EDGAR 10-K Filing

Company CIK: 1000228
Filing Year: 2024
Filename: 1000228_10-K_2024_0001000228-24-000011.json

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ITEM 1. BUSINESS
ITEM 1.
Business
General
Henry Schein, Inc. is a solutions company for health care professionals powered
by a network of people and
technology.
We believe we are the world’s largest
provider of health care products and services primarily to
office-
based dental and medical practitioners, as well as alternate sites of care.
Our philosophy is grounded in our
commitment to help customers operate a more efficient and successful business so
the practitioner can provide
better clinical care.
With more than 91 years of experience distributing health care products, we have built a vast set of small,
mid-sized
and large customers in the dental and medical markets, serving more than one million
customers worldwide across
dental practices, laboratories,
physician practices, and ambulatory surgery centers, as well as government,
institutional health care clinics and other alternate care clinics.
We are headquartered in Melville, New York
and employ more than 25,000 people.
Approximately 55% of our
workforce is based in the United States and approximately 45% is based outside
of the United States.
We have
operations or affiliates in 33 countries and territories.
Our broad global footprint has evolved over time through our
organic success as well as through contribution from strategic acquisitions.
We stock a comprehensive selection of more than 300,000 branded products and Henry Schein corporate brand
products through our main distribution centers.
Our infrastructure, including over 5.3 million square feet of space
in 36 strategically located distribution and 22 manufacturing facilities around
the world, enables us to historically
provide rapid and accurate order fulfillment, better serve our customers and
increase our operating efficiency.
This
infrastructure, together with broad product and service offerings at competitive
prices, and a strong commitment to
customer service, enables us to be a single source of supply for our customers’
needs.
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.
Our dental
businesses serve office-based dental practitioners, dental laboratories, schools, government
and other
institutions.
Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,
emergency
medical technicians, dialysis centers, home health, federal and state governments
and large enterprises, such as
group practices and integrated delivery networks, among other providers
across a wide range of specialties.
The health care distribution reportable segment, combining our global dental
and medical operating segments,
distributes consumable products, small equipment, laboratory products, large equipment, equipment
repair services,
branded and generic pharmaceuticals, vaccines, surgical products, dental specialty
products (including implant,
orthodontic and endodontic products), diagnostic tests, infection-control products,
personal protective equipment
products (“PPE”) and vitamins.
While our primary go-to-market strategy is in our capacity as a
distributor, we also
market and sell under our own corporate brand portfolio of cost-effective, high-quality consumable
merchandise
products, and manufacture certain dental specialty products in the areas of oral
surgery, implants, orthodontics and
endodontics.
The technology and value-added services reportable segment provides
software, technology and other value-added
services to health care practitioners.
Henry Schein One, the largest contributor of sales to this category, offers
dental practice management solutions for dental and medical practitioners.
In addition, we offer dentists and
physicians a broad suite of electronic health records, patient communication
services including electronic marketing
and website design, analytics and patient demand generation.
Our value-added practice solutions include practice
consultancy, education, integrated revenue cycle management and the facilitation of financial service offerings (on
a non-recourse basis) to help dentists and physicians operate and expand
their business operations,
e-services,
practice technology, network and hardware services, as well as consulting, and continuing education services for
practitioners.
We believe our hands-on consultative approach to provide solutions to support practice decision-
making is a key differentiator for our business.
Recent Developments
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent
Developments” herein for a discussion related to recent Company developments.
Industry
The global health care distribution industry, as it relates to office-based health care practitioners, is fragmented and
diverse.
The industry ranges from sole practitioners working out of
relatively small offices to mid-sized and large
group practices ranging in size from a few practitioners to several
hundred practices owned or operated by dental
support organizations (“DSOs”), medical group purchasing organizations (“GPOs”), hospital
systems or integrated
delivery networks.
Due in part to the limited capacity of office-based health care practitioners
to store and manage large quantities of
supplies in their offices, the distribution of health care supplies and small equipment
to office-based health care
practitioners has been characterized by frequent, small quantity orders,
and a need for rapid, reliable and
substantially complete order fulfillment.
The purchasing decisions within an office-based health care practice
are
typically made by the practitioner, hygienist or office manager.
Supplies and small equipment are generally
purchased from more than one distributor, with one generally serving as the primary supplier.
