filings.toolsItem 8. Financial Statements and Supplementary Data
168K characters. Original on sec.gov ·
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
Page
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Balance Sheets as of December 26, 2020 and December 28, 2019
Statements of Income for the years ended December 26, 2020,
December 28, 2019 and December 29, 2018
Statements of Comprehensive Income for the years ended December 26, 2020,
December 28, 2019 and December 29, 2018
Statements of Changes in Stockholders’ Equity for the years ended
December 26, 2020, December 28, 2019 and December 29, 2018
Statements of Cash Flows for the years ended December 26, 2020,
December 28, 2019 and December 29, 2018
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies
Note 2 – Discontinued Operations
Note 3 – Property and Equipment, Net
Note 4 – Goodwill and Other Intangibles, Net
Note 5 – Investments and Other
Note 8 – Redeemable Noncontrolling Interests
Note 10 – Fair Value Measurements
Note 11 – Business Acquisitions Divestitures
Note 12 – Plans of Restructuring
Note 15 – Concentrations of Risk
Note 16 – Derivatives and Hedging Activities
Note 17 – Revenue from Contracts with Customers
Note 18 – Segment and Geographic Data
Note 19 – Employee Benefit Plans
Note 20 – Commitments and Contingencies
Note 21 – Quarterly Information (Unaudited)
Note 22 – Supplemental Cash Flow Information
Note 23 – Related Party Transactions
Schedule II - Valuation and Qualifying Accounts for the years ended December 26, 2020,
December 28, 2019 and December 29, 2018
All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated
financial statements or the notes thereto.
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 26, 2020 and December 28, 2019, the related consolidated statements of income, comprehensive income,
stockholders’ equity,
and cash flows for each
of the three years in
the period ended December 26, 2020,
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 at
December 26, 2020 and December 28, 2019, and the results of its operations and its cash flows for each of the three
years in
the period
ended December
26, 2020,
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
26,
2020,
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
7,
2021
expressed an unqualified opinion thereon.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements,
effective on December 30, 2018, the Company
changed its method of accounting for leases due to the adoption of Accounting
Standards Codification Topic
842,
Leases
.
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
of the
Board
of
Directors
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
critical audit
matters 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.
Uncertain Tax Position
As described
in Note
14 of
the consolidated
financial statements the
Company operates in
multiple jurisdictions
and
is
subject
to
transfer
pricing
compliance
for
intercompany
transactions
that
are
subject
to
audit
by
taxing
authorities. The resolution
of these audits may span multiple
years.
We
identified
the
determination
of
uncertain
tax
positions
related
to
transfer
pricing
from
intercompany
transactions
as
a
critical
audit
matter.
The
principal
considerations
for
our
determination
included
complex
judgments
related
to:
(i)
auditing
assumptions
applied
to
the
interpretation
of
tax
laws
and
legal
rulings
in
multiple
tax
paying
jurisdictions, (ii)
determining
whether
a
transfer
pricing
tax
position’s
technical merits
are
more-likely-than-not
to
be
sustained
when
measuring
the
amount
of
tax
benefits
that
qualifies
for
recognition,
(iii)
assessing
whether
intercompany
transactions
are
based
on
the
arm’s
length
standard
that
may
produce
a
range of
arm’s
length outcomes,
and (iv)
assessing the
adjustments to
the liability
for unrecognized
tax benefits
associated
with
tax
settlements
or
agreements.
Auditing
these
elements
involved
especially
subjective
auditor
judgment and
an increased
level
of audit
effort,
including involvement
of personnel
with specialized
skills and
knowledge.
The primary procedures we performed to address this critical audit matter
included:
●
Assessing the design and implementation and testing operating effectiveness of
certain controls over
the recognition and measurement of uncertain tax positions related
to transfer pricing.
●
Utilizing personnel with specialized knowledge and skill in taxation to evaluate
the appropriateness of
management’s methods and assumptions used to estimate uncertain tax positions related to transfer
pricing by: (i) verifying our understanding of the relevant facts by
reading the Company’s
correspondence with the relevant tax authorities and third-party advice obtained
by the Company, (ii)
evaluating the reasonableness of technical merits, management’s judgments and assumptions and
assessing the overall reasonableness of conclusions reached, (iii)
evaluating the ranges of arm’s length
outcomes and pricing conclusions reached within management’s transfer pricing studies, and (iv)
reviewing settlement activity or agreements with income tax authorities.
/s/ BDO USA, LLP
We have served as the Company's auditor since 1984.
New York,
NY
February 17, 2021
See accompanying notes.
HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 26,
December 28,
2020
2019
ASSETS
Current assets:
Cash and cash equivalents
$
421,185
$
106,097
Accounts receivable, net of reserves of $
88,030
and $
60,002
1,424,787
1,246,246
Inventories, net
1,512,499
1,428,799
Prepaid expenses and other
432,944
445,360
Total current assets
3,791,415
3,226,502
Property and equipment, net
342,004
329,645
Operating lease right-of-use assets, net
288,847
231,662
Goodwill
2,504,392
2,462,495
Other intangibles, net
479,429
572,878
Investments and other
366,445
327,919
Total assets
$
7,772,532
$
7,151,101
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
1,005,655
$
880,266
Bank credit lines
73,366
23,975
Current maturities of long-term debt
109,836
109,849
Operating lease liabilities
64,716
65,349
Accrued expenses:
Payroll and related
295,329
265,206
Taxes
138,671
165,171
Other
595,529
528,553
Total current liabilities
2,283,102
2,038,369
Long-term debt
515,773
622,908
Deferred income taxes
30,065
64,989
Operating lease liabilities
238,727
176,267
Other liabilities
392,781
331,173
Total liabilities
3,460,448
3,233,706
Redeemable noncontrolling interests
327,699
287,258
Commitments and contingencies
Stockholders' equity:
Preferred stock, $
0.01
par value,
1,000,000
shares authorized,
none
outstanding
-
-
Common stock, $
0.01
par value,
480,000,000
shares authorized,
142,462,571
outstanding on December 26, 2020 and
143,353,459
outstanding on December 28, 2019
1,425
1,434
Additional paid-in capital
-
47,768
Retained earnings
3,454,831
3,116,215
Accumulated other comprehensive loss
(108,084)
(167,373)
Total Henry Schein, Inc. stockholders' equity
3,348,172
2,998,044
Noncontrolling interests
636,213
632,093
Total stockholders' equity
3,984,385
3,630,137
Total liabilities, redeemable noncontrolling
interests and stockholders' equity
$
7,772,532
$
7,151,101
See accompanying notes.
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF INCOME
(in thousands, except per share data)
Years
Ended
December 26,
December 28,
December 29,
2020
2019
2018
Net sales
$
10,119,141
$
9,985,803
$
9,417,603
Cost of sales
7,304,798
6,894,917
6,506,856
Gross profit
2,814,343
3,090,886
2,910,747
Operating expenses:
Selling, general and administrative
2,246,947
2,357,920
2,217,273
Litigation settlements
-
-
38,488
Restructuring costs
32,093
14,705
54,367
Operating income
535,303
718,261
600,619
Other income (expense):
Interest income
9,842
15,757
15,491
Interest expense
(41,377)
(50,792)
(76,016)
Other, net
(3,873)
(2,919)
(3,258)
Income from continuing operations before taxes, equity in
earnings of affiliates and noncontrolling interests
499,895
680,307
536,836
Income taxes
(95,374)
(159,515)
(107,432)
Equity in earnings of affiliates
12,344
17,900
21,037
Net gain on sale of equity investments
1,572
186,769
-
Net income from continuing operations
418,437
725,461
450,441
Income (loss) from discontinued operations, net of tax
(6,323)
111,685
Net Income
419,423
719,138
562,126
Less: Net income attributable to noncontrolling interests
(15,629)
(24,770)
(19,724)
Less: Net (income) loss attributable to noncontrolling interests
from discontinued operations
-
(6,521)
Net income attributable to Henry Schein, Inc.
$
403,794
$
694,734
$
535,881
Amounts attributable to Henry Schein Inc.:
Continuing operations
$
402,808
$
700,691
$
430,717
Discontinued operations
(5,957)
105,164
Net income attributable to Henry Schein, Inc.
$
403,794
$
694,734
$
535,881
Earnings per share from continuing operations attributable to
Henry Schein, Inc.:
Basic
$
2.83
$
4.74
$
2.82
Diluted
$
2.81
$
4.69
$
2.80
Earnings (loss) per share from discontinued operations attributable to
Henry Schein, Inc.:
Basic
$
0.01
$
(0.04)
$
0.69
Diluted
$
0.01
$
(0.04)
$
0.68
Earnings per share attributable to Henry Schein, Inc.:
Basic
$
2.83
$
4.70
$
3.51
Diluted
$
2.82
$
4.65
$
3.49
Weighted
-average common shares outstanding:
Basic
142,504
147,817
152,656
Diluted
143,404
149,257
153,707
See accompanying notes.
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(in thousands)
Years
Ended
December 26,
December 28,
December 29,
2020
2019
2018
Net income
$
419,423
$
719,138
$
562,126
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)
63,094
(4,070)
(136,356)
Unrealized gain (loss) from foreign currency hedging activities
(7,456)
(3,876)
Unrealized investment gain (loss)
(5)
(3)
Pension adjustment gain (loss)
(5,924)
3,033
Other comprehensive income (loss), net of tax
55,776
(13,858)
(132,700)
Comprehensive income
475,199
705,280
429,426
Comprehensive income attributable to noncontrolling interests:
Net income
(15,629)
(24,404)
(26,245)
Foreign currency translation loss
3,513
1,848
13,996
Comprehensive income attributable to noncontrolling interests
(12,116)
(22,556)
(12,249)
Comprehensive income attributable to Henry Schein, Inc.
$
463,083
$
682,724
$
417,177
See accompanying notes.
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 30, 2017
153,690,146
1,537
-
2,940,029
(130,067)
12,911
2,824,410
Cumulative impact of adopting new accounting standards
-
-
2,594
-
-
2,594
Net income (excluding $
21,848
attributable to Redeemable
noncontrolling interests)
-
-
535,881
-
4,397
540,278
Foreign currency translation loss (excluding loss of $
13,031
attributable to Redeemable noncontrolling interests)
-
-
-
-
(122,360)
(965)
(123,325)
Unrealized gain from foreign currency hedging activities,
net of tax benefit of $
-
-
-
-
-
Unrealized investment loss, net of tax benefit of $
-
-
-
-
(3)
-
(3)
Pension adjustment gain, net of tax of $
1,179
-
-
-
-
3,033
-
3,033
Dividends paid
-
-
-
-
-
(656)
(656)
Other adjustments
-
-
(19)
-
-
Purchase of noncontrolling interests
-
-
-
-
-
(214)
(214)
Change in fair value of redeemable securities
-
-
(148,919)
-
-
-
(148,919)
Initial noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
564,270
564,270
Repurchase and retirement of common stock
(2,518,387)
(25)
(36,206)
(163,769)
-
-
(200,000)
Stock issued upon exercise of stock options
153,516
3,075
-
-
-
3,076
Stock-based compensation expense
340,794
36,236
-
-
-
36,240
Shares withheld for payroll taxes
(267,772)
(3)
(18,140)
-
-
-
(18,143)
Settlement of stock-based compensation awards
3,371
-
(727)
-
-
-
(727)
Deferred tax benefit arising from acquisition of
noncontrolling interest in partnership
-
-
58,554
-
-
-
58,554
Transfer of charges in excess of capital
-
-
106,146
(106,146)
-
-
-
Balance, December 29, 2018
151,401,668
1,514
-
3,208,589
(248,771)
580,456
3,541,788
Cumulative impact of adopting new accounting standards
-
-
-
(274)
-
-
(274)
Net income (excluding $
14,838
attributable to Redeemable
noncontrolling interests from continuing operations
and ($
from discontinued operations)
-
-
-
694,734
-
9,932
704,666
Foreign currency translation loss (excluding loss of $
2,335
attributable to Redeemable noncontrolling interests
and ($
gain from discontinued operations)
-
-
-
-
(2,222)
(105)
(2,327)
Unrealized loss from foreign currency hedging activities,
net of tax benefit of $
1,035
-
-
-
-
(3,876)
-
(3,876)
Unrealized investment gain, net of tax of $
-
-
-
-
-
Pension adjustment loss, net of tax benefit of $
1,806
-
-
-
-
(5,924)
-
(5,924)
Dividends paid
-
-
-
-
-
(535)
(535)
Other adjustments
-
-
(3)
-
-
-
(3)
Change in fair value of redeemable securities
-
-
7,300
-
-
-
7,300
Initial noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
42,345
42,345
Adjustment for Animal Health Spin-off
87,629
-
-
-
-
Repurchase and retirement of common stock
(8,173,912)
(82)
(79,785)
(445,133)
-
-
(525,000)
Stock issued upon exercise of stock options
2,526
-
-
-
-
Stock-based compensation expense
215,408
45,243
-
-
-
45,245
Shares withheld for payroll taxes
(179,860)
(1)
(10,844)
-
-
-
(10,845)
Settlement of stock-based compensation awards
-
-
-
-
-
Share Sale related to Animal Health business
-
-
361,090
-
-
-
361,090
Separation of Animal Health business
-
-
(73,970)
(543,158)
93,408
-
(523,720)
Transfer of charges in excess of capital
-
-
(201,457)
201,457
-
-
-
Balance, December 28, 2019
143,353,459
1,434
47,768
3,116,215
(167,373)
632,093
3,630,137
Cumulative impact of adopting new accounting standards
-
-
-
(412)
-
-
(412)
Net income (excluding $
13,363
attributable to Redeemable
noncontrolling interests from continuing operations)
-
-
-
403,794
-
2,266
406,060
Foreign currency translation gain (excluding loss of $
4,279
attributable to Redeemable noncontrolling interests )
-
-
-
-
66,607
67,373
Unrealized loss from foreign currency hedging activities,
net of tax benefit of $
2,768
-
-
-
-
(7,456)
-
(7,456)
Unrealized investment loss, net of tax benefit of $
-
-
-
-
(5)
-
(5)
Pension adjustment gain, including tax benefit of $
-
-
-
-
-
Dividends paid
-
-
-
-
-
(1,086)
(1,086)
Purchase of noncontrolling interests
-
-
(1,597)
-
-
(701)
(2,298)
Change in fair value of redeemable securities
-
-
(32,842)
-
-
-
(32,842)
Initial noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
2,875
2,875
Repurchase and retirement of common stock
(1,200,000)
(12)
(10,949)
(62,828)
-
-
(73,789)
Stock-based compensation expense
545,864
8,783
-
-
-
8,788
Shares withheld for payroll taxes
(236,752)
(2)
(14,475)
-
-
-
(14,477)
Settlement of stock-based compensation awards
-
-
(275)
-
-
-
(275)
Separation of Animal Health business
-
-
1,649
-
-
-
1,649
Transfer of charges in excess of capital
-
-
1,938
(1,938)
-
-
-
Balance, December 26, 2020
142,462,571
1,425
-
3,454,831
(108,084)
636,213
3,984,385
See accompanying notes.
