Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

MarketScreener Homepage  >  Equities  >  Nasdaq  >  Henry Schein, Inc.    HSIC

HENRY SCHEIN, INC.

(HSIC)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
SummaryMost relevantAll NewsPress ReleasesOfficial PublicationsSector newsAnalyst Recommendations

HENRY SCHEIN : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/02/2020 | 02:23pm EST

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 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 the Company, its results of
operations, liquidity, and financial condition (including any estimates of the
percentage impact on these items), the rate and consistency with which dental
and other practices resume normal operations in the United States and
internationally, expectations regarding PPE and other COVID-19 related product
sales and inventory levels and whether one or more resurgences of the virus will
adversely impact the resumption of normal operations, as well as more generally
current expectations regarding performance in current and future periods.
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 COVID-19, as well as other disease outbreaks,
epidemics, pandemics, or similar wide spread public health concerns and other
natural disasters; risks associated with the United Kingdom's withdrawal from
the European 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.

                                       38

--------------------------------------------------------------------------------

Table of Contents

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) and the social media channels identified on the Newsroom page of our website.



Recent Developments



COVID-19 Pandemic



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 implemented business closures and restrictions, stay-at-home and
social distancing ordinances and similar measures to combat the pandemic, which
significantly impacted global business and dramatically reduced demand for
dental products and certain medical products in the second quarter of 2020.
Demand increased in the third quarter resulting in growth over the prior year
driven by sales of personal protective equipment (PPE) and COVID-19 related
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 had a material adverse effect on our
business, results of operations and cash flows in the second quarter of 2020. In
the latter half of the second quarter, dental and medical practices began to
re-open worldwide, and continued to do so during the third quarter. However,
patient volumes remain below pre-COVID-19 levels and certain regions in the U.S.
and internationally are experiencing an increase in COVID-19 cases. As such,
there is an ongoing risk that the COVID-19 pandemic may again have a material
adverse effect on our business, results of operations and cash flows and may
result in a material adverse effect on our financial condition and liquidity.
However, the extent of the potential impact cannot be reasonably estimated at
this time.



As part of a broad-based effort to support plans for the long-term health of our
business and to strengthen our financial flexibility, we implemented cost
reduction measures that included certain reductions in payroll, substantially
decreased capital expenditures, reduced corporate spending and elimination of
certain non-strategic targeted expenditures. As our markets have begun to
recover we have ended most of those temporary expense-reduction initiatives
during the third quarter.



Corporate Transactions



On February 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") with Direct 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/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

                                       39

--------------------------------------------------------------------------------

Table of Contents




Merger whereby it merged with and into Vets First Choice, with Vets First Choice
surviving the Merger as a wholly owned subsidiary of Covetrus. Immediately
following the consummation of the Merger, on a fully diluted basis, (i)
approximately 63% of the shares of Covetrus common stock were (a) owned by our
stockholders and the Share Sale Investors, and (b) held by certain employees of
the Henry Schein Animal Health Business (in the form of certain equity awards),
and (ii) approximately 37% of the shares of Covetrus common stock were (a) owned
by stockholders of Vets First Choice immediately prior to the Merger, and (b)
held by certain employees of Vets First Choice (in the form of certain equity
awards). After the Separation and the Merger, we no longer beneficially owned
any shares of Covetrus common stock and, following the Distribution Date, will
not consolidate the financial results of Covetrus for the purpose of our
financial reporting. Following the Separation and the Merger, Covetrus was an
independent, publicly traded company on the Nasdaq Global Select Market.



Executive-Level Overview



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 88 years of experience distributing
health care products.



We are headquartered in Melville, New York, employ more than 19,000 people (of
which more than 9,500 are based outside the United States) and have operations
or affiliates in 31 countries, including the United States, Australia, Austria,
Belgium, Brazil, Canada, Chile, China, the Czech Republic, France, Germany, Hong
Kong SAR, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg, Malaysia,
the Netherlands, New Zealand, Poland, Portugal, Singapore, South Africa, Spain,
Sweden, Switzerland, Thailand, United Arab Emirates and the United Kingdom.



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 and on value-based reimbursement arrangements that condition payment
to health care providers on the achievement of cost savings and quality targets.
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 group
practices, managed care arrangements 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 and value-based
reimbursement has the potential to favorably affect demand for

                                       40

--------------------------------------------------------------------------------

Table of Contents

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 continue to be adversely impacted by the COVID-19 pandemic, the current economic environment and uncertainty, particularly impacting overall demand for our products and services.




Industry Consolidation



The health care products distribution industry, as it relates to office-based
health care practitioners, is fragmented and diverse. The industry ranges from
sole practitioners working out 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 had
taken a range of actions to preserve cash, including the temporary suspension of
significant acquisition activity. During the third quarter of 2020, as global
conditions improved, we resumed our acquisition strategy.

                                       41

--------------------------------------------------------------------------------

  Table of Contents




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'sInternational 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 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 2019-2028" 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 in the 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, importation and sale 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 in the 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, price gouging 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
our Annual Report on Form 10-K for the fiscal year ended December 28 2019, filed
on February 20, 2020.

