UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 27, 2021

or

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

 

For the transition period from ____________ to ____________

Commission File Number:   0-27078

 

HENRY SCHEIN, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

11-3136595

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

135 Duryea Road

Melville, New York

(Address of principal executive offices)

11747

(Zip Code)

 

(631) 843-5500

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

HSIC

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒   

No  ☐ 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒   

No  ☐ 

 

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

 

Large accelerated filer ☒ 

 

Accelerated filer ☐ 

Non-accelerated filer   ☐     

 

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐   

No

As of April 26, 2021 there were 140,696,094 shares of the registrant’s common stock outstanding.

 


 

HENRY SCHEIN, INC.

INDEX

 

 

 

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

 

 

 

 

 

Page

ITEM 1.

Consolidated Financial Statements:

 

 

 

 

 

 

 

 

 

 

Balance Sheets as of March 27, 2021 and December 26, 2020

3

 

 

 

 

 

 

 

 

 

Statements of Income for the three months ended

 

 

 

 

March 27, 2021 and March 28, 2020

4

 

 

 

 

 

 

 

 

 

Statements of Comprehensive Income for the three months ended

 

 

 

 

March 27, 2021 and March 28, 2020

5

 

 

 

 

 

 

 

 

 

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

 

 

 

 

March 27, 2021 and March 28, 2020

6

 

 

 

 

 

 

 

 

 

Statements of Cash Flows for the three months ended

 

 

 

 

March 27, 2021 and March 28, 2020

7

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Note 1 – Basis of Presentation  

8

 

 

 

Note 2 – Critical Accounting Policies, Accounting Pronouncements Adopted  

 

 

 

 

and Recently Issued Accounting Standards

9

 

 

 

Note 3 – Revenue from Contracts with Customers  

10

 

 

 

Note 4 – Segment Data  

11

 

 

 

Note 5 – Debt  

12

 

 

 

Note 6 – Leases

15

 

 

 

Note 7 – Redeemable Noncontrolling Interests

17

 

 

 

Note 8 – Comprehensive Income

17

 

 

 

Note 9 – Fair Value Measurements  

19

 

 

 

Note 10 – Business Acquisitions  

21

 

 

 

Note 11 – Plans of Restructuring  

22

 

 

 

Note 12 – Earnings Per Share

23

 

 

 

Note 13 – Income Taxes

24

 

 

 

Note 14 – Derivatives and Hedging Activities

25

 

 

 

Note 15 – Stock-Based Compensation

26

 

 

 

Note 16 – Supplemental Cash Flow Information

28

 

 

 

Note 17 – Legal Proceedings

28

 

 

 

Note 18 – Related Party Transactions

31

 

 

 

 

 

 

 

ITEM 2.

Management's Discussion and Analysis of

 

 

 

 

Financial Condition and Results of Operations

32

 

 

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

46

 

 

 

 

 

 

 

ITEM 4.

Controls and Procedures

47

 

 

 

 

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

48

 

 

 

ITEM 1A.

Risk Factors

48

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

 

 

 

ITEM 6.

Exhibits

49

 

 

 

 

Signature

50

 

 

 

   
 

 

 

 


Table of Contents 

 

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HENRY SCHEIN, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

 

 

 

March 27,

 

December 26,

 

 

 

 

 

2021

 

2020

 

 

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

144,538

 

$

421,185

 

Accounts receivable, net of reserves of $79,936 and $88,030

 

 

1,317,546

 

 

1,424,787

 

Inventories, net

 

 

1,626,185

 

 

1,512,499

 

Prepaid expenses and other

 

 

482,356

 

 

432,944

 

 

 

Total current assets

 

 

3,570,625

 

 

3,791,415

Property and equipment, net

 

 

353,248

 

 

342,004

Operating lease right-of-use assets

 

 

301,759

 

 

288,847

Goodwill

 

 

2,587,438

 

 

2,504,392

Other intangibles, net

 

 

597,619

 

 

479,429

Investments and other

 

 

369,231

 

 

366,445

 

 

 

Total assets

 

$

7,779,920

 

$

7,772,532

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

909,575

 

$

1,005,655

 

Bank credit lines

 

 

67,415

 

 

73,366

 

Current maturities of long-term debt

 

 

111,176

 

