HENRY SCHEIN, INC. 
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," "believe," "plan," "estimate," "forecast," "project," "anticipate," "to be," "to make" or other comparable terms. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular the risks discussed under the caption "Risk Factors" in Item 1A of this report and those discussed in other documents we file with theSecurities and Exchange Commission (SEC), including our Annual Report on Form 10-K. Forward looking statements include the overall impact of the COVID-19 pandemic on the Company, its results of operations, liquidity, and financial condition (including any estimates of the percentage impact on these items), the efficacy and impact of the Company's cost reduction initiatives, and the rate at which dental and other practices may begin to resume normal operations inthe United States and internationally. Forward looking statements also include the Company's ability to make additional testing available, the nature of those tests and the number of tests intended to be made available and the timing for availability, the nature of the target market, as well as the efficacy or relative efficacy of the test results given that the test efficacy has not been, or will not have been, independently verified under normal FDA procedures. 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 and consolidating market; increased competition by third party online commerce sites; our dependence on third parties for the manufacture and supply of our products; our dependence upon sales personnel, customers, suppliers and manufacturers; our dependence on our senior management; fluctuations in quarterly earnings; 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 macro-economic conditions; risks associated with currency fluctuations; risks associated with political and economic uncertainty; disruptions in financial markets; volatility of the market price of our common stock; changes in the health care industry; implementation of health care laws; failure to comply with regulatory requirements and data privacy laws; risks associated with our global operations; risks associated with the Novel Coronavirus Disease 2019 (COVID-19); risks associated with theUnited Kingdom's withdrawal from theEuropean Union ; transitional challenges associated with acquisitions, dispositions and joint ventures, including the failure to achieve anticipated synergies/benefits; financial and tax risks associated with acquisitions, dispositions and joint ventures; litigation risks; new or unanticipated litigation developments and the status of litigation matters; the dependence on our continued product development, technical support and successful marketing in the technology segment; our dependence on third parties for certain technologically advanced components; risks from disruption to our information systems; cyberattacks or other privacy or data security breaches; certain provisions in our governing documents that may discourage third-party acquisitions of us; and changes in tax legislation. The order in which these factors appear should not be construed to indicate their relative importance or priority.
We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control or predict. Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results. We undertake no duty and have no obligation to update forward-looking statements.
Where You Can Find Important Information
We may disclose important information through one or more of the following
channels:
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Table of Contents Recent Developments COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of global financial markets. In response, many countries 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. The pandemic and the governmental responses to it have 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. 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. As part of a broad-based effort to support plans for the long-term health ofHenry Schein's business and to strengthen the Company's financial flexibility,Henry Schein has implemented cost reduction measures that include certain reductions in payroll, substantially decreasing capital expenditures, reducing planned corporate spending and eliminating certain non-strategic targeted expenditures. As the COVID-19 pandemic continues to unfold, the Company will continue to evaluate appropriate actions for its business. Corporate Transactions OnFebruary 7, 2019 (the "Distribution Date"), we completed the separation (the "Separation") and subsequent merger of our animal health business (the "Henry Schein Animal Health Business") withDirect Vet Marketing, Inc. (d/b/a Vets First Choice, "Vets First Choice") (the "Merger"). This was accomplished by a series of transactions among us, Vets First Choice, Covetrus, Inc. (f/k/aHS Spinco, Inc. "Covetrus"), a wholly owned subsidiary of ours prior to the Distribution Date, andHS 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 onJanuary 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 theShare 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 40
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financial results of Covetrus for the purpose of our financial reporting. Following the Separation and the Merger, Covetrus was an independent, publicly traded company on the Nasdaq Global Select Market.
