ITEM 1. BUSINESS
OVERVIEW
Sirona Dental Systems, Inc. ( “Sirona,” the “Company,” “we,” “us,” and “our” refer to Sirona Dental Systems, Inc. and its consolidated subsidiaries and their predecessors, except as otherwise indicated or unless context otherwise requires) is the leading global manufacturer of high-quality, technologically-advanced dental equipment, and is focused on developing, manufacturing, and marketing innovative solutions for dentists around the world. The Company is uniquely positioned to benefit from several trends in the global dental industry, such as technological innovation, the shift to digital imaging, favorable demographic trends, and growing patient focus on dental health and cosmetic appearance. The Company’s headquarters is in Long Island City, New York, and its largest facility is located in Bensheim, Germany.
Sirona has a long tradition of innovation in the dental industry. The Company introduced the first dental electric drill over 130 years ago, the first dental X-ray unit approximately 100 years ago, the first dental computer-aided design/computer-aided manufacturing (CAD/CAM) system 30 years ago, and numerous other significant innovations in dentistry. Sirona continues to make significant investments in research and development (“R&D”), and its track record of innovative and profitable new products continues today. Sirona has the broadest product portfolio in the industry and is capable of fully outfitting and integrating a dental practice.
The majority of our revenues derive from the manufacture and sale of dental equipment. In addition, we also provide sales and after-sales service support to dentists and distributors through our growing sales and service infrastructure.
Sirona manages its commercial operations on both a product and geographic basis and maintains four reporting segments: 1) Dental CAD/CAM Systems, 2) Imaging Systems, 3) Treatment Centers, and 4) Instruments. Products from each category are marketed in all geographical sales regions.
The Company’s business has grown substantially in the past several years, driven by numerous high-tech product introductions, a continued expansion of its global sales and service infrastructure, strong relationships with key distribution partners, namely Patterson and Henry Schein, and an international dealer network.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Segment and geographic breakouts of Sirona’s revenues for the fiscal year ended September 30, 2015 were as follows:
HISTORY
Sirona dates back to the establishment of Reiniger, Gebbert & Schall, which introduced the first dental electrical drill in 1882. In 1925, the Company became part of Siemens & Halske Group and in 1934 launched the smallest x-ray in the world, enabling dental x-rays for the first time. In 1956, Siemens introduced Sirona as a brand for treatment centers, and in 1958 the group developed the first ball-bearing turbine for dental drills.
In 1997, funds advised by the financial sponsor, Permira, acquired the Sirona dental business from Siemens in a leveraged buy-out transaction. Following the transaction, Sirona substantially increased its international sales and intensified its focus on product innovation. In November 2003, Permira sold Sirona to the Scandinavian financial sponsor, EQT, and management in a leveraged buy-out transaction that closed in February 2004. In April 2005, funds managed by Madison Dearborn Partners, a private equity firm, and Sirona’s management entered into an agreement to acquire Sirona in a leveraged buy-out transaction that closed in June 2005.
In September 2005, Schick Technologies, Inc. (“Schick”) entered into an Exchange Agreement with Sirona Holdings Luxco S.C.A. (“Luxco”) and Sirona Holding GmbH (“Sirona Holding”) providing for the issuance of 36,972,480 shares of Schick common stock to Luxco in exchange for Luxco’s entire economic interest in Sirona Holding, which consisted of all of the issued and outstanding share capital of Sirona Holding and the existing indebtedness of Sirona Holding owed to Luxco in the principal amount of Euro 151.0 million ($182 million) plus accrued interest (the “Exchange”). In June 2006, the Exchange closed and Schick, a Delaware corporation formed in 1997, was renamed Sirona Dental Systems, Inc. Although Sirona Holding became a subsidiary of Schick upon the completion of the Exchange, Sirona Holding was deemed the acquiring corporation for accounting purposes because Luxco received a controlling ownership interest in the Company, Sirona Holding's designees constituted a majority of the members of the Company’s board of directors and Sirona Holding's senior management represented a majority of the senior management of the Company. In May 2011, Luxco sold all of its remaining shares of Sirona common stock pursuant to an underwritten follow-on public offering.
On September 15, 2015, the Company and DENTSPLY International, Inc. (“DENTSPLY”) announced that the Board of Directors of both companies had unanimously approved a definitive Agreement and Plan of Merger (the “Merger Agreement”) under which the companies will combine in an all-stock merger (the “Merger”). DENTSPLY is a leading manufacturer and distributor of dental and other consumable medical device products. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Sirona will merge with and into a wholly-owned subsidiary of DENTSPLY, with Sirona surviving as a wholly-owned subsidiary of DENTSPLY. Upon completion of the Merger, the combined company's name will be changed to DENTSPLY SIRONA Inc. Subject to the terms and conditions of the Merger Agreement, if the Merger is completed, each outstanding share of Sirona common stock will be converted into the right to receive 1.8142 shares of common stock of DENTSPLY, with cash paid in lieu of any fractional shares of common stock of DENTSPLY that a Sirona stockholder would otherwise have been entitled to receive.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The transaction, which is expected to be completed in the second quarter of Fiscal 2016, is subject to the receipt of regulatory approvals and other customary closing conditions, including the approval of stockholders of both Sirona and DENTSPLY. For additional information related to the Merger refer to DENTSPLY’S Registration Statement on Form S-4 which was filed with the SEC on October 29, 2015.
Our common stock is currently traded publicly on the NASDAQ Global Select Market under the trading symbol “SIRO”.
INDUSTRY/PRODUCTS
Overview
The global dental market encompasses the diagnosis, treatment and prevention of disease and ailments of the teeth, gums and supporting bone. This market has enjoyed steady growth, driven by a number of factors, including an increased desire for aesthetics, a demographic shift towards an aging population coupled with a desire to retain tooth structure later in life, growth in disposable income, a desire for more convenience on the part of both dentists and patients, a shift towards private pay, a greater need for dental preventative care.
The global dental market has benefited from technological innovation, which increase productivity for the dentist. This is particularly important in markets facing increased demand for dental services with little or no increase in the number of dentists servicing those markets. In addition, technological developments allow dentists to offer higher quality treatment to patients. We believe that the high-tech end of the dental market is growing at a faster pace than the overall dental market and that this trend will continue over time.
Recent technological advancements in the dental equipment industry include 3D radiography, digital radiography, CAD/CAM technology, and intra oral cameras.
Sirona serves the high-tech dental equipment and technology market for dental practitioners and laboratories. We are the only manufacturing company that can fully outfit a dental practitioner’s office with dental equipment, including treatment centers, imaging systems, dental CAD/CAM systems, and instruments. Our products represent important investments by dental practitioners, and some of these products can have a life span of 10-20 years (shorter for instruments and software), depending on the nature and quality of the product.
Products
Our principal products are generally classified into the following segments: Dental CAD/CAM Systems, Imaging Systems, Treatment Centers, and Instruments.
A brief description of each of our segments follows. See Note 11 to our consolidated financial statements for revenues and gross profit by segment for each of the last three fiscal years, and assets by segment, at September 30, 2015 and 2014.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Dental CAD / CAM Systems
Dental CAD/CAM Systems address the worldwide market for dental restorations, which includes several types of restorations, such as inlays, onlays, veneers, crowns, bridges, copings and bridge frameworks made from ceramic, metal or composite blocks. The global market for dental restorations can be divided into two sub-segments: in-mouth fillings and out-of-mouth pre-shaped restorations. CAD/CAM-produced ceramic restorations represent a growing portion of the out-of-mouth restoration market and the number of out-of-mouth restorations prepared with CAD/CAM systems has increased substantially over the past few years. At the same time, the number of dental practitioners and dental laboratories using CAD/CAM technology has increased. Sirona estimates that as of the end of fiscal year 2015, the market penetration for in-office CAD/CAM systems had grown to approximately 16% in the United States and Germany.
Sirona pioneered the application of high-tech CAD/CAM techniques to the traditional lab-based restoration process with the commercialization of the CEramic REConstruction, or CEREC, method. Sirona’s CEREC system is an in-office application that enables dentists to produce high quality restorations from ceramic material and insert them into the patient’s mouth during a single appointment. CEREC has a number of advantages compared to the traditional out-of-mouth pre-shaped restoration method, as CEREC does not require a physical model, restorations can be created in the dentist’s office and the procedure can be completed in a single visit. The CEREC system consists of an imaging unit and a milling unit. The imaging unit scans the damaged area, captures the image of the tooth or teeth requiring restoration and proposes the specifications for the restoration. The milling unit then mills the ceramic restoration to the required specifications based upon the captured image and the dentist’s design specifications. The result is a biocompatible, non-metallic, natural-looking restoration made of durable, high-quality ceramic materials completed in a single treatment session. Independent studies indicate that CEREC ceramic restorations are as durable as gold and can replace conventional restoration materials for most procedures. In addition, CEREC restorations are aesthetically pleasing and have the benefit of a natural-looking appearance.
Sirona offers a service contract on its CEREC product, which includes software updates and upgrades and maintenance on software-related hardware.
In addition to CEREC, Sirona also offers CAD/CAM products for dental laboratories, including the inLab restoration fabrication system and the extra-oral inEos scanner. These products are designed to improve efficiency and reduce costs for the dental laboratory. The inLab system scans the models received from the dentists and then mills ceramic or composite block restorations, such as crown copings and bridge frameworks to the specifications of the captured image.
Summary Innovation Timeline
(last 10 years)
Dental CAD/CAM Systems
Year Product / Event
Launch of the inEos scanner, which is a high speed extra-oral scanner which produces 3D digital images from a single tooth up to a jaw, directly from the plaster model.
Launch of the MC XL next generation milling unit, which produces high quality, precisely fitted restorations in about half the time that the older CEREC milling units required.
Introduction of Sirona’s Biogeneric software, which virtually automated the design portion of the CAD/CAM process for inlays and onlays.
Launch of the next generation inLab milling unit, the inLab MC XL. The inLab MC XL milling and grinding unit opens up a broad range of production options for the dental laboratory. Milling performance and precision have been greatly enhanced, and a switch from grinding to milling can be accomplished in just a few, simple steps.
Expansion of the central restoration service business to the United States.
Expanded our CEREC offering with the introduction of Sirona Connect. Sirona Connect is a web-based service that facilitates the electronic transmission of digital impressions acquired with a CEREC acquisition unit to inLab laboratories. Laboratories can use the digital impression to create final restorations. This process eliminates the need to take physical impressions, resulting in increased accuracy, less reworking of restorations and productivity savings.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Launch of a new CEREC camera, based on the Company’s proprietary Bluecam technology, which was faster, more accurate, and improved the workflow for practitioners.
Further enhancement Sirona’s Biogeneric software with the introduction of Version 3.8, which has the ability to create crowns and bridges.
