and each of the holders of Notes parties thereto, with respect to that certain Note Purchase Agreement, dated June 24, 2019, by and among the Issuers and the holders of Notes set forth therein. (32) |
| | Restricted Stock Unit Deferral Plan* (9) |
10.2 | | 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 (1) |
| | 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 (1) |
| | DENTSPLY Supplemental Saving Plan Agreement dated as of December 10, 2007* (3) |
| | DENTSPLY SIRONA Inc. Directors’ Deferred Compensation Plan, as amended and restated January 1, 2019* (17) |
| | DENTSPLY SIRONA Inc. Supplemental Executive Retirement Plan, as amended and restated January 1, 2019* (17) |
| | AZ Trade Marks License Agreement, dated January 18, 2001 between AstraZeneca AB and Maillefer Instruments Holdings, S.A. (1) |
| | 2010 Equity Incentive Plan, amended and restated* (9) |
| | DENTSPLY SIRONA Inc. 2016 Omnibus Incentive Plan, as amended and restated effective February 14, 2018* (13) |
| | Sirona Dental Systems, Inc. Equity Incentive Plan, as Amended* (10) |
10.10 | | Employment Agreement, dated February 12, 2018, between DENTSPLY SIRONA Inc. and Donald M. Casey Jr.* (11) |
| | First Amendment to Employment Agreement, dated August 3, 2018, by and between DENTSPLY SIRONA Inc. and Donald M. Casey Jr.* (17) |
| | Second Amendment dated as of March 5, 2019 to Employment Agreement by and between DENTSPLY SIRONA Inc. and Donald M. Casey, Jr.* (18) |
10.11 | | Form of DENTSPLY SIRONA Inc. Indemnification Agreement* (12) |
| | Form of Amended and Restated DENTSPLY SIRONA Inc. Indemnification Agreement dated as of December 15, 2021* (27) |
| | Form of Amended and Restated DENTSPLY SIRONA Inc. Indemnification Agreement dated as of December 14, 2022* (33) |
| | Form of Amended and Restated DENTSPLY SIRONA Inc. Indemnification Agreement dated as of February 27, 2024* (Filed herewith) |
| | Form of Option Grant Notice Under the DENTSPLY SIRONA Inc. 2016 Omnibus Incentive Plan as amended and restated* (12) |
| | Form of Restricted Share Unit Grant Notice Under the DENTSPLY SIRONA Inc. 2016 Omnibus Incentive Plan as amended and restated* (12) |
| | Form of Performance Restricted Share Unit Grant Notice Under the DENTSPLY SIRONA Inc. 2016 Omnibus Incentive Plan as amended and restated* (12) |
| | Employee Stock Purchase Plan, dated May 23, 2018* (16) |
10.16 | | Non-Employee Director Compensation Policy, effective February 23, 2022* (27) |
| | Non-Employee Director Compensation Policy, effective July 27, 2023* (Filed herewith) |
| | Form of Performance Restricted Stock Unit Award Agreement* (18) |
| | |
|
| | | | |
(in millions) | | |
| | |
2018 | | $ | 34.8 |
|
2019 | | 28.0 |
|
2020 | | 22.5 |
|
2021 | | 17.7 |
|
2022 | | 14.8 |
|
2023 and thereafter | | 34.4 |
|
| | $ | 152.2 |
|
| | | | | | | | |
| | |
Exhibit Number | | Description |
| | Form of Restricted Share Unit Grant Notice for Directors under the DENTSPLY SIRONA Inc. 2016 Omnibus Incentive Plan as amended and restated* (20) |
| | Amended and Restated Restricted Stock Unit Deferral Plan, effective July 31, 2019* (20) |
| | Offer Letter, dated June 27, 2019, between DENTSPLY SIRONA Inc. and Jorge Gomez* (20) |
| | Interim Chief Executive Officer Employment Agreement by and between DENTSPLY SIRONA Inc. and John P. Groetelaars, dated April 16, 2022 (29) |
| | Interim Chief Financial Officer Employment Agreement by and between DENTSPLY SIRONA Inc. and Barbara W. Bodem, dated April 16, 2022 (29) |
| | Dentsply Sirona Inc. Key Employee Severance Benefits Plan, dated May 25, 2022* (29) |
| | Dentsply Sirona Inc. Amended and Restated Key Employee Severance Benefits Plan, dated September 22, 2022. (32) |
| | Employment Agreement between DENTSPLY SIRONA Inc. and Simon D. Campion, entered into as of August 22, 2022. (30) |
| | First Amendment to the Interim Chief Financial Officer Employment Agreement between DENTSPLY SIRONA Inc. and Barbara W. Bodem, dated as of September 22, 2022. (31) |