Executive-Level Overview We believe we are the world's largest provider of health care products and services primarily to office-based dental and medical practitioners. We serve more than one million customers worldwide including dental practitioners and laboratories and physician practices, as well as government, institutional health care clinics and other alternate care clinics. We believe that we have a strong brand identity due to our more than 87 years of experience distributing health care products. We are headquartered inMelville, New York , employ more than 19,000 people (of which more than 9,500 are based outsidethe United States ) and have operations or affiliates in 31 countries, includingthe United States ,Australia ,Austria ,Belgium ,Brazil ,Canada ,Chile ,China , theCzech Republic ,France ,Germany , Hong Kong SAR,Ireland ,Israel ,Italy ,Japan ,Liechtenstein , Luxembourg,Malaysia ,the Netherlands ,New Zealand ,Poland ,Portugal ,Singapore ,South Africa ,Spain ,Sweden ,Switzerland ,Thailand ,United Arab Emirates and theUnited Kingdom . We have established strategically located distribution centers to enable us to better serve our customers and increase our operating efficiency. This infrastructure, together with broad product and service offerings at competitive prices, and a strong commitment to customer service, enables us to be a single source of supply for our customers' needs. Our infrastructure also allows us to provide convenient ordering and rapid, accurate and complete order fulfillment.
We conduct our business through two reportable segments: (i) health care distribution and (ii) technology and value-added services. These segments offer different products and services to the same customer base.
The health care distribution reportable segment aggregates our global dental and medical operating segments. This segment distributes consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins. Our global dental group serves office-based dental practitioners, dental laboratories, schools and other institutions. Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions. Our global technology and value-added services group provides software, technology and other value-added services to health care practitioners. Our technology group offerings include practice management software systems for dental and medical practitioners. Our value-added practice solutions include financial services on a non-recourse basis, e-services, practice technology, network and hardware services, as well as continuing education services for practitioners. Industry Overview In recent years, the health care industry has increasingly focused on cost containment. This trend has benefited distributors capable of providing a broad array of products and services at low prices. It also has accelerated the growth of HMOs, group practices, other managed care accounts and collective buying groups, which, in addition to their emphasis on obtaining products at competitive prices, tend to favor distributors capable of providing specialized management information support. We believe that the trend towards cost containment has the potential to favorably affect demand for technology solutions, including software, which can enhance the efficiency and facilitation of practice management. Our operating results in recent years have been significantly affected by strategies and transactions that we undertook to expand our business, domestically and internationally, in part to address significant changes in the health care industry, including consolidation of health care distribution companies, health care reform, trends toward managed care, cuts in Medicare and collective purchasing arrangements.
Our current and future results have been and could be impacted by the COVID-19 pandemic, the current economic environment and uncertainty, particularly impacting overall demand for our products and services.
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Industry Consolidation
The health care products distribution industry, as it relates to office-based
health care practitioners, is fragmented and diverse. The industry ranges from
sole practitioners working out of relatively small offices to group practices or
service organizations ranging in size from a few practitioners to a large number
of practitioners who have combined or otherwise associated their practices.
Due in part to the inability of office-based health care practitioners to store
and manage large quantities of supplies in their offices, the distribution of
health care supplies and small equipment to office-based health care
practitioners has been characterized by frequent, small quantity orders, and a
need for rapid, reliable and substantially complete order fulfillment. The
purchasing decisions within an office-based health care practice are typically
made by the practitioner or an administrative assistant. Supplies and small
equipment are generally purchased from more than one distributor, with one
generally serving as the primary supplier.
The trend of consolidation extends to our customer base. Health care
practitioners are increasingly seeking to partner, affiliate or combine with
larger entities such as hospitals, health systems, group practices or physician
hospital organizations. In many cases, purchasing decisions for consolidated
groups are made at a centralized or professional staff level; however, orders
are delivered to the practitioners' offices.
We believe that consolidation within the industry will continue to result in a
number of distributors, particularly those with limited financial, operating and
marketing resources, seeking to combine with larger companies that can provide
growth opportunities. This consolidation also may continue to result in
distributors seeking to acquire companies that can enhance their current product
and service offerings or provide opportunities to serve a broader customer base.
Our trend with regard 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-based
practitioner setting.
As the health care industry continues to change, we continually evaluate
possible candidates for merger and joint venture or acquisition and intend to
continue to seek opportunities to expand our role as a provider of products and
services to the health care industry. There can be no assurance that we will be
able to successfully pursue any such opportunity or consummate any such
transaction, if pursued. If additional transactions are entered into or
consummated, we would incur merger and/or acquisition-related costs, and there
can be no assurance that the integration efforts associated with any such
transaction would be successful. In response to the COVID-19 pandemic, we have
taken a range of actions to preserve cash, including the temporary suspension of
acquisition activity.
