10-Q 1 dentsplysirona10-q22017.htm FORM 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017
OR
 
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to _______________
 
Commission File Number 0-16211
 
DENTSPLY SIRONA Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
39-1434669
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
 
221 West Philadelphia Street, York, PA
 
17401-2991
(Address of principal executive offices)
  
(Zip Code)
 
(717) 845-7511
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   x No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
 
Yes   o No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  At
July 31, 2017, DENTSPLY SIRONA Inc. had 229,501,846 shares of Common Stock outstanding, with a par value of $.01 per share.




DENTSPLY SIRONA Inc.

TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net sales
$
992.7

 
$
1,022.0

 
$
1,893.2

 
$
1,794.6

Cost of products sold
448.5

 
495.1

 
857.0

 
848.8

 
 
 
 
 
 
 
 
Gross profit
544.2

 
526.9

 
1,036.2

 
945.8

Selling, general and administrative expenses
417.6

 
402.1

 
822.3

 
744.2

Goodwill impairment
1,092.9

 

 
1,092.9

 

Restructuring and other costs
81.7

 
3.6

 
84.8

 
7.7

 
 
 
 
 
 
 
 
Operating (loss) income
(1,048.0
)
 
121.2

 
(963.8
)
 
193.9

 
 
 
 
 
 
 
 
Other income and expenses:
 

 
 

 
 

 
 

Interest expense
9.6

 
9.3

 
18.9

 
18.5

Interest income
(0.6
)
 
(0.4
)
 
(1.3
)
 
(0.9
)
Other expense (income), net
7.8

 
(11.5
)
 
6.8

 
(14.9
)
 
 
 
 
 
 
 
 
(Loss) income before income taxes
(1,064.8
)
 
123.8

 
(988.2
)
 
191.2

(Benefit) provision for income taxes
(14.5
)
 
17.9

 
2.4

 
(40.0
)
 
 
 
 
 
 
 
 
Net (loss) income
(1,050.3
)
 
105.9

 
(990.6
)
 
231.2

 
 
 
 
 
 
 
 
Less: Net (loss) income attributable to noncontrolling interests
(0.3
)
 
0.5

 
(0.4
)
 
0.8

 
 
 
 
 
 
 
 
Net (loss) income attributable to Dentsply Sirona
$
(1,050.0
)
 
$
105.4

 
$
(990.2
)
 
$
230.4

 
 
 
 
 
 
 
 
Net (loss) income per common share attributable to Dentsply Sirona:
 

 
 

 
 

 
 

Basic
$
(4.58
)
 
$
0.45

 
$
(4.31
)
 
$
1.13

Diluted
$
(4.58
)
 
$
0.44

 
$
(4.31
)
 
$
1.11

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
229.4

 
233.7

 
229.7

 
204.2

Diluted
229.4

 
237.4

 
229.7

 
207.9

 
 
 
 
 
 
 
 
Dividends declared per common share:
$
0.0875

 
$
0.0775

 
$
0.1750

 
$
0.1550

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

3



DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net (loss) income
$
(1,050.3
)
 
$
105.9

 
$
(990.6
)
 
$
231.2

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
222.0

 
(92.8
)
 
271.7

 
94.0

Net (loss) gain on derivative financial instruments
(2.5
)
 
8.5

 
(5.8
)
 
(16.3
)
Pension liability gain
1.1

 
0.9

 
2.3

 
1.8

Total other comprehensive income (loss), net of tax
220.6

 
(83.4
)
 
268.2

 
79.5

 
 
 
 
 
 
 
 
Total comprehensive (loss) income
(829.7
)
 
22.5

 
(722.4
)
 
310.7

 
 
 
 
 
 
 
 
Less: Comprehensive income attributable
 

 
 

 
 
 
 
to noncontrolling interests
0.3

 
0.5

 
0.1

 
0.9

 
 
 
 
 
 
 
 
Comprehensive (loss) income attributable to Dentsply Sirona
$
(830.0
)
 
$
22.0

 
$
(722.5
)
 
$
309.8

 


 


 
 
 
 
See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

4



DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
(unaudited)
 
June 30, 2017
 
December 31, 2016
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
268.4

 
$
383.9

Accounts and notes receivables-trade, net
664.2

 
636.0

Inventories, net
596.8

 
517.1

Prepaid expenses and other current assets, net
236.3

 
206.5

 
 
 
 
Total Current Assets
1,765.7

 
1,743.5

 
 
 
 
Property, plant and equipment, net
841.0

 
799.8

Identifiable intangible assets, net
3,059.4

 
2,957.6

Goodwill, net
5,023.6

 
5,952.0

Other noncurrent assets, net
160.3

 
102.9

 
 
 
 
Total Assets
$
10,850.0

 
$
11,555.8

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
245.6

 
$
223.0

Accrued liabilities
455.1

 
462.7

Income taxes payable
31.4

 
60.8

Notes payable and current portion of long-term debt
21.6

 
21.1

 
 
 
 
Total Current Liabilities
753.7

 
767.6

 
 
 
 
Long-term debt
1,587.3

 
1,511.1

Deferred income taxes
802.4

 
751.7

Other noncurrent liabilities
432.4

 
399.5

 
 
 
 
Total Liabilities
3,575.8

 
3,429.9

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity:
 

 
 

Preferred stock, $1.00 par value; 0.25 million shares authorized; no shares issued

 

Common stock, $.01 par value;
2.6

 
2.6

400.0 million shares authorized at June 30, 2017 and December 31, 2016, respectively
 
 
 
264.5 million shares issued at June 30, 2017 and December 31, 2016, respectively
 
 
 
