Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018

Commission File Number 0-16211
 
DENTSPLY SIRONA Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
39-1434669
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
 
221 West Philadelphia Street, York, PA
 
17401-2991
(Address of principal executive offices)
  
(Zip Code)
 
(717) 845-7511
(Registrant’s telephone number, including area code)

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

Yes x No   o

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

Yes   x No   o

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  At July 26, 2018, DENTSPLY SIRONA Inc. had 222,344,874 shares of Common Stock outstanding, with a par value of $.01 per share.



DENTSPLY SIRONA Inc.

TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net sales
$
1,042.1

 
$
992.7

 
$
1,998.2

 
$
1,893.2

Cost of products sold
489.3

 
448.5

 
931.3

 
857.0

 
 
 
 
 
 
 
 
Gross profit
552.8

 
544.2

 
1,066.9

 
1,036.2

Selling, general and administrative expenses
432.2

 
417.6

 
867.4

 
822.3

Goodwill impairment
1,085.8

 
1,092.9

 
1,085.8

 
1,092.9

Restructuring and other costs
188.9

 
81.7

 
199.1

 
84.8

 
 
 
 
 
 
 
 
Operating loss
(1,154.1
)
 
(1,048.0
)
 
(1,085.4
)
 
(963.8
)
 
 
 
 
 
 
 
 
Other income and expenses:
 

 
 

 
 

 
 

Interest expense
9.6

 
9.6

 
18.2

 
18.9

Interest income
(0.4
)
 
(0.6
)
 
(1.0
)
 
(1.3
)
Other expense (income), net
(1.0
)
 
7.8

 
(35.1
)
 
6.8

 
 
 
 
 
 
 
 
Loss before income taxes
(1,162.3
)
 
(1,064.8
)
 
(1,067.5
)
 
(988.2
)
Provision (benefit) for income taxes
(41.3
)
 
(14.5
)
 
(27.6
)
 
2.4

 
 
 
 
 
 
 
 
Net loss
(1,121.0
)
 
(1,050.3
)
 
(1,039.9
)
 
(990.6
)
 
 
 
 
 
 
 
 
Less: Net income (loss) attributable to noncontrolling interests
1.0

 
(0.3
)
 
0.9

 
(0.4
)
 
 
 
 
 
 
 
 
Net loss attributable to Dentsply Sirona
$
(1,122.0
)
 
$
(1,050.0
)
 
$
(1,040.8
)
 
$
(990.2
)
 
 
 
 
 
 
 
 
Net loss per common share attributable to Dentsply Sirona:
 

 
 

 
 

 
 

Basic
$
(4.98
)
 
$
(4.58
)
 
$
(4.60
)
 
$
(4.31
)
Diluted
$
(4.98
)
 
$
(4.58
)
 
$
(4.60
)
 
$
(4.31
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
225.2

 
229.4

 
226.2

 
229.7

Diluted
225.2

 
229.4

 
226.2

 
229.7

 
 
 
 
 
 
 
 
Dividends declared per common share:
$
0.0875

 
$
0.0875

 
$
0.1750

 
$
0.1750


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

3


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net loss
$
(1,121.0
)
 
$
(1,050.3
)
 
$
(1,039.9
)
 
$
(990.6
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation (loss) gain
(192.6
)
 
222.0

 
(126.9
)
 
271.7

Net gain (loss) on derivative financial instruments
29.6

 
(2.5
)
 
17.6

 
(5.8
)
Net realized holding gain on available for sale securities
—

 
—

 
(44.3
)
 
—

Pension liability gain
3.0

 
1.1

 
4.2

 
2.3

Total other comprehensive (loss) income, net of tax
(160.0
)
 
220.6

 
(149.4
)
 
268.2

 
 
 
 
 
 
 
 
Total comprehensive loss
(1,281.0
)
 
(829.7
)
 
(1,189.3
)
 
(722.4
)
 
 
 
 
 
 
 
 
Less: Comprehensive income attributable
 

 
 

 
 
 
 
to noncontrolling interests
0.8

 
0.3

 
1.3

 
0.1

 
 
 
 
 
 
 
 
Comprehensive loss attributable to Dentsply Sirona
$
(1,281.8
)
 
$
(830.0
)
 
$
(1,190.6
)
 
$
(722.5
)
 


 


 
 
 
 

See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

4


DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
(unaudited)
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
239.3

 
$
320.6

Accounts and notes receivables-trade, net
710.3

 
746.2

Inventories, net
666.3

 
623.1

Prepaid expenses and other current assets, net
276.5

 
312.6

 
 
 
 
Total Current Assets
1,892.4

 
2,002.5

 
 
 
 
Property, plant and equipment, net
857.6

 
876.0

Identifiable intangible assets, net
2,546.8

 
2,800.7

Goodwill, net
3,457.8

 
4,539.2

Other noncurrent assets, net
67.4

 
156.1

 
 
 
 
