Quarterly Report (10-q)

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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 September 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-16211

DENTSPLY SIRONA Inc.

(Exact name of registrant as specified in its charter)


Delaware						39-1434669
(State or other jurisdiction of						(I.R.S. Employer
incorporation or organization)						Identification No.)

13320 Ballantyne Corporate Place, Charlotte, North Carolina						28277-3607
(Address of principal executive offices)						(Zip Code)

(844) 848-0137

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $.01 per share	XRAY	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer x			Accelerated filer ☐
Non-accelerated filer ☐			Smaller reporting company ☐
			Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At November 3, 2022, DENTSPLY SIRONA Inc. had 214,911,886 shares of common stock outstanding.

EXPLANATORY NOTE

As described in additional detail in the Explanatory Notes to its Amendment No. 1 to its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2021 (the "2021 Form 10-K/A") and Amendment No. 1 to its Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2021 (the "Form 10-Q/A"), DENTSPLY SIRONA Inc. (the "Company"), restated its audited consolidated financial statements for the fiscal year ended December 31, 2021 and the unaudited consolidated financial statements for the quarter ended September 30, 2021.

The impact of the restatement on the Company's consolidated financial statements included herein is further described in Note 1, Significant Accounting Policies and Restatement. The comparative financial information for the three and nine months ended September 30, 2021 provided herein should be read in conjunction with the applicable financial statements and accompanying notes of the Company, as provided in the 2021 Form 10-K/A and the Form 10-Q/A.

DENTSPLY SIRONA Inc.

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION	Page

Item 1	Financial Statements (unaudited)	5

	Consolidated Statements of Operations	5

	Consolidated Statements of Comprehensive Income (Loss)	6

	Consolidated Balance Sheets	7

	Consolidated Statements of Changes in Equity	8

	Consolidated Statements of Cash Flows	10

	Notes to Unaudited Interim Consolidated Financial Statements	11

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3	Quantitative and Qualitative Disclosures About Market Risk	59

Item 4	Controls and Procedures	59

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	62

Item 1A	Risk Factors	62

Item 2	Unregistered Sales of Securities and Use of Proceeds	62

Item 6	Exhibits	64

Signatures		65

General

Unless otherwise stated herein or the context otherwise indicates, reference throughout this Form 10-Q to “Dentsply Sirona,” or the “Company,” “we,” “us” or “our” refers to financial information and transactions of DENTSPLY SIRONA Inc., together with its subsidiaries on a consolidated basis.

Forward-Looking Statements and Associated Risks

All statements in this Form 10-Q that do not directly and exclusively relate to historical facts constitute “forward-looking statements” and include statements related to our ability to successfully remediate the material weaknesses in our internal control over financial reporting disclosed in this Form 10-Q in the manner currently anticipated. These statements represent current expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved. Such statements are subject to numerous assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those described in such statements, many of which are outside of our control, including those described in Part II, Item 1A “Risk Factors” of this Form 10-Q and in Part I, Item 1A, “Risk Factors” of Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2021 filed on November 7, 2022, and other factors which may be described in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). No assurance can be given that any expectation, belief, goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

Investors should understand it is not possible to predict or identify all such factors or risks. As such, you should not consider the risks identified in the Company’s SEC filings to be a complete discussion of all potential risks or uncertainties associated with an investment in the Company.

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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021


Net sales	$	947	$	1,040	$	2,939	$	3,128
Cost of products sold	439		471		1,329		1,385

Gross profit	508		569		1,610		1,743
Selling, general, and administrative expenses	401		395		1,187		1,174
Research and development expenses	41		39		131		122
Goodwill impairment	1,187		—		1,187		—
Intangible asset impairment and other costs	97		3		107		11

Operating (loss) income	(1,218)		132		(1,002)		436

Other income and expenses:
Interest expense, net	14		14		41		43

Other expense (income), net	9		5		20		4

(Loss) income before income taxes	(1,241)		113		(1,063)		389
(Benefit) provision for income taxes	(164)		29		(128)		97


Net (loss) income	(1,077)		84		(935)		292

Less: Net income attributable to noncontrolling interest	—		—		—		—

Net (loss) income attributable to Dentsply Sirona	$	(1,077)	$	84	$	(935)	$	292

Net (loss) income per common share attributable to Dentsply Sirona:
Basic	$	(5.01)	$	0.39	$	(4.34)	$	1.34
Diluted	$	(5.01)	$	0.38	$	(4.34)	$	1.32

Weighted average common shares outstanding:
Basic	214.9		218.6		215.6		218.6
Diluted	214.9		220.5		215.6		220.7

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

DENTSPLY SIRONA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021


Net (loss) income	$	(1,077)	$	84	$	(935)	$	292

Other comprehensive loss, net of tax:
Foreign currency translation loss	(148)		(68)		(310)		(130)
Net gain on derivative financial instruments	22		10		54		19

Pension liability gain	1		2		4		8
Total other comprehensive loss, net of tax	(125)		(56)		(252)		(103)

Total comprehensive (loss) income	(1,202)		28		(1,187)		189

Less: Comprehensive income attributable to noncontrolling interests	—		—		—		—

Total comprehensive (loss) income attributable to Dentsply Sirona	$	(1,202)	$	28	$	(1,187)	$	189

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

DENTSPLY SIRONA INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts)

(unaudited)


	September 30, 2022		December 31, 2021

Assets
Current Assets:
Cash and cash equivalents	$	418	$	339
Accounts and notes receivables-trade, net	645		750
Inventories, net	592		515
Prepaid expenses and other current assets	284		248
Total Current Assets	1,939		1,852

Property, plant, and equipment, net	714		773
Operating lease right-of-use assets, net	201		198
Identifiable intangible assets, net	1,875		2,319
Goodwill	2,584		3,976
Other noncurrent assets	209		121
Total Assets	$	7,522	$	9,239

Liabilities and Equity
Current Liabilities:
Accounts payable	$	271	$	262
Accrued liabilities	711		760
Income taxes payable	68		57
Notes payable and current portion of long-term debt	246		182
Total Current Liabilities	1,296		1,261

