DENTSPLY SIRONA Inc. 10-Q

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations Information included in or incorporated by reference in this Form 10-Q, and other filings with the U.S. Securities and Exchange Commission (the “SEC”) and the Company’s press releases or other public statements, contains or may contain forward-looking statements. Please refer to a discussion of the Company’s forward-looking statements and associated risks in Part I, “Forward-Looking Statements,” Part I, Item 1, “Business” and Part I, Item 1A, "Risk Factors" of the Company's Form 10-K for the year ended December 31, 2020. See Part II, Item 1A, "Risk Factors" of this Form 10-Q for any updated risk factors. Company Profile DENTSPLY SIRONA Inc. ("Dentsply Sirona" or the "Company"), is the world’s largest manufacturer of professional dental products and technologies, with a 134-year history of innovation and service to the dental industry and patients worldwide. Dentsply Sirona develops, manufactures, and markets a comprehensive solutions offering including dental equipment and dental consumable products under a strong portfolio of world class brands. The Company also manufactures and markets healthcare consumable products. As The Dental Solutions Company, Dentsply Sirona’s products provide innovative, high-quality, and effective solutions to advance patient care and deliver better, safer, and faster dentistry. Dentsply Sirona’s worldwide headquarters is located in Charlotte, North Carolina. The Company’s shares of common stock are listed in the United States on Nasdaq under the symbol XRAY. BUSINESS The Company operates in two operating segments, Technologies & Equipment and Consumables. The Technologies & Equipment segment is responsible for the design, manufacture, sales and distribution of the Company’s Dental Technology and Equipment Products and Healthcare Consumable Products. These products include dental implants, CAD/CAM systems, orthodontic clear aligner products, imaging systems, treatment centers, instruments, as well as consumable medical device products. The Consumables segment is responsible for the design, manufacture, sales and distribution of the Company’s Dental Consumable Products which include preventive, restorative, endodontic, and dental laboratory products. The impact of COVID-19 and the Company’s response Information pertaining to the impact of the COVID-19 pandemic on the Company's operations and financial results during the course of 2020 as well as the Company's overall response can be found in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020. Updates to that summary of impact for the nine months ended September 30, 2021 are as follows: • Continuing the trend from the last two quarters, the Company has seen customer demand and dental patient traffic normalize in major markets. Certain markets including regions of Southeast Asia and South America have experienced setbacks in demand in the second and third quarters as a result of renewed COVID-19 infections from recent variants of the virus. While most government authorities have lifted many of their restrictions, the end dates for all restrictions being lifted are still unknown, and it is uncertain when customer demand will fully return to pre-COVID-19 levels upon lifting these restrictions, or whether a resurgence of the virus may have an impact on demand in affected markets. • The Company continues to monitor the impact of global supply chain issues related to the pandemic, including potential downside related to labor shortages, shipping disruption and inflation of material inputs. To date, there have been no significant disruptions to the Company's production, distribution network or ability to procure raw materials used in the development of its products. Although the Company has experienced an increase in supply chain related costs including freight and shipping rates during the first nine months of 2021, these have not yet resulted in a material impact to the results of operations. 32 • The Company's COVID-19 infection crisis management process implemented in 2020 remains in effect, and there have been no significant disruptions to operations as a result of infections. During the course of the pandemic, the Company has utilized this process to manage several incidents of exposure at facilities. All potential and actual cases have been reviewed to ensure that the Company managed exposed employees appropriately, consistently and safely. None of these incidents have resulted in a material loss of production or financial impact to the results for the nine months ended September 30, 2021. • The Company previously undertook various initiatives during the second quarter of 2020, to ensure its ongoing liquidity which included, among other actions, entering into a $310 million revolving credit facility on April 9, 2020, a 40 million euro revolving credit on May 5, 2020, a 30 million euro revolving credit facility on May 12, 2020 and 3.3 billion Japanese yen revolving credit facility on June 11, 2020. These additional short-term facilities were entered into in an abundance of caution and have all expired as planned as of June 30, 2021. • During the third quarter the Company has continued to prioritize employee safety and preventing the possible spread of COVID-19 by encouraging ongoing work-from-home where possible and maintaining travel restrictions. Up through the date of the filing of this Form 10-Q, the Company’s principal manufacturing facilities and other operations have remained operational at a more normalized level than during the preceding year. The Company continues to monitor the COVID-19 pandemic. As governmental authorities adjust restrictions globally, the Company plans to appropriately staff sales, manufacturing, and other functions to meet