Total Assets
$
8,822.0

 
$
10,374.5

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
292.4

 
$
284.4

Accrued liabilities
575.3

 
585.8

Income taxes payable
31.9

 
54.2

Notes payable and current portion of long-term debt
218.1

 
30.1

 
 
 
 
Total Current Liabilities
1,117.7

 
954.5

 
 
 
 
Long-term debt
1,586.6

 
1,611.6

Deferred income taxes
538.0

 
718.0

Other noncurrent liabilities
439.6

 
462.5

 
 
 
 
Total Liabilities
3,681.9

 
3,746.6

 
 
 
 
Commitments and contingencies
—

 
—

 
 
 
 
Equity:
 

 
 

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

 
—

Common stock, $0.01 par value;
2.6

 
2.6

400.0 million shares authorized and 264.5 million shares issued at June 30, 2018 and December 31, 2017, respectively
 
 
 
222.2 million and 226.8 million shares outstanding at June 30, 2018 and December 31, 2017, respectively
 
 
 
Capital in excess of par value
6,526.2

 
6,543.9

Retained earnings
1,216.2

 
2,316.2

Accumulated other comprehensive loss
(440.8
)
 
(291.0
)
Treasury stock, at cost, 42.3 million and 37.7 million shares at June 30, 2018 and December 31, 2017, respectively
(2,177.0
)
 
(1,955.4
)
Total Dentsply Sirona Equity
5,127.2

 
6,616.3

 
 
 
 
Noncontrolling interests
12.9

 
11.6

 
 
 
 
Total Equity
5,140.1

 
6,627.9

 
 
 
 
Total Liabilities and Equity
$
8,822.0

 
$
10,374.5


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

5


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

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

 
$
6,516.7

 
$
3,948.0

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

 
$
11.6

 
$
8,125.9

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net loss
—

 
—

 
(990.2
)
 
—

 
—

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

 
—

 
—

 
267.7

 
—

 
267.7

 
0.5

 
268.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
—

 
6.3

 
—

 
—

 
39.1

 
45.4

 
—

 
45.4

Stock based compensation expense
—

 
21.9

 
—

 
—

 
—

 
21.9

 
—

 
21.9

Reclassification on adoption of ASU No. 2016-09
—

 
1.0

 
(1.5
)
 
—

 
—

 
(0.5
)
 
—

 
(0.5
)
Funding of Employee Stock Ownership Plan
—

 
3.3

 
—

 
—

 
3.3

 
6.6

 
—

 
6.6

Treasury shares purchased
—

 
—

 
—

 
—

 
(150.3
)
 
(150.3
)
 
—

 
(150.3
)
RSU distributions
—

 
(22.1
)
 
—

 
—

 
10.1

 
(12.0
)
 
—

 
(12.0
)
RSU dividends
—

 
0.3

 
(0.3
)
 
—

 
—

 
—

 
—

 
—

Cash dividends
—

 
—

 
(40.4
)
 
—

 
—

 
(40.4
)
 
—

 
(40.4
)
Balance at June 30, 2017
$
2.6

 
$
6,527.4

 
$
2,915.6

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

 
$
11.7

 
$
7,274.2


 
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, 2017
$
2.6

 
$
6,543.9

 
$
2,316.2

 
$
(291.0
)
 
$
(1,955.4
)
 
$
6,616.3

 
$
11.6

 
$
6,627.9

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net (loss) income
—

 
—

 
(1,040.8
)
 
—

 
—

 
(1,040.8
)
 
0.9

 
(1,039.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income
—

 
—

 
—

 
(149.8
)
 
—

 
(149.8
)
 
0.4

 
(149.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
—

 
(6.4
)
 
—

 
—

 
17.6

 
11.2

 
—

 
11.2

Cumulative effect on adoption of ASC 606
—

 
—

 
(6.0
)
 
—

 
—

 
(6.0
)
 
—

 
(6.0
)
Reclassification on adoption of ASU No. 2016-16
—

 
—

 
(2.7
)
 
—

 
—

 
(2.7
)
 
—

 
(2.7
)
Reclassification on adoption of ASU No. 2018-02
—

 
—

 
8.1

 
—

 
—

 
8.1

 
—

 
8.1

Stock based compensation expense
—

 
9.8

 
—

 
—

 
—

 
9.8

 
—

 
9.8

Treasury shares purchased
—

 
—

 
—

 
—

 
(250.2
)
 
(250.2
)
 
—

 
(250.2
)
RSU distributions
—

 
(21.4
)
 
—

 
—

 
11.0

 
(10.4
)
 
—

 
(10.4
)
RSU dividends
—

 
0.3

 
(0.3
)
 
—

 
—

 
—

 
—

 
—

Cash dividends
—

 
—

 
(58.3
)
 
—

 
—

 
(58.3
)
 
—

 
(58.3
)
Balance at June 30, 2018
$
2.6

 
$
6,526.2

 
$
1,216.2

 
$
(440.8
)
 
$
(2,177.0
)
 
$
5,127.2

 
$
12.9

 
$
5,140.1


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

6


DENTSPLY SIRONA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(1,039.9
)
 
