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 SEC and the Company’s press releases or other public statements, contains or may contain forward-looking statements. Please refer to the discussion under the header “Forward-Looking Statements and Associated Risks” in the forepart of this Form 10-Q. Company Profile DENTSPLY SIRONA Inc. is the world's largest manufacturer of professional dental products and technologies, with a 137-year history of innovation and service to the dental industry and a vision of improving oral health and continence care globally. Dentsply Sirona develops, manufactures, and markets comprehensive solutions, including technologically advanced dental equipment supported by cloud software solutions as well as dental products and healthcare consumable products in urology and enterology under a strong portfolio of world class brands. 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 the Nasdaq stock market under the symbol XRAY. BUSINESS The Company operates in four reportable segments as described below. Connected Technology Solutions This segment includes the design, manufacture, and sales of the Company’s dental technology and equipment products. These products include the Equipment & Instruments and CAD/CAM product categories. Dental CAD/CAM technologies are products designed for dental offices to support numerous digital workflows for procedures such as dental restorations through integrations with DS Core, our cloud-based platform. Essential Dental Solutions This segment includes the development, manufacture, and sales of the Company’s value-added endodontic, restorative, and preventive consumable products and small equipment used in dental offices for the treatment of patients. Offerings in this segment also include specialized treatment products including products used in the creation of dental appliances. Orthodontic and Implant Solutions This segment includes the design, manufacture, and sales of the Company’s various digital implant systems and innovative dental implant products, digital dentures and dental professional directed aligner solutions. Offerings in this segment also include application of our digital services and technology, including those provided by DS Core, our cloud-based platform. Wellspect Healthcare This segment includes the design, manufacture, and sales of the Company’s innovative continence care solutions for both urinary and bowel management. This category consists mainly of urology catheters and other healthcare-related consumable products. The impact of the Israel-Hamas war The terrorist attacks by Hamas militants crossing the border from Gaza to Israel in October 2023 and the subsequent military response by the Israeli government in Gaza has resulted in significant unrest and uncertainty within that region. During the course of 2024, the state of Israel has also been a target of coordinated missile and drone attacks launched by the Republic of Iran and by Iran’s terrorist proxy organization in Lebanon. These events have heightened the possibility that escalating violence and involvement of other terrorist groups or foreign powers in the region may further impact our employees and operations. Additionally, in May 2024, in response to ongoing military actions, the government of Turkey implemented restrictions on the import of goods manufactured within Israel for sale in the Turkish market. Sales of our products made in Israel and sold in Turkey represent less than 2% of our global sales of Implant & Prosthetic Solutions, but this product category 39 is an area of relatively high potential growth. It is not clear when these restrictions will be lifted or if other countries will institute similar restrictions. The Company’s operations in Israel consist of two manufacturing facilities for implants products, with one site in northern Israel and one site in southern Israel, which together employ approximately 350 associates. These facilities remain open and continue to operate. We may, however, decide to discontinue production at these facilities for the safety of our employees, or we could face future production slowdowns or interruptions at either location due to the impacts of the war, including personnel absences as a number of our employees have been called to active military duty, or due to other resource constraints such as the inability to source materials for production. For the three months ended September 30, 2024, net sales of products produced at these sites comprised approximately 3% of consolidated net sales and 12% of the net sales of the Orthodontic and Implant Solutions segment. Net assets within Israel total $179 million as of September 30, 2024, consisting primarily of acquired technology, property, plant and equipment, cash, and inventory associated with our operations in country. Overall, the Company’s operations in Israel have not been materially impacted by the conflict, and consequently, the Company has not recorded any allowance for doubtful accounts, inventory reserves, or fixed asset impairments through the nine months ended September 30, 2024 due to the conflict. The Company continues to monitor developments and prepare contingency plans to limit potential disruption to its operations. Additionally, we sell products from across our portfolio to distributors of dental products and direct to dental practices within Israel and its neighboring countries which may face reduced patient traffic and demand for our products in the near term. Net sales for products sold to our customers in Israel comprised approximately 1% of our consolidated net sales for the three months ended September 30, 2024 . While Israel does not constitute a material portion of our business, a significant escalation or expansion of the conflict’s current scope and economic disruption could result in loss of sales and market position, disrupt our supply chain, broaden inflationary costs including energy prices, and have a material adverse effect on our results of operations, including impairment of the net assets in Israel or goodwill within the Implant & Prosthetic Solutions reporting unit. The impact of the war in Ukraine In February 2022, because of the invasion of Ukraine by Russia, economic sanctions were imposed by the United States, the European Union, and certain other countries on Russian financial institutions and businesses. Due to the medical nature of our products, the current sanctions have not materially restricted our ability to continue selling many of our products to customers located in Russia. The Company also sources certain raw materials and components from Russia and Ukraine and has taken actions to minimize any adverse impacts from disrupted supply chains related to these items. The Company’s operations in Ukraine consist primarily of R&D activities, which continue from locations that focus on the safety of employees. Ov erall, the Company’s operations in Russia and Ukraine have not