229.3 million and 230.1 million shares outstanding at June 30, 2017 and December 31, 2016, respectively
 
 
 
Capital in excess of par value
6,527.4

 
6,516.7

Retained earnings
2,915.6

 
3,948.0

Accumulated other comprehensive loss
(438.0
)
 
(705.7
)
Treasury stock, at cost, 35.2 million and 34.4 million shares at June 30, 2017 and December 31, 2016, respectively
(1,745.1
)
 
(1,647.3
)
Total Dentsply Sirona Equity
7,262.5

 
8,114.3

 
 
 
 
Noncontrolling interests
11.7

 
11.6

 
 
 
 
Total Equity
7,274.2

 
8,125.9

 
 
 
 
Total Liabilities and Equity
$
10,850.0

 
$
11,555.8

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

5



DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(990.6
)
 
$
231.2

 
 
 
 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 

 
 

Depreciation
62.1

 
55.1

Amortization of intangible assets
91.8

 
65.6

Amortization of deferred financing costs
1.3

 
2.1

Goodwill impairment
1,092.9

 

Indefinite-lived intangible asset impairment
79.8

 

Deferred income taxes
(34.2
)
 
(70.5
)
Stock based compensation expense
21.9

 
17.4

Restructuring and other costs - non-cash
1.0

 
3.3

Stock option income tax benefit

 
(8.8
)
Other non-cash income
5.5

 
(31.5
)
Loss on disposal of property, plant and equipment
0.4

 
0.5

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
1.9

 
(82.8
)
Inventories, net
(49.6
)
 
44.7

Prepaid expenses and other current assets, net
(59.3
)
 
(8.5
)
Other noncurrent assets, net
1.2

 
1.6

Accounts payable
9.5

 
13.9

Accrued liabilities
(19.2
)
 
(11.1
)
Income taxes
(15.4
)
 
(41.5
)
Other noncurrent liabilities
7.7

 
7.4

 
 
 
 
Net cash provided by operating activities
208.7

 
188.1

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(64.8
)
 
(47.8
)
Cash assumed in Merger

 
522.3

Cash and deposits paid for acquisitions of businesses and equity investments, net of cash acquired
(125.2
)
 
(0.4
)
Cash received from sale of business or product line

 
2.4

Cash received on derivatives contracts
5.3

 
10.7

Cash paid on derivatives contracts

 
(3.6
)
Expenditures for identifiable intangible assets
(5.9
)
 

Purchase of short-term investments
(2.3
)
 

Purchase of Company-owned life insurance policies
(0.9
)
 
(1.7
)
Proceeds from sale of property, plant and equipment, net
1.9

 
4.4

 
 
 
 
Net cash (used in) provided by investing activities
(191.9
)
 
486.3

 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
Increase (decrease) in short-term borrowings
1.4

 
(3.6
)
Cash paid for treasury stock
(151.5
)
 
(600.0
)
Cash dividends paid
(38.1
)
 
(28.6
)
Proceeds from long-term borrowings
2.9

 
79.9

Repayments on long-term borrowings
(6.6
)
 
(127.5
)
Proceeds from exercised stock options
45.4

 
20.4

Excess tax benefits from stock based compensation

 
8.8

 
 
 
 
Net cash used in financing activities
(146.5
)
 
(650.6
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
14.2

 
3.2

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(115.5
)
 
27.0

 
 
 
 
Cash and cash equivalents at beginning of period
383.9

 
284.6

 
 
 
 
Cash and cash equivalents at end of period
$
268.4

 
$
311.6

 
 
 
 
Schedule of non-cash investing activities:
 
 
 
   Merger financed by common stock
$

 
$
6,256.2

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

6



DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In millions)
(unaudited)

 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total Dentsply Sirona
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2015
$
1.6

 
$
237.8

 
$
3,591.0

 
$
(594.0
)
 
$
(898.4
)
 
$
2,338.0

 
$
1.4

 
$
2,339.4

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
230.4

 

 

 
230.4

 
0.8

 
231.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 
79.4

 

 
79.4

 
0.1

 
79.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issuance related to Merger
1.0

 
6,253.4

 
 
 
 
 
 
 
6,254.4

 
1.8

 
6,256.2

Exercise of stock options

 
(4.5
)
 

 

 
24.8

 
20.3

 

 
20.3

Tax benefit from stock options exercised

 
8.8

 

 

 

 
8.8

 

 
8.8

Stock based compensation expense

 
17.4

 

 

 

 
17.4

 

 
17.4

Funding of Employee Stock Ownership Plan

 
2.1

 

 

 
4.2

 
6.3

 

 
6.3

Treasury shares purchased

 

 

 

 
(600.0
)
 
(600.0
)
 

 
(600.0
)
RSU distributions

 
(16.5
)
 

 

 
9.4

 
(7.1
)
 

 
(7.1
)
RSU dividends

 
0.3

 
(0.3
)
 

 

 

 

 

Cash dividends

 

 
(36.4
)
 

 

 
(36.4
)
 

 
(36.4
)
Balance at June 30, 2016
$
2.6

 
$
6,498.8

 
$
3,784.7

 
$
(514.6
)
 
$
(1,460.0
)
 
$
8,311.5

 
$
4.1

 
$
8,315.6


 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total Dentsply Sirona
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2016
$
2.6

 
$
6,516.7

 
$
3,948.0

 
$
(705.7
)
 
$
(1,647.3
)
 
$
8,114.3

 
$
11.6

 
$
8,125.9

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net loss

 

 
(990.2
)
 

 

 
(990.2
)
 
(0.4
)
 
