UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington,
D.C.
20549

FORM
10-K

(Mark One)

☒
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended
December 28, 2019

31, 2022

☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

For the transition period from ____________ to ____________

Commission file number
0-27078

HENRY SCHEIN, INC.

INC.

(Exact name of registrant as specified in its charter)

Delaware

11-3136595

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

Delaware
11-3136595
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
135 Duryea Road

Melville
,
New York

(Address of principal executive offices)

11747

(Zip Code)

(631)

(
631
)
843-5500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b)
of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

HSIC

The Nasdaq Global Select Market

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.01 per share
HSIC
The Nasdaq Global Select Market
Securities registered pursuant to Section
12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES
:
☒
NO:
☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES:
☐ NO:
NO
:
☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES
:
☒
NO:
☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES
:
☒
NO:
☐

Indicate by check mark whether the registrant is a
large accelerated filer, an
accelerated filer, a non-accelerated filer,
a smaller reporting company,
or an
emerging
growth
company.
See
the
definitions
of “large
“large
accelerated
filer,” “accelerated
“accelerated
filer,” “smaller
“smaller
reporting
company,”
and “emerging
“emerging
growth
company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer: filer
:
☒
Accelerated filer:
☐
Non-accelerated filer:
☐
Smaller reporting company:
☐
Emerging
growth company:
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. YES:
☒
NO:
☐
If securities are registered pursuant to
Section 12(b) of the Act, indicate by
check mark whether the financial statements of
the registrant included in the
filing reflect the correction of an error to previously issued financial statements.
☐
Indicate
by
check
mark
whether
any
of
those
error
corrections
are
restatements
that
required
a
recovery
analysis
of
incentive-based
compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES:
☐
NO:
☒

The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price as
quoted on the Nasdaq Global Select Market on June 29, 2019,25, 2022, was approximately $10,236,712,000.

$

10,463,590,000
.
As of February 14, 2020,7, 2023, there were 143,390,505
131,283,515
shares of registrant’s Common Stock, par value $.01 per share, outstanding.

Documents Incorporated by Reference:

Portions of the Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year (December 28, 2019)
(December 31, 2022) are incorporated by reference in Part III hereof.

2

TABLE OF CONTENTS
Page
Number
3
25
40
40
40
40
41
42
43
58
60
116
116
118
118
118
119

119

119
119
127
128
3
PART

PART I

ITEM 1.

Business

General

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
office-
based dental and medical practitioners. We serve more than 1 million customers worldwide including dental practitioners, and laboratories and physician practices, as well as alternate sites of care.
Our philosophy is grounded in our
commitment to help customers operate a more efficient and successful business so
the practitioner can provide
better clinical care.
With more than 90 years of experience distributing health care products, we have built a vast set of small,
mid-sized
and large customers in the dental and medical markets, serving more than one million
customers worldwide across
dental practices, laboratories,
physician practices, and ambulatory surgery centers, 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 87 years of experience distributing health care products.

We are headquartered in Melville, New York
and employ more than 19,000 people (of which approximately 9,400 are22,000 people.
Approximately 50% of our
workforce is based outsidein the United States)States and approximately 50% is based
outside of the United States.
We have
operations or affiliates in 3132 countries 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, the Netherlands, New Zealand, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Arab Emirates and the United Kingdom.

territories.

Our broad global footprint has evolved over time through our
organic success as well as through contribution from strategic acquisitions.
We offer
a comprehensive selection of products and services and value-added solutions for operating efficient practices and delivering high quality care. We operate through a centralized and automated distribution network with a selection of more than 120,000300,000 branded products
and Henry Schein privatecorporate brand
products in stock, as well as more than 180,000 additional products available as special order items. We also offerthrough our customers exclusive, innovative technology solutions,distribution centers.
Our infrastructure, including practice management software and e-commerce solutions, as well as a broad range of financial services.

We have established over 3.53.8 million square

feet of space in 29
strategically located distribution centersand 19 manufacturing facilities around
the world, to enableenables us to historically provide
rapid and accurate order fulfillment, 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.

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 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.
The health care distribution reportable segment, aggregatescombining our global dental
and medical operating segments. This segmentbusinesses, 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, personal
protective equipment products
(“PPE”) and vitamins. Our global
While our primary go-to-market strategy is in our capacity
as a distributor, we also market
and sell under our own corporate brand portfolio of cost-effective, high-quality consumable
merchandise products,
and manufacture certain dental group serves office-based dental practitioners, dental laboratories, schoolsspecialty products in the areas of oral
surgery, implants, orthodontics and other institutions. Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions.

Our global

endodontics.
The technology and value-added services groupreportable segment provides
software, technology and other value-added
services to health care practitioners. Our technology group offerings include
Henry Schein One, the largest contributor of sales to this category, offers
dental practice management software systemssolutions for dental and medical practitioners. Our
In addition, we offer dentists and
physicians a broad suite of electronic health records, patient communication
services including electronic marketing
and web-site design, analytics and patient demand generation.
Finally, our value-added practice solutions include
practice consultancy, education, integrated revenue cycle management and the facilitation of financial services onservice
offerings (on a non-recourse basis, e-services,basis) to help dentists and physicians operate and
expand their business operations.
We believe our hands-on consultative approach to provide solutions to support practice technology, networkdecision-making is a key
differentiator for our business.
4
Recent Developments
See “Management’s Discussion and hardware services, as well as continuing education servicesAnalysis of Financial Condition and Results of Operations – Recent
Developments” herein for practitioners.

Spin-Off of Henry Schein Animal Health Business

On February 7, 2019 (the “Distribution Date”), we completed the separation (the “Separation”) and subsequent merger (“Merger”) of our animal health business (the “Henry Schein Animal Health Business”) with Direct Vet Marketing, Inc. (d/b/a Vets First Choice, “Vets First Choice”). This was accomplished by a series of transactions among us, Vets First Choice, Covetrus, Inc. (f/k/a HS Spinco, Inc. “Covetrus”), a wholly owned subsidiary of ours priordiscussion related to the Distribution Date,COVID-19

pandemic and HS Merger Sub, Inc., a wholly owned subsidiary of Covetrus (“Merger

recent corporate transactions.

3

Table of Contents

Industry

Sub”). In connection with the Separation, we contributed, assigned and transferred to Covetrus certain applicable assets, liabilities and capital stock or other ownership interests relating to the Henry Schein Animal Health Business. On the Distribution Date, we received a tax-free distribution of $1,120 million from Covetrus pursuant to certain debt financing incurred by Covetrus. On the Distribution Date and prior to the Animal Health Spin-off, Covetrus issued shares of Covetrus common stock to certain institutional accredited investors (the “Share Sale Investors”) for $361.1 million (the “Share Sale”). The proceeds of the Share Sale were paid to Covetrus and distributed to us. Subsequent to the Share Sale, we distributed, on a pro rata basis, all of the shares of the common stock of Covetrus held by us to our stockholders of record as of the close of business on January 17, 2019 (the “Animal Health Spin-off”). After the Share Sale and Animal Health Spin-off, Merger Sub consummated the Merger whereby it merged with and into Vets First Choice, with Vets First Choice surviving the Merger as a wholly owned subsidiary of Covetrus. Immediately following the consummation of the Merger, on a fully diluted basis, (i) approximately 63% of the shares of Covetrus common stock were (a) owned by our stockholders and the Share Sale Investors, and (b) held by certain employees of the Henry Schein Animal Health Business (in the form of certain equity awards), and (ii) approximately 37% of the shares of Covetrus common stock were (a) owned by stockholders of Vets First Choice immediately prior to the Merger, and (b) held by certain employees of Vets First Choice (in the form of certain equity awards). After the Separation and the Merger, we no longer beneficially owned any shares of Covetrus common stock and, following the Distribution Date, will not consolidate the financial results of Covetrus for the purpose of our financial reporting. Following the Separation and the Merger, Covetrus was an independent, publicly traded company on the Nasdaq Global Select Market.

In connection with the completion of the Animal Health Spin-off, we entered into a transition services agreement with Covetrus under which we have agreed to provide certain transition services for up to twenty-four months in areas such as information technology, finance and accounting, human resources, supply chain, and real estate and facility services.

As a result of the Separation, the financial position and results of operations of the Henry Schein Animal Health Business are presented as discontinued operations and have been excluded from continuing operations and segment results for all periods presented.

Industry

Theglobal 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 mid-sized and large
group practices or service organizations ranging in size from a few practitioners to a large number of practitioners who have combinedseveral
hundred practices owned or otherwise associated their practices.

operated by dental

support organizations (DSOs), medical group purchasing organizations (GPOs), hospital systems
or integrated
delivery networks (IDNs).
Due in part to the inabilitylimited capacity 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, hygienist or an administrative assistant. office manager.
Supplies and small equipment are generally
purchased from more than one distributor, with one generally serving as the primary supplier.

The health care products distribution industry continues to experience growth due
to demand driven by the aging population,
increased health care awareness and the importance of preventative care,
an increasing understanding of the
connection between good oral health and overall health, improved access
to care globally, 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. coverage and technological
improvements, including
the advancement of software and services, prosthetic solutions and
telemedicine.
In addition, the physiciannon-acute market
continues to benefit from the shift of procedures and diagnostic
testing from acute care settings to alternate-care
sites, particularly physicians’ offices.

offices and ambulatory surgery centers.

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.

4

In addition, customer consolidation will likely lead to multiple locations
under common management and the

Tablemovement of Contents

more procedures from the hospital setting to the physician

In recent years,or alternate care setting as the health care

industry hasis increasingly focused on efficiency and 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,health
maintenance organizations (“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.

Competition

The distribution and manufacture of health care supplies and equipment is
highly competitive.
Many of the health
care distribution products we sell are available to our customers from a number of suppliers.
In addition, our competitors could
obtain exclusive rights from manufacturers to market particular products.
Manufacturers also could seek to sell
directly to end-users, and thereby eliminate or reduce our role and
that of other distributors.

In certain parts of the
dental end market, such as those related to dental specialty products, and
medical end market manufacturers already
sell directly to end customers.
In North America, we compete with other distributors, as well as several
manufacturers, of dental and medical
products, primarily on the basis of price, breadth of product line, e-commerce
capabilities, customer service and
5
value-added products and services.
In the dental market, our primary competitors in the U.S. are the Patterson
Dental division of Patterson Companies, Inc. and Benco Dental Supply
Company.
In addition, we compete against
a number of other distributors that operate on a national, regional and
local level.
Our primary competitors in the
U.S. medical market, which accounts for the large majority of our global medical
sales, are McKesson Corporation
and Medline Industries, Inc., which are national distributors.
We also compete againstwith a number of regional and local
medical distributors, as well as a number of manufacturers that
sell directly to physicians.
With regard to our dental practice management
software, we compete against numerous companies, including Carestream Health, Inc. and the
Patterson Dental division of Patterson
Companies, Inc., Carestream Health, Inc., Carestream Dental LLC, Centaur
Software Development Co Pty Ltd.
(d.b.a. dental4windows, dental4web), Open Dental Software, Inc., PlanetDDS
LLC, Good Methods Global Inc.
(d.b.a. CareStack) and Curve Dental, LLC.
In other software end markets, including revenue cycle
management,
patient relationship management and patient demand generation, we
compete with companies such as Vyne
Therapeutics Inc., EDI-Health Group, Inc. (d.b.a. Dental X Change, Inc.),
Weave Communications, Inc., and
Solutionreach, Inc.
The medical practice management and electronic medical
records market is very fragmented and we
compete with numerous companies such as the NextGen division of
Quality Systems, Inc., eClinicalWorks, and
Allscripts Healthcare Solutions, Inc.

and Epic Systems Corporation.

Outside of the U.S., we believe we are the only global distributor of supplies
and equipment to dental practices and
our competitors are primarily local and regional companies.
We also face significant competition internationally,
where we compete on the basis of price and customer service against
several large competitors, including the
GACD Group, Pluradent AG & Co.,Proclinic SA, Lifco AB, Planmeca Oy and Billericay Dental
Supply Co. Ltd., as well as a large
number of other dental and medical product distributors and manufacturers
in Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, the Netherlands, New Zealand, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Arab Emiratesinternational countries and the United Kingdom.

Significant price reductions by our competitors could result in a similar reduction in our prices. Any of these competitive pressures may materially adversely affect our operating results.

territories

we serve.
Competitive Strengths

We have more than 8790 years of experience in distributing products to health care practitioners resulting in strong
awareness of the Henry Schein® Schein
®
brand.
Our competitive strengths include:

A focus on meeting our customers’ unique needs
.
We are committed to providing customized solutions to our
customers that are driven by our understanding of the marketend markets we
serve and reflect the technology-driven
products and services best suited for their practice needs.

We are committed to continuing to enhance these
offerings through organic investment in our products and our teams, as well as through the acquisition
of new
products and services that may help us better serve our customers.
Direct sales and marketing expertise.
Our sales and marketing efforts are designed to establish and solidify
customer relationships through personal or virtual visits by field sales representatives,
frequent direct marketing and
telesales contact, emphasizing our broad product lines, including exclusive
distribution agreements, competitive
prices and ease of order placement. placement,
particularly through our e-commerce platforms.
The key elements of our direct
sales and marketing efforts are:

5

•

Table of Contents

• Field sales consultants. We have over 3,650

Our field sales consultants, including equipment sales specialists, covering
major
North American, European and other international markets.
These consultants complement our direct
marketing and telesales efforts and enable us to better market, service and support
the sale of more
sophisticated products and equipment.

•Direct marketing. During 2019, we distributed approximately 30 million pieces
Marketing.
We market to existing and prospective office-based health care providers through a
combination of direct marketing material, includingowned, earned and paid digital channels, tradeshows, as well
as through catalogs, flyers, order stuffers
direct mail and other promotional materialsmaterials.
Our strategies include an emphasis on educational content
through webinars and content marketing initiatives.
We continue to existingenhance our marketing technology to
improve our targeting capability and potential office-based health care customers.

the relevance of messaging and offers.

•
Telesales.
We support our direct marketing effort with approximately 2,000 inbound and outbound telesales representatives,
who facilitate order processing, generate new sales through direct and frequent
contact with customers and
stay abreast of market developments and the hundreds of new products,
services and technologies
introduced each year to educate practice personnel.

6
•
Electronic commerce solutions.
We provide our customers and sales teams with innovative and
competitive Internet, PC and mobile e-commerce solutions.

We continue to invest in our e-commerce platform to offer enhanced
content management so customers can more easily find the products
they need and to enable an engaging
purchase experience, supported by excellent customer service.
•
Social media.
Our operating entities and employees engage our customers and
supplier partners through
various social media platforms.

platforms, which are an important element of our

communications and marketing
efforts.
We continue to expand our social media presence to raise awareness about issues, engage
customers beyond a sale and deliver services and solutions to specialized
audiences.
Broad product and service offerings at competitive prices.
We offer
a broad range of products and services to our
customers, at competitive prices, in the following categories:

•
Consumable supplies and equipment.equipment
.
We distribute consumable products, small equipment, laboratory
products, large equipment, equipment repair services, branded and generic pharmaceuticals,
vaccines, dental
specialty products, diagnostic tests, infection-control products and vitamins.
We offer over 120,000 Stock Keeping Units, or SKUs,300,000 branded
products, through our distribution centers, to our customers.
We offer over 180,000 additional SKUs toalso market and sell our customersown corporate
brand portfolio of cost-effective, high-quality consumable merchandise products
and manufacture certain
dental specialty products in the formareas of special order items.

implants, orthodontics and endodontics.

•
Technology and other value-added products and services.
We sell practice management, business
analytics, patient engagement and patient demand creation software systems solutions
to our dental and medical customers.
Our
practice management solutions provide practitioners with electronic
medical records, patient treatment
history, analytics, billing, accounts receivable analyses and management, appointment calendars, electronic
claims processing and word processing programs, network and hardware
services, e-commerce and
electronic marketing services, sourcing third party patient payment plans,
transition services and training
and education programs for practitioners.
We also sell medical software for practice management, certified
electronic health records (“EHR”) and e-Prescribe medications and prescription
solutions through
MicroMD®.
We have approximately 800 technical representatives supporting customers using our practice management solutions.
solutions and services.
As of December 28, 2019,31, 2022, we had an active user base of approximately 83,600
110,000
practices and 380,000 consumers, including users of AxiUm, Dentally®, Dentrix
Ascend®, Dental
Vision®, Dentrix® Dental Systems, Dentrix® Enterprise, Dentrix® Dental VisionTM, Dentrix Ascend®, Easy Dental®, OasisTMEndoVision®, Evolution® and
EXACT®, Gesden®, Jarvis Analytics™, Julie®Software, Oasis, OMSVision®, Orisline®, PBS Endo®,
PerioVision®, Power Practice® Px, AxiUmTM, EndoVision®, PerioVision®, OMSVision® PowerDent,
and Viive® and subscriptions for Demandforce®, Sesame,
and Lighthouse360® for dental practices;practices and DentalPlans.com®
for dental patients; and MicroMD® for
physician practices.

•
Repair services.
We have over 170130 equipment sales and service centers worldwide that provide a variety of
repair, installation and technical services for our health care customers.
Our over 2,000 technicians provide
installation and repair services for: dental handpieces; handpieces,
dental and medical small equipment; table top sterilizers;equipment,
table-top
sterilizers and large dental equipment.

•
Financial services.
We offer our customers solutions in operating their practices more efficiently by
providing access to a number of financial services and products
provided by third party vendorssuppliers (including
non-recourse financing for equipment, technology and software products;
products, non-recourse practice financing
for leasehold improvements, business debt consolidation and commercial
real estate, non-recourse patient financing; collection services
financing and credit card processing) at rates that we believe are
generally lower than what our customers
would be able to secure independently.
We also provide consultingstaffing services, dental practice valuation and
brokerage services.

Commitment to superior customer service
.
We maintain a strong commitment to providing superior customer
service.
We frequently monitor our customer service through customer surveys, focus groups and statistical
reports.
Our customer service policy primarily focuses on:

6

7

•
Exceptional order fulfillment
.
We ship an average of approximately 124,000157,000 cartons daily. Approximately
Historically,
approximately 99% of items ordered arehave been shipped without back orderingback-ordering and are were
shipped on the same
business day the order is received.

Due to supply chain disruptions during the year ended December
31,
2022, approximately 96% of items ordered were shipped without back-ordering.
As supply chains continue
to stabilize, we expect our percentage of items shipped without back-ordering and
shipped on the same day
to return to historical levels.
•Streamlined
Comprehensive ordering process
.
Customers may place orders 24 hours a day, 7 days a week by mail,via e-
commerce solutions, telephone, fax, telephone, e-mail Internet and by using our computerized order entry systems.

mail.

Integrated management information systems
. Our
Certain of our information systems generally allow for centralized
management of key functions, including accounts receivable, inventory, accounts payable, payroll, purchasing,
sales, order fulfillment and order fulfillment. financial and operational reporting.
These systems allow us to manage our growth,
deliver superior customer service, properly target customers, manage financial
performance and monitor daily
operational statistics.

Cost-effective purchasing
.
We believe that cost-effective purchasing is a key element to maintaining and enhancing
our position as a competitive-pricingcompetitively priced provider of health care products.
We continuously evaluate our purchase
requirements and suppliers’ offerings and prices in order to obtain products at the
lowest possible cost.
In 2019, 2022,
our top 10 health care distribution suppliers and our single largest supplier accounted for approximately 31%
28% and 6%
4%, respectively, of our aggregate purchases.

Efficient distribution
.
We distribute our products from our 29 strategically located distribution centers.
We strive
to maintain optimal inventory levels in order to satisfy customer demand
for prompt delivery and complete order
fulfillment.
These inventory levels are managed on a daily basis with
the aid of our management information
systems.
Once an order is entered, it is electronically transmitted to the distribution
center nearest the customer’s
location and a packing slip for the entire order is printed for order fulfillment.

Products

and Services

The following table sets forth the percentage of consolidated net sales
by principal categories of products and
services offered through our health care distribution and technology and value-added services
reportable segments:

 

 

 

 

December 28,

 

 

December 29,

 

 

December 30,

 

 

 

 

 

2019

 

 

2018

 

 

2017

 

Health care distribution:

 

 

 

 

 

 

 

 

 

 

 

 

 

Dental products (1)

 

 

64.2

%

 

 

67.4

%

 

 

68.1

%

 

Medical products (2)

 

 

29.8

 

 

 

28.3

 

 

 

28.1

 

 

 

Total health care distribution

 

 

94.0

 

 

 

95.7

 

 

 

96.2

 

Technology and value-added services:

 

 

 

 

 

 

 

 

 

 

 

 

 

Software and related products and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other value-added products (3)

 

 

5.2

 

 

 

4.3

 

 

 

3.8

 

Total excluding Corporate TSA revenues

 

 

99.2

 

 

 

100.0

 

 

 

100.0

 

 

Corporate TSA revenues (4)

 

 

0.8

 

 

 

-

 

 

 

-

 

Total

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Includes infection-control products, handpieces, preventatives, impression materials, composites, anesthetics, teeth, dental implants, gypsum, acrylics, articulators, abrasives, dental chairs, delivery units and lights, X-ray supplies and equipment, equipment repair and high-tech and digital restoration equipment.

(2)

Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray products, equipment and vitamins.

(3)

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.

(4)

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 we expect to continue through August 2020.

7

December 31,

December 25,

December 26,
2022
2021
2020
Health care distribution:
Dental products
(1)
59.1
%
60.8
%
58.4
%
Medical products
(2)
35.2
34.0
35.8
Total
health care distribution
94.3
94.8
94.2
Technology
and value-added services:
Software and related products and
other value-added products
(3)
5.7
5.2
5.1
Total
excluding Corporate TSA net sales
100.0
100.0
99.3
Corporate TSA net sales
(4)
-
-
0.7
Total
100.0
100.0
100.0
(1)
Includes infection-control products, handpieces, preventatives, impression materials, composites, anesthetics, teeth, dental implants,
gypsum, acrylics, articulators, abrasives, dental chairs, delivery units and lights, X-ray supplies and equipment, PPE products,
equipment repair and high-tech and digital restoration equipment.
(2)
Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray
products, equipment, PPE products and vitamins.
(3)
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.
(4)
Corporate TSA net sales 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
for further
information.

8

Business Strategy

Our objectivemission is to continue to expand as a global value-added provider ofprovide innovative, integrated health care products and
services; and to be trusted advisors and
consultants to our customers - enabling them to deliver the best quality patient
care and enhance their practice
management efficiency and profitability.
Our BOLD+1 Strategic Plan consists of the following:
•
Build (“B”)
Complementary software, specialty, and services businesses for high growth
•
Operationalize (“O”)
One Distribution to office-based dental deliver exceptional customer experience, increased
efficiency,
and medical practitioners. growth
•
Leverage (“L”)
One Schein to broaden and deepen relationships with our customers
•
Drive (“D”)
Drive digital transformation for our customers and for Henry Schein
•
+1
Create Value
for our stakeholders
To accomplish this, we will apply our competitive strengths in executing the following strategies:

•
Increase penetration of our existing customer base.
We have over 1 million customers worldwide and we
intend to increase sales to our existing customer base and enhance our position
as their primary supplier.

We believe our offering of a broad range of products, services and support, including software solutions
that can help drive improved workflow efficiency and patient communications for
practices, coupled with
our full-service value proposition, helps us to retain and grow our customer
base.
•
Increase the number of customers we serve.
This strategy includes increasing the number and productivity of our field
sales consultants and telesales team, as well as using our customer
database to focus our marketing efforts
in all of our operating segments.
In the dental business, we provide products and services to traditional dental
independent
practices, mid-market groups, and large DSOs as well as new emerging segments, such as dental service organizations and community health centers. centers and government
sites of
care.
Leveraging our broad array of assets and capabilities, we offer solutions to address these
new
markets.
In the medical business, we have expanded to serve customers
located in settings outside of the
traditional office, such as urgent care clinics, retail, and occupational health and home health settings.
As
settings of health care shift, we remain committed to serving these practitioners
and providing them with
the products and services they need.

•
Leverage our value-added products and services.
We continue to increase cross-selling efforts for key
product lines utilizing a consultative selling process.
In the dental business, we have significant cross-sellingcross-
selling opportunities between our dental practice management software users and our dental distribution customers.
In the medical business,
we have opportunities to expand our vaccine, injectables and other pharmaceuticals
sales to health care
practitioners, as well as cross-selling EHR systems and software
when we sell our core products and electronic health record and practice management software. products.
Our
strategy extends to providing health systems, integrated delivery networks
and other large group and multi-sitemulti-
site health care organizations, that includeincluding physician clinics, these same value added
products and services.
As physicians and health systems closely align, we have increased
access to opportunities for cross-marketingcross-
marketing and selling our product and service portfolios.

•
Pursue strategic acquisitions and joint ventures.
Our acquisition strategy includes acquiring businessesis focused on investments in
companies that add new customers and sales teams, increase our geographic
footprint (whether entering into joint ventures complementarya
new country, such as emerging markets, or building scale where we have already invested in businesses),
and finally, those that enable us to ours that will provide, among other things, additional sales to be channeled through our existing distribution infrastructure, access to additional product linesnew products and field sales consultants and an opportunity to further expand into new geographic markets.

technologies.

Markets Served

Demographic trends indicate that our markets are growing, as an
aging U.S. population is increasingly using health
care services. Between 2019
According to the U.S. Census Bureau’s International Database, between 2022 and 2029,2032, the 45 and
older population is expected to grow by approximately 11%.
Between 20192022 and 2039,2042, this age group is expected to
grow by approximately 22%21%.
This compares with expected total U.S. population growth
rates of approximately 7% 6%
between 20192022 and 20292032 and approximately 13%12% between 20192022 and 2039.

2042.

In the dental industry, there is predicted to be a rise in oral health care expenditures as the 45 and older45-and-older segment of
the population increases.
There is increasing demand for new technologies that allow
dentists to increase
9
productivity, and this is being driven in the U.S. by lower insurance reimbursement rates.
At the same time, there is
an expected increase in dental insurance coverage.

We support our dental professionals through the many SKUs that we offer, as well as through important value-added services, including practice management software, electronic claims processing, financial services and continuing education, all designed to help maximize a practitioner’s efficiency.

In the medical market, there continues to be a migration of procedures from
acute-care settings to physicians’
offices and home health settings,
a trend that we believe provides additional opportunities for us.
There also is the
continuing use of

8

Table of Contents

vaccines, injectables and other pharmaceuticals in alternate-care

settings.
We believe we have
established a leading position as a vaccine supplier to the office-based physician
practitioner.

We support our dental and medical professionals through the many SKUs that we offer, as well as through
important value-added services, including practice management software,
electronic claims processing, financial
services and continuing education, all designed to help maximize a practitioner’s efficiency.
Additionally, we are expandingseek to expand our dental full-service model and our medical offerings in countries where
opportunities exist. Through our “Schein Direct” program, we also have the capability to provide door-to-door air package delivery to practitioners in over 190 countries around the world.

We do this through both direct sales and by partnering with local distribution and
manufacturing companies.
For information on revenues and long-lived assets by geographic area, see
of “Notes to Consolidated Financial Statements.”

Seasonality and Other Factors Affecting Our Business and Quarterly Results

We experience fluctuations in quarterly earnings.
As a result, we may fail to meet or exceed the expectations of
securities analysts and investors, which could cause our stock price
to decline.

Our business is subject to seasonal and other quarterly fluctuations. Revenues
Sales and profitability generally have been
higher in the third and fourth quarters due to the timing of sales of seasonal
products (including influenza vaccine, equipment and software products), vaccine)
purchasing patterns of office-based health care practitioners for certain products (including
equipment and
software) and year-end promotions. Revenues
Sales and profitability generally have been lowermay also be impacted by the timing of
certain annual
and biennial dental tradeshows where equipment promotions are offered.
In addition, some dental practices delay
equipment purchases in the first quarter, primarilyU.S. until year-end due to increased sales in the prior two quarters. tax incentives.
We expect our historical seasonality of sales
to continue in the foreseeable future. Quarterly results may also
Governmental Regulations
We
strive to be materially adversely affected by a variety ofcompliant in all material respects with the applicable
laws, regulations and guidance described
below, and believe we have effective compliance programs and other factors, including:

• timing and amount of sales and marketing expenditures;

• timing of pricing changes offered by our suppliers;

• timing of the introduction of new products and services by our suppliers;

• timing of the release of upgrades and enhancementscontrols in place to our technology-related products and services;

• changes inensure substantial

compliance.
However, compliance is not guaranteed either now or availability of supplier contracts or rebate programs;

• supplier rebates based upon attaining certain growth goals;

• changes in the way suppliers introduce or deliver productsfuture, as certain laws, regulations and

guidance may be subject to market;

• costs of developing new applicationsvarying and services;

•evolving interpretations that could

affect our ability to correctly identify customer needs and preferences and predict future needs and preferences;

• uncertainties regarding potential significant breaches of data security or disruptions of our information technology systems;

• unexpected regulatory actions, or government regulation generally;

• exclusivity requirements with certain suppliers may prohibit us from distributing competitive products manufactured by other suppliers;

• loss of sales representatives;

• costs related to acquisitions and/or integrations of technologies or businesses;

• costs associated with our self-insured medical and dental insurance programs;

9

Table of Contents

• general market and economic conditions,comply, as well as those specific

future changes, additions and enforcement approaches, including political changes.
When we discover situations of
non-compliance we seek to remedy them and bring the health care industryaffected area back into compliance.
President Biden’s
administration (the “Biden Administration”) has indicated that it will be
more aggressive in its pursuit of alleged
violations of law, and related industries;

• our success in establishing or maintaining business relationships;

• unexpected difficulties in developing and manufacturing products;

• product demand and availability or recalls by manufacturers;

• exposure to product liability and other claims in the eventhas revoked certain guidance that thewould have limited governmental use of the products we sell results in injury;

• increases in shippinginformal agency

guidance to pursue potential violations, and has stated that it is more prepared
to pursue individuals for corporate
law violations, including an aggressive approach to anti-corruption activities.
Changes to applicable laws,
regulations and guidance described below, as well as related administrative or judicial interpretations, may require
us to update or revise our operations, services, marketing practices and
compliance programs and controls, and may
impose additional and unforeseen costs on us, pose new or service issues withpreviously immaterial
risks to us, or may otherwise have
a material adverse effect on our third-party shippers;

• fluctuations in the value of foreign currencies;

• restructuring costs;

• the adoption or repeal of legislation;

• changes in accounting principles; and

• litigation or regulatory judgments, expenses or settlements.

Any change in one or more of these or other factors could cause our annual or quarterly financial results to fluctuate. If our financial results do not meet market expectations, our stock price may decline.

Governmental Regulations

Operating, Security and Licensure Standards

business.

Government
Certain of our businesses involve the distribution, manufacturing, importation,
exportation, marketing and sale of,
and/or third party payment for, pharmaceuticals andand/or medical devices, and in this regard, we are subject
to various
extensive local, state, federal and foreign governmental laws and regulations,
including as applicable to theour
wholesale distribution of pharmaceuticals and medical devices. devices, manufacturing
activities, and as part of our
specialty home medical supply business that distributes and sells medical equipment
and supplies directly to
10
patients.
Federal, state and certain foreign 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,
the “ACA”).
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 generally subject to numerous laws and regulations that could
impact our financial performance,
and failure to comply with such laws or regulations could have a material adverse
effect on our business.
Operating, Security and Licensure Standards
Certain of our businesses are subject to local, state and federal governmental
laws and regulations relating to the
distribution of pharmaceuticals and medical devices and supplies.
Among the United States federal laws applicable
to us are the Controlled Substances Act, the Federal Food, Drug,
and Cosmetic Act, as amended (“FDC Act”), and
Section 361 of the Public Health Service Act. Act and Section 401 of the Consolidated
Appropriations Act of the Social
Security Act, as well as laws regulating the billing of and reimbursement
from government programs, such as
Medicare and Medicaid, and from commercial payers.
We
are also subject to comparable foreign regulations.

The FDC Act, the Controlled Substances Act, their implementing regulations,
and similar foreign laws generally
regulate the introduction, manufacture, advertising, marketing and promotion,
sampling, pricing and
reimbursement, labeling, packaging, storage, handling, returning or recalling,
reporting, marketing and distribution of, and
record keeping for, pharmaceuticals and medical devices shipped in interstate commerce, and states
may similarly
regulate such activities within the state.
Furthermore, Section 361 of the Public Health Service Act, which provides
authority to prevent the introduction, transmission or spread of communicable
diseases, serves as the legal basis for
the United States Food and Drug Administration’s (“FDA”) regulation of human cells, tissues and cellular and
tissue-based products, also known as “HCT/P products.”

The Federal Drug Quality and Security Act of 2013 brought about significant
changes with respect to
pharmaceutical supply chain requirements.
Title II of this measure, known as the Drug Supply Chain Security Act
(“DSCSA”), is beingwas first implemented in November 2014 and will be phased
in over a period of ten years, andyears. DSCSA is
intended to build a national electronic, interoperable system toby November
27, 2023, that will identify and trace
certain prescription drugs as they are distributed in the United States.
The law’s track and trace requirements
applicable to manufacturers, wholesalers, third-party logistics providers (e.g.,
trading partners), repackagers and
dispensers (e.g., pharmacies) of prescription drugs took effect in January 2015, and
continues to be implemented.
The DSCSA product tracing requirements replace the former FDA drug pedigree
requirements and pre-empt certain
state requirements that are inconsistent with, more stringent than, or
in addition to, the DSCSA requirements.

10

Table of Contents

The DSCSA also establishes certain requirements for the licensing and operation

of prescription drug wholesalers
and third partythird-party logistics providers (“3PLs”), and includes the eventual
creation of national wholesaler and 3PL
licenses in cases where states do not license such entities.
The DSCSA requires that wholesalers and 3PLs
distribute drugs in accordance with certain standards regarding the recordkeeping,
storage and handling of
prescription drugs.
The DSCSA requires wholesalers and 3PLs to submit annual reports
to the FDA, which include
information regarding each state where the wholesaler or 3PL is licensed, the name
and address of each facility and
contact information.
According to FDA guidance, states are pre-empted from imposing
any licensing requirements
that are inconsistent with, less stringent than, directly related to, or covered
by the standards established by federal
law in this area.
Current state licensing requirements concerning wholesalers will
remain in effect until the FDA
issues new regulations as directed by the DSCSA.

We believe that

In addition, with respect to our specialty home medical supply
business, we are substantially compliant with applicable DSCSA requirements.

subject to certain state licensure laws (including state pharmacy

laws), and also certain
accreditation standards, including to qualify for reimbursement from
Medicare and other third-party payers.
11
The Food and Drug Administration Amendments Act of 2007 and
the Food and Drug Administration Safety and
Innovation Act of 2012 amended the FDC Act to require the FDA to promulgate
regulations to implement a unique
device identification (“UDI”) system.
The UDI rule phased in the implementation of the UDI
regulations, over seven years,
generally beginning with the highest-risk devices (i.e., Class III medical devices)
and ending with the lowest-risk
devices.
Most compliance dates were reached as of September 24, 2018, with
a final set of requirements for low
risk devices being reached on September 24, 2022, which will completecompleted the
phase in.
However, in May 2021, the
FDA issued an enforcement policy stating that it does not intend to
object to the use of legacy identification
numbers on device labels and packages for finished devices manufactured
and labeled prior to September 24, 2023.
The UDI regulations require “labelers” to include unique device identifiers
(“UDIs”), with a content and format
prescribed by the FDA and issued under a system operated by an FDA-accredited
issuing agency, on the labels and
packages of medical devices (including, but not limited to, certain software
that qualifies as a medical device under
FDA rules), and to directly mark certain devices with UDIs.
The UDI regulations also require labelers to submit
certain information concerning UDI-labeled devices to the FDA, much of which
information is publicly available
on an FDA database, the Global Unique Device Identification Database.
On July 22, 2022, the FDA posted the
final guidance regarding the Global Unique Device Identification Database
called Unique Device Identification
Policy Regarding Compliance Dates for Class I and Unclassified Devices, Direct
Marketing, and Global Unique
Device Identification Database Requirements for Certain Devices.
The UDI regulations and subsequent FDA
guidance regarding the UDI requirements provide for certain exceptions, alternatives
and time extensions.
For
example, the UDI regulations include a general exception for Class I devices
exempt from the Quality System
Regulation (other than record-keeping requirements and complaint files).
Regulated labelers include entities such
as device manufacturers, repackagers, reprocessors and relabelers that cause a
device’s label to be applied or
modified, with the intent that the device will be commercially distributed without
any subsequent replacement or
modification of the label and include certain of our businesses.

We believe that we are substantially compliant with applicable UDI requirements.

Under the Controlled Substances Act, as a distributor of controlled substances,
we are required to obtain and renew
annually registrations for our facilities from the United States Drug
Enforcement Administration (“DEA”)
permitting us to handle controlled substances.
We are also subject to other statutory and regulatory requirements
relating to the storage, sale, marketing, handling, reporting, record-keeping
and distribution of such drugs, in
accordance with the Controlled Substances Act and its implementing regulations,
and these requirements have been
subject to heightened enforcement activity in recent times.
We
are subject to inspection by the DEA.

Certain of
our businesses are also required to register for permits and/or licenses
with, and comply with operating and security
standards of, the DEA, the FDA, the United States Department of Health
and Human Services (“HHS”), and
various state boards of pharmacy, state health departments and/or comparable state agencies as well as comparable
foreign agencies, and certain accrediting bodies, depending on the type of
operations and location of product
distribution, manufacturing or sale.
These businesses include those that distribute, manufacture, relabel, and/or
repackage prescription pharmaceuticals and/or medical devices and/or HCT/P
products, or own pharmacy
operations, or install, maintain or repair equipment.
In addition, Section 301 of the National Organ Transplant Act, and a number of comparable state laws, impose civil
and/or criminal penalties for the transfer of certain human tissue (for example,
human bone products) for valuable
consideration, while generally permitting payments for the reasonable costs
incurred in procuring, processing,
storing and distributing that tissue.
We
are also subject to foreign government regulation of such products.
The
DEA, the FDA and state regulatory authorities have broad inspection and enforcement
powers, including the ability
to suspend or limit the distribution of products by our distribution centers,
seize or order the recall of products and
impose significant criminal, civil and administrative sanctions for violations of
these laws and regulations.
Foreign
regulations subject us to similar foreign enforcement powers.

11

EU Regulation of Medicinal and Dental Products

European Union (“EU”) member states regulate their own healthcare systems,

as does EU law.
The latter regulates
certain matters, most notably medicinal products and medical devices.
Medicinal products are defined, broadly, as
substances or combinations of substances having certain functionalities and
may not include medical devices.
EU
“regulations” apply in all member states, whereas “directives” are implemented
by the individual laws of member
states.

12

On medicines for humans, we are regulated under Directive No. 2001/83/EC
of 6 November 2001, as amended by
Directive 2003/63/EC of 25 June 2003, and EU Regulation (EC) No. 726/2004
of 31 March 2004.
These rules
provide for the authorization of products, and regulate their manufacture,
importation, marketing and distribution.
It implements requirements which may be implemented without warning, as
well as a national pharmacovigilance
system under which marketing authorizations may be withdrawn, and includes
potential sanctions for breaches of
the rules, and on other bases such as harmfulness or lack of efficacy.
EU Regulation No. 1223/2009 of 30 November 2009
on cosmetic products
requires that cosmetic products (which
includes dental products) be safe for human health when used under normal
or reasonably foreseeable conditions of
use and comply with certain obligations which apply to manufacturer, importer and distributor.
It includes market
surveillance, and non-compliance may result in the recall or withdrawal of
products, along with other sanctions.
In the European Union,EU, the EU Medical Device Regulation No. 2017/745 (“of 5 April 2017
(“EU MDR”) will apply ascovers a wide scope of
our activities, from dental material to X-ray machines, and certain software.
It was meant to become applicable
three years after publication (i.e., May 26, 2020. 2020).
However, on April 23, 2020, to allow European Economic Area
(“EEA”) national authorities, notified bodies, manufacturers and other actors
to focus fully on urgent priorities
related to the COVID-19 pandemic, the European Council and Parliament
adopted Regulation 2020/561,
postponing the date of application of the EU MDR by one year (to
May 26, 2021).
The EU MDR significantly modifies and intensifies the regulatory compliance
requirements for the medical device
industry as a whole.
Among other things, the EU MDR:
•
strengthens the rules on placing devices on the market and reinforces surveillance
once they are available;
•
establishes explicit provisions on manufacturers’ responsibilities
for the follow-up of the quality,
performance and safety of devices placed on the market;
•
improves the traceability of medical devices throughout the supply chain to the
end-user or patient through
a unique identification number;
•
sets up a central database to provide patients, healthcare professionals and
the public with comprehensive
information on products available in the EU;
•
strengthens rules for the assessment of certain high-risk devices, such
as implants, which may have to
undergo an additional check by experts before they are placed on the market; and
•
identifies importers and distributors and medical device products through
registration in a database
(EUDAMED, which is not fully functional for the time being and might
not be so before the end of 2024 at
the earliest; therefore, the use of this database is only possible through
a voluntary basis and, by a way of
consequence, is currently not mandatory).
In particular, the EU MDR imposes stricterstrict requirements for the confirmation that a product meets
the regulatory
requirements, including regarding a product’s clinical evaluation and a company’s quality systems, and for the
distribution, marketing and sale of medical devices, including post-market
surveillance. Medical devices that have
been assessed and/or certified under the Directive No. 93/42/EEC of
14 June 1993
concerning medical devices
(“EU Medical Device DirectiveDirective”) may for the moment continue to be placed
on the market until 2024 (or until the
expiry of their certificates, if applicable and earlier); however, .
However, on January 6, 2023, the EU Commission submitted a
proposed amendment to extend the MDR transitional periods until December
31, 2027 for higher risk devices and
December 31, 2028, for other medical devices to ensure continued access
to medical devices for patients and to
allow medical devices already placed on the market in accordance with
the current legal framework to remain on
the market. We continue to monitor developments and whether the proposed amendment and new deadlines will be
approved by the European Parliament and Council. Nevertheless, EU MDR
requirements regarding the distribution,
marketing and sale including quality systems and post-market surveillance
have to be observed by manufacturers,
importers and distributors as of the application date.

date (i.e., since May 26, 2021).

Other EU regulations that may apply under appropriate circumstances
include EU Regulation No. 1907/2006 of 18
December 2006
concerning the Registration, Evaluation, Authorisation and
Restriction of Chemicals
, which
requires importers to register substances or mixtures that they import
in the EU beyond certain quantities, and the
EU Regulation No. 1272/2008 of 16 December 2008 on classification, labelling
and packaging of substances and
mixtures, which sets various obligations with respect to the labelling and
packaging of concerned substances and
mixtures.
13
Furthermore, compliance with legal requirements has required and may in the future
require us to delay product
release, sale or distribution, or institute voluntary recalls of, or other corrective
action with respect to products we
sell, each of which could result in regulatory and enforcement actions, financial
losses and potential reputational
harm.
Our customers are also subject to significant federal, state, local
and foreign governmental regulation.

regulation, which

may affect our interactions with customers, including the design and functionality
of our products.
Certain of our businesses are subject to various additional federal, state,
local and foreign laws and regulations,
including with respect to the sale, transportation, storage, handling and
disposal of hazardous or potentially
hazardous substances, and safe working conditions.

In addition, certain of our businesses must operate in
compliance with a variety of burdensome and complex billing and record-keeping
requirements in order to
substantiate claims for payment under federal, state and commercial healthcare
reimbursement programs.
One of
these businesses was suspended in October 2021 by CMS from receiving
payments from Medicare, although it was
permitted to continue to perform and bill for Medicare services.
On September 30, 2022, CMS terminated the
suspension of Medicare payments.
As a result of the termination of the suspension, we recognized
$4 million of
previously deferred revenue during the year ended December 31, 2022.
Certain of our businesses also maintain contracts with governmental agencies
and are subject to certain regulatory
requirements specific to government contractors.

Antitrust

and Consumer Protection

The U.S. federal government of the United States, most U.S. states and many
foreign countries have antitrust laws that
prohibit certain types of conduct deemed to be anti-competitive. anti-competitive, as well as consumer
protection laws that seek to
protect consumers from improper business practices.
At the U.S. federal level, the Federal Trade Commission
oversees enforcement of these types of laws, and states have similar government
agencies.
Violations of antitrust
or consumer protection laws canmay result in various sanctions, including criminal
and civil penalties.
Private
plaintiffs may also could bring civil lawsuits against us in the United States for alleged antitrust
law violations, including
claims for treble damages.

damages.

EU law also regulates competition and provides for detailed rules protecting
consumers.
The Biden Administration has indicated increased antitrust enforcement and
has been more aggressive in
enforcement activities, including investigation and challenging non-compete
restrictions and other restrictive
contractual terms that it believes harm workers and competition.
Health Care Fraud

Certain of our businesses are subject to federal and state (and similar
foreign) health care fraud and abuse, referral
and reimbursement laws and regulations with respect to their operations.
Some of these laws, referred to as “false
claims laws,” prohibit the submission or causing the submission of false or fraudulent
claims for reimbursement to
federal, state and other health care payers and programs.
Other laws, referred to as “anti-kickback laws,” prohibit
soliciting, offering, receiving or paying remuneration in order to induce the referral
of a patient or ordering,
purchasing, leasing or arranging for, or recommending, ordering, purchasing or leasing of, items or services
that are
paid for by federal, state and other health care payers and programs.

Certain additional state and federal laws, such
as the federal Physician Self-Referral Law, commonly known as the “Stark Law,” prohibit physicians and other
health professionals from referring a patient to an entity with which the
physician (or family member) has a
financial relationship, for the furnishing of certain designated health services
(for example, durable medical
equipment and medical supplies), unless an exception applies.
Violations of Anti-Kickback Statutes or the Stark
Law may be enforced as violations of the federal False Claims Act.
The fraud and abuse laws and regulations have been subject to varying interpretations, as well as heightened
enforcement activity over the past few
years, and significant enforcement activity has been the result of “relators” who
serve as whistleblowers by filing
complaints in the name of the United States (and if applicable, particular states)
under federal and stateapplicable false claims laws,
and who may receive up to 30% of total government recoveries.
Penalties under fraud and abuse laws may be severe. For example,
severe, including treble damages and substantial civil penalties under
the federal False Claims Act, violations may result in treble damages, plus civil penalties of up to $22,927 per claim, as well as exclusion from
potential loss of licenses and the ability to participate in federal and state
health care programs, criminal penalties,
or imposition of a corporate integrity agreement or corporate compliance
monitor which could have a material
adverse effect on our business.
Also, these measures may be interpreted or applied by a prosecutorial,
regulatory or
14
judicial authority in a manner that could require us to make changes
in our operations or incur substantial defense
and criminal penalties. settlement expenses.
Even unsuccessful challenges by regulatory authorities or private
relators could result in
reputational harm and the incurring of substantial costs.
Most states have adopted similar state false claims laws,
and these state laws have their own penalties, which may be in addition
to federal False Claims Act penalties. With respect to “anti-kickback laws,” violations of, for example, the federal Anti-Kickback Law may result in civil penalties, of up to $102,522 for each violation, plus up to three times the total amount of remuneration offered, paid, solicited or received, as
well as exclusion from federal health care programsother fraud and criminal penalties. Notably, effective October 24, 2018, a new federal anti-kickback law (the “Eliminating Kickbacks in Recovery Act of 2018”) enacted in connection with broader addiction services legislation, may impose criminal penalties for kickbacks involving clinical laboratory services, regardless of whether the services at issue involved addiction services, and regardless of whether the services were reimbursed by a federal health care program or by a

abuse laws.

12

Table of Contents

commercial health insurer. Furthermore, the United States Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010 (the “Health Care Reform Law”) significantly strengthened the federal False Claims Act and the federal Anti-Kickback Law provisions, clarifying that a federal Anti-Kickback Law violation can be a basis for federal False Claims Act liability.

With respect to measures of this type, the United States government (among others) has expressed concerns

about
financial relationships between suppliers on the one hand and physicians,
dentists and dentistsother healthcare
professionals on the other.
As a result, we regularly review and revise our marketing practices as necessary
to
facilitate compliance.

We
also are subject to certain United States and foreign laws and regulations
concerning the conduct of our foreign
operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery
Act, German anti-corruption laws
and other anti-bribery laws and laws pertaining to the accuracy of our internal
books and records, which have been
the focus of increasing enforcement activity globally in recent years.

Failure to comply with fraud and abuse laws and regulations could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse effect on our business. Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations or incur substantial defense and settlement expenses. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs. In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing the risk of noncompliance.

While we believe that we are substantially compliant with applicable fraud and
abuse laws and regulations, and
have adequate compliance programs and controls in place to ensure substantial
compliance, we cannot predict
whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in
response to changes in applicable law or interpretation of laws, or failure
to comply with applicable law, could have
a material adverse effect on our business.

Health

Affordable Care Act and Other Insurance Reform

The Health Care Reform LawACA increased federal oversight of private health insurance plans and
included a number of provisions
designed to reduce Medicare expenditures and the cost of health care generally, to reduce fraud and abuse, and to
provide access to increased health coverage.

The Health Care Reform Law included a 2.3% excise tax on domestic sales of many medical devices by manufacturers and importers that was to begin in 2013 and a fee on branded prescription drugs and biologics. The fee on branded prescription drugs and biologics was implemented in 2011. However, subsequent federal laws had suspended the imposition of the medical device excise tax, through December 31, 2019, and the Further Consolidated Appropriations Act, 2020, signed into law on December 20, 2019, has permanently repealed the medical device excise tax. The Health Care Reform Law hasACA also materially expanded the number of individuals
in the
United States with health insurance.
The Health Care Reform LawACA has faced ongoingfrequent legal challenges, including litigation seeking
to invalidate and Congressional action
seeking to repeal some of or all of the law or the manner in which it has been
implemented.

In 2012, the United
States Supreme Court, in upholding the constitutionality of the
ACA and its individual mandate provision requiring
that people buy health insurance or else face a penalty, simultaneously limited ACA provisions requiring Medicaid
expansion, making such expansion a state-by-state decision.
In addition, one of the President is seeking to repeal and replace the Health Care Reform Law. Repeal and replace legislation has been passedmajor political parties in the House
United States remains committed to seeking the ACA’s legislative repeal, but legislative efforts to do so have
previously failed to pass both chambers of Representatives, but did not obtain the necessary votes in the Senate. Subsequently, theCongress.
Under President has affirmed his intention to repeal and replace the Health Care Reform Law and has takenTrump’s administration, a number of
administrative actions were taken to materially weaken it,the ACA, including,
without limitation, by permitting the
use of less robust plans with lower coverage and eliminating “premium support”
for insurers providing policies
under the Health Care Reform Law. On December 22, 2017, the President signed into law theACA.
The Tax Cuts and Jobs Act (the “Tax Act”),enacted in 2017, which contains a broad range of tax reform provisions
that impact the individual and corporate
tax rates, international tax provisions, income tax add-back provisions
and
deductions, and which also effectively repealed the ACA’s
individual mandate by zeroing out the penalty for non-compliance.
In the most recent ACA litigation, the federal Fifth Circuit Court of Appeals
found the individual mandate to be
unconstitutional, and returned the case to the District Court for the Northern
District of the Health Care Reform Law. Further, in December 2019, the Fifth Circuit ruled that the

Texas for consideration of

13

Table of Contents

mandate within the Health Care Reform Law requiring that people buy health insurance was unconstitutional, through the ruling will likely be appealed. The Fifth Circuit remandedwhether the remainder of the case, pertainingACA could survive the excision of the individual

mandate.
The Fifth Circuit’s
decision was appealed to the viabilityUnited States Supreme Court.
The Supreme Court issued a decision on June 17, 2021.
Without reaching the merits of the remainder ofcase, the Health Care Reform Law,Supreme Court held that the plaintiffs in the absencecase did not have standing
to challenge the ACA.
Any outcomes of the individual mandate, to the District Court of the Northern District of Texas. Any outcome of thesefuture cases that changeschange the Health Care Reform LawACA, in addition
to future legislation,
regulation, guidance and/or Executive Orders that do the same, could have a
significant impact on the U.S.
healthcare industry. The uncertain status
For instance, the American Rescue Plan Act of 2021 enhanced
premium tax credits, which has
resulted in an expansion of the Health Care Reform Law affects our ability to plan.

A Health Care Reform Lawnumber of people covered under the ACA.

These changes are time-limited, with
some enhancements in place for 2021 only and others available through
the end of 2022.
An ACA provision, generally referred to as the Physician Payment Sunshine
Act or Open Payments Program (the
“Sunshine Act”), imposes annual reporting and disclosure requirements
for drug and device manufacturers and
distributors with regard to payments or other transfers of value made to certain
covered recipients (including
physicians, dentists, teaching hospitals, physician assistants, nurse practitioners,
clinical nurse specialists, certified
15
registered nurse anesthetists, and teaching hospitals)certified nurse midwives), and for such manufacturers
and distributors and for
group purchasing organizations, with regard to certain ownership interests held by physicianscovered
recipients in the
reporting entity.
The Centers for Medicare and Medicaid Services (“CMS”) publishes information
from these
reports on a publicly available website, including amounts transferred and physician,
dentist, and teaching hospital, and
non-physician practitioner identities. Amendments expanded the law to also require reporting, effective January 1, 2022, of payments or other transfers of value to physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and certified nurse-midwives, and this new requirement will be effective for data collected beginning in calendar year 2021.

Under the Physician Payment Sunshine Act, we are required to collect and report detailed information regarding certain financial relationships we have with covered recipients such as physicians, dentists and teaching hospitals. We believe that we are substantially compliant with applicable Physician Payment Sunshine Act requirements.

The Physician Payment Sunshine Act pre-empts similar state reporting laws, although we
or our
subsidiaries may be required to report under certain state transparency laws that
address circumstances not covered
by the Physician Payment Sunshine Act, and some of these state laws, as well as the federal
law, can be ambiguous. unclear.
We
are also subject to
foreign regulations requiring transparency of certain interactions between
suppliers and their customers. While we believe we have substantially compliant programs
In the United States, government actions to seek to increase health-related
price transparency may also affect our
business.
For example, hospitals are currently required to publish online a
list of their standard charges for all items
and controlsservices, including discounted cash prices and payer-specific and de-identified negotiated
charges, in placea publicly
accessible online file. Hospitals are also required to complypublish a consumer-friendly
list of standard charges for certain
“shoppable” services (i.e., services that can be scheduled by a patient in
advance) and associated ancillary services
or, alternatively, maintain an online price estimator tool. CMS may impose civil monetary penalties for
noncompliance with these requirements, our compliance with these rulesprice transparency requirements. Additionally, the No Surprises Act (“NSA”), generally
effective January 1, 2022, imposes additional costsprice transparency requirements.
The NSA is intended to reduce the
number of “out-of-network” patients.
This will result in fewer out-of-network payments to physicians and
other
providers, which may cause financial stress to those providers who
are dependent on us.

higher out-of-network fees.

Another notable Medicare health care reform initiative, the Medicare Access
and CHIP Reauthorization Act of
2015 (“MACRA”), enacted on April 16, 2015, established a new payment framework, called the Quality Payment Program,
which modifiesmodified certain
Medicare payments to “eligible clinicians,” including physicians, dentists and
other practitioners.
Under MACRA,
certain eligible clinicians are required to participate in Medicare through the Merit-Based
Incentive Payment
System (“MIPS”) or Advanced Alternative Payment Models, (“APMs”). MIPS generally consolidated three programs (the physician quality reporting system, the value-based payment modifier and the Medicare electronic health record (“EHR”) program) into a single program inthrough which
Medicare reimbursement to eligible
clinicians includes both positive and negative payment adjustments that take
into account quality, promoting
interoperability, cost and improvement activities. Advanced APMs generally involve higher levels of financial and technology risk. The
Data collected in the first MIPS performance year was 2017, and the data collected in the first performance year determines(2017)
determined payment adjustments that began January 1, 2019.
MACRA standards and payment levels continue to
evolve, and representreflect a fundamental change in physician reimbursement
that is expected to provide substantial
financial incentives for physicians to participate in risk contracts, and to increase
physician information technology
and reporting obligations.
The implications of the implementation of MACRA are uncertain and will
depend on
future regulatory activity and physician activity in the marketplace. MACRA
New state-level payment and delivery system
reform programs, including those modeled after such federal programs, are
also increasingly being rolled out
through Medicaid administrators, as well as through the private sector, which may encourage physiciansfurther
alter the marketplace and
impact our business.
Recently, in addition to move from smaller practicesother government efforts to larger physician groupscontrol health care costs, there has been increased scrutiny on
drug pricing and concurrent efforts to control or hospital employment, leadingreduce drug costs by Congress, the
President, executive branch
agencies and various states.
At the state level, several states have adopted laws that require drug manufacturers
to
provide advance notice of certain price increases and to a consolidationreport information
relating to those price increases, while
others have taken legislative or administrative action to establish prescription
drug affordability boards or multi-
payer purchasing pools to reduce the cost of a portion of our customer base. Although we believe that we are positioned to capitalize on this consolidation trend, there can be no assurances that we will be able to successfully accomplish this.

prescription drugs.

At the federal level, several related bills have been
introduced and regulations proposed which, if enacted or finalized,
respectively, would impact drug pricing and
related costs.
As a result of political, economic and regulatory influences, the health care distribution
industry in the United
States is under intense scrutiny and subject to fundamental changes.
We
cannot predict what further reform
proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us.

Recently, there has been increased scrutiny

EU Directive on drugthe pricing and concurrent effortsreimbursement of medicinal products
EU law provides for the regulation of the pricing of medicinal products which are
implemented by EU member
states (Directive No. 89/105/EC of 21 December 1988
relating to control or reduce drug costs by Congress, the Presidenttransparency of measures regulating the
pricing of medicinal products for human use and varioustheir inclusion in the scope of national health insurance
systems
).
Member states including that several related bills have been introduced atmay, subject notably to transparency conditions and to the federal level. Such legislation, if enacted, could havestatement of reasons based upon
objective and verifiable criteria, regulate the potential to impose additional costs on our business.

price charged (or its increases) for authorized
medicines and their level

14

16

of reimbursement, or they may freeze prices, place controls on the profitability
of persons responsible for placing
medicinal products on the market, and include or exclude the medicine on
the list of products covered by national
health insurance systems.
EU law does not expressly include provisions like those of the Sunshine Act
in the United States, but a growing
number of EU member states (such as France in 2011 and Italy in 2022) have enacted laws to increase
the
transparency of relationships in the healthcare sector.
The scope of these laws varies from one member state to
another and may, for example, include the relations between healthcare industry players and physicians or their
associations, students preparing for medical professions or their associations,
teachers, health establishments or
publishers of prescription and dispensing assistance software.
Regulated Software; Electronic Health Records

The FDA has become increasingly active in addressing the regulation of
computer software and digital health
products intended for use in health care settings.
The 21st Century Cures Act (the “Cures Act”), signed into law on
December 13, 2016, among other things, amended the medical device definition
to exclude certain software from
FDA regulation, including clinical decision
support software that meets certain criteria.
On September 27, 2019,
the FDA issued a suite of guidance documents on digital health products, which
incorporated applicable Cures Act
standards, including regarding the types of clinical decision support tools and other
software that are exempt from
regulation by the FDA as medical devices. devices, and continues to issue new guidance
in this area.
Certain of our
businesses involve the development and sale of software and related products
to support physician and dental
practice management, and it is possible that the FDA or foreign government
authorities could determine that one or
more of our products is a medical device, which could subject us or one
or more of our businesses to substantial
additional requirements
with respect to these products.

In addition, our businesses that involve physician and dental practice management
products, and our specialty home
medical supply business, include electronic information technology systems
that store and process personal health,
clinical, financial and other sensitive information of individuals.
These information technology systems may be
vulnerable to breakdown, wrongful intrusions, data breaches and malicious
attack, which could require us to
expend significant resources to eliminate these problems and address related
security concerns and could involve
claims against us by private parties and/or governmental agencies.
For example, we are directly or indirectly
subject to numerous and evolving federal, state, local and foreign laws and
regulations that protect the privacy and
security of suchpersonal information, such as the privacy and security provisions of the federal Health Insurance Portability
and Accountability Act of 1996,
as amended, and implementing regulations (“HIPAA”). HIPAA requires, among other things,, the implementationControlling the Assault of various recordkeeping, operational, notice Non-Solicited Pornography
and other practices intendedMarketing Act, the Telephone Consumer Protection Act of 1991, Section 5 of the Federal Trade Commission
Act, the California Privacy Act (“CCPA”), and the California Privacy Rights Act (“CPRA”) that became effective
on January 1, 2023.
Additionally, Virginia,
Colorado, Connecticut and Utah recently passed comprehensive
privacy legislation, and several privacy bills have been proposed both at
the federal and state level that may result
in additional legal requirements that impact our business.
Laws and regulations relating to safeguard that information, limit its use to allowed purposes and notify individuals in the event of privacy and security breaches. Failuredata
protection are continually evolving and subject to potentially differing interpretations.
These requirements may not
be harmonized, may be interpreted and applied in a manner that is inconsistent
from one jurisdiction to another or
may conflict with other rules or our practices.
Our businesses’ failure to comply with these laws and regulations can result
could expose us to breach of contract claims, substantial fines, penalties and
other liabilities and expenses, costs for
remediation and harm to our reputation.
Also, evolving laws and regulations in substantial penalties and other liabilities.

In addition,this area could restrict the

ability of
our customers to obtain, use or disseminate patient information, or could
require us to incur significant additional
costs to re-design our products to reflect these legal requirements, which
could have a material adverse effect on
our operations.
Also, the European Parliament and the Council of the European Union haveEU adopted a newthe pan-European
General Data Protection
Regulation (“GDPR”), effective from May 25, 2018, which increased privacy
rights for individuals in Europe (“Data
Subjects”), including individuals who are our customers, suppliers and
employees.
The GDPR extended the scope
of responsibilities for data controllers and data processors, and generally
imposes increased requirements and
potential penalties on companies, such as us, that are either established
in the EU and process personal data of Data
Subjects (regardless the Data Subject location), or that are not established
in the EU but that offer goods or services
to Data Subjects in the EU or monitor their behavior (including by companies based outside of Europe).in the EU. Noncompliance
can result in penalties of up to the
greater of EUR 20 million, or 4% of global company revenues. Individual memberrevenues (sanction
that may be public), and Data Subjects
17
may seek damages.
Member states may individually impose additional requirements
and penalties regarding
certain limited matters (for which the GDPR let some room of flexibility),
such as employee personal data.
With
respect to the personal data it protects, the GDPR requires, among other things, company
controller accountability, consents
from Data Subjects or otheranother acceptable legal basis to process the
personal data, notification within 72 hours of a
personal data breach notifications within 72 hours,where required, data integrity and security, and fairness and transparency regarding the
storage, use or other processing of the personal data.
The GDPR also provides rights to Data Subjects relating
notably to modification,information, access, rectification, erasure and transporting of the personal
data and
the right to object to the processing.
On August 20, 2021, China promulgated the PRC Personal Information
Protection Law (“PIPL”), which took effect
on November 1, 2021.
The PIPL imposes specific rules for processing personal information
and it also specifies
that the law shall also apply to personal information activities carried out
outside China but for the purpose of
providing products or services to PRC citizens.
Any non-compliance with these laws and regulations may
subject
us to fines, orders to rectify or terminate any actions that are deemed
illegal by regulatory authorities, other
penalties, as well as reputational damage or legal proceedings against us,
which may affect our business, financial
condition or results of operations.
The PIPL carries maximum penalties of CNY50 million or 5% of the
annual
revenue of entities that process personal data.
In the United States, the California Consumer Privacy Act (“CCPA”),CCPA, which increases the privacy protections afforded California residents, and was signed into law on June 28, 2018, became
effective January 1, 2020.
The CCPA generally requires companies, such as us, to institute additional protections
regarding the collection, use and disclosure of certain personal information
of California residents. The
Compliance
with the obligations imposed by the CCPA depends in part on how particular regulators interpret and apply them.
Regulations were released in August of 2020, but there remains some
uncertainty about how the CCPA will be
interpreted by the courts and enforced by the regulators.
If we fail to comply with the CCPA or if regulators assert
that we have failed to comply with the CCPA, we may be subject to certain fines or other penalties and litigation,
any of which may negatively impact our reputation, require us to expend
significant resources, and harm our
business.
Furthermore, California Attorney General released proposedvoters approved the CPRA on November 3,
2020, which amends and expands
the CCPA, regulationsincluding by providing consumers with additional rights with respect to their personal information, and
creating a new state agency, the California Privacy Protection Agency, to enforce the CCPA
and the CPRA.
The
CPRA came into effect on October 10, 2019, and is requiredJanuary 1, 2023, applying to adopt final regulationsinformation collected by
businesses on or before Julyafter January 1, 2020. In addition to providing for enforcement by the California Attorney General, the CCPA also provides for a private right of action. Entities in violation of the CCPA may be liable for civil penalties.
2022.
Other states, as well as the federal government, have increasingly
considered the adoption of similarly expansive
personal privacy laws, backed by significant civil penalties for non-compliance.
Virginia and Colorado were both
successful in passing privacy legislation in 2021, becoming effective on January
1, 2023 and July 1, 2023,
respectively.
In 2022, privacy legislation passed in Connecticut, effective July 1, 2023, and
Utah, effective
December 31, 2023.
While we believe we have substantially compliant programs
and controls in place to comply
with the GDPR, CCPA, PIPL, CPRA and CCPAstate law requirements, our compliance with these measuresdata privacy and
cybersecurity laws is likely to impose additional costs on us, and we cannot
predict whether the interpretations of
the requirements, or changes in our practices in response to new requirements
or interpretations of the
requirements, could have a material adverse effect on our business.

15

Table of Contents

We

We also sell products and services that health care providers, such as physicians

and dentists, use to store and
manage patient medical or dental records.
These customers, and we, are subject to laws, regulations and industry
standards, such as HIPAA and the Payment Card Industry Data Security Standards, which require the protection of
the privacy and security of those records, and our products may also be
used as part of these customers’
comprehensive data security programs, including in connection with their efforts to comply with
applicable privacy
and security laws.
Perceived or actual security vulnerabilities in our products or services,
or the perceived or actual
failure by us or our customers
who use our products or services to comply with applicable legal or
contractual data
privacy and security requirements, may not only cause us significant reputational
harm, but may also lead to claims
against us by our customers and/or governmental agencies and involve substantial
fines, penalties and other
liabilities and expenses and costs for remediation.

Various
federal initiatives involve the adoption and use by health care
providers of certain electronic health care
records systems and processes.
The initiatives include, among others, programs that incentivize
physicians and
dentists, through Medicare’s MIPS, to use certified EHR technology in accordance with certain
evolving requirements, including
regarding quality, promoting interoperability, cost and improvement activities.
Qualification for the MIPS
18
incentive payments requires the use of EHRs that are certified as having certain
capabilities designated in evolving
standards adopted by CMS and by the Office of the National Coordinator for Health
Information Technology of the Department of Health and Human Services. These standards have been subject to change.

HHS

(“ONC”).
Certain of our businesses involve the manufacture and sale of such
certified EHR systems and other
products linked to MIPS and othergovernment supported incentive programs.
In order to maintain certification of our EHR
products, we must satisfy these changing governmental standards.
If any of our EHR systems do not meet these
standards, yet have been relied upon by health care providers to receive
federal incentive payments, as noted above, we are may be
exposed to risk, such as under federal health care fraud and abuse laws,
including the False Claims Act. For example, on May 31, 2017, the U.S. Department of Justice announced a $155 million settlement and 5-year corporate integrity agreement involving a vendor of certified EHR systems, based on allegations that the vendor, by misrepresenting capabilities to the certifying body, caused its health care provider customers to submit false Medicare and Medicaid claims for meaningful use incentive payments in violation of the False Claims Act. While we believe we are substantially in compliance with such certifications and with applicable fraud and abuse laws and regulations, and we have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our practices in response to changes in applicable law or interpretation of laws, could have a material adverse effect on our business.
Moreover, in order to satisfy our customers, and comply with evolving legal requirements, our products
may need
to incorporate increasingly complex functionality, such as with respect to reporting functionality. and information blocking.
Although we believe we are positioned to accomplish this, the effort may involve
increased costs, and our failure to
implement product modifications, or otherwise satisfy applicable standards,
could have a material adverse effect on
our business.

Other health information standards, such as regulations under HIPAA, establish standards regarding electronic
health data transmissions and transaction code set rules for specific electronic
transactions, such as transactions
involving claims submissions to third party payers. Certain of our businesses provide electronic practice management products that must meet these requirements.
Failure to abide by these and other electronic health data
transmission standards could expose us to breach of contract claims,
substantial fines, penalties, and other liabilities
and expenses, costs for remediation and harm to our reputation.

Additionally, as electronic medical devices are increasingly connected to each other and to other technology, the
ability of these connected systems safely and effectively to exchange and use exchanged information becomes increasingly important. For example on September 6, 2017, the FDA issued final guidance to assist industry in identifying specific considerations related to the ability of electronic medical devices to safely and effectively exchange and use exchanged information.
information becomes
increasingly important.
As a medical device manufacturer, we must manage risks including those associated with
an electronic interface that is incorporated into a medical device.

There may be additional legislative or regulatory initiatives in the future impacting
health care.

16

Table of Contents

E-Commerce

E-Commerce

Electronic commerce solutions have become an integral part of traditional health

care supply and distribution
relationships.
Our distribution business is characterized by rapid technological
developments and intense
competition.
The continuing advancement of online commerce requires
us to cost-effectively adapt to changing
technologies, to enhance existing services and to develop and introduce a
variety of new services to address the
changing demands of consumers and our customers on a timely basis, particularly
in response to competitive
offerings.

Through our proprietary, technologically basedtechnologically-based suite of products, we offer customers a variety of competitive
alternatives.
We believe that our tradition of reliable service, our name recognition and large customer base built
on solid customer relationships, position us well to participate in
this significant aspect of the distribution business.
We
continue to explore ways and means to improve and expand our Internet online
presence and capabilities, including our
online commerce offerings and our use of various social media outlets.

International Transactions

In addition,

United States and foreign import and export laws and regulations require us to
abide by certain standards relating to
the importation and exportation of products.
We also are subject to certain laws and regulations concerning the
conduct of our foreign operations, including the U.S. Foreign Corrupt Practices
Act, the U.K. Bribery Act, German
anti-corruption laws and other anti-bribery laws and laws pertaining
to the accuracy of our internal books and
records, as well as other types of foreign requirements similar to those
imposed in the United States.

While we believe that we are substantially compliant with the foregoing laws
and regulations promulgated
thereunder and possess all material permits and licenses required for the conduct
of our business, there can be no
assurance that laws and regulations that impact our business or laws and
regulations as they apply to our customers’
practices will not have a material adverse effect on our business.

19
See “ITEM“
” for a discussion of additional burdens, risks and regulatory developments
that may
affect our results of operations and financial condition.

Proprietary Rights

We hold trademarks relating to the “Henry Schein
®
” name and logo, as well as certain other trademarks.
We intend
to protect our trademarks to the fullest extent practicable.

Employees

and Human Capital

Environment, Social and Governance
Henry Schein has remained steadfastly committed over our nine-decade history
to the core philosophy that our
purpose-driven mission of "doing good" for our stakeholders is inextricably
linked to our Company "doing well" in
business through our stakeholder engagement model “our Mosaic of Success”.
We balance the needs of our five
key stakeholders – Team Schein Members (TSMs), our Customers, our Suppliers, our Stockholders, and Society –
to continue to drive our sustainability and ESG efforts to foster a healthier planet and healthier
people.
Overseen
by the Nominating and Governance Committee of our Board of Directors with the
Compensation Committee also
playing a role in ESG matters related to human capital engagement and executive
compensation, key 2022
sustainability and ESG highlights included:
●
With the backdrop of the ongoing COVID-19 pandemic and the humanitarian crises in Ukraine and other
regions, we continued our efforts to drive an overall culture of wellness and engagement
for our TSMs as
we navigated a new hybrid work environment and ensure supply chain resiliency
to support our customers
and our communities.
Henry Schein was named Chair of the Private Sector Roundtable
on Global Health
Security, and continued its work across sectors to support the creation of market intelligence platforms that
enable the appropriate sharing of real-time supply chain data, including through
the WHO's Pandemic
Supply Chain Network and various national efforts, including the U.S. Supply Chain
Control Tower.
●
(i) Publishing our annual Corporate Social Responsibility and Sustainability
Report according to the Global
Reporting Initiative and Sustainability Accounting Standards Board reporting
standards and issuing our
first Taskforce for Climate-related Financial Disclosures report; (ii) committing to announcing our carbon
reduction goal by the end of 2023; (iii) continued initiatives and programs
to advance health equity efforts
to promote access to care for underserved and underrepresented communities,
investing in diversity for
greater health equity in partnership with health care professionals, and
increasing awareness of health
equity needs globally; (iv) announced the top line findings of our pay equity
analysis across the U.S., which
reviews compensation across gender and ethnic groups; (v) expanding our
Diversity and Inclusion (“D&I”)
learning journey, such as by educating global directors and vice presidents on more advanced topics of D&I
including privilege and equity, as well as offering education to all global TSMs below director level on the
importance of D&I; and (vi) continuing to drive a culture of wellness for our
TSMs by fostering an
environment where they can feel engaged, included and psychologically
safe.
At Henry Schein, our employees are our greatest asset.
We employ more than 19,000 full-time equivalent employees, including22,000 people, approximately 2,000 telesales representatives, over 3,650 field sales consultants, including equipment sales specialists, 3,000 warehouse employees, 800 computer programmers50%
of our workforce is based in the United States and technicians, 660 management employees and 7,000 office, clerical and administrative employees. approximately 50%
is based outside of the United States.
Approximately 2,160, or 11%,12% of our employees are subject to collective bargaining agreements.
We believe that our
relations with our employees are excellent.

