UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 26, 2020
30, 2023
☐
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)
135 Duryea Road
Melville
,
New York
(Address of principal executive offices)
11747
(Zip Code)
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
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
☒
☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
☐
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
☒
☐
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
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES
☒
☐
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
accelerated
filer,”
“accelerated
filer,”
“smaller
reporting
company,”
and
“emerging
growth
company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
☒
Accelerated filer:
☐
☐
Smaller reporting company: ☐
Emerging growth company:
Smaller reporting company:
☐
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 toSection 12(b) of the Act, indicate bycheck mark whether the financial statements ofthe registrant included in thefiling reflect the correction of an error to previously issued financial statements. ☐
Indicate
by
checkmarkwhetheranyofthoseerrorcorrectionsarerestatementsthatrequiredarecoveryanalysisofincentive-basedcompensation 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).
☐
☒
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 27, 2020,July 1, 2023, was approximately $
7,932,914,00010,506,752,000
.
As of February
8, 2021,20, 2024, there were
142,464,090128,505,719
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 26, 2020)30, 2023) are incorporated by reference in Part III hereof.
2
TABLE OF CONTENTS
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3
General
Henry Schein, Inc. is a solutions company for health care professionals powered
by a network of people and
technology.
We
We believe we are the world’s largest
provider of health care products and services primarily to
office-
based dental and medical practitioners, as well as alternate sites of care.
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
8891 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
million customers worldwide across
dental practices,
and laboratories,
and physician practices,
and ambulatory surgery centers, as well as government,
institutional health care clinics and
other alternate care clinics.
We are headquartered in Melville, New York
and employ more than
19,000 people (of which approximately 9,800 are25,000 people.Approximately 55% of ourworkforce is based
outsidein the United
States)States and
approximately 45% is based outsideof the United States.We have
operations or affiliates in
3133 countries and
territories.
territories, including theUnited 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 Emiratesand the United Kingdom.ThisOur broad global footprint has evolved over time through our
organic success as well
as
through contribution from strategic acquisitions.
Our business extends far beyond our supply chain capabilities acrossthe globe. We
provide a wide breadthof products, value-added solutions and support to customers, includingconsumables and equipment. ThroughHenry Schein One, we offer dental practice management, patient engagementand demand creation softwaresolutions. We also offer a broad range of financial services for our customers to help them operate and expand their
business operations. We believe our hands-on consultative approach to support practice decision-making is a key
differentiator for our business.
We offerstock a comprehensive 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 productsthrough our main distribution centers.
available as special-order items.As the market continues to evolve toward solutions that offer ease and convenience forordering products andcommunicating with our solutions teams, we are investing in digital enhancementsto our e-commerce platformsand our web capabilities.
We have establishedOur infrastructure, including over 3.55.3 million square feet of space
in
2836 strategically located distribution
centersand 22 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.
Our infrastructure allows us to provide rapid and accurate order fulfillment. Historically, approximately 99% of items have been shipped
without back ordering and were shipped on the same business day the orderis received.Due to the significantincrease in demand for personal protective equipment (“PPE”), as a resultof the COVID-19 pandemic, during theyear ended December 26, 2020, approximately 93% of items orderedwere shipped without back ordering and 90%were shipped on the same business day the order was received.As the demand for PPE stabilizes, we expect ourpercentage of items shipped without back ordering and shipped on thesame day to return to historic levels.
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.
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 dentalbusinesses serve office-based dental practitioners, dental laboratories, schools, governmentand other institutions.Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,emergency medical technicians, dialysis centers, home health, federal and state governmentsand large enterprises, such as group practices and integrated delivery networks, among other providersacross a wide range of specialties. The health care distribution reportable segment,
aggregatescombining our global
dental
dental and medical operating
segments.Thissegments,combined dental and medical segment distributes consumable products,
small equipment, laboratory products, large
equipment, equipment
repair services,
branded and generic pharmaceuticals,
vaccines, surgical products,
diagnosticdental specialty
products (including implant,
4
orthodontic and endodontic products), diagnostic tests, infection-control products,
personal protective equipment products (“PPE”) and vitamins.
Our global dental group serves office-based dental practitioners, dental laboratories, schools, government and other institutions.Our global medical group serves physician offices,urgent care centers, ambulatory care sites, emergency medical technicians, dialysis centers, home health,federaland state governments and large enterprises, such as group practices and integrateddelivery networks, among otherproviders across a wide range of specialties.
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 consumablemerchandise products, and manufacture certain dental specialty products in the areas of
oralsurgery, implants, orthodontics
and
endodontics. We have achieved scale in these global businesses primarily through acquisitions as manufacturers of
these products typically do not utilize a distribution channel to serve customers.As an alternative to branded product options, we also market under our ownprivate label portfolio of cost-effective,high-quality consumable merchandise products for our dental and medical customers.Sales of our private labelproducts generally achieve gross profit margins that are higher than the average margin on the otherproducts weOur globalThe technology and value-added services
groupreportable segment provides
software,
software, technology and other value-added
services to health care practitioners.
Henry Schein One, the largest contributor of sales to this category, offers
software systemsdental practice management solutions for dental
and medical practitioners.
This segment also includes a
small medical software business known asMicroMD. In addition, we offer dentists and
physicians a broad suite of electronic health records,
patient communication
integrated revenue cycleservices including electronic marketingmanagement,and website design, analytics and patient
communication services. Finally, ourdemand generation.Our value-added practice solutions include
financialpracticeconsultancy, education, integrated revenue cycle management and the facilitation of financial service offerings
which include practice finance solutions such as credit card billingand facilitation of customer(on loans (on a non-recourse basis) to
acquire equipmenthelp dentists and
physicians operate and expandtheir business operations,e-services,practice technology, network and hardware services, as well as consulting, and continuing education services for
practitioners.We believe our hands-on consultative approach to provide solutions to
broker dentalsupport practice
decision- transitions. We do not take on the liabilitymaking is a key differentiator for our business.
loans between practice customers and third-party banking groups.
4
Recent Developments
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent
Developments” herein for a discussion related to
the COVID-19pandemic and recent
corporate transactions.Company developments.
Industry
The global health care 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 ranging in size from a few practitioners to several
hundred
hundred practices owned or operated by dental
support organizations
(DSOs)(“DSOs”), medical group purchasing organizations (“GPOs”), hospital
systems or integrated
networks.
Due in part to the
inabilitylimited capacity of office-based health care practitioners
to store and manage
large quantities of
suppliessupplies in their offices, the distribution of health care supplies and small equipment
to office-based health
care
practitioners 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
aretypically made by the
practitioner, hygienist or office manager.
Supplies and small equipment are generally
one distributor, with one generally serving as the primary supplier.
The health care 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 and technological
improvements,
improvements, including
the advancement of software and services, prosthetic solutions and telemedicine.
In addition, the non-acute market
continues to benefit from the shift of procedures and diagnostic
testing from acute care settings to alternate-care
sites, particularly physicians’ 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
5
companies that can enhance their current product and service offerings or provide
opportunities to serve a broader
In addition, customer consolidation will likely lead to multiple locations
under common management and the
movement of more procedures from the hospital setting to the physician
or alternate care setting as the health care
industry is 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,healthmaintenance organizations (“HMOs”), group practices, other managed care accounts
and collective buying
groups, 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
thethe efficiency and facilitation of practice
management.
The distribution and manufacture of health care supplies and equipment is
highly competitive.
Many of the health
care 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.
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 with a number of regional and local
medical distributors, as well as a number of manufacturers that
sell directly to
physicians.physicians and patients in theirhomes.
With regard to our dental
software, we compete against numerous companies, including the Patterson
Dental division of Patterson
Companies, Inc., Carestream Health, Inc.,
Carestream Dental LLC, Centaur SoftwareDevelopment Co Pty Ltd. (d.b.a. dental4windows, dental4web), Open Dental
Software, Inc., PlanetDDS
LLC, LLC, Good Methods Global Inc.
(d.b.a. (d.b.a. CareStack) and Curve Dental, LLC.
In other software end markets, including
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,Communications, Inc.,
Solutionreach, Inc., ZocDoc, Inc., LocalMed Inc. and
PrositesSolutionreach, 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, Allscripts Healthcare Solutions, Inc., and Epic Systems
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, 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 international countries and territories
we serve.
Competitive Strengths
We have more than 8891 years of experience in distributing products to health care practitioners resulting in strong
awareness of the Henry 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 end 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
6
offerings through organic investment in our products and our teams, as well
as through
asthe acquisition
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,
particularly through our e-commerce
platforms.
The key elements of our direct
sales and marketing efforts are:
Field sales consultants.
We have over 3,450Our field sales consultants, including equipment sales specialists,
coveringmajorcovering 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
and support the sale of
moremore sophisticated products and equipment.
Marketing.
During 2020, we marketedWe market to existing and prospective office-based health care
providers
through a
combination of owned, earned and paid digital channels,
tradeshows, as well
as through catalogs, flyers,
direct mail and other promotional materials.
Our strategies
includedinclude an emphasis on educational content
through webinars and content marketing initiatives.
We continue to enhance our marketing technology to
improve our targeting capability and the relevance of messaging and offers.
Telesales.
We support our direct marketing effort with
approximately 2,250 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 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, 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
offer over 120,000 Stock Keeping Units, or SKUs, to ourdistribute consumable products, small equipment, laboratory customers.products, large equipment, equipment repair services, branded and generic pharmaceuticals,vaccines, dentalspecialty products, diagnostic tests, infection-control products and vitamins.
We
offer over 180,000 additional SKUs tostock a comprehensive selection of more than 300,000 branded products and Henry Scheincorporate brand products through our
customers main distribution centers.We also market and sell our own corporate brand portfolio of cost-effective, high- quality consumable merchandise products and manufacture certaindental 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,
patientbusinessanalytics, patient engagement and patient demand creation software solutions
to our
dental customers.
Our
practice practice management solutions provide practitioners with electronic
medical records, patient treatment
history, history, analytics, billing, accounts receivable analyses and management, appointment
calendars, electronic
claims processing
and word processing programs, network and hardware
services, e-commerce
andand 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
electronicelectronic health records (“EHR”) and e-Prescribe medications and prescription
solutions
through MicroMD®.solutions.
We
have have approximately 800 technical representatives supporting customers
using our practice management
solutions and services.
As
of December
26, 2020,30, 2023, we had an active user base of approximately
94,500 110,000 practices and 374,000 350,000
consumers, including users of AxiUm, Dentally®, Dentrix
Ascend®, Dental
Vision®, Dentrix® Dental
Systems, Dentrix® Enterprise, Easy Dental®, EndoVision®, Evolution® and
EXACT®, Gesden®, Jarvis
Analytics™, Julie® Software, Oasis, OMSVision®,
Orisline®,
PerioVision®PBS Endo®,
PerioVision®, Power
Practice® Practice® Px, PowerDent,
and Viive®
and subscriptions for Demandforce®, Sesame, and Lighthouse360®
for dental
practices and DentalPlans.com®
for dental
patients; and MicroMD® for physician practices.7
patients.
Repair services.
We have
over 140 119equipment 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:for dental
handpieces; handpieces,dental and
medical small
equipment; table topequipment,table-topsterilizers;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
patient financing;practice financingcollection servicesfor leasehold improvements, business debt consolidation and commercialreal estate, non-recourse patientfinancing and credit card processing) at rates that we believe are generally
lower than what our
customers 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:
Exceptional order fulfillment
.
We ship an average of approximately
128,000141,000 cartons daily.
approximately 99% of items have been shipped without back ordering and
were shipped on the samebusiness day the order is received.
Due to the significant increase in demand for PPE, as a result
ofCOVID-19, during the year ended December 26, 2020, approximately
93%without back ordering and 90% were shipped on the same business daythe order was received.As thedemand for PPE stabilizes, we expect our percentage of items shipped withoutback ordering and shippedon the same day to return to historical levels.
7
Comprehensive ordering process
.
Customers may place orders 24 hours a day, 7 days a week via e-
commerce solutions, telephone, fax, e-mail and mail.
Integrated management information systems
.
OurCertain of our information systems generally allow for centralized
managementmanagement of key functions, including accounts receivable, inventory, accounts payable, payroll, purchasing,
sales,order sales, order fulfillment and 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 competitively 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
2020,2023,our top 10 health care distribution suppliers and our single largest supplier accounted for approximately
30%24% and
4%, respectively, of our aggregate purchases.
Efficient distribution
.
We distribute our products from our
36 strategically located distribution centers.
We strive
toto 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 for order fulfillment.
8
Products
and Services
The following table sets forth the percentage of consolidated net sales
by principal categories of products
offeredandservices offered through our health care distribution and technology
and value-added servicesreportable segments:
December 30,
December 26,31,
December 28,25,
December 29,2023
20202022
2019
20182021
Health care distribution:
Dental products
(1)
58.461.1
%
64.259.1
%
67.460.8
%
Medical products
(2)
35.832.4
29.835.2
28.334.0
Total
health care distribution
94.293.5
94.094.3
95.794.8
Technology
and value-added services:
Software and related products and
other value-added products
(3)
5.16.5
5.7
5.2
4.3
Totalexcluding Corporate TSA revenues99.3
99.2
100.0
Corporate TSA revenues
(4)
0.7
0.8
-
Total
100.0
100.0
100.0
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, personal protectivePPE products,
equipment, equipment repair and high-tech and digital restoration equipment.
Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray products,
products, equipment, personal protective equipment,PPE products and vitamins.
Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and
and financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other services.
Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in
connection with the Animal Health spin-off, which ended in December 2020.
services.
Business Strategy
Our
objectivemission is to
continue to expand as a global value-added providerofprovide innovative, integrated health care products and
servicesservices; and to
be trusted advisors andoffice-based dentalconsultants to our customers - enabling them to deliver the best quality patientcare and
medical practitioners by increasingenhance their
practicemanagement efficiency and
success.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 deliver exceptional customer experience, increasedefficiency, and 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 Valuefor our stakeholders 8
To accomplish this, we
will apply our competitive strengths in executing the following strategies:
Increase penetration of our existing customer base.
We have over
1one million customers worldwide and
wewe intend to increase sales to our existing customer base and enhance
our position
as their primary
supplier. supplier.We believe our offering of a broad range of products, services and support, including software
solutions solutions that can help drive improved workflow efficiency and patient communications
for
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 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
independent
practices, mid-market groups, and large DSOs as well as community health 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, 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-
selling opportunities between our dental software users and our dental
distributioncustomers.
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
electronic health recordEHR systems and software
and software when we sell our
strategy extends to providing health systems, integrated
delivery networks
delivery networks and other
large group and multi-sitemulti-
site health care organizations, including physician clinics, these same value
added
added 9
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 is focused on investments in
companies that add new customers and sales teams, increase our geographic
footprint (whether entering a
new country, such as emerging markets, or building scale where we have already invested in businesses),
and finally, those that enable us to access new products and technologies.
Demographic trends indicate that our markets are growing, as an
aging U.S. population is increasingly using health
care services.
Between 2020According to the U.S. Census Bureau’s International Database, between 2023 and
2030,2033, the 45 and
older population is expected
to grow by approximately 11%.
Between
20202023 and
2040,2043, 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
20202023 and
20302033 and approximately
12%11% between
In the dental industry, there is predicted to be a rise in oral health care expenditures as the 45-and-older segment of
the population increases.
There is increasing demand for new technologies that allow
dentists to increase
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 claimsprocessing, financial services andcontinuing 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 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’sefficiency. 9
Additionally, we seek to expand our dental full-service model and our medical offerings in countries where
opportunities exist.
Through our “Schein Direct” program, we also have thecapability to provide door-to-door airWe do this through both direct sales and by partnering with local distribution andpackage delivery to practitioners in over 190 countries around the world.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.
RevenuesSales and profitability generally have been
higher in the third and fourth quarters due to the timing of sales of seasonal
products (including influenza
vaccine,vaccine),equipment and software products), purchasing patterns of office-based health care practitioners
for certain products (including
equipment andsoftware) and year-end
promotions.promotions. RevenuesSales and profitability may also be impacted by
the timing of
certain annual
and biennial dental
tradeshows where equipment promotions are offered.
In addition, some dental practices
delaydelay equipment purchases
in the U.S. until year-end due to tax incentives.
Revenues and profitability generally have been lower in the firstquarter, primarily due to increased sales in the prior two quarters.We expect our historical seasonality of sales
toto continue in the foreseeable future.
10
Governmental Regulations
We
strive to be
substantially compliant
in all material respects with the applicable
laws, regulations and guidance described
below, and
believe we have effective compliance programs and other controls in place to ensure substantial
However, compliance is not guaranteed
either now or in the future, as certain laws, regulations and
guidancemayguidance 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.
For example, When we discover situations ofnon-compliance we seek to remedy them and bring the affected area back into compliance.President Biden’s
administration
(the “Biden Administration”) has
authorized and encouraged a freeze on certain federalindicated that it will be
regulationsmore aggressive in its pursuit of allegedviolations of law, and has revoked certain guidance that would have been published butlimited governmental use of informal agency
are not yet effective, as well as a review of all federal regulations issued during President Trump’s administration.guidance to pursue potential violations, and has stated that it is more prepared
to pursue individuals for corporatelaw violations, including an aggressive approach to anti-corruption activities.Federal, state and certain foreign governments have also increased enforcement activity in the health caresector, particularly in areas of fraud and abuse, anti-bribery and corruption, controlled substances handling,medical device regulations and data privacy and security standards.
Changes with respect to the applicable laws, regulations and guidance described below, as well as related administrative or judicial
belowinterpretations, 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 previously immaterial
risks to us, or may otherwise have a
material adverse effect on our business.
Government
Certain of our businesses involve the distribution,
manufacturing, importation,
exportation,
exportation, marketing,
and sale
andpromotion of and third party
payment for, pharmaceuticals
andand/or medical devices, and in this regard, we
are subject to extensive local, state,
federal and foreign governmental laws and regulations, including as applicable
to our wholesale distribution of
pharmaceuticals and medical devices,
manufacturing activities, and as part of
our specialty home medical supply
businessbusinesses that
distributesdistribute and
sells sell medical equipment and supplies directly
to patients.
The federal governmentFederal, state and
statecertainforeign governments have also
increased enforcement activity in the health care
sector, particularly in areas of fraud
and abuse, anti-bribery
and
corruption, anti-corruption, controlled substances
prescribing, handling,medical device
regulation,regulations and data
privacy and security standards.
Certain of our businesses involve pharmaceuticals and/or medical devices,
including in vitro diagnostic devices, that are paid for by third parties and must operate in compliance with a variety ofburdensome and complex coding, billing and record-keeping requirements in order to substantiate claims forpayment under federal, state and commercial healthcare reimbursement programs.
10
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
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(as amended,
(the “ACA”).
Certain of our businesses are subject to various additional federal, state,local and foreign laws and regulations, including with respect to the sale, transportation, importation, storage, handlingand disposal of hazardous or potentially hazardous substances; “forever chemicals” such as per-andpolyfluoroalkyl substances; and safe working conditions.
In addition, activities to
control medical costs, including laws and regulations
lowering reimbursement
loweringreimbursement rates for pharmaceuticals, medical
devices,
medical suppliesand/or medical treatments or services,
are ongoing.
Many of theseThe Centers for Medicare & Medicaid Services (“CMS”) recentlyreleased the 2024 durable medicalequipment, prosthetics, orthotics and supplies (“DMEPOS”) reimbursementschedule, which, effective January 1, 2024, reduced the DMEPOS reimbursement rates for non-rural suppliers,such as us, by removing the Coronavirus Aid, Relief, and Economic Security (aka CARES) Act relief rates in effect duringthe COVID-19 pandemic.This and other laws and regulations are subject to
change and their evolving implementation
may impact our operations
and our
financial performance.
Our businesses are
also generally subject to numerous
other laws and regulations
that could
that could impact our financial
performance,performance, including securities, antitrust, consumer protection, anti-briberyand
anti-kickback, customerinteraction transparency, data privacy,data security, government contracting and other laws and regulations.Failurefailure to comply with
lawsuch laws or regulations could have a material adverse
effect on our business.
Operating, Security and Licensure Standards
Certain of our businesses
involve the distribution, importation, exportation,are subject to local, state and federal governmental
marketinglaws and
saleregulations relating to thedistribution of and third party
payment for, pharmaceuticals and medical devices and
in this regard we are subject to various local,state, federaland foreign governmental laws and regulations, including as applicableto our wholesale distribution and sale ofpharmaceuticals and medical devices, and, as part of our specialty home medicalsupply business that distributesand sells medical equipment and supplies directly to patients.supplies.
Among the United States federal laws applicable
toto 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
and Section 401 of the ConsolidatedAppropriations Act of the SocialSecurity 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, 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
11
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 phasedwas enacted in
November 2013, and had a planned“phase in” schedule over a period of ten years,
and is intendedto buildresulting in a national electronic,
interoperable system to identify and trace
certain prescription drugs as they
areare distributed in the United
States.States that went into effect on November 27, 2023.
Those DSCSA requirements that werescheduled to change on November 27, 2023, and include requiring trading partnersto provide, receive and maintain documentation about products and ownership only “electronically”(andnot via paper) are now subject to a one-year “stabilization period” announced by FDA through two guidance documentsin late August 2023.FDA is permitting the stabilization period to accommodate an additional year, until November 27, 2024, to allow trading partnersto implement, troubleshoot and mature their electronic (versus paper), interoperablesystems, during which time the FDA does not intend to take action to enforce the requirements for the interoperable,electronic, package level product tracing.Additionally, the FDA announced that it does not intend to take action to enforce the portion of the FDC Act with respect to drug product that is introduced in a transaction intocommerce by the product’s manufacturer or repackager before November 27, 2024, and for subsequent transactionsof such product through the product’s expiry.FDA states this stabilization period is intended to avoid disruptionto the supply chain, and ensure continued patient access to drug products as trading partnersmove towards full implementation of the DSCSA’senhanced drug security requirements.The law’s track and trace requirements applicable to
manufacturers, wholesalers,
third-party logistics providers (e.g., trading partners),repackagers and dispensers (e.g.,
11
pharmacies) of prescription drugs took effect in January 2015, and,
as stated, continues
to be
implemented.
The
DSCSADSCSA product tracing requirements replace the former FDA drug pedigree
requirements
requirements and pre-empt certain
state 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 3PL is licensed, the
name
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.
FDA issued a proposed rule establishing wholesaler and 3PLnational standards for licensing and other requirements in February 2022,but that rule has not yet been finalized. In addition, with respect to our specialty home medical supply
business, we
are 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.
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.system for medical devices.
The UDI rule phased in the implementation of the UDI
regulations,regulations, generally beginning with the highest-risk devices (i.e., Class
III medical devices)
and ending with the
lowest-risk lowest-risk devices.
Most compliance dates were reached as of September 24, 2018,
with
with a final set of
requirements for low
risk devices being reached on September 24, 2022, which
will complete
completed the phase in.
However,in May 2021, the FDA issued an enforcement policy stating thatit does not intend to object to the use of legacy identification numbers on device labels and packages for finished devicesmanufactured and labeled prior to September 24, 2023.
The UDI regulations require
“labelers” “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 DeviceIdentification Database.On July22, 2022, the
FDA posted the final guidance regarding the Global Unique DeviceIdentification Database called Unique Device Identification Policy Regarding Compliance Dates for ClassI and Unclassified Devices, Direct Marketing, and Global Unique Device Identification
Database.Database Requirementsfor 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-keepingrecord-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.
Under the Controlled Substances Act, asAs a distributor of controlled substances,
we are required,
under the Controlled Substances Act, 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
ourour 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
repackage12
repackage prescription pharmaceuticals and/or medical devices and/or HCT/P
products, or
own pharmacy
operations, or
install, maintain or repair equipment.
12
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,organs, as defined in the regulations, for valuable
human bone products) for valuableconsideration,consideration, while generally permitting payments for the reasonable costs
incurred
incurred in
procuring,their procurement, processing,
storage andstoring and distributing that tissue.distribution.
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
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.
EU Regulation of Medicinal and Dental Products
EUEuropean 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.
medical devices. EU
“regulations”“regulations” apply in all
Member States,member states, whereas “directives” are implemented
by the
individual laws of member
On medicines for humans, we are regulated under Directive No. 2001/83/EC
of 6 November 2001,
as amended byDirective 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
ofof the rules, and on other bases
such as harmfulness or
inefficiency.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”) covers a wide scope of
ourour activities, from dental material to X-ray machines, and certain software.
It was meant to become applicable
three three years after publication
(in(i.e., May
26, 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 2021).
In the meantime, rules provided for by Directive No.90/385/EEC of 20 June 1990
on the approximation of the laws of the member states relating to active implantable
medical devices
remain applicable (in particular to certain software)May 26, 2021).
The EU MDR significantly modifies and intensifies the regulatory compliance
requirements for the medical device
industry as a whole.
Once applicable,Among other things, the EU
MDR will among other things:MDR:•
•
strengthens the rules on placing devices on the market and reinforces surveillance
once they are available; •
Strengthen
establishes explicit provisions on manufacturers’ responsibilities
for the
rules
on
placing
devices
on
follow-up of the
market
and
rein
force
surveillance
once
they
are
available;
•
Establish
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
Improve
the
traceability
of
medical
devices
throughout
the
supply
chain
to
the
end
-
user
end-user or
patient
through
a
unique identification number;
•
sets up a central database to provide patients, healthcare professionals and
Se
t
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
Strengthen
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
•
Identifyidentifies importers and distributors and medical device products through
registration in a database
(
EudaMedEUDAMED, which is not
due until 2022fully functional for the time being and
after).might
not be so before the end of 2027 atthe earliest; therefore, the use of this database is only possible through
a voluntary basis and, by a way of 13consequence, 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.
Medical13
Regulation 2023/607 of the European Parliament and of the Council of
amending Regulations (EU) 2017/745 and
(EU) 2017/746 as regards the transitional provisions for certain medical devices and in vitro diagnostic medical
devices
has, notably, extended the EU MDR transitional periods applicable to certain medical devices that have
been assessed and/or certified under the
Directive No. 93/42/EEC of1993concerning medical devices
(“EU
Medical Device Directive”).Subject to certain conditions, medical devices that (i) obtained a certificateunder the EU Medical Device Directive
mayfrom May 25, 2017, (ii) which was still valid
on May 26, 2021, and (iii) has not beensubsequently withdrawn may, for the moment, continue to be placed on the market or put into service until
until 2024 (or until the expiry of their certificates, if applicable and earlier);December 31, 2027 for higher risk devices or December 31, 2028 for
however,medium and lower risk devices. 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., sinceMay 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 (“CLP Regulation”)
(currently under revision), which sets various obligations with respect
to the labelling and packaging of
concerned substances and mixtures.
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 correctiveaction 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, 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
record-keeping requirements in order to
substantiate claims for payment under federal, state and commercial healthcare
reimbursement programs.
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 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, 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
oror consumer protection laws may result in various sanctions, including criminal
and civil penalties.
Private
plaintiffs plaintiffs may also bring civil lawsuits against us in the United States for alleged
antitrust
antitrust law violations, including
claims for
treble damages.
EU law also regulates competition and provides for detailed rules
protecting
protecting consumers.
The Biden Administration has indicated increased antitrust enforcement andhas been more aggressive in enforcement activities, including investigation and challenging non-competerestrictions 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
14
as the federal Physician Self-Referral Law, commonly known as the “Stark Law,” prohibit physicians and other
health
care professionals from referring a patient to an entity with which
the physician
(or (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 StarkLaw may be enforced as violations of the federal False Claims Act.
The fraud and abuse laws and regulations have been subject to heightened
enforcement activity over the past few
years, and significant enforcement activity has been the result of “relators” who
serve as whistleblowers by filing
14
complaints in the name of the United States (and if applicable, particular states)
under applicable false claims laws,
and who may receive up to 30% of total government recoveries.
Penalties under fraud and abuse laws may be
severe,
including treble damages and
could result in significantsubstantial civil
and criminal penalties
and costs,under
including the
federal False Claims Act, as well aspotential loss of licenses and the
ability to participate in federal and state
health care programs,
and couldcriminal 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
judicial authority in
a manner that could require us to make changes
in our operations or incur substantial
defensedefense and settlement
expenses.
Even unsuccessful challenges by regulatory authorities or private
relators could result in
reputationalreputational harm and the incurring of substantial costs.
Most states have adopted similar state false claims laws,
laws have their own penalties, which may be in addition
to federal False Claims
Act penalties, as
well as other
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 healthcareprofessionals on the other.
As a result, we
regularly review and revise our marketing practices as necessary
to facilitate
tofacilitate compliance.
We
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.
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.
Affordable Care Act
The United States Patient Protection and Affordable Care Act
as amended by theHealth Care and
EducationOther Insurance ReformReconciliation Act, each enacted in March 2010, as amended (the “ACA”),The ACA 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 ACA
also materially expanded the number of individuals
in the
United States with health
insurance.
The ACA 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 major political parties in the
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 Congress.
Under President Trump’s administration, a number of
administrative actions were taken to materially weaken 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 ACA.
The Tax Cuts and Jobs Act enacted in 2017,
(the “Tax Act”), which contains a broad range of tax
reform provisions
that impact the individual and corporate tax rates, international
tax provisions,
tax provisions, income tax
add-backadd-back provisions and
deductions, also effectively repealed the ACA’s
individual mandate by zeroing out the penalty
for non-compliance.
In the most recentAn ACA
litigation,lawsuit decided by the federal Fifth Circuit Court
of Appeals found
the
individual mandate to be
15
unconstitutional, and returned the case to the District Court
for the Northern
District of
Texas for consideration of
whether the remainder of the ACA could survive the excision of the individual
mandate.
The Fifth Circuit’s
decision was appealed to the United States Supreme Court.
The Supreme Court
heardargument on the appeal on November 10, 2020, andissued a decision
is anticipated soon.on June 17, 2021.Without reaching the merits of the case, the Supreme Court held that the plaintiffs in the case did not have standing
to challenge the ACA.
Any
outcomeoutcomes of
this casefuture cases that
changes change the ACA, 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.
For instance, the American Rescue Plan Act of 2021 enhancedpremium tax credits, which hasresulted in an expansion of the number of people covered under the ACA.These changes were time-limited, with some enhancements in place for 2021 only and others available throughthe end of 2022. An ACA provision, generally referred to as the Physician
PaymentPayments Sunshine
Act or Open Payments Program (the
“Sunshine Act”),
imposes annual reporting and disclosure requirements
for drug
and device manufacturers and
15
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, certifiedregistered 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
physicianscoveredrecipients in the
reporting
entity.
The Centers forMedicare and Medicaid Services (“CMS”)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 thelaw to also require reporting, effective January1, 2022, of payments or other transfers of value to physicianassistants, nurse practitioners, clinical nurse specialists, certified registerednurse anesthetists, and certified nurse-midwives, and this new requirement will be effective for data collectedbeginning in calendar year 2021.The
Sunshine Act
pre-empts similar state reporting laws, although we or our subsidiaries
may
may be required to report
under certain state
transparency laws that address circumstances not covered by
the Sunshine
the 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
interactions between suppliers and their customers.
In the United States, government actions to seek to increase health-related
price
price transparency may also affect our
business.
For example, hospitals are currently required to publish online a list oftheir standard charges for all itemsand services, including discounted cash prices and payer-specific and de-identified negotiatedcharges, in a publicly accessible online file.Hospitals are also required to publish a consumer-friendlylist of standard charges for certain “shoppable” services (i.e., services that can be scheduled by a patient inadvance) and associated ancillary services or, alternatively, maintain an online price estimator tool.CMS may impose civil monetary penalties for noncompliance with these price transparency requirements.Additionally, the No Surprises Act (“NSA”), generally effective January 1, 2022, imposes additional price 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 andother providers, which may cause financial stress to those providers whoare dependent on 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,
which modified 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”), through
which
which Medicare reimbursement to
eligibleeligible clinicians includes both positive and negative payment adjustments
that take
that take into account quality,
promotingpromoting interoperability, cost and improvement
activities.
Data collected in the first MIPS performance year
(2017)(2017) determined payment adjustments that began January 1, 2019.
MACRA standards
and payment levels continue to
evolve, and
represent reflect a fundamental change in physician reimbursement
that is expected
to provide substantial
financialfinancial incentives for physicians to participate in risk contracts, and to increase
physician
physician information technology
and and reporting obligations.
The implications of the implementation of MACRA are uncertain
and will
and will depend on
future future regulatory activity and physician activity in the marketplace.
New
state-level payment and delivery system
reform programs,
including those modeled after such federal
program,programs, are
also increasingly being
rolled out
at the state level throughthrough Medicaid administrators, as well as through the private sector, which may further
alter the marketplace
and
impact Recently, in addition to 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 have adopted
laws that require drug manufacturers
(including relabelers and repackagers) 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-payermulti-payer purchasing pools to reduce the cost of
prescription drugs.
At
16
the federal level, section 1927 of the Social Security Act sets forth Average Sales Price (ASP) reporting
requirements for manufacturers (including repackagers and relabelers) andrequires that manufacturers provide CMS with pricing information for their Part B-covered drugs no laterthan 30 days after the close of the previous quarter.Also 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.
EU Directive on the pricing and reimbursement 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 the transparency of measures regulating the
pricing of medicinal products for human use and their inclusion in the scope of national health insurance
systems
Member states may, subject notably to transparency conditions and to the statement of reasons based upon
objective and verifiable criteria, regulate the price charged (or its increases) for authorized
medicines and their level
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.
16
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
since 2011)in 2011 and Italy in 2022) have enacted laws to increase
the transparency
ofthetransparency of relationships in the healthcare sector.
The scope of these laws varies from
onone 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, whichdocument describing the impact the Cures Act
incorporated applicable Cures Actstandards, includingon existing software policies.
regarding the types ofConcurrently, FDA issued a draft guidance describing FDA’sapproach to clinical decision support
toolssoftware.On September 28, 2022, FDA issued final guidance that made several changesto the draft guidance and
other software that
areprovided a more restrictive interpretation of exempt
fromregulation by the FDA as medical devices, and continues to issue new guidancein this area.clinical decision support software.
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
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 personal information, such as the federal Health Insurance Portability
and Accountability Act of 1996,
as amended, and implementing regulations (“HIPAA”), the Controlling the Assault of Non-Solicited Pornography
and Marketing Act
(“CAN-SPAM”), the Telephone
Protection and ElectronicConsumer Protection Act of 1991
(“TCPA”), Section 5 of the
Federal Trade
Commission Act (“FTC Act”), the California Privacy Act (“CCPA”), and the California Privacy
Rights Act (“CPRA”) that
becomes became effective on January 1, 2023.
Several other states have also passedcomprehensive privacy legislation, and several privacy bills have been proposedboth at the federal and state level 17
that may result in additional legal requirements that impact our business.
Laws and regulations relating to privacy
and data 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
toto 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 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 UnionEU adopted
the pan-European
the pan-European General Data
ProtectionProtection Regulation (“GDPR”), effective from May 25, 2018, which increased
privacy
privacy rights for individuals
in(“DataEurope (“Data Subjects”), including individuals who are our customers, suppliers
and
and employees.
The GDPR
extended the scope
of responsibilities for data controllers and data processors,
and generally
and generally imposes increased
requirements and
potential penalties on companies, such as us, that
are either establishedin the EU and process personal data of DataSubjects (regardless the Data Subject location), or that are not establishedin the EU but that offer goods or
services services to Data Subjects in the EU ormonitor their behavior
(including by companies based outside of Europe).in the EU. Noncompliance
Noncompliance can result in penalties of
up to the
greater of EUR 20 million, or 4% of global company revenues
and(sanction
that may be public), and Data Subjects
may seek damages.
EUmemberMember states may individually impose additional requirements
and penalties
regardingcertain limited matters (for which the GDPR let some room of flexibility),
regarding certain matters, such as
employee personal data.
With
respect to the personal data it protects, the GDPR requires, among other things,
companycontroller accountability, consents
from Data Subjects or
otheranother acceptable legal basis to process the
personal data,
breach notifications notification 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 information, access,
modification,rectification, erasure
of the personaldata and
transportingthe right to object to the processing.On August 20, 2021, China promulgated the PRC Personal InformationProtection Law (“PIPL”), which took effect on November 1, 2021.The PIPL imposes specific rules for processing personal informationand it also specifies that the law shall also apply to personal information activities carriedout outside China but for the purpose of providing products or services to PRC citizens.Any non-compliance with these laws and regulations maysubject us to fines, orders to rectify or terminate any actions that are deemedillegal 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.
17
In the United States, the CCPA, which increases the privacy
protections afforded California residents, became
effective January 1, 2020.
The CCPA generally requires
companies, such as us, to institute additional protections
regardingregarding the collection, use and disclosure of certain
personal information
of California residents.
Compliance
with the new obligations imposed by the CCPA depends in
part on how particular regulators interpret and apply
them, and because the CCPA is relatively new, them.
and its implementing regulationsRegulations were released in August of
2020,
but therethere remains some uncertainty about how the CCPA will be interpreted by the courts and enforced by the
regulators.Ifregulators. 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 amendamends and
expand expands the CCPA, including by providing
consumers with additional rights
with respect to their personal information,
and creating a new state agency,
tothe California Privacy ProtectionAgency, to enforce the CCPA
and the CPRA.
The CPRA
will comecame into effect on January 1, 2023, applying to
information information collected by businesses on or after January 1, 2022.
OtherAs noted above, 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.
While we
believe we have
substantially compliant programs and controls in place to comply
with
with the GDPR, CCPA,
PIPL,CPRA and CPRAother state law requirements,
our compliance with
these measuresdata privacy andcybersecurity 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,
requirements, could have a material adverse
effect on our business.
18
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
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 carerecordsEHR systems and
processes.
The
initiatives include, among others, programs that incentivize
physicians
physicians and
dentists, through MIPS,
to use EHR technology in accordance with certain
evolving requirements,
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
capabilities designated in evolving
standards adopted by CMS and by the
Office of the National Coordinator for Health
Information Technology
of
HHS (“ONC”).
Certain of our businesses
involve the manufacture and sale
of such certified EHR systems and
other products
linked to government 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,standards, yet have been relied upon by
health care providers to receive
federal incentive payments, we may be
exposedexposed to risk, such as under federal health
care fraud and abuse laws,
including the False Claims Act.
ForAdditionally, effective September 1, 2023, the Office ofexample, on May 31, 2017, the
U.S. Department of Justice announcedInspector General (“OIG”) for HHS issued a
$155final rule implementing
million settlement and 5-yearcivil money penalties for informationcorporate integrity agreement involving a vendor of certified EHR systems, basedon allegations thatblocking as established by the
vendor, bymisrepresenting capabilities to the certifying body, caused its health care provider customers to submit false
Medicare and Medicaid claims for meaningful use incentive paymentsin violation of the False ClaimsCures Act.
OIG incorporated regulations published by ONC as the basis forenforcing information blocking penalties.Each information blocking violation carries up to a $1 million penalty. 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
effortmay involve increased costs, and our failure to
implement product
modifications, or otherwise satisfy applicable
standards,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.
Failure to abide by these and other electronic health data
18
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 to safely and effectively exchange and use exchanged
information becomes
increasingly important.
For example, on September 6, 2017, the FDA issued finalguidance to assist industry inidentifying specific considerations related to the ability of electronic medicaldevices to safely and effectivelyexchange 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
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
Through our proprietary, technologically-based suite of products, we offer customers a variety of competitive
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.
19
We
continue to explore ways and means to improve and expand our
Internet onlinepresence and capabilities, including
ourour online commerce offerings and our use of various social media outlets.
International Transactions
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
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
customers’ practiceslaws and
regulations as they apply to our customers’practices will not have a material adverse effect
See “
” 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.
19
Employees and Human Capital
Henry Schein has a long, rich history of a purpose-driven model that engagesour five key stakeholders – our supplier partners, customers, our employees, who are referred to as Team Schein Members (“TSMs”), stockholders
and society at large – of our Mosaic of Success to drive sustained, long-term economicsuccess while also creating shared value for society.Through our strong values-based culture, our sustainabilityapproach and environmental, social, and governance (“ESG”) efforts integrates our sense of purpose into the way we operate ourbusiness so that we can “do well by doing good” for a healthier planet and healthier people.Overseen by the Nominating and Governance Committee of our Board of Directors (“Board”) with the CompensationCommittee also playing a role in ESG matters related to human capital engagement and executivecompensation, some key 2023 highlights related to human capital matters include:
•
continuing to evaluate our pay equity analysis for the majority ofthe U.S. workforce, which reviews compensation across gender and ethnic groups for equity and fairness; •
expanding our Diversity and Inclusion (“D&I”) learning journey by educating TSMson key D&I topics; and
•
continuing to drive a culture of wellness and engagement for our TSMs byfostering 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 equivalent25,000 people, approximately 55%employees, including approximately 2,250 telesales representatives, over3,450 field sales consultants, includingequipment sales specialists, 2,000 installation and repair technicians, 3,550 warehouseemployees, 800 computerprogrammers and technicians, 675 management employees and 6,300 office, clericaland administrative employees.Approximately 49% of our workforce is based in the United States and
approximately 45%
approximately 51% is based outside of the
United States.
Approximately
13%14% 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 TeamSchein Members, or “TSMs.”Our TSMs are the cornerstone of the Company.
We provide a connected and caring community that invests in thecareer journey of our TSMs and encourages their contribution toour mission of making the world healthier.Our
TSM experience strategy is centered around our Team Schein Values,or the guiding principles and shared responsibilities of Henry Schein and its TSMs.We know our business success is built on the engagement and
commitment of our team, which
is dedicated to meeting the needs of
theirfellow TSMs, our customers, supplier
partners,
fellow TSMs, stockholders and society.
20
We recognize the changes in how and where we work, and the expectations of our team members to still feel
connected to our values-based culture.Throughout 2023, we rolled out a continuous listening programthat used various vehicles, including The Pulse Global Culture Survey and TSMroundtables, to garner feedback from our TSMs on their employee experience.The Pulse Global Culture Survey was redesigned in 2023 to measurescores aligned to our Team Schein Values- and we received good or excellent scores in all values.The feedback showed us that TSMs overall enjoy working for the Company and intendto stay, mainly driven by our values-based culture and providing TSMs with a sense of purpose, a meaningful experienceand an overall positive work environment. However, there are also areas of opportunity, which include a focus on reducing burnout and stress, and providing
more opportunities for career mobility.This feedback is shared with our Executive Management Committeeand Board, both of whom are committed to supportingaddressing the
personal and professional development of our TSMs, as well as providing competitivebenefits and a safe, inclusiveworkplace, and believe that these measures help us to retain our TSMsand attract new TSMs. identified opportunities.
As part of this
commitment, somecommitment, we have, among other things:highlights in 2023 included:
•
Community
Developed a strong collaborative workplace culture.
: Provide opportunities for TSMs to have fun while contributing to an inclusive team
We believe our TSMs’ ability to effectivelythat respects communicate and
cooperate across functional and departmental teams positivelyimpacts our performance.Each TSM’s performance is evaluated annually, based on a measure of Team Schein values, with a focus
on open communication.Our team’s performance as a whole is evaluated via a culture survey, conductedevery two years, distributed to all TSMs, which, among other things,addresses collaboration.The resultsfrom our culture surveys are reviewed by senior leaders, reported to the Boardof Directors and used toimplement programs and processes designed to further enhance our culture.We are currently in theprocess of further developing our collaborative culture by, among other things, strengthening our existing
commitment to diversity and inclusion, as further described below.supports one another.
•
Committed toContinued focus on creating a diverse and inclusive environment where TSMs
enhancefeel a sense ofbelonging.In 2023, Diversity and Inclusion, for the second time, was our
Diversityand Inclusion(“D&I”) initiatives.top strength identified in The Webelieveadiverse workforcefosters innovation and cultivates an environment filled with uniqueperspectives.As a result, D&I helps usmeet the needs of customers around the world.We collect feedback through hosting roundtables where ourseniorleadersactivelylistentoourTSMsontopicsrelatedtoD&I,andtheinsightslearnedareusedtoguideoureffortstosupportadiverseandinclusiveenvironment.Pulse Global Culture Survey.
To
guide
our
efforts
and
education
related to
D&I,
weour Diversity andhave establishedanInclusion Council, with engagement from our Board and Executive
Diversity andInclusion Councilwith engagementfromour Board of Directors and Executive Management
Committee. ThisCouncilCommittee, drives the
Company’s overall
D&I strategy.
In 2020,To deepen our commitment to D&I across the Company, GlobalDirectors and Vice Presidents each have a goal tied to their compensation to champion D&I and attend
educational training, and in 2023 we
launchedcascaded this goal down
ato our U.S. Managers.We continue to expand our D&I learning
program to educate our journey, educating TSMs on
criticalkey D&I topics.
D&I relatedWe understand the importance of ensuring our internal team reflects the diversity of our customers and societyand continue to focus on this through our talent planning, compensation and recruitment processesin alignment with our corporate strategic planning objectives to achieve concrete results.We continue to publish our United States Equal Employment Opportunity Commission (“EEOC”) EEO-1data for the U.S. •
Launched Henry Schein Games, a virtual platform with a field-day type eventat various locations that brought TSMs together through friendly competition by earningpoints for their team by engaging in cultural-related activities and posting photos.
•
Launched Community Circles, which brought TSMs across the Companytogether to connect about topics, hobbies and management is incentivized to advance our D&I efforts.activities that they are passionate about.
•
Hosted Connection Days throughout the globe at Henry Schein facilities, which
Additionally, we promote engagementwere designed to boost team morale by
bringing TSMs together to participate in fun non-work-related
utilizingactivities at least once per quarter.
•
Continued to expand our
Employee
Resource
Groups
as (“ERGs”), an
inclusive
and
diverse
vehicle
for
all
TSMstoshare, TSMs to share, connect, learn and develop both personally and professionally.
We believe that these efforts will serve asEach of our ERGs has a
criticalsponsor from our Executive Management Committee and our Board.
stepping stoneaswecontinue tostrengthen ourD&IinitiativesOur CEO engages directly in
anefforttomeettheevolvingneedsmany of our customers, supplier partners, TSMs, stockholders and society.
•
Committed to the professional development of our TSMs.
We have invested in education and skill building,and provide formal and informal learning opportunities to our TSMs.All TSMs globally are offered abroad suite of talent and professional development training programstargeted to specific learningopportunities based on their current and potential future role withinthe Company.We also offerover 50organizational and development training courses designed to aid in the overall developmentandadvancement of skills and competencies to enable organizational success.ERG programs.
•
Supported talent development and succession planning.
Launched an enhanced Onboarding Program that provides TSMs with
Talent planning efforts are an integral part of ourstrategic programming to help commitment to ensure a strong leadership pipeline across the organization. We continuously identify a
group of potential management successors as part of our succession planningsuccessful start to their careers at Henry Schein.
process.To help ensure TSMs who are joining theCompany in a remote or hybrid working environment feel connected to
Our senior leadersour values-based culture, we work to develop our TSMs’ talent and focus the team to execute ourlaunched a Culture Ambassador Program, which provides new hires with
long-terma mentor for 90 days to walkthrough how we live our values and how they can engage. •
Caring:
Build a world we want to live in by supporting each other andthe communities in which we live and work.
•
Continued to offer a variety of opportunities to volunteer for team-building and engagingin local communities in which TSMs live and work, such as through Carry the Load,the We Care Global Challenge, Back to School and Holiday Cheer. •
Launched a new quarterly campaign to provide opportunities for TSMsto engage in meaningful ways that connect back to their own personal purpose, such as helpingthe community through corporate social responsibility activities virtually or in-person. •
Enhanced our strategic
plans.partnerships with industry associations, customers
Our Boardand suppliers that of Directors is provided with periodic updates regarding oursupport access to quality health care through various key programs and
talent developmentinitiatives (e.g., Gives KidsA Smile, Alpha Omega-Henry Schein Cares Holocaust Survivors OralHealth Program and
succession planning efforts, participates in professional development activities with our TSMs and receivesformaldocumentation on these topics annually.Release
21
20the Pressure).
•
Expanded our Steps for Suicide Prevention campaign, which brings TSMs
together to walk for a Supported TSM healthcause and safety.provide education.
•
We also understand the importance of driving a culture of wellness for our own team members
through our Mental Wellness Committee, which is supported by our CEO, Executive Management
Committee and Board.In 2023, we rolled out a ‘Year of Wellness’campaign that provided monthly tips, videos and educational programming to TSMs that focusedon how they may be feeling that month.
We
offer competitive healthalso launched an education program for managers of TSMs that provided tactical examples of how to help reduce burnout amongst teams and
wellness programssupportthe new way of working.
•
Career:
Provide opportunities for TSMs to develop personally and other benefitsprofessionally with an emphasis on
embodying our values to
eligible TSMs.In addition to employee health, we are committed to providinga safe and secure workenvironment for all TSMs.In response to the COVID-19 pandemic, in March 2020, we implementedcertain policy and procedure changes in an effort to protect achieve our
TSMs and customers,collective goals with excellence
and
to supportintegrity.appropriate health•
Continued investment in our employees by providing both formal and
safety protocols.
Whileinformal learning opportunities focused on growing and enhancing knowledge, skills and abilitiesthrough a broad suite of professional development training programs for current andfuture roles.In 2023, we saw an increase in participation in our workshops, with TSMs
atreporting a high utilization of skills learned.
•
Continued expansion of our
manufacturingformal mentorship and
distribution facilities, ascoaching programs. •
Continued roll-out of talent planning efforts designed to ensure a strong, diverse leadership
pipeline across the organization by strategically identifying and developing talentthrough targeted development opportunities and intentional succession plans.Information derived from talent planning efforts informs curriculum design and content to help focus on theright capabilities and help ensure alignment of career development efforts with the futureneeds of the organization.Our Board is provided with periodic updates regarding our talentand succession planning efforts and participates in professional development activitieswith our •
Enhanced company-wide recognitions, including our Teddy Philson Team Schein Award,
which was redesigned in 2023 to provide more visibility andmeaningful recognition to TSMs who exemplify our Team Schein Values,as well as
field sales consultants and equipmentother programs including service
technicians, havecontinued to work onsite or in theawards field to provide vital services towhich highlight TSMs who exemplify our
customers, most TSMs in administrativefunctions have effectivelyworked remotely since mid-March.To support the health and safety of our TSMs, we, among other things,implemented extensive cleaning and sanitation processes and facemask policies to protect TSMs at ourmanufacturing and distribution facilities, instituted social distancingand face mask policies for our fieldsales consultants and equipment service technicians and adopted broad work-from-homeinitiatives forTSMs in administrative functions. In connection with this shift to remote working,we made investments inequipment, technology, and security upgrades to help protect our information and enhance our team’s
ability to work remotely.Additionally, to help the team manage stress during the pandemic, we, amongother things, established a “COVID-19 Resource Center” to provide a centrallocation for allcommunications to support the health of TSMs and their families, and holdvirtual Global Town Halls forall TSMs.
Team Schein Values.
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
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,the “Company,”
“Henry Schein,” “we,” “us” and “our” mean Henry Schein, Inc., a Delaware
corporation, and its consolidated
subsidiaries.
2122
Information about our Executive Officers
The following table sets forth certain information regarding our executive
officers:
Name
Age
Position
7174
Chairman, Chief Executive Officer, Director
68
Executive Vice President, Chief Administrative Officer, Director
6770
Vice Chairman, President, Director
Brad Connett
65
Chief Executive Officer, North America Distribution Group
5962
Executive Vice President and Chief Operating Officer
Lorelei McGlynn
60
Senior Vice President, Corporate & Legal Affairs and Chief of Staff, SecretaryHuman Resources Officer
6568
Executive Vice President, Chief Strategic Officer, Director
Steven PaladinoWalter Siegel6364
ExecutiveSenior Vice President and Chief Legal Officer
Ronald N. South
62
Senior Vice President, Chief Financial Officer Director
61
Senior Vice President and General Counsel
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 adirector since 1994.Prior to holding his current position, Mr. Benjamin was Senior Vice President ofAdministration and Customer Satisfaction since 1993.Mr. Benjamin was VicePresident of DistributionOperations from 1990 to 1992 and Director of Materials Managementfrom 1988 to 1990.Before joining us in1988, 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.
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 from 2018 to 2021.Mr. Connett joined us in 1997 and has held a number of roles 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.
Michael S. Ettinger
has been our
SeniorExecutive Vice President
Corporate & Legal Affairs,and Chief
of Staff and SecretaryOperating Officer since
2015.2022.
Prior to his
current position, Mr. Ettinger served as Senior Vice President, Corporate & Legal Affairs, Chief of Staff and
Secretary from 2015 to 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, Chief 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.
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.
Steven Paladino
has been our Executive Vice President and Chief Financial Officer since 2000.Prior to holdinghis 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 from1987 to 1990 served as Corporate Controller.Before joining us, Mr. Paladino was employed in public accountingfor seven years, most recently with the international accountingfirm of BDO USA, LLP.Mr. Paladino is acertified public accountant.
2223
Walter Siegel
has been our Senior Vice President and
Chief Legal Officer since 2021.Previously, Mr.Siegel wasour Senior Vice President and General Counsel
since 2013.from 2013 until 2021.
Prior to joining us, Mr. Siegel
was employed
with Standard Microsystems Corporation, a publicly
traded global
traded global semiconductor company from
2005 to 2012,
holding positions of increasing responsibility, most recently as Senior Vice President, General
Counsel and
Secretary.
Ronald N. South
has been our Senior Vice Presidentand Chief Financial Officer (and principal financial officerand principal accounting officer) since 2022.Prior to holding his current position, Mr. South was our Vice President Corporate Finance, and Chief Accounting Officer from 2013 until 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 atPepsiCo, 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. Other Executive Management
The following table sets forth certain information regarding other Executive
Management:
Name
Age
Position
David BrousAndrea Albertini
5253
President, Strategic Business Units Group andAsia Pacific & Brazil DentalBrad Connett
62
President, U.S. MedicalChief Executive Officer, International Distribution Group
Jonathan KochLeigh Benowitz4656
Senior Vice President and Chief ExecutiveGlobal Digital Transformation Officer Global Dental Group
Lorelei McGlynnTrinh Clark5750
Senior Vice President and Chief Human ResourcesGlobal Customer Experience Officer
James Mullins
5659
Senior Vice President, Global ServicesSupply Chain
Kelly Murphy
43
Senior Vice President and General Counsel
Christopher Pendergast
5861
Senior Vice President and Chief Technology Officer
66
Senior Vice President, Chief Merchandising Officer
René Willi, Ph.D.
5356
President,Chief Executive Officer, Global Dental SurgicalOral Reconstruction Group
David BrousAndrea Albertini
has been
our President, Strategic Business UnitsChief Executive Officer, International Distribution Group
and Asiasince 2023.
Pacific & Brazil Dental since 2019.Mr. AlbertiniMr. Brous joined us in
20022013 and has held
manyseveral positions within the organization including
leading President, InternationalDistribution Group, President of our EMEA Dental Distribution Group,and
managingVice-President of International Dental the Corporate Business DevelopmentEquipment.Prior to joining Henry Schein, Mr. Albertini held leadership positions at Cefla Dental Group and
the International Healthcare Group(managing our InternationalAnimal Health business, International Medical business and Australia/ New Zealand Dental business).Castellini.Brad Connett
has been our President of the U.S. Medical Group since 2018.Mr. Connett joined us in 1997 andhas held a number of increasingly responsible positions at the Company.Throughout his career, he has receivednumerous 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 KochLeigh Benowitz
has been our Senior Vice President and Chief
ExecutiveGlobal Digital Transformation Officer
of oursince August2022.Ms. Benowitz joined us in 2017 and has held several key positionsincluding Vice President Digital & Customer Experience and Global Dental Group since
2018.eCommerce Platform Digital Transformation Officer.
