DENTSPLY SIRONA INC. Information included in or incorporated by reference in this Form 10-Q, and other filings with theU.S. Securities and Exchange Commission (the "SEC") and the Company's press releases or other public statements, contains or may contain forward-looking statements. Please refer to a discussion of the Company's forward-looking statements and associated risks in Part I, "Forward-Looking Statements," Part I, Item 1, "Business" and Part I, Item 1A, "Risk Factors" of the Company's Form 10-K for the year endedDecember 31, 2020 . See Part II, Item 1A, "Risk Factors" of this Form 10-Q for any updated risk factors.
Company Profile
DENTSPLY SIRONA Inc. ("Dentsply Sirona" or the "Company"), is the world's largest manufacturer of professional dental products and technologies, with a 134-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.
The Technologies & Equipment segment is responsible for the 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 design, manufacture, sales and distribution of the Company's Dental Consumable Products which include preventive, restorative, endodontic, and dental laboratory products.
The impact of COVID-19 and the Company's response
Information pertaining to the impact of the COVID-19 pandemic on the Company's operations and financial results during the course of 2020 as well as the Company's overall response can be found in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . Updates to that summary of impact for the six months endedJune 30, 2021 are as follows: •Continuing the trend from the last three quarters, the Company has continued to see demand improve and dental patient traffic normalize in major markets. Certain markets including regions ofSoutheast Asia andSouth America have experienced setbacks in demand in the second quarter as a result of renewed COVID-19 infections from recent variants of the virus. While most government authorities have lifted many of their restrictions, the end dates for all restrictions being lifted are still unknown. It is also uncertain when customer demand will fully return to pre-COVID-19 levels upon lifting these restrictions, or whether a resurgence of the virus may have an impact on demand in affected markets. •The Company's COVID-19 infection crisis management process implemented in 2020 remains in effect, and there have been no significant disruptions to operations as a result of infections. During the course of the pandemic, the Company has utilized this process to manage several incidents of exposure at facilities. All potential and actual cases have been reviewed to ensure that the Company managed exposed employees appropriately, consistently and safely. None of these incidents have resulted in a material loss of production or financial impact to the results for the six months endedJune 30, 2021 . 31 -------------------------------------------------------------------------------- •The Company previously undertook various initiatives during the second quarter of 2020, to ensure its ongoing liquidity which included, among other actions, entering into a$310 million revolving credit facility onApril 9, 2020 , a40 million euro revolving credit onMay 5, 2020 , a30 million euro revolving credit facility onMay 12, 2020 and3.3 billion Japanese yen revolving credit facility onJune 11, 2020 . These additional short-term facilities were entered into in an abundance of caution and have all expired as planned as ofJune 30, 2021 . •During the second quarter the Company has continued to prioritize employee safety and preventing the possible spread of COVID-19 by encouraging ongoing work-from-home where possible and maintaining travel restrictions. Up through the date of the filing of this Form 10-Q, the Company's principal manufacturing facilities and other operations have remained operational at a more normalized level than during the preceding year. The Company continues to monitor the COVID-19 pandemic. As governmental authorities adjust restrictions globally, the Company plans to appropriately staff sales, manufacturing, and other functions to meet customer demand and deliver on continuing critical projects while also complying with all government requirements.
