UNITED STATES

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

X          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 24, 2016

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)

 

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 X  

 

No  __

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

 

Yes X  

 

No  __

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer X  

 

 

Accelerated filer __

Non-accelerated filer  __

(Do not check if a smaller reporting company)

Smaller reporting company  __

                                                                                     

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 October 24, 2016 there were 80,490,951 shares of the registrant’s common stock outstanding.

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HENRY SCHEIN, INC.

INDEX

 

 

 

 

 

 

 

 

 

 

 

 

 

Page

 

 

 

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM 1.

 

Consolidated Financial Statements:

 

 

 

 

 

 

 

 

 

 

 

Balance Sheets as of September 24, 2016 and December 26, 2015 ............................................................................  

3

 

 

 

 

 

 

 

 

 

 

Statements of Income for the three and nine months ended

 

 

 

 

 

September 24, 2016 and September 26, 2015   .......................................................................................................  

4

 

 

 

 

 

 

 

 

 

 

Statements of Comprehensive Income for the three and nine months ended

 

 

 

 

 

September 24, 2016 and September 26, 2015 ........................................................................................................  

5

 

 

 

 

 

 

 

 

 

 

Statement of Changes in Stockholders' Equity for the nine months ended

 

 

 

 

 

September 24, 2016 ................................................................................................................................................  

6

 

 

 

 

 

 

 

 

 

 

Statements of Cash Flows for the nine months ended

 

 

 

 

 

September 24, 2016 and September 26, 2015 ........................................................................................................  

7

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements ................................................................................................................  

8

 

 

 

 

 

 

 

ITEM 2.

 

Management's Discussion and Analysis of  

 

 

 

 

Financial Condition and Results of Operations ........................................................................................................  

23

 

 

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk .....................................................................................  

43

 

 

 

 

 

 

 

ITEM 4.

 

Controls and Procedures ...............................................................................................................................................  

43

 

 

 

 

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings ..........................................................................................................................................................  

44

 

 

 

 

 

 

 

ITEM 1A.

 

Risk Factors ...................................................................................................................................................................  

44

 

 

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds ......................................................................................  

45

 

 

 

 

 

 

 

ITEM 5.

 

Other Information .........................................................................................................................................................  

46

 

 

 

 

 

 

 

ITEM 6.

 

Exhibits ..........................................................................................................................................................................  

47

 

 

 

 

 

 

 

 

 

Signature ........................................................................................................................................................................  

48

               

  

 


  

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HENRY SCHEIN, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

  

 

 

 

 

 

September 24,

 

December 26,

 

 

 

 

 

2016

 

2015

 

 

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents ..............................................................................................................................................................  

 

$

76,192

 

$

72,086

 

Accounts receivable, net of reserves of $78,460 and $77,008 ................................................................................................................  

 

 

1,367,604

 

 

1,229,816

 

Inventories, net .............................................................................................................................................................................  

 

 

1,468,312

 

 

1,509,957

 

Deferred income taxes ...................................................................................................................................................................  

 

 

-

 

 

58,159

 

Prepaid expenses and other .............................................................................................................................................................  

 

 

373,847

 

 

361,082

 

 

 

Total current assets ................................................................................................................................................................  

 

 

3,285,955

 

 

3,231,100

Property and equipment, net ...............................................................................................................................................................  

 

 

324,108

 

 

318,476

Goodwill ..........................................................................................................................................................................................  

 

 

1,975,566

 

 

1,907,593

Other intangibles, net .........................................................................................................................................................................  

 

 

593,260

 

 

592,971

Investments and other .......................................................................................................................................................................  

 

 

454,704

 

 

454,600

 

 

 

Total assets ..........................................................................................................................................................................  

 

$

6,633,593

 

$

6,504,740

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable .........................................................................................................................................................................  

 

$

931,090

 

$

1,005,798

 

Bank credit lines ...........................................................................................................................................................................  

 

 

333,123

 

 

328,631

 

Current maturities of long-term debt .................................................................................................................................................  

 

 

17,460

 

 

17,331

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll and related ....................................................................................................................................................................  

 

 

249,938

 

 

258,416

 

 

Taxes ......................................................................................................................................................................................  

 

 

158,157

 

 

161,760

 

 

Other ......................................................................................................................................................................................  

 

 

349,887

 

 

375,061

 

 

 

Total current liabilities ............................................................................................................................................................  

 

 

2,039,655

 

 

2,146,997

Long-term debt .................................................................................................................................................................................  

 

 

718,024

 

 

463,752

Deferred income taxes .......................................................................................................................................................................  

 

 

143,612

 

 

252,862

Other liabilities ..................................................................................................................................................................................  

 

 

257,755

 

 

212,121

 

 

 

Total liabilities ......................................................................................................................................................................  

 

 

3,159,046

 

 

3,075,732

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests .....................................................................................................................................................  

 

 

571,369

 

 

542,194

Commitments and contingencies .........................................................................................................................................................  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $.01 par value, 1,000,000 shares authorized,

 

 

 

 

 

 

 

 

none outstanding ......................................................................................................................................................................  

 

 

-

 

 

-

 

Common stock, $.01 par value, 240,000,000 shares authorized,

 

 

 

 

 

 

 

 

80,644,289 outstanding on September 24, 2016 and

 

 

 

 

 

 

 

 

82,415,320 outstanding on December 26, 2015 ..............................................................................................................................  

 

 

806

 

 

824

 

Additional paid-in capital ...............................................................................................................................................................  

 

 

119,918

 

 

207,374

 

Retained earnings ..........................................................................................................................................................................  

 

 

2,996,773

 

 

2,895,997

 

Accumulated other comprehensive loss .............................................................................................................................................  

 

 

(222,180)

 

 

(219,939)

 

 

Total Henry Schein, Inc. stockholders' equity .................................................................................................................................  

 

 

2,895,317

 

 

2,884,256

 

Noncontrolling interests ..................................................................................................................................................................  

 

 

7,861

 

 

2,558

 

 

 

Total stockholders' equity .......................................................................................................................................................  

 

 

2,903,178

 

 

2,886,814

 

 

Total liabilities, redeemable noncontrolling interests and stockholders' equity .......................................................................................  

 

$

6,633,593

 

$

6,504,740

 


 

 

HENRY SCHEIN, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

(in thousands, except per share data)

 

(unaudited)

  

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 24,

 

September 26,

 

September 24,

 

September 26,

 

 

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales ....................................................................................................................................................................................  

 

$

2,865,148

 

$

2,685,835

 

$

8,450,734

 

$

7,778,801

Cost of sales ...............................................................................................................................................................................  

 

 

2,075,657

 

 

1,936,927

 

 

6,078,622

 

 

5,565,820

 

 

Gross profit ...........................................................................................................................................................................  

 

 

789,491

 

 

748,908

 

 

2,372,112

 

 

2,212,981

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative ................................................................................................................................................  

 

 

583,400

 

 

551,588

 

 

1,784,709

 

 

1,657,180

 

Restructuring costs ....................................................................................................................................................................  

 

 

5,370

 

 

8,438

 

 

29,811

 

 

22,522

 

 

Operating income ...................................................................................................................................................................  

 

 

200,721

 

 

188,882

 

 

557,592

 

 

533,279

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income .........................................................................................................................................................................  

 

 

3,141

 

 

3,129

 

 

10,045

 

 

9,841

 

Interest expense ........................................................................................................................................................................  

 

 

(7,488)

 

 

(6,297)

 

 

(21,982)

 

 

(18,850)

 

Other, net .................................................................................................................................................................................  

 

 

(199)

 

 

(277)

 

 

3,206

 

 

(334)

 

 

Income before taxes and equity in earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of affiliates .........................................................................................................................................................................  

 

 

196,175

 

 

185,437

 

 

548,861

 

 

523,936

Income taxes ..............................................................................................................................................................................  

 

 

(56,601)

 

 

(49,232)

 

 

(159,099)

 

 

(152,143)

Equity in earnings of affiliates .......................................................................................................................................................  

 

 

5,717

 

 

5,191

 

 

13,160

 

 

10,791

Net income .................................................................................................................................................................................  

 

 

145,291

 

 

141,396

 

 

402,922

 

 

382,584

 

Less: Net income attributable to noncontrolling interests ...................................................................................................................  

 

 

(11,578)

 

 

(13,661)

 

 

(35,360)

 

 

(33,474)

Net income attributable to Henry Schein, Inc. ...................................................................................................................................  

 

$

133,713

 

$

127,735

 

$

367,562

 

$

349,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic ......................................................................................................................................................................................  

 

$

1.65

 

$

1.54

 

$

4.52

 

$

4.20

 

Diluted ....................................................................................................................................................................................  

 

$

1.63

 

$

1.52

 

$

4.47

 

$

4.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic ......................................................................................................................................................................................  

 

 

80,896

 

 

82,858

 

 

81,300

 

 

83,042

 

Diluted ....................................................................................................................................................................................  

 

 

81,855

 

 

84,084

 

 

82,317

 

 

84,312

See accompanying notes.

 

4


 

 

HENRY SCHEIN, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(in thousands)

 

(unaudited)

  

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 24,

 

September 26,

 

September 24,

 

September 26,

 

 

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income .................................................................................................................................................................................  

 

$

145,291

 

$

141,396

 

$

402,922

 

$

382,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation loss....................................................................................................................................................  

 

 

(6,463)

 

 

(38,730)

 

 

(2,041)

 

 

(112,877)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) from foreign currency hedging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

activities ................................................................................................................................................................................  

 

 

(603)

 

 

1,924

 

 

1,026

 

 

1,270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gain ..........................................................................................................................................................  

 

 

-

 

 

-

 

 

-

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension adjustment gain..............................................................................................................................................................  

 

 

209

 

 

1,363

 

 

10

 

 

2,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax  ...............................................................................................................................................  

 

 

(6,857)

 

 

(35,443)

 

 

(1,005)

 

 

(109,068)

Comprehensive income .................................................................................................................................................................  

 

 

138,434

 

 

105,953

 

 

401,917

 

 

273,516

 

Comprehensive income attributable to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

  interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income ............................................................................................................................................................................  

 

 

(11,578)

 

 

(13,661)

 

 

(35,360)

 

 

(33,474)

 

 

Foreign currency translation loss (gain) ........................................................................................................................................  

 

 

(716)

 

 

1,498

 

 

(1,236)

 

 

4,518

 

 

 

Comprehensive income attributable to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  interests ............................................................................................................................................................................  

 

 

(12,294)

 

 

(12,163)

 

 

(36,596)

 

 

(28,956)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Henry Schein, Inc. ...................................................................................................................  

 

$

126,140

 

$

93,790

 

$

365,321

 

$

244,560

See accompanying notes.

 

5


 

HENRY SCHEIN, INC.

 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

 (in thousands, except share and per share data)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

 

 

 

 Other 

 

 

 

 

Total

 

 

 

$.01 Par Value

 

Paid-in

 

Retained

 

Comprehensive

 

Noncontrolling

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 Capital 

 

Earnings

 

 Income/(Loss) 

 

Interests

 

Equity

Balance, December 26, 2015 ..............................................................................................................................................................  

 

82,415,320

 

$

824

 

$

207,374

 

$

2,895,997

 

$

(219,939)

 

$

2,558

 

$

2,886,814

Net income (excluding $34,849 attributable to Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests) .............................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

367,562

 

 

-

 

 

511

 

 

368,073

Foreign currency translation gain (loss) (excluding gain of $1,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Redeemable noncontrolling interests) ...................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

(3,277)

 

 

8

 

 

(3,269)

Unrealized gain from foreign currency hedging activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax of $290 ....................................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

1,026

 

 

-

 

 

1,026

Pension adjustment gain, net of tax benefit of $23..........................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

10

 

 

-

 

 

10

Dividends paid ..........................................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(370)

 

 

(370)

Initial noncontrolling interests and adjustments related to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

business acquisitions ................................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

5,144

 

 

5,144

Change in fair value of redeemable securities ..............................................................................................................................................  

 

-

 

 

-

 

 

(49,648)

 

 

-

 

 

-

 

 

-

 

 

(49,648)

Other adjustments .......................................................................................................................................................................  

 

-

 

 

-

 

 

2

 

 

-

 

 

-

 

 

10

 

 

12

Repurchase and retirement of common stock ...............................................................................................................................................  

 

(2,180,440)

 

 

(22)

 

 

(83,193)

 

 

(266,786)

 

 

-

 

 

-

 

 

(350,001)

Stock issued upon exercise of stock options,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

including tax benefit of $16,528 ......................................................................................................................................................  

 

177,837

 

 

1

 

 

26,281

 

 

-

 

 

-

 

 

-

 

 

26,282

Stock-based compensation expense .......................................................................................................................................................  

 

367,107

 

 

4

 

 

43,623

 

 

-

 

 

-

 

 

-

 

 

43,627

Shares withheld for payroll taxes .........................................................................................................................................................  

 

(163,478)

 

 

(1)

 

 

(28,778)

 

 

-

 

 

-

 

 

-

 

 

(28,779)

Settlement of stock-based compensation awards ...........................................................................................................................................  

 

27,943

 

 

-

 

 

4,257

 

 

-

 

 

-

 

 

-

 

 

4,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 24, 2016 .............................................................................................................................................................  

 

80,644,289

 

$

806

 

$

119,918

 

$

2,996,773

 

$

(222,180)

 

$

7,861

 

$

2,903,178

See accompanying notes.

