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 24, 2016

__ 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 __

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 24, 2016, there were 80,490,951 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 24, 2016 and December 26, 2015 ............................................................................		3

		Statements of Income for the three and nine months ended
			September 24, 2016 and September 26, 2015 .......................................................................................................	4

		Statements of Comprehensive Income for the three and nine months ended
			September 24, 2016 and September 26, 2015 ........................................................................................................	5

		Statement of Changes in Stockholders' Equity for the nine months ended
			September 24, 2016 ................................................................................................................................................	6

		Statements of Cash Flows for the nine months ended
			September 24, 2016 and September 26, 2015 ........................................................................................................	7

		Notes to Consolidated Financial Statements ................................................................................................................		8

ITEM 2.	Management's Discussion and Analysis of
		Financial Condition and Results of Operations ........................................................................................................		23

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk .....................................................................................			43

ITEM 4.	Controls and Procedures ...............................................................................................................................................			43

PART II. OTHER INFORMATION



ITEM 1.	Legal Proceedings ..........................................................................................................................................................			44

ITEM 1A.	Risk Factors ...................................................................................................................................................................			44

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds ......................................................................................			45

ITEM 5.	Other Information .........................................................................................................................................................			46

ITEM 6.	Exhibits ..........................................................................................................................................................................			47

	Signature ........................................................................................................................................................................			48

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HENRY SCHEIN, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

				September 24,		December 26,
				2016		2015
				(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents ..............................................................................................................................................................			$	76,192	$	72,086
	Accounts receivable, net of reserves of $78,460 and $77,008 ................................................................................................................				1,367,604		1,229,816
	Inventories, net .............................................................................................................................................................................				1,468,312		1,509,957
	Deferred income taxes ...................................................................................................................................................................				-		58,159
	Prepaid expenses and other .............................................................................................................................................................				373,847		361,082
			Total current assets ................................................................................................................................................................		3,285,955		3,231,100
Property and equipment, net ...............................................................................................................................................................					324,108		318,476
Goodwill ..........................................................................................................................................................................................					1,975,566		1,907,593
Other intangibles, net .........................................................................................................................................................................					593,260		592,971
Investments and other .......................................................................................................................................................................					454,704		454,600
			Total assets ..........................................................................................................................................................................	$	6,633,593	$	6,504,740

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable .........................................................................................................................................................................			$	931,090	$	1,005,798
	Bank credit lines ...........................................................................................................................................................................				333,123		328,631
	Current maturities of long-term debt .................................................................................................................................................				17,460		17,331
	Accrued expenses:
		Payroll and related ....................................................................................................................................................................			249,938		258,416
		Taxes ......................................................................................................................................................................................			158,157		161,760
		Other ......................................................................................................................................................................................			349,887		375,061
			Total current liabilities ............................................................................................................................................................		2,039,655		2,146,997
Long-term debt .................................................................................................................................................................................					718,024		463,752
Deferred income taxes .......................................................................................................................................................................					143,612		252,862
Other liabilities ..................................................................................................................................................................................					257,755		212,121
			Total liabilities ......................................................................................................................................................................		3,159,046		3,075,732

Redeemable noncontrolling interests .....................................................................................................................................................					571,369		542,194
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,
		80,644,289 outstanding on September 24, 2016 and
		82,415,320 outstanding on December 26, 2015 ..............................................................................................................................			806		824
	Additional paid-in capital ...............................................................................................................................................................				119,918		207,374
	Retained earnings ..........................................................................................................................................................................				2,996,773		2,895,997
	Accumulated other comprehensive loss .............................................................................................................................................				(222,180)		(219,939)
		Total Henry Schein, Inc. stockholders' equity .................................................................................................................................			2,895,317		2,884,256
	Noncontrolling interests ..................................................................................................................................................................				7,861		2,558
			Total stockholders' equity .......................................................................................................................................................		2,903,178		2,886,814
		Total liabilities, redeemable noncontrolling interests and stockholders' equity .......................................................................................		$	6,633,593	$	6,504,740

	HENRY SCHEIN, INC.
	CONSOLIDATED STATEMENTS OF INCOME
	(in thousands, except per share data)
	(unaudited)

					Three Months Ended				Nine Months Ended
				September 24,		September 26,		September 24,		September 26,
				2016		2015		2016		2015