Long-term debt	1,737		1,913
Operating lease liabilities	154		149
Deferred income taxes	246		391
Other noncurrent liabilities	475		528
Total Liabilities	3,908		4,242

Commitments and contingencies (Note 15)

Equity:
Preferred stock, $1.00 par value; 0.25 million shares authorized; no shares issued	—		—
Common stock, $0.01 par value;	3		3
400.0 million shares authorized, and 264.5 million shares issued at September 30, 2022 and December 31, 2021
214.9 million and 217.4 million shares outstanding at September 30, 2022 and December 31, 2021
Capital in excess of par value	6,619		6,606
Retained earnings	498		1,514
Accumulated other comprehensive loss	(844)		(592)
Treasury stock, at cost, 49.6 million and 47.1 million shares at September 30, 2022 and December 31, 2021, respectively	(2,663)		(2,535)
Total Dentsply Sirona Equity	3,613		4,996

Noncontrolling interests	1		1
Total Equity	3,614		4,997
Total Liabilities and Equity	$	7,522	$	9,239

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

DENTSPLY SIRONA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in millions, except per share amounts)

(unaudited)


	Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total Dentsply Sirona Equity		Noncontrolling Interests		Total Equity

Balance at December 31, 2021	$	3	$	6,606	$	1,514	$	(592)	$	(2,535)	$	4,996	$	1	$	4,997
Net income	—		—		69		—		—		69		—		69
Other comprehensive loss	—		—		—		(37)		—		(37)		—		(37)

Exercise of stock options	—		1		—		—		4		5		—		5
Stock based compensation expense	—		11		—		—		—		11		—		11
Funding of employee stock purchase plan	—		1		—		—		1		2		—		2

Accelerated share repurchase	—		(30)		—		—		(120)		(150)		—		(150)

Restricted stock unit distributions	—		(16)		—		—		10		(6)		—		(6)

Cash dividends declared ($0.125 per share)	—		—		(27)		—		—		(27)		—		(27)
Balance at March 31, 2022	$	3	$	6,573	$	1,556	$	(629)	$	(2,640)	$	4,863	$	1	$	4,864
Net income	—		—		73		—		—		73		—		73
Other comprehensive loss	—		—		—		(90)		—		(90)		—		(90)

Exercise of stock options	—		—		—		—		2		2		—		2
Stock based compensation expense	—		16		—		—		—		16		—		16
Funding of employee stock purchase plan	—		—		—		—		1		1		—		1


Accelerated share repurchase	—		30		—		—		(30)		—		—		—
Restricted stock unit distributions	—		(3)		—		—		1		(2)		—		(2)
Restricted stock unit dividends	—		1		(1)		—		—		—		—		—
Cash dividends declared ($0.125 per share)	—		—		(26)		—		—		(26)		—		(26)
Balance at June 30, 2022	$	3	$	6,617	$	1,602	$	(719)	$	(2,666)	$	4,837	$	1	$	4,838
Net loss	—		—		(1,077)		—		—		(1,077)		—		(1,077)
Other comprehensive loss	—		—		—		(125)		—		(125)		—		(125)


Stock based compensation expense	—		3		—		—		—		3		—		3
Funding of employee stock purchase plan	—		—		—		—		3		3		—		3


Restricted stock unit distributions	—		(1)		—		—		—		(1)		—		(1)

Cash dividends ($0.125 per share)	—		—		(27)		—		—		(27)		—		(27)
Balance at September 30, 2022	$	3	$	6,619	$	498	$	(844)	$	(2,663)	$	3,613	$	1	$	3,614


	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, 2020	$	3	$	6,604	$	1,198	$	(464)	$	(2,409)	$	4,932	$	3	$	4,935
Net income	—		—		112		—		—		112		—		112
Other comprehensive loss	—		—		—		(90)		—		(90)		—		(90)

Exercise of stock options	—		11		—		—		22		33		—		33
Stock based compensation expense	—		13		—		—		—		13		—		13
Funding of employee stock purchase plan	—		1		—		—		2		3		—		3
Treasury shares purchased	—		—		—		—		(90)		(90)		—		(90)
Restricted stock unit distributions	—		(11)		—		—		7		(4)		—		(4)

Cash dividends declared ($0.10 per share)	—		—		(22)		—		—		(22)		—		(22)
Balance at March 31, 2021	$	3	$	6,618	$	1,288	$	(554)	$	(2,468)	$	4,887	$	3	$	4,890
Net income	—		—		96		—		—		96		—		96
Other comprehensive income	—		—		—		43		—		43		—		43

Exercise of stock options	—		3		—		—		9		12		—		12

Stock based compensation expense	—		19		—		—		—		19		—		19


Restricted stock unit distributions	—		(2)		—		—		1		(1)		—		(1)

Cash dividends declared ($0.11 per share)	—		—		(25)		—		—		(25)		—		(25)
Balance at June 30, 2021	$	3	$	6,638	$	1,359	$	(511)	$	(2,458)	$	5,031	$	3	$	5,034
Net income	—		—		84		—		—		84		—		84
Other comprehensive loss	—		—		—		(56)		—		(56)		—		(56)
Exercise of stock options	—		—		—		—		1		1		—		1
Stock based compensation expense	—		23		—		—		—		23		—		23
Funding of employee stock purchase plan	—		1		—		—		2		3		—		3


Restricted stock unit distributions	—		(4)		—		—		1		(3)		—		(3)
Restricted stock unit dividends	—		1		(1)		—		—		—		—		—
Cash dividends ($0.11 per share)	—		—		(23)		—		—		(23)		—		(23)
Balance at September 30, 2021	$	3	$	6,659	$	1,419	$	(567)	$	(2,454)	$	5,060	$	3	$	5,063

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

DENTSPLY SIRONA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)


	Nine Months Ended September 30,
	2022		2021


Cash flows from operating activities:
Net (loss) income	$	(935)	$	292

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	90		94
Amortization of intangible assets	159		167


Goodwill impairment	1,187		—
Indefinite-lived intangible asset impairment	94		—

Deferred income taxes	(220)		(11)
Stock based compensation expense	47		54



Other non-cash expense	38		13


Gain on sale of non-strategic businesses and product lines	—		(14)