Restructuring Announcement
InNovember 2018 , the Board of Directors of the Company approved a plan to restructure and simplify the Company's business. The goal of the restructuring is to drive annualized net sales growth of 3% to 4% and adjusted operating income margins of 22% by the end of 2022 as well as achieve net annual cost savings of$200 million to$225 million by 2021. InJuly 2020 , the Board of Directors of the Company approved an expansion of this plan that is intended to further optimize the Company's product portfolio and reduces operating expenses. The product portfolio optimization has resulted in the divestiture or closure of certain underperforming businesses. The operating expense reductions will come as a result of additional leverage from continued integration and simplification of the business. The Company had initially anticipated one-time expenditures and charges of approximately$275 million yielding annual cost savings of$200 million to$225 million by 2021. The program expansion is expected to result in total charges of approximately$375 million and annual cost savings of approximately$250 million . The Company expects that these expanded actions will result in incremental global headcount reductions of 6% to 7% in addition to the original projections of 6% to 8%. SinceNovember 2018 , the Company has incurred expenditures of approximately$321 million under this program, of which, approximately$123 million were non-cash charges. These amounts include the charges for the portfolio shaping initiatives announced onAugust 6, 2020 which are further discussed below. As part of this expanded plan, the Company announced onAugust 6, 2020 that it will exit its traditional orthodontics business as well as both exit and restructure certain portions of its laboratory business. The traditional orthodontics business is part of the Technologies & Equipment segment and the laboratory business is part of the Consumables segment. The Company is exiting several of its facilities and reducing its workforce by approximately 4% to 5%. The Company expects to record total restructuring charges in a range of$60 million to$70 million for inventory write-downs, severance costs, fixed asset write-offs, and other facility closure costs related to these actions. The Company estimates that$45 million to$55 million of these restructuring charges will be non-cash charges related to inventory write-downs and fixed asset write-offs. The Company has recorded expenses of approximately$57 million related to these actions, of which approximately$47 million were non-cash charges. For the six months endedJune 30, 2021 , the Company made a$3 million adjustment related to inventory reserves and paid$1 million in severance costs. The Company expects nearly all of the remaining restructuring charges to be completed by the first quarter of 2022. 32 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS, THREE MONTHS ENDED
Net Sales The Company presents net sales comparing the current year periods to the prior year periods. In addition, the Company also compares net sales on an organic sales basis, which is a Non-GAAP measure. The Company defines "organic sales" as net sales excluding: (1) net sales from acquired and divested businesses recorded prior to the first anniversary of the acquisition or divestiture, (2) net sales attributable to discontinued product lines in both the current and prior year periods, and (3) the impact of foreign currency translation, which is calculated by comparing current-period sales to prior-period sales, with both periods converted to theU.S. dollar rate at local currency foreign exchange rates for each month of the prior period. The "organic sales" measure is not calculated in accordance with US GAAP; therefore, this item represents a Non-GAAP measure. This Non-GAAP measure may differ from those used by other companies and should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with US GAAP. Organic sales is an important internal measure for the Company. The Company's senior management receives a monthly analysis of operating results that includes organic sales. The performance of the Company is measured on this metric along with other performance metrics. The Company discloses organic sales 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. The Company believes that this information is helpful in understanding underlying net sales trends. Three Months Ended June 30, (in millions, except percentages) 2021 2020 $ Change % Change Net sales$ 1,067 $ 491 $ 576 117.3 % Net sales for the three months endedJune 30, 2021 were$1,067 million , an increase of$576 million or 117.3% from the three months endedJune 30, 2020 . The increase in net sales was attributable to increased volumes in both the Technologies & Equipment and Consumables segments due to a recovery in demand from the impact of the COVID-19 pandemic. As a result, organic sales increased 104.6% as compared to the same prior year period. Net sales were also positively impacted by approximately 10.7% due to the weakening of theU.S. dollar as compared to the same prior year period as well as a benefit of 11.9% from acquisitions offset by a reduction of 9.9% due to divestitures of non-strategic businesses and discontinued products.
Net sales by geographic region were as follows:
Three Months Ended June 30,
(in millions, except percentages) 2021 2020 $ Change % Change
United States $ 366 $ 131 $ 235 179.4 %
Europe 431 216 215 99.5 %
Rest of World 270 144 126 87.5 %
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The increase in net sales was attributable to both the Technologies & Equipment and the Consumables segments and resulted from the overall higher volumes during the three months endedJune 30, 2021 due to the recovery in demand from the COVID-19 pandemic. As a result, organic sales increased by 145.8% as compared to the same prior year period. The increase in net sales also included a benefit of 43.6% from acquisitions offset by a reduction of 11.8% due to divestitures of non-strategic businesses and discontinued products.
The increase in net sales was attributable to both the Technologies & Equipment and the Consumables segments and resulted from the overall higher volumes during the three months endedJune 30, 2021 due to the recovery in demand from the COVID-19 pandemic. As a result, organic sales increased by 91.8% as compared to the same prior year period. Net sales for the quarter endedJune 30, 2021 was also positively impacted by 15.6% due to the weakening of theU.S. dollar as compared to the same prior year period, offset by a reduction of 7.9% due to divestitures of non-strategic businesses and discontinued products.