 

6


 

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

  

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

September 24,

 

September 26,

 

 

 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income ......................................................................................................................................................................................  

 

$

402,922

 

$

382,584

 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization ....................................................................................................................................................  

 

 

125,829

 

 

118,891

 

 

 

Stock-based compensation expense .............................................................................................................................................  

 

 

43,627

 

 

35,080

 

 

 

Provision for losses on trade and other accounts receivable ...............................................................................................................  

 

 

1,736

 

 

2,878

 

 

 

Benefit from deferred income taxes ..............................................................................................................................................  

 

 

(13,425)

 

 

(7,818)

 

 

 

Equity in earnings of affiliates .....................................................................................................................................................  

 

 

(13,160)

 

 

(10,791)

 

 

 

Distributions from equity affiliates ...............................................................................................................................................  

 

 

12,104

 

 

11,316

 

 

 

Changes in unrecognized tax benefits ...........................................................................................................................................  

 

 

4,252

 

 

8,541

 

 

 

Other ......................................................................................................................................................................................  

 

 

8,392

 

 

7,131

 

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

 

 

Accounts receivable ...............................................................................................................................................................  

 

 

(131,586)

 

 

(111,890)

 

 

 

 

Inventories ...........................................................................................................................................................................  

 

 

48,513

 

 

(108,268)

 

 

 

 

Other current assets ...............................................................................................................................................................  

 

 

(35,781)

 

 

(63,485)

 

 

 

 

Accounts payable and accrued expenses ...................................................................................................................................  

 

 

(102,470)

 

 

24,361

Net cash provided by operating activities ...............................................................................................................................................  

 

 

350,953

 

 

288,530

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of fixed assets ....................................................................................................................................................................  

 

 

(44,525)

 

 

(52,164)

 

Payments for equity investments and business

 

 

 

 

 

 

 

 

acquisitions, net of cash acquired .....................................................................................................................................................  

 

 

(126,543)

 

 

(142,078)

 

Proceeds from sales of available-for-sale securities ..................................................................................................................................  

 

 

-

 

 

20

 

Other ..............................................................................................................................................................................................  

 

 

(8,766)

 

 

(9,247)

Net cash used in investing activities .......................................................................................................................................................  

 

 

(179,834)

 

 

(203,469)

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from (repayments of) bank borrowings .....................................................................................................................................  

 

 

(3,274)

 

 

4,920

 

Proceeds from issuance of long-term debt ..............................................................................................................................................  

 

 

260,000

 

 

135,000

 

Debt issuance costs ............................................................................................................................................................................  

 

 

(233)

 

 

(150)

 

Principal payments for long-term debt ...................................................................................................................................................  

 

 

(9,293)

 

 

(70,585)

 

Proceeds from issuance of stock upon exercise of stock options .................................................................................................................  

 

 

9,754

 

 

11,625

 

Payments for repurchases of common stock ..........................................................................................................................................  

 

 

(350,001)

 

 

(150,863)

 

Excess tax benefits related to stock-based compensation .........................................................................................................................  

 

 

(463)

 

 

2,932

 

Distributions to noncontrolling shareholders ...........................................................................................................................................  

 

 

(26,366)

 

 

(22,316)

 

Acquisitions of noncontrolling interests in subsidiaries ..............................................................................................................................  

 

 

(51,265)

 

 

(8,570)

Net cash used in financing activities ......................................................................................................................................................  

 

 

(171,141)

 

 

(98,007)

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents ..................................................................................................................  

 

 

4,128

 

 

(16,047)

Net change in cash and cash equivalents ................................................................................................................................................  

 

 

4,106

 

 

(28,993)

Cash and cash equivalents, beginning of period .......................................................................................................................................  

 

 

72,086

 

 

89,474

Cash and cash equivalents, end of period ...............................................................................................................................................  

 

$

76,192

 

$

60,481

See accompanying notes.

 

7


 

Note 1Basis 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.

 

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, 2015.

 

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and 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 nine months ended September 24, 2016 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 31, 2016.

 

Note 2Segment Data

 

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, animal health 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 animal health group serves animal health practices and clinics.  Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions.  Our global dental, animal health and medical groups serve practitioners in 33 countries worldwide.

 

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 and animal health clinics.  Our value-added practice solutions include financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other services.

 

See accompanying notes.

 

8


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

The following tables present information about our reportable and operating segments:

  

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 24,

 

September 26,

 

September 24,

 

September 26,

 

 

 

 

 

2016

 

2015

 

2016

 

2015

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Health care distribution (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dental .....................................................................................................................................................................................  

 

$

1,330,525

 

$

1,266,321

 

$

4,005,468

 

$

3,837,137

 

 

Animal health ...........................................................................................................................................................................  

 

 

790,279

 

 

732,533

 

 

2,415,290

 

 

2,165,415

 

 

Medical ...................................................................................................................................................................................  

 

 

639,648

 

 

597,243

 

 

1,716,590

 

 

1,511,295

 

 

 

Total health care distribution ..................................................................................................................................................  

 

 

2,760,452

 

 

2,596,097

 

 

8,137,348

 

 

7,513,847

 

Technology and value-added services (2)...........................................................................................................................................  

 

 

104,696

 

 

89,738

 

 

313,386

 

 

264,954

 

 

Total .......................................................................................................................................................................................  

 

$

2,865,148

 

$

2,685,835

 

$

8,450,734

 

$

7,778,801

*CS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*CE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 24,

 

September 26,

 

September 24,

 

September 26,

 

 

 

 

 

2016

 

2015

 

2016

 

2015

Operating Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Health care distribution ..................................................................................................................................................................  

 

$

170,158

 

$

161,702

 

$

468,610

 

$

454,009

 

Technology and value-added services ...............................................................................................................................................  

 

 

30,563

 

 

27,180

 

 

88,982

 

 

79,270

 

 

Total .......................................................................................................................................................................................  

 

$

200,721

 

$

188,882

 

$

557,592

 

$

533,279

 

Note 3Debt

 

Bank Credit Lines

 

On September 12, 2012, we entered into a $500 million revolving credit agreement (the “Credit Agreement”) with a $200 million expansion feature, which was originally set to expire on September 12, 2017.  On September 22, 2014, we extended the expiration date of the Credit Agreement to September 22, 2019.  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.  The Credit Agreement provides, among other things, that we are required to maintain maximum leverage ratios, and contains customary representations, warranties and affirmative covenants.  The Credit Agreement also contains customary negative covenants, subject to exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements.  As of September 24, 2016 and December 26, 2015, the borrowings on this revolving credit facility were $0.0 million and $40.0 million, respectively.  As of September 24, 2016 and December 26, 2015, there were $13.4 million and $11.4 million of letters of credit, respectively, provided to third parties under the credit facility.

 

As of September 24, 2016 and December 26, 2015, we had various other short-term bank credit lines available, of which $333.1 million and $288.6 million, respectively, were outstanding.  At September 24, 2016 and December 26, 2015, borrowings under all of our credit lines had a weighted average interest rate of 1.41% and 1.21%, respectively.

 

9


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

Private Placement Facilities

 

On August 10, 2010, we entered into $400 million private placement facilities with two insurance companies.  On April 30, 2012, we increased our available credit facilities by $375 million by entering into an additional agreement with one insurance company and amending our existing agreements with two insurance companies.  On September 22, 2014, we increased our available private placement facilities by $200 million to a total facility amount of $975 million, and extended the expiration date to September 22, 2017.  These facilities 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 September 22, 2017.  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.

 

The components of our private placement facility borrowings as of September 24, 2016 are presented in the following table (in thousands):

 

 

 

Amount of

 

 

 

 

 

 

 

Borrowing

 

Borrowing

 

 

Date of Borrowing

 

Outstanding

 

Rate

 

Due Date

September 2, 2010

 

$

100,000

 

3.79

%

 

September 2, 2020

January 20, 2012

 

 

50,000

 

3.45

 

 

January 20, 2024

January 20, 2012 (1)

 

 

42,857

 

3.09

 

 

January 20, 2022

December 24, 2012

 

 

50,000

 

3.00

 

 

December 24, 2024

June 2, 2014

 

 

100,000

 

3.19

 

 

June 2, 2021

 

 

$

342,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016.

 

U.S. Trade Accounts Receivable Securitization

 

On April 17, 2013, we entered into a facility agreement of up to $300 million with a bank, as agent, based on the securitization of our U.S. trade accounts receivable.  This facility allowed us to replace public debt (approximately $220 million), which had a higher interest rate at Henry Schein Animal Health during February 2013 and provided funding for working capital and general corporate purposes.  The financing was structured as an asset-backed securitization program with pricing committed for up to three years.  On April 17, 2015, we extended the expiration date of this facility agreement to April 15, 2018, and on June 1, 2016, we extended the expiration date of this facility agreement to April 29, 2019 and increased the purchase limit under the facility from $300 million to $350 million.  The borrowings outstanding under this securitization facility were $350.0 million and $90.0 million as of September 24, 2016 and December 26, 2015, respectively.  At September 24, 2016, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 84 basis points plus 75 basis points, for a combined rate of 1.59%.  At December 26, 2015, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 40 basis points plus 75 basis points, for a combined rate of 1.15%.

 

We are required to pay a commitment fee of 30 basis points on the daily balance of the unused portion of the facility if our usage is greater than or equal to 50% of the facility limit or a commitment fee of 35 basis points on the daily balance of the unused portion of the facility if our usage is less than 50% of the facility limit.

10


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

 

Borrowings under this facility are presented as a component of Long-term debt within our consolidated balance sheet.

 

Long-term debt

 

Long-term debt consisted of the following:

 

 

 

 

September 24,

 

December 26,

 

 

 

2016

 

2015

Private placement facilities ..........................................................................................................................................................  

 

$

342,857

 

$

350,000

U.S. trade accounts receivable securitization ...................................................................................................................................  

 

 

350,000

 

 

90,000

Note payable to bank at a weighted-average interest rate of 11.00% and 8.83%

 

 

33

 

 

5

Various collateralized and uncollateralized loans payable with interest,

 

 

 

 

 

 

 

in varying installments through 2018 at interest rates

 

 

 

 

 

 

 

ranging from 2.27% to 9.36%

 

37,146

 

 

38,215

Capital lease obligations payable through 2029 with interest rates

 

 

 

 

 

 

 

ranging from 1.38% to 16.90%

 

5,448

 

 

2,863

Total .......................................................................................................................................................................................  

 

 

735,484

 

 

481,083

Less current maturities ................................................................................................................................................................  

 

 

(17,460)

 

 

(17,331)

 

Total long-term debt ..........................................................................................................................................................  

 

$

718,024

 

$

463,752

 

 

 

 

 

 

 

 

 

Note 4 – Redeemable Noncontrolling Interests

 

Some minority shareholders 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 nine months ended September 24, 2016 and the year ended December 26, 2015 are presented in the following table:

  

 

 

 

 

September 24,

 

December 26,

 

 

 

2016

 

2015

Balance, beginning of period ...................................................................................................................................................  

 

$

542,194

 

$

564,527

Decrease in redeemable noncontrolling interests due to

 

 

 

 

 

 

 

redemptions .....................................................................................................................................................................  

 

 

(51,265)

 

 

(82,563)

Increase in redeemable noncontrolling interests due to business

 

 

 

 

 

 

 

acquisitions.......................................................................................................................................................................  

 

 

20,584

 

 

18,936

Net income attributable to redeemable noncontrolling interests ......................................................................................................  

 

 

34,849

 

 

43,588

Dividends declared ................................................................................................................................................................  

 

 

(25,869)

 

 

(32,706)

Effect of foreign currency translation gain (loss) attributable to

 

 

 

 

 

 

 

redeemable noncontrolling interests ......................................................................................................................................  

 

 

1,228

 

 

(4,790)

Change in fair value of redeemable securities .............................................................................................................................  

 

 

49,648

 

 

35,202

Balance, end of period ...........................................................................................................................................................  

 

$

571,369

 

$

542,194

 

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.

 

11


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

Note 5 – 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. Our comprehensive income is primarily comprised of net income, foreign currency translation gain (loss), unrealized gain (loss) on foreign currency hedging activities, unrealized investment gain (loss) and pension adjustment gain (loss).

 

The following table summarizes our Accumulated other comprehensive loss, net of applicable taxes as of:

  

 

 

 

 

September 24,

 

December 26,

 

 

 

 

2016

 

2015

Attributable to Redeemable noncontrolling interests:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment ..........................................................................................................  

 

$

(9,145)

 

$

(10,373)

 

 

 

 

 

 

 

 

 

Attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment ..........................................................................................................  

 

$

(68)

 

$

(76)

 

 

 

 

 

 

 

 

 

Attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

Foreign currency translation loss .........................................................................................................................  

 

$

(203,776)

 

$

(200,499)

 

Unrealized gain from foreign currency hedging activities ..........................................................................................  

 

 

1,965

 

 

939

 

Unrealized investment loss .................................................................................................................................  

 

 

(2)

 

 

(2)

 

Pension adjustment loss ....................................................................................................................................  

 

 

(20,367)

 

 

(20,377)

 

 

Accumulated other comprehensive loss ...........................................................................................................  

 

$

(222,180)

 

$

(219,939)

 

 

 

 

 

 

 

 

 

Total Accumulated other comprehensive loss ............................................................................................................  