(990.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 
267.7

 

 
267.7

 
0.5

 
268.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options

 
6.3

 

 

 
39.1

 
45.4

 

 
45.4

Stock based compensation expense

 
21.9

 

 

 

 
21.9

 

 
21.9

Reclassification on adoption of ASU No. 2016-09 (see Note 1)

 
1.0

 
(1.5
)
 

 

 
(0.5
)
 

 
(0.5
)
Funding of Employee Stock Ownership Plan

 
3.3

 

 

 
3.3

 
6.6

 

 
6.6

Treasury shares purchased

 

 

 

 
(150.3
)
 
(150.3
)
 

 
(150.3
)
RSU distributions

 
(22.1
)
 

 

 
10.1

 
(12.0
)
 

 
(12.0
)
RSU dividends

 
0.3

 
(0.3
)
 

 

 

 

 

Cash dividends

 

 
(40.4
)
 

 

 
(40.4
)
 

 
(40.4
)
Balance at June 30, 2017
$
2.6

 
$
6,527.4

 
$
2,915.6

 
$
(438.0
)
 
$
(1,745.1
)
 
$
7,262.5

 
$
11.7

 
$
7,274.2


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

7



DENTSPLY SIRONA Inc. and Subsidiaries

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”).  The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Results for interim periods should not be considered indicative of results for a full year. These financial statements and related notes contain the accounts of DENTSPLY SIRONA Inc. and Subsidiaries (“Dentsply Sirona” or the “Company”) on a consolidated basis and should be read in conjunction with the consolidated financial statements and notes included in the Company’s most recent Form 10-K for the year ended December 31, 2016.

On February 29, 2016, DENTSPLY International Inc. merged with Sirona Dental Systems, Inc. (“Sirona”) to form DENTSPLY SIRONA Inc. (the “Merger”). See Note 5, Business Combinations, for additional information about the Merger.

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of the Company, as applied in the interim consolidated financial statements presented herein are substantially the same as presented in the Company’s Form 10-K for the year ended December 31, 2016, except as may be indicated below:

Accounts and Notes Receivable

The Company records a provision for doubtful accounts, which is included in Selling, general and administrative expenses on the Consolidated Statements of Operations.

Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $23.2 million at June 30, 2017 and $22.7 million at December 31, 2016.

Marketable Securities

The Company accounts for its direct investment in the DIO Corporation (“DIO”) using the cost-basis method of accounting. At June 30, 2017 and December 31, 2016, the fair value of the direct investment was $55.7 million and $63.4 million.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” that seeks to provide a single, comprehensive revenue recognition model for all contracts with customers that improve comparability within industries, across industries and across capital markets. Under this standard, an entity should recognize revenue for the transfer of goods or services equal to the amount it expects to be entitled to receive for those goods or services. Enhanced disclosure requirements regarding the nature, timing and uncertainty of revenue and related cash flows exist. To assist entities in applying the standard, a five step model for recognizing and measuring revenue from contracts with customers has been introduced. Entities have the option to apply the new guidance retrospectively to each prior reporting period presented (full retrospective approach) or retrospectively with a cumulative effect adjustment to retained earnings for initial application of the guidance at the date of initial adoption (modified retrospective method). On July 9, 2015, the FASB issued ASU No. 2015-14, deferring the effective date by one year to annual reporting periods beginning after December 15, 2017. Early adoption is permitted. In April 2016, the FASB issued ASU No. 2016-10, which clarifies the “identifying performance obligations and licensing implementations guidance” aspects of Topic 606. In May 2016, the FASB issued ASU No. 2016-11, which amends and or rescinds certain aspects of the Accounting Standards Codification (“ASC”) to reflect the requirements under Topic 606. Additionally, the FASB issued ASU No. 2016-12, which clarifies the criteria for assessing collectibility, permits an entity to elect an accounting policy to exclude from the transaction price amounts collected from customers for all sales taxes, and provides a practical expedient that permits an entity to reflect the aggregate effect of all contract modifications that occur before the beginning of the earliest period presented in accordance with Topic 606. In December 2016, the FASB issued ASU No. 2016-20, which clarifies several additional aspects of Topic 606 including contract modifications and performance obligations. The Company will adopt these accounting standards on January 1, 2018. The Company has completed its analysis of revenue areas that will be impacted by the adoption of this standard. The primary areas affected are the Company’s promotional and customer loyalty programs. The Company is currently gathering and assessing the impact this standard will have on its

8



financial position, results of operations, cash flows and disclosures. The Company is also in the process of implementing changes to systems, processes and internal controls to meet the standard update to reporting and disclosure requirements. The Company has not made a decision on the transition method of adoption.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This accounting standard requires that an entity measure inventory at the lower of cost and net realizable value, as opposed to the lower of cost or market value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Excluded from this update are the Last In First Out (“LIFO”) and retail inventory methods of accounting for inventory. Prospective application is required for presentation purposes. The Company adopted this accounting standard for the quarter ended March 31, 2017. The adoption of this standard did not materially impact the Company’s financial position or results of operations.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” This accounting standard seeks to simplify the accounting related to deferred income taxes. Current US GAAP requires an entity to separate deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) into current and noncurrent amounts for each tax jurisdiction based on the classification of the related asset or liability for financial reporting. DTAs and DTLs not related to assets and liabilities for financial reporting are classified based on the expected reversal date. The new standard requires DTAs or DTLs for each tax jurisdiction to be classified as noncurrent in a classified statement of financial position. The Company adopted this accounting standard for the quarter ended March 31, 2017, applying retrospective application to the December 31, 2016, Consolidated Balance Sheet presented in this Form 10-Q. At adoption, the Company reclassified certain deferred charges on the December 31, 2016 Consolidated Balance Sheet. During the quarter ended June 30, 2017, upon further review of these deferred charges, the Company determined that an error was made in the reclassification of certain deferred charges on the December 31, 2016 Consolidated Balance Sheet. As a result the Company corrected the presentation to the December 31, 2016 Consolidated Balance Sheet to increase “Prepaid expenses and other current assets” by $33.0 million and decrease “Deferred income taxes” and “Other noncurrent assets, net” by $28.2 million and $4.8 million, respectively. The Company determined that the error was not material to the Company’s financial position in the periods covered. The adoption of this standard is reflected below in the summary of the classification adjustments, including the correction for the error noted above, by financial statement line item:
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Classification
 