Rest of World
The increase in net sales was attributable to both the Technologies & Equipment and the Consumables segments and resulted from the overall higher volumes during the three months endedJune 30, 2021 due to a recovery in demand from the COVID-19 pandemic. As a result, organic sales increased by 86.2% as compared to the same prior year period. Net sales for three months endedJune 30, 2021 was also positively impacted by 11.4% due to the weakening of theU.S. dollar as compared to the same prior year period, as well as a benefit of 0.8% from acquisitions offset by a reduction of 10.9% due to divestitures of non-strategic businesses and discontinued products.
Gross Profit
Three Months Ended June 30,
(in millions, except percentages) 2021 2020 $ Change % Change
Gross profit $ 598 $ 176 $ 422 239.8%
Gross profit as a percentage of net sales 56.0% 35.8%
For the three months endedJune 30, 2021 , the increase in the gross profit rate as a percentage of net sales was primarily driven by favorable mix including an increase in net sales for higher margin products, as compared to the same period endedJune 30, 2020 . Operating Expenses Three Months Ended June 30, (in millions, except percentages) 2021 2020 $ Change % Change Selling, general and administrative expenses ("SG&A")$ 398 $ 261 $ 137 52.5 % Research and development expenses ("R&D") 40 18 22 122.2 % Restructuring and other costs 5 1 4 NM SG&A as a percentage of net sales 37.3 % 53.2 % R&D as a percentage of net sales 3.7 % 3.7 % NM - Not meaningful 34
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SG&A Expenses
For the three months endedJune 30, 2021 , the decrease in SG&A expenses as a percentage of net sales was primarily driven by greater absorption of expenses due to higher sales as well as continued expense discipline, as compared to the same period endedJune 30, 2020 .
R&D Expenses
For the three months endedJune 30, 2021 , the increase in R&D expenses from the comparable quarter of the prior year was primarily driven by significant spend controls put in place in 2020 in response to the COVID-19 pandemic. As a percentage of sales, R&D expenses were flat year-over-year. The Company intends to continue to increase its investment and the ratio of R&D expense to net sales over time. Restructuring and Other Costs The Company recorded restructuring and other costs of$5 million for the three months endedJune 30, 2021 compared to$1 million for the three months endedJune 30, 2020 . In connection with the various restructuring initiatives, as described earlier, the Company recorded$9 million of restructuring costs and a benefit of$4 million in other costs for the three months endedJune 30, 2021 . For the three months endedJune 30, 2020 , the Company recorded$2 million of restructuring costs and a benefit of$1 million in other costs. Other Income and Expense Three Months Ended June 30, (in millions) 2021 2020 $ Change Net interest expense$ 16 $ 11 $ 5 Other expense (income), net 5 5 - Net interest and other expense (income)$ 21 $ 16 $ 5 Net Interest Expense
The increase in net interest expense was due to higher average debt levels
during for the three months ended
Income Taxes and Net Income
Three Months Ended June 30,
(in millions, except percentages) 2021 2020 $ Change
Provision (benefit) for income taxes $ 35 $ (24) $ 59
Effective income tax rate 26.1 % (20.0) %
Net income (loss) attributable to Dentsply Sirona $ 99 Provision (benefit) for income taxes
For the three months endedJune 30, 2021 , the provision for income taxes was$35 million as compared to a benefit of$24 million during the three months endedJune 30, 2020 . 35 --------------------------------------------------------------------------------
During the three months ended
During the three months ended
The increase in the effective tax rate is primarily from an increase in mix of higher-taxed foreign income and additionalU.S. tax on foreign income. 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. Segment ResultsNet Sales Three Months Ended June 30, (in millions, except percentages) 2021 2020 $ Change % Change Technologies & Equipment$ 622 $ 304 $ 318 104.6 % Consumables 445 187 258 138.0 %
Segment Adjusted Operating Income (a)
Three Months Ended June 30,
(in millions, except percentages) 2021 2020 $ Change % Change
Technologies & Equipment (b) $ 135 $ (4) $ 139 NM
Consumables (b) 154 (17) 171 NM
NM - Not meaningful
(a) See Note 6, Segment and Geographic Information, in the Notes to Consolidated
Financial Statements in Item 8 of this Form 10-Q for a reconciliation from
segment adjusted operating income to consolidated US GAAP income.
