DENTSPLY SIRONA INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following Management's Discussion and Analysis of Financial Conditions and
Results of Operations ("MD&A") is intended to help the reader understand the
Company's operations and business environment. MD&A is provided as a supplement
to, and should be read in conjunction with, the Consolidated Financial
Statements and Notes to Consolidated Financial Statements contained in Items 8
of this Form 10-K. The following discussion includes forward-looking statements
that involve certain risks and uncertainties. See Part I, Item 1, "Business-
Forward-Looking Statements and Associated Risks" in the beginning of this Form
10-K. The MD&A includes the following sections:
•Business - a general description of Dentsply Sirona's business and how
performance is measured;
•Results of Operations - an analysis of the Company's consolidated results of
operations for the three years presented in the Consolidated Financial
Statements;
•Critical Accounting Judgements and Policies - a discussion of accounting
policies that require critical judgments and estimates; and
•Liquidity and Capital Resources - an analysis of cash flows; debt and other
obligations; off-balance sheet arrangements; and aggregate contractual
obligations.
2019 Operational Highlights
•For the year endedDecember 31, 2019 , net sales increased 1.1% compared to the year endedDecember 31, 2018 . Net sales were negatively impacted by approximately 3.3% due to the strengthening of theU.S. dollar over the prior period. Net sales, on an internal sales growth basis (a non-US GAAP measure as defined under the heading "Principal Measurements" below), increased 5.7% for the year endedDecember 31, 2019 as compared toDecember 31, 2018 . •For the year endedDecember 31, 2019 , the Company reported net income attributable toDentsply Sirona of$262.9 million as compared to the net loss attributable toDentsply Sirona of$1,011.0 million for the year endedDecember 31, 2018 . The Company reported net earnings per share of$1.17 per share compared to a net loss per share of$4.51 in the prior year. On an adjusted basis (a non-US GAAP measure as defined under the heading "Net Income attributable toDentsply Sirona " below), full year 2019 net income increased$95.4 million or 21.0% compared to the prior year and earnings per diluted share increased 22.0% to$2.45 from$2.01 in the prior year.
•For the year ended
•During the year, the Company continued to execute on the restructuring plan that was announced inNovember 2018 . Under this plan, the Company is undergoing a restructuring to drive revenue growth, margin expansion and to simplify its organization. Company ProfileDENTSPLY SIRONA Inc. ("Dentsply Sirona" or the "Company"), is the world's largest manufacturer of professional dental products and technologies, with a 133-year history of innovation and service to the dental industry and patients worldwide.Dentsply Sirona develops, manufactures, and markets a comprehensive solutions offering including dental equipment and dental consumable products under a strong portfolio of world class brands. The Company also manufactures and markets healthcare consumable products. AsThe Dental Solutions Company ,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 inCharlotte, North Carolina . The Company's shares of common stock are listed inthe United States on Nasdaq under the symbol XRAY.
BUSINESS
The Company operates in two operating segments, Technologies & Equipment and Consumables.
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The Technologies & Equipment segment is responsible for the worldwide design,
manufacture, sales and distribution of the Company's Dental Technology and
Equipment Products and Healthcare Consumable Products. These products include
dental implants, CAD/CAM systems, orthodontic clear aligner products, imaging
systems, treatment centers, instruments, as well as consumable medical device
products.
The Consumables segment is responsible for the worldwide design, manufacture,
sales and distribution of the Company's Dental Consumable Products which include
preventive, restorative, endodontic, and dental laboratory products.
Principal Measurements
The principal measurements used by the Company in evaluating its business are: (1) constant currency sales growth by segment and geographic region; (2) internal sales growth by segment and geographic region; and (3) adjusted operating income and margins of each reportable segment, which excludes the impacts of purchase accounting, corporate expenses, and certain other items to enhance the comparability of results period to period. These principal measurements are not calculated in accordance with accounting principles generally accepted inthe United States ; therefore, these items represent non-US GAAP measures. These non-US GAAP measures may differ from other companies and should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with US GAAP. The Company defines "constant currency" sales growth as the increase or decrease in net sales from period to period excluding precious metal content and the impact of changes in foreign currency exchange rates. This impact is calculated by comparing current-period revenues to prior-period revenues, with both periods converted to theU.S. dollar using local currency foreign exchange rates for each month of the prior period, for the currencies in which the Company does business. The Company defines "internal sales growth" as constant currency sales growth excluding the impacts of net acquisitions and divestitures and discontinued products.
Business Drivers
The primary drivers of internal sales growth include macroeconomic factors, global dental market demand, innovation and new product launches by the Company, as well as continued investments in sales and marketing resources, including clinical education. Management believes that the Company's ability to execute its strategies should allow it to grow faster than the underlying dental market over time. On a short term basis, changes in strategy or distributor inventory levels can impact the Company's internal sales growth. The Company has a focus on maximizing operational efficiencies on a global basis. The Company has expanded the use of technology as well as process improvement initiatives to enhance global efficiency. In addition, management continues to evaluate the worldwide consolidation of operations and functions to further reduce costs. While the Company continues consolidation initiatives which can have an adverse impact on reported results, the Company expects that the continued benefits from these global efficiency efforts will improve its cost structure. In connection with these initiatives, the Board of Directors of the Company approved a plan to restructure the Company's business to drive revenue growth and margin expansion and to simplify the organization, with the understanding that the restructuring plan may continue to evolve as the Company progresses through the continued planning and execution of the plan. The plan includes a restructuring of the business through streamlining the organization and consolidating functions. The restructuring plan anticipates a net reduction in the Company's global workforce of approximately 6% to 8% from theNovember 2018 levels, and the Company will consult with employee representation in connection with the execution of the restructuring plan where required. The Company's goal is that the restructuring will result in annualized revenue growth of 3% to 4%, an adjusted operating income margin of 20% by the end of the year 2020, an adjusted operating income margin of 22% by the year 2022 and$200 million to$225 million in net annual cost savings by 2021. As ofDecember 31, 2019 , the Company has achieved savings of approximately$88 million and headcount reduction of approximately 7%. The Company expects to incur approximately$275 million in one-time expenditures and charges. For the year endedDecember 31, 2019 , the Company has recorded expenses and charges of approximately$192 million related to this restructuring plan, of which, approximately$73 million were non-cash charges. There can be no assurance that the cost reductions and results will be achieved.
As part of this restructuring plan, the Company has introduced five key operating principles in order to achieve this goal:
•Approach customers as one: Put the customer at the center of howDentsply Sirona is organized. The Company is creating one integrated approach to customer service, direct and indirect selling, and clinical education to strengthen the relationship with the customer and better serve the customers' needs. 33 -------------------------------------------------------------------------------- •Assume greater responsibility forDentsply Sirona's demand creation: To better support dealer partners and end-user customers, the Company launched a sales force effectiveness program, with a view to improving returns on sales and marketing investments. •Ensure that innovation is substantial and supported: Create a comprehensive R&D program that prioritizes spending across the entire Company portfolio resulting in more impactful innovations each year.
•Lead in clinical education:
•Take advantage of scale: The Company is focused on integrating its dental product portfolios to unlock operational efficiencies, including performance improvements in procurement, logistics, manufacturing, sales force and marketing programs. In addition,Dentsply Sirona is taking significant measures to simplify the business. In combination, these initiatives will improve organizational efficiency and better leverage the Company's selling, general and administrative infrastructure. Product innovation is a key component of the Company's overall growth strategy. New advances in technology are anticipated to have a significant influence on future products in the dentistry and consumable medical device markets in which the Company operates. As a result, the Company continues to pursue research and development initiatives to support technological development, including collaborations with various research institutions and dental schools. In addition, the Company licenses and purchases technologies developed by third parties. Although the Company believes these activities will lead to new innovative dental, healthcare consumable, and dental technology products; they involve new technologies and there can be no assurance that commercialized products will be developed. The Company will continue to pursue opportunities to expand the Company's product offerings, technologies, and sales and service infrastructure through partnerships and acquisitions. Although the professional dental and the consumable medical device markets in which the Company operates have experienced consolidation, they remain fragmented. Management believes that there will continue to be adequate opportunities to participate as a consolidator in the industry for the foreseeable future. The Company's business is subject to quarterly fluctuations of consolidated net sales and net income. Price increases, promotional activities, as well as changes in inventory levels at distributors contribute to this fluctuation. The Company typically implements most of its price increases in October or January of a given year across most of its businesses. Distributor inventory levels tend to increase in the period leading up to a price increase and decline in the period following the implementation of a price increase. Required minimum purchase commitments under agreements with key distributors may increase inventory levels in excess of retail demand. These net inventory changes have impacted the Company's consolidated net sales and net income in the past, and may continue to do so in the future, over a given period or multiple periods. In addition, the Company may from time to time, engage in new distributor relationships that could cause quarterly fluctuations of consolidated net sales and net income. Distributor inventory levels may fluctuate, and may differ from the Company's predictions, resulting in the Company's projections of future results being different than expected. There can be no assurance that the Company's dealers and customers will maintain levels of inventory in accordance with the Company's predictions or past history, or that the timing of customers' inventory build or liquidation will be in accordance with the Company's predictions or past history. Any of these fluctuations could be material to the Company's consolidated financial statements. In 2018 and 2017 the Company was impacted by the transition in distribution strategy with Patterson andHenry Schein . In 2017, the Company signed new distribution agreements with Patterson andHenry Schein for the Company's equipment products. The Company shipped initial stocking orders for the equipment products toHenry Schein under the agreements primarily in the second and third quarters of 2017 which resulted in unfavorable year-over-year sales growth comparisons. Based on the Company's estimate, year-over-year changes in distributor inventories associated with these agreements negatively impacted the Company's reported sales growth for the year endedDecember 31, 2018 by approximately$127 million . Based on the Company's estimate, distributor inventories increased for the year endedDecember 31, 2017 by approximately$27 million as compared to a decrease of approximately$100 million for the full year 2018. For more information about the drivers of our business and related risks, see Part I, Item 1, "Business" and Part I, Item 1A, "Risk Factors." 34 --------------------------------------------------------------------------------
Impact of Foreign Currencies
Due to the Company's significant international presence, movements in foreign currency exchange may impact the Consolidated Statements of Operations. With approximately two-thirds of the Company's net sales located in regions outsidethe United States , the Company's consolidated net sales are impacted negatively by the strengthening or positively impacted by the weakening of theU.S. dollar. Additionally, movements in certain foreign exchange rates may unfavorably or favorably impact the Company's results of operations, financial condition and liquidity as a number of the Company's manufacturing and distribution operations are located outside of theU.S.
