Edgar Filing: HENRY SCHEIN INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

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

For the transition period from ____________ to ____________

Commission File Number: 0-27078

HENRY SCHEIN, INC.

(Exact name of registrant as specified in its charter)

Delaware	11-3136595
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

135 Duryea Road

Melville, New York

(Address of principal executive offices)

11747

(Zip Code)

(631) 843-5500

(Registrant’s telephone number, including area code)

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

Yes X

No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X

No __

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

Large accelerated filer X

Accelerated filer __

Non-accelerated filer __

(Do not check if a smaller reporting company)

Smaller reporting company __

Emerging growth company __

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. □

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

Yes __

No X

As of October 31, 2017, there were 156,954,392 shares of the registrant’s common stock outstanding.



HENRY SCHEIN, INC.
INDEX
						Page

PART I. FINANCIAL INFORMATION

ITEM 1.	Consolidated Financial Statements:

		Balance Sheets as of September 30, 2017 and December 31, 2016............................................................................................................................................				3

		Statements of Income for the three and nine months ended
			September 30, 2017 and September 24, 2016.......................................................................................................................................................................			4

		Statements of Comprehensive Income for the three and nine months ended
			September 30, 2017 and September 24, 2016.......................................................................................................................................................................			5

		Statement of Changes in Stockholders' Equity for the nine months ended
			September 30, 2017..............................................................................................................................................................................................................			6

		Statements of Cash Flows for the nine months ended
				September 30, 2017 and September 24, 2016.......................................................................................................................................................................		7

		Notes to Consolidated Financial Statements...............................................................................................................................................................................				8
		Note 1 – Basis of Presentation...............................................................................................................................................................................................				8
		Note 2 – Segment Data..........................................................................................................................................................................................................				8
		Note 3 - Debt.........................................................................................................................................................................................................................				10
		Note 4 – Redeemable Noncontrolling Interests......................................................................................................................................................................				12
		Note 5 – Comprehensive Income...........................................................................................................................................................................................				13
		Note 6 – Fair Value Measurements.......................................................................................................................................................................................				15
		Note 7 – Business Acquisitions.............................................................................................................................................................................................				17
		Note 8 – Plan of Restructuring..............................................................................................................................................................................................				18
		Note 9 – Earnings Per Share..................................................................................................................................................................................................				19
		Note 10 – Income Taxes........................................................................................................................................................................................................				19
		Note 11 – Derivatives and Hedging Activities.......................................................................................................................................................................				20
		Note 12 – Stock-Based Compensation..................................................................................................................................................................................				20
		Note 13 – Supplemental Cash Flow Information...................................................................................................................................................................				22
		Note 14 – Legal Proceedings.................................................................................................................................................................................................				22
						24
		Note 15 – Subsequent Event...................................................................................................................................................................			22


ITEM 2.	Management's Discussion and Analysis of
		Financial Condition and Results of Operations....................................................................................................................................................................				25

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.................................................................................................................................................					48

ITEM 4.	Controls and Procedures..............................................................................................................................................................................................................					48

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings..........................................................................................................................................................................................................................					50

ITEM 1A.	Risk Factors...................................................................................................................................................................................................................................					51

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.....................................................................................................................................................					51


ITEM 6.	Exhibits...........................................................................................................................................................................................................................................					53

	Signature........................................................................................................................................................................................................................................					54

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HENRY SCHEIN, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

				September 30,		December 31,
				2017		2016
				(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents ..............................................................................................................................................................			$	79,879	$	62,381
	Accounts receivable, net of reserves of $96,953 and $90,329 ................................................................................................................				1,544,582		1,254,139
	Inventories, net .............................................................................................................................................................................				1,692,256		1,635,750
	Prepaid expenses and other .............................................................................................................................................................				465,812		360,510
			Total current assets ................................................................................................................................................................		3,782,529		3,312,780
Property and equipment, net ...............................................................................................................................................................					361,708		333,906
Goodwill ..........................................................................................................................................................................................					2,224,657		2,019,740
Other intangibles, net .........................................................................................................................................................................					666,997		621,180
Investments and other .......................................................................................................................................................................					450,770		442,790
			Total assets ..........................................................................................................................................................................	$	7,486,661	$	6,730,396