Introduction of the CEREC AC Connect stand-alone digital impression unit. CEREC AC Connect allows dental professionals to scan digital impressions and then send them to the inLab® dental laboratory of their choice.
Introduction of the successor inEos scanner, the inEos Blue. inEos Blue is based on the Bluecam technology, is easy to use, fast, precise, flexible, and its auto capture function allows for substantial time savings.
Introduction of CEREC 4.0 software, an entirely redesigned software that gives CEREC users enhanced capabilities and speeds up the restoration process. In addition, CEREC 4.0 enables dentists to design and manufacture multiple restorations simultaneously, further enhancing productivity and profitability.
Launch of new CEREC Omnicam camera, which allows dentists to generate precise whole-arch scans in the shortest possible time. Three features of the CEREC Omnicam are particularly notable: video streaming, digitization of jaw structures in their natural color, and powderless scanning of tooth surfaces. This introduction further strengthens Sirona’s leadership position in the dental CAD/CAM market.
Introduction of inLab 4.0 software, which offers an extended spectrum of clinical applications. New design tools facilitate a customized and direct workflow. The completely revised platform provides a secure basis for integrating future applications.
Launch of updated and expanded CEREC 4.2 software, further differentiated its CAD/CAM milling product line with the units MC X and MC XL Premium, and introduced the Apollo DI digital imaging system, all in March. These introductions expanded our portfolio and enable Sirona to offer “CAD/CAM for Everyone”, an approach which seeks to address the various needs of the widest possible range of dentists.
Launch of enhanced inLab MC XL.
Introduction of the successor inEos scanner, the inEos X5. The 5-axis in Eos X5 is unrivaled in precision and has flexible handling, quick scanning times, and a comprehensive application spectrum for all digitization tasks.
Launch of inLab4.2 software, which introduced further applications, such as smart design with virtual articulation, smile design, and other features.
Launch of CEREC 4.3 software, which enables carbide milling for optimal fabrication of zirconium oxide and polymer materials. Improved and simplified workflow for Omnicam. Virtual articulation is now calculated automatically. Integrated button to automatically upload the current case in Sirona Connect. CEREC 4.3 also allows a screw-retained implant workflow. Together with the introduction of additional TiBases and Scanpost, this leads to strong growth in implantology consumables.
Launch of precolored inCoris TZI C blocks that remove the need to use coloring liquids, thus simplifying the operating process with an improved result.
Introduction of inLab MC X5, new milling and grinding unit for dental labs. First Sirona disc processing unit with 5 axis designed specifically for the commercial dental lab.
Launch of CEREC Ortho 1.1 software: CEREC can now also be used for digital impressions for orthodontic indications, e.g., for treatment with transparent aligners. The new guided scanning procedure enables precise, full-arch digital impressions. The CEREC Ortho software creates a digital model of the entire arch. The data obtained can then be sent for planning the orthodontic treatment and manufacturing the required appliances, thus eliminating the necessity to create and send a physical model. A cooperation agreement with Align Technology allows dentists to also use digital impressions for aligner therapy with Invisalign.
Launch of CEREC Guide 2: the surgical guide can now be produced chairside and cost-effectively in the practice. The guide is designed based upon the ideal prosthetic and surgical positioning via combination of CEREC intra-oral digital impressions and Sirona’s 3D X-ray volume data. Once designed, the guide is then milled from PMMA on one of the CEREC MC X or CEREC MC XL Premium Package milling units. The guide can be manufactured within an hour and requires no models or a radiographic guide with reference bodies.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Launch of CEREC 4.4 software: CEREC 4.4 provides simple and user-friendly operation. The software also includes several new functions that further improve the workflow and produce more accurate results throughout the design process. The new Biojaw algorithm uses the entire scanned area as a reference for the restoration to be created and generates initial restoration proposals. The latest software uses improved algorithms that allow smoother surfaces and deeper fissures when grinding feldspathic, glass and silicate ceramics. With the new, extra-fine grinding tools of the 4-motor CEREC MC XL Premium Package in particular, designs are milled with more detail and greater precision.
Introduction of CEREC AF/AI: In addition to the CEREC AC cart version, two new acquisition versions are available: the CEREC AF flexible tabletop version and the CEREC AI integrated in the treatment center TENEO. Both new models use the CEREC Omnicam powder-free color camera.
Imaging Systems
Imaging Systems comprise a broad range of systems for diagnostic imaging in the dental practice. Sirona has developed a comprehensive range of imaging systems for 2D or 3D, panoramic, and intra-oral applications that allow the dentist to provide a full range of diagnostics and treat the patient in a more efficient manner, resulting in safer, faster, and better dentistry.
Intra-oral x-ray systems use image-capture sensor devices, which are inserted into the mouth behind the diagnostic area, and typically take images of one or two teeth. Panoramic x-ray systems produce images of the entire jaw structure by means of an x-ray tube and an image capture device, which rotates around the head.
Summary Innovation Timeline
(last 10 years)
Imaging Systems
Year Product / Event
Expansion of our imaging system product line to include Schick's intraoral sensor portfolio based on CMOS technology, as a result of the Exchange.
Introduction of the GALILEOS Comfort 3-D imaging unit. Today, three-dimensional imaging is offering dentists advanced diagnostic and therapeutic options in the fields of surgery, implantology, prosthetics, orthodontics, and restorative dentistry. GALILEOS integrates these capabilities efficiently into dental practices.
Launch of GALILEOS Compact, which is specifically tailored to meet the needs of the general practitioner.
Introduction of software that facilitates the integration of 3D X-ray volume (bone level data) with a CEREC AC CAD/CAM scan (surface level information). This software allows the practitioner to plan both the implant surgery and the prosthetic at the start of the implant treatment session. This integrated process reduces the number of treatment sessions, resulting in greater accuracy and superior implant alignment. With this new software, the dental practitioner can now place more focus on the desired aesthetic outcome throughout the entire treatment process.
Introduction of the flagship Orthophos XG 3DReady, which provides dental practitioners with a wide variety of diagnostic possibilities and is upgradeable to a 3D unit. Other models of the family include the Orthophos XG 5 and the basic model Orthophos XG 3.
Launch of the Orthophos XG 3D imaging unit. This system gives the practitioner traditional 2D panoramic imaging capability and the ability to scan and view a large, 8x8 centimeter 3D field of view (a scan big enough to capture the entire jaw). Orthophos XG 3D is also available with cephalometric options, orthodontic, implant, and other specialty programs.
Launch of the next generation of intraoral digital radiography - the Schick 33 sensor and image management system. Schick 33 is the most advanced sensor in dentistry, delivering an unparalleled combination of high-resolution images and dynamic image management.
Launch of the GALILEOS CompactPLUS , which is specifically tailored to meet the needs of the general practitioner, orthodontist, and oral surgeon.
Launch of the SICAT function - the first software which visualizes real, patient-specific movement of the lower jaw within the 3D module of the GALILEOS.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Introduction of the Orthophos SL imaging unit. This system ensures image quality in 2D and 3D x-rays via Sharp Layer, a capture technology that automatically adapts the panoramic curve of the sensor to the patient's individual jaw anatomy, thus producing a sharper image. The digital conversion sensor (DCS) technology generates electrical signals directly from the x-ray beams without intermediate conversion to light, thus producing highly precise x-ray images with reduced radiation doses.
Launch of the SIDEXIS 4 software, which based on workflows, provides access to all pertinent patient image data and acts as a central hub for the integration of diagnostic image data of any kind - not only prepared during the course of the actual treatment, but also image data received from other dentists for long-term patients. With SIDEXIS 4, the dentist is able to display a full overview of the patient's treatment history in a timeline.
Treatment Centers
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 preventative treatment and for training purposes. Sirona offers specifically configured products to meet the preferences of dentists within each region in which it operates. Sirona’s treatment center configurations and system integration are designed to enhance productivity by creating a seamless workflow within the dental practice. Sirona’s centers therefore allow the dentist to both improve productivity and increase patient satisfaction, significant factors in adding value to his or her practice.
Summary Innovation Timeline
(last 10 years)
Treatment Centers
Year Product / Event
Launch of the TENEO treatment center, which combines industry-leading technology with a timeless design that provides both patient and dentist with the ultimate in convenience and comfort.
Introduction of the SINIUS treatment center, a comfort class treatment center, which enables the dentist to maximize time and flexibility of their practice. SINIUS is fully networked and is easily integrated into any dental practice.
Launch of the INTEGO treatment center. INTEGO offers the design of the new generation of Sirona treatment centers with top quality and flexible configuration options at an attractive price. The fully-networked treatment center comes in two versions: INTEGO and INTEGO pro with extended functionality.
Instruments
Sirona offers a wide range of instruments, including handheld and power-operated handpieces for cavity preparation, endodontics, periodontology and prophylaxis, which are regularly updated and improved. The instruments are supplemented by multi-function tips, supply and suction hoses, as well as care and hygiene systems for instrument preparation. Sirona’s instruments are often sold as packages in combination with treatment centers. Sirona’s unique handpiece cleaning and sterilizing machine, the DAC Universal, is the only fully automatic system for instruments hygiene - with its unique features it has defined the standard of care for infection prevention in the dental office.
Sirona intends to continue to strengthen the position of its Instruments segment as a diversified supplier of high-quality, reliable, user-friendly and cost-efficient dental instruments.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Summary Innovation Timeline
(last 10 years)
Instruments
Year Product / Event
Launch of first generation SIROLaser - the smallest diode laser worldwide, redefining ergonomics in laser dentistry.
Launch of SIROEndo, a device for endodontic treatment with built-in APEX Location, seamlessly adaptable to the treatment center, and optimal integration into daily workflow.
Launch of SIROPure - the first handpiece not requiring any lubrication over its entire product lifetime, keeps the cavity oil-free, eliminates maintenance errors, and lowers total cost of ownership.
Launch of new diode laser, SIROLaser Advance / SIROLaser Xtend.
Launch of 3rd generation of DAC Universal, allowing the processing of wrapped instruments.
Launch of SIROBoost high performance power turbine line with a high torque level, allowing faster, more efficient, and comfortable operation.
Launch of the new handpiece program: T2 Line / T3 Line.
Launch of new turbine generation (T1/T2/T3) and the T4 Line.
Launch of SIROInspect - fluorescence-based cavity detection device, whose safe and simple operation significantly reduces the risk of secondary cavities.
Launch of new T3 Racer, with 30 watts the most powerful turbine on the market.
Launch of new SIROLaser Blue, beeing the first dental diode laser to have a blue, an infrared, and a red diode. This enables it to cover a range of 21 indications.
Manufacturing and Suppliers
Our main manufacturing and assembly activities are located in Bensheim, approximately 60 kilometers south of Frankfurt am Main, Germany. We also operate smaller manufacturing sites in New York, Italy, Denmark and China. All of our facilities are in good condition.
