Dentsply Sirona Inc.

31/07/2024 | Press release | Distributed by Public on 31/07/2024 12:21

Quarterly Report for Quarter Ending June 30, 2024 (Form 10-Q)

xray-20240630
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-16211
DENTSPLY SIRONA Inc.
(Exact name of registrant as specified in its charter)
Delaware
39-1434669
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
13320 Ballantyne Corporate Place, Charlotte, North Carolina
28277-3607
(Address of principal executive offices)
(Zip Code)
(844) 848-0137
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, par value $.01 per share XRAY The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerx
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: At July 19, 2024, DENTSPLY SIRONA Inc. had 202,713,953 shares of common stock outstanding.
DENTSPLY SIRONA Inc.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
Item 1
Financial Statements (unaudited)
4
Consolidated Statements of Operations
4
Consolidated Statements of Comprehensive(Loss) Income
5
Consolidated Balance Sheets
6
Consolidated Statements of Changes in Equity
7
Consolidated Statements of Cash Flows
9
Notes to Unaudited Interim Consolidated Financial Statements
10
Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
37
Item 3
Quantitative and Qualitative Disclosures About Market Risk
52
Item 4
Controls and Procedures
52
PART II
OTHER INFORMATION
Item 1
Legal Proceedings
53
Item 1A
Risk Factors
53
Item 2
Unregistered Sales of Securities and Use of Proceeds
53
Item 6
Exhibits
54
Signatures
55
2
General
Unless otherwise stated herein or the context otherwise indicates, reference throughout this Form 10-Q to "Dentsply Sirona," or the "Company," "we," "us" or "our" refers to financial information and transactions of DENTSPLY SIRONA Inc., together with its subsidiaries on a consolidated basis.
Forward-Looking Statements and Associated Risks
All statements in this Form 10-Q that do not directly and exclusively relate to historical facts constitute "forward-looking statements." Such statements are subject to numerous assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those described in such statements, many of which are outside of our control, including those described in Part I, Item 1A, "Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the "2023 Form 10-K"),and other factors which may be described in the Company's other filings with the Securities and Exchange Commission (the "SEC"). No assurance can be given that any expectation, belief, goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
Investors should understand it is not possible to predict or identify all such factors or risks. As such, you should not consider the risks identified in the Company's SEC filings to be a complete discussion of all potential risks or uncertainties associated with an investment in the Company.
Disclosure Regarding Trademarks
This report includes trademarks, trade names and service marks that are our property or the property of other third parties. Solely for convenience, such trademarks and trade names sometimes appear without any "™" or "®" symbol. Failure to include such symbols is not intended to suggest, in any way, that we will not assert our rights or the rights of any applicable licensor, to these trademarks and trade names.
3
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Net sales $ 984 $ 1,028 $ 1,937 $ 2,006
Cost of products sold 473 478 920 937
Gross profit 511 550 1,017 1,069
Selling, general, and administrative expenses 399 416 814 832
Research and development expenses
41 49 83 95
Intangible asset impairments - - 6 -
Restructuring and other costs 21 5 22 64
Operating income 50 80 92 78
Other income and expenses:
Interest expense, net 17 22 35 42
Other (income) expense, net (1) 12 (8) 18
Income before income taxes 34 46 65 18
Provision (benefit) for income taxes 38 (39) 52 (44)
Net (loss) income (4) 85 13 62
Less: Net loss attributable to noncontrolling interest - (1) (1) (5)
Net (loss) income attributable to Dentsply Sirona $ (4) $ 86 $ 14 $ 67
(Loss) earnings per common share attributable to Dentsply Sirona:
Basic $ (0.02) $ 0.41 $ 0.07 $ 0.31
Diluted $ (0.02) $ 0.40 $ 0.07 $ 0.31
Weighted average common shares outstanding:
Basic 205.6 211.9 206.5 213.2
Diluted 205.6 213.1 207.3 214.4
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
4
DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in millions)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Net (loss) income $ (4) $ 85 $ 13 $ 62
Other comprehensive (loss) income, net of tax:
Foreign currency translation (loss) gain (10) - (72) 15
Net (loss) gain on derivative financial instruments (1) (6) 31 (7)
Pension liability gain - - - -
Total other comprehensive (loss) income, net of tax (11) (6) (41) 8
Total comprehensive (loss) income (15) 79 (28) 70
Less: Comprehensive loss attributable to noncontrolling interests - (1) (1) (5)
Total comprehensive (loss) income attributable to Dentsply Sirona $ (15) $ 80 $ (27) $ 75
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
5
DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
(unaudited)
June 30, 2024 December 31, 2023
Assets
Current Assets:
Cash and cash equivalents $ 279 $ 334
Accounts and notes receivable-trade, net 591 695
Inventories, net 608 624
Prepaid expenses and other current assets 280 320
Total Current Assets 1,758 1,973
Property, plant, and equipment, net 789 800
Operating lease right-of-use assets, net 162 178
Identifiable intangible assets, net 1,559 1,705
Goodwill 2,389 2,438
Other noncurrent assets 240 276
Total Assets $ 6,897 $ 7,370
Liabilities and Equity
Current Liabilities:
Accounts payable $ 287 $ 305
Accrued liabilities 650 749
Income taxes payable 24 49
Notes payable and current portion of long-term debt 362 322
Total Current Liabilities 1,323 1,425
Long-term debt 1,737 1,796
Operating lease liabilities 113 125
Deferred income taxes 194 228
Other noncurrent liabilities 466 502
Total Liabilities 3,833 4,076
Commitments and contingencies (Note 14)
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, and 264.5 million shares issued at June 30, 2024 and December 31, 2023
202.6 million and 207.2 million shares outstanding at June 30, 2024 and December 31, 2023
Capital in excess of par value 6,631 6,643
Retained earnings 152 205
Accumulated other comprehensive loss (677) (636)
Treasury stock, at cost, 61.9 million and 57.3 million shares at June 30, 2024 and December 31, 2023, respectively
(3,045) (2,922)
Total Dentsply Sirona Equity 3,064 3,293
Noncontrolling interests - 1
Total Equity 3,064 3,294
Total Liabilities and Equity $ 6,897 $ 7,370
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
6
DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in millions, except per share amounts)
(unaudited)
Common
Stock 		Capital in
Excess of
Par Value 		Retained
Earnings 		Accumulated
Other
Comprehensive
Loss 		Treasury
Stock 		Total Dentsply Sirona
Equity 		Noncontrolling
Interests 		Total
Equity
Balance at December 31, 2023 $ 3 $ 6,643 $ 205 $ (636) $ (2,922) $ 3,293 $ 1 $ 3,294
Net income (loss) - - 18 - - 18 (1) 17
Other comprehensive loss
- - - (30) - (30) - (30)
Stock based compensation expense - 11 - - - 11 - 11
Funding of employee stock purchase plan - - - - 3 3 - 3
Restricted stock unit distributions - (15) - - 11 (4) - (4)
Cash dividends declared ($0.16 per share)
- - (33) - - (33) - (33)
Balance at March 31, 2024 $ 3 $ 6,639 $ 190 $ (666) $ (2,908) $ 3,258 $ - $ 3,258
Net loss - (4) - - (4) - (4)
Other comprehensive loss - - - (11) - (11) - (11)
Stock based compensation expense - 12 - - - 12 - 12
Treasury shares purchased - - - - (152) (152) - (152)
Restricted stock unit distributions - (20) - - 15 (5) - (5)
Restricted stock unit dividends - - - - - - - -
Cash dividends declared ($0.16 per share)
- - (34) - - (34) - (34)
Balance at June 30, 2024 $ 3 $ 6,631 $ 152 $ (677) $ (3,045) $ 3,064 $ - $ 3,064
7
Common
Stock 		Capital in
Excess of
Par Value 		Retained
Earnings 		Accumulated
Other
Comprehensive
Loss 		Treasury
Stock 		Total Dentsply Sirona
Equity 		Noncontrolling
Interests 		Total
Equity
Balance at December 31, 2022 $ 3 $ 6,629 $ 456 $ (628) $ (2,649) $ 3,811 $ 1 $ 3,812
Net income (loss) - - (19) - - (19) (4) (23)
Other comprehensive income - - - 14 - 14 - 14
Stock based compensation expense - 17 - - - 17 - 17
Funding of employee stock purchase plan - - - - 3 3 - 3
Accelerated share repurchase - (30) - - (121) (151) - (151)
Restricted stock unit distributions - (12) - - 8 (4) - (4)
Cash dividends declared ($0.14 per share)
- - (30) - - (30) - (30)
Balance at March 31, 2023 $ 3 $ 6,604 $ 407 $ (614) $ (2,759) $ 3,641 $ (3) $ 3,638
Net income (loss) - - 86 - - 86 (1) 85
Other comprehensive loss - - - (6) - (6) - (6)
Exercise of stock options - - - - 1 1 - 1
Stock based compensation expense - 14 - - - 14 - 14
Accelerated share repurchase - 30 - - (30) - - -
Restricted stock unit dividends - - (1) - - (1) - (1)
Cash dividends declared ($0.14 per share)
- - (29) - - (29) - (29)
Balance at June 30, 2023 $ 3 $ 6,648 $ 463 $ (620) $ (2,788) $ 3,706 $ (4) $ 3,702
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
8
DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Six Months Ended June 30,
2024 2023
Cash flows from operating activities:
Net income $ 13 $ 62
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 64 64
Amortization of intangible assets 108 106
Indefinite-lived intangible asset impairment 6 -
Deferred income taxes (11) (83)
Stock based compensation expense 23 31
Other non-cash expense 38 36
Changes in operating assets and liabilities, net of acquisitions:
Accounts and notes receivable-trade, net 86 (38)
Inventories, net (7) (32)
Prepaid expenses and other current assets 29 (40)
Other noncurrent assets (6) (1)
Accounts payable (11) (15)
Accrued liabilities (78) (2)
Income taxes (9) (34)
Other noncurrent liabilities (12) 29
Net cash provided by operating activities 233 83
Cash flows from investing activities:
Capital expenditures (86) (72)
Cash received on derivative contracts 1 4
Cash paid on derivative contracts (9) -
Other investing activities 1 1
Net cash used in investing activities (93) (67)
Cash flows from financing activities:
Cash paid for treasury stock (150) (150)
Proceeds on short-term borrowings 43 143
Cash dividends paid (62) (57)
Repayments on long-term borrowings (6) (1)
Other financing activities, net (10) (5)
Net cash used in financing activities (185) (70)
Effect of exchange rate changes on cash and cash equivalents (10) (16)
Net decrease in cash and cash equivalents (55) (70)
Cash and cash equivalents at beginning of period 334 365
Cash and cash equivalents at end of period $ 279 $ 295
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.