Prior to joining
us, for the years 2006 to 2018, Mr. Koch was a senior executive at Covance,the drugHenrydevelopment services business of Laboratory Corporation of America.In his last role at Covance, Mr. Koch wasthe 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 andDevelopment Laboratories from 2015 to 2017.Mr. Koch was also President of Covance Central LaboratoryServices from 2010 to 2015,and Vice President at Covance, withSchein, Ms. Benowitz held various
responsibilities, from 2006 to 2010.Priorto Covance, Mr. Koch held senior leadership rolespositions of increasing responsibility while employed with Charles River
Laboratories from 1998 to 2006.
at Citi.Trinh Clark
Lorelei McGlynn
has been our Senior Vice President
and Chief Global
Human ResourcesCustomer Experience Officer since
2013.AugustMs. Clark joined us in 1999, Ms. McGlynn2007 and has served as Vice President, Global Human Resources and Financial Operations fromTechnology Enablement, North American
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.Distribution Group.
Prior to joining
us,Henry Schein, Ms.
McGlynnClark held various positions ofincreasing responsibility atserved as Assistant Vice President of Finance at Adecco Corporation.
eSurg.
James Mullins
has been our Senior Vice President of Global
ServicesSupply Chain since 2018.
Mr. Mullins joined us in
19881988 and has held a number of key positions with increasing responsibility, including Global Chief Customer Service
Service Officer.
Kelly Murphy
has been our Senior Vice President and General Counsel since 2021.Since joining us in 2011, Ms. Murphy has held several key positions of increasing responsibility withinthe legal function, most recently serving as Deputy General Counsel.
2324
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 holdinghis 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, CorporateMerchandising from 1992 to 1994.Before joining us in 1992, Mr. Racioppi was employed by KetchumDistributors, Inc. as the Vice President of Purchasing and Marketing.He currently serves on the board of NationalDistribution and Contracting and previously served on the board of HealthDistribution Management Associationand 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.
25
24
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 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 andliquidity may be negatively impacted bythe effects of disease outbreaks, epidemics, pandemics, or similar wide-spread publichealth concerns and othernatural disasters
.
The COVID-19 pandemic and the responses of governmentsto it had, and may again have, amaterial adverse effect on our business, results of operations and cash flows and mayresult in a materialadverse effect on our financial condition and liquidity.
Our business, results of operations, cash flows, financial condition andliquidity may be negatively impacted by theeffects of disease outbreaks, epidemics, pandemics, similar wide-spread public health concerns,and other naturaldisasters. The COVID-19 pandemic has had, and continues to have,an unprecedented impact on society, worldwideeconomic 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 amaterial adverse effect onour financial condition and liquidity. In March and April 2020, the dental market was severely impacted by
COVID-19, with many, if not a majority, of practices being closed or open on a limited basis only. Although dental
practice openings and patient volume recovery in the United States andmany other countries have rebounded fasterthan originally anticipated, patient volumes have remained below pre-COVID-19levels.Material uncertaintyremains and the potential for additional significant resurgences of COVID-19could cause a significant reduction indental practice openings and patient volume recovery, or further delay the return to normal operations. EvenafterCOVID-19 has subsided, we may again experience material adverseimpacts to our business, results of operationsand cash flows as a result of, among other things, its global economicimpact, including any recession that mayoccur in the future, or a prolonged period of economic slowdown or thereluctance of patients to return for electivedental or medical care. The impacts and potential impacts fromthe COVID-19 pandemic include, but are notlimited to:
•
Significant reductions in demand or significant volatility in demand for certain of our products.
March and April 2020, many dental offices in the United States performed only emergency procedures,andrescheduled wellness exams and elective procedures. Dental offices in other countriesalso experienced closures orrestricted operations, as did medical offices around the world. Such closures and restrictionsimpacted ourcustomers’ spending with us and had, and if reinstated may again have, a materialadverse effect on our business,results of operations and cash flows. Although dental practice openings andpatient volume recovery haverebounded faster than originally anticipated, capacity constraintsin offices and demand-side factors may again leadto reductions in demand or significant volatility in demand for our products. Additionally, significant reduction in
demand for certain of our products or customers’ decisions to delaythe purchase of large equipment may result inus having increased inventory;
•
Shortage of Certain Personal Protective Equipment (PPE
). Supply chain disruptions for PPE and an increased
demand for these products has resulted, and may continue to result,in backorders of certain PPE and a potentialscarcity in raw materials to make certain PPE. Prices for certain PPE have beenvolatile. Although we believe thatmost practices currently are able to access adequate supply, with some exceptions in certain markets depending on
a number of factors, including the progress of the virus and efforts to combat it, westill may be unable to supplyour customers with the quantity of certain PPE products they demand,which may lead to our customers seekingalternative sources of supply. Furthermore, healthcare professionals’ inability to obtain a sufficient quantity of
certain PPE wouldadversely impact our business, results of operations and cash flows,and could materiallyadversely affect our financial condition and liquidity. Conversely, we recorded significant charges throughout the
year beginning in the second quarter for PPE inventory due to volatilityof pricing for PPE, and, depending upon25
the course of the pandemic, if PPE pricing or demand decreases, ourmargins and the value of certain our PPEinventory could be further negatively impacted in future periods, whichcould result in a material adverse impact onour business, results of operations and cash flows and our financial conditionand liquidity;•
Reduction in Peoples’ Ability and Willingness to be in Public.
Restrictions recommended by several public healthorganizations, and implemented by many local governments, to slow and limit the transmissionof COVID-19(including business closures and restrictions, stay-at-home and similar measures)were implemented and then liftedor partially lifted in some locations and reinstituted in others. Ongoingsocial distancing ordinances and similarrestrictions, and the actual and potential for additional resurgences of COVID-19has in some locations and may inother locations result in the re-imposition or tightening of governmentalsocial distancing and other restrictions,and/or cause people to be less willing to go to elective medical and dentalappointments, which could againmaterially adversely affect demand for our products. A lengthened period of materiallysuppressed demand couldagain cause material adverse impacts on our business, results of operationsand cash flows and could materiallyadversely affect our financial condition and liquidity;
•
Potential delays in customer payments, or defaults on our customer credit arrangements.
products to customers with payment terms. If customers’ cashflows or operating and financial performancedeteriorate due to the impact of COVID-19, or if they are unable to make scheduledpayments or obtain credit, theymay not be able to pay, or may delay payment to us. Likewise, for similar reasons, suppliers may restrict credit or
impose more stringent payment terms. The inability of current and/orpotential customers to pay us for our productsand/or services or any demands by suppliers for more stringent payment termsmay materially adversely affect ourbusiness, results of operations, cash flows, financial condition andliquidity and may limit the amounts we canborrow under our trade accounts receivable securitization;
•
Impact on third parties’ ability to meet their obligations to us; impact on our ability to meet obligationsto thirdparties.
Failure of third parties on which we rely, including our suppliers, contract manufacturers, distributors,contractors (including third-party shippers), banks, joint venture partnersand external business partners, to meettheir obligations to us, or significant disruptions in their ability to doso, which may be caused by their ownfinancial or operational difficulties, or by travel restrictions and border closures, may materiallyadversely affectour business, results of operations, cash flows, financial condition andliquidity. Certain of our contracts withsupply partners contain minimum purchase requirements or include rebate provisionsif we satisfy certain sales orpurchasing targets that, in certain cases we have not been able to satisfy and in othercases we may not be able tofully satisfy, due to the impact of the COVID-19 pandemic. Rebate income recognized in fiscal 2020 is less than
rebates earned over the prior fiscal year. Our failure to satisfy such contractual provisions or renegotiatemorefavorable terms could materially adversely affect our business, results of operationsand cash flows;•
Negative impact on our workforce and impact of adapted business practices.
The spread of COVID-19 caused usto implement temporary cost reduction measures (including a payrollcost reduction plan centered aroundfurloughs, reduced pay and work hours, voluntary unpaid time off, suspension of Companycontributions to certainretirement plans and job reductions), all of which have now ended (exceptfor a small number of TSMs who remainon furlough), modify our business practices (including employeetravel, employee work locations, and cancellationof physical participation in meetings, events and conferences), andwe may take further actions as may be requiredby government authorities or that we determine are in the best interestsof our employees. As the COVID-19pandemic continues to unfold, we will continue to evaluate appropriate actionsfor our business. Many of ouremployees shifted abruptly to working remotely and our non-essential workerswho are able to work from homecontinue to do so. An extended period of modified business practicesand remote work arrangements could have anegative impact on employee morale, strain our business continuity plans,introduce operational risk (including butnot limited to cybersecurity risks), and impair our ability to efficiently operate ourbusiness;•
Significant changes in political conditions.
Significant changes in political conditions in markets in whichwepurchase and distribute our products have occurred and are expected tocontinue at least during the pendency of thepandemic, including quarantines, governmental or regulatory actions, closuresor other restrictions that limit orclose our operating facilities, restrict our employees’ ability totravel or perform necessary business functions, orotherwise constrain the operations of our business partners, suppliers, orcustomers, which may materiallyadversely affect our business, results of operations, cash flows, financial conditionand liquidity;26
•
Potential impact on our ability to meet obligations under credit facilities.
Although in fiscal 2020 we entered intoamendments to our material credit facilities to, among other things,extend the maturity dates and temporarilyprovide additional flexibility under certain covenants, an extended negativeimpact of COVID-19 on our business,results of operations, cash flows, financial condition and liquidity couldimpact our ability to meet our obligationsunder credit facilities or outstanding long term debt, which containmaximum leverage ratios, and customaryrepresentations, warranties and affirmative covenants;
•
Volatilityin the financial markets.Volatilityin the financial markets may materially adversely affect theavailability and cost of credit to us;
•
Refocusing management resources to mitigate effects of COVID-19
. Our management is focused on mitigating the
effects of COVID-19, which has required, and may continue to require for the duration ofthe pandemic, a largeinvestment of time and resources across the Company, and may delay certain strategic and other plans, which could
materially adversely affect our business;
•
Potential
increased costs associated with our self-insured medical insurance programs.
We may incur significant
employee health care costs under our self-insurance medical insurance programsif a large number of ouremployees and/or their covered family members become ill from COVID-19;and•
Reputational risk associated with response to COVID-19.
If we do not respond appropriately to the COVID-19pandemic, or if customers do not perceive our response to be adequate, we couldsuffer damage to our reputationand our brands, which could materially adversely affect our business.
The impact of COVID-19 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 substantially alla significant volume of our products.
We obtain substantially alla significant volume of the products we distribute from third parties, with whom we generally do not have
have long-term contracts.
While there is typically more than one source of
supply, some key suppliers, in the
aggregate, aggregate, supply a significant portion of the products we sell.
In
2020,2023, our top 10 health care distribution suppliers
andour and our single largest supplier accounted for approximately
30%25% 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
suppliers’ manufacturing capabilities.
In the event of any such
interruption in supply, we would need to identify
andand obtain acceptable replacement sources on a timely basis.
There is no guarantee
that we would be able to obtain
such such alternative sources of supply on a timely basis, if at all, and an extended
interruption
interruption in supply, particularly of
a high salesa high-sales volume product, could result in a significant disruption in our
sales
sales and operations, as well as damage
toto 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 becauseof allegations of forced labor in their supply chain.Forced labor legislation affecting the supply chain has increased aroundthe 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 demandfor products, as a result of applicable forced labor legislation and regulations.
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
increased expenses related to the
software and could adversely
affect
our
relationships
with
customers
as
well
as
our
reputation.
WhileWith respect to certain
software
and
e-services
thatwe27
that we develop,
are protectedunder patent law,we rely primarily
upon copyright, trademark
and
and trade secret
laws, as well
as contractual and
common law protections and
confidentiality obligations.
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.
Our expansion throughRisks inherent in acquisitions,
dispositions and joint ventures
involvescould
risks and may not result inoffset the
benefits andrevenue growth we expect.
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, financial, and
financialhuman resources
functions, and
there
there26
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
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,
management, financial and
operational controls and strategies.
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 delaythe 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 involvementin a divested business, such as through transition service agreements, indemnities or other currentor contingent financial obligations. Under these arrangements, performance by the acquired or divestedbusiness, 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.
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.
These provisions, among other things
require:•
require (i) 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
•
and (ii) the affirmative vote of the holders
of at least 66 2/3% of our common stock entitled
to vote to
(i)(a)remove a director; and (ii)(b) to amend or repeal our
by-laws, with certain limited
exceptions.
exceptions.In addition, certain of our employee incentive plans provide
for accelerated
foraccelerated 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 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 incentivescould negatively affect our business. The termson whichwe purchaseor sellproducts frommany suppliersmay entitleus toreceive arebate orother purchasing incentive based on the attainment of certain growthgoals.Suppliers may reduce or eliminate rebates or incentivesofferedundertheirprograms,orincreasethegrowthgoalsorotherconditionswemustmeettoearn rebatesorincentivestolevelsthatwecannotachieve.Increasedcompetitioneitherfromgenericorequivalent branded productscould resultin usfailing toearn rebatesor incentivesthat areconditioned uponachievement of growth goals.Additionally, factors outsideof our control, such as customerpreferences, consolidation of suppliers or supply issues, can have a material impact onour ability to achieve the growth goals established byour suppliers,
27
whichmayreduce theamount ofrebatesorincentives wereceive.Theoccurrenceofanyofthese eventscould have an adverse impact on our business, financial condition or operatingresults. Sales of corporate brand products entail additional risks, including the risk that such sales couldadversely affect our relationships with suppliers.
We offercertain 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
notlimited topotential productliability risks,mandatory orvoluntary productrecalls, potentialsupply chainand distributionchaindisruptions,andpotentialintellectualpropertyinfringementrisks.Anyfailuretoadequately addresssomeoralloftheseriskscouldhaveanadverseeffectonourbusiness, financialconditionoroperating results.Inaddition,anincreaseinthesalesofourcorporatebrandproductsmaynegativelyaffectoursalesof products owned by oursuppliers which, consequently,could adversely impact certainof our supplier relationships. Our ability to locate qualified, economically stable suppliers who satisfy our requirements, and toacquire sufficient products ina timelyand effectivemanner,is criticalto ensuring,among otherthings, thatcustomer confidenceis not diminished.In addition, weare exposed tothe riskthat our competitorsor our largecustomers may introduce their ownprivate label,generic, orlow-cost productsthat competewith ourproducts atlower pricepoints.Such products couldcapture significantmarket shareor decreasemarket pricesoverall, erodingour salesand margins. Any failureto develop sourcingrelationships with abroad and deepsupplier base couldhave an adverseeffect on our business, financial condition or operating results. INDUSTRY RISKS
Security risks generally associated with our information systems and ourtechnology products and services have in the recent past adversely affected our business and results of operations, and couldin the future materially adversely affect our business and our results of operations if such products, services,or systems (or third-party systems we rely on) are interrupted, damaged by unforeseen events, are subjectto 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 anddistribution 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 our customers;
•
process payments to suppliers; •
provide products and services that maintain certain of our customers’ electronicmedical or dental records (including protected health information of their patients); and
•
maintain and manage global human resources, compensation and payrollsystems. In addition to health information in our customers’ electronicmedical and dental records, certain of our IS stores other sensitive personal and financial information, such as healthcareand other information related to our employees, as well as other sensitive information such as credit cardinformation from our third-party business partners, that is confidential,and in many cases subject to privacy laws. Our IS are vulnerable to, among other things, natural disasters,power losses, computer viruses, telecommunication failures, cybersecurity threats and other criminal activity. Information security risks have significantly increasedin recent years in part because of an overall increase in cyber incidents,their increased sophistication, and the involvement of organized crime, hackers, terrorists and foreign state agents. The healthcareindustry in particular has been targeted by threat actors seeking to undermine companies’ cybersecuritydefensive measures. We have processes in place intended to ensure that our security measures keep pace with new and emerging risks. We regularly review,monitor and implement multiple layers of security through technology, processes and our people.We utilize security technologies designed to protect and maintain the integrity of our IS and data, and our 28
defenses are monitored and routinely tested internally and by external
parties.28
Despite these efforts, our facilities INDUSTRY RISKSand systems and those of our third-party service providers have been,and may in the future be, vulnerable toprivacy and security incidents, cybersecurity attacks and data breaches,acts of vandalism or theft, computer viruses and other malicious code, misplaced or lost data, programming and/or humanerrors,attacks or other acts undermining IS of third party business partners including our customers,or other similar events that could impact the security, reliability and availability of our systems.In addition, hardware, software or applications developed internally or procured from third parties may contain defectsin design or manufacture or other problems that could unexpectedly compromise information security.As a practical matter, so long as we depend on IS to operate our business, and our business partners do the same, there can be no guarantythat such measures will successfully stop any one particular cybersecurity incident given the constantly evolvingnature of the threat.We may also incur substantial costs as we update our cybersecurity defense systems and our generalcomputer controls to meet evolving challenges, and legislative or regulatory action related to cybersecuritymay increase our costs to develop or implement new technology products and services.
A cyberattack that bypasses or compromises our IS cybersecurity / or generalinformation technology (“IT”) controls (including third-party systems we rely on) causing an IS security breachmay lead, and has in the past led, to a disruption of our IS business systems (including third-party systems werely on), interruption of operations (including, without limitation, receiving, verifying, and processing customer orders,customer service, accounts payable, warehouse management and shipping, and systems tied to internalcontrols over financial reporting), the loss or alteration of business, financial, and other protected information,a negative impact on our financial performance, and to an adverse impact on our financial accountingand reporting controls. A cyberattack that bypasses or compromises our IS cybersecurity / or generalcomputer controls or those of third parties with whom we engage may also lead to claims against us byaffected parties and/or governmental agencies, and involve fines and penalties, as well as substantial defense and settlementexpenses.Any of these impacts may alone, or collectively, have a material impact on our business.A successful cyberattack has, and may again in the future, disrupt our business operations, adversely impact our financialaccounting and reporting of results of operations, divert the attention of management, and adversely impactour results of operations. In addition, we develop products and provide services to our customersthat are technology-based, and a cyberattack that bypasses the IS supporting our products or services causinga security breach and/or perceived security vulnerabilities in our products or services could also cause significantloss of business and reputational harm, and actual or perceived vulnerabilities may lead to claims againstus by our customers and/or governmental agencies.In addition, certain of our practice management products and servicespurchased by health care providers, such as physicians and dentists, are used to store and manage patientmedical or dental records.These customers are subject to laws and regulations which require that theyprotect the privacy and security of those records, and our products may be used as part of these customers’ comprehensivedata security programs, including in connection with their efforts to comply with applicable privacy and security laws. In addition to immaterial and unrelated prior incidents at certain ofour subsidiaries, in October 2023, Henry Schein experienced a cybersecurity incident that primarily affected the operations of ourNorth American and European dental and medical distribution businesses.Henry Schein One, our practice management software, revenuecycle management and patient relationship management solutions business wasnot affected, and our manufacturing businesses were mostly unaffected.Once we became aware of the issue, we took steps to assess, containand remediate this incident.We restored affected systems and applications, our distribution operations resumed and we reactivated our ecommerce platform.We also notified law enforcement and our employees, customers, suppliers and investors, informing them of both the incident and management’s efforts to mitigate its impact on our daily
operations and data maintained on the Company’s systems.Subsequently, on or about November 8, 2023, we determined that the threat actor obtained personal and sensitive informationmaintained on our systems belonging to certain third parties and since that date we have notified affected parties and potentiallyaffected parties as appropriate.The scope of personal and sensitive data impacted is still under investigation.On November 22, 2023, we experienced a related disruption to our ecommerce platform andrelated applications, which has since been remediated.The October 2023 cybersecurity incident disrupted keybusiness operations, adversely impacted our financial results for the fourth quarter and full year 2023, divertedattention of management, and caused the Company to incur significant remediation costs.We continue to review the effects of the incident on the Company’s business as we do expect some short-term residual impact on our financial results in 2024.In January 29
2024, two putative class actions were filed against us based on the incidentand one of these actions is still pending. We are spending, and plan to expend in the future, additional resources to continue to protect against, or to address
problems caused by, business interruptions, and data security breaches.
In addition, customers and suppliers may impose additional cybersecurityrequirements on us as a result of the incident we experienced in October 2023, and some customers and suppliershave made such requests to date.We cannot guarantee that we will be able to satisfy such additional requirements,and failure to satisfy such requirements could result in a loss of revenue or diminished productavailability that could materially affect our business adversely.We also may be perceived as a more vulnerable target of the cyber hackers as a result of the October 2023 incident.If the Company is subject to more attacks in the future as a result ofthe recent incident, this could materially affect our business adversely.
We maintain cyber insurance, subject to certain retentions and policy limitations.With respect to the October 2023 cybersecurity incident, we have a $60 million insurance policy, following a $5 million retention.
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 in distribution.
Industry consolidation among health
care product distributors and
manufacturers, price competition, product unavailability, whether due to our inability to gain access to products or
to interruptions in manufacturing supply, or the emergence of new competitors, also could increase competition.
Consolidation has also increased among manufacturers of health care
products, which could have a material
adverse effect on our margins and product availability.
We
We could be subject to charges and financial losses in the
event we fail to satisfy minimum purchase commitments contained
in some of our contracts.
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 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.
The repeal or judicial prohibition on implementation of the Affordable Care Actcould materially adverselyaffect our business.
The U.S. Patient Protection and Affordable Care Act, as amended by the Health Care andEducation ReconciliationAct, each enacted in March 2010, as amended (the “ACA”), greatly expandedhealth insurance coverage in theUnited States and has been the target of litigation and Congressional reform efforts since its adoption.The U.S.Supreme Court, in upholding the constitutionality of the ACA and itsindividual mandate provision in 2012,simultaneously limited ACA provisions requiring Medicaid expansion,making such expansion a state-by-statedecision.In 2017, the U.S. Congress effectively repealed the ACA’sindividual mandate provision by eliminatingthe financial penalty for non-compliance.In the most recent ACA litigation, a federal appeals court foundtheindividual mandate to be unconstitutional, and returned the case to a lower federalcourt for consideration ofwhether the remainder of the ACA could survive the excision of the individualmandate.This decision wasappealed to the U.S. Supreme Court, and a decision is expected soon.Any outcome of this case that changes theACA, in addition to future legislation, regulation, guidance and/or ExecutiveOrders that do the same, could have asignificant impact on the U.S. healthcare industry and our operations.
The health care industry is experiencing changes due to political, economic
and
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
significant changes
driven by various efforts to reduce costs, including, among other factors: trends
toward managed care; collective
purchasing arrangements and consolidation among office-based health care practitioners;
and
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 business could be materially adversely affected.
The ACAgreatly expanded health insurance coverage in the United States and has beenthe target of litigation and Congressional reform efforts since its adoption.Any outcome of future court cases that change the ACA, in addition to future legislation, regulation, guidance and/or Executive Ordersthat do the same, could have a significant impact on the U.S. healthcare industry and the ability or willingnessof individuals to engage with it.
2930
Expansion of
group purchasing organizations (“GPO”)GPOs, DSOs or provider networks
and the multi-tiered
costing
structure may place us at a
competitive disadvantage.
The
medicalhealth care products industry is subject to a multi-tiered costing structure,
which
which can vary by manufacturer
and/or
product.product. Under this structure, certain institutions can obtain more
favorable
favorable prices for
medicalhealth 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 GPOsDSOs 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.
In addition, such organizations mayestablish direct relationships with manufacturers, thereby either eliminatingor reducing the services historically provided by distributors.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
develop relationships with existing and
emerging provider networks,
GPOs and
GPOs,DSOs, we cannot guarantee that such terms will
be obtained or contracts
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-
partythird-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 theseadditional 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 ECONOMICMACRO-ECONOMIC AND POLITICAL RISKS
Uncertain global
and domestic macro-economic and political conditions
could
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
United States, Europe, Asia, and other parts of the
world could materially adversely
affect our results
of operations
and financial condition.
These uncertainties, include, among other things:
•
election results;
•
changes to laws and policies governing foreign trade,
(including, withouttariffs and sanctions, or greater
limitation, the United States-Mexico-Canada Agreement (USMCA), the EU-UK Trade and Cooperation Agreement of December
2020, and other international trade agreements);
•
greater restrictions on
imports and exports;
•
supply chain disruptions due to social issues;disruptions;
•
changes in laws and policies governing health care or data privacy;
•
tariffs and sanctions;
•
changes to the relationship between the United States and China;
•
sovereign debt levels;
•
the inability of political institutions 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;
•
interest rate fluctuations, and strengthening of the dollar, which have and will continue to
impact our increases in interest rates;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;time andpass through to our customers price increases we may receive;
31
•
changes in tax rates and the availability of certain tax deductions;
•
increases in labor costs or health care costs;
•
the threat or outbreak of war, terrorism or public unrest;unrest (including, without limitation, the war in
Ukraine, the Israel-Gaza war and
other unrest and threats in the Middle East,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.
30
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 experiencedinflationary pressures, including higher freight costs and interest expense.Although inflation impacts both our revenues and costs, the depth and breadth of our product portfolio oftenallows us to offer lower-cost national brand solutions or corporate brand alternatives to our more price-sensitivecustomers 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 havematerially impacted our results of operations in fiscal year 2023.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
The lawsrespects, and
regulations that govern our businessbelieve we have effective compliance programs and
operations areother controls
in place to ensure substantialcompliance.However, compliance is not guaranteed either now or in the future as certain laws, regulationsand guidance may be subject to varying and evolving
interpretations that couldaffect our ability to comply, as well as, interpretations, future changes, additions and enforcement approaches,
(including in light
of political
changes, suchas with respect to the new administration of President Biden) thatchanges.
affect our abilityWhen we discoversituations of non-compliance we seek to
comply.remedy them and bring
For example, President Biden’s administration has authorized and encouraged a freeze on certain federal regulationsthat havebeen published but are not yet effective, as well as a review of all federal regulationsissued during PresidentTrump’s administration.the affected area back into compliance.
Changes
with respect to the applicable laws,
regulations and
regulations mayguidance described below
may require us to update or
reviserevise our operations, services, marketing practices, and compliance programs
and controls, and may impose
additionaladditional and unforeseen costs on us, pose new or previously immaterial
risks to us, or
may otherwise have a
materialmaterial 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
the form, content or timing
ofof regulatory actions, and their impact on the health care industry and on
our
our business and operations.
Global efforts toward healthcare cost containment continue to exert pressure on
product pricing.
In the United
States, in addition to 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.
We and our subsidiaries may be required to report drug pricing data under federal laws andregulations.At the state level, several states have adopted
laws, that
mayapply to some of our operations, that require drug manufacturers,
including re-packagers or re-labelers, 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
introducedintroduced and regulations
proposed which, if enacted or finalized,
respectively, would impact drug pricing and
related costs.
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,
physicians, dentiststeaching hospitals, and
teaching hospitals.certain othernon-physician practitioners.
We orand our subsidiaries may be required to report information under certain state
32
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 satisfying the above laws and requirements,
such compliance imposes additional costs on us
and the requirements are sometimes
ambiguous.unclear.
In the United States, government actions to seek to increase
health-health-relatedrelated price transparency may also affect our business.
31
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
payment for, pharmaceuticals and medical
devices
human cells, tissue and
cellular and tissue-based products (“HCT/P
products”).products.
Among the federal laws
with which we must comply are the Controlled Substances
Act,
the
U.S. Food, Drug, and CosmeticFDC Act,
asamended (“FDC Act”), the Federal Drug Quality and Security Act, including
DSCSA,
Drug Supply Chain Security Act(“DSCSA”), and Section 361 of the Public Health
Services
Act. AmongAct and Section 401 of the Consolidated Appropriations Act
of the Social Security Act.Among other
things, such laws, and the regulations
•
regulate the
storageintroduction, manufacture, advertising, marketing and
distribution,promotion,sampling, pricing andreimbursement, labeling, packaging,
storage, handling,
reporting,returning or
recalling, reporting, and distribution of, and record keeping
introduction, manufacturing and marketing of for drugs, HCT/P products
and
and medical devices,
including
requirements with respect to unique medical device identifiers;
•
subject us to inspection by the
U.S. FoodFDA and
Drug Administration (“FDA”)and the U.S. DrugEnforcement Administration (“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 payableunder 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;
•
impose on us reporting requirements if a pharmaceutical, HCT/P product or
medical device causes
serious illness, injury or death;
•
require manufacturers, wholesalers,
repackagersre-packagers 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
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
certain clinical decision support software.
On September 27, 2019, the FDA issued a suite of guidance documentson digital health products, which incorporated applicable Cures Act standards,and on September 28, 2022, the FDA subsequently finalized certain of these guidance documents, includingregarding the types of clinical decision support tools and other software that are exempt from regulation by the FDA asmedical devices, and the FDA continues to issue new guidance in this area.
Certain of our businesses involve the
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 withrespect to these products. Some of our imaging software is regulated as a medical device which subjects our businessesto substantial additional
requirements, costs and potential enforcement actions or liabilities
for noncompliance
for noncompliance with respect to
thesethese products.
33
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 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)
, and state Medicaid agencies, have recently increased
their regulatory and enforcement
activitiesactivities and, in particular, the DEA
has heightened enforcement activities due to the opioid crisis in the United States.
Our
business is also subject to
requirements of similar and other foreign governmental
laws and regulations
affectingaffecting our operations abroad.
The failure to comply with any of these laws
andor regulations, or new
interpretations
interpretations of existing laws and
regulations,regulations, or the imposition of any additional laws and regulations,
could
could materially adversely affect our business.
The costs
to us associated with complying with the various applicable
statutes
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
compliant32
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
not complied with these laws, we are
potentiallypotentially subject to
penalties, including warning letters, substantial civil and
criminal penalties,
criminal penalties, mandatory recall
of product, seizure of product
and injunction, consent decrees and suspension
or limitation of
paymentsto us, product sale and
enter into settlement agreements to resolve allegations of non-compliance,
we
we could be required
to make settlement
payments or be subject to civil and criminal penalties, including
fines and the loss of licenses.
Non-complianceNon-compliance with government requirements could also adversely affect our ability
to participate
to participate in important
federal and state
government health care programs, such as Medicare
and Medicaid,
and Medicaid, and damage our reputation.
The EU Medical Device Regulation
(“MDR”) may adversely affect our business.
The EU Medical Device Regulation No. 2017/745 (“EU MDR”) was meantto become applicable three years afterpublication (in May 2020). However, on April 23, 2020, to allow EEA national authorities, notified bodies,
manufacturers and other actors to focus fully on urgent priorities related to the COVID-19pandemic, the EuropeanCouncil and Parliament adopted Regulation 2020/561, postponing the dateof application of the EU MDR by oneyear (to May 2021).The EU MDR,
applicable since May 26, 2021, significantly modifies and intensifies
the regulatory
compliance
requirementsrequirements for the medical device industry as a whole.
Once applicable,Among other things, the EU
MDR will among other things: MDR:
•
Strengthenstrengthens the rules on placing devices on the market and
reinforcereinforces surveillance
once they are
available;
•
Establishestablishes explicit provisions on manufacturers’
responsibilities
responsibilities for the follow-up of the quality,
performance and safety of devices placed on the market;
•
Improveimproves the traceability of medical devices throughout the supply chain
to the end-user
or patient
through a unique identification number;
•
Setsets up a central database to provide patients, healthcare professionals and
the public with
comprehensive information on products available in the EU;
•
Strengthenstrengthens rules for the assessment of certain high-risk devices, such
as
as implants, which may have to
undergo an additional check by experts before they are placed on the market; and
•
Identifyidentifies importers and distributors and medical device products through
registration in a database
(
EudaMedEUDAMED not due,
for the time being, until
2022 and after)the end of 2027 atthe earliest, as mentioned above).
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.
MedicalAs mentioned above,pursuant to Regulation 2023/607 and subject to certain conditions, medical devices
that
have(i) obtained a certificate been assessed and/or certified under the EU Medical Device Directive
mayfrom May 25, 2017, (ii) which was
still valid on May 26, 2021, and (iii)has not been subsequently withdrawn may, for the moment, continue to be placed on the market or put into service
until
2024 (or until the expiry of their certificates, if applicable and earlier);December 31, 2027 for higher risk devices or December 31, 2028 for medium
however,and lower risk devices.Nevertheless, EU MDR requirements regarding the
distribution,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., 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
the
European Economic Area.EEA.
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
or rewardthe referral
of a patient or
ordering,ordering, purchasing, leasing or arranging for, or recommending ordering, purchasing or leasing of,
items or
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
care professionals from referring a patient
to an entity with which the physician
(or(or family member) has a
33
financial relationship, for the furnishing of certain designated
health services
(for example,(for example, durable medical
equipment and medical supplies), unless an exception applies.
Violations of Anti-Kickbackstatutes or the Stark Law may be enforced as violations of the federal False ClaimsAct. The fraud and abuse laws and regulations have been subject to 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 applicable false claims laws,
and who may receive up to 30% of total government recoveries.
Penalties under fraud and abuse laws may be
severe,
including treble damages and
could result in significantsubstantial civil
and criminal penalties
and costs,under
including the
federal False Claims Act, as well aspotential loss of licenses and the
ability to participate in federal and state
health care programs,
andcriminal penalties,or imposition of a corporate compliance monitor, which could
have a material adverse effect on our
these measures may be interpreted or applied by a prosecutorial,
regulatory or
regulatory or judicial authority in
a manner that
could require us to make changes in our operations or incur substantial
defense
defense and settlement
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
statelaws have
their own penalties which may be in addition to federal False Claims
Act penalties, as well as other fraud
and abuse
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 other health care providers,
on the other.
As a result, we regularly review and revise our marketing practices
as necessary to facilitate
Our aspirations, goals and disclosures related to environmental, socialand governance matters and the focus on regulators and private litigants among other things on related claims madeby companies and funds expose us to numerous risks, including reputational, financial, legal and other risks,that could have an adverse impact on us, including on our stock price.California has adopted stringent new climate disclosure requirements,as has the EU, and the SEC appears about to adopt expansive new disclosure requirementson climate change. In the EU, the Directive No. 2019/1937 of October 23, October 2019,
on the protection of persons who report breaches of
Union law,
which organizes the legal protection of
whistleblowers must be implemented by EUwhistleblowers.
member states byDecember 17, 2021. 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.
channels.All EU Member States other than Poland and Estonia have now implementedtheWe 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 which has to beimplemented by EU members states by July 6, 2024, at the latest.By amending Directives No. 2004/109, No. 2006/43, No. 2013/34and Regulation No. 537/2014, the CSR Directive strengthens the existing rules on non-financialreporting by setting new requirements for large companies to publish sustainability-related information and, in particular, disclose details abouttheir risks and impacts on environmental matters.
35
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.
Our businesses are generally subject to
numerous other laws and regulations that could impact our financial
results, including, without limitation,
securities, antitrust, consumer protection, and marketing laws and regulations.
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 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.
We may
determine to enter into settlements, make payments, agree to consent decrees
or enter into other arrangements to
resolve such matters.
Intentional or unintentional failure to comply with
settlement agreementsor 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.
34
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.
Our businesses that involve physician and dental practice management
products, and our specialty home medical
supply
business,businesses, include electronic information technology systems
that
that store and process personal health,
clinical,clinical, financial, and other sensitive information of individuals.
These information technology systems may be
vulnerable vulnerable to breakdown, wrongful intrusions, data breaches and
malicious attack, which
could require us to
expend expend significant resources to eliminate these problems and address
related security
concerns, and could involve
claims claims against us by private parties and/or governmental agencies.
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 personal information, such as
theHIPAA, CAN-SPAM, TCPA,
HIPAA, the Controlling the Assault ofNon-Solicited Pornography and Marketing Act, the Telephone Protection and Electronic Protection Act of 1991,
Section 5 of the Federal Trade Commission
FTC Act, the CCPA, and the CPRA that becomesbecame effective on January 1,
2023.
Laws and regulations relating to
privacy and data 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,
substantialsubstantial 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
to
reflect these legal requirements, which
could have a material adverse
effect on our operations.
In addition, the European Parliament and the Council of the
European UnionEU adopted
have adopted the GDPR
whicheffective from May 25, 2018,increaseswhich increased privacy rights for
Data Subjects, including individuals
in Europe, or “Data Subjects”,
including individuals who are our customers,
suppliers and
employees.
The GDPR extended the scope of responsibilities for data controllers
and data processors,
andand generally imposes increased requirements and potential penalties
on companies,
on companies, such as us, that
are eitherestablished in the EU and process personal data of Data Subjects (regardlessthe Data Subject location), or that are not established in the EU but that offer goods or
services to Data Subjects
in the EUor monitor their behavior
(including bycompanies based outside of Europe).in theEU. Noncompliance can result in penalties of up to the greater of EUR 20
million, or 4% of global company
revenues. revenues (sanction that may be public), and Data Subjects
also have the right tomay seek
compensation for damages.
EU memberMember states may individually
impose impose additional requirements and penalties regarding certain
matters,limited
matters (for which the GDPR left some 36
room of flexibility), such as employee personal data.
With respect to the personal data it protects, the GDPR requires, among other things, controller accountability, consents from Data Subjects or another acceptable legal
basis to process the personal data, notification within 72 hoursof 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 notablyto information, access, rectification, erasure of the personal data and the right to object to the processing. On August 20, 2021, China promulgated the PIPL, which took effect on November1, 2021.The PIPL imposes specific rules for processing personal information and it also specifiesthat the law shall also apply to personal information activities carried out outside China but for the purposeof providing products or services to PRC citizens.Any non-compliance with these laws and regulations may subjectus 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 resultsof operations.The PIPL carries maximum penalties of CNY50 million or 5% of the annual revenueof entities that process personal data. In the United States, the CCPA, which increases the privacy protections afforded California residents, 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 new obligations imposed by the CCPA depends in part on how particular regulators interpret and apply
them, and because the CCPA is relatively new, them.
and its implementing regulationsRegulations 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.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
expandexpand the CCPA, including by providing
consumers with additional rights with respect to their personal information, and
and creating a new state agency to
enforce CCPA and CPRA.
The CPRA
will comecame into effect on January 1, 2023, applying
to information collected
by businesses on or after January 1, 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.
While we believe we have
substantially compliant programs and controls in place to comply with
the GDPR, CCPA,
PIPL and CPRA
requirements,requirements, our compliance with
these measures data privacy and cybersecurity lawsis likely to impose additional costs
on us,
and we cannot predict whether the
interpretations of the requirements, or
changes in our practices in response
toto 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
35
standards, such as HIPAA and the Payment Card Industry Data Security Standards, which require the protection of
the privacy and security of those records.
Our products or services
may be used as part of these customers’
comprehensive data security programs, including in connection with their
efforts to comply with applicable data
privacy and security 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.
Additionally, underUnder the
EU GDPR, health data belong to the category of “sensitive data”
and benefit
and benefit from specific
protections.protection.ProcessingProcessing of such data is generally prohibited, except for specific exceptions.
Certain of our businesses involve the manufacture and sale of electronic
health record
(“EHR”)(EHR) systems and other
products linked to 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
by the Office of theNational Coordinator for Health InformationTechnology of HHS (“ONC”).ONC.
In order to maintain
certification of
our EHR products, we must satisfy the changing governmental
standards.
If any
of ourother EHR systems
do not meet
these standards, yet have been relied upon by health care providers
to receive
federal incentive
payments, we may
be exposed to risk, such as under federal health care
fraud and abuse laws,
including the False
Claims Act.
WhileAdditionally, effective September 1, 2023, the OIG for HHS issued a final rule implementing civilmoney penalties for information blocking as established by the Cures Act.OIG incorporated regulations published 37
by ONC as the basis for enforcing information blocking penalties.Each information blocking violation carries a $1 million penalty.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 compliance programs and controls, 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 and information blocking.
reportingfunctionality.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,
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 to safely and effectively exchange and use exchanged
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.
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
be materially
adversely affected by legislation resulting from these initiatives.
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
and medical 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
private-label corporate brandbusiness 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
36
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 enforcementactions and/or sanctions. Government-imposed import policies and legislation regulating theimport of goods and prohibiting the use of forced labor or human trafficking could result in delays or the inability to importgoods in a timely manner that are necessary to our operations, and such policies or legislation could alsoresult 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 forcedlabor or through human trafficking, as a result of legislative and governmental policy initiatives, we may besubject to increasing potential delays, added costs, supply chain disruption and other restrictions.
GENERAL RISKS
Security risks generally associated with our information systems and ourtechnology products and services couldmaterially adversely affect ourOur business
and ouroperations, results of operations,
could becash flows, financial condition
materially adversely affected ifand liquidity may be negativelysuch products, services or systems (or third-party systems we rely on) are interrupted,events, are subject to cyberattacks or fail for any extended period oftime.
38
impacted by the effects of disease outbreaks, epidemics, pandemics, or similar wide-spreadpublic health concerns and other natural or man-made disasters, such as terrorism, civilunrest, fire, and extreme weather Our business operations, results of operations, cash flows, financial conditionand liquidity may be negatively impacted by the effects of disease outbreaks, epidemics, pandemics, similar wide-spreadpublic health concerns and other natural or man-made disasters, such as terrorism, civil unrest, fire,and extreme weather (“disasters”).For example, as a global healthcare solutions company, the COVID-19 pandemic and the governmental responsesto it had, and may again have, a material adverse effect on
information systems (IS) in our business,
to obtain, rapidly process, analyze, manage results of operationsand
store customer,cash flows and may product, supplierresult in a material adverse effect on our financial condition and
employee data to,liquidity.The impacts and potential impacts fromthe COVID-19 pandemic included, and could include as a result of other disasters,the following, among other
things: impacts:
•
significant volatility in supply, demand and selling prices for personal protective equipment (PPE), test
maintainkits and
manage worldwide systemsrelated products;•
reduction in peoples’ ability and willingness to
facilitatebe in public; •
reduction in peoples’ ability and willingness to seek elective care;
•
interrupted operations of industries that use or manufacture the
purchaseproductswe distribute; •
impact of adapted business practices; •
significant changes in political conditions; ���
volatility in the financial market; 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 ofcustomers;•
process payments to suppliers; and
•
provide products and services that maintain certainunavailability or impairment of our
customers’ electronicmanufacturing, distribution, or other
medicalfacilities, or
dentalfirmwide systemsrecords (including protected healthsuch as our information of their patients).
systems.
Information security risks have generally increased in recent years, and acyberattack that bypasses our IS securitysystems (including third-party systems we rely on) causing an IS security breachmay lead to a material disruptionof our IS business systems (including third-party systems we rely on) and/orthe loss of business information, aswell as claims against us by affected parties and/or governmental agencies, and involvefines and penalties, costsfor remediation, and substantial defense and settlement expenses. In addition,we develop products and provideservices to our customers that are technology-based, and a cyberattackthat bypasses the IS security systems of ourproducts or services causing a security breach and/or perceived securityvulnerabilities in our products or servicescould also cause significant loss of business and reputational harm, and actualor perceived vulnerabilities may leadto claims against us by our customers and/or governmental agencies.In particular, certain of our practicemanagement products and services purchased by health care providers, suchas physicians and dentists, are used tostore and manage patient medical or dental records.These customers are subject to laws and regulations whichrequire that they protect the privacy and security of those records, and ourproducts may be used as part of thesecustomers’ comprehensive data security programs, including in connectionwith their efforts to comply withapplicable privacy and security laws. Perceived or actual security vulnerabilitiesin our products or services, or theperceived or actual failure by us or our customers who use our productsto comply with applicable legalrequirements, may not only cause reputational harm and loss of business,butThe impact from disasters may also
lead to claims against us byour customers and/or governmental agencies and involve damages, fines andexacerbate other risks discussed herein,
penalties, costs for remediation, andany of which could have a materialsubstantial defense and settlement expenses. In addition, a cyberattackon a third-party that we use to manage aportion of our information systems could result in the same effects.Additionally, legislative or regulatory actionrelated to cybersecurity may increase our costs to develop or implementnew technology products and services.Furthermore, procedures and safeguards must continually evolve to meet newIS challenges, and enhancingprotections, and conducting investigations and remediation, may impose additionalcostsadverse effect on us.
Finally, our business may be interrupted by shortfalls of IS systems providers engaged by our customers, suchasInternet-based services upon which our customers depend to access certain ofour products.Our global operations are subject to inherent risks that could materially
adversely affect our business.
Our global operations are subject to risks that
maycould materially adversely affect our business.
The
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
and contract
manufacturing in foreign markets;
37
•
fluctuations in the value of foreign
currencies (including, without limitation,in connection withBrexit);currencies;
•
uncertainties relating to the EU-UK Tradetrade agreements and Cooperation Agreement of December 2020, including
for example potential implementation problems such as border delays, aswell as potential changes tothe U.K. regulatory scheme to replace EU requirements;international trade relationships;
•
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 andthe 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; and
•
risks associated with climate change, including physical risks such as
public health emergencies, including COVID-19.impacts from extreme weather
events and other potential physical consequences, regulatory and technologicalrequirements, market developments, stakeholder expectations and reputational risk.
39
Our future success is substantially dependent upon our senior
management, and our revenues and profitability
depend on our relationships with capable sales
representatives,service technicians, and other personnel
whointeract directly with our customers, as well as
customers, suppliers
customers, suppliers and manufacturers of
the products that we distribute.
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.
TheIn November 2022, Mr.Bergman’s employment agreement was extended through December 31, 2025.Although the Company has an internal succession plan for its senior leadership team, including Mr. Bergman, the loss of the services of Mr.
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 ratesareincreasing workplace concerns, and we may not be successful in
attracting
attracting and retaining key personnel.
Additionally, Additionally, our future revenues and profitability depend on our ability to
maintain satisfactory relationships with
qualified sales
representatives, service technicians, and other personnelwho interact directly with our customers, aspersonnel 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,
future, our business may be materially
adverselyadversely 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.
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 20202023 fiscal year.
We rely on information systems in our business to obtain, rapidly process, analyze, manage and store customer,
product, supplier and employee data to, among other things: maintainand manage multiple information systems worldwide to facilitate the purchase and distribution of thousands ofinventory items from numerous distribution centers; receive, process and ship orders on a timely basis; manage theaccurate billing and collections for thousands of customers; process payments to suppliers and vendors; provideproducts and services that maintain certain of our customers’ electronic medical or dental records (includingprotected health information of their patients) and maintain and manage global human resources, compensationand payroll systems.For these purposes, we define “information systems” in a manner consistent with the definitioncontained in the new rules recently adopted by the SEC to mean “electronic information resources, owned or usedby the registrant, including physical or virtual infrastructure controlled by such information resources, or componentsthereof, organized for the collection, processing, maintenance, use, sharing, dissemination, or dispositionof the registrant's information to maintain or support the registrant's operations.” Cybersecurity Risk Management and Strategy We have developed and implemented a cybersecurity risk mitigation strategy intended to protect our information
systems.Our cybersecurity risk mitigation strategy is designedso that the Company’s cybersecurity program is aligned with generally accepted cybersecurity standards and frameworks,in particular the NIST Cybersecurity Framework, or “NIST CSF,” and our Company is externally audited, or certified, with ISO27001 partial scope. We maintain an Office of Cybersecurity (“OCS”), led by our Chief Information Security Officer (“CISO”), which
oversees the operations of our cyber risk mitigation strategy.The OCS is a cross-functional, enterprise-wide management team, which continuously evaluates our global cybersecurityprogram’s effectiveness and is focused on maintaining and protecting our information systems.In overseeing the operations of our cyber risk mitigation 40
strategy, the OCS partners with our Global Technology Solutions team, which is led by our Chief Technology
Officer (“CTO”) and is comprised of over one hundred professionals that support our informationsystems and operations.Our cyber risk mitigation strategy includes monitoring forand addressing risks that materialize within the Company’s information systems, as well as at our third-party vendors, suppliers and other third-party business
Our CISO reports to our CTO.Our CTO,who also serves as Senior Vice President,has more than 30 years of experience leading large-scale global IT organizations and received a Bachelor of Business Administrationin Business Computer Information Systems and a Master of Business Administrationfrom Hofstra University.See also
Our Vice President, Global CISO, who also serves as Vice President and Head of the Office of Cyber Security, is a National Security Agency Certified Information Systems
Securities Engineer, has nearly 30 years of experience leading global cybersecurity programs, and receiveda BS, Electrical Engineering and Computer Science from Lafayette College,and a Master of Science, Business, Information Technology Management from Johns Hopkins University.The cybersecurity risk mitigation strategy is also overseen by senior managers who are members of our ExecutiveSteering Committee, comprised of the Company’s most senior technology, legal and internal auditing officers.Our CEO is regularly briefed on issues, incidents, and developments, and our Board oversees our risk mitigationstrategy principally through its Audit Committee and Regulatory, Compliance and Cybersecurity Committee, as described in more detail below. Our cybersecurity risk management program includes, among otherelements: ●
risk assessments designed to help identify material cybersecurity risksto our information systems; ●
a security team principally responsible for managing our (i) cybersecurityrisk assessment processes, and (ii) defining cybersecurity control standards;
●
the use of expert external service providers to assess, test or otherwise assistwith aspects of our cybersecurity controls, and to respond to specific cybersecurity threats;
●
the review and assessment of past cybersecurity incidents with a view to learningfrom those events to further strengthen our cyber risk mitigation strategy;
●
a written cybersecurity incident response plan that includes proceduresfor responding to cybersecurity incidents; and
●
a Global Information Security Policy, together with more detailed information security policies,
procedures, standards, and guidelines.
In addition, all employees with systems access are required to participatein mandatory annual cybersecurity and anti-phishing courses, along with compliance programs.Our employees who perform financial gatekeeper roles also receive additional mandatory annual data security training specificto spoofing, phishing and similar data security threats.Per written Company policies, employees are also requiredto safeguard confidential information. Our cybersecurity risk strategy is integrated into our overall enterpriserisk management program, and our cybersecurity team is supported by and connected with the enterprise riskmanagement team. Prior Cybersecurity Incidents In addition to immaterial and unrelated prior incidents at certain ofour subsidiaries, in October 2023 Henry Schein experienced a cybersecurity incident that primarily affected the operations of ourNorth American and European dental and medical distribution businesses.Henry Schein One, our practice management software, revenuecycle management and patient relationship management solutions business, wasnot affected, and our manufacturing businesses were mostly unaffected. Once we became aware of the issue, we took stepsto assess, contain and remediate this incident.We restored affected systems and applications, our distribution operations resumed and we reactivated our ecommerce platform.We also notified law enforcement and our employees, customers, suppliers and investors, informing them of both the incident and management’s efforts to mitigate its impact on our daily
operations and data maintained on the Company’s systems.Subsequently, on or about November 8, 2023, we determined that the threat actor obtained personal and sensitive informationmaintained on our systems belonging to certain third parties and since that date we have notified affected and potentially affected partiesas appropriate. 41
The scope of personal and sensitive data impacted is still under investigation.On November 22, 2023, we experienced a related disruption to our ecommerce platform and relatedapplications, which has since been remediated.As described in “Management’s Discussion & Analysis – 2023 Compared to 2022, the incident adversely impacted our financial results for the fourth quarter and full year 2023.We also expect some short-term residual impact on our financial results in 2024. It is part of the mission of our cybersecurity risk mitigation strategy to constantlyevolve our cybersecurity defenses to adapt to evolving risks, and to learn from prior incidents, and wehave evaluated and continue to evaluate the incident with the assistance of third-party expert consultants.Members of the Audit Committee and Regulatory, Compliance and Cybersecurity Committee of our Board of Directors areconducting a review of the October 2023 cybersecurity incident, including the measures undertaken in response to the incident.
Our Board has a Regulatory, Compliance and Cybersecurity Committee that focuses on cybersecurity oversight,
together with other board committees, principally the Audit Committee.The purpose of the Regulatory, Compliance and Cybersecurity Committee is to assist the Board by providingguidance to, and oversight of, the Company’s senior management responsible for assessing and managing Company-wide regulatory, corporate
compliance and cybersecurity risk management programs.The primary responsibilities of the Regulatory, Compliance and Cybersecurity Committee are to (i) discuss cybersecuritystrategic decisions, issues, challenges and opportunities relating thereto, (ii) provide expertise to guide assessmentand monitoring of Company-wide regulatory, corporate compliance and cybersecurity risk management budgeting, spending and capital investment,
(iii) monitor progress and status of the Company’s regulatory, corporate compliance and cybersecurity risk
management programs, (iv) review and evaluate major regulatory, corporate compliance and cybersecurity risk
management initiatives to identify emerging and future opportunities for synergy or toleverage regulatory, corporate compliance and cybersecurity risk management investmentsmore effectively and cost efficiently, (v) report to the Audit Committee on regulatory, corporate compliance and cybersecurity risk management matters
reviewed by the Regulatory, Compliance and Cybersecurity Committee that may impact the Company’s financial
reporting and (vi) be generally available to, and communicate with,the Company’s senior management, and to inform the Board in the areas described above.
Our CISO and CTO, along with other key executives who are part of our ExecutiveSteering Committee, review strategy, policy,program effectiveness, standards, enforcement and cybersecurity issue managementwith the Board’s Regulatory,Compliance and Cybersecurity Committee on at least a quarterly basis andwith the Audit Committee on at least a bi-annual basis.Our CTO meets with Board members outside of the formal meetings on a regular basis as well as in connection with specific cybersecurity issues orthreats. Within our health care distribution segment (for properties with more than 100,000 square feet) we leaseand/or own approximately 5.7 million square feet of properties, consisting of 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, Morocco, the Netherlands, New Zealand,Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, UnitedArab Emirates and the United Kingdom. Lease expirations range from 2024 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. For a discussion of Legal Proceedings, see
Consolidated Financial Statements included under Item 8.
42
ITEM 4.Mine Safety Disclosures Not applicable.
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 ofthe Nasdaq Stock Market, or Nasdaq, under the symbol HSIC.
On February 20, 2024, there were approximately 107,000 holdersof record of our common stock and the last reported sales price was $75.64.A substantially greater number of holders of our common stock are “streetname” or beneficial holders, whose shares are held by banks, brokers and other financialinstitutions. Purchases of Equity Securities by the Issuer
Our share repurchase program, announced on March 3, 2003, originallyallowed us to repurchase up to two million shares pre-stock splits (eight million shares post-stock splits) of our commonstock, which represented approximately 2.3% of the shares outstanding at the commencementof the program.Subsequent additional increases totaling $4.9 billion, authorized by our Board, to the repurchaseprogram provide for a total of $5.0 billion (including $400 million authorized on February 8, 2023) of sharesof our common stock to be repurchased under this program.
As of December 30, 2023,we had repurchased approximately $4.7 billion of common stock (90,394,805shares) under these initiatives, with $265 million available for future common stockshare repurchases. The following table summarizes repurchases of our common stockunder our stock repurchase program during the fiscal quarter ended December 30, 2023:
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)
10/1/2023 through 11/4/2023
-
-
-
5,048,074
11/5/2023 through 12/2/2023
-
-
-
4,529,764
12/3/2023 through 12/30/2023
692,441
$
72.32
692,441
3,499,205
692,441
692,441
(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 2023 or 2022.We currently do not anticipate declaring any cash or stock dividends on our commonstock 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 andwill depend upon the earnings, financial condition, capital requirements, levelof indebtedness, contractual restrictions with respect to payment of dividends and other factors.
43
$50
$100
$150
$200
$250
$300
December
2018
December
2019
December
2020
December
2021
December
2022
December
2023
Henry Schein, Inc.