 

109,836

 

Operating lease liabilities

 

 

68,580

 

 

64,716

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll and related

 

 

286,106

 

 

295,329

 

 

Taxes

 

 

146,755

 

 

138,671

 

 

Other

 

 

533,161

 

 

595,529

 

 

 

Total current liabilities

 

 

2,122,768

 

 

2,283,102

Long-term debt

 

 

506,461

 

 

515,773

Deferred income taxes

 

 

42,254

 

 

30,065

Operating lease liabilities

 

 

248,624

 

 

238,727

Other liabilities

 

 

410,184

 

 

392,781

 

 

 

Total liabilities

 

 

3,330,291

 

 

3,460,448

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

452,899

 

 

327,699

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 1,000,000 shares authorized,

 

 

 

 

 

 

 

 

 none outstanding

 

 

-

 

 

-

 

Common stock, $0.01 par value, 480,000,000 shares authorized,

 

 

 

 

 

 

 

 

 141,310,113 outstanding on March 27, 2021 and

 

 

 

 

 

 

 

 

 142,462,571 outstanding on December 26, 2020

 

 

1,413

 

 

1,425

 

Additional paid-in capital

 

 

-

 

 

-

 

Retained earnings

 

 

3,493,060

 

 

3,454,831

 

Accumulated other comprehensive loss

 

 

(136,305)

 

 

(108,084)

 

 

Total Henry Schein, Inc. stockholders' equity

 

 

3,358,168

 

 

3,348,172

 

Noncontrolling interests

 

 

638,562

 

 

636,213

 

 

 

Total stockholders' equity

 

 

3,996,730

 

 

3,984,385

 

 

Total liabilities, redeemable noncontrolling interests and stockholders' equity

 

$

7,779,920

 

$

7,772,532

See accompanying notes.

 

3 


Table of Contents 

 

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 27,

 

March 28,

 

 

 

 

 

2021

 

2020

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,924,961

 

$

2,428,871

Cost of sales

 

 

2,034,110

 

 

1,682,857

 

 

Gross profit

 

 

890,851

 

 

746,014

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative

 

 

657,992

 

 

567,362

 

Restructuring costs

 

 

2,931

 

 

4,787

 

 

Operating income

 

 

229,928

 

 

173,865

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

 

1,983

 

 

3,190

 

Interest expense

 

 

(6,485)

 

 

(7,812)

 

Other, net

 

 

309

 

 

(220)

 

 

Income from continuing operations before taxes, equity in

 

 

 

 

 

 

 

 

earnings of affiliates and noncontrolling interests

 

 

225,735

 

 

169,023

Income taxes

 

 

(56,685)

 

 

(37,910)

Equity in earnings of affiliates

 

 

5,878

 

 

2,734

Net income from continuing operations

 

 

174,928

 

 

133,847

Loss from discontinued operations

 

 

-

 

 

(282)

Net Income

 

 

174,928

 

 

133,565

 

Less: Net income attributable to noncontrolling interests

 

 

(8,931)

 

 

(3,304)

Net income attributable to Henry Schein, Inc.

 

$

165,997

 

$

130,261

Amounts attributable to Henry Schein, Inc.:

 

 

 

 

 

 

Continuing operations

 

$

165,997

 

$

130,543

Discontinued operations

 

 

-

 

 

(282)

Net income attributable to Henry Schein, Inc.

 

$

165,997

 

$

130,261

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.17

 

$

0.91

 

Diluted

 

$

1.16

 

$

0.91

 

 

 

 

 

 

 

 

 

 

Loss per share from discontinued operations attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

-

 

$

0.00

 

Diluted

 

$

-

 

$

0.00

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.17

 

$

0.91

 

Diluted

 

$

1.16

 

$

0.91

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

142,298

 

 

142,967

 

Diluted

 

 

143,398

 

 

143,095

See accompanying notes.