customer demand and deliver on continuing critical projects while also complying with all government requirements. Restructuring Announcement In November 2018, the Board of Directors of the Company approved a plan to restructure and simplify the Company’s business. The goal of the restructuring is to drive annualized net sales growth of 3% to 4% and adjusted operating income margins of 22% by the end of 2022 as well as achieve net annual cost savings of $200 million to $225 million by 2021. In July 2020, the Board of Directors of the Company approved an expansion of this plan that is intended to further optimize the Company’s product portfolio and reduces operating expenses. The product portfolio optimization has resulted in the divestiture or closure of certain underperforming businesses. The operating expense reductions will come as a result of additional leverage from continued integration and simplification of the business. The Company had initially anticipated one-time expenditures and charges of approximately $275 million yielding annual cost savings of $200 million to $225 million by 2021. The program expansion is expected to result in total charges of approximately $375 million and annual cost savings of approximately $250 million. T he Company expects that these expand ed actions will result in incremental global headcount reductions of 6% to 7% in addition to the original projections of 6% to 8%. Since November 2018, the Company has incurred expenditures of approximately $321 million under this program, of which, approximately $123 million were non-cash charges. These amounts include the charges for the portfolio shaping initiatives announced on August 6, 2020 which are further discussed below. As part of this expanded plan, the Company announced on August 6, 2020 that it will exit its traditional orthodontics business as well as both exit and restructure certain portions of its laboratory business. The traditional orthodontics business is part of the Technologies & Equipment segment and the laboratory business is part of the Consumables segment. The Company is exiting several of its facilities and reducing its workforce by approximately 4% to 5%. The Company expects to record total restructuring charges in a range of $60 million to $70 million for inventory write-downs, severance costs, fixed asset write-offs, and other facility closure costs related to these actions. The Company estimates that $45 million to $55 million of these restructuring charges will be non-cash charges related to inventory write-downs and fixed asset write-offs. The Company has recorded expenses of approximately $58 million related to these actions, of which approximately $46 million were non-cash charges. For the nine months ended September 30, 2021, the Company made a $3 million adjustment related to inventory reserves and paid $2 million in severance costs. The Company expects nearly all of the remaining restructuring charges to be completed by the first quarter of 2022. 33 RESULTS OF OPERATIONS, THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2020 Net Sales The Company presents net sales comparing the current year periods to the prior year periods. In addition, the Company also compares net sales on an organic sales basis, which is a Non-GAAP measure. The Company defines "organic sales" as net sales excluding: (1) net sales from acquired and divested businesses recorded prior to the first anniversary of the acquisition or divestiture, (2) net sales attributable to discontinued product lines in both the current and prior year periods, and (3) the impact of foreign currency translation, which is calculated by comparing current-period sales to prior-period sales, with both periods converted to the U.S. dollar rate at local currency foreign exchange rates for each month of the prior period. The "organic sales" measure is not calculated in accordance with US GAAP; therefore, this item represents a Non-GAAP measure. This Non-GAAP measure may differ from those used by other companies and should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with US GAAP. Organic sales is an important internal measure for the Company. The Company's senior management receives a monthly analysis of operating results that includes organic sales. The performance of the Company is measured on this metric along with other performance metrics. The Company discloses organic sales to allow investors to evaluate the performance of the Company’s operations exclusive of certain items that impact the comparability of results from period to period and may not be indicative of past or future performance of the normal operations of the Company. The Company believes that this information is helpful in understanding underlying net sales trends. Three Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Net sales $ 1,069 $ 895 $ 174 19.4 % A reconciliation of net sales to organic sales for the three months ended September 30, 2021 was as follows: % Change Net sales 19.4 % Foreign exchange impact 1.3 % Acquisitions 4.3 % Divestitures and discontinued products (7.3 %) Organic sales 21.1 % The increase in organic sales was attributable to increased volumes in both the Technologies & Equipment and Consumables segments due to a recovery in demand from the impact of the COVID-19 pandemic, sales attributed to recent product launches, and an increase of sales to dealers in the third quarter ahead of annual price increases, which previously occurred in the fourth quarter of 2020. 