Edgar Filing: HENRY SCHEIN INC

UNITED STATES

Table of Contents

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 July 1, 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 August 2, 2017, there were 79,055,985 shares of the registrant’s common stock outstanding.

Table of Contents



HENRY SCHEIN, INC.
INDEX
					Page

PART I. FINANCIAL INFORMATION

ITEM 1.	Consolidated Financial Statements:

		Balance Sheets as of July 1, 2017 and December 31, 2016.............................................................................................................................................................			3

		Statements of Income for the three and six months ended
			July 1, 2017 and June 25, 2016.................................................................................................................................................................................................		4

		Statements of Comprehensive Income for the three and six months ended
			July 1, 2017 and June 25, 2016.................................................................................................................................................................................................		5

		Statement of Changes in Stockholders' Equity for the six months ended
			July 1, 2017...............................................................................................................................................................................................................................		6

		Statements of Cash Flows for the six months ended
				July 1, 2017 and June 25, 2016.................................................................................................................................................................................................	7

		Notes to Consolidated Financial Statements...................................................................................................................................................................................			8
		Note 1 – Basis of Presentation...................................................................................................................................................................................................			8
		Note 2 – Segment Data...............................................................................................................................................................................................................			8
		Note 3 - Debt.............................................................................................................................................................................................................................			9
		Note 4 – Redeemable Noncontrolling Interests..........................................................................................................................................................................			11
		Note 5 – Comprehensive Income...............................................................................................................................................................................................			12
		Note 6 – Fair Value Measurements............................................................................................................................................................................................			14
		Note 7 – Business Acquisitions.................................................................................................................................................................................................			16
		Note 8 – Plan of Restructuring...................................................................................................................................................................................................			17
		Note 9 – Earnings Per Share.......................................................................................................................................................................................................			18
		Note 10 – Income Taxes.............................................................................................................................................................................................................			18
		Note 11 – Derivatives and Hedging Activities...........................................................................................................................................................................			19
		Note 12 – Stock-Based Compensation......................................................................................................................................................................................			19
		Note 13 – Supplemental Cash Flow Information......................................................................................................................................................................			21
		Note 14 – Legal Proceedings......................................................................................................................................................................................................			21

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

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk....................................................................................................................................................				45

ITEM 4.	Controls and Procedures...................................................................................................................................................................................................................				45

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings..............................................................................................................................................................................................................................				46

ITEM 1A.	Risk Factors........................................................................................................................................................................................................................................				47

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.......................................................................................................................................................				47

ITEM 5.	Other Information..............................................................................................................................................................................................................................				48

ITEM 6.	Exhibits................................................................................................................................................................................................................................................				49

	Signature............................................................................................................................................................................................................................................				50

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)

				July 1,		December 31,
				2017		2016
				(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents ..............................................................................................................................................................			$	74,654	$	62,381
	Accounts receivable, net of reserves of $89,145 and $90,329 ...................................................................................................................				1,409,060		1,254,139
	Inventories, net .............................................................................................................................................................................				1,567,159		1,635,750
	Prepaid expenses and other .............................................................................................................................................................				412,904		360,510
			Total current assets ...............................................................................................................................................................		3,463,777		3,312,780
Property and equipment, net ................................................................................................................................................................					351,381		333,906
Goodwill ..........................................................................................................................................................................................					2,172,563		2,019,740
Other intangibles, net .........................................................................................................................................................................					636,813		621,180
Investments and other ........................................................................................................................................................................					472,922		442,790
			Total assets ..........................................................................................................................................................................	$	7,097,456	$	6,730,396

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable .........................................................................................................................................................................			$	882,674	$	977,249
	Bank credit lines ............................................................................................................................................................................				577,477		437,476
	Current maturities of long-term debt ..................................................................................................................................................				17,241		65,923
	Accrued expenses:
		Payroll and related .....................................................................................................................................................................			246,402		266,463
		Taxes ......................................................................................................................................................................................			152,719		151,750
		Other ......................................................................................................................................................................................			353,432		391,785
			Total current liabilities ............................................................................................................................................................		2,229,945		2,290,646
Long-term debt .................................................................................................................................................................................					807,625		715,457
Deferred income taxes .........................................................................................................................................................................					89,756		51,589
Other liabilities ..................................................................................................................................................................................					288,478		264,264
			Total liabilities ......................................................................................................................................................................		3,415,804		3,321,956

Redeemable noncontrolling interests .....................................................................................................................................................					747,022		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,
		79,194,792 outstanding on July 01, 2017 and
		79,402,505 outstanding on December 31, 2016 ..................................................................................................................................			792		794
	Additional paid-in capital ................................................................................................................................................................				-		127,536
	Retained earnings ..........................................................................................................................................................................				3,134,989		2,981,777
	Accumulated other comprehensive loss .............................................................................................................................................				(209,526)		(317,041)
		Total Henry Schein, Inc. stockholders' equity ..................................................................................................................................			2,926,255		2,793,066
	Noncontrolling interests .................................................................................................................................................................				8,375		7,738
			Total stockholders' equity .......................................................................................................................................................		2,934,630		2,800,804
		Total liabilities, redeemable noncontrolling interests and stockholders' equity ........................................................................................		$	7,097,456	$	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				Six Months Ended
				July 1,		June 25,		July 1,		June 25,
				2017		2016		2017		2016