December 31, 2016
 
 
Deferred Tax Assets
 
As Reported
 
Adjustment
 
Revised
Consolidated Balance Sheet Item
 
and Liabilities
 
Balance
 
As Revised
 
Balance
Prepaid expenses and other current assets
 
Current DTAs
 
$
345.6

 
$
(139.1
)
 
$
206.5

Other noncurrent assets, net
 
Noncurrent DTAs
 
64.1

 
38.8

 
102.9

Income taxes payable
 
Current DTLs
 
64.2

 
(3.4
)
 
60.8

Deferred income taxes
 
Noncurrent DTLs
 
848.6

 
(96.9
)
 
751.7

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This accounting standard seeks to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information as well as to improve and achieve convergence of the FASB and International Accounting Standards Board (“IASB”) standards on the accounting for financial instruments. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. It also requires enhanced disclosures about those investments and reduces the number of items that are recognized in other comprehensive income. The adoption of this standard is required for interim and fiscal periods beginning after December 15, 2017 and should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently assessing the impact that this standard may have on its financial position, results of operations, cash flows and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” This accounting standard seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Current US GAAP does not require lessees to recognize assets and liabilities arising from operating leases on the balance sheet. This standard also provides guidance from the lessees prospective on how to determine if a lease is an operating lease or a financing lease and the differences in accounting for each. The adoption of this standard is required for interim and fiscal periods ending after December 15, 2018 and it is required to be applied using the modified retrospective approach. Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.

9




In March 2016, the FASB issued ASU No. 2016-09, “Stock Compensation.” This accounting standard seeks to simplify the accounting for all entities that issue stock-based payment awards to their employees. The primary areas of change include accounting for income taxes, cash flow statement classification of excess tax benefits and employee taxes paid when an employer withholds shares, accounting for forfeitures and tax withholding requirements. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid in the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement should be applied prospectively. The Company adopted this accounting standard for the quarter ended March 31, 2017, and as a result, the Company recorded $4.2 million of excess tax benefit related to employee share-based compensation as a component of income tax expense which impacted the current year tax provision. The Company elected to record forfeitures on stock-based compensation as the participant terminates rather than estimating forfeitures. As result of election to actual-basis forfeitures, the Company recorded a cumulative-effect adjustment of $1.0 million, net of tax, to “Capital in Excess of Par Value” and “Retained Earnings” in the Consolidated Statements of Changes in Equity related to prior year’s estimated forfeitures. In addition, the Company elected to adopt the cash flow classification of excess tax benefits on a prospective basis. The adoption of this standard did not materially impact the Company’s financial position, results of operations, cash flows, or disclosures.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows.” This accounting standard seeks to clarify the presentation of eight specific cash flow issues in order to reduce diversity in practice. The topics of clarification include debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interest in securitization transactions, and separately identifiable cash flows. The amendments in this update are effective for interim and fiscal periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company is currently assessing the impact that this standard will have on the presentation of its Consolidated Statements of Cash Flows.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes.” This accounting standard seeks to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current US GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to a third party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in US GAAP. ASU No. 2016-16 eliminates this exception. The amendments in this update are effective for interim and fiscal periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations.” This newly issued accounting standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisition or disposal of assets or businesses. The amendments in this update provide a screen to determine when a set of assets is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. The amendments in this update are effective for interim and fiscal periods beginning after December 15, 2017. Early adoption is permitted under certain conditions. The amendments in this update should be applied prospectively.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles, Goodwill and Other.” This newly issued accounting standard seeks to simplify the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test, which requires business to perform procedures to determine the fair value of its assets and liabilities at the impairment testing date. Under this amendment, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in this update are required for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The amendments in this update should be applied prospectively. As permitted by the accounting standard, the Company early adopted this accounting standard during the three months ended March 31, 2017. The adoption of this standard did not materially impact the Company’s financial position, results of operations, cash flows, or disclosures. During the three months ended June 30, 2017, the Company assessed its goodwill

10



impairment under this new standard and recorded an impairment charge of $1,092.9 million. For further information, see Note 14, Goodwill and Intangibles.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits.” This newly issued accounting standard is primarily intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments in this update require an employer to report the service cost component of net periodic benefit cost in operating income, while the interest cost, amortization, return on assets and any settlement or curtailment expense will be reported below operating income. More specifically, the service cost will be reported in the same line item as other compensation costs arising from the services rendered by the pertinent employee during the period. The amendments in this update are required for annual and interim periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued. The amendments in this update should be applied retrospectively for the presentation of the components of net periodic benefit cost and net periodic postretirement benefit cost in the income statement. The Company is currently assessing the impact that this standard will have on its results of operations and disclosures.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation.” This newly issued accounting standard provides clarity and reduces both diversity in practice as well cost and complexity when applying Topic 718 “Stock Compensation” as it relates to changes in terms or conditions of share based payments. The amendments in this update provide guidance about what changes to a share based payment should be considered substantive and therefore require modification accounting. More specifically, this update requires entities to apply modification accounting unless the modified awards fair value, vesting conditions and award classification as an equity or liability instrument all remain the same as the original award. The amendments in this update are required for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for reporting periods for which financial statements have not been issued. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The Company is currently assessing the impact that this standard will have on its results of operations and disclosures.