All of our manufacturing facilities have established and maintain a Quality Management System that is registered to ISO 9001:2000 and ISO 13485:2003. Our New York and Bensheim facilities also maintain a Device Establishment Registration with the United States Food and Drug Administration.
Manufacturing consists primarily of assembly, systems integration and testing. We generally outsource manufacturing of parts and components used in the assembly of our products but own the design and tools used by our key component suppliers. We do, however, manufacture most of the precision parts used for our instruments.
We purchase various components for our products from a number of outside suppliers. We currently have established relationships with approximately 1,400 suppliers, of which we view approximately 160 as “key suppliers.” Each supplier is selected according to stringent quality criteria, which are reviewed regularly. We do not believe we are dependent on one or a small group of suppliers and believe we could locate alternative suppliers if needed. For reasons of quality assurance or cost effectiveness, the Company relies on single sources for certain purchased components, e.g. sensors, which we use in our imaging segment. We work closely with our suppliers to help ensure continuity of supply while maintaining high quality and reliability. We have agreements in place and use a number of techniques, including security or consignment stock commitments, to address potential disruptions of the supply chain. We also own any custom tooling used in manufacturing these components. The Company has not experienced any significant difficulty in the past in obtaining the materials necessary to meet its production schedule. However, the need to replace one of our single source suppliers could cause a disruption in our ability to timely deliver certain of our products or increase costs. See Item 1A
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Sirona is exposed to economic risk from foreign currency exchange rates as well as interest rates. Portions of these risks are hedged; however, they may impact our operating performance.
The following discussion should be read in conjunction with Notes 2, 17, and 19 to Sirona’s audited consolidated financial statements appearing elsewhere in this report, which provide further information on Sirona’s derivative instruments.
Foreign Currency
Sirona’s primary market risk exposure is foreign currency risk. Certain transactions, assets, and liabilities are exposed to foreign currency risk, which can adversely affect our revenues and operating profits. To help mitigate this risk and maximize the economic effectiveness of our foreign currency positions, Sirona enters into forward exchange contracts where practicable.
The Euro is the functional currency for the majority of Sirona’s subsidiaries, including its German operations, which are the primary sales and manufacturing operations of Sirona. Sales from other Sirona operations are denominated in various foreign currencies. As a percent of total revenues, sales and operating expenses in Euro, U.S. Dollar, and all other currencies (most importantly: Japanese Yen, Australian Dollar, Chinese Yuan Renminbi, and Brazilian Real) for fiscal year 2015 were approximately as follows:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The most significant influencing factor is the U.S. Dollar/Euro exchange rate. During the periods under review, the U.S. Dollar/Euro exchange rate has fluctuated significantly. The following table presents the relevant U.S. Dollar/Euro exchange rate information for the period(s) under report:
In order to hedge portions of the transactional exposure to fluctuations in exchange rates, based on forecasted and firmly committed cash flows, Sirona enters into forward foreign currency contracts. Currently, the principal currencies hedged against the Euro are the U.S. Dollar, Japanese Yen, and Australian Dollar. These forward foreign currency contracts are intended to reduce short-term effects of changes in exchange rates. Sirona does not apply hedge accounting to these forward foreign currency contracts.
As of September 30, 2014, we changed our disclosure method of estimating and quantifying our foreign currency risks from a tabular presentation of the assets subject to foreign currency risk without an estimate of the possible effects on future earnings to a value-at-risk (“VAR”) model. We made this change because we believe that use of a VAR method provides our shareholders with a better understanding and estimate of the potential impacts on our earnings due to foreign currency risk.
VAR is defined as the expected gain or loss, for a given confidence level, in the fair value of our portfolio due to positive or adverse market movements over a defined time horizon. The VAR model is not intended to represent actual gains or losses in fair value, including determinations of other-than-temporary losses in fair value in accordance with U.S. GAAP, but is used as a risk estimation and management tool. The distribution of the potential changes in total market value of all transactional asset, and liability positions is computed based on the historical volatilities and correlations among foreign currency exchange rates, assuming normal market conditions.
The VAR is calculated as the total gain or loss that will not be exceeded at the 95.0 percentile confidence level. Several risk factors are not captured in the model, including liquidity, operational, and legal risks. The following table sets forth the one-day VAR for substantially all of our positions for the fiscal years ended September 30, 2015 and 2014:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Interest Rate
Sirona is also exposed to interest rate risk associated with short and long-term bank loans bearing variable interest rates. To help mitigate this interest rate risk exposure, Sirona enters into interest rate swap agreements.
On November 16, 2011, Sirona entered into interest rate swaps to fully hedge its interest exposure in connection with the Senior Facilities Agreement dated November 14, 2011. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Long-Term Debt” for further details. Since Sirona’s interest exposure is fully hedged and nearly 100% effective as of September 30, 2015, any sensitivity analysis (such as a hypothetical, instantaneous increase of one percentage point in the interest rates applicable to the variable interest rate debt) would not have had a material impact on interest expense for the periods under report.
Please refer to Note 19 for information on interest rates and scheduled maturities of principal by fiscal year for our outstanding variable-rate indebtedness as of September 30, 2015.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included as a separate section of this Annual Report on Form 10-K, beginning on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer (principal executive officer) and chief financial officer (principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of September 30, 2015. Based upon this evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2015, the Company’s disclosure controls and procedures are effective. Our disclosure controls and procedures are designed to ensure that information relating to the Company, including our consolidated subsidiaries, that is required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Commission’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2015. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework (2013). Based on our assessment, management believes that, as of September 30, 2015, our internal control over financial reporting is effective based on those criteria.
The independent registered public accounting firm, which audited the Company’s financial statements included in this Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting. Please see the attestation report on page 71.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item not set forth herein is incorporated by reference to the proxy statement for our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year (September 30, 2015).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item not set forth herein is incorporated by reference to the proxy statement for our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year (September 30, 2015).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item not set forth herein is incorporated by reference to the proxy statement for our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year (September 30, 2015).
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item not set forth herein is incorporated by reference to the proxy statement for our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year (September 30, 2015).
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item not set forth herein is incorporated by reference to the proxy statement for our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year (September 30, 2015).
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements, See Financial Information Table of Contents on Page 69.
(b) The following Exhibits are included in this report:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Exhibit
No.
Item Title
2.1 Exchange Agreement, by and among Sirona Holdings Luxco S.C.A, Blitz 05-118 GmbH and Schick Technologies, Inc., dated September 25, 2005 (incorporated by reference to Exhibit 99.1 to Form 8-K, filed on September 26, 2005)
2.2 Amendment No. 1 to Exchange Agreement, dated May 11, 2006 (incorporated by reference to Exhibit 99.1 to Form 8-K, filed on May 16, 2006)
2.3 Agreement and Plan of Merger, dated September 15, 2015, by and among DENTSPLY International Inc., the Company and Dawkins Merger Sub Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K, filed on September 16, 2015)
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, File No. 333-33731, filed on June 30, 1997)
3.2 Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to Form 8-K filed on June 20, 2006)
3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to Form 8-K filed on February 24, 2014)
3.4 Bylaws of the Company effective as of September 20, 2010 (incorporated by reference to Exhibit 3.2 to Form 8-K, filed on September 23, 2010)
3.5 First Amendment to the By-Laws of the Company, dated September 15, 2015 (incorporated by reference to Exhibit 3.1 to Form 8-K, filed on September 16, 2015)
4.1 Form of Common Stock certificate of the Company (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-3, File No. 333-153092, filed on August 20, 2008)
10.1 1996 Employee Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to Form 10-K, filed on July 13, 2001)†
10.2 Amendment to 1996 Employee Stock Option Plan (incorporated by reference to the Company’s definitive proxy statement on Schedule 14A, filed on May 16, 2006)†
10.3 1997 Stock Option Plan for Non-Employee Directors, as amended (incorporated by reference to Exhibit 10.2 to Form 10-K, filed on June 18, 2003)†
10.4 Sirona Dental Systems, Inc. Equity Incentive Plan (incorporated by reference to the Company’s definitive proxy statement on Schedule 14A, filed on January 26, 2007)†
10.5 Form of Stock Option Notice under Sirona Dental Systems, Inc. Equity Incentive Plan (incorporated by reference Exhibit 10.2 to Form 8-K filed on February 28, 2007)†
10.6 Distributorship Agreement, dated April 6, 2000, by and between Schick Technologies, Inc. and Patterson Dental Company (incorporated by reference to Exhibit 10.34 to Form 10-K, filed on June 29, 2000)**
10.7 Amendment No. 1 to Distributorship Agreement, dated July 1, 2005 by and between Schick Technologies, Inc. and Patterson Dental Company (incorporated by reference to Exhibit 10.1 to Form 10-Q/A, filed on March 24, 2006)**
10.8 Consulting and Non-Competition Agreement between Schick Technologies, Inc. and David B. Schick, dated May 7, 2004 (incorporated by reference to Exhibit 10.33 to Form 10-K, filed on June 25, 2004)
