UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,D.C.20549
FORM
(Mark One)
☒
For the fiscal year ended
☐
For the transition period from ____________ to ____________
Commission file number
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,
(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 |
Securities registered pursuant to Section12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES:
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
YES
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
YES
Indicate by check mark whether the registrant is alarge accelerated filer, anaccelerated filer, a non-accelerated filer,a smaller reporting company,or an
Large accelerated filer
If anemerging growthcompany,indicate bycheck markif theregistrant haselected notto use theextended transitionperiod forcomplying withany
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).
YES:
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price as
As of February 8, 2021,7, 2022, there were
Documents Incorporated by Reference:
Portions of the Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year
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Market for Registrant's Common Equity, Related Stockholder Matters | ||||||
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspection | 117 | |||||
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Security Ownership of Certain Beneficial Owners and Management | ||||||
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Certain Relationships and Related Transactions, and Director Independence | 118 | |||||
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PART I
ITEM 1.Business
General
Henry Schein, Inc. is a solutions company for health care professionals poweredby a network of people and
With more than 8889 years of experience distributing health care products, we have built a vast set of small,mid-sized
We are headquartered in Melville, New York,employ more than 19,00021,600 people (of which approximately 9,80010,700 are
We offera comprehensive selection of more than 120,000 branded productsand Henry Schein private brand
We conduct our business through two reportable segments: (i) health care distribution and (ii) technology and
The health care distribution reportable segment, combining our global dental and medical businesses, distributes consumable products, dental specialty products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins. While our primary go-to-market strategy is in our capacity as a
The technology and value-added services groupreportable segment provides software,technology and other value-added
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Recent Developments
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent
Industry
The global health care distribution industry, as it relates to office-based health care practitioners, is fragmented and
Due in part to the inability of office-based health care practitioners to store and managelarge quantities of supplies
The health care distribution industry continues to experience growth dueto demand driven by the aging population,
We believe that consolidation within the industry will continue to result in a number of distributors, particularly
In addition, customer consolidation will likely lead to multiple locationsunder common management and the
Competition
The distribution and manufacture of health care supplies and equipment ishighly competitive.Many of the health
In North America, we compete with other distributors, as well as severalmanufacturers, of dental and medical
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value-added products and services.In the dental market, our primary competitors in the U.S. are the Patterson
Outside of the U.S., we believe we are the only global distributor of suppliesand equipment to dental practices and
Competitive Strengths
We have more than 8889 years of experience in distributing products to health care practitioners resulting in strong
A focus on meeting our customers’ unique needs
Direct sales and marketing expertise.
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Broad product and service offerings at competitive prices.
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Commitment to superior customer service
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Integrated management information systems
Cost-effective purchasing
Efficient distribution
Products
The following table sets forth the percentage of consolidated net salesby principal categories of products and services offered
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Health care distribution: |
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| Dental products (1) |
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| 60.8 | % |
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| 58.4 | % |
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| 64.2 | % | |
| Medical products (2) |
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| 34.0 |
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| 35.8 |
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| 29.8 |
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| Total health care distribution |
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| 94.8 |
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| 94.2 |
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| 94.0 |
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Technology and value-added services: |
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| Software and related products and |
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| other value-added products (3) |
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Total excluding Corporate TSA revenues |
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| 99.3 |
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| 0.7 |
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Total |
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Business Strategy
Our objective is to continue to expand as a global value-added providerof health care products and services to
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Markets Served
Demographic trends indicate that our markets are growing, as anaging U.S. population is increasingly using health
In the dental industry, there is predicted to be a rise in oral health care expenditures as the 45-and-older segment of
In the medical market, there continues to be a migration of procedures from acute-care settings to physicians’ offices and home health settings, a trend that we believe provides additional opportunities for us. There also is the continuing use of vaccines, injectables and other pharmaceuticals in alternate-care settings. We believe we have established a leading position as a vaccine supplier to the office-based physician practitioner.
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We support our dental and medical professionals through the many SKUs that we offer, as well as through important value-
Additionally, we seek to expand our dental full-service model and our medical offerings in countries where
For information on revenues and long-lived assets by geographic area, see
Seasonality and Other Factors Affecting Our Business and Quarterly Results
We experience fluctuations in quarterly earnings.As a result, we may fail to meet or exceed the expectations of
Our business is subject to seasonal and other quarterly fluctuations.Revenues Sales and profitability generally have been
Governmental Regulations
We strive to be substantially compliant with the applicable laws, regulations and guidance described below, and
Government
Certain of our businesses involve the distribution, importation, exportation,marketing and sale of, and third party
Government and private insurance programs fund a large portion of the total cost of medical care,and there have
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Our businesses are also generally subject to numerous other laws and regulationsthat could impact our financial
Failure to comply with lawlaws, rules or regulations could have a material adverse effect on our business.
Operating, Security and Licensure Standards
Certain of our businesses involveare subject to local, state and federal governmental laws and regulations relating to the distribution importation, exportation,marketingand sale of and third party
The FDC Act, the Controlled Substances Act, their implementing regulations,and similar foreign laws generally
The Federal Drug Quality and Security Act of 2013 brought about significantchanges with respect to
The DSCSA also establishes certain requirements for the licensing and operationof prescription drug wholesalers
The Food and Drug Administration Amendments Act of 2007 andthe Food and Drug Administration Safety and
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numbers on device labels and packages for finished devices manufactured and labeled prior to September 24, 2023. The UDI regulations require
Under the Controlled Substances Act, as a distributor of controlled substances,we are required to obtain and renew
In addition, Section 301 of the National Organ Transplant Act, and a number of comparable state laws, impose civil
EU Regulation of Medicinal and Dental Products
European Union (“EU”) member states regulate their own healthcare systems, as does EU law.The latter regulates certain matters,
On medicines for humans, we are regulated under Directive No. 2001/83/ECof 6 November 2001, as amended by Directive 2003/63/EC of 25 June 2003, and EU
EU Regulation No. 1223/2009 of 30 November 2009
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In the European Union,EU, the EU Medical Device Regulation No. 2017/745(“ of 5 April 2017 (“EU MDR”) covers a wide scope of our
The EU MDR significantly modifies and intensifies the regulatory compliancerequirements for the medical device
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In particular, the EU MDR imposes stricter requirements for the confirmation that a product meets the regulatory
Other EU regulations that may apply under appropriate circumstancesinclude EU Regulation No. 1907/2006 of 18
Furthermore, compliance with legal requirements has required and may in the futurerequire us to delay product
Certain of our businesses are subject to various additional federal, state,local and foreign laws and regulations,
Certain of our businesses also maintain contracts with governmental agenciesand are subject to certain regulatory
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Antitrust and Consumer Protection
The federal government of the United States, most U.S. states and manyforeign countries have antitrust laws that
Health Care Fraud
Certain of our businesses are subject to federal and state (and similarforeign) health care fraud and abuse, referral
The fraud and abuse laws and regulations have been subject to heightenedenforcement activity over the past few
With respect to measures of this type, the United States government (among others) has expressed concernsabout
We also are subject to certain United States and foreign laws and regulations concerning the conduct of our foreign
While we believe that we are substantially compliant with applicable fraud andabuse laws and regulations, and
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Affordable Care Act as amended by theHealth Care and Education
The ACA increased federal oversight of private
The ACA has faced ongoingfrequent legal challenges, including litigation seekingto invalidate and Congressional action
An ACA provision, generally referred to as the Physician Payment SunshineAct or Open Payments Program (the
In the United States, government actions to seek to increase health-related pricetransparency may also affect our
Another notable Medicare health care reform initiative, the Medicare Accessand CHIP Reauthorization Act of
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evolve, and
Recently, in addition to other government efforts to control health care costs, there has been increased scrutiny on
As a result of political, economic and regulatory influences, the health care distributionindustry in the United
EU Directive on the pricing and reimbursement of medicinal products
EU law provides for the regulation of the pricing of medicinal products which areimplemented by EU member
EU law does not expressly include provisions like those of the Sunshine Act inthe United States, but a growing
Regulated Software; Electronic Health Records
The FDA has become increasingly active in addressing the regulation ofcomputer software and digital health
In addition, our businesses that involve physician and dental practice managementproducts, and our specialty home
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vulnerable to breakdown, wrongful intrusions, data breaches and maliciousattack, which could require us to
Also, the European Parliament and the Council of the European UnionEU adoptedthe pan-European General Data
In the United States, the CCPA, which increases the privacy protections afforded California residents, became
Other states, as well as the federal government, have increasinglyconsidered the adoption of similarly expansive
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respectively. While we believe we have
We also sell products and services that health care providers, such as physicians and dentists, use to store and
Variousfederal initiatives involve the adoption and use by health careproviders of certain electronic health care
Moreover, in order to satisfy our customers, and comply with evolving legal requirements, our products may need to incorporate increasingly complex
Other health information standards, such as regulations under HIPAA, establish standards regarding electronic
Additionally, as electronic medical devices are increasingly connected to each other and to other technology, the
There may be additional legislative or regulatory initiatives in the futureimpacting health care.
E-Commerce
Electronic commerce solutions have become an integral part of traditional healthcare supply and distribution
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Through our proprietary, technologically-based suite of products, we offer customers a variety of competitive
International Transactions
United States and foreign import and export laws and regulations require us toabide by certain standards relating to
While we believe that we are substantially compliant with the foregoing lawsand regulations promulgated
See “
Proprietary Rights
We hold trademarks relating to the “Henry Schein
Employees and Human Capital
At Henry Schein, our employees are our greatest asset.We employ more than 19,00021,600 full-time equivalent
We refer to our employees as TeamSchein Members, or “TSMs.”Our TSMs are the cornerstone of the Company.
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•Are committed toenhance enhancing ourDiversityand Inclusion(“D&I”) initiatives.
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and secure work
Available Information
We make available free of charge through our Internet website,
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Information about our Executive Officers
The following table sets forth certain information regarding our executive officers:
Name | Age | Position | ||
Stanley M. Bergman | 72 | Chairman, Chief Executive Officer, Director | ||
Gerald A. Benjamin | 69 | Executive Vice President, Chief Administrative Officer, Director | ||
James P. Breslawski | 68 | Vice Chairman, President, Director | ||
David Brous | 53 | Chief Executive Officer, Strategic Business Group | ||
Brad Connett | 63 | Chief Executive Officer, North American Distribution Group | ||
Michael S. Ettinger | 60 | Senior Vice President, Corporate & Legal Affairs and Chief of Staff, Secretary | ||
Lorelei McGlynn | 58 | Senior Vice President, Chief Human Resources Officer | ||
Mark E. Mlotek | 66 | Executive Vice President, Chief Strategic Officer, Director | ||
Steven Paladino | 64 | Executive Vice President, Chief Financial Officer, Director | ||
Walter Siegel | 62 | Senior Vice President and Chief Legal Officer |
Stanley M. Bergman
Gerald A. Benjamin
James P. Breslawski
David Brous has been our Chief Executive Officer, Strategic Business Group since 2021. Mr. Brous joined us in 2002 and has held many positions within the organization, including President, Strategic Business Units Group and Asia Pacific & Brazil Dental, leading and managing the Corporate Business Development Group and the International Healthcare Group (managing our International Animal Health business, International Medical business and Australia / New Zealand Dental business).
Brad Connett has been our Chief Executive Officer, North American Distribution Group since 2021. Previously Mr. Connett was the President of our U.S. Medical Group from 2018 to 2021. Mr. Connett joined us in 1997 and has held a number of roles of increasing responsibility at the Company. Throughout his career, he has received numerous industry honors, including the John F. Sasen Leadership Award from the Health Industry Distributors Association (HIDA), in recognition of his service to the industry, and induction into the Medical Distribution Hall of Fame by Repertoire Magazine.
Michael S. Ettinger
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Lorelei McGlynn has been our Senior Vice President, Chief Human Resources Officer since 2013. Since joining us in 1999, Ms. McGlynn has served as Vice President, Global Human Resources and Financial Operations from 2008 to 2013, Chief Financial Officer, International Group and Vice President of Global Financial Operations from 2002 to 2008 and Vice President, Finance, North America from 1999 to 2002. Prior to joining us, Ms. McGlynn served as Assistant Vice President of Finance at Adecco Corporation.
Mark E. Mlotek
Steven Paladino
Walter Siegel
Other Executive Management
The following table sets forth certain information regarding other Executive Management:
Name | Age | Position | ||
Andrea Albertini | 51 | President, International Distribution Group | ||
James Mullins | 57 | Senior Vice President, Global Supply Chain | ||
Kelly Murphy | 41 | Senior Vice President and General Counsel | ||
Christopher Pendergast | 59 | Senior Vice President and Chief Technology Officer | ||
Michael Racioppi | 67 | Senior Vice President, Chief Merchandising Officer | ||
Ronald N. South | 60 | Vice President, Corporate Finance and Chief Accounting Officer | ||
René Willi, Ph.D. | 54 | Chief Executive Officer, Global Oral Reconstruction Group |
Andrea Albertinihas been our President, Strategic Business UnitsInternational Distribution Group and AsiaPacific & Brazil Dental since 2019.
James Mullins
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Kelly Murphy has been our Senior Vice President and General Counsel since 2021. Since joining us in 2011, Ms. Murphy has held several key positions of increasing responsibility within the legal function, most recently serving as Deputy General Counsel.
Christopher Pendergast
Michael Racioppi
Ronald N. Southhas been our Vice President, Corporate Finance and Chief Accounting Officer since 2013. Prior to joining us in 2008 as our Vice President, Corporate Finance, Mr. South held leadership roles at Bristol-Myers Squibb, where he served as Vice President, Finance, for the Cardiovascular and Metabolic business lines, as well as Vice President, Controller, for its U.S. Pharmaceutical Division, and Vice President, Corporate General Auditor. Prior to Bristol-Myers Squibb, he served as North American Director of Corporate Audit at PepsiCo, and held several roles of increasing responsibility with PricewaterhouseCoopers LLP, where he advised clients located in the United States, Europe, and Latin America. Mr. South is a certified public accountant. On January 4, 2022, the Company’s Board of Directors appointed Mr. South to succeed Mr. Paladino as Senior Vice President and Chief Financial Officer of the Company, effective upon Mr. Paladino’s retirement on April 29, 2022, and Mr. South will replace Mr. Paladino as the Company’s principal financial officer and principal accounting officer.
René Willi, Ph.D. has been our Chief Executive Officer, Global Oral Reconstruction Group since 2021. Previously, Dr. Willi was the President of our Global Dental Surgical Group, Henry Schein Inc., since 2013.Group. Prior to
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ITEM 1A. Risk Factors
Our business operations could be affected by factors that are not presently knownto us or that we currently
COMPANY RISKS
Our business, results of operations, cash flows, financial condition andliquidity may be negatively impacted by
Our business, results of operations, cash flows, financial condition andliquidity may be negatively impacted by the
effects of disease outbreaks, epidemics, pandemics, similar wide-spread public health concernsand other natural
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mitigating the
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The impact of the COVID-19 pandemic may also exacerbate other risks discussed below, any of which could have a material
We are dependent upon third parties for the manufacture and supply of substantially all of our products.
We obtain substantially all of the products we distribute from third parties, with whom we generally do not have
Our futuregrowth(especially (especially forourtechnologyandvalue-addedservicessegment)isdependentuponour
Our future successdepends on our abilityto timely develop (orobtain the rightto sell) competitiveand innovative (particularly for our technology and value-added services segment) products and services and to market them
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quickly andcost-effectively.Our abilityto anticipatecustomer needsand emergingtrends anddevelop oracquire
Our expansion through acquisitions and joint ventures involvesrisks and may not result in the benefits and
One of our business strategies has been to expand our domestic andinternational markets in part through
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Furthermore, some of our acquisitions and future acquisitions may giverise to an obligation to make contingent
Certain provisions in our governing documents and other documents towhich we are a party may discourage
The provisions of our certificate of incorporation and by-laws maymake it more difficult for a third-party to
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INDUSTRY RISKS
The health care products distribution industry is highly competitive(including, (including, without limitation, competition
We compete with numerous companies, including several major manufacturers and distributors. Some of our
The repeal or judicial prohibition on implementation of the Affordable Care Actcould materially adversely
The U.S. Patient Protection and Affordable Care Act, as amended by the Health Care andEducation Reconciliation
The health care industry is experiencing changes due to political, economic andregulatory influences that could
The health care industry is highly regulated and subject to changingpolitical, economic and regulatory influences.
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Expansion of group purchasing organizations (“GPO”), dental support organizations (“DSO”) or provider networksand the multi-tiered costing
The medicalhealth care products industry is subject to a multi-tiered costing structure,which can vary by manufacturer and/or
Increases in shipping costs or service issues with our third-party shipperscould harm our business.
Our ability to meet our customers’ expedited delivery expectations is an integral component of our business strategy for which our customers rely. Shipping is a significant expense in the operation of our business. We ship almost all of our orders through third-
MACRO ECONOMIC AND POLITICAL RISKS
Uncertain global macro-economic and political conditions couldmaterially adversely affect our results of
Uncertain global macro-economic and political conditions that affect the economyand the economic outlook of the
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•the threat or outbreak of war, terrorism or public unrest;unrest (including, without limitation, the possibility of war in the Ukraine and
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Additionally, changes in government, government debt and/or budget crises may lead to reductions in government
REGULATORYAND LITIGATION RISKS
Failure to comply with existing and future regulatory requirementscould materially adversely affect our
We strive to be compliant with the applicable laws, regulations and guidance described below, and believe we have effective compliance programs and other controls in place to ensure substantial compliance. However, compliance is not guaranteed either now or in the future as certain laws, regulations that govern our business and operations areguidance may be subject to varying and evolving
Global efforts toward healthcare cost containment continue to exert pressure onproduct pricing.In the United
Under the Physician Payment Sunshine Act, we are required to collectand report detailed information regarding
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Our business is subject to additional requirements under various local, state,federal and international laws and
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The FDA has become increasingly active in addressing the regulation ofcomputer software and digital health
Applicable federal, state, local and foreign laws and regulations also may requireus to meet various standards
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The failure to comply with any of these laws andor regulations, or newinterpretations of existing laws and
The EU Medical Device Regulation may adversely affect our business.
The EU MDR, applicable since May 26, 2021, significantly modifies and intensifies the regulatorycompliance requirements
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In particular, the EU MDR imposes stricter requirements for the confirmation that a product meets the regulatory
The modifications created by the EU MDR may have an impact on theway we design and manufacture products
If we fail to comply with laws and regulations relating to health carefraud or other laws and regulations, we
Certain of our businesses are subject to federal and state (and similarforeign) health care fraud and abuse, referral
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as the federal Physician Self-Referral Law, commonly known as the “Stark Law,” prohibit physicians and other
The fraud and abuse laws and regulations have been subject to heightenedenforcement activity over the past few
With respect to measures of this type, the United States government (among others) has expressed concernsabout
In the EU, the Directive No. 2019/1937 of 23 October 2019
We also are subject to certain United States and foreign laws and regulations concerning the conduct of our foreign
In the EU, both active and passive bribery are criminalized. The EU CouncilFramework Decision 2003/568/JHA
Failure to comply with fraud and abuse laws and regulations, and otherlaws and regulations, could result in
While we believe that we are substantially compliant with applicable fraud andabuse and other laws and
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services or marketing practices in response to changes in applicable law orinterpretation of laws, could have a
If we fail to comply with laws and regulations relating to the confidentialitycollection, storage and processing of sensitive personal information or
Our businesses that involve physician and dental practice managementproducts, and our specialty home medical
We are directly or indirectly subject to numerous and evolving federal, state, local and foreign laws and regulations
In addition, the European Parliament and the Council of the European UnionEU have adopted the GDPR, which
On August 20, 2021, China promulgated the PIPL, which took effect on November 1, 2021. The PIPL imposes specific rules for processing personal information and it also specifies that the law shall also apply to personal information activities carried out outside China but for the purpose of providing products or services to PRC citizens. Any non-compliance with these laws and regulations may subject us to fines, orders to rectify or terminate any actions that are deemed illegal by regulatory authorities, other penalties, as well as reputational damage or legal proceedings against us, which may affect our business, financial condition or results of operations. The PIPL carries maximum penalties of CNY50 million or 5% of the annual revenue of entities that process personal data.
In the United States, the CCPA, which increases the privacy protections afforded California residents, became
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any of which may negatively impact our
Other states, as well as the federal government, have increasinglyconsidered the adoption of similarly expansive
We also sell products and services that health care providers, such as physicians and dentists, use to store and
Under the EU GDPR, health data belong to the category of “sensitive data”and benefit from specific protections.
Certain of our businesses involve the manufacture and sale of electronichealth record (“EHR”)EHR systems and other
Moreover, in order to satisfy our customers and comply with evolving legal requirements, our products may need to incorporate increasingly complex functionality, such as with respect to reporting
Additionally, as electronic medical devices are increasingly connected to each other and to other technology, the
Tax legislation could materially adversely affect our financial results and tax liabilities.
We are subject to the tax laws and regulations of the United States federal, state and local governments, as well as
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adversely affected by legislation resulting from these initiatives. In addition, taxlaws and regulations are extremely
We face inherent risk of exposure to product liability, intellectual property infringement and other claims in the
Our business involves a risk of product liability, intellectual property infringement and other claims in the ordinary
Customs policies or legislative import restrictions could hinder the Company’s ability to import goods necessary to our operations on a timely basis and result in government enforcement actions and/or sanctions
Government-imposed import policies and legislation regulating the import of goods and prohibiting the use of forced labor or human trafficking could result in delays or the inability to import goods in a timely manner that are necessary to our operations, and such policies or legislation could also result in financial penalties, other sanctions, government enforcement actions and reputational harm. While the Company has policies against and seeks to avoid the import of goods that are manufactured in whole or in part by forced labor or through human trafficking, as a result of legislative and governmental policy initiatives, we may be subject to increasing potential delays, added costs, supply chain disruption and other restrictions.
