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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
In accordance with the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, we provide the following cautionary remarks regarding important factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. All forward-looking statements made by us are subject to risks and uncertainties and are not guarantees of future performance. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These statements are generally identified by the use of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,” “to be,” “to make” or other comparable terms. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the documents we file with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K. Forward looking statements include the overall impact of the Novel Coronavirus Disease 2019 (COVID-19) on the Company, its results of operations, liquidity, and financial condition (including any estimates of the impact on these items), the rate and consistency with which dental and other practices resume or maintain normal operations in the United States and internationally, expectations regarding personal protective equipment (“PPE”) and COVID-19 related product sales and inventory levels, whether additional resurgences or variants of the virus will adversely impact the resumption of normal operations, whether vaccine mandates will adversely impact the Company (by disrupting our workforce and/or business), whether supply chain disruptions will adversely impact our business, the impact of restructuring programs as well as of any future acquisitions, and more generally current expectations regarding performance in current and future periods. Forward looking statements also include the (i) ability of the Company to make additional testing available, the nature of those tests and the number of tests intended to be made available and the timing for availability, the nature of the target market, as well as the efficacy or relative efficacy of the test results given that the test efficacy has not been, or will not have been, independently verified under normal FDA procedures and (ii) potential for the Company to distribute the COVID-19 vaccines and ancillary supplies.
Risk factors and uncertainties that could cause actual results to differ materially from current and historical results include, but are not limited to: risks associated with COVID-19 and any variants thereof, as well as other disease outbreaks, epidemics, pandemics, or similar wide spread public health concerns and other natural disasters or acts of terrorism; our dependence on third parties for the manufacture and supply of our products; our ability to develop or acquire and maintain and protect new products (particularly technology products) and technologies that achieve market acceptance with acceptable margins; transitional challenges associated with acquisitions, dispositions and joint ventures, including the failure to achieve anticipated synergies/benefits; financial and tax risks associated with acquisitions, dispositions and joint ventures; certain provisions in our governing documents that may discourage third-party acquisitions of us; effects of a highly competitive (including, without limitation, competition from third-party online commerce sites) and consolidating market; the potential repeal or judicial prohibition on implementation of the Affordable Care Act; changes in the health care industry; risks from expansion of customer purchasing power and multi-tiered costing structures; increases in shipping costs for our products or other service issues with our third-party shippers; general global macro-economic and political conditions, including international trade agreements and potential trade barriers; failure to comply with existing and future regulatory requirements; risks associated with the EU Medical Device Regulation; failure to comply with laws and regulations relating to health care fraud or other laws and regulations; failure to comply with laws and regulations relating to the confidentiality of sensitive personal information or standards in electronic health records or transmissions; changes in tax legislation; litigation risks; new or unanticipated litigation developments and the status of litigation matters; cyberattacks or other privacy or data security breaches; risks associated with our global operations; our dependence on our senior management, as well as employee hiring and retention; and disruptions in financial markets. The order in which these factors appear should not be construed to indicate their relative importance or priority.
We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control or predict. Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results. We undertake no duty and have no obligation to update forward-looking statements.
Where You Can Find Important Information
We may disclose important information through one or more of the following channels: SEC filings, public conference calls and webcasts, press releases, the investor relations page of our website (www.henryschein.com) and the social media channels identified on the Newsroom page of our website.
Recent Developments
COVID-19 Pandemic
In March 2020, the World Health Organization declared 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 PPE and COVID-19 related products.
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 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.
Recently the federal government has issued executive orders for government contractors regarding COVID-19 vaccine mandates. The federal government has also indicated that the Occupational Safety and Health Administration intends to issue regulations concerning vaccine mandates for employers. In addition, state governments and some customers have also issued vaccine requirements for workers in their jurisdictions or who may service their accounts, and some state regulations contradict the federal vaccine mandates. Also, at this time, it remains unclear whether international jurisdictions will impose vaccine mandates or additional COVID-19 regulations. It is possible that a significant number of our employees have not been vaccinated, and in the event of a vaccine mandate some of those employees may seek exemptions or otherwise resist vaccination. The imposition of vaccine mandates could potentially cause labor shortages if employees refuse to get vaccinated and their employment is terminated, either voluntarily or involuntarily. Such labor shortages could reduce our sales and/or affect our ability to fulfill customer orders, impacting our revenue and profitability. Furthermore, managing and tracking vaccination status and ongoing testing for exempt and/or unvaccinated employees could potentially increase our costs, as could addressing inconsistent mandates. COVID-19 vaccine mandates and similar regulations have the potential to significantly adversely affect our business, as the nature and effect of such mandates are uncertain at this time.
Executive-Level Overview
Henry Schein, Inc. is a solutions company for health care professionals powered by a network of people and technology. We believe we are the world’s largest provider of health care products and services primarily to office-based dental and medical practitioners, as well as alternate sites of care. We serve more than one million customers worldwide including dental practitioners and laboratories and physician practices, as well as government, institutional health care clinics and other alternate care clinics. We believe that we have a strong brand identity due to our more than 88 years of experience distributing health care products.
We are headquartered in Melville, New York, employ more than 21,000 people (of which more than 10,300 are based outside the United States) and have operations or affiliates in 32 countries and territories, including the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Arab Emirates and the United Kingdom.
We have established strategically located distribution centers around the world to enable us to better serve our customers and increase our operating efficiency. This infrastructure, together with broad product and service offerings at competitive prices, and a strong commitment to customer service, enables us to be a single source of supply for our customers’ needs. Our infrastructure also allows us to provide convenient ordering and rapid, accurate and complete order fulfillment.