(b) Certain charges related to discontinuance of product lines which were
previously reported in adjusted operating income for the reportable segments, $7
million for the three months June 30, 2020 , have been reclassified to the "All
other" category to conform to current year presentation and the Company's
internal reporting to the Chief Operating Decision Maker package. These amounts
are not material to the measure of segment results for the years presented.
Technologies & Equipment
The increase in net sales occurred across all dental businesses and resulted from overall higher volumes during the three months endedJune 30, 2021 due to a recovery in demand from the COVID-19 pandemic. As a result, organic sales increased 85.2% as compared to the same prior year period, driven primarily by the Equipment & Instruments, Digital Dentistry, and Implants businesses. Net sales were also positively impacted by approximately 10.4% due to the weakening of theU.S. dollar over the prior year period, as well as a benefit of 19.0% from acquisitions offset by a reduction of 10.0% due to divestitures of non-strategic businesses and discontinued products.
The adjusted operating income increase was primarily driven by the increase in net sales as well as continued expense discipline.
Consumables
The increase in net sales occurred across all regions and resulted from overall higher volumes during the three months endedJune 30, 2021 due to a recovery in demand from the COVID-19 pandemic. As a result, organic sales increased 135.3% as compared to the same prior year period, primarily driven by the Endodontic, Restorative, and Preventive businesses. Net sales were also positively impacted by approximately 11.2% due to the weakening of theU.S. dollar as compared to the same prior year period, offset by a reduction of 8.5% due to divestitures of non-strategic businesses and discontinued products. 36 -------------------------------------------------------------------------------- The adjusted operating income increase was primarily driven by the increase in net sales as well as favorable mix including increased volumes for higher margin products, and continued expense discipline. 37 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS, SIX MONTHS ENDEDJUNE 30, 2021 COMPARED TO SIX MONTHS ENDEDJUNE 30, 2020 Net Sales Six Months Ended June 30, (in millions, except percentages) 2021 2020 $ Change % Change Net sales$ 2,094 $ 1,365 $ 729 53.4 % Net sales for the six months endedJune 30, 2021 were$2,094 million , an increase of$729 million or 53.4% from the six months endedJune 30, 2020 . The increase in net sales was attributable to both the Technologies & Equipment and Consumables segments which were affected by overall higher volumes primarily due to a recovery in demand from the impact of the COVID-19 pandemic. During the six months endedJune 30, 2020 , the Company saw normal sales levels for the months of January and February and started to experience a decline in sales volume beginning in March and extending through June due to the onset of the pandemic. As a result, organic sales increased 45.3% in the first six months of 2021 relative to the comparative period.
Net sales were also positively impacted by approximately 7.2% due to the
weakening of the
Net sales by geographic region were as follows:
Six Months Ended June 30,
(in millions, except percentages) 2021 2020 $ Change % Change
United States $ 713 $ 431 $ 282 65.4 %
Europe 849 589 260 44.1 %
Rest of World 532 345 187 54.2 %
United States
The increase in net sales was attributable to both the Technologies & Equipment
and the Consumables segments and was primarily due to overall higher volumes
during the six months ended June 30, 2021 following periods of lower demand
resulting from the COVID-19 pandemic. As a result, organic sales increased by
47.6% as compared to the same prior year period. The increase in net sales also
included a benefit of 23.6% from acquisitions offset by a reduction of 7.3% due
to divestitures of non-strategic businesses and discontinued products.