Dow Jones US Health Care Index
NASDAQ Composite Index
Stock Performance Graph
The graph below compares the cumulative total stockholder returnon $100 invested, assuming the reinvestment of all dividends, on December 29, 2018, the last trading day before thebeginning of our 2019 fiscal year, through the end of our 2023 fiscal year with the cumulative total return on $100invested 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 TOTALRETURN ASSUMES $100 INVESTED ON DECEMBER 29, 2018
ASSUMES DIVIDENDS REINVESTED
December 29,
December 28,
December 26,
December 25,
December 31,
December 30,
2018
2019
2020
2021
2022
2023
Henry Schein, Inc.
$
100.00
$
110.31
$
109.05
$
124.11
$
132.28
$
125.37
Dow Jones U.S. Health
100.00
123.48
140.83
175.06
168.44
171.61
NASDAQ Stock Market
100.00
138.27
198.34
244.03
164.56
238.01
ITEM 6.
[Reserved]
44
ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations Cautionary Note Regarding Forward-Looking Statements In accordance with the “Safe Harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, we provide the following cautionary remarks regarding important factorsthat, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptionsexpressed or implied herein.All forward-looking statements made by us are subject torisks and uncertainties and are not guarantees of future performance.These forward-looking statements involve known and unknownrisks, uncertainties and other factors that may cause our actual results, performance and achievementsor industry results to be materially different from any future results, performance or achievements expressed or implied by suchforward-looking statements.These statements are generally identified by the use of suchterms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,”“to be,” “to make” or other comparable terms.Factors that could cause or contribute to such differences include, but are not limitedto, those discussed in this Annual Report on Form 10-K, and in particular the risks discussed underthe caption “Risk Factors” in Item 1A of this report and those that may be discussed in other documents wefile with the Securities and Exchange Commission (“SEC”).
Risk factors and uncertainties that could cause actual results to differ materially fromcurrent and historical results include, but are not limited to: our dependence on third parties forthe manufacture and supply of our products; our ability to develop or acquire and maintain and protect new products (particularlytechnology products) and technologies that achieve market acceptance with acceptable margins; transitionalchallenges associated with acquisitions, dispositions and joint ventures, including the failureto achieve anticipated synergies/benefits, as well as significant demands on our operations, information systems,legal, regulatory, compliance, financial and human resources functions in connection with acquisitions, dispositions andjoint ventures; certain provisions in our governing documents that may discourage third-party acquisitions of us; adversechanges in supplier rebates or other purchasing incentives; risks related to the sale of corporate brand products;security risks associated with our information systems and technology products and services, such ascyberattacks or other privacy or data security breaches (including the October 2023 incident); effects of a highly competitive (including, withoutlimitation, competition from third-party online commerce sites) and consolidatingmarket;changes in the health care industry; risks from expansion of customer purchasing power and multi-tieredcosting structures; increases in shipping costs for our products or other service issues with our third-party shippers; generalglobal and domestic macro-economic and political conditions, including inflation, deflation, recession, ongoingwars, fluctuations in energy pricing and the value of the U.S. dollar as compared to foreign currencies, and changesto other economic indicators, international trade agreements, potential trade barriers and terrorism; geopoliticalwars; failure to comply with existing and future regulatory requirements; risks associated with the EU MedicalDevice Regulation; failure to comply with laws and regulations relating to health care fraud or otherlaws and regulations; failure to comply with laws and regulations relating to the collection, storage and processing ofsensitive personal information or standards in electronic health records or transmissions; changes in tax legislation;risks related to product liability, intellectual property and other claims; risks associated with customs policiesor legislative import restrictions; risks associated with disease outbreaks, epidemics, pandemics (such as the COVID-19pandemic), or similar wide-spread public health concerns and other natural or man-made disasters; risks associated with ourglobal operations; litigation risks; new or unanticipated litigation developments and the statusof litigation matters; our dependence on our senior management, employee hiring and retention, and our relationshipswith customers, suppliers and manufacturers; and disruptions in financial markets.The order in which these factors appear should not be construed to indicate their relative importance or priority.
We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control
or predict.Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results.We undertake no duty and have no obligation to update forward-looking statements except as required by law.
45
Where YouCan 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 relationspage of our website (www.henryschein.com) and the social media channels identified on the Newsroom page of our website.
Recent Developments
During the years ended December 30, 2023 and December 31, 2022 wecontinued to experience a decrease in the sales of PPE and COVID-19 test kits as compared to the comparableprior-year periods, primarily due to lower market pricing of PPE and lower market demand for COVID-19test kits. While the U.S. economy has recently experienced inflationarypressures and strengthening of the U.S. dollar, their impacts have not been material to our results of operations.Though inflation impacts both our revenues and costs, the depth and breadth of our product portfolio often allows us to offer lower-costnational brand solutions or corporate brand alternatives to our more price-sensitive customers whoare unwilling to absorb price increases, thus positioning us to protect our gross profit.
Our consolidated financial statements reflect estimates and assumptionsmade 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 incometaxes and income tax contingencies; the allowance for doubtful accounts; hedging activity; supplierrebates; measurement of compensation cost for certain share-based performance awards and cash bonusplans; and pension plan assumptions.
Cybersecurity Incident
In addition to immaterial and unrelated prior incidents at certain ofour subsidiaries, in October 2023 Henry Schein experienced a cybersecurity incident that primarily affected the operations of ourNorth American and European dental and medical distribution businesses.Henry Schein One, our practice management software, revenuecycle management and patient relationship management solutions business, wasnot affected, and our manufacturing businesses were mostly unaffected. Once we became aware of the issue, we took stepsto assess, contain and remediate this incident.We restored affected systems and applications, our distribution operations resumed and we reactivated our ecommerce platform.We also notified law enforcement and our employees, customers, suppliers and investors, informing them of both the incident and management’s efforts to mitigate its impact on our daily
operations and data maintained on the Company’s systems.Subsequently, on or about November 8, 2023, we determined that the threat actor obtained personal and sensitive informationmaintained on our systems belonging to certain third parties and since that date we have notified affected and potentially affected partiesas appropriate. The scope of personal and sensitive data impacted is still under investigation.On November 22, 2023, we experienced a related disruption to our ecommerce platform and relatedapplications, which has since been remediated.As described in “Management’s Discussion & Analysis – 2023 Compared to 2022, the incident adversely impacted our financial results for the fourth quarter and full year 2023.We also expect some short-term residual impact on our financial results in 2024.
We maintain cybersecurity insurance, subject to certain retentions and policy limitations.With respect to the October 2023 cybersecurity incident, we have a $60 million insurance policy, following a $5 million retention. 46
Henry Schein, Inc. is a solutions company for health care professionals poweredby a network of people and We
believe we are the world’s largest provider of health care products and services primarily to office-
based dental and medical practitioners, as well as alternate sites of care. We
serve more than one million customers
worldwide including dental practitioners, laboratories, physician practices, andambulatory 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 91 years of experience distributing healthcare products. We are headquartered in Melville, New York,employ approximately 25,000 people (of which approximately 11,500 are based outside of the United States) and have operations or affiliates in 33 countries and territories.Our broad global footprint has evolved over time through our organic success as well asthrough contribution from strategic acquisitions.
We
have established strategically located distribution centers aroundthe 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, enablesus to be a single source of supply for our customers’ needs.
While our primary go-to-market strategy is in our capacity as a distributor, we also market and sell our own
corporate brand portfolio of cost-effective, high-quality consumable merchandise products,including in vitro diagnostic devices, manufacture certain dental specialty products inthe areas of implants, orthodontics and endodontics, manufacture drug products, and repackage/relabel prescription drugsand/or devices. We
have
achieved scale in these global businesses primarily through acquisitions, asmanufacturers of these products typically do not utilize a distribution channel to serve customers.
We
conduct our business through two reportable segments: (i) healthcare 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, governmentand other institutions.Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,emergency medical technicians, dialysis centers, home health, federal and state governmentsand large enterprises, such as group practices and integrated delivery networks, among other providersacross a wide range of specialties. The health care distribution reportable segment, combining our global dental andmedical operating segments, distributes consumable products, small equipment, laboratory products, large equipment, equipmentrepair services, branded and generic pharmaceuticals, vaccines, surgical products, dental specialtyproducts (including implant, orthodontic and endodontic products), diagnostic tests, infection-control products,PPE products and vitamins. Our global technology and value-added services business provides software, technologyand other value-added services to health care practitioners.Our technology business offerings include practice management software systems for dental and medical practitioners.Our value-added practice solutions include practice consultancy, education, revenue cycle management and financial services on a non-recoursebasis, 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, whichis 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 thecombined 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 specialtyproducts 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.
47
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 lowprices.It also has accelerated the growth of HMOs, group practices, other managed care accounts and collective buyinggroups, which, in addition to their emphasis on obtaining products at competitive prices, tend to favor distributorscapable 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 canenhance the efficiency and facilitation of practice management.
Our operating results in recent years have been significantly affected by strategiesand 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.
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 ofrelatively 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 managelarge quantities of supplies in their offices, the distribution of health care supplies and small equipment to office-based healthcare 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 typicallymade by the practitioner or an administrative assistant.Supplies and small equipment are generally purchased from morethan 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 groupsare 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 toresult in a number of distributors, particularly those with limited financial, operating and marketing resources, seeking tocombine with larger companies that can provide growth opportunities.This consolidation also may continue to result in distributors seekingto acquire companies that can enhance their current product and service offerings or provideopportunities to serve a broader customer base.
Our approach to acquisitions and joint ventures has been to expand our role asa provider of products and services to the health care industry.This trend has resulted in our expansion into service areas that complementour existing operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquiredbusinesses. As industry consolidation continues, we believe that we are positioned tocapitalize on this trend, as we believe we have the ability to support increased sales through our existing infrastructure, althoughthere can be no assurances that we will be able to successfully accomplish this. We
also have invested in expanding our sales/marketing
infrastructure to include a focus on building relationships with decisionmakers who do not reside in the office- based practitioner setting.
As the health care industry continues to change, we continually evaluate possiblecandidates for joint venture or acquisition and intend to continue to seek opportunities to expand ourrole as a provider of products and services to the health care industry.There can be no assurance that we will be able to successfully pursueany 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 therecan be no assurance that the integration efforts associated with any such transaction would be successful.
48
Aging Population and Other Market Influences
The health care products distribution industry continues to experience growthdue to the aging population, increased health care awareness, the proliferation of medical technologyand testing, new pharmacological treatments, and expanded third-party insurance coverage, partially offset by the effects of unemploymenton insurance coverage.In addition, the physician market continues to benefit from theshift of procedures and diagnostic testing from acute care settings to alternate-care sites, particularlyphysicians’ offices. According to the U.S. Census Bureau’s International Database, between 2023and 2033, the 45 and older population is expected to grow by approximately 11%.Between 2023 and 2043, this age group is expected to grow by approximately 21%.This compares with expected total U.S. population growthrates of approximately 6% between 2023 and 2033and approximately 11% between 2023 and 2043. According to the U.S. Census Bureau’s International Database, in 2023there are approximately seven million Americans aged 85 years or older, the segment of the population most in need of long-term careand elder-care services.By the year 2050, that number is projected to nearly triple to approximately19 million.The population aged 65 to 84 years is projected to increase by approximately 23% duringthe same period. As a result of these market dynamics, annual expenditures for healthcare 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 Data” indicatingthat total national health care spending reached approximately $4.5 trillion in 2022, or 17.3% of the nation’s gross domestic product, the benchmarkmeasure for annual production of goods and services in the United States.Health care spending is projected to reach approximately $7.2 trillion by 2031, or 19.6% of the nation’s projected gross domestic product.
Our businesses are generally subject to numerous laws and regulations that couldimpact our financial performance, and failure to comply with such laws or regulations could have amaterial adverse effect on our business. See “
” for a discussion of laws, regulations and governmental activity
that may affect our results of operations and financial condition.
49
Results of Operations
Refer to Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operationsin our 2022 Annual Report on Form 10-K for management’s discussion and analysis of financial condition and results
of operations for the fiscal year 2022 compared to fiscal year 2021.
The following tables summarize the significant components of our operatingresults and cash flows: December 30,
December 31,
December 25,
2023
2022
2021
Operating results:
Net sales
$
12,339
$
12,647
$
12,401
Cost of sales
8,478
8,816
8,727
Gross profit
3,861
3,831
3,674
Operating expenses:
Selling, general and administrative
2,956
2,771
2,634
Depreciation and amortization
210
182
180
Restructuring and integration costs
80
131
8
Operating income
$
615
$
747
$
852
Other expense, net
$
(73)
$
(26)
$
(21)
Gain on sale of equity investment
-
-
7
Net income
436
566
660
Net income attributable to Henry Schein, Inc.
416
538
631
December 30,
December 31,
December 25,
2023
2022
2021
Cash flows:
Net cash provided by operating activities
$
500
$
602
$
710
Net cash used in investing activities
(1,135)
(276)
(677)
Net cash provided by (used in) financing activities
701
(315)
(333)
50
Plans of Restructuring and Integration Costs
On August 1, 2022, we committed to a restructuring plan focused onfunding the priorities of the BOLD+1 strategic plan, streamlining operations and other initiatives to increase efficiency.We revised our previous expectations of completion and we have extended this initiative through the end of 2024.We are currently unable in good faith to make a determination of an estimate of the amount or range of amountsexpected to be incurred in connection with these activities, both with respect to each major type of cost associatedtherewith and to the total cost, or an estimate of the amount or range of amounts that will result in futurecash expenditures. During the years ended December 30, 2023, December 31, 2022, and December25, 2021, we recorded restructuring costs of $80 million, $128 million, and $8 million, respectively.The restructuring costs for these periods primarily related to severance and employee-related costs,impairment of intangible assets, accelerated amortization of right-of-use lease assets and fixed assets, other lease exitcosts, and certain business exit costs During the year ended December 30, 2023, in connection with our restructuringplan, we recorded an impairment of an intangible asset of $12 million related to a planned disposal of a non-U.S.business.The disposal is expected to be completed in 2024.This impairment is included in the $80 million of restructuringcharges discussed above. During the year ended December 31, 2022, in connection with ourrestructuring plan, we vacated one of the buildings at our corporate headquarters in Melville, New York, which resulted in an accelerated amortization of a
right-of-use lease asset of $34 million.We also initiated the disposal of a non-profitable U.S. business and recorded related costs of $49 million, which primarily consisted ofimpairment 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 was completed during the first quarter of 2023. On August 26, 2022, we acquired Midway Dental Supply.In connection with this acquisition, during the year ended December 31, 2022, we recorded integration costs of $3 millionrelated 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 restructuringinitiative intended to mitigate stranded costs associated with the spin-off of our animal health business and to rationalize operationsand provide expense efficiencies.These activities were originally expected to be completed bythe end of 2020 but we extended them to the end of 2021 in light of the changes to the business environment broughton by the COVID-19 pandemic.The restructuring activities under this prior initiative were completedin 2021.
51
2023 Compared to 2022
Note: Percentages for Net Sales; Gross Profit; Operating Expenses; Other
38Expense, Net; and Income Taxes are
ITEM 2.Propertiesbased on actual values and may not recalculate due to rounding.Net Sales
We own or lease the following properties with more than 100,000 square feet:Net sales were as follows:Own% of
% of
Increase / (Decrease)
2023
Total
2022
Total
$
%
Health care distribution
(1)
Dental
$
7,539
61.1
%
$
7,473
59.1
%
$
66
0.9
%
Medical
3,994
32.4
4,451
35.2
(457)
(10.3)
Total health care distribution
11,533
93.5
11,924
94.3
(391)
(3.3)
Technology and value-added services
(2)
806
6.5
723
5.7
83
11.4
Total
$
12,339
100.0
$
12,647
100.0
$
(308)
(2.4)
The components of our sales growth were as follows:
Local Currency Growth/(Decline)
Total Local
Currency
Growth/(Decline)
Foreign
Exchange
Impact
Total Sales
Growth/(Decline)
Local Internal
Growth
Acquisition
Growth
Extra Week
Impact
Health care distribution
(1)
Dental Merchandise
(1.6)
%
4.2
%
(1.0)
%
1.6
%
0.1
%
1.7
%
Dental Equipment
(0.9)
1.1
(2.1)
(1.9)
-
(1.9)
Total Dental
(1.4)
3.4
(1.3)
0.7
0.2
0.9
Medical
(11.2)
2.2
(1.3)
(10.3)
-
(10.3)
Total Health Care Distribution
(5.1)
2.9
(1.2)
(3.4)
0.1
(3.3)
Technology and value-added services
(2)
7.2
5.0
(0.8)
11.4
-
11.4
Total
(4.4)
3.1
(1.2)
(2.5)
0.1
(2.4)
(1)
Consists of consumable products, dental specialty products (including implant, orthodontic and endodontic products), small
equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical
products, diagnostic tests, infection-control products, PPE products 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
We report our results of operations on a 52 or
Approximate
Lease Expiration
Property
Location
Lease
Square Footage
Date
Melville, NY
Lease
185,000
July 2036
Melville, NY
Own
105,000
N/A
Office and Distribution CenterFiumana-Predappio, Italy
Own
183,000
N/A
Office and Distribution CenterTours, France
Own
166,000
N/A
Office and Distribution CenterGillingham, United Kingdom
Lease/Own
165,000
June 2033
Office and Distribution CenterEastern Creek, New South Wales, Australia
Lease
161,000
July 2030
Office and Distribution CenterNiagara 53 weeks per fiscal year basis ending on the Lake, Canadalast Saturday of
Lease
128,000
September 2021
Office and Distribution CenterDecember.
Bastian, VA
Own
108,000
N/A
Office and Distribution CenterThe year ended December 30, 2023, consisted of 52 weeks,
and the year ended, December 31, 2022West Allis, WI
Lease
106,000
October 2027
Office and Distribution Centerconsisted of 53 weeks,
resulting in an extra week of sales.Greer, SC
Lease
102,000
Global net sales for the year ended December 2028
Distribution Center30, 2023 decreased 2.4%.
The components of our sales growth areDenver, PA
Lease
624,000
December 2032
Indianapolis, IN
Lease
380,000
March 2022
Sparks, NV
Lease
370,000
December 2021
Indianapolis, IN
Own
287,000
N/A
Grapevine, TX
Lease
242,000
July 2023
Gallin, Germany
Own
215,000
N/A
Jacksonville, FL
Lease
212,000
February 2026
Heppenheim, Germany
Lease
194,000
March 2030
The properties listedpresented in the table
above areabove.The 4.4% decrease in our
principal propertiesinternally generated local currency sales was primarily
used by our health care distributionattributable to a decrease in sales segment.of PPE products and COVID-19 test kits.
In addition, we lease numerous other distribution, office, showroom, manufacturingFor the nine months ended September 30, 2023, the estimatedincrease ininternally generated local currency sales, excluding PPE products
and
sales space in locations including the United States, Australia, Austria, Belgium, Brazil,COVID-19 test kits, was 3.5%.
Canada, Chile, China, the CzechHowever, asRepublic, 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.
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.For a discussion of Legal Proceedings, see
Consolidated Financial Statements included under Item 8.
ITEM 4.Mine Safety DisclosuresNot applicable.
39
ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities
Our common stock is traded on the Nasdaq Global Select Market tier ofthe Nasdaq Stock Market, or Nasdaq,On February 8, 2021, there were approximately 235 holders of record of our commonstock and the last reportedsales price was $70.78.
Purchases of Equity Securities by the Issuer
Our share repurchase program, announced on March 3, 2003, originallyallowed us to repurchase up to two millionshares pre-stock splits (eight million shares post-stock splits) of our commonstock, which representedapproximately 2.3% of the shares outstanding at the commencement ofthe program.Subsequent additionalincreases totaling $3.7 billion, authorized by our Board of Directors,to the repurchase program provide for a totalof $3.8 billion of shares of our common stock to be repurchased under this program.
As of December 26, 2020,we had repurchased approximately $3.6 billion of common stock (75,563,289shares)under these initiatives, with $201.2 million available for future common stockshare repurchases.As a result of the
COVID-19 pandemic, as previously announced, we haveadverse impact of the cybersecurity incident during the quarter
temporarily suspended our sharerepurchase program in an effort to preserve cash and exercise caution in this uncertainperiod and due to certainrestrictions related to financial covenants in our credit facilities.
During the fiscal quarter ended December 26, 2020,30, 2023, our
internally generated local currency sales, excluding sales of PPE productsand COVID-19 test kits, on a full year basis were flat compared to the prior year.
In addition, we
did not make anyestimate that sales of PPE products and COVID-19
repurchases of our common stock.The maximum number of shares that could be purchased under this programis determined at the end of each monthbased on the closing price of our common stock at that time.The maximum number of shares that could berepurchased as of October 31, 2020, November 28, 2020, and December26, 2020test kits were
3,164,694, 3,159,724approximately $713 million and
3,056,528, respectively.
Dividend Policy
We have not declared any cash or stock dividends on our common stock during fiscal years 2020 or 2019.Wecurrently do not anticipate declaring any cash or stock dividends on our commonstock 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 ofDirectors andwill depend upon the earnings, financial condition, capital requirements,level of indebtedness, contractualrestrictions with respect to payment of dividends and other factors.
Stock Performance Graph
The graph below compares the cumulative total stockholder returnon $100 invested, assuming the reinvestment ofall dividends, on December 26, 2015, the last trading day before thebeginning of our 2016 fiscal year, through theend of our 2020 fiscal year with the cumulative total return on $100invested$1,245 million for the
same period in the Dow JonesU.S. Health Care Indexyears ended December 30, 2023 and the Nasdaq Stock Market Composite Index.
December 31,
2022, respectively, representing an
40
COMPARISON OF 5-YEAR CUMULATIVE TOTALRETURN
ASSUMES $100 INVESTED ON DECEMBER 26, 2015
ASSUMES DIVIDENDS REINVESTED
52
estimated decrease of $532 million or 42.7%versus the prior year, with the $532 million net decrease year-over- year representing 4.2%of global net sales for the year ended December
26,30, 2023. Dental
Dental net sales for the year ended December
31,30, 2023 increased 0.9%.The components of our sales growth are presented in the table above.Our decrease in internally generated local currency sales for dentalmerchandise was primarily attributable to the negative impact of the cybersecurity incident.Our sales decrease in internally generated local currency for dental equipment was also primarily attributableto the impact of the cybersecurity We estimate that sales of PPE products were approximately $338 million and $448 million for the years ended
December 30, 2023 and December 31, 2022, respectively, representing an estimated decrease of $110 million or
24.5% versus the prior year, with the $110 million net decrease year-over-year representing 1.5% of dental net sales
for the year ended December
29,30, 2023.The decrease in sales of PPE products is primarily due to lowermarket December 28,prices and loss of demand during the cybersecurity incident.Our estimated internally generated local currencyDecember 26,
2015
2016
2017
2018
2019
2020
Henry Schein, Inc.sales, excluding PPE products were flat compared to the prior year.
$Medical
100.00Medical net sales for the year ended December 30, 2023 decreased 10.3%.The components of our sales growth arepresented in the table above.The internally generated local currency decrease in medical salesis primarily attributable to the impact of the cybersecurity incident that occurredduring the fourth quarter of the year ended December 30, 2023 and to lower sales of PPE products and COVID-19test kits and other point-of-care diagnostic products.
We estimate that sales of PPE products and COVID-19 test kits were approximately $375 million and $797 million
for the years ended December 30, 2023 and December 31, 2022, respectively, representing an estimated decreaseof $422 million or 52.9% versus the prior year, with the $422 million net decrease year-over-year representing 10.6%
of medical net sales for the year ended December 30, 2023.The decrease in sales of these products is primarily due to lower market prices of PPE, lower market demand of COVID-19test kits, and loss of sales of both product categories during the cybersecurity incident.The estimated decrease in internally generated local currencysales, excluding PPE products and COVID-19 test kits was 2.2%.
Technology and value-added services
Technology and value-added services net sales for the year ended December 30, 2023 increased 11.4%.The components of our sales growth are presented in the table above.During the year ended December 30, 2023, the trend for sales of practice management software growth remainsstrong as we continued to increase the number of cloud-based users.We also experienced increased demand for our revenue cycle management solutions and our analytical products.The increase in sales during the year ended December 30, 2023was partially offset by the expiration, during the year ended December 31, 2022, of a modestly profitablegovernment contract in one of our value-added services businesses.This segment of our business was largely unaffected by the cybersecurity incident in the fourth quarter.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
Gross
Gross
Increase / (Decrease)
2023
Margin %
2022
Margin %
$
96.58%
Health care distribution
$
88.973,312
28.7
%
$
99.203,357
28.2
%
$
109.44(45)
(1.3)
%
Technology and value-added services
549
68.0
474
65.5
75
15.7
Total
$
108.213,861
Dow Jones U.S. Health31.3
100.003,831
97.0430.3
119.21$
124.8430
154.14
175.81
NASDAQ Stock Market
100.00
108.00
140.01
134.97
186.63
267.700.8
53
As a result of different practices of categorizing costs associated with distribution networksthroughout 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 servicessegment 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 between the periods as a result ofthe changes in the mix of products sold as well as changes in our customermix.For example, sales of our corporate brand and certain specialty products achieve gross profit margins that are higher than averagetotal gross profit margins of all products.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. Health care distribution gross profit for the year ended December 30, 2023decreased compared to the prior-year- period due to the decrease in sales resulting from the cybersecurityincident and a reduction in sales of PPE products and COVID-19 test kits, partially offset by gross profit from acquisitionsand gross margin expansion as a result of a favorable impact of sales mix of higher-margin products.
Technology and value-added services gross profit increased as a result of a higher gross profit from internally
generated sales and gross profit from acquisitions, as well as an increasein gross margin rates primarily due to product mix and increases in productivity.
Operating Expenses
Operating expenses (consisting of selling, general and administrativeexpenses; depreciation and amortization, restructuring and integration costs) by segment and in total were as follows:
% of
% of
Respective
Respective
Increase
2023
Net Sales
2022
Net Sales
$
%
Health care distribution
$
2,842
24.6
%
$
2,738
23.0
%
$
104
3.8
%
Technology and value-added services
404
50.1
346
47.8
58
16.8
$
3,246
26.3
%
$
3,084
24.4
%
$
162
5.3
%
The net increase in operating expenses is attributable to the following:
Operating Costs
Restructuring and
Integration Costs
Acquisitions
Total
Health care distribution
$
92
$
(55)
$
67
$
104
Technology and value-added services
5
4
49
58
Total
$
97
$
(51)
$
116
$
162
The increase in operating costs during the year ended December 30, 2023 includesincreases in payroll and payroll related costs, travel, convention and consulting expenses in both of our reportablesegments and increased acquisition expenses in our healthcare distribution segment.During the year ended December 30, 2023, our operating expenses were favorably impacted by the recognition ofa remeasurement gain of $18 million following an acquisition of a controlling interest of a previously held equityinvestment, and were negatively impacted by restructuring, an impairment of capitalized costs of $27 million and impairmentof intangible assets of $7 million within our health care distribution segment.During the year ended December 30, 2023, we also incurred $11 million of direct costs, primarily professional fees, for the remediation ofthe cybersecurity incident.The restructuring and integration costs are primarily related to severance andemployee-related costs, accelerated amortization of right-of-use lease assets and fixed assets, and other lease exitcosts. 54
Other Expense, Net
Other expense, net was as follows:
Variance
2023
2022
$
%
Interest income
$
17
$
8
$
9
125.1
%
Interest expense
(87)
(35)
(52)
(148.7)
Other, net
(3)
1
(4)
n/a
Other expense, net
$
(73)
$
(26)
$
(47)
(172.9)
%
Interest income increased primarily due to increased interest rates.Interest expense increased primarily due to increased borrowings and increased interest rates.
Income Taxes
Our effective tax rate was 22.1% for the year ended December 30, 2023 compared to 23.5%for the prior year.In each year, the difference between our effective and federal statutory tax rates primarily relates to state and foreign
income taxes and interest expense.
The Organization of Economic Co-Operation and Development (OECD) issuedtechnical and administrative guidance on Pillar Two Model Rules in December 2021, which provides for a global minimum tax rate on the
earnings of large multinational businesses, on a country-by-country basis.Effective January 1, 2024, the minimum global tax rate is 15% for various jurisdictions pursuant to the Pillar Two framework.Future tax reform resulting from these developments may result in changes to long-standing tax principles,which may adversely impact our effective tax rate going forward or result in higher cash tax liabilities.As we operate in jurisdictions which have adopted Pillar 2, we are continuing to analyze the implications to effectively managethe impact for 2024 and beyond.
55
Liquidity and Capital Resources
Our principal capital requirements have included funding of acquisitions, purchasesof 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 receivablesand payables.Historically, sales have tended to be stronger during the second half of the year and special inventoryforward buy-in opportunities have been most prevalent just before the end of the year, and have caused our working capital requirementsto be higher from the end of the third quarter to the end of the first quarter ofthe following year. We finance our business primarily through cash generated from our operations, revolving credit facilities and debt
for further information.Our ability to generate sufficient cash flows from operations is dependent on the continued demand of our customersfor our products and services, and access to products and services from our suppliers.
Our business requires a substantial investment in working capital, whichis 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, maychange.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 withsufficient liquidity to meet our currently foreseeable short-term and long-term capital needs.
Our acquisition strategy is focused on investments in companies thatadd new customers and sales teams, increase our geographic footprint (whether entering a new country, such as emerging markets, or building scale where we
have already invested in businesses), and finally, those that enable us to access new products and technologies.As part of our BOLD+1 Strategic Plan, including pursuing focused mergers and acquisitions,during the year ended December 30, 2023 we have announced acquisitions of companies specializingin implant systems, clear aligners, homecare medical products delivered directly to patients, and dental practicetransition services. Net cash provided by operating activities was $500 million for theyear ended December 30, 2023, compared to net cash provided by operating activities of $602 million for the prior year.The net change of $102 million was primarily attributable to lower cash net income.During the quarter ended December 30, 2023, the cybersecurity incident had several offsetting impacts to the operating cash flows from our workingcapital, net of acquisitions, including a decrease in operating cash flows from accounts receivabledue to delayed timing of billings and limited collection efforts resulting from the impact of the cybersecurity incident, and an increasein operating cash flows resulting from reduced inventory purchases. Net cash used in investing activities was $1,135 million for theyear ended December 30, 2023, compared to net cash used in investing activities of $276 million for the prior year.The net change of $859 million was primarily attributable to increased payments for equity investments and business acquisitions,and increased purchases of fixed assets resulting from our continued investment in our facilities and operations.
Net cash provided by financing activities was $701 million for the yearended December 30, 2023, compared to net cash used in financing activities of $315 million for the prior year.The net change of $1,016 million was primarily due to increased net borrowings from debtto finance our investments, partially offset by decreased repurchases of common stock.
41
ITEM 6.Selected Financial DataThe following selected financial data, with respect to our financial positionand results of operations for each of thefive fiscal years in the period ended December 26, 2020, set forth below, has been derived from, should be read in
conjunction with and is qualified in its entirety by reference to, our consolidatedfinancial statements and notesthereto.The selected financial data presented below should also be readin conjunction with,
“
” and
,
“
.”
Years ended
December 26,
December 28,
December 29,
December 30,
December 31,
2020
2019
2018
2017
2016
(in thousands, except per share data)
Income Statement Data:
$
10,119,141
$
9,985,803
$
9,417,603
$
8,883,438
$
8,218,885
2,814,343
3,090,886
2,910,747
2,746,662
2,605,907
Selling, general and administrative expenses
2,246,947
2,357,920
2,217,273
2,071,576
1,975,445
Litigation settlements
-
-
38,488
5,325
-
32,093
14,705
54,367
-
38,621
535,303
718,261
600,619
669,761
591,841
Other expense, net
(35,408)
(37,954)
(63,783)
(39,967)
(18,705)
Income from continuing operations before taxes, equity
in earnings of affiliates and noncontrolling interests499,895
680,307
536,836
629,794
573,136
(95,374)
(159,515)
(107,432)
(308,975)
(169,311)
Equity in earnings of affiliates12,344
17,900
21,037
15,293
17,110
Net gain (loss) on sale of equity investments (3)
1,572
186,769
-
(17,636)
-
Net income from continuing operations418,437
725,461
450,441
318,476
420,935
Income (loss) from discontinued operations
986
(6,323)
111,685
140,817
135,460
419,423
719,138
562,126
459,293
556,395
Less: Net income attributable to noncontrolling interests
(15,629)
(24,770)
(19,724)
(25,304)
(19,651)
Less: Net (income) loss attributable to noncontrolling
interests from discontinued operations-
366
(6,521)
(27,690)
(29,966)
Net income attributable to Henry Schein, Inc.$
403,794
$
694,734
$
535,881
$
406,299
$
506,778
Amounts attributable to Henry Schein, Inc.:402,808
700,691
430,717
293,172
401,284
Discontinued operations
986
(5,957)
105,164
113,127
105,494
Net income attributable to Henry Schein, Inc.$
403,794
$
694,734
$
535,881
$
406,299
$
506,778
Earnings (loss) per share attributable to
From continuing operations:
$
2.83
$
4.74
$
2.82
$
1.87
$
2.48
2.81
4.69
2.80
1.85
2.45
From discontinued operations:
$
0.01
$
(0.04)
$
0.69
$
0.72
$
0.65
0.01
(0.04)
0.68
0.72
0.64
Earnings per share attributable to Henry Schein, Inc.:
$
2.83
$
4.70
$
3.51
$
2.59
$
3.14
2.82
4.65
3.49
2.57
3.10
Weighted-average common shares outstanding:
142,504
147,817
152,656
156,787
161,641
143,404
149,257
153,707
158,208
163,723
42
Years ended
December 26,
December 28,
December 29,
December 30,
December 31,
2020
2019
2018
2017
2016
(in thousands)
Net Sales by Market Data:
Health care distribution (4):
$
5,912,593
$
6,415,865
$
6,347,998
$
6,047,811
$
5,554,296
3,617,017
2,973,586
2,661,166
2,497,994
2,337,661
Total health care distribution9,529,610
9,389,451
9,009,164
8,545,805
7,891,957
Technology and value-added services (5)514,258
515,085
408,439
337,633
326,928
Total excluding Corporate TSA revenues
10,043,868
9,904,536
9,417,603
8,883,438
8,218,885
Corporate TSA revenues (6)
75,273
81,267
-
-
-
$
10,119,141
$
9,985,803
$
9,417,603
$
8,883,438
$
8,218,885
As of
December 26,
December 28,
December 29,
December 30,
December 31,
2020
2019
2018
2017
2016
(in thousands)
Balance Sheet Data:
$
7,772,532
$
7,151,101
$
8,500,527
$
7,863,995
$
6,811,763
515,773
622,908
980,344
884,227
689,626
Redeemable noncontrolling interests327,699
287,258
219,724
465,584
285,567
3,984,385
3,630,137
3,541,788
2,824,410
2,800,804
1)
Restructuring costs for the year ended December 26, 2020 consist primarily of severance costs, including severance pay and benefits
of $25.8 million, facility closing costs of $5.9 million and other costs of $0.4 million.Restructuring costs for the year endedDecember 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, includingseverance pay and benefits of $50.2 million, facility closing costs of $3.2 million and other costs of $1.0 million.Restructuring costsfor 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.See “Management’s Discussion and Analysis of FinancialCondition 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.
(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.In the fourth quarter of 2020 we received contingent proceeds of $2.1 million from the 2019 saleof Hu-Friedy resulting in the recognition of an additional after-tax gain of $1.6 million.Our investment was non-controlling, wewere not involved in running the business and had no representation on the board of directors.During the fourth quarter of 2019, wealso sold certain other equity investments.During 2017 we sold our equity ownership in E4D Technologies resulting in a loss ofapproximately $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, personal protective equipment, 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 ended in December 2020.
43
ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperationsCautionary Note Regarding Forward-Looking StatementsIn accordance with the “Safe Harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, weprovide the following cautionary remarks regarding important factorsthat, among others, could cause future resultsto differ materially from the forward-looking statements, expectations and assumptionsexpressed or impliedherein.All forward-looking statements made by us are subject torisks and uncertainties and are not guarantees offuture performance.These forward-looking statements involve known and unknown risks, uncertaintiesand otherfactors that may cause our actual results, performance and achievementsor industry results to be materiallydifferent from any future results, performance or achievements expressed or implied by suchforward-lookingstatements.These statements are generally identified by the use of suchterms as “may,” “could,” “expect,”“intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,”“to be,” “to make” or other comparableterms.Factors that could cause or contribute to such differences include, but are not limitedto, those discussed inthis Annual Report on Form 10-K, and in particular the risks discussed underthe caption “Risk Factors” in Item 1Aof this report and those that may be discussed in other documents we file withthe Securities and ExchangeCommission (SEC).Forward looking statements include the overall impact of the Novel CoronavirusDisease 2019(COVID-19) on the Company, its results of operations, liquidity, and financial condition (including any estimates
of the impact on these items), the rate and consistency with which dentaland other practices resume or maintainnormal operations in the United States and internationally, expectations regarding personal protective equipment
(“PPE”) and COVID-19 related product sales and inventory levels and whetheradditional resurgences of the viruswill adversely impact the resumption of normal operations, the impactof restructuring programs as well as of anyfuture acquisitions, and more generally current expectations regardingperformance in current and future periods.Forward looking statements also include the (i) ability of the Companyto make additional testing available, thenature of those tests and the number of tests intended to be made availableand the timing for availability, the natureof the target market, as well as the efficacy or relative efficacy of the test results given that the test efficacy hasnotbeen, or will not have been, independently verified under normal FDA proceduresand (ii) potential for theCompany to distribute the COVID-19 vaccines and ancillary supplies.Risk factors and uncertainties that could cause actual results to differ materially fromcurrent and historical resultsinclude, but are not limited to: risks associated with COVID-19,as well as other disease outbreaks, epidemics,pandemics, or similar wide spread public health concerns and other naturaldisasters or acts of terrorism; ourdependence on third parties for the manufacture and supply of our products;our ability to develop or acquire andmaintain and protect new products (particularly technology products) andtechnologies that achieve marketacceptance with acceptable margins; transitional challenges associated with acquisitions,dispositions and jointventures, including the failure to achieve anticipated synergies/benefits; financialand tax risks associated withacquisitions, dispositions and joint ventures; certain provisionsin our governing documents that may discouragethird-party acquisitions of us; effects of a highly competitive (including, withoutlimitation, competition from third-party online commerce sites) and consolidating market; the potential repeal orjudicial prohibition onimplementation of the Affordable Care Act; changes in the health care industry; risks fromexpansion of customerpurchasing power and multi-tiered costing structures; increases in shipping costsfor our products or other serviceissues with our third-party shippers; general global macro-economic and politicalconditions, includinginternational trade agreements and potential trade barriers; failure tocomply with existing and future regulatoryrequirements; risks associated with the EU Medical Device Regulation; failureto comply with laws and regulationsrelating to health care fraud or other laws and regulations; failure to comply withlaws and regulations relating tothe confidentiality of sensitive personal information or standards in electronichealth records or transmissions;changes in tax legislation; litigation risks; new or unanticipated litigationdevelopments and the status of litigationmatters; cyberattacks or other privacy or data security breaches; risks associatedwith our global operations; ourdependence on our senior management, as well as employee hiring and retention;and disruptions in financialmarkets. The order in which these factors appear should not be construedto indicate their relative importance or44
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 predictionof actual results.We undertake no duty and have no obligation to update forward-looking statements.Where YouCan Find Important InformationWe may disclose important information through one or more of the following channels: SEC filings, public
conference calls and webcasts, press releases, the investor relationspage of our website (www.henryschein.com)and the social media channels identified on the Newsroom page of our website.
Recent Developments
In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has
negatively impacted the global economy, disrupted global supply chains and created significant volatility and
disruption of global financial markets. In response, many countries implementedbusiness closures and restrictions,stay-at-home and social distancing ordinances and similar measuresto combat the pandemic, which significantlyimpacted global business and dramatically reduced demand for dentalproducts and certain medical productsbeginning in the second quarterof 2020. Demand increased in the second half of 2020 resultingin slight growthover the prior year driven by sales of PPE and COVID-19 related products.
Our consolidated financial statements reflect estimates and assumptionsmade by us that affect, among other things,our goodwill, long-lived asset and definite-lived intangible asset valuation;inventory valuation; equity investmentvaluation; assessment of the annual effective tax rate; valuation of deferred incometaxes and income taxcontingencies; the allowance for doubtful accounts; hedging activity; vendorrebates; measurement ofcompensation cost for certain share-based performance awards and cash bonusplans; and pension planassumptions.Due to the significant uncertainty surrounding the future impact ofCOVID-19, our judgmentsregarding estimates and impairments could change in the future.In addition, the impact of COVID-19 had amaterial adverse effect on our business, results of operations and cash flows, primarily inthe second quarter of2020.In the latter half of the second quarter, dental and medical practices began to re-open worldwide, andcontinued to do so during the second half of 2020.However, patient volumes have remained below pre-COVID-19levels and certain regions in the U.S. and internationally are experiencing anincrease in COVID-19 cases.As such,there is an ongoing risk that the COVID-19 pandemic may again materiallyadversely effect our business, results ofoperations and cash flows and may result in a material adverse effect on our financialcondition and liquidity.However, the extent of the potential impact cannot be reasonably estimated at this time.
As part of a broad-based effort to support plans for the long-term health of our businessand to strengthen ourfinancial flexibility, we implemented cost reduction measures that included certain reductions in payroll,
substantially decreased capital expenditures, reduced corporate spendingand eliminated certain non-strategictargeted expenditures. As our markets began to recover,we substantially ended most of those temporary expense-reduction initiatives during the second half of 2020.
Corporate Transactions
During the fourth quarter of 2019, we sold an equity investmentin Hu-Friedy Mfg. Co., LLC (“Hu-Friedy”), amanufacturer of dental instruments and infection prevention solutions.Our investment was non-controlling, wewere not involved in running the business and had no representationon the board of directors.During the fourthquarter of 2019, we also sold certain other equity investments.In the aggregate, the sales of these investmentsresulted in a pre-tax gain in 2019 of approximately $250.2 million and an after-taxgain of approximately $186.8million.In the fourth quarter of 2020 we received contingent proceeds of$2.1 million from the 2019 sale of Hu-Friedy resulting in the recognition of an additional after-tax gain of $1.6million.On February 7, 2019 (the “Distribution Date”), we completed the separation(the “Separation”) and subsequentmerger of our animal health business (the “Henry Schein Animal Health Business”)with Direct Vet Marketing, Inc.(d/b/a VetsFirst Choice, “Vets First Choice”) (the “Merger”).This was accomplished by a series of transactions45
among us, VetsFirst Choice, Covetrus, Inc. (f/k/a HS Spinco, Inc. “Covetrus”), awholly owned subsidiary of oursprior to the Distribution Date, and HS Merger Sub, Inc., a wholly owned subsidiaryof Covetrus (“MergerSub”).In connection with the Separation, we contributed, assignedand transferred to Covetrus certain applicableassets, liabilities and capital stock or other ownership interests relatingto the Henry Schein Animal HealthBusiness.On the Distribution Date, we received a tax-free distribution of $1,120million from Covetrus pursuant tocertain 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 institutionalaccredited investors (the “Share SaleInvestors”) for $361.1 million (the “Share Sale”).The proceeds of the Share Sale were paid to Covetrus anddistributed to us.Subsequent to the Share Sale, we distributed, on a pro rata basis,all of the shares of the commonstock of Covetrus held by us to our stockholders of record as of the close ofbusiness on January 17, 2019 (the“Animal Health Spin-off”).After the Share Sale and Animal Health Spin-off, Merger Sub consummated theMerger whereby it merged with and into VetsFirst Choice, with Vets First Choice surviving the Merger as awholly owned subsidiary of Covetrus.Immediately following the consummation of the Merger, on a fully dilutedbasis, (i) approximately 63% of the shares of Covetrus common stock were (a) ownedby our stockholders and theShare Sale Investors, and (b) held by certain employees of the Henry ScheinAnimal Health Business (in the formof certain equity awards), and (ii) approximately 37% of the shares of Covetruscommon stock were (a) owned bystockholders of VetsFirst Choice immediately prior to the Merger, and (b) held by certain employees of Vets FirstChoice (in the form of certain equity awards).After the Separation and the Merger, we no longer beneficiallyowned any shares of Covetrus common stock and, following the DistributionDate, will not consolidate thefinancial 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 SelectMarket.We believe we are the world’s largestprovider of health care products and services primarily to office-based dentaland medical practitioners, as well as alternate sites of care.We serve more than one million customers worldwideincluding dental practitioners and laboratories and physician practices, as wellas government, institutional healthcare clinics and other alternate care clinics.We believe that we have a strong brand identity due to our more than88 years of experience distributing health care products.
We are headquartered in Melville, New York,employ more than 19,000 people (of which more than 9,800 arebased outside the United States) and have operations or affiliates in 31 countries and territories,including theUnited 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 Emiratesand the United Kingdom.
We have established strategically located distribution centers to enable us to better serve our customers and
increase our operating efficiency.This infrastructure, together with broad product and service offerings atcompetitive prices, and a strong commitment to customer service, enables usto be a single source of supply for ourcustomers’ needs.Our infrastructure also allows us to provide convenient orderingand rapid, accurate andcomplete 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.The health care distribution reportable segment aggregates our global dentaland medical operating segments.Thissegment distributes consumable products, small equipment, laboratory products,large equipment, equipment repairservices, branded and generic pharmaceuticals, vaccines, surgical products, diagnostictests, infection-controlproducts and vitamins.Our global dental group serves office-based dental practitioners, dental laboratories, schoolsand other institutions.Our global medical group serves office-based medical practitioners, ambulatorysurgerycenters, other alternate-care settings and other institutions.
Our global technology and value-added services group provides software,technology and other value-addedservices to health care practitioners.Our technology group offerings include practice management softwaresystems for dental and medical practitioners.Our value-added practice solutions include financial services on a46
non-recourse basis, e-services, practice technology, network and hardware services, as well as continuing education
services for practitioners.
Industry Overview
In recent years, the health care industry has increasingly focused on cost containment.This trend has benefiteddistributors capable of providing a broad array of products and services at lowprices.It also has accelerated thegrowth of HMOs, group practices, other managed care accounts and collective buyinggroups, which, in addition totheir emphasis on obtaining products at competitive prices, tend to favor distributorscapable of providingspecialized management information support.We believe that the trend towards cost containment has the potentialto favorably affect demand for technology solutions, including software, which canenhance the efficiency andfacilitation of practice management.
Our operating results in recent years have been significantly affected by strategiesand transactions that weundertook 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 currenteconomic environment anduncertainty, particularly impacting overall demand for our products and services.
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 ofrelatively small offices to group practicesor service organizations ranging in size from a few practitioners to a largenumber of practitioners who havecombined or otherwise associated their practices.
Due in part to the inability of office-based health care practitioners to store and managelarge quantities of suppliesin their offices, the distribution of health care supplies and small equipment to office-based healthcare practitionershas been characterized by frequent, small quantity orders, and a need for rapid,reliable and substantially completeorder fulfillment.The purchasing decisions within an office-based health care practice are typicallymade by thepractitioner or an administrative assistant.Supplies and small equipment are generally purchased from morethanone distributor, with one generally serving as the primary supplier.
The trend of consolidationextends to our customer base.Health care practitioners are increasingly seeking topartner, affiliate or combine with larger entities such as hospitals, health systems, group practices or physician
hospital organizations.In many cases, purchasing decisions for consolidated groupsare made at a centralized orprofessional 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 tocombine with larger companies that canprovide growth opportunities.This consolidation also may continue to result in distributors seekingto acquirecompanies that can enhance their current product and service offerings or provideopportunities to serve a broadercustomer base.
Our trend with regard to acquisitions and joint ventures has been to expandour role as a provider of products andservices to the health care industry.This trend has resulted in our expansion into service areas that complementourexisting operations and provide opportunities for us to develop synergies with, andthus strengthen, the acquiredbusinesses.
As industry consolidation continues, we believe that we are positionedto capitalize on this trend, as we believe wehave the ability to support increased sales through our existing infrastructure, althoughthere can be no assurancesthat we will be able to successfully accomplish this.We also have invested in expanding our sales/marketinginfrastructure to include a focus on building relationships with decisionmakers who do not reside in the office-based practitioner setting.
47
As the health care industry continues to change, we continually evaluate possiblecandidates for merger and jointventure or acquisition and intend to continue to seek opportunities to expandour role as a provider of products andservices to the health care industry.There can be no assurance that we will be able to successfully pursueany suchopportunity or consummate any such transaction, if pursued.If additional transactions are entered into orconsummated, we would incur merger and/or acquisition-related costs, and therecan be no assurance that theintegration efforts associated with any such transaction would be successful.In response to the COVID-19pandemic, we had taken a range of actions to preserve cash, includingthe temporary suspension of significantacquisition activity.During the third and fourth quarters of 2020, as global conditionsimproved, we resumed ouracquisition strategy.
Aging Population and Other Market InfluencesThe health care products distribution industry continues to experience growthdue to the aging population,increased health care awareness, the proliferation of medical technologyand testing, new pharmacology treatmentsand expanded third-party insurance coverage, partially offset by the effects of unemployment on insurance
coverage.In addition, the physician market continues to benefit fromthe shift of procedures and diagnostic testingfrom acute care settings to alternate-care sites, particularly physicians’ offices.
According to the U.S. Census Bureau’s International Data Base, in 2020 there were more than six and a half`
million Americans aged 85 years or older, the segment of the population most in need of long-term careand elder-care services.By the year 2050, that number is projected to nearly triple toapproximately 19 million.Thepopulation aged 65 to 84 years is projected to increase by approximately 36%during the same time period.As a result of these market dynamics, annual expenditures for health careservices continue to increase in theUnited States.We believe that demand for our products and services will grow, while continuing to be impacted bycurrent and future operating, economic and industry conditions.The Centers for Medicare and Medicaid Services,or CMS,published “National Health Expenditure Projections 2019-2028”indicating that total national health carespending reached approximately $3.6 trillion in 2018, or 17.7% of thenation’s gross domestic product, thebenchmark measure for annual production of goods and services in the UnitedStates.Health care spending isprojected to reach approximately $6.2 trillion in 2028,approximately 19.7%of the nation’s projected grossdomestic product.
48
Results of Operations
The following tables summarize the significant components of our operatingresults and cash flows from continuingoperations for each of the three years ended December 26, 2020, December28, 2019 and December 29, 2018 (inthousands):
December 26,
December 28,
December 29,
2020
2019
2018
Operating results:
$
10,119,141
$
9,985,803
$
9,417,603
7,304,798
6,894,917
6,506,856
2,814,343
3,090,886
2,910,747
Operating expenses:
Selling, general and administrative2,246,947
2,357,920
2,217,273
-
-
38,488
Restructuring costs
32,093
14,705
54,367
Operating income
$
535,303
$
718,261
$
600,619
$
(35,408)
$
(37,954)
$
(63,783)
Net gain on sale of equity investments1,572
186,769
-
Net income from continuing operations
418,437
725,461
450,441
Income (loss) from discontinued operations
986
(6,323)
111,685
Net income attributable to Henry Schein, Inc.403,794
694,734
535,881
December 26,
December 28,
December 29,
2020
2019
2018
Net cash provided by operating activities from continuing operations
$
593,519
$
820,478
$
450,955
Net cash used in investing activities from continuing operations
(115,019)
(422,309)
(164,324)
Net cash used in financing activities from continuing operations
(181,794)
(363,351)
(402,173)
Plans of Restructuring
On July 9, 2018, we committed to an initiative to rationalize our operations andprovide expenseefficiencies.These actions allowed us to execute on our plan to reduce our cost structureand fund new initiativesto drive growth under our 2018 to 2020 strategic plan.This initiative resulted in the elimination of approximately4% of our workforce and the closing of certain facilities.
On November 20, 2019, we committed to a contemplated initiative, intendedto mitigate stranded costs associatedwith the Animal Health Spin-off and to rationalize operations and to provide expense efficiencies.These activitieswere originally expected to be completed by the end of 2020.As a result of the business environment brought onby the COVID-19 pandemic, we are continuing our restructuring activitiesinto 2021. We are currently unable ingood faith to make a determination of an estimate of the amount or range ofamounts expected to be incurred inconnection with these activities in 2021, both with respect to each majortype of cost associated therewith and withrespect to the total cost, or an estimate of the amount or range of amountsthat will result in future cashexpenditures.
During the years ended December 26, 2020, December 28, 2019, and December29, 2018 we recorded restructuringcharges of $32.1 million, $14.7 million and $54.4 million, respectively.The costs associated with theserestructurings are included in a separate line item, “Restructuring costs” withinour consolidated statements ofincome.
49
2020 Compared to 2019
Net Sales
Net sales for 2020 and 2019 were as follows (in thousands):
% of
% of
Increase / (Decrease)
2020
Total
2019
Total
$
%
Health care distribution
(1)
$
5,912,593
58.4
%
$
6,415,865
64.2
%
$
(503,272)
(7.8)
%
3,617,017
35.8
2,973,586
29.8
643,431
21.6
Total health care distribution9,529,610
94.2
9,389,451
94.0
140,159
1.5
Technology and value-added services
(2)
514,258
5.1
515,085
5.2
(827)
(0.2)
Total excluding Corporate TSA revenues
10,043,868
99.3
9,904,536
99.2
139,332
1.4
Corporate TSA revenues
(3)
75,273
0.7
81,267
0.8
(5,994)
(7.4)
$
10,119,141
100.0
$
9,985,803
100.0
$
133,338
1.3
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic
pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, personal protective equipment and vitamins.
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.
Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in connection
with the Animal Health Spin-off, which ended in December 2020.
The 1.3% increase in net sales for the year ended December 26, 2020includes an increase of 1.4% local currencygrowth (0.8% increase in internally generated revenue and 0.6% growthfrom acquisitions) partially offset by adecrease of 0.1% related to foreign currency exchange.Excluding sales of products under the transition servicesagreement with Covetrus, our net sales increased 1.4%, including localcurrency growth of 1.5% (0.9% increase ininternally generated revenue and 0.6%growth from acquisitions) partially offset by a decrease of 0.1% relatedtoforeign currency exchange.Sales for the year ended December 26, 2020 benefited from sales ofPPE and COVID-19 related products of approximately $1,298 million, an increase of approximately208% versus the prior year.Future PPE and COVID-19 related product sales may be lower than whatwe have experienced in 2020, which weredriven by rising positive COVID-19 cases and practices seeking to ensureadequate supply.The 7.8% decrease in dental net sales for the year ended December26, 2020 includes a decrease of 7.6% in localcurrencies (8.0% decrease in internally generated revenue,partially offset by 0.4%growth from acquisitions) and adecrease of 0.2% related to foreign currency exchange.The 7.6% decrease in local currency sales was due todecreases in dental equipment sales and service revenues of 12.5%,all of which is attributable to a decrease ininternally generated revenue and a decrease in dental consumable merchandisesales of 6.1% (6.5% decrease ininternally generated revenue,partially offset by 0.4% growth from acquisitions).The COVID-19 pandemicadversely impacted our dental business beginning in mid-March of 2020as many dental offices progressivelyclosed or began seeing a limited number of patients, resulting in a decreaseof 41.2% in second quarter dentalrevenues versus the same period in the prior year.However, in the second half of the year ended December 26,2020, our dental sales began to improve as dental practices resumed activitiesand patient traffic increased.Globaldental sales for the year ended December 26, 2020 benefited from sales ofPPE and COVID-19 related products ofapproximately $491 million, an increase of approximately 72% versus theprior year.The 21.6% increase in medical net sales for the year ended December26, 2020 includes an increase of 21.6% localcurrency growth (20.7% increase in internally generated revenue and 0.9%growth from acquisitions).TheCOVID-19 pandemic adversely impacted our medical business beginning inmid-March of 2020, but not assignificantly as our dental business as the decrease in second quartermedical revenues was only 11.2% versus thesame period in the prior year. Our medical business rebounded strongly in the second half of the year in partdue tocontinued strong sales of PPE, such as masks, gowns and face shields,and COVID-19 related products, such asdiagnostic test kits.Global medical sales for the year ended December 26, 2020 benefitedfrom sales of PPE andCOVID-19 related products of approximately $807 million, anincrease of approximately 490% versus the prior50
The 0.2% decrease in technology and value-added services net salesfor the year ended December 26, 2020 includesa decrease of 0.3% local currency growth (3.2% decrease in internally generatedrevenue, partially offset by 2.9%growth from acquisitions) partially offset by an increase of 0.1% related to foreigncurrency exchange.The closureof dental and medical offices beginning in mid-March of 2020 due to the COVID-19 pandemicresulted in adecrease of 15.9% in second quarter technology and value-added servicesrevenues versus the same period in theprior year.As dental and medical practice operations, resumed in the secondhalf of the year, the trend fortransactional software revenues improved as more patients visited practicesworldwide.Although dental and medical practices continued to re-open globallyin the second half of the year, patient volumesremain below pre-COVID-19 levels.As such, there is an ongoing risk that the COVID-19 pandemic mayagainhave a material adverse effect on our net sales in future periods.
