HENRY SCHEIN INC - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly
March 27, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to ____________
Commission File Number:
0-27078
HENRY SCHEIN, INC.
(Exact name of registrant as specified in its charter)
Delaware
11-3136595
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
135 Duryea Road
Melville
,
New York
(Address of principal executive offices)
11747
(Zip Code)
(
631
)
843-5500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.01 per share
HSIC
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
As of April 26, 2021,
there were
140,696,094
HENRY SCHEIN, INC.
INDEX
Page
3
4
5
6
7
8
8
9
10
11
12
15
17
17
19
21
22
23
24
25
26
28
28
31
32
46
47
48
48
48
49
50
See accompanying notes.
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
March 27,
December 26,
2021
2020
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
144,538
$
421,185
Accounts receivable, net of reserves of $
79,936
88,030
1,317,546
1,424,787
Inventories, net
1,626,185
1,512,499
Prepaid expenses and other
482,356
432,944
Total current assets
3,570,625
3,791,415
Property and equipment, net
353,248
342,004
Operating lease right-of-use assets
301,759
288,847
Goodwill
2,587,438
2,504,392
Other intangibles, net
597,619
479,429
Investments and other
369,231
366,445
Total assets
$
7,779,920
$
7,772,532
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
909,575
$
1,005,655
Bank credit lines
67,415
73,366
Current maturities of long-term debt
111,176
109,836
Operating lease liabilities
68,580
64,716
Accrued expenses:
Payroll and related
286,106
295,329
Taxes
146,755
138,671
Other
533,161
595,529
Total current liabilities
2,122,768
2,283,102
Long-term debt
506,461
515,773
Deferred income taxes
42,254
30,065
Operating lease liabilities
248,624
238,727
Other liabilities
410,184
392,781
Total liabilities
3,330,291
3,460,448
Redeemable noncontrolling interests
452,899
327,699
Commitments and contingencies
Stockholders' equity:
Preferred stock, $
0.01
1,000,000
none
-
-
Common stock, $
0.01
480,000,000
141,310,113
142,462,571
1,413
1,425
Additional paid-in capital
-
-
Retained earnings
3,493,060
3,454,831
Accumulated other comprehensive loss
(136,305)
(108,084)
Total Henry Schein, Inc. stockholders' equity
3,358,168
3,348,172
Noncontrolling interests
638,562
636,213
Total stockholders' equity
3,996,730
3,984,385
Total liabilities, redeemable noncontrolling interests and stockholders' equity
$
7,779,920
$
7,772,532
See accompanying notes.
4
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 27,
March 28,
2021
2020
Net sales
$
2,924,961
$
2,428,871
Cost of sales
2,034,110
1,682,857
Gross profit
890,851
746,014
Operating expenses:
Selling, general and administrative
657,992
567,362
Restructuring costs
2,931
4,787
Operating income
229,928
173,865
Other income (expense):
Interest income
1,983
3,190
Interest expense
(6,485)
(7,812)
Other, net
309
(220)
Income from continuing operations before taxes, equity in
earnings of affiliates and noncontrolling interests
225,735
169,023
Income taxes
(56,685)
(37,910)
Equity in earnings of affiliates
5,878
2,734
Net income from continuing operations
174,928
133,847
Loss from discontinued operations
-
(282)
Net Income
174,928
133,565
Less: Net income attributable to noncontrolling interests
(8,931)
(3,304)
Net income attributable to Henry Schein, Inc.
$
165,997
$
130,261
Amounts attributable to Henry Schein, Inc.:
Continuing operations
$
165,997
$
130,543
Discontinued operations
-
(282)
Net income attributable to Henry Schein, Inc.
$
165,997
$
130,261
Earnings per share from continuing operations attributable to Henry Schein, Inc.:
Basic
$
1.17
$
0.91
Diluted
$
1.16
$
0.91
Loss per share from discontinued operations attributable to Henry Schein, Inc.:
Basic
$
-
$
0.00
Diluted
$
-
$
0.00
Earnings per share attributable to Henry Schein, Inc.:
Basic
$
1.17
$
0.91
Diluted
$
1.16
$
0.91
Weighted -average common shares outstanding:
Basic
142,298
142,967
Diluted
143,398
143,095
See accompanying notes.
5
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Ended
March 27,
March 28,
2021
2020
Net income
$
174,928
$
133,565
Other comprehensive loss, net of tax:
Foreign currency translation loss
(38,481)
(89,312)
Unrealized gain from foreign currency hedging activities
3,361
15,143
Unrealized investment loss
(6)
(9)
Pension adjustment gain
807
724
Other comprehensive loss, net of tax
(34,319)
(73,454)
Comprehensive income
140,609
60,111
Comprehensive (income) loss attributable to noncontrolling interests:
Net income
(8,931)
(3,304)
Foreign currency translation loss
6,098
13,179
Comprehensive (income) loss attributable to noncontrolling interests
(2,833)
9,875
Comprehensive income attributable to Henry Schein, Inc.
$
137,776
$
69,986
See accompanying notes.
6
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share and per share data)
(unaudited)
Accumulated
Common Stock
Additional
Other
Total
$.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Equity
Balance, December 26, 2020
142,462,571
$
1,425
$
-
$
3,454,831
$
(108,084)
$
636,213
$
3,984,385
Net income (excluding $
7,053
noncontrolling interests from continuing operations)
-
-
-
165,997
-
1,878
167,875
Foreign currency translation loss (excluding loss of $
6,173
attributable to Redeemable noncontrolling interests)
-
-
-
-
(32,383)
75
(32,308)
Unrealized gain from foreign currency hedging activities,
net of tax of $
1,334
-
-
-
-
3,361
-
3,361
Unrealized investment loss, net of tax benefit of $
2
-
-
-
-
(6)
-
(6)
Pension adjustment gain, net of tax of $
219
-
-
-
-
807
-
807
Dividends paid
-
-
-
-
-
(77)
(77)
Change in fair value of redeemable securities
-
-
(45,520)
-
-
-
(45,520)
Initial noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
473
473
Repurchase and retirement of common stock
(1,325,242)
(13)
(12,250)
(76,396)
-
-
(88,659)
Stock-based compensation expense
281,645
3
12,787
-
-
-
12,790
Settlement of stock-based compensation awards
-
-
787
-
-
-
787
Shares withheld for payroll taxes
(108,861)
(2)
(7,176)
-
-
-
(7,178)
Transfer of charges in excess of capital
-
-
51,372
(51,372)
-
-
-
Balance, March 27, 2021
141,310,113
$
1,413
$
-
$
3,493,060
$
(136,305)
$
638,562
$
3,996,730
Accumulated
Common Stock
Additional
Other
Total
$.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Equity
Balance, December 28, 2019
143,353,459
$
1,434
$
47,768
$
3,116,215
$
(167,373)
$
632,093
$
3,630,137
Cumulative impact of adopting new accounting standards
-
-
-
(412)
-
-
(412)
Net income (excluding $
2,839
noncontrolling interests from continuing operations)
-
-
-
130,261
-
465
130,726
Foreign currency translation loss (excluding loss of $
13,027
attributable to Redeemable noncontrolling interests)
-
-
-
-
(76,133)
(152)
(76,285)
Unrealized gain from foreign currency hedging activities,
net of tax of $
5,090
-
-
-
-
15,143
-
15,143
Unrealized investment loss, net of tax benefit of $
2
-
-
-
-
(9)
-
(9)
Pension adjustment gain, net of tax of $
324
-
-
-
-
724
-
724
Dividends paid
-
-
-
-
-
(499)
(499)
Purchase of noncontrolling interests
-
-
(1,597)
-
-
(692)
(2,289)
Change in fair value of redeemable securities
-
-
13,072
-
-
-
13,072
Repurchase and retirement of common stock
(1,200,000)
(12)
(10,949)
(62,828)
-
-
(73,789)
Stock-based compensation credit
507,410
5
(17,519)
-
-
-
(17,514)
Shares withheld for payroll taxes
(227,509)
(3)
(13,871)
-
-
-
(13,874)
Settlement of stock-based compensation awards
-
-
660
-
-
-
660
Separation of Animal Health business
-
-
1
-
-
-
1
Balance, March 28, 2020
142,433,360
$
1,424
$
17,565
$
3,183,236
$
(227,648)
$
631,215
$
3,605,792
See accompanying notes.
7
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 27,
March 28,
2021
2020
Cash flows from operating activities:
Net income
$
174,928
$
133,565
Loss from discontinued operations
-
(282)
Income from continuing operations
174,928
133,847
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
49,363
46,983
Impairment charge on intangible assets
-
2,000
Stock-based compensation (credit) expense
12,790
(17,514)
Provision for (benefit from) losses on trade and other accounts receivable
(2,696)
14,543
Provision for deferred income taxes
11,171
2,645
Equity in earnings of affiliates
(5,878)
(2,734)
Distributions from equity affiliates
5,139
2,413
Changes in unrecognized tax benefits
2,804
(1,575)
Other
35
(13,924)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
118,795
(1,283)
Inventories
(78,085)
73,038
Other current assets
(45,310)
(22,002)
Accounts payable and accrued expenses
(179,725)
(137,680)
Net cash provided by operating activities from continuing operations
63,331
78,757
Net cash used in operating activities from discontinued operations
-
(282)
Net cash provided by operating activities
63,331
78,475
Cash flows from investing activities:
Purchases of fixed assets
(13,843)
(23,008)
Payments related to equity investments and business
acquisitions, net of cash acquired
(204,027)
(37,947)
Proceeds from sale of equity investment
-
12,000
Repayments from loan to affiliate
139
1,137
Other
(5,513)
(5,787)
Net cash used in investing activities from continuing operations
(223,244)
(53,605)
Net cash used in investing activities from discontinued operations
-
-
Net cash used in investing activities
(223,244)
(53,605)
Cash flows from financing activities:
Net change in bank borrowings
(241)
358,639
Proceeds from issuance of long-term debt
-
250,000
Principal payments for long-term debt
(17,781)
(8,478)
Debt issuance costs
(85)
(58)
Payments for repurchases of common stock
(88,659)
(73,789)
Payments for taxes related to shares withheld for employee taxes
(6,158)
(13,155)
Distributions to noncontrolling shareholders
(6,520)
(3,664)
Acquisitions of noncontrolling interests in subsidiaries
-
(14,925)
Payments to Henry Schein Animal Health Business
-
(2,962)
Net cash provided by (used in) financing activities from continuing operations
(119,444)
491,608
Net cash provided by financing activities from discontinued operations
-
282
Net cash provided by (used in) financing activities
(119,444)
491,890
Effect of exchange rate changes on cash and cash equivalents from continuing operations
2,710
(5,489)
Effect of exchange rate changes on cash and cash equivalents from discontinued operations
-
-
Net change in cash and cash equivalents from continuing operations
(276,647)
511,271
Net change in cash and cash equivalents from discontinued operations
-
-
Cash and cash equivalents, beginning of period
421,185
106,097
Cash and cash equivalents, end of period
$
144,538
$
617,368
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
8
Note 1
Basis of Presentation
Our consolidated financial statements include our accounts, as well as those of our wholly-owned and majority-
owned subsidiaries. Certain prior period amounts have been reclassified to conform to the current period
presentation.
Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnote disclosures required by U.S. GAAP for complete financial statements.
We consolidate a Variable Interest Entity (“VIE”) where we hold a variable interest and are the primary
beneficiary.
The VIE is a trade accounts receivable securitization.
have the power to direct activities that most significantly affect the economic performance and have the obligation
to absorb the majority of the losses or benefits. The results of operations and financial position of this VIE are
included in our consolidated financial statements.
For the consolidated VIE, the trade accounts receivable transferred to the VIE are pledged as collateral to the
related debt.
The creditors have recourse to us for losses on these trade accounts receivable.
and December 26, 2020,
there were no trade accounts receivable that were restricted to settle obligations of this
VIE,
The consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the
consolidated results of operations and financial position for the interim periods presented. All such adjustments are
of a normal recurring nature. These unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes to the consolidated financial statements
contained in our Annual Report on Form 10-K for the year ended December 26, 2020.
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of
operations for the three months ended March 27, 2021 are not necessarily indicative of the results to be expected
for any other interim period or for the year ending December 25, 2021.
In March 2020, the World Health Organization declared the Novel Coronavirus Disease 2019 (“COVID-19”) a
pandemic. The COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains and
created significant volatility and disruption of global financial markets. In response, many countries implemented
business closures and restrictions, stay-at-home and social distancing ordinances and similar measures to combat
the pandemic, which significantly impacted global business and dramatically reduced demand for dental products
and certain medical products in the second quarter of 2020.
Demand increased in the second half of 2020 and has
continued into the first quarter of 2021, resulting in growth over the prior year driven by sales of personal
protective equipment (PPE) and COVID-19 related products.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
9
Our consolidated financial statements reflect estimates and assumptions made by us that affect, among other things,
our goodwill, long-lived asset and definite-lived intangible asset valuation; inventory valuation; equity investment
valuation; assessment of the annual effective tax rate; valuation of deferred income taxes and income tax
contingencies; the allowance for doubtful accounts; hedging activity; vendor rebates; measurement of
compensation cost for certain share-based performance awards and cash bonus plans; and pension plan
assumptions. Due to the significant uncertainty surrounding the future impact of COVID-19, our judgments
regarding estimates and impairments could change in the future. In addition, the impact of COVID-19 had a
material adverse effect on our business, results of operations and cash flows, primarily in the second quarter of
2020. In the latter half of the second quarter of 2020, dental and medical practices began to re-open worldwide, and
continued to do so during the second half of 2020. During the first quarter of 2021, patient traffic levels returned to
levels approaching pre-pandemic levels, although certain regions in the U.S. and internationally are experiencing an
increase in COVID-19 cases. There is an ongoing risk that the COVID-19 pandemic may again have a material
adverse effect on our business, results of operations and cash flows and may result in a material adverse effect on
our financial condition and liquidity. However, the extent of the potential impact cannot be reasonably estimated at
this time.
