HENRY SCHEIN, INC. 
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary Note Regarding Forward-Looking Statements
In accordance with the "Safe Harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we provide the following cautionary remarks regarding important factors
that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions
expressed or implied herein.
All forward-looking statements made by us are subject to
risks and uncertainties and are not guarantees of future performance. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements
or industry results to be materially different from any future results, performance or achievements expressed or implied by such
forward-looking statements.
These statements are generally identified by the use of such
terms as "may," "could," "expect," "intend," "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 that may be discussed in other documents we file with the Securities and Exchange Commission (SEC).
Forward looking statements include the overall impact of the Novel Coronavirus
Disease 2019 (COVID-19) on the Company, its results of operations, liquidity, and financial condition (including any estimates of the impact on these items), the rate and consistency with which dental and other practices resume or maintain normal operations inthe United States and internationally, expectations regarding personal protective equipment ("PPE") and COVID-19 related product sales and inventory levels and whether additional resurgences of the virus will adversely impact the resumption of normal operations, the impact of restructuring programs as well as of any future acquisitions, and more generally current expectations regarding
performance in current and future periods.
Forward looking statements also include the (i) ability of the Company
to make additional testing available, the nature of those tests and the number of tests intended to be made available
and the timing for availability, the nature of the target market, as well as the efficacy or relative efficacy of the test results given that the test efficacy has
not
been, or will not have been, independently verified under normal FDA procedures
and (ii) potential for the Company to distribute the COVID-19 vaccines and ancillary supplies.
Risk factors and uncertainties that could cause actual results to differ materially from
current and historical results include, but are not limited to: risks associated with COVID-19, as well as other disease outbreaks, epidemics, pandemics, or similar wide spread public health concerns and other natural disasters or acts of terrorism; our dependence on third parties for the manufacture and supply of our products; our ability to develop or acquire and maintain and protect new products (particularly technology products) and
technologies that achieve market acceptance with acceptable margins; transitional challenges associated with acquisitions,
dispositions and joint ventures, including the failure to achieve anticipated synergies/benefits; financial
and tax risks associated with acquisitions, dispositions and joint ventures; certain provisions
in our governing documents that may discourage third-party acquisitions of us; effects of a highly competitive (including, without
limitation, competition from third- party online commerce sites) and consolidating market; the potential repeal or
judicial prohibition on implementation of the Affordable Care Act; changes in the health care industry; risks from
expansion of customer purchasing power and multi-tiered costing structures; increases in shipping costs
for our products or other service issues with our third-party shippers; general global macro-economic and political
conditions, including international trade agreements and potential trade barriers; failure to comply with existing and future regulatory requirements; risks associated with the EU Medical Device Regulation; failure
to comply with laws and regulations relating to health care fraud or other laws and regulations; failure to comply with
laws and regulations relating to the confidentiality of sensitive personal information or standards in electronic health records or transmissions; changes in tax legislation; litigation risks; new or unanticipated litigation
developments and the status of litigation matters; cyberattacks or other privacy or data security breaches; risks associated
with our global operations; our dependence on our senior management, as well as employee hiring and retention; and disruptions in financial markets. The order in which these factors appear should not be construed to indicate their relative importance or priority. Table of Contents 44
We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control or predict.
Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results.
We undertake no duty and have no obligation to update forward-looking statements.
Where You
Can Find Important Information
We may disclose important information through one or more of the following
channels:
page of our website (www.henryschein.com) and the social media channels identified on the Newsroom page of our website. Recent Developments COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of global financial markets. In response, many countries implemented business closures and restrictions, stay-at-home and social distancing ordinances and similar measures to combat the pandemic, which significantly impacted global business and dramatically reduced demand for dental products and certain medical products beginning in the second quarter
of 2020. Demand increased in the second half of 2020 resulting
in slight growth over the prior year driven by sales of PPE and COVID-19 related products.
Our consolidated financial statements reflect estimates and assumptions
made by us that affect, among other things, our goodwill, long-lived asset and definite-lived intangible asset valuation;
inventory valuation; equity investment valuation; assessment of the annual effective tax rate; valuation of deferred income
taxes and income tax contingencies; the allowance for doubtful accounts; hedging activity; vendor rebates; measurement of compensation cost for certain share-based performance awards and cash bonus plans; and pension plan assumptions.
Due to the significant uncertainty surrounding the future impact of
COVID-19, our judgments regarding estimates and impairments could change in the future.
In addition, the impact of COVID-19 had a material adverse effect on our business, results of operations and cash flows, primarily in
the second quarter of 2020.
In the latter half of the second quarter, dental and medical practices began to re-open worldwide, and continued to do so during the second half of 2020.
However, patient volumes have remained below pre-COVID-19
levels and certain regions in the
increase in COVID-19 cases.
As such, there is an ongoing risk that the COVID-19 pandemic may again materially
adversely effect our business, results of operations and cash flows and may result in a material adverse effect on our financial
condition and liquidity.
However, the extent of the potential impact cannot be reasonably estimated at this time.
