NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
DENTSPLY SIRONA Inc. (“Dentsply Sirona” or the “Company”), is the world’s largest manufacturer of dental products and technologies, with a 134-year history of innovation and service to the dental industry and patients worldwide. The Company’s principal product categories include dental consumable products, dental equipment, dental technologies and certain healthcare consumable products. The Company sells its products in over 150 countries under some of the most well-established brand names in the industry.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ materially from those estimates.
Specifically, for the year ended December 31, 2021, some of these estimates and assumptions continue to be based on an ongoing evaluation of expected future impacts from the COVID-19 pandemic. The full extent to which the COVID-19 pandemic will directly or indirectly have a negative material impact on the Company's financial condition, liquidity, or results of operations in future periods is highly uncertain and difficult to predict. More specifically, the demand for the Company's products has been, and continues to be, affected by social distancing guidelines, dental practice safety protocols which reduce patient traffic, and some lingering patient reluctance to seek dental care. The Company’s 2020 results were materially impacted by the preventative measures implemented at the outset of the pandemic, including the closure or reduced operations of dental practices. During 2021, demand for the Company’s products has largely recovered, although impacts from the pandemic continue to be experienced as evidenced by the more recent shortages and higher prices of raw materials such as electronic components, higher related transportation costs, and labor shortages. In the current year, the Company has experienced supply chain constraints, which has impacted its ability to timely produce and deliver certain products, and has also resulted in increases in shipping rates. To address these issues, the Company has taken steps to mitigate the impact of these trends, including continued emphasis on cost reduction and supply chain efficiencies. However, uncertainties remain regarding how long these impacts will continue, whether customer demand will fully return to pre-COVID-19 levels upon lifting of remaining government restrictions, or whether future variants of the virus may have an adverse impact on demand in affected markets.
Basis of Presentation
The consolidated financial statements include the results of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
Amounts recorded in the Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income reflect certain adjustments pertaining to prior periods, the impact of which are not material to the financial statements for the years presented. Research and development (“R&D”) expenses for the years ended December 31, 2020 and 2019 have been separately presented on the Consolidated Statement of Operations to conform to the current year presentation. Additionally, results for the year ended December 31, 2020, included adjustments to accruals from prior years which resulted in a net $9 million and $7 million decrease to pre-tax income and net income respectively in that period.
Cash and Cash Equivalents
Cash and cash equivalents include deposits with banks as well as highly liquid time deposits with original maturities of ninety days or less.
Short-term Investments
Short-term investments are highly liquid time deposits with original maturities greater than ninety days and with remaining maturities of one year or less.
Accounts Receivable
The Company recognizes a receivable when it has an unconditional right to payment, which represents the amount the Company expects to collect in a transaction. Payment terms are typically 30 days in the U.S. but may be longer in international markets. In general, contracts containing significant financing components are not material to the Company’s financial statements.
The Company establishes an allowance for doubtful accounts based on an estimate of current expected credit losses resulting from the inability of its customers to make required payments. The allowance is determined based on a combination of factors, including the length of time that the receivable is past due, history of write-offs, and the Company's knowledge of circumstances relating to specific customers' ability to meet their financial obligations. Provision for doubtful accounts are included in Selling, general and administrative expenses in the Consolidated Statements of Operations. For customers on credit terms, the Company performs ongoing credit evaluation of those customers’ financial condition and generally does not require collateral from them.
Accounts receivable are stated net of allowances for doubtful accounts of $13 million and $18 million at December 31, 2021 and 2020, respectively. For the years ended December 31, 2021 and 2020, the Company wrote-off $2 million and $12 million, respectively, of accounts receivable that were previously reserved. The Company increased the provision for doubtful accounts by $2 million and $1 million during 2021 and 2020, respectively.
Inventories
Inventories are stated at the lower of cost and net realizable value. The cost of inventories is based upon the First In First Out Method ("FIFO") or average cost methods, except for $3 million and $5 million of inventories that was determined by the last-in, first-out (“LIFO”) method as of December 31, 2020 and 2019, respectively. During the current fiscal year 2021, the method of accounting for these inventories was changed from LIFO to FIFO. This change in accounting is preferable as the value of inventory for which cost was previously determined using a LIFO cost flow assumption has declined from prior years due to changes in the business, and it also allows for a more consistent methodology being utilized across the Company, and provides improved comparability with industry peers.
This change in accounting principle was effected during the second quarter, and resulted in an increase in inventories of $4 million and a corresponding reduction to Cost of products sold. The impact of this change was not material to the Company’s financial position as of December 31, 2020, the Company’s results of operations for any previously reported prior year nor is the cumulative effect of the change material to the results of operations for the year ended December 31, 2021. Therefore, prior year amounts have not been retrospectively adjusted.
The Company establishes reserves for inventory estimated to be excess, obsolete or unmarketable based upon assumptions about future demand, market conditions, and expiration of products.
Valuation of Goodwill and Indefinite-Lived and Definite-Lived Intangible Assets
Effective 2021 and prospectively, the Company is performing its required annual goodwill impairment test as of April 1 rather than as of 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. This change did not result 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.
The following information outlines the Company’s significant accounting policies on long-lived assets by type.
Goodwill
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. The Company conducts an impairment test as of April 1 of each year, or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired. This impairment assessment includes an evaluation of reporting units, which the Company has determined are either an operating segment or one level below its operating segments, as determined in accordance with ASC 350. The Company performs impairment tests by comparing the fair value of each reporting unit to its carrying amount to determine if there is a potential impairment. If the carrying value of a reporting unit with goodwill exceeds its fair value, an impairment charge is recognized for the excess amount. To determine the fair value of the Company’s reporting units, the Company uses a discounted cash flow model as its valuation technique to measure the fair value for its reporting units. The discounted cash flow model uses five- to ten-year forecasted cash flows plus a terminal value based on capitalizing the last period’s cash flows using a perpetual growth rate. The Company's significant assumptions in the discounted cash flow models include, but are not limited to, the discount rates, revenue growth rates, perpetual revenue growth rates, and operating margin percentages of the reporting unit's business. The Company considers the current market conditions when determining its assumptions. Lastly, the Company reconciles the aggregate fair values of its reporting units to its market capitalization, which include a reasonable control premium based on market conditions. Additional information related to the testing for goodwill impairment including results of the annual test performed at April 1, 2021 is provided in Note 12, Goodwill and Intangible Assets.
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets consists primarily of tradenames and trademarks and in-process research and development acquired during business combinations, and these are not subject to amortization. Valuations of indefinite life intangibles assets acquired are based on information and assumptions available at the time of their acquisition, using income and market approaches to determine fair value. The Company conducts an impairment test as of April 1 of each year, or more frequently if events or circumstances indicate that the carrying value of indefinite-lived intangible assets may be impaired. Potential impairment is identified by comparing the fair value of an intangible asset to its carrying value. For most indefinite-lived intangible assets, the Company performs impairment tests using an income approach, more specifically a relief from royalty method. In the development of the forecasted cash flows, the Company applies significant judgment to determine key assumptions, including revenue growth rates, perpetual revenue growth rates, royalty rates, and discount rates. For certain indefinite-lived intangible assets, the Company performs a qualitative assessment. If the carrying value exceeds the fair value, an impairment loss in the amount equal to the excess is recognized. Additional information related to the testing for indefinite-lived intangible asset impairment including results of the annual test performed at April 1, 2021 is provided in Note 12, Goodwill and Intangible Assets.
Definite-Lived Intangible Assets
Definite-lived intangible assets primarily consist of patents, tradenames, trademarks, licensing agreements, developed technology, and customer relationships. Valuation of definite-lived intangibles assets acquired in business combinations are based on information and assumptions available at the time of acquisition, using income and market model approaches to determine fair value.
Identifiable definite-lived intangible assets are amortized on a basis that best reflects how their economic benefits are utilized over the life of the asset or on a straight-line basis if not materially different from actual utilization. The useful life is the period over which the asset is expected to contribute to the future cash flows of the Company. The Company uses the following useful lives for its definite-lived intangible assets:
| | | | | | | | |
Definite-lived Intangible Asset Type | | Useful Life |
| | |
Patents | | Up to date patent expires |
Tradenames and trademarks | | Up to 20 years |
Licensing agreements | | Up to 20 years |
Customer relationships | | Up to 15 years |
Developed technology | | Up to 15 years |
When the expected useful life of an intangible is not known, the Company will estimate its useful life based on similar asset or asset groups, any legal, regulatory, or contractual provision that limits the useful life, the effect of economic factors, including obsolescence, demand, competition, and the level of maintenance expenditures required to obtain the expected future economic benefit from the asset.
These assets are reviewed for impairment whenever events or circumstances suggest that the carrying amount of the asset may not be recoverable. The Company closely monitors all intangible assets, including those related to new and existing technologies, for indicators of impairment as these assets have more risk of becoming impaired. Impairment is based upon an initial evaluation of the identifiable undiscounted cash flows. If the initial evaluation identifies a potential impairment, a fair value of the asset is determined by using a discounted cash flows valuation. If impaired, the resulting charge reflects the excess of the asset’s carrying cost over its fair value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Assets acquired through acquisitions are recorded at fair value. The Company capitalizes costs incurred in the development or acquisition of software, whether for internal or external use. The Company expenses costs incurred in the preliminary project planning stage. Except for leasehold improvements, depreciation and amortization is computed by the straight-line method over the assets' estimated useful lives:
| | | | | | | | |
Property, Plant, and Equipment Assets Type | | Useful Life |
Buildings | 40 years |
Machinery and Equipment | 4 to 15 years |
Capitalized Software | | 2 to 10 years |
Leasehold Improvements | Shorter of the estimated useful life or the term of the lease |
Maintenance and repairs are expensed as incurred; replacements and major improvements are capitalized. If events or circumstances exist which suggest that the carrying amount of the asset group may not be recoverable, the identifiable undiscounted cash flows of the asset group are compared to the carrying value of the asset. If the carrying value is in excess of the identifiable undiscounted cash flows, the excess of the asset group's carrying cost over its fair value is recorded as an impairment charge.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) with subsequent amendments (collectively, “ASC 842”). The Company adopted the new leasing standards on January 1, 2019 using the modified retrospective approach transition method. The Company leases real estate, automobiles and equipment under various operating and finance leases. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the implicit rate is not readily determinable in most of the Company’s lease agreements, the Company uses its estimated secured incremental borrowing rate, based on the information available, at commencement of the lease to determine the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Beginning January 1, 2019, any new real estate and equipment operating lease agreements with lease and non-lease components, were accounted for as a single lease component; auto leases were accounted for as separate lease components.
The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of approximately 1 year to 10 years. Many of the Company's real estate and equipment leases have one or more options to renew, with terms that can extend primarily from 1 year to 3 years, which are not included in the initial lease term until deemed probable of renewal. The Company does not have lease agreements with residual value guarantees, sale-and-leaseback terms, or material restrictive covenants. The Company does not have any material sublease arrangements. See Note 11, Leases for additional information.
Derivative Financial Instruments
The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, and assets and liabilities denominated in foreign currencies. Additionally, the Company manages exposures to changes in interest rates by utilizing interest rate swaps that have the effect of converting floating rate debt to fixed rate, or vice versa.
The Company records all derivative instruments at fair value and changes in fair value are recorded each period in the consolidated statements of operations or accumulated other comprehensive income (“AOCI”). The Company classifies derivative assets and liabilities as current when the remaining term of the derivative contract is one year or less. The Company has elected to classify the cash flow from derivative instruments in the same category as the cash flows from the items being hedged. Should the Company enter into a derivative instrument that included an other-than-insignificant financing element then all cash flows will be classified as financing activities in the Consolidated Statements of Cash Flows as required by US GAAP. See Note 20, Financial Instruments for additional information on derivative instruments.
Pension and Other Postemployment Benefits
Some of the employees of the Company and its subsidiaries are covered by government or Company-sponsored defined benefit plans and defined contribution plans. Additionally, certain union and salaried employee groups in the United States are covered by postemployment healthcare plans. Projected benefit obligations and net periodic costs for Company-sponsored defined benefit and postemployment benefit plans are based on an annual actuarial valuation that includes assessment of key assumptions relating to expected return on plan assets, discount rates, employee compensation increase rates and health care cost trends. Expected return on plan assets, discount rates and health care cost trend assumptions are particularly important when determining the Company’s benefit obligations and net periodic benefit costs associated with postemployment benefits. Changes in these assumptions can impact the Company’s earnings. In determining the cost of postemployment benefits, certain assumptions are established annually to reflect market conditions and plan experience to appropriately reflect the expected costs as determined by actuaries. These assumptions include medical inflation trend rates, discount rates, employee turnover and mortality rates. The Company predominantly uses liability durations in establishing its discount rates, which are observed from indices of high-grade corporate bond yields in the respective economic regions of the plans. The expected return on plan assets is the weighted average long-term expected return based upon asset allocations and historic average returns for the markets where the assets are invested, principally in foreign locations. The Company reports the funded status of its defined benefit pension and other postemployment benefit plans on its consolidated balance sheets as a net liability or asset. Additional information related to the impact of changes in these assumptions is provided in Note 18, Benefit Plans.
Accruals for Self-Insured Losses
The Company maintains insurance for certain risks, including workers’ compensation, and is self-insured for employee related healthcare benefits. The Company accrues for the expected costs associated with these risks by considering historical claims experience, demographic factors, severity factors and other relevant information. Costs are recognized in the period the claim is incurred, and the financial statement accruals include an estimate of claims incurred but not yet reported. The Company has stop-loss coverage to limit its exposure to any significant exposure on a per claim basis.
Litigation
The Company and its subsidiaries, from time to time, are parties to lawsuits arising from operations. The Company records liabilities when a loss is probable and can be reasonably estimated. If these estimates are in the form of ranges, the Company records the liabilities at the most likely outcome within the range. If no point within the range represents a better estimate of the probable loss, then the low point in the range is accrued. The ranges established by management are based on analysis made by internal and external legal counsel who considers the best information known at the time. If the Company determines that a contingency is reasonably possible, it considers the same information to estimate the possible exposure and discloses any material potential liability. These loss contingencies are monitored regularly for a change in fact or circumstance that would require an accrual adjustment. Legal costs related to these lawsuits are expensed as incurred.
Foreign Currency Translation
The local currency of foreign operations, except for those in highly inflationary economies, generally are considered to be their functional currency.
Assets and liabilities of foreign subsidiaries are translated at foreign exchange rates on the balance sheet date; revenue and expenses are translated at the monthly average foreign exchange rates. The effects of these translation adjustments are reported within AOCI in the Consolidated Balance Sheets. During the year ended December 31, 2021, the Company had translation loss of $225 million and a gain of $46 million on its loans designated as hedges of net investments. During the year ended December 31, 2020, the Company had translation gains of $235 million and losses of $54 million on its loans designated as hedges of net investments.
Foreign currency gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included within Other expense (income), net in the Consolidated Statements of Operations. During the years ended December 31, 2021, 2020, 2019, net foreign currency gains were $6 million, $13 million and $27 million, respectively.
Revenue Recognition
Revenues are derived primarily from the sale of dental equipment and dental and healthcare consumable products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services in accordance with ASC 606-10, Revenues from Contracts with Customers. Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied; this occurs with the transfer of control of products and services to its customers, which for products generally occurs when title and risk of loss transfers to the customer, and for services generally occurs as the customer receives and consumes the benefit. Sales, value-added, and other taxes collected concurrent with revenue-producing activities are excluded from revenue.
Certain of our contracts with customers include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment. The Company generally uses an observable price, typically average selling price, to determine the stand-alone selling price for separate performance obligations. The Company determines the stand-alone selling price, based on Company geographic sales locations' database of pricing and discounting practices for the specific product or service when sold separately, and utilizes this data to arrive at average selling prices by product. In cases where an average selling price is not observable, the Company determines the stand-alone selling price using relevant information and applies suitable estimation methods including, but not limited to, the cost plus a margin approach. Revenue is then allocated proportionately, based on the determined stand-alone selling price, to each distinct performance obligation.
The Company exercises judgment in estimating variable consideration, which primarily includes volume discounts, sales rebates, and product returns. The Company adjusts the estimate of revenue at the earlier of when the most likely amount of consideration can be estimated, the amount expected to be received changes, or when the consideration becomes fixed. The Company estimates volume discounts by evaluating specific inputs and assumptions, including the individual customer’s historical and estimated future product purchases. Discounts are deducted from revenue at the time of sale or when the discount is offered, whichever is later. In estimating sales rebates, the Company evaluates inputs such as customer-specific trends, terms of the customers’ contracted rebate program, historical experience, and the forecasted performance of a customer and their expected level of achievement within the rebate programs. The accruals for these rebate programs are updated as actual results and updated forecasts impact the estimated achievement for customers within the rebate programs. When the Company gives customers the right to return eligible products and receive credit, returns are estimated based on an analysis of historical experience. However, returns of products, excluding warranty-related returns, are not material.
To the extent the transaction price includes variable consideration, the Company applies judgment in constraining the estimated variable consideration due to factors that may cause reversal of revenue recognized. The Company evaluates constraints based on its historical and projected experience with similar customer contracts.
For most of its products, the Company transfers control and recognizes revenue when products are shipped from the Company's manufacturing facility or warehouse to the customer. For contracts with customers that contain destination shipping terms, revenue is not recognized until the goods are delivered to the agreed upon destination. As such, the Company’s performance obligations related to product sales are satisfied at a point in time as this is when the customer obtains the use of and substantially all of the benefit of the product.
The Company recognizes revenue from support and maintenance contracts, extended warranties, and other certain contract performance obligations over time based on the period of the contracts or as the services are performed, as the customer simultaneously receives and consumes the benefits provided by the Company's performance of the services. In general, the total amount of revenue recognized over time is not material to the Company’s financial statements.