While our primary go-to-market strategy is in our capacity as a distributor, we also manufacture certain dental specialty products and solutions in the areas of implants, orthodontics and endodontics. We have achieved scale in these global businesses primarily through acquisitions as manufacturers of these products typically do not utilize a distribution channel to serve customers.
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 business serves office-based dental practitioners, dental laboratories, schools and other institutions. Our global medical business serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions.
Our global technology and value-added services business provides software, technology and other value-added services to health care practitioners. Our technology business 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.
A key element to grow closer to our customers is our One Schein initiative, which is a unified go-to-market approach that enables practitioners to work synergistically with our supply chain, equipment sales and service and other value-added services, allowing our customers to leverage the combined value that we offer through a single program. Specifically, One Schein provides customers with streamlined access to our comprehensive offering of national brand products, our private label products, and proprietary specialty products and solutions (including implant, orthodontic and endodontic products). In addition, customers have access to a wide range of services, including software and other value-added services.
Industry Overview
In recent years, the health care industry has increasingly focused on cost containment. This trend has benefited distributors capable of providing a broad array of products and services at low prices. It also has accelerated the
growth of HMOs, group practices, other managed care accounts and collective buying groups, which, in addition to their emphasis on obtaining products at competitive prices, tend to favor distributors capable of providing specialized management information support. We believe that the trend towards cost containment has the potential to favorably affect demand for technology solutions, including software, which can enhance the efficiency and facilitation of practice management.
Our operating results in recent years have been significantly affected by strategies and transactions that we undertook to expand our business, domestically and internationally, in part to address significant changes in the health care industry, including consolidation of health care distribution companies, health care reform, trends toward managed care, cuts in Medicare and collective purchasing arrangements.
Our current and future results have been and could be impacted by the COVID-19 pandemic, the current economic environment and continued economic and public health uncertainty. Since the onset of the COVID-19 pandemic in early 2020, we have been carefully monitoring its impact on our global operations and have taken appropriate steps to minimize the risk to our employees. We have seen and expect to continue to see changes in demand trends for some of our products and services, supply chain challenges, and labor challenges, as rates of infection fluctuate, new strains or variants of COVID-19 emerge and spread, vaccine uptake and mandates increase, governments adapt their approaches to combatting the virus (including without limitation, vaccine mandates), and local conditions change across geographies. For example, vaccine mandates affecting our workforce, whether imposed through government regulations or contracts with governmental authorities or other customers, could potentially cause staffing shortages if employees choose not to comply as well as other consequences to our business or operations, managing and tracking vaccination status and ongoing testing for exempt employees could potentially increase our costs, as could addressing inconsistent federal and state COVID-19 mandates. As a result, we expect to see continued volatility through at least the duration of the pandemic.
Industry Consolidation
The health care products distribution industry, as it relates to office-based health care practitioners, is fragmented and diverse. The industry ranges from sole practitioners working out of relatively small offices to group practices or service organizations ranging in size from a few practitioners to a large number of practitioners who have combined or otherwise associated their practices.
Due in part to the inability of office-based health care practitioners to store and manage large quantities of supplies in their offices, the distribution of health care supplies and small equipment to office-based health care practitioners has been characterized by frequent, small quantity orders, and a need for rapid, reliable and substantially complete order fulfillment. The purchasing decisions within an office-based health care practice are typically made by the practitioner or an administrative assistant. Supplies and small equipment are generally purchased from more than one distributor, with one generally serving as the primary supplier.
The trend of consolidation extends to our customer base. Health care practitioners are increasingly seeking to partner, affiliate or combine with larger entities such as hospitals, health systems, group practices or physician hospital organizations. In many cases, purchasing decisions for consolidated groups are made at a centralized or professional staff level; however, orders are delivered to the practitioners’ offices.
We believe that consolidation within the industry will continue to result in a number of distributors, particularly those with limited financial, operating and marketing resources, seeking to combine with larger companies that can provide growth opportunities. This consolidation also may continue to result in distributors seeking to acquire companies that can enhance their current product and service offerings or provide opportunities to serve a broader customer base.
Our trend with regard to acquisitions and joint ventures has been to expand our role as a provider of products and services to the health care industry. This trend has resulted in our expansion into service areas that complement our existing operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquired businesses.
As industry consolidation continues, we believe that we are positioned to capitalize on this trend, as we believe we have the ability to support increased sales through our existing infrastructure, although there can be no assurances that we will be able to successfully accomplish this. We also have invested in expanding our sales/marketing infrastructure to include a focus on building relationships with decision makers who do not reside in the office-based practitioner setting.
As the health care industry continues to change, we continually evaluate possible candidates for merger and joint venture or acquisition and intend to continue to seek opportunities to expand our role as a provider of products and services to the health care industry. There can be no assurance that we will be able to successfully pursue any such opportunity or consummate any such transaction, if pursued. If additional transactions are entered into or consummated, we would incur merger and/or acquisition-related costs, and there can be no assurance that the integration efforts associated with any such transaction would be successful. In response to the COVID-19 pandemic, we had taken a range of actions to preserve cash, including the temporary suspension of significant acquisition activity. During the second half of 2020, as global conditions improved, we resumed our acquisition strategy.
Aging Population and Other Market Influences
The health care products distribution industry continues to experience growth due to the aging population, increased health care awareness, the proliferation of medical technology and testing, new pharmacology treatments and expanded third-party insurance coverage, partially offset by the effects of unemployment on insurance coverage. In addition, the physician market continues to benefit from the shift of procedures and diagnostic testing from acute care settings to alternate-care sites, particularly physicians’ offices.