 

4 


Table of Contents 

 

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 27,

 

March 28,

 

 

 

 

 

2021

 

2020

 

 

 

 

 

 

 

 

 

 

Net income

 

$

174,928

 

$

133,565

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(38,481)

 

 

(89,312)

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain from foreign currency hedging activities

 

 

3,361

 

 

15,143

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment loss

 

 

(6)

 

 

(9)

 

 

 

 

 

 

 

 

 

 

 

Pension adjustment gain

 

 

807

 

 

724

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax

 

 

(34,319)

 

 

(73,454)

Comprehensive income

 

 

140,609

 

 

60,111

 

Comprehensive (income) loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

Net income

 

 

(8,931)

 

 

(3,304)

 

 

Foreign currency translation loss

 

 

6,098

 

 

13,179

 

 

 

Comprehensive (income) loss attributable to noncontrolling interests

 

 

(2,833)

 

 

9,875

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Henry Schein, Inc.

 

$

137,776

 

$

69,986

See accompanying notes.

 

5 


Table of Contents 

 

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common Stock

Additional

 

 

Other

 

 

Total

 

 

$.01 Par Value

Paid-in

Retained

Comprehensive

Noncontrolling

Stockholders'

 

 

Shares

 

Amount

Capital

Earnings

Income / (Loss)

 Interests 

Equity

Balance, December 26, 2020

142,462,571

$

1,425

$

-

$

3,454,831

$

(108,084)

$

636,213

$

3,984,385

Net income (excluding $7,053 attributable to Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests from continuing operations)

-

 

-

 

-

 

165,997

 

-

 

1,878

 

167,875

Foreign currency translation loss (excluding loss of $6,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Redeemable noncontrolling interests)

-

 

-

 

-

 

-

 

(32,383)

 

75

 

(32,308)

Unrealized gain from foreign currency hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax of $1,334

-

 

-

 

-

 

-

 

3,361

 

-

 

3,361

Unrealized investment loss, net of tax benefit of $2

-

 

-

 

-

 

-

 

(6)

 

-

 

(6)

Pension adjustment gain, net of tax of $219

-

 

-

 

-

 

-

 

807

 

-

 

807

Dividends paid

-

 

-

 

-

 

-

 

-

 

(77)

 

(77)

Change in fair value of redeemable securities

-

 

-

 

(45,520)

 

-

 

-

 

-

 

(45,520)

Initial noncontrolling interests and adjustments related to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

business acquisitions

-

 

-

 

-

 

-

 

-

 

473

 

473

Repurchase and retirement of common stock

(1,325,242)

 

(13)

 

(12,250)

 

(76,396)

 

-

 

-

 

(88,659)

Stock-based compensation expense

281,645

 

3

 

12,787

 

-

 

-

 

-

 

12,790

Settlement of stock-based compensation awards

-

 

-

 

787

 

-

 

-

 

-

 

787

Shares withheld for payroll taxes

(108,861)

 

(2)

 

(7,176)

 

-

 

-

 

-

 

(7,178)

Transfer of charges in excess of capital

-

 

-

 

51,372

 

(51,372)

 

-

 

-

 

-

Balance, March 27, 2021

141,310,113

$

1,413

$

-

$

3,493,060

$

(136,305)

$

638,562

$

3,996,730

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common Stock

Additional

 

 

Other

 

 

Total

 

 

$.01 Par Value

Paid-in

Retained

Comprehensive

Noncontrolling

Stockholders'

 

 

Shares

 

Amount

Capital

Earnings

Income / (Loss)

 Interests 

Equity

Balance, December 28, 2019

143,353,459

$

1,434

$

47,768

$

3,116,215

$

(167,373)

$

632,093

$

3,630,137

Cumulative impact of adopting new accounting standards

-

 

-

 

-

 

(412)

 

-

 

-

 

(412)

Net income (excluding $2,839 attributable to Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests from continuing operations)

-

 

-

 

-

 

130,261

 

-

 

465

 

130,726

Foreign currency translation loss (excluding loss of $13,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Redeemable noncontrolling interests)

-

 

-

 

-

 

-

 

(76,133)

 

(152)

 

(76,285)

Unrealized gain from foreign currency hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax of $5,090

-

 

-

 

-

 

-

 

15,143

 

-

 

15,143

Unrealized investment loss, net of tax benefit of $2

-

 

-

 

-

 

-

 

(9)

 

-

 

(9)

Pension adjustment gain, net of tax of $324

-

 

-

 

-

 

-

 

724

 

-

 

724

Dividends paid

-

 

-

 

-

 

-

 

-

 

(499)

 

(499)