The health care distribution industry continues to experience growth due
to demand driven by the aging population,
increased health care awareness and the importance of preventative care,
an increasing understanding of the
connection between good oral health and overall health, improved access
to care globally, the proliferation of
medical technology and testing, new pharmacology treatments and
expanded third-party insurance coverage,
partially offset by the effects of unemployment on insurance coverage and technological
improvements, including
the advancement of software and services, prosthetic solutions and telemedicine.
In addition, the non-acute market
continues to benefit from the shift of procedures and diagnostic
testing from acute care settings to alternate-care
sites, particularly physicians’ offices and ambulatory surgery centers.
We believe that consolidation within the industry will continue to result in a number of distributors, particularly
those with limited financial, operating and marketing resources, seeking
to combine with larger companies that can
provide growth opportunities.
This consolidation also may continue to result in distributors seeking
to acquire
companies that can enhance their current product and service offerings or provide
opportunities to serve a broader
customer base.
In addition, customer consolidation will likely lead to multiple locations
under common management and the
movement of more procedures from the hospital setting to the physician
or alternate care setting as the health care
industry is increasingly focused on efficiency and cost containment.
This trend has benefited distributors capable
of providing a broad array of products and services at low prices.
It also has accelerated the growth of health
maintenance organizations (“HMOs”), group practices, other managed care accounts
and collective buying groups,
which, in addition to their emphasis on obtaining products at competitive
prices, tend to favor distributors capable
of providing specialized management information support.
We believe that the trend towards cost containment has
the potential to favorably affect demand for technology solutions, including software,
which can enhance the
efficiency and facilitation of practice management.
Competition
The distribution and manufacture of health care supplies and equipment is
highly competitive.
Many of the health
care products we sell are available to our customers from a number of suppliers.
In addition, our competitors could
obtain exclusive rights from manufacturers to market particular products.
Manufacturers also could seek to sell
directly to end-users, and thereby eliminate or reduce our role and
that of other distributors.
In certain parts of the
dental end market, such as those related to dental specialty products, and
medical end market manufacturers already
sell directly to end customers.
In North America, we compete with other distributors, as well as several
manufacturers, of dental and medical
products, primarily on the basis of price, breadth of product line, e-commerce
capabilities, customer service and
value-added products and services.
In the dental market, our primary competitors in the U.S. are the Patterson
Dental division of Patterson Companies, Inc. and Benco Dental Supply
Company.
In addition, we compete against
a number of other distributors that operate on a national, regional and
local level.
Our primary competitors in the
U.S. medical market, which accounts for the large majority of our global medical
sales, are McKesson Corporation
and Medline Industries, Inc., which are national distributors.
We also compete with a number of regional and local
medical distributors, as well as a number of manufacturers that
sell directly to physicians and patients in their
homes.
With regard to our dental software, we compete against numerous companies, including the Patterson
Dental division of Patterson Companies, Inc., Carestream Health, Inc.,
Carestream Dental LLC, Centaur Software
Development Co Pty Ltd. (d.b.a. dental4windows, dental4web), Open Dental
Software, Inc., PlanetDDS LLC,
Good Methods Global Inc. (d.b.a. CareStack) and Curve Dental, LLC.
In other software end markets, including
revenue cycle management, patient relationship management and patient
demand generation, we compete with
companies such as Vyne Therapeutics Inc., EDI-Health Group, Inc. (d.b.a. Dental X Change, Inc.), Weave
Communications, Inc., and Solutionreach, Inc.
The medical practice management and electronic medical
records
market is fragmented and we compete with numerous companies such
as the NextGen division of Quality Systems,
Inc., eClinicalWorks, Allscripts Healthcare Solutions, Inc. and Epic Systems Corporation.
Outside of the U.S., we believe we are the only global distributor of supplies
and equipment to dental practices and
our competitors are primarily local and regional companies.
We also face significant competition internationally,
where we compete on the basis of price and customer service against
several large competitors, including the
GACD Group, Proclinic SA, Lifco AB, Planmeca Oy and Billericay Dental
Supply Co. Ltd., as well as a large
number of other dental and medical product distributors and manufacturers
in international countries and territories
we serve.
Competitive Strengths
We have more than 91 years of experience in distributing products to health care practitioners resulting in strong
awareness of the Henry Schein
®
brand.
Our competitive strengths include:
A focus on meeting our customers’ unique needs
.
We are committed to providing customized solutions to our
customers that are driven by our understanding of the end markets we
serve and reflect the technology-driven
products and services best suited for their practice needs.
We are committed to continuing to enhance these
offerings through organic investment in our products and our teams, as well as through the acquisition
of new
products and services that may help us better serve our customers.
Direct sales and marketing expertise.