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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 theU.S. Census Bureau's International Data Base , in 2020 there were more than six and a half` million Americans aged 85 years or older, the segment of the population most in need of long-term care and elder-care services. By the year 2050, that number is projected to nearly triple to approximately 19 million. The population aged 65 to 84 years is projected to increase by approximately 36% during the same time period. As a result of these market dynamics, annual expenditures for health care services continue to increase inthe 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. TheCenters for Medicare and Medicaid Services , or CMS, published "National Health Expenditure Projections 2018-2027" indicating that total national health care spending reached approximately$3.6 trillion in 2018, or 17.7% of the nation's gross domestic product, the benchmark measure for annual production of goods and services inthe United States . Health care spending is projected to reach approximately$6.2 trillion in 2028, approximately 19.7% of the nation's projected gross domestic product. Government Certain of our businesses involve the distribution of pharmaceuticals and medical devices, and in this regard we are subject to extensive local, state, federal and foreign governmental laws and regulations applicable to the distribution and sale of pharmaceuticals and medical devices. Additionally, government and private insurance programs fund a large portion of the total cost of medical care, and there has been an emphasis on efforts to control medical costs, including laws and regulations lowering reimbursement rates for pharmaceuticals, medical devices, and/or medical treatments or services. Also, many of these laws and regulations are subject to change and may impact our financial performance. For example, certain laws and regulations restricting medical supply sales inthe United States have been temporarily modified or waived in response to the COVID-19 pandemic. In addition, 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, and some of the related rules have been temporarily modified in response to the COVID-19 pandemic. Failure to comply with law or regulations could have a material adverse effect on our business. A more detailed discussion of governmental laws and regulations is included in Management's Discussion & Analysis, contained in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 28 2019 , filed onFebruary 20, 2020 . 43
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Table of Contents Results of Operations The following table summarizes the significant components of our operating results and cash flows for the three months endedMarch 28, 2020 andMarch 30, 2019 (in thousands): Three Months Ended March 28, March 30, 2020 2019 Operating results: 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 expense, net$ (4,842) $ (11,949) Net income from continuing operations 133,847 123,640 Loss from discontinued operations (282) (8,630) Net income attributable to Henry Schein, Inc. 130,261 109,783 Three Months Ended March 28, March 30, 2020 2019 Cash flows: Net cash provided by operating activities from continuing operations$ 90,757 $ 133,334 Net cash used in investing activities from continuing operations (65,605) (596,527) Net cash provided by financing activities from continuing operations 491,608 484,076 Plans of Restructuring OnJuly 9, 2018 , we committed to an initiative to rationalize our operations and provide expense efficiencies. These actions allowed us to execute on our plan to reduce our cost structure and fund new initiatives that are expected to drive future growth under our 2018 to 2020 strategic plan. This initiative resulted in the elimination of approximately 4% of our workforce and the closing of certain facilities. OnNovember 20, 2019 , we committed to a contemplated initiative, intended to mitigate stranded costs associated with the Animal Health Spin-off and to rationalize operations and to provide expense efficiencies. These activities were originally expected to be completed by the end of 2020. We are re-assessing that timeline in light of the current business environment brought on by the COVID-19 pandemic. During the three months endedMarch 28, 2020 andMarch 30, 2019 , we recorded restructuring costs of$4.8 million and$4.6 million , respectively for certain redundancies and facility exit costs. The costs associated with this restructuring are included in a separate line item, "Restructuring costs" within our consolidated statements of income. 44
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Three Months Ended
Net Sales Net sales for the three months endedMarch 28, 2020 andMarch 30, 2019 were as follows (in thousands): March 28, % of March 30, % of Increase/(Decrease) 2020 Total 2019 Total $ % Health care distribution (1) Dental$ 1,475,076 60.7 %$ 1,546,380 65.5 %$ (71,304) (4.6) % Medical 800,688 33.0 683,660 29.0 117,028 17.1 Total health care distribution 2,275,764 93.7 2,230,040 94.5 45,724 2.1 Technology and value-added services (2) 131,965 5.4 115,598 4.9 16,367 14.2 Total excluding Corporate TSA revenue 2,407,729 99.1 2,345,638 99.4 62,091 2.6 Corporate TSA revenue (3) 21,142 0.9 14,630 0.6 6,512 44.5 Total$ 2,428,871 100.0 %$ 2,360,268 100.0 % $ 68,603 2.9
(1) Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic
pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.
