UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM
10-Q

(Mark One)

X

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

For the
quarterly
period ended September 30, 2017

April 1, 2023
or                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               ��                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

__         

☐
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.

(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)

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

Melville
,
New York

(Address of principal executive offices)

11747

(Zip Code)

(631)

(
631
)
843-5500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.01 per share
HSIC
The Nasdaq Global Select Market
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.

YesX  

No  __

☒
No
☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted
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 and post such files).

YesX  

No  __

☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated
“accelerated filer,” “smaller
“smaller reporting company,”
and emerging“emerging growth company company”
in Rule 12b-2 of the Exchange Act.

Large accelerated filerX  

Accelerated filer __

Non-accelerated filer  __

(Do not check if a smaller reporting company)

Smaller reporting company  __

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

☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for
complying with any new or revised financial accounting standards provided
pursuant to Section 7(a)(2)(B)13(a) of the SecuritiesExchange Act. □

☐
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).

Yes __

No  X 

☐
No
☒
As of October 31, 2017, May 1, 2023,
there were 156,954,392
131,003,202
shares of the registrant’s common stock outstanding.

HENRY SCHEIN, INC.

INDEX

Page

PART I.  FINANCIAL INFORMATION

ITEM 1.

Consolidated Financial Statements:

Balance Sheets as of September 30, 2017 and December 31, 2016............................................................................................................................................  

3

Statements of Income for the three and nine months ended

September 30, 2017 and September 24, 2016.......................................................................................................................................................................  

4

Statements of Comprehensive Income for the three and nine months ended

September 30, 2017 and September 24, 2016.......................................................................................................................................................................  

5

Statement of Changes in Stockholders' Equity for the nine months ended

September 30, 2017..............................................................................................................................................................................................................  

6

Statements of Cash Flows for the nine months ended

September 30, 2017 and September 24, 2016.......................................................................................................................................................................  

7

Notes to Consolidated Financial Statements...............................................................................................................................................................................  

8

Note 1 – Basis of Presentation...............................................................................................................................................................................................  

8

Note 2 – Segment Data..........................................................................................................................................................................................................  

8

Note 3 - Debt.........................................................................................................................................................................................................................  

10

Note 4 – Redeemable Noncontrolling Interests......................................................................................................................................................................  

12

Note 5 – Comprehensive Income...........................................................................................................................................................................................  

13

Note 6 – Fair Value Measurements.......................................................................................................................................................................................  

15

Note 7 – Business Acquisitions.............................................................................................................................................................................................  

17

Note 8 – Plan of Restructuring..............................................................................................................................................................................................  

18

Note 9 – Earnings Per Share..................................................................................................................................................................................................  

19

Note 10 – Income Taxes........................................................................................................................................................................................................  

19

Note 11 – Derivatives and Hedging Activities.......................................................................................................................................................................  

20

Note 12 – Stock-Based Compensation..................................................................................................................................................................................  

20

Note 13 – Supplemental Cash Flow Information...................................................................................................................................................................  

22

Note 14 – Legal Proceedings.................................................................................................................................................................................................  

22

24

Note 15 – Subsequent Event...................................................................................................................................................................  

22

ITEM 2.

Management's Discussion and Analysis of

Financial Condition and Results of Operations....................................................................................................................................................................  

25

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk.................................................................................................................................................  

48

ITEM 4.

Controls and Procedures..............................................................................................................................................................................................................  

48

PART II.  OTHER INFORMATION

ITEM 1.

Legal Proceedings..........................................................................................................................................................................................................................  

50

ITEM 1A.

Risk Factors...................................................................................................................................................................................................................................  

51

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds.....................................................................................................................................................

51

ITEM 6.

Exhibits...........................................................................................................................................................................................................................................  

53

Signature........................................................................................................................................................................................................................................  

54

INDEX
Page
3
4
5
6
7
8
8
9
10
11
12
14
16
18
19
20
21
23
23
25
26
26
27
39
39
40
40
40
41
42
 
See accompanying notes.
3

PART

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

HENRY SCHEIN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, millions,
except share data)
April 1,
December 31,
2023
2022
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
126
$
117
Accounts receivable, net of allowances for credit losses of $
65
and $
65
1,470
1,442
Inventories, net
1,918
1,963
Prepaid expenses and other
438
466
Total current assets
3,952
3,988
Property and equipment, net
396
383
Operating lease right-of-use assets
280
284
Goodwill
2,917
2,893
Other intangibles, net
548
587
Investments and other
479
472
Total assets
$
8,572
$
8,607
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
855
$
1,004
Bank credit lines
236
103
Current maturities of long-term debt
55
6
Operating lease liabilities
73
73
Accrued expenses:
Payroll and related
231
314
Taxes
156
132
Other
566
592
Total current liabilities
2,172
2,224
Long-term debt
1,021
1,040
Deferred income taxes
40
36
Operating lease liabilities
274
275
Other liabilities
368
361
Total liabilities
3,875
3,936
Redeemable noncontrolling interests
570
576
Commitments and contingencies
(nil)
(nil)
Stockholders' equity:
Preferred stock, $
0.01
par value,
1,000,000
shares authorized,
none
outstanding
-
-
Common stock, $
0.01
par value,
480,000,000
shares authorized,
131,196,783
outstanding on April 01, 2023 and
131,792,817
outstanding on December 31, 2022
1
1
Additional paid-in capital
-
-
Retained earnings
3,684
3,678
Accumulated other comprehensive loss
(213)
(233)
Total Henry Schein, Inc. stockholders' equity
3,472
3,446
Noncontrolling interests
655
649
Total stockholders' equity
4,127
4,095
Total liabilities, redeemable noncontrolling
interests and stockholders' equity
$
8,572
$
8,607
See accompanying notes.
4
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
(in millions,
except share and per share data)

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

2017

 

2016

 

 

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents ..............................................................................................................................................................  

 

$

79,879

 

$

62,381

 

Accounts receivable, net of reserves of $96,953 and $90,329 ................................................................................................................  

 

 

1,544,582

 

 

1,254,139

 

Inventories, net .............................................................................................................................................................................  

 

 

1,692,256

 

 

1,635,750

 

Prepaid expenses and other .............................................................................................................................................................  

 

 

465,812

 

 

360,510

 

 

 

Total current assets ................................................................................................................................................................  

 

 

3,782,529

 

 

3,312,780

Property and equipment, net ...............................................................................................................................................................  

 

 

361,708

 

 

333,906

Goodwill ..........................................................................................................................................................................................  

 

 

2,224,657

 

 

2,019,740

Other intangibles, net .........................................................................................................................................................................  

 

 

666,997

 

 

621,180

Investments and other .......................................................................................................................................................................  

 

 

450,770

 

 

442,790

 

 

 

Total assets ..........................................................................................................................................................................  

 

$

7,486,661

 

$

6,730,396

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable .........................................................................................................................................................................  

 

$

1,029,138

 

$

977,249

 

Bank credit lines ...........................................................................................................................................................................  

 

 

631,865

 

 

437,476

 

Current maturities of long-term debt .................................................................................................................................................  

 

 

17,247

 

 

65,923

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll and related ....................................................................................................................................................................  

 

 

251,849

 

 

266,463

 

 

Taxes ......................................................................................................................................................................................  

 

 

148,627

 

 

151,750

 

 

Other ......................................................................................................................................................................................  

 

 

358,421

 

 

391,785

 

 

 

Total current liabilities ............................................................................................................................................................  

 

 

2,437,147

 

 

2,290,646

Long-term debt .................................................................................................................................................................................  

 

 

907,592

 

 

715,457

Deferred income taxes .......................................................................................................................................................................  

 

 

91,786

 

 

51,589

Other liabilities ..................................................................................................................................................................................  

 

 

292,179

 

 

264,264

 

 

 

Total liabilities ......................................................................................................................................................................  

 

 

3,728,704

 

 

3,321,956

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests .....................................................................................................................................................  

 

 

737,747

 

 

607,636

Commitments and contingencies .........................................................................................................................................................  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

none outstanding ......................................................................................................................................................................  

 

 

-

 

 

-

 

Common stock, $.01 par value, 240,000,000 shares authorized,

 

 

 

 

 

 

 

 

156,952,738 outstanding on September 30, 2017 and

 

 

 

 

 

 

 

 

158,805,010 outstanding on December 31, 2016 ............................................................................................................................  

 

 

1,570

 

 

1,588

 

Additional paid-in capital ...............................................................................................................................................................  

 

 

-

 

 

126,742

 

Retained earnings ..........................................................................................................................................................................  

 

 

3,164,541

 

 

2,981,777

 

Accumulated other comprehensive loss .............................................................................................................................................  

 

 

(154,472)

 

 

(317,041)

 

 

Total Henry Schein, Inc. stockholders' equity .................................................................................................................................  

 

 

3,011,639

 

 

2,793,066

 

Noncontrolling interests ..................................................................................................................................................................  

 

 

8,571

 

 

7,738

 

 

 

Total stockholders' equity .......................................................................................................................................................  

 

 

3,020,210

 

 

2,800,804

 

 

Total liabilities, redeemable noncontrolling interests and stockholders' equity .......................................................................................  

 

$

7,486,661

 

$

6,730,396

See accompanying notes.

(unaudited)

Three Months Ended
April 1,
March 26,
2023
2022
Net sales
$
3,060
$
3,179
Cost of sales
2,094
2,206
Gross profit
966
973
Operating expenses:
Selling, general and administrative
717
682
Depreciation and amortization
44
47
Restructuring costs
30
-
Operating income
175
244
Other income (expense):
Interest income
3

2
Interest expense
(14)
(7)
Other, net
(1)
-
Income before taxes, equity in earnings of affiliates and noncontrolling interests
163
239
Income taxes
(39)
(57)
Equity in earnings of affiliates
4
4
Net income
128
186
Less: Net income attributable to noncontrolling interests
(7)
(5)
Net income attributable to Henry Schein, Inc.
$
121
$
181
Earnings per share attributable to Henry Schein, Inc.:
Basic
$
0.92
$
1.31
Diluted
$
0.91
$
1.30
Weighted-average common
shares outstanding:
Basic
131,365,789
137,296,581
Diluted
133,039,886
139,237,472
 
 
See accompanying notes.
5
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
Three Months Ended
April 1,
March 26,
2023
2022
Net income
$
128
$
186
Other comprehensive income, net of tax:
Foreign currency translation gain
25
3
Unrealized gain (loss) from foreign currency hedging activities
(3)
1
Other comprehensive income, net of tax
22
4
Comprehensive income
150
190
Less: Comprehensive income attributable to noncontrolling interests:
Net income
(7)
(5)
Foreign currency translation gain
(2)
(1)
Comprehensive income attributable to noncontrolling interests
(9)
(6)
Comprehensive income attributable to Henry Schein, Inc.
$
141
$
184
See accompanying notes.
6
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN
STOCKHOLDERS’ EQUITY
(in millions, except share data)
(unaudited)
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Interests
Equity
Balance, December 31, 2022
131,792,817
$
1
$
-
$
3,678
$
(233)
$
649
$
4,095
Net income (excluding $
4
attributable to redeemable
noncontrolling interests)
-
-
-
121
-
3
124
Foreign currency translation gain (excluding gain of $
2
attributable to redeemable noncontrolling interests)
-
-
-
-
23
-
23
Unrealized loss from foreign currency hedging activities,
net of tax benefit of $
1
-
-
-
-
(3)
-
(3)
Change in fair value of redeemable securities
-
-
3
-
-
-
3
Initial noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
3
3
Repurchases and retirement of common stock
(1,223,919)
-
(13)
(87)
-
-
(100)
Stock-based compensation expense
1,016,300
-
10
-
-
-
10
Stock issued upon exercise of stock options
10,779
-
1
-
-
-
1
Shares withheld for payroll taxes
(399,194)
-
(29)
-
-
-
(29)
Transfer of charges in excess of
capital
-
-
28
(28)
-
-
-
Balance, April 1, 2023
131,196,783
$
1
$
-
$
3,684
$
(213)
$
655
$
4,127
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Interests
Equity
Balance, December 25, 2021
137,145,558
$
1
$
-
$
3,595
$
(171)
$
638
$
4,063
Net income (excluding $
4
attributable to redeemable
noncontrolling interests)
-
-
-
181
-
1
182
Foreign currency translation gain (excluding gain of $
1
attributable to redeemable noncontrolling interests)
-
-
-
-
2
-
2
Unrealized gain from foreign currency hedging activities,
net of tax of $
1
-
-
-
-
1
-
1
Purchase of noncontrolling interests
-
-
-
-
-
(7)
(7)
Change in fair value of redeemable securities
-
-
(3)
-
-
-
(3)
Stock-based compensation expense
876,161
-
12
-
-
-
12
Stock issued upon exercise of stock options
26,233
-
2
-
-
-
2
Shares withheld for payroll taxes
(336,331)
-
(28)
-
-
-
(28)
Settlement of stock-based compensation awards
(2,812)
-
-
-
-
-
-
Transfer of charges in excess of
capital
-
-
17
(17)
-
-
-
Balance, March 26, 2022
137,708,809
$
1
$
-
$
3,759
$
(168)
$
632
$
4,224
See accompanying notes.
7
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(in millions)
(unaudited)
Three Months Ended
April 1,
March 26,
2023
2022
Cash flows from operating activities:
Net income
$
128
$
186
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
52
55
Non-cash restructuring charges
7
-
Stock-based compensation expense
10
12
Provision for losses on trade and other accounts receivable
1
1
Provision for (benefit from) deferred income taxes
2
(3)
Equity in earnings of affiliates
(4)
(4)
Distributions from equity affiliates
2
4
Changes in unrecognized tax benefits
1
4
Other
(1)
(7)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(20)
16
Inventories
63
(9)
Other current assets
29
26
Accounts payable and accrued expenses
(243)
(188)
Net cash provided by operating activities
27
93
Cash flows from investing activities:
Purchases of fixed assets
(31)
(19)
Payments related to equity investments and business acquisitions,
net of cash acquired
(1)
(5)
Proceeds from loan to affiliate
2
4
Other
(9)
(7)
Net cash used in investing activities
(39)
(27)
Cash flows from financing activities:
Net change in bank borrowings
132
30
Proceeds from issuance of long-term debt
31
-
Principal payments for long-term debt
(1)
(53)
Proceeds from issuance of stock upon exercise of stock options
1
2
Payments for repurchases and retirement of common stock
(100)
-
Payments for taxes related to shares withheld for employee taxes
(30)
(26)
Distributions to noncontrolling shareholders
(4)
(5)
Acquisitions of noncontrolling interests in subsidiaries
(8)
(10)
Net cash provided by (used in) financing activities
21
(62)
Effect of exchange rate changes on cash and cash equivalents
-
4
Net change in cash and cash equivalents
9
8
Cash and cash equivalents, beginning of period
117
118
Cash and cash equivalents, end of period
$
126
$
126

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 24,

 

September 30,

 

September 24,

 

 

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales ....................................................................................................................................................................................  

 

$

3,161,083

 

$

2,865,148

 

$

9,143,489

 

$

8,450,734

Cost of sales ...............................................................................................................................................................................  

 

 

2,325,029

 

 

2,077,473

 

 

6,645,342

 

 

6,083,748

 

 

Gross profit ...........................................................................................................................................................................  

 

 

836,054

 

 

787,675

 

 

2,498,147

 

 

2,366,986

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative ................................................................................................................................................  

 

 

622,506

 

 

581,584

 

 

1,879,969

 

 

1,779,583

 

Restructuring costs ....................................................................................................................................................................  

 

 

-

 

 

5,370

 

 

-

 

 

29,811

 

 

Operating income ...................................................................................................................................................................  

 

 

213,548

 

 

200,721

 

 

618,178

 

 

557,592

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income .........................................................................................................................................................................  

 

 

4,793

 

 

3,141

 

 

13,204

 

 

10,045

 

Interest expense ........................................................................................................................................................................  

 

 

(13,428)

 

 

(7,488)

 

 

(37,056)

 

 

(21,982)

 

Other, net .................................................................................................................................................................................  

 

 

(194)

 

 

(199)

 

 

489

 

 

3,206

 

 

Income before taxes and equity in earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of affiliates .........................................................................................................................................................................  

 

 

204,719

 

 

196,175

 

 

594,815

 

 

548,861

Income taxes ..............................................................................................................................................................................  

 

 

(59,340)

 

 

(56,601)

 

 

(156,276)

 

 

(159,099)

Equity in earnings of affiliates .......................................................................................................................................................  

 

 

5,569

 

 

5,717

 

 

12,244

 

 

13,160

Net income .................................................................................................................................................................................  

 

 

150,948

 

 

145,291

 

 

450,783

 

 

402,922

 

Less: Net income attributable to noncontrolling interests ...................................................................................................................  

 

 

(12,917)

 

 

(11,578)

 

 

(35,949)

 

 

(35,360)

Net income attributable to Henry Schein, Inc. ...................................................................................................................................  

 

$

138,031

 

$

133,713

 

$

414,834

 

$

367,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic ......................................................................................................................................................................................  

 

$

0.88

 

$

0.83

 

$

2.64

 

$

2.26

 

Diluted ....................................................................................................................................................................................  

 

$

0.87

 

$

0.82

 

$

2.61

 

$

2.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic ......................................................................................................................................................................................  

 

 

156,914

 

 

161,791

 

 

157,386

 

 

162,600

 

Diluted ....................................................................................................................................................................................  

 

 

158,271

 

 

163,710

 

 

158,866

 

 

164,635

See accompanying notes.

4

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 24,

 

September 30,

 

September 24,

 

 

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income .................................................................................................................................................................................  

 

$

150,948

 

$

145,291

 

$

450,783

 

$

402,922

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)...........................................................................................................................................  

 

 

58,916

 

 

(6,463)

 

 

173,166

 

 

(2,041)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) from foreign currency hedging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

activities ................................................................................................................................................................................  

 

 

(34)

 

 

(603)

 

 

(1,274)

 

 

1,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment loss ..........................................................................................................................................................  

 

 

(2)

 

 

-

 

 

(2)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension adjustment gain (loss)......................................................................................................................................................  

 

 

(353)

 

 

209

 

 

(1,063)

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax  ..................................................................................................................................  

 

 

58,527

 

 

(6,857)

 

 

170,827

 

 

(1,005)

Comprehensive income .................................................................................................................................................................  

 

 

209,475

 

 

138,434

 

 

621,610

 

 

401,917

 

Comprehensive income attributable to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

  interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income ............................................................................................................................................................................  

 

 

(12,917)

 

 

(11,578)

 

 

(35,949)

 

 

(35,360)

 

 

Foreign currency translation gain................................................................................................................................................  

 

 

(3,473)

 

 

(716)

 

 

(8,258)

 

 

(1,236)

 

 

 

Comprehensive income attributable to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  interests ............................................................................................................................................................................  

 

 

(16,390)

 

 

(12,294)

 

 

(44,207)

 

 

(36,596)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Henry Schein, Inc. ...................................................................................................................  

 

$

193,085

 

$

126,140

 

$

577,403

 

$

365,321

See accompanying notes.

5

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

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

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

 

 

 

 Other 

 

 

 

 

Total

 

 

 

$.01 Par Value

 

Paid-in

 

Retained

 

Comprehensive

 

Noncontrolling

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 Capital 

 

Earnings

 

 Income/(Loss) 

 

Interests

 

Equity

Balance, December 31, 2016 .........................................................................................................................................................................  

 

158,805,010

 

$

1,588

 

$

126,742

 

$

2,981,777

 

$

(317,041)

 

$

7,738

 

$

2,800,804

Net income (excluding $35,398 attributable to Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests) ........................................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

414,834

 

 

-

 

 

551

 

 

415,385

Foreign currency translation gain (excluding gain of $7,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Redeemable noncontrolling interests) .............................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

164,908

 

 

297

 

 

165,205

Unrealized loss from foreign currency hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefit of $4..........................................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,274)

 

 

-

 

 

(1,274)

Unrealized investment loss, net of tax of $1..........................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

(2)

 

 

-

 

 

(2)

Pension adjustment loss, including tax benefit of $508................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,063)

 

 

-

 

 

(1,063)

Dividends paid .....................................................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(383)

 

 

(383)

Other adjustments ..................................................................................................................................................................................  

 

-

 

 

-

 

 

29

 

 

-

 

 

-

 

 

368

 

 

397

Change in fair value of redeemable securities .........................................................................................................................................................  

 

-

 

 

-

 

 

(124,747)

 

 

-

 

 

-

 

 

-

 

 

(124,747)

Repurchase and retirement of common stock .........................................................................................................................................................  

 

(2,625,230)

 

 

(26)

 

 

(49,184)

 

 

(175,795)

 

 

-

 

 

-

 

 

(225,005)

Stock issued upon exercise of stock options,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

including tax benefit of $681 ....................................................................................................................................................................  

 

186,570

 

 

2

 

 

4,258

 

 

-

 

 

-

 

 

-

 

 

4,260

Stock-based compensation expense ..................................................................................................................................................................  

 

1,106,354

 

 

11

 

 

31,976

 

 

-

 

 

-

 

 

-

 

 

31,987

Shares withheld for payroll taxes ....................................................................................................................................................................  

 

(519,966)

 

 

(5)

 

 

(44,696)

 

 

-

 

 

-

 

 

-

 

 

(44,701)

Liability for cash settlement of stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

awards.........................................................................................................................................................................................  

 

-

 

 

-

 

 

(653)

 

 

-

 

 

-

 

 

-

 

 

(653)

Transfer of charges in excess of capital.................................................................................................................................................................  

-

 

 

-

 

 

56,275

 

 

(56,275)

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2017 ........................................................................................................................................................................  

 

156,952,738

 

$

1,570

 

$

-

 

$

3,164,541

 

$

(154,472)

 

$

8,571

 

$

3,020,210

See accompanying notes.

6

 
(unaudited
)
8

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

September 30,

 

September 24,

 

 

 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income ......................................................................................................................................................................................  

 

$

450,783

 

$

402,922

 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization ....................................................................................................................................................  

 

 

141,278

 

 

125,829

 

 

 

Stock-based compensation expense .............................................................................................................................................  

 

 

31,987

 

 

43,627

 

 

 

Provision for losses on trade and other accounts receivable ...............................................................................................................  

 

 

6,981

 

 

1,736

 

 

 

Provision for (benefit from) deferred income taxes ..........................................................................................................................  

 

 

8,600

 

 

(13,425)

 

 

 

Equity in earnings of affiliates .....................................................................................................................................................  

 

 

(12,244)

 

 

(13,160)

 

 

 

Distributions from equity affiliates ...............................................................................................................................................  