The increase in net sales was attributable to both the Consumables and the Technologies & Equipment segments and was primarily due to overall higher volumes during the six months endedJune 30, 2021 following periods of lower demand resulting from the COVID-19 pandemic. As a result, organic sales increased by 38.9% as compared to the same prior year period. Net sales for the quarter endedJune 30, 2021 was also positively impacted by 11.1% due to the weakening of theU.S. dollar as compared to the same prior year period, offset by a reduction of 5.9% due to divestitures of non-strategic businesses and discontinued products. 38 --------------------------------------------------------------------------------
Rest of World
The increase in net sales was attributable to both the Technologies & Equipment and the Consumables segments and was primarily due to overall higher volumes during the six months endedJune 30, 2021 following periods of lower demand resulting from the COVID-19 pandemic. During the six months endedJune 30, 2020 , the Company experienced a decline in sales volume beginning in March and extending through June due to the COVID-19 pandemic, particularly inChina and other Asian markets. As a result, organic sales increased by 53.5% as compared to the same prior year period. Net sales for the six months endedJune 30, 2021 was also positively impacted by 7.7% due to the weakening of theU.S. dollar as compared to the same prior year period, as well as a benefit of 0.8% from acquisitions offset by a reduction of 7.8% due to divestitures of non-strategic businesses and discontinued products.
Gross Profit
Six Months Ended June 30,
(in millions, except percentages) 2021 2020 $ Change % Change
Gross profit $ 1,177 $ 644 $ 533 82.8 %
Gross profit as a percentage of net sales 56.2 % 47.2 %
For the six months endedJune 30, 2021 , the increase in the gross profit rate as a percentage of net sales was primarily driven by favorable mix including the increase in net sales for higher margin products, as compared to the same period endedJune 30, 2020 . Operating Expenses Six Months Ended June 30, (in millions, except percentages) 2021 2020 $ Change % Change Selling, general and administrative expenses ("SG&A")$ 783 $ 620 $ 163 26.3 % Research and development expenses ("R&D") 77 52 25 48.1 % Goodwill impairment - 157 (157) NM Restructuring and other costs 8 44 (36) NM SG&A as a percentage of net sales 37.4 % 45.4 % R&D as a percentage of net sales 3.7 % 3.8 % NM - Not meaningful SG&A Expenses For the six months endedJune 30, 2021 , the decrease in SG&A expenses as a percentage of net sales was primarily driven by greater absorption of expenses due to higher sales as well as continued expense discipline, as compared to the same period endedJune 30, 2020 .
R&D Expenses
For the six months endedJune 30, 2021 , the increase in R&D expense from the comparable six month period of the prior year was primarily driven by significant spend controls put into place in 2020 in response to the COVID-19 pandemic, increased investment on product development initiatives particularly in the Company's Technology & Equipment segment, and in research investments specific to our recent acquisitions of Byte and Datum Dental. The Company intends to continue to increase its investment and the ratio of R&D expense to net sales over time. 39 --------------------------------------------------------------------------------
Goodwill Impairment
There were no impairments recorded in the six months endedJune 30, 2021 . During the six months endedJune 30, 2020 , as a result of updating the estimates and assumptions pertaining to the impact of the ongoing COVID-19 pandemic the Company determined that the goodwill associated with the Equipment & Instruments reporting unit within the Technologies & Equipment segment was impaired. As a result, the Company recorded a goodwill impairment charge of$157 million .
Restructuring and Other Cost
The Company recorded restructuring and other costs of
In connection with the various restructuring initiatives, as described earlier,
the Company recorded
During the six months endedJune 30, 2020 , the Company recorded$5 million of restructuring costs and$39 million in other costs, which consisted primarily of impairment charges of$39 million related to indefinite-lived intangible assets within the Technologies & Equipment segment driven by a decline in forecasted sales as a result of the COVID-19 pandemic as well as an unfavorable change in the discount rate. Other Income and Expense Six Months Ended June 30, (in millions) 2021 2020 Change Net interest expense$ 30 $ 18 $ 12 Other expense (income), net (4) 3 (7) Net interest and other expense$ 26 $ 21 $ 5 The increase in net interest expense was due to higher average debt levels during the six months endedJune 30, 2021 compared to the prior year period. As noted in Part I, Item 1, Note 15, Subsequent Events, inJuly 2021 the Company entered into a cross currency basis swap which effectively converts a portion of the Company's$750 million bond coupon from 3.3% to 1.7%. Also inJuly 2021 , the Company entered into variable interest rate swaps which convert a portion of the$750 million Senior Notes from a fixed rate of 3.3% into a variable interest rate. Together, these instruments are expected to result in a net reduction of interest expense for the remainder of 2021.