Note 2 – Critical Accounting Policies, Accounting Pronouncements Adopted and Recently Issued Accounting
Standards
Critical Accounting Policies
There have been no material changes in our critical accounting policies during the three months ended March 27,
2021, as compared to the critical accounting policies described in Item 8 to the consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 26, 2020, except as follows:
Accounting Pronouncements Adopted
In
December 2019
, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2019-12, “Income Taxes” (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-
12”). ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general
principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other
areas of Topic 740 by clarifying and amending existing guidance. Our
adoption
material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options” (Subtopic
470-20) and “Derivatives and Hedging— in Entity’s Own Equity” (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting
for convertible instruments. In addition to eliminating certain accounting models, this ASU includes improvements
to the disclosures for convertible instruments and earnings-per-share (EPS) guidance and amends the guidance for
the derivatives scope exception for contracts in an entity’s own equity. ASU 2020-06 is effective for fiscal years
beginning after December 15, 2021. We do not expect that the requirements of this ASU will have a material
impact on our consolidated financial statements.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
10
Note 3 – Revenue from Contracts with Customers
Revenue is recognized in accordance with policies disclosed in Item 8 of our Annual Report on Form 10-K for
the year ended December 26, 2020.
Disaggregation of Revenue
The following table disaggregates our revenue by segment and geography:
Three Months Ended
March 27, 2021
North America
International
Global
Revenues:
Health care distribution
Dental
$
1,044,783
744,145
1,788,928
Medical
965,127
27,910
993,037
Total health care distribution
2,009,910
772,055
2,781,965
Technology and value-added services
121,937
21,059
142,996
Total revenues
$
2,131,847
$
793,114
$
2,924,961
Three Months Ended
March 28, 2020
North America
International
Global
Revenues:
Health care distribution
Dental
$
888,372
586,704
1,475,076
Medical
778,028
22,660
800,688
Total health care distribution
1,666,400
609,364
2,275,764
Technology and value-added services
113,498
18,467
131,965
Total excluding Corporate TSA revenues
1,779,898
627,831
2,407,729
Corporate TSA revenues
-
21,142
21,142
Total revenues
$
1,779,898
$
648,973
$
2,428,871
(1)
Corporate TSA revenues represents sales of certain animal health products to Covetrus under the transition services agreement
entered into in connection with the Animal Health Spin-off, which ended in December 2020. See
At December 26, 2020, the current portion of contract liabilities of $
71.5
expenses: Other, and $
8.2
During the three months ended March 27, 2021, we recognized in revenue $
32.9
previously deferred at December 26, 2020. At March 27, 2021, the current and non-current portion of contract
liabilities were $
73.7
9.5
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
11
Note 4
Segment Data
We conduct our business through
two
value-added services. These segments offer different products and services to the same customer base.
The health care distribution reportable segment aggregates our global dental and medical operating segments. This
segment distributes consumable products, small equipment, laboratory products, large equipment, equipment repair
services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control
products and vitamins. Our global dental group serves office-based dental practitioners, dental laboratories, schools
and other institutions. Our global medical group serves office-based medical practitioners, ambulatory surgery
centers, other alternate-care settings and other institutions. Our global dental and medical groups serve
practitioners in
31
Our global technology and value-added services group provides software, technology and other value-added
services to health care practitioners. Our technology group offerings include practice management software
systems for dental and medical practitioners. Our value-added practice solutions include financial services on a
non-recourse basis, e-services, practice technology, network and hardware services, as well as continuing education
services for practitioners.
The following tables present information about our reportable and operating segments:
Three Months Ended
March 27,
March 28,
2021
2020
Net Sales:
Health care distribution
(1)
Dental
$
1,788,928
$
1,475,076
Medical
993,037
800,688
Total health care distribution
2,781,965
2,275,764
Technology and value-added services
(2)
142,996
131,965
Total excluding Corporate TSA revenue
2,924,961
2,407,729
Corporate TSA revenues
(3)
-
21,142
Total
$
2,924,961
$
2,428,871
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, personal protective equipment
and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
and financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other
services.
(3)
Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in
connection with the Animal Health Spin-off, which ended in December 2020. See
information.
Three Months Ended
March 27,
March 28,
2020
2020
Operating Income:
Health care distribution
$
197,932
$
148,167
Technology and value-added services
31,996
25,698
Total
$
229,928
$
173,865
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
12
Note 5 – Debt
Bank Credit Lines
Bank credit lines consisted of the following:
March 27,
December 26,
2021
2020
Revolving credit agreement
$
-
$
-
Other short-term bank credit lines
67,415
73,366
Total
$
67,415
$
73,366
Revolving Credit Agreement
On
April 18, 2017
, we entered into a $
750
matures in
April 2022
. The interest rate is based on the USD LIBOR plus a spread based on our leverage ratio at
the end of each financial reporting quarter. We expect most LIBOR rates to be discontinued immediately after
December 31, 2021, while the remaining LIBOR rates will be discontinued immediately after June 30, 2023, which
will require an amendment to our debt agreements to reflect a new reference rate. We do not expect the
discontinuation of LIBOR as a reference rate in our debt agreements to have a material adverse effect on our
financial position or to materially affect our interest expense. The Credit Agreement also requires, among other
things, that we maintain maximum leverage ratios. Additionally, the Credit Agreement contains customary
representations, warranties and affirmative covenants as well as customary negative covenants, subject to
negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and
certain restrictive agreements. As of March 27, 2021, and December 26, 2020, we had no borrowings on this
revolving credit facility. As of March 27, 2021, and December 26, 2020, there were $
9.3
9.5
of letters of credit, respectively, provided to third parties under the credit facility.
On April 17, 2020, we amended the Credit Agreement to, among other things, (i) modify the financial covenant
from being based on total leverage ratio to net leverage ratio, (ii) adjust the pricing grid to reflect the net leverage
ratio calculation, and (iii) increase the maximum maintenance leverage ratio through March 31, 2021.
364-Day Credit Agreement
On March 4, 2021 we repaid the outstanding obligations and terminated the lender commitments under our $
700
million
364
-day credit agreement which was entered into on
April 17, 2020
. This facility was originally scheduled
to mature on
April 16, 2021
.
Other Short-Term Credit Lines
As of March 27, 2021 and December 26, 2020, we had various other short-term bank credit lines available, of
which $
67.4
73.4
2020, borrowings under all of these credit lines had a weighted average interest rate of
4.52
% and
4.14
%,
respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
13
Long-term debt
Long-term debt consisted of the following:
March 27,
December 26,
2021
2020
Private placement facilities
$
606,355
$
613,498
Note payable
-
1,554
Various collateralized and uncollateralized loans payable with interest,
in varying installments through
2023
ranging from
2.45
% to
4.27
% at March 27, 2021 and
ranging from
2.62
% to
4.27
% at December 26, 2020
5,969
4,596
Finance lease obligations (see Note 7)
5,313
5,961
Total
617,637
625,609
Less current maturities
(111,176)
(109,836)
Total long-term debt
$
506,461
$
515,773
Private Placement Facilities
Our private placement facilities, with
three
1
available on an uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from
time to time through
June 23, 2023
. The facilities allow us to issue senior promissory notes to the lenders at a fixed
rate based on an agreed upon spread over applicable treasury notes at the time of issuance. The term of each
possible issuance will be selected by us and can range from
five
15
12
years). The proceeds of any issuances under the facilities will be used for general corporate purposes, including
working capital and capital expenditures, to refinance existing indebtedness and/or to fund potential acquisitions.
The agreements provide, among other things, that we maintain certain maximum leverage ratios, and contain
restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal of assets and certain changes in
ownership. These facilities contain make-whole provisions in the event that we pay off the facilities prior to the
applicable due dates.
On March 5, 2021, we amended the private placement facilities to, among other things, (a) modify the financial
covenant from being based on a net leverage ratio to a total leverage ratio and (b) restore the maximum
maintenance total leverage ratio to 3.25x and remove the 1.00% interest rate increase triggered if the net leverage
ratio were to exceed 3.0x.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
14
The components of our private placement facility borrowings as of March 27, 2021 are presented in the following
table (in thousands):
Amount of
Borrowing
Borrowing
Date of Borrowing
Outstanding
Rate
Due Date
January 20, 2012
$
7,143
3.09
%
January 20, 2022
January 20, 2012
50,000
3.45
January 20, 2024
December 24, 2012
50,000
3.00
December 24, 2024
June 2, 2014
100,000
3.19
June 2, 2021
June 16, 2017
100,000
3.42
June 16, 2027
September 15, 2017
100,000
3.52
September 15, 2029
January 2, 2018
100,000
3.32
January 2, 2028
September 2, 2020
100,000
2.35
September 2, 2030
Less: Deferred debt issuance costs
(788)
$
606,355
(1)
Annual
7.1
January 20, 2016
.
U.S. Trade Accounts Receivable Securitization
We have a facility agreement with a bank, as agent, based on the securitization of our U.S. trade accounts
receivable that is structured as an asset-backed securitization program with pricing committed for up to
three years
.
Our current facility, which has a purchase limit of $
350
April 29, 2022
. On
June 22, 2020, the expiration date for this facility was extended to
June 12, 2023
covenant levels for 2020. As of March 27, 2021 and December 26, 2020, there were
no
under this securitization facility. At March 27, 2021, the interest rate on borrowings under this facility was based
on the asset-backed commercial paper rate of
0.18
% plus
0.95
%, for a combined rate of
1.13
%. At December 26,
2020, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of
0.22
% plus
0.95
%, for a combined rate of
1.17
%.
If our accounts receivable collection pattern changes due to customers either paying late or not making payments,
our ability to borrow under this facility may be reduced.
We are required to pay a commitment fee of
25
45
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
15
Note 6 – Leases
Leases
We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles,
and certain equipment.
one year
15 years
, some of
which
may include options to extend the leases for up to 10 years
. The components of lease expense were as
follows:
Three Months Ended
March 27,
March 28,
2021
2020
Operating lease cost:
(1)
$
23,106
$
22,079
Finance lease cost:
Amortization of right-of-use assets
604
432
Interest on lease liabilities
26
37
Total finance lease cost
$
630
$
469
(1)
Includes variable lease expenses.
Supplemental balance sheet information related to leases is as follows:
March 27,
December 26,
2021
2020
Operating Leases:
Operating lease right-of-use assets
$
301,759
$
288,847
Current operating lease liabilities
68,580
64,716
Non-current operating lease liabilities
248,624
238,727
Total operating lease liabilities
$
317,204
$
303,443
Finance Leases:
Property and equipment, at cost
$
10,388
$
10,683
Accumulated depreciation
(4,607)
(4,277)
Property and equipment, net of accumulated depreciation
$
5,781
$
6,406
Current maturities of long-term debt
$
2,256
$
2,420
Long-term debt
3,057
3,541
Total finance lease liabilities
$
5,313
$
5,961
Weighted Average Remaining Lease Term in Years:
Operating leases
7.4
7.5
Finance leases
4.2
4.3
Weighted Average Discount Rate:
Operating leases
2.6
%
2.8
%
Finance leases
1.9
%
1.9
%
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
16
Supplemental cash flow information related to leases is as follows:
Three Months Ended
March 27,
March 28,
2021
2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
19,150
$
19,146
Operating cash flows for finance leases
23
27
Financing cash flows for finance leases
625
495
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
32,388
$
8,065
Finance leases
99
1,222
Maturities of lease liabilities are as follows:
March 27, 2021
Operating
Finance
Leases
Leases
2021
$
57,860
$
1,821
2022
64,241
1,545
2023
46,827
643
2024
32,991
329
2025
29,515
294
Thereafter
117,566
883
Total future lease payments
349,000
5,515
Less: imputed interest
(31,796)
(202)
Total
$
317,204
$
5,313
As of March 27, 2021, we have additional operating leases with total lease payments of $
11.1
buildings
and vehicles
with lease terms of
two years
10 years
.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
17
Note 7 – Redeemable Noncontrolling Interests
Some minority stockholders in certain of our subsidiaries have the right, at certain times, to require us to acquire
their ownership interest in those entities at fair value. Accounting Standards Codification (“ASC”) Topic 480-10 is
applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the
outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put
option contained in contractual agreements. The components of the change in the redeemable noncontrolling
interests for the three months ended March 27, 2021 and the year ended December 26, 2020 are presented in the
following table:
March 27,
December 26,
2021
2020
Balance, beginning of period
$
327,699
$
287,258
Decrease in redeemable noncontrolling interests due to
redemptions
-
(17,241)
Increase in redeemable noncontrolling interests due to business
acquisitions
85,037
28,387
Net income attributable to redeemable noncontrolling interests
7,053
13,363
Dividends declared
(6,237)
(12,631)
Effect of foreign currency translation loss attributable to
redeemable noncontrolling interests
(6,173)
(4,279)
Change in fair value of redeemable securities
45,520
32,842
Balance, end of period
$
452,899
$
327,699
Note 8 – Comprehensive Income
Comprehensive income includes certain gains and losses that, under U.S. GAAP, are excluded from net income as
such amounts are recorded directly as an adjustment to stockholders’ equity.