 

$

(231,393)

 

$

(230,388)

 

 

The following table summarizes the components of comprehensive income, net of applicable taxes as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 24,

 

September 26,

 

September 24,

 

September 26,

 

 

2016

 

2015

 

2016

 

2015

Net income ........................................................................................................................................................................  

 

$

145,291

 

$

141,396

 

$

402,922

 

$

382,584

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation loss............................................................................................................................................  

 

 

(6,463)

 

 

(38,730)

 

 

(2,041)

 

 

(112,877)

Tax effect .........................................................................................................................................................................  

 

 

-

 

 

-

 

 

-

 

 

-

Foreign currency translation loss ............................................................................................................................................  

 

 

(6,463)

 

 

(38,730)

 

 

(2,041)

 

 

(112,877)

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) from foreign currency hedging

 

 

 

 

 

 

 

 

 

 

 

 

   activities .........................................................................................................................................................................  

 

 

(803)

 

 

2,671

 

 

1,316

 

 

1,850

Tax effect .........................................................................................................................................................................  

 

 

200

 

 

(747)

 

 

(290)

 

 

(580)

Unrealized gain (loss) from foreign currency hedging

 

 

 

 

 

 

 

 

 

 

 

 

   activities .........................................................................................................................................................................  

 

 

(603)

 

 

1,924

 

 

1,026

 

 

1,270

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gain ..................................................................................................................................................  

 

 

-

 

 

-

 

 

-

 

 

2

Tax effect .........................................................................................................................................................................  

 

 

-

 

 

-

 

 

-

 

 

-

Unrealized investment gain ..................................................................................................................................................  

 

 

-

 

 

-

 

 

-

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension adjustment gain (loss)...............................................................................................................................................  

 

 

280

 

 

1,704

 

 

(13)

 

 

3,416

Tax effect .........................................................................................................................................................................  

 

 

(71)

 

 

(341)

 

 

23

 

 

(879)

Pension adjustment gain (loss)...............................................................................................................................................  

 

 

209

 

 

1,363

 

 

10

 

 

2,537

Comprehensive income .......................................................................................................................................................  

 

$

138,434

 

$

105,953

 

$

401,917

 

$

273,516

 

12


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

During the three months ended September 24, 2016 and September 26, 2015, we recognized, as a component of our comprehensive income, a foreign currency translation loss of $6.5 million and $38.7 million, respectively, due to changes in foreign exchange rates from the beginning of the period to the end of the period.  During the nine months ended September 24, 2016 and September 26, 2015, we recognized, as a component of our comprehensive income, a foreign currency translation loss of $2.0 million and $112.9 million, respectively, due to changes in foreign exchange rates from the beginning of the period to the end of the period.  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 (loss).  The foreign currency translation loss during the three and nine months ended September 24, 2016 and September 26, 2015 was impacted by changes in foreign currency exchange rates as follows:

  

 

 

 

Foreign Currency

 

 

 

 

 

Foreign Currency

 

 

 

 

 

 

 

Translation

 

 

 

 

 

Translation

 

 

 

 

 

 

 

Gain (Loss)

 

 

 

 

 

Gain (Loss)

 

 

 

 

 

 

 

for the Three

 

 

 

 

 

for the Three

 

 

 

 

 

 

 

Months Ended

 

FX Rate into USD

 

Months Ended

 

FX Rate into USD

 

 

 

September 24,

 

September 24,

 

June 25,

 

September 26,

 

September 26,

 

June 27,

Currency

 

2016

 

2016

 

2016

 

2015

 

2015

 

2015

Euro ..........................................................................................................................................................................................  

 

$

3,755

 

1.12

 

1.12

 

$

1,063

 

1.12

 

1.12

British Pound ...............................................................................................................................................................................  

 

 

(17,161)

 

1.30

 

1.38

 

 

(9,668)

 

1.52

 

1.57

Australian Dollar ..........................................................................................................................................................................  

 

 

3,826

 

0.76

 

0.75

 

 

(14,004)

 

0.70

 

0.77

Canadian Dollar ..........................................................................................................................................................................  

 

 

(1,565)

 

0.76

 

0.77

 

 

(6,572)

 

0.75

 

0.81

Polish Zloty .................................................................................................................................................................................  

 

 

2,044

 

0.26

 

0.25

 

 

(458)

 

0.26

 

0.27

Swiss Franc .................................................................................................................................................................................  

 

 

189

 

1.03

 

1.03

 

 

(3,098)

 

1.02

 

1.07

Brazilian Real..............................................................................................................................................................................  

 

 

826

 

0.31

 

0.30

 

 

(3,418)

 

0.25

 

0.32

All other currencies .......................................................................................................................................................................  

 

 

1,623

 

 

 

 

 

 

(2,575)

 

 

 

 

 

Total .......................................................................................................................................................................................  

 

$

(6,463)

 

 

 

 

 

$

(38,730)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

 

 

 

 

Foreign Currency

 

 

 

 

 

 

 

Translation

 

 

 

 

 

Translation

 

 

 

 

 

 

 

Gain (Loss)

 

 

 

 

 

Gain (Loss)

 

 

 

 

 

 

 

for the Nine

 

 

 

 

 

for the Nine

 

 

 

 

 

 

 

Months Ended

 

FX Rate into USD

 

Months Ended

 

FX Rate into USD

 

 

 

September 24,

 

September 24,

 

December 26,

 

September 26,

 

September 26,

 

December 27,

Currency

 

2016

 

2016

 

2015

 

2015

 

2015

 

2014

Euro ..........................................................................................................................................................................................  

 

$

14,932

 

1.12

 

1.10

 

$

(58,577)

 

1.12

 

1.22

British Pound ...............................................................................................................................................................................  

 

 

(39,536)

 

1.30

 

1.49

 

 

(9,775)

 

1.52

 

1.56

Australian Dollar ..........................................................................................................................................................................  

 

 

9,268

 

0.76

 

0.73

 

 

(25,809)

 

0.70

 

0.81

Canadian Dollar ..........................................................................................................................................................................  

 

 

5,941

 

0.76

 

0.72

 

 

(7,915)

 

0.75

 

0.86

Polish Zloty .................................................................................................................................................................................  

 

 

428

 

0.26

 

0.26

 

 

(2,309)

 

0.26

 

0.28

Swiss Franc .................................................................................................................................................................................  

 

 

1,408

 

1.03

 

1.01

 

 

606

 

1.02

 

1.01

Brazilian Real..............................................................................................................................................................................  

 

 

3,055

 

0.31

 

0.25

 

 

(6,032)

 

0.25

 

0.37

All other currencies .......................................................................................................................................................................  

 

 

2,463

 

 

 

 

 

 

(3,066)

 

 

 

 

 

Total .......................................................................................................................................................................................  

 

$

(2,041)

 

 

 

 

 

$

(112,877)

 

 

 

 

 

13


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

The following table summarizes our total comprehensive income, net of applicable taxes, as follows:

  

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 24,

 

September 26,

 

September 24,

 

September 26,

 

 

 

2016

 

2015

 

2016

 

2015

Comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

Henry Schein, Inc. ...................................................................................................................................................  

 

$

126,140

 

$

93,790

 

$

365,321

 

$

244,560

Comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests .............................................................................................................................................  

 

 

165

 

 

128

 

 

519

 

 

513

Comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests ...........................................................................................................................  

 

 

12,129

 

 

12,035

 

 

36,077

 

 

28,443

Comprehensive income .................................................................................................................................................  

 

$

138,434

 

$

105,953

 

$

401,917

 

$

273,516

 

Note 6Fair Value Measurements

 

ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC Topic 820”) provides a framework for measuring fair value in generally accepted accounting principles.

 

ASC Topic 820 defines fair value 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.  ASC Topic 820 establishes a fair value hierarchy that 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 under ASC Topic 820 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 valuation methodologies that we used to measure different financial instruments at fair value.

 

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.

 

14


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

Debt

 

The fair value of our debt as of September 24, 2016 and December 26, 2015 was estimated at $1,068.6 million and $809.7 million, respectively.  Factors that we considered when estimating the fair value of our debt include market conditions, prepayment and make-whole provisions, liquidity levels in the private placement market, variability in pricing from multiple lenders and term of debt.

 

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 intercompany loans and certain forecasted inventory purchase commitments with suppliers.

 

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.

 

Redeemable noncontrolling interests

 

Some minority shareholders 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 based on third-party valuations.  The primary factor affecting the future value of redeemable noncontrolling interests is expected earnings and, if such earnings are not achieved, the value of the redeemable noncontrolling interests might be impacted.  The noncontrolling interests subject to put options are adjusted to their estimated redemption amounts 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.  The values for Redeemable noncontrolling interests are classified within Level 3 of the fair value hierarchy.  The details of the changes in Redeemable noncontrolling interests are presented in Note 4.

  

15


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

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 September 24, 2016 and December 26, 2015:

  

 

 

 

 

 

September 24, 2016

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts ..............................................................................................................................................................  

 

$

-

 

$

1,201

 

$

-

 

$

1,201

 

 

Total assets .....................................................................................................................................................................  

 

$

-

 

$

1,201

 

$

-

 

$

1,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts ..............................................................................................................................................................  

 

$

-

 

$

1,068

 

$

-

 

$

1,068

 

 

Total liabilities ..................................................................................................................................................................  

 

$

-

 

$

1,068

 

$

-

 

$

1,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests ..............................................................................................................................................  

 

$

-

 

$

-

 

$

571,369

 

$

571,369

*CS

 

 

 

 

 

 

 

 

 

 

 

 

 

*CE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 26, 2015

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts ..............................................................................................................................................................  

 

$

-

 

$

4,289

 

$

-

 

$

4,289

 

 

Total assets .....................................................................................................................................................................  

 

$

-

 

$

4,289

 

$

-

 

$

4,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts ..............................................................................................................................................................  

 

$

-

 

$

2,477

 

$

-

 

$

2,477

 

 

Total liabilities ..................................................................................................................................................................  

 

$

-

 

$

2,477

 

$

-

 

$

2,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests ..............................................................................................................................................  

 

$

-

 

$

-

 

$

542,194

 

$

542,194

 

Note 7Business Acquisitions

 

Acquisitions

 

The operating results of all acquisitions are reflected in our financial statements from their respective acquisition dates.

 

We completed certain acquisitions during the nine months ended September 24, 2016.  Such acquisitions were immaterial to our financial statements individually and in the aggregate.

 

Some prior owners of such 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 nine months ended September 24, 2016 and September 26, 2015, there were no material adjustments recorded in our consolidated statement of income relating to changes in estimated contingent purchase price liabilities.

16


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

Note 8Plan of Restructuring

 

 

On November 6, 2014, we announced a corporate initiative to rationalize our operations and provide expense efficiencies, which was expected to be completed by the end of fiscal 2015.  This initiative originally planned for the elimination of approximately 2% to 3% of our workforce and the closing of certain facilities.  We subsequently announced that we plan to extend these restructuring activities through the end of 2016 to further implement cost-savings initiatives, which will now result in the elimination of approximately 3% to 4% of our workforce.  The total costs associated with the actions to date for this restructuring include $34.9 million pre-tax, which was recorded in fiscal 2015 and $29.8 million pre-tax which has been recorded in the nine months ended September 24, 2016.

 

During the three months ended September 24, 2016 and September 26, 2015, we recorded restructuring costs of $5.4 million and $8.4 million, respectively.  During the nine months ended September 24, 2016 and September 26, 2015, we recorded restructuring costs of $29.8 million and $22.5 million, respectively.  The costs associated with this restructuring are included in a separate line item, “Restructuring costs” within our consolidated statements of income.

 

On October 28, 2016, we estimated the remaining restructuring costs to be recorded in the fourth quarter of 2016 to be in the range of $17 million to $22 million.

 

The following table shows the amounts expensed and paid for restructuring costs that were incurred during the nine months ended September 24, 2016 and during our 2015 fiscal year and the remaining accrued balance of restructuring costs as of September 24, 2016, which is included in Accrued expenses: Other and Other liabilities within our consolidated balance sheet:

  

 

 

 

 

 

Facility

 

 

 

 

 

 

 

Severance

 

Closing

 

 

 

 

 

 

 

Costs

 

Costs

 

Other

 

Total

Balance, December 27, 2014 ...............................................................................................................................................................  

 

$

120

 

$

301

 

$

-

 

$

421

Provision ..........................................................................................................................................................................................  

 

 

26,742

 

 

5,706

 

 

2,483

 

 

34,931

Payments and other adjustments ..........................................................................................................................................................  

 

 

(17,759)

 

 

(3,856)

 

 

(1,672)

 

 

(23,287)

Balance, December 26, 2015 ...............................................................................................................................................................  

 

$

9,103

 

$

2,151

 

$

811

 

$

12,065

Provision ..........................................................................................................................................................................................  

 

 

25,736

 

 

2,619

 

 

1,456

 

 

29,811

Payments .........................................................................................................................................................................................  

 

 

(16,964)

 

 

(3,140)

 

 

(2,029)

 

 

(22,133)

Balance, September 24, 2016 ..............................................................................................................................................................  

 

$

17,875

 

$

1,630

 

$

238

 

$

19,743

 

.......................................................................................................................................................................................................

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table shows, by reportable segment, the amounts expensed and paid for restructuring costs that were incurred during the nine months ended September 24, 2016 and the 2015 fiscal year and the remaining accrued balance of restructuring costs as of September 24, 2016:

  

 

 

 

 

 

 

Technology and

 

 

 

 

 

Health Care

 

Value-Added

 

 

 

 

 

 

Distribution

 

Services

 

Total

Balance, December 27, 2014 ..................................................................................................................................................  