been materially impacted by the conflict, and consequently, the Company has not recorded any allowance for doubtful accounts, inventory reserves, or asset impairments through the nine months ended September 30, 2024 as a result of the conflict. For the three months ended September 30, 2024, net sales in Russia and Ukraine were approximately 3% of our consolidated net sales, and net assets in these countries were $68 million as of September 30, 2024. These net assets include $40 million of cash and cash equivalents held within Russia as of September 30, 2024, as well as inventory and trade accounts receivable. Due to currency control measures imposed by the Russian government, which include restrictions on the ability of companies to repatriate or otherwise remit cash from their Russian-based operations to locations outside of Russia, we continue to be limited in our ability to transfer this cash balance out of Russia without incurring substantial costs. Additionally, beginning in September 2024, as a result of further restrictions by European financial institutions on receiving payments from Russia, our capacity to receive intercompany payments for the delivery of our products into Russia has been partially reduced, which further limits our ability to use cash received from sales in Russia for our general purposes. It is unclear whether the remaining financial institutions which the Company relies upon for bank transfers from Russia will ultimately be able to continue facilitating payments, or for how long. If these restrictions on cash transfers from Russia worsen, or if we are not able to obtain long-term relief from these restrictions, we may need to take additional actions, including potential suspension of our business in Russia. A significant escalation or expansion of economic disruption from the conflict could interrupt our supply chain, broaden inflationary costs, impair our assets located in Russia, result in a loss of sales, and have a material adverse effect on our results of operations. 40 The impact of global economic conditions Markets in several regions, particularly Europe, continue to experience varying degrees of recessionary pressures and face concerns about the systemic impacts of adverse economic conditions and geopolitical issues. Changes in economic conditions, supply chain constraints, higher energy costs, labor shortages, the conflict in Ukraine, and geopolitical tensions in the Middle East, have all contributed to a period of higher inflation across the industry and the regions in which the Company operates. As a result, the Company has experienced higher prices for certain raw materials, including electronic components, which consequently have led to a negative impact on margins. We expect a continuation of inflationary pressure on the cost of both raw materials and wages through the remainder of 2024, the effect of which will depend on our ability to successfully mitigate and offset the related impacts. The challenging macroeconomic conditions have also negatively impacted demand for the Company’s products and may continue to do so in the future. Specifically, higher interest rates have put pressure on the ability and willingness of our customers to obtain financing for equipment purchases, which affects volumes for these products. The higher cost of borrowing has also reduced patient demand for elective dental procedures, which affects sales of the Company’s offerings more broadly. The Company has also faced additional competitive pressure for lower-priced options for investments in new equipment by dental practices, in particular for imaging products. While the Company has taken steps to address competitive pressures, such as the reintroduction of its Orthophos SL 2D and 3D products, these trends may continue. While patient volumes have largely remained stable in the United States, the impact of macroeconomic declines and high interest rates has been particularly a pparent in Germany, which represented 10% of the Company’s sales for the nine months ended September 30, 2024. Germany was in a recession for most of 2023, largely due to persistent high inflation and falling household spending. Although conditions, including inflation, appeared to improve marginally in the first half 2024, demand for investments in new dental equipment continues to be weak, and economic forecasts by the German government now project there will be no growth through the end of 2024. The Company therefore believes the challenging macroeconomic and market conditions in Germany are likely to persist and negatively impact sales of equipment in the fourth quarter. In anticipation of a continued inflationary trend and potentially deteriorating macroeconomic environment, we have attempted to mitigate these pressures through the following actions, among others: • Driving strategic procurement initiatives to leverage alternative sources of raw materials and transportation; • Implementing cost-containment measures, as well as intensifying continuous improvement and restructuring programs in our manufacturing and distribution facilities and other areas of our business, including the most recent restructuring plan approved by the Board of Directors on July 29, 2024; • Optimizing our customer management and implementing strategic investments in our commercial sales organization in key markets, particularly the United States; and • Refining our focus on developing a winning portfolio with global scale to maximize market share in a competitive pricing environment. As explained further in the Results of Operations section below, the Company has partially offset elevated costs in certain areas of the business with price increases. Should the higher inflationary environment continue, we may be unable to raise the prices of certain products and services sufficiently or engage in other cost cutting measures commensurate with the rate of inflation, which could have a material adverse effect on our results of operations and financial condition. Distribution arrangements In July 2024, the Company delivered a one-year notice of non-renewal in connection with its non-exclusive distribution agreements with Patterson Companies, Inc. (“Patterson”) for the distribution of dental equipment in the United States and Canada. It is anticipated that Patterson will continue to be one of the Company’s two largest distributors as a percentage of the Company’s global revenue during the one-year notice period. The Company intends to engage in discussions for new distribution agreements with Patterson. However, failure to successfully renegotiate the distribution agreements or secure potential new agreements with another distributor could have a material adverse effect on the Company’s business, operating results and financial condition. The Company does not anticipate a charge against earnings related to non-renewal of the distribution agreements. For additional information, see Part 1, Item 