10-Q 1 the10q_1q18.htm THE 1Q18 QUARTERLY 10-Q REPORT 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 March 31, 2018

or                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

__         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, 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  __

(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 

As of May 2, 2018there were 154,025,003 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 March 31, 2018 and December 30, 2017..................................................................................................................................................  

3

 

 

 

 

 

 

 

 

 

 

Statements of Income for the three months ended

 

 

 

 

 

March 31, 2018 and April 1, 2017.......................................................................................................................................................................................  

4

 

 

 

 

 

 

 

 

 

 

Statements of Comprehensive Income for the three months ended

 

 

 

 

 

March 31, 2018 and April 1, 2017.......................................................................................................................................................................................  

5

 

 

 

 

 

 

 

 

 

 

Statement of Changes in Stockholders' Equity for the three months ended

 

 

 

 

 

March 31, 2018.....................................................................................................................................................................................................................  

6

 

 

 

 

 

 

 

 

 

 

Statements of Cash Flows for the three months ended

 

 

 

 

 

March 31, 2018 and April 1, 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..........................................................................................................................................................................................................................  

8

 

 

 

     Note 3 – Revenue from Contracts with Customers..............................................................................................................................................................  

13

 

 

 

     Note 4 – Segment Data..........................................................................................................................................................................................................  

13

 

 

 

     Note 5 - Debt........................................................................................................................................................................................................................  

15

 

 

 

     Note 6 – Redeemable Noncontrolling Interests.....................................................................................................................................................................  

17

 

 

 

     Note 7 – Comprehensive Income..........................................................................................................................................................................................  

18

 

 

 

     Note 8 – Fair Value Measurements.......................................................................................................................................................................................  

19

 

 

 

     Note 9 – Business Acquisitions............................................................................................................................................................................................  

21

 

 

 

     Note 10 – Plans of Restructuring..........................................................................................................................................................................................  

22

 

 

 

     Note 11 – Earnings Per Share................................................................................................................................................................................................  

23

 

 

 

     Note 12 – Income Taxes........................................................................................................................................................................................................  

23

 

 

 

     Note 13 – Derivatives and Hedging Activities......................................................................................................................................................................  

24

 

 

 

     Note 14 – Stock-Based Compensation.................................................................................................................................................................................  

25

 

 

 

     Note 15 – Supplemental Cash Flow Information.................................................................................................................................................................  

27

 

 

 

     Note 16 – Legal Proceedings.................................................................................................................................................................................................  

27

 

 

 

     Note 17 – Subsequent Events...............................................................................................................................................................................................  

30

 

 

 

 

 

 

 

ITEM 2.

 

Management's Discussion and Analysis of  

 

 

 

 

Financial Condition and Results of Operations..................................................................................................................................................................  

31

 

 

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk...............................................................................................................................................  

53

 

 

 

 

 

 

 

ITEM 4.

 

Controls and Procedures..............................................................................................................................................................................................................  

54

 

 

 

 

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings.........................................................................................................................................................................................................................  

55

 

 

 

 

 

 

 

ITEM 1A.

 

Risk Factors...................................................................................................................................................................................................................................  

57

 

 

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.................................................................................................................................................  

57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM 6.

 

Exhibits...........................................................................................................................................................................................................................................  

58

 

 

 

 

 

 

 

 

 

Signature.......................................................................................................................................................................................................................................  

59

 

 

   

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HENRY SCHEIN, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

 

 

March 31,

 

December 30,

 

 

 

 

 

2018

 

2017

 

 

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents ..............................................................................................................................................................  

 

$

99,235

 

$

174,658

 

Accounts receivable, net of reserves of $57,351 and $53,832 ...................................................................................................................  

 

 

1,576,390

 

 

1,522,807

 

Inventories, net .............................................................................................................................................................................  

 

 

2,015,069

 

 

1,933,803

 

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

 

 

430,111

 

 

454,752

 

 

 

Total current assets ...............................................................................................................................................................  

 

 

4,120,805

 

 

4,086,020

Property and equipment, net ................................................................................................................................................................  

 

 

377,002

 

 

375,001

Goodwill ..........................................................................................................................................................................................  

 

 

2,317,873

 

 

2,301,331

Other intangibles, net .........................................................................................................................................................................  

 

 

649,465

 

 

669,641

Investments and other ........................................................................................................................................................................  