Changes in operating assets and liabilities, net of acquisitions:
Accounts and notes receivable-trade, net	43		(89)
Inventories, net	(140)		(88)
Prepaid expenses and other current assets, net	(46)		(24)
Other noncurrent assets	(13)		(12)
Accounts payable	40		(45)
Accrued liabilities	(2)		70
Income taxes	41		6
Other noncurrent liabilities	(8)		22
Net cash provided by operating activities	375		435

Cash flows from investing activities:
Capital expenditures	(117)		(101)

Cash paid for acquisitions of businesses and equity investments, net of cash acquired	—		(248)
Cash received on sale of non-strategic businesses or product lines	—		27
Cash received on derivative contracts	10		1








Other investing activities	(2)		2
Net cash used in investing activities	(109)		(319)

Cash flows from financing activities:
Cash paid for accelerated share repurchase	(150)		—
Proceeds on short-term borrowings	64		147
Cash paid for treasury stock	—		(90)
Cash dividends paid	(78)		(68)

Proceeds from long-term borrowings, net of deferred financing costs	7		15
Repayments on long-term borrowings	(2)		(297)

Proceeds from exercised stock options	6		47




Other financing activities, net	(15)		(11)
Net cash used in financing activities	(168)		(257)
Effect of exchange rate changes on cash and cash equivalents	(19)		(16)
Net increase (decrease) in cash and cash equivalents	79		(157)
Cash and cash equivalents at beginning of period	339		438
Cash and cash equivalents at end of period	$	418	$	281

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

DENTSPLY SIRONA Inc. and Subsidiaries

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES AND RESTATEMENT

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. 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/A for the year ended December 31, 2021, as amended and filed on November 7, 2022.

Recently Concluded Investigation

As previously disclosed, the Audit and Finance Committee of the Company's Board of Directors (the "Audit and Finance Committee"), assisted by independent legal counsel and forensic accountants, commenced an internal investigation in March 2022 of allegations regarding certain financial reporting matters submitted by current and former employees of the Company. The investigation was conducted in two components, one pertaining to allegations regarding the Company’s use of incentives to sell products to certain distributors in North America in the third and fourth quarters of 2021 (the "North American Investigation") and another to analyze the increase in returns of products in China during the fourth quarter of 2021 identified by the Company (the "China Investigation"). In the North America Investigation, the Audit and Finance Committee concluded that there was no evidence of intentional wrongdoing or fraud. The Audit and Finance Committee found that certain former members of senior management, including the Company's former Chief Executive Officer and former Chief Financial Officer, violated provisions of the Company's Code of Ethics and Business Conduct. In addition, these former members of senior management did not maintain and promote an appropriate control environment focused on compliance in areas of the Company’s business, nor did they sufficiently promote, monitor or enforce adherence to the Code of Ethics and Business Conduct. The North America Investigation found that certain former members of senior management, including the former Chief Executive Officer and the former Chief Financial Officer created a culture where employees did not feel comfortable raising concerns without fear of retaliation. In addition, the North America Investigation substantiated certain allegations regarding inappropriate tone at the top by the former Chief Executive Officer and the former Chief Financial Officer. Based on the China Investigation, the Audit and Finance Committee concluded that members of the Company's local commercial team in China, as well as the head of the Company's Asia-Pacific commercial organization, committed intentional wrongdoing by failing to provide requested information to the Company's local accounting team, by obstructing the work of the accounting team and by lacking truthfulness in providing information to the Company and to the Audit and Finance Committee as part of the China Investigation. The China Investigation also determined that these actions by the certain members of the Company's local commercial team in China, as well as the former Chief Financial Officer and the head of the Company's Asia-Pacific commercial organization, violated the Company's Code of Ethics and Business Conduct.

On October 29, 2022, the Audit and Finance Committee determined that its investigation was complete.

Prior Restatement and Other Corrections of Previously Issued Consolidated Financial Statements

The interim consolidated financial statements include previously-made corrections to the three-month and nine-month periods ended September 30, 2021 which were presented in Note 1 to the interim consolidated financial statements and notes thereto for these same periods in the Company's Form 10-Q/A filed on November 7, 2022. This restatement corrected for errors related to certain customer incentive programs as well as the accounting and assumptions in the determination of estimates related to the Company’s sales returns provisions, warranty reserve provisions and variable consideration. In addition, a failure to appropriately account for certain product returns and/or exchanges identified as part of the China investigation referred to above resulted in an overstatement of Net sales in the third quarter of 2021 of approximately $4 million which should have been recorded in the fourth quarter of 2021, and was also reflected in the restated interim financial statements for the three and nine month periods ended September 30, 2021. In conjunction with making these corrections, the Company has also made certain other restatements and revisions for previously identified errors. The restatement from these collective errors resulted in a decrease to Net sales by $29 million, a decrease to Gross profit by $22 million, a decrease to Operating income of $27 million and a decrease to Diluted EPS by $0.09 per share from amounts previously reported for the three-month period ended September 30, 2021. The restatement resulted in a decrease to Net sales by $35 million, a decrease to Gross profit by $25 million, a decrease to Operating income of $32 million and a decrease to Diluted EPS by $0.13 per share from amounts previously reported for the nine-month period ended September 30, 2021.

In order to correct these errors, management previously restated the Company's consolidated financial statements as of and for the three and nine months ended September 30, 2021 which are presented as the comparative periods in the accompanying consolidated financial statements, and also restated as necessary the comparative periods presented in the related notes included herein to correct these accounting errors. For details of these restatements on the previously issued financial statements for these periods, refer to Note 1 of the interim consolidated financial statements in the Company's Form 10-Q/A filed on November 7, 2022. The Company also restated its consolidated financial statements for the fiscal year ended December 31, 2021 in its Form 10-K/A filed on November 7, 2022.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of Net sales and expense during the reporting period. Actual results could differ materially from those estimates.