Net sales ....................................................................................................................................................................................				$	3,059,458	$	2,872,630	$	5,982,406	$	5,585,586
Cost of sales ...............................................................................................................................................................................					2,220,285		2,071,161		4,320,313		4,006,275
		Gross profit ............................................................................................................................................................................			839,173		801,469		1,662,093		1,579,311
Operating expenses:
	Selling, general and administrative .................................................................................................................................................				628,511		600,409		1,257,463		1,197,999
	Restructuring costs ....................................................................................................................................................................				-		20,383		-		24,441
		Operating income ....................................................................................................................................................................			210,662		180,677		404,630		356,871
Other income (expense):
	Interest income ..........................................................................................................................................................................				4,107		3,556		8,411		6,904
	Interest expense ........................................................................................................................................................................				(12,198)		(7,367)		(23,628)		(14,494)
	Other, net .................................................................................................................................................................................				728		268		683		3,405
		Income before taxes and equity in earnings
			of affiliates ..........................................................................................................................................................................		203,299		177,134		390,096		352,686
Income taxes ...............................................................................................................................................................................					(58,306)		(48,965)		(96,936)		(102,498)
Equity in earnings of affiliates .........................................................................................................................................................					4,589		4,929		6,675		7,443
Net income .................................................................................................................................................................................					149,582		133,098		299,835		257,631
	Less: Net income attributable to noncontrolling interests ...................................................................................................................				(13,527)		(13,001)		(23,032)		(23,782)
Net income attributable to Henry Schein, Inc. .....................................................................................................................................				$	136,055	$	120,097	$	276,803	$	233,849

Earnings per share attributable to Henry Schein, Inc.:

	Basic .......................................................................................................................................................................................			$	1.72	$	1.47	$	3.51	$	2.87
	Diluted ....................................................................................................................................................................................			$	1.71	$	1.46	$	3.48	$	2.83

Weighted-average common shares outstanding:
	Basic .......................................................................................................................................................................................				78,874		81,458		78,839		81,516
	Diluted ....................................................................................................................................................................................				79,538		82,394		79,630		82,565

See accompanying notes.

Table of Contents

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

				Three Months Ended				Six Months Ended
				July 1,		June 25,		July 1,		June 25,
				2017		2016		2017		2016

Net income .................................................................................................................................................................................				$	149,582	$	133,098	$	299,835	$	257,631

Other comprehensive income (loss), net of tax:
	Foreign currency translation gain (loss)..........................................................................................................................................				72,798		(5,568)		114,250		4,422

	Unrealized gain (loss) from foreign currency hedging
		activities ...............................................................................................................................................................................			1,621		12		(1,240)		1,629

	Pension adjustment gain (loss)......................................................................................................................................................				(794)		194		(710)		(199)

Other comprehensive income (loss), net of tax ...................................................................................................................................					73,625		(5,362)		112,300		5,852
Comprehensive income .................................................................................................................................................................					223,207		127,736		412,135		263,483
	Comprehensive income attributable to noncontrolling
	interests:
		Net income ............................................................................................................................................................................			(13,527)		(13,001)		(23,032)		(23,782)
		Foreign currency translation loss (gain) .......................................................................................................................................			(1,332)		452		(4,785)		(520)
			Comprehensive income attributable to noncontrolling
			interests ...........................................................................................................................................................................		(14,859)		(12,549)		(27,817)		(24,302)

Comprehensive income attributable to Henry Schein, Inc. ....................................................................................................................				$	208,348	$	115,187	$	384,318	$	239,181

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 .........................................................................................................................................................................		79,402,505	$	794	$	127,536	$	2,981,777	$	(317,041)	$	7,738	$	2,800,804
Net income (excluding $22,740 attributable to Redeemable
	noncontrolling interests) .......................................................................................................................................................................	-		-		-		276,803		-		292		277,095
Foreign currency translation gain (excluding gain of $4,601
	attributable to Redeemable noncontrolling interests) .............................................................................................................................................	-		-		-		-		109,465		184		109,649
Unrealized loss from foreign currency hedging activities,
	net of tax benefit of $64..........................................................................................................................................................................	-		-		-		-		(1,240)		-		(1,240)
Pension adjustment gain, net of tax benefit of $332....................................................................................................................................................		-		-		-		-		(710)		-		(710)
Dividends paid .....................................................................................................................................................................................		-		-		-		-		-		(200)		(200)
Other adjustments ..................................................................................................................................................................................		-		-		29		-		-		361		390
Change in fair value of redeemable securities ..........................................................................................................................................................		-		-		(129,009)		-		-		-		(129,009)
Repurchase and retirement of common stock ..........................................................................................................................................................		(596,792)		(6)		(22,170)		(77,830)		-		-		(100,006)
Stock issued upon exercise of stock options,
	including tax benefit of $841 ....................................................................................................................................................................	89,193		-		3,860		-		-		-		3,860
Stock-based compensation expense ..................................................................................................................................................................		558,929		6		19,349		-		-		-		19,355
Shares withheld for payroll taxes ....................................................................................................................................................................		(259,043)		(2)		(44,923)		-		-		-		(44,925)
Liability for cash settlement of stock-based compensation
	awards.........................................................................................................................................................................................	-		-		(433)		-		-		-		(433)
Transfer of charges in excess of capital..................................................................................................................................................................		-		-		45,761		(45,761)		-		-		-