10.9 Transaction Services Agreement by and between Blitz-506 GmbH, Sirona Dental Services GmbH & Co KG, Sirona Dental Systems GmbH, MDP IV Offshore GP, LP and Harry M. Jansen Kraemer, Jr., dated July 6, 2005 (incorporated by reference to Exhibit 10.7 to Form 10-K, filed on December 11, 2006)
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
10.10 Registration Agreement between the Company and Luxco, dated as of June 20, 2006 (incorporated by reference to Exhibit 2.1 to Form 8-K filed on June 20, 2006)
10.11 Employment Agreement between the Company and Jeffrey T. Slovin, dated as of June 14, 2006 (incorporated by reference to Exhibit 2.2 to Form 8-K filed on June 20, 2006)†
10.12 Employment Agreement between the Company and Michael Stone, dated as of June 14, 2006 (incorporated by reference to Exhibit 2.3 to Form 8-K filed on June 20, 2006)†
10.13 Transition and Severance Agreement between the Company and Zvi Raskin, dated as of June 14, 2006 (incorporated by reference to Exhibit 2.4 to Form 8-K filed on June 20, 2006)†
10.14 Employment Agreement between Sirona Beteiligungs- und Verwaltungsgesellschaft mbH (represented by its shareholder Sirona Dental Systems SARL) and Jost Fischer, dated as of January 25, 2002 (incorporated by reference to Exhibit 10.5 to Form 10-Q, filed on August 9, 2006)†
10.15 Employment Agreement between Sirona Beteiligungs- und Verwaltungsgesellschaft mbH (represented by its shareholder Sirona Dental Systems SARL) and Simone Blank, dated as of June 27, 2001 (incorporated by reference to Exhibit 10.6 to Form 10-Q, filed on August 9, 2006)†
10.16 Consolidated and Restated Amendment to Distributorship Agreement between Sirona Dental Systems GmbH and Patterson Companies, Inc. (incorporated by reference to Exhibit 10.8 to Form 10-Q, filed on August 9, 2006)**
10.17 Senior Facilities Agreement (incorporating amendments made on December 5, 2006 and January 19, 2007) among Sirona Dental Systems, Inc., Schick Technologies, Inc., Sirona Dental Systems GmbH, Sirona Dental Services GmbH, Sirona Dental Systems LLC, Sirona Holding GmbH, Sirona Immobilien GmbH, J.P. Morgan PLC, UBS Limited, JPMorgan Chase Bank, N.A., and J.P. Morgan Europe Limited, dated November 22, 2006 (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed on May 10, 2007)
10.18 Description of the Sirona Dental Systems, Inc. EVA Plan (incorporated by reference to Exhibit 10.18 to Form 10-K filed on December 7, 2007)†
10.19 Employment Agreement between Schick Technologies, Inc. and Jeffrey T. Slovin, dated June 9, 2004 (superseded by the employment agreement dated June 20, 2006 (the “2006 employment agreement”) incorporated by reference as Exhibit 10.11 to this Form 10-K, except for the bonus information contained in Section IV referenced in the 2006 employment agreement)†
10.20 Company’s 2008 Executive Bonus Plan (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed on May 8, 2008)†
10.21 Company’s 2009 Executive Bonus Plan (incorporated by reference to Exhibit 10.21 to Form 10-K, filed on December 4, 2008)†
10.22 Amended and Restated Service Agreement between Sirona Dental GmbH, the Company and Jost Fischer, dated as of December 2, 2008 (superseding an Executive Service Agreement between Sirona Dental GmbH and Jost Fischer, dated as of October 10, 2007, which superseded the Employment Agreement between Sirona Beteiligungs- und Verwaltungsgesellschaft mbH (represented by its shareholder Sirona Dental Systems SARL) and Jost Fischer, dated as of January 25, 2002) (incorporated by reference to Exhibit 10.22 to Form 10-K, filed on December 4, 2008)†
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
10.23 Amended and Restated Service Agreement between Sirona Dental GmbH, the Company and Simone Blank, dated as of December 2, 2008 (superseding an Executive Service Agreement between Sirona Dental GmbH and Simone Blank, dated as of October 1, 2007, which superseded the Employment Agreement between Sirona Beteiligungs- und Verwaltungsgesellschaft mbH (represented by its shareholder Sirona Dental Systems SARL) and Simone Blank, dated as of June 27, 2001) (incorporated by reference to Exhibit 10.23 to Form 10-K, filed on December 4, 2008)†
10.24 Amendment to Employment Agreement, dated as of December 2, 2008, between the Company and Jeffrey T. Slovin (amending the Employment Agreement between the Company and Jeffrey T. Slovin, dated as of June 14, 2006 and superseding the Employment Agreement between the Company and Jeffrey T. Slovin dated as of June 9, 2004) (incorporated by reference to Exhibit 10.24 to Form 10-K, filed on December 4, 2008)†
10.25 Sirona Dental Systems, Inc. Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to Form 8-K, filed on March 3, 2009)†
10.26 Schick Technologies, Inc. 1996 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.2 to Form 8-K, filed on March 3, 2009)†
10.27 Renewal Letter Agreement, dated as of May 4, 2009, between Sirona Dental Services GmbH, a corporation organized under the laws of Germany (“Sirona GmbH”) and Sirona Holdings Luxco S.C.A., a société en commandite par actions organized under the laws of the Grand Duchy of Luxembourg (“Luxco”), to the Advisory Services Agreement dated October 1, 2005 between Sirona GmbH and Luxco, together with the Assignment and Assumption Agreement dated May 4, 2009 among Sirona GmbH, Sirona Dental Systems, Inc. and Luxco (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed on May 5, 2009)
10.28 Form of Restricted Stock Unit Agreement for December 8, 2009 restricted stock unit grants (incorporated by reference to Exhibit 10.1 to Form 8-K, filed on December 11, 2009)†
10.29 Amendment to Distributorship Agreement, dated May 5, 2010, by and between Schick Technologies, Inc. and Patterson Companies, Inc. (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed on May 5, 2010)**
10.30 Amendment No. 2 to Amended and Restated Employment Agreement, dated as of September 20, 2010, between the Company and Jeffrey T. Slovin (amending the Employment Agreement between the Company and Jeffrey T. Slovin, dated as of June 14, 2006) (incorporated by reference to Exhibit 10.1 to Form 8-K, filed on September 23, 2010)†
10.31 Employment Agreement, dated as of September 13, 2007, as amended on October 15, 2008, by and between Sirona Dental GmbH and Walter Petersohn (incorporated by reference to Exhibit 10.1 to Form 8-K, filed on September 23, 2010)†
10.32 Supplement Agreement to Service Agreement between Sirona Dental GmbH, the Company and Jost Fischer, dated as of November 15, 2010, as amended by the Amended and Restated Service Agreement between Sirona Dental GmbH, the Company and Jost Fischer, dated as of December 2, 2008 (incorporated by reference to Exhibit 10.32 to Form 10-K, filed on November 18, 2010)†**
10.33 Supplement Agreement to Service Agreement between Sirona Dental GmbH, the Company and Simone Blank, dated as of November 15, 2010, as amended by the Amended and Restated Service Agreement between Sirona Dental GmbH, the Company and Simone Blank, dated as of December 2, 2008 (incorporated by reference to Exhibit 10.33 to Form 10-K, filed on November 18, 2010)†**
10.34 Amendment to Consolidated and Restated Amendment to Distributorship Agreement, dated May 3, 2011, between Patterson Companies. Inc. and Sirona Dental Systems GMBH (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed on May 6, 2011)**
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
10.35 Term and Revolving Facilities Agreement between, among others, Sirona Dental Systems, Inc., Schick Technologies, Inc., Sirona Dental Systems, LLC, Sirona Dental Services GmbH, Sirona Dental Systems GmbH, Sirona Immobilien GmbH, Sirona Technologie GmbH & Co. KG, JPMorgan Limited, UniCredit Bank AG and J.P. Morgan Europe Limited, dated November 14, 2011. (incorporated by reference to Exhibit 10.35 to Form 8-K, filed on November 18, 2011)
10.36 Senior Facilities Agreement, dated November 4, 2011, by and among Sirona Dental Systems, Inc., J.P. Morgan Limited, Unicredit Bank AG and J.P. Morgan Europe Limited. (incorporated by reference to Exhibit 10.1 to Form 8-K, filed on November 18, 2011)
10.37 Amended and Restated U.S. Distributorship Agreement, dated May 31, 2012, by and between Patterson Companies, Inc. and Sirona Dental Systems, Inc. (incorporated by reference to Exhibit 10.1 to Form 8-K/A, filed on July 12, 2012)
10.38 Amended and Restated U.S. CAD-CAM Distributorship Agreement, dated May 31, 2012, by and between Patterson Companies, Inc. and Sirona Dental Systems GmbH. (incorporated by reference to Exhibit 10.2 to Form 8-K/A, filed on July 12, 2012)
10.39 Letter Amendment to Amended and Restated Employment Agreement, dated as of October 1, 2012, between Sirona Dental Systems, Inc. and Jeffrey T. Slovin (incorporated by reference to Exhibit 10.1 to Form 8-K, filed on October 5, 2012)†
10.40 Transition Agreement by and between Sirona Dental GmbH, Sirona Dental Systems, Inc. and Jost Fischer, dated November 16, 2012 (incorporated by reference to Exhibit 10.39 to Form 10-K, filed on November 16, 2012)†
10.41 Employment Contract between Sirona Dental Services GmbH and Rainer Berthan, dated February 20, 2012 (incorporated by reference to Exhibit 10.40 to Form 10-K, filed on November 16, 2012)†
10.42 Amendment to Amended and Restated Employment Agreement, dated as of May 7, 2013, between Sirona Dental Systems, Inc. and Jeffrey T. Slovin (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed on May 10, 2013)†
10.43 Executive Employment Agreement, dated July 29, 2013, by and between Sirona Dental Systems, Inc. and Ulrich Michel (incorporated by reference to Exhibit 10.2 to Form 10-Q, filed on August 2, 2013)†
10.44 Separation Agreement, dated August 1, 2013, by and between Sirona Dental GmbH, Sirona Dental Systems, Inc. and Simone Blank (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed on August 2, 2013)†
10.45 Sirona Dental Systems, Inc. 2015 Long-Term Incentive Plan (incorporated by reference to the Company’s definitive proxy statement on Schedule 14A, filed on January 28, 2015)†
10.46 Letter Amendment to Amended and Restated Employment Agreement of Jeffrey T. Slovin, dated September 15, 2015, between Sirona Dental Systems, Inc. and Jeffrey T. Slovin (incorporated by reference to Exhibit 10.1 to Form 8-K, filed on September 16, 2015)†
14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K, filed on June 25, 2004)
16.1 Letter from Grant Thornton LLP to the Securities and Exchange Commission confirming statements made about it by Company in connection with changes to the Company's certifying accountant (incorporated by reference to Exhibit 16.1 to Form 8-K, filed on June 26, 2006)
21.1 List of Subsidiaries of Company*
23.1 Consent of Independent Registered Public Accounting Firm*
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1 Section 1350 Certification of Chief Executive Officer*
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
By: /s/ JEFFREY T. SLOVIN
Jeffrey T. Slovin
President, Chief Executive Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
FINANCIAL INFORMATION
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Sirona Dental Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Sirona Dental Systems, Inc. and subsidiaries as of September 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended September 30, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sirona Dental Systems, Inc. and subsidiaries as of September 30, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2015 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sirona Dental Systems, Inc.’s internal control over financial reporting as of September 30, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated November 20, 2015 expressed an unqualified opinion on the effectiveness of Sirona Dental Systems, Inc.’s internal control over financial reporting.