 

 

449,731

 

 

432,002

 

 

 

Total assets ..........................................................................................................................................................................  

 

$

7,914,876

 

$

7,863,995

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable .........................................................................................................................................................................  

 

$

1,020,739

 

$

1,153,012

 

Bank credit lines ............................................................................................................................................................................  

 

 

954,140

 

 

741,653

 

Current maturities of long-term debt ..................................................................................................................................................  

 

 

14,164

 

 

16,659

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll and related .....................................................................................................................................................................  

 

 

234,704

 

 

272,998

 

 

Taxes ......................................................................................................................................................................................  

 

 

214,377

 

 

188,873

 

 

Other ......................................................................................................................................................................................  

 

 

418,167

 

 

455,780

 

 

 

Total current liabilities ............................................................................................................................................................  

 

 

2,856,291

 

 

2,828,975

Long-term debt .................................................................................................................................................................................  

 

 

1,000,515

 

 

907,756

Deferred income taxes .........................................................................................................................................................................  

 

 

54,453

 

 

50,431

Other liabilities ..................................................................................................................................................................................  

 

 

421,684

 

 

420,285

 

 

 

Total liabilities ......................................................................................................................................................................  

 

 

4,332,943

 

 

4,207,447

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests .....................................................................................................................................................  

 

 

670,017

 

 

832,138

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,

 

 

 

 

 

 

 

 

154,025,003 outstanding on March 31, 2018 and

 

 

 

 

 

 

 

 

153,690,146 outstanding on December 30, 2017 ................................................................................................................................  

 

 

1,540

 

 

1,537

 

Retained earnings ..........................................................................................................................................................................  

 

 

2,998,328

 

 

2,940,029

 

Accumulated other comprehensive loss .............................................................................................................................................  

 

 

(97,888)

 

 

(130,067)

 

 

Total Henry Schein, Inc. stockholders' equity ..................................................................................................................................  

 

 

2,901,980

 

 

2,811,499

 

Noncontrolling interests .................................................................................................................................................................  

 

 

9,936

 

 

12,911

 

 

 

Total stockholders' equity .......................................................................................................................................................  

 

 

2,911,916

 

 

2,824,410

 

 

Total liabilities, redeemable noncontrolling interests and stockholders' equity........................................................................................  

 

$

7,914,876

 

$

7,863,995

See accompanying notes. 

 

3

 
 

 

 

HENRY SCHEIN, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

(in thousands, except per share data)

 

(unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

April 1,

 

 

 

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

Net sales ......................................................................................................................................................................................  

 

$

3,220,439

 

$

2,922,948

Cost of sales .................................................................................................................................................................................  

 

 

2,324,847

 

 

2,100,028

 

 

Gross profit ..........................................................................................................................................................................  

 

 

895,592

 

 

822,920

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative .................................................................................................................................................  

 

 

685,688

 

 

628,952

 

Restructuring costs ....................................................................................................................................................................  

 

 

3,762

 

 

-

 

 

Operating income ..................................................................................................................................................................  

 

 

206,142

 

 

193,968

Other income (expense):

 

 

 

 

 

 

 

Interest income ..........................................................................................................................................................................  

 

 

5,158

 

 

4,304

 

Interest expense ........................................................................................................................................................................  

 

 

(17,538)

 

 

(11,430)

 

Other, net .................................................................................................................................................................................  

 

 

(338)

 

 

(45)

 

 

Income before taxes and equity in earnings of affiliates .................................................................................................................  

 

 

193,424

 

 

186,797

Income taxes .................................................................................................................................................................................  

 

 

(47,764)

 

 

(38,630)

Equity in earnings of affiliates ..........................................................................................................................................................  

 

 

2,971

 

 

2,086

Net income ...................................................................................................................................................................................  

 

 

148,631

 

 

150,253

 

Less: Net income attributable to noncontrolling interests ...................................................................................................................  

 

 

(8,413)

 

 

(9,505)

Net income attributable to Henry Schein, Inc. ......................................................................................................................................  

 

$

140,218

 

$

140,748

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Henry Schein, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic .......................................................................................................................................................................................  

 

$

0.92

 

$

0.89

 

Diluted ....................................................................................................................................................................................  

 

$

0.91

 

$

0.88

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

Basic .......................................................................................................................................................................................  

