filings.toolsItem 1. CONDENSED CONSOLIDATED
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Item 1. CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions,
except share data)
March 30,
December 30,
2024
2023
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
$
Accounts receivable, net of allowance for credit losses of $
and $
(1)
1,644
1,863
Inventories, net of reserves of $
and $
1,686
1,815
Prepaid expenses and other
Total current assets
4,078
4,488
Property and equipment, net
Operating lease right-of-use assets
Goodwill
3,835
3,875
Other intangibles, net
Investments and other
Total assets
$
10,145
$
10,573
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
$
1,020
Bank credit lines
Current maturities of long-term debt
Operating lease liabilities
Accrued expenses:
Payroll and related
Taxes
Other
Total current liabilities
2,334
2,683
Long-term debt (1)
2,010
1,937
Deferred income taxes
Operating lease liabilities
Other liabilities
Total liabilities
5,110
5,420
Redeemable noncontrolling interests
Commitments and contingencies
(nil)
(nil)
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,
128,480,909
outstanding on March 30, 2024 and
129,247,765
outstanding on December 30, 2023
Additional paid-in capital
-
-
Retained earnings
3,838
3,860
Accumulated other comprehensive loss
(239)
(206)
Total Henry Schein, Inc. stockholders' equity
3,600
3,655
Noncontrolling interests
Total stockholders' equity
4,237
4,289
Total liabilities, redeemable noncontrolling
interests and stockholders' equity
$
10,145
$
10,573
(1)
Amounts presented include balances held by our consolidated variable interest entity (“VIE”).
At March 30, 2024 and December
30, 2023, includes trade accounts receivable of $
million and $
million, respectively, and long-term debt of $
million and
$
million, respectively.
See
Note 1 – Basis of Presentation
for further information.
See accompanying notes.
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
(in millions,
except share and per share data)
(unaudited)
Three Months Ended
March 30,
April 1,
2024
2023
Net sales
$
3,172
$
3,060
Cost of sales
2,160
2,094
Gross profit
1,012
Operating expenses:
Selling, general and administrative
Depreciation and amortization
Restructuring costs
Operating income
Other income (expense):
Interest income
Interest expense
(30)
(14)
Other, net
(1)
Income before taxes, equity in earnings of affiliates and noncontrolling interests
Income taxes
(32)
(39)
Equity in earnings of affiliates, net of tax
Net income
Less: Net income attributable to noncontrolling interests
(5)
(7)
Net income attributable to Henry Schein, Inc.
$
$
Earnings per share attributable to Henry Schein, Inc.:
Basic
$
0.72
$
0.92
Diluted
$
0.72
$
0.91
Weighted-average common
shares outstanding:
Basic
128,720,661
131,365,789
Diluted
129,769,580
133,039,886
See accompanying notes.
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
Three Months Ended
March 30,
April 1,
2024
2023
Net income
$
$
Other comprehensive income, net of tax:
Foreign currency translation gain (loss)
(54)
Unrealized gain (loss) from hedging activities
(3)
Other comprehensive income (loss), net of tax
(43)
Comprehensive income
Comprehensive income attributable to noncontrolling interests:
Net income
(5)
(7)
Foreign currency translation loss (gain)
(2)
Comprehensive loss (income) attributable to noncontrolling interests
(9)
Comprehensive income attributable to Henry Schein, Inc.
$
$
See accompanying notes.
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN
STOCKHOLDERS’ EQUITY
(in millions, except share data)
(unaudited)
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Interests
Equity
Balance, December 30, 2023
129,247,765
$
$
-
$
3,860
$
(206)
$
$
4,289
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
(44)
-
(44)
Unrealized gain from hedging activities,
net of tax of $
-
-
-
-
-
Change in fair value of redeemable securities
-
-
(42)
-
-
-
(42)
Noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
Repurchase and retirement of common stock
(998,728)
-
(10)
(65)
-
-
(75)
Stock issued upon exercise of stock options
20,939
-
-
-
-
Stock-based compensation expense
314,759
-
-
-
-
Shares withheld for payroll taxes
(103,865)
-
(8)
-
-
-
(8)
Settlement of stock-based compensation awards
-
-
-
-
-
-
Transfer of charges in excess of
capital
-
-
(50)
-
-
-
Balance, March 30, 2024
128,480,909
$
$
-
$
3,838
$
(239)
$
$
4,237
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Interests
Equity
Balance, December 31, 2022
131,792,817
$
$
-
$
3,678
$
(233)
$
$
4,095
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation gain (excluding gain of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
-
Unrealized loss from foreign currency hedging activities,
net of tax benefit of $
-
-
-
-
(3)
-
(3)
Change in fair value of redeemable securities
-
-
-
-
-
Initial noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
Repurchases and retirement of common stock
(1,223,919)
-
(13)
(87)
-
-
(100)
Stock-based compensation expense
1,016,300
-
-
-
-
Stock issued upon exercise of stock options
10,779
-
-
-
-
Shares withheld for payroll taxes
(399,194)
-
(29)
-
-
-
(29)
Transfer of charges in excess of
capital
-
-
(28)
-
-
-
Balance, April 1, 2023
131,196,783
$
$
-
$
3,684
$
(213)
$
$
4,127
See accompanying notes.
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(in millions)
(unaudited)
Three Months Ended
March 30,
April 1,
2024
2023
Cash flows from operating activities:
Net income
$
$
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Non-cash restructuring charges
Stock-based compensation expense
Provision for losses on trade and other accounts receivable
Provision for deferred income taxes
Equity in earnings of affiliates
(3)
(4)
Distributions from equity affiliates
Changes in unrecognized tax benefits
Other
(6)
(1)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(20)
Inventories
Other current assets
Accounts payable and accrued expenses
(290)
(243)
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
(41)
(31)
Payments related to equity investments and business acquisitions,
net of cash acquired
(20)
(1)
Proceeds from loan to affiliate
Capitalized software costs
(9)
(9)
Other
(3)
-
Net cash used in investing activities
(72)
(39)
Cash flows from financing activities:
Net change in bank credit lines
-
Proceeds from issuance of long-term debt
Principal payments for long-term debt
(60)
(1)
Proceeds from issuance of stock upon exercise of stock options
Payments for repurchases and retirement of common stock
(75)
(100)
Payments for taxes related to shares withheld for employee taxes
(7)
(30)
Distributions to noncontrolling shareholders
(6)
(4)
Acquisitions of noncontrolling interests in subsidiaries
(94)
(8)
Net cash provided by (used in) financing activities
(151)
Effect of exchange rate changes on cash and cash equivalents
-
Net change in cash and cash equivalents
(12)
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 1 – Basis of Presentation
Our condensed consolidated financial statements include the accounts of Henry
Schein, Inc., and all of our
controlled subsidiaries (“we”, “us” and “our”).