Reclassification of Prior Year Amounts
For the year endedDecember 31, 2019 , certain reclassifications have been made to data for the years endedDecember 31, 2018 and 2017 in order to conform to the current year presentation. Specifically, during the three months endedMarch 31, 2019 , the Company moved the dental laboratory business into the Consumables segment as the products sold from this business are typically made on a recurring basis and have similar sales and operating characteristics as the other businesses in this segment. The Company moved the orthodontics business into the Technologies & Equipment segment to take advantage of the synergies related to digital planning and treatment within this segment. The Company also moved the instruments business into the Technologies & Equipment segment in order to take advantage of the synergies that stem from pairing equipment with instruments, which are often sold in conjunction with each other. The segment information reflects the revised structure for all periods shown. 35 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS 2019 Compared to 2018Net Sales The discussion below summarizes the Company's sales growth which excludes precious metal content, into the following components: (1) constant currency sales growth by segment and geographic region and (2) internal sales growth by segment and geographic region. These disclosures of net sales growth provide the reader with sales results on a comparable basis between periods. These principal measurements are not calculated in accordance with accounting principles generally accepted inthe United States ; therefore, these items represent non-US GAAP measures. These non-US GAAP measures may differ from other companies and should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with US GAAP. The Company defines "constant currency" sales growth as the increase or decrease in net sales from period to period excluding precious metal content and the impact of changes in foreign currency exchange rates. This impact is calculated by comparing current-period revenues to prior-period revenues, with both periods converted at theU.S. dollar to local currency foreign exchange rate for each month of the prior period, for the currencies in which the Company does business. The Company defines "internal sales growth" as constant currency sales growth excluding the impacts of precious metals, net acquisitions and divestitures and discontinued products. Management believes that the presentation of net sales, excluding precious metal content, provides useful information to investors because a portion ofDentsply Sirona's net sales comprises of sales of precious metals generated through sales of the Company's precious metal dental alloy products, which are used by third parties to construct crown and bridge materials. Due to the fluctuations of precious metal prices and because the cost of the precious metal content of the Company's sales is largely passed through to customers and has minimal effect on earnings,Dentsply Sirona reports net sales both with and without precious metal content to show the Company's performance independent of precious metal price volatility and to enhance comparability of performance between periods. The Company uses its cost of precious metal purchased as a proxy for the precious metal content of sales, as the precious metal content of sales is not separately tracked and invoiced to customers. The Company believes that it is reasonable to use the cost of precious metal content purchased in this manner since precious metal dental alloy sale prices are typically adjusted when the prices of underlying precious metals change. The presentation of net sales, excluding precious metal content, is considered a measure not calculated in accordance with US GAAP, and is therefore considered a non-US GAAP measure. The Company provides the following reconciliation of net sales to net sales, excluding precious metal content. The Company's definitions and calculations of net sales, excluding precious metal content, and other operating measures derived using net sales, excluding precious metal content, may not necessarily be the same as those used by other companies. Year Ended December 31, (in millions, except percentages) 2019 2018
$ Change % Change
Net sales$ 4,029.2 $ 3,986.3 $ 42.9 1.1 % Less: Precious metal content of sales 41.1 37.2 3.9 10.5 % Net sales, excluding precious metal content$ 3,988.1 $ 3,949.1 $ 39.0 1.0 % Reported net sales of$4,029.2 million increased by 1.1% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Net sales, excluding precious metal content, of$3,988.1 million , increased by 1.0% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Net sales, excluding precious metal content, were impacted by a 3.3% unfavorable currency impact, resulting from the strengthening of theU.S. dollar. The divestitures of non-strategic businesses and discontinued products reduced reported sales growth by 1.6%. On an internal sales growth basis, excluding the impact of currency, divestitures and discontinued products, net sales increased 5.7% which was attributable to the Technologies & Equipment segment, partially offset by lower Consumables revenues. Key drivers of the internal sales growth for the year endedDecember 31, 2019 were strong growth in Digital Dentistry and positive performance in Equipment & Instruments and Healthcare, partially offset by declines in Consumables. The year endedDecember 31, 2018 included an estimated decrease in inventory within the Technologies & Equipment segment held at certain distributors of approximately$100 million . 36 --------------------------------------------------------------------------------
The impact of divestitures of non-strategic product lines negatively impacted
reported net sales by approximately
A reconciliation of reported net sales to non-US GAAP net sales, excluding precious metal content were as follows:
Year Ended December 31,
(in millions, except percentages) 2019 2018 $ Change % Change
Net sales $ 4,029.2 $ 3,986.3 $ 42.9 1.1 %
Less: precious metal content of sales 41.1 37.2 3.9 10.5 %
Net sales, excluding precious metal content $ 3,988.1 $ 3,949.1 $ 39.0 1.0 %
Acquisition related adjustments (a) - 6.4 (6.4) NM
Non-US GAAP, net sales, excluding precious metal
content $ 3,988.1 $ 3,955.5 $ 32.6 0.8 %
(a) Represents an adjustment to reflect deferred revenue that was eliminated
under business combination accounting standards.
NM - Not meaningful
Sales Growth by Region
Net sales, excluding precious metal content, by geographic region were as follows:
Year Ended December 31,
(in millions, except percentages) 2019 2018 $ Change % Change United States$ 1,367.2 $ 1,269.2 $ 98.0 7.7 % Europe 1,581.9 1,637.2 (55.3) (3.4 %) Rest of World 1,039.0 1,042.7 (3.7) (0.4 %)
A reconciliation of reported net sales to non-US GAAP net sales, excluding precious metal content, by geographic region were as follows:
Year Ended December 31, 2019
(in millions) United States Europe Rest of World Total
Net sales $ 1,372.9 $ 1,614.0 $ 1,042.3 $ 4,029.2
Less: precious metal content of sales 5.7 32.1 3.3 41.1
Net sales, excluding precious metal content $ 1,367.2 $ 1,581.9 $ 1,039.0 $ 3,988.1
Year Ended December 31, 2018
(in millions) United States Europe Rest of World Total
Net sales $ 1,274.3 $ 1,665.9 $ 1,046.1 $ 3,986.3
Less: precious metal content of sales 5.1 28.7 3.4 37.2
Net sales, excluding precious metal content $ 1,269.2
6.4 - - 6.4
Non-US GAAP, net sales, excluding precious
metal content $ 1,275.6 (a) Represents an adjustment to reflect deferred revenue that was eliminated under business combination accounting standards.
Reported net sales of$1,372.9 million , increased by 7.7% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Net sales, excluding precious metal content, of$1,367.2 million , increased by 7.7% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The year endedDecember 31, 2018 included an estimated decrease of approximately$100 million in inventory held at certain distributors as discussed above. The divestitures of non-strategic businesses and discontinued products reduced reported sales growth by 1.7%. On an internal sales growth basis, excluding the impact of currency, divestitures and discontinued products, net sales increased by 9.0%, which was driven by the Technologies & Equipment segment, partially offset by lower Consumables segment revenues. 37 --------------------------------------------------------------------------------
Reported net sales of$1,614.0 million , decreased by 3.1% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Net sales, excluding precious metal content, of$1,581.9 million decreased by 3.4% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Net sales, excluding precious metal content, were impacted by a 5.3% unfavorable currency impact due to the strengthening of theU.S. dollar. The divestitures of non-strategic businesses and discontinued products reduced reported sales growth by 0.9%. On an internal sales growth basis, excluding the impact of currency, divestitures and discontinued products, net sales increased by 2.8%, which was driven by the Technologies & Equipment segment, while the Consumables segment revenue remained relatively flat.
Rest of World
Reported net sales of$1,042.3 million , decreased by 0.4% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Net sales, excluding precious metal content, of$1,039.0 million , decreased by 0.4% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Net sales, excluding precious metal content, were impacted by a 4.2% unfavorable currency impact due to the strengthening of theU.S. dollar. The divestitures of non-strategic businesses and discontinued products reduced reported sales growth by 2.5%. On an internal sales growth basis, excluding the impact of currency, divestitures and discontinued products, net sales increased by 6.3%, which was driven primarily by the Technologies & Equipment segment while the Consumables segment revenues were slightly positive.
Gross Profit
Year Ended December 31,
(in millions, except percentages) 2019 2018 $ Change % Change
Gross profit $ 2,165.1 $ 2,067.8 $ 97.3 4.7 %
Gross profit as a percentage of net sales,
including precious metal content 53.7 % 51.9 %
Gross profit as a percentage of net sales,
excluding precious metal content 54.3 % 52.4 %
Gross profit as a percentage of net sales, excluding precious metal content, increased by 190 basis points for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The increase in the gross profit rate was primarily driven by cost savings initiatives including headcount reductions, the reclassification of$18.1 million of expenses to SG&A, see Item 8, Note 21, Quarterly Financial Information, in the Notes to the Audited Consolidated Financial Statements of this Form 10-K for further details, and the benefit from divesting non-strategic businesses with a lower gross profit rate as compared to the year endedDecember 31, 2018 .