According to the U.S. Census Bureau’s International Data Base, in 2021 there were more than six and a half million Americans aged 85 years or older, the segment of the population most in need of long-term care and elder-care services. By the year 2050, that number is projected to nearly triple to approximately 19 million. The population aged 65 to 84 years is projected to increase by approximately 32% during the same time period.
As a result of these market dynamics, annual expenditures for health care services continue to increase in the United States. We believe that demand for our products and services will grow, while continuing to be impacted by current and future operating, economic and industry conditions. The Centers for Medicare and Medicaid Services, or CMS, published “National Health Expenditure Projections 2019-2028” indicating that total national health care spending reached approximately $3.8 trillion in 2019, or 17.7% of the nation’s gross domestic product, the benchmark measure for annual production of goods and services in the United States. Health care spending is projected to reach approximately $6.2 trillion in 2028, approximately 19.7% of the nation’s projected gross domestic product. The latest projections begin after the latest historical year (2018) and go through 2028. These projections do not take into account the impacts of COVID-19 because of the timing of the report and the highly uncertain nature of the pandemic.
Government
Certain of our businesses involve the distribution, importation, exportation, marketing and sale of, and third party payment for, pharmaceuticals and medical devices, and in this regard, we are subject to extensive local, state, federal and foreign governmental laws and regulations, including as applicable to our wholesale distribution of pharmaceuticals and medical devices, and as part of our specialty home medical supply business that distributes and sells medical equipment and supplies directly to patients. The federal government and state governments have also increased enforcement activity in the health care sector, particularly in areas of fraud and abuse, anti-bribery and corruption, controlled substances handling, medical device regulations, and data privacy and security standards.
Government and private insurance programs fund a large portion of the total cost of medical care, and there have been efforts to limit such private and government insurance programs, including efforts, thus far unsuccessful, to seek repeal of the entire United States Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, as amended. In addition, activities to control medical costs, including laws and regulations lowering reimbursement rates for pharmaceuticals, medical devices,
and/or medical treatments or services, are ongoing. Many of these laws and regulations are subject to change and their evolving implementation may impact our operations and our financial performance.
Our businesses are also generally subject to numerous other laws and regulations that could impact our financial performance, including securities, antitrust, consumer protection, anti-bribery and anti-kickback, customer interaction transparency, data privacy, data security, government contracting, price gouging, and other laws and regulations.
Failure to comply with law or regulations could have a material adverse effect on our business. A more detailed discussion of governmental laws and regulations is included in Management’s Discussion & Analysis, contained in our Annual Report on Form 10-K for the fiscal year ended December 26, 2020, filed on February 17, 2021.
Results of Operations
The following table summarizes the significant components of our operating results for the three and nine months ended September 25, 2021 and September 26, 2020 and cash flows for the nine months ended September 25, 2021 and September 26, 2020 (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 25, | September 26, | September 25, | September 26, | |||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||
| Operating results: | ||||||||||||||
| Net sales | $ | 3,178,315 | $ | 2,840,146 | $ | 9,070,499 | $ | 6,953,416 | ||||||
| Cost of sales | 2,266,170 | 2,085,878 | 6,377,752 | 4,998,868 | ||||||||||
| Gross profit | 912,145 | 754,268 | 2,692,747 | 1,954,548 | ||||||||||
| Operating expenses: | ||||||||||||||
| Selling, general and administrative | 701,499 | 559,605 | 2,038,292 | 1,572,732 | ||||||||||
| Restructuring costs (credits) | (175) | 6,992 | 3,360 | 27,713 | ||||||||||
| Operating income | $ | 210,821 | $ | 187,671 | $ | 651,095 | $ | 354,103 | ||||||
| Other expense, net | $ | (4,738) | $ | (10,516) | $ | (13,596) | $ | (24,138) | ||||||
| Gain on sale of equity investment | 7,318 | - | 7,318 | - | ||||||||||
| Net income from continuing operations | 169,474 | 151,813 | 508,379 | 271,808 | ||||||||||
| Income (loss) from discontinued operations | - | (29) | - | 274 | ||||||||||
| Net income attributable to Henry Schein, Inc. | 162,286 | 141,697 | 483,999 | 261,161 | ||||||||||
| Nine Months Ended | ||||||||||||||
| September 25, | September 26, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| Cash flows: | ||||||||||||||
| Net cash provided by operating activities from continuing operations | $ | 432,941 | $ | 248,414 | ||||||||||
| Net cash used in investing activities from continuing operations | (479,001) | (93,956) | ||||||||||||
| Net cash provided by (used in) financing activities from continuing operations | (254,473) | 264,433 |
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.
Three Months Ended September 25, 2021 Compared to Three Months Ended September 26, 2020
Net Sales
Net sales were as follows (in thousands):
| September 25, | % of | September 26, | % of | Increase / (Decrease) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | Total | 2020 | Total | $ | % | |||||||||||||||
| Health care distribution (1) | ||||||||||||||||||||
| Dental | $ | 1,822,894 | 57.4 | % | $ | 1,649,853 | 58.1 | % | $ | 173,041 | 10.5 | % | ||||||||
| Medical | 1,186,812 | 37.3 | 1,027,146 | 36.2 | 159,666 | 15.5 | ||||||||||||||
| Total health care distribution | 3,009,706 | 94.7 | 2,676,999 | 94.3 | 332,707 | 12.4 | ||||||||||||||
| Technology and value-added services (2) | 168,609 | 5.3 | 138,355 | 4.9 | 30,254 | 21.9 | ||||||||||||||
| Total excluding Corporate TSA revenue | 3,178,315 | 100.0 | 2,815,354 | 99.2 | 362,961 | 12.9 | ||||||||||||||
| Corporate TSA revenue (3) | - | - | 24,792 | 0.8 | (24,792) | - | ||||||||||||||
| Total | $ | 3,178,315 | 100.0 | % | $ | 2,840,146 | 100.0 | % | $ | 338,169 | 11.9 | |||||||||
(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 Transactions for further information.