As part of a broad-based effort to support plans for the long-term health of our business
and to strengthen our financial flexibility, we implemented cost reduction measures that included certain reductions in payroll, substantially decreased capital expenditures, reduced corporate spending and eliminated certain non-strategic targeted expenditures. As our markets began to recover,
we substantially ended most of those temporary expense- reduction initiatives during the second half of 2020.
Corporate Transactions
During the fourth quarter of 2019, we sold an equity investment
inHu-Friedy Mfg. Co., LLC ("Hu-Friedy"), 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 the aggregate, the sales of these investments
resulted in a pre-tax gain in 2019 of approximately
gain of approximately$186.8 million .
In the fourth quarter of 2020 we received contingent proceeds of
$2.1 million from the 2019 sale of Hu- Friedy resulting in the recognition of an additional after-tax gain of$1.6
million.
On
(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
Table of Contents 45 among us, Vets
First Choice, Covetrus, Inc. (f/k/a
wholly owned subsidiary of ours
prior to the Distribution Date, and
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 theHenry Schein Animal Health Business.
On the Distribution Date, we received a tax-free distribution of
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, as well as alternate sites of care.
We serve more than one million customers worldwide including dental practitioners and laboratories and physician practices, as well
as government, institutional health care clinics and other alternate care clinics.
We believe that we have a strong brand identity due to our more than 88 years of experience distributing health care products.
We are headquartered in
employ more than 19,000 people (of which more than 9,800 are
based outside
includingthe United States ,Australia ,Austria ,Belgium ,Brazil ,Canada ,Chile ,China , theCzech Republic ,France ,Germany , Hong Kong SAR,Ireland ,Israel ,Italy ,Japan ,Liechtenstein , Luxembourg,Malaysia ,the Netherlands ,New Zealand ,Poland ,Portugal ,Singapore ,South Africa ,Spain ,Sweden ,Switzerland ,Thailand ,United Arab Emirates and theUnited Kingdom .
We have established strategically located distribution centers to enable us to better serve our customers and increase our operating efficiency.
This infrastructure, together with broad product and service offerings at competitive prices, and a strong commitment to customer service, enables us
to be a single source of supply for our customers' needs.
Our infrastructure also allows us to provide convenient ordering
and rapid, accurate and complete order fulfillment.
We conduct our business through two reportable segments: (i) health care distribution and (ii) technology and value-added services.
These segments offer different products and services to the same customer base.
The health care distribution reportable segment aggregates our global dental
and medical operating segments.
This
segment distributes consumable products, small equipment, laboratory products,
large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic
tests, infection-control products and vitamins.
Our global dental group serves office-based dental practitioners, dental laboratories, schools and other institutions.
Our global medical group serves office-based medical practitioners, ambulatory
surgery
centers, other alternate-care settings and other institutions.
Our global technology and value-added services group provides software,
technology and other value-added services to health care practitioners.
Our technology group offerings include practice management software systems for dental and medical practitioners.
Our value-added practice solutions include financial services on a
Table of Contents
46
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.
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. Table of Contents 47
As the health care industry continues to change, we continually evaluate possible
candidates for merger and joint venture or acquisition and intend to continue to seek opportunities to expand our role as a provider of products and services to the health care industry.
There can be no assurance that we will be able to successfully pursue
any such opportunity or consummate any such transaction, if pursued. If additional transactions are entered into or consummated, we would incur merger and/or acquisition-related costs, and there can be no assurance that the integration efforts associated with any such transaction would be successful. In response to the COVID-19 pandemic, we had taken a range of actions to preserve cash, including the temporary suspension of significant acquisition activity.
During the third and fourth quarters of 2020, as global conditions
improved, we resumed our acquisition strategy.
Aging Population and Other Market Influences
The health care products distribution industry continues to experience growth
due to the aging population, increased health care awareness, the proliferation of medical technology and testing, new pharmacology treatments and expanded third-party insurance coverage, partially offset by the effects of unemployment on insurance coverage.
In addition, the physician market continues to benefit from
the shift of procedures and diagnostic testing from acute care settings to alternate-care sites, particularly physicians' offices.
According to the
and elder- care services.
By the year 2050, that number is projected to nearly triple to
approximately 19 million.
The
population aged 65 to 84 years is projected to increase by approximately 36%
during the same time period.
As a result of these market dynamics, annual expenditures for health care
services continue to increase inthe United States .
We believe that demand for our products and services will grow, while continuing to be impacted by current and future operating, economic and industry conditions.
TheCenters for Medicare and Medicaid Services , or CMS,
published "National Health Expenditure Projections 2019-2028"
indicating that total national health care spending reached approximately$3.6 trillion in 2018, or 17.7% of the nation's gross domestic product, the benchmark measure for annual production of goods and services in the United
States.