 

 

16,826

 

 

12,104

 

 

 

Changes in unrecognized tax benefits ...........................................................................................................................................  

 

 

(6,653)

 

 

4,799

 

 

 

Other ......................................................................................................................................................................................  

 

 

6,031

 

 

7,845

 

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

 

 

Accounts receivable ...............................................................................................................................................................  

 

 

(229,239)

 

 

(131,586)

 

 

 

 

Inventories ...........................................................................................................................................................................  

 

 

27,336

 

 

48,513

 

 

 

 

Other current assets ...............................................................................................................................................................  

 

 

(70,833)

 

 

(35,781)

 

 

 

 

Accounts payable and accrued expenses ...................................................................................................................................  

 

 

(63,352)

 

 

(75,355)

Net cash provided by operating activities ...............................................................................................................................................  

 

 

307,501

 

 

378,068

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of fixed assets ....................................................................................................................................................................  

 

 

(55,315)

 

 

(44,525)

 

Payments for equity investments and business

 

 

 

 

 

 

 

 

acquisitions, net of cash acquired .....................................................................................................................................................  

 

 

(258,786)

 

 

(126,543)

 

Other ..............................................................................................................................................................................................  

 

 

(6,694)

 

 

(8,766)

Net cash used in investing activities .......................................................................................................................................................  

 

 

(320,795)

 

 

(179,834)

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from (repayments of) bank borrowings .....................................................................................................................................  

 

 

193,550

 

 

(3,274)

 

Proceeds from issuance of long-term debt ..............................................................................................................................................  

 

 

200,440

 

 

260,000

 

Principal payments for long-term debt ...................................................................................................................................................  

 

 

(59,531)

 

 

(9,293)

 

Debt issuance costs ............................................................................................................................................................................  

 

 

(1,771)

 

 

(233)

 

Proceeds from issuance of stock upon exercise of stock options .................................................................................................................  

 

 

4,941

 

 

9,754

 

Payments for repurchases of common stock ..........................................................................................................................................  

 

 

(225,005)

 

 

(350,001)

 

Payments for taxes related to shares withheld for employee taxes...............................................................................................................  

 

 

(44,721)

 

 

(27,115)

 

Excess tax benefits related to stock-based compensation..........................................................................................................................  

 

 

-

 

 

(463)

 

Distributions to noncontrolling shareholders ...........................................................................................................................................  

 

 

(23,921)

 

 

(26,366)

 

Acquisitions of noncontrolling interests in subsidiaries ..............................................................................................................................  

 

 

(27,914)

 

 

(51,265)

Net cash provided by (used in) financing activities ...................................................................................................................................  

 

 

16,068

 

 

(198,256)

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents ..................................................................................................................  

 

 

14,724

 

 

4,128

Net change in cash and cash equivalents ................................................................................................................................................  

 

 

17,498

 

 

4,106

Cash and cash equivalents, beginning of period .......................................................................................................................................  

 

 

62,381

 

 

72,086

Cash and cash equivalents, end of period ...............................................................................................................................................  

 

$

79,879

 

$

76,192

See accompanying notes.

7

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited) 

Note 1 – Basis of Presentation

Our condensed consolidated financial statements include ourthe accounts as well as thoseof Henry
Schein, Inc. and all of our wholly-owned
controlled subsidiaries (“we”, “us” or “our”).
All intercompany accounts and majority-owned subsidiaries.  transactions are eliminated
in
consolidation.
Investments in unconsolidated affiliates in which we have the ability to
influence the operating or
financial decisions are accounted for under the equity method.
Certain prior period amounts have been reclassified
to conform to the current
period presentation.

These reclassifications, individually and in the aggregate, did
not
have a material impact on our condensed consolidated financial condition,
results of operations or cash flows.
Our accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with
accounting principles generally accepted in the United States (“
(“U.S. GAAP”) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the
information and footnote disclosures required by U.S. GAAP for complete
financial statements.

The unaudited interim condensed consolidated financial statements should be
read in conjunction with the audited
consolidated financial statements and notes to the consolidated financial
statements contained in our Annual Report
on Form 10-K for the year ended December 31, 2022 and with the information
contained in our other publicly-
available filings with the Securities and Exchange Commission.
The condensed consolidated financial statements
reflect all adjustments considered necessary for a fair presentation of
the consolidated results of operations and
financial position for the interim periods presented.
All such adjustments are of a normal recurring nature.  These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

The preparation of financial statements in conformity with U.S. GAAPaccounting principles
generally accepted in the United
States requires us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The results of
operations for the ninethree months ended September 30, 2017April 1, 2023 are not necessarily
indicative of the results to be expected for
any other interim period or for the year ending December 30, 2017.

On August 16, 2017, 2023.

We consolidate the results of operations and financial position of a trade accounts receivable securitization which
we announcedconsider a Variable Interest Entity (“VIE”) because we are the primary beneficiary, and we have the power to
direct activities that most significantly affect the economic performance and have
the obligation to absorb the
majority of the losses or benefits.
For this VIE, the trade accounts receivable transferred to the VIE
are pledged as
collateral to the related debt.
The creditors have recourse to us for losses on these trade accounts receivable.
At
April 1, 2023 and December 31, 2022, certain trade accounts receivable that
can only be used to settle obligations
of this VIE were $
555
million and $
327
million, respectively, and the liabilities of this VIE where the creditors
have recourse to us were $
420
million and $
255
million, respectively.
Our condensed consolidated financial statements reflect estimates and
assumptions made by us that affect, among
other things, our Boardgoodwill, long-lived asset and definite-lived intangible
asset valuation; inventory valuation; equity
investment valuation; assessment of Directors approvedthe annual effective tax rate; valuation of
deferred income taxes and income
tax contingencies; the allowance for doubtful accounts; hedging activity;
supplier rebates; measurement of
compensation cost for certain share-based performance awards and cash bonus
plans; and pension plan
assumptions.
There is an ongoing risk that the consequences of the COVID-19
pandemic may again have a 2-for-1 split
material adverse effect on our business, results of operations and cash flows and may
result in a material adverse
effect on our financial condition and liquidity.
However, the extent of the potential impact cannot be reasonably
estimated at this time
.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
9
Note 2 – Critical Accounting Policies, Accounting Pronouncements Adopted
and Recently Issued Accounting
Standards
Critical Accounting Policies
There have been no material changes in our critical accounting policies
during the three months ended April 1,
2023, as compared to the critical accounting policies described in Item
7 of our common stock. Each Henry Schein, Inc. stockholderAnnual Report on Form 10-K for
the year ended December 31, 2022.
Recently Issued Accounting Standards
In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2022-04, “Liabilities – Supplier Finance Programs (Subtopic
405-50): Disclosure of recordSupplier Finance
Program Obligations,” which will increase transparency of supplier finance
programs by requiring entities that use
such programs in connection with the purchase of goods and services to disclose
certain qualitative and quantitative
information about such programs.
ASU 2022-04 is effective for fiscal years beginning after December 15, 2022,
including interim periods within those fiscal years, except for amended
roll forward information, which is effective
for fiscal years beginning after December 15, 2023.
We do not expect that the requirements of this guidance will
have a material impact on our condensed consolidated financial statements.
In December 2022, the FASB issued ASU No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the
Sunset Date of Topic 848,” which extends the period of application of temporary optional expedients from
December 21, 2022 to December 31, 2024.
We do not expect that the requirements of this guidance will have a
material impact on our condensed consolidated financial statements.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
10
Note 3 – Net Sales from Contracts with Customers
Net sales are recognized in accordance with policies disclosed in Item
8 of our Annual Report on Form 10-K for
the year ended December 31, 2022.
Disaggregation of Net Sales
The following table disaggregates our net sales by reportable segment and geographic
area:
Three Months Ended
April 1, 2023
North America
International
Global
Net sales:
Health care distribution
Dental
$
1,144
$
754
$
1,898
Medical
951
20
971
Total health care distribution
2,095
774
2,869
Technology
and value-added services
166
25
191
Total net sales
$
2,261
$
799
$
3,060
Three Months Ended
March 26, 2022
North America
International
Global
Net sales:
Health care distribution
Dental
$
1,105
$
723
$
1,828
Medical
1,150
22
1,172
Total health care distribution
2,255
745
3,000
Technology
and value-added services
156
23
179
Total net sales
$
2,411
$
768
$
3,179
Deferred Revenue
During the three months ended April 1, 2023, we recognized in net sales
$
35
million of the amounts that were
previously deferred at December 31, 2022.
At December 31, 2022, the closecurrent portion of business on Septembercontract liabilities
of $
86
million was reported in accrued expenses: other, and $
8
million related to non-current contract liabilities was
reported in other liabilities.
At April 1, 2017 received a dividend2023, the current and non-current portion of one additionalcontract liabilities were
$
85
million and $
9
million, respectively.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share for everyand per share held.  Trading began on a split-adjusted basis on September 15, 2017 and has been retroactively reflected for all periods presented in this Form 10-Q.

data)

(unaudited
)
11
Note 24
–
Segment Data

We conduct our business through
two
reportable segments: (i) health care distribution and (ii) technology and
value-added services.
These segments offer different products and services to the same customer base.

Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools, government
and other
institutions.
Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,
emergency
medical technicians, dialysis centers, home health, federal and state governments
and large enterprises, such as
group practices and integrated delivery networks, among other providers
across a wide range of specialties.
Our
dental and medical groups serve practitioners in
32
countries worldwide.
The health care distribution reportable segment aggregates our global dental animal health
and medical operating segments.
This
segment distributes consumable products, dental specialty products, small
equipment, laboratory products, large
equipment, equipment repair services, branded and generic pharmaceuticals,
vaccines, surgical products, diagnostic
tests, infection-control products, personal protective equipment (“PPE”)
and vitamins.
Our global technology and value-added services reportable segment provides
software, technology and other value-
added services to health care practitioners.
Our technology offerings include practice management software
systems for dental and medical practitioners.
Our value-added practice solutions include practice consultancy,
education, revenue cycle management and financial services on a non-recourse
basis, e-services, practice
technology, network and hardware services, as well as continuing education services for practitioners.
The following tables present information about our reportable and operating
segments:
Three Months Ended
April 1,
March 26,
2023
2022
Net Sales:
Health care distribution
(1)
Dental
$
1,898
$
1,828
Medical
971
1,172
Total health care distribution
2,869
3,000
Technology
and value-added services
(2)
191
179
Total
$
3,060
$
3,179
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic
products), diagnostic tests, infection-control products, PPE products and vitamins.  Our global dental group serves office-based dental practitioners, dental laboratories, schools and other institutions.  Our global animal health group serves animal health practices and clinics.  Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions.  Our global dental, animal health and medical groups serve practitioners in 33 countries worldwide.

Our global technology and value-added services group provides

(2)
Consists of practice management software technology and other value-added servicesproducts, which are distributed primarily to health care practitioners.  Our technology group offerings include providers,
practice consultancy, education, revenue cycle management software systems for dental and medical practitioners and animal health clinics.  Our value-added practice solutions include financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.

8

Three Months Ended
April 1,
March 26,
2023
2022
Operating Income:
Health care distribution
$
145
$
211
Technology
and value-added services
30
33
Total
$
175
$
244
 
 
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
12
Note 5
–
Business Acquisitions
In connection with our business acquisitions, the major classes of
assets and liabilities to which we generally
allocate acquisition consideration to, excluding goodwill, include
identifiable intangible assets (i.e., customer
relationships and lists, trademarks and trade names, product development
and non-compete agreements), inventory
and accounts receivable.
The estimated fair value of identifiable intangible assets
is based on critical judgments
and assumptions derived from analysis of market conditions, including
discount rates, projected revenue growth
rates (which are based on historical trends and assessment of financial projections),
estimated customer attrition and
projected cash flows.
These assumptions are forward-looking and could be affected by future economic
and market
conditions.
While we use our best estimates and assumptions to accurately value assets
acquired and liabilities assumed at the
acquisition date as well as contingent consideration, where applicable,
our estimates are inherently uncertain and
subject to refinement.
As a result, within 12 months following the date of acquisition,
or the measurement period,
we may record adjustments to the assets acquired and liabilities assumed
with the corresponding offset to goodwill
within our condensed consolidated balance sheets.
At the end of the measurement period or final determination of
the values of such assets acquired or liabilities assumed, whichever
comes first, any subsequent adjustments are
recognized in our condensed consolidated statements of operations.
The accounting for certain of our acquisitions during the year ended December
31, 2022 had not been completed in
several areas, including but not limited to pending assessments of intangible
assets, and contingent consideration
assets and liabilities.
For the three months ended April 1, 2023 and March 26, 2022,
there were no material
adjustments recorded in our condensed consolidated statements of income
relating to changes in estimated values of
assets acquired, liabilities assumed and contingent consideration
assets and liabilities.
2023 Acquisitions
During the three months ended April 1, 2023, we acquired the majority
of a company within the health care
distribution segment.
The impact of this acquisition was not considered material to
our condensed consolidated
financial statements.
The following table aggregates
the estimated fair value, as of the date of acquisition, of consideration
paid and net
assets acquired for the acquisition during the three months ended April
1, 2023.
2023
Acquisition consideration:
Cash
$
8
Deferred consideration
1
Noncontrolling interests
2
Total consideration
$
11
Intangible assets
$
2
Total identifiable
net assets
2
Goodwill
9
Total net assets acquired
$
11
The acquired goodwill is deductible for tax purposes.
During the three months ended April 1, 2023 the identifiable intangible
assets acquired consisted of customer
relationships and lists of $
1
million and trademarks and tradenames of $
1
million.
The estimated useful lives of
these intangible assets are
2 years
and
5 years
, respectively.

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

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

(unaudited
)

The following tables present information about our reportable

13
Acquisition Costs
During the three months ended April 1, 2023 and operating segments:

March 26, 2022 we

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 24,

 

September 30,

 

September 24,

 

 

 

 

 

2017

 

2016

 

2017

 

2016

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Health care distribution (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dental .....................................................................................................................................................................................  

 

$

1,478,730

 

$

1,330,525

 

$

4,372,055

 

$

4,005,468

 

 

Animal health ...........................................................................................................................................................................  

 

 

882,580

 

 

790,279

 

 

2,586,850

 

 

2,415,290

 

 

Medical ...................................................................................................................................................................................  

 

 

690,761

 

 

639,648

 

 

1,861,074

 

 

1,716,590

 

 

 

Total health care distribution ..................................................................................................................................................  

 

 

3,052,071

 

 

2,760,452

 

 

8,819,979

 

 

8,137,348

 

Technology and value-added services (2)...........................................................................................................................................  

 

 

109,012

 

 

104,696

 

 

323,510

 

 

313,386

 

 

Total .......................................................................................................................................................................................  

 

$

3,161,083

 

$

2,865,148

 

$

9,143,489

 

$

8,450,734

*CS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*CE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

  Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and

 

  generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

  Consists of practice management software and other value-added products, which are distributed primarily to health care providers,

 

  and financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other

 

  services.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 24,

 

September 30,

 

September 24,

 

 

 

 

 

2017

 

2016

 

2017

 

2016

Operating Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Health care distribution ..................................................................................................................................................................  

 

$

181,612

 

$

170,158

 

$

521,278

 

$

468,610

 

Technology and value-added services ...............................................................................................................................................  

 

 

31,936

 

 

30,563

 

 

96,900

 

 

88,982

 

 

Total .......................................................................................................................................................................................  

 

$

213,548

 

$

200,721

 

$

618,178

 

$

557,592

incurred $

9

7
million and $
1
million,
respectively, in acquisition costs.

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

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

(unaudited
)

14
Note 36 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The fair value hierarchy distinguishes between
(1) market participant assumptions developed based on market data obtained
from independent sources (observable
inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the
highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest priority
to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described as follows:
•
Level 1— Unadjusted quoted prices in active markets for identical assets
or liabilities that are accessible at the
measurement date.
•
Level 2— Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability,
either directly or indirectly.
Level 2 inputs include: quoted prices for similar assets or liabilities
in active markets;
quoted prices for identical or similar assets or liabilities in markets that are
not active; inputs other than quoted
prices that are observable for the asset or liability; and inputs that are
derived principally from or corroborated by
observable market data by correlation or other means.
•
Level 3— Inputs that are unobservable for the asset or liability.
The following section describes the fair values of our financial instruments
and the methodologies that we used to
measure their fair values.
Investments and notes receivable
There are no quoted market prices available for investments in unconsolidated
affiliates and notes receivable.
Certain of our notes receivable contain variable interest rates.
We believe the carrying amounts are a reasonable
estimate of fair value based on the interest rates in the applicable markets.
Debt

The fair value of our debt (including bank credit lines, current maturities
of long-term debt and long-term debt) is
classified as Level 3 within the fair value hierarchy, and as of April 1, 2023 and December 31, 2022 was estimated
at $
1,312
million and $
1,149
million, respectively.
Factors that we considered when estimating the fair value
of
our debt include market conditions, such as interest rates and credit spreads.
Derivative contracts
Derivative contracts are valued using quoted market prices and
significant other observable inputs.
We use
derivative instruments to minimize our exposure to fluctuations in foreign
currency exchange rates.
Our derivative
instruments primarily include foreign currency forward agreements related
to certain intercompany loans, certain
forecasted inventory purchase commitments with foreign suppliers,
foreign currency forward contracts to hedge a
portion of our euro-denominated foreign operations which are designated
as net investment hedges and a total
return swap for the purpose of economically hedging our unfunded non-qualified
supplemental executive retirement
plan and our deferred compensation plan.
The fair values for the majority of our foreign currency derivative contracts
are obtained by comparing our contract
rate to a published forward price of the underlying market rates, which
is based on market rates for comparable
transactions and are classified within Level 2 of the fair value hierarchy.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
15
Total
Return Swaps
The fair value for the total return swap is measured by valuing
the underlying exchange traded funds of the swap
using market-on-close pricing by industry providers as of the valuation
date and are classified within Level 2 of the
fair value hierarchy.
Redeemable noncontrolling interests
The values for redeemable noncontrolling interests are classified within Level
3 of the fair value hierarchy and are
based on recent transactions and/or implied multiples of earnings.
See
for additional information.
Assets measured on a non-recurring basis at fair value include Goodwill
and Other intangibles, net, and are
classified as Level 3 within the fair value hierarchy.
The following table presents our assets and liabilities that are measured and
recognized at fair value on a recurring
basis classified under the appropriate level of the fair value hierarchy as of
April 1, 2023 and December 31, 2022:
April 1, 2023
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
19
$
-
$
19
Derivative contracts undesignated
-
3
-
3
Total return
swaps
-
1
-
1
Total assets
$
-
$
23
$
-
$
23
Liabilities:
Derivative contracts designated as hedges
$
-
$
1
$
-
$
1
Derivative contracts undesignated
-
2
-
2
Total liabilities
$
-
$
3
$
-
$
3
Redeemable noncontrolling interests
$
-
$
-
$
570
$
570
December 31, 2022
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
23
$
-
$
23
Derivative contracts undesignated
-
4
-
4
Total assets
$
-
$
27
$
-
$
27
Liabilities:
Derivative contracts designated as hedges
$
-
$
1
$
-
$
1
Derivative contracts undesignated
-
3
-
3
Total return
swaps
-
3
-
3
Total liabilities
$
-
$
7
$
-
$
7
Redeemable noncontrolling interests
$
-
$
-
$
576
$
576
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
16
Note 7 – Debt
Bank Credit Lines

On

Bank credit lines consisted of the following:
April 18, 2017,1,
December 31,
2023
2022
Revolving credit agreement
$
-
$
-
Other short-term bank credit lines
236
103
Total
$
236
$
103
Revolving Credit Agreement
On
August 20, 2021
, we entered into a new $750 million
1.0
billion revolving credit agreement (the “Credit Agreement”).
This
facility, which matures in April 2022, on
August 20, 2026
replaced our $500
750
million revolving credit facility which was scheduled
to mature in September 2019.  April 2022.
The interest rate is based on the USD LIBOR plus a spread based on our
leverage ratio at
the end of each financial reporting quarter.
Most LIBOR rates have been discontinued after December 31,
2021,
while the remaining LIBOR rates will be discontinued immediately
after June 30, 2023.
We do not expect the
discontinuation of LIBOR as a reference rate in our debt agreements
to have a material adverse effect on our
financial position or to materially affect our interest expense.
The Credit Agreement provides,requires, among other things,
that we are required to maintain certain maximum leverage ratios, andratios.
Additionally, the Credit Agreement contains customary
representations, warranties and affirmative covenants.  The Credit Agreement also containscovenants as well as customary negative
covenants, subject to
negotiated exceptions, on liens, indebtedness, significant corporate changes (including
(including mergers), dispositions and
certain restrictive agreements.
As of September 30, 2017April 1, 2023 and December 31, 2016, the 2022, we had
no
borrowings onunder this
revolving credit facility, and the prior credit facilitythere were $175.0
9
million and $65.0 million, respectively.  As of September 30, 2017 and December 31, 2016, there were $11.7 million and $13.0
9
million of letters of credit, respectively, provided to third
parties under the credit facility and the prior credit facility.

Other Short-Term Bank Credit
Lines
As of September 30, 2017April 1, 2023 and December 31, 2016,2022, we had various other short-term
bank credit lines available, with a
maximum borrowing capacity of which $456.9
404
million and $372.5
402
million, respectively.
As of April 1, 2023 and December
31, 2022, $
236
million and $
103
million, respectively, were outstanding.
At September 30, 2017April 1, 2023 and December 31, 2016, 2022,
borrowings under all of ourthese credit lines had a weighted average interest
rate of2.09
7.55
% and1.61
10.11
%, respectively.
Long-term debt
Long-term debt consisted of the following:
April 1,
December 31,
2023
2022
Private placement facilities
$
699
$
699
U.S. trade accounts receivable securitization
360
330
Various
collateralized and uncollateralized loans payable with interest,
in varying installments through 2023 at interest rates
ranging from
0.00
% to
3.65
% at April 1, 2023 and
ranging from
0.00
% to
3.50
% at December 31, 2022
8
7
Finance lease obligations
9
10
Total
1,076
1,046
Less current maturities
(55)
(6)
Total long-term debt
$
1,021
$
1,040
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
17
Private Placement Facilities

On September 15, 2017, we increased our available

Our private placement facilities with three include
four
insurance companies, tohave a total facility amount of $1
1.5
billion, and extended the expiration date to September 15, 2020.  These facilities
are available on an uncommitted basis at fixed rate economic
terms to be agreed upon at the time of issuance, from
time to time throughSeptember 15, 2020
October 20, 2026
.
The facilities allow us to issue senior promissory notes to the
lenders at a
fixed rate based on an agreed upon spread over applicable treasury notes
at the time of issuance.
The term of each
possible issuance will be selected by us and can range from
five
to
15 years (with
(with an average life no longer than
12 years)
years
).
The proceeds of any issuances under the facilities will be used
for general corporate purposes, including
working capital and capital expenditures, to refinance existing indebtedness,
and/or to fund potential acquisitions.
The agreements provide, among other things, that we maintain
certain maximum leverage ratios, and contain
restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal
of assets and certain changes in
ownership.
These facilities contain make-whole provisions in the event that we
pay off the facilities prior to the
applicable due dates.