The following table summarizes our Accumulated other comprehensive loss, net of applicable taxes as of:
March 27,
December 26,
2021
2020
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment
$
(30,790)
$
(24,617)
Attributable to noncontrolling interests:
Foreign currency translation adjustment
$
310
$
235
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
(108,948)
$
(76,565)
Unrealized loss from foreign currency hedging activities
(8,127)
(11,488)
Unrealized investment gain (loss)
(5)
1
Pension adjustment loss
(19,225)
(20,032)
Accumulated other comprehensive loss
$
(136,305)
$
(108,084)
Total Accumulated other comprehensive loss
$
(166,785)
$
(132,466)
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
18
The following table summarizes the components of comprehensive income, net of applicable taxes as follows:
Three Months Ended
March 27,
March 28,
2021
2020
Net income
$
174,928
$
133,565
Foreign currency translation loss
(38,481)
(89,312)
Tax effect
-
-
Foreign currency translation loss
(38,481)
(89,312)
Unrealized gain from foreign currency hedging activities
4,695
20,233
Tax effect
(1,334)
(5,090)
Unrealized gain from foreign currency hedging activities
3,361
15,143
Unrealized investment loss
(8)
(11)
Tax effect
2
2
Unrealized investment loss
(6)
(9)
Pension adjustment gain
1,026
1,048
Tax effect
(219)
(324)
Pension adjustment gain
807
724
Comprehensive income
$
140,609
$
60,111
Our financial statements are denominated in the U.S. Dollar currency. Fluctuations in the value of foreign
currencies as compared to the U.S. Dollar may have a significant impact on our comprehensive income. The
foreign currency translation loss during the three months ended March 27, 2021 and three months ended March 28,
2020 was primarily impacted by changes in foreign currency exchange rates of the Euro, British Pound, Brazilian
Real, Australian Dollar, and Canadian Dollar.
The following table summarizes our total comprehensive income, net of applicable taxes, as follows:
Three Months Ended
March 27,
March 28,
2021
2020
Comprehensive income attributable to
Henry Schein, Inc.
$
137,776
$
69,986
Comprehensive income attributable to
noncontrolling interests
1,953
313
Comprehensive income (loss) attributable to
Redeemable noncontrolling interests
880
(10,188)
Comprehensive income
$
140,609
$
60,111
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
19
Note 9 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value hierarchy distinguishes between
(1) market participant assumptions developed based on market data obtained from independent sources (observable
inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described as follows:
• Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the
measurement date.
• Level 2— Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted
prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
• Level 3— Inputs that are unobservable for the asset or liability.
The following section describes the fair values of our financial instruments and the methodologies that we used to
measure their fair values.
Investments and notes receivable
There are no quoted market prices available for investments in unconsolidated affiliates and notes receivable;
however, we believe the carrying amounts are a reasonable estimate of fair value based on the interest rates in the
applicable markets.
Debt
The fair value of our debt (including bank credit lines) is classified as Level 3 within the fair value hierarchy as of
March 27, 2021 and December 26, 2020 was estimated at $
685.1
699.0
that we considered when estimating the fair value of our debt include market conditions, such as interest rates and
credit spreads.
Derivative contracts
Derivative contracts are valued using quoted market prices and significant other observable and unobservable
inputs. We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchange
rates. Our derivative instruments primarily include foreign currency forward agreements related to certain
intercompany loans, certain forecasted inventory purchase commitments with foreign suppliers, foreign currency
forward contracts to hedge a portion of our euro-denominated foreign operations which are designated as net
investment hedges and a total return swap for the purpose of economically hedging our unfunded non-qualified
supplemental retirement plan and our deferred compensation plan.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
20
The fair values for the majority of our foreign currency derivative contracts are obtained by comparing our contract
rate to a published forward price of the underlying market rates, which is based on market rates for comparable
transactions and are classified within Level 2 of the fair value hierarchy. See
Redeemable noncontrolling interests
The values for Redeemable noncontrolling interests are classified within Level 3 of the fair value hierarchy and are
based on recent transactions and/or implied multiples of earnings. See
The following table presents our assets and liabilities that are measured and recognized at fair value on a recurring
basis classified under the appropriate level of the fair value hierarchy as of March 27, 2021 and December 26,
2020:
March 27, 2021
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts
$
-
$
1,856
$
-
$
1,856
Total return swaps
-
1,458
-
1,458
Total assets
$
-
$
3,314
$
-
$
3,314
Liabilities:
Derivative contracts
$
-
$
5,353
$
-
$
5,353
Total liabilities
$
-
$
5,353
$
-
$
5,353
Redeemable noncontrolling interests
$
-
$
-
$
452,899
$
452,899
December 26, 2020
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts
$
-
$
1,868
$
-
$
1,868
Total return swaps
-
1,565
-
1,565
Total assets
$
-
$
3,433
$
-
$
3,433
Liabilities:
Derivative contracts
$
-
$
11,765
$
-
$
11,765
Total liabilities
$
-
$
11,765
$
-
$
11,765
Redeemable noncontrolling interests
$
-
$
-
$
327,699
$
327,699
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
21
Note 10
Business Acquisitions
Acquisitions
We completed acquisitions during the three months ended March 27, 2021 which were immaterial to our financial
statements. The acquisitions that we completed included companies within our Health care distribution and
Technology and value-added services segments. Our initial ownership interest acquired ranges between
approximately
65
% to
100
%.
Acquisitions within our Health care distribution segment include companies that
specialize in distribution of dental products, a provider of home medical supplies, and product kitting and sterile
packaging.
marketing and website solutions, practice transition services, and business analytics and intelligence software.
The following table summarizes the estimated fair value, as of the date of acquisition, of consideration paid and net
assets acquired for acquisitions during the three months ended March 27, 2021. While we use our best estimates
and assumptions to accurately value those assets acquired and liabilities assumed at the acquisition date as well as
contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a
result, during the measurement period we may record adjustments to the assets acquired and liabilities assumed
with the corresponding offset to goodwill within our consolidated balance sheets.
Acquisition consideration:
Cash
$
213.8
Redeemable noncontrolling interests
75.2
Total consideration
289.0
Identifiable assets acquired and liabilities assumed:
Current assets
86.9
Intangible assets
151.4
Other noncurrent assets
19.0
Current liabilities
(31.8)
Deferred income taxes
(9.4)
Other noncurrent liabilities
(22.4)
Total identifiable net assets
193.7
Goodwill
95.3
Total net assets acquired
$
289.0
The major classes of assets and liabilities that we generally allocate purchase price to, excluding goodwill, include
identifiable intangible assets (i.e., trademarks and trade names, customer relationships and lists, non-compete
agreements and product development), property, plant and equipment, deferred taxes and other current and long-
term assets and liabilities. The estimated fair value of identifiable intangible assets is based on critical estimates,
judgments and assumptions derived from analysis of market conditions, discount rates, discounted cash flows,
customer retention rates and estimated useful lives.
Some prior owners of acquired subsidiaries are eligible to receive additional purchase price cash consideration if
certain financial targets are met. We have accrued liabilities for the estimated fair value of additional purchase
price consideration at the time of the acquisition. Any adjustments to these accrual amounts are recorded in our
consolidated statements of income. For the three months ended March 27, 2021 and March 28, 2020, there were no
material adjustments recorded in our consolidated statements of income relating to changes in estimated contingent
purchase price liabilities.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
22
Note 11 – Plans of Restructuring
On November 20, 2019, we committed to a contemplated initiative, intended to mitigate stranded costs associated
with the Animal Health Spin-off and to rationalize operations and to provide expense efficiencies. These activities
were originally expected to be completed by the end of 2020. In light of the changes to the business environment
brought on by the COVID-19 pandemic, we extended such activities to the end of 2021.
During the three months ended March 27, 2021 and March 28, 2020, we recorded restructuring costs of $
2.9
million and $
4.8
benefits and facility exit costs. The costs associated with these restructurings are included in a separate line item,
“Restructuring costs” within our consolidated statements of income.
We are currently unable in good faith to make a determination of an estimate of the amount or range of
amounts expected to be incurred in connection with these activities in 2021, both with respect to each major type of
cost associated therewith and with respect to the total cost, or an estimate of the amount or range of amounts that
will result in future cash expenditures.
The following table shows the net amounts expensed and paid for restructuring costs that were incurred during the
three months ended March 27, 2021 and during our 2020 fiscal year and the remaining accrued balance of
restructuring costs as of March 27, 2021, which is included in Accrued expenses: Other within our consolidated
balance sheets:
Facility
Severance
Closing
Costs
Costs
Other
Total
Balance, December 28, 2019
$
12,911
$
826
$
73
$
13,810
Provision
25,855
5,878
360
32,093
Payments and other adjustments
(26,152)
(6,309)
(329)
(32,790)
Balance, December 26, 2020
$
12,614
$
395
$
104
$
13,113
Provision
2,848
(151)
234
2,931
Payments and other adjustments
(8,623)
156
(243)
(8,710)
Balance, March 27, 2021
$
6,839
$
400
$
95
$
7,334
The following table shows, by reportable segment, the net amounts expensed and paid for restructuring costs that
were incurred during the three months ended March 27, 2021 and during our 2020 fiscal year and the remaining
accrued balance of restructuring costs as of March 27, 2021:
Technology and
Health Care
Value-Added
Distribution
Services
Total
Balance, December 28, 2019
$
13,373
$
437
$
13,810
Provision
30,935
1,158
32,093
Payments and other adjustments
(31,484)
(1,306)
(32,790)
Balance, December 26, 2020
$
12,824
$
289
$
13,113
Provision
2,803
128
2,931
Payments and other adjustments
(8,531)
(179)
(8,710)
Balance, March 27, 2021
$
7,096
$
238
$
7,334
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
23
Note 12
Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to Henry Schein, Inc. by the weighted-
average number of common shares outstanding for the period. Our diluted earnings per share is computed similarly
to basic earnings per share, except that it reflects the effect of common shares issuable for presently unvested
restricted stock and restricted stock units and upon exercise of stock options using the treasury stock method in
periods in which they have a dilutive effect.
A reconciliation of shares used in calculating earnings per basic and diluted share follows:
Three Months Ended
March 27,
March 28,
2021
2020
Basic
142,298
142,967
Effect of dilutive securities:
Stock options, restricted stock and restricted stock units
1,100
128
Diluted
143,398
143,095
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
24
Note 13 – Income Taxes
For the three months ended March 27, 2021 our effective tax rate was
25.1
% compared to
22.4
% for the prior year
period. The difference between our effective tax rate and the federal statutory tax rate for the three months ended
March 27, 2021 was primarily due to state and foreign income taxes and interest expense. The difference between
our effective tax rate and the federal statutory tax rate for the three months ended March 28, 2020 primarily relates
to state and foreign income taxes and interest expense as well as tax charges and credits associated with legal entity
reorganizations outside the United States.
The American Rescue Plan Act of 2021 (“ARPA”) was signed into law on March 11, 2021. The ARPA included a
corporate income tax provision to further limit the deductibility of compensation under Section 162(m) for tax
years starting after December 31, 2026. Section 162(m) generally limits the deductibility of compensation paid to
covered employees of publicly held corporations. Covered employees include the CEO, CFO and the three highest
paid officers. The ARPA expands the group of covered employees to additionally include five of the highest paid
employees.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in
response to the COVID-19 pandemic. The CARES Act includes, but is not limited to, certain income tax
provisions that modify the Section 163(j) limitation of business interest and net operating loss carryover and
carryback rules. We have analyzed the income tax provisions of the CARES Act and have accounted for the
impact in the three months ended March 28, 2020, which did not have a material impact on our consolidated
financial statements. There are certain other non-income tax benefits available to us under the CARES Act that
require further clarification or interpretation that may affect our consolidated financial statements in the future.
The total amount of unrecognized tax benefits, which are included in “Other liabilities” within our consolidated
balance sheets, as of March 27, 2021 was approximately $
89.2
73.0
effective tax rate if recognized. It is possible that the amount of unrecognized tax benefits will change in the next
12 months, which may result in a material impact on our consolidated statements of income.
The tax years subject to examination by major tax jurisdictions include years 2012, 2013, 2017 and forward by the
U.S Internal Revenue Service (the “IRS”) as well as the years 2008 and forward for certain states and certain
foreign jurisdictions. All tax returns audited by the IRS are officially closed through 2011 and 2014 through
2016. We are currently under audit with the IRS for the years 2012 and 2013 and all fieldwork has been completed.
We reached a settlement with the U.S. Competent Authority to resolve certain transfer pricing issues related to
2012 and 2013 in the quarter ended December 28, 2019. For all remaining outstanding issues for 2012 and 2013,
we have provided all necessary documentation to the Appellate Division to date and are waiting for responses. We
do not believe the final resolution will have a material impact to our consolidated financial statements. During the
quarter ended September 26, 2020 we finalized negotiations with the Advance Pricing Division and reached an
agreement on an appropriate transfer pricing methodology for the years 2014-2025. The objective of this resolution
was to mitigate future transfer pricing audit adjustments. In the fourth quarter of 2020, we reached a favorable
resolution with the IRS relating to select audit years.
