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 Annual Report on Form 10-K, 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). 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 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 Coronavirus; 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
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Recent Developments During the fourth quarter of 2019, we sold an equity investment inHu-Friedy Mfg. Co., LLC , a manufacturer of dental instruments and infection prevention solutions. Our investment was non-controlling, we were not involved in running the business and had no representation on the board of directors. During the fourth quarter of 2019, we also sold certain other equity investments. In aggregate, the sales of these investments resulted in a pre-tax gain of approximately$250.2 million and an after-tax gain of approximately$186.8 million . 50
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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 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 1 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 9,400 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.
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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 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.
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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.
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 2019 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 41% 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$6.0 trillion in 2027, approximately 19.4% 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. 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. Failure to comply with law or regulations could have a material adverse effect on our business. Health Care Reform The United States Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted inMarch 2010 (the "Health Care Reform Law") increased federal oversight of private health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost of health care generally, to reduce fraud and abuse, and to provide access to increased health coverage. 53
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Table of Contents The Health Care Reform Law included a 2.3% excise tax on domestic sales of many medical devices by manufacturers and importers that was to begin in 2013 and a fee on branded prescription drugs and biologics. The fee on branded prescription drugs and biologics was implemented in 2011. However, subsequent federal laws had suspended the imposition of the medical device excise tax throughDecember 31, 2019 , and the Further Consolidated Appropriations Act, 2020, signed into law onDecember 20, 2019 , has permanently repealed the medical device excise tax. The Health Care Reform Law has also materially expanded the number of individuals inthe United States with health insurance. The Health Care Reform Law has faced ongoing legal challenges, including litigation seeking to invalidate some of or all of the law or the manner in which it has been implemented. In addition, the President is seeking to repeal and replace the Health Care Reform Law. Repeal and replace legislation has been passed in theHouse of Representatives , but did not obtain the necessary votes in theSenate . Subsequently, the President has affirmed his intention to repeal and replace the Health Care Reform Law and has taken a number of administrative actions to materially weaken it, including, without limitation, by permitting the use of less robust plans with lower coverage and eliminating "premium support" for insurers providing policies under the Health Care Reform Law. OnDecember 22, 2017 , the President signed into law the Tax Cuts and Jobs Act (the "Tax Act"), which contains a broad range of tax reform provisions that impact the individual and corporate tax rates, international tax provisions, income tax add-back provisions and deductions, and which also repealed the individual mandate of the Health Care Reform Law. Further, inDecember 2019 , the Fifth Circuit ruled that the mandate within the Health Care Reform Law requiring that people buy health insurance was unconstitutional, though the ruling will likely be appealed. The Fifth Circuit remanded the remainder of the case pertaining to the viability of the remainder of the Health Care Reform Law, in the absence of the individual mandate, to theDistrict Court of the Northern District of Texas . Any outcome of these cases that changes the Health Care Reform Law, could have a significant impact on theU.S. health care industry. The uncertain status of the Health Care Reform Law affects our ability to plan. A Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, imposes annual reporting and disclosure requirements for drug and device manufacturers and distributors with regard to payments or other transfers of value made to certain covered recipients (including physicians, dentists and teaching hospitals), and for such manufacturers and distributors and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. CMS publishes information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities. Amendments expanded the law to also require reporting, effectiveJanuary 1, 2022 , of payments or other transfers of value to physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and certified nurse-midwives, and this new requirement will be effective for data collected beginning in calendar year 2021. Under the Physician Payment Sunshine Act, we are required to collect and report detailed information regarding certain financial relationships we have with covered recipients such as physicians, dentists and teaching hospitals. We believe that we are substantially compliant with applicable Physician Payment Sunshine Act requirements. The Physician Payment Sunshine Act pre-empts similar state reporting laws, although we or our subsidiaries may be required to report under certain state transparency laws that address circumstances not covered by the Physician Payment Sunshine Act, and some of these state laws, as well as the federal law, can be ambiguous. We are also subject to foreign regulations requiring transparency of certain interactions between suppliers and their customers. While we believe we have substantially compliant programs and controls in place to comply with these requirements, our compliance with these rules imposes additional costs on us. Another notable Medicare health care reform initiative, the Medicare Access and CHIP Reauthorization Act of 2015 ("MACRA"), enacted onApril 16, 2015 , established a new payment framework, called the Quality Payment Program, which modifies certain Medicare payments to "eligible clinicians," including physicians, dentists and other practitioners. Under MACRA, certain eligible clinicians are required to participate in Medicare through the Merit-Based Incentive Payment System ("MIPS") or Advanced Alternative Payment Models ("APMs"). MIPS generally consolidated three programs (the physician quality reporting system, the value-based payment modifier and the Medicare electronic health record ("EHR") program) into a single program in which Medicare 54
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reimbursement to eligible clinicians includes both positive and negative payment adjustments that take into account quality, promoting interoperability, cost and improvement activities. Advanced APMs generally involve higher levels of financial and technology risk. The first MIPS performance year was 2017, and the data collected in the first performance year determines payment adjustments that beganJanuary 1, 2019 . MACRA standards continue to evolve, and represent a fundamental change in physician reimbursement that is expected to provide substantial financial incentives for physicians to participate in risk contracts, and to increase physician information technology and reporting obligations. The implications of the implementation of MACRA are uncertain and will depend on future regulatory activity and physician activity in the marketplace. MACRA may encourage physicians to move from smaller practices to larger physician groups or hospital employment, leading to a consolidation of a portion of our customer base. Although we believe that we are positioned to capitalize on this consolidation trend, there can be no assurances that we will be able to successfully accomplish this. Recently, there has been increased scrutiny on drug pricing and concurrent efforts to control or reduce drug costs byCongress , the President, and various states, including that several related bills have been introduced at the federal level. Such legislation, if enacted, could have the potential to impose additional costs on our business. Health Care Fraud Certain of our businesses are subject to federal and state (and similar foreign) health care fraud and abuse, referral and reimbursement laws and regulations with respect to their operations. Some of these laws, referred to as "false claims laws," prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to federal, state and other health care payers and programs. Other laws, referred to as "anti-kickback laws," prohibit soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering, purchasing, leasing or arranging for, or recommending ordering, purchasing or leasing of, items or services that are paid for by federal, state and other health care payers and programs. The fraud and abuse laws and regulations have been subject to varying interpretations, as well as heightened enforcement activity over the past few years, and significant enforcement activity has been the result of "relators" who serve as whistleblowers by filing complaints in the name ofthe United States (and if applicable, particular states) under federal and state false claims laws, and who may receive up to 30% of total government recoveries. Penalties under fraud and abuse laws may be severe. For example, under the federal False Claims Act, violations may result in treble damages, plus civil penalties of up to$22,927 per claim, as well as exclusion from federal health care programs and criminal penalties. Most states have adopted similar state false claims laws, and these state laws have their own penalties which may be in addition to federal False Claims Act penalties. With respect to "anti-kickback laws," violations of, for example, the federal Anti-Kickback Law may result in civil penalties of up to$102,522 for each violation, plus up to three times the total amount of remuneration offered, paid, solicited or received, as well as exclusion from federal health care programs and criminal penalties. Notably, effectiveOctober 24, 2018 , a new federal anti-kickback law (the "Eliminating Kickbacks in Recovery Act of 2018") enacted in connection with broader addiction services legislation, may impose criminal penalties for kickbacks involving clinical laboratory services, regardless of whether the services at issue involved addiction services, and regardless of whether the services were reimbursed by a federal health care program or by a commercial health insurer. Furthermore, the Health Care Reform Law significantly strengthened the federal False Claims Act and the federal Anti-Kickback Law provisions, clarifying that a federal Anti-Kickback Law violation can be a basis for federal False Claims Act liability. With respect to measures of this type,the United States government (among others) has expressed concerns about financial relationships between suppliers on the one hand and physicians and dentists on the other. As a result, we regularly review and revise our marketing practices as necessary to facilitate compliance. We also are subject to certainUnited States and foreign laws and regulations concerning the conduct of our foreign operations, including theU.S. Foreign Corrupt Practices Act, theU.K. Bribery Act, German anti-corruption laws and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, which have been the focus of increasing enforcement activity globally in recent years. 55
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Failure to comply with fraud and abuse laws and regulations could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse effect on our business. Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations or incur substantial defense and settlement expenses. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs. In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing the risk of noncompliance. While we believe that we are substantially compliant with applicable fraud and abuse laws and regulations, and have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in response to changes in applicable law or interpretation of laws, could have a material adverse effect on our business.