All intercompany accounts and transactions are eliminated in
consolidation.
Investments in unconsolidated affiliates for which we have the ability to influence
the operating or
financial decisions are accounted for under the equity method.
Our accompanying unaudited condensed 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.
The unaudited interim condensed 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 30, 2023 and with the information
contained in our other publicly-
available filings with the Securities and Exchange Commission.
The condensed 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.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United
States requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The results of
operations for the three months ended March 30, 2024 are not necessarily
indicative of the results to be expected
for any other interim period or for the year ending December 28, 2024.
Our condensed consolidated financial statements reflect estimates and
assumptions made by us that affect, among
other things, our goodwill, long-lived asset and definite-lived intangible
asset valuation; inventory valuation; equity
investment valuation; assessment of the annual effective tax rate; valuation of
deferred income taxes and income
tax contingencies; the allowance for doubtful accounts; hedging activity;
supplier rebates; measurement of
compensation cost for certain share-based performance awards and cash bonus
plans; and pension plan
assumptions.
We consolidate the results of operations and financial position of a trade accounts receivable securitization which
we consider a VIE because we are its primary beneficiary, as we have the power to direct activities that most
significantly affect its economic performance and have the obligation to absorb the
majority of its losses or
benefits.
For this VIE, the trade accounts receivable transferred
to the VIE are pledged as collateral to the related
debt.
The VIE’s creditors have recourse to us for losses on these trade accounts receivable.
At March 30, 2024 and
December 30, 2023, certain trade accounts receivable that can only be used
to settle obligations of this VIE were
$
million and $
million, respectively, and the liabilities of this VIE where the creditors have recourse to us
were $
million and $
million, respectively.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 2 – Significant Accounting Policies and Recently Issued Accounting
Standards
Significant Accounting Policies
There have been no material changes in our significant accounting policies during
the three months ended March
30, 2024, as compared to the significant accounting policies described in Item
8 of our Annual Report on Form 10-
K for the year ended December 30, 2023.
Recently Issued Accounting Standards
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2023-09, “
Income Taxes (Topic
740): Improvements to Income Tax Disclosures
,” which requires public
business entities to disclose additional information in specified categories with
respect to the reconciliation of the
effective tax rate to the statutory rate for federal, state and foreign income taxes.
It also requires greater detail
about individual reconciling items in the rate reconciliation to the extent
the impact of those items exceeds a
specified threshold.
In addition to new disclosures associated with the rate reconciliation,
the ASU requires
information pertaining to taxes paid (net of refunds received) to be
disaggregated for federal, state and foreign taxes
and further disaggregated for specific jurisdictions to the extent the
related amounts exceed a quantitative threshold.
The ASU also describes items that need to be disaggregated based on
their nature, which is determined by reference
to the item’s fundamental or essential characteristics, such as the transaction or event that triggered the
establishment of the reconciling item and the activity with which the reconciling
item is associated.
The ASU
eliminates the historic requirement that entities disclose information concerning
unrecognized tax benefits having a
reasonable possibility of significantly increasing or decreasing in the 12
months following the reporting date.
This
ASU is effective for annual periods beginning after December 15, 2024.
Early adoption is permitted for annual
financial statements that have not yet been issued or made available
for issuance.
This ASU should be applied on a
prospective basis; however, retrospective application is permitted.
We are currently evaluating the impact that
ASU 2023 – 09 will have on our consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, “
Segment Reporting (Topic 280): Improvements to Reportable
Segments
,” which aims to improve financial reporting by requiring disclosure
of incremental segment information
on an annual and interim basis for all public entities to enable investors to
develop more decision-useful financial
analyses.
Currently, Topic
280 requires that a public entity disclose certain information about its
reportable
segments.
For example, a public entity is required to report a measure of
segment profit or loss that the chief
operating decision maker uses to assess segment performance and
make decisions about allocating resources.
Topic 280 also requires other specified segment items and amounts, such as depreciation, amortization, and
depletion expense, to be disclosed under certain circumstances.
The amendments in this ASU do not change or
remove those disclosure requirements and do not change how a public
entity identifies its operating segments,
aggregates those operating segments or applies the quantitative thresholds
to determine its reportable segments.
This ASU is effective for fiscal years beginning after December 15, 2023, and interim
periods within fiscal years
beginning after December 15, 2024.
Early adoption is permitted.
We do not expect that the requirements of ASU
2023 – 07 will have a material impact on our consolidated financial
statements.
In March 2024, the FASB issued ASU 2024-01, “
Compensation - Stock Compensation (Topic 718): Scope
Application of Profits Interest and Similar Awards,
” which clarifies how to determine whether a profit interest and
similar awards should be accounted for as a share-based payment arrangement
under Topic 718 or within the scope
of other guidance.
The ASU provides an illustrative example with multiple fact patterns
and amends the structure
of paragraph 718-10-15-3 of Topic 718 to improve its clarity and operability.
The guidance in ASU 2024-01
applies to all entities that issue profits interest awards as compensation
to employees or nonemployees in exchange
for goods or services.
Entities can apply the amendments either retrospectively to
all periods presented in the
financial statements or prospectively to profits interest awards granted
or modified on or after the date of adoption.
If prospective application is elected, an entity must disclose the nature
of and reason for the change in accounting
principle that resulted from the adoption of the ASU.
This ASU is effective for fiscal years beginning after
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
December 15, 2024, including interim periods within those fiscal years.
We do not expect that the requirements of
ASU 2024 – 01 will have a material impact on our consolidated financial
statements.
Note 3 – Cyber Incident
In October 2023 Henry Schein experienced a cyber incident that primarily
affected the operations of our North
American and European dental and medical distribution businesses.
Henry Schein One, our practice management
software, revenue cycle management and patient relationship management
solutions business, was not affected, and
our manufacturing businesses were mostly unaffected.
On November 22, 2023, we experienced a disruption of our
ecommerce platform and related applications, which has since been
remediated.
During the three months ended March 30, 2024, we continued
to experience a residual impact of the cyber events
noted above relating primarily to decreased sales to episodic customers (customers
that had generally registered a
less continuous level of demand pre-incident).