Income Taxes and Net Income (Loss)
Six Months Ended June 30,
(in millions, except percentages) 2021 2020 $ Change
Provision (benefit) for income taxes $ 67 $ (14) $ 81
Effective income tax rate 23.7 % (5.6) %
Net income (loss) attributable to Dentsply Sirona $ 216 Provision (benefit) for income taxes
For the six months endedJune 30, 2021 , the provision for income taxes was$67 million as compared to a tax benefit of$14 million during the six months endedJune 30, 2020 .
During the six months ended
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During the six months ended June 30, 2020 , the Company recorded $7 million of
tax expense for other discrete matters. The Company also recorded a $11 million
tax benefit as a discrete item related to the indefinite-lived intangible asset
impairment charge.
The increase in the effective tax rate is primarily from an increase in mix of
higher-taxed foreign income and additional U.S. tax on foreign income. 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.
Segment Results
Net Sales
Six Months Ended June 30,
(in millions, except percentages) 2021 2020 $ Change % Change
Technologies & Equipment $ 1,219 $ 824 $ 395 47.9%
Consumables 875 541 334 61.7%
Segment Adjusted Operating Income (a)
Six Months Ended June 30,
(in millions, except percentages) 2021 2020 $ Change % Change
Technologies & Equipment (b) $ 261 $ 107 $ 154 143.9%
Consumables (b) 304 45 259 575.6%
(a) See Note 6, Segment and Geographic Information, in the Notes to Consolidated
Financial Statements in Item 8 of this Form 10-Q for a reconciliation from
segment adjusted operating income to consolidated US GAAP income.
(b) Certain charges related to discontinuance of product lines which were
previously reported in adjusted operating income for the reportable segments, $7
million for the six months June 30, 2020 , have been reclassified to the "All
other" category to conform to current year presentation and the Company's
internal reporting to the Chief Operating Decision Maker package. These amounts
are not material to the measure of segment results for the years presented.
Technologies & Equipment
The increase in net sales occurred across all dental businesses and was the result of overall higher volumes during the six months ended primarily due to demand recovery from the impact of the COVID-19 pandemic. As a result, organic sales increased 35.0% as compared to the same prior year period, driven primarily by the Equipment & Instruments and Implants businesses. Net sales were also positively impacted by approximately 7.4% due to the weakening of theU.S. dollar over the prior year period, as well as a benefit of 12.7% from acquisitions offset by a reduction of 7.2% due to divestitures of non-strategic businesses and discontinued products.
The adjusted operating income increase was primarily driven by the increase in net sales as well as continued expense discipline.
Consumables
The increase in net sales occurred across all regions and was the result of overall higher volumes during the six months ended primarily due to demand recovery from the impact of the COVID-19 pandemic. As a result, organic sales increased 60.6% as compared to the same prior year period, primarily driven by the Endodontic, Restorative, and Preventive businesses. Net sales were also positively impacted by approximately 6.9% due to the weakening of theU.S. dollar as compared to the same prior year period, offset by a reduction of 5.8% due to divestitures of non-strategic businesses and discontinued products. The adjusted operating income increase was primarily driven by favorable mix including increased volumes for higher margin products, and continued expense discipline. 41
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CRITICAL ACCOUNTING POLICIES
There have been no changes to the critical accounting policies as disclosed in the Company's Form 10-K for the year endedDecember 31, 2020 other than those changes explained in Part I, Item 1, Note 1, Significant Accounting Policies, in the Notes of the Unaudited Consolidated Financial Statements of this Form 10-Q.
Goodwill Impairment
Goodwill represents the excess cost over the fair value of the identifiable net assets of business acquired.Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired. Judgment is involved in determining if an indicator of impairment has occurred during the course of the year. Such indicators may include a decline in expected cash flows, unanticipated competition or slower growth rates, among others. When testing goodwill for impairment, the Company may assess qualitative factors for its reporting units to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount including goodwill. Alternatively, the Company may bypass this qualitative assessment and perform the quantitative goodwill impairment test.