Operating, Security and Licensure Standards
Certain of our businesses involve the distribution of pharmaceuticals and medical devices, and in this regard we are subject to various local, state, federal and foreign governmental laws and regulations applicable to the distribution of pharmaceuticals and medical devices. Amongthe United States federal laws applicable to us are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended ("FDC Act"), and Section 361 of the Public Health Service Act. We are also subject to comparable foreign regulations. The FDC Act and similar foreign laws generally regulate the introduction, manufacture, advertising, labeling, packaging, storage, handling, reporting, marketing and distribution of, and record keeping for, pharmaceuticals and medical devices shipped in interstate commerce, and states may similarly regulate such activities within the state. Section 361 of the Public Health Service Act, which provides authority to prevent the introduction, transmission or spread of communicable diseases, serves as the legal basis for theUnited States Food and Drug Administration's ("FDA") regulation of human cells, tissues and cellular and tissue-based products, also known as "HCT/P products." The Federal Drug Quality and Security Act of 2013 brought about significant changes with respect to pharmaceutical supply chain requirements. Title II of this measure, known as the Drug Supply Chain Security Act ("DSCSA"), is being phased in over a period of ten years, and is intended to build a national electronic, interoperable system to identify and trace certain prescription drugs as they are distributed inthe United States . The law's track and trace requirements applicable to manufacturers, wholesalers, repackagers and dispensers (e.g., pharmacies) of prescription drugs took effect inJanuary 2015 , and continues to be implemented. The DSCSA product tracing requirements replace the former FDA drug pedigree requirements and pre-empt certain state requirements that are inconsistent with, more stringent than, or in addition to, the DSCSA requirements. The DSCSA also establishes certain requirements for the licensing and operation of prescription drug wholesalers and third party logistics providers ("3PLs"), and includes the eventual creation of national wholesaler and 3PL licenses in cases where states do not license such entities. The DSCSA requires that wholesalers and 3PLs distribute drugs in accordance with certain standards regarding the recordkeeping, storage and handling of prescription drugs. The DSCSA requires wholesalers and 3PLs to submit annual reports to the FDA, which include information regarding each state where the wholesaler or PL is licensed, the name and address of each facility and contact information. According to FDA guidance, states are pre-empted from imposing any licensing requirements that are inconsistent with, less stringent than, directly related to, or covered by the standards established by federal law in this area. Current state licensing requirements concerning wholesalers will remain in effect until the FDA issues new regulations as directed by the DSCSA.
We believe that we are substantially compliant with applicable DSCSA requirements.
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The Food and Drug Administration Amendments Act of 2007 and the Food and Drug
Administration Safety and Innovation Act of 2012 amended the FDC Act to require
the FDA to promulgate regulations to implement a unique device identification
("UDI") system. The UDI rule phased in the implementation of the UDI regulations
over seven years, generally beginning with the highest-risk devices (i.e., Class
III medical devices) and ending with the lowest-risk devices. Most compliance
dates were reached as of September 24, 2018 , with a final set of requirements
for low-risk devices being reached on September 24, 2022 , which will complete
the phase in. The UDI regulations require "labelers" to include unique device
identifiers ("UDIs"), with a content and format prescribed by the FDA and issued
under a system operated by an FDA-accredited issuing agency, on the labels and
packages of medical devices, and to directly mark certain devices with UDIs. The
UDI regulations also require labelers to submit certain information concerning
UDI-labeled devices to the FDA, much of which information is publicly available
on an FDA database, the Global Unique Device Identification Database. The UDI
regulations and subsequent FDA guidance regarding the UDI requirements provide
for certain exceptions, alternatives and time extensions. For example, the UDI
regulations include a general exception for Class I devices exempt from the
Quality System Regulation (other than record-keeping requirements and complaint
files). Regulated labelers include entities such as device manufacturers,
repackagers, reprocessors and relabelers that cause a device's label to be
applied or modified, with the intent that the device will be commercially
distributed without any subsequent replacement or modification of the label, and
include certain of our businesses.
We believe that we are substantially compliant with applicable UDI requirements.
Under the Controlled Substances Act, as a distributor of controlled substances, we are required to obtain and renew annually registrations for our facilities from theUnited States Drug Enforcement Administration ("DEA ") permitting us to handle controlled substances. We are also subject to other statutory and regulatory requirements relating to the storage, sale, marketing, handling, reporting, record keeping and distribution of such drugs, in accordance with the Controlled Substances Act and its implementing regulations, and these requirements have been subject to heightened enforcement activity in recent times. We are subject to inspection by theDEA . Certain of our businesses are also required to register for permits and/or licenses with, and comply with operating and security standards of, theDEA , the FDA, theUnited States Department of Health and Human Services , and various state boards of pharmacy, state health departments and/or comparable state agencies as well as comparable foreign agencies, and certain accrediting bodies depending on the type of operations and location of product distribution, manufacturing or sale. These businesses include those that distribute, manufacture and/or repackage prescription pharmaceuticals and/or medical devices and/or HCT/P products, or own pharmacy operations, or install, maintain or repair equipment. In addition, Section 301 of the National Organ Transplant Act, and a number of comparable state laws, impose civil and/or criminal penalties for the transfer of certain human tissue (for example, human bone products) for valuable consideration, while generally permitting payments for the reasonable costs incurred in procuring, processing, storing and distributing that tissue. We are also subject to foreign government regulation of such products. TheDEA , the FDA and state regulatory authorities have broad inspection and enforcement powers, including the ability to suspend or limit the distribution of products by our distribution centers, seize or order the recall of products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations. Foreign regulations subject us to similar foreign enforcement powers. Furthermore, compliance with legal requirements has required and may in the future require us to institute voluntary recalls of products we sell, which could result in financial losses and potential reputational harm. Our customers are also subject to significant federal, state, local and foreign governmental regulation. In theEuropean Union , the EU Medical Device Regulation No. 2017/745 ("EU MDR") will apply as ofMay 26, 2020 . The EU MDR significantly modifies and intensifies the regulatory compliance requirements for the medical device industry as a whole. In particular, the EU MDR imposes stricter requirements for confirmation that a product meets the regulatory requirements, including regarding a product's clinical evaluation and a company's quality systems and for the distribution, marketing and sale of medical devices, including post-market surveillance. Medical devices that have been assessed and/or certified under the EU Medical Device Directive may continue to be placed on the market until 2024 (or until the expiry of their certificates, if applicable and earlier); however, requirements regarding the distribution, marketing and sale including quality systems and post-market surveillance 57
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are required to be observed by manufacturers, importers and distributors as of the application date.
Furthermore, compliance with legal requirements has required and may in the future require us to institute voluntary recalls of products we sell, which could result in financial losses and potential reputational harm. Our customers are also subject to significant federal, state, local and foreign governmental regulation.
Certain of our businesses are subject to various additional federal, state, local and foreign laws and regulations, including with respect to the sale, transportation, storage, handling and disposal of hazardous or potentially hazardous substances, and safe working conditions.
Certain of our businesses also maintain contracts with governmental agencies and are subject to certain regulatory requirements specific to government contractors.
Antitrust TheU.S. federal government, mostU.S. states and many foreign countries have antitrust laws that prohibit certain types of conduct deemed to be anti-competitive. Violations of antitrust laws can result in various sanctions, including criminal and civil penalties. Private plaintiffs also could bring civil lawsuits against us inthe United States for alleged antitrust law violations, including claims for treble damages.