Operating Expenses
Year Ended December 31,
(in millions, except percentages) 2019 2018 $ Change % Change
Selling, general and administrative expenses ("SG&A")
$ 1,719.1 $ 4.4 0.3 % Goodwill impairment - 1,085.8 (1,085.8) NM Restructuring and other costs 80.7 221.0 (140.3) NM
SG&A as a percentage of net sales, including precious metal content
42.8 % 43.1 %
SG&A as a percentage of net sales, excluding precious
metal content 43.2 % 43.5 %
NM - Not meaningful
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SG&A Expenses
SG&A expenses, including R&D expenses, as a percentage of net sales, excluding precious metal content, for the year endedDecember 31, 2019 decreased 30 basis points compared to the year endedDecember 31, 2018 . The lower rate was driven primarily by higher sales, the favorable rate impact as a result of divesting non-strategic businesses, and cost saving initiatives all of which impacted the rate by approximately 280 basis points as compared to the year endedDecember 31, 2018 . These favorable impacts were mostly offset by higher incentive compensation costs of approximately$52 million , the reclassification of$18.1 million of expenses from gross profit, see Item 8, Note 21, Quarterly Financial Information, in the Notes to the Audited Consolidated Financial Statements of this Form 10-K for further details, and$11.0 million related to certain executive severance costs as compared to the year endedDecember 31, 2018 . Goodwill Impairment For the year endedDecember 31, 2018 , the Company recorded a goodwill impairment charge of$1,085.8 million , related to two reporting units in the Technologies & Equipment segment. For further information see Item 8, Note 10,Goodwill and Intangible Assets, in the Notes to the Audited Consolidated Financial Statements of this Form 10-K. Restructuring and Other Costs The Company recorded restructuring and other costs of$80.7 million for the year endedDecember 31, 2019 as compared to$221.0 million for the year endedDecember 31, 2018 . The Company recorded$33.5 million in net restructuring costs during the year endedDecember 31, 2019 compared to$32.1 million in net restructuring costs during the year endedDecember 31, 2018 . During the year endedDecember 31, 2019 , the Company recorded other costs of$47.2 million which consisted of fixed asset impairment charges of$32.8 million and impairment charges of$9.1 million related to impairments of both indefinite-lived and definite-lived intangible assets. These impairment charges are related to discontinued product lines. During the year endedDecember 31, 2018 , the Company recorded other costs of$188.9 million which consisted of impairment charges of$179.2 million and$9.7 million primarily related to legal settlements. For further information on the impairment charges, see Item 8, Note 10,Goodwill and Intangible Assets, in the Notes to the Audited Consolidated Financial Statements of this Form 10-K.
Other Income and Expenses
Year Ended December 31 ,
(in millions, except percentages) 2019 2018 $ Change
% Change
Net interest expense $ 27.0 $ 35.2 $ (8.2) (23.3 %)
Other expense (income), net (11.5) (34.9) 23.4 NM
Net interest and other expense
NM - Not meaningful Net Interest Expense Net interest expense for the year endedDecember 31, 2019 decreased$8.2 million as compared to the year endedDecember 31, 2018 . The Company maintained lower average debt levels during the year endedDecember 31, 2019 when compared to the prior year resulting in lower net interest expense. Other Expense (Income), Net Other expense (income), net for the year endedDecember 31, 2019 increased$23.4 million compared to the year endedDecember 31, 2018 . Other expense (income), net for the year endedDecember 31, 2019 includes foreign exchange gains of$26.9 million , primarily on net investment hedges, offset by the non-operating losses of$15.4 million related to the divestitures of non-strategic businesses. Other expense (income), net for the year endedDecember 31, 2018 includes other non-operating income of$40.7 million , primarily from a gain of$44.1 million from the sale of marketable securities, partially offset by$5.8 million of foreign exchange loss. 39 --------------------------------------------------------------------------------
Income Taxes and Net Income
Year Ended December 31,
(in millions, except per share data and percentages) 2019 2018 $ Change
Provision (benefit) from income taxes $ 82.3 $ 52.5 $ 29.8
Effective income tax rate 23.8 % NM
Net income (loss) attributable to Dentsply Sirona $ 262.9 Net income (loss) per common share - diluted$ 1.17 $ (4.51) NM - Not meaningful Provision for Income Taxes For the year endedDecember 31, 2019 , income taxes were a net expense of$82.3 million . During the year endedDecember 31, 2019 , the Company recorded the following discrete tax items:$4.1 million of excess tax benefit related to employee share-based compensation, tax expense of$0.2 million related to enacted statutory rate changes, tax expense of$9.1 million for other discrete tax matters, and tax benefit of$4.3 million related to valuation allowance on foreign tax credits and other deferred tax assets. The Company also recorded a$10.3 million tax benefit as a discrete item related to the fixed asset impairment charge,$1.5 million tax benefit related to the indefinite-lived intangible asset impairment charge and$1.0 million tax benefit related to the definite-lived intangible asset impairment charge. Excluding these discrete tax items and adjusting pretax income to exclude the pretax charge related to impairment of fixed assets, impairment of the indefinite-lived intangible assets, and the losses related to the divestitures of non-strategic businesses, the Company's effective tax rate was 24.3% The Company continues to reassess the realizability of its deferred tax assets and, after weighing all positive and negative evidence, continues to maintain a valuation allowance on certain deferred tax assets. However, the Company has outlined its global business improvement plans, and the benefits of these plans could give rise to a change of the valuation allowance in the next 12 months. For the year endedDecember 31, 2018 , income taxes were a net expense of$52.5 million . During the year endedDecember 31, 2018 , the Company recorded the following discrete tax items:$4.3 million of excess tax benefit related to employee share-based compensation, tax benefit of$3.3 million related to enacted statutory rate changes, tax expense of$8.3 million for other discrete tax matters,$4.1 million tax benefit related toU.S. tax reform, and tax expense of$54.8 million related to valuation allowance on foreign tax credits and other deferred tax assets. The Company also recorded a$50.4 million tax benefit as a discrete item related to the indefinite-lived intangible asset impairment charge,$1.1 million for the fixed asset impairment charge, and$3.3 related to tax-deductible goodwill for the twelve months endedDecember 31, 2018 . In addition, the Company also recorded$2.5 million of tax expense as a discrete item related to the gain on sale of marketable securities. Excluding these discrete tax items and adjusting pretax income for the gain on the sale of marketable securities, net of tax and adjusting for the pretax loss related to the impairment of indefinite-lived intangible assets, and tax deductible and non-deductible goodwill impairment charges, the Company's effective tax rate was 20.0%. Further information regarding the details of income taxes is presented in Note 15, Income Taxes, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K. OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "Act" or "U.S. tax reform") was enacted.U.S. tax reform, among other things, reduced theU.S. federal income tax rate to 21% in 2018 from 35%, instituted a dividends received deduction for foreign earnings with a related tax for the deemed repatriation of unremitted foreign earnings and created a newU.S. minimum tax on earnings of foreign subsidiaries. In addition, theSEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for enactment effects of the Act and provides a measurement period of up to one year from the Act's enactment date for companies to complete their accounting under Accounting Standards Codification No. 740 "Income Taxes", ("ASC 740"). In accordance withSAB 118, income tax effects of the Act were refined upon obtaining, preparing, and analyzing additional information during the measurement period. AtDecember 31, 2018 the Company had completed its accounting for the tax effects of the Act. 40 -------------------------------------------------------------------------------- Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to$1,575.2 million atDecember 31, 2019 and$1,137.2 million atDecember 31, 2018 . The Act imposedU.S. tax on all post-1986 foreign unrepatriated earnings accumulated throughDecember 31, 2017 . Unrepatriated earnings generated afterDecember 31, 2017 , are now subject to tax in the current year. All undistributed earnings are still subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply. It is not practicable to calculate the unrecognized deferred tax liability on undistributed earnings.
For the GILTI provision of the Act, the Company has made the policy election to record any liability associated with GILTI in the period in which it is incurred.
Net Income (Loss) attributable to
In addition to the results reported in accordance with US GAAP, the Company provides adjusted net income attributable toDentsply Sirona and adjusted earnings per diluted common share ("adjusted EPS"). The Company discloses adjusted non-US GAAP net income to allow investors to evaluate the performance of the Company's operations exclusive of certain items that impact the comparability of results from period to period and may not be indicative of past or future performance of the normal operations of the Company and certain large non-cash charges related to intangible assets either purchased or acquired through a business combination. The Company believes that this information is helpful in understanding underlying operating trends and cash flow generation. Adjusted non-US GAAP net income and adjusted EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes adjusted non-US GAAP net income and adjusted EPS and the performance of the Company is measured on this basis along with other performance metrics.
The adjusted non-US GAAP net income consists of net income attributable to
(1) Business combination related costs and fair value adjustments. These adjustments include costs related to integrating and consummating mergers and recently acquired businesses, as well as costs, gains and losses related to the disposal of businesses or significant product lines. In addition, this category includes the roll off to the consolidated statements of operations of fair value adjustments related to business combinations, except for amortization expense noted below. These items are irregular in timing and as such may not be indicative of past and future performance of the Company and are therefore excluded to allow investors to better understand underlying operating trends. (2) Restructuring program related costs and other costs. These adjustments include costs related to the implementation of restructuring initiatives as well as certain other costs. These costs can include, but are not limited to, severance costs, facility closure costs, lease and contract terminations costs, related professional service costs, duplicate facility and labor costs associated with specific restructuring initiatives, as well as, legal settlements and impairments of assets. These items are irregular in timing, amount and impact to the Company's financial performance. As such, these items may not be indicative of past and future performance of the Company and are therefore excluded for the purpose of understanding underlying operating trends. (3) Amortization of purchased intangible assets. This adjustment excludes the periodic amortization expense related to purchased intangible assets. Amortization expense has been excluded from adjusted net income attributed toDentsply Sirona to allow investors to evaluate and understand operating trends excluding these large non-cash charges. (4) Credit risk and fair value adjustments. These adjustments include both the cost and income impacts of adjustments in certain assets and liabilities including the Company's pension obligations, that are recorded through net income which are due solely to the changes in fair value and credit risk. These items can be variable and driven more by market conditions than the Company's operating performance. As such, these items may not be indicative of past and future performance of the Company and therefore are excluded for comparability purposes.