34 Segment Results Net Sales Technologies & Equipment Three Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Technologies & Equipment $ 629 $ 504 $ 125 24.8 % A reconciliation of net sales to organic sales for the three months ended September 30, 2021 was as follows: % Change Net sales 24.8 % Foreign exchange impact 1.2 % Acquisitions 7.7 % Divestitures and discontinued products (9.4 %) Organic sales 25.3 % Consumables Three Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Consumables $ 440 $ 391 $ 49 12.4 % * Percentages are based on actual values and may not recalculate due to rounding. A reconciliation of net sales to organic sales for the three months ended September 30, 2021 was as follows: % Change Net sales 12.4% Foreign exchange impact 1.3% Acquisitions —% Divestitures and discontinued products (4.8%) Organic sales 15.9% 35 Segment Adjusted Operating Income (a) Three Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Technologies & Equipment (b) $ 148 $ 127 $ 21 16.5 % Consumables (b) 135 115 20 17.4 % (a) See Note 6, Segment and Geographic Information, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-Q for a reconciliation from segment adjusted operating income to a US GAAP measure of consolidated pre-tax income.. (b) Certain charges related to discontinuance of product lines which were previously reported in adjusted operating income for the reportable segments, $33 million for the three months ended September 30, 2020, have been reclassified to the "All other" category to conform to current year presentation and the Company's internal reporting to the Chief Operating Decision Maker package. These amounts are not material to the measure of segment results for the years presented. Technologies & Equipment The increase in organic sales occurred across all dental businesses and resulted from overall higher volumes during the three months ended September 30, 2021 due to a recovery in demand from the COVID-19 pandemic, timing of sales to dealers, and sales attributed to recent product launches. The adjusted operating income increase was primarily driven by the increase in net sales. Consumables The increase in organic sales occurred across all regions and resulted from overall higher volumes during the three months ended September 30, 2021 due to a recovery in demand from the COVID-19 pandemic primarily driven by the Endodontic, Restorative, and Preventive businesses, as well as an increase in sales to dealers in the third quarter ahead of annual price resets which previously occurred in the fourth quarter of 2020. The adjusted operating income increase was primarily driven by the increase in net sales as well as favorable mix including increased volumes for higher margin products. Net Sales by Region United States Three Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change United States $ 399 $ 319 $ 80 25.3 % * Percentages are based on actual values and may not recalculate due to rounding. A reconciliation of net sales to organic sales for the three months ended September 30, 2021 was as follows: % Change Net sales 25.3 % Foreign exchange impact (0.1 %) Acquisitions 11.2 % Divestitures and discontinued products (5.9 %) Organic sales 20.1 % 36 The increase in organic sales was attributable to both the Technologies & Equipment and the Consumables segments and resulted from the overall higher volumes during the three months ended September 30, 2021 due to the recovery in demand from the COVID-19 pandemic, sales attributed to recent product launches, and an increase in sales to dealers in the third quarter ahead of annual price increases which previously occurred in the fourth quarter of 2020. Europe Three Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Europe $ 399 $ 351 $ 48 13.6 % * Percentages are based on actual values and may not recalculate due to rounding. A reconciliation of net sales to organic sales for the three months ended September 30, 2021 was as follows: % Change Net sales 13.6 % Foreign exchange impact 1.7 % Acquisitions 0.1 % Divestitures and discontinued products (6.0 %) Organic sales 17.8% The increase in organic sales was attributable to both the Technologies & Equipment and the Consumables segments and resulted from the overall higher volumes during the three months ended September 30, 2021 due to the recovery in demand from the COVID-19 pandemic. Rest of World Three Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Rest of World $ 271 $ 225 $ 46 20.1 % * Percentages are based on actual values and may not recalculate due to rounding. A reconciliation of net sales to organic sales for the three months ended September 30, 2021 was as follows: % Change Net sales 20.1 % Foreign exchange impact 2.3 % Acquisitions 1.1 % Divestitures and discontinued products (11.1 %) Organic sales 27.8 % The increase in organic sales was attributable to both the Technologies & Equipment and the Consumables segments and resulted from the overall higher volumes during the three months ended September 30, 2021 due to an ongoing recovery in demand from the COVID-19 pandemic. 37 Gross Profit Three Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Gross profit $ 591 $ 442 $ 149 33.5% Gross profit as a percentage of net sales 55.3% 49.4% * Percentages are based on actual values and may not recalculate due to rounding. For the three months ended September 30, 2021, the increase in the gross profit rate as a percentage of net sales was primarily driven by favorable mix including an increase in net sales for higher margin products, as compared to the period ended September 30, 2020. Operating Expenses Three Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Selling, general and administrative expenses ("SG&A") $ 394 $ 315 $ 79 24.7 % Research and development expenses ("R&D") 35 27 8 32.2 % Restructuring and other costs 3 18 (15) NM SG&A as a percentage of net sales 36.8 % 35.2 % R&D as a percentage of net sales 3.3 % 3.0 % * Percentages are based on actual values and may not recalculate due to rounding. NM - Not meaningful SG&A Expenses For the three months ended September 30, 2021, the increase in