The 11.9% increase in net sales includes an increase of 11.1% in local currency revenue (7.2% increase in internally generated revenue and 3.9% growth from acquisitions) and an increase of 0.8% related to foreign currency exchange. During December 2020, our previous transition services agreement (TSA) with Covetrus, in connection with the completion of the Animal-Health Spin-off, concluded. Accordingly, we recorded no Corporate TSA revenues for the three months ended September 25, 2021. We estimate that sales of PPE and COVID-19 related products were approximately $494.5 million, an increase of 19.7% versus the prior year. Excluding PPE and COVID-19 related products, the estimated increase in internally generated local currency sales excluding Corporate TSA revenue was 7.4%.
The 10.5% increase in dental net sales includes an increase of 9.1% in local currency revenue (5.2% increase in internally generated revenue and 3.9% growth from acquisitions) and an increase of 1.4% related to foreign currency exchange. The 9.1% increase in local currency sales was attributable to an increase in dental consumable merchandise sales of 7.6% (2.9% increase in internally generated revenue and 4.7% growth from acquisitions) and an increase in dental equipment sales and service revenues of 14.6% (13.9% increase in internally generated revenue and 0.7% growth from acquisitions). We estimate that our dental business recorded sales of approximately $169.2 million of PPE and COVID-19 related products, an estimated increase of 6.2% versus the prior year. Excluding PPE and COVID-19 related products, the estimated increase in internally generated local currency dental sales was 6.9%.
The 15.5% increase in medical net sales is attributable to a 13.1% increase in internally generated revenue and 2.4% growth from acquisitions. We estimate that our medical business recorded sales of approximately $325.2 million of PPE and other COVID-19 related products for the three months ended September 25, 2021, an estimated increase of 28.2% compared to the prior year. Excluding sales of PPE and other COVID-19 related products, the estimated increase in internally generated local currency medical sales was 8.3%.
The 21.9% increase in technology and value-added services net sales includes an increase of 21.0% local currency revenue (6.3% increase in internally generated revenue and 14.7% growth from acquisitions) and an increase of 0.9% related to foreign currency exchange. Sales growth was driven by our practice management business, as well as strong financial services revenue, which benefited from dental equipment sales growth. During the quarter ended September 25, 2021, the trend for transactional software revenues improved compared to the prior year, as more patients visited dental practices worldwide. Net sales in the prior year were adversely affected by the COVID-19 pandemic, which significantly impacted transactional software revenues.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows (in thousands):
| September 25, | Gross | September 26, | Gross | Increase / (Decrease) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | Margin % | 2020 | Margin % | $ | % | ||||||||||||||
| Health care distribution | $ | 800,516 | 26.6 | % | $ | 653,173 | 24.4 | % | $ | 147,343 | 22.6 | % | |||||||
| Technology and value-added services | 111,629 | 66.2 | 100,272 | 72.5 | 11,357 | 11.3 | |||||||||||||
| Total excluding Corporate TSA revenues | 912,145 | 28.7 | 753,445 | 26.8 | 158,700 | 21.1 | |||||||||||||
| Corporate TSA revenues | - | - | 823 | 3.3 | (823) | - | |||||||||||||
| Total | $ | 912,145 | 28.7 | $ | 754,268 | 26.6 | $ | 157,877 | 20.9 |
As a result of different practices of categorizing costs associated with distribution networks throughout our industry, our gross margins may not necessarily be comparable to other distribution companies. Additionally, we realize substantially higher gross margin percentages in our technology segment than in our health care distribution segment. These higher gross margins result from being both the developer and seller of software products and services, as well as certain financial services. The software industry typically realizes higher gross margins to recover investments in research and development.
During December 2020, our previous transition services agreement with Covetrus, in connection with the completion of the Animal-Health Spin-off, concluded. Under this agreement, Covetrus had agreed to purchase certain products from us at a mark-up that ranged from 3% to 6% of our product cost to cover handling costs.
Within our health care distribution segment, gross profit margins may vary from one period to the next. Changes in the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting our gross profit margin. For example, sales of pharmaceutical products are generally at lower gross profit margins than other products. Conversely, sales of our private label products achieve gross profit margins that are higher than average. With respect to customer mix, sales to our large-group customers are typically completed at lower gross margins due to the higher volumes sold as opposed to the gross margin on sales to office-based practitioners, who normally purchase lower volumes at greater frequencies.
Health care distribution gross profit increased $147.3 million, or 22.6%, primarily due to the increase in net sales discussed above. Health care distribution gross profit margin increased primarily due to lower adjustments recorded for PPE inventory. Such adjustments to inventory may recur and adversely impact gross profit margins in future periods, although we do not expect further material inventory adjustments in 2021. The increase in health care distribution gross profit margin is also attributable to an increase in vendor rebates during the third quarter of 2021 due to increased purchase volumes. The overall increase in our health care distribution gross profit is attributable to an increase of $54.4 million from internally generated revenue, a $67.3 million increase in gross profit due to the increase in the gross margin rates and a $25.6 million increase in gross profit from acquisitions.
Technology and value-added services gross profit increased $11.4 million, or 11.3%, due to a $7.1 million increase in internally generated revenue and $11.1 million additional gross profit from acquisitions, partially offset by a decrease of $6.8 million from gross margin rates. Technology and value-added services gross profit margin decreased to 66.2% from 72.5% primarily due to lower gross margins of recently acquired companies in the business services sector and certain transactions with the U.S. federal government.