Depending on the terms of its contracts, the Company may defer the recognition of a portion of revenue on a relative stand-alone selling price basis when certain performance obligations are not yet satisfied. Consideration received from customers in advance of revenue recognition is classified as deferred revenue.
The Company has elected to account for shipping and handling activities as a fulfillment cost within the cost of products sold, and records shipping and handling costs collected from customers in net sales. The Company has adopted one practical expedient: relief from considering the existence of a significant financing component when the payment for the good or service is expected to be one year or less.
Additional information and disclosure regarding revenue recognition is provided in Note 2, Revenue.
Cost of Products Sold
Cost of products sold represents costs directly related to the manufacture and distribution of the Company’s products, and include costs of raw materials, packaging, direct labor, overhead, shipping and handling, warehousing and the depreciation of manufacturing, warehousing and distribution facilities and amortization of intangible assets. Overhead and related expenses include salaries, wages, employee benefits, utilities, lease costs, maintenance and property taxes.
Warranties
The Company provides manufacturer's warranties on certain equipment products. Estimated warranty costs are accrued when sales are made to customers. Estimates for warranty costs are based primarily on historical warranty claim experience. Warranty costs are included in Cost of products sold in the Consolidated Statements of Operations. The Company’s warranty expense and warranty accrual were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Warranty Expense | | $ | 50 | | | $ | 29 | | | $ | 36 | |
Warranty Accrual | | 28 | | | 18 | | | 18 | |
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") represent indirect costs associated with generating revenues and in managing the business of the Company. Such costs include advertising and marketing expenses, salaries, employee benefits, incentive compensation, travel, office expenses, lease costs, amortization of capitalized software developed for internal use, and depreciation of administrative facilities. Advertising cost are expensed as incurred.
Research and Development Costs
Research and development (“R&D”) costs primarily include costs associated with developing products, including software. These costs include internal labor costs, material costs, consulting expenses, and certain overheads, such as facilities and information technology costs. In addition, the Company contracts with outside vendors to conduct R&D activities. All costs incurred prior to feasibility of technology are expensed. The Company capitalizes the costs of equipment that have general R&D uses and expenses any equipment that is solely for specific R&D projects. The depreciation expense related to capitalized equipment, including any software directly supporting R&D activities is included in the Company’s R&D costs. Software development costs related to software to be sold, leased, or otherwise marketed incurred prior to the attainment of technological feasibility are considered R&D and are expensed as incurred. Once technological feasibility is established, the cost of software developed for external use is capitalized until the product is available for general release to customers. Amortization of these costs are included in Cost of products sold over the estimated life of the products.
Stock Compensation
Stock-based compensation is measured at the grant date at fair value, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity awards). The compensation cost is only recognized for the portion of the awards that are expected to vest.
Stock options granted become exercisable as determined by the grant agreement and expire ten years after the date of grant under these plans. Restricted Stock Units ("RSU") vest as determined by the grant agreement and are subject to a service condition, which requires grantees to remain employed by the Company during the period following the date of grant. Under the terms of the RSUs, the vesting period is referred to as the restricted period. In addition to the service condition, certain granted RSUs are subject to performance requirements that can vary between the first year and up to the final year of the RSU award. If targeted performance is not met the RSU granted is adjusted to reflect the achievement level. Upon the expiration of the applicable restricted period and the satisfaction of all conditions imposed, the restrictions on RSUs will lapse, and shares of common stock will be issued as payment for each vested RSU. Upon death, disability or qualified retirement all awards become immediately exercisable for up to one year. Awards are expensed as compensation over their respective vesting periods or to the eligible retirement date if shorter. The Company records forfeitures on stock-based compensation as the participant terminates rather than estimating forfeitures.
During 2019, the Company granted certain performance-based RSUs issued under the 2016 Omnibus Incentive Plan to provide performance targets for the Company's previously disclosed three year restructuring program announced in November 2018. The adjusted operating income margin performance target approximates the adjusted operating income margin targets previously disclosed by the Company as part of its effort to support revenue growth and margin expansion. The performance period began on January 1, 2019 and concludes on December 31, 2022. Under this program the Company could issue up to 3 million shares of common stock if all performance targets are met within the period. See Note 16 Equity for more information.
Income Taxes
The Company’s tax expense includes U.S. and international income taxes plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. Tax credits and other incentives reduce tax expense in the year the credits are claimed. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. The Company establishes a valuation allowance for deferred tax assets for which realization is not likely.
The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained upon examination by the taxing authorities based on the technical merits of the position.
The Company’s tax positions are subject to ongoing examinations by the tax authorities. The Company operates within multiple taxing jurisdictions throughout the world and in the normal course of business is examined by taxing authorities in those jurisdictions. Adjustments to the uncertain tax positions are recorded when taxing authority examinations are completed, statutes of limitation are closed, changes in tax laws occur or as new information comes to light with regard to the technical merits of the tax position.
Earnings Per Share
Basic earnings per share are calculated by dividing net earnings attributable to Company’s shareholders by the weighted average number of shares outstanding for the period. Diluted earnings per share is calculated by dividing net earnings attributable to Company’s shareholders by the weighted average number of shares outstanding for the period, adjusted for the effect of an assumed exercise of all dilutive options outstanding at the end of the period, unless the impact of including these options is anti-dilutive.
Business Acquisitions
The Company acquires businesses as well as partial interests in businesses. Acquired businesses are accounted for using the acquisition method of accounting which requires the Company to record assets acquired and liabilities assumed at their respective fair values with the excess of the purchase price over estimated fair values recorded as goodwill.
The Company obtains information during due diligence and through other sources to establish respective fair values. Examples of factors and information that the Company uses to determine the fair values include: tangible and intangible asset valuations and appraisals, and evaluations of existing contingencies, liabilities, and product line information. If the initial valuation for an acquisition is incomplete by the end of the reporting period in which the acquisition occurred, the Company will record provisional estimates in the financial statements. The provisional estimates will be finalized as soon as information becomes available, but not later than one year from the acquisition date.
As part of purchase accounting for acquisitions, the Company values identified intangible assets using an income approach. Technology know-how is valued using an excess earnings method. Tradename and trademark assets are valued using a relief-from-royalty method. Non-compete agreements are valued using a with-and-without method. The Company applies judgment in estimating the fair value of intangible assets acquired, which involves the use of estimates and assumptions with respect to revenue growth rates, EBITDA margin percentages, royalty rate, technology obsolescence factors, useful lives of the assets and discount rates used in computing present values. In addition, the estimates of useful lives of these acquired intangibles are used to calculate depreciation and amortization expense. For additional information related to accounting for acquisitions, see Note 6, Business Combinations.
Investments in Unconsolidated Affiliates
Investments in non-consolidated affiliates, joint ventures and partnerships where the Company maintains significant influence over an entity, but does not have control are accounted for using the equity method. The Company records the carrying value of these investments within Other noncurrent assets in the Consolidated Balance Sheets, and records the Company's proportional share of the investees' net earnings or losses within Other expense (income). Investments in which the Company does not exercise significant influence are recorded at cost, and assessed for any other-than-temporary impairment when events or changes in circumstances indicate the carrying amount of the investment might not be recoverable.
The Company's equity-method net losses were $10 million and $1 million, for the years ended December 31, 2021 and 2020, respectively and negligible for the year ended December 31, 2019.
Noncontrolling Interests
The Company reports noncontrolling interest (“NCI”) in a subsidiary as a separate component of Equity in the Consolidated Balance Sheets. Additionally, the Company reports the portion of net income (loss) and comprehensive income (loss) attributed to the Company and NCI separately in the Consolidated Statements of Operations, and in the Consolidated Statements of Comprehensive Income.
Segment Reporting
The Company has numerous operating businesses covering a wide range of products and geographic regions, primarily serving the professional dental market and to a lesser extent the consumable medical device market. The Company has two reportable segments and a description of the activities within these segments is included in Note 7, Segment and Geographic Information.
Fair Value Measurement
Recurring Basis
The Company records certain financial assets and liabilities at fair value in accordance with the accounting guidance, which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date in current markets. The accounting guidance establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels defined by the fair value hierarchy are as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2 - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. These financial instruments include derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market or can be derived principally from, or corroborated by observable market data.
Level 3 - Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
The degree of judgment utilized in measuring the fair value of certain financial assets and liabilities generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument. Financial assets and liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial assets and liabilities rarely traded or not quoted will generally have less, or no pricing observability and a higher degree of judgment utilized in measuring fair value.
The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Additionally, the Company considers its credit risks and its counterparties’ credit risks when determining the fair values of its financial assets and liabilities. The Company records its derivatives and contingent considerations on a recurring fair value basis.
The Company believes the carrying amounts of cash and cash equivalents, accounts receivable (net of allowance for doubtful accounts), prepaid expenses and other current assets, accounts payable, accrued liabilities, income taxes payable and notes payable approximate fair value due to the short-term nature of these instruments. The Company has presented the required disclosures in Note 21, Fair Value Measurement.
Non-Recurring Basis
When events or circumstances require an asset or liability to be measured at fair valued that otherwise is generally recorded based on another valuation method, such as, net realizable value, the Company will utilize the valuation techniques described above. The Company records its business combinations and impairments on a non-recurring basis.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This newly issued accounting standard changes the recognition and measurement of credit losses, including trade accounts receivable. Under current accounting standards, a loss is recognized when loss becomes probable of occurring. The new standard broadens the information that an entity must consider when developing expected credit loss estimates. The amendments in this update are effective for fiscal years and interim periods ending after December 15, 2019. Early adoption is permitted. The amendments in this update should be applied on a prospective basis for all periods presented with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company adopted this accounting standard on January 1, 2020. The adoption of this standard did not materially impact the Company's consolidated financial statements or related disclosures.
In August 2018, the FASB issued ASU No. 2018-14 "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." This newly issued accounting standard changes disclosure requirements for defined benefit plans, including removal and modification of existing disclosures. The amendments in this update are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The amendments in this update should be applied on a retrospective basis for all periods presented. The Company adopted this accounting standard on January 1, 2020. The adoption of this standard did not materially impact the Company’s disclosures.
In December 2019, the FASB issued ASU No. 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This newly issued accounting standard simplifies key provisions for accounting for income taxes, as part of the FASB's initiative to reduce complexity in accounting standards. The amendments eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendments also clarify and simplify other aspects of the accounting for income taxes. The amendments in this update are effective for interim and fiscal period beginning after December 31, 2020. The Company adopted this accounting standard on January 1, 2020. The adoption of this standard did not materially impact the Company’s consolidated financial statements or related disclosures.
Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04 "Reference Rate Reform (Topic 828), Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which was subsequently amended by ASU No. 2021-01 "Reference Rate Reform (Topic 848): Scope" in January 2021. The new standard provides optional expedients and exceptions to contracts, hedging relationships, and other transactions that reference the London Interbank Offer Rate ("LIBOR") or another rate expected to be discontinued due to the reference rate reform. This standard is permitted to be adopted any time through December 31, 2022, and does not apply to contract modifications made or hedging relationships entered into or evaluated after December 31, 2022. The Company does not expect this standard to have a material impact on its consolidated financial statements and related disclosures.
In October 2021, the FASB issued ASU No. 2021-08, "Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" (Topic 805), which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. The current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value differs from the current approach. This standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently assessing the impact of this standard on its consolidated financial statements and related disclosures.
NOTE 2 - REVENUE
Net sales disaggregated by product category were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Equipment & Instruments | | $ | 733 | | | $ | 580 | | | $ | 693 | |
CAD/CAM | | 590 | | | 457 | | | 527 | |
Orthodontics | | 274 | | | 161 | | | 191 | |
Implants | | 624 | | | 476 | | | 592 | |
Healthcare | | 303 | | | 287 | | | 280 | |
Technology & Equipment segment revenue | | $ | 2,524 | | | $ | 1,961 | | | $ | 2,283 | |
| | | | | | |
Endodontic & Restorative | | $ | 1,260 | | | $ | 964 | | | $ | 1,202 | |
Other Consumables | | 467 | | | 417 | | | 544 | |
Consumables segment revenue | | $ | 1,727 | | | $ | 1,381 | | | $ | 1,746 | |
| | | | | | |
Total net sales | | $ | 4,251 | | | $ | 3,342 | | | $ | 4,029 | |
Technologies & Equipment Segment
Equipment & Instruments
The Equipment & Instruments product category consists of basic and high-tech dental equipment such as treatment centers, imaging equipment, motorized dental handpieces, and other instruments for dental practitioners and specialists. Imaging equipment serves as the starting point for the Company’s digital workflow offerings and consists of a broad range of diagnostic imaging systems for 2D or 3D, panoramic, and intra-oral applications. Treatment centers comprise a broad range of products from basic dentist chairs to sophisticated chair-based units with integrated diagnostic, hygiene and ergonomic functionalities, as well as specialist centers used in preventive treatment and for training purposes. This product group also includes other lab equipment such as amalgamators, mixing machines and porcelain furnaces.
CAD/CAM
Dental CAD/CAM technologies are products designed for dental offices to support numerous digital dental procedures including dental restorations. This product category includes a full-chairside economical restoration of aesthetic ceramic dentistry offering called CEREC, as well as stand-alone CAD/CAM, digital impressions ("DI") intraoral scanners, mills, and services. The full-chairside offering enables dentists to practice same day or single visit dentistry.
Orthodontics
The company’s orthodontic product group primarily includes a dentist-directed clear aligner solution, SureSmile, and a direct-to-consumer clear aligner solution, Byte. The orthodontics product category also includes a High Frequency Vibration ("HFV") technology device known as VPro or as HyperByte within Byte's product offering. The clear aligners offerings include software technology that enables clear aligner treatment planning and for SureSmile seamless connectivity of a digital workflow from diagnostics through treatment delivery.
Implants
The Implants product offering includes technology to support signature digital workflows for implant systems, a portfolio of innovative dental implant products, bone regenerative and restorative solutions, and educational programs, all of which provide dental professionals with a completely new way of practicing implantology. The Implants business is supported by key technologies including custom abutments, advanced tapered immediate load screws and regenerative bone growth factor.
Healthcare
This category consists mainly of urology catheters and other healthcare-related consumable products.
Consumables Segment
Dental consumable products consist of value-added dental supplies and small equipment used in dental offices for the treatment of patients. It also includes specialized treatment products used within the dental office and laboratory settings including products used in the preparation of dental appliances by dental laboratories.
Endodontic & Restorative Products
The Company's Endodontic and Restorative products frequently work together to provide a tandem solution in high-tech dental procedures. The Endodontic products include drills, filers, sealers, irrigation needles and other tools or single-use solutions which support root canal procedures. Restorative products include dental prosthetics, such as artificial teeth, dental ceramics, digital dentures, precious metal dental alloys, and crown and bridge porcelain products.
Other Consumables
The remaining consumables products include small equipment products such as intraoral curing light systems, dental diagnostic systems and ultrasonic scalers and polishers, as well as other dental supplies including dental anesthetics, prophylaxis paste, dental sealants, impression materials, tooth whiteners and topical fluoride.
Net sales disaggregated by geographic region were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
United States | | $ | 1,497 | | | $ | 1,109 | | | $ | 1,373 | |
Europe | | 1,685 | | | 1,387 | | | 1,614 | |
Rest of World | | 1,069 | | | 846 | | | 1,042 | |
| | | | | | |
Total net sales | | $ | 4,251 | | | $ | 3,342 | | | $ | 4,029 | |
Contract Assets and Liabilities
The Company normally does not have contract assets in the course of its business. Contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for customer aligner treatment where the performance obligation has not yet been fulfilled. At December 31, 2021, the Company had $51 million of deferred revenue recorded in Accrued liabilities in the Consolidated Balance Sheets. The Company expects to recognize significantly all of the deferred revenue within the next twelve months. Prior year deferred revenue of $41 million was recognized in the current year.
NOTE 3 - STOCK COMPENSATION
The Company maintains the 2016 Omnibus Incentive Plan (the “Plan”) under which it may grant non-qualified stock options (“NQSOs”), incentive stock options, restricted stock, RSUs and stock appreciation rights, collectively referred to as “Awards.” Awards are granted at exercise prices that are equal to the closing stock price on the date of grant. The Company authorized grants under the Plan of 25 million shares of common stock, plus any unexercised portion of canceled or terminated stock options granted under the legacy DENTSPLY International Inc. 2010 and 2002 Equity Incentive Plans, as amended, and under the legacy Sirona Dental Systems, Inc. 2015 and 2006 Equity Incentive Plans, as amended. Each restricted stock and RSU issued is counted as a reduction of 3.09 shares of common stock available to be issued under the Plan. No key employee may be granted awards in excess of 1 million shares of common stock in any calendar year. The number of shares available for grant under the 2016 Plan at December 31, 2021 is 20 million.
The amounts of stock compensation expense recorded in the Company's Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Cost of products sold | | $ | 3 | | | $ | 1 | | | $ | 2 | |
Selling, general, and administrative expense | | 44 | | | 44 | | | 61 | |
Research and development expense | | 2 | | | 1 | | | 2 | |
Total stock based compensation expense | | $ | 49 | | | $ | 46 | | | $ | 65 | |
| | | | | | |
Related deferred income tax benefit | | $ | 6 | | | $ | 5 | | | $ | 8 | |
The Company uses the Black-Scholes option-pricing model to estimate the fair value of each option awarded. The average assumptions used to determine compensation cost for the Company’s NQSOs issued were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
Weighted average fair value per share | | $ | 15.90 | | | $ | 10.03 | | | $ | 12.20 | |
Expected dividend yield | | 0.68 | % | | 0.84 | % | | 0.71 | % |
Risk-free interest rate | | 0.79 | % | | 0.77 | % | | 2.36 | % |
Expected volatility | | 31.5 | % | | 24.0 | % | | 22.6 | % |
Expected life (years) | | 5.08 | | 5.49 | | 6.00 |
The total intrinsic value of options exercised for the years ended December 31, 2021, 2020 and 2019 was $16 million, $3 million and $37 million, respectively.