Specifically, for the three months ended September 30, 2022, some of these estimates and assumptions continue to be based on an ongoing evaluation of expected future impacts from the COVID-19 pandemic. The full extent to which the COVID-19 pandemic will directly or indirectly have a negative material impact on the Company's financial condition, liquidity, or results of operations in future periods is highly uncertain and difficult to predict. More specifically, although demand for the Company’s products has largely recovered from the impact of rigorous preventive measures implemented at the outset of the pandemic, it continues to be affected by social distancing guidelines, dental practice safety protocols which reduce patient traffic, and some lingering patient reluctance to seek dental care. Also, impacts from the pandemic continue to be experienced in the form of shortages for specific materials such as electronic components, higher related transportation costs, and labor shortages. Throughout 2022, the Company has continued to experience supply chain constraints, which has impacted its ability to timely produce and deliver certain products, and has also resulted in increases in shipping rates. In the third quarter the Company has been further impacted by deteriorating macroeconomic conditions more generally, including rising global interest rates and inflationary pressures which have raised the price of inputs, impacted the discretionary spending behavior of our customers, and introduced new competitive challenges. To address these issues, the Company has taken steps to mitigate the impact of these trends, including continued emphasis on cost reduction and supply chain efficiencies. However, uncertainties remain regarding how long these impacts will continue or whether future variants of the virus may have an adverse impact in affected markets.

Accounting Pronouncements Not Yet Adopted

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which was subsequently amended by ASU No. 2021-01 "Reference Rate Reform (Topic 848): Scope" in January 2021. The new standard provides optional expedients and exceptions to contracts, hedging relationships, and other transactions that reference the London Interbank Offer Rate ("LIBOR") or another rate expected to be discontinued due to the reference rate reform. The amendments in this standard were effective upon issuance and generally can be applied to contract modifications made or evaluated through December 31, 2022. The Company does not expect this standard to have a material impact on its consolidated financial statements and related disclosures.

In October 2021, the FASB issued ASU No. 2021-08, "Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805)", which requires contract assets and liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. The current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value differs from the current approach. This standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently assessing the impact of this standard on its consolidated financial statements and related disclosures.

Seasonality

Our business is subject to seasonal fluctuations. Our sales and profits are typically the highest during the third and fourth quarters due to DS World, our annual dental conference, which historically has occurred near the end of September. As a result, a disproportionate amount of operating cash flows is generated in the fourth quarter of our fiscal year. Despite a significant portion of these sales occurring in the third and fourth quarter, there are operating expenses, principally advertising and promotional expenses, throughout the year. Because of the seasonal nature of the Company's business, the results of operations for any fiscal quarter will not necessarily be indicative of results to be expected for other quarters or a full fiscal year.

NOTE 2 - REVENUE

Revenues are derived primarily from the sale of dental equipment and dental and healthcare consumable products. Revenues are measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services.

Net sales disaggregated by product category for the three and nine months ended September 30, 2022 and 2021 were as follows:


	Three Months Ended				Nine Months Ended
(in millions)	2022		2021		2022		2021

Equipment & Instruments	$	163	$	176	$	498	$	523
CAD/CAM	116		147		351		403
Orthodontics	76		63		220		212
Implants	135		150		439		461
Healthcare	66		76		208		225
Technology & Equipment segment revenue	$	556	$	612	$	1,716	$	1,824

Endodontic & Restorative	$	282	$	313	$	887	$	953
Other Consumables	109		115		336		351
Consumables segment revenue	$	391	$	428	$	1,223	$	1,304

Total net sales	$	947	$	1,040	$	2,939	$	3,128

Net sales disaggregated by geographic region for the three and nine months ended September 30, 2022 and 2021 were as follows:


	Three Months Ended				Nine Months Ended
(in millions)	2022		2021		2022		2021

United States	$	357	$	384	$	1,023	$	1,094
Europe	358		393		1,183		1,239
Rest of World	232		263		733		795

Total net sales	$	947	$	1,040	$	2,939	$	3,128

Contract Assets and Liabilities

The Company normally does not have contract assets in the course of its business. Contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for customer aligner treatment where the performance obligation has not yet been fulfilled. The Company had $74 million and $68 million of deferred revenue recorded in Accrued liabilities in the Consolidated Balance Sheets at September 30, 2022 and December 31, 2021, respectively. The Company recognized revenue deferred as of December 31, 2021 of approximately $48 million during the current year. The Company expects to recognize significantly all of the remaining deferred revenue within the next twelve months.

Allowance for Doubtful Accounts

Accounts and notes receivables-trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $9 million at September 30, 2022 and $13 million at December 31, 2021. For the three months and nine months ended September 30, 2022 and 2021, changes to the provision for doubtful accounts including write-offs of accounts receivable that were previously reserved were insignificant. Changes to this provision are included in Selling, general, and administrative expenses in the Consolidated Statements of Operations.

NOTE 3 – STOCK COMPENSATION

The amounts of stock compensation expense recorded in the Company's Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 were as follows:


	Three Months Ended				Nine Months Ended
(in millions)	2022		2021		2022		2021

Cost of products sold	$	1	$	2	$	2	$	4
Selling, general, and administrative expense	12		19		43		48
Research and development expense	1		1		2		2
Total stock based compensation expense	$	14	$	22	$	47	$	54

Related deferred income tax benefit	$	1	$	2	$	4	$	6

NOTE 4 – COMPREHENSIVE INCOME (LOSS)

Changes in Accumulated other comprehensive income (loss) ("AOCI"), net of tax, by component for the nine months ended September 30, 2022 and 2021 were as follows:



(in millions)	Foreign Currency Translation Gain (Loss)		Gain (Loss) on Cash Flow Hedges		Gain (Loss) on Net Investment and Fair Value Hedges		Pension Liability Gain (Loss)		Total

Balance, net of tax, at December 31, 2021	$	(366)	$	(16)	$	(103)	$	(107)	$	(592)
Other comprehensive (loss) income before reclassifications and tax impact	(37)		3		9		—		(25)
Tax expense	(11)		—		(1)		—		(12)
Other comprehensive (loss) income, net of tax, before reclassifications	(48)		3		8		—		(37)
Amounts reclassified from accumulated other comprehensive income, net of tax	—		(1)		—		1		—
Net (decrease) increase in other comprehensive income	(48)		2		8		1		(37)