During the three months ended March 30, 2024, we incurred $
million of expenses directly related to the cyber
incident, mostly consisting of professional fees.
We maintain cyber insurance, subject to certain retentions and
policy limitations.
With respect to the October 2023 cyber incident, we have a $
million insurance policy,
following a $
million retention.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 4 – Net Sales from Contracts with Customers
Net sales are recognized in accordance with policies disclosed in Item
8 of our Annual Report on Form 10-K for
the year ended December 30, 2023.
Disaggregation of Net Sales
The following table disaggregates our net sales by reportable and operating segment
and geographic area:
Three Months Ended
March 30, 2024
North America
International
Global
Net sales:
Health care distribution
Dental
$
1,103
$
$
1,914
Medical
1,014
1,041
Total health care distribution
2,117
2,955
Technology
and value-added services
Total net sales
$
2,306
$
$
3,172
Three Months Ended
April 1, 2023
North America
International
Global
Net sales:
Health care distribution
Dental
$
1,144
$
$
1,898
Medical
Total health care distribution
2,095
2,869
Technology
and value-added services
Total net sales
$
2,261
$
$
3,060
Contract Liabilities
At March 30, 2024, December 30, 2023, and December 31, 2022, the current
and non-current contract liabilities
were $
million and $
million; $
million and $
million; and $
million and $
million, respectively.
During
the three months ended March 30, 2024, we recognized, in net sales, $
million of the amount that was previously
deferred at December 30, 2023.
During the three months ended April 1, 2023, we recognized
in net sales $
million of the amounts that were previously deferred at December 31, 2022.
Current contract liabilities are
included in accrued expenses: other and the non-current contract liabilities
are included in other liabilities within
our consolidated balance sheets.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 5
–
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.
Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools, government
and other
institutions.
Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,
emergency
medical technicians, dialysis centers, home health, federal and state governments
and large enterprises, such as
group practices, and integrated delivery networks, among other providers
across a wide range of specialties.
Our
dental and medical groups serve practitioners in
countries worldwide.
The health care distribution reportable segment aggregates our global dental
and medical operating segments.
This
segment distributes consumable products, dental specialty products (including
implant, orthodontic and endodontic
products),
small equipment, laboratory products, large equipment, equipment repair
services, branded and generic
pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, personal
protective
equipment (“PPE”) products, vitamins, and orthopedic implants.
Our global technology and value-added services reportable segment provides
software, technology and other value-
added services to health care practitioners.
Our technology offerings include practice management software
systems for dental and medical practitioners.
Our value-added practice solutions include practice consultancy,
education, revenue cycle management and financial services on a non-recourse
basis, e-services, continuing
education services for practitioners,
practice technology, network and hardware services, and other services.
The following tables present information about our reportable and operating
segments:
Three Months Ended
March 30,
April 1,
2024
2023
Net sales:
Health care distribution
(1)
Dental
$
1,914
$
1,898
Medical
1,041
Total health care distribution
2,955
2,869
Technology
and value-added services
(2)
Total
$
3,172
$
3,060
(1)
Consists of consumable products, dental specialty products (including implant, orthodontic and endodontic products), small
equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical
products, diagnostic tests, infection-control products, PPE products, vitamins, and orthopedic implants.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, practice technology, network and hardware services, and other services.
Three Months Ended
March 30,
April 1,
2024
2023
Operating Income:
Health care distribution
$
$
Technology
and value-added services
Total
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 6
–
Business Acquisitions
Our acquisition strategy is focused on investments in companies that
add new customers and sales teams, increase
our geographic footprint (whether entering a new country, such as emerging markets, or building scale where we
have already invested in businesses), and finally, those that enable us to access new products and technologies.
2024 Acquisitions
During the quarter ended March 30, 2024, we made acquisitions within
the technology and value-added services
segment.
Our acquired ownership interest in these companies was
%.
Total consideration for these acquisitions
was $
million.
Net assets acquired primarily consisted of $
million of goodwill and $
million of intangible
assets.
The intangible assets acquired consisted of customer relationships
and lists of $
million, product
development of $
million, trademarks and tradenames of $
million and non-compete agreements of $
million.
Weighted average useful lives for these acquired intangible assets were
years,
years,
years and
years,
respectively.
Goodwill is a result of the expected synergies and cross-selling opportunities that
these acquisitions are expected to
provide for us, as well as the expected growth potential.
The majority of the acquired goodwill is deductible for tax
purposes.
The impact of these acquisitions, individually and in the aggregate, was
not considered material to our condensed
consolidated financial statements.
2023 Acquisitions
Acquisition of Shield Healthcare
On October 2, 2023 we acquired a
% voting equity interest in Shield Healthcare, Inc. (“Shield”), a supplier
of
homecare medical products delivered directly to patients in their homes, for
preliminary consideration of $
million (including cash paid of $
million, deferred consideration of $
million and redeemable noncontrolling
interests of $
million).
Based in California, Shield expands our existing medical business
by delivering a diverse
range of products, including items such as incontinence, urology, ostomy, enteral nutrition, advanced wound care
and diabetes supplies.
Additionally, Shield offers continuous glucose monitoring devices directly to patients in
their homes.
The accounting for the acquisition of Shield has not been completed
in several respects, including but not limited to
finalizing valuation assessments of accounts receivable, inventory, accrued liabilities and income and non-income
based taxes.
To assist in the allocation of consideration, we engaged valuation specialists to determine the fair
value of intangible and tangible assets acquired and liabilities assumed.
We will finalize the amounts recognized as
the information necessary to complete the analysis is obtained.
During the quarter ended March 30, 2024, we
recorded immaterial measurement period adjustments, related primarily
to operating leases.
The pro forma financial information has not been presented because the
impact of the Shield acquisition was
immaterial to our consolidated financial statements.
Acquisition of S.I.N. Implant System
On July 5, 2023, we acquired a
% voting equity interest in S.I.N. Implant System (“S.I.N.”) for consideration
of
$
million.
Based in São Paulo, S.I.N. manufactures an extensive line of products
to perform dental implant
procedures and is focused on advancing the development of value-priced dental
implants.
S.I.N. recently expanded
the distribution of its products into the United States and other international
markets.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
The accounting for the acquisition of S.I.N. has not been completed
in several respects, including but not limited to
finalizing valuation assessments of accounts receivable, inventory, accrued liabilities and income and non-income
based taxes.
To assist in the allocation of consideration, we engaged valuation specialists to determine the fair
value of intangible and tangible assets acquired and liabilities assumed.