GENERAL RISKS
Security risks generally associated with our information systems and ourtechnology products and services could
We rely on information systems (IS) in our business to obtain, rapidly process, analyze, manage and store customer,
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Information security risks have generally increased in recent years, and acyberattack that bypasses our IS security
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products or services causing a security breach and/or perceived securityvulnerabilities in our products or services
From time to time, we have had to address non-material security incidents (“security incidents”). There can be no assurance that we will not experience security incidents in the future. Security incidents can be difficult to detect and any delay in identifying them could increase their harm. While we have implemented measures to protect our IS systems, such measures may not prevent these events. Any such security incidents could disrupt our operations, harm our reputation or otherwise have a material adverse effect on our business. We have various insurance policies, including cybersecurity insurance, covering risks and in amounts that we consider adequate. There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost to cover costs and expenses related to security incidents.
Furthermore, procedures and safeguards must continually evolve to meet newIS challenges, and enhancing
Finally, our business may be interrupted by shortfalls of IS systems providers engaged by our customers, suchas
Our global operations are subject to inherent risks that could materiallyadversely affect our business.
Our global operations are subject to risks that may materially adversely affect our business. Therisks that our
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•risks associated with climate change, including physical risks such as impacts from extreme weather events and
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Our future success is substantially dependent upon our seniormanagement, and our revenues and profitability
Our future success is substantially dependent upon the efforts and abilities ofmembers of our existing senior
Disruptions in the financial markets may materially adverselyaffect the availability and cost of credit to us.
Our ability to make scheduled payments or refinance our obligations withrespect to indebtedness will depend on
Item 1B.Unresolved Staff Comments
We have no unresolved comments from the staff of the SEC that were issued 180 days or more preceding the end of
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ITEM 2. Properties
Within our health care distribution segment (for properties with more than 100,000 square feet:
We believe that our properties are in good condition, are well maintained and are suitable and adequate to carry on
ITEM 3.Legal Proceedings
For a discussion of Legal Proceedings, see
ITEM 4.Mine Safety Disclosures
Not applicable.
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PART II
ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Our common stock is traded on the Nasdaq Global Select Market tier ofthe Nasdaq Stock Market, or Nasdaq,
On February 8, 2021,7, 2022, there were approximately 23590,000 holders of record of our commonstock and the last reported
Purchases of Equity Securities by the Issuer
Our share repurchase program, announced on March 3, 2003, originallyallowed us to repurchase up to two million
On March 8, 2021, we announced the reinstatement of our share repurchase program, which was previously suspended in April 2020 as a result of the COVID-19 pandemic.
As of December 26, 2020,25, 2021, we had repurchased approximately $3.6$4.0 billion of common stock (75,563,289(81,068,993 shares)
The following table summarizes repurchases of the COVID-19 pandemic, as previously announced, we havetemporarily suspended our share
|
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| Total Number |
| Maximum Number |
|
|
| Total |
|
|
|
| of Shares |
| of Shares |
|
|
| Number |
| Average |
| Purchased as Part |
| that May Yet | |
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| of Shares |
| Price Paid |
| of Our Publicly |
| Be Purchased Under | |
Fiscal Month |
| Purchased (1) |
| Per Share |
| Announced Program |
| Our Program (2) | ||
9/26/2021 through 10/30/2021 |
| 638,645 |
| $ | 78.29 |
| 638,645 |
| 3,929,275 | |
10/31/2021 through 11/27/2021 |
| - |
|
| - |
| - |
| 4,073,875 | |
11/28/2021 through 12/25/2021 |
| 1,348,213 |
|
| 74.17 |
| 1,348,213 |
| 2,669,160 | |
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| 1,986,858 |
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| 1,986,858 |
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(1) | All repurchases were executed in the open market under our existing publicly announced authorized program. | |||||||||
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(2) | The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the closing price of our common stock at that time. This table excludes shares withheld from employees to satisfy minimum tax withholding requirements for equity-based transactions. |
Dividend Policy
We have not declared any cash or stock dividends on our common stock during fiscal years 20202021 or 2019.2020. We
40
Stock Performance Graph
The graph below compares the cumulative total stockholder returnon $100 invested, assuming the reinvestment of
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
ASSUMES $100 INVESTED ON DECEMBER 31, 2016 | ||||||||||||||||||
ASSUMES DIVIDENDS REINVESTED | ||||||||||||||||||
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| December 30, |
| December 29, |
| December 28, |
| December 26, |
| December 25, | ||||||
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| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 | ||||||
Henry Schein, Inc. |
| $ | 100.00 |
| $ | 92.12 |
| $ | 102.72 |
| $ | 113.33 |
| $ | 112.05 |
| $ | 127.54 |
Dow Jones U.S. Health |
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Care Index |
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| 100.00 |
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| 122.84 |
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| 128.65 |
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| 158.85 |
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| 181.17 |
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| 225.21 |
NASDAQ Stock Market |
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Composite Index |
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| 100.00 |
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| 129.64 |
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| 124.98 |
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| 172.81 |
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| 247.88 |
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| 304.99 |
ITEM 6.
[Reserved]
41
ITEM 7.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 SecuritiesLitigation Reform Act of 1995, we
Risk factors and uncertainties that could cause actual results to differ materially fromcurrent and historical results
42
We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control
Where YouCan Find Important Information
We may disclose important information through one or more of the following channels: SEC filings, public
Recent Developments
COVID-19 Pandemic
In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has
Our consolidated financial statements reflect estimates and assumptionsmade by us that affect, among other things,
Policies, rules and regulations relating to vaccine mandates currently vary by jurisdiction and by customer. In the United States, the vaccine mandate requiring that all federal contractors be vaccinated was stayed in December 2021 and is currently pending litigation. In addition, in January 2022, the United States Supreme Court blocked a federal mandate that would require businesses with more than 100 employees to make their employees receive a COVID-19 vaccination or undergo weekly COVID-19 testing. In addition, state governments and some customers have also issued vaccine requirements for workers in their jurisdictions or who may service their accounts, and some state regulations contradict the contemplated federal vaccine mandates. Also, various international jurisdictions have, or may in the future impose vaccine mandates or additional COVID-19 regulations. The imposition of government or customer mandated vaccination or testing mandates may impact our ability to retain current employees, attract new employees and retain certain product and service contracts. It is possible that a significant number of our employees have not been vaccinated, and in the event of a broad-based effort to support plans for the long-term health of our businessand to strengthen our
43
Corporate Transactions
During the fourth quarter of 2019, we sold an equity investmentin Hu-Friedy Mfg. Co., LLC (“Hu-Friedy”), a
On February 7, 2019 (the “Distribution Date”), we completed the separation(the (the “Separation”) and subsequent
Executive-Level Overview
Henry Schein, Inc. is a solutions company for health care professionals powered by a network of people and technology. We believe we are the world’s largestprovider of health care products and services primarily to office-based dental
We have established strategically located distribution centers around the world to enable us to better serve our customers and
While our primary go-to-market strategy is in our capacity as a distributor, we also allows usmanufacture certain dental specialty products and solutions in the areas of implants, orthodontics and endodontics. We have achieved scale in these global businesses primarily through acquisitions as manufacturers of these products typically do not utilize a distribution channel to provide convenient orderingand rapid, accurate andserve customers.
44
We conduct our business through two reportable segments: (i) health care distribution and (ii) technology and
The health care distribution reportable segment aggregates our global dentaland medical operating segments.This
Our global technology and value-added services groupbusiness provides software,technology and other value-added
A key element to grow closer to our customers is our One Schein initiative, which is a unified go-to-market approach that enables practitioners to work synergistically with our supply chain, equipment sales and service and other value-added services, allowing our customers to leverage the combined value that we offer through a single program. Specifically, One Schein provides customers with streamlined access to our comprehensive offering of national brand products, our private label products and proprietary specialty products and solutions (including implant, orthodontic and endodontic products). In addition, customers have access to a wide range of services, including software and other value-added services.
Industry Overview
In recent years, the health care industry has increasingly focused on cost containment.This trend has benefited
Our operating results in recent years have been significantly affected by strategiesand transactions that we
Our current and future results have been and could be impacted by the COVID-19 pandemic, the currenteconomic environment and
45
Industry Consolidation
The health care products distribution industry, as it relates to office-based health care practitioners, is fragmented
Due in part to the inability of office-based health care practitioners to store and managelarge quantities of supplies
The trend of consolidationextends to our customer base.Health care practitioners are increasingly seeking to
We believe that consolidation within the industry will continue to result in a number of distributors, particularly
Our trend with regard to acquisitions and joint ventures has been to expandour role as a provider of products and
As industry consolidation continues, we believe that we are positionedto capitalize on this trend, as we believe we
As the health care industry continues to change, we continually evaluate possiblecandidates for merger and joint
Aging Population and Other Market Influences
The health care products distribution industry continues to experience growthdue to the aging population,
According to the U.S. Census Bureau’s International Data Base,Database, in 20202021 there were more than six and a half`
46
services.By the year 2050, that number is projected to nearly triple toapproximately 19 million.The
As a result of these market dynamics, annual expenditures for health careservices continue to increase in the
Government
Our businesses are generally subject to numerous laws and regulations that could impact our financial performance, and failure to comply with such laws or regulations could have a material adverse effect on our business.
See “Item 1. Business – Governmental Regulations” for a discussion of laws, regulations and governmental activity that may affect our results of operations and financial condition.
47
Results of Operations
Refer to Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Annual Report on Form 10-K for management’s discussion and analysis of financial condition and results of operations for the fiscal year 2020 compared to fiscal year 2019.
The following tables summarize the significant components of our operatingresults and cash flows from continuing
|
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| Years Ended | |||||||
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| December 25, |
| December 26, |
| December 28, | |||
|
|
|
| 2021 |
| 2020 |
| 2019 | |||
Operating results: |
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|
|
|
|
| ||
Net sales |
| $ | 12,401,021 |
| $ | 10,119,141 |
| $ | 9,985,803 | ||
Cost of sales |
|
| 8,728,770 |
|
| 7,304,913 |
|
| 6,894,917 | ||
| Gross profit |
|
| 3,672,251 |
|
| 2,814,228 |
|
| 3,090,886 | |
Operating expenses: |
|
|
|
|
|
|
|
|
| ||
| Selling, general and administrative |
|
| 2,812,656 |
|
| 2,246,832 |
|
| 2,357,920 | |
| Restructuring costs |
|
| 7,939 |
|
| 32,093 |
|
| 14,705 | |
|
| Operating income |
| $ | 851,656 |
| $ | 535,303 |
| $ | 718,261 |
|
|
|
|
|
|
|
|
|
| ||
Other expense, net |
| $ | (21,108) |
| $ | (35,408) |
| $ | (37,954) | ||
Gain on sale of equity investments, net of tax |
|
| 7,318 |
|
| 1,572 |
|
| 186,769 | ||
Net income from continuing operations |
|
| 660,526 |
|
| 418,437 |
|
| 725,461 | ||
Income (loss) from discontinued operations, net of tax |
|
| - |
|
| 986 |
|
| (6,323) | ||
Net income attributable to Henry Schein, Inc. |
|
| 631,232 |
|
| 403,794 |
|
| 694,734 | ||
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| Years Ended | |||||||
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| December 25, |
| December 26, |
| December 28, | |||
|
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| 2021 |
| 2020 |
| 2019 | |||
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Cash flows: |
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|
| ||
Net cash provided by operating activities from continuing operations |
| $ | 709,580 |
| $ | 593,519 |
| $ | 820,478 | ||
Net cash used in investing activities from continuing operations |
|
| (677,217) |
|
| (115,019) |
|
| (422,309) | ||
Net cash used in financing activities from continuing operations |
|
| (332,957) |
|
| (181,794) |
|
| (363,351) |
Plans of Restructuring
On November 20, 2019, we committed to a contemplated restructuring initiative intendedto mitigate stranded costs associated
During the years ended December 25, 2021, December 26, 2020, and December 28, 2019 and December29, 2018 we recorded restructuring
Our restructuring activities under this initiative are now complete and we do not expect to report any restructuring costs separately in 2022.
48
2021 Compared to 2019
Net Sales
Net sales for 2020 and 2019 were as follows (in thousands):
|
|
|
|
|
| % of |
|
|
| % of |
| Increase / (Decrease) | ||||||||
|
|
|
| 2021 |
| Total |
| 2020 |
| Total |
| $ |
| % | ||||||
Health care distribution (1) |
|
|
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|
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| ||
| Dental |
| $ | 7,541,950 |
| 60.8 | % |
| $ | 5,912,593 |
| 58.4 | % |
| $ | 1,629,357 |
| 27.6 | % | |
| Medical |
|
| 4,218,175 |
| 34.0 |
|
|
| 3,617,017 |
| 35.8 |
|
|
| 601,158 |
| 16.6 |
| |
|
| Total health care distribution |
|
| 11,760,125 |
| 94.8 |
|
|
| 9,529,610 |
| 94.2 |
|
|
| 2,230,515 |
| 23.4 |
|
Technology and value-added services (2) |
|
| 640,896 |
| 5.2 |
|
|
| 514,258 |
| 5.1 |
|
|
| 126,638 |
| 24.6 |
| ||
|
| Total excluding Corporate TSA revenues |
|
| 12,401,021 |
| 100.0 |
|
|
| 10,043,868 |
| 99.3 |
|
|
| 2,357,153 |
| 23.5 |
|
Corporate TSA revenues (3) |
|
| - |
| - |
|
|
| 75,273 |
| 0.7 |
|
|
| (75,273) |
| - |
| ||
|
| Total |
| $ | 12,401,021 |
| 100.0 |
|
| $ | 10,119,141 |
| 100.0 |
|
| $ | 2,281,880 |
| 22.6 |
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(1)
(2)
(3)
The 1.3%22.6% increase in net sales for the year ended December 26, 2020includesconsists of an increase of 1.4%21.1% in local currency
The 7.8% decrease27.6% increase in dental net sales for the year ended December26, 2020 includes a decreaseconsists of 7.6%an increase of 25.2% in local
The 21.6%16.6% increase in medical net sales for the year ended December26, 2020 includesis attributable to an increase of 21.6%16.5% in local
49
The 0.2% decrease24.6% increase in technology and value-added services net salesfor the year ended December 26, 2020 includes
Gross Profit
Gross profit and gross margins for 2020 and 2019margin percentages by segment and in total were as follows(in (in thousands):
|
|
|
|
| Gross |
|
|
| Gross |
| Increase / (Decrease) | ||||||||
|
|
| 2021 |
| Margin % |
| 2020 |
| Margin % |
| $ |
| % | ||||||
Health care distribution |
| $ | 3,240,608 |
| 27.6 | % |
| $ | 2,448,876 |
| 25.7 | % |
| $ | 791,732 |
| 32.3 | % | |
Technology and value-added services |
|
| 431,643 |
| 67.3 |
|
|
| 363,245 |
| 70.6 |
|
|
| 68,398 |
| 18.8 |
| |
| Total excluding Corporate TSA revenues |
|
| 3,672,251 |
| 29.6 |
|
|
| 2,812,121 |
| 28.0 |
|
|
| 860,130 |
| 30.6 |
|
Corporate TSA revenues |
|
| - |
| - |
|
|
| 2,107 |
| 2.8 |
|
|
| (2,107) |
| - |
| |
| Total |
| $ | 3,672,251 |
| 29.6 |
|
| $ | 2,814,228 |
| 27.8 |
|
| $ | 858,023 |
| 30.5 |
|
As a result of different practices of categorizing costs associated with distribution networksthroughout our
During December 2020, our transition services agreement with Covetrus, in connection with the completion of the Animal HealthAnimal-Health Spin-off, (see
Within our health care distribution segment, gross profit margins may vary from one period to the next.Changes in
Health care distribution gross profit decreased $268.6increased $791.7 million, or 9.9%,for the year ended December 26, 2020
Technology and value-added services gross profit decreased $7.6increased $68.4 million, or 2.1%18.8%, for the year ended December
50
Selling, General and Administrative
Selling, general and administrative expenses by segment and intotal for 2020 and 2019 were as follows (in
|
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| ||
|
|
|
|
| Respective |
|
|
| Respective |
| Increase | ||||||||
|
|
| 2021 |
| Net Sales |
| 2020 |
| Net Sales |
| $ |
| % | ||||||
Health care distribution |
| $ | 2,512,567 |
| 21.4 | % |
| $ | 2,014,810 |
| 21.1 | % |
| $ | 497,757 |
| 24.7 | % | |
Technology and value-added services |
|
| 308,028 |
| 48.1 |
|
|
| 264,115 |
| 51.4 |
|
|
| 43,913 |
| 16.6 |
| |
| Total |
| $ | 2,820,595 |
| 22.7 |
|
| $ | 2,278,925 |
| 22.5 |
|
| $ | 541,670 |
| 23.8 |
|
Selling, general and administrative expenses (including restructuring costsin the years ended December 26, 2020
The $113.7$497.8 million decreaseincrease in selling, general and administrative
As a component of total selling, general and administrative expenses, sellingexpenses decreased $86.4increased $294.8 million, or
As a component of total selling, general and administrative expenses, generaland administrative expenses
Other Expense, Net
Other expense, net for the years ended 2020 and 2019 was as follows(in (in thousands):
|
|
|
|
|
|
| Variance | ||||||
|
|
| 2021 |
| 2020 |
| $ |
| % | ||||
Interest income |
| $ | 6,451 |
| $ | 9,842 |
| $ | (3,391) |
| (34.5) | % | |
Interest expense |
|
| (27,600) |
|
| (41,377) |
|
| 13,777 |
| 33.3 |
| |
Other, net |
|
| 41 |
|
| (3,873) |
|
| 3,914 |
| (101.1) |
| |
| Other expense, net |
| $ | (21,108) |
| $ | (35,408) |
| $ | 14,300 |
| 40.4 |
|
Interest expense
Income Taxes
For the year ended December 26, 2020,25, 2021, our effective tax rate was 19.1%23.8% compared to 23.4%19.1% for the prior year
Gain on Sale of Equity Investments
In the fourththird quarter of 20202021 we received contingent proceeds of $2.1$9.8 million from the 2019 sale of Hu-Friedy
51
Liquidity and Capital Resources
Our principal capital requirements have included funding of acquisitions, purchasesof additional noncontrolling
The pandemic and the governmental responses to it had a material adverseeffect on our cash flows in the second
We finance our business primarily through cash generated from our operations, revolving credit facilities and debt
Our business requires a substantial investment in working capital, whichis susceptible to fluctuations during the
We finance our business to provide adequate funding for at least 12 months.Funding requirements are based on
We believe that our cash and cash equivalents, our ability to access private debt markets and public equity markets,
Net cash from Covetrus, which has been used topay down our debt, thereby generating
Net cash from continuing operations used in investing activities was $115.0$677.2 million for the year ended December 26, 2020,25, 2021, compared to $422.3
Net cash from continuing operations used in financing activities was $333.0 million for the year ended December 25, 2021, compared to net cash used in financing activities of $181.8 million for the prior year. The net change of $151.2 million was primarily due to decreased paymentsfor equity
52
The following table summarizes selected measures of liquidity and capitalresources (in thousands):
|
|
|
| December 25, |
| December 26, | ||
|
|
|
| 2021 |
| 2020 | ||
Cash and cash equivalents |
| $ | 117,965 |
| $ | 421,185 | ||
Working capital (1) |
|
| 1,537,521 |
|
| 1,508,313 | ||
Debt: |
|
|
|
|
|
| ||
| Bank credit lines |
| $ | 50,530 |
| $ | 73,366 | |
| Current maturities of long-term debt |
|
| 10,640 |
|
| 109,836 | |
| Long-term debt |
|
| 811,346 |
|
| 515,773 | |
|
| Total debt |
| $ | 872,516 |
| $ | 698,975 |
Leases: |
|
|
|
|
|
| ||
| Current operating lease liabilities |
| $ | 76,393 |
| $ | 64,716 | |
| Non-current operating lease liabilities |
|
| 267,772 |
|
| 238,727 | |
|
|
|
|
|
|
|
|
|
(1) | Includes $138.0 million and $0.0 million of certain accounts receivable which serve as security for U.S. trade accounts receivable securitization at December 25, 2021 and December 26, 2020, respectively. |
Our cash and cash equivalents consist of bank balances and investmentsin money market funds representing
Accounts receivable days sales outstanding and inventory turnover
Our accounts receivable days sales outstanding from operationsincreased decreased to 41.8 days as of December 25, 2021 from 46.0 days as of December 26, 2020
Contractual obligations
The following table summarizes our contractual obligations relatedto fixed and variable rate long-term debt and
| Payments due by period (in thousands) | |||||||||||||
| < 1 year |
| 2 - 3 years |
| 4 - 5 years |
| > 5 years |
| Total | |||||
Contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including interest | $ | 29,560 |
| $ | 252,916 |
| $ | 35,340 |
| $ | 653,623 |
| $ | 971,439 |
Inventory purchase commitments |
| 111,696 |
|
| 488 |
|
| - |
|
| - |
|
| 112,184 |
Operating lease obligations |
| 82,920 |
|
| 106,053 |
|
| 73,694 |
|
| 113,667 |
|
| 376,334 |
Transition tax obligations |
| 14,142 |
|
| 42,426 |
|
| - |
|
| - |
|
| 56,568 |
Finance lease obligations, including interest |
| 3,303 |
|
| 2,768 |
|
| 740 |
|
| 576 |
|
| 7,387 |
Total | $ | 241,621 |
| $ | 404,651 |
| $ | 109,774 |
| $ | 767,866 |
| $ | 1,523,912 |
For information relating to our debt agreements toreflect a new reference rate. We do notplease see Note 12 – Debt.
53
Leases
We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles,
Stock Repurchases
On March 8, 2021, we announced the reinstatement of our share repurchase program, which had been temporarily suspended in April of 2020.
