Item 1. CONSOLIDATED FINANCIAL STATEMENTS

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Item 1. CONSOLIDATED FINANCIAL STATEMENTS

HENRY SCHEIN, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

September 25,December 26,
20212020
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$119,133$421,185
Accounts receivable, net of reserves of $73,095 and $88,0301,551,9461,424,787
Inventories, net1,784,0501,512,499
Prepaid expenses and other457,232432,944
Total current assets3,912,3613,791,415
Property and equipment, net355,675342,004
Operating lease right-of-use assets329,886288,847
Goodwill2,779,2342,504,392
Other intangibles, net645,832479,429
Investments and other397,764366,445
Total assets$8,420,752$7,772,532
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$1,057,127$1,005,655
Bank credit lines59,39473,366
Current maturities of long-term debt9,638109,836
Operating lease liabilities77,38364,716
Accrued expenses:
Payroll and related345,438295,329
Taxes157,446138,671
Other594,979595,529
Total current liabilities2,301,4052,283,102
Long-term debt705,540515,773
Deferred income taxes37,24830,065
Operating lease liabilities270,152238,727
Other liabilities388,211392,781
Total liabilities3,702,5563,460,448
Redeemable noncontrolling interests612,582327,699
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized,
none outstanding--
Common stock, $0.01 par value, 480,000,000 shares authorized,
139,129,543 outstanding on September 25, 2021 and
142,462,571 outstanding on December 26, 20201,3911,425
Additional paid-in capital--
Retained earnings3,594,2383,454,831
Accumulated other comprehensive loss(137,640)(108,084)
Total Henry Schein, Inc. stockholders' equity3,457,9893,348,172
Noncontrolling interests647,625636,213
Total stockholders' equity4,105,6143,984,385
Total liabilities, redeemable noncontrolling interests and stockholders' equity$8,420,752$7,772,532

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

Three Months EndedNine Months Ended
September 25,September 26,September 25,September 26,
2021202020212020
Net sales$3,178,315$2,840,146$9,070,499$6,953,416
Cost of sales2,266,1702,085,8786,377,7524,998,868
Gross profit912,145754,2682,692,7471,954,548
Operating expenses:
Selling, general and administrative701,499559,6052,038,2921,572,732
Restructuring costs (credits)(175)6,9923,36027,713
Operating income210,821187,671651,095354,103
Other income (expense):
Interest income1,4092,2944,7497,481
Interest expense(6,550)(11,111)(19,411)(29,409)
Other, net403(1,699)1,066(2,210)
Income from continuing operations before taxes,
equity in earnings of affiliates and noncontrolling interests206,083177,155637,499329,965
Income taxes(49,276)(29,005)(153,988)(65,965)
Equity in earnings of affiliates5,3493,66317,5507,808
Gain on sale of equity investment7,318-7,318-
Net income from continuing operations169,474151,813508,379271,808
Income (loss) from discontinued operations, net of tax-(29)-274
Net income169,474151,784508,379272,082
Less: Net income attributable to noncontrolling interests(7,188)(10,087)(24,380)(10,921)
Net income attributable to Henry Schein, Inc.$162,286$141,697$483,999$261,161
Amounts attributable to Henry Schein Inc.:
Continuing operations$162,286$141,726$483,999$260,887
Discontinued operations-(29)-274
Net income attributable to Henry Schein, Inc.$162,286$141,697$483,999$261,161
Earnings per share from continuing operations attributable to Henry Schein, Inc.:
Basic$1.16$1.00$3.44$1.83
Diluted$1.15$0.99$3.40$1.82
Earnings per share from discontinued operations attributable to Henry Schein, Inc.:
Basic$-$-$-$-
Diluted$-$-$-$-
Earnings per share attributable to Henry Schein, Inc.:
Basic$1.16$1.00$3.44$1.83
Diluted$1.15$0.99$3.40$1.82
Weighted-average common shares outstanding:
Basic139,377142,362140,661142,553
Diluted141,079143,091142,179143,308

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

Three Months EndedNine Months Ended
September 25,September 26,September 25,September 26,
2021202020212020
Net income$169,474$151,784$508,379$272,082
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)(39,762)37,588(40,105)(17,316)
Unrealized gain (loss) from foreign currency hedging
activities3,536(7,697)5,1462,457
Unrealized investment gain (loss)22(1)(5)
Pension adjustment gain (loss)624(338)1,466161
Other comprehensive income (loss), net of tax(35,600)29,555(33,494)(14,703)
Comprehensive income133,874181,339474,885257,379
Comprehensive income attributable to noncontrolling
interests:
Net income(7,188)(10,087)(24,380)(10,921)
Foreign currency translation (gain) loss4,739(1,636)3,93810,744
Comprehensive income attributable to noncontrolling
interests(2,449)(11,723)(20,442)(177)
Comprehensive income attributable to Henry Schein, Inc.$131,425$169,616$454,443$257,202

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, except share and per share data)

(unaudited)

Accumulated
Common StockAdditionalOtherTotal
$.01 Par ValuePaid-inRetainedComprehensiveNoncontrollingStockholders'
SharesAmountCapitalEarningsIncome / (Loss)InterestsEquity
Balance, June 26, 2021139,780,841$1,398$-$3,465,647$(106,779)$646,415$4,006,681
Net income (excluding $5,737 attributable to Redeemable
noncontrolling interests from continuing operations)---162,286-1,451163,737
Foreign currency translation loss (excluding loss of $4,668
attributable to Redeemable noncontrolling interests)----(35,023)(71)(35,094)
Unrealized gain from foreign currency hedging activities,
net of tax of $1,172----3,536-3,536
Unrealized investment gain, net of tax of $1----2-2
Pension adjustment gain, net of tax of $269----624-624
Dividends paid-----(170)(170)
Change in fair value of redeemable securities--(10,884)---(10,884)
Repurchase and retirement of common stock(651,289)(7)(6,500)(43,493)--(50,000)
Stock-based compensation expense11-27,546---27,546
Shares withheld for payroll taxes(20)-(1)---(1)
Settlement of stock-based compensation awards--(363)---(363)
Transfer of charges in excess of capital--(9,798)9,798---
Balance, September 25, 2021139,129,543$1,391$-$3,594,238$(137,640)$647,625$4,105,614
Accumulated
Common StockAdditionalOtherTotal
$.01 Par ValuePaid-inRetainedComprehensiveNoncontrollingStockholders'
SharesAmountCapitalEarningsIncome / (Loss)InterestsEquity
Balance, June 27, 2020142,438,127$1,424$16,475$3,172,439$(199,251)$630,458$3,621,545
Net income (excluding $6,092 attributable to Redeemable
noncontrolling interests from continuing operations)---141,697-3,995145,692
Foreign currency translation gain (excluding gain of $1,277
attributable to Redeemable noncontrolling interests)----35,95235936,311
Unrealized loss from foreign currency hedging activities,
net of tax benefit of $2,793----(7,697)-(7,697)
Unrealized investment gain, net of tax of $0----2-2
Pension adjustment loss, net of tax benefit of $133----(338)-(338)
Dividends paid-----(309)(309)
Change in fair value of redeemable securities--(10,724)---(10,724)
Initial noncontrolling interests and adjustments related to
business acquisitions-----2,4912,491
Stock-based compensation expense21,113-5,710---5,710
Shares withheld for payroll taxes(2,922)1(194)---(193)
Settlement of stock-based compensation awards--(223)---(223)
Balance, September 26, 2020142,456,318$1,425$11,044$3,314,136$(171,332)$636,994$3,792,267