/s/ KPMG AG Wirtschaftsprüfungsgesellschaft
Frankfurt, Germany
November 20, 2015
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Sirona Dental Systems, Inc.:
We have audited Sirona Dental Systems, Inc.’s internal control over financial reporting as of September 30, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Sirona Dental Systems, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Sirona Dental Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sirona Dental Systems, Inc. and subsidiaries as of September 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended September 30, 2015, and our report dated November 20, 2015 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG AG Wirtschaftsprüfungsgesellschaft
Frankfurt, Germany
November 20, 2015
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
CONSOLIDATED STATEMENTS OF INCOME
The accompanying Notes are an integral part of these financial statements.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The accompanying Notes are an integral part of these financial statements.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
CONSOLIDATED BALANCE SHEETS
The accompanying Notes are an integral part of these financial statements.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
The accompanying Notes are an integral part of these financial statements.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying Notes are an integral part of these financial statements.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying Notes are an integral part of these financial statements.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THE COMPANY AND ITS OPERATIONS
Sirona Dental Systems, Inc. (“Sirona,” the “Company,” “we,” “us,” and “our” refer to Sirona Dental Systems, Inc. and its consolidated subsidiaries) is the leading global manufacturer of high-quality, technologically-advanced dental equipment, and is focused on developing, manufacturing, and marketing innovative systems and solutions for dentists around the world. We offer a broad range of products across all major segments of the dental technology market including CEREC and our other CAD/CAM systems, digital intra oral and 2D and 3D panoramic imaging systems, treatment centers, and instruments. The Company acquired Schick Technologies, Inc. (“Schick”) in 2006, in a transaction accounted for as a reverse acquisition (the “Exchange”), further expanding our global presence and product offerings and strengthening our research and development capabilities. Sirona has served equipment dealers and dentists worldwide for more than 130 years. The Company’s headquarters is located in Long Island City, New York with its primary facility located in Bensheim, Germany, as well as other support, manufacturing, assembling, and sales and service facilities located around the globe.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (‘‘U.S. GAAP’’). All amounts are reported in millions of U.S. Dollars ($), except per share amounts or as otherwise disclosed.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company’s fiscal year is October 1 to September 30.
Principles of Consolidation
The consolidated financial statements include, after eliminating inter-company transactions and balances, the accounts of Sirona Dental Systems, Inc. and its subsidiaries.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from estimates. Some of the more significant estimates include allowances for doubtful accounts, inventory valuation reserves, purchase accounting assumptions, depreciable lives of assets, amortization periods, impairment of long-lived assets, deferred tax asset valuation allowance, discounts to customers, pension reserves, provisions and warranty reserves.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Foreign Currency
The functional currency for foreign operations has been determined in all cases to be the local currency. Adjustments resulting from translating foreign functional-currency assets and liabilities are recorded in shareholders’ equity as a component of accumulated other comprehensive income. Gains or losses resulting from transactions in other than the functional currency are reflected in the consolidated statements of income, except for intra-group transactions of a long-term nature, which are recorded in shareholders’ equity as a component of accumulated other comprehensive income.
Comprehensive Income
In addition to net income, comprehensive income includes other charges or credits to equity other than those resulting from transactions with shareholders. Accumulated other comprehensive income relates to foreign currency translation adjustments related to the Company’s foreign subsidiaries, changes in the fair value of cash flow hedges, as well as to the pension adjustment resulting from the application of ASC 715-30, Compensation-Retirement Benefits - Defined Benefit Plans-Pension.
The Company presents all non-owner changes in shareholders’ equity in two separate but consecutive statements: Consolidated Statements of Income and Consolidated Statement of Comprehensive Income. The details for these items (category and type of change, current period movements, and related tax effects) are reported separately in Note 12 to the consolidated financial statements.
Revenue Recognition
The Company’s main revenue stream results from the delivery of dental equipment. The Company also enters into revenue arrangements that consist of multiple deliverables of its product and service offerings. Additionally, certain products, primarily in our CAD/CAM and Imaging segments, may contain embedded software that functions together with the product to deliver the product’s essential functionality.
Revenue, net of related discounts and allowances, is recognized when products or equipment have been shipped, when persuasive evidence of the arrangement exists, the price is fixed or determinable, collectability is reasonably assured, title and risk of loss has passed to customers based on the shipping terms, no significant obligations remain, and allowances for discounts, returns, and customer incentives can be reliably estimated. The Company offers discounts to its distributors if certain conditions are met. Discounts and allowances are primarily based on the volume of products purchased or targeted to be purchased by the individual customer or distributor. Discounts are deducted from revenue at the time of sale or when the discount is offered, whichever is later. The Company estimates volume discounts based on the individual customer’s historical and estimated future product purchases. Returns of products, excluding warranty related returns, are infrequent and insignificant. Amounts received from customers in advance of product shipment are classified as deferred income until the revenue can be recognized in accordance with the Company’s revenue recognition policy.
·Services: Service revenue is generally recognized ratably over the contract term as the specified services are performed. Amounts received from customers in advance of rendering of services are classified as deferred income until the revenue can be recognized upon rendering of those services.
·Extended Warranties: The Company offers its customers an option to purchase extended warranties on certain products. The Company recognizes revenue on these extended warranty contracts ratably over the life of the contract. The costs associated with these extended warranty contracts are recognized when incurred.
·Multiple-Element Arrangements (“MEAs”): Arrangements with customers may include multiple deliverables, including any combination of equipment, services, and extended warranties. The deliverables included in the Company’s MEAs are separated into more than one unit of accounting when (i) the delivered equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in the control of the Company. Arrangement consideration is then allocated to each unit, delivered or undelivered, based on the relative selling price (“RSP”) of each unit of accounting based first on vendor-specific objective evidence (“VSOE”) if it exists and then based on estimated selling price (“ESP”).
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
VSOE: In most instances, products are sold separately in stand-alone arrangements. Services are also sold separately through renewals of contracts with varying periods. The Company determines VSOE based on its pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or stand-alone prices for the service element(s).
ESP: The estimated selling price represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When VSOE does not exist for all elements, the Company determines ESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on its pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining ESP.
After separating the elements into their specific units of accounting, total arrangement consideration is allocated to each unit of accounting according to the nature of the revenue as described above and application of the RSP method. Total recognized revenue is limited to the amount not contingent upon future transactions.
Research and Development
Amounts spent by the Company for research and development (R&D) efforts are recorded as R&D expenses when incurred. R&D costs relate primarily to internal costs for salaries, direct overhead costs and outside vendors. The Company capitalizes costs of equipment used for general R&D if it has alternative future use. The depreciation related to this capitalized equipment is included in the Company’s R&D costs. Software development costs incurred prior to the attainment of technological feasibility are considered R&D and are expensed as incurred. Once technological feasibility is established, software development costs are capitalized until the product is available for general release to customers. Amortization of these costs is included in cost of goods sold over the estimated life of the products.
Warranty Expense
The Company offers warranties on its products for periods between one and three years. Estimated future warranty obligations related to product sales are charged to operations in the period in which the related revenue is recognized. These estimates are based on historical warranty experience and other relevant information of which the Company is aware. Estimated warranty expenses are recorded as an accrued liability and selling, general and administrative expense.
Shipping and Handling Costs
Shipping and handling costs charged to customers are included in revenues, and the associated expense is recorded in cost of sales for all periods presented.
Advertising Costs
Advertising costs are expensed as incurred and recorded within selling, general and administrative expense. During the periods under report, advertising expense was as follows:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Pension Benefits
The Company has defined benefit and defined contribution pension plans and an early retirement plan. Sirona recognizes changes in the funded status of its benefit plans, not yet recognized in the income statement, in other comprehensive income until they are amortized as a component of net periodic benefit cost in accordance with the provisions of ASC 715-30, Compensation-Retirement Benefits - Defined Benefit Plans-Pension.
Pension expense is recognized on an accrual basis over the employee’s approximate service periods. Defined benefit pension costs are determined by using an actuarial method, which provides for the deferral of actuarial gains and losses (within a specified corridor) that result from changes in assumptions or actual experience differing from that assumed. Costs relating to changes in the benefit plan are amortized. Disclosure of the components of periodic pension cost is also required. When purchase accounting is applied, pension liabilities are recognized for the projected benefit obligation in excess of plan assets.
For the defined contribution pension plans, the net pension cost is equal to the contributions required by the plan.
The Company also has an early retirement plan, Altersteilzeit (‘‘ATZ’’), which allows certain German employees who have been accepted into the plan to retire at 60 rather than at the legal retirement age of 67. Eligible employees are those who have attained the age of 59, have completed 12 years of service, and have been accepted to participate in the ATZ plan. Accepted employees join for a period of 2-4 years, during which they work in full active service for 50% of the agreed ATZ plan period, the remaining 50% of the plan period being the passive phase during which the employee does not work. Alternatively, the employee may work for 50% of the time for the entire agreed ATZ plan period. The alternative actually executed is decided via mutual agreement between Sirona and the employee. During the active service period, the employees receive 50% of their salary plus a bonus payment equal to 35% of their salary, and the remaining 50% of their salary, plus a bonus payment equal to 35% of their salary, is paid during the inactive service period. The Company recognizes the salary component of the ATZ plan over the period from the beginning of the ATZ period to the end of the active service period.
Income Taxes
Differences between the basis of assets and liabilities for financial statement purposes and for tax return purposes are recorded as deferred tax assets or deferred tax liabilities in the accompanying consolidated financial statements. Deferred taxes represent the tax consequences in future years of these differences at each balance sheet date, based on the enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. The provision (benefit) for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. A valuation allowance is established when it is more likely than not that the deferred tax assets are not realizable. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income as an adjustment to income tax expense in the period that includes the enactment date. See Note 9, “Income Taxes” for additional information.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. Investments in money market funds are carried at fair value. All other cash equivalents are stated at cost, which approximates fair value.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Restricted Cash
Restricted cash represents cash balances that are i) pledged as collateral to financial institutions that provide security for prepayments from customers and other bonds or ii) held as security deposits for leased office space.
Accounts Receivable
Accounts receivable are stated at the invoiced amount, less allowances for doubtful accounts, which approximates fair value given their short-term due dates. Collectability of accounts receivable is regularly reviewed and is based upon management’s knowledge of customers and compliance with credit terms. The allowance for doubtful accounts is adjusted based on such evaluation, with the corresponding expense included in selling, general, and administrative expense in the Consolidated Statements of Income. Accounts receivable balances are written off when management deems the balances uncollectible.
Inventory
Inventory is carried at the lower of cost or market value. Cost is determined using standard costing, which approximates the weighted average cost method. In addition to direct material and direct labor costs, certain costs related to the overhead and production expenses are included in inventory. Inventory reserves are provided for risks relating to slow moving, unmarketable, and obsolete items.
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 that all assets and liabilities are recorded at their respective fair values. Any excess of the purchase price over estimated fair values of net assets is recorded as goodwill. The assumptions made in determining fair value assigned to assets and liabilities acquired as well as asset lives can materially impact the results of operations.
The Company obtains information during due diligence and through other sources to arrive at respective fair values. Examples of factors and information that the Company uses to determine the fair values include: tangible and intangible asset evaluations and appraisals; evaluations of existing contingencies and liabilities; product line integration information; and information systems compatibilities. If the initial accounting for an acquisition is incomplete by the end of the quarter in which the acquisition occurred, the Company will record a provisional estimate in the financial statements. The provisional estimate will be finalized as soon as information becomes available but no later than one year from the acquisition date.
Investments in Companies
Investments in associated companies over which the Company can exercise significant influence but not control are accounted for using the equity method. Investments in associated companies over which the Company cannot exercise significant influence or control are accounted for at cost.