The total amounts of interest and penalties are classified as a component of the provision for income taxes. The
amount of tax interest expense was approximately $
0.5
$
0.3
liabilities”, and was approximately $
14.6
14.0
No
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
25
Note 14
Derivatives and Hedging Activities
We are exposed to market risks as well as changes in foreign currency exchange rates as measured against the U.S.
dollar and each other, and changes to the credit risk of the derivative counterparties. We attempt to minimize these
risks by primarily using foreign currency forward contracts and by maintaining counter-party credit limits. These
hedging activities provide only limited protection against currency exchange and credit risks. Factors that could
influence the effectiveness of our hedging programs include currency markets and availability of hedging
instruments and liquidity of the credit markets. All foreign currency forward contracts that we enter into are
components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated
currency exposure. We do not enter into such contracts for speculative purposes and we manage our credit risks by
diversifying our counterparties, maintaining a strong balance sheet and having multiple sources of capital.
During 2019
we entered into foreign currency forward contracts to hedge a portion of our euro-denominated
foreign operations which are designated as net investment hedges. These net investment hedges offset the change
in the U.S dollar value of our investment in certain euro-functional currency subsidiaries due to fluctuating foreign
exchange rates.
Accumulated other
comprehensive loss
effectiveness are included in interest expense within our consolidated statements of income. The aggregate
notional value of this net investment hedge, which matures on
November 16, 2023
, is approximately €
200
During the three months ended March 27, 2021 and March 28, 2020, we recognized approximately $
1.1
1.2
million, respectively, of interest savings as a result of this net investment hedge.
On
March 20, 2020
,
we entered into a total return swap for the purpose of economically hedging our unfunded non-
qualified supplemental retirement plan (“SERP”) and our deferred compensation plan (“DCP”). This swap will
offset changes in our SERP and DCP liabilities.
plans was $
43.4
77.5
million. At March 27, 2021, the financing blended rate for this swap was based on LIBOR of
0.12
% plus
0.50
%,
for a combined rate of
0.62
%. For the three months ended March 27, 2021, we have recorded a gain, within the
selling, general and administrative line item in our consolidated statement of income, of approximately $
2.7
million, net of transaction costs, related to this undesignated swap. This swap is expected to be renewed on an
annual basis after its current expiration date of March 29, 2022, and is expected to result in a neutral impact to our
results of operations.
Fluctuations in the value of certain foreign currencies as compared to the U.S. dollar may positively or negatively
affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S.
dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward
contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase
short-term (i.e., generally
18
exchange risks associated with intercompany loans due from our international subsidiaries and the payment of
merchandise purchases to our foreign suppliers. We do not hedge the translation of foreign currency profits into
U.S. dollars, as we regard this as an accounting exposure, not an economic exposure. Our hedging activities have
historically not had a material impact on our consolidated financial statements. Accordingly, additional disclosures
related to derivatives and hedging activities required by ASC 815 have been omitted.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
26
Note 15 – Stock-Based Compensation
Our accompanying consolidated statements of income reflect pre-tax share-based compensation expense of $
12.8
million ($
9.6
credit of $
17.5
13.6
17.5
credit for share-based compensation during the three months ended March 28, 2020 reflected our reduced estimate
in expected achievement of performance targets resulting from the impact of COVID-19.
Our accompanying consolidated statements of cash flows present our stock-based compensation expense (credit) as
an adjustment to reconcile net income to net cash provided by operating activities for all periods presented. In the
accompanying consolidated statements of cash flows, there were
no
excess of recognized compensation as a cash inflow from financing activities for the three months ended March 27,
2021 and March 28, 2020, respectively.
Stock-based compensation represents the cost related to stock-based awards granted to employees and non-
employee directors. We measure stock-based compensation at the grant date, based on the estimated fair value of
the award, and recognize the cost (net of estimated forfeitures) as compensation expense over the requisite service
period. Our stock-based compensation expense is reflected in selling, general and administrative expenses in our
consolidated statements of income.
Stock-based awards are provided to certain employees and non-employee directors under the terms of our 2020
Stock Incentive Plan and our 2015 Non-Employee Director Stock Incentive Plan (together, the “Plans”). The Plans
are administered by the Compensation Committee of the Board of Directors (the “Compensation
Committee”). Historically, equity-based awards have been granted solely in the form of restricted stock units
(“RSUs”). However, in March 2021, our equity-based awards were granted in the form of RSUs and non-qualified
stock options.
Grants of RSUs are stock-based awards granted to recipients with specified vesting provisions. In the case of
RSUs, common stock is generally delivered on or following satisfaction of vesting conditions. We issue RSUs that
vest solely based on the recipient’s continued service over time (primarily four-year cliff vesting, except for grants
made under the 2015 Non-Employee Director Stock Incentive Plan, which are primarily
12
-month cliff vesting),
and RSUs that vest based on our achieving specified performance measurements and the recipient’s continued
service over time (primarily three-year cliff vesting). For these RSUs, we recognize the cost as compensation
expense on a straight-line basis.
During the three months ended March 27, 2021, as a result of the continuing economic risk and uncertainty
resulting from the ongoing COVID-19 pandemic, the Compensation Committee decided to adjust the form of
awards granted under our 2021 long-term incentive program for our 2021 fiscal year in a manner that focuses on
our long-term value by granting stock options and time-based RSUs rather than performance-based RSUs. Stock
options are awards that allow the recipient to purchase shares of our common stock at a fixed price following
vesting of the stock options. Stock options are granted at an exercise price equal to our closing stock price on the
date of grant. Stock options issued during 2021 vest
one-third
subject to the terms and conditions of the Plans, are fully vested
three years
contractual term of
ten years
Compensation expense for these stock options is recognized using a graded vesting method. We estimate the fair
value of stock options using the Black-Scholes valuation model.
In addition to equity-based awards under the 2021 long-term incentive program under the 2020 Stock Incentive
Plan, the Compensation Committee granted a Special Pandemic Recognition Award under the 2020 Stock Incentive
Plan to recipients of performance-based RSUs under the 2018 long-term incentive program. These awards will vest
50
% on the first anniversary of the grant date and
50
% on the second anniversary of the grant date and are recorded
as compensation expense using a graded vesting method.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
27
With respect to time-based RSUs, we estimate the fair value on the date of grant based on our closing stock price at
time of grant. With respect to performance-based RSUs, the number of shares that ultimately vest and are received
by the recipient is based upon our performance as measured against specified targets over a specified period, as
determined by the Compensation Committee. Although there is no guarantee that performance targets will be
achieved, we estimate the fair value of performance-based RSUs based on our closing stock price at time of grant.
The Plans provide for adjustments to the performance-based restricted stock units targets for significant events,
including, without limitation, acquisitions, divestitures, new business ventures, certain capital transactions
(including share repurchases), restructuring costs, if any, certain litigation settlements or payments, if any, changes
in accounting principles or in applicable laws or regulations, changes in income tax rates in certain markets and
foreign exchange fluctuations. Over the performance period, the number of shares of common stock that will
ultimately vest and be issued and the related compensation expense is adjusted upward or downward based upon
our estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and
the related compensation cost recognized as an expense will be based on our actual performance metrics as defined
under the Plans.
Total unrecognized compensation cost related to unvested awards as of March 27, 2021 was $
110.0
is expected to be recognized over a weighted-average period of approximately
2.8
The following weighted-average assumptions were used in determining the fair values of stock options using the
Black-Scholes valuation model:
Expected dividend yield
0.0
%
Expected stock price volatility
25.80
%
Risk-free interest rate
0.94
%
Expected life of options (years)
6.00
We have not declared cash dividends on our stock in the past and we do not anticipate declaring cash dividends in
the foreseeable future. The expected stock price volatility is based on implied volatilities from traded options on our
stock, historical volatility of our stock, and other factors. The risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant in conjunction with considering the expected life of options. The
6
-year
expected life of the options was determined using the simplified method for estimating the expected term as
permitted under SAB Topic 14. Estimates of fair value are not intended to predict actual future events or the value
ultimately realized by recipients of stock options, and subsequent events are not indicative of the reasonableness of
the original estimates of fair value made by us.
The following table summarizes stock option activity under the Plans during the three months ended March 27,
2021:
Weighted
Average
Weighted
Remaining
Average
Contractual
Aggregate
Exercise
Life in
Shares
Price
Years
Outstanding at beginning of period
-
$
-
Granted
788
62.71
Forfeited
-
-
Outstanding at end of period
788
$
62.71
9.9
$
4,152
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
28
The following tables summarize the activity of our unvested RSUs for the three months ended March 27, 2021:
Time-Based Restricted Stock Units
Weighted Average
Grant Date Fair
Intrinsic Value
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period
1,459
$
57.61
Granted
797
62.75
Vested
(256)
66.92
Forfeited
(7)
59.59
Outstanding at end of period
1,993
$
58.46
$
67.98
Performance-Based Restricted Stock Units
Weighted Average
Grant Date Fair
Intrinsic Value
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period
136
$
53.52
Granted
189
58.35
Vested
(78)
51.92
Forfeited
(4)
59.05
Outstanding at end of period
243
$
59.21
$
67.98
Note 16 – Supplemental Cash Flow Information
Cash paid for interest and income taxes was:
Three Months Ended
March 27,
March 28,
2021
2020
Interest
$
7,763
$
9,951
Income taxes
13,425
12,613
During the three months ended March 27, 2021 and March 28, 2020, we had a $
4.7
20.2
non-cash net unrealized gains related to foreign currency hedging activities, respectively.
Note 17 – Legal Proceedings
On
August 31, 2012
,
Archer and White Sales, Inc.
Henry Schein, Inc. as well
as Danaher Corporation and its subsidiaries Instrumentarium Dental, Inc., Dental Equipment, LLC, Kavo Dental
Technologies, LLC and Dental Imaging Technologies Corporation (collectively, the “Danaher Defendants”)
U.S. District Court for the Eastern District of Texas, Civil Action No. 2:12-CV-00572-JRG, styled as an antitrust
action under Section 1 of the Sherman Act, and the Texas Free Enterprise Antitrust Act.
Archer alleges a
conspiracy between Henry Schein, an unnamed company and the Danaher Defendants to terminate or limit
Archer’s distribution rights.
August 1, 2017
,
Archer
Patterson Companies,
Inc. (“Patterson”) and Benco Dental Supply Co. (“Benco”) as defendants
, and
alleging that Henry Schein,
Patterson, Benco and Burkhart Dental Supply conspired to fix prices and refused to compete with each other for
sales of dental equipment to dental professionals and agreed to enlist their common suppliers, the Danaher
Defendants, to join a price-fixing conspiracy and boycott by reducing the distribution territory of, and eventually
terminating, their price-cutting competing distributor Archer.
trial, to be trebled with interest and costs, including attorneys’ fees, jointly and severally, as well as injunctive
relief. On
October 30, 2017
,
Archer
add additional allegations that it believes
support its claims. The named parties and causes of action are the same as the August 1, 2017 amended complaint.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
29
On October 1, 2012, we filed a motion for an order: (i) compelling Archer to arbitrate its claims against us; (2)
staying all proceedings pending arbitration; and (3) joining the Danaher Defendants’ motion to arbitrate and stay.
On May 28, 2013, the Magistrate Judge granted the motions to arbitrate and stayed proceedings pending arbitration.
On June 10, 2013, Archer moved for reconsideration before the District Court judge. On December 7, 2016, the
District Court Judge granted Archer’s motion for reconsideration and lifted the stay. Defendants appealed the
District Court’s order. On December 21, 2017, the U.S. Court of Appeals for the Fifth Circuit affirmed the District
Court’s order denying the motions to compel arbitration. On June 25, 2018, the Supreme Court of the United States
granted defendants’ petition for writ of certiorari. On October 29, 2018, the Supreme Court heard oral arguments.
On January 8, 2019, the Supreme Court issued its published decision vacating the judgment of the Fifth Circuit and
remanding the case to the Fifth Circuit for further proceedings consistent with the Supreme Court’s opinion. On
April 2, 2019, the District Court stayed the proceeding in the trial court pending resolution by the Fifth Circuit. The
Fifth Circuit heard oral argument on May 1, 2019 on whether the case should be arbitrated. The Fifth Circuit
issued its opinion on August 14, 2019 affirming the District Court’s order denying defendants’ motions to compel
arbitration. Defendants filed a petition for rehearing en banc before the Fifth Circuit. The Fifth Circuit denied that
petition. On October 1, 2019, the District Court set the case for trial on February 3, 2020, which was subsequently
moved to January 29, 2020. On January 24, 2020 the Supreme Court granted our motion to stay the District Court
proceedings, pending the disposition of our petition for writ of certiorari, which was filed on January 31, 2020.
Archer conditionally cross petitioned for certiorari on an arbitration issue on March 2, 2020. On June 15, 2020, the
Supreme Court granted our petition for writ of certiorari, and denied Archer’s conditional petition for certiorari, and
thus the District Court proceedings remained stayed. After briefing from the parties and several amici, the case was
argued before the Supreme Court on December 8, 2020. On January 25, 2021, the Supreme Court dismissed the
writ of certiorari as improvidently granted. That action dissolved the stay the Supreme Court had previously
granted. The U.S. District Court for the Eastern District of Texas then set the case for trial, and jury selection was
scheduled to begin on June 1, 2021. Patterson and the Danaher Defendants settled with Archer and they have been
dismissed from the case with prejudice. Benco has agreed to settle the case with the plaintiff. Henry Schein and the
plaintiff have agreed to settle this matter for an amount that is not material to the Company and to dismiss the case
with prejudice.
On
May 29, 2018
, an amended complaint was filed in the MultiDistrict Litigation (“MDL”) proceeding In Re
National Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804) in an action entitled
The County of
Summit, Ohio et al.
Action”), in the U.S. District Court for the Northern District of Ohio,
adding Henry Schein, Inc., Henry Schein
Medical Systems, Inc. and others as defendants
.