SG&A expenses as a percentage of net sales was primarily driven by the resumption of more normalized advertising and promotional expenses as well as increased investment in employee headcount and compensation relative to the comparative period ended September 30, 2020 which was impacted by cost-saving measures in response to COVID-19. R&D Expenses For the three months ended September 30, 2021, the increase in R&D expenses from the comparable quarter of the prior year was primarily driven by significant spend controls put in place in 2020 in response to the COVID-19 pandemic, as well as current year increased investment in digital workflow solutions and the non-capitalizable costs associated with software development including clinical application suite and cloud deployment. The Company intends to continue to increase its R&D investments over time. Restructuring and Other Costs The Company recorded restructuring and other costs of $3 million for the three months ended September 30, 2021 compared to $18 million for the three months ended September 30, 2020. In connection with the various restructuring initiatives, as described earlier, the Company recorded $2 million of restructuring costs and $1 million in other costs for the three months ended September 30, 2021. For the three months ended September 30, 2020, the Company recorded $14 million of restructuring costs and $4 million in other costs. 38 Other Income and Expense Three Months Ended September 30, (in millions) 2021 2020 $ Change Net interest expense $ 13 $ 14 $ (1) Other expense (income), net 8 1 7 Net interest and other expense (income) $ 21 $ 15 $ 6 The increase in other expense for the three months ended September 30, 2021 is primarily due to foreign exchange losses of $5 million as compared to a gain of $3 million in the prior year period. Income Taxes and Net Income Three Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change Provision for income taxes $ 35 $ 13 $ 22 Effective income tax rate 25.2 % 18.8 % Net income attributable to Dentsply Sirona $ 103 $ 53 $ 50 * Percentages are based on actual values and may not recalculate due to rounding. Provision for income taxes For the three months ended September 30, 2021, the provision for income taxes was $35 million as compared to $13 million during the three months ended September 30, 2020. During the three months ended September 30, 2021, the Company recorded $4 million of tax expense for discrete tax matters. During the three months ended September 30, 2020, the Company recorded $2 million of tax expense for discrete tax matters. The increase in the effective tax rate is primarily from an increase in mix of higher-taxed foreign income. The Company continues to reassess the realizability of its deferred tax assets and, after weighing all positive and negative evidence, continues to maintain a valuation allowance on certain deferred tax assets. 39 RESULTS OF OPERATIONS, NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2020 Net Sales Nine Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Net sales $ 3,163 $ 2,260 $ 903 40.0 % A reconciliation of net sales to organic sales for the nine months ended September 30, 2021 was as follows: % Change Net sales 40.0 % Foreign exchange impact 4.9 % Acquisitions 6.3 % Divestitures and discontinued products (7.0 %) Organic sales 35.8 % The increase in organic sales was attributable to both the Technologies & Equipment and Consumables segments which were affected by overall higher volumes primarily due to a recovery in demand from the impact of the COVID-19 pandemic, as well as sales attributed to recent product launches. During the nine months ended September 30, 2020, the Company saw normal sales levels for the months of January and February and started to experience a decline in sales volume beginning in March and extending through September due to the onset of the pandemic. Segment Results Net Sales Technologies & Equipment Nine Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Technologies & Equipment $ 1,848 $ 1,328 $ 520 39.2% A reconciliation of net sales to organic sales for the nine months ended September 30, 2021 was as follows: % Change Net sales 39.2% Foreign exchange impact 5.1% Acquisitions 10.8% Divestitures and discontinued products (8.1%) Organic sales 31.4% 40 Consumables Nine Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Consumables $ 1,315 $ 932 $ 383 41.1% A reconciliation of net sales to organic sales for the nine months ended September 30, 2021 was as follows: % Change Net sales 41.1% Foreign exchange impact 4.5% Acquisitions —% Divestitures and discontinued products (5.3%) Organic sales 41.9% Segment Adjusted Operating Income (a) Nine Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Technologies & Equipment (b) $ 409 $ 234 $ 175 NM Consumables (b) 439 160 279 NM NM - Not meaningful (a) See Note 6, Segment and Geographic Information, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-Q for a reconciliation from segment adjusted operating income to a US GAAP measure of consolidated pre-tax income. (b) Certain charges related to discontinuance of product lines which were previously reported in adjusted operating income for the reportable segments, $34 million for the nine months ended September 30, 2020, have been reclassified to the "All other" category to conform to current year presentation and the Company's internal reporting to the Chief Operating Decision Maker package. These amounts are not material to the measure of segment results for the years presented. Technologies & Equipment The increase in organic sales occurred across all dental businesses and was the result of overall higher volumes during the nine months ended primarily due to demand recovery from the impact of the COVID-19 pandemic, as well as sales attributed to recent product launches. The adjusted operating income increase was primarily driven by the increase in net sales as well as expense discipline during the nine months of 2021 relative to the comparative period. Consumables The increase in organic sales occurred across all regions and was the result of overall higher volumes during the nine months ended primarily due to demand recovery from the impact of the COVID-19 pandemic driven by the Endodontic, Restorative, and Preventive businesses. The adjusted operating income increase was primarily driven by favorable mix including increased volumes for higher margin products, and expense discipline during the nine months of 2021 relative to the comparative period. 