| | Offer Letter between DENTSPLY SIRONA Inc. and Glenn Coleman, entered into as of September 22, 2022. (31) |
| | Credit Agreement, dated as of May 12, 2023, among DENTSPLY SIRONA Inc., JPMorgan Chase Bank, N.A., as Administrative Agent, Citibank, N.A., as Syndication Agent, Bank of America, N.A., Commerzbank AG, New York Branch, PNC Bank, National Association, TD Bank, N.A., Truist Bank and Wells Fargo Bank, National Association as Co-Documentation Agents, JPMorgan Chase Bank, N.A., and Citibank N.A., as Joint Bookrunners and Joint Leader Arrangers, and the several lenders party thereto (34) |
| | Insider Trading Policy revised July 26, 2022 (Filed herewith) |
| | Dodd-Frank Act Restatement Clawback Policy dated November 21, 2023 (Filed herewith) |
| | Subsidiaries of the Company (Filed herewith) |
| | Consent of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP (Filed herewith) |
| | Section 302 Certification Statements Chief Executive Officer (Filed herewith) |
| | Section 302 Certification Statements Chief Financial Officer (Filed herewith) |
| | Section 906 Certification Statement (Furnished herewith) |
101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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 |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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® ultrasonic scalers are suitable for use in oral surgical procedures. The complaint sought 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 certified class 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*Management contract or more Cavitron® ultrasonic scalers for the performance of oral surgical procedures on their patients, which Cavitrons® were accompanied by Directions for Use that “Indicated” Cavitron® 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 plaintiffs appealed the Superior Court’s decision, but on January 10, 2018, the California Court of Appeals affirmed the trial court’s judgment in the Company’s favor. On February 15, 2018, the Company reached a settlement on this matter, in which the plaintiffs agreed to reimburse certain of the Company’s costs and not to appeal the California Court of Appeals decision.
On December 12, 2006, Carole Hildebrand, DDS, and Robert Jaffin, DDS, filed a complaint in the Eastern District of Pennsylvania (the Plaintiffs subsequently added Dr. Mitchell Goldman as a named class representative). The same law firm that filed the Weinstat case in California filed this case. The complaint asserts putative class action claims on behalf of dentists located in New Jersey and Pennsylvania. The complaint asserts that the Company’s Cavitron® ultrasonic scaler was negligently designed and sold in breach of contract and warranty arising from alleged misrepresentations about the potential uses of the product because the Company cannot assure the delivery of potable or sterile water through the device. The court granted the Company’s Motion for Dismissal of the case for lack of jurisdiction. Following that dismissal, the plaintiffs filed a second complaint under the name of Dr. Hildebrand’s corporate practice, Center City Periodontists, asserting the same allegations. The plaintiffs moved to have the case certified as a class action and the Company objected. The court granted the Company’s Motion to Dismiss plaintiffs’ New Jersey Consumer Fraud and negligent design claims, leaving only a breach of express warranty claim. The court subsequently denied the Company’s motion for summary judgment on the express warranty claim. The court held hearings during 2016 on plaintiffs’ class certification motion. On July 24, 2017, the Court issued an order denying class certification on multiple, independently sufficient grounds. On October 6, 2017, the parties to the lawsuit filed a stipulation of dismissal, dismissing all claims with prejudice, with the plaintiffs agreeing to pay the Company’s costs associated with the litigation.