(5) Gain on sale of marketable securities. This adjustment represents the gain
on the sale of marketable securities held by the Company. The gain has been
excluded from adjusted net income attributed to
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(6) Income tax related adjustments. These adjustments include both income tax
expenses and income tax benefits that are representative of income tax
adjustments mostly related to prior periods, as well as the final settlement of
income tax audits, and discrete tax items resulting from the implementation of
restructuring initiatives and the vesting and exercise of employee share-based
compensation. These adjustments are irregular in timing and amount and may
significantly impact the Company's operating performance. As such, these items
may not be indicative of past and future performance of the Company and
therefore are excluded for comparability purposes.
Adjusted EPS is calculated by dividing adjusted non-US GAAP net income by
diluted weighted-average common shares outstanding. The "adjusted EPS" and
"adjusted non-US GAAP net income" measurements are not calculated in accordance
with accounting principles generally accepted in the United States ; therefore,
these items represent non-US GAAP measures. These non-US GAAP measures may
differ from other companies and should not be considered in isolation from, or
as a substitute for, measures of financial performance prepared in accordance
with US GAAP. Income tax related adjustments may include the impact to adjust
the interim effective income tax rate to the expected annual effective tax rate.
Year Ended December 31, 2019
Per Diluted
(in millions, except per share amounts) Net Income Common Share
Net income attributable to Dentsply Sirona $ 262.9 $ 1.17
Pre-tax non-US GAAP adjustments:
Amortization of purchased intangible assets 189.6
Restructuring program related costs and other costs
183.3
Business combination related costs and fair value adjustments
9.5
Credit risk and fair value adjustments
5.3
Tax impact of the pre-tax non-US GAAP adjustments (a)
(101.7)
Subtotal non-US GAAP adjustments$ 286.0 $ 1.28 Income tax related adjustments 1.0 - Adjusted non-US GAAP net income$ 549.9 $ 2.45
(a) The tax amount was calculated using the applicable statutory tax rate in the tax jurisdiction where the non-US GAAP adjustments were generated.
For the year endedDecember 31, 2019 , the following table presents the details of the "Restructuring program and related costs and other costs" line item of the above table and the affected line item in the Consolidated Statements of Operations: Sale or Discontinuation Separation Costs of Non-Strategic Related to Business or Costs Related to Professional Incentive (in millions) Asset Impairments Executives Product Lines Restructuring Plans Services Costs Compensation Other Total Cost of products sold $ - $ - $ 24.0 $ - $ - $ -$ 1.3 $ 25.3 SG&A - 9.6 10.8 - 40.0 15.1 3.0 78.5 Restructuring and other costs 41.7 - 0.8 32.2 - - 6.0 80.7 Interest expense, Interest income, and Other expense (income), net - - (6.9) - - 5.7 (1.2) Total $ 41.7 $ 9.6 $ 28.7 $ 32.2$ 40.0 $ 15.1 $ 16.0 $ 183.3 42
--------------------------------------------------------------------------------
Year End
Per Diluted
(in millions, except per share amounts) Net (Loss) Income Common Share
Net loss attributable to Dentsply Sirona$ (1,011.0) $ (4.51) Pre-tax non-US GAAP adjustments: Restructuring program related costs and other costs
1,353.1
Amortization of purchased intangible assets
197.9
Business combination related costs and fair value adjustments
22.8
Credit risk and fair value adjustments
14.5
Gain on sale of marketable securities
(44.1)
Tax impact of the pre-tax non-US GAAP adjustments (a)
(130.2)
Subtotal non-US GAAP adjustments$ 1,414.0 $ 6.26
Adjustment for calculating non-US GAAP net income per diluted common share (b)
0.23
Income tax related adjustments 51.5 0.03
Adjusted non-US GAAP net income $ 454.5 $ 2.01
(a) The tax amount was calculated using the applicable statutory tax rate in the tax jurisdiction where the non-US
GAAP adjustments were generated.
(b) The Company had a net loss for the year ended December 31, 2018 , but had net income on a non-US GAAP basis. The
shares used in calculating diluted non-US GAAP net income per share includes the dilutive effect of common stock.
Shares used in calculating diluted GAAP net loss per share 224.3
Shares used in calculating diluted non-US GAAP net income per share.
226.0
Adjusted Operating Income and Margin
Adjusted operating income and margin is another important internal measure for
the Company. Operating income in accordance with US GAAP is adjusted for the
items noted above which are excluded on a pre-tax basis to arrive at adjusted
operating income, a non-US GAAP measure. The adjusted operating margin is
calculated by dividing adjusted operating income by net sales, excluding
precious metal content.
Senior management receives a monthly analysis of operating results that includes
adjusted operating income. The performance of the Company is measured on this
basis along with the adjusted non-US GAAP earnings noted above as well as other
performance metrics. This non-US GAAP measure may differ from other companies
and should not be considered in isolation from, or as a substitute for, measures
of financial performance prepared in accordance with US GAAP.
Year Ended December 31, 2019
Percentage of Net
Sales, Excluding
Precious Metal
(in millions, except percentages) Operating Income Content
Operating income $ 360.9 9.0 %
Amortization of purchased intangible assets 189.6 4.8 %
Restructuring program related costs and other costs 184.5 4.6 %
Business combination related costs and fair value adjustments 7.1 0.2 %
Adjusted non-US GAAP Operating Income $ 742.1 18.6 %
43--------------------------------------------------------------------------------
Year Ended December 31, 2018
Percentage of Net
Sales, Excluding
Operating (Loss) Precious Metal
(in millions, except percentages) Income Content
Operating loss $ (958.1) (24.3 %)
Restructuring program related costs and other costs 1,353.1 34.3 %
Amortization of purchased intangible assets 197.9 5.0 %
Business combination related costs and fair value adjustments 21.3 0.5 %
Adjusted non-US GAAP Operating Income $ 614.2 15.5 %
Operating Segment Results
Net Sales, Excluding Precious Metal Content Year Ended December 31,
(in millions, except percentages) 2019 2018 $ Change % Change
Technologies & Equipment$ 2,283.2 $ 2,167.7 $ 115.5 5.3 % Consumables 1,704.9 1,781.4 (76.5) (4.3 %) Segment Operating Income Year Ended December 31, (in millions, except percentages) 2019 2018 $ Change % Change Technologies & Equipment$ 431.4 $ 277.9 $ 153.5 55.2 % Consumables 437.1 459.9 (22.8) (5.0 %)
A reconciliation of reported net sales to non-US GAAP net sales, excluding precious metal content, by segment were as follows:
Year Ended December 31, 2019
Technologies &
(in millions) Equipment Consumables Total
Net sales $ 2,283.2 $ 1,746.0 $ 4,029.2
Less: precious metal content of sales - 41.1 41.1
Net sales, excluding precious metal content $ 2,283.2 $ 1,704.9 $ 3,988.1
Year Ended December 31, 2018
Technologies &
(in millions) Equipment Consumables Total
Net sales $ 2,167.7 $ 1,818.6 $ 3,986.3
Less: precious metal content of sales - 37.2 37.2
Net sales, excluding precious metal content $ 2,167.7 $ 1,781.4 $ 3,949.1
Acquisition related adjustments (a) 6.4 - 6.4
Non-US GAAP net sales, excluding precious metal
content $ 2,174.1 (a) Represents an adjustment to reflect deferred revenue that was eliminated under business combination accounting standards.
44
--------------------------------------------------------------------------------Technologies & Equipment
Reported net sales of$2,283.2 million , increased by 5.3% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Net sales were impacted by a 3.5% unfavorable currency impact, resulting from the strengthening of theU.S. dollar. The divestitures of non-strategic businesses and discontinued products reduced reported sales growth by 3.0%. On an internal sales growth basis, excluding the impact of currency, divestitures and discontinued products, net sales increased by 11.5%, with all three major geographic regions experiencing positive sales growth. Key drivers of the internal sales growth for the year endedDecember 31, 2019 , were strong growth in Digital Dentistry, increases in Equipment & Instruments, and positive Healthcare performance. The growth in Digital Dentistry was significantly driven by new product sales in the CAD/CAM business. The year endedDecember 31, 2018 included an estimated decrease in inventory held at certain distributors of approximately$100 million which impacted the Digital Dentistry and Equipment & Instruments businesses.
Operating income increased
Consumables
Reported net sales of$1,746.0 million , decreased by 4.0% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Net sales, excluding precious metal content, of$1,704.9 million , decreased by 4.3% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Net sales, excluding precious metal content, were impacted by a 3.0% unfavorable currency impact, resulting from the strengthening of theU.S. dollar. On an internal sales growth basis, excluding the impact of currency, net sales, excluding precious metal content, decreased 1.3% which was primarily driven by theU.S. region, partially offset by the Rest of World region.
Key drivers of the decline in internal sales growth for the year ended
Operating income decreased$22.8 million or 5.0% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The decrease in operating income was primarily related to lower sales, unfavorable manufacturing variances, and the impact of higher incentive compensation costs, partially offset by cost savings initiatives and favorable product pricing. 45 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS 2018 Compared to 2017Net Sales Year Ended December 31, (in millions, except percentages) 2018 2017
$ Change % Change
Net sales$ 3,986.3 $ 3,993.4
Less: Precious metal content of sales 37.2 40.5 (3.3) (8.1 %) Net sales, excluding precious metal content$ 3,949.1 $ 3,952.9
Net sales, excluding precious metal content, for the year endedDecember 31, 2018 were$3,949.1 million , a decrease of$3.8 million from the year endedDecember 31, 2017 . Net sales, excluding precious metal content, was negatively impacted, based on the Company's estimate, by approximately$127 million as a result of net changes in equipment inventory levels in the current year as compared to the prior year at certain distributors primarily inthe United States , which the Company believes is primarily related to the transition in distribution strategy (see "Business Drivers" under this section for further detail). Based on the Company's estimate, distributor inventories increased for the year endedDecember 31, 2017 by approximately$27 million as compared to a decrease of approximately$100 million for the full year 2018. For the year endedDecember 31, 2018 , net sales, excluding precious metal content, decreased 1.3% on a constant currency basis. This includes a benefit of 0.5% from net acquisitions which leads to negative internal sales growth of 1.8%. Net sales, excluding precious metal content, were positively impacted by approximately 1.3% due to the weakening of theU.S. dollar over the prior year period. The negative internal sales growth was attributable to the Technologies & Equipment segment, partially offset by the Consumables segment.