1A, “Risk Factors” in our 2023 Form 10-K. 41 Suspension of Byte aligner shipments On October 24, 2024, we announced that as a precautionary measure, we were voluntarily suspending the sale and marketing of our direct-to-consumer Byte aligner systems and impression kits while we conduct a review of certain regulatory requirements related to these products. We expect this suspension of sales to have a material impact on our results of operations in future periods. The sales of Byte aligner systems and impression kits represented approximately 5% of our annual revenue for the year ended December 31, 2023. For additional information, see Note 15, Subsequent Events, in the Notes to the Unaudited Consolidated Financial Statements of this Form 10-Q and see also Part II, Item 1A, “Risk Factors” of this Form 10-Q. RESULTS OF OPERATIONS: THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 Net Sales The Company presents net sales comparing the current year periods to the prior year periods. In addition, the Company also presents the changes in net sales on an organic sales basis, which is a Non-GAAP measure. The Company defines “organic sales” as the reported net sales adjusted for: (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 changes, which is calculated by translating current period net sales using the comparable prior period’s currency exchange rates. Our measure of organic sales 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, and its 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 changes in organic sales to allow investors to evaluate the performance of the Company’s operations exclusive of the items listed above that may 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 supplemental information is helpful in understanding underlying net sales trends. A reconciliation of net sales to organic sales for the three and nine months ended September 30, 2024 is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Net sales $ 951 $ 947 $ 4 0.5 % $ 2,888 $ 2,953 $ (65) (2.2 %) Unfavorable foreign exchange impact (0.8 %) (1.2 %) Organic sales 1.3 % (1.0 %) Percentages are based on actual values and may not reconcile due to rounding. The increase in organic sales for the three months ended September 30, 2024 was led by the performance of the Essential Dental Solutions segment, driven by higher volume in preventive and restorative products, particularly in the United States as described below. The increase was partially offset by unfavorable pricing in the Connected Technology Solutions segment and lower volumes in the Orthodontic and Implant Solutions segment. The decrease in organic sales for the nine months ended September 30, 2024 was primarily due to weaker demand for products in Connected Technology Solutions, particularly outside the United States, partially offset by growth in the Wellspect Healthcare segment and orthodontics products. The organic sales decrease for the nine months ended September 30, 2024 was also driven by weaker demand for implant and prosthetic solutions, primarily in the United States and Europe. 42 Net Sales by Segment Connected Technology Solutions A reconciliation of net sales to organic sales for the three and nine months ended September 30, 2024 is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Net sales $ 269 $ 276 $ (7) (2.3 %) $ 769 $ 850 $ (81) (9.5 %) Unfavorable foreign exchange impact (0.9 %) (1.4 %) Organic sales (1.4 %) (8.1 %) Percentages are based on actual values and may not reconcile due to rounding. The decrease in organic sales for both the three and nine months ended September 30, 2024 was primarily due to lower volumes of imaging equipment and treatment centers across all three regions, driven in part by competitive pressures including pricing as well as unfavorable economic conditions. The organic sales decrease for the three months ended September 30, 2024 was lower than the decrease for the nine months ended September 30, 2024 as a result of higher volumes of treatment centers sold in Europe and higher volumes of CAD/CAM equipment sold in the United States and Rest of World during the three months ended September 30, 2024. Essential Dental Solutions A reconciliation of net sales to organic sales for the three and nine months ended September 30, 2024 is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Net sales $ 369 $ 347 $ 22 6.6 % $ 1,108 $ 1,110 $ (2) (0.1 %) Unfavorable foreign exchange impact (0.9 %) (1.0 %) Organic sales 7.5 % 0.9 % Percentages are based on actual values and may not reconcile due to rounding. The increase in organic sales for the three months ended September 30, 2024 was driven by higher volumes of preventive and restorative products in the United States. As described below, the higher volumes of preventive and restorative products in the United States was driven by a shift in the timing of approximately $20 million in distributor order s fr om the fourth quarter into the third quarter in advance of a fourth quarter Enterprise Resource Planning (“ERP”) system deployment in the United States. The increase in organic sales for the nine months ended September 30, 2024 was primarily due to higher volumes of endodontic products in Rest of World, offset by lower overall demand in Europe. Orthodontic and Implant Solutions A reconciliation of net sales to organic sales for the three and nine months ended September 30, 2024 is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Net sales $ 241 $ 252 $ (11) (4.6 %) $ 788 $ 781 $ 7 0.9 % Unfavorable foreign exchange impact (0.7 %) (1.3 %) Organic sales (3.9 %) 2.2 % Percentages are based on actual values and may not reconcile due to rounding. 43 The decrease in organic sales for the three months ended September 30, 2024 was primarily driven by a decrease in volume for implants and prosthetics products across all regions and weaker demand in the United States for orthodontics, as sales for our direct-to-consumer aligner business were negatively impacted by legislative trends as described below. The decrease was partially offset by growth in Europe and Rest of World for orthodontics products. The increase in organic sales for the nine months ended September 30, 2024 was primarily driven by higher volumes of orthodontics products in all regions, coupled with an increase in demand for implants products in Rest of World. This was partially offset by lower volumes of implants and prosthetics products in the United States and Europe. Prior to the suspension of Byte aligner sales and shipments on October 24, 2024, as discussed under Note 15, Subsequent Events, in the Notes to the Unaudited Consolidated Financial Statements of this Form 10-Q, sales for our direct-to-consumer aligner business continued to be negatively impacted in the third quarter by changes made to our operating model in response to legislative trends. Beginning in the second quarter, legislative changes in Nevada required us to discontinue new patient recruitment