41 Net Sales by Region United States Nine Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change United States $ 1,112 $ 750 $ 362 48.2 % * Percentages are based on actual values and may not recalculate due to rounding. A reconciliation of net sales to organic sales for the nine months ended September 30, 2021 was as follows: % Change Net sales 48.2 % Foreign exchange impact 0.8 % Acquisitions 18.3 % Divestitures and discontinued products (6.9 %) Organic sales 36.0% The increase in organic sales was attributable to both the Technologies & Equipment and the Consumables segments and was primarily due to overall higher volumes during the nine months ended September 30, 2021 following periods of lower demand resulting from the COVID-19 pandemic. as well as sales attributed to recent product launches. Europe Nine Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Europe $ 1,248 $ 939 $ 309 32.9 % A reconciliation of net sales to organic sales for the nine months ended September 30, 2021 was as follows: % Change Net sales 32.9 % Foreign exchange impact 7.6 % Acquisitions — % Divestitures and discontinued products (5.8 %) Organic sales 31.1% The increase in organic sales was attributable to both the Consumables and the Technologies & Equipment segments and was primarily due to overall higher volumes during the nine months ended September 30, 2021 following periods of lower demand resulting from the COVID-19 pandemic. Rest of World Nine Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Rest of World $ 803 $ 571 $ 232 40.8 % * Percentages are based on actual values and may not recalculate due to rounding. 42 A reconciliation of net sales to organic sales for the nine months ended September 30, 2021 was as follows: % Change Net sales 40.8 % Foreign exchange impact 5.6 % Acquisitions 1.0 % Divestitures and discontinued products (9.3 %) Organic sales 43.5% The increase in organic sales was attributable to both the Technologies & Equipment and the Consumables segments and was primarily due to overall higher volumes during the nine months ended September 30, 2021 following periods of lower demand resulting from the COVID-19 pandemic. During the nine months ended September 30, 2020, the Company experienced a decline in sales volume beginning in March due to the COVID-19 pandemic, particularly in China and other Asian markets. Gross Profit Nine Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Gross profit $ 1,768 $ 1,086 $ 682 62.8 % Gross profit as a percentage of net sales 55.9 % 48.1 % * Percentages are based on actual values and may not recalculate due to rounding. For the nine months ended September 30, 2021, the increase in the gross profit rate as a percentage of net sales was primarily driven by favorable mix including the increase in net sales for higher margin products, as compared to the same period ended September 30, 2020. Operating Expenses Nine Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change % Change Selling, general and administrative expenses ("SG&A") $ 1,177 $ 935 $ 242 25.8 % Research and development expenses ("R&D") 112 79 33 42.5 % Goodwill impairment — 157 (157) NM Restructuring and other costs 11 62 (51) NM SG&A as a percentage of net sales 37.2 % 41.4 % R&D as a percentage of net sales 3.6 % 3.5 % * Percentages are based on actual values and may not recalculate due to rounding. NM - Not meaningful SG&A Expenses For the nine months ended September 30, 2021, the decrease in SG&A expenses as a percentage of net sales was primarily driven by greater absorption of expenses due to higher sales as well as expense discipline, as compared to the same period ended September 30, 2020. 43 R&D Expenses For the nine months ended September 30, 2021, the increase in R&D expenses from the comparable quarter of the prior year was primarily driven by significant spend controls put in place in 2020 in response to the COVID-19 pandemic, as well as current year increased investments in digital workflow solutions and other product development initiatives, and the non-capitalizable costs associated with software development including clinical application suite and cloud deployment. The Company also has additional spend in the current year associated with our recent acquisitions and the opening of a new innovation center in Charlotte, North Carolina. The Company intends to continue to increase its R&D investments over time. Goodwill Impairment There were no impairments recorded in the nine months ended September 30, 2021. During the nine months ended September 30, 2020, as a result of updating the estimates and assumptions pertaining to the impact of the ongoing COVID-19 pandemic the Company determined that the goodwill associated with the Equipment & Instruments reporting unit within the Technologies & Equipment segment was impaired. As a result, the Company recorded a goodwill impairment charge of $157 million. Restructuring and Other Cost The Company recorded restructuring and other costs of $11 million for the nine months ended September 30, 2021 compared to $62 million for the nine months ended September 30, 