A reconciliation of reported net sales to non-US GAAP net sales, excluding
precious metal content, for the years ended
December 31,
(in millions, except percentages) 2018 2017 $ Change % Change
Net sales $ 3,986.3 $ 3,993.4 $ (7.1) (0.2 %)
Less: precious metal content of sales 37.2 40.5 (3.3) (8.1 %)
Net sales, excluding precious metal content $ 3,949.1 $ 3,952.9 $ (3.8) (0.1 %)
Acquisition/merger related adjustments (a) 6.4 4.0 2.4 NM
Non-US GAAP combined business, net sales,
excluding precious metal content $ 3,955.5 $ 3,956.9 $ (1.4) (0.1 %)
(a) For 2018, amounts represent an adjustment to reflect deferred revenue and
for 2017, amounts represents an adjustment to reflect deferred subscription and
warranty revenue which was eliminated under business combination accounting
standards to make the non-US GAAP results comparable for both years.
NM - Not meaningful
Sales Growth by Region
Net sales, excluding precious metal content, for the years ended
December 31,
(in millions, except percentage amounts) 2018 2017 $ Change % Change
United States $ 1,269.2 $ 1,366.8 $ (97.6) (7.1 %)
Europe 1,637.2 1,575.2 62.0 3.9 %
Rest of World 1,042.7 1,010.9 31.8 3.1 %
46--------------------------------------------------------------------------------
A reconciliation of reported net sales to non-US GAAP net sales, excluding
precious metal content, by geographic region for the year ended
December 31, 2018
(in millions) United States Europe Rest of World Total
Net sales $ 1,274.3
5.1 28.7 3.4 37.2
Net sales, excluding precious metal content $ 1,269.2 Acquisition related adjustments (a) 6.4 - - 6.4 Non-US GAAP combined business, net sales, excluding precious metal content$ 1,275.6
(a) Represents an adjustment to reflect deferred revenue that was eliminated
under business combination accounting standards to make the 2018 and 2017
non-
December 31, 2017
(in millions) United States Europe Rest of World Total
Net sales $ 1,372.5
5.7 31.0 3.8 40.5
Net sales, excluding precious metal content $ 1,366.8
4.0 - - 4.0
Non-US GAAP combined business, net sales,
excluding precious metal content $ 1,370.8 (a) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make the 2018 and 2017 non-US GAAP results comparable.
Reported net sales decreased by 7.2% for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . Reported net sales, excluding precious metal content, decreased by 7.1% for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . The decrease in net sales, excluding precious metal content, was unfavorably impacted, based on the Company's estimate, by approximately$127 million as a result of net changes in equipment inventory levels in the current year as compared to the prior year at two distributors inthe United States related to the transition in distribution strategy as discussed above. Based on the Company's estimate, distributor inventories increased for the year endedDecember 31, 2017 by approximately$27 million as compared to a decrease of approximately$100 million for the full year 2018. For the year endedDecember 31, 2018 , net sales, excluding precious metal content, including acquisition related adjustments, decreased 6.8% on a constant currency basis. This includes a benefit of 0.9% from net acquisitions which results in a negative internal sales growth rate of 7.7%. The negative internal sales growth in this region was driven by lower sales in the Technologies & Equipment segment. Based on the Company's assessment, the internal sales growth was impacted as a result of the net changes in equipment inventory levels in the current year over the prior year as discussed above. The impact from net changes in inventory levels was entirely within the Technologies & Equipment segment.
Reported net sales increased by 3.7% for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . Reported net sales, excluding precious metal content, increased by 3.9% for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . For the year endedDecember 31, 2018 , net sales, excluding precious metal content, were increased 0.3% on a constant currency basis offset by a benefit of 0.3% from net acquisitions. Internal sales growth was led by the Consumables segment, offset by the negative internal sales growth in the Technologies & Equipment segment. 47 --------------------------------------------------------------------------------
Rest of World
Reported net sales increased by 3.1% for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . Reported net sales, excluding precious metal content, increased by 3.1% for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . For the year endedDecember 31, 2018 , net sales, excluding precious metal content, increased 3.8% on a constant currency basis. This includes a benefit of 0.4% from net acquisitions, which results in internal sales growth of 3.4%. The internal sales growth in this region was driven by growth in both the Technologies & Equipment and Consumables segment.
Gross Profit
Year Ended December 31,
(in millions, except percentages) 2018 2017 $ Change % Change
Gross profit $ 2,067.8 $ 2,188.5 $ (120.7) (5.5 %)
Gross profit as a percentage of net sales,
including precious metal content 51.9 % 54.8 %
Gross profit as a percentage of net sales,
excluding precious metal content 52.4 % 55.4 %
Gross profit as a percentage of net sales, excluding precious metal content, decreased by 300 basis points for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . The decrease in the gross profit rate was primarily driven by higher manufacturing costs, unfavorable product pricing including the impact of geographic sales mix, business combination related costs and product line eliminations, and the effect of dealer destocking, which collectively impacted the gross profit rate by approximately 350 basis points, partially offset by the benefit of the Company's global efficiency initiatives as compared to the year endedDecember 31, 2017 .
Operating Expenses
Year Ended December 31,
(in millions, except percentages) 2018 2017 $ Change % Change
Selling, general and administrative expenses ("SG&A")
$ 1,674.7 $ 44.4 2.7 % Goodwill impairment 1,085.8 1650.9 (565.1) (34.2 %) Restructuring and other costs 221.0 425.2 (204.2) NM
SG&A as a percentage of net sales, including precious metal content
43.1 % 41.9 %
SG&A as a percentage of net sales, excluding precious
metal content 43.5 % 42.4 %
NM - Not meaningful
SG&A Expenses
SG&A expenses, including R&D expenses, as a percentage of net sales, excluding
precious metal content, for the year ended December 31, 2018 increased 110 basis
points compared to the year ended December 31 , 2017.The higher rate was
primarily driven by increased compensation costs and selling and marketing
expenses as compared to the year ended December 31, 2017 .
For the year endedDecember 31, 2018 , the Company recorded a goodwill impairment charge of$1,085.8 million related to two reporting units in the Technologies & Equipment segment. For the year endedDecember 31, 2017 , the Company recorded a goodwill impairment charge of$1,650.9 million , related to two reporting units in the Technologies & Equipment segment. For further information see Note 10,Goodwill and Intangible Assets, in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K. 48 --------------------------------------------------------------------------------
Restructuring and Other Costs
The Company recorded restructuring and other costs of$221.0 million for the year endedDecember 31, 2018 compared to$425.2 million for the year endedDecember 31, 2017 . The Company recorded$32.1 million in net restructuring costs during the year endedDecember 31, 2018 compared to$55.4 million in net restructuring costs during the year endedDecember 31, 2017 . During the year endedDecember 31, 2018 , the Company recorded other costs of$188.9 million which consisted of impairment charges of$179.2 million and$9.7 million primarily related to legal settlements. For further information on the impairment charges, see Note 10,Goodwill and Intangible Assets, and Note 20, Commitments and Contingencies, each in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K. During the year endedDecember 31, 2017 , the Company recorded other costs of$369.8 million which consisted of impairment charges of$346.7 million and legal settlements of$23.1 million .
Other Income and Expenses
Year Ended December 31 ,
(in millions, except percentages) 2018 2017 $ Change
% Change
Net interest expense $ 35.2 $ 35.9 $ (0.7) (1.9 %)
Other expense (income), net (34.9) 5.3 (40.2) NM
Net interest and other expense
NM - Not meaningful Net Interest Expense Net interest expense for the year endedDecember 31, 2018 decreased$0.7 million as compared to the year endedDecember 31, 2017 . Lower average interest rates partially offset by increased debt levels in 2018 when compared to the prior year resulted in the decrease in net interest expense.
Other Expense (Income), Net
Other expense (income), net for the year endedDecember 31, 2018 decreased$40.2 million compared to the year endedDecember 31, 2017 . Other expense (income), net for the year endedDecember 31, 2018 includes foreign exchange loss of$5.8 million and$40.7 million of other non-operating income including a gain of$44.1 million from the sale of marketable securities. Other income, net for the year endedDecember 31, 2017 was$5.3 million , includes foreign exchange loss of$1.7 million and$3.6 million of other non-operating expenses.