The total fair value of shares vested for the years ended December 31, 2021, 2020 and 2019 was $76 million, $54 million and $44 million, respectively.
The NQSO transactions for the year ended December 31, 2021 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding | | Exercisable |
(in millions, except per share amounts) | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| | | | | | | | | | | | |
December 31, 2020 | | 4.0 | | | $ | 50.01 | | | $ | 17 | | | 2.7 | | | $ | 50.28 | | | $ | 12 | |
Granted | | 0.5 | | | 58.85 | | | | | | | | | |
| | | | | | | | | | | | |
Exercised | | (1.1) | | | 46.81 | | | | | | | | | |
| | | | | | | | | | | | |
Forfeited | | (0.2) | | | 53.03 | | | | | | | | | |
December 31, 2021 | | 3.2 | | | $ | 52.44 | | | $ | 15 | | | 2.2 | | | $ | 52.05 | | | $ | 11 | |
There were 1.0 million NQSOs unvested at December 31, 2021. The remaining unamortized compensation cost related to NQSOs is $9 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.8 years.
The weighted average remaining contractual term of all outstanding options is 5.6 years and the weighted average remaining contractual term of exercisable options is 4.2 years.
Information about NQSOs outstanding for the year ended December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding | | Exercisable |
| | Number Outstanding at December 31, 2021 | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price | | Number Exercisable at December 31, 2021 | | Weighted Average Exercise Price |
Range of Exercise Prices | | | | | |
(in millions, except per share amounts and life) | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
30.01 | | - | 40.00 | | 0.1 | | | 1.4 | | $ | 37.29 | | | 0.1 | | | $ | 37.29 | |
40.01 | | - | 50.00 | | 1.4 | | | 5.9 | | 47.31 | | | 0.8 | | | 46.73 | |
50.01 | | - | 60.00 | | 1.4 | | | 6.0 | | 56.32 | | | 0.9 | | | 55.05 | |
60.01 | | - | 70.00 | | 0.3 | | | 4.3 | | 62.37 | | | 0.4 | | | 62.24 | |
| | | | 3.2 | | | | | | | 2.2 | | | |
The unvested RSU transactions for the year ended December 31, 2021 were as follows: | | | | | | | | | | | | | | |
| | Unvested Restricted Stock Units |
| | Shares | | Weighted Average Grant Date Fair Value |
| | |
(in millions, except per share amounts) | | |
| | | | |
Unvested at December 31, 2020 | | 4.2 | | | $ | 47.29 | |
Granted | | 1.0 | | | 63.61 | |
| | | | |
Vested | | (1.5) | | | 45.08 | |
Forfeited | | (0.6) | | | 50.01 | |
Unvested at December 31, 2021 | | 3.1 | | | $ | 53.52 | |
The unamortized compensation cost related to RSUs is $42 million, which will be expensed over the remaining weighted average restricted period of the RSUs, or 2.0 years.
NOTE 4 - EARNINGS PER COMMON SHARE
The computation of basic and diluted earnings (loss) per common share for the years ended December 31 were as follows:
| | | | | | | | | | | | | | | | | | | | |
Basic Earnings (Loss) Per Common Share | | |
(in millions, except per share amounts) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Net income (loss) attributable to Dentsply Sirona | | $ | 421 | | | $ | (83) | | | $ | 263 | |
| | | | | | |
Weighted average common shares outstanding | | 218.4 | | | 219.2 | | | 223.1 | |
| | | | | | |
Earnings (loss) per common share - basic | | $ | 1.93 | | | $ | (0.38) | | | $ | 1.18 | |
| | | | | | |
Diluted Earnings (Loss) Per Common Share | | |
(in millions, except per share amounts) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Net income (loss) attributable to Dentsply Sirona | | $ | 421 | | | $ | (83) | | | $ | 263 | |
| | | | | | |
Weighted average common shares outstanding | | 218.4 | | | 219.2 | | | 223.1 | |
Incremental weighted average shares from assumed exercise of dilutive options from stock-based compensation awards | | 1.8 | | | — | | | 1.3 | |
Total weighted average diluted shares outstanding | | 220.2 | | | 219.2 | | | 224.4 | |
| | | | | | |
Earnings (loss) per common share - diluted | | $ | 1.91 | | | $ | (0.38) | | | $ | 1.17 | |
For the years ended December 31, 2021, 2020, and 2019, the Company excluded from the computation of weighted average diluted shares outstanding of 1.0 million, 3.1 million, and 3.1 million, respectively of equivalent shares of common stock from stock options and RSUs because their effect would be antidilutive.
The calculation of weighted average diluted common shares outstanding excluded 0.9 million of potentially diluted common shares because the Company reported a net loss for year ended December 31, 2020.
NOTE 5 - COMPREHENSIVE (LOSS) INCOME
AOCI includes cumulative foreign currency translation adjustments related to consolidation of the Company’s foreign subsidiaries, fair value adjustments related to the Company’s derivative financial instruments, and actuarial gains and losses related to the Company's pension plans. These changes are recorded in AOCI net of any related tax adjustments. For the years ended December 31, 2021, 2020 and 2019, these tax adjustments were $168 million, $216 million and $173 million, respectively, primarily related to foreign currency translation adjustments.
The cumulative foreign currency translation adjustments included translation losses of $250 million and $25 million at December 31, 2021 and 2020, respectively, and which included losses of $116 million and $162 million, at December 31, 2021 and 2020, respectively, on inter-company loans designated as hedges of net investments.
Changes in AOCI, net of tax, by component for the years ended December 31, 2021 and 2020 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign Currency Translation Gain (Loss) | | Gain and (Loss) on Cash Flow Hedges | | Gain and (Loss) on Net Investment and Fair Value Hedges | | | | Pension Liability Gain (Loss) | | Total |
| | | | | | | | | | | | |
Balance, net of tax, at December 31, 2020 | | $ | (187) | | | $ | (25) | | | $ | (119) | | | | | $ | (133) | | | $ | (464) | |
Other comprehensive (loss) income before reclassifications and tax impact | | (156) | | | 3 | | | 22 | | | | | 26 | | | (105) | |
Tax expense | | (23) | | | (1) | | | (6) | | | | | (8) | | | (38) | |
Other comprehensive (loss) income, net of tax, before reclassifications | | $ | (179) | | | $ | 2 | | | $ | 16 | | | | | $ | 18 | | | $ | (143) | |
Amounts reclassified from accumulated other comprehensive income, net of tax | | — | | | 7 | | | — | | | | | 8 | | | 15 | |
Net (decrease) increase in other comprehensive income | | (179) | | | 9 | | | 16 | | | | | 26 | | | (128) | |
| | | | | | | | | | | | |
Balance, net of tax, at December 31, 2021 | | $ | (366) | | | $ | (16) | | | $ | (103) | | | | | $ | (107) | | | $ | (592) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign Currency Translation Gain (Loss) | | Gain and (Loss) on Cash Flow Hedges | | Gain and (Loss) on Net Investment and Fair Value Hedges | | | | Pension Liability Gain (Loss) | | Total |
| | | | | | | | | | | | |
Balance, net of tax, at December 31, 2019 | | $ | (368) | | | $ | (11) | | | $ | (101) | | | | | $ | (120) | | | $ | (600) | |
Other comprehensive income (loss) before reclassifications and tax impact | | 151 | | | (17) | | | (23) | | | | | (26) | | | 85 | |
Tax benefit | | 30 | | | 1 | | | 5 | | | | | 7 | | | 43 | |
Other comprehensive income (loss), net of tax, before reclassifications | | $ | 181 | | | $ | (16) | | | $ | (18) | | | | | $ | (19) | | | $ | 128 | |
Amounts reclassified from accumulated other comprehensive income, net of tax | | — | | | 2 | | | — | | | | | 6 | | | 8 | |
Net increase (decrease) in other comprehensive income | | 181 | | | (14) | | | (18) | | | | | (13) | | | 136 | |
| | | | | | | | | | | | |
Balance, net of tax, at December 31, 2020 | | $ | (187) | | | $ | (25) | | | $ | (119) | | | | | $ | (133) | | | $ | (464) | |
Reclassification out of AOCI to the Consolidated Statements of Operations for the years ended December 31, 2021, 2020, and 2019 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | Amounts Reclassified from AOCI | Affected Line Item in the Consolidated Statements of Operations |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | | | | |
|
| | | | | | | |
| | | | | | | | | |
Loss on derivative financial instruments: |
Interest rate swaps | | $ | (4) | | | $ | (4) | | | $ | (2) | | Interest expense, net |
Foreign exchange forward contracts | | (3) | | | 2 | | | 1 | | Cost of products sold |
| | | | | | | |
| | | | | | | |
Net loss before tax | | $ | (7) | | | $ | (2) | | | $ | (1) | | |
Tax impact | | — | | | — | | | — | | Provision for income taxes |
Net loss after tax | | $ | (7) | | | $ | (2) | | | $ | (1) | | | | |
| | | | | | | | | |
|
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | |
Amortization of defined benefit pension and other postemployment benefit items: |
Amortization of prior service benefits | | $ | 1 | | | $ | 1 | | | $ | 1 | | (a) |
| | | | | | | |
Amortization of net actuarial losses | | (12) | | | (9) | | | (6) | | (a) |
Net loss before tax | | $ | (11) | | | $ | (8) | | | $ | (5) | | |
Tax impact | | 3 | | | 2 | | | 1 | | Provision for income taxes |
Net loss after tax | | $ | (8) | | | $ | (6) | | | $ | (4) | | |
| | | | | | | | | |
Total reclassifications for the period | | $ | (15) | | | $ | (8) | | | $ | (5) | | | | |
| | | | | | | | | |
(a) These AOCI components are included in the computation of net periodic benefit cost for the years ended December 31, 2021, 2020, and 2019, respectively.
NOTE 6 - BUSINESS COMBINATIONS
Acquisitions
2021 Transactions
On July 1, 2021, the effective date of the transaction, the Company paid $7 million to acquire the remaining interest in the dental business of a partially owned affiliate based in Switzerland that primarily develops highly specialized software with a focus on CAD/CAM systems. The acquisition is expected to further accelerate the development of the Company's specialized software related to CAD/CAM systems.
The preliminary fair values of the assets acquired and liabilities assumed in connection with the acquisition of the affiliate included $4 million of Other current assets, $3 million of Intangible assets, $2 million of Current Liabilities and $1 million of Other long-term liabilities. The cash paid and the $4 million fair value of the previously-held interest in the entity prior to the acquisition has been allocated on the basis of the preliminary estimates of fair values of assets acquired and liabilities assumed, resulting in the recording of $7 million in goodwill. This goodwill is considered to represent the value associated with the acquired workforce and synergies the two companies anticipate realizing as a combined company and is not expected to be deductible for tax purposes. Measurement period adjustments made to the fair values of the assets acquired and liabilities assumed during the year ended December 31, 2021 were immaterial to the financial statements, resulting in an increase to goodwill of $2 million. Management is continuing to finalize its valuation of certain assets and liabilities including other intangible assets and will conclude its valuation no later than one year from the acquisition date.
Identifiable intangible assets acquired were as follows:
| | | | | | | | | | | | | | |
| | | | Weighted Average |
| | | | Useful Life |
(in millions, except for useful life) | | Amount | | (in years) |
| | | | |
In-process R&D | | $ | 3 | | | Indefinite |
| | | | |
| | | | |
| | | | |
| | | | |
On June 1, 2021, the effective date of the transaction, the Company paid $132 million to acquire substantially all of the assets of Propel Orthodontics LLC, a privately-held company based in New York and California. Propel Orthodontics manufactures and sells orthodontic devices and provides in-office and at-home orthodontic accessory devices to orthodontists and their patients primarily within the clear aligner market. The acquisition is expected to further accelerate the growth and profitability of the Company's combined clear aligners business.
The preliminary fair values of the assets acquired and liabilities assumed in connection with the Propel Orthodontics acquisition were as follows:
| | | | | | | | | | | |
(in millions) | | | |
| | | |
| | | |
Other current assets | | $ | 4 | | |
Intangible assets | | 66 | | |
Current liabilities | | (1) | | |
Net assets acquired | | 69 | | |
Goodwill | | 63 | | |
Purchase consideration | | $ | 132 | | |
The purchase price has been allocated on the basis of the preliminary estimates of fair values of assets acquired and liabilities assumed, resulting in the recording of $63 million in goodwill, which is considered to represent the value associated with the acquired workforce and synergies the two companies anticipate realizing as a combined company. The goodwill is expected to be deductible for tax purposes. Management is continuing to finalize its valuation of certain assets including other intangible assets and will conclude its valuation no later than one year from the acquisition date. Measurement period adjustments made to the fair values of the assets acquired and liabilities assumed during the year ended December 31, 2021 were immaterial to the financial statements, resulting in a reduction to goodwill of $2 million.
Identifiable intangible assets acquired were as follows:
| | | | | | | | | | | | | | |
| | | | Weighted Average |
| | | | Useful Life |
(in millions, except for useful life) | | Amount | | (in years) |
| | | | |
Developed technology | | $ | 66 | | | 10 |
| | | | |
| | | | |
| | | | |
| | | | |
On January 21, 2021, the effective date of the transaction, the Company paid $94 million with the potential for additional earn-out provision payments of up to $10 million, to acquire 100% of the outstanding shares of Datum Dental, Ltd., a privately-held producer and distributor of specialized regenerative dental material based in Israel. The fair value of the earn-out provision has been valued at $9 million as of the transaction date, resulting in a total purchase price of $103 million.
The fair values of the assets acquired and liabilities assumed in connection with the Datum acquisition were as follows:
| | | | | | | | | | | |
(in millions) | | | |
| | | |
Cash and cash equivalents | | $ | 2 | | |
Other current assets | | 2 | | |
Intangible assets | | 76 | | |
Current liabilities | | (2) | | |
Other long-term assets (liabilities), net | | (14) | | |
Net assets acquired | | 64 | | |
Goodwill | | 39 | | |
Purchase consideration | | $ | 103 | | |
The purchase price has been allocated on the basis of the estimates of fair values of assets acquired and liabilities assumed, resulting in the recording of $39 million in goodwill, which is considered to represent the value associated with the acquired workforce and synergies the two companies anticipate realizing as a combined company. The goodwill is not deductible for tax purposes. Measurement period adjustments made to the fair values of the assets acquired and liabilities assumed during the year ended December 31, 2021 were immaterial to the financial statements, resulting in an increase to goodwill of $6 million.
Identifiable intangible assets acquired were as follows:
| | | | | | | | | | | | | | |
| | | | Weighted Average |
| | | | Useful Life |
(in millions, except for useful life) | | Amount | | (in years) |
| | | | |
Developed technology | | $ | 66 | | | 15 |
In-process R&D | | 10 | | | Indefinite |
Total | | $ | 76 | | | |
| | | | |
| | | | |
2020 Transactions
On December 31, 2020, the effective date of the transaction, the Company acquired 100% of the outstanding interests of Straight Smile, LLC ("Byte"), a privately-held company, for approximately $1.0 billion using cash on hand. Byte is a doctor-directed, direct-to-consumer, clear aligner business. The acquisition is expected to enhance scale and accelerate the growth and profitability of the Company's combined clear aligners business.
The fair values of the assets acquired and liabilities assumed in connection with the Byte acquisition for the year ended December 31, 2020 were as follows:
| | | | | | | | | | | |
(in millions) | | | |
| | | |
Cash and cash equivalents | | $ | 14 | | |
Current assets | | 16 | | |
Intangible assets | | 416 | | |
Current liabilities | | (28) | | |
| | | |
Net assets acquired | | 418 | | |
Goodwill | | 627 | | |
Purchase consideration | | $ | 1,045 | | |
The purchase price has been allocated on the basis of the estimates of fair values of assets acquired and liabilities assumed, which resulted in the recording of $627 million in goodwill. The amount of goodwill is considered to represent the value associated with the acquired workforce and synergies the two companies anticipate realizing as a combined company, including alignment with the Company’s existing clear aligner business, and is deductible for tax purposes. Measurement period adjustments made to the fair values of the assets acquired and liabilities assumed during the year ended December 31, 2021 were immaterial to the financial statements, resulting in a reduction to goodwill of $4 million.
Intangible assets acquired were as follows:
| | | | | | | | | | | | | | |
| | | | Weighted Average |
| | | | Useful Life |
(in millions, except for useful life) | | Amount | | (in years) |
| | | | |
Non-compete agreements | | $ | 16 | | | 5 |
Technology know-how | | 210 | | | 10 |
Tradenames and trademarks | | 190 | | | 20 |
Total | | $ | 416 | | | |
| | | | |
| | | | |
The results of operations for each of the acquired businesses above upon the effective date of each transaction have been included in the accompanying financial statements. These results, as well as the historical results for the above acquired businesses for the years ended December 31, 2021, and 2020 are not material in relation to the Company’s net sales and earnings for those periods. The Company therefore does not believe these acquisitions represent material transactions either individually or in the aggregate requiring the supplemental pro-forma information prescribed by ASC 805 and accordingly, this information is not presented.
Acquisition-related costs incurred for the year ended December 31, 2021 and 2020 were $8 million and $16 million, respectively, consisting primarily of legal and professional fees in relation to the Propel and Byte acquisitions, for their respective year of acquisition, and are recorded in SG&A expenses in the Consolidated Statements of Operations.