 

$

421

 

$

-

 

$

421

Provision ............................................................................................................................................................................  

 

 

33,889

 

 

1,042

 

 

34,931

Payments and other adjustments ............................................................................................................................................  

 

 

(22,248)

 

 

(1,039)

 

 

(23,287)

Balance, December 26, 2015 ..................................................................................................................................................  

 

$

12,062

 

$

3

 

$

12,065

Provision ............................................................................................................................................................................  

 

 

28,963

 

 

848

 

 

29,811

Payments ...........................................................................................................................................................................  

 

 

(21,503)

 

 

(630)

 

 

(22,133)

Balance, September 24, 2016 .................................................................................................................................................  

 

$

19,522

 

$

221

 

$

19,743

 

17


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

Note 9Earnings 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

 

Nine Months Ended

 

 

 

September 24,

 

September 26,

 

September 24,

 

September 26,

 

 

 

2016

 

2015

 

2016

 

2015

Basic .......................................................................................................................................................................................  

 

80,896

 

82,858

 

81,300

 

83,042

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options, restricted stock and restricted stock units .................................................................................................................  

 

959

 

1,226

 

1,017

 

1,270

 

Diluted ..................................................................................................................................................................................  

 

81,855

 

84,084

 

82,317

 

84,312

 

Note 10 – Income Taxes

 

For the nine months ended September 24, 2016 and September 26, 2015, our effective tax rate was 29.0%.  The difference between our effective tax rates and the federal statutory tax rates for both periods primarily relates to state and foreign income taxes and interest expense.  During the second quarter of 2016, the effective tax rate was affected by a federal tax audit settlement, as discussed below, which reduced our income tax expense by approximately $4.5 million.  The 2015 effective tax rate was affected by a favorable response to a tax petition allowing us to conclude that it was more likely than not that certain unrecognized tax benefits, which had previously been reserved, was realized.  As a result, in the quarter ended September 26, 2015, our provision for income for taxes included a one-time $6.3 million tax benefit.

 

The total amount of unrecognized tax benefits as of September 24, 2016 was approximately $104.6 million, of which $76.7 million would affect the effective tax rate if recognized.  It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect the change to have a material impact on our consolidated financial statements.

 

The total amounts of interest and penalties, which are classified as a component of the provision for income taxes, were approximately $16.0 million and $0.0, respectively, as of September 24, 2016.

 

The tax years subject to examination by major tax jurisdictions include the years 2012 and forward by the U.S. Internal Revenue Service (“IRS”), as well as the years 2008 and forward for certain states and certain foreign jurisdictions.   In December 2014, the IRS issued a Statutory Notice of Deficiency for 2009, 2010 and 2011.  During the quarter ended March 28, 2015, we filed our petition to the U.S. Tax Court disputing the adjustments proposed by the IRS.  During the quarter ended June 27, 2015, we were notified by the IRS that our protest was transferred to the Appellate Divisions (Appeals Section) of the IRS.  During the quarter ended March 26, 2016, we filed our protest with the Appellate Division. The opening appeals conference was held on June 8, 2016 and a proposed settlement was reached.  On July 13, 2016, a joint status report was filed with the Tax Court indicating a basis for settlement has been reached on all of the issues in this case.  On October 19, 2016 an executed decision document was signed by the Internal Revenue Service’s Special Trial Attorney and submitted to the Tax Court finalizing the settlement.

 

During the third quarter of 2016, the Company elected to early adopt Accounting Standards Update (“ASU”) No. 2015-17 (Topic 740), Balance Sheet Classification of Deferred Taxes, prospectively. As a result, all deferred

18


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

tax assets and liabilities will be presented as noncurrent on the consolidated balance sheet.  There was no impact on our results of operations as a result of the adoption of ASU 2015-17 and prior periods have not been adjusted.

  

 

Note 11Derivatives 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 markets.  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 investments, maintaining a strong balance sheet and having multiple sources of capital.

 

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., 18 months or less) foreign currency forward contracts to protect against currency 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 Topic 815 have been omitted.

19


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

Note 12 – Stock-Based Compensation

 

Our accompanying consolidated statements of income reflect pre-tax share-based compensation expense of $16.1 million ($11.5 million after-tax) and $43.6 million ($31.0 million after-tax) for the three and nine months ended September 24, 2016, respectively, and $13.1 million ($9.6 million after-tax) and $35.1 million ($24.9 million after-tax) for the three and nine months ended September 26, 2015, 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 on a straight-line basis 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 2013 Stock Incentive Plan, as amended, 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.  Prior to March 2009, awards under the Plans principally included a combination of at-the-money stock options and restricted stock/units.  Since March 2009, equity-based awards have been granted solely in the form of restricted stock/units, with the exception of providing stock options to employees pursuant to certain pre-existing contractual obligations.

 

Grants of restricted stock/units are stock-based awards granted to recipients with specified vesting provisions.  In the case of restricted stock, common stock is delivered on the date of grant, subject to vesting conditions.  In the case of restricted stock units, common stock is generally delivered on or following satisfaction of vesting conditions.  We issue restricted stock/units 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 restricted stock/units that vest based on our achieving specified performance measurements and the recipient’s continued service over time (primarily three-year cliff vesting).

 

With respect to time-based restricted stock/units, we estimate the fair value on the date of grant based on our closing stock price.  With respect to performance-based restricted stock/units, 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 of the Board of Directors.  Although there is no guarantee that performance targets will be achieved, we estimate the fair value of performance-based restricted stock/units 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 such as acquisitions, divestitures, new business ventures, certain capital transactions (including share repurchases), restructuring costs, if any, changes in accounting principles or in applicable laws or regulations and certain 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 non-vested awards as of September 24, 2016 was $98.8 million, which is expected to be recognized over a weighted-average period of approximately 2.1 years.  

 

20


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

The following table summarizes stock option activity under the Plans during the nine months ended September 24, 2016:

  

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

 

 

 

 

 

 

Average

 

Contractual

 

Aggregate

 

 

 

 

Exercise

 

Life in

 

 Intrinsic 

 

 

Shares

 

Price

 

Years

 

 Value 

Outstanding at beginning of period ............................................................................................................................................  

 

385

 

$

 56.00  

 

 

 

 

 

Granted ...............................................................................................................................................................................  

 

-

 

 

 -    

 

 

 

 

 

Exercised .............................................................................................................................................................................  

 

(178)

 

 

 54.88  

 

 

 

 

 

Forfeited ..............................................................................................................................................................................  

 

-

 

 

 -    

 

 

 

 

 

Outstanding at end of period ....................................................................................................................................................  

 

207

 

$

 56.96  

 

 1.1  

 

$

22,203

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at end of period ..........................................................................................................................................  

 

207

 

$

 56.96  

 

 1.1  

 

$

22,203

 

The following tables summarize the activity of our non-vested restricted stock/units for the nine months ended September 24, 2016:

  

 

 

Time-Based Restricted Stock/Units

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Grant Date Fair

 

 

Intrinsic Value

 

 

Shares/Units

 

Value Per Share

 

 

Per Share

Outstanding at beginning of period .............................................................................................................................................  

 

775

 

$

99.29

 

 

 

 

Granted .................................................................................................................................................................................  

 

158

 

 

168.93

 

 

 

 

Vested ...................................................................................................................................................................................  

 

(236)

 

 

74.58

 

 

 

 

Forfeited ................................................................................................................................................................................  

 

(33)

 

 

123.25

 

 

 

 

Outstanding at end of period .....................................................................................................................................................  

 

664

 

$

123.43

 

 

$

164.45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance-Based Restricted Stock/Units

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Grant Date Fair

 

 

Intrinsic Value

 

 

Shares/Units

 

Value Per Share

 

 

Per Share

Outstanding at beginning of period .............................................................................................................................................  

 

930

 

$

91.33

 

 

 

 

Granted .................................................................................................................................................................................  

 

259

 

 

159.68

 

 

 

 

Vested ...................................................................................................................................................................................  

 

(213)

 

 

90.43

 

 

 

 

Forfeited ................................................................................................................................................................................  

 

(32)

 

 

136.78

 

 

 

 

Outstanding at end of period .....................................................................................................................................................  

 

944

 

$

108.97

 

 

$

164.45

21


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

Note 13 – Supplemental Cash Flow Information 

 

Cash paid for interest and income taxes was:

  

 

 

Nine Months Ended

 

 

September 24,

 

September 26,

 

 

2016

 

2015

Interest..................................................................................................................................................................................  

 

$

21,187

 

$

18,062

Income taxes..........................................................................................................................................................................  

 

 

152,351

 

 

128,693

 

During the nine months ended September 24, 2016 and September 26, 2015, we had $1.3 million and $1.9 million of non-cash net unrealized gains related to foreign currency hedging activities, respectively.

 

Note 14 – Legal Proceedings

 

In September 2015, Henry Schein, Inc. was served with a summons and complaint in an action commenced in the United States District Court for the Eastern District of New York, entitled SourceOne Dental, Inc. v. Patterson Companies, Inc., Henry Schein, Inc. and Benco Dental Supply Company, Civil Action No. 15-cv-05440-JMA-GRB.  Plaintiff alleges that, through its website, it markets and sells dental supplies and equipment to dentists.  Plaintiff alleges, among other things, that defendants conspired to eliminate plaintiff as a viable competitor and to exclude plaintiff from the market for the marketing, distribution and sale of dental supplies and equipment in the United States and that defendants unlawfully agreed with one another to boycott dentists, manufacturers and state dental associations that deal with, or considered dealing with, plaintiff.  Plaintiff asserts the following claims:  (i) unreasonable restraint of trade in violation of state and federal antitrust laws; (ii) tortious interference with prospective business relations; (iii) civil conspiracy; and (iv) aiding and abetting the other defendants’ ongoing tortious and anticompetitive conduct.  Plaintiff seeks equitable relief, compensatory and treble damages, jointly and severally, punitive damages, interest, and reasonable costs and expenses, including attorneys’ fees and expert fees.  We intend to defend ourselves vigorously against the action.

 

Beginning in January 2016, class action complaints were filed against Patterson Companies, Inc., Benco Dental Supply Co. and Henry Schein, Inc.  Each of these complaints allege, among other things, that defendants conspired to fix prices, allocate customers and foreclose competitors by boycotting manufacturers, state dental associations and others that deal with defendants’ competitors.  Subject to certain exclusions, these classes seek to represent all persons who purchased dental supplies or equipment in the United States directly from any of the defendants or Burkhart Dental Supply Co. since August 31, 2008.  Each class action complaint asserts a single count under Section 1 of the Sherman Act, and seeks equitable relief, compensatory and treble damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees.  We intend to defend ourselves vigorously against these actions.

 

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 financial condition or results of operations.

 

As of September 24, 2016, 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 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.

 

22


HENRY SCHEIN, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

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 identified by the use of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate” or other comparable terms.

 

Risk factors and uncertainties that could cause actual results to differ materially from current and historical results include, but are not limited to: effects of a highly competitive and consolidating market; our dependence on third parties for the manufacture and supply of our products; our dependence upon sales personnel, customers, suppliers and manufacturers; our dependence on our senior management; fluctuations in quarterly earnings; 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 conditions; risks associated with political and economic uncertainty arising from the outcome of the referendum on the membership of the United Kingdom in the European Union; disruptions in financial markets; volatility of the market price of our common stock; changes in the health care industry; implementation of health care laws; failure to comply with regulatory requirements and data privacy laws; risks associated with our global operations; transitional challenges associated with acquisitions and joint ventures, including the failure to achieve anticipated synergies; financial risks associated with acquisitions and joint ventures; litigation risks; the dependence on our continued product development, technical support and successful marketing in the technology segment; increased competition by third-party online commerce sites; risks from disruption to our information systems; cyberattacks or other privacy or data security breaches; certain provisions in our governing documents that may discourage third-party acquisitions of us; and changes in tax legislation. The order in which these factors appear should not be construed to indicate their relative importance or priority.

 

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.

 

Executive-Level Overview

 

We believe we are the world’s largest provider of health care products and services primarily to office-based dental, animal health and medical practitioners.  We serve more than 1 million customers worldwide including dental practitioners and laboratories, animal health clinics 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 84 years of experience distributing health care products.

 

23


  

We are headquartered in Melville, New York, employ more than 19,000 people (of which more than 8,500 are based outside the United States) and have operations or affiliates in 33 countries, including the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, Denmark, France, Germany, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Malaysia, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, South Africa, Spain, Sweden, Switzerland, Thailand and the United Kingdom.

 

We have established strategically located distribution centers 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, animal health 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 animal health group serves animal health practices and clinics.  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 and animal health clinics.  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 current economic environment and uncertainty, particularly impacting overall demand for our products and services.

 

 

24


  

Industry Consolidation

 

The health care products distribution industry, as it relates to office-based health care practitioners, is fragmented and diverse.  This industry, which encompasses the dental, animal health and medical markets, was estimated to produce revenues of approximately $45 billion in 2015 in the global markets.  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.

 

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 2015 there were more than six million Americans aged 85 years or older, the segment of the population most in need of long-term care and elder-care

25


  

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 over 65% 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 2015-2025” indicating that total national health care spending reached approximately $3.2 trillion in 2015, or 17.8% 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 $5.6 trillion in 2025, approximately 20.1% of the nation’s gross domestic product.