                                       42

--------------------------------------------------------------------------------

  Table of Contents



Results of Operations



The following table summarizes the significant components of our operating
results for the three and nine months ended September 26, 2020 and September 28,
2019 and cash flows for the nine months ended September 26, 2020 and September
28, 2019 (in thousands):



                                                         Three Months Ended                   Nine Months Ended
                                                   September 26,     September 28,     September 26,     September 28,
                                                       2020              2019              2020              2019
Operating results:
Net sales                                         $     2,840,146$     2,508,767$     6,953,416$     7,316,862
Cost of sales                                           2,085,847         1,747,600         4,998,784         5,036,574
     Gross profit                                         754,299           761,167         1,954,632         2,280,288
Operating expenses:
     Selling, general and administrative                  559,636          

574,771 1,572,816 1,742,597

     Restructuring costs (credits)                          6,992          
  (802)            27,713            15,764
          Operating income                        $       187,671$       187,198$       354,103$       521,927

Other expense, net                                $      (10,516)$       (8,607)$      (24,138)$      (31,103)
Net income from continuing operations                     151,813           143,212           271,808           388,269
Income (loss) from discontinued operations                   (29)             5,641               274           (5,210)
Net income attributable to Henry Schein, Inc.             141,697           140,557           261,161           364,872

                                                                                              Nine Months Ended
                                                                                       September 26,     September 28,
                                                                                           2020              2019
Cash flows:
Net cash provided by operating activities from continuing operations                  $       248,414$       525,180
Net cash used in investing activities from continuing operations                             (93,956)         (691,349)

Net cash provided by financing activities from continuing operations

                  264,433           176,139




Plans of Restructuring



On July 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 drive growth under our
2018 to 2020 strategic plan. This initiative has resulted in the elimination of
approximately 4% of our workforce and the closing of certain facilities.



On November 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 ended September 26, 2020 and September 28, 2019, we
recorded restructuring costs (credits) of $7.0 million and $(0.8) million.
During the nine months ended September 26, 2020 and September 28, 2019, we
recorded restructuring costs of $27.7 million and $15.8 million. The
restructuring costs for these periods included costs for severance benefits and
facility exit costs. The costs associated with these restructurings are included
in a separate line item, "Restructuring costs" within our consolidated
statements of income.

                                       43

--------------------------------------------------------------------------------

Table of Contents

Three Months Ended September 26, 2020 Compared to Three Months Ended September 28, 2019




Net Sales

Net sales for the three months ended September 26, 2020 and September 28, 2019 were as follows (in thousands):



                                        September 26,           % of          September 28,          % of              Increase
                                             2020              Total               2019              Total            $          %

Health care distribution (1)

    Dental                             $      1,649,853       58.1 %         $      1,545,981       61.6 %       $   103,872    6.7 %
    Medical                                   1,027,146       36.2                    803,709       32.0             223,437   27.8
         Total health care
         distribution                         2,676,999       94.3                  2,349,690       93.6             327,309   13.9
Technology and value-added
services (2)                                    138,355        4.9                    137,334        5.5               1,021    0.7

Total excluding

         Corporate TSA revenue                2,815,354       99.2                  2,487,024       99.1             328,330   13.2
Corporate TSA revenue (3)                        24,792        0.8                     21,743        0.9               3,049   14.0
         Total                         $      2,840,146      100.0 %        

$ 2,508,767 100.0 % $ 331,379 13.2

(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.

(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 has been substantially completed as of October 2020.




The 13.2% increase in net sales for the three months ended September 26, 2020
includes an increase of 13.1% in local currency revenue (13.0% increase in
internally generated revenue and 0.1% growth from acquisitions) and an increase
of 0.1% related to foreign currency exchange. Sales in the third quarter
benefited from an approximate 291% increase in sales of personal protection
equipment (PPE) and other COVID-19 related products, which accounts for nearly
all the growth in sales.



The 6.7% increase in dental net sales for the three months ended September 26,
2020 includes an increase of 6.6% local currency revenue (6.5% increase in
internally generated revenue and 0.1% growth from acquisitions) and an increase
of 0.1% related to foreign currency exchange. The 6.6% increase in local
currency sales was attributable to an increase in dental consumable merchandise
sales of 9.4% (9.3% increase in internally generated revenue and 0.1% growth
from acquisitions), partially offset by a decrease in dental equipment sales and
service revenues of 2.6%, all of which is attributable to the decrease in
internally generated revenue. Dental equipment sales in the third quarter
continued to recover as internal sales in local currencies in North America were
essentially flat. International dental equipment sales experienced only a slight
decline as practices resumed investments in traditional and high-technology
capital equipment solutions. Although the COVID-19 pandemic adversely impacted
our worldwide revenue beginning in mid-March as many dental offices
progressively closed or began seeing a limited number of patients, our dental
sales began to improve in the second half of the quarter ended June 27, 2020 and
continuing into the quarter ended September 26, 2020 as dental practices resumed
operating and patient traffic increased. Global dental sales in the third
quarter benefited from an approximate 130% increase in sales of PPE, which
accounts for nearly all the growth in dental sales.



The 27.8% increase in medical net sales for the three months ended September 26,
2020 includes an increase of 27.7% local currency revenue and an increase 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 PPE, such as
masks, gowns and face shields, and other COVID-19 related products, such as
diagnostic test kits. Globally, our medical business experienced growth of sales
of such products by approximately 600% compared to the prior year, which
accounts for nearly all the growth in medical sales.



The 0.7% increase in technology and value-added services net sales for the three
months ended September 26, 2020 includes an increase of 0.3% local currency
revenue (1.3% decrease in internally generated revenue, partially offset by 1.6%
growth from acquisitions) and an increase of 0.4% related to foreign currency
exchange. During the

                                       44

--------------------------------------------------------------------------------

Table of Contents




quarter, in line with the resumption of dental practice operations, the trend
for transactional software revenues improved as more patients visited dental
practices worldwide.



Although dental and medical practices continued to re-open during the third
quarter, patient volumes remain below pre-COVID-19 levels and certain regions in
the U.S and internationally are experiencing an increase in COVID-19 cases. As
such, there is an ongoing risk that the COVID-19 pandemic may again have a
material adverse effect on our net sales in future periods.