Balance, July 01, 2017 ..............................................................................................................................................................................		79,194,792	$	792	$	-	$	3,134,989	$	(209,526)	$	8,375	$	2,934,630

See accompanying notes.

Table of Contents

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

					Six Months Ended
					July 1,		June 25,
					2017		2016

Cash flows from operating activities:
	Net income .......................................................................................................................................................................................				$	299,835	$	257,631
	Adjustments to reconcile net income to net cash provided by
		operating activities:
			Depreciation and amortization ..........................................................................................................................................................			92,538		83,398
			Stock-based compensation expense ..............................................................................................................................................			19,355		27,456
			Provision for losses on trade and other accounts receivable ...............................................................................................................			4,049		790
			Provision for (benefit from) deferred income taxes ............................................................................................................................			4,415		(4,658)
			Equity in earnings of affiliates ......................................................................................................................................................			(6,675)		(7,443)
			Distributions from equity affiliates ................................................................................................................................................			9,678		6,337
			Changes in unrecognized tax benefits ............................................................................................................................................			(7,627)		2,451
			Other ......................................................................................................................................................................................			5,015		2,361
			Changes in operating assets and liabilities, net of acquisitions:
				Accounts receivable ..............................................................................................................................................................		(122,938)		(56,702)
				Inventories ...........................................................................................................................................................................		115,800		34,395
				Other current assets ...............................................................................................................................................................		(57,699)		(38,876)
				Accounts payable and accrued expenses ...................................................................................................................................		(179,607)		(107,701)
Net cash provided by operating activities ...............................................................................................................................................						176,139		199,439

Cash flows from investing activities:
	Purchases of fixed assets ....................................................................................................................................................................					(36,965)		(26,180)
	Payments for equity investments and business
		acquisitions, net of cash acquired .....................................................................................................................................................				(149,586)		(92,441)
	Other ..............................................................................................................................................................................................					(4,872)		(1,765)
Net cash used in investing activities ......................................................................................................................................................						(191,423)		(120,386)

Cash flows from financing activities:
	Proceeds from (repayments of) bank borrowings ......................................................................................................................................					139,262		(97,479)
	Proceeds from issuance of long-term debt ...............................................................................................................................................					100,000		244,000
	Debt issuance costs ...........................................................................................................................................................................					(1,133)		(233)
	Principal payments for long-term debt ....................................................................................................................................................					(59,184)		(7,921)
	Proceeds from issuance of stock upon exercise of stock options .................................................................................................................					4,701		9,059
	Payments for repurchases of common stock ............................................................................................................................................					(100,006)		(157,009)
	Payments for taxes related to shares withheld for employee taxes.................................................................................................................					(44,414)		(26,567)
	Distributions to noncontrolling shareholders ..........................................................................................................................................					(19,601)		(20,160)
	Acquisitions of noncontrolling interests in subsidiaries ............................................................................................................................					(4,151)		(35,632)
Net cash provided by (used in) financing activities ...................................................................................................................................						15,474		(91,942)

Effect of exchange rate changes on cash and cash equivalents ....................................................................................................................						12,083		4,363
Net change in cash and cash equivalents ................................................................................................................................................						12,273		(8,526)
Cash and cash equivalents, beginning of period .......................................................................................................................................						62,381		72,086
Cash and cash equivalents, end of period ...............................................................................................................................................					$	74,654	$	63,560

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 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 six months ended July 1, 2017 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 30, 2017.

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 32 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				Six Months Ended
				July 1,		June 25,		July 1,		June 25,
				2017		2016		2017		2016
Net Sales:
	Health care distribution (1):
		Dental ......................................................................................................................................................................................		$	1,488,167	$	1,373,188	$	2,893,325	$	2,674,943
		Animal health ............................................................................................................................................................................			891,331		853,598		1,704,270		1,625,011
		Medical ....................................................................................................................................................................................			571,427		538,825		1,170,313		1,076,942
			Total health care distribution ...................................................................................................................................................		2,950,925		2,765,611		5,767,908		5,376,896
	Technology and value-added services (2)............................................................................................................................................				108,533		107,019		214,498		208,690
		Total .......................................................................................................................................................................................		$	3,059,458	$	2,872,630	$	5,982,406	$	5,585,586
*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.