 

Government

 

Certain of our businesses involve the distribution of pharmaceuticals and medical devices, and in this regard we are subject to extensive local, state, federal and foreign governmental laws and regulations applicable to the distribution and sale of pharmaceuticals and medical devices.  Additionally, government and private insurance programs fund a large portion of the total cost of medical care, and there has been an emphasis on efforts to control medical costs, including laws and regulations lowering reimbursement rates for pharmaceuticals, medical devices, and/or medical treatments or services.  Also, many of these laws and regulations are subject to change and may impact our financial performance.  In addition, our businesses are generally subject to numerous other laws and regulations that could impact our financial performance, including securities, antitrust, data privacy, data security and other laws and regulations.  Failure to comply with law or regulations could have a material adverse effect on our business.

 

Health Care Reform

 

The United States Health Care Reform Law adopted through the March 2010 enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act increased federal oversight of private health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost of health care generally, to reduce fraud and abuse, and to provide access to increased health coverage.

 

The Health Care Reform Law requirements include a 2.3% excise tax on domestic sales of many medical devices by manufacturers and importers that began in 2013 and a fee on branded prescription drugs and biologics that was implemented in 2011, both of which may affect sales.  However, with respect to the medical device excise tax, a two-year moratorium was imposed under the Consolidated Appropriations Act, 2016, suspending the imposition of the tax on device sales during the period beginning January 1, 2016 and ending on December 31, 2017.  The Health Care Reform Law has also materially expanded the number of individuals in the United States with health insurance.  The Health Care Reform Law has faced ongoing legal challenges, including litigation seeking to invalidate some of or all of the law or the manner in which it has been implemented, and Congress and the Republican candidate for President will support repeal.  The uncertain status of the Health Care Reform Law affects our ability to plan.

 

A Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, has imposed new reporting and disclosure requirements for drug and device manufacturers and distributors with regard to payments or other transfers of value made to certain covered recipients (including physicians, dentists and teaching hospitals), and for such manufacturers and distributors and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity.  On February 1, 2013, CMS released the final rule to implement the Physician Payment Sunshine Act.  Under this rule, data collection activities began on August 1, 2013, and as required under the Physician Payment Sunshine Act, CMS publishes information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities.

 

26


  

Under the Physician Payment Sunshine Act, we are required to collect and report detailed information regarding certain financial relationships we have with physicians, dentists and teaching hospitals, and we believe that we are substantially compliant with applicable Physician Payment Sunshine Act requirements.  The Physician Payment Sunshine Act pre-empts similar state reporting laws, although we or our subsidiaries may be required to report under certain state transparency laws that address circumstances not covered by the Physician Payment Sunshine Act, and some of these state laws, as well as the federal law, can be ambiguous.  We are also subject to foreign regulations requiring transparency of certain interactions between suppliers and their customers.  While we believe we have substantially compliant programs and controls in place to comply with these requirements, our compliance with these rules imposes additional costs on us.

 

Another notable Medicare health care reform initiative, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), enacted on April 16, 2015, establishes a new payment framework, called the Quality Payment Program, which modifies certain Medicare payments to “eligible professionals,” including physicians, dentists and other practitioners.  Under MACRA, eligible professionals will be required to participate in Medicare through the Merit-Based Incentive Payment System (“MIPS”) or Advanced Alternative Payment Models (“APMs”).  MIPS generally will consolidate three current programs; the physician quality reporting system, the value-based payment modifier, and the Medicare EHR program into a single program in which Medicare reimbursement to eligible professionals will include both positive and negative payment adjustments that take into account quality, resource use, clinical practice improvement and meaningful use of certified EHR technology.  AMPs generally involve higher levels of financial and technology risk.  MACRA represents a fundamental change in physician reimbursement that is expected to provide substantial financial incentives for physicians to participate in risk contracts, and to increase physician information technology and reporting obligations.  The implications of the implementation of MACRA are uncertain and will depend on future regulatory activity and physician activity in the marketplace.  MACRA may encourage physicians to move from smaller practices to larger physician groups or hospital employment, leading to a consolidation of a portion of our customer base.  Although we believe that we are positioned to capitalize on this consolidation trend, there can be no assurances that we will be able to successfully accomplish this.

 

Health Care Fraud

 

Certain of our businesses are subject to federal and state (and similar foreign) health care fraud and abuse, referral and reimbursement laws and regulations with respect to their operations.  Some of these laws, referred to as “false claims laws,” prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to federal, state and other health care payers and programs.  Other laws, referred to as “anti-kickback laws,” prohibit soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering, purchasing, leasing or arranging for, or recommending ordering, purchasing or leasing of, items or services that are paid for by federal, state and other health care payers and programs.

 

The fraud and abuse laws and regulations have been subject to varying interpretations, as well as heightened enforcement activity over the past few years, and significant enforcement activity has been the result of “relators,” who serve as whistleblowers by filing complaints in the name of the United States (and if applicable, particular states) under federal and state false claims laws.  Under the federal False Claims Act, relators can be entitled to receive up to 30% of total recoveries.  Also, violations of the federal False Claims Act can result in treble damages, and, in accordance with an interim final rule published by the Department of Justice on June 30, 2016, which substantially increased maximum civil penalties for False Claims Act violations, the amounts for civil penalties assessed after August 1, 2016, whose associated violations occurred after November 2, 2015, can be up to $21,563 per claim (the maximum civil penalties for violations occurring on or before November 2, 2015 can be up to $11,000 per claim).  Most states have adopted similar state false claims laws, and these state laws have their own penalties which may be in addition to federal False Claims Act penalties.  The Health Care Reform Law significantly strengthened the federal False Claims Act and the federal Anti-Kickback Law provisions, which could lead to the possibility of increased whistleblower or relator suits, and among other things made clear that a federal Anti-Kickback Law violation can be a basis for federal False Claims Act liability.

 

27


  

The United States government (among others) has expressed concerns about financial relationships between suppliers on the one hand and physicians and dentists on the other.  As a result, we regularly review and revise our marketing practices as necessary to facilitate compliance.

 

We also are subject to certain United States and foreign laws and regulations concerning the conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, which have been the focus of increasing enforcement activity globally in recent years.

 

Failure to comply with fraud and abuse laws and regulations could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse effect on our business.  Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations or incur substantial defense and settlement expenses.  Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs.  In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing the risk of noncompliance.

 

While we believe that we are substantially compliant with applicable fraud and abuse laws and regulations, and have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in response to changes in applicable law or interpretation of laws, could have a material adverse effect on our business.

 

Operating, Security and Licensure Standards

 

The Federal Food, Drug, and Cosmetic Act and similar foreign laws generally regulate the introduction, manufacture, advertising, labeling, packaging, storage, handling, reporting, marketing and distribution of, and record keeping for, pharmaceuticals and medical devices shipped in interstate commerce, and states may similarly regulate such activities within the state.

 

The Federal Drug Quality and Security Act of 2013 brought about significant changes with respect to pharmaceutical supply chain requirements and pre-empts state law.  Title II of this measure, known as the Drug Supply Chain Security Act (“DSCSA”), will be phased in over 10 years, and is intended to build a national electronic, interoperable system to identify and trace certain prescription drugs as they are distributed in the United States.  The law’s track and trace requirements applicable to manufacturers, wholesalers, repackagers and dispensers (e.g., pharmacies) of prescription drugs began to take effect in January 2015, and continue to be implemented.  The DSCSA product tracing requirements replace the former United States Food and Drug Administration (“FDA”) drug pedigree requirements and pre-empt state requirements that are inconsistent with, more stringent than, or in addition to, the DSCSA requirements.  

 

The DSCSA also establishes certain requirements for the licensing and operation of prescription drug wholesalers and third party logistics providers (“3PLs”), and includes the eventual creation of national wholesaler and 3PL licenses in cases where states do not license such entities.  The DSCSA requires that wholesalers and 3PLs distribute drugs in accordance with certain standards regarding the recordkeeping, storage and handling of prescription drugs.  According to FDA guidance, states are pre-empted from imposing any licensing requirements that are inconsistent with, less stringent than, directly related to, or covered by the standards established by federal law in this area.  Current state licensing requirements will likely remain in effect until the FDA issues new regulations as directed by the DSCSA.

 

We believe that we are substantially compliant with applicable DSCSA requirements.

 

28


  

The Food and Drug Administration Amendments Act of 2007 and the Food and Drug Administration Safety and Innovation Act of 2012 amended the Federal Food, Drug, and Cosmetic Act (“FDCA”) to require the FDA to promulgate regulations to implement a Unique Device Identification (“UDI”) System.  The FDA issued a final rule on September 24, 2013 to implement the UDI System, and is phasing in the implementation of the UDI regulations over seven years, generally beginning with the highest-risk devices (i.e., Class III medical devices) and ending with the lowest-risk devices.  The UDI regulations require “labelers” to include unique device identifiers (“UDIs”), with a content and format prescribed by the FDA and issued under a system operated by an FDA-accredited issuing agency, on the labels and packages of medical devices, and to directly mark certain devices with UDIs.  The UDI regulations also require labelers to submit certain information concerning UDI-labeled devices to the FDA, much of which information is publicly available on an FDA database, the Global Unique Device Identification Database.   The UDI regulations provide for certain exceptions, alternatives and time extensions.  For example, the UDI regulations include a general exception for Class I devices exempt from the Quality System Regulation (other than record-keeping requirements and complaint files).  Regulated labelers include entities such as device manufacturers, repackagers, reprocessors and relabelers that cause a device’s label to be applied or modified, with the intent that the device will be commercially distributed without any subsequent replacement or modification of the label, and include certain of our businesses.

 

We believe that we are substantially compliant with applicable UDI requirements.

 

Regulated Software; Electronic Health Records

 

The FDA has become increasingly active in addressing the regulation of computer software intended for use in health care settings, and has developed and continues to develop policies on regulating clinical decision support tools and other types of software as medical devices.  Certain of our businesses involve the development and sale of software and related products to support physician and dental practice management, and it is possible that the FDA or foreign government authorities could determine that one or more of our products is a medical device, which could subject us or one or more of our businesses to substantial additional requirements with respect to these products.

 

In addition, our businesses that involve physician and dental practice management products include electronic information technology systems that store and process personal health, clinical, financial and other sensitive information of individuals.  These information technology systems may be vulnerable to breakdown, wrongful intrusions, data breaches and malicious attack, which could require us to expend significant resources to eliminate these problems and address related security concerns, and could involve claims against us by private parties and/or governmental agencies.  For example, we are directly or indirectly subject to numerous federal, state, local and foreign laws and regulations that protect the privacy and security of such information, such as the privacy and security provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended, and implementing regulations (“HIPAA”).  HIPAA requires, among other things, the implementation of various recordkeeping, operational, notice and other practices intended to safeguard that information, limit its use to allowed purposes and notify individuals in the event of privacy and security breaches.  Failure to comply with these laws and regulations can result in substantial penalties and other liabilities.

 

We also sell products and services that health care providers, such as physicians and dentists, use to store and manage patient medical or dental records.  These customers are subject to laws and regulations, such as HIPAA, which require that they protect the privacy and security of those records, and our products may be used as part of these customers’ comprehensive data security programs, including in connection with their efforts to comply with applicable privacy and security laws.  Perceived or actual security vulnerabilities in our products or services, or the perceived or actual failure by us or our customers who use our products to comply with applicable legal or contractual requirements, may not only cause us significant reputational harm, but may also lead to claims against us by our customers and/or governmental agencies and involve substantial fines, penalties and other liabilities and expenses and costs for remediation.

 

29


  

Federal initiatives provide a program of incentive payments available to certain health care providers involving the adoption and use of certain electronic health care records systems and processes.  The initiatives include providing, among others, physicians and dentists, with financial incentives if they meaningfully use certified electronic health record technology (“EHR”) in accordance with applicable requirements.  In addition, Medicare-eligible providers that fail to timely adopt certified EHR systems and meet “meaningful use” requirements for those systems in accordance with regulatory requirements are to be subject to cumulative Medicare reimbursement reductions, which reductions for applicable health professionals (including physicians and dentists) began on January 1, 2015.  Qualification for the incentive payments requires the use of EHRs that have certain capabilities for meaningful use pursuant to evolving standards adopted by CMS and by the Office of the National Coordinator for Health Information Technology (“ONC”) of the Department of Health and Human Services.

 

The use of certified EHR technology will continue as a feature of MACRA’s MIPS program, and in connection with this, Medicare EHR program payment adjustments to eligible professionals will sunset at the end of 2018 and MIPS payment adjustments will begin on January 1, 2019.  The first performance period for MIPS is scheduled to begin January 1, 2017, and will afford eligible professionals different reporting options linked to the amount of data reported and the duration of the reporting period, with positive payment adjustments generally linked to more robust reporting.

 

Certain of our businesses involve the manufacture and sale of certified EHR systems and other products linked to incentive programs.  CMS and ONC establish criteria for certified EHR systems, and these criteria have been subject to change.  In order to maintain certification of our EHR products, we must satisfy these changing governmental criteria.  Moreover, in order to satisfy our customers, our products may need to incorporate increasingly complex reporting functionality.  Although we believe we are positioned to accomplish this, the effort may involve increased costs, and our failure to implement product modifications, or otherwise satisfy applicable standards, could have a material adverse effect on our business.

 

There may be additional legislative initiatives in the future impacting health care.