Gross Profit



Gross profit and gross margin percentages by segment and in total for the three
months ended September 26, 2020 and September 28, 2019 were as follows (in
thousands):



                               September 26,      Gross      September 28,      Gross       Increase / (Decrease)
                                   2020         Margin %         2019         Margin %          $              %
Health care distribution      $       653,204      24.4 %   $       659,955      28.1 %   $     (6,751)      (1.0) %
Technology and value-added
services                              100,272      72.5             100,557      73.2             (285)      (0.3)
   Total excluding
   Corporate TSA revenues             753,476      26.8             760,512      30.6           (7,036)      (0.9)
Corporate TSA revenues                    823       3.3                 655       3.0               168       25.6
   Total                      $       754,299      26.6     $       761,167      30.3     $     (6,868)      (0.9)




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-Discontinued Operations   of the Notes to the Consolidated Financial
Statements included under Item 1 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. These sales have been substantially completed as
of October 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 $6.8 million, or 1.0%, for the
three months ended September 26, 2020 compared to the prior year period, due
primarily to the COVID-19 pandemic. Health care distribution gross profit margin
decreased to 24.4% for the three months ended September 26, 2020 from 28.1% for
the comparable prior year period. The overall decrease in our health care
distribution gross profit is attributable to an $85.2 million decline in gross
profit due to the decrease in the gross margin rates and $1.4 million reduction
in gross profit from acquisitions, partially offset by an increase of $77.0
million from internally generated revenue. Gross profit margin was negatively
affected by PPE products, primarily due to significant adjustments recorded for
PPE inventory and other COVID-19 related products caused by volatility of
pricing and demand experienced during the quarter, which conditions may recur
and adversely impact gross profit margins in future periods. During the quarter,
we continued to earn lower vendor rebates, due to lower purchase volumes, during
the year in our health care distribution segment, which also contributes to the
lower gross profit margin.



                                       45

--------------------------------------------------------------------------------

Table of Contents




Technology and value-added services gross profit decreased $0.3 million, or
0.3%, for the three months ended September 26, 2020 compared to the prior year
period. The overall decrease in our Technology and value-added services gross
profit is attributable to a $0.8 million decrease in internally generated
revenue, primarily due to the COVID-19 pandemic and a decrease of $1.3 million
from gross margin rates, partially offset by $1.8 million additional gross
profit from acquisitions. Technology and value-added services gross profit
margin decreased to 72.5% for the three months ended September 26, 2020 from
73.2% for the comparable prior year period primarily due to a decrease in the
volume of our transactional revenue from eClaims and credit card processing.



Selling, General and Administrative




Selling, general and administrative expenses by segment and in total for the
three months ended September 26, 2020 and September 28, 2019 were as follows (in
thousands):



                                                     % of                            % of
                                 September 26,    Respective     September 28,    Respective          Decrease
                                     2020          Net Sales         2019          Net Sales        $           %
Health care distribution        $       505,370       18.9 %    $       511,116       21.8 %    $  (5,746)   (1.1) %
Technology and value-added
services                                 61,258       44.3               62,853       45.8         (1,595)   (2.5)
       Total                    $       566,628       20.0      $       573,969       22.9      $  (7,341)   (1.3)




Selling, general and administrative expenses (including restructuring costs in
the three months ended September 26, 2020 and September 26, 2020) decreased $7.3
million, or 1.3%, for the three months ended September 26, 2020 from the
comparable prior year period. The $5.7 million decrease in selling, general and
administrative expenses within our health care distribution segment for the
three months ended September 26, 2020 as compared to the prior year period was
attributable to a reduction of $16.9 million of operating costs, primarily as a
result of cost-saving measures taken in response to the COVID-19 pandemic,
partially offset by increases of $3.6 million of additional costs from acquired
companies and an increase of $7.6 million in restructuring costs. The $1.6
million decrease in selling, general and administrative expenses within our
technology and value-added services segment for the three months ended September
26, 2020 as compared to the prior year period was attributable to a reduction of
$3.3 million of operating costs, primarily as a result of cost-saving measures
taken in response to the COVID-19 pandemic, partially offset by an increase of
$1.5 million of additional costs from acquired companies and an increase of $0.2
million in restructuring costs. As a percentage of net sales, selling, general
and administrative expenses decreased to 20.0% from 22.9% for the comparable
prior year period, primarily due to the cost-saving measures taken in response
to the COVID-19 pandemic, partially offset by an increase in restructuring
costs. The cost savings achieved from measures taken in response to the COVID-19
pandemic are expected to diminish in future periods as most measures were
temporary and ended during the third quarter of 2020.



As a component of total selling, general and administrative expenses, selling
expenses decreased $12.6 million, or 3.5% to $345.7 million, for the three
months ended September 26, 2020 from the comparable prior year period, primarily
as a result of cost-saving measures taken in response to the COVID-19 pandemic.
As a percentage of net sales, selling expenses decreased to 12.2% from 14.3% for
the comparable prior year period.



As a component of total selling, general and administrative expenses, general
and administrative expenses increased $5.3 million, or 2.4% to $220.9 million,
for the three months ended September 26, 2020 from the comparable prior year
period, primarily due to an increase in restructuring costs. As a percentage of
net sales, general and administrative expenses decreased to 7.8% from 8.6% for
the comparable prior year period.