Investment in Affiliates
On June 4, 2021, the effective date of the transaction, the Company paid $16 million to acquire a minority interest in a U.K. based, privately-held provider of healthcare consumables. The investment is recorded as an equity method investment within Other noncurrent assets in the Consolidated Balance Sheets.
During the three months ended December 31, 2020, the Company paid $45 million for interest in a privately-held dental services company. The investment is recorded as an equity-method investment and recorded in Other noncurrent assets in the Consolidated Balance Sheets.
Divestitures
On April 1, 2021, the Company disposed of certain orthodontics businesses based in Japan previously included as part of the Technologies & Equipment segment in exchange for a cash receipt of $8 million. The divestiture resulted in an immaterial loss recorded in Other expense (income), net in the Consolidated Statements of Operations for the year ended December 31, 2021.
On February 1, 2021, the Company disposed of an investment casting business previously included as part of the Consumables segment in exchange for a cash receipt of $19 million. The divestiture resulted in a pre-tax gain of $13 million recorded in Other expense (income), net in the Consolidated Statements of Operations for the year ended December 31, 2021.
NOTE 7 - SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two operating segments that are organized primarily by product and generally have overlapping geographical presence, customer bases, distribution channels, and regulatory oversight. These operating segments are also the Company’s reportable segments in accordance with how the Company’s chief operating decision-maker regularly reviews financial results and uses this information to evaluate the Company’s performance and allocate resources.
The Company evaluates performance of the segments based on the net sales and adjusted operating income. Segment adjusted operating income is defined as operating income before income taxes and before certain corporate headquarters unallocated costs, restructuring and other costs, interest expense, interest income, other expense (income), net, amortization of intangible assets and depreciation resulting from the fair value step-up of property, plant, and equipment from acquisitions.
A description of the products and services provided within each of the Company’s two reportable segments is provided below.
Technologies & Equipment
This segment is responsible for the design, manufacture, and sales of the Company’s dental technology and equipment products and healthcare products. These products include dental implants, CAD/CAM systems, orthodontic clear aligners, imaging systems, treatment centers, instruments, as well as medical devices.
Consumables
This segment is responsible for the design, manufacture, and sales of the Company’s consumable products which include various preventive, restorative, endodontic, and dental laboratory products.
The Company’s segment information for the years ended December 31 was as follows:
| | | | | | | | | | | | | | | | | | | | |
Net Sales | | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Technologies & Equipment | | $ | 2,524 | | | $ | 1,961 | | | $ | 2,283 | |
Consumables | | 1,727 | | | 1,381 | | | 1,746 | |
| | | | | | |
| | | | | | |
Total net sales | | $ | 4,251 | | | $ | 3,342 | | | $ | 4,029 | |
| | | | | | | | | | | | | | | | | | | | |
Depreciation and Amortization | | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Technologies & Equipment | | $ | 280 | | | $ | 261 | | | $ | 258 | |
Consumables | | 52 | | | 61 | | | 54 | |
| | | | | | |
All Other (a) | | 15 | | | 12 | | | 11 | |
Total | | $ | 347 | | | $ | 334 | | | $ | 323 | |
(a) Includes amounts recorded at Corporate headquarters.
| | | | | | | | | | | | | | | | | | | | |
Segment Adjusted Operating Income | | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Technologies & Equipment (a) | | $ | 556 | | | $ | 387 | | | $ | 467 | |
Consumables (a) | | 541 | | | 314 | | | 440 | |
| | | | | | |
Segment adjusted operating income | | $ | 1,097 | | | $ | 701 | | | $ | 907 | |
| | | | | | |
Reconciling items (income) expense: | | | | | | |
All other (a) (b) | | 230 | | | 281 | | | 269 | |
Goodwill impairment | | — | | | 157 | | | — | |
Restructuring and other costs | | 17 | | | 77 | | | 81 | |
Interest expense, net | | 55 | | | 47 | | | 28 | |
Other expense (income), net | | 8 | | | 1 | | | (12) | |
Amortization of intangible assets | | 222 | | | 192 | | | 189 | |
Depreciation resulting from the fair value step-up of property, plant, and equipment from business combinations | | 6 | | | 6 | | | 7 | |
Income (loss) before income taxes | | $ | 559 | | | $ | (60) | | | $ | 345 | |
(a) $38 million of charges related to discontinuance of product lines, incurred in 2019, which were previously reported in adjusted operating income for the reportable segments, have been reclassified to the “All other” category to conform to current year presentation and our internal reporting to our Chief Operating Decision Maker package ("CODM"). These amounts are not material to the measure of segment results for the years presented.
(b) Includes the results of unassigned Corporate headquarters costs and inter-segment eliminations.
| | | | | | | | | | | | | | | | | | | | |
Capital Expenditures | | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Technologies & Equipment | | $ | 100 | | | $ | 50 | | | $ | 73 | |
Consumables | | 37 | | | 26 | | | 34 | |
| | | | | | |
All Other (a) | | 22 | | | 11 | | | 16 | |
Total | | $ | 159 | | | $ | 87 | | | $ | 123 | |
(a) Includes capital expenditures of Corporate headquarters.
| | | | | | | | | | | | | | |
Assets | | Year Ended December 31, |
(in millions) | | 2021 | | 2020 |
| | | | |
Technologies & Equipment | | $ | 6,894 | | | $ | 7,014 | |
Consumables | | 2,123 | | | 2,172 | |
| | | | |
All Other (a) | | 203 | | | 156 | |
Total | | $ | 9,220 | | | $ | 9,342 | |
(a) Includes the results of unassigned Corporate headquarters costs and inter-segment eliminations.
Geographic Information
The following tables set forth information about the Company’s significant operations by geographic areas, for the years ended December 31, 2021, 2020, and 2019. Net Sales reported below represent revenues from external customers in those respective countries based on the destination of shipments.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Net sales | | | | | | |
United States | | $ | 1,494 | | | $ | 1,109 | | | $ | 1,375 | |
Germany | | 499 | | | 439 | | | 478 | |
| | | | | | |
Other Foreign | | 2,258 | | | 1,794 | | | 2,176 | |
Total net sales | | $ | 4,251 | | | $ | 3,342 | | | $ | 4,029 | |
Property, plant and equipment, net, represents those long-lived assets held by the operating businesses located in the respective geographic areas.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Property, plant, and equipment, net | | | | | | |
United States | | $ | 166 | | | $ | 145 | | | $ | 168 | |
Germany | | 309 | | | 337 | | | 327 | |
Sweden | | 107 | | | 110 | | | 99 | |
Other Foreign | | 191 | | | 199 | | | 208 | |
Total property, plant, and equipment, net | | $ | 773 | | | $ | 791 | | | $ | 802 | |
Product and Customer Information
For information on the Company's net sales by product category, including a description of the revenue streams comprising each of the reportable segments, see Note 2, Revenue.
Concentration Risk
For the year ended December 31, 2021, no customer accounted for 10% or more of consolidated net sales or consolidated accounts receivable balance. Customers that accounted for 10% or more of net sales and accounts receivable for the years ended December 31, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | |
| | % of net sales | | % of accounts receivable | | % of net sales | | % of accounts receivable | |
| | | | | | | | | |
Henry Schein, Inc. | | 14 | % | | N/A | | 13 | % | | 12 | % | |
Patterson Companies, Inc. | | 10 | % | | 18 | % | | N/A | | 17 | % | |
For the years ended December 31, 2021, 2020, and 2019, third party export sales from the U.S. were less than ten percent of consolidated net sales.
NOTE 8 - OTHER EXPENSE (INCOME), NET
Other expense (income), net, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Foreign exchange transaction (gain) loss | | $ | (6) | | | $ | (13) | | | $ | (27) | |
Other expense (income), net | | 14 | | | 14 | | | 15 | |
Total other expense (income), net | | $ | 8 | | | $ | 1 | | | $ | (12) | |
NOTE 9 - INVENTORIES, NET
Inventories, net were as follows: | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 |
| | | | |
Raw materials and supplies | | $ | 139 | | | $ | 134 | |
Work-in-process | | 72 | | | 68 | |
Finished Goods | | 293 | | | 264 | |
| | | | |
| | | | |
Inventories, net | | $ | 504 | | | $ | 466 | |
The Company’s inventory reserve was $86 million and $117 million at December 31, 2021 and 2020, respectively. Inventories are stated at the lower of cost and net realizable value.
NOTE 10 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, were as follows: | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 |
| | | | |
Land | | $ | 51 | | | $ | 54 | |
Buildings and improvements | | 561 | | | 595 | |
Machinery and equipment | | 982 | | | 1,075 | |
Capitalized Software | | 353 | | | 339 | |
Construction in progress | | 134 | | | 120 | |
| | $ | 2,081 | | | $ | 2,183 | |
Less: Accumulated depreciation and amortization | | 1,308 | | | 1,392 | |
Property, plant and equipment, net | | $ | 773 | | | $ | 791 | |
NOTE 11 - LEASES
The net present value of finance and operating lease right-of-use assets and liabilities were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
(in millions, except percentages) | | Location in the Consolidated Balance Sheets | | 2021 | | 2020 |
| | | | | | |
Assets | | | | | | |
Finance leases | | Property, plant, and equipment, net | | $ | 2 | | | $ | 1 | |
Operating leases | | Operating lease right-of-use assets, net | | 193 | | | 176 | |
Total right-of-use assets | | | | $ | 195 | | | $ | 177 | |
| | | | | | |
Liabilities | | | | | | |
Current liabilities | | | | | | |
Finance leases | | Notes payable and current portion of long-term debt | | $ | 1 | | | $ | — | |
Operating leases | | Accrued liabilities | | 50 | | | 48 | |
Noncurrent liabilities | | | | | | |
Finance leases | | Long-term debt | | 1 | | | 1 | |
Operating leases | | Operating lease liabilities | | 145 | | | 130 | |
Total lease liabilities | | | | $ | 197 | | | $ | 179 | |
| | | | | | |
Supplemental information: | | | | |
Weighted-average discount rate | | | | |
Finance leases | | | | 3.2 | % | | 3.7 | % |
Operating leases | | | | 3.3 | % | | 3.0 | % |
| | | | | | |
Weighted-average remaining lease term in years | | | | |
Finance leases | | | | 4.3 | | 6.5 |
Operating leases | | | | 5.3 | | 5.2 |
The lease cost recognized in the Consolidated Statements of Operations for the year ended December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | |
(in millions) | | | 2021 | | 2020 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Operating lease cost | | | $ | 67 | | | $ | 57 | |
Short-term lease cost | | | 1 | | | 1 | |
Variable lease cost | | | 10 | | | 9 | |
Total lease cost | | | $ | 78 | | | $ | 67 | |
The contractual maturity dates of the remaining lease liabilities for the year ended December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Finance Leases | | Operating Leases | | Total |
| | | | | | |
2022 | | $ | 1 | | | $ | 57 | | | $ | 58 | |
2023 | | 1 | | | 46 | | | 47 | |
2024 | | — | | | 35 | | | 35 | |
2025 | | — | | | 24 | | | 24 | |
2026 | | — | | | 17 | | | 17 | |
2027 and beyond | | — | | | 36 | | | 36 | |
Total lease payments | | $ | 2 | | | $ | 215 | | | $ | 217 | |
Less imputed interest | | — | | | 20 | | | 20 | |
Present value of lease liabilities | | $ | 2 | | | $ | 195 | | | $ | 197 | |
The supplemental cash flow information for the year ended December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | |
(in millions) | | 2021 | | 2020 |
| | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| | | | |
Operating cash flows paid for operating leases | | $ | 65 | | | $ | 56 | |
| | | | |
| | | | |
Right-of-use assets obtained in exchange for new lease liabilities: | | | | |
Finance leases | | $ | 1 | | | $ | — | |
Operating leases | | 79 | | | 43 | |
NOTE 12 - GOODWILL AND INTANGIBLE ASSETS
The Company assesses both goodwill and indefinite-lived intangible assets for impairment annually during the second quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. The Company conducted its annual goodwill and indefinite-lived intangible assets impairment tests as of April 1, 2021.
2021 Annual Goodwill Impairment Testing
The fair values of the Company's five reporting units were computed using a discounted cash flow model with inputs developed using both internal and market-based data. The discounted cash flow model uses five- to ten- year forecasted cash flows plus a terminal value based on capitalizing the last period’s cash flows using a perpetual growth rate. The Company's significant assumptions in the discounted cash flow models include, but are not limited to, the discount rates, 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 total forecasted cash flows for each of the reporting units were discounted using rates ranging between 8.0% to 9.5%. Further, 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. The revenue growth rate assumptions were developed in consideration of future expectations which include, but were not limited to, distribution channel changes, impact from competition, and new product developments for these reporting units. The Company also considered the current and projected market and economic conditions amid the ongoing COVID-19 pandemic for the dental industry both in the U.S. and globally, when determining its assumptions. As a result of the annual tests of goodwill performed as of April 1, 2021, no impairment was identified.
The use of estimates and the development of assumptions results in uncertainties around forecasted cash flows. For this reason, in conjunction with the annual test, the Company applied a hypothetical sensitivity analysis to its reporting units. 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.
During the time subsequent to the annual evaluation, and at December 31, 2021, the Company considered whether any events or changes in circumstances had resulted in the likelihood that the goodwill of any of its reporting units may have been impaired. It is management's assessment that no such events have occurred. A change in any of the estimates and assumptions used in the annual test, as well as further unfavorable changes in the ongoing COVID-19 pandemic, a decline 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 could result in a future impairment charge. There can be no assurance that the Company’s future goodwill impairment testing will not result in a material charge to earnings.
2021 Annual Indefinite-Lived Intangibles Impairment Testing
The Company also assessed the annual impairment of indefinite-lived intangible assets at April 1, 2021, which largely consists of acquired tradenames and trademarks, in conjunction with the annual impairment tests of goodwill. 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 ownership of an asset. Management judgment is necessary to determine key assumptions, including revenue growth rates, perpetual revenue growth rates, royalty rates, and discount rates. The Company utilized discount rates ranging from 8.5% to 10.0%. As a result of the annual impairment test of indefinite-lived intangible assets, no impairment was identified. The Company applied a hypothetical sensitivity analysis. 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 at April 1, 2021, the fair value of these assets would still exceed their book value.
Should the Company’s analysis in the future indicate additional unfavorable impacts related to the ongoing COVID-19 pandemic, an increase in discount rates, or a decline in the use of the tradenames and trademarks, any of which could have a negative material impact to the implied fair values and could result in a future impairment to the carrying value of the indefinite-lived intangible assets. There can be no assurance that the Company’s future indefinite-lived intangible asset impairment testing will not result in a material charge to earnings.
2020 Annual Goodwill and Indefinite-Lived Intangibles Impairment and Testing
During the three months ended March 31, 2020, the Company recorded an impairment charge of $157 million related to the goodwill associated with the Equipment & Instruments reporting unit. The impairment was a result of changes in forecasted revenues, operating margins, and discount rates due to the negative impacts of the COVID-19 pandemic on customer demand for the Company's products, which caused a decline in revenue and profitability in the first quarter of 2020. To determine the fair value of each of the reporting units for which a triggering event was concluded to exist as of March 31, 2020, the Company utilized a discounted cash flow model consistent with the valuation approach described above for the annual impairment test, and utilized discount rates for each of the reporting units which ranged between 9.5% to 11.5%. As a result of these models which included updates to the estimates and assumptions resulting from the ongoing COVID-19 pandemic, the Company determined the goodwill associated with the Equipment & Instruments reporting unit was impaired. The impairment charge was recorded as a separate line in the Consolidated Statements of Operations.
The Company also concluded in the first quarter of 2020 that due to the negative effects of the COVID-19 pandemic on revenue and profitability, a triggering event also existed for all but two of the Company's indefinite-lived intangible assets as of March 31, 2020. The Company performed impairment tests for the indefinite-lived intangible assets using an income approach, more specifically a relief from royalty method. In the development of the forecasted cash flows, the Company applied significant judgment to determine key assumptions, including royalty rates, and discount rates, which ranged from 10.0% to 17.5%. The impairment test resulted in an impairment charge of $39 million related to certain tradenames and trademarks related to the Equipment & Instruments reporting unit during the three months ended March 31, 2020. The impairment charge was driven by a decline in forecasted sales as a result of the COVID-19 pandemic as discussed above, as well as an unfavorable change in the discount rates. The impairment charge was recorded in Restructuring and other costs in the Consolidated Statements of Operations.
The Company further performed the required annual impairment tests of goodwill and indefinite-lived intangibles at April 30, 2020 consistent with the valuation approaches described above, which did not result in any additional impairment in 2020.
2019 Annual Goodwill and Indefinite-Lived Intangibles Impairment and Testing
Effective January 1, 2019, the Company realigned certain businesses between segments resulting in a change from eleven reporting units to five. As a result, the Company transferred goodwill between segments due to these changes. Affected reporting units, including the CAD/CAM and Treatment Center reporting units in the Technologies & Equipment segment, were tested for potential impairment of goodwill before the transfers. No goodwill impairment was identified due to the realignment. The Company further performed the required annual impairment tests of goodwill at April 30, 2019 on all five reporting units. The performance of the Company’s annual impairment test did not result in any impairment of the Company’s goodwill.
During the three months ended March 31, 2019, the Company impaired $5 million of product tradenames and trademarks within the Technologies & Equipment segment. The impairment was the result of a change in forecasted sales related to the divestitures of non-strategic product lines. The Company further assessed the annual impairment of the remaining indefinite-lived intangible assets at April 30, 2019, which largely consists of acquired tradenames and trademarks, in conjunction with the annual impairment tests of goodwill. The performance of the Company’s annual impairment test did not result in any impairment of the Company’s indefinite-lived intangible assets.