9
DENTSPLY SIRONA Inc. and Subsidiaries
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") and the rules of the U.S. Securities and Exchange Commission ("SEC"). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Certain prior period amounts have been reclassified to conform to current year presentation. Results for interim periods should not be considered indicative of results for a full year. These financial statements and related notes contain the accounts of DENTSPLY SIRONA Inc. and subsidiaries ("Dentsply Sirona" or the "Company") on a consolidated basis and should be read in conjunction with the consolidated financial statements and notes included in the Company's most recent Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on February 29, 2024 (the "2023 Form 10-K").
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of Net sales and expense during the reporting period. Actual results could differ materially from those estimates.
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 and 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 income tax 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, and early adoption is permitted and should be applied prospectively. The Company is currently evaluating the impact on its consolidated financial statements and related disclosures.
Seasonality
The Company's business is subject to quarterly fluctuations in demand due to price changes, marketing and promotional programs, management of inventory levels by distributors and other customers, and implementation of strategic initiatives which may impact sales levels in any given period. Demand can also fluctuate based on the timing of dental tradeshows, new product introductions, and variability in dental patient traffic, which can be exacerbated by seasonal or severe weather patterns, demographic disruptions, macroeconomic conditions, or other factors. Some dental practices in certain countries may also delay purchasing equipment and restocking consumables until year-end due to tax or other financial planning reasons which can impact the timing of the Company's consolidated net sales, net income and cash flows. Sales for the industry and the Company are generally strongest in the second and fourth quarters and weaker in the first and third quarters, due to the effects of the items noted above and due to the impact of holidays and vacations, particularly throughout Europe. Because of the seasonal nature of the Company's business, the results of operations for any fiscal quarter will not necessarily be indicative of results to be expected for other quarters or a full fiscal year.
10
NOTE 2 - REVENUE
Revenues are derived primarily from the sale of dental equipment and dental and healthcare consumable products. Revenues are measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services.
Net sales disaggregated by product category for the three and six months ended June 30, 2024 and 2023 were as follows:
Three Months Ended Six Months Ended
(in millions) 2024 2023 2024 2023
Equipment & Instruments $ 139 $ 180 $ 264 $ 332
CAD/CAM 114 129 236 242
Connected Technology Solutions 253 309 $ 500 $ 574
Essential Dental Solutions 375 377 $ 739 $ 763
Orthodontics 95 86 $ 193 $ 172
Implants & Prosthetics 181 184 354 357
Orthodontic and Implant Solutions 276 270 $ 547 $ 529
Wellspect Healthcare 80 72 $ 151 $ 140
Total net sales $ 984 $ 1,028 $ 1,937 $ 2,006
Net sales disaggregated by geographic region for the three and six months ended June 30, 2024 and 2023 were as follows:
Three Months Ended Six Months Ended
(in millions) 2024 2023 2024 2023
United States $ 360 $ 362 $ 715 $ 713
Europe 387 403 763 799
Rest of World 237 263 459 494
Total net sales $ 984 $ 1,028 $ 1,937 $ 2,006
Contract Assets and Liabilities
The Company does not typically have contract assets in the normal course of its business. Contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for customer orthodontic aligner treatments where the performance obligation has not yet been fulfilled. The Company recorded deferred revenue of $105 million and $63 million in Accrued liabilities and Other noncurrent liabilities, respectively, in the Consolidated Balance Sheets at June 30, 2024. The Company recorded deferred revenue of $91 million and $57 million in Accrued liabilities and Other noncurrent liabilities, respectively, in the Consolidated Balance Sheets at December 31, 2023. During the three and six months ended June 30, 2024, the Company recognized approximately $41 million and $82 millionof net sales, respectively, which was previously deferred as of December 31, 2023. During the three and six months ended June 30, 2023, the Company recognized approximately $13 million and $47 million, respectively, which was previously deferred as of December 31, 2022. The Company expects to recognize most of the remaining deferred revenue in net sales within the next twelve months.
11
Allowance for Doubtful Accounts
Accounts and notes receivable-trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $15 million at June 30, 2024 and $17 million at December 31, 2023. For the three and six months ended June 30, 2024 and 2023, changes to the provision for doubtful accounts, including write-offs of accounts receivable that were previously reserved, were not significant. Changes to this provision are included in Selling, general, and administrative expenses in the Consolidated Statements of Operations.
12
NOTE 3 - STOCK COMPENSATION
The amounts of stock compensation expense recorded in the Company's Consolidated Statements of Operations for the three and six months ended June 30, 2024 and 2023 were as follows:
Three Months Ended Six Months Ended
(in millions) 2024 2023 2024 2023
Cost of products sold
$ 1 $ 1 $ 2 $ 2
Selling, general, and administrative expense 10 11 20 24
Research and development expense 1 1 1 2
Restructuring and other costs - 1 - 3
Total stock based compensation expense $ 12 $ 14 $ 23 $ 31
Related deferred income tax benefit $ 2 $ 1 $ 4 $ 3
13
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
Changes in Accumulated other comprehensive income (loss) ("AOCI"), net of tax, by component for the six months ended June 30, 2024 and 2023 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, 2023 $ (473) $ (13) $ (107) $ (43) $ (636)
Other comprehensive income (loss) before reclassifications and tax impact (34) 42 - 8
Tax expense
(28) (10) - (38)
Other comprehensive income (loss), net of tax, before reclassifications (62) - 32 - (30)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax - - - - -
Net increase (decrease) in other comprehensive income (62) - 32 - (30)
Balance, net of tax, at March 31, 2024 $ (535) $ (13) $ (75) $ (43) $ (666)
Other comprehensive loss before reclassifications and tax impact (14) - (2) - (16)
Tax benefit 4 - 1 - 5
Other comprehensive loss, net of tax, before reclassifications (10) - (1) - (11)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax - - - - -
Net increase (decrease) in other comprehensive income (10) - (1) - (11)
Balance, net of tax, at June 30, 2024 $ (545) $ (13) $ (76) $ (43) $ (677)
14
(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 (loss) income before reclassifications and tax impact 6 (1) - - 5
Tax benefit
9 - - - 9
Other comprehensive (loss) income, net of tax, before reclassifications 15 (1) - - 14
Amounts reclassified from accumulated other comprehensive income (loss), net of tax - - - - -
Net (decrease) increase in other comprehensive income 15 (1) - - 14
Balance, net of tax, at March 31, 2023 $ (507) $ (18) $ (73) $ (16) $ (614)
Other comprehensive (loss) income before reclassifications and tax impact (3) - (11) - (14)
Tax expense 3 - 3 - 6
Other comprehensive (loss) income, net of tax, before reclassifications - - (8) - (8)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax - 2 - - 2
Net (decrease) increase in other comprehensive income - 2 (8) - (6)
Balance, net of tax, at June 30, 2023 $ (507) $ (16) $ (81) $ (16) $ (620)
At June 30, 2024 and December 31, 2023, the cumulative tax adjustments were $133 million and $166 million, respectively, primarily related to foreign currency translation adjustments.
The cumulative foreign currency translation adjustments included translation losses of $467 million and $360 million at June 30, 2024 and December 31, 2023, respectively, and cumulative losses on loans designated as hedges of net investments of $78 million and $113 million, respectively.
Reclassifications out of AOCI to the Consolidated Statements of Operations for the three and six months ended June 30, 2024 and 2023 were not significant.
15
NOTE 5 - (LOSS) EARNINGS PER COMMON SHARE
The computation of basic and diluted earnings (loss) per common share for the three and six months ended June 30, 2024 and 2023 was as follows:
Basic (Loss) Earnings per common share Three Months Ended Six Months Ended
(in millions, except per share amounts) 2024 2023 2024 2023
Net (loss) income attributable to Dentsply Sirona $ (4) $ 86 $ 14 $ 67
Weighted average common shares outstanding 205.6 211.9 206.5 213.2
Basic (loss) earnings per common share $ (0.02) $ 0.41 $ 0.07 $ 0.31
Diluted (loss) earnings per common share Three Months Ended Six Months Ended
(in millions, except per share amounts) 2024 2023 2024 2023
Net (loss) income attributable to Dentsply Sirona $ (4) $ 86 $ 14 $ 67
Weighted average common shares outstanding 205.6 211.9 206.5 213.2
Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards - 1.2 0.8 1.2
Total weighted average diluted shares outstanding 205.6 213.1 207.3 214.4
Diluted (loss) earnings per common share $ (0.02) $ 0.40 $ 0.07 $ 0.31
Weighted average shares excluded from diluted common shares outstanding due to reported net loss for the period
0.5 - - -
Weighted average shares excluded from diluted common shares outstanding due to antidilutive nature 4.2 3.8 4.1 3.6
On 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 transactions in such amounts and at such times as the Company considers appropriate based upon prevailing market and business conditions and other factors. At June 30, 2024, the Company had authorization to repurchase $1.29 billion in shares of common stock remaining under the share repurchase program.
For the three and six months ended June 30, 2024, the Company repurchased approximately 5.4 million outstanding shares of common stock through open market purchases at a cost of $150 million.
16
NOTE 6 - SEGMENT INFORMATION
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 medical device industry. These operating segments, which also form the Company's reportable segments, are identified in accordance with how the Company's chief operating decision maker ("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 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 is not reported to the CODM.
The Company's segment information for the three and six months ended June 30, 2024 and 2023 was as follows:
Net Sales
Three Months Ended Six Months Ended
(in millions) 2024 2023 2024 2023
Connected Technology Solutions $ 253 $ 309 $ 500 $ 574
Essential Dental Solutions 375 377 739 763
Orthodontic and Implant Solutions 276 270 547 529
Wellspect Healthcare 80 72 151 140
Total net sales $ 984 $ 1,028 $ 1,937 $ 2,006
Segment Adjusted Operating Income
Three Months Ended Six Months Ended
(in millions) 2024 2023 2024 2023
Connected Technology Solutions $ 3 $ 26 $ 5 $ 32
Essential Dental Solutions 125 125 240 250
Orthodontic and Implant Solutions 42 49 84 98
Wellspect Healthcare 24 21 47 39
Segment adjusted operating income 194 221 376 419
Reconciling items expense (income):
All other(a)
69 83 148 171
Intangible asset impairments - - 6 -
Restructuring and other costs 21 5 22 64
Interest expense, net 17 22 35 42
Other (income) expense, net (1) 12 (8) 18
Amortization of intangible assets 54 53 108 106
Income before income taxes $ 34 $ 46 $ 65 $ 18
(a) Includes unassigned corporate headquarters costs.