Gross Profit
Gross profit and gross margins for 2020 and 2019 by segment and in total were as follows(in thousands):Gross
Gross
Decrease
2020
Margin %
2019
Margin %
$
%
$
2,448,991
25.7
%
$
2,717,574
28.9
%
$
(268,583)
(9.9)
%
Technology and value-added services
363,245
70.6
370,887
72.0
(7,642)
(2.1)
Total excluding Corporate TSA revenues
2,812,236
28.0
3,088,461
31.2
(276,225)
(8.9)
Corporate TSA revenues
2,107
2.8
2,425
3.0
(318)
(13.1)
$
2,814,343
27.8
$
3,090,886
31.0
$
(276,543)
(8.9)
As a result of different practices of categorizing costs associated with distribution networksthroughout ourindustry, our gross margins may not necessarily be comparable to other distribution companies.Additionally, werealize substantially higher gross margin percentages in our technology segment than inour health care distributionsegment.These higher gross margins result from being both the developer and seller ofsoftware products andservices, as well as certain financial services. The software industrytypically realizes higher gross margins torecover investments in research and development.
In connection with the completion of the Animal Health Spin-off (see
additional details), we entered into a transition services agreement withCovetrus, pursuant to which Covetruspurchased certain products from us.The agreement, which ended in December 2020, provided that these productswould be sold to Covetrus at a mark-up that ranged from 3% to 6%of our product cost to cover handling costs.Within our health care distribution segment, gross profit margins may vary from one period to the next.Changes inthe mix of products sold as well as changes in our customer mix havebeen the most significant drivers affectingour gross profit margin.For example, sales of pharmaceutical products are generallyat lower gross profit marginsthan other products.Conversely, sales of our private label products achieve gross profit margins that are higherthan average.With respect to customer mix, sales to our large-group customers are typically completed at lowergross margins due to the higher volumes sold as opposed to the grossmargin on sales to office-based practitioners,who normally purchase lower volumes at greater frequencies.
Health care distribution gross profit decreased $268.6 million, or 9.9%,for the year ended December 26, 2020compared to the prior year period, due primarily to the COVID-19pandemic.Health care distribution gross profitmargin decreased to 25.7% for the year ended December 26, 2020 from 28.9% for the comparableprior yearperiod.The overall decrease in our health care distribution gross profit isattributable to a $232.2 million decline ingross profit due to the decrease in the gross margin rates and a $48.3 million gross profitdecrease in internallygenerated revenue, partially offset by $11.9 million of additional gross profit from acquisitions.Gross profitmargin was negatively affected by significant adjustments recorded for PPE inventory and COVID-19relatedproducts caused by volatility of pricing and demand experienced during theyear, which conditions may recur andadversely impact gross profit margins in future periods, although we do not expectmaterial inventory adjustmentsto continue into 2021.During the year, we continued to earn lower vendor rebates, due to lower purchase volumes,in our health care distribution segment, which also contributes to the lower grossprofit margin.51
Technology and value-added services gross profit decreased $7.6 million, or 2.1%, for the year ended December
26, 2020 compared to the prior year period.Technologyand value-added services gross profit margin decreased to70.6% for the year ended December 26, 2020 from 72.0%for the comparable prior year period.The overalldecrease in our Technology and value-added services gross profit is attributable to a decrease of $11.5 million in
internally generated revenue and a decrease of $8.8 million in gross profitdue to the decrease in the gross marginrates, partially offset by $12.7 million additional gross profit from acquisitions.
Selling, General and Administrative
Selling, general and administrative expenses by segment and intotal for 2020 and 2019 were as follows (inthousands):
% of
% of
Respective
Respective
Increase / (Decrease)
2020
Net Sales
2019
Net Sales
$
%
$
2,014,925
21.1
%
$
2,128,595
22.7
%
$
(113,670)
(5.3)
%
Technology and value-added services264,115
51.4
244,030
47.4
20,085
8.2
$
2,279,040
22.5
$
2,372,625
23.8
$
(93,585)
(3.9)
Selling, general and administrative expenses (including restructuring costsin the years ended December 26, 2020and December 28, 2019) decreased $93.6 million, or 3.9%, to $2,279.0 millionfor the year ended December 26,2020 from the comparable prior year period.The $113.7 million decrease in selling, general and administrativeexpenses within our health care distribution segment for the year ended December26, 2020 as compared to theprior year period was attributable to a reduction of $151.5 million of operatingcosts, primarily as a result of cost-saving measures taken in response to the COVID-19 pandemic, partially offset by$20.8 million of additional costsfrom acquired companies and an increase of $17.0 million in restructuringcosts.The $20.1 million increase inselling, general and administrative expenses within our technology and value-addedservices segment for the yearended December 26, 2020 as compared to the prior year period wasattributable to $10.5 million of additional costsfrom acquired companies and an increase of $9.6 million of operating costs.As a percentage of net sales, selling,general and administrative expenses decreased to 22.5% from 23.8% forthe comparable prior year period. The costsavings achieved from measures taken in response to the COVID-19pandemic are expected to diminish in futureperiods as most of these measures were temporary and substantially endedduring the second half of 2020.As a component of total selling, general and administrative expenses, sellingexpenses decreased $86.4 million, or5.9%, to $1,375.2 million for the year ended December 26, 2020 fromthe comparable prior year period, primarilyas a result of cost-saving measures taken in response to the COVID-19pandemic.As a percentage of net sales,selling expenses decreased to 13.6% from 14.7% for the comparable prioryear period.As a component of total selling, general and administrative expenses, generaland administrative expensesdecreased $7.2 million, or 0.8%, to $903.8 million for the year endedDecember 26, 2020 from the comparableprior year period.As a percentage of net sales, general and administrative expensesdecreased to 8.9% from 9.1%for the comparable prior year period.
Other Expense, Net
Other expense, net for the years ended 2020 and 2019 was as follows(in thousands):Variance
2020
2019
$
%
$
9,842
$
15,757
$
(5,915)
(37.5)
%
(41,377)
(50,792)
9,415
18.5
(3,873)
(2,919)
(954)
(32.7)
$
(35,408)
$
(37,954)
$
2,546
6.7
Interest income decreased $5.9 million primarily due to lower interest ratesand reduced late fee income.Interestexpense decreased $9.4 million primarily due to lower interest rates andlower average debt balances for the yearended December 26, 2020 as compared to the prior year.52
Income Taxes
For the year ended December 26, 2020, our effective tax rate was 19.1%compared to 23.4%for the prior yearperiod.In 2020, our effective tax rate was primarily impacted by the agreement with the U.S InternalRevenueService on our Advanced Pricing Agreement (APA), other audit resolutions, and state and foreign income taxes and
interest expense.In 2019, our effective tax rate was primarily impacted by state andforeign income taxes andinterest expense.
Net Gain on Sale of Equity Investments
In the fourth quarter of 2020 we received contingent proceeds of $2.1million from the 2019 sale of Hu-Friedyresulting in the recognition of an additional after-tax gain of $1.6 million.53
2019 Compared to 2018
Net Sales
Net sales for 2019 and 2018 were as follows (in thousands):
% of
% of
Increase
2019
Total
2018
Total
$
%
Health care distribution
(1)
$
6,415,865
64.2
%
$
6,347,998
67.4
%
$
67,867
1.1
%
2,973,586
29.8
2,661,166
28.3
312,420
11.7
Total health care distribution9,389,451
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
-
$
9,985,803
100.0
$
9,417,603
100.0
$
568,200
6.0
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.
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.
Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in
connection with the Animal Health Spin-off, which ended in December 2020.
The 6.0% increase in net sales for the year ended December 28, 2019includes an increase of 7.7% local currencygrowth (4.4% increase in internally generated revenue and 3.3% growthfrom acquisitions) partially offset by adecrease of 1.7% related to foreign currency exchange.Excluding sales of products under the transition servicesagreement with Covetrus, our net sales increased 5.2%, including localcurrency growth of 6.9% (3.5% increase ininternally generated revenue and 3.4% growth from acquisitions) partiallyoffset by a decrease of 1.7% related toforeign currency exchange.
The 1.1% increase in dental net sales for the year ended December 28, 2019includes an increase of 3.4% in localcurrencies (2.0% increase in internally generated revenue and 1.4% growthfrom acquisitions) partially offset by adecrease of 2.3% related to foreign currency exchange.The 3.4% increase in local currency sales was due toincreases in dental equipment sales and service revenues of 1.0%, all of whichis attributable to an increase ininternally generated revenue and dental consumable merchandise sales growthof 4.2% (2.3% increase in internallygenerated revenue and 1.9% growth from acquisitions).The 11.7% increase in medical net sales for the year ended December 28, 2019 includes anincrease of 11.9% localcurrency growth (7.0% increase in internally generated revenue and4.9% growth from acquisitions) partially offsetby a decrease of 0.2% related to foreign currency exchange.
The 26.1% increase in technology and value-added services net sales for theyear ended December 28, 2019includes an increase of 27.0% local currency growth (4.3% increase ininternally generated revenue and 22.7%growth from acquisitions) partially offset by a decrease of 0.9% related to foreigncurrency exchange.54
Gross Profit
Gross profit and gross margins for 2019 and 2018 by segment and in total were as follows(in thousands):Gross
Gross
Increase
2019
Margin %
2018
Margin %
$
%
$
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
-
$
3,090,886
31.0
$
2,910,747
30.9
$
180,139
6.2
As a result of different practices of categorizing costs associated with distribution networksthroughout ourindustry, our gross margins may not necessarily be comparable to other distribution companies.Additionally, werealize substantially higher gross margin percentages in our technology segment thanin our health care distributionsegment.These higher gross margins result from being both the developer and seller ofsoftware products andservices, as well as certain financial services. The software industry typicallyrealizes higher gross margins torecover investments in research and development.
In connection with the completion of the Animal Health Spin-off (see
additional details), we entered into a transition services agreement withCovetrus, pursuant to which Covetruspurchased certain products from us.The agreement, which ended in December 2020, provided that these productswould be sold to Covetrus at a mark-up that ranged from 3% to 6%of our product cost to cover handling costs.Within our health care distribution segment, gross profit margins may vary from one period to the next.Changes inthe mix of products sold as well as changes in our customer mix havebeen the most significant drivers affectingour gross profit margin.For example, sales of pharmaceutical products are generallyat lower gross profit marginsthan other products.Conversely, sales of our private label products achieve gross profit margins that are higherthan average.With respect to customer mix, sales to our large-group customers are typically completed at lowergross margins due to the higher volumes sold as opposed to the grossmargin on sales to office-based practitioners,who normally purchase lower volumes at greater frequencies.
Health care distribution gross profit increased $88.8 million, or 3.4%, forthe year ended December 28, 2019compared to the prior year period.Health care distribution gross profit margin decreased to 28.9% for the yearended December 28, 2019 from 29.2% for the comparable prior year period.The overall increase in our health caredistribution gross profit is attributable to $73.1 million of additional grossprofit from acquisitions and $30.9million gross profit increase from growth in internally generated revenue.These increases were partially offset bya $15.2 million decline in gross profit due to the decrease in the grossmargin rates.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 services gross profit margin increased to72.0% for the year ended December 28, 2019 from 69.0% for the comparableprior year period.Acquisitionsaccounted for $80.2 million of our gross profit increase within our technologyand value-added services segmentfor the year ended December 28, 2019 compared to the prior year periodand also accounted for the increase in thegross profit margin. The remaining increase of $8.7 million in our technologyand value-added services segmentgross profit was primarily attributable to growth in internally generatedrevenue.55
Selling, General and Administrative
Selling, general and administrative expenses by segment and intotal for 2019 and 2018 were as follows (inthousands):
% of
% of
Respective
Respective
Increase / (Decrease)
2019
Net Sales
2018
Net Sales
$
%
$
2,128,595
22.7
%
$
2,137,779
23.7
%
$
(9,184)
(0.4)
%
Technology and value-added services244,030
47.4
172,349
42.2
71,681
41.6
$
2,372,625
23.8
$
2,310,128
24.5
$
62,497
2.7
Selling, general and administrative expenses (including restructuringcosts in the years ended December 28, 2019and December 29, 2018, and litigation settlements in the year ended December29, 2018) increased $62.5 million,or 2.7%, to $2,372.6 million for the year ended December 28, 2019 fromthe comparable prior year period.The$9.2 million decrease in selling, general and administrative expenses withinour health care distribution segment forthe year ended December 28, 2019 as compared to the prior year period wasattributable to a reduction of $73.7million of operating costs (primarily due to $38.5 million of litigationsettlement costs recorded in 2018 and a $39.7million decrease in restructuring costs) partially offset by $64.5 million of additionalcosts from acquiredcompanies.The $71.7 million increase in selling, general and administrativeexpenses within our technology andvalue-added services segment for the year ended December 28, 2019 ascompared to the prior year period wasattributable to $70.5 million of additional costs from acquired companies and $1.2million of additional operatingcosts.As a percentage of net sales, selling, general and administrative expensesdecreased to 23.8% from 24.5%for the comparable prior year period.
As a component of total selling, general and administrative expenses, sellingexpenses increased $33.5 million, or2.3%, to $1,461.6 million for the year ended December 28, 2019 fromthe comparable prior year period.As apercentage of net sales, selling expenses decreased to 14.7%from 15.1% for the comparable prior year period.As a component of total selling, general and administrative expenses, generaland administrative expensesdecreased $29.0 million, or 3.3%, to $911.0 million for the year ended December 28, 2019 fromthe comparableprior year period primarily due to $38.5 million of litigation settlementcosts recorded in 2018 and a $39.7 milliondecrease in restructuring costs partially offset by increases in general and administrativeexpenses.As a percentageof net sales, general and administrative expenses decreased to 9.1% from 9.4%for the comparable prior yearperiod.
Other Expense, Net
Other expense, net for the years ended 2019 and 2018 was as follows(in thousands):Variance
2019
2018
$
%
$
15,757
$
15,491
$
266
1.7
%
(50,792)
(76,016)
25,224
33.2
(2,919)
(3,258)
339
10.4
$
(37,954)
$
(63,783)
$
25,829
40.5
Interest expense decreased $25.2 million primarily due to decreasedborrowings under our bank credit lines.56
Income Taxes
For the year ended December 28, 2019, our effective tax rate was 23.4% compared to 20.0%for the prior yearperiod.In 2019, our effective tax rate was primarily impacted by state and foreign incometaxes and interestexpense.In 2018, our effective tax rate was primarily impacted by a reduction in the estimateof our transition taxassociated with the Tax Cuts and Jobs Act, tax charges and credits associated with legal entity reorganizations
outside the U.S., and 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 2019and2018, 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, a manufacturer of dental instruments and infection
prevention solutions.Our investment was non-controlling, we were not involved inrunning the business and hadno representation on the board of directors.During the fourth quarter of 2019, we also sold certain other investments.In the aggregate, the sales of theseinvestments resulted in a pre-tax gain of approximately $250.2 millionand an after-tax gain of approximatelyLiquidity and Capital ResourcesOur principal capital requirements have included funding of acquisitions, purchasesof additional noncontrollinginterests, repayments of debt principal, the funding of working capital needs,purchases of fixed assets andrepurchases of common stock (which have been temporarily suspended).Working capital requirements generallyresult from increased sales, special inventory forward buy-in opportunities andpayment terms for receivables andpayables.Historically, sales have tended to be stronger during the third and fourth quarters and special inventoryforward buy-in opportunities have been most prevalent just before theend of the year, and have caused our workingcapital requirements to be higher from the end of the third quarter tothe end of the first quarter of the followingyear.
The pandemic and the governmental responses to it had a material adverseeffect on our cash flows in the secondquarter of 2020.In the latter half of the second quarter and continuingthrough year-end, dental and medicalpractices began to re-open worldwide. However, patient volumes remain below pre-COVID-19 levels and certain
regions in the U.S. and internationally are experiencing an increase in COVID-19cases.As such, there is anongoing risk that the COVID-19 pandemic may again have a materialadverse effect on our cash flows in futureperiods and may result in a material adverse effect on our financial condition andliquidity.However, the extent ofthe potential impact cannot be reasonably estimated at this time.
As part of a broad-based effort to support plans for the long-term health of our businessand to strengthen ourfinancial flexibility, we implemented cost reduction measures that included certain reductions in payroll,
substantially decreased capital expenditures, reduced corporatespending and the elimination of certain non-strategic targeted expenditures. As our markets have begun to recover, we ended most of those temporary expense-
reduction initiatives during the second half of 2020.As the COVID-19 pandemic continues to unfold, we willcontinue to evaluate appropriate actions for the business.
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 dependenton the continued demand ofour customers for our products and services, and access to products andservices from our suppliers.Our business requires a substantial investment in working capital, whichis susceptible to fluctuations during theyear as a result of inventory purchase patterns and seasonal demands.Inventory purchase activity is a function ofsales activity, special inventory forward buy-in opportunities and our desired level of inventory.We anticipatefuture increases in our working capital requirements.
57
We finance our business to provide adequate funding for at least 12 months.Funding requirements are based onforecasted profitability and working capital needs, which, on occasion, may change.Consequently, we may changeour 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 withsufficient liquidity to meet our currentlyforeseeable 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 freedistribution of $1,120 million from Covetrus, which has been used topay down our debt, thereby generatingadditional debt capacity that can be used for general corporate purposes, includingshare repurchases and mergersand acquisitions.
Net cash provided by operating activities was $593.5 million for theyear ended December 26, 2020, compared to$820.5 million for the prior year.The net change of $227.0 million was primarily attributable to lower net incomeand lower distributions from equity affiliates,both resulting from the sale of our equity investment in Hu-Friedyinthe fourth quarter of 2019, and increased working capital requirements,specifically an increase in inventories dueto stocking of PPE and COVID-19 related products, and an increase in accountsreceivable due to higher salesvolume.These working capital increases were partially offset by greater growthin accounts payable and accruedexpenses.
Net cash used in investing activities was $115.0 million for the year ended December 26, 2020,compared to $422.3million for the prior year.The net change of $307.3 million was primarily due to decreased paymentsfor equityinvestments and business acquisitions, partially offset by decreased proceeds fromsales of equity investments.Net cash used in financing activities was $181.8 million for theyear ended December 26, 2020, compared to$363.4 million for the prior year.The net change of $181.6 million was primarilydue to increased net proceeds
from bank borrowings and lower repurchases of our common stock,partially offset by proceeds received during theprior year related to the Animal Health Spin-off.
The following table summarizes selected measures of liquidity and capital
resources (in thousands):resources:
December 26,30,
December 28,31,
20202023
20192022
Cash and cash equivalents
$
421,185171
$
106,097117
(1)
1,508,3131,805
1,188,1331,764
Debt:
$
73,366264
$
23,975103
Current maturities of long-term debt
109,836150
109,8496
515,7731,937
622,9081,040
$
698,9752,351
$
756,7321,149
Leases:
Current operating lease liabilities
$
64,71680
$
65,34973
Non-current operating lease liabilities
238,727310
176,267275
Includes $0.0$284 million and $127.0$327 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitizationsecuritizations at December 26, 202030, 2023 and December 28, 2019,31, 2022, 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 turnover
turns
Our accounts receivable days sales outstanding from operations
increased to
46.046.2 days as of December
26, 202030, 2023from
44.541.9 days as of December
28, 2019.31, 2022 due to delays in billingsleading to limited collections in the quarter endedDecember 30, 2023 as a result of the cybersecurity incident.
During the years ended December
26, 202030, 2023 and
December
28,2019,31, 2022, we
wrote off approximately $7.8$16 million and $5.9$10 million, respectively, of fully reserved
accounts receivable against
58
our trade receivable reserve.
Our inventory
turnoverturns from operations was
5.14.5 as ofDecember 30, 2023 and 4.7 as of December
26, 2020 and 5.0 as of December 28, 2019. 31, 2022.
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%4.8%), as well as
inventory purchase commitments and operating lease obligations
as of December
26, 2020: 30, 2023:
Payments due by period (in thousands)
< 1 year
2 - 3 years
4 - 5 years
> 5 years
Total
Contractual obligations:
Long-term debt, including interest
$
125,797243
$
43,9941,097
$
126,464346
$
435,219783
$
731,4742,469
Inventory purchase commitments
208,2005
110,8008
4
-
17
Operating lease obligations
92
141
86
119
438
Transition tax obligations
11
24
-
-
319,000
Operating lease obligations71,801
98,719
55,046
110,228
335,794
Transition tax obligations9,895
43,291
30,923
-
84,10935
Finance lease obligations, including interest
2,5034
2,1383
632
920
6,193
$
418,196
$
298,942
$
213,065
$
546,367
$
1,476,570
Bank Credit Lines
Bank credit lines consisted of the following:
December 26,
December 28,
2020
2019
Revolving credit agreement
$2
-
$
-
Other short-term bank credit lines
73,366
23,9759
Total
$
73,366355
$
23,9751,273
$
Revolving Credit Agreement438
$
On April 18, 2017, we entered into a $750 million revolving creditagreement (the “Credit Agreement”), which902matures in April 2022.The interest rate is based on the USD LIBORplus a spread based on our leverage ratio at$the end of each financial reporting quarter.We expect the LIBOR rate to be discontinued at some point2,968during 2021, which will require an amendmentFor information relating to our debt
agreements toreflect a new reference rate. We do notplease seeexpect the discontinuation of LIBOR as a reference rate in our debt agreementsto have a material adverse effect onNote 13 – Debtour financial position or to materially affect our interest expense.The Credit Agreement also requires, among otherthings, that we maintain maximum leverage ratios. Additionally, the Credit Agreement contains customary
representations, warranties and affirmative covenants as well as customary negativecovenants, subject tonegotiated exceptions on liens, indebtedness, significant corporate changes(including mergers), dispositions andcertain restrictive agreements.As of December 26, 2020 and December 28, 2019, we had no borrowingson thisrevolving credit facility.As of December 26, 2020 and December 28, 2019, therewere $9.5 million and $9.6million of letters of credit, respectively, provided to third parties under the credit facility.
On April 17, 2020, we amended the Credit Agreement to, among otherthings, (i) modify the financial covenantfrom being based on total leverage ratio to net leverage ratio, (ii) adjustthe pricing grid to reflect the net leverageratio calculation, and (iii) increase the maximum maintenance leverage ratiothrough March 31, 2021. .
59
364-Day Credit Agreement
On April 17, 2020, we entered into a new $700 million 364-day credit agreement,with JPMorgan Chase Bank,N.A. and U.S. Bank National Association as joint lead arrangers and jointbookrunners.This facility matures onApril 16, 2021.As of December 26, 2020, we had no borrowings under this creditfacility.We have the ability toborrow up to an additional $200 million, from the original facility amountof $700 million, under this credit facilityon a revolving basis as needed, subject to the terms and conditions ofthe credit agreement.The interest rate forborrowings under this facility will fluctuate based on our net leverageratio.At December 26, 2020, the interestrate on this facility was 2.50%.The proceeds from this facility can be used for working capital requirementsandgeneral corporate purposes, including, but not limited to, permitted refinancingof existing indebtedness.Under theterms of this agreement, we are prohibited from repurchasing our common stockuntil we report our financialresults for the second quarter of 2021.
Other Short-Term CreditLinesAs of December 26, 2020 and December 28, 2019, we had various othershort-term bank credit lines available, ofwhich $73.4 million and $24.0 million, respectively, were outstanding.At December 26, 2020 and December 28,2019, borrowings under all of these credit lines had a weighted averageinterest rate of 4.14% and 3.45%,respectively.
Long-term debt consisted of the following:
December 26,
December 28,
2020
2019
Private placement facilities$
613,498
$
621,274
U.S. trade accounts receivable securitization
-
100,000
Note payable due in 2025 with an interest rate of 3.1%
at December 26, 2020
1,554
-
Variouscollateralized and uncollateralized loans payable with interest,in varying installments through 2023 at interest rates
ranging from 2.62% to 4.27% at December 26, 2020 and
ranging from 2.56% to 10.5% at December 28, 2019
4,596
6,089
Finance lease obligations (see Note 7)5,961
5,394
625,609
732,757
(109,836)
(109,849)
$
515,773
$
622,908
Private Placement Facilities
Our private placement facilities, with three insurance companies, have atotal facility amount of $1 billion, and areavailable on an uncommitted basis at fixed rate economic terms to be agreed uponat the time of issuance, fromtime to time through June 23, 2023.The facilities allow us to issue senior promissory notes to thelenders at a fixedrate based on an agreed upon spread over applicable treasury notes atthe time of issuance.The term of eachpossible issuance will be selected by us and can range from five to15 years (with an average life no longer than 12years).The proceeds of any issuances under the facilities will be usedfor general corporate purposes, includingworking capital and capital expenditures, to refinance existing indebtednessand/or to fund potential acquisitions.On June 29, 2018, we amended and restated the above private placementfacilities to, among other things, (i) permitthe consummation of the Animal Health Spin-off and (ii) provide for the issuanceof notes in Euros, British Poundsand Australian Dollars, in addition to U.S. Dollars.The agreements provide, among other things, that we maintaincertain maximum leverage ratios, and contain restrictions relatingto subsidiary indebtedness, liens, affiliatetransactions, disposal of assets and certain changes in ownership.These facilities contain make-whole provisions inthe event that we pay off the facilities prior to the applicable due dates.
60
On June 23, 2020, we amended the private placement facilities to, amongother things, (i) temporarily modify thefinancial covenant from being based on total leverage ratio to net leverageratio until March 31, 2021, (ii) increasethe maximum maintenance leverage ratio through March 31, 2021, but witha 1.00% interest rate increase on theoutstanding notes if the net leverage ratio exceeds 3.0x, which will remainin effect until we deliver financials for afour-quarter period ending on or after June 30, 2021 showing compliance withthe total leverage ratio requirement,and (iii) make certain other changes conforming to the Credit Agreement, datedas of April 18, 2017, as amended.The components of our private placement facility borrowings asof December 26, 2020 are presented in thefollowing table (in thousands):
Amount of
Borrowing
Borrowing
Outstanding
Rate
Due Date
January 20, 2012
$
14,286
3.09
%
January 20, 2022
January 20, 2012
50,000
3.45
January 20, 2024
December 24, 2012
50,000
3.00
December 24, 2024
June 2, 2014
100,000
3.19
June 2, 2021
June 16, 2017
100,000
3.42
June 16, 2027
September 15, 2017
100,000
3.52
September 15, 2029
January 2, 2018
100,000
3.32
January 2, 2028
September 2, 2020
100,000
2.35
September 2, 2030
Less: Deferred debt issuance costs
(788)
$
613,498
(1)Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016.(2)On September 2, 2020, we refinanced our $100 million private placement borrowing at 3.79%, originally due on September 2, 2020,with a similar 10-year borrowing at 2.35% maturing on September 2, 2030.
U.S. Trade Accounts Receivable Securitization
We have a facility agreement with a bank, as agent, based on the securitization of our U.S. trade accounts
receivable that is structured as an asset-backed securitization program with pricingcommitted for up to three years.Our current facility, which has a purchase limit of $350 million, was scheduled to expire on April 29, 2022.OnJune 22, 2020, the expiration date for this facility was extended toJune 12, 2023 and was amended to adjust certaincovenant levels for 2020.As of December 26, 2020 and December 28, 2019, the borrowings outstandingunder thissecuritization facility were $0.0 million and $100 million, respectively.At December 26, 2020, the interest rate onborrowings under this facility was based on the asset-backed commercialpaper rate of 0.22% plus 0.95%, for acombined rate of 1.17%.At December 28, 2019, the interest rate on borrowings under this facilitywas based onthe asset-backed commercial paper rate of 1.90% plus 0.75%, for a combinedrate of 2.65%.If our accounts receivable collection pattern changes due to customerseither paying late or not making payments,our ability to borrow under this facility may be reduced.
We are required to pay a commitment fee of 25 to 45 basis points depending upon program utilization.
6157
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
16approximately 18 years, some
ofof which may
include options to extend the leases for up to
1015 years.
As of December
26, 2020,30, 2023, our right-of-use
assets related to
operating leases were
$288.8$325 million and our current and non-current
operating
operating lease liabilities were
$64.7$80 million
and
$238.7$310 million, respectively.
Please seeStock Repurchases
On February 8, 2023, our Board authorized the repurchase of upto an additional $400 million in shares of our common stock.
From
June 21, 2004March 3, 2003 through December
26, 2020,30, 2023, we repurchased
$3.6$4.7
billion, or
75,563,28990,394,805 shares, under our
common stock repurchase programs, with
$201.2$265 million available
as of
December
26, 202030, 2023 for future common
stockOn October 30, 2019, our Board of Directors authorized the repurchase ofup to an additional $400 million inshares of our common stock.
As a result of the COVID-19 pandemic, as previously announced, we havetemporarily suspended our sharerepurchase program in an effort to preserve cash and exercise caution during thisuncertain period and due tocertain restrictions related to financial covenants in our credit facilities.
Redeemable Noncontrolling interests
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.entities.
AccountAccounting Standards Codification
(“ASC”)Topic 480-10 is
applicableapplicable for noncontrolling interests where we are or may be required
to purchase
to purchase all or a portion of the
outstanding interest
in a consolidated subsidiary from the noncontrolling interest
holder
holder under the terms of a put
option contained in
contractual agreements.
The componentsAs of
the change in the Redeemable noncontrollinginterests for the years ended December
26, 2020, December 28, 201930, 2023 and December
31, 2022,
29, 2018 are presented in theour balance for redeemablefollowing table:noncontrolling interests was $864 million and $576 million, respectively.Please seeDecember 26,
December 28,
December 29,
2020
2019
2018
Balance, beginning of period$
287,258
$
219,724
$
465,585
Decrease in redeemable noncontrolling interests due to
(17,241)
(2,270)
(287,767)
Increase in redeemable noncontrolling interests due to
business acquisitions
28,387
74,865
4,655
Net income attributable to redeemable noncontrolling interests13,363
14,838
15,327
(12,631)
(10,264)
(8,206)
Effect of foreign currency translation loss attributable to
redeemable noncontrolling interests(4,279)
(2,335)
(11,330)
Change in fair value of redeemable securities32,842
(7,300)
41,460
$
327,699
$
287,258
$
219,724
Changes in the estimated redemption amounts of the noncontrollinginterests subject to put options are adjusted ateach reporting period with a corresponding adjustment to Additional paid-incapital.Future reductions in thecarrying amounts are subject to a floor amount that is equal tothe fair value of the redeemable noncontrollinginterests at the time they were originally recorded.The recorded value of the redeemable noncontrolling interestscannot go below the floor level.These adjustments do not impact the calculation of earnings pershare.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 ourconsolidated statement of income.For the years ended December 26, 2020 and December 28, 2019,there were no62
material adjustments recorded in our consolidated statements of incomerelating to changes in estimated contingentpurchase price liabilities.
On July 1, 2018, we closed on a joint venture with Internet Brands,a provider of web presence and onlinemarketing software, to create a newly formed entity, Henry Schein One, LLC.The joint venture includes HenrySchein 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 originally held a 26%noncontrolling interest in Henry Schein One, LLC that is accountedfor
within stockholders’ equity, as well as afreestanding and separately exercisable right to put its noncontrollinginterest to Henry Schein, Inc. for fair valuefollowing the fifth anniversary of the effective date of the formation of the joint venture.Beginning with thesecond anniversary of the effective date of the formation of the joint venture, HenrySchein One began issuing afixed number of additional interests to Internet Brands, which increasedInternet Brands interest to 27% effectiveJuly 1, 2020.Henry Schein One will continue issuing additional intereststo Internet Brands annually through thefifth anniversary, ultimately increasing Internet Brands’ ownership to approximately 33.6%.Internet Brands is alsoentitled to receive a fixed number of additional interests, in the aggregate upto approximately 1.6% of the jointventure’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 considerationthat are accounted for within stockholders’equity; however, these shares will not be allocated any net income of Henry Schein One until theshares vest or areearned by Internet Brands.A Monte Carlo simulation was utilized to value the additional contingentinterests thatare subject to operating targets.Key assumptions that were applied to derive the fair value ofthe contingentinterests include an assumed equity value of Henry Schein One, LLCat its inception date, a risk-free interest ratebased on U.S. treasury yields, an assumed future dividend yield, a risk-adjusteddiscount rate applied to projectedfuture cash flows, an assumed equity volatility based on historical stock pricereturns of a group of guidelinecompanies, and an estimated correlation of annual cash flow returns toequity returns.As a result of this transactionwith Internet Brands, we recorded $567.6 million of noncontrollinginterest within stockholders’ equity.Noncontrolling Interests
Noncontrolling interests represent our less than 50% ownership interestin an acquired subsidiary. Our net incomeis reduced by the portion of the subsidiaries net income that is attributableto noncontrolling interests.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
theour unrecognized
tax benefits,
including accrued
interest, of $84.0$115 million
as of December
26, 2020.30, 2023.
Critical Accounting PoliciesEstimates
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
ofof assets and liabilities that are not readily
apparent from other sources.
We believe that the estimates, judgments andassumptions upon which we rely are reasonable based upon informationavailable 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.
ReportedTherefore, reported results
are therefore sensitive tomay differ from estimates and any
changes in our assumptions,judgments and estimates,such differences mayincluding the possibility of obtaining materially different results if different assumptions wereto be
applied.Our financial results for the year ended December 26, 2020 wereaffected by certain estimates we made due to theadverse business environment brought on by the COVID-19 pandemic.During the year ended December 26, 2020,we recorded incremental bad debt reserves of approximately $10.0million for our global dental business.Ourstock compensation expense during the year ended December 26, 2020was lower than in the years endedDecember 28, 2019 and December 29, 2018 duematerial to our
estimate that a lower amountconsolidated financial statements.
of performance shares grantedin 2018, 2019 or 2020 would ultimately vest as a result of the lower-than-normal earningsin 2020.Additionally, inthe year ended December 26, 2020, we recorded total impairment charges on intangible assetsof approximately$20.3 million.Although our selling, general and administrative expensesfor the year ended December 26, 202063
represent management's best estimates and assumptions that affect the reportedamounts, our judgment couldchange in the future due to the significant uncertainty surrounding the macroeconomiceffect of the COVID-19pandemic.
Furthermore, during the year ended December 26, 2020, our gross profitmargin was negatively affected bysignificant adjustments recorded for PPE inventory and COVID-19 relatedproducts reflecting changes in ourestimates of net realizable value brought on by volatility of pricing and changesin demand experienced during theyear. Such conditions may recur and adversely impact gross profit margins in future periods, although we do not
expect material inventory adjustments to continue into 2021.We believe that the following critical accounting policies,estimates, which have been discussed with the Audit Committee of
theof our Board,
of Directors, affect the significant estimates and judgments used in the
preparation
preparation of our
consolidated financial
statements:
Revenue Recognition
We generate revenue from the sale of dental and medical consumable products, equipment (health care distribution
revenues), software products and services and other sources (technologyand value-added services revenues).Provisions for discounts, rebates to customers, customer returns and othercontra revenue adjustments are includedin the transaction price at contract inception by estimating the most likelyamount based upon historical data andestimates and are provided for in the period in which the related sales arerecognized.Revenue derived from the sale of consumable products is recognized at a pointin time when control transfers to thecustomer.Such sales typically entail high-volume, low-dollar orders shippedusing 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 whenlegal title and risks and rewards ofownership transfer to the customer and the point at which we have anenforceable right to payment.Revenue derived from the sale of equipment is recognized when controltransfers to the customer. This occurswhen the equipment is delivered.Such sales typically entail scheduled deliveries of large equipment primarilybyequipment service technicians. Some equipment sales require minimalinstallation, which is typically completed atthe time of delivery. Our product generally carries standard warranty terms provided by the manufacturer, however,
in instances where we provide warranty labor services, the warrantycosts are accrued in accordance with ASC 460“Guarantees”.
Revenue derived from the sale of software products is recognized whenproducts are shipped to customers or madeavailable 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 customersupport for software, including annualsupport and/or training, is generally recognized over time using time elapsedas the input method that best depictsthe transfer of control to the customer.Revenue derived from other sources, including freight charges, equipment repairsand financial services, isrecognized when the related product revenue is recognized or whenthe services are provided.We apply thepractical expedient to treat shipping and handling activities performed afterthe customer obtains control asfulfillment activities, rather than a separate performance obligation in the contract.
Sales, value-add and other taxes we collect concurrent with revenue-producingactivities are excluded fromrevenue.
Certain of our revenue is derived from bundled arrangements that includemultiple distinct performance obligationswhich are accounted for separately.When we sell software products together with related services (i.e.,trainingand technical support), we allocate revenue to software using the residualmethod, using an estimate of thestandalone selling price to estimate the fair value of the undeliveredelements.There are no cases where revenue isdeferred due to a lack of a standalone selling price. Bundled arrangements thatinclude elements that are notconsidered software consist primarily of equipment and the related installationservice.We allocate revenue forsuch arrangements based on the relative selling prices of the goods or services. Ifan observable selling price is not64
available (i.e., we do not sell the goods or services separately), we use oneofthe following techniques to estimatethe standalone selling price:adjusted market approach; cost-plus approach; or the residualmethod.There is nospecific hierarchy for the use of these methods, but the estimated sellingprice reflects our best estimate of what theselling prices of each deliverable would be if it were sold regularly ona standalone basis taking into considerationthe cost structure of our business, technical skill required, customerlocation and other market conditions.Accounts Receivable
Accounts receivable are generally recognized when health care distributionand technology and value-addedservices revenues are recognized.In accordance with the “expected credit loss” model, the carrying amountofaccounts receivable is reduced by a valuation allowance that reflectsour best estimate of the amounts that will notbe collected.In addition to reviewing delinquent accounts receivable, we considermany factors in estimating ourreserve, including types of customers and their credit worthiness, experienceand historical data adjusted for currentconditions and reasonable supportable forecasts.Sales Returns
Sales returns are recognized as a reduction of revenue by the amountof expected returns and are recorded as refundliability 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, adjustedas necessary for new products.Theallowance for returns is presented gross as a refund liability and werecord an inventory asset (and a correspondingadjustment to cost of sales) for any products that we expect to be returned.Inventories and Reserves
Inventories consist primarily of finished goods and are valued at
the lower of cost or
market.net realizable value.
Cost is
determined by
the first-in, first-out method for merchandise
orand actual cost
for large equipment and
high tech
accordance with our policy for estimating carrying value of inventory,
valuation, we consider many
factors including the condition and
salabilityof the inventory, historical sales, forecasted sales and market and economic trends.
From time to time, we may adjust our assumptions for anticipated changesin any of these or other factors expectedto affect the value of inventory.Although we believe our judgments, estimates and/orassumptions related toinventory and reserves are reasonable, making material changes to suchjudgments, estimates and/or assumptionscould 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 atthe acquisition date and our consolidated financialstatements include their results of operations from that date.Any excess of acquisition consideration over the fairvalue of identifiable net assets acquired is recorded as goodwill.The major classes of assets and liabilities that wegenerally allocate purchase price to, excluding goodwill, include identifiableintangible assets (i.e., trademarks andtrade names, customer relationships and lists, non-compete agreements andproduct development), property, plantand equipment, deferred taxes and other current and long-term assets andliabilities.The estimated fair value ofidentifiable intangible assets is based on critical estimates, judgmentsand assumptions derived from: analysis ofmarket conditions; discount rates; discounted cash flows; customerretention rates; and estimated useful lives.Some prior owners of such acquired subsidiaries are eligible to receive additionalpurchase price cash considerationif certain financial targets are met.While we use our best estimates and assumptions to accurately valuethoseassets acquired and liabilities assumed at the acquisition date as wellas contingent consideration, where applicable,our estimates are inherently uncertain and subject to refinement.As a result, during the measurement period wemay record adjustments to the assets acquired and liabilities assumed withthe corresponding offset to goodwillwithin our consolidated balance sheets.At the end of the measurement period or final determinationof the valuesof such assets acquired or liabilities assumed, whichever comes first,any subsequent adjustments are recognized inour consolidated statements of operations.58
salability of the inventory by reviewing on-hand quantities, historical sales,
65forecasted sales and market and
Goodwilleconomic trends.Certain of our products, specifically PPE and COVID-19 test kits, have experiencedchanges innet realizable value, due to volatility of pricing and changes in demandfor these products.
Business Combinations
The estimated fair value of acquired identifiable intangible assets (i.e., customerrelationships and lists, trademarks and trade names, product development and non-compete agreements)is based on critical judgments and assumptions derived from analysis of market conditions, including discountrates, 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 economicand market for further discussion of our acquisitions. Goodwill is not amortized, but
Goodwill is subject to impairment analysis at least
once annually as
once annually,of the first day of our fourth quarter, or if an
event occurs or
circumstances change that would more likely than
not reduce
thea reporting unit’s fair value
of a reporting unit below
its carryingvalue.Such impairment analyses for goodwill require a comparison of thefair value to the carrying
value ofreporting units.value.
We regard our reporting units to be our operating segments:
our global dental
globaland medical
andbusinesses, and technology and value-added services.
Goodwill
wasis allocated to such reporting units, for the
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
applyingapplying the discounted cash flow methodology and confirming with
a market approach.
This analysis requiresThere are inherent uncertainties, however, related to fair value models, the inputs and our judgments
in applying themto this analysis. includingThe 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.
unit. On an annual basis, we prepare financial projections.These projections are based on input from our leadership and are presented annually to our Board.Influences on this year's forecasted financial information andthe fair value model include: the impact of planned strategic initiatives, the continuedintegration 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.factors. Changes in these estimates and assumptions could materially affect theOur third-party valuation specialists provide inputs into our determination
of
the discount rate.The rate isdependent 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 haveforecasted operating results.We also consider external benchmarks, and other data points which we believe areapplicable to our industry and the composition of our global operations.
For the years ended December 30, 2023 and December 25, 2021, we believethe fair value
andof each of our reporting goodwill impairment for each reporting unit.
Supplier Rebates
Supplier rebates are included as a reduction of cost of salesunits sufficiently exceeds the carrying values and
are recognizedover the period they are earned.Thefactorsthus we
consider in estimating supplier rebate accruals include forecastedinventory purchases and sales inconjunction with supplier rebate contract terms which generally providedid not record any amount
for
increasing rebates basedgoodwill impairment.Based on
eitherour quantitative assessment for the year ended December 31, 2022,we recorded a $20 million impairment increased purchaseof goodwill relating to the disposal of an unprofitable business for whichestimated fair value was lower thancarrying value.As part of our analysis for the rest of the goodwill balance, we performeda sensitivity analysis on the discount rate and long-term growth rate assumptions.The sensitivities did not result in any additional 59
Definite-Lived Intangible Assets
Annually or
sales volume.if we identify an impairment indicator,definite-lived intangible assets such as non-compete agreements, trademarks, trade names, customer relationships and lists, andproduct development are reviewed for impairment indicators.If any impairment indicators exist, quantitative testingis performed on the asset. The quantitative impairment model is a two-step test under which wefirst calculate the recoverability of the carrying value by comparing the undiscounted projected cash flows associatedwith 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 perform a fair value assessmentof the asset, or asset group.If the carrying amount is found to be greater than the fair value, we record animpairment 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 appropriate.
Although we believe our judgments, estimates and/or
assumptions
used in estimating cash flows and determining fair value
related tosupplier rebates are reasonable, making material changes to
such judgments,estimates and/or assumptions couldmaterially affect our financial results.
Long-Lived Assets
Long-lived assets, other than goodwill and other definite-lived intangibles,are evaluated for impairment wheneverevents or changes in circumstances indicate that the carrying amountof the assets may not be recoverable throughthe estimated undiscounted future cash flows to be derived from such
assets.Definite-lived intangible assets primarily consist of non-compete agreements,trademarks, trade names, customerrelationships and lists, and product development.For long-lived assets used in operations, impairment lossesareonly 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 theestimated fair value.When an impairment exists, the related assets are written down to fair value.Although webelieve our judgments, estimates and/or assumptions
used in estimatingcash flows and determining fair value arereasonable, making material changes to such judgments, estimates and/orassumptions could materially affect such
impairmentimpairment analyses and our financial results.
During the year ended December
26, 2020,30, 2023 we recorded
total $19 million ofimpairment charges
related to businesses inour health care distribution segment, the components of which were
on $7 million primarily related to customer lists and relationships attributable to lower than anticipated operatingmargins in certain businesses, and a $12 million charge related to the planned exit of a business.These impairment charges were calculated as the differences between the carrying values and the estimated fair values of the impairedintangible assets,
ofusing a discounted approximately $20.3estimate of future cash flows.Please seedetails.
During the year ended December 31, 2022 we recorded $49 million
nearly allofimpairment charges related to businesses in our health care distribution segment, the components of which
waswerea $15 million charge related to the disposal of an unprofitable business and a $34 million charge related to customer lists and relationshipsattributable to customer attrition rates being higher than expected in certain otherhealth care distribution businesses.These impairment charges were calculated as the differences between the carrying values and theestimated fair values of the impaired intangible assets, using a discounted estimate of futurecash flows.Please see During the year ended December 25, 2021, we recorded
in oura $1 million
impairment charge related ratably to a business within our health care distribution segment and a business withinour technology and value-added services
segment.
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.
Stock-Based CompensationThe redemption amounts have been estimatedStock-based compensation represents the cost related to stock-based awards grantedto employees and non-employee directors.We measure stock-based compensation at the grant date, based on
recent transactions, expected future earnings and cash flowsand, if such earnings and cash flows are notachieved, the estimated fair value of
the
award, and recognize the cost (net of estimated forfeitures) as compensationredeemable noncontrolling interests might be impacted.
expense on a straight-line basisSeeOur stock-based compensation expense is reflected in selling, generalinformation.
Income Tax
When determining if the realization of a deferred tax asset is likely to assessthe need to record a 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 existing temporary differences and historical operating results.Additionally, changes to tax laws and statutory tax rates can have an impact on our consolidated statements of income.
determination.
Stock-based awards are providedOur intention is to
certain employees and non-employee directorsunderevaluate the
termsrealizability of our
2020Stock Incentive Plan (formerly known as the 2013 Stock Incentive Plan),and our 2015 Non-Employee Director 66
Stock Incentive Plan (together, the “Plans”).The Plans are administered by the Compensation Committee oftheBoard of Directors.Equity-based awards are granted solely in the form of restrictedstock units, with the exceptionof providing stock options to employees pursuant to certain pre-existingcontractual obligations.Grants of restricted stock units are stock-based awards granted to recipients withspecified vesting provisions.Inthe case of restricted stock units, common stock is generally deliveredon or following satisfaction of vestingconditions.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-EmployeeDirector Stock IncentivePlan, which are primarily 12 month cliff vesting) and restricted stock units that vestbased on our achievingspecified 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 onourclosing stock price.With respect to performance-based restricted stock units, the number of shares that ultimatelyvest and are received by the recipient is based upon our performance as measuredagainst specified targets over aspecified period, as determined by the Compensation Committee ofthe Board of Directors.Although there is noguarantee that performance targets will be achieved, we estimate the fair value of performance-basedrestrictedstock units based on our closing stock price at time of grant.
The Plans provide for adjustments to the performance-based restrictedstock units targets for significant events,including, without limitation, acquisitions, divestitures, new business ventures,certain capital transactions(including share repurchases), restructuring costs, if any, certain litigation settlements or payments, if any, changes
indeferred tax
rates in certain countries, changes in accounting principles or in applicablelaws or regulations and foreignexchange fluctuations.Over the performance period, the number of shares of commonstock that will ultimatelyvest and be issued and the related compensation expense is adjusted upwardor downward based upon ourestimation of achieving such performance targets.The ultimate number of shares delivered to recipientsand therelated compensation cost recognized as an expense will be based on ouractual performance metrics as definedunder the Plans.
Although we believe our judgments, estimates and/or assumptionsrelated to stock-based compensation arereasonable, making material changes to such judgments, estimates and/orassumptions could materially affect ourfinancial results.
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
thisits guidance.
This topic prescribes a recognition threshold and
aa measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected
toto 60
be taken in a tax return.
For those benefits to be recognized, a tax position must be more
likely
likely than not to be
sustained upon examination by the taxing authorities.
The amount recognized is measured as the largest amount of
benefit that
ishas a greater than 50%
likelylikelihood of being realized upon ultimate
audit
audit settlement.
In the normal
course of
business, our tax returns are subject to examination by various
taxing
taxing authorities.
Such examinations may
result in
future tax and interest assessments by these taxing authorities for uncertain
tax positions taken in respect of
certaincertain tax matters.
Please see The Financial Accounting Standards Board 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 toeither 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 have elected to recognize the tax on GILTI as a period expense in the period the tax is incurred. Accounting Standards Update
For a discussion of accounting standards updates that have been adopted
or will be adopted in the future, please see
67
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, interest rate 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 primarily 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
may
and the value of certain underlying functionalcurrencies 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 asconsider foreigncurrency translation to be an accounting
exposure,exposure, not an economic
exposure.
A hypothetical 5% change in the average value of the U.S. dollar
in 2023 compared
in 2020 compared to
foreign currencies
would have changed our
20202023 reported Net income
attributable to Henry
Schein, Inc. by
approximately $1.3
$5 million.
As of December
26, 2020, we had30, 2023, our forward foreign currency exchange
agreements,
agreements, which expire through November
3,16, 2023, which include2028, had a
mark-to-market lossfair value of
$9.9$(8) million as determined
by quoted market prices.
Included in
the forward foreign
currency exchange agreements, Henry Schein, Inc.
had net investment
haddesignated EUR/USD forward contracts
notionallytotaling an amountwith notional values of approximately
€200€300 million
with aand reported fair
valuevalues
of
these contracts as a net liability of$9.6$(7) million.
A 5% increase in the
value of the Euro to the USD from December
26,30, 2023 would decrease the fair
2020, with all other variablesheld constant, would have had an unfavorable effect on the fair value of these forward contracts
by
decreasing thevalue of these instruments by $11.9$18 million.
On March 20, 2020, we entered into a total return swap for the purpose
of economically hedging our unfunded non-
qualified supplemental retirement plan
(“SERP”) and our deferred compensation
plan obligation.
plan (“DCP”).This swap willoffset changes in our SERP and DCP liabilities.61
At the inception, the notional value of the investments in these
plans was
$43.4 $43million.
At December
26, 2020,30, 2023, the
notional value of the investments
in these plans was
$67.6$96 million.
At December
26, 202030, 2023, the financing
blended rate
for this swap was
based on
LIBOR the Secured Overnight Financing Rate (“SOFR”)of
0.15% 5.33%plus
0.38%0.52%, for a
combinedcombined rate of
0.53%5.85%.
From March 20, 2020,For the
effective date of the swap, toyears ended December
26, 2020,30, 2023, December 31, 2022, andDecember 25, 2021 we have
recorded a
gain,gain/(loss), within
the selling, general and administrative
line itemexpense,
in our consolidated statement of
income, ofapproximately $10 million, $(17)approximately $21.2 million
and $12 million, respectively, net of transaction costs, related to this undesignated
swap for the year endedDecember 26, 2020. swap.
This
gain was offset by the change in fair value adjustment in deferred compensation,swap isresulting expected to be renewed on an annual basis and is expected to resultin a neutral impact to our results of operations.
This swap is expected to be renewed on an annual basis.Short-Term Investments
Credit Risk Monitoring
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 counterparties to such financial
instruments.
As a risk management policy, we limit the amount of credit exposure by diversifying and utilizing
numerous investment grade counterparties.
68
VariableInterest Rate
DebtRisk
As of December
26, 2020,30, 2023, 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, 2017July 11,
2023 and expires on
April 18, 2022, July 11, 2028,has
an interesta variableinterest rate that is based on the
U.S. Dollar LIBORSOFR plus a spread based on our
leverage
leverage ratio at the end of each financial
reporting quarter.
As of December
26, 2020,30, 2023, there was
$0.0$200 million outstanding under
this revolving credit
facility.
During the year ended December
26, 2020,30, 2023, the average outstanding
balance
under this revolving creditfacility was approximately $21.4 $61
million.
Based upon our average outstanding
balance for this revolvingcreditfacility,balances, for each hypothetical increase of 25 basis points, our interest expense thereunder would have increased by
less than $0.1 million.
Our U.S trade accounts receivable securitization, which we entered intoon April 17, 2013 and was scheduled toexpire on April 29, 2022, has an interest rate that is based upon the asset-backedcommercial paper rate.On June22, 2020, the expiration date for this facility was extended to June 12, 2023.As of December 26, 2020, thecommercial paper rate was 0.22% plus 0.95%, for a combined rate of1.17%. At December 26, 2020 theoutstanding balance was $0.0 million under this securitization facility.During the year ended December 26, 2020,the average outstanding balance under this securitization facility was approximately$92.3 million.Based upon ouraverage outstanding balance for this securitization facility, for each hypothetical increase of 25 basis points, our
interest expense thereunder would have increased by $0.2 million.
Our U.S. trade accounts receivable securitization, which we entered
into on April 17, 2013 and expires on December 15, 2025, has a variable interest rate that is based upon the asset-backed
commercial paper rate.As of December 30, 2023, the commercial paper rate was 5.67% plus 0.75%,for a combined rate of 6.42%,and the outstanding balance under this securitization facility was $210 million.During the year ended December 30, 2023, the average outstanding balance was approximately $238 million.Based upon our average outstanding balances, for each hypothetical increase of 25 basis points, our interest expense thereunderwould have increased by $1 million.
On July 11, 2023, we entered into interest rate swap agreements to hedge the cash flow of our variablerate $750 million floating debt term loan facility, with three years maturity, effectively changing the floating rate portion of
our obligation to a fixed rate.Under the terms of the interest rate swap agreements, we receive variableinterest payments based on the one-month Term SOFR rate and pay interest at a fixed rate.As of December 30, 2023, the notional value of the interest rate swap agreements was $741million.This term loan matures on July 11, 2026. At December 30, 2023, the interest on this Term Credit Agreement was 5.36% plus 1.35% for a combined rate of
6.71%.However, we have a hedge in place (see information) that ultimately creates an effective fixed rate of 5.79%.