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable .........................................................................................................................................................................			$	1,029,138	$	977,249
	Bank credit lines ...........................................................................................................................................................................				631,865		437,476
	Current maturities of long-term debt .................................................................................................................................................				17,247		65,923
	Accrued expenses:
		Payroll and related ....................................................................................................................................................................			251,849		266,463
		Taxes ......................................................................................................................................................................................			148,627		151,750
		Other ......................................................................................................................................................................................			358,421		391,785
			Total current liabilities ............................................................................................................................................................		2,437,147		2,290,646
Long-term debt .................................................................................................................................................................................					907,592		715,457
Deferred income taxes .......................................................................................................................................................................					91,786		51,589
Other liabilities ..................................................................................................................................................................................					292,179		264,264
			Total liabilities ......................................................................................................................................................................		3,728,704		3,321,956

Redeemable noncontrolling interests .....................................................................................................................................................					737,747		607,636
Commitments and contingencies .........................................................................................................................................................

Stockholders' equity:
	Preferred stock, $.01 par value, 1,000,000 shares authorized,
		none outstanding ......................................................................................................................................................................			-		-
	Common stock, $.01 par value, 240,000,000 shares authorized,
		156,952,738 outstanding on September 30, 2017 and
		158,805,010 outstanding on December 31, 2016 ............................................................................................................................			1,570		1,588
	Additional paid-in capital ...............................................................................................................................................................				-		126,742
	Retained earnings ..........................................................................................................................................................................				3,164,541		2,981,777
	Accumulated other comprehensive loss .............................................................................................................................................				(154,472)		(317,041)
		Total Henry Schein, Inc. stockholders' equity .................................................................................................................................			3,011,639		2,793,066
	Noncontrolling interests ..................................................................................................................................................................				8,571		7,738
			Total stockholders' equity .......................................................................................................................................................		3,020,210		2,800,804
		Total liabilities, redeemable noncontrolling interests and stockholders' equity .......................................................................................		$	7,486,661	$	6,730,396

See accompanying notes.

Table of Contents

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)


					Three Months Ended				Nine Months Ended
				September 30,		September 24,		September 30,		September 24,
				2017		2016		2017		2016

Net sales ....................................................................................................................................................................................				$	3,161,083	$	2,865,148	$	9,143,489	$	8,450,734
Cost of sales ...............................................................................................................................................................................					2,325,029		2,077,473		6,645,342		6,083,748
		Gross profit ...........................................................................................................................................................................			836,054		787,675		2,498,147		2,366,986
Operating expenses:
	Selling, general and administrative ................................................................................................................................................				622,506		581,584		1,879,969		1,779,583
	Restructuring costs ....................................................................................................................................................................				-		5,370		-		29,811
		Operating income ...................................................................................................................................................................			213,548		200,721		618,178		557,592
Other income (expense):
	Interest income .........................................................................................................................................................................				4,793		3,141		13,204		10,045
	Interest expense ........................................................................................................................................................................				(13,428)		(7,488)		(37,056)		(21,982)
	Other, net .................................................................................................................................................................................				(194)		(199)		489		3,206
		Income before taxes and equity in earnings
			of affiliates .........................................................................................................................................................................		204,719		196,175		594,815		548,861
Income taxes ..............................................................................................................................................................................					(59,340)		(56,601)		(156,276)		(159,099)
Equity in earnings of affiliates .......................................................................................................................................................					5,569		5,717		12,244		13,160
Net income .................................................................................................................................................................................					150,948		145,291		450,783		402,922
	Less: Net income attributable to noncontrolling interests ...................................................................................................................				(12,917)		(11,578)		(35,949)		(35,360)
Net income attributable to Henry Schein, Inc. ...................................................................................................................................				$	138,031	$	133,713	$	414,834	$	367,562

Earnings per share attributable to Henry Schein, Inc.:

	Basic ......................................................................................................................................................................................			$	0.88	$	0.83	$	2.64	$	2.26
	Diluted ....................................................................................................................................................................................			$	0.87	$	0.82	$	2.61	$	2.23

Weighted-average common shares outstanding:
	Basic ......................................................................................................................................................................................				156,914		161,791		157,386		162,600
	Diluted ....................................................................................................................................................................................				158,271		163,710		158,866		164,635

See accompanying notes.

