Edgar Filing: HENRY SCHEIN INC

UNITED STATES

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 29, 2018

__ 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes X

No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 __

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 13(a) of the Exchange 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 29, 2018, there were 152,437,680 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 29, 2018 and December 30, 2017 ............................................................................................................................................			3

		Statements of Income for the three and nine months ended
			September 29, 2018 and September 30, 2017 .......................................................................................................................................................................		4

		Statements of Comprehensive Income for the three and nine months ended
			September 29, 2018 and September 30, 2017 .......................................................................................................................................................................		5

		Statement of Changes in Stockholders' Equity for the nine months ended
			September 29, 2018 ...............................................................................................................................................................................................................		6

		Statements of Cash Flows for the nine months ended
				September 29, 2018 and September 30, 2017 .......................................................................................................................................................................	7

		Notes to Consolidated Financial Statements ................................................................................................................................................................................			8
		Note 1 - Basis of Presentation ...............................................................................................................................................................................................			8
		Note 2 – Accounting Pronouncements Adopted and Critical Accounting Policies and Estimates ..........................................................................................			9
		Note 3 – Revenue from Contracts with Customers ................................................................................................................................................................			14
		Note 4 – Segment Data ..........................................................................................................................................................................................................			15
		Note 5 - Debt .........................................................................................................................................................................................................................			16
		Note 6 – Redeemable Noncontrolling Interests ......................................................................................................................................................................			18
		Note 7 – Comprehensive Income ...........................................................................................................................................................................................			19
		Note 8 – Fair Value Measurements ........................................................................................................................................................................................			21
		Note 9 – Business Acquisitions and Planned Divestiture ......................................................................................................................................................			24
		Note 10 – Plans of Restructuring ...........................................................................................................................................................................................			26
		Note 11 – Earnings Per Share ................................................................................................................................................................................................			27
		Note 12 – Income Taxes ........................................................................................................................................................................................................			27
		Note 13 – Derivatives and Hedging Activities .......................................................................................................................................................................			29
		Note 14 – Stock-Based Compensation ...................................................................................................................................................................................			29
		Note 15 – Supplemental Cash Flow Information ...................................................................................................................................................................			31
		Note 16 – Legal Proceedings .................................................................................................................................................................................................			32

ITEM 2.	Management's Discussion and Analysis of
		Financial Condition and Results of Operations ....................................................................................................................................................................			36

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk ..................................................................................................................................................				65

ITEM 4.	Controls and Procedures ...............................................................................................................................................................................................................				66

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings ...........................................................................................................................................................................................................................				67

ITEM 1A.	Risk Factors ....................................................................................................................................................................................................................................				71

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.....................................................................................................................................................				71


ITEM 6.	Exhibits ...........................................................................................................................................................................................................................................				72

	Signature .........................................................................................................................................................................................................................................				73

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 29,		December 30,
				2018		2017
				(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents ..............................................................................................................................................................			$	119,740	$	174,658
	Accounts receivable, net of reserves of $55,289 and $53,832.................................................................................................................				1,627,640		1,522,807
	Inventories, net .............................................................................................................................................................................				1,932,855		1,933,803
	Prepaid expenses and other .............................................................................................................................................................				513,717		454,752
			Total current assets ................................................................................................................................................................		4,193,952		4,086,020
Property and equipment, net ................................................................................................................................................................					374,051		375,001
Goodwill ..........................................................................................................................................................................................					2,685,681		2,301,331
Other intangibles, net ..........................................................................................................................................................................					618,201		669,641
Investments and other ........................................................................................................................................................................					518,425		432,002
			Total assets ..........................................................................................................................................................................	$	8,390,310	$	7,863,995

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable ..........................................................................................................................................................................			$	1,136,120	$	1,153,012
	Bank credit lines ............................................................................................................................................................................				1,144,881		741,653
	Current maturities of long-term debt .................................................................................................................................................				12,482		16,659
	Accrued expenses:
		Payroll and related .....................................................................................................................................................................			259,180		272,998
		Taxes ......................................................................................................................................................................................			180,163		188,873
		Other .......................................................................................................................................................................................			496,959		455,780
			Total current liabilities ............................................................................................................................................................		3,229,785		2,828,975
Long-term debt .................................................................................................................................................................................					1,000,315		907,756
Deferred income taxes ........................................................................................................................................................................					45,947		50,431
Other liabilities ..................................................................................................................................................................................					415,045		420,285
			Total liabilities ......................................................................................................................................................................		4,691,092		4,207,447

Redeemable noncontrolling interests .....................................................................................................................................................					282,502		832,138
Commitments and contingencies ..........................................................................................................................................................