$
(990.6
)
 
 
 
 
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation
68.8

 
62.1

Amortization of intangible assets
100.1

 
91.8

Amortization of deferred financing costs
1.3

 
1.3

Goodwill impairment
1,085.8

 
1,092.9

Indefinite-lived intangible asset impairment
179.2

 
79.8

Deferred income taxes
(70.8
)
 
(34.2
)
Stock based compensation expense
9.8

 
21.9

Restructuring and other costs - non-cash
9.1

 
1.0

Other non-cash (income) expense
(2.9
)
 
5.5

Loss on disposal of property, plant and equipment
0.6

 
0.4

Gain on sale of equity security
(44.1
)
 
—

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts and notes receivable-trade, net
23.0

 
1.9

Inventories, net
(69.3
)
 
(49.6
)
Prepaid expenses and other current assets, net
(25.7
)
 
(59.3
)
Other noncurrent assets, net
(7.7
)
 
1.2

Accounts payable
(6.5
)
 
9.5

Accrued liabilities
(4.6
)
 
(19.2
)
Income taxes
(28.5
)
 
(15.4
)
Other noncurrent liabilities
(5.7
)
 
7.7

 
 
 
 
Net cash provided by operating activities
172.0

 
208.7

 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
 
 
Capital expenditures
(81.2
)
 
(64.8
)
Cash paid for acquisitions of businesses and equity investments, net of cash acquired
(130.5
)
 
(125.2
)
Cash received on derivatives contracts
1.9

 
5.3

Cash paid on derivatives contracts
(2.4
)
 
—

Expenditures for identifiable intangible assets
(5.3
)
 
(5.9
)
Purchase of short-term investments
—

 
(2.3
)
Purchase of Company-owned life insurance policies
—

 
(0.9
)
Proceeds from sale of equity security
54.1

 
—

Proceeds from sale of property, plant and equipment, net
3.9

 
1.9

 
 
 
 
Net cash used in investing activities
(159.5
)
 
(191.9
)
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 
 
 
Increase in short-term borrowings
187.3

 
1.4

Cash paid for treasury stock
(250.2
)
 
(151.5
)
Cash dividends paid
(39.7
)
 
(38.1
)
Proceeds from long-term borrowings
0.3

 
2.9

Repayments on long-term borrowings
(0.4
)
 
(6.6
)
Proceeds from exercised stock options
13.9

 
45.4

 
 
 
 
Net cash used in financing activities
(88.8
)
 
(146.5
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(5.0
)
 
14.2

 
 
 
 
Net decrease in cash and cash equivalents
(81.3
)
 
(115.5
)
 
 
 
 
Cash and cash equivalents at beginning of period
320.6

 
383.9

 
 
 
 
Cash and cash equivalents at end of period
$
239.3

 
$
268.4


See accompanying Notes to Unaudited Interim Consolidated Financial Statements.

7


DENTSPLY SIRONA Inc. and Subsidiaries

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, 2017.

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, 2017, except as may be indicated below.

Revenue Recognition

Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied; generally this occurs with the transfer of risk and/or control of Dental and Healthcare Consumables products (“consumable” products), Dental Technology products (“technology” products), or Dental Equipment products (“equipment” products). Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Sales, value add and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense.

For most of consumable, technology and equipment products, the Company transfers control and recognizes a sale when products are shipped from the manufacturing facility or warehouse to the customer (distributors and direct to dentists). For contracts with customers that contain destination shipping terms, revenue is not recognized until risk has transferred and the goods are delivered to the agreed upon destination. The amount of consideration received and revenue recognized varies with changes in marketing incentives (e.g., discounts, rebates, free goods) and returns offered to customers and their customers. When the Company gives customers the right to return eligible products and receive credit, returns are estimated based on an analysis of historical experience. However, returns of products, excluding warranty related returns, are infrequent and insignificant. The Company adjusts the estimate of revenue at the earlier of when the most likely amount of consideration can be estimated, the amount expected to be received changes, or when the consideration becomes fixed. Consideration received from customers in advance of revenue recognition is classified as deferred revenue.

Depending on the terms of the arrangement, the Company will defer the recognition of a portion of the consideration received when performance obligations are not yet satisfied (e.g., extended maintenance/service contracts, software and licenses, customer loyalty points and coupon programs). The Company uses an observable price, typically average selling price, to determine the stand-alone selling price for separate performance obligations. The Company determines the stand-alone selling price, based on Company geographic sales locations’ database of pricing and discounting practices for the specific product or service when sold separately, and utilizes this data to arrive at average selling prices by product. Revenue is then allocated proportionately, based on the determined stand-alone selling price, to the unsatisfied performance obligation, which is deferred until satisfied. At June 30, 2018, the Company had $26.2 million of deferred revenue recorded in Accrued liabilities on the Consolidated Balance Sheets. The Company expects to recognize significantly all of the deferred revenue within the next twelve months.