Selling, General and Administrative
Selling, general and administrative expenses by segment and in total were as follows (in thousands):
| % of | % of | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 25, | Respective | September 26, | Respective | Increase | |||||||||||||||
| 2021 | Net Sales | 2020 | Net Sales | $ | % | ||||||||||||||
| Health care distribution | $ | 621,241 | 20.6 | % | $ | 505,338 | 18.9 | % | $ | 115,903 | 22.9 | % | |||||||
| Technology and value-added services | 80,083 | 47.5 | 61,259 | 44.3 | 18,824 | 30.7 | |||||||||||||
| Total | $ | 701,324 | 22.1 | $ | 566,597 | 19.9 | $ | 134,727 | 23.8 |
Selling, general and administrative expenses (including restructuring credits in the three months ended September 25, 2021 and restructuring costs in the three months ended September 26, 2020) increased $134.7 million, or 23.8%. In the prior year, there were significant cost-saving measures taken in response to the COVID-19 pandemic. These cost-saving measures were temporary and ended during the third quarter of 2020.
The $115.9 million increase in selling, general and administrative expenses within our health care distribution segment was attributable to an increase of $96.7 million of operating costs and an increase of $26.1 million of additional costs from acquired companies, partially offset by a decrease of $6.9 million in restructuring costs. The $18.8 million increase in selling, general and administrative expenses within our technology and value-added services segment was attributable to an increase of $9.2 million of operating costs and an increase of $9.8 million of additional costs from acquired companies, partially offset by a decrease of $0.2 million in restructuring costs.
As a component of total selling, general and administrative expenses, selling expenses increased $67.7 million, or 19.7% to $411.2 million primarily due to an increase in payroll and payroll related costs. As a percentage of net sales, selling expenses increased to 13.0% from 12.1%.
As a component of total selling, general and administrative expenses, general and administrative expenses increased $67.0 million, or 30.0% to $290.1 million primarily due to an increase in payroll and payroll related costs. As a percentage of net sales, general and administrative expenses increased to 9.1% from 7.8%.
Other Expense, Net
Other expense, net, was as follows (in thousands):
| September 25, | September 26, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ | % | ||||||||||
| Interest income | $ | 1,409 | $ | 2,294 | $ | (885) | (38.6) | % | |||||
| Interest expense | (6,550) | (11,111) | 4,561 | 41.0 | |||||||||
| Other, net | 403 | (1,699) | 2,102 | 123.7 | |||||||||
| Other expense, net | $ | (4,738) | $ | (10,516) | $ | 5,778 | 54.9 |
Interest income decreased $0.9 million primarily due to lower interest rates and reduced late fee income. Interest expense decreased $4.6 million primarily due to reduced credit line borrowings.
Income Taxes
For the three months ended September 25, 2021, our effective tax rate was 23.9% compared to 16.4% for the prior year period. The difference between our effective tax rate and the federal statutory tax rate for the three months ended September 25, 2021 was primarily due to state and foreign 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 three months ended September 26, 2020 was primarily due to a U.S federal income tax settlement, reached during the third quarter of 2020, which lowered income tax expense by approximately $15.6 million, as well as state and foreign income taxes and interest expense.
Gain on Sale of Equity Investment
In the third quarter of 2021 we received contingent proceeds of $9.8 million from the 2019 sale of Hu-Friedy resulting in the recognition of an additional after-tax gain of $7.3 million.
Nine Months Ended September 25, 2021 Compared to Nine Months Ended September 26, 2020
Net Sales
Net sales were as follows (in thousands):
| September 25, | % of | September 26, | % of | Increase/(Decrease) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | Total | 2020 | Total | $ | % | |||||||||||||||
| Health care distribution (1) | ||||||||||||||||||||
| Dental | $ | 5,522,166 | 60.9 | % | $ | 4,066,221 | 58.5 | % | $ | 1,455,945 | 35.8 | % | ||||||||
| Medical | 3,084,677 | 34.0 | 2,445,644 | 35.2 | 639,033 | 26.1 | ||||||||||||||
| Total health care distribution | 8,606,843 | 94.9 | 6,511,865 | 93.7 | 2,094,978 | 32.2 | ||||||||||||||
| Technology and value-added services (2) | 463,656 | 5.1 | 375,547 | 5.4 | 88,109 | 23.5 | ||||||||||||||
| Total excluding Corporate TSA revenue | 9,070,499 | 100.0 | 6,887,412 | 99.1 | 2,183,087 | 31.7 | ||||||||||||||
| Corporate TSA revenue (3) | - | - | 66,004 | 0.9 | (66,004) | - | ||||||||||||||
| Total | $ | 9,070,499 | 100.0 | % | $ | 6,953,416 | 100.0 | % | $ | 2,117,083 | 30.4 |
(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 Transactions for further information.
The 30.4% increase in net sales includes an increase of 28.1% in local currency revenue (24.0% increase in internally generated revenue and 4.1% growth from acquisitions) and an increase of 2.3% related to foreign currency exchange. Excluding sales of products under the transition services agreement with Covetrus, our net sales increased 31.7%, including an increase in local currency revenue of 29.3% (25.2% increase in internally generated revenue and 4.1% growth from acquisitions) and an increase of 2.4% related to foreign currency exchange. We estimate that sales for the nine months ended September 25, 2021 of PPE and COVID-19 related products were approximately $1,304.0 million, an estimated increase of 68.9% versus the prior year. Excluding PPE and COVID-19 related products, the estimated increase in internally generated local currency sales excluding Corporate TSA revenues was 21.3%.