(2) Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and
financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other services.
(3) Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in
connection with the Animal Health Spin-off, which we expect to continue through
The 2.9% increase in net sales for the three months endedMarch 28, 2020 includes 4.0% local currency growth (2.1% increase in internally generated revenue and 1.9% growth from acquisitions) partially offset by a decrease of 1.1% related to foreign currency exchange. Excluding sales of products under the transition services agreement with Covetrus, our net sales increased 2.6%, including local currency growth of 3.7% (1.7% increase in internally generated revenue and 2.0% growth from acquisitions) partially offset by a decrease of 1.1% related to foreign currency exchange. The 4.6% decrease in dental net sales for the three months endedMarch 28, 2020 includes a decrease of 3.0% local currency growth (3.7% decrease in internally generated revenue, partially offset by 0.7% growth from acquisitions) and a decrease of 1.6% related to foreign currency exchange. The 3.0% decrease in local currency sales was attributable to a decrease in dental consumable merchandise sales growth of 3.3% (4.1% decrease in internally generated revenue, partially offset by 0.8% growth from acquisitions) and a decrease in dental equipment sales and service revenues of 2.1%, all of which was internally generated. The COVID-19 pandemic began to meaningfully impact our worldwide sales growth beginning in mid-March as many dental offices and independent medical practices progressively closed or began seeing a limited number of patients. Dental office closures occurred on a somewhat rolling basis beginning mid-quarter, first inChina , thenEurope and then in theU.S. Those closures have continued into the second quarter and we expect such closures to continue to have a material adverse effect on our net sales until dental offices begin to re-open. The 17.1% increase in medical net sales for the three months endedMarch 28, 2020 includes 17.2% local currency growth (13.4% increase in internally generated revenue and 3.8% growth from acquisitions) partially offset by a decrease of 0.1% related to foreign currency exchange. Economic conditions relating to the COVID-19 pandemic have had less of an impact on the performance of our medical group versus dental, in part due to continued strong sales of personal protective equipment, such as masks, gowns and face shields. The 14.2% increase in technology and value-added services net sales for the three months endedMarch 28, 2020 includes 14.5% local currency growth (6.4% increase in internally generated revenue and 8.1% growth from acquisitions) partially offset by a decrease of 0.3% related to foreign currency exchange. As a result of the dental office closures referred to above, we expect a material adverse impact to technology and value-added services revenues in the second quarter, most specifically related to the e-services portion of our business. 45
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Table of Contents Gross Profit
Gross profit and gross margin percentages by segment and in total for the three
months ended
March 28, Gross March 30, Gross Increase / (Decrease)
2020 Margin % 2019 Margin % $ %
Health care distribution $ 653,341 28.7 % $ 667,867 29.9 % $ (14,526) (2.2) %
Technology and value-added
services 92,085 69.8 83,368 72.1 8,717 10.5
Total excluding
Corporate
(5,809) (0.8)
Corporate TSA revenues 613 2.9 455 3.1 158 34.7
Total $ 746,039 30.7 $ 751,690 31.8 $ (5,651) (0.8)
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.
In connection with the completion of the Animal Health Spin-off (see Note 2 for
additional details), we entered into a transition services agreement with
Covetrus, pursuant to which Covetrus purchases certain products from us. The
agreement provides that these products will be sold to Covetrus at a mark-up
that ranges from 3% to 6% of our product cost to cover handling costs. We expect
these sales to continue through August 2020 .
Within our health care distribution segment, gross profit margins may vary from
one period to the next. Changes in the mix of products sold as well as changes
in our customer mix have been the most significant drivers affecting our gross
profit margin. For example, sales of 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 decreased $14.5 million , or 2.2%, for the
three months ended March 28, 2020 compared to the prior year period. Health care
distribution gross profit margin decreased to 28.7% for the three months ended
March 28, 2020 from 29.9% for the comparable prior year period. We expect to
earn lower vendor rebates during the year in our health care distribution
segment, which contributes to the lower gross profit margin. The overall
decrease in our health care distribution gross profit is attributable to a $17.3
million decline in gross profit due to the decrease in the gross margin rates
and a decrease of $9.3 million in internally generated revenue, partially offset
by $12.1 million additional gross profit from acquisitions.