10

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited) 

The components of our private placement facility borrowings, which

have a weighted average interest rate of
2.99
%, as of September 30, 2017April 1, 2023 are presented in the following table (in thousands):

table:

 

 

Amount of

 

 

 

 

 

 

 

Borrowing

 

Borrowing

 

 

Date of Borrowing

 

Outstanding

 

Rate

 

Due Date

September 2, 2010

 

$

100,000

 

3.79

%

 

September 2, 2020

January 20, 2012

 

 

50,000

 

3.45

 

 

January 20, 2024

January 20, 2012 (1)

 

 

35,714

 

3.09

 

 

January 20, 2022

December 24, 2012

 

 

50,000

 

3.00

 

 

December 24, 2024

June 2, 2014

 

 

100,000

 

3.19

 

 

June 2, 2021

June 16, 2017

 

 

100,000

 

3.42

 

 

June 16, 2027

September 15, 2017

 

 

100,000

 

3.52

 

 

September 15, 2029

Less: Deferred debt issuance costs

 

 

(250)

 

 

 

 

 

 

 

$

535,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016.

Amount of

Borrowing
Borrowing
Date of Borrowing
Outstanding
Rate
Due Date
January 20, 2012
$
50
3.45
%
January 20, 2024
December 24, 2012
50
3.00
December 24, 2024
June 16, 2017
100
3.42
June 16, 2027
September 15, 2017
100
3.52
September 15, 2029
January 2, 2018
100
3.32
January 2, 2028
September 2, 2020
100
2.35
September 2, 2030
June 2, 2021
100
2.48
June 2, 2031
June 2, 2021
100
2.58
June 2, 2033
Less: Deferred debt issuance costs
(1)
Total
$
699
U.S. Trade Accounts Receivable Securitization

We have a facility agreement with a bank, as agent, based on the securitization of our U.S. trade accounts receivable that is structured as
an asset-backed securitization program with pricing committed for up
to
three years.  On June 1, 2016, we extended the expiration date of thisyears
.
This facility agreement to April 29, 2019 and increased the has a
purchase limit underof $
450
million with
two
banks as agents, expires on
December 15, 2025
.
As of April 1, 2023 and December 31, 2022, the facility from $300 million to $350 million.  On July 6, 2017, we extended the expiration date of this facility agreement to April 29, 2020.  The borrowings outstanding
under this securitization facility were $350.0
360
million and $350.0
330
million, asrespectively.
At April 1, 2023, the interest rate on borrowings under this
facility was
based on the asset-backed commercial paper rate of September 30, 2017 and
4.99
% plus
0.75
%, for a combined rate of
5.74
%.
At
December 31, 2016, respectively.  At September 30, 2017,2022, the interest rate on borrowings under this facility was
based on the asset-backed commercial
paper rate of134 basis points
4.58
% plus75 basis points,
0.75
%, for a combined rate of2.09
5.33
%.  At December 31, 2016, the interest rate on borrowings
If our accounts receivable collection pattern changes due to customers
either paying late or not making payments,
our ability to borrow under this facility was based on the asset-backed commercial paper rate of 101 basis points plus 75 basis points, for a combined rate of 1.76%.

may be reduced.

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

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

11

depending upon program utilization.

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

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

(unaudited
)

Long-term debt

Long-term debt consisted

18
Note 8 – Income Taxes
For the three months ended April 1, 2023 our effective tax rate was
23.8
% compared to
24.0
% for the prior year
period.
The difference between our effective tax rate and the federal statutory tax rate primarily
relates to state and
foreign income taxes and interest expense as well as stock-based compensation.
The total amount of unrecognized tax benefits, which are included in
“other liabilities” within our condensed
consolidated balance sheets, as of April 1, 2023 and December 31, 2022
was $
95
million and $
94
million,
respectively, of which $
80
million and $
80
million, respectively, would affect the following:

effective tax rate if recognized.

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

Private placement facilities ..........................................................................................................................................................  

 

$

535,464

 

$

342,857

U.S. trade accounts receivable securitization ...................................................................................................................................  

 

 

350,000

 

 

350,000

Note payable to bank at a weighted-average interest rate of

 

 

 

 

 

 

 

21.37% at December 31, 2016...................................................................................................................................................  

 

-

 

 

47,957

Various collateralized and uncollateralized loans payable with

 

 

 

 

 

 

 

interest, in varying installments through 2022 at interest rates

 

 

 

 

 

 

 

ranging from 2.56% to 12.90% at September 30, 2017 and

 

 

 

 

 

 

ranging from 2.56% to 12.90% at December 31, 2016....................................................................................................................  

 

33,994

 

 

35,150

Capital lease obligations payable through 2029 with interest rates

 

 

 

 

 

 

 

ranging from 0.84% to 19.79% at September 30, 2017 and

 

 

 

 

 

 

ranging from 1.38% to 19.15% at December 31, 2016 ...................................................................................................................  

 

5,381

 

 

5,416

Total .......................................................................................................................................................................................  

 

 

924,839

 

 

781,380

Less current maturities ................................................................................................................................................................  

 

 

(17,247)

 

 

(65,923)

 

Total long-term debt .............................................................................................................................................................  

 

$

907,592

 

$

715,457

 

 

 

 

 

 

 

 

Note 4 – Redeemable Noncontrolling Interests

Some minority shareholders in certain

It is possible that the amount of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value.  Accounting Standards Codification (“ASC”) Topic 480-10 is applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. The components of the unrecognized tax benefits will
change in the Redeemable noncontrolling interestsnext 12 months, which may result in a
material impact on our condensed consolidated statements of income.
All tax returns audited by the IRS are officially closed through 2018.
The tax years subject to examination by the
IRS include years 2019 and forward.
In addition, limited positions reported in the 2017 tax year are subject
to IRS
examination.
During the quarter ended December 25, 2021, we were notified by
the IRS that tax year 2019 was
selected for examination.
The total amounts of interest and penalties are classified as a component
of the provision for income taxes.
The
amount of tax interest expense was $
1
million for the ninethree months ended September 30, 2017April 1, 2023 and $
1
million for the yearthree
months ended March 26, 2022.
The total amount of accrued interest is included in “other
liabilities,” and was $
13
million as of April 1, 2023 and $
12
million as of December 31, 2016 are2022.
The amount of penalties accrued for during
the periods presented in the following table:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

Balance, beginning of period ...................................................................................................................................................  

 

$

607,636

 

$

542,194

Decrease in redeemable noncontrolling interests due to

 

 

 

 

 

 

 

redemptions .....................................................................................................................................................................  

 

 

(40,638)

 

 

(72,729)

Increase in redeemable noncontrolling interests due to business

 

 

 

 

 

 

 

acquisitions.......................................................................................................................................................................  

 

 

25,209

 

 

58,172

Net income attributable to redeemable noncontrolling interests ......................................................................................................  

 

 

35,398

 

 

48,760

Dividends declared ................................................................................................................................................................  

 

 

(22,566)

 

 

(32,973)

Effect of foreign currency translation gain (loss) attributable to

 

 

 

 

 

 

 

redeemable noncontrolling interests ......................................................................................................................................  

 

 

7,961

 

 

(2,652)

Change in fair value of redeemable securities .............................................................................................................................  

 

 

124,747

 

 

66,864

Balance, end of period ...........................................................................................................................................................  

 

$

737,747

 

$

607,636

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

our condensed consolidated financial

12

statements
.
 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

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

(unaudited
)

19

Note 59 – Comprehensive Income

ComprehensivePlan of Restructuring

On August 1, 2022, we committed to a restructuring plan focused on
funding the priorities of the strategic plan and
streamlining operations and other initiatives to increase efficiency.
We expect this initiative to extend through
2023.
We are currently unable in good faith to make a determination of an estimate of the amount or range of
amounts expected to be incurred in connection with these activities, both with
respect to each major type of cost
associated therewith and with respect to the total cost, or an estimate of
the amount or range of amounts that will
result in future cash expenditures.
During the three months ended April 1, 2023, we recorded restructuring costs of
$
30
million primarily related to
severance and employee-related costs, accelerated amortization of right-of-use
lease assets and fixed assets, and
other lease exit costs.
This amount also includes $
1
million related to the disposal of an unprofitable U.S. business,
initiated during 2022 and completed during the three months ended April
1, 2023.
Restructuring costs recorded for the three months ended April 1, 2023 consisted
of the following (there were
no
restructuring costs for the three months ended March 26, 2022):
Three Months Ended April 1, 2023
Health-Care
Distribution
Technology
and
Value-Added
Services
Total
Severance and employee-related costs
$
17
$
3
$
20
Accelerated depreciation and amortization
7
-
7
Exit and other related costs
1
1
2
Loss on disposal of a business
1
-
1
Total restructuring
costs
$
26
$
4
$
30
The following table summarizes,
by reportable segment, the activity related to the liabilities associated
with our
restructuring initiatives
for the period ended April 1, 2023.
The remaining accrued balance of restructuring costs as
of April 1, 2023 is included in accrued expenses: other within our condensed
consolidated balance sheet.
Technology
and
Health Care
Value-Added
Distribution
Services
Total
Balance, December 31, 2022
$
21
$
3
$
24
Restructuring costs
26
4
30
Non-cash asset impairment and accelerated
depreciation and amortization of right-of-use lease
assets and other long-lived assets
(7)
-
(7)
Cash payments and other adjustments
(14)
(3)
(17)
Balance, April 1, 2023
$
26
$
4
$
30
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
20
Note 10 – Legal Proceedings
Henry Schein, Inc. has been named as a defendant in multiple opioid related
lawsuits (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 and
their own market share and that the entities
in the supply chain (including Henry Schein, Inc. and its affiliated companies) reaped
financial rewards by refusing
or otherwise failing to monitor appropriately and restrict the improper
distribution of those drugs.
These actions
consist of some that have been consolidated within the MultiDistrict Litigation
(“MDL”) proceeding In Re National
Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804)
and are currently stayed, and others which
remain pending in state courts and are proceeding independently and outside
of the MDL.
At this time, the
following cases are set for trial: the action filed by DCH Health Care Authority, et al. in Alabama state court, which
has been designated a bellwether with
eight
of
thirty-eight
plaintiffs set for a jury trial on July 24, 2023; and the
action filed by Florida Health Sciences Center, Inc. (and
38
other hospitals located throughout the State of Florida)
in Florida state court, which is currently scheduled for a jury trial
in May 2025.
Of Henry Schein’s 2022 net sales
of approximately $
12.6
billion from continuing operations, sales of opioids represented
less than
two-tenths
of 1
percent.
Opioids represent a negligible part of our business.
We intend to defend ourselves vigorously against
these actions.
In August 2022, Henry Schein received a Grand Jury Subpoena from the United
States Attorney’s Office for the
Western District of Virginia,
seeking documents in connection with an investigation of possible
violations of the
Federal Food, Drug & Cosmetic Act by Butler Animal Health Supply, LLC (“Butler”), a former subsidiary of
Henry Schein.
The investigation relates to the sale of veterinary prescription drugs
to certain customers.
In
October 2022, Henry Schein received a second Grand Jury Subpoena
from the United States Attorney’s Office for
the Western District of Virginia.
The October Subpoena seeks documents relating to payments Henry
Schein
received from Butler or Covetrus, Inc. (“Covetrus”).
Butler was spun off into a separate company and became a
subsidiary of Covetrus in 2019 and is no longer owned by Henry Schein.
We are cooperating with the
investigation.
From time to time, we may become a party to other legal proceedings,
including, without limitation, product
liability claims, employment matters, commercial disputes, governmental
inquiries and investigations (which may
in some cases involve our entering into settlement arrangements or consent
decrees), and other matters arising out
of the ordinary course of our business.
While the results of any legal proceeding cannot be predicted with certainty,
in our opinion none of these other pending matters are currently
anticipated to have a material adverse effect on our
consolidated financial position, liquidity or results of operations.
As of April 1, 2023, we had accrued our best estimate of potential losses
relating to claims that were probable to
result in liability and for which we were able to reasonably estimate a
loss.
This accrued amount, as well as related
expenses, was not material to our financial position, results of operations
or cash flows.
Our method for
determining estimated losses considers currently available
facts, presently enacted laws and regulations and other
factors, including probable recoveries from third parties.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
21
Note 11 – Stock-Based Compensation
Stock-based awards are provided to certain employees under the terms of
our 2020 Stock Incentive Plan and to
non-employee directors under the terms of our 2015 Non-Employee Director
Stock Incentive Plan (together, the
“Plans”).
The Plans are administered by the Compensation Committee of the Board
of Directors (the
“Compensation Committee”).
Historically, equity-based awards to our employees have been granted solely in the
form of time-based and performance-based restricted stock units (“RSUs”)
with the exception of our 2021 plan year
in which non-qualified stock options were issued in place of performance-based
RSUs.
In 2022, we granted time-
based and performance-based RSUs, as well as non-qualified stock
options.
For our 2023 plan year, we returned to
granting our employees equity-based awards solely in the form of time-based
and performance-based RSUs.
Our
non-employee directors receive equity-based awards solely in the form
of time-based RSUs.
RSUs are stock-based awards granted to recipients with specified vesting provisions.
In the case of RSUs, common
stock is delivered on or following satisfaction of vesting conditions.
We issue RSUs to employees that primarily
vest (i) solely based on the recipient’s continued service over time, primarily with
four
-year cliff vesting and/or (ii)
based on achieving specified performance measurements and the recipient’s continued service over time, primarily
with
three
-year cliff vesting.
RSUs granted to our non-employee directors primarily are granted
with
12
-month
cliff vesting.
For these RSUs, we recognize the cost as compensation expense on
a straight-line basis.
With respect to time-based RSUs, we estimate the fair value based on our closing stock price on the date of
grant.
With respect to performance-based RSUs, the number of shares that ultimately vest and are
received by the
recipient is based upon our performance as measured against specified
targets over a specified period, as
determined by the Compensation Committee.
Although there is no guarantee that performance targets will be
achieved, we estimate the fair value of performance-based RSUs based on
our closing stock price at time of grant.
Each of the Plans provide for certain adjustments to the performance
measurement in connection with awards under
the Plans.
With respect to the performance-based RSUs granted under our 2020 Stock Incentive Plan, such
performance measurement adjustments relate to significant events, including,
without limitation, acquisitions,
divestitures, new business ventures, certain capital transactions (including share
repurchases), differences in
budgeted average outstanding shares (other than those resulting from capital
transactions referred to above),
restructuring costs, if any, certain litigation settlements or payments, if any, changes in accounting principles or in
applicable laws or regulations, changes in income includestax rates in certain gains
markets, foreign exchange fluctuations, the
financial impact either positive or negative, of the difference in projected earnings
generated by COVID-19 test kits
(solely with respect to performance-based RSUs granted in the 2022 and losses
2023 plan years) and impairment charges
(solely with respect to performance-based RSUs granted in the 2023 plan
year), and unforeseen events or
circumstances affecting us.
Over the performance period, the number of shares of common stock that will
ultimately vest and be issued and the
related compensation expense is adjusted upward or downward based upon our
estimation of achieving such
performance targets.
The ultimate number of shares delivered to recipients and
the related compensation cost
recognized as an expense will be based on our actual performance metrics
as defined under U.S. GAAP,the Plans.
Stock options are excluded awards that allow the recipient to purchase shares of our
common stock at a fixed price following
vesting of the stock options.
Stock options were granted at an exercise price equal to our closing stock
price on the
date of grant.
Stock options issued in 2021 and 2022 vest
one-third
per year based on the recipient’s continued
service, subject to the terms and conditions of the 2020 Stock Incentive Plan,
are fully vested
three years
from netthe
grant date and have a contractual term of
ten years
from the grant date, subject to earlier termination of the term
upon certain events.
Compensation expense for these stock options is recognized
using a graded vesting method.
We estimated the fair value of stock options using the Black-Scholes valuation model.
During the three months
ended April 1, 2023 we did
no
t grant any stock options.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
22
Our accompanying condensed consolidated statements of income reflect
pre-tax share-based compensation expense
of $
10
million ($
7
million after-tax) and $
12
million ($
9
million after-tax) for the three months ended April 1, 2023
and March 26, 2022, respectively.
Total unrecognized compensation cost related to unvested awards as such amounts are recorded directly of April 1, 2023 was $
119
million, which is
expected to be recognized over a weighted average period of approximately
2.7
years.
Our accompanying condensed consolidated statements of cash flows present
our stock-based compensation expense
as an adjustment to stockholders’ equity. Our comprehensive income is primarily comprised ofreconcile net income foreign currency translation gain (loss), unrealized gain (loss)to net cash provided by operating activities
for all periods presented.
In
the accompanying consolidated statements of cash flows, there were
no benefits associated with tax deductions in
excess of recognized compensation as a cash inflow from financing
activities for the three months ended April 1,
2023 and March 26, 2022, respectively.
We have not declared cash dividends on foreign currency hedging activities, unrealized investment lossour stock in the past and pension adjustment gain (loss).

we do not anticipate declaring cash dividends in

the foreseeable future.
The following table summarizes expected stock price volatility is based on implied volatilities
from traded options on
our Accumulatedstock, historical volatility of our stock, and other comprehensive loss, netfactors.
The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of applicable taxes grant in conjunction with considering the expected life of options.
The
six
-year expected life of the options was determined using the simplified
method for estimating the expected term
as of:

permitted under SAB Topic 14.

 

 

 

 

September 30,

 

December 31,

 

 

 

 

2017

 

2016

Attributable to Redeemable noncontrolling interests:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment ..........................................................................................................  

 

$

(5,064)

 

$

(13,025)

 

 

 

 

 

 

 

 

 

Attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment ..........................................................................................................  

 

$

184

 

$

(113)

 

 

 

 

 

 

 

 

 

Attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

Foreign currency translation loss .........................................................................................................................  

 

$

(131,304)

 

$

(296,212)

 

Unrealized loss from foreign currency hedging activities ..........................................................................................  

 

 

(1,327)

 

 

(53)

 

Unrealized investment loss .................................................................................................................................  

 

 

(2)

 

 

-

 

Pension adjustment loss ....................................................................................................................................  

 

 

(21,839)

 

 

(20,776)

 

 

Accumulated other comprehensive loss ...........................................................................................................  

 

$

(154,472)

 

$

(317,041)

 

 

 

 

 

 

 

 

 

Total Accumulated other comprehensive loss ............................................................................................................  

 

$

(159,352)

 

$

(330,179)

Estimates of fair value are not intended to predict actual future events or

the
value ultimately realized by recipients of stock options, and subsequent
events are not indicative of the
reasonableness of the original estimates of fair value made by us.
The following table summarizes the componentsstock option activity during the three
months ended April 1, 2023:
Stock Options
Weighted Average
Weighted Average
Aggregate
Exercise
Remaining Contractual
Intrinsic
Shares
Price
Life (in years)
Value
Outstanding at beginning of comprehensive income, netperiod
1,117,574
$
71.38
Granted
-
-
Exercised
(10,897)
62.71
Forfeited
(5,911)
77.31
Outstanding at end of applicable taxes as follows:

period

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 24,

 

September 30,

 

September 24,

 

 

2017

 

2016

 

2017

 

2016

Net income ........................................................................................................................................................................  

 

$

150,948

 

$

145,291

 

$

450,783

 

$

402,922

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)....................................................................................................................................  

 

 

58,916

 

 

(6,463)

 

 

173,166

 

 

(2,041)

Tax effect .........................................................................................................................................................................  

 

 

-

 

 

-

 

 

-

 

 

-

Foreign currency translation gain (loss) ...................................................................................................................................  

 

 

58,916

 

 

(6,463)

 

 

173,166

 

 

(2,041)

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) from foreign currency hedging

 

 

 

 

 

 

 

 

 

 

 

 

   activities .........................................................................................................................................................................  

 

 

26

 

 

(803)

 

 

(1,278)

 

 

1,316

Tax effect .........................................................................................................................................................................  

 

 

(60)

 

 

200

 

 

4

 

 

(290)

Unrealized gain (loss) from foreign currency hedging

 

 

 

 

 

 

 

 

 

 

 

 

   activities .........................................................................................................................................................................  

 

 

(34)

 

 

(603)

 

 

(1,274)

 

 

1,026

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment loss....................................................................................................................................................  

 

 

(3)

 

 

-

 

 

(3)

 

 

-

Tax effect .........................................................................................................................................................................  

 

 

1

 

 

-

 

 

1

 

 

-

Unrealized investment loss....................................................................................................................................................  

 

 

(2)

 

 

-

 

 

(2)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension adjustment gain (loss)...............................................................................................................................................  

 

 

(529)

 

 

280

 

 

(1,571)

 

 

(13)

Tax effect .........................................................................................................................................................................  

 

 

176

 

 

(71)

 

 

508

 

 

23

Pension adjustment gain (loss)...............................................................................................................................................  

 

 

(353)

 

 

209

 

 

(1,063)

 

 

10

Comprehensive income .......................................................................................................................................................  

