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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 28, 2020

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)

 

 

135 Duryea Road

Melville, New York

(Address of principal executive offices)

11747

(Zip Code)

 

(631) 843-5500

(Registrant’s telephone number, including area code)

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

HSIC

The Nasdaq Global Select Market

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

 

Yes

 

No

 

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

 

Yes

 

No

 

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

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

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

 

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

Yes

No

As of April 27, 2020, there were 142,756,052 shares of the registrant’s common stock outstanding.

 


 

HENRY SCHEIN, INC.

INDEX

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Page

ITEM 1.

Consolidated Financial Statements:

 

 

 

 

 

 

 

 

 

 

Balance Sheets as of March 28, 2020 and December 28, 2019

3

 

 

 

 

 

 

 

 

 

Statements of Income for the three months ended

 

 

 

 

March 28, 2020 and March 30, 2019

4

 

 

 

 

 

 

 

 

 

Statements of Comprehensive Income for the three months ended

 

 

 

 

March 28, 2020 and March 30, 2019

5

 

 

 

 

 

 

 

 

 

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

 

 

 

 

March 28, 2020 and March 30, 2019

6

 

 

 

 

 

 

 

 

 

Statements of Cash Flows for the three months ended

 

 

 

 

March 28, 2020 and March 30, 2019

7

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Note 1 – Basis of Presentation

8

 

 

 

Note 2 – Discontinued Operations

10

 

 

 

Note 3 – Critical Accounting Policies, Accounting Pronouncements Adopted

 

 

 

 

and Recently Issued Accounting Standards

13

 

 

 

Note 4 – Revenue from Contracts with Customers

14

 

 

 

Note 5 – Segment Data

15

 

 

 

Note 6 – Debt

16

 

 

 

Note 7 – Leases

20

 

 

 

Note 8 – Redeemable Noncontrolling Interests

22

 

 

 

Note 9 – Comprehensive Income

23

 

 

 

Note 10 – Fair Value Measurements

24

 

 

 

Note 11 – Business Acquisitions

27

 

 

 

Note 12 – Plans of Restructuring

28

 

 

 

Note 13 – Earnings Per Share

29

 

 

 

Note 14 – Income Taxes

30

 

 

 

Note 15 – Derivatives and Hedging Activities

31

 

 

 

Note 16 – Stock-Based Compensation

32

 

 

 

Note 17 – Supplemental Cash Flow Information

34

 

 

 

Note 18 – Legal Proceedings

34

 

 

 

Note 19 – Related Party Transactions

38

 

 

 

 

 

 

 

ITEM 2.

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

39

 

 

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

54

 

 

 

 

 

 

 

ITEM 4.

Controls and Procedures

55

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

56

 

 

 

ITEM 1A.

Risk Factors

60

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

 

 

 

ITEM 5.

Other Information

63

 

 

 

ITEM 6.

Exhibits

64

 

 

 

 

Signature

65

 

 


PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HENRY SCHEIN, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

 

 

March 28,

 

December 28,

 

 

 

 

 

2020

 

2019

 

 

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

617,368

 

$

106,097

 

Accounts receivable, net of reserves of $67,028 and $60,002

 

 

1,198,743

 

 

1,246,246

 

Inventories, net

 

 

1,328,405

 

 

1,428,799

 

Prepaid expenses and other

 

 

474,589

 

 

445,360

 

 

 

Total current assets

 

 

3,619,105

 

 

3,226,502

Property and equipment, net

 

 

328,033

 

 

329,645

Operating lease right-of-use assets, net

 

 

215,122

 

 

231,662

Goodwill

 

 

2,470,603

 

 

2,462,495

Other intangibles, net

 

 

554,747

 

 

572,878

Investments and other

 

 

331,590

 

 

327,919

 

 

 

Total assets

 

$

7,519,200

 

$

7,151,101

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

780,853

 

$

880,266

 

Bank credit lines

 

 

381,899

 

 

23,975

 

Current maturities of long-term debt

 

 

109,507

 

 

109,849

 

Operating lease liabilities

 

 

63,150

 

 

65,349

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll and related

 

 

208,395

 

 

265,206

 

 

Taxes

 

 

170,210

 

 

165,171

 

 

Other

 

 

491,820

 

 

528,553

 

 

 

Total current liabilities

 

 

2,205,834

 

 

2,038,369

Long-term debt

 

 

865,821

 

 

622,908

Deferred income taxes

 

 

73,225

 

 

64,989

Operating lease liabilities

 

 

162,981

 

 

176,267

Other liabilities

 