Health care spending is projected to reach approximately$6.2 trillion in 2028,
approximately 19.7%
of the nation's projected gross domestic product. Table of Contents 48 Results of Operations
The following tables summarize the significant components of our operating
results and cash flows from continuing operations for each of the three years endedDecember 26, 2020 ,December 28, 2019 andDecember 29, 2018 (in thousands): Years EndedDecember 26 ,December 28 ,December 29, 2020 2019 2018 Operating results: Net sales$ 10,119,141 $ 9,985,803 $ 9,417,603 Cost of sales 7,304,798 6,894,917 6,506,856 Gross profit 2,814,343 3,090,886 2,910,747 Operating expenses: Selling, general and administrative 2,246,947 2,357,920 2,217,273 Litigation settlements - - 38,488 Restructuring costs 32,093 14,705 54,367 Operating income$ 535,303 $ 718,261 $ 600,619 Other expense, net$ (35,408) $ (37,954) $ (63,783)
Net gain on sale of equity investments
1,572
186,769
- Net income from continuing operations 418,437 725,461 450,441 Income (loss) from discontinued operations 986 (6,323) 111,685 Net income attributable toHenry Schein, Inc. 403,794 694,734 535,881 Years EndedDecember 26 ,December 28 ,December 29, 2020 2019 2018 Cash flows: Net cash provided by operating activities from continuing operations$ 593,519 $ 820,478 $ 450,955 Net cash used in investing activities from continuing operations (115,019) (422,309) (164,324) Net cash used in financing activities from continuing operations (181,794) (363,351) (402,173) Plans of Restructuring
On
provide expense efficiencies.
These actions allowed us to execute on our plan to reduce our cost structure
and fund new initiatives to drive 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.
On
to mitigate stranded costs associated with the Animal Health Spin-off and to rationalize operations and to provide expense efficiencies.
These activities were originally expected to be completed by the end of 2020.
As a result of the business environment brought on by the COVID-19 pandemic, we are continuing our restructuring activities
into 2021. 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 in 2021, both with respect to each major type of cost associated therewith and with respect to the total cost, or an estimate of the amount or range of amounts that will result in future cash expenditures.
During the years ended
29, 2018 we recorded restructuring charges of$32.1 million ,$14.7 million and$54.4 million , respectively.
The costs associated with these restructurings are included in a separate line item, "Restructuring costs" within
our consolidated statements of income. Table of Contents 49 2020 Compared to 2019Net Sales
Net sales for 2020 and 2019 were as follows (in thousands):
% of % of Increase / (Decrease) 2020 Total 2019 Total $ % Health care distribution (1) Dental$ 5,912,593 58.4 %$ 6,415,865 64.2 %$ (503,272) (7.8) % Medical 3,617,017 35.8 2,973,586 29.8 643,431 21.6
Total health care distribution
9,529,610 94.2 9,389,451 94.0 140,159 1.5 Technology and value-added services (2) 514,258 5.1 515,085 5.2 (827) (0.2) Total excluding Corporate TSA revenues 10,043,868 99.3 9,904,536 99.2 139,332 1.4 CorporateTSA revenues (3) 75,273 0.7 81,267 0.8 (5,994) (7.4) Total$ 10,119,141 100.0$ 9,985,803 100.0$ 133,338 1.3 (1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, personal protective equipment 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
The 1.3% increase in net sales for the year ended
includes an increase of 1.4% local currency growth (0.8% increase in internally generated revenue and 0.6% growth from acquisitions) partially offset by a decrease of 0.1% related to foreign currency exchange.
Excluding sales of products under the transition services agreement with Covetrus, our net sales increased 1.4%, including local
currency growth of 1.5% (0.9% increase in internally generated revenue and 0.6%
growth from acquisitions) partially offset by a decrease of 0.1% related
to
foreign currency exchange.
Sales for the year ended
PPE and COVID-
19 related products of approximately
208% versus the prior year.
Future PPE and COVID-19 related product sales may be lower than what
we have experienced in 2020, which were driven by rising positive COVID-19 cases and practices seeking to ensure
adequate supply.
The 7.8% decrease in dental net sales for the year ended December
26, 2020 includes a decrease of 7.6% in local currencies (8.0% decrease in internally generated revenue,
partially offset by 0.4%
growth from acquisitions) and a decrease of 0.2% related to foreign currency exchange.
The 7.6% decrease in local currency sales was due to decreases in dental equipment sales and service revenues of 12.5%,
all of which is attributable to a decrease in internally generated revenue and a decrease in dental consumable merchandise sales of 6.1% (6.5% decrease in internally generated revenue,
partially offset by 0.4% growth from acquisitions).
The COVID-19 pandemic adversely impacted our dental business beginning in mid-March of 2020 as many dental offices progressively closed or began seeing a limited number of patients, resulting in a decrease of 41.2% in second quarter dental revenues versus the same period in the prior year.
However, in the second half of the year ended
and patient traffic increased.
Global
dental sales for the year ended
PPE and COVID-19 related products of approximately$491 million , an increase of approximately 72% versus the
prior year.
The 21.6% increase in medical net sales for the year ended December
26, 2020 includes an increase of 21.6% local currency growth (20.7% increase in internally generated revenue and 0.9%
growth from acquisitions).
The
COVID-19 pandemic adversely impacted our medical business beginning in
mid-March of 2020, but not as significantly as our dental business as the decrease in second quarter
medical revenues was only 11.2% versus the same period in the prior year. Our medical business rebounded strongly in the second half of the year in part
due to continued strong sales of PPE, such as masks, gowns and face shields, and COVID-19 related products, such as diagnostic test kits.