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(in thousands, except per share data) (unaudited)
Years Ended
December 26,
December 28,
December 29,
2020
2019
2018
Cash flows from operating activities:
Net income
$
419,423
$
719,138
$
562,126
Income (loss) from discontinued operations
(6,323)
111,685
Income from continuing operations
418,437
725,461
450,441
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
185,538
184,942
143,630
Impairment charge on intangible assets
20,275
-
-
Gain on sale of equity investments
(2,096)
(250,167)
-
Stock-based compensation expense
8,788
44,920
32,621
Provision for losses on trade and other accounts receivable
35,137
12,612
14,384
Benefit from deferred income taxes
(52,977)
(4,057)
(25,388)
Equity in earnings of affiliates
(12,344)
(17,900)
(21,037)
Distributions from equity affiliates
16,002
71,469
20,386
Changes in unrecognized tax benefits
(24,881)
1,941
(1,169)
Benefit from transition tax
-
-
(10,000)
Other
5,012
5,684
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(189,349)
(72,689)
(127,201)
Inventories
(31,817)
14,702
(41,042)
Other current assets
(6,479)
(57,291)
(165,645)
Accounts payable and accrued expenses
224,273
160,851
180,606
Net cash provided by operating activities from continuing
operations
593,519
820,478
450,955
Net cash provided by (used in) operating activities from
discontinued operations
5,391
(166,391)
233,751
Net cash provided by operating activities
598,910
654,087
684,706
Cash flows from investing activities:
Purchases of fixed assets
(48,829)
(76,219)
(71,283)
Payments related to equity investments and business
acquisitions, net of cash acquired
(60,173)
(655,879)
(53,240)
Proceeds from sale of equity investment
14,020
307,251
1,000
Repayments from (borrowings for) loan to affiliate
(1,243)
16,713
(25,700)
Other
(18,794)
(14,175)
(15,101)
Net cash used in investing activities from continuing operations
(115,019)
(422,309)
(164,324)
Net cash used in investing activities from discontinued operations
-
(2,064)
(28,630)
Net cash used in investing activities
(115,019)
(424,373)
(192,954)
Cash flows from financing activities:
Net change in bank borrowings
45,082
(927,912)
210,741
Proceeds from issuance of long-term debt
501,421
115,000
Principal payments for long-term debt
(611,216)
(260,944)
(24,735)
Debt issuance costs
(3,879)
(391)
(501)
Debt extinguishment costs
(401)
-
-
Proceeds from issuance of stock upon exercise of stock options
-
3,076
Payments for repurchases of common stock
(73,789)
(525,000)
(200,000)
Payments for taxes related to shares withheld for employee
taxes
(14,299)
(10,814)
(18,023)
Distribution received related to Animal Health Spin-off
-
1,120,000
-
Proceeds related to Animal Health Share Sale
-
361,090
-
Proceeds from (distributions to) noncontrolling shareholders
(7,886)
51,498
(7,351)
Acquisitions of noncontrolling interests in subsidiaries
(19,538)
(2,358)
(287,635)
Proceeds from (payments) to Henry Schein Animal Health
Business
2,711
(169,295)
(192,745)
Net cash used in financing activities from continuing operations
(181,794)
(363,351)
(402,173)
Net cash provided by (used in) financing activities from
discontinued operations
(5,391)
147,371
(201,603)
Net cash used in financing activities
(187,185)
(215,980)
(603,776)
Effect of exchange rate changes on cash and cash equivalents from continuing
operations
18,382
14,394
14,425
Effect of exchange rate changes on cash and cash equivalents from discontinued
operations
-
(2,240)
3,150
Net change in cash and cash equivalents from continuing
operations
315,088
49,212
(101,117)
Net change in cash and cash equivalents from discontinued
operations
-
(23,324)
6,668
Cash and cash equivalents, beginning of period
106,097
56,885
158,002
Cash and cash equivalents, end of period
$
421,185
$
106,097
$
56,885
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 1 –Significant Accounting Policies
Nature of Operations
We distribute health care products and services primarily to office-based health care practitioners with 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, 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, which are greater than or equal to 20% and less than or equal
to 50% owned or
investments in unconsolidated affiliates of less than 20% 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 a Variable
Interest Entity (“VIE”) where we hold a variable interest
and are the primary
beneficiary.
The VIE is a trade accounts receivable securitization.
We are the primary beneficiary because we
have the power to direct activities that most significantly affect the economic performance
and have the obligation
to absorb the majority of the losses or benefits.
The results of operations and financial position of this VIE
are
included in our consolidated financial statements.
For the consolidated VIE, the trade accounts receivable transferred
to the VIE are pledged as collateral to the
related debt.
The creditors have recourse to us for losses on these trade
accounts receivable.
At December 26,
2020 and December 28, 2019, trade accounts receivable that can only
be used to settle obligations of this VIE were
$
0.0
million and $
million, respectively, and the liabilities of the VIE where the creditors have recourse to us
were $
0.0
million and $
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 the Novel Coronavirus Disease 2019 (“COVID-19”) a
pandemic. The COVID-19 pandemic has 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 the
year resulting in growth over the prior year driven by sales of personal
protective equipment (PPE) and COVID-19
related products.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Our consolidated financial statements reflect estimates and assumptions
made by us that affect, among other things,
our goodwill, long-lived asset and indefinite-lived intangible asset valuation;
inventory valuation; equity investment
valuation; assessment of the annual effective tax rate; valuation of deferred income
taxes and income tax
contingencies; the allowance for doubtful accounts; hedging activity; vendor
rebates; measurement of
compensation cost for certain share-based performance awards and cash bonus
plans; and pension plan
assumptions.
Due to the significant uncertainty surrounding the future impact
of COVID-19, our judgments
regarding estimates and impairments could change in the future.
In addition, the impact of COVID-19 had a
material adverse effect on our business, results of operations and cash flows in the
second quarter of 2020. In the
latter half of the year, dental and medical practices began to re-open worldwide, and continued to do so
during the
remainder of the year.
However, patient volumes remain below pre-COVID-19 levels and certain regions in the
U.S. and internationally are experiencing an increase in COVID-19
cases.
As such, there is an ongoing risk that the
COVID-19 pandemic may again have a material adverse effect on our business, results
of operations and cash
flows and may result in a material adverse effect on our financial condition
and liquidity.
However, the extent of
the potential impact cannot be reasonably estimated at this time.
Fiscal Year
We report our results of operations and cash flows on a
-
week basis ending on the last Saturday of December.
The years ended December 26, 2020, December 28, 2019 and December
29, 2018 consisted of
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.
Some equipment sales require 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”.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Revenue derived from the sale of software products is recognized when products
are shipped to customers or made
available electronically.
Such software is generally installed by customers and does
not require extensive 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 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.
There are no cases where revenue is
deferred due to a lack of a standalone selling price.
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 17 – Revenue from Contracts with Customers
for additional disclosures of disaggregated net sales and
Note 18 – Segment and Geographic Data
for disclosures of net sales by segment and geographic data.
Contract Balances
Contract balances represent amounts presented in our consolidated balance
sheet 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
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.
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
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Investments and other within our consolidated balance sheets.
Current and non-current contract asset balances as of
December 26, 2020 and December 28, 2019 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 28, 2019, the current portion of contract liabilities of $
70.8
million was reported in Accrued expenses:
Other, and $
6.2
million related to non-current contract liabilities were reported
in Other liabilities.
During the year
ended December 26, 2020,
we recognized substantially all of the current contract liability amounts
that were
previously deferred at December 28, 2019.
At December 26, 2020, the current and non-current portion of contract
liabilities were $
71.5
million and $
8.2
million, respectively.
Deferred Commissions
Sales commissions earned by our sales force that relate to long term
arrangements are capitalized as costs to obtain
a contract when the costs incurred are incremental and are expected to be recovered.
Deferred sales commissions
are amortized over the estimated customer relationship period.
We apply the practical expedient related to the
capitalization of incremental costs of obtaining a contract, and recognize such costs as an expense when incurred if
the amortization period of the assets that we would have recognized is one year or less.
Our deferred commission
balances as of December 26, 2020 and December 28, 2019 were not
material.
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.
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.
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 $
1.3
million and $
29.5
million, primarily related to
payments for inventory, were classified as accounts payable as of December 26, 2020 and December 28, 2019.
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
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
for shipment to our customers are reflected in selling, general and administrative
expenses.
Direct shipping and
handling costs were $
79.2
million, $
73.8
million and $
70.6
million for the years ended December 26, 2020,
December 28, 2019 and December 29, 2018.
Advertising and Promotional Costs
We generally expense advertising and promotional costs as incurred.
Total advertising and promotional expenses
were $
30.8
million, $
25.2
million and $
12.9
million for the years ended December 26, 2020, December 28, 2019
and December 29, 2018.
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.
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 3 – Property and Equipment, Net
for 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 costs consist of costs to purchase and develop
software.
Costs incurred during the application
development stage for software bought and further customized by outside suppliers
for our use and software
developed by a supplier for our proprietary use are capitalized.
Costs incurred for our own personnel who are
directly associated with software development are capitalized.
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
% or greater owned U.S. subsidiaries.
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.
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
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
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 compensation
plan (“DCP”).
This swap will offset
changes in our SERP and DCP liabilities. This swap is expected
to be renewed on an annual basis.
Acquisitions
We account for business acquisitions and combinations under the acquisition method of accounting, where the net
assets of businesses purchased 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.
The major classes of assets and liabilities that we
generally allocate purchase price to, excluding goodwill, include identifiable
intangible assets (i.e., trademarks and
trade names, customer relationships and lists, non-compete agreements and
product development), property, plant
and equipment, deferred taxes and other current and long-term assets and
liabilities.
The estimated fair value of
identifiable intangible assets is based on critical estimates, judgments and assumptions
derived from: analysis of
market conditions; discount rates; discounted cash flows; customer
retention rates; and estimated useful lives.
Some prior owners of such acquired subsidiaries are eligible to receive additional
purchase price cash consideration
if certain financial targets are met.
While we use our best estimates and assumptions to accurately value
those
assets acquired and liabilities assumed at the acquisition date as well
as contingent consideration, where applicable,
our estimates are inherently uncertain and subject to refinement.
As a result, during the measurement period we
may record adjustments to the assets acquired and liabilities assumed with
the corresponding offset to goodwill
within our consolidated balance sheets.
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.
For the years
ended December 26, 2020, December 28, 2019 and
December 29, 2018, there were no material adjustments recorded in our consolidated
statement of income relating
to changes in subsequent adjustments or estimated contingent purchase price
liabilities.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our subsidiaries have the right,
at certain times, to require us to acquire
their ownership interest in those entities at fair value.
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.
These adjustments do not impact the calculation of earnings
per share.
Noncontrolling Interests
Noncontrolling interests represent our less than 50% ownership interest
in an acquired subsidiary.
Our net income
is reduced by the portion of the subsidiaries net income that is attributable
to noncontrolling interests.
Goodwill
Goodwill is not amortized, but is subject to impairment analysis annually or
more frequently if there is a triggering
event or if an event occurs or circumstances change that would
more likely than not reduce the fair value of a
reporting unit below its carrying value.