The FDA has become increasingly active in addressing the regulation of computer software and digital health products intended for use in health care settings. The 21st Century Cures Act (the "Cures Act"), signed into law onDecember 13, 2016 , among other things amended the medical device definition to exclude certain software from FDA regulation, including clinical decision support software that meets certain criteria. OnSeptember 27, 2019 , the FDA issued a suite of guidance documents on digital health products, which incorporated applicable Cures Act standards, including regarding the types of clinical decision support tools and other software that are exempt from regulation by the FDA as medical devices. Certain of our businesses involve the development and sale of software and related products to support physician and dental practice management, and it is possible that the FDA or foreign government authorities could determine that one or more of our products is a medical device, which could subject us or one or more of our businesses to substantial additional requirements with respect to these products. In addition, theEuropean Parliament and theCouncil of the European Union have adopted a new pan-European General Data Protection Regulation ("GDPR"), effective fromMay 25, 2018 , which increased privacy rights for individuals inEurope ("Data Subjects"), including individuals who are our customers, suppliers and employees. The GDPR extended the scope of responsibilities for data controllers and data processors and generally imposes increased requirements and potential penalties on companies, such as us, that offer goods or services to Data Subjects or monitor their behavior (including by companies based outside ofEurope ). Noncompliance can result in penalties of up to the greater ofEUR 20 million , or 4% of global company revenues. Individual member states may impose additional requirements and penalties regarding certain matters such as employee personal data. With respect to the personal data it protects, the GDPR requires, among other things, company accountability, consents from Data Subjects or other acceptable legal basis to process the personal data, breach notifications within 72 hours, data integrity and security, and fairness and transparency regarding the storage, use or other processing of the personal data. The GDPR also, provides rights to Data Subjects relating to the modification, erasure and transporting of the personal data. Inthe United States , the California Consumer Privacy Act ("CCPA"), which increases the privacy protections affordedCalifornia residents and was signed into law onJune 28, 2018 , became effectiveJanuary 1, 2020 . The CCPA generally requires companies, such as us, to institute additional protections regarding the collection use and disclosure of certain personal information ofCalifornia residents. TheCalifornia Attorney General released proposed CCPA regulations onOctober 10, 2019 , and is required to adopt final regulations on or beforeJuly 1, 2020 . In addition to providing for enforcement by theCalifornia Attorney General, the CCPA also provides for a private right of action. Entities in violation of the CCPA may be liable for substantial civil penalties. Other states, as well as the federal government, have increasingly considered the adoption of similarly expansive personal privacy laws, also backed by substantial civil penalties for non-compliance. While we 58
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believe we have substantially compliant programs and controls in place to comply
with the GDPR and CCPA requirements, our compliance with these measures is
likely to impose additional costs on us, and we cannot predict whether the
interpretations of the requirements, or changes in our practices in response to
new requirements or interpretations of the requirements, could have a material
adverse effect on our business.
We also sell products and services that health care providers, such as
physicians and dentists, use to store and manage patient medical or dental
records. These customers, and we, are subject to laws, regulations and industry
standards, such as the federal Health Insurance Portability and Accountability
Act of 1996, as amended, and implementing regulations ("HIPAA") and the Payment
Card Industry Data Security Standards, which require the protection of the
privacy and security of those records, and our products may also be used as part
of these customers' comprehensive data security programs, including in
connection with their efforts to comply with applicable privacy and security
laws. Perceived or actual security vulnerabilities in our products or services,
or the perceived or actual failure by us or our customers who use our products
or services to comply with applicable legal or contractual data privacy and
security requirements, may not only cause us significant reputational harm, but
may also lead to claims against us by our customers and/or governmental agencies
and involve substantial fines, penalties and other liabilities and expenses and
costs for remediation.
Various federal initiatives involve the adoption and use by health care
providers of certain electronic health care records systems and processes. The
initiatives include, among others, programs that incentivize physicians and
dentists, through Medicare's MIPS, to use certified EHR technology in accordance
with certain evolving requirements, including regarding quality, promoting
interoperability, cost and improvement activities. Qualification for the MIPS
incentive payments requires the use of EHRs that are certified as having certain
capabilities designated in standards adopted by CMS and by the Office of the
National Coordinator for Health Information Technology of the Department of
Health and Human Services ("ONC"). These standards have been subject to change.
Certain of our businesses involve the manufacture and sale of certified EHR
systems and other products linked to MIPS and other incentive programs. In order
to maintain certification of our EHR products, we must satisfy these changing
governmental standards. If any of our EHR systems do not meet these standards,
yet have been relied upon by health care providers to receive federal incentive
payments, as noted above, we are exposed to risk, such as under federal health
care fraud and abuse laws, including the False Claims Act. For example, on May
31, 2017 , the U.S. Department of Justice announced a $155 million settlement and
5-year corporate integrity agreement involving a vendor of certified EHR
systems, based on allegations that the vendor, by misrepresenting capabilities
to the certifying body, caused its health care provider customers to submit
false Medicare and Medicaid claims for meaningful use incentive payments in
violation of the False Claims Act. While we believe we are substantially in
compliance with such certifications and with applicable fraud and abuse laws and
regulations, and we have adequate compliance programs and controls in place to
ensure substantial compliance, we cannot predict whether changes in applicable
law, or interpretation of laws, or changes in our practices in response to
changes in applicable law or interpretation of laws, could have a material
adverse effect on our business. Moreover, in order to satisfy our customers, our
products may need to incorporate increasingly complex reporting functionality.
Although we believe we are positioned to accomplish this, the effort may involve
increased costs, and our failure to implement product modifications, or
otherwise satisfy applicable standards, could have a material adverse effect on
our business.
Other health information standards, such as regulations under HIPAA, establish
standards regarding electronic health data transmissions and transaction code
set rules for specific electronic transactions, such as transactions involving
claims submissions to third party payers. Certain of our businesses provide
electronic practice management products that must meet these requirements.
Failure to abide by electronic health data transmission standards could expose
us to breach of contract claims, substantial fines, penalties, and other
liabilities and expenses, costs for remediation and harm to our reputation.
Additionally, as electronic medical devices are increasingly connected to each
other and to other technology, the ability of these connected systems safely and
effectively to exchange and use exchanged information becomes increasingly
important. For example on September 6, 2017 , the FDA issued final guidance to
assist industry in
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identifying specific considerations related to the ability of electronic medical devices to safely and effectively exchange and use exchanged information. As a medical device manufacturer, we must manage risks including those associated with an electronic interface that is incorporated into a medical device.
There may be additional legislative or regulatory initiatives in the future impacting health care.
E-Commerce
Electronic commerce solutions have become an integral part of traditional health
care supply and distribution relationships. Our distribution business is
characterized by rapid technological developments and intense competition. The
continuing advancement of online commerce requires us to cost-effectively adapt
to changing technologies, to enhance existing services and to develop and
introduce a variety of new services to address the changing demands of consumers
and our customers on a timely basis, particularly in response to competitive
offerings.
Through our proprietary, technologically based suite of products, we offer
customers a variety of competitive alternatives. We believe that our tradition
of reliable service, our name recognition and large customer base built on solid
customer relationships, position us well to participate in this significant
aspect of the distribution business. We continue to explore ways and means to
improve and expand our Internet presence and capabilities, including our online
commerce offerings and our use of various social media outlets.
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Table of Contents Results of Operations The following tables summarize the significant components of our operating results and cash flows from continuing operations for each of the three years endedDecember 28, 2019 ,December 29, 2018 andDecember 30, 2017 (in thousands): Years Ended December 28, December 29, December 30, 2019 2018 2017 Operating results: Net sales$ 9,985,803 $ 9,417,603 $ 8,883,438 Cost of sales 6,894,917 6,506,856 6,136,776 Gross profit 3,090,886 2,910,747 2,746,662 Operating expenses: Selling, general and administrative 2,357,920 2,217,273 2,071,576 Litigation settlements - 38,488 5,325 Restructuring costs 14,705 54,367 - Operating income$ 718,261 $ 600,619 $ 669,761 Other expense, net$ (37,954) $ (63,783) $ (39,967) Net gain (loss) on sale of equity investments 186,769 - (17,636) Net income from continuing operations 725,461 450,441 318,476 Income (loss) from discontinued operations (6,323) 111,685 140,817 Net income attributable to Henry Schein, Inc. 694,734 535,881 406,299 Years Ended December 28, December 29, December 30, 2019 2018 2017 Cash flows: Net cash provided by operating activities from continuing operations$ 820,478 $
450,955
(422,309) (164,324) (212,741)
Net cash used in financing activities from continuing
operations (363,351) (402,173) (73,944)
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 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.