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, except share and per share data)

(unaudited)

Accumulated
Common StockAdditionalOtherTotal
$.01 Par ValuePaid-inRetainedComprehensiveNoncontrollingStockholders'
SharesAmountCapitalEarningsIncome / (Loss)InterestsEquity
Balance, December 26, 2020142,462,571$1,425$-$3,454,831$(108,084)$636,213$3,984,385
Net income (excluding $19,770 attributable to Redeemable
noncontrolling interests from continuing operations)---483,999-4,610488,609
Foreign currency translation gain (loss) (excluding loss of $4,098
attributable to Redeemable noncontrolling interests)----(36,167)160(36,007)
Unrealized gain from foreign currency hedging activities,
net of tax of $1,819----5,146-5,146
Unrealized investment loss, net of tax benefit of $0----(1)-(1)
Pension adjustment gain, net of tax of $450----1,466-1,466
Dividends paid-----(324)(324)
Change in fair value of redeemable securities--(143,592)---(143,592)
Initial noncontrolling interests and adjustments related to
business acquisitions-----6,9666,966
Repurchase and retirement of common stock(3,518,846)(35)(33,742)(217,434)--(251,211)
Stock-based compensation expense299,572357,697---57,700
Shares withheld for payroll taxes(113,754)(2)(7,546)---(7,548)
Settlement of stock-based compensation awards--25---25
Transfer of charges in excess of capital--127,158(127,158)---
Balance, September 25, 2021139,129,543$1,391$-$3,594,238$(137,640)$647,625$4,105,614
Accumulated
Common StockAdditionalOtherTotal
$.01 Par ValuePaid-inRetainedComprehensiveNoncontrollingStockholders'
SharesAmountCapitalEarningsIncome / (Loss)InterestsEquity
Balance, December 28, 2019143,353,459$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 $7,253 attributable to Redeemable
noncontrolling interests from continuing operations)---261,161-3,668264,829
Foreign currency translation gain (loss) (excluding loss of $10,999
attributable to Redeemable noncontrolling interests)----(6,572)255(6,317)
Unrealized gain from foreign currency hedging activities,
net of tax of $553----2,457-2,457
Unrealized investment loss, net of tax benefit of $1----(5)-(5)
Pension adjustment gain, net of tax of $66----161-161
Dividends paid-----(816)(816)
Purchase of noncontrolling interests--(1,597)--(701)(2,298)
Change in fair value of redeemable securities--(5,141)---(5,141)
Initial noncontrolling interests and adjustments related to
business acquisitions-----2,4952,495
Repurchase and retirement of common stock(1,200,000)(12)(10,949)(62,828)--(73,789)
Stock-based compensation expense (credit)535,5565(6,653)---(6,648)
Shares withheld for payroll taxes(232,697)(2)(14,197)---(14,199)
Settlement of stock-based compensation awards--164---164
Separation of Animal Health business--1,649---1,649
Balance, September 26, 2020142,456,318$1,425$11,044$3,314,136$(171,332)$636,994$3,792,267

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Nine Months Ended
September 25,September 26,
20212020
Cash flows from operating activities:
Net income$508,379$272,082
Income from discontinued operations-274
Income from continuing operations508,379271,808
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization150,833138,515
Impairment charge on intangible assets-2,149
Gain on sale of equity investment(9,757)-
Stock-based compensation expense (credit)57,700(6,648)
Provision for (benefit from) losses on trade and other accounts receivable(8,795)34,590
Benefit from deferred income taxes(725)(48,193)
Equity in earnings of affiliates(17,550)(7,808)
Distributions from equity affiliates15,03510,053
Changes in unrecognized tax benefits(6,479)(18,365)
Other(48)4,794
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable(83,101)(199,858)
Inventories(207,921)(25,830)
Other current assets(41,651)(51,746)
Accounts payable and accrued expenses77,021144,953
Net cash provided by operating activities from continuing operations432,941248,414
Net cash provided by operating activities from discontinued operations-648
Net cash provided by operating activities432,941249,062
Cash flows from investing activities:
Purchases of fixed assets(48,706)(37,799)
Payments related to equity investments and business
acquisitions, net of cash acquired(415,365)(52,208)
Proceeds from sale of equity investments9,75712,000
Payments for loan to affiliate(5,980)(1,451)
Other(18,707)(14,498)
Net cash used in investing activities from continuing operations(479,001)(93,956)
Net cash used in investing activities from discontinued operations--
Net cash used in investing activities(479,001)(93,956)
Cash flows from financing activities:
Net change in bank borrowings(13,128)484,139
Proceeds from issuance of long-term debt200,000501,421
Principal payments for long-term debt(121,835)(610,457)
Debt issuance costs(2,013)(3,683)
Debt extinguishment costs-(401)
Payments for repurchases and retirement of common stock(251,211)(73,789)
Payments for taxes related to shares withheld for employee taxes(7,372)(14,007)
Distributions to noncontrolling shareholders(8,622)(3,995)
Acquisitions of noncontrolling interests in subsidiaries(50,292)(14,934)
Proceeds from Henry Schein Animal Health Business-139
Net cash provided by (used in) financing activities from continuing operations(254,473)264,433
Net cash used in financing activities from discontinued operations-(648)
Net cash provided by (used in) financing activities(254,473)263,785
Effect of exchange rate changes on cash and cash equivalents from continuing operations(1,519)8,507
Effect of exchange rate changes on cash and cash equivalents from discontinued operations--
Net change in cash and cash equivalents from continuing operations(302,052)427,398
Net change in cash and cash equivalents from discontinued operations--
Cash and cash equivalents, beginning of period421,185106,097
Cash and cash equivalents, end of period$119,133$533,495

See accompanying notes.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 1 – Basis of Presentation

Our consolidated financial statements include our accounts, as well as those of our wholly-owned and majority-owned subsidiaries. Certain prior period amounts have been reclassified to conform to the current period presentation.

Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements.

We consolidate the results of operations and financial position of a trade accounts receivable securitization which we consider a Variable Interest Entity (“VIE”) because we are the primary beneficiary, and we have the power to direct activities that most significantly affect the economic performance and have the obligation to absorb the majority of the losses or benefits. For this VIE, the trade accounts receivable transferred to the VIE are pledged as collateral to the related debt. The creditors have recourse to us for losses on these trade accounts receivable. At September 25, 2021 and December 26, 2020, there were no trade accounts receivable that were restricted to settle obligations of this VIE, nor were there liabilities of the VIE where the creditors have recourse to us.

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the nine months ended September 25, 2021 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 25, 2021.

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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

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

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

Critical Accounting Policies

There have been no material changes in our critical accounting policies during the nine months ended September 25, 2021, as compared to the critical accounting policies described in Item 8 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 26, 2020, except as follows:

Accounting Pronouncements Adopted

On December 27, 2020 we adopted Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes” (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. Our adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards

In August 2020, the Financial Accounting Standards Board 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)

(unaudited)

Note 3 – Revenue from Contracts with Customers

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

Disaggregation of Revenue

The following table disaggregates our revenue by segment and geography:

Three Months EndedNine Months Ended
September 25, 2021September 25, 2021
North AmericaInternationalGlobalNorth AmericaInternationalGlobal
Revenues:
Health care distribution
Dental$1,114,631$708,263$1,822,894$3,287,021$2,235,145$5,522,166
Medical1,163,79923,0131,186,8123,006,69977,9783,084,677
Total health care distribution2,278,430731,2763,009,7066,293,7202,313,1238,606,843
Technology and value-added services147,64420,965168,609399,47864,178463,656
Total revenues$2,426,074$752,241$3,178,315$6,693,198$2,377,301$9,070,499
Three Months EndedNine Months Ended
September 26, 2020September 26, 2020
North AmericaInternationalGlobalNorth AmericaInternationalGlobal
Revenues:
Health care distribution
Dental$1,008,836$641,017$1,649,853$2,413,154$1,653,067$4,066,221
Medical1,002,74124,4051,027,1462,377,35768,2872,445,644
Total health care distribution2,011,577665,4222,676,9994,790,5111,721,3546,511,865
Technology and value-added services120,94917,406138,355327,37448,173375,547
Total excluding Corporate TSA revenues (1)2,132,526682,8282,815,3545,117,8851,769,5276,887,412
Corporate TSA revenues (1)-24,79224,792-66,00466,004
Total revenues$2,132,526$707,620$2,840,146$5,117,885$1,835,531$6,953,416

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

At December 26, 2020, the current portion of contract liabilities of $71.5 million was reported in Accrued expenses: Other, and $8.2 million related to non-current contract liabilities was reported in Other liabilities. During the nine months ended September 25, 2021, we recognized in revenue $54.1 million of the amounts that were previously deferred at December 26, 2020. At September 25, 2021, the current and non-current portion of contract liabilities were $77.8 million and $9.1 million, respectively.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 4 – Segment 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, dental specialty products (including implant, orthodontic and endodontic products), diagnostic tests, infection-control products, PPE and vitamins. Our global dental businesses serve office-based dental practitioners, dental laboratories, schools and other institutions. Our global medical businesses serve office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions. Our global dental and medical businesses serve practitioners in 32 countries worldwide.

Our global technology and value-added services businesses provide software, technology and other value-added services to health care practitioners. Our technology offerings include practice management software systems for dental and medical practitioners. Our value-added practice solutions include financial services on a non-recourse basis, e-services, practice technology, network and hardware services, as well as consulting, and continuing education services for practitioners.

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

Three Months EndedNine Months Ended
September 25,September 26,September 25,September 26,
2021202020212020
Net Sales:
Health care distribution (1)
Dental$1,822,894$1,649,853$5,522,166$4,066,221
Medical1,186,8121,027,1463,084,6772,445,644
Total health care distribution3,009,7062,676,9998,606,8436,511,865
Technology and value-added services (2)168,609138,355463,656375,547
Total excluding Corporate TSA revenue3,178,3152,815,3549,070,4996,887,412
Corporate TSA revenues (3)-24,792-66,004
Total$3,178,315$2,840,146$9,070,499$6,953,416

(1) Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic products), diagnostic tests, infection-control products, PPE and vitamins.

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

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

Three Months EndedNine Months Ended
September 25,September 26,September 25,September 26,
2021202020212020
Operating Income:
Health care distribution$179,275$148,658$558,968$271,477
Technology and value-added services31,54639,01392,12782,626
Total$210,821$187,671$651,095$354,103

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 5 – Debt

Bank Credit Lines

Bank credit lines consisted of the following:

September 25,December 26,
20212020
Revolving credit agreement$-$-
Other short-term bank credit lines59,39473,366
Total$59,394$73,366

Revolving Credit Agreement

On August 20, 2021, we entered into a new $1 billion revolving credit agreement (the “Credit Agreement”). This facility, which matures on August 20, 2026, replaced our $750 million revolving credit facility, which was scheduled to mature in April 2022. The interest rate is based on the USD LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter. We expect most LIBOR rates to be discontinued immediately after December 31, 2021, while the remaining LIBOR rates will be discontinued immediately after June 30, 2023. We do not expect the discontinuation of LIBOR as a reference rate in our debt agreements to have a material adverse effect on our financial position or to materially affect our interest expense. The Credit Agreement also requires, among other things, that we maintain certain maximum leverage ratios. Additionally, the Credit Agreement contains customary representations, warranties and affirmative covenants as well as customary negative covenants, subject to negotiated exceptions, on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements. As of September 25, 2021, and December 26, 2020, we had no borrowings under this revolving credit facility. As of September 25, 2021, and December 26, 2020, there were $9.1 million and $9.5 million of letters of credit, respectively, provided to third parties under the credit facility.