We will finalize the amounts recognized as
the information necessary to complete the analysis is obtained.
We expect to finalize these amounts as soon as
possible but no later than one year from the acquisition date.
During the quarter ended March 30, 2024, we
recorded insignificant measurement period adjustments, related primarily
to deferred tax adjustments.
The pro forma financial information has not been presented because the
impact of the S.I.N. acquisition was
immaterial to our consolidated financial statements.
Acquisition of Biotech Dental
On April 5, 2023, we acquired a
% voting equity interest in Biotech Dental (“Biotech Dental”), which
is a
provider of dental implants, clear aligners, individualized prosthetics
and innovative digital dental software based in
France.
Biotech Dental has several important solutions for dental practices
and dental labs, including Nemotec, a
comprehensive, integrated suite of planning and diagnostic software
using open architecture that connects disparate
medical devices to create a digital view of the patient, offering greater diagnostic
accuracy and an improved patient
experience.
The integration of Biotech Dental’s software with Henry Schein One’s industry-leading practice
management software solutions will help customers streamline their
clinical as well as administrative workflow for
the ultimate benefit of patients.
The following table aggregates the final fair value, as of the date of acquisition,
of consideration paid and net assets
acquired in the Biotech Dental acquisition, including measurement period
adjustments recorded through March 30,
2024:
Preliminary
Allocation as
of July 1, 2023
Measurement
Period
Adjustments
Allocation as
of March 30,
2024
Acquisition consideration:
Cash
$
$
-
$
Fair value of contributed equity share in a controlled subsidiary
-
Redeemable noncontrolling interests
-
Total consideration
$
$
-
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
$
(4)
$
Intangible assets
Other noncurrent assets
(7)
Current liabilities
(50)
(10)
(60)
Long-term debt
(90)
(73)
Deferred income taxes
(38)
(15)
(53)
Other noncurrent liabilities
(16)
(4)
(20)
Total identifiable
net assets
Goodwill
(47)
Total net assets acquired
$
$
-
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Goodwill is a result of expected synergies that are expected to originate from the
acquisition as well as the expected
growth potential of Biotech Dental.
The acquired goodwill is deductible for tax purposes.
During the quarter
ended March 30, 2024 we finalized our accounting for the acquisition
and recorded measurement period
adjustments related primarily to the completion of the intangibles valuation,
including adjustments to intangibles,
deferred tax and certain other assets and liabilities.
The following table summarizes the identifiable intangible assets acquired
as part of the acquisition of Biotech
Dental:
2023
Weighted Average
Useful
Lives (in years)
Customer relationships and lists
$
Trademarks / Tradenames
Product development
Total
$
The pro forma financial information has not been presented because the
impact of the Biotech Dental acquisition
was immaterial to our condensed consolidated financial statements.
Other 2023 Acquisitions
During the year ended December 30, 2023, in addition to those noted above,
we acquired companies within the
health care distribution and technology and value-added services segments.
Our acquired ownership interest ranged
between
% to
%.
During the quarter ended March 30, 2024, we recorded an
adjustment of $
million,
within the selling, general and administrative line in our condensed consolidated
statements of income, representing
a change in the fair value of contingent consideration related to a 2023
acquisition.
During the three months ended March 30, 2024 we completed accounting
for certain acquisitions that occurred in
the year ended December 30, 2023.
In relation to these acquisitions, we did not record material
adjustments in our
condensed consolidated financial statements relating to changes in estimated
values of assets acquired, liabilities
assumed and contingent consideration assets and liabilities.
The pro forma financial information for our 2023 acquisitions has not been
presented because the impact of the
acquisitions was immaterial to our condensed consolidated
financial statements.
Acquisition Costs
During the three months ended March 30, 2024 and April 1, 2023 we
incurred $
million and $
million in
acquisition costs, which are included in “selling, general and administrative”
within our condensed consolidated
statements of income.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 7 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The 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.
Certain of our notes receivable contain variable interest rates.
We believe the carrying amounts are a reasonable
estimate of fair value based on the interest rates in the applicable
markets.
Our investments and notes receivable
fair value is based on Level 3 inputs within the fair value hierarchy.
Debt
The fair value of our debt (including bank credit lines, current maturities
of long-term debt and long-term debt) is
based on Level 3 inputs within the fair value hierarchy, and as of March 30, 2024 and December 30, 2023 was
estimated at $
2,377
million and $
2,351
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 inputs.
Our derivative
instruments primarily include foreign currency forward agreements, forecasted
inventory purchase commitments,
foreign currency forward contracts, interest rate swaps and total return swaps.
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
are based on market rates for comparable
transactions that are classified within Level 2 of the fair value hierarchy.
The fair value of the interest rate swap, which is classified within Level 2
of the fair value hierarchy, is determined
by comparing our contract rate to a forward market rate as of the
valuation date.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
The fair value of total return swaps is determined by valuing the underlying
exchange traded funds of the swap
using market-on-close pricing by industry providers as of the valuation
date that are classified within Level 2 of the
fair value hierarchy.
Redeemable noncontrolling interests
The values for redeemable noncontrolling interests are based on recent
transactions and/or implied multiples of
earnings that are classified within Level 3 of the fair value hierarchy.
See
Note 13 – Redeemable Noncontrolling
for additional information.
Assets measured on a non-recurring basis at fair value include intangibles.
Inputs for measuring intangibles are
classified as Level 3 within the fair value hierarchy.
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
March 30, 2024 and December 30,
2023:
March 30, 2024
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
$
-
$
Derivative contracts undesignated
-
-
Total return
swap
-
-
Total assets
$
-
$
$
-
$
Liabilities:
Derivative contracts designated as hedges
$
-
$
$
-
$
Derivative contracts undesignated
-
-
Total liabilities
$
-
$
$
-
$
Redeemable noncontrolling interests
$
-
$
-
$
$
December 30, 2023
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
$
-
$
Derivative contracts undesignated
-
-
Total return
swap
-
-
Total assets
$
-
$
$
-
$
Liabilities:
Derivative contracts designated as hedges
$
-
$
$
-
$
Derivative contracts undesignated
-
-
Total liabilities
$
-
$
$
-
$
Redeemable noncontrolling interests
$
-
$
-
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 8 – Debt
Bank Credit Lines
Bank credit lines consisted of the following:
March 30,
December 30,
2024
2023
Revolving credit agreement
$
$
Other short-term bank credit lines
Total
$
$
Revolving Credit Agreement
On
August 20, 2021
, we entered a $
1.0
billion revolving credit agreement (the “Revolving Credit Agreement”)
which was subsequently amended and restated on
July 11, 2023
to extend the maturity date to
July 11, 2028
and
update the interest rate provisions to reflect the current market approach
for a multicurrency facility.