Purchase of noncontrolling interests

-

 

-

 

(1,597)

 

-

 

-

 

(692)

 

(2,289)

Change in fair value of redeemable securities

-

 

-

 

13,072

 

-

 

-

 

-

 

13,072

Repurchase and retirement of common stock

(1,200,000)

 

(12)

 

(10,949)

 

(62,828)

 

-

 

-

 

(73,789)

Stock-based compensation credit

507,410

 

5

 

(17,519)

 

-

 

-

 

-

 

(17,514)

Shares withheld for payroll taxes

(227,509)

 

(3)

 

(13,871)

 

-

 

-

 

-

 

(13,874)

Settlement of stock-based compensation awards

-

 

-

 

660

 

-

 

-

 

-

 

660

Separation of Animal Health business

-

 

-

 

1

 

-

 

-

 

-

 

1

Balance, March 28, 2020

142,433,360

$

1,424

$

17,565

$

3,183,236

$

(227,648)

$

631,215

$

3,605,792

See accompanying notes.

 

6 


Table of Contents 

 

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 27,

 

March 28,

 

 

 

 

 

 

2021

 

2020

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

174,928

 

$

133,565

 

Loss from discontinued operations

 

 

-

 

 

(282)

 

Income from continuing operations

 

 

174,928

 

 

133,847

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

49,363

 

 

46,983

 

 

 

Impairment charge on intangible assets

 

 

-

 

 

2,000

 

 

 

Stock-based compensation (credit) expense

 

 

12,790

 

 

(17,514)

 

 

 

Provision for (benefit from) losses on trade and other accounts receivable

 

 

(2,696)

 

 

14,543

 

 

 

Provision for deferred income taxes

 

 

11,171

 

 

2,645

 

 

 

Equity in earnings of affiliates

 

 

(5,878)

 

 

(2,734)

 

 

 

Distributions from equity affiliates

 

 

5,139

 

 

2,413

 

 

 

Changes in unrecognized tax benefits

 

 

2,804

 

 

(1,575)

 

 

 

Other

 

 

35

 

 

(13,924)

 

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

118,795

 

 

(1,283)

 

 

 

 

Inventories

 

 

(78,085)

 

 

73,038

 

 

 

 

Other current assets

 

 

(45,310)

 

 

(22,002)

 

 

 

 

Accounts payable and accrued expenses

 

 

(179,725)

 

 

(137,680)

Net cash provided by operating activities from continuing operations

 

 

63,331

 

 

78,757

Net cash used in operating activities from discontinued operations

 

 

-

 

 

(282)

Net cash provided by operating activities

 

 

63,331

 

 

78,475

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of fixed assets

 

 

(13,843)

 

 

(23,008)

 

Payments related to equity investments and business

 

 

 

 

 

 

 

 

acquisitions, net of cash acquired

 

 

(204,027)

 

 

(37,947)

 

Proceeds from sale of equity investment

 

 

-

 

 

12,000

 

Repayments from loan to affiliate

 

 

139

 

 

1,137

 

Other

 

 

(5,513)

 

 

(5,787)

Net cash used in investing activities from continuing operations

 

 

(223,244)

 

 

(53,605)

Net cash used in investing activities from discontinued operations

 

 

-

 

 

-

Net cash used in investing activities

 

 

(223,244)

 

 

(53,605)

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net change in bank borrowings

 

 

(241)

 

 

358,639

 

Proceeds from issuance of long-term debt

 

 

-

 

 

250,000

 

Principal payments for long-term debt

 

 

(17,781)

 

 

(8,478)

 

Debt issuance costs

 

 

(85)

 

 

(58)

 

Payments for repurchases of common stock

 

 

(88,659)

 

 

(73,789)

 

Payments for taxes related to shares withheld for employee taxes

 

 

(6,158)

 

 

(13,155)

 

Distributions to noncontrolling shareholders

 

 

(6,520)

 

 

(3,664)

 

Acquisitions of noncontrolling interests in subsidiaries

 

 

-

 

 

(14,925)

 

Payments to Henry Schein Animal Health Business

 

 

-

 

 

(2,962)

Net cash provided by (used in) financing activities from continuing operations

 

 

(119,444)

 

 

491,608

Net cash provided by financing activities from discontinued operations

 