62
69
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
Page
Number
70(BDO USA, P.C.;New York,NY; PCAOBID#
243
)
63
7265
7366
7467
7568
7669
7770
7770
80
81
9182
9285
92
9793
9995
10097
10198
100
105101
106103
106107
110
111
114
116
113
115
119
122
122
124
123124
123
138
All other schedules are omitted because the required information is eitherinapplicable or is included in the consolidatedfinancial statements or the notes thereto.12563
Report of Independent Registered Public Accounting Firm
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
StockholdersShareholders and Board of Directors
Henry Schein, Inc.
Melville, NY
Opinion on the Consolidated Financial Statements
We
have
audited
the
accompanying
consolidated
balance
sheets
of
Henry
Schein,
Inc.
(the
“Company”)
as
of
December 26, 202030, 2023 and December 28, 2019,31, 2022, the related consolidated statements of income, comprehensive income,
changes in stockholders’ equity,
and cash flows for each
of
of the three years in
the periodended December 30, 2023, and
the
period ended December 26, 2020,
the related
notes
andschedulenotes
(collectively
referred
to
as
the
“consolidated
financial
statements”).
In
our
opinion,
the
consolidated financial
statements present
fairly,
in
all material
respects, the
financial position
of
the
Company at
December 26, 202030, 2023 and December 28, 2019,31, 2022, and the results of its operations and its cash flows for each of the three
years in
the period
ended December
26, 2020,30, 2023,
in conformity
with accounting
principles generally
accepted in
the
United States of America.
We
also
have
audited,
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board
(United
States)
(“PCAOB”),
the
Company's
internal
control
over
financial
reporting
as
of
December
26,30,
2020,2023,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
1
expressed an unqualifiedadverse opinion thereon.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements,effective on December 30, 2018, the Companychanged its method of accounting for leases due to the adoption of AccountingStandards Codification Topic842,
Leases
.
Basis for Opinion
These consolidated financial statements are
the responsibility of the
Company’s
Company’s management.
Our
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 andperform
the
standards
of audittoobtainreasonableassuranceaboutwhetherthe
PCAOB.consolidated
Those standardsfinancial
require thatstatements
we planarefreeand 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
ofstatements, whether
materialdue to
misstatementerror or
offraud, and
performing proceduresthat respondto thoserisks. Suchproceduresincluded examining,on atest basis,evidence regardingthe amountsand disclosuresin the
consolidated
financial
statements,whetherduetoerrororfraud,andperforming procedures that respond to those risks.Such procedures included examining, on a test basis, evidence regarding theamountsanddisclosuresintheconsolidatedfinancialstatements.
Our
audits
also
included
evaluating
the
theaccounting
principles
used
and
significant
estimates
made
by
management,aswellasevaluatingtheoverallmanagement, 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
the Audit
Committee
of theBoardofDirectorsCommittee and
that:
(1)
relates
to
accounts
or
disclosures
that
are
material
to
the
consolidated
financial
statements;and(2)involvedourstatements; and (2) involved our especially challenging,
subjective or
complex judgments.
The communication
of
thecritical audit
mattersmatter does
not
alter
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 auditmatter oron the
critical audit matter or on the accounts or disclosures to which it relates.
Business Acquisition
AsdescribedinNote5oftheconsolidatedfinancialstatements,theCompanyacquiredShieldHealthcare,Inc., (“Shield”)in2023.Asaresultofthisacquisition,managementwasrequiredtodeterminethefairvaluesofthe 64
identifiable
71
assets
Uncertain Tax Position
acquired
As describedand
in Noteliabilities
14 assumed.Inconnectionwiththeacquisitionof
the consolidatedShield,
financial statements the
Company
operates inmultiple jurisdictionsandissubjectrecorded $156 million of identifiable intangible assets related to
transferpricingcomplianceforintercompanytransactionsthataresubjecttoauditbytaxingauthorities. The resolutionof these audits may span multipleyears.customer relationships and lists.
We
identified
management’s
judgements used todetermine the
revenue growth ratesand discountrate usedin thedetermination
of
uncertainthe
taxfair
positionsvalue
relatedof
tothe
transferacquired
pricingcustomer
fromrelationships
intercompanyandliststransactions
intheacquisitionofShield
as
a
critical
audit
matter.
The
principal
considerations
for
our
determination
includedwere the subjective
complexjudgement required by judgmentsmanagement in formulating the
relatedrevenue growth rates and
to:assessing the appropriateness of the
(i)discount rate used inauditingassumptionsappliedtodeveloping
the
interpretationfairvalues
of
taxlawsandlegalrulingsinmultipletaxpayingjurisdictions, (ii)determiningwhetheratransferpricingtaxposition’stechnical meritsaremore-likely-than-nottobesustainedwhenmeasuringthe
amountapplicable
ofacquired identifiable
taxintangible
benefitsthatqualifiesforrecognition,(iii)assessingwhetherintercompanytransactionsarebasedonthearm’slengthstandardthatmayproducearange ofarm’slength outcomes,and (iv)assessing theadjustments tothe liabilityfor unrecognizedtax benefitsassociatedwithtaxsettlementsoragreements.assets.
Auditing
these
elementsconsiderationsinvolved
especially
subjective
auditorjudgment and
an increasedchallenging
levelauditorjudgementduetothenatureandextent
of
audit
effort
required to address these matters, including
involvementthe extent of
personnelwith specialized
skills andknowledge.
skill or knowledge needed.
The primary procedures we performed to address this critical audit matter
included:
●
Assessing the design and implementation and testing operating effectiveness ofcertain controls overthe recognition and measurement of uncertain tax positions relatedto transfer pricing.●
Utilizing personnel with specialized knowledge and skill in taxation to evaluatethe appropriateness ofmanagement’s methods and assumptions used to estimate uncertain tax positions related to transfer
pricing by: (i) verifying our understanding of the relevant facts byreading the Company’scorrespondence with the relevant tax authorities and third-party advice obtainedby the Company, (ii)evaluatingEvaluating the reasonableness of
technical merits, management’s judgmentsthe revenue growth rates used in the determinationof the fair values of theacquiredcustomerrelationshipsandlistsintheacquisitionofShieldby:(i)reviewingthehistorical performance oftheacquired companyusingtheiraudited financialstatements, and(ii)assessing revenue projections against industry metrics and assumptions andpeer-group companies.
assessing the overall reasonableness of conclusions reached, (iii)●
Utilizing
evaluating the ranges of arm’s length outcomes and pricing conclusions reached within management’s transfer pricing studies, and (iv)
reviewing settlement activity or agreements with income tax authorities.
personnel
with
specializedknowledgeandskillinvaluationtoassistin:(i)testingthesourceinformation underlyingthe determinationof thediscount rate,and (ii)developing arange ofindependent estimates of discount rates andcomparing those to the discountrate selected by management in connection with the determination of the fair value of the acquired customer relationships and lists inthe acquisition of Shield.
/s/
BDO USA, LLP
We have served as the Company's auditor since 1984.
February 17, 2021
28, 2024
See accompanying notes.
7265
HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands,millions, except share and per share data)
December 26,30,
December 28,31,
20202023
20192022
ASSETS
Current assets:
Cash and cash equivalents
$
421,185171
$
106,097117
Accounts receivable, net of reservesallowance for credit losses of $
88,03083
60,00265
1,246,2461,863
1,442
Inventories, net
1,512,4991,815
1,428,7991,963
Prepaid expenses and other
432,944639
445,360466
3,791,4154,488
3,226,5023,988
Property and equipment, net
342,004498
329,645383
Operating lease right-of-use assets net
288,847325
231,662284
2,504,3923,875
2,462,4952,893
479,429916
572,878587
Investments and other
366,445471
327,919472
$
7,772,53210,573
$
7,151,1018,607
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
STOCKHOLDERS' EQUITY
Current liabilities:
$
1,005,6551,020
$
880,2661,004
73,366264
23,975103
Current maturities of long-term debt
109,836150
109,8496
Operating lease liabilities
64,71680
65,34973
Accrued expenses:
295,329332
265,206314
138,671137
165,171132
595,529700
528,553592
Total current liabilities
2,283,1022,683
2,038,3692,224
515,7731,937
622,9081,040
30,06554
64,98936
Operating lease liabilities
238,727310
176,267275
392,781436
331,173361
3,460,4485,420
3,233,7063,936
Redeemable noncontrolling interests
327,699864
287,258576
Commitments and contingencies
Stockholders' equity:
Preferred stock, $
0.01
1,000,000
NaNnone
0-
0-
Common stock, $
0.01
480,000,000
142,462,571129,247,765
outstanding on December
26, 202030, 2023 and
143,353,459131,792,817
outstanding on December
28, 201931, 20221,4251
1,4341
Additional paid-in capital
0-
47,768-
3,454,8313,860
3,116,2153,678
Accumulated other comprehensive loss
(108,084)(206)
(167,373)(233)
Total Henry Schein, Inc. stockholders' equity
3,348,1723,655
2,998,0443,446
Noncontrolling interests
636,213634
632,093649
Total stockholders' equity
3,984,3854,289
3,630,1374,095
Total liabilities, redeemable noncontrolling
interests and stockholders' equity
$
7,772,53210,573
$
7,151,1018,607
(1)
Amounts presented include balances held by our consolidated variable interest entity (“VIE”).At December 30, 2023 and December 31, 2022, includes trade accounts receivable of $
284
327
million, respectively, and long-term debt of $ 210
million and $
255
million, respectively.See information.
See accompanying notes.
7366
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF INCOME
(in thousands,millions, except share and per share data)
December 26,30,
December 28,31,
December 29,25,
20202023
20192022
20182021
$
10,119,14112,339
$
9,985,80312,647
$
9,417,60312,401
7,304,7988,478
6,894,9178,816
6,506,8568,727
2,814,3433,861
3,090,8863,831
2,910,7473,674
Operating expenses:
Selling, general and administrative
2,246,9472,956
2,357,9202,771
2,217,2732,634
Litigation settlementsDepreciation and amortization0210
0182
38,488180
Restructuring and integration costs
32,09380
14,705131
54,3678
535,303615
718,261747
600,619852
Other income (expense):
9,84217
15,7578
15,4916
(41,377)(87)
(50,792)(35)
(76,016)(27)
(3,873)(3)
(2,919)1
(3,258)-
Income
from continuing operations before taxes, equity in
earnings of affiliates and noncontrolling interests
499,895542
680,307721
536,836831
(95,374)(120)
(159,515)(170)
(107,432)(198)
Equity in earnings of affiliates,
net of tax12,34414
17,90015
21,03720
Net gainGain on sale of equity investmentsinvestment
1,572-
186,769-
07
Net income from continuing operations
418,437436
725,461566
450,441
Income (loss) from discontinued operations, net of tax
986
(6,323)
111,685
Net Income
419,423
719,138
562,126660
Less: Net income attributable to noncontrolling interests
(15,629)(20)
(24,770)(28)
(19,724)
Less: Net (income) loss attributable to noncontrolling interestsfrom discontinued operations
0
366
(6,521)
Net income attributable to Henry Schein, Inc.$
403,794
$
694,734
$
535,881
Amounts attributable to Henry Schein Inc.:
Continuing operations
$
402,808
$
700,691
$
430,717
Discontinued operations
986
(5,957)
105,164(29)
Net income attributable to Henry Schein, Inc.
$
403,794416
$
694,734538
$
535,881
Earnings per share from continuing operations attributable to
Henry Schein, Inc.:
$
2.83
$
4.74
$
2.82
$
2.81
$
4.69
$
2.80
Earnings (loss) per share from discontinued operations attributable to
Henry Schein, Inc.:
$
0.01
$
(0.04)
$
0.69
$
0.01
$
(0.04)
$
0.68631
Earnings per share attributable to Henry Schein, Inc.:
$
2.833.18
$
4.703.95
$
3.514.51
$
2.823.16
$
4.653.91
$
3.494.45
WeightedWeighted-average common
-average common shares outstanding:
142,504130,618,990
147,817136,064,221
152,656140,090,889
143,404131,748,171
149,257137,755,670
153,707
See accompanying notes.
74
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTSOF COMPREHENSIVE INCOME(in thousands)
December 26,
December 28,
December 29,
2020
2019
2018
$
419,423
$
719,138
$
562,126
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)63,094
(4,070)
(136,356)
Unrealized gain (loss) from foreign currency hedging activities(7,456)
(3,876)
626
Unrealized investment gain (loss)
(5)
12
(3)
Pension adjustment gain (loss)143
(5,924)
3,033
Other comprehensive income (loss), net of tax55,776
(13,858)
(132,700)
475,199
705,280
429,426
Comprehensive income attributable to noncontrolling interests:(15,629)
(24,404)
(26,245)
Foreign currency translation loss3,513
1,848
13,996
Comprehensive income attributable to noncontrolling interests(12,116)
(22,556)
(12,249)
Comprehensive income attributable to Henry Schein, Inc.$
463,083
$
682,724
$
417,177141,772,781
See accompanying notes.
67
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (in millions)
December 30,
December 31,
December 25,
2023
2022
2021
Net income
$
436
$
566
$
660
Other comprehensive income, net of tax:
Foreign currency translation gain (loss)
53
(88)
(84)
Unrealized gain (loss) from hedging activities
(18)
7
9
Pension adjustment gain (loss)
(3)
12
6
Other comprehensive income (loss), net of tax
32
(69)
(69)
Comprehensive income
468
497
591
Comprehensive income attributable to noncontrolling interests:
Net income
(20)
(28)
(29)
Foreign currency translation loss (gain)
(5)
7
6
Comprehensive income attributable to noncontrolling interests
(25)
(21)
(23)
Comprehensive income attributable to Henry Schein, Inc.
$
443
$
476
$
568
See accompanying notes.
7568
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
(
In thousands, in millions,except share and per share data)
Accumulated
Common Stock
$.01 Par Value
Paid-in
Comprehensive
Stockholders'
Shares
Amount
Earnings
Interests
Equity
Balance, December
30, 201726, 2020153,690,146142,462,571
1,537$
01
2,940,029$
(130,067)-
12,911$
2,824,4103,455
Cumulative impact of adopting new accounting standards$
0(108)
0$
2,594636
0$
0
2,5943,984
Net income (excluding $
21,84823
attributable to Redeemable
noncontrolling interests)
0-
0-
535,881-
0631
4,397-
540,2786
637
Foreign currency translation loss (excluding loss of $
13,0316
attributable to Redeemable noncontrolling interests)
-
0-
0-
0-
(122,360)(78)
(965)-
(123,325)(78)
Unrealized gain from
foreign currency hedging activities,
net of tax benefit of $
396
-
0
0
0
626
0
626
Unrealized investment loss, net of tax benefit of $
0
-
0
0
0
(3)
0
(3)
Pension adjustment gain, net of tax of $
1,1793
-
0
0
0
3,033
0
3,033
-
0-
0
0
0
(656)
(656)
-
09
(19)Pension adjustment gain, including tax of $
0
0
713
694
Purchase of noncontrolling interests2-
0-
0-
0-
06
(214)-
(214)6
Distributions to noncontrolling shareholders
-
-
-
-
-
(11)
(11)
Change in fair value of redeemable securities
-
0-
(148,919)(160)
0-
0-
0-
(148,919)(160)
Initial noncontrollingNoncontrolling interests and adjustments related to
-
0-
0-
0-
0-
564,2707
564,2707
Repurchase and retirement of common stock
(2,518,387)(5,505,704)
(25)-
(36,206)(53)
(163,769)(348)
0-
0-
(200,000)
Stock issued upon exercise of stock options
153,516
1
3,075
0
0
0
3,076(401)
Stock-based compensation expense
340,794303,643
4-
36,23678
0-
0-
0-
36,24078
Shares withheld for payroll taxes
(267,772)
(3)
(18,140)
0
0
0
(18,143)
Settlement of stock-based compensation awards3,371
0
(727)
0
0
0
(727)
Deferred tax benefit arising from acquisition ofnoncontrolling interest in partnership(114,952)
-
0(8)
58,554-
0-
0-
0
58,554(8)
Transfer of charges in excess of capital
-
0-
106,146143
(106,146)(143)
0-
0-
0-
Balance, December
29, 201825, 2021151,401,668137,145,558
1,514
0
3,208,589
(248,771)
580,456
3,541,788
Cumulative impact of adopting new accounting standards1
-
03,595
0(171)
(274)638
0
0
(274)4,063
Net income (excluding $
14,83821
attributable to Redeemable
noncontrolling interests from continuing operations
and ($
366
from discontinued operations)interests)-
0-
0-
694,734538
0-
9,9327
704,666545
Foreign currency translation loss (excluding loss of $
2,3356
attributable to Redeemable noncontrolling
interestsand ($
592
gain from discontinued operations)interests)-
0
0
0
(2,222)
(105)
(2,327)
Unrealized loss from foreign currency hedging activities,net of tax benefit of $
1,035-
-
0-
0(81)
0(1)
(3,876)
0
(3,876)(82)
Unrealized investment gain from hedging activities,
net of tax of $
23
-
0-
0-
0-
127
0-
127
Pension adjustment loss, net ofgain, including tax benefit of $
1,8064
-
0
0
0
(5,924)
0
(5,924)
-
0-
0
0
0
(535)
(535)
-
012
(3)Distributions to noncontrolling shareholders
0-
0-
0-
(3)-
-
(1)
(1)
Purchase of noncontrolling interests
-
-
-
-
-
(7)
(7)
Change in fair value of redeemable securities
-
0-
7,3004
0-
0-
0-
7,3004
Initial noncontrollingNoncontrolling interests and adjustments related to
-
0-
0-
0-
0-
42,34513
42,345
Adjustment for Animal Health Spin-off
87,629
1
0
0
0
0
113
Repurchase and retirement of common stock
(8,173,912)(6,111,676)
(82)-
(79,785)(65)
(445,133)(420)
0-
0-
(525,000)(485)
Stock issued upon exercise of stock options
2,52635,792
0-
342
0-
0-
0-
342
Stock-based compensation expense
215,4081,102,108
2-
45,24354
0-
0-
0-
45,24554
Shares withheld for payroll taxes
(179,860)(376,034)
(1)-
(10,844)(32)
0-
0-
0-
(10,845)(32)
Settlement of stock-based compensation awards
0
0
160
0
0
0
160
Share Sale related to Animal Health business(2,931)
-
0
361,090
0
0
0
361,090
Separation of Animal Health business2
-
0-
(73,970)-
(543,158)
93,408
0
(523,720)2
Transfer of charges in excess of capital
-
0-
(201,457)35
201,457(35)
0-
0-
0-
Balance, December
28, 201931, 2022143,353,459131,792,817
1,434
47,768
3,116,215
(167,373)
632,093
3,630,137
Cumulative impact of adopting new accounting standards1
-
03,678
0(233)
(412)649
0
0
(412)4,095
Net income (excluding $
13,3636
attributable to Redeemable
noncontrolling interests from continuing operations)interests)
-
0-
0-
403,794416
0-
2,26614
406,060430
Foreign currency translation gain (excluding lossgain of $
4,2795
attributable to Redeemable noncontrolling interests )interests)
-
0-
0-
0-
66,60748
766-
67,37348
Unrealized loss from
foreign currency hedging activities,
net of tax benefit of $
2,768
-
0
0
0
(7,456)
0
(7,456)
Unrealized investment loss, net of tax benefit of $
1
-
0
0
0
(5)
0
(5)
Pension adjustment gain, including tax benefit of $
6767
-
0-
-
-
(18)
-
(18)
Pension adjustment loss, including tax benefit of $
0
0
143
0
143
-
0
0
0
0
(1,086)
(1,086)
Purchase of noncontrolling interests--
0(3)
(1,597)-
0(3)
0Distributions to noncontrolling shareholders
(701)-
(2,298)-
-
-
-
(27)
(27)
Change in fair value of redeemable securities
-
0-
(32,842)11
0-
0-
0-
(32,842)11
Initial noncontrollingNoncontrolling interests and adjustments related to
-
0-
0-
0-
0-
2,875(2)
2,875(2)
Repurchase and retirement of common stock
(1,200,000)(3,214,136)
(12)-
(10,949)(33)
(62,828)(219)
0-
0-
(73,789)(252)
Stock issued upon exercise of stock options
21,068
-
1
-
-
-
1
Stock-based compensation expense
545,8641,065,319
5-
8,78339
0-
0-
0-
8,78839
Shares withheld for payroll taxes
(236,752)(416,605)
(2)-
(14,475)(34)
0-
0-
0-
(14,477)(34)
Settlement of stock-based compensation awards
(698)-
0
(275)
0
0
0
(275)
Separation of Animal Health business1
-
0-
1,649-
0
0
0
1,6491
Transfer of charges in excess of capital
-
0-
1,93815
(1,938)(15)
0-
0-
0-
Balance, December
26, 202030, 2023142,462,571129,247,765
1,425$
01
3,454,831$
(108,084)-
636,213$
3,984,3853,860
$
(206)
$
634
$
4,289
See accompanying notes.
7669
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(in thousands, except per share data) (unaudited)millions)
Years Ended
December 26,30,
December 28,31,
December 29,25,
20202023
20192022
20182021
Cash flows from operating activities:
$
419,423436
$
719,138566
$
562,126
Income (loss) from discontinued operations
986
(6,323)
111,685
Income from continuing operations
418,437
725,461
450,441660
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
185,538248
184,942212
143,630210
Impairment charge on intangible assets
20,2757
034
01
Impairment of capitalized software
27
-
-
Non-cash restructuring charges
27
93
-
Gain on sale of equity investmentsinvestment
(2,096)-
(250,167)-
0(10)
Stock-based compensation expense
8,78839
44,92054
32,62178
Provision for
(benefits from) losses on trade and other
accounts receivable
35,13718
12,6125
14,384(8)
Benefit from deferred income taxes
(52,977)(20)
(4,057)(73)
(25,388)(11)
Equity in earnings of affiliates
(12,344)(14)
(17,900)(15)
(21,037)(20)
Distributions from equity affiliates
16,00215
71,46915
20,38618
Changes in unrecognized tax benefits
(24,881)10
1,94112
(1,169)
Benefit from transition tax0
0
(10,000)(2)
5,012(3)
5,684(20)
369(10)
Changes in operating assets and liabilities, net of acquisitions:
(189,349)(327)
(72,689)(7)
(127,201)4
(31,817)231
14,702(126)
(41,042)(295)
(6,479)(138)
(57,291)(52)
(165,645)9
Accounts payable and accrued expenses
224,273(56)
160,851(96)
180,60686
Net cash provided by operating activities
from continuingoperations593,519500
820,478602
450,955
Net cash provided by (used in) operating activities fromdiscontinued operations5,391
(166,391)
233,751
Net cash provided by operating activities598,910
654,087
684,706710
Cash flows from investing activities:
Purchases of
fixed assetsproperty and equipment(48,829)(147)
(76,219)(96)
(71,283)(79)
Payments related to equity investments and business acquisitions,
acquisitions, net of cash acquired
(60,173)(955)
(655,879)(158)
(53,240)(571)
Proceeds from sale of equity investment
14,020-
307,251-
1,00010
RepaymentsProceeds from
(borrowings for) loan to affiliate
(1,243)6
16,71311
(25,700)(4)
Settlements for net investment hedges
22
-
-
Capitalized software costs
(40)
(32)
(33)
(18,794)(21)
(14,175)(1)
(15,101)-
Net cash used in investing activities from continuing operations
(115,019)(1,135)
(422,309)(276)
(164,324)
Net cash used in investing activities from discontinued operations
0
(2,064)
(28,630)
Net cash used in investing activities(115,019)
(424,373)
(192,954)(677)
Cash flows from financing activities:
Net change in bank
borrowingscredit lines45,082153
(927,912)48
210,741(18)
Proceeds from issuance of long-term debt
501,4211,368
741270
115,000305
Principal payments for long-term debt
(611,216)(468)
(260,944)(59)
(24,735)(122)
(3,879)(3)
(391)-
(501)
Debt extinguishment costs
(401)
0
0(3)
Proceeds from issuance of stock upon exercise of stock options
01
342
3,076-
Payments for repurchases
and retirement of common stock
(73,789)(250)
(525,000)(485)
(200,000)(401)
Payments for taxes related to shares withheld for employee
taxes
(14,299)(34)
(10,814)(32)
(18,023)(8)
Distribution received relatedDistributions to Animal Health Spin-off
0
1,120,000
0
Proceeds related to Animal Health Share Sale
0
361,090
0
Proceeds from (distributions to) noncontrolling shareholders
(7,886)(47)
51,498(21)
(7,351)(26)
Acquisitions of noncontrolling interests in subsidiaries
(19,538)(19)
(2,358)(38)
(287,635)
Proceeds from (payments) to Henry Schein Animal HealthBusiness2,711
(169,295)
(192,745)
Net cash used in financing activities from continuing operations
(181,794)
(363,351)
(402,173)(60)
Net cash provided by (used in) financing activities
fromdiscontinued operations(5,391)701
147,371(315)
(201,603)
Net cash used in financing activities
(187,185)
(215,980)
(603,776)(333)
Effect of exchange rate changes on cash and cash equivalents
from continuingoperations18,382(12)
14,394(12)
14,425
Effect of exchange rate changes on cash and cash equivalents from discontinuedoperations0
(2,240)
3,150(3)
Net change in cash and cash equivalents
from continuingoperations315,08854
49,212(1)
(101,117)
Net change in cash and cash equivalents from discontinuedoperations0
(23,324)
6,668(303)
Cash and cash equivalents, beginning of period
106,097117
56,885118
158,002421
Cash and cash equivalents, end of period
$
421,185171
$
106,097117
$
56,885118
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
70
77
Note 1
–Significant– 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,
withdental 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 deliverynetworks, 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, Morocco, the
Netherlands, New Zealand, Poland, Portugal,
Singapore, South Africa, Spain,
Sweden, Switzerland, Thailand,
United Arab Emirates and the United Kingdom.
PrinciplesBasis of Consolidation
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
which are greater than or equal to 20% and less than or equalto 50% owned orinvestments in unconsolidated affiliates of less than 20% infor 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
current period presentation.
These reclassifications, individually and in the aggregate, did nothave a materialimpact on our consolidated financial condition, results of operationsor cash flows. We consolidate
a VariableInterest Entity (“VIE”) where we hold a variable interestand are the
primarybeneficiary.The VIE is a trade accounts receivable securitization.We are the primary beneficiary because wehave the power to direct activities that most significantly affect the economic performanceand have the obligationto absorb the majority of the losses or benefits.The results of operations and financial position of
this VIEa trade accounts receivable securitization whichwe consider a Variable Interest Entity (“VIE”) because we are its primary beneficiary as we have the power to
direct activities that most significantly affect its economic performance and have
arethe obligation to absorb the included in our consolidated financial statements.majority of its losses or benefits.
For
the consolidatedthis VIE, the trade accounts receivable transferred
to the VIE are pledged as
collateral to the
related debt.
The
VIE’s creditors have recourse to us for losses on these trade
accounts receivable.
At December 26,
202030, 2023 and December
28, 2019,31, 2022,certain trade accounts receivable that can only
be used to settle
obligations of this VIE were
$
0.0284
127327
million, respectively, and the liabilities of
thethis VIE where the
creditors have recourse to us
were $
0.0210
100255
Fair value is defined as the price that would be received to sell an asset orpaid to transfer a liability in an orderly transaction between market participants at the measurement date.The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtainedfrom 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 thehighest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priorityto 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 assetsor liabilities that are accessible at the measurement date.
•Level 2— Inputs other than quoted prices included within Level 1 that areobservable for the asset or liability, either directly or indirectly.Level 2 inputs include: quoted prices for similar assets or liabilitiesin active markets; HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
71
quoted prices for identical or similar assets or liabilities in marketsthat are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that arederived principally from or corroborated by observable market data by correlation or other means.
•Level 3— Inputs that are unobservable for the asset or liability. See
for additional information. Use of Estimates
The preparation of
consolidated financial statements in conformity with
accounting principles
generally accepted in
the United
States requires us to make estimates and assumptions that
affect the reported amounts of
assets and
liabilities and
disclosure of contingent assets and liabilities at the date of
the financial
statements and the reported
amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In March 2020, the World Health Organization declared the Novel Coronavirus Disease 2019 (“COVID-19”) a
pandemic. The COVID-19 pandemic has negatively impacted the globaleconomy, disrupted global supply chainsand created significant volatility and disruption of global financial markets.In response, many countriesimplemented business closures and restrictions, stay-at-home and socialdistancing ordinances and similar measuresto combat the pandemic, which significantly impacted global businessand dramatically reduced demand for dentalproducts and certain medical products in the second quarter of 2020.Demand increased in the second half of theyear resulting in growth over the prior year driven by sales of personalprotective equipment (PPE) and COVID-19related products.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
78
Our consolidated financial statements reflect estimates and assumptions
made by us that affect, among other things,
our goodwill, long-lived asset and
indefinite-liveddefinite-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;
redeemable noncontrollinginterests; hedging activity;
vendorsupplierrebates; measurement of
compensation cost for certain share-based
performance awards and cash bonus
plans; and
pension plan assumptions.
assumptions.Due to the significant uncertainty surrounding the future impactof COVID-19, our judgmentsregarding estimates and impairments could change in the future.In addition, the impact of COVID-19 had amaterial adverse effect on our business, results of operations and cash flows in thesecond quarter of 2020. In thelatter half of the year, dental and medical practices began to re-open worldwide, and continued to do soduring theremainder of the year.However, patient volumes remain below pre-COVID-19 levels and certain regions in theU.S. and internationally are experiencing an increase in COVID-19cases.As such, there is an ongoing risk that theCOVID-19 pandemic may again have a material adverse effect on our business, resultsof operations and cashflows and may result in a material adverse effect on our financial conditionand liquidity.However, the extent ofthe potential impact cannot be reasonably estimated at this time.
Fiscal Year
We report our results of operations and cash flows on a
52
53
weekweeks per fiscal year basis ending on the last
Saturday of December.
The
yearsyear ended December
26, 2020, December 28, 2019 and December29, 201830, 2023 consisted of
52
weeks.weeks, and the years ended December31, 2022 and December 25, 2021 consisted of
53
52
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:we:
•
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 satisfieswe satisfy 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 pointthe
point in time when control transfers to
thethe customer.
Such sales typically entail high-volume, low-dollar orders
shipped
shipped using third-party common
We believe that the shipment date is the most appropriate point in time indicating control has transferred
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
72
to the
customer.customer becauseOn the shipment date, 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
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.
SomeMost equipment
sales requirerequires minimal installation, which
is
is typically completed at
thethe time of delivery.
Our product generally carries standard warranty terms provided
by the
manufacturer,manufacturer; however, in
instances where we provide warranty labor services, the warranty costs
are accrued
in accordance with
AccountingAccounting Standards Codification (“ASC”)
Topic 460
“Guarantees”.Guarantees.
At December 30, 2023 and December 31, 2022, we hadaccrued approximately $
12
HENRY SCHEIN, INC.
million, respectively, for warranty costs.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
79
Revenue derived from the sale of software products is recognized when
products
products are
shippeddelivered to customers or
mademade available electronically.
Such software is generally installed by customers and does
not require extensive
training due to the nature of its design.training.
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 a Software-as-a-Servicebasis is recognized ratablyover the subscription period as control is transferred to the customer.
Revenue derived from other sources, including freight charges, equipment repairs
and financial
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
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.
CertainSome 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
usingby the residual
method, using an estimate of the
standalonestandalone selling price to estimate the fair value of the undelivered
elements.
There are no cases where revenue isdeferred 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.,
because we
or others do not sell the goods or
services separately), we
use one of the
following techniques to estimate
the standalone selling price:
adjusted
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 amountof expected returns and are recorded as refund liability within accrued expenses-other within our consolidated balance sheets.We estimate the sales return liability based on historical data for specific products, adjusted as necessaryfor new products.The allowance for returns is presented gross as a refund liability and we record an inventoryasset (and a corresponding adjustment to cost of sales) for any products that we expect to be returnedand resaleable. HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
73
Contract BalancesCost of Sales
The primary components of cost of sales include the cost of the product
(net of purchase discounts, supplier Contract balanceschargebacks 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 administrativeexpenses along with other operating costs. Total distribution network costs were $
105
103
89
million for the years ended December 30, 2023, December 31, 2022 and December 25, 2021, respectively.
Supplier rebates are included as a reduction of cost of sales and are recognizedover the period they are earned.The factors we consider in estimating supplier rebate accruals include forecastedinventory purchases,sales, supplier rebate contract terms, which generally provide for increasing rebates basedon either increased purchase or sales volumes.
Direct Shipping and Handling Costs
Freight and other direct shipping costs are included in cost of sales.Direct handling costs, which represent
amounts presented primarily direct compensation costs of employees who pick, pack and otherwiseprepare, if necessary, merchandise for shipment to our customers are reflected in selling, general and administrativeexpenses.Direct handling costs were $
98
96
97
million for the years ended December 30, 2023, December 31, 2022and December 25, 2021, respectively.
Advertising and Promotional Costs
We expense advertising and promotional costs as incurred.Total advertising and promotional expenses were $ 47
million, $
47
48
million for the years ended December 30, 2023, December 31, 2022 andDecember 25, 2021, respectively.
Stock-Based Compensation Costs
We
measure stock-based compensation at the grant date, based on the estimatedfair value of the award, and recognize the cost (net of estimated forfeitures) as compensation expense ona straight-line basis over the requisite service period for time-based restricted stock units and on a graded vestingbasis for the option awards.For performance-based awards, at each reporting date, we reassess whether achievementof the performance condition is probable and accrue compensation expense when achievement ofthe performance condition is probable.Our stock-based compensation expense is reflected in selling, general and administrativeexpenses. Employment Benefit Plans and other Postretirement Benefit Plans
Some of our employees in our
consolidated balanceinternational markets participate
sheet whenin various noncontributory defined benefit plans. We recognize the funded status, measured as the difference between the fair value of plan assets and the projected
benefit obligation.Each unfunded plan is recognized as a liability and each fundedplan is recognized as either
we have transferredan goodsasset or
servicesliability 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 assumptionsused by third-party actuaries in calculating those amounts.These assumptions include discount rates, expected return on planassets, 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 withinour consolidated statements of income. HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
74
Gains and losses that result from changes in actuarial assumptions orfrom actual experience that differs from actuarial assumptions are recognized in and then amortized from Accumulatedother comprehensive income (loss). 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
customer or the customer has paid consideration to usshort-term maturity of such investments,
under the
contract.carrying amounts are a reasonable estimate of fair value.
These contractOutstanding checks in excess of funds on deposit of $ balances include accounts receivable, contract assets and contract liabilities.52
53
million, primarily related to payments for inventory, were classified as accounts payable as of December 30, 2023 and December 31, 2022.
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 allsignificant 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 regionthat 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 net accounts receivable balance was $
1,863
1,442
1,452
million at December 30, 2023, December 31, 2022, and December 25, 2021, respectively.Our allowance for credit losses was $ 83
65
million $
67
88
million as of December 30, 2023, December 31, 2022, December 25, 2021,and December 26, 2020, respectively.Additions to the allowance for the years ended December 30, 2023,December 31, 2022 and December 25, 2021 were $
34
8
0
million, respectively.Deductions to the allowance for the years ended December 30, 2023, December 31, 2022and December 25, 2021, were $ 16
$
10
21
, respectively.
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 bydate.
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
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
80
Investments and other within our consolidated balance
sheets.
Current and non-current contract asset balances as of
December
26, 202030,2023 and December
28, 201931, 2022 were not
material.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
Accruedaccrued expenses:
Other otherand the non-current contract liabilities are included in
Otherother liabilities
within
within our consolidated balance sheets.
At
December
28, 2019,30, 2023 and December 31, 2022, the current
portion ofand non-current contract
liabilities
ofwere $
70.889
million
was reported in Accrued expenses:andOther, and $
6.29
million,
related to non-current contract liabilities were reportedand $86
in Other liabilities.million and $8
million, respectively. During the year
ended December
26, 2020,30, 2023, we recognized
substantially all of the current contract liability amounts
that were previously
deferred at December 31, 2022.At HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
75
December 25, 2021, the current and non-current contract liabilities were$ 89
10
year ended December 31, 2022, we recognized substantially all of the currentcontract liability amounts that were
previously deferred at December
28, 2019.25, 2021.
AtCurrent contract liabilities at December
26, 2020, the current and non-current portion30, 2023 includedbalances of
contractliabilities were $
71.59
8.2
Deferred Commissions
Sales commissions earned by our sales force that relate to long termarrangements are capitalized as costs to obtaina contract when the costs incurred are incremental and are expected to be recovered.Deferred sales commissionsare 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.
business acquisitions completed in 2023.
Our deferred commissionAcquisition-related contract liability amounts at balances as of December
26, 202031, 2022 and December
28, 201925, 2021 were
notimmaterial.
material.Sales Returns
Sales returns are recognized as a reduction of revenue by the amountof expected returns and are recorded as refundliability within current liabilities.We estimate the amount of revenue expected to be reversed to calculate the salesreturn liability based on historical data for specific products, adjustedas necessary for new products.Theallowance for returns is presented gross as a refund liability and werecord an inventory asset (and a correspondingadjustment to cost of sales) for any products that we expect to be returned.
Inventories consist primarily of finished goods and are valued at
the lower of cost or net realizable value.
Cost is
determined by the
weighted-average first-in, first-out method for merchandise
orand by actual cost
for large
equipment and high tech
equipment.
In accordance with our policy for inventory valuation, we
consider
consider many
factors including the
condition and salability of the inventory, historical sales, forecasted sales and market and
time to time, we adjust our assumptions for anticipated
changes in any
of these or other
factors expected to affect
the value of inventory.
Cash and Cash EquivalentsWe 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, thecarrying amounts are a reasonable estimate offair value.Outstanding checks in excess of funds on deposit of $1.3
29.5
million, primarily related topayments for inventory, were classified as accounts payable as of December 26, 2020 and December 28, 2019.
Direct Shipping and Handling Costs
Freight and other direct shipping costs are included in cost of sales.Direct handling costs, which representprimarily direct compensation costs of employees who pick, pack and otherwiseprepare, if necessary, merchandiseHENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
81
for shipment to our customers are reflected in selling, general and administrativeexpenses.Direct shipping andhandling costs were $
79.2
73.8
70.6
million for the years ended December 26, 2020,December 28, 2019 and December 29, 2018.
Advertising and Promotional Costs
We generally expense advertising and promotional costs as incurred.Total advertising and promotional expenseswere $
30.8
25.2
12.9
million for the years ended December 26, 2020, December 28, 2019and December 29, 2018.
Supplier Rebates
Supplier rebates are included as a reduction of cost of sales and are recognizedover the period they are earned.Thefactors we consider in estimating supplier rebate accruals include forecastedinventory purchases and sales, inconjunction with supplier rebate contract terms, which generally providefor increasing rebates based on eitherincreased 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
(seeusing estimated useful lives (Seefor estimated useful
Amortization of leasehold improvements is computed using
the straight-line
the straight-line method
over the lesser of the
useful life of the assets or the remaining lease term.
Capitalized Software Development Costs
Capitalized internal-use software costs consist of costs to purchase and
develop
develop software.
Costs For software to be used solely to meet internal needs and for cloud-based applications used to deliverour services, we capitalize costs incurred during the application
development stage
for software bought and
further customized by outside suppliersinclude such costs within
for our use and softwaredeveloped by a supplier for our proprietary use are capitalized.Costs incurred for our own personnel who aredirectly 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 eventsthat have been recognized in ourfinancial statements or tax returns.In estimating future tax consequences, we generally consider all expectedfutureevents other than enactments of changes in tax laws or rates.The effect on deferred income tax assets andliabilities of a change in tax rates is recognized as income or expense inthe 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.
Foreign Currency Translationand TransactionsThe financial position and results of operations of our foreign subsidiariesare determined using local currency asthe functional currency.Assets and liabilities of these subsidiaries are translated at the exchangerate in effect ateach year-end.Income statement accounts are translated at the average rateof exchange prevailing during the year.Translation adjustments arising from the use of differing exchange rates from period to period are includedinAccumulated other comprehensive income in stockholders’ equity.Gains and losses resulting from foreigncurrency 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.Ourobjective is to manage the impact that foreign currency exchange rate fluctuationscould have on recognized assetand liability fair values, earnings and cash flows, as well as our netinvestments in foreign subsidiaries.Our riskHENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
82
management policy requires that derivative contracts used as hedges beeffective at reducing the risks associatedwith the exposure being hedged and be designated as a hedge at the inceptionof the contract.We do not enter intoderivative instruments for speculative purposes.Our derivative instruments primarily include foreign currencyforward agreements related to certain intercompany loans, certain forecastedinventory purchase commitments withforeign suppliers and foreign currency forward contracts to hedge a portion of oureuro-denominated foreignoperations which are designated as net investment hedges.Foreign currency forward agreements related to forecasted inventorypurchase commitments with foreign suppliersand foreign currency swaps related to foreign currency denominated debt are designatedas cash flow hedges.Forderivatives that are designated and qualify as cash flow hedges, thechanges in the fair value of the derivative isrecorded as a component of Accumulated other comprehensive incomein stockholders’ equity and subsequentlyreclassified into earnings in the period(s) during which the hedged transactionaffects earnings.We classify thecash flows related to our hedging activities in the same category on our consolidatedstatements of cash flows as thecash flows related to the hedged item.
Foreign currency forward contracts related to our euro-denominatedforeign operations are designated as netinvestment hedges.For derivatives that are designated and qualify as net investmenthedges, the changes in the fairvalue of the derivative is recorded in the foreign currency translationgain (loss) component of Accumulated othercomprehensive income in stockholders’ equity until the net investmentis sold or substantially liquidated.Our foreign currency forward agreements related to foreign currencybalance sheet exposure provide economichedges 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 orloss on the hedged item, are recorded in earnings.
Total return swaps are entered into for the purpose of economically hedging our unfunded non-qualified
supplemental retirement plan (“SERP”) and our deferred compensationplan (“DCP”).This swap will offsetchanges in our SERP and DCP liabilities. This swap is expectedto be renewed on an annual basis.Acquisitions
We account for business acquisitions and combinations under the acquisition method of accounting, where the net
assets of businesses purchased are recorded at their fair value atthe acquisition date and our consolidated financialstatements include their results of operations from that date.Any excess of acquisition consideration over the fairvalue of identifiable net assets acquired is recorded as goodwill.The major classes of assets and liabilities that wegenerally allocate purchase price to, excluding goodwill, include identifiableintangible assets (i.e., trademarks andtrade names, customer relationships and lists, non-compete agreements andproduct development), property
plantand equipment,
deferred taxes and other current and long-term assets andliabilities.The estimated fair value ofnet withinidentifiable intangible assets is based on critical estimates, judgments and assumptionsderived from: analysis ofmarket conditions; discount rates; discounted cash flows; customerretention rates; and estimated useful lives.Some prior owners of such acquired subsidiaries are eligible to receive additionalpurchase price cash considerationif certain financial targets are met.While we use our best estimates and assumptions to accurately valuethoseassets acquired and liabilities assumed at the acquisition date as wellas contingent consideration, where applicable,our estimates are inherently uncertain and subject to refinement.As a result, during the measurement period wemay record adjustments to the assets acquired and liabilities assumed withthe corresponding offset to goodwillwithin our consolidated balance sheets.
At the end of the measurement periodFor software to be sold, leased, or
final determinationmarketed to external users, we capitalizesoftware development costs when technological feasibility is reached and
of the values ofinclude such
assets acquired or liabilities assumed, whichever comes first, any subsequentadjustments are recognized inour consolidated statements of operations.For the yearsended December 26, 2020, December 28, 2019costs within investments and
December 29, 2018, there were no material adjustments recorded in our consolidatedstatement of income relatingto changes in subsequent adjustments or estimated contingent purchase priceliabilities.HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
83
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our subsidiaries have the right,at certain times, to require us to acquiretheir ownership interest in those entities at fair value.Their interests in these subsidiaries are classified outsidepermanent equity onother within our consolidated balance
sheets and are carriedat the estimated redemption amounts.Theredemption amounts have been estimated based on expected future earningsand cash flow and, if such earnings andcash flow are not achieved, the value of the redeemable noncontrollinginterests might be impacted.Changes in theestimated redemption amounts of the noncontrolling interests subjectto put options are reflected at each reportingperiod with a corresponding adjustment to Additional paid-in capital.Future reductions in the carrying amounts aresubject to a “floor” amount that is equal to the fair value of the redeemablenoncontrolling interests at the time theywere originally recorded.The recorded value of the redeemable noncontrolling interests cannotgo below the floorlevel.These adjustments do not impact the calculation of earningsper share.Noncontrolling Interests
Noncontrolling interests represent our less than 50% ownership interestin an acquired subsidiary.Our net incomeis reduced by the portion of the subsidiaries net income that is attributableto noncontrolling interests.Goodwill is not amortized, but is subject to impairment analysis annually ormore frequently if there is a triggeringevent or if an event occurs or circumstances change that wouldmore likely than not reduce the fair value of areporting unit below its carrying value.Such impairment analyses for goodwill requires a comparison ofthe fairvalue to the carrying value of reporting units.We regard our reporting units to be our operating segments: globaldental; 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 specificidentification basis.On December 29, 2019 we adopted Account Standards Update (“ASU”)2017-04 Intangibles-Goodwill and Other(Topic 350): Simplifying the Testfor Goodwill Impairment, which eliminated step two from the goodwillimpairment test, thereby eliminating the requirement to calculate theimplied fair value of a reporting unit.Weperform our annual goodwill impairment test by comparing the fair value ofour reporting units to the carryingvalue of those units.Goodwill as of December 26, 2019 and December 29, 2018were tested under the priorstandard.
For the year ended December 26, 2020 we tested goodwill for impairment,on the first day of the fourth quarter,using a quantitative analysis comparing the carrying value of our reportingunits, including goodwill, to theestimated fair value of our reporting units using a discounted cash flowmethodology. If the fair value of a reportingunit exceeds its carrying amount, goodwill of the reporting unit is considerednot impaired.Conversely,impairment loss would be equivalent to the excess of a reporting unit’s carrying value over its fair value limitedtothe total amount of goodwill allocated to that reporting unit.
For the years ended December 26, 2019 and December 29, 2018 we testedgoodwill for impairment on the first dayof the fourth quarter, using a quantitative analysis which consisted of a two-step approach.The first step of ourquantitative analysis consisted of a comparison of the carrying value ofour reporting units, including goodwill, tothe estimated fair value of our reporting units using a discounted cashflow methodology. If step one resulted in thecarrying value of the reporting unit exceeding the fair value of such reportingunit, we would have then proceededto step two which would have required us to calculate the amount of impairmentloss, if any, that we would haverecorded for such reporting unit.The calculation of the impairment loss in step two would have beenequivalent tothe 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 futurerevenue based upon budget projectionsand growth rates which take into account estimated inflation rates.We also develop estimates for future levels of sheets.HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
84
gross and operating profits and projected capital expenditures.Our methodology also includes the use of estimateddiscount rates based upon industry and competitor analysis as well asother factors. The estimates that we use in ourdiscounted cash flow methodology involve many assumptions bymanagement that are based upon future growthprojections.Some factors we consider important that could trigger an interimimpairment review include:significant underperformance relative to expected historical or projectedfuture operating results; significantchanges in the manner of our use of acquired assets or the strategy forour overall business (e.g., decision to divest abusiness); or significant negative industry or economic trends.
If we determine through the impairment review process that goodwillis impaired, we record an impairment chargein our consolidated statements of income.For the years ended December 28, 2019 and December 29, 2018,theresults of our goodwill impairment analysis did
0
t result in any impairments.
Long-Lived Assets
Long-lived assets, other than goodwill and other definite-lived intangibles,are evaluated for impairment wheneverevents or changes in circumstances indicate that the carrying amountof the assets may not be recoverable throughthe estimated undiscounted future cash flows to be derived from suchassets.Definite-lived intangible assets primarily consist of non-compete agreements,trademarks, trade names, customerlists, customer relationships and intellectual property.For long-lived assets used in operations, impairment lossesare 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 theestimated fair value.When an impairment exists, the related assets are written down to fair value.During the year ended December 26, 2020, we recorded total impairmentcharges on intangible assets ofapproximately $
20.3
million, nearly all of which was recorded in our technology andvalue-added services segment.Cost of Sales
The primary components of cost of sales include the cost of the product(net of purchase discounts, supplierchargebacks and rebates) and inbound and outbound freight charges.Costs related to purchasing, receiving,inspections, warehousing, internal inventory transfers and other costs ofour distribution network are included inselling, general and administrative expenses along with other operatingcosts.As a result of different practices of categorizing costs associated with distribution networksthroughout ourindustry, our gross margins may not necessarily be comparable to other distribution companies.Total distributionnetwork costs were $
71.7
72.3
69.6
million for the years ended December 26, 2020,December 28, 2019 and December 29, 2018.
Comprehensive Income
Comprehensive income includes certain gains and losses that, under accountingprinciples generally accepted in theUnited States, are excluded from net income as such amounts are recordeddirectly as an adjustment tostockholders’ equity.Our comprehensive income is primarily comprised of net income,foreign currencytranslation gain (loss), unrealized gain (loss) from foreign currencyhedging activities, unrealized investment gain(loss) and pension adjustment gain (loss).
Leases
On December 30, 2018, we adopted ASC Topic 842, Leases, using a modified retrospective approach, whereby
we continue to apply existing lease guidance during the comparativeperiods and apply the new leaserequirements through a cumulative-effect adjustment in the period of adoption. We elected the package of
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
85
practical expedients permitted under the transition guidance withinthe new standard, which, among other things,allowed us to carry forward the historical lease classification. Informationrelated to leases as of December 28,2019 is presented under Topic 842, while prior period amounts are not adjusted and continue to be reported under
legacy guidance in ASC Topic 840, Leases.
The most significant impact was the recognition of ROU assets and lease liabilitiesfor operating leases, while ouraccounting for finance leases remained substantially unchanged. Adoptionof the new standard resulted in therecording of additional net operating lease assets of $
259.9
million and operating lease liabilities of $267.3
and a decrease of $
1.1
8.5
million in prepaid rent and deferred rent liabilities, respectively. Thestandard did not materially impact our consolidated net income and hadno impact on cash flows.We
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
Operatingoperating lease right-of-use
(“ROU”) assets,
Operatingoperating lease liabilities, and
Non-currentnon-current operating lease liabilities in our
consolidated balance
sheet.sheets.
Finance
leases are included in
Propertyproperty and equipment,
Currentcurrent maturities of
long-term debt, and
Long-termlong-term debt in our
consolidated balance
sheets.
sheet.ROU assets represent our right to use an underlying asset for the lease
term and lease liabilities represent our
obligation to make lease payments arising from the lease.
Operating lease ROU assets and liabilities are recognized
upon commencement of the lease based on the present value of the lease payments
over the lease term.
As most of
our leases do not provide an implicit interest rate, we generally use our incremental
borrowing rate based on the
estimated rate of interest for fully collateralized and fully amortizing borrowings
over a similar term of the lease
payments at commencement date to determine the present value of
lease payments.
When readily determinable, we
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,selling, general
and
administrative”administrative and
“Interest expense”,interest expense, respectively within our
Consolidatedconsolidated
Statementstatement of
Income.income.
Short-termLeases
leases with a lease term of 12 months or less are not capitalized.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
76
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
the transaction price based on the relative
standalone selling price.
Business Acquisitions
We account for business acquisitions under the acquisition method of accounting, under which
the net assets ofacquired businesses are recorded at their fair value at the acquisitiondate and our consolidated financial statements include the acquired businesses’ results of operations from that date.
Some prior owners of acquired subsidiaries are eligible to receive additionalpurchase price cash consideration, or we may be entitled to recoup a portion of purchase price cash considerationif certain financial targets are met.We have accrued liabilities for the estimated fair value of additional purchaseprice consideration at the time of the acquisition, using the income approach, including a probability-weighteddiscounted cash flow method or an option pricing method, where applicable.Any adjustments to these accrual amounts are recordedin selling, general and administrative within our consolidated statements of income. While we use our best estimates and assumptions to accurately valueassets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subjectto refinement.As a result, within 12 months
following the date of acquisition, or the measurement period, wemay record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill within our consolidated balancesheets.At the end of the measurement period or final determination of the values of such assetsacquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognizedin our consolidated statements of operations. Any excess of acquisition consideration over the fair value of identifiablenet assets acquired is recorded as goodwill.Goodwill is an asset representing the future economic benefitsarising from other assets acquired in a business combination that are not individually identified and separatelyrecognized, such as future customers and technology, as well as the assembled workforce.
Goodwill represents, for acquired business, the excess of the purchase priceover the estimated fair value of the net assets acquired, including the amount assigned to identifiable intangibleassets.Goodwill is subject to impairment analysis annually or more frequently if needed.Such impairment analyses for goodwill requires a comparisonof 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 ona specific identification basis. For the years ended December 30, 2023 and December 31, 2022, we tested goodwillfor impairment, on the first day of the fourth quarter, using a quantitative analysis comparing the carrying value of our reportingunits, including goodwill, to their estimated fair values using a discountedcash flow methodology.When the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of thereporting unit is considered not impaired.Conversely, when a reporting unit’s carrying value exceeds its fair value, an impairment charge against goodwill, limited to the total amount of goodwill allocated to thatreporting unit, is recognized. Application of the goodwill impairment test requires judgment, includingthe identification of reporting units, assignment of assets and liabilities that are considered shared servicesto 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 witha market approach.There are inherent uncertainties related to fair value models, the inputs and our judgmentsin applying them to this analysis.The most HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
77
significant inputs include estimation of future cash flows based on budgetexpectations, and determination of comparable companies to develop a weighted average cost of capital for eachreporting unit. For the year ended December 30, 2023 and December 25, 2021, the results ofour goodwill impairment analysis did no
t result in any impairments.For the year ended December 31, 2022 we recorded a $ 20
goodwill relating to the disposal of an unprofitable business whoseestimated fair value was lower than its carrying value.The disposal of this business is part of our restructuring initiativeas more fully discussed in Intangible Assets
In connection with our business acquisitions, the major classes ofassets and liabilities to which we generally allocate acquisition consideration to, excluding goodwill, includeidentifiable intangible assets (i.e., customer relationships and lists, trademarks and trade names, product developmentand non-compete agreements), inventory and accounts receivable.The estimated fair value of identifiable intangible assetsis based on critical judgments and assumptions derived from analysis of market conditions, includingdiscount rates, projected revenue growth rates (which are based on historical trends and assessment of financial projections),estimated customer attrition and projected cash flows.We have calculated the value of these intangible assets using the multi-period excess earnings method, the relief-from-royalty method, and the with and withoutmethod, where applicable.These assumptions are forward-looking and could be affected by future economic andmarket conditions. Intangible assets, other than goodwill, are evaluated for impairment wheneverevents or changes in circumstances indicate that the carrying amount of the assets may not be recoverablethrough the undiscounted future cash flows expected to be derived from such asset or asset group.