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.
On December 29, 2019 we adopted Account Standards Update (“ASU”)
2017-04 Intangibles-Goodwill and Other
(Topic 350): Simplifying the Test
for Goodwill Impairment, which eliminated step two from the goodwill
impairment test, thereby eliminating the requirement to calculate the
implied fair value of a reporting unit.
We
perform our annual goodwill impairment test by comparing the fair value of
our reporting units to the carrying
value of those units.
Goodwill as of December 26, 2019 and December 29, 2018
were tested under the prior
standard.
For the year ended 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.
For the years ended December 26, 2019 and December 29, 2018 we tested
goodwill for impairment on the first day
of the fourth quarter, using a quantitative analysis which consisted of a two-step approach.
The first step of our
quantitative analysis consisted of a comparison of 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 step one resulted in the
carrying value of the reporting unit exceeding the fair value of such reporting
unit, we would have then proceeded
to step two which would have required us to calculate the amount of impairment
loss, if any, that we would have
recorded for such reporting unit.
The calculation of the impairment loss in step two would have been
equivalent to
the reporting unit’s carrying value of goodwill less the implied fair value of such goodwill.
Our use of a discounted cash flow methodology includes estimates of future
revenue based upon budget projections
and growth rates which take into account estimated inflation rates.
We also develop estimates for future levels of
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
gross and operating profits and projected capital expenditures.
Our methodology also includes the use of estimated
discount rates based upon industry and competitor analysis as well as
other factors. The estimates that we use in our
discounted cash flow methodology involve many assumptions by
management that are based upon future growth
projections.
Some factors we consider important that could trigger an interim
impairment review include:
significant underperformance relative to expected historical or projected
future operating results; significant
changes in the manner of our use of acquired assets or the strategy for
our overall business (e.g., decision to divest a
business); or significant negative industry or economic trends.
If we determine through the impairment review process that goodwill
is impaired, we record an impairment charge
in our consolidated statements of income.
For the years ended December 28, 2019 and December 29, 2018,
the
results of our goodwill impairment analysis did
no
t result in any impairments.
Long-Lived Assets
Long-lived assets, other than goodwill and other definite-lived intangibles,
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 intellectual property.
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 year ended December 26, 2020, we recorded total impairment
charges on intangible assets of
approximately $
20.3
million, nearly all of which was recorded in our technology and
value-added services segment.
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.
As a result of different practices of categorizing costs associated with distribution networks
throughout our
industry, our gross margins may not necessarily be comparable to other distribution companies.
Total distribution
network costs were $
71.7
million, $
72.3
million and $
69.6
million for the years ended December 26, 2020,
December 28, 2019 and December 29, 2018.
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).
Leases
On December 30, 2018, we adopted ASC Topic 842, Leases, using a modified retrospective approach, whereby
we continue to apply existing lease guidance during the comparative
periods and apply the new lease
requirements through a cumulative-effect adjustment in the period of adoption. We elected the package of
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
practical expedients permitted under the transition guidance within
the new standard, which, among other things,
allowed us to carry forward the historical lease classification. Information
related to leases as of December 28,
2019 is presented under Topic 842, while prior period amounts are not adjusted and continue to be reported under
legacy guidance in ASC Topic 840, Leases.
The most significant impact was the recognition of ROU assets and lease liabilities
for operating leases, while our
accounting for finance leases remained substantially unchanged. Adoption
of the new standard resulted in the
recording of additional net operating lease assets of $
259.9
million and operating lease liabilities of $
267.3
million,
and a decrease of $
1.1
million and $
8.5
million in prepaid rent and deferred rent liabilities, respectively. The
standard did not materially impact our consolidated net income and had
no impact on cash flows.
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 sheet.
Finance
leases are included in Property and equipment, Current maturities of
long-term debt, and Long-term debt in our
consolidated balance
sheet.
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.
Leases
with a lease term of 12 months or less are not capitalized.
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.
Accounting Pronouncements Adopted
On December 29, 2019, we adopted ASU No. 2017-04, “Intangibles-Goodwill
and Other” (Topic 350) (“ASU
2017-04”).
ASU 2017-04 eliminates step two from the goodwill impairment
test, thereby eliminating the
requirement to calculate the implied fair value of a reporting unit.
ASU 2017-04 requires us to perform our annual
goodwill impairment test by comparing the fair value of our reporting
units to the carrying value of those units.
If
the carrying value exceeds the fair value, we will be required to recognize
an impairment charge; however, the
impairment charge should not exceed the amount of goodwill allocated to such reporting
unit.
Our adoption of
ASU 2017-04 did not have a material impact on our consolidated
financial statements.
On December 29, 2019, we adopted ASU No. 2016-13, "Financial Instruments-Credit
Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments" which requires the
measurement and recognition of
expected credit losses for financial assets held at amortized cost.
We adopted Topic
326 using the modified-
retrospective method and recorded an immaterial cumulative-effect adjustment
to the opening balance of retained
earnings.
Based upon the level and makeup of our financial asset portfolio,
including accounts receivable, past loan
loss activity and current known activity regarding our outstanding loans,
the adoption of this ASU resulted in a
decrease of $
0.4
million to retained earnings.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Recently Issued Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes” (Topic
740): Simplifying the Accounting
for Income Taxes (“ASU 2019-12”).
ASU 2019-12 will simplify the accounting for income taxes by
removing
certain exceptions to the general principles in Topic 740.
The amendments also improve consistent application of
and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance.
ASU 2019-12
is effective for fiscal years beginning after December 15, 2020.
We do not expect that the requirements of this
ASU will have a material impact on our consolidated financial statements.
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-06, “Debt—Debt with
Conversion and Other Options” (Subtopic 470-20) and “Derivatives and Hedging—
in Entity’s Own Equity”
(Subtopic 815-40): Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity (“ASU 2020-
06”).
ASU 2020-06 simplifies the accounting for convertible instruments.
In addition to eliminating certain
accounting models, this ASU includes improvements to the disclosures
for convertible instruments and earnings-
per-share (EPS) guidance and amends the guidance for the derivatives scope exception
for contracts in an entity’s
own equity.
ASU 2020-06 is effective for fiscal years beginning after December
15, 2021.
We do not expect that
the requirements of this ASU will have a material impact on our consolidated
financial statements.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 2 – 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 proceeds of the Share Sale were paid to Covetrus and
distributed to us.
Subsequent to the Share Sale, we distributed, on a pro rata basis,
all of the shares of the common
stock of Covetrus held by us to our stockholders of record as of the close of
business on January 17, 2019 (the
“Animal Health Spin-off”).
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
% 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
% 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 purpose 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.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Summarized financial information for our discontinued operations
is as follows:
Years
Ended
December 26,
December 28,
December 29,
2020
2019
2018
Net sales
$
-
$
319,522
$
3,784,392
Cost of goods sold
-
260,097
3,100,055
Gross profit
-
59,425
684,337
Selling, general and administrative
2,347
68,919
531,905
Operating income (loss)
(2,347)
(9,494)
152,432
Income tax expense (benefit)
(3,333)
(2,181)
48,060
Income (loss) from discontinued operations
(6,323)
111,685
Net (income) loss attributable to noncontrolling interests
-
(6,521)
Net income (loss) from discontinued operations
attributable to Henry Schein, Inc.
(5,957)
105,164
The operating loss from discontinued operations for the year ended
December 26, 2020 was primarily attributable
to costs directly related to the Animal Health Spin-off.
See
Note 23 – Related Party Transactions
for additional
information.
The net income from discontinued operations for the year 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, represents activity of the discontinued
operations during year-to-date through the Distribution Date.
The loss from discontinued operations for the year
ended December 28, 2019 was primarily attributable to the inclusion of
the transaction costs directly related to the
Animal Health Spin-off.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
The following are the amounts of assets and liabilities that were
transferred to Covetrus as of February 7, 2019.
February 7,
2019
Cash and cash equivalents
$
6,815
Accounts receivable, net
432,812
Inventories, net
536,637
Prepaid expenses and other
120,546
Total current
assets of discontinued operations
1,096,810
Property and equipment, net
69,790
Operating lease right-of-use asset, net
57,012
Goodwill
742,931
Other intangibles, net
205,793
Investments and other
120,518
Total long-term assets of
discontinued operations
1,196,044
Total assets of discontinued
operations
$
2,292,854
Accounts payable
$
316,162
Current maturities of long-term debt
Operating lease liabilities
18,951
Accrued expenses:
Payroll and related
36,847
Taxes
24,060
Other
80,400
Total current
liabilities of discontinued operations
477,077
Long-term debt
1,176,105
Deferred income taxes
17,019
Operating lease liabilities
38,668
Other liabilities
29,209
Total long-term liabilities
of discontinued operations
1,261,001
Total liabilities of discontinued
operations
$
1,738,078
Redeemable noncontrolling interests
$
28,270
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 3 – Property and Equipment, Net
Property and equipment, including related estimated useful lives, consisted
of the following:
December 26,
December 28,
2020
2019
Land
$
20,297
$
18,030
Buildings and permanent improvements
145,160
121,823
Leasehold improvements
107,753
104,089
Machinery and warehouse equipment
142,437
124,640
Furniture, fixtures and other
108,041
99,083
Computer equipment and software
344,494
330,926
868,182
798,591
Less accumulated depreciation
(526,178)
(468,946)
Property and equipment, net
$
342,004
$
329,645
Estimated Useful
Lives (in years)
Buildings and permanent improvements
Machinery and warehouse equipment
-
Furniture, fixtures and other
-
Computer equipment and software
-
Property and equipment related depreciation expense for the years
ended December 26, 2020, December 28, 2019
and December 29, 2018 was $
64.3
million, $
64.4
million and $
58.1
million.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 4 – Goodwill and Other Intangibles, Net
The changes in the carrying amount of goodwill for the years ended December
26, 2020 and December 28, 2019
were as follows:
Health Care
Distribution
Technology
and
Value-Added
Services
Total
Balance as of December 29, 2018
$
1,433,412
$
647,617
$
2,081,029
Adjustments to goodwill:
Acquisitions
50,276
338,352
388,628
Foreign currency translation
(6,969)
(193)
(7,162)
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
Other intangible assets consisted of the following:
December 26, 2020
December 28, 2019
Accumulated
Accumulated
Cost
Amortization
Net
Cost
Amortization
Net
Non-compete agreements
$
30,993
$
(11,480)
$
19,513
$
34,553
$
(9,327)
$
25,226
Trademarks / trade names - definite lived
95,382
(50,893)
44,489
99,314
(44,134)
55,180
Customer relationships and lists
652,605
(283,469)
369,136
715,630
(274,330)
441,300
Product Development
94,216
(54,451)
39,765
85,211
(42,326)
42,885
Other
14,188
(7,662)
6,526
26,237
(17,950)
8,287
Total
$
887,384
$
(407,955)
$
479,429
$
960,945
$
(388,067)
$
572,878
Non-compete agreements represent amounts paid primarily to key employees
and prior owners of acquired
businesses, as well as certain sales persons, in exchange for placing restrictions
on their ability to pose a
competitive 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 us.
The weighted-average
non-compete period for agreements currently being amortized was approximately
5.1
years as of December 26,
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
8.1
years as of December 26, 2020.
Customer relationships and customer lists 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 26, 2020.
Product development is a definite-lived intangible asset that is amortized
on a
straight-line basis over a weighted-average period of approximately
8.5
years as of December 26, 2020.
Amortization expense related to definite-lived intangible assets for the years ended
December 26, 2020, December
28, 2019 and December 29, 2018 was $
105.9
million, $
108.3
million and $
75.3
million.
During the year ended
December 26, 2020, we recorded total impairment charges on intangible assets of
approximately $
20.3
million.
The annual amortization expense expected to be recorded for existing
intangibles assets for the years 2021 through
2025 is $
99.3
million, $
85.5
million, $
78.0
million, $
54.8
million and $
43.2
million.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 5 – Investments and Other
Investments and other consisted of the following:
December 26,
December 28,
2020
2019
Investment in unconsolidated affiliates
$
169,382
$
164,659
Non-current deferred foreign, state and local income taxes
42,594
23,625
Notes receivable
(1)
34,760
43,544
Capitalized costs for internally generated software for resale
47,650
42,445
Security deposits
1,752
Acquisition-related indemnification
49,401
38,464
Other long-term assets
20,906
14,648
Total
$
366,445
$
327,919
(1)
Long-term notes receivable carry interest rates ranging from
.0% to
.0%
and are due in varying installments through
September 30, 2027
.
Amortization expense related to other long-term assets for the years ended December
26, 2020, December 28, 2019
and December 29, 2018 was $
15.3
million, $
12.3
million and $
10.2
million.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 6 – Debt
Bank Credit Lines
Bank credit lines consisted of the following:
December 26,
December 28,
2020
2019
Revolving credit agreement
$
-
$
-
Other short-term bank credit lines
73,366
23,975
Total
$
73,366
$
23,975
Revolving Credit Agreement
On
April 18, 2017
, we entered into a $
million revolving credit agreement (the “Credit Agreement”), which
matures in April 2022.