The Company has elected to account for shipping and handling activities as a fulfillment cost within the cost of products sold, and records shipping and handling costs collected from customers in net sales. The Company has adopted two practical expedients: the “right to invoice” practical expedient, which allows us to recognize revenue in the amount of the invoice when it corresponds directly with the value of performance completed to date; and relief from considering the existence of a significant financing component when the payment for the good or service is expected to be one year or less.


8


The Company offers discounts to its customers and distributors if certain conditions are met. Discounts are primarily based on the volume of products purchased or targeted to be purchased by the customer. Discounts are deducted from revenue at the time of sale or when the discount is offered, whichever is later. The Company estimates volume discounts based on an individual customer’s historical and estimated future product purchases.

Certain of the Company’s customers are offered cash rebates based on targeted sales increases. The Company estimates rebates based on the forecasted performance of a customer and their expected level of achievement within the rebate programs. In accounting for these rebate programs, the Company records an accrual and reduces sales ratably as sales occur over the rebate period. The Company updates the accruals for these rebate programs as actual results and updated forecasts impact the estimated achievement for customers within the rebate programs.

A portion of the Company’s net sales is comprised of sales of precious metals generated through its precious metal dental alloy product offerings. As the precious metal content of the Company’s sales is largely a pass-through to customers, 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 alloy sale prices are typically adjusted when the prices of underlying precious metals change.

Accounts and Notes Receivable

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

Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $23.4 million at June 30, 2018 and $22.4 million at December 31, 2017.

Marketable Securities

During the three months ended March 31, 2018, the Company sold its direct investment in the DIO Corporation (“DIO”) for $54.1 million, resulting in a gain of $44.1 million. At December 31, 2017, the Company had recorded an unrealized gain of $45.0 million in accumulated other comprehensive loss. This gain was transferred out of Accumulated other comprehensive loss (“AOCI”), and recorded in Other expense (income), net on the Consolidated Statements of Operations. The fair value of the direct investment at December 31, 2017 was $54.4 million.

Income Taxes

The Company has accounted for the tax effects of the Tax Cuts and Jobs Act, enacted on December 22, 2017, on a provisional basis. At December 31, 2017, the accounting for certain income tax effects was incomplete, but the Company determined reasonable estimates for those effects which were included in the financial statements. The Company expects to complete the accounting during 2018 in accordance with the one year measurement period.

Recently Adopted Accounting Pronouncements

Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, as amended (Topic 606, commonly referred to as ASC 606) to all contracts using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Most of the Company’s sales revenue continues to be recognized when products are shipped from manufacturing facilities. For certain customer and dealer incentive programs, such as coupons, customer loyalty and free goods, the Company recognizes the proportionate revenue and cost of product when the incentives are shipped or awarded. Prior to adoption of ASC 606, costs for these types of programs were recognized when triggering events occurred. For contracts with customers where performance occurs over time, such as software sales, the Company recognizes revenue ratably over the performance period.
The new revenue standard also provided additional guidance that resulted in reclassifications to or from Net sales, Cost of products sold, Selling, general and administrative expenses, and the resultant change in Provision (benefit) for income taxes.


9



The cumulative effect of the changes made on the Consolidated Balance Sheets at December 31, 2017 for the adoption of ASC 606, is as follows:
(in millions)
 
 
 
 
 
 
Consolidated Balance Sheets Item
 
December 31, 2017 As Reported Balance
 
Adoption of ASC 606
 
January 1, 2018 Revised Balance
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts and notes receivable-trade, net
 
$
746.2

 
$
0.2

 
$
746.4

Inventory, net
 
623.1

 
(0.3
)
 
622.8

Prepaid expense and other current assets, net
 
312.6

 
1.9

 
314.5

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued liabilities
 
585.8

 
9.9

 
595.7

Income taxes payable
 
54.2

 
(2.1
)
 
52.1

Retained earnings
 
2,316.2

 
(6.0
)
 
2,310.2


The impact of adopting the new revenue recognition standard on the Company’s Consolidated Statements of Operations and Consolidated Balance Sheets is as follows:
(in millions)
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Consolidated Statements of Operations Item
 
As Reported Balance
 
Balances Without Adoption of ASC 606
 
Effect of Change Increase/(Decrease)
 
As Reported Balance
 
Balances Without Adoption of ASC 606
 
Effect of Change Increase/(Decrease)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,042.1

 
$
1,044.8

 
$
(2.7
)
 
$
1,998.2

 
$
1,998.8

 
$
(0.6
)
Cost of products sold
 
489.3

 
491.4

 
(2.1
)
 
931.3

 
930.3

 
1.0

Selling, general and administrative expenses
 
432.2

 
432.3

 
(0.1
)
 
867.4

 
868.1

 
(0.7
)
Provision (benefit) for income taxes
 
(41.3
)
 
(41.2
)
 
(0.1
)
 
(27.6
)
 
(27.4
)
 
(0.2
)
Net loss attributable to Dentsply Sirona
 
(1,122.0
)
 
(1,121.6
)
 