Summit County alleged that manufacturers of prescription opioid
drugs engaged in a false advertising campaign to expand the market for such drugs and their own market share and
that the entities in the supply chain (including Henry Schein, Inc. and Henry Schein Medical Systems, Inc.) reaped
financial rewards by refusing or otherwise failing to monitor appropriately and restrict the improper distribution of
those drugs.
On October 29, 2019, the Company was dismissed with prejudice from this lawsuit. Henry Schein,
working with Summit County, donated $1 million to a foundation and paid $250,000 of Summit County’s
expenses, as described in our prior filings with the SEC.
In addition to the County of Summit Action,
Henry Schein and/or one or more of its affiliated companies
named as a defendant in multiple lawsuits (currently less than one-hundred and fifty (
150
)), which
allege claims
similar to those alleged in the County of Summit Action
. These actions consist of some that have been consolidated
within the MDL and are currently abated for discovery purposes, and others which remain pending in state courts
and are proceeding independently and outside of the MDL. On October 9, 2020, the Circuit Court of the 17th
Judicial Circuit in and for Broward County, Florida, Case No. CACE19018882, granted Henry Schein’s motion to
dismiss the claims brought against it in the action filed by North Broward Hospital District et. al. The Florida court
gave plaintiffs until November 24, 2020 to replead their claims against Henry Schein. On January 8, 2021, Henry
Schein filed a motion to dismiss the Amended Complaint. By Order entered on March 24, 2021, the Circuit Court
of Washington County, Arkansas, Case No. 72-CV20-156, granted Henry Schein’s motion to dismiss the claims
brought against it in the action filed by Fayetteville Arkansas Hospital Company, LLC, et al. The Arkansas court
gave plaintiffs until forty-five (45) days from the date the court enters an order or orders deciding all other motions
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
30
to dismiss currently pending before the court, to replead their claims against Henry Schein. An action filed by
Tucson Medical Center et al. was previously scheduled for trial beginning on June 1, 2021 but the court has vacated
that trial date. At this time, the only cases set for trial are the actions filed by West Virginia University Hospitals,
Inc. et al., which is currently scheduled for a non-jury liability trial on plaintiffs’ public nuisance claims on
November 1, 2021, and DCH Health Care Authority, et al., which is currently scheduled for a liability jury trial on
plaintiffs’ public nuisance claims on July 18, 2022. Of Henry Schein’s 2020 revenue of approximately $
10.1
billion from continuing operations, sales of opioids represented less than
one-tenth of 1
a negligible part of our business. We intend to defend ourselves vigorously against these actions.
On
September 30, 2019
, the
City of Hollywood Police Officers Retirement System, individually and on behalf of
all others similarly situated
, filed a putative class action complaint for violation of the federal securities laws
against
Henry Schein, Inc., Covetrus, Inc., and Benjamin Shaw and Christine Komola (Covetrus’s then Chief
Executive Officer and Chief Financial Officer, respectively
) in the U.S. District Court for the Eastern District of
New York, Case No. 2:19-cv-05530-FB-RLM. The complaint seeks to certify a class consisting of all persons and
entities who, subject to certain exclusions, purchased or otherwise acquired Covetrus common stock from February
8, 2019 through August 12, 2019. The case relates to the Animal Health Spin-off and Merger of the Henry Schein
Animal Health Business with Vets First Choice in February 2019.
The complaint alleges violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Securities and Exchange Commission
Rule 10b-5 and asserts that defendants’ statements in the offering documents and after the transaction were
materially false and misleading
management and supply-chain services, understated the costs of integrating the Henry Schein Animal Health
Business and Vets First Choice, understated Covetrus’s separation costs from Henry Schein, and understated the
impact on earnings from online competition and alternative distribution channels and from the loss of an allegedly
large customer in North America just before the Separation and Merger. The complaint seeks unspecified monetary
damages and a jury trial. Pursuant to the provisions of the PSLRA, the court appointed lead plaintiff and lead
counsel on December 23, 2019. Lead plaintiff filed a Consolidated Class Action Complaint on February 21, 2020.
Lead plaintiff added Steve Paladino, our Chief Financial Officer, as a defendant in the action. Lead plaintiff filed
an Amended Consolidated Class Action Complaint on May 21, 2020, in which it added a claim that Mr. Paladino is
a “control person” of Covetrus. We intend to defend ourselves vigorously against this action.
On
February 5, 2021
,
Jack Garnsey filed a putative shareholder derivative action on behalf of Covetrus, Inc.
U.S. District Court for the Eastern District of New York, naming as defendants
Benjamin Shaw, Christine T.
Komola, Steven Paladino, Betsy Atkins, Deborah G. Ellinger, Sandra L. Helton, Philip A. Laskaway, Mark J.
Manoff, Edward M. McNamara, Ravi Sachdev, David E. Shaw, Benjamin Wolin, and Henry Schein, Inc., with
Covetrus, Inc.
the individual defendants breached their
fiduciary duties under state law in connection with the same allegations asserted in the City of Hollywood securities
class action described above and further alleges that Henry Schein aided and abetted such breaches. The complaint
also asserts claims for contribution under the federal securities laws against Henry Schein and other defendants,
also arising out of the allegations in the City of Hollywood lawsuit.
and monetary relief. We intend to defend ourselves vigorously against this action. On April 8, 2021 the Court
entered an order staying the Garnsey action until forty-five (
45
) days after a decision is issued finally resolving the
motions to dismiss in the City of Hollywood Class Action.
From time to time, we may become a party to other legal proceedings, including, without limitation, product
liability claims, employment matters, commercial disputes, governmental inquiries and investigations (which may
in some cases involve our entering into settlement arrangements or consent decrees), and other matters arising out
of the ordinary course of our business. While the results of any legal proceeding cannot be predicted with certainty,
in our opinion none of these other pending matters are currently anticipated to have a material adverse effect on our
consolidated financial position, liquidity or results of operations.
As of March 27, 2021, we had accrued our best estimate of potential losses relating to claims that were probable to
result in liability and for which we were able to reasonably estimate a loss. This accrued amount, as well as related
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
)
31
expenses, was not material to our financial position, results of operations or cash flows. Our method for
determining estimated losses considers currently available facts, presently enacted laws and regulations and other
factors, including probable recoveries from third parties.
Note 18 – Related Party Transactions
On February 7, 2019 (the “Distribution Date”), we completed the separation (the “Separation”) and subsequent
merger (“Merger”) of our animal health business (the “Henry Schein Animal Health Business”) with Direct Vet
Marketing, Inc. (d/b/a Vets First Choice, “Vets First Choice”). This was accomplished by a series of transactions
among us, Vets First Choice, Covetrus, Inc. (f/k/a HS Spinco, Inc. “Covetrus”), a wholly owned subsidiary of ours
prior to the Distribution Date, and HS Merger Sub, Inc., a wholly owned subsidiary of Covetrus (“Merger Sub”). In
connection with the Separation, we contributed, assigned and transferred to Covetrus certain applicable assets,
liabilities and capital stock or other ownership interests relating to the Henry Schein Animal Health Business. On
the Distribution Date, we received a tax-free distribution of $
1,120
financing incurred by Covetrus. On the Distribution Date and prior to the Animal Health Spin-off, Covetrus issued
shares of Covetrus common stock to certain institutional accredited investors for $
361.1
The proceeds of the Share Sale were paid to Covetrus and distributed to us. Subsequent to the Share Sale, we
distributed, on a pro rata basis, all of the shares of the common stock of Covetrus held by us to our stockholders of
record as of the close of business on January 17, 2019 (the “Animal Health Spin-off”).
In connection with the completion of the Animal Health Spin-off during our 2019 fiscal year, we entered into a
transition services agreement with Covetrus under which we agreed to provide certain transition services for up to
twenty-four months in areas such as information technology, finance and accounting, human resources, supply
chain, and real estate and facility services.
December 2020. During the three months ended March 28, 2020, we recorded approximately $
4.4
for these services. Covetrus also purchased certain products from us pursuant to the transition services agreement,
which ended in December 2020. During the three months ended March 28, 2020, net sales to Covetrus were
approximately $
21.1
In connection with the formation of Henry Schein One, LLC, our joint venture with Internet Brands, which was
formed on July 1, 2018, we entered into a ten-year royalty agreement with Internet Brands whereby we will pay
Internet Brands approximately $31.0 million annually for the use of their intellectual property.
months ended March 27, 2021 and March 28, 2020, we recorded $
7.8
7.8
connection with costs related to this royalty agreement. As of March 27, 2021 and December 26, 2020, Henry
Schein One, LLC had a net receivable balance due from Internet Brands of $
1.7
4.7
respectively, comprised of amounts related to results of operations and the royalty agreement.
During our normal course of business, we have interests in entities that we account for under the equity accounting
method.
15.5
million and $
15.4
28, 2020, we purchased $
3.8
3.0
December 26, 2020, we had in aggregate $
36.7
36.4
7.8
million and $
8.6
32
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
In accordance with the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, we
provide the following cautionary remarks regarding important factors that, among others, could cause future results
to differ materially from the forward-looking statements, expectations and assumptions expressed or implied
herein. All forward-looking statements made by us are subject to risks and uncertainties and are not guarantees of
future performance. These forward-looking statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance and achievements or industry results to be materially
different from any future results, performance or achievements expressed or implied by such forward-looking
statements. These statements are generally identified by the use of such terms as “may,” “could,” “expect,”
“intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,” “to be,” “to make” or other comparable
terms. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in
the documents we file with the Securities and Exchange Commission (SEC), including our Annual Report on Form
10-K. Forward looking statements include the overall impact of the Novel Coronavirus Disease 2019 (COVID-19)
on the Company, its results of operations, liquidity, and financial condition (including any estimates of the impact
on these items), the rate and consistency with which dental and other practices resume or maintain normal
operations in the United States and internationally, expectations regarding personal protective equipment (“PPE”)
and COVID-19 related product sales and inventory levels and whether additional resurgences of the virus will
adversely impact the resumption of normal operations, the impact of restructuring programs as well as of any future
acquisitions, and more generally current expectations regarding performance in current and future periods.
Forward looking statements also include the (i) ability of the Company to make additional testing available, the
nature of those tests and the number of tests intended to be made available and the timing for availability, the nature
of the target market, as well as the efficacy or relative efficacy of the test results given that the test efficacy has not
been, or will not have been, independently verified under normal FDA procedures and (ii) potential for the
Company to distribute the COVID-19 vaccines and ancillary supplies.
Risk factors and uncertainties that could cause actual results to differ materially from current and historical results
include, but are not limited to: risks associated with COVID-19, as well as other disease outbreaks, epidemics,
pandemics, or similar wide spread public health concerns and other natural disasters or acts of terrorism; our
dependence on third parties for the manufacture and supply of our products; our ability to develop or acquire and
maintain and protect new products (particularly technology products) and technologies that achieve market
acceptance with acceptable margins; transitional challenges associated with acquisitions, dispositions and joint
ventures, including the failure to achieve anticipated synergies/benefits; financial and tax risks associated with
acquisitions, dispositions and joint ventures; certain provisions in our governing documents that may discourage
third-party acquisitions of us; effects of a highly competitive (including, without limitation, competition from third-
party online commerce sites) and consolidating market; the potential repeal or judicial prohibition on
implementation of the Affordable Care Act; changes in the health care industry; risks from expansion of customer
purchasing power and multi-tiered costing structures; increases in shipping costs for our products or other service
issues with our third-party shippers; general global macro-economic and political conditions, including
international trade agreements and potential trade barriers; failure to comply with existing and future regulatory
requirements; risks associated with the EU Medical Device Regulation; failure to comply with laws and regulations
relating to health care fraud or other laws and regulations; failure to comply with laws and regulations relating to
the confidentiality of sensitive personal information or standards in electronic health records or transmissions;
changes in tax legislation; litigation risks; new or unanticipated litigation developments and the status of litigation
matters; cyberattacks or other privacy or data security breaches; risks associated with our global operations; our
dependence on our senior management, as well as employee hiring and retention; and disruptions in financial
markets. The order in which these factors appear should not be construed to indicate their relative importance or
priority.
33
We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control
or predict. Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction
of actual results. We undertake no duty and have no obligation to update forward-looking statements.
Where You Can Find Important Information
We may disclose important information through one or more of the following channels: SEC filings, public
conference calls and webcasts, press releases, the investor relations page of our website (www.henryschein.com)
and the social media channels identified on the Newsroom page of our website.
Recent Developments
COVID-19 Pandemic
In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic
negatively impacted the global economy, disrupted global supply chains and created significant volatility and
disruption of global financial markets. In response, many countries implemented business closures and restrictions,
stay-at-home and social distancing ordinances and similar measures to combat the pandemic, which significantly
impacted global business and dramatically reduced demand for dental products and certain medical products in the
second quarter of 2020.
Demand increased in the second half of 2020 and continued into the first quarter of 2021,
resulting in growth over the prior year driven by sales of PPE and COVID-19 related products.
Our consolidated financial statements reflect estimates and assumptions made by us that affect, among other things,
our goodwill, long-lived asset and indefinite-lived intangible asset valuation; inventory valuation; equity investment
valuation; assessment of the annual effective tax rate; valuation of deferred income taxes and income tax
contingencies; the allowance for doubtful accounts; hedging activity; vendor rebates; measurement of
compensation cost for certain share-based performance awards and cash bonus plans; and pension plan
assumptions. Due to the significant uncertainty surrounding the future impact of COVID-19, our judgments
regarding estimates and impairments could change in the future. In addition, the impact of COVID-19 had a
material adverse effect on our business, results of operations and cash flows in the second quarter of 2020. In the
latter half of the second quarter of 2020, dental and medical practices began to re-open worldwide, and continued to
do so during the second half of 2020. During the first quarter of 2021, patient traffic levels returned to levels
approaching pre-pandemic levels, although certain regions in the U.S. and internationally are experiencing an
increase in COVID-19 cases. There is an ongoing risk that the COVID-19 pandemic may again have a material
adverse effect on our business, results of operations and cash flows and may result in a material adverse effect on
our financial condition and liquidity. However, the extent of the potential impact cannot be reasonably estimated at
this time.