17
NOTE 7 - INVENTORIES
Inventories, net were as follows:
(in millions) June 30, 2024 December 31, 2023
Raw materials and supplies $ 171 $ 185
Work-in-process 77 77
Finished goods 360 362
Inventories, net $ 608 $ 624
The Company's inventory reserve was $104 million at June 30, 2024 and $107 million at December 31, 2023. Inventories are stated at the lower of cost and net realizable value.
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NOTE 8 - RESTRUCTURING AND OTHER COSTS
Restructuring and other costs for the three and six months ended June 30, 2024 and 2023 were recorded in the Consolidated Statements of Operations as follows:
Affected Line Item Three Months Ended Six Months Ended
(in millions) 2024 2023 2024 2023
Cost of products sold $ 1 $ - $ 1 $ 4
Selling, general, and administrative expenses 1 1 4 1
Restructuring and other costs 21 5 22 64
Total restructuring and other costs $ 23 $ 6 $ 27 $ 69
Restructuring and other costs of $22 million recorded in the first six months of 2024 consisted primarily of employee severance benefits and other restructuring costs related to the plan approved by the Board of Directors of the Company on February 14, 2023 (the "2023 Plan"). The 2023 Plan seeks to restructure the business through a new operating model with five global business units, optimize central functions and overall management infrastructure, and implement other efforts aimed at cost savings. The 2023 Plan's annual cost savings target of $200 million has been substantially met as of June 30, 2024, with the benefits mostly offset in the short term by additional investments in sales personnel, our new global ERP system, and other transformation initiatives. As of June 30, 2024, the Company has incurred $86 million in restructuring charges since the inception of the 2023 Plan, 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. Remaining restructuring charges attributable to the 2023 Plan are not expected to be material.
On July 29, 2024 the Board of Directors of the Company approved an additional plan to restructure the Company's business to improve operational performance and drive shareholder value creation (the "2024 Plan"). In connection with the 2024 Plan, which is expected to be substantially completed by the end of 2025, the Company anticipates a net reduction in the Company's global workforce of approximately 2% to 4%. The proposed changes are subject to co-determination processes with employee representative groups in countries where required. Actions taken under the 2024 Plan will seek to further streamline the Company's operations and global footprint, as well as improve alignment of the Company's cost structure with its strategic growth objectives. The Company expects to incur between $40 million and $50 million in non-recurring restructuring charges under the 2024 Plan, primarily related to employee transition, severance payments and employee benefits, which are expected to be expensed and paid in cash in 2024 and 2025.
The estimates of the charges and expenditures that the Company expects to incur in connection with the 2024 Plan, and the timing thereof, 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 additional charges or cash expenditures not currently contemplated due to unanticipated events that may occur, including in connection with the implementation of the 2024 Plan.
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The liabilities associated with the Company's restructuring plans are recorded in Accrued liabilities and Other noncurrent liabilities in the Consolidated Balance Sheets. Activity in the Company's restructuring accruals at June 30, 2024 was as follows:
Severance
(in millions) 2022 and Prior Plans 2023 Plans Total
Balance at December 31, 2023 $ 2 $ 37 $ 39
Provisions - 22 22
Amounts applied - (23) (23)
Change in estimates - (3) (3)
Balance at June 30, 2024 $ 2 $ 33 $ 35
Other Restructuring Costs
(in millions) 2022 and Prior Plans 2023 Plans Total
Balance at December 31, 2023 $ 1 $ - $ 1
Provisions - 2 2
Amounts applied - (1) (1)
Change in estimates - - -
Balance at June 30, 2024 $ 1 $ 1 $ 2
The cumulative amounts for the provisions and adjustments and amounts applied for all the plans by segment were as follows:
(in millions) December 31, 2023 Provisions Amounts
Applied 		Change in Estimates June 30, 2024
Connected Technology Solutions $ 13 $ 11 $ (13) $ (3) $ 8
Essential Dental Solutions 17 5 (4) - 18
Orthodontic and Implant Solutions 9 6 (5) - 10
Wellspect Healthcare 1 1 - - 2
All Other - 1 (2) - (1)
Total $ 40 $ 24 $ (24) $ (3) $ 37
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NOTE 9 - 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 and interest rates. 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 cash flows. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert fixed rate debt into variable rate debt or vice versa. The Company does not hold derivative instruments for trading or speculative purposes.
The following summarizes the notional amounts of cash flow hedges, hedges of net investments, fair value hedges, and derivative instruments not designated as hedges for accounting purposes by derivative instrument type at June 30, 2024 and the notional amounts expected to mature during the next 12 months.
(in millions) Aggregate Notional Amount Aggregate Notional Amount Maturing within 12 Months
Cash Flow Hedges
Foreign exchange forward contracts $ - $ -
Interest rate swaps - -
Total derivative instruments designated as cash flow hedges $ - $ -
Hedges of Net Investments
Foreign exchange forward contracts
$ 839 $ 86
Cross currency basis swaps 286 -
Total derivative instruments designated as hedges of net investments $ 1,125 $ 86
Fair Value Hedges
Interest rate swaps $ 150 $ -
Foreign exchange forward contracts 9 9
Total derivative instruments designated as fair value hedges $ 159 $ 9
Derivative Instruments not Designated as Hedges
Foreign exchange forward contracts $ 887 $ 887
Total derivative instruments not designated as hedges $ 887 $ 887
Cash Flow Hedges
Foreign Exchange Risk Management
The Company hedges select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings. The Company designates certain foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contracts through AOCI based on the assessed 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 is 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 reported on a straight-line basis in Cost of products sold in the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows.
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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 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 Notes due June 2030. This loss is amortized over the ten-year life of the notes. As of June 30, 2024 and December 31, 2023, $18 million and $19 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 considered to be highly effective for accounting purposes. At June 30, 2024, the Company expects to reclassify $3 million of deferred net losses on cash flow hedges recorded in AOCI in the Consolidated Statements of Operations during the next 12 months. For the rollforward of derivative instruments designated as cash flow hedges in AOCI, see Note 4, Comprehensive Income (Loss).
Hedges of Net Investments in Foreign Operations
The Company has significant investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in foreign currency exchange rates. The Company employs both derivative and non-derivative financial instruments to hedge a portion of these exposures. 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 the aforementioned instruments, which are designated as hedges of net investments and the intrinsic value changes in these instruments are recorded on AOCI, net of tax effects. The time-value component of the fair value of the derivative instrument is amortized on a straight-line basis in Other (income) expense, 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 Consolidated Statements of Cash Flows.
The fair value of the foreign currency 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 and foreign exchange rates. The effective portion of the change in the value of these derivatives is recorded in AOCI, net of tax effects.
Fair Value Hedges
Foreign Exchange Risk Management
The Company has intercompany loans denominated in Swedish kronor that are exposed to volatility in foreign currency exchange rates. The Company employs derivative financial instruments to hedge these exposures. The Company accounts for these designated foreign exchange forward contracts as fair value hedges. 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 derivative fair value will be recorded in Other (income) expense, net in the Consolidated Statements of Operations. The time-value component of the fair value of the derivative is reported on a straight-line basis in Other (income) expense, 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 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.
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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 (income) expense, 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.
Gains and (losses) recorded in the Company's Consolidated Statements of Operations related to the economic hedges not designated as hedges for the three and six months ended June 30, 2024 and 2023 were not significant.
Derivative Instrument Activity
The effect of derivative hedging instruments on the Consolidated Statements of Operations and Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2024 and 2023 were as follows:
Three Months Ended
2024 2023
(in millions) 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 Statement of Operations in which the effects of cash flow, net investment or fair value hedges are recorded $ 473 $ 17 $ (1) $ 478 $ 22 $ 12
(Gain) loss on Cash Flow Hedges reclassified from AOCI into income
Foreign exchange forward contracts $ - $ - $ - $ 1 $ - $ -
Interest rate swaps - 1 - - 1 -
(Gain) loss on Hedges of Net Investment
Cross currency basis swaps $ - $ - $ (1) $ - $ - $ (1)
Foreign exchange forward contracts - - (6) - - -
(Gain) loss on Fair Value Hedges:
Interest rate swaps $ - $ 2 $ - $ - $ 3 $ -
Foreign exchange forward contracts - - - - - (3)
23
Amount of Gain or (Loss) Recognized in AOCI Amount of Gain or (Loss) Reclassified from AOCI into Income
Three Months Ended Consolidated Statements of Operations Location Three Months Ended
(in millions) 2024 2023 2024 2023
Cash Flow Hedges
Foreign exchange forward contracts $ - $ - Cost of products sold $ - $ (1)
Interest rate swaps - - Interest expense, net (1) (1)
Hedges of Net Investments
Cross currency basis swaps $ 4 $ (10) Other expense (income), net $ - $ -
Foreign exchange forward contracts (6) (1) Other expense (income), net - -
Fair Value Hedges
Interest rate swaps $ - $ - Interest expense, net $ - $ -
Foreign exchange forward contracts - - Other expense (income), net - -
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Six Months Ended
2024 2023
(in millions) Cost of products sold Interest expense, net Other expense (income), net Cost of products sold Interest expense, net Other expense (income), net
Total amounts of line items presented in the Statement of Operations in which the effects of cash flow, net investment or fair value hedges are recorded $ 920 $ 35 $ (8) $ 937 $ 42 $ 18
(Gain) loss on Cash Flow Hedges reclassified from AOCI into income
Foreign exchange forward contracts $ - $ - $ - $ - $ - $ -
Interest rate swaps - 2 - - 2 -
(Gain) loss on Hedges of Net Investment
Cross currency basis swaps $ - $ - $ (2) $ - $ - $ (2)
Foreign exchange forward contracts - - (12) - - (1)
(Gain) loss on Fair Value Hedges:
Interest rate swaps $ - $ 4 $ - $ - $ 5 $ -
Foreign exchange forward contracts - - (1) - - (3)
Amount of Gain or (Loss) Recognized in AOCI Amount of Gain or (Loss) Reclassified from AOCI into Income
Six Months Ended Consolidated Statements of Operations Location Six Months Ended
(in millions) 2024 2023 2024 2023
Cash Flow Hedges
Foreign exchange forward contracts $ - $ (1) Cost of products sold $ - $ -
Interest rate swaps - - Interest expense, net (2) (2)
Hedges of Net Investments
Cross currency basis swaps $ 8 $ (9) Other expense (income), net $ - $ -
Foreign exchange forward contracts 32 (3) Other expense (income), net - -
Fair Value Hedges
Interest rate swaps $ - $ - Interest expense, net $ - $ -
Foreign exchange forward contracts - 1 Other expense (income), net - -
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Consolidated Balance Sheets Location of Derivative Fair Values
The fair value and the financial statement presentation of the Company's derivatives in the Consolidated Balance Sheets were as follows:
June 30, 2024
(in millions) Prepaid Expenses and Other Current Assets Other Noncurrent Assets Accrued Liabilities Other Noncurrent Liabilities
Designated as Hedges:
Foreign exchange forward contracts $ 2 $ 1 $ 2 $ 7
Interest rate swaps - - 5 17
Cross currency basis swaps 4 11 - -
Total $ 6 $ 12 $ 7 $ 24
Not Designated as Hedges:
Foreign exchange forward contracts $ 7 $ - $ 1 $ -
Total $ 7 $ - $ 1 $ -
December 31, 2023
(in millions) Prepaid Expenses and Other Current Assets Other Noncurrent Assets Accrued Liabilities 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 $ -
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.