From June 21, 2004 through December 26, 2020,25, 2021, we repurchased $3.6$4.0 billion, or 75,563,28981,068,993 shares, under our
Redeemable Noncontrolling interests
Some minority stockholders in certain of our consolidated subsidiaries have the right,at certain times, to require us to acquire
Unrecognized tax benefits
As more fully disclosed in Note 1413 – Income Taxes of “Notes to Consolidated FinancialStatements,” we cannot reasonably estimate
Critical Accounting Policies and Estimates
Our accounting policies are more fully described in Note 1 – Basis of Presentation and Significant Accounting Policies of the consolidated financial statements. The preparation of consolidated financial statements requires us tomake estimates and judgments that affect the
We believe that the following critical accounting policies, which have been discussed with the Audit Committee of
Inventories and Reserves
Inventories consist primarily of finished goods and are valued atthe lower of cost or market.net realizable value. Cost is determined by
54
salability of the inventory by reviewing on-hand quantities, historical sales, forecasted sales and market and economic trends.
Business Combinations
The estimated fair value of inventory.Although we believe our judgments, estimates and/orassumptions related to
Goodwill
Goodwill is not amortized, but is subject to impairment analysis at leastonce annually as of the first day of our fourth quarter, or if an event occurs or
Application of the goodwill impairment test requires judgment, includingthe identification of reporting units,
On an annual basis, we prepare annual and medium-term financial projections. These projections are based on input from our leadership and are presented annually to our Board of Directors. Influences on this year's forecasted financial information and the fair value model include: the impact of planned strategic initiatives, the continued integration of recent acquisitions and overall market conditions. The estimates used to calculate the
Our third-party valuation specialists provide inputs into our determination of the discount rate. The rate is dependent on a number of underlying assumptions, including the risk-free rate, tax rate, equity risk premium, debt to equity ratio and assumptions could materially affectpre-tax cost of debt.
Long-term growth rates are applied to our estimation of future cash flows. The long-term growth rates are tied to growth rates we expect to achieve beyond the determinationyears for which we have forecasted operating results. We also consider external benchmarks, and other data points which we believe are applicable to our industry and the composition of our global operations.
Based on our quantitative assessment, we believe the fair value and
Definite-Lived Intangible Assets
Annually, definite-lived intangible assets primarily consist ofsuch as non-compete agreements,trademarks, trade names, customer
The quantitative impairment model is a two-step test under which we first calculate the recoverability of the carrying value by comparing the undiscounted, probability-weighted value of the projected cash flows associated
55
with the asset’sasset or asset group, including its estimated residual value, to the carrying amount. If the cash flows associated with the asset or asset group are less than the carrying value, we would perform a fair value assessment of the asset, or asset group. If the carrying amount is not recoverable through its undiscounted, probability-weighted
During the yearyears ended December 25, 2021 and December 26, 2020, we recorded total impairment chargeson definite-lived intangible assets of
Income Tax
When determining if the cost relatedrealization of the deferred tax asset is likely by assessing the need for a valuation allowance, estimates and judgement are required. We consider all available evidence, both positive and negative, including estimated future taxable earnings, ongoing planning strategies, future reversals of existing temporary differences and historical operating results. Additionally, changes to stock-based awards grantedtax laws and statutory tax rates can have an impact on our determination. Our intention is to employees and non-
ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in
For a discussion of accounting standards updates that have been adoptedor will be adopted in the future, please see
56
ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks as well as changes in foreign currency exchange rates as measured against the U.S.
Foreign Currency Agreements
The value of certain foreign currencies as compared to the U.S. dollarand the value of certain underlying functional
As of December 26, 2020,25, 2021, we had forward foreign currency exchangeagreements, which expire through November
TotalReturn Swaps
On March 20, 2020, we entered into a total return swap for the purposeof economically hedging our unfunded non-
Short-Term Investments
We limit our credit risk with respect to our cash equivalents, short-term investments and derivative instruments, by
57
VariableInterest Rate Debt
As of December 26, 2020,25, 2021, we had variable interest rate exposure for certainof our revolving credit facilities and
Our revolving credit facility which we entered into on April 18, 2017August 20, 2021 and expires on April 18, 2022,August 20, 2026, has an interest
Our U.S trade accounts receivable securitization, which we entered intoon April 17, 2013 and was scheduled to
58
All other schedules are omitted because the required information is either inapplicable or is included in the consolidated financial statements or the notes thereto.
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Henry Schein, Inc.
Melville, NY
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Henry Schein, Inc. (the “Company”) as of December 25, 2021 and December 26, 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 25, 2021, the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company on December 25, 2021 and December 26, 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 25, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 25, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 15, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements; and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
60
Revenue growth rates utilized in the determination of the fair values of acquired customer relationships for certain acquisitions
As described in Note 4 of the consolidated financial statements, the Company acquired several companies in the current year. As a result of the acquisitions, management was required to determine estimated fair values of the assets acquired and liabilities assumed, including certain identifiable intangible assets. In some instances, management utilized third-party valuation specialists to assist in the preparation of the valuation of certain identifiable intangible assets. Management exercised significant judgment to develop and select revenue growth rates in the measurement of the fair value of the customer relationships.
We identified the revenue growth rates utilized in the determination of the fair values of acquired customer relationships for certain acquisitions, as a critical audit matter. The principal considerations for our determination included the following: (i) management utilizes significant unobservable inputs and assumptions in determining the projected revenue growth rates and (ii) changes in the revenue growth rates could have a significant impact on the fair value of acquired customer relationships for certain acquisitions. Auditing these elements involved especially subjective auditor judgment due to the nature and extent of audit effort required to address these matters.
The primary procedures we performed to address this critical audit matter included:
Assessing the design and implementation of controls over the development of projected revenue growth rates used to determine the fair values of certain customer relationships.
Assessing the reasonableness of the projected revenue growth rates through: (i) evaluating historical performance, (ii) comparing historical revenue growth rates to audited financial statements, and (iii) assessing financial projections against industry metrics and peer-group companies.
/s/ BDO USA, LLP
We have served as the Company's auditor since 1984.
New York, NY
February 15, 2022
61
HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
| December 25, |
| December 26, | |||
|
|
|
|
| 2021 |
| 2020 | ||
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
| |||
Current assets: |
|
|
|
|
|
| |||
| Cash and cash equivalents |
| $ | 117,965 |
| $ | 421,185 | ||
| Accounts receivable, net of reserves of $67,168 and $88,030 |
|
| 1,451,829 |
|
| 1,424,787 | ||
| Inventories, net |
|
| 1,861,138 |
|
| 1,512,499 | ||
| Prepaid expenses and other |
|
| 413,103 |
|
| 432,944 | ||
|
|
| Total current assets |
|
| 3,844,035 |
|
| 3,791,415 |
Property and equipment, net |
|
| 366,456 |
|
| 342,004 | |||
Operating lease right-of-use assets, net |
|
| 324,950 |
|
| 288,847 | |||
Goodwill |
|
| 2,854,150 |
|
| 2,504,392 | |||
Other intangibles, net |
|
| 667,626 |
|
| 479,429 | |||
Investments and other |
|
| 423,874 |
|
| 366,445 | |||
|
|
| Total assets |
| $ | 8,481,091 |
| $ | 7,772,532 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
| |||
Current liabilities: |
|
|
|
|
|
| |||
| Accounts payable |
| $ | 1,053,934 |
| $ | 1,005,655 | ||
| Bank credit lines |
|
| 50,530 |
|
| 73,366 | ||
| Current maturities of long-term debt |
|
| 10,640 |
|
| 109,836 | ||
| Operating lease liabilities |
|
| 76,393 |
|
| 64,716 | ||
| Accrued expenses: |
|
|
|
|
|
| ||
|
| Payroll and related |
|
| 385,376 |
|
| 295,329 | |
|
| Taxes |
|
| 136,919 |
|
| 138,671 | |
|
| Other |
|
| 592,722 |
|
| 595,529 | |
|
|
| Total current liabilities |
|
| 2,306,514 |
|
| 2,283,102 |
Long-term debt |
|
| 811,346 |
|
| 515,773 | |||
Deferred income taxes |
|
| 42,283 |
|
| 30,065 | |||
Operating lease liabilities |
|
| 267,772 |
|
| 238,727 | |||
Other liabilities |
|
| 376,672 |
|
| 392,781 | |||
|
|
| Total liabilities |
|
| 3,804,587 |
|
| 3,460,448 |
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests |
|
| 613,312 |
|
| 327,699 | |||
Commitments and contingencies |
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
| |||
| Preferred stock, $0.01 par value, 1,000,000 shares authorized, |
|
|
|
|
|
| ||
|
| NaN outstanding |
|
| 0 |
|
| 0 | |
| Common stock, $0.01 par value, 480,000,000 shares authorized, |
|
|
|
|
|
| ||
|
| 137,145,558 outstanding on December 25, 2021 and |
|
|
|
|
|
| |
|
| 142,462,571 outstanding on December 26, 2020 |
|
| 1,371 |
|
| 1,425 | |
| Additional paid-in capital |
|
| - |
|
| - | ||
| Retained earnings |
|
| 3,595,233 |
|
| 3,454,831 | ||
| Accumulated other comprehensive loss |
|
| (171,478) |
|
| (108,084) | ||
|
| Total Henry Schein, Inc. stockholders' equity |
|
| 3,425,126 |
|
| 3,348,172 | |
| Noncontrolling interests |
|
| 638,066 |
|
| 636,213 | ||
|
|
| Total stockholders' equity |
|
| 4,063,192 |
|
| 3,984,385 |
|
| Total liabilities, redeemable noncontrolling interests and stockholders' equity |
| $ | 8,481,091 |
| $ | 7,772,532 |
See accompanying notes.
62
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
|
|
|
| Years Ended | ||||||||
|
|
|
|
| December 25, |
| December 26, |
| December 28, | |||
|
|
|
|
| 2021 |
| 2020 |
| 2019 | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 12,401,021 |
| $ | 10,119,141 |
| $ | 9,985,803 | |||
Cost of sales |
|
| 8,728,770 |
|
| 7,304,913 |
|
| 6,894,917 | |||
|
| Gross profit |
|
| 3,672,251 |
|
| 2,814,228 |
|
| 3,090,886 | |
Operating expenses: |
|
|
|
|
|
|
|
|
| |||
| Selling, general and administrative |
|
| 2,812,656 |
|
| 2,246,832 |
|
| 2,357,920 | ||
| Restructuring costs |
|
| 7,939 |
|
| 32,093 |
|
| 14,705 | ||
|
| Operating income |
|
| 851,656 |
|
| 535,303 |
|
| 718,261 | |
Other income (expense): |
|
|
|
|
|
|
|
|
| |||
| Interest income |
|
| 6,451 |
|
| 9,842 |
|
| 15,757 | ||
| Interest expense |
|
| (27,600) |
|
| (41,377) |
|
| (50,792) | ||
| Other, net |
|
| 41 |
|
| (3,873) |
|
| (2,919) | ||
|
| Income from continuing operations before taxes, equity in |
|
|
|
|
|
|
|
|
| |
|
|
| earnings of affiliates and noncontrolling interests |
|
| 830,548 |
|
| 499,895 |
|
| 680,307 |
Income taxes |
|
| (197,349) |
|
| (95,374) |
|
| (159,515) | |||
Equity in earnings of affiliates |
|
| 20,009 |
|
| 12,344 |
|
| 17,900 | |||
Gain on sale of equity investments |
|
| 7,318 |
|
| 1,572 |
|
| 186,769 | |||
Net income from continuing operations |
|
| 660,526 |
|
| 418,437 |
|
| 725,461 | |||
Income (loss) from discontinued operations, net of tax |
|
| 0 |
|
| 986 |
|
| (6,323) | |||
Net Income |
|
| 660,526 |
|
| 419,423 |
|
| 719,138 | |||
| Less: Net income attributable to noncontrolling interests |
|
| (29,294) |
|
| (15,629) |
|
| (24,770) | ||
| Plus: Net loss attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
| ||
|
|
| from discontinued operations |
|
| 0 |
|
| 0 |
|
| 366 |
Net income attributable to Henry Schein, Inc. |
| $ | 631,232 |
| $ | 403,794 |
| $ | 694,734 | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Henry Schein Inc.: |
|
|
|
|
|
|
|
|
| |||
Continuing operations |
| $ | 631,232 |
| $ | 402,808 |
| $ | 700,691 | |||
Discontinued operations |
|
| 0 |
|
| 986 |
|
| (5,957) | |||
Net income attributable to Henry Schein, Inc. |
| $ | 631,232 |
| $ | 403,794 |
| $ | 694,734 | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations attributable to Henry Schein, Inc.: |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
| Basic |
| $ | 4.51 |
| $ | 2.83 |
| $ | 4.74 | ||
| Diluted |
| $ | 4.45 |
| $ | 2.81 |
| $ | 4.69 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from discontinued operations attributable to Henry Schein, Inc.: |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
| Basic |
| $ | 0 |
| $ | 0.01 |
| $ | (0.04) | ||
| Diluted |
| $ | 0 |
| $ | 0.01 |
| $ | (0.04) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Henry Schein, Inc.: |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
| Basic |
| $ | 4.51 |
| $ | 2.83 |
| $ | 4.70 | ||
| Diluted |
| $ | 4.45 |
| $ | 2.82 |
| $ | 4.65 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
| |||
| Basic |
|
| 140,091 |
|
| 142,504 |
|
| 147,817 | ||
| Diluted |
|
| 141,773 |
|
| 143,404 |
|
| 149,257 |
See accompanying notes.
63
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended | |||||||
|
|
|
|
| December 25, |
| December 26, |
| December 28, | |||
|
|
|
|
| 2021 |
| 2020 |
| 2019 | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 660,526 |
| $ | 419,423 |
| $ | 719,138 | |||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
| |||
| Foreign currency translation gain (loss) |
|
| (83,841) |
|
| 63,094 |
|
| (4,070) | ||
| Unrealized gain (loss) from foreign currency hedging activities |
|
| 9,442 |
|
| (7,456) |
|
| (3,876) | ||
| Unrealized investment gain (loss) |
|
| (9) |
|
| (5) |
|
| 12 | ||
| Pension adjustment gain (loss) |
|
| 5,186 |
|
| 143 |
|
| (5,924) | ||
Other comprehensive income (loss), net of tax |
|
| (69,222) |
|
| 55,776 |
|
| (13,858) | |||
Comprehensive income |
|
| 591,304 |
|
| 475,199 |
|
| 705,280 | |||
| Comprehensive income attributable to noncontrolling interests: |
|
|
|
|
|
|
|
|
| ||
|
| Net income |
|
| (29,294) |
|
| (15,629) |
|
| (24,404) | |
|
| Foreign currency translation loss |
|
| 5,828 |
|
| 3,513 |
|
| 1,848 | |
|
|
| Comprehensive income attributable to noncontrolling interests |
|
| (23,466) |
|
| (12,116) |
|
| (22,556) |
Comprehensive income attributable to Henry Schein, Inc. |
| $ | 567,838 |
| $ | 463,083 |
| $ | 682,724 |
See accompanying notes.
64
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS 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 29, 2018 | 151,401,668 |
|
| 1,514 |
|
| 0 |
|
| 3,208,589 |
|
| (248,771) |
|
| 580,456 |
|
| 3,541,788 | |
Cumulative impact of adopting new accounting standards | - |
|
| 0 |
|
| 0 |
|
| (274) |
|
| 0 |
|
| 0 |
|
| (274) | |
Net income (excluding $14,838 attributable to Redeemable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| noncontrolling interests from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| and ($366 ) from discontinued operations) | - |
|
| 0 |
|
| 0 |
|
| 694,734 |
|
| 0 |
|
| 9,932 |
|
| 704,666 |
Foreign currency translation loss (excluding loss of $2,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| attributable to Redeemable noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| and $592 gain from discontinued operations) | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (2,222) |
|
| (105) |
|
| (2,327) |
Unrealized loss from foreign currency hedging activities, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| net of tax benefit of $1,035 | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (3,876) |
|
| 0 |
|
| (3,876) |
Unrealized investment gain, net of tax of $2 | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 12 |
|
| 0 |
|
| 12 | |
Pension adjustment loss, net of tax benefit of $1,806 | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (5,924) |
|
| 0 |
|
| (5,924) | |
Dividends paid | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (535) |
|
| (535) | |
Other adjustments | - |
|
| 0 |
|
| (3) |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (3) | |
Change in fair value of redeemable securities | - |
|
| 0 |
|
| 7,300 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 7,300 | |
Noncontrolling interests and adjustments related to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| business acquisitions | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 42,345 |
|
| 42,345 |
Adjustment for Animal Health Spin-off | 87,629 |
|
| 1 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 1 | |
Repurchase and retirement of common stock | (8,173,912) |
|
| (82) |
|
| (79,785) |
|
| (445,133) |
|
| 0 |
|
| 0 |
|
| (525,000) | |
Stock issued upon exercise of stock options | 2,526 |
|
| 0 |
|
| 34 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 34 | |
Stock-based compensation expense | 215,408 |
|
| 2 |
|
| 45,243 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 45,245 | |
Shares withheld for payroll taxes | (179,860) |
|
| (1) |
|
| (10,844) |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (10,845) | |
Settlement of stock-based compensation awards | - |
|
| 0 |
|
| 160 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 160 | |
Share Sale related to Animal Health business | - |
|
| 0 |
|
| 361,090 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 361,090 | |
Separation of Animal Health business | - |
|
| 0 |
|
| (73,970) |
|
| (543,158) |
|
| 93,408 |
|
| 0 |
|
| (523,720) | |
Transfer of charges in excess of capital | - |
|
| 0 |
|
| (201,457) |
|
| 201,457 |
|
| 0 |
|
| 0 |
|
| 0 | |
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 | - |
|
| 0 |
|
| 0 |
|
| (412) |
|
| 0 |
|
| 0 |
|
| (412) | |
Net income (excluding $13,363 attributable to Redeemable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| noncontrolling interests from continuing operations) | - |
|
| 0 |
|
| 0 |
|
| 403,794 |
|
| 0 |
|
| 2,266 |
|
| 406,060 |
Foreign currency translation gain (excluding loss of $4,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| attributable to Redeemable noncontrolling interests) | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 66,607 |
|
| 766 |
|
| 67,373 |
Unrealized loss from foreign currency hedging activities, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| net of tax benefit of $2,768 | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (7,456) |
|
| 0 |
|
| (7,456) |
Unrealized investment loss, net of tax benefit of $1 | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (5) |
|
| 0 |
|
| (5) | |
Pension adjustment gain, including tax benefit of $676 | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 143 |
|
| 0 |
|
| 143 | |
Dividends paid | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (1,086) |
|
| (1,086) | |
Purchase of noncontrolling interests | - |
|
| 0 |
|
| (1,597) |
|
| 0 |
|
| 0 |
|
| (701) |
|
| (2,298) | |
Change in fair value of redeemable securities | - |
|
| 0 |
|
| (32,842) |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (32,842) | |
Noncontrolling interests and adjustments related to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| business acquisitions | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 2,875 |
|
| 2,875 |
Repurchase and retirement of common stock | (1,200,000) |
|
| (12) |
|
| (10,949) |
|
| (62,828) |
|
| 0 |
|
| 0 |
|
| (73,789) | |
Stock-based compensation expense | 545,864 |
|
| 5 |
|
| 8,783 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 8,788 | |
Shares withheld for payroll taxes | (236,752) |
|
| (2) |
|
| (14,475) |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (14,477) | |
Settlement of stock-based compensation awards | - |
|
| 0 |
|
| (275) |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (275) | |
Separation of Animal Health business | - |
|
| 0 |
|
| 1,649 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 1,649 | |
Transfer of charges in excess of capital | - |
|
| 0 |
|
| 1,938 |
|
| (1,938) |
|
| 0 |
|
| 0 |
|
| 0 | |
Balance, December 26, 2020 | 142,462,571 |
|
| 1,425 |
|
| 0 |
|
| 3,454,831 |
|
| (108,084) |
|
| 636,213 |
|
| 3,984,385 | |
Net income (excluding $23,358 attributable to Redeemable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| noncontrolling interests from continuing operations) | - |
|
| 0 |
|
| 0 |
|
| 631,232 |
|
| 0 |
|
| 5,936 |
|
| 637,168 |
Foreign currency translation gain (loss) (excluding loss of $6,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| attributable to Redeemable noncontrolling interests) | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (78,013) |
|
| 177 |
|
| (77,836) |
Unrealized gain from foreign currency hedging activities, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| net of tax of $3,275 | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 9,442 |
|
| 0 |
|
| 9,442 |
Unrealized investment loss, net of tax benefit of $3 | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (9) |
|
| 0 |
|
| (9) | |
Pension adjustment gain, including tax of $2,426 | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 5,186 |
|
| 0 |
|
| 5,186 | |
Dividends paid | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (11,226) |
|
| (11,226) | |
Change in fair value of redeemable securities | - |
|
| 0 |
|
| (160,279) |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (160,279) | |
Noncontrolling interests and adjustments related to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| business acquisitions | - |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 6,966 |
|
| 6,966 |
Repurchase and retirement of common stock | (5,505,704) |
|
| (55) |
|
| (53,550) |
|
| (347,606) |
|
| 0 |
|
| 0 |
|
| (401,211) | |
Stock-based compensation expense | 303,643 |
|
| 3 |
|
| 78,412 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 78,415 | |
Shares withheld for payroll taxes | (114,952) |
|
| (2) |
|
| (7,637) |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (7,639) | |
Settlement of stock-based compensation awards | - |
|
| 0 |
|
| (170) |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (170) | |
Transfer of charges in excess of capital | - |
|
| 0 |
|
| 143,224 |
|
| (143,224) |
|
| 0 |
|
| 0 |
|
| 0 | |
Balance, December 25, 2021 | 137,145,558 |
|
| 1,371 |
|
| 0 |
|
| 3,595,233 |
|
| (171,478) |
|
| 638,066 |
|
| 4,063,192 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
65
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
|
|
|
|
| Years Ended | ||||||||
|
|
|
|
|
| December 25, |
| December 26, |
| December 28, | |||
|
|
|
|
|
| 2021 |
| 2020 |
| 2019 | |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| ||||
| Net income |
| $ | 660,526 |
| $ | 419,423 |
| $ | 719,138 | |||
| Income (loss) from discontinued operations |
|
| 0 |
|
| 986 |
|
| (6,323) | |||
| Income from continuing operations |
|
| 660,526 |
|
| 418,437 |
|
| 725,461 | |||
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| |||
|
|
| Depreciation and amortization |
|
| 209,528 |
|
| 185,538 |
|
| 184,942 | |
|
|
| Impairment charge on intangible assets |
|
| 713 |
|
| 20,275 |
|
| 0 | |
|
|
| Gain on sale of equity investments |
|
| (9,757) |
|
| (2,096) |
|
| (250,167) | |
|
|
| Stock-based compensation expense |
|
| 78,415 |
|
| 8,788 |
|
| 44,920 | |
|
|
| Provision for (benefits from) losses on trade and other accounts receivable |
|
| (7,748) |
|
| 35,137 |
|
| 12,612 | |
|
|
| Benefit from deferred income taxes |
|
| (10,985) |
|
| (52,977) |
|
| (4,057) | |
|
|
| Equity in earnings of affiliates |
|
| (20,009) |
|
| (12,344) |
|
| (17,900) | |
|
|
| Distributions from equity affiliates |
|
| 17,762 |
|
| 16,002 |
|
| 71,469 | |
|
|
| Changes in unrecognized tax benefits |
|
| (1,947) |
|
| (24,881) |
|
| 1,941 | |
|
|
| Other |
|
| (9,717) |
|
| 5,012 |
|
| 5,684 | |
|
|
| Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
| |
|
|
|
| Accounts receivable |
|
| 4,162 |
|
| (189,349) |
|
| (72,689) |
|
|
|
| Inventories |
|
| (295,131) |
|
| (31,817) |
|
| 14,702 |
|
|
|
| Other current assets |
|
| 9,060 |
|
| (6,479) |
|
| (57,291) |
|
|
|
| Accounts payable and accrued expenses |
|
| 84,708 |
|
| 224,273 |
|
| 160,851 |
Net cash provided by operating activities from continuing operations |
|
| 709,580 |
|
| 593,519 |
|
| 820,478 | ||||
Net cash provided by (used in) operating activities from discontinued operations |
|
| 0 |
|
| 5,391 |
|
| (166,391) | ||||
Net cash provided by operating activities |
|
| 709,580 |
|
| 598,910 |
|
| 654,087 | ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
| Purchases of fixed assets |
|
| (79,015) |
|
| (48,829) |
|
| (76,219) | |||
| Payments related to equity investments and business |
|
|
|
|
|
|
|
|
| |||
|
| acquisitions, net of cash acquired |
|
| (570,558) |
|
| (60,173) |
|
| (655,879) | ||
| Proceeds from sale of equity investment |
|
| 9,757 |
|
| 14,020 |
|
| 307,251 | |||
| Proceeds from (repayments to) loan to affiliate |
|
| (4,090) |
|
| (1,243) |
|
| 16,713 | |||
| Other |
|
| (33,311) |
|
| (18,794) |
|
| (14,175) | |||
Net cash used in investing activities from continuing operations |
|
| (677,217) |
|
| (115,019) |
|
| (422,309) | ||||
Net cash used in investing activities from discontinued operations |
|
| 0 |
|
| 0 |
|
| (2,064) | ||||
Net cash used in investing activities |
|
| (677,217) |
|
| (115,019) |
|
| (424,373) | ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
| Net change in bank borrowings |
|
| (18,408) |
|
| 45,082 |
|
| (927,912) | |||
| Proceeds from issuance of long-term debt |
|
| 305,000 |
|
| 501,421 |
|
| 741 | |||
| Principal payments for long-term debt |
|
| (122,270) |
|
| (611,216) |
|
| (260,944) | |||
| Debt issuance costs |
|
| (2,893) |
|
| (3,879) |
|
| (391) | |||
| Debt extinguishment costs |
|
| 0 |
|
| (401) |
|
| 0 | |||
| Proceeds from issuance of stock upon exercise of stock options |
|
| 0 |
|
| 0 |
|
| 34 | |||
| Payments for repurchases of common stock |
|
| (401,211) |
|
| (73,789) |
|
| (525,000) | |||
| Payments for taxes related to shares withheld for employee taxes |
|
| (7,471) |
|
| (14,299) |
|
| (10,814) | |||
| Distribution received related to Animal Health Spin-off |
|
| 0 |
|
| 0 |
|
| 1,120,000 | |||
| Proceeds related to Animal Health Share Sale |
|
| 0 |
|
| 0 |
|
| 361,090 | |||
| Proceeds from (distributions to) noncontrolling shareholders |
|
| (25,464) |
|
| (7,886) |
|
| 51,498 | |||
| Acquisitions of noncontrolling interests in subsidiaries |
|
| (60,240) |
|
| (19,538) |
|
| (2,358) | |||
| Proceeds from (payments) to Henry Schein Animal Health Business |
|
| 0 |
|
| 2,711 |
|
| (169,295) | |||
Net cash used in financing activities from continuing operations |
|
| (332,957) |
|
| (181,794) |
|
| (363,351) | ||||
Net cash provided by (used in) financing activities from discontinued operations |
|
| 0 |
|
| (5,391) |
|
| 147,371 | ||||
Net cash used in financing activities |
|
| (332,957) |
|
| (187,185) |
|
| (215,980) | ||||
Effect of exchange rate changes on cash and cash equivalents from continuing operations |
|
| (2,626) |
|
| 18,382 |
|
| 14,394 | ||||
Effect of exchange rate changes on cash and cash equivalents from discontinued operations |
|
| 0 |
|
| 0 |
|
| (2,240) | ||||
Net change in cash and cash equivalents from continuing operations |
|
| (303,220) |
|
| 315,088 |
|
| 49,212 | ||||
Net change in cash and cash equivalents from discontinued operations |
|
| 0 |
|
| 0 |
|
| (23,324) | ||||
Cash and cash equivalents, beginning of period |
|
| 421,185 |
|
| 106,097 |
|
| 56,885 | ||||
Cash and cash equivalents, end of period |
| $ | 117,965 |
| $ | 421,185 |
| $ | 106,097 |
See accompanying notes.