The interest
rate on this revolving credit facility is based on Term Secured Overnight Financing Rate (“Term SOFR”) plus a
spread based on our leverage ratio at the end of each financial reporting
quarter.
As of March 30, 2024 the interest
rate on this revolving credit agreement was
5.32
% plus
1.10
% for a combined rate of
6.42
%.
The Revolving Credit
Agreement requires, among other things, that we maintain certain maximum
leverage ratios.
Additionally, the
Revolving Credit Agreement contains customary representations, warranties
and affirmative covenants as well as
customary negative covenants, subject to negotiated exceptions, on
liens, indebtedness, significant corporate
changes (including mergers), dispositions and certain restrictive agreements.
As of March 30, 2024 and December
30, 2023, we had $
million and $
million in borrowings, respectively under this revolving credit facility.
During the three months ended March 30, 2024, the average outstanding balance
under the Revolving Credit
Agreement was approximately $
million.
As of March 30, 2024 and December 30, 2023, there were $
million and $
million of letters of credit, respectively, provided to third parties under this Revolving Credit
Agreement.
Other Short-Term Bank Credit
Lines
As of March 30, 2024 and December 30, 2023, we had various other short-term
bank credit lines available, in
various currencies, with a maximum borrowing capacity of $
million and $
million, respectively.
As of
March 30, 2024 and December 30, 2023, $
million and $
million, respectively, were outstanding.
During the
three months ended March 30, 2024, the average outstanding balances under
our various other short-term bank
credit lines was approximately $
million.
At March 30, 2024 and December 30, 2023, borrowings under
other
short-term bank credit lines had weighted average interest rates of
6.08
% and
6.02
%, respectively.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Long-term debt
Long-term debt consisted of the following:
March 30,
December 30,
2024
2023
Private placement facilities
$
1,024
$
1,074
Term loan
U.S. trade accounts receivable securitization
Various
collateralized and uncollateralized loans payable with interest,
in varying installments through 2030 at interest rates
from
0.00
% to
9.42
% at March 30, 2024 and
from
0.00
% to
9.42
% at December 30, 2023
Finance lease obligations
Total
2,113
2,087
Less current maturities
(103)
(150)
Total long-term debt
$
2,010
$
1,937
Private Placement Facilities
Our private placement facilities include
four
insurance companies, have a total facility amount of $
1.5
billion, and
are available on an uncommitted basis at fixed rate economic
terms to be agreed upon at the time of issuance, from
time to time through
October 20, 2026
.
The facilities allow us to issue senior promissory notes to the lenders
at a
fixed rate based on an agreed upon spread over applicable treasury notes
at the time of issuance.
The term of each
possible issuance will be selected by us and can range from
five
to
15 years
(with an average life no longer than
years
).
The proceeds of any issuances under the facilities will be used
for general corporate purposes, including
working capital and capital expenditures, to refinance existing indebtedness,
and/or to fund potential acquisitions.
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.
The components of our private placement facility borrowings, which
have a weighted average interest rate of
3.66
%, as of March 30, 2024 are presented in the following table:
Amount of
Date of
Borrowing
Borrowing
Borrowing
Outstanding
Rate
Due Date
December 24, 2012
$
3.00
%
December 24, 2024
June 16, 2017
3.42
June 16, 2027
September 15, 2017
3.52
September 15, 2029
January 2, 2018
3.32
January 2, 2028
September 2, 2020
2.35
September 2, 2030
June 2, 2021
2.48
June 2, 2031
June 2, 2021
2.58
June 2, 2033
May 4, 2023
4.79
May 4, 2028
May 4, 2023
4.84
May 4, 2030
May 4, 2023
4.96
May 4, 2033
May 4, 2023
4.94
May 4, 2033
Less: Deferred debt issuance costs
(1)
Total
$
1,024
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Term Loan
On July 11, 2023, we entered into a
three-year
$
million term loan credit agreement (the “Term Credit
Agreement”).
The interest rate on this term loan is based on the Term SOFR plus a spread based on our leverage
ratio at the end of each financial reporting quarter.
This term loan matures on July 11, 2026.
We are required to make quarterly payments of $
million from September 2023 through June 2024 and quarterly
payments of $
million from September 2024 through June 2026, with the remaining balance
due in July 2026.
As
of March 30, 2024, the borrowings outstanding under this term loan were
$
million.
At March 30, 2024, the
interest rate under the Term Credit Agreement was
5.32
% plus
1.47
% for a combined rate of
6.79
%.
As of
December 30, 2023, the borrowings outstanding under this term loan were
$
million.
At December 30, 2023,
the interest rate under the Term Credit Agreement was
5.36
% plus
1.35
% for a combined rate of
6.71
%.
However,
we have a hedge in place that ultimately creates an effective fixed rate of
5.91
% and
5.79
% at March 30, 2024 and
December 30, 2023, respectively.
The Term Credit Agreement requires, among other things, that we maintain
certain maximum leverage ratios.
Additionally, the Term
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.
U.S. Trade Accounts Receivable Securitization
We have a facility agreement based on our U.S. trade accounts receivable that is structured as an asset-backed
securitization program with pricing committed for up to
three years
.
This facility agreement has a purchase limit of
$
million with
two
banks as agents, and expires on
December 15, 2025
.
As of March 30, 2024 and December 30, 2023, the borrowings outstanding
under this securitization facility were
$
million and $
million, respectively.
At March 30, 2024, the interest rate on borrowings under
this facility
was based on the asset-backed commercial paper rate of
5.47
% plus
0.75
%, for a combined rate of
6.22
%.
At
December 30, 2023, the interest rate on borrowings under this facility was
based on the asset-backed commercial
paper rate of
5.67
% plus
0.75
%, for a combined rate of
6.42
%.
If our accounts receivable collection pattern changes due to customers
either paying late or not making payments,
our ability to borrow under this facility may be reduced.
We are required to pay a commitment fee of
to
basis points depending upon program utilization.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 9 – Income Taxes
For the three months ended March 30, 2024 our effective tax rate was
25.6
%, compared to
23.8
% for the prior year
period.
The difference between our effective tax rate and the federal statutory tax rate primarily
relates to state and
foreign income taxes and interest expense.