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Offsetting of financial assets and liabilities under netting arrangements at June 30, 2024 were as follows:
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 $ 10 $ - $ 10 $ (5) $ - $ 5
Cross currency basis swaps 15 - 15 (5) - 10
Total assets $ 25 $ - $ 25 $ (10) $ - $ 15
Liabilities
Foreign exchange forward contracts $ 10 $ - $ 10 $ (6) $ - $ 4
Interest rate swaps 22 - 22 (4) - 18
Total liabilities $ 32 $ - $ 32 $ (10) $ - $ 22
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 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 $ 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
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NOTE 10 - FAIR VALUE MEASUREMENT
The estimated fair and carrying values of the Company's total debt were $1,971 million and $2,099 million, respectively, at June 30, 2024. At December 31, 2023, the estimated fair and carrying values were $2,018 million and $2,118 million, respectively. The fair value of long-term debt is determined by discounting future cash flows using interest rates available at June 30, 2024 and December 31, 2023 and interest rates for companies with similar credit ratings for issuances 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:
June 30, 2024
(in millions) Total Level 1 Level 2 Level 3
Assets
Cross currency basis swaps $ 15 $ - $ 15 $ -
Foreign exchange forward contracts 10 - 10 -
Total assets $ 25 $ - $ 25 $ -
Liabilities
Interest rate swaps $ 22 $ - $ 22 $ -
Foreign exchange forward contracts 10 - 10 -
Contingent considerations on acquisitions 4 - - 4
Total liabilities $ 36 $ - $ 32 $ 4
December 31, 2023
(in millions) Total Level 1 Level 2 Level 3
Assets
Cross currency basis 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
Derivative valuations are based on observable inputs to the valuation model including interest rates, foreign currency exchange rates, and credit risks.
There were no transfers between fair value measurement levels during the six months ended June 30, 2024.
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NOTE 11 - INCOME TAXES
The effective tax rates for the three months ended June 30, 2024 and 2023 were 114.4% and (83.2%), respectively. For the six months ended June 30, 2024 and 2023 the rates were 81.2% and (239.3%), respectively. The effective tax rates for 2024 include discrete expenses related to a taxable gain from implementing an internal reorganization and reserves pertaining to ongoing foreign tax audits. In contrast, the rates for 2023 were significantly affected by the partial release of the valuation allowance on net operating loss carryforwards.
The Company performed an assessment to evaluate the new global minimum tax developed by the Organisation for Economic Co-operation and Development ("Pillar Two"), which involved analyzing the tax laws in each jurisdiction in which the Company operates and modeling the implications with the Pillar Two framework. The impact of Pillar Two on the Company was not significant. The Company included the impact of the top-up tax under the Income Inclusion Rule for those jurisdictions in which the Company failed the transitional safe harbor requirement in its full year 2024 effective tax rate.
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NOTE 12 - FINANCING ARRANGEMENTS
The Company has a five-year senior unsecured multi-currency revolving facility, for an aggregate principal amount of $700 million, that expires on May 12, 2028. 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, resulting in an aggregate of $700 million as the total available credit under the commercial paper facility and the multi-currency revolving credit facility. The Company had outstanding borrowings of $270 million and $225 million under the commercial paper facility at June 30, 2024 and December 31, 2023, respectively, and no outstanding borrowings under the multi-currency revolving credit facility. The Company also has access to $41 million in uncommitted short-term financing available under lines of credit from various financial institutions, which is reduced by other outstanding short-term borrowings of $17 million. At June 30, 2024, the weighted-average interest rate for short-term debt was 6.1%.
At June 30, 2024, the Company had $454 million of borrowings available under lines of credit, including lines available under its short-term arrangements and revolving credit facility.
The Company's revolving credit facility, term loans, and senior notes contain certain affirmative and negative debt covenants relating to the Company's operations and financial condition. At June 30, 2024, the Company was in compliance with all debt covenants.
Interest expense, net includes interest income of $5 million and $3 million for the three months ended June 30, 2024 and 2023, respectively. Interest expense, net includes interest income of $10 million and $7 million for the six months ended June 30, 2024 and 2023, respectively. Interest income primarily relates to interest-bearing cash equivalents and customer financing for the Company's direct-to-consumer aligner solutions.
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NOTE 13 - GOODWILL AND INTANGIBLE ASSETS
The Company's policy is to assess goodwill and indefinite-lived intangible assets for impairment annually as of April 1, with more frequent assessments if events or changes in circumstances indicate the asset might be impaired.
For the goodwill impairment tests as of April 1, 2024, the fair values of reporting units were 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. The Company's significant assumptions in the discounted cash flow model included, but were not limited to, discount rates (ranging from 9.5% to 10.5%) revenue growth rates (including perpetual growth rates), operating margin percentages, and net working capital changes of the reporting unit's business. Based on these tests, it was determined that the fair values of the reporting units more likely than not exceeded their carrying values, resulting in no goodwill impairment.
Indefinite-lived intangible assets were assessed either through a computation of fair value using an income approach, specifically a relief from royalty method for acquired trade names and trademarks, or through a qualitative assessment for in-process R&D. The Company's significant assumptions in the relief from royalty method include, but were not limited to, discount rates (ranging from 10.0% to 13.0%), revenue growth rates (including perpetual growth rates) and royalty rates, all of which were determined using the judgment of management. Other assumptions are consistent with those applied to goodwill impairment testing. These assumptions for both the goodwill and indefinite-lived intangible asset tests were developed in consideration of current market conditions and future expectations which include, but were not limited to, impact from competition and new product developments. Based on these tests, it was determined that the fair values of the indefinite-lived intangible assets more likely than not exceed their carrying values, resulting in no intangible impairment.
For the three months ended June 30, 2024, 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 course of the quarter, and concluded there were no such indicators. The Company applied a hypothetical sensitivity analysis by increasing the discount rate used to value the reporting units by 50 basis points. As of June 30, 2024, the estimated fair value of the Implants & Prosthetics reporting unit within the Orthodontic and Implant Solutions segment exceeded its carrying value by less than 10%. An increase of the discount rate by 50 basis points would result in a material impairment of the Implants & Prosthetics reporting unit. Additionally, if market conditions worsen, such as a further decline in demand for premium implants, the resulting reduction in projected long-term growth rates would also likely lead to a material impairment for this reporting unit. Goodwill associated with Implants & Prosthetics was $1,141 million as of June 30, 2024.
The fair values of certain indefinite-lived intangible assets within the Connected Technology Solutions segment continued to approximate carrying values as of June 30, 2024. Any further decline in key assumptions could result in additional impairments in future periods. The carrying value of these assets within the aforementioned segment was $203 million as of June 30, 2024.
There is a risk of future impairment charges if there is a decline in the fair value of the reporting units or indefinite-lived intangible assets as a result of, among other things, actual financial results that are lower than forecasts, an adverse change in valuation assumptions, a decline in equity valuations, increases in interest rates, or changes in the use of intangible assets. There can be no assurance that the Company's future asset impairment testing will not result in a material charge to earnings.
Impairment during the Three Months Ended March 31, 2024
In the three months ended March 31, 2024, the Company identified indicators of a more likely than not impairment related to certain indefinite-lived imaging product trade names within the Connected Technology Solutions segment. The decline in fair value of these indefinite-lived trade names was driven by declines in volumes during the three months ended March 31, 2024, which was due in part to a loss in market share from competitive pricing pressures, as well as unfavorable economic conditions in certain markets. These factors contributed to a reduction in forecasted revenues in the near term. The trade names were evaluated for impairment using an income approach, specifically a relief from royalty method. As a result, the Company recorded an indefinite-lived intangible asset impairment charge of $6 million for the three months ended March 31, 2024.
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A reconciliation of changes in the Company's goodwill by reportable segment were as follows:
(in millions) Connected Technology Solutions Essential Dental Solutions Orthodontic and Implant Solutions Wellspect Healthcare Total
Balance at December 31, 2023
Goodwill $ 291 $ 840 $ 1,323 $ 275 $ 2,729
Accumulated impairment losses (a)
(291) - - - (291)
Goodwill, net at December 31, 2023 - 840 1,323 275 2,438
Impairment - - - - -
Foreign Currency Translation
- (8) (36) (5) (49)
Balance at June 30, 2024
Goodwill $ 291 $ 832 $ 1,287 $ 270 $ 2,389
Accumulated impairment losses (a)
$ (291) $ - $ - $ - $ -
Goodwill, net at June 30, 2024 $ - $ 832 $ 1,287 $ 270 $ 2,389
(a) The Company realigned segments in 2023, and at that time, there was an accumulated impairment loss that was not allocated to the new segments.
Identifiable definite-lived and indefinite-lived intangible assets were as follows:
June 30, 2024 December 31, 2023
(in millions) Gross
Carrying
Amount 		Accumulated
Amortization 		Net
Carrying
Amount 		Gross
Carrying
Amount 		Accumulated
Amortization 		Net
Carrying
Amount
Developed technology and patents $ 1,659 $ (1,043) $ 616 $ 1,697 $ (1,006) $ 691
Trade names and trademarks
270 (107) 163 271 (102) 169
Licensing agreements 30 (28) 2 30 (27) 3
Customer relationships 1,044 (698) 346 1,070 (680) 390
Total definite-lived 3,003 (1,876) 1,127 3,068 (1,815) 1,253
Indefinite-lived trade names and trademarks
427 - 427 447 - 447
In-process R&D (a)
5 - 5 5 - 5
Total indefinite-lived 432 - 432 452 - 452
Total identifiable intangible assets $ 3,435 $ (1,876) $ 1,559 $ 3,520 $ (1,815) $ 1,705
(a) Intangible assets acquired in a business combination that are in-process and used in research and development ("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.
In 2021, the Company purchased certain developed technology rights for an initial payment of $3 million and minimum guaranteed contingent payments of $17 million to be made upon reaching certain regulatory and commercial milestones. The contingent payments are not considered probable as of June 30, 2024.