We refer to our employees as Team
Schein Members, or “TSMs.” Our TSMs are the cornerstone
of the Company.
We have a strong values-based culture that cultivates a meaningful employee experience that is centered around
people.
We know our business success is built on the engagement and commitment of our team, which is dedicated
to meeting the needs of their fellow TSMs, our customers, supplier partners,
stockholders and society.
As part of
this commitment, our highlights in 2022 included:
20
●
Nurturing a connected community for a happier, more engaged, collaborative work environment.
We
continue to adapt to the new way of working for our TSMs by listening
to their needs.
With TSMs working
remotely, hybrid and in-person, our goal is to continue to create a collaborative community where every
TSM feels connected to our culture.
Through various virtual and in-person programming from our
Employee Resource Groups, Wellness Committee and Team Schein Engagement team, we continue to
bring TSMs together in a meaningful way through virtual education sessions
and networking events.
To
help create a sense of connection and belonging amongst the team, we
launched “TSM Experience Panels,”
which feature TSMs who share their authentic experiences and offer advice and
best practices on specific
topics. We offer a variety of opportunities to volunteer for team-building and engaging in their local
communities in which they live and work such as through the We Care Global Challenge, Back to School,
and Holiday Cheer. In addition, they can “help health happen” by participating in key programs and
initiatives (e.g., Gives Kids A Smile, Healthy Lifestyles, Healthy Communities
and Release the Pressure)
that partner with industry associations, customers, and suppliers to support
access to quality health care for
underserved and underrepresented communities.
We continue to evaluate the engagement of our team
through various listening mechanisms including roundtables, hosted
by our CEO and Executive
Management Committee (“EMC”), and various surveys, including The
Pulse, our global culture survey that
evaluates TSM engagement globally with results reviewed by senior leaders,
reported to the Board of
Directors (“BOD”).
Throughout 2022, we held 10 solutions-focused roundtables
hosted by our EMC
members with over 100 TSMs to dive in deeper and influence our
strategy on programs and processes
designed to further enhance our culture.
●
Driving a culture of wellness for our team members and society.
In 2020, we launched a Mental Wellness
Committee with a mission to drive a culture of wellness and empower
every TSM to be their best self,
mentally, emotionally and physically.
The Committee provides resources, guidance and support,
and
works across our businesses to establish enhanced workplace norms to
help improve and safeguard our
TSMs’ wellness.
We actively engage leadership, including our CEO, EMC, BOD and TSMs alike in
conversations around the importance of wellness in the workplace.
In 2022, we rolled-out an EMC video
series that focused on being more intentional in the way we work across
our business.
These new
workplace norms focused on meeting and technology etiquette, successful
calendaring, establishing and
communicating reasonable expectations and prioritization, the importance
of taking and respecting time
off, and the importance of making time for social connection. In addition to expanding
education on key
mental health topics in partnership with our employee assistance vendor, we also rolled-out manager-
specific education to provide tips on how to identify signs of burnout
and have conversations around
wellness with their teams.
With the rise of suicide rates around the world, the Wellness Committee held
seminars for the team on suicide prevention and hosted in-person community walks
that resulted in
donations to local suicide prevention organizations globally.
●
Being committed to enhancing our D&I initiatives.
We believe a diverse workforce fosters innovation and
cultivates an environment filled with unique perspectives.
As a result, D&I helps us meet the needs of
customers around the world and provide our TSMs an inclusive environment
where they feel they belong.
We measure our success in D&I through, among other things, our global culture survey, where results in
2021 showed D&I is our top strength out of 14 focus areas. To guide our efforts and education related to
D&I, our Diversity and Inclusion Council, with engagement from our
BOD and EMC, drives the
Company’s overall D&I strategy.
To deepen our commitment to D&I across the Company, Global
Directors and Vice Presidents each have a goal tied to their compensation to champion D&I and attend
education.
We continue to expand our D&I learning journey, educating global Directors and Vice
Presidents on key D&I topics including leading inclusively, bias and equity.
We also continue to educate
our global TSMs on the importance of D&I. Additionally, we promote engagement by utilizing our
Employee Resource Groups (“ERGs”), which we continue to expand,
as an inclusive and diverse vehicle
for all TSMs to share, connect, learn and develop both personally
and professionally.
Each of our ERGs
has a sponsor from our Executive Management Committee and our BOD
and our CEO engages directly in
many of our ERG programs.
While inclusion continues to remain a top priority, we also understand the
importance of ensuring our internal team reflects the diversity of our customers
and society.
In addition to
our current gender parity by 2030 goal, we announced a new goal in 2022 with
an enhanced focus on
21
increasing the diversity of all underrepresented groups in senior leadership
levels through our talent
planning, compensation and recruitment processes, in alignment with
our corporate strategic planning
objectives to achieve concrete results.
We continue to disclose additional diversity data, with frequent
reporting to the EMC and BOD.
In 2022, we published our United States Equal Employment Opportunity
Commission (“EEOC”) EEO-1 data for the U.S. for the first time.
We continue to enhance our recruiting
strategy by developing and investing in strategic hires who complement
our D&I mission.
We believe that
these efforts will serve as a critical steppingstone as we continue to strengthen our
D&I initiatives in an
effort to meet the evolving needs of our customers, supplier partners, TSMs, stockholders
and society.
●
Understanding that growth, recognition and purpose are key pillars to TSM fulfillment.
Personal and
professional development of our TSMs is important to us.
As such, we invest in our employees by
providing both formal and informal learning opportunities that are
focused on growing and enhancing
knowledge, skills and abilities.
TSMs globally are offered a broad suite of professional development
training programs targeted to specific learning opportunities based on their current
and potential future role
within the Company.
We also offer over 50 organizational and development training courses designed to
aid in the overall development and advancement of skills and competencies
to enable organizational
success.
Executive education, mentorship and coaching programs also
form an important part of our
development and career support initiatives.
Additionally, we continued to see an increase in participation
in our Organizational Development initiatives in 2022 with our TSMs reporting
a high utilization of skills
learned.
Talent planning efforts are also an integral part of our commitment to ensure a strong diverse
leadership pipeline across the organization.
Through a formal global process, we strategically identify and
develop talent through targeted development opportunities and intentional succession
plans.
We
continuously identify potential management successors as part
of our succession planning process.
Information derived from talent planning efforts informs curriculum design and
content to help focus on the
right capabilities and help ensure alignment of career development
efforts with the future needs of the
organization.
Our BOD is provided with periodic updates regarding our
talent and succession planning
efforts and participates in professional development activities with our TSMs.
We know recognition and
purpose are also key pillars to TSM engagement, so we continue to find
ways to recognize our TSMs
through our annual performance review process, and various recognition
opportunities including our Teddy
Philson Team Schein Award,
which highlights TSMs who exemplify our Team Schein Values.
In addition,
we continue to focus on ensuring every TSM understands the importance
in the role they play within the
organization, how they contribute to a larger purpose of creating a healthier world, as well as
continue to
provide opportunities for TSMs to engage in meaningful ways
that connect back to their own personal
purpose, such as helping the community through CSR activities.
Available Information

We make available free of charge through our Internet website, www.henryschein.com,, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, statements
of beneficial ownership of
securities on Forms 3, 4 and 5 and amendments to these reports and statements
filed or furnished pursuant to
Section 13(a) and Section 16 of the Securities Exchange Act of 1934
as soon as reasonably practicable after such
materials are electronically filed with, or furnished to, the United States Securities
and Exchange Commission, or
SEC.
Our principal executive offices are located at 135 Duryea Road, Melville, New
York
11747, and our
telephone number is (631) 843-5500.
Unless the context specifically requires otherwise, the terms the “Company,
“Company,” “Henry
“Henry Schein,” “we,” “us” and “our” mean Henry Schein, Inc., a Delaware
corporation, and its consolidated subsidiaries.

17

subsidiaries.

22

Information about our Executive Officers

The following table sets forth certain information regarding our executive
officers:

Name

Age

Position

Stanley M. Bergman

70

Chairman, Chief Executive Officer, Director

Gerald A. Benjamin

67

Executive Vice President, Chief Administrative Officer, Director

James P. Breslawski

66

Vice Chairman, President, Director

Michael S. Ettinger

58

Senior Vice President, Corporate & Legal Affairs and Chief of Staff, Secretary

Mark E. Mlotek

64

Executive Vice President, Chief Strategic Officer, Director

Steven Paladino

62

Executive Vice President, Chief Financial Officer, Director

Walter Siegel

60

Senior Vice President and General Counsel

Name
Age
Position
Stanley M. Bergman
73
Chairman, Chief Executive Officer, Director
James P.
Breslawski
69
Vice Chairman, President, Director
David Brous
54
Chief Executive Officer, Strategic Business Group
Brad Connett
64
Chief Executive Officer, North America Distribution Group
Michael S. Ettinger
61
Executive Vice President and Chief Operating Officer
Lorelei McGlynn
59
Senior Vice President, Chief Human Resources Officer
Mark E. Mlotek
67
Executive Vice President, Chief Strategic Officer, Director
Ronald N. South
61
Senior Vice President, Chief Financial Officer
Walter Siegel
63
Senior Vice President and Chief Legal Officer
Stanley M. Bergman
has been our Chairman and Chief Executive Officer since 1989 and a director
since 1982.
Mr. Bergman held the position of President from 1989 to 2005.
Mr. Bergman held the position of Executive Vice
President from 1985 to 1989 and Vice President of Finance and Administration from 1980 to 1985.

Gerald A. Benjamin has been our Executive Vice President and Chief Administrative Officer since 2000 and a director since 1994. Prior to holding his current position, Mr. Benjamin was Senior Vice President of Administration and Customer Satisfaction since 1993. Mr. Benjamin was Vice President of Distribution Operations from 1990 to 1992 and Director of Materials Management from 1988 to 1990. Before joining us in 1988, Mr. Benjamin was employed for 12 years at Estée Lauder, Inc., in various management positions where his last position was Director of Materials Planning and Control.

James P. Breslawski
has been our Vice Chairman since 2018, President since 2005 and a director since 1992.
Mr.
Breslawski was the Chief Executive Officer of our Henry Schein Global Dental
Group from 2005 to 2018.
Mr.
Breslawski held the position of Executive Vice President and President of U.S. Dental from 1990 to 2005, with
primary responsibility for the North American Dental Group.
Between 1980 and 1990, Mr. Breslawski held
various positions with us, including Chief Financial Officer, Vice President of Finance and Administration and
Corporate Controller.

Michael S. Ettinger has been Senior Vice President, Corporate & Legal Affairs, Chief of Staff and Secretary since 2015. Prior to his current position, Mr. Ettinger served as Senior Vice President, Corporate & Legal Affairs and Secretary from 2013 to 2015, Corporate Senior Vice President, General Counsel & Secretary from 2006 to 2013, Vice President, General Counsel and Secretary from 2000 to 2006, Vice President and Associate General Counsel from 1998 to 2000 and Associate General Counsel from 1994 to 1998. Before joining us, Mr. Ettinger served as a senior associate with Bower & Gardner and as a member of the Tax Department at Arthur Andersen.

Mark E. Mlotek has been Executive Vice President and Chief Strategic Officer since 2012. Mr. Mlotek was Senior Vice President and subsequently Executive Vice President of the Corporate Business Development Group between 2000 and 2012. Prior to that, Mr. Mlotek was Vice President, General Counsel and Secretary from 1994 to 1999 and became a director in 1995. Prior to joining us, Mr. Mlotek was a partner in the law firm of Proskauer Rose LLP, counsel to us, specializing in mergers and acquisitions, corporate reorganizations and tax law from 1989 to 1994.

Steven Paladino

David Brous
has been our Executive Vice President and Chief Financial Officer since 2000. Prior to holding his current position, Mr. Paladino was Senior Vice President and Chief Financial Officer from 1993 to 2000 and has been a director since 1992. From 1990 to 1992, Mr. Paladino served as Vice President and Treasurer and from 1987 to 1990 served as Corporate Controller. Before joining us, Mr. Paladino was employed in public accounting for seven years, most recently with the international accounting firm of BDO USA, LLP. Mr. Paladino is a certified public accountant.

18

Table of Contents

Walter Siegel has been Senior Vice President and General Counsel since 2013. Prior to joining us, Mr. Siegel was employed with Standard Microsystems Corporation, a publicly traded global semiconductor company from 2005 to 2012, holding positions of increasing responsibility, most recently as Senior Vice President, General Counsel and Secretary.

Other Executive Management

The following table sets forth certain information regarding other Executive Management:

Name

Age

Position

David Brous

51

President, Strategic Business Units Group and Asia Pacific & Brazil Dental

Brad Connett

61

President, U.S. Medical Group

Jonathan Koch

45

Senior Vice President and Chief Executive Officer, Global Dental Group and Interim Chief Executive Officer, Henry Schein One

Lorelei McGlynn

56

Chief Human Resources Officer

James Mullins

55

Senior Vice President, Global Services

Christopher Pendergast

57

Senior Vice President and Chief Technology Officer

Michael Racioppi

65

Senior Vice President, Chief Merchandising Officer

René Willi, Ph.D.

52

President, Global Dental Surgical Group

David Brous has been our President, Strategic Business Units Group and Asia Pacific & Brazil Dental since 2019. 2021.

Mr. Brous joined us in
2002 and has held many positions within the organization, including President, Strategic Business
Units Group and
Asia Pacific & Brazil Dental, leading and managing the Corporate Business
Development Group and the
International Healthcare Group (managing our International Animal Health business,
International Medical
business and Australia / New Zealand Dental business).

Brad Connett
has been our Chief Executive Officer, North American Distribution Group since 2021.
Previously
Mr. Connett was the President of our U.S. Medical Group since 2018. from 2018 to 2021.
Mr. Connett joined us in 1997 and
has held a number of increasingly responsible positionsroles of increasing responsibility at the Company.
Throughout his career, he has received
numerous industry honors, including the John F. Sasen Leadership Award from the Health Industry Distributors
Association (HIDA), in recognition of his service to the industry, and induction into the Medical Distribution Hall
of Fame by Repertoire Magazine.

Jonathan Koch

Michael S. Ettinger
has been our Executive Vice President and Chief Operating Officer since July 2022.
Prior to
his current position, Mr. Ettinger served as Senior Vice President, Corporate & Legal Affairs, Chief of Staff and
Secretary from 2015 to July 2022, Senior Vice President, Corporate & Legal Affairs and Secretary from 2013 to
2015, Corporate Senior Vice President, General Counsel & Secretary from 2006 to 2013, Vice President, General
Counsel and Secretary from 2000 to 2006, Vice President and Associate General Counsel from 1998 to 2000
and
Associate General Counsel from 1994 to 1998.
Before joining us, Mr. Ettinger served as a senior associate with
Bower & Gardner and as a member of the Tax Department at Arthur Andersen.
Lorelei McGlynn
has been our Senior Vice President, and Chief Executive Officer of our Global Dental Group since 2018 and Interim Chief Executive Officer of Henry Schein One since January 2020. Prior to joining us, for the years 2006 to 2018, Mr. Koch was a senior executive at Covance, the drug development services business of Laboratory Corporation of America. In his last role at Covance, Mr. Koch was the Executive Vice President and Group President of Covance Clinical Development & Commercialization Services. Prior to that, Mr. Koch was Executive Vice President and Group President of Covance Research and Development Laboratories from 2015 to 2017. Mr. Koch was also President of Covance Central Laboratory Services from 2010 to 2015, and Vice President at Covance, with various responsibilities, from 2006 to 2010. Prior to Covance, Mr. Koch held senior leadership roles of increasing responsibility while employed with Charles River Laboratories from 1998 to 2006.

Lorelei McGlynn has served as Senior Vice President, Global Human Resources Officer since 2013.

Since joining
us in 1999, Ms. McGlynn has served as Vice President, Global Human Resources and Financial Operations from
2008 to 2013, Chief Financial Officer, International Group and Vice President of Global Financial Operations from
2002 to 2008 and Vice President, Finance, North America from 1999 to 2002.
Prior to joining us, Ms. McGlynn
served as Assistant Vice President of Finance at Adecco Corporation.

23
Mark E. Mlotek
has been our Executive Vice President and Chief Strategic Officer since 2012.
Mr. Mlotek was
Senior Vice President and subsequently Executive Vice President of the Corporate Business Development Group
between 2000 and 2012.
Prior to that, Mr. Mlotek was Vice President, General Counsel and Secretary from 1994 to
1999 and became a director in 1995.
Prior to joining us, Mr. Mlotek was a partner in the law firm of Proskauer
Rose LLP,
counsel to us, specializing in mergers and acquisitions, corporate reorganizations and tax law from
1989
to 1994.
Ronald N. South
has been our Senior Vice President
and Chief Financial Officer (and principal financial officer
and principal accounting officer) since April 2022.
Prior to holding his current position, Mr. South was our
Corporate Finance and Chief Accounting Officer from 2013 until April 2022.
Prior to joining us in 2008 as our
Vice President, Corporate Finance, Mr. South held leadership roles at Bristol-Myers Squibb, where he served as
Vice President, Finance, for the Cardiovascular and Metabolic business lines, as well as Vice President, Controller,
for its U.S. Pharmaceutical Division, and Vice President, Corporate General Auditor.
Prior to Bristol-Myers
Squibb, he served as North American Director of Corporate Audit at
PepsiCo, and held several roles of increasing
responsibility with PricewaterhouseCoopers LLP, where he advised clients located in the United States, Europe,
and Latin America.
Mr. South is a certified public accountant.
Walter Siegel
has been our Senior Vice President and Chief Legal Officer since 2021.
Previously, Mr.
Siegel was
our Senior Vice President and General Counsel from 2013 until 2021.
Prior to joining us, Mr. Siegel was employed
with Standard Microsystems Corporation, a publicly traded global semiconductor
company from 2005 to 2012,
holding positions of increasing responsibility, most recently as Senior Vice President, General Counsel and
Secretary.
Other Executive Management
The following table sets forth certain information regarding other Executive
Management:
Name
Age
Position
Andrea Albertini
52
Chief Executive Officer, International Distribution Group
Leigh Benowitz
55
Senior Vice President and Chief Global Digital Transformation Officer
Trinh Clark
49
Senior Vice President and Chief Global Customer Experience Officer
James Mullins
58
Senior Vice President, Global Supply Chain
Kelly Murphy
42
Senior Vice President and General Counsel
Christopher Pendergast
60
Senior Vice President and Chief Technology Officer
Michael Racioppi
68
Senior Vice President, Chief Merchandising Officer
René Willi, Ph.D.
55
Chief Executive Officer, Global Oral Reconstruction Group
Andrea Albertini
has been Chief Executive Officer, International Distribution Group since 2023.
Mr. Albertini
joined us in 2013 and has held several positions within the organization including
President, International
Distribution Group, President of our EMEA Dental Distribution Group,
and Vice-President of International Dental
Equipment.
Prior to joining Henry Schein, Mr. Albertini held leadership positions at Cefla Dental Group and
Castellini.
Leigh Benowitz
has been our Senior Vice President and Chief Global Digital Transformation Officer since August
2022.
Ms. Benowitz joined us in 2017 and has held several key positions
including Vice President Digital &
Customer Experience and Global eCommerce Platform Digital Transformation Officer.
Prior to joining Henry
Schein, Ms. Benowitz held various positions with increasing responsibilities
at Citi.
Trinh Clark
has been our Senior Vice President and Chief Global Customer Experience Officer since August
2022.
Ms. Clark joined us in 2007 and has served as Vice President, Technology Enablement, North American
Distribution Group.
Prior to joining Henry Schein, Ms. Clark held various positions of
increasing responsibilities at
eSurg.
24
James Mullins
has been our Senior Vice President of Global ServicesSupply Chain since 2018.
Mr. Mullins joined us in
1988 and has held a number of key positions with increasing responsibility, including Global Chief Customer
Service Officer.

19

Kelly Murphy
Murphy has held several key positions of Contents

increasing responsibility within
the legal function, most recently serving

as Deputy General Counsel.

Christopher Pendergast
has been our Senior Vice President and Chief Technology Officer since 2018.
Prior to
joining us, Mr. Pendergast was the employed by VSP Global from 2008 to 2018, most recently as the Chief
Technology Officer and Chief Information Officer.
Prior to VSP Global, Mr. Pendergast served in roles of
increasing responsibility at Natural Organics, Inc., from 2006 to 2008, IdeaSphere Inc./Twinlab Corporation from
2000 to 2006, IBM Corporation from 1987 to 1994 and 1998 to 2000
and Rohm and Haas from 1994 to 1998.

Michael Racioppi
has been our Senior Vice President, Chief Merchandising Officer since 2008.
Prior to holding
his current position, Mr. Racioppi was President of the Medical Division from 2000 to 2008 and Interim President
from 1999 to 2000, and Corporate Vice President from 1994 to 2008, with primary responsibility for the Medical
Group, Marketing and Merchandising departments.
Mr. Racioppi served as Senior Director, Corporate
Merchandising from 1992 to 1994.
Before joining us in 1992, Mr. Racioppi was employed by Ketchum
Distributors, Inc. as the Vice President of Purchasing and Marketing.
He currently serves on the board of National
Distribution and Contracting and previously served on the board of Health
Distribution Management Association
and Health Industry Distributors Association (HIDA).

René Willi, Ph.D.
has been our Chief Executive Officer, Global Oral Reconstruction Group since 2021.
Previously, Dr.
Willi was the President of our Global Dental Surgical Group, Henry Schein Inc., since 2013. Group.
Prior to joining Henry Schein, Dr.
Willi held senior level roles with Institut Straumann AG as Executive Vice President, Surgical Business Unit from
2005 to 2013.
Prior to Straumann, he held roles of increasing responsibility
in Medtronic Plc’s cardiovascular
division from 2003 to 2005 and with McKinsey & Company as
a management consultant from 2000 to 2003.

20

25

ITEM 1A. Risk Factors

Our business operations could be affected by factors that are not presently known
to us or that we currently
consider not to be material to our operations, so you should not consider
the risks disclosed in this section to
necessarily represent a complete statement of all risks and uncertainties.
The Company believes that the following
risks described below could have a material adverse impact on our business, reputation, financial
results, financial condition and/or
the trading price of our common stock.
The order in which these factors appear does not necessarily reflect
their
relative importance or priority.
COMPANY RISKS
Our business, results of operations, cash flows, financial condition and
liquidity may be negatively impacted by
the effects of disease outbreaks, epidemics, pandemics, or similar wide-spread public health
concerns and other
natural disasters
.
The COVID-19 pandemic and the responses of governments
to it had, and 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.
Our business, results of operations, cash flows, financial condition and
liquidity may be negatively impacted by the
effects of disease outbreaks, epidemics, pandemics, similar wide-spread public health concerns
and other natural
disasters. The COVID-19 pandemic has had, and continues to have, an
unprecedented impact on society, worldwide
economic activity, and the health care sector (particularly, the dental market). As a global healthcare solutions
company, the COVID-19 pandemic and the governmental responses to it had, and 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. Even after the COVID-19 pandemic has begun to subside, we may again
experience material adverse impacts to our business, results of operations
and cash flows as a result of, among other
things, its global economic impact, including any recession that
may occur in the future, or a prolonged period of
economic slowdown or the reluctance of patients to return for elective dental
or medical care. The impacts and
potential impacts from the COVID-19 pandemic include, but are not
limited to:
•
Significant volatility in supply, demand and selling prices for personal protective equipment (PPE), COVID-19
tests and other COVID-19 related products.
Available supply,
customer demand and selling prices for PPE,
COVID-19 tests and other COVID-19 related products
fluctuated in fiscal 2022 and we expect such volatility to
continue for the duration of the COVID-19 pandemic. This has resulted
in inventory reserves, fluctuating margins
and increased revenue related to such products.
The volatility in sales of COVID-19 test kits has moderated,
albeit
at a significantly lower level of sales compared with 2021, resulting in
us recording an inventory obsolescence
reserve of $17 million for COVID-19 test kits during the year
ended December 31, 2022 and we expect further
declines in sales volumes.
Our estimates for supply, demand and selling prices are inherently uncertain and if
supply, demand, selling prices or other market dynamics significantly fluctuate in the future beyond our current
assumptions, additional inventory reserves may be required, margins may be reduced and/or
revenue may decline
for such products, each which could materially adversely impact our business,
results of operations and cash flows.
Additionally, governmental policies designed to reduce the transmission of COVID-19 and variants thereof could
once again lead to the closure of dental offices or deferral of elective procedures and
wellness exams by medical
and dental patients. Such previous closures and restrictions impacted our
customers’ spending with us and had, and
if reinstated may again have, a material adverse effect on our business, reputation,results of operations
and cash flows.
Although we believe that most practices currently are able to access
adequate supply, we still may be unable to
supply our customers with the specific brand and/or quantity of certain PPE products,
COVID-19 tests and other
COVID-19 related products they demand, which may lead to our
customers seeking alternative sources of supply.
Healthcare professionals’ inability to obtain a sufficient quantity and/or brand of certain PPE, COVID-19
tests and
other COVID-19 related products would adversely impact our business,
results of operations and cash flows, and
could materially adversely affect our financial condition and liquidity;
26
•
Reduction in Peoples’ Ability and Willingness to be in Public.
Restrictions recommended by several public health
organizations, and implemented, from time to time, by federal, state and local governments,
to slow and limit the
transmission of COVID-19 and variants thereof has caused and may in
the future cause some people to be less
willing to go to elective medical and dental appointments, which could
again materially adversely affect demand
for our products.
A lengthened period of materially suppressed demand could again cause
material adverse impacts
on our business, results of operations and cash flows and could materially
adversely affect our financial condition
and liquidity;
•
Negative impact on our workforce and impact of adapted business practices.
The spread of COVID-19 and
variants thereof caused us to modify our business practices (including
employee travel, employee work locations,
and physical participation in meetings, events and conferences), and
we may take further actions as may be required
by government authorities or our customers or that we determine are in the
best interests of our employees. As the
COVID-19 pandemic continues to unfold, we continue to evaluate
appropriate actions for our business. At the onset
of the COVID-19 pandemic, many of our office-based workers shifted abruptly to
working remotely. As the
COVID-19 pandemic has evolved, we have modified our work
arrangements to implement more flexible working
arrangements for our office-based workers, including permanent work from home,
hybrid and office-based
arrangements. Implementing these modified business practices
to include remote work arrangements could have a
negative impact on employee morale, strain our business continuity plans,
introduce operational risk (including but
not limited to cybersecurity risks), and impair our ability
to efficiently operate our business;
•
Significant changes in political conditions.
Significant changes in political conditions in markets in which
we
purchase and distribute our products have occurred and are expected to
continue at least during the pendency of the
pandemic, including quarantines, governmental or regulatory actions, closures
or other restrictions that limit or
close our operating facilities, restrict our employees’ ability to
travel or perform necessary business functions, or
otherwise constrain the operations of our business partners, suppliers or
customers, which may materially adversely
affect our business, results of operations, cash flows, financial condition
and liquidity;
•
Volatility
in the financial markets.
Volatility
in the financial markets may materially adversely affect the
availability and cost of credit to us;
The impact of the COVID-19 pandemic may also exacerbate other risks discussed
below, any of which could have
a material adverse effect on us.
We are dependent upon third parties for the manufacture and supply of a significant volume of our products.
We obtain a significant volume of the products we distribute from third parties, with whom we generally do not
have long-term contracts.
While there is typically more than one source of supply, some key suppliers, in the
aggregate, supply a significant portion of the products we sell.
In 2022, our top 10 health care distribution suppliers
and our single largest supplier accounted for approximately 28% and 4%, respectively, of our aggregate purchases.
Because of our dependence upon such suppliers, our operations are
subject to the suppliers’ ability and willingness
to supply products in the quantities that we require, and the risks include delays
caused by interruption in
production based on conditions outside of our control, including
a supplier’s failure to comply with applicable
government requirements (which may result in product recalls and/or
cessation of sales) or an interruption in the trading
suppliers’ manufacturing capabilities.
In the event of any such interruption in supply, we would need to identify
and obtain acceptable replacement sources on a timely basis.
There is no guarantee that we would be able to obtain
such alternative sources of supply on a timely basis, if at all, and an extended
interruption in supply, particularly of
a high sales volume product, could result in a significant disruption
in our sales and operations, as well as damage
to our relationships with customers and our reputation.
In addition, certain of our suppliers have had their ability to
service certain markets restricted or negatively impacted because
of allegations of forced labor in their supply
chain.
Forced labor legislation affecting the supply chain has increased around the
world, and the United States
recently passed the Uyghur Forced Labor Prevention Act.
Our supply chain could be materially disrupted if our
suppliers fail to comply with, or are unable to satisfy our demand
for products, as a result of applicable forced labor
legislation and regulations.
27
Our
future
growth
(especially
for
our
technology
and
value-added
services
segment)
is
dependent
upon
our
ability
to
develop
or
acquire
and
maintain
and
protect
new
products
and
technologies
that
achieve
market
acceptance with acceptable margins.
Our future success depends on our ability to timely develop (or obtain the right
to sell) competitive and innovative
(particularly for our technology and value-added services segment)
products and services and to market them
quickly and cost-effectively.
Our ability to anticipate customer needs and emerging trends and develop or acquire
new products, services and technologies at competitive prices requires significant
resources, including employees
with the requisite skills, experience and expertise, particularly in our technology
segment, including dental practice
management, patient engagement and demand creation software solutions.
The failure to successfully address these
challenges could materially disrupt our sales and operations.
Additionally, our software and e-services products,
like software products generally, may contain undetected errors or bugs when introduced or as new versions are
released.
Any such defective software may result in increased expenses related
to the software and could adversely
affect our relationships with customers as well as our reputation.
With respect to certain software and e-services
that we develop, we rely primarily upon copyright, trademark and
trade secret laws, as well as contractual and
common law protections and confidentiality obligations.
We cannot provide assurance that such legal protections
will be available, adequate or enforceable in a timely manner to protect
our software or e-services products.
Risks inherent in acquisitions,
dispositions and joint ventures could offset the anticipated benefits.
One of our business strategies has been to expand our domestic and
international markets in part through
acquisitions and joint ventures and we expect to continue to make acquisitions
and enter into joint ventures in the
future. Such transactions require significant management attention,
may place significant demands on our
operations, information systems, legal, regulatory, compliance-functions and financial resources, and there is risk
that one or more may not succeed. We cannot be sure, for example, that we will achieve the benefits of revenue
growth that we expect from these acquisitions or joint ventures or
that we will avoid unforeseen additional costs,
taxes or expenses. Our ability to successfully implement our acquisition
and joint venture strategy depends upon,
among other things, the following:
•
the availability of suitable acquisition or joint venture candidates at
acceptable prices;
•
our ability to consummate such transactions, which could potentially
be prohibited due to U.S. or
foreign antitrust regulations;
•
the liquidity of our investments and the availability of financing on
acceptable terms;
•
our ability to retain customers or product lines of the acquired businesses or
joint ventures;
•
our ability to retain, recruit and incentivize the management of the
companies we acquire; and
•
our ability to successfully integrate these companies’ operations, services,
products and personnel with
our culture, management policies, legal, regulatory and compliance policies,
cybersecurity systems and
policies, internal procedures, working capital management, financial
and operational controls and
strategies.
Furthermore, some of our acquisitions and future acquisitions may give rise to
an obligation to make contingent
payments or to satisfy certain repurchase obligations, which payments
could have material adverse impacts on our
financial results individually or in the aggregate.
Additionally, when we decide to sell assets or a business, we may encounter difficulty in finding buyers or
executing alternative exit strategies on acceptable terms in a timely manner, which could delay
the accomplishment
of our strategic objectives. Alternatively, we may dispose of assets or a business at a price or on terms that are
less
than we had anticipated.
Dispositions may also involve continued financial involvement
in a divested business,
such as through transition service agreements, indemnities or other current
or contingent financial obligations.
Under these arrangements, performance by the acquired or divested
business, or other conditions outside our
control, could affect our future financial results.
Certain provisions in our governing documents and other documents to which we
are a party may discourage
third parties from seeking to acquire us that might otherwise result in
our stockholders receiving a premium
over the market price of their shares.
28
The provisions of our certificate of incorporation and by-laws may
make it more difficult for a third-party to
acquire us, may discourage acquisition bids and may impact the price
that certain investors might be willing to pay
in the future for shares of our common stock. Although it is not possible
These provisions, among other things require (i) the affirmative vote
of the holders of at least 60% of the shares of common stock entitled to predictvote
to approve a merger, consolidation, or identify
a sale, lease, transfer or exchange of all such risks or substantially all of our assets;
and uncertainties,(ii) the affirmative vote of the holders
of at least 66 2/3% of our common stock entitled to vote to (a) remove
a director; and (b) to amend or repeal our
by-laws, with certain limited exceptions.
In addition, certain of our employee incentive plans provide
for
accelerated vesting of stock options and other awards upon termination without cause
within two years following a
change in control, or grant the plan committee discretion to accelerate
awards upon a change of control.
Further,
certain agreements between us and our executive officers provide for increased severance
payments and certain
benefits if those executive officers are terminated without cause by us or if they may include, but are not limited terminate
for good reason, in each
case within two years following a change in control or within ninety days prior
to the effective date of the change in
control or after the first public announcement of the pendency of the change
in control.
Adverse changes in supplier rebates or other purchasing incentives
could negatively affect our business.
The terms
on which
we purchase
or sell
products from
many suppliers
may entitle
us to
receive a
rebate or
other
purchasing incentive based on
the attainment of
certain growth goals. Suppliers may
reduce or eliminate rebates
or
incentives
offered
under
their
programs,
or
increase
the
growth
goals
or
other
conditions
we
must
meet
to
earn
rebates
or
incentives
to
levels
that
we
cannot
achieve.
Increased
competition
either
from
generic
or
equivalent
branded products
could result
in us
failing to
earn rebates
or incentives
that are
conditioned upon
achievement of
growth goals. Additionally,
factors discussed below. Ouroutside of
our control, such
as customer preferences,
consolidation of suppliers
or supply issues, can have a material impact on
our ability to achieve the growth goals established
by our suppliers,
which may reduce the amount of rebates or incentives we receive. The occurrence of any of these events
could have
an adverse impact on our business, operationsfinancial condition or operating
results.
Sales of corporate brand products entail additional risks, including the risk that such sales could also be affected by additional factors
adversely affect
our relationships with suppliers.
We
offer certain corporate brand products that are available exclusively from us. The sale
of such products subjects
us to the risks generally encountered by entities that source, market and sell corporate brand products, including but
not
limited to
potential product
liability risks,
mandatory or
voluntary product
recalls, potential
supply chain
and
distribution
chain
disruptions,
and
potential
intellectual
property
infringement
risks.
Any
failure
to
adequately
address
some
or
all
of
these
risks
could
have
an
adverse
effect
on
our
business, financial
condition
or
operating
results.
In
addition,
an
increase
in
the
sales
of
our
corporate
brand
products may
negatively
affect
our
sales
of
products
owned
by
our
suppliers
which,
consequently,
could
adversely
impact
certain
of
our
supplier
relationships.
Our
ability
to
locate
qualified,
economically
stable
suppliers
who
satisfy
our
requirements,
and
to
acquire
sufficient
products in
a timely
and effective
manner,
is critical
to ensuring,
among other
things, that
customer confidence
is
not presently known diminished.
Any failure
to usdevelop
sourcing relationships
with a
broad and
deep supplier
base could
have an
adverse effect on our business, financial condition or that we currently consider not to be material to our operations. You should not consider this list to be a complete statement of all risks and uncertainties. The order in which these factors appear should not be construed to indicate their relative importance or priority.

operating results.

INDUSTRY RISKS
The health care products distribution industry is highly competitive
(including, without limitation, competition
from third-party online commerce sites) and consolidating, and we may not
be able to compete successfully.

We compete with numerous companies, including several major manufacturers and distributors.
Some of our
competitors have greater financial and other resources than we do, which
could allow them to compete more
successfully.
Most of our products are available from several sources and our customers
tend to have relationships
with several distributors.
Competitors could obtain exclusive rights to market particular
products, which we would
then be unable to market. Manufacturers also could increase their
efforts to sell directly to end-users and thereby
eliminate or reduce our role and the roles of other distributors. in distribution.
Industry consolidation among health care product distributors and
manufacturers, price competition, theproduct unavailability, of products, whether due to our inability to gain access to products or
29
to interruptions in manufacturing supply, from manufacturers, or the emergence of new competitors, also could increase competition. There
Consolidation has also been increasing consolidationincreased among manufacturers of health care
products, which could have a material
adverse effect on our margins and product availability. Additionally, in this competitive market, some of our contracts contain minimum purchase commitments.
We could be subject to charges and financial losses in the
event we fail to satisfy minimum purchase commitments. In the future, we may be unable to compete successfully and competitive pressures may reducecommitments contained
in some of our revenues and profitability.

We may experience competition from third-party online commerce sites.

Traditionalcontracts. Additionally,

traditional health care supply and distribution relationships are being challenged
by electronic online commerce
solutions.
The continued advancement of online commerce by third
parties will require us to cost-effectively adapt
to changing technologies, to enhance existing services and to differentiate our business (including
(including with additional
value-added services) to address changing demands of consumers and
our customers on a timely basis.
The
emergence of such potential competition and our inability to anticipate and
effectively respond to changes on a
timely basis could have a material adverse effect on our business.

Because substantially all

The repeal or judicial prohibition on implementation of the products that we distribute are not manufactured by us, we are dependent upon third parties for the manufacture and supply of substantially all of our products.

We obtain substantially all of our products from third parties. Generally, we do not have long-term contracts with our suppliers committing them to supply products to us. Therefore, suppliers may not provide the products we need in the quantities we request. While there is generally more than one source of supply for most of the categories of products we sell, some key suppliers, in the aggregate, supply a significant portion of the products we sell. Additionally, because we generally do not control the actual production of the products we sell, we may be subject to delays caused by interruption in production based on conditions outside of our control, including the failure to comply with applicable government requirements. The failure of manufacturers of products regulated by the FDA or other governmental agencies to meet these requirements could result in product recall, cessation of sales or other market disruptions. In the event that any of our third-party suppliers were to become unable or unwilling to continue to provide the products in our required volumes, we would need to identify and obtain acceptable replacement sources on a timely basis. There is no guarantee that we would be able to obtain such alternative sources of supply on a timely basis, if at all. An extended interruption in the supply of our products, especially any high sales volume product, could have a material adverse effect on our results of operations, which most likely would adversely affect the value of our common stock.

Affordable Care Act

21

Table of Contents

Our revenues and profitability depend on our relationships with capable sales personnel as well as customers, suppliers and manufacturers of the products that we distribute.

Our future revenues and profitability depend on our ability to maintain satisfactory relationships with qualified sales personnel as well as customers, suppliers and manufacturers. If we fail to maintain our existing relationships with such persons or fail to acquire relationships with such key persons in the future, our business may be materially adversely affected.

Our future success is substantially dependent upon our senior management.

Our future success is substantially dependent upon the efforts and abilities of members of our existing senior management, particularly Stanley M. Bergman, Chairman and Chief Executive Officer. The loss of the services of Mr. Bergman could have a material adverse effect on our business. We have an employment agreement with Mr. Bergman. We do not currently have “key man” life insurance policies on any of our employees. Competition for senior management is intense and we may not be successful in attracting and retaining key personnel.

We experience fluctuations in quarterly earnings. As a result, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline.

Our business is subject to seasonal and other quarterly fluctuations. Revenues and profitability generally have been higher in the third and fourth quarters due to the timing of sales of seasonal products (including influenza vaccine, equipment and software products), purchasing patterns of office-based health care practitioners and year-end promotions. Revenues and profitability generally have been lower in the first quarter, primarily due to increased sales in the prior two quarters. We expect our historical seasonality of sales to continue in the foreseeable future. Quarterly results may also be materially adversely affected by a variety of other factors, including:

• timing and amount of sales and marketing expenditures;

• timing of pricing changes offered by our suppliers;

• timing of the introduction of new products and services by our suppliers;

• timing of the release of upgrades and enhancements to our technology-related products and services;

• changes in or availability of supplier contracts or rebate programs;

• supplier rebates based upon attaining certain growth goals;

• changes in the way suppliers introduce or deliver products to market;

• costs of developing new applications and services;

• our ability to correctly identify customer needs and preferences and predict future needs and preferences;

• uncertainties regarding potential significant breaches of data security or disruptions of our information technology systems;

• unexpected regulatory actions, or government regulation generally;

• exclusivity requirements with certain suppliers, which may prohibit us from distributing competitive products manufactured by other suppliers;

• loss of sales representatives;

• costs related to acquisitions and/or integrations of technologies or businesses;

22

Table of Contents

• costs associated with our self-insured medical and dental insurance programs;

• general market and economic conditions, as well as those specific to the health care industry and related industries;

• our success in establishing or maintaining business relationships;

• unexpected difficulties in developing and manufacturing products;

• product demand and availability, or product recalls by manufacturers;

• exposure to product liability and other claims in the event that the use of the products we sell results in injury;

• increases in shipping costs or service issues with our third-party shippers;

• fluctuations in the value of foreign currencies;

• restructuring costs;

• the adoption or repeal of legislation;

• changes in accounting principles; and

• litigation or regulatory judgments, expenses or settlements.

Any change in one or more of these or other factors could cause our annual or quarterly financial results to fluctuate. If our financial results do not meet market expectations, our stock price may decline.

Expansion of group purchasing organizations (“GPO”) or provider networks and the multi-tiered costing structure may place us at a competitive disadvantage.

The medical products industry is subject to a multi-tiered costing structure, which can vary by manufacturer and/or product. Under this structure, certain institutions can obtain more favorable prices for medical products than we are able to obtain. The multi-tiered costing structure continues to expand as many large integrated health care providers and others with significant purchasing power, such as GPOs, demand more favorable pricing terms. Additionally, the formation of provider networks and GPOs may shift purchasing decisions to entities or persons with whom we do not have a historical relationship. This may threaten our ability to compete effectively, which could in turn negatively impact our financial results. Although we are seeking to obtain similar terms from manufacturers to obtain access to lower prices demanded by GPO contracts or other contracts, and to develop relationships with provider networks and new GPOs, we cannot assure that such terms will be obtained or contracts will be executed.

Increases in shipping costs or service issues with our third-party shippers could harm our business.

Shipping is a significant expense in the operation of our business. We ship almost all of our orders through third-party delivery services, and typically bear the cost of shipment. Accordingly, any significant increase in shipping rates could have a material adverse effect on our business, financial condition or operating results. Similarly, strikes or other service interruptions by those shippers could cause our operating expenses to rise and materially adversely affect our ability to deliver products on a timely basis.

23

Table of Contents

Uncertain global macro-economic and political conditions could materially adversely

affect our results of operations and financial condition.

Uncertain global macro-economic and political conditions that affect the economy and the economic outlook of the United States, Europe and other parts of the world could materially adversely affect our results of operations and financial condition. These uncertainties, include, among other things:

• the United Kingdom’s vote to leave the European Union (generally referred to as Brexit) and any other similar referenda or actions by other European Union member countries (during 2019, approximately 3% of our consolidated net sales were invoiced to customersbusiness.

The ACA greatly expanded health insurance coverage in the United Kingdom States
and approximately 20%has been the target of our consolidated net sales were invoicedlitigation and
Congressional reform efforts since its adoption.
The U.S. Supreme Court, in upholding the constitutionality of the
ACA and its individual mandate provision in 2012, simultaneously
limited ACA provisions requiring Medicaid
expansion, making such expansion a state-by-state decision.
In 2017, the U.S. Congress effectively repealed the
ACA’s
individual mandate provision by eliminating the financial penalty for non-compliance.
In the most recent
ACA litigation, a federal appeals court found the individual mandate to customers in Europe overall, includingbe unconstitutional,
and returned the U.K.);

• election results;

• changescase to laws and policies governing foreign trade (including, without limitation,

a lower federal court for consideration of whether the United States-Mexico-Canada Agreement (USMCA) and other international trade agreements);

• greater restrictions on imports and exports;

• changes in laws and policies governing health care or data privacy;

• tariffs and sanctions;

• sovereign debt levels;

•remainder of the inabilityACA

could survive the excision of political institutionsthe
individual mandate.
This decision was appealed to effectively resolve actual or perceived economic, currency or budgetary crises or issues;

• consumer confidence;

• unemployment levels (and a corresponding increase in the uninsured and underinsured population);

• changes in regulatory and tax regulations, including, without limitation, the Tax Act;

• increases in interest rates;

• availability of capital;

• increases in fuel and energy costs;

• the effect of inflation on our ability to procure products and our ability to increase prices over time;

• changes in tax ratesU.S. Supreme Court, and the availabilitySupreme

Court issued a
decision on June 17, 2021.
Without reaching the merits of certain tax deductions;

• increasesthe case, the Supreme Court held that the plaintiffs in health care costs;

•

the threat or outbreakcase did not have standing to challenge the ACA.
Any outcome of war, terrorism or public unrest; and

• changesfuture cases that change the ACA, in laws and policies governing manufacturing, development and investment in territories and countries where we do business.

Additionally, changes in government, government debt

addition to future legislation, regulation, guidance and/or budget crises may lead to reductions in government spending in certain countries, whichExecutive Orders
that do the same, could reduce overall health care spending, and/or higher income or corporate taxes, which could depress spending overall.

24

Table of Contents

Recessionary conditions and depressed levels of consumer and commercial spending may also cause customers to reduce, modify, delay or cancel plans to purchase our products and may cause suppliers to reduce their output or change their terms of sale. We generally sell products to customers with payment terms. If customers’ cash flow or operating and financial performance deteriorate, or if they are unable to make scheduled payments or obtain credit, they may not be able to pay, or may delay payment to us. Likewise, for similar reasons suppliers may restrict credit or impose different payment terms. Any inability of current and/or potential customers to pay us for our products and/or services or any demands by suppliers for different payment terms may materially adversely affect our results of operations and financial condition.

Disruptions in the financial markets may materially adversely affect the availability and cost of credit to us.

Our ability to make scheduled payments or refinance our obligations with respect to indebtedness will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and financial, business and other factors beyond our control. Disruptions in the financial markets may materially adversely affect the availability and cost of credit to us.

The market price for our common stock may be highly volatile.

The market price for our common stock may be highly volatile. A variety of factors may have a

significant impact on the market priceU.S. healthcare industry.
For instance, the American Rescue Plan Act of our common stock, including, but not limited to:

• the publication of earnings estimates or other research reports and speculation2021 enhanced

premium tax credits, which has resulted in the press or investment community;

• changes in our industry and competitors;

• changes in government or legislation;

• our financial condition, results of operations and cash flows and prospects;

• stock repurchases;

• any future issuances of our common stock, which may include primary offerings for cash, stock splits, issuances in connection with business acquisitions, issuances of restricted stock/units and the grant or exercise of stock options from time to time;

• general market and economic conditions; and

• any outbreak or escalation of hostilities in areas where we do business.

In addition, the Nasdaq Stock Market can experience extreme price and volume fluctuations that can be unrelated or disproportionate to the operating performancean expansion of the companies listed on Nasdaq. Broad marketnumber of people

covered under the ACA.
These
changes are time-limited, with some enhancements in place for 2021
only and industry factors may negatively affectothers available through the market priceend of our common stock, regardless of actual operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action or derivative litigation has often been instituted against companies. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business.

2022.
The health care industry is experiencing changes due to political, economic and
regulatory influences that could
materially adversely affect our business.

The health care industry is highly regulated and subject to changing
political, economic and regulatory influences.
In recent years, the health care industry has undergone, and is in the process of undergoing,
significant changes
driven by various efforts to reduce costs, including, among other things:factors: trends
toward managed care; consolidation

collective

25

Table of Contents

of health care distribution companies; consolidation of health care manufacturers; collective purchasing arrangements and consolidation among office-based health care practitioners;

and changes in
reimbursements to customers, including increased attention to value-based payment
arrangements, as well as
growing enforcement activities (and related monetary recoveries) by governmental
officials.
Both our profitability
and the profitability of our customers may be materially adversely affected by laws
and regulations reducing
reimbursement rates for pharmaceuticals, medical supplies and devices,
and/or medical treatments or services, or
changes to the methodology by which reimbursement levels are determined.
If we are unable to react effectively to
these and other changes in the health care industry, our financial resultsbusiness could be materially adversely affected.

Expansion of group purchasing organizations (“GPO”), dental support organizations
(“DSO”) or provider
networks and the multi-tiered costing structure may place us at a competitive
disadvantage.
The implementationhealth care products industry is subject to a multi-tiered costing structure, which
can vary by manufacturer
and/or product.
Under this structure, certain institutions can obtain more favorable
prices for health care products
than we are able to obtain.
The multi-tiered costing structure continues to expand as many large integrated health
care providers and others with significant purchasing power, such as GPOs and DSOs, demand more favorable
pricing terms.
Additionally, the formation of provider networks, GPOs and DSOs may shift purchasing decisions
to entities or persons with whom we do not have a historical relationship
and may threaten our ability to compete
effectively, which could in turn negatively impact our financial results.
Although we are seeking to obtain similar
terms from manufacturers to access lower prices demanded by GPO and
DSO contracts or other contracts, and to
30
develop relationships with existing and emerging provider networks, GPOs and DSOs,
we cannot guarantee that
such terms will be obtained or contracts executed.
Increases in shipping costs or service issues with our third-party shippers
could harm our business.
Our ability to meet our customers’ expedited delivery expectations is an
integral component of our business
strategy for which our customers rely.
Shipping is a significant expense in the operation of our business.
We ship
almost all of our orders through third-party delivery services, and typically bear
the cost of shipment.
Accordingly,
any significant increase in shipping rates could have a material adverse
effect on our business, financial condition
or operating results.
While we have recently experienced increases in the cost of shipping,
we do not expect these
additional expenses to be material to our results.
However, it is possible that such costs could be material in the
future.
Similarly, strikes or other service interruptions by those shippers, including at transportation centers or
shipping ports, could cause our operating expenses to rise and materially
adversely affect our ability to deliver
products on a timely basis.
MACRO ECONOMIC AND POLITICAL RISKS
Uncertain global and domestic macro-economic and political conditions
could materially adversely affect our
results of operations and financial condition.
Uncertain global and domestic macro-economic and political conditions
that affect the economy and the economic
outlook of the Health Care Reform LawUnited States, Europe, Asia and other parts of the
world could materially adversely affect our business.

The Health Care Reform Law increased federal oversight results

of private health insurance plansoperations and included a numberfinancial condition.
These uncertainties, include, among other things:
•
election results;
•
changes to laws and policies governing foreign trade (including, without
limitation, the United States-
Mexico-Canada Agreement (USMCA), the EU-UK Trade and Cooperation Agreement of provisions designed to reduce Medicare expendituresDecember
2020 (that went into effect in 2021) and the cost ofother international trade agreements);
•
greater restrictions on imports and exports;
•
supply chain disruptions;
•
changes in laws and policies governing health care generally,or data privacy;
•
tariffs and sanctions;
•
changes to reduce fraud and abuse, and to provide access to increased health coverage.

The Health Care Reform Law contained many provisions designed to generate the revenues necessary to fund the coverage expansions and to reduce costs of Medicare and Medicaid, which included a 2.3% excise tax on domestic sales of many medical devices by manufacturers and importers that was to begin in 2013 and a fee on branded prescription drugs and biologics. The fee on branded prescription drugs and biologics was implemented in 2011, and may adversely affect sales and cost of goods sold. However, subsequent federal laws had suspended the imposition of the medical device excise tax through December 31, 2019, and the Further Consolidated Appropriations Act, 2020, signed into law on December 20, 2019, has permanently repealed the medical device excise tax. The Health Care Reform Law has also materially expanded the number of individuals inrelationship between the United States with health insurance.

The Health Care Reform Law has faced ongoing legal challenges, including litigation seekingand China;

•
sovereign debt levels;
•
the inability of political institutions to invalidate some ofeffectively resolve actual or allperceived
economic, currency or
budgetary crises or issues;
•
consumer confidence;
•
unemployment levels (and a corresponding increase in the uninsured
and underinsured population);
•
changes in regulatory and tax regulations;
•
interest rate fluctuations,
and strengthening of the dollar, which have and will continue to impact our
results of operations;
•
availability of capital;
•
increases in fuel and energy costs;
•
the effect of inflation on our ability to procure products and our ability to increase
prices over time and
pass through to our customers price increases we may receive;
•
changes in tax rates and the availability of certain tax deductions;
•
increases in labor costs;
•
increases in health care costs;
•
our aspirations, goals and disclosures related to environmental, social and
governance (ESG) matters;
•
the threat or outbreak of war, terrorism or public unrest (including, without limitation, the war in
Ukraine and the possibility of a wider European or global conflict);
and
•
changes in laws and policies governing manufacturing, development and
investment in territories and
countries where we do business.
31
Additionally, changes in government, government debt and/or budget crises may lead to reductions in government
spending in certain countries, which could reduce overall health care spending,
and/or higher income or corporate
taxes, which could depress spending overall.
Recessionary or inflationary conditions and depressed levels of
consumer and commercial spending may also cause customers to
reduce, modify, delay or cancel plans to purchase
our products and may cause suppliers to reduce their output or change
their terms of sale. We have experienced
inflationary pressures, including higher freight costs and interest expense.
Although inflation impacts both our
revenues and costs, the depth and breadth of our product portfolio often
allows us to offer lower-cost national brand
solutions or corporate brand alternatives to our more price-sensitive
customers who are unable to absorb price
increases, thus positioning us to protect our gross profit.
The strengthening of the dollar, likewise, has impacted
our revenues and costs, but neither inflation nor exchange rates have materially
impacted our results of operations
in fiscal year 2022.
We generally sell products to customers with payment terms.
If customers’ cash flow or
operating and financial performance deteriorate, or if they are unable to make scheduled
payments or obtain credit,
they may not be able to, or may delay, payment to us.
Likewise, for similar reasons suppliers may restrict credit or
impose different payment terms.
REGULATORY
AND LITIGATION RISKS
Failure to comply with existing and future regulatory requirements
could materially adversely affect our
business.
We strive to be compliant with the applicable laws, regulations and guidance described below in all material
respects, and believe we have effective compliance programs and other controls
in place to ensure substantial
compliance.
However, compliance is not guaranteed either now or in the future as certain laws, regulations
and
guidance may be subject to varying and evolving interpretations that could
affect our ability to comply, as well as,
future changes, additions and enforcement approaches, including in light
of political changes.
When we discover
situations of non-compliance we seek to remedy them and bring
the affected area back into compliance.
The Biden
Administration has indicated that it will be more aggressive in its pursuing
alleged violations of law, or the manner in whichand it has been implemented.

In addition, the President is seeking to repeal and replace the Health Care Reform Law. Repeal and replace legislation has been passed in the House of Representatives, but did not obtain the necessary votes in the Senate. Subsequently, the President has affirmed his intention to repeal and replace the Health Care Reform Law and has taken a number of administrative actions to materially weaken it, including, without limitation, by permitting the

revoked certain guidance that would have limited governmental use of less robust plansinformal
agency guidance to pursue such
violations, as well as indicating it was more prepared to pursue individuals
for corporate law violations, including
an aggressive approach to anti-corruption activities.
Changes with lower coverage and eliminating “premium support” for insurers providing policies under the Health Care Reform Law. On December 22, 2017, the President signed into law the Tax Act, which contains a broad range of tax reform provisions that impact the individual and corporate tax rates, international tax provisions, income tax add-back provisions and deductions and which also repealed the individual mandate of the Health Care Reform Law. Further, in December 2019, the Fifth Circuit ruled that the mandate within the Health Care Reform Law requiring that people buy health insurance was unconstitutional, though the ruling will likely be appealed. The Fifth Circuit remanded the remainder of the case, pertainingrespect to the viability of the Health Care Reform Law, in the absence of the individual mandate,applicable laws, regulations and
guidance described below may require us to the District Court of the Northern District of Texas. Any outcome of these cases that changes the Health Care Reform Law couldupdate or revise our operations,
services, marketing practices, and
compliance programs and controls, and may impose additional and unforeseen
costs on us, pose new or previously
immaterial risks to us, or may otherwise have a significantmaterial adverse effect on our business.
There can be no assurance
that current and future government regulations will not adversely
affect our business, and we cannot predict new
regulatory priorities, the form, content or timing of regulatory actions,
and their impact on the U.S. health care industry. The uncertain status ofindustry
and on our business and operations.
Global efforts toward healthcare cost containment continue to exert pressure on
product pricing.
In the Health Care Reform Law affects our abilityUnited
States, in addition to plan.

Recently,other government efforts to control health care costs, there has been increased

scrutiny on drug
pricing and concurrent efforts to control or reduce drug costs by Congress, the President,
executive branch agencies
and various states.
At the state level, several states includinghave adopted laws that require drug manufacturers
to provide
advance notice of certain price increases and to report information
relating to those price increases, while others
have taken legislative or administrative action to establish prescription drug
affordability boards or multi-payer
purchasing pools to reduce the cost of prescription drugs.
At the federal level, several related bills have been
introduced at the federal level. Such legislation,and regulations proposed which, if enacted could have the potential to impose additional costs on our business.

The implementation of the reportingor finalized,

respectively, would impact drug pricing and disclosure obligations of the Physician Payment Sunshine Act provisions of the Health Care Reform Law could adversely affect our business.

A Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act, or Open Payments Program, imposes annual reporting and disclosure requirements for drug and device manufacturers and distributors with regard to payments or other transfers of value made to certain covered recipients (including physicians, dentists and teaching hospitals), and for such manufacturers and distributors and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. CMS publishes

26

Table of Contents

related costs.

information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities. Amendments expanded the law to also require reporting, effective January 1, 2022, of payments or other transfers of value to physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and certified nurse-midwives, and this new requirement will be effective for data collected beginning in calendar year 2021.

Under the Physician Payment Sunshine Act, we are required to collect and report detailed

information regarding certain financial
relationships we have with covered recipients, such asincluding physicians, dentists,
teaching hospitals, and teaching hospitals. certain other
non-physician practitioners.
We believe that we are substantially compliant with applicable Physician Payment Sunshine Act requirements. The Physician Payment Sunshine Act pre-empts similar state reporting laws, although we orand our subsidiaries may be required to report information under certain state
transparency laws that address circumstances not covered by the Physician Payment Sunshine
Act, and some of these state laws, as
well as the federal law, can be ambiguous. unclear.
We are also subject to foreign regulations requiring transparency of certain
interactions between suppliers and their customers.
While we believe we have substantially compliant programs
and controls in place to comply with thesesatisfying the above laws and requirements, our such
compliance with these rules imposes additional costs on us.

Failureus

and the requirements are sometimes unclear.
In the United States, government actions to comply with existing and future regulatory requirements could materially adverselyseek to increase health-
related price transparency may also affect our business.

32
Our business is subject to additional requirements under various local, state,
federal and international laws and
regulations applicable to the sale and distribution of, and third-party payment
for, pharmaceuticals and medical
devices and human cells, tissue and cellular and tissue-based products, also known as HCT/P products, and animal feed and supplements. products.
Among the federal laws with which we must comply are the Controlled Substances
Act, the FDC Act, as amended,the Federal Drug Quality and Security Act, including DSCSA,
Section 361 of the Public Health
Services Act and Section 401 of the Consolidated Appropriations Act
of the Social Security Act.
Among other
things, such laws, and the regulations promulgated thereunder:

•
regulate the storageintroduction, manufacture, advertising, marketing and distribution,promotion,
sampling, pricing and
reimbursement, labeling, packaging, storage, handling, returning or
recalling, reporting, and
distribution of, and record keeping introduction, manufacturing and marketing offor drugs, HCT/P products and
medical devices;

devices,

including
requirements with respect to unique medical device identifiers;
•
subject us to inspection by the FDA and the DEA;

DEA and similar state authorities;

•
regulate the storage, transportation and disposal of certain of our products
that are considered
hazardous materials;

•
require us to advertise and promote our drugs and devices in accordance
with applicable FDA
requirements;

•
require us to report average sales price (ASP) for drugs or biologicals payable
under Medicare Part B to
CMS with or without a Medicaid drug rebate agreement;
•
require registration with the FDA and the DEA and various state agencies;

•
require record keeping and documentation of transactions involving drug
products;

•
require us to design and operate a system to identify and report suspicious
orders of controlled
substances to the DEA;

DEA and certain states;

•
require us to manage returns of products that have been recalled and subject
us to inspection of our
recall procedures and activities; and

•
impose on us reporting requirements if a pharmaceutical, HCT/P product or
medical device causes
serious illness, injury or death.

death;

•
require manufacturers, wholesalers, repackagers and dispensers of prescription
drugs to identify and
trace certain prescription drugs as they are distributed;
•
require the licensing of prescription drug wholesalers and third-party
logistics providers; and
•
mandate compliance with standards for the recordkeeping, storage
and handling of prescription drugs,
and associated reporting requirements.
The FDA has become increasingly active in addressing the regulation of
computer software and digital health
products intended for use in health care settings.
The Cures Act, signed into law on December 13, 2016, among
other things, amended the medical device definition to exclude certain software
from FDA regulation, including
certain clinical decision support software.
On September 27, 2019, the FDA issued a suite of guidance documents
on digital health products, which incorporated applicable Cures Act standards,
and on September 28, 2022, the
FDA subsequently finalized certain of these guidance documents, including
regarding the types of clinical decision
support tools and other software that are exempt from regulation by the FDA as
medical devices, and the FDA
continues to issue new guidance in this area.
Certain of our businesses involve the development and
sale of
software and related products to support physician and dental practice management,
and it is possible that the FDA
or foreign government authorities could determine that one or more of our products
is subject to regulation as a
medical device, which could subject us or one or more of our businesses to
substantial additional requirements,
costs and potential enforcement actions or liabilities for noncompliance with
respect to these products.
Applicable federal, state, local and foreign laws and regulations also may require
us to meet various standards
relating to, among other things, licensure or registration, program eligibility, procurement, third-party
reimbursement, sales and marketing practices, product integrity and
supply tracking to the manufacturer of the product manufacturers,
product labeling, personnel, privacy and security of health or other personal
information, installation, maintenance
and repair of equipment and the importation and exportation of products.
The FDA and DEA, as well as CMS
(including with respect to complex Medicare reimbursement requirements
applicable to our specialty home medical
supplies business), have recently increased their regulatory and enforcement
activities and, in particular, the DEA
has heightened enforcement activities due to the opioid crisis in the United States.
One of our businesses was
33
suspended in October 2021 by CMS from receiving payments from
Medicare, although it was permitted to continue
to perform and bill for Medicare services.
On September 30, 2022, CMS terminated the suspension of Medicare
payments.
As a result of the termination of the suspension, we recognized $4
million of previously deferred
revenue during the year ended December 31, 2022.
Our business is also subject to requirements of similar and
other foreign governmental laws and regulations affecting our operations

abroad.

27

Table of Contents

abroad. The FDA and DEA have recently increased their regulatory and enforcement activities, and in particular, the DEA has increased generally its regulatory and enforcement activities due to the widely reported opioid crisis in the United States.

The failure to comply with any of these laws or regulations, or new interpretations

of existing laws and regulations,
or the imposition of any additional laws and regulations, could
materially adversely affect our business. There can be no assurance that current and future government regulations will not adversely affect our business.
The costs
to us associated with complying with the various applicable statutes
and regulations, as they now exist and as they
may be modified, could be material.
Allegations by a governmental body that we have not complied with
these
laws could have a material adverse effect on our businesses.
While we believe that we are substantially compliant
with applicable laws and regulations, and believe we have adequate
compliance programs and controls in place to
ensure substantial compliance, if it is determined that we have not complied
with these laws, we are potentially
subject to penalties, including warning letters, substantial civil and criminal penalties,
mandatory recall of product, seizure of product
and injunction, consent decrees and suspension or limitation of payments
to us, product sale and distribution.
If we
enter into settlement agreements to resolve allegations of non-compliance, we
could be required to make settlement
payments or be subject to civil and criminal penalties, including fines
and the loss of licenses.
Non-compliance
with government requirements could also adversely affect our ability to participate
in important federal and state
government health care programs, such as Medicare and Medicaid,
and damage our reputation.

The EU Medical Device Regulation may adversely affect our business.

As of May 26, 2020, the European Union Medical Device Regulation No. 2017/745 (the “EU MDR”) applies to medical devices developed and/or commercialized in the European Union.

The EU MDR, is anticipated to have a major impact onapplicable since May 26, 2021, significantly modifies and intensifies
the regulatory compliance
requirements for the medical device industry as a whole. It
Among other things, the EU MDR:
•
strengthens the rules on placing devices on the market and reinforce surveillance once
they are
available;
•
establishes explicit provisions on manufacturers’
responsibilities for the follow-up of the quality,
performance and safety of devices placed on the market;
•
improves the traceability of medical devices throughout the supply chain to the end-user
or patient
through a unique identification number;
•
sets up a central database to provide patients, healthcare professionals and
the public with
comprehensive information on products available in the EU;
•
strengthens rules for the assessment of certain high-risk devices, such
as implants, which may adversely affecthave to
undergo an additional check by experts before they are placed on the market; and
•
identifies importers and distributors and medical device products through
registration in a database
(EUDAMED not due until 2024 and after as mentioned above).
In particular, the EU MDR imposes strict requirements for the confirmation that a product
meets the regulatory
requirements, including regarding a product’s clinical evaluation and a company’s quality systems, and for the
distribution, marketing and sale of medical devices, including post-market surveillance.
Medical devices that have
been assessed and/or certified under the EU Medical Device Directive
may continue to be placed on the market
until 2024 (or until the expiry of their certificates, if applicable and earlier).
However, on January 6, 2023, the EU
Commission submitted a proposed amendment to extend the MDR transitional
periods until December 31, 2028,
for certain medical devices to ensure continued access to medical devices
for patients and to allow medical devices
already placed on the market in accordance with the current legal framework
to remain on the market. We continue
to monitor developments and whether the proposed amendment and
new deadlines will be approved by the
European Parliament and Council. Nevertheless, EU MDR requirements
regarding the distribution, marketing and
sale including quality systems and post-market surveillance have to be observed
by manufacturers, importers and
distributors as of the application date (i.e., May 26, 2021).
The modifications created by the EU MDR may have an impact on the
way we design and manufacture products
and the way we conduct our business in various ways.

First, to the extent new products require a conformity assessment and such conformity assessment requires involvement of a notified body, the current and persisting significant shortage of notified bodies may limit our options to seek certification and/or significantly delay certification. Furthermore the (few) existing notified bodies designated under the EU MDR are experiencing significant capacity bottlenecks, which leads to above-average timelines for product certifications. The same applies to timelines for recertification of our existing products for which the CE certificate is approaching expiry. This may result in us not being able to launch or to continue commercializing products.

Furthermore, within the context of conformity assessment (both for self-certified devices, and for devices under conformity assessment with a notified body), the EU MDR is tightening the requirements for clinical evaluation of a device. In the specific case of Class I products, where to date the legal manufacturer confirmed compliance with the regulatory requirements, oversight by supervisory authorities is expected to increase, and such authorities may have a stricter view. It may be that, from a perspective of the legal manufacturer, or of an authority, the existing product documentation has to be expanded, which may require additional development work. We may also have to decide to discontinue commercialization of certain products, if and to the extent investments into additional development are not commensurate with the business contribution of such products.

Additionally in the context of conformity assessment, certain national authorities as well as the European Commission have further scrutinized the business model of own brand labeling (private label products) under the EU MDR, i.e., the reliance of a manufacturer distributing a product under its name on an assessment of a supplier confirming that the product meets the regulatory requirements, including its technical file(s) for the supplied product. While this question remains under intense discussion between the industry and the authorities, and while we are exploring all options, this may require us to adapt the supply chain structure (e.g., by switching suppliers or moving to a distribution business model under which the supplier of a product is labeled as the legal manufacturer), for certain of our products, and may make it more difficult to bring private label products to market in Europe. We may not be able to continue commercializing products, if no alternative supply chain solution is found.

In addition, the EU MDR is imposing more stringent regulatory requirements across the whole value chain including post marketing requirements, additional requirements for the organization of the quality management

Economic Area.

28

system such as a responsible person for regulatory compliance, post marketing safety reporting, the requirement of Unique Device Identification (UDI), and the input into a European Databank on Medical Devices (EUDAMED, which however is delayed in its operations, with unknown implications on the regulatory obligations for product owners and distributors). Also, the regulatory requirements for our interactions with suppliers and distributors alike are tightened. These additional regulatory requirements increase our compliance obligations and thus the risk for non-compliance and greater costs.

The uncertain impact of the new EU MDR regulations, as well as failure to comply with the EU MDR, could have a material adverse effect on our business.

34

If we fail to comply with laws and regulations relating to health care
fraud or other laws and regulations, we
could suffer penalties or be required to make significant changes to our operations,
which could materially
adversely affect our business.

Certain of our businesses are subject to federal and state (and similar
foreign) health care fraud and abuse, referral
and reimbursement laws and regulations with
respect to their operations.
Some of these laws, referred to as “false
claims laws,” prohibit the submission or causing the submission of false or fraudulent
claims for reimbursement to
federal, state and other health care payers and programs.
Other laws, referred to as “anti-kickback laws,” prohibit
soliciting, offering, receiving or paying remuneration in order to induce the referral
of a patient or ordering,
purchasing, leasing or arranging for, or recommending ordering, purchasing or leasing of, items or services
that are
paid for by federal, state and other health care payers and programs. Health care fraud measures may implicate,
Certain additional state and federal laws, such
as the federal Physician Self-Referral Law, commonly known as the “Stark Law,” prohibit physicians and other
health professionals from referring a patient to an entity with which the
physician (or family member) has a
financial relationship, for the furnishing of certain designated health services
(for example, our relationships with pharmaceutical manufacturers, our pricingdurable medical
equipment and incentive programs for physician and dental practices, and our dental and physician practice management products that offer billing related functionality.

medical supplies), unless an exception applies.

Violations of Anti-Kickback statutes or the Stark
Law may be enforced as violations of the federal False Claims Act.
The fraud and abuse laws and regulations have been subject to varying interpretations, as well as heightened
enforcement activity over the past few
years, and significant enforcement activity has been the result of “relators” who
serve as whistleblowers by filing
complaints in the name of the United States (and if applicable, particular states)
under federal and stateapplicable false claims laws,
and who may receive up to 30% of total government recoveries.
Penalties under fraud and abuse laws may be severe. For example,
severe, including treble damages and substantial civil penalties under
the federal False Claims Act, violations may result in treble damages, plus civil penalties of up to $22,927 per claim, as well as exclusion from
potential loss of licenses and the ability to participate in federal and state
health care programs, criminal penalties,
or imposition of a corporate compliance monitor, which could have a material adverse effect on our business.
Also,
these measures may be interpreted or applied by a prosecutorial, regulatory or
judicial authority in a manner that
could require us to make changes in our operations or incur substantial defense
and criminal penalties. settlement expenses.
Even
unsuccessful challenges by regulatory authorities or private relators could result
in reputational harm and the
incurring of substantial costs.
Most states have adopted similar state false claims laws, and these state
laws have
their own penalties which may be in addition to federal False Claims
Act penalties. With respect to “anti-kickback laws,” violations of, for example, the federal Anti-Kickback Law may result in civil penalties, of up to $100,522 for each violation, plus up to three times the total amount of remuneration offered, paid, solicited or received, as well as exclusion from federal health care programsother fraud and criminal penalties. Notably, effective October 24, 2018, a new federal anti-kickback law (the “Eliminating Kickbacks in Recovery Act of 2018”) enacted in connection with broader addiction services legislation, may impose criminal penalties for kickbacks involving clinical laboratory services, regardless of whether the services at issue involved addiction services, and regardless of whether the services were reimbursed by a federal health care program or by a commercial health insurer. Furthermore, the Health Care Reform Law significantly strengthened the federal False Claims Act and the federal Anti-Kickback Law provisions, clarifying that a federal Anti-Kickback Law violation can be a basis for federal False Claims Act liability.

abuse

laws.
With respect to measures of this type, the United States government (among others) has expressed concerns
about
financial relationships between suppliers on the one hand and physicians,
dentists and dentists other health care providers,
on the other.
As a result, we regularly review and revise our marketing practices
as necessary to facilitate
compliance.

In the EU, the Directive No. 2019/1937 of October 23, 2019,
on the protection of persons who report breaches of
Union law,
organizes the legal protection of whistleblowers. This Directive covers whistleblowers
reporting
breaches of certain EU laws, in particular as regards public health, the above-mentioned
Directive No. 2001/83,
Regulation No. 726/2004 or, as regards data protection, the GDPR. The Directive protects a wide range of
people
and includes former employees. All private companies with 50 or
more employees are required to create effective
internal reporting channels. Though it was required before December 17, 2021,
at the latest, the implementation of
this Directive by EU member states is still underway for some of
them. At the end of January 2023 and according
to information available on public sources, sixteen EU member states have
fully implemented it (France, Belgium,
Denmark, Finland, Latvia, The Netherlands, Ireland, Croatia, Cyprus, Greece, Lithuania,
Romania, Malta, Portugal,
Sweden and Bulgaria) while the process is ongoing in the others with varying
degrees of progress.
We also are subject to the requirements of the new Directive No. 2022/2464 on corporate sustainability reporting
("CSR Directive") adopted on December 14, 2022 and has to be
implemented by EU members states by July 6,
2024, at the latest. By amending Directives No. 2004/109, No. 2006/43, No.
2013/34 and Regulation No. 537/2014,
the CSR Directive strengthens the existing rules on non-financial
reporting by setting new requirements for large
companies to publish sustainability-related information and, in particular, disclose details about their
risks and
impacts on environmental matters.
We
also are subject to certain United States and foreign laws and regulations
concerning the conduct of our foreign
operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery
Act, German anti-corruption laws
35
and other anti-bribery laws and laws pertaining to the accuracy of our internal
books and records, which have been
the focus of increasing enforcement activity globally in recent years.
Our businesses are generally subject to
numerous other laws and regulations that could impact our financial
results, including, without limitation,

29

Table of Contents

securities, antitrust, consumer protection, and marketing laws and regulations. Failure to comply with laws or regulations could have

In the EU, both active and passive bribery are criminalized.
The EU Council Framework Decision 2003/568/JHA
of 22 July 2003
on combating corruption in the private sector
establishes more detailed rules on the liability of
legal persons and deterrent sanctions.
However, the liability of legal persons is regulated at a material adverse effect on our business.

national level.