Global medical sales for the year ended
from sales of PPE and COVID-19 related products of approximately$807 million , an increase of approximately 490% versus the prior year. Table of Contents 50
The 0.2% decrease in technology and value-added services net sales
for the year endedDecember 26, 2020 includes a decrease of 0.3% local currency growth (3.2% decrease in internally generated
revenue, partially offset by 2.9% growth from acquisitions) partially offset by an increase of 0.1% related to foreign
currency exchange.
The closure of dental and medical offices beginning in mid-March of 2020 due to the COVID-19 pandemic
resulted in a decrease of 15.9% in second quarter technology and value-added services revenues versus the same period in the prior year.
As dental and medical practice operations, resumed in the second
half of the year, the trend for transactional software revenues improved as more patients visited practices
worldwide.
Although dental and medical practices continued to re-open globally
in the second half of the year, patient volumes remain below pre-COVID-19 levels.
As such, there is an ongoing risk that the COVID-19 pandemic may
again
have a material adverse effect on our net sales in future periods.
Gross Profit
Gross profit and gross margins for 2020 and 2019 by segment and in total were as follows (in thousands): Gross Gross Decrease 2020 Margin % 2019 Margin % $ % Health care distribution$ 2,448,991 25.7 %$ 2,717,574 28.9 %$ (268,583) (9.9) % Technology and value-added services 363,245 70.6 370,887 72.0 (7,642) (2.1) Total excluding Corporate TSA revenues 2,812,236 28.0 3,088,461 31.2 (276,225) (8.9) CorporateTSA revenues 2,107 2.8 2,425 3.0 (318) (13.1) Total$ 2,814,343 27.8$ 3,090,886 31.0$ (276,543) (8.9)
As a result of different practices of categorizing costs associated with distribution networks
throughout our industry, our gross margins may not necessarily be comparable to other distribution companies.
Additionally, we realize substantially higher gross margin percentages in our technology segment than in
our health care distribution segment.
These higher gross margins result from being both the developer and seller of
software products and services, as well as certain financial services. The software industry typically realizes higher gross margins to recover investments in research and development.
In connection with the completion of the Animal Health Spin-off (see
Note 2 - Discontinued Operations
for
additional details), we entered into a transition services agreement with
Covetrus, pursuant to which Covetrus purchased certain products from us.
The agreement, which ended in
of our product cost to cover handling costs.
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 decreased
for the year endedDecember 26, 2020 compared to the prior year period, due primarily to the COVID-19
pandemic.
Health care distribution gross profit
margin decreased to 25.7% for the year ended
prior year period.
The overall decrease in our health care distribution gross profit is
attributable to a
decrease in internally
generated revenue, partially offset by
Gross profit margin was negatively affected by significant adjustments recorded for PPE inventory and COVID-19
related
products caused by volatility of pricing and demand experienced during the
year, which conditions may recur and adversely impact gross profit margins in future periods, although we do not expect
material inventory adjustments to continue into 2021.
During the year, we continued to earn lower vendor rebates, due to lower purchase volumes, in our health care distribution segment, which also contributes to the lower gross
profit margin. Table of Contents
51
Technology and value-added services gross profit decreased
Technology
and value-added services gross profit margin decreased to
70.6% for the year ended
for the comparable prior year period.
The overall decrease in our Technology and value-added services gross profit is attributable to a decrease of$11.5 million in internally generated revenue and a decrease of$8.8 million in gross profit
due to the decrease in the gross margin
rates, partially offset by
Selling, General and Administrative
Selling, general and administrative expenses by segment and in
total for 2020 and 2019 were as follows (in thousands): % of % of Respective Respective Increase / (Decrease) 2020Net Sales 2019Net Sales $ % Health care distribution$ 2,014,925 21.1 %$ 2,128,595 22.7 %$ (113,670) (5.3) %
Technology and value-added services
264,115 51.4 244,030 47.4 20,085 8.2 Total$ 2,279,040 22.5$ 2,372,625 23.8$ (93,585) (3.9)
Selling, general and administrative expenses (including restructuring costs
in the years endedDecember 26, 2020 andDecember 28, 2019 ) decreased$93.6 million , or 3.9%, to$2,279.0 million for the year endedDecember 26, 2020 from the comparable prior year period.
The
26, 2020 as compared to the prior year period was attributable to a reduction of$151.5 million of operating costs, primarily as a result of cost- saving measures taken in response to the COVID-19 pandemic, partially offset by$20.8 million of additional costs from acquired companies and an increase of$17.0 million in restructuring
costs.
The
services segment for the year endedDecember 26, 2020 as compared to the prior year period was attributable to$10.5 million of additional costs from acquired companies and an increase of$9.6 million of operating costs. As a percentage of net sales, selling, general and administrative expenses decreased to 22.5% from 23.8% for the comparable prior year period. The cost savings achieved from measures taken in response to the COVID-19 pandemic are expected to diminish in future periods as most of these measures were temporary and substantially ended
during the second half of 2020.
As a component of total selling, general and administrative expenses, selling
expenses decreased$86.4 million , or 5.9%, to$1,375.2 million for the year endedDecember 26, 2020 from the comparable prior year period, primarily as a result of cost-saving measures taken in response to the COVID-19
pandemic.