The Organization of Economic Co-Operation and Development (OECD) issued
technical and administrative
guidance on Pillar Two Model Rules in December 2021, which provides for a global minimum tax rate on the
earnings of large multinational businesses on a country-by-country basis.
Effective January 1, 2024, the minimum
global tax rate is 15% for various jurisdictions pursuant to the Pillar Two framework.
Future tax reform resulting
from these developments may result in changes to long-standing tax principles,
which may adversely impact our
effective tax rate going forward or result in higher cash tax liabilities.
As of March 30, 2024, the impact of the
Pillar Two Rules to our financial statements was immaterial.
As we operate in jurisdictions which have adopted
Pillar Two,
we are continuing to analyze the implications to effectively manage the impact
for 2024 and beyond.
The total amount of unrecognized tax benefits, which are included in
“other liabilities” within our condensed
consolidated balance sheets, as of March 30, 2024 and December 30, 2023, was
$
million and $
million,
respectively, of which $
million and $
million, respectively, 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 condensed consolidated statements of income.
All tax returns audited by the IRS are officially closed through 2019.
The tax years subject to examination by the
IRS include years 2020 and forward.
In addition, limited positions reported in the 2017 tax year are subject
to IRS
examination.
The amount of tax interest expense included as a component of the provision
for taxes was $
million and $
million for the three months ended March 30, 2024 and April 1, 2023,
respectively.
The total amount of accrued
interest is included in “other liabilities,” and was $
million as of March 30, 2024 and $
million as of December
30, 2023.
The amount of penalties accrued for during the periods presented
were not material to our condensed
consolidated financial statements.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 10 – Plan of Restructuring
On August 1, 2022, we committed to a restructuring plan focused on
funding the priorities of the BOLD+1 strategic
plan, streamlining operations and other initiatives to increase efficiency.
We revised our previous expectations of
completion and we have extended this initiative through the end of 2024.
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, both with respect to each major type of cost associated
therewith and to the total cost, or an
estimate of the amount or range of amounts that will result in future
cash expenditures.
During the three months ended March 30, 2024 and April 1, 2023, we
recorded restructuring costs of $
million
and $
million, respectively.
The restructuring costs for these periods primarily related to severance
and
employee-related costs, accelerated amortization of right-of-use
lease assets and fixed assets, and other lease exit
costs.
Restructuring costs recorded for the three months ended March 30, 2024
and April 1, 2023, consisted of the
following:
Three Months Ended March 30, 2024
Health Care
Distribution
Technology
and
Value-Added
Services
Total
Severance and employee-related costs
$
$
$
Accelerated depreciation and amortization
-
Exit and other related costs
-
Total restructuring
costs
$
$
$
Three Months Ended April 1, 2023
Health Care
Distribution
Technology
and
Value-Added
Services
Total
Severance and employee-related costs
$
$
$
Accelerated depreciation and amortization
-
Exit and other related costs
Loss on disposal of a business
-
Total restructuring
costs
$
$
$
The following table summarizes,
by reportable segment, the activity related to the liabilities associated
with our
restructuring initiatives
for the three months ended March 30, 2024.
The remaining accrued balance of
restructuring costs as of March 30, 2024, which primarily relates
to severance and employee-related costs, is
included in accrued expenses: other within our condensed consolidated
balance sheets.
Liabilities related to exited
leased facilities are recorded within our current and non-current operating
lease liabilities within our condensed
consolidated balance sheets.
Technology
and
Health Care
Value-Added
Distribution
Services
Total
Balance, December 30, 2023
$
$
$
Restructuring costs
Non-cash accelerated depreciation and amortization
(1)
-
(1)
Cash payments and other adjustments
(11)
(1)
(12)
Balance, March 30, 2024
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 11 – Legal Proceedings
Henry Schein, Inc. has been named as a defendant in multiple opioid
related lawsuits (currently less than one-
hundred and seventy-five (
); one or more of Henry Schein, Inc.’s subsidiaries is also named as a defendant in a
number of those cases).
Generally, the lawsuits allege that the 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 its subsidiaries) reaped
financial rewards by refusing or
otherwise failing to monitor appropriately and restrict the improper distribution
of those drugs.
These actions
consist of some that have been consolidated within the MultiDistrict Litigation
(“MDL”) proceeding In Re National
Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804)
and are currently stayed, and others which
remain pending in state courts and are proceeding independently and outside
of the MDL.
At this time, the
following cases are set for trial: the action filed by DCH Health Care Authority, et al. in Alabama state court, which
is currently set for a jury trial on July 8, 2024; the action filed by Mobile
County Board of Health, et al. in Alabama
state court, which has been set for a jury trial on August 12, 2024;
and the action filed by Florida Health Sciences
Center, Inc. (and
other hospitals located throughout the State of Florida) in Florida state court,
which is currently
scheduled for a jury trial in September 2025.
Of Henry Schein’s 2023 net sales of approximately $
12.3
billion,
sales of opioids represented less than four-tenths of 1 percent.
Opioids represent a negligible part of our
business.
We intend to defend ourselves vigorously against these actions.
In August 2022, Henry Schein received a Grand Jury Subpoena from the United
States Attorney’s Office for the
Western District of Virginia,
seeking documents in connection with an investigation of possible
violations of the
Federal Food, Drug & Cosmetic Act by Butler Animal Health Supply, LLC (“Butler”), a former subsidiary of
Henry Schein.
The investigation relates to the sale of veterinary prescription drugs
to certain customers.
In
October 2022, Henry Schein received a second Grand Jury Subpoena
from the United States Attorney’s Office for
the Western District of Virginia.
The October 2022 Subpoena seeks documents relating to payments Henry
Schein
received from Butler or Covetrus, Inc. (“Covetrus”).
Butler was spun off into a separate company and became a
subsidiary of Covetrus in 2019 and is no longer owned by Henry Schein.
We are cooperating with the
investigation.
On January 18, 2024, a putative class action was filed against the Company
in the U.S. District Court for the
Eastern District of New York (“EDNY”), Case No. 24-cv-387 (the “Cruz-Bermudez Action”), based on the
October 2023 cyber incident described in
.
On January 26, 2024, a second putative class
action was filed against the Company based on the cyber incident, also
in the EDNY,
Case No. 24-cv-550 (the
“Depperschmidt Action”).
On February 12, 2024, the Depperschmidt Action was voluntarily dismissed
without
prejudice.
On February 16, 2024, an amended complaint was filed in
the Cruz-Bermudez Action with additional
plaintiffs’ counsel from the Depperschmidt Action and an additional new plaintiff.