Stockholders' equity:
	Preferred stock, $.01 par value, 1,000,000 shares authorized,
		none outstanding .......................................................................................................................................................................			-		-
	Common stock, $.01 par value, 480,000,000 shares authorized,
		152,437,680 outstanding on September 29, 2018 and 240,000,000 shares
		authorized, 153,690,146 outstanding on December 30, 2017.............................................................................................................			1,524		1,537
	Retained earnings ..........................................................................................................................................................................				3,191,260		2,940,029
	Accumulated other comprehensive loss .............................................................................................................................................				(219,649)		(130,067)
		Total Henry Schein, Inc. stockholders' equity ..................................................................................................................................			2,973,135		2,811,499
	Noncontrolling interests ..................................................................................................................................................................				443,581		12,911
			Total stockholders' equity .......................................................................................................................................................		3,416,716		2,824,410
		Total liabilities, redeemable noncontrolling interests and stockholders' equity........................................................................................		$	8,390,310	$	7,863,995

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 29,		September 30,		September 29,		September 30,
				2018		2017		2018		2017

Net sales ....................................................................................................................................................................................				$	3,279,678	$	3,161,083	$	9,826,793	$	9,143,489
Cost of sales ...............................................................................................................................................................................					2,391,118		2,325,029		7,141,569		6,645,342
		Gross profit ............................................................................................................................................................................			888,560		836,054		2,685,224		2,498,147
Operating expenses:
	Selling, general and administrative ................................................................................................................................................				668,011		622,506		2,027,138		1,874,644
	Litigation settlements .................................................................................................................................................................				38,488		-		38,488		5,325
	Transaction costs related to Animal Health spin-off.........................................................................................................................				7,282		-		18,670		-
	Restructuring costs .....................................................................................................................................................................				8,853		-		27,511		-
		Operating income ...................................................................................................................................................................			165,926		213,548		573,417		618,178
Other income (expense):
	Interest income .........................................................................................................................................................................				5,163		4,793		15,429		13,204
	Interest expense ........................................................................................................................................................................				(21,045)		(13,428)		(56,466)		(37,056)
	Other, net .................................................................................................................................................................................				(346)		(194)		(802)		489
		Income before taxes and equity in earnings
			of affiliates .........................................................................................................................................................................		149,698		204,719		531,578		594,815
Income taxes ..............................................................................................................................................................................					(29,401)		(59,340)		(124,084)		(156,276)
Equity in earnings of affiliates ........................................................................................................................................................					6,679		5,569		15,622		12,244
Net income .................................................................................................................................................................................					126,976		150,948		423,116		450,783
	Less: Net income attributable to noncontrolling interests ...................................................................................................................				(5,498)		(12,917)		(20,208)		(35,949)
Net income attributable to Henry Schein, Inc. ...................................................................................................................................				$	121,478	$	138,031	$	402,908	$	414,834

Earnings per share attributable to Henry Schein, Inc.:

	Basic .......................................................................................................................................................................................			$	0.80	$	0.88	$	2.63	$	2.64
	Diluted ....................................................................................................................................................................................			$	0.79	$	0.87	$	2.62	$	2.61

Weighted-average common shares outstanding:
	Basic .......................................................................................................................................................................................				152,533		156,914		152,970		157,386
	Diluted ....................................................................................................................................................................................				153,614		158,271		153,982		158,866

See accompanying notes.

Table of Contents

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

				Three Months Ended				Nine Months Ended
				September 29,		September 30,		September 29,		September 30,
				2018		2017		2018		2017

Net income .................................................................................................................................................................................				$	126,976	$	150,948	$	423,116	$	450,783

Other comprehensive income (loss), net of tax:
	Foreign currency translation gain (loss)...........................................................................................................................................				(10,582)		58,916		(106,154)		173,166

	Unrealized gain (loss) from foreign currency hedging
		activities ................................................................................................................................................................................			(379)		(34)		674		(1,274)

	Unrealized investment loss ...........................................................................................................................................................				(1)		(2)		(2)		(2)

	Pension adjustment gain (loss)......................................................................................................................................................				116		(353)		1,056		(1,063)