Income Taxes and Net Income
Year Ended December 31,
(in millions, except per share data and percentages) 2018 2017 $ Change
Provision (benefit) for income taxes $ 52.5 $ (53.2) $ 105.7
Effective income tax rate NM 3.3 %
Net loss attributable to Dentsply Sirona $
(1,011.0)
Net loss per common share - diluted$ (4.51) $ (6.76) NM - Not meaningful 49
--------------------------------------------------------------------------------
Provision for Income Taxes
For the year endedDecember 31, 2018 , income taxes were a net expense of$52.5 million . During the year endedDecember 31, 2018 , the Company recorded the following discrete tax items:$4.3 million of excess tax benefit related to employee share-based compensation, tax benefit of$3.3 million related to enacted statutory rate changes, tax expense of$8.3 million for other discrete tax matters,$4.1 million tax benefit related toU.S. tax reform, and tax expense of$54.8 million related to valuation allowance on foreign tax credits and other deferred tax assets. The Company also recorded a$50.4 million tax benefit as a discrete item related to the indefinite-lived intangible asset impairment charge,$1.1 million for the fixed asset impairment charge, and$3.3 related to tax-deductible goodwill for the twelve months endedDecember 31, 2018 . In addition, the Company also recorded$2.5 million of tax expense as a discrete item related to the gain on sale of marketable securities. Excluding these discrete tax items and adjusting pretax income for the gain on the sale of marketable securities, net of tax and adjusting for the pretax loss related to the impairment of indefinite-lived intangible assets, and tax deductible and nondeductible goodwill impairment charges, the Company's effective tax rate was 20.0%. For the year endedDecember 31, 2017 , income taxes were a net benefit of$53.2 million . During the year, the Company recorded the following discrete tax items,$20.5 million of excess tax benefit related to employee share based compensation, tax expense of$12.0 million related primarily to state valuation allowances,$3.6 million related to enacted statutory rate changes,$1.0 million related to other discrete tax matters and$20.1 million related to US Tax Reform. The Company also recorded a$99.1 million tax benefit related to the intangible asset impairment charge recorded during the twelve months endedDecember 31, 2017 . Excluding these discrete tax items and adjusting pretax loss to exclude the pretax loss related to the impairment of the intangible assets and non-deductible goodwill impairment charge the Company's effective tax rate was 7.54%. The effective tax rate was favorably impacted by the Company's change in the mix of consolidated earnings. Further information regarding the details of income taxes is presented in Note 15, Income Taxes, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K. OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "Act" or "U.S. tax reform") was enacted.U.S. tax reform, among other things, reduced theU.S. federal income tax rate to 21% in 2018 from 35%, instituted a dividends received deduction for foreign earnings with a related tax for the deemed repatriation of unremitted foreign earnings and created a newU.S. minimum tax on earnings of foreign subsidiaries. In addition, theSEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for enactment effects of the Act and provides a measurement period of up to one year from the Act's enactment date for companies to complete their accounting under Accounting Standards Codification No. 740 "Income Taxes", ("ASC 740"). In accordance withSAB 118, income tax effects of the Act were refined upon obtaining, preparing, and analyzing additional information during the measurement period. AtDecember 31, 2018 the Company had completed its accounting for the tax effects of the Act. Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to$1,137.2 million atDecember 31, 2018 and$1,071.1 million atDecember 31, 2017 . The Act imposedU.S. tax on all post-1986 foreign unrepatriated earnings accumulated throughDecember 31, 2017 . Unrepatriated earnings generated afterDecember 31, 2017 , are now subject to tax in the current year. All undistributed earnings are still subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply. It is not practicable to calculate the unrecognized deferred tax liability on undistributed earnings.
For the GILTI provision of the Act, the Company has made the policy election to record any liability associated with GILTI in the period in which it is incurred.
Net (Loss) Income attributable to
In addition to the results reported in accordance with US GAAP, the Company provides adjusted net income attributable toDentsply Sirona and adjusted earnings per diluted common share ("adjusted EPS"). The Company discloses adjusted non-US GAAP net income to allow investors to evaluate the performance of the Company's operations exclusive of certain items that impact the comparability of results from period to period and may not be indicative of past or future performance of the normal operations of the Company and certain large non-cash charges related to intangible assets either purchased or acquired through a business combination. The Company believes that this information is helpful in understanding underlying operating trends and cash flow generation. 50 --------------------------------------------------------------------------------
Adjusted non-GAAP net income and adjusted EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes adjusted non-GAAP net income and adjusted EPS and the performance of the Company is measured on this basis along with other performance metrics.
Year Ended
Per Diluted
(in millions, except per share amounts) Net (Loss) Income Common Share
Net loss attributable to Dentsply Sirona$ (1,011.0) $ (4.51) Pre-tax non-US GAAP adjustments: Restructuring program related costs and other costs
1,353.1
Amortization of purchased intangible assets
197.9
Business combination related costs and fair value adjustments
22.8
Credit risk and fair value adjustments
14.5
Gain on sale of marketable securities
(44.1)
Tax impact of the pre-tax non-US GAAP adjustments (a)
(130.2)
Subtotal non-US GAAP adjustments$ 1,414.0 $ 6.26
Adjustment for calculating non-US GAAP net income per diluted common share (b)
0.23
Income tax related adjustments 51.5 0.03
Adjusted non-US GAAP net income $ 454.5 $ 2.01
(a) The tax amount was calculated using the applicable statutory tax rate in the tax jurisdiction where the
non-US GAAP adjustments were generated.
(b) The Company had a net loss for the year ended December 31, 2018 , but had net income on a non-US GAAP
basis. The shares used in calculating diluted non-US GAAP net income per share includes the dilutive effect
of common stock.
Shares used in calculating diluted GAAP net loss per share 224.3
Shares used in calculating diluted non-US GAAP net income per
share 226.0
Year Ended December 31, 2017
Per Diluted
(in millions, except per share amounts) Net (Loss) Income Common Share
Net loss attributable to Dentsply Sirona$ (1,550.0) $ (6.76) Pre-tax non-US GAAP adjustments: Restructuring program related costs and other costs
2,119.3
Amortization of purchased intangible assets
189.1
Business combination related costs and fair value adjustments
38.5
Credit risk and fair value adjustments
4.9
Tax impact of the pre-tax non-US GAAP adjustments (a)
(199.8)
Subtotal non-US GAAP adjustments$ 2,152.0 $ 9.26
Adjustments for calculating non-US GAAP net income per diluted common share (b)
0.09
Income tax related adjustments 16.2 0.07
Adjusted non-US GAAP net income $ 618.2 $ 2.66
(a) The tax amount was calculated using the applicable statutory tax rate in the tax jurisdiction where the
non-US GAAP adjustments were generated.
(b) The Company had a net loss for the year ended December 31, 2017 , but had net income on a non-US GAAP
basis. The shares used in calculating diluted non-US GAAP net income per share includes the dilutive effect
of common stock.
Shares used in calculating diluted GAAP net loss per share 229.4
Shares used in calculating diluted non-US GAAP net income per
share 232.7
Adjusted Operating Income and Margin
Adjusted operating income and margin is another important internal measure for
the Company. Operating income in accordance with US GAAP is adjusted for the
items noted above which are excluded on a pre-tax basis to arrive at adjusted
operating income, a non-US GAAP measure. The adjusted operating margin is
calculated by dividing adjusted operating income by net sales, excluding
precious metal content.
51
--------------------------------------------------------------------------------
Senior management receives a monthly analysis of operating results that includes
adjusted operating income. The performance of the Company is measured on this
basis along with the adjusted non-US GAAP earnings noted above as well as other
performance metrics. This non-US GAAP measure may differ from other companies
and should not be considered in isolation from, or as a substitute for, measures
of financial performance prepared in accordance with US GAAP.
Year Ended December 31, 2018
Percentage of Net
Sales, Excluding
Operating (Loss) Precious Metal
(in millions, except percentage of net sales amount) Income Content
Operating loss attributable to Dentsply Sirona $ (958.1) (24.3 %)
Restructuring program related costs and other costs 1,353.1 34.3 %
Amortization of purchased intangible assets 197.9 5.0 %
Business combination related costs and fair value adjustments 21.3 0.5 %
Adjusted non-US GAAP Operating Income $ 614.2 15.5 %
Year Ended December 31, 2017
Percentage of Net
Sales, Excluding
Operating (Loss) Precious Metal
(in millions, except percentage of net sales amounts) Income Content
Operating loss attributable to Dentsply Sirona $ (1,562.3) (39.5 %)
Restructuring program related costs and other costs 2,119.9 53.6 %
Amortization of purchased intangible assets 189.1 4.8 %
Business combination related costs and fair value adjustments 37.7 0.9 %
Credit risk and fair value adjustments 7.0 0.2 %
Adjusted non-US GAAP Operating Income $ 791.4 20.0 %
Operating Segment Results
Net Sales, Excluding Precious Metal Content Year Ended December 31,
(in millions, except percentages) 2018 2017 $ Change % Change
Technologies & Equipment$ 2,167.7 $ 2,202.8 $ (35.1) (1.6 %) Consumables 1,781.4 1,750.1 31.3 1.8 % Segment Operating Income Year Ended December 31, (in millions, except percentages) 2018 2017 $ Change % Change Technologies & Equipment$ 277.9 $ 393.9 $ (116.0) (29.4 %) Consumables 459.9 495.5 (35.6) (7.2 %) 52
--------------------------------------------------------------------------------
A reconciliation of reported net sales to non-US GAAP net sales, excluding
precious metal content, by segment for the years ended
December 31, 2018
Technologies &
(in millions) Equipment Consumables Total
Net sales $ 2,167.7 $ 1,818.6 $ 3,986.3
Less: precious metal content of sales - 37.2 37.2
Net sales, excluding precious metal content $ 2,167.7 Acquisition related adjustments (a) 6.4 - 6.4 Non-US GAAP net sales, excluding precious metal content$ 2,174.1
(a) Represents an adjustment to reflect deferred revenue that was eliminated
under business combination accounting standards to make the 2018 and 2017
non-
December 31, 2017
Technologies &
(in millions) Equipment Consumables Total
Net sales $ 2,202.8 $ 1,790.6 $ 3,993.4
Less: precious metal content of sales - 40.5 40.5
Net sales, excluding precious metal content $ 2,202.8 $ 1,750.1 $ 3,952.9
Merger related adjustments (a) 4.0 - 4.0
Non-US GAAP net sales, excluding precious metal
content $ 2,206.8 (a) Represents an adjustment to reflect deferred subscription and warranty revenue that was eliminated under business combination accounting standards to make 2018 and 2017 non-US. GAAP results comparable
Technologies & Equipment
Reported net sales decreased by 1.6% for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . Reported net sales, excluding precious metal content, decreased by 35.1 million or 1.6% for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . The decrease in net sales, excluding precious metal content, was negatively impacted, based on the Company's estimate, by approximately$127 million as a result of net changes in equipment inventory levels in the current year as compared to the prior year at certain distributors primarily inthe United States , that the Company believes is primarily related to the transition in distribution strategy (see "Business Drivers" under this section for further detail). Based on the Company's estimate, distributor inventories increased for the year endedDecember 31, 2017 by approximately$27 million as compared to a decrease of approximately$100 million for the full year 2018. For the year endedDecember 31, 2018 , net sales, excluding precious metal content, decreased 2.7% on a constant currency basis, or negative internal sales growth of 3.4%. The decline in internal sales growth was driven by theU.S. , partially offset by internal sales growth in Rest of World region. The operating income decreased$116.0 million or 29.4% for the year endedDecember 31, 2018 as compared to 2017. The decrease is primarily the result of the net change in equipment inventory at certain distributors, higher selling and marketing expenses, unfavorable product pricing, as well as unfavorable product mix, partially offset by the benefit of the Company's global efficiency initiatives as compared to the year endedDecember 31, 2017 .