 

-

 

 

282

Net cash provided by (used in) financing activities

 

 

(119,444)

 

 

491,890

Effect of exchange rate changes on cash and cash equivalents from continuing operations

 

 

2,710

 

 

(5,489)

Effect of exchange rate changes on cash and cash equivalents from discontinued operations

 

 

-

 

 

-

Net change in cash and cash equivalents from continuing operations

 

 

(276,647)

 

 

511,271

Net change in cash and cash equivalents from discontinued operations

 

 

-

 

 

-

Cash and cash equivalents, beginning of period

 

 

421,185

 

 

106,097

Cash and cash equivalents, end of period

 

$

144,538

 

$

617,368

See accompanying notes.

 

7 


Table of Contents 

HENRY SCHEIN, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

  (unaudited)

 

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.

 

We consolidate a Variable Interest Entity (“VIE”) where we hold a variable interest and are the primary beneficiary.  The VIE is a trade accounts receivable securitization.  We are the primary beneficiary because we have the power to direct activities that most significantly affect the economic performance and have the obligation to absorb the majority of the losses or benefits.  The results of operations and financial position of this VIE are included in our consolidated financial statements.

 

For the consolidated VIE, the trade accounts receivable transferred to the VIE are pledged as collateral to the related debt.  The creditors have recourse to us for losses on these trade accounts receivable.  At March 27, 2021 and December 26, 2020, there were no trade accounts receivable that were restricted to settle obligations of this VIE, nor were there liabilities of the VIE where the creditors have recourse to us.

 

The consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented.  All such adjustments are of a normal recurring nature.  These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 26, 2020.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 three months ended March 27, 2021 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 25, 2021.

 

In March 2020, the World Health Organization declared the Novel Coronavirus Disease 2019 (“COVID-19”) a pandemic. The COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of global financial markets. In response, many countries implemented business closures and restrictions, stay-at-home and social distancing ordinances and similar measures to combat the pandemic, which significantly impacted global business and dramatically reduced demand for dental products and certain medical products in the second quarter of 2020. Demand increased in the second half of 2020 and has continued into the first quarter of 2021, resulting in growth over the prior year driven by sales of personal protective equipment (PPE) and COVID-19 related products.

8 


Table of Contents 

HENRY SCHEIN, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

  (unaudited)

 

Our consolidated financial statements reflect estimates and assumptions made by us that affect, among other things, our goodwill, long-lived asset and definite-lived intangible asset valuation; inventory valuation; equity investment valuation; assessment of the annual effective tax rate; valuation of deferred income taxes and income tax contingencies; the allowance for doubtful accounts; hedging activity; vendor rebates; measurement of compensation cost for certain share-based performance awards and cash bonus plans; and pension plan assumptions. Due to the significant uncertainty surrounding the future impact of COVID-19, our judgments regarding estimates and impairments could change in the future. In addition, the impact of COVID-19 had a material adverse effect on our business, results of operations and cash flows, primarily in the second quarter of 2020. In the latter half of the second quarter of 2020, dental and medical practices began to re-open worldwide, and continued to do so during the second half of 2020.  During the first quarter of 2021, patient traffic levels returned to levels approaching pre-pandemic levels, although certain regions in the U.S. and internationally are experiencing an increase in COVID-19 cases. There is an ongoing risk that the COVID-19 pandemic may again have a material adverse effect on our business, results of operations and cash flows and may result in a material adverse effect on our financial condition and liquidity. However, the extent of the potential impact cannot be reasonably estimated at this time.

 

 

Note 2 – Critical Accounting Policies, Accounting Pronouncements Adopted and Recently Issued Accounting Standards

 

Critical Accounting Policies

 

There have been no material changes in our critical accounting policies during the three months ended March 27, 2021, as compared to the critical accounting policies described in Item 8 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 26, 2020, except as follows:

 

Accounting Pronouncements Adopted

 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes” (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”).  ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.  The amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance.  Our adoption of ASU 2019 - 12 did not have a material impact on our consolidated financial statements.