Technology and value-added services gross profit increased $8.7 million , or
10.5%, for the three months ended March 28, 2020 compared to the prior year
period. The overall increase in our Technology and value-added services gross
profit is attributable to $7.8 million additional gross profit from
acquisitions, $5.0 million from growth in internally generated revenue,
partially offset by a decrease of $4.1 million from gross margin rates.
Technology and value-added services gross profit margin decreased to 69.8% for
the three months ended March 28, 2020 from 72.1% for the comparable prior year
period.
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Selling, General and Administrative
Selling, general and administrative expenses by segment and in total for the three months endedMarch 28, 2020 andMarch 30, 2019 were as follows (in thousands): % of % of March 28, Respective March 30, Respective Increase / (Decrease) 2020 Net Sales 2019 Net Sales $ % Health care distribution$ 505,787 22.2 %$ 523,798 23.5 %$ (18,011) (3.4) % Technology and value-added services 66,387 50.3 55,451 48.0 10,936 19.7 Total$ 572,174 23.6$ 579,249 24.5$ (7,075) (1.2) Selling, general and administrative expenses (including restructuring costs in the three months endedMarch 28, 2020 andMarch 28, 2020 ) decreased$7.1 million , or 1.2%, for the three months endedMarch 28, 2020 from the comparable prior year period. The$18.0 million decrease in selling, general and administrative expenses within our health care distribution segment for the three months endedMarch 28, 2020 as compared to the prior year period was attributable to a reduction of$30.2 million of operating costs, partially offset by$12.1 million of additional costs from acquired companies and an increase of$0.1 million in restructuring costs. The$10.9 million increase in selling, general and administrative expenses within our technology and value-added services segment for the three months endedMarch 28, 2020 as compared to the prior year period was attributable to$6.0 million of additional costs from acquired companies, an increase of$4.8 million of operating costs, and an increase of$0.1 million in restructuring costs. As a percentage of net sales, selling, general and administrative expenses decreased to 23.6% from 24.5% for the comparable prior year period. As a component of total selling, general and administrative expenses, selling expenses increased$20.9 million , or 5.8% to$381.6 million , for the three months endedMarch 28, 2020 from the comparable prior year period. As a percentage of net sales, selling expenses increased to 15.7% from 15.3% for the comparable prior year period. As a component of total selling, general and administrative expenses, general and administrative expenses decreased$28.0 million , or 12.8% to$190.6 million , for the three months endedMarch 28, 2020 from the comparable prior year period. As a percentage of net sales, general and administrative expenses decreased to 7.8% from 9.3% for the comparable prior year period. Our selling, general and administrative expenses for the three months endedMarch 28, 2020 were affected by certain estimates we made due to the adverse business environment brought on by the COVID-19 pandemic. For example, we recorded incremental bad debt reserves of approximately$10 million for our global dental business. We also recognized a net credit of approximately$17.5 million in stock-based compensation expense during the quarter due to our current estimate that no performance shares granted in 2018, 2019 or 2020 will ultimately vest. Additionally, we recorded total impairment charges of approximately$6.1 million during the quarter related to prepaid royalty expenses and a customer relationship intangible asset. Although our selling, general and administrative expenses for the three months endedMarch 28, 2020 represent management's best estimates and assumptions that affect the reported amounts, our judgments could change in the future due to the significant uncertainty surrounding the macroeconomic effect of the COVID-19 pandemic. 47
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Table of Contents Other Expense, Net
Other expense, net, for the three months ended
March 28, March 30, Variance
2020 2019 $ %
Interest income $ 3,190 $ 4,771 $ (1,581) (33.1) %
Interest expense (7,812) (16,301) 8,489 52.1
Other, net (220) (419) 199 47.5
Other expense, net $ (4,842) $ (11,949) $ 7,107 59.5
Interest income decreased $1.6 million primarily due to lower investment and
late fee income. Interest expense decreased $8.5 million primarily due to
decreased borrowings under our bank credit lines, prior to the impact of the
COVID-19 pandemic, as well as lower interest rates.