for our current direct-to-consumer aligner business model in that state. Additionally, laws relating to teledentistry enacted in Florida and Illinois during the third quarter prompted us to make certain adjustments to our processes and workflow for engaging with customers and other parts of our direct-to-consumer aligner business model. Our response to these regulatory and legislative developments has resulted in reductions of sales of direct-to-consumer orthodontics products by approximately $15 million during the first nine months of 2024. We expect these adjustments would have continued to have a negative impact in the fourth quarter of 2024 and into 2025 prior to the suspension of sales as discussed under Note 15, Subsequent Events, in the Notes to the Unaudited Consolidated Financial Statements of this Form 10-Q. We are also monitoring potential legislative initiatives underway in additional states, which could result in rules similar to those imposed in Florida and Illinois being enacted in 2025. Future legislative changes at the state or federal level, or changes in the interpretation of existing legislation by regulators, may further impact the current business model and operations of our direct-to-consumer aligner business or require us to evaluate patient recruitment strategies in certain states. We continue to monitor these legal developments. For additional information, see Part I, Item 1, “Business - Regulation” and Part 1, Item 1A, “Risk Factors” in our 2023 Form 10-K as updated in Part II, Item 1A “Risk Factors” in this Form 10-Q. Wellspect Healthcare A reconciliation of net sales to organic sales for the three and nine months ended September 30, 2024 is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Net sales $ 72 $ 72 $ — (0.4 %) $ 223 $ 212 $ 11 4.9 % Unfavorable foreign exchange impact (0.4 %) (0.6 %) Organic sales — % 5.5 % Percentages are based on actual values and may not reconcile due to rounding. Organic sales for the three months ended September 30, 2024 were flat as higher volumes from new product net sales and growth in Europe were offset due to timing of orders with a distributor in the United States. The increase in organic sales for the nine months ended September 30, 2024 was driven by higher volumes in all regions, particularly in Europe, primarily driven by new product launches. 44 Net Sales by Region United States A reconciliation of net sales to organic sales for the three and nine months ended September 30, 2024 is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Net sales $ 374 $ 356 $ 18 5.0 % $ 1,089 $ 1,069 $ 20 1.9 % Unfavorable foreign exchange impact (0.1 %) — % Organic sales 5.1 % 1.9 % Percentages are based on actual values and may not reconcile due to rounding. The increase in organic sales for the three months ended September 30, 2024 was driven by timing of orders for preventive and restorative consumable products in the United States, as distributors placed orders of approximately $20 million in advance of our fourth quarter deployment of a new ERP system. We expect distributor inventory levels of consumables products to return to historical averages by the end of the fourth quarter. The increase in organic sales was partially offset by lower volumes for Orthodontic and Implant Solutions. Volumes for imaging products in the three months ended September 30, 2024 were positively impacted by a higher seasonal build in distributor inventory of approximately $13 million, compared to a build of approximately $8 million in the three months ended September 30, 2023. Similarly, volumes for CAD/CAM products were positively affected by a build in distributor inventory levels of approximately $35 million in the three months ended September 30, 2024, compared to approximately $20 million in the three months ended September 30, 2023, due in part to distributor stocking of our new intraoral scanner, as well as lower than expected retail demand in the third quarter. Levels of distributor inventory for CAD/CAM products at September 30, 2024 are approximately $24 million higher than the levels at September 30, 2023. We expect levels to return to historical averages by the end of the fourth quarter. The increase in organic sales for the nine months ended September 30, 2024 was primarily due to an increase in demand for certain orthodontics products and CAD/CAM products, partially offset by a decrease in demand for implants and imaging products. Volumes for imaging products in the nine months ended September 30, 2024 included an increase in distributor inventory during the period of approximately $2 million compared to a build of approximately $15 million in the nine months ended September 30, 2023. Volumes for CAD/CAM products were positively affected by build in distributor inventory levels of approximately $28 million in the nine months ended September 30, 2024, compared to approximately $2 million in the nine months ended September 30, 2023. Europe A reconciliation of net sales to organic sales for the three and nine months ended September 30, 2024 is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Net sales $ 347 $ 354 $ (7) (1.8 %) $ 1,110 $ 1,153 $ (43) (3.7 %) Favorable foreign exchange impact 0.2 % (0.2 %) Organic sales (2.0 %) (3.5 %) Percentages are based on actual values and may not reconcile due to rounding. The decrease in organic sales for both the three and nine months ended September 30, 2024 was primarily due to lower demand for imaging products within the Connected Technology Solutions segment and lower demand for implants and prosthetics products, which was primarily a result of unfavorable market and macroeconomic trends. These decreases were partially offset by higher demand for orthodontics and Wellspect products. 45 Rest of World A reconciliation of net sales to organic sales for the three and nine months ended September 30, 2024 is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Net sales $ 230 $ 237 $ (7) (3.0 %) $ 689 $ 731 $ (42) (5.7 %) Unfavorable foreign exchange impact (3.6 %) (4.3 %) Organic sales 0.6 % (1.4 %) Percentages are based on actual values and may not reconcile due to rounding. The increase in organic sales for the three months ended September 30, 2024 was primarily driven by an increase in demand for Essential Dental Solutions products, offset by lower demand for Connected Technology Solutions, particularly related to treatment centers and imaging. The decrease in organic sales for the nine months ended September 30, 2024 was primarily driven by unfavorable pricing for Connected Technology Solutions products, particularly in Japan, where there was lower volume due to competitive pressures. These decreases were partially offset by increased volumes for implants products. The local volume-based procurement program in China resulted in increased volumes for implants products during the first half of 2024, representing a marked improvement from the program's adverse impact in