NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”). 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, 2018.
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, 2018, except as may be indicated below.
Revenue Recognition
At September 30, 2019, the Company had $28.8 million of deferred revenue recorded in Accrued liabilities in the Consolidated Balance Sheets. The Company expects to recognize significantly all of the deferred revenue within the next 12 months.
Accounts and Notes Receivable
The Company records a provision for doubtful accounts, which is included in Selling, general, and administrative expenses in the Consolidated Statements of Operations.
Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $29.7 million at September 30, 2019 and $24.5 million at December 31, 2018.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) with subsequent amendments (collectively, “ASC 842”). The Company adopted the new leasing standards on January 1, 2019 using the modified retrospective approach transition method. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior periods are not adjusted and continue to be reported in accordance with historic accounting under ASC 840. The Company elected the package of practical expedients permitted under the transition guidance within the standard, which eliminates the reassessment of past leases, their classification and initial direct costs for existing leases. The Company did not elect to adopt the hindsight practical expedient. The Company recognized material right-of-use assets and liabilities in the Consolidated Balance Sheets for its operating lease commitments with terms greater than 12 months. See Note 8, Leases for additional information. The impact of adopting this standard, by financial statement line item, on January 1, 2019 were as follows:
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(in millions)
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January 1, 2019
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Assets
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Operating lease right-of-use assets, net
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$
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167.1
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Property, plant, and equipment, net
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1.8
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Liabilities
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Accrued liabilities
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$
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39.4
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Notes payable and current portion of long-term debt
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0.2
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Long-term debt
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1.5
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Operating lease liabilities
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126.5
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In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging.” This newly issued accounting standard improves the financial reporting and disclosure of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this update make improvements to simplify the application of the hedge accounting guidance in current US GAAP based on the feedback received from preparers, auditors, users and other stakeholders. More specifically, this update expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instruments and the hedged items in the financial statements. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this update. The amended presentation and disclosure guidance is required only prospectively. The Company adopted this accounting standard during the three months ended March 31, 2019. The adoption of this standard did not materially impact the statements of operations, financial position, cash flows, and disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-14 "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." This newly issued accounting standard changes disclosure requirements for defined benefit plans, including removal and modification of existing disclosures. The amendments in this standard are required for fiscal years ending after December 15, 2020. Early adoption is permitted. The amendments should be applied on a retrospective basis for all periods presented. The Company is currently assessing the impact that this standard will have on its disclosures.
NOTE 2 – STOCK COMPENSATION
The following represents total stock based compensation expense for non-qualified stock options, RSUs and the tax related benefit for the three and nine months ended September 30, 2019 and 2018:
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Three Months Ended
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Nine Months Ended
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(in millions)
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2019
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2018
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2019
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2018
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Stock option expense
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$
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0.6
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$
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1.7
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$
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5.6
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$
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5.1
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RSU expense
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14.6
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3.4
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43.4
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9.2
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Total stock based compensation expense
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$
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15.2
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$
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5.1
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$
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49.0
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$
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14.3
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Related deferred income tax benefit
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$
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1.8
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$
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0.8
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$
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6.8
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$
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2.4
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For the three and nine months ended September 30, 2019, stock compensation expense was $15.2 million and $49.0 million, respectively, of which $14.7 million and $47.5 million, respectively, was recorded in Selling, general, and administrative expense, and $0.5 million and $1.5 million, respectively, was recorded in Cost of products sold in the Consolidated Statements of Operations.
For the three and nine months ended September 30, 2018, stock compensation expense was $5.1 million and $14.3 million, respectively, of which $4.4 million and $12.6 million, respectively, was recorded in Selling, general, and administrative expense, and $0.1 million and $0.5 million, respectively, was recorded in Cost of products sold in the Consolidated Statements of Operations. For the three and nine months ended September 30, 2018, the Company recorded expense of $0.6 million and $1.2 million, respectively, in Restructuring and other costs in the Consolidated Statements of Operations. For the nine months ended September 30, 2018, the Company lowered the likely payout level on certain performance-based grants.
During the nine months ended September 30, 2019, the Company granted certain performance-based RSUs issued under the 2016 Omnibus Incentive Plan to provide performance targets for the Company's three year restructuring program. The adjusted operating income margin performance target approximates the adjusted operating income margin targets previously disclosed by the Company as part of its effort to support revenue growth and margin expansion. For vesting to occur an adjusted operating income margin target must be achieved over a period of four consecutive quarters, and an adjusted operating income margin above that target threshold as measured at the end of the subsequent quarter, all calculated on a trailing four quarter basis. The performance period began on January 1, 2019 and concludes on December 31, 2022.
NOTE 3 – COMPREHENSIVE INCOME (LOSS)
The following summarizes the components of Other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2019 and 2018:
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Three Months Ended
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Nine Months Ended
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(in millions)
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2019
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2018
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2019
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2018
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Foreign currency translation losses
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$
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(147.2)
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$
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(30.1)
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$
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(164.2)
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$
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(169.5)
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Foreign currency translation gain on hedges of net investments
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19.7
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1.2
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19.1
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13.3
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These amounts are recorded in Accumulated other comprehensive loss ("AOCI"), net of any related tax adjustments. At September 30, 2019 and December 31, 2018, the cumulative tax adjustments were $143.8 million and $157.4 million, respectively, primarily related to foreign currency translation gains and losses.
The cumulative foreign currency translation adjustments included translation losses of $337.1 million and $172.9 million at September 30, 2019 and December 31, 2018, respectively, and cumulative gains on loans designated as hedges of net investments of $92.7 million and $111.8 million, respectively. These foreign currency translation gains and losses were partially offset by movements on derivative financial instruments.