NOTE 2 – STOCK COMPENSATION

The following table represents total stock based compensation expense for non-qualified stock options, restricted stock units (“RSU”) and the tax related benefit for the three and six months ended June 30, 2017 and 2016.
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Stock option expense
 
$
2.5

 
$
3.4

 
$
5.2

 
$
5.5

RSU expense
 
8.0

 
8.7

 
15.7

 
11.1

Total stock based compensation expense
 
$
10.5

 
$
12.1

 
$
20.9

 
$
16.6

 
 
 
 
 
 
 
 
 
Related deferred income tax benefit
 
$
2.5

 
$
2.8

 
$
5.8

 
$
4.1


For the three and six months ended June 30, 2017, stock compensation expense of $10.5 million and $20.9 million, respectively, of which, $10.3 million and $20.4 million, respectively, was recorded in Selling, general and administrative expenses and $0.2 million and $0.5 million, respectively, was recorded in Cost of products sold on the Consolidated Statements of Operations. For the three and six months ended June 30, 2016, stock compensation expense of $12.1 million and $16.6 million, respectively, of which $11.9 million and $16.3 million, respectively, was recorded in Selling, general and administrative expense and $0.2 million and $0.3 million, respectively, was recorded in Cost of products sold on the Consolidated Statements of Operations.














11



NOTE 3 – COMPREHENSIVE INCOME

The following table summarizes the components of comprehensive income, net of tax, for the three and six months ended June 30, 2017 and 2016:

 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Foreign currency translation gains
 
$
248.2

 
$
91.4

 
$
304.8

 
$
107.2

Foreign currency translation loss on hedges of net investments
 
(24.2
)
 
(1.6
)
 
(33.6
)
 
(13.3
)

These amounts are recorded in Accumulated other comprehensive loss (“AOCI”), net of any related tax adjustments. At June 30, 2017 and December 31, 2016, the cumulative tax adjustments were $192.8 million and $166.4 million, respectively, primarily related to foreign currency translation gains and losses.

The cumulative foreign currency translation adjustments included translation losses of $107.5 million and $412.4 million at June 30, 2017 and December 31, 2016, respectively, and cumulative losses on loans designated as hedges of net investments of $111.8 million and $78.1 million, respectively.  These foreign currency translation gains and losses were partially offset by movements on derivative financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.

Changes in AOCI, net of tax, by component for the six months ended June 30, 2017 and 2016:
(in millions)
 
Foreign Currency Translation Gain (Loss)
 
Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges
 
Gain and (Loss) on Derivative Financial Instruments
 
Pension Liability Gain (Loss)
 
Total
 
 
 
 
 
 
 
 
 
 
 
Balance, net of tax, at December 31, 2016
 
$
(490.5
)
 
$
(3.2
)
 
$
(116.8
)
 
$
(95.2
)
 
$
(705.7
)
Other comprehensive income (loss) before reclassifications and tax impact
 
245.8

 
(2.7
)
 
(4.2
)
 

 
238.9

Tax (expense) benefit
 
25.4

 
0.2

 
0.8

 

 
26.4

Other comprehensive income (loss), net of tax, before reclassifications
 
271.2

 
(2.5
)
 
(3.4
)
 

 
265.3

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 

 
0.1

 

 
2.3

 
2.4

Net increase (decrease) in other comprehensive income
 
271.2

 
(2.4
)
 
(3.4
)
 
2.3

 
267.7

Balance, net of tax, at June 30, 2017
 
$
(219.3
)
 
$
(5.6
)
 
$
(120.2
)
 
$
(92.9
)
 
$
(438.0
)


12



(in millions)
 
Foreign Currency Translation Gain (Loss)
 
Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges
 
Gain and (Loss) on Derivative Financial Instruments
 
Pension Liability Gain (Loss)
 
Total
 
 
 
 
 
 
 
 
 
 
 
Balance, net of tax, at December 31, 2015
 
$
(401.2
)
 
$
(1.2
)
 
$
(110.2
)
 
$
(81.4
)
 
$
(594.0
)
Other comprehensive (loss) income before reclassifications and tax impact
 
86.0

 
(4.6
)
 
(17.2
)
 

 
64.2

Tax (expense) benefit
 
7.9

 
1.7

 
6.6

 

 
16.2

Other comprehensive (loss) income, net of tax, before reclassifications
 
93.9

 
(2.9
)
 
(10.6
)
 

 
80.4

Amounts reclassified from accumulated other comprehensive (loss) income, net of tax
 

 
(2.8
)
 

 
1.8

 
(1.0
)
Net (decrease) increase in other comprehensive income
 
93.9

 
(5.7
)
 
(10.6
)
 
1.8

 
79.4

Balance, net of tax, at June 30, 2016
 
$
(307.3
)
 
$
(6.9
)
 
$
(120.8
)
 
$
(79.6
)
 
$
(514.6
)

Reclassifications out of accumulated other comprehensive income (expense) to the Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016:
(in millions)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the Consolidated Statements of Operations
 
Three Months Ended
 
 
2017
 
2016
 
 
 
 
 
 
 
 
Gain and (loss) on derivative financial instruments:
Interest rate swaps
 
$
(0.4
)
 