                                       46

--------------------------------------------------------------------------------

  Table of Contents



Other Expense, Net


Other expense, net, for the three months ended September 26, 2020 and September 28, 2019 was as follows (in thousands):



                        September 26,     September 28,          Variance
                            2020              2019             $           %
Interest income        $         2,294   $         3,943   $ (1,649)    (41.8) %
Interest expense              (11,111)          (12,373)       1,262      10.2
Other, net                     (1,699)             (177)     (1,522)   (859.9)
  Other expense, net   $      (10,516)$       (8,607)$ (1,909)    (22.2)




Interest income decreased $1.6 million primarily due to lower interest rates and
reduced late fee income. Interest expense decreased $1.3 million primarily due
to reduced interest expense resulting from decreased borrowings under our U.S
trade accounts receivable securitization and lower interest rates, partially
offset by increased borrowings under our bank credit lines. Other, net increased
primarily due to certain litigation-related costs.



Income Taxes



For the three months ended September 26, 2020, our effective tax rate was 16.4%
compared to 23.5% for the prior year period. The difference between our
effective tax rate and the federal statutory tax rate for the three months ended
September 26, 2020, was primarily due to a U.S. federal income tax settlement,
reached during the third quarter, which lowered income tax expense by
approximately $15.6 million, as well as state and foreign income taxes and
interest. The difference between our effective tax rate and the federal
statutory tax rate for the three months ended September 28, 2019 primarily
relates to state and foreign income taxes and interest expense.

                                       47

--------------------------------------------------------------------------------

Table of Contents

Nine Months Ended September 26, 2020 Compared to Nine Months Ended September 28, 2019




Net Sales

Net sales for the nine months ended September 26, 2020 and September 28, 2019 were as follows (in thousands):



                                           September 26,           % of          September 28,          % of            Increase/(Decrease)
                                                2020              Total               2019              Total              $               %

Health care distribution (1)

    Dental                                $      4,066,221       58.5 %         $      4,693,711       64.1 %       $     (627,490)     (13.4) %
    Medical                                      2,445,644       35.2                  2,184,927       29.9                 260,717       11.9
         Total health care
         distribution                            6,511,865       93.7                  6,878,638       94.0               (366,773)      (5.3)
Technology and value-added services
(2)                                                375,547        5.4                    377,983        5.2                 (2,436)      (0.6)
         Total excluding Corporate
         TSA revenue                             6,887,412       99.1                  7,256,621       99.2               (369,209)      (5.1)
Corporate TSA revenue (3)                           66,004        0.9                     60,241        0.8                   5,763        9.6
         Total                            $      6,953,416      100.0 %     

$ 7,316,862 100.0 % $ (363,446) (5.0)

(1) Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic

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

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

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

(3) Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in connection

with the Animal Health Spin-off, which has been substantially completed as of October 2020.





The 5.0% decrease in net sales for the nine months ended September 26, 2020
includes a decrease of 4.4% in local currency revenue (5.1% decrease in
internally generated revenue, partially offset by 0.7% growth from acquisitions)
and a decrease of 0.6% related to foreign currency exchange. Excluding sales of
products under the transition services agreement with Covetrus, our net sales
decreased 5.1%, including a decrease in local currency revenue of 4.5% (5.2%
decrease in internally generated revenue, partially offset by 0.7% growth from
acquisitions) and a decrease of 0.6% related to foreign currency exchange. Sales
for the nine months ended September 26, 2020 benefited from an approximate 142%
increase in sales of PPE and other COVID-19 related products.



The 13.4% decrease in dental net sales for the nine months ended September 26,
2020 includes a decrease of 12.4% local currency revenue (12.7% decrease in
internally generated revenue, partially offset by 0.3% growth from acquisitions)
and a decrease of 1.0% related to foreign currency exchange. The 12.4% decrease
in local currency sales was attributable to a decrease in dental consumable
merchandise revenue of 11.6% (12.0% decrease in internally generated revenue,
partially offset by 0.4% growth from acquisitions), and a decrease in dental
equipment sales and service revenues of 15.4%, all of which is attributable to a
decrease in internally generated revenue. The COVID-19 pandemic began to
adversely impact our worldwide dental revenue beginning in mid-March as many
dental offices progressively closed or began seeing a limited number of
patients. However, in the second half of the quarter ended June 27, 2020 and
continuing into the quarter ended September 26, 2020 our dental sales began to
improve as dental practices began to resume activities and patient traffic
increased. Global dental sales for the nine months ended September 26, 2020
benefited from an approximate 66% increase in sales of PPE.



The 11.9% increase in medical net sales for the nine months ended September 26,
2020 is attributable to an increase of 11.9% local currency growth (10.8%
increase in internally generated revenue and 1.1% growth from acquisitions). The
COVID-19 pandemic began to adversely impact our medical revenue beginning in
mid-March and continuing to a lesser extent into the third quarter, as medical
offices began seeing a limited increase in the number of patients. 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 PPE, such as masks, gowns and face shields, and other COVID-19 related
products, such as diagnostic test kits. Globally, our medical business
experienced growth of sales of such products during the nine months ended
September 26, 2020 by approximately 295% compared to the prior year, and these
products are the primary contributor to the increase in sales during this
period.



                                       48

--------------------------------------------------------------------------------

Table of Contents




The 0.6% decrease in technology and value-added services net sales for the nine
months ended September 26, 2020 is attributable to a decrease of 0.6% in local
currency revenue (4.2% decrease in internally generated revenue, partially
offset 3.6% growth from acquisitions). During the second quarter and continuing
into the third quarter, in line with the resumption of dental practice
operations, the trend for transactional software revenues improved as more
patients visited dental practices worldwide.



Although dental and medical practices continued to re-open globally in the third
quarter, patient volumes remain below pre-COVID-19 levels and certain regions in
the U.S and internationally are experiencing an increase in COVID-19 cases. As
such, there is an ongoing risk that the COVID-19 pandemic may again have a
material adverse effect on our net sales in future periods.