Changes in AOCI, net of tax, by component for the nine months ended September 30, 2019 and 2018 were as follows:
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(in millions)
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Foreign Currency Translation Gain (Loss)
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Gain (Loss) on Cash Flow Hedges
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Gain (Loss) on Net Investment Hedges
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Pension Liability Gain (Loss)
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Total
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Balance, net of tax, at December 31, 2018
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$
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(284.7)
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$
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0.6
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$
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(111.4)
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$
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(83.2)
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$
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(478.7)
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Other comprehensive (loss) income before reclassifications and tax impact
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(134.0)
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(18.6)
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31.7
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—
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(120.9)
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Tax (expense) benefit
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(11.1)
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4.5
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(7.0)
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—
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(13.6)
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Other comprehensive (loss) income, net of tax, before reclassifications
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(145.1)
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(14.1)
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24.7
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—
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(134.5)
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Amounts reclassified from accumulated other comprehensive income, net of tax
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—
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1.4
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—
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2.7
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4.1
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Net (decrease) increase in other comprehensive loss
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|
(145.1)
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(12.7)
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24.7
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2.7
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(130.4)
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Balance, net of tax, at September 30, 2019
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$
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(429.8)
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$
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(12.1)
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$
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(86.7)
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$
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(80.5)
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$
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(609.1)
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(in millions)
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Foreign Currency Translation Gain (Loss)
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Gain (Loss) on Cash Flow Hedges
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Gain (Loss) on Net Investment Hedges
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Net Unrealized Holding Gain on Available-for-sale Securities
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Pension Liability Gain (Loss)
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Total
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Balance, net of tax, at December 31, 2017
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$
|
(104.5)
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|
$
|
(12.6)
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|
$
|
(127.6)
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|
|
$
|
44.3
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|
|
$
|
(90.6)
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$
|
(291.0)
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Other comprehensive (loss) income before reclassifications and tax impact
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|
(131.6)
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|
|
(2.2)
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|
|
28.9
|
|
|
—
|
|
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|
|
2.4
|
|
|
(102.5)
|
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Tax (expense) benefit
|
|
(24.6)
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|
|
—
|
|
|
(15.3)
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|
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—
|
|
|
|
|
(0.6)
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|
|
(40.5)
|
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Other comprehensive (loss) income, net of tax, before reclassifications
|
|
(156.2)
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|
|
(2.2)
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|
|
13.6
|
|
|
—
|
|
|
|
|
1.8
|
|
|
(143.0)
|
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Amounts reclassified from accumulated other comprehensive income (loss), net of tax
|
|
—
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|
|
8.4
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|
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—
|
|
|
(44.3)
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|
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3.4
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|
|
(32.5)
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Net (decrease) increase in other comprehensive loss
|
|
(156.2)
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|
6.2
|
|
|
13.6
|
|
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(44.3)
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5.2
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|
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(175.5)
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|
|
|
|
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|
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Balance, net of tax, at September 30, 2018
|
|
$
|
(260.7)
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|
|
$
|
(6.4)
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|
|
$
|
(114.0)
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|
|
$
|
—
|
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|
|
$
|
(85.4)
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|
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$
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(466.5)
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Reclassifications out of AOCI to the Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 were as follows:
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Details about AOCI Components
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Amounts Reclassified from AOCI
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Affected Line Item in the Consolidated Statements of Operations
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Three Months Ended
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(in millions)
|
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2019
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2018
|
|
|
|
|
|
|
|
|
|
Loss on derivative financial instruments:
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|
|
|
|
|
Interest rate swaps
|
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$
|
(0.7)
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|
$
|
(0.6)
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Interest expense
|
Foreign exchange forward contracts
|
|
0.5
|
|
|
(1.8)
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|
|
Cost of products sold
|
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|
|
|
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|
|
|
|
|
|
|
|
Net loss before tax
|
|
(0.2)
|
|
|
(2.4)
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|
|
Tax impact
|
|
—
|
|
|
0.4
|
|
|
Provision (benefit) for income taxes
|
Net loss after tax
|
|
$
|
(0.2)
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|
|
$
|
(2.0)
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Amortization of defined benefit pension and other postemployment benefit items:
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|
|
|
|
Amortization of prior service benefits
|
|
$
|
0.2
|
|
|
$
|
0.1
|
|
|
(a)
|
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|
|
|
|
|
|
Amortization of net actuarial losses
|
|
(1.4)
|
|
|
(1.5)
|
|
|
(a)
|
Net loss before tax
|
|
(1.2)
|
|
|
(1.4)
|
|
|
|
Tax impact
|
|
0.3
|
|
|
0.4
|
|
|
Provision (benefit) for income taxes
|
Net loss after tax
|
|
$
|
(0.9)
|
|
|
$
|
(1.0)
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(1.1)
|
|
|
$
|
(3.0)
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|
|
(a) These AOCI components are included in the computation of net periodic benefit cost for the three months ended September 30, 2019 and 2018.
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|
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|
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Details about AOCI Components
|
|
Amounts Reclassified from AOCI
|
|
|
|
Affected Line Item in the Consolidated Statements of Operations
|
|
|
Nine Months Ended
|
|
|
|
|
(in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Loss on derivative financial instruments:
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(1.8)
|
|
|
$
|
(1.7)
|
|
|
Interest expense
|
Foreign exchange forward contracts
|
|
0.4
|
|
|
(7.9)
|
|
|
Cost of products sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before tax
|
|
(1.4)
|
|
|
(9.6)
|
|
|
|
Tax impact
|
|
—
|
|
|
1.2
|
|
|
Provision (benefit) for income taxes
|
Net loss after tax
|
|
$
|
(1.4)
|
|
|
$
|
(8.4)
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gain on available-for-sale securities:
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
—
|
|
|
$
|
45.0
|
|
|
Other expense (income), net
|
Tax impact
|
|
—
|
|
|
(0.7)
|
|
|
Provision (benefit) for income taxes
|
Net gain after tax
|
|
$
|
—
|
|
|
$
|
44.3
|
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension and other postemployment benefit items:
|
|
|
|
|
|
|
Amortization of prior service benefits
|
|
$
|
0.4
|
|
|
$
|
0.1
|
|
|
(a)
|
|
|
|
|
|
|
|
Amortization of net actuarial losses
|
|
(4.1)
|
|
|
(4.9)
|
|
|
(a)
|
Net loss before tax
|
|
(3.7)
|
|
|
(4.8)
|
|
|
|
Tax impact
|
|
1.0
|
|
|
1.4
|
|
|
Provision (benefit) for income taxes
|
Net loss after tax
|
|
$
|
(2.7)
|
|
|
$
|
(3.4)
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(4.1)
|
|
|
$
|
32.5
|
|
|
|
(a) These AOCI components are included in the computation of net periodic benefit cost for the nine months ended September 30, 2019 and 2018.
NOTE 4 – EARNINGS PER COMMON SHARE
The calculation of earnings per common share for the three and nine months ended September 30 were as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Common Share Computation
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
(in millions, except per share amounts)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Dentsply Sirona
|
|
$
|
85.0
|
|
|
$
|
28.0
|
|
|
$
|
160.6
|
|
|
$
|
(1,012.8)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
223.1
|
|
|
222.4
|
|
|
223.5
|
|
|
224.9
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - basic
|
|
$
|
0.38
|
|
|
$
|
0.13
|
|
|
$
|
0.72
|
|
|
$
|
(4.50)
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share Computation
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
(in millions, except per share amounts)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Dentsply Sirona
|
|
$
|
85.0
|
|
|
$
|
28.0
|
|
|
$
|
160.6
|
|
|
$
|
(1,012.8)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
223.1
|
|
|
222.4
|
|
|
223.5
|
|
|
224.9
|
|
Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards
|
|
1.8
|
|
|
1.3
|
|
|
1.7
|
|
|
—
|
|
Total weighted average diluted shares outstanding
|
|
224.9
|
|
|
223.7
|
|
|
225.2
|
|
|
224.9
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - diluted
|
|
$
|
0.38
|
|
|
$
|
0.13
|
|
|
$
|
0.71
|
|
|
$
|
(4.50)
|
|
The calculation of weighted average diluted common shares outstanding excludes stock options and RSUs of 2.5 million and 3.4 million equivalent shares of common stock that were outstanding during the three and nine months ended September 30, 2019, respectively, because their effect would be antidilutive. There were 4.4 million and 5.1 million antidilutive equivalent shares of common stock outstanding during the three and nine months ended September 30, 2018, respectively.
NOTE 5 – BUSINESS COMBINATIONS
On May 1, 2018, the Company acquired all of the outstanding shares of privately held OraMetrix, Inc. for $120.0 million, with an additional payment totaling $30.0 million, subject to meeting certain earn-out provisions. During the three months ended March 31, 2019, the Company paid the earn-out provision. OraMetrix specializes in orthodontic treatment planning software, wire bending, and clear aligner manufacturing and is headquartered in Richardson, Texas.
NOTE 6 – SEGMENT INFORMATION
The Company has numerous operating businesses covering a wide range of dental consumable products, dental technology, and dental equipment products primarily serving the professional dental market, and certain healthcare products. Professional dental products represented approximately 92% of net sales for the three and nine months ended September 30, 2019 and September 30, 2018, respectively.
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 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. Net third party sales excluding precious metal content is considered a measure not calculated in accordance with US GAAP, and is therefore considered a non-US GAAP measure. 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.