The interest rate is based on the USD LIBOR
plus a spread based on our leverage ratio at
the end of each financial reporting quarter.
We expect the LIBOR rate to be discontinued at some point
during 2021, which will require an amendment to our debt agreements to
reflect a new reference rate. We do not
expect the discontinuation of LIBOR as a reference rate in our debt agreements
to have a material adverse effect on
our financial position or to materially affect our interest expense.
The Credit Agreement also requires, among other
things, that we maintain maximum leverage ratios. Additionally, the Credit Agreement contains customary
representations, warranties and affirmative covenants as well as customary negative
covenants, subject to
negotiated exceptions on liens, indebtedness, significant corporate changes
(including mergers), dispositions and
certain restrictive agreements.
As of December 26, 2020 and December 28, 2019, we had
no
borrowings on this
revolving credit facility.
As of December 26, 2020 and December 28, 2019, there
were $
9.5
million and $
9.6
million of letters of credit, respectively,
provided to third parties under the credit facility.
On April 17, 2020, we amended the Credit Agreement to, among other
things, (i) modify the financial covenant
from being based on total leverage ratio to net leverage ratio, (ii) adjust
the pricing grid to reflect the net leverage
ratio calculation, and (iii) increase the maximum maintenance leverage ratio
through March 31, 2021.
364-Day Credit Agreement
On
April 17, 2020
, we entered into a new $
million
-day credit agreement, with JPMorgan Chase Bank,
N.A. and U.S. Bank National Association as joint lead arrangers and joint
bookrunners.
This facility matures on
April 16, 2021
.
As of December 26, 2020, we had
no
borrowings under this credit facility.
We have the ability to
borrow up to an additional $
million, from the original facility amount of $
million, under this credit facility
on a revolving basis as needed, subject to the terms and conditions of
the credit agreement.
The interest rate for
borrowings under this facility will fluctuate based on our net leverage ratio. At December 26, 2020, the interest
rate on this facility was 2.50%. The proceeds from this facility can be used for working capital requirements and
general corporate purposes, including, but not limited to, permitted refinancing of existing indebtedness
.
Under the
terms of this agreement, we are prohibited from repurchasing our common stock
until we report our financial
results for the second quarter of 2021.
Other Short-Term Credit
Lines
As of December 26, 2020 and December 28, 2019, we had various other
short-term bank credit lines available, of
which $
73.4
million and $
24.0
million, respectively, were outstanding.
At December 26, 2020 and December 28,
2019, borrowings under all of these credit lines had a weighted average
interest rate of
4.14
% and
3.45
%,
respectively.
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 26,
December 28,
2020
2019
Private placement facilities
$
613,498
$
621,274
U.S. trade accounts receivable securitization
-
100,000
Note payable due in
2025
with an interest rate of
3.1
%
at December 26, 2020
1,554
-
Various
collateralized and uncollateralized loans payable with interest,
in varying installments through
2023
at interest rates
ranging from
2.62
% to
4.27
% at December 26, 2020 and
ranging from
2.56
% to
10.5
% at December 28, 2019
4,596
6,089
Finance lease obligations (see Note 7)
5,961
5,394
Total
625,609
732,757
Less current maturities
(109,836)
(109,849)
Total long-term debt
$
515,773
$
622,908
Private Placement Facilities
Our private placement facilities, with three insurance companies, have a
total facility amount of $
billion, and are
available on an uncommitted basis at fixed rate economic terms to be agreed upon
at the time of issuance, from
time to time through
June 23, 2023
.
The facilities allow us to issue senior promissory notes to the
lenders at a fixed
rate based on an agreed upon spread over applicable treasury notes at
the time of issuance.
The term of each
possible issuance will be selected by us and can range from
five
to
15 years
(with an average life no longer than
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.
On June 29, 2018, we amended and restated the above private placement
facilities to, among other things, (i) permit
the consummation of the Animal Health Spin-off and (ii) provide for the issuance
of notes in Euros, British Pounds
and Australian Dollars, in addition to U.S. Dollars.
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 June 23, 2020, we amended the private placement facilities to, among other things, (i) temporarily modify the
financial covenant from being based on total leverage ratio to net leverage ratio until March 31, 2021, (ii) increase
the maximum maintenance leverage ratio through March 31, 2021, but with a 1.00% interest rate increase on the
outstanding notes if the net leverage ratio exceeds 3.0x, which will remain in effect until we deliver financials for a
four-quarter period ending on or after June 30, 2021 showing compliance with the total leverage ratio requirement,
and (iii) make certain other changes conforming to the Credit Agreement, dated as of April 18, 2017, as amended.
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 26, 2020 are presented in the
following table (in thousands):
Amount of
Date of
Borrowing
Borrowing
Borrowing
Outstanding
Rate
Due Date
January 20, 2012
(1)
$
14,286
3.09
%
January 20, 2022
January 20, 2012
50,000
3.45
January 20, 2024
December 24, 2012
50,000
3.00
December 24, 2024
June 2, 2014
100,000
3.19
June 2, 2021
June 16, 2017
100,000
3.42
June 16, 2027
September 15, 2017
100,000
3.52
September 15, 2029
January 2, 2018
100,000
3.32
January 2, 2028
September 2, 2020
(2)
100,000
2.35
September 2, 2030
Less: Deferred debt issuance costs
(788)
$
613,498
(1)
Annual
repayments of approximately $
7.1
million for this borrowing commenced on
January 20, 2016
.
(2)
On
September 2, 2020
, we refinanced our $
million private placement borrowing at
3.79
%, originally due on September 2, 2020,
with a similar
10-year borrowing
at
2.35
% maturing on
September 2, 2030
.
U.S. Trade Accounts Receivable Securitization
We have a facility agreement with a bank, as agent, based on the securitization of our U.S. trade accounts
receivable that is structured as an asset-backed securitization program with pricing
committed for up to
three years
.
Our current facility, which has a purchase limit of $
million, was scheduled to expire on
April 29, 2022
.
On
June 22, 2020, the expiration date for this facility was extended to
June 12, 2023
and was amended to adjust certain
covenant levels for 2020.
As of December 26, 2020 and December 28, 2019, the borrowings outstanding
under this
securitization facility were $
0.0
million and $
million, respectively.
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
%.
At December 28, 2019, the interest rate on borrowings under
this facility was based on
the asset-backed commercial paper rate of
1.90
% plus
0.75
%, for a combined rate of
2.65
%.
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
to
basis points depending upon program utilization.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
As of December 26, 2020,
the aggregate amounts of long-term debt, including finance lease obligations
and net of
deferred debt issuance costs of $
0.8
million, maturing in each of the next five years and thereafter are
as follows:
2021
$
109,836
2022
11,607
2023
1,916
2024
100,303
2025
1,839
Thereafter
400,108
Total
$
625,609
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 7 – Leases
Leases
We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles,
and certain equipment.
Our leases have remaining terms of less than
one year
to approximately
16 years
, some of
which may include options to extend the leases for
up to 10 years
.
The components of lease expense were as
follows:
Years
Ended
December 26,
December 28,
2020
2019
Operating lease cost:
(1) (2)
$
86,800
$
88,246
Finance lease cost:
Amortization of right-of-use assets
2,209
1,154
Interest on lease liabilities
Total finance
lease cost
$
2,324
$
1,285
(1)
Includes variable lease expenses.
(2)
Operating lease cost for each of the years ended December 26, 2020, and December 28, 2019, includes amortization of right-of-use
assets of $
0.6
million, 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 26,
December 28,
2020
2019
Operating Leases:
Operating lease right-of-use assets
$
288,847
$
231,662
Current operating lease liabilities
64,716
65,349
Non-current operating lease liabilities
238,727
176,267
Total operating lease liabilities
$
303,443
$
241,616
Finance Leases:
Property and equipment, at cost
$
10,683
$
10,268
Accumulated depreciation
(4,277)
(4,581)
Property and equipment, net of accumulated depreciation
$
6,406
$
5,687
Current maturities of long-term debt
$
2,420
$
1,736
Long-term debt
3,541
3,658
Total finance
lease liabilities
$
5,961
$
5,394
Weighted Average
Remaining Lease Term in
Years:
Operating leases
7.5
5.5
Finance leases
4.3
5.0
Weighted Average
Discount Rate:
Operating leases
2.8
%
3.4
%
Finance leases
1.9
%
2.2
%
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Supplemental cash flow information related to leases is as follows:
Years
Ended
December 26,
December 28,
2020
2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
76,985
79,699
Operating cash flows for finance leases
Financing cash flows for finance leases
2,148
1,413
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
120,148
297,800
Finance leases
2,947
2,940
Maturities of lease liabilities are as follows:
December 26, 2020
Operating
Finance
Leases
Leases
2021
$
71,801
$
2,503
2022
58,049
1,542
2023
40,670
2024
28,899
2025
26,147
Thereafter
110,228
Total future
lease payments
335,794
6,193
Less imputed interest
(32,351)
(232)
Total
$
303,443
$
5,961
As of December 26, 2020, we have additional operating leases with total lease
payments of $
13.5
million
for
buildings and vehicles
that have not yet commenced.
These operating leases will commence subsequent to
December 26, 2020, with lease terms of
two years
to
10 years
.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 8 – Redeemable Noncontrolling Interests
Some minority stockholders in certain of our subsidiaries have the right,
at certain times, to require us to acquire
their ownership interest in those entities at fair value.
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
the noncontrolling interest holder under the terms of a put option
contained in contractual agreements.
The
components of the change in the Redeemable noncontrolling interests for the years
ended December 26, 2020,
December 28, 2019 and December 29, 2018 are presented in the following table:
December 26,
December 28,
December 29,
2020
2019
2018
Balance, beginning of period
$
287,258
$
219,724
$
465,585
Decrease in redeemable noncontrolling interests due to
redemptions
(17,241)
(2,270)
(287,767)
Increase in redeemable noncontrolling interests due to
business acquisitions
28,387
74,865
4,655
Net income attributable to redeemable noncontrolling interests
13,363
14,838
15,327
Dividends declared
(12,631)
(10,264)
(8,206)
Effect of foreign currency translation loss attributable to
redeemable noncontrolling interests
(4,279)
(2,335)
(11,330)
Change in fair value of redeemable securities
32,842
(7,300)
41,460
Balance, end of period
$
327,699
$
287,258
$
219,724
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 9 – Comprehensive Income
Comprehensive income includes certain gains and losses that, under U.S.
GAAP,
are excluded from net income as
such amounts are recorded directly as an adjustment to stockholders’
equity.
The following table summarizes our Accumulated other comprehensive loss, net of
applicable taxes as of:
December 26,
December 28,
December 29,
2020
2019
2018
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment
$
(24,617)
$
(20,338)
$
(18,595)
Attributable to noncontrolling interests:
Foreign currency translation adjustment
$
$
(531)
$
(426)
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
(76,565)
$
(143,172)
$
(234,799)
Unrealized loss from foreign currency hedging activities
(11,488)
(4,032)
(156)
Unrealized investment gain (loss)
(6)
Pension adjustment loss
(20,032)
(20,175)
(13,810)
Accumulated other comprehensive loss
$
(108,084)
$
(167,373)
$
(248,771)
Total Accumulated
other comprehensive loss
$
(132,466)
$
(188,242)
$
(267,792)
The following table summarizes the components of comprehensive income, net of
applicable taxes as follows:
December 26,
December 28,
December 29,
2020
2019
2018
Net income
$
419,423
$
719,138
$
562,126
Foreign currency translation gain (loss)
63,094
(4,070)
(136,356)
Tax effect
-
-
-
Foreign currency translation gain (loss)
63,094
(4,070)
(136,356)
Unrealized gain (loss) from foreign currency hedging activities
(10,224)
(4,911)
1,022
Tax effect
2,768
1,035
(396)
Unrealized gain (loss) from foreign currency hedging activities
(7,456)
(3,876)
Unrealized investment gain (loss)
(6)
(3)
Tax effect
(2)
-
Unrealized investment gain (loss)
(5)
(3)
Pension adjustment gain (loss)
(533)
(7,730)
4,212
Tax effect
1,806
(1,179)
Pension adjustment gain (loss)
(5,924)
3,033
Comprehensive income
$
475,199
$
705,280
$
429,426
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL 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 December
26, 2020, December 28, 2019 and
December 29, 2018 was impacted by changes in foreign currency exchange
rates of the Euro, Brazilian Real,
British Pound and Australian Dollar
.
The following table summarizes our total comprehensive income, net of
applicable taxes as follows:
December 26,
December 28,
December 29,
2020
2019
2018
Comprehensive income attributable to
Henry Schein, Inc.
$
463,083
$
682,724
$
417,177
Comprehensive income attributable to
noncontrolling interests
3,032
9,827
3,432
Comprehensive income attributable to
Redeemable noncontrolling interests
9,084
12,729
8,817
Comprehensive income
$
475,199
$
705,280
$
429,426
Note 10 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The hierarchy for determining that distinguishes
between (1) market participant assumptions developed based on market data obtained
from independent sources
(observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based
on
the best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the
highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest priority
to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described as follows:
Level 1— Unadjusted quoted prices in active markets for identical assets
or liabilities that are accessible at the
measurement date.