Property, Plant and Equipment
Property, plant, and equipment are recorded at historical cost plus the fair value of asset retirement costs, if any and if reasonably estimable, less accumulated depreciation. Additions, improvements and major renewals, which extend the useful life of the asset, are capitalized; maintenance and repairs are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in current operating income. Development costs for software to be sold, leased, or otherwise marketed incurred after the establishment of technological feasibility are capitalized and amortized to cost of goods sold on a straight-line basis over the expected useful life of the software. Costs of software developed for internal use incurred during the development of the application are capitalized and amortized to operating expense on a straight-line basis over the expected useful life of the software. Prepayments for property, plant, and equipment are classified as property, plant, and equipment and are not depreciated until the assets are received and placed into service.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The cost of property, plant and equipment is depreciated using the straight-line method over the following estimated useful lives of the respective assets:
Finite-Lived Intangible Assets
Finite-lived intangible assets are amortized according to the pattern in which the economic benefit of the asset is used up over their estimated useful lives, as shown below:
Impairment of Long-Lived and Finite-Lived Assets
Long lived assets held for use by the Company are reviewed for impairment whenever events or circumstances provide evidence that suggests the carrying amount of the asset may not be recoverable. The Company performs ongoing impairment analysis on technology-related intangible assets. Determination of whether an impairment exists is based upon a comparison of the identifiable undiscounted cash flows of the assets or groups of assets to the carrying amount of the assets or groups of assets. If impaired, the resulting charge reflects the excess of the asset’s carrying amount over its fair value.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite lived intangible assets, consisting of certain trademarks and in-process research and development (IPR&D), are not amortized, but are reviewed for potential impairment on an annual basis as of September 30, or whenever events or circumstances indicate that the carrying amount may not be recoverable. First, a qualitative assessment is performed on reporting units to determine if further quantitative impairment testing is necessary. If this qualitative assessment indicates that a possible impairment exists, a quantitative impairment test is performed. Goodwill impairment tests are based upon a comparison of the fair value of the reporting units to their respective carrying amount. If the carrying amount of the reporting unit exceeds its fair value, the goodwill impairment loss is measured as the excess of the carrying amount of goodwill over its implied fair value. If impairment is identified on indefinite-lived intangibles, the resulting charge reflects the excess of the asset’s carrying amount over its fair value.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Other non-current assets
Other non-current assets and prepaid expenses include capitalized debt issuance costs. The costs are amortized using the effective interest method. The non-current unamortized balance of such debt issuance costs was $0.1 million as of September 30, 2015 (prior year period: $0.6 million).
Derivative Financial Instruments
The Company enters into forward foreign currency contracts in order to manage currency risks arising from its forecasted and firmly committed foreign currency denominated cash flows. The Company enters into these contracts to limit the foreign exchange rate risk for periods generally not to exceed six months. The Company also enters into interest rate swaps to manage its interest rates on its long term debt.
The Company does not utilize financial instruments for speculative purposes. The Company accounts for derivative financial instruments in accordance with ASC 815, Derivatives and Hedging. This Topic prescribes requirements for designation and documentation of hedging relationships and ongoing assessments of effectiveness in order to qualify for hedge accounting. The Company has designated its interest rate swaps as qualifying hedge instruments and therefore applies hedge accounting. The Company has not designated any of its foreign currency derivatives as qualifying for hedge accounting under ASC 815. All derivative instruments are recognized as either assets or liabilities in the consolidated balance sheet at fair value. The fair value of the forward foreign currency contracts and interest rate swaps are included within prepaid and other current assets or current accrued liabilities, depending on whether they are an asset or a liability. The change in fair value is recognized within ‘‘Gains (losses) on derivative instruments’’ in the consolidated statement of income for the forward foreign currency contracts and the ineffective portion of the interest rate swaps. The effective portion of interest rate swaps is recognized within “Accumulated other comprehensive income/(loss)” in the consolidated balance sheet.
Fair Value of Financial Instruments
Financial instruments consist of cash, cash equivalents, accounts receivable, accounts payable, bank loans, foreign currency forward contracts, interest rate swaps, and certain liabilities related to fixed and intangible asset purchases and liabilities for business acquisitions primarily from earn-out features. The carrying values of cash, cash equivalents, accounts receivable, and accounts payable approximate their respective fair values because of the short-term nature of these items. The fair value of the foreign currency forward contracts and interest rate swaps are estimated based on information such as quotes from financial institutions. The fair values of the acquisition-related liabilities are based on discounted valuations of commercial assumptions made by Company management of stipulations governed in the underlying purchase agreements.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Changes to accounting principles generally accepted in the United States (“U.S. GAAP”) are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”). The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either (i) not applicable, (ii) are expected to have a minimal impact on our consolidated financial statements, or (iii) their adoption had an immaterial impact on our consolidated financial statements.
Adopted
There were no ASUs adopted during the current period, which had a material impact on our consolidated financial statements.
Not Yet Adopted
In May 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If such an arrangement contains a software license, the software license element of that arrangement should be accounted for consistent with the acquisition of other software licenses. If such an arrangement does not include a software license, the arrangement should be accounted for as a service contract. ASU 2015-05 is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2015, which corresponds to the Company’s fiscal year beginning October 1, 2016, with early adoption permitted. The new guidance permits either prospective or retrospective adoption. We are currently evaluating the potential impact of adoption on our consolidated financial statements and have not yet selected an adoption method.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present such costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability on the balance sheet rather than as an asset. ASU 2015-03 is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2015, which corresponds to the Company’s fiscal year beginning October 1, 2016, with early adoption permitted. Currently, we do not expect a material impact of adoption on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides updated guidance on revenue recognition principles that will supersede most current conceptual and industry-specific revenue recognition guidance and thus enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The key principle of this updated guidance is that entities should recognize revenue to depict the transfer of goods or services to customers at an amount reflecting the consideration expected in exchange for those goods or services. The new guidance prescribes a five-step analysis of transactions to determine how and when to recognize revenue. In addition, the new guidance provides for capitalization of certain costs of obtaining or fulfilling a contract with a customer as well as enhanced disclosure requirements to enable a better understanding of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2016. The new guidance permits the use of either a retrospective or cumulative effect transition method. In July 2015, the FASB approved a one-year deferral of the effective date to apply to fiscal years, and interim periods within those years, beginning after December 15, 2017, which corresponds to the Company’s fiscal year beginning October 1, 2018, with early adoption as of the original effective date permitted. We have not yet selected a transition method or adoption date and are evaluating the expected impact of adoption on our consolidated financial statements.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
ACQUISITIONS
On June 30, 2015, the Company acquired 100% of the outstanding shares of capital stock of a dental marketing services and software company. The results of its operations have been included in the consolidated financial statements since this date. The fair value of total consideration transferred for this acquisition totaled $18.6 million, consisting entirely of cash. The purchase price allocation resulted in goodwill acquired of $12.9 million. The results of operations for this acquisition included in the current period under report was as follows: revenues of $11.3 million and $0.2 million of net income.
MERGERS
On September 15, 2015, the Company and DENTSPLY International, Inc. (“DENTSPLY”) announced that the Board of Directors of both companies had unanimously approved a definitive Agreement and Plan of Merger (the “Merger Agreement”) under which the companies will combine in an all-stock merger. DENTSPLY is a leading manufacturer and distributor of dental and other consumable medical device products. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Sirona will merge with and into a wholly-owned subsidiary of DENTSPLY, with Sirona surviving as a wholly-owned subsidiary of DENTSPLY. Upon completion of the merger, the combined company's name will be changed to DENTSPLY SIRONA Inc. Subject to the terms and conditions of the Merger Agreement, if the merger is completed, each outstanding share of Sirona common stock will be converted into the right to receive 1.8142 shares of common stock of DENTSPLY, with cash paid in lieu of any fractional shares of common stock of DENTSPLY that a Sirona stockholder would otherwise have been entitled to receive.
The Merger Agreement contains certain termination rights for both the Company and DENTSPLY, including if the merger is not consummated on or before March 15, 2016 (which is subject to extension under certain circumstances but generally not beyond December 15, 2016) and if the approval of the stockholders of either the Company or DENTSPLY is not obtained. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, including termination of the Merger Agreement by the Company or DENTSPLY as a result of an adverse change in the recommendation of the other party’s board of directors, (i) the Company may be required to pay a termination fee of $205.0 million to DENTSPLY and DENTSPLY may be required to pay a termination fee of $280.0 million to the Company and (ii) either company may be required to reimburse the other company for merger-related expenses of up to $15.0 million.
The transaction, which is expected to be completed in the second quarter of Fiscal 2016, is subject to the receipt of regulatory approvals and other customary closing conditions, including the approval of stockholders of both Sirona and DENTSPLY. For additional information related to the merger refer to DENTSPLY’S Registration Statement on Form S-4 which was filed with the SEC on October 29, 2015.
ASC 718, Compensation - Stock Compensation, requires that all share based compensation arrangements, including grants of stock option awards to employees, be recognized based on the estimated fair value of the share-based payment award.
EQUITY INCENTIVE PLAN
Stock options, restricted stock shares, restricted stock units (“RSU”), and performance-based stock units (“PSU”) have been issued to employees, directors, and consultants under the Company’s 2006 Equity Incentive Plan (“2006 Plan”). The 2006 Plan provided for granting in total up to 4,550,000 stock options, incentive stock, restricted stock shares, RSU’s, and PSU’s. The 2006 Plan received stockholder approval at the Company’s Annual Meeting of Stockholders held on February 27, 2007, and was amended on February 25, 2009. At the Company’s Annual Meeting of Stockholders held on February 25, 2015, stockholders approved the Company’s new 2015 Long-Term Incentive Plan (“2015 Plan”) to replace the 2006 Plan. The 2015 Plan provides for granting in total up to 6,825,000 stock options, incentive shares, restricted stock shares, RSU’s, PSU’s, and other forms of equity-based awards to employees, directors, consultants, and advisers. Shares under the new 2015 Plan were first registered pursuant to a registration statement dated April 2, 2015, at which time these shares became available for grant and any remaining shares available under the 2006 Plan were nullified. To cover the exercise of options and vesting of RSU’s and PSU’s, the Company generally issues new shares from its authorized but unissued share pool. As of September 30, 2015, 6,804,157 shares were available for future grant under the 2015 Plan.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Restricted and Performance-Based Stock Units
In the fiscal year ended September 30, 2015, the Company granted 139,387 RSU’s and 37,004 PSU’s with an average value of $87.29, representing the average of closing prices of the Company’s common stock at the grant dates.