66
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 1 –Basis of Presentation and Significant Accounting Policies
Nature of Operations
We distribute health care products and services primarily to office-based dental and medical practitioners, across dental practices, laboratories, physician practices, and ambulatory surgery centers, as well as government, institutional health care clinics and alternate care clinics. We also provide software, technology and other value-added services to health care practitioners. Our dental businesses serve office-based dental practitioners, dental laboratories, schools, government and other institutions. Our medical businesses serve physician offices, urgent care centers, ambulatory care sites, emergency medical technicians, dialysis centers, home health, federal and state governments and large enterprises, such as group practices and integrated delivery networks, among other providers across a wide range of specialties.
We have operations or affiliates in the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Arab Emirates and the United Kingdom.
Principles of Consolidation
Our consolidated financial statements include the accounts of Henry Schein, Inc. and all of our controlled subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. Investments in unconsolidated affiliates in which we have the ability to influence the operating or financial decisions, are accounted for under the equity method. Certain prior period amounts have been reclassified to conform to the current period presentation.
We consolidate the results of operations and financial position of a trade accounts receivable securitization which we consider a Variable Interest Entity (“VIE”) because we are the primary beneficiary, and 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. For this 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 December 25, 2021 and December 26, 2020, certain trade accounts receivable that can only be used to settle obligations of this VIE were $138.0 million and $0.0 million, respectively and the liabilities of this VIE where the creditors have recourse to us were $105.0 million and $0.0 million, respectively.
Use of Estimates
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.
In March 2020, the World Health Organization declared 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 continued throughout 2021 resulting in growth over the prior year.
67
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
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; supplier 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 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.
Fiscal Year
We report our results of operations and cash flows on a 52-53 week basis ending on the last Saturday of December. The years ended December 25, 2021, December 26, 2020and December 28, 2019consisted of 52 weeks.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive for those goods or services. To recognize revenue, we do the following:
• identify the contract(s) with a customer;
• identify the performance obligations in the contract;
• determine the transaction price;
• allocate the transaction price to the performance obligations in the contract; and
• recognize revenue when, or as, the entity satisfies a performance obligation.
We generate revenue from the sale of dental and medical consumable products, equipment (Health care distribution revenues), software products and services and other sources (Technology and value-added services revenues). Provisions for discounts, rebates to customers, customer returns and other contra revenue adjustments are included in the transaction price at contract inception by estimating the most likely amount based upon historical data and estimates and are provided for in the period in which the related sales are recognized.
Revenue derived from the sale of consumable products is recognized at a point in time when control transfers to the customer. Such sales typically entail high-volume, low-dollar orders shipped using third-party common carriers. We believe that the shipment date is the most appropriate point in time indicating control has transferred to the customer because we have no post-shipment obligations and this is when legal title and risks and rewards of ownership transfer to the customer and the point at which we have an enforceable right to payment.
Revenue derived from the sale of equipment is recognized when control transfers to the customer. This occurs when the equipment is delivered. Such sales typically entail scheduled deliveries of large equipment primarily by equipment service technicians. Most equipment requires minimal installation, which is typically completed at the time of delivery. Our product generally carries standard warranty terms provided by the manufacturer, however, in instances where we provide warranty labor services, the warranty costs are accrued in accordance with Accounting Standards Codification (“ASC”) 460 “Guarantees”. At December 25, 2021 and December 26, 2020, we had accrued approximately $8.1 million and $6.9 million, respectively, for warranty costs.
Revenue derived from the sale of software products is recognized when products are delivered to customers or made available electronically. Such software is generally installed by customers and does not require extensive
68
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
training due to the nature of its design. Revenue derived from post-contract customer support for software, including annual support and/or training, is generally recognized over time using time elapsed as the input method that best depicts the transfer of control to the customer. Revenue derived from software sold on Software-as-a -Service basis is recognized ratably over the subscription period as control is transferred to the customer.
Revenue derived from other sources, including freight charges, equipment repairs and financial services, is recognized when the related product revenue is recognized or when the services are provided. We apply the practical expedient to treat shipping and handling activities performed after the customer obtains control as fulfillment activities, rather than a separate performance obligation in the contract.
Sales, value-add and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
Certain of our revenue is derived from bundled arrangements that include multiple distinct performance obligations, which are accounted for separately. When we sell software products together with related services (i.e., training and technical support), we allocate revenue to software using the residual method, using an estimate of the standalone selling price to estimate the fair value of the undelivered elements. Bundled arrangements that include elements that are not considered software consist primarily of equipment and the related installation service. We allocate revenue for such arrangements based on the relative selling prices of the goods or services. If an observable selling price is not available (i.e., we do not sell the goods or services separately), we use one of the following techniques to estimate the standalone selling price: adjusted market approach; cost-plus approach; or the residual method. There is no specific hierarchy for the use of these methods, but the estimated selling price reflects our best estimate of what the selling prices of each deliverable would be if it were sold regularly on a standalone basis taking into consideration the cost structure of our business, technical skill required, customer location and other market conditions.
See Note 2 – Revenue from Contracts with Customers for additional disclosures of disaggregated net sales and Note 3 – Segment and Geographic Data for disclosures of net sales by segment and geographic data.
Cost of Sales
The primary components of cost of sales include the cost of the product (net of purchase discounts, supplier chargebacks and rebates) and inbound and outbound freight charges.
Costs related to purchasing, receiving, inspections, warehousing, internal inventory transfers and other costs of our distribution network are included in selling, general and administrative expenses along with other operating costs. Total distribution network costs were $89.2 million, $71.7 million and $72.3 million for the years ended December 25, 2021, December 26, 2020 and December 28, 2019.
Sales Returns
Sales returns are recognized as a reduction of revenue by the amount of expected returns and are recorded as refund liability within current liabilities. We estimate the amount of revenue expected to be reversed to calculate the sales return liability based on historical data for specific products, adjusted as necessary for new products. The allowance for returns is presented gross as a refund liability and we record an inventory asset (and a corresponding adjustment to cost of sales) for any products that we expect to be returned.
69
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Supplier Rebates
Supplier rebates are included as a reduction of cost of sales and are recognized over the period they are earned. The factors we consider in estimating supplier rebate accruals include forecasted inventory purchases and sales, in conjunction with supplier rebate contract terms, which generally provide for increasing rebates based on either increased purchase or sales volume.
Direct Shipping and Handling Costs
Freight and other direct shipping costs are included in cost of sales. Direct handling costs, which represent primarily direct compensation costs of employees who pick, pack and otherwise prepare, if necessary, merchandise for shipment to our customers are reflected in selling, general and administrative expenses. Direct handling costs were $96.7 million, $79.2 million and $73.8 million for the years ended December 25, 2021, December 26, 2020 and December 28, 2019.
Advertising and Promotional Costs
We generally expense advertising and promotional costs as incurred. Total advertising and promotional expenses were $45.9 million, $30.8 million and $25.2 million for the years ended December 25, 2021, December 26, 2020 and December 28, 2019.
Stock Compensation Costs
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 for time-based restricted stock units and on a graded vesting basis for the option awards. For performance-based awards, the Company reassesses at each reporting date whether achievement of the performance condition is probable and accrues compensation expense when achievement of the performance condition is probable. Our stock-based compensation expense is reflected in selling, general and administrative expenses.
Cash and Cash Equivalents
We consider all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents. Due to the short-term maturity of such investments, the carrying amounts are a reasonable estimate of fair value. Outstanding checks in excess of funds on deposit of $2.0 million and $1.3 million, primarily related to payments for inventory, were classified as accounts payable as of December 25, 2021 and December 26, 2020.
Contract Balances
Contract balances represent amounts presented in our consolidated balance sheets when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable, contract assets and contract liabilities.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are generally recognized when health care distribution and technology and value-added services revenues are recognized. In accordance with the “expected credit loss” model, the carrying amount of accounts receivable is reduced by a valuation allowance that reflects our best estimate of the amounts that we do not expect to collect. In addition to reviewing delinquent accounts receivable, we consider many factors in estimating our reserve, including types of customers and their credit worthiness, experience and historical data adjusted for current conditions and reasonable supportable forecasts.
70
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
We record allowances for credit losses based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable, the collection history associated with the geographic region that the receivable was recorded in, current economic trends and reasonable supportable forecasts. We write-off a receivable and charge it against its recorded allowance when we deem them uncollectible.
Contract Assets
Contract assets include amounts related to any conditional right to consideration for work completed but not billed as of the reporting date and generally represent amounts owed to us by customers, but not yet billed. Contract assets are transferred to accounts receivable when the right becomes unconditional. The contract assets primarily relate to our bundled arrangements for the sale of equipment and consumables and sales of term software licenses. Current contract assets are included in Prepaid expenses and other and the non-current contract assets are included in investments and other within our consolidated balance sheets. Current and non-current contract asset balances as of December 25, 2021 and December 26, 2020 were not material.
Contract Liabilities
Contract liabilities are comprised of advance payments and upfront payments for service arrangements provided over time that are accounted for as deferred revenue amounts. Contract liabilities are transferred to revenue once the performance obligation has been satisfied. Current contract liabilities are included in accrued expenses: other and the non-current contract liabilities are included in other liabilities within our consolidated balance sheets. 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 year ended December 25, 2021, we recognized substantially all of the current contract liability amounts that were previously deferred at December 26, 2020. At December 25, 2021, the current and non-current portion of contract liabilities were $89.2 million and $9.7 million, respectively.
Inventories and Reserves
Inventories consist primarily of finished goods and are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method for merchandise or actual cost for large equipment and high tech equipment. In accordance with our policy for inventory valuation, we consider many factors including the condition and salability of the inventory, historical sales, forecasted sales and market and economic trends. From time to time, we adjust our assumptions for anticipated changes in any of these or other factors expected to affect the value of inventory.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is computed primarily under the straight-line method
(see Note 5 – Property and Equipment, Netfor estimated useful lives). Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the assets or the lease term.
Capitalized Software Development Costs
Capitalized internal-use software costs consist of costs to purchase and develop software. For software to be used solely to meet internal needs and cloud-based applications used to deliver our services, we capitalize costs incurred during the application development stage and include such costs within property and equipment, net within our consolidated balance sheets. For software to be sold, leased, or marketed to external users, we capitalize software development costs when technological feasibility is reached and include such costs in Investments and other within our consolidated balance sheets.
71
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Leases
We determine if an arrangement contains a lease at inception. An arrangement contains a lease if it implicitly or explicitly identifies an asset to be used and conveys the right to control the use of the identified asset in exchange for consideration. As a lessee, we include operating leases in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and non-current operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, current maturities of long-term debt, and long-term debt in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized upon commencement of the lease based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we generally use our incremental borrowing rate based on the estimated rate of interest for fully collateralized and fully amortizing borrowings over a similar term of the lease payments at commencement date to determine the present value of lease payments. When readily determinable, we use the implicit rate. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Expenses associated with operating leases and finance leases are included in “selling, general and administrative” and “interest expense”, respectively within our consolidated statement of income. Short-term leases with a term of 12 months or less are not capitalized. During the years ended December 25, 2021, December 26, 2020, and December 28, 2019, such short-term lease expense was $3.9 million, $1.9 million, and $0.9 million, respectively.
We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component, except non-lease components for leases of vehicles, which are accounted for separately. When a vehicle lease contains both lease and non-lease components, we allocate the transaction price based on the relative standalone selling price.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired, including the amount assigned to identifiable intangible assets. Goodwill is subject to impairment analysis annually or more frequently if needed. Such impairment analyses for goodwill requires a comparison of the fair value to the carrying value of reporting units. We regard our reporting units to be our operating segments: global dental; global medical; and technology and value-added services. Goodwill was allocated to such reporting units, for the purposes of preparing our impairment analyses, based on a specific identification basis.
For the years ended December 25, 2021 and December 26, 2020 we tested goodwill for impairment, on the first day of the fourth quarter, using a quantitative analysis comparing the carrying value of our reporting units, including goodwill, to the estimated fair value of our reporting units using a discounted cash flow methodology. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. Conversely, impairment loss would be equivalent to the excess of a reporting unit’s carrying value over its fair value limited to the total amount of goodwill allocated to that reporting unit.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities that are considered shared services to the reporting units, and ultimately the determination of the fair value of each reporting unit. The fair value of each reporting unit is calculated by applying the discounted cash flow methodology and confirming with a market approach. There are inherent uncertainties, however, related to fair value models, the inputs and our judgments in applying them to this analysis. The most significant inputs include estimation of future cash flows based on budget expectations, and determination of comparable companies to develop a weighted average cost of capital for each reporting unit.
72
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
For the years ended December 25, 2021 and December 26, 2020, the results of our goodwill impairment analysis did 0t result in any impairments.
Intangible Assets
Intangible assets, other than goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows to be derived from such assets.
Definite-lived intangible assets primarily consist of non-compete agreements, trademarks, trade names, customer lists, customer relationships and product development. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.
During the years ended December 25, 2021 and December 26, 2020, we recorded total impairment charges, within selling, general and administrative expenses, on intangible assets of approximately $0.7 million and $20.3 million, nearly all of which was recorded in our technology and value-added services segment.
Income Taxes
We account for income taxes under an asset and liability approach that requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in tax laws or rates. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. We file a consolidated U.S. federal income tax return with our 80% or greater owned U.S. subsidiaries. In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), which allows the reclassification of stranded income tax effects, resulting from U.S. tax reform, from accumulated other comprehensive income (AOCI) to retained earnings. The adoption of this ASU in the first quarter of 2019 did not have a material impact on our consolidated financial statements. We applied an individual item basis approach for releasing income tax effects from AOCI.
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our consolidated subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. Their interests in these subsidiaries are classified outside permanent equity on our consolidated balance sheets and are carried at the estimated redemption amounts. The redemption amounts have been estimated based on expected future earnings and cash flow and, if such earnings and cash flow are not achieved, the value of the redeemable noncontrolling interests might be impacted. Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are reflected 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. Adjustments to the carrying amount of a noncontrolling interests to
reflect a fair value redemption feature do not impact the calculation of earnings per share. Our net income is reduced by the portion of the subsidiaries’ net income that is attributable to redeemable noncontrolling interests.
73
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Noncontrolling Interests
Non-controlling interest represents the ownership interests of certain minority owners of our consolidated subsidiaries. Our net income is reduced by the portion of the subsidiaries net income that is attributable to noncontrolling interests.
Comprehensive Income
Comprehensive income includes certain gains and losses that, under accounting principles generally accepted in the United States, 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) from foreign currency hedging activities, unrealized investment gain (loss) and pension adjustment gain (loss).
Risk Management and Derivative Financial Instruments
We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchange rates. Our objective is to manage the impact that foreign currency exchange rate fluctuations could have on recognized asset and liability fair values, earnings and cash flows, as well as our net investments in foreign subsidiaries. Our risk management policy requires that derivative contracts used as hedges be effective at reducing the risks associated with the exposure being hedged and be designated as a hedge at the inception of the contract. We do not enter into derivative instruments for speculative purposes. Our derivative instruments primarily include foreign currency forward agreements related to certain intercompany loans, certain forecasted inventory purchase commitments with foreign suppliers and foreign currency forward contracts to hedge a portion of our euro-denominated foreign operations which are designated as net investment hedges.