  

E-Commerce

 

Electronic commerce solutions have become an integral part of traditional health care supply and distribution relationships.  Our distribution business is characterized by rapid technological developments and intense competition.  The continuing advancement of online commerce requires us to cost-effectively adapt to changing technologies, to enhance existing services and to develop and introduce a variety of new services to address the changing demands of consumers and our customers on a timely basis, particularly in response to competitive offerings.

 

Through our proprietary, technologically based suite of products, we offer customers a variety of competitive alternatives.  We believe that our tradition of reliable service, our name recognition and large customer base built on solid customer relationships position us well to participate in this significant aspect of the distribution business.  We continue to explore ways and means to improve and expand our Internet presence and capabilities, including our online commerce offerings and our use of various social media outlets.

 

 

30


  

Results of Operations

 

The following table summarizes the significant components of our operating results for the three and nine months ended September 24, 2016 and September 26, 2015 and cash flows for the nine months ended September 24, 2016 and September 26, 2015 (in thousands):

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 24,

 

September 26,

 

September 24,

 

September 26,

 

 

 

 

2016

 

2015

 

2016

 

2015

Operating results:

 

 

 

 

 

 

 

 

 

 

 

 

Net sales ..............................................................................................................................................................................  

 

$

2,865,148

 

$

2,685,835

 

$

8,450,734

 

$

7,778,801

Cost of sales ........................................................................................................................................................................  

 

 

2,075,657

 

 

1,936,927

 

 

6,078,622

 

 

5,565,820

 

Gross profit ......................................................................................................................................................................  

 

 

789,491

 

 

748,908

 

 

2,372,112

 

 

2,212,981

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative .......................................................................................................................................  

 

 

583,400

 

 

551,588

 

 

1,784,709

 

 

1,657,180

 

Restructuring costs ............................................................................................................................................................  

 

 

5,370

 

 

8,438

 

 

29,811

 

 

22,522

 

 

Operating income ..........................................................................................................................................................  

 

$

200,721

 

$

188,882

 

$

557,592

 

$

533,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net .................................................................................................................................................................  

 

$

(4,546)

 

$

(3,445)

 

$

(8,731)

 

$

(9,343)

Net income ..........................................................................................................................................................................  

 

 

145,291

 

 

141,396

 

 

402,922

 

 

382,584

Net income attributable to Henry Schein, Inc. ............................................................................................................................  

 

 

133,713

 

 

127,735

 

 

367,562

 

 

349,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows:

 

 

 

 

 

 

Net cash provided by operating activities ...............................................................................................................................................  

 

$

350,953

 

$

288,530

Net cash used in investing activities .......................................................................................................................................................  

 

 

(179,834)

 

 

(203,469)

Net cash used in financing activities ......................................................................................................................................................  

 

 

(171,141)

 

 

(98,007)

 

Plan of Restructuring  

 

On November 6, 2014, we announced a corporate initiative to rationalize our operations and provide expense efficiencies, which was expected to be completed by the end of fiscal 2015.  This initiative originally planned for the elimination of approximately 2% to 3% of our workforce and the closing of certain facilities.  We subsequently announced that we plan to extend these restructuring activities through the end of 2016 to further implement cost-savings initiatives, which will now result in the elimination of approximately 3% to 4% of our workforce.  The total costs associated with the actions to date for this restructuring include $34.9 million pre-tax, which was recorded in fiscal 2015 and $29.8 million pre-tax which has been recorded in the nine months ended September 24, 2016.

 

During the three months ended September 24, 2016 and September 26, 2015, we recorded restructuring costs of $5.4 million and $8.4 million, respectively.  During the nine months ended September 24, 2016 and September 26, 2015, we recorded restructuring costs of $29.8 million and $22.5 million, respectively.  The costs associated with this restructuring are included in a separate line item, “Restructuring costs” within our consolidated statements of income.

 

On October 28, 2016, we estimated the remaining restructuring costs to be recorded in the fourth quarter of 2016 to be in the range of $17 million to $22 million.

 

  

31


  

Three Months Ended September 24, 2016 Compared to Three Months Ended September 26, 2015

 

Net Sales

 

Net sales for the three months ended September 24, 2016 and September 26, 2015 were as follows (in thousands):

  

 

 

 

 

September 24,

 

% of

 

September 26,

 

% of

 

Increase

 

 

 

 

2016

 

Total

 

2015

 

Total

 

$

 

%

Health care distribution (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dental ............................................................................................................................................................................................  

 

$

1,330,525

 

46.4

%

 

$

1,266,321

 

47.2

%

 

$

64,204

 

5.1

%

 

Animal health ...................................................................................................................................................................................  

 

 

790,279

 

27.6

 

 

 

732,533

 

27.3

 

 

 

57,746

 

7.9

 

 

Medical ..........................................................................................................................................................................................  

 

 

639,648

 

22.3

 

 

 

597,243

 

22.2

 

 

 

42,405

 

7.1

 

 

 

Total health care distribution ..............................................................................................................................................................  

 

 

2,760,452

 

96.3

 

 

 

2,596,097

 

96.7

 

 

 

164,355

 

6.3

 

Technology and value-added services (2).......................................................................................................................................................  

 

 

104,696

 

3.7

 

 

 

89,738

 

3.3

 

 

 

14,958

 

16.7

 

 

 

Total .........................................................................................................................................................................................  

 

$

2,865,148

 

100.0

%

 

$

2,685,835

 

100.0

%

 

$

179,313

 

6.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 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.

 

The $179.3 million, or 6.7%, increase in net sales for the three months ended September 24, 2016 includes an increase of 7.7% in local currency growth (6.0% increase in internally generated revenue and 1.7% growth from acquisitions) partially offset by a decrease of 1.0% related to foreign currency exchange. 

 

The $64.2 million, or 5.1%, increase in dental net sales for the three months ended September 24, 2016 includes an increase of 5.6% in local currency growth (3.9% increase in internally generated revenue and 1.7% growth from acquisitions) partially offset by a decrease of 0.5% related to foreign currency exchange.  The 5.6% increase in local currency sales was due to dental consumable merchandise sales growth of 3.7% (2.1% increase in internally generated revenue and 1.6% growth from acquisitions), as well as an increase in dental equipment sales and service revenues of 11.8% (9.9% increase in internally generated revenue and 1.9% growth from acquisitions).

 

The $57.7 million, or 7.9%, increase in animal health net sales for the three months ended September 24, 2016 includes an increase of 10.6% in local currency growth (8.6% increase in internally generated revenue and 2.0% growth from acquisitions) partially offset by a decrease of 2.7% related to foreign currency exchange.  The growth in internally generated animal health revenue is affected by the revenue for certain products being recognized on a gross basis in 2016 that had been recognized on an agency basis in the prior year.  When excluding the effects of this change, internally generated revenue grew by 6.9%.

 

The $42.4 million, or 7.1%, increase in medical net sales for the three months ended September 24, 2016 is the result of an increase of 7.1% in local currency growth attributable to internally generated revenue. 

 

The $15.0 million, or 16.7%, increase in technology and value-added services net sales for the three months ended September 24, 2016 includes an increase of 18.3% in local currency growth (7.6% increase in internally generated revenue and 10.7% growth from acquisitions) partially offset by a decrease of 1.6% related to foreign currency exchange.  

32


  

Gross Profit

 

Gross profit and gross margin percentages by segment and in total for the three months ended September 24, 2016 and September 26, 2015 were as follows (in thousands):

  

 

 

 

September 24,

 

Gross

 

September 26,

 

Gross

 

Increase

 

 

 

2016

 

Margin %

 

2015

 

Margin %

 

$

 

%

Health care distribution ........................................................................................................................................................................  

 

$

719,246

 

26.1

%

 

$

687,184

 

26.5

%

 

$

32,062

 

4.7

%

Technology and value-added services .......................................................................................................................................................  

 

 

70,245

 

67.1

 

 

 

61,724

 

68.8

 

 

 

8,521

 

13.8

 

 

Total .........................................................................................................................................................................................  

 

$

789,491

 

27.6

 

 

$

748,908

 

27.9

 

 

$

40,583

 

5.4

 

 

For the three months ended September 24, 2016, gross profit increased $40.6 million, or 5.4%, compared to the prior year period.  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.

 

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 $32.1 million, or 4.7%, for the three months ended September 24, 2016 compared to the prior year period.  Health care distribution gross profit margin decreased to 26.1% for the three months ended September 24, 2016 from 26.5% for the comparable prior year period.  Acquisitions accounted for $12.9 million of our gross profit increase within our health care distribution segment for the three months ended September 24, 2016 compared to the prior year period.  The remaining increase of $19.2 million in our health care distribution gross profit was attributable to a $31.6 million gross profit increase from growth in internally generated revenue, partially offset by a $12.4 million gross profit decrease related to the decrease in the gross margin rates.

 

Technology and value-added services gross profit increased $8.5 million, or 13.8%, for the three months ended September 24, 2016 compared to the prior year period.  Technology gross profit margin decreased to 67.1% for the three months ended September 24, 2016 from 68.8% for the comparable prior year period.  Acquisitions accounted for $4.0 million of our gross profit increase within our technology and value-added services segment for the three months ended September 24, 2016 compared to the prior year period. The remaining increase of $4.5 million in our technology and value-added services segment gross profit was primarily attributable to growth in internally generated revenue.

 

Selling, General and Administrative

 

Selling, general and administrative expenses by segment and in total for the three months ended September 24, 2016 and September 26, 2015 were as follows (in thousands):

  

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

September 24,

 

Respective

 

September 26,

 

Respective

 

Increase

 

 

 

2016

 

Net Sales

 

2015

 

Net Sales

 

$

 

%

Health care distribution .......................................................................................................................................................................  

 

$

543,763

 

19.7

%

 

$

517,080

 

19.9

%

 

$

26,683

 

5.2

%

Technology and value-added services ......................................................................................................................................................  

 

 

39,637

 

37.9

 

 

 

34,508

 

38.5

 

 

 

5,129

 

14.9

 

 

Total  ........................................................................................................................................................................................  

 

$

583,400

 

20.4

 

 

$

551,588

 

20.5

 

 

$

31,812

 

5.8

 

 

33


  

Selling, general and administrative expenses increased $31.8 million, or 5.8%, to $583.4 million for the three months ended September 24, 2016 from the comparable prior year period.  The $26.7 million increase in selling, general and administrative expenses within our health care distribution segment for the three months ended September 24, 2016 as compared to the prior year period was attributable to $13.2 million of additional costs from acquired companies, and $13.5 million of additional operating costs. The $5.1 million increase in selling, general and administrative expenses within our technology and value-added services segment for the three months ended September 24, 2016 as compared to the prior year period was attributable to $3.5 million of additional costs from acquired companies and $1.6 million of additional operating costs.  As a percentage of net sales, selling, general and administrative expenses decreased to 20.4% as compared to 20.5% in the comparable prior year period.

 

As a component of selling, general and administrative expenses, selling expenses increased $18.9 million, or 5.5%, to $363.0 million for the three months ended September 24, 2016 from the comparable prior year period.  As a percentage of net sales, selling expenses decreased to 12.7% from 12.8% for the comparable prior year period.

 

As a component of selling, general and administrative expenses, general and administrative expenses increased $12.9 million, or 6.2%, to $220.4 million for the three months ended September 24, 2016 from the comparable prior year period.  As a percentage of net sales, general and administrative expenses remained consistent at 7.7%.

 

Other Expense, Net

 

Other expense, net, for the three months ended September 24, 2016  and September 26, 2015 was as follows (in thousands):

  

 

 

 

September 24,

 

September 26,

 

Variance

 

 

 

2016

 

2015

 

$

 

%

Interest income ........................................................................................................................................................................  

 

$

3,141

 

$

3,129

 

$

12

 

0.4

%

Interest expense .......................................................................................................................................................................  

 

 

(7,488)

 

 

(6,297)

 

 

(1,191)

 

(18.9)

 

Other, net ..............................................................................................................................................................................  

 

 

(199)

 

 

(277)

 

 

78

 

28.2

 

 

Other expense, net .............................................................................................................................................................  

 

$

(4,546)

 

$

(3,445)

 

$

(1,101)

 

(32.0)

 

 

Other expense, net increased by $1.1 million for the three months ended September 24, 2016 compared to the prior year period primarily due to increased interest expense resulting from additional borrowings under our bank credit lines.

 

Income Taxes

 

For the three months ended September 24, 2016, our effective tax rate was 28.9% compared to 26.5% for the prior year period.  The difference between our effective tax rates and the federal statutory tax rates for both periods primarily relates to state and foreign income taxes and interest expense. 

 

The 2015 effective tax rate for the quarter ended September 26, 2015 was affected by a favorable response to a tax petition allowing us to conclude that it was more likely than not that certain unrecognized tax benefits, which had previously been reserved, was realized.  As a result, in the quarter ended September 26, 2015, our provision for income for taxes included a one-time $6.3 million tax benefit.

 

Net Income

 

Net income increased $3.9 million, or 2.8%, for the three months ended September 24, 2016, compared to the prior year period due to the factors noted above.

34


  

Nine Months Ended September 24, 2016 Compared to Nine Months Ended September 26, 2015

 

Net Sales

 

Net sales for the nine months ended September 24, 2016 and September 26, 2015 were as follows (in thousands):

  

 

 

 

 

September 24,

 

% of

 

September 26,

 

% of

 

Increase

 

 

 

 

2016

 

Total

 

2015

 

Total

 

$

 

%

Health care distribution (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dental ............................................................................................................................................................................................  