 

333,421

 

 

331,173

 

 

 

Total liabilities

 

 

3,641,282

 

 

3,233,706

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

272,126

 

 

287,258

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

none outstanding

 

 

-

 

 

-

 

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

 

 

 

 

 

 

 

 

142,433,360 outstanding on March 28, 2020 and

 

 

 

 

 

 

 

 

143,353,459 outstanding on December 28, 2019

 

 

1,424

 

 

1,434

 

Additional paid-in capital

 

 

17,565

 

 

47,768

 

Retained earnings

 

 

3,183,236

 

 

3,116,215

 

Accumulated other comprehensive loss

 

 

(227,648)

 

 

(167,373)

 

 

Total Henry Schein, Inc. stockholders' equity

 

 

2,974,577

 

 

2,998,044

 

Noncontrolling interests

 

 

631,215

 

 

632,093

 

 

 

Total stockholders' equity

 

 

3,605,792

 

 

3,630,137

 

 

Total liabilities, redeemable noncontrolling interests and stockholders' equity

 

$

7,519,200

 

$

7,151,101

See accompanying notes.

 

3


HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 28,

 

March 30,

 

 

 

 

 

2020

 

2019

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,428,871

 

$

2,360,268

Cost of sales

 

 

1,682,832

 

 

1,608,578

 

 

Gross profit

 

 

746,039

 

 

751,690

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative

 

 

567,387

 

 

574,608

 

Restructuring costs

 

 

4,787

 

 

4,641

 

 

Operating income

 

 

173,865

 

 

172,441

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

 

3,190

 

 

4,771

 

Interest expense

 

 

(7,812)

 

 

(16,301)

 

Other, net

 

 

(220)

 

 

(419)

 

 

Income from continuing operations before taxes, equity in

 

 

 

 

 

 

 

 

earnings of affiliates and noncontrolling interests

 

 

169,023

 

 

160,492

Income taxes

 

 

(37,910)

 

 

(39,482)

Equity in earnings of affiliates

 

 

2,734

 

 

2,630

Net income from continuing operations

 

 

133,847

 

 

123,640

Loss from discontinued operations, net of tax

 

 

(282)

 

 

(8,996)

Net Income

 

 

133,565

 

 

114,644

 

Less: Net income attributable to noncontrolling interests

 

 

(3,304)

 

 

(5,227)

 

Plus: Net loss attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

from discontinued operations

 

 

-

 

 

366

Net income attributable to Henry Schein, Inc.

 

$

130,261

 

$

109,783

Amounts attributable to Henry Schein Inc.:

 

 

 

 

 

 

Continuing operations

 

$

130,543

 

$

118,413

Discontinued operations

 

 

(282)

 

 

(8,630)

Net income attributable to Henry Schein, Inc.

 

$

130,261

 

$

109,783

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.91

 

$

0.79

 

Diluted

 

$

0.91

 

$

0.78

 

 

 

 

 

 

 

 

 

 

Loss per share from discontinued operations attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.00

 

$

(0.06)

 

Diluted

 

$

0.00

 

$

(0.06)

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.91

 

$

0.73

 

Diluted

 

$

0.91

 

$

0.73

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

142,967

 

 

150,257

 

Diluted

 

 

143,095

 

 

151,156

See accompanying notes.

 

4


HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 28,

 

March 30,

 

 

 

 

 

2020

 

2019

 

 

 

 

 

 

 

 

 

 

Net income

 

$

133,565

 

$

114,644

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(89,312)

 

 

6,602

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) from foreign currency hedging activities

 

 

15,143

 

 

(1,281)

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gain (loss)

 

 

(9)

 

 

3

 

 

 

 

 

 

 

 

 

 

 

Pension adjustment gain

 

 

724

 

 

717

 

 

 

 

 

 

 

 

 

 

Other comprehensive income gain (loss), net of tax

 

 

(73,454)

 

 

6,041

Comprehensive income

 

 

60,111

 

 

120,685

 

Comprehensive income (loss) attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

Net income

 

 

(3,304)

 

 

(4,861)

 

 

Foreign currency translation (gain) loss

 

 

13,179

 

 

(556)

 

 

 

Comprehensive income gain (loss) attributable to noncontrolling interests

 

 

9,875

 

 

(5,417)

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Henry Schein, Inc.

 

$

69,986

 

$

115,268

See accompanying notes.