 

$

209,475

 

$

138,434

 

$

621,610

 

$

401,917

1,100,766

$
71.44
8.3
$
13

Options exercisable at end of period
572,132
$
68.11
Weighted Average
Weighted Average
Aggregate
Number of
Exercise
Remaining Contractual
Intrinsic
Options
Price
Life (in years)
Value
Vested
or expected to vest
520,781
$
75.22
8.5
$
4
The following tables summarize the activity of our unvested RSUs for
the three months ended April 1, 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
395,750
77.75
465,260
79.66
Vested
(387,302)
61.13
(627,596)
60.66
Forfeited
(34,843)
68.16
(39,463)
74.48
Outstanding at end of period
1,729,649
$
70.38
$
81.54
319,117
$
68.96
$
81.54
 
 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

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

(unaudited) 

During the three months ended September 30, 2017 and September 24, 2016, we recognized, as a component of our comprehensive income, a foreign currency translation gain (loss) of $58.9 million and $(6.5) million, respectively, due to changes in foreign exchange rates from the beginning of the period to the end of the period.  During the nine months ended September 30, 2017 and September 24, 2016, we recognized, as a component of our comprehensive income, a foreign currency translation gain (loss) of $173.2 million and $(2.0) million, respectively, due to changes in foreign exchange rates from the beginning of the period to the end of the period.  Our financial statements are denominated in the U.S. Dollar currency.  Fluctuations in the value of foreign currencies as compared to the U.S. Dollar may have a significant impact on our comprehensive income (loss).  The foreign currency translation gain (loss) during the three and nine months ended September 30, 2017 and September 24, 2016 was impacted by changes in foreign currency exchange rates as follows:

 

 

 

Foreign Currency

 

 

 

 

 

Foreign Currency

 

 

 

 

 

 

 

Translation

 

 

 

 

 

Translation

 

 

 

 

 

 

 

Gain (Loss)

 

 

 

 

 

Gain (Loss)

 

 

 

 

 

 

 

for the Three

 

 

 

 

 

for the Three

 

 

 

 

 

 

 

Months Ended

 

FX Rate into USD

 

Months Ended

 

FX Rate into USD

 

 

 

September 30,

 

September 30,

 

July 1,

 

September 24,

 

September 24,

 

June 25,

Currency

 

2017

 

2017

 

2017

 

2016

 

2016

 

2016

Euro ..........................................................................................................................................................................................  

 

$

30,373

 

1.18

 

1.14

 

$

3,755

 

1.12

 

1.12

British Pound ...............................................................................................................................................................................  

 

 

9,168

 

1.34

 

1.30

 

 

(17,161)

 

1.30

 

1.38

Australian Dollar ..........................................................................................................................................................................  

 

 

3,767

 

0.78

 

0.77

 

 

3,826

 

0.76

 

0.75

Canadian Dollar ..........................................................................................................................................................................  

 

 

5,640

 

0.80

 

0.77

 

 

(1,565)

 

0.76

 

0.77

Polish Zloty .................................................................................................................................................................................  

 

 

940

 

0.27

 

0.27

 

 

2,044

 

0.26

 

0.25

Swiss Franc .................................................................................................................................................................................  

 

 

407

 

1.03

 

1.04

 

 

189

 

1.03

 

1.03

Brazilian Real..............................................................................................................................................................................  

 

 

6,400

 

0.32

 

0.30

 

 

826

 

0.31

 

0.30

All other currencies .......................................................................................................................................................................  

 

 

2,221

 

 

 

 

 

 

1,623

 

 

 

 

 

Total .......................................................................................................................................................................................  

 

$

58,916

 

 

 

 

 

$

(6,463)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

 

 

 

 

Foreign Currency

 

 

 

 

 

 

 

Translation

 

 

 

 

 

Translation

 

 

 

 

 

 

 

Gain (Loss)

 

 

 

 

 

Gain (Loss)

 

 

 

 

 

 

 

for the Nine

 

 

 

 

 

for the Nine

 

 

 

 

 

 

 

Months Ended

 

FX Rate into USD

 

Months Ended

 

FX Rate into USD

 

 

 

September 30,

 

September 30,

 

December 31,

 

September 24,

 

September 24,

 

December 26,

Currency

 

2017

 

2017

 

2016

 

2016

 

2016

 

2015

Euro ..........................................................................................................................................................................................  

 

$

95,715

 

1.18

 

1.05

 

$

14,932

 

1.12

 

1.10

British Pound ...............................................................................................................................................................................  

 

 

24,712

 

1.34

 

1.23

 

 

(39,536)

 

1.30

 

1.49

Australian Dollar ..........................................................................................................................................................................  

 

 

16,220

 

0.78

 

0.72

 

 

9,268

 

0.76

 

0.73

Canadian Dollar ..........................................................................................................................................................................  

 

 

9,820

 

0.80

 

0.74

 

 

5,941

 

0.76

 

0.72

Polish Zloty .................................................................................................................................................................................  

 

 

7,891

 

0.27

 

0.24

 

 

428

 

0.26

 

0.26

Swiss Franc .................................................................................................................................................................................  

 

 

5,305

 

1.03

 

0.98

 

 

1,408

 

1.03

 

1.01

Brazilian Real..............................................................................................................................................................................  

 

 

4,136

 

0.32

 

0.31

 

 

3,055

 

0.31

 

0.25

All other currencies .......................................................................................................................................................................  

 

 

9,367

 

 

 

 

 

 

2,463

 

 

 

 

 

Total .......................................................................................................................................................................................  

 

$

173,166

 

 

 

 

 

$

(2,041)

 

 

 

 

14

 
(unaudited
)
23
Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited) 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 24,

 

September 30,

 

September 24,

 

 

 

2017

 

2016

 

2017

 

2016

Comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

Henry Schein, Inc. ...................................................................................................................................................  

 

$

193,085

 

$

126,140

 

$

577,403

 

$

365,321

Comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests .............................................................................................................................................  

 

 

372

 

 

165

 

 

848

 

 

519

Comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests ...........................................................................................................................  

 

 

16,018

 

 

12,129

 

 

43,359

 

 

36,077

Comprehensive income .................................................................................................................................................  

 

$

209,475

 

$

138,434

 

$

621,610

 

$

401,917

Note 6 – Fair Value Measurements

ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC Topic 820”) provides a framework for measuring fair value in generally accepted accounting principles.

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:

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

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

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

The following section describes the valuation methodologies that we used to measure different financial instruments at fair value.

Investments and notes receivable

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

15

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited) 

Debt

The fair value of our debt, including bank credit lines, as of September 30, 2017 and December 31, 2016 was estimated at $1,556.7 million and $1,218.9 million, respectively.  Factors that we considered when estimating the fair value of our debt include market conditions, prepayment and make-whole provisions, liquidity levels in the private placement market, variability in pricing from multiple lenders and term of debt.

Derivative contracts

Derivative contracts are valued using quoted market prices and significant other observable and unobservable inputs.  We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchange rates.  Our derivative instruments primarily include foreign currency forward agreements related to intercompany loans and certain forecasted inventory purchase commitments with suppliers.

The fair values for the majority of our foreign currency derivative contracts are obtained by comparing our contract rate to a published forward price of the underlying market rates, which is based on market rates for comparable transactions and are classified within Level 2 of the fair value hierarchy.

Redeemable noncontrolling interests

Some minority shareholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value based on third-party valuations.  The primary factor affecting the future value of redeemable noncontrolling interests is expected earnings and, if such earnings are not achieved, the value of the redeemable noncontrolling interests might be impacted.  The noncontrolling interests subject to put options are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to Additional paid-in capital.  Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded.  The recorded value of the redeemable noncontrolling interests cannot go below the floor level.  These adjustments do not impact the calculation of earnings per share.  The values for Redeemable noncontrolling interests are classified within Level 3 of the fair value hierarchy.  The details of the changes in Redeemable noncontrolling interests are presented in Note 4.

16

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited) 

The following table presents our assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2017 and December 31, 2016:

 

 

 

 

September 30, 2017

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts ..............................................................................................................................................................  

 

$

-

 

$

6,191

 

$

-

 

$

6,191

 

 

Total assets .....................................................................................................................................................................  

 

$

-

 

$

6,191

 

$

-

 

$

6,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts ..............................................................................................................................................................  

 

$

-

 

$

2,636

 

$

-

 

$

2,636

 

 

Total liabilities ..................................................................................................................................................................  

 

$

-

 

$

2,636

 

$

-

 

$

2,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests ..............................................................................................................................................  

 

$

-

 

$

-

 

$

737,747

 

$

737,747

*CS

 

 

 

 

 

 

 

 

 

 

 

 

 

*CE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts ..............................................................................................................................................................  

 

$

-

 

$

1,240

 

$

-

 

$

1,240

 

 

Total assets .....................................................................................................................................................................  

 

$

-

 

$

1,240

 

$

-

 

$

1,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts ..............................................................................................................................................................  

 

$

-

 

$

931

 

$

-

 

$

931

 

 

Total liabilities ..................................................................................................................................................................  

 

$

-

 

$

931

 

$

-

 

$

931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests ..............................................................................................................................................  

 

$

-

 

$

-

 

$

607,636

 

$

607,636

Note 7 – Business Acquisitions

Acquisitions

The operating results of all acquisitions are reflected in our financial statements from their respective acquisition dates.

We did not complete any material acquisitions during the nine months ended September 30, 2017. 

Some prior owners of acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial targets are met.  We have accrued liabilities for the estimated fair value of additional purchase price consideration at the time of the acquisition.  Any adjustments to these accrual amounts are recorded in our consolidated statements of income.  For the nine months ended September 30, 2017 and September 24, 2016, there were no material adjustments recorded in our consolidated statement of income relating to changes in estimated contingent purchase price liabilities.

17

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited) 

Note 812 – PlanRedeemable Noncontrolling Interests
Some minority stockholders in certain of Restructuring

On November 6, 2014,our subsidiaries have the right,

at certain times, to require us to acquire
their ownership interest in those entities at fair value.
Accounting Standards Codification Topic 480-10 is
applicable for noncontrolling interests where we announcedare or may be required
to purchase all or a corporate initiativeportion of the
outstanding interest in a consolidated subsidiary from the noncontrolling
interest holder under the terms of a put
option contained in contractual agreements.
The components of the change in the redeemable noncontrolling
interests for the three months ended April 1, 2023 and the year ended December
31, 2022 are presented in the
following table:
April 1,
December 31,
2023
2022
Balance, beginning of period
$
576
$
613
Decrease in redeemable noncontrolling interests due to rationalize our operations and provide expense efficiencies, which was expectedacquisitions of
noncontrolling interests in subsidiaries
(8)
(31)
Increase in redeemable noncontrolling interests due to be completed by thebusiness
acquisitions
3
4
Net income attributable to redeemable noncontrolling interests
4
21
Dividends declared
(4)
(21)
Effect of foreign currency translation gain (loss) attributable to
redeemable noncontrolling interests
2
(6)
Change in fair value of redeemable securities
(3)
(4)
Balance, end of fiscal 2015.  This initiative originally planned for the elimination of approximately 2%period
$
570
$
576
Note 13 – Comprehensive Income
Comprehensive income includes certain gains and losses that, under U.S.
GAAP,
are excluded from net income as
such amounts are recorded directly as an adjustment to 3% of our workforce and the closing of certain facilities.  We subsequently announced our plan to extend these restructuring activities through the end of 2016 to further implement cost-savings initiatives, which ultimately resulted in the elimination of approximately 900 positions, representing 4% of our workforce.  We recorded restructuring costs of $34.9 million pre-tax in fiscal 2015 and $45.9 million pre-tax in fiscal 2016.  Our restructuring activities are complete and we do not expect to report any such charges in 2017.

During the nine months ended September 24, 2016, we recorded restructuring costs of $29.8 million.  The costs associated with this restructuring are included in a separate line item, “Restructuring costs” within our consolidated statements of income.

stockholders’

equity.
The following table shows the amounts expensed and paid for restructuring costs that were incurred during the nine months ended September 30, 2017 and duringsummarizes our 2016 fiscal year and the remaining accrued balanceAccumulated other comprehensive loss, net of restructuring costs
applicable taxes as of September 30, 2017, which is included in Accrued expenses: Other and Other liabilities within our consolidated balance sheet:

of:

 

 

 

 

 

Facility

 

 

 

 

 

 

 

Severance

 

Closing

 

 

 

 

 

 

 

Costs

 

Costs

 

Other

 

Total

Balance, December 26, 2015 ...............................................................................................................................................................  

 

$

9,103

 

$

2,151

 

$

811

 

$

12,065

Provision ..........................................................................................................................................................................................  

 

 

40,728

 

 

3,587

 

 

1,576

 

 

45,891

Payments and other adjustments ..........................................................................................................................................................  

 

 

(27,477)

 

 

(3,284)

 

 

(1,492)

 

 

(32,253)

Balance, December 31, 2016 ...............................................................................................................................................................  

 

$

22,354

 

$

2,454

 

$

895

 

$

25,703

Provision ..........................................................................................................................................................................................  

 

 

-

 

 

-

 

 

-

 

 

-

Payments .........................................................................................................................................................................................  

 

 

(17,282)

 

 

(935)

 

 

(824)

 

 

(19,041)

Balance, September 30, 2017 ..............................................................................................................................................................  

 

$

5,072

 

$

1,519

 

$

71

 

$

6,662

 

.......................................................................................................................................................................................................

 

 

 

 

 

 

 

 

 

 

 

 

April 1,

The following table shows, by reportable segment, the amounts expensed and paid for restructuring costs that were incurred during the nine months ended September 30, 2017 and the 2016 fiscal year and the remaining accrued balance of restructuring costs as of September 30, 2017:

 

 

 

 

 

 

Technology and

 

 

 

 

 

Health Care

 

Value-Added

 

 

 

 

 

 

Distribution

 

Services

 

Total

Balance, December 26, 2015 ..................................................................................................................................................  

 

$

12,062

 

$

3

 

$

12,065

Provision ............................................................................................................................................................................  

 

 

44,082

 

 

1,809

 

 

45,891

Payments and other adjustments ............................................................................................................................................  

 

 

(30,906)

 

 

(1,347)

 

 

(32,253)

Balance, December 31, 2016 ..................................................................................................................................................  

 

$

25,238

 

$

465

 

$

25,703

Provision ............................................................................................................................................................................  

 

 

-

 

 

-

 

 

-

Payments ...........................................................................................................................................................................  

 

 

(18,679)

 

 

(362)

 

 

(19,041)

Balance, September 30, 2017 .................................................................................................................................................  

 

$

6,559

 

$

103

 

$

6,662

December 31,

18

2023
2022
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment
$
(35)
$
(37)
Attributable to noncontrolling interests:
Foreign currency translation adjustment
$
(1)
$
(1)
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
(213)
$
(236)
Unrealized gain from foreign currency hedging activities
2
5
Pension adjustment loss
(2)
(2)
Accumulated other comprehensive loss
$
(213)
$
(233)
Total Accumulated
other comprehensive loss
$
(249)
$
(271)
 
 
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
24
The following table summarizes the components of comprehensive income, net
of applicable taxes as follows:
Three Months Ended
April 1,
March 26,
2023
2022
Net income
$
128
$
186
Foreign currency translation gain
25
3
Tax effect
-
-
Foreign currency translation gain
25
3
Unrealized gain (loss) from foreign currency hedging activities
(4)
2
Tax effect
1
(1)
Unrealized gain (loss) from foreign currency hedging activities
(3)
1
Comprehensive income
$
150
$
190
Our financial statements are denominated in the U.S. Dollar currency.
Fluctuations in the value of foreign
currencies as compared to the U.S. Dollar may have a significant impact
on our comprehensive income.
The
foreign currency translation gain during the three months ended April 1,
2023 and three months ended March 26,
2022 was primarily due to changes in foreign currency exchange
rates of the Euro, British Pound, Australian
Dollar, Brazilian Real, New Zealand Dollar and Canadian Dollar.
The following table summarizes our total comprehensive income, net of
applicable taxes as follows:
Three Months Ended
April 1,
March 26,
2023
2022
Comprehensive income attributable to
Henry Schein, Inc.
$
141
$
184
Comprehensive income attributable to
noncontrolling interests
3
1
Comprehensive income attributable to
Redeemable noncontrolling interests
6
5
Comprehensive income
$
150
$
190
 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

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

(unaudited
)

25
Note 914
–
Earnings Per Share

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

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 24,

 

September 30,

 

September 24,

 

 

 

2017

 

2016

 

2017

 

2016

Basic .......................................................................................................................................................................................  

 

156,914

 

161,791

 

157,386

 

162,600

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options, restricted stock and restricted stock units .................................................................................................................  

 

1,357

 

1,919

 

1,480

 

2,035

 

Diluted ..................................................................................................................................................................................  

 

158,271

 

163,710

 

158,866

 

164,635

Three Months Ended

Note 10 – Income Taxes

For the nine months ended September 30, 2017

April 1,
March 26,
2023
2022
Basic
131,365,789
137,296,581
Effect of dilutive securities:
Stock options and September 24, 2016, our effective tax rate was 26.3% and 29.0%.  restricted stock units
1,674,097
1,940,891
Diluted
133,039,886
139,237,472
The difference between our effective tax rate and the federal statutory tax rate for both periods primarily relates to the adoptionnumber of Accounting Standards Update No. 2016-09, “Stock Compensation” (Topic 718) (“ASU 2016-09”) in the first quarter of 2017, as well as state and foreign income taxes and interest expense for both periods.  The 2016 effective tax rate was further affected by a federal tax audit settlement which reduced our income tax expense by approximately $4.5 million in the period.

Under ASU 2016-09, all excess tax benefits and tax deficiencies resultingantidilutive securities that were excluded from the difference between the deduction for tax purposes and the stock-based compensation cost recognized for financial reporting purposescalculation

of diluted weighted average common
shares outstanding are included as a component of income tax expense beginning Januaryfollows:
Three Months Ended
April 1, 2017.  Prior to the implementation of ASU 2016-09, excess tax benefits were recorded as a component of additional paid in capital and tax deficiencies were recognized either as an offset to accumulated excess tax benefits or in the income statement if there were no accumulated excess tax benefits.  The adoption of ASU No. 2016-09 reduced income tax expense by approximately $19.5 million for the nine months ended September 30, 2017.

The total amount of unrecognized tax benefits as of September 30, 2017 was approximately $102.3 million, of which $75.6 million would affect the effective tax rate if recognized.  It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect the change to have a material impact on our consolidated financial statements.

The total amounts of interest and penalties, which are classified as a component of Other liabilities within our consolidated balance sheets, were approximately $12.9 million and $0.0, respectively, as of September 30, 2017.

19

March 26,
2023
2022
Stock options
422,190
76,597
Restricted stock units
18,305
70,923
Total anti-dilutive
securities excluded from EPS computation
440,495
147,520

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

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

(unaudited) 

The tax years subject to examination by major tax jurisdictions include the years 2012 and forward by the U.S. Internal Revenue Service (“IRS”), as well as the years 2008 and forward for certain states and certain foreign jurisdictions.  We are currently under audit for the years 2012 and 2013.  During the quarter ended December 31, 2016, we reached a settlement on a portion of the IRS audit of tax years 2012 and 2013. Additionally, during the quarter ended December 31, 2016 we filed a Mutual Agreement Procedure request with the IRS for assistance from the U.S. Competent Authority for an open transfer pricing matter.  We received a 30-Day Letter from the IRS during the quarter ended April 1, 2017 for the remaining open audit matters for the years 2012 and 2013.  We have filed a protest with the Appellate Division regarding these matters during the second quarter of 2017.  We do not expect this to have a material adverse effect on our consolidated financial condition, liquidity or results of operations.

Note 11 – Derivatives and Hedging Activities

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

Fluctuations in the value of certain foreign currencies as compared to the U.S. dollar may positively or negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S. dollars.  Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings.  We purchase short-term (i.e., 18 months or less) foreign currency forward contracts to protect against currency exchange risks associated with intercompany loans due from our international subsidiaries and the payment of merchandise purchases to our foreign suppliers.  We do not hedge the translation of foreign currency profits into U.S. dollars, as we regard this as an accounting exposure, not an economic exposure.  Our hedging activities have historically not had a material impact on our consolidated financial statements.  Accordingly, additional disclosures related to derivatives and hedging activities required by ASC Topic 815 have been omitted.

Note 12 – Stock-Based Compensation

Our accompanying consolidated statements of income reflect pre-tax share-based compensation expense of $12.6 million ($9.0 million after-tax) and $32.0 million ($23.6 million after-tax) for the three and nine months ended September 30, 2017, respectively, and $16.1 million ($11.5 million after-tax) and $43.6 million ($31.0 million after-tax) for the three and nine months ended September 24, 2016, respectively.

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

20

 
(unaudited
)
26

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited) 

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

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

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

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

Total unrecognized compensation cost related to non-vested awards as of September 30, 2017 was $101.2 million, which is expected to be recognized over a weighted-average period of approximately 2.2 years.

The following table summarizes stock option activity under the Plans during the nine months ended September 30, 2017:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

 

 

 

 

 

 

Average

 

Contractual

 

Aggregate

 

 

 

 

Exercise

 

Life in

 

 Intrinsic 

 

 

Shares

 

Price

 

Years

 

 Value 

Outstanding at beginning of period ............................................................................................................................................  

 

353

 

$

 28.59  

 

 

 

 

 

Granted ...............................................................................................................................................................................  

 

-

 

 

 -    

 

 

 

 

 

Exercised .............................................................................................................................................................................  

 

(187)

 

 

 27.63  

 

 

 

 

 

Forfeited ..............................................................................................................................................................................  

 

-

 

 

 -    

 

 

 

 

 

Outstanding at end of period ....................................................................................................................................................  

 

166

 

$

 29.67  

 

 0.5  

 

$

8,705

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at end of period ..........................................................................................................................................  

 

166

 

$

 29.67  

 

 0.5  

 

$

8,705

21

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited) 

The following tables summarize the activity of our non-vested restricted stock/units for the nine months ended September 30, 2017:

 

 

Time-Based Restricted Stock/Units

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Grant Date Fair

 

 

Intrinsic Value

 

 

Shares/Units

 

Value Per Share

 

 

Per Share

Outstanding at beginning of period .............................................................................................................................................  

 

1,339

 

$

60.54

 

 

 

 

Granted .................................................................................................................................................................................  

 

295

 

 

85.58

 

 

 

 

Vested ...................................................................................................................................................................................  

 

(374)

 

 

47.13

 

 

 

 

Forfeited ................................................................................................................................................................................  

 

(22)

 

 

74.63

 

 

 

 

Outstanding at end of period .....................................................................................................................................................  

 

1,238

 

$

70.30

 

 

$

81.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance-Based Restricted Stock/Units

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Grant Date Fair

 

 

Intrinsic Value

 

 

Shares/Units

 

Value Per Share

 

 

Per Share

Outstanding at beginning of period .............................................................................................................................................  

 

1,849

 

$

54.05

 

 

 

 

Granted .................................................................................................................................................................................  

 

343

 

 

83.02

 

 

 

 

Vested ...................................................................................................................................................................................  

 

(850)

 

 

54.88

 

 

 

 

Forfeited ................................................................................................................................................................................  

 

(18)

 

 

79.68

 

 

 

 

Outstanding at end of period .....................................................................................................................................................  

 

1,324

 

$

62.38

 

 

$

81.99

Note 1315 – Supplemental Cash Flow Information

Cash paid for interest and income taxes was:

 

 

Nine Months Ended

 

 

September 30,

 

September 24,

 

 

2017

 

2016

Interest..................................................................................................................................................................................  