(0.4
)
 
(1,040.8
)
 
(1,040.1
)
 
(0.7
)

(in millions)
 
Balance at June 30, 2018
Consolidated Balance Sheets Item
 
As Reported Balance
 
Balances Without Adoption of ASC 606
 
Effect of Change Increase/(Decrease)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts and notes receivables-trade, net
 
$
710.3

 
$
710.2

 
$
0.1

Inventories, net
 
666.3

 
666.6

 
(0.3
)
Prepaid expenses and other current assets, net
 
276.5

 
273.4

 
3.1

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued liabilities
 
575.3

 
563.4

 
11.9

Income taxes payable
 
31.9

 
34.2

 
(2.3
)
Retained earnings
 
1,216.2

 
1,222.9

 
(6.7
)


10


Effective January 1, 2018, the Company adopted ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This accounting standard seeks to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Previously, US GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to a third party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in US GAAP. ASU No. 2016-16 eliminates this exception. The Company adopted this accounting standard using the modified retrospective method with a cumulative-effect adjustment directly to retained earnings. Upon adoption, the Company made the following reclassification:
(in millions)
 
 
Consolidated Balance Sheets Item
 
December 31, 2017 As Reported Balance
 
Adoption of ASU 2016-16 Increase/(Decrease)
 
January 1, 2018 Revised Balance
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets, net
 
$
312.6

 
$
(5.6
)
 
$
307.0

Other noncurrent assets, net
 
156.1

 
(73.1
)
 
83.0

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred income taxes
 
718.0

 
(76.0
)
 
642.0

Retained earnings
 
2,316.2

 
(2.7
)
 
2,313.5

In March 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This newly issued accounting standard is primarily intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments in this update require an employer to report the service cost component of net periodic benefit cost in operating income, while the interest cost, amortization, return on assets and any settlement or curtailment expense will be reported below operating income. More specifically, the service cost will be reported in the same line item as other compensation costs arising from the services rendered by the pertinent employee during the period. The amendments in this update are required for annual and interim periods beginning after December 15, 2017, and should be applied retrospectively for the presentation of the components of net periodic benefit cost and net periodic postretirement benefit cost in the income statement. The amendment allows a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company adopted this accounting standard on January 1, 2018, and applied the practical expedient upon adoption. The impact of adopting this standard, by financial statement line item, is reflected below:
(in millions)
 
 
 
 
 
 
Consolidated Statements of Operations Item
 
Three Months Ended June 30, 2017
As Reported
 
Adoption of 2017-07 Increase/(Decrease)
 
Three Months Ended
June 30, 2017
Revised
 
 
 
 
 
 
 
Cost of products sold
 
$
448.5

 
$
(0.3
)
 
$
448.2

Gross profit
 
544.2

 
0.3

 
544.5

Selling, general and administrative expense
 
417.6

 
(1.9
)
 
415.7

Operating loss
 
(1,048.0
)
 
2.2

 
(1,045.8
)
Other expense (income), net
 
7.8

 
2.2

 
10.0



11


(in millions)
 
 
 
 
 
 
Consolidated Statements of Operations Item
 
Six Months Ended
June 30, 2017
As Reported
 
Adoption of 2017-07 Increase/(Decrease)
 
Six Months Ended
June 30, 2017
Revised
 
 
 
 
 
 
 
Cost of products sold
 
$
857.0

 
$
(0.8
)
 
$
856.2

Gross profit
 
1,036.2

 
0.8

 
1,037.0

Selling, general and administrative expense
 
822.3

 
(3.6
)
 
818.7

Operating loss
 
(963.8
)
 
4.4

 
(959.4
)
Other expense (income), net
 
6.8

 
4.4

 
11.2


In February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This newly issued accounting standard allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from tax rate changes due to the Tax Cuts and Jobs Act. The amendments in this update are required for annual and interim periods beginning after December 15, 2018. This standard also requires the Company to disclose its accounting policy for releasing income tax effects from accumulated other comprehensive income. In general, the Company applies the individual item approach. As permitted by the accounting standard, the Company early adopted this accounting standard on January 1, 2018. As a result of the adoption, the Company elected to reclassify the income tax effects from AOCI to Retained earnings and reclassified $8.1 million.

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) with subsequent amendments (collectively, “Topic 842”). This accounting standard seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of this standard is required for interim and fiscal periods ending after December 15, 2018, using the modified retrospective approach. Topic 842 provides for an additional optional transition method that allows application of the new standard beginning January 1, 2019 with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Periods prior to adoption would continue to conform to current US GAAP (Topic 840, Leases) and periods after adoptions would conform to Topic 842. The Company anticipates adopting Topic 842 using the optional transition method and is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” 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 instrument and the hedged item in the financial statements. The amendments in this update are required for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. 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 is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.