The total 2019 and 2018 costs associated with the actions to complete this
restructuring were
OnNovember 20, 2019 , we committed to the contemplated initiative, intended to mitigate stranded costs associated with the Animal Health Spin-off as well as to rationalize operations and provide expense efficiencies. These activities are expected to be completed by the end of 2020. We are currently unable in good faith to make a determination of an estimate of the amount or range of amounts expected to be incurred in connection with these activities, both with respect to each major type of cost associated therewith and with respect to the total cost, or an estimate of the amount or range of amounts that will result in future cash expenditures. We will disclose this information after we determine such estimates or range of estimates. 61
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Table of Contents 2019 Compared to 2018Net Sales
Net sales for 2019 and 2018 were as follows (in thousands):
% of % of Increase
2019 Total 2018 Total $ %
Health care distribution (1):
Dental $ 6,415,865 64.2 % $ 6,347,998 67.4 % $ 67,867 1.1 %
Medical 2,973,586 29.8 2,661,166 28.3 312,420 11.7
Total health care
distribution 9,389,451 94.0 9,009,164 95.7 380,287 4.2
Technology and value-added services
(2) 515,085 5.2 408,439 4.3 106,646 26.1
Total excluding Corporate
TSA revenues 9,904,536 99.2 9,417,603 100.0 486,933 5.2
Corporate TSA revenues (3) 81,267 0.8 - - 81,267 -
Total $ 9,985,803 100.0 % $ 9,417,603 100.0 % $ 568,200 6.0
(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 we expect to continue through
The 6.0% increase in net sales for the year endedDecember 28, 2019 includes an increase of 7.7% local currency growth (4.4% increase in internally generated revenue and 3.3% growth from acquisitions) partially offset by a decrease of 1.7% related to foreign currency exchange. Excluding sales of products under the transition services agreement with Covetrus, our net sales increased 5.2%, including local currency growth of 6.9% (3.5% increase in internally generated revenue and 3.4% growth from acquisitions) partially offset by a decrease of 1.7% related to foreign currency exchange. The 1.1% increase in dental net sales for the year endedDecember 28, 2019 includes an increase of 3.4% in local currencies (2.0% increase in internally generated revenue and 1.4% growth from acquisitions) partially offset by a decrease of 2.3% related to foreign currency exchange. The 3.4% increase in local currency sales was due to increases in dental equipment sales and service revenues of 1.0%, all of which is attributable to an increase in internally generated revenue and dental consumable merchandise sales growth of 4.2% (2.3% increase in internally generated revenue and 1.9% growth from acquisitions). The 11.7% increase in medical net sales for the year endedDecember 28, 2019 includes an increase of 11.9% local currency growth (7.0% increase in internally generated revenue and 4.9% growth from acquisitions) partially offset by a decrease of 0.2% related to foreign currency exchange. The 26.1% increase in technology and value-added services net sales for the year endedDecember 28, 2019 includes an increase of 27.0% local currency growth (4.3% increase in internally generated revenue and 22.7% growth from acquisitions) partially offset by a decrease of 0.9% related to foreign currency exchange. 62
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Gross Profit
Gross profit and gross margins for 2019 and 2018 by segment and in total were as
follows (in thousands):
Gross Gross Increase
2019 Margin % 2018 Margin % $ %
Health care distribution $ 2,717,574 28.9 % $ 2,628,767 29.2 % $ 88,807 3.4 %
Technology and value-added
services 370,887 72.0 281,980 69.0 88,907 31.5
Total excluding
Corporate TSA revenues 3,088,461 31.2 2,910,747 30.9 177,714 6.1
Corporate TSA revenues 2,425 3.0 - - 2,425 -
Total $ 3,090,886 31.0 $ 2,910,747 30.9 $ 180,139 6.2
As a result of different practices of categorizing costs associated with
distribution 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 pharmaceutical products are generally at
lower gross profit margins than other products. Conversely, sales of our private
label products achieve gross profit margins that are higher than average. With
respect to customer mix, sales to our large-group customers are typically
completed at lower gross margins due to the higher volumes sold as opposed to
the gross margin on sales to office-based practitioners, who normally purchase
lower volumes at greater frequencies.
Health care distribution gross profit increased $88.8 million , or 3.4%, for the
year ended December 28, 2019 compared to the prior year period. Health care
distribution gross profit margin decreased to 28.9% for the year ended December
28, 2019 from 29.2% for the comparable prior year period. The overall increase
in our health care distribution gross profit is attributable to $73.1 million
additional gross profit from acquisitions and $30.9 million gross profit
increase from growth in internally generated revenue. These increases were
partially offset by a $15.2 million decline in gross profit due to the decrease
in the gross margin rates.
Technology and value-added services gross profit increased $88.9 million , or
31.5%, for the year ended December 28, 2019 compared to the prior year period.
Technology and value-added services gross profit margin increased to 72.0% for
the year ended December 28, 2019 from 69.0% for the comparable prior year
period. Acquisitions accounted for $80.2 million of our gross profit increase
within our technology and value-added services segment for the year ended
December 28, 2019 compared to the prior year period and also accounted for the
increase in the gross profit margin. The remaining increase of $8.7 million in
our technology and value-added services segment gross profit was primarily
attributable to growth in internally generated revenue.
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Selling, General and Administrative
Selling, general and administrative expenses by segment and in total for 2019 and 2018 were as follows (in thousands):
% of % of
Respective Respective Increase / (Decrease)
2019 Net Sales 2018 Net Sales $ %
Health care distribution $ 2,128,595 22.7 % $ 2,137,779 23.7 % $ (9,184) (0.4) %
Technology and value-added
services 244,030 47.4 172,349 42.2 71,681 41.6
Total $ 2,372,625 23.8 $ 2,310,128 24.5 $ 62,497 2.7
Selling, general and administrative expenses (including restructuring costs in
the years ended December 28, 2019 and December 29, 2018 , and litigation
settlements in the year ended December 29, 2018 ) increased $62.5 million , or
2.7%, to $2,372.6 million for the year ended December 28, 2019 from the
comparable prior year period. The $9.2 million decrease in selling, general and
administrative expenses within our health care distribution segment for the year
ended December 28, 2019 as compared to the prior year period was attributable to
a reduction of $73.7 million of operating costs (primarily due to $38.5 million
of litigation settlement costs recorded in 2018 and a $39.7 million decrease in
restructuring costs) partially offset by $64.5 million of additional costs from
acquired companies. The $71.7 million increase in selling, general and
administrative expenses within our technology and value-added services segment
for the year ended December 28, 2019 as compared to the prior year period was
attributable to $70.5 million of additional costs from acquired companies and
$1.2 million of additional operating costs. As a percentage of net sales,
selling, general and administrative expenses decreased to 23.8% from 24.5% for
the comparable prior year period.
As a component of total selling, general and administrative expenses, selling
expenses increased $69.2 million , or 4.8%, to $1,497.3 million for the year
ended December 28, 2019 from the comparable prior year period. As a percentage
of net sales, selling expenses decreased to 15.0% from 15.2% for the comparable
prior year period.
As a component of total selling, general and administrative expenses, general
and administrative expenses decreased $6.8 million , or 0.8%, to $875.3 million
for the year ended December 28, 2019 from the comparable prior year period
primarily due to $38.5 million of litigation settlement costs recorded in 2018
and a $39.7 million decrease in restructuring costs partially offset by
increases in general and administrative expenses. As a percentage of net sales,
general and administrative expenses decreased to 8.8% from 9.4% for the
comparable prior year period.
Other Expense, Net
Other expense, net for the years ended 2019 and 2018 was as follows (in
thousands):
Variance
2019 2018 $ %
Interest income $ 15,757 $ 15,491 $ 266 1.7 %
Interest expense (50,792) (76,016) 25,224 33.2
Other, net (2,919) (3,258) 339 10.4
Other expense, net $ (37,954) $ (63,783) $ 25,829 40.5
Interest expense decreased
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Table of Contents Income Taxes For the year endedDecember 28, 2019 , our effective tax rate was 23.4% compared to 20.0% for the prior year period. In 2019, our effective tax rate was primarily impacted by state and foreign income taxes and interest expense. In 2018, our effective tax rate was primarily impacted by a reduction in the estimate of our transition tax associated with the Tax Act, tax charges and credits associated with legal entity reorganizations outside theU.S. , and state and foreign income taxes and interest expense.
Within our consolidated balance sheets, transition tax of
OnOctober 1, 2019 , we sold an equity investment inHu-Friedy Mfg. Co., LLC , a manufacturer of dental instruments and infection prevention solutions. Our investment was non-controlling, we were not involved in running the business and had no representation on the board of directors.
During the fourth quarter of 2019, we also sold certain other investments. In
aggregate, the sales of these investments resulted in a pretax gain of
approximately
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Table of Contents 2018 Compared to 2017Net Sales
Net sales for 2018 and 2017 were as follows (in thousands):
% of % of Increase
2018 Total 2017 Total $ %
Health care distribution (1):
Dental $ 6,347,998 67.4 % $ 6,047,811 68.1 % $ 300,187 5.0 %
Medical 2,661,166 28.3 2,497,994 28.1 163,172 6.5
Total health care
distribution 9,009,164 95.7 8,545,805 96.2 463,359 5.4
Technology and value-added
services (2) 408,439 4.3 337,633 3.8 70,806 21.0
Total $ 9,417,603 100.0 % $ 8,883,438 100.0 % $ 534,165 6.0
(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.