 

 

153,106

 

 

157,715

 

Diluted ....................................................................................................................................................................................  

 

 

154,130

 

 

159,758

See accompanying notes. 

 

4

 
 
 

 

 

HENRY SCHEIN, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(in thousands)

 

(unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

April 1,

 

 

 

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

Net income ...............................................................................................................................................................................  

 

$

148,631

 

$

150,253

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

Foreign currency translation gain...............................................................................................................................................  

 

 

34,224

 

 

41,452

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss from foreign currency hedging activities ................................................................................................................  

 

 

(902)

 

 

(2,861)

 

 

 

 

 

 

 

 

 

 

 

Pension adjustment gain (loss)..................................................................................................................................................  

 

 

(23)

 

 

84

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax ..........................................................................................................................................  

 

 

33,299

 

 

38,675

Comprehensive income ...............................................................................................................................................................  

 

 

181,930

 

 

188,928

 

Comprehensive income attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

Net income .......................................................................................................................................................................  

 

 

(8,413)

 

 

(9,505)

 

 

Foreign currency translation gain ..........................................................................................................................................  

 

 

(1,120)

 

 

(3,453)

 

 

 

Comprehensive income attributable to noncontrolling interests ...............................................................................................  

 

 

(9,533)

 

 

(12,958)

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Henry Schein, Inc. ...................................................................................................................  

 

$

172,397

 

$

175,970

See accompanying notes. 

 

5

 
 

 

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 $8,324 attributable to Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests) ...........................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

140,218

 

 

-

 

 

89

 

 

140,307

Foreign currency translation gain (excluding $897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Redeemable noncontrolling interests) .................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

33,104

 

 

223

 

 

33,327

Unrealized loss from foreign currency hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefit of $182............................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

(902)

 

 

-

 

 

(902)

Pension adjustment loss, including tax benefit of $0......................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

(23)

 

 

-

 

 

(23)

Dividends paid ........................................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(161)

 

 

(161)

Other adjustments .....................................................................................................................................................................  

 

-

 

 

-

 

 

7

 

 

-

 

 

-

 

 

779

 

 

786

Change in fair value of redeemable securities .............................................................................................................................................  

 

-

 

 

-

 

 

(82,361)

 

 

-

 

 

-

 

 

-

 

 

(82,361)

Initial noncontrolling interests and adjustments related to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

business acquisitions..............................................................................................................................................................  

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(3,905)

 

 

(3,905)

Stock issued upon exercise of stock options .............................................................................................................................................  

 

151,516

 

 

2

 

 

3,020

 

 

-

 

 

-

 

 

-

 

 

3,022

Stock-based compensation expense .....................................................................................................................................................  

 

430,330

 

 

4

 

 

8,750

 

 

-

 

 

-

 

 

-

 

 

8,754

Shares withheld for payroll taxes ........................................................................................................................................................  

 

(246,989)

 

 

(3)

 

 

(16,391)

 

 

-

 

 

-

 

 

-

 

 

(16,394)

Settlement of stock-based compensation awards

 

-

 

 

-

 

 

(182)

 

 

-

 

 

-

 

 

-

 

 

(182)

Deferred tax benefit arising from acquisition of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest in partnership...............................................................................................................................................  

.......................................................................................................................................................................................................

-

 

 

-

 

 

2,644

 

 

-

 

 

-

 

 

-

 

 

2,644

Transfer of charges in excess of capital...................................................................................................................................................................  

-

 

 

-

 

 

84,513

 

 

(84,513)

 

 

-

 

 

-

 

 

-

Balance, March 31, 2018 ...............................................................................................................................................................  

 

154,025,003

 

$

1,540

 

$

-

 

$

2,998,328

 

$

(97,888)

 

$

9,936

 

$

2,911,916

See accompanying notes. 

 

6

 
 

 

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

  

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31,

 

April 1,

 

 

 

 

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income .......................................................................................................................................................................................  

 

$

148,631

 

$

150,253

 

Adjustments to reconcile net income to net cash used in

 

 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization ......................................................................................................................................................  

 

 

52,085

 

 

44,749

 

 

 

Stock-based compensation expense ..............................................................................................................................................  

 

 

8,754

 

 

8,497

 

 

 

Provision for losses on trade and other accounts receivable ...............................................................................................................  

 

 

3,241

 

 

2,810

 

 

 

Provision for deferred income taxes ...............................................................................................................................................  