 

$

33,640

 

$

21,187

Income taxes..........................................................................................................................................................................  

 

 

179,445

 

 

152,351

Three Months Ended
April 1,
March 26,
2023
2022
Interest
$
13
$
8
Income taxes
21
21
During the ninethree months ended September 30, 2017April 1, 2023 and September 24, 2016,March 26, 2022, we
had $(1.3) $
(4)
million and $1.3 $
2
million of non-cash
net unrealized gains (losses) related to foreign currency hedging activities,
respectively.
Note 16 – Related Party Transactions
In connection with the formation of Henry Schein One, LLC, our joint venture
with Internet Brands, which was
formed on July 1, 2018, we entered into a
ten-year
royalty agreement with Internet Brands whereby we will pay
Internet Brands approximately $
31
million annually for the use of their intellectual property.
During the second quarterthree
months ended April 1, 2023 and March 26, 2022, we recorded $
8
million and $
9
million, respectively, in
connection with costs related to this royalty agreement.
As of 2017,April 1, 2023 and December 31, 2022, Henry Schein
One, LLC had as part of a business acquisition, we increased our ownership in a subsidiary through a non-cash transaction net payable balance due to Internet Brands of $16.8 million. 

Note 14 – Legal Proceedings

Beginning

12
million and $
8
million, respectively, comprised
of amounts related to results of operations and the royalty agreement.
The components of this payable are recorded
within accrued expenses: other, within our condensed consolidated balance sheets.
During our normal course of business, we have interests in January 2016, class action complaintsentities that we
account for under the equity accounting
method.
During the three months ended April 1, 2023 and March 26, 2022,
we recorded net sales of $
8
million and
$
12
million, respectively, to such entities.
During the three months ended April 1, 2023 and March 26, 2022,
we
purchased $
2
million and $
4
million, respectively from such entities.
At April 1, 2023 and December 31, 2022, we
had an aggregate of $
34
million and $
36
million, respectively, due from our equity affiliates, and $
6
million and $
6
million, respectively, due to our equity affiliates.
Certain of our facilities related to our acquisitions are leased from employees
and minority shareholders.
These
leases are classified as operating leases and have a remaining lease term
ranging from less than
one year
to
9
years
.
As of April 1, 2023, current and non-current liabilities associated with related
party operating leases were filed against Patterson Companies, Inc. (“Patterson”), Benco Dental Supply Co. (“Benco”)$
4
million and Henry Schein, Inc.Each of these complaints allege, among other things, that defendants conspired to fix prices, allocate customers$
15
million, respectively.
Related party leases represented
6.1
% and foreclose competitors by boycotting manufacturers, state dental associations and others that deal with defendants’ competitors.  Subject to certain exclusions, these classes seek to represent all persons who purchased dental supplies or equipment in the United States directly from any
5.6
% of the defendants or Burkhart Dental Supply Co. (“Burkhart”) since August 31, 2008.  Each class action complaint asserts a single count under Section 1 of the Sherman Act,total current and seeks equitable relief, compensatory and treble damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees.  We intend to defend ourselves vigorously against these actions.

non-

22

current operating lease liabilities.
27

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited) 

On August 31, 2012, Archer and White Sales, Inc. (“Archer”) filed a complaint against Henry Schein, Inc. as well as Danaher Corporation and its subsidiaries Instrumentarium Dental, Inc., Dental Equipment, LLC, Kavo Dental Technologies, LLC and Dental Imaging Technologies Corporation (collectively, the “Danaher Defendants”) in the United States 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, Inc., an unnamed company and the Danaher Defendants to terminate or limit Archer’s distribution rights.  On October 1, 2012, Henry Schein filed a motion for an order: (i) compelling Archer to arbitrate its claims against Henry Schein; (2) staying all proceedings pending arbitration; and (3) joining the Danaher Defendants’ motion to arbitrate and stay.  On May 28, 2013, the Magistrate Judge granted the motions to arbitrate and stayed proceedings pending arbitration.  On June 10, 2013, Archer moved for reconsideration before the District Court judge.  On December 7, 2016, the District Court Judge granted Archer’s motion for reconsideration and lifted the stay.  Defendants have appealed the District Court’s order, and that appeal is pending.

On August 1, 2017, Archer filed an amended complaint, adding Patterson and Benco as defendants, and alleging that Henry Schein, Inc., Patterson, Benco and Burkhart 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 injunctive relief, and damages in an amount to be proved at trial, to be trebled with interest and costs, including attorneys’ fees, jointly and severally.

On October 30, 2017, Archer filed a second amended complaint under seal, 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.   Trial is currently scheduled for February 2018.  We intend to defend ourselves vigorously against this action.

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

IQ Dental alleges, among other things, that defendants conspired to suppress competition from IQ Dental and SourceOne for the marketing, distribution and sale of dental supplies and equipment in the United States, and that defendants unlawfully agreed with one another to boycott dentists, manufacturers and state dental associations that deal with, or considered dealing with, plaintiff and SourceOne.  Plaintiff claims that this alleged conduct constitutes unreasonable restraint of trade in violation of Section 1 of the Sherman Act, New York’s Donnelly Act and the New Jersey Antitrust Act, and also makes pendant state law claims for tortious interference with prospective business relations, civil conspiracy and aiding and abetting.  Plaintiff seeks injunctive relief, compensatory, treble and punitive damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees.  We intend to vigorously defend ourselves against this action.

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

23

ITEM 2.
 

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited) 

As of September 30, 2017, 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 15 – Subsequent Event  

In October 2017, we sold our 21.4% equity ownership of D4D Technologies LLC in exchange for cash and contingent consideration.  As a result of this transaction, we expect to record a loss of approximately $17 million to $18 million, or $0.10 to $0.11 per diluted share, in the fourth quarter of 2017.

24

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

In accordance with the “Safe Harbor” provisions of the Private Securities
Litigation Reform Act of 1995, we
provide the following cautionary remarks regarding important factors
that, among others, could cause future results
to differ materially from the forward-looking statements, expectations and assumptions
expressed or implied
herein.
All forward-looking statements made by us are subject to
risks and uncertainties and are not guarantees of
future performance.
These forward-looking statements involve known and unknown
risks, uncertainties and other
factors that may cause our actual results, performance and achievements
or industry results to be materially
different from any future results, performance or achievements expressed or implied by such
forward-looking
statements.
These statements are generally identified by the use of such
terms as “may,” “could,” “expect,” “intend,
“intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate”“anticipate,”
“to be,” “to make” or other comparable
terms.

Factors that could cause or contribute to such differences include, but are not limited
to, those discussed in
the documents we file with the Securities and Exchange Commission
(SEC), including our Annual Report on Form
10-K.
Forward looking statements include the overall impact of the Novel Coronavirus
Disease 2019 (COVID-19)
on us, our results of operations, liquidity and financial condition (including
any estimates of the impact on these
items), the rate and consistency with which dental and other practices
resume or maintain normal operations in the
United States and internationally, expectations regarding PPE products and COVID-19 related product sales and
inventory levels, whether additional resurgences or variants of the virus will adversely impact
the resumption of
normal operations, whether supply chain disruptions will adversely impact
our business, the impact of integration
and restructuring programs as well as of any future acquisitions, general economic
conditions including exchange
rates, inflation and recession, and more generally current expectations
regarding performance in current and future
periods.
Forward looking statements also include the (i) our ability to
have continued access to a variety of
COVID-19 test types and expectations regarding COVID-19
test sales, demand and inventory levels and (ii)
potential for us to distribute the COVID-19 vaccines and ancillary supplies.
Risk factors and uncertainties that could cause actual results to differ materially from current
and historical results
include, but are not limited to: effects of a highly competitive risks associated with COVID-19
and consolidating market;any variants thereof, as well as other disease
outbreaks, epidemics, pandemics, or similar wide-spread public health concerns
and other natural disasters; our
dependence on third parties for the manufacture and supply of our products;
our dependence upon sales personnel, customers, suppliersability to develop or acquire and manufacturers;
maintain and protect new products (particularly technology products) and
technologies that achieve market
acceptance with acceptable margins; transitional challenges associated with acquisitions,
dispositions and joint
ventures, including the failure to achieve anticipated synergies/benefits; legal, regulatory, compliance,
cybersecurity, financial and tax risks associated with acquisitions, dispositions and joint ventures; certain provisions
in our dependencegoverning documents that may discourage third-party acquisitions
of us; adverse changes in supplier rebates
or other purchasing incentives; risks related to the sale of corporate brand products;
effects of a highly competitive
(including, without limitation, competition from third-party online commerce
sites) and consolidating market; the
repeal or judicial prohibition on our senior management; fluctuationsimplementation of the Affordable Care Act; changes in quarterly earnings; the health
care industry;
risks from expansion of customer purchasing power and multi-tiered
costing structures; increases in shipping costs
for our products or other service issues with our third-party shippers; general
global and domestic macro-economic conditions; risks associated with currency fluctuations; risks associated with
and political conditions, including inflation, deflation, recession, fluctuations
in energy pricing and economic uncertainty; disruptions in financial markets; volatilitythe value of the market price of our common stock;
U.S. dollar as compared to foreign currencies, and changes in the health care industry; implementation of health care laws;to other economic
indicators, international trade
agreements, potential trade barriers and terrorism; failure to comply with regulatory requirements existing
and data privacy laws;future regulatory
requirements; risks associated with our global operations; transitional challenges associatedthe EU Medical Device Regulation; failure
to comply with acquisitionslaws and joint ventures, including the regulations
relating to health care fraud or other laws and regulations;
failure to achieve anticipated synergies; financialcomply with laws and regulations relating to
the collection, storage and processing of sensitive personal information
or standards in electronic health records or
transmissions; changes in tax legislation; risks associated with acquisitionsrelated to product liability, intellectual property and joint ventures; other claims;
litigation risks;
new or unanticipated litigation developments and the dependence on our continued product development, technical support and successful marketing in the technology segment; increased competition by third party online commerce sites;status of litigation
matters; risks from disruption to our information systems;associated
with customs policies or legislative import restrictions; cyberattacks
or other privacy or data security breaches; certain provisionsrisks
associated with our global operations; our dependence on our senior management,
employee hiring and retention,
and our relationships with customers, suppliers and manufacturers;
and disruptions in our governing documents that may discourage third-party acquisitions of us; and changes in tax legislation. financial markets.
The order
in which these factors appear should not be construed to indicate their
relative importance or priority.

28
We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control
or predict.
Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction
of actual results.
We undertake no duty and have no obligation to update forward-looking statements.

statements except as

required by law.
Where You
Can Find Important Information

We may disclose important information through one or more of the following channels: SEC filings, public
conference calls and webcasts, press releases, the investor relations
page of our website (www.henryschein.com) (www.henryschein.com)
and the social media channels identified on the Newsroom page of our website.

Recent Developments
During the year ended December 31, 2022 we experienced a decrease
in the sales of PPE and COVID-19 test kits.
During the three months ended April 1, 2023, we continued to experience
a decrease in the sales of PPE and
COVID-19 test kits compared with the same period in the prior
year and we expect further decreases in sales in
2023 compared to the prior year.
The impact from inflation, including manufacturer price increases excluding PPE
products, was slightly more
pronounced in Europe than in North America.
Though inflation impacts both our revenues and costs, the
depth and
breadth of our product portfolio often allows us to offer lower-cost national brand solutions or
corporate brand
alternatives to our more price-sensitive customers who are unable
to absorb price increases, thus positioning us to
protect our gross profit.
Our condensed consolidated financial statements reflect estimates and
assumptions made by us that affect, among
other things, our goodwill, long-lived asset and definite-lived intangible
asset valuation; inventory valuation; equity
investment valuation; assessment of the annual effective tax rate; valuation of
deferred income taxes and income
tax contingencies; the allowance for doubtful accounts; hedging activity;
supplier rebates; measurement of
compensation cost for certain share-based performance awards and cash bonus
plans; and pension plan
assumptions.
There is an ongoing risk that the consequences of the COVID-19
pandemic may again have a
material adverse effect on our business, results of operations and cash flows and may
result in a material adverse
effect on our financial condition and liquidity.
However, the extent of the potential impact cannot be reasonably
estimated at this time.
29
Executive-Level Overview

Henry Schein, Inc. is a solutions company for health care professionals powered
by a network of people and
technology.
We believe we are the world’s
largest provider of health care products and services primarily to office-basedoffice-
based dental animal health and medical practitioners.  practitioners, as well as alternate sites of care.
We
serve more than 1one million customers
worldwide including dental practitioners, and laboratories, animal health clinics and physician practices, and
ambulatory surgery centers, as well
as government, institutional health care clinics and other alternate care clinics.
We
believe that we have a strong
brand identity due to our more than 8590 years of experience distributing health
care products.

25

We are headquartered in Melville, New York,

employ more than 22,000 people (of which more than 11,000 approximately 10,700
are
based outside of the United States) and have operations or affiliates in 3332 countries including the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, Denmark, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Japan, Luxembourg, Malaysia, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, South Africa, Spain, Sweden, Switzerland, Thailand, United Arab Emirates
and the United Kingdom.

territories.

Our broad
global footprint has evolved over time through our organic success as well as
through contribution from strategic
acquisitions.
We
have established strategically located distribution centers around
the world to enable us to better serve our
customers and increase our operating efficiency.
This infrastructure, together with broad product and service
offerings at competitive prices, and a strong commitment to customer service, enables
us to be a single source of
supply for our customers’ needs.  Our infrastructure
While our primary go-to-market strategy is in our capacity as a distributor, we also allows us market and sell our own
corporate brand portfolio of cost-effective, high-quality consumable merchandise products,
manufacture certain
dental specialty products in the areas of implants, orthodontics and endodontics,
and repackage/relabel prescription
drugs and/or devices.
We
have
achieved scale in these global businesses primarily through acquisitions
as
manufacturers of these products typically do not utilize a distribution channel
to provide convenient ordering and rapid, accurate and complete order fulfillment.

serve customers.

We
conduct our business through two reportable segments: (i) health
care distribution and (ii) technology and
value-added services.
These segments offer different products and services to the same customer base.

Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools, government
and other
institutions.
Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,
emergency
medical technicians, dialysis centers, home health, federal and state governments
and large enterprises, such as
group practices and integrated delivery networks, among other providers
across a wide range of specialties.
The health care distribution reportable segment, aggregatescombining our global dental animal health and
medical operating segments.  This segment segments,
distributes consumable products, small equipment, laboratory products, large equipment, equipment
repair services,
branded and generic pharmaceuticals, vaccines, surgical products, dental specialty
products (including implant,
orthodontic and endodontic products), diagnostic tests, infection-control products,
PPE products and vitamins.  Our global dental group serves office-based dental practitioners, dental laboratories, schools and other institutions.  Our global animal health group serves animal health practices and clinics.  Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions.

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

A key element to grow closer to our customers is our One Schein initiative, which
is a unified go-to-market
approach that enables practitioners to work synergistically with our supply chain,
equipment sales and service and
other value-added services, allowing our customers to leverage the
combined value that we offer through a single
program.
Specifically, One Schein provides customers with streamlined access to our comprehensive offering of
national brand products, our corporate brand products and proprietary specialty
products and solutions (including
implant, orthodontic and endodontic products).
In addition, customers have access to a wide range of services,
including software and other value-added services.
30
Industry Overview

In recent years, the health care industry has increasingly focused on cost containment.
This trend has benefited
distributors capable of providing a broad array of products and services at low
prices.
It also has accelerated the
growth of HMOs, group practices, other managed care accounts and collective buying
groups, which, in addition to
their emphasis on obtaining products at competitive prices, tend to favor distributors
capable of providing
specialized management information support.
We
believe that the trend towards cost containment has the potential
to favorably affect demand for technology solutions, including software, which can
enhance the efficiency and
facilitation of practice management.

Our operating results in recent years have been significantly affected by strategies
and transactions that we
undertook to expand our business, domestically and internationally, in part to address significant changes in the
health care industry, including consolidation of health care distribution companies, health care reform, trends
toward managed care, cuts in Medicare and collective purchasing arrangements.

Our current and future results have been and could be impacted by the current economic environment and uncertainty, particularly impacting overall demand for our products and services.

26

Industry Consolidation

The health care products distribution industry, as it relates to office-based health care practitioners, is fragmented
and diverse.  This industry, which encompasses the dental, animal health and medical markets, was estimated to produce revenues of approximately $45 billion in 2016 in the global markets.  
The industry ranges from sole practitioners working out of
relatively small offices to group practices
or service organizations ranging in size from a few practitioners to a large number of practitioners who have
combined or otherwise associated their practices.

Due in part to the inability of office-based health care practitioners to store and manage
large quantities of supplies
in their offices, the distribution of health care supplies and small equipment to office-based health
care practitioners
has been characterized by frequent, small quantity orders, and a need for rapid,
reliable and substantially complete
order fulfillment.
The purchasing decisions within an office-based health care practice
are typically made by the
practitioner or an administrative assistant.
Supplies and small equipment are generally purchased from more
than
one distributor, with one generally serving as the primary supplier.

The trend of consolidation extends to our customer base.
Health care practitioners are increasingly seeking to
partner, affiliate or combine with larger entities such as hospitals, health systems, group practices or physician
hospital organizations.
In many cases, purchasing decisions for consolidated groups
are made at a centralized or
professional staff level; however, orders are delivered to the practitioners’ offices.

We
believe that consolidation within the industry will continue to
result in a number of distributors, particularly
those with limited financial, operating and marketing resources, seeking to
combine with larger companies that can
provide growth opportunities.
This consolidation also may continue to result in distributors seeking
to acquire
companies that can enhance their current product and service offerings or provide
opportunities to serve a broader
customer base.

Our trend with regardapproach to acquisitions and joint ventures has been to expand our role as
a provider of products and services
to the health care industry.
This trend has resulted in our expansion into service areas that complement
our existing
operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquired
businesses.

As industry consolidation continues, we believe that we are positioned
to capitalize on this trend, as we believe we
have the ability to support increased sales through our existing infrastructure, although
there can be no assurances
that we will be able to successfully accomplish this.
We
also have invested in expanding
our sales/marketing
infrastructure to include a focus on building relationships with decision
makers who do not reside in the office-basedoffice-
based practitioner setting.

As the health care industry continues to change, we continually evaluate possible
candidates for merger and joint venture or
acquisition and intend to continue to seek opportunities to expand our
role as a provider of products and services to
the health care industry.
There can be no assurance that we will be able to successfully pursue
any such
opportunity or consummate any such transaction, if pursued.
If additional transactions are entered into or
31
consummated, we would incur merger and/or acquisition-related costs, and there
can be no assurance that the
integration efforts associated with any such transaction would be successful.

Aging Population and Other Market Influences

The health care products distribution industry continues to experience growth
due to the aging population,
increased health care awareness, the proliferation of medical technology
and testing, new pharmacology treatments,
and expanded third-party insurance coverage, partially offset by the effects of unemployment on insurance
coverage.
In addition, the physician market continues to benefit from
the shift of procedures and diagnostic testing
from acute care settings to alternate-care sites, particularly physicians’
offices.

According to the U.S. Census Bureau’s International Data Base,Database, between 2023 and 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 growth
rates of approximately 6%
between 2023 and 2033 and approximately 11% between 2023 and 2043.
According to the U.S. Census Bureau’s International Database, in 20162023 there were more than sixare approximately seven million
Americans aged 85 years or older, the segment of the population most in need of long-term care
and elder-care

27

services.
 

services.  By the year 2050, that number is projected to nearly triple to approximately

19 million.
The population
aged 65 to 84 years is projected to increase over 60%by approximately 23% during
the same time period.

As a result of these market dynamics, annual expenditures for health
care services continue to increase in the
United States.
We believe that demand for our products and services will grow while continuing to be impacted by
current and future operating, economic, and industry conditions.
The Centers for Medicare and Medicaid Services,
or CMS, published “National Health Expenditure Projections 2016-2025”Data” indicating that
total national health care spending reached
approximately $3.4$4.3 trillion in 2016,2021, or 18.1%18.3% of the nation’s gross domestic product, the benchmark
measure for
annual production of goods and services in the United States.
Health care spending is projected to reach
approximately $5.5$6.8 trillion in 2025, approximately 19.9%by 2030, or 19.6% of the nation’s projected gross domestic product.

Government

Certain of our businesses involve the distribution, manufacturing, importation,
exportation, marketing and sale of,
and/or third party payment for, pharmaceuticals andand/or medical devices, and in this regard, we are subject
to
extensive local, state, federal and foreign governmental laws and regulations,
including as applicable to theour
wholesale distribution and sale of pharmaceuticals and medical devices.  Additionally, governmentdevices, manufacturing
activities, and as part of our
specialty home medical supply business that distributes and sells medical equipment
and supplies directly to
patients.
Federal, state and certain foreign governments have also increased enforcement
activity in the health care
sector, particularly in areas of fraud and abuse, anti-bribery and corruption, controlled substances handling,
medical
device regulations and data privacy and security standards.
Certain of our businesses are subject to various additional federal, state,
local and foreign laws and regulations,
including with respect to the sale, transportation, storage, handling and
disposal of hazardous or potentially
hazardous substances, and safe working conditions.
In addition, certain of our businesses must operate in
compliance with a variety of burdensome and complex billing and record-keeping
requirements in order to
substantiate claims for payment under federal, state and commercial healthcare
reimbursement programs.
One of
these businesses was suspended in October 2021 by CMS from receiving
payments from Medicare, although it was
permitted to continue to perform and bill for Medicare services.
Such suspension was terminated on September 30,
2022.
Government and private insurance programs fund a large portion of the total cost of medical care,
and there has have
been an emphasis on efforts to limit such private and government insurance programs, including efforts, thus far
unsuccessful, to
seek repeal of the entire United States Patient Protection and Affordable Care Act,
as amended by the Health Care
and Education Reconciliation Act, each enacted in March 2010 (as amended,
the “ACA”).
In addition, activities to
control medical costs, including laws and regulations lowering reimbursement
rates for pharmaceuticals, medical
32
devices and/or medical treatments or services.  Also, manyservices, are ongoing.
Many of these laws and regulations are subject to
change and their evolving implementation may impact our operations and our
financial performance.  In addition, our
Our businesses are generally subject to numerous other laws and regulations that could
impact our financial performance, including securities, antitrust, anti-bribery
and anti-kickback, customer interaction transparency, data privacy, data security and other laws and regulations.  Failurefailure to comply with lawsuch laws or regulations could have a material adverse
effect on our business.