 

$

4,005,468

 

47.4

%

 

$

3,837,137

 

49.3

%

 

$

168,331

 

4.4

%

 

Animal health ...................................................................................................................................................................................  

 

 

2,415,290

 

28.6

 

 

 

2,165,415

 

27.8

 

 

 

249,875

 

11.5

 

 

Medical ..........................................................................................................................................................................................  

 

 

1,716,590

 

20.3

 

 

 

1,511,295

 

19.5

 

 

 

205,295

 

13.6

 

 

 

Total health care distribution ..............................................................................................................................................................  

 

 

8,137,348

 

96.3

 

 

 

7,513,847

 

96.6

 

 

 

623,501

 

8.3

 

Technology and value-added services (2).......................................................................................................................................................  

 

 

313,386

 

3.7

 

 

 

264,954

 

3.4

 

 

 

48,432

 

18.3

 

 

 

Total .........................................................................................................................................................................................  

 

$

8,450,734

 

100.0

%

 

$

7,778,801

 

100.0

%

 

$

671,933

 

8.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 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.

 

The $671.9 million, or 8.6%, increase in net sales for the nine months ended September 24, 2016 includes an increase of 9.7% in local currency growth (7.6% increase in internally generated revenue and 2.1% growth from acquisitions) partially offset by a decrease of 1.1% related to foreign currency exchange. 

 

The $168.3 million, or 4.4%, increase in dental net sales for the nine months ended September 24, 2016 includes an increase of 5.3% in local currency growth (3.8% increase in internally generated revenue and 1.5% growth from acquisitions) partially offset by a decrease of 0.9% related to foreign currency exchange.  The 5.3% increase in local currency sales was due to an increase in dental equipment sales and service revenues of 8.7% (7.4% increase in internally generated revenue and 1.3% growth from acquisitions) and dental consumable merchandise sales growth of 4.3% (2.8% increase in internally generated revenue and 1.5% growth from acquisitions).

 

The $249.9 million, or 11.5%, increase in animal health net sales for the nine months ended September 24, 2016 includes an increase of 13.8% in local currency growth (10.1% internally generated revenue and 3.7% growth from acquisitions) partially offset by a decrease of 2.3% related to foreign currency exchange.  The growth in internally generated animal health revenue is affected by the revenue for certain products being recognized on a gross basis in 2016 that had been recognized on an agency basis in the prior year.  When excluding the effects of this change, internally generated revenue grew by 6.8%.

 

The $205.3 million, or 13.6%, increase in medical net sales for the nine months ended September 24, 2016 is the result of an increase of 13.6% in local currency growth attributable to internally generated revenue.  The growth in internally generated medical revenue is affected by certain sales being recognized on a gross basis in 2016 that had been recognized on an agency basis in the prior year.  When excluding the effects of this change, internally generated revenue grew by 9.2%.

 

The $48.4 million, or 18.3%, increase in technology and value-added services net sales for the nine months ended September 24, 2016 includes an increase of 19.5% in local currency growth (7.7% internally generated revenue and 11.8% growth from acquisitions) partially offset by a decrease of 1.2% related to foreign currency exchange.  

35


  

Gross Profit

 

Gross profit and gross margin percentages by segment and in total for the nine months ended September 24, 2016 and September 26, 2015 were as follows (in thousands):

  

 

 

 

September 24,

 

Gross

 

September 26,

 

Gross

 

Increase

 

 

 

2016

 

Margin %

 

2015

 

Margin %

 

$

 

%

Health care distribution ........................................................................................................................................................................  

 

$

2,163,248

 

26.6

%

 

$

2,032,377

 

27.0

%

 

$

130,871

 

6.4

%

Technology and value-added services .......................................................................................................................................................  

 

 

208,864

 

66.6

 

 

 

180,604

 

68.2

 

 

 

28,260

 

15.6

 

 

Total .........................................................................................................................................................................................  

 

$

2,372,112

 

28.1

 

 

$

2,212,981

 

28.4

 

 

$

159,131

 

7.2

 

 

For the nine months ended September 24, 2016, gross profit increased $159.1 million, or 7.2%, from the comparable prior year period.  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.

  

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 $130.9 million, or 6.4%, for the nine months ended September 24, 2016 compared to the prior year period.  Health care distribution gross profit margin decreased to 26.6% for the nine months ended September 24, 2016 from 27.0% for the comparable prior year period.  Acquisitions accounted for $51.2 million of our gross profit increase within our health care distribution segment for the nine months ended September 24, 2016 compared to the prior year period.  The remaining increase of $79.7 million in our health care distribution segment gross profit was attributable to a $115.4 million gross profit increase from growth in internally generated revenue, partially offset by a $35.7 million decline in gross profit due primarily to the effects of foreign exchange on revenues and the decrease in the gross margin rates.

 

Technology and value-added services gross profit increased $28.2 million, or 15.6%, for the nine months ended September 24, 2016 compared to the prior year period.  Technology gross profit margin decreased to 66.6% for the nine months ended September 24, 2016 from 68.2% for the comparable prior year period.  Acquisitions accounted for $15.4 million of our gross profit increase within our technology and value-added services segment for the nine months ended September 24, 2016 compared to the prior year period. The remaining increase of $12.8 million in our technology and value-added services segment gross profit was primarily attributable to growth in internally generated revenue. 

36


  

Selling, General and Administrative

 

Selling, general and administrative expenses by segment and in total for the nine months ended September 24, 2016 and September 26, 2015 were as follows (in thousands):

  

 

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

September 24,

 

Respective

 

September 26,

 

Respective

 

Increase

 

 

 

2016

 

Net Sales

 

2015

 

Net Sales

 

$

 

%

Health care distribution ........................................................................................................................................................................  

 

$

1,665,675

 

20.5

%

 

$

1,556,862

 

20.7

%

 

$

108,813

 

7.0

%

Technology and value-added services .......................................................................................................................................................  

 

 

119,034

 

38.0

 

 

 

100,318

 

37.9

 

 

 

18,716

 

18.7

 

 

Total .........................................................................................................................................................................................  

 

$

1,784,709

 

21.1

 

 

$

1,657,180

 

21.3

 

 

$

127,529

 

7.7

 

 

Selling, general and administrative expenses increased $127.5 million, or 7.7%, to $1,784.7 million for the nine months ended September 24, 2016 from the comparable prior year period.  As a percentage of net sales, selling, general and administrative expenses decreased to 21.1% compared to 21.3% for the comparable prior year period.  The $108.8 million increase in selling, general and administrative expenses within our health care distribution segment for the nine months ended September 24, 2016 as compared to the prior year period was attributable to $48.9 million of additional costs from acquired companies, and $59.9 million of additional operating costs.  The $18.7 million increase in selling, general and administrative expenses within our technology and value-added services segment for the nine months ended September 24, 2016 as compared to the prior year period was attributable to $11.6 of additional costs from acquired companies and $7.1 million of additional operating costs.

 

As a component of selling, general and administrative expenses, selling expenses increased $72.4 million, or 7.0%, to $1,104.2 million for the nine months ended September 24, 2016 from the comparable prior year period.  As a percentage of net sales, selling expenses decreased to 13.1% as compared to 13.3% for the comparable prior year period. 

 

As a component of selling, general and administrative expenses, general and administrative expenses increased $55.1 million, or 8.8%, to $680.5 million for the nine months ended September 24, 2016 from the comparable prior year period.  As a percentage of net sales, general and administrative expenses increased to 8.1% compared to 8.0% for the comparable prior year period.

 

Other Expense, Net

 

Other expense, net, for the nine months ended September 24, 2016  and September 26, 2015 was as follows (in thousands):

  

 

 

 

September 24,

 

September 26,

 

Variance

 

 

 

2016

 

2015

 

$

 

%

Interest income ........................................................................................................................................................................  

 

$

10,045

 

$

9,841

 

$

204

 

2.1

%

Interest expense .......................................................................................................................................................................  

 

 

(21,982)

 

 

(18,850)

 

 

(3,132)

 

(16.6)

 

Other, net ..............................................................................................................................................................................  

 

 

3,206

 

 

(334)

 

 

3,540

 

1,059.9

 

 

Other expense, net .............................................................................................................................................................  

 

$

(8,731)

 

$

(9,343)

 

$

612

 

6.6

 

 

Other expense, net decreased by $0.6 million for the nine months ended September 24, 2016 compared to the comparable prior year period.  Interest expense increased by $3.1 million primarily due to increased borrowings under our bank credit lines.  Other, net increased by $3.5 million primarily due to investment proceeds received in the first quarter of 2016.

 

Income Taxes  

 

For the nine months ended September 24, 2016 and September 26, 2015, our effective tax rate was 29.0%.  The difference between our effective tax rate and the federal statutory tax rate for both periods primarily relates to state and foreign income taxes and interest expense.  The 2016 effective tax rate was affected by a federal tax audit settlement which reduced our income tax expense by approximately $4.5 million in the period.

37


  

 

The 2015 effective tax rate for the nine months ended September 26, 2015, was affected by a favorable response to a tax petition allowing us to conclude that it was more likely than not that certain unrecognized tax benefits, which had previously been reserved, was realized.  As a result, in the quarter ended September 26, 2015, our provision for income for taxes included a one-time $6.3 million tax benefit.

 

Net Income

 

Net income increased $20.3 million, or 5.3%, for the nine months ended September 24, 2016, compared to the prior year period due to the factors noted above.

 

Liquidity and Capital Resources

 

Our principal capital requirements include 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.  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 third and fourth quarters and special inventory forward buy-in opportunities have been most prevalent just before the end of the year, which has 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.

 

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.

 

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 provided by operating activities was $351.0 million for the nine months ended September 24, 2016, compared to $288.5 million for the comparable prior year period.  The net change of $62.5 million was primarily attributable to changes in net working capital and an increase in net income.

 

Net cash used in investing activities was $179.8 million for the nine months ended September 24, 2016, compared to $203.5 million for the comparable prior year period.  The net change of $23.7 million was primarily due to a decrease in payments for equity investments and business acquisitions and a reduction in purchases of fixed assets. 

 

Net cash used in financing activities was $171.1 million for the nine months ended September 24, 2016, compared to $98.0 million for the comparable prior year period.  The net change of $73.1 million was primarily due to increases in repurchases of common stock and acquisitions of noncontrolling interests in subsidiaries, partially offset by increased net proceeds from debt.

38


  

The following table summarizes selected measures of liquidity and capital resources (in thousands):

  

 

 

 

 

September 24,

 

December 26,

 

 

 

 

2016

 

2015

Cash and cash equivalents ...........................................................................................................................................................  

 

$

76,192

 

$

72,086

Working capital ..........................................................................................................................................................................  

 

 

1,246,300

 

 

1,084,103

 

 

 

 

 

 

 

 

 

Debt:

 

 

 

 

 

 

 

Bank credit lines .....................................................................................................................................................................  

 

$

333,123

 

$

328,631

 

Current maturities of long-term debt ...........................................................................................................................................  

 

 

17,460

 

 

17,331

 

Long-term debt ......................................................................................................................................................................  

 

 

718,024

 

 

463,752

 

 

Total debt .........................................................................................................................................................................  

 

$

1,068,607

 

$

809,714

 

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 increased to 41.9 days as of September 24, 2016 from 40.6 days as of September 26, 2015.  During the nine months ended September 24, 2016, we wrote off approximately $4.5 million of fully reserved accounts receivable against our trade receivable reserve.  Our inventory turns from operations decreased to 5.4 as of September 24, 2016 from 5.5 as of September 26, 2015.  Our working capital accounts may be impacted by current and future economic conditions.

 

Bank Credit Lines

 

On September 12, 2012, we entered into a $500 million revolving credit agreement (the “Credit Agreement”) with a $200 million expansion feature, which was originally set to expire on September 12, 2017.  On September 22, 2014, we extended the expiration date of the Credit Agreement to September 22, 2019.  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.  The Credit Agreement provides, among other things, that we are required to maintain maximum leverage ratios, and contains customary representations, warranties and affirmative covenants.  The Credit Agreement also contains customary negative covenants, subject to exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements.  As of September 24, 2016 and December 26, 2015, the borrowings on this revolving credit facility were $0.0 million and $40.0 million, respectively.  As of September 24, 2016 and December 26, 2015, there were $13.4 million and $11.4 million of letters of credit, respectively, provided to third parties under the credit facility.

 

As of September 24, 2016 and December 26, 2015, we had various other short-term bank credit lines available, of which $333.1 million and $288.6 million, respectively, were outstanding.  At September 24, 2016 and December 26, 2015, borrowings under all of our credit lines had a weighted average interest rate of 1.41% and 1.21%, respectively.

39


  

Private Placement Facilities

 

On August 10, 2010, we entered into $400 million private placement facilities with two insurance companies.  On April 30, 2012, we increased our available credit facilities by $375 million by entering into an additional agreement with one insurance company and amending our existing agreements with two insurance companies.  On September 22, 2014, we increased our available private placement facilities by $200 million to a total facility amount of $975 million, and extended the expiration date to September 22, 2017.  These facilities 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 September 22, 2017.  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.

 

The components of our private placement facility borrowings as of September 24, 2016 are presented in the following table (in thousands):

  

 

 

Amount of

 

 

 

 

 

Date of

 

Borrowing

 

Borrowing

 

 

Borrowing

 

Outstanding

 

Rate

 

Due Date

September 2, 2010

 

$

100,000

 

3.79

%

 

September 2, 2020

January 20, 2012

 

 

50,000

 

3.45

 

 

January 20, 2024

January 20, 2012 (1)

 

 

42,857

 

3.09

 

 

January 20, 2022

December 24, 2012

 

 

50,000

 

3.00

 

 

December 24, 2024

June 2, 2014

 

 

100,000

 

3.19

 

 

June 2, 2021

 

 

$

342,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)   Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016.