34
Executive-Level Overview
Henry Schein, Inc. is a solutions company for health care professionals powered by a network of people and
technology. We believe we are the world’s largest provider of health care products and services primarily to office-
based dental and medical practitioners, as well as alternate sites of care. We serve more than one million customers
worldwide including dental practitioners and laboratories and physician practices, as well as government,
institutional health care clinics and other alternate care clinics. We believe that we have a strong brand identity due
to our more than 88 years of experience distributing health care products.
We are headquartered in Melville, New York, employ more than 20,000 people (of which more than 9,500 are
based outside the United States) and have operations or affiliates in 31 countries and territories, including the
United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, France, Germany,
Hong Kong SAR, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, the Netherlands, New
Zealand, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Arab Emirates
and the United Kingdom.
We have established strategically located distribution centers around the world to enable us to better serve our
customers and increase our operating efficiency. This infrastructure, together with broad product and service
offerings at competitive prices, and a strong commitment to customer service, enables us to be a single source of
supply for our customers’ needs. Our infrastructure also allows us to provide convenient ordering and rapid,
accurate and complete order fulfillment.
We conduct our business through two reportable segments: (i) health care distribution and (ii) technology and
value-added services. These segments offer different products and services to the same customer base.
The health care distribution reportable segment aggregates our global dental and medical operating segments. This
segment distributes consumable products, small equipment, laboratory products, large equipment, equipment repair
services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control
products and vitamins. Our global dental group serves office-based dental practitioners, dental laboratories, schools
and other institutions. Our global medical group serves office-based medical practitioners, ambulatory surgery
centers, other alternate-care settings and other institutions.
Our global technology and value-added services group provides software, technology and other value-added
services to health care practitioners. Our technology group offerings include practice management software
systems for dental and medical practitioners. Our value-added practice solutions include financial services on a
non-recourse basis, e-services, practice technology, network and hardware services, as well as continuing education
services for practitioners.
Industry Overview
In recent years, the health care industry has increasingly focused on cost containment. This trend has benefited
distributors capable of providing a broad array of products and services at low prices. It also has accelerated the
growth of HMOs, group practices, other managed care accounts and collective buying groups, which, in addition to
their emphasis on obtaining products at competitive prices, tend to favor distributors capable of providing
specialized management information support. We believe that the trend towards cost containment has the potential
to favorably affect demand for technology solutions, including software, which can enhance the efficiency and
facilitation of practice management.
Our operating results in recent years have been significantly affected by strategies and transactions that we
undertook to expand our business, domestically and internationally, in part to address significant changes in the
health care industry, including consolidation of health care distribution companies, health care reform, trends
toward managed care, cuts in Medicare and collective purchasing arrangements.
Our current and future results have been and could be impacted by the COVID-19 pandemic, the current economic
environment and continued economic and public health uncertainty. Since the onset of the COVID-19 pandemic in
early 2020, we have been carefully monitoring its impact on our global operations and have taken appropriate steps
35
to minimize the risk to our employees. We have seen and continue to see changes in demand trends for some of our
products and services as rates of infection fluctuate, new strains or mutations of COVID-19 emerge and spread,
vaccine uptake increases, governments adapt their approaches to combatting the virus, and local conditions change
across geographies. As a result, we expect to see continued volatility through at least the duration of the pandemic.
Industry Consolidation
The health care products distribution industry, as it relates to office-based health care practitioners, is fragmented
and diverse. The industry ranges from sole practitioners working out of relatively small offices to group practices
or service organizations ranging in size from a few practitioners to a large number of practitioners who have
combined or otherwise associated their practices.
Due in part to the inability of office-based health care practitioners to store and manage large quantities of supplies
in their offices, the distribution of health care supplies and small equipment to office-based health care practitioners
has been characterized by frequent, small quantity orders, and a need for rapid, reliable and substantially complete
order fulfillment. The purchasing decisions within an office-based health care practice are typically made by the
practitioner or an administrative assistant. Supplies and small equipment are generally purchased from more than
one distributor, with one generally serving as the primary supplier.
The trend of consolidation extends to our customer base. Health care practitioners are increasingly seeking to
partner, affiliate or combine with larger entities such as hospitals, health systems, group practices or physician
hospital organizations. In many cases, purchasing decisions for consolidated groups are made at a centralized or
professional staff level; however, orders are delivered to the practitioners’ offices.
We believe that consolidation within the industry will continue to result in a number of distributors, particularly
those with limited financial, operating and marketing resources, seeking to combine with larger companies that can
provide growth opportunities. This consolidation also may continue to result in distributors seeking to acquire
companies that can enhance their current product and service offerings or provide opportunities to serve a broader
customer base.
Our trend with regard to acquisitions and joint ventures has been to expand our role as a provider of products and
services to the health care industry. This trend has resulted in our expansion into service areas that complement our
existing operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquired
businesses.
As industry consolidation continues, we believe that we are positioned to capitalize on this trend, as we believe we
have the ability to support increased sales through our existing infrastructure, although there can be no assurances
that we will be able to successfully accomplish this. We also have invested in expanding our sales/marketing
infrastructure to include a focus on building relationships with decision makers who do not reside in the office-
based practitioner setting.
As the health care industry continues to change, we continually evaluate possible candidates for merger and joint
venture or acquisition and intend to continue to seek opportunities to expand our role as a provider of products and
services to the health care industry. There can be no assurance that we will be able to successfully pursue any such
opportunity or consummate any such transaction, if pursued. If additional transactions are entered into or
consummated, we would incur merger and/or acquisition-related costs, and there can be no assurance that the
integration efforts associated with any such transaction would be successful. In response to the COVID-19
pandemic, we had taken a range of actions to preserve cash, including the temporary suspension of significant
acquisition activity. During the second half of 2020, as global conditions improved, we resumed our acquisition
strategy.
36
Aging Population and Other Market Influences
The health care products distribution industry continues to experience growth due to the aging population,
increased health care awareness, the proliferation of medical technology and testing, new pharmacology treatments
and expanded third-party insurance coverage, partially offset by the effects of unemployment on insurance
coverage. In addition, the physician market continues to benefit from the shift of procedures and diagnostic testing
from acute care settings to alternate-care sites, particularly physicians’ offices.
According to the U.S. Census Bureau’s International Data Base, in 2020 there were more than six and a half million
Americans aged 85 years or older, the segment of the population most in need of long-term care and elder-care
services. By the year 2050, that number is projected to nearly triple to approximately 19 million. The population
aged 65 to 84 years is projected to increase by approximately 36% during the same time period.
As a result of these market dynamics, annual expenditures for health care services continue to increase in the
United States. We believe that demand for our products and services will grow, while continuing to be impacted by
current and future operating, economic and industry conditions. The Centers for Medicare and Medicaid Services,
or CMS, published “National Health Expenditure Projections 2019-2028” indicating that total national health care
spending reached approximately $3.8 trillion in 2019, or 17.7% of the nation’s gross domestic product, the
benchmark measure for annual production of goods and services in the United States. Health care spending is
projected to reach approximately $6.2 trillion in 2028, approximately 19.7% of the nation’s projected gross
domestic product.
Government
Certain of our businesses involve the distribution, importation, exportation, marketing and sale of, and third party
payment for, pharmaceuticals and medical devices, and in this regard, we are subject to extensive local, state,
federal and foreign governmental laws and regulations, including as applicable to our wholesale distribution of
pharmaceuticals and medical devices, and as part of our specialty home medical supply business that distributes and
sells medical equipment and supplies directly to patients. The federal government and state governments have also
increased enforcement activity in the health care sector, particularly in areas of fraud and abuse, anti-bribery and
corruption, controlled substances handling, medical device regulations, and data privacy and security standards.
Government and private insurance programs fund a large portion of the total cost of medical care, and there have
been efforts to limit such private and government insurance programs, including efforts, thus far unsuccessful, to
seek repeal of the entire United States Patient Protection and Affordable Care Act, as amended by the Health Care
and Education Reconciliation Act, each enacted in March 2010, as amended. In addition, activities to control
medical costs, including laws and regulations lowering reimbursement rates for pharmaceuticals, medical devices,
and/or medical treatments or services, are ongoing. Many of these laws and regulations are subject to change and
their evolving implementation may impact our operations and our financial performance.
Our businesses are also generally subject to numerous other laws and regulations that could impact our financial
performance, including securities, antitrust, consumer protection, anti-bribery and anti-kickback, customer
interaction transparency, data privacy, data security, government contracting, price gouging, and other laws and
regulations.
Failure to comply with law or regulations could have a material adverse effect on our business. A more detailed
discussion of governmental laws and regulations is included in Management’s Discussion & Analysis, contained in
our Annual Report on Form 10-K for the fiscal year ended December 26, 2020, filed on February 17, 2021.
37
Results of Operations
The following table summarizes the significant components of our operating results and cash flows for the three
months ended March 27, 2021 and March 28, 2020 (in thousands):
Three Months Ended
March 27,
March 28,
2021
2020
Operating results:
Net sales
$
2,924,961
$
2,428,871
Cost of sales
2,034,110
1,682,857
Gross profit
890,851
746,014
Operating expenses:
Selling, general and administrative
657,992
567,362
Restructuring costs
2,931
4,787
Operating income
$
229,928
$
173,865
Other expense, net
$
(4,193)
$
(4,842)
Net income from continuing operations
174,928
133,847
Loss from discontinued operations
-
(282)
Net income attributable to Henry Schein, Inc.
165,997
130,261
Three Months Ended
March 27,
March 28,
2021
2020
Cash flows:
Net cash provided by operating activities from continuing operations
$
63,331
$
78,757
Net cash used in investing activities from continuing operations
(223,244)
(53,605)
Net cash provided by (used in) financing activities from continuing operations
(119,444)
491,608
Plans of Restructuring
On November 20, 2019, we committed to a contemplated initiative, intended to mitigate stranded costs associated
with the Animal Health Spin-off and to rationalize operations and to provide expense efficiencies. These activities
were originally expected to be completed by the end of 2020. In light of the changes to the business environment
brought on by the COVID-19 pandemic, we extended such activities to the end of 2021.
During the three months ended March 27, 2021 and March 28, 2020, we recorded restructuring costs of $2.9
million and $4.8 million, respectively. The restructuring costs for these periods included costs for severance
benefits and facility exit costs. The costs associated with these restructurings are included in a separate line item,
“Restructuring costs” within our consolidated statements of income.
We are currently unable in good faith to make a determination of an estimate of the amount or range of
amounts expected to be incurred in connection with these activities in 2021, both with respect to each major type of
cost associated therewith and with respect to the total cost, or an estimate of the amount or range of amounts that
will result in future cash expenditures.
38
Three Months Ended March 27, 2021 Compared to Three Months Ended March 28, 2020
Net Sales
Net sales for the three months ended March 27, 2021 and March 28, 2020 were as follows (in thousands):
March 27,
% of
March 28,
% of
Increase / (Decrease)
2021
Total
2020
Total
$
%
Health care distribution
(1)
Dental
$
1,788,928
61.2
%
$
1,475,076
60.7
%
$
313,852
21.3
%
Medical
993,037
33.9
800,688
33.0
192,349
24.0
2,781,965
95.1
2,275,764
93.7
506,201
22.2
Technology and value-added services
(2)
142,996
4.9
131,965
5.4
11,031
8.4
Total excluding Corporate TSA revenue
2,924,961
100.0
2,407,729
99.1
517,232
21.5
Corporate TSA revenue
(3)
-
-
21,142
0.9
(21,142)
-
Total
$
2,924,961
100.0
%
$
2,428,871
100.0
%
$
496,090
20.4
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, personal protective equipment
and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
and financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other
services.
(3)
Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in
connection with the Animal Health Spin-off, which ended in December 2020. See
information.
The 20.4% increase in net sales for the three months ended March 27, 2021 includes an increase of 18.2% in local
currency revenue (14.9% increase in internally generated revenue and 3.3% growth from acquisitions) and an
increase of 2.2% related to foreign currency exchange. During December 2020, our previous transition services
agreement (TSA) with Covetrus, in connection with the completion of the Animal-Health Spin-off, concluded.
Accordingly, we recorded no Corporate TSA revenues for the three months ended March 27, 2021. Sales for the
three months ended March 27, 2021 benefited from sales of PPE and COVID-19 related products of approximately
$457.5 million, an increase of approximately 189.5% versus the prior year.
The 21.3% increase in dental net sales for the three months ended March 27, 2021 includes an increase of 17.9% in
local currency revenue (13.7% increase in internally generated revenue and 4.2% growth from acquisitions) and an
increase of 3.4% related to foreign currency exchange. The 17.9% increase in local currency sales was attributable
to an increase in dental consumable merchandise sales of 18.3% (13.2% increase in internally generated revenue
and 5.1% growth from acquisitions) and an increase in dental equipment sales and service revenues of 16.1%,
(15.5% increase in internally generated revenue and 0.6% growth from acquisitions). The COVID-19 pandemic
had an adverse impact on prior year revenues when dental offices began closing or seeing a limited number of
patients beginning in mid-March of 2020. During the first quarter of 2021, patient traffic levels returned to levels
approaching pre-pandemic levels, thus contributing to growth in worldwide dental revenues. Additionally, global
dental sales for the three months ended March 27, 2021 benefited from sales of PPE and COVID-19 related
products of approximately $169.3 million, an increase of approximately 72.4% versus the prior year. Excluding
PPE and COVID-19 related products, the increase in internally generated local currency dental sales was 11.9%.