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

364-Day Credit Agreement

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

Other Short-Term Credit Lines

As of September 25, 2021 and December 26, 2020, we had various other short-term bank credit lines available, of which $59.4 million and $73.4 million, respectively, were outstanding. At September 25, 2021 and December 26, 2020, borrowings under all of these credit lines had a weighted average interest rate of 7.42% and 4.14%, respectively.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Long-term debt

Long-term debt consisted of the following:

September 25,December 26,
20212020
Private placement facilities$706,433$613,498
Note payable-1,554
Various collateralized and uncollateralized loans payable with interest,
in varying installments through 2023 at interest rates
ranging from 2.45% to 4.27% at September 25, 2021 and
ranging from 2.62% to 4.27% at December 26, 20203,5664,596
Finance lease obligations (see Note 6)5,1795,961
Total715,178625,609
Less current maturities(9,638)(109,836)
Total long-term debt$705,540$515,773

Private Placement Facilities

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

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

On October 20, 2021, we amended our three private placement facilities with insurance companies and entered into a fourth private placement facility with another insurance company, increasing the total facilities amount to $1.5 billion and extending the maturity date of the existing facilities. The maturity date for our private placement facilities is October 20, 2026.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

The components of our private placement facility borrowings as of September 25, 2021 are presented in the following table (in thousands):

Amount of
BorrowingBorrowing
Date of BorrowingOutstandingRateDue Date
January 20, 2012 (1)$7,1433.09%January 20, 2022
January 20, 201250,0003.45January 20, 2024
December 24, 201250,0003.00December 24, 2024
June 16, 2017100,0003.42June 16, 2027
September 15, 2017100,0003.52September 15, 2029
January 2, 2018100,0003.32January 2, 2028
September 2, 2020100,0002.35September 2, 2030
June 2, 2021100,0002.48June 2, 2031
June 2, 2021100,0002.58June 2, 2033
Less: Deferred debt issuance costs(710)
$706,433
(1) Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016.

U.S. Trade Accounts Receivable Securitization

We have a facility agreement with a bank, as agent, based on the securitization of our U.S. trade accounts receivable that is structured as an asset-backed securitization program with pricing committed for up to three years. Our current facility, which has a purchase limit of $350 million, was scheduled to expire on April 29, 2022. On June 22, 2020, the expiration date for this facility was extended to June 12, 2023 and was amended to adjust certain covenant levels for 2020. As of September 25, 2021 and December 26, 2020, there were no borrowings outstanding under this securitization facility. At September 25, 2021, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 0.13% plus 0.95%, for a combined rate of 1.08%. At December 26, 2020, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 0.22% plus 0.95%, for a combined rate of 1.17%.

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

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

On October 20, 2021, we amended our U.S. trade accounts receivable securitization facility to increase the purchase limit to $450 million with two banks as agents and extend the expiration date to October 18, 2024.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 6 – 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 20 years, some of which may include options to extend the leases for up to 10 years. The components of lease expense were as follows:

Three Months EndedNine Months Ended
September 25,September 26,September 25,September 26,
2021202020212020
Operating lease cost: (1)$26,914$21,343$75,860$65,413
Finance lease cost:
Amortization of right-of-use assets5734341,6931,148
Interest on lease liabilities24297786
Total finance lease cost$597$463$1,770$1,234
(1)Includes variable lease expenses.
Supplemental balance sheet information related to leases is as follows:
September 25,December 26,
20212020
Operating Leases:
Operating lease right-of-use assets$329,886$288,847
Current operating lease liabilities77,38364,716
Non-current operating lease liabilities270,152238,727
Total operating lease liabilities$347,535$303,443
Finance Leases:
Property and equipment, at cost$11,255$10,683
Accumulated depreciation(5,470)(4,277)
Property and equipment, net of accumulated depreciation$5,785$6,406
Current maturities of long-term debt$2,219$2,420
Long-term debt2,9603,541
Total finance lease liabilities$5,179$5,961
Weighted Average Remaining Lease Term in Years:
Operating leases7.47.5
Finance leases4.04.3
Weighted Average Discount Rate:
Operating leases2.5%2.8%
Finance leases1.7%1.9%

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Supplemental cash flow information related to leases is as follows:
Nine Months Ended
September 25,September 26,
20212020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases$62,363$57,666
Operating cash flows for finance leases6776
Financing cash flows for finance leases2,1291,515
Right-of-use assets obtained in exchange for lease obligations:
Operating leases$101,192$66,082
Finance leases1,4882,489
Maturities of lease liabilities are as follows:
September 25, 2021
OperatingFinance
LeasesLeases
2021$22,362$699
202280,6621,990
202357,8781,015
202443,237416
202538,621355
Thereafter138,529888
Total future lease payments381,2895,363
Less: imputed interest(33,754)(184)
Total$347,535$5,179

As of September 25, 2021, we have additional operating leases with total lease payments of $10.8 million for buildings and vehicles that have not yet commenced. These operating leases will commence subsequent to September 25, 2021, with lease terms of two years to 10 years.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 7 – Redeemable Noncontrolling Interests

Some minority stockholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. Accounting Standards Codification (“ASC”) Topic 480-10 is applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. The components of the change in the redeemable noncontrolling interests for the nine months ended September 25, 2021 and the year ended December 26, 2020 are presented in the following table:

September 25,December 26,
20212020
Balance, beginning of period$327,699$287,258
Decrease in redeemable noncontrolling interests due to
redemptions(50,292)(17,241)
Increase in redeemable noncontrolling interests due to business
acquisitions189,87028,387
Net income attributable to redeemable noncontrolling interests19,77013,363
Dividends declared(13,959)(12,631)
Effect of foreign currency translation loss attributable to
redeemable noncontrolling interests(4,098)(4,279)
Change in fair value of redeemable securities143,59232,842
Balance, end of period$612,582$327,699

Note 8 – Comprehensive Income

Comprehensive income includes certain gains and losses that, under U.S. GAAP, are excluded from net income as such amounts are recorded directly as an adjustment to stockholders’ equity.