 

 

3,522

 

 

13,496

 

 

 

Equity in earnings of affiliates ......................................................................................................................................................  

 

 

(2,971)

 

 

(2,086)

 

 

 

Distributions from equity affiliates ................................................................................................................................................  

 

 

3,548

 

 

3,038

 

 

 

Changes in unrecognized tax benefits ............................................................................................................................................  

 

 

2,413

 

 

(10,876)

 

 

 

Other ......................................................................................................................................................................................  

 

 

(4,811)

 

 

2,689

 

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

 

 

Accounts receivable ..............................................................................................................................................................  

 

 

(45,620)

 

 

(97,493)

 

 

 

 

Inventories ...........................................................................................................................................................................  

 

 

(63,875)

 

 

28,278

 

 

 

 

Other current assets ...............................................................................................................................................................  

 

 

11,869

 

 

2,689

 

 

 

 

Accounts payable and accrued expenses ...................................................................................................................................  

 

 

(187,730)

 

 

(198,635)

Net cash used in operating activities ......................................................................................................................................................  

 

 

(70,944)

 

 

(52,591)

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of fixed assets ....................................................................................................................................................................  

 

 

(18,251)

 

 

(17,311)

 

Payments for equity investments and business

 

 

 

 

 

 

 

 

acquisitions, net of cash acquired .....................................................................................................................................................  

 

 

(8,703)

 

 

(11,820)

 

Other ..............................................................................................................................................................................................  

 

 

(8,212)

 

 

(5,549)

Net cash used in investing activities ......................................................................................................................................................  

 

 

(35,166)

 

 

(34,680)

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from bank borrowings ............................................................................................................................................................  

 

 

212,055

 

 

234,037

 

Proceeds from issuance of debt ............................................................................................................................................................  

 

 

100,000

 

 

-

 

Debt issuance costs ...........................................................................................................................................................................  

 

 

(30)

 

 

-

 

Principal payments for long-term debt ....................................................................................................................................................  

 

 

(10,032)

 

 

(56,367)

 

Proceeds from issuance of stock upon exercise of stock options .................................................................................................................  

 

 

3,022

 

 

3,952

 

Payments for repurchases of common stock ............................................................................................................................................  

 

 

-

 

 

(50,006)

 

Payments for taxes related to shares withheld for employee taxes.................................................................................................................  

 

 

(15,012)

 

 

(40,605)

 

Distributions to noncontrolling stockholders ..........................................................................................................................................  

 

 

(811)

 

 

(3,264)

 

Acquisitions of noncontrolling interests in subsidiaries ............................................................................................................................  

 

 

(261,433)

 

 

(4,089)

Net cash provided by financing activities ................................................................................................................................................  

 

 

27,759

 

 

83,658

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents ....................................................................................................................  

 

 

2,928

 

 

4,120

Net change in cash and cash equivalents ................................................................................................................................................  

 

 

(75,423)

 

 

507

Cash and cash equivalents, beginning of period .......................................................................................................................................  

 

 

174,658

 

 

62,381

Cash and cash equivalents, end of period ...............................................................................................................................................  

 

$

99,235

 

$

62,888

See accompanying notes. 

 

7

 
 

HENRY SCHEIN, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

Note 1Basis 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 three months ended March 31, 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. 

  

Note 2Accounting Pronouncements Adopted and Critical Accounting Policies and Estimates

 

Accounting Pronouncements Adopted

 

       In May 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 (“VSOE”) 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

8

 
 

HENRY SCHEIN, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

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. 

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

 

 

 

Three Months Ended

 

March 31, 2018

 

 

 

 

 

 

Balances

 

 

Effect of

 

 

As

 

 

 

Without Adoption

 

 

Change

Balance Sheet

 

 

Reported

 

 

 

of Topic 606

 

 

Increase/(Decrease)

Assets:

 

 

 

 

 

 

 

 

 

 

 

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

 

$

430,111

 

 

$

430,851

 

$

(740)

 

Investments and other ...............................................................................................................................................  

 

 

449,731

 

 

 

448,278

 

 

1,453

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accrued Expenses -Taxes............................................................................................................................................  

 

$

214,377

 

 

$

214,102

 

$

275

 

Accrued Expenses - Other ...........................................................................................................................................  