As a percentage of net sales, selling expenses decreased to 13.6% from 14.7% for the comparable prior
year period.
As a component of total selling, general and administrative expenses, general
and administrative expenses decreased$7.2 million , or 0.8%, to$903.8 million for the year endedDecember 26, 2020 from the comparable prior year period.
As a percentage of net sales, general and administrative expenses
decreased to 8.9% from 9.1% for the comparable prior year period.
Other Expense, Net
Other expense, net for the years ended 2020 and 2019 was as follows
(in thousands): Variance 2020 2019 $ % Interest income$ 9,842 $ 15,757 $ (5,915) (37.5) % Interest expense (41,377) (50,792) 9,415 18.5 Other, net (3,873) (2,919) (954) (32.7) Other expense, net$ (35,408) $ (37,954) $ 2,546 6.7
Interest income decreased
and reduced late fee income.
Interest
expense decreased
lower average debt balances for the year endedDecember 26, 2020 as compared to the prior year. Table of Contents 52 Income Taxes
For the year ended
compared to 23.4% for the prior year period.
In 2020, our effective tax rate was primarily impacted by the agreement with the
Revenue
Service on our Advanced Pricing Agreement (APA), other audit resolutions, and state and foreign income taxes and interest expense.
In 2019, our effective tax rate was primarily impacted by state and
foreign income taxes and interest expense.
In the fourth quarter of 2020 we received contingent proceeds of
million from the 2019 sale of Hu-Friedy resulting in the recognition of an additional after-tax gain of$1.6 million . Table of Contents 53 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 CorporateTSA 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
The 6.0% increase in net sales for the year ended
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 ended
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 ended
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. Table of Contents 54 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 CorporateTSA 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 - Discontinued Operations
for
additional details), we entered into a transition services agreement with
Covetrus, pursuant to which Covetrus purchased certain products from us.
The agreement, which ended in
of our product cost to cover handling costs.
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
the year endedDecember 28, 2019 compared to the prior year period.
Health care distribution gross profit margin decreased to 28.9% for the year
ended
The overall increase in our health care distribution gross profit is attributable to$73.1 million of 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
Technology and value-added services gross profit margin increased to
72.0% for the year ended
prior year period.
Acquisitions
accounted for
and value-added services segment for the year endedDecember 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. Table of Contents 55
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) 2019Net Sales 2018Net 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 endedDecember 28, 2019 andDecember 29, 2018 , and litigation settlements in the year endedDecember 29, 2018 ) increased$62.5 million , or 2.7%, to$2,372.6 million for the year endedDecember 28, 2019 from
the comparable prior year period.
The
our health care distribution segment for the year endedDecember 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
costs from acquired companies.
The
expenses within our technology and value-added services segment for the year endedDecember 28, 2019 as
compared to the prior year period was
attributable to
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$33.5 million , or 2.3%, to$1,461.6 million for the year endedDecember 28, 2019 from
the comparable prior year period.
As a percentage of net sales, selling expenses decreased to 14.7%
from 15.1% for the comparable prior year period.
As a component of total selling, general and administrative expenses, general
and administrative expenses
decreased
the comparable prior year period primarily due to$38.5 million of litigation settlement
costs recorded in 2018 and a
expenses. As a percentage of net sales, general and administrative expenses decreased to 9.1% 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
borrowings under our bank credit lines.
Table of Contents 56 Income Taxes
For the year ended
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 Cuts and Jobs 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
and
2018, and
for 2019 and 2018 respectively.
On
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 the 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 .
Liquidity and Capital Resources
Our principal capital requirements have included funding of acquisitions, purchases
of additional noncontrolling interests, repayments of debt principal, the funding of working capital needs, purchases of fixed assets and repurchases of common stock (which have been temporarily suspended). Working capital requirements generally result from increased sales, special inventory forward buy-in opportunities and payment terms for receivables and payables.
Historically, sales have tended to be stronger during the third and fourth quarters and special inventory forward buy-in opportunities have been most prevalent just before the
end of the year, and have caused our working capital requirements to be higher from the end of the third quarter to the end of the first quarter of the following year.
The pandemic and the governmental responses to it had a material adverse
effect on our cash flows in the second quarter of 2020.
In the latter half of the second quarter and continuing
through year-end, dental and medical practices began to re-open worldwide. However, patient volumes remain below pre-COVID-19 levels and certain regions in theU.S. and internationally are experiencing an increase in COVID-19
cases.
As such, there is an ongoing risk that the COVID-19 pandemic may again have a material
adverse effect on our cash flows in future periods and may result in a material adverse effect on our financial condition and
liquidity. However, the extent of the potential impact cannot be reasonably estimated at this time.
As part of a broad-based effort to support plans for the long-term health of our business
and to strengthen our financial flexibility, we implemented cost reduction measures that included certain reductions in payroll, substantially decreased capital expenditures, reduced corporate spending and the elimination of certain non- strategic targeted expenditures. As our markets have begun to recover, we ended most of those temporary expense- reduction initiatives during the second half of 2020.
As the COVID-19 pandemic continues to unfold, we will continue to evaluate appropriate actions for the business.