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

September 25,December 26,
20212020
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment$(28,715)$(24,617)
Attributable to noncontrolling interests:
Foreign currency translation adjustment$395$235
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment$(112,732)$(76,565)
Unrealized loss from foreign currency hedging activities(6,342)(11,488)
Unrealized investment gain-1
Pension adjustment loss(18,566)(20,032)
Accumulated other comprehensive loss$(137,640)$(108,084)
Total Accumulated other comprehensive loss$(165,960)$(132,466)

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

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

Three Months EndedNine Months Ended
September 25,September 26,September 25,September 26,
2021202020212020
Net income$169,474$151,784$508,379$272,082
Foreign currency translation gain (loss)(39,762)37,588(40,105)(17,316)
Tax effect----
Foreign currency translation gain (loss)(39,762)37,588(40,105)(17,316)
Unrealized gain (loss) from foreign currency hedging
activities4,708(10,490)6,9653,010
Tax effect(1,172)2,793(1,819)(553)
Unrealized gain (loss) from foreign currency hedging
activities3,536(7,697)5,1462,457
Unrealized investment gain (loss)32(1)(6)
Tax effect(1)--1
Unrealized investment gain (loss)22(1)(5)
Pension adjustment gain (loss)893(471)1,916227
Tax effect(269)133(450)(66)
Pension adjustment gain (loss)624(338)1,466161
Comprehensive income$133,874$181,339$474,885$257,379

The change in the unrealized gain (loss) from foreign currency hedging activities during the three and nine months ended September 25, 2021, compared to the comparable prior year period, was primarily attributable to a net investment hedge that was entered into during 2019. See Note 14-Derivatives and Hedging Activities

for further information.

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 nine months ended September 25, 2021 and nine months ended September 26, 2020 was primarily impacted by changes in foreign currency exchange rates of the Euro, British Pound, Brazilian Real, Australian Dollar and Canadian Dollar.

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

Three Months EndedNine Months Ended
September 25,September 26,September 25,September 26,
2021202020212020
Comprehensive income attributable to
Henry Schein, Inc.$131,425$169,616$454,443$257,202
Comprehensive income attributable to
noncontrolling interests1,3804,3544,7703,923
Comprehensive income (loss) attributable to
Redeemable noncontrolling interests1,0697,36915,672(3,746)
Comprehensive income$133,874$181,339$474,885$257,379

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 9 – Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described as follows:

  • Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

  • Level 2— Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

  • Level 3— Inputs that are unobservable for the asset or liability.

The following section describes the fair values of our financial instruments and the methodologies that we used to measure their fair values.

Investments and notes receivable

There are no quoted market prices available for investments in unconsolidated affiliates and notes receivable; however, we believe the carrying amounts are a reasonable estimate of fair value based on the interest rates in the applicable markets.

Debt

The fair value of our debt (including bank credit lines) is classified as Level 3 within the fair value hierarchy as of September 25, 2021 and December 26, 2020 was estimated at $774.6 million and $699.0 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, foreign currency forward contracts to hedge a portion of our euro-denominated foreign operations which are designated as net investment hedges and a total return swap for the purpose of economically hedging our unfunded non-qualified supplemental retirement plan and our deferred compensation plan.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

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 14-Derivatives and Hedging Activities

for further 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 7–Redeemable Noncontrolling Interests

for additional information.

The following table presents our assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 25, 2021 and December 26, 2020:

September 25, 2021
Level 1Level 2Level 3Total
Assets:
Derivative contracts$-$1,141$-$1,141
Total assets$-$1,141$-$1,141
Liabilities:
Derivative contracts$-$1,905$-$1,905
Total return swaps-408-408
Total liabilities$-$2,313$-$2,313
Redeemable noncontrolling interests$-$-$612,582$612,582
December 26, 2020
Level 1Level 2Level 3Total
Assets:
Derivative contracts$-$1,868$-$1,868
Total return swaps-1,565-1,565
Total assets$-$3,433$-$3,433
Liabilities:
Derivative contracts$-$11,765$-$11,765
Total liabilities$-$11,765$-$11,765
Redeemable noncontrolling interests$-$-$327,699$327,699

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 10 – Business Acquisitions

Acquisitions

We completed acquisitions during the nine months ended September 25, 2021 which were immaterial to our financial statements. The acquisitions that we completed included companies within our health care distribution and technology and value-added services segments. The initial ownership interest we acquired in these companies ranged from approximately 51% to 100%. Acquisitions within our health care distribution segment included companies that specialize in the distribution and manufacturing of dental and medical products, a provider of home medical supplies, and a provider of product kitting and sterile packaging. Within our technology and value-added services segment, we acquired companies that focus on dental marketing and website solutions, practice transition services, and business analytics and intelligence software.

The following table summarizes the estimated fair value, as of the date of acquisition, of consideration paid and net assets acquired for acquisitions during the nine months ended September 25, 2021. While we use our best estimates and assumptions to accurately value those assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill within our consolidated balance sheets.

Acquisition consideration:
Cash$435,216
Redeemable noncontrolling interests179,086
Total consideration614,302
Identifiable assets acquired and liabilities assumed:
Current assets158,657
Intangible assets258,501
Other noncurrent assets38,519
Current liabilities(62,176)
Deferred income taxes(17,580)
Other noncurrent liabilities(38,271)
Total identifiable net assets337,650
Goodwill284,151
Total net assets acquired$621,801

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 income taxes and other current and long-term assets and liabilities. The estimated fair value of identifiable intangible assets is based on critical judgments and assumptions derived from analysis of market conditions, including discount rates, projected revenue growth rates, estimated customer attrition and projected cash flows. These assumptions are forward-looking and could be affected by future economic and market conditions.

Certain prior owners of acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial targets are met. We have accrued liabilities for the estimated fair value of additional purchase price consideration at the time of the acquisition. Any adjustments to these accrual amounts are recorded in our consolidated statements of income. For the nine months ended September 25, 2021 and September 26, 2020, there were no material adjustments recorded in our consolidated statements of income relating to changes in estimated contingent purchase price liabilities.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 11 – Plans of Restructuring

On November 20, 2019, we committed to a contemplated restructuring initiative intended to mitigate stranded costs associated with the Animal Health Spin-off and to rationalize operations and to provide expense efficiencies. These activities were originally expected to be completed by the end of 2020. In light of the changes to the business environment brought on by the COVID-19 pandemic, we extended such activities to the end of 2021.

During the three months ended September 25, 2021 and September 26, 2020, we recorded restructuring costs (credits) of $(0.2) million and $7.0 million. During the nine months ended September 25, 2021 and September 26, 2020, we recorded restructuring costs of $3.4 million and $27.7 million. The restructuring costs (credits) for these periods included costs (credits) for severance benefits and facility exit costs. The costs (credits) associated with these restructurings are included in a separate line item, “Restructuring costs (credits)” within our consolidated statements of income.