A reconciliation of changes in the Company’s goodwill by reportable segment were as follows: | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Technologies & Equipment | | Consumables | | Total |
| | | | | | |
Balance at December 31, 2019 | | | | | | |
Goodwill | | $ | 5,253 | | | $ | 881 | | | $ | 6,134 | |
Accumulated impairment losses | | (2,737) | | | — | | | (2,737) | |
Goodwill, net | | $ | 2,516 | | | $ | 881 | | | $ | 3,397 | |
| | | | | | |
Acquisition related additions (a) | | 631 | | | — | | | 631 |
Impairment | | (157) | | | — | | | (157) | |
Translation and other | | 102 | | | 13 | | | 115 | |
| | | | | | |
Balance at December 31, 2020 | | | | | | |
Goodwill | | $ | 5,985 | | | $ | 894 | | | $ | 6,879 | |
Accumulated impairment losses | | (2,893) | | | — | | | (2,893) | |
Goodwill, net | | $ | 3,092 | | | $ | 894 | | | $ | 3,986 | |
| | | | | | |
Acquisition related additions (a) | | 109 | | | — | | | 109 | |
Translation and other | | (105) | | | (14) | | | (119) | |
| | | | | | |
Balance at December 31, 2021 | | | | | | |
Goodwill | | $ | 5,989 | | | $ | 880 | | | $ | 6,869 | |
Accumulated impairment losses | | (2,893) | | | — | | | (2,893) | |
Goodwill, net | | $ | 3,096 | | | $ | 880 | | | $ | 3,976 | |
(a) Refer to Note 6, Business Combinations, for more information regarding recent acquisitions.
Identifiable definite-lived and indefinite-lived intangible assets at were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
(in millions) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | | | | | | | | |
Developed technology and patents | | $ | 1,729 | | | $ | (762) | | | $ | 967 | | | $ | 1,681 | | | $ | (677) | | | $ | 1,004 | |
Tradenames and trademarks | | 269 | | | (79) | | | 190 | | | 273 | | | (70) | | | 203 | |
Licensing agreements | | 36 | | | (32) | | | 4 | | | 37 | | | (30) | | | 7 | |
Customer relationships | | 1,091 | | | (545) | | | 546 | | | 1,142 | | | (494) | | | 648 | |
Total definite-lived | | $ | 3,125 | | | $ | (1,418) | | | $ | 1,707 | | | $ | 3,133 | | | $ | (1,271) | | | $ | 1,862 | |
| | | | | | | | | | | | |
Indefinite-lived tradenames and trademarks | | 598 | | | — | | | 598 | | | 642 | | | — | | | 642 | |
In-process R&D (a) | | 14 | | | — | | | 14 | | | — | | | — | | | — | |
Total indefinite-lived | | 612 | | | — | | | 612 | | | 642 | | | — | | | 642 | |
| | | | | | | | | | | | |
Total identifiable intangible assets | | $ | 3,737 | | | $ | (1,418) | | | $ | 2,319 | | | $ | 3,775 | | | $ | (1,271) | | | $ | 2,504 | |
(a) Intangible assets acquired in a business combination that are in-process and used in research and development ("R&D") activities are considered indefinite-lived until the completion or abandonment of the R&D efforts. The useful life and amortization of those assets will be determined once the R&D efforts are completed.
Amortization expense for identifiable definite-lived intangible assets for the years ended December 31, 2021, 2020 and 2019 was $222 million, $192 million and $190 million, respectively. The annual estimated amortization expense related to these intangible assets for each of the five succeeding calendar years is $214 million, $216 million, $219 million, $224 million and $146 million for 2022, 2023, 2024, 2025 and 2026, respectively.
During the second quarter of 2021, the Company purchased certain developed technology rights for an initial payment of $3 million. The purchase consideration also includes contingent payments of $17 million to be made upon reaching certain regulatory and commercial milestones, which were not yet deemed probable at December 31, 2021.
NOTE 13 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets were as follows: | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 |
| | | | |
Prepaid expenses | | $ | 89 | | | $ | 79 | |
Value-added tax receivable | | 53 | | | 36 | |
Deposits | | 22 | | | 33 | |
Other current assets | | 83 | | | 66 | |
Prepaid expenses and other current assets | | $ | 247 | | | $ | 214 | |
NOTE 14 - ACCRUED LIABILITIES
Accrued liabilities were as follows: | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 |
| | | | |
Payroll, commissions, bonuses, other cash compensation and employee benefits | | $ | 172 | | | $ | 142 | |
Sales and marketing programs | | 20 | | | 21 | |
Reserve for dealer rebates | | 203 | | | 134 | |
Restructuring costs | | 11 | | | 31 | |
Accrued vacation and holidays | | 40 | | | 41 | |
Professional and legal costs | | 19 | | | 33 | |
Current portion of derivatives | | 3 | | | 32 | |
General insurance | | 12 | | | 12 | |
Warranty liabilities | | 28 | | | 18 | |
Third party royalties | | 7 | | | 11 | |
Deferred income | | 51 | | | 41 | |
Accrued interest | | 8 | | | 13 | |
| | | | |
Accrued property taxes | | 6 | | | 13 | |
Current operating lease liabilities | | 50 | | | 48 | |
| | | | |
Other | | 49 | | | 63 | |
Accrued liabilities | | $ | 679 | | | $ | 653 | |
NOTE 15 - FINANCING ARRANGEMENTS
Short-Term Debt
Short-term debt was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
| | Principal | | Interest | | Principal | | Interest |
(in millions except percentages) | | Balance | | Rate | | Balance | | Rate |
| | | | | | | | |
| | | | | | | | |
Corporate commercial paper facility | | $ | 170 | | | 0.3 | % | | $ | — | | | — | % |
Other short-term borrowings | | 11 | | | 4.8 | % | | 3 | | | 1.9 | % |
Add: Current portion of long-term debt | | 1 | | | | | 296 | | | |
| | | | | | | | |
Total short-term debt | | $ | 182 | | | | | $ | 299 | | | |
| | | | | | | | |
Maximum month-end short-term debt outstanding during the year | | $ | 380 | | | | | $ | 299 | | | |
Average amount of short-term debt outstanding during the year | | $ | 265 | | | | | $ | 95 | | | |
Weighted-average interest rate on short-term debt at year-end | | | | 0.6 | % | | | | 1.9 | % |
Short-Term Borrowings
The Company has access to a $700 million multi-currency revolving credit facility ("2018 Credit Facility") through July 28, 2024. The facility is unsecured and contains 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. The credit facility serves as a back-stop facility for the Company's commercial paper program.
The Company has a $500 million commercial paper facility. At December 31, 2021, the Company had borrowings of $170 million outstanding under this facility. The average balance outstanding for the commercial paper facility during the year ended December 31, 2021 was $16 million. At December 31, 2020, the Company had no outstanding borrowings under this commercial paper facility. The Company also has access to $41 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 of $11 million.
On July 2, 2021 the Company pre-paid the fixed rate Senior Notes totaling $296 million that were scheduled to mature on August 16, 2021 using cash and short-term commercial paper.
Long-Term Debt
Long-term debt was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
| | Principal | | Interest | | Principal | | Interest |
(in millions except percentages) | | Balance | | Rate | | Balance | | Rate |
| | | | | | | | |
Fixed rate senior notes $450 million due August 2021 | | $ | — | | | — | % | | $ | 296 | | | 4.1 | % |
Private placement notes 70 million euros due October 2024 | | 79 | | | 1.0 | % | | 85 | | | 1.0 | % |
Private placement notes 25 million Swiss franc due December 2025 | | 27 | | | 0.9 | % | | 28 | | | 0.9 | % |
Private placement notes 97 million euros due December 2025 | | 110 | | | 2.1 | % | | 118 | | | 2.1 | % |
Private placement notes 26 million euros due February 2026 | | 30 | | | 2.1 | % | | 32 | | | 2.1 | % |
Private placement notes 58 million Swiss franc due August 2026 | | 64 | | | 1.0 | % | | 65 | | | 1.0 | % |
Private placement notes 106 million euros due August 2026 | | 121 | | | 2.3 | % | | 129 | | | 2.3 | % |
Private placement notes 70 million euros due October 2027 | | 80 | | | 1.3 | % | | 85 | | | 1.3 | % |
Private placement notes 8 million Swiss franc due December 2027 | | 8 | | | 1.0 | % | | 8 | | | 1.0 | % |
Private placement notes 15 million euros due December 2027 | | 17 | | | 2.2 | % | | 18 | | | 2.2 | % |
Private placement notes 140 million Swiss franc due August 2028 | | 153 | | | 1.2 | % | | 158 | | | 1.2 | % |
Private placement notes 70 million euros due October 2029 | | 79 | | | 1.5 | % | | 85 | | | 1.5 | % |
Fixed rate senior notes 750 million due June 2030 | | 750 | | | 3.3 | % | | 750 | | | 3.3 | % |
Private placement notes 70 million euros due October 2030 | | 80 | | | 1.6 | % | | 85 | | | 1.6 | % |
Private placement notes 45 million euros due February 2031 | | 51 | | | 2.5 | % | | 55 | | | 2.5 | % |
Private placement notes 65 million Swiss franc due August 2031 | | 71 | | | 1.3 | % | | 73 | | | 1.3 | % |
Private placement notes 12.6 billion Japanese yen due September 2031 | | 109 | | | 1.0 | % | | 122 | | | 1.0 | % |
Private placement notes 70 million euros due October 2031 | | 80 | | | 1.7 | % | | 85 | | | 1.7 | % |
Other borrowings, various currencies and rates | | 13 | | | | | 7 | | | |
| | $ | 1,922 | | | | | $ | 2,284 | | | |
Less: Current portion | | | | | | | | |
(included in “Notes payable and current portion of long-term debt” in the Consolidated Balance Sheets) | | 1 | | | | | 296 | | | |
Less: Long-term portion of deferred financing costs | | 8 | | | | | 10 | | | |
Long-term portion | | $ | 1,913 | | | | | $ | 1,978 | | | |
At December 31, 2021, the Company had $560 million borrowings available under unused lines of credit, including lines available under its short-term arrangements and revolving credit agreement.
The Company’s revolving credit facility, term loans and senior notes contain certain affirmative and negative covenants relating to the Company's operations and financial condition. At December 31, 2021, the Company was in compliance with all debt covenants.
The table below reflects the contractual maturity dates of the various long-term borrowings as follows:
| | | | | | | | |
(in millions) | | December 31, 2021 |
2022 | | $ | 3 | |
2023 | | 11 | |
2024 | | 84 | |
2025 | | 138 | |
2026 | | 213 | |
2027 and beyond | | 1,473 | |
| | $ | 1,922 | |
NOTE 16 - EQUITY
On July 28, 2021, the Board of Directors of the Company approved an increase to $1.0 billion in the value of shares of common stock that may be repurchased under the share repurchase program. Share repurchases may be made through open market purchases, Rule 10b5-1 plans, accelerated share repurchases, privately negotiated transactions or other transactions in such amounts and at such times as the Company deems appropriate based upon prevailing market and business conditions and other factors.
For the years ended December 31, 2021, 2020 and 2019, the Company repurchased outstanding shares of common stock at a cost of $200 million, $140 million and $260 million, respectively. At December 31, 2021, the Company had authorization to repurchase $890 million in shares of common stock remaining under the share repurchase program.
For the years ended December 31, 2021, 2020 and 2019, the Company received proceeds of $51 million, $11 million and $109 million, respectively, primarily as a result of stock options exercised in the amount of 1.1 million, 0.3 million and 2.7 million in each of the years, respectively. It is the Company’s practice to issue shares from treasury stock when options are exercised.
Total outstanding shares of common stock and treasury stock were as follows: | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Shares of Common Stock | | Shares of Treasury Stock | | Outstanding Shares |
| | | | | | |
Balance at December 31, 2018 | | 264.5 | | | (41.5) | | | 223.0 | |
| | | | | | |
Shares of treasury stock issued | | — | | | 3.1 | | | 3.1 | |
Repurchase of common stock at an average cost of $54.18 | | — | | | (4.8) | | | (4.8) | |
| | | | | | |
Balance at December 31, 2019 | | 264.5 | | | (43.2) | | | 221.3 | |
| | | | | | |
Shares of treasury stock issued | | — | | | 1.1 | | | 1.1 | |
Repurchase of common stock at an average cost of $38.25 | | — | | | (3.7) | | | (3.7) | |
| | | | | | |
Balance at December 31, 2020 | | 264.5 | | | (45.8) | | | 218.7 | |
Shares of treasury stock issued | | — | | | 2.2 | | | 2.2 | |
Repurchase of common stock at an average cost of $57.47 | | — | | | (3.5) | | | (3.5) | |
| | | | | | |
Balance at December 31, 2021 | | 264.5 | | | (47.1) | | | 217.4 | |
NOTE 17 - INCOME TAXES
The components of income (loss) before income taxes were as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
United States | | $ | 58 | | | $ | (109) | | | $ | (110) | |
Foreign | | 501 | | | 49 | | | 455 | |
| | $ | 559 | | | $ | (60) | | | $ | 345 | |
The components of the provision (benefit) for income taxes from operations were as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Current: | | | | | | |
U.S. federal | | $ | 1 | | | $ | (5) | | | $ | (11) | |
U.S. state | | 4 | | | 1 | | | 1 | |
Foreign | | 153 | | | 91 | | | 129 | |
Total | | $ | 158 | | | $ | 87 | | | $ | 119 | |
| | | | | | |
Deferred: | | | | | | |
U.S. federal | | $ | 11 | | | $ | — | | | $ | (2) | |
U.S. state | | 2 | | | (2) | | | 2 | |
Foreign | | (33) | | | (62) | | | (37) | |
Total | | $ | (20) | | | $ | (64) | | | $ | (37) | |
| | | | | | |
| | $ | 138 | | | $ | 23 | | | $ | 82 | |
The reconciliation of the U.S. federal statutory tax rate to the effective rate were as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
Statutory U.S. federal income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
Effect of: | | | | | | |
State income taxes, net of federal benefit | | 0.8 | | | 2.3 | | | 0.7 | |
Federal benefit of R&D and foreign tax credits | | (0.9) | | | 15.8 | | | (2.0) | |
US other permanent differences | | 0.4 | | | (5.6) | | | 0.8 | |
Tax effect of international operations | | 0.5 | | | 4.7 | | | 0.4 | |
Global Intangible Low Taxed Income (GILTI) | | 2.3 | | | (10.9) | | | 3.7 | |
Foreign Derived Intangible Income (FDII) | | (1.3) | | | 9.9 | | | (0.1) | |
Net effect of tax audit activity | | 1.6 | | | (6.9) | | | 0.4 | |
Tax effect of enacted statutory rate changes on Non-U.S. jurisdictions | | 1.9 | | | (0.2) | | | 0.1 | |
Federal tax on unremitted earnings of certain foreign subsidiaries | | (0.2) | | | (4.6) | | | 0.1 | |
Valuation allowance adjustments | | (1.7) | | | (12.9) | | | (1.3) | |
Tax effect of impairment of goodwill and intangibles | | — | | | (51.0) | | | (0.2) | |
Other | | 0.3 | | | 0.1 | | | 0.2 | |
| | | | | | |
Effective income tax rate on operations | | 24.7 | % | | (38.3 | %) | | 23.8 | % |
The tax effect of significant temporary differences giving rise to deferred tax assets and liabilities were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
(in millions) | | Deferred Tax Asset | | Deferred Tax Liability | | Deferred Tax Asset | | Deferred Tax Liability |
| | | | | | | | |
Commission and bonus accrual | | $ | 6 | | | $ | — | | | $ | 8 | | | $ | — | |
Employee benefit accruals | | 51 | | | — | | | 58 | | | — | |
Inventory | | 17 | | | — | | | 25 | | | — | |
Identifiable intangible assets | | — | | | 569 | | | — | | | 613 | |
Insurance premium accruals | | 3 | | | — | | | 3 | | | — | |
Miscellaneous accruals | | 11 | | | — | | | 11 | | | — | |
Other | | 17 | | | — | | | 11 | | | — | |
Unrealized losses included in AOCI | | 46 | | | — | | | 98 | | | — | |
Property, plant and equipment | | — | | | 48 | | | — | | | 50 | |
Lease right-of-use asset | | — | | | 47 | | | — | | | 42 | |
Lease right-of-use liability | | 47 | | | — | | | 42 | | | — | |
Product warranty accruals | | 1 | | | — | | | 1 | | | — | |
Foreign tax credit and R&D carryforward | | 49 | | | — | | | 60 | | | — | |
Restructuring and other cost accruals | | 5 | | | — | | | 9 | | | — | |
Sales and marketing accrual | | 13 | | | — | | | 7 | | | — | |
Taxes on unremitted earnings of foreign subsidiaries | | — | | | 5 | | | — | | | 6 | |
Tax loss carryforwards and other tax attributes | | 276 | | | — | | | 280 | | | — | |
Subtotal | | $ | 542 | | | $ | 669 | | | $ | 613 | | | $ | 711 | |
Valuation allowances | | (267) | | | — | | | (287) | | | — | |
Total | | $ | 275 | | | $ | 669 | | | $ | 326 | | | $ | 711 | |
Deferred tax assets and liabilities are included in the following Consolidated Balance Sheets line items at December 31 were as follows:
| | | | | | | | | | | | | | |
(in millions) | | 2021 | | 2020 |
| | | | |
Assets | | | | |
Other noncurrent assets | | $ | 14 | | | $ | 8 | |
Liabilities | | | | |
Deferred income taxes | | $ | 408 | | | $ | 393 | |
The Company has $45 million of foreign tax credit carryforwards at December 31, 2021, of which $36 million will expire in 2025, $3 million will expire in 2027, and $6 million will expire at various times from 2028 through 2031.