The 6.0% increase in net sales for the year ended December 29, 2018 includes an
increase of 5.5% local currency growth (4.0% increase in internally generated
revenue and 1.5% growth from acquisitions) as well as an increase of 0.5%
related to foreign currency exchange.
The 5.0% increase in dental net sales for the year ended December 29, 2018
includes an increase of 4.2% in local currencies (3.0% increase in internally
generated revenue and 1.2% growth from acquisitions) as well as an increase of
0.8% related to foreign currency exchange. The 4.2% increase in local currency
sales was due to increases in dental equipment sales and service revenues of
4.5% (4.4% increase in internally generated revenue and 0.1% growth from
acquisitions) and dental consumable merchandise sales growth of 4.1% (2.6%
increase in internally generated revenue and 1.5% growth from acquisitions).
The 6.5% increase in medical net sales for the year ended December 29, 2018
includes an increase of 6.4% local currency growth (6.3% increase in internally
generated revenue and 0.1% growth from acquisitions) as well as an increase of
0.1% related to foreign currency exchange.
The 21.0% increase in technology and value-added services net sales for the year
ended
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Gross Profit
Gross profit and gross margins for 2018 and 2017 by segment and in total were as
follows (in thousands):
Gross Gross Increase
2018 Margin % 2017 Margin % $ %
Health care distribution $ 2,628,767 29.2 % $ 2,520,806 29.5 % $ 107,961 4.3 %
Technology and value-added
services 281,980 69.0 225,856 66.9 56,124 24.8
Total $ 2,910,747 30.9 $ 2,746,662 30.9 $ 164,085 6.0
As a result of different practices of categorizing costs associated with
distribution networks throughout our industry, our gross margins may not
necessarily be comparable to other distribution companies. Additionally, we
realize substantially higher gross margin percentages in our technology segment
than in our health care distribution segment. These higher gross margins result
from being both the developer and seller of software products and services, as
well as certain financial services. The software industry typically realizes
higher gross margins to recover investments in research and development.
Within our health care distribution segment, gross profit margins may vary from
one period to the next. Changes in the mix of products sold as well as changes
in our customer mix have been the most significant drivers affecting our gross
profit margin. For example, sales of pharmaceutical products are generally at
lower gross profit margins than other products. Conversely, sales of our private
label products achieve gross profit margins that are higher than average. With
respect to customer mix, sales to our large-group customers are typically
completed at lower gross margins due to the higher volumes sold as opposed to
the gross margin on sales to office-based practitioners who normally purchase
lower volumes at greater frequencies.
Health care distribution gross profit increased $108.0 million , or 4.3%, for the
year ended December 29, 2018 compared to the prior year period. Health care
distribution gross profit margin decreased to 29.2% for the year ended December
29, 2018 from 29.5% for the comparable prior year period. The overall increase
in our health care distribution gross profit is attributable to a $108.2 million
gross profit increase from growth in internally generated revenue and $31.7
million is attributable to acquisitions. These increases were partially offset
by a $31.9 million decline in gross profit due to the decrease in the gross
margin rates.
Technology and value-added services gross profit increased $56.1 million , or
24.8%, for the year ended December 29, 2018 compared to the prior year period.
Technology and value-added services gross profit margin increased to 69.0% for
the year ended December 29, 2018 from 66.9% for the comparable prior year
period. Acquisitions accounted for $44.0 million of our gross profit increase
within our technology and value-added services segment for the year ended
December 29, 2018 compared to the prior year period. The remaining increase of
$12.1 million in our technology and value-added services segment gross profit
was primarily attributable to growth in internally generated revenue and the
increase in gross margin rates.
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Selling, General and Administrative
Selling, general and administrative expenses by segment and in total for 2018 and 2017 were as follows (in thousands):
% of % of
Respective Respective Increase
2018 Net Sales 2017 Net Sales $ %
Health care distribution
22.9 %$ 178,861 9.1 % Technology and value-added services 172,349 42.2 117,983 34.9 54,366 46.1 Total$ 2,310,128 24.5$ 2,076,901 23.4$ 233,227 11.2 Selling, general and administrative expenses (including restructuring costs in 2018 and litigation settlements in 2018 and 2017) increased$233.2 million , or 11.2%, for the year endedDecember 29, 2018 from the comparable prior year period. The$178.9 million increase in selling, general and administrative expenses within our health care distribution segment for the year endedDecember 29, 2018 as compared to the prior year period was attributable to$152.1 million of additional operating costs (including an increase of$33.2 million for litigation settlements and$50.8 million of restructuring costs) and$26.8 million of additional costs from acquired companies. The$54.4 million increase in selling, general and administrative expenses within our technology and value-added services segment for the year endedDecember 29, 2018 as compared to the prior year period was attributable to$43.7 million of additional costs from acquired companies and$10.7 million of additional operating costs (including$3.6 million of restructuring costs). As a percentage of net sales, selling, general and administrative expenses increased to 24.5% from 23.4% for the comparable prior year period. As a component of total selling, general and administrative expenses, selling expenses increased$74.4 million , or 5.5%, for the year endedDecember 29, 2018 from the comparable prior year period. As a percentage of net sales, selling expenses remained consistent at 15.2%. As a component of total selling, general and administrative expenses, general and administrative expenses increased$158.8 million , or 22.0%, for the year endedDecember 29, 2018 from the comparable prior year period primarily due to restructuring costs of$54.4 million and an increase of$33.2 million of litigation settlements costs. As a percentage of net sales, general and administrative expenses increased to 9.4% from 8.1% for the comparable prior year period. Other Expense, Net Other expense, net for the years ended 2018 and 2017 was as follows (in thousands): Variance 2018 2017 $ % Interest income$ 15,491 $ 12,438 $ 3,053 24.5 % Interest expense (76,016) (51,066) (24,950) (48.9) Other, net (3,258) (1,339) (1,919) (143.3) Other expense, net$ (63,783) $ (39,967) $ (23,816) (59.6) Other expense, net increased$23.8 million to$63.8 million for the year endedDecember 29, 2018 from the comparable prior year period. Interest income increased$3.1 million primarily due to increased investment and late fee income. Interest expense increased$25.0 million primarily due to increased borrowings under our bank credit lines and our private placement facilities primarily to fund acquisitions of noncontrolling interests in subsidiaries, as well as higher interest rates. 68
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Table of Contents Income Taxes For the year endedDecember 29, 2018 , our effective tax rate was 20.0% compared to 49.1% for the prior year period. In 2018, our effective tax rate was primarily impacted by a reduction in the estimate of our transition tax associated with the Tax Act, tax charges and credits associated with legal entity reorganizations outside theU.S. , and state and foreign income taxes and interest expense. In 2017, our effective tax rate was primarily impacted by the Tax Act, the adoption of Accounting Standards Update ("ASU") No. 2016-09, "Stock Compensation" (Topic 718), as well as state and foreign income taxes and interest expense. OnDecember 22, 2017 , theU.S. government passed the Tax Act. The Tax Act is comprehensive tax legislation that implemented complex changes to theU.S. tax code including, but not limited to, the reduction of the corporate tax rate from 35% to 21%, modification of accelerated depreciation, the repeal of the domestic manufacturing deduction and changes to the limitations of the deductibility of interest. Additionally, the Tax Act moved from a global tax regime to a modified territorial regime, which requiresU.S. companies to pay a mandatory one-time transition tax on historical offshore earnings that have not been repatriated to theU.S. The transition tax is payable over eight years. In the fourth quarter of 2017, we recorded provisional amounts for any items that could be reasonably estimated at the time. This included the one-time transition tax that we estimated to be$140.0 million and a net deferred tax expense of$3.0 million attributable to the revaluation of deferred taxes due to the lower enacted federal income tax rate of 21%. We completed our analysis in the year endedDecember 29, 2018 and recorded a net$10.0 million reduction to the one-time transition tax and an additional$1.7 million net deferred tax benefit from the revaluation of deferred taxes to reflect the new tax rate. Absent the effects of the transition tax and the revaluation of deferred tax assets and liabilities, our effective tax rate for the year endedDecember 30, 2017 would have been 26.4% as compared to our actual effective tax rate of 49.1%.