 

U.S. Trade Accounts Receivable Securitization

 

On April 17, 2013, we entered into a facility agreement of up to $300 million with a bank, as agent, based on the securitization of our U.S. trade accounts receivable.  This facility allowed us to replace public debt (approximately $220 million), which had a higher interest rate at Henry Schein Animal Health during February 2013 and provided funding for working capital and general corporate purposes.  The financing was structured as an asset-backed securitization program with pricing committed for up to three years.  On April 17, 2015, we extended the expiration date of this facility agreement to April 15, 2018, and on June 1, 2016, we extended the expiration date of this facility agreement to April 29, 2019 and increased the purchase limit under the facility from $300 million to $350 million.  The borrowings outstanding under this securitization facility were $350.0 million and $90.0 million as of September 24, 2016 and December 26, 2015, respectively.  At September 24, 2016, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 84 basis points plus 75 basis points, for a combined rate of 1.59%.  At December 26, 2015, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 40 basis points plus 75 basis points, for a combined rate of 1.15%.

 

We are required to pay a commitment fee of 30 basis points on the daily balance of the unused portion of the facility if our usage is greater than or equal to 50% of the facility limit or a commitment fee of 35 basis points on the daily balance of the unused portion of the facility if our usage is less than 50% of the facility limit.

 

Borrowings under this facility are presented as a component of Long-term debt within our consolidated balance sheet.

 

40


  

Long-term debt

 

Long-term debt consisted of the following:

  

 

 

 

September 24,

 

December 26,

 

 

 

2016

 

2015

Private placement facilities ..........................................................................................................................................................  

 

$

342,857

 

$

350,000

U.S. trade accounts receivable securitization ...................................................................................................................................  

 

 

350,000

 

 

90,000

Note payable to bank at a weighted-average interest rate of 11.00% and 8.83%

 

 

33

 

 

5

Various collateralized and uncollateralized loans payable with interest,

 

 

 

 

 

 

 

in varying installments through 2018 at interest rates

 

 

 

 

 

 

 

ranging from 2.27% to 9.36%

 

 

37,146

 

 

38,215

Capital lease obligations payable through 2029 with interest rates

 

 

 

 

 

 

 

ranging from 1.38% to 16.90%

 

5,448

 

 

2,863

Total .......................................................................................................................................................................................  

 

 

735,484

 

 

481,083

Less current maturities ................................................................................................................................................................  

 

 

(17,460)

 

 

(17,331)

 

Total long-term debt ..........................................................................................................................................................  

 

$

718,024

 

$

463,752

 

 

 

 

 

 

 

 

 

Stock Repurchases

 

From June 21, 2004 through September 24, 2016, we repurchased $2.0 billion, or 23,621,951 shares, under our common stock repurchase programs, with $50.0 million available as of September 24, 2016 for future common stock share repurchases.

 

On October 18, 2016, our Board of Directors authorized the repurchase of up to an additional $400.0 million in shares of our common stock.

 

Redeemable Noncontrolling Interests

 

Some minority shareholders 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 nine months ended September 24, 2016 and the year ended December 26, 2015 are presented in the following table:

  

 

 

 

September 24,

 

December 26,

 

 

 

2016

 

2015

Balance, beginning of period ..................................................................................................................................................  

 

$

542,194

 

$

564,527

Decrease in redeemable noncontrolling interests due to

 

 

 

 

 

 

 

redemptions ....................................................................................................................................................................  

 

 

(51,265)

 

 

(82,563)

Increase in redeemable noncontrolling interests due to

 

 

 

 

 

 

 

business acquisitions.........................................................................................................................................................  

 

 

20,584

 

 

18,936

Net income attributable to redeemable noncontrolling interests .....................................................................................................  

 

 

34,849

 

 

43,588

Dividends declared ...............................................................................................................................................................  

 

 

(25,869)

 

 

(32,706)

Effect of foreign currency translation gain (loss) attributable to

 

 

 

 

 

 

 

redeemable noncontrolling interests .....................................................................................................................................  

 

 

1,228

 

 

(4,790)

Change in fair value of redeemable securities ............................................................................................................................  

 

 

49,648

 

 

35,202

Balance, end of period ..........................................................................................................................................................  

 

$

571,369

 

$

542,194

 

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.

41


  

 

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 statement of income.

 

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, 2015.

 

Accounting Pronouncement Adopted

 

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17 (Topic 740), Balance Sheet Classification of Deferred Taxes. ASU 2015-17 requires deferred tax liabilities and assets to be classified as noncurrent in the Consolidated Balance Sheet. The standard will be effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements that have not been previously issued. The ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company elected to early adopt ASU 2015-17 prospectively in the third quarter of 2016. As a result, all deferred tax assets and liabilities will be presented as noncurrent on the consolidated balance sheet.  There was no impact on our results of operations as a result of the adoption of ASU 2015-17 and prior periods have not been adjusted.

  

 

Recently Issued Accounting Standards

 

In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation (Topic 718).  ASU 2016-09 contains amended guidance for share-based payment accounting.  ASU 2016-09 requires that all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement in the reporting period in which the awards vest or are exercised.  Excess tax benefits should be classified in the statement of cash flows as an operating activity instead of a financing activity.  Within the statement of cash flows, cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity.  Accounting for forfeitures can be accomplished via a policy election to either estimate the number of awards that are expected to vest or account for forfeitures at the time that they occur.  The threshold to qualify for equity accounting will be increased to permit withholding up to the maximum statutory tax rates in the applicable taxing jurisdictions.  The standard which requires the use of a modified retrospective transition approach will be effective for annual periods beginning after December 15, 2016.  Early adoption is permitted in any interim or annual period. We are currently evaluating the impact of ASU 2016-09 on our consolidated financial statements.

 

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842).  ASU 2016-02 contains guidance on accounting for leases and requires that most lease assets and liabilities and the associated rights and obligations be recognized on the Company’s balance sheet.  ASU 2016-02 focuses on lease assets and lease liabilities by lessees classified as operating leases under previous generally accepted accounting principles.  For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.  ASU 2016-02 will require disclosures regarding the amount, timing and uncertainty of cash flows arising from leases.  The standard which requires the use of a modified retrospective approach will be effective for interim and annual periods beginning after December 15, 2018.  Early adoption is permitted. We are currently evaluating the impact of ASU 2016-02 on our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under accounting principles generally accepted in United States (“U.S. GAAP”). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this

42


  

core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

 

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers” (“ASU 2015-14”) which deferred the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date.  Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

 

When effective, ASU 2014-09 will use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard.

  

 

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, 2015.

 

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 September 24, 2016 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 

 

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 24, 2016 that have materially affected, or are reasonably likely to materially affect, 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.

43


  

PART II.  OTHER INFORMATION   

 

ITEM 1.  LEGAL PROCEEDINGS    

 

In September 2015, Henry Schein, Inc. was served with a summons and complaint in an action commenced in the United States District Court for the Eastern District of New York, entitled SourceOne Dental, Inc. v. Patterson Companies, Inc., Henry Schein, Inc. and Benco Dental Supply Company, Civil Action No. 15-cv-05440-JMA-GRB.  Plaintiff alleges that, through its website, it markets and sells dental supplies and equipment to dentists.  Plaintiff alleges, among other things, that defendants conspired to eliminate plaintiff as a viable competitor and to exclude plaintiff from the market for the marketing, distribution and sale of dental supplies and equipment in the United States and that defendants unlawfully agreed with one another to boycott dentists, manufacturers and state dental associations that deal with, or considered dealing with, plaintiff.  Plaintiff asserts the following claims:  (i) unreasonable restraint of trade in violation of state and federal antitrust laws; (ii) tortious interference with prospective business relations; (iii) civil conspiracy; and (iv) aiding and abetting the other defendants’ ongoing tortious and anticompetitive conduct.  Plaintiff seeks equitable relief, compensatory and treble damages, jointly and severally, punitive damages, interest, and reasonable costs and expenses, including attorneys’ fees and expert fees.  We intend to defend ourselves vigorously against the action.

 

Beginning in January 2016, class action complaints were filed against Patterson Companies, Inc., Benco Dental Supply Co. and Henry Schein, Inc.  Each of these complaints allege, among other things, that defendants conspired to fix prices, allocate customers and foreclose competitors by boycotting manufacturers, state dental associations and others that deal with defendants’ competitors.  Subject to certain exclusions, these classes seek to represent all persons who purchased dental supplies or equipment in the United States directly from any of the defendants or Burkhart Dental Supply Co. since August 31, 2008.  Each class action complaint asserts a single count under Section 1 of the Sherman Act, and seeks equitable relief, compensatory and treble damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees.  We intend to defend ourselves vigorously against these actions.

 

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 financial condition or results of operations.

 

As of September 24, 2016, 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 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.

 

ITEM 1A. RISK FACTORS   

 

Except as disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 25, 2016, 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, 2015.

  

 

44


  

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Purchases of equity securities by the issuer  

 

Our share repurchase program, announced on June 21, 2004, originally allowed us to repurchase up to $100 million of shares of our common stock, which represented approximately 3.5% of the shares outstanding at the commencement of the program.  As summarized in the table below, subsequent additional increases totaling $2.0 billion, authorized by our Board of Directors, to the repurchase program provide for a total of $2.1 billion of shares of our common stock to be repurchased under this program.

  

 

Date of

 

Amount of Additional

 

 

Authorization

 

Repurchases Authorized

 

 

October 31, 2005

 

$

100,000,000

 

 

March 28, 2007

 

 

100,000,000

 

 

November 16, 2010

 

 

100,000,000

 

 

August 18, 2011

 

 

200,000,000

 

 

April 18, 2012

 

 

200,000,000

 

 

November 12, 2012

 

 

300,000,000

 

 

December 9, 2013

 

 

300,000,000

 

 

December 4, 2014

 

 

300,000,000

 

 

November 30, 2015

 

 

400,000,000

 

 

As of September 24, 2016, we had repurchased approximately $2.0 billion of common stock (23,621,951 shares) under these initiatives, with $50.0 million available as of September 24, 2016 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 September 24, 2016:

  

 

 

 

 

 

 

 

 

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)

06/26/16 through 07/30/16

 

21,556

 

$

168.85

 

21,556

 

1,322,660

07/31/16 through 08/27/16

 

1,157,942

 

 

163.53

 

1,157,942

 

306,208

08/28/16 through 09/24/16

 

-

 

 

-

 

-

 

304,179

 

 

1,179,498

 

 

 

 

1,179,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

 

 

 

 

 

 

 

 

 

 

 

On October 18, 2016, our Board of Directors authorized the repurchase of up to an additional $400.0 million in shares of our common stock.

  

45


  

ITEM 5.  OTHER INFORMATION

 

Plan of Restructuring

 

On November 6, 2014, we announced a corporate initiative to rationalize our operations and provide expense efficiencies, which was expected to be completed by the end of fiscal 2015.  This initiative originally planned for the elimination of approximately 2% to 3% of our workforce and the closing of certain facilities.  We subsequently announced that we plan to extend these restructuring activities through the end of 2016 to further implement cost-savings initiatives, which will now result in the elimination of approximately 3% to 4% of our workforce.  The total costs associated with the actions to date for this restructuring include $34.9 million pre-tax, which was recorded in fiscal 2015 and $29.8 million pre-tax which has been recorded in the nine months ended September 24, 2016.

 

During the three months ended September 24, 2016 and September 26, 2015, we recorded restructuring costs of $5.4 million and $8.4 million, respectively.  During the nine months ended September 24, 2016 and September 26, 2015, we recorded restructuring costs of $29.8 million and $22.5 million, respectively.  The costs associated with this restructuring are included in a separate line item, “Restructuring costs” within our consolidated statements of income.

 

On October 28, 2016, we estimated the remaining restructuring costs to be recorded in the fourth quarter of 2016 to be in the range of $17 million to $22 million.

  

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ITEM 6.  EXHIBITS

 

Exhibits.

 

 

31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+

 

31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+

 

32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+

 

101.INS

XBRL Instance Document+

 

101.SCH

XBRL Taxonomy Extension Schema Document+

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document+

 

101.DEF

XBRL Taxonomy Definition Linkbase Document+

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document+

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document+

_________

+    Filed herewith

47


  

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: November 2, 2016

48


EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Stanley M. Bergman, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Henry Schein, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 2, 2016       /s/ Stanley M. Bergman
      Stanley M. Bergman
      Chairman and Chief Executive Officer
EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Steven Paladino, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Henry Schein, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 2, 2016       /s/ Steven Paladino
     

Steven Paladino

Executive Vice President and

Chief Financial Officer

 

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Henry Schein, Inc. (the “Company”) for the period ending September 24, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stanley M. Bergman, the Chairman and Chief Executive Officer of the Company, and I, Steven Paladino, Executive Vice President and Chief Financial Officer of the Company, do hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

   

/s/ Stanley M. Bergman

Dated: November 2, 2016    

Stanley M. Bergman

Chairman and Chief Executive Officer

Dated: November 2, 2016    

/s/ Steven Paladino

   

Steven Paladino

Executive Vice President and

Chief Financial Officer

This certification accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.