Other comprehensive income (loss), net of tax ..................................................................................................................................					(10,846)		58,527		(104,426)		170,827
Comprehensive income .................................................................................................................................................................					116,130		209,475		318,690		621,610
	Comprehensive income attributable to noncontrolling
	interests:
		Net income ............................................................................................................................................................................			(5,498)		(12,917)		(20,208)		(35,949)
		Foreign currency translation (gain) loss.........................................................................................................................................			2,589		(3,473)		14,844		(8,258)
			Comprehensive income attributable to noncontrolling
			interests .............................................................................................................................................................................		(2,909)		(16,390)		(5,364)		(44,207)

Comprehensive income attributable to Henry Schein, Inc. ...................................................................................................................				$	113,221	$	193,085	$	313,326	$	577,403

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 30, 2017 ...............................................................................................................................................................		153,690,146	$	1,537	$	-	$	2,940,029	$	(130,067)	$	12,911	$	2,824,410
Cumulative impact of adopting new accounting standards (Note 2)...........................................................................................................................		-		-		-		2,594		-		-		2,594
Net income (excluding $17,019 attributable to Redeemable
	noncontrolling interests) ..............................................................................................................................................................	-		-		-		402,908		-		3,189		406,097
Foreign currency translation loss (excluding loss of $13,752
	attributable to Redeemable noncontrolling interests) ...................................................................................................................................	-		-		-		-		(91,310)		(1,092)		(92,402)
Unrealized gain from foreign currency hedging activities,
	net of tax of $405.....................................................................................................................................................................	-		-		-		-		674		-		674
Unrealized investment loss, net of tax of $0................................................................................................................................................		-		-		-		-		(2)		-		(2)
Pension adjustment gain, including tax of $393.............................................................................................................................................		-		-		-		-		1,056		-		1,056
Dividends paid ...........................................................................................................................................................................		-		-		-		-		-		(396)		(396)
Other adjustments ........................................................................................................................................................................		-		-		(11)		-		-		712		701
Purchase of noncontrolling interests.......................................................................................................................................................		-		-		-		-		-		(207)		(207)
Change in fair value of redeemable securities ...............................................................................................................................................		-		-		(119,695)		-		-		-		(119,695)
Initial noncontrolling interests and adjustments related to
	business acquisitions.................................................................................................................................................................	-		-		-		-		-		428,464		428,464
Repurchase and retirement of common stock ...............................................................................................................................................		(1,521,208)		(15)		(20,865)		(93,226)		-		-		(114,106)
Stock issued upon exercise of stock options ...............................................................................................................................................		153,516		1		3,075		-		-		-		3,076
Stock-based compensation expense ........................................................................................................................................................		379,428		4		34,231		-		-		-		34,235
Shares withheld for payroll taxes ..........................................................................................................................................................		(267,573)		(3)		(18,107)		-		-		-		(18,110)
Settlement of stock-based compensation awards ............................................................................................................................................		3,371		-		(642)		-		-		-		(642)
Deferred tax benefit arising from acquisition of
	noncontrolling interest in partnership..................................................................................................................................................	-		-		60,969		-		-		-		60,969
Transfer of charges in excess of capital......................................................................................................................................................		-		-		61,045		(61,045)		-		-		-
Balance, September 29, 2018 ..............................................................................................................................................................		152,437,680	$	1,524	$	-	$	3,191,260	$	(219,649)	$	443,581	$	3,416,716

See accompanying notes.

Table of Contents

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

					Nine Months Ended
					September 29,		September 30,
					2018		2017

Cash flows from operating activities:
	Net income .......................................................................................................................................................................................				$	423,116	$	450,783
	Adjustments to reconcile net income to net cash provided by
		operating activities:
			Depreciation and amortization .....................................................................................................................................................			155,089		141,278
			Stock-based compensation expense ..............................................................................................................................................			34,235		31,987
			Provision for losses on trade and other accounts receivable ...............................................................................................................			7,870		6,981
			Provision for (benefit from) deferred income taxes ..........................................................................................................................			(6,282)		8,600
			Equity in earnings of affiliates .....................................................................................................................................................			(15,622)		(12,244)
			Distributions from equity affiliates ................................................................................................................................................			15,534		16,826
			Changes in unrecognized tax benefits ............................................................................................................................................			2,853		(6,653)
			Other .......................................................................................................................................................................................			590		6,031
			Changes in operating assets and liabilities, net of acquisitions:
				Accounts receivable ...............................................................................................................................................................		(155,579)		(226,577)
				Inventories ...........................................................................................................................................................................		(35,300)		27,336
				Other current assets ................................................................................................................................................................		(81,774)		(70,833)
				Accounts payable and accrued expenses ...................................................................................................................................		46,024		(66,014)
Net cash provided by operating activities ...............................................................................................................................................						390,754		307,501