Within our consolidated balance sheets, transition tax of
The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed
Income ("GILTI"), states that an entity can make an accounting policy election
to either recognize deferred taxes for temporary differences expected to reverse
as GILTI in future years or provide for the tax expense related to GILTI in the
year the tax is incurred. We elected to recognize the tax on GILTI as a period
expense in the period the tax is incurred. We recorded a current tax expense for
the GILTI provision of $7.6 million for the year ended December 29, 2018 .
Liquidity and Capital Resources
Our principal capital requirements include funding of acquisitions, purchases of
additional noncontrolling interests, repayments of debt principal, the funding
of working capital needs, purchases of fixed assets and repurchases of common
stock. Working capital requirements generally result from increased sales,
special inventory forward buy-in opportunities and payment terms for receivables
and payables. Historically, sales have tended to be stronger during the third
and fourth 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.
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.
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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 provided by operating activities was$820.5 million for the year endedDecember 28, 2019 , compared to$451.0 million for the prior year. The net change of$369.5 million was primarily attributable to an increase in net income, decreases in working capital requirements, and increased distributions from equity affiliates. Net cash used in investing activities was$422.3 million for the year endedDecember 28, 2019 , compared to$164.3 million for the prior year. The net change of$258.0 million was primarily due to increased payments for equity investments and business acquisitions, partially offset by increased proceeds of sales of equity investments. Net cash used in financing activities was$363.4 million for the year endedDecember 28, 2019 , compared to$402.2 million for the prior year. The net change of$38.8 million was primarily due to a distribution received related to the Animal Health Spin-off, proceeds from the Animal Health Share Sale, a reduction in acquisitions of noncontrolling interests in subsidiaries, and payments to the Henry Schein Animal Health Business, partially offset by increased repayments of debt related to the Animal Health Spin-off and increased repurchases of our common stock. 70
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The following table summarizes selected measures of liquidity and capital
resources (in thousands):
December 28 , December 29,
2019 2018
Cash and cash equivalents $ 106,097 $ 56,885 Working capital (1) 1,188,133 956,393 Debt:
Bank credit lines $ 23,975 $ 951,458
Current maturities of long-term debt 109,849 8,280
Long-term debt
622,908 980,344
Total debt $ 756,732 $ 1,940,082
Leases:
Current operating lease liabilities $ 65,349 $ -
Non-current operating lease liabilities 176,267 -
(1) Includes
trade accounts receivable securitization at
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 44.5 days as ofDecember 28, 2019 from 43.8 days as ofDecember 29, 2018 . During the years endedDecember 28, 2019 andDecember 29, 2018 , we wrote off approximately$5.9 million and$6.4 million , respectively, of fully reserved accounts receivable against our trade receivable reserve. Our inventory turns from operations were 5.0 as ofDecember 28, 2019 and 4.5 as ofDecember 29, 2018 . Our working capital accounts may be impacted by current and future economic conditions. Contractual obligations The following table summarizes our contractual obligations related to fixed and variable rate long-term debt and finance lease obligations, including interest (assuming a weighted average interest rate of 3.3%), as well as inventory purchase commitments and operating lease obligations as ofDecember 28, 2019 : Payments due by period (in thousands) < 1 year 2 - 3 years 4 - 5 years > 5 years Total Contractual obligations: Long-term debt, including interest$ 132,073 $ 250,166 $ 130,084 $ 337,615 $ 849,938 Inventory purchase commitments 403,241 319,000 - - 722,241 Operating lease obligations 70,986 97,158 45,965 51,762 265,871 Transition tax obligations 9,923 28,527 55,815 - 94,265 Finance lease obligations, including interest 1,853 2,175 587 1,117 5,732 Total$ 618,076 $ 697,026 $ 232,451 $ 390,494 $ 1,938,047 71
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Table of ContentsBank Credit Lines
Bank credit lines consisted of the following:
December 28 ,
2019 2018
Revolving credit agreement $ -$ 175,000 Other short-term bank credit lines 23,975
376,458
Committed loan associated with Animal Health Spin-off - 400,000 Total$ 23,975 $ 951,458 Revolving Credit Agreement OnApril 18, 2017 , we entered into a$750 million revolving credit agreement (the "Credit Agreement"), which matures inApril 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 that the LIBOR rate will be discontinued at some point during 2021. We expect to work with our lenders to identify a suitable replacement rate and amend our debt agreements to reflect this new reference rate accordingly. We do not believe that the discontinuation of LIBOR as a reference rate in our debt agreements will have a material adverse effect on our financial position or materially affect our interest expense. Additionally, the Credit Agreement provides, among other things, that we are required to maintain maximum leverage ratios, and contains customary representations, warranties and affirmative covenants. The Credit Agreement also contains customary negative covenants, subject to negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements. As ofDecember 28, 2019 andDecember 29, 2018 , the borrowings on this revolving credit facility were$0.0 million and$175.0 million , respectively. As ofDecember 28, 2019 andDecember 29, 2018 , there were$9.6 million and$11.2 million of letters of credit, respectively, provided to third parties under the credit facility. Other Short-Term Credit Lines As ofDecember 28, 2019 andDecember 29, 2018 , we had various other short-term bank credit lines available, of which$24.0 million and$376.5 million , respectively, were outstanding. AtDecember 28, 2019 andDecember 29, 2018 , borrowings under all of our credit lines had a weighted average interest rate of 3.45% and 3.30%, respectively.
Committed Loan Associated with Animal Health Spin-off
OnMay 21, 2018 , we obtained a$400 million committed loan which matured on the earlier of (i)March 31, 2019 and (ii) the consummation of theAnimal Health Spin-off. The proceeds of this loan were used, among other things, to fund our purchase of all of the equity interests inButler Animal Health Holding Company, LLC ("BAHHC") directly or indirectly owned byDarby Group Companies, Inc. ("Darby") and certain other sellers pursuant to the terms of that certain Amendment to Put Rights Agreements, dated as ofApril 20, 2018 , by and among us, Darby, BAHHC and the individual sellers party thereto for an aggregate purchase price of$365 million . As ofDecember 29, 2018 , the balance outstanding on this loan was$400 million and is included within the "Bank credit lines" caption within our consolidated balance sheet. AtDecember 29, 2018 the interest rate on this loan was 3.38%. Concurrent with the completion of theAnimal Health Spin-off onFebruary 7, 2019 , we re-paid the balance of this loan. 72
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Table of Contents Long-term debt
Long-term debt consisted of the following:
December 28, December 29,
2019 2018
Private placement facilities $ 621,274 $ 628,189
U.S. trade accounts receivable securitization 100,000 350,000
Various collateralized and uncollateralized loans
payable with interest,
in varying installments through 2024 at interest
rates
ranging from 2.56% to 10.5% at December 28, 2019 and
ranging from 2.61% to 4.17% at December 29, 2018 6,089 6,491
Finance lease obligations (see Note 7) 5,394 3,944
Total 732,757 988,624
Less current maturities (109,849) (8,280)
Total long-term debt $ 622,908 $ 980,344
Private Placement Facilities
On September 15, 2017 , we increased our available private placement facilities
with three insurance companies to a total facility amount of $1 billion , and
extended the expiration date to September 15, 2020 . These facilities are
available on an uncommitted basis at fixed rate economic terms to be agreed upon
at the time of issuance, from time to time through September 15, 2020 . The
facilities allow us to issue senior promissory notes to the lenders at a fixed
rate based on an agreed upon spread over applicable treasury notes at the time
of issuance. The term of each possible issuance will be selected by us and can
range from five to 15 years (with an average life no longer than 12 years). The
proceeds of any issuances under the facilities will be used for general
corporate purposes, including working capital and capital expenditures, to
refinance existing indebtedness and/or to fund potential acquisitions. 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.
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The components of our private placement facility borrowings as of
Amount of
Date of Borrowing Borrowing
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) 21,429 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 (155)
$ 621,274
(1) Annual repayments of approximately
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 , and was previously scheduled to expire onApril 29, 2020 , has been extended toApril 29, 2022 . As ofDecember 28, 2019 andDecember 29, 2018 , the borrowings outstanding under this securitization facility were$100 million and$350 million , respectively. 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%. AtDecember 29, 2018 , the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 2.66% plus 0.75%, for a combined rate of 3.41%. 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.