The 24.0% increase in medical net sales for the three months ended March 27, 2021 includes an increase of 23.7%
in local currency revenue (22.1% increase in internally generated revenue and 1.6% growth from acquisitions) and
an increase of 0.3% related to foreign currency exchange. Economic conditions relating to the COVID-19
pandemic had less of an impact on the performance of our medical group in the prior year in part due to continued
strong sales of PPE, such as masks, gowns and face shields, and other COVID-19 related products. Globally, our
medical business continued to benefit from sales of such PPE and other COVID-19 related products for the three
months ended March 27, 2021, recording net sales of $288.2 million, an increase of approximately 381.3%
compared to the prior year. Excluding sales of PPE and other COVID-19 related products, medical internal sales in
local currencies was down 6.8%, in part due to a mild influenza season that impacted diagnostic and consumable
merchandise sales, as well as from lower pharmaceutical sales.
39
The 8.4% increase in technology and value-added services net sales for the three months ended March 27, 2021
includes an increase of 7.0% local currency revenue (3.6% increase in internally generated revenue and 3.4%
growth from acquisitions) and an increase of 1.4% related to foreign currency exchange. Sales growth was driven
by our practice management business, as well as strong financial services revenue, which benefited from dental
equipment sales growth. During the quarter ended March 27, 2021, the trend for transactional software revenues
improved compared to the prior year, as more patients visited dental practices worldwide.
Gross Profit
Gross profit and gross margin percentages by segment and in total for the three months ended March 27, 2021 and
March 28, 2020 were as follows (in thousands):
March 27,
Gross
March 28,
Gross
Increase / (Decrease)
2021
Margin %
2020
Margin %
$
%
Health care distribution
$
789,984
28.4
%
$
653,316
28.7
%
$
136,668
20.9
%
Technology and value-added services
100,867
70.5
92,085
69.8
8,782
9.5
Total excluding Corporate TSA revenues
890,851
30.5
745,401
31.0
145,450
19.5
Corporate TSA revenues
-
-
613
2.9
(613)
-
Total
$
890,851
30.5
$
746,014
30.7
$
144,837
19.4
As a result of different practices of categorizing costs associated with distribution networks throughout our
industry, our gross margins may not necessarily be comparable to other distribution companies. Additionally, we
realize substantially higher gross margin percentages in our technology segment than in our health care distribution
segment. These higher gross margins result from being both the developer and seller of software products and
services, as well as certain financial services. The software industry typically realizes higher gross margins to
recover investments in research and development.
During December 2020, our previous transition services agreement with Covetrus, in connection with the
completion of the Animal-Health Spin-off, concluded. Under this agreement, Covetrus had agreed to purchase
certain products from us at a mark-up that ranged from 3% to 6% of our product cost to cover handling costs.
Within our health care distribution segment, gross profit margins may vary from one period to the next. Changes in
the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting
our gross profit margin. For example, sales of pharmaceutical products are generally at lower gross profit margins
than other products. Conversely, sales of our private label products achieve gross profit margins that are higher than
average. With respect to customer mix, sales to our large-group customers are typically completed at lower gross
margins due to the higher volumes sold as opposed to the gross margin on sales to office-based practitioners, who
normally purchase lower volumes at greater frequencies.
Health care distribution gross profit increased $136.7 million, or 20.9%, for the three months ended March 27, 2021
compared to the prior year period, due primarily to the increase in net sales discussed above. Health care
distribution gross profit margin decreased to 28.4% for the three months ended March 27, 2021 from 28.7% for the
comparable prior year period due to adjustments recorded for PPE inventory and COVID-19 related products, as
well as influenza diagnostic kits, caused by volatility of pricing and demand experienced during the quarter. Such
conditions may recur and adversely impact gross profit margins in future periods, although we do not expect further
material inventory adjustments in 2021. The overall increase in our health care distribution gross profit is
attributable to an increase of $120.5 million from internally generated revenue and $27.2 million increase in gross
profit from acquisitions, partially offset by an $11.0 million decline in gross profit due to the decrease in the gross
margin rates.
40
Technology and value-added services gross profit increased $8.8 million, or 9.5%, for the three months ended
March 27, 2021 compared to the prior year period. The overall increase in our Technology and value-added
services gross profit is attributable to a $4.5 million increase in internally generated revenue, $4.2 million additional
gross profit from acquisitions, and an increase of $0.1 million from gross margin rates. Technology and value-
added services gross profit margin increased to 70.5% for the three months ended March 27, 2021 from 69.8% for
the comparable prior year period primarily due to an increase in the volume of our transactional revenue from
eClaims and credit card processing.
Selling, General and Administrative
Selling, general and administrative expenses by segment and in total for the three months ended March 27, 2021
and March 28, 2020 were as follows (in thousands):
% of
% of
March 27,
Respective
March 28,
Respective
Increase
2021
Net Sales
2020
Net Sales
$
%
Health care distribution
$
592,052
21.3
%
$
505,762
22.2
%
$
86,290
17.1
%
Technology and value-added services
68,871
48.2
66,387
50.3
2,484
3.7
Total
$
660,923
22.6
$
572,149
23.6
$
88,774
15.5
Selling, general and administrative expenses (including restructuring costs in the three months ended March 27,
2021 and March 28, 2020) increased $88.8 million, or 15.5%, for the three months ended March 27, 2021 from the
comparable prior year period. The $86.3 million increase in selling, general and administrative expenses within our
health care distribution segment for the three months ended March 27, 2021 as compared to the prior year period
was attributable to an increase of $64.8 million of operating costs (including $12.8 million of settlement and
litigation costs), an increase of $23.3 million of additional costs from acquired companies, partially offset by a
decrease of $1.8 million in restructuring costs. The $2.5 million increase in selling, general and administrative
expenses within our technology and value-added services segment for the three months ended March 27, 2021 as
compared to the prior year period was attributable to an increase of $3.5 million of additional costs from acquired
companies, partially offset by a decrease of $1.0 million of operating costs. As a percentage of net sales, selling,
general and administrative expenses decreased to 22.6% from 23.6% for the comparable prior year period.
As a component of total selling, general and administrative expenses, selling expenses increased $12.9 million, or
3.5% to $384.7 million, for the three months ended March 27, 2021 from the comparable prior year period. As a
percentage of net sales, selling expenses decreased to 13.2% from 15.3% for the comparable prior year period.
As a component of total selling, general and administrative expenses, general and administrative expenses
increased $75.9 million, or 37.9% to $276.2 million, for the three months ended March 27, 2021 from the
comparable prior year period, primarily due to an increase in payroll and payroll related costs. As a percentage of
net sales, general and administrative expenses increased to 9.4% from 8.2% for the comparable prior year period.
Our selling, general and administrative expenses for the three months ended March 28, 2020 were affected by
certain estimates we made due to the adverse business environment brought on by the COVID-19 pandemic. For
example, in the prior-year quarter we recorded incremental bad debt reserves of approximately $10 million for our
global dental business. We also recognized a net credit of approximately $17.5 million in stock-based compensation
expense during the prior-year quarter as we had estimated that no performance shares granted in 2018, 2019 or
2020 would ultimately vest. In contrast, for the three months ended March 27, 2021, we recorded $12.8 million in
stock-based compensation expense. Additionally, in the prior-year quarter we recorded total impairment charges of
approximately $6.1 million during the quarter related to prepaid royalty expenses and a customer relationship
intangible asset. We recorded no such impairment charges in the three months ended March 27, 2021.
41
Other Expense, Net
Other expense, net, for the three months ended March 27, 2021 and March 28, 2020 was as follows (in thousands):
March 27,
March 28,
Variance
2021
2020
$
%
Interest income
$
1,983
$
3,190
$
(1,207)
(37.8)
%
Interest expense
(6,485)
(7,812)
1,327
17.0
Other, net
309
(220)
529
240.5
Other expense, net
$
(4,193)
$
(4,842)
$
649
13.4
Interest income decreased $1.2 million primarily due to lower investment and late fee income. Interest expense
decreased $1.3 million primarily due to decreased borrowings under our bank credit lines as well as lower interest
rates.
Income Taxes
For the three months ended March 27, 2021, our effective tax rate was 25.1% compared to 22.4% for the prior year
period. The difference between our effective tax rate and the federal statutory tax rate for the three months ended
March 27, 2021, was primarily due to state and foreign income taxes and interest expense. The difference between
our effective tax rate and the federal statutory tax rate for the three months ended March 28, 2020 primarily relates
to state and foreign income taxes and interest expense as well as tax charges and credits associated with legal entity
reorganizations outside the United States.
Liquidity and Capital Resources
Our principal capital requirements have included funding of acquisitions, purchases of additional noncontrolling
interests, repayments of debt principal, the funding of working capital needs, purchases of fixed assets and
repurchases of common stock (which had been temporarily suspended, but were resumed during the three months
ended March 27, 2021). Working capital requirements generally result from increased sales, special inventory
forward buy-in opportunities and payment terms for receivables and payables. Historically, sales have tended to be
stronger during the second half of the year and special inventory forward buy-in opportunities have been most
prevalent just before the end of the year, and have caused our working capital requirements to be higher from the
end of the third quarter to the end of the first quarter of the following year.
The pandemic and the governmental responses to it had a material adverse effect on our cash flows in the second
quarter of 2020. In the latter half of the second quarter of 2020 and continuing through year-end, dental and
medical practices began to re-open worldwide. During the first quarter of 2021, patient traffic levels returned to
levels approaching pre-pandemic levels, although certain regions in the U.S. and internationally are experiencing an
increase in COVID-19 cases. There is an ongoing risk that the COVID-19 pandemic may again have a material
adverse effect on our business, results of operations and cash flows and may result in a material adverse effect on
our financial condition and liquidity. However, the extent of the potential impact cannot be reasonably estimated at
this time.
We finance our business primarily through cash generated from our operations, revolving credit facilities and debt
placements. Our ability to generate sufficient cash flows from operations is dependent on the continued demand of
our customers for our products and services, and access to products and services from our suppliers.
Our business requires a substantial investment in working capital, which is susceptible to fluctuations during the
year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of
sales activity, special inventory forward buy-in opportunities and our desired level of inventory. We anticipate
future increases in our working capital requirements.
We finance our business to provide adequate funding for at least 12 months. Funding requirements are based on
forecasted profitability and working capital needs, which, on occasion, may change. Consequently, we may change
our funding structure to reflect any new requirements.
42
We believe that our cash and cash equivalents, our ability to access private debt markets and public equity markets,
and our available funds under existing credit facilities provide us with sufficient liquidity to meet our currently
foreseeable short-term and long-term capital needs. We have no off-balance sheet arrangements.
Net cash from continuing operations provided by operating activities was $63.3 million for the three months ended
March 27, 2021, compared to net cash from continuing operations provided by operating activities of $78.8 million
for the comparable prior year period. The net change of $15.4 million was primarily attributable to increased
working capital requirements, specifically an increase in inventories due to stocking of PPE and other COVID-19
related products, partially offset by decreased accounts receivable due to lower days sales outstanding. The effect
on operating cash flows from the increased working capital requirements was partially offset by higher net income.
Net cash from continuing operations used in investing activities was $223.2 million for the three months ended
March 27, 2021, compared to $53.6 million for the comparable prior year period. The net change of $169.6 million
was attributable to increased payments for equity investments and business acquisitions.
Net cash from continuing operations used in financing activities was $119.4 million for the three months ended
March 27, 2021, compared to net cash provided by financing activities of $491.6 million for the comparable prior
year period. The net change of $611.1 million was primarily due to decreased net proceeds from bank borrowings.
The following table summarizes selected measures of liquidity and capital resources (in thousands):
March 27,
December 26,
2021
2020
Cash and cash equivalents
$
144,538
$
421,185
Working capital
1,447,857
1,508,313
Debt:
Bank credit lines
$
67,415
$
73,366
Current maturities of long-term debt
111,176
109,836
Long-term debt
506,461
515,773
Total debt
$
685,052
$
698,975
Leases:
Current operating lease liabilities
$
68,580
$
64,716
Non-current operating lease liabilities
248,624
238,727
(1)
At March 27, 2021 and December 26, 2020, there were no trade accounts receivable that were restricted to settle obligations of this VIE,
nor were there liabilities of the VIE where the creditors have recourse to us.
Our cash and cash equivalents consist of bank balances and investments in money market funds representing
overnight investments with a high degree of liquidity.
Accounts receivable days sales outstanding and inventory turns
Our accounts receivable days sales outstanding from operations decreased to 42.8 days as of March 27, 2021 from
45.9 days as of March 28, 2020. During the three months ended March 27, 2021, we wrote off approximately $3.3
million of fully reserved accounts receivable against our trade receivable reserve. Our inventory turns from
operations increased to 5.2 as of March 27, 2021 from 4.9 as of March 28, 2020. Our working capital accounts
may be impacted by current and future economic conditions.