The 35.8% increase in dental net sales includes an increase of 32.0% in local currency revenue (27.2% increase in internally generated revenue and 4.8% growth from acquisitions) and an increase of 3.8% related to foreign currency exchange. The 32.0% increase in local currency sales was attributable to an increase in dental consumable merchandise revenue of 32.4% (26.5% increase in internally generated revenue and 5.9% growth from acquisitions), and an increase in dental equipment sales and service revenues of 30.5% (29.8% increase in internally generated revenue and 0.7% growth from acquisitions). The COVID-19 pandemic began to adversely impact our worldwide dental revenue beginning in mid-March of 2020 as many dental offices progressively closed or began seeing a limited number of patients. However, in the second half of the quarter ended June 27, 2020 and continuing through the quarter ended September 26, 2020, patient traffic began to stabilize and approached pre-pandemic levels. The growth in dental revenues reflects this recovery. Additionally, we estimate that global dental sales for the nine months ended September 25, 2021 of PPE and COVID-19 related products were approximately $520.3 million, an estimated increase of 46.8% versus the prior year. Excluding PPE and COVID-19 related products, the estimated increase in internally generated local currency dental sales was 27.9%.
The 26.1% increase in medical net sales is attributable to an increase of 25.9% in local currency growth (23.7% increase in internally generated revenue and 2.2% growth from acquisitions) and an increase of 0.2% related to foreign currency exchange. Economic conditions relating to the COVID-19 pandemic have had less of an impact on the performance of our medical group versus dental, in part due to continued strong sales of PPE, such as masks, gowns and face shields, and other COVID-19 related products, such as diagnostic test kits. Globally, we estimate our medical business recorded sales of approximately $783.8 million sales of such PPE and other COVID-19 related products for the nine months ended September 25, 2021, an increase of approximately 87.6% compared to the prior year. Excluding PPE and other COVID-19 related products, the estimated increase in internally generated local currency medical sales was 10.7%.
The 23.5% increase in technology and value-added services net sales is attributable to an increase of 21.9% in local currency revenue (12.9% increase in internally generated revenue and 9.0% growth from acquisitions) and 1.6% related to foreign currency exchange. Sales growth was driven by our practice management business, as well as strong financial services revenue, which benefitted from dental equipment sales growth.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows (in thousands):
| September 25, | Gross | September 26, | Gross | Increase/(Decrease) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | Margin % | 2020 | Margin % | $ | % | ||||||||||||||
| Health care distribution | $ | 2,375,341 | 27.6 | % | $ | 1,687,531 | 25.9 | % | $ | 687,810 | 40.8 | % | |||||||
| Technology and value-added services | 317,406 | 68.5 | 265,040 | 70.6 | 52,366 | 19.8 | |||||||||||||
| Total excluding Corporate TSA revenues | 2,692,747 | 29.7 | 1,952,571 | 28.3 | 740,176 | 37.9 | |||||||||||||
| Corporate TSA revenues | - | - | 1,977 | 3.0 | (1,977) | - | |||||||||||||
| Total | $ | 2,692,747 | 29.7 | $ | 1,954,548 | 28.1 | $ | 738,199 | 37.8 |
As a result of different practices of categorizing costs associated with distribution networks throughout our industry, our gross margins may not necessarily be comparable to other distribution companies. Additionally, we realize substantially higher gross margin percentages in our technology and value-added services segment than in our health care distribution segment. These higher gross margins result from being both the developer and seller of software products and services, as well as certain financial services. The software industry typically realizes higher gross margins to recover investments in research and development.
During December 2020, our previous transition services agreement with Covetrus, in connection with the completion of the Animal-Health Spin-off, concluded. Under this agreement, Covetrus had agreed to purchase certain products from us at a mark-up that ranged from 3% to 6% of our product cost to cover handling costs.
Within our health care distribution segment, gross profit margins may vary from one period to the next. Changes in the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting our gross profit margin. For example, sales of our private label products achieve gross profit margins that are higher than average. With respect to customer mix, sales to our large-group customers are typically completed at lower gross margins due to the higher volumes sold as opposed to the gross margin on sales to office-based practitioners, who normally purchase lower volumes at greater frequencies.
Health care distribution gross profit increased $687.8 million, or 40.8% primarily due to the increase in net sales discussed above. Health care distribution gross profit margin increased to 27.6% from 25.9% primarily due to lower adjustments recorded for PPE inventory. Such adjustments to inventory may recur and adversely impact gross profit margins in future periods, although we do not expect further material inventory adjustments in 2021. The increase in the health care distribution gross profit margin is also attributable to an increase in vendor rebates during the first nine months of 2021 due to increased purchase volumes. The overall increase in our health care distribution gross profit is attributable to a $489.2 million increase in internally generated revenue, $119.1 million in gross profit due to the increase in the gross margin rates and $79.5 million additional gross profit from acquisitions.
Technology and value-added services gross profit increased $52.4 million, or 19.8%, attributable to an increase of $37.8 million in internally generated revenue and $22.1 million additional gross profit from acquisitions, partially offset by a $7.5 million decrease in gross profit. Technology and value-added services gross profit margin decreased to 68.5% from 70.6% primarily due to lower gross margins of recently acquired companies in the business services sector and certain transactions with the U.S. federal government.