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 16 years, some of which may include options to extend the leases for up to 10 years. As ofDecember 28, 2019 , our right-of-use assets related to operating leases were$231.7 million and our current and non-current operating lease liabilities were$65.3 million and$176.3 million , respectively. Stock repurchases FromMarch 3, 2003 throughDecember 28, 2019 , we repurchased approximately$3.5 billion , or 74,363,289 shares, under our common stock repurchase programs, with$275.0 million available as ofDecember 28, 2019 for future common stock share repurchases. 74
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Redeemable Noncontrolling interests
Some minority stockholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. ASC 480-10 is applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. The components of the change in the Redeemable noncontrolling interests for the years endedDecember 28, 2019 ,December 29, 2018 andDecember 30, 2017 are presented in the following table: December 28, December 29, December 30, 2019 2018 2017 Balance, beginning of period$ 219,724 $ 465,585 $ 285,567 Decrease in redeemable noncontrolling interests due to redemptions (2,270) (287,767) (22,294) Increase in redeemable noncontrolling interests due to business acquisitions 74,865 4,655 72,291 Net income attributable to redeemable noncontrolling interests 14,838 15,327 24,513 Dividends declared (10,264) (8,206) (7,680) Effect of foreign currency translation gain (loss) attributable to redeemable noncontrolling interests (2,335) (11,330) 4,530 Change in fair value of redeemable securities (7,300) 41,460 108,658 Balance, end of period$ 287,258 $ 219,724 $ 465,585 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. OnJuly 1, 2018 , we closed on a joint venture with Internet Brands, a provider of web presence and online marketing software, to create a newly formed entity,Henry Schein One, LLC . The joint venture includes Henry Schein Practice Solutions products and services, as well as Henry Schein's international dental practice management systems and the dental businesses of Internet Brands. Internet Brands holds a 26% noncontrolling interest inHenry Schein One, LLC that is accounted for within stockholders' equity, as well as a freestanding and separately exercisable right to put its noncontrolling interest toHenry Schein, Inc. for fair value following the fifth anniversary of the effective date of the formation of the joint venture. Beginning with the second anniversary of the effective date of the formation of the joint venture, Henry Schein One will issue a fixed number of additional interests to Internet Brands through the fifth anniversary, thereby increasing Internet Brands' ownership by approximately 7.6%. Internet Brands will also be entitled to receive a fixed number of additional interests, in the aggregate up to approximately 1.6% of the joint venture's ownership, if certain operating targets are met by the joint venture in its fourth, fifth and sixth operating years. These additional shares are considered contingent consideration that are accounted for within stockholders' equity; however, these shares will not be allocated any net income of Henry Schein One until the shares vest or are earned by Internet Brands. A Monte Carlo simulation was utilized to value the additional contingent interests that are subject to operating targets. Key assumptions that were applied to derive the fair value of the contingent interests include an assumed equity value ofHenry Schein One, LLC at its inception date, a risk-free interest rate based onU.S. treasury yields, an assumed future dividend yield, a risk-adjusted discount rate applied to projected future cash flows, an assumed equity volatility based on historical stock price returns of a group of guideline companies, and an estimated correlation of annual cash flow returns to equity returns. As a result of this transaction with Internet Brands, we recorded$567.6 million of noncontrolling interest within stockholders' equity. 75
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Table of Contents 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.
Unrecognized tax benefits
As more fully disclosed in Note 14 of "Notes to Consolidated Financial
Statements," we cannot reasonably estimate the timing of future cash flows
related to the unrecognized tax benefits, including accrued interest, of
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical data, when available, experience, industry and market trends, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, by their nature, estimates are subject to various assumptions and uncertainties. Reported results are therefore sensitive to any changes in our assumptions, judgments and estimates, including the possibility of obtaining materially different results if different assumptions were to be applied.
We believe that the following critical accounting policies, which have been discussed with the Audit Committee of the Board of Directors, affect the significant estimates and judgments used in the preparation of our financial statements:
Revenue Recognition OnDecember 31, 2017 , we adopted ASC 606 ("Topic 606") using the modified retrospective method applied to those contracts which were not completed as of the adoption date. Results for reporting periods beginning afterDecember 30, 2017 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for those periods. Our revenue recognition accounting policies applied prior to adoption of Topic 606 are outlined in the financial statements in our Annual Report on Form 10-K for the year endedDecember 30, 2017 . The disclosures included herein reflect our accounting policies under Topic 606. We generate revenue from the sale of dental and medical consumable products, equipment (Health care distribution revenues), software products and services and other sources (Technology and value-added services revenues). Provisions for discounts, rebates to customers, customer returns and other contra revenue adjustments are included in the transaction price at contract inception by estimating the most likely amount based upon historical data and estimates and are provided for in the period in which the related sales are recognized. Revenue derived from the sale of consumable products is recognized at a point in time when control transfers to the customer. Such sales typically entail high-volume, low-dollar orders shipped using third-party common carriers. We believe that the shipment date is the most appropriate point in time indicating control has transferred to the customer because we have no post-shipment obligations and this is when legal title and risks and rewards of ownership transfer to the customer and the point at which we have an enforceable right to payment. Revenue derived from the sale of equipment is recognized when control transfers to the customer. This occurs when the equipment is delivered. Such sales typically entail scheduled deliveries of large equipment primarily by equipment service technicians. Some equipment sales require minimal installation, which is typically completed at the time of delivery. Our product generally carries standard warranty terms provided by the manufacturer, however, in instances where we provide warranty labor services, the warranty costs are accrued in accordance with ASC 460 "Guarantees". 76
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Table of Contents Revenue derived from the sale of software products is recognized when products are shipped to customers or made available electronically. Such software is generally installed by customers and does not require extensive training due to the nature of its design. Revenue derived from post-contract customer support for software, including annual support and/or training, is generally recognized over time using time elapsed as the input method that best depicts the transfer of control to the customer. Revenue derived from other sources, including freight charges, equipment repairs and financial services, is recognized when the related product revenue is recognized or when the services are provided. We apply the practical expedient to treat shipping and handling activities performed after the customer obtains control as fulfillment activities, rather than a separate performance obligation in the contract.
Sales, value-add and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
Certain of our revenue is derived from bundled arrangements that include multiple distinct performance obligations which are accounted for separately. When we sell software products together with related services (i.e., training and technical support), we allocate revenue to software using the residual method, using an estimate of the standalone selling price to estimate the fair value of the undelivered elements. There are no cases where revenue is deferred due to a lack of a standalone selling price. Bundled arrangements that include elements that are not considered software consist primarily of equipment and the related installation service. We allocate revenue for such arrangements based on the relative selling prices of the goods or services. If an observable selling price is not available (i.e., we do not sell the goods or services separately), we use one of the following techniques to estimate the standalone selling price: adjusted market approach; cost-plus approach; or the residual method. There is no specific hierarchy for the use of these methods, but the estimated selling price reflects our best estimate of what the selling prices of each deliverable would be if it were sold regularly on a standalone basis taking into consideration the cost structure of our business, technical skill required, customer location and other market conditions. Contract Balances
Contract balances represent amounts presented in our consolidated balance sheet when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable, contract assets and contract liabilities.
Accounts Receivable
Accounts receivable are generally recognized when heath care distribution and
technology and value-added services revenues are recognized. The carrying amount
of accounts receivable is reduced by a valuation allowance that reflects our
best estimate of the amounts that will not be collected. In addition to
reviewing delinquent accounts receivable, we consider many factors in estimating
our reserve, including historical data, experience, customer types, credit
worthiness and economic trends. From time to time, we adjust our assumptions for
anticipated changes in any of these or other factors expected to affect
collectability.
Contract Assets
Contract assets include amounts related to any conditional right to
consideration for work completed but not billed as of the reporting date and
generally represent amounts owed to us by customers, but not yet billed.
Contract assets are transferred to accounts receivable when the right becomes
unconditional. The contract assets primarily relate to our bundled arrangements
for the sale of equipment and consumables and sales of term software licenses.
Current contract assets are included in Prepaid expenses and other and the
non-current contract assets are included in Investments and other within our
consolidated balance sheet.
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Contract Liabilities
Contract liabilities are comprised of advance payments and upfront payments for
service arrangements provided over time that are accounted for as deferred
revenue amounts. Contract liabilities are transferred to revenue once the
performance obligation has been satisfied. Current contract liabilities are
included in Accrued expenses: Other and the non-current contract liabilities are
included in Other liabilities within our consolidated balance sheet.