43
Bank Credit Lines
Bank credit lines consisted of the following:
March 27,
December 26,
2021
2020
Revolving credit agreement
$
-
$
-
Other short-term bank credit lines
67,415
73,366
Total
$
67,415
$
73,366
Revolving Credit Agreement
On April 18, 2017, we entered into a $750 million revolving credit agreement (the “Credit Agreement”), which
matures in April 2022. The interest rate is based on the USD LIBOR plus a spread based on our leverage ratio at
the end of each financial reporting quarter. We expect most LIBOR rates to be discontinued immediately after
December 31, 2021, while the remaining LIBOR rates will be discontinued immediately after June 30, 2023, which
will require an amendment to our debt agreements to reflect a new reference rate. We do not expect the
discontinuation of LIBOR as a reference rate in our debt agreements to have a material adverse effect on our
financial position or to materially affect our interest expense. The Credit Agreement also requires, among other
things, that we maintain maximum leverage ratios. Additionally, the Credit Agreement contains customary
representations, warranties and affirmative covenants as well as customary negative covenants, subject to
negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and
certain restrictive agreements. As of March 27, 2021, and December 26, 2020, we had no borrowings on this
revolving credit facility. As of March 27, 2021, and December 26, 2020, there were $9.3 million and $9.5 million
of letters of credit, respectively, provided to third parties under the credit facility.
On April 17, 2020, we amended the Credit Agreement to, among other things, (i) modify the financial covenant
from being based on total leverage ratio to net leverage ratio, (ii) adjust the pricing grid to reflect the net leverage
ratio calculation, and (iii) increase the maximum maintenance leverage ratio through March 31, 2021.
364-Day Credit Agreement
On March 4, 2021 we repaid the outstanding obligations and terminated the lender commitments under our $700
million 364-day credit agreement which was entered into on April 17, 2020. This facility was originally scheduled
to mature on April 16, 2021.
Other Short-Term Credit Lines
As of March 27, 2021 and December 26, 2020, we had various other short-term bank credit lines available, of
which $67.4 million and $73.4 million, respectively, were outstanding. At March 27, 2021 and December 26,
2020, borrowings under all of these credit lines had a weighted average interest rate of 4.52% and 4.14%,
respectively.
44
Long-term debt
Long-term debt consisted of the following:
March 27,
December 26,
2021
2020
Private placement facilities
$
606,355
$
613,498
Note payable
-
1,554
Various collateralized and uncollateralized loans payable with interest,
in varying installments through 2023 at interest rates
ranging from 2.45% to 4.27% at March 27, 2021 and
ranging from 2.62% to 4.27% at December 26, 2020
5,969
4,596
Finance lease obligations (see Note 7)
5,313
5,961
Total
617,637
625,609
Less current maturities
(111,176)
(109,836)
Total long-term debt
$
506,461
$
515,773
Private Placement Facilities
Our private placement facilities, with three insurance companies, have a total facility amount of $1 billion, and are
available on an uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from
time to time through June 23, 2023. The facilities allow us to issue senior promissory notes to the lenders at a fixed
rate based on an agreed upon spread over applicable treasury notes at the time of issuance. The term of each
possible issuance will be selected by us and can range from five to 15 years (with an average life no longer than 12
years). The proceeds of any issuances under the facilities will be used for general corporate purposes, including
working capital and capital expenditures, to refinance existing indebtedness and/or to fund potential acquisitions.
The agreements provide, among other things, that we maintain certain maximum leverage ratios, and contain
restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal of assets and certain changes in
ownership. These facilities contain make-whole provisions in the event that we pay off the facilities prior to the
applicable due dates.
On March 5, 2021, we amended the private placement facilities to, among other things, (a) modify the financial
covenant from being based on a net leverage ratio to a total leverage ratio and (b) restore the maximum
maintenance total leverage ratio to 3.25x and remove the 1.00% interest rate increase triggered if the net leverage
ratio were to exceed 3.0x.
The components of our private placement facility borrowings as of March 27, 2021 are presented in the following
table (in thousands):
Amount of
Borrowing
Borrowing
Date of Borrowing
Outstanding
Rate
Due Date
January 20, 2012
$
7,143
3.09
%
January 20, 2022
January 20, 2012
50,000
3.45
January 20, 2024
December 24, 2012
50,000
3.00
December 24, 2024
June 2, 2014
100,000
3.19
June 2, 2021
June 16, 2017
100,000
3.42
June 16, 2027
September 15, 2017
100,000
3.52
September 15, 2029
January 2, 2018
100,000
3.32
January 2, 2028
September 2, 2020
100,000
2.35
September 2, 2030
Less: Deferred debt issuance costs
(788)
$
606,355
(1) Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016.
45
U.S. Trade Accounts Receivable Securitization
We have a facility agreement with a bank, as agent, based on the securitization of our U.S. trade accounts
receivable that is structured as an asset-backed securitization program with pricing committed for up to three years.
Our current facility, which has a purchase limit of $350 million, was scheduled to expire on April 29, 2022. On
June 22, 2020, the expiration date for this facility was extended to June 12, 2023 and was amended to adjust certain
covenant levels for 2020. As of March 27, 2021 and December 26, 2020, there were no borrowings outstanding
under this securitization facility. At March 27, 2021, the interest rate on borrowings under this facility was based
on the asset-backed commercial paper rate of 0.18% plus 0.95%, for a combined rate of 1.13%. At December 26,
2020, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of
0.22% plus 0.95%, for a combined rate of 1.17%.
If our accounts receivable collection pattern changes due to customers either paying late or not making payments,
our ability to borrow under this facility may be reduced.
We are required to pay a commitment fee of 25 to 45 basis points depending upon program utilization.
Leases
We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles,
and certain equipment. Our leases have remaining terms of less than one year to approximately 15 years, some of
which may include options to extend the leases for up to 10 years. As of March 27, 2021, our right-of-use assets
related to operating leases were $301.8 million and our current and non-current operating lease liabilities were
$68.6 million and $248.6 million, respectively.
Stock Repurchases
On March 8, 2021, we announced the reinstatement of our share repurchase program.
From March 3, 2003 through March 27, 2021, we repurchased $3.7 billion, or 76,888,531 shares, under our
common stock repurchase programs, with $112.6 million available as of March 27, 2021 for future common stock
share repurchases.
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our subsidiaries have the right, at certain times, to require us to acquire
their ownership interest in those entities at fair value. Accounting Standards Codification Topic 480-10 is
applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the
outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put
option contained in contractual agreements. The components of the change in the redeemable noncontrolling
interests for the three months ended March 27, 2021 and the year ended December 26, 2020 are presented in the
following table:
March 27,
December 26,
2021
2020
Balance, beginning of period
$
327,699
$
287,258
Decrease in redeemable noncontrolling interests due to
redemptions
-
(17,241)
Increase in redeemable noncontrolling interests due to business
acquisitions
85,037
28,387
Net income attributable to redeemable noncontrolling interests
7,053
13,363
Dividends declared
(6,237)
(12,631)
Effect of foreign currency translation loss attributable to
redeemable noncontrolling interests
(6,173)
(4,279)
Change in fair value of redeemable securities
45,520
32,842
Balance, end of period
$
452,899
$
327,699
46
Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are adjusted at
each reporting period with a corresponding adjustment to Additional paid-in capital. Future reductions in the
carrying amounts are subject to a floor amount that is equal to the fair value of the redeemable noncontrolling
interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests
cannot go below the floor level. These adjustments do not impact the calculation of earnings per share.
Additionally, some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash
consideration if certain financial targets are met. Any adjustments to these accrual amounts are recorded in our
consolidated statements of income. For the three months ended March 27, 2021 and March 28, 2020, there were no
material adjustments recorded in our consolidated statements of income relating to changes in estimated contingent
purchase price liabilities.
Noncontrolling Interests
Noncontrolling interests represent our less than 50% ownership interest in an acquired subsidiary. Our net income
is reduced by the portion of the subsidiaries net income that is attributable to noncontrolling interests.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates from those disclosed in Item
7 of our Annual Report on Form 10-K for the year ended December 26, 2020, except accounting policies adopted
as of December 27, 2020, which are discussed in
under Item 1.
Our financial results for the three months ended March 27, 2021 were affected by certain estimates we made due to
the adverse business environment brought on by the COVID-19 pandemic. For example, in the quarter ended
March 28, 2020 we recorded incremental bad debt reserves of approximately $10.0 million for our global dental
business. During the quarter ended March 28, 2020, we also recognized a net credit of approximately $17.5 million
in stock-based compensation expense due to our estimate that no performance shares granted in 2018, 2019 or 2020
would ultimately vest. In contrast, for the three months ended March 27, 2021, we recorded $12.8 million in stock-
based compensation expense. Additionally in the quarter ended March 28, 2020, we recorded total impairment
charges of approximately $6.1 million related to prepaid royalty expenses and a customer relationship intangible
asset. We had no material impairment charges in the quarter ended March 27, 2021. Although our selling, general
and administrative expenses for the three months ended March 27, 2021 represent management's best estimates and
assumptions that affect the reported amounts, our judgment could change in the future due to the significant
uncertainty surrounding the macroeconomic effect of the COVID-19 pandemic.
Accounting Standards Update
For a discussion of accounting standards updates that have been adopted or will be adopted, see
to the Consolidated Financial Statements included under Item 1.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our exposure to market risk from that disclosed in Item 7A of our Annual
Report on Form 10-K for the year ended December 26, 2020.
47
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our principal executive officer and
principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report as such term is defined in Rules 13a-15(e)
and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based
on this evaluation, our management, including our principal executive officer and principal financial officer,
concluded that our disclosure controls and procedures were effective as of March 27, 2021, to ensure that all
material information required to be disclosed by us in reports that we file or submit under the Exchange Act is
accumulated and communicated to them as appropriate to allow timely decisions regarding required disclosure and
that all such information is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
The combination of acquisitions and continued acquisition integrations undertaken
during the quarter and carried
over from prior quarters, as well as changes to the operating methods of some of our internal controls over financial
reporting due to the COVID-19 pandemic, when considered in the aggregate, represents a material change in our
internal control over financial reporting.
During the quarter ended March 27, 2021, we completed the acquisition of dental and medical businesses in North
America and Europe with approximate aggregate annual revenues of approximately $354 million. In addition,
post-acquisition integration related activities continued for our North American medical and global dental
businesses acquired during prior quarters, representing aggregate annual revenues of approximately $299
million. These acquisitions, the majority of which utilize separate information and financial accounting systems,
have been included in our consolidated financial statements since their respective dates of acquisition.
All acquisitions and continued acquisition integrations involve necessary and appropriate change-management
controls that are considered in our quarterly assessment of the design and operating effectiveness of our internal
control over financial reporting.
In addition, as a result of a combination of continued governmental imposed and Company directed closures of
some of our facilities due to the COVID-19 pandemic, we have had to maintain a number of changes to the
operating methods of some of our internal controls. For example, moving from manual sign-offs and in-person
meetings to electronic sign-offs and electronic communications such as email and telephonic or video conference
due to out-of-office working arrangements. However, the design of our internal control framework and objectives
over financial reporting remains unchanged and we do not believe that these changes have materially affected, or
are reasonably likely to materially affect, the effectiveness of our internal control over financial reporting.
Limitations of the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the internal control system are met. Because of the inherent limitations of any internal control
system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company
have been detected.
48
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of Legal Proceedings, see
Statements included under Item 1.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Annual Report on
Form 10-K for the year ended December 26, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of equity securities by the issuer
Our share repurchase program announced on March 3, 2003
, originally allowed us to repurchase up to two million
shares pre-stock splits (eight million shares post-stock splits) of our common stock, which represented
approximately 2.3% of the shares outstanding at the commencement of the program. Subsequent additional
increases totaling $3.7 billion, authorized by our Board of Directors, to the repurchase program provide for a total
of $3.8 billion of shares of our common stock to be repurchased under this program.
On March 8, 2021, we announced the reinstatement of our share repurchase program.
As of March 27, 2021, we had repurchased approximately $3.7 billion of common stock (76,888,531 shares) under
these initiatives, with $112.6 million available for future common stock share repurchases.
The following table summarizes repurchases of our common stock under our stock repurchase program during the
fiscal quarter ended March 27, 2021.
Total Number
Maximum Number
Total
of Shares
of Shares
Number
Average
Purchased as Part
that May Yet
of Shares
Price Paid
of Our Publicly
Be Purchased Under
Fiscal Month
Purchased (1)
Per Share
Announced Program
Our Program (2)
12/27/20 through 1/30/2021
-
$
-
-
3,055,600
1/31/21 through 2/27/2021
-
-
-
3,253,214
2/28/21 through 3/27/2021
1,325,242
66.90
1,325,242
1,655,664
1,325,242
1,325,242
(1) All repurchases were executed in the open market under our existing publicly announced authorized program.
(2) The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the
closing price of our common stock at that time. This table excludes shares withheld from employees to satisfy minimum tax withholding
requirements for equity-based transactions.
49
ITEM 6. EXHIBITS
.
2021.)
.
2021.)
.
2021.)
.
101.INS
Inline XBRL Instance Document - the instance document does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document+
101.SCH
Inline XBRL Taxonomy Extension Schema Document+
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document+
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document+
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document+
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document+
104
The cover page of Henry Schein, Inc.’s Quarterly Report on Form 10-Q for the
quarter ended March 27, 2021, formatted in Inline XBRL (included within
Exhibit 101 attachments).+
+ Filed or furnished herewith.
** Indicates management contract or compensatory plan or agreement.
50
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned thereunto duly authorized.
Henry Schein, Inc.
(Registrant)
By: /s/ Steven Paladino
Steven Paladino
Executive Vice President and
Chief Financial Officer
(Authorized Signatory and Principal Financial
and Accounting Officer)
Dated: May 4, 2021