Failure to comply with fraud and abuse laws and regulations, and other
laws and regulations, could result in
significant civil and criminal penalties and costs, including the loss of
licenses and the ability to participate in
federal and state health care programs, and could have a material adverse
effect on our business. Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations or incur substantial defense and settlement expenses. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs. In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing the risk of non-compliance.
We may
determine to enter into settlements, make payments, agree to consent decrees
or enter into other arrangements to
resolve such matters. For example, one of our subsidiaries resolved an investigation by the Federal Trade Commission related to the manner in which it advertised certain data security features of its dental practice management software, which resulted in a consent order and fine. Failure
Intentional or unintentional failure to comply with consent decrees could
materially adversely
affect our business.

While we believe that we are substantially compliant with applicable fraud and
abuse and other laws and
regulations, and believe we have adequate compliance programs and controls
in place to ensure substantial
compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our
services or marketing practices in response to changes in applicable law or
interpretation of laws, could have a
material adverse effect on our business.

If we fail to comply with laws and regulations relating to the confidentialitycollection,
storage and processing of sensitive
personal information or standards in electronic health records or transmissions,
we could be required to make
significant changes to our products, or incur substantial fines, penalties or
other liabilities.

The FDA has become increasingly active in addressing the regulation of computer software and digital health products intended for use in health care settings. The Cures Act, signed into law on December 13, 2016, among other things amended the medical device definition to exclude certain software from FDA regulation, including clinical decision support software that meet certain criteria. On September 27, 2019, the FDA issued a suite of guidance documents on digital health products, which incorporated applicable Cures Act standards, including regarding the types of clinical decision support tools and other software that are exempt from regulations by the FDA as medical devices. Certain of our businesses involve the development and sale of software and related products to support physician and dental practice management, and it is possible that the FDA or foreign government authorities could determine that one or more of our products is subject to regulation as a medical device, which could subject us or one or more of our businesses to substantial additional requirements with respect to these products.

Our businesses that involve physician and dental practice management
products, and our specialty home medical
supply business, include electronic information technology systems that
store and process personal health, clinical,
financial and other sensitive information of individuals.
These information technology systems may be vulnerable
to breakdown, wrongful intrusions, data breaches and malicious attack,
which could require us to expend
significant resources to eliminate these problems and address related security
concerns, and could involve claims
against us by private parties and/or governmental agencies. For example, we
We are directly or indirectly subject to numerous and evolving federal, state, local and foreign laws and regulations
that protect the privacy and security of suchpersonal information, such as HIPAA. HIPAA, requires, among other things, the implementationControlling the Assault of various recordkeeping, operational, noticeNon-
Solicited Pornography and other practices intendedMarketing Act, the Telephone Consumer Protection Act of 1991, Section 5 of the
Federal Trade Commission Act, the CCPA, and the CPRA that becomes effective on January 1, 2023.
Laws and
regulations relating to safeguard that information, limit its use to allowed purposes and notify individuals in the event of privacy and security breaches. Failuredata protection are continually evolving
and subject to potentially differing
interpretations.
These requirements
may not be harmonized, may be interpreted and applied in a
manner that is
inconsistent from one jurisdiction to another or may conflict with other
rules or our practices.
Our businesses’
failure to comply with these laws and regulations could expose us to breach of
contract claims, substantial fines,
penalties and other liabilities and expenses, costs for remediation and harm to
our reputation.
Also, evolving laws
and regulations in this area could restrict the ability of our customers to obtain,
use or disseminate patient
information, or could require us to incur significant additional costs to
re-design our products in a timely manner to reflect these legal
requirements, either of which could have a material adverse effect on our results of operations.

30

Table of Contents

Other health information standards, such as regulations under HIPAA, establish standards regarding electronic health data transmissions and transaction code set rules for specific electronic transactions, such as transactions involving claims submissions to third party payers. Certain of our businesses provide electronic practice management products that must meet these requirements. Failure to abide by electronic health data transmission standards could expose us to breach of contract claims, substantial fines, penalties and other liabilities and expenses, costs for remediation and harm to our reputation.

In addition, the European Parliament and the Council of the European Union haveEU adopted

the GDPR effective from May 25, 2018,
which increased privacy rights for individuals in Europe (“Data Subjects”), including
individuals who are our customers,
suppliers and employees.
The GDPR extended the scope orof responsibilities for data controllers and data
processors, and generally imposes increased requirements and potential
penalties on companies, such as us, that are
either established in the EU and process personal data of Data Subjects
(regardless the Data Subject location), or
that are not established in the EU but that offer goods or services to Data Subjects
in the EU or monitor their
behavior (including by companies based outside of Europe).in the EU. Noncompliance can result in penalties of up to
the greater of EUR 20 million, or 4% of global
company revenues. Individual memberrevenues (sanction that may be public), and Data Subjects may
seek damages.
Member states may
individually impose additional requirements and penalties regarding certain
limited matters (for which the GDPR
left some room of flexibility), such as employee personal data. With respect to the personal data it protects,
the
36
GDPR requires, among other things, companycontroller accountability, consents from Data Subjects or otheranother acceptable
legal basis to process the personal data, breach notificationsnotification within 72 hours of
a personal data breach where required, data
integrity and security, and fairness and transparency regarding the storage, use or other processing of the personal
data.
The GDPR also provides rights to Data Subjects relating notably
to modification,information, access, rectification, erasure and transporting
of the personal data and the right to object to the processing.
On August 20, 2021, China promulgated the PIPL, which took effect on November
1, 2021.
The PIPL imposes
specific rules for processing personal information and it also specifies
that the law shall also apply to personal
information activities carried out outside China but for the purpose
of providing products or services to PRC
citizens.
Any non-compliance with these laws and regulations may subject
us to fines, orders to rectify or terminate
any actions that are deemed illegal by regulatory authorities, other penalties,
as well as reputational damage or legal
proceedings against us, which may affect our business, financial condition or results
of operations.
The PIPL
carries maximum penalties of CNY50 million or 5% of the annual revenue of
entities that process personal data.
In the United States, the CCPA, which increases the privacy protections afforded California residents, and was signed into law on June 28, 2018, became
effective January 1, 2020.
The CCPA generally requires companies, such as us, to institute additional protections
regarding the collection, use and disclosure of certain personal information
of California residents.
Compliance
with the obligations imposed by the CCPA depends in part on how particular regulators interpret and apply them.
Regulations were released in August of 2020, but there remains some
uncertainty about how the CCPA will be
interpreted by the courts and enforced by the regulators.
If we fail to comply with the CCPA or if regulators assert
that we have failed to comply with the CCPA, we may be subject to certain fines or other penalties and litigation,
any of which may negatively impact our reputation, require us to expend
significant resources, and harm our
business.
Furthermore, California voters approved the CPRA on November 3,
2020, which will amend and expand
the CCPA, including by providing consumers with additional rights with respect to their personal information, and
creating a new state agency to enforce CCPA and CPRA.
The California Attorney General released proposed CCPA regulationsCPRA came into effect on October 10, 2019, and is required January 1, 2023, applying
to adopt final regulationsinformation collected by businesses on or before Julyafter January 1, 2020. In addition to providing for enforcement by the California Attorney General, the CCPA also provides for a private right of action. Entities in violation of the CCPA may be liable for civil penalties. 2022.
Other states, as well as the federal government, have increasingly
considered the adoption of similarly expansive
personal privacy laws, backed
by significant civil penalties for non-compliance.
Virginia and Colorado were both
successful in passing privacy legislation in 2021, becoming effective on January
1, 2023 and July 1, 2023,
respectively.
Connecticut and Utah also passed comprehensive privacy laws
that will go into effect in July 1, 2023
and December 31, 2023.
While we believe we have substantially compliant programs and controls
in place to
comply with the GDPR, CCPA, PIPL and CCPACPRA requirements, our compliance with these measuresdata privacy and cybersecurity
laws is likely to impose additional costs on us, and we cannot predict whether
the interpretations of the
requirements, or changes in our practices in response to new requirements
or interpretations of the requirements,
could have a material adverse effect on our business.

We also sell products and services that health care providers, such as physicians and dentists, use to store and
manage patient medical or dental records.
These customers and we are subject to laws, regulations and
industry
standards, such as HIPAA and the Payment Card Industry Data Security Standards, which require the protection of
the privacy and security of those records, and ourrecords.
Our products or services may also be used as part of these customers’
comprehensive data security programs, including in connection with their efforts to comply with
applicable legal or contractual data
privacy and security laws. laws and contractual requirements.
Perceived or actual security vulnerabilities in our products
or services, or the perceived or actual failure by us or our customers who
use our products or services to comply
with applicable legal or contractual data privacy and security requirements,
may not only cause us significant
reputational harm, but may also lead to claims against us by our customers
and/or governmental agencies and
involve substantial fines, penalties and other liabilities and expenses
and costs for remediation.

Various federal initiatives involve

Under the adoptionGDPR, health data belong to the category of “sensitive data” and use by health care providersbenefit
from specific protections.
Processing of certain electronic health care records systems and processes. The initiatives include, among others, programs that incentivize physicians and dentists, though Medicare’s MIPS, to use certified EHR technology in accordance with certain evolving requirements, including regarding quality, promoting interoperability, cost and improvement activities. Qualificationsuch data is generally prohibited, except for the MIPS incentive payments requires the use of EHRs that are certified as having certain capabilities designated in standards adopted by CMS and by the ONC. These standards have been subject to change.

specific exceptions.

Certain of our businesses involve the manufacture and sale of certified EHR systems
and other products linked to MIPS
government supported incentive programs, where the EHR systems
must be certified as having certain capabilities
designated in evolving standards, such as those adopted by CMS and other incentive programs. ONC.
In order to maintain certification of our
EHR products, we must satisfy the

31

Table of Contents

changing governmental standards.

If any of our EHR systems do not meet these
standards, yet have been relied upon by health care providers to receive
federal incentive payments, as noted above, we are may be
37
exposed to risk, such as under federal health care fraud and abuse
laws, including the False Claims Act. For example, on May 31, 2017, the U.S. Department of Justice announced a $155 million settlement and 5-year corporate integrity agreement involving a vendor of certified EHR systems, based on allegations that the vendor, by misrepresenting capabilities to the certifying body, caused its health care provider customers to submit false Medicare and Medicaid claims for meaningful use incentive payments in violation of the False Claims Act.
While we
believe we are substantially in compliance with such certifications and with applicable
fraud and abuse laws and
regulations and that we have adequate compliance programs and controls
in place to ensure substantial compliance,
we cannot predict whether changes in applicable law, or interpretation of laws, or resulting changes in our, practices in response to changes in applicable law or interpretation of laws, could
have a material adverse effect on our business.
Moreover, in order to satisfy our customers and comply with evolving legal requirements, our products
may need to
incorporate increasingly complex functionality, such as with respect to reporting functionality. and information blocking.
Although we believe we are positioned to accomplish this, the effort may involve
increased costs, and our failure to
implement product modifications, or otherwise satisfy applicable standards,
could have a material adverse effect on
our business.

Additionally, as electronic medical devices are increasingly connected to each other and to other technology, the
ability of these connected systems safely and effectively to exchange and use exchanged information becomes increasingly important. For example, on September 6, 2017, the FDA issued final guidance to assist industry in identifying specific considerations related to the ability of electronic medical devices to safely and effectively exchange and use exchanged information.
information becomes
increasingly important.
As a medical device manufacturer, we must manage risks including those associated with
an electronic interface that is incorporated into a medical device.

There may be additional legislative or regulatory initiatives in the future impacting health care.

Our global operations are subject to inherent risks that could materially adversely affect our business.

Global operations are subject to risks that may materially adversely affect our business. The risks that our global operations are subject to include, among other things:

• difficulties and costs relating to staffing and managing foreign operations;

• difficulties in establishing channels of distribution;

• fluctuations in the value of foreign currencies (including, without limitation, in connection with Brexit);

• longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions;

• repatriation of cash from our foreign operations to the United States;

• regulatory requirements;

• anti-bribery, anti-corruption and laws pertaining to the accuracy of our internal books and records;

• unexpected difficulties in importing or exporting our products;

• imposition of import/export tariffs, quotas, sanctions or penalties;

• difficulties and delays inherent in sourcing products and contract manufacturing in foreign markets;

• limitations on our ability under local laws to protect our intellectual property;

• unexpected regulatory, legal, economic and political changes in foreign markets;

32

Table of Contents

• changes in tax regulations that influence purchases of capital equipment;

• civil disturbances, geopolitical turmoil, including terrorism, war or political or military coups; and

• public health emergencies, including the Coronavirus (as defined below).

The coronavirus could materially adversely affect our results

The Novel Coronavirus Disease 2019 (COVID-19) (“Coronavirus”) is impacting worldwide economic activity, and activity in China in particular. Estimates for Chinese gross domestic product and economic growth have been reduced as a result of the coronavirus. The Company has several businesses in China that were forced to close as a result of the coronavirus for certain periods, with a corresponding effect on their sales activity. In addition, it is unclear if the coronavirus will spread to other countries, and how economic activity might be impacted on a worldwide basis. The Company also might be unable to obtain infection control products from its suppliers due to the additional demand for such products created by the virus. The impact of the virus on Chinese and other economic activity, and its effect on the supply chain are uncertain at this time and could have a material adverse effect on our results.

We operate within the European Union, including in the United Kingdom, and therefore may be affected by the United Kingdom's withdrawal from the European Union.

We operate within the European Union, including the United Kingdom, and as a result, we face risks associated with the potential uncertainty and disruptions that may lead up to and follow Brexit, including with respect to volatility in exchange rates and interest rates and potential material changes to the regulatory regime applicable to our operations in the U.K. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets. During 2019, approximately 3% of our consolidated net sales were invoiced to customers in the United Kingdom and approximately 20% of our consolidated net sales were invoiced to customers in Europe overall, including the U.K. There is significant uncertainty about the terms and timing under which the U.K. will continue a relationship with the EU. It is possible that Brexit will result in our U.K. and EU operations becoming subject to materially different, and potentially conflicting, laws, regulations or tariffs which could require costly new compliance initiatives or changes to legal entity structures or operating practices. Furthermore, in the event the U.K. and the EU do not reach a trade agreement during a prescribed transition period, there may be additional adverse impacts on immigration and trade between the U.K. and the EU or countries outside the EU. Such impacts could materially adversely affect our business. The ultimate effects of Brexit on us will depend on the specific terms of any agreement the U.K. and the EU reach to provide access to each other’s respective markets.

Our expansion through acquisitions and joint ventures involves risks.

We have expanded our domestic and international markets in part through acquisitions and joint ventures, and we expect to continue to make acquisitions and enter into joint ventures in the future. Such transactions involve numerous risks, including possible material adverse effects on our financial results or the market price of our common stock. Some of our acquisitions and future acquisitions may also give rise to an obligation by us to make contingent payments or to satisfy certain repurchase obligations, which payments could have a material adverse effect on our financial results. In addition, integrating acquired businesses and joint ventures:

• may result in a loss of customers or product lines of the acquired businesses or joint ventures;

• requires significant management attention;

• may place significant demands on our operations, information systems and financial resources; and

33

Table of Contents

• results in additional acquisition and integration expenses.

There can be no assurance that our future acquisitions or joint ventures will be successful. Our ability to continue to successfully effect acquisitions and joint ventures will depend upon the following:

• the availability of suitable acquisition or joint venture candidates at acceptable prices;

• our ability to consummate such transactions, which could potentially be prohibited due to U.S. or foreign antitrust regulations;

• the availability of financing on acceptable terms, in the case of non-stock transactions;

• the liquidity of our investments and our ability to raise capital could be affected by the financial credit markets; and

• our ability to retain, recruit and incentivize the management of the companies we acquire.

Our acquisitions may not result in the benefits and revenue growth we expect.

We are in the process of integrating companies that we acquired and including the operations, services, products and personnel of each company within our management policies, procedures and strategies. We cannot be sure that we will achieve the benefits of revenue growth that we expect from these acquisitions or that we will not incur unforeseen additional costs or expenses in connection with these acquisitions. To effectively manage our expected future growth, we must continue to manage successfully our integration of these companies and continue to improve our operational systems, internal procedures, working capital management and financial and operational controls. If we fail in any of these areas, our business could be materially adversely affected.

If the Animal Health Spin-off or certain internal transactions undertaken in anticipation of the Animal Health Spin-off are determined to be taxable in whole or in part, we and our stockholders may incur substantial tax liabilities.

In connection with the Animal Health Spin-off, we obtained an opinion of outside tax counsel that the Animal Health Spin-off will qualify as a tax-free transaction to us and our stockholders for U.S. federal income tax purposes. We have not sought or obtained a ruling from the Internal Revenue Service (“IRS”) on the tax consequences of the transaction. In addition, the tax opinion is subject to customary qualifications and assumptions, and is based on factual representations and undertakings. The failure of any factual representation or assumption to be true, correct and complete in all material respects, or any undertakings to be fully complied with, could affect the validity of the tax opinion. Moreover, an opinion of counsel represents counsel’s best legal judgment, is not binding on the IRS or the courts, and the IRS or the courts may not agree with the conclusions set forth in the tax opinion. Even if the Animal Health Spin-off otherwise qualified as a tax-free transaction for U.S. federal income tax purposes, it may become taxable to us if certain events occur that affect either us or Covetrus. While Covetrus has agreed not to take certain actions that could cause the transaction not to qualify as a tax-free transaction and is generally obligated to indemnify us against any tax consequences if it breaches this agreement, the potential tax liabilities could have an adverse effect on us if we were not entitled to indemnification or if the indemnification obligations were not fulfilled. If the Animal Health Spin-off or certain internal transactions undertaken in anticipation of the Animal Health Spin-off are determined to be taxable for U.S. federal income tax purposes, we and/or our U.S. stockholders who participated in the Animal Health Spin-off could incur substantial U.S. federal income tax liabilities. There can be no assurance that we would be entitled to indemnification or that Covetrus would have the resources or liquidity required to indemnify us for any such taxable gain. In addition, we and/or our stockholders who participated in the Animal Health Spin-off could incur tax costs in foreign jurisdictions in connection with the transaction, irrespective of whether the Animal Health Spin-off qualifies as tax-free for U.S. federal income tax purposes.

34

Table of Contents

The Animal Health Spin-off may not achieve the intended benefits and may expose us to potential risks and liabilities.

We completed the Animal Health Spin-off on February 7, 2019. We undertook the transaction because, among other things, we believed that our animal health business could achieve greater growth by combining with Vets First Choice and that we could benefit from greater strategic focus of our resources and management efforts. We may not benefit as expected from the increased focus on our core business, strategic programs and objectives made possible by the Animal Health Spin-off. In addition, the value of the transaction may be reduced by potential liabilities related to post-closing adjustments and indemnities, which could adversely affect our results of operations.

We face inherent risk of exposure to product liability, intellectual property infringement and other claims in the event that the use of the products we sell results in injury.

Our business involves a risk of product liability, intellectual property infringement and other claims in the ordinary course of business, and from time to time we are named as a defendant in cases as a result of our distribution of products. Additionally, we own interests in companies that manufacture certain dental products. As a result, we are subject to the potential risk of product liability, intellectual property infringement or other claims relating to the manufacture and distribution of products by those entities. Additionally, as our private-label business continues to grow, purchasers of such products may increasingly seek recourse directly from us, rather than the ultimate product manufacturer, for product-related claims. Another potential risk we face in the distribution of our products is liability resulting from counterfeit or tainted products infiltrating the supply chain. In addition, some of the products that we transport and sell are considered hazardous materials. The improper handling of such materials or accidents involving the transportation of such materials could subject us to liability. In addition, our reputation could be adversely affected by negative publicity surrounding such events regardless of whether or not claims against us are successful. We have various insurance policies, including product liability insurance, covering risks and in amounts that we consider adequate. In many cases in which we have been sued in connection with products manufactured by others, the manufacturer of the product provides us with indemnification. There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide us with adequate protection. A successful claim brought against us in excess of available insurance or not covered by indemnification agreements, or any claim that results in significant adverse publicity against us, could have a material adverse effect on our business and our reputation.

Our technology segment depends upon continued software and e-services product development, technical support and successful marketing.

Competition among companies supplying practice management software and/or e-services is intense and increasing. Our future sales of practice management software and e-services will depend on, among other factors:

• the effectiveness of our sales and marketing programs;

• our ability to enhance our products and services to satisfy customer requirements; and

• our ability to provide ongoing technical support.

We cannot be sure that we will be successful in introducing and marketing new software, software enhancements or e-services, or that such software, software enhancements and e-services will be released on time or accepted by the market. Our software and applicable e-services products, like software products generally, may contain undetected errors or bugs when introduced or as new versions are released. We cannot be sure that future problems with post-release software errors or bugs will not occur. Any such defective software may result in increased expenses related to the software and could adversely affect our relationships with the customers using such software as well as our reputation. We do not have any patents on our software or e-services, and rely upon copyright, trademark

35

Table of Contents

and trade secret laws, as well as contractual and common law protections. We cannot provide assurance that such legal protections will be available or enforceable to protect our software or e-services products.

We rely on third parties for certain technologically advanced products.

Some of our products contain technologically advanced components, including software, that are developed by third parties. We may not be able to replace the functions provided by these third-party components or products if they become obsolete, defective or incompatible with future versions of our products or with our services and solutions, or if they are not adequately maintained or updated.

In addition, third-party suppliers of software or other intellectual property assets could be unwilling to permit us to use their intellectual property and this could impede or disrupt use of their products or services by us and our customers. Alternate sources for the technology currently provided by third parties to us may not be available to us in a timely manner, and may not provide us with the same functions as currently provided to us or may be more expensive than products we currently use or sell.

Further, the risk of intellectual property infringement claims against us may increase as we expand our business to include more technologically advanced products and continue to incorporate third party components, software and/or other intellectual property into the products we sell. Also, individuals and firms have purchased intellectual property assets in order to assert claims of infringement against technology providers and customers that use such technology. Any infringement action brought against us or our customers could be costly to defend or lead to an expensive settlement or judgment against us.

The risks described above could have a material adverse effect on our business, financial condition or operating results and our reputation.

Security risks generally associated with our information systems and our technology products and services could materially adversely affect our business, and our results of operations could be materially adversely affected if such products, services or systems (or third-party systems we rely on) are interrupted, damaged by unforeseen events, are subject to cyberattacks or fail for any extended period of time.

We rely on information systems (IS) in our business to obtain, rapidly process, analyze, manage and store customer, product, supplier and employee data to, among other things:

• maintain and manage worldwide systems to facilitate the purchase and distribution of thousands of inventory items from numerous distribution centers;

• receive, process and ship orders on a timely basis;

• manage the accurate billing and collections for thousands of customers;

• process payments to suppliers; and

• provide products and services that maintain certain of our customers’ electronic medical or dental records (including protected health information of their patients).

Information security risks have generally increased in recent years, and a cyberattack that bypasses our IS security systems (including third-party systems we rely on) causing an IS security breach may lead to a material disruption of our IS business systems (including third-party systems we rely on) and/or the loss of business information resulting in a material adverse effect on our business, as well as claims against us by affected parties and/or governmental agencies, and involve fines and penalties, costs for remediation, and substantial defense and settlement expenses.

36

Table of Contents

In addition, we develop products and provide services to our customers that are technology-based, and a cyberattack that bypasses the IS security systems of our products or services causing a security breach and/or perceived security vulnerabilities in our products or services could also cause significant reputational harm, and actual or perceived vulnerabilities may lead to claims against us by our customers and/or governmental agencies. In particular, certain of our practice management products and services purchased by health care providers, such as physicians and dentists, are used to store and manage patient medical or dental records. These customers are subject to laws and regulations which require that they protect the privacy and security of those records, and our products may be used as part of these customers’ comprehensive data security programs, including in connection with their efforts to comply with applicable privacy and security laws. Perceived or actual security vulnerabilities in our products or services, or the perceived or actual failure by us or our customers who use our products to comply with applicable legal requirements, may not only cause us significant reputational harm, but may also lead to claims against us by our customers and/or governmental agencies and involve fines and penalties, costs for remediation, and substantial defense and settlement expenses.

Regarding direct customer claims, although our customer license agreements typically contain provisions that seek to eliminate or limit our exposure to such liability, there is no assurance these provisions will withstand legal challenges, or that we will be able to obtain such provisions in all cases.

In addition, our information systems also utilize certain third party service organizations that manage a portion of our information systems, and our business may be materially adversely affected if these third party service organizations are subject to a cyber attack. Additionally, legislative or regulatory action related to cybersecurity may increase our costs to develop or implement new technology products and services.

Risks associated with these and other IS security breaches may include, among other things:

• future results could be materially adversely affected due to the theft, destruction, loss, misappropriation or release of confidential data or intellectual property;

• operational or business delays resulting from the disruption of information systems and subsequent clean-up and mitigation activities;

• procedures and safeguards must continually evolve to meet new IS challenges, and enhancing protections, and conducting investigations and remediation, may impose additional costs on us;

• we may incur claims, fines and penalties, and costs for remediation, or substantial defense and settlement expenses; and

• negative publicity resulting in reputation or brand damage with our customers, partners or industry peers.

We also deliver Internet-based services and, accordingly, depend on our ability and the ability of our customers to access the Internet. In the event of any difficulties, outages and delays by Internet service providers, we may be impeded from providing such services, which may have a material adverse effect on our business and our reputation.

We have various insurance policies, including cyber liability insurance, covering risks and in amounts that we consider adequate. There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost. Successful claims for misappropriation or release of confidential or personal data brought against us in excess of available insurance or fines or other penalties assessed or any claim that results in significant adverse publicity against us could have a material adverse effect on our business and our reputation.

37

Table of Contents

Certain provisions in our governing documents and other documents to which we are a party may discourage third-party offers to acquire us that might otherwise result in our stockholders receiving a premium over the market price of their shares.

The provisions of our certificate of incorporation and by-laws may make it more difficult for a third party to acquire us, may discourage acquisition bids and may limit the price that certain investors might be willing to pay in the future for shares of our common stock. These provisions, among other things:

• require the affirmative vote of the holders of at least 60% of the shares of common stock entitled to vote to approve a merger, consolidation, or a sale, lease, transfer or exchange of all or substantially all of our assets; and

• require the affirmative vote of the holders of at least 66 2/3% of our common stock entitled to vote to (i) remove a director; and (ii) to amend or repeal our by-laws, with certain limited exceptions.

In addition, our 2013 Stock Incentive Plan and 2015 Non-Employee Director Stock Incentive Plan provide for accelerated vesting of stock options upon a change in control. These incentive plans also authorize the committee under the plans to provide for accelerated vesting of other types of equity awards in connection with a change in control at grant or thereafter, and certain other awards made under these incentive plans (such as restricted stock/unit awards) accelerate upon a change in control or upon certain termination events in connection with a change in control. Further, certain agreements between us and our executive officers provide for increased severance payments and certain benefits if those executive officers are terminated without cause by us or if they terminate for good reason, in each case within two years after a change in control or within ninety days prior to the effective date of the change in control or after the first public announcement of the pendency of the change in control.

Tax legislation could materially adversely affect our financial results and tax liabilities.

We are subject to the tax laws and regulations of the United States federal, state and local governments, as well as
foreign jurisdictions.
From time to time, various legislative initiatives may be proposed
that could materially
adversely affect our tax positions.
There can be no assurance that our effective tax rate will not be
materially
adversely affected by legislation resulting from these initiatives. On December 22, 2017, the President signed the Tax Act into law, which contains a broad range of tax reform provisions that impact the individual and corporate tax rates, international tax provisions, income tax add-back provisions and deductions.
In addition, tax laws and regulations are extremely
complex and subject to varying interpretations.
Although we believe that our historical tax positions are sound and
consistent with applicable laws, regulations and existing precedent,
there can be no assurance that our tax positions
will not be challenged by relevant tax authorities or that we would be successful
in any such challenge.

We face inherent risk of exposure to product liability, intellectual property infringement and other claims in the

event that the use of the products we sell results in injury.
Our business involves a risk of product liability, intellectual property infringement and other claims in the ordinary
course of business, and from time to time we are named as a defendant
in cases as a result of our distribution of
products.
Additionally, we own interests in companies that manufacture certain dental products.
As a result, we
could be subject to the potential risk of product liability, intellectual property infringement or other claims relating
to the manufacture and distribution of products by those entities.
In addition, as our corporate brand business
continues to grow, purchasers of such products may increasingly seek recourse directly from us, rather than the
ultimate product manufacturer, for product-related claims.
Another potential risk we face in the distribution of our
products is liability resulting from counterfeit or tainted products infiltrating
the supply chain.
In addition, some of
the products that we transport and sell are considered hazardous materials.
The improper handling of such
materials or accidents involving the transportation of such materials could
subject us to liability or at least legal
action that could harm our reputation.
Customs policies or legislative import restrictions could hinder the Company’s ability to import goods necessary
to our operations on a timely basis and result in government enforcement
actions and/or sanctions.
Government-imposed import policies and legislation regulating the
import of goods and prohibiting the use of
forced labor or human trafficking could result in delays or the inability to import
goods in a timely manner that are
necessary to our operations, and such policies or legislation could also
result in financial penalties, other sanctions,
government enforcement actions and reputational harm.
While the Company has policies against and seeks to
avoid the import of goods that are manufactured in whole or in part by forced
labor or through human trafficking,
as a result of legislative and governmental policy initiatives, we may be subject
to increasing potential delays,
added costs, supply chain disruption and other restrictions.
38
GENERAL RISKS
Security risks generally associated with our information systems and our
technology products and services could
materially adversely affect our business, and our results of operations could be
materially adversely affected if
such products, services or systems (or third-party systems we rely on) are
interrupted, damaged by unforeseen
events, are subject to cyberattacks or fail for any extended period
of time.
We rely on information systems (IS) in our business to obtain, rapidly process, analyze, manage and store customer,
product, supplier and employee data to, among other things:
•
maintain and manage worldwide systems to facilitate the purchase and
distribution of thousands of
inventory items from numerous distribution centers;
•
receive, process and ship orders on a timely basis;
•
manage the accurate billing and collections for thousands of
customers;
•
process payments to suppliers; and
•
provide products and services that maintain certain of our customers’ electronic
medical or dental
records (including protected health information of their patients).
Information security risks have generally increased in recent years, and a cyberattack
that bypasses our IS security
systems (including third-party systems we rely on) causing an IS security breach
may lead to a material disruption
of our IS business systems (including third-party systems we rely on) and/or
the loss of business information, as
well as claims against us by affected parties and/or governmental agencies, and involve
fines and penalties, costs
for remediation, and substantial defense and settlement expenses.
In addition, we develop products and provide
services to our customers that are technology-based, and a cyberattack
that bypasses the IS security systems of our
products or services causing a security breach and/or perceived security
vulnerabilities in our products or services
could also cause significant loss of business and reputational harm, and actual
or perceived vulnerabilities may lead
to claims against us by our customers and/or governmental agencies.
In particular, certain of our practice
management products and services purchased by health care providers, such
as physicians and dentists, are used to
store and manage patient medical or dental records.
These customers are subject to laws and regulations which
require that they protect the privacy and security of those records, and our
products may be used as part of these
customers’ comprehensive data security programs, including in connection
with their efforts to comply with
applicable privacy and security laws.
Perceived or actual security vulnerabilities in our products or services,
or the
perceived or actual failure by us or our customers who use our products
to comply with applicable legal
requirements, may not only cause reputational harm and loss of business,
but may also lead to claims against us by
our customers and/or governmental agencies and involve damages, fines and
penalties, costs for remediation, and
substantial defense and settlement expenses.
In addition, a cyberattack on a third-party that we use to manage
a
portion of our information systems could result in the same effects.
Additionally, legislative or regulatory action
related to cybersecurity may increase our costs to develop or implement
new technology products and services.
From time to time, we have had to address immaterial security incidents
(“security incidents”).
There can be no
assurance that we will not experience material security incidents in the future. Security
incidents can be difficult to
detect and any delay in identifying them could increase their harm.
While we have implemented measures to
protect our IS systems, such measures may not prevent these events.
Any such security incidents could disrupt our
operations, harm our reputation or otherwise have a material adverse effect on our
business.
We have various
insurance policies, including cybersecurity insurance, covering risks and
in amounts that we consider adequate.
There can be no assurance that the insurance coverage we maintain is sufficient or
will be available in adequate
amounts or at a reasonable cost to cover costs and expenses related
to security incidents.
Furthermore, procedures and safeguards must continually evolve to meet new
IS challenges, and enhancing
protections, and conducting investigations and remediation, may impose additional
costs on us.
Finally, our business may be interrupted by shortfalls of IS systems providers engaged by our customers, such
as
Internet-based services upon which our customers depend to access certain of
our products.
39
Our global operations are subject to inherent risks that could materially adversely
affect our business.
Our global operations are subject to risks that could materially adversely affect our business.
The risks that our
global operations are subject to include, among other things:
•
difficulties and costs relating to staffing and managing foreign operations;
•
difficulties and delays inherent in sourcing products, establishing channels of distribution
and contract
manufacturing in foreign markets;
•
fluctuations in the value of foreign currencies (including, without limitation,
in connection with
Brexit);
•
uncertainties relating to the EU-UK Trade and Cooperation Agreement of December 2020, which
went
into effect in 2021, including for example potential implementation issues, potential
disputes over the
interpretation of the provisions of the Agreement and possible changes
to the Agreement restricting the
free movement of goods between the U.K. and the European Union;
•
longer payment cycles of foreign customers and difficulty of collecting receivables
in foreign
jurisdictions;
•
repatriation of cash from our foreign operations to the United States;
•
regulatory requirements, including,
without limitation, anti-bribery, anti-corruption and laws pertaining
to the accuracy of our internal books and records;
•
litigation risks, new or unanticipated litigation developments and
the status of litigation matters;
•
unexpected difficulties in importing or exporting our products and import/export
tariffs, quotas,
sanctions or penalties;
•
limitations on our ability under local laws to protect our intellectual property;
•
unexpected regulatory, legal, economic and political changes in foreign markets;
•
changes in tax regulations that influence purchases of capital equipment;
•
civil disturbances, geopolitical turmoil, including terrorism, war or political
or military coups;
•
risks associated with climate change, including physical risks such as
impacts from extreme weather
events and other potential physical consequences, regulatory and technological
requirements, market
developments, stakeholder expectations and reputational risk; and
•
public health emergencies, including COVID-19.
Our future success is substantially dependent upon our senior
management, and our revenues and profitability
depend on our relationships with capable sales personnel as well as
customers, suppliers and manufacturers of
the products that we distribute.
Our future success is substantially dependent upon the efforts and abilities of members
of our existing senior
management, particularly Stanley M. Bergman, Chairman and Chief Executive Officer.
The loss of the services of
Mr. Bergman could have a material adverse effect on our business. We have an employment agreement with Mr.
Bergman.
We do not currently have “key man” life insurance policies on any of our employees.
Competition for
senior management is intense, burnout and turn-over rates are increasing workplace
concerns during and after the
COVID-19 pandemic, and we may not be successful in attracting and
retaining key personnel.
Additionally, our
future revenues and profitability depend on our ability to maintain satisfactory
relationships with qualified sales
personnel as well as customers, suppliers and manufacturers.
If we fail to maintain our existing relationships with
such persons or fail to acquire relationships with such key persons in the
future, our business may be materially
adversely affected.
Disruptions in the financial markets may materially adversely affect the availability
and cost of credit to us.
Our ability to make scheduled payments or refinance our obligations with
respect to indebtedness will depend on
our operating and financial performance, which in turn is subject to prevailing
economic conditions and financial,
business and other factors beyond our control.
Disruptions in the financial markets may materially adversely affect
the availability and cost of credit to us.
40
Item 1B.
Unresolved Staff Comments

We have no unresolved comments from the staff of the SEC that were issued 180 days or more preceding the end of
our 20192022 fiscal year.

38

Table of Contents

ITEM 2. Properties

We own or lease the following

Within our health care distribution segment (for properties with more than 100,000 square feet:

Own or

Approximate

Lease Expiration

Property

Location

Lease

Square Footage

Date

Corporate Headquarters

Melville, NY

Lease

185,000

June 2020

Corporate Headquarters

Melville, NY

Own

105,000

N/A

Office and Distribution Center

Fiumana-Predappio, Italy

Own

183,000

N/A

Office and Distribution Center

Tours, France

Own

166,000

N/A

Office and Distribution Center

Gillingham, United Kingdom

Lease/Own

165,000

June 2033

Office and Distribution Center

Eastern Creek, New South Wales, Australia

Lease

161,000

July 2030

Office and Distribution Center

Niagara on the Lake, Canada

Lease

128,000

September 2021

Office and Distribution Center

Bastian, VA

Own

108,000

N/A

Office and Distribution Center

West Allis, WI

Lease

106,000

October 2027

Office and Distribution Center

Geer, SC

Lease

102,000

December 2028

Distribution Center

Denver, PA

Lease

624,000

December 2021

Distribution Center

Indianapolis, IN

Lease

380,000

March 2022

Distribution Center

Sparks, NV

Lease

370,000

December 2021

Distribution Center

Indianapolis, IN

Own

287,000

N/A

Distribution Center

Grapevine, TX

Lease

242,000

July 2023

Distribution Center

Gallin, Germany

Own

215,000

N/A

Distribution Center

Jacksonville, FL

Lease

212,000

February 2026

Distribution Center

Heppenheim, Germany

Lease

194,000

March 2030

Thefeet) we lease

and/or
own approximately 5.8 million square feet of properties, listed in the table above are our principal properties primarily used by our health careconsisting of distribution, segment. In addition, we lease numerous other distribution,
office, showroom,
manufacturing and sales space, in locations 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.

Lease expirations
range from 2023 to 2041.
We believe that our properties are in good condition, are well maintained and are suitable and adequate to carry on
our business.
We have additional operating capacity at certain distribution center facilities.

39

ITEM 3.
Legal Proceedings

For a discussion of Legal Proceedings, see
of the Notes to the
Consolidated Financial Statements included under Item 8.
ITEM 4.
Mine Safety Disclosures
Not applicable.

ITEM 3. Legal Proceedings

On August 31, 2012, Archer and White Sales, Inc. (“Archer”) filed a complaint against Henry Schein, Inc. as well as Danaher Corporation and its subsidiaries Instrumentarium Dental, Inc., Dental Equipment, LLC, Kavo Dental Technologies, LLC and Dental Imaging Technologies Corporation (collectively, the “Danaher Defendants”) in the U.S. District Court for the Eastern District of Texas, Civil Action No. 2:12-CV-00572-JRG, styled as an antitrust action under Section 1 of the Sherman Act, and the Texas Free Enterprise Antitrust Act. Archer alleges a conspiracy between Henry Schein, an unnamed company and the Danaher Defendants to terminate or limit Archer’s distribution rights. On August 1, 2017, Archer filed an amended complaint, adding Patterson Companies, Inc. (“Patterson”) and Benco Dental Supply Co. (“Benco”) as defendants, and alleging that Henry Schein, Patterson, Benco and Burkhart Dental Supply conspired to fix prices and refused to compete with each other for sales of dental equipment to dental professionals and agreed to enlist their common suppliers, the Danaher Defendants, to join a price-fixing conspiracy and boycott by reducing the distribution territory of, and eventually terminating, their price-cutting competing distributor Archer. Archer seeks damages in an amount to be proved at trial, to be trebled with interest and costs, including attorneys’ fees, jointly and severally, as well as injunctive relief. On October 30, 2017, Archer filed a second amended complaint, to add additional allegations that it believes support its claims. The named parties and causes of action are the same as the August 1, 2017 amended complaint.

On October 1, 2012, we filed a motion for an order: (i) compelling Archer to arbitrate its claims against us; (2) staying all proceedings pending arbitration; and (3) joining the Danaher Defendants’ motion to arbitrate and stay. On May 28, 2013, the Magistrate Judge granted the motions to arbitrate and stayed proceedings pending arbitration. On June 10, 2013, Archer moved for reconsideration before the District Court judge. On December 7, 2016, the District Court Judge granted Archer’s motion for reconsideration and lifted the stay. Defendants appealed the District Court’s order. On December 21, 2017, the U.S. Court of Appeals for the Fifth Circuit affirmed the District Court’s order denying the motions to compel arbitration. On June 25, 2018, the Supreme Court of the United States granted defendants’ petition for writ of certiorari. On October 29, 2018, the Supreme Court heard oral arguments. On January 8, 2019, the Supreme Court issued its published decision vacating the judgment of the Fifth Circuit and remanding the case to the Fifth Circuit for further proceedings consistent with the Supreme Court’s opinion. On April 2, 2019, the District Court stayed the proceeding in the trial court pending resolution by the Fifth Circuit. The Fifth Circuit heard oral argument on May 1, 2019 on whether the case should be arbitrated. The Fifth Circuit issued its opinion on August 14, 2019 affirming the District Court’s order denying defendants’ motions to compel arbitration. Defendants filed a petition for rehearing en banc before the Fifth Circuit. The Fifth Circuit denied that petition. On October 1, 2019, the District Court set the case for trial on February 3, 2020, which was subsequently moved to January 29, 2020. On January 24, 2020 the Supreme Court granted our motion to stay the District Court proceedings, pending the disposition of our petition for writ of certiorari, which was filed on January 31, 2020. We intend to defend ourselves vigorously against this action.

On August 17, 2017, IQ Dental Supply, Inc. (“IQ Dental”) filed a complaint in the U.S. District Court for the Eastern District of New York, entitled IQ Dental Supply, Inc. v. Henry Schein, Inc., Patterson Companies, Inc. and Benco Dental Supply Company, Case No. 2:17-cv-4834. Plaintiff alleged that it is a distributor of dental supplies and equipment, and sells dental products through an online dental distribution platform operated by SourceOne Dental (“SourceOne”). SourceOne had previously brought an antitrust lawsuit against Henry Schein, Patterson and Benco, which Henry Schein settled in the second quarter of 2017 and which is described in our prior filings with the SEC.

IQ Dental alleged, among other things, that defendants conspired to suppress competition from IQ Dental and SourceOne for the marketing, distribution and sale of dental supplies and equipment in the United States, and that defendants unlawfully agreed with one another to boycott dentists, manufacturers and state dental associations that deal with, or considered dealing with, plaintiff and SourceOne. Plaintiff claimed that this alleged conduct constitutes unreasonable restraint of trade in violation of Section 1 of the Sherman Act, New York’s Donnelly Act and the New Jersey Antitrust Act, and also made pendant state law claims for tortious interference with prospective business relations, civil conspiracy and aiding and abetting. Plaintiff sought injunctive relief, compensatory, treble and punitive damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees. On December 21, 2017, the District Court granted the defendants’ motion to dismiss. On January 19,

41

40

PART

2018, IQ Dental appealed the District Court’s order. On May 10, 2019, the U.S. Court of Appeals for the Second Circuit affirmed in part and reversed in part the District Court’s dismissal of the complaint, holding that IQ Dental lacks antitrust standing to challenge the alleged boycott of SourceOne and state dental associations, but that it has standing to challenge injury related to the alleged direct boycott of its business. On June 29, 2019, the Second Circuit denied IQ Dental’s petition for rehearing or rehearing en banc. On January 8, 2020, Henry Schein and IQ Dental entered into a settlement agreement, pursuant to which Henry Schein paid an amount which is not material. Henry Schein was dismissed from the case on January 16, 2020.

On February 12, 2018, the United States Federal Trade Commission (“FTC”) filed a complaint against Benco Dental Supply Co., Henry Schein, Inc. and Patterson Companies, Inc. The FTC alleged, among other things, that defendants violated U.S. antitrust laws by conspiring, and entering into an agreement, to refuse to provide discounts to or otherwise serve buying groups representing dental practitioners. The FTC alleged that defendants conspired in violation of Section 5 of the FTC Act. The complaint sought equitable relief only and does not seek monetary damages. We denied the allegation that we conspired to refuse to provide discounts to or otherwise serve dental buying groups. A hearing before an administrative law judge began on October 16, 2018 and the hearing record was closed on February 21, 2019. On October 7, 2019, the administrative law judge issued his Initial Decision, finding in relevant part that the “evidence fails to prove a conspiracy involving Schein,” and dismissing the complaint as to Henry Schein. The Initial Decision became the decision of the FTC on November 7, 2019 and is not subject to further appeal.

On March 7, 2018, Joseph Salkowitz, individually and on behalf of all others similarly situated, filed a putative class action complaint for violation of the federal securities laws against Henry Schein, Inc., Stanley M. Bergman and Steven Paladino in the U.S. District Court for the Eastern District of New York, Case No. 1:18-cv-01428. The complaint sought to certify a class consisting of all persons and entities who, subject to certain exclusions, purchased Henry Schein securities from March 7, 2013 through February 12, 2018 (the “Class Period”). The complaint alleged, among other things, that the defendants had made materially false and misleading statements about Henry Schein’s business, operations and prospects during the Class Period, including matters relating to the issues in the In re Dental Supplies Antitrust Litigation which Henry Schein settled and which the court dismissed in June 2019, as described in our prior filings with the SEC, and the FTC action described above, thereby causing the plaintiff and members of the purported class to pay artificially inflated prices for Henry Schein securities. The complaint sought unspecified monetary damages and a jury trial. Pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), the court appointed lead plaintiff and lead counsel on June 22, 2018 and recaptioned the putative class action as In re Henry Schein, Inc. Securities Litigation, under the same case number. Lead plaintiff filed a consolidated class action complaint on September 14, 2018. The consolidated class action complaint asserts similar claims against the same defendants (plus Timothy Sullivan) on behalf of the same putative class of purchasers during the Class Period. It alleges that Henry Schein’s stock price was inflated during that period because Henry Schein had misleadingly portrayed its dental-distribution business “as successfully producing excellent profits while operating in a highly competitive environment” even though, “in reality, [Henry Schein] had engaged for years in collusive and anticompetitive practices in order to maintain Schein’s margins, profits, and market share.” The complaint alleges that the stock price started to fall from August 8, 2017, when the company announced below-expected financial performance that allegedly “revealed that Schein’s poor results were a product of abandoning prior attempts to inflate sales volume and margins through anticompetitive collusion,” through February 13, 2018, after the FTC filed a complaint against Benco, Henry Schein and Patterson alleging that they violated U.S. antitrust laws. The complaint alleges violations of Section 10(b) of the Exchange Act and Rule 10b-5 and Section 20(a) of the Exchange Act. On September 27, 2019, the court issued a decision partially granting and partially denying defendants’ motion to dismiss the securities action. The court dismissed all claims against Messrs. Bergman and Paladino as well as the Section 10(b) claim against Henry Schein to the extent that that claim relied on the Company’s financial results and margins to allege a material misstatement or omission. The court also dismissed the Section 10(b) claim against Henry Schein to the extent that it relied on the Company’s August 8, 2017 disclosure to allege loss causation. The court otherwise denied the motion as to Henry Schein and Mr. Sullivan. Henry Schein and Mr. Sullivan moved for partial reconsideration of the court’s decision. Pursuant to all parties’ request, the court temporarily took the motion off the calendar after it was fully briefed. The parties have agreed to a resolution of this matter, subject to various conditions, including the drafting and execution of a definitive settlement agreement and court approval. The

41

contemplated settlement, if finally approved, would have no earnings impact to the Company as all payments would be covered by insurance. Henry Schein had previously received a request under 8 Del. C. § 220 to inspect corporate books and records relating to the issues raised in the securities class action and the antitrust matters discussed above.

On May 3, 2018, a purported class action complaint, Marion Diagnostic Center, LLC, et al. v. Becton, Dickinson, and Co., et al., Case No. 3:18-cv-010509, was filed in the U.S. District Court for the Southern District of Illinois against Becton, Dickinson, and Co. (“Becton”); Premier, Inc. (“Premier”), Vizient, Inc. (“Vizient”), Cardinal Health, Inc. (“Cardinal”), Owens & Minor Inc. (“O&M”), Henry Schein, Inc., and Unnamed Becton Distributor Co-Conspirators. The complaint alleges that the defendants entered into a vertical conspiracy to force health care providers into long-term exclusionary contracts that restrain trade in the nationwide markets for conventional and safety syringes and safety IV catheters and inflate the prices of certain Becton products to above-competitive levels. The named plaintiffs seek to represent three separate classes consisting of all health care providers that purchased (i) Becton’s conventional syringes, (ii) Becton’s safety syringes, or (iii) Becton’s safety catheters directly from Becton, Premier, Vizient, Cardinal, O&M or Henry Schein on or after May 3, 2014. The complaint asserts a single count under Section 1 of the Sherman Act, and seeks equitable relief, treble damages, reasonable attorneys’ fees and costs and expenses, and pre-judgment and post-judgment interest. On June 15, 2018, an amended complaint was filed asserting the same allegations against the same parties and adding McKesson Medical-Surgical, Inc. as a defendant. On November 30, 2018, the District Court granted defendants’ motion to dismiss and entered a final judgment, dismissing plaintiffs’ complaint with prejudice. On December 27, 2018, plaintiffs appealed the District Court’s decision to the Seventh Circuit Court of Appeals. The parties argued the appeal on September 27, 2019 and are currently awaiting the Seventh Circuit’s ruling.

On May 29, 2018, an amended complaint was filed in the MultiDistrict Litigation (“MDL”) proceeding In Re National Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804) in an action entitled The County of Summit, Ohio et al. v. Purdue Pharma, L.P., et al., Civil Action No. 1:18-op-45090-DAP (“County of Summit Action”), in the U.S. District Court for the Northern District of Ohio, adding Henry Schein, Inc., Henry Schein Medical Systems, Inc. and others as defendants. Summit County alleges that manufacturers of prescription opioid drugs engaged in a false advertising campaign to expand the market for such drugs and their own market share and that the entities in the supply chain (including Henry Schein, Inc. and Henry Schein Medical Systems, Inc.) reaped financial rewards by refusing or otherwise failing to monitor appropriately and restrict the improper distribution of those drugs. On October 29, 2019, the Company was dismissed with prejudice from this lawsuit. Henry Schein, working with Summit County, donated $1 million to a foundation dedicated to making grants to programs within Summit County focused on (i) educating the community on alternative pain management treatment techniques and/or avoiding addiction; ‎(ii) supporting research into alternative pain management techniques and protocols; (iii) enabling professionals to obtain the necessary certification for a Medication Assisted Treatment (MAT) Waiver; and (iv) advancing programs and services to Summit County to deliver results and solutions to the opiate and addiction crises. Henry Schein paid $250,000 of Summit County’s expenses.

In addition to the County of Summit Action, Henry Schein and/or one or more of its affiliated companies have currently been named as a defendant in multiple lawsuits (currently less than one-hundred and twenty-five (125)), which allege claims similar to those alleged in the County of Summit Action. At this time, the only case set for trial is the action filed by Tuscon Medical Center, which is currently scheduled for a 30-day trial beginning on March 16, 2021. These actions consist of some that have been consolidated within the MDL and are currently abated for discovery purposes, and others which remain pending in state courts and are proceeding independently and outside of the MDL. Of Henry Schein’s 2018 revenue of $9.4 billion from continuing operations, sales of opioids represented less than one-tenth of 1 percent. Opioids represent a negligible part of our business. We intend to defend ourselves vigorously against these actions.

On January 29, 2019, a purported class action complaint was filed by R. Lawrence Hatchett, M.D. against Henry Schein, Inc., Patterson Co., Inc., Benco Dental Supply Co., and unnamed co-conspirators in the U.S. District Court for the Southern District of Illinois. The complaint alleges that members of the proposed class suffered antitrust injury due to an unlawful boycott, price-fixing or otherwise anticompetitive conspiracy among Henry Schein, Patterson and Benco. The complaint alleges that the alleged conspiracy overcharged Illinois dental practices,

42

orthodontic practices and dental laboratories on their purchase of dental supplies, which in turn passed on some or all of such overcharges to members of the class. Subject to certain exclusions, the complaint defines the class as “all persons residing in Illinois purchasing and/or reimbursing for dental care provided by independent Illinois dental practices purchasing dental supplies from the defendants, or purchasing from buying groups purchasing these supplies from the defendants, on or after January 29, 2015.” The complaint alleges violations of the Illinois Antitrust Act, 740 Ill. Comp. Stat. §§ 10/3(2), 10/7(2), and seeks a permanent injunction, actual damages to be determined at trial, trebled, reasonable attorneys’ fees and costs, and pre- and post-judgment interest. On February 13, 2020, the court granted our motion to dismiss for lack of standing, and dismissed the action with prejudice.

On September 30, 2019, City of Hollywood Police Officers Retirement System, individually and on behalf of all others similarly situated, filed a putative class action complaint for violation of the federal securities laws against Henry Schein, Inc., Covetrus, Inc., and Benjamin Shaw and Christine Komola (Covetrus’s then Chief Executive Officer and Chief Financial Officer, respectively) in the U.S. District Court for the Eastern District of New York, Case No. 2:19-cv-05530-FB-RLM. The complaint seeks to certify a class consisting of all persons and entities who, subject to certain exclusions, purchased or otherwise acquired Covetrus common stock from February 8, 2019 through August 12, 2019. The case relates to the Animal Health Spin-off and Merger of the Henry Schein Animal Health Business with Vets First Choice in February 2019. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 and asserts that defendants’ statements in the offering documents and after the transaction were materially false and misleading because they purportedly overstated Covetrus’s capabilities as to inventory management and supply-chain services, understated the costs of integrating the Henry Schein Animal Health Business and Vets First Choice, understated Covetrus’s separation costs from Henry Schein, and understated the impact on earnings from online competition and alternative distribution channels and from the loss of an allegedly large customer in North America just before the Separation and Merger. The complaint seeks unspecified monetary damages and a jury trial. Pursuant to the provisions of the PSLRA, the court appointed lead plaintiff and lead counsel on December 23, 2019. We intend to defend ourselves vigorously against this action.

On November 15, 2019, Frank Finazzo filed a putative shareholder derivative action on behalf of Henry Schein, Inc. against various present and former directors and officers of Henry Schein in the U.S. District Court for the Eastern District of New York, Case No. 1:19-cv-6485-LDH-JO. The named defendants in the action are Stanley M. Bergman, Steven Paladino, Timothy J. Sullivan, Barry J. Alperin, Lawrence S. Bacow, Gerald A. Benjamin, James P. Breslawski, Paul Brons, Shira Goodman, Joseph L. Herring, Donald J. Kabat, Kurt Kuehn, Philip A. Laskawy, Anne H. Margulies, Karyn Mashima, Norman S. Matthews, Mark E. Mlotek, Carol Raphael, E. Dianne Rekow, Bradley T. Sheares, and Louis W. Sullivan, with Henry Schein named as a nominal defendant. The Complaint asserts claims under the federal securities laws and state law relating to the allegations in the antitrust actions, the In re Henry Schein, Inc. Securities Litigation, and the City of Hollywood securities class action described above. The complaint seeks declaratory, injunctive, and monetary relief on behalf of Henry Schein. On January 6, 2020, counsel who filed the Finazzo case filed another, virtually identical putative shareholder derivative action on behalf of Henry Schein against the same defendants, asserting the same claims and seeking the same relief. That case, captioned Mark Sloan v. Stanley M. Bergman, et al., is also pending in the U.S. District Court for the Eastern District of New York, Case No. 1:20-cv-0076. On January 24, 2020, the court consolidated the Finazzo and Sloan cases under the new caption In re Henry Schein, Inc. Derivative Litigation, No. 1:19-cv-06485-LDH-JO, and appointed the counsel in these cases as co-lead counsel for the consolidated action. The parties have agreed to a resolution of this matter subject to various conditions, including the drafting and execution of a definitive settlement agreement and court approval. The contemplated settlement, if finally approved, would involve the adoption of certain procedures but would not involve the payment of any money except a fee to the plaintiffs’ attorneys that is immaterial.

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.

43

As of December 28, 2019, 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.

ITEM 4. Mine Safety Disclosures

Not applicable.

44

PART II

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities

Our common stock is traded on the Nasdaq Global Select Market tier of
the Nasdaq Stock Market, or Nasdaq,
under the symbol HSIC.

On February 14, 2020,7, 2023, there were approximately 26988,000 holders of record of
our common stock and the last reported
sales price was $72.13.

$87.14.

A substantially greater number of holders of our common
stock are “street name” or
beneficial holders, whose shares are held by banks, brokers and other financial
institutions.
Purchases of Equity Securities by the Issuer

Our share repurchase program, announced on March 3, 2003, originally
allowed us to repurchase up to two million
shares pre-stock splits (eight million shares post-stock splits) of our common
stock, which represented
approximately 2.3% of the shares outstanding at the commencement
of the program. As summarized in the table below, subsequent
Subsequent additional
increases totaling $3.7$4.5 billion, authorized by our Board of Directors,
to the repurchase program provide for a total
of $3.8$4.6 billion (including $400 million authorized on August 17, 2022) of shares
of our common stock to be
repurchased under this program.

 

Date of

 

Amount of Additional

 

 

Authorization

 

Repurchases Authorized

 

 

June 21, 2004

 

$

100,000,000

 

 

October 31, 2005

 

 

100,000,000

 

 

March 28, 2007

 

 

100,000,000

 

 

November 16, 2010

 

 

100,000,000

 

 

August 18, 2011

 

 

200,000,000

 

 

April 18, 2012

 

 

200,000,000

 

 

November 12, 2012

 

 

300,000,000

 

 

December 9, 2013

 

 

300,000,000

 

 

December 4, 2014

 

 

300,000,000

 

 

November 30, 2015

 

 

400,000,000

 

 

October 18, 2016

 

 

400,000,000

 

 

September 15, 2017

 

 

400,000,000

 

 

December 12, 2018

 

 

400,000,000

 

 

October 30, 2019

 

 

400,000,000

 

As of December 28, 2019, 31, 2022,
we had repurchased approximately $3.5$4.5 billion of common stock (74,363,289 (87,180,669
shares)
under these initiatives, with $275.0$115 million available for future common stock share repurchases.

45

TableOn February 8, 2023, our Board of Contents

Directors authorized the repurchase
of up to an additional $400 million in shares

of our common stock.

The following table summarizes repurchases of our common stock
under our stock repurchase program during the
fiscal quarter ended December 28, 2019:

 

 

 

 

 

 

 

 

Total Number

 

Maximum Number

 

 

 

Total

 

 

 

 

of Shares

 

of Shares

 

 

 

Number

 

Average

 

Purchased as Part

 

that May Yet

 

 

 

of Shares

 

Price Paid

 

of Our Publicly

 

Be Purchased Under

Fiscal Month

 

Purchased (1)

 

Per Share

 

Announced Program

 

Our Program (2)

9/29/19 through 11/02/19

 

-

 

$

-

 

 

 

7,503,954

11/03/19 through 11/30/19

 

795,000

 

 

69.40

 

795,000

 

6,093,247

12/01/19 through 12/28/19

 

2,101,656

 

 

68.91

 

2,101,656

 

4,130,374

 

 

2,896,656

 

 

 

 

2,896,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

All repurchases were executed in the open market under our existing publicly announced authorized program. This table excludes shares withheld from employees to satisfy minimum tax withholding requirements for equity-based transactions.

 

 

 

 

 

 

 

 

 

 

 

(2)

The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the

 

closing price of our common stock at that time.

31, 2022:

Total Number
Maximum Number
Total
of Shares
of Shares
Number
Average
Purchased as Part
that May Yet
of Shares
Price Paid
of Our Publicly
Be Purchased Under
Fiscal Month
Purchased (1)
Per Share
Announced Program
Our Program (2)
9/25/2022 through 10/29/2022
-
-
-
5,703,693
10/30/2022 through 11/26/2022
1,249,083
$
76.29
1,249,083
3,741,485
11/27/2022 through 12/31/2022
2,333,467
81.30
2,333,467
1,439,841
3,582,550
3,582,550
(1)
All repurchases were executed in the open market under our existing publicly announced authorized program.
(2)
The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the
closing price of our common stock at that time.
This table excludes shares withheld from employees to satisfy minimum tax
withholding requirements for equity-based transactions.
Dividend Policy

We have not declared any cash or stock dividends on our common stock during fiscal years 20192022 or 2018. 2021.
We
currently do not anticipate declaring any cash or stock dividends on our common
stock in the foreseeable future.
We intend to retain earnings to finance the expansion of our business and for general corporate purposes, including
our share repurchase program.
Any declaration of dividends will be at the discretion of our Board of
Directors and
will depend upon the earnings, financial condition, capital requirements,
level of indebtedness, contractual
restrictions with respect to payment of dividends and other factors.

46

hsic-20221231p42i0
hsic-20221231p42i1
hsic-20221231p42i2
hsic-20221231p42i3

42

$50
$100
$150
$200
$250
$300
December
2017
December
2018
December
2019
December
2020
December
2021
December
2022
Henry Schein, Inc.
Dow Jones US Health Care Index
NASDAQ Composite Index
Stock Performance Graph

The graph below compares the cumulative total stockholder return
on $100 invested, assuming the reinvestment of
all dividends, on December 27, 2014,30, 2017, the last trading day before the
beginning of our 20152018 fiscal year, through the
end of our 20192022 fiscal year with the cumulative total return on $100
invested for the same period in the Dow Jones
U.S. Health Care Index and the Nasdaq Stock Market Composite Index.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL
RETURN

Chart 1 

ASSUMES $100 INVESTED ON DECEMBER 27, 2014

ASSUMES DIVIDENDS REINVESTED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 27,

 

December 26,

 

December 31,

 

December 30,

 

December 29,

 

December 28,

 

 

2014

 

2015

 

2016

 

2017

 

2018

 

2019

Henry Schein, Inc.

 

$

100.00

 

$

114.34

 

$

110.43

 

$

101.73

 

$

113.43

 

$

125.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dow Jones U.S. Health

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Care Index

 

 

100.00

 

 

105.95

 

 

102.82

 

 

126.30

 

 

132.27

 

 

163.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NASDAQ Stock Market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Composite Index

 

 

100.00

 

 

106.25

 

 

114.75

 

 

148.76

 

 

143.41

 

 

198.30

47

ASSUMES $100 INVESTED ON DECEMBER 30, 2017

ASSUMES DIVIDENDS REINVESTED

December 30,
December 29,
December 28,
December 26,
December 25,
December 31,
2017
2018
2019
2020
2021
2022
Henry Schein, Inc.
$
100.00
$
111.49
$
122.98
$
121.58
$
138.37
$
147.48
Dow Jones U.S. Health
Care Index
100.00
104.72
129.31
147.48
183.33
176.40
NASDAQ Stock Market
Composite Index
100.00
96.41
133.30
191.21
235.27
158.65
ITEM 6.
[Reserved]

ITEM 6. Selected Financial Data

The following selected financial data, with respect to our financial position and results of operations for each of the five fiscal years in the period ended December 28, 2019, set forth below, has been derived from, should be read in conjunction with and is qualified in its entirety by reference to, our consolidated financial statements and notes thereto. The selected financial data presented below should also be read in conjunction with ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and ITEM 8, “Financial Statements and Supplementary Data.”

 

Years ended

 

December 28,

 

December 29,

 

December 30,

 

December 31,

 

December 26,

 

2019

 

2018

 

2017

 

2016

 

2015

 

(in thousands, except per share data)

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

9,985,803

 

$

9,417,603

 

$

8,883,438

 

$

8,218,885

 

$

7,650,755

Gross profit

 

3,090,886

 

 

2,910,747

 

 

2,746,662

 

 

2,605,907

 

 

2,476,068

Selling, general and administrative expenses

 

2,357,920

 

 

2,217,273

 

 

2,071,576

 

 

1,975,445

 

 

1,869,351

Litigation settlements

 

-

 

 

38,488

 

 

5,325

 

 

-

 

 

-

Restructuring costs (1)

 

14,705

 

 

54,367

 

 

-

 

 

38,621

 

 

26,587

Operating income

 

718,261

 

 

600,619

 

 

669,761

 

 

591,841

 

 

580,130

Other expense, net

 

(37,954)

 

 

(63,783)

 

 

(39,967)

 

 

(18,705)

 

 

(17,904)

Income from continuing operations before taxes, equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in earnings of affiliates and noncontrolling interests

 

680,307

 

 

536,836

 

 

629,794

 

 

573,136

 

 

562,226

Income taxes (2)

 

(159,515)

 

 

(107,432)

 

 

(308,975)

 

 

(169,311)

 

 

(170,113)

Equity in earnings of affiliates

 

17,900

 

 

21,037

 

 

15,293

 

 

17,110

 

 

13,300

Net gain (loss) on sale of equity investments (3)

 

186,769

 

 

-

 

 

(17,636)

 

 

-

 

 

-

Net income from continuing operations

 

725,461

 

 

450,441

 

 

318,476

 

 

420,935

 

 

405,413

Income (loss) from discontinued operations

 

(6,323)

 

 

111,685

 

 

140,817

 

 

135,460

 

 

118,014

Net income

 

719,138

 

 

562,126

 

 

459,293

 

 

556,395

 

 

523,427

Less: Net income attributable to noncontrolling interests

 

(24,770)

 

 

(19,724)

 

 

(25,304)

 

 

(19,651)

 

 

(19,705)

Less: Net (income) loss attributable to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests from discontinued operations

 

366

 

 

(6,521)

 

 

(27,690)

 

 

(29,966)

 

 

(24,664)

Net income attributable to Henry Schein, Inc.

$

694,734

 

$

535,881

 

$

406,299

 

$

506,778

 

$

479,058

Amounts attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

700,691

 

 

430,717

 

 

293,172

 

 

401,284

 

 

385,708

Discontinued operations

 

(5,957)

 

 

105,164

 

 

113,127

 

 

105,494

 

 

93,350

Net income attributable to Henry Schein, Inc.

$

694,734

 

$

535,881

 

$

406,299

 

$

506,778

 

$

479,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

4.74

 

$

2.82

 

$

1.87

 

$

2.48

 

$

2.33

Diluted

 

4.69

 

 

2.80

 

 

1.85

 

 

2.45

 

 

2.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.04)

 

$

0.69

 

$

0.72

 

$

0.65

 

$

0.56

Diluted

 

(0.04)

 

 

0.68

 

 

0.72

 

 

0.64

 

 

0.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

4.70

 

$

3.51

 

$

2.59

 

$

3.14

 

$

2.89

Diluted

 

4.65

 

 

3.49

 

 

2.57

 

 

3.10

 

 

2.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

147,817

 

 

152,656

 

 

156,787

 

 

161,641

 

 

165,687

Diluted

 

149,257

 

 

153,707

 

 

158,208

 

 

163,723

 

 

168,250

43

48

 

 

Years ended

 

 

December 28,

 

December 29,

 

December 30,

 

December 31,

 

December 26,

 

 

2019

 

2018

 

2017

 

2016

 

2015

 

 

(in thousands)

Net Sales by Market Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Health care distribution (4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dental

 

$

6,415,865

 

$

6,347,998

 

$

6,047,811

 

$

5,554,296

 

$

5,275,405

Medical

 

 

2,973,586

 

 

2,661,166

 

 

2,497,994

 

 

2,337,661

 

 

2,072,915

Total health care distribution

 

 

9,389,451

 

 

9,009,164

 

 

8,545,805

 

 

7,891,957

 

 

7,348,320

Technology and value-added services (5)

 

 

515,085

 

 

408,439

 

 

337,633

 

 

326,928

 

 

302,435

Total excluding Corporate TSA revenues

 

 

9,904,536

 

 

9,417,603

 

 

8,883,438

 

 

8,218,885

 

 

7,650,755

Corporate TSA revenues (6)

 

 

81,267

 

 

-

 

 

-

 

 

-

 

 

-

Total

 

$

9,985,803

 

$

9,417,603

 

$

8,883,438

 

$

8,218,885

 

$

7,650,755

 

 

As of

 

 

December 28,

 

December 29,

 

December 30,

 

December 31,

 

December 26,

 

 

2019

 

2018

 

2017

 

2016

 

2015

 

 

 

(in thousands)

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

7,151,101

 

$

8,500,527

 

$

7,863,995

 

$

6,811,763

 

$

6,580,775

Long-term debt

 

 

622,908

 

 

980,344

 

 

884,227

 

 

689,626

 

 

439,830

Redeemable noncontrolling interests

 

 

287,258

 

 

219,724

 

 

465,584

 

 

285,567

 

 

266,435

Stockholders' equity

 

 

3,630,137

 

 

3,541,788

 

 

2,824,410

 

 

2,800,804

 

 

2,886,814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Restructuring costs for the year ended December 28, 2019 consist primarily of severance costs, including severance pay and benefits of $13.8 million and facility closing costs of $0.9 million. Restructuring costs for the year ended December 29, 2018 consist primarily of severance costs, including severance pay and benefits of $50.2 million, facility closing costs of $3.2 million and other costs of $1.0 million. Restructuring costs for the year ended December 31, 2016 consist primarily of severance costs, including severance pay and benefits of $33.8 million, facility closing costs of $3.2 million and other costs of $1.6 million. Restructuring costs for the year ended December 26, 2015 consist primarily of severance costs, including severance pay and benefits of $20.3 million, facility closing costs of $4.9 million and other costs of $1.4 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Plans of Restructuring” herein and the consolidated financial statements and related notes contained in ITEM 8.

(2)

In 2018 we recorded (a) a $10.0 million net credit to income tax representing a change in our estimate of the transition tax on deemed repatriated foreign earnings, (b) a one-time income tax charge of $3.9 million to income tax as a result of a reorganization of legal entities related to Henry Schein One, (c) an income tax credit of $13.9 million ($10.6 million attributable to Henry Schein, Inc.) resulting from a legal entity reorganization outside of the United States and (d) a one-time income tax charge of $3.1 million as a result of the reorganization of legal entities completed in preparation for the Animal Health Spin-off. In 2017 we recorded a one-time income tax charge of $140 million related to the transition tax on deemed repatriated foreign earnings and a one-time income tax charge of $3.0 million for the revaluation of deferred taxes associated with U.S. tax reform legislation. In 2015, we recorded a $6.3 million income tax benefit related to a favorable response to a tax petition, which allowed us to conclude that it is was more likely than not that certain unrecognized tax benefits, which had been previously reserved, would be realized.

(3)

During the fourth quarter of 2019, we sold an equity investment in Hu-Friedy Mfg. Co., LLC, a manufacturer of dental instruments and infection prevention solutions. Our investment was non-controlling, we were not involved in running the business and had no representation on the board of directors. During the fourth quarter of 2019, we also sold certain other equity investments.

During 2017 we sold our equity ownership in E4D Technologies resulting in a loss of approximately $17.6 million. There was no tax benefit recognized related to this loss.

(4)

Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

(5)

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.

(6)

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 we expect to continue through August 2020.

49

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of
Operations

Cautionary Note Regarding Forward-Looking Statements

In accordance with the “Safe Harbor” provisions of the Private 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,
“intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,” “to
“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
this Annual Report on Form 10-K, and in particular the risks discussed under
the caption “Risk Factors” in Item 1A
of this report and those that may be discussed in other documents we
file with the Securities and Exchange
Commission (SEC).

Forward looking statements include the overall impact of the Novel Coronavirus
Disease 2019
(COVID-19) on us, our 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”)
products 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
supply chain disruptions will
adversely impact our business, the impact of integration and restructuring
programs as well as of any future
acquisitions, general economic conditions including exchange rates,
inflation and recession, and more generally
current expectations regarding performance in current and future periods.
Forward looking statements also include
the (i) our ability to have continued access to a variety of COVID-19
test types, expectations regarding COVID-19
test sales, demand and inventory levels, 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 us 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: effects of a highly competitive risks associated with COVID-19
and consolidating market; increased competition by third party commerce sites;any variants thereof, as well as other disease
outbreaks, epidemics, pandemics, or similar wide-spread public health concerns
and other natural disasters; our
dependence on third parties for the manufacture and supply of our products;
our dependence upon sales personnel, customers, suppliersability to develop or acquire and manufacturers;
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; legal, regulatory, compliance,
cybersecurity, financial and tax risks associated with acquisitions, dispositions and joint ventures; certain provisions
in our dependencegoverning documents that may discourage third-party acquisitions
of us; adverse changes in supplier rebates
or other purchasing incentives; risks related to the sale of corporate brand
products; effects of a highly competitive
(including, without limitation, competition from third-party online commerce
sites) and consolidating market; the
repeal or judicial prohibition on our senior management; fluctuationsimplementation of the Affordable Care Act; changes in quarterly earnings; 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 and domestic macro-economic conditions; risks associated with currency fluctuations; risks associated with
and political conditions, including inflation, deflation, recession, fluctuations
in energy pricing and economic uncertainty; disruptions in financial markets; volatilitythe value of the market price of our common stock;
U.S. dollar as compared to foreign currencies, and changes in the health care industry; implementation of health care laws;to other economic
indicators, international trade
agreements, potential trade barriers and terrorism; failure to comply with regulatory requirements existing
and data privacy laws; risks associated with our global operations;future regulatory
requirements; risks associated with the Coronavirus; risks associatedEU Medical Device Regulation; failure
to comply with the United Kingdom’s withdrawal from the European Union; transitional challenges associated with acquisitions, dispositionslaws and joint ventures, including theregulations
relating to health care fraud or other laws and regulations; failure to achieve anticipated synergies/benefits; financialcomply with
laws and regulations relating to
the collection, storage and processing of sensitive personal information
or standards in electronic health records or
transmissions; changes in tax legislation; risks associated with acquisitions, dispositionsrelated to product liability, intellectual property and joint ventures; other claims;
litigation risks;
new or unanticipated litigation developments and the status of litigation
matters; the dependence on our continued product development, technical support and successful marketing in the technology segment; our dependence on third parties for certain technologically advanced components; risks from disruption to our information systems;associated
with customs policies or legislative import restrictions; cyberattacks
or other privacy or data security breaches; certain provisionsrisks
associated with our global operations; our dependence on our senior management,
employee hiring and retention,
and our relationships with customers, suppliers and manufacturers;
and disruptions in our governing documents that may discourage third-party acquisitions of us; and changes in tax legislation. financial markets.
The order
in which these factors appear should not be construed to indicate their
relative importance or priority.