$
(0.9
)
 
Interest expense
Foreign exchange forward contracts
 
0.5

 
2.1

 
Cost of products sold
Commodity contracts
 

 
0.2

 
Cost of products sold
Net (loss) gain before tax
 
0.1

 
1.4

 

Tax impact
 

 
(0.1
)
 
(Benefit) provision for income taxes
Net (loss) gain after tax
 
$
0.1

 
$
1.3

 

 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$
0.1

 
$
0.1

 
(a)
Amortization of net actuarial losses
 
$
(1.7
)
 
$
(1.4
)
 
(a)
Net loss before tax
 
(1.6
)
 
(1.3
)
 

Tax impact
 
0.5

 
0.4

 
(Benefit) provision for income taxes
Net loss after tax
 
$
(1.1
)
 
$
(0.9
)
 

 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(1.0
)
 
$
0.4

 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the three months ended June 30, 2017 and 2016 (see Note 8, Benefit Plans, for additional details).


13



(in millions)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item in the Consolidated Statements of Operations
 
Six Months Ended
 
 
2017
 
2016
 
 
 
 
 
 
 
 
Gain and (loss) on derivative financial instruments:
Interest rate swaps
 
$
(1.1
)
 
$
(2.0
)
 
Interest expense
Foreign exchange forward contracts
 
1.0

 
5.2

 
Cost of products sold
Foreign exchange forward contracts
 

 
0.1

 
SG&A expenses
Commodity contracts
 

 
(0.1
)
 
Cost of products sold
Net (loss) gain before tax
 
(0.1
)
 
3.2

 
 
Tax impact
 

 
(0.4
)
 
(Benefit) provision for income taxes
Net (loss) gain after tax
 
$
(0.1
)
 
$
2.8

 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postemployment benefit items:
Amortization of prior service benefits
 
$
0.1

 
$
0.1

 
(a)
Amortization of net actuarial losses
 
$
(3.4
)
 
$
(2.6
)
 
(a)
Net loss before tax
 
(3.3
)
 
(2.5
)
 
 
Tax impact
 
1.0

 
0.7

 
(Benefit) provision for income taxes
Net loss after tax
 
$
(2.3
)
 
$
(1.8
)
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(2.4
)
 
$
1.0

 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for the six months ended June 30, 2017 and 2016 (see Note 8, Benefit Plans, for additional details).

NOTE 4 – EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2017 and 2016:
Basic Earnings Per Common Share Computation
 
Three Months Ended
 
Six Months Ended
(in millions, except per share amounts)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net (loss) income attributable to Dentsply Sirona
 
$
(1,050.0
)
 
$
105.4

 
$
(990.2
)
 
$
230.4

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
229.4

 
233.7

 
229.7

 
204.2

 
 
 
 
 
 
 
 
 
Earnings per common share - basic
 
$
(4.58
)
 
$
0.45

 
$
(4.31
)
 
$
1.13

 
 
 
 
 
 
 
 
 
Diluted Earnings Per Common Share Computation
 
 

 
 

 
 
 
 
(in millions, except per share amounts)
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income attributable to Dentsply Sirona
 
$
(1,050.0
)
 
$
105.4

 
$
(990.2
)
 
$
230.4

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
229.4

 
233.7

 
229.7

 
204.2

Incremental weighted average shares from assumed exercise of
dilutive options from stock-based compensation awards
 

 
3.7

 

 
3.7

Total weighted average diluted shares outstanding
 
229.4

 
237.4

 
229.7

 
207.9

 
 
 
 
 
 
 
 
 
Earnings per common share - diluted
 
$
(4.58
)
 
$
0.44

 
$
(4.31
)
 
$
1.11


The calculation of weighted average diluted common shares outstanding excludes stock options and RSUs of 0.8 million and 1.2 million shares of common stock that were outstanding during the three and six months ended June 30, 2017, respectively,

14



because their effect would be antidilutive. There were 0.5 million and 0.8 million antidilutive shares of common stock outstanding during the three and six months ended June 30, 2016, respectively.

NOTE 5 – BUSINESS COMBINATIONS

On February 29, 2016, DENTSPLY merged with Sirona in an all-stock transaction and the registrant was renamed DENTSPLY SIRONA Inc. During the three months ended March 31, 2017, the Company finalized the valuation analysis of identifiable assets acquired and liabilities assumed and allocated the consideration based on the final fair values of those identifiable assets acquired and liabilities assumed related to the Merger.

The following table summarizes the final fair value of identifiable assets acquired and liabilities assumed at the date of the Merger:
(in millions)
 
 
 
 
 
Cash and cash equivalents
 
$
522.3

Trade receivables
 
143.0

Inventory
 
220.7

Prepaid expenses and other current assets
 
111.1

Property, plant and equipment
 
237.1

Identifiable intangible assets
 
2,435.0

Goodwill
 
3,758.1

Other long-term assets
 
6.9

Total assets
 
7,434.2

Accounts payable
 
68.0

Other current liabilities
 
197.9

Debt
 
57.5

Deferred income taxes
 
749.1

Other long-term liabilities
 
95.3

Total liabilities
 
1,167.8

Noncontrolling interest
 
10.2

Total identifiable net assets
 
$
6,256.2


Weighted average useful lives for intangible assets were determined based upon the useful economic lives of the intangible assets that are expected to contribute to future cash flows.  The acquired definite-lived intangible assets are being amortized on a straight-line basis over their expected useful lives. Intangible assets acquired consist of the following:
(in millions, except for useful life)
 
 
 
Weighted Average

 
 