Effective 2021 and prospectively, the Company will perform its required annual goodwill impairment test as ofApril 1 rather than onApril 30 which was the Company's previous practice. The Company believes this change is preferable as it more closely aligns with the timing of the Company's strategic business planning process. The Company does not believe this change resulted in any delay, acceleration or avoidance of impairment. Furthermore, a retrospective application to prior periods is impracticable as the Company is unable to objectively determine, without the use of hindsight, the assumptions which would be used in earlier periods. For the fiscal year 2021, the Company performed its goodwill impairment test as ofApril 1, 2021 and elected to bypass the qualitative assessment and performed a quantitative assessment. The Company did not record any goodwill impairment during the first six months of 2021. During the comparative first six months of 2020, the Company recorded a goodwill impairment charge of$157 million associated with one reporting unit within the Technologies & Equipment segment. In conjunction with its annual goodwill impairment test, the Company applied a hypothetical sensitivity analysis to each of its reporting units by increasing the discount rate of these reporting units by 100 basis points and, in a separate test, reducing by 10% the fair value of those reporting units. All of the Company's reporting units passed the hypothetical tests without the fair value being reduced below carrying value, and therefore it is noted that there are currently no reporting units deemed at risk of being impaired based on the sensitivity analysis. To determine the fair value of the reporting units, the Company used a discounted cash flow model which utilizes both internal and market-based data as its valuation technique. 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. The Company's significant assumptions in the discounted cash flow model include, but are not limited to, the weighted average cost of capital, revenue growth rates (including perpetual growth rates), and operating margin percentages of the reporting unit's business. These assumptions were developed in consideration of current market conditions. The Company reconciled the aggregate fair values of its reporting units to its market capitalization, which included a reasonable control premium based on market conditions.
Indefinite-Lived Intangible Asset Impairment
Indefinite-lived intangible assets consist of tradenames and trademarks and are not subject to amortization; instead, tested for impairment annually or more frequently if events or circumstances indicate that the carrying value of indefinite-lived intangible assets may be impaired or if a decision is made to sell a business. The Company performed this annual impairment test as ofApril 1, 2021 in conjunction with the goodwill impairment annual test.
The Company did not record any indefinite-lived intangible asset impairment
during the first six months of 2021. During the comparative first six months of
2020, the Company recorded an indefinite-lived intangible asset impairment
charge of
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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. The royalty rate, which is based on the estimated
rate applied against forecasted sales, is tax-effected and discounted at present
value using a discount rate commensurate with the relative risk of achieving the
cash flow attributable to the asset. Management judgment is necessary to
determine key assumptions, including revenue growth rates, perpetual revenue
growth rates, royalty rates, and discount rates. Other assumptions are
consistent with those applied to goodwill impairment testing.
The Company also applied a hypothetical sensitivity analysis as part of the
annual impairment test of indefinite-lived intangibles. It was noted that 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 as of April 1st, 2021 , the fair value of these
assets would still exceed their book value and currently none of the
indefinite-lived intangible assets would be considered at risk based on the
sensitivity analysis.
The determination of fair value involves uncertainties around the forecasted
cash flows as it requires management to make assumptions and apply judgement to
estimate future business expectations. Those future expectations include, but
are not limited to, the current and ongoing impact of the COVID-19 pandemic and
new product development changes for these reporting units. The Company also
considers the current and projected market and economic conditions amid the
ongoing pandemic for the dental industry both in the U.S. and globally, when
determining its assumptions.
A change in any of these estimates and assumptions used in the annual test, as
well as unfavorable changes in the ongoing COVID-19 pandemic, or in the overall
markets served by these reporting units, among other factors, could have a
negative material impact to the fair value of the reporting units and the
indefinite-lived tangible assets and could result in a future impairment charge.
There can be no assurance that the Company's future goodwill and
indefinite-lived assets impairment testing will not result in a material adverse
impact to the Company's results of operations.