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NOTE 14 - COMMITMENTS AND CONTINGENCIES
Contingencies
On December 19, 2018, a 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 claims that the Company, and certain individual defendants, violated U.S. securities laws 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") and 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. 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 from 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 opposition to the plaintiff's motion for class certification was filed on February 8, 2024, and the plaintiff's reply was filed on May 10, 2024. On June 7, 2024, the Company served a motion for judgment on the pleadings seeking dismissal of the remainder of the amended complaint. The plaintiff served its opposition on July 26, 2024, and the motion will be fully briefed and filed on August 16, 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, 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 substantially 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 was granted as to Mr. Chadha and granted in part and denied in part as to the Company, Mr. Casey, and Mr. Gomez in a ruling by the Court on May 1, 2024. The Company's answer to the Amended Complaint was filed on May 21, 2024.
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 internal investigation by the Audit and Finance Committee of the Company's Board of Directors. 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 "Presura 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
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4, 2023, the Delaware Court of Chancery stayed the Presura Derivative Litigation until the earlier of public announcement of a settlement of the Securities Litigation or resolution of the pending motion to dismiss in the Securities Litigation.
Additionally, on March 26, 2024, Dentsply Sirona stockholder Calvin Snee filed a shareholder derivative suit in the Delaware Court of Chancery captioned Calvin Snee, derivatively on behalf of Dentsply Sirona Inc. v. Donald M. Casey Jr., et al. and Dentsply Sirona Inc, No. 2024-0308 (the "Snee 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 Presura Derivative Litigation and the Securities Litigation, and it alleges that beginning in 2021, various of the defendants breached fiduciary duties, misappropriated information to conduct insider trading, and were unjustly enriched 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 May 2, 2024, the Delaware Court of Chancery issued an order consolidating and staying the Presura Derivative Litigation and Snee Derivative Litigation.
On July 19, 2024, Dentsply Sirona stockholder Frank Manfre filed a shareholder derivative suit in the Delaware Court of Chancery captioned Frank Manfre, derivatively on behalf of nominal defendant Dentsply Sirona Inc. v. Donald M. Casey Jr. et al. and Dentsply Sirona Inc., No. 2024-0763 (the "Manfre Derivative Litigation"). The complaint 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 complaint in this case contains allegations similar to those in the Snee Derivative Litigation, the Presura Derivative Litigation, and the Securities Litigation, and it alleges that beginning in 2021, various of the defendants breached fiduciary duties, misappropriated information to conduct insider trading, and were unjustly enriched 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 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 execution of the SPA 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 Dentsply Italia S.r.l. in 2018 (the surviving entity is now Dentsply Sirona Italia S.r.l.). Under the SPA, a portion of the purchase price equal to €7 million was required to be deposited into an escrow account (the "Escrow Account") and 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 had to meet certain specifications. In connection with the closing of the share purchase transaction, the SPA was supplemented by a Facility Agreement, also dated October 8, 2012 (the "FA"), which specifically set out the mechanics of payment and release of the proceeds of the Escrow Account. The Austrian notary public, Mr. Gottfried Schachinger, acting as escrow agent, Mr. Gobbetti, and SIRONA Holdings GmbH, an affiliate of Sirona Dental Systems, Inc. which paid the €7 million into the Escrow Account, were parties to the FA. The FA is subject to Austrian law and to the jurisdiction of the Court of Salzburg in Austria.
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 the 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 also developed their arguments in several rounds of defensive briefs. The final submissions were completed on April 15, 2024 and the final hearing for discussion took place on May 8, 2024. On July 22, 2024, the arbitral tribunal rejected all of Mr. Gobbetti's claims, ruling that the Company had met its contractual obligations under the SPA, particularly regarding the balance of the purchase price. The arbitral tribunal also dismissed Mr. Gobbetti's claims in tort and those pertaining to the FA for lack of jurisdiction and lack of capacity for the Company to be sued. The arbitral tribunal observed that such claims should have been brought against SIRONA Holdings GmbH, which is a party to the FA but not to the SPA, before the Court of Salzburg in Austria based on the jurisdictional clause of the FA.
Except as noted above, no specific amounts of damages have been alleged in these lawsuits. The Company will continue to incur legal fees in connection 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 defend such litigation may be
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significant. The Company intends to defend these lawsuits vigorously, but there can be no assurance that the Company will be successful in any defense. If any of the lawsuits are decided adversely, the Company may be liable for significant damages directly or under its indemnification obligations, which could adversely affect the Company's 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") is conducting an examination of the Company's U.S. federal income tax returns for the tax years 2015 and 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 would be 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. The Company believes that it accurately reported the federal income tax consequences of the internal restructuring and stock redemption in its tax returns and in April 2024, submitted an administrative protest with the IRS Independent Office of Appeals contesting the examination team's proposed adjustments. The Company intends to vigorously defend its reported positions and believes that it is more likely than not that its positions 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 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 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. Except as otherwise noted, the Company generally cannot predict what the eventual outcome of the above described pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be. 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.
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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 June 30, 2024, non-cancelable purchase commitments were as follows:
(in millions)
2024 $ 128
2025 142
2026 57
2027 35
2028 32
Thereafter -
Total $ 394
The above information should be read in conjunction with Part II, Item 7 "Contractual Obligations" and Part II, Item 8, Note 21, Commitments and Contingencies, in the Company's 2023 Form 10-K.
The table above includes commitments under the Company's agreement with a cloud services provider supporting the Company's digital platform which requires minimum purchases totaling $94 million through 2028.
Off-Balance Sheet Arrangements
As of June 30, 2024, the Company had no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company's consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in the sections above.
Indemnification
In the normal course of business to facilitate the sale of the Company's products and services, the Company indemnifies certain parties, including customers, vendors, lessors, service providers, and others, with respect to certain matters, including, but not limited to, services to be provided by or for the Company, and intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with its directors and its executive officers that will require the Company, 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 which an indemnification claim can be made and the amount of the claim.
It is not possible to make a reasonable estimate of the maximum potential amount of indemnification under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Additionally, the Company has a limited history of prior indemnification claims, and the payments the Company has made under such agreements have not had a material effect on its results of operations, cash flows or financial position. As of June 30, 2024, the Company 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 the Company could be significant and could have a material adverse effect on the Company's results of operations or cash flows in a particular period.
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DENTSPLY SIRONA Inc. and Subsidiaries
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Information included in or incorporated by reference in this Form 10-Q, and other filings with the SEC and the Company's press releases or other public statements, contains or may contain forward-looking statements. Please refer to the discussion under the header "Forward-Looking Statements and Associated Risks" in the forepart of this Form 10-Q.
Company Profile
DENTSPLY SIRONA Inc. 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 a vision of improving oral health and continence care globally. Dentsply Sirona develops, manufactures, and markets comprehensive solutions, including technologically advanced dental equipment supported by cloud software solutions as well as dental products and healthcare consumable products in urology and enterology under a strong portfolio of world class brands. 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 the Nasdaq stock market under the symbol XRAY.
BUSINESS
The Company operates in four reportable segments as described 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. 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.
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 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 in Gaza has resulted in significant unrest and uncertainty within that region. In April 2024, the state of Israel was also a target of a coordinated missile and drone direct attack launched by the Republic of Iran. These events have heightened the possibility that escalating violence and involvement of other terrorist groups or foreign powers in the region may further impact our employees and operations. Additionally, in May 2024, in response to ongoing military actions, the government of Turkey implemented restrictions on the import of goods manufactured within Israel for sale in the Turkish market. Sales of our products made in Israel and sold in Turkey represent less than 2% of our global sales of Implants & Prosthetics, but this product category is an area of relatively high potential growth. It is not clear when these restrictions will be lifted or if other countries will institute similar restrictions.
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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 together employ approximately 300 associates. These facilities remain open and continue to operate. We may, however, decide to discontinue production at these facilities 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 three months ended June 30, 2024, net sales of products produced at these sites comprised approximately 4% of consolidated net sales and 13% of the net sales of the Orthodontic and Implant Solutions segment. Net assets within Israel total $198 million as of June 30, 2024, consisting primarily of acquired technology, cash, inventory, and property, plant and equipment associated with our operations in country. Overall, the Company's operations in Israel 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 six months ended June 30, 2024. The Company continues to monitor developments and prepare contingency plans to limit potential disruption to its operations.
Additionally, we sell 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 comprised approximately 1% of our consolidated net sales for the three months ended June 30, 2024.
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 goodwill within the 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 our 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 three months ended June 30, 2024 as a result of the conflict.
For the three months ended June 30, 2024, net sales in Russia and Ukraine were approximately 2% of our consolidated net sales, and net assets in these countries were $76 million. These net assets include $44 million of cash and cash equivalents held within Russia as of June 30, 2024. Due to currency 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.
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 in a loss of sales, disrupt our supply chain, broaden inflationary costs, and have a material adverse effect on our results of operations.
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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, including electronic components, which consequently have led to a negative impact on margins. We expect a continuation of inflationary pressure on the cost of both raw materials and wages through the remainder of 2024, the effect of which will depend on our ability to successfully mitigate and offset the related impacts.
The challenging macroeconomic conditions have 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 higher cost of borrowing has also reduced patient demand for elective dental procedures, which affects sales of the Company's offerings more broadly. The Company has also faced additional competitive pressure for lower-priced options for investments in new equipment by dental practices, in particular for imaging products. While the Company has taken steps to address competitive pressures, such as the reintroduction of its Orthophos SL 2D and 3D products, these trends may continue. While patient volumes have largely remained stable in the United States, the impact of macroeconomic declines and high interest rates has been particularly apparent in Germany, which represented 10% of the Company's sales for the six months ended June 30, 2024. Germany was in a recession for most of 2023, largely due to persistent high inflation and falling household spending. Although conditions including inflation have recently improved marginally, demand for investments in new dental equipment continues to be weak, and recent economic forecasts have delayed the projected timing for recovery and more meaningful growth beyond the next two quarters. The Company therefore believes the challenging macroeconomic and market conditions in Germany are likely to persist and negatively impact sales of equipment, in particular through the remainder of 2024.
In anticipation of a continued inflationary trend and potentially deteriorating macroeconomic environment, we have 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, including the most recent restructuring plan approved by the Board of Directors on July 29, 2024;
•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. Should the higher inflationary environment continue, we may be unable to raise the prices of certain products and services sufficiently or engage in other cost cutting measures commensurate with the rate of inflation, which could have a material adverse effect on our results of operations and financial condition.
Distribution Arrangements
In July 2024, the Company delivered a one-year notice of non-renewal in connection with its non-exclusive distribution agreements with Patterson Companies, Inc. ("Patterson") for the distribution of dental equipment in the United States and Canada. It is anticipated that Patterson will continue to be one of the Company's two largest distributors as a percentage of the Company's global revenue during the one-year notice period. The Company intends to engage in discussions for new distribution agreements with Patterson. However, failure to successfully renegotiate the distribution agreements or secure potential new agreements with another distributor could have a material adverse effect on the Company's business, operating results and financial condition. The Company does not anticipate a charge against earnings related to non-renewal of the distribution agreements. For additional information, see Part 1, Item 1A, "Risk Factors" in our 2023 Form 10-K.