Income Taxes
For the three months ended March 28, 2020 , our effective tax rate was 22.4%
compared to 24.6% for the prior year period. The difference between our
effective tax rate and the federal statutory tax rate for the three months ended
March 28, 2020 primarily relates to state and foreign income taxes and interest
expense as well as tax charges and credits associated with legal entity
reorganizations outside the U.S. The difference between our effective tax rate
and the federal statutory tax rate for the three months ended March 30, 2019
primarily relates to state and foreign income taxes and interest expense.
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Liquidity and Capital Resources
Our principal capital requirements have included funding of acquisitions (which have been temporarily suspended), purchases of additional noncontrolling interests, repayments of debt principal, the funding of working capital needs, purchases of fixed assets and repurchases of common stock (which have been temporarily suspended). Working capital requirements generally result from increased sales, special inventory forward buy-in opportunities and payment terms for receivables and payables. Historically, sales have tended to be stronger during the third and fourth quarters and special inventory forward buy-in opportunities have been most prevalent just before the end of the year, and have caused our working capital requirements to be higher from the end of the third quarter to the end of the first quarter of the following year. The pandemic and the governmental responses to it have had a material adverse effect on our cash flows. In the future, we expect that COVID-19 will continue to have such an impact at least until medical and dental offices begin to re-open. Due to the significant uncertainty surrounding the future impact of COVID-19, the extent of the potential impact cannot be reasonably estimated at this time. As part of a broad-based effort to support plans for the long-term health ofHenry Schein's business and to strengthen the Company's financial flexibility,Henry Schein has implemented cost reduction measures that include certain reductions in payroll, substantially decreasing capital expenditures, reducing planned corporate spending and eliminating certain non-strategic targeted expenditures. As the COVID-19 pandemic continues to unfold, the Company will continue to evaluate appropriate actions for its business. We finance our business primarily through cash generated from our operations, revolving credit facilities and debt placements. Our ability to generate sufficient cash flows from operations is 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.
On
Net cash from continuing operations provided by operating activities was$90.8 million for the three months endedMarch 28, 2020 , compared to net cash from continuing operations provided by operating activities of$133.3 million for the comparable prior year period. The net change of$42.5 million was primarily attributable to decreased distributions from equity affiliates, partially offset by increased net income, and increases in working capital requirements. The decrease in distributions from equity affiliates is the result of having sold our equity investment inHu-Friedy Mfg. Co., LLC in the fourth quarter of 2019. Net cash from continuing operations used in investing activities was$65.6 million for the three months endedMarch 28, 2020 , compared to$596.5 million for the comparable prior year period. The net change of$530.9 million was primarily attributable to decreased payments for equity investments and business acquisitions. 49
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Table of Contents Net cash from continuing operations provided by financing activities was$491.6 million for the three months endedMarch 28, 2020 , compared to net cash provided by financing activities of$484.1 million for the comparable prior year period. The net change of$7.4 million was primarily due to increased bank borrowings and proceeds from issuance of long-term debt, reduced payments toHenry Schein Animal Health Business and decreased repurchases of our common stock, partially offset by proceeds received during the prior year related to theAnimal Health Spin-off and a reduction in proceeds from noncontrolling subsidiaries. The following table summarizes selected measures of liquidity and capital resources (in thousands): March 28, December 28, 2020 2019 Cash and cash equivalents$ 617,368 $ 106,097 Working capital (1) 1,413,271 1,188,133
Debt:
Bank credit lines $ 381,899 $ 23,975
Current maturities of long-term debt 109,507 109,849
Long-term debt 865,821 622,908
Total debt $ 1,357,227 $ 756,732
Leases:
Current operating lease liabilities $ 63,150 $ 65,349
Non-current operating lease liabilities 162,981 176,267
(1) Includes
respectively.
Our cash and cash equivalents consist of bank balances and investments in money market funds representing overnight investments with a high degree of liquidity.