early 2023; however, volumes in China declined in the third quarter due to current macroeconomic conditions. Gross Profit Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Gross profit $ 495 $ 495 $ — 0.2 % $ 1,512 $ 1,564 $ (52) (3.3 %) Gross profit as a percentage of net sales 52.1 % 52.2 % (10) bps 52.4 % 53.0 % (60) bps Percentages are based on actual values and may not reconcile due to rounding. Gross profit as a percentage of net sales for the three months ended September 30, 2024 decreased primarily due to unfavorable pricing and mix of CAD/CAM and implants products, as well as lower volumes of imaging products, which was offset by increased volumes in the Essential Dental Solutions segment for preventive and restorative products. Gross profit as a percentage of net sales for the nine months ended September 30, 2024 declined primarily due to lower volumes of imaging products, partially offset by improved pricing in Essential Dental Solutions. Higher manufacturing and input costs for the both the three and nine months ended September 30, 2024 were partially offset by a decrease in warranty costs. 46 Operating Expenses Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Selling, general, and administrative expenses ("SG&A") $ 390 $ 372 $ 18 5.2 % $ 1,204 $ 1,204 $ — 0.1 % Research and development expenses ("R&D") 40 46 (6) (12.0 %) 123 141 (18) (12.2 %) Goodwill and intangible asset impairments 504 307 197 NM 510 307 203 NM Restructuring and other costs 23 6 17 NM 45 70 (25) NM SG&A as a percentage of net sales 41.0 % 39.1 % 190 bps 41.7 % 40.8 % 90 bps R&D as a percentage of net sales 4.2 % 4.8 % (60) bps 4.3 % 4.8 % (50) bps Percentages are based on actual values and may not reconcile due to rounding. NM - Not meaningful SG&A Expenses The increase in SG&A expenses for the three months ended September 30, 2024 was primarily driven by higher selling costs, particularly in Orthodontic and Implant Solutions, and costs related to a new global ERP system. The comparative three months ended September 30, 2023 included a gain from release of employee compensation accruals as a result of a settlement. These increases were partly offset by lower headcount costs as a result of restructuring activities. The decrease in SG&A expenses for the nine months ended September 30, 2024 was driven by lower headcount costs, travel costs, and professional service costs. The decrease was mostly offset by higher selling costs, particularly in Orthodontic and Implant Solutions. 47 R&D Expenses For the three and nine months ended September 30, 2024, R&D expenses decreased as the Company continues to prioritize a disciplined approach with ongoing investments in digital workflow solutions, product development initiatives, and software development, including clinical application suite and cloud deployment. The Company expects to continue to maintain a level of investment in R&D that is at least 4% of annual net sales. Goodwill and Intangible Asset Impairments For the three months ended September 30, 2024, the Company recorded pre-tax goodwill impairment charges of $504 million for the Orthodontic Aligner Solutions and Implant & Prosthetic reporting units, both within the Orthodontic and Implant Solutions segment. The charge for the Orthodontic Aligner Solutions reporting unit was driven by adverse impacts from legislative trends pertaining to the Company’s direct-to-consumer aligner business, specifically the Company’s experience of slower than expected improvements in conversion rates for new aligner customers in the third quarter as the Company continued to modify its operating model in response to those trends. The charge for the Implant & Prosthetic Solutions reporting unit was driven by weakened demand, particularly in North American and European markets, in conjunction with competitive pressures and adverse impacts of ongoing global conflicts in certain markets, as well as lower long-term expectations for volumes of lab materials. These factors contributed to reduced forecasted revenues, lower operating margins, and reduced expectations for future cash flows in the near term for the two reporting units within the Orthodontic and Implant Solutions segment. For the nine months ended September 30, 2024, the Company also recorded an intangible asset impairment charge of $6 million. The charge was related to indefinite-lived imaging product trade names within the Connected Technology Solutions segment. For further information see Note 13, Goodwill and Intangible Assets, in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q. Restructuring and Other Costs For the three and nine months ended September 30, 2024, the Company recorded $23 million and $45 million, respectively, of restructuring and other costs, and for the three and nine months ended September 30, 2023, the Company recorded $6 million and $70 million, respectively. The expenses in 2023 consisted primarily of severance costs in conjunction with the restructuring plan announced in February 2023 (the “2023 Plan”). On July 31, 2024, the Company announced a new restructuring plan (the “2024 Plan”). The expenses in 2024 primarily consist of severance costs in conjunction with the 2023 Plan and the 2024 Plan. For further details refer to Material Trends in Capital Resources below, and Note 8, Restructuring and other costs, in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q. Segment Adjusted Operating Income Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) (a) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Connected Technology Solutions $ 16 $ 22 $ (6) (26.5 %) $ 21 $ 54 $ (33) (60.7 %) Essential Dental Solutions 132 115 17 15.3 % 372 365 $ 7 2.2 % Orthodontic and Implant Solutions 24 31 (7) (23.9 %) 108 129 $ (21) (16.3 %) Wellspect Healthcare 26 26 — (0.9 %) 73 65 $ 8 12.2 % Percentages are based on actual values and may not reconcile due to rounding. (a) See Note 6, Segment Information, in the Notes to Unaudited Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a reconciliation from segment adjusted operating income to consolidated US GAAP income. 