Health Care Reform

The United States Health Care Reform Law adopted through the March 2010 enactment

A more detailed discussion of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act increased federal oversight of private health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost of health care generally, to reduce fraud and abuse, and to provide access to increased health coverage.

The Health Care Reform Law requirements include a 2.3% excise tax on domestic sales of many medical devices by manufacturers and importers that began in 2013 and a fee on branded prescription drugs and biologics that was implemented in 2011, both of which may affect sales.  However, with respect to the medical device excise tax, a two-year moratorium was imposed under the Consolidated Appropriations Act, 2016, suspending the imposition of the tax on device sales during the period beginning January 1, 2016 and ending on December 31, 2017.  The Health Care Reform Law has also materially expanded the number of individuals in the United States with health insurance.  The Health Care Reform Law has faced ongoing legal challenges, including litigation seeking to invalidate some of or all of the law or the manner in which it has been implemented.  The President has reaffirmed his intention to repeal and replace the Health Care Reform Law, and has taken a number of administrative actions that seek to materially weaken the Health Care Reform Law, such as to curtail funding intended to help lower-income individuals pay for health insurance policies, and to make less robust plans available, both of which actions may adversely affect our business.  Some of these administrative actions have been challenged as unlawful.  The uncertain status of the Health Care Reform Law affects our ability to plan.

A Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, imposes reporting and disclosure requirements for drug and device manufacturers and distributors with regard to payments or other transfers of value made to certain covered recipients (including physicians, dentists and teaching hospitals), and for such manufacturers and distributors and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity.  CMS publishes information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities.

28

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

Another notable Medicare health care reform initiative, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), enacted on April 16, 2015, establishes a new payment framework, called the Quality Payment Program, which modifies certain Medicare payments to “eligible clinicians,” including physicians, dentists and other practitioners.  Under MACRA, eligible clinicians will be required to participate in Medicare through the Merit-Based Incentive Payment System (“MIPS”) or Advanced Alternative Payment Models (“APMs”).  MIPS generally will consolidate three current programs; the physician quality reporting system, the value-based payment modifier and the Medicare electronic health record (“EHR”) program, into a single program in which Medicare reimbursement to eligible clinicians will include both positive and negative payment adjustments that take into account quality, resource use, clinical practice improvement and meaningful use of certified EHR technology.  Advanced APMs generally involve higher levels of financial and technology risk.  A final rule was published in the Federal Register on November 4, 2016 and allows eligible Medicare clinicians to pick their pace of participation for the first performance period that began January 1, 2017.  The data collected in the first performance year will determine payment adjustments beginning January 1, 2019.  A final rule updating certain Quality Payment Program regulations is expected to be released on or about November 1, 2017, and is anticipated to be effective on January 1, 2018.  MACRA represents a fundamental change in physician reimbursement that is expected to provide substantial financial incentives for physicians to participate in risk contracts, and to increase physician information technology and reporting obligations.  The implications of the implementation of MACRA are uncertain and will depend on future regulatory activity and physician activity in the marketplace.  MACRA may encourage physicians to move from smaller practices to larger physician groups or hospital employment, leading to a consolidation of a portion of our customer base.  Although we believe that we are positioned to capitalize on this consolidation trend, there can be no assurances that we will be able to successfully accomplish this.

Health Care Fraud

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

The fraud and abuse laws and regulations have been subject to varying interpretations, as well as heightened enforcement activity over the past few years, and significant enforcement activity has been the result of “relators,” who serve as whistleblowers by filing complaints in the name of the United States (and if applicable, particular states) under federal and state false claims laws.  Under the federal False Claims Act, relators can be entitled to receive up to 30% of total recoveries.  Also, violations of the federal False Claims Act can result in treble damages, and each false claim submitted can be subject to a civil penalty which, for penalties assessed after February 3, 2017 whose associated violations occurred after November 2, 2015, ranges from a minimum of $10,957 to a maximum of $21,916 per claim.   Most states have adopted similar state false claims laws, and these state laws have their own penalties which may be in addition to federal False Claims Act penalties.  The Health Care Reform Law significantly strengthened the federal False Claims Act and the federal Anti-Kickback Law provisions, which could lead to the possibility of increased whistleblower or relator suits, and among other things made clear that a federal Anti-Kickback Law violation can be a basis for federal False Claims Act liability.

29

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

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

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

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

Operating, Security and Licensure Standards

Certain of our businesses involve the distribution of pharmaceuticals and medical devices, and in this regard we are subject to various local, state, federal and foreign governmental laws and regulations applicable to the distribution

is included in Management’s Discussion &
Analysis of pharmaceuticalsFinancial Condition and medical devices.  Among the United States federal laws applicable to us are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended (“FDC Act”), and Section 361 of the Public Health Service Act.  We are also subject to comparable foreign regulations.

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

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

30

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.  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 will likely remain in effect until the FDA issues new regulations as directed by the DSCSA.

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

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

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

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

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

31

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

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

Antitrust

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

Regulated Software and Data Processing; Electronic Health Records

The FDA has become increasingly active in addressing the regulation of computer software intended for use in health care settings, and has developed and continues to develop policies on regulating clinical decision support tools and other types of software as medical devices.  Certain of our businesses involve the development and sale of software and related products to support physician and dental practice management, and it is possible that the FDA or foreign government authorities could determine that one or more of our products is a medical device that is subject to regulation, 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 include electronic information technology systems that store and process personal health, clinical, financial and other sensitive information of individuals.  These information technology systems may be vulnerable to breakdown, wrongful intrusions, data breaches and malicious attack, which could require us to expend significant resources to eliminate these problems and address related security concerns, and could involve claims against us by private parties and/or governmental agencies.  For example, we are directly or indirectly subject to numerous federal, state, local and foreign laws and regulations that protect the privacy and security of such information, such as the privacy and security provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended, and implementing regulations (“HIPAA”).  HIPAA requires, among other things, the implementation of various recordkeeping, operational, notice and other practices intended to safeguard that information, limit its use to allowed purposes and notify individuals in the event of privacy and security breaches.  Failure to comply with these laws and regulations can result in substantial penalties and other liabilities.

In addition, the European Parliament and the Council of the European Union have adopted a new pan-European General Data Protection Regulation (“GDPR”), effective from May 25, 2018, which increases privacy rights for individuals in Europe, extends the scope of responsibilities for data controllers and data processors and imposes increased requirements and potential penalties on companies offering goods or services to individuals who are located  in Europe (“Data Subjects”) or monitoring the behavior of such individuals (including by companies based outside of Europe).  Noncompliance can result in penalties of up to the greater of EUR 20 million, or 4% of global company revenues.  Individual member states may impose additional requirements and penalties as they relate to certain things such as employee personal data.  Among other things, the GDPR requires with respect to data concerning Data Subjects, company accountability, consents from Data Subjects’ or other acceptable legal basis needed to process the personal data, prompt breach notifications within 72 hours, fairness and transparency in how the personal data is stored, used or otherwise processed, and data integrity and security, and provides rights to Data Subjects relating to modification, erasure and transporting of the personal data. While we expect to have substantially compliant programs and controls in place to comply with the GDPR requirements, our compliance with the new regulation is likely to impose additional costs on us, and we cannot predict whether the interpretations of the requirements, or changes in our practices in response to new requirements or interpretations of the requirements, could have a material adverse effect on our business.

32

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 are subject to laws,  regulations and industry standards, such as HIPAA and the Payment Card Industry Data Security Standards, which require that they protect the privacy and security of those records, and our products may be used as part of these customers’ comprehensive data security programs, including in connection with their efforts to comply with applicable privacy and security laws.  Perceived or actual security vulnerabilities in our products or services, or the perceived or actual failure by us or our customers who use our products to comply with applicable legal or contractual 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.

Federal initiatives provide a program of incentive payments available to certain health care providers involving the adoption and use of certain electronic health care records systems and processes.  The initiatives include providing, among others, physicians and dentists, with financial incentives if they meaningfully use certified EHR technology in accordance with applicable and evolving requirements.  In addition, Medicare-eligible providers that fail to timely adopt certified EHR systems and meet “meaningful use” requirements for those systems in accordance with regulatory requirements are to be subject to cumulative Medicare reimbursement reductions, which reductions for applicable health professionals (including physicians and dentists) began on January 1, 2015.  Qualification for the incentive payments requires the use of EHRs that have certain capabilities for meaningful use pursuant to evolving standards adopted by CMS and by the Office of the National Coordinator for Health Information Technology (“ONC”) of HHS.

The use of certified EHR technology will continue as a feature of MACRA’s MIPS program, and in connection with this, Medicare EHR program payment adjustments to eligible professionals will sunset at the end of 2018 and MIPS payment adjustments will begin on January 1, 2019.  The first performance period for MIPS began January 1, 2017, and will afford eligible clinicians different reporting options linked to the amount of data reported and the duration of the reporting period, with positive payment adjustments generally linked to more robust reporting.

On October 6, 2015, CMS and ONC released comprehensive final rules with respect to the EHR program that, among other things, established the more challenging “Stage 3” criteria, made certain adjustments to Stage 1 and Stage 2 standards (e.g., reducing the 2015 reporting period from a full year to 90 days), and finalized 2015 edition health information technology (HIT) certification criteria (which is now added to the existing 2014 edition HIT certification criteria, but not required until 2018).  Notably, under the new rules, compliance with Stage 3 standards is optional for providers in 2017, and would generally be required for all eligible providers (regardless of prior participation in the EHR incentive program) for 2018 reporting periods and subsequently.  Developers and others involved in the manufacture of EHR program technology will have this interim period to develop and certify products, and work with customers to implement products for the 2018 EHR program period.  In connection with the release of the October 6 rules, HHS has also stated that it will continue to modify applicable EHR program standards.  On November 14, 2016, CMS published a final rule that will impact Medicare and Medicaid EHR incentive programs through revisions to the objectives and measures for eligible hospitals, critical access hospitals and dual-eligible hospitals.

33

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

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

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

E-Commerce

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

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

34

Results of Operations,

contained

in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2022, filed with the SEC on February 21, 2023.
Results of Operations
The following table summarizestables summarize the significant components of our operating
results for the three and nine months ended September 30, 2017 and September 24, 2016 and cash flows for the nine three
months ended September 30, 2017April 1, 2023 and September 24, 2016 (in thousands):

March 26, 2022:

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 24,

 

September 30,

 

September 24,

 

 

 

 

2017

 

2016

 

2017

 

2016

Operating results:

 

 

 

 

 

 

 

 

 

 

 

 

Net sales ..............................................................................................................................................................................  

 

$

3,161,083

 

$

2,865,148

 

$

9,143,489

 

$

8,450,734

Cost of sales ........................................................................................................................................................................  

 

 

2,325,029

 

 

2,077,473

 

 

6,645,342

 

 

6,083,748

 

Gross profit ......................................................................................................................................................................  

 

 

836,054

 

 

787,675

 

 

2,498,147

 

 

2,366,986

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative .......................................................................................................................................  

 

 

622,506

 

 

581,584

 

 

1,879,969

 

 

1,779,583

 

Restructuring costs ............................................................................................................................................................  

 

 

-

 

 

5,370

 

 

-

 

 

29,811

 

 

Operating income ..........................................................................................................................................................  

 

$

213,548

 

$

200,721

 

$

618,178

 

$

557,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net .................................................................................................................................................................  

 

$

(8,829)

 

$

(4,546)

 

$

(23,363)

 

$

(8,731)

Net income ..........................................................................................................................................................................  

 

 

150,948

 

 

145,291

 

 

450,783

 

 

402,922

Net income attributable to Henry Schein, Inc. ............................................................................................................................  

 

 

138,031

 

 

133,713

 

 

414,834

 

 

367,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows:

 

 

 

 

 

 

Net cash provided by operating activities ...............................................................................................................................................  

 

$

307,501

 

$

378,068

Net cash used in investing activities .......................................................................................................................................................  

 

 

(320,795)

 

 

(179,834)

Net cash provided by (used in) financing activities ...................................................................................................................................  

 

 

16,068

 

 

(198,256)

Three Months Ended

April 1,
March 26,
2023
2022
Operating results:
Net sales
$
3,060
$
3,179
Cost of sales
2,094
2,206
Gross profit
966
973
Operating expenses:
Selling, general and administrative
717
682
Depreciation and amortization
44
47
Restructuring costs
30
-
Operating income
$
175
$
244
Other expense, net
$
(12)
$
(5)
Net income
128
186
Net income attributable to Henry Schein, Inc.
121
181
Three Months Ended
April 1,
March 26,
2023
2022
Cash flows:
Net cash provided by operating activities
$
27
$
93
Net cash used in investing activities
(39)
(27)
Net cash provided by (used in) financing activities
21
(62)
33
Plan of Restructuring

On November 6, 2014,August 1, 2022, we announcedcommitted to a corporaterestructuring plan focused on
funding the priorities of the strategic plan and
streamlining operations and other initiatives to increase efficiency.
We expect this initiative to rationalize our operations and provide expense efficiencies, which wasextend through
2023.
We are currently unable in good faith to make a determination of an estimate of the amount or range of
amounts expected to be completed byincurred in connection with these activities, both with
respect to each major type of cost
associated therewith and with respect to the endtotal cost, or an estimate of fiscal 2015.  This initiative originally planned for
the eliminationamount or range of approximately 2% to 3% of our workforce and the closing of certain facilities.  We subsequently announced our plan to extend these restructuring activities through the end of 2016 to further implement cost-savings initiatives, which ultimately resultedamounts that will
result in the elimination of approximately 900 positions, representing 4% of our workforce.  We recorded restructuring costs of $34.9 million pre-tax in fiscal 2015 and $45.9 million pre-tax in fiscal 2016.  Our restructuring activities are complete and we do not expect to report any such charges in 2017.

future cash expenditures.

During the three and ninemonths ended September 24, 2016,April 1, 2023, we recorded restructuring costs of $5.4
$30 million primarily related to
severance and $29.8employee-related costs, accelerated amortization of right-of-use
lease assets and fixed assets, and
other lease exit costs.
This amount also includes $1 million respectively.  The costs associated with this restructuring are included in a separate line item, “Restructuring costs” within our consolidated statements related to the disposal
of income.

an unprofitable U.S. business,

35

initiated during 2022 and completed during the three months ended April
1, 2023.
 
34

Three Months Ended September 30, 2017April 1, 2023 Compared to Three Months Ended September 24, 2016

March 26, 2022

Net Sales

Net sales for the three months ended September 30, 2017 and September 24, 2016 were as follows (in thousands):

follows:

 

 

 

 

September 30,

 

% of

 

September 24,

 

% of

 

Increase

 

 

 

 

2017

 

Total

 

2016

 

Total

 

$

 

%

Health care distribution (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dental ............................................................................................................................................................................................  

 

$

1,478,730

 

46.8

%

 

$

1,330,525

 

46.4

%

 

$

148,205

 

11.1

%

 

Animal health ...................................................................................................................................................................................  

 

 

882,580

 

27.9

 

 

 

790,279

 

27.6

 

 

 

92,301

 

11.7

 

 

Medical ..........................................................................................................................................................................................  

 

 

690,761

 

21.9

 

 

 

639,648

 

22.3

 

 

 

51,113

 

8.0

 

 

 

Total health care distribution ..............................................................................................................................................................  

 

 

3,052,071

 

96.6

 

 

 

2,760,452

 

96.3

 

 

 

291,619

 

10.6

 

Technology and value-added services (2).......................................................................................................................................................  

 

 

109,012

 

3.4

 

 

 

104,696

 

3.7

 

 

 

4,316

 

4.1

 

 

 

Total .........................................................................................................................................................................................  

 

$

3,161,083

 

100.0

%

 

$

2,865,148

 

100.0

%

 

$

295,935

 

10.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and

 

 

generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

 

Consists of practice management software and other value-added products, which are distributed primarily to health care providers,

 

 

and financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other

 

 

services.

April 1,

% of
March 26,
% of
Increase / (Decrease)
2023
Total
2022
Total
$
%
Health care distribution
(1)
Dental
$
1,898
62.0
%
$
1,828
57.5
%
$
70
3.8
%
Medical
971
31.8
1,172
36.9
(201)
(17.2)
Total health care distribution
2,869
93.8
3,000
94.4
(131)
(4.4)
Technology and value-added services
(2)
191
6.2
179
5.6
12
6.8
Total
$
3,060
100.0
%
$
3,179
100.0
%
$
(119)
(3.8)
%
The $295.9 million, or 10.3%components of our sales growth were as follows:
Total Local
Currency
Growth
Foreign
Exchange
Impact
Total Sales
Growth
Local Currency Growth
Local Internal
Growth
Acquisition
Growth
Health care distribution
(1)
Dental Merchandise
4.0
%
2.5
%
6.5
%
(2.4)
%
4.1
%
Dental Equipment
3.9
1.5
5.4
(2.6)
2.8
Total Dental
4.0
2.3
6.3
(2.5)
3.8
Medical
(17.1)
-
(17.1)
(0.1)
(17.2)
Total Health Care Distribution
(4.3)
1.4
(2.9)
(1.5)
(4.4)
Technology and value-added services
(2)
6.5
1.5
8.0
(1.2)
6.8
Total
(3.7)
%
1.4
%
(2.3)
%
(1.5)
%
(3.8)
%
Note: Percentages for Net Sales; Gross Profit; Selling, General and Administrative; Other Expense, Net; and Income Taxes are based on
actual values and may not recalculate due to rounding.
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic
products), increase indiagnostic tests, infection-control products, PPE products and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
Global Sales
Global net sales for the three months ended September 30, 2017 includes 8.8%April 1, 2023 decreased 3.8% based
upon the components presented in
the table above.
Sales of PPE products and COVID-19 test kits for the three
months ended April 1, 2023 were
approximately $201 million, a decrease of approximately 58.8% versus
the three months ended March 26, 2022.
Excluding PPE products and COVID-19 test kits, the increase in
internally generated local currency growth (4.8% increase in internally generated revenue and 4.0% growth from acquisitions) as well as an increase of 1.5% related to foreign currency exchange.  We have estimated that our total increase in internally generated revenuesales was negatively affected by approximately 0.3% due to the hurricanes that occurred in North America during the quarter. 

The $148.2 million, or 11.1%, increase in dental

6.3%.
Dental
Dental net sales for the three months ended September 30, 2017 includes 9.1%April 1, 2023 increased 3.8%
based upon the components presented in
the table above.
Our sales growth in local currency for dental merchandise was primarily
attributable to stable
patient traffic along with some price increases.
Our sales growth (1.6% in local currency for dental equipment was
primarily attributable to growth in North America for traditional equipment,
partially offset by a decrease in digital
equipment.
International dental equipment sales growth in local currency
was supported by a strong equipment
backlog.
Sales of PPE products for the three months ended April 1, 2023
were approximately $92 million, a
decrease of approximately 35.8% versus the three months ended March 26,
2022.
Excluding PPE products, the
increase in internally generated revenue and 7.5% growth from acquisitions) as well as an increase of 2.0% related to foreign currency exchange.  The 9.1% local currency growthdental sales was due to an increase in dental consumable merchandise sales7.4%.
35
Medical
Medical net sales for the three months ended September 30, 2017 includes 9.9% April 1, 2023 decreased
17.2% based upon the components presented
in the table above.
The local currency growth (8.0%decrease in medical sales is primarily attributable
to lower sales of PPE
products and COVID-19 test kits, partially offset by strong medical equipment and
pharmaceutical sales.
Sales of
PPE products and COVID-19 test kits were approximately $109 million for
the three months ended April 1, 2023, a
decrease of approximately 68.4% compared to the three months ended March
26, 2022.
Excluding PPE products
and COVID-19 test kits, the increase in internally generated revenue and 1.9% growth from acquisitions) as well as an increase of 1.8% related to foreign currency exchange.  The growth in internally generated animal health revenue is affected by the revenue for certain products being recognized on a gross basis in 2017 that had been recognized on an agency basis in the prior year.  When excluding the effects of this change, internally generated revenue grew by 7.8%.  We have estimated that our increase in internally generated animal health revenue was negatively affected by approximately 0.2% due to the hurricanes that occurred in North America during the quarter. 

The $51.1 million, or 8.0%, increase in medical net sales for the three months ended September 30, 2017 includes 7.9% local currency growth (7.8% increase in internally generated revenuemedical

sales was 4.2%.
Technology and 0.1% growth from acquisitions) as well as an increase of 0.1% related to foreign currency exchange.  We have estimated that our increase in internally generated medical revenue was negatively affected by approximately 0.2% due to the hurricanes that occurred in North America during the quarter. 

36

value-added services

The $4.3 million, or 4.1%, increase in technologyTechnology and value-added services net sales for the three months ended September 30, 2017 includes 3.7% local currency growth (3.0% internally generated April 1, 2023 increased 6.8% based upon

the components presented in the table above.
During the three months ended April 1, 2023,
the trend for sales of
transactional software improved as we increased the number of cloud-based
users, generating demand for our
revenue cycle management solutions which drive practice efficiency and 0.7% growth from acquisitions) as well as anpatient engagement.
The increase in sales
during the quarter ended April 1, 2023 was partially offset by the expiration, during
the third quarter of 0.4% related to foreign currency exchange.   We believe that2022, of a
modestly profitable government contract in one of our internally generated technology and value-added services revenue was not meaningfully affected by the hurricanes that occurred in North America during the quarter.

businesses.
Gross Profit

Gross profit and gross margin percentages by segment and in total for the three months ended September 30, 2017 and September 24, 2016 were as follows (in thousands):

follows:

 

 

 

September 30,

 

Gross

 

September 24,

 

Gross

 

Increase

 

 

 

2017

 

Margin %

 

2016

 

Margin %

 

$

 

%

Health care distribution ........................................................................................................................................................................  

 

$

765,528

 

25.1

%

 

$

719,255

 

26.1

%

 

$

46,273

 

6.4

%

Technology and value-added services .......................................................................................................................................................  

 

 

70,526

 

64.7

 

 

 

68,420

 

65.4

 

 

 

2,106

 

3.1

 

 

Total .........................................................................................................................................................................................  

 

$

836,054

 

26.4

 

 

$

787,675

 

27.5

 

 

$

48,379

 

6.1

 

April 1,

Gross profit increased $48.4 million, or 6.1% for the three months ended September 30, 2017, compared to the prior year period. 
March 26,
Gross
Increase / (Decrease)
2023
Margin %
2022
Margin %
$
%
Health care distribution
$
837
29.2
%
$
857
28.6
%
$
(20)
(2.3)
%
Technology and value-added services
129
67.4
116
64.9
13
11.1
Total
$
966
31.6
$
973
30.6
$
(7)
(0.7)
As a result of different practices of categorizing costs associated with distribution networks
throughout our
industry, our gross margins may not necessarily be comparable to other distribution companies.
Additionally, we
realize substantially higher gross margin percentages in our technology and value-added services
segment than in
our health care distribution segment.
These higher gross margins result from being both the developer and seller of
software products and services, as well as certain financial services.
The software industry typically realizes higher
gross margins to recover investments in research and development.