 
Useful Life
 
 
Amount
 
(in years)
 
 
 
 
 
Customer relationships
 
$
495.0

 
14
Developed technology and patents
 
1,035.0

 
12
Trade names and trademarks
 
905.0

 
Indefinite
Total
 
$
2,435.0

 
 

The fair values assigned to intangible assets were determined through the use of the income approach, specifically the relief from royalty method was used to fair value the developed technology and patents and tradenames and trademarks and the multi-period excess earnings method was used to fair value customer relationships. Both valuation methods rely on management’s judgments, including expected future cash flows resulting from existing customer relationships, customer attrition rates, contributory effects of other assets utilized in the business, peer group cost of capital and royalty rates as well as other factors. The valuation of tangible assets was derived using a combination of the income approach, the market approach and the cost approach. Significant judgments used in valuing tangible assets include estimated reproduction or replacement cost, weighted average useful lives of assets, estimated selling prices, costs to complete and reasonable profit.

The $3,758.1 million of goodwill is attributable to the excess of the purchase price over the fair value of the net tangible and

15



intangible assets acquired and liabilities assumed. Goodwill is considered to represent the value associated with workforce and synergies the two companies anticipate realizing as a combined company.  Goodwill of $3,645.4 million has been assigned to the Company's Technologies segment and $112.7 million has been assigned to the Company’s Dental and Healthcare Consumables segment. The goodwill is not expected to be deductible for tax purposes.

Sirona contributed net sales of $498.2 million and operating loss of $1,108.8 million to the Company's Consolidated Statements of Operations during the period from January 1, 2017 to June 30, 2017, which is primarily included in the Technologies segment. The operating loss includes a goodwill impairment charge of $1,092.9 million and an indefinite-lived intangible asset impairment charge of $79.8 million. For the period from February 29, 2016 to June 30, 2016, Sirona contributed net sales of $438.3 million and operating income of $102.4 million, which is primarily included in the Technologies segment.

The following unaudited pro forma financial information reflects the consolidated results of operations of the Company had the Merger occurred on January 1, 2015.  Sirona’s financial information has been compiled in a manner consistent with the accounting policies adopted by DENTSPLY. The following unaudited pro forma financial information for the three and six months ended June 30, 2016, has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the Merger occurred on January 1, 2015, nor are they indicative of any future results.
 
 
Pro forma - unaudited
 
 
Three Months Ended
 
Six Months Ended
(in millions, except per share amount)
 
2016
 
2016
 
 
 
 
 
Net sales
 
$
1,022.0

 
$
1,962.2

Net income attributable to Dentsply Sirona
 
$
141.2

 
$
234.9

Diluted earnings per common share
 
$
0.59

 
$
0.99


These pro forma amounts were calculated after applying the Company’s accounting policies and adjusting Sirona’s results to reflect adjustments that are directly attributable to the Merger. These adjustments mainly included additional intangible asset amortization, depreciation, inventory fair value adjustments, transaction costs and taxes that would have been charged assuming the fair value adjustments had been applied from January 1, 2015, together with the consequential tax effects at the statutory rate. Pro forma results do not include any anticipated synergies or other benefits of the Merger.

During the quarter ended June 30, 2017, the Company acquired RTD, a privately-held France-based manufacturer of endodontic posts for $129.0 million which is subject to final purchase price adjustments. At June 30, 2017, the Company recorded a preliminary estimate of $81.8 million in goodwill related to the fair value of assets acquired and liabilities assumed and the consideration given for the acquisition. Intangible assets acquired consist of the following:
(in millions, except for useful life)
 
 
 
Weighted Average
 
 
 
 
Useful Life
 
 
Amount
 
(in years)
 
 
 
 
 
Customer relationships
 
$
23.6

 
15
Developed technology and patents
 
23.6

 
15
Trade names and trademarks
 
9.0

 
Indefinite
Total
 
$
56.2

 
 

The results of operation for this business have been included in the accompanying financial statements as of the effective date of the transaction. The purchase price has been assigned on the basis of the preliminary estimate of the fair values of assets acquired and liabilities assumed. This transaction was not material to the Company’s net sales and net (loss) income attributable to Dentsply Sirona for the quarter ended June 30, 2017.

NOTE 6 – SEGMENT INFORMATION

The Company has numerous operating businesses covering a wide range of dental consumable products, dental technology products and certain healthcare products primarily serving the professional dental market. Professional dental products represented approximately 92% of net sales for the three and six months ended June 30, 2017 and June 30, 2016.

The operating businesses are combined into two operating groups, which generally have overlapping geographical presence, customer bases, distribution channels, and regulatory oversight. These operating groups are considered the Company’s reportable

16



segments as the Company’s chief operating decision-maker regularly reviews financial results at the operating group level and uses this information to manage the Company’s operations. The accounting policies of the segments are consistent with those described in the Company’s most recently filed Form 10-K, in the summary of significant accounting policies.

The Company evaluates performance of the segments based on the groups’ net third party sales, excluding precious metal content, and segment adjusted operating income. The Company defines net third party sales excluding precious metal content as the Company’s net sales excluding the precious metal cost within the products sold, which is considered a measure not calculated in accordance with US GAAP, and is therefore considered a non-US GAAP measure. Management believes that the presentation of net sales, excluding precious metal content, provides useful information to investors because a portion of Dentsply Sirona’s net sales is comprised 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 Company’s exclusion of precious metal content in the measurement of net third party sales enhances comparability of performance between periods as it excludes the fluctuating market prices of the precious metal content. The Company also evaluates segment performance based on each segment’s adjusted operating income before provision for income taxes and interest. Segment adjusted operating income is defined as operating income before income taxes and before certain corporate headquarter unallocated costs, restructuring and other costs, interest expense, interest income, other expense (income), net, amortization of intangible assets and depreciation resulting from the fair value step-up of property, plant and equipment from acquisitions. The Company’s segment adjusted operating income is considered a non-US GAAP measure. A description of the products and services provided within each of the Company’s two operating segments is provided below.