Our sales and marketing efforts are designed to establish and solidify
customer relationships through personal or virtual visits by field sales representatives,
frequent direct marketing and
telesales contact, emphasizing our broad product lines, including exclusive
distribution agreements, competitive
prices and ease of order placement,
particularly through our e-commerce platforms.
The key elements of our direct
sales and marketing efforts are:
•
Field sales consultants.
Our field sales consultants, including equipment sales specialists, covering
major
North American, European and other international markets.
These consultants complement our direct
marketing and telesales efforts and enable us to better market, service and support
the sale of more
sophisticated products and equipment.
•
Marketing.
We market to existing and prospective office-based health care providers through a
combination of owned, earned and paid digital channels, tradeshows, as well
as through catalogs, flyers,
direct mail and other promotional materials.
Our strategies include an emphasis on educational content
through webinars and content marketing initiatives.
We continue to enhance our marketing technology to
improve our targeting capability and the relevance of messaging and offers.
•
Telesales.
We support our direct marketing effort with inbound and outbound telesales representatives,
who facilitate order processing, generate new sales through direct and frequent
contact with customers and
stay abreast of market developments and the hundreds of new products,
services and technologies
introduced each year to educate practice personnel.
•
Electronic commerce solutions.
We provide our customers and sales teams with innovative and
competitive e-commerce solutions.
We continue to invest in our e-commerce platform to offer enhanced
content management so customers can more easily find the products
they need and to enable an engaging
purchase experience, supported by excellent customer service.
•
Social media.
Our operating entities and employees engage our customers and
supplier partners through
various social media platforms, which are an important element of our
communications and marketing
efforts.
We continue to expand our social media presence to raise awareness about issues, engage
customers beyond a sale and deliver services and solutions to specialized
audiences.
Broad product and service offerings at competitive prices.
We offer
a broad range of products and services to our
customers, at competitive prices, in the following categories:
•
Consumable supplies and equipment
.
We distribute consumable products, small equipment, laboratory
products, large equipment, equipment repair services, branded and generic pharmaceuticals,
vaccines, dental
specialty products, diagnostic tests, infection-control products and vitamins.
We stock a comprehensive
selection of more than 300,000 branded products and Henry Schein
corporate brand products through our
main distribution centers.
We also market and sell our own corporate brand portfolio of cost-effective, high-
quality consumable merchandise products and manufacture certain
dental specialty products in the areas of
implants, orthodontics and endodontics.
•
Technology and other value-added products and services.
We sell practice management, business
analytics, patient engagement and patient demand creation software solutions
to our dental customers.
Our
practice management solutions provide practitioners with electronic
medical records, patient treatment
history, analytics, billing, accounts receivable analyses and management, appointment calendars, electronic
claims processing and word processing programs, network and hardware
services, e-commerce and
electronic marketing services, sourcing third party patient payment plans,
transition services and training
and education programs for practitioners.
We also sell medical software for practice management, certified
electronic health records (“EHR”) and e-Prescribe medications and prescription
solutions.
We have
technical representatives supporting customers using our practice management
solutions and services.
As
of December 30, 2023, we had an active user base of approximately 110,000 practices and 350,000
consumers, including users of AxiUm, Dentally®, Dentrix Ascend®, Dental
Vision®, Dentrix® Dental
Systems, Dentrix® Enterprise, Easy Dental®, EndoVision®, Evolution® and EXACT®, Gesden®, Jarvis
Analytics™, Julie® Software, Oasis, OMSVision®, Orisline®, PBS Endo®,
PerioVision®, Power
Practice® Px, PowerDent,
and Viive® and subscriptions for Demandforce®, Sesame, and Lighthouse360®
for dental practices and DentalPlans.com® for dental patients.
•
Repair services.
We have 119
equipment sales and service centers worldwide that provide
a variety of
repair, installation and technical services for our health care customers.
Our technicians provide
installation and repair services for dental handpieces,
dental and medical small equipment,
table-top
sterilizers and large dental equipment.
•
Financial services.
We offer our customers solutions in operating their practices more efficiently by
providing access to a number of financial services and products
provided by third party suppliers (including
non-recourse financing for equipment, technology and software
products, non-recourse practice financing
for leasehold improvements, business debt consolidation and commercial
real estate, non-recourse patient
financing and credit card processing) at rates that we believe are generally
lower than what our customers
would be able to secure independently.
We also provide staffing services, dental practice valuation and
brokerage services.
Commitment to superior customer service
.
We maintain a strong commitment to providing superior customer
service.