44
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.

statements except as

required by law.
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) (www.henryschein.com)
and the social media channels identified on the Newsroom page of our website.

Recent Developments

The COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains and created
significant volatility and disruption of global financial markets in
2020 and 2021.
The impact of COVID-19 had a
material adverse effect on our business, results of operations and cash flows in 2020.
During the year ended
December 25, 2021, patient traffic levels returned to levels approaching pre-pandemic
levels.
Demand for dental
products and certain medical products throughout 2021 was driven
by sales of PPE and COVID-19 test kits.
During the year ended December 31, 2022 we experienced a decrease
in the sales volume of PPE and COVID-19
test kits.
The volatility in sales of COVID-19 test kits has moderated, albeit at a significantly
lower level of sales
compared with 2021, resulting in us recording an inventory obsolescence
reserve of $17 million for COVID-19 test
kits during the year ended December 31, 2022.
While the U.S. economy has recently experienced inflationary
pressures and strengthening of the U.S dollar, their
impacts have not been material to our results of operations in the
fourth quarter or full year ended December 31,
2022, and we currently expect moderating of 2019, we sold aninflation and foreign currency
fluctuations.
Though inflation impacts
both our revenues and costs, the depth and breadth of our product portfolio
often allows us to offer lower-cost
national brand solutions or corporate brand alternatives to our more
price-sensitive customers who are unable to
absorb price increases, thus positioning us to protect our gross profit.
Our consolidated financial statements reflect estimates and assumptions
made by us that affect, among other things,
our goodwill, long-lived asset and definite-lived intangible asset valuation;
inventory valuation; equity investment
valuation; assessment of the annual effective tax rate; valuation of deferred income
taxes and income tax
contingencies; the allowance for doubtful accounts; hedging activity; supplier
rebates; measurement of
compensation cost for certain share-based performance awards and cash
bonus plans; and pension plan
assumptions.
Due to the significant uncertainty surrounding the future impact
of COVID-19, our judgments
regarding estimates and impairments could change in Hu-Friedy Mfg. Co., LLC,the future.
There is an ongoing risk that the COVID-19
pandemic may again have a manufacturermaterial adverse effect on our business, results of dental instruments operations
and infection prevention solutions. Our investment was non-controlling, we were not involved in running the businesscash flows and had no representation on the board of directors. During the fourth quarter of 2019, we also sold certain other equity investments. In aggregate, the sales of these investments resultedmay
result in a pre-tax gainmaterial adverse effect on our financial condition and liquidity.
However, the extent of approximately $250.2 million and an after-tax gain of approximately $186.8 million.

the potential

50

impact cannot be reasonably estimated at this time.

On February 7, 2019 (the “Distribution Date”), we completed the separation (the “Separation”) and subsequent merger of our animal45

Executive-Level Overview
Henry Schein, Inc. is a solutions company for health business (the “Henry Schein Animal Health Business”) with Direct Vet Marketing, Inc. (d/b/a Vets First Choice, “Vets First Choice”) (the “Merger”). This was accomplished care professionals powered
by a seriesnetwork of transactions among us, Vets First Choice, Covetrus, Inc. (f/k/a HS Spinco, Inc. “Covetrus”), a wholly owned subsidiary of ours prior to the Distribution Date,people and HS Merger Sub, Inc., a wholly owned subsidiary of Covetrus (“Merger Sub”). In connection with the Separation, we contributed, assigned and transferred to Covetrus certain applicable assets, liabilities and capital stock or other ownership interests relating to the Henry Schein Animal Health Business. On the Distribution Date, we received a tax-free distribution of $1,120 million from Covetrus pursuant to certain debt financing incurred by Covetrus. On the Distribution Date and prior to the Animal Health Spin-off, Covetrus issued shares of Covetrus common stock to certain institutional accredited investors (the “Share Sale Investors”) for $361.1 million (the “Share Sale”). The proceeds of the Share Sale were paid to Covetrus and distributed to us. Subsequent to the Share Sale, we distributed, on a pro rata basis, all of the shares of the common stock of Covetrus held by us to our stockholders of record as of the close of business on January 17, 2019 (the “Animal Health Spin-off”). After the Share Sale and Animal Health Spin-off, Merger Sub consummated the Merger whereby it merged with and into Vets First Choice, with Vets First Choice surviving the Merger as a wholly owned subsidiary of Covetrus. Immediately following the consummation of the Merger, on a fully diluted basis, (i) approximately 63% of the shares of Covetrus common stock were (a) owned by our stockholders and the Share Sale Investors, and (b) held by certain employees of the Henry Schein Animal Health Business (in the form of certain equity awards), and (ii) approximately 37% of the shares of Covetrus common stock were (a) owned by stockholders of Vets First Choice immediately prior to the Merger, and (b) held by certain employees of Vets First Choice (in the form of certain equity awards). After the Separation and the Merger, we no longer beneficially owned any shares of Covetrus common stock and, following the Distribution Date, will not consolidate the financial results of Covetrus for the purpose of our financial reporting. Following the Separation and the Merger, Covetrus was an independent, publicly traded company on the Nasdaq Global Select Market.

Executive-Level Overview

technology.
We believe we are the world’s
largest provider of health care products and services primarily to office-basedoffice-
based dental and medical practitioners. practitioners, as well as alternate sites of care.
We
serve more than 1one million customers
worldwide including dental practitioners, and laboratories, and physician practices, and
ambulatory surgery centers, 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 8790 years of experience distributing health
care products.

We are headquartered in Melville, New York,
employ more than 19,000approximately 22,000 people (of which more than 9,400approximately
10,700 are based outside of the United States) and have operations or
affiliates in 3132 countries 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, the Netherlands, New Zealand, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Arab Emirates and the United Kingdom.

territories.

Our
broad global footprint has evolved over time through our organic success as well as
through contribution from
strategic acquisitions.
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
While our primary go-to-market strategy is in our capacity as a distributor, we also allows usmarket and sell under
our own
corporate brand portfolio of cost-effective, high-quality consumable merchandise products,
and manufacture certain
dental specialty products in the areas of implants, orthodontics and endodontics.
We
have achieved scale in these
global businesses primarily through acquisitions as manufacturers of these
products typically do not utilize a
distribution channel to provide convenient ordering and rapid, accurate and complete order fulfillment.

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.

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.
The health care distribution reportable segment, aggregatescombining our global dental and
medical operating segments. This segment segments,
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 products and vitamins. Our global dental group serves office-based dental practitioners, dental laboratories, schools and other institutions. Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions.

51

Our global technology and value-added services groupbusiness provides software, technology

and other value-added
services to health care practitioners.
Our technology groupbusiness offerings include practice management software
systems for dental and medical practitioners.
Our value-added practice solutions include practice consultancy,
education, revenue cycle management and financial services on a non-recourse
basis, e-services, practice
technology, network and hardware services, as well as 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 corporate brand 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.
46
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 uncertainty, particularly impacting overallcontinued 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.

services, supply chain challenges and labor

challenges, as rates of infection fluctuate, new
strains or variants of COVID-19 emerge and spread, governments adapt their approaches
to combatting the virus,
and local conditions change across geographies.
As a result, we expect to see continued volatility.
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 regardapproach 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.

52

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
47
infrastructure to include a focus on building relationships with decision
makers who do not reside in the office-basedoffice-
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.

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,Database, between 2022 and 2032, the 45 and older
population is expected to grow by approximately 11%.
Between 2022 and 2042, this age group is expected to grow
by approximately 21%.
This compares with expected total U.S. population growth
rates of approximately 6%
between 2022 and 2032 and approximately 12% between 2022 and 2042.
According to the U.S. Census Bureau’s International Database, in 20192022 there were more than six and a half`are approximately seven 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 41%27% 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 2018-2027”Data” indicating
that total national health care spending reached
approximately $3.6$4.3 trillion in 2018,2021, or 17.7%18.3% 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 $6.0$6.2 trillion in 2027, approximately 19.4%2028, or 19.7% of the nation’s projected gross domestic product.

Government

Certain of our businesses involve the distribution of pharmaceuticals and medical devices, and in this regard we are subject to extensive local, state, federal and foreign governmental laws and regulations applicable to the distribution and sale of pharmaceuticals and medical devices. Additionally, government and private insurance programs fund a large portion of the total cost of medical care, and there has been an emphasis on efforts to control medical costs, including laws and regulations lowering reimbursement rates for pharmaceuticals, medical devices, and/or medical treatments or services. Also, many of these laws and regulations are subject to change and may impact our financial performance. In addition, our

Our businesses are generally subject to numerous other laws and regulations that could
impact our financial performance, including securities, antitrust, anti-bribery
and anti-kickback, customer interaction transparency, data privacy, data security and other laws and regulations. Failurefailure to comply with lawsuch laws or regulations could have a
material adverse effect on our business.

Health Care Reform

The United States Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010 (the “Health Care Reform Law”) increased federal oversight

See “
” for a discussion of private health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost of health care generally, to reduce fraud and abuse, and to provide access to increased health coverage.

53

The Health Care Reform Law included a 2.3% excise tax on domestic sales of many medical devices by manufacturers and importers that was to begin in 2013 and a fee on branded prescription drugs and biologics. The fee on branded prescription drugs and biologics was implemented in 2011. However, subsequent federal laws, had suspended the imposition of the medical device excise tax through December 31, 2019, and the Further Consolidated Appropriations Act, 2020, signed into law on December 20, 2019, has permanently repealed the medical device excise tax. The Health Care Reform Law has also materially expanded the number of individuals in the United States with health insurance. The Health Care Reform Law has faced ongoing legal challenges, including litigation seeking to invalidate some of or all of the law or the manner in which it has been implemented.

In addition, the President is seeking to repeal and replace the Health Care Reform Law. Repeal and replace legislation has been passed in the House of Representatives, but did not obtain the necessary votes in the Senate. Subsequently, the President has affirmed his intention to repeal and replace the Health Care Reform Law and has taken a number of administrative actions to materially weaken it, including, without limitation, by permitting the use of less robust plans with lower coverage and eliminating “premium support” for insurers providing policies under the Health Care Reform Law. On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Tax Act”), which contains a broad range of tax reform provisions that impact the individual and corporate tax rates, international tax provisions, income tax add-back provisions and deductions, and which also repealed the individual mandate of the Health Care Reform Law. Further, in December 2019, the Fifth Circuit ruled that the mandate within the Health Care Reform Law requiring that people buy health insurance was unconstitutional, though the ruling will likely be appealed. The Fifth Circuit remanded the remainder of the case pertaining to the viability of the remainder of the Health Care Reform Law, in the absence of the individual mandate, to the District Court of the Northern District of Texas. Any outcome of these cases that changes the Health Care Reform Law, could have a significant impact on the U.S. health care industry. The uncertain status of the Health Care Reform Law affects our ability to plan.

A Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, imposes annual reporting and disclosure requirements for drug and device manufacturers and distributors with regard to payments or other transfers of value made to certain covered recipients (including physicians, dentists and teaching hospitals), and for such manufacturers and distributors and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. CMS publishes information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities. Amendments expanded the law to also require reporting, effective January 1, 2022, of payments or other transfers of value to physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and certified nurse-midwives, and this new requirement will be effective for data collected beginning in calendar year 2021.

Under the Physician Payment Sunshine Act, we are required to collect and report detailed information regarding certain financial relationships we have with covered recipients such as physicians, dentists and teaching hospitals. We believe that we are substantially compliant with applicable Physician Payment Sunshine Act requirements. The Physician Payment Sunshine Act pre-empts similar state reporting laws, although we or our subsidiaries may be required to report under certain state transparency laws that address circumstances not covered by the Physician Payment Sunshine Act, and some of these state laws, as well as the federal law, can be ambiguous. We are also subject to foreign regulations requiring transparency of certain interactions between suppliers and their customers. While we believe we have substantially compliant programs and controls in place to comply with these requirements, our compliance with these rules imposes additional costs on us.

Another notable Medicare health care reform initiative, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), enacted on April 16, 2015, established a new payment framework, called the Quality Payment Program, which modifies certain Medicare payments to “eligible clinicians,” including physicians, dentists and other practitioners. Under MACRA, certain eligible clinicians are required to participate in Medicare through the Merit-Based Incentive Payment System (“MIPS”) or Advanced Alternative Payment Models (“APMs”). MIPS generally consolidated three programs (the physician quality reporting system, the value-based payment modifier and the Medicare electronic health record (“EHR”) program) into a single program in which Medicare

54

reimbursement to eligible clinicians includes both positive and negative payment adjustments that take into account quality, promoting interoperability, cost and improvement activities. Advanced APMs generally involve higher levels of financial and technology risk. The first MIPS performance year was 2017, and the data collected in the first performance year determines payment adjustments that began January 1, 2019. MACRA standards continue to evolve, and represent a fundamental change in physician reimbursement that is expected to provide substantial financial incentives for physicians to participate in risk contracts, and to increase physician information technology and reporting obligations. The implications of the implementation of MACRA are uncertain and will depend on future regulatory activity and physician activity in the marketplace. MACRA may encourage physicians to move from smaller practices to larger physician groups or hospital employment, leading to a consolidation of a portion of our customer base. Although we believe that we are positioned to capitalize on this consolidation trend, there can be no assurances that we will be able to successfully accomplish this.

Recently, there has been increased scrutiny on drug pricing and concurrent efforts to control or reduce drug costs by Congress, the President, and various states, including that several related bills have been introduced at the federal level. Such legislation, if enacted, could have the potential to impose additional costs on our business.

Health Care Fraud

Certain of our businesses are subject to federal and state (and similar foreign) health care fraud and abuse, referral and reimbursement laws and regulations with respect to their operations. Some of these laws, referred to as “false claims laws,” prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to federal, state and other health care payers and programs. Other laws, referred to as “anti-kickback laws,” prohibit soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering, purchasing, leasing or arranging for, or recommending ordering, purchasing or leasing of, items or services that are paid for by federal, state and other health care payers and programs.

The fraud and abuse laws and regulations have been subject to varying interpretations, as well as heightened enforcement activity over the past few years, and significant enforcement activity has been the result of “relators” who serve as whistleblowers by filing complaints in the name of the United States (and if applicable, particular states) under federal and state false claims laws, and who may receive up to 30% of total government recoveries. Penalties under fraud and abuse laws may be severe. For example, under the federal False Claims Act, violations may result in treble damages, plus civil penalties of up to $22,927 per claim, as well as exclusion from federal health care programs and criminal penalties. Most states have adopted similar state false claims laws, and these state laws have their own penalties which may be in addition to federal False Claims Act penalties. With respect to “anti-kickback laws,” violations of, for example, the federal Anti-Kickback Law may result in civil penalties of up to $102,522 for each violation, plus up to three times the total amount of remuneration offered, paid, solicited or received, as well as exclusion from federal health care programs and criminal penalties. Notably, effective October 24, 2018, a new federal anti-kickback law (the “Eliminating Kickbacks in Recovery Act of 2018”) enacted in connection with broader addiction services legislation, may impose criminal penalties for kickbacks involving clinical laboratory services, regardless of whether the services at issue involved addiction services, and regardless of whether the services were reimbursed by a federal health care program or by a commercial health insurer. Furthermore, the Health Care Reform Law significantly strengthened the federal False Claims Act and the federal Anti-Kickback Law provisions, clarifying that a federal Anti-Kickback Law violation can be a basis for federal False Claims Act liability.

With respect to measures of this type, the United States government (among others) has expressed concerns about financial relationships between suppliers on the one hand and physicians and dentists on the other. As a result, we regularly review and revise our marketing practices as necessary to facilitate compliance.

We also are subject to certain United States and foreign laws and regulations concerning the conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, German anti-corruption laws and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, which have been the focus of increasing enforcement activity globally in recent years.

55

Failure to comply with fraud and abuse laws and regulations could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse effect on our business. Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations or incur substantial defense and settlement expenses. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs. In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing the risk of noncompliance.

While we believe that we are substantially compliant with applicable fraud and abuse laws and regulations and have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes ingovernmental activity

that may affect our services or marketing practices in response to changes in applicable law or interpretation of laws, could have a material adverse effect on our business.

Operating, Security and Licensure Standards

Certain of our businesses involve the distribution of pharmaceuticals and medical devices, and in this regard we are subject to various local, state, federal and foreign governmental laws and regulations applicable to the distribution of pharmaceuticals and medical devices. Among the United States federal laws applicable to us are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended (“FDC Act”), and Section 361 of the Public Health Service Act. We are also subject to comparable foreign regulations.

The FDC Act and similar foreign laws generally regulate the introduction, manufacture, advertising, labeling, packaging, storage, handling, reporting, marketing and distribution of, and record keeping for, pharmaceuticals and medical devices shipped in interstate commerce, and states may similarly regulate such activities within the state. Section 361 of the Public Health Service Act, which provides authority to prevent the introduction, transmission or spread of communicable diseases, serves as the legal basis for the United States Food and Drug Administration’s (“FDA”) regulation of human cells, tissues and cellular and tissue-based products, also known as “HCT/P products.”

The Federal Drug Quality and Security Act of 2013 brought about significant changes with respect to pharmaceutical supply chain requirements. Title II of this measure, known as the Drug Supply Chain Security Act (“DSCSA”), is being phased in over a period of ten years, and is intended to build a national electronic, interoperable system to identify and trace certain prescription drugs as they are distributed in the United States. The law’s track and trace requirements applicable to manufacturers, wholesalers, repackagers and dispensers (e.g., pharmacies) of prescription drugs took effect in January 2015, and continues to be implemented. The DSCSA product tracing requirements replace the former FDA drug pedigree requirements and pre-empt certain state requirements that are inconsistent with, more stringent than, or in addition to, the DSCSA requirements.

The DSCSA also establishes certain requirements for the licensing and operation of prescription drug wholesalers and third party logistics providers (“3PLs”), and includes the eventual creation of national wholesaler and 3PL licenses in cases where states do not license such entities. The DSCSA requires that wholesalers and 3PLs distribute drugs in accordance with certain standards regarding the recordkeeping, storage and handling of prescription drugs. The DSCSA requires wholesalers and 3PLs to submit annual reports to the FDA, which include information regarding each state where the wholesaler or PL is licensed, the name and address of each facility and contact information. According to FDA guidance, states are pre-empted from imposing any licensing requirements that are inconsistent with, less stringent than, directly related to, or covered by the standards established by federal law in this area. Current state licensing requirements concerning wholesalers will remain in effect until the FDA issues new regulations as directed by the DSCSA.

We believe that we are substantially compliant with applicable DSCSA requirements.

56

The Food and Drug Administration Amendments Act of 2007 and the Food and Drug Administration Safety and Innovation Act of 2012 amended the FDC Act to require the FDA to promulgate regulations to implement a unique device identification (“UDI”) system. The UDI rule phased in the implementation of the UDI regulations over seven years, generally beginning with the highest-risk devices (i.e., Class III medical devices) and ending with the lowest-risk devices. Most compliance dates were reached as of September 24, 2018, with a final set of requirements for low-risk devices being reached on September 24, 2022, which will complete the phase in. The UDI regulations require “labelers” to include unique device identifiers (“UDIs”), with a content and format prescribed by the FDA and issued under a system operated by an FDA-accredited issuing agency, on the labels and packages of medical devices, and to directly mark certain devices with UDIs. The UDI regulations also require labelers to submit certain information concerning UDI-labeled devices to the FDA, much of which information is publicly available on an FDA database, the Global Unique Device Identification Database. The UDI regulations and subsequent FDA guidance regarding the UDI requirements provide for certain exceptions, alternatives and time extensions. For example, the UDI regulations include a general exception for Class I devices exempt from the Quality System Regulation (other than record-keeping requirements and complaint files). Regulated labelers include entities such as device manufacturers, repackagers, reprocessors and relabelers that cause a device’s label to be applied or modified, with the intent that the device will be commercially distributed without any subsequent replacement or modification of the label, and include certain of our businesses.

We believe that we are substantially compliant with applicable UDI requirements.

Under the Controlled Substances Act, as a distributor of controlled substances, we are required to obtain and renew annually registrations for our facilities from the United States Drug Enforcement Administration (“DEA”) permitting us to handle controlled substances. We are also subject to other statutory and regulatory requirements relating to the storage, sale, marketing, handling, reporting, record keeping and distribution of such drugs, in accordance with the Controlled Substances Act and its implementing regulations, and these requirements have been subject to heightened enforcement activity in recent times. We are subject to inspection by the DEA.

Certain of our businesses are also required to register for permits and/or licenses with, and comply with operating and security standards of, the DEA, the FDA, the United States Department of Health and Human Services, and various state boards of pharmacy, state health departments and/or comparable state agencies as well as comparable foreign agencies, and certain accrediting bodies depending on the typeresults of operations and locationfinancial condition.

48
Results of Operations
Refer to Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in
our 2021 Annual Report on Form 10-K for management’s discussion and analysis of financial condition and results
of operations or install, maintain or repair equipment. In addition, Section 301 of the National Organ Transplant Act, and a number of comparable state laws, impose civil and/or criminal penalties for the transfer of certain human tissue (for example, human bone products) for valuable consideration, while generally permitting payments for the reasonable costs incurred in procuring, processing, storing and distributing that tissue. We are also subjectfiscal year 2021 compared to foreign government regulation of such products. The DEA, the FDA and state regulatory authorities have broad inspection and enforcement powers, including the ability to suspend or limit the distribution of products by our distribution centers, seize or order the recall of products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations. Foreign regulations subject us to similar foreign enforcement powers. Furthermore, compliance with legal requirements has required and may in the future require us to institute voluntary recalls of products we sell, which could result in financial losses and potential reputational harm. Our customers are also subject to significant federal, state, local and foreign governmental regulation.

In the European Union, the EU Medical Device Regulation No. 2017/745 (“EU MDR”) will apply as of May 26,fiscal year 2020. The EU MDR significantly modifies and intensifies the regulatory compliance requirements for the medical device industry as a whole. In particular, the EU MDR imposes stricter requirements for confirmation that a product meets the regulatory requirements, including regarding a product’s clinical evaluation and a company’s quality systems and for the distribution, marketing and sale of medical devices, including post-market surveillance. Medical devices that have been assessed and/or certified under the EU Medical Device Directive may continue to be placed on the market until 2024 (or until the expiry of their certificates, if applicable and earlier); however, requirements regarding the distribution, marketing and sale including quality systems and post-market surveillance

57

are required to be observed by manufacturers, importers and distributors as of the application date.

Furthermore, compliance with legal requirements has required and may in the future require us to institute voluntary recalls of products we sell, which could result in financial losses and potential reputational harm. Our customers are also subject to significant federal, state, local and foreign governmental regulation.

Certain of our businesses are subject to various additional federal, state, local and foreign laws and regulations, including with respect to the sale, transportation, storage, handling and disposal of hazardous or potentially hazardous substances, and safe working conditions.

Certain of our businesses also maintain contracts with governmental agencies and are subject to certain regulatory requirements specific to government contractors.

Antitrust

The U.S. federal government, most U.S. states and many foreign countries have antitrust laws that prohibit certain types of conduct deemed to be anti-competitive. Violations of antitrust laws can result in various sanctions, including criminal and civil penalties. Private plaintiffs also could bring civil lawsuits against us in the United States for alleged antitrust law violations, including claims for treble damages.

Regulated Software; Electronic Health Records

The FDA has become increasingly active in addressing the regulation of computer software and digital health products intended for use in health care settings. The 21st Century Cures Act (the “Cures Act”), signed into law on December 13, 2016, among other things amended the medical device definition to exclude certain software from FDA regulation, including clinical decision support software that meets certain criteria. On September 27, 2019, the FDA issued a suite of guidance documents on digital health products, which incorporated applicable Cures Act standards, including regarding the types of clinical decision support tools and other software that are exempt from regulation by the FDA as medical devices. Certain of our businesses involve the development and sale of software and related products to support physician and dental practice management, and it is possible that the FDA or foreign government authorities could determine that one or more of our products is a medical device, which could subject us or one or more of our businesses to substantial additional requirements with respect to these products.

In addition, the European Parliament and the Council of the European Union have adopted a new pan-European General Data Protection Regulation (“GDPR”), effective from May 25, 2018, which increased privacy rights for individuals in Europe (“Data Subjects”), including individuals who are our customers, suppliers and employees. The GDPR extended the scope of responsibilities for data controllers and data processors and generally imposes increased requirements and potential penalties on companies, such as us, that offer goods or services to Data Subjects or monitor their behavior (including by companies based outside of Europe). Noncompliance can result in penalties of up to the greater of EUR 20 million, or 4% of global company revenues. Individual member states may impose additional requirements and penalties regarding certain matters such as employee personal data. With respect to the personal data it protects, the GDPR requires, among other things, company accountability, consents from Data Subjects or other acceptable legal basis to process the personal data, breach notifications within 72 hours, data integrity and security, and fairness and transparency regarding the storage, use or other processing of the personal data. The GDPR also, provides rights to Data Subjects relating to the modification, erasure and transporting of the personal data. In the United States, the California Consumer Privacy Act (“CCPA”), which increases the privacy protections afforded California residents and was signed into law on June 28, 2018, became effective January 1, 2020. The CCPA generally requires companies, such as us, to institute additional protections regarding the collection use and disclosure of certain personal information of California residents. The California Attorney General released proposed CCPA regulations on October 10, 2019, and is required to adopt final regulations on or before July 1, 2020. In addition to providing for enforcement by the California Attorney General, the CCPA also provides for a private right of action. Entities in violation of the CCPA may be liable for substantial civil penalties. Other states, as well as the federal government, have increasingly considered the adoption of similarly expansive personal privacy laws, also backed by substantial civil penalties for non-compliance. While we

58

believe we have substantially compliant programs and controls in place to comply with the GDPR and CCPA requirements, our compliance with these measures is likely to impose additional costs on us, and we cannot predict whether the interpretations of the requirements, or changes in our practices in response to new requirements or interpretations of the requirements, could have a material adverse effect on our business.

We also sell products and services that health care providers, such as physicians and dentists, use to store and manage patient medical or dental records. These customers, and we, are subject to laws, regulations and industry standards, such as the federal Health Insurance Portability and Accountability Act of 1996, as amended, and implementing regulations (“HIPAA”) and the Payment Card Industry Data Security Standards, which require the protection of the privacy and security of those records, and our products may also be used as part of these customers’ comprehensive data security programs, including in connection with their efforts to comply with applicable privacy and security laws. Perceived or actual security vulnerabilities in our products or services, or the perceived or actual failure by us or our customers who use our products or services to comply with applicable legal or contractual data privacy and security requirements, may not only cause us significant reputational harm, but may also lead to claims against us by our customers and/or governmental agencies and involve substantial fines, penalties and other liabilities and expenses and costs for remediation.

Various federal initiatives involve the adoption and use by health care providers of certain electronic health care records systems and processes. The initiatives include, among others, programs that incentivize physicians and dentists, through Medicare’s MIPS, to use certified EHR technology in accordance with certain evolving requirements, including regarding quality, promoting interoperability, cost and improvement activities. Qualification for the MIPS incentive payments requires the use of EHRs that are certified as having certain capabilities designated in standards adopted by CMS and by the Office of the National Coordinator for Health Information Technology of the Department of Health and Human Services (“ONC”). These standards have been subject to change.

Certain of our businesses involve the manufacture and sale of certified EHR systems and other products linked to MIPS and other incentive programs. In order to maintain certification of our EHR products, we must satisfy these changing governmental standards. If any of our EHR systems do not meet these standards, yet have been relied upon by health care providers to receive federal incentive payments, as noted above, we are exposed to risk, such as under federal health care fraud and abuse laws, including the False Claims Act. For example, on May 31, 2017, the U.S. Department of Justice announced a $155 million settlement and 5-year corporate integrity agreement involving a vendor of certified EHR systems, based on allegations that the vendor, by misrepresenting capabilities to the certifying body, caused its health care provider customers to submit false Medicare and Medicaid claims for meaningful use incentive payments in violation of the False Claims Act. While we believe we are substantially in compliance with such certifications and with applicable fraud and abuse laws and regulations, and we have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our practices in response to changes in applicable law or interpretation of laws, could have a material adverse effect on our business. Moreover, in order to satisfy our customers, our products may need to incorporate increasingly complex reporting functionality. Although we believe we are positioned to accomplish this, the effort may involve increased costs, and our failure to implement product modifications, or otherwise satisfy applicable standards, could have a material adverse effect on our business.

Other health information standards, such as regulations under HIPAA, establish standards regarding electronic health data transmissions and transaction code set rules for specific electronic transactions, such as transactions involving claims submissions to third party payers. Certain of our businesses provide electronic practice management products that must meet these requirements. Failure to abide by electronic health data transmission standards could expose us to breach of contract claims, substantial fines, penalties, and other liabilities and expenses, costs for remediation and harm to our reputation.

Additionally, as electronic medical devices are increasingly connected to each other and to other technology, the ability of these connected systems safely and effectively to exchange and use exchanged information becomes increasingly important. For example on September 6, 2017, the FDA issued final guidance to assist industry in

59

identifying specific considerations related to the ability of electronic medical devices to safely and effectively exchange and use exchanged information. As a medical device manufacturer, we must manage risks including those associated with an electronic interface that is incorporated into a medical device.

There may be additional legislative or regulatory initiatives in the future impacting health care.

E-Commerce

Electronic commerce solutions have become an integral part of traditional health care supply and distribution relationships. Our distribution business is characterized by rapid technological developments and intense competition. The continuing advancement of online commerce requires us to cost-effectively adapt to changing technologies, to enhance existing services and to develop and introduce a variety of new services to address the changing demands of consumers and our customers on a timely basis, particularly in response to competitive offerings.

Through our proprietary, technologically based suite of products, we offer customers a variety of competitive alternatives. We believe that our tradition of reliable service, our name recognition and large customer base built on solid customer relationships, position us well to participate in this significant aspect of the distribution business. We continue to explore ways and means to improve and expand our Internet presence and capabilities, including our online commerce offerings and our use of various social media outlets.

60

Results of Operations

The following tables summarize the significant components of our operating

results and cash flows from continuing
operations:
Years
Ended
December 31,
December 25,
December 26,
2022
2021
2020
Operating results:
Net sales
$
12,647
$
12,401
$
10,119
Cost of sales
8,816
8,727
7,303
Gross profit
3,831
3,674
2,816
Operating expenses:
Selling, general and administrative
2,771
2,634
2,086
Depreciation and amortization
182
180
163
Restructuring and integration costs
131
8
32
Operating income
$
747
$
852
$
535
Other expense, net
$
(26)
$
(21)
$
(35)
Gain on sale of equity investments, net of tax
-
7
2
Net income from continuing operations for each
566
660
419
Income from discontinued operations, net of the three years ended tax
-
-
1
Net income attributable to Henry Schein, Inc.
538
631
404
Years
Ended
December 28, 2019, 31,
December 29, 2018 and 25,
December 30, 2017 (in thousands):

 

 

 

 

Years Ended

 

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

 

2019

 

2018

 

2017

Operating results:

 

 

 

 

 

 

 

 

 

Net sales

 

$

9,985,803

 

$

9,417,603

 

$

8,883,438

Cost of sales

 

 

6,894,917

 

 

6,506,856

 

 

6,136,776

 

Gross profit

 

 

3,090,886

 

 

2,910,747

 

 

2,746,662

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

2,357,920

 

 

2,217,273

 

 

2,071,576

 

Litigation settlements

 

 

-

 

 

38,488

 

 

5,325

 

Restructuring costs

 

 

14,705

 

 

54,367

 

 

-

 

 

Operating income

 

$

718,261

 

$

600,619

 

$

669,761

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

$

(37,954)

 

$

(63,783)

 

$

(39,967)

Net gain (loss) on sale of equity investments

 

 

186,769

 

 

-

 

 

(17,636)

Net income from continuing operations

 

 

725,461

 

 

450,441

 

 

318,476

Income (loss) from discontinued operations

 

 

(6,323)

 

 

111,685

 

 

140,817

Net income attributable to Henry Schein, Inc.

 

 

694,734

 

 

535,881

 

 

406,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

 

2019

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows:

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities from continuing operations

 

$

820,478

 

$

450,955

 

$

375,035

Net cash used in investing activities from continuing operations

 

 

(422,309)

 

 

(164,324)

 

 

(212,741)

Net cash used in financing activities from continuing operations

 

 

(363,351)

 

 

(402,173)

 

 

(73,944)

26,

2022
2021
2020
Cash flows:
Net cash provided by operating activities from continuing operations
$
602
$
710
$
594
Net cash used in investing activities from continuing operations
(276)
(677)
(115)
Net cash used in financing activities from continuing operations
(315)
(333)
(182)
49
Plans of Restructuring

and Integration Costs

On July 9, 2018,August 1, 2022, we committed to ana restructuring plan focused on

funding the priorities of the strategic plan and
streamlining operations and other initiatives to increase efficiency.
We expect this initiative to rationalize our operations and provide expense efficiencies. These actions allowed us to execute on our plan to reduce our cost structure and fund new initiatives that are expected to drive future growth under our 2018 to 2020 strategic plan. This initiative resulted in the elimination of approximately 4% of our workforce and the closing of certain facilities.

The total 2019 and 2018 costs associated with the actions to complete this restructuring were $14.7 million and $54.4 million, respectively, from continuing operations, consisting primarily of severance costs. The costs associated with this restructuring are included in a separate line item, “Restructuring costs” within our consolidated statements of income.

On November 20, 2019, we committed to the contemplated initiative, intended to mitigate stranded costs associated with the Animal Health Spin-off as well as to rationalize operations and provide expense efficiencies. These activities are expected to be completed by the end of 2020. extend through

2023.
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 with respect to the total cost, or an estimate of the
amount or range of amounts that will
result in future cash expenditures.
During the year ended December 31, 2022, we recorded restructuring charges of $128
million primarily related to
severance and employee-related costs, accelerated amortization of right-of-use
lease assets, impairment of other
long-lived assets and lease exit costs.
During the three months ended December 31, 2022, in connection with our restructuring
plan, we vacated one of
the buildings at our corporate headquarters in Melville NY, which resulted in an accelerated amortization of right-
of-use lease asset of $34 million.
We will disclosealso initiated the disposal of a non-profitable US business and recorded
related costs of $49 million which primarily consisted of impairment of
intangible assets and goodwill, inventory
impairment, and severance and employee-related costs.
These expenses are included in the $128 million of
restructuring charges discussed above.
The disposal is expected to be completed in the first quarter of 2023.
On August 26, 2022, we acquired Midway Dental Supply.
In connection with this information afteracquisition, during the year
ended December 31, 2022, we determine such estimates or rangerecorded integration costs of estimates.

$3 million related

to one-time employee and other

61

costs, as well as restructuring charges of $9 million, which are included in the
$128 million of restructuring charges

discussed above.

On November 20, 2019, we committed to a contemplated restructuring
initiative intended to mitigate stranded costs
associated with the spin-off of our animal health business and to rationalize operations
and provide expense
efficiencies.
These activities were originally expected to be completed by
the end of 2020 but we extended them to
the end of 2021 in light of the changes to the business environment brought
on by the COVID-19 pandemic.
The
restructuring activities under this prior initiative were completed
in 2021.

201950

2022 Compared to 2018

2021

Net Sales

Net sales for 2019 and 2018 were as follows (in thousands):

 

 

 

 

 

 

% of

 

 

 

% of

 

Increase

 

 

 

 

2019

 

Total

 

2018

 

Total

 

$

 

%

Health care distribution (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dental

 

$

6,415,865

 

64.2

%

 

$

6,347,998

 

67.4

%

 

$

67,867

 

1.1

%

 

Medical

 

 

2,973,586

 

29.8

 

 

 

2,661,166

 

28.3

 

 

 

312,420

 

11.7

 

 

 

Total health care distribution

 

 

9,389,451

 

94.0

 

 

 

9,009,164

 

95.7

 

 

 

380,287

 

4.2

 

Technology and value-added services (2)

 

 

515,085

 

5.2

 

 

 

408,439

 

4.3

 

 

 

106,646

 

26.1

 

 

 

Total excluding Corporate TSA revenues

 

 

9,904,536

 

99.2

 

 

 

9,417,603

 

100.0

 

 

 

486,933

 

5.2

 

Corporate TSA revenues (3)

 

 

81,267

 

0.8

 

 

 

-

 

-

 

 

 

81,267

 

-

 

 

 

Total

 

$

9,985,803

 

100.0

%

 

$

9,417,603

 

100.0

%

 

$

568,200

 

6.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products 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 we expect to continue through August 2020.

follows:

% of
% of
Increase / (Decrease)
2022
Total
2021
Total
$
%
Health care distribution
(1)
Dental
$
7,473
59.1
%
$
7,544
60.8
%
$
(71)
(0.9)
%
Medical
4,451
35.2
4,210
34.0
241
5.7
Total health care distribution
11,924
94.3
11,754
94.8
170
1.4
Technology and value-added services
(2)
723
5.7
647
5.2
76
11.8
Total
$
12,647
100.0
$
12,401
100.0
$
246
2.0
The 6.0% increase incomponents of our sales growth were as follows:
Local Currency Growth
Total Sales
Growth
Foreign
Exchange
Impact
Total Local
Currency
Growth
Acquisition
Growth
Extra Week
Impact
Local Internal
Growth
Health care distribution
(1)
Dental Merchandise
(2.6)
%
(3.5)
%
0.9
%
1.3
%
1.0
%
(1.4)
%
Dental Equipment
4.7
(4.6)
9.3
0.6
2.3
6.4
Total Dental
(0.9)
(3.7)
2.8
1.2
1.2
0.4
Medical
5.7
(0.3)
6.0
2.4
1.5
2.1
Total Health Care Distribution
1.4
(2.5)
3.9
1.6
1.3
1.0
Technology and value-added services
(2)
11.8
(1.5)
13.3
5.4
0.8
7.1
Total
2.0
(2.4)
4.4
1.8
1.3
1.3
Note: Percentages for Net Sales; Gross Profit; Selling, General and Administrative; Other Expense, Net; and Income Taxes are based on
actual values and may not recalculate due to rounding.
(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 products and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
Global Sales
Global net sales for the year ended December 28, 2019 includes31, 2022 increased 2.0% based
upon the components presented in the
table above.
We estimate that sales for the year ended
December 31, 2022 of PPE products and COVID-19 test kits
were approximately $1,245 million, an increaseestimated decrease of 7.7% local currency growth (4.4%34.7% versus the prior
year.
Excluding PPE products
and COVID-19 test kits,
the estimated increase in internally generated revenue and 3.3% growth from acquisitions) partially offset by a decrease of 1.7% related to foreign currency exchange. Excluding sales of products under the transition services agreement with Covetrus, our net sales increased 5.2%, including local currency growth of 6.9% (3.5% increase in internally generated revenue and 3.4% growth from acquisitions) partially offset by a decrease of 1.7% related to foreign currency exchange.

The 1.1% increase in dentalsales was 6.7%.

Dental
Dental net sales for the year ended December 28, 2019 includes an increase of 3.4%31, 2022 decreased 0.9% based
upon the components presented in the
table above.
Our sales growth in local currencies (2.0%currency for dental merchandise decreased
primarily due to a decrease in
PPE product sales.
We estimate that global dental sales for the year ended December 31, 2022 of PPE products
were approximately $447 million, an estimated decrease of 32.5% versus the prior
year.
Excluding PPE products,
the estimated increase in internally generated revenue and 1.4% growth from acquisitions) partially offset by a decrease of 2.3% related to foreign currency exchange. The 3.4% increase in local currency dental sales
was 3.8%.
Dental equipment sales wasin local
currency increased in both our North American and international markets,
primarily due to increases in dental equipment sales and service revenuesincreased demand.
51
Medical
Medical net sales for the year ended December 28, 2019 includes31, 2022 increased 5.7% based
upon the components presented in
the table above.
Globally, we estimate our medical business recorded sales of approximately $798 million of
sales
of PPE products
and COVID-19 test kits for the year ended December 31, 2022, an increaseestimated
decrease of 11.9% local currency growth (7.0%
approximately 27.4% compared to the prior year.
Excluding PPE products and COVID-19 test kits, the estimated
increase in internally generated revenuelocal currency medical sales was
2.1%.
Te
chnology and 4.9% growth from acquisitions) partially offset by a decrease of 0.2% related to foreign currency exchange.

The 26.1% increase in technologyvalue-added services

Technology and value-added services net sales for the year ended December 28, 2019 includes an increase31, 2022 increased 11.8% based upon
the components presented in the table above.
During the year ended December 31, 2022, the trend for transactional
software sales improved as we increased the number of 27.0% local currency growth (4.3% increase in internally generated revenueusers, generating demand
for our sales cycle management
solutions, and 22.7% growthalso from acquisitions) partially offset by a decrease of 0.9% related to foreign currency exchange.

cloud-based solutions that drive practice efficiency and patient engagement.

62

Table of Contents

Gross Profit

Gross profit and gross margins for 2019 and 2018margin percentages by segment and in total were as follows (in thousands):

 

 

 

 

 

Gross

 

 

 

Gross

 

Increase

 

 

 

2019

 

Margin %

 

2018

 

Margin %

 

$

 

%

Health care distribution

 

$

2,717,574

 

28.9

%

 

$

2,628,767

 

29.2

%

 

$

88,807

 

3.4

%

Technology and value-added services

 

 

370,887

 

72.0

 

 

 

281,980

 

69.0

 

 

 

88,907

 

31.5

 

 

Total excluding Corporate TSA revenues

 

 

3,088,461

 

31.2

 

 

 

2,910,747

 

30.9

 

 

 

177,714

 

6.1

 

Corporate TSA revenues

 

 

2,425

 

3.0

 

 

 

-

 

-

 

 

 

2,425

 

-

 

 

Total

 

$

3,090,886

 

31.0

 

 

$

2,910,747

 

30.9

 

 

$

180,139

 

6.2

 

follows:

Gross
Gross
Increase
2022
Margin %
2021
Margin %
$
%
Health care distribution
$
3,357
28.2
%
$
3,239
27.6
%
$
118
3.6
%
Technology and value-added services
474
65.5
435
67.2
39
9.0
Total
$
3,831
30.3
$
3,674
29.6
$
157
4.3
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.

In connection with the completion of the Animal Health Spin-off (see Note 2 for additional details), we entered into a transition services agreement with Covetrus, pursuant to which Covetrus purchases certain products from us. The agreement provides that these products will be sold to Covetrus at a mark-up that ranges from 3% to 6% of our product cost to cover handling costs. We expect these sales to continue through August 2020.

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 pharmaceuticalour corporate brand 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. average total gross profit margins of all products.
With respect to customer mix, sales to our large-grouplarge-
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.

volumes.

Health care distribution gross profit increased $88.8 million, or 3.4%, for the year ended December 28, 2019 comparedprimarily due to the prior year period. Health care distribution gross profit margin decreased to 28.9% for the year ended December 28, 2019 from 29.2% for the comparable prior year period. increase
in net sales discussed above.
The
overall increase in our health care distribution gross profit iswas attributable to $73.1
$67 million additionalof gross profit from
acquisitions and $30.9 million gross profit increase from growth in internally generated revenue. These increases were partially offset by a $15.2 million decline in gross profit due to the decrease in the gross margin rates.

expansion, mainly as a result of increased sales

mix of higher-margin products.
Technology and value-added services gross profit increased $88.9 million, or 31.5%, for the year ended December 28, 2019 compared to the prior year period. Technology and value-added servicesas a result of an increase in gross profit margin increased to 72.0% for the year ended December 28, 2019 from 69.0% for the comparable prior year period. Acquisitions accounted for $80.2 million of ourinternally
generated sales and gross profit increase withinfrom acquisitions, partially offset by a decrease in
gross margin rates.
Gross
margin rates decreased primarily due to lower gross margins of recently acquired companies in
the business
services sector and our technologycontinued investment in product development and value-added services segment for the year ended December 28, 2019 compared to the prior year period and also accounted for the increase in the gross profit margin. The remaining increase of $8.7 million in our technology and value-added services segment gross profit was primarily attributable to growth in internally generated revenue.

customer
service.

63

Selling, General and Administrative

Selling,52

Operating Expenses
Operating expenses (consisting of selling, general and administrative expenses
expenses; depreciation and amortization,
restructuring and integration costs) by segment and in total for 2019 and 2018 were as follows (in thousands):

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

 

 

Respective

 

 

 

Respective

 

Increase / (Decrease)

 

 

 

2019

 

Net Sales

 

2018

 

Net Sales

 

$

 

%

Health care distribution

 

$

2,128,595

 

22.7

%

 

$

2,137,779

 

23.7

%

 

$

(9,184)

 

(0.4)

%

Technology and value-added services

 

 

244,030

 

47.4

 

 

 

172,349

 

42.2

 

 

 

71,681

 

41.6

 

 

Total

 

$

2,372,625

 

23.8

 

 

$

2,310,128

 

24.5

 

 

$

62,497

 

2.7

 

Selling, generalfollows:

% of
% of
Respective
Respective
Increase
2022
Net Sales
2021
Net Sales
$
%
Health care distribution
$
2,738
23.0
%
$
2,512
21.4
%
$
226
9.0
%
Technology and administrativevalue-added services
346
47.8
310
48.0
36
11.4
Total
$
3,084
24.4
$
2,822
22.8
$
262
9.3
The net increase in operating expenses (includingis attributable to the
following:
Change in
Restructuring and
Integration Costs
Increase in
Operating Costs
Acquisitions
Total
Health care distribution
$
121
$
39
$
66
$
226
Technology and value-added services
2
20
14
36
Total
$
123
$
59
$
80
$
262
The increase in restructuring and integration costs inis attributable to our disposal
of an unprofitable business,
acceleration of amortization of right-of-use lease assets related
to the years ended December 28, 2019exit from one of the properties at our
corporate headquarters, severance costs, and December 29, 2018, and litigation settlementsother costs relating to
the exit of some facilities.
The increase in the year ended December 29, 2018) increased $62.5
operating costs includes a $20 million or 2.7%, to $2,372.6 million for the year ended December 28, 2019 from the comparable prior year period. The $9.2 million decrease in selling, general and administrative expensesintangible assets impairment charge within
our health care distribution
segment, forand increases in payroll and payroll related costs and travel and convention
expenses in both of our
reportable segments.
While the year ended December 28, 2019U.S. economy has recently experienced inflationary
pressures and strengthening of
the U.S dollar, their impacts have not been material to our results of operations.
Other Expense, Net
Other expense, net was as compared to the prior year period was attributable to follows:
Variance
2022
2021
$
%
Interest income
$
17
$
7
$
10
158.9
%
Interest expense
(44)
(28)
(16)
(59.1)
Other, net
1
-
1
n/a reduction of $73.7 million of operating costs (primarily due to $38.5 million of litigation settlement costs recorded in 2018 and a $39.7 million decrease in restructuring costs) partially offset by $64.5 million of additional costs from acquired companies. The $71.7 million increase in selling, general and administrative expenses within our technology and value-added services segment for the year ended December 28, 2019 as compared to the prior year period was attributable to $70.5 million of additional costs from acquired companies and $1.2 million of additional operating costs. As a percentage of
Other expense, net sales, selling, general and administrative expenses decreased to 23.8% from 24.5% for the comparable prior year period.

As a component of total selling, general and administrative expenses, selling expenses

$
(26)
$
(21)
$
(5)
(26.0)
Interest income increased $69.2 million, or 4.8%, to $1,497.3 million for the year ended December 28, 2019 from the comparable prior year period. As a percentage of net sales, selling expenses decreased to 15.0% from 15.2% for the comparable prior year period.

As a component of total selling, general and administrative expenses, general and administrative expenses decreased $6.8 million, or 0.8%, to $875.3 million for the year ended December 28, 2019 from the comparable prior year period primarily due to $38.5 million of litigation settlement costs recorded in 2018 and a $39.7 million decrease in restructuring costs partially offset by increases in general and administrative expenses. As a percentage of net sales, general and administrative expenses decreased to 8.8% from 9.4% for the comparable prior year period.

Other Expense, Net

Other expense, net for the years ended 2019 and 2018 was as follows (in thousands):

 

 

 

 

 

 

 

Variance

 

 

 

2019

 

2018

 

$

 

%

Interest income

 

$

15,757

 

$

15,491

 

$

266

 

1.7

%

Interest expense

 

 

(50,792)

 

 

(76,016)

 

 

25,224

 

33.2

 

Other, net

 

 

(2,919)

 

 

(3,258)

 

 

339

 

10.4

 

 

Other expense, net

 

$

(37,954)

 

$

(63,783)

 

$

25,829

 

40.5

 

increased interest rates.

Interest expense decreased $25.2 millionincreased primarily due to decreased
increased borrowings under our bank credit lines.

and increased interest rates.

64

Table of Contents

Income Taxes

For the year ended December 28, 2019,31, 2022, our effective tax rate was 23.4%23.5% compared to 20.0% 23.8%
for the prior year
period.
In 2019,2022, the difference between our effective tax rate wasand the federal statutory tax rate primarily impacted by
relates to
state and foreign income taxes and interest expense.
In 2018,2021, the difference between our effective tax rate and the
federal statutory tax rate was primarily impacted by a reduction in the estimate of our transition tax associated with the Tax Act, tax charges and credits associated with legal entity reorganizations outside the U.S., anddue to state and foreign income
taxes and interest expense.

Within our consolidated balance sheets, transition tax of $9.9 million was included in “Accrued taxes” for 2019 and 2018, and $94.9 million and $104.2 million were included in “Other liabilities” for 2019 and 2018 respectively.

Net

Gain on Sale of Equity Investments

On October 1, 2019, we sold an equity investment in Hu-Friedy Mfg. Co., LLC, a manufacturer of dental instruments and infection prevention solutions. Our investment was non-controlling, we were not involved in runningInvestment

In the business and had no representation on the board of directors.

During the fourththird quarter of 2021, we received contingent proceeds of $10 million

from the 2019 we also sold certain other investments. In aggregate,sale of Hu-Friedy
resulting in the salesrecognition of these investments resulted in a pretax gain of approximately $250.2 million and an additional after-tax gain of approximately $186.8 $7
million.

No further proceeds are expected from this

65

sale.

2018 Compared53

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.
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 2017

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.
We finance our business primarily through cash generated from our operations, revolving credit facilities and debt
placements.
Please see
for further information.
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.
Net Sales

Net salescash provided by operating activities was $602 million for 2018 and 2017 were as follows (in thousands):

 

 

 

 

 

 

% of

 

 

 

% of

 

Increase

 

 

 

 

2018

 

Total

 

2017

 

Total

 

$

 

%

Health care distribution (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dental

 

$

6,347,998

 

67.4

%

 

$

6,047,811

 

68.1

%

 

$

300,187

 

5.0

%

 

Medical

 

 

2,661,166

 

28.3

 

 

 

2,497,994

 

28.1

 

 

 

163,172

 

6.5

 

 

 

Total health care distribution

 

 

9,009,164

 

95.7

 

 

 

8,545,805

 

96.2

 

 

 

463,359

 

5.4

 

Technology and value-added services (2)

 

 

408,439

 

4.3

 

 

 

337,633

 

3.8

 

 

 

70,806

 

21.0

 

 

 

Total

 

$

9,417,603

 

100.0

%

 

$

8,883,438

 

100.0

%

 

$

534,165

 

6.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the

year ended December 31, 2022, compared to net
cash from continuing operations provided by operating activities of $710 million
for the prior year.
The 6.0%net change
of $108 million was primarily due to unfavorable net cash used by our working
capital accounts, net of
acquisitions, driven by an impact of timing of payments which
resulted in an increase in other current assets and
relative decreases in accounts payable and accrued expenses, partially offset by the
relative year over year impact
of inventory increases (2021 increase was more significant than the
2022 increase).
Net cash used in investing activities was $276 million for the year
ended December 31, 2022, compared to $677
million for the prior year.
The net change of $401 million was primarily attributable to decreased payments
for
equity investments and business acquisitions.
Net cash used in financing activities was $315 million for the year
ended December 31, 2022, compared to net cash
used in financing activities of $333 million for the prior year.
The net change of $18 million was primarily due to
increased net borrowings from debt, partially offset by increased repurchases of common
stock.
54
The following table summarizes selected measures of liquidity and capital
resources:
December 31,
December 25,
2022
2021
Cash and cash equivalents
$
117
$
118
Working
capital
(1)
1,764
1,537
Debt:
Bank credit lines
$
103
$
51
Current maturities of long-term debt
6
11
Long-term debt
1,040
811
Total debt
$
1,149
$
873
Leases:
Current operating lease liabilities
$
73
$
76
Non-current operating lease liabilities
275
268
(1)
Includes $327 million and $138 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitization at December 31, 2022 and December 25, 2021, respectively.
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
increased to 41.9 days as of December 31, 2022
from 41.8 days as of December 25, 2021.
During the years ended December 31, 2022 and December
25, 2021, we
wrote off approximately $10 million and $8 million, respectively, of fully reserved accounts receivable against our
trade receivable reserve.
Our inventory turns from operations was 4.7 as of December
31, 2022 and 5.2 as of
December 25, 2021.
Our working capital accounts may be impacted by current and
future economic conditions.
Contractual obligations
The following table summarizes our contractual obligations related
to fixed and variable rate long-term debt and
finance lease obligations, including interest (assuming a weighted
average interest rate of 4.3%), as well as
inventory purchase commitments and operating lease obligations
as of December 31, 2022:
Payments due by period
< 1 year
2 - 3 years
4 - 5 years
> 5 years
Total
Contractual obligations:
Long-term debt, including interest
$
41
$
508
$
134
$
538
$
1,221
Inventory purchase commitments
5
8
8
-
21
Operating lease obligations
82
122
79
98
381
Transition tax obligations
19
23
-
-
42
Finance lease obligations, including interest
5
4
1
1
11
Total
$
152
$
665
$
222
$
637
$
1,676
For information relating to our debt please see
.
55
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
19 years, some of
which may include options to extend the leases for up to 15 years.
As of December 31, 2022, our right-of-use
assets related to operating leases were $284 million and our current and non-current
operating lease liabilities were
$73 million and $275 million, respectively.
Please see
for further information.
Stock Repurchases
On March 8, 2021, we announced the reinstatement of our share repurchase
program, which had been temporarily
suspended in April of 2020.
From March 3, 2003 through December 31, 2022, we repurchased $4.5
billion, or 87,180,669 shares, under our
common stock repurchase programs, with $115 million available as of December 31, 2022 for future
common stock
share repurchases.
On February 8, 2023, our Board of Directors authorized the repurchase
of up to an additional $400 million in shares
of our common stock.
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our consolidated subsidiaries have
the right, at certain times, to require us
to acquire their ownership interest in those entities.
Accounting Standards Codification (“ASC”) Topic 480-10 is
applicable for noncontrolling interests where we are or may be required
to purchase all or a portion of the
outstanding interest in a consolidated subsidiary from the noncontrolling
interest holder under the terms of a put
option contained in contractual agreements.
As of December 31, 2022 and December 25, 2021, our balance
for
redeemable noncontrolling interests was $576 million and $613 million, respectively.
Please see
for further information.
Unrecognized tax benefits
As more fully disclosed in
of “Notes to Consolidated Financial Statements,” we cannot
reasonably estimate the timing of future cash flows related to the unrecognized
tax benefits, including accrued
interest, of $94 million as of December 31, 2022.
Critical Accounting Policies and Estimates
Our accounting policies are more fully described in
of the consolidated financial statements.
The preparation of consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and
related disclosures of contingent assets and liabilities.
We base our estimates on historical data, when available,
experience, industry and market trends, and on various other assumptions
that are believed to be reasonable under
the circumstances, the combined results of which form the basis for
making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
We believe that the estimates, judgments and
assumptions upon which we rely are reasonable based upon information
available to us at the time that these
estimates, judgments and assumptions are made.
However, by their nature, estimates are subject to various
assumptions and uncertainties.
Therefore, reported results may differ from estimates and any such differences may
be material to our consolidated financial statements.
We believe that the following critical accounting estimates, which have been discussed with the Audit Committee
of our Board of Directors, affect the significant estimates and judgments used in
the preparation of our financial
statements:
56
Inventories and Reserves
Inventories consist primarily of finished goods and are valued at
the lower of cost or net realizable value.
Cost is
determined by the first-in, first-out method for merchandise or actual cost
for large equipment and high tech
equipment.
In estimating carrying value of inventory, we consider many factors including the condition and
salability of the inventory by reviewing on-hand quantities, historical sales,
forecasted sales and market and
economic trends.
Certain of our products, specifically PPE and COVID-19 test kits, have experienced
changes in
net realizable value, due to volatility of pricing and changes in demand
for these products.
Business Combinations
The estimated fair value of acquired identifiable intangible assets (trademarks
and trade names, customer
relationships and lists, non-compete agreements and product development)
is based on critical estimates, judgments
and assumptions derived from: analysis of market conditions; discount
rates; projected cash flows; customer
retention rates; and estimated useful lives.
Please see
for further
discussion of our acquisitions.
Goodwill
Goodwill is subject to impairment analysis at least once annually as of
the first day of our fourth quarter, or if an
event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit
below its carrying value.
Such impairment analyses for goodwill require a comparison of
the fair value to the
carrying value of reporting units.
We regard our reporting units to be our operating segments: global dental,
global
medical, and technology and value-added services.
Goodwill is allocated to such reporting units, for the purposes
of preparing our impairment analyses, based on a specific identification
basis.
Application of the goodwill impairment test requires judgment, including
the identification of reporting units,
assignment of assets and liabilities that are considered shared services
to the reporting units, and ultimately the
determination of the fair value of each reporting unit.
The fair value of each reporting unit is calculated by
applying the discounted cash flow methodology and confirming with
a market approach.
There are inherent
uncertainties, however, related to fair value models, the inputs and our judgments in applying them
to this analysis.
The most significant inputs include estimation of detailed future cash flows based
on budget expectations, and
determination of comparable companies to develop a weighted average
cost of capital for each reporting unit.
On an annual basis, we prepare annual and
medium-term financial projections.
These projections are based on
input from our leadership and are presented annually to our Board of Directors.
Influences on this year's forecasted
financial information and the fair value model include: the impact of planned
strategic initiatives, the continued
integration of recent acquisitions and overall market conditions.
The estimates used to calculate the fair value of a
reporting unit change from year to year based on operating results,
market conditions, and other factors.
Our third-party valuation specialists provide inputs into our determination
of the discount rate.
The rate is
dependent on a number of underlying assumptions, including the risk-free rate,
tax rate, equity risk premium, debt
to equity ratio
and pre-tax cost of debt.
Long-term growth rates are applied to our estimation of future cash flows.
The long-term growth rates are tied to
growth rates we expect to achieve beyond the years for which we have
forecasted operating results.
We also
consider external benchmarks, and other data points which we believe are
applicable to our industry and the
composition of our global operations.
Based on our quantitative assessment for the year ended December 29, 2018 includes31, 2022,
we recorded a $20 million impairment
of goodwill relating to the disposal of an increaseunprofitable business whose
estimated fair value was lower than its
carrying value.
As part of 5.5% local currencyour analysis for the rest of the goodwill balance,
we performed a sensitivity analysis on
the discount rate and long-term growth (4.0% increaserate assumptions.
The sensitivities did not result in internally generated revenueany additional
impairment charges.
57
Definite-Lived Intangible Assets
Annually, definite-lived intangible assets such as non-compete agreements, trademarks, trade names, customer
relationships and 1.5% growth from acquisitions) lists, and product development are reviewed for impairment
indicators.
If any impairment
indicators exist, quantitative testing is performed on the asset.
The quantitative impairment model is a two-step test under which we
first calculate the recoverability of the
carrying value by comparing the undiscounted, probability-weighted value
of the projected cash flows associated
with the asset or asset group, including its estimated residual value, to
the carrying amount.
If the cash flows
associated with the asset or asset group are less than the carrying value,
we would perform a fair value assessment
of the asset, or asset group.
If the carrying amount is found to be greater than the fair value, we record an
impairment loss for the excess of book value over the fair value.
In addition, in all cases of an impairment review,
we re-evaluate the remaining useful lives of the assets and modify them,
as well as an increaseappropriate.
Although we believe our
judgments, estimates and/or assumptions used in estimating cash flows
and determining fair value are reasonable,
making material changes to such judgments, estimates and/or assumptions
could materially affect such impairment
analyses and our financial results.
During the years ended December 31, 2022, December 25, 2021
and December 26, 2020, we recorded total
impairment charges on intangible assets of 0.5% approximately $49 million ($34 million
related to foreign currency exchange.

The 5.0% increaseimpairment of

customer lists and relationships attributable to customer attrition rates being higher
than expected in dental net sales forcertain
businesses and $15 million due to the disposal of an unprofitable
business), $1 million and $20 million,
respectively.
For the year ended December 29, 2018 includes an increase of 4.2% in local currencies (3.0% increase in internally generated revenue and 1.2% growth from acquisitions) as well as an increase of 0.8% related to foreign currency exchange. The 4.2% increase in local currency sales was due to increases in dental equipment sales and service revenues of 4.5% (4.4% increase in internally generated revenue and 0.1% growth from acquisitions) and dental consumable merchandise sales growth of 4.1% (2.6% increase in internally generated revenue and 1.5% growth from acquisitions).

The 6.5% increase in medical net sales for31, 2022 impairment charges were recorded

within our health care
distribution segment.
For the yearyears ended December 29, 2018 includes an increase of 6.4% local currency growth (6.3% increase in internally generated revenue25, 2021 and 0.1% growth from acquisitions) as well as an increase of 0.1% related to foreign currency exchange.

The 21.0% increase in technology and value-added services net sales for the year ended December 29, 2018 includes an increase of 20.4% local currency growth (5.4% increase in internally generated revenue and 15.0% growth from acquisitions) as well as an increase of 0.6% related to foreign currency exchange.

26,
2020, impairment charges were

66

Table of Contents

Gross Profit

Gross profit and gross margins for 2018 and 2017 by segment and in total were as follows (in thousands):

 

 

 

 

 

Gross

 

 

 

Gross

 

Increase

 

 

 

2018

 

Margin %

 

2017

 

Margin %

 

$

 

%

Health care distribution

 

$

2,628,767

 

29.2

%

 

$

2,520,806

 

29.5

%

 

$

107,961

 

4.3

%

Technology and value-added services

 

 

281,980

 

69.0

 

 

 

225,856

 

66.9

 

 

 

56,124

 

24.8

 

 

Total

 

$

2,910,747

 

30.9

 

 

$

2,746,662

 

30.9

 

 

$

164,085

 

6.0

 

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.

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 $108.0 million, or 4.3%, for the year ended December 29, 2018 compared to the prior year period. Health care distribution gross profit margin decreased to 29.2% for the year ended December 29, 2018 from 29.5% for the comparable prior year period. The overall increase in our health care distribution gross profit is attributable to a $108.2 million gross profit increase from growth in internally generated revenue and $31.7 million is attributable to acquisitions. These increases were partially offset by a $31.9 million decline in gross profit due to the decrease in the gross margin rates.

Technology and value-added services gross profit increased $56.1 million, or 24.8%, for the year ended December 29, 2018 compared to the prior year period. Technology and value-added services gross profit margin increased to 69.0% for the year ended December 29, 2018 from 66.9% for the comparable prior year period. Acquisitions accounted for $44.0 million of our gross profit increase within our technology and value-added services segment for the year ended December 29, 2018 compared to the prior year period. The remaining increase of $12.1 million in our technology and value-added services segment gross profit was primarily attributable to growth in internally generated revenue and the increase in gross margin rates.

67

Table of Contents

Selling, General and Administrative

Selling, general and administrative expenses by segment and in total for 2018 and 2017 were as follows (in thousands):

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

 

 

Respective

 

 

 

Respective

 

Increase

 

 

 

2018

 

Net Sales

 

2017

 

Net Sales

 

$

 

%

Health care distribution

 

$

2,137,779

 

23.7

%

 

$

1,958,918

 

22.9

%

 

$

178,861

 

9.1

%

Technology and value-added services

 

 

172,349

 

42.2

 

 

 

117,983

 

34.9

 

 

 

54,366

 

46.1

 

 

Total

 

$

2,310,128

 

24.5

 

 

$

2,076,901

 

23.4

 

 

$

233,227

 

11.2

 

Selling, general and administrative expenses (including restructuring costs in 2018 and litigation settlements in 2018 and 2017) increased $233.2 million, or 11.2%, for the year ended December 29, 2018 from the comparable prior year period. The $178.9 million increase in selling, general and administrative expensesrecorded within our health care distribution segment for the year ended December 29, 2018 as compared to the prior year period was attributable to $152.1 million of additional operating costs (including an increase of $33.2 million for litigation settlements and $50.8 million of restructuring costs) and $26.8 million of additional costs from acquired companies. The $54.4 million increase in selling, general and administrative expenses within our technology and value-added services segment

segments.
Income Tax
When determining if the realization of the deferred tax asset is likely by assessing
the need for the year ended December 29, 2018 as compared to the prior year period was attributable to $43.7 milliona valuation
allowance, estimates and judgement are required.
We
consider all available evidence, both positive and negative,
including estimated future taxable earnings, ongoing planning strategies,
future reversals of additional costs from acquired companiesexisting temporary
differences and $10.7 million of additionalhistorical operating costs (including $3.6 million of restructuring costs). As a percentage of net sales, selling, general and administrative expenses increased to 24.5% from 23.4% for the comparable prior year period.

As a component of total selling, general and administrative expenses, selling expenses increased $74.4 million, or 5.5%, for the year ended December 29, 2018 from the comparable prior year period. As a percentage of net sales, selling expenses remained consistent at 15.2%.

As a component of total selling, general and administrative expenses, general and administrative expenses increased $158.8 million, or 22.0%, for the year ended December 29, 2018 from the comparable prior year period primarily due to restructuring costs of $54.4 million and an increase of $33.2 million of litigation settlements costs. As a percentage of net sales, general and administrative expenses increased to 9.4% from 8.1% for the comparable prior year period.

Other Expense, Net

Other expense, net for the years ended 2018 and 2017 was as follows (in thousands):

 

 

 

 

 

 

 

Variance

 

 

 

2018

 

2017

 

$

 

%

Interest income

 

$

15,491

 

$

12,438

 

$

3,053

 

24.5

%

Interest expense

 

 

(76,016)

 

 

(51,066)

 

 

(24,950)

 

(48.9)

 

Other, net

 

 

(3,258)

 

 

(1,339)

 

 

(1,919)

 

(143.3)

 

 

Other expense, net

 

$

(63,783)

 

$

(39,967)

 

$

(23,816)

 

(59.6)

 

Other expense, net increased $23.8 million to $63.8 million for the year ended December 29, 2018 from the comparable prior year period. Interest income increased $3.1 million primarily due to increased investment and late fee income. Interest expense increased $25.0 million primarily due to increased borrowings under our bank credit lines and our private placement facilities primarily to fund acquisitions of noncontrolling interests in subsidiaries, as well as higher interest rates.

results.

68

Income Taxes

For the year ended December 29, 2018, our effective tax rate was 20.0% compared to 49.1% for the prior year period. In 2018, our effective tax rate was primarily impacted by a reduction in the estimate of our transition tax associated with the Tax Act, tax charges and credits associated with legal entity reorganizations outside the U.S., and state and foreign income taxes and interest expense. In 2017, our effective tax rate was primarily impacted by the Tax Act, the adoption of Accounting Standards Update (“ASU”) No. 2016-09, “Stock Compensation” (Topic 718), as well as state and foreign income taxes and interest expense.

On December 22, 2017, the U.S. government passed the Tax Act. The Tax Act is comprehensive tax legislation that implemented complexAdditionally, changes to tax laws and statutory tax rates can have an

impact on our determination.
Our intention is to evaluate the U.S. tax code including, but not limited to, the reductionrealizability of the corporate tax rate from 35% to 21%, modification of accelerated depreciation, the repeal of the domestic manufacturing deduction and changes to the limitations of the deductibility of interest. Additionally, the Tax Act moved from a global tax regime to a modified territorial regime, which requires U.S. companies to pay a mandatory one-time transition tax on historical offshore earnings that have not been repatriated to the U.S. The transition tax is payable over eight years. In the fourth quarter of 2017, we recorded provisional amounts for any items that could be reasonably estimated at the time. This included the one-time transition tax that we estimated to be $140.0 million and a net deferred tax expense of $3.0 million attributable to the revaluation of deferred taxes due to the lower enacted federal income tax rate of 21%. We completed our analysis in the year ended December 29, 2018 and recorded a net $10.0 million reduction to the one-time transition tax and an additional $1.7 million net deferred tax benefit from the revaluation of deferred taxes to reflect the new tax rate. Absent the effects of the transition tax and the revaluation of deferred tax assets quarterly.
ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in
accordance with other provisions contained within this guidance.
This topic prescribes a recognition threshold and liabilities, our effective tax rate
a measurement attribute for the year ended December 30, 2017 would have been 26.4%financial statement recognition and measurement
of tax positions taken or expected
to be taken in a tax return.
For those benefits to be recognized, a tax position must be more likely
than not to be
sustained upon examination by the taxing authorities.
The amount recognized is measured as comparedthe largest amount of
benefit that has a greater than 50% likely of being realized upon ultimate
audit settlement.
In the normal course of
business, our tax returns are subject to our actual effectiveexamination by various taxing
authorities.
Such examinations may result in
future tax rateand interest assessments by these taxing authorities for uncertain
tax positions taken in respect of 49.1%.

Within our consolidated balance sheets, transition certain

tax of $9.9 million was included in “Accrued taxes” and $104.2 million were included in “Other liabilities” matters.
Please see
for December 29, 2018.

further discussion.

The FASB Staff Q&A, Topic
740 No. 5, Accounting for Global Intangible Low-Taxed Income (“GILTI”), states
that an entity can make an accounting policy election to either recognize deferred
taxes for temporary differences
expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is
incurred.
We elected to recognize the tax on GILTI
as a period expense in the period the tax is incurred. We recorded a current tax expense for the GILTI provision of $7.6 million for the year ended December 29, 2018.

Liquidity and Capital Resources

Our principal capital requirements include 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. 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 third and fourth quarters 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.

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.

69

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.

On February 7, 2019, we completed the Animal Health Spin-off. On the Distribution Date we received a tax free distribution of $1,120 million from Covetrus, which has been used to pay down our debt, thereby generating additional debt capacity that can be used for general corporate purposes, including share repurchases and mergers and acquisitions.

Net cash provided by operating activities was $820.5 million for the year ended December 28, 2019, compared to $451.0 million for the prior year. The net change of $369.5 million was primarily attributable to an increase in net income, decreases in working capital requirements, and increased distributions from equity affiliates.

Net cash used in investing activities was $422.3 million for the year ended December 28, 2019, compared to $164.3 million for the prior year. The net change of $258.0 million was primarily due to increased payments for equity investments and business acquisitions, partially offset by increased proceeds of sales of equity investments.

Net cash used in financing activities was $363.4 million for the year ended December 28, 2019, compared to $402.2 million for the prior year. The net change of $38.8 million was primarily due to a distribution received related to the Animal Health Spin-off, proceeds from the Animal Health Share Sale, a reduction in acquisitions of noncontrolling interests in subsidiaries, and payments to the Henry Schein Animal Health Business, partially offset by increased repayments of debt related to the Animal Health Spin-off and increased repurchases of our common stock.

70

The following table summarizes selected measures of liquidity and capital resources (in thousands):

 

 

 

 

December 28,

 

December 29,

 

 

 

 

2019

 

2018

Cash and cash equivalents

 

$

106,097

 

$

56,885

Working capital (1)

 

 

1,188,133

 

 

956,393

 

 

 

 

 

 

 

 

 

Debt:

 

 

 

 

 

 

 

Bank credit lines

 

$

23,975

 

$

951,458

 

Current maturities of long-term debt

 

 

109,849

 

 

8,280

 

Long-term debt

 

 

622,908

 

 

980,344

 

 

Total debt

 

$

756,732

 

$

1,940,082

 

 

 

 

 

 

 

 

 

Leases:

 

 

 

 

 

 

 

Current operating lease liabilities

 

$

65,349

 

$

-

 

Non-current operating lease liabilities

 

 

176,267

 

 

-

 

 

 

 

 

 

 

 

 

(1)

Includes $127 million and $422 million of accounts receivable which serve as security for U.S. trade accounts receivable securitization at December 28, 2019 and December 29, 2018, respectively.

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 increased to 44.5 days as of December 28, 2019 from 43.8 days as of December 29, 2018. During the years ended December 28, 2019 and December 29, 2018, we wrote off approximately $5.9 million and $6.4 million, respectively, of fully reserved accounts receivable against our trade receivable reserve. Our inventory turns from operations were 5.0 as of December 28, 2019 and 4.5 as of December 29, 2018. Our working capital accounts may be impacted by current and future economic conditions.

Contractual obligations

The following table summarizes our contractual obligations related to fixed and variable rate long-term debt and finance lease obligations, including interest (assuming a weighted average interest rate of 3.3%), as well as inventory purchase commitments and operating lease obligations as of December 28, 2019:

 

Payments due by period (in thousands)

 

< 1 year

 

2 - 3 years

 

4 - 5 years

 

> 5 years

 

Total

Contractual obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including interest

$

132,073

 

$

250,166

 

$

130,084

 

$

337,615

 

$

849,938

Inventory purchase commitments

 

403,241

 

 

319,000

 

 

-

 

 

-

 

 

722,241

Operating lease obligations

 

70,986

 

 

97,158

 

 

45,965

 

 

51,762

 

 

265,871

Transition tax obligations

 

9,923

 

 

28,527

 

 

55,815

 

 

-

 

 

94,265

Finance lease obligations, including interest

 

1,853

 

 

2,175

 

 

587

 

 

1,117

 

 

5,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

618,076

 

$

697,026

 

$

232,451

 

$

390,494

 

$

1,938,047

71

Bank Credit Lines

Bank credit lines consisted of the following:

 

 

 

December 28,

 

December 29,

 

 

 

2019

 

2018

Revolving credit agreement

 

$

-

 

$

175,000

Other short-term bank credit lines

 

 

23,975

 

 

376,458

Committed loan associated with Animal Health Spin-off

 

 

-

 

 

400,000

Total

 

$

23,975

 

$

951,458

Revolving Credit Agreement

On April 18, 2017, we entered into a $750 million revolving credit agreement (the “Credit Agreement”), which matures in April 2022. The interest rate is based on the USD LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter. We expect that the LIBOR rate will be discontinued at some point during 2021. We expect to work with our lenders to identify a suitable replacement rate and amend our debt agreements to reflect this new reference rate accordingly. We do not believe that the discontinuation of LIBOR as a reference rate in our debt agreements will have a material adverse effect on our financial position or materially affect our interest expense. Additionally, the Credit Agreement provides, among other things, that we are required to maintain maximum leverage ratios, and contains customary representations, warranties and affirmative covenants. The Credit Agreement also contains customary negative covenants, subject to negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements. As of December 28, 2019 and December 29, 2018, the borrowings on this revolving credit facility were $0.0 million and $175.0 million, respectively. As of December 28, 2019 and December 29, 2018, there were $9.6 million and $11.2 million of letters of credit, respectively, provided to third parties under the credit facility.