48 Connected Technology Solutions The decrease in segment adjusted operating income for both the three and nine months ended September 30, 2024 is due to the lower organic sales noted above, unfavorable manufacturing leverage from lower volumes, and unfavorable product mix as a result of lower sales for certain higher margin CAD/CAM equipment products. These decreases were partially offset by lower headcount-related costs and product warranty and return costs. Essential Dental Solutions The increase in segment adjusted operating income for both the three and nine months ended September 30, 2024 is due to the higher organic sales noted above and favorable product mix, particularly in the three months ended September 30, 2024. Orthodontic and Implant Solutions The decrease in segment adjusted operating income for both the three and nine months ended September 30, 2024 is due to unfavorable geographic mix for implants products, higher distribution and manufacturing costs, an increase in advertising and selling costs, and higher headcount, primarily for key customer-facing roles in the orthodontics business. As noted above, operating income for the three months ended September 30, 2024 was unfavorably impacted by a decline in sales for implants and direct-to-consumer aligners. For the nine months ended September 30, 2024 these drivers were partially offset by the organic sales increase, primarily for orthodontics products. Wellspect Healthcare Segment adjusted operating income was flat for the three months ended September 30, 2024 due to the sales trend noted above, as well as stable margins and operating costs. The increase in segment adjusted operating income for the nine months ended September 30, 2024 was due to the increase in sales noted above, as well as margin improvement due to the favorable manufacturing leverage of higher volumes. Other Income and Expense Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Interest expense, net $ 18 $ 19 $ (1) (11.2 %) $ 53 $ 61 $ (8) (14.9 %) Other (income) expense, net (2) (5) 3 NM (10) 13 (23) NM Net interest and other expense (income) $ 16 $ 14 $ 2 $ 43 $ 74 $ (31) Percentages are based on actual values and may not reconcile due to rounding. NM - Not meaningful Interest expense, net Interest expense, net for the three months ended September 30, 2024 decreased compared to the three months ended September 30, 2023. Interest expense, net decreased for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, driven primarily by lower short-term and other borrowings. 49 Other (income) expense, net Other (income) expense, net for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023 is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change 2024 2023 $ Change Foreign exchange (gains) losses $ (3) $ (6) $ 3 $ (17) $ 4 $ (21) Loss (gain) from equity method investments — 1 (1) — 4 (4) Defined benefit pension plan expenses 1 1 — 6 5 1 Other non-operating (income) expense — (1) 1 1 — 1 Other (income) expense, net $ (2) $ (5) $ 3 $ (10) $ 13 $ (23) Foreign exchange (gains) losses include revaluation of intercompany payables and loans, as well as a benefit from our Swiss franc net investment hedge totaling $6 million and $17 million for the three and nine months ended September 30, 2024, respectively. Income Taxes and Net Income Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages) 2024 2023 $ Change 2024 2023 $ Change Provision (benefit) for income taxes $ 17 $ 16 $ 1 $ 69 $ (28) $ 97 Effective income tax rate (3.3 %) (6.3 %) (16.7 %) 12.1 % Net loss attributable to Dentsply Sirona $ (494) $ (266) $ (228) $ (480) $ (199) $ (281) Diluted loss per common share $ (2.46) $ (1.25) $ (2.35) $ (0.94) Percentages are based on actual values and may not reconcile due to rounding. Provision for income taxes The effective tax rates for the three months ended September 30, 2024 and 2023 were (3.3%) and (6.3%), respectively. For the nine months ended September 30, 2024 and 2023, the rates were (16.7%) and 12.1%, respectively. The effective tax rates for 2024 include discrete expenses resulting from implementing an internal reorganization. In contrast, the rates for 2023 were significantly affected by the partial release of the valuation allowance on net operating loss carryforwards. The Company performed an assessment to evaluate the new global minimum tax developed by the Organisation for Economic Co-operation and Development (“Pillar Two”), which involved analyzing the tax laws in each jurisdiction in which the Company operates and modeling the implications with the Pillar Two framework. The impact of Pillar Two on the Company was not significant. The Company included the impact of the top-up tax under the Income Inclusion Rule for those jurisdictions in which the Company failed the transitional safe harbor requirement in its full year 2024 effective tax rate. 50 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Goodwill and Indefinite-Lived Intangible Assets Goodwill Goodwill represents the excess cost over the fair value of the identifiable net assets of business acquired and is allocated among the Company's reporting units. Goodwill is not amortized; instead, it is tested for impairment at the reporting unit level annually at April 1 or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired, or if a decision is made to sell a business. Judgment is involved in determining if an indicator of impairment has occurred during the year. Such indicators may include a decline in expected cash flows, unanticipated competition, increased interest rates, 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. It is important to note that fair values which could be realized in an actual transaction may differ from those used to evaluate the impairment of goodwill. Refer to Part I, Item 1, Note 13, Goodwill and Intangible Assets, in the Notes to the Unaudited Consolidated Financial Statements of this Form 10-Q for further discussion of the Company's annual and interim goodwill impairment testing. Indefinite-Lived Intangible Assets Indefinite-lived intangible assets consist of trade names, trademarks, and in-process R&D and are not subject to amortization; instead, they are tested for impairment annually at April 1 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. A significant amount of judgment is involved in determining if an indicator of impairment has occurred during the year. Such indicators may include a decline in expected cash flow, unanticipated competition, increased interest rates, or slower growth rates, among others. It is important to note that fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of indefinite-lived assets. The fair value of acquired trade names and trademarks is estimated using 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. Impairment Test Results The Company assessed the goodwill of its reporting units and its indefinite-lived intangible assets for impairment as of April 1, 2024. Based on the Company's April 1 impairment test, it was determined that the fair values of its reporting units and indefinite-lived intangible assets more likely than not exceeded their carrying values, resulting in no impairment. In the quarter ended September 30, 2024, the Company identified indicators of a more likely than not impairment for two of its reporting units, Orthodontic Aligner Solutions and Implant & Prosthetic Solutions, which together comprise all of the Orthodontic and Implant Solutions segment. The decline in fair value for the Orthodontic Aligner Solutions reporting unit was driven by adverse impacts from legislative trends pertaining to the Company’s direct-to-consumer aligner business, specifically the Company’s experience of slower than expected improvements in conversion rates for new aligner customers in the third quarter as the Company continued to