We are currently unable in good faith to make a determination of an estimate of the amount or range of amounts expected to be incurred in connection with these activities in 2021, both with respect to each major type of cost associated therewith and with respect to the total cost, or an estimate of the amount or range of amounts that will result in future cash expenditures.

The following table shows the net amounts expensed and paid for restructuring costs that were incurred during the nine months ended September 25, 2021 and during our 2020 fiscal year and the remaining accrued balance of restructuring costs as of September 25, 2021, which is included in Accrued expenses: Other within our consolidated balance sheets:

Facility
SeveranceClosing
CostsCostsOtherTotal
Balance, December 28, 2019$12,911$826$73$13,810
Provision25,8555,87836032,093
Payments and other adjustments(26,152)(6,309)(329)(32,790)
Balance, December 26, 2020$12,614$395$104$13,113
Provision3,234(105)2313,360
Payments and other adjustments(13,746)10(332)(14,068)
Balance, September 25, 2021$2,102$300$3$2,405

The following table shows, by reportable segment, the net amounts expensed and paid for restructuring costs that were incurred during the nine months ended September 25, 2021 and during our 2020 fiscal year and the remaining accrued balance of restructuring costs as of September 25, 2021:

Technology and
Health CareValue-Added
DistributionServicesTotal
Balance, December 28, 2019$13,373$437$13,810
Provision30,9351,15832,093
Payments and other adjustments(31,484)(1,306)(32,790)
Balance, December 26, 2020$12,824$289$13,113
Provision2,8305303,360
Payments and other adjustments(13,563)(505)(14,068)
Balance, September 25, 2021$2,091$314$2,405

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 12 – Earnings Per Share

Basic earnings per share is computed by dividing net income attributable to Henry Schein, Inc. by the weighted-average number of common shares outstanding for the period. Our diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the effect of common shares issuable for presently unvested restricted stock and restricted stock units and upon exercise of stock options using the treasury stock method in periods in which they have a dilutive effect.

A reconciliation of shares used in calculating earnings per basic and diluted share follows:

Three Months EndedNine Months Ended
September 25,September 26,September 25,September 26,
2021202020212020
Basic139,377142,362140,661142,553
Effect of dilutive securities:
Stock options, restricted stock and restricted stock units1,7027291,518755
Diluted141,079143,091142,179143,308

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 13 – Income Taxes

For the nine months ended September 25, 2021 our effective tax rate was 24.2% compared to 20.0% for the prior year period. The difference between our effective tax rates and the federal statutory tax rate for the nine months ended September 25, 2021 primarily relates to state and foreign income taxes, interest expense and tax charges and credits associated with legal entity reorganizations. The difference between our effective tax rate and the federal statutory tax rate for the nine months ended September 26, 2020 was primarily due to a U.S. federal income tax settlement reached during the third quarter, which lowered income tax expense by approximately $15.6 million, as well as state and foreign income taxes and interest expense.

The American Rescue Plan Act of 2021 (“ARPA”) was signed into law on March 11, 2021. The ARPA included a corporate income tax provision to further limit the deductibility of compensation under Section 162(m) for tax years starting after December 31, 2026. Section 162(m) generally limits the deductibility of compensation paid to covered employees of publicly held corporations. Covered employees include the CEO, CFO and the three highest paid officers. The ARPA expands the group of covered employees to additionally include five of the highest paid employees.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act includes, but is not limited to, certain income tax provisions that modify the Section 163(j) limitation of business interest and net operating loss carryover and carryback rules. We have analyzed the income tax provisions of the CARES Act and have accounted for the impact in the nine months ended September 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.

The total amount of unrecognized tax benefits, which are included in “Other liabilities” within our consolidated balance sheets, as of September 25, 2021 was approximately $79.0 million, of which $64.3 million would affect the effective tax rate if recognized. It is possible that the amount of unrecognized tax benefits will change in the next 12 months, which may result in a material impact on our consolidated statements of income.

The tax years subject to examination by major tax jurisdictions include years 2017 and forward by the U.S Internal Revenue Service (the “IRS”) as well as the years 2008 and forward for certain states and certain foreign jurisdictions. All tax returns audited by the IRS are officially closed through 2016. During the quarter ended June 26, 2021 we reached a resolution with the Appellate Division for all remaining outstanding issues for 2012 and 2013. The resolution did not have a material impact to our consolidated financial statements. We reached a settlement with the U.S. Competent Authority to resolve certain transfer pricing issues related to 2012 and 2013 in the quarter ended December 28, 2019. During the quarter ended September 26, 2020 we finalized negotiations with the Advance Pricing Division and reached an agreement on an appropriate transfer pricing methodology for the years 2014-2025. The objective of this resolution was to mitigate future transfer pricing audit adjustments. In the fourth quarter of 2020, we reached a favorable resolution with the IRS relating to select audit years.

The total amounts of interest and penalties are classified as a component of the provision for income taxes. The amount of tax interest credits were approximately $(2.2) million for the nine months ended September 25, 2021, and $(1.1) million for the nine months ended September 26, 2020. The total amount of accrued interest is included in “Other liabilities,” and was approximately $11.7 million as of September 25, 2021 and $14.0 million as of December 26, 2020. No penalties were accrued for the periods presented.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 14 – Derivatives and Hedging Activities

We are exposed to market risks as well as changes in foreign currency exchange rates as measured against the U.S. dollar and each other, and changes to the credit risk of the derivative counterparties. We attempt to minimize these risks by primarily using foreign currency forward contracts and by maintaining counter-party credit limits. These hedging activities provide only limited protection against currency exchange and credit risks. Factors that could influence the effectiveness of our hedging programs include currency markets and availability of hedging instruments and liquidity of the credit markets. All foreign currency forward contracts that we enter into are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure. We do not enter into such contracts for speculative purposes and we manage our credit risks by diversifying our counterparties, maintaining a strong balance sheet and having multiple sources of capital.