Other Short-Term Credit Lines

As of December 28, 2019 and December 29, 2018, we had various other short-term bank credit lines available, of which $24.0 million and $376.5 million, respectively, were outstanding. At December 28, 2019 and December 29, 2018, borrowings under all of our credit lines had a weighted average interest rate of 3.45% and 3.30%, respectively.

Committed Loan Associated with Animal Health Spin-off

On May 21, 2018, we obtained a $400 million committed loan which matured on the earlier of (i) March 31, 2019 and (ii) the consummation of the Animal Health Spin-off. The proceeds of this loan were used, among other things, to fund our purchase of all of the equity interests in Butler Animal Health Holding Company, LLC (“BAHHC”) directly or indirectly owned by Darby Group Companies, Inc. (“Darby”) and certain other sellers pursuant to the terms of that certain Amendment to Put Rights Agreements, dated as of April 20, 2018, by and among us, Darby, BAHHC and the individual sellers party thereto for an aggregate purchase price of $365 million. As of December 29, 2018, the balance outstanding on this loan was $400 million and is included within the “Bank credit lines” caption within our consolidated balance sheet. At December 29, 2018 the interest rate on this loan was 3.38%. Concurrent with the completion of the Animal Health Spin-off on February 7, 2019, we re-paid the balance of this loan.

72

Long-term debt

Long-term debt consisted of the following:

 

 

 

December 28,

 

December 29,

 

 

 

2019

 

2018

Private placement facilities

 

$

621,274

 

$

628,189

U.S. trade accounts receivable securitization

 

 

100,000

 

 

350,000

Various collateralized and uncollateralized loans payable with interest,

 

 

 

 

 

 

 

in varying installments through 2024 at interest rates

 

 

 

 

 

 

 

ranging from 2.56% to 10.5% at December 28, 2019 and

 

 

 

 

 

 

 

ranging from 2.61% to 4.17% at December 29, 2018

 

 

6,089

 

 

6,491

Finance lease obligations (see Note 7)

 

 

5,394

 

 

3,944

Total

 

 

732,757

 

 

988,624

Less current maturities

 

 

(109,849)

 

 

(8,280)

 

Total long-term debt

 

$

622,908

 

$

980,344

 

 

 

 

 

 

 

 

Private Placement Facilities

On September 15, 2017, we increased our available private placement facilities with three insurance companies to a total facility amount of $1 billion, and extended the expiration date to September 15, 2020. These facilities 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 September 15, 2020. 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. On June 29, 2018, we amended and restated the above private placement facilities to, among other things, (i) permit the consummation of the Animal Health Spin-off and (ii) provide for the issuance of notes in Euros, British Pounds and Australian Dollars, in addition to U.S. Dollars. The agreements provide, among other things, that we maintain certain maximum leverage ratios, and contain restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal of assets and certain changes in ownership. These facilities contain make-whole provisions in the event that we pay off the facilities prior to the applicable due dates.

73

The components of our private placement facility borrowings as of December 28, 2019 are presented in the following table (in thousands):

 

 

Amount of

 

 

 

 

 

Date of

 

Borrowing

 

Borrowing

 

 

Borrowing

 

Outstanding

 

Rate

 

Due Date

September 2, 2010

 

$

100,000

 

3.79

%

 

September 2, 2020

January 20, 2012

 

 

50,000

 

3.45

 

 

January 20, 2024

January 20, 2012 (1)

 

 

21,429

 

3.09

 

 

January 20, 2022

December 24, 2012

 

 

50,000

 

3.00

 

 

December 24, 2024

June 2, 2014

 

 

100,000

 

3.19

 

 

June 2, 2021

June 16, 2017

 

 

100,000

 

3.42

 

 

June 16, 2027

September 15, 2017

 

 

100,000

 

3.52

 

 

September 15, 2029

January 2, 2018

 

 

100,000

 

3.32

 

 

January 2, 2028

Less: Deferred debt issuance costs

 

 

(155)

 

 

 

 

 

 

 

$

621,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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, and was previously scheduled to expire on April 29, 2020, has been extended to April 29, 2022. As of December 28, 2019 and December 29, 2018, the borrowings outstanding under this securitization facility were $100 million and $350 million, respectively. At December 28, 2019, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 1.90% plus 0.75%, for a combined rate of 2.65%. At December 29, 2018, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 2.66% plus 0.75%, for a combined rate of 3.41%.

We are required to pay a commitment fee of 30 basis points on the daily balance of the unused portion of the facility if our usage is greater than or equal to 50% of the facility limit or a commitment fee of 35 basis points on the daily balance of the unused portion of the facility if our usage is less than 50% of the facility limit.

Borrowings under this facility are presented as a component of Long-term debt within our consolidated balance sheet.

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 16 years, some of which may include options to extend the leases for up to 10 years. As of December 28, 2019, our right-of-use assets related to operating leases were $231.7 million and our current and non-current operating lease liabilities were $65.3 million and $176.3 million, respectively.

Stock repurchases

From March 3, 2003 through December 28, 2019, we repurchased approximately $3.5 billion, or 74,363,289 shares, under our common stock repurchase programs, with $275.0 million available as of December 28, 2019 for future common stock share repurchases.

74

Redeemable Noncontrolling interests

Some minority stockholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. ASC 480-10 is applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. The components of the change in the Redeemable noncontrolling interests for the years ended December 28, 2019, December 29, 2018 and December 30, 2017 are presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

2019

 

2018

 

2017

Balance, beginning of period

 

$

219,724

 

$

465,585

 

$

285,567

Decrease in redeemable noncontrolling interests due to

 

 

 

 

 

 

 

 

 

 

redemptions

 

 

(2,270)

 

 

(287,767)

 

 

(22,294)

Increase in redeemable noncontrolling interests due to

 

 

 

 

 

 

 

 

 

 

business acquisitions

 

 

74,865

 

 

4,655

 

 

72,291

Net income attributable to redeemable noncontrolling interests

 

 

14,838

 

 

15,327

 

 

24,513

Dividends declared

 

 

(10,264)

 

 

(8,206)

 

 

(7,680)

Effect of foreign currency translation gain (loss) attributable to

 

 

 

 

 

 

 

 

 

 

redeemable noncontrolling interests

 

 

(2,335)

 

 

(11,330)

 

 

4,530

Change in fair value of redeemable securities

 

 

(7,300)

 

 

41,460

 

 

108,658

Balance, end of period

 

$

287,258

 

$

219,724

 

$

465,585

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 statement of income.

On July 1, 2018, we closed on a joint venture with Internet Brands, a provider of web presence and online marketing software, to create a newly formed entity, Henry Schein One, LLC. The joint venture includes Henry Schein Practice Solutions products and services, as well as Henry Schein’s international dental practice management systems and the dental businesses of Internet Brands. Internet Brands holds a 26% noncontrolling interest in Henry Schein One, LLC that is accounted for within stockholders’ equity, as well as a freestanding and separately exercisable right to put its noncontrolling interest to Henry Schein, Inc. for fair value following the fifth anniversary of the effective date of the formation of the joint venture. Beginning with the second anniversary of the effective date of the formation of the joint venture, Henry Schein One will issue a fixed number of additional interests to Internet Brands through the fifth anniversary, thereby increasing Internet Brands’ ownership by approximately 7.6%. Internet Brands will also be entitled to receive a fixed number of additional interests, in the aggregate up to approximately 1.6% of the joint venture’s ownership, if certain operating targets are met by the joint venture in its fourth, fifth and sixth operating years. These additional shares are considered contingent consideration that are accounted for within stockholders’ equity; however, these shares will not be allocated any net income of Henry Schein One until the shares vest or are earned by Internet Brands. A Monte Carlo simulation was utilized to value the additional contingent interests that are subject to operating targets. Key assumptions that were applied to derive the fair value of the contingent interests include an assumed equity value of Henry Schein One, LLC at its inception date, a risk-free interest rate based on U.S. treasury yields, an assumed future dividend yield, a risk-adjusted discount rate applied to projected future cash flows, an assumed equity volatility based on historical stock price returns of a group of guideline companies, and an estimated correlation of annual cash flow returns to equity returns. As a result of this transaction with Internet Brands, we recorded $567.6 million of noncontrolling interest within stockholders’ equity.

75

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.

Unrecognized tax benefits

As more fully disclosed in Note 14 of “Notes to Consolidated Financial Statements,” we cannot reasonably estimate the timing of future cash flows related to the unrecognized tax benefits, including accrued interest, of $109.1 million as of December 28, 2019.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical data, when available, experience, industry and market trends, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, by their nature, estimates are subject to various assumptions and uncertainties. Reported results are therefore sensitive to any changes in our assumptions, judgments and estimates, including the possibility of obtaining materially different results if different assumptions were to be applied.

We believe that the following critical accounting policies, which have been discussed with the Audit Committee of the Board of Directors, affect the significant estimates and judgments used in the preparation of our financial statements:

Revenue Recognition

On December 31, 2017, we adopted ASC 606 (“Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of the adoption date. Results for reporting periods beginning after December 30, 2017 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for those periods. Our revenue recognition accounting policies applied prior to adoption of Topic 606 are outlined in the financial statements in our Annual Report on Form 10-K for the year ended December 30, 2017. The disclosures included herein reflect our accounting policies under Topic 606.

We generate revenue from the sale of dental and medical consumable products, equipment (Health care distribution revenues), software products and services and other sources (Technology and value-added services revenues). Provisions for discounts, rebates to customers, customer returns and other contra revenue adjustments are included in the transaction price at contract inception by estimating the most likely amount based upon historical data and estimates and are provided for in the period in which the related sales are recognized.

Revenue derived from the sale of consumable products is recognized at a point in time when control transfers to the customer. Such sales typically entail high-volume, low-dollar orders shipped using third-party common carriers. We believe that the shipment date is the most appropriate point in time indicating control has transferred to the customer because we have no post-shipment obligations and this is when legal title and risks and rewards of ownership transfer to the customer and the point at which we have an enforceable right to payment.

Revenue derived from the sale of equipment is recognized when control transfers to the customer. This occurs when the equipment is delivered. Such sales typically entail scheduled deliveries of large equipment primarily by equipment service technicians. Some equipment sales require minimal installation, which is typically completed at the time of delivery. Our product generally carries standard warranty terms provided by the manufacturer, however, in instances where we provide warranty labor services, the warranty costs are accrued in accordance with ASC 460 “Guarantees”.

76

Revenue derived from the sale of software products is recognized when products are shipped to customers or made available electronically. Such software is generally installed by customers and does not require extensive training due to the nature of its design. Revenue derived from post-contract customer support for software, including annual support and/or training, is generally recognized over time using time elapsed as the input method that best depicts the transfer of control to the customer.

Revenue derived from other sources, including freight charges, equipment repairs and financial services, is recognized when the related product revenue is recognized or when the services are provided. We apply the practical expedient to treat shipping and handling activities performed after the customer obtains control as fulfillment activities, rather than a separate performance obligation in the contract.

Sales, value-add and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

Certain of our revenue is derived from bundled arrangements that include multiple distinct performance obligations which are accounted for separately. When we sell software products together with related services (i.e., training and technical support), we allocate revenue to software using the residual method, using an estimate of the standalone selling price to estimate the fair value of the undelivered elements. There are no cases where revenue is deferred due to a lack of a standalone selling price. Bundled arrangements that include elements that are not considered software consist primarily of equipment and the related installation service. We allocate revenue for such arrangements based on the relative selling prices of the goods or services. If an observable selling price is not available (i.e., we do not sell the goods or services separately), we use one of the following techniques to estimate the standalone selling price: adjusted market approach; cost-plus approach; or the residual method. There is no specific hierarchy for the use of these methods, but the estimated selling price reflects our best estimate of what the selling prices of each deliverable would be if it were sold regularly on a standalone basis taking into consideration the cost structure of our business, technical skill required, customer location and other market conditions.

Contract Balances

Contract balances represent amounts presented in our consolidated balance sheet when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable, contract assets and contract liabilities.

Accounts Receivable

Accounts receivable are generally recognized when heath care distribution and technology and value-added services revenues are recognized. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects our best estimate of the amounts that will not be collected. In addition to reviewing delinquent accounts receivable, we consider many factors in estimating our reserve, including historical data, experience, customer types, credit worthiness and economic trends. From time to time, we adjust our assumptions for anticipated changes in any of these or other factors expected to affect collectability.

Contract Assets

Contract assets include amounts related to any conditional right to consideration for work completed but not billed as of the reporting date and generally represent amounts owed to us by customers, but not yet billed. Contract assets are transferred to accounts receivable when the right becomes unconditional. The contract assets primarily relate to our bundled arrangements for the sale of equipment and consumables and sales of term software licenses. Current contract assets are included in Prepaid expenses and other and the non-current contract assets are included in Investments and other within our consolidated balance sheet.

77

Contract Liabilities

Contract liabilities are comprised of advance payments and upfront payments for service arrangements provided over time that are accounted for as deferred revenue amounts. Contract liabilities are transferred to revenue once the performance obligation has been satisfied. Current contract liabilities are included in Accrued expenses: Other and the non-current contract liabilities are included in Other liabilities within our consolidated balance sheet.

Deferred Commissions

Sales commissions earned by our sales force that relate to long term arrangements are capitalized as costs to obtain a contract when the costs incurred are incremental and are expected to be recovered. Deferred sales commissions are amortized over the estimated customer relationship period. We apply the practical expedient related to the capitalization of incremental costs of obtaining a contract, and recognize such costs as an expense when incurred if the amortization period of the assets that we would have recognized is one year or less.

Sales Returns

Sales returns are recognized as a reduction of revenue by the amount of expected returns and are recorded as refund liability within current liabilities. We estimate the amount of revenue expected to be reversed to calculate the sales return liability based on historical data for specific products, adjusted as necessary for new products. The allowance for returns is presented gross as a refund liability and we record an inventory asset (and a corresponding adjustment to cost of sales) for any goods or services that we expect to be returned.

Inventories and Reserves

Inventories consist primarily of finished goods and are valued at the lower of cost or market. Cost is determined by the first-in, first-out method for merchandise or actual cost for large equipment and high tech equipment. In accordance with our policy for inventory valuation, we consider many factors including the condition and salability of the inventory, historical sales, forecasted sales and market and economic trends.

From time to time, we may adjust our assumptions for anticipated changes in any of these or other factors expected to affect the value of inventory. Although we believe our judgments, estimates and/or assumptions related to inventory and reserves are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results.

Acquisitions

We account for business acquisitions and combinations under the acquisition method of accounting, where the net assets of businesses purchased are recorded at their fair value at the acquisition date and our consolidated financial statements include their results of operations from that date. Any excess of acquisition consideration over the fair value of identifiable net assets acquired is recorded as goodwill. The major classes of assets and liabilities that we generally allocate purchase price to, excluding goodwill, include identifiable intangible assets (i.e., trademarks and trade names, customer relationships and lists, non-compete agreements and product development), property, plant and equipment, deferred taxes and other current and long-term assets and liabilities. The estimated fair value of identifiable intangible assets is based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rates; discounted cash flows; customer retention rates; and estimated useful lives. Some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial targets are met. While we use our best estimates and assumptions to accurately value those assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill within our consolidated balance sheets. At the end of the measurement period or final determination of the values of such assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations.

78

Goodwill

Goodwill is not amortized, but are subject to impairment analysis at least once annually. Such impairment analyses for goodwill require a comparison of the fair value to the carrying value of reporting units. We regard our reporting units to be our operating segments: health care distribution (global dental and medical) and technology and value-added services. Goodwill was allocated to such reporting units, for the purposes of preparing our impairment analyses, based on a specific identification basis.

For the years ended December 28, 2019 and December 29, 2018, and December 30, 2017 we tested goodwill for impairment, on the first day of the fourth quarter of each respective year, using a quantitative analysis consisting of a two-step approach. The first step of our quantitative analysis consists of a comparison of the carrying value of our reporting units, including goodwill, to the estimated fair value of our reporting units using a discounted cash flow methodology. If step one results in the carrying value of the reporting unit exceeding the fair value of such reporting unit, we would then proceed to step two which would require us to calculate the amount of impairment loss, if any, that we would record for such reporting unit. The calculation of the impairment loss in step two would be equivalent to the reporting unit’s carrying value of goodwill less the implied fair value of such goodwill.

Our use of a discounted cash flow methodology includes estimates of future revenue based upon budget projections and growth rates which take into account estimated inflation rates. We also develop estimates for future levels of gross and operating profits and projected capital expenditures. Our methodology also includes the use of estimated discount rates based upon industry and competitor analysis as well as other factors. The estimates that we use in our discounted cash flow methodology involve many assumptions by management that are based upon future growth projections.

Some factors we consider important that could trigger an interim impairment review include:

• significant underperformance relative to expected historical or projected future operating results;

• significant changes in the manner of our use of acquired assets or the strategy for our overall business (e.g., decision to divest a business); or

• significant negative industry or economic trends.

If we determine through the impairment review process that goodwill is impaired, we record an impairment charge in our consolidated statements of income.

For the years ended December 28, 2019, December 29, 2018 and December 30, 2017, the results of our goodwill impairment analysis did not result in any impairments.

Supplier Rebates

Supplier rebates are included as a reduction of cost of sales and are recognized over the period they are earned. The factors we consider in estimating supplier rebate accruals include forecasted inventory purchases and sales in conjunction with supplier rebate contract terms which generally provide for increasing rebates based on either increased purchase or sales volume. Although we believe our judgments, estimates and/or assumptions related to supplier rebates are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results.

Long-Lived Assets

Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows to be derived from such assets.

79

Definite-lived intangible assets primarily consist of non-compete agreements, trademarks, trade names, customer relationships and lists, and product development. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value. Although we believe our judgments, estimates and/or assumptions used in estimating cash flows and determining fair value are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect such impairment analyses and our financial results.

Stock-Based Compensation

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

Stock-based awards are provided to certain employees and non-employee directors under the terms of our 2013 Stock Incentive Plan, as amended, and our 2015 Non-Employee Director Stock Incentive Plan (together, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors. Prior to March 2009, awards under the Plans principally included a combination of at-the-money stock options and restricted stock/units. Since March 2009, equity-based awards have been granted solely in the form of restricted stock/units, with the exception of providing stock options to employees pursuant to certain pre-existing contractual obligations.

Grants of restricted stock/units are stock-based awards granted to recipients with specified vesting provisions. In the case of restricted stock, common stock is delivered on the date of grant, subject to vesting conditions. In the case of restricted stock units, common stock is generally delivered on or following satisfaction of vesting conditions. We issue restricted stock/units that vest solely based on the recipient’s continued service over time (primarily four-year cliff vesting, except for grants made under the 2015 Non-Employee Director Stock Incentive Plan, which are primarily 12-month cliff vesting) and restricted stock/units that vest based on our achieving specified performance measurements and the recipient’s continued service over time (primarily three-year cliff vesting).

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

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

Although we believe our judgments, estimates and/or assumptions related to stock-based compensation are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results.

80

Unrecognized Tax Benefits

ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within this guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate audit settlement. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities for uncertain tax positions taken in respect of certain tax matters.

Accounting Standards Update

For a discussion of accounting standards updates that have been adopted
or will be adopted in the future, please refer to see
included under Item 8.

81

58

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Currency Agreements

The value of certain foreign currencies as compared to the U.S. dollar

and the value of certain underlying functional
currencies of the Company, including its foreign subsidiaries, may affect our financial results.
Fluctuations in
exchange rates may positively or negatively affect our revenues, gross margins, operating expenses
and retained
earnings, all of which are
expressed in U.S. dollars.
Where we deem it prudent, we engage in hedging programs
using primarily foreign currency forward contracts aimed at limiting
the impact of foreign currency exchange rate
fluctuations on earnings.
We purchase short-term (i.e., generally 18 months or less) foreign currency forward
contracts to protect against currency exchange risks associated with intercompany
loans due from our international
subsidiaries and the payment of merchandise purchases to foreign
suppliers.
We do not hedge the translation of
foreign currency profits into U.S. dollars, as we regard this as an accounting
exposure, not an economic
exposure.
A hypothetical 5% change in the average value of the U.S. dollar
in 20192022 compared to foreign currencies
would have changed our 20192022 reported Net income attributable to Henry
Schein, Inc. by approximately $6.0$7 million.

As of December 28, 2019,31, 2022, we had forward foreign currency exchange
agreements, which expire through November
16, 2023, which includewith a mark-to-market lossfair value of $3.9$23 million as determined by quoted market
prices.
Included in the forward foreign
currency exchange agreements, Henry Schein, Inc. had net investment
designated EUR/USD forward contracts notionally totaling an amount
with notional values of approximately €200 million, with a reported fair value
of these contracts as a net liability of $0.3$20 million.
A
5% increase in the value of the Euro to the USD from December 28, 2019, 31, 2022,
with all other variables held constant,
would have had an unfavorable effect on the fair value of these forward contracts
by decreasing the value of these
instruments by $12.0$10 million. As
Total
Return Swaps
On March 20, 2020, we entered into a total return swap for the purpose
of December 28, 2019, Henry Schein, Inc. had Euro to Brazilian Real (BRL) cross currencyeconomically hedging our unfunded non-
qualified supplemental retirement plan (“SERP”) and our deferred compensation
plan (“DCP”).
This swap contracts notionally totaling an amount of €83.6 million, with a reported fair value of these contracts as a net liability of $1.4 million. A 5% increasewill
offset changes in our SERP and DCP liabilities.
At the inception, the notional value of the Euro toinvestments in these
plans was $43 million.
At December 31, 2022, the BRL from December 28, 2019, with all other variables held constant, would have had a favorable effect on the fairnotional value of the investments
in these plans was $78
million.
At December 31, 2022, the financing blended rate for
this swap contracts by increasingwas based on LIBOR of 4.03% plus
0.55%, for a combined rate of 4.58%.
For the valueyears ended December 31, 2022 ended and December
25, 2021, we
have recorded a gain/(loss), within the selling, general and administrative
line item in our consolidated statement of these instruments by $4.6 million.

income, of approximately $(17) million and $12 million, respectively, net of transaction costs, related to this
undesignated swap.
This swap is expected to be renewed on an annual basis after its current
expiration date of
March 31, 2023, and is expected to result in a neutral impact to our results
of operations.
Short-Term Investments

We limit our credit risk with respect to our cash equivalents, short-term investments and derivative instruments, by
monitoring the credit worthiness of the financial institutions who are
the counter-partiescounterparties to such financial
instruments.
As a risk management policy, we limit the amount of credit exposure by diversifying and utilizing
numerous investment grade counter-parties.

counterparties.

59
Variable
Interest Rate Debt

As of December 28, 2019,31, 2022, we had variable interest rate exposure for certain
of our revolving credit facilities and
our U.S. trade accounts receivable securitization.

Our revolving credit facility which we entered into on April 18, 2017 August 20, 2021
and expires on April 18, 2022,August 20, 2026, has an
interest rate that is based on the U.S. Dollar LIBOR plus a spread based on
our leverage ratio at the end of each
financial reporting quarter.
As of December 28, 2019,31, 2022, there was $0.0$0 million outstanding under this
revolving credit

82

facility.

Table of Contents

facility. During the year ended December 28, 2019,31, 2022, we had no borrowings under

this revolving credit facility.
Our U.S trade accounts receivable securitization, which we entered
into on April 17, 2013 and expires on
December 15, 2025, has an interest rate that is based upon the asset-backed
commercial paper rate.
As of
December 31, 2022, the commercial paper rate was 4.58% plus 0.75%,
for a combined rate of 5.33%.
At
December 31, 2022 the outstanding balance was $330 million under
this securitization facility.
During the year
ended December 31, 2022, the average outstanding balance under this revolving credit securitization
facility was approximately $147.5
$166 million.
Based upon our average outstanding balance for this revolving credit securitization
facility, for each hypothetical
increase of 25 basis points, our interest expense thereunder would have
increased by $0.4 million.

Our U.S trade accounts receivable securitization, which we entered into on April 17, 2013 and which expires on April 29, 2022, has an interest rate that is based upon the asset-backed commercial paper rate. As of December 28, 2019, the commercial paper rate was 1.90% plus 0.75%, for a combined rate of 2.65%. At December 28, 2019 the outstanding balance was $100.0 million under this securitization facility. During the year ended December 28, 2019, the average outstanding balance under this securitization facility was approximately $274.8 million. Based upon our average outstanding balance for this securitization facility, for each hypothetical increase of 25 basis points, our interest expense thereunder would have increased by $0.7 million.

83

60

ITEM 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

HENRY SCHEIN, INC.

Page

Number

85

BDO USA, LLP; New York,
NY; PCAOB
ID#
243
)
61

88

63

89

64

 

31, 2022,

90

65

91

66

92

67

93

68

93

68

103

78
79
81

106

85
86

107

88

108

89

109

Note 7 – Leases

113

Note 8 – Redeemable Noncontrolling Interests

115

Note 9 – Comprehensive IncomeFair Value 

116

Measurements

90

117

Note 11 – Business Acquisitions Divestitures

120

Note 12 – Plans of Restructuring

122

Note 13 – Earnings Per Share

124

Note 14 – Income Taxes

125

Note 15 – Concentrations of Risk

129

92

130

92
94
97
101
103
105

131

Note 18 – Segment and Geographic Data

132

Note 19 – Employee Benefit Plans

134

108
111
111

138

113

143

114

144

115

144

Schedule II - Valuation and Qualifying Accounts for the years ended December 28, 2019,

December 29, 2018 and December 30, 2017

161

115
All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated
financial statements or the notes thereto.

61
Report Of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Henry Schein, Inc.
Melville, NY
Opinion on the Consolidated Financial Statements
We
have
audited
the
accompanying
consolidated
balance
sheets
of
Henry
Schein,
Inc.
(the
“Company”)
as
of
December 31, 2022 and December 25, 2021, the related consolidated statements of income, comprehensive income,
stockholders’ equity,
and cash
flows for
each of
the three
years in
the
period ended
December 31,
2022, and
the
related notes
(collectively referred to
as the
“consolidated financial statements”).
In our
opinion, the
consolidated
financial statements
present fairly,
in all
material respects, the
financial position of
the Company
at December
31,
2022 and
December 25, 2021,
and the
results of its
operations and its
cash flows for
each of
the three
years in the
period ended December 31,
2022, in conformity with
accounting principles generally accepted in
the United States
of America.
We
also
have
audited,
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board
(United
States)
(“PCAOB”),
the
Company's
internal
control
over
financial
reporting
as
of
December
31,
2022,
based
on
criteria
established
in
Internal
Control
–
Integrated
Framework
(2013)
issued
by
the
Committee
of
Sponsoring
Organizations
of
the
Treadway
Commission
(“COSO”)
and
our
report
dated
February
21,
2023,
expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are
the responsibility of the
Company’s management. Our
responsibility is
to
express
an
opinion
on
the
Company’s
consolidated
financial
statements
based
on
our
audits.
We
are
a
public
accounting
firm
registered
with
the
PCAOB
and
are
required
to
be
independent
with
respect
to
the
Company
in
accordance
with
the
U.S.
federal
securities
laws
and
the
applicable
rules
and
regulations
of
the
Securities
and
Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform
the
audit
to
obtain
reasonable
assurance
about
whether
the
consolidated
financial
statements
are
free
of
material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks
of
material
misstatement
of
the
consolidated
financial
statements,
whether
due
to
error
or
fraud,
and
performing
procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the
amounts
and
disclosures
in
the
consolidated
financial
statements.
Our
audits
also
included
evaluating
the
accounting
principles
used
and
significant
estimates
made
by
management,
as
well
as
evaluating
the
overall
presentation of the consolidated financial
statements.
We
believe that our audits provide
a reasonable basis for our
opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the
current period audit of the consolidated
financial statements that was communicated or required to be communicated
to the audit committee and that: (1)
relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our
especially challenging, subjective,
or complex judgments. The communication of the critical
audit matter does not
alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
62
Revenue growth rates utilized in
the determination of the fair
value of acquired customer relationships
for a
certain acquisition
As described in
Note 4 of
the consolidated financial
statements, the Company
acquired several companies in
the
current year.
As a
result of
the acquisitions,
management was
required to
determine estimated
fair values
of the
assets
acquired
and
liabilities
assumed,
including
certain
identifiable
intangible
assets.
In
some
instances,
management
utilized
third-party
valuation
specialists
to
assist
in
the
preparation
of
the
valuation
of
certain
identifiable intangible assets.
Management exercised judgment to
develop and select
revenue growth rates
in the
measurement of the fair value of the customer relationships.
We
identified
the
revenue
growth
rates
utilized
in
the
determination
of
the
fair
value
of
acquired
customer
relationships
for
a
certain
acquisition,
as
a
critical
audit
matter.
The
principal
considerations
for
our
determination included the
subjectivity and judgment
required to determine
the revenue growth
rates used
in the
fair
value
measurement
of
acquired
customer
relationships
for
a
certain
acquisition.
Auditing
these
revenue
growth rates involved especially subjective auditor judgment due to
the nature and extent of audit effort required.
The primary procedures we performed to address this critical audit matter
included:
●
Evaluating the reasonableness of the revenue growth rates by i)
reviewing the historical performance
of the acquired company using its audited financial statements and
(ii) assessing revenue projections
against industry metrics and peer-group companies.
/s/
BDO USA, LLP
We have served as the Company's auditor since 1984.
New York, NY
February 21, 2023
63
HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
December 31,
December 25,
2022
2021
ASSETS
Current assets:
Cash and cash equivalents
$
117
$
118
Accounts receivable, net of reserves of $
65
and $
67
1,442
1,452
Inventories, net
1,963
1,861
Prepaid expenses and other
466
413
Total current assets
3,988
3,844
Property and equipment, net
383
366
Operating lease right-of-use assets
284
325
Goodwill
2,893
2,854
Other intangibles, net
587
668
Investments and other
472
424
Total assets
$
8,607
$
8,481
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
1,004
$
1,054
Bank credit lines
103
51
Current maturities of long-term debt
6
11
Operating lease liabilities
73
76
Accrued expenses:
Payroll and related
314
385
Taxes
132
137
Other
592
593
Total current liabilities
2,224
2,307
Long-term debt
1,040
811
Deferred income taxes
36
42
Operating lease liabilities
275
268
Other liabilities
361
377
Total liabilities
3,936
3,805
Redeemable noncontrolling interests
576
613
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,
131,792,817
outstanding on December 31, 2022 and
137,145,558
outstanding on December 25, 2021
1
1
Additional paid-in capital
-
-
Retained earnings
3,678
3,595
Accumulated other comprehensive loss
(233)
(171)
Total Henry Schein, Inc. stockholders' equity
3,446
3,425
Noncontrolling interests
649
638
Total stockholders' equity
4,095
4,063
Total liabilities, redeemable noncontrolling
interests and stockholders' equity
$
8,607
$
8,481
64
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF INCOME
(in millions, except share and per share data)
Years
Ended
December 31,
December 25,
December 26,
2022
2021
2020
Net sales
$
12,647
$
12,401
$
10,119
Cost of sales
8,816
8,727
7,303
Gross profit
3,831
3,674
2,816
Operating expenses:
Selling, general and administrative
2,771
2,634
2,086
Depreciation and amortization
182
180
163
Restructuring and integration costs
131
8
32
Operating income
747
852
535
Other income (expense):
Interest income
17
7
10
Interest expense
(44)
(28)
(41)
Other, net
1
-
(4)
Income from continuing operations before taxes, equity in
earnings of affiliates and noncontrolling interests
721
831
500
Income taxes
(170)
(198)
(95)
Equity in earnings of affiliates
15
20
12
Gain on sale of equity investment
-
7
2
Net income from continuing operations
566
660
419
Income from discontinued operations, net of tax
-
-
1
Net Income
566
660
420
Less: Net income attributable to noncontrolling interests
(28)
(29)
(16)
Net income attributable to Henry Schein, Inc.
$
538
$
631
$
404
Amounts attributable to Henry Schein, Inc.:
Continuing operations
$
538
$
631
$
403
Discontinued operations
-
-
1
Net income attributable to Henry Schein, Inc.
$
538
$
631
$
404
Earnings per share from continuing operations attributable to
Henry Schein, Inc.:
Basic
$
3.95
$
4.51
$
2.83
Diluted
$
3.91
$
4.45
$
2.81
Earnings per share from discontinued operations attributable to Henry
Schein, Inc.:
Basic
$
-
$
-
$
0.01
Diluted
$
-
$
-
$
0.01
Earnings per share attributable to Henry Schein, Inc.:
Basic
$
3.95
$
4.51
$
2.83
Diluted
$
3.91
$
4.45
$
2.82
Weighted-average common
shares outstanding:
Basic
136,064,221
140,090,889
142,504,193
Diluted
137,755,670
141,772,781
143,403,682
65
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(in millions)
Years
Ended
December 31,
December 25,
December 26,
2022
2021
2020
Net income
$
566
$
660
$
420
Other comprehensive income, net of tax:
Foreign currency translation gain (loss)
(88)
(84)
63
Unrealized gain (loss) from foreign currency hedging activities
7
9
(7)
Pension adjustment gain
12
6
-
Other comprehensive income (loss), net of tax
(69)
(69)
56
Comprehensive income
497
591
476
Comprehensive income attributable to noncontrolling interests:
Net income
(28)
(29)
(16)
Foreign currency translation loss
7
6
3
Comprehensive income attributable to noncontrolling interests
(21)
(23)
(13)
Comprehensive income attributable to Henry Schein, Inc.
$
476
$
568
$
463
66
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions, except share and per share data)
Accumulated
Common Stock
Additional
Other
Total
$.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income (Loss)
Interests
Equity
Balance, December 28, 2019
143,353,459
$
1
$
48
$
3,116
$
(167)
$
632
$
3,630
Net income (excluding $
14
attributable to Redeemable
noncontrolling interests from continuing operations)
-
-
-
404
-
2
406
Foreign currency translation gain (excluding loss of $
4
attributable to Redeemable noncontrolling interests)
-
-
-
-
66
1
67
Unrealized loss from foreign currency hedging activities,
net of tax benefit of $
3
-
-
-
-
(7)
-
(7)
Dividends paid
-
-
-
-
-
(1)
(1)
Purchase of noncontrolling interests
-
-
(2)
-
-
(1)
(3)
Change in fair value of redeemable securities
-
-
(33)
-
-
-
(33)
Noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
3
3
Repurchase and retirement of common stock
(1,200,000)
-
(11)
(63)
-
-
(74)
Stock-based compensation expense
545,864
-
9
-
-
-
9
Shares withheld for payroll taxes
(236,752)
-
(15)
-
-
-
(15)
Separation of Animal Health business
-
-
2
-
-
-
2
Transfer of charges in excess of capital
-
-
2
(2)
-
-
-
Balance, December 26, 2020
142,462,571
1
-
3,455
(108)
636
3,984
Net income (excluding $
23
attributable to Redeemable
noncontrolling interests from continuing operations)
-
-
-
631
-
6
637
Foreign currency translation loss (excluding loss of $
6
attributable to Redeemable noncontrolling interests)
-
-
-
-
(78)
-
(78)
Unrealized gain from foreign currency hedging activities,
net of tax of $
3
-
-
-
-
9
-
9
Pension adjustment gain, including tax of $
2
-
-
-
-
6
-
6
Dividends paid
-
-
-
-
-
(11)
(11)
Change in fair value of redeemable securities
-
-
(160)
-
-
-
(160)
Noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
7
7
Repurchase and retirement of common stock
(5,505,704)
-
(53)
(348)
-
-
(401)
Stock-based compensation expense
303,643
-
78
-
-
-
78
Shares withheld for payroll taxes
(114,952)
-
(8)
-
-
-
(8)
Transfer of charges in excess of capital
-
-
143
(143)
-
-
-
Balance, December 25, 2021
137,145,558
1
-
3,595
(171)
638
4,063
Net income (excluding $
21
attributable to Redeemable
noncontrolling interests from continuing operations)
-
-
-
538
-
7
545
Foreign currency translation loss (excluding loss of $
6
attributable to Redeemable noncontrolling interests)
-
-
-
-
(81)
(1)
(82)
Unrealized gain from foreign currency hedging activities,
net of tax of $
3
-
-
-
-
7
-
7
Pension adjustment gain, including tax of $
4
-
-
-
-
12
-
12
Dividends paid
-
-
-
-
-
(1)
(1)
Purchase of noncontrolling interests
-
-
-
-
-
(7)
(7)
Change in fair value of redeemable securities
-
-
4
-
-
-
4
Noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
13
13
Repurchase and retirement of common stock
(6,111,676)
-
(65)
(420)
-
-
(485)
Stock issued upon exercise of stock options
35,792
-
2
-
-
-
2
Stock-based compensation expense
1,102,108
-
54
-
-
-
54
Shares withheld for payroll taxes
(376,034)
-
(32)
-
-
-
(32)
Settlement of stock-based compensation awards
(2,931)
-
2
-
-
-
2
Transfer of charges in excess of capital
-
-
35
(35)
-
-
-
Balance, December 31, 2022
131,792,817
$
1
$
-
$
3,678
$
(233)
$
649
$
4,095
67
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(in millions)
Years Ended
December 31,
December 25,
December 26,
2022
2021
2020
Cash flows from operating activities:
Net income
$
566
$
660
$
420
Income from discontinued operations
-
-
1
Income from continuing operations
566
660
419
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
212
210
186
Impairment charge on intangible assets
34
1
20
Non-cash restructuring charges
93
-
-
Gain on sale of equity investment
-
(10)
(2)
Stock-based compensation expense
54
78
9
Provision for (benefits from) losses on trade and other
accounts receivable
5
(8)
35
Benefit from deferred income taxes
(73)
(11)
(53)
Equity in earnings of affiliates
(15)
(20)
(12)
Distributions from equity affiliates
15
18
16
Changes in unrecognized tax benefits
12
(2)
(25)
Other
(20)
(10)
32
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(7)
4
(189)
Inventories
(126)
(295)
(32)
Other current assets
(52)
9
(6)
Accounts payable and accrued expenses
(96)
86
196
Net cash provided by operating activities from continuing
operations
602
710
594
Net cash provided by operating activities from discontinued operations
-
-
5
Net cash provided by operating activities
602
710
599
Cash flows from investing activities:
Purchases of fixed assets
(96)
(79)
(49)
Payments related to equity investments and business
acquisitions, net of cash acquired
(158)
(571)
(60)
Proceeds from sale of equity investment
-
10
14
Proceeds from (repayments to) loan to affiliate
11
(4)
(1)
Other
(33)
(33)
(19)
Net cash used in investing activities
(276)
(677)
(115)
Cash flows from financing activities:
Net change in bank borrowings
48
(18)
45
Proceeds from issuance of long-term debt
270
305
501
Principal payments for long-term debt
(59)
(122)
(611)
Debt issuance costs
-
(3)
(4)
Proceeds from issuance of stock upon exercise of stock options
2
-
-
Payments for repurchases of common stock
(485)
(401)
(74)
Payments for taxes related to shares withheld for employee
taxes
(32)
(8)
(14)
Distributions to noncontrolling shareholders
(21)
(26)
(8)
Acquisitions of noncontrolling interests in subsidiaries
(38)
(60)
(19)
Proceeds from Henry Schein Animal Health Business
-
-
2
Net cash used in financing activities from continuing
operations
(315)
(333)
(182)
Net cash used in financing activities from discontinued
operations
-
-
(5)
Net cash used in financing activities
(315)
(333)
(187)
Effect of exchange rate changes on cash and cash equivalents from continuing
operations
(12)
(3)
18
Net change in cash and cash equivalents from continuing
operations
(1)
(303)
315
Cash and cash equivalents, beginning of period
118
421
106
Cash and cash equivalents, end of period
$
117
$
118
$
421
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
68
Note 1 –Basis of Presentation and Significant Accounting Policies
Nature of Operations
We distribute health care products and services primarily to office-based dental and medical practitioners, across
dental practices, laboratories, physician practices, and ambulatory surgery centers,
as well as government,
institutional health care clinics and alternate care clinics.
We also provide software, technology and other value-
added services to health care practitioners.
Our dental businesses serve office-based dental practitioners, dental
laboratories, schools, government and other institutions.
Our medical businesses serve physician offices, urgent
care centers, ambulatory care sites, emergency medical technicians, dialysis centers,
home health, federal and state
governments and large enterprises, such as group practices and integrated delivery networks,
among other providers
across a wide range of specialties.
We have operations or affiliates in the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the
Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg,
Malaysia, Mexico, the Netherlands, New Zealand, Poland, Portugal, Singapore, South
Africa, Spain, Sweden,
Switzerland, Thailand, United Arab Emirates and the United Kingdom.
Basis of Presentation
Our consolidated financial statements include the accounts of Henry
Schein, Inc. and all of our controlled
subsidiaries.
All intercompany accounts and transactions are eliminated in
consolidation.
Investments in
unconsolidated affiliates in which we have the ability to influence the operating or
financial decisions are accounted
for under the equity method.
Certain prior period amounts have been reclassified to conform to
the current period
presentation.
These reclassifications, individually and in the aggregate, did
not have a material impact on our
consolidated financial condition, results of operations or cash flows.
We consolidate the results of operations and financial position of a trade accounts receivable securitization which
we consider a Variable Interest Entity (“VIE”) because we are the primary beneficiary, and we have the power to
direct activities that most significantly affect the economic performance and have
the obligation to absorb the
majority of the losses or benefits.
For this VIE, the trade accounts receivable transferred to the VIE are
pledged as
collateral to the related debt.
The creditors have recourse to us for losses on these trade accounts receivable.
At
December 31, 2022 and December 25, 2021, certain trade accounts receivable that
can only be used to settle
obligations of this VIE were $
327
million and $
138
million, respectively, and the liabilities of this VIE where the
creditors have recourse to us were $
255
million and $
105
million, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United
States requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In March 2020, the World Health Organization declared the Novel Coronavirus Disease 2019 (“COVID-19”) a
pandemic.
The COVID-19 pandemic 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 for these non-PPE products increased in the
second half of 2020 and continued throughout the years ended December 25,
2021 and December 31, 2022,
resulting in growth over the prior years.
Demand for PPE products declined during the year ended
December 31,
2022.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
69
Our consolidated financial statements reflect estimates and assumptions
made by us that affect, among other things,
our goodwill, long-lived asset and definite-lived intangible asset valuation;
inventory valuation; equity investment
valuation; assessment of the annual effective tax rate; valuation of deferred income
taxes and income tax
contingencies; the allowance for doubtful accounts; hedging activity; supplier
rebates; measurement of
compensation cost for certain share-based performance awards and cash bonus
plans; and pension plan
assumptions.
Due to the significant uncertainty surrounding the future impact of
COVID-19, our judgments
regarding estimates and impairments could change in the future.
There is an ongoing risk that the COVID-19
pandemic may again have a material adverse effect on our business, results of operations
and cash flows and may
result in a material adverse effect on our financial condition and liquidity.
However, the extent of the potential
impact cannot be reasonably estimated at this time.
Fiscal Year
We report our results of operations and cash flows on a
52
-
53
week basis ending on the last Saturday of December.
The year ended December 31, 2022 consisted of
53
weeks, and the years ended, December 25, 2021 and December
26, 2020 consisted of
52
weeks.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods
or services in an amount that reflects the
consideration that we expect to receive for those goods or services.
To recognize revenue, we do the following:
•
identify the contract(s) with a customer;
•
identify the performance obligations in the contract;
•
determine the transaction price;
•
allocate the transaction price to the performance obligations in the contract;
and
•
recognize revenue when, or as, the entity satisfies a performance obligation.
We generate revenue from the sale of dental and medical consumable products, equipment (Health care distribution
revenues), software products and services and other sources (Technology and value-added services revenues).
Provisions for discounts, rebates to customers, customer returns and other
contra revenue adjustments are included
in the transaction price at contract inception by estimating the most likely
amount based upon historical data and
estimates and are provided for in the period in which the related sales are
recognized.
Revenue derived from the sale of consumable products is recognized at a point
in time when control transfers to the
customer.
Such sales typically entail high-volume, low-dollar orders shipped
using third-party common carriers.
We believe that the shipment date is the most appropriate point in time indicating control has transferred to the
customer because we have no post-shipment obligations and this is when
legal title and risks and rewards of
ownership transfer to the customer and the point at which we have an
enforceable right to payment.
Revenue derived from the sale of equipment is recognized when control
transfers to the customer.
This occurs
when the equipment is delivered.
Such sales typically entail scheduled deliveries of large equipment primarily
by
equipment service technicians.
Most equipment requires minimal installation, which is
typically completed at the
time of delivery.
Our product generally carries standard warranty terms provided
by the manufacturer, however, in
instances where we provide warranty labor services, the warranty costs
are accrued in accordance with Accounting
Standards Codification (“ASC”) 460 “Guarantees”.
At December 31, 2022 and December 25, 2021, we had
accrued approximately $
8
million and $
8
million, respectively, for warranty costs.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
70
Revenue derived from the sale of software products is recognized when
products are delivered to customers or
made available electronically.
Such software is generally installed by customers and does not
require extensive
training due to the nature of its design.
Revenue derived from post-contract customer support for software,
including annual support and/or training, is generally recognized over
time using time elapsed as the input method
that best depicts the transfer of control to the customer.
Revenue derived from software sold on Software-as-a -
Service basis is recognized ratably over the subscription period as
control is transferred to the customer.
Revenue derived from other sources, including freight charges, equipment repairs
and financial services, is
recognized when the related product revenue is recognized or when
the services are provided.
We apply the
practical expedient to treat shipping and handling activities performed after the
customer obtains control as
fulfillment activities, rather than a separate performance obligation in the
contract.
Sales, value-add and other taxes we collect concurrent with revenue-producing
activities are excluded from
revenue.
Certain of our revenue is derived from bundled arrangements that include
multiple distinct performance obligations,
which are accounted for separately.
When we sell software products together with related services (i.e.,
training
and technical support), we allocate revenue to software using the residual
method, using an estimate of the
standalone selling price to estimate the fair value of the undelivered
elements.
Bundled arrangements that include
elements that are not considered software consist primarily of equipment
and the related installation service.
We
allocate revenue for such arrangements based on the relative selling
prices of the goods or services.
If an
observable selling price is not available (i.e., we do not sell the goods or
services separately), we use one of the
following techniques to estimate the standalone selling price: adjusted
market approach; cost-plus approach; or the
residual method.
There is no specific hierarchy for the use of these methods,
but the estimated selling price reflects
our best estimate of what the selling prices of each deliverable would be
if it were sold regularly on a standalone
basis taking into consideration the cost structure of our business, technical skill
required, customer location and
other market conditions.
See
for additional disclosures of disaggregated net sales and
for disclosures of net sales by segment and geographic data.
Sales Returns
Sales returns are recognized as a reduction of revenue by the amount
of expected returns and are recorded as refund
liability within current liabilities.
We estimate the amount of revenue expected to be reversed to calculate the sales
return liability based on historical data for specific products, adjusted
as necessary for new products.
The
allowance for returns is presented gross as a refund liability and we
record an inventory asset (and a corresponding
adjustment to cost of sales) for any products that we expect to be returned.
Cost of Sales
The primary components of cost of sales include the cost of the product
(net of purchase discounts, supplier
chargebacks and rebates) and inbound and outbound freight charges.
Costs related to purchasing, receiving, inspections, warehousing, internal
inventory transfers and other costs of our
distribution network are included in selling, general and administrative
expenses along with other operating costs.
Total distribution network costs were $
103
million, $
89
million and $
72
million for the years ended December 31,
2022, December 25, 2021 and December 26, 2020.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
71
Supplier Rebates
Supplier rebates are included as a reduction of cost of sales and are recognized
over the period they are earned.
The
factors we consider in estimating supplier rebate accruals include forecasted
inventory purchases and sales, in
conjunction with supplier rebate contract terms, which generally provide
for increasing rebates based on either
increased purchase or sales volume.
Direct Shipping and Handling Costs
Freight and other direct shipping costs are included in cost of sales.
Direct handling costs, which represent
primarily direct compensation costs of employees who pick, pack and otherwise
prepare, if necessary, merchandise
for shipment to our customers are reflected in selling, general and administrative
expenses.
Direct handling costs
were $
96
million, $
97
million and $
79
million for the years ended December 31, 2022, December 25, 2021
and
December 26, 2020.
Advertising and Promotional Costs
We generally expense advertising and promotional costs as incurred.
Total advertising and promotional expenses
were $
47
million, $
48
million and $
32
million for the years ended December 31, 2022, December 25, 2021
and
December 26, 2020.
Stock Compensation Costs
We
measure stock-based compensation at the grant date, based on the estimated
fair value of the award, and
recognize the cost (net of estimated forfeitures) as compensation expense on
a straight-line basis over the requisite
service period for time-based restricted stock units and on a graded vesting
basis for the option awards.
For
performance-based awards, at each reporting date, we reassess whether achievement
of the performance condition
is probable and accrue compensation expense when achievement of
the performance condition is probable.
Our
stock-based compensation expense is reflected in selling, general and administrative
expenses.
Employment Benefit Plans and other Postretirement Benefit Plans
Certain of our employees in our international markets participate
in various noncontributory defined benefit plans.
We recognize the funded status, measured as the difference between the fair value of plan assets and the benefit
obligation, of each applicable plan, within accumulated other comprehensive
income in the consolidated balance
sheets, whereby each unfunded plan is recognized as a liability and
each funded plan is recognized as either an
asset or liability based on its funded status.
We measure our plan assets and liabilities at the end of our fiscal year.
Net periodic pension costs and valuations are dependent on assumptions
used by third-party actuaries in calculating
those amounts.
These assumptions include discount rates, expected return on plan
assets, rate of future
compensation levels, retirement rates, mortality rates, and other factors.
We record the service cost component of
net pension cost in selling, general and administrative expenses within
our consolidated statements of income.
Cash and Cash Equivalents
We consider all highly liquid short-term investments with an original maturity of three months or less to be cash
equivalents.
Due to the short-term maturity of such investments,
the carrying amounts are a reasonable estimate of
fair value.
Outstanding checks in excess of funds on deposit of $
54
million and $
2
million, primarily related to
payments for inventory, were classified as accounts payable as of December 31, 2022 and December 25, 2021.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
72
Contract Balances
Contract balances represent amounts presented in our consolidated balance
sheets when either we have transferred
goods or services to the customer or the customer has paid consideration to us
under the contract.
These contract
balances include accounts receivable,
contract assets and contract liabilities.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are generally recognized when health care distribution
and technology and value-added
services revenues are recognized.
In accordance with
the “expected credit loss” model, the carrying amount of
accounts receivable is reduced by a valuation allowance that reflects
our best estimate of the amounts that we do
not expect to collect.
In addition to reviewing delinquent accounts receivable, we consider many
factors in
estimating our reserve, including types of customers and their credit worthiness,
experience and historical data
adjusted for current conditions and reasonable supportable forecasts.
We
record allowances for credit losses based upon a specific review of all
significant outstanding invoices.
For
those invoices not specifically reviewed, provisions are provided at differing rates,
based upon the age of the
receivable, the collection history associated with the geographic region
that the receivable was recorded in, current
economic trends and reasonable supportable forecasts.
We
write-off a receivable and charge it against its recorded
allowance when we deem them uncollectible.
Our allowance for doubtful accounts was $
65
million, $
67
million and $
88
million as of December 31, 2022,
December 25, 2021 and December 26, 2020, respectively.
Additions to the allowance for the years ended
December 31, 2022, December 25, 2021 and December 26, 2020 were $
8
million, $
0
million and $
36
million.
Deductions to the allowance for the years ended December 31, 2022, December
25, 2021 and December 26, 2020
were $
10
million, $
21
million and $
8
million.
Contract Assets
Contract assets include amounts related to any conditional right to consideration
for work completed but not billed
as of the reporting date, and generally represent amounts owed to us by
customers, but not yet billed.
Contract
assets are transferred to accounts receivable when the right becomes unconditional.
The contract assets primarily
relate to our bundled arrangements for the sale of equipment and consumables
and sales of term software licenses.
Current contract assets are included in Prepaid expenses and other and the non-current
contract assets are included
in investments and other within our consolidated balance sheets.
Current and non-current contract asset balances as
of December 31, 2022 and December 25, 2021 were not material.
Contract Liabilities
Contract liabilities are comprised of advance payments and upfront payments
for service arrangements provided
over time that are accounted for as deferred revenue amounts.
Contract liabilities are transferred to revenue once
the performance obligation has been satisfied.
Current contract liabilities are included in accrued expenses: Other
and the non-current contract liabilities are included in other liabilities
within our consolidated balance sheets.
At
December 25, 2021, the current portion of contract liabilities of $
89
million was reported in accrued expenses:
Other, and $
10
million related to non-current contract liabilities was reported
in other liabilities.
During the year
ended December 31, 2022,
we recognized substantially all of the current contract liability amounts
that were
previously deferred at December 25, 2021.
At December 31, 2022, the current and non-current portion of contract
liabilities were $
86
million and $
8
million, respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
73
Inventories and Reserves
Inventories consist primarily of finished goods and are valued at the
lower of cost or net realizable value.
Cost is
determined by the first-in, first-out method for merchandise or actual cost
for large equipment and high tech
equipment.
In accordance with our policy for inventory valuation, we
consider many factors including the
condition and salability of the inventory, historical sales, forecasted sales and market and economic trends.
From
time to time, we adjust our assumptions for anticipated changes in any
of these or other factors expected to affect
the value of inventory.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation or
amortization.
Depreciation is
computed primarily under the straight-line method
(see
for estimated useful
lives).
Amortization of leasehold improvements is computed using
the straight-line method over the lesser of the
useful life of the assets or the lease term.
Capitalized Software Development Costs
Capitalized internal-use software costs consist of costs to purchase and
develop software.
For software to be used
solely to meet internal needs and cloud-based applications used to deliver
our services, we capitalize costs incurred
during the application development stage and include such costs within
property and equipment, net within our
consolidated balance sheets.
For software to be sold, leased, or marketed to external users, we capitalize
software
development costs when technological feasibility is reached and
include such costs in Investments and other within
our consolidated balance sheets.
Leases
We
determine if an arrangement contains a lease at inception.
An arrangement contains a lease if it implicitly or
explicitly identifies an asset to be used and conveys the right to control
the use of the identified asset in exchange
for consideration.
As a lessee, we include operating leases in operating lease right-of-use
(“ROU”) assets,
operating lease liabilities, and non-current operating lease liabilities in our
consolidated balance sheets.
Finance
leases are included in property and equipment, current maturities
of long-term debt, and long-term debt in our
consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease
term and lease liabilities represent our
obligation to make lease payments arising from the lease.
Operating lease ROU assets and liabilities are recognized
upon commencement of the lease based on the present value of the lease payments
over the lease term.
As most of
our leases do not provide an implicit interest rate, we generally use our incremental
borrowing rate based on the
estimated rate of interest for fully collateralized and fully amortizing borrowings
over a similar term of the lease
payments at commencement date to determine the present value of
lease payments.
When readily determinable, we
use the implicit rate.
Our lease terms may include options to extend or terminate the lease when it is reasonably
certain that we will exercise that option.
Lease expense for lease payments is recognized on a straight-line
basis
over the lease term.
Expenses associated with operating leases and finance leases
are included in “selling, general
and administrative”
and “interest expense”, respectively within our consolidated statement
of income.
Short-term
leases with a term of 12 months or less are not capitalized.
During the years ended December 31, 2022, December
25, 2021 and December 26, 2020, such short-term lease expense was
$
7
million, $
4
million, and $
2
million,
respectively.
We
have lease agreements with lease and non-lease components, which are
generally accounted for as a single
lease component, except non-lease components for leases of vehicles, which
are accounted for separately.
When a
vehicle lease contains both lease and non-lease components, we allocate the
transaction price based on the relative
standalone selling price.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
74
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair
value of the net assets acquired,
including the amount assigned to identifiable intangible assets.
Goodwill is subject to impairment analysis annually
or more frequently if needed.
Such impairment analyses for goodwill requires a comparison of the
fair value to the
carrying value of reporting units.
We regard our reporting units to be our operating segments: global dental; global
medical; and technology and value-added services.
Goodwill was allocated to such reporting units, for the
purposes of preparing our impairment analyses, based on a specific identification
basis.
For the years ended December 31, 2022 and December 25, 2021, we tested goodwill
for impairment, on the first
day of the fourth quarter, using a quantitative analysis comparing the carrying value of our reporting
units,
including goodwill, to the estimated fair value of our reporting units using
a discounted cash flow methodology.
If
the fair value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is considered not
impaired.
Conversely, impairment loss would be equivalent to the excess of a reporting unit’s carrying value over
its fair value limited to the total amount of goodwill allocated to that
reporting unit.
Application of the goodwill impairment test requires judgment, including
the identification of reporting units,
assignment of assets and liabilities that are considered shared services
to the reporting units, and ultimately the
determination of the fair value of each reporting unit.
The fair value of each reporting unit is calculated by
applying the discounted cash flow methodology and confirming with
a market approach.
There are inherent
uncertainties related to fair value models, the inputs and our judgments
in applying them to this analysis.
The most
significant inputs include estimation of future cash flows based on budget
expectations, and determination of
comparable companies to develop a weighted average cost of capital for each
reporting unit.
For the year ended December 31, 2022, we recorded a $
20
million impairment of goodwill relating to the disposal
of an unprofitable business whose estimated fair value was lower than
its carrying value.
The disposal of this
business is part of our restructuring initiative as more fully discussed
in
.
For the year ended December 25, 2021, the results of our goodwill
impairment analysis did
no
t
result in any impairments.
Intangible Assets
Intangible assets, other than goodwill, are evaluated for impairment whenever
events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable
through the estimated undiscounted future
cash flows to be derived from such assets.
Definite-lived intangible assets primarily consist of non-compete agreements,
trademarks, trade names, customer
lists, customer relationships and product development.
For long-lived assets used in operations, impairment losses
are only recorded if the asset’s
carrying amount is not recoverable through its undiscounted, probability-weighted
future cash flows.
We measure the impairment loss based on the difference between the carrying amount and the
estimated fair value.
When an impairment exists, the related assets are written down to fair value.
During the years ended December 31, 2022, December 25, 2021
and December 26, 2020, we recorded total
impairment charges on intangible assets of $
34
million, $
1
million and $
20
million, respectively, as more fully
discussed in
Income Taxes
We account for income taxes under an asset and liability approach that requires the recognition of deferred income
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in our
financial statements or tax returns.
In estimating future tax consequences, we generally consider all expected
future
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
75
events other than enactments of changes in tax laws or rates.
The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized as income or expense in
the period that includes the enactment date.
We file a consolidated U.S. federal income tax return with our 80% or greater owned U.S. subsidiaries
.
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our consolidated subsidiaries have
the right, at certain times, to require us
to acquire their ownership interest in those entities at fair value.
Their interests in these subsidiaries are classified
outside permanent equity on our consolidated balance sheets and are
carried at the estimated redemption amounts.
The redemption amounts have been estimated based on expected future
earnings and cash flow and, if such
earnings and cash flow are not achieved, the value of the redeemable noncontrolling
interests might be impacted.
Changes in the estimated redemption amounts of the noncontrolling
interests subject to put options are reflected at
each reporting period with a corresponding adjustment to Additional paid-in
capital.
Future reductions in the
carrying amounts are subject to a “floor” amount that is equal to the
fair value of the redeemable noncontrolling
interests at the time they were originally recorded.
The recorded value of the redeemable noncontrolling interests
cannot go below the floor level.
Adjustments to the carrying amount of noncontrolling interests
to
reflect a fair value redemption feature do not impact the calculation of earnings
per share.
Our net income is
reduced by the portion of the subsidiaries’ net income that is attributable
to redeemable noncontrolling interests.
Noncontrolling Interests
Non-controlling interest represents the ownership interests of certain
minority owners of our consolidated
subsidiaries.
Our net income is reduced by the portion of the subsidiaries
net income that is attributable to
noncontrolling interests.
Comprehensive Income
Comprehensive income includes certain gains and losses that, under accounting
principles generally accepted in the
United States, are excluded from net income as such amounts are recorded
directly as an adjustment to
stockholders’ equity.
Our comprehensive income is primarily comprised of net income,
foreign currency
translation gain (loss), unrealized gain (loss) from foreign currency
hedging activities and pension adjustment gain.
Risk Management and Derivative Financial Instruments
We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchange rates.
Our
objective is to manage the impact that foreign currency exchange rate fluctuations
could have on recognized asset
and liability fair values, earnings and cash flows, as well as our net
investments in foreign subsidiaries.
Our risk
management policy requires that derivative contracts used as hedges be
effective at reducing the risks associated
with the exposure being hedged and be designated as a hedge at the inception
of the contract.
We do not enter into
derivative instruments for speculative purposes.
Our derivative instruments primarily include foreign currency
forward agreements related to certain intercompany loans, certain forecasted
inventory purchase commitments with
foreign suppliers and foreign currency forward contracts to hedge a portion of
our euro-denominated foreign
operations which are designated as net investment hedges.
Foreign currency forward agreements related to forecasted inventory
purchase commitments with foreign suppliers
and foreign currency swaps related to foreign currency denominated debt are designated
as cash flow hedges.
For
derivatives that are designated and qualify as cash flow hedges, the changes
in the fair value of the derivative is
recorded as a component of Accumulated other comprehensive income
in stockholders’ equity and subsequently
reclassified into earnings in the period(s) during which the hedged transaction
affects earnings.
We classify the
cash flows related to our hedging activities in the same category on our consolidated
statements of cash flows as the
cash flows related to the hedged item.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
76
Foreign currency forward contracts related to our euro-denominated
foreign operations are designated as net
investment hedges.
For derivatives that are designated and qualify as net investment
hedges, the changes in the fair
value of the derivative is recorded in the foreign currency translation
gain (loss) component of Accumulated other
comprehensive income in stockholders’ equity until the net investment
is sold or substantially liquidated.
Our foreign currency forward agreements related to foreign currency
balance sheet exposure provide economic
hedges but are not designated as hedges for accounting purposes.
For agreements not designated as hedges, changes in the value of the derivative,
along with the transaction gain or
loss on the hedged item, are recorded in other, net, within our consolidated statements of income.
Total return swaps are entered into for the purpose of economically hedging our unfunded non-qualified
supplemental retirement plan (“SERP”) and our deferred compensation plan
(“DCP”).
This swap will offset
changes in our SERP and DCP liabilities.
This swap is expected to be renewed on an annual basis and is
recorded
in selling, general, and administrative expenses within our consolidated
statements of income.
Foreign Currency Translation
and Transactions
The financial position and results of operations of our foreign subsidiaries
are determined using local currency as
the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange
rate in effect at
each year-end.
Income statement accounts are translated at the average rate
of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from period to period are included
in
Accumulated other comprehensive income in stockholders’ equity.
Gains and losses resulting from foreign
currency transactions are included in earnings.
Accounting Pronouncements Adopted
On December 26, 2021 we adopted Accounting Standards Update
(“ASU”) No. 2021 – 08, “Accounting for
Contract Assets and Contract Liabilities from Contracts with Customers”
(Subtopic 805).
ASU 2021 – 08 requires
an acquirer to recognize and measure contract assets and contract liabilities acquired
in a business combination in
accordance with ASU No. 2014 - 09, “Revenue from Contracts with Customers”
(Topic 606).
At the acquisition
date, an acquirer should account for the related revenue contracts in accordance
with Topic 606 as if it had
originated the contracts.
To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine
what to record for the acquired revenue contracts.
Generally, this should result in an acquirer recognizing and
measuring the acquired contract assets and contract liabilities consistent with how
they were recognized and
measured in the acquiree’s financial statements.
Our adoption of ASU 2021 - 08 did not have a material impact on
our consolidated financial statements.
On December 27, 2020 we adopted ASU No. 2019-12, “Income Taxes” (Topic 740): Simplifying the Accounting
for Income Taxes (“ASU 2019-12”).
ASU 2019-12 simplifies the accounting for income taxes by
removing certain
exceptions to the general principles in Topic 740.
The amendments also improve consistent application of and
simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance.
Our adoption of
ASU 2019-12 did not have a material impact on our consolidated
financial statements.
Recently Issued Accounting Standards
In September 2022, the FASB issued ASU No. 2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-
50): Disclosure of Supplier Finance Program Obligations” which will
increase transparency of supplier finance
programs by requiring entities that use such programs in connection with
the purchase of goods and services to
disclose certain qualitative and quantitative information about such
programs.
ASU 2022-04 is effective for fiscal
years beginning after December 15, 2022, including interim periods within
those fiscal years, except for amended
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
77
rollforward information, which is effective for fiscal years beginning after December
15, 2023.
We do not expect
that the requirements of this guidance will have a material impact on our consolidated
financial statements.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the
Effects of Reference Rate Reform on Financial Reporting” which provides optional expedients
and exceptions for
applying GAAP to contracts, hedging relationships and other transactions affected
by the discontinuation of the
London Interbank Offered Rate (“LIBOR”) or by another reference rate expected
to be discontinued because of
reference rate reform.
The guidance was effective beginning March 12, 2020 and can be applied prospectively
through December 31, 2022.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic
848): Scope (“ASU 2021-01”).
ASU 2021-01 provides temporary optional expedients and exceptions
to certain
guidance in U.S. GAAP to ease the financial reporting burdens related
to the expected market transition from
LIBOR and other interbank offered rates to alternative reference rates, such as
the Secured Overnight Financing
Rate.
The guidance became effective upon issuance, on January 7, 2021, and can
be applied through December 31,
2022.
In December 2022, the FASB issued ASU No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of
the Sunset Date of Topic 848,” which extends the period of application of temporary optional expedients from
December 21, 2022 to December 31, 2024.
We do not expect that the requirements of this guidance will have a
material impact on our consolidated financial statements.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
78
Note 2 – Net Sales from Contracts with Customers
Net sales is recognized in accordance with policies disclosed in
Disaggregation of Net sales
The following table disaggregates our Net sales by reportable segment and
geographic area:
Year
Ended
December 31, 2022
North America
International
Global
Net Sales:
Health care distribution
Dental
$
4,628
$
2,845
$
7,473
Medical
4,375
76
4,451
Total health care distribution
9,003
2,921
11,924
Technology
and value-added services
633
90
723
Net sales
$
9,636
$
3,011
$
12,647
Year
Ended
December 25, 2021
North America
International
Global
Net Sales:
Health care distribution
Dental
$
4,506
$
3,038
$
7,544
Medical
4,107
103
4,210
Total health care distribution
8,613
3,141
11,754
Technology
and value-added services
560
87
647
Net sales
$
9,173
$
3,228
$
12,401
Year
Ended
December 26, 2020
North America
International
Global
Net Sales:
Health care distribution
Dental
$
3,472
$
2,441
$
5,913
Medical
3,515
102
3,617
Total health care distribution
6,987
2,543
9,530
Technology
and value-added services
447
67
514
Total excluding
Corporate TSA net sales
(1)
7,434
2,610
10,044
Corporate TSA net sales
(1)
-
75
75
Net sales
$
7,434
$
2,685
$
10,119
(1)
Corporate TSA net sales represents sales of certain animal health products to Covetrus under the transition services agreement
entered into in connection with the Animal Health Spin-off, which ended in December 2020.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
79
Note 3 – Segment and Geographic Data
We conduct our business through
two
reportable segments: (i) health care distribution and (ii) technology
and
value-added services.
These segments offer different products and services to the same customer base.
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
global dental and medical groups serve practitioners in
32
countries worldwide.
The health care distribution reportable segment aggregates our global dental
and medical operating segments.
This
segment distributes consumable products, dental specialty products, small
equipment, laboratory products, large
equipment, equipment repair services, branded and generic pharmaceuticals,
vaccines, surgical products, diagnostic
tests, infection-control products, PPE and vitamins.
Our global technology and value-added services reportable segment provides
software, technology and other value-
added services to health care practitioners.
Our technology offerings include practice management software
systems for dental and medical practitioners.
Our value-added practice solutions include practice consultancy,
education, revenue cycle management and financial services on a non-recourse
basis, e-services, practice
technology, network and hardware services, as well as continuing education services for practitioners.
The following tables present information about our reportable and operating
segments:
Years
Ended
December 31,
December 25,
December 26,
2022
2021
2020
Net Sales:
Health care distribution
(1)
Dental
$
7,473
$
7,544
$
5,913
Medical
4,451
4,210
3,617
Total health care distribution
11,924
11,754
9,530
Technology
and value-added services
(2)
723
647
514
Total excluding
Corporate TSA net sales
12,647
12,401
10,044
Corporate TSA net sales
(3)
-
-
75
Total
$
12,647
$
12,401
$
10,119
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic
products), diagnostic tests, infection-control products, PPE and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
(3)
Corporate TSA net sales 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
for further
information.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
80
Years
ended
December 31,
December 25,
December 26,
2022
2021
2020
Operating Income:
Health care distribution
$
619
$
727
$
436
Technology
and value-added services
128
125
99
Total
$
747
$
852
$
535
Income from continuing operations before
taxes
and equity in earnings of affiliates:
Health care distribution
$
592
$
706
$
400
Technology
and value-added services
129
125
100
Total
$
721
$
831
$
500
Depreciation and Amortization:
Health care distribution
$
160
$
157
$
143
Technology
and value-added services
52
53
43
Total
$
212
$
210
$
186
Interest Income:
Health care distribution
$
16
$
7
$
10
Technology
and value-added services
1
-
-
Total
$
17
$
7
$
10
Interest Expense:
Health care distribution
$
44
$
28
$
41
Total
$
44
$
28
$
41
Income Tax
Expense:
Health care distribution
$
141
$
168
$
71
Technology
and value-added services
29
30
24
Total
$
170
$
198
$
95
Purchases of Fixed Assets:
Health care distribution
$
86
$
74
$
44
Technology
and value-added services
10
5
5
Total
$
96
$
79
$
49
As of
December 31,
December 25,
December 26,
2022
2021
2020
Total
Assets:
Health care distribution
$
7,287
$
7,157
$
6,503
Technology
and value-added services
1,320
1,324
1,270
Total
$
8,607
$
8,481
$
7,773
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
81
The following table presents information about our operations by geographic
area as of and for the three years
ended December 31, 2022.
Net sales by geographic area are based on the respective locations
of our subsidiaries.
No country, except for the United States, generated net sales greater than
10
% of consolidated net sales.
There
were no material amounts of sales or transfers among geographic areas
and there were no material amounts of
export sales.
2022
2021
2020
Net Sales
Long-Lived
Assets
Net Sales
Long-Lived
Assets
Net Sales
Long-Lived
Assets
United States
$
9,190
$
2,891
$
8,722
$
2,981
$
7,090
$
2,363
Other
3,457
1,256
3,679
1,232
3,029
1,252
Consolidated total
$
12,647
$
4,147
$
12,401
$
4,213
$
10,119
$
3,615

84

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors

Henry Schein, Inc.

Melville, NY

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Henry Schein, Inc. (the “Company”) as of December 28, 2019 and December 29, 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 28, 2019, the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2019, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 20, 2020 expressed an unqualified opinion thereon.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, effective on December 30, 2019, the Company changed its method of accounting for leases due to the adoption of Accounting Standards Codification Topic 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee of the Board of Directors and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements; and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit

85

matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Business Combinations

As described in Note 11 of the consolidated financial statements, the Company acquired several companies in the current year. As a result of the acquisitions, management was required to determine estimated fair values of the assets acquired and liabilities assumed, including certain identifiable intangible assets. In some instances, management utilized third-party valuation specialists to assist in the preparation of the valuation of certain identifiable intangible assets.

We identified the determination of fair values of certain identifiable intangible assets, which primarily included customer relationships, as a critical audit matter. Management exercised significant judgment to develop and select assumptions in the measurement of the fair value of the identifiable intangible assets. Significant assumptions included discount rates, customer attrition, and projected revenue growth rates. These assumptions are forward-looking and could be affected by future economic and market conditions. The principal considerations for our determination included the following: (i) changes in the significant assumptions could have a significant impact on the fair value of the assets acquired, (ii) significant unobservable inputs and assumptions utilized by management in determining the fair value of the identifiable intangible assets acquired, and (iii) appropriateness of use of various valuation models to determine the fair value of the identifiable intangible assets acquired. Auditing these elements involved especially subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

• Assessing the design and testing operating effectiveness of certain controls over the development of significant assumptions used to determine the fair values of certain identifiable intangible assets, and controls over the selection of the valuation models used by management.

• Assessing the reasonableness of significant underlying assumptions through: (i) evaluating historical performance of target entities, (ii) assessing financial projections against industry metrics and peer-group companies, and (iii) performing sensitivity analyses and evaluating the potential effect of changes in the significant assumptions.

• Utilizing personnel with specialized knowledge and skill with valuation to assist in: (i) assessing the reasonableness of certain significant assumptions incorporated into the various valuation models, and (ii) assessing the appropriateness of various valuation models utilized by management to determine the fair values of the assets acquired.

Uncertain Tax Position

As described in Note 14 of the consolidated financial statements the Company operates in multiple jurisdictions and is subject to transfer pricing compliance for intercompany transactions that are subject to audit by taxing authorities. The resolution of these audits may span multiple years.