We frequently monitor our customer service through customer surveys, focus groups and statistical
reports.
Our customer service policy primarily focuses on:
•
Exceptional order fulfillment
.
We ship an average of approximately 141,000 cartons daily.
•
Comprehensive ordering process
.
Customers may place orders 24 hours a day, 7 days a week via e-
commerce solutions, telephone, fax, e-mail and mail.
Integrated management information systems
.
Certain of our information systems generally allow for centralized
management of key functions, including accounts receivable, inventory, accounts payable, payroll, purchasing,
sales, order fulfillment and financial and operational reporting.
These systems allow us to manage our growth,
deliver superior customer service, properly target customers, manage financial
performance and monitor daily
operational statistics.
Cost-effective purchasing
.
We believe that cost-effective purchasing is a key element to maintaining and enhancing
our position as a competitively priced provider of health care products.
We continuously evaluate our purchase
requirements and suppliers’ offerings and prices in order to obtain products at the
lowest possible cost.
In 2023,
our top 10 health care distribution suppliers and our single largest supplier accounted for approximately
24% and
4%, respectively, of our aggregate purchases.
Efficient distribution
.
We distribute our products from our 36 strategically located distribution centers.
We strive
to maintain optimal inventory levels in order to satisfy customer demand
for prompt delivery and complete order
fulfillment.
These inventory levels are managed on a daily basis with
the aid of our management information
systems.
Once an order is entered, it is electronically transmitted to the distribution
center nearest the customer’s
location for order fulfillment.
Products and Services
The following table sets forth the percentage of consolidated net sales
by principal categories of products and
services offered through our health care distribution and technology and value-added services
reportable segments:
December 30,
December 31,
December 25,
Health care distribution:
Dental products
(1)
61.1
%
59.1
%
60.8
%
Medical products
(2)
32.4
35.2
34.0
Total
health care distribution
93.5
94.3
94.8
Technology
and value-added services:
Software and related products and
other value-added products
(3)
6.5
5.7
5.2
Total
100.0
100.0
100.0
(1)
Includes infection-control products, handpieces, preventatives, impression materials, composites, anesthetics, teeth, dental implants,
gypsum, acrylics, articulators, abrasives, dental chairs, delivery units and lights, X-ray supplies and equipment, PPE products,
equipment repair and high-tech and digital restoration equipment.
(2)
Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray
products, equipment, PPE products and vitamins.
(3)
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.
Business Strategy
Our mission is to provide innovative, integrated health care products and
services; and to be trusted advisors and
consultants to our customers - enabling them to deliver the best quality patient
care and enhance their practice
management efficiency and profitability.
Our BOLD+1 Strategic Plan consists of the following:
•
Build (“B”)
Complementary software, specialty, and services businesses for high growth
•
Operationalize (“O”)
One Distribution to deliver exceptional customer experience, increased
efficiency,
and growth
•
Leverage (“L”)
One Schein to broaden and deepen relationships with our customers
•
Drive (“D”)
Drive digital transformation for our customers and for Henry Schein
•
+1
Create Value
for our stakeholders
To accomplish this, we apply our competitive strengths in executing the following strategies:
•
Increase penetration of our existing customer base.
We have over one million customers worldwide and
we intend to increase sales to our existing customer base and enhance
our position as their primary
supplier.
We believe our offering of a broad range of products, services and support, including software
solutions that can help drive improved workflow efficiency and patient communications
for practices,
coupled with our full-service value proposition, helps us to retain and grow
our customer base.
•
Increase the number of customers we serve.
This strategy includes increasing the productivity of our field
sales consultants and telesales team, as well as using our customer
database to focus our marketing efforts
in all of our operating segments.
In the dental business, we provide products and services to
independent
practices, mid-market groups, and large DSOs as well as community health centers
and government sites of
care.
Leveraging our broad array of assets and capabilities, we offer solutions to address these
new
markets.
In the medical business, we have expanded to serve customers
located in settings outside of the
traditional office, such as urgent care clinics, retail, occupational health and home health settings.
As
settings of health care shift, we remain committed to serving these practitioners
and providing them with
the products and services they need.
•
Leverage our value-added products and services.
We continue to increase cross-selling efforts for key
product lines utilizing a consultative selling process.
In the dental business, we have significant cross-
selling opportunities between our dental software users and our dental customers.
In the medical business,
we have opportunities to expand our vaccine, injectables and other pharmaceuticals
sales to health care
practitioners, as well as cross-selling EHR systems and software
when we sell our core products.