Balance, net of tax, at March 31, 2022	$	(414)	$	(14)	$	(95)	$	(106)	$	(629)
Other comprehensive (loss) income before reclassifications and tax impact	(86)		(3)		32		—		(57)
Tax expense	(28)		—		(8)		—		(36)
Other comprehensive (loss) income, net of tax, before reclassifications	(114)		(3)		24		—		(93)
Amounts reclassified from accumulated other comprehensive income, net of tax	—		1		—		2		3
Net (decrease) increase in other comprehensive income	(114)		(2)		24		2		(90)


Balance, net of tax, at June 30, 2022	$	(528)	$	(16)	$	(71)	$	(104)	$	(719)
Other comprehensive (loss) income before reclassifications and tax impact	(120)		3		28		—		(89)
Tax expense	(28)		(1)		(7)		—		(36)
Other comprehensive (loss) benefit, net of tax, before reclassifications	(148)		2		21		—		(125)
Amounts reclassified from accumulated other comprehensive income, net of tax	—		(1)		—		1		—
Net (decrease) increase in other comprehensive income	(148)		1		21		1		(125)


Balance, net of tax, at September 30, 2022	$	(676)	$	(15)	$	(50)	$	(103)	$	(844)


(in millions)	Foreign Currency Translation Gain (Loss)		Gain (Loss) on Cash Flow Hedges		Gain (Loss) on Net Investment and Fair Value Hedges		Pension Liability Gain (Loss)		Total

Balance, net of tax, at December 31, 2020	$	(187)	$	(25)	$	(119)	$	(133)	$	(464)
Other comprehensive (loss) income before reclassifications and tax impact	(74)		(6)		9		3		(68)
Tax (expense) benefit	(25)		2		(2)		(1)		(26)
Other comprehensive (loss) income, net of tax, before reclassifications	(99)		(4)		7		2		(94)
Amounts reclassified from accumulated other comprehensive income, net of tax	—		2		—		2		4
Net (decrease) increase in other comprehensive income	(99)		(2)		7		4		(90)
Balance, net of tax, at March 31, 2021	$	(286)	$	(27)	$	(112)	$	(129)	$	(554)
Other comprehensive income before reclassifications and tax impact	31		3		1		—		35
Tax benefit (expense)	6		(2)		(1)		—		3
Other comprehensive income, net of tax, before reclassifications	37		1		—		—		38
Amounts reclassified from accumulated other comprehensive income, net of tax	—		3		—		2		5
Net increase in other comprehensive income	37		4		—		2		43

Balance, net of tax, at June 30, 2021	$	(249)	$	(23)	$	(112)	$	(127)	$	(511)
Other comprehensive (loss) income before reclassifications and tax impact	(59)		6		3		—		(50)
Tax expense	(9)		(1)		(1)		—		(11)
Other comprehensive (loss) income, net of tax, before reclassifications	(68)		5		2		—		(61)
Amounts reclassified from accumulated other comprehensive income, net of tax	—		3		—		2		5
Net (decrease) increase in other comprehensive income	(68)		8		2		2		(56)
Balance, net of tax, at September 30, 2020	$	(317)	$	(15)	$	(110)	$	(125)	$	(567)

At September 30, 2022 and December 31, 2021, the cumulative tax adjustments were $84 million and $168 million, respectively, primarily related to foreign currency translation adjustments.

The cumulative foreign currency translation adjustments included translation losses of $639 million and $250 million at September 30, 2022 and December 31, 2021, respectively, and cumulative losses on loans designated as hedges of net investments of $37 million and $116 million, respectively. These foreign currency translation losses were partially offset by movements on derivative financial instruments.

Reclassifications out of AOCI to the Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 were not significant.

NOTE 5 – EARNINGS PER COMMON SHARE

The computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2022 and 2021 were as follows:


Basic Earnings Per Common Share	Three Months Ended				Nine Months Ended
(in millions, except per share amounts)	2022		2021		2022		2021

Net (loss) income attributable to Dentsply Sirona	$	(1,077)	$	84	$	(935)	$	292

Weighted average common shares outstanding	214.9		218.6		215.6		218.6

(Loss) earnings per common share - basic	$	(5.01)	$	0.39	$	(4.34)	$	1.34

Diluted Earnings Per Common Share	Three Months Ended				Nine Months Ended
(in millions, except per share amounts)	2022		2021		2022		2021

Net (loss) income attributable to Dentsply Sirona	$	(1,077)	$	84	$	(935)	$	292

Weighted average common shares outstanding	214.9		218.6		215.6		218.6
Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards	—		1.9		—		2.1
Total weighted average diluted shares outstanding	214.9		220.5		215.6		220.7

(Loss) earnings per common share - diluted	$	(5.01)	$	0.38	$	(4.34)	$	1.32

The calculation of weighted average diluted common shares outstanding excluded 0.3 million and 0.5 million of potentially diluted common shares because the Company reported a net loss for the three months ended and nine months ended September 30, 2022, respectively.

For the three and nine months ended September 30, 2022, the Company excluded from the computation of weighted average diluted shares outstanding 3.6 million of equivalent shares of common stock from stock options and RSUs because their effect would be antidilutive. For the three and nine months ended September 30, 2021, the Company excluded 0.9 million and 0.9 million of equivalent shares of common stock outstanding from stock options and RSUs, respectively, because their effect would be antidilutive.

The Board of Directors has approved a share repurchase program, of up to $1.0 billion. Share repurchases may be made through open market purchases, Rule 10b5-1 plans, accelerated share repurchases, privately negotiated transactions or other transactions in such amounts and at such times as the Company deems appropriate based upon prevailing market and business conditions and other factors. At September 30, 2022, the Company had authorization to repurchase $740 million in shares of common stock remaining under the share repurchase program.

On March 8, 2022, the Company entered into an Accelerated Share Repurchase Agreement ("ASR Agreement") with a financial institution to purchase the Company's common stock based on the volume-weighted average price of the Company's common stock during the term of the agreement, less a discount.