Gross Profit



Gross profit and gross margin percentages by segment and in total for the nine
months ended September 26, 2020 and September 28, 2019 were as follows (in
thousands):



                               September 26,      Gross      September 28,      Gross       Increase/(Decrease)
                                   2020         Margin %         2019         Margin %         $            %
Health care distribution      $     1,687,615      25.9 %   $     2,004,126      29.1 %   $  (316,511)   (15.8) %
Technology and value-added
services                              265,040      70.6             274,358      72.6          (9,318)    (3.4)
   Total excluding
   Corporate TSA revenues           1,952,655      28.4           2,278,484      31.4        (325,829)   (14.3)
Corporate TSA revenues                  1,977       3.0               1,804       3.0              173      9.6
   Total                      $     1,954,632      28.1     $     2,280,288      31.2     $  (325,656)   (14.3)




As a result of different practices of categorizing costs associated with
distribution networks throughout our industry, our gross margins may not
necessarily be comparable to other distribution companies. Additionally, we
realize substantially higher gross margin percentages in our technology and
value-added services segment than in our health care distribution segment. These
higher gross margins result from being both the developer and seller of software
products and services, as well as certain financial services. The software
industry typically realizes higher gross margins to recover investments in
research and development.



In connection with the completion of the Animal Health Spin-off (see   Note
2-Discontinued Operations   of the Notes to the Consolidated Financial
Statements included under Item 1 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. These sales have been substantially completed as
of October 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 $316.5 million, or 15.8%, for
the nine months ended September 26, 2020 compared to the prior year period, due
primarily to the COVID-19 pandemic. Health care distribution gross profit margin
decreased to 25.9% for the nine months ended September 26, 2020 from 29.1% for
the comparable prior year period. The overall decrease in our health care
distribution gross profit is attributable to a $165.7 million decrease in
internally generated revenue and a $163.5 million decline in gross profit due to
the decrease in the gross margin rates, partially offset by $12.7 million
additional gross profit from acquisitions. Gross profit margin was negatively
affected by PPE products, primarily due to significant adjustments recorded for
PPE inventory and other COVID-19 related products caused by volatility of
pricing and demand experienced during the quarter, which conditions may recur
and adversely impact gross profit margins in future periods. Gross profit margin
was also affected by fixed costs included in cost of goods sold that adversely
affect gross margin rates when sales are lower. During the year, we continued to
earn lower vendor rebates, due to lower purchase volumes, in our health care
distribution segment, which also contributes to the lower gross profit margin.

                                       49

--------------------------------------------------------------------------------

  Table of Contents





Technology and value-added services gross profit decreased $9.3 million, or
3.4%, for the nine months ended September 26, 2020 compared to the prior year
period. The overall decrease in our Technology and value-added services gross
profit is attributable to a decrease of $11.5 million in internally generated
revenue, primarily due to the COVID-19 pandemic and a $9.0 million decline in
gross profit due to the decrease in the gross margin rates, partially offset by
$11.2 million additional gross profit from acquisitions. Technology and
value-added services gross profit margin decreased to 70.6% for the nine months
ended September 26, 2020 from 72.6% for the comparable prior year period
primarily due to a decrease in the volume of our transactional revenue from
eClaims and credit card processing.



Selling, General and Administrative




Selling, general and administrative expenses by segment and in total for the
nine months ended September 26, 2020 and September 28, 2019 were as follows (in
thousands):



                                                     % of                            % of
                                 September 26,    Respective     September 28,    Respective      Increase / (Decrease)
                                     2020          Net Sales         2019          Net Sales          $             %
Health care distribution        $     1,418,115       21.8 %    $     1,576,996       22.9 %    $    (158,881)   (10.1) %
Technology and value-added
services                                182,414       48.6              181,365       48.0               1,049      0.6
       Total                    $     1,600,529       23.0      $     1,758,361       24.0      $    (157,832)    (9.0)




Selling, general and administrative expenses (including restructuring costs in
the nine months ended September 26, 2020 and September 26, 2020) decreased
$157.8 million, or 9.0%, for the nine months ended September 26, 2020 from the
comparable prior year period. The $158.9 million decrease in selling, general
and administrative expenses within our health care distribution segment for the
nine months ended September 26, 2020 as compared to the prior year period was
attributable to a reduction of $188.2 million of operating costs, primarily as a
result of cost-saving measures taken in response to the COVID-19 pandemic,
partially offset by increases of $17.6 million of additional costs from acquired
companies and an increase of $11.7 million in restructuring costs. The $1.0
million increase in selling, general and administrative expenses within our
technology and value-added services segment for the nine months ended September
26, 2020 as compared to the prior year period was attributable to an increase of
$9.2 million of additional costs from acquired companies and an increase of $0.3
million in restructuring costs, partially offset by a reduction of $8.5 million
of operating costs. As a percentage of net sales, selling, general and
administrative expenses decreased to 23.0% from 24.0% for the comparable prior
year period. The cost savings achieved from measures taken in response to the
COVID-19 pandemic are expected to diminish in future periods as most of these
measures were temporary and ended during the third quarter of 2020.



As a component of total selling, general and administrative expenses, selling
expenses decreased $104.1 million, or 9.6% to $ 980.9 million, for the nine
months ended September 26, 2020 from the comparable prior year period, primarily
as a result of cost-saving measures taken in response to the COVID-19 pandemic.
As a percentage of net sales, selling expenses decreased to 14.1% from 14.8% for
the comparable prior year period.



As a component of total selling, general and administrative expenses, general
and administrative expenses decreased $53.7 million, or 8.0% to $ 619.6 million,
for the nine months ended September 26, 2020 from the comparable prior year
period, primarily as a result of cost-saving measures taken in response to the
COVID-19 pandemic. As a percentage of net sales, general and administrative
expenses decreased to 8.9% from 9.2% for the comparable prior year period.