The Company has tax loss carryforwards related to certain foreign and domestic subsidiaries of approximately $1,278 million at December 31, 2021, of which $1,017 million expires at various times through 2041 and $261 million may be carried forward indefinitely. Included in deferred income tax assets at December 31, 2021 are tax benefits totaling $228 million, before valuation allowances, for the tax loss carryforwards. In addition the Company has recorded a deferred tax asset of $48 million, related to tax attributes.
The Company has recorded $210 million of valuation allowance to offset the tax benefit of net operating losses, $45 million to offset the tax benefit of foreign tax credits, and $12 million of valuation allowance for other deferred tax assets. The Company has recorded these valuation allowances due to the uncertainty that these assets can be realized in the future.
The Company has provided $5 million of withholding taxes on certain undistributed earnings of its foreign subsidiaries that the Company anticipates will be repatriated.
Tax Contingencies
The total amount of gross unrecognized tax benefits at December 31, 2021 is approximately $42 million, of this total, approximately $41 million represents the amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate. It is reasonably possible that certain amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date of the Company’s consolidated financial statements. Expiration of statutes of limitation in various jurisdictions during the next twelve months could include unrecognized tax benefits of approximately $1 million. Of this approximately $1 million represents the amount of unrecognized tax benefits that, if recognized would affect the effective income tax rate.
The total amount of accrued interest and penalties were $8 million and $4 million at December 31, 2021 and 2020, respectively. The Company has consistently classified interest and penalties recognized in its consolidated financial statements as income taxes based on the accounting policy election of the Company. During the years ended December 31, 2021 and 2020, the Company recognized income tax expense of $2 million each year, related to interest and penalties. During the year ended December 31, 2019, the Company recognized income tax benefit of $2 million, related to interest and penalties.
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The significant jurisdictions include the U.S., Germany, Sweden and Switzerland. The Company has substantially concluded all U.S. federal income tax matters for years through 2011. The Company is currently under audit for the tax years 2012, 2013, 2015 and 2016. For further information on the Internal Revenue Service (“IRS”) Audit, see Note 22, Commitments and Contingencies. The tax years 2014 through 2020 are subject to future potential tax audit adjustments. The Company has concluded audits in Germany through the tax year 2013 and is currently under audit for the years 2014 through 2017. The tax years 2018 through 2020 are subject to future potential audit adjustments in Germany. The taxable years that remain open for Sweden are 2013 through 2020. For information related to Sweden, see Note 22, Commitments and Contingencies. The taxable years that remain open for Switzerland are 2011 through 2020.
The activity recorded for unrecognized tax benefits were as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Unrecognized tax benefits at beginning of period | | $ | 27 | | | $ | 24 | | | $ | 28 | |
Gross change for prior-period positions | | 6 | | | 1 | | | — | |
Gross change for current year positions | | 2 | | | 1 | | | — | |
Decrease due to settlements and payments | | — | | | — | | | (4) | |
Decrease due to statute expirations | | — | | | — | | | — | |
Increase due to effect of foreign currency translation | | — | | | 1 | | | — | |
Decrease due to effect from foreign currency translation | | (1) | | | — | | | — | |
| | | | | | |
Unrecognized tax benefits at end of period | | $ | 34 | | | $ | 27 | | | $ | 24 | |
U.S. Federal Legislative Changes
Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $1,771 million at December 31, 2021 and $1,807 million at December 31, 2020. The Tax Cuts and Jobs Act (the "act" or "U.S. tax reform") imposed U.S. tax on all post-1986 foreign unrepatriated earnings accumulated through December 31, 2017. Unrepatriated earnings generated after December 31, 2017, are now subject to tax in the current year. All undistributed earnings are still subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply. It is not practicable to calculate the unrecognized deferred tax liability on undistributed earnings.
For the Global Intangible Low Taxed Income (GILTI) provision of the Act, the Company has made the policy election to record any liability associated with GILTI in the period in which it is incurred.
In March 2020, in response to the impact of the COVID-19 pandemic in the U.S. and across the globe, the U.S. Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. In December 2020, the U.S. Congress passed a second relief package, Consolidated Appropriations Act, 2021. The enactment period impacts to the Company were immaterial to income tax expense.
NOTE 18 - BENEFIT PLANS
Defined Contribution Plans
The Company maintains both U.S. and non-U.S. employee defined contribution plans. The primary U.S. plan, the Dentsply Sirona Inc. 401(k) Savings Plan (the "Plan"), allows eligible employees to contribute a portion of their cash compensation to the plan on a tax-deferred basis, and in most cases, the Company provides a matching contribution. The Plan includes various investment funds. The Company makes a discretionary cash contribution that is initially targeted to be 3% of compensation. Each eligible participant who elects to defer to the Plan will receive a matching contribution of 100% on the first 1% contributed and 50% on the next 5% contributed for a total maximum matching contribution of 3.5%. In addition to the primary U.S. plan, the Company also maintains various other U.S. and non-U.S. defined contribution and non-qualified deferred compensation plans. The annual expenses, net of forfeitures, were $39 million, $36 million and $35 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Defined Benefit Plans
The Company maintains defined benefit pension plans for certain employees in Austria, France, Germany, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, Taiwan, and the United States. These plans provide benefits based upon age, years of service and remuneration. Substantially all of the German and Swedish plans are unfunded book reserve plans. Most employees and retirees outside the U.S. are covered by government health plans.
The Company predominantly derives its discount rates by applying the specific spot rates along the yield curve to the relevant projected cash flows; or, in markets where there is an absence of a sufficiently deep corporate bond market, it uses liability durations in establishing its discount rates, which are observed from indices of high-grade corporate or government bond yield in the respective economic regions of the plan. For the large defined benefits pension plans, the Company uses a spot rate approach for the estimation of the Service Cost and Interest Cost components of benefit cost by applying the specific spot rates along the yield curve to the relevant projected cash flows.
Significant changes in the retirement plan benefit obligations for the year ended December 31, 2021 include a $26 million actuarial gain primarily attributable to the increase in discount rates, the effect of which is slightly offset by the change in inflation and salary increase assumptions in some plans. The changes also include a $6 million actuarial gain due to demographic assumption changes and a $16 million actuarial loss due to plan experience different than anticipated.
Significant changes in the retirement plan benefit obligations for the year ended December 31, 2020 include a $31 million actuarial loss primarily attributable to the change in discount rates, the effect of which is slightly offset by the change in inflation and salary increase assumptions in some plans.
Defined Benefit Pension Plan Assets
The primary investment strategy is to ensure that the assets of the plans, along with anticipated future contributions, will be invested in order that the benefit entitlements of employees, pensioners and beneficiaries covered under the plan can be met when due with high probability. Pension plan assets consist mainly of common stock and fixed income investments. The target allocations for defined benefit plan assets are 30% to 65% equity securities, 30% to 65% fixed income securities, 0% to 15% real estate, and 0% to 25% in all other types of investments. Equity securities include investments in companies located both in and outside the U.S. Equity securities in the defined benefit pension plans do not include Company common stock contributed directly by the Company. Fixed income securities include corporate bonds of companies from diversified industries, government bonds, mortgage notes and pledge letters. Other types of investments include investments in mutual funds, insurance contracts, hedge funds and real estate. These plan assets are not recorded in the Company’s Consolidated Balance Sheet as they are held in trust or other off-balance sheet investment vehicles.
The defined benefit pension plan assets maintained in Austria, Germany, Norway, the Netherlands, Switzerland and Taiwan all have separate investment policies but generally have an objective to achieve a long-term rate of return in excess of 2% while at the same time mitigating the impact of investment risk associated with investment categories that are expected to yield greater than average returns. In accordance with the investment policies, the plans’ assets were invested in the following investment categories: interest-bearing cash, U.S. and foreign equities, foreign fixed income securities (primarily corporate and government bonds), insurance company contracts, real estate and hedge funds.
Reconciliation of changes in the defined benefit obligations, fair value of assets and statement of funded status were as follows: | | | | | | | | | | | | | | |
| | | | |
| | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 |
| | | | |
Change in Benefit Obligation | | | | |
Benefit obligation at beginning of year | | $ | 675 | | | $ | 578 | |
Service cost | | 17 | | | 16 | |
Interest cost | | 3 | | | 5 | |
Participant contributions | | 4 | | | 4 | |
Actuarial losses (gains) | | (16) | | | 31 | |
Plan amendments | | (1) | | | — | |
Acquisitions/Divestitures | | (2) | | | — | |
Effect of exchange rate changes | | (41) | | | 59 | |
| | | | |
Plan curtailments and settlements | | (1) | | | (1) | |
Benefits paid | | (19) | | | (17) | |
Benefit obligation at end of year | | $ | 619 | | | $ | 675 | |
| | | | |
Change in Plan Assets | | | | |
Fair value of plan assets at beginning of year | | $ | 213 | | | $ | 185 | |
Actual return on assets | | 10 | | | 9 | |
Plan settlements | | (1) | | | — | |
Acquisitions/Divestitures | | (3) | | | — | |
Effect of exchange rate changes | | (7) | | | 17 | |
Employer contributions | | 15 | | | 15 | |
Participant contributions | | 4 | | | 4 | |
Benefits paid | | (19) | | | (17) | |
Fair value of plan assets at end of year | | $ | 212 | | | $ | 213 | |
| | | | |
Funded status at end of year | | $ | (407) | | | $ | (462) | |
The amounts recognized in the accompanying Consolidated Balance Sheets, net of tax effects, were as follows: | | | | | | | | | | | | | | | | | | | | |
| | Location In The | | Year Ended December 31, |
(in millions) | | Consolidated Balance Sheets | | 2021 | | 2020 |
| | | | | | |
Other noncurrent assets, net | | Other noncurrent assets | | $ | 2 | | | $ | — | |
Deferred tax asset | | Other noncurrent assets | | 36 | | | 49 | |
Total assets | | | | $ | 38 | | | $ | 49 | |
| | | | | | |
Current liabilities | | Accrued liabilities | | (9) | | | (10) | |
Other noncurrent liabilities | | Other noncurrent liabilities | | (400) | | | (452) | |
Deferred tax liability | | Deferred income taxes | | (1) | | | (1) | |
Total liabilities | | | | $ | (410) | | | $ | (463) | |
| | | | | | |
Accumulated other comprehensive income | | Accumulated other comprehensive loss | | 105 | | | 139 | |
Net amount recognized | | | | $ | (267) | | | $ | (275) | |
Amounts recognized in AOCI were as follows: | | | | | | | | | | | | | | |
| | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 |
| | | | |
Net actuarial loss | | $ | 144 | | | $ | 191 | |
Net prior service cost | | (4) | | | (4) | |
Before tax AOCI | | $ | 140 | | | $ | 187 | |
Less: Deferred taxes | | 35 | | | 48 | |
Net of tax AOCI | | $ | 105 | | | $ | 139 | |
Information for pension plans with a projected or accumulated benefit obligation in excess of plan assets were as follows: | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 |
| | | | |
Projected benefit obligation | | $ | 427 | | | $ | 484 | |
Accumulated benefit obligation | | 403 | | | 455 | |
Fair value of plan assets | | 17 | | | 26 | |
Components of net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Location in Consolidated |
(in millions) | | 2021 | | 2020 | | 2019 | | Statements of Operations |
| | | | | | | | |
Service cost | | $ | 7 | | | $ | 6 | | | $ | 6 | | | Cost of products sold |
Service cost | | 10 | | | 10 | | | 8 | | | Selling, general and administrative expenses |
Interest cost | | 3 | | | 5 | | | 8 | | | Other expense (income), net |
Expected return on plan assets | | (4) | | | (4) | | | (5) | | | Other expense (income), net |
| | | | | | | | |
Amortization of prior service credit | | (1) | | | (1) | | | (1) | | | Other expense (income), net |
Amortization of net actuarial loss | | 12 | | | 9 | | | 6 | | | Other expense (income), net |
Acquisitions/Divestitures | | 1 | | | — | | | — | | | Other expense (income), net |
Curtailment and settlement (gains) loss | | (1) | | | — | | | 6 | | | Other expense (income), net |
| | | | | | | | |
Net periodic benefit cost | | $ | 27 | | | $ | 25 | | | $ | 28 | | | |
Other changes in plan assets and benefit obligations recognized in AOCI were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Net actuarial loss (gain) | | $ | (36) | | | $ | 43 | | | $ | 53 | |
| | | | | | |
| | | | | | |
Amortization | | (11) | | | (9) | | | (5) | |
Total recognized in AOCI | | $ | (47) | | | $ | 34 | | | $ | 48 | |
Total recognized in net periodic benefit cost and AOCI | | $ | (20) | | | $ | 59 | | | $ | 76 | |
Assumptions
The weighted average assumptions used to determine benefit obligations for the Company’s plans, principally in foreign locations were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
Interest crediting rate | | 1.3 | % | | 1.3 | % | | 1.3 | % |
Discount rate | | 1.1 | % | | 0.6 | % | | 1.0 | % |
Rate of compensation increase | | 2.6 | % | | 2.4 | % | | 2.5 | % |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The weighted average assumptions used to determine net periodic benefit cost for the Company’s plans, principally in foreign locations were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
Interest crediting rate | | 1.3 | % | | 1.3 | % | | 1.3 | % |
Discount rate | | 0.6 | % | | 1.0 | % | | 1.8 | % |
Expected return on plan assets | | 2.2 | % | | 2.3 | % | | 2.9 | % |
Rate of compensation increase | | 2.4 | % | | 2.5 | % | | 2.5 | % |
Measurement date | | 12/31/2021 | | 12/31/2020 | | 12/31/2019 |
To develop the assumptions for the expected long-term rate of return on assets, the Company considered the current level of expected returns on risk free investments (primarily U.S. government bonds), the historical level of the risk premium associated with the other asset classes in which the assets are invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocations to develop the assumptions for the expected long-term rate of return on assets.
Fair Value Measurements of Plan Assets
The fair value of the Company’s pension plan assets at December 31, 2021 and 2020 is presented in the table below by asset category. Approximately 78% of the total plan assets are categorized as Level 1, and therefore, the values assigned to these pension assets are based on quoted prices available in active markets. For the other category levels, a description of the valuation is provided in Note 1, Significant Accounting Policies, under the “Fair Value Measurement” heading. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets Category | | | | | | | | |
Cash and cash equivalents | | $ | 17 | | | $ | 17 | | | $ | — | | | $ | — | |
Equity securities: | | | | | | | | |
| | | | | | | | |
International | | 65 | | | 65 | | | — | | | — | |
Fixed income securities: | | | | | | | | |
Fixed rate bonds (a) | | 66 | | | 66 | | | — | | | — | |
Other types of investments: | | | | | | | | |
Mutual funds (b) | | 18 | | | 18 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
Insurance contracts | | 34 | | | — | | | — | | | 34 | |
Hedge funds | | 11 | | | — | | | — | | | 11 | |
Real estate | | 1 | | | — | | | — | | | 1 | |
Total | | $ | 212 | | | $ | 166 | | | $ | — | | | $ | 46 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets Category | | | | | | | | |
Cash and cash equivalents | | $ | 16 | | | $ | 16 | | | $ | — | | | $ | — | |
Equity securities: | | | | | | | | |
| | | | | | | | |
International | | 58 | | | 58 | | | — | | | — | |
Fixed income securities: | | | | | | | | |
Fixed rate bonds (a) | | 65 | | | 65 | | | — | | | — | |
Other types of investments: | | | | | | | | |
Mutual funds (b) | | 20 | | | 20 | | | — | | | — | |
| | | | | | | | |
Common trusts (c) | | 5 | | | — | | | 5 | | | — | |
Insurance contracts | | 37 | | | — | | | — | | | 37 | |
Hedge funds | | 12 | | | — | | | — | | | 12 | |
| | | | | | | | |
Total | | $ | 213 | | | $ | 159 | | | $ | 5 | | | $ | 49 | |
(a) This category includes fixed income securities invested primarily in Swiss bonds, foreign bonds denominated in Swiss francs, foreign currency bonds, mortgage notes and pledged letters.
(b) This category includes mutual funds balanced between moderate-income generation and moderate capital appreciation with investment allocations of approximately 50% equities and 50% fixed income investments.
(c) This category includes common/collective funds with investments in approximately 65% equities and 35% in fixed income investments.
A reconciliation from December 31, 2020 to December 31, 2021 for the plan assets categorized as Level 3 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(in millions) | | Insurance Contracts | | Hedge Funds | | Real Estate | | Total |
| | | | | | | | |
Balance at December 31, 2020 | | $ | 37 | | | $ | 12 | | | $ | — | | | $ | 49 | |
Actual return on plan assets: | | | | | | | | |
Relating to assets still held at the reporting date | | (2) | | | 1 | | | 1 | | | — | |
| | | | | | | | |
| | | | | | | | |
Purchases, sales and settlements, net | | (1) | | | (2) | | | — | | | (3) | |
Transfers in and/or (out) | | 2 | | | — | | | — | | | 2 | |
Effect of exchange rate changes | | (2) | | | — | | | — | | | (2) | |
Balance at December 31, 2021 | | $ | 34 | | | $ | 11 | | | $ | 1 | | | $ | 46 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
(in millions) | | Insurance Contracts | | Hedge Funds | | Real Estate | | Total |
| | | | | | | | |
Balance at December 31, 2019 | | $ | 30 | | | $ | 9 | | | $ | — | | | $ | 39 | |
Actual return on plan assets: | | | | | | | | |
Relating to assets still held at the reporting date | | 3 | | | — | | | — | | | 3 | |
| | | | | | | | |
| | | | | | | | |
Purchases, sales and settlements, net | | — | | | 2 | | | — | | | 2 | |
| | | | | | | | |
Effect of exchange rate changes | | 4 | | | 1 | | | — | | | 5 | |
Balance at December 31, 2020 | | $ | 37 | | | $ | 12 | | | $ | — | | | $ | 49 | |
Fair values for Level 3 assets are determined as follows:
Insurance Contracts: The value of the asset represents the mathematical reserve of the insurance policies and is calculated by the insurance firms using their own assumptions.