(in millions, except per share amounts)			Initial Delivery					Final Settlement
Agreement Date	Amount Paid		Shares Received	Price per share		Value of Shares as a % of Contract Value		Settlement Date	Total Shares Received	Average Price per Share
March 8, 2022	$	150	2.4	$	50.44	80	%	April 19, 2022	3.1	$	48.22

The ASR agreement was accounted for as an initial delivery of common shares in a treasury stock transaction on March 9, 2022 of $120 million and a forward contract indexed to the Company's common stock for an amount of common shares to be determined on the final settlement date. The forward contract met all applicable criteria for equity classification and was not accounted for as a derivative instrument. Therefore, the forward contract was recorded as Capital in excess of par value and upon final settlement was recorded as Treasury Stock in the Consolidated Balance Sheets at September 30, 2022. The initial delivery and final settlement of common stock reduced the weighted average common shares outstanding for both basic and diluted EPS. The forward contract did not impact the weighted average common shares outstanding for diluted EPS.

NOTE 6 – BUSINESS COMBINATIONS

Acquisitions

2021 Transactions

On July 1, 2021, the effective date of the transaction, the Company paid $7 million to acquire the remaining interest in the dental business of a partially owned affiliate based in Switzerland that primarily develops highly specialized software with a focus on CAD/CAM systems. The acquisition is expected to further accelerate the development of the Company's specialized software related to CAD/CAM systems.

The fair values of the assets acquired and liabilities assumed in connection with the acquisition of the affiliate included $4 million of Other current assets, $3 million of Intangible assets, $2 million of Current Liabilities and $1 million of Other long-term liabilities. The cash paid and the $4 million fair value of the previously-held interest in the entity prior to the acquisition has been allocated on the basis of the estimates of fair values of assets acquired and liabilities assumed, resulting in the recording of $7 million in goodwill. This goodwill is considered to represent the value associated with the acquired workforce and synergies the Company anticipates realizing from integrating the acquired assets into the Company's existing business operations, and is not deductible for tax purposes. Measurement period adjustments made to the fair values of the assets acquired and liabilities assumed during the year ended December 31, 2021 and the nine months ended September 30, 2022 were immaterial to the financial statements, resulting in an increase to goodwill of $2 million.

Identifiable intangible assets acquired were as follows:

Weighted Average

Useful Life

(in millions, except for useful life)

Amount

(in years)

In-process R&D

Indefinite

On June 1, 2021, the effective date of the transaction, the Company paid $132 million to acquire substantially all of the assets of Propel Orthodontics LLC and certain of its affiliated entities, a privately-held business based in California ("Propel Orthodontics"). The acquired business manufactures and sells orthodontic devices and provides in-office and at-home orthodontic accessory devices to orthodontists and their patients primarily within the clear aligner market. The acquisition is expected to further accelerate the growth and profitability of the Company's combined clear aligners business.

The fair values of the assets acquired and liabilities assumed in connection with the Propel Orthodontics acquisition were as follows:


(in millions)


Other current assets	$	4
Intangible assets	66
Current liabilities	(1)
Net assets acquired	69
Goodwill	63
Purchase consideration	$	132

The purchase price has been allocated on the basis of the estimates of fair values of assets acquired and liabilities assumed, resulting in the recording of $63 million in goodwill, which is considered to represent the value associated with the acquired workforce and synergies the Company anticipates realizing from integrating the acquired assets into the Company's existing business operations. The goodwill is expected to be deductible for tax purposes. Measurement period adjustments made to the fair values of the assets acquired and liabilities assumed during the year ended December 31, 2021 and the nine months ended September 30, 2022 were immaterial to the financial statements, resulting in a reduction to goodwill of $2 million.

Identifiable intangible assets acquired were as follows:

Weighted Average

Useful Life

(in millions, except for useful life)

Amount

(in years)

Developed technology

On January 21, 2021, the effective date of the transaction, the Company paid $94 million with the potential for additional earn-out provision payments of up to $10 million, to acquire 100% of the outstanding shares of Datum Dental, Ltd. ("Datum"), a privately-held producer and distributor of specialized regenerative dental material based in Israel. The fair value of the earn-out provision has been valued at $9 million as of the transaction date, resulting in a total purchase price of $103 million.

The fair values of the assets acquired and liabilities assumed in connection with the Datum acquisition were as follows:


(in millions)

Cash and cash equivalents	$	2
Other current assets	2
Intangible assets	76
Current liabilities	(2)
Other long-term assets (liabilities), net	(14)
Net assets acquired	64
Goodwill	39
Purchase consideration	$	103

The purchase price has been allocated on the basis of the estimates of fair values of assets acquired and liabilities assumed, resulting in the recording of $39 million in goodwill, which is considered to represent the value associated with the acquired workforce and synergies the Company anticipates realizing from integrating the acquired assets into the Company's existing business operations. The goodwill is not deductible for tax purposes. Measurement period adjustments made to the fair values of the assets acquired and liabilities assumed during the year ended December 31, 2021 and the nine months ended September 30, 2022 were immaterial to the financial statements, resulting in an increase to goodwill of $6 million.

Identifiable intangible assets acquired were as follows:


			Weighted Average
			Useful Life
(in millions, except for useful life)	Amount		(in years)

Developed technology	$	66	15
In-process R&D	10		Indefinite
Total	$	76

In the nine months ended September 30, 2022, certain earn-out provisions were achieved and the Company made cash payments of $5 million to the former shareholders of Datum with no impact to the Company's Statement of Operations for the period. As of September 30, 2022, the remaining contingent consideration obligation was $4 million.

The results of operations for each of the acquired businesses above upon the effective date of each transaction have been included in the accompanying financial statements. These results, as well as the historical results for the above acquired businesses for the periods ended September 30, 2022 and September 30, 2021, are not material in relation to the Company’s net sales and earnings for those periods. The Company therefore does not believe these acquisitions represent material transactions either individually or in the aggregate requiring the supplemental pro-forma information prescribed by ASC 805 and accordingly, this information is not presented.