Foreign currency forward agreements related to forecasted inventory purchase commitments with foreign suppliers and foreign currency swaps related to foreign currency denominated debt are designated as cash flow hedges. For derivatives that are designated and qualify as cash flow hedges, the changes in the fair value of the derivative is recorded as a component of Accumulated other comprehensive income in stockholders’ equity and subsequently reclassified into earnings in the period(s) during which the hedged transaction affects earnings. We classify the cash flows related to our hedging activities in the same category on our consolidated statements of cash flows as the cash flows related to the hedged item.
Foreign currency forward contracts related to our euro-denominated foreign operations are designated as net investment hedges. For derivatives that are designated and qualify as net investment hedges, the changes in the fair value of the derivative is recorded in the foreign currency translation gain (loss) component of Accumulated other comprehensive income in stockholders’ equity until the net investment is sold or substantially liquidated.
Our foreign currency forward agreements related to foreign currency balance sheet exposure provide economic hedges but are not designated as hedges for accounting purposes.
For agreements not designated as hedges, changes in the value of the derivative, along with the transaction gain or loss on the hedged item, are recorded in earnings.
Total return swaps are entered into for the purpose of economically hedging our unfunded non-qualified supplemental retirement plan (“SERP”) and our deferred compensationplan (“DCP”). This swap will offset changes in our SERP and DCP liabilities. This swap is expected to be renewed on an annual basis.
74
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Foreign Currency Translation and Transactions
The financial position and results of operations of our foreign subsidiaries are determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in Accumulated other comprehensive income in stockholders’ equity. Gains and losses resulting from foreign currency transactions are included in earnings.
Accounting Pronouncements Adopted
On December 27, 2020 we adopted ASU No. 2019-12, “Income Taxes” (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies 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 March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued because of reference rate reform. The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”). ASU 2021-01 provides temporary optional expedients and exceptions to certain guidance in U.S. GAAP to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. The guidance is effective upon issuance, on January 7, 2021, and can be applied through December 31, 2022. We do not expect that the requirements of this guidance will have a material impact on our consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021 – 08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (Subtopic 805). ASU 2021 – 08 requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine what to record for the acquired revenue contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements. ASU 2021 – 08 is effective for fiscal year beginning after December 15, 2022. Early adoption is permitted. We expect to adopt this ASU on December 26, 2021. We do not expect that the requirements of this ASU will have a material impact on our consolidated financial statements.
75
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 2 – Revenue from Contracts with Customers
Revenue (Net sales) is recognized in accordance with the policies discussed in Note 1 – Basis of Presentation and Significant Accounting Policies.
Disaggregation of Net sales
The following table disaggregates our Net sales by reportable segment and geographic area:
|
|
|
|
|
| Year Ended |
| |||||||
|
|
|
|
|
| December 25, 2021 |
| |||||||
|
|
|
|
|
| North America |
| International |
| Global |
| |||
Revenues: |
|
|
|
|
|
|
|
|
| |||||
| Health care distribution |
|
|
|
|
|
|
|
|
| ||||
|
| Dental | $ | 4,504,243 |
| $ | 3,037,707 |
| $ | 7,541,950 |
| |||
|
| Medical |
| 4,115,240 |
|
| 102,935 |
|
| 4,218,175 |
| |||
|
|
|
| Total health care distribution |
| 8,619,483 |
|
| 3,140,642 |
|
| 11,760,125 |
| |
| Technology and value-added services |
| 554,123 |
|
| 86,773 |
|
| 640,896 |
| ||||
| Total excluding Corporate TSA revenues (1) |
| 9,173,606 |
|
| 3,227,415 |
|
| 12,401,021 |
| ||||
| Corporate TSA revenues (1) |
| 0 |
|
| 0 |
|
| 0 |
| ||||
|
| Total revenues | $ | 9,173,606 |
| $ | 3,227,415 |
| $ | 12,401,021 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended |
| |||||||
|
|
|
|
|
| December 26, 2020 |
| |||||||
|
|
|
|
|
| North America |
| International |
| Global |
| |||
Revenues: |
|
|
|
|
|
|
|
|
| |||||
| Health care distribution |
|
|
|
|
|
|
|
|
| ||||
|
| Dental | $ | 3,471,521 |
| $ | 2,441,072 |
| $ | 5,912,593 |
| |||
|
| Medical |
| 3,514,670 |
|
| 102,347 |
|
| 3,617,017 |
| |||
|
|
|
| Total health care distribution |
| 6,986,191 |
|
| 2,543,419 |
|
| 9,529,610 |
| |
| Technology and value-added services |
| 446,830 |
|
| 67,428 |
|
| 514,258 |
| ||||
| Total excluding Corporate TSA revenues (1) |
| 7,433,021 |
|
| 2,610,847 |
|
| 10,043,868 |
| ||||
| Corporate TSA revenues (1) |
| 0 |
|
| 75,273 |
|
| 75,273 |
| ||||
|
| Total revenues | $ | 7,433,021 |
| $ | 2,686,120 |
| $ | 10,119,141 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended |
| |||||||
|
|
|
|
|
| December 28, 2019 |
| |||||||
|
|
|
|
|
| North America |
| International |
| Global |
| |||
Revenues: |
|
|
|
|
|
|
|
|
| |||||
| Health care distribution |
|
|
|
|
|
|
|
|
| ||||
|
| Dental | $ | 3,911,746 |
| $ | 2,504,119 |
| $ | 6,415,865 |
| |||
|
| Medical |
| 2,894,137 |
|
| 79,449 |
|
| 2,973,586 |
| |||
|
|
|
| Total health care distribution |
| 6,805,883 |
|
| 2,583,568 |
|
| 9,389,451 |
| |
| Technology and value-added services |
| 445,317 |
|
| 69,768 |
|
| 515,085 |
| ||||
| Total excluding Corporate TSA revenues (1) |
| 7,251,200 |
|
| 2,653,336 |
|
| 9,904,536 |
| ||||
| Corporate TSA revenues (1) |
| 4,098 |
|
| 77,169 |
|
| 81,267 |
| ||||
|
| Total revenues | $ | 7,255,298 |
| $ | 2,730,505 |
| $ | 9,985,803 |
| |||
(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. |
|
76
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 3 – PropertySegment and Equipment, Net
We conduct our business through 2 reportable segments: (i) health care distribution and equipment, including related estimated useful lives, consistedof(ii) technology and value-added services. These segments offer different products and services to the following:
The health care distribution reportable segment aggregates our global dental and medical operating segments. This segment distributes consumable products, dental specialty products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control product, PPE and vitamins.
Our global technology and value-added services reportable segment provides software, technology and other value-added services to health care practitioners. Our technology offerings include practice management software systems for dental and medical practitioners. Our value-added practice solutions include practice consultancy, education, revenue cycle management and 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended | |||||||
|
|
|
|
| December 25, |
| December 26, |
| December 28, | |||
|
|
|
|
| 2021 |
| 2020 |
| 2019 | |||
Net Sales: |
|
|
|
|
|
|
|
|
| |||
| Health care distribution (1) |
|
|
|
|
|
|
|
|
| ||
|
| Dental |
| $ | 7,541,950 |
| $ | 5,912,593 |
| $ | 6,415,865 | |
|
| Medical |
|
| 4,218,175 |
|
| 3,617,017 |
|
| 2,973,586 | |
|
| Total health care distribution |
|
| 11,760,125 |
|
| 9,529,610 |
|
| 9,389,451 | |
| Technology and value-added services (2) |
|
| 640,896 |
|
| 514,258 |
|
| 515,085 | ||
|
| Total excluding Corporate TSA revenues |
|
| 12,401,021 |
|
| 10,043,868 |
|
| 9,904,536 | |
| Corporate TSA revenues (3) |
|
| 0 |
|
| 75,273 |
|
| 81,267 | ||
|
| Total |
| $ | 12,401,021 |
| $ | 10,119,141 |
| $ | 9,985,803 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic products), diagnostic tests, infection-control products, PPE and vitamins.
(2)Consists of practice management software and other value-added products, which are distributed primarily to health care providers, practice consultancy, education, revenue cycle management 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-23 Related Party Transactions for further information.
77
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
|
|
|
| Years ended | |||||||
|
|
|
| December 25, |
| December 26, |
| December 28, | |||
|
|
|
| 2021 |
| 2020 |
| 2019 | |||
Operating Income: |
|
|
|
|
|
|
|
|
| ||
| Health care distribution |
| $ | 728,041 |
| $ | 436,173 |
| $ | 591,404 | |
| Technology and value-added services |
|
| 123,615 |
|
| 99,130 |
|
| 126,857 | |
|
| Total |
| $ | 851,656 |
| $ | 535,303 |
| $ | 718,261 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes |
|
|
|
|
|
|
|
|
| ||
| and equity in earnings of affiliates: |
|
|
|
|
|
|
|
|
| |
| Health care distribution |
| $ | 706,874 |
| $ | 400,343 |
| $ | 553,181 | |
| Technology and value-added services |
|
| 123,674 |
|
| 99,552 |
|
| 127,126 | |
|
| Total |
| $ | 830,548 |
| $ | 499,895 |
| $ | 680,307 |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
| ||
| Health care distribution |
| $ | 156,333 |
| $ | 142,712 |
| $ | 146,960 | |
| Technology and value-added services |
|
| 53,195 |
|
| 42,826 |
|
| 37,982 | |
|
| Total |
| $ | 209,528 |
| $ | 185,538 |
| $ | 184,942 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income: |
|
|
|
|
|
|
|
|
| ||
| Health care distribution |
| $ | 6,384 |
| $ | 9,736 |
| $ | 15,352 | |
| Technology and value-added services |
|
| 67 |
|
| 106 |
|
| 405 | |
|
| Total |
| $ | 6,451 |
| $ | 9,842 |
| $ | 15,757 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
| ||
| Health care distribution |
| $ | 27,554 |
| $ | 41,307 |
| $ | 50,666 | |
| Technology and value-added services |
|
| 46 |
|
| 70 |
|
| 126 | |
|
| Total |
| $ | 27,600 |
| $ | 41,377 |
| $ | 50,792 |
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense: |
|
|
|
|
|
|
|
|
| ||
| Health care distribution |
| $ | 167,584 |
| $ | 71,206 |
| $ | 129,381 | |
| Technology and value-added services |
|
| 29,765 |
|
| 24,168 |
|
| 30,134 | |
|
| Total |
| $ | 197,349 |
| $ | 95,374 |
| $ | 159,515 |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Fixed Assets: |
|
|
|
|
|
|
|
|
| ||
| Health care distribution |
| $ | 74,021 |
| $ | 43,511 |
| $ | 69,095 | |
| Technology and value-added services |
|
| 4,994 |
|
| 5,318 |
|
| 7,124 | |
|
| Total |
| $ | 79,015 |
| $ | 48,829 |
| $ | 76,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of | |||||||
|
|
|
| December 25, |
| December 26, |
| December 28, | |||
|
|
|
| 2021 |
| 2020 |
| 2019 | |||
Total Assets: |
|
|
|
|
|
|
|
|
| ||
| Health care distribution |
| $ | 7,157,025 |
| $ | 6,503,089 |
| $ | 5,821,468 | |
| Technology and value-added services |
|
| 1,324,066 |
|
| 1,269,443 |
|
| 1,329,633 | |
|
| Total |
| $ | 8,481,091 |
| $ | 7,772,532 |
| $ | 7,151,101 |
78
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
The following table presents information about our operations by geographic area as of and for the three years ended December 25, 2021. Net sales by geographic area are based on the respective locations of our subsidiaries. No country, except for the United States, generated net sales greater than 10% of consolidated net sales. There were no material amounts of sales or transfers among geographic areas and there were no material amounts of export sales.
|
|
| 2021 |
| 2020 |
| 2019 | ||||||||||||
|
|
| Net Sales |
| Long-Lived Assets |
| Net Sales |
| Long-Lived Assets |
| Net Sales |
| Long-Lived Assets | ||||||
United States |
| $ | 8,722,223 |
| $ | 2,980,765 |
| $ | 7,090,206 |
| $ | 2,362,823 |
| $ | 6,876,194 |
| $ | 2,400,733 | |
Other |
|
| 3,678,798 |
|
| 1,232,417 |
|
| 3,028,935 |
|
| 1,251,849 |
|
| 3,109,609 |
|
| 1,195,947 | |
| Consolidated total |
| $ | 12,401,021 |
| $ | 4,213,182 |
| $ | 10,119,141 |
| $ | 3,614,672 |
| $ | 9,985,803 |
| $ | 3,596,680 |
Note 4 – Business Acquisitions and Divestitures
Acquisitions
We account for business acquisitions and combinations under the acquisition method of accounting, where the net assets of acquired businesses are recorded at their fair value at the acquisition date and our consolidated financial statements include their results of operations from that date. Any excess of acquisition consideration over the fair value of identifiable net assets acquired is recorded as goodwill. Goodwill is an asset presenting the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized, such as future customers and technology, as well as the assembled workforce. Excluding goodwill, the major classes of assets and liabilities to which we generally allocate acquisition consideration include identifiable intangible assets (i.e., customer relationships and lists, trademarks and trade names, product development, and non-compete agreements), inventory and accounts receivable. The estimated fair value of identifiable intangible assets is based on critical judgments and assumptions derived from analysis of market conditions, including discount rates, projected revenue growth rates (which are based on historical trends and assessment of financial projections), estimated customer attrition and projected cash flows. These assumptions are forward-looking and could be affected by future economic and market conditions.
If certain financial targets are met after the date of acquisition, certain prior owners of acquired subsidiaries are eligible to receive additional purchase price cash consideration, or we may be entitled to recoup a portion of purchase price cash consideration if certain financial targets are met. We accrue the estimated fair value of such contingent consideration at the time of the acquisition, using the income approach, including a probability-weighted discounted cash flow method or an option pricing method, where applicable.
While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, within 12 months following the date of acquisition, or the measurement period, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill within our consolidated balance sheets. At the end of the measurement period or final determination of the values of such assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations.
We completed acquisitions during the year ended December 25, 2021, which were immaterial to our financial statements individually, and in which our ownership interests ranged from approximately 51% to 100%. Acquisitions within our health care distribution segment included companies that specialize in the distribution and manufacturing of dental and medical products, a provider of home medical supplies, and a provider of product kitting and sterile packaging. Within our technology and value-added services segment, we acquired companies that focus on dental marketing and website solutions, practice transition services, revenue cycle management, and
79
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
business analytics and intelligence software. Approximately half of the acquired goodwill is deductible for tax purposes.
The following table aggregates the estimated fair value, as of the date of acquisition, of consideration paid and net assets acquired for acquisitions during the year ended December 25, 2021.
Acquisition consideration: |
|
|
Cash | $ | 578,819 |
Deferred consideration |
| 11,233 |
Estimated fair value of contingent consideration receivable |
| (4,900) |
Fair value of previously held equity method investment |
| 7,500 |
Redeemable noncontrolling interests |
| 181,236 |
Total consideration | $ | 773,888 |
|
|
|
Identifiable assets acquired and liabilities assumed: |
|
|
Current assets | $ | 195,479 |
Intangible assets |
| 316,855 |
Other noncurrent assets |
| 51,244 |
Current liabilities |
| (93,492) |
Deferred income taxes |
| (25,929) |
Other noncurrent liabilities |
| (46,480) |
Total identifiable net assets |
| 397,677 |
Goodwill |
| 376,211 |
Total net assets acquired | $ | 773,888 |
The following table summarizes the identifiable intangible assets acquired during the year ended December 25, 2021 and their estimated useful lives as of the date of the acquisition:
|
|
| Estimated |
|
|
| Useful Lives |
|
|
| (in years) |
Trademark / Tradename | $ | 58,208 | 5-12 |
Non-compete agreements |
| 4,688 | 3-5 |
Customer relationships and lists |
| 220,454 | 5-12 |
Product development |
| 19,274 | 5-10 |
Other |
| 14,231 | 18 |
| $ | 316,855 |
|
At December 25, 2021 we have recorded a contingent consideration receivable of $4.9 million relating to the timing of government approval of a certain product.
The accounting for certain of our acquisitions during the year ended December 25, 2021 has not been completed in several areas, including but not limited to pending assessments of accounts receivable, inventory, operating leases, accrued and contingent liabilities and income and non-income based taxes.
The pro forma financial information has not been presented because the impact of the acquisitions during the year ended December 25, 2021 to our consolidated financial statements was immaterial.
80
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
We completed acquisitions during the year ended December 26, 2020, which were immaterial to our financial statements individually. In the aggregate, these transactions resulted in consideration of $57.8 million in 2020 related to business combinations, for net assets amounting to $32.8 million. As of December 26, 2020, we had recorded $36.9 million of identifiable intangibles, $23.9 million of goodwill and $26.4 million of non-controlling interest, related to these acquisitions.
We completed acquisitions during the year ended December 28, 2019, which were immaterial to our financial statements individually. In the aggregate, these transactions resulted in consideration of $652.9 million in 2019 related to business combinations, for net assets amounting to $19.7 million. As of December 28, 2019, we had recorded $310.4 million identifiable intangibles, $395.3 million of goodwill and $72.5 million of non-controlling interest, related to these acquisitions.
For the years ended December 25, 2021, December 26, 2020 and December 28, 2019, there were no material adjustments recorded in our consolidated balance sheets relating to accounting for acquisitions incomplete in prior periods, or in our consolidated statements of income relating to changes in estimated contingent consideration assets or liabilities.
During the years ended December 25, 2021, December 26, 2020, and December 28, 2019 we incurred $6.6 million, $5.9 million and $4.5 million in acquisition costs reported within income from continuing operations.
Divestitures
During the fourth quarter of 2019, we sold an equity investment in Hu-Friedy Mfg. Co., LLC, a manufacturer of dental instruments and infection prevention solutions. Our investment was non-controlling, we were not involved in running the business and had no representation on the board of directors. During the fourth quarter of 2019, we also sold certain other equity investments. In the aggregate, the sales of these investments resulted in a pre-tax gain of approximately $250.2 million, net of taxes of approximately $63.4 million.
In the third quarter of 2021 we received contingent proceeds of $9.8 million from the 2019 sale of Hu-Friedy resulting in the recognition of an additional after-tax gain of $7.3 million. During the fourth quarter of 2020 we received contingent proceeds of $2.1 million from the 2019 sale of Hu-Friedy resulting in the recognition of an additional after-tax gain of $1.6 million. For the year ended December 28, 2019 we recognized approximately $6.0 million of equity in earnings from these affiliates. We do expect to receive any additional proceeds from the sale of Hu-Friedy.
81
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 5 – InvestmentsProperty and Other
Property and otherequipment, including related estimated useful lives, consisted of the following:
|
|
|
| December 25, |
| December 26, | ||
|
|
|
| 2021 |
| 2020 | ||
Land |
| $ | 21,115 |
| $ | 20,297 | ||
Buildings and permanent improvements |
|
| 140,062 |
|
| 145,160 | ||
Leasehold improvements |
|
| 97,909 |
|
| 107,753 | ||
Machinery and warehouse equipment |
|
| 152,952 |
|
| 142,437 | ||
Furniture, fixtures and other |
|
| 119,693 |
|
| 108,041 | ||
Computer equipment and software |
|
| 385,011 |
|
| 344,494 | ||
|
|
|
|
| 916,742 |
|
| 868,182 |
Less accumulated depreciation |
|
| (550,286) |
|
| (526,178) | ||
| Property and equipment, net |
| $ | 366,456 |
| $ | 342,004 | |
|
|
|
|
|
|
|
|
|
|
|
|
| Estimated Useful |
|
|
| |
|
|
|
| Lives (in years) |
|
|
| |
Buildings and permanent improvements |
| 40 |
|
|
| |||
Machinery and warehouse equipment |
| 5-10 |
|
|
| |||
Furniture, fixtures and other |
| 3-10 |
|
|
| |||
Computer equipment and software |
| 3-10 |
|
|
|
Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the assets or the lease term.
