Item 1A. Risk Factors
Item 1A – Risk Factors
Except as set forth below, there have been no material changes to our risk factors disclosed in Part 1A, “Risk Factors” in our Form 10-K for the year ended December 31, 2023:
We voluntarily suspended 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. As a result of the suspension, we expect to experience material adverse effects on our business, financial condition, and results of operations.
On October 24, 2024, we announced the voluntary suspension of 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. Our decision was made in communication with the U.S. Food and Drug Administration (the “FDA”).
We expect this suspension of sales to have a material impact on our results of operations. The sales of Byte aligner systems and impression kits represented approximately 5% of our annual revenue for the nine months ended September 30, 2024, and the assets related to the Byte aligner business are approximately 6% of the Company’s assets as of September 30, 2024. While we are evaluating and assessing the appropriate next steps as we explore strategic alternatives, we are unable to estimate the timeframe or provide any assurances that we can resume marketing, sales, and shipment of Byte aligners and impression kits. The results of our review may also require us to further change or discontinue our current business model and operations of our direct-to-consumer aligner business, which could result in a greater material adverse impact on our business, financial condition, and results of operations, including asset impairments. In addition, failure to promptly resolve these issues or to comply with the U.S. medical device regulatory requirements, in general, could result in regulatory action being initiated by the FDA that would have a material adverse impact on our business, financial condition, and results of operations, including asset impairments. FDA actions could include, among other things, fines, injunctions, consent decrees, civil money penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspension of production, the FDA’s refusal to grant future premarket approvals, and criminal prosecution.
Even if we are able to resume sales and marketing in the United States, the commercial prospects for Byte aligner systems and impression kits as revised may be permanently diminished and the product may no longer be commercially viable. Furthermore, there is no guarantee that we will be successful in our endeavor to resume sales and marketing of Byte aligner systems and impression kits, and we may make a strategic decision to wind down the business if we believe that the product is no longer commercially viable, which may result in significant impairment charges.
Increases in banking restrictions on cash payments made from Russia could harm our financial performance and ability to conduct business in that market.
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, following 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. However, subsequent to the invasion and the start of these sanctions in 2022, the Russian government responded by imposing significant currency control measures which include restrictions on the ability of companies to repatriate or otherwise remit cash from their Russian-based operations to locations outside of Russia.
Due to these restrictions, which were renewed by the Russian central bank in September 2024, we are likely to continue to be limited in our ability to transfer our accumulated cash balance out of Russia without incurring substantial costs, if we are able to transfer our accumulated cash balance at all. 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.
56
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 sales and operations in Russia.
For the nine 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. 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. A significant escalation or expansion of economic disruption 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.
We have recognized substantial goodwill impairment charges, most recently in the September 2024 quarter, and may be required to recognize additional goodwill and indefinite-lived intangible asset impairment charges in the future.
We have acquired other companies and intangible assets and may not realize all the economic benefit from those acquisitions, which could cause an impairment of goodwill or intangibles. We review amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill and indefinite-lived intangibles for impairment at least annually. The valuation models used to determine the fair value of goodwill or indefinite-lived intangible assets are dependent upon various assumptions and reflect management's best estimates.
The goodwill and indefinite-lived intangible asset impairment analyses are sensitive to changes in key assumptions used, such as discount rates, revenue growth rates, perpetual revenue growth rates, operating margin percentages, and net working capital assumptions of the business as well as current market conditions affecting the dental and medical device industries in both the United States and globally. Given the uncertainty in the marketplace and other factors affecting management's assumptions underlying our discounted cash flow model, the assumptions and projections used in the analyses may not be realized and our current estimates could vary significantly in the future, which may result in one or more additional goodwill or indefinite-lived intangible asset impairment charges in the future.
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. 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 carrying 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 aforementioned segment was $211 million as of September 30, 2024.
There is a risk of future impairment charges if there is a decline in the fair value of the reporting units or indefinite-lived intangible assets as a result of, among other things, actual financial results that are lower than forecasts, an adverse change in valuation assumptions, a decline in equity valuations, increases in interest rates, or changes in the use of intangible assets. There can be no assurance that the Company’s future asset impairment testing will not result in a material charge to earnings.
At September 30, 2024, the Company has $447 million of indefinite-lived intangible assets and $1.9 billion of goodwill recorded on its balance sheet.
57
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.