During 2019 we entered into foreign currency forward contracts to hedge a portion of our euro-denominated foreign operations which are designated as net investment hedges. These net investment hedges offset the change in the U.S. dollar value of our investment in certain euro-functional currency subsidiaries due to fluctuating foreign exchange rates. 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 €200 million. During the three months ended September 25, 2021 and September 26, 2020, we recognized approximately $1.1 million and $1.2 million, respectively, of interest savings as a result of this net investment hedge. During the nine months ended September 25, 2021 and September 26, 2020, we recognized approximately $3.3 and $3.6 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 supplemental retirement plan (“SERP”) and our deferred compensation plan (“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 September 25, 2021, the notional value of the investments in these plans was $86.0 million. At September 25, 2021, the financing blended rate for this swap was based on LIBOR of 0.08% plus 0.47%, for a combined rate of 0.55%. For the three months and nine months ended September 25, 2021, we have recorded a gain, within the selling, general and administrative line item in our consolidated statement of income, of approximately $2.0 million and $10.1 million, respectively, net of transaction costs, related to this undesignated swap. For the three months and nine months ended September 26, 2020, we have recorded a gain, within the selling, general and administrative line item in our consolidated statement of income, of approximately $3.8 million and $14.2 million, respectively, net of transaction costs, related to this undesignated swap. This swap is expected to be renewed on an annual basis after its current expiration date of March 29, 2022, and is expected to result in a neutral impact to our results of operations.

Fluctuations in the value of certain foreign currencies as compared to the U.S. dollar may positively or negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., generally 18 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)

(unaudited)

Note 15 – Stock-Based Compensation

Our accompanying consolidated statements of income reflect pre-tax stock-based compensation expense of $27.5 million ($20.9 million after-tax) and $57.7 million ($43.8 million after-tax) for the three and nine months ended September 25, 2021, respectively. For the three and nine months ended September 26, 2020 we recorded pre-tax stock-based compensation expense of $5.7 million ($4.1 million after-tax) and a credit of $6.6 million ($5.3 million after-tax), respectively. The $6.6 million credit for stock-based compensation during the nine months ended September 26, 2020 reflected our reduced estimate in expected achievement of performance-based targets resulting from the impact of COVID-19.

Our accompanying consolidated statements of cash flows present our stock-based compensation expense (credit) as an adjustment to reconcile net income to net cash provided by operating activities for all periods presented. In the accompanying consolidated statements of cash flows, there were no benefits associated with tax deductions in excess of recognized compensation as a cash inflow from financing activities for the nine months ended September 25, 2021 and September 26, 2020, respectively.

Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee directors. We measure stock-based compensation at the grant date, based on the estimated fair value of the award, and recognize the cost (net of estimated forfeitures) as compensation expense over the requisite service period. Our stock-based compensation expense is reflected in selling, general and administrative expenses in our consolidated statements of income.

Stock-based awards are provided to certain employees and non-employee directors under the terms of our 2020 Stock Incentive Plan and our 2015 Non-Employee Director Stock Incentive Plan (together, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors (the “Compensation Committee”). Historically, equity-based awards have been granted solely in the form of restricted stock units (“RSUs”). However, beginning in 2021, our equity-based awards have been granted in the form of RSUs and non-qualified stock options.

Grants of RSUs are stock-based awards granted to recipients with specified vesting provisions. In the case of RSUs, common stock is generally delivered on or following satisfaction of vesting conditions. We issue RSUs that vest solely based on the recipient’s continued service over time (primarily four-year cliff vesting, except for grants made under the 2015 Non-Employee Director Stock Incentive Plan, which are primarily 12-month cliff vesting), and RSUs that vest based on our achieving specified performance measurements and the recipient’s continued service over time (primarily three-year cliff vesting). For these RSUs, we recognize the cost as compensation expense on a straight-line basis.

During the three months ended March 27, 2021, as a result of the continuing economic risk and uncertainty resulting from the ongoing COVID-19 pandemic, the Compensation Committee decided to adjust the form of awards granted under our 2021 long-term incentive program for our 2021 fiscal year in a manner that focuses on our long-term value by granting stock options and time-based RSUs rather than performance-based RSUs. Stock options are awards that allow the recipient to purchase shares of our common stock at a fixed price following vesting of the stock options. Stock options are granted at an exercise price equal to our closing stock price on the date of grant. Stock options issued during 2021 vest one-third per year based on the recipient’s continued service, subject to the terms and conditions of the Plans, are fully vested three years from the grant date and have a contractual term of ten years from the grant date, subject to earlier termination of the term upon certain events. Compensation expense for these stock options is recognized using a graded vesting method. We estimate the fair value of stock options using the Black-Scholes valuation model.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

In addition to equity-based awards under the 2021 long-term incentive program under the 2020 Stock Incentive Plan, the Compensation Committee granted a Special Pandemic Recognition Award under the 2020 Stock Incentive Plan to recipients of performance-based RSUs under the 2018 long-term incentive program. These time-based RSU awards will vest 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date, based on the recipient’s continued service and subject to the terms and conditions of the Plans, and are recorded as compensation expense using a graded vesting method.

With respect to time-based RSUs, we estimate the fair value on the date of grant based on our closing stock price at time of grant. With respect to performance-based RSUs, the number of shares that ultimately vest and are received by the recipient is based upon our performance as measured against specified targets over a specified period, as determined by the Compensation Committee. Although there is no guarantee that performance targets will be achieved, we estimate the fair value of performance-based RSUs based on our closing stock price at time of grant.

The Plans provide for adjustments to the performance-based restricted stock units targets for significant events, including, without limitation, acquisitions, divestitures, new business ventures, certain capital transactions (including share repurchases), restructuring costs, if any, certain litigation settlements or payments, if any, changes in accounting principles or in applicable laws or regulations, changes in income tax rates in certain markets and foreign exchange fluctuations. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted upward or downward based upon our estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on our actual performance metrics as defined under the Plans.

Total unrecognized compensation cost related to unvested awards as of September 25, 2021 was $85.7 million, which is expected to be recognized over a weighted-average period of approximately 2.2 years.