Property and local income taxes
82
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
Note payable due in
We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles,
|
|
|
|
| Years Ended |
| |||||||
|
| December 25, |
| December 26, |
| December 28, |
| ||||||
|
| 2021 |
| 2020 |
| 2019 |
| ||||||
Operating lease cost: (1) (2) |
| $ | 103,459 |
| $ | 86,800 |
| $ | 88,246 |
| |||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
| |||
| Amortization of right-of-use assets |
|
| 2,882 |
|
| 2,209 |
|
| 1,154 |
| ||
| Interest on lease liabilities |
|
| 114 |
|
| 115 |
|
| 131 |
| ||
Total finance lease cost |
| $ | 2,996 |
| $ | 2,324 |
| $ | 1,285 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes variable lease expenses. |
| |||||||||||
(2) | Operating lease cost for the years ended December 25, 2021, December 26, 2020, and December 28, 2019, include amortization of right-of-use assets of $0.0 million, $0.6 million, and $0.6 million, respectively, related to facility leases recorded in “Restructuring costs” within our consolidated statements of income. |
|
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
| Years Ended |
| ||||
|
|
|
|
| December 25, |
| December 26, |
| ||
|
|
|
|
| 2021 |
| 2020 |
| ||
Operating Leases: |
|
|
|
|
|
|
| |||
Operating lease right-of-use assets |
| $ | 324,950 |
| $ | 288,847 |
| |||
|
|
|
|
|
|
|
|
|
|
|
Current operating lease liabilities |
|
| 76,393 |
|
| 64,716 |
| |||
Non-current operating lease liabilities |
|
| 267,772 |
|
| 238,727 |
| |||
| Total operating lease liabilities |
| $ | 344,165 |
| $ | 303,443 |
| ||
|
|
|
|
|
|
|
|
|
|
|
Finance Leases: |
|
|
|
|
|
|
| |||
Property and equipment, at cost |
| $ | 12,580 |
| $ | 10,683 |
| |||
Accumulated depreciation |
|
| (5,325) |
|
| (4,277) |
| |||
| Property and equipment, net of accumulated depreciation |
| $ | 7,255 |
| $ | 6,406 |
| ||
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
| $ | 3,216 |
| $ | 2,420 |
| |||
Long-term debt |
|
| 3,960 |
|
| 3,541 |
| |||
| Total finance lease liabilities |
| $ | 7,176 |
| $ | 5,961 |
| ||
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term in Years: |
|
|
|
|
|
|
| |||
| Operating leases |
|
| 7.3 |
|
| 7.5 |
| ||
| Finance leases |
|
| 3.6 |
|
| 4.3 |
| ||
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate: |
|
|
|
|
|
|
| |||
| Operating leases |
|
| 2.4 | % |
| 2.8 | % | ||
| Finance leases |
|
| 1.7 | % |
| 1.9 | % |
83
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
Supplemental cash flow information related to leases is as follows:
|
|
|
|
| Years Ended |
| ||||
|
|
|
|
| December 25, |
| December 26, |
| ||
|
|
|
|
| 2021 |
| 2020 |
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
| |||
| Operating cash flows for operating leases |
| $ | 85,123 |
|
| 76,985 |
| ||
| Operating cash flows for finance leases |
|
| 95 |
|
| 101 |
| ||
| Financing cash flows for finance leases |
|
| 2,602 |
|
| 2,148 |
| ||
Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
| |||
| Operating leases |
| $ | 120,732 |
|
| 120,148 |
| ||
| Finance leases |
|
| 3,868 |
|
| 2,947 |
| ||
|
|
|
|
|
|
|
|
|
|
|
Maturities of lease liabilities are as follows:
|
|
|
|
| December 25, 2021 |
| ||||
|
|
|
|
|
| Operating |
|
| Finance |
|
|
|
|
|
|
| Leases |
|
| Leases |
|
2022 |
| $ | 82,920 |
| $ | 3,303 |
| |||
2023 |
|
| 60,061 |
|
| 1,815 |
| |||
2024 |
|
| 45,992 |
|
| 953 |
| |||
2025 |
|
| 40,880 |
|
| 432 |
| |||
2026 |
|
| 32,814 |
|
| 308 |
| |||
Thereafter |
|
| 113,667 |
|
| 576 |
| |||
Total future lease payments |
|
| 376,334 |
|
| 7,387 |
| |||
Less imputed interest |
|
| (32,169) |
|
| (211) |
| |||
Total |
| $ | 344,165 |
| $ | 7,176 |
|
As of December 26, 2020,25, 2021, we have additional operating leases with total leasepayments of $
Certain of our facilities related to our acquisitions are leased from employees and minority shareholders. These leases are classified as operating leases and have a remaining lease term ranging from 6 months to 10 years. The present value of lease payments under these related party leases is not material to our consolidated financial statements.
84
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
Note 87 – Redeemable Noncontrolling Interests
The changes in certainthe carrying amount of our subsidiaries havegoodwill for the right,years ended December 25, 2021 and December 26, 2020 were as follows:
|
|
|
| Health Care Distribution |
| Technology and Value-Added Services |
| Total | |||
Balance as of December 28, 2019 |
| $ | 1,476,719 |
| $ | 985,776 |
| $ | 2,462,495 | ||
| Adjustments to goodwill: |
|
|
|
|
|
|
|
|
| |
|
| Acquisitions |
|
| 14,230 |
|
| 12,101 |
|
| 26,331 |
|
| Foreign currency translation |
|
| 9,888 |
|
| 5,678 |
|
| 15,566 |
Balance as of December 26, 2020 |
|
| 1,500,837 |
|
| 1,003,555 |
|
| 2,504,392 | ||
| Adjustments to goodwill: |
|
|
|
|
|
|
|
|
| |
|
| Acquisitions |
|
| 359,093 |
|
| 24,252 |
|
| 383,345 |
|
| Foreign currency translation |
|
| (29,343) |
|
| (4,244) |
|
| (33,587) |
Balance as of December 25, 2021 |
| $ | 1,830,587 |
| $ | 1,023,563 |
| $ | 2,854,150 |
Other intangible assets consisted of the outstandingfollowing:
| December 25, 2021 |
| December 26, 2020 | ||||||||||||||
|
|
|
| Accumulated |
|
|
|
|
|
|
| Accumulated |
|
| |||
| Cost |
| Amortization |
| Net |
| Cost |
| Amortization |
| Net | ||||||
Customer relationships and lists | $ | 852,689 |
| $ | (353,457) |
| $ | 499,232 |
| $ | 652,605 |
| $ | (283,469) |
| $ | 369,136 |
Trademarks / trade names - definite lived |
| 129,061 |
|
| (43,921) |
|
| 85,140 |
|
| 95,382 |
|
| (50,893) |
|
| 44,489 |
Product Development |
| 113,777 |
|
| (70,316) |
|
| 43,461 |
|
| 94,216 |
|
| (54,451) |
|
| 39,765 |
Non-compete agreements |
| 25,364 |
|
| (5,987) |
|
| 19,377 |
|
| 30,993 |
|
| (11,480) |
|
| 19,513 |
Other |
| 28,303 |
|
| (7,887) |
|
| 20,416 |
|
| 14,188 |
|
| (7,662) |
|
| 6,526 |
Total | $ | 1,149,194 |
| $ | (481,568) |
| $ | 667,626 |
| $ | 887,384 |
| $ | (407,955) |
| $ | 479,429 |
Trademarks, trade names, customer lists and customer relationships were established through business acquisitions. Definite-lived trademarks and trade names are amortized on a straight-line basis over a weighted-average period of approximately 8.4 years as of December 25, 2021. Customer lists and customer relationships are definite-lived intangible assets that are amortized on a straight-line basis over a weighted-average period of approximately 10.0 years as of December 25, 2021. Product development is a definite-lived intangible asset that is amortized on a straight-line basis over a weighted-average period of approximately 7.9 years as of December 25, 2021.
Non-compete agreements represent amounts paid primarily to prior owners of acquired businesses, as well as certain sales persons, in exchange for placing restrictions on their ability to pose a consolidated subsidiarycompetitive risk to us. Such amounts are amortized, on a straight-line basis over the respective non-compete period, which generally commences upon termination of employment or separation from
Amortization expense related to definite-lived intangible assets for the yearsended December 25, 2021, December 26, 2020
85
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
Note 98 – Comprehensive Income
Investments and other consisted of the following:
|
|
| December 25, |
| December 26, | ||
|
|
| 2021 |
| 2020 | ||
Investment in unconsolidated affiliates |
| $ | 168,118 |
| $ | 169,382 | |
Non-current deferred foreign, state and local income taxes |
|
| 34,607 |
|
| 42,594 | |
Notes receivable (1) |
|
| 35,748 |
|
| 34,760 | |
Capitalized costs for software to be sold, leased or marketed to external users |
|
| 65,349 |
|
| 47,650 | |
Security deposits |
|
| 2,225 |
|
| 1,752 | |
Acquisition-related indemnification |
|
| 65,638 |
|
| 49,401 | |
Other long-term assets |
|
| 52,189 |
|
| 20,906 | |
| Total |
| $ | 423,874 |
| $ | 366,445 |
|
|
|
|
|
|
|
|
(1) | Long-term notes receivable carry interest rates ranging from 3.0% to 14.2% and are due in varying installments through | ||||||
| September 30, 2027. |
Amortization expense, primarily related to stockholders’equity.
Note 109 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset orpaid to transfer a liability in an orderly
The fair value hierarchy consists of three broad levels, which gives thehighest priority to unadjusted quoted prices
•Level 1— Unadjusted quoted prices in active markets for identical assetsor liabilities that are accessible at the
•Level 2— Inputs other than quoted prices included within Level 1 that are observablefor the asset or liability,
•Level 3— Inputs that are unobservable for the asset or liability.
The following section describes the fair values of our financial instrumentsand the methodologies that we used to
86
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Investments and notes receivable
There are no quoted market prices available for investments in unconsolidatedaffiliates and notes receivable;
Debt
The fair value of our debt (including bank credit lines) is classified asLevel 3 within the fair value hierarchy as of December 25, 2021 and as
Derivative contracts
Derivative contracts are valued using quoted market prices andsignificant other observable and unobservable
The fair values for the majority of our foreign currency derivative contractsare obtained by comparing our contract
Redeemable noncontrolling interests
The values for Redeemable noncontrolling interests are classified withinLevel 3 of the fair value hierarchy and are
87
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
The following table presents our assets and liabilities that are measured andrecognized at fair value on a recurring
|
|
|
| December 25, 2021 | ||||||||||
|
|
|
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Derivative contracts designated as hedges |
| $ | 0 |
| $ | 7,859 |
| $ | 0 |
| $ | 7,859 | |
| Derivative contracts undesignated |
|
| 0 |
|
| 640 |
|
| 0 |
|
| 640 | |
| Total return swap |
|
| 0 |
|
| 1,404 |
|
| 0 |
|
| 1,404 | |
|
| Total assets |
| $ | 0 |
| $ | 9,903 |
| $ | 0 |
| $ | 9,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Derivative contracts designated as hedges |
| $ | 0 |
| $ | 650 |
| $ | 0 |
| $ | 650 | |
| Derivative contracts undesignated |
|
| 0 |
|
| 1,503 |
|
| 0 |
|
| 1,503 | |
|
| Total liabilities |
| $ | 0 |
| $ | 2,153 |
| $ | 0 |
| $ | 2,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests |
| $ | 0 |
| $ | 0 |
| $ | 613,312 |
| $ | 613,312 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 26, 2020 | ||||||||||
|
|
|
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Derivative contracts designated as hedges |
| $ | 0 |
| $ | 453 |
| $ | 0 |
| $ | 453 | |
| Derivative contracts undesignated |
|
| 0 |
|
| 1,415 |
|
| - |
|
| 1,415 | |
| Total return swap |
|
| 0 |
|
| 1,565 |
|
| 0 |
|
| 1,565 | |
|
| Total assets |
| $ | 0 |
| $ | 3,433 |
| $ | 0 |
| $ | 3,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Derivative contracts designated as hedges |
| $ | 0 |
| $ | 10,880 |
| $ | 0 |
| $ | 10,880 | |
| Derivative contracts undesignated |
|
| 0 |
|
| 885 |
|
| 0 |
|
| 885 | |
|
| Total liabilities |
| $ | 0 |
| $ | 11,765 |
| $ | 0 |
| $ | 11,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests |
| $ | 0 |
| $ | 0 |
| $ | 327,699 |
| $ | 327,699 |
88
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
Note 1110 – Business AcquisitionsConcentrations of Risk
Certain financial instruments potentially subject us to concentrations of credit risk. These financial instruments consist primarily of cash equivalents, trade receivables, long-term investments, notes receivable and Divestitures
We limit our credit risk with respect to our cash equivalents, short-term and long-term investments and derivative instruments, by monitoring the credit worthiness of the acquisition,nonefinancial institutions who are the counter-parties to such financial instruments. As a risk management policy, we limit the amount of which are material.Any adjustmentscredit exposure by diversifying and utilizing numerous investment grade counter-parties.
With respect to these accrual
Our long-term notes receivable primarily represent strategic financing arrangements with certain affiliates. Generally, these notes are secured by certain assets of the counterparty; however, in most cases our security is subordinate to other commercial financial institutions. While we have exposure to credit loss in the Animal Health Spin-off have been includedevent of non-performance by these counter-parties, we conduct ongoing assessments of their financial and operational performance.
Note 1211 – PlansDerivatives and Hedging Activities
We are exposed to market risks as well as changes in foreign currency exchange rates as measured against the U.S. dollar and each other, and changes to the credit risk of Restructuring
During 2019 we entered into foreign currency forward contracts to an initiative to rationalizehedge a portion of our euro-denominated foreign operations andprovide expense
89
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
On March 20, 2020, we entered into a total return swap for the purpose of economically hedging our unfunded non-qualified SERP and our DCP. This swap will offset changes in our SERP and DCP liabilities. At the inception, the notional value of the investments in these plans was $43.4 million. At December 25, 2021, the notional value of the investments in these plans was $88.7 million. At December 25, 2021, the financing blended rate for this swap was based on LIBOR of 0.09% plus 0.46%, for a combined rate of 0.55%. For the years ended December 25, 2021 ended and December 26, 2020, we have recorded a gain, within selling, general and administrative in our consolidated statement of income, of approximately $12.1 million and $21.2 million, respectively, net of transaction costs, related to this undesignated swap. During the years ended December 25, 2021 and December 26, 2020, the swap resulted in a neutral impact to our results of operations. This swap is expected to be renewed on an annual basis after its current expiration date of March 29, 2022, and is expected to result in a neutral impact to our results of operations. See Note 16 – Employee Benefit Plans for additional information.
Fluctuations in the value of certain foreign currencies as compared to the U.S. dollar may positively or negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., generally 18 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. Amounts related to our hedging activities are recorded in prepaid expenses and other and/or accrued expenses: other within our consolidated balance sheets. Our hedging activities have historically not had a material impact on our consolidated financial statements. Accordingly, additional disclosures related to derivatives and hedging activities required by ASC 815 have been omitted.
90
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 12 – Debt
Bank Credit Lines
Bank credit lines consisted of the following:
|
|
| December 25, |
| December 26, | ||
|
|
| 2021 |
| 2020 | ||
Revolving credit agreement |
| $ | - |
| $ | - | |
Other short-term bank credit lines |
|
| 50,530 |
|
| 73,366 | |
Total |
| $ | 50,530 |
| $ | 73,366 |
Revolving Credit Agreement
On August 20, 2021, we entered into a new $1 billion revolving credit agreement (the “Credit Agreement”). This facility, which matures on August 20, 2026, replaced our $750 million revolving credit facility, which was scheduled to mature 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. 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 certain 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 December 25, 2021, and December 26, 2020, we had 0 borrowings under this revolving credit facility. As of December 25, 2021, and December 26, 2020, there were $9.1 million and $9.5 million of letters of credit, respectively, provided to third parties under the credit facility.
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 December 25, 2021 and December 26, 2020, we had various other short-term bank credit lines available, of which $50.5 million and $73.4 million, respectively, were outstanding. At December 25, 2021 and December 26, 2020, borrowings under all of these credit lines had a weighted average interest rate of 10.44% and 4.14%, respectively.
91
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Long-term debt
Long-term debt consisted of the following:
|
|
| December 25, |
| December 26, | ||
|
|
| 2021 |
| 2020 | ||
Private placement facilities |
| $ | 706,186 |
| $ | 613,498 | |
U.S. trade accounts receivable securitization |
|
| 105,000 |
|
| 0 | |
Note payable due in 2025 with an interest rate of 3.1% |
|
|
|
|
|
| |
| at December 26, 2020 |
|
| 0 |
|
| 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 December 25, 2021 and |
|
|
|
|
|
|
| ranging from 2.62% to 4.27% at December 26, 2020 |
|
| 3,624 |
|
| 4,596 |
Finance lease obligations (see Note 6) |
|
| 7,176 |
|
| 5,961 | |
Total |
|
| 821,986 |
|
| 625,609 | |
Less current maturities of long-term debt |
|
| (10,640) |
|
| (109,836) | |
| Total long-term debt |
| $ | 811,346 |
| $ | 515,773 |
Private Placement Facilities
Our private placement facilities were amended on October 20, 2021, to include four (previously three) insurance companies, have a total facility amount of $1.5 billion (previously $1.0 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 October 20, 2026 (previously 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.
92
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The components of our private placement facility borrowings as of December 25, 2021 are presented in the following table (in thousands):
|
| Amount of |
|
|
|
|
| |
Date of |
| Borrowing |
| Borrowing |
|
| ||
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 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 |
June 2, 2021 |
|
| 100,000 |
| 2.48 |
|
| June 2, 2031 |
June 2, 2021 |
|
| 100,000 |
| 2.58 |
|
| June 2, 2033 |
Less: Deferred debt issuance costs |
|
| (957) |
|
|
|
|
|
|
| $ | 706,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 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 had a purchase limit of $350 million, was scheduled to expire on April 29, 2022. On October 20, 2021, we amended our U.S. trade accounts receivable securitization facility to increase the purchase limit to $450 million with two banks as agents and extend the expiration date to October 18, 2024. As of December 25, 2021 and December 26, 2020, the borrowings outstanding under this securitization facility were $105 million and $0, respectively. At December 25, 2021, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 0.19% plus 0.75%, for a combined rate of 0.94%. 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 30 to 35 basis points depending upon program utilization.
As of December 25, 2021, the aggregate amounts of long-term debt, including finance lease obligations and net of deferred debt issuance costs of $1.0 million, maturing in each of the next five years and thereafter are as follows:
| 2022 | $ | 10,640 |
| |
| 2023 |
| 5,108 |
| |
| 2024 |
| 205,924 |
| |
| 2025 |
| 412 |
| |
| 2026 |
| 295 |
| |
| Thereafter |
| 599,607 |
| |
|
| Total | $ | 821,986 |
|
93
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 13 – Earnings Per Share
Income before taxes and equity in earnings of affiliates was as follows:
|
| Years ended | |||||||
|
| December 25, |
| December 26, |
| December 28, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
Domestic | $ | 593,137 |
| $ | 430,838 |
| $ | 507,003 | |
Foreign |
| 237,411 |
|
| 69,057 |
|
| 173,304 | |
| Total | $ | 830,548 |
| $ | 499,895 |
| $ | 680,307 |
The provisions for income taxes were as follows: |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended | |||||||
|
|
|
|
| December 25, |
| December 26, |
| December 28, | |||
|
|
|
|
| 2021 |
| 2020 |
| 2019 | |||
Current income tax expense: |
|
|
|
|
|
|
|
|
| |||
| U.S. Federal |
| $ | 128,328 |
| $ | 82,912 |
| $ | 93,418 | ||
| State and local |
|
| 37,255 |
|
| 24,640 |
|
| 28,150 | ||
| Foreign |
|
| 42,751 |
|
| 40,799 |
|
| 42,004 | ||
|
| Total current |
|
| 208,334 |
|
| 148,351 |
|
| 163,572 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit): |
|
|
|
|
|
|
|
|
| |||
| U.S. Federal |
|
| (12,115) |
|
| (18,032) |
|
| 5,633 | ||
| State and local |
|
| (2,567) |
|
| (4,889) |
|
| 1,597 | ||
| Foreign |
|
| 3,697 |
|
| (30,056) |
|
| (11,287) | ||
|
| Total deferred |
|
| (10,985) |
|
| (52,977) |
|
| (4,057) | |
|
|
| Total provision |
| $ | 197,349 |
| $ | 95,374 |
| $ | 159,515 |
94
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
The tax effects of temporary differences that give rise to our deferred income tax asset (liability) were as follows: | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended | ||||
|
|
|
| December 25, |
| December 26, | ||
|
|
|
| 2021 |
| 2020 | ||
|
|
|
|
|
|
|
|
|
Deferred income tax asset: |
|
|
|
|
|
| ||
| Net operating losses and other carryforwards |
| $ | 54,651 |
| $ | 64,297 | |
| Inventory, premium coupon redemptions and accounts receivable |
|
|
|
|
|
| |
|
| valuation allowances |
|
| 46,219 |
|
| 56,668 |
| Stock-based compensation |
|
| 12,543 |
|
| 4,858 | |
| Uniform capitalization adjustment to inventories |
|
| 10,422 |
|
| 6,895 | |
| Operating lease right of use asset |
|
| 78,719 |
|
| 74,674 | |
| Other asset |
|
| 41,090 |
|
| 42,966 | |
| Total deferred income tax asset |
|
| 243,644 |
|
| 250,358 | |
| Valuation allowance for deferred tax assets (1) |
|
| (35,982) |
|
| (40,496) | |
| Net deferred income tax asset |
|
| 207,662 |
|
| 209,862 | |
Deferred income tax liability |
|
|
|
|
|
| ||
| Intangibles amortization |
|
| (134,023) |
|
| (118,165) | |
| Operating lease liability |
|
| (73,952) |
|
| (71,343) | |
| Property and equipment |
|
| (7,363) |
|
| (7,820) | |
| Total deferred tax liability |
|
| (215,338) |
|
| (197,328) | |
Net deferred income tax asset (liability) |
| $ | (7,676) |
| $ | 12,534 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Primarily relates to operating losses, the benefits of which are uncertain. Any future reductions of such valuation allowances will be reflected as a reduction of income tax expense. |
The assessment of the amount of value assigned to our deferred tax assets underthe applicable accounting rules is
As of December 26, 2020,25, 2021, we had federal, state, and foreign net operatingloss carryforwards of approximately
95
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
The tax provisions differ from the amount computed using the federal statutory incometax rate as follows:
|
|
| Years ended | |||||||
|
|
| December 25, |
| December 26, |
| December 28, | |||
|
|
| 2021 |
| 2020 |
| 2019 | |||
Income tax provision at federal statutory rate |
| $ | 174,415 |
| $ | 104,977 |
| $ | 142,865 | |
State income tax provision, net of federal income tax effect |
|
| 21,245 |
|
| 13,015 |
|
| 16,539 | |
Foreign income tax provision (benefit) |
|
| 5,669 |
|
| (428) |
|
| (4,580) | |
Pass-through noncontrolling interest |
|
| (4,479) |
|
| (2,681) |
|
| (3,931) | |
Valuation allowance |
|
| (5,533) |
|
| 659 |
|
| (79) | |
Unrecognized tax benefits and audit settlements |
|
| 6,981 |
|
| (17,722) |
|
| 3,671 | |
Interest expense related to loans |
|
| (10,917) |
|
| (11,098) |
|
| (5,498) | |
Tax on global intangible low-taxed income ("GILTI") |
|
| 4,895 |
|
| 2,365 |
|
| 3,917 | |
Tax benefit related to legal entity reorganization outside the U.S. |
|
| 0 |
|
| (5,823) |
|
| 0 | |
Tax credit related to reorganization of legal entities |
|
|
|
|
|
|
|
|
| |
completed in preparation for the Animal Health spin-off |
|
|
|
|
| 0 |
|
| (1,333) | |
Other |
|
| 5,073 |
|
| 12,110 |
|
| 7,944 | |
| Total income tax provision |
| $ | 197,349 |
| $ | 95,374 |
| $ | 159,515 |
For the year ended December 26,25, 2021, our effective tax rate was 23.8% compared to 19.1% for the prior year period. In 2021, our effective tax rate was primarily impacted by state and foreign income taxes and interest expense. In 2020, our effective tax rate was
The American Rescue Plan Act of 2021 (“ARPA”) was signed into law on March 11, 2021. The ARPA included a corporate income tax rateprovision to further limit the deductibility of
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act(“ (“CARES Act”) was enacted in
On July 20, 2020, the IRS issued final regulations related to the Tax Act.Cuts and Jobs Act enacted in 2017 (the “Act”). The final regulations concern the global
96
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
regulations toprior tax years, if the taxpayer elects to
On December 22, 2017, the U.S. government passed the Tax Act.The Tax Act, is comprehensive tax legislation
The FASB Staff Q&A, Topic740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity
Due to the one-time transition tax and the imposition of the GILTI provisions, all previously unremitted earnings
ASC 740 prescribes the accounting for uncertainty in income taxes recognizedin the financial statements in
The total amount of unrecognized tax benefits, which are included in “Other“other liabilities” within our consolidated
All tax returns audited by the IRS are officially closed through 2016. The tax years subject to examination by major tax jurisdictionsthe IRS include years 2017 and forward. During the years 2012 and forwardquarter ended December 25, 2021, we were notified by the IRS as
Regarding transfer pricing matters, in the quarter ended December 28, 2019, we reached a settlement withthe U.S. Competent
In the fourth quarter of 2020, we
The total amounts of interest and penalties are classified as a component ofthe provision for income taxes.The
97
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
2020 and 2019, and 2018, respectively.The total amount of accrued interest is included in “Other“other liabilities”, and was
The following table provides a reconciliation of unrecognized tax benefits:
|
| December 25, |
| December 26, |
| December 28, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
Balance, beginning of period |
| $ | 70,000 |
| $ | 91,100 |
| $ | 77,800 |
Additions based on current year tax positions |
|
| 3,300 |
|
| 4,900 |
|
| 4,900 |
Additions based on prior year tax positions |
|
| 10,800 |
|
| 7,900 |
|
| 17,300 |
Reductions based on prior year tax positions |
|
| (1,000) |
|
| (1,000) |
|
| (1,000) |
Reductions resulting from settlements with taxing authorities |
|
| (9,500) |
|
| (18,600) |
|
| (4,200) |
Reductions resulting from lapse in statutes of limitations |
|
| (2,500) |
|
| (14,300) |
|
| (3,700) |
Balance, end of period |
| $ | 71,100 |
| $ | 70,000 |
| $ | 91,100 |
Note 1514 – Concentrations of Risk
Purchase Commitments
In all cases, our maximum exposure to loss from creditrisk equals the gross fair value of the financial
2022 |
| $ | 111,696 |
2023 |
|
| 488 |
Total minimum inventory purchase commitment payments |
| $ | 112,184 |
Employment, Consulting and Non-Compete Agreements
We have employment, consulting and non-compete agreements that have varying base aggregate annual payments for the years 2022 through 2026 and thereafter of approximately $24.6 million, $4.7 million, $0.9 million, $0.8 million, $0.8 million, and $0.0 million, respectively. We also have lifetime consulting agreements that provide for current compensation of $0.4 million per year, increasing $25 every fifth year with the next increase in 2022. In addition, some agreements have provisions for additional incentives and compensation.