Accounts receivable days sales outstanding and inventory turns
Our accounts receivable days sales outstanding from operations increased to 45.9 days as ofMarch 28, 2020 from 45.7 days as ofMarch 30, 2019 . During the three months endedMarch 28, 2020 , we wrote off approximately$1.2 million of fully reserved accounts receivable against our trade receivable reserve. Our inventory turns from operations increased to 4.9 as ofMarch 28, 2020 from 4.6 as ofMarch 30, 2019 . Our working capital accounts may be impacted by current and future economic conditions.Bank Credit Lines
Bank credit lines consisted of the following:
March 28, December 28,
2020 2019
Revolving credit agreement $ 250,000 $ -
Other short-term bank credit lines 131,899 23,975
Total $ 381,899 $ 23,975
Revolving Credit Agreement
On April 18, 2017 , we entered into a $750 million revolving credit agreement
(the "Credit Agreement") which matures in April 2022 . The interest rate is based
on the USD LIBOR plus a spread based on our leverage ratio at the end of each
financial reporting quarter. We expect the LIBOR rate to be discontinued at some
point during 2021, which will require an amendment to our debt agreements to
reflect a new reference rate. 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 also requires, among other
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things, that we maintain maximum leverage ratios. Additionally, the Credit Agreement contains customary representations, warranties and affirmative covenants as well as customary negative covenants, subject to negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements. As ofMarch 28, 2020 andDecember 28, 2019 , the borrowings on this revolving credit facility were$250.0 million and$0.0 million , respectively. As ofMarch 28, 2020 andDecember 28, 2019 , there were$9.4 million and$9.6 million of letters of credit, respectively, provided to third parties under the credit facility. OnApril 17, 2020 , we amended the Credit Agreement to, among other things, (i) modify the financial covenant from being based on total leverage ratio to net leverage ratio, (ii) adjust the pricing grid to reflect the net leverage ratio calculation, and (iii) increase the maximum maintenance leverage ratio throughMarch 31, 2021 . Other Short-Term Credit Lines As ofMarch 28, 2020 andDecember 28, 2019 , we had various other short-term bank credit lines available, of which$131.9 million and$24 million , respectively, were outstanding. AtMarch 28, 2020 andDecember 28, 2019 , borrowings under all of our credit lines had a weighted average interest rate of 1.59% and 3.45%, respectively. The increase in the level of borrowings under our revolving credit agreement and our other short-term credit lines as ofMarch 28, 2020 was attributable to our desire to increase cash levels due to the impact of the COVID-19 pandemic.
The decrease, during the quarter ended
OnApril 17, 2020 , we entered into a new$700 million 364-day credit agreement, withJPMorgan Chase Bank, N.A . andU.S. Bank National Association as joint lead arrangers and joint bookrunners. This facility matures onApril 16, 2021 . At the time of closing of this facility, we were fully drawn on the$500 million term loan portion of the facility. We have the ability to borrow the remaining$200 million on a revolving basis as needed, subject to the terms and conditions of the credit agreement. The interest rate for borrowings under this facility will fluctuate based on net leverage ratio. The proceeds from this facility can be used for working capital requirements and general corporate purposes, including, but not limited to, permitted refinancing of existing indebtedness. Long-term debt
Long-term debt consisted of the following:
March 28, December 28,
2020 2019
Private placement facilities $ 614,188 $ 621,274
U.S. trade accounts receivable securitization 350,000 100,000
Various collateralized and uncollateralized loans
payable with interest,
in varying installments through 2024 at interest
rates
ranging from 2.62% to 9.75% at March 28,2020 and
ranging from 2.56% to 10.50% at December 28,2019 5,060 6,089
Finance lease obligations (see Note 7) 6,080 5,394
Total 975,328 732,757
Less current maturities (109,507) (109,849)
Total long-term debt $ 865,821 $ 622,908
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
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time to time throughSeptember 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. OnJune 29, 2018 , we amended and restated the above private placement facilities to, among other things, (i) permit the consummation of the Animal Health Spin-off and (ii) provide for the issuance of notes in Euros, British Pounds and Australian Dollars, in addition toU.S. Dollars. The agreements provide, among other things, that we maintain certain maximum leverage ratios, and contain restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal of assets and certain changes in ownership. These facilities contain make-whole provisions in the event that we pay off the facilities prior to the applicable due dates.