Hedge Funds: The investments are valued using the net asset value provided by the administrator of the fund, which is based on the fair value of the underlying securities.
Real Estate: Investment is stated by its appraised value.
Cash Flows
In 2022, the Company expects to make employer contributions of $17 million to its defined benefit pension plans.
Estimated Future Benefit Payments
Total benefits expected to be paid from the plans in the future were as follows: | | | | | | | | |
(in millions) | | Pension Benefits |
| | |
2022 | | $ | 23 | |
2023 | | 24 | |
2024 | | 24 | |
2025 | | 25 | |
2026 | | 25 | |
2027-2031 | | 127 | |
NOTE 19 - RESTRUCTURING AND OTHER COSTS
During the year ended December 31, 2021, the Company recorded net restructuring and other costs of $20 million, which consists primarily of severance and other restructuring costs of $23 million, offset by adjustments to inventory reserve of $3 million.
During the year ended December 31, 2020, the Company recorded restructuring and other costs of $123 million which consists primarily of inventory write-downs of $31 million, accelerated depreciation of $14 million, severance costs of $23 million, indefinite-lived intangible asset impairment of $39 million, and other impairments of $8 million.
During the year ended December 31, 2019, the Company recorded restructuring and other costs of $128 million, which consists primarily of inventory write-downs of $20 million, accelerated depreciation of $3 million, severance costs of $37 million, fixed asset impairments of $33 million, and $9 million related to impairments of both definite-lived and indefinite-lived intangible assets.
The details of total restructuring and other costs for the years ended 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | |
Affected Line Item in the Consolidated Statements of Operations | | Year Ended December 31, |
(in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
Cost of products sold | | $ | (3) | | | $ | 44 | | | $ | 25 | |
Selling, general, and administrative expenses | | 6 | | | 2 | | | 23 | |
Restructuring and other costs | | 17 | | | 77 | | | 81 | |
Other income and expenses | | — | | | — | | | (1) | |
Total restructuring and other costs | | $ | 20 | | | $ | 123 | | | $ | 128 | |
Restructuring Programs and Accruals
In 2018, the Board of Directors of the Company approved a plan to restructure and simplify the Company’s business, which was expanded in 2020 for certain portfolio optimization objectives including the exit of the Company's traditional orthodontics business as well as portions of its laboratory business. These plans are nearing completion as of the end of 2021 and are expected to result in total charges of approximately $345 million, of which $321 million has been incurred as of December 31, 2021. For the year ended December 31, 2021, the Company made a $3 million adjustment related to inventory reserves and recorded severance costs of $2 million related to these plans. Remaining expenses in 2021 pertain to minor restructuring actions taken during the year. These expenses are included in the above table.
The Company's restructuring accruals at December 31, 2021 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Severance |
(in millions) | | 2019 and Prior Plans | | 2020 Plans | | 2021 Plans | | Total |
| | | | | | | | |
Balance at December 31, 2020 | | $ | 12 | | | $ | 17 | | | $ | — | | | $ | 29 | |
Provisions and adjustments | | 3 | | | 3 | | | 13 | | | 19 | |
Amounts applied | | (10) | | | (11) | | | (4) | | | (25) | |
Change in estimates | | (2) | | | (7) | | | — | | | (9) | |
Balance at December 31, 2021 | | $ | 3 | | | $ | 2 | | | $ | 9 | | | $ | 14 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Other Restructuring Costs |
(in millions) | | 2019 and Prior Plans | | 2020 Plans | | 2021 Plans | | Total |
| | | | | | | | |
Balance at December 31, 2020 | | $ | 3 | | | $ | 2 | | | $ | — | | | $ | 5 | |
Provisions and adjustments | | 2 | | | 5 | | | 3 | | | 10 | |
Amounts applied | | (2) | | | (5) | | | (3) | | | (10) | |
| | | | | | | | |
Balance at December 31, 2021 | | $ | 3 | | | $ | 1 | | | $ | — | | | $ | 4 | |
The cumulative amounts for the provisions and adjustments and amounts applied for all the plans by segment were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | December 31, 2020 | | Provisions and Adjustments | | Amounts Applied | | Change in Estimates | | December 31, 2021 |
| | | | | | | | | | |
Technologies & Equipment | | $ | 16 | | | $ | 9 | | | $ | (14) | | | $ | (4) | | | $ | 7 | |
Consumables | | 17 | | | 15 | | | (16) | | | (5) | | | 11 | |
All Other | | 1 | | | 5 | | | (5) | | | (1) | | | — | |
Total | | $ | 34 | | | $ | 29 | | | $ | (35) | | | $ | (10) | | | $ | 18 | |
The Company's restructuring accruals at December 31, 2020 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Severances |
(in millions) | | 2018 and Prior Plans | | 2019 Plans | | 2020 Plans | | Total |
| | | | | | | | |
Balance at December 31, 2019 | | $ | 7 | | | $ | 20 | | | $ | — | | | $ | 27 | |
Provisions and adjustments | | 2 | | | 2 | | | 28 | | | 32 | |
Amounts applied | | (4) | | | (8) | | | (9) | | | (21) | |
Change in estimates | | — | | | (7) | | | (2) | | | (9) | |
Balance at December 31, 2020 | | $ | 5 | | | $ | 7 | | | $ | 17 | | | $ | 29 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Other Restructuring Costs |
(in millions) | | 2018 and Prior Plans | | 2019 Plans | | 2020 Plans | | Total |
| | | | | | | | |
Balance at December 31, 2019 | | $ | 3 | | | $ | — | | | $ | — | | | $ | 3 | |
Provisions and adjustments | | — | | | 1 | | | 3 | | | 4 | |
Amounts applied | | — | | | (1) | | | (1) | | | (2) | |
| | | | | | | | |
Balance at December 31, 2020 | | $ | 3 | | | $ | — | | | $ | 2 | | | $ | 5 | |
The cumulative amounts for the provisions and adjustments and amounts applied for all the plans by segment were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | December 31, 2019 | | Provisions and Adjustments | | Amounts Applied | | Change in Estimates | | December 31, 2020 |
| | | | | | | | | | |
Technologies & Equipment | | $ | 19 | | | $ | 16 | | | $ | (12) | | | $ | (7) | | | $ | 16 | |
Consumables | | 11 | | | 16 | | | (8) | | | (2) | | | 17 | |
All Other | | — | | | 4 | | | (3) | | | — | | | 1 | |
Total | | $ | 30 | | | $ | 36 | | | $ | (23) | | | $ | (9) | | | $ | 34 | |
NOTE 20 - FINANCIAL INSTRUMENTS AND DERIVATIVES
Derivative Instruments and Hedging Activities
The Company’s activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates and interest rates. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company’s operating results and cash flows. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert fixed rate debt into variable rate debt or vice versa. The Company does not hold derivative instruments for trading or speculative purposes.
The following summarizes the notional amounts of cash flow hedges, hedges of net investments, fair value hedges, and derivative instruments not designated as hedges for accounting purposes, by derivative instrument type at December 31, 2021 and the notional amounts expected to mature during the next 12 months:
| | | | | | | | | | | | | | |
| | Aggregate Notional Amount | | Aggregate Notional Amount Maturing within 12 Months |
| | |
(in millions) | | |
| | | | |
Cash Flow Hedges | | | | |
Foreign exchange forward contracts | | $ | 311 | | | $ | 235 | |
| | | | |
| | | | |
Total derivative instruments designated as cash flow hedges | | $ | 311 | | | $ | 235 | |
| | | | |
Hedges of Net Investments | | | | |
Foreign exchange forward contracts | | $ | 182 | | | $ | 91 | |
Cross currency basis swaps | | 303 | | | — | |
Total derivative instruments designated as hedges of net investments | | $ | 485 | | | $ | 91 | |
| | | | |
Fair Value Hedges | | | | |
Foreign exchange forward contracts | | $ | 217 | | | $ | 87 | |
Interest rate swaps | | 250 | | | — | |
Total derivative instruments designated as fair value hedges | | $ | 467 | | | $ | 87 | |
| | | | |
Derivative Instruments not Designated as Hedges | | | | |
Foreign exchange forward contracts | | $ | 301 | | | $ | 301 | |
| | | | |
Total derivative instruments not designated as hedges | | $ | 301 | | | $ | 301 | |
Cash Flow Hedges
Foreign Exchange Risk Management
The Company hedges select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings. The Company designates certain foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the assessed effectiveness of the foreign exchange forward contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded in the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time-value component of the fair value of the derivative is reported on a straight-line basis in Cost of products sold in the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows.
These foreign exchange forward contracts generally have maturities up to 18 months, which is the period over which the Company is hedging exposures to variability of cash flows and the counterparties to the transactions are typically large international financial institutions.
Interest Rate Risk Management
The Company enters into interest rate swap contracts to manage interest rate risk on long-term debt instruments and not for speculative purposes. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows.
On May 26, 2020, the Company paid $31 million to settle the $150 million notional T-Lock contract, which partially hedged the interest rate risk of the $750 million senior unsecured notes. This loss is amortized over the ten-year life of the notes. At December 31, 2021, $25 million of this loss is remaining to be amortized from AOCI in future periods.
AOCI Release
Overall, the derivatives designated as cash flow hedges are considered to be highly effective for accounting purposes. At December 31, 2021, the Company expects to reclassify $1 million of deferred net losses on cash flow hedges recorded in AOCI in the Consolidated Statements of Operations during the next 12 months. For the rollforward of derivative instruments designated as cash flow hedges in AOCI see Note 5, Comprehensive (Loss) Income.
Hedges of Net Investments in Foreign Operations
The Company has significant investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. The Company employs both derivative and non-derivative financial instruments to hedge a portion of this exposure. The derivative instruments consist of foreign exchange forward contracts and cross-currency basis swaps. The non-derivative instruments consist of foreign currency denominated debt held at the parent company level. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the aforementioned instruments, which are designated as hedges of net investments and are included in AOCI. The time-value component of the fair value of the derivative is reported on a straight-line basis in Other expense (income), net in the Consolidated Statements of Operations in the applicable period. Any cash flows associated with these instruments are included in investing activities in the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, for which all cash flows are classified as financing activities in the Consolidated Statements of Cash Flows.
The fair value of the foreign exchange forward contracts and cross-currency basis swaps is the estimated amount the Company would receive or pay at the reporting date, taking into account the effective interest rates, cross-currency swap basis rates and foreign exchange rates. The effective portion of the change in the value of these derivatives is recorded in AOCI, net of tax effects.
On July 2, 2021, the Company entered into a cross-currency basis swap of a notional amount of $300 million, which matures on June 3, 2030. The cross-currency basis swap is designated as a hedge of net investments. This contract effectively converts a portion of the $750 million bond coupon from 3.3% to 1.7%, which will result in a net reduction of interest expense in 2021.
On May 25, 2021, the Company re-established its euro net investment hedge portfolio by entering into eight foreign exchange forward contracts, each with a notional amount of 10 million euro. The contracts have quarterly maturity dates through March 31, 2023.
On April 7, 2020, the Company terminated its entire foreign exchange forward contracts net investment hedge portfolio early which resulted in a $48 million cash receipt. The Company elected to enter into this transaction to convert the favorable gain position into additional liquidity.
Fair Value Hedges
Foreign Exchange Risk Management
The Company has intercompany loans denominated in Swedish kronor that are exposed to volatility in currency exchange rates. The Company employs derivative financial instruments to hedge these exposures. The Company accounts for these designated foreign exchange forward contracts as fair value hedges. The Company measures the effectiveness of fair value hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be recorded in the Consolidated Statements of Operations. The time-value component of the fair value of the derivative is reported on a straight-line basis in Other expense (income), net in the Consolidated Statements of Operations in the applicable period. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows.
On January 6, 2021 the Company entered into foreign exchange forward contracts with a notional value of SEK 1.3 billion as a result of an increase in intercompany loans denominated in Swedish kronor. The foreign exchange forwards are designated as fair value hedges.
Interest Rate Risk Management
On July 1, 2021, the Company entered into variable interest rate swaps with a notional amount of $250 million, which effectively converted a portion of the underlying fixed rate of 3.3% on the $750 million Senior Notes due June 2030 to a variable interest rate. Of the $250 million notional amount, $100 million has a term of five-years maturing on June 1, 2026 and $150 million has a term of nine years maturing on March 1, 2030.
Derivative Instruments Not Designated as Hedges
The Company enters into derivative instruments with the intent to partially mitigate the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The Company primarily uses foreign exchange forward contracts to hedge these risks. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in Other expense (income), net in the Consolidated Statements of Operations. Any cash flows associated with the foreign exchange forward contracts and interest rate swaps not designated as hedges are included in operating activities in the Consolidated Statements of Cash Flows.
Derivative Instrument Activity
The amount of gains (losses) recorded in the Company's Consolidated Balance Sheets and Consolidated Statements of Operations related to all derivative instruments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
(in millions) | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into Income (Expense) | | Ineffective Portion Recognized in Income (Expense) | | Recognized in Income (Expense) |
| | | | | | | | | | |
Cash Flow Hedges | | | | | | | | | | |
| | | | | | | | | | |
Foreign exchange forward contracts | | $ | 3 | | | Cost of products sold | | $ | (3) | | | $ | 2 | | | $ | — | |
Interest rate swaps | | — | | | Interest expense, net | | (4) | | | — | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total for cash flow hedging | | $ | 3 | | | | | $ | (7) | | | $ | 2 | | | $ | — | |
| | | | | | | | | | |
Hedges of Net Investments | | |
| | | | | | | | | | |
Cross currency basis swaps | | $ | 13 | | | Interest expense, net | | $ | — | | | $ | — | | | $ | 6 | |
| | | | | | | | | | |
Foreign exchange forward contracts | | 10 | | | Other expense (income), net | | — | | | 1 | | | — | |
| | | | | | | | | | |
Total for net investment hedging | | $ | 23 | | | | | $ | — | | | $ | 1 | | | $ | 6 | |
| | | | | | | | | | |
Fair Value Hedges | | | | | | | | | | |
Foreign exchange forward contracts | | $ | (1) | | | Other expense (income), net | | $ | — | | | $ | 1 | | | $ | 23 | |
Interest rate swap | | — | | | Interest expense, net | | — | | | — | | | 1 | |
Total for fair value hedging | | $ | (1) | | | | | $ | — | | | $ | 1 | | | $ | 24 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
(in millions) | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into Income (Expense) | | Ineffective Portion Recognized in Income (Expense) | | Recognized in Income (Expense) |
| | | | | | | | | | |
Cash Flow Hedges | | | | | | | | | | |
| | | | | | | | | | |
Foreign exchange forward contracts | | $ | (2) | | | Cost of products sold | | $ | 2 | | | $ | 4 | | | $ | — | |
| | | | | | | | | | |
Interest rate swaps | | (16) | | | Interest expense, net | | (4) | | | — | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total for cash flow hedging | | $ | (18) | | | | | $ | (2) | | | $ | 4 | | | $ | — | |
| | | | | | | | | | |
Hedges of Net Investments | | |
| | | | | | | | | | |
Cross currency basis swaps | | $ | (26) | | | Interest expense, net | | $ | — | | | $ | — | | | $ | 9 | |
| | | | | | | | | | |
Foreign exchange forward contracts | | 6 | | | Other expense (income), net | | — | | | 6 | | | — | |
| | | | | | | | | | |
Total for net investment hedging | | $ | (20) | | | | | $ | — | | | $ | 6 | | | $ | 9 | |
| | | | | | | | | | |
Fair Value Hedges | | | | | | | | | | |
Foreign exchange forward contracts | | $ | (3) | | | Interest expense, net | | $ | — | | | $ | 3 | | | $ | — | |
| | | | | | | | | | |
Total for fair value hedging | | $ | (3) | | | | | $ | — | | | $ | 3 | | | $ | — | |
.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
(in millions) | | Gain (Loss) in AOCI | | Consolidated Statements of Operations Location | | Effective Portion Reclassified from AOCI into Income (Expense) | | Ineffective Portion Recognized in Income (Expense) | | Recognized in Income (Expense) |
| | | | | | | | | | |
Cash Flow Hedges | | | | | | | | | | |
| | | | | | | | | | |
Foreign exchange forward contracts | | $ | (6) | | | Cost of products sold | | $ | 1 | | | $ | 2 | | | $ | — | |
Interest rate swaps | | (11) | | | Interest expense, net | | (2) | | | — | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total for cash flow hedging | | $ | (17) | | | | | $ | (1) | | | $ | 2 | | | $ | — | |
| | | | | | | | | | |
Hedges of Net Investments | | |
| | | | | | | | | | |
Cross currency basis swaps | | $ | 9 | | | Interest expense, net | | $ | — | | | $ | — | | | $ | 8 | |
| | | | | | | | | | |
Foreign exchange forward contracts | | 9 | | | Other expense (income), net | | — | | | 22 | | | — | |
| | | | | | | | | | |
Total for net investment hedging | | $ | 18 | | | | | $ | — | | | $ | 22 | | | $ | 8 | |
| | | | | | | | | | |
Fair Value Hedges | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 3 | | | Interest expense, net | | $ | — | | | $ | 3 | | | $ | — | |
| | | | | | | | | | |
Total for fair value hedging | | $ | 3 | | | | | $ | — | | | $ | 3 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Consolidated Statements of Operations Location | | Gain (Loss) Recognized |
| | | December 31, |
(in millions) | | | 2021 | | 2020 | | 2019 |
| | | | | | | | |
Derivative Instruments not Designated as Hedges |
Foreign exchange forward contracts | | Other expense (income), net | | $ | (9) | | | $ | 7 | | | $ | (3) | |
Total for instruments not designated as hedges | | | | $ | (9) | | | $ | 7 | | | $ | (3) | |
Consolidated Balance Sheets Location of Derivative Fair Values
The fair value and the location of the Company's derivatives in the Consolidated Balance Sheets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
(in millions) | | Prepaid Expenses and Other Current Assets | | Other Noncurrent Assets | | Accrued Liabilities | | Other Noncurrent Liabilities |
| | | | | | | | |
Designated as Hedges: | | | | | | | | |
Foreign exchange forward contracts | | $ | 18 | | | $ | 11 | | | $ | 2 | | | $ | 1 | |
| | | | | | | | |
Interest rate swaps | | 5 | | | — | | | — | | | 9 | |
Cross currency basis swaps | | 4 | | | — | | | — | | | 7 | |
Total | | $ | 27 | | | $ | 11 | | | $ | 2 | | | $ | 17 | |
| | | | | | | | |
Not Designated as Hedges: | | | | | | | | |
Foreign exchange forward contracts | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
(in millions) | | Prepaid Expenses and Other Current Assets | | Other Noncurrent Assets | | Accrued Liabilities | | Other Noncurrent Liabilities |
| | | | | | | | |
Designated as Hedges: | | | | | | | | |
Foreign exchange forward contracts | | $ | 5 | | | $ | 2 | | | $ | 10 | | | $ | 3 | |
| | | | | | | | |
| | | | | | | | |
Cross currency basis swaps | | — | | | — | | | 20 | | | — | |
Total | | $ | 5 | | | $ | 2 | | | $ | 30 | | | $ | 3 | |
| | | | | | | | |
Not Designated as Hedges: | | | | | | | | |
Foreign exchange forward contracts | | $ | 3 | | | $ | — | | | $ | 2 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | 3 | | | $ | — | | | $ | 2 | | | $ | — | |
Balance Sheet Offsetting
Substantially all of the Company’s derivative contracts are subject to netting arrangements; whereby the right to offset occurs in the event of default or termination in accordance with the terms of the arrangements with the counterparty. While these contracts contain the enforceable right to offset through netting arrangements with the same counterparty, the Company elects to present them on a gross basis in the Consolidated Balance Sheets.