During the three and nine months ended September 30, 2019, certain reclassifications have been made to prior year’s data in order to conform to current year presentation. Specifically, during the three months ended March 31, 2019; the Company moved the dental laboratory business into the Consumables segment as the products sold from this business are typically made on a recurring basis and have similar sales and operating characteristics as the other businesses in this segment. The Company moved the orthodontics business into the Technologies & Equipment segment to take advantage of the synergies related to digital planning and treatment within this segment. The Company also moved the instruments business into the Technologies & Equipment segment in order to take advantage of the synergies that stem from pairing equipment with instruments, which are often sold in conjunction with each other. The segment information reflects the revised structure for all periods shown.
Technologies & Equipment
This segment is responsible for the worldwide design, manufacture, sales, and distribution of the Company’s Dental Technology and Equipment Products and Healthcare Consumable Products. These products include dental implants, CAD/CAM systems, orthodontic dental products, imaging systems, treatment centers, instruments, as well as consumable medical device products.
Consumables
This segment is responsible for the worldwide design, manufacture, sale, and distribution of the Company’s Dental Consumable Products which include preventive, restorative, endodontic, and dental laboratory products.
The Company’s segment information for the three and nine months ended September 30 were as follows:
Third Party Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
(in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Technologies & Equipment
|
|
$
|
534.5
|
|
|
$
|
508.5
|
|
|
$
|
1,613.7
|
|
|
$
|
1,571.8
|
|
Consumables
|
|
427.6
|
|
|
419.9
|
|
|
1,304.0
|
|
|
1,354.8
|
|
Total net sales
|
|
$
|
962.1
|
|
|
$
|
928.4
|
|
|
$
|
2,917.7
|
|
|
$
|
2,926.6
|
|
Third Party Net Sales, Excluding Precious Metal Content
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
(in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Technologies & Equipment
|
|
$
|
534.5
|
|
|
$
|
508.5
|
|
|
$
|
1,613.7
|
|
|
$
|
1,571.8
|
|
Consumables
|
|
416.1
|
|
|
412.1
|
|
|
1,272.4
|
|
|
1,327.3
|
|
Total net sales, excluding precious metal content
|
|
950.6
|
|
|
920.6
|
|
|
2,886.1
|
|
|
2,899.1
|
|
Precious metal content of sales
|
|
11.5
|
|
|
7.8
|
|
|
31.6
|
|
|
27.5
|
|
Total net sales, including precious metal content
|
|
$
|
962.1
|
|
|
$
|
928.4
|
|
|
$
|
2,917.7
|
|
|
$
|
2,926.6
|
|
Segment Adjusted Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
(in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Technologies & Equipment
|
|
$
|
104.7
|
|
|
$
|
48.1
|
|
|
$
|
272.5
|
|
|
$
|
185.4
|
|
Consumables
|
|
113.8
|
|
|
102.3
|
|
|
341.3
|
|
|
360.4
|
|
Segment adjusted operating income before income taxes and interest
|
|
218.5
|
|
|
150.4
|
|
|
613.8
|
|
|
545.8
|
|
|
|
|
|
|
|
|
|
|
Reconciling items expense (income):
|
|
|
|
|
|
|
|
|
All Other (a)
|
|
54.7
|
|
|
41.4
|
|
|
173.3
|
|
|
133.6
|
|
Goodwill impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,085.8
|
|
Restructuring and other costs
|
|
5.2
|
|
|
12.1
|
|
|
68.1
|
|
|
211.2
|
|
Interest expense
|
|
6.6
|
|
|
9.7
|
|
|
23.0
|
|
|
27.9
|
|
Interest income
|
|
(0.7)
|
|
|
(0.6)
|
|
|
(2.0)
|
|
|
(1.6)
|
|
Other expense (income), net
|
|
(2.9)
|
|
|
4.7
|
|
|
(4.6)
|
|
|
(30.4)
|
|
Amortization of intangible assets
|
|
47.4
|
|
|
49.6
|
|
|
142.9
|
|
|
149.7
|
|
Depreciation resulting from the fair value step-up of property, plant, and equipment from business combinations
|
|
1.7
|
|
|
1.8
|
|
|
5.2
|
|
|
5.4
|
|
Income (loss) before income taxes
|
|
$
|
106.5
|
|
|
$
|
31.7
|
|
|
$
|
207.9
|
|
|
$
|
(1,035.8)
|
|
(a) Includes the results of unassigned Corporate headquarter costs and inter-segment eliminations.
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 September 30, 2019 and December 31, 2018 were $8.0 million and $9.0 million, respectively. The cost of remaining inventories was determined by the first-in, first-out (“FIFO”) or average cost methods. If the FIFO method had been used to determine the cost of LIFO inventories, the amounts at which net inventories are stated would be higher than reported at September 30, 2019 and December 31, 2018 by $13.9 million and $10.2 million, respectively.
Inventories, net of inventory valuation reserves, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
Finished goods
|
|
$
|
385.7
|
|
|
$
|
380.0
|
|
Work-in-process
|
|
84.0
|
|
|
89.2
|
|
Raw materials and supplies
|
|
135.4
|
|
|
129.7
|
|
Inventories, net
|
|
$
|
605.1
|
|
|
$
|
598.9
|
|
The inventory valuation allowance was $85.9 million and $92.5 million at September 30, 2019 and December 31, 2018, respectively.
NOTE 8 – LEASES
The Company leases real estate, automobiles and equipment under various operating and finance leases. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the implicit rate is not readily determinable in most of the Company’s lease agreements, the Company uses its estimated secured incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Beginning January 1, 2019, any new real estate and equipment operating lease agreements with lease and nonlease components, will be accounted for as a single lease component; auto leases will be accounted for as separate lease components.
The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of approximately 1 year to 11 years. Many of the Company's real estate and equipment leases have one or more options to renew, with terms that can extend primarily from 1 year to 3 years, which are not included in the initial lease term. The Company does not have lease agreements with residual value guarantees, sale-and-leaseback terms, or material restrictive covenants. The Company does not have any material sublease arrangements.