Level 2— Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability,
either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets
that are not active; inputs other than quoted
prices that are observable for the asset or liability; and inputs that are
derived principally from or corroborated by
observable market data by correlation or other means.
Level 3— Inputs that are unobservable for the asset or liability.
The following section describes the fair values of our financial instruments
and the methodologies that we used to
measure their fair values.
Investments and notes receivable
There are no quoted market prices available for investments in unconsolidated
affiliates and notes receivable;
however, we believe the carrying amounts are a reasonable estimate of fair value based on the interest rates
in the
applicable markets.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Debt
The fair value of our debt (including bank credit lines) is classified as
Level 3 within the fair value hierarchy and as
of December 26, 2020 and December 28, 2019 was estimated at $
699.0
million and $
756.7
million, respectively.
Factors that we considered when estimating the fair value of our debt
include market conditions, such as interest
rates and credit spreads.
Derivative contracts
Derivative contracts are valued using quoted market prices and
significant other observable and unobservable
inputs.
We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchange
rates.
Our derivative instruments primarily include foreign currency forward
agreements related to certain
intercompany loans, certain forecasted inventory purchase commitments with
foreign suppliers and foreign
currency forward contracts to hedge a portion of our euro-denominated
foreign operations which are designated as
net investment hedges;
and a total return swap for the purpose of economically hedging
our unfunded non-qualified
SERP and our DCP.
The fair values for the majority of our foreign currency derivative contracts
are obtained by comparing our contract
rate to a published forward price of the underlying market rates, which
is based on market rates for comparable
transactions and are classified within Level 2 of the fair value hierarchy.
See
Note 16 – Derivatives and Hedging
for additional information.
Redeemable noncontrolling interests
The values for Redeemable noncontrolling interests are classified within
Level 3 of the fair value hierarchy and are
based on recent transactions and/or implied multiples of earnings.
See
Note 8 – Redeemable Noncontrolling
for additional information.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
The following table presents our assets and liabilities that are measured and
recognized at fair value on a recurring
basis classified under the appropriate level of the fair value hierarchy as of
December 26, 2020 and December 28,
2019:
December 26, 2020
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts
$
-
$
1,868
$
-
$
1,868
Total return
swaps
-
1,565
-
1,565
Total assets
$
-
$
3,433
$
-
$
3,433
Liabilities:
Derivative contracts
$
-
$
11,765
$
-
$
11,765
Total liabilities
$
-
$
11,765
$
-
$
11,765
Redeemable noncontrolling interests
$
-
$
-
$
327,699
$
327,699
December 28, 2019
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts
$
-
$
$
-
$
Total assets
$
-
$
$
-
$
Liabilities:
Derivative contracts
$
-
$
5,795
$
-
$
5,795
Total liabilities
$
-
$
5,795
$
-
$
5,795
Redeemable noncontrolling interests
$
-
$
-
$
287,258
$
287,258
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 11 – Business Acquisitions and Divestitures
The operating results of all acquisitions are reflected in our financial statements from their
respective acquisition
dates.
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.
Some prior owners of acquired subsidiaries are eligible to receive additional
purchase price cash consideration if
certain financial targets are met.
We have accrued liabilities for the estimated fair value of additional purchase
price consideration at the time of the acquisition,
none of which are material.
Any adjustments to these accrual
amounts are recorded in our consolidated statements of income.
For the years ended December 26, 2020,
December 28, 2019 and December 29, 2018, there were no material adjustments
recorded in our consolidated
statement of income relating to changes in estimated contingent purchase
price liabilities.
Divestitures of Investments
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 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 years ended December 28, 2019 and December 29,
2018, we
recognized approximately $
6.0
million and $
10.4
million of equity in earnings from these affiliates.
Acquisition Costs
During the years ended December 26, 2020, December 28, 2019, and December
29, 2018 we incurred $
5.9
million,
$
4.5
million and $
7.3
million in acquisition costs from continuing operations.
In February 2019, we completed the Animal Health Spin-off.
During the years ended December 26, 2020,
December 28, 2019, and December 29, 2018, we incurred $
0.1
million, $
23.6
million and $
38.9
million in
transaction costs associated with this transaction.
We
do not expect to incur additional spin-off related transaction
costs after December 26, 2020.
All transaction costs related to the Animal Health Spin-off have been included
in
results from discontinued operations.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 12 – Plans of Restructuring
On July 9, 2018, we committed to an initiative to rationalize our operations and
provide expense
efficiencies.
These actions allowed us to execute on our plan to reduce our cost structure
and fund new initiatives
to drive growth under our 2018 to 2020 strategic plan.
This initiative resulted in the elimination of approximately
% of our workforce and the closing of certain facilities.
On November 20, 2019, we committed to a contemplated initiative, intended
to mitigate stranded costs associated
with the Animal Health Spin-off and to rationalize operations and to provide expense efficiencies.
These activities
were originally expected to be completed by the end of 2020.
As a result of the business environment brought on
by the COVID-19 pandemic, we are continuing our restructuring activities
into 2021. We are currently unable in
good faith to make a determination of an estimate of the amount or range of
amounts expected to be incurred in
connection with these activities in 2021, both with respect to each
major type of cost associated therewith and with
respect to the total cost, or an estimate of the amount or range of amounts
that will result in future cash
expenditures.
During the years ended December 26, 2020, December 28, 2019, and December
29, 2018 we recorded restructuring
charges of $
32.1
million, $
14.7
million and $
54.4
million, respectively.
The costs associated with these
restructurings are included in a separate line item, “Restructuring costs” within
our consolidated statements of
income.
The following table shows the amounts expensed and paid for restructuring
costs that were incurred during our
2020, 2019 and 2018 fiscal years and the remaining accrued balance
of restructuring costs as of December 26,
2020, which is included in Accrued expenses: Other and Other liabilities
within our consolidated balance sheet:
Facility
Severance
Closing
Costs
Costs
Other
Total
Balance, December 30, 2017
$
3,087
$
1,315
$
$
4,426
Provision
50,197
3,153
1,017
54,367
Payments and other adjustments
(23,320)
(2,865)
(883)
(27,068)
Balance, December 29, 2018
$
29,964
$
1,603
$
$
31,725
Provision
13,741
14,705
Payments and other adjustments
(30,794)
(1,714)
(112)
(32,620)
Balance, December 28, 2019
$
12,911
$
$
$
13,810
Provision
25,855
5,878
32,093
Payments and other adjustments
(26,152)
(6,309)
(329)
(32,790)
Balance, December 26, 2020
$
12,614
$
$
$
13,113
The following table shows,
by reportable segment, the amounts expensed and paid for restructuring costs
that were
incurred during our 2020, 2019 and 2018 fiscal years and the remaining accrued
balance of restructuring costs as of
December 26, 2020:
Technology
and
Health Care
Value-Added
Distribution
Services
Total
Balance, December 30, 2017
$
4,426
$
-
$
4,426
Provision
50,824
3,543
54,367
Payments and other adjustments
(24,959)
(2,109)
(27,068)
Balance, December 29, 2018
$
30,291
$
1,434
$
31,725
Provision
13,935
14,705
Payments and other adjustments
(30,853)
(1,767)
(32,620)
Balance, December 28, 2019
$
13,373
$
$
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
$
$
13,113
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 13 – Earnings Per Share
Basic earnings per share is computed by dividing net income attributable
to Henry Schein, Inc. by the weighted-
average number of common shares outstanding for the period.
Our diluted earnings per share is computed similarly
to basic earnings per share, except that it reflects the effect of common shares issuable
for presently unvested
restricted stock and restricted stock units and upon exercise of stock options,
using the treasury stock method in
periods in which they have a dilutive effect.
A reconciliation of shares used in calculating earnings per basic and
diluted share follows:
Years
Ended
December 26,
December 28,
December 29,
2020
2019
2018
Basic
142,504
147,817
152,656
Effect of dilutive securities:
Stock options, restricted stock and restricted stock units
1,440
1,051
Diluted
143,404
149,257
153,707
Note 14 – Income Taxes
Income before taxes and equity in earnings of affiliates was as follows:
Years
ended
December 26,
December 28,
December 29,
2020
2019
2018
Domestic
$
430,838
$
507,003
$
405,289
Foreign
69,057
173,304
131,547
Total
$
499,895
$
680,307
$
536,836
The provisions for income taxes were as follows:
Years
ended
December 26,
December 28,
December 29,
2020
2019
2018
Current income tax expense:
U.S. Federal
$
82,912
$
93,418
$
71,854
State and local
24,640
28,150
22,533
Foreign
40,799
42,004
38,433
Total current
148,351
163,572
132,820
Deferred income tax expense (benefit):
U.S. Federal
(18,032)
5,633
State and local
(4,889)
1,597
(1,622)
Foreign
(30,056)
(11,287)
(23,972)
Total deferred
(52,977)
(4,057)
(25,388)
Total provision
$
95,374
$
159,515
$
107,432
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL 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 26,
December 28,
2020
2019
Deferred income tax asset:
Investment in partnerships
$
(6,294)
$
1,420
Net operating losses and other carryforwards
64,297
43,663
Inventory, premium
coupon redemptions and accounts receivable
valuation allowances
56,668
23,808
Stock-based compensation
4,858
14,075
Uniform capitalization adjustment to inventories
6,895
7,259
Operating lease right of use asset
74,674
56,780
Other asset
49,260
33,311
Total deferred income
tax asset
250,358
180,316
Valuation
allowance for deferred tax assets
(1)
(40,496)
(20,699)
Net deferred income tax asset
209,862
159,617
Deferred income tax liability
Intangibles amortization
(118,165)
(135,754)
Operating lease liability
(71,343)
(54,672)
Property and equipment
(7,820)
(10,555)
Total deferred tax
liability
(197,328)
(200,981)
Net deferred income tax asset (liability)
$
12,534
$
(41,364)
(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 under
the applicable accounting rules is
judgmental.
We are required to consider all available positive and negative evidence in evaluating the likelihood
that we will be able to realize the benefit of our deferred
tax assets in the future.
Such evidence includes scheduled
reversals of deferred tax liabilities, projected future taxable income, tax planning
strategies and the results of recent
operations.
Since this evaluation requires consideration of events that
may occur some years into the future, there
is an element of judgment involved.
Realization of our deferred tax assets is dependent on generating sufficient
taxable income in future periods.
We believe that it is more likely than not that future taxable income will be
sufficient to allow us to recover substantially all of the value assigned to our deferred
tax assets.
However, if future
events cause us to conclude that it is not more likely than not that we will be
able to recover all of the value
assigned to our deferred tax assets, we will be required to adjust our valuation
allowance accordingly.
As of December 26, 2020, we had federal, state, and foreign net operating
loss carryforwards of approximately
$
29.8
million, $
31.6
million and $
200.5
million, respectively. The federal, state and foreign net operating loss
carryforwards will begin to expire in various years from
2024
through
2040
.
The amounts of state and foreign net
operating losses that can be carried forward indefinitely are $
10.6
million and $
199.3
million, respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
The tax provisions differ from the amount computed using the federal statutory income
tax rate as follows:
Years
ended
December 26,
December 28,
December 29,
2020
2019
2018
Income tax provision at federal statutory rate
$
104,977
$
142,865
$
112,735
State income tax provision, net of federal income tax effect
13,015
16,539
15,872
Foreign income tax benefit
(428)
(4,580)
(2,558)
Pass-through noncontrolling interest
(2,681)
(3,931)
(2,700)
Valuation
allowance
(79)
2,017
Unrecognized tax benefits and audit settlements
(17,722)
3,671
2,126
Interest expense related to loans
(11,098)
(5,498)
(11,700)
Excess tax benefits related to stock compensation
(86)
(1,008)
Transition tax on deemed repatriation of
foreign earnings
-
-
(10,000)
Revaluation of deferred tax assets and liabilities
-
-
(1,676)
Tax on global
intangible low-taxed income ("GILTI")
2,365
3,917
7,599
Tax benefit related
to legal entity reorganization outside the U.S.
(5,823)
-
(13,852)
Tax charge
related to reorganization of legal entities related
to forming Henry Schein One
-
-
3,914
Tax charge
(credit) related to reorganization of legal entities
completed in preparation for the Animal Health spin-off
-
(1,333)
3,135
Other
11,332
8,030
3,528
Total income
tax provision
$
95,374
$
159,515
$
107,432
For the year ended December 26, 2020, our effective tax rate was
19.1
% compared to
23.4
% for the prior year
period.
Our effective tax rate in 2020 was primarily impacted by an Advance Pricing
Agreement (“APA”) with the
U.S Internal Revenue Service (the “IRS”) in the U.S., other audit resolutions,
state and foreign income taxes and
interest expense. The positive effect of the APA and the other audit resolutions are not expected to be recurring and,
as a result, we expect our effective tax rate in future periods to be higher.
In 2019, our effective tax rate of
23.4
% was primarily impacted by state and foreign income taxes and interest
expense.
In 2018, our effective tax rate of
20.0
% was primarily impacted by a reduction in the estimate of our
transition tax associated with the Tax Act, tax charges and credits associated with legal entity reorganizations
outside the U.S., and state and foreign income taxes and interest expense.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act
(“CARES Act”) was enacted in
response to the COVID-19 pandemic.