2020. In connection with the various restructuring initiatives, as described earlier, the Company recorded $14 million of restructuring costs and a benefit of $3 million in other costs for the nine months ended September 30, 2021. During the nine months ended September 30, 2020, the Company recorded $19 million of restructuring costs and $43 million in other costs, which consisted primarily of impairment charges of $39 million related to indefinite-lived intangible assets within the Technologies & Equipment segment driven by a decline in forecasted sales as a result of the COVID-19 pandemic as well as an unfavorable change in the discount rate. Other Income and Expense Nine Months Ended September 30, (in millions) 2021 2020 Change Net interest expense $ 43 $ 32 $ 11 Other expense (income), net 4 4 — Net interest and other expense $ 47 $ 36 $ 11 The increase in net interest expense was due to higher average debt levels particularly during the first six months of 2021 compared to the prior year period. As noted in Part I, Item 1, Note 9, Financial Instruments, in July 2021 the Company entered into a cross currency basis swap which effectively converts a portion of the Company's $750 million bond coupon from 3.3% to 1.7%. Also in July 2021, the Company entered into variable interest rate swaps which convert a portion of the $750 million Senior Notes from a fixed rate of 3.3% into a variable interest rate. Together, these instruments are expected to continue to result in a net reduction of interest expense for the second half of 2021. Income Taxes and Net Income (Loss) Nine Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change Provision (benefit) for income taxes $ 102 $ (1) $ 103 Effective income tax rate 24.2 % 0.7 % Net income (loss) attributable to Dentsply Sirona $ 319 $ (182) $ 501 * Percentages are based on actual values and may not recalculate due to rounding. 44 Provision (benefit) for income taxes For the nine months ended September 30, 2021, the provision for income taxes was $102 million as compared to a tax benefit of $1 million during the nine months ended September 30, 2020. During the nine months ended September 30, 2021, the Company recorded $7 million of tax expense for discrete tax matters. The Company also recorded a $4 million tax expense as a discrete item related to business divestitures. During the nine months ended September 30, 2020, the Company recorded $9 million of tax expense for discrete matters. The Company also recorded a $11 million tax benefit as a discrete item related to the indefinite-lived intangible asset impairment charge. The increase in the effective tax rate is primarily from an increase in mix of higher-taxed foreign income. The Company continues to reassess the realizability of its deferred tax assets and, after weighing all positive and negative evidence, continues to maintain a valuation allowance on certain deferred tax assets. CRITICAL ACCOUNTING POLICIES There have been no changes to the critical accounting policies as disclosed in the Company’s Form 10-K for the year ended December 31, 2020 other than those changes explained in Part I, Item 1, Note 1, Significant Accounting Policies, in the Notes of the Unaudited Consolidated Financial Statements of this Form 10-Q. Goodwill Impairment Goodwill represents the excess cost over the fair value of the identifiable net assets of business acquired. Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired. Judgment is involved in determining if an indicator of impairment has occurred during the course of the year. Such indicators may include a decline in expected cash flows, unanticipated competition or slower growth rates, among others. When testing goodwill for impairment, the Company may assess qualitative factors for its reporting units to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount including goodwill. Alternatively, the Company may bypass this qualitative assessment and perform the quantitative goodwill impairment test. Goodwill is allocated among reporting units and evaluated for impairment at that level. The Company's reporting units are either an operating segment or one level below its operating segments, as determined in accordance with ASC 350. Effective 2021 and prospectively, the Company is performing its required annual goodwill impairment test as of April 1 rather than on April 30 which was the Company’s previous practice. The Company believes this change is preferable as it more closely aligns with the timing of the Company’s strategic business planning process. The Company does not believe this change resulted in any delay, acceleration or avoidance of impairment. Furthermore, a retrospective application to prior periods is impracticable as the Company is unable to objectively determine, without the use of hindsight, the assumptions which would be used in earlier periods. For the fiscal year 2021, the Company performed its goodwill impairment test as of April 1, 2021 and elected to bypass the qualitative assessment and performed a quantitative assessment. The Company did not record any goodwill impairment during the first nine months of 2021. During the comparative first nine months of 2020, the Company recorded a goodwill impairment charge of $157 million associated with one reporting unit within the Technologies & Equipment segment. In conjunction with its annual goodwill impairment test, the Company applied a hypothetical sensitivity analysis to each of its reporting units by increasing the discount rate of these reporting units by 100 basis points and, in a separate test, reducing by 10% the fair value of those reporting units. All of the Company's reporting units passed the hypothetical tests without the fair value being reduced below carrying value, and therefore it was noted that there were currently no reporting units deemed at risk of being impaired based on the sensitivity analysis. 