The net present value of finance and operating lease assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except percentages)
|
|
Location in the Consolidated Balance Sheets
|
|
September 30, 2019
|
|
|
|
|
|
Assets
|
|
|
|
|
Current assets
|
|
|
|
|
Finance leases
|
|
Property, plant, and equipment, net
|
|
$
|
1.5
|
|
Operating leases
|
|
Operating lease right-of-use assets, net
|
|
156.7
|
|
Total right-of-use assets
|
|
|
|
$
|
158.2
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current liabilities
|
|
|
|
|
Finance leases
|
|
Notes payable and current portion of long-term debt
|
|
$
|
0.2
|
|
Operating leases
|
|
Accrued liabilities
|
|
41.6
|
|
Noncurrent liabilities
|
|
|
|
|
Finance leases
|
|
Long-term debt
|
|
1.3
|
|
Operating leases
|
|
Operating lease liability
|
|
118.5
|
|
Total lease liabilities
|
|
|
|
$
|
161.6
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
|
Finance leases
|
|
|
|
3.6
|
%
|
Operating leases
|
|
|
|
2.9
|
%
|
|
|
|
|
|
Weighted-average remaining lease term in years
|
|
|
|
|
Finance leases
|
|
|
|
7.2
|
Operating leases
|
|
|
|
5.5
|
The lease cost recognized in the Consolidated Statements of Operations for the three and nine months ended September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
|
Finance lease cost
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
Operating lease cost
|
|
|
13.8
|
|
|
39.5
|
|
Short-term lease cost
|
|
|
0.3
|
|
|
0.7
|
|
Variable lease cost
|
|
|
2.2
|
|
|
6.1
|
|
|
|
|
|
|
|
Total lease cost
|
|
|
$
|
16.4
|
|
|
$
|
46.5
|
|
The contractual maturity dates of the remaining lease liabilities at September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Finance Leases
|
|
Operating Leases
|
|
Total
|
|
|
|
|
|
|
|
2019, excluding the nine months ended September 30, 2019
|
|
$
|
0.1
|
|
|
$
|
12.0
|
|
|
$
|
12.1
|
|
2020
|
|
0.3
|
|
|
43.3
|
|
|
43.6
|
|
2021
|
|
0.3
|
|
|
33.0
|
|
|
33.3
|
|
2022
|
|
0.2
|
|
|
24.3
|
|
|
24.5
|
|
2023
|
|
0.2
|
|
|
18.6
|
|
|
18.8
|
|
2024 and beyond
|
|
0.7
|
|
|
44.1
|
|
|
44.8
|
|
Total lease payments
|
|
$
|
1.8
|
|
|
$
|
175.3
|
|
|
$
|
177.1
|
|
Less imputed interest
|
|
0.3
|
|
|
15.2
|
|
|
15.5
|
|
Present value of lease liabilities
|
|
$
|
1.5
|
|
|
$
|
160.1
|
|
|
$
|
161.6
|
|
The contractual maturity dates presented under prior lease accounting guidance of the remaining rental commitments at December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Finance Leases
|
|
Operating Leases
|
|
Total
|
|
|
|
|
|
|
|
2019
|
|
$
|
4.2
|
|
|
$
|
36.6
|
|
|
$
|
40.8
|
|
2020
|
|
4.2
|
|
|
28.5
|
|
|
32.7
|
|
2021
|
|
2.5
|
|
|
22.1
|
|
|
24.6
|
|
2022
|
|
1.8
|
|
|
16.4
|
|
|
18.2
|
|
2023
|
|
1.3
|
|
|
12.7
|
|
|
14.0
|
|
2024 and beyond
|
|
1.1
|
|
|
16.9
|
|
|
18.0
|
|
Total lease payments
|
|
$
|
15.1
|
|
|
$
|
133.2
|
|
|
$
|
148.3
|
|
The supplemental cash flow information for the three and nine months ended September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
14.3
|
|
|
$
|
39.5
|
|
Financing cash flows from finance leases
|
|
—
|
|
|
0.2
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new lease liabilities:
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
17.0
|
|
|
$
|
22.8
|
|
NOTE 9 – RESTRUCTURING AND OTHER COSTS
During the three and nine months ended September 30, 2019, the Company recorded restructuring and other costs of $5.2 million and $68.1 million, respectively. During the three and nine months ended September 30, 2018, the Company recorded restructuring and other costs of $12.1 million and $211.2 million, respectively. These costs are recorded in Restructuring and other costs in the Consolidated Statements of Operations and the associated liabilities are recorded in Accrued liabilities and Other noncurrent liabilities in the Consolidated Balance Sheets.
Restructuring Costs
During the three months ended September 30, 2019, the Company had net restructuring benefit of $1.9 million related to a change in estimated severance costs. During the nine months ended September 30, 2019 the Company recorded net restructuring costs of $23.0 million. During the three and nine months ended September 30, 2018, the Company recorded net restructuring costs of $11.7 million and $22.5 million, respectively.
The Company’s restructuring accruals at September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
(in millions)
|
|
2017 and
Prior Plans
|
|
2018 Plans
|
|
2019 Plans
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
26.8
|
|
|
$
|
16.4
|
|
|
$
|
—
|
|
|
$
|
43.2
|
|
Provisions
|
|
3.3
|
|
|
1.8
|
|
|
17.1
|
|
|
22.2
|
|
Amounts applied
|
|
(18.1)
|
|
|
(9.8)
|
|
|
(6.1)
|
|
|
(34.0)
|
|
Change in estimates
|
|
(4.0)
|
|
|
(0.5)
|
|
|
(0.1)
|
|
|
(4.6)
|
|
Balance at September 30, 2019
|
|
$
|
8.0
|
|
|
$
|
7.9
|
|
|
$
|
10.9
|
|
|
$
|
26.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease/Contract Terminations
|
|
|
|
|
|
|
(in millions)
|
|
2017 and
Prior Plans
|
|
2018 Plans
|
|
2019 Plans
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.6
|
|
Provisions
|
|
0.5
|
|
|
—
|
|
|
0.1
|
|
|
0.6
|
|
Amounts applied
|
|
(0.5)
|
|
|
(0.1)
|
|
|
—
|
|
|
(0.6)
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Restructuring Costs
|
|
|
|
|
|
|
(in millions)
|
|
2017 and
Prior Plans
|
|
2018 Plans
|
|
2019 Plans
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
2.0
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
2.4
|
|
Provisions
|
|
1.3
|
|
|
1.0
|
|
|
2.3
|
|
|
4.6
|
|
Amounts applied
|
|
(1.3)
|
|
|
(1.0)
|
|
|
(1.3)
|
|
|
(3.6)
|
|
Change in estimate
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
Balance at September 30, 2019
|
|
$
|
2.2
|
|
|
$
|
0.4
|
|
|
$
|
1.0
|
|
|
$
|
3.6
|
|
The following provides the year-to-date changes in the restructuring accruals by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
December 31, 2018 (a)
|
|
Provisions
|
|
Amounts
Applied
|
|
Change in Estimates
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Technologies & Equipment
|
|
$
|
32.9
|
|
|
$
|
9.5
|
|
|
$
|
(25.7)
|
|
|
$
|
(3.7)
|
|
|
$
|
13.0
|
|
Consumables
|
|
13.6
|
|
|
16.9
|
|
|
(11.6)
|
|
|
(0.5)
|
|
|
18.4
|
|
All Other
|
|
(0.3)
|
|
|
1.0
|
|
|
(0.9)
|
|
|
(0.2)
|
|
|
(0.4)
|
|
Total
|
|
$
|
46.2
|
|
|
$
|
27.4
|
|
|
$
|
(38.2)
|
|
|
$
|
(4.4)
|
|
|
$
|
31.0
|
|
(a) Reclassifications have been made to prior year balances to conform to the new segments, see Note 6, Segment Information.
Other Costs
Other costs for the three and nine months ended September 30, 2019 were $7.1 million and $45.1 million, respectively. For the three months ended September 30, 2019, the Company recorded an impairment charge of $3.8 million of intangible assets related to discontinued product lines within the Consumables segment. For the nine months ended September 30, 2019, the Company recorded fixed asset impairments of $32.8 million and an impairments of $9.1 million related to both definite-lived and indefinite-lived intangible assets.
Other costs for the three and nine months ended September 30, 2018 were $0.4 million and $188.7 million, respectively. For the three months ended September 30, 2018, other costs were primarily related to legal settlements. For the nine months ended September 30, 2018 the Company recorded an impairment of $179.2 million related to indefinite-lived tradenames and trademarks within the Technologies & Equipment segment.
NOTE 10 – FINANCIAL INSTRUMENTS AND DERIVATIVES
Derivative Instruments and Hedging Activities
The Company’s activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates and interest rates. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company’s operating results and equity. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company has utilized interest rate swaps to convert variable rate debt to fixed rate debt.