Our
strategy extends to providing health systems, integrated delivery networks
and other large group and multi-
site health care organizations, including physician clinics, these same value added
products and services.
As physicians and health systems closely align, we have increased
access to opportunities for cross-
marketing and selling our product and service portfolios.
•
Pursue strategic acquisitions and joint ventures.
Our acquisition strategy is focused on investments in
companies that add new customers and sales teams, increase our geographic
footprint (whether entering a
new country, such as emerging markets, or building scale where we have already invested in businesses),
and finally, those that enable us to access new products and technologies.
Markets Served
Demographic trends indicate that our markets are growing, as an
aging U.S. population is increasingly using health
care services.
According to the U.S. Census Bureau’s International Database, between 2023 and 2033, the 45 and
older population is expected to grow by approximately 11%.
Between 2023 and 2043, this age group is expected to
grow by approximately 21%.
This compares with expected total U.S. population growth
rates of approximately 6%
between 2023 and 2033 and approximately 11% between 2023 and 2043.
In the dental industry, there is predicted to be a rise in oral health care expenditures as the 45-and-older segment of
the population increases.
There is increasing demand for new technologies that allow
dentists to increase
productivity, and this is being driven in the U.S. by lower insurance reimbursement rates.
At the same time, there is
an expected increase in dental insurance coverage.
In the medical market, there continues to be a migration of procedures from
acute-care settings to physicians’
offices and home health settings, a trend that we believe provides additional opportunities
for us.
There also is the
continuing use of vaccines, injectables and other pharmaceuticals in alternate-care
settings.
We believe we have
established a leading position as a vaccine supplier to the office-based physician
practitioner.
We support our dental and medical professionals through the many SKUs that we offer, as well as through
important value-added services, including practice management software,
electronic claims processing, financial
services and continuing education, all designed to help maximize a practitioner’s
efficiency.
Additionally, we seek to expand our dental full-service model and medical offerings in countries where
opportunities exist.
We do this through both direct sales and by partnering with local distribution and
manufacturing companies.
For information on revenues and long-lived assets by geographic area, see
Note 4 - Segment and Geographic Data
of “Notes to Consolidated Financial Statements.”
Seasonality and Other Factors Affecting Our Business and Quarterly Results
We experience fluctuations in quarterly earnings.
As a result, we may fail to meet or exceed the expectations of
securities analysts and investors, which could cause our stock price
to decline.
Our business is subject to seasonal and other quarterly fluctuations.
Sales and profitability generally have been
higher in the third and fourth quarters due to the timing of sales of seasonal
products (including influenza vaccine),
purchasing patterns of office-based health care practitioners for certain products (including
equipment and
software) and year-end promotions.
Sales and profitability may also be impacted by the timing of
certain annual
and biennial dental tradeshows where equipment promotions are offered.
In addition, some dental practices delay
equipment purchases in the U.S. until year-end due to tax incentives.
We expect our historical seasonality of sales
to continue in the foreseeable future.
Governmental Regulations
We
strive to be compliant in all material respects with the applicable
laws, regulations and guidance described
below, and believe we have effective compliance programs and other controls in place to ensure substantial
compliance.
However, compliance is not guaranteed either now or in the future, as certain laws, regulations and
guidance may be subject to varying and evolving interpretations that could
affect our ability to comply, as well as
future changes, additions and enforcement approaches, including political changes.
When we discover situations of
non-compliance we seek to remedy them and bring the affected area back into compliance.
President Biden’s
administration (the “Biden Administration”) has indicated that it will be
more aggressive in its pursuit of alleged
violations of law, and has revoked certain guidance that would have limited governmental use of informal agency
guidance to pursue potential violations, and has stated that it is more prepared
to pursue individuals for corporate
law violations, including an aggressive approach to anti-corruption activities.
Federal, state and certain foreign
governments have also increased enforcement activity in the health care
sector, particularly in areas of fraud and
abuse, anti-bribery and corruption, controlled substances handling,
medical device regulations and data privacy and
security standards.
Changes to applicable laws, regulations and guidance described below, as well as related administrative or judicial
interpretations, may require us to update or revise our operations, services,
marketing practices and compliance
programs and controls, and may impose additional and unforeseen costs
on us, pose new or previously immaterial
risks to us, or may otherwise have a material adverse effect on our business.