Cash flows from investing activities:
	Purchases of fixed assets ....................................................................................................................................................................					(61,826)		(55,315)
	Payments for equity investments and business
		acquisitions, net of cash acquired .....................................................................................................................................................				(47,325)		(258,786)
	Other ...............................................................................................................................................................................................					(37,206)		(6,694)
Net cash used in investing activities .......................................................................................................................................................						(146,357)		(320,795)

Cash flows from financing activities:
	Proceeds from bank borrowings ...........................................................................................................................................................					404,098		193,550
	Proceeds from issuance of long-term debt ..............................................................................................................................................					115,000		200,440
	Principal payments for long-term debt ...................................................................................................................................................					(27,621)		(59,531)
	Debt issuance costs ............................................................................................................................................................................					(395)		(1,771)
	Proceeds from issuance of stock upon exercise of stock options .................................................................................................................					3,076		4,941
	Payments for repurchases of common stock ..........................................................................................................................................					(114,106)		(225,005)
	Payments for taxes related to shares withheld for employee taxes...............................................................................................................					(17,903)		(44,721)
	Distributions to noncontrolling stockholders ............................................................................................................................................					(15,767)		(23,921)
	Acquisitions of noncontrolling interests in subsidiaries ..............................................................................................................................					(664,898)		(27,914)
Net cash provided by (used in) financing activities ...................................................................................................................................						(318,516)		16,068

Effect of exchange rate changes on cash and cash equivalents ..................................................................................................................						19,201		14,724
Net change in cash and cash equivalents ................................................................................................................................................						(54,918)		17,498
Cash and cash equivalents, beginning of period .......................................................................................................................................						174,658		62,381
Cash and cash equivalents, end of period ...............................................................................................................................................					$	119,740	$	79,879

See accompanying notes.

Table of Contents

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 30, 2017.

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 29, 2018 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 29, 2018.

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. As a result of the stock split, we increased our authorized common shares from 240,000,000 to 480,000,000, effective May 31, 2018.

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 2 – Accounting Pronouncements Adopted and Critical Accounting Policies and Estimates

Accounting Pronouncements Adopted

InMay 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, Accounting Standards Codification (“ASC”) 606 (“Topic 606”). We adopted the provisions of this standard as of December 31, 2017, on a modified retrospective basis. We applied the requirements of the new standard only to contracts that were not completed as of the adoption date. We recorded an immaterial adjustment to the opening balance of retained earnings for the adoption of Topic 606. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The impact of the new standard on our consolidated statements of income, which we expect to be immaterial on an ongoing basis, is primarily related to software sales and sales commissions and is described as follows:

Software Sales

For software licenses sold together with post contract support (PCS), we previously deferred software revenue if it did not have vendor-specific evidence of fair value of the PCS. Under Topic 606, the concept of vendor-specific objective evidence is eliminated and there are no cases where revenue is deferred due to a lack of standalone selling price. In addition, we previously recognized revenue from term licenses ratably over the contract term. Under Topic 606, such licenses represent a right to use intellectual property and therefore require upfront recognition. Furthermore, certain upfront fees related to service arrangements were previously deferred and recognized over the estimated customer life. Under Topic 606, the period over which we will recognize these fees is reduced, as the upfront fee represents additional contract price which will be allocated to the performance obligations in the contract and recognized as those performance obligations are satisfied, rather than being amortized over the estimated customer life. Based on the aforementioned changes, such software revenue will be recognized sooner than under the previous revenue recognition standard.

Sales Commissions

We previously recognized sales commissions as an expense when incurred. Under Topic 606, we defer such sales commissions as costs to obtain a contract when the costs are incremental and expected to be recovered. Deferred sales commissions are amortized over the estimated customer relationship period. We apply the practical expedient to expense, as incurred, commissions with an expected amortization period of one year or less.

Table of Contents

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

The impact of adoption on our consolidated balance sheet and income statement was as follows:

As of

September 29, 2018

Balances

Effect of

Without Adoption

Change

Balance Sheet

Reported

of Topic 606

Increase/(Decrease)

Assets:

Prepaid expenses and other ........................................................................................................................................