Refer to Part I, Item 1, Note 13, Goodwill and Intangible Assets, in the Notes
of the Unaudited Consolidated Financial Statements of this Form 10-Q for further
discussion of the Company's annual goodwill and indefinite-lived intangible
asset impairment testing.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities during the six months endedJune 30, 2021 was$263 million , an increase of$99 million as compared to$164 million during the six months endedJune 30, 2020 . This increase was driven primarily by the higher cash collections in the current period, offset by changes in working capital including a build in inventory during the current period to meet recovered demand. For the six months endedJune 30, 2021 , on a constant currency basis, the number of days of sales outstanding in accounts receivable increased by 2 day to 56 days as compared to 54 days atDecember 31, 2020 . On a constant currency basis, the number of days of sales in inventory increased by 11 days to 113 days atJune 30, 2021 as compared to 102 days atDecember 31, 2020 . The Company calculates "constant currency basis" by removing the impact of foreign currency translation, which is calculated by comparing current-period sales, accounts receivables, and inventory to prior-period sales, accounts receivable, and inventory, with both periods converted to theU.S. dollar rate at local currency foreign exchange rates for each month of the prior period. Cash used in investing activities during the first six months of 2021 included net cash paid for acquisitions of$241 million and capital expenditures of$66 million , offset by the receipt of$27 million in net cash from the sale of a non-core business. The Company expects critical capital expenditures to be in the range of approximately$150 million to$170 million for the full year 2021. Cash used in financing activities for the six months endedJune 30, 2021 was primarily related to net share repurchases of$90 million and dividend payments of$44 million . Financing inflows consisted of proceeds from the exercise of stock options of$45 million and additional borrowings of$19 million .
The Company's overall cash and cash equivalents decreased by
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During the six months ended June 30, 2021 , the Company repurchased approximately
1.5 million shares under its open market share repurchase plan for a cost of $90
million at a weighted average price of $60.62 . Including prior year repurchases,
the total amount repurchased under this authorization is $740 million leaving
approximately $260 million available to be repurchased. Additional share
repurchases, if any, will be made through open market purchases, Rule 10b5-1
plans, accelerated share repurchases, privately negotiated transactions, or
other transactions in such amounts and at such times as the Company deems
appropriate based upon prevailing market and business conditions and other
factors.
The Company's total borrowings decreased by a net $26 million during the six
months ended June 30, 2021 , driven by $45 million due to exchange rate
fluctuations on debt denominated in foreign currencies. At June 30, 2021 and
December 31, 2020 , the Company's ratio of total net debt to total capitalization
was 27.4% and 27.0%, respectively. The Company defines net debt as total debt,
including current and long-term portions, less cash and cash equivalents, and
total capitalization as the sum of net debt plus equity.
In response to the COVID-19 pandemic, the Company previously took actions during
the course of 2020 to strengthen its liquidity and financial flexibility. See
the Company's most recently filed Form 10-K for more information.
At June 30, 2021 , the Company had a borrowing capacity of $744 million available
under lines of credit, including lines available under its short-term
arrangements and revolving credit facility. Through the date of the filing of
this Form 10-Q, the Company has no outstanding borrowings under any of its
credit facilities.
These agreements are unsecured and contain 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. At June 30, 2021 , the Company was in
compliance with these covenants and expects to remain in compliance with all
covenants over the next twelve months.
At June 30, 2021 , the Company held $52 million of precious metals on consignment
from several financial institutions. The consignment agreements allow the
Company to acquire the precious metals 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 in the required precious
metal inventory levels.
The cash held by foreign subsidiaries for permanent reinvestment is generally
used to finance the subsidiaries' operating activities and future foreign
investments. The Company has the ability to repatriate additional funds to the
U.S. , which could result in an adjustment to the tax liability for foreign
withholding taxes, foreign and/or U.S. state income taxes, and the impact of
foreign currency movements. At June 30, 2021 , management believed that
sufficient liquidity was available in the United States and expects this to
remain for the next twelve months. The Company has repatriated 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.
Except as stated above, there have been no material changes to the Company's
scheduled contractual cash obligations disclosed in its Form 10-K for the year
ended December 31, 2020 .
The Company continues to review its debt portfolio and may refinance additional
debt or add debt in the near-term as interest rates remain at historically low
levels. The Company believes there is sufficient liquidity available for the
next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Part 1, Item 1, Note 1, Significant Accounting Policies, to the Unaudited Interim Consolidated Financial Statements of this Form 10-Q for a discussion of recent accounting pronouncements.
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