Litigation
Henry Schein has been named as a defendant in multiple lawsuits (currently less than one-hundred and our single largest supplier from continuingoperations accountedseventy-five (175); in less than half of those cases one or more of Schein’s affiliated companies is also named as a defendant), which allege that manufacturers of prescription opioid drugs engaged in a false advertising campaign to expand the market for such drugs and their own market share and that the entities in the supply chain (including Henry Schein, Inc.) reaped financial rewards by refusing or otherwise failing to monitor appropriately and restrict the improper distribution of those drugs. These actions consist of some that have been consolidated within the MultiDistrict Litigation (“MDL”) proceeding In Re National Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804) and are currently abated for discovery purposes, and others which remain pending in state courts and are proceeding independently and outside of the MDL. At this time, the only cases set for trial are: the action filed by Mobile County Board of Health, et al., in Alabama state court, which is currently set for a jury trial on January 9, 2023; and the action filed by DCH Health Care Authority, et al. in Alabama state court, which is currently scheduled for a jury trial on March 20, 2023. The court for the pending cases filed by hospitals in West Virginia
98
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
has indicated it intends to usset trials for all defendants in 2022. However, as of this filing, the West Virginia hospital cases against Henry Schein have not been set for trial. Of Henry Schein’s 2021 revenue of approximately $12.4 billion from continuing operations, sales of certain businesses.Generally,opioids represented less than two-tenths of 1 percent. Opioids represent a negligible part of our business. We intend to defend ourselves vigorously against these notes are secured by certain assetsactions.
On February 5, 2021, Jack Garnsey filed a putative shareholder derivative action on behalf of Covetrus, Inc. in the U.S. District Court for the Eastern District of New York, naming as defendants Benjamin Shaw, Christine T. Komola, Steven Paladino, Betsy Atkins, Deborah G. Ellinger, Sandra L. Helton, Philip A. Laskaway, Mark J. Manoff, Edward M. McNamara, Ravi Sachdev, David E. Shaw, Benjamin Wolin, and Henry Schein, Inc., with Covetrus, Inc. named as a nominal defendant. The complaint alleges that the individual defendants breached their fiduciary duties under state law in connection with the same allegations asserted in the City of Hollywood securities class action described in our prior filings with the SEC and further alleges that Henry Schein aided and abetted such breaches. The complaint also asserts claims for contribution under the federal securities laws against Henry Schein and other defendants, also arising out of the
From time to time, we may become a party to other legal proceedings, including, without limitation, product liability claims, employment matters, commercial disputes, governmental inquiries and investigations (which may in some cases involve our entering into settlement arrangements or consent decrees), and other matters arising out of the ordinary course of our business. While the results of any legal proceeding cannot be predicted with certainty, in our opinion none of these other pending matters are currently anticipated to have a material adverse effect on our consolidated financial institutions.Whileposition, liquidity or results of operations.
As of December 25, 2021, we had accrued our best estimate of potential losses relating to claims that were probable to result in liability and for which we were able to reasonably estimate a loss. This accrued amount, as well as related 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.
99
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 15 – Stock-Based Compensation
Stock-based awards are provided to certain employees and non-employee directors under the terms of our 2020 Stock Incentive Plan and our 2015 Non-Employee Director Stock Incentive Plan (together, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors (the “Compensation Committee”). Historically, equity-based awards have exposure to credit lossbeen granted solely in the eventform of non-performancetime-based and performance-based restricted stock units (“RSUs”). However, beginning in 2021, our equity-based awards have been granted in the form of time-based RSUs and non-qualified stock options. As of December 25, 2021, there were 70,943 shares authorized and 9,368 shares available to be granted under the 2020 Stock Incentive Plan and 1,893 shares authorized and 229 shares available to be granted under the 2015 Non-Employee Director Stock Incentive Plan.
Grants of RSUs are stock-based awards granted to recipients with specified vesting provisions. In the case of RSUs, common stock is generally delivered on or following satisfaction of vesting conditions. We issue RSUs that vest solely based on the recipient’s continued service over time (primarily four-year cliff vesting, except for grants made under the 2015 Non-Employee Director Stock Incentive Plan, which are primarily 12-month cliff vesting), and RSUs that vest based on our achieving specified performance measurements and the recipient’s continued service over time (primarily three-year cliff vesting). For these RSUs, we recognize the cost as compensation expense on a straight-line basis.
With respect to time-based RSUs, we estimate the fair value on the date of grant based on our closing stock price at time of grant. With respect to performance-based RSUs, the number of shares that ultimately vest and are received by the recipient is based upon our performance as measured against specified targets over a specified period, as determined by the Compensation Committee. Although there is no guarantee that performance targets will be achieved, we estimate the fair value of performance-based RSUs based on our closing stock price at time of grant.
The Plans provide for adjustments to the performance-based RSU targets for significant events, including, without limitation, acquisitions, divestitures, new business ventures, certain capital transactions (including share repurchases), restructuring costs, if any, certain litigation settlements or payments, if any, changes in accounting principles or in applicable laws or regulations, changes in income tax rates in certain markets and foreign exchange fluctuations. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted upward or downward based upon our estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on our actual performance metrics as defined under the Plans.
During the three months ended March 27, 2021, as a result of the continuing economic risk and uncertainty resulting from the ongoing COVID-19 pandemic, the Compensation Committee decided to adjust the form of awards granted under our 2021 long-term incentive program for our 2021 fiscal year in a manner that focuses on our long-term value by granting non-qualified stock options and time-based RSUs rather than performance-based RSUs. Stock options are awards that allow the recipient to purchase shares of our common stock at a fixed price following vesting of the stock options. Stock options are granted at an exercise price equal to our closing stock price on the date of grant. Stock options issued during 2021 vest one-third per year based on the recipient’s continued service, subject to the terms and conditions of the Plans, are fully vested three years from the grant date and have a contractual term of ten years from the grant date, subject to earlier termination of the term upon certain events. Compensation expense for these counter-parties,stock options is recognized using a graded vesting method. We estimate the fair value of stock options using the Black-Scholes valuation model.
100
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
In addition to equity-based awards under the 2021 long-term incentive program under the 2020 Stock Incentive Plan, the Compensation Committee granted a Special Pandemic Recognition Award under the 2020 Stock Incentive Plan to recipients of performance-based RSUs under the 2018 long-term incentive program. These time-based RSU awards vest 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date, based on the recipient’s continued service and subject to the terms and conditions of the Plans, and are recorded as compensation expense using a graded vesting method.
Our accompanying consolidated statements of income reflect pre-tax share-based compensation expense of $78.4 million ($59.8 million after-tax), $8.8 million ($7.1 million after-tax) and $44.9 million ($34.4 million after-tax) for the years ended December 25, 2021, December 26, 2020 and December 28, 2019.
Total unrecognized compensation cost related to non-vested awards as of December 25, 2021 was $79.8 million, which is expected to be recognized over a weighted-average period of approximately 2.0 years.
The weighted-average grant date fair value of stock-based awards granted before forfeitures was $62.72, $60.23 and $56.83 per share during the years ended December 25, 2021, December 26, 2020 and December 28, 2019.
Certain stock-based compensation granted may require us to settle in the form of a cash payment. During the year ended December 25, 2021, we conduct ongoing
We record deferred income tax assets for awards that will result in future deductions on our income tax returns based on the amount of compensation cost recognized and operational performance.our statutory tax rate in the jurisdiction in which we will receive a deduction.
Our accompanying consolidated statements of cash flows present our stock-based compensation expense as an adjustment to reconcile net income to net cash provided by operating activities for all periods presented. In the accompanying consolidated statements of cash flows, there were 0 benefits associated with tax deductions in excess of recognized compensation as a cash inflow from financing activities for the years ended December 25, 2021, December 26, 2020 and December 28, 2019.
The following weighted-average assumptions were used in determining the most recent fair values of stock options using the Black-Scholes valuation model:
2021 | ||||
Expected dividend yield | 0.0 | % | ||
Expected stock price volatility | 27.10 | % | ||
Risk-free interest rate | 1.33 | % | ||
Expected life of options (years) | 6.00 |
We have not declared cash dividends on our stock in the past and we do not anticipate declaring cash dividends in the foreseeable future. The expected stock price volatility is based on implied volatilities from traded options on our stock, historical volatility of our stock, and other factors. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant in conjunction with considering the expected life of options. The six-year expected life of the options was determined using the simplified method for estimating the expected term as permitted under SAB Topic 14. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by recipients of stock options, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by us.
101
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The following table summarizes the stock option activity for the year ended December 25, 2021:
|
|
|
| |||||
|
| Stock Options |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted | Remaining |
|
| |
|
|
|
| Average | Weighted Average | Aggregate |
| |
|
|
|
| Exercise | Remaining Contractual | Intrinsic |
| |
|
| Shares |
| Price | Life in Years | Value |
| |
Outstanding at beginning of year |
| 0 |
| $ | 0 |
|
|
|
Granted |
| 817 |
|
| 63.21 |
|
|
|
Forfeited |
| (50) |
|
| 62.75 |
|
|
|
Outstanding at end of year |
| 767 |
| $ | 63.24 | 9.2 | $9,027 |
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year |
| 1 |
| $ | 62.71 | 6.1 | $8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
| Weighted |
|
| Average |
|
| Aggregate |
|
|
| Number of |
|
| Average |
|
| Remaining |
|
| Intrinsic |
|
|
| Options |
|
| Exercise |
|
| Contractual |
|
| Value |
|
|
| (in thousands) |
|
| Price |
|
| Life (in years) |
|
| (in thousands) |
Vested or expected to vest |
|
| 736 |
| $ | 63.26 |
|
| 9.2 |
| $ | 8,642 |
The following tables summarize the activity of our unvested RSUs for the year ended December 25, 2021:
|
|
|
|
|
|
|
|
|
|
|
| Time-Based Restricted Stock Units | |||||||
|
|
|
| Weighted Average |
|
|
| ||
|
|
|
| Grant Date Fair |
|
| Intrinsic Value | ||
|
| Shares/Units |
| Value Per Share |
|
| Per Share | ||
Outstanding at beginning of period |
| 1,459 |
| $ | 57.61 |
|
|
|
|
Granted |
| 843 |
|
| 63.38 |
|
|
|
|
Vested |
| (269) |
|
| 66.85 |
|
|
|
|
Forfeited |
| (87) |
|
| 60.55 |
|
|
|
|
Outstanding at end of period |
| 1,946 |
| $ | 58.79 |
|
| $ | 74.93 |
|
|
|
|
|
|
|
|
|
|
|
| Performance-Based Restricted Stock Units | |||||||
|
|
|
| Weighted Average |
|
|
| ||
|
|
|
| Grant Date Fair |
|
| Intrinsic Value | ||
|
| Shares/Units |
| Value Per Share |
|
| Per Share | ||
Outstanding at beginning of period |
| 136 |
| $ | 53.52 |
|
|
|
|
Granted |
| 669 |
|
| 59.29 |
|
|
|
|
Vested |
| (84) |
|
| 52.49 |
|
|
|
|
Forfeited |
| (46) |
|
| 59.72 |
|
|
|
|
Outstanding at end of period |
| 675 |
| $ | 59.63 |
|
| $ | 74.93 |
|
|
|
|
|
|
|
|
|
|
The total intrinsic value per share of RSUs that vested was $73.99, $61.49 and $64.31 during the years ended December 25, 2021, December 26, 2020 and December 28, 2019.
102
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 16 – DerivativesEmployee Benefit Plans
Defined benefit plans
Certain of our employees in our international markets participate in various noncontributory defined benefit plans. These plans are managed to provide pension benefits to covered employees in accordance with local regulations and Hedging Activities
|
|
| Years Ended | |||
|
|
| December 25, |
|
| December 26, |
|
|
| 2021 |
|
| 2020 |
Obligation and funded status: |
|
|
|
|
| |
Change in benefit obligation |
|
|
|
|
| |
Projected benefit obligation, beginning of period | $ | 130,095 |
| $ | 120,622 | |
Service costs |
| 3,692 |
|
| 3,186 | |
Interest cost |
| 421 |
|
| 518 | |
Past service cost |
| 5,348 |
|
| 0 | |
Actuarial gain (loss) |
| (5,451) |
|
| 569 | |
Benefits (paid) received (1) |
| 422 |
|
| (3,685) | |
Participant contributions |
| 936 |
|
| 839 | |
Settlements |
| (2,256) |
|
| (2,143) | |
Effect of foreign currency translation |
| (5,011) |
|
| 10,189 | |
Projected benefit obligation, end of period | $ | 128,196 |
| $ | 130,095 | |
|
|
|
|
|
|
|
Change in plan assets |
|
|
|
|
| |
Fair value of plan assets at beginning of period | $ | 64,708 |
| $ | 60,090 | |
Actual return on plan assets |
| 5,091 |
|
| 1,772 | |
Employer contributions |
| 1,713 |
|
| 1,545 | |
Plan participant contributions |
| 936 |
|
| 839 | |
Expected return on plan assets |
| 3,988 |
|
| 987 | |
Benefit (paid) received (1) |
| 1,990 |
|
| (1,988) | |
Settlements |
| (2,256) |
|
| (2,143) | |
Effect of foreign currency translation |
| (1,111) |
|
| 3,606 | |
Fair value of plan assets at end of period | $ | 75,059 |
| $ | 64,708 | |
|
|
|
|
|
|
|
Unfunded status at end of period | $ | 53,137 |
| $ | 65,387 | |
|
|
|
|
|
|
|
(1)Includes regular benefit payments and amounts transferred in by new participants.
The majority of our defined benefit plans are unfunded, with the exception of one plan in one country where the amount of assets exceeds the projected benefit obligation by approximately $5.8 million.
103
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in interest expense withinthousands, except per share data)
The following table provides the amounts recognized in our consolidated statementsbalance sheets for our defined benefit pension plans:
|
|
|
|
|
|
|
| Years Ended | |||
|
| December 25, |
|
| December 26, |
|
| 2021 |
|
| 2020 |
Current liabilities | $ | 991 |
| $ | 1,031 |
Non-Current liabilities |
| 52,146 |
|
| 64,356 |
Accumulated other comprehensive loss, pre-tax |
| 20,456 |
|
| 29,798 |
The following table provides the net periodic pension cost for our defined benefit plans:
|
| Years Ended | ||||||
|
| December 25, |
|
| December 26, |
|
| December 28, |
|
| 2021 |
|
| 2020 |
|
| 2019 |
Service cost | $ | 3,692 |
| $ | 3,186 |
| $ | 1,655 |
Interest cost |
| 421 |
|
| 518 |
|
| 899 |
Expected return on plan assets |
| (451) |
|
| (421) |
|
| (337) |
Employee contributions |
| (483) |
|
| (371) |
|
| 0 |
Amortization of prior service credit |
| 871 |
|
| 785 |
|
| 300 |
Recognized net actuarial loss |
| 252 |
|
| 447 |
|
| 92 |
Settlements |
| 98 |
|
| 155 |
|
| 373 |
Net periodic pension cost | $ | 4,400 |
| $ | 4,299 |
| $ | 2,982 |
The following tables present the weighted-average actuarial assumptions used to determine our pension benefit obligation and our net periodic pension cost for the periods presented:
| Years Ended | ||||
| December 25, |
|
| December 26, |
|
Pension Benefit Obligation | 2021 |
|
| 2020 |
|
Weighted average discount rate | 0.87 | % |
| 0.54 | % |
|
| Years Ended | |||||||
|
| December 25, |
|
| December 26, |
|
| December 28, |
|
Net Periodic Pension Cost |
| 2021 |
|
| 2020 |
|
| 2019 |
|
Discount rate-pension benefit |
| 0.56 | % |
| 0.51 | % |
| 1.14 | % |
Expected return on plan assets |
| 0.71 | % |
| 0.87 | % |
| 0.87 | % |
Rate of compensation increase |
| 1.95 | % |
| 1.97 | % |
| 2.20 | % |
Pension increase rate |
| 0.72 | % |
| 0.67 | % |
| 0.77 | % |
104
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The following table presents the estimated pension benefit payments that are payable to the plan’s participants as of December 25, 2021:
| Year |
|
|
|
| 2022 |
| $ | 5,503 |
| 2023 |
|
| 6,109 |
| 2024 |
|
| 5,837 |
| 2025 |
|
| 5,174 |
| 2026 |
|
| 5,162 |
| 2027 to 2031 |
|
| 32,857 |
| Total |
| $ | 60,642 |
401(k) Plans
We offer qualified 401(k) plans to substantially all our domestic full-time employees. As determined by our Board of Directors, matching contributions to these plans generally do not exceed 100% of the participants’ contributions up to 7% of their base compensation, subject to applicable legal limits. Matching contributions consist of cash and were allocated entirely to the participants’ investment elections on file, subject to a 20% allocation limit to the Henry Schein Stock Fund. Due to the impact of COVID-19, as part of our initiative to generate cash savings, we suspended the matching contribution for the second half of 2020. The matching contribution has been reinstated for 2021. Forfeitures attributable to participants whose employment terminates prior to becoming fully vested are used to reduce our matching contributions and offset administrative expenses of the 401(k) plans.
Assets of the 401(k) and other defined contribution plans are held in self-directed accounts enabling participants to choose from various investment fund options. Matching contributions related to these plans charged to operations during the years ended December 25, 2021, December 26, 2020 and December 28, 2019 werecognized approximately $
Supplemental Executive Retirement Plan
We offer an unfunded, non-qualified SERP to eligible employees. This plan generally covers officers and certain highly compensated employees after they have reached the maximum IRS allowed pre-tax 401(k) contribution limit. Our contributions to this net investment hedge.