The CARES Act includes, but is not limited to, certain income tax
provisions that modify the Section 163(j) limitation of business interest and Net
Operating Loss (“NOL”) carryover
and carryback rules.
The modifications to Section 163(j) increase the allowable business
interest deduction from
% of adjusted taxable income to
% of adjusted taxable income for years beginning in 2019 and 2020.
The
CARES Act eliminated the NOL income limitation for years beginning
before 2021 and it extended the carryback
period to five years for losses incurred in 2018, 2019 and 2020.
We have analyzed the income tax provisions of the
CARES Act and have accounted for the impact in the year ended December 26,
2020, which did not have a
material impact on our consolidated financial statements.
There are certain other non-income tax benefits available
to us under the CARES Act that require further clarification or interpretation
that may affect our consolidated
financial statements in the future.
On December 27, 2020, the Consolidated Appropriations Act was
enacted into
law and extended certain non-income tax benefits under the CARES
Act.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
On July 20, 2020, the IRS issued final regulations related to the Tax Act.
The final regulations concern the global
intangible low-taxed income (“GILTI”) and subpart F income provisions of the Tax Act.
To provide flexibility to
taxpayers, the IRS is permitting the application of these final regulations to
prior tax years, if the taxpayer elects to
do so.
We have analyzed the final regulations, which do not have a material impact to our consolidated financial
statements.
On December 22, 2017, the U.S. government passed the Tax Act.
The Tax Act is comprehensive tax legislation
that implemented complex changes to the U.S. tax code including, but not
limited to, the reduction of the corporate
tax rate from
% to
%, modification of accelerated depreciation, the repeal of the domestic
manufacturing
deduction and changes to the limitations of the deductibility of interest.
Additionally, the Tax
Act moved from a
global tax regime to a modified territorial regime, which requires U.S. companies
to pay a mandatory one-time
transition tax on historical offshore earnings that have not been repatriated to the U.S.
The transition tax is payable
over eight years.
In the fourth quarter of 2017, we recorded provisional amounts
for any items that could be
reasonably estimated at the time.
This included the one-time transition tax that we estimated to
be $
140.0
million
and a net deferred tax expense of $
3.0
million attributable to the revaluation of deferred taxes due to the lower
enacted federal income tax rate of 21%.
We completed our analysis in the year ended December 29, 2018 and
recorded a net $
10.0
million reduction to the one-time transition tax and an additional $
1.7
million net deferred tax
benefit from the revaluation of deferred
taxes to reflect the new tax rate.
Within our consolidated balance sheets, transition tax of $
9.9
million was included in “Accrued taxes” for 2020 and
2019 and $
74.5
million and $
94.9
million were included in “Other liabilities” for 2020 and 2019, respectively.
The FASB Staff Q&A, Topic
740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity
can make an accounting policy election to either recognize deferred
taxes for temporary differences expected to
reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred.
We
elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.
We recorded a current
tax expense for the GILTI provision of $
2.4
million $
3.9
million and $
7.6
million for 2020, 2019, and 2018,
respectively.
Due to the one-time transition tax and the imposition of the GILTI provisions, all previously unremitted earnings
will no longer be subject to U.S. federal income tax; however, there could be U.S. state and/or foreign withholding
taxes upon distribution of such unremitted earnings.
Determination of the amount of unrecognized deferred tax
liability with respect to such earnings is not practicable.
ASC 740 prescribes the accounting for uncertainty in income taxes recognized
in the financial statements in
accordance with other provisions contained within this guidance.
This topic prescribes a recognition threshold and
a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected
to be taken in a tax return.
For those benefits to be recognized, a tax position must be more likely
than not to be
sustained upon examination by the taxing authorities.
The amount recognized is measured as the largest amount of
benefit that is greater than 50% likely of being realized upon ultimate audit
settlement.
In the normal course of
business, our tax returns are subject to examination by various taxing
authorities.
Such examinations may result in
future tax and interest assessments by these taxing authorities for uncertain
tax positions taken in respect to certain
tax matters.
The total amount of unrecognized tax benefits, which are included in “Other
liabilities” within our consolidated
balance sheets as of December 26, 2020 was approximately $
84.0
million, of which $
70.1
million would affect the
effective tax rate if recognized.
It is possible that the amount of unrecognized tax benefits
may change in the next
12 months, which may result in a material impact on our consolidated statement of
income.
The tax years subject to examination by major tax jurisdictions include
the years 2012 and forward by the IRS, as
well as the years 2008 and forward for certain states and certain foreign
jurisdictions.
All tax returns audited by the
IRS are officially closed through 2011 and 2014 through 2016.
All IRS audit fieldwork has been completed for the
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
years 2012 and 2013.
In the quarter ended December 28, 2019, we reached a settlement with
the U.S. Competent
Authority to resolve certain transfer pricing issues related to 2012 and 2013.
For all remaining outstanding issues
for 2012 and 2013, we have provided all necessary documentation to
the Appellate Division to date and are waiting
for responses.
We do not believe the final resolution will have a material impact to our consolidated financial
statements.
During the quarter ended September 26, 2020 we finalized negotiations
with the Advance Pricing
Division and reached an agreement on an appropriate transfer pricing
methodology for the years 2014-2025.
The
objective of this resolution is to mitigate future transfer pricing audit
adjustments.
In the fourth quarter of 2020, we
reached a favorable resolution with the IRS relating to select audit years.
The total amounts of interest and penalties are classified as a component of
the provision for income taxes.
The
amount of tax interest expense (credit) was approximately $(
3.3
) million, $
2.2
million, and $
3.6
million in 2020,
2019 and 2018, respectively.
The total amount of accrued interest is included in “Other liabilities”, and was
approximately $
14.0
million as of December 26, 2020 and $
18.0
million as of December 28, 2019.
No
penalties
were accrued for the periods presented.
The following table provides a reconciliation of unrecognized tax benefits:
December 26,
December 28,
December 29,
2020
2019
2018
Balance, beginning of period
$
91,100
$
77,800
$
83,200
Additions based on current year tax positions
4,900
4,900
5,000
Additions based on prior year tax positions
7,900
17,300
9,400
Reductions based on prior year tax positions
(1,000)
(1,000)
(1,600)
Reductions resulting from settlements with taxing authorities
(18,600)
(4,200)
(1,600)
Reductions resulting from lapse in statutes of limitations
(14,300)
(3,700)
(16,600)
Balance, end of period
$
70,000
$
91,100
$
77,800
Note 15 – Concentrations 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 derivative
instruments.
In all cases, our maximum exposure to loss from credit
risk equals the gross fair value of the financial
instruments.
We routinely maintain cash balances at financial institutions in excess of insured amounts. We have
not experienced any loss in such accounts and we manage this risk through
maintaining cash deposits and other
highly liquid investments in high quality financial institutions.
We continuously assess the need for reserves for
such losses, which have been within our expectations.
We do not require collateral or other security to support
financial instruments subject to credit risk, except for long-term notes receivable.
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 financial institutions who are
the counter-parties to such
financial instruments.
As a risk management policy, we limit the amount of credit exposure by diversifying and
utilizing numerous investment grade counter-parties.
With respect to our trade receivables, our credit risk is somewhat limited due to a relatively large customer base
and
its dispersion across different types of health care professionals and geographic areas.
For the year ended
December 26, 2020, two customers accounted for slightly more than
% of our net sales from continuing
operations.
For the year ended December 28, 2019, one customer accounted
for slightly less than
% of our net
sales from continuing operations.
With respect to our sources of supply, our top 10 health care distribution
suppliers from continuing operations and our single largest supplier from continuing
operations accounted for
approximately
% and
%, respectively, of our aggregate purchases in 2020 and approximately
% and
%,
respectively, of our aggregate purchases in 2019.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Our long-term notes receivable primarily represent strategic financing arrangements
with certain industry affiliates
and amounts owed to us from sales of certain businesses.
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 event of non-performance by these counter-parties,
we conduct ongoing
assessments of their financial and operational performance.
Note 16 – Derivatives and Hedging Activities
We are exposed to market risks as well as changes in foreign currency exchange rates as measured against the U.S.
dollar and each other, and changes to the credit risk of the derivative counterparties.
We attempt to minimize these
risks by primarily using foreign currency forward contracts and by
maintaining counter-party credit limits.
These
hedging activities provide only limited protection against currency exchange
and credit risks.
Factors that could
influence the effectiveness of our hedging programs include currency markets and
availability of hedging
instruments and liquidity of the credit markets.
All foreign currency forward contracts that we enter into are
components of hedging programs and are entered into for the sole purpose
of hedging an existing or anticipated
currency exposure.
We do not enter into such contracts for speculative purposes and we manage our credit risks by
diversifying our counterparties, maintaining a strong balance sheet and having
multiple sources of capital.
During 2019 we entered into foreign currency forward contracts to hedge a portion of our euro-denominated
foreign operations which are designated as net investment hedges.
These net investment hedges offset the change
in the U.S dollar value of our investment in certain euro-functional currency subsidiaries due to fluctuating foreign
exchange rates.
Gains and losses related to these net investment hedges are recorded
in
Accumulated other
comprehensive loss
within our consolidated balance sheets.
Amounts excluded from the assessment of hedge
effectiveness are included in interest expense within our consolidated statements
of income.
The aggregate
notional value of this net investment hedge, which matures on
November 16, 2023
, is approximately €
million.
During the years ended December 26, 2020 and December 28, 2019 we
recognized approximately $
4.7
million and
$
0.6
million, respectively, of interest savings as a result of this net investment hedge.
On
March 20, 2020
,
we entered into a total return swap for the purpose of economically hedging our unfunded non-
qualified SERP and 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 26, 2020, the notional value of
the investments in these plans was $
67.6
million.
At December 26, 2020, the financing rate for this swap is based
on LIBOR of
0.15
% plus
0.38
%, for a combined rate of
0.53
%.
From March 20, 2020, the effective date of the
swap, to December 26, 2020, we have recorded a gain, within the selling,
general and administrative line item in
our consolidated statement of income, of approximately $
21.2
million, net of transaction costs, related to this
undesignated swap for the year ended December 26, 2020.
This gain was partially offset by the change in fair
value adjustment of $
10.6
million in the SERP and the DCP, which occurred prior to the inception of the swap on
March 20, 2020.
This swap is expected to be renewed on an annual basis and
is expected to result in a neutral
impact to our results of operations.
See
Note 19 – 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.
Our hedging activities have
historically not had a material impact on our consolidated financial statements.
Accordingly, additional disclosures
related to derivatives and hedging activities required by ASC 815 have
been omitted.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 17 – Revenue from Contracts with Customers
Revenue (Net sales) is recognized in accordance with the policies discussed
in
Note 1 – Significant Accounting
Disaggregation of Net sales
The following table disaggregates our Net sales by reportable segment and
geographic area:
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)
-
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.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 18 – Segment and Geographic Data
We conduct our business through
two
reportable segments: (i) health care distribution and (ii) technology
and
value-added services.
These segments offer different products and services to the same customer base.
The health care distribution reportable segment aggregates our global dental
and medical operating segments.
This
segment distributes consumable products, small equipment, laboratory products,
large equipment, equipment repair
services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic
tests, infection-control
products and vitamins.
Our global dental group serves office-based dental practitioners, dental laboratories, schools
and other institutions.
Our global medical group serves office-based medical practitioners, ambulatory
surgery
centers, other alternate-care settings and other institutions.
Our global dental and medical groups serve
practitioners in
countries worldwide.
Our global technology and value-added services group provides software,
technology and other value-added
services to health care practitioners.
Our technology group offerings include practice management software
systems for dental and medical practitioners.
Our value-added practice solutions include financial services on a
non-recourse basis, e-services, practice technology, network and hardware services, as well as continuing education
services for practitioners.
The following tables present information about our reportable and operating
segments:
Years
Ended
December 26,
December 28,
December 29,
2020
2019
2018
Net Sales:
Health care distribution
(1)
Dental
$
5,912,593
$
6,415,865
$
6,347,998
Medical
3,617,017
2,973,586
2,661,166
Total health care distribution
9,529,610
9,389,451
9,009,164
Technology
and value-added services
(2)
514,258
515,085
408,439
Total excluding
Corporate TSA revenues
10,043,868
9,904,536
9,417,603
Corporate TSA revenues
(3)
75,273
81,267
-
Total
$
10,119,141
$
9,985,803
$
9,417,603
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, personal protective equipment and
vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and
financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other services.