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 or asset groups carrying amount is not recoverablethrough its undiscounted 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 30, 2023, December 31, 2022and December 25, 2021, we recorded total impairment charges, within the selling, general and administrative line of our consolidated statementsof income, on intangible assets of $
7
34
1
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 eventsthat have been recognized in our financial statements or tax returns.In estimating future tax consequences, we generally consider all expectedfuture events other than expected 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 inthe 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 havethe 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 arecarried at the estimated redemption amounts. The redemption amounts have been estimated based on expected futureearnings and cash flows and, if such earnings and cash flows are not achieved, the value of the redeemable noncontrollinginterests might be impacted. HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
78
Changes in the estimated redemption amounts of the noncontrollinginterests subject to put options are reflected at each reporting period with a corresponding adjustment to Additional paid-incapital.Future reductions in the carrying amounts are subject to a “floor” amount that is equal to thefair 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 intereststo reflect a fair value redemption feature do not impact the calculation ofearnings per share.Our net income is reduced by the portion of the subsidiaries’ net income that is attributableto redeemable noncontrolling interests. Noncontrolling Interests
Noncontrolling interest represents the ownership interests of certainminority 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 accountingprinciples generally accepted in the United States, are excluded from net income as such amounts are recordeddirectly as an adjustment to stockholders’ equity.Our comprehensive income is primarily comprised of net income,foreign currency translation gain (loss), unrealized gain (loss) from hedging activitiesand unrealized pension adjustment gain. Risk Management and Derivative Financial Instruments
We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchange rates, interest
rates, and our unfunded non-qualified supplemental retirement plan (“SERP”)and our deferred compensation plan (“DCP”).Our objective is to manage the impact that foreign currencyexchange rate fluctuations could have on recognized asset and liability fair values, earnings and cash flows, as wellas our net investments in foreign subsidiaries, the interest rate risk on variable rate debt, and the returns onour SERP and DCP.Our risk management policy requires that derivative contracts used as hedges beeffective at reducing the risks associated with the exposure being hedged and be designated hedges at inceptionof the contracts.We do not enter into derivative instruments for speculative purposes.Our derivative instruments primarily include foreign currency forward contracts, total return swaps, and interest rate swaps. Foreign currency forward agreements related to forecasted inventorypurchase commitments with foreign suppliers, foreign currency swaps related to foreign currency denominated debt, andinterest rate swaps related to variable rate 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 derivatives are recorded as acomponent of Accumulated other comprehensive income in stockholders’ equity and subsequently reclassified intoearnings in the period(s) during which the hedged transactions affect earnings.We classify the cash flows related to our hedging activities in the same category in our consolidated statements of cash flows as the cash flows relatedto the hedged item. Foreign currency forward contracts related to our euro-denominatedforeign operations are designated as net investment hedges.For derivatives that are designated and qualify as net investmenthedges, changes in the fair value of the derivatives are recorded in the foreign currency translation gain(loss) component of Accumulated other comprehensive income in stockholders’ equity until the netinvestment is sold or substantially liquidated. Interest swap agreements are entered into for the purpose of hedgingthe cash flow of our variable interest rate term loan.
Our foreign currency forward agreements related to foreign currencybalance sheet exposure provide economic hedges but are not designated as hedges for accounting purposes.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
79
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 SERP and DCP.These swaps are expected to be renewed on an annual basis.Changes in the fair values of these total return swaps are recorded in selling, general, and administrative expenses within our consolidatedstatements of income and offset recognized changes in the fair values of our SERP and DCP liabilities.
Foreign Currency Translationand Transactions The financial position and results of operations of our foreign subsidiariesare determined using local currencies as the functional currencies.Assets and liabilities of foreign subsidiaries are translated at the exchangerate in effect at each year-end.Income statement accounts are translated at the average rateof exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are includedin Accumulated other comprehensive income in stockholders’ equity.Gains and losses resulting from foreign currency transactions are included in earnings.
Accounting Pronouncements Adopted
OnDuring the year ended December 29, 2019,30, 2023, we adopted ASU No. 2017-04, “Intangibles-GoodwillASC Topic 848,
“Reference Rate Reform” (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
which provides optional expedientsand Other” (Topic 350) (“ASU
2017-04”).exceptions for applying GAAP to contracts, hedging relationships and
ASU 2017-04 eliminates step two fromother transactions affected by the
goodwill impairmentdiscontinuation of the London Interbank Offered Rate or by another reference rate
test, thereby eliminating theexpected to be discontinued requirement to calculate the implied fair valuebecause of
a reporting unit.reference rate reform.
ASU 2017-04 requires us to perform our annualgoodwill impairment test by comparing the fair valueThe adoption of
our reportingunits to the carrying value of those units.Ifthe carrying value exceeds the fair value, we will be required to recognizean impairment charge; however, theimpairment charge should not exceed the amount of goodwill allocated to such reportingunit.Our adoption ofASU 2017-04Topic 848 did not have a material impact on our consolidated
financial statements.
On December
29, 2019,26, 2021 we adopted Accounting Standards Update(“ASU”) No. 2021 – 08,“Accounting for
Contract Assets and Contract Liabilities from Contracts with Customers” (Subtopic 805).
an acquirer to recognize and measure contract assets and contract liabilities acquiredin 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 accordancewith 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 howthey 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.
2016-13, "Financial Instruments-CreditLosses (Topic 326):2019-12, Measurement of Credit Losses on Financial Instruments" which requires themeasurement and recognition ofexpected credit losses for financial assets held at amortized cost.We adopted Topic326 using the modified-retrospective method and recorded an immaterial cumulative-effect adjustmentto the opening balance of retainedearnings.Based upon the level and makeup of our financial asset portfolio,including accounts receivable, past loanloss activity and current known activity regarding our outstanding loans,the adoption of this ASU resulted in adecrease of $
0.4
million to retained earnings.HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
86
Recently Issued Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, “Income“Income Taxes” (Topic
740): Simplifying the Accounting
for Income Taxes (“
(“ASU 2019-12”).
ASU 2019-12
will simplifysimplifies the accounting for income taxes by
removing
certain certain exceptions to the general principles in Topic 740.
The amendments also improve consistent application of
andand simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance.
ASU 2019-12is effective for fiscal years beginning after December 15, 2020.We do not expect that the requirementsOur adoption of
thisASU will have a material impact on our consolidated financial statements.
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-06, “Debt—Debt with
Conversion and Other Options” (Subtopic 470-20) and “Derivatives and Hedging—in Entity’s Own Equity”(Subtopic 815-40): Accounting for Convertible Instruments and Contractsin an Entity’s Own Equity (“ASU 2020-06”).ASU 2020-06 simplifies the accounting for convertible instruments.In addition to eliminating certainaccounting models, this ASU includes improvements to the disclosuresfor convertible instruments and earnings-per-share (EPS) guidance and amends the guidance for the derivatives scope exceptionfor contracts in an entity’sown equity.ASU 2020-06 is effective for fiscal years beginning after December15, 2021.We do2019-12 did not
expect thatthe requirements of this ASU will have a material impact on our consolidated
financial statements.
Recently Issued Accounting Standards
In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09, “
Income Taxes
(Topic 740): Improvements toIncome Tax Disclosures ,” which requires public business entities to disclose
additional information in specified categories with respect tothe reconciliation of the effective tax rate to the statutory rate for federal, state, and foreign income taxes.It also requires greater detail about individual reconciling items in the rate reconciliation to the extent the impact of those itemsexceeds a specified threshold.In addition to new disclosures associated with the rate reconciliation, the ASU requiresinformation pertaining to taxes paid (net of refunds received) to be disaggregated for federal, state, and foreigntaxes and further disaggregated for specific HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
80
87jurisdictions to the extent the related amounts exceed a quantitative threshold.The ASU also describes items that need to be disaggregated based on their nature, which is determined byreference to the item’s fundamental or essential characteristics, such as the transaction or event that triggeredthe establishment of the reconciling item and the activity with which the reconciling item is associated.The ASU eliminates the historic requirement that entities disclose information concerning unrecognized tax benefits having a reasonablepossibility of significantly increasing or decreasing in the 12 months following the reporting date.This ASU is effective for annual periods beginning after December 15, 2024.Early adoption is permitted for annual financial statementsthat have not yet been issued or made available for issuance.This ASU should be applied on a prospective basis; however, retrospective application is permitted.We are currently evaluating the impact that ASU 2023 – 09 will have on our consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, “
Segment Reporting (Topic 280): Improvements to Reportable
Segments
,” which aims to improve financial reporting by requiring disclosureof incremental segment information on an annual and interim basis for all public entities to enable investors todevelop more decision-useful financial analyses.Currently, Topic280 requires that a public entity disclose certain information about itsreportable segments.For example, a public entity is required to report a measure ofsegment profit or loss that the CODM uses to assess segment performance and make decisions about allocatingresources.Topic 280 also requires other specified segment items and amounts, such as depreciation, amortization,and depletion expense, to be disclosed under certain circumstances.The amendments in this ASU do not change or remove those disclosurerequirements and do not change how a public entity identifies its operating segments,aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments.This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal yearsbeginning after December 15, 2024. Early adoption is permitted.We do not expect that the requirements of ASU 2023 – 07 will have a material impact on our consolidated financial statements.
Note 2 – Discontinued OperationsCybersecurity Incident
In October 2023 Henry Schein experienced a cybersecurity incident that
primarily affected the operations of our Animal Health Spin-off
North American and European dental and medical distribution businesses.
Henry Schein One, our practiceOn February 7, 2019 (the “Distribution Date”), we completed the separationmanagement software, revenue cycle management and patient relationship
(the “Separation”)management solutions business, was notaffected, and subsequent
merger (“Merger”) of our
animal health business (the “Henry Schein Animal Health Business”) with Directmanufacturing businesses were mostly unaffected.
VetWe reported the incident to law enforcementMarketing, Inc. (d/b/a Vets First Choice, “Vetsauthorities, restored affected systems and applications, our distribution operations
First Choice”).resumed and we reactivated ourecommerce platform. Subsequently, on or about November 8, 2023, we determined that the threat actor obtained
personal and sensitive information maintained on our systems belonging
This was accomplished byto certain third parties and since that date we have notified affected and potentially affected parties as appropriate.The scope of personal and sensitive data impacted is still under investigation.On November 22, 2023, we experienced a
series of transactions among us, VetsFirst Choice, Covetrus, Inc. (f/k/a HS Spinco, Inc. “Covetrus”), awholly owned subsidiary of oursprior to the Distribution Date, and HS Merger Sub, Inc., a wholly owned subsidiarydisruption
of
Covetrus (“Mergerour ecommerceSub”).platform and related applications, which has since been remediated.
In connection withThe incident adversely impacted our financialresults for the Separation,fourth quarter and full year 2023.
During the year ended December 30, 2023, we
contributed, assignedand transferred to Covetrus certain applicable assets, liabilities and capital stock or other ownership interests relatingto the Henry Schein Animal HealthBusiness.On the Distribution Date, we received a tax-free distribution ofincurred $
1,12011
million
from Covetrus pursuantof expenses directly related to thecybersecurity incident, mostly consisting of professional fees.We maintain cybersecurity insurance, subject to
certain
debt financing incurred by Covetrus.retentions and policy limitations.
On the Distribution Date and priorWith respect to the
Animal Health Spin-off,Covetrus issued shares of Covetrus common stock to certain institutionalaccredited investors (the “Share SaleInvestors”) forOctober 2023 cybersecurity incident, we have a $
361.160
million insurance policy, following a $
5
million
(the “Share Sale”).retention.
The proceeds of the Share Sale were paid to Covetrus anddistributed to us.Subsequent to the Share Sale, we distributed, on a pro rata basis,all of the shares of the commonstock of Covetrus held by us to our stockholders of record as of the close ofbusiness on January 17, 2019 (the“Animal Health Spin-off”).After the Share Sale and Animal Health Spin-off, Merger Sub consummated theMerger whereby it merged with and into VetsFirst Choice, with Vets First Choice surviving the Merger as awholly owned subsidiary of Covetrus.Immediately following the consummation of the Merger, on a fully dilutedbasis, (i) approximately
63
% of the shares of Covetrus common stock were (a) owned by our stockholdersand theShare Sale Investors, and (b) held by certain employees of the Henry ScheinAnimal Health Business (in the formof certain equity awards), and (ii) approximately
37
% of the shares of Covetrus common stock were (a) owned by
stockholders of VetsFirst Choice immediately prior to the Merger, and (b) held by certain employees of Vets FirstChoice (in the form of certain equity awards).After the Separation and the Merger, we no longer beneficiallyowned any shares of Covetrus common stock and, following the DistributionDate, will not consolidate thefinancial 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 SelectMarket.In connection with the completion of the Animal Health Spin-off, we entered intoa transition services agreement,which ended in December 2020, with Covetrus under which we agreed to providecertain transition services for upto twenty-four months in areas such as information technology, finance and accounting,human resources, supplychain, and real estate and facility services.
As a result of the Separation, the financial position and results of operationsof the Henry Schein Animal HealthBusiness are presented as discontinued operations and have been excludedfrom continuing operations and segmentresults for all periods presented. The accompanying Notes to the ConsolidatedFinancial Statements have beenrevised to reflect the effect of the Separation and all prior year balances have beenrevised accordingly to reflectcontinuing operations only. The historical statements of Comprehensive Income(Loss) and Shareholders' Equityhave not been revised to reflect the Separation and instead reflect the Separationas an adjustment to the balances atDecember 26, 2020.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
8881
Note 3 – Net Sales from Contracts with Customers
Summarized financial information for our discontinued operationsNet sales are recognized in accordance with policies disclosed
is as follows: inDisaggregation of Net sales
YearsThe following table disaggregates our net sales by reportable and operating segment
EndedDecember 26,
December 28,
December 29,
2020
2019
2018
$
0
$
319,522
$
3,784,392
Cost of goods sold
0
260,097
3,100,055
0
59,425
684,337
Selling, general and administrative
2,347
68,919
531,905
(2,347)
(9,494)
152,432
Income tax expense (benefit)
(3,333)
(2,181)
48,060
Income (loss) from discontinued operations986
(6,323)
111,685
Net (income) loss attributable to noncontrolling interests0
366
(6,521)
Net income (loss) from discontinued operationsattributable to Henry Schein, Inc.986
(5,957)
105,164
geographic area:The operating loss from discontinued operations for the year endedDecember 26, 2020 was primarily attributableto costs directly related to the Animal Health Spin-off.
information.
The net income from discontinued operations for the year ended December26, 2020 was primarily attributable to areduction in a liability for tax indemnification and a tax refund receivedduring 2020 by a holding companypreviously part of our Animal Health legal structure and otherfavorable tax resolutions.The financial information above, for the year ended December28, 2019, represents activity of the discontinuedoperations during year-to-date through the Distribution Date.The loss from discontinued operations for the yearended December 28, 2019 was primarily attributable to the inclusion ofthe transaction costs directly related to theAnimal Health Spin-off.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
89
The following are the amounts of assets and liabilities that weretransferred to Covetrus as of February 7, 2019.February 7,
2019
Cash and cash equivalents$
6,815
Accounts receivable, net
432,812
536,637
Prepaid expenses and other120,546
Total currentassets of discontinued operations1,096,810
Property and equipment, net69,790
Operating lease right-of-use asset, net
57,012
742,931
205,793
120,518
Total long-term assets ofdiscontinued operations1,196,044
Total assets of discontinuedoperations$
2,292,854
$
316,162
Current maturities of long-term debt657
Operating lease liabilities
18,951
Accrued expenses:
36,847
24,060
80,400
Total currentliabilities of discontinued operations477,077
1,176,105
17,019
Operating lease liabilities
38,668
29,209
Total long-term liabilitiesof discontinued operations1,261,001
Total liabilities of discontinuedoperations$
1,738,078
Redeemable noncontrolling interests
$
28,270
December 30, 2023
North America
International
Global
Net sales:
Health care distribution
Dental
$
4,500
$
3,039
$
7,539
Medical
3,897
97
3,994
Total health care distribution
8,397
3,136
11,533
Technologyand value-added services 705
101
806
Total net sales
$
9,102
$
3,237
$
12,339
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
Technologyand value-added services 633
90
723
Total net sales
$
9,636
$
3,011
$
12,647
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
Technologyand value-added services 560
87
647
Total net sales
$
9,173
$
3,228
-
$
12,401
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
9082
Note 34 – PropertySegment and Equipment, NetGeographic Data
We conduct our business through
two
Propertyreportable segments: (i) health care distribution and
equipment, including related estimated useful lives, consisted(ii) technology
andvalue-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, governmentand other institutions.Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,emergency medical technicians, dialysis centers, home health, federal and state governmentsand large enterprises, such as group practices and integrated delivery networks, among other providersacross a wide range of
the following:specialties.Our dental and medical groups serve practitioners in
33
The health care distribution reportable segment aggregates our global dentaland medical operating segments.This segment distributes consumable products, dental specialty products, smallequipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals,vaccines, surgical products, diagnostic tests, infection-control products, personal protective equipment products (“PPE”)and vitamins. Our global technology and value-added services reportable segment providessoftware, 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-recoursebasis, 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 operatingsegments: December 26,
December 28,30,
2020December 31,
2019December 25,
Land2023
2022
2021
Net sales:
Health care distribution
(1)
Dental
$
20,2977,539
$
18,030
Buildings and permanent improvements145,160
121,823
107,753
104,089
Machinery and warehouse equipment142,437
124,640
Furniture, fixtures and other108,041
99,083
Computer equipment and software344,494
330,926
868,182
798,591
Less accumulated depreciation(526,178)
(468,946)
Property and equipment, net7,473$
342,0047,544
Medical
3,994
4,451
4,210
Total health care distribution
11,533
11,924
11,754
Technologyand value-added services (2)
806
723
647
Total
$
329,64512,339
Estimated Useful$
Lives (in years)12,647
Buildings and permanent improvements$4012,401
Machinery and warehouse equipment5
-
10
Furniture, fixtures and other3
-
10
Computer equipment and software3
-
10
(1)
PropertyConsists of consumable products, dental specialty products (including implant, orthodontic and endodontic products), small
equipment, related depreciation expenselaboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical
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
the yearspractitioners, consulting and other services.
ended December 26, 2020, December 28, 2019 and December 29, 2018 was $
64.3
million, $64.4
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
83
58.1
December 30,
December 31,
December 25,
2023
2022
2021
Operating Income:
Health care distribution
$
470
$
619
$
727
Technologyand value-added services 145
128
125
Total
$
615
$
747
$
852
Income before taxes and equity in earnings of affiliates:
Health care distribution
$
396
$
592
$
706
Technologyand value-added services 146
129
125
Total
$
542
$
721
$
831
Depreciation and Amortization:
Health care distribution
$
184
$
160
$
157
Technologyand value-added services 64
52
53
Total
$
248
$
212
$
210
Interest Income:
Health care distribution
$
16
$
7
$
6
Technologyand value-added services 1
1
-
Total
$
17
$
8
$
6
Interest Expense:
Health care distribution
$
87
$
35
$
27
Technologyand value-added services -
-
-
Total
$
87
$
35
$
27
Health care distribution
$
90
$
141
$
168
Technologyand value-added services 30
29
30
Total
$
120
$
170
$
198
Equity in Earnings of Affiliates:
Health care distribution
$
14
$
14
$
19
Technologyand value-added services -
1
1
Total
$
14
$
15
$
20
Purchases of Property and Equipment:
Health care distribution
$
139
$
86
$
74
Technologyand value-added services 8
10
5
Total
$
147
$
96
$
79
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
9184
As of
December 30,
December 31,
December 25,
2023
2022
2021
Health care distribution
$
9,083
$
7,287
$
7,157
Technologyand value-added services 1,490
1,320
1,324
Total
$
10,573
$
8,607
$
8,481
The following table presents information about our operations by geographicarea as of and for the years ended December 30, 2023, December 31, 2022 and December 25, 2021.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 geographicareas and there were no material amounts of export sales.
2023
2022
2021
Net Sales
Long-Lived
Assets
Net Sales
Long-Lived
Assets
Net Sales
Long-Lived
Assets
United States
$
8,631
$
3,434
$
9,190
$
2,891
$
8,722
$
2,981
Other
3,708
2,180
3,457
1,256
3,679
1,232
Consolidated total
$
12,339
$
5,614
$
12,647
$
4,147
$
12,401
$
4,213
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
85
Note 4 – Goodwill and Other Intangibles, Net
The changes in the carrying amount of goodwill for the years ended December26, 2020 and December 28, 2019were as follows:
Health Care
Distribution
Value-Added
Services
Total
Balance as of December 29, 2018$
1,433,412
$
647,617
$
2,081,029
Adjustments to goodwill:
50,276
338,352
388,628
Foreign currency translation(6,969)
(193)
(7,162)
Balance as of December 28, 20191,476,719
985,776
2,462,495
Adjustments to goodwill:
14,230
12,101
26,331
Foreign currency translation9,888
5,678
15,566
Balance as of December 26, 2020$
1,500,837
$
1,003,555
$
2,504,392
Other intangible assets consisted of the following:
December 26, 2020
December 28, 2019
Accumulated
Accumulated
Cost
Amortization
Net
Cost
Amortization
Net
$
30,993
$
(11,480)
$
19,513
$
34,553
$
(9,327)
$
25,226
Trademarks / trade names - definite lived95,382
(50,893)
44,489
99,314
(44,134)
55,180
Customer relationships and lists652,605
(283,469)
369,136
715,630
(274,330)
441,300
Product Development
94,216
(54,451)
39,765
85,211
(42,326)
42,885
14,188
(7,662)
6,526
26,237
(17,950)
8,287
$
887,384
$
(407,955)
$
479,429
$
960,945
$
(388,067)
$
572,878
Non-compete agreements represent amounts paid primarily to key employeesand prior owners of acquiredbusinesses, as well as certain sales persons, in exchange for placing restrictionson their ability to pose acompetitive risk to us.Such amounts are amortized, on a straight-line basis over therespective non-competeperiod, which generally commences upon termination of employmentor separation from us.The weighted-averagenon-compete period for agreements currently being amortized was approximately
5.1
2020.
Trademarks, trade names, customer lists and customer relationships were established throughbusiness acquisitions.Definite-lived trademarks and trade names are amortized on a straight-linebasis over a weighted-average period ofapproximately
8.1
years as of December 26, 2020.Customer relationships and customer lists are definite-livedintangible assets that are amortized on a straight-line basis over a weighted-averageperiod of approximately10.0
years as of December 26, 2020.Product development is a definite-lived intangible asset that is amortizedon astraight-line basis over a weighted-average period of approximately
8.5
years as of December 26, 2020.Amortization expense related to definite-lived intangible assets for the years endedDecember 26, 2020, December28, 2019 and December 29, 2018 was $
105.9
108.3
75.3
million.During the year endedDecember 26, 2020, we recorded total impairment charges on intangible assets ofapproximately $20.3
The annual amortization expense expected to be recorded for existingintangibles assets for the years 2021 through2025 is $
99.3
85.5
78.0
54.8
43.2
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
92
Note 5 – InvestmentsBusiness Acquisitions and OtherDivestiture
InvestmentsOur acquisition strategy is focused on investments in companies thatadd new customers and
other consisted of the following:sales teams, increaseour geographic footprint (whether entering a new country, such as emerging markets, or building scale where we
have already invested in businesses), and finally, those that enable us to access new products and technologies
.
Acquisition of Shield Healthcare
On October 2, 2023 we acquired a
90
% voting equity interest in Shield Healthcare, Inc. (“Shield”), a supplierof homecare medical products delivered directly to patients in their homes.Based in California, Shield expands our existing medical business by delivering a diverse range of products,including items such as incontinence, urology, ostomy, enteral nutrition, advanced wound care, and diabetes supplies.Additionally, Shield offers continuous glucose monitoring devices directly to patients in their homes.
December 26,
December 28,
2020
2019
Investment in unconsolidated affiliatesThe following table aggregates
$
169,382
$
164,659
Non-current deferred foreign, state and local income taxesthe preliminary estimated fair value, as of the date of acquisition, of
consideration42,594
23,625
Notes receivable
(1)
34,760
43,544
Capitalized costs for internally generated software for resale47,650
42,445
1,752
534
Acquisition-related indemnification49,401
38,464
Other long-termpaid and net assets
20,906
14,648
$
366,445
$
327,919
(1)
Long-term notes receivable carry interest rates ranging from
1
.0% to
14
.0%and are due acquired in
varying installments throughSeptember 30, 2027
.
the Shield acquisition:Amortization expense related to other long-term assets for the years ended December26, 2020, December 28, 2019and December 29, 2018 was $
15.3
12.3
10.2
2023
Acquisition consideration:
Cash
$
307
Deferred consideration
22
Redeemable noncontrolling interest
37
Total consideration
$
366
Identifiable assets acquired and liabilities assumed:
Current assets
$
41
Intangible assets
166
Other noncurrent assets
14
Current liabilities
(24)
Deferred income taxes
(41)
Other noncurrent liabilities
(7)
Total identifiablenet assets 149
Goodwill
217
Total net assets acquired
$
366
Goodwill is a result of expected synergies that are expected to originate from theacquisition as well as the expected growth potential of Shield.The acquired goodwill is not deductible for tax purposes. The following table summarizes the preliminary identifiable intangible assetsacquired as part of the acquisition of Shield:
2023
Lives (in years)
Customer relationships and lists
$
156
12
Trademarks / Tradenames
10
5
Total
$
166
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
93
Bank Credit Lines
Bank credit lines consisted of the following:
86
December 26,
December 28,
2020
2019
Revolving credit agreement
$
0
$
0
Other short-term bank credit lines
73,366
23,975
Total
$
73,366
$
23,975
The accounting for the acquisition of Shield has not been completed
Revolving Credit Agreement
On
April 18, 2017
, we entered into a $
750
million revolving credit agreement (the “Credit Agreement”), whichmatures in
April 2022.The interest rate is based on the USD LIBORplus a spread based on our leverage ratio atthe end of each financial reporting quarter.We expect the LIBOR rate to be discontinued at some pointduring 2021, which will require an amendment to our debt agreements toreflect a new reference rate. We do notexpect the discontinuation of LIBOR as a reference rate in our debt agreementsto have a material adverse effect onour financial position or to materially affect our interest expense.The Credit Agreement also requires, among otherthings, that we maintain maximum leverage ratios. Additionally, the Credit Agreement contains customary
representations, warranties and affirmative covenants as well as customary negativecovenants, subject tonegotiated exceptions on liens, indebtedness, significant corporate changes(including mergers), dispositions andcertain restrictive agreements.As of December 26, 2020 and December 28, 2019, we had0
revolving credit facility.As of December 26, 2020 and December 28, 2019, therewere $9.5
9.6
million of letters of credit, respectively,provided to third parties under the credit facility.On April 17, 2020, we amended the Credit Agreement to, among otherthings, (i) modify the financial covenantfrom being based on total leverage ratio to net leverage ratio, (ii) adjustthe pricing grid to reflect the net leverageratio calculation, and (iii) increase the maximum maintenance leverage ratiothrough March 31, 2021.364-Day Credit Agreement
On
April 17, 2020
, we entered into a new $
700
364
-day credit agreement, with JPMorgan Chase Bank,
N.A. and U.S. Bank National Association as joint lead arrangers and jointbookrunners.This facility matures onApril 16, 2021
.As of December 26, 2020, we had0
borrowings under this credit facility.We have the ability toborrow up to an additional $
200
million, from the original facility amount of $700
million, under this credit facilityon a revolving basis as needed, subject to the terms and conditions ofthe credit agreement.The interest rate for
borrowings under this facility will fluctuate based on our net leverage ratio. At December 26, 2020, the interest
rate on this facility was 2.50%. The proceeds from this facility can be used for working capital requirements and
general corporate purposes,several respects, including but not limited to permitted refinancing
finalizing valuation assessments of existing indebtednessaccounts receivable, inventory, accrued liabilities and income and non-income
based taxes.To assist in the allocation of consideration,we engaged valuation specialists to determine the fair value of intangible and tangible assets acquired and liabilities assumed. We
will finalize the amounts recognized as
the information necessary to complete the analysis is obtained.We expect to finalize these amounts as soon as possible but no later than one year from the acquisition date.The pro forma financial information has not been presented because the impact of the Shield acquisition during the year endedDecember 30, 2023 was immaterial to our consolidated financial statements.
Acquisition of S.I.N. Implant System
On July 5, 2023, we acquired a
100
% voting equity interest in S.I.N. Implant System (“S.I.N.”).
Under theBased in São termsPaulo, S.I.N. manufactures an extensive line of
this agreement, we are prohibited from repurchasing our common stockproducts to perform dental
until we report our financialimplant procedures and is focused onresults foradvancing the second quarterdevelopment of 2021.
value-priced dental implants.
Other Short-Term CreditLinesS.I.N. recently expanded the distribution of itsAs of December 26, 2020products into the United States and
December 28, 2019, we had various other
international markets.
short-term bank credit lines available, ofwhich $
73.4
24.0
million, respectively, were outstanding.At December 26, 2020 and December 28,2019, borrowings under all of these credit lines had a weighted averageinterest rate of4.14
% and
3.45
%,
respectively.
The following table aggregates the preliminary estimated fair value, as of
the date of acquisition, of consideration paid and net assets acquired in the S.I.N., including measurement periodadjustments recorded through December 30, 2023:
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
94
Long-term debt consisted of the following:
December 26,
December 28,
2020
2019
Private placement facilities$
613,498
$
621,274
U.S. trade accounts receivable securitization
0
100,000
Note payable due in
2025
3.1
%
at December 26, 2020
1,554
0
Variouscollateralized and uncollateralized loans payable with interest,in varying installments through
2023
ranging from
2.62
% to
4.27
% at December 26, 2020 and
ranging from
2.56
% to
10.5
% at December 28, 2019
4,596
6,089
Finance lease obligations (see Note 7)5,961
5,394
625,609
732,757
(109,836)
(109,849)
$
515,773
$
622,908
Private Placement Facilities
Our private placement facilities, with three insurance companies, have atotal facility amount of $1
available on an uncommitted basis at fixed rate economic terms to be agreed uponat the time of issuance, fromtime to time through
June 23, 2023
.The facilities allow us to issue senior promissory notes to thelenders at a fixedrate based on an agreed upon spread over applicable treasury notes atthe time of issuance.The term of eachpossible issuance will be selected by us and can range from
five
15 years
(with an average life no longer than12
years
).The proceeds of any issuances under the facilities will be usedfor general corporate purposes, includingworking capital and capital expenditures, to refinance existing indebtednessand/or to fund potential acquisitions.On June 29, 2018, we amended and restated the above private placementfacilities to, among other things, (i) permitthe consummation of the Animal Health Spin-off and (ii) provide for the issuanceof notes in Euros, British Poundsand Australian Dollars, in addition to U.S. Dollars.The agreements provide, among other things, that we maintaincertain maximum leverage ratios, and contain restrictions relatingto subsidiary indebtedness, liens, affiliatetransactions, disposal of assets and certain changes in ownership.These facilities contain make-whole provisions inthe event that we pay off the facilities prior to the applicable due dates.
On June 23, 2020, we amended the private placement facilities to, among other things, (i) temporarily modify the
financial covenant from being based on total leverage ratio to net leverage ratio until March 31, 2021, (ii) increase
the maximum maintenance leverage ratio through March 31, 2021, but with a 1.00% interest rate increase on the
outstanding notes if the net leverage ratio exceeds 3.0x, which will remain in effect until we deliver financials for a
four-quarter period ending on or after June 30, 2021 showing compliance with the total leverage ratio requirement,
and (iii) make certain other changes conforming to the Credit Agreement, dated as of April 18, 2017, as amended.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
95
The components of our private placement facility borrowings asof December 26, 2020 are presented in thefollowing table (in thousands):
Amount of
Borrowing
Borrowing
Outstanding
Rate
Due Date
January 20, 2012
$
14,286
3.09
%
January 20, 2022
January 20, 2012
50,000
3.45
January 20, 2024
December 24, 2012
50,000
3.00
December 24, 2024
June 2, 2014
100,000
3.19
June 2, 2021
June 16, 2017
100,000
3.42
June 16, 2027
September 15, 2017
100,000
3.52
September 15, 2029
January 2, 2018
100,000
3.32
January 2, 2028
September 2, 2020
100,000
2.35
September 2, 2030
Less: Deferred debt issuance costs
(788)
$
613,498
Annual
repayments of approximately $7.1
million for this borrowing commenced onJanuary 20, 2016
.
September 2, 2020
, we refinanced our $
100
million private placement borrowing at3.79
%, originally due on September 2, 2020,
with a similar
10-year borrowing
2.35
% maturing on
September 2, 2030
.
Preliminary
U.S. Trade Accounts Receivable SecuritizationAllocation as
of September
30, 2023
Measurement
Period
Adjustments
Preliminary
Allocation as
of December
30, 2023
Acquisition consideration:
Cash
$
326
$
3
$
329
Total consideration
$
326
$
3
$
329
Identifiable assets acquired and liabilities assumed:
Current assets
$
75
$
(8)
$
67
Intangible assets
155
(68)
87
Other noncurrent assets
33
13
46
Current liabilities
(33)
-
(33)
Long-term debt
(22)
-
(22)
Deferred income taxes
(55)
20
(35)
Other noncurrent liabilities
(27)
-
(27)
Total identifiable
We have a facility agreement with a bank, as agent, based on the securitization of our U.S. trade accountsnet assets
receivable that is structured as an asset-backed securitization program with pricingcommitted for up to126three years(43)
Our current facility, which has a purchase limit of Goodwill
200
46
246
Total net assets acquired
$
350326
million, was scheduled to expire onApril 29, 2022
June 22, 2020, the expiration date for this facility was extended to
June 12, 2023
and was amended to adjust certaincovenant levels for 2020.As of December 26, 2020 and December 28, 2019, the borrowings outstandingunder thissecuritization facility were $
0.03
100329
million, respectively.At December 26, 2020, the interest rate onborrowings under this facility was based on the asset-backed commercialpaper rate of0.22
% plus
0.95
%, for a
combined rate of
1.17
%.At December 28, 2019, the interest rate on borrowings underthis facility was based onthe asset-backed commercial paper rate of
1.90
% plus
0.75
%, for a combined rate of
2.65
%.
If our accounts receivable collection pattern changes due to customerseither paying late or not making payments,our ability to borrow under this facility may be reduced.
We are required to pay a commitment fee of
25
45
basis points depending upon program utilization. Goodwill is a result of expected synergies that are expected to originate from theacquisition as well as the expected growth potential of S.I.N.The acquired goodwill is not deductible for tax purposes.Measurement period adjustments recorded in the year ended December 30, 2023 were primarilya result of finalization of net working capital adjustments and third party intangible valuations.
The following table summarizes the preliminary identifiable intangible assetsacquired as part of the acquisition of S.I.N.:
2023
Lives (in years)
Customer relationships and lists
$
38
7
Trademarks / Tradenames
13
10
Product development
36
8
Total
$
87
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
9687
AsThe accounting for the acquisition of
December 26, 2020,S.I.N. has not been completed
the aggregate amountsin several respects, including but not limited to finalizing valuation assessments of long-term debt, including finance lease obligationsaccounts receivable, inventory, accrued liabilities and income and non-income
based taxes.
and netTo assist in the allocation of
deferred debt issuance costs of $
0.8
consideration,
million, maturing in eachwe engaged valuation specialists to determine the fair value of intangible and tangible assets acquired and liabilities assumed. We
will finalize the amounts recognized as
the information necessary to complete the analysis is obtained.We expect to finalize these amounts as soon as possible but no later than one year from the acquisition date.The pro forma financial information has not been presented because the impact of the
next five years and thereafter areS.I.N. acquisition during the year ended
as follows:December 30, 2023 was immaterial to our consolidated financial statements.
Acquisition of Biotech Dental
2021On April 5, 2023, we acquired a
57
% voting equity interest in Biotech Dental (“Biotech Dental”), which
is a $
109,836
2022provider of dental implants, clear aligners, individualized prosthetics,
and innovative digital dental software based11,607
1,916
2024Biotech Dental has several important solutions for dental practices
and dental labs, including Nemotec, a100,303
2025comprehensive, integrated suite of planning and diagnostic software
using open architecture that connects disparate1,839
Thereaftermedical devices to create a digital view of the patient, offering greater diagnostic
accuracy and an improved patient400,108
Totalexperience.
The integration of Biotech Dental’s software with Henry Schein One’s industry-leading practice$management software solutions will help customers streamline theirclinical as well as administrative workflow for625,609the ultimate benefit of patients.
The following table aggregates the preliminary estimated fair value, asof the date of acquisition, of consideration paid and net assets acquired in the Biotech Dental acquisition, includingmeasurement period adjustments recorded through December 30, 2023:
Preliminary
Allocation as
of July 1, 2023
Measurement
Period
Adjustments
Allocation as
of December
30, 2023
Acquisition consideration:
Cash
$
216
$
-
$
216
Fair value of contributed equity share in a controlled subsidiary
25
-
25
Redeemable noncontrolling interests
182
-
182
Total consideration
$
423
$
-
$
423
Identifiable assets acquired and liabilities assumed:
Current assets
$
78
$
-
$
78
Intangible assets
119
28
147
Other noncurrent assets
76
10
86
Current liabilities
(50)
(9)
(59)
Long-term debt
(90)
16
(74)
Deferred income taxes
(38)
(7)
(45)
Other noncurrent liabilities
(16)
(7)
(23)
Total identifiablenet assets 79
31
110
Goodwill
344
(31)
313
Total net assets acquired
$
423
$
-
$
423
Goodwill is a result of expected synergies that are expected to originate from theacquisition as well as the expected growth potential of Biotech Dental.The acquired goodwill is deductible for tax purposes.Measurement period adjustments recorded in the year ended December 30, 2023 were primarilya result of preliminary third party intangible valuation and various other adjustments.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
88
The following table summarizes the preliminary identifiable intangible assetsacquired as part of the acquisition of Biotech Dental:
2023
Lives (in years)
Customer relationships and lists
$
46
9
Trademarks / Tradenames
18
7
Product development
83
10
Total
$
147
The accounting for the acquisition of Biotech Dental hasnot been completed in several areas, including but not limited to pending assessments of accounts receivable, inventory, intangible assets, accrued liabilities and income
and non-income based taxes.To assist in the allocation of consideration, we engaged valuation specialists to determine the fair value of intangible and tangible assets acquired and liabilitiesassumed.We will finalize the amounts recognized as the information necessary to complete theanalysis is obtained.We expect to finalize these amounts as soon as possible but no later than one year from the acquisitiondate.The pro forma financial information has not been presented because the impact of the Biotech Dentalacquisition during the year ended December 30, 2023 was immaterial to our consolidated financial statements.
Other 2023 Acquisitions
During the year ended December 30, 2023, we acquired companies withinthe health care distribution and technology and value-added services segments.Our acquired ownership interest ranged between 51
% to
100
%.
The following table aggregatesthe preliminary estimated fair value, as of the date of acquisition, ofconsideration paid and net assets acquired for these acquisitions during the year endedDecember 30, 2023: 2023
Acquisition consideration:
Cash
$
168
Deferred consideration
4
Estimated fair value of contingent consideration payable
6
Fair value of previously held equity method investment
29
Redeemable noncontrolling interests
77
Total consideration
$
284
Identifiable assets acquired and liabilities assumed:
Current assets
$
32
Intangible assets
116
Other noncurrent assets
17
Current liabilities
(23)
Deferred income taxes
(11)
Long-term debt
(8)
Other noncurrent liabilities
(10)
Total identifiablenet assets 113
Goodwill
171
Total net assets acquired
$
284
Goodwill is a result of the expected synergies and cross-selling opportunities thatthese acquisitions are expected to provide for us, as well as the expected growth potential.Approximately half of the acquired goodwill is deductible for tax purposes.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
89
97In connection with an acquisition of a controlling interest of anaffiliate, we recognized a gain of approximately $ 18
million related to the remeasurement to fair value of our previously heldequity investment, using a discounted cash flow model based on Level 3 inputs, as defined in
The following table summarizes the preliminary identifiable intangibleassets acquired during the year ended December 30, 2023 and their estimated useful lives as of the date of the acquisition:
2023
Lives (in years)
Customer relationships and lists
$
79
9
Trademarks / Tradenames
8
5
Non-compete agreements
2
5
Product development
7
7
Patents
1
10
Other
19
2
Total
$
116
The pro forma financial information has not been presented because theimpact of the acquisitions during the year ended December 30, 2023 was immaterial to our consolidated financialstatements. 2022 Acquisitions
We completed several acquisitions during the year ended December 31, 2022, which were immaterial to our
consolidated financial statements.Our acquired ownership interests ranged from between 55
% to
100
Acquisitions in our health care distribution segment included companiesthat 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 leadersacross North America. The following table aggregates the estimated fair value, as of thedate 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 identifiablenet assets 107
Goodwill
86
Total net assets acquired
$
193
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
90
The following table summarizes the identifiable intangible assets acquired duringthe 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
Trademarks / Tradenames
9
5
Non-compete agreements
3
2
-
5
Other
3
10
Total
$
96
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 companiesthat specialize in the distribution and manufacturing of dental and medical products, a provider of homemedical 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 transitionservices, revenue cycle management, and business analytics and intelligence software.Approximately half of the acquired goodwill is deductible for tax The following table aggregates the estimated fair value, as of the date ofacquisition, 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 identifiablenet assets 398
Goodwill
376
Total net assets acquired
$
774
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
91
The following table summarizes the identifiable intangible assets acquired duringthe 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
Trademarks / Tradenames
58
5
-
12
Product development
19
5
-
10
Non-compete agreements
5
3
-
5
Other
15
18
Total
$
317
For the years ended December 30, 2023, December 31, 2022 and December25, 2021, there were no material adjustments recorded in our financial statements relating to acquisitionsfor which provisional amounts were recorded in prior periods.At December 25, 2021 we recorded an estimated contingent considerationreceivable of $
5
million, which was subsequently increased by an additional $ 5
million during 2022, by crediting income from operations, based on delays in timing of government approval of a certainproduct. During the years ended December 30, 2023, December 31, 2022and December 25, 2021 we incurred $ 22
$
9
7
million in acquisition costs, which are included in “selling, generaland administrative” within our consolidated statements of income.
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 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 after-tax gain of $
2
million.We do not expect to receive any additional proceeds from the sale of Hu-Friedy. HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
92
Note 6 – Property and Equipment, Net
Property and equipment, including related estimated useful lives, consistedof the following as of: December 30,
December 31,
2023
2022
Land
$
21
$
20
Buildings and permanent improvements
166
135
Leasehold improvements
103
94
Machinery and warehouse equipment
243
169
Furniture, fixtures and other
137
127
Computer equipment and software
500
411
1,170
956
Less accumulated depreciation and amortization
(672)
(573)
Property and equipment, net
$
498
$
383
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
Leasehold improvements are amortized on a straight-line basis overthe lesser of the useful life of the assets or the remaining lease term.
Property and equipment related depreciation expense for the yearsended December 30, 2023, December 31, 2022 and December 25, 2021, was $
70
68
71
million, respectively.Please see for
finance lease amounts included in property and equipment, net within ourconsolidated balance sheets. During the year ended December 30, 2023 we recorded a $
27
million impairment of capitalized costs, within our healthcare distribution segment.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
93
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
16 years18
which may include options to extend the leases for
up to 10 years
.15
years.
The components of lease expense were as
follows:
December 26,30,
December 28,31,
2020December 25,
20192023
2022
2021
Operating lease cost:
$
(1) (2)99$
86,800132
$
88,24689
Finance lease cost:
Amortization of right-of-use assets2,209
1,154
Interest on lease liabilities
115
131
Total financeVariable
lease cost
$12
2,32411
10
Short-term lease cost
10
7
4
Total operating lease cost
121
150
103
Finance lease cost
5
3
3
Total lease cost
$
1,285126
$
153
$
106
(1)
Includes variable lease expenses.
(2)
OperatingTotal operating lease cost for each of the years ended December 26, 2020,30, 2023, December 31, 2022 and December 28, 2019, includes amortization25, 2021, included costs of right-of-use
assets of $
0.611
42
0
million, respectively, related to facility leases recorded in
“Restructuring costs” "Restructuring and integration costs" within our consolidated statements of income.
Further, for the years ended December 30, 2023,
December 31, 2022 and December 25, 2021, we recognized an impairment of operating lease right-of-use assets of $
3
3
0
million respectively, related to facility leases recorded in “Restructuring and integration costs” within our consolidatedstatement of income. Supplemental balance sheet information related to leases is as follows:
December 26,
December 28,
2020
2019
Operating Leases:
Operating lease right-of-use assets
$
288,847
$
231,662
Current operating lease liabilities
64,716
65,349
Non-current operating lease liabilities
238,727
176,267
Total operating lease liabilities
$
303,443
$
241,616
Finance Leases:
Property and equipment, at cost
$
10,683
$
10,268
Accumulated depreciation
(4,277)
(4,581)
Property and equipment, net of accumulated depreciation
$
6,406
$
5,687
Current maturities of long-term debt
$
2,420
$
1,736
Long-term debt
3,541
3,658
Total financelease liabilities$
5,961
$
5,394
Weighted AverageRemaining Lease Term inYears:Operating leases
7.5
5.5
Finance leases
4.3
5.0
Weighted AverageDiscount Rate:Operating leases
2.8
%
3.4
%
Finance leases
1.9
%
2.2
%
December 30,
December 31,
2023
2022
Operating Leases:
Operating lease right-of-use assets
$
325
$
284
Current operating lease liabilities
80
73
Non-current operating lease liabilities
310
275
Total operating lease liabilities
$
390
$
348
Finance Leases:
Property and equipment, at cost
$
18
$
16
Accumulated depreciation
(9)
(6)
Property and equipment, net of accumulated depreciation
$
9
$
10
Current maturities of long-term debt
$
4
$
4
4
6
Total financelease liabilities $
8
$
10
Weighted AverageRemaining Lease Term inYears: Operating leases
6.6
6.7
Finance leases
2.6
3.1
Weighted AverageDiscount Rate: Operating leases
3.6
%
2.8
%
Finance leases
4.0
%
3.3
%
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
94
98
Supplemental cash flow information related to leases is as follows:
December 26,30,
December 28,31,
20202023
20192022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
76,98592
79,699
Operating cash flows for finance leases
101
9987
Financing cash flows for finance leases
2,1485
1,4133
Right-of-use assets obtained in exchange for lease obligations:
$
120,148124
297,80088
Finance leases
2,9474
2,9406
Maturities of lease liabilities are as follows:
December 26, 2020
Operating
Finance
Leases
Leases
2021
$
71,801
$
2,503
2022
58,049
1,542
2023
40,670
596
2024
28,899
327
2025
26,147
305
Thereafter
110,228
920
Total futurelease payments335,794
6,193
Less imputed interest
(32,351)
(232)
Total
$
303,443
$
5,961
As of December 26, 2020, we have additional operating leases with total leasepayments of $13.5
for
buildings and vehicles
that have not yet commenced.These operating leases will commence subsequent toDecember 26, 2020, with lease terms of
two years
10 years
.
December 30, 2023
Operating
Finance
Leases
Leases
2024
$
92
$
4
2025
77
2
2026
64
1
2027
48
1
2028
38
1
Thereafter
119
-
Total futurelease payments 438
9
Less imputed interest
(48)
(1)
Total
$
390
$
8
As of December 30, 2023, we have additional operating leases that havenot yet commenced with total lease payments of $
9
million for buildings and vehicles.These operating leases will commence after December 30, 2023, with lease terms of
one year
10 years
.
Certain of our facilities related to our acquisitions are leased fromemployees and minority shareholders.These leases are classified as operating leases and have a remaining lease termranging from five months
14 years
of December 30, 2023, current and non-current liabilities associated withrelated party operating leases were $ 5
million and $
23
million, respectively.At December 30, 2023 related party leases represented 6.3
% and
7.4
% of the
total current and non-current operating lease liabilities, respectively.As of December 31, 2022, current and non- current liabilities associated with related party operating leases were$ 4
14
December 31, 2022 related party leases represented
5.0
% and
5.3
% of the total current and non-current operating
lease liabilities, respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
9995
Note 8 – Redeemable Noncontrolling InterestsGoodwill and Other Intangibles, Net
Changes in the carrying amountsof goodwill for the years ended December 30, 2023 and December31, 2022 were as follows:
Some minority stockholders in certain of our subsidiaries have the right,
at certain times, to require us to acquiretheir ownership interest in those entities at fair value.
ASC 480-10 is applicable for noncontrolling interests wherewe are or may be required to purchase all or a portion of the outstanding
interest in a consolidated subsidiary fromthe noncontrolling interest holder under the terms of a put option
contained in contractual agreements.
Thecomponents of the change in the Redeemable noncontrolling interests for the years
ended December 26, 2020,December 28, 2019 and December 29, 2018 are presented in the following table:
December 26,Health Care
December 28,Distribution
December 29,Technologyand2020Value-Added
2019Services
2018Total
Balance
beginningas of
periodDecember 25, 2021$
287,2581,831
$
219,7241,023
$
465,5852,854
Decrease in redeemable noncontrolling interests dueAdjustments to goodwill:
(17,241)86
(2,270)(1)
(287,767)85
Increase in redeemable noncontrolling interests due toImpairment
business acquisitions(20)
28,387-
74,865(20)
4,655
Net income attributable to redeemable noncontrolling interests13,363
14,838
15,327
(12,631)
(10,264)
(8,206)
Effect of foreignForeign currency translation loss attributable to
redeemable noncontrolling interests(22)(4,279)(4)
(2,335)
(11,330)
Change in fair value of redeemable securities32,842
(7,300)
41,460(26)
Balance endas of periodDecember 31, 2022
1,875
1,018
2,893
Adjustments to goodwill:
Acquisitions
827
118
945
Foreign currency translation
35
2
37
Balance as of December 30, 2023
$
327,6992,737
$
287,2581,138
$
219,7243,875
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 thanits carrying value.The disposal of this business is part of our restructuring initiative as more fully discussedin Other intangible assets consisted of the following:
December 30, 2023
Weighted Average
Accumulated
Remaining Life
Cost
Amortization
Net
(in years)
Customer relationships and lists
$
984
$
(346)
$
638
10
Trademarks / Tradenames
168
(69)
99
8
Product development
205
(62)
143
9
Non-compete agreements
21
(6)
15
5
Other
39
(18)
21
10
Total
$
1,417
$
(501)
$
916
December 31, 2022
Weighted Average
Accumulated
Remaining Life
Cost
Amortization
Net
(in years)
Customer relationships and lists
$
826
$
(387)
$
439
10
Trademarks / Tradenames
125
(51)
74
8
Product development
90
(56)
34
9
Non-compete agreements
25
(6)
19
5
Other
31
(10)
21
17
Total
$
1,097
$
(510)
$
587
Trademarks, trade names, customer lists and customer relationships were established throughbusiness acquisitions and are amortized on a straight-line basis over their respective asset life.Non-compete agreements represent amounts paid primarily to prior owners of acquired businesses and certainsales 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 upontermination of employment or separation from us.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
96
Amortization expense, excluding impairment charges, related to definite-lived intangible assetsfor the years ended December 30, 2023, December 31, 2022 and December 25, 2021, was $
152
126
124
During the year ended December 30, 2023 we recorded $
19
million of impairment charges related to businesses in our health care distribution segment, the components of which were$ 7
million primarily related to customer lists and relationships attributable to lower than anticipated operatingmargins in certain businesses, and a $ 12
charge related to the planned exit of a business.These impairment charges were calculated as the differences between the carrying values and the estimated fair valuesof the impaired intangible assets, using a discounted estimate of future cash flows.
details.
During the year ended December 31, 2022 we recorded $
49
million of impairment charges related to businesses in our health care distribution segment, the components of which werea $ 15
million charge related to the disposal of an unprofitable business and a $
34
million charge related to customer lists and relationships attributable to customer attrition rates being higher than expected in certain other healthcare distribution businesses.These impairment charges were calculated as the differences between the carrying values and the estimatedfair valuesof the impaired intangible assets, using a discounted estimate of futurecash flows. 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 withinour technology and value-added services segment.
The above intangible asset impairment charges were recorded within selling, generaland administrative expenses and in restructuring and integration charges in our consolidated statement of income.
The annual amortization expense expected to be recorded for existingintangibles assets for the years 2024 through 2028 is $
157
138
121
109
91
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
97
Note 9 – Investments and Other
Investments and other consisted of the following:
December 30,
December 31,
2023
2022
Investments in unconsolidated affiliates
$
180
$
161
Non-current deferred foreign, state and local income taxes
38
88
Notes receivable
(1)
44
28
Capitalized costs for software to be sold, leased or marketed to external
users 95
79
4
3
Acquisition-related indemnification
46
59
Non-current pension assets
9
8
Other long-term assets
55
46
$
471
$
472
(1)
Long-term notes receivable carry interest rates ranging from
3.0
% to
10.0
% and are due in varying installments through
November 21, 2028
.
Amortization expense, primarily related to capitalized costs for software to
be sold, leased or marketed to external users, for the years ended December 30, 2023, December 31, 2022 and
December 25, 2021, was $ 26
18
million and $
15
million, respectively, and is included in the selling, general and administrative line within our
consolidated statements of income.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
10098
Note 9 – Comprehensive Income
Comprehensive income includes certain gains and losses that, under U.S.GAAP,are excluded from net income assuch amounts are recorded directly as an adjustment to stockholders’equity.The following table summarizes our Accumulated other comprehensive loss, net ofapplicable taxes as of:December 26,
December 28,
December 29,
2020
2019
2018
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment$
(24,617)
$
(20,338)
$
(18,595)
Attributable to noncontrolling interests:
Foreign currency translation adjustment$
235
$
(531)
$
(426)
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
(76,565)
$
(143,172)
$
(234,799)
Unrealized loss from foreign currency hedging activities(11,488)
(4,032)
(156)
Unrealized investment gain (loss)
1
6
(6)
(20,032)
(20,175)
(13,810)
Accumulated other comprehensive loss$
(108,084)
$
(167,373)
$
(248,771)
Total Accumulatedother comprehensive loss$
(132,466)
$
(188,242)
$
(267,792)
The following table summarizes the components of comprehensive income, net ofapplicable taxes as follows:December 26,
December 28,
December 29,
2020
2019
2018
$
419,423
$
719,138
$
562,126
Foreign currency translation gain (loss)
63,094
(4,070)
(136,356)
0
0
0
Foreign currency translation gain (loss)
63,094
(4,070)
(136,356)
Unrealized gain (loss) from foreign currency hedging activities(10,224)
(4,911)
1,022
2,768
1,035
(396)
Unrealized gain (loss) from foreign currency hedging activities(7,456)
(3,876)
626
Unrealized investment gain (loss)
(6)
14
(3)
1
(2)
0
Unrealized investment gain (loss)
(5)
12
(3)
Pension adjustment gain (loss)(533)
(7,730)
4,212
676
1,806
(1,179)
Pension adjustment gain (loss)143
(5,924)
3,033
$
475,199
$
705,280
$
429,426
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
101
Our financial statements are denominated in the U.S. Dollar currency.Fluctuations in the value of foreigncurrencies as compared to the U.S. Dollar may have a significant impacton our comprehensive income.Theforeign currency translation gain (loss) during the years ended December26, 2020, December 28, 2019 andDecember 29, 2018 was impacted by changes in foreign currency exchangerates of the Euro, Brazilian Real,British Pound and Australian Dollar
.
The following table summarizes our total comprehensive income, net ofapplicable taxes as follows:December 26,
December 28,
December 29,
2020
2019
2018
Comprehensive income attributable to
$
463,083
$
682,724
$
417,177
Comprehensive income attributable to
3,032
9,827
3,432
Comprehensive income attributable to
Redeemable noncontrolling interests9,084
12,729
8,817
$
475,199
$
705,280
$
429,426
Note 10 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset orpaid to transfer a liability in an orderlytransaction between market participants at the measurement date.The hierarchy for determining that distinguishesbetween (1) market participant assumptions developed based on market data obtainedfrom independent sources(observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed basedonthe best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives thehighest priority to unadjusted quoted pricesin active markets for identical assets or liabilities (Level 1) and the lowest priorityto 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 assetsor liabilities that are accessible at themeasurement date.