Within our health care distribution segment, gross profit margins may vary from one period to the next.
Changes in
the mix of products sold as well as changes in our customer mix have been
the most significant drivers affecting
our gross profit margin.
For example, sales of pharmaceuticalour corporate brand products are generally at lower gross profit margins than other products.  Conversely, sales of our private label products achieve
gross profit margins that are
higher than average.  average total gross profit margins of all products.
With respect to customer mix, sales to our large-grouplarge-
group customers are typically completed at lower gross margins due to the higher
volumes sold as opposed to the
gross margin on sales to office-based practitioners, who normally purchase lower volumes at greater frequencies.

volumes.

Health care distribution gross profit increased $46.3 million, or 6.4%, for the three months ended September 30, 2017 compareddecreased primarily due to the prior year period.  Health care distributiondecrease
in net sales discussed above, partially
offset by $11 million of gross profit from acquisitions and gross margin decreased to 25.1% for the three months ended September 30, 2017 from 26.1% for the comparable prior year period.  The decline in gross profit margin was attributable to lower margins experienced in each of our operating segments within the health care distribution segment.  Our lower margin medical and animal health businesses have been growing at a faster rate than our higher margin dental product sales, resulting in overall gross profit margins being impacted.  Asexpansion, mainly as a result of extending multi-year contracts with key Dental Support Organizations, our gross profit margins have been negatively impacted.  Our gross profit margins were also negatively impacted by our European dental business, particularly in Germany.  The overall increase in our health care distribution gross profit is attributable toprice
increases and a $39.4 million gross profit increase from growth in internally generated revenue and $33.7 million is attributable to acquisitions.  These increases were partially offset by a $26.8 million decline in gross profit due primarily to the effectsfavorable impact of foreign exchange on revenues and the decrease in the gross margin rates.

sales mix of higher-margin products.

Technology and value-added services gross profit increased $2.1 million, or 3.1%, for the three months ended September 30, 2017 compared to the prior year period.  Technology and value-added servicesas a result of a higher gross profit margin decreased to  64.7% for the three months ended September 30, 2017 from 65.4% for the comparable prior year period. The internally
generated sales and gross profit of $3 million from acquisitions, as well as an
increase in gross profit in our technology and value-added services segment was attributable to $1.4 million of growth in internally generated revenue.  Acquisitions accounted for the remaining $0.7 million increase of gross profit increase within our technology and value-added services segment for the three months ended September 30, 2017 comparedmargin rates
primarily due to the prior year period. 

impact of price increases.

37

 
36
Operating Expenses

Selling, General and Administrative

Selling,Operating expenses (consisting of selling, general and administrative expenses

expenses; depreciation and amortization; and
restructuring costs) by segment and in total for the three months ended September 30, 2017 and September 24, 2016 were as follows (in thousands):

follows:

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

September 30,

 

Respective

 

September 24,

 

Respective

 

Increase

 

 

 

2017

 

Net Sales

 

2016

 

Net Sales

 

$

 

%

Health care distribution .......................................................................................................................................................................  

 

$

583,915

 

19.1

%

 

$

543,771

 

19.7

%

 

$

40,144

 

7.4

%

Technology and value-added services ......................................................................................................................................................  

 

 

38,591

 

35.4

 

 

 

37,813

 

36.1

 

 

 

778

 

2.1

 

 

Total  ........................................................................................................................................................................................  

 

$

622,506

 

19.7

 

 

$

581,584

 

20.3

 

 

$

40,922

 

7.0

 

% of

Selling, general

% of
April 1,
Respective
March 26,
Respective
Increase
2023
Net Sales
2022
Net Sales
$
%
Health care distribution
$
692
24.1
%
$
646
21.5
%
$
46
7.2
%
Technology and administrative expenses increased $40.9 million, or 7.0%, to $622.5 million for the three months ended September 30, 2017 from the comparable prior year period.  value-added services
99
51.6
83
46.4
16
18.7
Total
$
791
25.8
$
729
22.9
$
62
8.5
The $40.1 millionnet increase in selling, general and administrativeoperating expenses within our health care distribution segment for the three months ended September 30, 2017 as comparedis attributable to the prior year period was attributablefollowing:
Restructuring Costs
Operating Costs
Acquisitions
Total
Health care distribution
$
26
$
18
$
2
$
46
Technology and value-added services
4
4
8
16
Total
$
30
$
22
$
10
$
62
The restructuring costs are primarily related to $26.7 millionseverance and employee-related
costs, accelerated amortization of additional
right-of-use lease assets and fixed assets, and other lease exit costs.
The increase in operating costs from acquired companies,includes
increases in payroll and $13.4 millionpayroll related costs, travel and convention expenses
and acquisition costs in both of additional operating costs.  As a percentageour
reportable segments.
While the U.S. economy has recently experienced inflationary
pressures and strengthening of net sales, selling, general and administrative expenses decreased
the U.S. dollar, their impacts have not been material to 19.7% from 20.3% for the comparable prior year period.

As a componentour results of total selling, general and administrative expenses, selling expenses increased $22.8 million, or 6.3% to $385.7 million, for the three months ended September 30, 2017 from the comparable prior year period.  As a percentage of net sales, selling expenses decreased to 12.2% from 12.7% for the comparable prior year period.

As a component of total selling, general and administrative expenses, general and administrative expenses increased $18.1 million, or 8.3% to $236.8 million, for the three months ended September 30, 2017 from the comparable prior year period.  As a percentage of net sales, general and administrative expenses decreased to 7.5% from 7.6% for the comparable prior year period.

operations.

Other Expense, Net

Other expense, net for the three months ended September 30, 2017  and September 24, 2016 was as follows (in thousands):

follows:

 

 

 

September 30,

 

September 24,

 

Variance

 

 

 

2017

 

2016

 

$

 

%

Interest income ........................................................................................................................................................................  

 

$

4,793

 

$

3,141

 

$

1,652

 

52.6

%

Interest expense .......................................................................................................................................................................  

 

 

(13,428)

 

 

(7,488)

 

 

(5,940)

 

(79.3)

 

Other, net ..............................................................................................................................................................................  

 

 

(194)

 

 

(199)

 

 

5

 

2.5

 

 

Other expense, net .............................................................................................................................................................  

 

$

(8,829)

 

$

(4,546)

 

$

(4,283)

 

(94.2)

 

April 1,

March 26,
Variance
2023
2022
$
%
Interest income
$
3
$
2
$
1
58.3
%
Interest expense
(14)
(7)
(7)
(97.8)
Other, net
(1)
-
(1)
n/a
Other expense, net increased $4.3 million to $8.8 million for the three months ended September 30, 2017 from the comparable prior year period. 
$
(12)
$
(5)
$
(7)
(119.0)
Interest income increased by $1.7 million primarily due to increased investment and late fee income.  interest rates.
Interest expense increased $5.9 million primarily due to
increased borrowings and higherincreased interest rates under our bank credit lines and interest expense related to a financing arrangement entered into during the first quarter of 2017 in Brazil. 

rates.

Income Taxes

For the three months ended September 30, 2017,April 1, 2023 our effective tax rate was 29.0%23.8% compared
to 28.9%24.0% for the prior year
period.The difference between our effective tax rates and the federal statutory tax rates primarily relates to state and foreign income taxes and interest expense. 

Net Income

Net income increased $5.7 million, or 3.9%, for the three months ended September 30, 2017, compared to the prior year period due to the factors noted above.

38

 
Table of Contents

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 24, 2016

Net Sales

Net sales for the nine months ended September 30, 2017 and September 24, 2016 were as follows (in thousands):

 

 

 

 

September 30,

 

% of

 

September 24,

 

% of

 

Increase

 

 

 

 

2017

 

Total

 

2016

 

Total

 

$

 

%

Health care distribution (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dental ............................................................................................................................................................................................  

 

$

4,372,055

 

47.8

%

 

$

4,005,468

 

47.4

%

 

$

366,587

 

9.2

%

 

Animal health ...................................................................................................................................................................................  

 

 

2,586,850

 

28.3

 

 

 

2,415,290

 

28.6

 

 

 

171,560

 

7.1

 

 

Medical ..........................................................................................................................................................................................  

 

 

1,861,074

 

20.4

 

 

 

1,716,590

 

20.3

 

 

 

144,484

 

8.4

 

 

 

Total health care distribution ..............................................................................................................................................................  

 

 

8,819,979

 

96.5

 

 

 

8,137,348

 

96.3

 

 

 

682,631

 

8.4

 

Technology and value-added services (2).......................................................................................................................................................  

 

 

323,510

 

3.5

 

 

 

313,386

 

3.7

 

 

 

10,124

 

3.2

 

 

 

Total .........................................................................................................................................................................................  

 

$

9,143,489

 

100.0

%

 

$

8,450,734

 

100.0

%

 

$

692,755

 

8.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and

 

 

generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

 

 

 

(2)

 

Consists of practice management software and other value-added products, which are distributed primarily to health care providers,

 

 

and financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other

 

 

services.

The $692.8 million, or 8.2%, increase in net sales for the nine months ended September 30, 2017 includes an increase of 8.4% in local currency growth (5.0% increase in internally generated revenue and 3.4% growth from acquisitions) partially offset by a decrease of 0.2% related to foreign currency exchange. 

The $366.6 million, or 9.2%, increase in dental net sales for the nine months ended September 30, 2017 includes an increase of 8.9% in local currency growth (2.6% increase in internally generated revenue and 6.3% growth from acquisitions) as well as an increase of 0.3% related to foreign currency exchange.  The 8.9% increase in local currency sales was due to an increase in dental consumable merchandise sales growth of 10.5% (2.4% increase in internally generated revenue and 8.1% growth from acquisitions), as well as an increase in dental equipment sales and service revenues of 3.6% (3.0% increase in internally generated revenue and 0.6% growth from acquisitions).

The $171.6 million, or 7.1%, increase in animal health net sales for the nine months ended September 30, 2017 includes an increase of 8.2% in local currency growth (6.9% internally generated revenue and 1.3% growth from acquisitions) partially offset by a decrease of 1.1% related to foreign currency exchange.  The growth in internally generated animal health revenue is affected by the revenue for certain products being recognized on a gross basis in 2017 that had been recognized on an agency basis in the prior year.  When excluding the effects of this change, internally generated revenue grew by 6.6%.

The $144.5 million, or 8.4%, increase in medical net sales for the nine months ended September 30, 2017 is the result of an increase of 8.5% in local currency growth (8.4% increase in internally generated revenue and 0.1% growth from acquisitions) partially offset by a decrease of 0.1% related to foreign currency exchange. 

The $10.1 million, or 3.2%, increase in technology and value-added services net sales for the nine months ended September 30, 2017 includes an increase of 4.0% in local currency growth (3.6% internally generated revenue and 0.4% growth from acquisitions) partially offset by a decrease of 0.8% related to foreign currency exchange.  

39

Table of Contents

Gross Profit

Gross profit and gross margin percentages by segment and in total for the nine months ended September 30, 2017 and September 24, 2016 were as follows (in thousands):

 

 

 

September 30,

 

Gross

 

September 24,

 

Gross

 

Increase

 

 

 

2017

 

Margin %

 

2016

 

Margin %

 

$

 

%

Health care distribution ........................................................................................................................................................................  

 

$

2,286,863

 

25.9

%

 

$

2,163,217

 

26.6

%

 

$

123,646

 

5.7

%

Technology and value-added services .......................................................................................................................................................  

 

 

211,284

 

65.3

 

 

 

203,769

 

65.0

 

 

 

7,515

 

3.7

 

 

Total .........................................................................................................................................................................................  

 

$

2,498,147

 

27.3

 

 

$

2,366,986

 

28.0

 

 

$

131,161

 

5.5

 

For the nine months ended September 30, 2017, gross profit increased $131.2 million, or 5.5%, from the comparable prior year period.  As a result of different practices of categorizing costs associated with distribution networks throughout our industry, our gross margins may not necessarily be comparable to other distribution companies.  Additionally, we realize substantially higher gross margin percentages in our technology segment than in our health care distribution segment.  These higher gross margins result from being both the developer and seller of software products and services, as well as certain financial services. The software industry typically realizes higher gross margins to recover investments in research and development.

Within our health care distribution segment, gross profit margins may vary from one period to the next.  Changes in the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting our gross profit margin.  For example, sales of pharmaceutical products are generally at lower gross profit margins than other products.  Conversely, sales of our private label products achieve gross profit margins that are higher than average.  With respect to customer mix, sales to our large-group customers are typically completed at lower gross margins due to the higher volumes sold as opposed to the gross margin on sales to office-based practitioners who normally purchase lower volumes at greater frequencies.

Health care distribution gross profit increased $123.6 million, or 5.7%, for the nine months ended September 30, 2017 compared to the prior year period.  Health care distribution gross profit margin decreased to 25.9% for the nine months ended September 30, 2017 from 26.6% for the comparable prior year period.  The decline in gross profit margin was attributable to lower margins experienced in each of our operating segments within the health care distribution segment.  Our lower margin medical and animal health businesses have been growing at a faster rate than our higher margin dental product sales, resulting in overall gross profit margins being impacted.  As a result of extending multi-year contracts with key Dental Support Organizations, our gross profit margins have been negatively impacted.  Our gross profit margins were also negatively impacted by our European dental business, particularly in Germany.  The overall increase in our health care distribution gross profit is attributable to a $86.8 million gross profit increase from growth in internally generated revenue and $91.6 million is attributable to acquisitions.  These increases were partially offset by a $54.8 million decline in gross profit due primarily to the effects of foreign exchange on revenues and the decrease in the gross margin rates.

Technology and value-added services gross profit increased $7.5 million, or 3.7%, for the nine months ended September 30, 2017 compared to the prior year period.  Technology gross profit margin increased to 65.3% for the nine months ended September 30, 2017 from 65.0% for the comparable prior year period.  The increase in gross profit in our technology and value-added services segment was attributable to $6.3 million growth in internally generated revenue.  Acquisitions accounted for the remaining $1.2 million increase of gross profit within our technology and value-added services segment for the nine months ended September 30, 2017 compared to the prior year period.

40

Table of Contents

Selling, General and Administrative

Selling, general and administrative expenses by segment and in total for the nine months ended September 30, 2017 and September 24, 2016 were as follows (in thousands):

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

September 30,

 

Respective

 

September 24,

 

Respective

 

Increase

 

 

 

2017

 

Net Sales

 

2016

 

Net Sales

 

$

 

%

Health care distribution ........................................................................................................................................................................  

 

$

1,765,585

 

20.0

%

 

$

1,665,644

 

20.5

%

 

$

99,941

 

6.0

%

Technology and value-added services .......................................................................................................................................................  

 

 

114,384

 

35.4

 

 

 

113,939

 

36.4

 

 

 

445

 

0.4

 

 

Total .........................................................................................................................................................................................  

 

$

1,879,969

 

20.6

 

 

$

1,779,583

 

21.1

 

 

$

100,386

 

5.6

 

Selling, general and administrative expenses increased $100.4 million, or 5.6%, to $1,880.0 million for the nine months ended September 30, 2017 from the comparable prior year period.  The $99.9 million increase in selling, general and administrative expenses within our health care distribution segment for the nine months ended September 30, 2017 as compared to the prior year period was attributable to $79.9 million of additional costs from acquired companies, and $20.0 million of additional operating costs.  As a percentage of net sales, selling, general and administrative expenses decreased to 20.6% from 21.1% for the comparable prior year period.

As a component of selling, general and administrative expenses, selling expenses increased $42.0 million, or 3.8%, to $1,146.2 million for the nine months ended September 30, 2017 from the comparable prior year period.  As a percentage of net sales, selling expenses decreased to 12.5% as compared to 13.1% for the comparable prior year period. 

As a component of selling, general and administrative expenses, general and administrative expenses increased $58.4 million, or 8.7%, to $733.8 million for the nine months ended September 30, 2017 from the comparable prior year period.  As a percentage of net sales, general and administrative expenses remained consistent at 8.0%.

Other Expense, Net

Other expense, net, for the nine months ended September 30, 2017  and September 24, 2016 was as follows (in thousands):

 

 

 

September 30,

 

September 24,

 

Variance

 

 

 

2017

 

2016

 

$

 

%

Interest income ........................................................................................................................................................................  

 

$

13,204

 

$

10,045

 

$

3,159

 

31.4

%

Interest expense .......................................................................................................................................................................  

 

 

(37,056)

 

 

(21,982)

 

 

(15,074)

 

(68.6)

 

Other, net ..............................................................................................................................................................................  

 

 

489

 

 

3,206

 

 

(2,717)

 

(84.7)

 

 

Other expense, net .............................................................................................................................................................  

 

$

(23,363)

 

$

(8,731)

 

$

(14,632)

 

(167.6)

 

Other expense, net increased $14.6 million to $23.4 million for the nine months ended September 30, 2017 from the comparable prior year period.  Interest income increased $3.2 million primarily due to increased investment and late fee income.  Interest expense increased $15.1 million primarily due to increased borrowings and higher interest rates under our bank credit lines and interest expense related to a financing arrangement entered into during the first quarter of 2017 in Brazil.  Other, net decreased by $2.7 million primarily due to investment proceeds received in the first quarter of 2016.

41

Table of Contents

Income Taxes  

For the nine months ended September 30, 2017 and September 24, 2016, our effective tax rate was 26.3% and 29.0%.  The difference between our effective tax rate and the federal statutory tax rate for both periods primarily

relates to the adoption of Accounting Standards Update No. 2016-09, “Stock Compensation” (Topic 718) in the first quarter of 2017, as well as state and
foreign income taxes and interest expense for both periods.  See Note 10 “Income Taxes” in the Notes to Consolidated Financial Statements.  The 2016 effective tax rate was further affected by a federal tax audit settlement which reduced our income tax expense by approximately $4.5 million in the period.

Net Income

Net income increased $47.9 million, or 11.9%, for the nine months ended September 30, 2017, compared to the prior year period due to the factors noted above.

as well as stock-based compensation.

37
Liquidity and Capital Resources

Our principal capital requirements includehave included funding of acquisitions, purchases
of additional noncontrolling
interests, repayments of debt principal, the funding of working capital needs,
purchases of fixed assets and
repurchases of common stock.
Working capital requirements generally result from increased sales, special
inventory forward buy-in opportunities and payment terms for receivables
and payables.
Historically, sales have
tended to be stronger during the third and fourth quarterssecond half of the year and special inventory
forward buy-in opportunities have
been most prevalent just before the end of the year, which hasand have caused our working capital requirements
to be higher
from the end of the third quarter to the end of the first quarter of
the following year.

We finance our business primarily through cash generated from our operations, revolving credit facilities and debt
placements.
Please see
for further information.
Our ability to generate sufficient cash flows from
operations is dependent on the continued demand of our customers
for our products and services, and access to
products and services from our suppliers.

Our business requires a substantial investment in working capital, which
is susceptible to fluctuations during the
year as a result of inventory purchase patterns and seasonal demands.
Inventory purchase activity is a function of
sales activity, special inventory forward buy-in opportunities and our desired level of inventory.
We anticipate
future increases in our working capital requirements.

We finance our business to provide adequate funding for at least 12 months.
Funding requirements are based on
forecasted profitability and working capital needs, which, on occasion, may
change.
Consequently, we may change
our funding structure to reflect any new requirements.

We believe that our cash and cash equivalents, our ability to access private debt markets and public equity markets,
and our available funds under existing credit facilities provide us with
sufficient liquidity to meet our currently
foreseeable short-term and long-term capital needs.  We have no off-balance sheet arrangements.

Net cash provided by operating activities was $307.5$27 million for the nine
three months ended September 30, 2017,April 1, 2023, compared to $378.1
net cash provided by operating activities of $93 million for the comparable prior year period.  year.
The net change of $70.6$66 million was
primarily attributabledue to changesa decrease in net operating income and an unfavorable change in
working capital, partially offset by an increase in net income.

of acquisitions.

Net cash used in investing activities was $320.8$39 million for the ninethree months
ended September 30, 2017,April 1, 2023, compared to $179.8 $27
million for the comparable prior year period.  year.
The net change of $141.0$12 million was primarily dueattributable to increased payments
for equity investments and business acquisitions.

purchases of fixed assets.
Net cash provided by financing activities was $16.1$21 million for the nine
three months ended September 30, 2017,April 1, 2023, compared to
net cash used in financing activities of $198.3$62 million for the comparable prior year period.  year.
The net change of $214.4$83 million was primarily
due to increased net borrowings from debt, decreasedpartially offset by increased repurchases
of common stock and decreased acquisitions of noncontrolling interests in subsidiaries.

stock.

42

 
 
38

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

 

 

 

 

September 30,

 

December 31,

 

 

 

 

2017

 

2016

Cash and cash equivalents ...........................................................................................................................................................  

 

$

79,879

 

$

62,381

Working capital ..........................................................................................................................................................................  

 

 

1,345,382

 

 

1,022,134

 

 

 

 

 

 

 

 

 

Debt:

 

 

 

 

 

 

 

Bank credit lines .....................................................................................................................................................................  

 

$

631,865

 

$

437,476

 

Current maturities of long-term debt ...........................................................................................................................................  

 

 

17,247

 

 

65,923

 

Long-term debt ......................................................................................................................................................................  

 

 

907,592

 

 

715,457

 

 

Total debt .........................................................................................................................................................................  

 

$

1,556,704

 

$

1,218,856

resources:

April 1,
December 31,
2023
2022
Cash and cash equivalents
$
126
$
117
Working
capital
(1)
1,780
1,764
Debt:
Bank credit lines
$
236
$
103
Current maturities of long-term debt
55
6
Long-term debt
1,021
1,040
Total debt
$
1,312
$
1,149
Leases:
Current operating lease liabilities
$
73
$
73
Non-current operating lease liabilities
274
275
(1)
Includes $555 million and $327 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitization at April 1, 2023 and December 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 turns

Our accounts receivable days sales outstanding from operations decreased
increased to 41.743.4 days as of September 30, 2017April 1, 2023 from 41.9
41.6 days as of September 24, 2016.  March 26, 2022.
During the ninethree months ended September 30, 2017,April 1, 2023, we wrote
off approximately $5.8 $3
million of fully reserved accounts receivable against our trade receivable
reserve.
Our inventory turns from
operations remained consistent at 5.4decreased to 4.3 as of September 30, 2017 compared to comparable prior year period.  April 1, 2023 from 4.7 as of March 26, 2022.
Our working capital accounts may
be impacted by current and future economic conditions.