 

Recently Issued Accounting Standards

 

In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options” (Subtopic 470-20) and “Derivatives and Hedging— in Entity’s Own Equity” (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”).  ASU 2020-06 simplifies the accounting for convertible instruments.  In addition to eliminating certain accounting models, this ASU includes improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity.  ASU 2020-06 is effective for fiscal years beginning after December 15, 2021.  We do not expect that the requirements of this ASU will have a material impact on our consolidated financial statements.

 

9 


Table of Contents 

HENRY SCHEIN, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

  (unaudited)

 

Note 3 – Revenue from Contracts with Customers

 

Revenue is recognized in accordance with policies disclosed in Item 8 of our Annual Report on Form 10-K for the year ended December 26, 2020.

 

Disaggregation of Revenue

 

The following table disaggregates our revenue by segment and geography:

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 27, 2021

 

 

 

 

 

 

North America

 

International

 

Global

Revenues:

 

 

 

 

 

 

 

 

 

Health care distribution

 

 

 

 

 

 

 

 

 

 

Dental

$

1,044,783

 

 

744,145

 

 

1,788,928

 

 

Medical

 

965,127

 

 

27,910

 

 

993,037

 

 

 

 

Total health care distribution

 

2,009,910

 

 

772,055

 

 

2,781,965

 

Technology and value-added services

 

121,937

 

 

21,059

 

 

142,996

 

 

Total revenues

$

2,131,847

 

$

793,114

 

$

2,924,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 28, 2020

 

 

 

 

 

 

North America

 

International

 

Global

Revenues:

 

 

 

 

 

 

 

 

 

Health care distribution

 

 

 

 

 

 

 

 

 

 

Dental

$

888,372

 

 

586,704

 

 

1,475,076

 

 

Medical

 

778,028

 

 

22,660

 

 

800,688

 

 

 

 

Total health care distribution

 

1,666,400

 

 

609,364

 

 

2,275,764

 

Technology and value-added services

 

113,498

 

 

18,467

 

 

131,965

 

Total excluding Corporate TSA revenues (1)

 

1,779,898

 

 

627,831

 

 

2,407,729

 

Corporate TSA revenues (1)

 

-

 

 

21,142

 

 

21,142

 

 

Total revenues

$

1,779,898

 

$

648,973

 

$

2,428,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)     Corporate TSA revenues represents sales of certain animal health products to Covetrus under the transition services agreement entered into in connection with the Animal Health Spin-off, which ended in December 2020.  See Note-18 Related Party Transactions for further information.

 

At December 26, 2020, the current portion of contract liabilities of $71.5 million was reported in Accrued expenses: Other, and $8.2 million related to non-current contract liabilities were reported in Other liabilities.  During the three months ended March 27, 2021, we recognized in revenue $32.9 million of the amounts that were previously deferred at December 26, 2020.  At March 27, 2021, the current and non-current portion of contract liabilities were $73.7 million and $9.5 million, respectively.

 

10 


Table of Contents 

HENRY SCHEIN, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

  (unaudited)

 

Note 4Segment 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 and medical operating segments.  This segment distributes consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.  Our global dental group serves office-based dental practitioners, dental laboratories, schools and other institutions.  Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions.  Our global dental and medical groups serve practitioners in 31 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.  Our value-added practice solutions include financial services on a non-recourse basis, e-services, practice technology, network and hardware services, as well as continuing education services for practitioners.

 

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

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 27,

 

March 28,

 

 

 

 

 

2021

 

2020

Net Sales:

 

 

 

 

 

 

 

Health care distribution (1)

 

 

 

 

 

 

 

 

Dental

 

$

1,788,928

 

$

1,475,076

 

 

Medical

 

 

993,037

 

 

800,688

 

 

Total health care distribution

 

 

2,781,965

 

 

2,275,764

 

Technology and value-added services (2)

 

 

142,996

 

 

131,965

 

 

Total excluding Corporate TSA revenue

 

 

2,924,961

 

 

2,407,729

 

Corporate TSA revenues (3)

 

 

-

 

 

21,142

 

 

Total

 

$

2,924,961

 

$

2,428,871

 

(1)        Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic   pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, personal protective equipment and vitamins.

(2)        Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other services.

(3)        Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in   connection with the Animal Health Spin-off, which ended in December 2020.  See Note-18 Related Party Transactions for further information.