We identified the determination of uncertain tax positions related to transfer pricing from intercompany transactions as a critical audit matter. The principal considerations for our determination included complex judgments related to: (i) auditing the measurement of the liability for unrecognized tax benefits related to certain intercompany transactions because of assumptions applied to the interpretation of tax laws and legal rulings in multiple tax paying jurisdictions, (ii) determining whether a transfer pricing tax position’s technical merits are more-likely-than-not to be sustained when measuring the amount of tax benefits that qualifies for recognition, and (iii) assessing whether intercompany transactions are based on the arm’s length standard that may produce a range of arm’s length outcomes. Auditing these elements involved subjective auditor judgment, including involvement of

86

our tax professionals with specialized skills and knowledge.

The primary procedures we performed to address this critical audit matter included:

• Assessing the design and testing operating effectiveness of certain controls over the recognition and measurement of uncertain tax positions.

• Evaluating the appropriateness of management’s methods and assumptions used to estimate uncertain transfer pricing positions related to: (i) evaluating the ranges of arm’s length outcomes and pricing conclusions reached within management’s transfer pricing studies, (ii) verifying our understanding of the relevant facts by reading the Company’s correspondence with the relevant tax authorities and third-party advice obtained by the Company, and (iii) reviewing historical settlement activity from income tax authorities.

• Utilizing personnel with specialized knowledge and skill in taxation to assist in evaluating the reasonableness of technical merits, management’s judgments and assumptions used in uncertain tax position calculations related to transfer pricing, and assessing the overall reasonableness of conclusions reached.

/s/ BDO USA, LLP

We have served as the Company's auditor since 1984.

New York, NY

February 20, 2020

87

HENRY SCHEIN, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

 

December 28,

 

December 29,

 

 

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,097

 

$

56,885

 

Accounts receivable, net of reserves of $60,002 and $53,121

 

 

1,246,246

 

 

1,168,776

 

Inventories, net

 

 

1,428,799

 

 

1,415,512

 

Prepaid expenses and other

 

 

445,360

 

 

451,033

 

Assets of discontinued operations

 

 

-

 

 

1,083,014

 

 

 

Total current assets

 

 

3,226,502

 

 

4,175,220

Property and equipment, net

 

 

329,645

 

 

314,221

Operating lease right-of-use assets, net

 

 

231,662

 

 

-

Goodwill

 

 

2,462,495

 

 

2,081,029

Other intangibles, net

 

 

572,878

 

 

376,031

Investments and other

 

 

327,919

 

 

420,367

Assets of discontinued operations

 

 

-

 

 

1,133,659

 

 

 

Total assets

 

$

7,151,101

 

$

8,500,527

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

880,266

 

$

785,756

 

Bank credit lines

 

 

23,975

 

 

951,458

 

Current maturities of long-term debt

 

 

109,849

 

 

8,280

 

Operating lease liabilities

 

 

65,349

 

 

-

 

Liabilities of discontinued operations

 

 

-

 

 

577,607

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll and related

 

 

265,206

 

 

242,876

 

 

Taxes

 

 

165,171

 

 

154,613

 

 

Other

 

 

528,553

 

 

498,237

 

 

 

Total current liabilities

 

 

2,038,369

 

 

3,218,827

Long-term debt

 

 

622,908

 

 

980,344

Deferred income taxes

 

 

64,989

 

 

27,218

Operating lease liabilities

 

 

176,267

 

 

-

Other liabilities

 

 

331,173

 

 

357,741

Liabilities of discontinued operations

 

 

-

 

 

62,453

 

 

 

Total liabilities

 

 

3,233,706

 

 

4,646,583

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

287,258

 

 

219,724

Redeemable noncontrolling interests from discontinued operations

 

 

-

 

 

92,432

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $.01 par value, 1,000,000 shares authorized,

 

 

 

 

 

 

 

 

NaN outstanding

 

 

-

 

 

-

 

Common stock, $.01 par value, 480,000,000 shares authorized,

 

 

 

 

 

 

 

 

143,353,459 outstanding on December 28, 2019 and

 

 

 

 

 

 

 

 

151,401,668 outstanding on December 29, 2018

 

 

1,434

 

 

1,514

 

Additional paid-in capital

 

 

47,768

 

 

-

 

Retained earnings

 

 

3,116,215

 

 

3,208,589

 

Accumulated other comprehensive loss

 

 

(167,373)

 

 

(248,771)

 

 

Total Henry Schein, Inc. stockholders' equity

 

 

2,998,044

 

 

2,961,332

 

Noncontrolling interests

 

 

632,093

 

 

580,456

 

 

 

Total stockholders' equity

 

 

3,630,137

 

 

3,541,788

 

 

Total liabilities, redeemable noncontrolling interests and stockholders' equity

 

$

7,151,101

 

$

8,500,527

See accompanying notes.

88

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

 

 

 

Years Ended

 

 

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

 

 

2019

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

9,985,803

 

$

9,417,603

 

$

8,883,438

Cost of sales

 

 

6,894,917

 

 

6,506,856

 

 

6,136,776

 

 

Gross profit

 

 

3,090,886

 

 

2,910,747

 

 

2,746,662

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

2,357,920

 

 

2,217,273

 

 

2,071,576

 

Litigation settlements

 

 

-

 

 

38,488

 

 

5,325

 

Restructuring costs

 

 

14,705

 

 

54,367

 

 

-

 

 

Operating income

 

 

718,261

 

 

600,619

 

 

669,761

Other income (expense):

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

15,757

 

 

15,491

 

 

12,438

 

Interest expense

 

 

(50,792)

 

 

(76,016)

 

 

(51,066)

 

Other, net

 

 

(2,919)

 

 

(3,258)

 

 

(1,339)

 

 

Income from continuing operations before taxes, equity in

 

 

 

 

 

 

 

 

 

 

 

 

earnings of affiliates and noncontrolling interests

 

 

680,307

 

 

536,836

 

 

629,794

Income taxes

 

 

(159,515)

 

 

(107,432)

 

 

(308,975)

Equity in earnings of affiliates

 

 

17,900

 

 

21,037

 

 

15,293

Net gain (loss) on sale of equity investments

 

 

186,769

 

 

-

 

 

(17,636)

Net income from continuing operations

 

 

725,461

 

 

450,441

 

 

318,476

Income (loss) from discontinued operations

 

 

(6,323)

 

 

111,685

 

 

140,817

Net Income

 

 

719,138

 

 

562,126

 

 

459,293

 

Less: Net income attributable to noncontrolling interests

 

 

(24,770)

 

 

(19,724)

 

 

(25,304)

 

Less: Net (income) loss attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

from discontinued operations

 

 

366

 

 

(6,521)

 

 

(27,690)

Net income attributable to Henry Schein, Inc.

 

$

694,734

 

$

535,881

 

$

406,299

Amounts attributable to Henry Schein Inc.:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

700,691

 

$

430,717

 

$

293,172

Discontinued operations

 

 

(5,957)

 

 

105,164

 

 

113,127

Net income attributable to Henry Schein, Inc.

 

$

694,734

 

$

535,881

 

$

406,299

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations attributable to

 

 

 

 

 

 

 

 

 

Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.74

 

$

2.82

 

$

1.87

 

Diluted

 

$

4.69

 

$

2.80

 

$

1.85

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from discontinued operations

 

 

 

 

 

 

 

 

 

attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.04)

 

$

0.69

 

$

0.72

 

Diluted

 

$

(0.04)

 

$

0.68

 

$

0.72

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.70

 

$

3.51

 

$

2.59

 

Diluted

 

$

4.65

 

$

3.49

 

$

2.57

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

147,817

 

 

152,656

 

 

156,787

 

Diluted

 

 

149,257

 

 

153,707

 

 

158,208

See accompanying notes.

89

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

 

 

2019

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

719,138

 

$

562,126

 

$

459,293

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(4,070)

 

 

(136,356)

 

 

191,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) from foreign currency hedging activities

 

 

(3,876)

 

 

626

 

 

(729)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gain (loss)

 

 

12

 

 

(3)

 

 

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension adjustment gain (loss)

 

 

(5,924)

 

 

3,033

 

 

3,933

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

(13,858)

 

 

(132,700)

 

 

195,087

Comprehensive income

 

 

705,280

 

 

429,426

 

 

654,380

 

Comprehensive income attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

(24,404)

 

 

(26,245)

 

 

(52,994)

 

 

Foreign currency translation (gain) loss

 

 

1,848

 

 

13,996

 

 

(8,113)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to noncontrolling interests

 

 

(22,556)

 

 

(12,249)

 

 

(61,107)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Henry Schein, Inc.

 

$

682,724

 

$

417,177

 

$

593,273

See accompanying notes.

90

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

 

 

$.01 Par Value

 

Paid-in

 

Retained

 

Comprehensive

 

Noncontrolling

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Interests

 

Equity

Balance, December 31, 2016

 

158,805,010

 

 

1,588

 

 

126,742

 

 

2,981,777

 

 

(317,041)

 

 

7,738

 

 

2,800,804

Net income (excluding $52,203 attributable to Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests)

 

-

 

 

-

 

 

-

 

 

406,299

 

 

-

 

 

791

 

 

407,090

Foreign currency translation gain (excluding gain of $7,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Redeemable noncontrolling interests)

 

-

 

 

-

 

 

-

 

 

 

 

 

183,773

 

 

652

 

 

184,425

Unrealized loss from foreign currency hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefit of $786

 

-

 

 

-

 

 

-

 

 

-

 

 

(729)

 

 

-

 

 

(729)

Unrealized investment loss, net of tax benefit of $1

 

-

 

 

-

 

 

-

 

 

-

 

 

(3)

 

 

-

 

 

(3)

Pension adjustment gain, net of tax of $314

 

-

 

 

-

 

 

-

 

 

-

 

 

3,933

 

 

-

 

 

3,933

Dividends paid

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(546)

 

 

(546)

Other adjustments

 

-

 

 

-

 

 

23

 

 

-

 

 

-

 

 

376

 

 

399

Purchase of noncontrolling interests

 

 

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(4,150)

 

 

(4,150)

Change in fair value of redeemable securities

 

-

 

 

-

 

 

(162,729)

 

 

-

 

 

-

 

 

-

 

 

(162,729)

Initial noncontrolling interests and adjustments related to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

business acquisitions

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

8,050

 

 

8,050

Repurchase and retirement of common stock

 

(5,864,404)

 

 

(59)

 

 

(97,205)

 

 

(352,736)

 

 

-

 

 

-

 

 

(450,000)

Stock issued upon exercise of stock options

 

197,434

 

 

2

 

 

5,264

 

 

-

 

 

-

 

 

-

 

 

5,266

Stock-based compensation expense

 

1,072,922

 

 

11

 

 

42,283

 

 

-

 

 

-

 

 

-

 

 

42,294

Shares withheld for payroll taxes

 

(520,816)

 

 

(5)

 

 

(44,771)

 

 

-

 

 

-

 

 

-

 

 

(44,776)

Settlement of stock-based compensation awards

 

-

 

 

-

 

 

(599)

 

 

-

 

 

-

 

 

-

 

 

(599)

Deferred tax benefit arising from acquisition of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest in partnership

 

-

 

 

-

 

 

35,681

 

 

-

 

 

-

 

 

-

 

 

35,681

Transfer of charges in excess of capital

 

-

 

 

-

 

 

95,311

 

 

(95,311)

 

 

-

 

 

-

 

 

-

Balance, December 30, 2017

 

153,690,146

 

 

1,537

 

 

-

 

 

2,940,029

 

 

(130,067)

 

 

12,911

 

 

2,824,410

Cumulative impact of adopting new accounting standards

 

 

 

 

-

 

 

-

 

 

2,594

 

 

-

 

 

-

 

 

2,594

Net income (excluding $21,848 attributable to Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests)

 

 

 

-

 

 

-

 

 

535,881

 

 

-

 

 

4,397

 

 

540,278

Foreign currency translation loss (excluding loss of $13,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Redeemable noncontrolling interests)

 

-

 

 

-

 

 

-

 

 

-

 

 

(122,360)

 

 

(965)

 

 

(123,325)

Unrealized gain from foreign currency hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax of $396

 

-

 

 

-

 

 

-

 

 

-

 

 

626

 

 

-

 

 

626

Unrealized investment loss, net of tax benefit of $0

 

-

 

 

-

 

 

-

 

 

-

 

 

(3)

 

 

-

 

 

(3)

Pension adjustment gain, net of tax of $1,179

 

-

 

 

-

 

 

-

 

 

-

 

 

3,033

 

 

-

 

 

3,033

Dividends paid

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(656)

 

 

(656)

Other adjustments

 

-

 

 

-

 

 

(19)

 

 

-

 

 

-

 

 

713

 

 

694

Purchase of noncontrolling interests

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(214)

 

 

(214)

Change in fair value of redeemable securities

 

-

 

 

-

 

 

(148,919)

 

 

-

 

 

-

 

 

-

 

 

(148,919)

Initial noncontrolling interests and adjustments related to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

business acquisitions

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

564,270

 

 

564,270

Repurchase and retirement of common stock

 

(2,518,387)

 

 

(25)

 

 

(36,206)

 

 

(163,769)

 

 

-

 

 

-

 

 

(200,000)

Stock issued upon exercise of stock options

 

153,516

 

 

1

 

 

3,075

 

 

-

 

 

-

 

 

-

 

 

3,076

Stock-based compensation expense

 

340,794

 

 

4

 

 

36,236

 

 

-

 

 

-

 

 

-

 

 

36,240

Shares withheld for payroll taxes

 

(267,772)

 

 

(3)

 

 

(18,140)

 

 

-

 

 

-

 

 

-

 

 

(18,143)

Settlement of stock-based compensation awards

 

3,371

 

 

-

 

 

(727)

 

 

-

 

 

-

 

 

-

 

 

(727)

Deferred tax benefit arising from acquisition of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest in partnership

 

-

 

 

-

 

 

58,554

 

 

-

 

 

-

 

 

-

 

 

58,554

Transfer of charges in excess of capital

 

-

 

 

-

 

 

106,146

 

 

(106,146)

 

 

-

 

 

-

 

 

-

Balance, December 29, 2018

 

151,401,668

 

 

1,514

 

 

-

 

 

3,208,589

 

 

(248,771)

 

 

580,456

 

 

3,541,788

Cumulative impact of adopting new accounting standards

-

 

 

-

 

 

-

 

 

(274)

 

 

-

 

 

-

 

 

(274)

Net income (excluding $14,838 attributable to Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and ($366) from discontinued operations)

-

 

 

-

 

 

-

 

 

694,734

 

 

-

 

 

9,932

 

 

704,666

Foreign currency translation loss (excluding loss of $2,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Redeemable noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and ($592) gain from discontinued operations)

 

-

 

 

-

 

 

-

 

 

-

 

 

(2,222)

 

 

(105)

 

 

(2,327)

Unrealized loss from foreign currency hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefit of $1,035

 

-

 

 

-

 

 

-

 

 

-

 

 

(3,876)

 

 

-

 

 

(3,876)

Unrealized investment gain, net of tax of $2

 

-

 

 

-

 

 

-

 

 

-

 

 

12

 

 

-

 

 

12

Pension adjustment loss, net of tax benefit of $1,806

 

-

 

 

-

 

 

-

 

 

-

 

 

(5,924)

 

 

-

 

 

(5,924)

Dividends paid

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(535)

 

 

(535)

Other adjustments

 

-

 

 

-

 

 

(3)

 

 

-

 

 

-

 

 

-

 

 

(3)

Change in fair value of redeemable securities

 

-

 

 

-

 

 

7,300

 

 

-

 

 

-

 

 

-

 

 

7,300

Initial noncontrolling interests and adjustments related to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

business acquisitions

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

42,345

 

 

42,345

Adjustment for Animal Health Spin-off

 

87,629

 

 

1

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1

Repurchase and retirement of common stock

 

(8,173,912)

 

 

(82)

 

 

(79,785)

 

 

(445,133)

 

 

-

 

 

-

 

 

(525,000)

Stock issued upon exercise of stock options

 

2,526

 

 

-

 

 

34

 

 

-

 

 

-

 

 

-

 

 

34

Stock-based compensation expense

 

215,408

 

 

2

 

 

45,243

 

 

-

 

 

-

 

 

-

 

 

45,245

Shares withheld for payroll taxes

 

(179,860)

 

 

(1)

 

 

(10,844)

 

 

-

 

 

-

 

 

-

 

 

(10,845)

Settlement of stock-based compensation awards

 

-

 

 

-

 

 

160

 

 

-

 

 

-

 

 

-

 

 

160

Share Sale related to Animal Health business

 

-

 

 

-

 

 

361,090

 

 

-

 

 

-

 

 

-

 

 

361,090

Separation of Animal Health business

 

-

 

 

-

 

 

(73,970)

 

 

(543,158)

 

 

93,408

 

 

-

 

 

(523,720)

Transfer of charges in excess of capital

 

-

 

 

-

 

 

(201,457)

 

 

201,457

 

 

-

 

 

-

 

 

-

Balance, December 28, 2019

 

143,353,459

 

 

1,434

 

 

47,768

 

 

3,116,215

 

 

(167,373)

 

 

632,093

 

 

3,630,137

See accompanying notes.

91

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

 

 

Years Ended

 

 

 

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

 

 

 

2019

 

2018

 

2017

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net income

 

$

719,138

 

$

562,126

 

$

459,293

 

Income (loss) from discontinued operations

 

 

(6,323)

 

 

111,685

 

 

140,817

 

Income from continuing operations

 

 

725,461

 

 

450,441

 

 

318,476

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

184,942

 

 

143,630

 

 

133,855

 

 

 

Net (gain) loss on sale of equity investments

 

 

(250,167)

 

 

-

 

 

17,636

 

 

 

Stock-based compensation expense

 

 

44,920

 

 

32,621

 

 

36,845

 

 

 

Provision for losses on trade and other accounts receivable

 

 

12,612

 

 

14,384

 

 

7,915

 

 

 

Benefit from deferred income taxes

 

 

(4,057)

 

 

(36,007)

 

 

(1,773)

 

 

 

Equity in earnings of affiliates

 

 

(17,900)

 

 

(21,037)

 

 

(15,293)

 

 

 

Distributions from equity affiliates

 

 

71,469

 

 

20,386

 

 

20,895

 

 

 

Changes in unrecognized tax benefits

 

 

1,941

 

 

(1,169)

 

 

(2,208)

 

 

 

Provision for (benefit from) transition tax

 

 

-

 

 

(10,000)

 

 

140,000

 

 

 

Other

 

 

5,684

 

 

369

 

 

9,850

 

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(72,689)

 

 

(127,201)

 

 

(128,498)

 

 

 

 

Inventories

 

 

14,702

 

 

(41,042)

 

 

(143,155)

 

 

 

 

Other current assets

 

 

(57,291)

 

 

(165,645)

 

 

(101,024)

 

 

 

 

Accounts payable and accrued expenses

 

 

160,851

 

 

191,225

 

 

81,514

Net cash provided by operating activities from continuing operations

 

 

820,478

 

 

450,955

 

 

375,035

Net cash provided by (used in) operating activities from discontinued operations

 

 

(166,391)

 

 

233,751

 

 

170,480

Net cash provided by operating activities

 

 

654,087

 

 

684,706

 

 

545,515

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Purchases of fixed assets

 

 

(76,219)

 

 

(71,283)

 

 

(62,404)

 

Payments related to equity investments and business

 

 

 

 

 

 

 

 

 

 

 

acquisitions, net of cash acquired

 

 

(655,879)

 

 

(53,240)

 

 

(181,415)

 

Proceeds from sale of equity investment

 

 

307,251

 

 

1,000

 

 

34,048

 

Repayments from (borrowings for) loan to affiliate

 

 

16,713

 

 

(25,700)

 

 

6,700

 

Other

 

 

(14,175)

 

 

(15,101)

 

 

(9,670)

Net cash used in investing activities from continuing operations

 

 

(422,309)

 

 

(164,324)

 

 

(212,741)

Net cash used in investing activities from discontinued operations

 

 

(2,064)

 

 

(28,630)

 

 

(129,535)

Net cash used in investing activities

 

 

(424,373)

 

 

(192,954)

 

 

(342,276)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Net change in bank borrowings

 

 

(927,912)

 

 

210,741

 

 

302,941

 

Proceeds from issuance of long-term debt

 

 

741

 

 

115,000

 

 

200,440

 

Principal payments for long-term debt

 

 

(260,944)

 

 

(24,735)

 

 

(59,288)

 

Debt issuance costs

 

 

(391)

 

 

(501)

 

 

(1,892)

 

Proceeds from issuance of stock upon exercise of stock options

 

 

34

 

 

3,076

 

 

5,266

 

Payments for repurchases of common stock

 

 

(525,000)

 

 

(200,000)

 

 

(450,000)

 

Payments for taxes related to shares withheld for employee taxes

 

 

(10,814)

 

 

(18,023)

 

 

(44,832)

 

Distribution received related to Animal Health Spin-off

 

 

1,120,000

 

 

-

 

 

-

 

Proceeds related to Animal Health Share Sale

 

 

361,090

 

 

-

 

 

-

 

Proceeds from (distributions to) noncontrolling shareholders

 

 

51,498

 

 

(7,351)

 

 

(8,673)

 

Acquisitions of noncontrolling interests in subsidiaries

 

 

(2,358)

 

 

(287,635)

 

 

(11,532)

 

Payments to Henry Schein Animal Health Business

 

 

(169,295)

 

 

(192,745)

 

 

(6,374)

Net cash used in financing activities from continuing operations

 

 

(363,351)

 

 

(402,173)

 

 

(73,944)

Net cash provided by (used in) financing activities from discontinued operations

 

 

147,371

 

 

(201,603)

 

 

(38,607)

Net cash used in financing activities

 

 

(215,980)

 

 

(603,776)

 

 

(112,551)

Effect of exchange rate changes on cash and cash equivalents from continuing operations

 

 

14,394

 

 

14,425

 

 

26,985

Effect of exchange rate changes on cash and cash equivalents from discontinued operations

 

 

(2,240)

 

 

3,150

 

 

(5,396)

Net change in cash and cash equivalents from continuing operations

 

 

49,212

 

 

(101,117)

 

 

115,335

Net change in cash and cash equivalents from discontinued operations

 

 

(23,324)

 

 

6,668

 

 

(3,058)

Cash and cash equivalents, beginning of period

 

 

56,885

 

 

158,002

 

 

42,667

Cash and cash equivalents, end of period

 

$

106,097

 

$

56,885

 

$

158,002

See accompanying notes.

92

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 1 –Significant Accounting Policies

Nature of Operations

We distribute health care products and services primarily to office-based health care practitioners with operations or affiliates in the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, the Netherlands, New Zealand, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Arab Emirates and the United Kingdom.

Principles of Consolidation

Our consolidated financial statements include the accounts of Henry Schein, Inc. and all of our controlled subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. Investments in unconsolidated affiliates, which are greater than or equal to 20% and less than or equal to 50% owned or investments in unconsolidated affiliates of less than 20% in which we have the ability to influence the operating or financial decisions, are accounted for under the equity method. See Note 8 for accounting treatment of Redeemable noncontrolling interests. Certain prior period amounts have been reclassified to conform to the current period presentation.

We consolidate a Variable Interest Entity (“VIE”) where we hold a variable interest and are the primary beneficiary. The VIE is a trade accounts receivable securitization. We are the primary beneficiary because we have the power to direct activities that most significantly affect the economic performance and have the obligation to absorb the majority of the losses or benefits. The results of operations and financial position of this VIE are included in our consolidated financial statements.

For the consolidated VIE, the trade accounts receivable transferred to the VIE are pledged as collateral to the related debt. The creditors have recourse to us for losses on these trade accounts receivable. For the years ended December 28, 2019 and December 29, 2018, trade accounts receivable that can only be used to settle obligations of this VIE were $127 million and $422 million, respectively, and the liabilities of the VIE where the creditors have recourse to us were $100 million and $350 million, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fiscal Year

We report our results of operations and cash flows on a 52-53 week basis ending on the last Saturday of December. The years ended December 28, 2019, December 29, 2018and December 30, 2017consisted of 52 weeks.

Revenue Recognition

On December 31, 2017, we adopted Accounting Standards Codification (“ASC”) 606 (“Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of the adoption date. Results for reporting periods beginning after December 30, 2017 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for those periods.

93

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Our revenue recognition accounting policies applied prior to adoption of Topic 606 are outlined in the financial statements in our Annual Report on Form 10-K for the year ended December 30, 2017. The disclosures included herein reflect our accounting policies under Topic 606.

Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive for those goods or services. To recognize revenue, we do the following:

• identify the contract(s) with a customer;

• identify the performance obligations in the contract;

• determine the transaction price;

• allocate the transaction price to the performance obligations in the contract; and

• recognize revenue when, or as, the entity satisfies a performance obligation.

We generate revenue from the sale of dental and medical consumable products, equipment (Health care distribution revenues), software products and services and other sources (Technology and value-added services revenues). Provisions for discounts, rebates to customers, customer returns and other contra revenue adjustments are included in the transaction price at contract inception by estimating the most likely amount based upon historical data and estimates and are provided for in the period in which the related sales are recognized.

Revenue derived from the sale of consumable products is recognized at a point in time when control transfers to the customer. Such sales typically entail high-volume, low-dollar orders shipped using third-party common carriers. We believe that the shipment date is the most appropriate point in time indicating control has transferred to the customer because we have no post-shipment obligations and this is when legal title and risks and rewards of ownership transfer to the customer and the point at which we have an enforceable right to payment.

Revenue derived from the sale of equipment is recognized when control transfers to the customer. This occurs when the equipment is delivered. Such sales typically entail scheduled deliveries of large equipment primarily by equipment service technicians. Some equipment sales require minimal installation, which is typically completed at the time of delivery. Our product generally carries standard warranty terms provided by the manufacturer, however, in instances where we provide warranty labor services, the warranty costs are accrued in accordance with ASC 460 “Guarantees”.

Revenue derived from the sale of software products is recognized when products are shipped to customers or made available electronically. Such software is generally installed by customers and does not require extensive training due to the nature of its design. Revenue derived from post-contract customer support for software, including annual support and/or training, is generally recognized over time using time elapsed as the input method that best depicts the transfer of control to the customer.

Revenue derived from other sources, including freight charges, equipment repairs and financial services, is recognized when the related product revenue is recognized or when the services are provided. We apply the practical expedient to treat shipping and handling activities performed after the customer obtains control as fulfillment activities, rather than a separate performance obligation in the contract.

Sales, value-add and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

94

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Certain of our revenue is derived from bundled arrangements that include multiple distinct performance obligations which are accounted for separately. When we sell software products together with related services (i.e., training and technical support), we allocate revenue to software using the residual method, using an estimate of the standalone selling price to estimate the fair value of the undelivered elements. There are no cases where revenue is deferred due to a lack of a standalone selling price. Bundled arrangements that include elements that are not considered software consist primarily of equipment and the related installation service. We allocate revenue for such arrangements based on the relative selling prices of the goods or services. If an observable selling price is not available (i.e., we do not sell the goods or services separately), we use one of the following techniques to estimate the standalone selling price: adjusted market approach; cost-plus approach; or the residual method. There is no specific hierarchy for the use of these methods, but the estimated selling price reflects our best estimate of what the selling prices of each deliverable would be if it were sold regularly on a standalone basis taking into consideration the cost structure of our business, technical skill required, customer location and other market conditions

See Note 17 for additional disclosures of disaggregated net sales and Note 18 for disclosures of net sales by segment and geographic data.

Contract Balances

Contract balances represent amounts presented in our consolidated balance sheet when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable, contract assets and contract liabilities.

Accounts Receivable

Accounts receivable are generally recognized when heath care distribution and technology and value-added services revenues are recognized. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects our best estimate of the amounts that will not be collected. In addition to reviewing delinquent accounts receivable, we consider many factors in estimating our reserve, including historical data, experience, customer types, credit worthiness and economic trends. From time to time, we adjust our assumptions for anticipated changes in any of these or other factors expected to affect collectability.

Contract Assets

Contract assets include amounts related to any conditional right to consideration for work completed but not billed as of the reporting date and generally represent amounts owed to us by customers, but not yet billed. Contract assets are transferred to accounts receivable when the right becomes unconditional. The contract assets primarily relate to our bundled arrangements for the sale of equipment and consumables and sales of term software licenses. Current contract assets are included in Prepaid expenses and other and the non-current contract assets are included in Investments and other within our consolidated balance sheet. Current and non-current contract asset balances as of December 28, 2019and December 29, 2018 were not material.

Contract Liabilities

Contract liabilities are comprised of advance payments and upfront payments for service arrangements provided over time that are accounted for as deferred revenue amounts. Contract liabilities are transferred to revenue once the performance obligation has been satisfied. Current contract liabilities are included in Accrued expenses: Other and the non-current contract liabilities are included in Other liabilities within our consolidated balance sheet. At December 29, 2018, the current portion of contract liabilities of $65.3 million was reported in Accrued expenses: Other, and $5.0 million related to non-current contract liabilities were reported in Other liabilities. During the year ended December 28, 2019, we recognized substantially all of the current contract liability amounts that were

95

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

previously deferred at December 29, 2018. At December 28, 2019, the current and non-current portion of contract liabilities were $70.8 million and $6.2 million, respectively.

Deferred Commissions

Sales commissions earned by our sales force that relate to long term arrangements are capitalized as costs to obtain a contract when the costs incurred are incremental and are expected to be recovered. Deferred sales commissions are amortized over the estimated customer relationship period. We apply the practical expedient related to the capitalization of incremental costs of obtaining a contract, and recognize such costs as an expense when incurred if the amortization period of the assets that we would have recognized is one year or less. Our deferred commission balances as of December 28, 2019 and December 29, 2018 were not material.

Sales Returns

Sales returns are recognized as a reduction of revenue by the amount of expected returns and are recorded as refund liability within current liabilities. We estimate the amount of revenue expected to be reversed to calculate the sales return liability based on historical data for specific products, adjusted as necessary for new products. The allowance for returns is presented gross as a refund liability and we record an inventory asset (and a corresponding adjustment to cost of sales) for any goods or services that we expect to be returned.

Cash and Cash Equivalents

We consider all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents. Due to the short-term maturity of such investments, the carrying amounts are a reasonable estimate of fair value. Outstanding checks in excess of funds on deposit of $29.5 million and $41.1 million, primarily related to payments for inventory, were classified as accounts payable as of December 28, 2019 and December 29, 2018.

Inventories and Reserves

Inventories consist primarily of finished goods and are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method for merchandise or actual cost for large equipment and high tech equipment. In accordance with our policy for inventory valuation, we consider many factors including the condition and salability of the inventory, historical sales, forecasted sales and market and economic trends. From time to time, we adjust our assumptions for anticipated changes in any of these or other factors expected to affect the value of inventory.

Direct Shipping and Handling Costs

Freight and other direct shipping costs are included in cost of sales. Direct handling costs, which represent primarily direct compensation costs of employees who pick, pack and otherwise prepare, if necessary, merchandise for shipment to our customers are reflected in selling, general and administrative expenses. Direct shipping and handling costs were $73.8 million, $70.6 million and $65.0 million for the years ended December 28, 2019, December 29, 2018 and December 30, 2017.

Advertising and Promotional Costs

We generally expense advertising and promotional costs as incurred. Total advertising and promotional expenses were $25.2 million, $12.9 million and $0.8 million for the years ended December 28, 2019, December 29, 2018 and December 30, 2017.

96

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Supplier Rebates

Supplier rebates are included as a reduction of cost of sales and are recognized over the period they are earned. The factors we consider in estimating supplier rebate accruals include forecasted inventory purchases and sales, in conjunction with supplier rebate contract terms, which generally provide for increasing rebates based on either increased purchase or sales volume.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is computed primarily under the straight-line method (see Note 3 - Property and Equipment, Net for estimated useful lives). Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the assets or the lease term.

Capitalized software costs consist of costs to purchase and develop software. Costs incurred during the application development stage for software bought and further customized by outside suppliers for our use and software developed by a supplier for our proprietary use are capitalized. Costs incurred for our own personnel who are directly associated with software development are capitalized.

Income Taxes

We account for income taxes under an asset and liability approach that requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in tax laws or rates. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Our accounting for the Tax Cuts and Jobs Act, enacted on December 22, 2017, is further discussed in Note 14–Income Taxes. We file a consolidated U.S. federal income tax return with our 80% or greater owned U.S. subsidiaries.

Foreign Currency Translation and Transactions

The financial position and results of operations of our foreign subsidiaries are determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in Accumulated other comprehensive income in stockholders’ equity. Gains and losses resulting from foreign currency transactions are included in earnings.

Risk Management and Derivative Financial Instruments

We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchange rates. Our objective is to manage the impact that foreign currency exchange rate fluctuations could have on recognized asset and liability fair values, earnings and cash flows, as well as our net investments in foreign subsidiaries. Our risk management policy requires that derivative contracts used as hedges be effective at reducing the risks associated with the exposure being hedged and be designated as a hedge at the inception of the contract. We do not enter into derivative instruments for speculative purposes. Our derivative instruments primarily include foreign currency forward agreements related to certain intercompany loans, certain forecasted inventory purchase commitments with foreign suppliers and foreign currency forward contracts to hedge a portion of our euro-denominated foreign operations which are designated as net investment hedges.

97

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Foreign currency forward agreements related to forecasted inventory purchase commitments with foreign suppliers and foreign currency swaps related to foreign currency denominated debt are designated as cash flow hedges. For derivatives that are designated and qualify as cash flow hedges, the changes in the fair value of the derivative is recorded as a component of Accumulated other comprehensive income in stockholders’ equity and subsequently reclassified into earnings in the period(s) during which the hedged transaction affects earnings. We classify the cash flows related to our hedging activities in the same category on our consolidated statements of cash flows as the cash flows related to the hedged item.

Foreign currency forward contracts related to our euro-denominated foreign operations are designated as net investment hedges. For derivatives that are designated and qualify as net investment hedges, the changes in the fair value of the derivative is recorded in the foreign currency translation gain (loss) component of Accumulated other comprehensive income in stockholders’ equity until the net investment is sold or substantially liquidated.

Our foreign currency forward agreements related to foreign currency balance sheet exposure provide economic hedges but are not designated as hedges for accounting purposes.

For agreements not designated as hedges, changes in the value of the derivative, along with the transaction gain or loss on the hedged item, are recorded in earnings.

Acquisitions

We account for business acquisitions and combinations under the acquisition method of accounting, where the net assets of businesses purchased are recorded at their fair value at the acquisition date and our consolidated financial statements include their results of operations from that date. Any excess of acquisition consideration over the fair value of identifiable net assets acquired is recorded as goodwill. The major classes of assets and liabilities that we generally allocate purchase price to, excluding goodwill, include identifiable intangible assets (i.e., trademarks and trade names, customer relationships and lists, non-compete agreements and product development), property, plant and equipment, deferred taxes and other current and long-term assets and liabilities. The estimated fair value of identifiable intangible assets is based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rates; discounted cash flows; customer retention rates; and estimated useful lives. Some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial targets are met. While we use our best estimates and assumptions to accurately value those assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill within our consolidated balance sheets. At the end of the measurement period or final determination of the values of such assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations. For the years ended December 28, 2019, December 29, 2018 and December 30, 2017, there were no material adjustments recorded in our consolidated statement of income relating to changes in subsequent adjustments or estimated contingent purchase price liabilities.

Redeemable Noncontrolling Interests

Some minority stockholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. Their interests in these subsidiaries are classified outside permanent equity on our consolidated balance sheets and are carried at the estimated redemption amounts. The redemption amounts have been estimated based on expected future earnings and cash flow and, if such earnings and cash flow are not achieved, the value of the redeemable noncontrolling interests might be impacted. Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are reflected at each reporting

98

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

period with a corresponding adjustment to Additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments do not impact the calculation of earnings per share.

Noncontrolling Interests

Noncontrolling interests represent our less than 50% ownership interest in an acquired subsidiary. Our net income is reduced by the portion of the subsidiaries net income that is attributable to noncontrolling interests.

Goodwill

Goodwill is not amortized, but are subject to impairment analysis at least once annually. Such impairment analyses for goodwill require a comparison of the fair value to the carrying value of reporting units. We regard our reporting units to be our operating segments: health care distribution (global dental and medical) and technology and value-added services. Goodwill was allocated to such reporting units, for the purposes of preparing our impairment analyses, based on a specific identification basis.

For the years ended December 28, 2019, December 29, 2018 and December 30, 2017 we tested goodwill for impairment using a quantitative analysis consisting of a two-step approach. The first step of our quantitative analysis consists of a comparison of the carrying value of our reporting units, including goodwill, to the estimated fair value of our reporting units using a discounted cash flow methodology. If step one results in the carrying value of the reporting unit exceeding the fair value of such reporting unit, we would then proceed to step two which would require us to calculate the amount of impairment loss, if any, that we would record for such reporting unit. The calculation of the impairment loss in step two would be equivalent to the reporting unit’s carrying value of goodwill less the implied fair value of such goodwill.

Our use of a discounted cash flow methodology includes estimates of future revenue based upon budget projections and growth rates, which take into account estimated inflation rates. We also develop estimates for future levels of gross profits and operating profits and projected capital expenditures. Our methodology also includes the use of estimated discount rates based upon industry and competitor analysis as well as other factors. The estimates that we use in our discounted cash flow methodology involve many assumptions by management that are based upon future growth projections.

Some factors we consider important that could trigger an interim impairment review include:

• significant underperformance relative to expected historical or projected future operating results;

• significant changes in the manner of our use of acquired assets or the strategy for our overall business (e.g., decision to divest a business); or

• significant negative industry or economic trends.

If we determine through the impairment review process that goodwill is impaired, we record an impairment charge in our consolidated statements of income.

For the years ended December 28, 2019, December 29, 2018 and December 30, 2017, the results of our goodwill analysis did 0t result in any impairments.

99

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Long-Lived Assets

Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows to be derived from such assets.

Definite-lived intangible assets primarily consist of non-compete agreements, trademarks, trade names, customer lists, customer relationships and intellectual property. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.

Cost of Sales

The primary components of cost of sales include the cost of the product (net of purchase discounts, supplier chargebacks and rebates) and inbound and outbound freight charges. Costs related to purchasing, receiving, inspections, warehousing, internal inventory transfers and other costs of our distribution network are included in selling, general and administrative expenses along with other operating costs.

As a result of different practices of categorizing costs associated with distribution networks throughout our industry, our gross margins may not necessarily be comparable to other distribution companies. Total distribution network costs were $72.3 million, $69.6 million and $67.5 million for the years ended December 28, 2019, December 29, 2018 and December 30, 2017.

Comprehensive Income

Comprehensive income includes certain gains and losses that, under accounting principles generally accepted in the United States, are excluded from net income as such amounts are recorded directly as an adjustment to stockholders’ equity. Our comprehensive income is primarily comprised of net income, foreign currency translation gain (loss), unrealized gain (loss) from foreign currency hedging activities, unrealized investment gain (loss) and pension adjustment gain (loss).

Leases

We determine if an arrangement contains a lease at inception. An arrangement contains a lease if it implicitly or explicitly identifies an asset to be used and conveys the right to control the use of the identified asset in exchange for consideration. As a lessee, we include operating leases in Operating lease right-of-use (“ROU”) assets, Operating lease liabilities, and Non-current operating lease liabilities in our consolidated balance sheet. Finance leases are included in Property and equipment, Current maturities of long-term debt, and Long-term debt in our consolidated balance sheet.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized upon commencement of the lease based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we generally use our incremental borrowing rate based on the estimated rate of interest for fully amortizing borrowings over a similar term of the lease payments at commencement date to determine the present value of lease payments. When readily determinable, we use the implicit rate. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Expenses associated with operating leases finance leases are included in “Selling, general and

100

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

administrative” and “Interest expense”, respectively within our Consolidated Statement of Income. Leases with a lease term of 12 months or less are not capitalized.

We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component, except non-lease components for leases of vehicles which are accounted for separately. When a vehicle lease contains both lease and non-lease components, we allocate the transaction price based on the relative standalone selling price.

Accounting Pronouncements Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 “Leases (Topic 842)” related to leases requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most significant among the changes in the standard is the recognition of ROU assets and lease liabilities by lessors for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

We adopted the standard on December 30, 2018 using a modified retrospective approach utilizing a transition relief expedient method whereby we continue to apply existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption, rather than in the earliest period presented without adjusting historical financial statements. We elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward the historical lease classification. Information related to leases as of December 28, 2019is presented under Topic 842, while prior period amounts are not adjusted and continue to be reported under legacy guidance in Topic 840.

The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged.

Adoption of the new standard resulted in the recording of additional net operating lease assets of $259.9 million and operating lease liabilities of $267.3 million, and a decrease of $1.1 million and $8.5 million in prepaid rent and deferred rent liabilities, respectively. The standard did not materially impact our consolidated net income and had no impact on cash flows.

In February 2018, the FASB issued ASU No. 2018-02, "Treatment of Stranded Tax Effects in Accumulated Other Comprehensive Income Resulting From the Tax Cuts and Jobs Act of 2017," which allows the reclassification from accumulated comprehensive income to retained earnings the income tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The adoption of this ASU did not have a material impact on our consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging” (Topic 815), which simplified the requirements for hedge accounting, more closely aligns hedge accounting risk with risk management activities and increases transparency of the scope and results of hedging activities. This ASU amends the presentation and disclosure requirements and changes how we can assess the effectiveness of our hedging relationships. This ASU will make more financial and nonfinancial hedging strategies eligible for hedge accounting. The adoption of this ASU did not have a material impact on our consolidated financial statements.

101

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. This ASU is required to be adopted using the modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance of this ASU is effective. Based upon the level and makeup of our financial asset portfolio, past loan loss activity and current known activity regarding our outstanding loans, we do not expect that this ASU will have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other” (Topic 350) (“ASU 2017-04”). ASU 2017-04 eliminates step two from the goodwill impairment test, thereby eliminating the requirement to calculate the implied fair value of a reporting unit. ASU 2017-04 will require us to perform our annual goodwill impairment test by comparing the fair value of our reporting units to the carrying value of those units. If the carrying value exceeds the fair value, we will be required to recognize an impairment charge; however, the impairment charge should not exceed the amount of goodwill allocated to such reporting unit. ASU 2017-04 is required to be implemented on a prospective basis for fiscal years beginning after December 15, 2019. We do not expect that the requirements of ASU 2017-04 will have a material impact on our consolidated financial statements

.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes” (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We do not expect that the requirements of ASU 2017-04 will have a material impact on our consolidated financial statements.

102

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 2 – Discontinued Operations

Animal Health Spin-off

On February 7, 2019 (the “Distribution Date”), we completed the separation (the “Separation”) and subsequent merger (“Merger”) of our animal health business (the “Henry Schein Animal Health Business”) with Direct Vet Marketing, Inc. (d/b/a Vets First Choice, “Vets First Choice”). This was accomplished by a series of transactions among us, Vets First Choice, Covetrus, Inc. (f/k/a HS Spinco, Inc. “Covetrus”), a wholly owned subsidiary of ours prior to the Distribution Date, and HS Merger Sub, Inc., a wholly owned subsidiary of Covetrus (“Merger Sub”). In connection with the Separation, we contributed, assigned and transferred to Covetrus certain applicable assets, liabilities and capital stock or other ownership interests relating to the Henry Schein Animal Health Business. On the Distribution Date, we received a tax-free distribution of $1,120 million from Covetrus pursuant to certain debt financing incurred by Covetrus. On the Distribution Date and prior to the Animal Health Spin-off, Covetrus issued shares of Covetrus common stock to certain institutional accredited investors (the “Share Sale Investors”) for $361.1 million (the “Share Sale”). The proceeds of the Share Sale were paid to Covetrus and distributed to us. Subsequent to the Share Sale, we distributed, on a pro rata basis, all of the shares of the common stock of Covetrus held by us to our stockholders of record as of the close of business on January 17, 2019 (the “Animal Health Spin-off”). After the Share Sale and Animal Health Spin-off, Merger Sub consummated the Merger whereby it merged with and into Vets First Choice, with Vets First Choice surviving the Merger as a wholly owned subsidiary of Covetrus. Immediately following the consummation of the Merger, on a fully diluted basis, (i) approximately 63% of the shares of Covetrus common stock were (a) owned by our stockholders and the Share Sale Investors, and (b) held by certain employees of the Henry Schein Animal Health Business (in the form of certain equity awards), and (ii) approximately 37% of the shares of Covetrus common stock were (a) owned by stockholders of Vets First Choice immediately prior to the Merger, and (b) held by certain employees of Vets First Choice (in the form of certain equity awards). After the Separation and the Merger, we no longer beneficially owned any shares of Covetrus common stock and, following the Distribution Date, will not consolidate the financial results of Covetrus for the purpose of our financial reporting. Following the Separation and the Merger, Covetrus was an independent, publicly traded company on the Nasdaq Global Select Market.

In connection with the completion of the Animal Health Spin-off, we entered into a transition services agreement with Covetrus under which we have agreed to provide certain transition services for up to twenty-four months in areas such as information technology, finance and accounting, human resources, supply chain, and real estate and facility services.

As a result of the Separation, the financial position and results of operations of the Henry Schein Animal Health Business are presented as discontinued operations and have been excluded from continuing operations and segment results for all periods presented. The accompanying Notes to the Consolidated Financial Statements have been revised to reflect the effect of the Separation and all prior year balances have been revised accordingly to reflect continuing operations only. The historical statements of Comprehensive Income (Loss) and Shareholders' Equity have not been revised to reflect the Separation and instead reflect the Separation as an adjustment to the balances at December 28, 2019.

103

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Summarized financial information for our discontinued operations is as follows:

 

 

 

Year Ended

 

 

 

December 28,

 

December 29,

 

 

December 30,

 

 

 

2019

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

319,522

 

$

3,784,392

 

$

3,578,105

Cost of goods sold

 

 

 

260,097

 

 

3,100,055

 

 

2,925,664

Gross profit

 

 

 

59,425

 

 

684,337

 

 

652,441

Selling, general and administrative

 

 

 

68,919

 

 

531,905

 

 

462,835

Operating income (loss)

 

 

 

(9,494)

 

 

152,432

 

 

189,606

Income tax expense (benefit)

 

 

 

(2,181)

 

 

48,060

 

 

53,532

Income (loss) from discontinued operations

 

 

 

(6,323)

 

 

111,685

 

 

140,817

Net (income) loss attributable to noncontrolling interests

 

 

 

366

 

 

(6,521)

 

 

(27,690)

Net income (loss) from discontinued operations

 

 

 

 

 

 

 

 

 

 

attributable to Henry Schein, Inc.

 

 

 

(5,957)

 

 

105,164

 

 

113,127

The financial information above represents activity of the discontinued operations during the year through the Distribution Date. The loss from discontinued operations for the year ended December 28, 2019 was primarily attributable to the inclusion of the transaction costs directly related to the Animal Health Spin-off. See Note 23-Related Party Transactions for additional information.

104

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

The following are the amounts of assets and liabilities that were transferred to Covetrus as of February 7, 2019 and December 29, 2018.

 

 

 

 

 

February 7,

 

December 29,

 

 

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,815

 

$

23,324

Accounts receivable, net

 

 

432,812

 

 

434,935

Inventories, net

 

 

536,637

 

 

555,230

Prepaid expenses and other

 

 

120,546

 

 

69,525

 

 

 

Total current assets of discontinued operations

 

 

1,096,810

 

 

1,083,014

Property and equipment, net

 

 

69,790

 

 

68,177

Operating lease right-of-use asset, net

 

 

57,012

 

 

-

Goodwill

 

 

742,931

 

 

739,266

Other intangibles, net

 

 

205,793

 

 

208,213

Investments and other

 

 

120,518

 

 

118,003

 

 

 

Total long-term assets of discontinued operations

 

 

1,196,044

 

 

1,133,659

Total assets of discontinued operations

 

$

2,292,854

 

$

2,216,673

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

316,162

 

$

441,453

Current maturities of long-term debt

 

 

657

 

 

675

Operating lease liabilities

 

 

18,951

 

 

-

Accrued expenses:

 

 

 

 

 

 

 

Payroll and related

 

 

36,847

 

 

36,888

 

Taxes

 

 

24,060

 

 

17,552

 

Other

 

 

80,400

 

 

81,039

 

 

 

Total current liabilities of discontinued operations

 

 

477,077

 

 

577,607

Long-term debt

 

 

1,176,105

 

 

23,529

Deferred income taxes

 

 

17,019

 

 

4,352

Operating lease liabilities

 

 

38,668

 

 

-

Other liabilities

 

 

29,209

 

 

34,572

 

 

 

Total long-term liabilities of discontinued operations

 

 

1,261,001

 

 

62,453

Total liabilities of discontinued operations

 

$

1,738,078

 

$

640,060

Redeemable noncontrolling interests

 

$

28,270

 

$

92,432

105

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 4 – Business Acquisitions and Divestiture
Acquisitions
We account for business acquisitions and combinations under the acquisition method of accounting, where the net
assets of acquired businesses are recorded at their fair value at the acquisition
date and our consolidated financial
statements include their results of operations from that date.
Any excess of acquisition consideration over the fair
value of identifiable net assets acquired is recorded as goodwill.
Goodwill is an asset representing the future
economic benefits arising from other assets acquired in a business combination
that are not individually identified
and separately recognized, such as future customers and technology, as well as the assembled workforce.
Excluding goodwill, the major classes of assets and liabilities to which
we generally allocate acquisition
consideration include identifiable intangible assets (i.e., customer
relationships and lists, trademarks and trade
names, product development, and non-compete agreements), inventory
and accounts receivable.
The estimated fair
value of identifiable intangible assets is based on critical judgments and
assumptions derived from analysis of
market conditions, including discount rates, projected revenue growth rates
(which are based on historical trends
and assessment of financial projections), estimated customer attrition and projected
cash flows.
These assumptions
are forward-looking and could be affected by future economic and market conditions.
Some prior owners of acquired subsidiaries are eligible to receive additional
purchase price cash consideration, or
we may be entitled to recoup a portion of purchase price cash consideration
if certain financial targets are met.
We
have accrued liabilities for the estimated fair value of additional purchase
price consideration at the time of the
acquisition, using the income approach, including a probability-weighted
discounted cash flow method or an option
pricing method, where applicable.
Any adjustments to these accrual amounts are recorded
in selling, general and
administrative expenses within our consolidated statements of income.
While we use our best estimates and assumptions to accurately value
assets acquired and liabilities assumed at the
acquisition date as well as contingent consideration, where applicable,
our estimates are inherently uncertain and
subject to refinement.
As a result, within 12 months following the date of acquisition,
or the measurement period,
we may record adjustments to the assets acquired and liabilities assumed
with the corresponding offset to goodwill
within our consolidated balance sheets.
At the end of the measurement period or final determination
of the values
of such assets acquired or liabilities assumed, whichever comes first,
any subsequent adjustments are recognized in
our consolidated statements of operations.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
82
2022 Acquisitions
We completed several acquisitions during the year ended December 31, 2022, which were immaterial to our
consolidated financial statements. Our acquired ownership interest ranged between
55
% to
100
%.
Acquisitions
within our health care distribution segment included companies that
specialize in the distribution of dental products.
Within our technology and value-added services segment, we acquired a company that educates and
connects
dental office managers, practice administrators and dental business leaders across
North America.
The following table aggregates the estimated fair value, as of the
date of acquisition, of consideration paid and net
assets acquired for acquisitions during the year ended December 31, 2022.
Approximately half of the acquired
goodwill is deductible for tax purposes.
2022
Acquisition consideration:
Cash
$
158
Deferred consideration
2
Fair value of previously held equity method investment
16
Redeemable noncontrolling interests
17
Total consideration
$
193
Identifiable assets acquired and liabilities assumed:
Current assets
$
41
Intangible assets
96
Other noncurrent assets
13
Current liabilities
(29)
Deferred income taxes
(6)
Other noncurrent liabilities
(8)
Total identifiable
net assets
107
Goodwill
86
Total net assets acquired
$
193
The following table summarizes the identifiable intangible assets acquired during
the year ended December 31,
2022 and their estimated useful lives as of the date of the acquisition:
Estimated
Useful Lives
2022
(in years)
Customer relationships and lists
81
8
-
12
Trademark / Tradename
9
5
Non-compete agreements
3
2
-
5
Other
3
10
$
96
The accounting for certain of our acquisitions during the year ended December
31, 2022 had not been completed in
several areas, including but not limited to pending assessments of accounts
receivable, inventory, intangible assets,
right-of-use lease assets,
accrued liabilities and income and non-income based taxes.
The pro forma financial information has not been presented because the impact
of the acquisitions during the year
ended December 31, 2022 to our consolidated financial statements was immaterial.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
83
2021 Acquisitions
We completed several acquisitions during the year ended December 25, 2021, which were immaterial to our
financial statements.
Our acquired ownership interests ranged from between approximately
51
% to
100
%.
Acquisitions within our health care distribution segment included companies
that specialize in the distribution and
manufacturing of dental and medical products, a provider of home
medical supplies, and a provider of product
kitting and sterile packaging.
Within our technology and value-added services segment, we acquired companies
that focus on dental marketing and website solutions, practice transition
services, revenue cycle management, and
business analytics and intelligence software.
Approximately half of the acquired goodwill is deductible for tax
purposes.
The following table aggregates the estimated fair value, as of the date of
acquisition, of consideration paid and net
assets acquired for acquisitions during the year ended December 25, 2021.
2021
Acquisition consideration:
Cash
$
579
Deferred consideration
11
Estimated fair value of contingent consideration receivable
(5)
Fair value of previously held equity method investment
8
Redeemable noncontrolling interests
181
Total consideration
$
774
Identifiable assets acquired and liabilities assumed:
Current assets
$
195
Intangible assets
317
Other noncurrent assets
51
Current liabilities
(93)
Deferred income taxes
(26)
Other noncurrent liabilities
(46)
Total identifiable
net assets
398
Goodwill
376
Total net assets acquired
$
774
The following table summarizes the identifiable intangible assets acquired during
the year ended December 25,
2021 and their estimated useful lives as of the date of the acquisition:
Estimated
Useful Lives
2021
(in years)
Customer relationships and lists
$
220
5
-
12
Trademark / Tradename
58
5
-
12
Product development
19
5
-
10
Non-compete agreements
5
3
-
5
Other
15
18
$
317
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
84
2020 Acquisitions
We completed several acquisitions during the year ended December 26, 2020, which were immaterial to our
financial statements.
Our acquired ownership interests ranged from between approximately
51
% to
100
%.
Acquisitions within our health care distribution segment included companies
that manufacture endodontic files and
companies that distribute dental supplies.
Within our technology and value-added services segment, we acquired
companies that focus on practice management software and provide software
as a solution for dental practices.
Approximately half of the acquired goodwill is deductible for tax purposes.
The following table aggregates the estimated fair value, as of the
date of acquisition, of consideration paid and net
assets acquired for acquisitions during the year ended December 26, 2020:
2020
Acquisition consideration:
Cash
$
52
Deferred consideration
6
Fair value of previously held equity method investment
9
Redeemable noncontrolling interests
26
Total consideration
$
93
Identifiable assets acquired and liabilities assumed:
Current assets
$
36
Intangible assets
38
Other noncurrent assets
22
Current liabilities
(21)
Deferred income taxes
(4)
Other noncurrent liabilities
(1)
Total identifiable
net assets
70
Goodwill
23
Total net assets acquired
$
93
The following table summarizes the identifiable intangible assets acquired during
the year ended December 26,
2020 and their estimated useful lives as of the date of the acquisition:
Estimated
Useful Lives
2020
(in years)
Customer relationships and lists
$
23
10
-
12
Product development
9
7
-
10
Trademark / Tradename
4
5
Non-compete agreements
2
5
$
38
For the years ended December 31, 2022, December 25, 2021 and December 26,
2020, there were no material
adjustments recorded in our consolidated balance sheets relating to
accounting for acquisitions incomplete in prior
periods.
At December 25, 2021 we recorded an estimated contingent
consideration receivable of $
5
million, which
was subsequently increased by additional $
5
million during 2022 based on delays in timing of government approval
of a certain product.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
85
During the years ended December 31, 2022, December 25, 2021
and December 26, 2020 we incurred $
9
million, $
7
million and $
6
million in acquisition costs reported within income from continuing
operations.
Divestiture
In the third quarter of 2021 we received contingent proceeds of $
10
million from the 2019 sale of Hu-Friedy,
resulting in the recognition of an additional after-tax gain of $
7
million.
During the fourth quarter of 2020 we
received contingent proceeds of $
2
million from the 2019 sale of Hu-Friedy, resulting in the recognition of an
additional after-tax gain of $
2
million.
We do expect to receive any additional proceeds from the sale of Hu-Friedy.
Note 5 – Property and Equipment, Net

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed primarily under the straight-line method over the estimated useful life. Depreciation of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the assets or the lease term.

Property and equipment, including related estimated useful lives, consisted
of the following:

 

 

 

 

December 28,

 

December 29,

 

 

 

 

2019

 

2018

Land

 

$

18,030

 

$

17,985

Buildings and permanent improvements

 

 

121,823

 

 

127,012

Leasehold improvements

 

 

104,089

 

 

103,929

Machinery and warehouse equipment

 

 

124,640

 

 

108,249

Furniture, fixtures and other

 

 

99,083

 

 

120,693

Computer equipment and software

 

 

330,926

 

 

427,237

 

 

 

 

 

798,591

 

 

905,105

Less accumulated depreciation

 

 

(468,946)

 

 

(590,884)

 

Property and equipment, net

 

$

329,645

 

$

314,221

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Useful

 

 

 

 

 

 

 

Lives (in years)

 

 

 

Buildings and permanent improvements

 

40

 

 

 

Machinery and warehouse equipment

 

5-10

 

 

 

Furniture, fixtures and other

 

3-10

 

 

 

Computer equipment and software

 

3-10

 

 

 

December 31,
December 25,
2022
2021
Land
$
20
$
21
Buildings and permanent improvements
135
140
Leasehold improvements
94
98
Machinery and warehouse equipment
169
153
Furniture, fixtures and other
127
119
Computer equipment and software
411
385
956
916
Less accumulated depreciation
(573)
(550)
Property and equipment, net
$
383
$
366
Estimated Useful
Lives (in years)
Buildings and permanent improvements
40
Machinery and warehouse equipment
5
-
10
Furniture, fixtures and other
3
-
10
Computer equipment and software
3
-
10
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the useful
life of the assets or the lease term.
Property and equipment related depreciation expense for the years
ended December 28, 2019,31, 2022, December 29, 2018 25, 2021
and December 30, 201726, 2020 was $64.4 $
68
million, $58.1 $
71
million
and $
64
million, respectively.
Please see
for
finance lease amounts included in property and $54.7 million.

equipment, net within our
consolidated balance sheets.

106

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

(in thousands,millions, except share and per share data)

86

Note 46 – GoodwillLeases
We have operating and Other Intangibles, Net

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
19
years, some of
which may include options to extend the leases for up to
15
years.
The changes in the carrying amountcomponents of goodwilllease expense were as
follows:
Years
Ended
December 31,
December 25,
December 26,
2022
2021
2020
Operating lease cost:
(1) (2)
$
150
$
103
$
87
Finance
lease cost:
Amortization of right-of-use assets
3
3
2
Total finance
lease cost
$
3
$
3
$
2
(1)
Includes variable lease expenses.
(2)
Operating lease cost for the years ended December 28, 201931, 2022, December 25, 2021, and December 29, 2018 were as follows:

 

 

 

 

Health Care Distribution

 

Technology and Value-Added Services

 

Total

Balance as of December 30, 2017

 

$

1,431,680

 

$

121,902

 

$

1,553,582

 

Adjustments to goodwill:

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

 

38,848

 

 

530,064

 

 

568,912

 

 

Foreign currency translation

 

 

(37,116)

 

 

(4,349)

 

 

(41,465)

Balance as of December 29, 2018

 

 

1,433,412

 

 

647,617

 

 

2,081,029

 

Adjustments to goodwill:

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

 

50,276

 

 

338,352

 

 

388,628

 

 

Foreign currency translation

 

 

(6,969)

 

 

(193)

 

 

(7,162)

Balance as of December 28, 2019

 

$

1,476,719

 

$

985,776

 

$

2,462,495

Other intangible26, 2020, include accelerated

amortization of right-of-use assets consisted of the following:

 

December 28, 2019

 

December 29, 2018

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Accumulated

 

 

 

Cost

 

Amortization

 

Net

 

Cost

 

Amortization

 

Net

Non-compete agreements

$

34,553

 

$

(9,327)

 

$

25,226

 

$

34,667

 

$

(6,834)

 

$

27,833

Trademarks / trade names - definite lived

 

99,314

 

 

(44,134)

 

 

55,180

 

 

72,462

 

 

(36,165)

 

 

36,297

Customer relationships and lists

 

715,630

 

 

(274,330)

 

 

441,300

 

 

479,542

 

 

(216,007)

 

 

263,535

Product Development

 

85,211

 

 

(42,326)

 

 

42,885

 

 

73,294

 

 

(34,689)

 

 

38,605

Other

 

26,237

 

 

(17,950)

 

 

8,287

 

 

34,620

 

 

(24,859)

 

 

9,761

Total

$

960,945

 

$

(388,067)

 

$

572,878

 

$

694,585

 

$

(318,554)

 

$

376,031

Non-compete agreements represent amounts paid primarily to key employees$

42
million, $
0
million and prior owners of acquired businesses, as well as certain sales persons, in exchange for placing restrictions on their ability to pose a competitive risk to us. Such amounts are amortized, on a straight-line basis over the respective non-compete period, which generally commences upon termination of employment or separation from us. The weighted-average non-compete period for agreements currently being amortized was approximately 4.9 years as of December 28, 2019.

Trademarks, trade names, customer lists and customer relationships were established through business acquisitions. Definite-lived trademarks and trade names are amortized on a straight-line basis over a weighted-average period of approximately 8.0 years as of December 28, 2019. Customer relationships and customer lists are definite-lived intangible assets that are amortized on a straight-line basis over a weighted-average period of approximately 10.0 years as of December 28, 2019. Product development is a definite-lived intangible asset that is amortized on a straight-line basis over a weighted-average period of approximately 8.6 years as of December 28, 2019.

Amortization expense$

0
million, respectively, related to definite-lived intangible assetsfacility leases recorded in
“Restructuring and integration costs” within our consolidated statements of income.
Further, for the years ended December 28, 2019, 31, 2022,
December 29, 201825, 2021 and December 30, 2017 was $108.3 26, 2020, we recognized
impairment of right-of-use assets of $
3
million, $75.3 $
0
million, and $70.3 million. The annual amortization expense expected$
4
million respectively, related to be facility leases
recorded for existing intangiblesin “Restructuring and integration costs” within our consolidated
statement of income.
Supplemental balance sheet information related to leases is as follows:
Years
Ended
December 31,
December 25,
2022
2021
Operating Leases:
Operating lease right-of-use assets for the years 2020 through 2024 is $102.7 million, $95.6 million, $81.4 million, $73.7 million
$
284
$
325
Current operating lease liabilities
73
76
Non-current operating lease liabilities
275
268
Total operating lease liabilities
$
348
$
344
Finance Leases:
Property and $59.3 million.

equipment, at cost

107

$

16

$
13
Accumulated depreciation
(6)
(5)
Property and equipment, net of accumulated depreciation
$
10
$
8
Current maturities of long-term debt
$
4
$
3
Long-term debt
6
4
Total finance
lease liabilities
$
10
$
7
Weighted Average
Remaining Lease Term in
Years:
Operating leases
6.7
7.3
Finance leases
3.1
3.6
Weighted
Average Discount
Rate:
Operating leases
2.8
%
2.4
%
Finance leases
3.3
%
1.7
%
HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

(in thousands,millions, except share and per share data)

87
Supplemental cash flow information related to leases is as follows:
Years
Ended
December 31,
December 25,
2022
2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
87
85
Financing cash flows for finance leases
3
3
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
88
121
Finance leases
6
4
Maturities of lease liabilities are as follows:
December 31, 2022
Operating
Finance
Leases
Leases
2023
$
82
$
5
2024
66
3
2025
56
1
2026
46
1
2027
33
-
Thereafter
98
1
Total future
lease payments
381
11
Less imputed interest
(33)
(1)
Total
$
348
$
10
As of December 31, 2022, we have additional operating leases with
total lease payments of $
8
million for buildings
and vehicles that have not yet commenced.
These operating leases will commence subsequent to December 31,
2022, with lease terms of
two years
to
five years
.
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
4 months
to
9 years
.
As of
December 31, 2022, current and non-current liabilities associated with
related party operating leases were $
4
million and $
14
million, respectively.
Related party leases represented
5.0
% and
5.3
% of the total current and non-
current operating lease liabilities, respectively.
The present value of lease payments under these related party
leases
is not material to our consolidated financial statements.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
88

Note 7 – Goodwill and Other Intangibles, Net
The changes in the carrying amount of goodwill for the years ended December
31, 2022 and December 25, 2021
were as follows:
Health Care
Distribution
Technology
and
Value-Added
Services
Total
Balance as of December 26, 2020
$
1,501
$
1,003
$
2,504
Adjustments to goodwill:
Acquisitions
359
24
383
Foreign currency translation
(29)
(4)
(33)
Balance as of December 25, 2021
1,831
1,023
2,854
Adjustments to goodwill:
Acquisitions
86
(1)
85
Impairment
(20)
-
(20)
Foreign currency translation
(22)
(4)
(26)
Balance as of December 31, 2022
$
1,875
$
1,018
$
2,893
For the year
ended December 31,
2022, we recorded
a $
20
million impairment of
goodwill relating to
the disposal
of
an
unprofitable
business
whose
estimated
fair
value
was
lower
than
its
carrying
value.
The
disposal
of
this
business
is
part
of
our
restructuring
initiative
as
more
fully
discussed
in
Other intangible assets consisted of the following:
December 31, 2022
December 25, 2021
Accumulated
Accumulated
Cost
Amortization
Net
Cost
Amortization
Net
Customer lists and relationships
$
826
$
(387)
$
439
$
853
$
(353)
$
500
Trademarks / trade names - definite lived
125
(51)
74
129
(44)
85
Product Development
90
(56)
34
114
(70)
44
Non-compete agreements
25
(6)
19
25
(6)
19
Other
31
(10)
21
28
(8)
20
Total
$
1,097
$
(510)
$
587
$
1,149
$
(481)
$
668
Trademarks, trade names, customer lists and customer relationships were established through
business acquisitions.
Definite-lived trademarks and trade names are amortized on a straight-line
basis over a weighted-average period of
approximately
8.4
years as of December 31, 2022.
Customer lists and customer relationships are definite-lived
intangible assets that are amortized on a straight-line basis over a weighted-average
period of approximately
10.0
years as of December 31, 2022.
Product development is a definite-lived intangible asset that is amortized
on a
straight-line basis over a weighted-average period of approximately
8.6
years as of December 31, 2022.
Non-compete agreements represent amounts paid primarily to prior owners of
acquired businesses, as well as
certain sales persons, in exchange for placing restrictions on their ability
to pose a competitive risk to us.
Such
amounts are amortized, on a straight-line basis over the respective non-compete
period, which generally
commences upon termination of employment or separation from us.
The weighted-average non-compete period for
agreements currently being amortized was approximately
5.3
years as of December 31, 2022.
Amortization expense, excluding impairment charges, related to definite-lived intangible assets
for the years ended
December 31, 2022, December 25, 2021 and December 26, 2020 was $
126
million, $
124
million and $
106
million.
During the year ended December 31, 2022, we recorded $
49
million of impairment charges related to businesses
within our health care distribution segment, represented by an intangible asset
impairment of $
15
million related to
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
89
the disposal of an unprofitable business and a $
34
million impairment of customer lists and relationships
attributable to customer attrition rates being higher than expected in certain other
businesses.
Our impairment loss
was calculated as the difference between the carrying value and the estimated
fair value of the intangible assets,
using a discounted estimate of future cash flows.
Please see
for additional details.
During the year ended December 25, 2021, we recorded a $
1
million impairment charge related ratably to a
business within our health care distribution segment and a business within
our technology and value-added services
segment.
During the year ended December 26, 2020, we recorded a $
20
million impairment charge related to businesses
within our technology and value-added services segment due to customer
attrition rates being higher than expected.
The above intangible asset impairment charges were recorded within selling, general
and administrative expenses;
and restructuring and integration charges in our consolidated statement of income.
The annual amortization expense expected to be recorded for existing
intangibles assets for the years 2023 through
2027 is $
120
million, $
96
million, $
84
million, $
68
million and $
55
million.
Note 8 – Investments and Other

Investments and other consisted of the following:

 

 

 

December 28,

 

December 29,

 

 

 

2019

 

2018

Investment in unconsolidated affiliates

 

$

164,659

 

$

260,954

Non-current deferred foreign, state and local income taxes

 

 

23,625

 

 

12,196

Notes receivable (1)

 

 

43,544

 

 

66,047

Capitalized costs for internally generated software for resale

 

 

42,445

 

 

37,659

Distribution rights and exclusivity agreements, net of amortization

 

 

4

 

 

582

Security deposits

 

 

534

 

 

-

Acquisition-related indemnification

 

 

38,464

 

 

28,283

Other long-term assets

 

 

14,644

 

 

14,646

 

Total

 

$

327,919

 

$

420,367

 

 

 

 

 

 

 

 

(1)

Long-term notes receivable carry interest rates ranging from 1.0% to 11.5% and are due in varying installments through

 

February 01, 2025.

December 31,
December 25,
2022
2021
Investment in unconsolidated affiliates
$
161
$
168
Non-current deferred foreign, state and local income taxes
88
35
Notes receivable
(1)
28
36
Capitalized costs for software to be sold, leased or marketed to external
users
79
65
Security deposits
3
2
Acquisition-related indemnification
59
66
Non-current pension assets
8
-
Other long-term assets
46
52
Total
$
472
$
424
(1)
Long-term notes receivable carry interest rates ranging from
3.0
% to
7.5
% and are due in varying installments through
May 11, 2028
.
Amortization expense, primarily related to other long-term assetscapitalized costs for software to
be sold, leased or marketed to external
users, for the years ended December 28, 2019,31, 2022, December 29, 201825, 2021 and
December 30, 201726, 2020 was $12.3 $
18
million, $10.2 $
15
million and $8.8 million.

$

108

16

million, respectively.
HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

(in thousands,millions, except share and per share data)

90

Note 6 – Debt

Bank Credit Lines

Bank credit lines consisted of the following:

 

 

 

December 28,

 

December 29,

 

 

 

2019

 

2018

Revolving credit agreement

 

$

-

 

$

175,000

Other short-term bank credit lines

 

 

23,975

 

 

376,458

Committed loan associated with Animal Health spin-off

 

 

-

 

 

400,000

Total

 

$

23,975

 

$

951,458

Revolving Credit Agreement

On April 18, 2017, we entered into a $750 million revolving credit agreement (the “Credit Agreement”), which matures in April 2022. The interest rate is based on the USD LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter. We expect that the LIBOR rate will be discontinued at some point during 2021. We expect to work with our lenders to identify a suitable replacement rate and amend our debt agreements to reflect this new reference rate accordingly. We do not believe that the discontinuation of LIBOR as a reference rate in our debt agreements will have a material adverse effect on our financial position or materially affect our interest expense. Additionally, the Credit Agreement provides, among other things, that we are required to maintain maximum leverage ratios, and contains customary representations, warranties and affirmative covenants. The Credit Agreement also contains customary negative covenants, subject to negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements. As of December 28, 2019 and December 29, 2018, the borrowings on this revolving credit facility were $0.0 million and $175.0 million, respectively. As of December 28, 2019 and December 29, 2018, there were $9.6 million and $11.2 million of letters of credit, respectively, provided to third parties under the credit facility.

Other Short-Term Credit Lines

As of December 28, 2019 and December 29, 2018, we had various other short-term bank credit lines available, of which $24.0 million and $376.5 million, respectively, were outstanding. At December 28, 2019 and December 29, 2018, borrowings under all of our credit lines had a weighted average interest rate of 3.45% and 3.30%, respectively.

Committed Loan Associated with Animal Health Spin-off

On May 21, 2018, we obtained a $400 million committed loan which matured on the earlier of (i) March 31, 2019 and (ii) the consummation of the Animal Health Spin-off. The proceeds of this loan were used, among other things, to fund our purchase of all of the equity interests in Butler Animal Health Holding Company, LLC (“BAHHC”) directly or indirectly owned by Darby Group Companies, Inc. (“Darby”) and certain other sellers pursuant to the terms of that certain Amendment to Put Rights Agreements, dated as of April 20, 2018, by and among us, Darby, BAHHC and the individual sellers party thereto for an aggregate purchase price of $365 million. As of December 29, 2018, the balance outstanding on this loan was $400 million and is included within the “Bank credit lines” caption within our consolidated balance sheet. At December 29, 2018, the interest rate on this loan was 3.38%. Concurrent with the completion of the Animal Health Spin-off on February 7, 2019, we re-paid the balance of this loan.

109

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Long-term debt

Long-term debt consisted of the following:

 

 

 

December 28,

 

December 29,

 

 

 

2019

 

2018

Private placement facilities

 

$

621,274

 

$

628,189

U.S. trade accounts receivable securitization

 

 

100,000

 

 

350,000

Various collateralized and uncollateralized loans payable with interest,

 

 

 

 

 

 

 

in varying installments through 2024 at interest rates

 

 

 

 

 

 

 

ranging from 2.56% to 10.5% at December 28, 2019 and

 

 

 

 

 

 

 

ranging from 2.61% to 4.17% at December 29, 2018

 

 

6,089

 

 

6,491

Finance lease obligations (see Note 7)

 

 

5,394

 

 

3,944

Total

 

 

732,757

 

 

988,624

Less current maturities

 

 

(109,849)

 

 

(8,280)

 

Total long-term debt

 

$

622,908

 

$

980,344

 

 

Private Placement Facilities

On September 15, 2017, we increased our available private placement facilities with three insurance companies to a total facility amount of $1 billion, and extended the expiration date to September 15, 2020. These facilities 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 September 15, 2020. 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. On June 29, 2018, we amended and restated the above private placement facilities to, among other things, (i) permit the consummation of the Animal Health Spin-off and (ii) provide for the issuance of notes in Euros, British Pounds and Australian Dollars, in addition to U.S. Dollars. The agreements provide, among other things, that we maintain certain maximum leverage ratios, and contain restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal of assets and certain changes in ownership. These facilities contain make-whole provisions in the event that we pay off the facilities prior to the applicable due dates.