We finance our business primarily through cash generated from our operations, revolving credit facilities and debt placements.
Our ability to generate sufficient cash flows from operations is dependent
on the continued demand of our customers for our products and services, and access to products and
services from our suppliers.
Our business requires a substantial investment in working capital, which
is susceptible to fluctuations during the year as a result of inventory purchase patterns and seasonal demands.
Inventory purchase activity is a function of sales activity, special inventory forward buy-in opportunities and our desired level of inventory.
We anticipate future increases in our working capital requirements. Table of Contents 57
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
On the Distribution Date we received a tax free distribution of$1,120 million from Covetrus, which has been used to
pay down our debt, thereby generating additional debt capacity that can be used for general corporate purposes, including
share repurchases and mergers and acquisitions.
Net cash provided by operating activities was
year endedDecember 26, 2020 , compared to$820.5 million for the prior year.
The net change of
both resulting from the sale of our equity investment in Hu-Friedy
in
the fourth quarter of 2019, and increased working capital requirements,
specifically an increase in inventories due to stocking of PPE and COVID-19 related products, and an increase in accounts receivable due to higher sales volume.
These working capital increases were partially offset by greater growth
in accounts payable and accrued expenses.
Net cash used in investing activities was
compared to$422.3 million for the prior year.
The net change of
for equity investments and business acquisitions, partially offset by decreased proceeds from
sales of equity investments.
Net cash used in financing activities was
year endedDecember 26, 2020 , compared to$363.4 million for the prior year. The net change of$181.6 million was primarily due to increased net proceeds from bank borrowings and lower repurchases of our common stock, partially offset by proceeds received during the prior year related to the Animal Health Spin-off.
The following table summarizes selected measures of liquidity and capital
resources (in thousands):December 26 ,December 28, 2020 2019 Cash and cash equivalents$ 421,185 $ 106,097 Working capital (1) 1,508,313 1,188,133 Debt: Bank credit lines$ 73,366 $ 23,975
Current maturities of long-term debt
109,836 109,849 Long-term debt 515,773 622,908 Total debt$ 698,975 $ 756,732 Leases: Current operating lease liabilities$ 64,716 $ 65,349 Non-current operating lease liabilities 238,727 176,267 (1)
Includes
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 turnover
Our accounts receivable days sales outstanding from operations
increased to 46.0 days as ofDecember 26, 2020 from 44.5 days as ofDecember 28, 2019 .
During the years ended
2019, we
wrote off approximately
Table of Contents 58 our trade receivable reserve.
Our inventory turnover from operations was 5.1 as of December
26, 2020 and 5.0 as ofDecember 28, 2019 .
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 of December
26, 2020:
Payments due by period (in thousands) < 1 year 2 - 3 years 4 - 5 years > 5 years Total Contractual obligations: Long-term debt, including interest$ 125,797 $ 43,994 $ 126,464 $ 435,219 $ 731,474
Inventory purchase commitments
208,200 110,800 - - 319,000 Operating lease obligations 71,801 98,719 55,046 110,228 335,794 Transition tax obligations 9,895 43,291 30,923 - 84,109
Finance lease obligations, including interest
2,503 2,138 632 920 6,193 Total$ 418,196 $ 298,942 $ 213,065 $ 546,367 $ 1,476,570 Bank Credit Lines
Bank credit lines consisted of the following:
December 26 ,December 28, 2020 2019 Revolving credit agreement $ - $ - Other short-term bank credit lines 73,366 23,975 Total$ 73,366 $ 23,975 Revolving Credit Agreement
On
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 the LIBOR rate to be discontinued at some point during 2021, which will require an amendment to our debt agreements to
reflect a new reference rate. We do not expect the discontinuation of LIBOR as a reference rate in our debt agreements to have a material adverse effect on our financial position or to materially affect our interest expense. The Credit Agreement also requires, among other things, that we maintain maximum leverage ratios. Additionally, the Credit Agreement contains customary representations, warranties and affirmative covenants as well as customary negative covenants, subject to negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements.
As of
on this revolving credit facility.
As of
were
On
things, (i) modify the financial covenant from being based on total leverage ratio to net leverage ratio, (ii) adjust the pricing grid to reflect the net leverage ratio calculation, and (iii) increase the maximum maintenance leverage ratio throughMarch 31, 2021 . Table of Contents 59 364-Day Credit Agreement
On
withJPMorgan Chase Bank, N.A . andU.S. Bank National Association as joint lead arrangers and joint bookrunners. This facility matures onApril 16, 2021 .
As of
facility.
We have the ability to borrow up to an additional$200 million , from the original facility amount of$700 million , under this credit facility on a revolving basis as needed, subject to the terms and conditions of
the credit agreement.
The interest rate for borrowings under this facility will fluctuate based on our net leverage
ratio.
AtDecember 26, 2020 , the interest rate on this facility was 2.50%.
The proceeds from this facility can be used for working capital requirements
and
general corporate purposes, including, but not limited to, permitted refinancing
of existing indebtedness.
Under the terms of this agreement, we are prohibited from repurchasing our common stock until we report our financial results for the second quarter of 2021.