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RESULTS OF OPERATIONS: THREE AND SIX MONTHS ENDED JUNE 30, 2024 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2023
Net Sales
The Company presents net sales comparing the current year periods to the prior year periods. In addition, the Company also presents the changes in net sales on an organic sales basis, which is a Non-GAAP measure. The Company defines "organic sales" as the reported net sales adjusted for: (1) net sales from acquired and divested businesses recorded prior to the first anniversary of the acquisition or divestiture; (2) net sales attributable to discontinued product lines in both the current and prior year periods; and (3) the impact of foreign currency changes, which is calculated by translating current period net sales using the comparable prior period's currency exchange rates.
Our measure of organic sales may differ from those used by 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. Organic sales is an important internal measure for the Company, and its senior management receives a monthly analysis of operating results that includes organic sales. The performance of the Company is measured on this metric along with other performance metrics.
The Company discloses changes in organic sales to allow investors to evaluate the performance of the Company's operations exclusive of the 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. The Company believes that this supplemental information is helpful in understanding underlying net sales trends.
A reconciliation of net sales to organic sales for the three and six months ended June 30, 2024 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change
Net sales $ 984 $ 1,028 $ (44) (4.2 %) $ 1,937 $ 2,006 $ (69) (3.5 %)
Foreign exchange impact (1.9 %) (1.4 %)
Organic sales (2.3 %) (2.1 %)
Percentages are based on actual values and may not reconcile due to rounding.
The decrease in organic sales for both the three and six months ended June 30, 2024 was primarily due to weaker demand for products in Connected Technology Solutions, particularly outside the United States, partially offset by growth in Wellspect Healthcare and Orthodontic and Implant Solutions. The organic sales decrease for the six months ended June 30, 2024 was also driven by weaker demand for Essential Dental Solutions, which improved during the second quarter primarily due to steadier patient traffic in Europe.
Net Sales by Segment
Connected Technology Solutions
A reconciliation of net sales to organic sales for the three and six months ended June 30, 2024 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change
Net sales $ 253 $ 309 $ (56) (18.2 %) $ 500 $ 574 $ (74) (12.9 %)
Foreign exchange impact (2.0 %) (1.6 %)
Organic sales (16.2 %) (11.3 %)
Percentages are based on actual values and may not reconcile due to rounding.
The decrease in organic sales for both the three and six months ended June 30, 2024 was primarily due to lower volumes of imaging equipment and treatment centers across all three regions, driven in part by competitive pressures including pricing as well as unfavorable economic conditions across our major markets. The organic sales decrease for the six months ended
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June 30, 2024 was lower than the three months ended June 30, 2024 as a result of higher volumes of CAD/CAM equipment sold in the United States during the three months ended March 31, 2024.
Essential Dental Solutions
A reconciliation of net sales to organic sales for the three and six months ended June 30, 2024 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change
Net sales $ 375 $ 377 $ (2) (0.4 %) $ 739 $ 763 $ (24) (3.2 %)
Foreign exchange impact (1.9 %) (1.1 %)
Organic sales 1.5 % (2.1 %)
Percentages are based on actual values and may not reconcile due to rounding.
The increase in organic sales for the three months ended June 30, 2024 was primarily driven by higher demand in Europe and Rest of World and price increases across all regions, partially offset by weaker demand in the United States. Sales of endodontic products improved during the three months ended June 30, 2024, partially offset by lower sales of preventive products.
The decrease in organic sales for the six months ended June 30, 2024 was primarily driven by weaker overall demand in the United States, in part, due to a benefit from satisfying backlog orders during the first quarter of 2023, partially offset by price increases.
Orthodontic and Implant Solutions
A reconciliation of net sales to organic sales for the three and six months ended June 30, 2024 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change
Net sales $ 276 $ 270 $ 6 2.6 % $ 547 $ 529 $ 18 3.5 %
Foreign exchange impact (2.0 %) (1.6 %)
Organic sales 4.6 % 5.1 %
Percentages are based on actual values and may not reconcile due to rounding.
The increase in organic sales for both the three and six months ended June 30, 2024 was primarily driven by higher volumes of orthodontic aligners, particularly in the United States and Europe, partially offset by the impact of regulatory developments on sales of direct-to-consumer aligners as described below. Organic sales also benefited from stronger demand for implants products in Rest of World, partially offset by lower volumes for implants and prosthetics products in Europe.
Legislative changes in Nevada relating to teledentistry required us to discontinue new patient recruitment for our current direct-to-consumer aligner business model in the state during the second quarter. Additionally, enacted and pending legislative changes in certain other states including Florida and Illinois are expected to impact sales in the second half of 2024. These changes would require certain adjustments to our business model, some of which have been made preemptively and have started to negatively impact sales of direct-to-consumer aligners in those states. These adjustments include developing new features and modifying our process for engaging with customers as part of our direct-to-consumer aligner business models in response to existing and pending legislation. Our response to these legislative developments resulted in reduced sales of direct-to-consumer orthodontic aligners by approximately $6 million during the second quarter of 2024, with a similar estimated impact for each of the remaining quarters of 2024, which we expect will be more than offset by organic growth. Future legislative or regulatory changes in other states, or changes in the interpretation of existing legislation by regulators, may further impact the current business model and operations of our direct-to-consumer aligner business or require us to evaluate patient recruitment strategies in certain states. We continue to monitor these legal and regulatory developments to understand their potential impact on the operations of our direct-to-consumer aligner business. For additional information, see Part I, Item 1, "Business - Regulation" and Part 1, Item 1A, "Risk Factors" in our 2023 Form 10-K.
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Wellspect Healthcare
A reconciliation of net sales to organic sales for the three and six months ended June 30, 2024 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change
Net sales $ 80 $ 72 $ 8 9.7 % $ 151 $ 140 $ 11 7.6 %
Foreign exchange impact (2.0 %) (0.8 %)
Organic sales 11.7 % 8.4 %
Percentages are based on actual values and may not reconcile due to rounding.
The increase in organic sales for both the three and six months ended June 30, 2024 was driven by higher volumes in all regions, particularly in the United States and Europe, partly driven by new product launches and the benefit of an initial stocking order from a new distributor.
Net Sales by Region
United States
A reconciliation of net sales to organic sales for the three and six months ended June 30, 2024 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change
Net sales $ 360 $ 362 $ (2) (0.7 %) $ 715 $ 713 $ 2 0.4 %
Foreign exchange impact (0.1 %) - %
Organic sales (0.6 %) 0.4 %
Percentages are based on actual values and may not reconcile due to rounding.
The decrease in organic sales for the three months ended June 30, 2024 was primarily driven by lower volumes of imaging equipment, partially due to the timing of sales to dealers, and lower demand for Essential Dental Solutions products. These decreases were partially offset by higher volumes of orthodontic aligners within our direct-to-consumer aligner solutions business. Volumes for imaging products in the three months ended June 30, 2024 were negatively impacted by a seasonal reduction in distributor inventory of approximately $4 million compared to a build of approximately $7 million in the three months ended June 30, 2023. Conversely, volumes for CAD/CAM products were positively affected by a lower seasonal reduction in dealer inventory levels of approximately $16 million in the three months ended June 30, 2024 compared to approximately $27 million in the three months ended June 30, 2023. Distributor inventory levels for both imaging and CAD/CAM products as of June 30, 2024 approximate historical averages.
The increase in organic sales for the six months ended June 30, 2024 was primarily driven by higher volumes of orthodontic aligners within our direct-to-consumer aligner solutions and CAD/CAM products, as well as price increases for these products. These increases were mostly offset by lower volumes for Essential Dental Solutions products, in part due to a benefit from satisfying backlog orders during the first quarter of 2023 and lower volumes of imaging equipment. Volumes for imaging products in the six months ended June 30, 2024 were negatively impacted by a seasonal reduction in distributor inventory of approximately $11 million compared to a build of approximately $7 million in the six months ended June 30, 2023. Conversely, volumes for CAD/CAM products were positively affected by a lower seasonal reduction in dealer inventory levels approximating $7 million in the six months ended June 30, 2024 compared to approximately $18 million in the six months ended June 30, 2023.
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Europe
A reconciliation of net sales to organic sales for the three and six months ended June 30, 2024 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change
Net sales $ 387 $ 403 $ (16) (4.0 %) $ 763 $ 799 $ (36) (4.6 %)
Foreign exchange impact (1.4 %) (0.4 %)
Organic sales (2.6 %) (4.2 %)
Percentages are based on actual values and may not reconcile due to rounding.
The decrease in organic sales for the three months ended June 30, 2024 was primarily due to overall lower volumes for Connected Technology Solutions products as a result of unfavorable economic conditions, particularly in Germany. These decreases were partially offset by higher volumes due to steadier patient traffic and price increases for Essential Dental Solutions products.
The decrease in organic sales for the six months ended June 30, 2024 was primarily due to overall lower volumes for Connected Technology Solutions products as a result of unfavorable economic conditions, particularly in Germany. These decreases were partially offset by price increases for Essential Dental Solutions products.
Rest of World
A reconciliation of net sales to organic sales for the three and six months ended June 30, 2024 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change
Net sales $ 237 $ 263 $ (26) (9.4 %) $ 459 $ 494 $ (35) (7.1 %)
Foreign exchange impact (5.1 %) (4.8 %)
Organic sales (4.3 %) (2.3 %)
Percentages are based on actual values and may not reconcile due to rounding.
The decrease in organic sales for the three months ended June 30, 2024 was primarily driven by lower volumes of Connected Technology Solutions products, particularly CAD/CAM, as well as competitive pricing. These decreases were partially offset by increased volumes for implants products and Essential Dental Solutions products, particularly endodontic consumables.
The decrease in organic sales for the six months ended June 30, 2024 was primarily driven by lower volumes of Connected Technology Solutions products, particularly CAD/CAM, competitive pricing, and lower demand in Japan. These decreases were mostly offset by increased volumes for implants products. The local volume-based procurement program in China continued to result in increased volumes for implants products, representing a marked improvement from the program's adverse impact in early 2023; however, the growth rates in China are expected to be more moderate for the remainder of 2024.
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Gross Profit
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change
Gross profit $ 511 $ 550 $ (39) (7.1 %) $ 1,017 $ 1,069 $ (52) (4.9 %)
Gross profit as a percentage of net sales 51.9 % 53.5 % (160) bps 52.5 % 53.3 % (80) bps
Percentages are based on actual values and may not reconcile due to rounding.