Table of Contents

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

				Three Months Ended				Nine Months Ended
				September 30,		September 24,		September 30,		September 24,
				2017		2016		2017		2016

Net income .................................................................................................................................................................................				$	150,948	$	145,291	$	450,783	$	402,922

Other comprehensive income (loss), net of tax:
	Foreign currency translation gain (loss)...........................................................................................................................................				58,916		(6,463)		173,166		(2,041)

	Unrealized gain (loss) from foreign currency hedging
		activities ................................................................................................................................................................................			(34)		(603)		(1,274)		1,026

	Unrealized investment loss ..........................................................................................................................................................				(2)		-		(2)		-

	Pension adjustment gain (loss)......................................................................................................................................................				(353)		209		(1,063)		10

Other comprehensive income (loss), net of tax ..................................................................................................................................					58,527		(6,857)		170,827		(1,005)
Comprehensive income .................................................................................................................................................................					209,475		138,434		621,610		401,917
	Comprehensive income attributable to noncontrolling
	interests:
		Net income ............................................................................................................................................................................			(12,917)		(11,578)		(35,949)		(35,360)
		Foreign currency translation gain................................................................................................................................................			(3,473)		(716)		(8,258)		(1,236)
			Comprehensive income attributable to noncontrolling
			interests ............................................................................................................................................................................		(16,390)		(12,294)		(44,207)		(36,596)

Comprehensive income attributable to Henry Schein, Inc. ...................................................................................................................				$	193,085	$	126,140	$	577,403	$	365,321

See accompanying notes.

Table of Contents

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, except share and per share data)

(unaudited)

									Accumulated
		Common Stock			Additional				Other				Total
		$.01 Par Value			Paid-in		Retained		Comprehensive		Noncontrolling		Stockholders'
		Shares		Amount	Capital		Earnings		Income/(Loss)		Interests		Equity
Balance, December 31, 2016 .........................................................................................................................................................................		158,805,010	$	1,588	$	126,742	$	2,981,777	$	(317,041)	$	7,738	$	2,800,804
Net income (excluding $35,398 attributable to Redeemable
	noncontrolling interests) ........................................................................................................................................................................	-		-		-		414,834		-		551		415,385
Foreign currency translation gain (excluding gain of $7,961
	attributable to Redeemable noncontrolling interests) .............................................................................................................................................	-		-		-		-		164,908		297		165,205
Unrealized loss from foreign currency hedging activities,
	net of tax benefit of $4..........................................................................................................................................................................	-		-		-		-		(1,274)		-		(1,274)
Unrealized investment loss, net of tax of $1..........................................................................................................................................................		-		-		-		-		(2)		-		(2)
Pension adjustment loss, including tax benefit of $508................................................................................................................................................		-		-		-		-		(1,063)		-		(1,063)
Dividends paid .....................................................................................................................................................................................		-		-		-		-		-		(383)		(383)
Other adjustments ..................................................................................................................................................................................		-		-		29		-		-		368		397
Change in fair value of redeemable securities .........................................................................................................................................................		-		-		(124,747)		-		-		-		(124,747)
Repurchase and retirement of common stock .........................................................................................................................................................		(2,625,230)		(26)		(49,184)		(175,795)		-		-		(225,005)
Stock issued upon exercise of stock options,
	including tax benefit of $681 ....................................................................................................................................................................	186,570		2		4,258		-		-		-		4,260
Stock-based compensation expense ..................................................................................................................................................................		1,106,354		11		31,976		-		-		-		31,987
Shares withheld for payroll taxes ....................................................................................................................................................................		(519,966)		(5)		(44,696)		-		-		-		(44,701)
Liability for cash settlement of stock-based compensation
	awards.........................................................................................................................................................................................	-		-		(653)		-		-		-		(653)
Transfer of charges in excess of capital.................................................................................................................................................................		-		-		56,275		(56,275)		-		-		-

Balance, September 30, 2017 ........................................................................................................................................................................		156,952,738	$	1,570	$	-	$	3,164,541	$	(154,472)	$	8,571	$	3,020,210

See accompanying notes.