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 27,

 

March 28,

 

 

 

 

 

2020

 

2020

Operating Income:

 

 

 

 

 

 

 

Health care distribution

 

$

197,932

 

$

148,167

 

Technology and value-added services

 

 

31,996

 

 

25,698

 

 

Total

 

$

229,928

 

$

173,865

11 


Table of Contents 

HENRY SCHEIN, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

  (unaudited)

 

Note 5 – Debt

 

Bank Credit Lines

 

Bank credit lines consisted of the following:

 

 

 

 

March 27,

 

December 26,

 

 

 

2021

 

2020

Revolving credit agreement

 

$

-

 

$

-

Other short-term bank credit lines

 

 

67,415

 

 

73,366

Total

 

$

67,415

 

$

73,366

 

Revolving Credit Agreement

 

On April 18, 2017, we entered into a $750 million revolving credit agreement (the “Credit Agreement”), which matures in April 2022.  The interest rate is based on the USD LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter.  We expect most LIBOR rates to be discontinued immediately after December 31, 2021, while the remaining LIBOR rates will be discontinued immediately after June 30, 2023, which will require an amendment to our debt agreements to reflect a new reference rate. We do not expect the discontinuation of LIBOR as a reference rate in our debt agreements to have a material adverse effect on our financial position or to materially affect our interest expense.  The Credit Agreement also requires, among other things, that we maintain maximum leverage ratios. Additionally, the Credit Agreement contains customary representations, warranties and affirmative covenants as well as customary negative covenants, subject to negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements.  As of March 27, 2021, and December 26, 2020, we had no borrowings on this revolving credit facility.  As of March 27, 2021, and December 26, 2020, there were $9.3 million and $9.5 million of letters of credit, respectively, provided to third parties under the credit facility.

 

On April 17, 2020, we amended the Credit Agreement to, among other things, (i) modify the financial covenant from being based on total leverage ratio to net leverage ratio, (ii) adjust the pricing grid to reflect the net leverage ratio calculation, and (iii) increase the maximum maintenance leverage ratio through March 31, 2021.

 

364-Day Credit Agreement

 

On March 4, 2021 we repaid the outstanding obligations and terminated the lender commitments under our $700 million 364-day credit agreement which was entered into on April 17, 2020.  This facility was originally scheduled to mature on April 16, 2021.  

 

Other Short-Term Credit Lines

 

As of March 27, 2021 and December 26, 2020, we had various other short-term bank credit lines available, of which $67.4 million and $73.4 million, respectively, were outstanding.  At March 27, 2021 and December 26, 2020, borrowings under all of these credit lines had a weighted average interest rate of 4.52% and 4.14%, respectively.

12 


Table of Contents 

HENRY SCHEIN, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

  (unaudited)

 

Long-term debt

 

Long-term debt consisted of the following:

 

 

 

 

March 27,

 

December 26,

 

 

 

2021

 

2020

Private placement facilities

 

$

606,355

 

$

613,498

Note payable

 

 

-

 

 

1,554

Various collateralized and uncollateralized loans payable with interest,

 

 

 

 

 

 

 

in varying installments through 2023 at interest rates

 

 

 

 

 

 

 

ranging from 2.45% to 4.27% at March 27, 2021 and

 

 

 

 

 

 

 

ranging from 2.62% to 4.27% at December 26, 2020

 

 

5,969

 

 

4,596

Finance lease obligations (see Note 7)  

 

 

5,313

 

 

5,961

 

Total

 

 

617,637

 

 

625,609

Less current maturities

 

 

(111,176)

 

 

(109,836)

 

Total long-term debt

 

$

506,461

 

$

515,773

 

Private Placement Facilities

 

Our private placement facilities, with three insurance companies, have a total facility amount of $1 billion, and are available on an uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from time to time through June 23, 2023.  The facilities allow us to issue senior promissory notes to the lenders at a fixed rate based on an agreed upon spread over applicable treasury notes at the time of issuance.  The term of each possible issuance will be selected by us and can range from five to 15 years (with an average life no longer than 12 years).  The proceeds of any issuances under the facilities will be used for general corporate purposes, including working capital and capital expenditures, to refinance existing indebtedness and/or to fund potential acquisitions.  The agreements provide, among other things, that we maintain certain maximum leverage ratios, and contain restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal of assets and certain changes in ownership.  These facilities contain make-whole provisions in the event that we pay off the facilities prior to the applicable due dates.