The components of our private placement facility borrowings as of
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) 14,286 3.09 January 20, 2022
December 24, 2012 50,000 3.00 December 24, 2024
June 2, 2014 100,000 3.19 June 2, 2021
June 16, 2017 100,000 3.42 June 16, 2027
September 15, 2017 100,000 3.52 September 15, 2029
January 2, 2018 100,000 3.32 January 2, 2028
Less: Deferred debt
issuance costs (98)
$ 614,188
(1) Annual repayments of approximately
DuringApril 2020 , we took certain steps to lock-in a lower interest rate to refinance our$100 million private placement borrowing at 3.79%, coming due onSeptember 2, 2020 with a similar 10 year borrowing at 2.35% maturing onSeptember 2, 2030 .
We have a facility agreement with a bank, as agent, based on the securitization of ourU.S. trade accounts receivable that is structured as an asset-backed securitization program with pricing committed for up to three years. Our current facility, which has a purchase limit of$350 million , is scheduled to expire onApril 29, 2022 . As ofMarch 28, 2020 andDecember 28, 2019 , the borrowings outstanding under this securitization facility were$350 million and$100 million , respectively. AtMarch 28, 2020 , the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 1.85% plus 0.75%, for a combined rate of 2.60%. AtDecember 28, 2019 , the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 1.90% plus 0.75%, for a combined rate of 2.65%. If our accounts receivable collection pattern changes due to customers either paying late or not making payments, our ability to borrow under this facility may be reduced. We are required to pay a commitment fee of 30 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.
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Table of Contents Leases We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles and certain equipment. Our leases have remaining terms of less than one year to 15 years, some of which may include options to extend the leases for up to 10 years. As ofMarch 28, 2020 , our right-of-use assets related to operating leases were$215.1 million and our current and non-current operating lease liabilities were$63.2 million and$163 million , respectively. Stock Repurchases
From
As a result of the COVID-19 pandemic, onApril 6, 2020 , we announced a temporary suspension of our share repurchase program in an effort to preserve cash and exercise caution during this uncertain period.
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. Accounting Standards Codification Topic 480-10 is applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. The components of the change in the Redeemable noncontrolling interests for the three months endedMarch 28, 2020 and the year endedDecember 28, 2019 are presented in the following table: March 28, December 28, 2020 2019 Balance, beginning of period$ 287,258 $ 219,724
Decrease in redeemable noncontrolling interests due to
redemptions (12,636) (2,270)
Increase in redeemable noncontrolling interests due to
business acquisitions 23,317 74,865
Net income attributable to redeemable noncontrolling interests
2,839 14,838
Dividends declared (2,553)
(10,264)
Effect of foreign currency translation loss attributable to
redeemable noncontrolling interests (13,027) (2,335)
Change in fair value of redeemable securities (13,072) (7,300) Balance, end of period$ 272,126 $ 287,258 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. For the three months endedMarch 28, 2020 andMarch 30, 2019 , there were no material adjustments recorded in our consolidated statement of income relating to changes in estimated contingent purchase price liabilities. Noncontrolling Interests
Noncontrolling interests represent our less than 50% ownership interest in an acquired subsidiary. Our net income is reduced by the portion of the subsidiaries net income that is attributable to noncontrolling interests.
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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 endedDecember 28, 2019 , except accounting policies adopted as ofDecember 29, 2019 , which are discussed in Note 3 of the Notes to Consolidated Financial Statements included in Item 1. Our financial results for the three months endedMarch 28, 2020 were affected by certain estimates we made due to the adverse business environment brought on by the COVID-19 pandemic. For example, we recorded incremental bad debt reserves of approximately$10 million for our global dental business. We also recognized a net credit of approximately$17.5 million in stock-based compensation expense during the quarter due to our current estimate that no performance shares granted in 2018, 2019 or 2020 will ultimately vest. Additionally, we recorded total impairment charges of approximately$6.1 million during the quarter related to prepaid royalty expenses and a customer relationship intangible asset. Although our selling, general and administrative expenses for the three months endedMarch 28, 2020 represent management's best estimates and assumptions that affect the reported amounts, our judgment could change in the future due to the significant uncertainty surrounding the macroeconomic effect of the COVID-19 pandemic. Accounting Standards Update For a discussion of accounting standards updates that have been adopted or will be adopted in the future, please refer to Note 3 of the Notes to Consolidated Financial Statements included under Item 1.
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