Table of Contents

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

					Nine Months Ended
					September 30,		September 24,
					2017		2016

Cash flows from operating activities:
	Net income ......................................................................................................................................................................................				$	450,783	$	402,922
	Adjustments to reconcile net income to net cash provided by
		operating activities:
			Depreciation and amortization ....................................................................................................................................................			141,278		125,829
			Stock-based compensation expense .............................................................................................................................................			31,987		43,627
			Provision for losses on trade and other accounts receivable ...............................................................................................................			6,981		1,736
			Provision for (benefit from) deferred income taxes ..........................................................................................................................			8,600		(13,425)
			Equity in earnings of affiliates .....................................................................................................................................................			(12,244)		(13,160)
			Distributions from equity affiliates ...............................................................................................................................................			16,826		12,104
			Changes in unrecognized tax benefits ...........................................................................................................................................			(6,653)		4,799
			Other ......................................................................................................................................................................................			6,031		7,845
			Changes in operating assets and liabilities, net of acquisitions:
				Accounts receivable ...............................................................................................................................................................		(229,239)		(131,586)
				Inventories ...........................................................................................................................................................................		27,336		48,513
				Other current assets ...............................................................................................................................................................		(70,833)		(35,781)
				Accounts payable and accrued expenses ...................................................................................................................................		(63,352)		(75,355)
Net cash provided by operating activities ...............................................................................................................................................						307,501		378,068

Cash flows from investing activities:
	Purchases of fixed assets ....................................................................................................................................................................					(55,315)		(44,525)
	Payments for equity investments and business
		acquisitions, net of cash acquired .....................................................................................................................................................				(258,786)		(126,543)
	Other ..............................................................................................................................................................................................					(6,694)		(8,766)
Net cash used in investing activities .......................................................................................................................................................						(320,795)		(179,834)

Cash flows from financing activities:
	Proceeds from (repayments of) bank borrowings .....................................................................................................................................					193,550		(3,274)
	Proceeds from issuance of long-term debt ..............................................................................................................................................					200,440		260,000
	Principal payments for long-term debt ...................................................................................................................................................					(59,531)		(9,293)
	Debt issuance costs ............................................................................................................................................................................					(1,771)		(233)
	Proceeds from issuance of stock upon exercise of stock options .................................................................................................................					4,941		9,754
	Payments for repurchases of common stock ..........................................................................................................................................					(225,005)		(350,001)
	Payments for taxes related to shares withheld for employee taxes...............................................................................................................					(44,721)		(27,115)
	Excess tax benefits related to stock-based compensation..........................................................................................................................					-		(463)
	Distributions to noncontrolling shareholders ...........................................................................................................................................					(23,921)		(26,366)
	Acquisitions of noncontrolling interests in subsidiaries ..............................................................................................................................					(27,914)		(51,265)
Net cash provided by (used in) financing activities ...................................................................................................................................						16,068		(198,256)

Effect of exchange rate changes on cash and cash equivalents ..................................................................................................................						14,724		4,128
Net change in cash and cash equivalents ................................................................................................................................................						17,498		4,106
Cash and cash equivalents, beginning of period .......................................................................................................................................						62,381		72,086
Cash and cash equivalents, end of period ...............................................................................................................................................					$	79,879	$	76,192

See accompanying notes.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 1 – Basis of Presentation

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

Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements.

The consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 30, 2017.

On August 16, 2017, we announced that our Board of Directors approved a 2-for-1 split of our common stock. Each Henry Schein, Inc. stockholder of record at the close of business on September 1, 2017 received a dividend of one additional share for every share held. Trading began on a split-adjusted basis on September 15, 2017 and has been retroactively reflected for all periods presented in this Form 10-Q.

Note 2 – Segment Data

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, animal health 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 animal health group serves animal health practices and clinics. Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions. Our global dental, animal health and medical groups serve practitioners in 33 countries worldwide.

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 and animal health clinics. Our value-added practice solutions include financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other services.

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

The following tables present information about our reportable and operating segments:

				Three Months Ended				Nine Months Ended
				September 30,		September 24,		September 30,		September 24,
				2017		2016		2017		2016
Net Sales:
	Health care distribution (1):
		Dental .....................................................................................................................................................................................		$	1,478,730	$	1,330,525	$	4,372,055	$	4,005,468
		Animal health ...........................................................................................................................................................................			882,580		790,279		2,586,850		2,415,290
		Medical ...................................................................................................................................................................................			690,761		639,648		1,861,074		1,716,590
			Total health care distribution ..................................................................................................................................................		3,052,071		2,760,452		8,819,979		8,137,348
	Technology and value-added services (2)...........................................................................................................................................				109,012		104,696		323,510		313,386
		Total .......................................................................................................................................................................................		$	3,161,083	$	2,865,148	$	9,143,489	$	8,450,734
*CS