Derivative Instruments Designated as Hedging
Cash Flow Hedges
The following summarizes the notional amounts of cash flow hedges by derivative instrument type at September 30, 2019 and the notional amounts expected to mature during the next 12 months, with a discussion of the various cash flow hedges by derivative instrument type following the table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Aggregate Notional Amount
|
|
Aggregate Notional Amount Maturing within 12 Months
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
323.3
|
|
|
$
|
240.5
|
|
Interest rate swaps
|
|
150.0
|
|
|
—
|
|
|
|
|
|
|
Total derivative instruments designated as cash flow hedges
|
|
$
|
473.3
|
|
|
$
|
240.5
|
|
Foreign Exchange Risk Management
The Company uses a program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings of the consolidated Company. The Company accounts for the designated foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the assessed effectiveness of the foreign exchange forward contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded in the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is reported on a straight line basis in Cost of products sold in the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows. The Company hedges various currencies, with the most significant activity occurring in euros, Swedish kronor, Canadian dollars, British pounds, Swiss francs and Australian dollars.
Interest Rate Risk Management
On March 11, 2019, the Company entered into a Treasury Rate Lock ("T-Lock") transaction to hedge the base interest rate variability exposure on a planned $150.0 million ten year debt issuance in 2021. The T-Lock is designated as a cash flow hedge of interest rate risk. The T-Lock will be cash settled when the debt is issued, with the fair value of the T-Lock recognized as an asset or liability with an offsetting position in AOCI. As interest is accrued on this debt in the future, a pro-rata amount from AOCI will be released and recorded in Other expense (income) in the Consolidated Statements of Operations.
The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows.
Cash Flow Hedge Activity
The following summarizes the amount of gains and losses recorded in AOCI in the Consolidated Balance Sheets, interest expense and cost of products sold in the Company's Consolidated Statements of Operations related to the cash flow hedges for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
Gain (Loss) in AOCI
|
|
Consolidated Statements of Operations Location
|
|
Effective Portion Reclassified from AOCI into Income (Expense)
|
|
Ineffective Portion Recognized in Income (Expense)
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(14.6)
|
|
|
Interest expense
|
|
$
|
(1.8)
|
|
|
$
|
—
|
|
Foreign exchange forward contracts
|
|
(4.0)
|
|
|
Cost of products sold
|
|
0.4
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Ineffective Portion:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
—
|
|
|
Cost of products sold
|
|
—
|
|
|
1.5
|
|
Total in cash flow hedging
|
|
$
|
(18.6)
|
|
|
|
|
$
|
(1.4)
|
|
|
$
|
1.5
|
|
Gains and losses recorded in AOCI in the Consolidated Balance Sheets and Cost of products sold in the Company’s Consolidated Statements of Operations related to all cash flow hedges for the three months ended September 30, 2019 and the three months and nine months ended September 30, 2018 were insignificant.
For the rollforward of derivative instruments designated as cash flow hedges in AOCI see Note 3, Comprehensive Income (Loss).
Hedges of Net Investments in Foreign Operations
The Company has significant investments in foreign subsidiaries the most significant of which are denominated in euros, Swiss francs, Japanese yen and Swedish kronor. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. The Company employs both derivative and non-derivative financial instruments to hedge a portion of this exposure. The derivative instruments consist of foreign exchange forward contracts and cross currency basis swaps. The non-derivative instruments consist of foreign currency denominated debt held at the parent company level. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in derivative and non-derivative financial instruments; which are designated as hedges of net investments and are included in AOCI. The time value component of the fair value of the derivative is reported on a straight line basis in Other expense (income), net in the Consolidated Statements of Operations in the period which it is applicable Any cash flows associated with these instruments are included in investing activities in the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, for which all cash flows are classified as financing activities in the Consolidated Statements of Cash Flows.
During the nine months ended September 30, 2019, the Company early terminated its existing 245.6 million euro cross currency basis swap and entered into a new 263.4 million euro cross currency basis swap maturing in August 2021. The cross currency basis swap is designated as a hedge of net investments. This contract effectively converts the $295.7 million bond coupon from 4.1% to 1.2%, which will result in a net reduction of interest expense through maturity in 2021. The early termination resulted in a cash receipt of $17.4 million.
The following summarizes the notional amount of hedges of net investments by derivative instrument at September 30, 2019 and the notional amounts expected to mature during the next 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Aggregate
Notional
Amount
|
|
Aggregate Notional Amount Maturing within 12 Months
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
753.0
|
|
|
$
|
251.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross currency basis swaps
|
|
287.1
|
|
|
—
|
|
Total for instruments designated as hedges of net investment
|
|
$
|
1,040.1
|
|
|
$
|
251.0
|
|
The following summarizes the amount of gains and losses recorded in AOCI in the Consolidated Balance Sheets and Other expense (income), net in the Company's Consolidated Statements of Operations related to the hedges of net investments for the three months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
Gain (Loss) in AOCI
|
|
Consolidated Statements of Operations Location
|
|
Recognized in Income (Expense)
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion:
|
|
|
|
|
|
|
Cross currency basis swaps
|
|
$
|
12.4
|
|
|
Interest Expense
|
|
$
|
2.2
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
25.5
|
|
|
Other expense (income), net
|
|
6.1
|
|
|
|
|
|
|
|
|
Total for net investment hedging
|
|
$
|
37.9
|
|
|
|
|
$
|
8.3
|
|
Gains (losses) recorded in AOCI on the Consolidated Balance Sheets and Other expense (income), net on the Company's Consolidated Statements of Operations related to the hedges of net investments for the three months ended September 30, 2018 were insignificant.
The following summarizes the amount of gains and losses recorded in AOCI in the Consolidated Balance Sheets and Other expense (income), net in the Company's Consolidated Statements of Operations related to the hedges of net investments for the nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
Gain (Loss) in AOCI
|
|
Consolidated Statements of Operations Location
|
|
Recognized in Income (Expense)
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion:
|
|
|
|
|
|
|
Cross currency basis swaps
|
|
$
|
13.1
|
|
|
Interest expense
|
|
$
|
6.3
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
31.7
|
|
|
Other expense (income), net
|
|
15.7
|
|
|
|
|
|
|
|
|
Total for net investment hedging
|
|
$
|
44.8
|
|
|
|
|
$
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
Gain (Loss) in AOCI
|
|
Consolidated Statements of Operations Location
|
|
Recognized in Income (Expense)
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion:
|
|
|
|
|
|
|
Cross currency basis swaps
|
|
$
|
11.0
|
|
|
Interest expense
|
|
$
|
5.5
|
|
|
|
|
|
Other expense (income), net
|
|
(7.1)
|
|
Foreign exchange forward contracts
|
|
17.9
|
|
|
Other expense (income), net
|
|
9.9
|
|
|
|
|
|
|
|
|
Total for net investment hedging
|
|
$
|
28.9
|
|
|
|
|
$
|
8.3
|
|
Fair Value Hedges
Foreign Exchange Risk Management
The Company has an intercompany loan denominated in Swedish kronor that is exposed to volatility in currency exchange rates. The Company employs derivative financial instruments to hedge this exposure. The Company accounts for these designated foreign exchange forward contracts as fair value hedges. The Company measures the effectiveness of fair value hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be recorded in the Consolidated Statements of Operations. Any cash flows associated with these instruments are included in investing activities in the Consolidated Statements of Cash Flows.
The following summarizes the notional amounts of fair value hedges by derivative instrument type at September 30, 2019 and the notional amounts expected to mature during the next 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Aggregate
Notional
Amount
|
|
Aggregate Notional Amount Maturing within 12 Months
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
104.7
|
|
|
$
|
36.6
|
|
Total derivative instruments as fair value hedges
|
|
$
|
104.7
|
|
|
$
|
36.6
|
|
Gains (losses) recorded in AOCI on the Consolidated Balance Sheets and Other expense (income), net on the Company's Consolidated Statements of Operations related to the fair value hedges for the three and nine months ended September 30, 2019 were insignificant.