The Company has concluded both of these actions with favorable outcomes. It does not anticipate that these cases will have any impact on the Company’s operations, financial position or liquidity going forward.
In 2012, the Company received subpoenas from the U. S. 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 (“OFAC”) requesting documents and information related to compliance with export controls and economic sanctions regulations by certain of its subsidiaries. The Company has voluntarily contacted OFAC and the Bureau of Industry and Security of the U. S. Department of Commerce (“BIS”), in 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. On September 1, 2016, the Company entered into an extension of the tolling agreement originally entered into in August 2014, such that the statute of limitations was tolled to May 1, 2017. On August 17, 2017, the Company entered into a new tolling agreement, which tolls the statute of limitations to November 30, 2017. Effective December 1, 2017, the Company reached a settlement on this matter with OFAC and BIS for $1.2 million regarding the above possible violations.
The SEC’s Division of Enforcement has asked the Company to provide documents and information concerning the Company’s accounting and disclosures. The Company is cooperating with the SEC’s investigation. The Company is unable to predict the ultimate outcome of this matter, or whether it will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Following Sirona’s acquisition of Arges Imaging, Inc. (“Arges”) in 2011, certain prior shareholders (the “Arges Shareholders”) of Arges filed a demand for arbitration with the American Arbitration Association alleging that Sirona violated certain provisions of the related merger agreement. In January 2016, an interim award was made to the Arges Shareholders, which was subsequently affirmed by the district court for the Southern District of New York. The Company subsequently appealed the decision. In October 2017, the Company entered into a Settlement Agreement, pursuant to which the Company agreed to pay the Arges Shareholders approximately $6.5 million. Settlement costs associated with this agreement are included in Restructuring and other costs in the Consolidated Statements of Operation for the period ended September 30, 2017.
On May 5, 2015, Roth Licensing, LLC (“Roth Licensing”) filed a demand for arbitration alleging that GAC International, LLC, a subsidiary of the Company (“GAC”), infringes a registered trademark of Roth Licensing pursuant to the Lanham Act, California Civil Code Section 3344.1, and certain other common law causes of action. On August 9, 2017, the arbitrator issued an interim decision on liability finding that GAC had willfully infringed the registered trademark of Roth Licensing. On November 8, 2017, the arbitrator served his Final Award on damages awarding Roth Licensing approximately $16.0 million for damages, attorneys’ fees and costs as well as injunctive relief regarding the ROTH mark and any reproduction, counterfeit, copy, or colorable imitation of the ROTH mark and Dr. Roth’s image. The Company believes the arbitrator’s decision exceeded the scope of the arbitration agreement, and it has filed a Motion to Vacate Arbitration Award with the district court of the Eastern District of New York.
On January 19, 2018, Futuredontics, Inc. received service of a purported class action lawsuit filed in the Superior Court of the State of California, for the County of Los Angeles, brought by a former employee, Henry Olivares, on behalf of other similarly situated individuals. The plaintiff alleges several wage and hour violations under California Business and Professions Code Section 17200, including, but not limited to, failure to provide rest and meal break periods and the failure to pay overtime. The Company has filed its answer to the complaint and it intends to vigorously defend against this matter.
In addition to the matters discussed above, the Company is, from time to time, subject to a variety of litigation and similar proceedings incidental to its business. These legal matters primarily involve claims for damages arising out of the use of the Company’s products and services and claims relating to intellectual property matters including patent 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, or representations, warranties or indemnities provided in connection with, divested businesses. Some of these lawsuits may include claims for punitive and 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.