Consumables
Reported net sales increased by 1.6% for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . Reported net sales, excluding precious metal content, increased by$31.3 million or 1.8% for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 .
For the year ended
53
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The operating income decreased $35.6 million or 7.2% for the year ended December
31, 2018 as compared to 2017. The decrease is primarily related to higher SG&A
costs, including selling and marketing expenses, and unfavorable manufacturing
costs, partially offset by the benefit of the Company's global efficiency
initiatives as compared to the year ended December 31, 2017 .
54
--------------------------------------------------------------------------------CRITICAL ACCOUNTING JUDGMENTS AND POLICIES
The preparation of the Company's consolidated financial statements in conformity with US GAAP requires the Company to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix and in some cases, actuarial techniques. The Company evaluates these significant factors as facts and circumstances dictate. Some events as described below could cause results to differ significantly from those determined using estimates. The Company has identified the following accounting estimates as those which are critical to its business and results of operations.
Business Acquisitions
The Company acquires businesses as well as partial interests in businesses. Acquired businesses are accounted for using the acquisition method of accounting which requires the Company to record assets acquired and liabilities assumed at their respective fair values with the excess of the purchase price over estimated fair values recorded as goodwill. The assumptions made in determining the fair value of acquired assets and assumed liabilities as well as asset lives can materially impact the results of operations. The Company obtains information during due diligence and through other sources to get respective fair values. Examples of factors and information that the Company uses to determine the fair values include: tangible and intangible asset evaluations and appraisals; evaluations of existing contingencies and liabilities and product line integration information. If the initial valuation for an acquisition is incomplete by the end of the quarter in which the acquisition occurred, the Company will record a provisional estimate in the financial statements. The provisional estimate will be finalized as soon as information becomes available but will only occur up to one year from the acquisition date.
The Company follows the accounting standards for goodwill and indefinite-lived
intangibles, which require an annual test for impairment to goodwill using a
fair value approach. In addition to minimum annual impairment tests, the Company
also requires that impairment assessments be made more frequently if events or
changes in circumstances indicate that the goodwill or indefinite-lived assets
might be impaired. If impairment related to goodwill is identified, the
resulting charge is determined by recalculating goodwill through a hypothetical
purchase price allocation of the fair value and reducing the current carrying
value to the extent it exceeds the recalculated goodwill. If the carrying amount
of an indefinite-lived intangible asset exceeds its fair value, an impairment
loss is recognized.
Impairment Assessment
Assessment of the potential impairment of goodwill and indefinite-lived
intangible assets is an integral part of the Company's normal ongoing review of
operations. Testing for potential impairment of these assets is significantly
dependent on numerous assumptions and reflects management's best estimates at a
particular point in time. The dynamic economic environments in which the
Company's businesses operate and key economic and business assumptions with
respect to projected selling prices, increased competition and introductions of
new technologies can significantly affect the outcome of impairment tests.
Estimates based on these assumptions may differ significantly from actual
results. Changes in factors and assumptions used in assessing potential
impairments can have a significant impact on the existence and magnitude of
impairments, as well as the time at which such impairments are recognized. If
there are unfavorable changes in these assumptions, particularly changes in the
Company's discount rates, earnings multiples and future cash flows, the Company
may be required to recognize impairment charges. Information with respect to the
Company's significant accounting policies on goodwill and indefinite-lived
intangible assets are included in Note 1, Significant Accounting Policies, in
the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
55
--------------------------------------------------------------------------------Annual Goodwill Impairment Testing
Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicators of impairment exist or if a decision is made to sell a business. The valuation date for annual impairment testing isApril 30 . Judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a decline in expected cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition or slower growth rates, among others. It is important to note that fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of goodwill.Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. The evaluation of impairment involves comparing the current fair value of each reporting unit to its net book value, including goodwill. The Company uses a discounted cash flow model ("DCF model") to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted operating cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including future sales growth, operating margin growth, benefits from restructuring initiatives, tax rates, capital spending, business initiatives, and working capital changes. These assumptions may vary significantly among the reporting units. Operating cash flow forecasts are based on approved business-unit operating plans for the early years and historical relationships and projections in later years. The weighted average cost of capital ("WACC") rate is estimated for geographic regions and applied to the reporting units located within the regions. The Company has not materially changed its methodology for goodwill impairment testing for the years presented. Due to the many variables inherent in the estimation of a reporting unit's fair value and the relative size of the Company's recorded goodwill, differences in assumptions may have a material effect on the results of the Company's impairment analysis. Should the Company's analysis in the future indicate an increase in discount rates or a degradation in the overall markets served by these reporting units, it could result in impairment of the carrying value of goodwill to its implied fair value. There can be no assurance that the Company's future goodwill impairment testing will not result in a charge to earnings.
Annual Indefinite-Lived Intangible Asset Impairment Testing
Indefinite-lived intangible assets consist of tradenames and trademarks and are not subject to amortization; instead, they are tested for impairment annually or more frequently if indicators of impairment exist or if a decision is made to sell a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a decline in expected cash flow projections, a significant adverse change in legal factors or in the business climate, unanticipated competition or slower growth rates, among others. It is important to note that fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of indefinite-lived assets. The fair value of acquired tradenames and trademarks is estimated by the use of 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. Royalty rates used are consistent with those assumed for the original purchase accounting valuation. 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 projected revenue, royalty rates and appropriate discount rates. Other assumptions are consistent with those applied to goodwill impairment testing.
EffectiveJanuary 1, 2019 , the Company realigned certain businesses between segments resulting in a change from eleven reporting units to five. As a result, the Company transferred goodwill between segments due to these changes. Affected reporting units, including theCAD/CAM and Treatment Center reporting units in the Technologies & Equipment segment, were tested for potential impairment of goodwill before the transfers. The CAD/CAM reporting unit was previously impaired in 2018 and the Treatment Center reporting unit that the Company disclosed in 2018 would not pass a hypothetical 100 basis points increase in the discount rate. These reporting units had a fair value that exceeded book value by approximately 10% and 20%, respectively, atJanuary 1, 2019 . No goodwill impairment was identified due to the realignment. 56 -------------------------------------------------------------------------------- The Company performed the required annual impairment tests of goodwill atApril 30, 2019 on five reporting units. To determine the fair value of the Company's reporting units, the Company uses a discounted cash flow model with market-based support as its valuation technique to measure the fair value for its reporting units. The discounted cash flow model uses five-to-ten-year forecasted cash flows plus a terminal value based on a multiple of earnings or by capitalizing the last period's cash flows using a perpetual growth rate. In the development of the forecasted cash flows, the Company applies revenue, gross profit, and operating expense assumptions taking into consideration historical trends as well as futures expectations.These future expectations include, but are not limited to, new product development and distribution channel changes for the respective reporting units. The Company also considers the current and projected market conditions for dental and medical device industries, both in theU.S. and globally, when determining its assumptions. The total forecasted cash flows were discounted based on market participant data, which included assumptions regarding the Company's weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected cash flows. The Company's significant assumptions in the discounted cash flow models include, but are not limited to, the weighted average cost of capital, revenue growth rates, including perpetual revenue growth rates, and gross margin percentages of the reporting unit's business. A change in any of these assumptions could produce a different fair value, which could have a material impact on the Company's results of operations. No goodwill impairment was identified atApril 30, 2019 .
Indefinite-lived Intangible Assets
During the three months ended
The Company also assessed the annual impairment of indefinite-lived intangible assets as ofApril 30, 2019 , which largely consist of acquired tradenames and trademarks, in conjunction with the annual impairment tests of goodwill. The assumptions used in determining the fair value of the indefinite-lived intangible assets contain uncertainties, and any changes to these assumptions could have a negative impact and result in a future impairment. AtApril 30, 2019 , the Company did not identify any impairment triggers for the indefinite-lived intangible assets. The indefinite-lived intangible assets held within the CAD/CAM business were previously impaired in 2018 and the indefinite-lived intangible assets held within the Imaging business were impaired in the first quarter of 2019. Had the fair value of these indefinite-lived intangible assets been hypothetically reduced by 10% or the discount rate had been hypothetically increased by 100 basis points atApril 30, 2019 , the fair value of these assets would still exceed their book value for those assets held within the CAD/CAM business and for the indefinite-lived intangible assets held within the Imaging business the result would be an insignificant impairment. For the Company's indefinite-lived assets not discussed above, the Company also applied a hypothetical sensitivity analysis. If the fair value of each of these indefinite-lived intangibles assets had been hypothetically reduced by 10% or the discount rate had been hypothetically increased by 100 basis points atApril 30, 2019 , the fair value of these assets would still exceed their book value.