Our selling, general and administrative expenses for the nine months ended
September 26, 2020 continued to be affected by certain estimates we made due to
the adverse business environment brought on by the COVID-19 pandemic. For
example, in the quarter ended March 28, 2020 we recorded incremental bad debt
reserves of approximately $10 million for our global dental business. As of
September 26, 2020, we have retained the $10 million incremental bad debt
reserves due to the ongoing uncertainties in the markets we serve.



                                       50

--------------------------------------------------------------------------------

Table of Contents




In the quarter ended March 28, 2020, we also recognized a net credit of
approximately $17.5 million in stock-based compensation expense during the
quarter due to our previous estimate that no performance shares granted in 2018,
2019 or 2020 will ultimately vest. Our assumptions regarding vesting of
performance shares under our 2018, 2019 and 2020 LTIP remain largely unchanged
from those as of March 28, 2020. Accordingly, we did not recognize any
significant stock compensation expense related to performance shares during the
nine months ended September 26, 2020.



During the quarter ended March 28, 2020, we recorded total impairment charges of approximately $6.1 million during the quarter related to prepaid royalty expenses and a customer relationship intangible asset.





Other Expense, Net


Other expense, net, for the nine months ended September 26, 2020 and September 28, 2019 was as follows (in thousands):



                        September 26,     September 28,          Variance
                            2020              2019             $          %
Interest income        $         7,481   $        12,368$ (4,887)   (39.5) %
Interest expense              (29,409)          (41,459)      12,050     29.1
Other, net                     (2,210)           (2,012)       (198)    (9.8)
  Other expense, net   $      (24,138)$      (31,103)$   6,965     22.4




Interest income decreased $4.9 million primarily due to lower interest rates and
reduced late fee income. Interest expense decreased $12.1 million primarily due
to decreased borrowings under our U.S trade accounts receivable securitization
and lower interest rates, partially offset by increased borrowings under our
bank credit lines.



Income Taxes



For the nine months ended September 26, 2020, our effective tax rate was 20.0%
compared to 23.9% for the prior year period. The difference between our
effective tax rate and the federal statutory tax rate for the nine months ended
September 26, 2020, was primarily due to a U.S. federal income tax settlement,
reached during the third quarter, which lowered income tax expense by
approximately $15.6 million, as well as state and foreign income taxes and
interest. The difference between our effective tax rate and the federal
statutory tax rate for the nine months ended September 28, 2019 primarily
relates to state and foreign income taxes and interest expense.

                                       51

--------------------------------------------------------------------------------

Table of Contents

Liquidity and Capital Resources




Our principal capital requirements have included funding of acquisitions,
purchases of additional noncontrolling interests, repayments of debt principal,
the funding of working capital needs, purchases of fixed assets and repurchases
of common stock (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 had a material adverse effect
on our cash flows in the second quarter. In the latter half of the second
quarter and continuing into the third quarter, dental and medical practices
began to re-open worldwide. However, patient volumes remain below pre-COVID-19
levels and certain regions in the U.S. and internationally are experiencing an
increase in COVID-19 cases. As such, there is an ongoing risk that the COVID-19
pandemic may again have a material adverse effect on our cash flows in future
periods 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 of our
business and to strengthen the our financial flexibility, we implemented cost
reduction measures that included certain reductions in payroll, substantially
decreased capital expenditures, reduced corporate spending and elimination of
certain non-strategic targeted expenditures. As our markets have begun to
recover we have ended most of those temporary expense-reduction initiatives
during the third quarter. As the COVID-19 pandemic continues to unfold, we 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 February 7, 2019, we completed the Animal Health Spin-off. On the Distribution Date we received a tax free distribution of $1,120 million from Covetrus, which has been used to pay down our debt, thereby generating additional debt capacity that can be used for general corporate purposes, including share repurchases and mergers and acquisitions.




Net cash from continuing operations provided by operating activities was $248.4
million for the nine months ended September 26, 2020, compared to net cash from
continuing operations provided by operating activities of $525.2 million for the
comparable prior year period. The net change of $276.8 million was primarily
attributable to lower net income, lower distributions from equity affiliates,
and increased working capital requirements, specifically an increase in
inventories due to stocking of PPE and other COVID-19 related products, and an
increase in accounts receivable due to higher third quarter sales volume. These
working capital increases were partially offset by greater growth in accounts
payable and accrued expenses. The decrease in distributions from equity
affiliates is the result of having sold our equity investment in Hu-Friedy Mfg.
Co., LLC in the fourth quarter of 2019.

                                       52

--------------------------------------------------------------------------------

  Table of Contents





Net cash from continuing operations used in investing activities was $94.0
million for the nine months ended September 26, 2020, compared to $691.3 million
for the comparable prior year period. The net change of $597.3 million was
primarily attributable to decreased payments for equity investments and business
acquisitions.



Net cash from continuing operations provided by financing activities was $264.4
million for the nine months ended September 26, 2020, compared to net cash
provided by financing activities of $176.1 million for the comparable prior year
period. The net change of $88.3 million was primarily due to increased net
proceeds from bank borrowings and lower repurchases of our common stock,
partially offset by proceeds received during the prior year related to the
Animal Health Spin-off.