Net sales ....................................................................................................................................................................................				$	2,865,148	$	2,685,835	$	8,450,734	$	7,778,801
Cost of sales ...............................................................................................................................................................................					2,075,657		1,936,927		6,078,622		5,565,820
		Gross profit ...........................................................................................................................................................................			789,491		748,908		2,372,112		2,212,981
Operating expenses:
	Selling, general and administrative ................................................................................................................................................				583,400		551,588		1,784,709		1,657,180
	Restructuring costs ....................................................................................................................................................................				5,370		8,438		29,811		22,522
		Operating income ...................................................................................................................................................................			200,721		188,882		557,592		533,279
Other income (expense):
	Interest income .........................................................................................................................................................................				3,141		3,129		10,045		9,841
	Interest expense ........................................................................................................................................................................				(7,488)		(6,297)		(21,982)		(18,850)
	Other, net .................................................................................................................................................................................				(199)		(277)		3,206		(334)
		Income before taxes and equity in earnings
			of affiliates .........................................................................................................................................................................		196,175		185,437		548,861		523,936
Income taxes ..............................................................................................................................................................................					(56,601)		(49,232)		(159,099)		(152,143)
Equity in earnings of affiliates .......................................................................................................................................................					5,717		5,191		13,160		10,791
Net income .................................................................................................................................................................................					145,291		141,396		402,922		382,584
	Less: Net income attributable to noncontrolling interests ...................................................................................................................				(11,578)		(13,661)		(35,360)		(33,474)
Net income attributable to Henry Schein, Inc. ...................................................................................................................................				$	133,713	$	127,735	$	367,562	$	349,110

Earnings per share attributable to Henry Schein, Inc.:

	Basic ......................................................................................................................................................................................			$	1.65	$	1.54	$	4.52	$	4.20
	Diluted ....................................................................................................................................................................................			$	1.63	$	1.52	$	4.47	$	4.14

Weighted-average common shares outstanding:
	Basic ......................................................................................................................................................................................				80,896		82,858		81,300		83,042
	Diluted ....................................................................................................................................................................................				81,855		84,084		82,317		84,312

See accompanying notes.

	HENRY SCHEIN, INC.
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	(in thousands)
	(unaudited)

				Three Months Ended				Nine Months Ended
				September 24,		September 26,		September 24,		September 26,
				2016		2015		2016		2015

Net income .................................................................................................................................................................................				$	145,291	$	141,396	$	402,922	$	382,584

Other comprehensive loss, net of tax:
	Foreign currency translation loss....................................................................................................................................................				(6,463)		(38,730)		(2,041)		(112,877)

	Unrealized gain (loss) from foreign currency hedging
		activities ................................................................................................................................................................................			(603)		1,924		1,026		1,270

	Unrealized investment gain ..........................................................................................................................................................				-		-		-		2

	Pension adjustment gain..............................................................................................................................................................				209		1,363		10		2,537

Other comprehensive loss, net of tax ...............................................................................................................................................					(6,857)		(35,443)		(1,005)		(109,068)
Comprehensive income .................................................................................................................................................................					138,434		105,953		401,917		273,516
	Comprehensive income attributable to noncontrolling
	interests:
		Net income ............................................................................................................................................................................			(11,578)		(13,661)		(35,360)		(33,474)
		Foreign currency translation loss (gain) ........................................................................................................................................			(716)		1,498		(1,236)		4,518
			Comprehensive income attributable to noncontrolling
			interests ............................................................................................................................................................................		(12,294)		(12,163)		(36,596)		(28,956)

Comprehensive income attributable to Henry Schein, Inc. ...................................................................................................................				$	126,140	$	93,790	$	365,321	$	244,560

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, except share and per share data)

									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 26, 2015 ..............................................................................................................................................................		82,415,320	$	824	$	207,374	$	2,895,997	$	(219,939)	$	2,558	$	2,886,814
Net income (excluding $34,849 attributable to Redeemable
	noncontrolling interests) .............................................................................................................................................................	-		-		-		367,562		-		511		368,073
Foreign currency translation gain (loss) (excluding gain of $1,228
	attributable to Redeemable noncontrolling interests) ...................................................................................................................................	-		-		-		-		(3,277)		8		(3,269)
Unrealized gain from foreign currency hedging activities
	net of tax of $290 ....................................................................................................................................................................	-		-		-		-		1,026		-		1,026
Pension adjustment gain, net of tax benefit of $23..........................................................................................................................................		-		-		-		-		10		-		10
Dividends paid ..........................................................................................................................................................................		-		-		-		-		-		(370)		(370)
Initial noncontrolling interests and adjustments related to
	business acquisitions ................................................................................................................................................................	-		-		-		-		-		5,144		5,144
Change in fair value of redeemable securities ..............................................................................................................................................		-		-		(49,648)		-		-		-		(49,648)
Other adjustments .......................................................................................................................................................................		-		-		2		-		-		10		12
Repurchase and retirement of common stock ...............................................................................................................................................		(2,180,440)		(22)		(83,193)		(266,786)		-		-		(350,001)
Stock issued upon exercise of stock options,
	including tax benefit of $16,528 ......................................................................................................................................................	177,837		1		26,281		-		-		-		26,282
Stock-based compensation expense .......................................................................................................................................................		367,107		4		43,623		-		-		-		43,627
Shares withheld for payroll taxes .........................................................................................................................................................		(163,478)		(1)		(28,778)		-		-		-		(28,779)
Settlement of stock-based compensation awards ...........................................................................................................................................		27,943		-		4,257		-		-		-		4,257