•Level 2— Inputs other than quoted prices included within Level 1 that are observablefor 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 marketsthat are not active; inputs other than quotedprices that are observable for the asset or liability; and inputs that arederived principally from or corroborated byobservable 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;receivable.however, weCertain 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.
inOur investments and notes receivablefair value is based on Level 3 inputs within the fair value hierarchy.
applicable markets.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
102
Debt
The fair value of our debt (including bank credit
lines) is classified aslines, current maturities
of long-term debt and long-term debt) isbased on Level 3 inputs within the fair value hierarchy, and as
of December 26, 202030, 2023 and December 28, 201931, 2022 was
estimated at $
699.02,351
756.71,149
Factors that we considered when estimating the fair
value of our debt
include market conditions, such as interest
Derivative contracts
Derivative contracts are valued using quoted market prices and
significant other observable
and unobservableinputs.
We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchangeinstruments primarily include foreign currency forward
agreements, forecasted
agreements related to certainintercompany loans, certain forecasted inventory purchase commitments, with
foreign
suppliers and foreigncurrency forward contracts,
to hedge a portion of our euro-denominatedinterest rate swaps, and total return
foreign operations which are designated asnet investment hedges;and a total return swap for the purpose of economically hedgingour unfunded non-qualifiedSERP and our DCP.
swaps.
The fair values for the majority of our foreign currency derivative contracts
are obtained by comparing our contract
rate to a published forward price of the underlying market rates, which
isare based on market rates for comparable
transactions andthat are classified within Level 2 of the fair value hierarchy.
The fair value of the interest rate swap, which is classified within Level 2
Seeof the fair value hierarchy, is determined by comparing our contract rate to a forward market rate as of the
for additional information.valuation date. The fair value of total return swaps is determined by valuing the underlying
exchange traded funds of the swap using market-on-close pricing by industry providers as of the valuationdate that are classified within Level 2 of the fair value hierarchy.
Redeemable noncontrolling interests
The values for
Redeemableredeemable noncontrolling interests are
based on recenttransactions and/or implied multiples ofearnings that are classified within
Level 3 of the fair value
hierarchy and arehierarchy. based on recent transactions and/or implied multiples of earnings.
for additional information.
Assets measured on a non-recurring basis at fair value include intangibles.Inputs for measuring intangibles are classified as Level 3 within the fair value hierarchy.
for additional information.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
99
The following table presents our assets and liabilities that are measured andrecognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as ofDecember 30, 2023 and December 31, 2022:
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
103
The following table presents our assets and liabilities that are measured andrecognized at fair value on a recurringbasis classified under the appropriate level of the fair value hierarchy as ofDecember 26, 2020 and December 28,2019:
December 26, 202030, 2023
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts
designated as hedges$
0-
$
1,8681
$
0-
$
1,8681
Derivative contracts undesignated
-
1
-
1
0-
1,5654
0-
1,5654
$
0-
$
3,4336
$
0-
$
3,4336
Liabilities:
Derivative contracts
designated as hedges$
0-
$
11,76518
$
0-
$
11,76518
Derivative contracts undesignated
-
2
-
2
$
0-
$
11,76520
$
0-
$
11,76520
Redeemable noncontrolling interests
$
0-
$
0-
$
327,699864
$
327,699864
December 28, 201931, 2022
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts
designated as hedges$
0-
$
56723
$
0-
$
56723
Derivative contracts undesignated
-
4
-
4
$
0-
$
56727
$
0-
$
56727
Liabilities:
Derivative contracts
designated as hedges$
0-
$
5,7951
$
0-
$
5,7951
Derivative contracts undesignated
-
3
-
3
-
3
-
3
$
0-
$
5,7957
$
0-
$
5,7957
Redeemable noncontrolling interests
$
0-
$
0-
$
287,258576
$
287,258576
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
100
104
Note 11 – Business AcquisitionsConcentrations of Risk
Certain financial instruments potentially subject us to concentrations ofcredit risk.These financial instruments consist primarily of cash equivalents, trade receivables, long-term investments,notes receivable and
Divestituresderivative instruments.
In all cases, our maximum exposure to loss from creditThe operating results
risk equals the gross fair value of
all acquisitions are reflectedthe financial instruments.We routinely maintain cash balances at financial institutions in
our financial statements from theirexcess of insured amounts.
respective acquisitionWe have dates.not experienced any loss in such accounts and we manage this risk throughmaintaining cash deposits and otherhighly 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 completed acquisitions duringlimit 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 institutionswho 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, credit risk is somewhat limited due to a relatively large customer baseand 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 either of the years ended December 30, 2023or December 31, 2022.With respect to our sources of supply, our top 10 health care distribution suppliers and our single largest supplier
accounted for approximately
24
% and
4
%, respectively, of our aggregate purchases for the year ended December 26, 2020, which were immaterial to
30, 2023 and approximately
28
% and
4
%, respectively, of our financialaggregate purchases for the year ended December
statements individually.31, 2022.
Our long-term notes receivable primarily represent strategic financing arrangements
In the aggregate, these transactions resulted in consideration of $ 57.8
related to business combinations, for net assets amounting to $
32.8
million.As of December 26, 2020, we hadrecorded $
36.9
million of identifiable intangibles, $23.9
million of goodwill and $26.4
million of non-controllinginterest, related to these acquisitions.with certain affiliates.
Some prior owners of acquired subsidiariesGenerally, these notes are
eligible to receive additionalpurchase price cash consideration ifsecured by certain
financial targets are met.We have accrued liabilities for the estimated fair value of additional purchase price consideration at the timeassets of the
acquisition,none of which are material.Any adjustments to these accrualcounterparty; however, in most cases our security isamounts are recorded in our consolidated statements of income.For the years ended December 26, 2020,December 28, 2019 and December 29, 2018, there were no material adjustmentsrecorded in our consolidatedstatement of income relating to changes in estimated contingent purchaseprice liabilities.Divestitures of Investments
During the fourth quarter of 2019, we sold an equity investmentin Hu-Friedy Mfg. Co., LLC, a manufacturer ofdental instruments and infection prevention solutions.Our investment was non-controlling, we were not involvedin running the business and had no representation on the board of directors.During the fourth quarter of 2019, wealso sold certain other equity investments.In the aggregate, the sales of these investments resulted in a pre-taxgainof approximately $
250.2
million, net of taxes of approximately $63.4
million.In the fourth quarter of 2020 wereceived contingent proceeds of $
2.1
million from the 2019 sale of Hu-Friedy resulting in the recognition of anadditional after-tax gain of $1.6 million.For the years ended December 28, 2019 and December 29,2018, werecognized approximately $
6.0
10.4
million of equity in earnings from these affiliates.Acquisition Costs
During the years ended December 26, 2020, December 28, 2019, and December29, 2018 we incurred $5.9
$
4.5
7.3
million in acquisition costs from continuing operations.In February 2019, we completed the Animal Health Spin-off.During the years ended December 26, 2020,December 28, 2019, and December 29, 2018, we incurred $
0.1
23.6
38.9
transaction costs associated with this transaction.Wedo not expect to incur additional spin-off related transactioncosts after December 26, 2020.All transaction costs relatedsubordinate to the
Animal Health Spin-offrights of other commercial financial institutions.While we have
been includedexposure to credit loss in theevent of non-performance by these counter-parties, we conduct ongoing
inassessments of their financial and results from discontinued operations.operational performance.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
105101
Note 12 – Derivatives and Hedging Activities
We are exposed to market risks and changes in foreign currency exchange rates against the U.S. dollar and each
other, and changes to the credit risk of the derivative counterparties.We attempt to minimize these risks using foreign currency forward contracts and by maintaining counter-party credit limits.Our 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 hedginginstruments and liquidity of the credit markets.All foreign currency forward contracts that we enter are for the solepurpose of hedging an existing or anticipated currency exposure.We do not enter into foreign currency forward 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.Our derivative instruments primarily include foreign currency forward contracts,total return swaps, and interest rate swaps.
During 2019 we entered foreign currency forward contracts that wedesignated as net investment hedges to hedge a portion of our euro-denominated foreign operations.These net investment hedges offset changes in the U.S. dollar value of our investments in certain euro-functional currency subsidiaries dueto fluctuating foreign exchange rates. Gains and losses related to these net investment hedges are recordedin accumulated other comprehensive loss within our consolidated balance sheets.Amounts excluded from the assessment of hedge effectiveness areincluded in interest expense within our consolidated statements of income.The aggregate notional value of these net investment hedges, which matured on
November 16, 2023
, was approximately €
200
2023 we entered into new foreign currency forward contracts tohedge a portion of our euro-denominated foreign operations which are designated as net investment hedges.The aggregate notional value of these net investment hedges, which matured on
November 16, 2023
, was approximately €
200
million.The aggregate notional value of this net investment hedge, which matures on
November 3, 2028
, is approximately €
300
ended December 30, 2023, December 31, 2022, and December 25, 2021,we recorded an increase/(decrease) of $
(32)
9
11
million, respectively, within other comprehensive income related to these foreign currency forward contracts.
for additional information. On
March 20, 2020
, we entered a total return swap to economically hedge our unfundednon-qualified SERP and our DCP.This swap will offset changes in our SERP and DCP liabilities.At the swap’s inception, the notional value of the investments in these plans was $
43
million.At December 30, 2023, the notional value of the investments in these plans was $
96
million.At December 30, 2023, the financing blended rate forthis swap was based on the Secured Overnight Financing Rate (“SOFR”) of
5.33
% plus
0.52
%, for a combined rate of
5.85
the years ended December 30, 2023, December 31, 2022,and December 25, 2021, we recorded within selling, general and administrative expenses in our consolidated statement of income,a gain (loss ) of $ 10
17
)
million, and $
12
million, respectively, net of transaction costs, related to this undesignated swap. for additional information. On July 11, 2023, we entered into interest rate swap agreements to hedge the cash flow of our variablerate $ 750
million floating debt term loan facility, with
three years
maturity, effectively changing the floating rate portion of our obligation to a fixed rate.Under the terms of the interest rate swap agreements, we receive variableinterest payments based on the one-month Term SOFR rate and pay interest at a fixed rate.As of December 30, 2023, the notional value of the interest rate swap agreements was $
741
million.For the year ended December 30, 2023, we recorded, within accumulated other comprehensive loss within our consolidatedbalance sheets, a loss of $ 10
million related to the change in the fair value of these interest rateswap agreements, since we have designated these swaps agreements as cash flow hedges.
Fluctuations in the value of certain foreign currencies as comparedto the U.S. dollar may positively or negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressedin U.S. dollars.Where we deem it prudent, we engage in hedging programs using primarilyforeign currency forward contracts aimed at limiting the impact of foreign currency exchangerate fluctuations on earnings.We purchase short-term (i.e., generally 18 months or less) foreign currency forward contractsto protect against currency HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
102
exchange risks associated with intercompany loans due from our internationalsubsidiaries 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 consider foreign currency translation to be an accountingexposure, not an economic exposure.Amounts related to our hedging activities are recorded in prepaidexpenses and other and/or accrued expenses: other within our consolidated balance sheets.
The following table summarizes the terms and fair value of our outstanding derivativefinancial instruments as of December 30, 2023 and December 31, 2022:
December 30, 2023
Notional
Amount
Classification
Fair
Value
Maturity Date
Derivatives used in cash flow hedges:
Foreign currency forward contracts
$
102
Accrued expenses, other
$
(1)
November 21, 2024
Interest rate swaps
741
Accrued expenses, other
(10)
July 13, 2026
Derivatives used in net investment hedges:
Foreign currency forward contracts
352
Accrued expenses, other
(6)
November 3, 2028
Undesignated hedging relationships:
96
Prepaid expenses and other
4
January 3, 2024
Total
$
1,291
$
(13)
December 31, 2022
Notional
Amount
Classification
Fair
Value
Maturity Date
Derivatives used in cash flow hedges:
Foreign currency forward contracts
$
123
Prepaid expenses and other
$
2
December 28, 2023
Derivatives used in net investment hedges:
Foreign currency forward contracts
200
Prepaid expenses and other
20
November 16, 2023
Undesignated hedging relationships:
78
Accrued expenses, other
(3)
January 4, 2023
Total
$
401
$
19
The following table summarizes the effect of cash flow hedges and net investment hedgeson our consolidated statements of income for the years endedDecember 30, 2023, December 31, 2022 and December25, 2021: December 30,
December 31,
December 25,
2023
2022
2021
Derivatives used in cash flow hedges:
Foreign currency forward contracts
$
(1)
$
-
$
1
Interest rate swaps
(7)
-
-
Derivatives used in net investment hedges:
Foreign currency forward contracts
(10)
7
8
Total
$
(18)
$
7
$
9
The amount of gains or losses reclassified from accumulated other comprehensiveloss into income were not material for the years ended December 30, 2023, December 31, 2022,and December 25, 2021. HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
103
Bank Credit Lines
Bank credit lines consisted of the following:
December 30,
December 31,
2023
2022
Revolving credit agreement
$
200
$
-
Other short-term bank credit lines
64
103
Total
$
264
$
103
Revolving Credit Agreement
On
August 20, 2021
, we entered a $
1.0
billion revolving credit agreement (the “Revolving Credit Agreement”) which was scheduled to mature on
August 20, 2026
July 11, 2023
, we amended and restated the Revolving
Credit Agreement to, among other things, extend the maturity dateto July 11, 2028
and update the interest rate provisions to reflect the current market approach for a multicurrencyfacility.The interest rate on this revolving credit facility is based on Term Secured Overnight Financing Rate (“Term SOFR”) plus a spread based on our
leverage ratio at the end of each financial reporting quarter.The Revolving Credit Agreement requires, among other things, that we maintain certain maximum leverage ratios.Additionally, the Revolving Credit Agreement contains customary representations, warranties and affirmative covenants as wellas customary negative covenants, subject to negotiated exceptions, on liens, indebtedness, significant corporatechanges (including mergers), dispositions and certain restrictive agreements.As of December 30, 2023 and December 31, 2022, we had $ 200
million and $
0
million in borrowings, respectively under this revolving credit facility.During the year ended December 30, 2023, the average outstanding balance under the Revolving CreditAgreement was approximately $
61
million.As of December 30, 2023 and December 31, 2022, there were $ 10
9
credit, respectively, provided to third parties under this Revolving Credit Agreement.
Other Short-Term Bank CreditLines As of December 30, 2023 and December 31, 2022, we had various othershort-term bank credit lines available, in various currencies, with a maximum borrowing capacity of $
368
402
million, respectively.As of December 30, 2023 and December 31, 2022, $
64
103
million, respectively, were outstanding.During the year ended December 30, 2023, the average outstanding balances under ourvarious other short-term bank credit lines was approximately $
115
million.At December 30, 2023 and December 31, 2022, borrowings underother short-term bank credit lines had weighted average interest rates of
6.02
% and
10.11
%, respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
104
Long-term debt consisted of the following:
December 30,
December 31,
2023
2022
Private placement facilities
$
1,074
$
699
U.S. trade accounts receivable securitization
210
330
Term loan
741
-
Variouscollateralized and uncollateralized loans payable with interest, in varying installments through 2030 at interest rates
from
0.00
% to
9.42
% at December 30, 2023 and
from
0.00
% to
3.50
% at December 31, 2022
54
7
Finance lease obligations
8
10
Total
2,087
1,046
Less current maturities
(150)
(6)
Total long-term debt
$
1,937
$
1,040
As of December 30, 2023,the aggregate amounts of long-term debt, including finance lease obligationsand net of deferred debt issuance costs of $
1
million, maturing in each of the next five years and thereafterare as follows: $
150
231
721
104
179
702
$
2,087
Private Placement Facilities
Our private placement facilities include four insurance companies, havea total facility amount of $ 1.5
are available on an uncommitted basis at fixed rate economicterms to be agreed upon at the time of issuance, from time to time through
October 20, 2026
.The facilities allow us to issue senior promissory notes to thelenders at a fixed rate based on an agreed upon spread over applicable treasury notesat the time of issuance.The term of each possible issuance will be selected by us and can range from
five
15 years
(with an average life no longer than 12
years
).The proceeds of any issuances under the facilities will be usedfor 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 maintaincertain maximum leverage ratios, and contain restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposalof assets and certain changes in ownership.These facilities contain make-whole provisions in the event that wepay off the facilities prior to the applicable due dates.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
105
The components of our private placement facility borrowings, whichhave a weighted average interest rate of 3.65
%, as of December 30, 2023 are presented in the following table:
Amount of
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
May 4, 2023
75
4.79
May 4, 2028
May 4, 2023
75
4.84
May 4, 2030
May 4, 2023
75
4.96
May 4, 2033
May 4, 2023
150
4.94
May 4, 2033
Less: Deferred debt issuance costs
(1)
Total
$
1,074
U.S. Trade Accounts Receivable Securitization
We have a facility agreement based on our U.S. trade accounts receivable that is structured as an asset-backed
securitization program with pricing committed for up to
three years
.This facility agreement has a purchase limit of $
450
two
banks as agents, and expires on December 15, 2025
.
As of December 30, 2023 and December 31, 2022, the borrowings outstandingunder this securitization facility were $
210
330
million, respectively.At December 30, 2023, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of
5.67
% plus
0.75
%, for a combined rate of
6.42
%.At December 31, 2022, the interest rate on borrowings underthis facility was based on the asset-backed commercial paper rate of
4.58
% plus
0.75
%, for a combined rate of
5.33
%.
If our accounts receivable collection pattern changes due to customerseither 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
35
basis points depending upon program utilization. On December 20, 2023 and February 23, 2024, we amended this facilityto temporarily adjust certain covenant levels.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
106
Term Loan
On July 11, 2023, we entered into a
three-year
750
million term loan credit agreement (the “Term Credit Agreement”).The interest rate on this term loan is based on the Term SOFR plus a spread based on our leverage ratio at the end of each financial reporting quarter.This term loan matures on July 11, 2026. We are required to make quarterly payments of $
5
million from September 2023 through June 2024 and quarterly payments of $
9
million from September 2024 through June 2026, with the remaining balancedue in July 2026.As of December 30, 2023, the borrowings outstanding under this termloan were $ 741
million.At December 30, 2023, the interest on this Term Credit Agreement was
5.36
% plus
1.35
% for a combined rate of
6.71
have a hedge in place (see
for additional information) that ultimately
creates an effective fixed rate of
5.79
%.The Term Credit Agreement requires, among other things, that we maintain certain maximum leverage ratios.Additionally, the TermCredit Agreement contains customary representations, warranties and affirmative covenants as well as customary negativecovenants, subject to negotiated exceptions, on liens, indebtedness, significant corporate changes(including mergers), dispositions and certain restrictive agreements.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
107
Note 14 – Income Taxes
Income before taxes and equity in earnings of affiliates was as follows:
December 30,
December 31,
December 25,
2023
2022
2021
Domestic
$
424
$
506
$
593
Foreign
118
215
238
Total
$
542
$
721
$
831
The provisions for income taxes were as follows:
December 30,
December 31,
December 25,
2023
2022
2021
Current income tax expense:
U.S. Federal
$
72
$
150
$
129
State and local
28
49
37
Foreign
40
44
43
Total current
140
243
209
Deferred income tax expense (benefit):
U.S. Federal
9
(48)
(12)
State and local
(3)
(13)
(3)
Foreign
(26)
(12)
4
Total deferred
(20)
(73)
(11)
Total provision
$
120
$
170
$
198
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
108
The tax effects of temporary differences that give rise to our deferred income tax asset (liability) wereas follows: December 30,
December 31,
2023
2022
Deferred income tax asset:
Net operating losses
$
90
$
64
Other carryforwards
34
10
Inventory, premiumcoupon redemptions and accounts receivable 44
57
Operating lease liability
80
77
Other asset
66
60
Total deferred incometax asset 314
268
Valuationallowance for deferred tax assets (1)
(36)
(36)
Net deferred income tax asset
278
232
Deferred income tax liability
Intangibles amortization
(219)
(112)
Operating lease right-of-use asset
(65)
(61)
Property and equipment
(10)
(7)
Total deferred taxliability (294)
(180)
Net deferred income tax asset (liability)
$
(16)
$
52
(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 underthe applicable accounting rules is We
are required to consider all available positive and negative evidencein 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 ofjudgment 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 recoversubstantially 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, wewill be required to adjust our valuation allowance accordingly.
As of December 30, 2023, we had federal, state and foreign net operatingloss carryforwards of approximately $
37
69
317
million, respectively.The federal, state and foreign net operating loss carryforwards will begin to expire in various years from 2024 through2043.The amounts of federal, state and foreign net operating losses that can be carried-forward indefinitely are $
37
23
304
respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
109
The tax provisions differ from the amount computed using the federal statutory incometax rate as follows: December 30,
December 31,
December 25,
2023
2022
2021
Income tax provision at federal statutory rate
$
114
$
151
$
175
State income tax provision, net of federal income tax effect
15
20
21
Foreign income tax provision
5
4
6
Pass-through noncontrolling interest
(8)
(4)
(4)
(3)
(2)
(6)
Unrecognized tax benefits and audit settlements
9
11
7
Interest expense related to loans
(13)
(12)
(11)
Tax on globalintangible low-taxed income ("GILTI") 7
6
5
Other
(6)
(4)
5
Total incometax provision $
120
$
170
$
198
For the year ended December 30, 2023 our effective tax rate was
22.1
%, compared to
23.5
% for the prior year
period.In 2023, the difference between our effective tax rate and the federal statutory tax rate primarilyrelates to state and foreign income taxes and interest expense.In 2022, the difference between our effective tax rate and the federal statutory tax rate was primarily due to state and foreign incometaxes and interest expense.In 2021, our effective tax rate was
23.8
%, 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. On December 22, 2017, the U.S. government passed the Tax Cuts and Jobs Act, which requires U.S. companies to
pay a mandatory one-time transition tax on historical offshore earnings that have notbeen repatriated to the U.S. The transition tax is payable over eight years.Within our consolidated balance sheets, transition tax of $ 11
and $
19
million were included in “accrued taxes” for 2023 and 2022, respectively, and $ 24
23
were included in “other liabilities” for 2023 and 2022, 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.
The Organization of Economic Co-Operation and Development (OECD) issuedtechnical and administrative guidance on Pillar Two Model Rules in December 2021, which provides for a global minimum tax rate on the
earnings of large multinational businesses, on a country-by-country basis.Effective January 1, 2024, the minimum global tax rate is 15% for various jurisdictions pursuant to the Pillar Two framework.Future tax reform resulting from these developments may result in changes to long-standing tax principles,which may adversely impact our effective tax rate going forward or result in higher cash tax liabilities.As we operate in jurisdictions which have adopted Pillar 2, we are continuing to analyze the implications to effectively managethe impact for 2024 and beyond.
ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in accordance with other
provisions contained within its guidance.This topic prescribes a recognition threshold and a measurementattribute for the financial statement recognition and measurement of tax positions taken orexpected to be taken in a tax return.For those benefits to be recognized, a tax position must bemore 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% likelihood of being realized upon ultimate audit settlement.In the normal course of business, HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
110
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 positionstaken in respect of certain tax matters.
The total amount of unrecognized tax benefits, which are included in “otherliabilities” within our consolidated balance sheets, as of December 30, 2023 and December 31, 2022, was $
115
94
of which $
107
80
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 12months, which may result in a material impact on our consolidated statements of income.
All tax returns audited by the IRS are officially closed through 2019.The tax years subject to examination by the IRS include years 2020 and forward.In addition, limited positions reported in the 2017 tax year are subjectto IRS examination.
The amount of tax interest expense included as a component of the provisionfor taxes was $ 4
0
and $
0
million in 2023, 2022 and 2021, respectively.The total amount of accrued interest is included in “other liabilities,” and was $
16
million as of December 30, 2023 and $ 12
million as of December 31, 2022.The amount of penalties accrued for during the periods presented were not material toour consolidated financial statements. The following table provides a reconciliation of unrecognized tax benefits:
December 30,
December 31,
December 25,
2023
2022
2021
Balance, beginning of period
$
82
$
71
$
70
Additions based on current year tax positions
9
14
3
Additions based on prior year tax positions
26
8
11
Reductions based on prior year tax positions
(2)
-
(1)
Reductions resulting from settlements with taxing authorities
(3)
(1)
(9)
Reductions resulting from lapse in statutes of limitations
(14)
(10)
(3)
Balance, end of period
$
98
$
82
$
71
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
111
Note 15 – Plans of Restructuring
On
July 9, 2018, we committed to an initiative to rationalize our operations andprovide expenseefficiencies.These actions allowed us to execute on our plan to reduce our cost structureand fund new initiativesto drive growth under our 2018 to 2020 strategic plan.This initiative resulted in the elimination of approximately4
% of our workforce and the closing of certain facilities.
On November 20, 2019,August 1, 2022, we committed to a
contemplated initiative, intendedrestructuring plan focused on
to mitigate stranded costs associatedfunding the priorities of the BOLD+1 strategicwith the Animal Health Spin-off and to rationalizeplan, streamlining operations and
other initiatives to
provide expense efficiencies.increase efficiency.
These activitiesWe revised our previous expectations ofwere originally expected to be completed bycompletion and we have extended this initiative through the end of
2020.2024.
As a result of the business environment brought onby the COVID-19 pandemic, we are continuing our restructuring activitiesinto 2021. We are currently unable in
good faith to
make a determination of an estimate of the amount or range of
amounts
amounts expected to be incurred in
connection with
these activities,
in 2021, both with respect to each
major type of cost associated
therewith and
withrespect to the total cost, or an
estimate of the amount or range of amounts
that will result in future
cashexpenditures.
cash expenditures.During the years ended December
26, 2020,30, 2023, December
28, 2019,31, 2022, and December
29, 201825, 2021, we recorded
restructuringchargesrestructuring costs of $
32.180
14.7128
54.48
million, respectively.
The
restructuring costs
associated withfor these
restructuringsperiods primarily related to severance and employee-related costs,impairment of intangible assets, acceleratedamortization of right-of-use lease assets and fixed assets, other lease exitcosts, and certain business exit costs During the year ended December 30, 2023, in connection with our restructuringplan, we recorded an impairment of an intangible asset of $
12
million related to a planned disposal of a non-U.S. business.The disposal is expected to be completed in 2024.This impairment is included in the $ 80
million of restructuring charges discussed above. During the year ended December 31, 2022, in connection with ourrestructuring plan, we vacated one
buildings at our corporate headquarters in Melville, New York, which resulted in an accelerated amortization of a
right-of-use lease asset of $
34
million.We also initiated the disposal of a non-profitable U.S. business and recorded related costs of $
49
million, which primarily consisted of impairment of intangibleassets and goodwill, inventory impairment, and severance and employee-related costs.These expenses are included in
a separate line item, “Restructuring costs” withinthe $ 128
our consolidated statements ofmillionincome.of restructuring charges discussed above.The disposal was completed during the first quarter of 2023. On August 26, 2022, we acquired Midway Dental Supply.
In connection with this acquisition, during the yearended December 31, 2022, we recorded integration costs of $
3
million related to one-time employee and other The following table showscosts, as well as restructuring charges of $
9
million, which are included in the
amounts expensed and paid for$ 128
million of restructuring charges discussed above.
On November 20, 2019, we committed to a contemplated restructuring
initiative intended to mitigate stranded costs
that associated with the spin-off of our animal health business and to rationalize operationsand provide expense efficiencies.These activities were
incurred during our 2020, 2019 and 2018 fiscal years and the remaining accrued balanceoriginally expected to be completed by
the end of
restructuring costs as2020 but we extended them tothe end of December 26,
2020, which is included2021 in
Accrued expenses: Other and Other liabilitieslight of the changes to the business environment brought
within our consolidated balance sheet:Facility
Severance
Closing
Costs
Costs
Other
Total
Balance, December 30, 2017on by the COVID-19 pandemic.
The$
3,087
$
1,315
$
24
$
4,426
Provisionrestructuring activities under this prior initiative were completed
in 2021.50,197
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
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
25,855
5,878
360
32,093
Payments and other adjustments(26,152)
(6,309)
(329)
(32,790)
Balance, December 26, 2020$
12,614
$
395
$
104
$
13,113
The following table shows,
by reportable segment, the amounts expensedHENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and
paid for restructuring coststhat wereper share data) incurred during our 2020, 2019 and 2018 fiscal years and the remaining accruedbalance of restructuring costs as ofDecember 26, 2020:
112
TechnologyRestructuring and integration costs recorded during our 2023, 2022 and
and2021 fiscal years consisted of theHealth Care
Value-Added
Distribution
Services
Total
Balance, December 30, 2017$
4,426
$
0
$
4,426
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
13,935
770
14,705
Payments and other adjustments(30,853)
(1,767)
(32,620)
Balance, December 28, 2019$
13,373
$
437
$
13,810
30,935
1,158
32,093
Payments and other adjustments(31,484)
(1,306)
(32,790)
Balance, December 26, 2020$
12,824
$
289
$
13,113following:
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
106
Note 13 – Earnings Per ShareBasic earnings per share is computed by dividing net income attributableto Henry Schein, Inc. by the weighted-average number of common shares outstanding for the period.Our diluted earnings per share is computed similarlyto basic earnings per share, except that it reflects the effect of common shares issuablefor presently unvestedrestricted stock and restricted stock units and upon exercise of stock options,using the treasury stock method inperiods in which they have a dilutive effect.
A reconciliation of shares used in calculating earnings per basic anddiluted share follows:December 26,
December 28,
December 29,
2020
2019
2018
142,504
147,817
152,656
Effect of dilutive securities:
Stock options, restricted stock and restricted stock units900
1,440
1,051
143,404
149,257
153,707
Note 14 – Income Taxes
Income before taxes and equity in earnings of affiliates was as follows:
December 26,
December 28,
December 29,
2020
2019
2018
$
430,838
$
507,003
$
405,289
69,057
173,304
131,547
$
499,895
$
680,307
$
536,836
The provisions for income taxes were as follows:
December 26,
December 28,
December 29,
2020
2019
2018
Current income tax expense:
$
82,912
$
93,418
$
71,854
24,640
28,150
22,533
40,799
42,004
38,433
148,351
163,572
132,820
Deferred income tax expense (benefit):
(18,032)
5,633
206
(4,889)
1,597
(1,622)
(30,056)
(11,287)
(23,972)
(52,977)
(4,057)
(25,388)
$
95,374
$
159,515
$
107,432
YearEnded December 30, 2023 Health Care Distribution
Technologyand Value-Added Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Integration
Costs
Total
Severance and employee-related costs
$
41
$
-
$
5
$
-
$
46
Impairment and accelerated depreciation and
amortization of right-of-use lease assets and
other long-lived assets
13
-
2
-
15
Exit and other related costs
5
-
1
-
6
Loss on disposal of a business
13
-
-
-
13
Total restructuring and integration costs
$
72
$
-
$
8
$
-
$
80
YearEnded December 31, 2022 Health Care Distribution
Technologyand 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
YearEnded December 25, 2021 Health Care Distribution
Technologyand 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
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
113
107
The
tax effectsfollowing table summarizes, by reportable segment, the activity relatedto the liabilities associated with ourrestructuring initiatives for the year ended December 30, 2023.The remaining accrued balance of
temporary differences that give rise to our deferred income tax asset (liability) wererestructuring costs as
follows:of December 26,
December 28,
2020
2019
Deferred income tax asset:
Investment in partnerships
$
(6,294)
$
1,420
Net operating losses and other carryforwards
64,297
43,663
Inventory, premiumcoupon redemptions and accounts receivable56,668
23,808
4,858
14,075
Uniform capitalization adjustment to inventories
6,895
7,259
Operating lease right of use asset
74,674
56,780
49,260
33,311
Total deferred incometax asset250,358
180,316
Valuationallowance for deferred tax assets(1)
(40,496)
(20,699)
Net deferred income tax asset
209,862
159,617
Deferred income tax liability
Intangibles amortization
(118,165)
(135,754)
Operating lease liability
(71,343)
(54,672)
Property and equipment
(7,820)
(10,555)
Total deferred taxliability(197,328)
(200,981)
Net deferred income tax asset (liability)
$
12,534
$
(41,364)
(1)
Primarily30, 2023, which primarily relates to
operating losses , the benefits of which are uncertain.severance and
Any future reductions of such valuation allowances will beemployee-related costs, is included inreflected as a reduction of income tax expense.accrued expenses: other within our consolidated balance sheets.Liabilities related to exited leased facilities arerecorded within our current and non-current operating lease liabilities withinour condensed consolidated balance sheets.
The assessment of the amount of value assigned to our deferred tax assets underthe applicable accounting rules isjudgmental.We are required to consider all available positive and negative evidence in evaluating the likelihoodthat we will be able to realize the benefit of our deferredtax assets in the future.Such evidence includes scheduledreversals of deferred tax liabilities, projected future taxable income, tax planningstrategies and the results of recentoperations.Since this evaluation requires consideration of events thatmay occur some years into the future, thereis an element of judgment involved.Realization of our deferred tax assets is dependent on generating sufficienttaxable income in future periods.We believe that it is more likely than not that future taxable income will besufficient to allow us to recover substantially all of the value assigned to our deferredtax assets.However, if futureevents cause us to conclude that it is not more likely than not that we will beable to recover all of the valueassigned to our deferred tax assets, we will be required to adjust our valuationallowance accordingly.As of December 26, 2020, we had federal, state, and foreign net operatingloss carryforwards of approximately$
29.8
31.6
200.5
million, respectively. The federal, state and foreign net operating losscarryforwards will begin to expire in various years from
2024
2040
.The amounts of state and foreign netoperating losses that can be carried forward indefinitely are $
10.6
199.3
Technology
and
Health Care
Value-Added
Distribution
Services
Total
Balance, December 25, 2021
$
3
$
1
$
4
Restructuring and integration costs
124
4
128
Non-cash asset impairment and accelerated 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
Restructuring and integration costs
72
8
80
Non-cash asset impairment and accelerated depreciation and
amortization of right-of-use lease assets and other long-lived assets
(13)
(2)
(15)
Non-cash impairment on disposal of a business
(12)
-
(12)
Cash payments and other adjustments
(46)
(8)
(54)
Balance, December 30, 2023
$
22
$
1
$
23
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
108114
The tax provisions differ from the amount computed using the federal statutory incometax rate as follows:December 26,
December 28,
December 29,
2020
2019
2018
Income tax provision at federal statutory rate$
104,977
$
142,865
$
112,735
State income tax provision, net of federal income tax effect13,015
16,539
15,872
Foreign income tax benefit
(428)
(4,580)
(2,558)
Pass-through noncontrolling interest(2,681)
(3,931)
(2,700)
659
(79)
2,017
Unrecognized tax benefits and audit settlements
(17,722)
3,671
2,126
Interest expense related to loans(11,098)
(5,498)
(11,700)
Excess tax benefits related to stock compensation778
(86)
(1,008)
Transition tax on deemed repatriation offoreign earnings0
0
(10,000)
Revaluation of deferred tax assets and liabilities0
0
(1,676)
Tax on globalintangible low-taxed income ("GILTI")2,365
3,917
7,599
Tax benefit relatedto legal entity reorganization outside the U.S.(5,823)
0
(13,852)
Tax chargerelated to reorganization of legal entities relatedto forming Henry Schein One0
0
3,914
Tax charge(credit) related to reorganization of legal entitiescompleted in preparation for the Animal Health spin-off
0
(1,333)
3,135
11,332
8,030
3,528
Total incometax provision$
95,374
$
159,515
$
107,432
For the year ended December 26, 2020, our effective tax rate was
19.1
% compared to
23.4
% for the prior year
period.Our effective tax rate in 2020 was primarily impacted by an Advance PricingAgreement (“APA”) with theU.S Internal Revenue Service (the “IRS”) in the U.S., other audit resolutions,state and foreign income taxes andinterest expense. The positive effect of the APA and the other audit resolutions are not expected to be recurring and,
as a result, we expect our effective tax rate in future periods to be higher.
In 2019, our effective tax rate of
23.4
% was primarily impacted by state and foreign income taxes and interest
expense.In 2018, our effective tax rate of20.0
% was primarily impacted by a reduction in the estimate of our
transition tax associated with the Tax Act, tax charges and credits associated with legal entity reorganizations
outside the U.S., and state and foreign income taxes and interest expense.On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act(“CARES Act”) was enacted inresponse to the COVID-19 pandemic.The CARES Act includes, but is not limited to, certain income taxprovisions that modify the Section 163(j) limitation of business interest and NetOperating Loss (“NOL”) carryoverand carryback rules.The modifications to Section 163(j) increase the allowable businessinterest deduction from30
% of adjusted taxable income to
50
% of adjusted taxable income for years beginning in 2019 and 2020.TheCARES Act eliminated the NOL income limitation for years beginningbefore 2021 and it extended the carrybackperiod to five years for losses incurred in 2018, 2019 and 2020.We have analyzed the income tax provisions of theCARES Act and have accounted for the impact in the year ended December 26,2020, which did not have amaterial impact on our consolidated financial statements.There are certain other non-income tax benefits availableto us under the CARES Act that require further clarification or interpretationthat may affect our consolidatedfinancial statements in the future.On December 27, 2020, the Consolidated Appropriations Act wasenacted intolaw and extended certain non-income tax benefits under the CARESAct.HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
109
On July 20, 2020, the IRS issued final regulations related to the Tax Act.The final regulations concern the globalintangible low-taxed income (“GILTI”) and subpart F income provisions of the Tax Act.To provide flexibility totaxpayers, the IRS is permitting the application of these final regulations toprior tax years, if the taxpayer elects todo so.We have analyzed the final regulations, which do not have a material impact to our consolidated financialstatements.
On December 22, 2017, the U.S. government passed the Tax Act.The Tax Act is comprehensive tax legislationthat implemented complex changes to the U.S. tax code including, but notlimited to, the reduction of the corporatetax rate from
35
% to
21
%, modification of accelerated depreciation, the repeal of the domesticmanufacturingdeduction and changes to the limitations of the deductibility of interest.Additionally, the TaxAct moved from aglobal tax regime to a modified territorial regime, which requires U.S. companiesto pay a mandatory one-timetransition tax on historical offshore earnings that have not been repatriated to the U.S.The transition tax is payableover eight years.In the fourth quarter of 2017, we recorded provisional amountsfor any items that could bereasonably estimated at the time.This included the one-time transition tax that we estimated tobe $140.0
and a net deferred tax expense of $
3.0
million attributable to the revaluation of deferred taxes due to the lowerenacted federal income tax rate of 21%.We completed our analysis in the year ended December 29, 2018 andrecorded a net $
10.0
million reduction to the one-time transition tax and an additional $1.7
benefit from the revaluation of deferredtaxes to reflect the new tax rate.Within our consolidated balance sheets, transition tax of $
9.9
million was included in “Accrued taxes” for 2020 and2019 and $
74.5
94.9
million were included in “Other liabilities” for 2020 and 2019, respectively.The FASB Staff Q&A, Topic740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entitycan make an accounting policy election to either recognize deferredtaxes for temporary differences expected toreverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred.Weelected to recognize the tax on GILTI as a period expense in the period the tax is incurred.We recorded a currenttax expense for the GILTI provision of $
2.4
3.9
7.6
million for 2020, 2019, and 2018,respectively.
Due to the one-time transition tax and the imposition of the GILTI provisions, all previously unremitted earnings
will no longer be subject to U.S. federal income tax; however, there could be U.S. state and/or foreign withholding
taxes upon distribution of such unremitted earnings.Determination of the amount of unrecognized deferred taxliability with respect to such earnings is not practicable.
ASC 740 prescribes the accounting for uncertainty in income taxes recognizedin the financial statements inaccordance with other provisions contained within this guidance.This topic prescribes a recognition threshold anda measurement attribute for the financial statement recognition and measurementof tax positions taken or expectedto be taken in a tax return.For those benefits to be recognized, a tax position must be more likelythan not to besustained upon examination by the taxing authorities.The amount recognized is measured as the largest amount ofbenefit that is greater than 50% likely of being realized upon ultimate auditsettlement.In the normal course ofbusiness, our tax returns are subject to examination by various taxingauthorities.Such examinations may result infuture tax and interest assessments by these taxing authorities for uncertaintax positions taken in respect to certaintax matters.
The total amount of unrecognized tax benefits, which are included in “Otherliabilities” within our consolidatedbalance sheets as of December 26, 2020 was approximately $
84.0
70.1
effective tax rate if recognized.It is possible that the amount of unrecognized tax benefitsmay change in the next12 months, which may result in a material impact on our consolidated statement ofincome.The tax years subject to examination by major tax jurisdictions includethe years 2012 and forward by the IRS, aswell as the years 2008 and forward for certain states and certain foreignjurisdictions.All tax returns audited by theIRS are officially closed through 2011 and 2014 through 2016.All IRS audit fieldwork has been completed for theHENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
110
years 2012 and 2013.In the quarter ended December 28, 2019, we reached a settlement withthe U.S. CompetentAuthority to resolve certain transfer pricing issues related to 2012 and 2013.For all remaining outstanding issuesfor 2012 and 2013, we have provided all necessary documentation tothe Appellate Division to date and are waitingfor responses.We do not believe the final resolution will have a material impact to our consolidated financialstatements.During the quarter ended September 26, 2020 we finalized negotiationswith the Advance PricingDivision and reached an agreement on an appropriate transfer pricingmethodology for the years 2014-2025.Theobjective of this resolution is to mitigate future transfer pricing auditadjustments.In the fourth quarter of 2020, wereached a favorable resolution with the IRS relating to select audit years.The total amounts of interest and penalties are classified as a component ofthe provision for income taxes.Theamount of tax interest expense (credit) was approximately $(
3.3
) million, $
2.2
3.6
2019 and 2018, respectively.The total amount of accrued interest is included in “Other liabilities”, and wasapproximately $
14.0
million as of December 26, 2020 and $18.0
million as of December 28, 2019.NaN
were accrued for the periods presented.
The following table provides a reconciliation of unrecognized tax benefits:
December 26,
December 28,
December 29,
2020
2019
2018
Balance, beginning of period$
91,100
$
77,800
$
83,200
Additions based on current year tax positions4,900
4,900
5,000
Additions based on prior year tax positions7,900
17,300
9,400
Reductions based on prior year tax positions(1,000)
(1,000)
(1,600)
Reductions resulting from settlements with taxing authorities(18,600)
(4,200)
(1,600)
Reductions resulting from lapse in statutes of limitations(14,300)
(3,700)
(16,600)
$
70,000
$
91,100
$
77,800
Note 15 – Concentrations of Risk
Certain financial instruments potentially subject us to concentrations of creditrisk.These financial instrumentsconsist primarily of cash equivalents, trade receivables, long-term investments,notes receivable and derivativeinstruments.In all cases, our maximum exposure to loss from creditrisk equals the gross fair value of the financialinstruments.We routinely maintain cash balances at financial institutions in excess of insured amounts. We havenot experienced any loss in such accounts and we manage this risk throughmaintaining cash deposits and otherhighly liquid investments in high quality financial institutions.We continuously assess the need for reserves forsuch losses, which have been within our expectations.We do not require collateral or other security to supportfinancial 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 arethe counter-parties to suchfinancial instruments.As a risk management policy, we limit the amount of credit exposure by diversifying andutilizing numerous investment grade counter-parties.
With respect to our trade receivables, our credit risk is somewhat limited due to a relatively large customer baseandits dispersion across different types of health care professionals and geographic areas.For the year endedDecember 26, 2020, two customers accounted for slightly more than
3
% of our net sales from continuing
operations.For the year ended December 28, 2019, one customer accountedfor slightly less than2
% of our net
sales from continuing operations.With respect to our sources of supply, our top 10 health care distributionsuppliers from continuing operations and our single largest supplier from continuingoperations accounted forapproximately
30
% and
4
%, respectively, of our aggregate purchases in 2020 and approximately
31
% and
6
%,
respectively, of our aggregate purchases in 2019.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
111
Our long-term notes receivable primarily represent strategic financing arrangementswith certain industry affiliatesand amounts owed to us from sales of certain businesses.Generally, these notes are secured by certain assets of thecounterparty; however, in most cases our security is subordinate to other commercial financial institutions.Whilewe have exposure to credit loss in the event of non-performance by these counter-parties,we conduct ongoingassessments of their financial and operational performance.
Note 16 – DerivativesCommitments and Hedging ActivitiesContingencies
Purchase Commitments
In our health care distribution business, we sometimes enter into long-term purchasecommitments to ensure the availability of products for distribution.Future minimum annual payments for inventory purchase commitmentsas of December 30, 2023 were:
2024
$
5
2025
4
2026
4
2027
4
2028
-
Thereafter
-
Total minimuminventory purchase commitment payments $
17
Employment, Consulting and Non-Compete Agreements
We have employment, consulting and non-compete agreements that have varying base aggregate annual payments
for the years 2024 through 2028 and thereafter of approximately $
21
8
1
1
0
million, and $
0
million, respectively.We also have lifetime consulting agreements that provide for current compensation of four-hundred thousand dollars per year, with small scheduled increases every fifth year with the
next increase in 2027.In addition, some agreements have provisions for additionalincentives and compensation. Legal Proceedings
Henry Schein, Inc. has been named as a defendant in multiple opioid relatedlawsuits (currently less than one- hundred and seventy-five (
175
); one or more of Henry Schein, Inc.’s subsidiaries is also named as a defendant in a
number of those cases).Generally, the lawsuits allege that the manufacturers of prescription opioid drugs engaged in a false advertising campaign to expand the market for such drugs andtheir own market share and that the entities in the supply chain (including Henry Schein, Inc. and its subsidiaries) reapedfinancial rewards by refusing or otherwise failing to monitor appropriately and restrict the improper distributionof those drugs.These actions consist of some that have been consolidated within the MultiDistrict Litigation(“MDL”) proceeding In Re National Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804)and are currently stayed, and others which remain pending in state courts and are proceeding independently and outsideof the MDL.At this time, the following cases are set for trial: the action filed by DCH Health Care Authority, et al. in Alabama state court, which
is currently set for a jury trial on July 8, 2024; the action filed by MobileCounty Board of Health, et al. in Alabama state court, which has been set for a jury trial on August 12, 2024;and the action filed by Florida Health Sciences Center, Inc. (and
25
other hospitals located throughout the State of Florida) in Florida state court,which is currently scheduled for a jury trial in September 2025.Of Henry Schein’s 2023 net sales of approximately $ 12.3
sales of opioids represented less than four-tenths of 1 percent.Opioids represent a negligible part of our business.We intend to defend ourselves vigorously against these actions. In August 2022, Henry Schein received a Grand Jury Subpoena from the UnitedStates Attorney’s Office for the Western District of Virginia,seeking documents in connection with an investigation of possibleviolations of the Federal Food, Drug & Cosmetic Act by Butler Animal Health Supply, LLC (“Butler”), a former subsidiary of
Henry Schein.The investigation relates to the sale of veterinary prescription drugsto certain customers.In October 2022, Henry Schein received a second Grand Jury Subpoenafrom the United States Attorney’s Office for the Western District of Virginia.The October 2022 Subpoena seeks documents relating to payments HenrySchein received from Butler or Covetrus, Inc. (“Covetrus”).Butler was spun off into a separate company and became a HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
115
subsidiary of Covetrus in 2019 and is no longer owned by Henry Schein.We are
exposedcooperating with the investigation.
On January 18, 2024, a putative class action was filed against the Companyin the U.S. District Court for the Eastern District of New York (“EDNY”), Case No. 24-cv-387 (the “Cruz-Bermudez Action”), based on the
October 2023 cybersecurity incident described above.On January 26, 2024, a second putative class action was filed against the Company based on the cybersecurity incident, also inthe EDNY,Case No. 24-cv-550 (the “Depperschmidt Action”).On February 12, 2024, the Depperschmidt Action was voluntarily dismissedwithout prejudice.On February 16, 2024, an amended complaint was filed inthe Cruz-Bermudez Action with additional plaintiffs’ counsel from the Depperschmidt Action and an additional new plaintiff. Plaintiffs in the Cruz-Bermudez Action seek to
market risksrepresent a class of all individualswhose personally identifying information and personal health information was compromised bythe incident.Plaintiffs generally claim to have been harmed by alleged actions and/or omissions by the Companyin connection with the incident and that the Company made deceptive public statements regarding privacy and data protection.Plaintiffs assert a variety of common law and statutory claims seeking monetary damages, injunctiverelief, costs and attorneys’ fees, and other related relief.The case remains pending.We intend to defend ourselves vigorously against this action. From time to time, we may become a party to other legal proceedings,including, without limitation, product liability claims, employment matters, commercial disputes, governmentalinquiries and investigations (which may in some cases involve our entering into settlement arrangements or consentdecrees), 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 currentlyanticipated to have a material adverse effect on our consolidated financial position, liquidity or results of operations.
As of December 30, 2023, we had accrued our best estimate of potentiallosses relating to claims that were probable to result in liability and for which we were able to reasonably estimatea loss.This accrued amount, as well as related expenses, was not material to our financial position, results of operationsor cash flows.Our method for determining estimated losses considers currently availablefacts, presently enacted laws and regulations and other factors, including probable recoveries from third parties.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
116
Note 17 – Stock-Based Compensation
Stock-based awards are provided to certain employees under our 2020 Stock IncentivePlan and to non-employee directors under our 2023 Non-Employee Director Stock Incentive Plan(formerly known as the 2015 Non- Employee Director Stock Incentive Plan) (together, the “Plans”).The Plans are administered by the Compensation Committee of the Board (the “Compensation Committee”).Historically, equity-based awards to our employees have been granted solely in the form of time-based and performance-basedrestricted stock units (“RSUs”) with the exception of our 2021 plan year in which non-qualified stock options wereissued in place of performance-based RSUs and in 2022, when we granted time-based and performance-basedRSUs, as well as
changes non-qualified stock options.For our 2023 plan year, we returned to granting our employees equity-based awards solelyin
foreign currency exchange ratesthe form of time-based and performance-based RSUs.Our non-employee directors receive equity-based awards solelyin the form of time-based RSUs.
As of December 30, 2023, there were
70,942,657
6,773,234
shares available to be granted under the 2020 Stock Incentive Plan and
2,075,000
393,309
shares available to be granted under the 2023 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 delivered on or following satisfaction of vesting conditions.We issue RSUs to employees that primarily vest (i) solely based on the recipient’s continued service over time, primarily with
four
-year cliff vesting and/or (ii)
based on achieving specified performance measurements and the recipient’s continued service over time, primarily
with
three
-year cliff vesting.RSUs granted to our non-employee directors primarily include 12
For these RSUs, we recognize the cost as compensation expense on a straight-linebasis. For all RSUs, we estimate the fair value based on our closing stockprice on the grant date.With respect to performance-based RSUs, the number of shares that ultimately vest andare received by the recipient is based upon our performance as measured against
specified targets over a specified period, asdetermined by the
U.S.Compensation dollar and each other, and changesCommittee.Although there is no guarantee that performance targets will be achieved, weestimate the fair value ofperformance-based RSUs based on our closing stock price at time of grant. Each of the Plans provide for certain adjustments to the
credit riskperformancemeasurement 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 sharerepurchases), differences in budgeted average outstanding shares (other than those resulting from capitaltransactions 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 certainmarkets, foreign exchange fluctuations, the financial impact either positive or negative, of the
derivative counterparties.difference in projected earningsgenerated by COVID-19 test kits (solely with respect to performance-based RSUs granted in the 2022 and2023 plan years) and impairment charges (solely with respect to performance-based RSUs granted in the 2023 planyear), and unforeseen events or circumstances affecting us.
Over the performance period, the number of RSUs that will ultimately vestand be issued and the related compensation expense is adjusted upward or downward based upon ourestimation of achieving such performance targets.The ultimate number of shares delivered to recipients and the related compensationcost recognized as an expense is based on our actual performance metrics as defined underthe 2020 Stock Incentive Plan. HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
117
Stock options are awards that allow the recipient to purchase shares of ourcommon stock after vesting at a fixed price set at the time of grant.Stock options were granted at an exercise price equal to ourclosing stock price on the date of grant.Stock options issued in 2021 and 2022 vest one-third per year basedon the recipient’s continued service, subject to the terms and conditions of the 2020 Stock Incentive Plan,are fully vested three years
grant date and have a contractual term of
ten years
from the grant date, subject to earlier termination of term and term acceleration upon certain events.Compensation expense for stock options is recognized usinga graded vesting method.
We
attemptestimate grant date fair value of stock options using the Black-Scholes valuation model. During the year ended December 30, 2023, we did
no
t grant any stock options.
In addition to minimize these
risks by primarily using foreign currency forward contracts and byequity-based awards granted in fiscal 2021 under the long-term
maintaining counter-party credit limits.incentive program, the CompensationCommittee 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 units 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 ouremployees (including those who received such awards), on March 3, 2021, the Compensation Committee granteda 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 vested hedging activities provide only limited protection against currency exchange50
% 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 IncentivePlan, and were 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 2021 generated a
cumulative payout of
75
% of each recipient’s original number of performance-based restricted stock units awarded
in 2018 if the recipient satisfied the
two
-year vesting schedule commencing on the grant date.
Our consolidated statements of income reflect pre-tax share-based compensationexpense of $ 39
54
million and $
78
million for the years ended December 30, 2023, December 31, 2022
and
credit risks.December 25, 2021. Total unrecognized compensation cost related to unvested awards as of December 30, 2023 was $
65
is expected to be recognized over a weighted-average period of approximately
2.6
The weighted-average grant date fair value of stock-based awards grantedwas $ 76.43
, $
85.51
62.72
during the years ended December 30, 2023, December 31, 2022 and December25, 2021. Certain stock-based compensation is required to be settled in cash.During the year ended December 30, 2023, we recorded a liability of $
0.1
million for stock-based compensation to be settled in cash. We
record deferred income tax assets for awards that could
influence the effectiveness of our hedging programs include currency markets andwill result in
availabilityfuture income tax deductions based on theamount of hedging
instrumentscompensation cost recognized and
liquidity ofour statutory tax rate in the
credit markets.
All foreign currency forward contracts thatjurisdiction in which we
enter into arewill receive acomponentsdeduction.
Our consolidated statements of
hedging programscash flows present our stock-based compensationexpense as a reconciling adjustment between net income and
are entered intonet cash provided by operatingactivities for all periods presented.There were no cash benefits associated with tax deductions in excess of recognizedcompensation for the
sole purposeyears ended December 30, 2023, December 31, 2022 and December 25, 2021.
of hedging an existing or anticipatedcurrency exposure.We do not enter into such contracts for speculative purposes and we manage our credit risks bydiversifying our counterparties, maintaining a strong balance sheet and havingmultiple sources of capital.
During 2019 we entered into foreign currency forward contracts to hedge a portion
foreign operations which are designated as net investment hedges.HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
118
The following weighted-average assumptions were used in determiningthe most recent fair values of stock options using the Black-Scholes valuation model:
These net investment hedges offset the change2022
2021
Expected dividend yield
-
%
-
%
Expected stock price volatility
27.80
%
27.10
%
Risk-free interest rate
3.62
%
1.33
%
Expected life of options (in years)
6.00
6.00
We have not declared cash dividends on our stock in the U.S dollar valuepast and we do not anticipate declaring cash dividends in
the foreseeable future.The expected stock price volatility is based on implied volatilitiesfrom traded options on our stock, historical volatility of our
investmentstock and other factors.The risk-free interest rate is based on the U.S. Treasury yield curve in
certain euro-functional currency subsidiaries dueeffect at the time of grant that most closely aligns to
fluctuating foreignthe expected life of options.The six- exchange rates.year expected life of the options was determined using the simplifiedmethod for estimating the expected term aspermitted under Staff Accounting Bulletin Topic 14.