Derivative Instruments Not Designated as Hedges
The Company enters into derivative instruments with the intent to partially mitigate the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in Other expense (income), net in the Consolidated Statements of Operations. The Company primarily uses foreign exchange forward contracts to hedge these risks. Any cash flows associated with the foreign exchange forward contracts and interest rate swaps not designated as hedges are included in cash from operating activities in the Consolidated Statements of Cash Flows.
The following summarizes the aggregate notional amounts of the Company’s economic hedges not designated as hedges by derivative instrument types at September 30, 2019 and the notional amounts expected to mature during the next 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Aggregate
Notional
Amount
|
|
Aggregate Notional Amount Maturing within 12 Months
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
210.8
|
|
|
$
|
210.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for instruments not designated as hedges
|
|
$
|
210.8
|
|
|
$
|
210.8
|
|
Gains and losses recorded in the Company’s Consolidated Statements of Operations related to the economic hedges not designated as hedging for the three and nine months ended September 30, 2019 and 2018 were insignificant.
Balance Sheet Offsetting
Substantially all of the Company’s derivative contracts are subject to netting arrangements, whereby the right to offset occurs in the event of default or termination in accordance with the terms of the arrangements with the counterparty. While these contracts contain the enforceable right to offset through netting arrangements with the same counterparty, the Company elects to present them on a gross basis in the Consolidated Balance Sheets.
Offsetting of financial liabilities under netting arrangements at September 30, 2019 were insignificant. Offsetting of financial assets under netting arrangements at September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
|
|
(in millions)
|
|
Gross Amounts Recognized
|
|
Gross Amount Offset in the Consolidated Balance Sheets
|
|
Net Amounts Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Received/Pledged
|
|
Net Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
70.5
|
|
|
$
|
—
|
|
|
$
|
70.5
|
|
|
$
|
(11.7)
|
|
|
$
|
—
|
|
|
$
|
58.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross currency basis swaps
|
|
10.9
|
|
|
—
|
|
|
10.9
|
|
|
(2.1)
|
|
|
—
|
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
81.4
|
|
|
$
|
—
|
|
|
$
|
81.4
|
|
|
$
|
(13.8)
|
|
|
$
|
—
|
|
|
$
|
67.6
|
|
Offsetting of financial liabilities under netting arrangements at December 31, 2018 were insignificant. Offsetting of financial assets under netting arrangements at December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
|
|
(in millions)
|
|
Gross Amounts Recognized
|
|
Gross Amount Offset in the Consolidated Balance Sheets
|
|
Net Amounts Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Received/Pledged
|
|
Net Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
33.7
|
|
|
$
|
—
|
|
|
$
|
33.7
|
|
|
$
|
(1.8)
|
|
|
$
|
—
|
|
|
$
|
31.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross currency basis swaps
|
|
11.6
|
|
|
—
|
|
|
11.6
|
|
|
(1.6)
|
|
|
—
|
|
|
10.0
|
|
Total Assets
|
|
$
|
45.3
|
|
|
$
|
—
|
|
|
$
|
45.3
|
|
|
$
|
(3.4)
|
|
|
$
|
—
|
|
|
$
|
41.9
|
|
NOTE 11 – FAIR VALUE MEASUREMENT
The Company estimated the fair value using Level 1 inputs and carrying value of total long-term debt, including the current portion, were $1,422.1 million and $1,415.5 million, respectively at September 30, 2019. At December 31, 2018, the Company estimated the fair value and carrying value of total long-term debt, including the current portion, were $1,577.1 million and $1,575.5 million, respectively.
The following set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at September 30, 2019 and December 31, 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
(in millions)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross currency basis swaps
|
|
$
|
10.9
|
|
|
$
|
—
|
|
|
$
|
10.9
|
|
|
$
|
—
|
|
Foreign exchange forward contracts
|
|
70.6
|
|
|
—
|
|
|
70.6
|
|
|
—
|
|
Total assets
|
|
$
|
81.5
|
|
|
$
|
—
|
|
|
$
|
81.5
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
14.5
|
|
|
$
|
—
|
|
|
$
|
14.5
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
5.2
|
|
|
—
|
|
|
5.2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Contingent considerations on acquisitions
|
|
9.1
|
|
|
—
|
|
|
—
|
|
|
9.1
|
|
Total liabilities
|
|
$
|
28.8
|
|
|
$
|
—
|
|
|
$
|
19.7
|
|
|
$
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
(in millions)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross currency basis swaps
|
|
$
|
11.6
|
|
|
$
|
—
|
|
|
$
|
11.6
|
|
|
$
|
—
|
|
Foreign exchange forward contracts
|
|
33.7
|
|
|
—
|
|
|
33.7
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
45.3
|
|
|
$
|
—
|
|
|
$
|
45.3
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
3.2
|
|
|
—
|
|
|
3.2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Contingent considerations on acquisitions
|
|
9.1
|
|
|
—
|
|
|
—
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
12.5
|
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
$
|
9.1
|
|
|
|
|
|
|
|
|
|
|
There have been no transfers between levels during the nine months ended September 30, 2019.
Derivative valuations are based on observable inputs to the valuation model including interest rates, foreign currency exchange rates and credit risks. The Company utilizes interest rate swaps and foreign exchange forward contracts that are considered cash flow hedges. In addition, the Company at times employs forward exchange contracts that are considered hedges of net investment in foreign operations. Designated derivative instruments are further discussed in Note 10, Financial Instruments and Derivatives.
NOTE 12 – INCOME TAXES
Uncertainties in Income Taxes
The Company recognizes the impact of a tax position in the interim consolidated financial statements if that position is more likely than not of being sustained on audit based on the technical merits of the position.
Final settlement and resolution of tax matters in various jurisdictions during the three months ended September 30, 2019 included approximately $4.5 million of previously recorded unrecognized tax benefits.
It is reasonably possible that certain amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date of the Company’s quarterly consolidated financial statements. Final settlement and resolution of outstanding tax matters in various jurisdictions during the next 12 months are not expected to be significant.
Other Tax Matters
During the three months ended September 30, 2019, the Company recorded tax benefit of $5.0 million related to valuation allowances.
During the three months ended September 30, 2018, the Company recorded the following discrete tax items, $0.3 million of excess tax benefit related to employee share-based compensation, $0.2 million related to enacted statutory rate changes and $0.6 million of tax expense for other discrete tax matters. In addition, the Company also recorded a $2.2 million tax expense as a discrete item related to the gain on sale of marketable securities.
The Company recorded a $50.4 million tax benefit as a discrete item related to the indefinite-lived intangible asset impairment charge, $1.1 million for the fixed asset impairment charge, and $3.3 million related to tax-deductible goodwill for the nine months ended September 30, 2018.
NOTE 13 – FINANCING ARRANGEMENTS
At September 30, 2019 and December 31, 2018, there were no outstanding borrowings under the current $700.0 million multi-currency revolving credit facility. The Company had no outstanding borrowings under the commercial paper facility at September 30, 2019 and $67.8 million outstanding under the commercial paper facility at December 31, 2018. The multi-currency revolving credit facility serves as a back-stop facility for the Company’s $500.0 million commercial paper program.
At September 30, 2019, the Company had $716.8 million of borrowing available under lines of credit, including lines available under its short-term arrangements and revolving credit facility.
The Company’s revolving credit facility, term loans and senior notes contain certain affirmative and negative covenants relating to the Company's operations and financial condition. At September 30, 2019, the Company was in compliance with all debt covenants.
On May 28, 2019, the Company pre-paid the PNC Term Loan for a total of $131.3 million using cash and short-term commercial paper.