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



                                                                  September 26,         December 28,
                                                                       2020                 2019
Cash and cash equivalents                                        $        533,495$        106,097
Working capital (1)                                                     1,265,443            1,188,133

Debt:

       Bank credit lines                                         $       

507,372 $ 23,975

       Current maturities of long-term debt                               110,015              109,849
       Long-term debt                                                    
515,357              622,908
           Total debt                                            $      1,132,744$        756,732

Leases:
       Current operating lease liabilities                       $        

62,914 $ 65,349

       Non-current operating lease liabilities                            200,611              176,267

(1) Includes $0 million and $127 million of accounts receivable which serve as security for U.S.

trade accounts receivable securitization at September 26, 2020 and December 28, 2019

       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 48.8
days as of September 26, 2020 from 45.3 days as of September 28, 2019. During
the nine months ended September 26, 2020, we wrote off approximately $5.0
million of fully reserved accounts receivable against our trade receivable
reserve. Our inventory turns from operations decreased to 4.7 as of September
26, 2020 from 4.9 as of September 28, 2019. Our working capital accounts may be
impacted by current and future economic conditions.



Bank Credit Lines

Bank credit lines consisted of the following:




                                       September 26,     December 28,
                                           2020              2019
Revolving credit agreement            $             -   $            -
364-day credit agreement                      500,000                -
Other short-term bank credit lines              7,372           23,975
Total                                 $       507,372$       23,975

The increase in the level of borrowings under our bank credit lines as of September 26, 2020 was attributable to potential cash requirements due to the impact of the COVID-19 pandemic.

                                       53

--------------------------------------------------------------------------------

  Table of Contents





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 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
of September 26, 2020 and December 28, 2019, the borrowings on this revolving
credit facility were $0.0 million and $0.0 million, respectively. As of
September 26, 2020 and December 28, 2019, there were $9.5 million and $9.6
million of letters of credit, respectively, provided to third parties under the
credit facility.



On April 17, 2020, we amended the Credit Agreement to, among 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 through
March 31, 2021.



364-Day Credit Agreement



On April 17, 2020, we entered into a new $700 million 364-day credit agreement,
with JPMorgan Chase Bank, N.A. and U.S. Bank National Association as joint lead
arrangers and joint bookrunners. This facility matures on April 16, 2021. As of
September 26, 2020, the borrowings on this credit facility were $500 million. 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 our net
leverage ratio. At September 26, 2020, the interest rate on this facility was
2.81%. 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.



Other Short-Term Credit Lines



As of September 26, 2020 and December 28, 2019, we had various other short-term
bank credit lines available, of which $7.4 million and $24 million,
respectively, were outstanding. At September 26, 2020 and December 28, 2019,
borrowings under all of these credit lines had a weighted average interest rate
of 2.82% and 3.45%, respectively.



The decrease during the quarter ended September 26, 2020 in the weighted average
interest rate under all of our credit lines was attributable to the Federal
Reserve lowering borrowing rates during March 2020 in response to the COVID-19
pandemic.



                                       54

--------------------------------------------------------------------------------

  Table of Contents



Long-term debt


Long-term debt consisted of the following:



                                                      September 26,     December 28,
                                                          2020              2019
Private placement facilities                         $       613,549$      621,274
U.S. trade accounts receivable securitization                      -        

100,000

Note payable due in 2025 with an interest rate of
3.1%
    at September 26, 2020                                      1,438       

-

Various collateralized and uncollateralized loans
payable with interest,
    in varying installments through 2023 at
    interest rates
    ranging from 2.62% to 4.22% at September 26,
    2020 and
    ranging from 2.56% to 10.5% at December 28,
    2019                                                       4,273            6,089
Finance lease obligations (see Note 7)                         6,112            5,394
    Total                                                    625,372          732,757
Less current maturities                                    (110,015)        (109,849)
    Total long-term debt                             $       515,357$      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. On June
23, 2020, the expiration date for our private placement facilities was extended
through June 23, 2023. 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 June 23, 2023. The facilities allow us to issue senior
promissory notes to the lenders at a fixed rate based on an agreed upon spread
over applicable treasury notes at the time of issuance. The term of each
possible issuance will be selected by us and can range from five to 15 years
(with an average life no longer than 12 years). The proceeds of any issuances
under the facilities will be used for general corporate purposes, including
working capital and capital expenditures, to refinance existing indebtedness
and/or to fund potential acquisitions. On June 29, 2018, we amended and restated
the above private placement facilities to, among other things, (i) permit the
consummation of the Animal Health Spin-off and (ii) provide for the issuance of
notes in Euros, British Pounds and Australian Dollars, in addition to U.S.
Dollars. The agreements provide, among other things, that we maintain certain
maximum leverage ratios, and contain restrictions relating to subsidiary
indebtedness, liens, affiliate transactions, disposal of assets and certain
changes in ownership. These facilities contain make-whole provisions in the
event that we pay off the facilities prior to the applicable due dates.



On June 23, 2020, we amended the private placement facilities to, among other
things, (i) temporarily modify the financial covenant from being based on total
leverage ratio to net leverage ratio until March 31, 2021, (ii) increase the
maximum maintenance leverage ratio through March 31, 2021, but with a 1.00%
interest rate increase on the outstanding notes if the net leverage ratio
exceeds 3.0x, which will remain in effect until we deliver financials for a
four-quarter period ending on or after June 30, 2021 showing compliance with the
total leverage ratio requirement, and (iii) make certain other changes
conforming to the Credit Agreement, dated as of April 18, 2017.

                                       55

--------------------------------------------------------------------------------

Table of Contents

The components of our private placement facility borrowings as of September 26, 2020 are presented in the following table (in thousands):




                                     Amount of
                                     Borrowing              Borrowing
    Date of Borrowing               Outstanding                Rate                    Due Date
January 20, 2012 (1)           $              14,286           3.09 %              January 20, 2022
January 20, 2012                              50,000           3.45                January 20, 2024
December 24, 2012                             50,000           3.00               December 24, 2024
June 2, 2014                                 100,000           3.19                  June 2, 2021
June 16, 2017                                100,000           3.42                 June 16, 2027
September 15, 2017                           100,000           3.52               September 15, 2029
January 2, 2018                              100,000           3.32                January 2, 2028
September 2, 2020 (2)                        100,000           2.35               September 3, 2030
Less: Deferred debt
issuance costs                                 (737)
                               $             613,549

(1) Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016.
(2) On September 2, 2020, we refinanced our $100 million private placement borrowing at 3.79%,
originally due on September 2, 2020, with a similar 10-year borrowing at 2.35% maturing on September 2,
2030.