12


NOTE 2 – STOCK COMPENSATION

The following table represents total stock based compensation expense for non-qualified stock options, restricted stock units (“RSU”) and the tax related benefit for the three and six months ended June 30, 2018 and 2017.
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Stock option expense
 
$
2.7

 
$
2.5

 
$
3.4

 
$
5.2

RSU expense
 
(2.6
)
 
8.0

 
5.9

 
15.7

Total stock based compensation expense
 
$
0.1

 
$
10.5

 
$
9.3

 
$
20.9

 
 
 
 
 
 
 
 
 
Related deferred income tax benefit
 
$
—

 
$
2.5

 
$
1.6

 
$
5.8


For the three and six months ended June 30, 2018, stock compensation expense of $0.1 million and $9.3 million, respectively, was recorded on the Consolidated Statements of Operations. For the three months ended June 30, 2018 the Company lowered the likely payout level on certain performance-based grants. For the three and six months ended June 30, 2018, $1.2 million and $8.3 million, respectively, was recorded in Selling, general, and administrative expense, and $0.1 million and $0.4 million, respectively, was recorded in Cost of products sold on the Consolidated Statements of Operations. For the three and six months ended June 30, 2018, the Company recorded income of $1.2 million and expense of $0.5 million, respectively, in Restructuring and other costs on the Consolidated Statements of Operations.

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


13


NOTE 3 – COMPREHENSIVE INCOME (LOSS)

The following table summarizes the components of comprehensive income (loss), net of tax, for the three and six months ended June 30, 2018 and 2017:

 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Foreign currency translation gains
 
$
—

 
$
248.2

 
$
—

 
$
304.8

Foreign currency translation losses
 
(223.4
)
 
—

 
(139.4
)
 
—

Foreign currency translation gain on hedges of net investments
 
31.0

 
—

 
12.1

 
—

Foreign currency translation loss on hedges of net investments
 
—

 
(24.2
)
 
—

 
(33.6
)

These amounts are recorded in AOCI, net of any related tax adjustments. At June 30, 2018 and December 31, 2017, the cumulative tax adjustments were $168.5 million and $203.8 million, respectively, primarily related to foreign currency translation gains and losses.

The cumulative foreign currency translation adjustments included translation losses of $117.3 million and gains $22.1 million at June 30, 2018 and December 31, 2017, respectively, and cumulative losses on loans designated as hedges of net investments of $114.5 million and $126.6 million, respectively.  These foreign currency translation gains and losses were partially offset by movements on derivative financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.

Changes in AOCI, net of tax, by component for the six months ended June 30, 2018 and 2017 were as follows:
(in millions)
 
Foreign Currency Translation Gain (Loss)
 
Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges
 
Gain and (Loss) on Derivative Financial Instruments
 
Net Unrealized Holding Gain (Loss) on Available-for-Sale Securities
 
Pension Liability Gain (Loss)
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, net of tax, at December 31, 2017
 
$
(104.5
)
 
$
(12.6
)
 
$
(127.6
)
 
$
44.3

 
$
(90.6
)
 
$
(291.0
)
Other comprehensive (loss) income before reclassifications and tax impact
 
(106.6
)
 
(4.2
)
 
29.4

 
—

 
2.4

 
(79.0
)
Tax (expense) benefit
 
(20.7
)
 
0.5

 
(14.5
)
 
 
 
(0.6
)
 
(35.3
)
Other comprehensive (loss) income, net of tax, before reclassifications
 
(127.3
)
 
(3.7
)
 
14.9

 
—

 
1.8

 
(114.3
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
—

 
6.4

 
—

 
(44.3
)
 
2.4

 
(35.5
)
Net (decrease) increase in other comprehensive income
 
(127.3
)
 
2.7

 
14.9

 
(44.3
)
 
4.2

 
(149.8
)
Balance, net of tax, at June 30, 2018
 
$
(231.8
)
 
$
(9.9
)
 
$
(112.7
)
 
$
—

 
$
(86.4
)
 
$
(440.8
)


14


(in millions)
 
Foreign Currency Translation Gain (Loss)
 
Gain and (Loss) on Derivative Financial Instruments Designated as Cash Flow Hedges
 
Gain and (Loss) on Derivative Financial Instruments
 
Pension Liability Gain (Loss)
 
Total
 
 
 
 
 
 
 
 
 
 
 
Balance, net of tax, at December 31, 2016
 
$
(490.5
)
 
$
(3.2
)
 
$
(116.8
)
 
$
(95.2
)
 
$
(705.7
)
Other comprehensive income (loss) before reclassifications and tax impact
 
245.8

 
(2.7
)
 
(4.2
)
 
—

 
238.9

Tax benefit
 
25.4

 
0.2

 
0.8

 
—

 
26.4

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

 
(2.5
)
 
(3.4
)
 
—

 
265.3

Amounts reclassified from accumulated other comprehensive income, net of tax
 
—

 
0.1

 
—

 
2.3

 
2.4

Net increase (decrease) in other comprehensive income
 
271.2

 
(2.4
)
 
(3.4
)
 
2.3

 
267.7

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

Reclassifications out of AOCI to the Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 were as follows:
(in millions)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item on the Consolidated Statements of Operations
 