While the Company maintains general, product, property, workers’ compensation, automobile, cargo, aviation, crime, fiduciary and directors’ and officers’ liability insurance up to certain limits that cover certain of these claims, this insurance may be insufficient or unavailable to cover such losses. In addition, while the 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 long-term inventory purchase commitments with minimum purchase requirements for raw materials and finished goods to ensure the availability of products for production and distribution. These commitments may have a significant impact on levels of inventory maintained by the Company.
NOTE 20 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
DENTSPLY SIRONA INC.
Quarterly Financial Information (Unaudited)
(in millions, except per share amounts)plan.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Rounding and Other | | Total Year |
| | | | | | | | | | | |
2017 | | | | | | | | | | | |
| | | | | | | | | | | |
Net sales | $ | 900.5 |
| | $ | 992.7 |
| | $ | 1,009.2 |
| | $ | 1,091.0 |
| | $ | — |
| | $ | 3,993.4 |
|
Gross profit | 492.0 |
| | 544.2 |
| | 559.0 |
| | 593.3 |
| | — |
| | 2,188.5 |
|
Goodwill impairment (a) | — |
| | 1,092.9 |
| | — |
| | 558.0 |
| | — |
| | 1,650.9 |
|
Operating income (loss) | 84.2 |
| | (1,048.0 | ) | | 107.9 |
| | (706.4 | ) | | — |
| | (1,562.3 | ) |
Net income (loss) attributable to | |
| | |
| | |
| | |
| | |
| | |
|
Dentsply Sirona | 59.7 |
| | (1,050.0 | ) | | 90.6 |
| | (650.4 | ) | | 0.1 |
| | (1,550.0 | ) |
| | | | | | | | | | | |
Net income (loss) per common share - basic | $ | 0.26 |
| | $ | (4.58 | ) | | $ | 0.39 |
| | $ | (2.85 | ) | | $ | 0.02 |
| | $ | (6.76 | ) |
| | | | | | | | | | | |
Net income (loss) per common share - diluted | $ | 0.26 |
| | $ | (4.58 | ) | | $ | 0.39 |
| | $ | (2.85 | ) | | $ | 0.02 |
| | $ | (6.76 | ) |
| | | | | | | | | | | |
Cash dividends declared per common share | $ | 0.0875 |
| | $ | 0.0875 |
| | $ | 0.0875 |
| | $ | 0.0875 |
| | $ | — |
| | $ | 0.3500 |
|
| | | | | | | | | | | |
| First Quarter (b) | | Second Quarter | | Third Quarter | | Fourth Quarter | | Rounding and Other (c) | | Total Year |
| | | | | | | | | | | |
2016 | |
| | |
| | |
| | |
| | |
| | |
|
| | | | | | | | | | | |
Net sales | $ | 772.6 |
| | $ | 1,022.0 |
| | $ | 954.2 |
| | $ | 996.5 |
| | $ | — |
| | $ | 3,745.3 |
|
Gross profit | 418.9 |
| | 526.9 |
| | 513.6 |
| | 541.5 |
| | — |
| | 2,000.9 |
|
Operating income | 72.7 |
| | 121.2 |
| | 126.6 |
| | 134.2 |
| | — |
| | 454.7 |
|
Net income attributable to | |
| | |
| | |
| | |
| | |
| | |
|
Dentsply Sirona | 125.0 |
| | 105.4 |
| | 92.5 |
| | 107.0 |
| | — |
| | 429.9 |
|
| | | | | | | | | | | |
Earnings per common share - basic | $ | 0.72 |
| | $ | 0.45 |
| | $ | 0.40 |
| | $ | 0.46 |
| | $ | (0.06 | ) | | $ | 1.97 |
|
| | | | | | | | | | | |
Earnings per common share - diluted | $ | 0.70 |
| | $ | 0.44 |
| | $ | 0.39 |
| | $ | 0.46 |
| | $ | (0.05 | ) | | $ | 1.94 |
|
| | | | | | | | | | | |
Cash dividends declared per common share | $ | 0.0775 |
| | $ | 0.0775 |
| | $ | 0.0775 |
| | $ | 0.0775 |
| | $ | — |
| | $ | 0.3100 |
|
| | | | | |
(1) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2000, File 0-16211. |
| |
(2) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2002, File 0-16211. |
| |
(3) | 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. |
| |
(4) | 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. |
| |
(5) | Incorporated by reference to exhibit included in the Company’s Registration Statement on Form S-3 dated August 15, 2011 (No. 333-176307). |
| |
(6) | Incorporated by reference to exhibit included in the Company’s Form 8-K dated August 29, 2011, File no. 0-16211. |
| |
(7) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2014, File no. 0-16211. |
| |
(8) | Incorporated by reference to exhibit included in the Company’s Form 8-K dated September 16, 2015, File no. 0-16211. |
| |
(9) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2015, 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, 2016, File no. 0-16211. |