The Company recently announced that it was changing from two operating segments to three operating segments as a result of realigning management responsibilities. The Company will begin reporting under the new segments for the period ending September 30, 2017.

Dental and Healthcare Consumables

This segment includes responsibility for the worldwide design, manufacture, sales and distribution of the Company’s Dental and Healthcare Consumable Products which include preventive, restorative, instruments, endodontic, and laboratory dental products as well as consumable medical device products.

Technologies

This segment is responsible for the worldwide design, manufacture, sales and distribution of the Company’s Dental Technology Products which includes dental implants, CAD/CAM systems, imaging systems, treatment centers and orthodontic products.

The following tables set forth information about the Company’s segments for the three and six months ended June 30, 2017 and 2016:

Third Party Net Sales
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Dental and Healthcare Consumables
 
$
554.1

 
$
543.8

 
$
1,065.3

 
$
1,032.7

Technologies
 
438.6

 
478.2

 
827.9

 
761.9

Total net sales
 
$
992.7

 
$
1,022.0

 
$
1,893.2

 
$
1,794.6








17



Third Party Net Sales, Excluding Precious Metal Content
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Dental and Healthcare Consumables
 
$
544.4

 
$
526.7

 
$
1,044.6

 
$
997.5

Technologies
 
438.6

 
478.0

 
827.8

 
761.7

Total net sales, excluding precious metal content
 
983.0

 
1,004.7

 
1,872.4

 
1,759.2

Precious metal content of sales
 
9.7

 
17.3

 
20.8

 
35.4

Total net sales, including precious metal content
 
$
992.7

 
$
1,022.0

 
$
1,893.2

 
$
1,794.6


Segment Adjusted Operating Income
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Dental and Healthcare Consumables
 
$
162.2

 
$
151.7

 
$
298.7

 
$
282.4

Technologies
 
65.0

 
112.1

 
119.0

 
165.9

Segment adjusted operating income before income taxes and interest
 
227.2

 
263.8

 
417.7

 
448.3

 
 
 
 
 
 
 
 
 
Reconciling items expense (income):
 
 

 
 

 
 
 
 
All Other (a)
 
52.7

 
93.8

 
109.2

 
178.9

Goodwill impairment
 
1,092.9

 

 
1,092.9

 

Restructuring and other costs
 
81.7

 
3.6

 
84.8

 
7.7

Interest expense
 
9.6

 
9.3

 
18.9

 
18.5

Interest income
 
(0.6
)
 
(0.4
)
 
(1.3
)
 
(0.9
)
Other expense (income), net
 
7.8

 
(11.5
)
 
6.8

 
(14.9
)
Amortization of intangible assets
 
46.6

 
43.8

 
91.8

 
65.6

Depreciation resulting from the fair value step-up of property,
plant and equipment from business combinations
 
1.3

 
1.4

 
2.8

 
2.2

(Loss) income before income taxes
 
$
(1,064.8
)
 
$
123.8

 
$
(988.2
)
 
$
191.2

(a) Includes the results of unassigned Corporate headquarter costs, inter-segment eliminations and one distribution warehouse not managed by named segments.

NOTE 7 – INVENTORIES

Inventories are stated at the lower of cost and net realizable value.  The cost of inventories determined by the last-in, first-out (“LIFO”) method at June 30, 2017 and December 31, 2016 were $11.6 million and $8.6 million, respectively. The cost of other inventories was determined by the first-in, first-out (“FIFO”) or average cost methods. If the FIFO method had been used to determine the cost of LIFO inventories, the amounts at which net inventories are stated would be higher than reported at June 30, 2017 and December 31, 2016 by $7.0 million and $6.8 million, respectively.

Inventories, net of inventory valuation reserves, consist of the following:
(in millions)
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
Finished goods
 
$
355.9

 
$
311.3

Work-in-process
 
91.3

 
77.1

Raw materials and supplies
 
149.6

 
128.7

Inventories, net
 
$
596.8

 
$
517.1


The inventory valuation reserves were $49.4 million and $37.5 million at June 30, 2017 and December 31, 2016, respectively.


18




NOTE 8 – BENEFIT PLANS

The following sets forth the components of net periodic benefit cost of the Company’s defined benefit plans and for the Company’s other postemployment benefit plans for the three and six months ended June 30, 2017 and 2016:

Defined Benefit Plans 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Service cost
 
$
3.9

 
$
3.9

 
$
7.7

 
$
7.7

Interest cost
 
1.8

 
2.0

 
3.5

 
3.8

Expected return on plan assets
 
(1.2
)
 
(1.2
)
 
(2.3
)
 
(2.4
)
Amortization of prior service credit
 
(0.1
)
 
(0.1
)
 
(0.1
)
 
(0.1
)
Amortization of net actuarial loss
 
1.7

 
1.3

 
3.3

 
2.5

Net periodic benefit cost
 
$
6.1

 
$
5.9

 
$
12.1

 
$
11.5


Other Postemployment Benefit Plans
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Service cost
 
$
0.1

 
$
0.1

 
$
0.2

 
$
0.2

Interest cost
 
0.1

 
0.1

 
0.2

 
0.3

Amortization of net actuarial loss
 

 
0.1

 
0.1