Selling, General and Administrative
Selling, general and administrative expenses by segment and in total were as follows (in thousands):
| % of | % of | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 25, | Respective | September 26, | Respective | Increase | |||||||||||||||
| 2021 | Net Sales | 2020 | Net Sales | $ | % | ||||||||||||||
| Health care distribution | $ | 1,816,373 | 21.1 | % | $ | 1,418,031 | 21.8 | % | $ | 398,342 | 28.1 | % | |||||||
| Technology and value-added services | 225,279 | 48.6 | 182,414 | 48.6 | 42,865 | 23.5 | |||||||||||||
| Total | $ | 2,041,652 | 22.5 | $ | 1,600,445 | 23.0 | $ | 441,207 | 27.6 |
Selling, general and administrative expenses (including restructuring costs) increased $441.2 million, or 27.6%. In the prior year, there were significant cost-saving measures taken in response to the COVID-19 pandemic. These cost-saving measures were temporary and ended during the third quarter of 2020.
The $398.3 million increase in selling, general and administrative expenses within our health care distribution segment was attributable to an increase of $349.8 million of operating costs and an increase of $72.3 million of additional costs from acquired companies, partially offset by a decrease of $23.8 million in restructuring costs. The $42.9 million increase in selling, general and administrative expenses within our technology and value-added services segment was attributable to an increase of $24.5 million of operating costs and an increase of $19.0 million of additional costs from acquired companies, partially offset by a decrease of $0.6 million in restructuring costs. As a percentage of net sales, selling, general and administrative expenses decreased to 22.5% from 23.0%.
As a component of total selling, general and administrative expenses, selling expenses increased $231.9 million, or 23.8% to $ 1,205.7 million, primarily due to an increase in payroll and payroll related costs. As a percentage of net sales, selling expenses decreased to 13.3% from 14.0%.
As a component of total selling, general and administrative expenses, general and administrative expenses increased $209.3 million, or 33.4% to $835.9 million, primarily due to an increase in payroll and payroll related costs. As a percentage of net sales, general and administrative expenses increased to 9.2% from 9.0%.
Other Expense, Net
Other expense, net, was as follows (in thousands):
| September 25, | September 26, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ | % | ||||||||||
| Interest income | $ | 4,749 | $ | 7,481 | $ | (2,732) | (36.5) | % | |||||
| Interest expense | (19,411) | (29,409) | 9,998 | 34.0 | |||||||||
| Other, net | 1,066 | (2,210) | 3,276 | 148.2 | |||||||||
| Other expense, net | $ | (13,596) | $ | (24,138) | $ | 10,542 | 43.7 |
Interest income decreased $2.7 million primarily due to lower interest rates and reduced late fee income. Interest expense decreased $10.0 million primarily due to reduced credit line borrowings and lower interest rates on certain of our private placement borrowings.
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 rate and the federal statutory tax rate for the nine months ended September 25, 2021 was primarily due 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 of 2020, which lowered income tax expense by approximately $15.6 million, as well as state and foreign income taxes and interest expense.
Gain on Sale of Equity Investment
In the third quarter of 2021 we received contingent proceeds of $9.8 million from the 2019 sale of Hu-Friedy resulting in the recognition of an additional after-tax gain of $7.3 million.
Liquidity and Capital Resources
Our principal capital requirements have included funding of acquisitions, purchases of additional noncontrolling interests, repayments of debt principal, the funding of working capital needs, purchases of fixed assets and repurchases of common stock (which had been temporarily suspended in March of 2020, but were resumed during the three months ended March 27, 2021). Working capital requirements generally result from increased sales, special inventory forward buy-in opportunities and payment terms for receivables and payables. Historically, sales have tended to be stronger during the second half of the year and special inventory forward buy-in opportunities have been most prevalent just before the end of the year, and have caused our working capital requirements to be higher from the end of the third quarter to the end of the first quarter of the following year.
The pandemic and the governmental responses to it had a material adverse effect on our cash flows in the second quarter of 2020. In the latter half of the second quarter of 2020 and continuing through year-end, dental and medical practices began to re-open worldwide. 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.
We finance our business primarily through cash generated from our operations, revolving credit facilities and debt placements. Our ability to generate sufficient cash flows from operations is dependent on the continued demand of our customers for our products and services, and access to products and services from our suppliers.
Our business requires a substantial investment in working capital, which is susceptible to fluctuations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity, special inventory forward buy-in opportunities and our desired level of inventory. We anticipate future increases in our working capital requirements.
We finance our business to provide adequate funding for at least 12 months. Funding requirements are based on forecasted profitability and working capital needs, which, on occasion, may change. Consequently, we may change our funding structure to reflect any new requirements.
We believe that our cash and cash equivalents, our ability to access private debt markets and public equity markets, and our available funds under existing credit facilities provide us with sufficient liquidity to meet our currently foreseeable short-term and long-term capital needs. We have no off-balance sheet arrangements.
Net cash from continuing operations provided by operating activities was $432.9 million for the nine months ended September 25, 2021, compared to net cash from continuing operations provided by operating activities of $248.4 million for the comparable prior year period. The net change of $184.5 million was primarily attributable to higher net income, partially offset by increased working capital requirements, specifically an increase in inventories due to ongoing stocking of PPE and COVID-19 related products, and reduced accounts payable and accrued expenses. These working capital increases were partially offset by lower growth in accounts receivable as days sales outstanding were lower than in the prior year.
Net cash from continuing operations used in investing activities was $479.0 million for the nine months ended September 25, 2021, compared to $94.0 million for the comparable prior year period. The net change of $385.0 million was attributable to increased payments for equity investments and business acquisitions.
Net cash from continuing operations used in financing activities was $254.5 million for the nine months ended September 25, 2021, compared to net cash provided by financing activities of $264.4 million for the comparable prior year period. The net change of $518.9 million was primarily due to decreased net proceeds from bank borrowings and increased repurchases of common stock.