Three Months Ended
 
 
2018
 
2017
 
 
 
 
 
 
 
 
(Loss) gain on derivative financial instruments:
Interest rate swaps
 
$
(0.5
)
 
$
(0.4
)
 
Interest expense
Foreign exchange forward contracts
 
(4.3
)
 
0.5

 
Cost of products sold
Net (loss) gain before tax
 
(4.8
)
 
0.1

 

Tax impact
 
0.7

 
—

 
Provision (benefit) for income taxes
Net (loss) gain after tax
 
$
(4.1
)
 
$
0.1

 

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

 
$
0.1

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

Tax impact
 
0.5

 
0.5

 
Provision (benefit) for income taxes
Net loss after tax
 
$
(1.2
)
 
$
(1.1
)
 

 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(5.3
)
 
$
(1.0
)
 
 
(a) These AOCI components are included in the computation of net periodic benefit cost for the three months ended June 30, 2018 and 2017 (see Note 8, Benefit Plans, for additional details).


15


(in millions)
 
 
 
 
 
 
Details about AOCI Components
 
Amounts Reclassified from AOCI
 
Affected Line Item on the Consolidated Statements of Operations
 
Six Months Ended
 
 
2018
 
2017
 
 
 
 
 
 
 
 
Loss on derivative financial instruments:
Interest rate swaps
 
$
(1.1
)
 
$
(1.1
)
 
Interest expense
Foreign exchange forward contracts
 
(6.1
)
 
1.0

 
Cost of products sold
Net loss before tax
 
(7.2
)
 
(0.1
)
 
 
Tax impact
 
0.8

 
—

 
Provision (benefit) for income taxes
Net loss after tax
 
$
(6.4
)
 
$
(0.1
)
 
 
 
 
 
 
 
 
 
Net realized 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
 
$
—

 
$
0.1

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

 
1.0

 
Provision (benefit) for income taxes
Net loss after tax
 
$
(2.4
)
 
$
(2.3
)
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
35.5

 
$
(2.4
)
 
 
(a) These AOCI components are included in the computation of net periodic benefit cost for the six months ended June 30, 2018 and 2017 (see Note 8, Benefit Plans, for additional details).


16


NOTE 4 – EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
 
 
The calculation of weighted average diluted common shares outstanding excludes stock options and RSUs of 5.5 million and 4.7 million equivalent shares of common stock that were outstanding during the three and six months ended June 30, 2018, respectively, because their effect would be antidilutive. There were 0.8 million and 1.2 million antidilutive equivalent shares of common stock outstanding during the three and six months ended June 30, 2017, respectively.



17


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 earn-out provisions. OraMetrix specializes in orthodontic treatment planning software, wire bending, and clear aligner manufacturing and is headquartered in Richardson, Texas. At June 30, 2018, the Company recorded a preliminary estimate of $62.8 million in goodwill related to the fair value of assets acquired and liabilities assumed and the consideration given for the acquisition. The purchase price has been assigned on the basis of the preliminary estimate of the fair values of assets acquired and liabilities assumed. Goodwill is considered to represent the value associated with workforce and synergies the two companies anticipate realizing as a combined company. The goodwill is not expected to be deductible for tax purposes.

Intangible assets acquired consist of the following:
 
 
 
 
Weighted Average
 
 
 
 
Useful Life
(in millions, except for useful life)
 
Amount
 
(in years)
 
 
 
 
 
Customer relationships
 
$
17.5

 
15
Developed technology and patents
 
63.4

 
15
Trade names and trademarks
 
12.8

 
Indefinite
Total
 
$
93.7

 
 

During the quarter ended June 30, 2017, the Company acquired Recherche Techniques Dentaires (“RTD”), a privately-held France-based manufacturer of endodontic posts for $132.0 million. The Company recorded $83.9 million in goodwill related to the fair value of assets acquired and liabilities assumed and the consideration given for the acquisition. Goodwill is considered to represent the value associated with workforce and synergies the two companies anticipate realizing as a combined company. The goodwill is not expected to be deductible for tax purposes.

Intangible assets acquired consist of the following:
 
 
 
 
Weighted Average
 
 
 
 
Useful Life
(in millions, except for useful life)
 
Amount
 
(in years)
 
 
 
 
 
Customer relationships
 
$
18.1

 
15
Developed technology and patents
 
22.4

 
15
Trade names and trademarks
 
8.5

 
Indefinite
Total
 
$
49.0

 
 

The results of operations for these businesses have been included in the accompanying financial statements as of the effective date of each transactions. These transactions were not material to the Company’s net sales and net loss attributable to Dentsply Sirona for the quarter ended June 30, 2018.




18


NOTE 6 – SEGMENT INFORMATION

The Company has numerous operating businesses covering a wide range of dental consumable products and dental technology products primarily serving the professional dental market, and certain healthcare products. Professional dental products represented approximately 92% of net sales for all periods presented.