RSU’s generally vest in annual tranches over a period of four to five years, while PSU’s generally vest after three years. The PSU’s were granted to certain Company executives and vest three years from the date of the grant provided the Company achieves performance targets specified in the grant. RSU’s and PSU’s do not have voting rights or rights to dividends prior to vesting. The value of each RSU and PSU grant is determined by the closing price at the date of grant. Share-based compensation expense for the entire award is recognized straight-line over the service period of the last separately vesting tranche of the award.
Stock Options
In the fiscal year ended September 30, 2015, the Company granted 160,262 stock options with a weighted average exercise price of $86.00 and weighted average fair value of $22.90 at the grant date. Grants generally vest in annual tranches over a period of four to five years. All grants expire ten years after the date of the grant.
The fair value of options granted under the 2006 Plan were estimated using the Black-Scholes option pricing model using assumptions in the following table. The exercise price is equal to the fair market value of Sirona’s stock at the grant date. Expected volatility is based on the Company’s historical stock price volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the day of grant and has a term equal to the expected life of the option. The expected life represents the period of time the options are expected to be outstanding based on anticipated grantee behavior. The expected dividend yield is based on the Company’s history of not paying regular dividends in the past and the Company’s current intention not to pay dividends in the foreseeable future.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Compensation Costs
The following tables summarize compensation expense charged to income for stock-based compensation and additional information for the fiscal years ended September 30, 2015, 2014, and 2013, respectively:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Restricted and Performance-Based Stock Unit Activity
The following is a summary of Sirona’s RSU and PSU activity for the last three fiscal years:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Stock Option Activity
The following is a summary of Sirona’s stock option activity for the last three fiscal years:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The components of net other operating income (loss) for the periods under report are as follows:
DEFERRED INCOME
On June 30, 2005, Sirona and its largest distributor, Patterson, amended the terms of an existing distribution agreement to extend Patterson’s rights as exclusive distributor of certain Sirona products within the U.S. and Canada from October 1, 2007 through September 30, 2017. As consideration for the extension of its exclusivity rights, Patterson made a one-time payment of $100 million to Sirona in July 2005. Sirona recorded the full amount of the payment as deferred income and started amortizing the amount on a straight-line basis over ten years on October 1, 2007. Sirona accounts for the deferred income related to the Patterson payment as a monetary liability. The deferred income is amortized and recognized in net other operating income on a straight-line basis over the term of the contract ($10 million per year). The current portion of deferred income is reported within accrued liabilities and deferred income in the consolidated balance sheets. Effects of remeasurement of the amount from U.S. Dollar to Euro are reflected in the statement of income. For the periods under report, these effects were as follows:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
RISKS AND EXPOSURE
Our operations are exposed to market risks from changes in foreign currency exchange rates and interest rates. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives.
Interest Rate Risk
The Company is exposed to interest rate risk associated with fluctuations in the interest rates on its variable interest rate debt. In order to manage this risk, the Company enters into interest rate swap agreements, when appropriate, based upon market conditions.
Foreign Currency Exposure 	
Although the U.S. Dollar is Sirona’s reporting currency, it conducts its business in many currencies, and its local functional currency varies depending on the country of operation, which exposes the Company to market risk associated with foreign currency exchange rate movements. The Company hedges certain foreign currency transaction exposure through foreign exchange forward contracts.
CASH FLOW HEDGES
Interest Rate
The Company uses interest rate swaps to convert a portion of its debt's variable interest rate to a fixed interest rate. Interest rate swaps have been established for 100% of the interest for the Facility A Term Loan under the Senior Facilities Agreement until November 2016. The interest rate swaps fix the LIBOR element of interest payable on 100% of the principal amount of the Facility A Term Loan for defined three month interest periods over the entire term of the loan. The defined interest rates fixed for each three month interest period range from 1.270% to 1.285%. Settlement of the swaps is required on a quarterly basis. These swaps are designated as hedging instruments under ASC 815. These instruments were immaterial for all periods under report. The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments.
Foreign Currency
The Euro is the functional currency for many of Sirona’s subsidiaries, including its primary sales and manufacturing operations in Germany. During the periods under review, exchange rates fluctuated significantly, thereby impacting Sirona’s financial results. In order to hedge portions of the transactional exposure to fluctuations in exchange rates, based on forecasted and firmly-committed cash flows, Sirona enters into foreign exchange forward contracts (currently: USD, AUD, and JPY). These forward foreign currency contracts are intended to reduce short-term effects of changes in exchange rates. The Company enters into forward contracts that are considered to be economic hedges but which are not considered hedging instruments under ASC 815. As of September 30, 2015, these contracts had notional amounts totaling $35.3 million (prior year period: $31.1 million). These agreements are relatively short-term (generally not exceeding six months).
The fair value carrying amount of the Company's derivative instruments at September 30, 2015 is described in Note 21 Fair Value Measurements.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The following tables summarize the impact of gains and losses from the fair value changes of the Company’s derivative instruments reported in our consolidated statements of income for the periods under report:
The following discussion and tables present the Company’s relevant income tax positions for the periods under report.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
INCOME TAX (PROVISION) BENEFIT
The income tax (provision) benefit is comprised of the following:
DEFERRED TAX ASSETS (LIABILITIES)
Components of Net Asset (Liability)
At September 30, 2015 the Company had total deferred tax assets of $46.1 million (prior year period $56.9 million), and total deferred tax liabilities of $110.4 million (prior year period $125.6 million).
The significant components of our net asset (liability) representing deferred income tax balances are as follows:
In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon sufficient taxable income within the carry-back years and the generation of future taxable income during the periods in which those temporary differences and tax loss carry-forwards become deductible. Management considers taxable income in the carry-back years, if carry back is permitted in the tax law, the projected future taxable income (including the realization of future taxable temporary differences), and tax planning strategies in making this assessment.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Tax Loss Carry-forwards
For the periods under report, the Company had gross tax loss carry-forwards subject to expiration as follows:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
RECONCILIATION OF (PROVISION) BENEFIT FOR INCOME TAXES
The difference between the U.S. federal income tax rate and the Company’s income tax provision included in the consolidated statements of income consisted of the following:
In August 2007, a tax law was enacted that may limit the Company’s deductibility of interest in Germany (“Zinsschranke”). For the periods under report, the Company’s deductibility of interest was not limited as a result of this German tax law.
COMPONENTS OF INCOME BEFORE TAXES
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
ADDITIONAL INFORMATION
None of the goodwill recognized in the Exchange or in the business combinations completed in any of the periods presented is tax deductible.
The company makes no provision for deferred U.S. income taxes on undistributed foreign earnings and profits because as of September 30, 2015, it remained management’s intention to continue to indefinitely reinvest these amounts in foreign operations. These earnings relate to ongoing operations and, as of September 30, 2015, the approximate amount of undistributed foreign earnings amounted to $710 million (prior year period: $552 million). Because of the availability of U.S. foreign tax credits as well as other factors, it is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
For the periods under report, the Company had no unrecognized tax benefits.
With limited exception, the Company and its subsidiaries are no longer subject to U.S. federal, state and local or non-U.S. income tax audits (including Germany) by taxing authorities for tax returns filed with respect to periods prior to fiscal year 2012. During the fourth quarter of fiscal year ending September 30, 2015, the German tax authority closed an income tax audit of the Company’s principal German operations for the fiscal years 2010 through 2013.
The Company classifies interest and penalties associated with income taxes as interest and other operating expense, respectively. Amounts of interest or penalties have not been material in any period.
The computation of basic and diluted income per share is as follows:
Sirona manages its business on both a product and geographic basis and has four reporting segments: (1) Dental CAD/CAM Systems, (2) Imaging Systems, (3) Treatment Centers, and (4) Instruments. Sirona’s products are distributed globally through a network of independent distributors or our own sales and service infrastructure to dental practices, clinics, and laboratories. The Electronic Center is a shared facility that manufactured electronic components and provides services for all Sirona segments, and to a very limited extent, external parties. The Electronic Center was outsourced beginning with fiscal year 2013. Further shared functions are operated centrally: including customer service, logistics, site management, IT, and administration.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
DESCRIPTION OF THE COMPANY’S SEGMENTS
Dental CAD/CAM Systems
Dental CAD/CAM Systems address the worldwide market for dental restorations: inlays, onlays, veneers, crowns, bridges, copings, bridge frameworks, etc. made from ceramic, metal, or composite blocks. Dental CAD/CAM Systems products comprise in-office systems for dentists (CEREC) and laboratories (inLab, inEOS, etc.), as well as a central manufacturing service for copings and bridge-frameworks. The CEREC system allows dentists to prepare restorations in an ‘‘out-of-mouth pre-shaped’ process and insert them into the patient’s mouth during a single visit.
Imaging Systems
Imaging systems products comprise a broad range of digital systems for diagnostic imaging in the dental practice. Sirona has developed a broad range of imaging systems for 2D and 3D panoramic and intra-oral applications that allow the dentist to accommodate the patient in a more efficient manner.
Treatment Centers
Sirona’s treatment centers comprise a broad range of products from basic dentist chairs to sophisticated chair-based centers with integrated diagnostic, hygiene, and ergonomic functionalities (such as Teneo, Sinius, C8+, etc.) as well as specialist centers used in preventative treatment and for training purposes.
Instruments
Sirona offers a wide range of instruments, including handheld and power-operated handpieces for cavity preparation, endodontics, periodontology, and prophylaxis, which are regularly updated and improved. The instruments are supplemented by multi-function tips, supply and suction hoses, as well as care and hygiene systems for instrument preparation. Sirona’s instruments are often sold as complete packages in combination with treatment centers. The segment also supplies parts for other divisions, especially Treatment Centers (OEM turbines and tubes) and Dental CAD/CAM Systems.
SEGMENT RESULTS
The following tables reflect the results of the Company’s reportable segments under the Company’s management reporting system. The segment performance measure used to monitor segment performance is gross profit (‘‘Segment Performance Measure’’) excluding the impact of the acquisition of control of the Sirona business by Sirona Holdings Luxco S.C.A. (“Luxco”) - the former controlling shareholder, a Luxembourg-based holding entity owned by funds managed by Madison Dearborn Partners (“MDP”), Beecken Petty O’Keefe, and management of Sirona through a leveraged buyout transaction on June 30, 2005 (the “MDP Transaction”) - and the Exchange. This measure is considered by management to better reflect the performance of each segment as it eliminates the need to allocate centrally-incurred costs and significant purchase accounting impacts that the Company does not believe are representative of the performance of the segments. Furthermore, the Company monitors performance geographically by region. As the Company manages its business on both a product and a geographical basis, U.S. GAAP requires segmental disclosure based on product information.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
RECONCILIATION OF THE RESULTS OF THE SEGMENT PERFORMANCE MEASURE TO THE CONSOLIDATED STATEMENTS OF INCOME
The following table and discussion provide a reconciliation of the total results of operations of the Company’s business segments under management reporting to the consolidated financial statements. The differences shown between management reporting and U.S. GAAP for the periods under report are mainly due to the impact of purchase accounting and certain other corporate items. These effects are not included in the segment performance measure as the Company does not believe these to be representative of the performance of each segment. These adjustments relate primarily to the exclusion of amortization and depreciation related to the step-up to fair value of the intangible and tangible assets as a result of the MDP Transaction (refer to Note 16 for more information).