Litigation
The Company and its subsidiaries are from time to time parties to lawsuits arising out of their respective operations. The Company records liabilities when a loss is probable and can be reasonably estimated. These estimates are typically in the form of ranges, and the Company records the liabilities at the low point of the ranges, when no other point within the ranges is a better estimate of the probable loss. The ranges established by management are based on analysis made by internal and external legal counsel based on information known at the time. If the Company determines a liability to be only reasonably possible, it considers the same information to estimate the possible exposure and discloses any material potential liability. These loss contingencies are monitored regularly for a change in fact or circumstance that would require an accrual adjustment. The Company believes it has appropriately estimated liabilities for probable losses in the past; however, the unpredictability of litigation and court decisions could cause a liability to be incurred in excess of estimates. Legal costs related to these lawsuits are expensed as incurred.
Income Taxes
Income taxes are determined using the liability method of accounting for income taxes. The Company's tax expense includesU.S. and international income taxes plus the provision forU.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. 57 -------------------------------------------------------------------------------- The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained upon examination by the taxing authorities based on the technical merits of the position. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. The Company establishes a valuation allowance for deferred tax assets for which realization is not likely. AtDecember 31, 2019 , the Company has a valuation allowance of$288.0 million against the benefit of certain deferred tax assets of foreign and domestic subsidiaries. The Company's tax positions are subject to ongoing examinations by the tax authorities. The Company operates within multiple taxing jurisdictions throughout the world and in the normal course of business is examined by taxing authorities in those jurisdictions. Adjustments to the uncertain tax positions are recorded when taxing authority examinations are completed, statutes of limitation are closed, changes in tax laws occur or as new information comes to light with regard to the technical merits of the tax position. 58 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities during the year endedDecember 31, 2019 were$632.8 million compared to$499.8 million during the year endedDecember 31, 2018 . Net income increased by$1,274.0 million in the period endedDecember 31, 2019 compared to the prior year, primarily due to the prior year goodwill and indefinite-lived intangible asset impairments. Working capital consumed$9.1 million of operating cash flow in 2019 compared to$4.0 million consumed in 2018. The Company's cash and cash equivalents increased by$95.3 million during the year endedDecember 31, 2019 to$404.9 million . For the year endedDecember 31, 2019 , on a constant currency basis, the number of days for sales outstanding in accounts receivable increased by 3 days to 62 days as compared to 59 days in 2018. On a constant currency basis, the number of days of sales in inventory decreased by 8 days to 116 days atDecember 31, 2019 as compared to 124 days atDecember 31, 2018 . Cash used in investing activities for the year endedDecember 31, 2019 included capital expenditures of$122.9 million and cash proceeds from net investment hedges of$40.3 million . The Company expects capital expenditures to be in the range of approximately$140 million to$150 million for the full year 2020. Cash used in financing activities for the year endedDecember 31, 2019 was primarily related to dividend payments of$80.9 million , share repurchases of$260.0 million , net repayments of total long-term borrowings of$132.3 million and net repayments of short term borrowings of$68.5 million . For the year endedDecember 31, 2019 , the Company purchased 4.8 million shares or$260.0 million at an average price of$54.18 . Share repurchases will be made through open market purchases, Rule 10b5-1 plans, accelerated share repurchase transactions and other structured share repurchases, privately negotiated transactions or other transactions in such amounts and at such times as the Company deems appropriate based upon prevailing market and business conditions and other factors. As ofDecember 31, 2019 and 2018, the Company held 43.2 million and 41.5 million shares, respectively, of treasury stock. The Company received proceeds of$108.9 million as a result of the exercise of 2.7 million shares of stock options during the year endedDecember 31, 2019 . Total debt decreased by$221.9 million for the year endedDecember 31, 2019 .Dentsply Sirona's long-term debt, including the current portion atDecember 31, 2019 and 2018, was$1,433.3 million and$1,575.5 million , respectively. The Company's long-term debt, including the current portion, decreased by a net of$142.2 million during the year endedDecember 31, 2019 . This net change included a net decrease in borrowings of$132.3 million , and a decrease of$9.9 million due to exchange rate fluctuations on debt denominated in foreign currencies. AtDecember 31, 2019 , there were no outstanding borrowings and atDecember 31, 2018 , there was$67.8 million in outstanding borrowings under the commercial paper facility. The Company pre-paid the PNC Term Loan onMay 28, 2019 for a total of$131.3 million using cash and short-term commercial paper. The Company repaid its short-term commercial paper that was outstanding atDecember 31, 2018 of$67.8 million . OnJune 24, 2019 , the Company entered into a Private Placement Note Purchase Agreement ("PPN") to borrow12.5 billion Japanese yen for a term of 12 years at a coupon of 0.99%. The proceeds were used to repay the12.5 billion Japanese yen term loan maturingSeptember 30, 2019 . During the year endedDecember 31, 2019 , the Company's ratio of net debt to total capitalization decreased to 16.8% compared to 20.8% atDecember 31, 2018 .Dentsply Sirona defines net debt as total debt, including current and long-term portions, less cash and cash equivalents and total capitalization as the sum of net debt plus total equity. The Company has access to a$700.0 million revolving credit facility throughJuly 28, 2024 . The facility is unsecured and contains certain affirmative and negative covenants relating to the operations and financial condition of the Company. The most restrictive of these covenants pertain to asset dispositions and prescribed ratios of indebtedness to total capital and operating income plus depreciation and amortization to interest expense. The Company also has available an aggregate$500.0 million under aU.S. dollar commercial paper facility. The 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 facilities in the aggregate is$700.0 million . AtDecember 31, 2019 , there were no outstanding borrowings under the$700 million multi-currency revolving credit facility. The Company had no outstanding borrowings under the commercial paper facility atDecember 31, 2019 . 59 -------------------------------------------------------------------------------- The Company's revolving credit facility, term loans and senior notes contain certain affirmative and negative covenants relating to the Company's operations and financial condition. These credit agreements contain a number of covenants and two financial ratios, which the Company is required to satisfy. The most restrictive of these covenants pertain to asset dispositions and prescribed ratios of total debt outstanding to total capital not to exceed the ratio of 0.6 to 1.0, and operating income excluding depreciation and amortization to interest expense of not less than 3.0 times, in each case, as such terms are defined in the relevant agreement. Any breach of any such covenants or ratios would result in a default under the existing debt agreements that would permit the lenders to declare all borrowings under such debt agreements to be immediately due and payable and, through cross default provisions, would entitle the Company's other lenders to accelerate their loans. AtDecember 31, 2019 , the Company was in compliance with these covenants. The Company also has access to$38.0 million in uncommitted short-term financing under lines of credit from various financial institutions. The lines of credit have no major restrictions and are provided under demand notes between the Company and the lending institutions. AtDecember 31, 2019 ,$2.1 million was outstanding under these short-term lines of credit. AtDecember 31, 2019 , the Company had total unused lines of credit related to the revolving credit agreement and the uncommitted short-term lines of credit of$735.9 million . The Company expects on an ongoing basis to be able to finance cash requirements, including capital expenditures, cash payments related to restructuring programs, debt service, operating leases and potential future acquisitions, from the current cash, cash equivalents and short-term investment balances, funds generated from operations and amounts available under its existing credit facilities. The Company estimates cash payments related to previously announced restructuring to be in a range from$50 million to$100 million in 2020. The Company's credit facilities are further discussed in Note 13, Financing Arrangements, to the Consolidated Financial Statements in Item 8 of this Form 10-K. As noted in the Company's Consolidated Statements of Cash Flows in Item 8 of this Form 10-K, the Company has continued to generate strong cash flows from operations, which has been used to finance the Company's activities. The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries' operational activities and future foreign investments. The Company has the ability to repatriate additional funds to theU.S. , which could result in an adjustment to the tax liability for foreign withholding taxes, foreign and/orU.S. state income taxes and the impact of foreign currency movements. AtDecember 31, 2019 , management believed that sufficient liquidity was available inthe United States . The Company has and expects to continue repatriating certain funds from its non-U.S. subsidiaries that are not needed to finance local operations; however, these particular repatriation activities have not and are not expected to result in a significant incremental tax liability to the Company.
Off Balance Sheet Arrangements
AtDecember 31, 2019 , the Company held$50.0 million of precious metals on consignment from several financial institutions. Under these consignment arrangements, the financial institutions own the precious metal, and, accordingly, the Company does not report this consigned inventory as part of its inventory on the Consolidated Balance Sheets. These consignment agreements allow the Company to acquire the precious metal at market rates at a point in time, which is approximately the same time, and for the same price as alloys are sold to the Company's customers. In the event that the financial institutions would discontinue offering these consignment arrangements, and if the Company could not obtain other comparable arrangements, the Company may be required to obtain third party financing to fund an ownership position to maintain precious metal inventory at operational levels. For additional details, see Item 7A "Quantitative and Qualitative Disclosure About Market Risk - Consignment Arrangements" of this Form 10-K. 60 --------------------------------------------------------------------------------
Contractual Obligations
The Company's scheduled contractual cash obligations atDecember 31, 2019 were as follows: Contractual Obligations Greater Within Than (in millions) 1 Year Years 1-3 Years 3-5 5 Years Total Long-term borrowings, including finance leases$ 0.2 $
298.7
47.7 63.8 35.4 30.6 177.5
Interest on long-term borrowings, net
of interest rate swap agreements 30.8 61.3 35.2 65.1 192.4
Postemployment obligations 20.3 38.5 39.5 112.8 211.1
Precious metal consignment agreements 50.0 - - - 50.0
$ 149.0 $ 462.3 $ 189.2 $ 1,268.3 $ 2,068.8
Due to the uncertainty with respect to the timing of future cash flows
associated with the Company's unrecognized tax benefits at December 31, 2019 ,
the Company is unable to make reasonably reliable estimates of the period of
cash settlement with the respective taxing authority; therefore, $26.0 million
of the unrecognized tax benefit has been excluded from the contractual
obligations table above. See Note 15, Income Taxes, in the Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1, Significant Accounting Policies, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for a discussion of recent accounting guidance and pronouncements.
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