Plaintiffs in the Cruz-Bermudez Action seek to represent a class of all individuals
whose personally identifying
information and personal health information was compromised by
the incident.
Plaintiffs generally claim to have
been harmed by alleged actions and/or omissions by the Company
in connection with the incident and that the
Company made deceptive public statements regarding privacy and data protection.
Plaintiffs assert a variety of
claims seeking monetary damages, injunctive relief, costs and attorneys’
fees, and other related relief.
On March
22, 2024, plaintiffs voluntarily withdrew two of their five causes of action.
On April 8, 2024, the court denied the
Company’s motion to dismiss the remaining claims.
The case remains pending.
We intend to defend ourselves
vigorously against this action.
Henry Schein, Inc. and its affiliate, North American Rescue, LLC (“NAR”), have
been named as defendants in a
qui tam lawsuit brought under the federal False Claims Act (“FCA”), in
an action entitled
Russ and Murphy ex rel.
United States v. North American Rescue, LLC et al.
; Case No. 21-cv-04238, filed in the United States District
Court
for the Eastern District of Pennsylvania.
The case was filed under seal in 2021 by two relators (Corey
Russ and
Chris Murphy) who worked for one of NAR’s competitors.
Relators also name C-A-T Resources, LLC (“CAT-R”)
as a defendant.
CAT
-R manufactures one of the products at issue in the case (the
combat application tourniquet, or
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
“CAT”).
After the Department of Justice declined to intervene, the case was unsealed,
and Relators filed their first
amended complaint in November 2023.
In response to motions to dismiss filed by Henry Schein, NAR
and CAT-
R, Relators requested and obtained leave to file their Second Amended
Complaint on April 24, 2024.
Relators’
FCA claims are based on allegations that NAR and Henry Schein made false
representations and certifications in
connection with, and sold and submitted false claims for payment to the federal
government for, various medical
products that Relators contend violated certain “Buy American”
laws (e.g., the Berry Amendment and Trade
Agreements Act of 1979) and/or were not properly sterilized as noted
on the products’ packaging, and thus
misbranded.
These products include the CAT,
syringes, compressed gauze, tracheostomy kits, hypothermia
blankets, eye, ear, nose and throat kits, and trauma dressing.
Relators allege Henry Schein controlled and
supervised NAR’s alleged misconduct for a period of time.
Relators seek three times the amount of damages to be
proved at trial, statutory civil penalties, reasonable expenses, attorneys’
fees and costs, and prejudgment
interest.
We intend to defend ourselves vigorously against this action.
From time to time, we may become a party to other legal proceedings,
including, without limitation, product
liability claims, employment matters, commercial disputes, governmental
inquiries and investigations (which may
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 March 30, 2024, 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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 12 – Stock-Based Compensation
Stock-based awards are provided to certain employees under our 2020 Stock Incentive
Plan and to non-employee
directors under our 2023 Non-Employee Director Stock Incentive Plan
(formerly known as the 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 to our
employees have been granted solely in the form of time-based and performance-based
restricted stock units
(“RSUs”) with the exception of our 2021 plan year in which non-qualified
stock options were issued in place of
performance-based RSUs and in 2022, when we granted time-based and
performance-based RSUs, as well as non-
qualified stock options.
For our 2023 plan year, we returned to granting our employees equity-based awards solely
in the form of time-based and performance-based RSUs.
Our non-employee directors receive equity-based awards
solely in the form of time-based RSUs.
RSUs are stock-based awards granted to recipients with specified vesting provisions.
In the case of RSUs, common
stock is delivered on or following satisfaction of vesting conditions.
We issue RSUs to employees that primarily
vest (i) solely based on the recipient’s continued service over time, primarily with
four
-year cliff vesting and/or (ii)
based on achieving specified performance measurements and the recipient’s continued service over time, primarily
with
three
-year cliff vesting.
RSUs granted to our non-employee directors primarily include
-month cliff vesting.
For these RSUs, we recognize the cost as compensation expense on a straight-line
basis.
For all RSUs, we estimate the fair value based on our closing stock
price on the grant date.
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.
Each of the Plans provide for certain adjustments to the performance
measurement in connection with awards under
the Plans.
With respect to the performance-based RSUs granted under our 2020 Stock Incentive Plan, such
performance measurement adjustments relate to significant events, including,
without limitation, acquisitions,
divestitures, new business ventures, certain capital transactions (including share
repurchases), differences in
budgeted average outstanding shares (other than those resulting from capital
transactions referred to above),
restructuring costs, if any, amortization expense recorded for acquisition-related intangible assets (solely with
respect to performance-based RSUs granted in the 2023 and 2024 plan years),
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, foreign exchange fluctuations, the financial impact
either positive or negative, of the difference
in projected earnings generated by COVID-19 test kits (solely with respect
to performance-based RSUs granted in
the 2022 and 2023 plan years) and impairment charges (solely with respect to performance-based
RSUs granted in
the 2023 and 2024 plan years), and unforeseen events or circumstances
affecting us.
Over the performance period, the number of RSUs 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 is based on our actual performance metrics as defined under
the 2020 Stock Incentive Plan.
Stock options are awards that allow the recipient to purchase shares of our
common stock after vesting at a fixed
price set at the time of grant.
Stock options were granted at an exercise price equal to our
closing stock price on the
date of grant.
Stock options issued in 2021 and 2022 vest one-third per year based
on the recipient’s continued
service, subject to the terms and conditions of the 2020 Stock Incentive Plan,
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 term and
term acceleration upon certain events.
Compensation expense for stock options is recognized using
a graded
vesting method.
We estimate grant date fair value of stock options using the Black-Scholes valuation model.
During the three months ended March 30, 2024, we did
no
t grant any stock options.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Our condensed consolidated statements of income reflect pre-tax share-based compensation
expense of $
million
and $
million for the three months ended March 30, 2024 and April 1, 2023.
Total unrecognized compensation cost related to unvested awards as of March 30, 2024 was $
million, which is
expected to be recognized over a weighted-average period of approximately
2.7
years.
Our condensed consolidated statements of cash flows present our
stock-based compensation expense as a
reconciling adjustment between net income and net cash provided by operating
activities for all periods presented.
There were no cash benefits associated with tax deductions in excess of
recognized compensation for the three
months ended March 30, 2024 and April 1, 2023.
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 that most closely aligns to 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 Staff Accounting Bulletin Topic 14.