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. The Company defines net third party sales excluding precious metal content as the Company’s net sales excluding the precious metal cost within the products sold, which is considered a measure not calculated in accordance with US GAAP, and is therefore considered a non-US GAAP measure. Management believes that the presentation of net sales, excluding precious metal content, provides useful information to investors because a portion of Dentsply Sirona’s net sales is comprised of sales of precious metals generated through sales of the Company’s precious metal dental alloy products, which are used by third parties to construct crown and bridge materials. Due to the fluctuations of precious metal prices and because the cost of the precious metal content of the Company’s sales is largely passed through to customers and has minimal effect on earnings, Dentsply Sirona reports net sales both with and without precious metal content to show the Company’s performance independent of precious metal price volatility and to enhance comparability of performance between periods. The Company uses its cost of precious metal purchased as a proxy for the precious metal content of sales, as the precious metal content of sales is not separately tracked and invoiced to customers. The Company believes that it is reasonable to use the cost of precious metal content purchased in this manner since precious metal dental alloy sale prices are typically adjusted when the prices of underlying precious metals change. The Company’s exclusion of precious metal content in the measurement of net third party sales enhances comparability of performance between periods as it excludes the fluctuating market prices of the precious metal content. The Company also evaluates segment performance based on each segment’s adjusted operating income before provision for income taxes and interest. Segment adjusted operating income is defined as operating income before income taxes and before certain corporate headquarter unallocated costs, restructuring and other costs, interest expense, interest income, other expense (income), net, amortization of intangible assets and depreciation resulting from the fair value step-up of property, plant and equipment from acquisitions. The Company’s segment adjusted operating income is considered a non-US GAAP measure. A description of the products and services provided within each of the Company’s two operating segments is provided below.

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, laboratory dental products, CAD/CAM systems, imaging systems, treatment centers, as well as consumable medical device products.

Consumables

This segment is responsible for the worldwide design, manufacture, sales and distribution of the Company’s Dental Consumable Products which include preventive, restorative, instruments, endodontic, and orthodontic dental products.

The following tables set forth information about the Company’s segments for the three and six months ended June 30, 2018 and 2017. Certain reclassifications have been made to the prior year’s data in order to conform to the current year presentation:

Third Party Net Sales
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Technologies & Equipment
 
$
548.8

 
$
532.8

 
$
1,057.1

 
$
1,011.8

Consumables
 
493.3

 
459.9

 
941.1

 
881.4

Total net sales
 
$
1,042.1

 
$
992.7

 
$
1,998.2

 
$
1,893.2


19


Third Party Net Sales, Excluding Precious Metal Content
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Technologies & Equipment
 
$
539.4

 
$
523.1

 
$
1,037.4

 
$
991.0

Consumables
 
493.3

 
459.9

 
941.1

 
881.4

Total net sales, excluding precious metal content
 
1,032.7

 
983.0

 
1,978.5

 
1,872.4

Precious metal content of sales
 
9.4

 
9.7

 
19.7

 
20.8

Total net sales, including precious metal content
 
$
1,042.1

 
$
992.7

 
$
1,998.2

 
$
1,893.2


Segment Adjusted Operating Income
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Technologies & Equipment
 
$
77.1

 
$
98.0

 
$
151.8

 
$
151.9

Consumables
 
146.0

 
122.8

 
253.2

 
238.9

Segment adjusted operating income before income taxes and interest
 
223.1

 
220.8

 
405.0

 
390.8

 
 
 
 
 
 
 
 
 
Reconciling items expense (income):
 
 

 
 

 
 
 
 
All Other (a)
 
50.5

 
46.3

 
101.8

 
82.3

Goodwill impairment
 
1,085.8

 
1,092.9

 
1,085.8

 
1,092.9

Restructuring and other costs
 
188.9

 
81.7

 
199.1

 
84.8

Interest expense
 
9.6

 
9.6

 
18.2

 
18.9

Interest income
 
(0.4
)
 
(0.6
)
 
(1.0
)
 
(1.3
)
Other expense (income), net
 
(1.0
)
 
7.8

 
(35.1
)
 
6.8

Amortization of intangible assets
 
50.2

 
46.5

 
100.1

 
91.8

Depreciation resulting from the fair value step-up of property, plant and equipment from business combinations
 
1.8

 
1.4

 
3.6

 
2.8

Loss before income taxes
 
$
(1,162.3
)
 
$
(1,064.8
)
 
$
(1,067.5
)
 
$
(988.2
)
(a) Includes the results of unassigned Corporate headquarter costs, inter-segment eliminations and one distribution warehouse not managed by named segments.


20


NOTE 7 – INVENTORIES

Inventories are stated at the lower of cost and net realizable value.  The cost of inventories determined by the last-in, first-out (“LIFO”) method at June 30, 2018 and December 31, 2017 were $12.7 million and $12.4 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 June 30, 2018 and December 31, 2017 by $8.8 million and $10.6 million, respectively.

Inventories, net of inventory valuation reserves, consist of the following:
(in millions)
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
Finished goods
 
$
441.6