(3)
Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in
connection with the Animal Health Spin-off, which ended in December 2020.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Years
ended
December 26,
December 28,
December 29,
2020
2019
2018
Operating Income:
Health care distribution
$
436,173
$
591,404
$
490,988
Technology
and value-added services
99,130
126,857
109,631
Total
$
535,303
$
718,261
$
600,619
Income from continuing operations before
taxes
and equity in earnings of affiliates:
Health care distribution
$
400,343
$
553,181
$
429,429
Technology
and value-added services
99,552
127,126
107,407
Total
$
499,895
$
680,307
$
536,836
Depreciation and Amortization:
Health care distribution
$
142,712
$
146,960
$
122,767
Technology
and value-added services
42,826
37,982
20,863
Total
$
185,538
$
184,942
$
143,630
Interest Income:
Health care distribution
$
9,736
$
15,352
$
15,106
Technology
and value-added services
Total
$
9,842
$
15,757
$
15,491
Interest Expense:
Health care distribution
$
41,307
$
50,666
$
76,006
Technology
and value-added services
Total
$
41,377
$
50,792
$
76,016
Income Tax
Expense:
Health care distribution
$
71,206
$
129,381
$
53,660
Technology
and value-added services
24,168
30,134
53,772
Total
$
95,374
$
159,515
$
107,432
Purchases of Fixed Assets:
Health care distribution
$
43,511
$
69,095
$
68,577
Technology
and value-added services
5,318
7,124
2,706
Total
$
48,829
$
76,219
$
71,283
As of
December 26,
December 28,
December 29,
2020
2019
2018
Total
Assets:
Health care distribution
$
6,503,089
$
5,821,468
$
5,288,662
Technology
and value-added services
1,269,443
1,329,633
995,192
Discontinued operations
-
-
2,216,673
Total
$
7,772,532
$
7,151,101
$
8,500,527
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL 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 26, 2020.
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
% 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.
2020
2019
2018
Net Sales
Long-Lived
Assets
Net Sales
Long-Lived
Assets
Net Sales
Long-Lived
Assets
United States
$
7,090,206
$
2,362,823
$
6,876,194
$
2,400,733
$
6,411,558
$
1,753,697
Other
3,028,935
1,251,849
3,109,609
1,195,947
3,006,045
1,017,584
Consolidated total
$
10,119,141
$
3,614,672
$
9,985,803
$
3,596,680
$
9,417,603
$
2,771,281
Note 19 – Employee Benefit Plans
Stock-based Compensation
Our accompanying consolidated statements of income reflect pre-tax share-based
compensation expense of $
8.8
million ($
7.1
million after-tax) for the year ended December 26, 2020, and pre-tax share-based
expense of $
44.9
million ($
34.4
million after-tax) and $
32.6
million ($
25.3
million after-tax) for the years ended December 28, 2019
and December 29, 2018.
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
no
benefits associated with tax deductions in
excess of recognized compensation as a cash inflow from financing
activities for the years ended December 26,
2020, December 28, 2019 and December 29, 2018.
Stock-based compensation represents the cost related to stock-based awards granted
to employees and non-
employee directors.
We measure stock-based compensation at the grant date, based on the estimated fair value of
the award, and recognize the cost (net of estimated forfeitures) as compensation
expense on a straight-line basis
over the requisite service period.
Our stock-based compensation expense is reflected in selling, general
and
administrative expenses in our consolidated statements of income.
Stock-based awards are provided to certain employees and non-employee directors
under the terms of our 2020
Stock Incentive Plan (formerly known as the 2013 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.
Equity-based awards are granted solely in the form of restricted
stock units, with the exception
of providing stock options to employees pursuant to certain pre-existing
contractual obligations.
As of December
26, 2020, there were
65,243
shares authorized and
5,812
shares available to be granted under the 2020 Stock
Incentive Plan and
1,893
shares authorized and
shares available to be granted under the 2015 Non-Employee
Director Stock Incentive Plan.
Grants of restricted stock units are stock-based awards granted to recipients with
specified vesting provisions.
In
the case of restricted stock units, common stock is generally delivered
on or following satisfaction of vesting
conditions.
We issue restricted stock units that vest solely based on the recipient’s continued service over time
(primarily four year cliff vesting, except for grants made under the 2015 Non-Employee
Director Stock Incentive
Plan, which are primarily
12 month
cliff vesting) and restricted stock units that vest based on our achieving
specified performance measurements and the recipient’s continued service over time (primarily three year cliff
vesting).
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
With respect to time-based restricted stock units, we estimate the fair value on the date of grant based on
our
closing stock price.
With respect to performance-based restricted stock units, the number of shares that ultimately
vest and are received by the recipient is based upon our performance as measured
against specified targets over a
specified period, as determined by the Compensation Committee of
the Board of Directors.
Although there is no
guarantee that performance targets will be achieved, we estimate the fair value of
performance-based restricted
stock units based on our closing stock price at time of grant.
The Plans provide for adjustments to the performance-based restricted
stock units targets for significant events,
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 tax rates in certain countries, changes in accounting principles or
in applicable laws or regulations 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.
As a result of the Separation, the number of our unvested (as of the
date of the Separation) equity-based awards
from previous grants made under our Long-term Incentive Program under the
Plans was increased by a factor of
approximately
1.2633
, along with a corresponding
decrease
in our price per share.
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 our statutory tax
rate in the jurisdiction in which we will
receive a deduction.
Stock-based compensation grants for the three years ended December 26,
2020 consisted of restricted stock/unit
grants.
Certain stock-based compensation granted may require us
to settle in the form of a cash payment.
During
the year ended December 26, 2020, we recorded a liability of $
0.8
million relating to the grant date fair value of
stock-based compensation to be settled in cash.
The weighted-average grant date fair value of stock-based awards
granted before forfeitures was $
60.23
, $
56.83
and $
71.38
per share during the years ended December 26, 2020,
December 28, 2019 and December 29, 2018.
Total unrecognized compensation cost related to non-vested awards as of December 26, 2020 was $
42.2
million,
which is expected to be recognized over a weighted-average period of
approximately
2.3
years.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
A summary of the stock option activity under the Plans is presented below:
Years
Ended
December 26,
December 28,
December 29,
2020
2019
2018
Weighted
Weighted
Weighted
Average
Average
Average
Exercise
Exercise
Exercise
Shares
Price
Shares
Price
Shares
Price
Outstanding at beginning of year
-
$
-
$
13.63
$
29.65
Granted
-
-
-
-
-
-
Exercised
-
-
(3)
13.63
(152)
29.81
Forfeited
-
-
-
-
-
-
Outstanding at end of year
-
$
-
-
$
-
$
17.22
Options exercisable at end of year
-
$
-
-
$
-
$
17.22
The following table represents the intrinsic values of:
As of
December 26,
December 28,
December 29,
2020
2019
2018
Stock options outstanding
$
-
$
-
$
Stock options exercisable
-
-
The total cash received as a result of stock option exercises for the year ended
December 29, 2018 was
approximately $
3.1
million.
In connection with these exercises, we did
no
t realize any tax benefits for the years
ended December 26, 2020, December 28, 2019 and December 29, 2018.
We settle employee stock option exercises
with newly issued common shares.
The total intrinsic value per share of restricted stock/units that vested
was $
61.49
, $
64.31
and $
76.48
during the
years ended December 26, 2020, December 28, 2019 and December
29, 2018.
The following table summarizes the
status of our non-vested restricted stock/units for the year ended December
26, 2020:
Time-Based Restricted Stock/Units
Weighted Average
Grant Date Fair
Intrinsic Value
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period
1,417
$
58.72
Granted
60.19
Vested
(298)
65.91
Forfeited
(51)
59.71
Outstanding at end of period
1,459
$
57.61
$
65.83
Performance-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
$
61.41
Granted
(954)
56.52
Vested
(327)
67.48
Forfeited
(42)
57.82
Outstanding at end of period
$
53.52
$
65.83
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
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
% of the participants’ contributions
up to
% 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
% 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.
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 26, 2020, December 28, 2019 and December
29, 2018 amounted to $
19.9
million,
$
34.9
million and $
35.0
million, respectively.
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 plan are equal to the 401(k) employee-elected
contribution percentage applied to
base compensation for the portion of the year in which such employees are
not eligible to make pre-tax
contributions to the 401(k) plan.
Due to the impact of COVID-19, as part of our initiative to
generate cash savings,
we suspended contributions under the SERP for the second half of
The amounts charged to operations during
the years ended December 26, 2020, December 28, 2019 and December
29, 2018 amounted to $
2.8
million, $
4.0
million and $
0.4
million, respectively.
Please see
Note 16 – Derivatives and Hedging Activities
for additional
information.
Deferred Compensation Plan
During 2011, we began to offer DCP to a select group of management or highly compensated employees of
the
Company and certain subsidiaries.
This plan allows for the elective deferral of base salary, bonus and/or
commission compensation by eligible employees.
The amounts charged (credited) to operations during the years
ended December 26, 2020, December 28, 2019 and December 29, 2018 were
approximately $
7.8
million, $
8.3
million and $
(2.3)
million, respectively.
Please see
Note 16 – Derivatives and Hedging Activities
for additional
information.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 20 – Commitments and Contingencies
Purchase Commitments
In our health care distribution business, we sometimes enter into long-term purchase
commitments to ensure the
availability of products for distribution.
Future minimum annual payments for inventory purchase commitments
as
of December 26, 2020 were:
2021
$
208,200
2022
110,800
2023
-
2024
-
2025
-
Thereafter
-
Total minimum
inventory purchase commitment payments
$
319,000
Employment, Consulting and Non-Compete Agreements
We have definite-lived employment, consulting and non-compete agreements that have varying base aggregate
annual payments for the years 2021 through 2025 and thereafter of approximately
$
16.9
million, $
6.8
million, $
1.0
million, $
0.9
million, $
0.9
million, and $
0.9
million, respectively.
We also have lifetime consulting agreements
that provide for current compensation of $
0.4
million per year, increasing $
every fifth year with the next
increase in 2022.
In addition, some agreements have provisions for additional
incentives and compensation.
Litigation
On
August 31, 2012
,
Archer and White Sales, Inc. (“Archer”)
filed a complaint against
Henry Schein, Inc. as well
as Danaher Corporation and its subsidiaries Instrumentarium Dental, Inc., Dental Equipment, LLC, Kavo Dental
Technologies, LLC and Dental Imaging Technologies Corporation (collectively, the “Danaher Defendants”)
in the
U.S. District Court for the Eastern District of Texas, Civil Action No. 2:12-CV-00572-JRG, styled as an antitrust
action under Section 1 of the Sherman Act, and the Texas Free Enterprise Antitrust Act.
Archer alleges a
conspiracy between Henry Schein, an unnamed company and the Danaher Defendants to terminate or limit
Archer’s distribution rights
.
On
August 1, 2017
,
Archer
filed an amended complaint, adding
Patterson Companies,
Inc. (“Patterson”) and Benco Dental Supply Co. (“Benco”)
as defendants, and
alleging that Henry Schein,
Patterson, Benco and Burkhart Dental Supply conspired to fix prices and refused to compete with each other for
sales of dental equipment to dental professionals and agreed to enlist their common suppliers, the Danaher
Defendants, to join a price-fixing conspiracy and boycott by reducing the distribution territory of, and eventually
terminating, their price-cutting competing distributor Archer.
Archer seeks damages in an amount to be proved at
trial, to be trebled with interest and costs, including attorneys’ fees, jointly and severally, as well as injunctive
relief.
On
October 30, 2017
,
Archer
filed a second amended complaint,
to add additional allegations that it believes
support its claims. The named parties and causes of action are the same as the August 1, 2017 amended complaint.
On October 1, 2012, we filed a motion for an order: (i) compelling Archer
to arbitrate its claims against us; (2)
staying all proceedings pending arbitration; and (3) joining the Danaher
Defendants’ motion to arbitrate and stay.
On May 28, 2013, the Magistrate Judge granted the motions to arbitrate
and stayed proceedings pending arbitration.
On June 10, 2013, Archer moved for reconsideration before the District Court
judge.
On December 7, 2016, the
District Court Judge granted Archer’s motion for reconsideration and lifted the stay.
Defendants appealed the
District Court’s order.
On December 21, 2017, the U.S. Court of Appeals for the Fifth Circuit
affirmed the District
Court’s order denying the motions to compel arbitration.
On June 25, 2018, the Supreme Court of the United States
granted defendants’ petition for writ of certiorari.
On October 29, 2018, the Supreme Court heard oral arguments.
On January 8, 2019, the Supreme Court issued its published decision vacating
the judgment of the Fifth Circuit and
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
remanding the case to the Fifth Circuit for further proceedings consistent with
the Supreme Court’s opinion.
On
April 2, 2019, the District Court stayed the proceeding in the trial court pending
resolution by the Fifth Circuit.
The
Fifth Circuit heard oral argument on May 1, 2019 on whether the case should be arbitrated.
The Fifth Circuit
issued its opinion on August 14, 2019 affirming the District Court’s order denying defendants’ motions to compel
arbitration.
Defendants filed a petition for rehearing en banc before the Fifth
Circuit.
The Fifth Circuit denied that
petition.
On October 1, 2019, the District Court set the case for trial
on February 3, 2020, which was subsequently
moved to January 29, 2020.
On January 24, 2020 the Supreme Court granted our motion to stay
the District Court
proceedings, pending the disposition of our petition for writ of certiorari, which
was filed on January 31, 2020.
Archer conditionally cross petitioned for certiorari on an arbitration issue
on March 2, 2020.
On June 15, 2020, the
Supreme Court granted our petition for writ of certiorari, and denied Archer’s conditional
petition for certiorari, and
thus the District Court proceedings remained stayed.