Balance, September 24, 2016 .............................................................................................................................................................		80,644,289	$	806	$	119,918	$	2,996,773	$	(222,180)	$	7,861	$	2,903,178

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

					Nine Months Ended
					September 24,		September 26,
					2016		2015

Cash flows from operating activities:
	Net income ......................................................................................................................................................................................				$	402,922	$	382,584
	Adjustments to reconcile net income to net cash provided by
		operating activities:
			Depreciation and amortization ....................................................................................................................................................			125,829		118,891
			Stock-based compensation expense .............................................................................................................................................			43,627		35,080
			Provision for losses on trade and other accounts receivable ...............................................................................................................			1,736		2,878
			Benefit from deferred income taxes ..............................................................................................................................................			(13,425)		(7,818)
			Equity in earnings of affiliates .....................................................................................................................................................			(13,160)		(10,791)
			Distributions from equity affiliates ...............................................................................................................................................			12,104		11,316
			Changes in unrecognized tax benefits ...........................................................................................................................................			4,252		8,541
			Other ......................................................................................................................................................................................			8,392		7,131
			Changes in operating assets and liabilities, net of acquisitions:
				Accounts receivable ...............................................................................................................................................................		(131,586)		(111,890)
				Inventories ...........................................................................................................................................................................		48,513		(108,268)
				Other current assets ...............................................................................................................................................................		(35,781)		(63,485)
				Accounts payable and accrued expenses ...................................................................................................................................		(102,470)		24,361
Net cash provided by operating activities ...............................................................................................................................................						350,953		288,530

Cash flows from investing activities:
	Purchases of fixed assets ....................................................................................................................................................................					(44,525)		(52,164)
	Payments for equity investments and business
		acquisitions, net of cash acquired .....................................................................................................................................................				(126,543)		(142,078)
	Proceeds from sales of available-for-sale securities ..................................................................................................................................					-		20
	Other ..............................................................................................................................................................................................					(8,766)		(9,247)
Net cash used in investing activities .......................................................................................................................................................						(179,834)		(203,469)

Cash flows from financing activities:
	Proceeds from (repayments of) bank borrowings .....................................................................................................................................					(3,274)		4,920
	Proceeds from issuance of long-term debt ..............................................................................................................................................					260,000		135,000
	Debt issuance costs ............................................................................................................................................................................					(233)		(150)
	Principal payments for long-term debt ...................................................................................................................................................					(9,293)		(70,585)
	Proceeds from issuance of stock upon exercise of stock options .................................................................................................................					9,754		11,625
	Payments for repurchases of common stock ..........................................................................................................................................					(350,001)		(150,863)
	Excess tax benefits related to stock-based compensation .........................................................................................................................					(463)		2,932
	Distributions to noncontrolling shareholders ...........................................................................................................................................					(26,366)		(22,316)
	Acquisitions of noncontrolling interests in subsidiaries ..............................................................................................................................					(51,265)		(8,570)
Net cash used in financing activities ......................................................................................................................................................						(171,141)		(98,007)

Effect of exchange rate changes on cash and cash equivalents ..................................................................................................................						4,128		(16,047)
Net change in cash and cash equivalents ................................................................................................................................................						4,106		(28,993)
Cash and cash equivalents, beginning of period .......................................................................................................................................						72,086		89,474
Cash and cash equivalents, end of period ...............................................................................................................................................					$	76,192	$	60,481

See accompanying notes.

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 26, 2015.

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 24, 2016 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 31, 2016.

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.

See accompanying notes.

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 24,		September 26,		September 24,		September 26,
				2016		2015		2016		2015
Net Sales:
	Health care distribution (1):
		Dental .....................................................................................................................................................................................		$	1,330,525	$	1,266,321	$	4,005,468	$	3,837,137
		Animal health ...........................................................................................................................................................................			790,279		732,533		2,415,290		2,165,415
		Medical ...................................................................................................................................................................................			639,648		597,243		1,716,590		1,511,295
			Total health care distribution ..................................................................................................................................................		2,760,452		2,596,097		8,137,348		7,513,847
	Technology and value-added services (2)...........................................................................................................................................				104,696		89,738		313,386		264,954
		Total .......................................................................................................................................................................................		$	2,865,148	$	2,685,835	$	8,450,734	$	7,778,801
*CS											*CE

(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.


				Three Months Ended				Nine Months Ended
				September 24,		September 26,		September 24,		September 26,
				2016		2015		2016		20