modify its operating model in response to those trends. Laws relating to teledentistry enacted in Florida and Illinois during the third quarter, and the potential for similar laws to be introduced in other states, required adjustments to the Company’s process for engaging with customers which resulted in a decline in forecasted revenues in the near term, as well as a longer-term decline in operating margins for the business. The reduction in fair value was also the result of continued macroeconomic pressures and weaker than expected demand for the direct-to-consumer business. The reduction in fair value for the Implant & Prosthetic Solutions reporting unit was driven by weakened demand, particularly in North American and European markets, in conjunction with competitive pressures and adverse impacts of ongoing global conflicts in certain markets, as well as lower long-term expectations for volumes of lab materials. These factors contributed to 51 reduced forecasted revenues, lower operating margins, and reduced expectations for future cash flows in the near term for both reporting units. The higher inflationary environment has impacted the discretionary spending behavior of the Company’s customers more generally, further reducing global demand for certain products in favor of lower cost options. As a result, the Company recorded pre-tax goodwill impairment charges as of September 30, 2024 of $145 million for the Orthodontic Aligner Solutions reporting unit and $359 million for the Implant & Prosthetic Solutions reporting unit, both within the Orthodontic and Implant Solutions segment. The impairment charge related to the Orthodontic Aligner Solutions reporting unit resulted in a full write-off of the remaining goodwill balance for this reporting unit. As the fair value of the Implant & Prosthetic Solutions reporting unit approximates its car rying value as of September 30, 2024, any further decline in key assumptions could result in additional impairment in future periods. The remaining goodwill associated with the Implant & Prosthetic Solutions reporting unit was $814 million as of September 30, 2024. Based on quantitative and qualitative analyses performed for the other reporting units and the Company’s indefinite-lived intangible assets, the Company believes there is no indication that the carrying value more likely than not exceeds the fair value in each case as of September 30, 2024. For the Company's reporting units that were not impaired, the Company applied a hypothetical sensitivity analysis by increasing the discount rate of these reporting units by 50 basis points. The results of this sensitivity analysis at September 30, 2024 indicate that none of the other reporting units would be impaired. The fair values of certain indefinite-lived intangible assets within the Connected Technology Solutions segment continued to approximate carrying values as of September 30, 2024. Any further decline in key assumptions could result in additional impairments in future periods. The carrying value of these assets within the Connected Technology Solutions segment was $211 million as of September 30, 2024. LIQUIDITY AND CAPITAL RESOURCES Nine Months Ended September 30, (in millions) 2024 2023 $ Change Cash (used in) provided by: Operating activities $ 374 $ 217 $ 157 Investing activities (140) (69) (71) Financing activities (264) (179) (85) Effect of exchange rate changes on cash and cash equivalents (8) (25) 17 Net (decrease) increase in cash and cash equivalents $ (38) $ (56) $ 18 Cash provided by operating activities increased compared to the nine months ended September 30, 2023, primarily as a result of changes in working capital, including higher collections on accounts receivable due largely to timing of customer remittances, management of inventory levels during the current period compared to an increase in the prior year, and lower payments to vendors during the current period due to timing. Cash provided by operating activities for the first nine months of 2024 also includes receipt of a $42 million foreign income tax refund. At September 30, 2024, the number of days for sales outstanding in accounts receivable increased by 3 days to 62 days as compared to 59 days at December 31, 2023, and the number of days of sales in inventory was 126 days at both September 30, 2024 and December 31, 2023. The cash used in investing activities increased compared to the nine months ended September 30, 2023, due to higher capital expenditures of $20 million and lower net cash proceeds on settlement of derivatives of $51 million. The Company estimates capital expenditures to be in the range of approximately $170 million to $200 million for the full year 2024 and expects these investments to include additional implementation expenses for the Company’s new global ERP system, equipment upgrades, and capacity expansion to support product innovation and consolidate operations for enhanced efficiencies. The increase of cash used in financing activities compared to the nine months ended September 30, 2023 was primarily driven by additional treasury share repurchases of $100 million. 52 On November 7, 2023, the Board of Directors approved an increase to the authorized share repurchase program of $1.0 billion. At September 30, 2024, the Company had $1.19 billion of authorization remaining available for share repurchases. Additional share repurchases, if any, may be made through open market purchases, Rule 10b5-1 plans, accelerated share repurchases, privately negotiated transactions, or other transactions in such amounts and at such times as the Company considers appropriate based upon prevailing market and business conditions and other factors. At September 30, 2024, the Company held 65.7 million shares of treasury stock. The Company's ratio of total net debt to total capitalization was as follows: (in millions, except percentages) September 30, 2024 December 31, 2023 Notes payable and current portion of debt $ 422 $ 322 Long-term debt 1,795 1,796 Less: Cash and cash equivalents 296 334 Net debt 1,921 1,784 Total equity 2,490 3,294 Total capitalization $ 4,411 $ 5,078 Total net debt to total capitalization ratio 43.6 % 35.1 % At September 30, 2024, the Company had $394 million of borrowings available under lines of credit, including lines available under its short-term arrangements and revolving credit facility. The Company’s borrowing capacity includes a $700 million multi-currency credit facility which expires in May 2028. The Company also has access to an aggregate $500 million under a U.S. dollar commercial paper facility. The $700 million revolver serves as a back-up to the commercial paper facility, thus the total available credit under the commercial paper facility and the multi-currency revolving credit facility in the aggregate is $700 million. The Company had $331 million outstanding borrowings under the commercial paper facility at September 30, 2024 resulting in $369 million