The following weighted-average assumptions were used in determining the most recent fair values of stock options granted using the Black-Scholes valuation model:

Expected dividend yield0.0%
Expected stock price volatility27.00%
Risk-free interest rate0.97%
Expected life of options (years)6.00

We have not declared cash dividends on our stock in the past and we do not anticipate declaring cash dividends in the foreseeable future. The expected stock price volatility is based on implied volatilities from traded options on our stock, historical volatility of our stock, and other factors. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant in conjunction with considering the expected life of options. The six year expected life of the options was determined using the simplified method for estimating the expected term as permitted under SAB Topic 14. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by recipients of stock options, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by us.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

The following table summarizes stock option activity under the Plans during the nine months ended September 25, 2021:

Weighted
Average
WeightedRemaining
AverageContractualAggregate
ExerciseLife inIntrinsic
SharesPriceYearsValue
Outstanding at beginning of period-$-
Granted80763.05
Exercised--
Forfeited(6)62.99
Outstanding at end of period801$63.059.4$15.05
Options exercisable at end of period1$62.71

The following tables summarize the activity of our unvested RSUs for the nine months ended September 25, 2021:

Time-Based Restricted Stock Units
Weighted Average
Grant Date FairIntrinsic Value
Shares/UnitsValue Per SharePer Share
Outstanding at beginning of period1,459$57.61
Granted83363.24
Vested(266)66.85
Forfeited(32)60.13
Outstanding at end of period1,994$58.77$78.10
Performance-Based Restricted Stock Units
Weighted Average
Grant Date FairIntrinsic Value
Shares/UnitsValue Per SharePer Share
Outstanding at beginning of period136$53.52
Granted53158.92
Vested(84)52.35
Forfeited(14)59.34
Outstanding at end of period569$59.65$78.10

Note 16 – Supplemental Cash Flow Information

Cash paid for interest and income taxes was:

Nine Months Ended
September 25,September 26,
20212020
Interest$21,959$29,551
Income taxes178,804164,575

During the nine months ended September 25, 2021 and September 26, 2020, we had a $7.0 million and $3.0 million of non-cash net unrealized gains related to foreign currency hedging activities, respectively.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 17 – Legal Proceedings

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 approximately one-hundred and fifty (150)), which allege claims similar to those alleged in the County of Summit Action. These actions consist of some that have been consolidated within the MDL and are currently abated for discovery purposes, and others which remain pending in state courts and are proceeding independently and outside of the MDL. On October 9, 2020, the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida, Case No. CACE19018882, granted Henry Schein’s motion to dismiss the claims brought against it in the action filed by North Broward Hospital District et. al. The Florida court gave plaintiffs until November 24, 2020 to replead their claims against Henry Schein, and plaintiffs filed an amended complaint. On January 8, 2021, Henry Schein filed a motion to dismiss the amended complaint. On September 20, 2021, the Florida court denied Henry Schein’s motion to dismiss. At this time, the only case set for trial is the action filed by DCH Health Care Authority, et al. in Alabama state court, which is currently scheduled for a liability jury trial on plaintiffs’ public nuisance claims on July 18, 2022. Of Henry Schein’s 2020 revenue of approximately $10.1 billion from continuing operations, sales of opioids represented less than one-tenth of 1 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 8, 2019 through August 12, 2019. The case relates to the Animal Health Spin-off and Merger of the Henry Schein Animal Health Business with Vets First Choice in February 2019. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Securities and Exchange Commission Rule 10b-5 and asserts that defendants’ statements in the offering documents and after the transaction were materially false and misleading 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. On August 3, 2021, the court granted Henry Schein’s and Mr. Paladino’s motion to dismiss them from the case with prejudice.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

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. A second similar complaint, Stegmann v. Wolin, was filed in the same court on March 30, 2021, which did not name the Company as a defendant. We expect a consolidated amended complaint to be filed and Plaintiffs have agreed to dismiss Henry Schein from the consolidated amended complaint without prejudice; we expect the parties to submit a proposed order to the Court reflecting this agreement.

From time to time, we may become a party to other legal proceedings, including, without limitation, product liability claims, employment matters, commercial disputes, governmental inquiries and investigations (which may in some cases involve our entering into settlement arrangements or consent decrees), and other matters arising out of the ordinary course of our business. While the results of any legal proceeding cannot be predicted with certainty, in our opinion none of these other pending matters are currently anticipated to have a material adverse effect on our consolidated financial position, liquidity or results of operations.

As of September 25, 2021, we had accrued our best estimate of potential losses relating to claims that were probable to result in liability and for which we were able to reasonably estimate a loss. This accrued amount, as well as related expenses, was not material to our financial position, results of operations or cash flows. Our method for determining estimated losses considers currently available facts, presently enacted laws and regulations and other factors, including probable recoveries from third parties.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 18 – Related Party Transactions

On February 7, 2019 (the “Distribution Date”), we completed the separation (the “Separation”) and subsequent merger (“Merger”) of our animal health business (the “Henry Schein Animal Health Business”) with Direct Vet Marketing, Inc. (d/b/a Vets First Choice, “Vets First Choice”). This was accomplished by a series of transactions among us, Vets First Choice, Covetrus, Inc. (f/k/a HS Spinco, Inc. “Covetrus”), a wholly owned subsidiary of ours prior to the Distribution Date, and HS Merger Sub, Inc., a wholly owned subsidiary of Covetrus. 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 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”).

In connection with the completion of the Animal Health Spin-off during our 2019 fiscal year, we entered into a transition services agreement with Covetrus under which we agreed to provide certain transition services for up to twenty-four months in areas such as information technology, finance and accounting, human resources, supply chain, and real estate and facility services. Services provided under this transition services agreement ended in December 2020. During the three and nine months ended September 26, 2020, we recorded approximately $3.9 million and $12.7 million, respectively, of fees for these services. Covetrus also purchased certain products from us pursuant to the transition services agreement, which ended in December 2020. During the three and nine months ended September 26, 2020, net sales to Covetrus were approximately $24.8 million and $66.0 million, respectively.

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 the three and nine months ended September 25, 2021, we recorded $7.8 million and $23.4 million, respectively in connection with costs related to this royalty agreement. During the three and nine months ended September 26, 2020, we recorded $7.8 million and $23.4 million, respectively, in connection with costs related to this royalty agreement. As of September 25, 2021 and December 26, 2020, Henry Schein One, LLC had a net (payable) receivable balance due (to) from Internet Brands of $(14.7) million and $4.7 million, respectively, comprised of amounts related to results of operations and the royalty agreement.

During our normal course of business, we have interests in entities that we account for under the equity accounting method. During the three and nine months ended September 25, 2021, we recorded net sales of $17.7 million and $50.9 million, respectively, to such entities. During the three and nine months ended September 26, 2020, we recorded net sales of $13.4 million and $38 million, respectively, to such entities. During the three and nine months ended September 25, 2021, we purchased $4.8 million and $13.9 million, respectively, from such entities. During the three and nine months ended September 26, 2020, we purchased $4.3 million and $10.3 million, respectively, from such entities. At September 25, 2021 and December 26, 2020, in the aggregate we had $48.3 million and $36.9 million, due from our equity affiliates, and $9.6 million and $8.7 million due to our equity affiliates, respectively.

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