Other Short-Term Credit
Lines
As of
short-term bank credit lines available, of which$73.4 million and$24.0 million , respectively, were outstanding. AtDecember 26, 2020 andDecember 28, 2019 , borrowings under all of these credit lines had a weighted average interest rate of 4.14% and 3.45%, respectively. Long-term debt
Long-term debt consisted of the following:
December 26 ,December 28, 2020 2019 Private placement facilities$ 613,498 $ 621,274 U.S. trade accounts receivable securitization - 100,000 Note payable due in 2025 with an interest rate of 3.1% atDecember 26, 2020 1,554 - Various collateralized and uncollateralized loans payable with interest, in varying installments through 2023 at interest rates ranging from 2.62% to 4.27% atDecember 26, 2020 and ranging from 2.56% to 10.5% atDecember 28, 2019 4,596 6,089 Finance lease obligations (see Note 7) 5,961 5,394 Total 625,609 732,757 Less current maturities (109,836) (109,849) Total long-term debt$ 515,773 $ 622,908 Private Placement Facilities
Our private placement facilities, with three insurance companies, have a
total facility amount of$1 billion , and are available on an uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from time to time throughJune 23, 2023 .
The facilities allow us to issue senior promissory notes to the
lenders at a fixed rate based on an agreed upon spread over applicable treasury notes at
the time of issuance.
The term of each possible issuance will be selected by us and can range from five to 15 years (with an average life no longer than 12 years).
The proceeds of any issuances under the facilities will be used
for general corporate purposes, including working capital and capital expenditures, to refinance existing indebtedness
and/or to fund potential acquisitions.
On
facilities to, among other things, (i) permit the consummation of the Animal Health Spin-off and (ii) provide for the issuance of notes in Euros, British Pounds and Australian Dollars, in addition toU.S. Dollars.
The agreements provide, among other things, that we maintain certain maximum leverage ratios, and contain restrictions relating
to subsidiary indebtedness, liens, affiliate transactions, disposal of assets and certain changes in ownership. These facilities contain make-whole provisions in the event that we pay off the facilities prior to the applicable due dates. Table of Contents 60
On
other things, (i) temporarily modify the financial covenant from being based on total leverage ratio to net leverage ratio untilMarch 31, 2021 , (ii) increase the maximum maintenance leverage ratio throughMarch 31, 2021 , but with a 1.00% interest rate increase on the outstanding notes if the net leverage ratio exceeds 3.0x, which will remain in effect until we deliver financials for a four-quarter period ending on or afterJune 30, 2021 showing compliance with the total leverage ratio requirement, and (iii) make certain other changes conforming to the Credit Agreement, dated
as of
The components of our private placement facility borrowings as
ofDecember 26, 2020 are presented in the following table (in thousands): Amount of Date of Borrowing Borrowing Borrowing Outstanding Rate Due DateJanuary 20, 2012 (1)$ 14,286 3.09 %January 20, 2022 January 20, 2012 50,000 3.45 January 20, 2024 December 24, 2012 50,000 3.00December 24, 2024 June 2, 2014 100,000 3.19June 2, 2021 June 16, 2017 100,000 3.42 June 16, 2027 September 15, 2017 100,000 3.52 September 15, 2029January 2, 2018 100,000 3.32January 2, 2028 September 2, 2020 (2) 100,000 2.35September 2, 2030 Less: Deferred debt issuance costs (788)$ 613,498 (1)
Annual repayments of approximately
On
We have a facility agreement with a bank, as agent, based on the securitization
of our
committed for up to three years.
Our current facility, which has a purchase limit of
On
June 12, 2023 and was amended to adjust certain covenant levels for 2020.
As of
under this securitization facility were$0.0 million and$100 million , respectively. AtDecember 26, 2020 , the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 0.22% plus 0.95%, for a combined rate of 1.17%.
At
was based on the asset-backed commercial paper rate of 1.90% plus 0.75%, for a combined
rate of 2.65%.
If our accounts receivable collection pattern changes due to customers
either paying late or not making payments, our ability to borrow under this facility may be reduced.
We are required to pay a commitment fee of 25 to 45 basis points depending upon program utilization.
Table of Contents 61 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 of
lease liabilities were$64.7 million and$238.7 million , respectively.
Stock Repurchases
From
billion, or 75,563,289 shares, under our common stock repurchase programs, with$201.2 million available as ofDecember 26, 2020 for future common stock share repurchases.
On
up to an additional$400 million in shares of our common stock.
As a result of the COVID-19 pandemic, as previously announced, we have
temporarily suspended our share repurchase program in an effort to preserve cash and exercise caution during this
uncertain period and due to certain restrictions related to financial covenants in our credit facilities.
Redeemable Noncontrolling interests
Some minority stockholders in certain of our subsidiaries have the right,
at certain times, to require us to acquire
their ownership interest in those entities at fair value.
Account Standards Codification ("ASC") 480-10 is
applicable for noncontrolling interests where we are or may be required
to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest
holder under the terms of a put option contained in contractual agreements.