 

5


HENRY SCHEIN, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, 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

Loss

Interests

Equity

Balance, December 28, 2019

143,353,459

$

1,434

$

47,768

$

3,116,215

$

(167,373)

$

632,093

$

3,630,137

Cumulative impact of adopting new accounting standards

-

 

-

 

-

 

(412)

 

-

 

-

 

(412)

Net income (excluding $2,839 attributable to Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests from continuing operations)

-

 

-

 

-

 

130,261

 

-

 

465

 

130,726

Foreign currency translation loss (excluding loss of $13,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Redeemable noncontrolling interests)

-

 

-

 

-

 

-

 

(76,133)

 

(152)

 

(76,285)

Unrealized gain from foreign currency hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax of $5,090

-

 

-

 

-

 

-

 

15,143

 

-

 

15,143

Unrealized investment loss, net of tax benefit of $2

-

 

-

 

-

 

-

 

(9)

 

-

 

(9)

Pension adjustment gain, net of tax of $324

-

 

-

 

-

 

-

 

724

 

-

 

724

Dividends paid

-

 

-

 

-

 

-

 

-

 

(499)

 

(499)

Purchase of noncontrolling interests

-

 

-

 

(1,597)

 

-

 

-

 

(692)

 

(2,289)

Change in fair value of redeemable securities

-

 

-

 

13,072

 

-

 

-

 

-

 

13,072

Repurchase and retirement of common stock

(1,200,000)

 

(12)

 

(10,949)

 

(62,828)

 

-

 

-

 

(73,789)

Stock-based compensation credit

507,410

 

5

 

(17,519)

 

-

 

-

 

-

 

(17,514)

Shares withheld for payroll taxes

(227,509)

 

(3)

 

(13,871)

 

-

 

-

 

-

 

(13,874)

Settlement of stock-based compensation awards

-

 

-

 

660

 

-

 

-

 

-

 

660

Separation of Animal Health business

-

 

-

 

1

 

-

 

-

 

-

 

1

Balance, March 28, 2020

142,433,360

$

1,424

$

17,565

$

3,183,236

$

(227,648)

$

631,215

$

3,605,792

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common Stock

Additional

 

 

Other

 

 

Total

 

 

$.01 Par Value

Paid-in

Retained

Comprehensive

Noncontrolling

Stockholders'

 

 

Shares

 

Amount

Capital

Earnings

Loss

Interests

Equity

Balance, December 29, 2018

151,401,668

$

1,514

$

-

$

3,208,589

$

(248,771)

$

580,456

$

3,541,788

Net income (excluding $3,378 attributable to Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and ($366) from discontinued operations)

-

 

-

 

-

 

109,783

 

-

 

1,849

 

111,632

Foreign currency translation gain (excluding loss of $191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Redeemable noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and $592 gain from discontinued operations)

-

 

-

 

-

 

-

 

6,046

 

155

 

6,201

Unrealized loss from foreign currency hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefit of $322

-

 

-

 

-

 

-

 

(1,281)

 

-

 

(1,281)

Unrealized investment gain, net of tax of $1

-

 

-

 

-

 

-

 

3

 

-

 

3

Pension adjustment gain, net of tax of $224

-

 

-

 

-

 

-

 

717

 

-

 

717

Dividends paid

-

 

-

 

-

 

-

 

-

 

(69)

 

(69)

Other adjustments

-

 

-

 

(2)

 

-

 

-

 

-

 

(2)

Change in fair value of redeemable securities

-

 

-

 

(2,492)

 

-

 

-

 

-

 

(2,492)

Initial noncontrolling interests and adjustments related to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

business acquisitions

-

 

-

 

-

 

-

 

-

 

35,360

 

35,360

Adjustment for Animal Health Spin-off

87,629

 

1

 

-

 

-

 

-

 

-

 

1

Repurchase and retirement of common stock

(2,523,137)

 

(25)

 

(32,486)

 

(117,489)

 

-

 

-

 

(150,000)

Stock issued upon exercise of stock options

2,526

 

-

 

34

 

-

 

-

 

-

 

34

Stock-based compensation expense

200,877

 

2

 

7,433

 

-

 

-

 

-

 

7,435

Shares withheld for payroll taxes

(173,471)

 

(2)

 

(10,443)

 

-

 

-

 

-

 

(10,445)

Settlement of stock-based compensation awards

-

 

-

 

356

 

-

 

-

 

-

 

356

Share Sale related to Animal Health business

-

 

-

 

361,090

 

-

 

-

 

-

 

361,090

Separation of Animal Health business

-

 

-

 

(35,905)

 

(543,158)

 

93,408

 

-

 

(485,655)

Transfer of charges in excess of capital

-

 

-

 

(201,457)

 

201,457

 

-

 

-

 

-

Balance, March 30, 2019

148,996,092

$

1,490

$

86,128

$

2,859,182

$

(149,878)

$

617,751

$

3,414,673

See accompanying notes.