U.S. Trade Accounts Receivable Securitization




We have a facility agreement with a bank, as agent, based on the securitization
of our U.S. trade accounts receivable that is structured as an asset-backed
securitization program with pricing committed for up to three years. Our current
facility, which has a purchase limit of $350 million, was scheduled to expire on
April 29, 2022. On June 22, 2020, the expiration date for this facility was
extended to June 12, 2023. As of September 26, 2020 and December 28, 2019, the
borrowings outstanding under this securitization facility were $0 million and
$100 million, respectively. At September 26, 2020, the interest rate on
borrowings under this facility was based on the asset-backed commercial paper
rate of 0.22% plus 0.95%, for a combined rate of 1.17%. At December 28, 2019,
the interest rate on borrowings under this facility was based on the
asset-backed commercial paper rate of 1.90% plus 0.75%, for a combined rate of
2.65%.



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 25 to 45 basis points depending upon program utilization.

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

On June 22, 2020 we amended this facility to adjust certain covenant levels, in particular for the second and third quarters of 2020.



Leases



We have operating and finance leases for corporate offices, office space,
distribution and other facilities, vehicles, and certain equipment. Our leases
have remaining terms of less than one year to approximately 16 years, some of
which may include options to extend the leases for up to 10 years. As of
September 26, 2020, our right-of-use assets related to operating leases were
$249.9 million and our current and non-current operating lease liabilities were
$62.9 million and $200.6 million, respectively.



                                       56

--------------------------------------------------------------------------------

  Table of Contents



Stock Repurchases


From March 3, 2003 through September 26, 2020, we repurchased $3.6 billion, or 75,563,289 shares, under our common stock repurchase programs, with $201.2 million available as of September 26, 2020 for future common stock share repurchases.

As a result of the COVID-19 pandemic, as previously announced, we have temporarily suspended our share repurchase program in an effort to preserve cash and exercise caution during this uncertain period and due to certain restrictions related to financial covenants in our credit facilities.

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 nine months ended September 26, 2020
and the year ended December 28, 2019 are presented in the following table:



                                                               September 26,     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                                                       25,955           74,865

Net income attributable to redeemable noncontrolling interests

                                                               7,253           14,838
Dividends declared                                                    (7,272)         (10,264)
Effect of foreign currency translation loss attributable to
    redeemable noncontrolling interests                              (10,999)          (2,335)
Change in fair value of redeemable securities                           5,141          (7,300)
Balance, end of period                                        $       294,700$      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 statements of income. For the nine months ended September 26, 2020
and September 28, 2019, there were no material adjustments recorded in our
consolidated statements 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.

                                       57

--------------------------------------------------------------------------------

Table of Contents

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 28, 2019, except accounting policies adopted as of
December 29, 2019, which are discussed in   Note 3-Critical Accounting Policies,
Accounting Pronouncements Adopted and Recently Issued Accounting Standards  

of

the Notes to the Consolidated Financial Statements included under Item 1.




Our financial results for the nine months ended September 26, 2020 were affected
by certain estimates we made due to the adverse business environment brought on
by the COVID-19 pandemic. For example, in the quarter ended March 28, 2020 we
recorded incremental bad debt reserves of approximately $10.0 million for our
global dental business and continued to retain those incremental reserves
through the quarter ended September 26, 2020. During the quarter ended March 28,
2020, we also recognized a net credit of approximately $17.5 million in
stock-based compensation expense due to our estimate that no performance shares
granted in 2018, 2019 or 2020 will ultimately vest. For the quarter ended
September 26, 2020, we continued to estimate that no such performance-based
shares will ultimately vest. Additionally in the quarter ended March 28, 2020,
we recorded total impairment charges of approximately $6.1 million related to
prepaid royalty expenses and a customer relationship intangible asset. We had no
material impairment charges in the quarter ended September 26, 2020. Although
our selling, general and administrative expenses for the nine months ended
September 26, 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, see   Note 3-Critical Accounting Policies, Accounting Pronouncements
Adopted and Recently Issued Accounting Standards   of the Notes to the
Consolidated Financial Statements included under Item 1.

© Edgar Online, source Glimpses

All news about HENRY SCHEIN, INC.
01/05HENRY SCHEIN : Acquires Majority Stake in Prism Medical Products, Marking Entran..
MT
01/05HENRY SCHEIN : Acquires Majority Interest in Prism Medical Products, Enters Home..
BU
01/04HENRY SCHEIN : Baird Upgrades Henry Schein to Outperform From Neutral, Adjusts P..
MT
01/04HENRY SCHEIN : Completes Joint Venture with Casa Schmidt
BU
2020HENRY SCHEIN, INC., II : Post-Argument Analysis
AQ
2020HENRY SCHEIN : to Present at the 39th Annual J.P. Morgan Healthcare Conference
BU
2020HENRY SCHEIN : Medical Enhances Access to Ansell Isolation Gowns Amid COVID-19, ..
BU
2020HENRY SCHEIN : Medical Helps Automate and Streamline Patient Waiting Room Proces..
BU
2020HENRY SCHEIN : to Ring the Nasdaq Stock Market Opening Bell
BU
2020HENRY SCHEIN : Arbitrability Returns To The Supreme Court In Henry Schein, Inc. ..
AQ
More news