The components of the change in the Redeemable noncontrolling
interests for the years ended
29, 2018 are presented in the following table:December 26 ,December 28 ,December 29, 2020 2019 2018 Balance, beginning of period$ 287,258 $ 219,724 $ 465,585
Decrease in redeemable noncontrolling interests due to redemptions
(17,241) (2,270)
(287,767)
Increase in redeemable noncontrolling interests due to business acquisitions 28,387 74,865 4,655 Net income attributable to redeemable noncontrolling interests 13,363 14,838 15,327 Dividends declared (12,631) (10,264) (8,206)
Effect of foreign currency translation loss attributable to redeemable noncontrolling interests
(4,279)
(2,335)
(11,330)
Change in fair value of redeemable securities
32,842 (7,300) 41,460 Balance, end of period$ 327,699 $ 287,258 $ 219,724
Changes in the estimated redemption amounts of the noncontrolling
interests subject to put options are adjusted at each reporting period with a corresponding adjustment to Additional paid-in
capital.
Future reductions in the carrying amounts are subject to a floor amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded.
The recorded value of the redeemable noncontrolling interests cannot go below the floor level.
These adjustments do not impact the calculation of earnings per
share.
Additionally, some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial targets are met.
Any adjustments to these accrual amounts are recorded in our consolidated statement of income.
For the years ended
there were no Table of Contents 62
material adjustments recorded in our consolidated statements of income
relating to changes in estimated contingent purchase price liabilities.
On
a provider of web presence and online marketing software, to create a newly formed entity,Henry Schein One, LLC . The joint venture includesHenry 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 originally held 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 to
Beginning with the second anniversary of the effective date of the formation of the joint venture, Henry
Schein One began issuing a fixed number of additional interests to Internet Brands, which increased Internet Brands interest to 27% effectiveJuly 1, 2020 .
to Internet Brands annually through the fifth anniversary, ultimately increasing Internet Brands' ownership to approximately 33.6%.
Internet Brands is also 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
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.
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$84.0 million as ofDecember 26, 2020 .
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.
Our financial results for the year ended
affected by certain estimates we made due to the adverse business environment brought on by the COVID-19 pandemic. During the year endedDecember 26, 2020 , we recorded incremental bad debt reserves of approximately$10.0
million for our global dental business.
Our
stock compensation expense during the year ended
was lower than in the years endedDecember 28, 2019 andDecember 29, 2018 due to our estimate that a lower amount
of performance shares granted in 2018, 2019 or 2020 would ultimately vest as a result of the lower-than-normal earnings
in 2020.
Additionally, in
the year ended
of approximately$20.3 million .
Although our selling, general and administrative expenses
for the year ended
Table of Contents
63
represent management's best estimates and assumptions that affect the reported
amounts, our judgment could change in the future due to the significant uncertainty surrounding the macroeconomic
effect of the COVID-19 pandemic.
Furthermore, during the year ended
margin was negatively affected by significant adjustments recorded for PPE inventory and COVID-19 related
products reflecting changes in our estimates of net realizable value brought on by volatility of pricing and changes
in demand experienced during the year. Such conditions may recur and adversely impact gross profit margins in future periods, although we do not expect material inventory adjustments to continue into 2021.
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
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".
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
Table of Contents
64
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.
Accounts Receivable
Accounts receivable are generally recognized when health care distribution
and technology and value-added services revenues are recognized.
In accordance with the "expected credit loss" model, 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 types of customers and their credit worthiness, experience and historical data adjusted for current conditions and reasonable supportable forecasts.
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 products 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. Table of Contents 65Goodwill
once annually, or if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
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: global dental, global medical,
and
technology and value-added services.
of preparing our impairment analyses, based on a specific identification basis.
Application of the goodwill impairment test requires judgment, including
the identification of reporting units, assignment of assets and liabilities that are considered shared services to the reporting units, and ultimately the determination of the fair value of each reporting unit. The fair value of each reporting unit is calculated by applying the discounted cash flow methodology and confirming with a market approach. This analysis requires judgments, including estimation of detailed future cash flows based on budget expectations, and determination of comparable companies to develop a weighted average cost of capital for each reporting
unit. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results,
market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination
of fair value and goodwill impairment for each reporting unit.
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 definite-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.
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.
During the year ended
on intangible assets of approximately$20.3 million , nearly all of which was recorded in our
technology and value-added services segment.
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 2020 Stock Incentive Plan (formerly known as the 2013 Stock Incentive Plan),
and our 2015 Non-Employee Director
Table of Contents
66
Stock Incentive Plan (together, the "Plans").
The Plans are administered by the Compensation Committee of
the
Board of Directors.
Equity-based awards are 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 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, certain litigation settlements or payments, if any, changes in tax rates in certain countries, changes in accounting principles or in applicable laws or regulations and foreign exchange fluctuations.
Over the performance period, the number of shares of common
stock that will ultimately vest and be issued and the related compensation expense is adjusted upward or downward based upon our estimation of achieving such performance targets.
The ultimate number of shares delivered to recipients
and the related compensation cost recognized as an expense will be based on our actual performance metrics as defined under the Plans.
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. 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 see
Note 1 - Significant Accounting Policies
included under Item 8. Table of Contents 67 ITEM 7A.
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