 

6


HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 28,

 

March 30,

 

 

 

 

 

 

2020

 

2019

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

133,565

 

$

114,644

 

Loss from discontinued operations

 

 

(282)

 

 

(8,996)

 

Income from continuing operations

 

 

133,847

 

 

123,640

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

48,983

 

 

40,300

 

 

 

Stock-based compensation (credit) expense

 

 

(17,514)

 

 

7,110

 

 

 

Provision for losses on trade and other accounts receivable

 

 

14,543

 

 

1,784

 

 

 

Benefit from deferred income taxes

 

 

2,645

 

 

7,932

 

 

 

Equity in earnings of affiliates

 

 

(2,734)

 

 

(2,630)

 

 

 

Distributions from equity affiliates

 

 

2,413

 

 

52,301

 

 

 

Changes in unrecognized tax benefits

 

 

(1,575)

 

 

3,214

 

 

 

Other

 

 

(13,924)

 

 

1,239

 

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,283)

 

 

(11,580)

 

 

 

 

Inventories

 

 

73,038

 

 

77,881

 

 

 

 

Other current assets

 

 

(10,002)

 

 

(17,782)

 

 

 

 

Accounts payable and accrued expenses

 

 

(137,680)

 

 

(150,075)

Net cash provided by operating activities from continuing operations

 

 

90,757

 

 

133,334

Net cash used in operating activities from discontinued operations

 

 

(282)

 

 

(167,073)

Net cash provided by (used in) operating activities

 

 

90,475

 

 

(33,739)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of fixed assets

 

 

(23,008)

 

 

(15,918)

 

Payments related to equity investments and business

 

 

 

 

 

 

 

 

 

acquisitions, net of cash acquired

 

 

(37,947)

 

 

(603,973)

 

Proceeds from sale of equity investment

 

 

-

 

 

10,500

 

Repayments from loan to affiliate

 

 

1,137

 

 

15,940

 

Other

 

 

(5,787)

 

 

(3,076)

Net cash used in investing activities from continuing operations

 

 

(65,605)

 

 

(596,527)

Net cash used in investing activities from discontinued operations

 

 

-

 

 

(2,064)

Net cash used in investing activities

 

 

(65,605)

 

 

(598,591)

Cash flows from financing activities:

 

 

 

 

 

 

 

Net change in bank borrowings

 

 

358,639

 

 

(652,117)

 

Proceeds from issuance of long-term debt

 

 

250,000

 

 

741

 

Principal payments for long-term debt

 

 

(8,478)

 

 

(7,376)

 

Debt issuance costs

 

 

(58)

 

 

-

 

Proceeds from issuance of stock upon exercise of stock options

 

 

-

 

 

34

 

Payments for repurchases of common stock

 

 

(73,789)

 

 

(150,000)

 

Payments for taxes related to shares withheld for employee taxes

 

 

(13,155)

 

 

(9,671)

 

Distribution received related to Animal Health Spin-off

 

 

-

 

 

1,120,000

 

Proceeds related to Animal Health Share Sale

 

 

-

 

 

361,090

 

Proceeds from (distributions to) noncontrolling shareholders

 

 

(3,664)

 

 

52,205

 

Acquisitions of noncontrolling interests in subsidiaries

 

 

(14,925)

 

 

(6,057)

 

Payments to Henry Schein Animal Health Business

 

 

(2,962)

 

 

(224,773)

Net cash provided by financing activities from continuing operations

 

 

491,608

 

 

484,076

Net cash provided by financing activities from discontinued operations

 

 

282

 

 

148,053

Net cash provided by financing activities

 

 

491,890

 

 

632,129

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

 

 

(5,489)

 

 

10,347

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

 

 

-

 

 

(2,240)

Net change in cash and cash equivalents from continuing operations

 

 

511,271

 

 

31,230

Net change in cash and cash equivalents from discontinued operations

 

 

-

 

 

(23,324)

Cash and cash equivalents, beginning of period

 

 

106,097

 

 

56,885

Cash and cash equivalents, end of period

 

$

617,368

 

$

88,115

 

See accompanying notes.

 

7


Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

 

Note 1Basis of Presentation

 

Our consolidated financial statements include our accounts, as well as those of our wholly-owned and majority-owned subsidiaries. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Our accompanying unaudited 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.