Offsetting of financial assets and liabilities under netting arrangements at December 31, 2021 were as follows:
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| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in millions) | | Gross Amounts Recognized | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount |
| | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 31 | | | $ | — | | | $ | 31 | | | $ | (9) | | | $ | — | | | $ | 22 | |
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| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total assets | | $ | 31 | | | $ | — | | | $ | 31 | | | $ | (9) | | | $ | — | | | $ | 22 | |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 4 | | | $ | — | | | $ | 4 | | | $ | (4) | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Interest rate swaps | | 4 | | | — | | | 4 | | | (2) | | | — | | | 2 | |
Cross currency basis swaps | | 4 | | | — | | | 4 | | | (3) | | | — | | | 1 | |
Total liabilities | | $ | 12 | | | $ | — | | | $ | 12 | | | $ | (9) | | | $ | — | | | $ | 3 | |
Offsetting of financial assets and liabilities under netting arrangements at December 31, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
(in millions) | | Gross Amounts Recognized | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received/Pledged | | Net Amount |
| | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 9 | | | $ | — | | | $ | 9 | | | $ | (9) | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cross currency basis swaps | | — | | | — | | | — | | | — | | | — | | | — | |
Total assets | | $ | 9 | | | $ | — | | | $ | 9 | | | $ | (9) | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Foreign exchange forward contracts | | $ | 15 | | | $ | — | | | $ | 15 | | | $ | — | | | $ | — | | | $ | 15 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cross currency basis swaps | | 20 | | | — | | | 20 | | | (7) | | | — | | | 13 | |
| | | | | | | | | | | | |
Total liabilities | | $ | 35 | | | $ | — | | | $ | 35 | | | $ | (7) | | | $ | — | | | $ | 28 | |
NOTE 21 - FAIR VALUE MEASUREMENT
The estimated fair value and carrying value of the Company's total long-term debt, including current portion, was $2,239 million and $2,095 million, respectively, at December 31, 2021. At December 31, 2020, the estimated the fair value and carrying value was $2,509 million and $2,281 million, respectively. The fair value of long-term debt is based on recent trade information in the financial markets of the Company’s public debt or is determined by discounting future cash flows using interest rates available at December 31, 2021 to companies with similar credit ratings for issues with similar terms and maturities. It is considered a Level 2 fair value measurement for disclosure purposes.
The interest rate on the outstanding principal of the $750 million Senior Notes is a fixed rate of 3.3%. The fair value of the Senior Notes is based on interest rates at December 31, 2021. For additional details on interest rates of long-term debt, please see Note 15, Financing Arrangements.
Assets and liabilities measured at fair value on a recurring basis
The Company’s financial assets and liabilities set forth by level within the fair value hierarchy that were accounted for at fair value on a recurring basis were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets | | | | | | | | |
| | | | | | | | |
Interest rate swaps | | $ | 5 | | | $ | — | | | $ | 5 | | | $ | — | |
Long-term debt | | 4 | | | — | | | 4 | | | — | |
Cross currency interest rate swaps | | 4 | | | — | | | 4 | | | — | |
Foreign exchange forward contracts | | 30 | | | — | | | 30 | | | — | |
| | | | | | | | |
Total assets | | $ | 43 | | | $ | — | | | $ | 43 | | | $ | — | |
| | | | | | | | |
Liabilities | | | | | | | | |
Interest rate swaps | | $ | 9 | | | $ | — | | | $ | 9 | | | $ | — | |
| | | | | | | | |
Cross currency basis swaps | | 7 | | | — | | | 7 | | | — | |
Foreign exchange forward contracts | | 4 | | | — | | | 4 | | | — | |
| | | | | | | | |
Contingent considerations on acquisitions | | 10 | | | — | | | — | | | 10 | |
| | | | | | | | |
Total liabilities | | $ | 30 | | | $ | — | | | $ | 20 | | | $ | 10 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
(in millions) | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Foreign exchange forward contracts | | $ | 10 | | | $ | — | | | $ | 10 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
Total assets | | $ | 10 | | | $ | — | | | $ | 10 | | | $ | — | |
| | | | | | | | |
Liabilities | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Cross currency interest rate swaps | | $ | 20 | | | $ | — | | | $ | 20 | | | $ | — | |
Foreign exchange forward contracts | | 15 | | | — | | | 15 | | | — | |
| | | | | | | | |
Contingent considerations on acquisitions | | 5 | | | — | | | — | | | 5 | |
| | | | | | | | |
Total liabilities | | $ | 40 | | | $ | — | | | $ | 35 | | | $ | 5 | |
Derivative valuations are based on observable inputs to the valuation model including interest rates, foreign currency exchange rates, and credit risks. The Company utilizes interest rates swaps and foreign exchange forward contracts that are considered cash flow hedges. In addition, the Company at times employs certain cross currency interest rate swaps and forward exchange contracts that are considered hedges of net investment in foreign operations. Both types of designated derivative instruments are further discussed in Note 20, Financial Instruments and Derivatives.
Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3)
The Company’s Level 3 liabilities at December 31, 2021 are related to earn-out obligations from acquisitions and licensing arrangements. The following table presents a reconciliation of the Company’s Level 3 holdings measured at fair value on a recurring basis using unobservable inputs:
| | | | | | | | | | | | |
| | | | | | |
(in millions) | | Level 3 | | | | |
| | | | | | |
Balance, December 31, 2019 | | $ | 9 | | | | | |
Issuance of new contingent consideration | | — | | | | | |
Loss (gain) in Other expense (income), net | | — | | | | | |
Payments | | (4) | | | | | |
| | | | | | |
Balance, December 31, 2020 | | $ | 5 | | | | | |
Issuance of contingent consideration from business acquisition (a) | | 9 | | | | | |
Loss (gain) in Other expense (income), net | | — | | | | | |
Payments | | (4) | | | | | |
| | | | | | |
Balance, December 31, 2021 | | $ | 10 | | | | | |
(a) Refer to Note 6, "Business Combinations" for more information regarding recent acquisitions
There were no additional purchases or transfers of Level 3 financial instruments in 2021 and 2020.
NOTE 22 - COMMITMENTS AND CONTINGENCIES
Contingencies
On January 25, 2018, Futuredontics, Inc., a former wholly-owned subsidiary of the Company, received service of a purported class action lawsuit brought by Henry Olivares and other similarly situated individuals in the Superior Court of the State of California for the County of Los Angeles. In January 2019, an amended complaint was filed adding another named plaintiff, Rachael Clarke, and various claims. The plaintiff class alleges several violations of the California wage and hours laws, including, but not limited to, failure to provide rest and meal breaks and the failure to pay overtime. The parties have engaged in written and other discovery. On February 5, 2019, Plaintiff Calethia Holt (represented by the same counsel as Mr. Olivares and Ms. Clarke) filed a separate representative action in Los Angeles Superior Court alleging a single violation of the Private Attorneys’ General Act that is based on the same underlying claims as the Olivares/Clarke lawsuit. On April 5, 2019, Plaintiff Kendra Cato filed a similar action in Los Angeles Superior Court alleging a single violation of the Private Attorneys’ General Act that is based on the same underlying claims as the Olivares/Clarke lawsuit. The Company has agreed to resolve all three actions (Olivares, Holt, and Cato). The court in Cato approved the settlement in that case, the settlement payment has been made, and the court dismissed the lawsuit. The parties to Olivares and Holt are in the process of seeking court approval of that settlement. The expected settlement amount, which is immaterial to the financial statements, has been recorded as an accrued liability within the Company's consolidated balance sheet as of December 31, 2021.
On June 7, 2018, and August 9, 2018, two putative class action suits were filed, and later consolidated, in the Supreme Court of the State of New York, County of New York claiming that the Company and certain individual defendants, violated U.S. securities laws (the "State Court Action") by making material misrepresentations and omitting required information in the December 4, 2015 registration statement filed with the SEC in connection with the 2016 merger of Sirona Dental Systems Inc. ("Sirona") with DENTSPLY International Inc. (the "Merger"). The amended complaint alleges that the defendants failed to disclose, among other things, that a distributor had purchased excessive inventory of legacy Sirona products and that three distributors of the Company's products had been engaging in anticompetitive conduct. The plaintiffs seek to recover damages on behalf of a class of former Sirona shareholders who exchanged their shares for shares of the Company's stock in the Merger. On September 26, 2019, the Court granted the Company's motion to dismiss all claims and a judgment dismissing the case was subsequently entered. On February 4, 2020, the Court denied plaintiffs' post-judgment motion to vacate or modify the judgment and to grant them leave to amend their complaint. The plaintiffs appealed the dismissal and the denial of the post-judgment motion to the Supreme Court of the State of New York, Appellate Division, First Department, and the Company cross-appealed select rulings in the Court's decision dismissing the action. The plaintiffs' appeals and the Company's cross-appeal were consolidated and argued on January 12, 2021. On February 2, 2021, the Appellate Division issued its decision upholding the dismissal of the State Court Action with prejudice on statute of limitations grounds. The Plaintiffs did not appeal the Appellate Division decision.
On December 19, 2018, a related putative class action was filed in the U.S. District Court for the Eastern District of New York against the Company and certain individual defendants (the "Federal Class Action"). The plaintiff makes similar allegations and asserts the same claims as those asserted in the State Court Action. In addition, the plaintiff alleges that the defendants violated U.S. securities laws by making false and misleading statements in quarterly and annual reports and other public statements between February 20, 2014, and August 7, 2018. The plaintiff asserts claims on behalf of a putative class consisting of (a) all purchasers of the Company's stock during the period February 20, 2014 through August 7, 2018 and (b) former shareholders of Sirona who exchanged their shares of Sirona stock for shares of the Company's stock in the Merger. The Company moved to dismiss the amended complaint on August 15, 2019. The plaintiff filed its second amended complaint on January 22, 2021, and the Company filed a motion to dismiss the second amended complaint on March 8, 2021. Briefing on the motion to dismiss was fully submitted on May 21, 2021, and that motion is currently pending before the Court.
The Company intends to defend itself vigorously in these actions.
As a result of an audit by the IRS for fiscal years 2012 through 2013, on February 11, 2019, the IRS issued to the Company a “30-day letter” and a Revenue Agent’s Report (“RAR”), relating to the Company’s worthless stock deduction in 2013 in the amount of $546 million. The RAR disallows the deduction and, after adjusting the Company’s net operating loss carryforward, asserts that the Company is entitled to a refund of $5 million for 2012, has no tax liability for 2013, and owes a deficiency of $17 million in tax for 2014, excluding interest. In accordance with ASC 740, the Company recorded the tax benefit associated with the worthless stock deduction in the Company’s 2012 financial statements. In March 2019, the Company submitted a formal protest disputing on multiple grounds the proposed taxes. The Company and its advisors discussed its position with the IRS Appeals Office Team on October 28, 2020 and, on November 13, 2020, submitted a supplemental response to questions raised by the Appeals Team. The Company’s position continues to be reviewed by the IRS Appeals Office team. The Company
believes the IRS' position is without merit and believes that it is more likely-than-not the Company’s position will be sustained upon further review by the IRS Appeals Office Team. The Company has not accrued a liability relating to the proposed tax adjustments. However, the outcome of this dispute involves a number of uncertainties, including those inherent in the valuation of various assets at the time of the worthless stock deduction, and those relating to the application of the Internal Revenue Code and other federal income tax authorities and judicial precedent. Accordingly, there can be no assurance that the dispute with the IRS will be resolved favorably. If determined adversely, the dispute would result in a current period charge to earnings and could have a material adverse effect in the consolidated results of operations, financial position, and liquidity of the Company.
The Swedish Tax Agency has disallowed certain of the Company’s interest expense deductions for the tax years from 2013 to 2018. If such interest expense deductions were disallowed, the Company would be subject to an additional $44 million in tax expense. The Company has appealed the disallowance to the Swedish Administrative Court. With respect to such deductions taken in the tax years from 2013 to 2014, the Court ruled against the Company on July 5, 2017. On August 7, 2017, the Company appealed the unfavorable decision of the Swedish Administrative Court. On November 5, 2018, the Company delivered its final argument to the Administrative Court of Appeals at a hearing. The European Union Commission has taken the view that Sweden’s interest deduction limitation rules are incompatible with European Union law and supporting legal opinions, and therefore the Company has not paid the tax or made provision in its financial statements for such potential expense. This view has now been confirmed by the European Union Court of Justice in a preliminary ruling requested by the Swedish Supreme Administrative Court. Subsequently, the Swedish Tax Authority has conceded in pending court proceedings that the Company should be granted further interest expense deductions, but still claims that interest expense deductions incurring a maximum additional tax expense of $11 million should be disallowed on grounds not relating to European Union law. The Company intends to vigorously defend its position and pursue related appeals.
In addition to the matters disclosed above, the Company is, from time to time, subject to a variety of litigation and similar proceedings incidental to its business. These legal matters primarily involve claims for damages arising out of the use of the Company’s products and services and claims relating to intellectual property matters including patent infringement, employment matters, tax matters, commercial disputes, competition and sales and trading practices, personal injury, and insurance coverage. The Company may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, or representations, warranties or indemnities provided in connection with, divested businesses. Some of these lawsuits may include claims for punitive and consequential, as well as compensatory damages. Based upon the Company’s experience, current information, and applicable law, it does not believe that these proceedings and claims will have a material adverse effect on its consolidated results of operations, financial position, or liquidity. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to the Company’s business, financial condition, results of operations, or liquidity.
While the Company maintains general, product, property, workers’ compensation, automobile, cargo, aviation, crime, fiduciary and directors’ and officers’ liability insurance up to certain limits that cover certain of these claims, this insurance may be insufficient or unavailable to cover such losses. In addition, while the Company believes it is entitled to indemnification from third parties for some of these claims, these rights may also be insufficient or unavailable to cover such losses.
Commitments
Purchase Commitments
The Company has certain non-cancelable future commitments primarily related to long-term supply contracts for key components and raw materials. At December 31, 2021, non-cancelable purchase commitments are as follows:
| | | | | | | | |
(in millions) | | |
| | |
| | |
2022 | | $ | 161 | |
2023 | | 73 | |
2024 | | 38 | |
2025 | | 41 | |
2026 | | 42 | |
Thereafter | | — | |
Total | | $ | 355 | |
Off-Balance Sheet Arrangements
As of December 31, 2021, we had no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in the sections above.
Indemnification
In the normal course of business to facilitate sale of our products and services, we indemnify certain parties: customers, vendors, lessors, and other parties with respect to certain matters, including, but not limited to, services to be provided by us and intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and our executive officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. Several of these agreements limit the time within which an indemnification claim can be made and the amount of the claim.
It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Additionally, we have a limited history of prior indemnification claims and the payments we have made under such agreements have not had a material effect on our results of operations, cash flows or financial position. As of December 31, 2021, we did not have any material indemnification claims that were probable or reasonably possible. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period.
Other Commitments
At December 31, 2021, we were obligated under various operating lease agreements. Please refer to Note 11, Leases, for additional details.
At December 31, 2021, we were obligated under various defined benefit pension plans in the U.S. and other countries that cover employees who meet eligibility requirements. Please refer to Note 18, Benefit Plans, for additional details.