Bank Credit Lines

On April 18, 2017, we entered into a new $750 million revolving agreement (the “Credit Agreement”).  This facility, which matures in April 2022, replaced our $500 million revolving credit facility, which was scheduled to mature in September 2019.  The interest rate is based on the USD LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter.  The Credit Agreement provides, among

Leases
We have operating and finance leases for corporate offices, office space, distribution and other things, that we are required to maintain maximum leverage ratios, and contains customary representations, warranties and affirmative covenants.  The Credit Agreement also contains customary negative covenants, subject to negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions facilities, vehicles,
and certain restrictive agreements.  Asequipment.
Our leases have remaining terms of September 30, 2017 and December 31, 2016,less than one year to
approximately 18 years, some of
which may include options to extend the borrowings on this revolving credit facility and the prior credit facility were $175.0 million and $65.0 million, respectively.  As of September 30, 2017 and December 31, 2016, there were $11.7 million and $13.0 million of letters of credit, respectively, provided to third parties under the credit facility and the prior credit facility.

As of September 30, 2017 and December 31, 2016, we had various other short-term bank credit lines available, of which $456.9 million and $372.5 million, respectively, were outstanding.  At September 30, 2017 and December 31, 2016, borrowings under all of our credit lines had a weighted average interest rate of 2.09% and 1.61%, respectively.

43

Private Placement Facilities

On September 15, 2017, we increased our available private placement facilities with three insurance companies to a total facility amount of $1 billion, and extended the expiration date to September 15, 2020.  These facilities are available on an uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from time to time through September 15, 2020.  The facilities allow us to issue senior promissory notes to the lenders at a fixed rate based on an agreed upon spread over applicable treasury notes at the time of issuance.  The term of each possible issuance will be selected by us and can range from five to 15 years (with an average life no longer than 12 years). The proceeds of any issuances under the facilities will be used for general corporate purposes, including working capital and capital expenditures, to refinance existing indebtedness and/or to fund potential acquisitions.  The agreements provide, among other things, that we maintain certain maximum leverage ratios, and contain restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal of assets and certain changes in ownership.  These facilities contain make-whole provisions in the event that we pay off the facilities prior to the applicable due dates.

The components of our private placement facility borrowings as of September 30, 2017 are presented in the following table (in thousands):

 

 

Amount of

 

 

 

 

 

 

 

Borrowing

 

Borrowing

 

 

Date of Borrowing

 

Outstanding

 

Rate

 

Due Date

September 2, 2010

 

$

100,000

 

3.79

%

 

September 2, 2020

January 20, 2012

 

 

50,000

 

3.45

 

 

January 20, 2024

January 20, 2012 (1)

 

 

35,714

 

3.09

 

 

January 20, 2022

December 24, 2012

 

 

50,000

 

3.00

 

 

December 24, 2024

June 2, 2014

 

 

100,000

 

3.19

 

 

June 2, 2021

June 16, 2017

 

 

100,000

 

3.42

 

 

June 16, 2027

September 15, 2017

 

 

100,000

 

3.52

 

 

September 15, 2029

Less: Deferred debt issuance costs

 

 

(250)

 

 

 

 

 

 

 

$

535,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)   Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016.

U.S. Trade Accounts Receivable Securitization

We have a facility agreement with a bank, as agent, based on the securitization of our U.S. trade accounts receivable that is structured as an asset-backed securitization program with pricing committedleases for up to three15 years.  On June

As of April 1, 2016, we extended the expiration date of this facility agreement2023, our right-of-use assets
related to April 29, 2019 and increased the purchase limit under the facility from $300 million to $350 million.  On July 6, 2017, we extended the expiration date of this facility agreement to April 29, 2020.  The borrowings outstanding under this securitization facilityoperating leases were $350.0$280 million and $350.0 million as of September 30, 2017our current and December 31, 2016, respectively.  At September 30, 2017, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 134 basis points plus 75 basis points, for a combined rate of 2.09%.  At December 31, 2016, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 101 basis points plus 75 basis points, for a combined rate of 1.76%.

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

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

44

non-current
 
operating lease liabilities were $73
million and $274 million, respectively.

Long-term debt

Long-term debt consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

Private placement facilities ..........................................................................................................................................................  

 

$

535,464

 

$

342,857

U.S. trade accounts receivable securitization ...................................................................................................................................  

 

 

350,000

 

 

350,000

Note payable to bank at a weighted-average interest rate of

 

 

 

 

 

 

 

21.37% at December 31, 2016...................................................................................................................................................  

 

-

 

 

47,957

Various collateralized and uncollateralized loans payable with

 

 

 

 

 

 

 

interest, in varying installments through 2022 at interest rates

 

 

 

 

 

 

 

ranging from 2.56% to 12.90% at September 30, 2017 and

 

 

 

 

 

 

 

ranging from 2.56% to 12.90% at December 31, 2016....................................................................................................................  

 

33,994

 

 

35,150

Capital lease obligations payable through 2029 with interest rates

 

 

 

 

 

 

 

ranging from 0.84% to 19.79% at September 30, 2017 and

 

 

 

 

 

 

ranging from 1.38% to 19.15% at December 31, 2016....................................................................................................................  

 

5,381

 

 

5,416

Total .......................................................................................................................................................................................  

 

 

924,839

 

 

781,380

Less current maturities ................................................................................................................................................................  

 

 

(17,247)

 

 

(65,923)

 

Total long-term debt .............................................................................................................................................................  

 

$

907,592

 

$

715,457

 

 

 

 

 

 

 

 

Stock Repurchases

From June 21, 2004 through September 30, 2017, we repurchased $2.5 billion, or 52,431,816 shares, under our common stock repurchase programs, with $425.0 million available as of September 30, 2017 for future common stock share repurchases.

On September 15, 2017,February 8, 2023, our Board of Directors authorized the repurchase
of up to an additional $400.0$400 million in shares
of our common stock.

Redeemable Noncontrolling Interests

Some minority shareholders in certain

From March 3, 2003 through April 1, 2023, we repurchased $4.6 billion,
or 88,404,588 shares, under our common
stock repurchase programs, with $415 million available as of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value.  Accounting Standards Codification Topic 480-10 is applicable April 1, 2023
for noncontrolling interests where we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements.  The components of the change in the Redeemable noncontrolling interests for the nine months ended September 30, 2017 and the year ended December 31, 2016 are presented in the following table:

future common stock share

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

Balance, beginning of period ..................................................................................................................................................  

 

$

607,636

 

$

542,194

Decrease in redeemable noncontrolling interests due to

 

 

 

 

 

 

 

redemptions ....................................................................................................................................................................  

 

 

(40,638)

 

 

(72,729)

Increase in redeemable noncontrolling interests due to

 

 

 

 

 

 

 

business acquisitions.........................................................................................................................................................  

 

 

25,209

 

 

58,172

Net income attributable to redeemable noncontrolling interests .....................................................................................................  

 

 

35,398

 

 

48,760

Dividends declared ...............................................................................................................................................................  

 

 

(22,566)

 

 

(32,973)

Effect of foreign currency translation gain (loss) attributable to

 

 

 

 

 

 

 

redeemable noncontrolling interests .....................................................................................................................................  

 

 

7,961

 

 

(2,652)

Change in fair value of redeemable securities ............................................................................................................................  

 

 

124,747

 

 

66,864

Balance, end of period ..........................................................................................................................................................  

 

$

737,747

 

$

607,636

repurchases.

45

39

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

Additionally, some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial targets are met.  Any adjustments to these accrual amounts are recorded in our consolidated statement of income.

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies and
estimates from those disclosed in Item
7 of our Annual Report on Form 10-K for the year ended December 31, 2016.

Accounting Pronouncement Adopted

In March 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Stock Compensation” (Topic 718) (“ASU 2016-09”).  ASU 2016-09 contains amended guidance for share-based payment accounting.  We2022,

except accounting policies adopted the provisions of this standard during the first quarter of 2017. 

Under ASU 2016-09, all excess tax benefits and tax deficiencies resulting from the difference between the deduction for tax purposes and the stock-based compensation cost recognized for financial reporting purposes are included as a component of income tax expense

as of January 1, 2017.  Prior to the implementation of ASU 2016-09, excess tax benefits were recorded as a component of additional paid2023, which are discussed in capital
Note 2-Critical Accounting Policies, Accounting Pronouncements
Adopted and tax deficiencies were recognized either as an offset to accumulated excess tax benefits or in the income statement if there were no accumulated excess tax benefits.  The adoption of ASU 2016-09 reduced income tax expense by approximately $19.5 million for the nine months ended September 30, 2017. 

The ASU clarifies the classification of certain share based payment activities within the statements of cash flow.  We have elected to prospectively present the amount of excess tax benefits related to stock compensation as a component of cash flow from operating activities.  Additionally, classification of all cash payments made to taxing authorities on an employees’ behalf when directly withholding shares for tax-withholding purposes, which was previously included as cash flows from operating activities, is now presented retrospectively as cash flows from financing activities within the statement of cash flows. 

46

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under accounting principles generally accepted in United States (“U.S. GAAP”). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers”, which deferred the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date.  Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

When effective, ASU 2014-09 will require us to use either

of the following transition methods: (i)Notes to the Condensed Consolidated Financial
Statements included under Item 1.
Accounting Standards Update
For a full retrospective approach reflecting the application discussion of accounting standards updates that have been adopted
or will be adopted, see
Note 2-Critical
Accounting Policies, Accounting Pronouncements Adopted and RecentlyIssued Accounting Standards
of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  

Currently, we are nearing completion of our review of our various revenue streams within our two reportable segments: (i) health care distribution and (ii) technology and value-added services.  We have gathered data to quantify the amount of sales by type of revenue stream and categorized the types of sales for our business units for the purpose of comparing how we currently recognize revenue Notes

to the new standard in order to quantify the impact of this ASU.  We generally anticipate having substantially similar performance obligationsCondensed Consolidated Financial Statements included under the new guidance as compared with deliverables and units of account currently being recognized. We intend to make policy elections within the amended standard that are consistent with our current accounting.

At this time, we believe that the largest impact of this ASU will occur within our technology and value-added services reportable segment.  However, we do not currently believe that the impact will be material to this segment or to our consolidated financial statements.

This preliminary assessment is subject to change prior to adoption. We anticipate adopting this amended standard on a modified retrospective basis in our first quarter of 2018.

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”).  ASU 2016-02 contains guidance on accounting for leases and requires that most lease assets and liabilities and the associated rights and obligations be recognized on the Company’s balance sheet.  ASU 2016-02 focuses on lease assets and lease liabilities by lessees classified as operating leases under previous generally accepted accounting principles.  For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.  ASU 2016-02 will require disclosures regarding the amount, timing and uncertainty of cash flows arising from leases.  The standard, which requires the use of a modified retrospective approach, will be effective for interim and annual periods beginning after December 15, 2018.  Early adoption is permitted. We are currently exploring the methods we can use to gather and process our operating lease data at a worldwide consolidated level.

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

Item 1.

47

ITEM 3.
 
QUANTITATIVE
 
Table of Contents
AND QUALITATIVE
 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting” (“ASU 2017-09”).  ASU 2017-09 clarifies guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting.  ASU 2017-09 requires modification accounting if the fair value, vesting conditions, or equity or liability classification of the award is not the same immediately before and after a change to the terms and conditions of the award.  ASU 2017-09 is required to be implemented on a prospective basis for fiscal years beginning after December 15, 2017.  We do not expect that the requirements of ASU 2017-09 will have a material impact on our consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging” (Topic 815) (“ASU 2017-12”), which simplifies the requirements for hedge accounting, more closely aligns hedge accounting with risk management activities and increases transparency of the scope and results of hedging activities. This ASU amends the presentation and disclosure requirements and changes how we can assess the effectiveness of our hedging relationships.  This ASU will make more financial and nonfinancial hedging strategies eligible for hedge accounting.  ASU 2017-12 is required to be implemented for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption of ASU 2017-12 is permitted in any interim period after the issuance of this ASU.  We do not expect that the requirements of ASU 2017-12 will have a material impact on our consolidated financial statements. 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our exposure to market risk
from that disclosed in Item 7A of our Annual
Report on Form 10-K for the year ended December 31, 2016.

2022.

ITEM 4.
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 quarterly 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 September 30, 2017April 1,
2023, to ensure that all material
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is accumulated
and communicated to them as appropriate to allow timely decisions
regarding required disclosure and that all such
information is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules
and forms.

Changes in Internal Control over Financial Reporting

The combination of continued acquisition integrations and systems implementationsimplementation
activity undertaken during the
quarter ended April 1, 2023 and carried over from prior quarters when considered
in the aggregate, representsdoes not
represent a material change in our internal control over financial reporting.

During the quarter ended September 30, 2017, we completed the acquisition of an animal health business in North America and dental businesses in Europe, Asia and Australia with approximate aggregate annual revenues of $157.0 million.  In addition, post-acquisition integration related activities continued for our global dental, animal health and corporate commercial development Group businesses acquired during prior quarters, representing aggregate annual revenues of approximately $370.0 million.  These acquisitions, the majority of which utilize separate information and financial accounting systems, have been included in our consolidated financial statements.  

48

Table of Contents

Also, during the quarter ended September 30, 2017, we completed multiple new system implementations and an existing system upgrade involving our US dental and medical and Canadian dental businesses having approximate aggregate annual revenues of $5.7 billion.  This included the implementations of a new master data management system and e-commerce website, a new equipment system at selected dental equipment centers, and a new medical sales commission application as well as an upgrade to our central enterprise resource planning system.

All acquisition integrations and systems implementations involved necessary and appropriate change-management controls that are considered in our annual assessment of the design and operating effectiveness of our internal control over financial reporting.

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.

49

 
40
PART
II.
OTHER INFORMATION

PART II.  OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Beginning in January 2016, class action complaints were filed against Patterson Companies, Inc. (“Patterson”), Benco Dental Supply Co. (“Benco”) and Henry Schein, Inc.Each

For a discussion of these complaints allege, among other things, that defendants conspired toLegal Proceedings, see
Note 10–Legal Proceedings fix prices, allocate customers and foreclose competitors by boycotting manufacturers, state dental associations and others that deal with defendants’ competitors.  Subject to certain exclusions, these classes seek to represent all persons who purchased dental supplies or equipment in the United States directly from any
of the defendants or Burkhart Dental Supply Co. (“Burkhart”) since August 31, 2008.  Each class action complaint asserts a single countNotes to the Condensed Consolidated
Financial Statements included under Section 1 of the Sherman Act, and seeks equitable relief, compensatory and treble damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees.  We intend to defend ourselves vigorously against these actions.

On August 31, 2012, Archer and White Sales, Inc. (“Archer”) filed a complaint against Henry Schein, Inc. as well as Danaher Corporation and its subsidiaries Instrumentarium Dental, Inc., Dental Equipment, LLC, Kavo Dental Technologies, LLC and Dental Imaging Technologies Corporation (collectively, the “Danaher Defendants”) in the United States 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, Inc., an unnamed company and the Danaher Defendants to terminate or limit Archer’s distribution rights.  On October 1, 2012, Henry Schein filed a motion for an order: (i) compelling Archer to arbitrate its claims against Henry Schein; (2) staying all proceedings pending arbitration; and (3) joining the Danaher Defendants’ motion to arbitrate and stay.  On May 28, 2013, the Magistrate Judge granted the motions to arbitrate and stayed proceedings pending arbitration.  On June 10, 2013, Archer moved for reconsideration before the District Court judge.  On December 7, 2016, the District Court Judge granted Archer’s motion for reconsideration and lifted the stay.  Defendants have appealed the District Court’s order, and that appeal is pending.

On August 1, 2017, Archer filed an amended complaint, adding Patterson and Benco as defendants, and alleging that Henry Schein, Inc., Patterson, Benco and Burkhart 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 injunctive relief, and damages in an amount to be proved at trial, to be trebled with interest and costs, including attorneys’ fees, jointly and severally.

On October 30, 2017, Archer filed a second amended complaint under seal, 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.   Trial is currently scheduled for February 2018.  We intend to defend ourselves vigorously against this action.

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

IQ Dental alleges, among other things, that defendants conspired to suppress competition from IQ Dental and SourceOne for the marketing, distribution and sale of dental supplies and equipment in the United States, and that defendants unlawfully agreed with one another to boycott dentists, manufacturers and state dental associations that deal with, or considered dealing with, plaintiff and SourceOne.  Plaintiff claims that this alleged conduct constitutes unreasonable restraint of trade in violation of Section 1 of the Sherman Act, New York’s Donnelly Act and the New Jersey Antitrust Act, and also makes pendant state law claims for tortious interference with prospective business relations, civil conspiracy and aiding and  abetting.  Plaintiff seeks injunctive relief, compensatory, treble

50

Item 1.

and punitive damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees.  We intend to vigorously defend ourselves against this action.

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

As of September 30, 2017, we had accrued our best estimate of potential losses relating to claims that were probable to result in liability and for which we were able to reasonably estimate a loss.  This accrued amount, as well as related expenses, was not material to our financial position, results of operations or cash flows.  Our method for determining estimated losses considers currently available facts, presently enacted laws and regulations and other factors, including probable recoveries from third parties.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in
Part 1, Item 1A, of our Annual Report on
Form 10-K for the year ended December 31, 2016.

2022.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS

Purchases of equity securities by the issuer

On August 16, 2017, we announced that our Board of Directors approved a 2-for-1 split of our common stock. Each Henry Schein, Inc. stockholder of record at the close of business on September 1, 2017 received a dividend of one additional share for every share held.  Trading began on a split-adjusted basis on September 15, 2017 and has been retroactively reflected for all periods presented in this Form 10-Q. 

Our share repurchase program, announced on June 21, 2004,March 3, 2003, originally
allowed us to repurchase up to $100two million of
shares pre-stock splits (eight million shares post-stock splits) of our common
stock, which represented
approximately 3.5%2.3% of the shares outstanding at the commencement of
the program.  As summarized in the table below, subsequent
Subsequent additional
increases totaling $2.8 $4.9
billion, authorized by our Board of Directors, to the repurchase program
provide for a total
of $2.9$5.0 billion (including $400 million authorized on February 8, 2023) of shares
of our common stock to be
repurchased under this program.

 

Date of

 

Amount of Additional

 

 

Authorization

 

Repurchases Authorized

 

 

October 31, 2005

 

$

100,000,000

 

 

March 28, 2007

 

 

100,000,000

 

 

November 16, 2010

 

 

100,000,000

 

 

August 18, 2011

 

 

200,000,000

 

 

April 18, 2012

 

 

200,000,000

 

 

November 12, 2012

 

 

300,000,000

 

 

December 9, 2013

 

 

300,000,000

 

 

December 4, 2014

 

 

300,000,000

 

 

November 30, 2015

 

 

400,000,000

 

 

October 18, 2016

 

 

400,000,000

 

 

September 15, 2017

 

 

400,000,000

 

As of September 30, 2017,April 1, 2023, we had repurchased approximately $2.5$4.6 billion of

common stock (52,431,816(88,404,588 shares) under
these initiatives, with $425.0$415 million available as of September 30, 2017 for future common stock
share repurchases.

51

The following table summarizes repurchases of our common stock

under our stock repurchase program during the
fiscal quarter ended September 30, 2017:

April 1, 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)

07/02/17 through 08/05/17

 

294,238

 

$

91.54

 

294,238

 

1,377,198

08/06/17 through 09/02/17

 

851,356

 

 

85.82

 

851,356

 

576,207

09/03/17 through 09/30/17

 

286,052

 

 

87.40

 

286,052

 

5,183,494

 

 

1,431,646

 

 

 

 

1,431,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

 

 

 

 

 

 

 

 

 

 

 

Total Number

52

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)
1/1/2023 through 2/4/2023
460,536
$
81.74
460,536
5,502,001
2/5/2023 through 3/4/2023
457,763
84.11
457,763
5,562,090
3/5/2023 through 4/1/2023
305,620
78.03
305,620
5,089,528
1,223,919
1,223,919
(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.
 
 
41
ITEM 6.
EXHIBITS
101.INS
Inline XBRL Instance Document - the instance document does not appear
in the
Interactive Data File because its XBRL tags are embedded within the
Inline
XBRL document+
101.SCH
Inline XBRL Taxonomy Extension Schema Document+
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document+
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document+
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document+
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document+
104
The cover page of Henry Schein, Inc.’s Quarterly Report on Form 10-Q for the
quarter ended April 1, 2023, formatted in Inline XBRL (included within
Exhibit
101 attachments).+
+ Filed or furnished herewith.

ITEM 6.  EXHIBITS

Exhibits.

4.1

Amended and Restated Private Shelf Agreement dated September 15, 2017, by and among the Company, PGIM, Inc. and each Prudential affiliate which becomes party thereto. (Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on September 18, 2017.)

4.2

Amended and Restated Master Note Facility dated September 15, 2017, by and among the Company, NYL Investors LLC and each New York Life affiliate which becomes party thereto. (Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on September 18, 2017.)

4.3

Amended and Restated Master Note Purchase Agreement dated September 15, 2017, by and among the Company, Metropolitan Life Insurance Company, MetLife Investment Advisors Company, LLC and each MetLife affiliate which becomes party thereto. (Incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K filed on September 18, 2017.)

10.1

Amendment No. 4 to Receivables Purchase Agreement, dated as of June 1, 2016, by and among us, as performance guarantor, HSFR, Inc., as seller, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as agent and the various purchaser groups party thereto.+

31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+

31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+

32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+

101.INS

XBRL Instance Document+

101.SCH

XBRL Taxonomy Extension Schema Document+

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document+

101.DEF

XBRL Taxonomy Definition Linkbase Document+

101.LAB

XBRL Taxonomy Extension Label Linkbase Document+

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document+

_________

+    Filed herewith.

53

 
42
SIGNATURE

SIGNATURE

Pursuant to the requirements 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.

(Registrant)

By: /s/ Steven Paladino

Steven Paladino

Executive Vice President and

Chief Financial Officer

(Authorized Signatory and Principal Financial

and Accounting Officer)

(Registrant)
By: /s/ Ronald N. South
Ronald N. South
Senior Vice President and
Chief Financial Officer
(Authorized Signatory and Principal Financial
and Accounting Officer)
Dated: November 6, 2017

54