45 To determine the fair value of the reporting units, the Company used a discounted cash flow model which utilizes both internal and market-based data as its valuation technique. The discounted cash flow model uses five-to-ten year forecasted cash flows plus a terminal value based on a multiple of earnings or by capitalizing the last period's cash flows using a perpetual growth rate. The Company's significant assumptions in the discounted cash flow model include, but are not limited to, the weighted average cost of capital, revenue growth rates (including perpetual growth rates), and operating margin percentages of the reporting unit's business. These assumptions were developed in consideration of current market conditions. The Company reconciled the aggregate fair values of its reporting units to its market capitalization, which included a reasonable control premium based on market conditions. Indefinite-Lived Intangible Asset Impairment Indefinite-lived intangible assets consist of tradenames and trademarks and are not subject to amortization; instead, tested for impairment annually or more frequently if events or circumstances indicate that the carrying value of indefinite-lived intangible assets may be impaired or if a decision is made to sell a business. The Company performed this annual impairment test as of April 1, 2021 in conjunction with the goodwill impairment annual test. The Company did not record any indefinite-lived intangible asset impairment during the first nine months of 2021. During the comparative first nine months of 2020, the Company recorded an indefinite-lived intangible asset impairment charge of $39 million within the Technologies & Equipment segment. The fair value of acquired tradenames and trademarks is estimated by the use of a relief from royalty method, which values an indefinite-lived intangible asset by estimating the royalties saved through the ownership of an asset. Under this method, an owner of an indefinite-lived intangible asset determines the arm’s length royalty that likely would have been charged if the owner had to license the asset from a third party. The royalty rate, which is based on the estimated rate applied against forecasted sales, is tax-effected and discounted at present value using a discount rate commensurate with the relative risk of achieving the cash flow attributable to the asset. Management judgment is necessary to determine key assumptions, including revenue growth rates, perpetual revenue growth rates, royalty rates, and discount rates. Other assumptions are consistent with those applied to goodwill impairment testing. The Company also applied a hypothetical sensitivity analysis as part of the annual impairment test of indefinite-lived intangibles. It was noted that if the fair value of each of these indefinite-lived intangibles assets had been hypothetically reduced by 10% or the discount rate had been hypothetically increased by 100 basis points as of April 1st, 2021, the fair value of these assets would still exceed their book value and none of the indefinite-lived intangible assets were considered at-risk based on the sensitivity analysis. The determination of fair value involves uncertainties around the forecasted cash flows as it requires management to make assumptions and apply judgement to estimate future business expectations. Those future expectations include, but are not limited to, the current and ongoing impact of the COVID-19 pandemic and new product development changes for these reporting units. The Company also considers the current and projected market and economic conditions amid the ongoing pandemic for the dental industry both in the U.S. and globally, when determining its assumptions. A change in any of these estimates and assumptions used in the annual test, as well as unfavorable changes in the ongoing COVID-19 pandemic, or in the overall markets served by these reporting units, among other factors, could have a negative material impact to the fair value of the reporting units and the indefinite-lived tangible assets and could result in a future impairment charge. There can be no assurance that the Company’s future goodwill and indefinite-lived assets impairment testing will not result in a material adverse impact to the Company’s results of operations. Refer to Part I, Item 1, Note 13, Goodwill and Intangible Assets, in the Notes of the Unaudited Consolidated Financial Statements of this Form 10-Q for further discussion of the Company's annual goodwill and indefinite-lived intangible asset impairment testing. 46 LIQUIDITY AND CAPITAL RESOURCES Nine Months Ended September 30, (in millions, except percentages) 2021 2020 $ Change Cash provided by (used in): Operating activities $ 435 $ 372 $ 63 Investing activities (319) (5) (314) Financing activities (257) 504 (761) Effect of exchange rate changes on cash and cash equivalents (16) (4) (12) Net (decrease) increase in cash and cash equivalents $ (157) $ 867 $ (1,024) The increase in cash provided by operating activities was driven primarily by the higher cash receipts in the current period as a result of higher sales, offset by changes in working capital including a build-up in inventory during the current period to meet recovered demand. At September 30, 2021, the number of days of sales outstanding in accounts receivable after adjusting for the impact of foreign currency translation increased by 8 days to 62 days as compared to 54 days at December 31, 2020. The number of days of sales in inventory increased by 8 days to 110 days at September 30, 2021 as compared to 102 days at December 31, 2020. The Company removes the impact of foreign currency translation in these ratios by comparing