| |
(a) During the quarters ended June 30, 2017 and December 31, 2017, the Company recorded goodwill and intangible asset impairments. See Note 9, Goodwill and Intangible Assets for further information. | | | | | |
(11) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated January 17, 2018, File no.0-16211. |
| |
(12) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated February 15, 2018, File no.0-16211. |
| |
(13) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2017, File no. 0-16211. |
| |
(14) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated May 23, 2018, File no.0-16211. |
| |
(15) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated July 30, 2018, File no.0-16211. |
| |
(16) | Incorporated by reference to exhibit included in the Company’s Form 10-Q for the quarterly period ended June 30, 2018, File no. 0-16211. |
| |
(17) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2018, File no. 0-16211. |
| |
(18) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated March 8, 2019, File no. 0-16211. |
| |
(19) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated June 26, 2019, File no. 0-16211. |
| |
(20) | Incorporated by reference to exhibit included in the Company’s Form 10-Q for the quarterly period ended June 30, 2019, File no. 0-16211. |
| |
(21) | Incorporated by reference to exhibit included in the Company’s Form 10-Q for the quarterly period ended March 31, 2019, File no. 0-16211. |
| |
(22) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2019, File no. 0-16211. |
| |
(23) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated May 26, 2020, File no. 0-16211. |
| |
(24) | Incorporated by reference to exhibit included in the Company’s Form 10-Q for the quarterly period ended September 30, 2020, File no. 0-16211. |
| |
(25) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated January 4, 2021, File no. 0-16211. |
| |
(26) | Incorporated by reference to exhibit included in the Company’s Form 10-Q for the quarterly period ended June 30, 2021, File no. 0-16211. |
| |
(27) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2021, File no. 0-16211. |
| |
(28) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated May 31, 2022, File no. 0-16211. |
| |
(29) | Incorporated by reference to exhibit included in the Company’s Form 10-Q for the quarterly period ended June 30, 2022, File no. 0-16211. |
| |
(30) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated August 25, 2022, File no. 0-16211. |
| |
(31) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated September 22, 2022, File no. 0-16211. |
| |
(32) | Incorporated by reference to exhibit included in the Company’s Form 10-Q for the quarterly period ended September 30, 2022, File no. 0-16211. |
| |
(33) | Incorporated by reference to exhibit included in the Company’s Form 10-K for the fiscal year ended December 31, 2022, File no. 0-16211. |
| |
(34) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated May 12, 2023, File no. 0-16211. |
| |
(35) | Incorporated by reference to exhibit included in the Company’s Form 8-K, dated August 2, 2023, File no. 0-16211. |
| |
(b) Includes the results of operations for Sirona for the period February 29, 2016 through March 31, 2016
(c) During the March 31, 2016 quarter, the Company issued 101.8 million shares related to the Merger. As a result, the calculation of the weighted average share count was lower in the March 31, 2016 quarter as compared to the weighted average share count for the year ended December 31, 2016.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Companyregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
DENTSPLY SIRONA Inc. |
| | |
DENTSPLY SIRONA INC. By: | /s/ | Simon D. Campion |
| | Simon D. Campion |
| By: | /s/Donald M. Casey, Jr.President and |
| | Donald M. Casey, Jr. |
| | Chief Executive Officer |
| | |
Date: | | February 29, 2024 |
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 Companyregistrant and in the capacities and on the dates indicated.