On June 24, 2019, the Company entered into a Private Placement Note Purchase Agreement (“PPN”) to borrow 12.5 billion Japanese yen for a term of 12 years at a coupon of 0.99%. The proceeds were used to repay the 12.5 billion Japanese yen Term Loan maturing September 30, 2019.
On July 31, 2019, the Company amended its $700.0 million revolving credit facility to extend the maturity date one year to July 26, 2024.
NOTE 14 – GOODWILL AND INTANGIBLE ASSETS
The Company performed its annual impairment tests of goodwill at April 30, 2019 on 5 reporting units. As discussed in Note 6, Segment Information, effective in the first quarter of 2019, the Company realigned certain businesses between segments. As a result, the Company transferred goodwill between segments due to changes in the reporting units. Affected reporting units were tested for potential impairment of goodwill before the transfers. No goodwill impairment was identified due to the realignment.
To determine the fair value of the Company’s reporting units, the Company uses a discounted cash flow model with market-based support as its valuation technique to measure the fair value for its reporting units. The discounted cash flow model uses five- to ten- year forecasted cash flows plus a terminal value based on a multiple of earnings or by capitalizing the last period’s cash flows using a perpetual growth rate. In the development of the forecasted cash flows, the Company applies revenue, gross profit and operating expense assumptions taking into consideration historical trends as well as future expectations. These future expectations include, but are not limited to, new product development and distribution channel changes for the respective reporting units. The Company also considers the current and projected market conditions for dental and medical device industries, both in the U.S. and globally, when determining its assumptions. The total forecasted cash flows are discounted based on a range between 8.0% to 11.3%. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected cash flows. The Company’s significant estimates in the discounted cash flow models include, but are not limited to, the weighted average cost of capital, long-term rate of growth and profitability of the reporting unit’s business and working capital effects. As a result of the annual impairment tests of goodwill, no impairment was identified. A change in any of these estimates and assumptions could produce a different fair value, which could have a material impact on the Company’s results of operations.
In addition, the Company assessed the annual impairment of indefinite-lived intangible assets at April 30, 2019, which largely consists of acquired tradenames and trademarks, in conjunction with the annual impairment tests of goodwill. The performance of the Company’s annual impairment test did not result in any impairment of the Company’s indefinite-lived intangible assets.
Unfavorable developments in the market for the dental or medical device industries, an increase in discount rates, unfavorable changes in earnings multiples or a decline in future cash flow projections, among other factors, may cause a change in circumstances indicating that the carrying value of the indefinite-lived assets and goodwill within the Company’s reporting units may not be recoverable.
A reconciliation of changes in the Company’s goodwill by reportable segment were as follows (the segment information below reflects the current structure for all periods shown):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Technologies & Equipment
|
|
Consumables
|
|
Total
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
2,579.8
|
|
|
$
|
851.5
|
|
|
$
|
3,431.3
|
|
Business unit transfers
|
|
(37.1)
|
|
|
37.1
|
|
|
—
|
|
Acquisition related additions
|
|
3.8
|
|
|
—
|
|
|
3.8
|
|
Divestiture of a business
|
|
(4.1)
|
|
|
—
|
|
|
(4.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes
|
|
(59.0)
|
|
|
(16.3)
|
|
|
(75.3)
|
|
Balance at September 30, 2019
|
|
$
|
2,483.4
|
|
|
$
|
872.3
|
|
|
$
|
3,355.7
|
|
The following provides the gross carrying amount of goodwill and the cumulative goodwill impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
(in millions)
|
|
Gross Carrying Amount
|
|
Cumulative Impairment
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Cumulative Impairment
|
|
Net Carrying Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technologies & Equipment
|
|
$
|
5,220.0
|
|
|
$
|
(2,736.6)
|
|
|
$
|
2,483.4
|
|
|
$
|
5,247.9
|
|
|
$
|
(2,668.1)
|
|
|
$
|
2,579.8
|
|
Consumables
|
|
872.3
|
|
|
—
|
|
|
872.3
|
|
|
920.0
|
|
|
(68.5)
|
|
|
851.5
|
|
Total effect of cumulative impairment
|
|
$
|
6,092.3
|
|
|
$
|
(2,736.6)
|
|
|
$
|
3,355.7
|
|
|
$
|
6,167.9
|
|
|
$
|
(2,736.6)
|
|
|
$
|
3,431.3
|
|
Identifiable definite-lived and indefinite-lived intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
(in millions)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
1,318.3
|
|
|
$
|
(477.0)
|
|
|
$
|
841.3
|
|
|
$
|
1,376.4
|
|
|
$
|
(407.1)
|
|
|
$
|
969.3
|
|
Tradenames and trademarks
|
|
77.5
|
|
|
(61.9)
|
|
|
15.6
|
|
|
81.1
|
|
|
(62.5)
|
|
|
18.6
|
|
Licensing agreements
|
|
35.8
|
|
|
(27.3)
|
|
|
8.5
|
|
|
36.1
|
|
|
(26.3)
|
|
|
9.8
|
|
Customer relationships
|
|
1,047.1
|
|
|
(373.8)
|
|
|
673.3
|
|
|
1,085.3
|
|
|
(334.4)
|
|
|
750.9
|
|
Total definite-lived
|
|
$
|
2,478.7
|
|
|
$
|
(940.0)
|
|
|
$
|
1,538.7
|
|
|
$
|
2,578.9
|
|
|
$
|
(830.3)
|
|
|
$
|
1,748.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived tradenames and trademarks
|
|
$
|
629.0
|
|
|
$
|
—
|
|
|
$
|
629.0
|
|
|
$
|
671.7
|
|
|
$
|
—
|
|
|
$
|
671.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
$
|
3,107.7
|
|
|
$
|
(940.0)
|
|
|
$
|
2,167.7
|
|
|
$
|
3,250.6
|
|
|
$
|
(830.3)
|
|
|
$
|
2,420.3
|
|
During the three months ended March 31, 2019, the Company impaired $5.3 million of product tradenames and trademarks within the Technologies & Equipment segment. The impairment was the result of a change in forecasted sales related to divestitures of non-strategic product lines. During the three months ended September 30, 2019, the Company impaired $3.8 million of intangible assets related to discontinued product lines within the Consumables segment.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Litigation
The SEC’s Division of Enforcement has asked the Company to provide documents and information concerning the Company’s accounting and disclosures. The Company is cooperating with the SEC’s investigation. The Company is unable to predict the ultimate outcome of this matter, or whether it will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
On January 11, 2018, Tom Redlich, a former employee, filed a lawsuit against the Company, demanding supplemental compensation pursuant to an agreement allegedly entered into with Sirona Dental GmbH which was intended to entice Mr. Redlich to continue to work for the company for no less than eight years following the date of this agreement. The Company filed its response on April 4, 2018, denying the authenticity and enforceability of, and all liability under, the alleged agreement. Mr. Jost Fischer, upon invitation of the Company, joined the litigation against Mr. Redlich as a third party. In his submission to the court Mr. Fischer disputed the central allegations raised by Mr. Redlich in his lawsuit. The court held several hearings in the matter, and then closed the hearings in June 2019 pending the court’s decision on the capacity of Mr. Fischer to enter into a binding agreement of the type alleged by Mr. Redlich in the manner alleged. On November 5, 2019, the Company received the court’s judgment rejecting Mr. Redlich’s lawsuit and dismissing his claims. Mr. Redlich has until December 2019 to appeal the court’s decision.