remaining available under the revolving credit and commercial paper facilities. The Company also has access to $38 million in uncommitted short-term financing under lines of credit from various financial institutions, the availability of which is reduced by other short-term borrowings. The lines of credit have no major restrictions and are provided under demand notes between the Company and the lending institutions. At September 30, 2024, the Company had $13 million outstanding under short-term borrowing arrangements. The Company’s revolving credit facility, term loans and senior notes contain certain covenants relating to the Company’s operations and financial condition. The most restrictive of these covenants are: (1) a ratio of total debt outstanding to total capital not to exceed 0.6, and (2) a ratio of operating income excluding depreciation and amortization to interest expense of not less than 3.0 times, in each case, as such terms are defined in the relevant agreement. Any breach of any such covenants would result in a default under the existing debt agreements that would permit the lenders to declare all borrowings under such debt agreements to be immediately due and payable and, through cross default provisions, would entitle the Company’s other lenders to accelerate their loans. At September 30, 2024, the Company was in compliance with these covenants. The Company expects on an ongoing basis to be able to finance operating cash require ments, capital expenditures, and debt service from the current cash, cash equivalents, cash flows from operations and amounts available under its existing borrowing facilities. The Company’s credit facilities are further discussed in Note 12, Financing Arrangements, to the Unaudited Consolidated Financial Statements of this Form 10-Q. 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 cash to the United States, 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, 2024 , management believed that sufficient liquidity was available in the United States and expects this to continue 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. Repatriation activities both performed and contemplated to date have not resulted in, and are not expected to result in, any significant incremental tax liability to the Company. 53 The Company continues to review its debt portfolio and may refinance additional debt or add debt in the near-term based on strategic capital management. The Company believes there is sufficient liquidity available for the next twelve months. Material Trends in Capital Resources On July 29, 2024, the Board of Directors of the Company approved an additional plan to restructure the Company’s business to improve operational performance and drive shareholder value creation (the “2024 Plan”). In connection with the 2024 Plan, the Company anticipates a net reduction in the Company’s global workforce of approximately 2% to 4%. The Company anticipates that the 2024 Plan will be substantially completed by the end of 2025 and result in $80 million to $100 million in annual cost savings. The proposed changes are subject to co-determination processes with employee representative groups in countries where required. As of September 30, 2024, in conjunction with the 2024 Plan, the Company has incurred $24 million in restructuring charges from inception, primarily related to employee transition, severance payments and employee benefits, which are expected to be expensed and paid in cash in 2024 and 2025. Actions taken under the 2024 Plan will seek to further streamline the Company’s operations and global footprint, as well as improve alignment of the Company’s cost structure with its strategic growth objectives. The Company expects to incur between $40 million and $50 million in non-recurring restructuring charges under the 2024 Plan. On February 14, 2023, the Board of Directors of the Company approved a plan to restructure the business through a new operating model with five global business units, optimize central functions and overall management infrastructure, and implement other efforts aimed at cost savings (the “2023 Plan”). The Company estimated a reduction in its global workforce of approximately 8% to 10% and annual cost savings of approximately $200 million pursuant to the 2023 Plan. The target for cost savings has been substantially met, with the benefits mostly offset in the short term by additional investments in sales personnel, the Company’s new global ERP system, and other transformation initiatives. As of September 30, 2024, in conjunction with the 2023 Plan, the Company incurred $86 million in restructuring charges, from inception, primarily related to employee transition, severance payments, employee benefits, and facility closure costs, and $20 million in other non-recurring costs related to restructuring activities which mostly consist of consulting, legal and other professional service fees. Remaining restructuring charges attributable to the 2023 Plan are not expected to be material. The estimates of the charges and expenditures that the Company expects to incur in connection with the 2024 Plan, and the timing thereof, are subject to several assumptions, including local law requirements in various jurisdictions and co-determination aspects in countries where required. Actual amounts may differ materially from estimates. In addition, the Company may incur additional charges or cash expenditures not currently contemplated due to unanticipated events that may occur, including in connection with the implementation of the 2024 Plan. For further details refer to Note 8, Restructuring and Other Costs, in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q. Beginning in the second quarter of 2022, the Company’s financial results have also been impacted by the costs associated with the internal investigation conducted and completed by the Audit and Finance Committee of the Company’s Board of Directors, and subsequently, associated litigation and the external investigation by the SEC which are ongoing. These costs totaled $61 million for the year ended December 31, 2022 and $19 million for the year ended December 31, 2023. In the nine months ended September 30, 2024, the Company recorded $6 million of similar costs, including legal defense expenses pertaining to the matters described in Note 14, Commitments and Contingencies in the Notes to the Unaudited Consolidated Financial Statements of this Form 10-Q, and expects that it will continue to incur such costs in the remainder of 2024. NEW ACCOUNTING PRONOUNCEMENTS Refer to Part I, Item 1, Note 1, Business and Basis of Presentation, to the Unaudited Consolidated Financial Statements of this Form 10-Q for a discussion of recent accounting pronouncements. 54 Item 3 – Quantitative and Qualitative Disclosures about Market Risk There have been no material changes from the information provided in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2023 Form 10-K.