| | | | | | | | | | | |
/s/ | Simon D. Campion | | February 29, 2024 |
| Simon D. Campion | | Date |
| /s/President and | | Donald M. Casey, Jr. | March 15, 2018 |
| Donald M. Casey, Jr. | | Date |
| Chief Executive Officer and Director | | |
| (Principal Executive Officer) | | |
| | | |
/s/ | Nicholas W. AlexosGlenn G. Coleman | | March 15, 2018February 29, 2024 |
| Nicholas W. AlexosGlenn G. Coleman | | Date |
| Executive Vice President and | | |
| Chief Financial Officer | | |
| (Principal Financial and Accounting Officer) | | |
| | | |
/s/ | Richard M. Wagner | | February 29, 2024 |
| /s/Richard M. Wagner | | Eric K. Brandt | March 15, 2018Date |
| Chief Accounting Officer | | Eric K. Brandt |
| (Principal Accounting Officer) | | |
| | | |
/s/ | DateGregory T. Lucier | | February 29, 2024 |
| Gregory T. Lucier | | Date |
| Chairman of the Board of Directors | | |
| | | |
/s/ | Eric K. Brandt | | February 29, 2024 |
| Eric K. Brandt | | Date |
/s/ | Dr. Michael C. AlfanoDirector | | March 15, 2018 |
| Dr. Michael C. Alfano | | Date |
/s/ | Director | | |
| | | |
/s/ | David K. Beecken | | March 15, 2018 |
| David K. Beecken | | Date |
| Director | | |
| | | |
/s/ | Michael J. Coleman | | March 15, 2018 |
| Michael J. Coleman | | Date |
| Director | | |
| | | |
/s/ | Willie A. Deese | | March 15, 2018February 29, 2024 |
| Willie A. Deese | | Date |
| Director | | |
| | | |
/s/ | Brian T. Gladden | | February 29, 2024 |
| Brian T. Gladden | | Date |
| Director | | |
| | | |
| | | | | | | | | | | |
/s/ | | | |
/s/ | Betsy D. Holden | | March 15, 2018February 29, 2024 |
| Betsy D. Holden | | Betsy D Holden | Date |
| Director | | Director |
| | | |
/s/ | Clyde R. Hosein | | February 29, 2024 |
| Clyde R. Hosein | | | Date |
| Director | | |
| | | |
/s/ | Harry M. Jansen Kraemer, Jr.Jonathan J. Mazelsky | | March 15, 2018February 29, 2024 |
| Jonathan J. Mazelsky | | Harry M. Jansen Kraemer, Jr. | Date |
| Director | | Director | |
| | | |
/s/ | Thomas Jetter | | March 15, 2018 |
| Thomas Jetter | | Date |
| Director | | |
| | | |
/s/ | Arthur D. Kowaloff | | March 15, 2018 |
| Arthur D. Kowaloff | | Date |
| Director | | |
| | | |
/s/ | Francis J. Lunger | | March 15, 2018 |
| Francis J. Lunger | | Date |
| Director | | |
| | | |
/s/ | Leslie F. Varon | | March 15, 2018February 29, 2024 |
| Leslie F. Varon | | Leslie F Varon | Date |
| Director | | Director |
| | | |
/s/ | Janet S. Vergis | | February 29, 2024 |
| Janet S. Vergis | | Date |
| Director | | |
| | | |
/s/ | Dorothea Wenzel | | February 29, 2024 |
| Dorothea Wenzel | | Date |
| Director | | |
| | | |