 

On March 5, 2021, we amended the private placement facilities to, among other things, (a) modify the financial covenant from being based on a net leverage ratio to a total leverage ratio and (b) restore the maximum maintenance total leverage ratio to 3.25x and remove the 1.00% interest rate increase triggered if the net leverage ratio were to exceed 3.0x.

13 


Table of Contents 

HENRY SCHEIN, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

  (unaudited)

 

The components of our private placement facility borrowings as of March 27, 2021 are presented in the following table (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Amount of

 

 

 

 

 

 

 

Borrowing

 

Borrowing

 

 

Date of Borrowing

 

Outstanding

 

Rate

 

Due Date

January 20, 2012 (1)

 

$

7,143

 

3.09

%

 

January 20, 2022

January 20, 2012

 

 

50,000

 

3.45

 

 

January 20, 2024

December 24, 2012

 

 

50,000

 

3.00

 

 

December 24, 2024

June 2, 2014

 

 

100,000

 

3.19

 

 

June 2, 2021

June 16, 2017

 

 

100,000

 

3.42

 

 

June 16, 2027

September 15, 2017

 

 

100,000

 

3.52

 

 

September 15, 2029

January 2, 2018

 

 

100,000

 

3.32

 

 

January 2, 2028

September 2, 2020

 

 

100,000

 

2.35

 

 

September 2, 2030

Less: Deferred debt issuance costs

 

 

(788)

 

 

 

 

 

 

 

$

606,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

U.S. Trade Accounts Receivable Securitization

 

We have a facility agreement with a bank, as agent, based on the securitization of our U.S. trade accounts receivable that is structured as an asset-backed securitization program with pricing committed for up to three years.  Our current facility, which has a purchase limit of $350 million, was scheduled to expire on April 29, 2022.  On June 22, 2020, the expiration date for this facility was extended to June 12, 2023 and was amended to adjust certain covenant levels for 2020.  As of March 27, 2021 and December 26, 2020, there were no borrowings outstanding under this securitization facility.  At March 27, 2021, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 0.18% plus 0.95%, for a combined rate of 1.13%.  At December 26, 2020, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 0.22% plus 0.95%, for a combined rate of 1.17%.

 

If our accounts receivable collection pattern changes due to customers either paying late or not making payments, our ability to borrow under this facility may be reduced.

 

We are required to pay a commitment fee of 25 to 45 basis points depending upon program utilization.  

14 


Table of Contents 

HENRY SCHEIN, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

  (unaudited)

 

Note 6 – Leases

 

Leases

 

We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles, and certain equipment.  Our leases have remaining terms of less than one year to approximately 15 years, some of which may include options to extend the leases for up to 10 years.  The components of lease expense were as follows:

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 27,

 

March 28,

 

 

 

 

 

 

2021

 

2020

 

Operating lease cost: (1)

 

$

23,106

 

$

22,079

 

Finance lease cost:

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

 

604

 

 

432

 

 

Interest on lease liabilities

 

 

26

 

 

37

 

Total finance lease cost

 

$

630

 

$

469

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Includes variable lease expenses.

 

 

 

 

 

 

 

 

 

 

 

Supplemental balance sheet information related to leases is as follows:                                                                  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 27,

 

December 26,

 

 

 

 

 

 

2021

 

2020

 

Operating Leases:

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

301,759

 

$

288,847

 

 

 

 

 

 

 

 

 

 

 

 

Current operating lease liabilities

 

 

68,580

 

 

64,716

 

Non-current operating lease liabilities

 

 

248,624

 

 

238,727

 

 

Total operating lease liabilities

 

$

317,204

 

$

303,443

 

 

 

 

 

 

 

 

 

 

 

 

Finance Leases:

 

 

 

 

 

 

 

Property and equipment, at cost

 

$

10,388

 

$

10,683

 

Accumulated depreciation

 

 

(4,607)

 

 

(4,277)

 

Property and equipment, net of accumulated depreciation

 

$

5,781

 

$

6,406

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

2,256

 

$

2,420

 

Long-term debt

 

 

3,057

 

 

3,541

 

 

Total finance lease liabilities

 

$

5,313

 

$

5,961