 

 

418,167

 

 

 

420,620

 

 

(2,453)

 

Deferred Income Taxes ...............................................................................................................................................  

 

 

54,453

 

 

 

53,879

 

 

574

 

Other Liabilities (Long-term) ........................................................................................................................................  

 

 

421,684

 

 

 

422,075

 

 

(391)

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

Retained earnings .....................................................................................................................................................  

 

$

2,998,328

 

 

$

2,995,620

 

$

2,708

 

 

 

Three Months Ended

 

March 31, 2018

 

 

 

 

 

 

Balances

 

 

Effect of

 

 

As

 

 

 

Without Adoption

 

 

Change

Statement of Income

 

 

Reported

 

 

 

of Topic 606

 

 

Increase/(Decrease)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Dental ..............................................................................................................................................................................................  

 

$

1,547,799

 

 

$

1,547,799

 

$

-

 

Animal Health ...................................................................................................................................................................................  

 

 

919,794

 

 

 

919,794

 

 

-

 

Medical ............................................................................................................................................................................................  

 

 

640,400

 

 

 

640,400

 

 

-

 

 

Total healthcare distribution ................................................................................................................................................................  

 

$

3,107,993

 

 

$

3,107,993

 

$

-

 

Technology and value-added services ...................................................................................................................................................  

 

 

112,446

 

 

 

112,485

 

 

(39)

 

 

Total revenues ..................................................................................................................................................................................  

 

$

3,220,439

 

 

$

3,220,478

 

$

(39)

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales .....................................................................................................................................................................................  

 

 

2,324,847

 

 

 

2,324,847

 

 

-

 

Selling, general and administrative .........................................................................................................................................................  

 

 

685,688

 

 

 

685,189

 

 

499

 

Income taxes......................................................................................................................................................................................  

 

 

47,764

 

 

 

47,806

 

 

(42)

 

 

.......................................................................................................................................................................................................

 

 

 

 

 

 

 

 

 

 

 

Net Income .......................................................................................................................................................................................  

 

$

148,631

 

 

$

149,127

 

$

(496)

 

             Additional information related to Topic 606 can be found below in “Critical Accounting Policies and Estimates” as well as in Note 3 – Revenue from Contracts with Customers.

             

            In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes, Intra-Entity Transfers of Assets

9

 
 

HENRY SCHEIN, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited

 

Other Than Inventory” (“Topic 740”).  Topic 740 requires companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period which the transfer occurs.  Previously, companies were required to defer the income tax effects on intercompany transfer of assets until the asset has been sold to an outside party. On December 31, 2017, we adopted the guidance, which is effective for annual periods and related interim periods beginning after December 15, 2017 on a modified retrospective basis.  As a result of the adoption of Topic 740, we have recorded an immaterial adjustment to the opening balance of retained earnings and a reduction to prepaid assets.  

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting”. ASU No. 2017-09 provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting.  ASU 2017-09 requires modification accounting if the fair value, vesting conditions, or equity or liability classification of the award is not the same immediately before and after a change to the terms and conditions of the award.  ASU 2017-09 was adopted on a prospective basis as of December 31, 2017 and did not have a material impact on the consolidated financial statements or disclosures as of March 31, 2018.

 

The cumulative effect of the changes made to our consolidated balance sheet as of December 31, 2017 related to Topic 606 and Topic 740 were as follows:

 

  

 

 

 

Balance at

 

 

Adjustments

 

 

Adjustments

 

 

Balance at

 

 

December 30,

 

 

Due To

 

 

 Due To

 

 

December 31,

 

 

2017

 

 

Topic 606

 

 

Topic 740

 

 

2017

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

454,752

 

$

119

 

$

(610)

 

$

454,261

 

Investments and other ...............................................................................................................................................  

 

 

432,002

 

 

1,133

 

 

-

 

 

433,135

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued Expenses - Taxes...........................................................................................................................................  

 

$

188,873

 

$

437

 

$

-

 

$

189,310

 

Accrued Expenses - Other ...........................................................................................................................................  

 

 

455,780

 

 

(2,615)

 

 

-

 

 

453,165

 

Deferred Income Taxes ...............................................................................................................................................  

 

 

50,431

 

 

471

 

 

-

 

 

50,902

 

Other Liabilities (Long-term) ........................................................................................................................................  

 

 

420,285

 

 

(246)

 

 

-

 

 

420,039