current-period sales, accounts receivables, and inventory to prior-period sales, accounts receivable, and inventory, with both periods converted to the U.S. dollar rate at local currency foreign exchange rates for each month of the prior period. Cash used in investing activities during the first nine months of 2021 included net cash paid for acquisitions of $248 million and capital expenditures of $101 million, offset by the receipt of $27 million in net cash from the sale of a non-core business. The Company expects critical capital expenditures to be in the range of approximately $150 million to $170 million for the full year 2021. Cash used in financing activities for the nine months ended September 30, 2021 was primarily driven by the repayment of fixed senior notes totaling $296 million, offset by the partial financing of this repayment through the Company's commercial paper program which resulted in proceeds of $147 from short-term borrowings. Primarily as a result of this activity, combined with an a decrease of $66 million due to exchange rate fluctuations on debt denominated in foreign currencies, the Company's total borrowings decreased by a net $201 million during the nine months ended September 30, 2021. Other uses of cash for financing included net share repurchases of $90 million and dividend payments of $68 million, offset by proceeds from the exercise of stock options of $47 million. During the nine months ended September 30, 2021, the Company repurchased approximately 1.5 million shares under its open market share repurchase plan for a cost of $90 million at a weighted average price of $60.62. On July 28, 2021, the Board of Directors of the Company approved an increase in the value of shares of common stock that may be repurchased under the share repurchase program to $1 billion, all of which is unused and available to be repurchased as of September 30, 2021. Additional share repurchases, if any, will be made through open market purchases, Rule 10b5-1 plans, accelerated share repurchases, privately negotiated transactions, or other transactions in such amounts and at such times as the Company deems appropriate based upon prevailing market and business conditions and other factors. 47 The Company's ratio of total net debt to total capitalization was as follows: (in millions, except percentages) September 30, 2021 December 31, 2020 Current portion of debt $ 151 $ 296 Long-term debt 1,925 1,978 Less: Cash and cash equivalents 281 438 Net debt $ 1,795 $ 1,836 Total equity 5,125 4,970 Total capitalization $ 6,920 $ 6,806 Total net debt to total capitalization ratio 25.9 % 27.0 % At September 30, 2021, the Company had a borrowing capacity of $607 million available under lines of credit, including lines available under its short-term arrangements and revolving credit facility. Through the date of the filing of this Form 10-Q, the Company has no outstanding borrowings under any of its credit facilities. These agreements are unsecured and contain certain affirmative and negative covenants relating to the operations and financial condition of the Company. The most restrictive of these covenants pertain to asset dispositions and prescribed ratios of indebtedness to total capital and operating income, plus depreciation and amortization to interest expense. At September 30, 2021, the Company was in compliance with these covenants and expects to remain in compliance with all covenants over the next twelve months. At September 30, 2021, the Company held $44 million of precious metals on consignment from several financial institutions. The consignment agreements allow the Company to acquire the precious metals at market rates at a point in time which is approximately the same time and for the same price as alloys are sold to the Company's customers. In the event that the financial institutions would discontinue offering these consignment arrangements, and if the Company could not obtain other comparable arrangements, the Company may be required to obtain third party financing to fund an ownership position in the required precious metal inventory levels. The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries' operating activities and future foreign investments. The Company has the ability to repatriate additional funds to the U.S., which could result in an adjustment to the tax liability for foreign withholding taxes, foreign and/or U.S. state income taxes, and the impact of foreign currency movements. At September 30, 2021, management believed that sufficient liquidity was available in the United States and expects this to remain for the next twelve months. The Company has repatriated and expects to continue repatriating certain funds from its non-U.S. subsidiaries that are not needed to finance local operations, however, these particular repatriation activities have not and are not expected to result in a significant incremental tax liability to the Company. Except as stated above, there have been no material changes to the Company's scheduled contractual cash obligations disclosed in its Form 10-K for the year ended December 31, 2020. The Company continues to review its debt portfolio and may refinance additional debt or add debt in the near-term as interest rates remain at historically low levels. The Company believes there is sufficient liquidity available for the next twelve months. NEW ACCOUNTING PRONOUNCEMENTS Refer to Part 1, Item 1, Note 1, Significant Accounting Policies, to the Unaudited Interim Consolidated Financial Statements of this Form 10-Q for a discussion of recent accounting pronouncements. Item 3 – Quantitative and Qualitative Disclosures about Market Risk There have been no significant material changes to the market risks as disclosed in the Company’s Form 10-K for the year ended December 31, 2020. 48