Gross profit as a percentage of net sales for the three months ended June 30, 2024 declined primarily due to unfavorable mix in sales of CAD/CAM products, unfavorable manufacturing leverage from the reduced volumes, and higher manufacturing and input costs. This decline was partly offset by improved pricing and a decrease in warranty costs.
Gross profit as a percentage of net sales for the six months ended June 30, 2024 declined as higher manufacturing and input costs were partially offset by improved pricing and a decrease in warranty costs.
Operating Expenses
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change
Selling, general, and administrative expenses ("SG&A") $ 399 $ 416 $ (17) (4.1 %) $ 814 $ 832 $ (18) (2.2 %)
Research and development expenses ("R&D") 41 49 (8) (15.7 %) 83 95 (12) (12.2 %)
Intangible asset impairments - - - NM 6 - 6 NM
Restructuring and other costs 21 5 16 NM 22 64 (42) NM
SG&A as a percentage of net sales 40.6 % 40.5 % 10 bps 42.0 % 41.5 % 50 bps
R&D as a percentage of net sales 4.1 % 4.7 % (60) bps 4.3 % 4.7 % (40) bps
Percentages are based on actual values and may not reconcile due to rounding.
NM - Not meaningful
SG&A Expenses
The decrease in SG&A expenses for the three months ended June 30, 2024 was driven by lower headcount and incentive compensation costs, as well as favorable impact from foreign currency exchange on operating expenses. The decreases were partially offset by higher selling costs, particularly in Orthodontic and Implant Solutions.
The decrease in SG&A expenses for the six months ended June 30, 2024 was driven by lower headcount and incentive compensation costs, and professional service costs, as well as favorable impact from foreign currency exchange on operating expenses. The decreases were partially offset by higher selling costs, particularly in Orthodontic and Implant Solutions.
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R&D Expenses
For the three and six months ended June 30, 2024, R&D expenses decreased as the Company continues to prioritize a disciplined approach with ongoing investments in digital workflow solutions, product development initiatives, and software development, including clinical application suite and cloud deployment. The Company expects to continue to maintain a level of investment in R&D that is at least 4% of annual net sales.
Intangible Asset Impairments
The Company did not record any impairment charges for the three months ended June 30, 2024. For the six months ended June 30, 2024, the Company recorded an intangible asset impairment charge of $6 million. The charge was related to indefinite-lived imaging product trade names within the Connected Technology Solutions segment. For further information see Note 13, Goodwill and Intangible Assets, in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q.
Restructuring and Other Costs
For the three and six months ended June 30, 2024, the Company recorded $21 million and $22 million, respectively, of restructuring and other costs, and for the three and six months ended June 30, 2023, the Company recorded $5 million and $64 million, respectively. These expenses in both years consisted primarily of severance costs in conjunction with the restructuring plan announced in February 2023. On July 31, 2024 the Company announced a new restructuring plan which will result in additional severance charges beginning in the third quarter. For further details refer to Material Trends in Capital Resourcesbelow, and Note 8, Restructuring and other costs, in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q.
Segment Adjusted Operating Income
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages)(a)
2024 2023 $ Change % Change 2024 2023 $ Change % Change
Connected Technology Solutions $ 3 $ 26 $ (23) (86.0 %) $ 5 $ 32 $ (27) (84.1 %)
Essential Dental Solutions 125 125 - (0.1 %) 240 250 $ (10) (3.8 %)
Orthodontic and Implant Solutions 42 49 (7) (13.2 %) 84 98 $ (14) (13.9 %)
Wellspect Healthcare 24 21 3 18.9 % 47 39 $ 8 20.8 %
Percentages are based on actual values and may not reconcile due to rounding.
(a) See Note 6, Segment Information, in the Notes to Unaudited Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a reconciliation from segment adjusted operating income to consolidated US GAAP income.
Connected Technology Solutions
The decrease in segment adjusted operating income for both the three and six months ended June 30, 2024 is due to lower organic sales noted above as well as unfavorable manufacturing leverage from lower volumes and unfavorable product mix as a result of lower sales for certain higher margin CAD/CAM equipment. These decreases were partially offset by lower headcount-related costs and product warranty and return costs.
Essential Dental Solutions
For the comparative three months ended June 30, segment adjusted operating income remained flat primarily due to higher organic sales noted above, as well as lower headcount-related costs. These increases were partially offset by higher manufacturing costs and unfavorable product mix.
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For the comparative six months ended June 30, the decrease in segment adjusted operating income is due to the reduction in organic sales for the period and higher manufacturing costs. These decreases were partially offset by the favorable impact of foreign currency translation.
Orthodontic and Implant Solutions
The decrease in segment adjusted operating income for both the three and six months ended June 30, 2024 is due to higher distribution and manufacturing costs, an increase in advertising and selling costs, and higher headcount, primarily for key customer-facing roles for direct-to-consumer aligner solutions. This was partially offset for both periods by the organic sales increase primarily for orthodontics products noted above.
Wellspect Healthcare
The increase in segment operating income for both the three and six months ended June 30, 2024 is due to the increase in sales noted above, as well as margin improvement due to the favorable manufacturing leverage of higher volumes, partially offset by unfavorable foreign currency translation.
Other Income and Expense
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2024 2023 $ Change % Change 2024 2023 $ Change % Change
Interest expense, net $ 17 $ 22 $ (5) (21.0 %) $ 35 $ 42 $ (7) (16.6 %)
Other (income) expense, net (1) 12 (13) NM (8) 18 (26) NM
Net interest and other expense (income) $ 16 $ 34 $ (18) $ 27 $ 60 $ (33)
NM - Not meaningful
Interest expense, net
Interest expense, net for the three and six months ended June 30, 2024 decreased compared to the three and six months ended June 30, 2023, driven primarily by lower short-term and other borrowings.
Other (income) expense, net
Other (income) expense, net for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2024 2023 $ Change 2024 2023 $ Change
Foreign exchange (gains) losses $ (4) $ 7 $ (11) $ (14) $ 10 $ (24)
Loss from equity method investments - 3 (3) - 3 (3)
Defined benefit pension plan expenses 2 2 - 4 4 -
Other non-operating income 1 - 1 2 1 1
Other (income) expense, net $ (1) $ 12 $ (13) $ (8) $ 18 $ (26)
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Income Taxes and Net Income
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except percentages) 2024 2023 $ Change 2024 2023 $ Change
Provision (benefit) for income taxes $ 38 $ (39) $ 77 $ 52 $ (44) $ 96
Effective income tax rate 114.4 % (83.2 %) 81.2 % (239.3 %)
Net income (loss) attributable to Dentsply Sirona $ (4) $ 86 $ (90) $ 14 $ 67 $ (53)
Diluted (loss) earnings per common share $ (0.02) $ 0.40 $ 0.07 $ 0.31
Percentages are based on actual values and may not reconcile due to rounding.
Provision for income taxes
The effective tax rates for the three months ended June 30, 2024 and 2023 were 114.4% and (83.2%), respectively. For the six months ended June 30, 2024 and 2023, the rates were 81.2% and (239.3%), respectively. The effective tax rates for 2024 include discrete expenses related to a taxable gain from implementing an internal reorganization and reserves pertaining to ongoing foreign tax audits. In contrast, the rates for 2023 were significantly affected by the partial release of the valuation allowance on net operating loss carryforwards.
The Company performed an assessment to evaluate the new global minimum tax developed by the Organisation for Economic Co-operation and Development ("Pillar Two"), which involved analyzing the tax laws in each jurisdiction in which the Company operates and modeling the implications with the Pillar Two framework. The impact of Pillar Two on the Company was not significant. The Company included the impact of the top-up tax under the Income Inclusion Rule for those jurisdictions in which the Company failed the transitional safe harbor requirement in its full year 2024 effective tax rate.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes to the critical accounting policies as disclosed in the 2023 Form 10-K.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill
Goodwill represents the excess cost over the fair value of the identifiable net assets of business acquired and is allocated among the Company's reporting units. Goodwill is not amortized; instead, it is tested for impairment at the reporting unit level annually at April 1 or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired, or if a decision is made to sell a business. Judgment is involved in determining if an indicator of impairment has occurred during the year. Such indicators may include a decline in expected cash flows, 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 which could be realized in an actual transaction may differ from those used to evaluate the impairment of goodwill.
For the three months ended June 30, 2024, the Company did not identify any indicators of a more likely than not impairment related to its goodwill balances which would require an interim quantitative assessment. Refer to Part I, Item 1, Note 13, Goodwill and Intangible Assets, in the Notes to the Unaudited Consolidated Financial Statements of this Form 10-Q for further discussion of the Company's annual and interim goodwill impairment testing.
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets consist of trade names, trademarks and in-process R&D and are not subject to amortization; instead, they are tested for impairment annually at April 1 or more frequently if events or circumstances indicate that the carrying value of indefinite-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 during the year. Such indicators may include a decline in expected cash flow, 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 trade names and trademarks is estimated using 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-effected and discounted at present value using a discount rate commensurate with the relative risk of achieving the cash flow attributable to the asset. Management judgment is necessary to determine key assumptions, including revenue growth rates, perpetual revenue growth rates, royalty rates, and discount rates. Other assumptions are consistent with those applied to goodwill impairment testing.
Impairment Test Results
The Company assessed the goodwill of its reporting units and its indefinite-lived intangible assets for impairment as of April 1, 2024. Based on the Company's April 1 impairment 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.
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For the three months ended June 30, 2024, 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 course of the quarter, and concluded there were no such indicators. The Company applied a hypothetical sensitivity analysis by increasing the discount rate used to value the reporting units by 50 basis points. As of June 30, 2024, the estimated fair value of the Implants & Prosthetics reporting unit within the Orthodontic and Implant Solutions segment exceeded its carrying value by less than 10%. An increase of the discount rate by 50 basis points would result in a material impairment of the Implants & Prosthetics reporting unit. Additionally, if market conditions worsen, such as a further decline in demand for premium implants, the resulting reduction in projected long-term growth rates would also likely lead to a material impairment for this reporting unit. Goodwill associated with the Implants & Prosthetics reporting unit was $1,141 million as of June 30, 2024.
The fair values of certain indefinite-lived intangible assets within the Connected Technology Solutions segment continued to approximate carrying values as of June 30, 2024. Any further decline in key assumptions could result in additional impairments in future periods. The carrying value of these assets within the aforementioned segment was $203 million as of June 30, 2024.