Inter-segment transactions are based on amounts which management believes are approximate to the amounts of transactions with unrelated third parties.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
CONCENTRATION OF REVENUE
A substantial portion of our revenue comes from two distributors accounting for more than 10% of revenues. Patterson Companies, Inc. (“Patterson”) and Henry Schein, Inc. (“Henry Schein”) accounted for revenues and accounts receivable for the periods under report as shown in the table below. These revenues were earned across all segments, with a significant portion of revenues with Patterson being earned in the CAD/CAM and Imaging segments. No other customer accounted for more than 10% of revenues.
ADDITIONAL SEGMENT ALLOCATIONS
The tables that follow present additional segment allocations in accordance with U.S. GAAP.
Asset Allocations
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Geographic Allocations
The components and development of accumulated other comprehensive income (loss) for the periods under report are as follows:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The allowance for doubtful accounts developed as follows:
The components of net inventories for the periods under report are as follows:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
COMPONENTS AND DEVELOPMENT
The components and development of intangible assets and goodwill for the periods under report are as follows:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
RECONCILIATIONS
The following table provides information reconciling the changes in the value of intangible assets for the current fiscal year:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
ADDITIONAL INFORMATION
On June 30, 2005, Sirona Holdings Luxco S.C.A. (‘‘Luxco’’), a Luxembourg-based holding entity owned by funds managed by Madison Dearborn Partners, Beecken Petty O’Keefe, management and employees of Sirona, obtained control over the Sirona business. The transaction was effected by using new legal entities, Sirona Holding GmbH and its wholly owned subsidiary Sirona Dental Services GmbH, to acquire 100% of the interest in Sirona Dental Systems Beteiligungs- und Verwaltungs GmbH, the former parent of the Sirona business through a leveraged buy-out transaction (the ‘‘MDP Transaction’’). The MDP Transaction was accounted for as a leveraged buyout transaction, in a manner similar to a business combination. Certain members of Sirona management who were deemed to be in the control group held equity interests in Sirona Group prior to and subsequent to the MDP Transaction (‘‘Continuing Shareholders’’). The interests of the Continuing Shareholders have been reflected at the predecessor basis, resulting in 9.15% of each asset and liability acquired being valued at historical cost at June 30, 2005. The remaining 90.85% interest in each asset and liability was recognized at fair value at June 30, 2005, and the excess of purchase price over predecessor basis is included in additional paid-in capital in shareholders’ equity. Intangible assets and goodwill were primarily recorded in the MDP Transaction and the reverse acquisition of Schick on June 30, 2006.
The components of short-term financial liabilities for the periods under report are as follows:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The components of accrued liabilities and deferred income for the periods under report are as follows:
PRODUCT WARRANTY
The following table provides the components of and changes in the product warranty accrual for the periods under report:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The components of long-term financial liabilities for the periods under report are as follows:
SENIOR TERM LOANS
Senior Facilities Agreement
On November 14, 2011, the Company entered into a senior facilities agreement (the “Senior Facilities Agreement”) with Sirona Dental Systems, Inc. and all significant subsidiaries of Sirona as original borrowers and original guarantors. As of November 16, 2011, Sirona fully repaid its obligations under the Prior Senior Facilities Agreement. Initial borrowings under the Senior Facilities Agreement were used to retire the outstanding borrowings under the Company's previous credit facilities.
The Senior Facilities Agreement includes:
(1)a term loan in an aggregate principal amount of $75 million ("Facility A Term Loan") available to Sirona or Sirona Dental, as borrower;
(2)a 120 million Euro revolving credit facility (“Revolving Facility B”) available to Sirona Dental Systems GmbH and Sirona Dental Services GmbH, as initial borrowers; and
(3)a $100 million revolving credit facility (“Revolving Facility C”) available to Sirona or Sirona Dental, as initial borrowers.
The Revolving Facility B is available for borrowing in Euro or any other freely available currency agreed to by the facility agent. The facilities are made available on an unsecured basis. Subject to certain limitations, each European guarantor guarantees the performance of each European borrower, except itself, and each U.S. guarantor guarantees the performance of each U.S. borrower, except itself. There are no cross-border guarantees.
Of the amount borrowed under the Facility A Term Loan, 30% is due on November 16, 2015, and the balance is due on November 16, 2016. The loans under the New Senior Facilities Agreement bear interest of EURIBOR, for Euro-denominated loans, and LIBOR for the other loans, plus an initial margin of 160, 85 and 110 basis points for the Facility A Term Loan, Revolving Facility B and Revolving Facility C, respectively.
The Senior Facilities Agreement contains a margin ratchet. Pursuant to this provision, which applies from March 31, 2012 onwards, the applicable margin varies depending on the Company’s leverage multiple (i.e. the ratio of consolidated total net debt to consolidated adjusted EBITDA as defined in the Senior Facilities Agreement) between 160 basis points and 215 basis points for the Facility A Term Loan, 85 basis points and 140 basis points for the Revolving Facility B, and 110 basis points and 165 basis points for the Revolving Facility C.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The Senior Facilities Agreement contains restrictive covenants that limit Sirona's ability to make loans, to incur additional indebtedness, and to make disposals, subject to agreed-upon exceptions. The Company has agreed to certain financial debt covenants in relation to the financing. The covenants stipulate that the Company must maintain certain ratios in respect of consolidated total net debt to consolidated adjusted EBITDA. If the Company breaches these covenants, the loans will become repayable on demand.
On November 16, 2011, Sirona entered into 5-year payer interest rate swaps to fully hedge its 3-month LIBOR exposure for the Facility A Term Loan. The terms of the swap reflect the term structure of the underlying loan. The effective nominal interest rate is 1.2775% plus the applicable margin. Settlement of the swaps is required on a quarterly basis.
Debt issuance costs of $2.8 million were incurred in relation to the financing in November 2011 and have been capitalized as deferred charges and are amortized using the effective interest method over the term of the loans.
As of September 30, 2015 and September 30, 2014, the Facility A Term Loan was fully drawn to the amount of $75.0 million. The Revolving Facilities B and C remained undrawn as of September 30, 2015 and September 30, 2014.
The table below reflects the contractual maturity dates of the various borrowings as of September 30, 2015:
DEFINED BENEFIT PLANS
In Germany, the Company traditionally had an unfunded defined benefit pension plan whose benefits are based primarily on years of service and wage and salary group. As of January 1, 2001, the Company replaced its unfunded defined benefit pension plan with a new defined contribution plan. All new hires after that date only receive defined contributions to a pension plan based on a percentage of the employee’s eligible compensation. However, due to grandfathering provisions for certain existing employees hired before that date, the Company continues to be obligated to provide pension benefits which are at a minimum equal to benefits that would have been available under the terms of the traditional defined benefit plans (Grandfathered Benefit). The Grandfathered Benefit and contributions to the Company’s pension plan made for those employees after January 1, 2001 are included in the disclosures for defined benefit plans. The Company accounts for the Grandfathered Benefit by recognizing the higher of the defined contribution obligation or the defined benefit obligation for the minimum benefit. As of September 30, 2015 and 2014, contributions made through the defined contribution plan for those employees are adequate to cover the Grandfathered Benefit obligation. Therefore, the Company accounts for that portion of its pension obligation as a fully funded plan with a funded status of zero.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The Company uses an actuarial measurement date of September 30.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
Plan assets consist of insurance policies with a guaranteed minimum return by the insurance company and an excess profit participation feature for a portion of the benefits. Sirona pays the premiums on the insurance policies but does not manage the investment of the funds; the insurance company makes all decisions on investment of funds, including the allocation to asset groups. The fair value of the plan assets such as equity securities, fixed-income investments, and others is based on the cash surrender values reported by the insurance company.
The benefits and contributions expected to be paid in cash in each of the following five years, and in aggregate for the fiscal years thereafter, are as follows:
DEFINED CONTRIBUTION PLANS
The Company also offers defined contribution benefits under the terms of a Section 401(k) plan in the U.S. as well as a number of other foreign plans. For the periods under report, the Company made payments to these plans as follows:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures, for assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and the credit risk of the Company and counterparties to the arrangement.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement. ASC 820 establishes and prioritizes the following three levels of inputs that may be used to measure fair value:
Level Quoted prices in active markets for identical assets or liabilities.
Level Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist of cash, cash equivalents, accounts receivable, accounts payable, foreign currency forward contracts, interest rate swaps, and certain liabilities related to business acquisitions primarily resulting from earn-out features. The carrying amounts of cash, cash equivalents, accounts receivable and accounts payable approximate their respective fair values because of the short maturity and nature of these items. The fair value of the foreign currency forward contracts and interest rate swaps is determined by the estimated cash flows of those contracts and swaps. The fair values of the acquisition-related liabilities are based on discounted valuations of commercial assumptions made by Company management of stipulations governed in the underlying purchase agreements.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
ASSETS/LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis for the periods under report:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
The change in the fair value of the business acquisition-related liabilities was $7.1 million for the period under report, and a total for all acquisitions of $6.0 million income was recorded in other income (expense) in the income statement for the fiscal year ended September 30, 2015.
In the Company’s September 30, 2015 and 2014 Consolidated Balance Sheet, derivative assets and derivative liabilities are classified as prepaid expenses and other current assets and accrued liabilities and deferred income, respectively.
The Company did not elect the fair value option for any other eligible financial instruments.
OPERATING LEASE COMMITMENTS
The Company leases certain buildings (including in New York and Charlotte (USA), Salzburg (Austria), and various other locations across the globe), vehicles, and IT equipment from unrelated third parties. The leases are non-cancellable and have terms of more than one year. Lease expense for the periods under report was as follows:
Future minimum lease payments under non-cancelable operating lease agreements as of September 30, 2015 are as follows:
UNCONDITIONAL PURCHASE COMMITMENTS
As of September 30, 2015, the Company had unconditional purchase commitments of $35.2 million (prior year period $20.0 million), mainly for purchases of raw material and components, which are due over a period of from one to three years.
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015
CONTINGENCIES
The Company may be involved in lawsuits, claims, investigations and proceedings, including patent and commercial matters that arise in the ordinary course of business. At September 30, 2015, there are no such matters pending that the Company expects to be material in relation to its business, consolidated financial position, results of operations or cash flows.
The following is a summary of the Company’s unaudited quarterly operating results for the periods under report:
SIRONA DENTAL SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015