On January 25, 2018, Futuredontics, Inc. received service of a purported class action lawsuit brought by Henry Olivares and other similarly situated individuals in the Superior Court of the State of California for the County of Los Angeles. In January 2019, an amended complaint was filed adding another named plaintiff, Rachael Clarke, and various claims. The plaintiff class alleges several violations of the California wage and hours laws, including, but not limited to, failure to provide rest and meal breaks and the failure to pay overtime. The parties have engaged in written and other discovery. On February 5, 2019, Plaintiff Calethia Holt (represented by the same counsel as Mr. Olivares and Ms. Clarke) filed a separate representative action in Los Angeles Superior Court alleging a single violation of the Private Attorneys’ General Act that is based on the same underlying claims as the Olivares/Clarke lawsuit. On April 5, 2019, Plaintiff Kendra Cato filed a similar action in Los Angeles Superior Court alleging a single violation of the Private Attorneys’ General Act that is based on the same underlying claims as the Olivares/Clarke lawsuit. The Company continues to vigorously defend against these matters.
On June 7, 2018, and August 9, 2018, two putative class action suits were filed, and later consolidated, in the Supreme Court of the State of New York, County of New York claiming that the Company and certain individual defendants, violated U.S. securities laws (the "State Court Class Action") by making material misrepresentations and omitting required information in the December 4, 2015 registration statement filed with the SEC in connection with the Merger. The amended complaint alleges that the defendants failed to disclose, among other things, that a distributor had purchased excessive inventory of legacy Sirona products and that three distributors of the Company's products had been engaging in anticompetitive conduct. The plaintiffs seek to recover damages on behalf of a class of former Sirona shareholders who exchanged their shares for shares of the Company's stock in the Merger. The Company has filed motions to dismiss the amended complaint, to stay discovery pending resolution of the motion to dismiss, and to stay all proceedings pending resolution of the Federal Class Action described below. On August 2, 2019, the Court denied the Company's motions to stay discovery and to stay all proceedings. On August 21, 2019, the Company filed a notice of appeal of that decision. Briefing has not yet commenced on that appeal. On September 26, 2019, the Court granted the Company's motion to dismiss all claims. The associated judgment was entered on September 30, 2019. On October 9, 2019, the plaintiffs moved by order to show cause to vacate or modify the judgment and grant plaintiffs leave to amend their complaint. The Company's opposition to that motion is due on November 8, 2019, and the reply is due November 29, 2019, with a hearing date scheduled for December 11, 2019.
On December 19, 2018, a related putative class action was filed in the U.S. District Court for the Eastern District of New York against the Company and certain individual defendants (the "Federal Class Action"). The plaintiff makes similar allegations and asserts the same claims as those asserted in the State Court Class Action. In addition, the plaintiff alleges that the defendants violated U.S. securities laws by making false and misleading statements in quarterly and annual reports and other public statements between February 20, 2014, and August 7, 2018. The plaintiff asserts claims on behalf of a putative class consisting of (a) all purchasers of the Company's stock during the period February 20, 2014 through August 7, 2018 and (b) former shareholders of Sirona who exchanged their shares of Sirona stock for shares of the Company's stock in the Merger. The Company's motion to dismiss the amended complaint was served on August 15, 2019. Briefing was completed on October 21, 2019 and the Company is awaiting the decision of the court.
On April 29, 2019, two purported stockholders of the Company filed a derivative action on behalf of the Company in the U.S. District Court for the District of Delaware against the Company's directors (the "Stockholder's Derivative Action"). Based
on allegations similar to those asserted in the class actions described above, the plaintiffs allege that the directors caused the Company to misrepresent its business prospects and thereby subjected the Company to multiple securities class actions and other litigation. On September 20, 2019, the plaintiffs in the Stockholder's Derivative Action filed an amended derivative complaint on behalf of the Company in the U.S. District Court for the District of Delaware against the Company's directors. The plaintiffs assert claims for breach of fiduciary duty, unjust enrichment, waste of corporate assets, and violations of the U.S. securities laws. The plaintiffs seek relief that includes, among other things, monetary damages and various corporate governance reforms.
The Company intends to defend itself vigorously in these actions.
As a result of an audit by the IRS for fiscal years 2012 through 2013, on February 11, 2019, the IRS issued to the Company a “30-day letter” and a Revenue Agent’s Report (“RAR”), relating to the Company’s worthless stock deduction in 2013 in the amount of $546.0 million. The RAR disallows the deduction and, after adjusting the Company’s net operating loss carryforward, asserts that the Company is entitled to a refund of $4.7 million for 2012, has no tax liability for 2013, and owes a deficiency of $17.1 million in tax for 2014, excluding interest. In accordance with ASC 740, the Company recorded the tax benefit associated with the worthless stock deduction in the Company’s 2012 financial statements. The Company has submitted a formal protest disputing on multiple grounds the proposed taxes.
The Company believes the IRS position is without merit and believes that it is more likely-than-not the Company’s position will be sustained upon further review. The Company has not accrued a liability relating to the proposed tax adjustments. However, the outcome of this dispute involves a number of uncertainties, including those inherent in the valuation of various assets at the time of the worthless stock deduction, and those relating to the application of the Internal Revenue Code and other federal income tax authorities and judicial precedent. Accordingly, there can be no assurance that the dispute with the IRS will be resolved favorably. If determined adversely, the dispute would result in a current period charge to earnings and could have a material adverse effect in the consolidated results of operations, financial position, and liquidity of the Company.
The Swedish Tax Agency has disallowed certain of the Company’s interest expense deductions for the tax years from 2013 to 2017 and is also expected to do the same for the 2018 tax year. If such interest expense deductions were disallowed, the Company would be subject to an additional $41.0 million in tax expense. The Company has appealed the disallowance to the Swedish administrative court. With respect to such deductions taken in the tax years from 2013 to 2014, the court ruled against the Company on July 5, 2017. On August 7, 2017, the Company appealed the unfavorable decision of the Swedish administrative court. On November 5, 2018, the Company delivered its final argument to the administrative court of appeal at a hearing. The European Union Commission has taken the view that Sweden’s interest deduction limitation rules are incompatible with European Union law and supporting legal opinions, and therefore the Company has not paid the tax or made provision in its financial statements for such potential expense. The Company intends to vigorously defend its position and pursue related appeals.
In addition to the matters disclosed above, the Company is, from time to time, subject to a variety of litigation and similar proceedings incidental to its business. These legal matters primarily involve claims for damages arising out of the use of the Company’s products and services and claims relating to intellectual property matters including patent infringement, employment matters, tax matters, commercial disputes, competition and sales and trading practices, personal injury, and insurance coverage. The Company may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, or representations, warranties or indemnities provided in connection with, divested businesses. Some of these lawsuits may include claims for punitive and consequential, as well as compensatory damages. Based upon the Company’s experience, current information and applicable law, it does not believe that these proceedings and claims will have a material adverse effect on its consolidated results of operations, financial position or liquidity. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to the Company’s business, financial condition, results of operations or liquidity.
While the Company maintains general, product, property, workers’ compensation, automobile, cargo, aviation, crime, fiduciary and directors’ and officers’ liability insurance up to certain limits that cover certain of these claims, this insurance may be insufficient or unavailable to cover such losses. In addition, while the Company believes it is entitled to indemnification from third parties for some of these claims, these rights may also be insufficient or unavailable to cover such losses.
Purchase Commitments
From time to time, the Company enters into long-term inventory purchase commitments with minimum purchase requirements for raw materials and finished goods to ensure the availability of products for production and distribution. These commitments may have a significant impact on levels of inventory maintained by the Company.
DENTSPLY SIRONA Inc. and Subsidiaries