Deferred Commissions
Sales commissions earned by our sales force that relate to long term
arrangements are capitalized as costs to obtain a contract when the costs
incurred are incremental and are expected to be recovered. Deferred sales
commissions are amortized over the estimated customer relationship period. We
apply the practical expedient related to the capitalization of incremental costs
of obtaining a contract, and recognize such costs as an expense when incurred if
the amortization period of the assets that we would have recognized is one year
or less.
Sales Returns
Sales returns are recognized as a reduction of revenue by the amount of expected
returns and are recorded as refund liability within current liabilities. We
estimate the amount of revenue expected to be reversed to calculate the sales
return liability based on historical data for specific products, adjusted as
necessary for new products. The allowance for returns is presented gross as a
refund liability and we record an inventory asset (and a corresponding
adjustment to cost of sales) for any goods or services that we expect to be
returned.
Inventories and Reserves
Inventories consist primarily of finished goods and are valued at the lower of
cost or market. Cost is determined by the first-in, first-out method for
merchandise or actual cost for large equipment and high tech equipment. In
accordance with our policy for inventory valuation, we consider many factors
including the condition and salability of the inventory, historical sales,
forecasted sales and market and economic trends.
From time to time, we may adjust our assumptions for anticipated changes in any
of these or other factors expected to affect the value of inventory. Although we
believe our judgments, estimates and/or assumptions related to inventory and
reserves are reasonable, making material changes to such judgments, estimates
and/or assumptions could materially affect our financial results.
Acquisitions
We account for business acquisitions and combinations under the acquisition
method of accounting, where the net assets of businesses purchased are recorded
at their fair value at the acquisition date and our consolidated financial
statements include their results of operations from that date. Any excess of
acquisition consideration over the fair value of identifiable net assets
acquired is recorded as goodwill. The major classes of assets and liabilities
that we generally allocate purchase price to, excluding goodwill, include
identifiable intangible assets (i.e., trademarks and trade names, customer
relationships and lists, non-compete agreements and product development),
property, plant and equipment, deferred taxes and other current and long-term
assets and liabilities. The estimated fair value of identifiable intangible
assets is based on critical estimates, judgments and assumptions derived from:
analysis of market conditions; discount rates; discounted cash flows; customer
retention rates; and estimated useful lives. Some prior owners of such acquired
subsidiaries are eligible to receive additional purchase price cash
consideration if certain financial targets are met. While we use our best
estimates and assumptions to accurately value those assets acquired and
liabilities assumed at the acquisition date as well as contingent consideration,
where applicable, our estimates are inherently uncertain and subject to
refinement. As a result, during the measurement period we may record adjustments
to the assets acquired and liabilities assumed with the corresponding offset to
goodwill within our consolidated balance sheets. At the end of the measurement
period or final determination of the values of such assets acquired or
liabilities assumed, whichever comes first, any subsequent adjustments are
recognized in our consolidated statements of operations.
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Table of ContentsGoodwill Goodwill is not amortized, but are subject to impairment analysis at least once annually. Such impairment analyses for goodwill require a comparison of the fair value to the carrying value of reporting units. We regard our reporting units to be our operating segments: health care distribution (global dental and medical) and technology and value-added services.Goodwill was allocated to such reporting units, for the purposes of preparing our impairment analyses, based on a specific identification basis. For the years endedDecember 28, 2019 andDecember 29, 2018 , andDecember 30, 2017 we tested goodwill for impairment, on the first day of the fourth quarter of each respective year, using a quantitative analysis consisting of a two-step approach. The first step of our quantitative analysis consists of a comparison of the carrying value of our reporting units, including goodwill, to the estimated fair value of our reporting units using a discounted cash flow methodology. If step one results in the carrying value of the reporting unit exceeding the fair value of such reporting unit, we would then proceed to step two which would require us to calculate the amount of impairment loss, if any, that we would record for such reporting unit. The calculation of the impairment loss in step two would be equivalent to the reporting unit's carrying value of goodwill less the implied fair value of such goodwill. Our use of a discounted cash flow methodology includes estimates of future revenue based upon budget projections and growth rates which take into account estimated inflation rates. We also develop estimates for future levels of gross and operating profits and projected capital expenditures. Our methodology also includes the use of estimated discount rates based upon industry and competitor analysis as well as other factors. The estimates that we use in our discounted cash flow methodology involve many assumptions by management that are based upon future growth projections.
Some factors we consider important that could trigger an interim impairment review include:
• significant underperformance relative to expected historical or projected future operating results;
• significant changes in the manner of our use of acquired assets or the strategy for our overall business (e.g., decision to divest a business); or
• significant negative industry or economic trends.
If we determine through the impairment review process that goodwill is impaired, we record an impairment charge in our consolidated statements of income.
For the years ended
Supplier Rebates
Supplier rebates are included as a reduction of cost of sales and are recognized
over the period they are earned. The factors we consider in estimating supplier
rebate accruals include forecasted inventory purchases and sales in conjunction
with supplier rebate contract terms which generally provide for increasing
rebates based on either increased purchase or sales volume. Although we believe
our judgments, estimates and/or assumptions related to supplier rebates are
reasonable, making material changes to such judgments, estimates and/or
assumptions could materially affect our financial results.
Long-Lived Assets
Long-lived assets, other than goodwill and other indefinite-lived intangibles,
are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
the estimated undiscounted future cash flows to be derived from such assets.
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Definite-lived intangible assets primarily consist of non-compete agreements, trademarks, trade names, customer relationships and lists, and product development. For long-lived assets used in operations, impairment losses are only recorded if the asset's carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value. Although we believe our judgments, estimates and/or assumptions used in estimating cash flows and determining fair value are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect such impairment analyses and our financial results. Stock-Based Compensation Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee directors. We measure stock-based compensation at the grant date, based on the estimated fair value of the award, and recognize the cost (net of estimated forfeitures) as compensation expense on a straight-line basis over the requisite service period. Our stock-based compensation expense is reflected in selling, general and administrative expenses in our consolidated statements of income. Stock-based awards are provided to certain employees and non-employee directors under the terms of our 2013 Stock Incentive Plan, as amended, and our 2015 Non-Employee Director Stock Incentive Plan (together, the "Plans"). The Plans are administered by the Compensation Committee of the Board of Directors. Prior toMarch 2009 , awards under the Plans principally included a combination of at-the-money stock options and restricted stock/units. SinceMarch 2009 , equity-based awards have been granted solely in the form of restricted stock/units, with the exception of providing stock options to employees pursuant to certain pre-existing contractual obligations. Grants of restricted stock/units are stock-based awards granted to recipients with specified vesting provisions. In the case of restricted stock, common stock is delivered on the date of grant, subject to vesting conditions. In the case of restricted stock units, common stock is generally delivered on or following satisfaction of vesting conditions. We issue restricted stock/units that vest solely based on the recipient's continued service over time (primarily four-year cliff vesting, except for grants made under the 2015 Non-Employee Director Stock Incentive Plan, which are primarily 12-month cliff vesting) and restricted stock/units that vest based on our achieving specified performance measurements and the recipient's continued service over time (primarily three-year cliff vesting). With respect to time-based restricted stock/units, we estimate the fair value on the date of grant based on our closing stock price. With respect to performance-based restricted stock/units, the number of shares that ultimately vest and are received by the recipient is based upon our performance as measured against specified targets over a specified period, as determined by the Compensation Committee of the Board of Directors. Although there is no guarantee that performance targets will be achieved, we estimate the fair value of performance-based restricted stock/units based on our closing stock price at time of grant. The Plans provide for adjustments to the performance-based restricted stock/units targets for significant events, including, without limitation, acquisitions, divestitures, new business ventures, certain capital transactions (including share repurchases), restructuring costs, if any, changes in accounting principles or in applicable laws or regulations, foreign exchange fluctuations, certain litigation related costs, and material changes in income tax rates. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted upward or downward based upon our estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on our actual performance metrics as defined under the Plans.
Although we believe our judgments, estimates and/or assumptions related to stock-based compensation are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results.
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Unrecognized Tax Benefits
ASC Topic 740 prescribes the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with other provisions
contained within this guidance. This topic prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return. For
those benefits to be recognized, a tax position must be more likely than not to
be sustained upon examination by the taxing authorities. The amount recognized
is measured as the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate audit settlement. In the normal course of business,
our tax returns are subject to examination by various taxing authorities. Such
examinations may result in future tax and interest assessments by these taxing
authorities for uncertain tax positions taken in respect of certain tax matters.
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 1 of the Notes to Consolidated
Financial Statements included under Item 8.
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