Impairment during the Three Months Ended March 31, 2024
In the three months ended March 31, 2024, the Company identified indicators of a more likely than not impairment related to certain indefinite-lived imaging product trade names within the Connected Technology Solutions segment. The decline in fair value of these indefinite-lived trade names was driven by declines in volumes during the three months ended March 31, 2024, which was due in part to a loss in market share from competitive pricing pressures, as well as unfavorable economic conditions in certain markets. These factors contributed to a reduction in forecasted revenues in the near term. The trade names were evaluated for impairment using an income approach, specifically a relief from royalty method. As a result, the Company recorded an indefinite-lived intangible asset impairment charge of $6 million for the three months ended March 31, 2024.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30,
(in millions) 2024 2023 $ Change
Cash (used in) provided by:
Operating activities $ 233 $ 83 $ 150
Investing activities (93) (67) (26)
Financing activities (185) (70) (115)
Effect of exchange rate changes on cash and cash equivalents (10) (16) 6
Net (decrease) increase in cash and cash equivalents $ (55) $ (70) $ 15
Cash provided by operating activities increased compared to the six months ended June 30, 2023, primarily as a result of changes in working capital including higher collections on accounts receivable due largely to timing of customer remittances, and a lower build of inventory during the current period. Cash provided by operating activities for the first six months of 2024 also includes receipt of a $42 million foreign income tax refund. These increases in operating cash were partially offset by other changes in working capital including higher payments to vendors during the current period due to timing. At June 30, 2024, the number of days for sales outstanding in accounts receivable decreased by 7 days to 52 days as compared to 59 days at December 31, 2023, and the number of days of sales in inventory increased by 2 days to 128 days at June 30, 2024 as compared to 126 days at December 31, 2023.
The cash used in investing activities increased compared to the six months ended June 30, 2023, due to higher cash paid on settlement of derivatives of $9 million and higher capital expenditures of $14 million. The Company estimates capital expenditures to be in the range of approximately $170 million to $200 million for the full year 2024 and expects these investments to include additional implementation expenses for our new global Enterprise Resource Planning ("ERP") system, equipment upgrades, and capacity expansion to support product innovation and consolidate operations for enhanced efficiencies.
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The increase of cash used in financing activities compared to the six months ended June 30, 2023 was primarily driven by lower short-term borrowings in 2024 of $100 million. For both the six months ended June 30, 2024 and 2023, the Company made common stock repurchases totaling $150 million.
On November 7, 2023, the Board of Directors approved an increase to the authorized share repurchase program of $1.0 billion. At June 30, 2024, the Company had $1.29 billion of authorization remaining available for share repurchases. Additional share repurchases, if any, may 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 considers appropriate based upon prevailing market and business conditions and other factors. The Company intends to repurchase $100 million of shares in the third quarter of 2024, subject to market conditions. At June 30, 2024, the Company held 61.9 million shares of treasury stock.
The Company's ratio of total net debt to total capitalization was as follows:
(in millions, except percentages) June 30, 2024 December 31, 2023
Notes payable and current portion of debt
$ 362 $ 322
Long-term debt 1,737 1,796
Less: Cash and cash equivalents 279 334
Net debt 1,820 1,784
Total equity 3,064 3,294
Total capitalization $ 4,884 $ 5,078
Total net debt to total capitalization ratio 37.3 % 35.1 %
At June 30, 2024, the Company had $454 million of borrowings available 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 credit facility which expires in May 2028. The Company also has access to an aggregate $500 million under a 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 $270 million outstanding borrowings under the commercial paper facility at June 30, 2024 resulting in $430 million remaining available under the revolving credit and commercial paper facilities. The Company also has access to $41 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. The lines of credit have no major restrictions and are provided under demand notes between the Company and the lending institutions. At June 30, 2024, the Company had $17 million outstanding under short-term borrowing arrangements.
The Company's revolving credit facility, term loans and senior notes contain certain covenants relating to the Company's operations and financial condition. The most restrictive of these covenants are: (1) a ratio of total debt outstanding to total capital not to exceed 0.6, and (2) a ratio of 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 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's other lenders to accelerate their loans. At June 30, 2024, the Company was in compliance with these covenants.
The Company expects on an ongoing basis to be able to finance operating cash requirements, capital expenditures, and debt servicefrom the current cash, cash equivalents, cash flows from operations and amounts available under its existing borrowing facilities. The Company's credit facilities are further discussed in Note 12, Financing Arrangements, to the Unaudited Consolidated Financial Statements of this Form 10-Q.
The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries' operating activities and future foreign investments. The Company has the ability to repatriate cash to the United States, which could result in an adjustment to the tax liability for foreign withholding taxes, foreign and/or U.S. state income taxes, and the impact of foreign currency movements. At June 30, 2024, management believed that sufficient liquidity was available in the United States and expects this to continue for the next twelve months. The Company has repatriated and expects to continue repatriating
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certain funds from its non-U.S. subsidiaries that are not needed to finance local operations. Repatriation activities both performed and contemplated to date have not resulted in, and are not expected to result in, any significant incremental tax liability to the Company.
The Company continues to review its debt portfolio and may refinance additional debt or add debt in the near-term based on strategic capital management. The Company believes there is sufficient liquidity available for the next twelve months.
Material Trends in Capital Resources
On February 14, 2023, the Board of Directors of the Company approved a plan to restructure the business through a new operating model with five global business units, optimize central functions and overall management infrastructure, and implement other efforts aimed at cost savings (the "2023 Plan"). The 2023 Plan estimated a reduction in the Company's global workforce of approximately 8% to 10% and annual cost savings of approximately $200 million. The target for cost savings has been substantially met as of June 30, 2024, with the benefits mostly offset in the short term by additional investments in sales personnel, our new global ERP system, and other transformation initiatives.
As of June 30, 2024, in conjunction with the 2023 Plan, the Company incurred $86 million in restructuring charges, from inception, 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. Remaining restructuring charges attributable to the 2023 Plan are not expected to be material.
On July 29, 2024, the Board of Directors of the Company approved an additional plan to restructure the Company's business to improve operational performance and drive shareholder value creation (the "2024 Plan"). In connection with the 2024 Plan, the Company anticipates a net reduction in the Company's global workforce of approximately 2% to 4%. The proposed changes are subject to co-determination processes with employee representative groups in countries where required. The Company expects to incur between $40 million and $50 million in non-recurring restructuring charges under the 2024 Plan, primarily related to employee transition, severance payments and employee benefits, which are expected to be expensed and paid in cash in 2024 and 2025.
Actions taken under the 2024 Plan will seek to further streamline the Company's operations and global footprint, as well as improve alignment of the Company's cost structure with its strategic growth objectives. The Company anticipates that the 2024 Plan will be substantially completed by the end of 2025 and result in $80 to $100 million in annual cost savings.
The estimates of the charges and expenditures that the Company expects to incur in connection with the 2024 Plan, and the timing thereof, 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 additional charges or cash expenditures not currently contemplated due to unanticipated events that may occur, including in connection with the implementation of the 2024 Plan. For further details refer to Note 8, Restructuring and Other Costs, in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q.
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 of the Company's Board of Directors, and subsequently, associated litigation and the external investigation by the SEC which are ongoing. These costs totaled $61 million for the year ended December 31, 2022 and $19 million for the year ended December 31, 2023. In the six months ended June 30, 2024, the Company recorded $4 million of similar costs, including legal defense expenses pertaining to the matters described in Note 14, Commitments and Contingencies in the Notes to the Unaudited Consolidated Financial Statements, and expects that it will continue to incur such costs in the second half of 2024.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Part I, Item 1, Note 1, Business and Basis of Presentation, to the Unaudited Consolidated Financial Statements of this Form 10-Q for a discussion of recent accounting pronouncements.
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Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes from the information provided in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," in our 2023 Form 10-K.
Item 4 - Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report were effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and that it is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting that occurred during the three months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Refer to Part I, Item 1, Note 14 Commitments and Contingencies, in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q.
Item 1A - Risk Factors
There have been no significant material changes to the risk factors as disclosed in Part 1A, "Risk Factors" in the Company's Form 10-K for the year ended December 31, 2023.
Item 2 - Unregistered Sales of Securities and Use of Proceeds
On November 7, 2023, the Board of Directors approved an increase to the authorized share repurchase program of $1.0 billion. At June 30, 2024, the Company had authorization to repurchase $1.29 billion in shares of common stock remaining under the share repurchase program.
During the three months ended June 30, 2024, the Company had the following activity with respect to the share repurchase program:
(in millions, except per share amounts) Total Number of Shares Purchased Average Price Paid Per Share Total Cost of Shares Purchased Dollar Value of Shares that May be Purchased Under the Stock Repurchase Program
Period
April 1, 2024 to April 30, 2024 - $ - $ - $ 1,440
May 1, 2024 to May 31, 2024 3.5 27.98 99 1,341
June 1, 2024 to June 30, 2024 1.9 27.60 51 1,290
5.4 $ 27.85 $ 150
Item 5 - Other Information
Rule 10b5-1 Trading Plans
During the three months ended June 30, 2024, none of the Company's directors or executive officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement" as defined in Item 408(c) of Regulation S-K.
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Item 6 - Exhibits
Exhibit Number Description
10.1
Non-Employee Director Compensation Policy, effective May 21, 2024* (Filed herewith)
DENTSPLY SIRONA Inc. 2024 Omnibus Incentive Plan* (1)
DENTSPLY SIRONA Inc. Amended and Restated Employee Stock Purchase Plan* (1)
Form of Share-Settled Restricted Stock Unit Award Agreement (Director) under the Dentsply Sirona Inc. 2024 Omnibus Incentive Plan* (1)
10.5
Form of Share-Settled Restricted Stock Unit Award Agreement under the Dentsply Sirona Inc. 2024 Omnibus Incentive Plan* (Filed herewith)
10.6
Form of Share-Settled Performance Restricted Stock Unit Award Agreement under the Dentsply Sirona Inc. 2024 Omnibus Incentive Plan* (Filed herewith)
10.7
Form of Cash-Settled Restricted Stock Unit Award Agreement under the Dentsply Sirona Inc. 2024 Omnibus Incentive Plan* (Filed herewith)
10.8
Form of Cash-Settled Performance Restricted Stock Unit Award Agreement under the Dentsply Sirona Inc. 2024 Omnibus Incentive Plan* (Filed herewith)
10.9
Form of Option Award Agreement under the Dentsply Sirona Inc. 2024 Omnibus Incentive Plan* (Filed herewith)
31.1
Section 302 Certification Statement Chief Executive Officer
31.2
Section 302 Certification Statement Chief Financial Officer
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Section 906 Certification Statements
101.INS 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)
*Management contract or compensatory plan.
(1) Incorporated by reference to exhibit included in the Company's Registration Statement on Form S-8 dated May 24, 2024 (No. 333-279714).
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
DENTSPLY SIRONA Inc.
/s/ Simon D. Campion July 31, 2024
Simon D. Campion Date
President and
Chief Executive Officer
/s/ Glenn G. Coleman July 31, 2024
Glenn G. Coleman Date
Executive Vice President and
Chief Financial Officer
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