110

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

The components of our private placement facility borrowings as of December 28, 2019 are presented in the following table (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Amount of

 

 

 

 

 

Date of

 

Borrowing

 

Borrowing

 

 

Borrowing

 

Outstanding

 

Rate

 

Due Date

September 2, 2010

 

$

100,000

 

3.79

%

 

September 2, 2020

January 20, 2012

 

 

50,000

 

3.45

 

 

January 20, 2024

January 20, 2012 (1)

 

 

21,429

 

3.09

 

 

January 20, 2022

December 24, 2012

 

 

50,000

 

3.00

 

 

December 24, 2024

June 2, 2014

 

 

100,000

 

3.19

 

 

June 2, 2021

June 16, 2017

 

 

100,000

 

3.42

 

 

June 16, 2027

September 15, 2017

 

 

100,000

 

3.52

 

 

September 15, 2029

January 2, 2018

 

 

100,000

 

3.32

 

 

January 2, 2028

Less: Deferred debt issuance costs

 

 

(155)

 

 

 

 

 

 

 

$

621,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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, and was previously scheduled to expire on April 29, 2020, has been extended to April 29, 2022. As of December 28, 2019 and December 29, 2018, the borrowings outstanding under this securitization facility were $100 million and $350 million, respectively. At December 28, 2019, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 1.90% plus 0.75%, for a combined rate of 2.65%. At December 29, 2018, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 2.66% plus 0.75%, for a combined rate of 3.41%.

We are required to pay a commitment fee of 30 basis points on the daily balance of the unused portion of the facility if our usage is greater than or equal to 50% of the facility limit or a commitment fee of 35 basis points on the daily balance of the unused portion of the facility if our usage is less than 50% of the facility limit.

Borrowings under this facility are presented as a component of Long-term debt within our consolidated balance sheet.

111

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

As of December 28, 2019, the aggregate amounts of long-term debt, including finance lease obligations and net of deferred debt issuance costs of $155, maturing in each of the next five years and thereafter are as follows:

 

2020

$

109,849

 

 

2021

 

108,842

 

 

2022

 

110,504

 

 

2023

 

1,529

 

 

2024

 

101,112

 

 

Thereafter

 

300,921

 

 

 

Total

$

732,757

 

112

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 7 – Leases

Leases

We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles and certain equipment. Our leases have remaining terms of less than one year to 16 years, some of which may include options to extend the leases for up to 10 years. The components of lease expense were as follows:

 

 

 

Year Ended

 

 

December 28,

 

 

2019

Operating lease cost (1)

 

$

88,246

Finance lease cost:

 

 

 

 

Amortization of right-of-use assets

 

$

1,154

 

Interest on lease liabilities

 

 

131

Total finance lease cost

 

$

1,285

 

 

 

 

 

(1)

Includes variable lease expenses.

 

 

 

Supplemental balance sheet information related to leases is as follows:

 

 

 

 

 

 

 

December 28,

 

 

 

 

2019

 

Operating Leases:

 

 

 

 

Operating lease right-of-use assets

 

$

231,662

 

 

 

 

 

 

 

Current operating lease liabilities

 

 

65,349

 

Non-current operating lease liabilities

 

 

176,267

 

 

Total operating lease liabilities

 

$

241,616

 

 

 

 

 

 

 

Finance Leases:

 

 

 

 

Property and equipment, at cost

 

$

10,268

 

Accumulated depreciation

 

 

(4,581)

 

Property and equipment, net of accumulated depreciation

 

$

5,687

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

1,736

 

Long-term debt

 

 

3,658

 

 

Total finance lease liabilities

 

$

5,394

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term in Years:

 

 

 

 

 

Operating leases

 

 

5.5

 

 

Finance leases

 

 

5.0

 

 

 

 

 

 

 

Weighted Average Discount Rate:

 

 

 

 

 

Operating leases

 

 

3.4

%

 

Finance leases

 

 

2.2

%

113

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Supplemental cash flow information related to leases is as follows:

 

 

 

 

 

 

 

 

December 28,

 

 

 

 

 

2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Operating cash flows for operating leases

 

$

79,699

 

Operating cash flows for finance leases

 

 

99

 

Financing cash flows for finance leases

 

 

1,413

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

Operating leases (1)

 

$

297,800

 

Finance leases

 

 

2,940

 

 

 

 

 

 

 

(1)

Includes leases that commenced during the year ended December 28, 2019, as well as balances related to leases in existence as of the date of the adoption of Topic 842.

Maturities of lease liabilities are as follows:

 

 

 

 

 

 

 

 

 

 

December 28,

 

 

 

 

2019

 

 

 

 

Operating

 

 

Finance

 

 

 

 

Leases

 

 

Leases

2020

 

$

70,986

 

$

1,853

2021

 

 

56,557

 

 

1,529

2022

 

 

40,601

 

 

646

2023

 

 

27,021

 

 

304

2024

 

 

18,944

 

 

283

Thereafter

 

 

51,762

 

 

1,117

Total future lease payments

 

 

265,871

 

 

5,732

Less: imputed interest

 

 

(24,255)

 

 

(338)

Total

 

$

241,616

 

$

5,394

As of December 28, 2019 we have additional operating leases with total lease payments of $9.0 million for buildings and vehicles that have not yet commenced. These operating leases will commence during 2020 with lease terms of two to 10 years.

As previously disclosed in our December 29, 2018 Form 10-K and under the previous lease accounting standard, future minimum lease payments under non-cancelable operating leases and capital leases as of December 29, 2018 were as follows (in thousands):

 

 

 

 

Operating

 

 

Capital

 

 

 

 

Leases

 

 

Leases

2019

 

$

62,535

 

$

976

2020

 

 

47,686

 

 

801

2021

 

 

34,633

 

 

501

2022

 

 

25,626

 

 

305

2023

 

 

19,560

 

 

283

Thereafter

 

 

62,918

 

 

1,430

Total minimum lease payments

 

$

252,958

 

 

4,296

Less: imputed interest (Capital leases only)

 

 

 

 

 

(352)

Total present value of minimum lease payments

 

 

 

 

$

3,944

114

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 8 – Redeemable Noncontrolling Interests

Some minority stockholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. ASC 480-10 is applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. The components of the change in the Redeemable noncontrolling interests for the years ended December 28, 2019, December 29, 2018 and December 30, 2017 are presented in the following table:

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

2019

 

2018

 

2017

Balance, beginning of period

 

$

219,724

 

$

465,585

 

$

285,567

Decrease in redeemable noncontrolling interests due to

 

 

 

 

 

 

 

 

 

 

redemptions

 

 

(2,270)

 

 

(287,767)

 

 

(22,294)

Increase in redeemable noncontrolling interests due to

 

 

 

 

 

 

 

 

 

 

business acquisitions

 

 

74,865

 

 

4,655

 

 

72,291

Net income attributable to redeemable noncontrolling interests

 

 

14,838

 

 

15,327

 

 

24,513

Dividends declared

 

 

(10,264)

 

 

(8,206)

 

 

(7,680)

Effect of foreign currency translation gain (loss) attributable to

 

 

 

 

 

 

 

 

 

 

redeemable noncontrolling interests

 

 

(2,335)

 

 

(11,330)

 

 

4,530

Change in fair value of redeemable securities

 

 

(7,300)

 

 

41,460

 

 

108,658

Balance, end of period

 

$

287,258

 

$

219,724

 

$

465,585

115

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 9 – Comprehensive Income

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

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

 

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

 

2019

 

2018

 

2017

Attributable to Redeemable noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

(20,338)

 

$

(18,595)

 

$

(5,564)

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

(531)

 

$

(426)

 

$

539

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

(143,172)

 

$

(234,799)

 

$

(112,439)

 

Unrealized loss from foreign currency hedging activities

 

 

(4,032)

 

 

(156)

 

 

(782)

 

Unrealized investment gain (loss )

 

 

6

 

 

(6)

 

 

(3)

 

Pension adjustment loss

 

 

(20,175)

 

 

(13,810)

 

 

(16,843)

 

 

Accumulated other comprehensive loss

 

$

(167,373)

 

$

(248,771)

 

$

(130,067)

 

 

 

 

 

 

 

 

 

 

 

 

Total Accumulated other comprehensive loss

 

$

(188,242)

 

$

(267,792)

 

$

(135,092)

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

 

 

December 28,

 

December 29,

 

December 30,

 

 

2019

 

2018

 

2017

Net income

 

$

719,138

 

$

562,126

 

$

459,293

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(4,070)

 

 

(136,356)

 

 

191,886

Tax effect

 

 

-

 

 

-

 

 

-

Foreign currency translation gain (loss)

 

 

(4,070)

 

 

(136,356)

 

 

191,886

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) from foreign currency hedging activities

 

 

(4,911)

 

 

1,022

 

 

(1,515)

Tax effect

 

 

1,035

 

 

(396)

 

 

786

Unrealized gain (loss) from foreign currency hedging activities

 

 

(3,876)

 

 

626

 

 

(729)

 

 

 

 

 

 

 

 

 

 

Unrealized investment gain (loss)

 

 

14

 

 

(3)

 

 

(4)

Tax effect

 

 

(2)

 

 

-

 

 

1

Unrealized investment gain (loss)

 

 

12

 

 

(3)

 

 

(3)

 

 

 

 

 

 

 

 

 

 

Pension adjustment gain (loss)

 

 

(7,730)

 

 

4,212

 

 

4,247

Tax effect

 

 

1,806

 

 

(1,179)

 

 

(314)

Pension adjustment gain (loss)

 

 

(5,924)

 

 

3,033

 

 

3,933

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

705,280

 

$

429,426

 

$

654,380

116

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Our financial statements are denominated in the U.S. Dollar currency. Fluctuations in the value of foreign currencies as compared to the U.S. Dollar may have a significant impact on our comprehensive income. The foreign currency translation gain (loss) during the years ended December 28, 2019, December 29, 2018 and December 30, 2017 was impacted by changes in foreign currency exchange rates of the Euro, Brazilian Real, British Pound and Australian Dollar.

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

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

2019

 

2018

 

2017

Comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

Henry Schein, Inc.

 

$

682,724

 

$

417,177

 

$

593,273

Comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

 

9,827

 

 

3,432

 

 

1,443

Comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

12,729

 

 

8,817

 

 

59,664

Comprehensive income

 

$

705,280

 

$

429,426

 

$

654,380

Note 10 – Fair Value Measurements

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

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

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

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

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

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

Investments and notes receivable

There are no quoted market prices available for investments in unconsolidated
affiliates and notes receivable; however, wereceivable.
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.

117

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Debt

Debt

The fair value of our debt (including bank credit lines)lines, current maturities

of long-term debt and long-term debt) is
classified as Level 3 within the fair value hierarchy, and as of December 28, 201931, 2022 and December 29, 201825, 2021 was
estimated at $756.7 $
1,149
million and $1,940.1 $
873
million, respectively.
Factors that we considered when estimating the fair
value of our debt include market conditions, such as interest rates and credit
spreads.

Derivative contracts

Derivative contracts are valued using quoted market prices and
significant other observable and unobservable inputs.
We use
derivative instruments to minimize our exposure to fluctuations in foreign
currency exchange rates.
Our derivative
instruments primarily include foreign currency forward agreements related
to certain intercompany loans, certain
forecasted inventory purchase commitments with foreign suppliers, and
foreign currency forward contracts to hedge a
portion of our euro-denominated foreign operations which are designated
as net investment hedges.

hedges and a total

return swap for the purpose of economically hedging our unfunded
non-qualified SERP and our DCP.
The fair values for the majority of our foreign currency derivative contracts
are obtained by comparing our contract
rate to a published forward price of the underlying market rates, which
is based on market rates for comparable
transactions and are classified within Level 2 of the fair value hierarchy.

See
for further information.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
91
Total
Return Swaps
The fair value for the Total Return Swap is measured by valuing the underlying ETFs of the swap using market-on-
close pricing by industry providers as of the valuation date and are
classified within Level 2 of the fair value
hierarchy.
Redeemable noncontrolling interests

The values for Redeemable noncontrolling interests are classified within
Level 3 of the fair value hierarchy and are
based on recent transactions and/or implied multiples of earnings. The details
See
for additional information.
Assets measured on a non-recurring basis at fair value include Goodwill
and Other intangibles, net, and are
classified as Level 3 within the fair value hierarchy.
See
and

118

for additional information.

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

The following table presents
our assets and liabilities that are measured and recognized at fair value on
a recurring basis classified under the
appropriate level of the fair value hierarchy as of December 31, 2022 and
December 25, 2021:
December 31, 2022
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
23
$
-
$
23
Derivative contracts undesignated
-
4
-
4
Total assets
$
-
$
27
$
-
$
27
Liabilities:
Derivative contracts designated as hedges
$
-
$
1
$
-
$
1
Derivative contracts undesignated
-
3
-
3
Total return
swaps
-
3
-
3
Total liabilities
$
-
$
7
$
-
$
7
Redeemable noncontrolling interests
$
-
$
-
$
576
$
576
December 25, 2021
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
8
$
-
$
8
Derivative contracts undesignated
-
1
-
1
Total return
swap
-
1
-
1
Total assets
$
-
$
10
$
-
$
10
Liabilities:
Derivative contracts designated as hedges
$
-
$
1
$
-
$
1
Derivative contracts undesignated
-
2
-
2
Total liabilities
$
-
$
3
$
-
$
3
Redeemable noncontrolling interests
$
-
$
-
$
613
$
613
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
92
Note 10 – Concentrations of Risk
Certain financial instruments potentially subject us to concentrations of
credit risk.
These financial instruments
consist primarily of cash equivalents, trade receivables, long-term investments,
notes receivable and derivative
instruments.
In all cases, our maximum exposure to loss from credit
risk equals the gross fair value of the financial
instruments.
We routinely maintain cash balances at financial institutions in excess of insured amounts.
We have
not experienced any loss in such accounts and we manage this risk through
maintaining cash deposits and other
highly liquid investments in high quality financial institutions.
We continuously assess the need for reserves for
such losses, which have been within our expectations.
We do not require collateral or other security to support
financial instruments subject to credit risk, except for long-term notes receivable.
We limit our credit risk with respect to our cash equivalents, short-term and long-term investments and derivative
instruments, by monitoring the credit worthiness of the financial institutions
who are the counter-parties to such
financial instruments.
As a risk management policy, we limit the amount of credit exposure by diversifying and
utilizing numerous investment grade counter-parties.
With respect to our trade receivables, our credit risk is somewhat limited due to a relatively large customer base
and
its dispersion across different types of health care professionals and geographic areas.
No single customer
accounted for more than
2
% of our net sales in 2022 or 2021.
With respect to our sources of supply, our top 10
health care distribution suppliers and our single largest supplier accounted for approximately
28 2019
% and
4
%,
respectively, of our aggregate purchases in each of the years ended December 31, 2022 and December 29, 2018:

 

 

 

 

December 28, 2019

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts

 

$

-

 

$

567

 

$

-

 

$

567

 

 

Total assets

 

$

-

 

$

567

 

$

-

 

$

567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts

 

$

-

 

$

5,795

 

$

-

 

$

5,795

 

 

Total liabilities

 

$

-

 

$

5,795

 

$

-

 

$

5,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

$

-

 

$

-

 

$

287,258

 

$

287,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29, 2018

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts

 

$

-

 

$

12,533

 

$

-

 

$

12,533

 

 

Total assets

 

$

-

 

$

12,533

 

$

-

 

$

12,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts

 

$

-

 

$

1,708

 

$

-

 

$

1,708

 

 

Total liabilities

 

$

-

 

$

1,708

 

$

-

 

$

1,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

$

-

 

$

-

 

$

219,724

 

$

219,724

25, 2021.

119

Our long-term notes receivable primarily represent strategic financing arrangements
with certain affiliates.

Table

Generally, these notes are secured by certain assets of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(the counterparty; however, in thousands, except per share data)

most cases our security is
subordinate to other commercial financial institutions.
While we have exposure to credit loss in the event of non-
performance by these counter-parties, we conduct ongoing assessments
of their financial and operational
performance.

Note 11 – Business AcquisitionsDerivatives and Divestitures

The operating resultsHedging Activities

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

We completed acquisitions during the year ended December 28, 2019, which were immaterial tocredit risks by

diversifying our financial statements individually. In the aggregate, these transactions resulted in considerationcounterparties, maintaining a strong balance sheet and
having multiple sources of $652.9 million in 2019 related to business combinations, for net assets amounting to $19.7 million. As of December 28,capital.
During 2019 we had recorded $310.4 million identifiable intangibles, $395.3 millionentered into foreign currency forward contracts to hedge
a portion of goodwillour euro-denominated
foreign operations which are designated as net investment hedges.
These net investment hedges offset the change
in the U.S. dollar value of our investment in certain euro-functional currency
subsidiaries due to fluctuating foreign
exchange rates.
Gains and $72.5 million of non-controlling interest,losses related to these acquisitions.

Henry Schein One, LLC

On July 1, 2018, we closed on a joint venture with Internet Brands, a providernet investment hedges are recorded

in accumulated other
comprehensive loss within our consolidated balance sheets.
Amounts excluded from the assessment of web presence and online marketing software, to create a newly formed entity, Henry Schein One, LLC. hedge
effectiveness are included in interest expense within our consolidated statements
of income.
The joint venture includes Henry Schein Practice Solutions products and services, as well as Henry Schein’s international dental practice management systems and the dental businesses of Internet Brands. We own 74% of the joint venture and Internet Brands owns the remaining 26% noncontrolling interest, which is accounted for within stockholders’ equity. In addition, Internet Brands received a freestanding and separately exercisable right to put their noncontrolling interest to Henry Schein, Inc. for fair value following the fifth anniversary of the effective date of the formation of the joint venture. Beginning with the second anniversary of the effective date of the formation of the joint venture, Henry Schein One will issue a fixed number of additional interests to Internet Brands through the fifth anniversary of the effective date, thereby increasing Internet Brands’ ownership by approximately 7.6%. Internet Brands will also be entitled to receive a fixed number of additional interests, in the aggregate up to approximately 1.6% of the joint venture’s ownership, if certain operating targets are met by the joint venture in its fourth, fifth and sixth operating years. These additional shares are considered contingent consideration that are accounted for within stockholders’ equity; however these shares will not be allocated any net income of Henry Schein One until the shares vest or are earned by Internet Brands. A Monte Carlo simulation was utilized to value the additional contingent interests that are subject to operating targets. Key assumptions that were applied to derive the fair
notional value of this net investment hedge, which matures on
November 16, 2023
, is approximately €
200
million.
During the contingent interests include an assumed equity valueyears ended December 31, 2022 and December 25, 2021, we
recorded losses of Henry Schein One, LLC at its inception date, a risk-free interest rate based on U.S. treasury yields, an assumed future dividend yield, a risk-adjusted discount rate applied to projected future cash flows, an assumed equity volatility based on historical stock price returns of a group of guideline companies,$
9
million and an estimated correlation of annual cash flow returns to equity returns. As a result of the transaction with Internet Brands, we recorded $550.9 $
11
million, of noncontrolling interestrespectively, within stockholders’ equity as of December 28, 2019.

Senior management from Henry Schein and Internet Brands serve on the board of Henry Schein One. The goodwill recorded as part of the acquisition primarily reflects the value of future synergies. We allocated all of the goodwill to our Technology and value-added services reporting segment. As of December 28, 2019, the goodwill associated with this transaction is $533.9 million. None of the goodwill recognized is deductible forother comprehensive income tax purposes, and as such, no deferred taxes have been recorded related to goodwill.

these foreign currency forward contracts.

See
Note 9 – Fair Value 

Concurrent with the formationMeasurements

for additional information.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
93
On
March 20, 2020
, we entered into a separate agreement with Internet Brands whereby (1) beginning July 1, 2023, Internet Brands will have the right to require Henry Schein to purchase all or a portion of Internet Brands ownership interests in Henry Schein One, LLC for fair market value, and (2) beginning July 1, 2028, or earlier if certain events occur, Henry Schein will have the right to require Internet Brands to sell all or a portion of its ownership interests in Henry Schein One, LLC to Henry Schein for fair market value.

120

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Some prior owners of acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial targets are met. We have accrued liabilitiestotal return swap for the estimated fairpurpose of economically hedging

our unfunded non-
qualified SERP and our DCP.
This swap will offset changes in our SERP and DCP liabilities.
At the inception, the
notional value of additional purchase price consideration at the timeinvestments in these plans was $
43
million.
At December 31, 2022, the notional value of the acquisition. Any adjustments to
investments in these accrual amounts are recorded in our consolidated statementsplans was $
78
million.
At December 31, 2022, the financing blended rate for
this swap was
based on the Secured Overnight Financing Rate (“SOFR”) of income.
4.03
% plus
0.55
%, for a combined rate of
4.58
%.
For
the years ended December 28, 2019, December 29, 201831, 2022 and December 30, 2017, there were no material adjustments 25, 2021, we have
recorded a gain/(loss), within selling, general
and administrative in our consolidated statement of income, relating to changes in estimated contingent purchase price liabilities.

Divestitures of Investments

During the fourth quarter of 2019, we sold an equity investment in Hu-Friedy Mfg. Co., LLC, a manufacturer of dental instruments and infection prevention solutions. Our investment was non-controlling, we were not involved in running the business and had no representation on the board of directors. During the fourth quarter of 2019, we also sold certain other equity investments. In the aggregate, the sales of these investments resulted in a pre-tax gain of approximately $250.2

($
17
) million and $
12
million,
respectively, net of taxes of approximately $63.4 million. For the years ended December 28, 2019, December 29, 2018 and December 30, 2017, we recognized approximately $6.0 million, $10.4 million and $6.4 million of equity in earnings from these affiliates.

During 2017 we sold our equity ownership in E4D Technologies resulting in a loss of approximately $17.6 million. There was 0 tax benefit recognizedtransaction costs, related to this loss.

Acquisition Costs

undesignated swap.

During the years ended December 28, 2019, December 29, 2018 31, 2022
and December 25, 2021, the swap resulted in a neutral impact to our
results of operations.
This swap is expected to
be renewed on an annual basis after its current expiration date of March 31, 2023,
and is expected to result in a
neutral impact to our results of operations.
See
for additional information.
Fluctuations in the value of certain foreign currencies as compared
to the U.S. dollar may positively or negatively
affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed
in U.S.
dollars.
Where we deem it prudent, we engage in hedging programs using primarily
foreign currency forward
contracts aimed at limiting the impact of foreign currency exchange
rate fluctuations on earnings.
We purchase
short-term (i.e., generally 18 months or less) foreign currency forward contracts
to protect against currency
exchange risks associated with intercompany loans due from our international
subsidiaries and the payment of
merchandise purchases to our foreign suppliers.
We do not hedge the translation of foreign currency profits into
U.S. dollars, as we regard this as an accounting exposure, not an economic
exposure.
Amounts related to our
hedging activities are recorded in prepaid expenses and other and/or accrued
expenses: other within our
consolidated balance sheets.
Our hedging activities have historically not had a material impact on our consolidated
financial statements.
Accordingly, additional disclosures related to derivatives and hedging activities required by
ASC 815 have been omitted.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
94
Note 12 – Debt
Bank Credit Lines
Bank credit lines consisted of the following:
December 31,
December 25,
2022
2021
Revolving credit agreement
$
-
$
-
Other short-term bank credit lines
103
51
Total
$
103
$
51
Revolving Credit Agreement
On
August 20, 2021
, we entered into a $
1.0
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.
Most LIBOR rates have been discontinued after December 31,
2021,
while the remaining LIBOR rates will be discontinued immediately after
June 30, 20172023.
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 requires, among other things,
that we incurred $4.5 million, $7.3 maintain certain maximum leverage ratios.
Additionally, the Credit Agreement contains customary
representations, warranties and affirmative covenants as well as customary negative
covenants, subject to
negotiated exceptions, on liens, indebtedness, significant corporate changes
(including mergers), dispositions and
certain restrictive agreements.
As of December 31, 2022 and December 25, 2021, we had
no
borrowings under this
revolving credit facility.
As of December 31, 2022 and December 25, 2021, there
were $
9
million and $5.3 $
9
million
of letters of credit, respectively, provided to third parties under the credit facility.
Other Short-Term Bank Credit
Lines
As of December 31, 2022 and December 25, 2021, we had various other short-term
bank credit lines available, with
a maximum borrowing capacity of $
402
million as of December 31, 2022, of which $
103
million and $
51
million,
respectively, were outstanding.
At December 31, 2022 and December 25, 2021, borrowings under
all of these
credit lines had a weighted average interest rate of
10.11
% and
10.44
%, respectively.
Long-term debt
Long-term debt consisted of the following:
December 31,
December 25,
2022
2021
Private placement facilities
$
699
$
706
U.S. trade accounts receivable securitization
330
105
Various
collateralized and uncollateralized loans payable with interest,
in acquisitionvarying installments through 2023 at interest rates
ranging from
0.00
% to
3.50
% at December 31, 2022 and
ranging from
2.62
% to
4.27
% at December 25, 2021
7
4
Finance lease obligations
10
7
Total
1,046
822
Less current maturities
(6)
(11)
Total long-term debt
$
1,040
$
811
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
95
Private Placement Facilities
Our private placement facilities were amended on
October 20, 2021
to include four (previously three) insurance
companies, have a total facility amount of $
1.5
billion (previously $
1.0
billion), and are available on an
uncommitted basis at fixed rate economic terms to be agreed upon at the
time of issuance, from time to time
through
October 20, 2026
(previously
June 23, 2023
).
The facilities allow us to issue senior promissory notes to
the lenders at a fixed rate based on an agreed upon spread over applicable
treasury notes at the time of
issuance.
The term of each possible issuance will be selected by us and
can range from
five
to
15 years
(with an
average life no longer than
12 years
).
The proceeds of any issuances under the facilities will be used for
general
corporate purposes, including working capital and capital expenditures,
to refinance existing indebtedness, and/or
to fund potential acquisitions.
The agreements provide, among other things, that we maintain
certain maximum
leverage ratios, and contain restrictions relating to subsidiary indebtedness,
liens, affiliate transactions, disposal of
assets and certain changes in ownership.
These facilities contain make-whole provisions in the event that we
pay
off the facilities prior to the applicable due dates.
On March 5, 2021, we amended the private placement facilities to,
among other things, (a) modify the financial
covenant from being based on a net leverage ratio to a total leverage
ratio and (b) restore the maximum
maintenance total leverage ratio to
3.25
x and remove the
1.00
% interest rate increase triggered if the net leverage
ratio were to exceed
3.0
x.
The components of our private placement facility borrowings, which
have a weighted average interest rate of
2.99
%, as of December 31, 2022 are presented in the following table:
Amount of
Date of
Borrowing
Borrowing
Borrowing
Outstanding
Rate
Due Date
January 20, 2012
$
50
3.45
%
January 20, 2024
December 24, 2012
50
3.00
December 24, 2024
June 16, 2017
100
3.42
June 16, 2027
September 15, 2017
100
3.52
September 15, 2029
January 2, 2018
100
3.32
January 2, 2028
September 2, 2020
100
2.35
September 2, 2030
June 2, 2021
100
2.48
June 2, 2031
June 2, 2021
100
2.58
June 2, 2033
Less: Deferred debt issuance costs
(1)
Total
$
699
U.S. Trade Accounts Receivable Securitization
We have a facility agreement based on the securitization of our U.S. trade accounts receivable that is structured as
an asset-backed securitization program with pricing committed for up
to
three years
.
On December 15, 2022, we
extended the expiration date of this facility agreement to
December 15, 2025
(the previous maturity date was
October 18, 2024
) and maintained the purchase limit under the facility as
$
450
million with
two
banks as agents.
As of December 31, 2022 and December 25, 2021, the borrowings outstanding
under this securitization facility
were $
330
million and $
105
million, respectively.
At December 31, 2022, the interest rate on borrowings under
this facility was based on the asset-backed commercial paper rate of
4.58
% plus
0.75
%, for a combined rate of
5.33
%.
At December 25, 2021, the interest rate on borrowings under
this facility was based on the asset-backed
commercial paper rate of
0.19
% plus
0.75
%, for a combined rate of
0.94
%.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
96
If our accounts receivable collection pattern changes due to customers
either paying late or not making payments,
our ability to borrow under this facility may be reduced.
We are required to pay a commitment fee of
30
to
35
basis points depending upon program utilization.
As of December 31, 2022,
the aggregate amounts of long-term debt, including finance lease obligations
and net of
deferred debt issuance costs of $
1
million, maturing in each of the next five years and thereafter
are as follows:
2023
$
6
2024
109
2025
331
2026
-
2027
100
Thereafter
500
Total
$
1,046
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
97
Note 13 – Income Taxes
Income before taxes and equity in earnings of affiliates was as follows:
Years
ended
December 31,
December 25,
December 26,
2022
2021
2020
Domestic
$
506
$
593
$
431
Foreign
215
238
69
Total
$
721
$
831
$
500
The provisions for income taxes were as follows:
Years
ended
December 31,
December 25,
December 26,
2022
2021
2020
Current income tax expense:
U.S. Federal
$
150
$
129
$
83
State and local
49
37
24
Foreign
44
43
41
Total current
243
209
148
Deferred income tax expense (benefit):
U.S. Federal
(48)
(12)
(18)
State and local
(13)
(3)
(5)
Foreign
(12)
4
(30)
Total deferred
(73)
(11)
(53)
Total provision
$
170
$
198
$
95
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
98
The tax effects of temporary differences that give rise to our deferred income tax asset (liability) were
as follows:
Years
Ended
December 31,
December 25,
2022
2021
Deferred income tax asset:
Net operating losses and other carryforwards
$
64
$
55
Inventory, premium
coupon redemptions and accounts receivable
valuation allowances
57
46
Stock-based compensation
11
13
Uniform capitalization adjustment to inventories
11
10
Operating lease liability
77
79
Other asset
48
41
Total deferred income
tax asset
268
244
Valuation
allowance for deferred tax assets
(1)
(36)
(36)
Net deferred income tax asset
232
208
Deferred income tax liability
Intangibles amortization
(112)
(134)
Operating lease right-of-use asset
(61)
(74)
Property and equipment
(7)
(7)
Total deferred tax
liability
(180)
(215)
Net deferred income tax asset (liability)
$
52
$
(7)
(1)
Primarily relates to operating losses, the benefits of which are uncertain.
Any future reductions of such valuation allowances will be
reflected as a reduction of income tax expense.
The assessment of the amount of value assigned to our deferred tax assets under
the applicable accounting rules is
judgmental.
We are required to consider all available positive and negative evidence in evaluating the likelihood
that we will be able to realize the benefit of our deferred tax assets in the future.
Such evidence includes reversals
of deferred tax liabilities and projected future taxable income.
Since this evaluation requires consideration of
events that may occur some years into the future, there is an element of
judgment involved.
Realization of our
deferred tax assets is dependent on generating sufficient taxable income in future periods.
We
believe that it is
more likely than not that future taxable income will be sufficient to allow us to recover
substantially all of the value
assigned to our deferred tax assets.
However, if future events cause us to conclude that it is not more likely than
not that we will be able to recover the value assigned to our deferred tax assets, we
will be required to adjust our
valuation allowance accordingly.
As of December 31, 2022, we had federal, state and foreign net operating
loss carryforwards of approximately
$
30
million, $
31
million and $
220
million, respectively.
The federal, state and foreign net operating loss
carryforwards will begin to expire in various years from continuing operations.

In February 2019, we completed2023 through

2041.
The amounts of federal, state and
foreign net operating losses that can be carried forward indefinitely are $
21
million, $
4
million and $
218
million,
respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
99
The tax provisions differ from the Animal Health Spin-off. Duringamount computed using the yearsfederal statutory income
tax rate as follows:
Years
ended
December 31,
December 25,
December 26,
2022
2021
2020
Income tax provision at federal statutory rate
$
151
$
175
$
105
State income tax provision, net of federal income tax effect
20
21
13
Foreign income tax provision
4
6
-
Pass-through noncontrolling interest
(4)
(4)
(3)
Valuation
allowance
(2)
(6)
1
Unrecognized tax benefits and audit settlements
11
7
(18)
Interest expense related to loans
(12)
(11)
(11)
Tax benefit related
to legal entity reorganization outside the U.S.
-
-
(6)
Other
2
10
14
Total income
tax provision
$
170
$
198
$
95
For the year ended December 28,31, 2022, our effective tax rate was
23.5
%, compared to
23.8
% for the prior year
period.
In 2022, the difference between our effective tax rate and the federal statutory tax rate primarily
relates to
state and foreign income taxes and interest expense.
In 2021, the difference between our effective tax rate and the
federal statutory tax rate was primarily due to state and foreign income
taxes and interest expense.
In 2020, our
effective tax rate was
19.1
%.
The difference between our effective tax rate and the federal statutory tax rate was
primarily due to an Advance Pricing Agreement with the U.S Internal Revenue
Service (the “IRS”) in the U.S.,
other audit resolutions, state and foreign income taxes and interest expense.
On August 16, 2022, the Inflation Reduction Act (H.R. 5376) (“IRA”) was
signed into law in the United States.
Among other things, the IRA imposes a 15% corporate alternative minimum
tax for tax years beginning after
December 31, 2022 and levies a 1% excise tax on net stock repurchases after
December 31, 2022.
We are still in
the process of analyzing the provisions of the IRA.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”) was enacted in
response to the COVID-19 pandemic.
The CARES Act includes, but is not limited to, certain income tax
provisions that modify the Section 163(j) limitation of business interest and
net operating loss carryover and
carryback rules.
The modifications to Section 163(j) increase the allowable business
interest deduction from
30
%
of adjusted taxable income to
50
% of adjusted taxable income for years beginning in 2019 and 2020.
The CARES
Act eliminated the NOL income limitation for years beginning before 2021
and it extended the carryback period to
five years for losses incurred in 2018, 2019 and 2020.
We
have analyzed the income tax provisions of the CARES
Act and have accounted for the impact in the year ended December 29, 2018, we incurred $23.6 million26, 2020,
which did not have a material impact
on our consolidated financial statements.
There are certain other non-income tax benefits available to us under
the
CARES Act that require further clarification or interpretation that
may affect our consolidated financial statements
in the future.
On December 27, 2020, the Consolidated Appropriations Act was
enacted into law and $38.9 million in transaction costs associated with this transaction. We expect to incur additional spin-off related transaction costs duringextended
certain non-income tax benefits under the CARES Act.
On July 20, 2020, related to required tax and other matters. All transaction coststhe IRS issued final regulations related to the Animal Health Spin-offTax Cuts and Jobs Act enacted in 2017 (the “Tax
Act”).
The final regulations concern the global intangible low-taxed income
(“GILTI”) and subpart F income
provisions of the Tax Act.
To provide flexibility to taxpayers, the IRS is permitting the application of these final
regulations to prior tax years, if the taxpayer elects to do so.
We have analyzed the final regulations, which do not
have a material impact to our consolidated financial statements.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
100
On December 22, 2017, the U.S. government passed the Tax Act, which requires U.S. companies to pay a
mandatory one-time transition tax on historical offshore earnings that have not been
repatriated to the U.S.
The
transition tax is payable over eight years.
Within our consolidated balance sheets, transition tax of $
19
million and
$
14
million were included in results from discontinued operations.

“accrued taxes” for 2022 and 2021, respectively, and $

121

23

million and $
42
million
were included in “other liabilities” for 2022 and 2021, respectively.
Due to the one-time transition tax and the imposition of the GILTI provisions, all previously unremitted earnings
will no longer be subject to U.S. federal income tax; however, there could be U.S., state and/or foreign withholding
taxes upon distribution of such unremitted earnings.
Determination of the amount of unrecognized deferred tax
liability with respect to such earnings is not practicable.
ASC 740 prescribes the accounting for uncertainty in income taxes recognized
in the financial statements in
accordance with other provisions contained within this guidance.
This topic prescribes a recognition threshold and
a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected
to be taken in a tax return.
For those benefits to be recognized, a tax position must be more likely
than not to be
sustained upon examination by the taxing authorities.
The amount recognized is measured as the largest amount of
benefit that has a greater than 50% likely of being realized upon ultimate
audit settlement.
In the normal course of
business, our tax returns are subject to examination by various taxing
authorities.
Such examinations may result in
future tax and interest assessments by these taxing authorities for uncertain
tax positions taken in respect of certain
tax matters.
The total amount of unrecognized tax benefits, which are included in “other
liabilities” within our consolidated
balance sheets, as of December 31, 2022 and December 25, 2021 was approximately
$
94
million and $
84
million,
respectively, of which $
80
million and $
69
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 consolidated statements of income.
All tax returns audited by the IRS are officially closed through 2018.
The tax years subject to examination by the
IRS include years 2019 and forward.
In addition, limited positions reported in the 2017 tax year are subject
to IRS
examination.
During the quarter ended December 25, 2021, we were notified by
the IRS that tax year 2019 was
selected for examination.
During the quarter ended June 26, 2021 we reached a resolution with
the Appellate
Division for all remaining outstanding issues for 2012 and 2013.
During the quarter ended September 26, 2020 we reached an agreement with
the Advanced Pricing Division on an
appropriate transfer pricing methodology for the years 2014-2025.
The objective of this resolution was to mitigate
future transfer pricing audit adjustments.
In the fourth quarter of 2020, we reached a resolution with the IRS for the
2014-2016 audit cycle.
The total amounts of interest and penalties are classified as a component of
the provision for income taxes.
The
amount of tax interest expense (credit) was approximately $
0
million, $
0
million and $(
3
) million in 2022, 2021
and 2020, respectively.
The total amount of accrued interest is included in “other liabilities”,
and was
approximately $
12
million as of December 31, 2022 and $
12
million as of December 25, 2021.
The amount of
penalties accrued for during the periods presented were not material
to our consolidated financial statements.
HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

(in thousands,millions, except share and per share data)

101
The following table provides a reconciliation of unrecognized tax benefits:
December 31,

December 25,
December 26,
2022
2021
2020
Balance, beginning of period
$
71
$
70
$
91
Additions based on current year tax positions
14
3
5
Additions based on prior year tax positions
8
11
8
Reductions based on prior year tax positions
-
(1)
(1)
Reductions resulting from settlements with taxing authorities
(1)
(9)
(19)
Reductions resulting from lapse in statutes of limitations
(10)
(3)
(14)
Balance, end of period
$
82
$
71
$
70

Note 1214 – Plans of Restructuring

and Integration Costs
On July 9, 2018,August 1, 2022, we committed to ana restructuring plan focused on
funding the priorities of the strategic plan and
streamlining operations and other initiatives to increase efficiency.
We expect this initiative to rationalize our operations and provide expense efficiencies. These actions allowed us to execute on our plan to reduce our cost structure and fund new initiatives that drive growth under our 2018 to 2020 strategic plan. This initiative has resulted in the elimination of approximately 4% of our workforce and the closing of certain facilities.

During the years ended December 28, 2019 and December 29, 2018, we recorded restructuring charges of $14.7 million and $54.4 million, respectively. The costs associated with these restructurings are included in a separate line item, “Restructuring costs” within our consolidated statements of income.

On November 20, 2019, we committed to the contemplated initiative, intended to mitigate stranded costs associated with the Animal Health Spin-off as well as to rationalize operations and provide expense efficiencies. These activities are expected to be completed by the end of 2020. extend through

2023.
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 with respect to the total cost, or an estimate of the
amount or range of amounts that will
result in future cash expenditures.
During the year ended December 31, 2022, we recorded restructuring charges of $
128
million primarily related to
severance and employee-related costs, accelerated amortization of right-of-use
lease assets, impairment of other
long-lived assets and lease exit costs.
During the three months ended December 31, 2022, in connection with our
restructuring plan, we vacated
one
of
the buildings at our corporate headquarters in Melville NY, which resulted in an accelerated amortization of right-
of-use lease asset of $
34
million.
We will disclosealso initiated the disposal of a non-profitable US business and recorded
related costs of $
49
million which primarily consisted of impairment of intangible assets
and goodwill, inventory
impairment, and severance and employee-related costs.
These expenses are included in the $
128
million of
restructuring charges discussed above.
The disposal is expected to be completed in the first quarter of 2023.
On August 26, 2022, we acquired Midway Dental Supply.
In connection with this information afteracquisition, during the year
ended December 31, 2022, we determine such estimates or rangerecorded integration costs of estimates.

$

3
million related to one-time employee and other
costs, as well as restructuring charges of $
9
million, which are included in the $
128
million of restructuring charges
discussed above.
On November 20, 2019, we committed to a contemplated restructuring
initiative intended to mitigate stranded costs
associated with the spin-off of our animal health business and to rationalize operations
and provide expense
efficiencies.
These activities were originally expected to be completed by
the end of 2020 but we extended them to
the end of 2021 in light of the changes to the business environment brought
on by the COVID-19 pandemic.
The
restructuring activities under this prior initiative were completed
in 2021.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
102
Restructuring and integration costs recorded during our 2022, 2021 and
2020 fiscal years consisted of the
following:
Year
Ended December 31, 2022
Health-Care Distribution
Technology
and Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Integration
Costs
Total
Severance and employee-related costs
$
25
$
-
$
4
$
-
$
29
Impairment and accelerated depreciation and
amortization of right-of-use lease assets and
other long-lived assets
47
-
-
-
47
Exit and other related costs
3
-
-
-
3
Loss on disposal of a business
49
-
49
Integration employee-related and other costs
-
3
-
-
3
Total restructuring and integration costs
$
124
$
3
$
4
$
-
$
131
Year
Ended December 25, 2021
Health-Care Distribution
Technology
and Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Integration
Costs
Total
Severance and employee-related costs
$
6
$
-
$
2
$
-
$
8
Total restructuring and integration costs
$
6
$
-
$
2
$
-
$
8
Year
Ended December 26, 2020
Health-Care Distribution
Technology
and Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Integration
Costs
Total
Severance and employee-related costs
$
25
$
-
$
1
$
-
$
26
Impairment and accelerated depreciation and
amortization of right-of-use lease assets and
other long-lived assets
4
-
-
-
4
Exit and other related costs
2
-
-
-
2
Total restructuring and integration costs
$
31
$
-
$
1
$
-
$
32
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
103
The following table showssummarizes, by reportable segment, the amounts expensed and paidactivity related
to the liabilities associated with our
restructuring initiatives for restructuring costs that were incurred during our 2019, 2018 and 2017 fiscal years and the year ended December 31, 2022.
The remaining accrued balance of restructuring
costs as of December 28, 2019, which31, 2022 is included in Accruedaccrued expenses: Otherother within
our condensed consolidated balance
sheet.
Technology
and
Health Care
Value-Added
Distribution
Services
Total
Balance, December 25, 2021
$
3
$
1
$
4
Restructuring charges
124
4
128
Non-cash asset impairment and Other liabilitiesaccelerated depreciation and
amortization of right-of-use lease assets and other long-lived
assets
(47)
-
(47)
Non-cash impairment on disposal of a business
(46)
-
(46)
Cash payments and other adjustments
(13)
(2)
(15)
Balance, December 31, 2022
$
21
$
3
$
24
Note 15 – Commitments and Contingencies
Purchase Commitments
In our health care distribution business, we sometimes enter into long-term purchase
commitments to ensure the
availability of products for distribution.
Future minimum annual payments for inventory purchase commitments
as
of December 31, 2022 were:
2023
$
5
2024
4
2025
4
2026
4
2027
4
Thereafter
-
Total minimum
inventory purchase commitment payments
$
21
Employment, Consulting and Non-Compete Agreements
We have employment, consulting and non-compete agreements that have varying base aggregate annual payments
for the years 2023 through 2027 and thereafter of approximately $
23
million, $
7
million, $
5
million, $
0
million, $
0
million, and $
0
million, respectively.
We also have lifetime consulting agreements that provide for current
compensation of
four-hundred thousand
dollars per year, increasing
twenty-five thousand
dollars every fifth year
with the next increase in 2026.
In addition, some agreements have provisions for additional
incentives and
compensation.
Litigation
Henry Schein, Inc. has been named as a defendant in multiple opioid
related lawsuits (currently less than one-
hundred and fifty (
150
); in approximately half of those cases one or more of Henry Schein, Inc.’s subsidiaries is
also named as a defendant).
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 affiliated companies) 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 our consolidated balance sheet:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facility

 

 

 

 

 

 

 

Severance

 

Closing

 

 

 

 

 

 

 

Costs

 

Costs

 

Other

 

Total

Balance, December 31, 2016

 

$

20,447

 

$

2,130

 

$

73

 

$

22,650

Provision

 

 

-

 

 

-

 

 

-

 

 

-

Payments and other adjustments

 

 

(17,360)

 

 

(815)

 

 

(49)

 

 

(18,224)

Balance, December 30, 2017

 

$

3,087

 

$

1,315

 

$

24

 

$

4,426

Provision

 

 

50,197

 

 

3,153

 

 

1,017

 

 

54,367

Payments and other adjustments

 

 

(23,320)

 

 

(2,865)

 

 

(883)

 

 

(27,068)

Balance, December 29, 2018

 

$

29,964

 

$

1,603

 

$

158

 

$

31,725

Provision

 

 

13,741

 

 

937

 

 

27

 

 

14,705

Payments and other adjustments

 

 

(30,794)

 

 

(1,714)

 

 

(112)

 

 

(32,620)

Balance, December 28, 2019

 

$

12,911

 

$

826

 

$

73

 

$

13,810

the
MultiDistrict Litigation (“MDL”) proceeding

122

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

(in thousands,millions, except share and per share data)

104

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 has been designated a bellwether with
eight
of
thirty-eight
plaintiffs set for a jury trial on July 24,
2023; and the action filed by Florida Health Sciences Center, Inc. (and
38
other hospitals located throughout the
State of Florida) in Florida state court, which is currently scheduled for a jury
trial in October 2024.
In December
2022, we settled
seven
cases filed in Utah (plus one case in which we were not yet
named a defendant) by
nineteen
plaintiffs for a total amount of
sixty thousand
dollars.
The
seven
cases have been dismissed.
Of Henry Schein’s
2022 net sales of approximately $
12.6
billion from continuing operations, sales of opioids represented
less than
two-tenths of 1 percent
.
Opioids represent a negligible part of our business.
We intend to defend ourselves
vigorously against these 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 following table shows,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 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 reportable segment,Henry Schein.
We are cooperating with the amounts expensed
investigation.
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 paid for restructuring costsinvestigations (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 December 31, 2022, we had accrued our best estimate of potential
losses relating to claims that were incurred duringprobable
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 2019, 2018financial position, results of operations
or cash flows.
Our method for
determining estimated losses considers currently available
facts, presently enacted laws and 2017 fiscal yearsregulations and the remaining accrued balance of restructuring costs as of December 28, 2019:

 

 

 

 

 

 

Technology and

 

 

 

 

 

Health Care

 

Value-Added

 

 

 

 

 

 

Distribution

 

Services

 

Total

Balance, December 31, 2016

 

$

22,505

 

$

145

 

$

22,650

Provision

 

 

-

 

 

-

 

 

-

Payments and other adjustments

 

 

(18,079)

 

 

(145)

 

 

(18,224)

Balance, December 30, 2017

 

$

4,426

 

$

-

 

$

4,426

Provision

 

 

50,824

 

 

3,543

 

 

54,367

Payments and other adjustments

 

 

(24,959)

 

 

(2,109)

 

 

(27,068)

Balance, December 29, 2018

 

$

30,291

 

$

1,434

 

$

31,725

Provision

 

 

13,935

 

 

770

 

 

14,705

Payments and other adjustments

 

 

(30,853)

 

 

(1,767)

 

 

(32,620)

Balance, December 28, 2019

 

$

13,373

 

$

437

 

$

13,810

other

123

factors, including probable recoveries from third parties.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

(in thousands,millions, except share and per share data)

105
Note 16 – Stock-Based Compensation

Note 13 – Earnings Per Share

Basic

Stock-based awards are provided to certain employees under the terms of our
2020 Stock Incentive Plan and to
non-employee directors under the terms of our 2015 Non-Employee Director
Stock Incentive Plan (together, the
“Plans”).
The Plans are administered by the Compensation Committee of the Board
of Directors (the
“Compensation Committee”).
Historically, equity-based awards to our employees have been granted solely in the
form of time-based and performance-based restricted stock units
(“RSUs”).
However, for our 2021 fiscal year, in
light of the COVID-19 pandemic, the Compensation Committee determined
it would be difficult for management
to set a meaningful three-year cumulative earnings per share target as the goal applicable
to performance-based
RSU awards as it had done in prior years.
Instead, the Compensation Committee set our equity-based awards
to
employees for fiscal 2021 in the form of time-based RSUs and non-qualified
stock options which focus on stock
value appreciation and retention instead of pre-established performance goals.
Our non-employee directors
continued to receive equity-based awards for fiscal 2021 solely in the form of time-based
RSUs.
In March 2022,
the Compensation Committee reinstated performance-based RSUs
for equity-based awards to employees for fiscal
2022 and awarded grants in the form of performance-based RSUs,
time-based RSUs and non-qualified stock
options.
As of December 31, 2022, there were
70,942,657
shares authorized and
8,034,696
shares available to be granted
under the 2020 Stock Incentive Plan and
1,892,657
shares authorized and
192,400
shares available to be granted
under the 2015 Non-Employee Director Stock Incentive Plan.
RSUs are stock-based awards granted to recipients with specified vesting provisions.
In the case of RSUs, common
stock is computed by dividing net income attributabledelivered on or following satisfaction of vesting conditions.
We issue RSUs to Henry Schein, Inc.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 under the 2015 Non-Employee Director Stock Incentive
Plan primarily
are granted with
12
-month cliff vesting.
For these RSUs, we recognize the cost as compensation expense on
a
straight-line basis.
With
respect to time-based RSUs, we estimate the fair value on the date
of grant based on our closing stock price at
the time of grant.
With respect to performance-based RSUs, the number of shares that ultimately vest
and are
received by the weighted-averagerecipient 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, 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 of certain products and unforeseen events or circumstances affecting us.
Over the performance period, the number of shares of common stock that will
ultimately vest and be issued and the
related compensation expense is adjusted upward or downward based upon
our estimation of achieving such
performance targets.
The ultimate number of shares outstanding fordelivered to recipients and the period. Our diluted earnings
related compensation cost
recognized as an expense will be based on our actual performance metrics
as defined under the Plans.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
106
Stock options are awards that allow the recipient to purchase shares of our
common stock at a fixed price following
vesting of the stock options.
Stock options are granted at an exercise price equal to our closing stock
price on the
date of grant.
Stock options issued beginning in 2021 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 the term
upon certain events.
Compensation expense for these stock options is computed similarly to basic earnings per share, except that it reflectsrecognized
using a graded vesting method.
We estimate the effect of common shares issuable for presently unvested restricted stock and restricted stock units and upon exercisefair value of stock options using the treasuryBlack-Scholes valuation model.
In addition to equity-based awards granted in fiscal 2021 under the long-term
incentive program, the Compensation
Committee granted a Special Pandemic Recognition Award under the 2020 Stock Incentive Plan to recipients of
performance-based RSUs under the 2018 long-term incentive program.
The payout under the performance-based
restricted stock methodunits granted under the fiscal 2018 long-term incentive program
(the “2018 LTIP”) was negatively
impacted by the global COVID-19 pandemic.
Given the significance of the impact of the pandemic on our
three
-
year EPS goal under such equity awards and the contributions made by our employees
(including those who
received such awards), on March 3, 2021, the Compensation Committee granted
a Special Pandemic Recognition
Award to recipients of performance-based restricted stock units under the 2018 LTIP who were employed by us on
the grant date of the Special Pandemic Recognition Award.
These time-based RSU awards vest
50
% on the first
anniversary of the grant date and
50
% on the second anniversary of the grant date, based on the recipient’s
continued service and subject to the terms and conditions of the 2020 Stock Incentive
Plan, and are recorded as
compensation expense using a graded vesting method.
The combination of the
20
% payout based on actual
performance of the 2018 LTIP and the one-time Special Pandemic Recognition Award granted in periods2021 will
generate a cumulative payout of
75
% of each recipient’s original number of performance-based restricted stock
units awarded in 2018 if the recipient satisfies the
two
-year vesting schedule commencing on the grant date.
Our accompanying consolidated statements of income reflect pre-tax share-based
compensation expense of $
54
million ($
41
million after-tax), $
78
million ($
60
million after-tax) and $
9
million ($
7
million after-tax) for the years
ended December 31, 2022, December 25, 2021 and December 26, 2020.
Total unrecognized compensation cost related to non-vested awards as of December 31, 2022 was $
75
million,
which they haveis expected to be recognized over a dilutive effect.

A reconciliationweighted-average period of shares used in calculating earnings per basic

approximately
2.1
years.
The weighted-average grant date fair value of stock-based awards granted
before forfeitures was $
85.51
, $
62.72
and diluted share follows:

 

 

 

Years Ended

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

2019

 

2018

 

2017

Basic

 

147,817

 

152,656

 

156,787

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options, restricted stock and restricted stock units

 

1,440

 

1,051

 

1,421

 

Diluted

 

149,257

 

153,707

 

158,208

$

124

60.23

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except

per share data)

during the years ended December 31, 2022, December 25,
2021 and December 26, 2020.
Certain stock-based compensation granted may require us to settle in
the form of a cash payment.
During the year
ended December 31, 2022, we recorded a liability of $
0.4
million relating to the grant date fair value of stock-based

Note 14 – Income Taxes

Income before taxes and equitycompensation to be settled in earnings of affiliates was as follows:

 

 

Years ended

 

 

December 28,

 

December 29,

 

December 30,

 

 

2019

 

2018

 

2017

Domestic

$

507,003

 

$

405,289

 

$

526,586

Foreign

 

173,304

 

 

131,547

 

 

103,208

 

Total

$

680,307

 

$

536,836

 

$

629,794

The provisions for income taxes were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended

 

 

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

 

 

2019

 

2018

 

2017

Current income tax expense:

 

 

 

 

 

 

 

 

 

 

U.S. Federal

 

$

93,418

 

$

71,854

 

$

247,254

 

State and local

 

 

28,150

 

 

22,533

 

 

19,489

 

Foreign

 

 

42,004

 

 

38,433

 

 

41,043

 

 

Total current

 

 

163,572

 

 

132,820

 

 

307,786

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

U.S. Federal

 

 

5,633

 

 

206

 

 

12,927

 

State and local

 

 

1,597

 

 

(1,622)

 

 

1,621

 

Foreign

 

 

(11,287)

 

 

(23,972)

 

 

(13,359)

 

 

Total deferred

 

 

(4,057)

 

 

(25,388)

 

 

1,189

 

 

 

Total provision

 

$

159,515

 

$

107,432

 

$

308,975

cash.

125

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

We

The tax effects of temporary differences that give rise to our deferred income tax asset (liability) were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

 

 

December 28,

 

December 29,

 

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

Deferred income tax asset:

 

 

 

 

 

 

 

Investment in partnerships

 

$

1,420

 

$

4,150

 

Net operating losses and other carryforwards

 

 

43,663

 

 

43,754

 

Inventory, premium coupon redemptions and accounts receivable

 

 

 

 

 

 

 

 

valuation allowances

 

 

23,808

 

 

25,008

 

Stock-based compensation

 

 

14,075

 

 

14,880

 

Uniform capitalization adjustment to inventories

 

 

7,259

 

 

8,189

 

Other asset

 

 

35,419

 

 

38,806

 

Total deferred income tax asset

 

 

125,644

 

 

134,787

 

Valuation allowance for deferred tax assets (1)

 

 

(20,699)

 

 

(22,403)

 

Net deferred income tax asset

 

 

104,945

 

 

112,384

Deferred income tax liability

 

 

 

 

 

 

 

Intangibles amortization

 

 

(135,754)

 

 

(103,309)

 

Property and equipment

 

 

(10,555)

 

 

(13,075)

 

Total deferred tax liability

 

 

(146,309)

 

 

(116,384)

Net deferred income tax asset (liability)

 

$

(41,364)

 

$

(4,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Primarily relates to operating losses of acquired subsidiaries, the benefits of which are uncertain. Any future reductions of such valuation allowances will be reflected as a reduction of income tax expense in accordance with the provisions of ASC Topic 805, “Business Combinations.”

The assessment ofrecord deferred income tax assets for awards that will result in

future deductions on our income tax returns
based on the amount of value assigned tocompensation cost recognized and our deferredstatutory tax assets under the applicable accounting rules is judgmental. We are required to consider all available positive and negative evidence in evaluating the likelihood that we will be able to realize the benefit of our deferred tax assets
rate in the future. Such evidence includes scheduled reversalsjurisdiction in which we will
receive a deduction.
Our accompanying consolidated statements of deferred tax liabilities, projected future taxablecash flows present our stock-based
compensation expense as an
adjustment to reconcile net income tax planning strategies andto net cash provided by operating
activities for all periods presented.
In the results
accompanying consolidated statements of recent operations. Since this evaluation requires consideration of events that may occur some years into the future, there is an element of judgment involved. Realization of our deferred tax assets is dependent on generating sufficient taxable income in future periods. We believe that it is more likely than not that future taxable income will be sufficient to allow us to recover substantially all of the value assigned to our deferred tax assets. However, if future events cause us to conclude that it is not more likely than not that we will be able to recover all of the value assigned to our deferred tax assets, we will be required to adjust our valuation allowance accordingly.

As of December 28, 2019, we had foreign net operating loss carryforwards of $2.0 million, which can be utilized against future foreign income through December 31, 2026. Additionally, as of December 28, 2019,cash flows, there were foreign net operating loss carryforwardsno benefits

associated with tax deductions in
excess of $144.9 million that have an indefinite life. As ofrecognized compensation as a cash inflow from financing
activities for the years ended December 28, 2019, the company had post-apportionment state net operating loss carryforwards of $14.3 million, which can be utilized against future state income through31,
2022, December 31, 2039. Additionally, as of25, 2021 and December 28, 2019, there were post-apportionment state operating loss carryforwards of $21.1 million that have an indefinite life.

26, 2020.

126

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

(in thousands,millions, except share and per share data)

107

The tax provisions differ from following weighted-average assumptions were used in determining
the amount computed most recent fair values of stock options
using the federal statutory income taxBlack-Scholes valuation model:
2022
Expected dividend yield
0.00
%
Expected stock price volatility
27.80
%
Risk-free interest rate
3.62
%
Expected life of options (years)
6.00
We have not declared cash dividends on our stock in the past and we do not anticipate declaring cash dividends in
the foreseeable future.
The expected stock price volatility is based on implied volatilities
from traded options on
our stock, historical volatility of our stock, and other factors.
The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant in conjunction with considering the expected life of options.
The
six
-year expected life of the options was determined using the simplified
method for estimating the expected term
as follows:

 

 

 

Years ended

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

2019

 

2018

 

2017

Income tax provision at federal statutory rate

 

$

142,865

 

$

112,735

 

$

220,427

State income tax provision, net of federal income tax effect

 

 

16,539

 

 

15,872

 

 

10,320

Foreign income tax benefit

 

 

(4,580)

 

 

(2,558)

 

 

(19,486)

Pass-through noncontrolling interest

 

 

(3,931)

 

 

(2,700)

 

 

(1,465)

Valuation allowance

 

 

(79)

 

 

2,017

 

 

1,629

Unrecognized tax benefits and audit settlements

 

 

3,671

 

 

2,126

 

 

4,196

Interest expense related to loans

 

 

(5,498)

 

 

(11,700)

 

 

(18,492)

Excess tax benefits related to stock compensation

 

 

(86)

 

 

(1,008)

 

 

(16,964)

Transition tax on deemed repatriation of foreign earnings

 

 

-

 

 

(10,000)

 

 

140,000

Revaluation of deferred tax assets and liabilities

 

 

-

 

 

(1,676)

 

 

2,953

Tax on global intangible low-taxed income ("GILTI")

 

 

3,917

 

 

7,599

 

 

-

Tax benefit related to legal entity reorganization outside the U.S.

 

 

-

 

 

(13,852)

 

 

-

Tax charge related to reorganization of legal entities related

 

 

 

 

 

 

 

 

 

to forming Henry Schein One

 

 

-

 

 

3,914

 

 

-

Tax charge (credit) related to reorganization of legal entities

 

 

 

 

 

 

 

 

 

completed in preparation for the Animal Health spin-off

 

 

(1,333)

 

 

3,135

 

 

-

Other

 

 

8,030

 

 

3,528

 

 

(14,143)

 

Total income tax provision

 

$

159,515

 

$

107,432

 

$

308,975

For permitted under SAB Topic 14.

Estimates of fair value are not intended to predict actual future events or
the
value ultimately realized by recipients of stock options, and subsequent
events are not indicative of the
reasonableness of the original estimates of fair value made by us.
The following table summarizes the stock option activity for the year
ended December 31, 2022:
Stock Options
Weighted
Remaining
Average
Weighted Average
Aggregate
Exercise
Remaining Contractual
Intrinsic
Shares
Price
Life in Years
Value
Outstanding at beginning of year
767,717
$
63.24
Granted
420,075
85.81
Exercised
(36,150)
62.92
Forfeited
(34,068)
74.84
Outstanding at end of year
1,117,574
$
71.38
8.5
$
12
Options exercisable at end of year
220,688
$
63.35
Weighted
Weighted Average
Average
Remaining
Aggregate
Number of
Exercise
Contractual
Intrinsic
Options
Price
Life (in years)
Value
Vested
or expected to vest
885,428
$
73.50
8.7
$
8
The following tables summarize the activity of our unvested RSUs for
the year ended December 28, 2019, our effective tax rate31, 2022:
Time-Based Restricted Stock Units
Performance-Based Restricted Stock Units
Weighted Average
Weighted Average
Grant Date Fair
Intrinsic Value
Grant Date Fair
Intrinsic Value
Shares/Units
Value Per Share
Per Share
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period
1,945,862
$
58.79
674,753
$
59.63
Granted
471,840
85.49
267,865
82.35
Vested
(566,887)
55.46
(396,220)
59.21
Forfeited
(94,771)
67.87
(25,482)
67.65
Outstanding at end of period
1,756,044
$
66.59
$
79.87
520,916
$
60.23
$
79.87
The total intrinsic value per share of RSUs that vested was 23.4% compared to 20.0% for$
78.74
, $
73.99
and $
61.49
during the prior year period. In 2019, our effective tax rate was primarily impacted by stateyears ended
December 31, 2022, December 25, 2021 and foreign income taxes and interest expense. In 2018, our effective tax rate was primarily impacted by a reduction in the estimate of our transition tax associated with the Tax Act, tax charges and credits associated with legal entity reorganizations outside the U.S., and state and foreign income taxes and interest expense. In 2017, our effective tax rate was primarily impacted by the Tax Act, the adoption of ASU 2016-09, as well as state and foreign income taxes and interest expense.

On December 22, 2017, the U.S. government passed the Tax Act. The Tax Act is comprehensive tax legislation that implemented complex changes to the U.S. tax code including, but not limited to, the reduction of the corporate tax rate from 35% to 21%, modification of accelerated depreciation, the repeal of the domestic manufacturing deduction and changes to the limitations of the deductibility of interest. Additionally, the Tax Act moved from a global tax regime to a modified territorial regime, which requires U.S. companies to pay a mandatory one-time transition tax on historical offshore earnings that have not been repatriated to the U.S. The transition tax is payable over eight years. In the fourth quarter of 2017, we recorded provisional amounts for any items that could be reasonably estimated at the time. This included the one-time transition tax that we estimated to be $140.0 million and a net deferred tax expense of $3.0 million attributable to the revaluation of deferred taxes due to the lower enacted federal income tax rate of 21%. We completed our analysis in the year ended December 29, 2018 and recorded a net $10.0 million reduction to the one-time transition tax and an additional $1.7 million net deferred tax benefit from the revaluation of deferred taxes to reflect the new tax rate. Absent the effects of the transition tax and the revaluation of deferred tax assets and liabilities, our effective tax rate for the year ended December 30, 2017 would have been 26.4% as compared to our actual effective tax rate of 49.1%.

26, 2020.

127

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

(in thousands,millions, except share and per share data)

Within our consolidated balance sheets, transition tax of $9.9 million was included in “Accrued taxes” for 2019 and 2018, and $94.9 million and $104.2 million were included in “Other liabilities” for 2019 and 2018, respectively.

The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income (“GILTI”), states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. We elected to recognize the tax on GILTI as a period expense in the period the tax is incurred. We recorded a current tax expense for the GILTI provision of $7.6 million and $3.9 million for 2018 and 2019, respectively.

Due to the one-time transition tax and the imposition of the GILTI provisions, all previously unremitted earnings will no longer be subject to U.S. federal income tax; however, there could be U.S. state and/or foreign withholding taxes upon distribution of such unremitted earnings. Determination of the amount of unrecognized deferred tax liability with respect to such earnings is not practicable.

ASC 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within this guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate audit settlement. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities for uncertain tax positions taken in respect to certain tax matters.

The total amount of unrecognized tax benefits, which are included in “Other liabilities” within our consolidated balance sheets as of December 28, 2019 was approximately $109.1 million, of which $91.2 million would affect the effective tax rate if recognized. It is possible that the amount of unrecognized tax benefits may change in the next 12 months, which may result in a material impact on our consolidated statement of income.

The tax years subject to examination by major tax jurisdictions include the years 2012 and forward by the U.S. Internal Revenue Service (“IRS”), as well as the years 2008 and forward for certain states and certain foreign jurisdictions. All tax returns audited by the IRS are officially closed through 2011. We are currently under audit for the years 2012 and 2013. In the quarter ended December 28, 2019, we reached a settlement with the U.S. Competent Authority to resolve certain transfer pricing issues related to 2012 and 2013. For all remaining outstanding issues for 2012 and 2013, we have provided all necessary documentation to the Appellate Division to date and are waiting for responses. We are also in negotiations with the Advanced Pricing Division to reach an agreement on an appropriate transfer pricing methodology. As part of this process, we have submitted documentation with the objective to reach a resolution for 2014-2021 in order to mitigate future transfer pricing audit adjustments. It is possible that the resolution with the IRS may have a material impact on our consolidated financial statements.

The total amounts of interest and penalties are classified as a component of the provision for income taxes. The amount of tax interest expense (credits) was approximately $2.2 million, $3.6 and $(2.9) in 2019, 2018 and 2017, respectively. The total amount of accrued interest is included in “Other liabilities”, and was approximately $18.0 million as of December 28, 2019 and $15.6 million as of December 29, 2018. NaN penalties were accrued for the periods presented.

128

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

The following table provides a reconciliation of unrecognized tax benefits:

 

 

December 28,

 

December 29,

 

December 30,

 

 

2019

 

2018

 

2017

Balance, beginning of period

 

$

77,800

 

$

83,200

 

$

82,200

Additions based on current year tax positions

 

 

4,900

 

 

5,000

 

 

8,500

Additions based on prior year tax positions

 

 

17,300

 

 

9,400

 

 

5,400

Reductions based on prior year tax positions

 

 

(1,000)

 

 

(1,600)

 

 

(800)

Reductions resulting from settlements with taxing authorities

 

 

(4,200)

 

 

(1,600)

 

 

(10,500)

Reductions resulting from lapse in statutes of limitations

 

 

(3,700)

 

 

(16,600)

 

 

(1,600)

Balance, end of period

 

$

91,100

 

$

77,800

 

$

83,200

Note 15 – Concentrations of Risk

Certain financial instruments potentially subject us to concentrations of credit risk. These financial instruments consist primarily of cash equivalents, trade receivables, long-term investments, notes receivable and derivative instruments. In all cases, our maximum exposure to loss from credit risk equals the gross fair value of the financial instruments. We continuously assess the need for reserves for such losses, which have been within our expectations. We do not require collateral or other security to support financial instruments subject to credit risk, except for long-term notes receivable.

We limit our credit risk with respect to our cash equivalents, short-term and long-term investments and derivative instruments, by monitoring the credit worthiness of the financial institutions who are the counter-parties to such financial instruments. As a risk management policy, we limit the amount of credit exposure by diversifying and utilizing numerous investment grade counter-parties.

With respect to our trade receivables, our credit risk is somewhat limited due to a relatively large customer base and its dispersion across different types of health care professionals and geographic areas. For the years ended December 28, 2019 and December 29, 2018 one customer accounted for slightly more than 1% of our net sales from continuing operations. With respect to our sources of supply, our top 10 health care distribution suppliers from continuing operations and our single largest supplier from continuing operations accounted for approximately 31% and 6%, respectively, of our aggregate purchases in 2019 and approximately 31% and 6%, respectively, of our aggregate purchases in 2018.

Our long-term notes receivable primarily represent strategic financing arrangements with certain industry affiliates and amounts owed to us from sales of certain businesses. Generally, these notes are secured by certain assets of the counter-party; however, in most cases our security is subordinate to other commercial financial institutions. While we have exposure to credit loss in the event of non-performance by these counter-parties, we conduct ongoing assessments of their financial and operational performance.

129

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

108

Note 1617 – Employee Benefit Plans
Defined benefit plans
Certain of our employees in our international markets participate
in various noncontributory defined benefit plans.
These plans are managed to provide pension benefits to covered employees
in accordance with local regulations
and practices.
Our net unfunded liability for these plans are recorded
in accrued expenses: other; and other
liabilities within our consolidated balance sheets.
The following table presents the changes in projected benefit
obligations, plan assets, and the funded status of our defined benefit pension
plans:
Years
Ended
December 31,
December 25,
2022
2021
Obligation and funded status:
Change in benefit obligation
Projected benefit obligation, beginning of period
$
128
$
130
Service costs
3
4
Interest cost
1
-
Past service cost
-
5
Actuarial loss
(19)
(5)
Benefits paid
(1)
(1)
-
Participant contributions
1
1
Settlements
(1)
(2)
Effect of foreign currency translation
(4)
(5)
Projected benefit obligation, end of period
$
108
$
128
Change in plan assets
Fair value of plan assets at beginning of period
$
75
$
65
Actual return on plan assets
(3)
5
Employer contributions
2
2
Plan participant contributions
1
1
Expected return on plan assets
1
4
Benefit received
(1)
-
2
Settlements
(1)
(3)
Effect of foreign currency translation
(2)
(1)
Fair value of plan assets at end of period
$
73
$
75
Unfunded status at end of period
$
35
$
53
(1)
Includes regular benefit payments and amounts transferred in by new
participants.
The majority of our defined benefit plans are unfunded, with the exception
of one plan in one country where the
amount of assets exceeds the projected benefit obligation by approximately
$
6
million and $
6
million as of
December 31, 2022 and December 25, 2021, respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
109
The following table provides the amounts recognized in our consolidated
balance sheets for our defined benefit
pension plans:
Years
Ended
December 31,
December 25,
2022
2021
Non-current assets
$
25
$
22
Current liabilities
(1)
(1)
Non-current liabilities
(59)
(74)
Accumulated other comprehensive loss, pre-tax
4
21
The following table provides the net periodic pension cost for our
defined benefit plans:
Years
Ended
December 31,
December 25,
December 26,
2022
2021
2020
Service cost
$
3
$
4
$
3
Interest cost
1
-
-
Expected return on plan assets
(1)
(1)
-
Employee contributions
-
-
-
Amortization of prior service credit
1
1
1
Recognized net actuarial loss
-
-
-
Settlements
-
-
-
Net periodic pension cost
$
4
$
4
$
4
The following tables present the weighted-average actuarial assumptions
used to determine our pension benefit
obligation and our net periodic pension cost for the periods presented:
Years
Ended
December 31,
December 25,
Pension Benefit Obligation
2022
2021
Weighted average
discount rate
1.67
%
0.87
%
Years
Ended
December 31,
December 25,
December 26,
Net Periodic Pension Cost
2022
2021
2020
Discount rate-pension benefit
1.25
%
0.56
%
0.51
%
Expected return on plan assets
0.81
%
0.71
%
0.87
%
Rate of compensation increase
1.68
%
1.95
%
1.97
%
Pension increase rate
0.61
%
0.72
%
0.67
%
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
110
The following table presents the estimated pension benefit payments that
are payable to the plan’s participants as of
December 31, 2022:
Year
2023
$
6
2024
6
2025
5
2026
5
2027
7
2028 to 2032
38
Total
$
67
401(k) Plans
We offer
qualified 401(k) plans to substantially all our domestic full-time
employees.
As determined by our Board
of Directors, matching contributions to these plans generally do not
exceed
100
% of the participants’ contributions
up to
7
% of their base compensation, subject to applicable legal limits.
Matching contributions consist of cash and
were allocated entirely to the participants’ investment elections on file,
subject to a
20
% allocation limit to the
Henry Schein Stock Fund.
Due to the impact of COVID-19, as part of our initiative to generate cash savings,
we
suspended the matching contribution for the second half of 2020.
The matching contribution was reinstated in
2021.
Forfeitures attributable to participants whose employment terminates prior
to becoming fully vested are used
to reduce our matching contributions and offset administrative expenses of the 401(k)
plans.
Assets of the 401(k) and other defined contribution plans are held
in self-directed accounts enabling participants to
choose from various investment fund options.
Matching contributions related to these plans charged to operations
during the years ended December 31, 2022, December 25, 2021 and December
26, 2020 amounted to $
45
million,
$
38
million and $
21
million, respectively.
Within our consolidated statements of income, $
37
million is included
in selling, general and administrative expenses; and $
8
million is included in cost of goods sold.
Supplemental Executive Retirement Plan (“SERP”)
We offer
an unfunded, non-qualified SERP to eligible employees.
This plan generally covers officers and certain
highly compensated employees after they have reached the maximum
IRS allowed pre-tax 401(k) contribution
limit.
Our contributions to this plan are equal to the 401(k)
employee-elected contribution percentage applied to
base compensation for the portion of the year in which such employees are
not eligible to make pre-tax
contributions to the 401(k) plan.
Due to the impact of COVID-19, as part of our initiative
to generate cash savings,
we suspended contributions under the SERP for the second half of
2020.
Contributions to the SERP were restored
in 2021.
The amounts charged to operations during the years ended December 31,
2022, December 25, 2021 and
December 26, 2020 amounted to $
(1)
million, $
2
million and $
3
million, respectively.
The charges are included in
selling, general and administrative expenses line item within our consolidated
statements of income.
Please see
for additional information.
Deferred Compensation Plan (“DCP”)
During 2011, we began to offer DCP to a select group of management or highly compensated employees of
the
Company and certain subsidiaries.
This plan allows for the elective deferral of base salary, bonus and/or
commission compensation by eligible employees.
The amounts charged to operations during the years ended
December 31, 2022, December 25, 2021 and December 26, 2020 were approximately
$
(11)
million, $
8
million and
$
8
million, respectively.
The charges are exposed to market risks as well as changesincluded in foreign currency exchange rates as measured against the U.S. dollarselling, general and each other,administrative expenses line
item within
our consolidated statements of income.
Please see
for additional
information.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and by maintaining counter-party credit limits. These hedging activities provide only limited protection against currency exchange and credit risks. Factors that could influence the effectivenessper share data)
111
Note 18 – Redeemable Noncontrolling Interests
Some minority stockholders in certain of our hedging programs include currency markets and availability of hedging instruments and liquidity ofsubsidiaries have the credit markets. All foreign currency forward contracts that right,
at certain times, to require us to acquire
their ownership interest in those entities at fair value.
ASC 480-10 is applicable for noncontrolling interests where
we enter into are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure. We do not enter into such contracts for speculative purposes and we manage our credit risks by diversifying our counterparties, maintaining a strong balance sheet and having multiple sources of capital.