Investment in Affiliates

On June 4, 2021, the effective date of the transaction, the Company paid $16 million to acquire a minority interest in a U.K.-based, privately-held provider of healthcare consumables. The investment is recorded as an equity method investment within Other noncurrent assets in the Consolidated Balance Sheets.

Divestitures

On April 1, 2021, the Company disposed of certain orthodontics businesses based in Japan previously included as part of the Technologies & Equipment segment in exchange for a cash receipt of $8 million. The divestiture resulted in an immaterial loss recorded in Other expense (income), net in the Consolidated Statements of Operations for the nine months ended September 30, 2021.

On February 1, 2021, the Company disposed of an investment casting business previously included as part of the Consumables segment in exchange for a cash receipt of $19 million. The divestiture resulted in a pre-tax gain of $13 million recorded in Other expense (income), net in the Consolidated Statements of Operations for the nine months ended September 30, 2021.

NOTE 7 – SEGMENT INFORMATION

The Company’s two operating segments are organized primarily by product and generally have overlapping geographical presence, customer bases, distribution channels, and regulatory oversight. These operating segments are also the Company’s reportable segments in accordance with how the Company’s chief operating decision-maker regularly reviews financial results and uses this information to evaluate the Company’s performance and allocate resources.

The Company evaluates performance of the segments based on net sales and adjusted operating income. Segment adjusted operating income is defined as operating income before income taxes and before certain corporate headquarters unallocated costs, goodwill impairments, intangible asset impairments and other costs, interest expense, net, other expense (income), net, amortization of intangible assets and depreciation resulting from the fair value step-up of property, plant, and equipment from acquisitions.

A description of the products and services provided within each of the Company’s two reportable segments is provided below.

Technologies & Equipment

This segment is responsible for the design, manufacture, and sales of the Company’s dental technology and equipment products and healthcare products. These products include dental implants, CAD/CAM systems, orthodontic clear aligners, imaging systems, treatment centers, instruments, as well as medical devices.

Consumables

This segment is responsible for the design, manufacture, and sales of the Company’s consumable products which include various preventive, restorative, endodontic, and dental laboratory products.

The Company’s segment information for the three and nine months ended September 30, 2022 and 2021 was as follows:

Net Sales


	Three Months Ended				Nine Months Ended
(in millions)	2022		2021		2022		2021

Technologies & Equipment	$	556	$	612	$	1,716	$	1,824
Consumables	391		428		1,223		1,304
Total net sales	$	947	$	1,040	$	2,939	$	3,128

Segment Adjusted Operating Income


	Three Months Ended				Nine Months Ended
(in millions)	2022		2021		2022		2021

Technologies & Equipment	$	73	$	134	$	278	$	391
Consumables	121		123		398		426
Segment adjusted operating income	194		257		676		817

Reconciling items expense (income):
All other (a)	77		67		223		199
Goodwill impairment	1,187		—		1,187		—
Intangible asset impairment and other costs	97		3		107		11
Interest expense, net	14		14		41		43

Other expense (income), net	9		5		20		4
Amortization of intangible assets	51		56		159		167
Depreciation resulting from the fair value step-up of property, plant, and equipment from business combinations	—		(1)		2		4
(Loss) income before income taxes	$	(1,241)	$	113	$	(1,063)	$	389

(a) Includes the results of unassigned Corporate headquarters costs and inter-segment eliminations.

NOTE 8 – INVENTORIES

Inventories, net were as follows:


(in millions)	September 30, 2022		December 31, 2021

Raw materials and supplies	$	142	$	139
Work-in-process	70		72
Finished goods	380		304
Inventories, net	$	592	$	515

The Company's inventory reserve was $77 million and $86 million at September 30, 2022 and December 31, 2021, respectively. Inventories are stated at the lower of cost and net realizable value.

NOTE 9 – INTANGIBLE ASSET IMPAIRMENT AND OTHER COSTS

Intangible asset impairment and other costs for the three and nine months ended September 30, 2022 and 2021 were as follows:


Affected Line Item in the Consolidated Statements of Operations	Three Months Ended				Nine Months Ended
(in millions)	2022		2021		2022		2021

Cost of products sold	$	—	$	—	$	—	$	(3)
Selling, general, and administrative expenses	—		3		—		6
Intangible asset impairment and other costs	97		3		107		11

Total intangible asset impairment and other costs	$	97	$	6	$	107	$	14

For the three and nine months ended September 30, 2022, the above costs include an impairment charge of $94 million related to indefinite-lived tradenames and trademarks within the Technologies & Equipment segment and the Consumables segment. For more information on this impairment charge, refer to Note 14 Goodwill and Intangible Assets.

Other costs for these periods include severance and other expense related to the Company's restructuring plans. The Company’s restructuring accruals at September 30, 2022 were as follows:


	Severance
(in millions)	2020 and Prior Plans		2021 Plans		2022 Plans		Total

Balance at December 31, 2021	$	5	$	9	$	—	$	14
Provisions	1		1		8		10
Amounts applied	(3)		(5)		(3)		(11)
Change in estimates	(1)		—		—		(1)
Balance at September 30, 2022	$	2	$	5	$	5	$	12


	Other Restructuring Costs
(in millions)	2020 and Prior Plans		2021 Plans		2022 Plans		Total

Balance at December 31, 2021	$	4	$	—	$	—	$	4
Provisions	1		1		1		3
Amounts applied	(4)		(1)		(1)		(6)

Balance at September 30, 2022	$	1	$	—	$	—	$	1

The cumulative amounts for the provisions and adjustments and amounts applied for all the plans by segment were as follows:


(in millions)	December 31, 2021		Provisions		Amounts Applied		Change in Estimates		September 30, 2022

Technologies & Equipment	$	7	$	3	$	(6)	$	—	$	4
Consumables	11		7		(8)		(1)		9
All Other	—		3		(3)		—		—
Total	$	18	$	13	$	(17)	$	(1)	$	13

The associated restructuring liabilities are recorded in Accrued liabilities and Other noncurrent liabilities in the Consolidated Balance Sheets.

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 cash flows. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert fixed rate debt into variable rate debt or vice versa. The Company does not hold derivative instruments for trading or speculative purposes.