The following table summarizes the stock option activity for the three
months ended March 30, 2024:
Stock Options
Weighted Average
Weighted Average
Aggregate
Exercise
Remaining Contractual
Intrinsic
Shares
Price
Life (in years)
Value
Outstanding at beginning of period
1,078,459
$
71.46
Granted
-
-
Exercised
(21,570)
62.71
Forfeited
(897)
82.62
Outstanding at end of period
1,055,992
$
71.63
7.3
$
Options exercisable at end of period
908,836
$
69.49
Weighted Average
Weighted Average
Aggregate
Number of
Exercise
Remaining Contractual
Intrinsic
Options
Price
Life (in years)
Value
Expected to vest
147,110
$
84.84
8.0
$
-
The following tables summarize the activity of our unvested RSUs for
the three months ended March 30, 2024:
Time-Based Restricted Stock Units
Performance-Based Restricted Stock Units
Weighted
Weighted
Average
Intrinsic
Average
Intrinsic
Grant Date Fair
Value
Grant Date Fair
Value
Shares/Units
Value Per Share
Per Share
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period
1,655,393
$
70.34
208,742
$
78.02
Granted
432,350
76.56
450,333
76.81
Vested
(307,839)
62.51
(6,432)
63.01
Forfeited
(6,021)
81.48
(6,431)
83.07
Outstanding at end of period
1,773,883
$
73.19
$
75.52
646,212
$
75.68
$
75.52
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 13 – 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 three months ended March 30, 2024 and the year ended December
30, 2023 are presented in the
following table:
March 30,
December 30,
2024
2023
Balance, beginning of period
$
$
Decrease in redeemable noncontrolling interests due to acquisitions of
noncontrolling interests in subsidiaries
(94)
(19)
Increase in redeemable noncontrolling interests due to business
acquisitions
-
Net income attributable to redeemable noncontrolling interests
Distributions declared, net of capital contributions
(6)
(19)
Effect of foreign currency translation gain (loss) attributable to
redeemable noncontrolling interests
(10)
Change in fair value of redeemable securities
(11)
Balance, end of period
$
$
Note 14 – Comprehensive Income
Comprehensive income includes certain gains and losses that, under U.S.
GAAP,
are excluded from net income and
are recorded directly to stockholders’ equity.
The following table summarizes our Accumulated other comprehensive loss, net of
applicable taxes as of:
March 30,
December 30,
2024
2023
Attributable to redeemable noncontrolling interests:
Foreign currency translation adjustment
$
(42)
$
(32)
Attributable to noncontrolling interests:
Foreign currency translation adjustment
$
(1)
$
(1)
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
(232)
$
(188)
Unrealized loss from hedging activities
(2)
(13)
Pension adjustment loss
(5)
(5)
Accumulated other comprehensive loss
$
(239)
$
(206)
Total Accumulated
other comprehensive loss
$
(282)
$
(239)
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
The following table summarizes the components of comprehensive income, net
of applicable taxes as follows:
Three Months Ended
March 30,
April 1,
2024
2023
Net income
$
$
Foreign currency translation gain (loss)
(54)
Tax effect
-
-
Foreign currency translation gain (loss)
(54)
Unrealized gain (loss) from hedging activities
(4)
Tax effect
(4)
Unrealized gain (loss) from hedging activities
(3)
Comprehensive income
$
$
Our financial statements are denominated in U.S. Dollars.
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 three months ended March 30, 2024
and three months ended April 1, 2023 was
primarily due to changes in foreign currency exchange rates of the Euro,
Brazilian Real, British Pound, Australian
Dollar, Swiss Franc and Canadian Dollar.
The hedging gain (loss) during the three months ended March 30, 2024, and
April 1, 2023 was attributable to a net
investment hedge.
The following table summarizes our total comprehensive income, net of
applicable taxes as follows:
Three Months Ended
March 30,
April 1,
2024
2023
Comprehensive income attributable to
Henry Schein, Inc.
$
$
Comprehensive income attributable to
noncontrolling interests
Comprehensive income (loss) attributable to
Redeemable noncontrolling interests
(8)
Comprehensive income
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 15
–
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 unvested RSUs 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 Ended
March 30,
April 1,
2024
2023
Basic
128,720,661
131,365,789
Effect of dilutive securities:
Stock options and restricted stock units
1,048,919
1,674,097
Diluted
129,769,580
133,039,886
The number of antidilutive securities that were excluded from the calculation
of diluted weighted average common
shares outstanding are as follows:
Three Months Ended
March 30,
April 1,
2024
2023
Stock options
419,139
422,190
Restricted stock units
245,667
18,305
Total anti-dilutive
securities excluded from earnings per share computation
664,806
440,495
Note 16 – Supplemental Cash Flow Information
Cash paid for interest and income taxes was:
Three Months Ended
March 30,
April 1,
2024
2023
Interest
$
$
Income taxes
For the three months ended March 30, 2024 and April 1, 2023, we had $
million and $
(4)
million of non-cash net
unrealized gains (losses) related to hedging activities, respectively.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
Note 17 – Related Party Transactions
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 $
million annually for the use of their intellectual property.
During the three
months ended March 30, 2024 and April 1, 2023, we recorded $
million and $
million, respectively, in
connection with costs related to this royalty agreement.
As of March 30, 2024 and December 30, 2023, Henry
Schein One, LLC had a net payable balance to Internet Brands of $
million and $
million, respectively,
comprised of amounts related to results of operations and the royalty agreement.
The components of this payable
are recorded within accrued expenses: other within our condensed consolidated
balance sheets.
We have interests in entities that we account for under the equity accounting method.
In our normal course of
business, during the three months ended March 30, 2024 and April 1, 2023,
we recorded net sales of $
million
and $
million respectively, to such entities.
During the three months ended March 30, 2024 and April 1, 2023,
we
purchased $
million and $
million respectively, from such entities.
At March 30, 2024 and December 30, 2023,
we had an aggregate $
million and $
million, respectively, due from our equity affiliates, and $
million and
$
million, respectively, due to our equity affiliates.
Certain of our facilities related to our acquisitions are leased from employees
and minority shareholders.
These
leases are classified as operating leases and have a remaining lease term
ranging from less than
one month
to
years.
As of March 30, 2024, current and non-current liabilities
associated with related party operating leases were
$
million and $
million, respectively.
At March 30, 2024 related party leases represented
6.7
% and
8.2
% of the
total current and non-current operating lease liabilities, respectively.
At December 30, 2023 related party leases
represented
6.3
% and
7.4
% of the total current and non-current operating lease liabilities, respectively.
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