During 2019 we entered into foreign currency forward contractsmay be required to hedgepurchase all or a portion of our euro-denominated foreign operations which are designated as net investment hedges. These net investment hedges offsetthe 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 U.S dollar valueredeemable noncontrolling interests for the
years ended December 31, 2022,
December 25, 2021 and December 26, 2020 are presented in the following table:
December 31,
December 25,
December 26,
2022
2021
2020
Balance, beginning of our investmentperiod
$
613
$
328
$
287
Decrease in certain euro-functional currency subsidiariesredeemable noncontrolling interests due to fluctuating foreign exchange rates. Gains and losses relatedacquisitions of
noncontrolling interests in subsidiaries
(31)
(60)
(17)
Increase in redeemable noncontrolling interests due to these net investment hedges are recorded in Accumulated other comprehensive loss within our Consolidated Balance Sheet. Amounts excluded from the assessment of hedge effectiveness are included in interest expense within our Consolidated Statement of Income. The aggregate notional value of this net investment hedge, which matures on November 16, 2023, is €200 million. During December business
acquisitions
4
189
28 2019 we recognized approximately $0.6 million of interest savings as a result of this net investment hedge.

Fluctuations in the value of certain foreign currencies as compared

Net income attributable to the U.S. dollar may positively or negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward contracts aimed at limiting the impactredeemable noncontrolling interests
21
23
14
Dividends declared
(21)
(21)
(13)
Effect of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., generally 18 months or less) foreign currency forward contractstranslation loss attributable to protect against currency exchange risks associated with intercompany loans due from our international subsidiaries and the paymentredeemable
noncontrolling interests
(6)
(6)
(4)
Change in fair value of merchandise purchases to our foreign suppliers. We do not hedge the translationredeemable securities
(4)
160
33
Balance, end of foreign currency profits into U.S. dollars, as we regard this as an accounting exposure, not an economic exposure. Our hedging activities have historically not had a material impact on our consolidated financial statements. Accordingly, additional disclosures related to derivatives and hedging activities required by ASC 815 have been omitted.

period

130

$

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

576
$
613
$
328

Note 17 – Revenue from Contracts with Customers

Revenue (Net sales) is recognized in accordance with the policies discussed in Note 1 – Significant Accounting Policies.

Disaggregation of Net sales

The following table disaggregates our Net sales by reportable segment and geographic area:

 

 

Year Ended

 

 

December 28, 2019

 

 

North America

 

International

 

Global

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Health care distribution

 

 

 

 

 

 

 

 

 

 

 

Dental

$

3,911,746

 

 

2,504,119

 

 

6,415,865

 

 

 

Medical

 

2,894,137

 

 

79,449

 

 

2,973,586

 

 

 

 

 

Total health care distribution

 

6,805,883

 

 

2,583,568

 

 

9,389,451

 

 

Technology and value-added services

 

445,317

 

 

69,768

 

 

515,085

 

 

Total excluding Corporate TSA revenues (1)

 

7,251,200

 

 

2,653,336

 

 

9,904,536

 

 

Corporate TSA revenues (1)

 

4,098

 

 

77,169

 

 

81,267

 

 

 

Total revenues

$

7,255,298

 

$

2,730,505

 

$

9,985,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

December 29, 2018

 

 

North America

 

International

 

Global

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Health care distribution

 

 

 

 

 

 

 

 

 

 

 

Dental

$

3,866,171

 

 

2,481,827

 

 

6,347,998

 

 

 

Medical

 

2,581,696

 

 

79,470

 

 

2,661,166

 

 

 

 

 

Total health care distribution

 

6,447,867

 

 

2,561,297

 

 

9,009,164

 

 

Technology and value-added services

 

344,168

 

 

64,271

 

 

408,439

 

 

Total excluding Corporate TSA revenues (1)

 

6,792,035

 

 

2,625,568

 

 

9,417,603

 

 

Corporate TSA revenues (1)

 

-

 

 

-

 

 

-

 

 

 

Total revenues

$

6,792,035

 

$

2,625,568

 

$

9,417,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Corporate TSA revenues represents sales of certain animal health products to Covetrus under the transition services agreement

entered into in connection with the Animal Health Spin-off, which we expect to continue through August 2020.

131

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 18 – Segment and Geographic Data

We conduct our business through 2 reportable segments: (i) health care distribution and (ii) technology and value-added services. These segments offer different products and services to the same customer base.

The health care distribution reportable segment aggregates our global dental and medical operating segments. This segment distributes consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins. Our global dental group serves office-based dental practitioners, dental laboratories, schools and other institutions. Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions. Our global dental and medical groups serve practitioners in 31 countries worldwide.

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

 

 

2019

 

2018

 

2017

Net Sales:

 

 

 

 

 

 

 

 

 

 

Health care distribution (1)

 

 

 

 

 

 

 

 

 

 

 

Dental

 

$

6,415,865

 

$

6,347,998

 

$

6,047,811

 

 

Medical

 

 

2,973,586

 

 

2,661,166

 

 

2,497,994

 

 

Total health care distribution

 

 

9,389,451

 

 

9,009,164

 

 

8,545,805

 

Technology and value-added services (2)

 

 

515,085

 

 

408,439

 

 

337,633

 

 

Total excluding Corporate TSA revenues

 

 

9,904,536

 

 

9,417,603

 

 

8,883,438

 

Corporate TSA revenues (3)

 

 

81,267

 

 

-

 

 

-

 

 

Total

 

$

9,985,803

 

$

9,417,603

 

$

8,883,438

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and

 

generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products 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 we expect to continue through August 2020.

 

 

 

 

 

 

 

 

 

 

 

 

 

132

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

 

 

 

 

Years ended

 

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

 

2019

 

2018

 

2017

Operating Income:

 

 

 

 

 

 

 

 

 

 

Health care distribution

 

$

591,404

 

$

490,988

 

$

561,888

 

Technology and value-added services

 

 

126,857

 

 

109,631

 

 

107,873

 

 

Total

 

$

718,261

 

$

600,619

 

$

669,761

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes and equity in earnings of affiliates:

 

 

 

 

 

 

 

 

 

 

Health care distribution

 

$

553,181

 

$

429,429

 

$

526,255

 

Technology and value-added services

 

 

127,126

 

 

107,407

 

 

103,539

 

 

Total

 

$

680,307

 

$

536,836

 

$

629,794

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization:

 

 

 

 

 

 

 

 

 

 

Health care distribution

 

$

146,960

 

$

122,767

 

$

116,260

 

Technology and value-added services

 

 

37,982

 

 

20,863

 

 

17,595

 

 

Total

 

$

184,942

 

$

143,630

 

$

133,855

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense:

 

 

 

 

 

 

 

 

 

 

Health care distribution

 

$

129,381

 

$

53,660

 

$

271,920

 

Technology and value-added services

 

 

30,134

 

 

53,772

 

 

37,055

 

 

Total

 

$

159,515

 

$

107,432

 

$

308,975

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income:

 

 

 

 

 

 

 

 

 

 

Health care distribution

 

$

15,352

 

$

15,106

 

$

12,236

 

Technology and value-added services

 

 

405

 

 

385

 

 

202

 

 

Total

 

$

15,757

 

$

15,491

 

$

12,438

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

Health care distribution

 

$

50,666

 

$

76,006

 

$

51,039

 

Technology and value-added services

 

 

126

 

 

10

 

 

27

 

 

Total

 

$

50,792

 

$

76,016

 

$

51,066

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of Fixed Assets:

 

 

 

 

 

 

 

 

 

 

Health care distribution

 

$

69,095

 

$

68,577

 

$

59,865

 

Technology and value-added services

 

 

7,124

 

 

2,706

 

 

2,539

 

 

Total

 

$

76,219

 

$

71,283

 

$

62,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

December 28,

 

December 29,

 

December 30,

 

 

 

 

2019

 

2018

 

2017

Total Assets:

 

 

 

 

 

 

 

 

 

 

Health care distribution

 

$

5,822,057

 

$

5,289,348

 

$

5,336,320

 

Technology and value-added services

 

 

1,329,044

 

 

994,506

 

 

334,977

 

Discontinued operations

 

 

-

 

 

2,216,673

 

 

2,192,698

 

 

Total

 

$

7,151,101

 

$

8,500,527

 

$

7,863,995

133

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

The following table presents information about our operations by geographic area as of and for the three years ended December 28, 2019. Net sales by geographic area are based on the respective locations of our subsidiaries. No country, except for the United States, generated net sales greater than 10% of consolidated net sales. There were no material amounts of sales or transfers among geographic areas and there were no material amounts of export sales.

 

 

 

2019

 

2018

 

2017

 

 

 

Net Sales

 

Long-Lived Assets

 

Net Sales

 

Long-Lived Assets

 

Net Sales

 

Long-Lived Assets

United States

 

$

6,876,194

 

$

2,400,733

 

$

6,411,558

 

$

1,855,788

 

$

6,039,613

 

$

1,208,351

Other

 

 

3,109,609

 

 

1,195,947

 

 

3,006,045

 

 

915,493

 

 

2,843,825

 

 

1,072,849

 

Consolidated total

 

$

9,985,803

 

$

3,596,680

 

$

9,417,603

 

$

2,771,281

 

$

8,883,438

 

$

2,281,200

Note 19 – Employee Benefit Plans

Stock-based Compensation

Comprehensive Income

Comprehensive income includes certain gains and losses that, under U.S.
GAAP,
are excluded from net income as
such amounts are recorded directly as an adjustment to stockholders’
equity.
The following table summarizes our Accumulated other comprehensive loss, net of
applicable taxes as of:
December 31,
December 25,
December 26,
2022
2021
2020
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment
$
(37)
$
(31)
$
(25)
Attributable to noncontrolling interests:
Foreign currency translation adjustment
$
(1)
$
-
$
-
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
(236)
$
(155)
$
(77)
Unrealized gain (loss) from foreign currency hedging activities
5
(2)
(11)
Pension adjustment loss
(2)
(14)
(20)
Accumulated other comprehensive loss
$
(233)
$
(171)
$
(108)
Total Accumulated
other comprehensive loss
$
(271)
$
(202)
$
(133)
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
112
The following table summarizes the components of comprehensive income, net of
applicable taxes as follows:
December 31,
December 25,
December 26,
2022
2021
2020
Net income
$
566
$
660
$
420
Foreign currency translation gain (loss)
(88)
(84)
63
Tax effect
-
-
-
Foreign currency translation gain (loss)
(88)
(84)
63
Unrealized gain (loss) from foreign currency hedging activities
10
12
(10)
Tax effect
(3)
(3)
3
Unrealized gain (loss) from foreign currency hedging activities
7
9
(7)
Pension adjustment gain
16
8
-
Tax effect
(4)
(2)
-
Pension adjustment gain
12
6
-
Comprehensive income
$
497
$
591
$
476
Our accompanying consolidatedfinancial statements are denominated in the U.S. Dollar currency.
Fluctuations in the value of income reflect pre-tax share-based compensation expense of $44.9 million ($34.4 million after-tax), $32.6 million ($25.3 million after-tax) and $36.8 million ($20.6 million after-tax) forforeign
currencies as compared to the U.S. Dollar may have a significant impact on our
comprehensive income.
The
foreign currency translation gain (loss) during the years ended December 28, 2019,
31, 2022, December 29, 201825, 2021 and
December 30, 2017.

Our accompanying consolidated statements26, 2020 was primarily due to changes in foreign currency exchange

rates of cash flows present our stock-based compensation expense as an adjustment to reconcile net income to net cash provided by operating activities for all periods presented. In the accompanying consolidated statements of cash flows, there were 0 benefits associated with tax deductions in excess of recognized compensation as a cash inflow from financing activities forEuro, British Pound,
Australian Dollar, Brazilian Real, New Zealand Dollar and Canadian Dollar.
The foreign currency translation gain
(loss) during the years ended December 28, 2019,31, 2022, December 29, 2018 25, 2021
and December 30, 2017.

Stock-based compensation represents26, 2020 was primarily

attributable to a net investment hedge that was entered into during 2019.
See
for further information.
The following table summarizes our total comprehensive income, net of
applicable taxes as follows:
December 31,
December 25,
December 26,
2022
2021
2020
Comprehensive income attributable to
Henry Schein, Inc.
$
476
$
568
$
463
Comprehensive income attributable to
noncontrolling interests
6
6
3
Comprehensive income attributable to
Redeemable noncontrolling interests
15
17
10
Comprehensive income
$
497
$
591
$
476
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
113
Note 20 – Discontinued Operations
Animal Health Spin-off
On February 7, 2019 (the “Distribution Date”), we completed the cost relatedseparation
(the “Separation”) and subsequent
merger (“Merger”) of our animal health business (the “Henry Schein Animal Health Business”) with Direct
Vet
Marketing, Inc. (d/b/a Vets First Choice, “Vets
First Choice”).
This was accomplished by a series of transactions
among us, Vets
First Choice, Covetrus, Inc. (f/k/a HS Spinco, Inc. “Covetrus”), a
wholly owned subsidiary of ours
prior to stock-based awards grantedthe Distribution Date, and HS Merger Sub, Inc., a wholly owned subsidiary
of Covetrus (“Merger
Sub”).
In connection with the Separation, we contributed, assigned
and transferred to employeesCovetrus certain applicable
assets, liabilities and non-employee directors. We measure stock-based compensation atcapital stock or other ownership interests relating
to the grant date, based onHenry Schein Animal Health
Business.
On the estimated fair valueDistribution Date, we received a tax-free distribution of $
1,120
million from Covetrus pursuant to
certain debt financing incurred by Covetrus.
On the Distribution Date and prior to the Animal Health Spin-off,
Covetrus issued shares of Covetrus common stock to certain institutional
accredited investors (the “Share Sale
Investors”) for $
361
million (the “Share Sale”).
The proceeds of the award,Share Sale were paid to Covetrus and recognize
distributed to us.
Subsequent to the cost (net of estimated forfeitures) as compensation expenseShare Sale, we distributed, on a straight-linepro rata basis, over
all of the requisite service period. Our stock-based compensation expense is reflected in selling, generalshares of the common
stock of Covetrus held by us to our stockholders of record as of the close of
business on January 17, 2019 (the
“Animal Health Spin-off”).
After the Share Sale and administrative expenses inAnimal Health Spin-off, Merger Sub consummated the
Merger whereby it merged with and into Vets
First Choice, with Vets First Choice surviving the Merger as a
wholly owned subsidiary of Covetrus.
Immediately following the consummation of the Merger, on a fully diluted
basis, (i) approximately
63
% of the shares of Covetrus common stock were (a) owned by our consolidated statements of income.

Stock-based awards are provided tostockholders

and the
Share Sale Investors, and (b) held by certain employees and non-employee directors under the terms of our 2013 Stock Incentive Plan, as amended, and our 2015 Non-Employee Director Stock Incentive Plan (together, the “Plans”). The Plans are administered by the Compensation Committee of the Board Henry Schein
Animal Health Business (in the form
of Directors. Priorcertain equity awards), and (ii) approximately
37
% of the shares of Covetrus common stock were (a) owned by
stockholders of Vets
First Choice immediately prior to March 2009, awards under the Plans principally included a combinationMerger, and (b) held by certain employees of at-the-money stock options and restricted stock/units. Since March 2009, equity-based awards have been granted solely inVets First
Choice (in the form of restricted stock/units,certain equity awards).
After the Separation and the Merger, we no longer beneficially
owned any shares of Covetrus common stock and, following the Distribution
Date, will not consolidate the
financial results of Covetrus for the purpose of our financial reporting.
Following the Separation and the Merger,
Covetrus was an independent, publicly traded company on the Nasdaq Global Select
Market.
In connection with the exception of providing stock options to employees pursuant to certain pre-existing contractual obligations. As of December 28, 2019, there were 65,242 shares authorized and 6,113 shares available to be granted under the 2013 Stock Incentive Plan and 1,892 shares authorized and 294 shares available to be granted under the 2015 Non-Employee Director Stock Incentive Plan.

Grants of restricted stock/units are stock-based awards granted to recipients with specified vesting provisions. In the case of restricted stock, common stock is delivered on the date of grant, subject to vesting conditions. In the case of restricted stock units, common stock is generally delivered on or following satisfaction of vesting conditions. We issue restricted stock/units that vest solely based on the recipient’s continued service over time (primarily four-year cliff vesting, except for grants made under the 2015 Non-Employee Director Stock Incentive Plan, which are primarily 12-month cliff vesting) and restricted stock/units that vest based on our achieving

134

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

specified performance measurements and the recipient’s continued service over time (primarily three-year cliff vesting).

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

The Plansentered into

a transition services agreement,
which ended in December 2020, with Covetrus under which we agreed to provide
certain transition services for adjustments up
to the performance-based restricted stock/units targets for significant events, including, without limitation, acquisitions, divestitures, new business ventures, certain capital transactions (including share repurchases), restructuring costs, if any, changes
twenty-four months
in areas such as information technology, finance and accounting, principles or in applicable laws or regulations, certain foreign exchange fluctuations, certain litigation related costs,human resources, supply
chain, and material changes in income tax rates. Over the performance period, the number of shares of common stock that will ultimately vestreal estate and be issued and the related compensation expense is adjusted upward or downward based upon our estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on our actual performance metrics as defined under the Plans.

facility services.

As a result of the Separation, the numberfinancial position and results of our unvested equity-based awards from previous grants to our remaining employees under our Long-term Incentive Program was increased in accordance with the provisions in the Plans. This was based on a factor of approximately 1.2633, corresponding with a decrease in our price per share.

We record deferred income tax assets for awards that will result in future deductions on our income tax returns based on the amount of compensation cost recognized and our statutory tax rate in the jurisdiction in which we will receive a deduction.

During the first quarter of 2017, we adopted the provisions of ASU 2016-09 which requires that all excess tax benefits and tax deficiencies resulting from the difference between the deduction for tax purposes and the stock-based compensation cost recognized for financial reporting purposes be included as a component of income tax expense as of January 1, 2017. Prior to the implementation of ASU 2016-09, excess tax benefits were recorded as a component of Additional paid-in capital and tax deficiencies were recognized either as an offset to accumulated excess tax benefits or in the income statement if there were no accumulated excess tax benefits.

Stock-based compensation grants for the three years ended December 28, 2019 consisted of restricted stock/unit grants. Certain stock-based compensation granted may require us to settle in the form of a cash payment. During the year ended December 28, 2019, we recorded a liability of $0.6 million relating to the grant date fair value of stock-based compensation to be settled in cash. The weighted-average grant date fair value of stock-based awards granted before forfeitures was $56.83, $71.38 and $85.43 per share during the years ended December 28, 2019, December 29, 2018 and December 30, 2017.

Total unrecognized compensation cost related to non-vested awards as of December 28, 2019 was $84.8 million, which is expected to be recognized over a weighted-average period of approximately 2.0 years.

operations

135

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

A summary of the stock option activity under the Plans is presented below:

 

 

Years Ended

 

 

December 28,

 

December 29,

 

December 30,

 

 

2019

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

Average

 

 

 

Average

 

 

 

Average

 

 

 

 

Exercise

 

 

 

Exercise

 

 

 

Exercise

 

 

Shares

 

Price

 

Shares

 

Price

 

Shares

 

Price

Outstanding at beginning of year

 

3

 

$

13.63

 

155

 

$

29.65

 

353

 

$

28.59

Granted

 

-

 

 

-

 

-

 

 

-

 

-

 

 

-

Exercised

 

(3)

 

 

13.63

 

(152)

 

 

29.81

 

(198)

 

 

27.76

Forfeited

 

-

 

 

-

 

-

 

 

-

 

-

 

 

-

Outstanding at end of year

 

-

 

$

-

 

3

 

$

17.22

 

155

 

$

29.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at end of year

 

-

 

$

-

 

3

 

$

17.22

 

155

 

$

29.65

The following table represents the intrinsic values of:

 

 

As of

 

 

December 28,

 

December 29,

 

December 30,

 

 

2019

 

2018

 

2017

Stock options outstanding

 

$

-

 

$

121

 

$

6,256

Stock options exercisable

 

 

-

 

 

121

 

 

6,256

The total cash received as a result of stock option exercises for the years ended December 28, 2019, December 29, 2018 and December 30, 2017 was approximately $0.0 million, $3.1 million and $5.3 million. In connection with these exercises, we did 0t realize any tax benefits for the years ended December 28, 2019, December 29, 2018 and December 30, 2017. We settle employee stock option exercises with newly issued common shares.

The total intrinsic value per share of restricted stock/units that vested was $64.31, $76.48 and $83.16 during the years ended December 28, 2019, December 29, 2018 and December 30, 2017. The following table summarizes the status of our non-vested restricted stock/units for the year ended December 28, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

Time-Based Restricted Stock/Units

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Grant Date Fair

 

 

Intrinsic Value

 

 

Shares/Units

 

Value Per Share

 

 

Per Share

Outstanding at beginning of period

 

1,513

 

$

57.94

 

 

 

 

Granted

 

452

 

 

59.56

 

 

 

 

Vested

 

(339)

 

 

55.62

 

 

 

 

Forfeited

 

(208)

 

 

60.35

 

 

 

 

Outstanding at end of period

 

1,418

 

$

58.72

 

 

$

66.58

 

 

Performance-Based Restricted Stock/Units

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Grant Date Fair

 

 

Intrinsic Value

 

 

Shares/Units

 

Value Per Share

 

 

Per Share

Outstanding at beginning of period

 

1,163

 

$

40.26

 

 

 

 

Granted

 

642

 

 

59.72

 

 

 

 

Vested

 

(189)

 

 

66.41

 

 

 

 

Forfeited

 

(157)

 

 

61.33

 

 

 

 

Outstanding at end of period

 

1,459

 

$

61.41

 

 

$

66.58

 

 

 

 

 

 

 

 

 

136

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

401(k) Plans

We offer qualified 401(k) plans to substantially all our domestic full-time employees. As determined by our Board of Directors, matching contributions to these plans generally do not exceed 100% of the participants’ contributions up to 7% of their base compensation, subject to applicable legal limits. Matching contributions consist of cash and were allocated entirely to the participants’ investment elections on file, subject to a 20% allocation limit to the Henry Schein Stock Fund. Forfeitures attributable to participants whose employment terminates prior to becoming fully vested are used to reduce our matching contributions and offset administrative expenses of the 401(k) plans.

Assets of the 401(k) and other defined contribution plans are held in self-directed accounts enabling participants to choose from various investment fund options. Matching contributions and administrative expenses related to these plans charged to operations during the years ended December 28, 2019, December 29, 2018 and December 30, 2017 amounted to $36.8 million, $35.8 million and $33.5 million, respectively.

Supplemental Executive Retirement Plan

We offer an unfunded, non-qualified supplemental executive retirement plan to eligible employees. This plan generally covers officers and certain highly-compensated employees after they have reached the maximum IRS allowed pre-tax 401(k) contribution limit. Our contributions to this plan are equal to the 401(k) employee-elected contribution percentage applied to base compensation for the portion of the year in which such employees are not eligible to make pre-tax contributions to the 401(k) plan. The amounts charged (credited) to operations during the years ended December 28, 2019, December 29, 2018 and December 30, 2017 amounted to $2.1 million, $(0.4 )million and $0.6 million, respectively.

Deferred Compensation Plan

During 2011, we began to offer a deferred compensation plan to a select group of management or highly compensated employees of the Company and certain subsidiaries. This plan allows for the elective deferral of base salary, bonus and/or commission compensation by eligible employees. The amounts charged (credited) to operations during the years ended December 28, 2019, December 29, 2018 and December 30, 2017 were approximately $8.3 million, $(2.3) million and $5.0 million, respectively.

137

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 20 – Commitments and Contingencies

Purchase Commitments

In our health care distribution business, we sometimes enter into long-term purchase commitments to ensure the availability of products for distribution. Future minimum annual payments for inventory purchase commitments as of December 28, 2019 were:

 

2020

$

403,241

 

 

2021

 

208,200

 

 

2022

 

110,800

 

 

2023

 

-

 

 

2024

 

-

 

 

Thereafter

 

-

 

 

 

Total minimum inventory purchase commitment payments

$

722,241

 

Employment, Consulting and Non-Compete Agreements

We have definite-lived employment, consulting and non-compete agreements that have varying base aggregate annual payments for the years 2020 through 2024 and thereafter of approximately $16.8 million, $6.3 million, $4.5 million, $0.9 million, $0.9 million, and $1.7 million, respectively. We also have lifetime consulting agreements that provide for current compensation of $0.4 million per year, increasing $25 every fifth year with the next increase in 2022. In addition, some agreements have provisions for additional incentives and compensation.

Litigation

On August 31, 2012, Archer and White Sales, Inc. (“Archer”) filed a complaint against Henry Schein, Inc. as well as Danaher Corporation and its subsidiaries Instrumentarium Dental, Inc., Dental Equipment, LLC, Kavo Dental Technologies, LLC and Dental Imaging Technologies Corporation (collectively, the “Danaher Defendants”) in the U.S. District Court for the Eastern District of Texas, Civil Action No. 2:12-CV-00572-JRG, styled as an antitrust action under Section 1 of the Sherman Act, and the Texas Free Enterprise Antitrust Act. Archer alleges a conspiracy between Henry Schein, an unnamed company and the Danaher Defendants to terminate or limit Archer’s distribution rights. On August 1, 2017, Archer filed an amended complaint, adding Patterson Companies, Inc. (“Patterson”) and Benco Dental Supply Co. (“Benco”) as defendants, and alleging that Henry Schein, Patterson, Benco and Burkhart Dental Supply conspired to fix prices and refused to compete with each other for sales of dental equipment to dental professionals and agreed to enlist their common suppliers, the Danaher Defendants, to join a price-fixing conspiracy and boycott by reducing the distribution territory of, and eventually terminating, their price-cutting competing distributor Archer. Archer seeks damages in an amount to be proved at trial, to be trebled with interest and costs, including attorneys’ fees, jointly and severally, as well as injunctive relief. On October 30, 2017, Archer filed a second amended complaint, to add additional allegations that it believes support its claims. The named parties and causes of action are the same as the August 1, 2017 amended complaint.

On October 1, 2012, we filed a motion for an order: (i) compelling Archer to arbitrate its claims against us; (2) staying all proceedings pending arbitration; and (3) joining the Danaher Defendants’ motion to arbitrate and stay. On May 28, 2013, the Magistrate Judge granted the motions to arbitrate and stayed proceedings pending arbitration. On June 10, 2013, Archer moved for reconsideration before the District Court judge. On December 7, 2016, the District Court Judge granted Archer’s motion for reconsideration and lifted the stay. Defendants appealed the District Court’s order. On December 21, 2017, the U.S. Court of Appeals for the Fifth Circuit affirmed the District Court’s order denying the motions to compel arbitration. On June 25, 2018, the Supreme

138

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Court of the United States granted defendants’ petition for writ of certiorari. On October 29, 2018, the Supreme Court heard oral arguments. On January 8, 2019, the Supreme Court issued its published decision vacating the judgment of the Fifth Circuit and remanding the case to the Fifth Circuit for further proceedings consistent with the Supreme Court’s opinion. On April 2, 2019, the District Court stayed the proceeding in the trial court pending resolution by the Fifth Circuit. The Fifth Circuit heard oral argument on May 1, 2019 on whether the case should be arbitrated. The Fifth Circuit issued its opinion on August 14, 2019 affirming the District Court’s order denying defendants’ motions to compel arbitration. Defendants filed a petition for rehearing en banc before the Fifth Circuit. The Fifth Circuit denied that petition. On October 1, 2019, the District Court set the case for trial on February 3, 2020, which was subsequently moved to January 29, 2020. On January 24, 2020 the Supreme Court granted our motion to stay the District Court proceedings, pending the disposition of our petition for writ of certiorari, which was filed on January 31, 2020. We intend to defend ourselves vigorously against this action.

On August 17, 2017, IQ Dental Supply, Inc. (“IQ Dental”) filed a complaint in the U.S. District Court for the Eastern District of New York, entitled IQ Dental Supply, Inc. v. Henry Schein, Inc., Patterson Companies, Inc. and Benco Dental Supply Company, Case No. 2:17-cv-4834. Plaintiff alleges that it is a distributor of dental supplies and equipment, and sells dental products through an online dental distribution platform operated by SourceOne Dental (“SourceOne”). SourceOne had previously brought an antitrust lawsuit against Henry Schein, Patterson and Benco, which Henry Schein settled in the second quarter of 2017 and which is described in our prior filings with the SEC.

IQ Dental alleges, among other things, that defendants conspired to suppress competition from IQ Dental and SourceOne for the marketing, distribution and sale of dental supplies and equipment in the United States, and that defendants unlawfully agreed with one another to boycott dentists, manufacturers and state dental associations that deal with, or considered dealing with, plaintiff and SourceOne. Plaintiff claims that this alleged conduct constitutes unreasonable restraint of trade in violation of Section 1 of the Sherman Act, New York’s Donnelly Act and the New Jersey Antitrust Act, and also makes pendant state law claims for tortious interference with prospective business relations, civil conspiracy and aiding and abetting. Plaintiff seeks injunctive relief, compensatory, treble and punitive damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees. On December 21, 2017, the District Court granted the defendants’ motion to dismiss. On January 19, 2018, IQ Dental appealed the District Court’s order. On May 10, 2019, the U.S. Court of Appeals for the Second Circuit affirmed in part and reversed in part the District Court’s dismissal of the complaint, holding that IQ Dental lacks antitrust standing to challenge the alleged boycott of SourceOne and state dental associations, but that it has standing to challenge injury related to the alleged direct boycott of its business. On June 29, 2019, the Second Circuit denied IQ Dental’s petition for rehearing or rehearing en banc. On January 8, 2020, Henry Schein and IQ Dental entered into a settlement agreement, pursuant to which Henry Schein paid an amount which is not material. Henry Schein was dismissed from the case on January 16, 2020.

On February 12, 2018, the United States Federal Trade Commission (“FTC”) filed a complaint against Benco Dental Supply Co., Henry Schein, Inc. and Patterson Companies, Inc. The FTC alleged, among other things, that defendants violated U.S. antitrust laws by conspiring, and entering into an agreement, to refuse to provide discounts to or otherwise serve buying groups representing dental practitioners. The FTC alleged that defendants conspired in violation of Section 5 of the FTC Act. The complaint sought equitable relief only and does not seek monetary damages. We denied the allegation that we conspired to refuse to provide discounts to or otherwise serve dental buying groups. A hearing before an administrative law judge began on October 16, 2018 and the hearing record was closed on February 21, 2019. On October 7, 2019, the administrative law judge issued his Initial Decision, finding in relevant part that the “evidence fails to prove a conspiracy involving Schein,” and dismissing the complaint as to Henry Schein. The Initial Decision became the decision of the FTC on November 7, 2019 and is not subject to further appeal.

139

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

On March 7, 2018, Joseph Salkowitz, individually and on behalf of all others similarly situated, filed a putative class action complaint for violation of the federal securities laws against Henry Schein, Inc., Stanley M. Bergman and Steven Paladino in the U.S. District Court for the Eastern District of New York, Case No. 1:18-cv-01428. The complaint sought to certify a class consisting of all persons and entities who, subject to certain exclusions, purchased Henry Schein securities from March 7, 2013 through February 12, 2018 (the “Class Period”). The complaint alleged, among other things, that the defendants had made materially false and misleading statements about Henry Schein’s business, operations and prospects during the Class Period, including matters relating to the issues in the In re Dental Supplies Antitrust Litigation which Henry Schein settled and which the court dismissed in June 2019, as described in our prior filings with the SEC, and the FTC action described above, thereby causing the plaintiff and members of the purported class to pay artificially inflated prices for Henry Schein securities. The complaint sought unspecified monetary damages and a jury trial. Pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), the court appointed lead plaintiff and lead counsel on June 22, 2018 and recaptioned the putative class action as In re Henry Schein, Inc. Securities Litigation, under the same case number. Lead plaintiff filed a consolidated class action complaint on September 14, 2018. The consolidated class action complaint asserts similar claims against the same defendants (plus Timothy Sullivan) on behalf of the same putative class of purchasers during the Class Period. It alleges that Henry Schein’s stock price was inflated during that period because Henry Schein had misleadingly portrayed its dental-distribution business “as successfully producing excellent profits while operating in a highly competitive environment” even though, “in reality, [Henry Schein] had engaged for years in collusive and anticompetitive practices in order to maintain Schein’s margins, profits, and market share.” The complaint alleges that the stock price started to fall from August 8, 2017, when the company announced below-expected financial performance that allegedly “revealed that Schein’s poor results were a product of abandoning prior attempts to inflate sales volume and margins through anticompetitive collusion,” through February 13, 2018, after the FTC filed a complaint against Benco, Henry Schein and Patterson alleging that they violated U.S. antitrust laws. The complaint alleges violations of Section 10(b) of the Exchange Act and Rule 10b-5 and Section 20(a) of the Exchange Act. On September 27, 2019, the court issued a decision partially granting and partially denying defendants’ motion to dismiss the securities action. The court dismissed all claims against Messrs. Bergman and Paladino as well as the Section 10(b) claim against Henry Schein to the extent that that claim relied on the Company’s financial results and margins to allege a material misstatement or omission. The court also dismissed the Section 10(b) claim against Henry Schein to the extent that it relied on the Company’s August 8, 2017 disclosure to allege loss causation. The court otherwise denied the motion as to Henry Schein and Mr. Sullivan. Henry Schein and Mr. Sullivan moved for partial reconsideration of the court’s decision. Pursuant to all parties’ request, the court temporarily took the motion off the calendar after it was fully briefed. The parties have agreed to a resolution of this matter, subject to various conditions, including the drafting and execution of a definitive settlement agreement and court approval. The contemplated settlement, if finally approved, would have no earnings impact to the Company as all payments would be covered by insurance. Henry Schein had previously received a request under 8 Del. C. § 220 to inspect corporate books and records relating to the issues raised in the securities class action and the antitrust matters discussed above.

On May 3, 2018, a purported class action complaint, Marion Diagnostic Center, LLC, et al. v. Becton, Dickinson, and Co., et al., Case No. 3:18-cv-010509, was filed in the U.S. District Court for the Southern District of Illinois against Becton, Dickinson, and Co. (“Becton”); Premier, Inc. (“Premier”), Vizient, Inc. (“Vizient”), Cardinal Health, Inc. (“Cardinal”), Owens & Minor Inc. (“O&M”), Henry Schein, Inc., and Unnamed Becton Distributor Co-Conspirators. The complaint alleges that the defendants entered into a vertical conspiracy to force health care providers into long-term exclusionary contracts that restrain trade in the nationwide markets for conventional and safety syringes and safety IV catheters and inflate the prices of certain Becton products to above-competitive levels. The named plaintiffs seek to represent three separate classes consisting of all health care providers that purchased (i) Becton’s conventional syringes, (ii) Becton’s safety syringes, or (iii) Becton’s safety catheters directly from Becton, Premier, Vizient, Cardinal, O&M or Henry Schein on or after May 3, 2014. The complaint asserts a single count under Section 1 of the Sherman Act, and seeks equitable relief, treble damages, reasonable attorneys’ fees and costs and expenses, and pre-judgment and post-judgment interest. On June 15, 2018, an amended

140

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

complaint was filed asserting the same allegations against the same parties and adding McKesson Medical-Surgical, Inc. as a defendant. On November 30, 2018, the District Court granted defendants’ motion to dismiss and entered a final judgment, dismissing plaintiffs’ complaint with prejudice. On December 27, 2018, plaintiffs appealed the District Court’s decision to the Seventh Circuit Court of Appeals. The parties argued the appeal on September 27, 2019 and are currently awaiting the Seventh Circuit’s ruling.

On May 29, 2018, an amended complaint was filed in the MultiDistrict Litigation (“MDL”) proceeding In Re National Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804) in an action entitled The County of Summit, Ohio et al. v. Purdue Pharma, L.P., et al., Civil Action No. 1:18-op-45090-DAP (“County of Summit Action”), in the U.S. District Court for the Northern District of Ohio, adding Henry Schein, Inc., Henry Schein Medical Systems, Inc. and others as defendants. Summit County alleges that manufacturers of prescription opioid drugs engaged in a false advertising campaign to expand the market for such drugs and their own market share and that the entities in the supply chain (including Henry Schein, Inc. and Henry Schein Medical Systems, Inc.) reaped financial rewards by refusing or otherwise failing to monitor appropriately and restrict the improper distribution of those drugs. On October 29, 2019, the Company was dismissed with prejudice from this lawsuit. Henry Schein, working with Summit County, donated $1 million to a foundation dedicated to making grants to programs within Summit County focused on (i) educating the community on alternative pain management treatment techniques and/or avoiding addiction; ‎(ii) supporting research into alternative pain management techniques and protocols; (iii) enabling professionals to obtain the necessary certification for a Medication Assisted Treatment (MAT) Waiver; and (iv) advancing programs and services to Summit County to deliver results and solutions to the opiate and addiction crises. Henry Schein paid $250,000 of Summit County’s expenses.

In addition to the County of Summit Action, Henry Schein and/or one or more of its affiliated companies have currently been named as a defendant in multiple lawsuits (currently less than one-hundred and twenty-five (125)), which allege claims similar to those alleged in the County of Summit Action. At this time, the only case set for trial is the action filed by Tuscon Medical Center, which is currently scheduled for a 30-day trial beginning on March 16, 2021. These actions consist of some that have been consolidated within the MDL and are currently abated for discovery purposes, and others which remain pending in state courts and are proceeding independently and outside of the MDL. Of Henry Schein’s 2018 revenue of $9.4 billion from continuing operations, sales of opioids represented less than one-tenth of 1 percent. Opioids represent a negligible part of our business. We intend to defend ourselves vigorously against these actions.

On January 29, 2019, a purported class action complaint was filed by R. Lawrence Hatchett, M.D. against Henry Schein, Inc., Patterson Co., Inc., Benco Dental Supply Co., and unnamed co-conspirators in the U.S. District Court for the Southern District of Illinois. The complaint alleges that members of the proposed class suffered antitrust injury due to an unlawful boycott, price-fixing or otherwise anticompetitive conspiracy among Henry Schein, Patterson and Benco. The complaint alleges that the alleged conspiracy overcharged Illinois dental practices, orthodontic practices and dental laboratories on their purchase of dental supplies, which in turn passed on some or all of such overcharges to members of the class. Subject to certain exclusions, the complaint defines the class as “all persons residing in Illinois purchasing and/or reimbursing for dental care provided by independent Illinois dental practices purchasing dental supplies from the defendants, or purchasing from buying groups purchasing these supplies from the defendants, on or after January 29, 2015.” The complaint alleges violations of the Illinois Antitrust Act, 740 Ill. Comp. Stat. §§ 10/3(2), 10/7(2), and seeks a permanent injunction, actual damages to be determined at trial, trebled, reasonable attorneys’ fees and costs, and pre- and post-judgment interest. On February 13, 2020, the court granted our motion to dismiss for lack of standing, and dismissed the action with prejudice.

On September 30, 2019, City of Hollywood Police Officers Retirement System, individually and on behalf of all others similarly situated, filed a putative class action complaint for violation of the federal securities laws against Henry Schein, Inc., Covetrus, Inc., and Benjamin Shaw and Christine Komola (Covetrus’s then Chief Executive Officer and Chief Financial Officer, respectively) in the U.S. District Court for the Eastern District of New York,

141

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Case No. 2:19-cv-05530-FB-RLM. The complaint seeks to certify a class consisting of all persons and entities who, subject to certain exclusions, purchased or otherwise acquired Covetrus common stock from February 8, 2019 through August 12, 2019. The case relates to the Animal Health Spin-off and Merger of the Henry Schein Animal Health

Business with Vets First Choice in February 2019. are presented as discontinued operations and have been excluded
from continuing operations and segment
results for all periods presented.
The complaint alleges violationsaccompanying notes to the consolidated financial
statements have been
revised to reflect the effect of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 and asserts that defendants’ statements in the offering documents and after the transaction were materially false and misleading because they purportedly overstated Covetrus’s capabilities as to inventory management and supply-chain services, understated the costs of integrating the Henry Schein Animal Health Business and Vets First Choice, understated Covetrus’s separation costs from Henry Schein, and understated the impact on earnings from online competition and alternative distribution channels and from the loss of an allegedly large customer in North America just before the Separation and Merger. all prior year balances have been
revised accordingly to reflect
continuing operations only.
The complaint seeks unspecified monetary damageshistorical statements of Comprehensive Income (Loss) and Shareholders'
Equity
have not been revised to reflect the Separation and instead reflect the Separation
as an adjustment to the balances at
December 26, 2020.
In February 2019, we completed the Animal Health Spin-off.
During the year ended December 26, 2020, we
incurred $
0
million in transaction costs associated with this transaction.
All transaction costs related to the Animal
Health Spin-off have been included in results from discontinued operations.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
114
Summarized financial information for our discontinued operations
is as follows:
Year
Ended
December 26,
2020
Selling, general and administrative
2
Operating loss
(2)
Income tax benefit
(3)
Income from discontinued operations
1
Net income from discontinued operations attributable to Henry Schein,
Inc.
1
The operating loss from discontinued operations for the year ended
December 26, 2020 was primarily attributable
to costs directly related to the Animal Health Spin-off.
See
for additional
information.
The net income from discontinued operations for the year ended December
26, 2020 was primarily attributable to a
reduction in a liability for tax indemnification and a jury trial. Pursuant to the provisionstax refund received
during 2020 by a holding company
previously part of the PSLRA, the court appointed lead plaintiffour Animal Health legal structure and lead counsel on December 23, 2019. We intend other
favorable tax resolutions.
Note 21 – Earnings Per Share
Basic earnings per share is computed by dividing net income attributable
to defend ourselves vigorously against this action.

On November 15, 2019, Frank Finazzo filed a putative shareholder derivative action on behalf of Henry Schein, Inc. against various present and former directors and officersby the weighted-

average number of Henry Schein in the U.S. District Courtcommon shares outstanding for the Eastern Districtperiod.
Our diluted earnings per share is computed similarly
to basic earnings per share, except that it reflects the effect of New York, Case No. 1:19-cv-6485-LDH-JO. The named defendants common shares issuable
for presently unvested RSUs
and upon exercise of stock options using the treasury stock method
in the action are Stanley M. Bergman, Steven Paladino, Timothy J. Sullivan, Barry J. Alperin, Lawrence S. Bacow, Gerald A. Benjamin, James P. Breslawski, Paul Brons, Shira Goodman, Joseph L. Herring, Donald J. Kabat, Kurt Kuehn, Philip A. Laskawy, Anne H. Margulies, Karyn Mashima, Norman S. Matthews, Mark E. Mlotek, Carol Raphael, E. Dianne Rekow, Bradley T. Sheares, and Louis W. Sullivan, with Henry Schein named as a nominal defendant.  The Complaint asserts claims under the federal securities laws and state law relating to the allegationsperiods in the antitrust actions, the In re Henry Schein, Inc. Securities Litigation, and the City of Hollywood securities class action described above. The complaint seeks declaratory, injunctive, and monetary relief on behalf of Henry Schein. On January 6, 2020, counsel who filed the Finazzo case filed another, virtually identical putative shareholder derivative action on behalf of Henry Schein against the same defendants, asserting the same claims and seeking the same relief. That case, captioned Mark Sloan v. Stanley M. Bergman, et al., is also pending in the U.S. District Court for the Eastern District of New York, Case No. 1:20-cv-0076. On January 24, 2020, the court consolidated the Finazzo and Sloan cases under the new caption In re Henry Schein, Inc. Derivative Litigation, No. 1:19-cv-06485-LDH-JO, and appointed the counsel in these cases as co-lead counsel for the consolidated action. The parties have agreed to a resolution of this matter subject to various conditions, including the drafting and execution of a definitive settlement agreement and court approval. The contemplated settlement, if finally approved, would involve the adoption of certain procedures but would not involve the payment of any money except a fee to the plaintiffs’ attorneys that is immaterial.

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 towhich they have a material adverse effect on our consolidated financial position, liquidity or resultsdilutive effect.

A reconciliation of operations.

Asshares used in calculating earnings per basic and diluted

share follows:
Years
Ended
December 31,
December 25,
December 26,
2022
2021
2020
Basic
136,064,221
140,090,889
142,504,193
Effect of December 28, 2019, we had accrued our best estimatedilutive securities:
Stock options and restricted stock units
1,691,449
1,681,892
899,489
Diluted
137,755,670
141,772,781
143,403,682
The number of potential losses relating to claimsantidilutive securities that were probable to result in liability and for which we were able to reasonably estimate a loss. This accrued amount,excluded from the calculation
of diluted weighted average common
shares outstanding are 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 recoveriesfollows:
Years
Ended
December 31,
December 25,
December 26,
2022
2021
2020
Stock options
342,716
611,869
-
Restricted stock units
19,466
1,048
2,398
Total anti-dilutive
securities excluded from third parties.

EPS computation

142

362,182

612,917

2,398
HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

(in thousands,millions, except share and per share data)

115

Note 21 – Quarterly Information (Unaudited)

The following tables present certain quarterly financial data:

 

 

 

Quarters ended

 

 

 

March 30,

 

June 29,

 

September 28,

 

December 28,

 

 

 

2019

 

2019

 

2019

 

2019

Net sales

 

$

2,360,268

 

$

2,447,827

 

$

2,508,767

 

$

2,668,941

Gross profit

 

 

751,690

 

 

767,431

 

 

761,167

 

 

810,598

Restructuring costs (credits) (1)

 

 

4,641

 

 

11,925

 

 

(802)

 

 

(1,059)

Operating income

 

 

172,441

 

 

162,288

 

 

187,198

 

 

196,334

Net gain on sale of equity investments (2)

 

 

-

 

 

-

 

 

-

 

 

186,769

Net income from continuing operations

 

 

123,640

 

 

121,417

 

 

143,212

 

 

337,192

Amounts attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

Henry Schein, Inc. from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

118,413

 

 

116,753

 

 

134,916

 

 

330,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

Henry Schein, Inc. from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.79

 

$

0.79

 

$

0.92

 

$

2.27

 

Diluted

 

 

0.78

 

 

0.78

 

 

0.91

 

 

2.25

 

 

 

Quarters ended

 

 

 

March 31,

 

June 30,

 

September 29,

 

December 29,

 

 

 

2018

 

2018

 

2018

 

2018

Net sales

 

$

2,273,450

 

$

2,316,032

 

$

2,355,565

 

$

2,472,556

Gross profit

 

 

719,129

 

 

718,328

 

 

722,359

 

 

750,931

Litigation settlements

 

 

-

 

 

-

 

 

38,488

 

 

-

Restructuring costs (1)

 

 

2,675

 

 

8,497

 

 

8,551

 

 

34,644

Operating income

 

 

162,240

 

 

157,108

 

 

123,269

 

 

158,002

Net income from continuing operations

 

 

114,717

 

 

114,591

 

 

96,247

 

 

124,886

Amounts attributable to Henry Schein, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

111,534

 

 

110,636

 

 

90,770

 

 

117,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Henry Schein, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.73

 

$

0.72

 

$

0.60

 

$

0.78

 

Diluted

 

 

0.72

 

 

0.72

 

 

0.59

 

 

0.77

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

See Note 12 - "Plans of Restructuring" for details of the restructuring costs incurred during our 2019 and 2018 fiscal years.

(2)

See Note 11 - "Business Acquisitions and Divestitures" for details of the net gain on sale of equity investments.

143

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 22 – Supplemental Cash Flow Information

Cash paid for interest and income taxes was:

 

 

Years ended

 

 

December 28,

 

December 29,

 

December 30,

 

 

2019

 

2018

 

2017

Interest

 

$

54,685

 

$

69,371

 

$

46,985

Income taxes

 

 

177,277

 

 

236,479

 

 

214,135

There was approximately $0.0 million, $0.0 million and $0.3 million of debt assumed as a part of the acquisitions for the years

Years
ended
December 28, 2019, 31,
December 29, 2018 and 25,
December 30, 2017, respectively.

26,

2022
2021
2020
Interest
$
47
$
29
$
43
Income taxes
265
242
207
For the years ended December 28, 2019,31, 2022, December 29, 201825, 2021 and December 30, 2017,
26, 2020, we had $(4.9) $
10
million, $1.0 $
12
million and $(1.5) $
(10)
million of non-cash net unrealized gains (losses) related to foreign
currency hedging activities,
respectively. During the year ended December 30, 2017, as part of business acquisitions, we increased our ownership interests in subsidiaries through non-cash transactions of $16.8 million.

During the third quarter of 2018, we formed Henry Schein One, LLC with Internet Brands through a non-cash transaction resulting in approximately $390.3 million of noncontrolling interest representing Internet Brands’ current 26% minority interest and $160.6 million of deferred additional ownership interests of Internet Brands in Henry Schein One, representing up to an additional 9.2% ownership interests at December 28, 2019, a portion of which is contingent upon the achievement of certain operating targets (See Note 11).

Note 23 – Related Party Transactions

In connection with the completion of the Animal Health Spin-off during our 2019
fiscal year, 2019, we entered into a
transition services agreement with Covetrus under which we have agreed to provide
certain transition services for up to
twenty-four months
in areas such as information technology, finance and accounting, human resources, supply
chain, and real estate and facility services. During 2019,
(see
Note 20 – Discontinued Operations
for additional details).
For the year ended December 26, 2020, we recorded approximately $17.5 $
13
million of fees for these services. In connection with
Pursuant
to the completion of the Animal Health Spin-off (see Note 2 for additional details), we entered into a transition services agreement, with Covetrus pursuant to which Covetrus purchases purchased
certain products from us.
During the year ended December 28, 2019,26,
2020, net sales to Covetrus were approximately $81.3 million. Sales to Covetrus under the transition services agreement are expectedwere
approximately $
75
million.
Sales to continue through August 2020. At December 28, 2019 we had $4.5 million of receivables due from Covetrus and $0.1 million payable to
Covetrus under thisthe transition services agreement.

agreement ended in December 2020.

In connection with the formation of Henry Schein One, LLC, our joint venture
with Internet Brands, which was
formed on July 1, 2018, we entered into a
ten-year
royalty agreement with Internet Brands whereby we will pay
Internet Brands approximately $31.0
31
million annually for the use of their intellectual property.
During 2019the years
ended December 31, 2022, December 25, 2021 and 2018,December 26, 2020, we recorded
$
31
million, $
31
million and $15.5
$
31
million, respectively in connection with costs related to this royalty
agreement.
As of December 28, 201931, 2022 and
December 29, 2018,25, 2021, Henry Schein One, LLC had a net receivable (payable)
balance due from (to) Internet Brands of $9.4
($
8
) million and $2.4 $
9
million, respectively, comprised of amounts related to results of operations and the royalty agreement
agreement.
The components of this receivable and payable are recorded within
prepaid expenses and other; and
accrued expenses: other, management fees.

respectively, within our consolidated balance sheets.

During our normal course of business, we have interests in entities that we
account for under the equity accounting
method.
During the years ended December 31, 2022, December
25, 2021 and December 26, 2020, we recorded net
sales of $
46
million, $
48
million, and $
38
respectively, to such entities.
During our fiscal years ended 2019, 2018 2022, 2021
and 2017,2020, we recorded net sales of $87.7 purchased $
9
million, $27.0 $
15
million and $23.4 million, respectively, to such entities. During our fiscal years ended 2019, 2018 and 2017, we purchased $18.1 million, $10.8 million, and $8.8 $
12
million respectively, from such entities.
At December 28, 201931,
2022 and

144

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

December 29, 2018,25, 2021, we had in aggregate $60.7 $

36
million and $61.4 $
44
million, due from our equity affiliates, and $5.3
$
6
million and $1.0 $
7
million due to our equity affiliates, respectively.

145

Certain of our facilities related to our acquisitions are leased from employees
and minority shareholders.

Please see
Note 6 – Leases
for further information.
116

ITEM 9.

Changes in and Disagreements Withwith Accountants on Accounting and
Financial Disclosure

None.

ITEM 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of management, including
our principal executive officer and
principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this annual report as
such term is defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”).
Based on
this evaluation, our management, including our principal executive officer and principal
financial officer,
concluded that our disclosure controls and procedures were effective as of December 28, 201931,
2022, to ensure that all
material information required to be disclosed by us in reports that we file
or submit under the Exchange Act is
accumulated and communicated to them as appropriate to allow timely
decisions regarding required disclosure and
that all such information is recorded, processed, summarized and reported
within the time periods specified in the
SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

The combination of acquisitions, continued acquisition integrations and systems implementations
implementation activity
undertaken during the quarter ended December 31, 2022 and carried over from
prior quarters when considered in
the aggregate, representsdoes not represent a material change in our internal control over
financial reporting.

During the quarter ended December 28, 2019, post-acquisition integration related activities continued for our global dental and North American technology and medical businesses acquired during prior quarters, representing aggregate annual revenues of approximately $539million. These acquisitions, the majority of which utilize separate information and financial accounting systems, have been included in our consolidated financial statements since their respective dates of acquisition.

Also, during the quarter ended December 28, 2019, post-implementation system improvement activities continued for a new equipment system implemented during prior quarters for our U.S. dental business representing approximate aggregate annual revenues of $912million, as well as an upgrade of an existing ERP system at a dental business in North America having approximate aggregate annual revenues of $58 million.

All continued acquisitions integrations and systems implementations involved necessary and appropriate change-management controls that are considered in our annual assessment of the design and operating effectiveness of our internal control over financial reporting.

Management’s
Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate
internal control over financial reporting,
as such term is defined in Exchange Act Rule 13a-15(f).
Our internal control system is designed to provide
reasonable assurance to our management and Board of Directors regarding the preparation
and fair presentation of
published financial statements.
Under the supervision and with the participation of our
management, including our
principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
in Internal Control-Integrated Framework (2013),
updated and reissued by the Committee of Sponsoring Organizations, or the COSO
Framework.
Based on our
evaluation under the COSO Framework, our management concluded that our
internal control over financial
reporting was effective at a reasonable assurance level as of December 28, 2019.

31, 2022.

146

Table of Contents

The effectiveness of our internal control over financial reporting as of December 28, 2019

31, 2022, has been independently
audited by BDO USA, LLP, an independent registered public accounting firm, and their attestation is included
herein.

Limitations of the Effectiveness of Internal Control

A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance
that the objectives of the internal control system are met.
Because of the inherent limitations of any internal control
system, no evaluation of controls can provide absolute assurance that all control
issues, if any, within a company
have been detected.

147

Table of Contents

117
Report Of Independent Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders

Shareholders and Board of Directors

Henry Schein, Inc.

Melville, NY

Opinion on Internal Control over Financial Reporting

We
have audited Henry
Schein, Inc.’s (the
(the “Company’s”)
internal control over
financial reporting as
of December 28, 2019,
31, 2022, based on criteria established in Internal Control
– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In
our opinion, the
Company maintained, in all
material respects, effective
internal control over
financial reporting as
of December 28, 2019,31, 2022, based on the COSO criteria.

criteria.

We
have
also have
audited,
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board (United
(United
States)
(“PCAOB”),
the
consolidated
balance
sheets
of
the
Company
as
of
December 28, 2019
31,
2022
and
December 29, 2018,
25,
2021, the
related
consolidated statements
of
income, comprehensive
income, changes in stockholders’
equity,
and cash
flows for
each of
the three
years in
the period
ended December 28, 2019,
31, 2022,
and the
related notes and schedule
and our
report dated February 20, 2020 21, 2023
expressed as an unqualified opinion thereon.

Basis for Opinion

The Company’s
management is
responsible for
maintaining effective
internal control
over financial
reporting and
for
its
assessment
of
the
effectiveness
of
internal
control
over
financial
reporting,
included
in
the
accompanying “Item
“Item 9A, Management’s
Report on Internal
Control over Financial Reporting”. Our
responsibility is to
express an
opinion on the
Company’s internal
control over financial
reporting based on
our audit. We
are a public
accounting
firm
registered
with
the
PCAOB and
are
required
to
be
independent
with
respect
to
the
Company in
accordance
with
U.S.
federal
securities
laws
and
the
applicable
rules
and
regulations
of
the
Securities
and
Exchange
Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB.
Those standards require
that we plan
and perform the
audit to
obtain reasonable assurance
about whether effective
internal
control
over
financial
reporting
was
maintained
in
all
material
respects.
Our
audit
included
obtaining
an
understanding
of
internal
control
over
financial
reporting,
assessing
the
risk
that
a
material
weakness
exists,
and
testing and
evaluating the
design and
operating effectiveness
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based
on the assessed
risk. Our
audit
also included
performing such
other procedures
as we
considered necessary
in the
circumstances. We
believe that
our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A
company’s
internal
control
over
financial
reporting
is
a
process
designed
to
provide
reasonable
assurance
regarding the
reliability of
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the
preparation of
financial statements
for external
purposes in
accordance
with
generally
accepted
accounting
principles.
A
company’s
internal
control
over
financial
reporting
includes
those
policies
and
procedures
that
(1)
pertain
to
the
maintenance
of
records
that,
in
reasonable
detail,
accurately and
fairly reflect
the transactions
and dispositions
of the
assets of
the company;
(2) provide
reasonable
assurance
that
transactions
are
recorded
as
necessary
to
permit
preparation
of
financial
statements
in
accordance
with generally
accepted accounting
principles, and
that receipts
and expenditures
of the
company are
being made
only
in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of
management and
directors of
the
company; and
(3) provide
reasonable
assurance
regarding
prevention
or
timely
detection
of
unauthorized
acquisition,
use,
or
disposition
of
the
company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that

148

Because
of

Table of Contents

its
inherent
limitations,
internal
control
over
financial
reporting
may
not
prevent
or
detect

misstatements.

Also,
projections
of
any
evaluation
of
effectiveness
to
future
periods
are
subject
to
the
risk
that
controls
may
become
inadequate
because
of
changes
in
conditions,
or
that
the
degree
of
compliance
with
the
policies or procedures may deteriorate.

/s/ BDO USA, LLP

New York
,
NY

February 20, 2020

21, 2023

149

Table of Contents

118

ITEM 9B.

Other Information

Not applicable.

ITEM 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.
PART
III

ITEM 10.

Directors, Executive Officers and Corporate Governance

Information required by this item regarding our directors and executive
officers and our corporate governance is
hereby incorporated by reference to the Section entitled “Election of Directors,”
with respect to directors, and the
first paragraph of the Section entitled “Corporate Governance - Board
of Directors Meetings and Committees -
Audit Committee,” with respect to corporate governance, in each case
in our definitive 20202023 Proxy Statement to be
filed pursuant to Regulation 14A and to the Section entitled “Information
about our Executive Officers” in Part I of
this report, with respect to executive officers.

There have been no changes to the procedures by which stockholders
may recommend nominees to our Board of
Directors since our last disclosure of such procedures, which appeared
in our definitive 20192022 Proxy Statement filed
pursuant to Regulation 14A on April 9, 2019.

6, 2022.

Information required by this item concerning compliance with Section
16(a) of the Securities Exchange Act of
1934 is hereby incorporated by reference to the Section entitled “Delinquent
Section 16(a) Reports” in our
definitive 20202023 Proxy Statement to be filed pursuant to Regulation 14A,
to the extent responsive disclosure is
required.

We have adopted a Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, Chief

Accounting Officer and Controller.
We make available free of charge through our Internet website,
www.henryschein.com,,
under the “About Henry Schein--Corporate Governance”Governance
Highlights” caption, our Code of
Ethics.
We intend to disclose on our Web
site any amendment to, or waiver of, a provision of the Code
of Ethics.

ITEM 11.

Executive Compensation

The information required by this item is hereby incorporated by reference
to the Sections
entitled “Compensation
Discussion and Analysis,” “Compensation Committee Report” (which
information shall be deemed furnished in
this Annual Report on Form 10-K), “Executive and Director Compensation” and “Compensation
“Compensation Committee
Interlocks and Insider Participation” in our definitive 20202023 Proxy
Statement to be filed pursuant to Regulation 14A.

150

119

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder
Matters

We maintain several stock incentive plans for the benefit of certain officers, directors and employees.
All active
plans have been approved by our stockholders.
Descriptions of these plans appear in the notes to our consolidated
financial statements.
The following table summarizes information relating to these plans as of December 28, 2019:

Weighted- Average

Number of Common

Exercise Price of

Shares Available for

Plan Category

Outstanding Options

Future Issuances

Plans Approved by Stockholders

$

-

6,407,767

Plans Not Approved by Stockholders

-

-

Total

$

-

6,407,767

31, 2022:
Number of Common
Shares to be Issued Upon
Weighted-
Average
Number of Common
Exercise of Outstanding
Exercise Price of
Shares Available
for
Plan Category
Options and Rights
Outstanding Options
Future Issuances
Plans Approved by Stockholders
-
$
-
8,227,096
Plans Not Approved by Stockholders
-
-
-
Total
-
$
-
8,227,096
The other information required by this item is hereby incorporated by
reference to the Section entitled “Security
Ownership of Certain Beneficial Owners and Management” in our definitive 2020
2023 Proxy Statement to be filed
pursuant to Regulation 14A.

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

The information required by this item is hereby incorporated by reference
to the Section entitled “Certain
Relationships and Related Transactions” and “Corporate Governance – Board of Directors Meetings and
Committees – Independent Directors” in our definitive 20202023 Proxy Statement
to be filed pursuant to Regulation
14A.

ITEM 14.

Principal Accounting Fees and Services

The information required by this item is hereby incorporated by reference
to the Section entitled “Independent
Registered Public Accounting Firm Fees and Pre-Approval Policies and
Procedures” in our definitive 20202023 Proxy
Statement to be filed pursuant to Regulation 14A.

PART

PART IV

ITEM 15.

Exhibits, Financial Statement Schedules

(a)
List of Documents Filed as a Part of This Report:

1.

Financial Statements:

Our Consolidated Financial Statements filed as a part of this report are listed on the index on

Page 84.

2.

Financial Statement Schedules:

Schedule II – Valuation of Qualifying Accounts

No other schedules are required.

3.

Index to Exhibits:

See exhibits listed under Item 15(b) below.

151

1.

Financial Statements:

Our Consolidated Financial Statements filed as a part of this report
are listed on the index on
Page 60.
2.
Index to Exhibits:
See exhibits listed under Item 15(b) below.

120

(b) Exhibits

121

152

Table of Contents4.3

122

153

Table of Contents

10.8Form of 2017 Restricted Stock Agreement for performance-based restricted stock awards pursuant to the Henry Schein, Inc. 2013 Stock Incentive Plan (as amended and restated effective as of May 14, 2013). (Incorporated(Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q

for the fiscal quarter ended March 31, 2018 filed on May 8, 2018.)**

10.12Form of 2018 Restricted Stock Unit Agreement for performance-based restricted stock unit awards pursuant to the Henry Schein, Inc. 2013 Stock Incentive Plan (as amended and restated effective as of May 14, 2013). (Incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2018 filed on May 8, 2018.)**

10.13Form of 2019 Restricted Stock Unit Agreement for time-based restricted stock unit awards pursuant to the Henry Schein, Inc. 2013 Stock Incentive Plan (as amended and restated effective as of May 14, 2013). (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2019 filed on May 7, 2019.)**

10.14Form of 2019 Restricted Stock Unit Agreement for performance-based restricted stock unit awards pursuant to the Henry Schein, Inc. 2013 Stock Incentive Plan (as amended and restated effective as of May 14, 2013). (Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2019 filed on May 7, 2019.)**

10.15Henry Schein, Inc. 2015 Non-Employee Director Stock Incentive Plan. (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 2015 filed on July 29, 2015.)**

10.16Form of 2018 Restricted Stock Unit Agreement for time-based restricted stock unit awards pursuant to the Henry Schein, Inc. 2015 Non-Employee Director Stock Incentive Plan (as amended and restated effective as of June 22, 2015). (Incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2018 filed on May 8, 2018.)**

154

Table of Contents10.11

123

155

Table of Contents10.19

124

156

Table of Contents10.27

**

10.43Raphael, Scott P. Serota, Bradley T. Sheares, Ph.D., Reed V.Tuckson, M.D.,
125
as seller, The Bank of Tokyo 

10.44-Mitsubishi UFJ, LTD., New YorkBranch, as agent

126
8-K filed on July 2, 2018.June 25, 2020.)

157

Table of Contents

10.49Amendment No. 3 dated as of June 1, 2016 to Receivables Purchase Agreement, dated as of April 17, 2013, by and among us, as performance guarantor, HSFR, Inc., as seller, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as agent and the various purchaser groups party thereto. (Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 25, 2016 filed on August 4, 2016.)

10.50Amendment No. 4 dated as of July 6, 2017 to Receivables Purchase Agreement, dated as of April 17, 2013, by and among us, as performance guarantor, HSFR, Inc., as seller, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as agent and the various purchaser groups party thereto. (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2017 filed on November 6, 2017.)

10.51Amendment No. 5 dated as of May 13, 2019 to Receivables Purchase Agreement, dated as of April 17, 2013, by and among us, as performance guarantor, HSFR, Inc., as seller, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as agent and the various purchaser groups party thereto. (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 2019 2013

Omnibus Amendment No. 1, dated July 22, 2013, to Receivables Purchase Agreement dated as of April 17, 2013, by and among us, as servicer, HSFR, Inc., as seller, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as agent, and the various purchaser groups from time to time party thereto and Receivables Sales Agreement, dated as of April 17, 2013, by and among us, certain of our wholly-owned subsidiaries and HSFR, Inc., as buyer. (Incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 2013 filed on August 6, 2013.)

10.54Omnibus Amendment No. 2, dated April 21, 2014, to Receivables Purchase Agreement dated as of April 17, 2013, as amended, by and among us, as servicer, HSFR, Inc., as seller, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as agent, and the various purchaser groups from time to time party thereto and Receivables Sales Agreement, dated as of April 17, 2013, by and among us, certain of our wholly-owned subsidiaries and HSFR, Inc., as buyer. (Incorporated by reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2014 filed on May 6, 2014.)

10.55Form of Indemnification Agreement between us and certain directors and executive officers who are a party thereto (Barry J. Alperin, Ph.D., Paul Brons, Shira Goodman, Joseph L. Herring, Kurt P. Kuehn, Philip A. Laskawy, Anne H. Margulies, Carol Raphael, E. Dianne Rekow, DDS, Ph.D., Bradley T. Sheares, Ph.D., Gerald A. Benjamin, Stanley M. Bergman, James P. Breslawski, Michael S. Ettinger, Mark E. Mlotek, Steven Paladino, and Walter Siegel, respectively). (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 26, 2015 filed on November 4, 2015.)**

21.1List of our Subsidiaries.+

158

Table of Contents23.1

127
to Section 906 of the Sarbanes-Oxley Act of 2002.+

101.INS

Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.+

101.SCH

Inline XBRL Taxonomy Extension Schema Document+

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document+

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document+

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document+

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document+

104

The cover page of Henry Schein, Inc.’s Annual Report on Form 10-K for the year ended December 28, 2019, formatted in Inline XBRL (included within Exhibit 101 attachments).+

101.INS
Inline XBRL Instance Document - the instance document does not
appear in the Interactive Data File because its XBRL tags are embedded
within the Inline XBRL document.+
101.SCH
Inline XBRL Taxonomy Extension Schema Document+
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document+
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document+
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document+
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document+
104
The cover page of Henry Schein, Inc.’s Annual Report on Form 10-K
for the year ended December 31, 2022, formatted in Inline XBRL
(included within Exhibit 101 attachments).+
_________

+
Filed or furnished herewith.

* Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company
hereby agrees to furnish supplementally a copy of any of the omitted schedules and exhibits upon request
by the U.S. Securities and Exchange Commission.

**
Indicates management contract or compensatory plan or agreement.

# Certain identified information has been excluded from the exhibit because it is both not material and is

the type that the registrant treats as private or confidential.
ITEM 16.
Form 10-K Summary

None.

159

None.

128
SIGNATURES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Henry Schein, Inc.

By: /s/ STANLEY M. BERGMAN

Stanley M. Bergman

Chairman and Chief Executive Officer

February 20, 2020

Henry Schein, Inc.
By: /s/ STANLEY M. BERGMAN
Stanley M. Bergman
Chairman and Chief Executive Officer
February 21, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

Signature

Capacity

Date

/s/ STANLEY M. BERGMAN

Chairman, Chief Executive Officer

February 20, 2020

Stanley M. Bergman

and Director (principal executive officer)

/s/ STEVEN PALADINO

Executive Vice President, Chief Financial

February 20, 2020

Steven Paladino

Officer and Director (principal financial and

accounting officer)

/s/ JAMES P. BRESLAWSKI

Vice Chairman, Director

February 20, 2020

James P. Breslawski

/s/ GERALD A. BENJAMIN

Director

February 20, 2020

Gerald A. Benjamin

/s/ MARK E. MLOTEK

Director

February 20, 2020

Mark E. Mlotek

/s/ BARRY J. ALPERIN

Director

February 20, 2020

Barry J. Alperin

/s/ PAUL BRONS

Director

February 20, 2020

Paul Brons

/s/ SHIRA GOODMAN

Director

February 20, 2020

Shira Goodman

/s/ JOSEPH L. HERRING

Director

February 20, 2020

Joseph L. Herring

/s/ KURT P. KUEHN

Director

February 20, 2020

Kurt P. Kuehn

/s/ PHILIP A. LASKAWY

Director

February 20, 2020

Philip A. Laskawy

/s/ ANNE H. MARGULIES

Director

February 20, 2020

Anne H. Margulies

/s/ CAROL RAPHAEL

Director

February 20, 2020

Carol Raphael

/s/ E. DIANNE REKOW

Director

February 20, 2020

E. Dianne Rekow, DDS, Ph.D.

/s/ BRADLEY T. SHEARES, PH. D.

Director

February 20, 2020

Bradley T. Sheares, Ph. D.

160

Signature
Date
/s/ STANLEY M. BERGMAN
Chairman, Chief Executive Officer
February 21, 2023
Stanley M. Bergman
and Director (principal executive officer)
/s/ RONALD N. SOUTH
Senior Vice President, Chief
Financial Officer
February 21, 2023
Ronald N. South

Schedule II

Valuation(principal financial and Qualifying Accounts

(in thousands)

 

 

 

 

 

 

Additions (Reductions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charged

 

 

 

 

 

 

 

 

 

 

Balance at

 

Charged to

 

(credited) to

 

 

 

 

Balance at

 

 

 

 

beginning of

 

statement of

 

other

 

 

 

 

end of

Description

 

period

 

income (1)

 

accounts (2)

 

Deductions (3)

 

period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 28, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and other

 

$

53,121

 

$

12,612

 

$

134

 

$

(5,865)

 

$

60,002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 29, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and other

 

$

46,261

 

$

14,384

 

$

(1,158)

 

$

(6,366)

 

$

53,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and other

 

$

33,150

 

$

7,915

 

$

11,341

 

$

(6,145)

 

$

46,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents amounts charged to bad debt expense.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

Amounts charged (credited) to other accounts primarily relate to provision for late fees and the impact of foreign currency exchange rates.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3)

Deductions primarily consist of fully reserved accounts receivable that have been written off.

accounting officer)

161

/s/ JAMES P.
BRESLAWSKI
Vice Chairman, President
and Director
February 21, 2023
James P.
Breslawski
/s/ MARK E. MLOTEK
Director
February 21, 2023
Mark E. Mlotek
/s/ MOHAMAD ALI
Director
February 21, 2023
Mohamad Ali
/s/ DEBORAH DERBY
Director
February 21, 2023
Deborah Derby
/s/ JOSEPH L. HERRING
Director
February 21, 2023
Joseph L. Herring
/s/ KURT P.
KUEHN
Director
February 21, 2023
Kurt P.
Kuehn
/s/ PHILIP A. LASKAWY
Director
February 21, 2023
Philip A. Laskawy
/s/ ANNE H. MARGULIES
Director
February 21, 2023
Anne H. Margulies
/s/ STEVEN PALADINO
Director
February 21, 2023
Steven Paladino
/s/ CAROL RAPHAEL
Director
February 21, 2023
Carol Raphael
/s/ SCOTT SEROTA
Director
February 21, 2023
Scott Serota
/s/ BRADLEY T. SHEARES,
PH. D.
Director
February 21, 2023
Bradley T.
Sheares, Ph. D.
/s/ REED V.
TUCKSON, M.D., FACP
Director
February 21, 2023
Reed V.
Tuckson, M.D., FACP