The following summarizes the notional amounts of cash flow hedges, hedges of net investments, fair value hedges, and derivative instruments not designated as hedges for accounting purposes by derivative instrument type at September 30, 2022 and the notional amounts expected to mature during the next 12 months.


(in millions)	Aggregate Notional Amount		Aggregate Notional Amount Maturing within 12 Months

Cash Flow Hedges
Foreign exchange forward contracts	$	85	$	79


Total derivative instruments designated as cash flow hedges	$	85	$	79

Hedges of Net Investments
Foreign exchange forward contracts	$	157	$	78
Cross currency basis swaps	262		—
Total derivative instruments designated as hedges of net investments	$	419	$	78

Fair Value Hedges
Interest rate swaps	$	250	$	—
Foreign exchange forward contracts	128		49
Total derivative instruments designated as fair value hedges	$	378	$	49

Derivative Instruments not Designated as Hedges
Foreign exchange forward contracts	$	27	$	27
Total derivative instruments not designated as hedges	$	27	$	27

Cash Flow Hedges

Foreign Exchange Risk Management

The Company hedges select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings. The Company designates certain foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contracts 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.

These foreign exchange forward contracts generally have maturities up to 18 months, which is the period over which the Company is hedging exposures to variability of cash flows and the counterparties to the transactions are typically large international financial institutions.

Interest Rate Risk Management

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.

On May 26, 2020, the Company paid $31 million to settle the $150 million notional T-Lock contract, which partially hedged the interest rate risk of the $750 million senior unsecured notes. This loss is amortized over the ten-year life of the notes. As of September 30, 2022 and December 31, 2021, $23 million and $25 million, respectively, of this loss is remaining to be amortized from AOCI in future periods.

AOCI Release

Overall, the derivatives designated as cash flow hedges are considered to be highly effective for accounting purposes. At September 30, 2022, the Company expects to reclassify an immaterial amount of deferred net losses on cash flow hedges recorded in AOCI in the Consolidated Statements of Operations during the next 12 months. For the rollforward of derivative instruments designated as cash flow hedges in AOCI see Note 4, Comprehensive Income (Loss).

Hedges of Net Investments in Foreign Operations

The Company has significant investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in 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 the aforementioned 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 applicable period. Any cash flows associated with these instruments are included in investing activities in the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, for which all cash flows are classified as financing activities in the Consolidated Statements of Cash Flows.

The fair value of the foreign exchange forward contracts and cross-currency basis swaps is the estimated amount the Company would receive or pay at the reporting date, taking into account the effective interest rates, cross-currency swap basis rates and foreign exchange rates. The effective portion of the change in the value of these derivatives is recorded in AOCI, net of tax effects.

On July 2, 2021, the Company entered into a cross currency basis swap totaling a notional amount of $300 million which matures on June 3, 2030. The cross currency basis swap is designated as a hedge of net investments. This contract effectively converts a portion of the $750 million bond coupon from 3.3% to 1.7%.

On May 25, 2021, the Company re-established its euro net investment hedge portfolio by entering into eight foreign exchange forward contracts, each with a notional amount of 10 million euro. The original contracts have quarterly maturity dates through March 2023. The Company enters into additional foreign exchange contracts as individual contracts within the portfolio mature. As of September 30, 2022, the euro net investment hedge portfolio has an aggregate notional value of 160 million euro with maturity dates through September 2024.

Fair Value Hedges

Foreign Exchange Risk Management

The Company has intercompany loans denominated in Swedish kronor that are exposed to volatility in currency exchange rates. The Company employs derivative financial instruments to hedge these exposures. The Company accounts for these designated foreign exchange forward contracts as fair value hedges. The Company measures the effectiveness of fair value hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be recorded in the Consolidated Statements of Operations. The time-value component of the fair value of the derivative is reported on a straight-line basis in Other expense (income), net in the Consolidated Statements of Operations in the applicable period. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows.

On January 6, 2021 the Company entered into foreign exchange forward contracts with a notional value of 1.3 billion Swedish kroner as a result of an increase in intercompany loans denominated in Swedish kronor. The foreign exchange forwards are designated as fair value hedges.

Interest Rate Risk Management

On July 1, 2021, the Company entered into variable interest rate swaps with a notional amount of $250 million, which effectively convert a portion of the underlying fixed rate of 3.3% on the $750 million Senior Notes due June 2030 to a variable interest rate. Of the $250 million notional amount, $100 million has a term of five-years maturing on June 1, 2026 and $150 million has a term of nine years maturing on March 1, 2030.

Derivative Instruments Not Designated as Hedges

The Company enters into derivative instruments with the intent to partially mitigate the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The Company primarily uses foreign exchange forward contracts to hedge these risks. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in Other expense (income), net in the Consolidated Statements of Operations. Any cash flows associated with the foreign exchange forward contracts and interest rate swaps not designated as hedges are included in operating activities in the Consolidated Statements of Cash Flows.

Gains and (losses) recorded in the Company’s Consolidated Statements of Operations related to the economic hedges not designated as hedges for the three and nine months ended September 30, 2022 and 2021 were not significant.

Derivative Instrument Activity

The amount of gains and losses recorded in the Company's Consolidated Balance Sheets and Consolidated Statements of Operations related to all derivative instruments for the three months ended September 30, 2022 and 2021 were as follows:


	Three Months Ended September 30, 2022
(in millions)	Gain (Loss) recognized in AOCI		Consolidated Statements of Operations Location	Effective Portion Reclassified from AOCI into Income (Expense)		Recognized in Income (Expense)

Cash Flow Hedges
Foreign exchange forward contracts	$	3	Cost of products sold	$	1	$	—
Interest rate swaps	—		Interest expense, net	—		—


Total for cash flow hedging	$	3		$	1	$	—

Hedges of Net Investments
Cross currency basis swaps	$	18	Interest expense, net	$	—	$	2

Foreign exchange forward contracts	11		Other expense (income), net	—		—

Total for net investment hedging	$	29		$	—	$	2

Fair Value Hedges

Boards:

Quotes:

XRAY