 

 

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

 

For the consolidated VIE, the trade accounts receivable transferred to the VIE are pledged as collateral to the related debt. The creditors have recourse to us for losses on these trade accounts receivable. At March 28, 2020 and December 28, 2019, trade accounts receivable that can only be used to settle obligations of this VIE were $438 million and $127 million, respectively, and the liabilities of the VIE where the creditors have recourse to us were $350 million and $100 million, respectively.

 

The 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 28, 2019.

 

On February 7, 2019 (the “Distribution Date”), we completed the separation (the “Separation”) and subsequent merger (“Merger”) of our animal health business (the “Henry Schein Animal Health Business”) with Direct Vet Marketing, Inc. (d/b/a Vets First Choice, “Vets First Choice”). All financial information within this Form 10-Q presents the Henry Schein Animal Health Business as a discontinued operation.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the three months ended March 28, 2020 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 26, 2020.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

 

In March 2020, the World Health Organization declared the Novel Coronavirus Disease 2019 (“COVID-19”) a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of global financial markets. In response, many countries have implemented business closures and restrictions, stay-at-home and social distancing ordinances and similar measures to combat the pandemic, which have significantly impacted global business and dramatically reduced demand for dental products.

 

Our consolidated financial statements reflect estimates and assumptions made by us that affect, among other things, our goodwill, long-lived asset and indefinite-lived intangible asset valuation; inventory valuation; equity investment valuation; assessment of the annual effective tax rate; valuation of deferred income taxes and income tax contingencies; the allowance for doubtful accounts; hedging activity; vendor rebates; measurement of compensation cost for certain share-based performance awards and cash bonus plans; and pension plan assumptions. Due to the significant uncertainty surrounding the future impact of COVID-19, our judgments regarding estimates and impairments could change in the future. In addition, the impact of COVID-19 has had a material adverse effect on our business, results of operations and cash flows. In the future, we expect that the COVID-19 pandemic will continue to have such impacts at least until medical and dental offices begin to re-open, 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.

 

 

 

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

 

Note 2 – Discontinued Operations

 

Animal Health Spin-off

 

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

 

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

 

As a result of the Separation, the financial position and results of operations of the Henry Schein Animal Health Business are presented as discontinued operations and have been excluded from continuing operations and segment results for all periods presented. The accompanying Notes to the Consolidated Financial Statements have been revised to reflect the effect of the Separation and all prior year balances have been revised accordingly to reflect continuing operations only. The historical statements of Comprehensive Income (Loss) and Shareholders' Equity have not been revised to reflect the Separation and instead reflect the Separation as an adjustment to the balances at March 30, 2019.

 

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

Summarized financial information for our discontinued operations is as follows:

 

 

 

Three Months Ended

 

 

March 28,

 

March 30,

 

 

2020

 

2019

 

 

 

 

 

 

 

Net sales

 

$

-

 

$

319,522

Cost of goods sold

 

 

-

 

 

260,097

Gross profit

 

 

-

 

 

59,425

Selling, general and administrative

 

 

376

 

 

64,894

Operating loss

 

 

(376)

 

 

(5,469)

Income tax expense (benefit)

 

 

(94)

 

 

4,764

Loss from discontinued operations

 

 

(282)

 

 

(8,996)

Net loss attributable to noncontrolling interests

 

 

-

 

 

366

Net loss from discontinued operations

 

 

 

 

 

 

attributable to Henry Schein, Inc.

 

 

(282)

 

 

(8,630)

 

The March 30, 2019 financial information above represents activity of the discontinued operations during the quarter through the Distribution Date. The net loss from discontinued operations for the three months ended March 28, 2020 and for the three months ended March 30, 2019 were primarily attributable to approximately $0.4 million and $20.9 million of transaction costs directly related to the Animal Health Spin-off, respectively. See Note 19-Related Party Transactions for additional information.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

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

 

 

 

 

 

 

February 7,

 

December 29,

 

 

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,815

 

$

23,324

Accounts receivable, net

 

 

432,812

 

 

434,935

Inventories, net

 

 

536,637

 

 

555,230

Prepaid expenses and other

 

 

120,546

 

 

69,525

 

 

 

Total current assets of discontinued operations

 

 

1,096,810

 

 

1,083,014

Property and equipment, net

 

 

69,790

 

 

68,177

Operating lease right-of-use asset, net

 

 

57,012

 

 

-

Goodwill

 

 

742,931

 

 

739,266

Other intangibles, net

 

 

205,793

 

 

208,213

Investments and other

 

 

120,518

 

 

118,003