Deferred Compensation Plan
During 2011, we began to offer DCP to a select group of management or highly compensated employees of the notional valueCompany and certain subsidiaries. This plan allows for the elective deferral of
105
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
Note 17 – RevenueRedeemable Noncontrolling Interests
Some minority stockholders in certain of our consolidated subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. ASC 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 Contracts with Customers
|
|
| December 25, |
| December 26, |
| December 28, | |||
|
|
| 2021 |
| 2020 |
| 2019 | |||
Balance, beginning of period |
| $ | 327,699 |
| $ | 287,258 |
| $ | 219,724 | |
Decrease in redeemable noncontrolling interests due to acquisitions of |
|
|
|
|
|
|
|
|
| |
| noncontrolling interests in subsidiaries |
|
| (60,240) |
|
| (17,241) |
|
| (2,270) |
Increase in redeemable noncontrolling interests due to |
|
|
|
|
|
|
|
|
| |
| business acquisitions |
|
| 188,977 |
|
| 28,387 |
|
| 74,865 |
Net income attributable to redeemable noncontrolling interests |
|
| 23,358 |
|
| 13,363 |
|
| 14,838 | |
Dividends declared |
|
| (20,756) |
|
| (12,631) |
|
| (10,264) | |
Effect of foreign currency translation loss attributable to |
|
|
|
|
|
|
|
|
| |
| redeemable noncontrolling interests |
|
| (6,005) |
|
| (4,279) |
|
| (2,335) |
Change in fair value of redeemable securities |
|
| 160,279 |
|
| 32,842 |
|
| (7,300) | |
Balance, end of period |
| $ | 613,312 |
| $ | 327,699 |
| $ | 287,258 |
106
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
Note 18 – SegmentComprehensive Income
Comprehensive income includes certain gains and Geographic Data
The following tables present information abouttable summarizes our reportable and operatingAccumulated other comprehensive loss, net of applicable taxes as of:
|
|
|
| December 25, |
| December 26, |
| December 28, | |||
|
|
|
| 2021 |
| 2020 |
| 2019 | |||
Attributable to Redeemable noncontrolling interests: |
|
|
|
|
|
|
|
|
| ||
|
| Foreign currency translation adjustment |
| $ | (30,622) |
| $ | (24,617) |
| $ | (20,338) |
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to noncontrolling interests: |
|
|
|
|
|
|
|
|
| ||
|
| Foreign currency translation adjustment |
| $ | 412 |
| $ | 235 |
| $ | (531) |
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to Henry Schein, Inc.: |
|
|
|
|
|
|
|
|
| ||
| Foreign currency translation adjustment |
| $ | (154,578) |
| $ | (76,565) |
| $ | (143,172) | |
| Unrealized loss from foreign currency hedging activities |
|
| (2,046) |
|
| (11,488) |
|
| (4,032) | |
| Unrealized investment gain (loss) |
|
| (8) |
|
| 1 |
|
| 6 | |
| Pension adjustment loss |
|
| (14,846) |
|
| (20,032) |
|
| (20,175) | |
|
| Accumulated other comprehensive loss |
| $ | (171,478) |
| $ | (108,084) |
| $ | (167,373) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Accumulated other comprehensive loss |
| $ | (201,688) |
| $ | (132,466) |
| $ | (188,242) |
The following table summarizes the components of comprehensive income, net of applicable taxes as follows:
|
| December 25, |
| December 26, |
| December 28, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
Net income |
| $ | 660,526 |
| $ | 419,423 |
| $ | 719,138 |
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss) |
|
| (83,841) |
|
| 63,094 |
|
| (4,070) |
Tax effect |
|
| 0 |
|
| 0 |
|
| 0 |
Foreign currency translation gain (loss) |
|
| (83,841) |
|
| 63,094 |
|
| (4,070) |
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) from foreign currency hedging activities |
|
| 12,717 |
|
| (10,224) |
|
| (4,911) |
Tax effect |
|
| (3,275) |
|
| 2,768 |
|
| 1,035 |
Unrealized gain (loss) from foreign currency hedging activities |
|
| 9,442 |
|
| (7,456) |
|
| (3,876) |
|
|
|
|
|
|
|
|
|
|
Unrealized investment gain (loss) |
|
| (12) |
|
| (6) |
|
| 14 |
Tax effect |
|
| 3 |
|
| 1 |
|
| (2) |
Unrealized investment gain (loss) |
|
| (9) |
|
| (5) |
|
| 12 |
|
|
|
|
|
|
|
|
|
|
Pension adjustment gain (loss) |
|
| 7,612 |
|
| (533) |
|
| (7,730) |
Tax effect |
|
| (2,426) |
|
| 676 |
|
| 1,806 |
Pension adjustment gain (loss) |
|
| 5,186 |
|
| 143 |
|
| (5,924) |
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
| $ | 591,304 |
| $ | 475,199 |
| $ | 705,280 |
107
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
Our financial statements are denominated in the U.S. Dollar currency. Fluctuations in the value of foreign currencies as compared to the U.S. Dollar may have a significant impact on our comprehensive income. The foreign currency translation gain (loss) during the years ended
The following table summarizes our total comprehensive income, net of applicable taxes as follows:
|
|
| December 25, |
| December 26, |
| December 28, | |||
|
|
| 2021 |
| 2020 |
| 2019 | |||
Comprehensive income attributable to |
|
|
|
|
|
|
|
|
| |
| Henry Schein, Inc. |
| $ | 567,838 |
| $ | 463,083 |
| $ | 682,724 |
Comprehensive income attributable to |
|
|
|
|
|
|
|
|
| |
| noncontrolling interests |
|
| 6,113 |
|
| 3,032 |
|
| 9,827 |
Comprehensive income attributable to |
|
|
|
|
|
|
|
|
| |
| Redeemable noncontrolling interests |
|
| 17,353 |
|
| 9,084 |
|
| 12,729 |
Comprehensive income |
| $ | 591,304 |
| $ | 475,199 |
| $ | 705,280 |
108
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
Note 19 – Discontinued Operations
Animal Health Spin-off
On February 7, 2019 (the “Distribution Date”), we completed the separation (the “Separation”) and subsequent merger (“Merger”) of our animal health business (the “Henry Schein Animal Health Business”) with Direct Vet Marketing, Inc. (d/b/a Vets First Choice, “Vets First Choice”). This was accomplished by a series of transactions among us, Vets First Choice, Covetrus, Inc. (f/k/a HS Spinco, Inc. “Covetrus”), a wholly owned subsidiary of ours prior to the Distribution Date, and HS Merger Sub, Inc., a wholly owned subsidiary of Covetrus (“Merger Sub”). In connection with the Separation, we contributed, assigned and transferred to Covetrus certain applicable assets, liabilities and capital stock or other ownership interests relating to the Henry Schein Animal Health Business. On the Distribution Date, we received a tax-free distribution of $1,120 million from Covetrus pursuant to certain debt financing incurred by Covetrus. On the Distribution Date and prior to the Animal Health Spin-off, Covetrus issued shares of Covetrus common stock to certain institutional accredited investors (the “Share Sale Investors”) for $361.1 million (the “Share Sale”). The following table presents information aboutproceeds of the Share Sale were paid to Covetrus and distributed to us. Subsequent to the Share Sale, we distributed, on a pro rata basis, all of the shares of the common stock of Covetrus held by us to our operations by geographicareastockholders of record as of the close of business on January 17, 2019 (the “Animal Health Spin-off”). After the Share Sale and Animal Health Spin-off, Merger Sub consummated the Merger whereby it merged with and into Vets First Choice, with Vets First Choice surviving the Merger as a wholly owned subsidiary of Covetrus. Immediately following the consummation of the Merger, on a fully diluted basis, (i) approximately 63% of the shares of Covetrus common stock were (a) owned by our stockholders and the Share Sale Investors, and (b) held by certain employees of the Henry Schein Animal Health Business (in the form of certain equity awards), and (ii) approximately 37% of the shares of Covetrus common stock were (a) owned by stockholders of Vets First Choice immediately prior to the Merger, and (b) held by certain employees of Vets First Choice (in the form of certain equity awards). After the Separation and the Merger, we no longer beneficially owned any shares of Covetrus common stock and, following the Distribution Date, will not consolidate the financial results of Covetrus for the threepurpose of our financial reporting. Following the Separation and the Merger, Covetrus was an independent, publicly traded company on the Nasdaq Global Select Market.
In connection with the completion of the Animal Health Spin-off, we entered into a transition services agreement, which ended in December 2020, with Covetrus under which we agreed to provide certain transition services for up to twenty-four months in areas such as information technology, finance and accounting, human resources, supply chain, and real estate and facility services.
As a result of the Separation, the financial position and results of operations of the Henry Schein Animal Health Business are presented as discontinued operations and have been excluded from continuing operations and segment results for all periods presented. The accompanying notes to the consolidated financial statements have been revised to reflect the effect of the Separation and all prior year balances have been revised accordingly to reflect continuing operations only. The historical statements of Comprehensive Income (Loss) and Shareholders' Equity have not been revised to reflect the Separation and instead reflect the Separation as an adjustment to the balances at December 26, 2020.
In February 2019, we completed the Animal Health Spin-off. During the years
109
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for the United States, generated net sales greater than
Summarized financial information for our discontinued operations is as follows:
|
|
|
|
| Years Ended | |||
|
|
|
| December 26, |
|
| December 28, | |
|
|
|
| 2020 |
|
| 2019 | |
|
|
|
|
|
|
|
|
|
Net sales |
|
|
| $ | 0 |
| $ | 319,522 |
Cost of goods sold |
|
|
|
| 0 |
|
| 260,097 |
Gross profit |
|
|
|
| 0 |
|
| 59,425 |
Selling, general and administrative |
|
|
|
| 2,347 |
|
| 68,919 |
Operating loss |
|
|
|
| (2,347) |
|
| (9,494) |
Income tax benefit |
|
|
|
| (3,333) |
|
| (2,181) |
Income (loss) from discontinued operations |
|
|
|
| 986 |
|
| (6,323) |
Net loss attributable to noncontrolling interests |
|
|
|
| 0 |
|
| 366 |
Net income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
attributable to Henry Schein, Inc. |
|
|
|
| 986 |
|
| (5,957) |
The operating loss from discontinued operations for the year ended December 26, 2020 and pre-tax share-basedexpense of $
The net income from discontinued operations for the yearsyear ended December 26, 2020 was primarily attributable to a reduction in a liability for tax indemnification and a tax refund received during 2020 by a holding company previously part of our Animal Health legal structure and other favorable tax resolutions.
The financial information above, for the year ended December 28, 2019,
110
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
Note 20 – CommitmentsPlans of Restructuring
On November 20, 2019, we committed to a contemplated restructuring initiative intended to mitigate stranded costs associated with the Animal Health Spin-off and Contingencies
During the years ended December 25, 2021, December 26, 2020, were:
Our restructuring activities under this initiative are now complete and we do not expect to report any restructuring costs separately in 2022.
The following table shows the net amounts expensed and paid for additionalincentivesrestructuring costs that were incurred during our 2021, 2020 and compensation.
|
|
|
|
| Facility |
|
|
|
| ||||
|
|
| Severance |
| Closing |
|
|
|
| ||||
|
|
| Costs |
| Costs |
| Other |
| Total | ||||
Balance, December 29, 2018 |
| $ | 29,964 |
| $ | 1,603 |
| $ | 158 |
| $ | 31,725 | |
Provision |
|
| 13,741 |
|
| 937 |
|
| 27 |
|
| 14,705 | |
Payments and other adjustments |
|
| (30,794) |
|
| (1,714) |
|
| (112) |
|
| (32,620) | |
Balance, December 28, 2019 |
| $ | 12,911 |
| $ | 826 |
| $ | 73 |
| $ | 13,810 | |
Provision |
|
| 25,855 |
|
| 5,878 |
|
| 360 |
|
| 32,093 | |
Payments and other adjustments |
|
| (26,152) |
|
| (6,309) |
|
| (329) |
|
| (32,790) | |
Balance, December 26, 2020 |
| $ | 12,614 |
| $ | 395 |
| $ | 104 |
| $ | 13,113 | |
Provision |
|
| 7,717 |
|
| (111) |
|
| 333 |
|
| 7,939 | |
Payments and other adjustments |
|
| (16,072) |
|
| (226) |
|
| (434) |
|
| (16,732) | |
Balance, December 25, 2021 |
| $ | 4,259 |
| $ | 58 |
| $ | 3 |
| $ | 4,320 |
The following table shows, by reportable segment, the amounts expensed and paid for restructuring costs that were incurred during our 2021, 2020 and 2019 fiscal years and the Danaher Defendants to terminate or limitremaining accrued balance of restructuring costs as of December 25, 2021:
|
|
|
|
|
| Technology and |
|
| ||
|
|
| Health Care |
| Value-Added |
|
|
| ||
|
|
| Distribution |
| Services |
| Total | |||
Balance, December 29, 2018 |
| $ | 30,291 |
| $ | 1,434 |
| $ | 31,725 | |
Provision |
|
| 13,935 |
|
| 770 |
|
| 14,705 | |
Payments and other adjustments |
|
| (30,853) |
|
| (1,767) |
|
| (32,620) | |
Balance, December 28, 2019 |
| $ | 13,373 |
| $ | 437 |
| $ | 13,810 | |
Provision |
|
| 30,935 |
|
| 1,158 |
|
| 32,093 | |
Payments and other adjustments |
|
| (31,484) |
|
| (1,306) |
|
| (32,790) | |
Balance, December 26, 2020 |
| $ | 12,824 |
| $ | 289 |
| $ | 13,113 | |
Provision |
|
| 5,939 |
|
| 2,000 |
|
| 7,939 | |
Payments and other adjustments |
|
| (15,692) |
|
| (1,040) |
|
| (16,732) | |
Balance, December 25, 2021 |
| $ | 3,071 |
| $ | 1,249 |
| $ | 4,320 |
111
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
(in thousands, except per share data)
Note 21 – Quarterly Information (Unaudited)
Basic earnings per share is computed by dividing net income (loss)
A reconciliation of shares used in calculating earnings per basic and diluted share follows:
|
|
| Years Ended | ||||
|
|
| December 25, |
| December 26, |
| December 28, |
|
|
| 2021 |
| 2020 |
| 2019 |
Basic |
| 140,091 |
| 142,504 |
| 147,817 | |
Effect of dilutive securities: |
|
|
|
|
|
| |
| Stock options, restricted stock and restricted stock units |
| 1,682 |
| 900 |
| 1,440 |
| Diluted |
| 141,773 |
| 143,404 |
| 149,257 |
Note 22 – Supplemental Cash Flow Information
Cash paid for interest and income taxes was:
|
| Years ended | |||||||
|
| December 25, |
| December 26, |
| December 28, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
Interest |
| $ | 29,455 |
| $ | 43,123 |
| $ | 54,685 |
Income taxes |
|
| 241,887 |
|
| 206,796 |
|
| 177,277 |
For the years ended December 25, 2021, December 26, 2020 and December 28, 2019, and December29, 2018, we had $
112
Table of 2018, we formed Henry Schein One, LLCwith Internet Brands through a non-cash
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in approximately $
Note 23 – Related Party Transactions
In connection with the completion of the Animal Health Spin-off during our 2019fiscal year, we entered into a
For the years ended December 26, 2020 and December 28, 2019, we recorded approximately$
In connection with the formation of Henry Schein One, LLC, our joint venture with Internet Brands, which was
During our normal course of business, we have interests in entities that we account for under the equity accounting
Certain of our facilities related to our acquisitions are leased from employees and minority shareholders. Please see Note 6 – Leases for further information.
113
ITEM 9.Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure
None.
ITEM 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, includingour principal executive officer and
Changes in Internal Control over Financial Reporting
The combination of acquisitions and continued acquisition integrations undertakenduring the quarter and carried
During the quarter ended December 26, 2020,25, 2021, we completed the acquisition of a dental business in North America
All acquisitions and continued acquisition integrations involve necessaryand appropriate change-management
In addition, as a result of a combination of continued governmentalgovernment imposedand Company directed closures of
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequateinternal control over financial reporting,
114
The effectiveness of our internal control over financial reporting as of December 26,202025, 2021, has been independently
Limitations of the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance
115
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Henry Schein, Inc.
Melville, NY
Opinion on Internal Control over Financial Reporting
Wehave audited HenrySchein, Inc.’s(the (the “Company’s”)internal control overfinancial reporting asof December
Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard
Basis for Opinion
The Company’smanagement isresponsible formaintaining effectiveinternal controlover financialreporting and
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB.
Definition and Limitations of Internal Control over Financial Reporting
Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassurance
Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetect
/s/ BDO USA, LLP
New York,,NY
February 15, 2022
116
ITEM 9B.Other Information
Not applicable.
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
ITEM 10.Directors, Executive Officers and Corporate Governance
Information required by this item regarding our directors and executiveofficers and our corporate governance is
There have been no changes to the procedures by which stockholdersmay recommend nominees to our Board of
Information required by this item concerning compliance with Section16(a) of the Securities Exchange Act of
We have adopted a Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, Chief
ITEM 11.Executive Compensation
The information required by this item is hereby incorporated by referenceto the Sections entitled “Compensation
117
ITEM 12.Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder
We maintain several stock incentive plans for the benefit of certain officers, directors and employees.All active
Number of Common | ||||||||
Shares to be Issued Upon | Weighted- Average | Number of Common | ||||||
Exercise of Outstanding | Exercise Price of | Shares Available for | ||||||
Plan Category | Options and Rights | Outstanding Options | Future Issuances | |||||
Plans Approved by Stockholders | - | $ | - | 9,597,745 | ||||
Plans Not Approved by Stockholders | - | - | - | |||||
Total | - | $ | - | 9,597,745 |
The other information required by this item is hereby incorporated byreference to the Section entitled “Security
ITEM 13.Certain Relationships and Related Transactions, and Director Independence
The information required by this item is hereby incorporated by referenceto the Section entitled “Certain
ITEM 14.Principal Accounting Fees and Services
The information required by this item is hereby incorporated by referenceto the Section entitled “Independent
PART IV
ITEM 15.Exhibits, Financial Statement Schedules
(a)
1. | Financial Statements: |
Our Consolidated Financial Statements filed as a part of this report are listed on the index on | |
Page 59. | |
2. | Financial Statement Schedules: |
Schedule II – Valuation of Qualifying Accounts | |
No other schedules are required. | |
3. | Index to Exhibits: |
See exhibits listed under Item 15(b) below. | |
118
(b) Exhibits | |
119
10.46 | |
101.INS | Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.+ |
101.SCH | Inline XBRL Taxonomy Extension Schema Document+ |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document+ |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document+ |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document+ |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document+ |
104 | The cover page of Henry Schein, Inc.’s Annual Report on Form 10-K for the year ended December 25, 2021, formatted in Inline XBRL (included within Exhibit 101 attachments).+ |
_________
* Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company
**Indicates management contract or compensatory plan or agreement.
ITEM 16.Form 10-K Summary
None.
125
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly
Henry Schein, Inc. | |
By: /s/ STANLEY M. BERGMAN | |
Stanley M. Bergman | |
Chairman and Chief Executive Officer | |
February 15, 2022 |
Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the
Signature | Capacity | Date | ||
/s/ STANLEY M. BERGMAN | Chairman, Chief Executive Officer | February 15, 2022 | ||
Stanley M. Bergman | and Director (principal executive officer) | |||
/s/ STEVEN PALADINO | Executive Vice President, Chief Financial Officer | February 15, 2022 | ||
Steven Paladino | and Director (principal financial and accounting officer) | |||
/s/ JAMES P. BRESLAWSKI | Vice Chairman, President and Director | February 15, 2022 | ||
James P. Breslawski | ||||
/s/ GERALD A. BENJAMIN | Director | February 15, 2022 | ||
Gerald A. Benjamin | ||||
/s/ MARK E. MLOTEK | Director | February 15, 2022 | ||
Mark E. Mlotek | ||||
/s/ MOHAMAD ALI | Director | February 15, 2022 | ||
Mohamad Ali | ||||
/s/ BARRY J. ALPERIN | Director | February 15, 2022 | ||
Barry J. Alperin | ||||
/s/ DEBORAH DERBY | Director | February 15, 2022 | ||
Deborah Derby | ||||
/s/ JOSEPH L. HERRING | Director | February 15, 2022 | ||
Joseph L. Herring | ||||
/s/ KURT P. KUEHN | Director | February 15, 2022 | ||
Kurt P. Kuehn | ||||
/s/ PHILIP A. LASKAWY | Director | February 15, 2022 | ||
Philip A. Laskawy | ||||
/s/ ANNE H. MARGULIES | Director | February 15, 2022 | ||
Anne H. Margulies | ||||
/s/ CAROL RAPHAEL | Director | February 15, 2022 | ||
Carol Raphael | ||||
/s/ E. DIANNE REKOW | Director | February 15, 2022 | ||
E. Dianne Rekow, DDS, Ph.D. | ||||
/s/ SCOTT SEROTA | Director | February 15, 2022 | ||
Scott Serota | ||||
/s/ BRADLEY T. SHEARES, PH. D. | Director | February 15, 2022 | ||
Bradley T. Sheares, Ph. D. | ||||
/s/ REED V. TUCKSON, M.D., FACP | Director | February 15, 2022 | ||
Reed V. Tuckson, M.D., FACP |
126
Schedule II
Valuationand Qualifying Accounts
(in thousands)
|
|
|
|
|
| Additions (Reductions) |
|
|
|
|
|
| |||||
|
|
|
|
|
| Charged |
| Charged |
|
|
|
|
|
| |||
|
|
|
| Balance at |
| (credited) to |
| (credited) to |
|
|
|
| Balance at | ||||
|
|
|
| beginning of |
| statement of |
| other |
|
|
|
| end of | ||||
Description |
| period |
| income (1) |
| accounts (2) |
| Deductions (3) |
| period | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 25, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| and other |
| $ | 88,030 |
| $ | (7,748) |
| $ | (4,624) |
| $ | (8,490) |
| $ | 67,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 26, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| and other |
| $ | 60,002 |
| $ | 35,137 |
| $ | 730 |
| $ | (7,839) |
| $ | 88,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 28, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| and other |
| $ | 53,121 |
| $ | 12,612 |
| $ | 134 |
| $ | (5,865) |
| $ | 60,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Represents amounts charged (credited) to bad debt expense. | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) | Amounts charged (credited) to other accounts primarily relate to provision for late fees and the impact of foreign currency exchange rates and the adoption of ASU No. 2016-13 effective December 29, 2019. | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) | Deductions primarily consist of fully reserved accounts receivable that have been written off. |
127