The following table summarizes selected measures of liquidity and capital resources (in thousands):
| September 25, | December 26, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Cash and cash equivalents | $ | 119,133 | $ | 421,185 | ||||
| Working capital (1) | 1,610,956 | 1,508,313 | ||||||
| Debt: | ||||||||
| Bank credit lines | $ | 59,394 | $ | 73,366 | ||||
| Current maturities of long-term debt | 9,638 | 109,836 | ||||||
| Long-term debt | 705,540 | 515,773 | ||||||
| Total debt | $ | 774,572 | $ | 698,975 | ||||
| Leases: | ||||||||
| Current operating lease liabilities | $ | 77,383 | $ | 64,716 | ||||
| Non-current operating lease liabilities | 270,152 | 238,727 | ||||||
| (1) | 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. |
Our cash and cash equivalents consist of bank balances and investments in money market funds representing overnight investments with a high degree of liquidity.
Accounts receivable days sales outstanding and inventory turns
Our accounts receivable days sales outstanding from operations decreased to 42.6 days as of September 25, 2021 from 48.8 days as of September 26, 2020. During the nine months ended September 25, 2021, we wrote off approximately $5.6 million of fully reserved accounts receivable against our trade receivable reserve. Our inventory turns from operations increased to 5.1 as of September 25, 2021 from 4.7 as of September 26, 2020. Our working capital accounts may be impacted by current and future economic conditions.
Bank Credit Lines
Bank credit lines consisted of the following:
| September 25, | December 26, | ||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| Revolving credit agreement | $ | - | $ | - | |||
| Other short-term bank credit lines | 59,394 | 73,366 | |||||
| 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.
Long-term debt
Long-term debt consisted of the following:
| September 25, | December 26, | ||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| 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, 2020 | 3,566 | 4,596 | |||||
| Finance lease obligations (see Note 6) | 5,179 | 5,961 | |||||
| Total | 715,178 | 625,609 | |||||
| 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.
The components of our private placement facility borrowings as of September 25, 2021 are presented in the following table (in thousands):
| Amount of | ||||||||
| Borrowing | Borrowing | |||||||
| Date of Borrowing | Outstanding | Rate | Due Date | |||||
| January 20, 2012 (1) | $ | 7,143 | 3.09 | % | January 20, 2022 | |||
| January 20, 2012 | 50,000 | 3.45 | January 20, 2024 | |||||
| December 24, 2012 | 50,000 | 3.00 | December 24, 2024 | |||||
| June 16, 2017 | 100,000 | 3.42 | June 16, 2027 | |||||
| September 15, 2017 | 100,000 | 3.52 | September 15, 2029 | |||||
| January 2, 2018 | 100,000 | 3.32 | January 2, 2028 | |||||
| September 2, 2020 | 100,000 | 2.35 | September 2, 2030 | |||||
| June 2, 2021 | 100,000 | 2.48 | June 2, 2031 | |||||
| June 2, 2021 | 100,000 | 2.58 | June 2, 2033 | |||||
| Less: Deferred debt issuance costs | (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.
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. As of September 25, 2021, our right-of-use assets related to operating leases were $329.9 million and our current and non-current operating lease liabilities were $77.4 million and $270.2 million, respectively.
Stock Repurchases
On March 8, 2021, we announced the reinstatement of our share repurchase program.
From March 3, 2003 through September 25, 2021, we repurchased $3.9 billion, or 79,082,135 shares, under our common stock repurchase programs, with $350.0 million available as of September 25, 2021 for future common stock share repurchases.
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 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, | ||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| 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 | |||||||
| acquisitions | 189,870 | 28,387 | |||||
| Net income attributable to redeemable noncontrolling interests | 19,770 | 13,363 | |||||
| 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 securities | 143,592 | 32,842 | |||||
| Balance, end of period | $ | 612,582 | $ | 327,699 |
Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are adjusted at each reporting period with a corresponding adjustment to Additional paid-in capital. Future reductions in the carrying amounts are subject to a floor amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments do not impact the calculation of earnings per share.
Additionally, some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial targets are met. Any adjustments to these accrual amounts are recorded in our consolidated 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.
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.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates from those disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 26, 2020, except accounting policies adopted as of December 27, 2020, which are discussed in Note 2-Critical Accounting Policies, Accounting Pronouncements Adopted and Recently Issued Accounting Standards of the Notes to the Consolidated Financial Statements included under Item 1.
Our financial results for the nine months ended September 26, 2020 were affected by certain estimates we made due to the adverse business environment brought on by the COVID-19 pandemic. For example, in the quarter ended March 28, 2020 we recorded incremental bad debt reserves of approximately $10.0 million for our global dental business. During the quarter ended March 28, 2020, we also recognized a net credit of approximately $17.5 million in stock-based compensation expense due to our estimate that no performance shares granted in 2018, 2019 or 2020 would ultimately vest. For the quarter ended June 27, 2020, we continued to estimate that no such performance-based shares would ultimately vest. In contrast, for the nine months ended September 25, 2021, we recorded $57.7 million in stock-based compensation. Additionally, in the quarter ended March 28, 2020, we recorded total impairment charges of approximately $6.1 million related to prepaid royalty expenses and a customer relationship intangible asset. We had no material impairment charges in the quarter ended September 25, 2021. Although our selling, general and administrative expenses for the nine months ended September 25, 2021 represent management's best estimates and assumptions that affect the reported amounts, our judgment could change in the future due to the significant uncertainty surrounding the macroeconomic effect of the COVID-19 pandemic.
Accounting Standards Update
For a discussion of accounting standards updates that have been adopted or will be adopted, see Note 2-Critical Accounting Policies, Accounting Pronouncements Adopted and Recently Issued Accounting Standards of the Notes to the Consolidated Financial Statements included under Item 1.
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