After briefing from the parties and several amici, the case was
argued before the Supreme Court on December 8, 2020.
On January 25, 2021, the Supreme Court dismissed the
writ of certiorari as improvidently granted.
That action dissolved the stay the Supreme Court had previously
granted, and thus the trial of the lawsuit may proceed.
The U.S. District Court for the Eastern District of Texas has
scheduled a Status Conference for February 19, 2021.
Patterson and the Danaher Defendants settled with Archer
and they have been dismissed from the case with prejudice.
Benco is still a defendant. We intend to defend
ourselves vigorously against this action.
On
May 29, 2018
, an amended complaint was filed in the MultiDistrict Litigation (“MDL”)
proceeding In Re
National Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804)
in an action entitled
The County of
Summit, Ohio et al
. v. Purdue Pharma, L.P.,
et al., Civil Action No. 1:18-op-45090-DAP (“County of
Summit
Action”), in the U.S. District Court for the Northern District of Ohio, adding Henry
Schein, Inc.,
Henry Schein
Medical Systems, Inc. and others as defendants
.
Summit County alleged that manufacturers of prescription opioid
drugs engaged in a false advertising campaign to expand the market for such drugs and their own market share and
that the entities in the supply chain (including Henry Schein, Inc. and Henry Schein Medical Systems, Inc.) reaped
financial rewards by refusing or otherwise failing to monitor appropriately and restrict the improper distribution of
those drugs.
On October 29, 2019, the Company was dismissed with prejudice from this lawsuit. Henry Schein,
working with Summit County, donated $1 million to a foundation and paid $250,000 of Summit County’s
expenses, as described in our prior filings with the SEC.
In addition to the County of Summit Action,
Henry Schein and/or one or more of its affiliated companies
have been
named as a defendant in multiple lawsuits (currently less than one-hundred
and fifty (
)), which
allege claims
similar to those alleged in the County of Summit Action.
These actions consist of some that have been consolidated
within the MDL and are currently abated for discovery purposes, and others which
remain pending in state courts
and are proceeding independently and outside of the MDL.
On October 9, 2020, the Circuit Court of the 17th
Judicial Circuit in and for Broward County, Florida, Case No. CACE19018882, granted Henry Schein’s motion to
dismiss the claims brought against it in the action filed by North Broward
Hospital District et. al.
The Florida court
gave plaintiffs until November 24, 2020 to replead their claims against Henry Schein.
On January 8, 2021, Henry
Schein filed a motion to dismiss the Amended Complaint. An action filed by Tucson Medical Center et
al. was
previously scheduled for trial beginning on June 1, 2021 but the court has vacated
that trial date.
At this time, the
only case set for trial is the action filed by West Virginia
University Hospitals, Inc. et al., which is currently
scheduled for a non-jury liability trial on Plaintiffs’ public nuisance claims on November 1,
Of Henry
Schein’s 2020 revenue of approximately $
10.1
billion from continuing operations, sales of opioids represented
less
than one-tenth of
percent.
Opioids represent a negligible part of our business.
We intend to defend ourselves
vigorously against these actions.
On
September 30, 2019
, the
City of Hollywood Police Officers Retirement System, individually and on behalf of
all others similarly situated
, filed a putative class action complaint for violation of the federal
securities laws
against
Henry Schein, Inc., Covetrus, Inc., and Benjamin Shaw and Christine Komola (Covetrus’s then Chief
Executive Officer and Chief Financial Officer, respectively)
in the U.S. District Court for the Eastern District of
New York,
Case No. 2:19-cv-05530-FB-RLM.
The complaint seeks to certify a class consisting of all persons and
entities who, subject to certain exclusions, purchased or otherwise acquired Covetrus common stock from February
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
8, 2019 through August 12, 2019. The case relates to the Animal Health Spin-off and Merger of the Henry Schein
Animal Health Business with Vets First Choice in February 2019. The complaint alleges violations of Sections
10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 and asserts that defendants’ statements in the offering
documents and after the transaction were materially false and misleading
because they purportedly overstated
Covetrus’s capabilities as to inventory management and supply-chain services, understated the costs of integrating
the Henry Schein Animal Health Business and Vets First Choice, understated Covetrus’s separation costs from
Henry Schein, and understated the impact on earnings from online competition
and alternative distribution channels
and from the loss of an allegedly large customer in North America just before the Separation and
Merger.
The
complaint seeks unspecified monetary damages and a jury trial.
Pursuant to the provisions of the PSLRA, the court
appointed lead plaintiff and lead counsel on December 23, 2019.
Lead plaintiff filed a Consolidated Class Action
Complaint on February 21, 2020.
Lead plaintiff added Steve Paladino, our Chief Financial Officer, as a defendant
in the action.
Lead plaintiff filed an Amended Consolidated Class Action Complaint on May 21, 2020,
in which it
added a claim that Mr. Paladino is a “control person” of Covetrus.
We intend to defend ourselves vigorously
against this action.
On
November 15, 2019
,
Frank Finazzo
filed a putative shareholder derivative action on behalf of Henry
Schein,
Inc. against various present and former directors and officers of Henry Schein in
the U.S. District Court for the
Eastern District of New York, Case No. 1:19-cv-6485-LDH-JO.
The named defendants in the action were Stanley
M. Bergman, Steven Paladino, Timothy J. Sullivan, Barry J. Alperin, Lawrence S. Bacow, Gerald A. Benjamin,
James P. Breslawski, Paul Brons, Shira Goodman, Joseph L. Herring, Donald J. Kabat, Kurt Kuehn, Philip A.
Laskawy, Anne H. Margulies, Karyn Mashima, Norman S. Matthews, Mark E. Mlotek, Carol Raphael, E. Dianne
Rekow, Bradley T. Sheares, and Louis W. Sullivan, with Henry Schein named as a nominal defendant.
The
Complaint asserted claims under the federal securities laws and state law
relating to the allegations in the antitrust
actions, the In re Henry Schein, Inc. Securities Litigation, and the City of Hollywood
securities class action
described in our prior filings with the SEC and/or above.
The complaint sought declaratory, injunctive, and
monetary relief on behalf of Henry Schein.
On January 6, 2020, one of the two law firms that filed the Finazzo
case filed another, virtually identical putative shareholder derivative action on behalf of Henry Schein
against the
same defendants, asserting the same claims and seeking the same relief.
That case, captioned Mark Sloan v.
Stanley M. Bergman, et al., was also filed in the U.S. District Court for the Eastern
District of New York, Case No.
1:20-cv-0076.
On January 24, 2020, the court consolidated the Finazzo and Sloan
cases under the new caption In
re Henry Schein, Inc. Derivative Litigation, No. 1:19-cv-06485-LDH-JO, and appointed the
two law firms that filed
the Finazzo case as co-lead counsel for the consolidated action.
The parties agreed to a resolution of this matter
subject to various conditions, including court approval.
The settlement involves the adoption of certain procedures
but does not involve the payment of any money except a fee to the
plaintiffs’ attorneys that is immaterial.
After the
court referred the motion to approve the settlement to a Magistrate Judge,
the parties consented to having the case
assigned to the Magistrate Judge for all purposes.
The Magistrate Judge to which the matter was ultimately
assigned held a fairness hearing and issued an order and judgment approving
the settlement.
The order and
judgment approving the settlement have become final.
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 above and further alleges that Henry Schein aided
and abetted such breaches. The complaint
also asserts claims for contribution under the federal securities laws against
Henry Schein and other defendants,
also arising out of the allegations in the City of Hollywood lawsuit.
The complaint seeks declaratory, injunctive,
and monetary relief. We intend to defend ourselves vigorously against this action.
From time to time, we may become a party to other legal proceedings,
including, without limitation, product
liability claims, employment matters, commercial disputes, governmental
inquiries and investigations (which may
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
in some cases involve our
entering into settlement arrangements or consent decrees), and other
matters arising out
of the ordinary course of our business.
While the results of any legal proceeding cannot be predicted with certainty,
in our opinion none of these other pending matters are currently anticipated
to have a material adverse effect on our
consolidated financial position, liquidity or results of operations.
As of December 26, 2020, 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.
Note 21 – Quarterly Information (Unaudited)
The following tables present certain quarterly financial data:
Quarters ended
March 28,
June 27,
September 26,
December 26,
2020
2020
2020
2020
Net sales
$
2,428,871
$
1,684,399
$
2,840,146
$
3,165,725
Gross profit
746,039
454,294
754,299
859,711
Restructuring costs
(1)
4,787
15,934
6,992
4,380
Operating income (loss)
173,865
(7,433)
187,671
181,200
Net gain on sale of equity investments
(2)
-
-
-
1,572
Net income (loss) from continuing operations
133,847
(13,852)
151,813
146,629
Amounts attributable to Henry Schein, Inc.
from continuing operations:
Net income (loss)
130,543
(11,382)
141,726
141,921
Earnings (loss) per share attributable to
Henry Schein, Inc. from continuing operations:
Basic
$
0.91
$
(0.08)
$
1.00
$
1.00
Diluted
0.91
(0.08)
0.99
0.99
Quarters ended
March 30,
June 29,
September 28,
December 28,
2019
2019
2019
2019
Net sales
$
2,360,268
$
2,447,827
$
2,508,767
$
2,668,941
Gross profit
751,690
767,431
761,167
810,598
Restructuring costs (credits)
(1)
4,641
11,925
(802)
(1,059)
Operating income
172,441
162,288
187,198
196,334
Net gain on sale of equity investments
(2)
-
-
-
186,769
Net income from continuing operations
123,640
121,417
143,212
337,192
Amounts attributable to Henry Schein, Inc.
from continuing operations:
Net income
118,413
116,753
134,916
330,609
Earnings per share attributable to Henry Schein, Inc.
from continuing operations:
Basic
$
0.79
$
0.79
$
0.92
$
2.27
Diluted
0.78
0.78
0.91
2.25
(1) See
Note 12 – Plans of Restructuring
for details of the restructuring costs (credits) incurred during our 2020 and 2019
fiscal years.
(2) See
Note 11 – Business Acquisitions Divestitures
for details of the net gain on sale of equity investments.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 22 – Supplemental Cash Flow Information
Cash paid for interest and income taxes was:
Years
ended
December 26,
December 28,
December 29,
2020
2019
2018
Interest
$
43,123
$
54,685
$
69,371
Income taxes
206,796
177,277
236,479
For the years ended December 26, 2020, December 28, 2019 and December
29, 2018, we had $
(10.2)
million,
$
(4.9)
million and $
1.0
million of non-cash net unrealized gains (losses) related to foreign
currency hedging
activities, respectively.
During the third quarter of 2018, we formed Henry Schein One, LLC
with Internet Brands through a non-cash
transaction resulting in approximately $
390.3
million of noncontrolling interest representing Internet Brands’
current
% minority interest and $
160.6
million of deferred additional ownership interests of Internet Brands
in
Henry Schein One, representing up to an additional
9.2
% ownership interests at December 26, 2020, a portion of
which is contingent upon the achievement of certain operating targets.
During the third quarter of 2020, the Internet
Brands ownership interest in Henry Schein One, LLC increased to
%.
Note 23 – Related Party Transactions
In connection with the completion of the Animal Health Spin-off during our 2019
fiscal year, we entered into a
transition services agreement with Covetrus under which we have 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
(see
Note 2 – Discontinued Operations
for additional details).
For the years ended December 26, 2020 and December 28, 2019, we recorded approximately
$
13.0
million and
$
17.5
million of fees for these services, respectively.
Pursuant to the transition services agreement, Covetrus
purchased certain products from us.
During the years
ended December 26, 2020 and December 28, 2019, net sales
to Covetrus under the transition services agreement were approximately
$
75.3
million and $
81.3
million,
respectively.
Sales to Covetrus under the transition services
agreement ended in December 2020.
At December 26,
2020 we had $
0.3
million payable to Covetrus under this transition services agreement.
In connection with the formation of Henry Schein One, LLC, our joint venture with Internet Brands, which was
formed on July 1, 2018, we entered into a ten-year royalty agreement with Internet Brands whereby we will pay
Internet Brands approximately $31.0 million annually for the use of their intellectual property.
During 2020, 2019
and 2018, we recorded $
31.0
, million, $
31.0
million and $
15.5
million, respectively in connection with costs related
to this royalty agreement.
As of December 26, 2020 and December 28, 2019, Henry Schein One, LLC
had a net
receivable balance due from Internet Brands of $
4.7
million and $
9.4
million, respectively, comprised of amounts
related to the royalty agreement and other management fees.
During our normal course of business, we have interests in entities that we account for under the equity accounting
method.
During our fiscal years ended 2020, 2019 and 2018, we recorded
net sales of $
59.6
million, $
93.2
million,
and $
27.0
million, respectively, to such entities.
During our fiscal years ended 2020, 2019 and 2018, we purchased
$
12.6
million, $
11.8
million, and $
10.8
million, respectively, from such entities.
At December 26, 2020 and
December 28, 2019, we had in the aggregate $
36.4
million and $
31.0
million, due from our equity affiliates, and
$
8.6
million and $
4.9
million due to our equity affiliates, respectively.
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