The following table summarizes the stock option activity for the yearended December 30, 2023: Stock Options
Weighted Average
Aggregate
Remaining Contractual
Intrinsic
Shares
Exercise Price
Life (in years)
Value
Outstanding at beginning of year
1,117,574
$
71.38
Granted
-
-
Exercised
(23,498)
62.74
Forfeited
(15,617)
79.04
Outstanding at end of year
1,078,459
$
71.46
7.6
$
9
Options exercisable at end of year
573,459
$
68.43
Weighted Average
Aggregate
Number of
Weighted Average
Remaining Contractual
Intrinsic
Options
Exercise Price
Life (in years)
Value
Vestedor expected to vest 503,497
$
74.95
7.7
$
3
The following tables summarize the activity of our unvested RSUs forthe year ended December 30, 2023: 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
1,756,044
$
66.59
520,916
$
60.23
Granted
426,021
77.50
381,571
81.00
Vested
(433,973)
61.96
(631,458)
60.65
Forfeited
(92,699)
72.37
(62,287)
77.45
Outstanding at end of period
1,655,393
$
70.34
$
75.71
208,742
$
78.02
$
75.71
The total intrinsic value per share of RSUs that vested was $
76.85
, $
78.74
Gains and
losses related$73.99
December 30, 2023, December 31, 2022 and December 25, 2021, respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
119
Note 18 – Employee Benefit Plans
Defined benefit plans
Certain of our employees in our international markets participatein various noncontributory defined benefit plans. These plans are managed to
provide pension benefits to covered employeesin accordance with local regulations and practices.Our net unfunded liability for these
net investment hedgesplans are recorded
in
Accumulated accrued expenses: other; and other
comprehensive loss
liabilities within our consolidated balance sheets.
Amounts excluded fromThe following table presents the
assessment of hedge effectiveness are included in interest expense within our consolidated statementsof income.The aggregatenotional value of this net investment hedge, which matures on
November 16, 2023
, is approximately €
200
During the years ended December 26, 2020 and December 28, 2019 werecognized approximately $4.7
$
0.6
million, respectively, of interest savings as a result of this net investment hedge.On
March 20, 2020
,
we entered into a total return swap for the purpose of economically hedging our unfunded non-
qualified SERP and DCP. This swap will offset changes in our SERP and DCP liabilities.projected benefit
notional value of the investments in these plans was $
43.4
million.At December 26, 2020, the notional value ofthe investments in these plans was $
67.6
million.At December 26, 2020, the financing rate for this swap is basedon LIBOR of
0.15
% plus
0.38
%, for a combined rate of
0.53
%.From March 20, 2020, the effective date of theswap, to December 26, 2020, we have recorded a gain, within the selling,general and administrative line item inour consolidated statement of income, of approximately $
21.2
million, net of transaction costs, related to thisundesignated swap for the year ended December 26, 2020.This gain was partially offset by the change in fairvalue adjustment of $
10.6
million in the SERPobligations, plan assets, and the
DCP, which occurred prior to the inceptionfunded status of
the swap onMarch 20, 2020.our defined benefit
This swap is expected to be renewed on an annual basis andpension plans:
is expected to result in a neutralimpact to our results of operations.
for additional information.Fluctuations in the value of certain foreign currencies as comparedto the U.S. dollar may positively or negativelyaffect our revenues, gross margins, operating expenses and retained earnings, all of which are expressedin U.S.dollars.Where we deem it prudent, we engage in hedging programs using primarilyforeign currency forwardcontracts aimed at limiting the impact of foreign currency exchangerate fluctuations on earnings.We purchaseshort-term (i.e., generally
18 months
or less) foreign currency forward contracts to protect againstcurrencyexchange risks associated with intercompany loans due from our internationalsubsidiaries and the payment ofmerchandise purchases to our foreign suppliers.We do not hedge the translation of foreign currency profits intoU.S. dollars, as we regard this as an accounting exposure, not aneconomic exposure.Our hedging activities havehistorically not had a material impact on our consolidated financial statements.Accordingly, additional disclosuresrelated to derivatives and hedging activities required by ASC 815 havebeen omitted.
December 30,
December 31,
2023
2022
Obligation and funded status:
Change in benefit obligation
Projected benefit obligation, beginning of period
$
108
$
128
Service costs
3
3
Interest cost
3
1
Past service cost
1
-
Actuarial gain (loss)
6
(19)
Benefits paid
-
(1)
Participant contributions
1
1
Settlements
(3)
(1)
Effect of foreign currency translation
6
(4)
Projected benefit obligation, end of period
$
125
$
108
Change in plan assets
Fair value of plan assets at beginning of period
$
73
$
75
Actual return on plan assets
4
(3)
Employer contributions
2
2
Plan participant contributions
1
1
Expected return on plan assets
1
1
Benefit received
2
-
Settlements
(2)
(1)
Effect of foreign currency translation
5
(2)
Fair value of plan assets at end of period
$
86
$
73
Unfunded status at end of period
$
39
$
35
(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
$ 7
6
December 30, 2023 and December 31, 2022, respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
112
Note 17 – Revenue from Contracts with Customers
120
Revenue (Net sales) is recognized in accordance with the policies discussedinDisaggregation of Net sales
The following table
disaggregatesprovides the amounts recognized in our
Net sales by reportable segment andconsolidated
geographic area:balance sheets for our defined benefitpension plans:
December 26, 2020
North America
International
Global
Revenues:
Health care distribution
$
3,471,521
2,441,072
5,912,593
3,514,670
102,347
3,617,017
Total health care distribution
6,986,191
2,543,419
9,529,610
Technologyand value-added services446,830
67,428
514,258
Total excludingCorporate TSA revenues7,433,021
2,610,847
10,043,868
Corporate TSA revenues
0
75,273
75,273
$
7,433,021
$
2,686,120
$
10,119,141
December 28, 2019
North America
International
Global
Revenues:
Health care distribution
$
3,911,746
2,504,119
6,415,865
2,894,137
79,449
2,973,586
Total health care distribution
6,805,883
2,583,568
9,389,451
Technologyand value-added services445,317
69,768
515,085
Total excludingCorporate TSA revenues7,251,200
2,653,336
9,904,536
Corporate TSA revenues
4,098
77,169
81,267
$
7,255,298
$
2,730,505
$
9,985,803
(1)
Corporate TSA revenues represents sales of certain animal health products to Covetrus under the transition services agreement
entered into in connection with the Animal Health Spin-off, which ended in December 2020.
Years
Ended
December 30,
December 31,
2023
2022
Non-current assets
$
27
$
25
Current liabilities
(1)
(1)
Non-current liabilities
(65)
(59)
Accumulated other comprehensive loss, pre-tax
8
4
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
113
Note 18 – Segment and Geographic Data
We conduct our business through
2
reportable segments: (i) health care distribution and (ii) technologyandvalue-added services.These segments offer different products and services to the same customer base.The health care distribution reportable segment aggregates our global dentaland medical operating segments.Thissegment distributes consumable products, small equipment, laboratory products,large equipment, equipment repairservices, branded and generic pharmaceuticals, vaccines, surgical products, diagnostictests, infection-controlproducts and vitamins.Our global dental group serves office-based dental practitioners, dental laboratories, schoolsand other institutions.Our global medical group serves office-based medical practitioners, ambulatorysurgerycenters, other alternate-care settings and other institutions.Our global dental and medical groups servepractitioners in
31
Our global technology and value-added services group provides software,technology and other value-addedservices to health care practitioners.Our technology group offerings include practice management softwaresystems for dental and medical practitioners.Our value-added practice solutions include financial services on anon-recourse basis, e-services, practice technology, network and hardware services, as well as continuing education
services for practitioners.
The following
tables present information abouttable provides the components of net periodic pension costfor our
reportable and operatingdefined benefit plans:
segments:December 26,
December 28,
December 29,
2020
2019
2018
Net Sales:
Health care distribution
(1)
$
5,912,593
$
6,415,865
$
6,347,998
3,617,017
2,973,586
2,661,166
Total health care distribution
9,529,610
9,389,451
9,009,164
Technologyand value-added services(2)
514,258
515,085
408,439
Total excludingCorporate TSA revenues10,043,868
9,904,536
9,417,603
Corporate TSA revenues
(3)
75,273
81,267
0
$
10,119,141
$
9,985,803
$
9,417,603
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded andgeneric pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, personal protective equipment and
vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and
financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other services.
(3)
Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in
connection with the Animal Health Spin-off, which ended in December 2020.
December 30,
December 31,
December 25,
2023
2022
2021
Service cost
$
3
$
3
$
4
Interest cost
3
1
-
Expected return on plan assets
(3)
(1)
(1)
Employee contributions
(1)
-
-
Amortization of prior service credit
-
1
1
Recognized net actuarial loss
-
-
-
Settlements
-
-
-
Net periodic pension cost
$
2
$
4
$
4
The following tables present the weighted-average actuarial assumptionsused to determine our pension benefit obligation and our net periodic pension cost for the periods presented:
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
114
December 26,30,
December 28,31,
December 29,Pension Benefit Obligation
20202023
20192022
2018
Operating Income:
Health care distributionWeighted average
discount rate$2.71
436,173%
$1.67
591,404
$
490,988
Technologyand value-added services99,130
126,857
109,631
$
535,303
$
718,261
$
600,619
Income from continuing operations beforetaxesand equity in earnings of affiliates:$
400,343
$
553,181
$
429,429
Technologyand value-added services99,552
127,126
107,407
$
499,895
$
680,307
$
536,836
Depreciation and Amortization:
$
142,712
$
146,960
$
122,767
Technologyand value-added services42,826
37,982
20,863
$
185,538
$
184,942
$
143,630
Interest Income:
$
9,736
$
15,352
$
15,106
Technologyand value-added services106
405
385
$
9,842
$
15,757
$
15,491
Interest Expense:
$
41,307
$
50,666
$
76,006
Technologyand value-added services70
126
10
$
41,377
$
50,792
$
76,016
$
71,206
$
129,381
$
53,660
Technologyand value-added services24,168
30,134
53,772
$
95,374
$
159,515
$
107,432
Purchases of Fixed Assets:
$
43,511
$
69,095
$
68,577
Technologyand value-added services5,318
7,124
2,706
$
48,829
$
76,219
$
71,283
As of
December 26,
December 28,
December 29,
2020
2019
2018
$
6,503,089
$
5,821,468
$
5,288,662
Technologyand value-added services1,269,443
1,329,633
995,192
Discontinued operations
0
0
2,216,673
$
7,772,532
$
7,151,101
$
8,500,527%
December 30,
December 31,
December 25,
Net Periodic Pension Cost
2023
2022
2021
Discount rate-pension benefit
1.50
%
1.25
%
0.56
%
Expected return on plan assets
0.51
%
0.81
%
0.71
%
Rate of compensation increase
1.64
%
1.68
%
1.95
%
Pension increase rate
0.80
%
0.61
%
0.72
%
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
121
The following table presents the estimated pension benefit payments thatare payable to the plan’s participants as of December 30, 2023:
Year
2024
$
7
2025
6
2026
7
2027
7
2028
8
2029 to 2033
44
Total
$
79
401(k) Plans
We offerqualified 401(k) plans to substantially all domestic full-time employees.As determined by our Board, 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 are made in cash and are allocated consistent with the participants’ investment elections on file, subjectto a 20
% allocation limit to the
Henry Schein Stock Fund.Forfeitures attributable to participants whose employment terminatesprior to becoming fully vested are reallocated as part of our ongoing matching contributionsand to offset administrative expenses of the 401(k) plans.
Assets of the 401(k) and other defined contribution plans are heldin 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 30, 2023, December 31, 2022 and December25, 2021 amounted to $ 50
$
45
38
million, respectively.Within our consolidated statements of income, $ 42
37
and $
30
million, is included in selling, general and administrative; and $ 8
8
8
included in cost of goods sold for the years ended December 30, 2023, December31, 2022, and December 25, 2021, respectively.
Supplemental Executive Retirement Plan
We offeran unfunded, non-qualified SERP to eligible employees.This plan generally covers officers and certain highly compensated employees after they have reached the maximumIRS allowed pre-tax 401(k) contribution limit.Our contributions to this plan are equal to the 401(k) employee-electedcontribution percentage applied to base compensation for the portion of the year in which such employees arenot eligible to make pre-tax contributions to the 401(k) plan.The amounts charged to operations during the years ended December 30, 2023, December 31, 2022 and December 25, 2021 amounted to $
3
(1)
2
million, respectively.The charges are included in selling, general and administrative within our consolidatedstatements of income. see
for additional information. Deferred Compensation Plan
During 2011, we began to offer DCP to a select group of management or highly compensated employees ofthe Company and certain subsidiaries.This plan allows for the elective deferral of base salary, bonus and/or commission compensation by eligible employees.The amounts (credited)/charged to operations during the years ended December 30, 2023, December 31, 2022 and December 25, 2021were approximately $ 12
(11)
million and $
8
million, respectively.The charges are included in selling, general and administrative within our consolidated statements of income.
information.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
115122
The following table presents information about our operations by geographicarea as of and for the three yearsended December 26, 2020.Net sales by geographic area are based on the respective locationsof our subsidiaries.No country, except for the United States, generated net sales greater than
10
% of consolidated net sales.Therewere no material amounts of sales or transfers among geographic areasand there were no material amounts ofexport sales.
2020
2019
2018
Net Sales
Long-Lived
Assets
Net Sales
Long-Lived
Assets
Net Sales
Long-Lived
Assets
$
7,090,206
$
2,362,823
$
6,876,194
$
2,400,733
$
6,411,558
$
1,753,697
3,028,935
1,251,849
3,109,609
1,195,947
3,006,045
1,017,584
$
10,119,141
$
3,614,672
$
9,985,803
$
3,596,680
$
9,417,603
$
2,771,281
Note 19 – Employee Benefit Plans
Stock-based Compensation
Our accompanying consolidated statements of income reflect pre-tax share-basedcompensation expense of $8.8Redeemable Noncontrolling Interests
million ($
7.1
Some minority stockholders in certain of our subsidiaries have the right,
million after-tax)at certain times, to require us to acquire their ownership interest in those entities at fair value.ASC Topic 480-10 is applicable for
noncontrolling interests where we are or may be required to purchase all or a portion of the
year ended December 26, 2020, and pre-tax share-based
expense of $outstanding interest in a consolidated subsidiary 44.9
million ($
34.4
32.6
25.3
million after-tax) forfrom the
years ended December 28, 2019and December 29, 2018.
Our accompanying consolidated statements of cash flows present ourstock-based compensation expense as anadjustment to reconcile net income to net cash provided by operatingactivities for all periods presented.In theaccompanying consolidated statements of cash flows, there were
0
benefits associated with tax deductions inexcess of recognized compensation as a cash inflow from financingactivities for the years ended December 26,2020, December 28, 2019 and December 29, 2018.
Stock-based compensation represents the cost related to stock-based awards grantedto employees and non-employee directors.We measure stock-based compensation at the grant date, based on the estimated fair value ofthe award, and recognize the cost (net of estimated forfeitures) as compensationexpense on a straight-line basisover the requisite service period.Our stock-based compensation expense is reflected in selling, generalandadministrative expenses in our consolidated statements of income.
Stock-based awards are provided to certain employees and non-employee directorsnoncontrolling interest holder under the terms of
our 2020Stock Incentive Plan (formerly known as the 2013 Stock Incentive Plan),a put option contained
and our 2015 Non-Employee DirectorStock Incentive Plan (together, the “Plans”).in contractual agreements.
The
Plans are administered bycomponents of the
Compensation Committee ofthe Board of Directors.Equity-based awards are granted solelychange in the
form of restrictedredeemable noncontrolling interests for the
stock units, withyears ended December 30, 2023,December 31, 2022 and December 25, 2021, are presented in the exceptionfollowing table:
of providing stock options to employees pursuant to certain pre-existingcontractual obligations.As of December26, 2020, there were
65,243
5,812
shares available to be granted under the 2020 StockIncentive Plan and
1,893
265
shares available to be granted under the 2015 Non-EmployeeDirector Stock Incentive Plan.
Grants
December 30,
December 31,
December 25,
2023
2022
2021
Balance, beginning of restricted stock units are stock-based awards grantedperiod
$
576
$
613
$
328
Decrease in redeemable noncontrolling interests due to recipients withacquisitions of
noncontrolling interests in subsidiaries
(19)
(31)
(60)
Increase in redeemable noncontrolling interests due to business
acquisitions
326
4
189
Net income attributable to redeemable noncontrolling interests
6
21
23
Distributions declared, net of capital contributions
(19)
(21)
(21)
Effect of foreign currency translation gain (loss)
specified vesting provisions.attributable to redeemable noncontrolling interests
5
(6)
(6)
Change in fair value of redeemable securities
In the case(11)
(4)
160
Balance, end of
restricted stock units, common stock is generally deliveredon or following satisfaction of vestingperiod conditions.We issue restricted stock units that vest solely based on the recipient’s continued service over time$(primarily four year cliff vesting, except for grants made under the 2015 Non-EmployeeDirector Stock Incentive864Plan, which are primarily$
12 month576
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 cliff613
vesting).
Note 20 – Comprehensive Income
Comprehensive income includes certain gains and losses that, under U.S.GAAP,are excluded from net income and are recorded directly to stockholders’ equity. The following table summarizes our Accumulated other comprehensive loss, netof applicable taxes as of: December 30,
December 31,
December 25,
2023
2022
2021
Attributable to redeemable noncontrolling interests:
Foreign currency translation adjustment
$
(32)
$
(37)
$
(31)
Attributable to noncontrolling interests:
Foreign currency translation adjustment
$
(1)
$
(1)
$
-
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
(188)
$
(236)
$
(155)
Unrealized gain (loss) from hedging activities
(13)
5
(2)
Pension adjustment loss
(5)
(2)
(14)
Accumulated other comprehensive loss
$
(206)
$
(233)
$
(171)
Total Accumulatedother comprehensive loss $
(239)
$
(271)
$
(202)
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
116123
With respect to time-based restricted stock units, we estimateThe following table summarizes the
fair value on the datecomponents of
grant based oncomprehensive income, net
our closing stock price.With respect to performance-based restricted stock units, the number of
shares that ultimatelyvest and are received by the recipient is based upon our performanceapplicable taxes as
measuredfollows:
against specified targets over aspecified period, as determined by the Compensation Committee ofthe Board of Directors.Although there is noguarantee that performance targets will be achieved, we estimate the fair value ofperformance-based restrictedstock units based on our closing stock price at time of grant.
The Plans provide for adjustments to the performance-based restrictedstock units targets for significant events,including, without limitation, acquisitions, divestitures, new business ventures,certain capital transactions(including share repurchases), restructuring costs, if any, certain litigation settlements or payments, if any, changes
in tax rates in certain countries, changes in accounting principles orin applicable laws or regulations and foreignexchange fluctuations.Over the performance period, the number of shares of commonstock that will ultimatelyvest and be issued and the related compensation expense is adjusted upwardor downward based upon ourestimation of achieving such performance targets.The ultimate number of shares delivered to recipientsand therelated compensation cost recognized as an expense will be based on ouractual performance metrics as definedunder the Plans.
As a result of the Separation, the number of our unvested (as of thedate of the Separation) equity-based awardsfrom previous grants made under our Long-term Incentive Program under thePlans was increased by a factor ofapproximately
1.2633
, along with a corresponding
decrease
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 taxrate in the jurisdiction in which we willStock-based compensation grants for the three years ended December 26,2020 consisted of restricted stock/unitgrants.Certain stock-based compensation granted may require usto settle in the form of a cash payment.Duringthe year ended December 26, 2020, we recorded a liability of $
0.8
million relating to the grant date fair value ofstock-based compensation to be settled in cash.The weighted-average grant date fair value of stock-based awardsgranted before forfeitures was $
60.23
, $
56.83
71.38
per share during the years ended December 26, 2020,December 28, 2019 and December 29, 2018.Total unrecognized compensation cost related to non-vested awards as of December 26, 2020 was $
42.2
which is expected to be recognized over a weighted-average period ofapproximately2.3
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
117
A summary of the stock option activity under the Plans is presented below:
December 26,31,
December 28,25,
December 29,2023
20202022
20192021
2018
Exercise
Exercise
Exercise
Shares
Price
Shares
Price
Shares
Price
Outstanding at beginning of year0Net income
$
0
3436
$
13.63
155566
$
29.65660
GrantedForeign currency translation gain (loss)053
0(88)
0(84)
0Tax effect
0-
0-
0Foreign currency translation gain (loss)
053
(88)
(84)
Unrealized gain (loss) from hedging activities
(25)
10
12
Tax effect
7
(3)
13.63(3)
(152)Unrealized gain (loss) from hedging activities
29.81(18)
09
0Pension adjustment gain (loss)
0(3)
016
08
0Tax effect
Outstanding at end of year-0(4)
(2)
Pension adjustment gain (loss)
(3)
12
6
Comprehensive income
$
0
0468
$
0
3497
$
17.22591
Options exercisable at end of year0
$
0
0
$
0
3
$
17.22
The following table representsOur financial statements are denominated in U.S. Dollars.Fluctuations in the
intrinsic values of: value of foreign currencies asAs of
December 26,
December 28,
December 29,
2020
2019
2018
Stock options outstandingcompared to the U.S. Dollar may have a significant impact on our
$
0
$
0
$
121
Stock options exercisable0
0
121
The total cash received as a result of stock option exercises for the year endedDecember 29, 2018 wasapproximately $
3.1
million.In connection with these exercises, we did0
t realize any tax benefits for the years
ended December 26, 2020, December 28, 2019 and December 29, 2018.We settle employee stock option exerciseswith newly issued common shares.
The total intrinsic value per share of restricted stock/units that vestedwas $61.49
, $
64.31
76.48
years ended December 26, 2020, December 28, 2019 and December29, 2018.comprehensive income.
The
following table summarizes theforeign currencystatus of our non-vested restricted stock/units for the year ended December26, 2020:Time-Based Restricted Stock/Units
Grant Date Fair
Intrinsic Value
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period1,417
$
58.72
391
60.19
(298)
65.91
(51)
59.71
Outstanding at end of period1,459
$
57.61
$
65.83
Performance-Based Restricted Stock/Units
Grant Date Fair
Intrinsic Value
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period1,459
$
61.41
(954)
56.52
(327)
67.48
(42)
57.82
Outstanding at end of period136
$
53.52
$
65.83
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
118
401(k) Plans
We offerqualified 401(k) plans to substantially all our domestic full-time employees.As determined by our Boardof Directors, matching contributions to these plans generally do notexceed100
% of the participants’ contributions
up to
7
% of their base compensation, subject to applicable legal limits.Matching contributions consist of cash andwere allocated entirely to the participants’ investment elections on file,subject to a20
% allocation limit to the
Henry Schein Stock Fund.Due to the impact of COVID-19, as part of our initiative to generate cash savings,wesuspended the matching contribution for the second half of 2020.Forfeitures attributable to participants whoseemployment terminates prior to becoming fully vested are used toreduce our matching contributions and offsetadministrative expenses of the 401(k) plans.
Assets of the 401(k) and other defined contribution plans are heldin self-directed accounts enabling participants tochoose from various investment fund options.Matching contributions related to these plans charged to operationstranslation gain (loss) during the years ended December
26, 2020,30, 2023, December
28, 201931,2022 and December
25, 2021 was 29, 2018 amountedprimarily due to
$19.9
$
34.9
35.0
Supplemental Executive Retirement Plan
We offeran unfunded, non-qualified SERP to eligible employees.This plan generally covers officers and certainhighly compensated employees after they have reached the maximumIRS allowed pre-tax 401(k) contributionlimit.Our contributions to this plan are equal to the 401(k) employee-electedcontribution percentage applied tobase compensation for the portionchanges in foreign currency exchange rates of the
year in which such employees areEuro,
not eligible to make pre-taxBrazilian Real, British Pound, Swisscontributions to the 401(k) plan.Franc, and Canadian Dollar.
Due to the impact of COVID-19, as part of our initiative togenerate cash savings,we suspended contributions under the SERP for the second half of2020.The
amounts charged to operationshedging gain (loss) during
the years ended December
26, 2020,30, 2023 , December
28, 201931, 2022, and December
25, 202129, 2018 amountedwas attributable to
$a net investment hedge.2.8
4.0
million and $
0.4
information.
Deferred Compensation Plan
During 2011, we began to offer DCP to a select group of management or highly compensated employeesThe following table summarizes our total comprehensive income, net of
theapplicable taxes as follows:Company and certain subsidiaries.This plan allows for the elective deferral of base salary, bonus and/orcommission compensation by eligible employees.The amounts charged (credited) to operations during the yearsended December 26, 2020, December 28, 2019 and December 29, 2018 wereapproximately $7.8
8.3
million and $
(2.3)
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
119
Note 20 – Commitments and Contingencies
Purchase Commitments
In our health care distribution business, we sometimes enter into long-term purchasecommitments to ensure theavailability of products for distribution.Future minimum annual payments for inventory purchase commitmentsasof December 26, 2020 were:
$
208,200
110,800
0
0
0
0
Total minimuminventory purchase commitment payments$
319,000
Employment, Consulting and Non-Compete Agreements
We have definite-lived employment, consulting and non-compete agreements that have varying base aggregate
annual payments for the years 2021 through 2025 and thereafter of approximately$16.9
6.8
1.0
million, $
0.9
0.9
0.9
million, respectively.We also have lifetime consulting agreementsthat provide for current compensation of $
0.4
million per year, increasing $25
every fifth year with the nextincrease in 2022.In addition, some agreements have provisions for additionalincentives and compensation.Litigation
On
August 31, 2012
,
Archer and White Sales, Inc. (“Archer”)
filed a complaint againstHenry 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”)
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
August 1, 2017
,
Archer
filed an amended complaint, addingPatterson Companies,
Inc. (“Patterson”) and Benco Dental Supply Co. (“Benco”)
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 attrial, to be trebled with interest and costs, including attorneys’ fees, jointly and severally, as well as injunctive
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 Archerto arbitrate its claims against us; (2)staying all proceedings pending arbitration; and (3) joining the DanaherDefendants’ motion to arbitrate and stay.On May 28, 2013, the Magistrate Judge granted the motions to arbitrateand stayed proceedings pending arbitration.On June 10, 2013, Archer moved for reconsideration before the District Courtjudge.On December 7, 2016, theDistrict Court Judge granted Archer’s motion for reconsideration and lifted the stay.Defendants appealed theDistrict Court’s order.On December 21, 2017, the U.S. Court of Appeals for the Fifth Circuitaffirmed the DistrictCourt’s order denying the motions to compel arbitration.On June 25, 2018, the Supreme Court of the United Statesgranted 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 vacatingthe judgment of the Fifth Circuit andHENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
120
remanding the case to the Fifth Circuit for further proceedings consistent withthe Supreme Court’s opinion.OnApril 2, 2019, the District Court stayed the proceeding in the trial court pendingresolution by the Fifth Circuit.TheFifth Circuit heard oral argument on May 1, 2019 on whether the case should be arbitrated.The Fifth Circuitissued 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 FifthCircuit.The Fifth Circuit denied thatpetition.On October 1, 2019, the District Court set the case for trialon February 3, 2020, which was subsequentlymoved to January 29, 2020.On January 24, 2020 the Supreme Court granted our motion to staythe District Courtproceedings, pending the disposition of our petition for writ of certiorari, whichwas filed on January 31, 2020.Archer conditionally cross petitioned for certiorari on an arbitration issueon March 2, 2020.On June 15, 2020, theSupreme Court granted our petition for writ of certiorari, and denied Archer’s conditionalpetition for certiorari, andthus the District Court proceedings remained stayed.After briefing from the parties and several amici, the case wasargued before the Supreme Court on December 8, 2020.On January 25, 2021, the Supreme Court dismissed thewrit of certiorari as improvidently granted.That action dissolved the stay the Supreme Court had previouslygranted, and thus the trial of the lawsuit may proceed.The U.S. District Court for the Eastern District of Texas hasscheduled a Status Conference for February 19, 2021.Patterson and the Danaher Defendants settled with Archerand they have been dismissed from the case with prejudice.Benco is still a defendant. We intend to defendourselves vigorously against this action.On
May 29, 2018
, an amended complaint was filed in the MultiDistrict Litigation (“MDL”)proceeding In ReNational Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804)in an action entitledThe County of
Summit, Ohio et al
. v. Purdue Pharma, L.P.,et al., Civil Action No. 1:18-op-45090-DAP (“County ofSummitAction”), in the U.S. District Court for the Northern District of Ohio, adding HenrySchein, Inc.,Henry Schein
Medical Systems, Inc. and others as defendants
Summit County alleged that manufacturers of prescription opioid
drugs engaged in a false advertising campaign to expand the market for such drugs and their own market share and
that the entities in the supply chain (including Henry Schein, Inc. and Henry Schein Medical Systems, Inc.) reaped
financial rewards by refusing or otherwise failing to monitor appropriately and restrict the improper distribution of
those drugs.
On October 29, 2019, the Company was dismissed with prejudice from this lawsuit. Henry Schein,
working with Summit County, donated $1 million to a foundation and paid $250,000 of Summit County’s
expenses, as described in our prior filings with the SEC.
In addition to the County of Summit Action,
Henry Schein and/or one or more of its affiliated companies
named as a defendant in multiple lawsuits (currently less than one-hundredand fifty (150
)), which
allege claims
similar to those alleged in the County of Summit Action.
These actions consist of some that have been consolidatedwithin the MDL and are currently abated for discovery purposes, and others whichremain pending in state courtsand are proceeding independently and outside of the MDL.On October 9, 2020, the Circuit Court of the 17thJudicial Circuit in and for Broward County, Florida, Case No. CACE19018882, granted Henry Schein’s motion to
dismiss the claims brought against it in the action filed by North BrowardHospital District et. al.The Florida courtgave plaintiffs until November 24, 2020 to replead their claims against Henry Schein.On January 8, 2021, HenrySchein filed a motion to dismiss the Amended Complaint. An action filed by Tucson Medical Center etal. waspreviously scheduled for trial beginning on June 1, 2021 but the court has vacatedthat trial date.At this time, theonly case set for trial is the action filed by West VirginiaUniversity Hospitals, Inc. et al., which is currentlyscheduled for a non-jury liability trial on Plaintiffs’ public nuisance claims on November 1,2021.Of HenrySchein’s 2020 revenue of approximately $
10.1
billion from continuing operations, sales of opioids representedlessthan one-tenth of
1
percent.Opioids represent a negligible part of our business.We intend to defend ourselvesvigorously against these actions.
On
September 30, 2019
, the
City of Hollywood Police Officers Retirement System, individually and on behalf of
all others similarly situated
, filed a putative class action complaint for violation of the federalsecurities lawsagainst
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 ofNew York,Case No. 2:19-cv-05530-FB-RLM.The complaint seeks to certify a class consisting of all persons and
entities who, subject to certain exclusions, purchased or otherwise acquired Covetrus common stock from February
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
121
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 overstatedCovetrus’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 competitionand alternative distribution channelsand from the loss of an allegedly large customer in North America just before the Separation andMerger.Thecomplaint seeks unspecified monetary damages and a jury trial.Pursuant to the provisions of the PSLRA, the courtappointed lead plaintiff and lead counsel on December 23, 2019.Lead plaintiff filed a Consolidated Class ActionComplaint on February 21, 2020.Lead plaintiff added Steve Paladino, our Chief Financial Officer, as a defendantin the action.Lead plaintiff filed an Amended Consolidated Class Action Complaint on May 21, 2020,in which itadded a claim that Mr. Paladino is a “control person” of Covetrus.We intend to defend ourselves vigorouslyagainst this action.
On
November 15, 2019
,
Frank Finazzo
filed a putative shareholder derivative action on behalf of HenrySchein,Inc. against various present and former directors and officers of Henry Schein inthe U.S. District Court for theEastern District of New York, Case No. 1:19-cv-6485-LDH-JO.The named defendants in the action were Stanley
M. Bergman, Steven Paladino, Timothy J. Sullivan, Barry J. Alperin, Lawrence S. Bacow, Gerald A. Benjamin,
James P. Breslawski, Paul Brons, Shira Goodman, Joseph L. Herring, Donald J. Kabat, Kurt Kuehn, Philip A.
Laskawy, Anne H. Margulies, Karyn Mashima, Norman S. Matthews, Mark E. Mlotek, Carol Raphael, E. Dianne
Rekow, Bradley T. Sheares, and Louis W. Sullivan, with Henry Schein named as a nominal defendant.
Complaint asserted claims under the federal securities laws and state lawrelating to the allegations in the antitrustactions, the In re Henry Schein, Inc. Securities Litigation, and the City of Hollywoodsecurities class actiondescribed in our prior filings with the SEC and/or above.The complaint sought declaratory, injunctive, andmonetary relief on behalf of Henry Schein.On January 6, 2020, one of the two law firms that filed the Finazzocase filed another, virtually identical putative shareholder derivative action on behalf of Henry Scheinagainst thesame defendants, asserting the same claims and seeking the same relief.That case, captioned Mark Sloan v.Stanley M. Bergman, et al., was also filed in the U.S. District Court for the EasternDistrict of New York, Case No.1:20-cv-0076.On January 24, 2020, the court consolidated the Finazzo and Sloancases under the new caption Inre Henry Schein, Inc. Derivative Litigation, No. 1:19-cv-06485-LDH-JO, and appointed thetwo law firms that filedthe Finazzo case as co-lead counsel for the consolidated action.The parties agreed to a resolution of this mattersubject to various conditions, including court approval.The settlement involves the adoption of certain proceduresbut does not involve the payment of any money except a fee to theplaintiffs’ attorneys that is immaterial.After thecourt referred the motion to approve the settlement to a Magistrate Judge,the parties consented to having the caseassigned to the Magistrate Judge for all purposes.The Magistrate Judge to which the matter was ultimatelyassigned held a fairness hearing and issued an order and judgment approvingthe settlement.The order andjudgment approving the settlement have become final.
On February 5, 2021, Jack Garnsey filed a putative shareholder derivativeaction on behalf of Covetrus, Inc. in theU.S. District Court for the Eastern District of New York, naming as defendants Benjamin Shaw, Christine T.
Komola, Steven Paladino, Betsy Atkins, Deborah G. Ellinger, Sandra L. Helton, Philip A. Laskaway, Mark J.
Manoff, Edward M. McNamara, Ravi Sachdev, David E. Shaw, Benjamin Wolin,and Henry Schein, Inc., withCovetrus, Inc. named as a nominal defendant.The complaint alleges that the individual defendants breachedtheirfiduciary duties under state law in connection with the same allegationsasserted in the City of Hollywood securitiesclass action described above and further alleges that Henry Schein aidedand abetted such breaches. The complaintalso asserts claims for contribution under the federal securities laws againstHenry Schein and other defendants,also arising out of the allegations in the City of Hollywood lawsuit.The complaint seeks declaratory, injunctive,and monetary relief. We intend to defend ourselves vigorously against this action.
From time to time, we may become a party to other legal proceedings,including, without limitation, productliability claims, employment matters, commercial disputes, governmentalinquiries and investigations (which may
December 30,
December 31,
December 25,
2023
2022
2021
Comprehensive income attributable to
Henry Schein, Inc.
$
443
$
476
$
568
Comprehensive income attributable to
noncontrolling interests
14
6
6
Comprehensive income attributable to
Redeemable noncontrolling interests
11
15
17
Comprehensive income
$
468
$
497
$
591
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (in millions, except share and per share data)
124
Note 21 – Earnings Per Share Basic earnings per share is computed by dividing net income attributableto Henry Schein, Inc. by the weighted- average number of common shares outstanding for the period.Our diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the effect of common shares issuablefor unvested RSUs and upon exercise of stock options using the treasury stock method in periodsin which they have a dilutive effect. A reconciliation of shares used in calculating earnings per basic anddiluted share follows: December 30,
December 31,
December 25,
2023
2022
2021
Basic
130,618,990
136,064,221
140,090,889
Effect of dilutive securities:
Stock options and restricted stock units
1,129,181
1,691,449
1,681,892
Diluted
131,748,171
137,755,670
141,772,781
The number of antidilutive securities that were excluded from the calculationof diluted weighted average common shares outstanding are as follows:
HENRY SCHEIN, INC.December 30,
December 31,
December 25,
2023
2022
2021
Stock options
424,695
342,716
611,869
Restricted stock units
15,040
19,466
1,048
Total anti-dilutive
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, exceptsecurities excluded from earnings per share data)
computation
122439,735
362,182
612,917
in some cases involve ourNote 22 – Supplemental Cash Flow Information
entering into settlement arrangements or consent decrees), and othermatters 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 anticipatedto have a material adverse effect on ourconsolidated financial position, liquidity or results of operations.
As of December 26, 2020, we had accrued our best estimate of potential losses relating to claims that were probable
to result in liability and for which we were able to reasonably estimate a loss. This accrued amount, as well as
related expenses, was not material to our financial position, results of operations or cash flows. Our method for
determining estimated losses considers currently available facts, presently enacted laws and regulations and other
factors, including probable recoveries from third parties.
Note 21 – Quarterly Information (Unaudited)The following tables present certain quarterly financial data:Cash paid for interest and income taxes was:
Quarters ended
March 28,
June 27,
September 26,
December 26,
2020
2020
2020
2020
$
2,428,871
$
1,684,399
$
2,840,146
$
3,165,725
746,039
454,294
754,299
859,711
Restructuring costs
(1)
4,787
15,934
6,992
4,380
173,865
(7,433)
187,671
181,200
Net gain on sale of equity investments
(2)
0
0
0
1,572
Net income (loss) from continuing operations
133,847
(13,852)
151,813
146,629
Amounts attributable to Henry Schein, Inc.from continuing operations:
130,543
(11,382)
141,726
141,921
Earnings (loss) per share attributable to
Henry Schein, Inc. from continuing operations:
$
0.91
$
(0.08)
$
1.00
$
1.00
0.91
(0.08)
0.99
0.99
Quarters ended
March 30,
June 29,
September 28,
December 28,
2019
2019
2019
2019
$
2,360,268
$
2,447,827
$
2,508,767
$
2,668,941
751,690
767,431
761,167
810,598
Restructuring costs (credits)
(1)
4,641
11,925
(802)
(1,059)
172,441
162,288
187,198
196,334
Net gain on sale of equity investments
(2)
0
0
0
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:
$
0.79
$
0.79
$
0.92
$
2.27
0.78
0.78
0.91
2.25
(1) See
for details of the restructuring costs (credits) incurred during our 2020 and 2019fiscal years.
(2) See
for details of the net gain on sale of equity investments.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except per share data)
123
Note 22 – Supplemental Cash Flow InformationCash paid for interest and income taxes was:
December 26,30,
December 28,31,
December 29,25,
20202023
20192022
20182021
$
43,12384
$
54,68547
$
69,37129
206,796218
177,277265
236,479242
For the years ended December
26, 2020,30, 2023, December
28, 201931, 2022 and December
29, 2018,25, 2021, we had $
(10.2)
$
(4.9)(25)
10
million and $
1.012
million of non-cash net unrealized gains (losses) related to
foreignhedging
currency hedgingactivities, respectively.
for additional information related to our total return swap and
with Internet Brands through a non-cashour transaction resulting ininterest rate swap agreements.
There was approximately $
390.3143
million of
noncontrolling interest representing Internet Brands’current
26
% minority interest and $
160.6
debt assumed as part of the acquisitions for the year ended
millionDecember 30, 2023.Debt assumed during the year ended December 30, 2023 primarilyrelates to the acquisitions of
deferred additional ownership interests of Internet BrandsinBiotech Henry Schein One, representing up to an additionalDental and S.I.N.
9.2
% ownership interests at December 26, 2020, a portion of
which is contingent upon the achievement of certain operating targets.During the third quarter of 2020, the InternetBrands ownership interest in Henry Schein One, LLC increased to
27
%.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (in millions, except share and per share data)
125
Note 23 – Related Party Transactions
In connection with the completion of the Animal Health Spin-off during our 2019fiscal year, we entered into atransition services agreement with Covetrus under which we have agreedto provide certain transition services forup to twenty-four months in areas such as information technology, finance and accounting, human resources,
supply chain, and real estate and facility services
For the years ended December 26, 2020 and December 28, 2019, we recorded approximately$13.0
$
17.5
million of fees for these services, respectively.Pursuant to the transition services agreement, Covetruspurchased certain products from us.During the yearsended December 26, 2020 and December 28, 2019, net salesto Covetrus under the transition services agreement were approximately$75.3
81.3
respectively.Sales to Covetrus under the transition servicesagreement ended in December 2020.At December 26,2020 we had $
0.3
million payable to Covetrus under this transition services agreement.In connection with the formation of Henry Schein One, LLC, our joint venture
with Internet Brands, which was
formed on July 1, 2018, we entered into a
ten-year
royalty agreement with Internet Brands whereby we will pay
Internet Brands approximately $31.0 $
31
million annually for the use of their intellectual property.
During the yearsended December 30, 2023, December 31, 2022 and December 25, 2021, we recorded$ 31
and 2018, we recorded $
31.0
, million, $
31.031
$
15.531
million, respectively, in connection with costs related
to this royalty agreement.
As of December
26, 202030, 2023 and
December
28, 2019,31, 2022, Henry Schein One, LLC
had a net
payable balancereceivable balance due fromto Internet Brands of $
4.71
9.49
million, respectively, comprised of amounts
related to
results of operations and the royalty
agreement andagreement.Thecomponents of this payable are recorded within accrued expenses: other, management fees.respectively, within our consolidated
balance sheets.
During our normal course of business, we We
have interests in entities that we account for under the equity accounting
method.
Duringmethod.In our
fiscalnormal course ofbusiness, during the years ended
2020, 2019 December 30, 2023, December 31, 2022and
2018,December 25, 2021, we recorded
net net sales of $
59.646
93.246
and $
27.048
million respectively, to such entities.
During
our fiscalthe years ended
2020, 2019December30, 2023, December 31, 2022 and
2018,December 25, 2021, we purchased
$
12.610
11.89
10.815
respectively, from such entities.
At December
26, 202030, 2023 and
December
28, 2019,31, 2022, we had
in thean aggregate
$
36.432
and $
36
million, respectively, due from our equity affiliates, and $ 5
31.06
million,
due from our equity affiliates, and$
8.6
4.9
millionrespectively, due to our
equity affiliates, respectively.affiliates.
Certain of our facilities related to our acquisitions are leased from employeesand minority shareholders.Please see 124126
ITEM 9.
Changes in and Disagreements with 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
26,30,
20202023, 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.forms, and the rules of the Nasdaq stock exchange.
Changes in Internal Control over Financial Reporting
During the quarter ended December 30, 2023, we acquired a 90% voting
equity interest in Shield, a supplier of homecare medical products headquartered in California.
The full integration of this acquisition, as well as our previously reported acquisitions of S.I.N and Biotech Dental, extendedbeyond year-end and, therefore, we excluded Shield, Biotech Dental, and S.I.N., which together representless than 1.5% of our total net sales, from our annual assessment of internal control over financial reporting as of December30, 2023, as permitted by SEC staff interpretive guidance for newly acquired businesses. Post-acquisition integration related activities for other dental andmedical businesses acquired during 2023 across the U.S., Europe, Brazil, Australia, and China were included inour annual assessment of internal control over financial reporting as of December 30, 2023.These acquisitions, the majority of which utilize separate information and financial accounting systems, have been included in our consolidated financialstatements since their respective Finally, we continued systems implementation activities in the U.S. for two of our dental businesses.
The combination of acquisitions
(including Shield, S.I.N., and
BiotechDental), continued acquisition integrations
and systems implementation activities undertaken
during the quarter
and carried
over from prior quarters
as well as changes to the operating methods of someof our internal controls over financialwhenreporting due to the COVID-19 pandemic, when considered in the aggregate,
represents a material change in our
internal control over financial reporting.
During the quarter,
ended December 26, 2020,we completed the acquisition of a dental business in North Americawith approximate aggregate annual revenues of approximately $20million.In addition, post-acquisition integrationrelated activities continued for our global dental and North Americanmedical businesses acquired during priorquarters, representing aggregate annual revenues of approximately $370 million.Theseall acquisitions,
the majorityof which utilize separate information and financial accounting systems, havebeen included in our consolidatedfinancial statements since their respective dates of acquisition.All acquisitions and continued acquisition integrations and systems implementation activities
involve necessary
and appropriate change-management
controlscontrols that are considered in our annualquarterly assessment of the design and operating effectiveness of
changes in our internal
control over financial reporting.
In October 2023, we experienced a cybersecurity incident that primarilyaffected the operations of our North American and European dental and medical distribution businesses.Once we became aware of the issue, as part of the Company’s incident response plan, we took precautionary actions to contain the incident including shutting
down connectivity to networks and key business, operating and financialaccounting systems globally.In addition to notifying affected and potentially affected third parties and all relevant law enforcementauthorities, we engaged external cyber-security experts to support our assessment of the cyber-incident’s impact as well as sanitize, rebuild
and restore our affected systems and applications.We also notified law enforcement and our employees, customers, suppliers and investors, informing them of both the incident andmanagement’s efforts to mitigate its impact on our daily operations and data maintained on the Company’s systems. 127
Subsequently, on or about November 8, 2023, we determined that the threat actor obtained personal and sensitive
information maintained on our systems belonging to certain third parties andsince that date we have notified affected parties and potentially affected parties as appropriate.The scope of personal and sensitive data impacted is still under investigation.
In addition, asOn November 22, 2023, we experienced a
result of a combination of continued governmental imposedrelated disruption to our
ecommerce platform and
Company directed closuresrelated applications,which has since been remediated.
In order to mitigate the impact of
some of this disruption on our
facilities due to the COVID-19 pandemic, we have hadsystems and on our
ability to
maintain a number of changes to theservice customers, alternativeoperating methods of some of our internal controls. For example, movingprocedures and controls were temporarily implemented.
Management’s
from manual sign-offs and in-person meetings to electronic sign-offs and electronic communications such as email andtelephonic or video conferencedue to out-of-office working arrangements. However, the design of our internal control framework and objectives
over financial reporting remains unchanged and we do not believe thatthese changes have materially affected, orare reasonably likely to materially affect, the effectiveness of our internal control over financialreporting.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
preparation and fair presentation of
publishedpublished financial statements.
Under the supervision and with the participation of our
management,
management, including our
principalprincipal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal
internal control over financial reporting based on the
framework in Internal Control-Integrated
Framework (2013),
updatedupdated and reissued by the Committee of Sponsoring Organizations, or the COSO
Framework.
Framework. Based on our
evaluation125
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 26, 2020.
30, 2023.
The effectiveness of our internal control over financial reporting as of December
26,30,
20202023, has been independently
audited by BDO USA, LLP,P.C., an independent registered public accounting firm, and their attestation is included
herein.
The evaluation of internal controls involves judgment.Our external auditor has concluded that theCompany has a material weakness resulting from the aggregation of certaincontrol deficiencies at the application control level related to logical and user access management and segregation ofduties.The Company agrees that there are control deficiencies that our external auditor has identified, all of whicheither have been addressed or are being addressed. The Company’s management has considered the control deficiencies identified by ourexternal auditor, and believes that, individually and in aggregate, they do not result in a material weakness.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, suchthat there is a reasonable possibility that a material misstatement of thecompany’s financial statements will not be prevented or detected on a timely basis.
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.
128
Report of Independent Registered Public Accounting Firm
126
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
StockholdersShareholders and Board of Directors
Henry Schein, Inc.
Melville, NY
Opinion on Internal Control over Financial Reporting
We
have audited Henry
Schein, Inc.’s
(the “Company’s”)
internal control over
financial reporting as
of December
26, 2020,30, 2023, based on
criteria established in
Internal Control
– Integrated Framework (2013)
issued
issued by the Committee
of
Sponsoring
Organizations
of
the
Treadway
Commission
(the (the
“COSO
criteria”).
In
our
opinion,
the
Company
didmaintained,not maintain,
in
all
material
respects,
effective
internal
control
over
financial
reporting
as
of
December
30,
26,2020,2023,based on the COSO criteria.
We
donotexpressanopinionoranyotherformofassuranceonmanagement’sstatementsreferringtoany corrective actions taken by the Company after the date of management’s assessment.
We
also
have
audited,
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board
(United
States)
(“PCAOB”),
the
consolidated
balance
sheets
of
the
Company
as
of
December
26,30,
20202023
and
December
28,31,
2019, therelatedconsolidated statementsofincome, comprehensiveincome,stockholders’ equity,andcashflowsforeachofthethreeyearsintheperiodendedDecember26,2020,and2022,
the
related
consolidatedstatementsofincome,comprehensiveincome,changesinstockholders’ equity,and cashflows foreach ofthe threeyears intheperiod endedDecember 30,2023, andthe relatednotes
(collectivelyreferredtoas“thefinancialstatements”)and
ourreportdatedFebruary28,2024 schedule and our report dated February 17, 2021 expressed 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 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
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.
A materialweakness isa deficiency,or acombination ofdeficiencies, ininternal controlover financialreporting, suchthatthereisareasonablepossibilitythatamaterialmisstatementoftheCompany’sannualorinterim consolidatedfinancialstatementswillnotbepreventedordetectedonatimelybasis.Wehaveidentifiedthe following material weaknessthat has notbeen identified asa material weaknessin management’sassessment. The material weakness ininternal control overfinancial reporting isrelated to logicaland user accessmanagement and segregationofduties,attheapplicationcontrollevel,incertaininformationtechnologyenvironmentsatcertain components.ThereisareasonablepossibilitythatamaterialmisstatementoftheCompany’sannualorinterim consolidatedfinancialstatementswithrespecttothesematterswouldnothavebeenpreventedordetectedona timelybasis.Thismaterialweaknesswasconsideredindeterminingthenature,timing,andextentofaudittests applied inour auditof the2023 consolidatedfinancial statements,and thisreport doesnot affectour reportdated February 28, 2024, on those consolidated financial statements.
As indicated inthe accompanying “Item9A, Management’sReport on InternalControl over FinancialReporting”, management’s assessment of and conclusion on the effectiveness of internal controlover financial reporting did not includetheinternalcontrolsofShieldHealthcare,Inc.,S.I.N.ImplantSystem,andBiotechDental,whichwere 129
acquiredduringtheyearendedDecember30,2023,andareincludedintheconsolidatedbalancesheetofthe CompanyasofDecember30,2023,andtherelatedconsolidatedstatementsofincome,comprehensiveincome, changesinstockholders’equity,andcashflowsfortheyearthenended.ShieldHealthcare,Inc.,S.I.N.Implant System, andBiotech Dental,together representless than1.5% oftotal netsales forthe yearended December30, 2023. Management did not assess the effectiveness of internal control over financial reporting of Shield Healthcare,
Inc.,S.I.N.ImplantSystem,orBiotechDentalbecauseofthetimingoftheacquisitionswhichwerecompleted during theyear endedDecember 30,2023. Ouraudit ofinternal controlover financialreporting ofthe Company also didnot includean evaluationof theinternal controlover financialreporting ofShield Healthcare,Inc., S.I.N. Implant System, or Biotech Dental.
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
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
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
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
P.C.
February 17, 2021
28, 2024
127130
ITEM 9B.
Other Information
Not applicable.
ITEM 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable.
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
20212024 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
ofsinceDirectors since our last disclosure of such procedures, which appeared
in our definitive
20202023 Proxy Statement filed
pursuant to
Regulation 14A on April 7, 2020.
11, 2023.
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
“Delinquent Section 16(a) Reports” in our
definitive
20212024 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
Highlights”
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
information shall be deemed furnished in
this Annual Report on Form 10-K), “Executive and Director Compensation”
and
and “Compensation“Compensation Committee
Interlocks and Insider Participation” in our definitive
20212024 Proxy Statement
to be filed pursuant to Regulation 14A.
128131
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
26, 2020:30, 2023:
Number of Common
Shares to be Issued Upon
Number of Common
Exercise of Outstanding
Exercise Price of
Plan Category
Options and Rights
Outstanding Options
Future Issuances
Plans Approved by Stockholders
-
$
-
6,077,5487,166,543
Plans Not Approved by Stockholders
-
-
-
-
$
-
6,077,548
7,166,543
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
20212024 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
20212024 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
20212024 Proxy
Statement to be filed pursuant to Regulation 14A.
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 69.62.
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.
135
Second Amendment,Agreement, dated as of April 17, 2020,2013, by and among us, the several lenders parties thereto,as servicer, HSFR, Inc., as seller,136
101.INS
Inline XBRL Instance Document - the instance document does not
appearappear 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+
138
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 26, 2020,30, 2023, formatted in Inline XBRL
(included (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 becauseit is both not material and is the type that the registrant treats as private or confidential.
ITEM 16.
Form 10-K Summary
None.
137139
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 17, 202128, 2024
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 17, 202128, 2024
Stanley M. Bergman
and Director (principal executive officer)
/s/ STEVEN PALADINORONALD N. SOUTH
ExecutiveSenior Vice President,
Chief
Chief Financial Officer
February 17, 202128, 2024
Steven PaladinoRonald N. South
and Director (principal(principal financial and accounting officer)
Vice Chairman, President
and Director
February 17, 202128, 2024
/s/ GERALD A. BENJAMINMARK E. MLOTEK
Executive Vice President,Chief Strategic Officer and Director
February 17, 2021
Gerald A. Benjamin
/s/ MARK E. MLOTEK
Director
February 17, 202128, 2024
Mark E. Mlotek
/s/ MOHAMAD ALI
Director
February 17, 202128, 2024
Mohamad Ali
/s/ BARRY J. ALPERIN
Director
February 17, 2021
Barry J. Alperin
Director
February 17, 2021
Paul Brons
/s/ DEBORAH DERBY
Director
February 17, 202128, 2024
Deborah Derby
/s/ SHIRA GOODMANCAROLE T. FAIG
Director
February 17, 202128, 2024
Shira GoodmanCarole T. Faig
/s/ JOSEPH L. HERRING
Director
February 17, 202128, 2024
Joseph L. Herring
Director
February 17, 202128, 2024
/s/ PHILIP A. LASKAWY
Director
February 17, 202128, 2024
Philip A. Laskawy
/s/ ANNE H. MARGULIES
Director
February 17, 202128, 2024
Anne H. Margulies
/s/ STEVEN PALADINO
Director
February 28, 2024
Steven Paladino
/s/ CAROL RAPHAEL
Director
February 17, 202128, 2024
Carol Raphael
/s/ E. DIANNE REKOWSCOTT SEROTA
Director
February 17, 202128, 2024
E. Dianne Rekow,DDS, Ph.D.Scott Serota/s/ BRADLEY T. SHEARES,
PH. D.PH.D.Director
February 17, 202128, 2024
Bradley T. Sheares,
Ph. D. Ph.D./s/ REED V.
TUCKSON, M.D., FACP Director
February 28, 2024
Reed V.
138
Schedule II
Valuationand 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
Yearended December 26, 2020:Allowance for doubtful accounts
$
60,002
$
35,137
$
730
$
(7,839)
$
88,030
Yearended December 28, 2019:Allowance for doubtful accounts
$
53,121
$
12,612
$
134
$
(5,865)
$
60,002
Yearended December 29, 2018:Allowance for doubtful accounts
$
46,261
$
14,384
$
(1,158)
$
(6,366)
$
53,121
(1)
Represents amounts charged to bad debt expense.
(2)
Amounts charged (credited) to other accounts primarily relate to provision for late fees and the impactof foreign currency exchange rates andthe adoption of ASU No. 2016-13 effective December 29, 2019.
(3)
Deductions primarily consist of fully reserved accounts receivable that have been written off.
Tuckson, M.D., FACP