Government
Certain of our businesses involve the distribution, manufacturing, importation,
exportation, marketing, sale and
promotion of pharmaceuticals and/or medical devices, and in this regard, we
are subject to extensive local, state,
federal and foreign governmental laws and regulations, including as applicable
to our wholesale distribution of
pharmaceuticals and medical devices, manufacturing activities, and as part of
our specialty home medical supply
businesses that distribute and sell medical equipment and supplies directly
to patients.
Federal, state and certain
foreign governments have also increased enforcement activity in the health care
sector, particularly in areas of fraud
and abuse, anti-bribery and anti-corruption, controlled substances handling,
medical device regulations and data
privacy and security standards.
Certain of our businesses involve pharmaceuticals and/or medical devices,
including in vitro diagnostic devices,
that are paid for by third parties and must operate in compliance with a variety of
burdensome and complex coding,
billing and record-keeping requirements in order to substantiate claims for
payment under federal, state and
commercial healthcare reimbursement programs.
Government and private insurance programs fund a large portion of the total cost of medical care,
and there have
been efforts to limit such private and government insurance programs, including efforts, thus far
unsuccessful, to
seek repeal of the entire United States Patient Protection and Affordable Care Act,
as amended by the Health Care
and Education Reconciliation Act, each enacted in March 2010 (as amended,
the “ACA”).
Certain of our businesses are subject to various additional federal, state,
local and foreign laws and regulations,
including with respect to the sale, transportation, importation, storage, handling
and disposal of hazardous or
potentially hazardous substances; “forever chemicals” such as per-and
polyfluoroalkyl substances; and safe
working conditions.
In addition, activities to control medical costs, including laws and regulations
lowering
reimbursement rates for pharmaceuticals, medical devices, medical supplies
and/or medical treatments or services,
are ongoing.
The Centers for Medicare & Medicaid Services (“CMS”) recently
released the 2024 durable medical
equipment, prosthetics, orthotics and supplies (“DMEPOS”) reimbursement
schedule, which, effective January 1,
2024, reduced the DMEPOS reimbursement rates for non-rural suppliers,
such as us, by removing the Coronavirus
Aid, Relief, and Economic Security (aka CARES) Act relief rates in effect during
the COVID-19 pandemic.
This
and other laws and regulations are subject to change and their evolving implementation
may impact our operations
and our financial performance.
Our businesses are generally subject to numerous laws and regulations that could
impact our financial performance,
and failure to comply with such laws or regulations could have a material adverse
effect on our business.
Operating, Security and Licensure Standards
Certain of our businesses are subject to local, state and federal governmental
laws and regulations relating to the
distribution of pharmaceuticals and medical devices and supplies.
Among the United States federal laws applicable
to us are the Controlled Substances Act, the Federal Food, Drug,
and Cosmetic Act, as amended (“FDC Act”),
Section 361 of the Public Health Service Act and Section 401 of the Consolidated
Appropriations Act of the Social
Security Act, as well as laws regulating the billing of and reimbursement
from government programs, such as
Medicare and Medicaid, and from commercial payers.
We
are also subject to comparable foreign regulations.
The FDC Act, the Controlled Substances Act, their implementing regulations,
and similar foreign laws generally
regulate the introduction, manufacture, advertising, marketing and promotion,
sampling, pricing and
reimbursement, labeling, packaging, storage, handling, returning or recalling,
reporting, and distribution of, and
record keeping for, pharmaceuticals and medical devices shipped in interstate commerce, and states
may similarly
regulate such activities within the state.
Furthermore, Section 361 of the Public Health Service Act, which provides
authority to prevent the introduction, transmission or spread of communicable
diseases, serves as the legal basis for
the United States Food and Drug Administration’s (“FDA”) regulation of human cells, tissues and cellular and
tissue-based products, also known as “HCT/P products.”
The Federal Drug Quality and Security Act of 2013 brought about significant
changes with respect to
pharmaceutical supply chain requirements.
Title II of this measure, known as the Drug Supply Chain Security Act
(“DSCSA”), was enacted in November 2013, and had a planned
“phase in” schedule over a period of ten years,
resulting in a national electronic, interoperable system to identify and trace
certain prescription drugs as they are
distributed in the United States that went into effect on November 27, 2023.
Those DSCSA requirements that were
scheduled to change on November 27, 2023, and include requiring trading partners
to provide, receive and maintain
documentation about products and ownership only “electronically”(and
not via paper) are now subject to a one-year
“stabilization period” announced by FDA through two guidance documents
in late August 2023.
FDA is permitting
the stabilization period to accommodate an additional year, until November 27, 2024, to allow trading partners
to
implement, troubleshoot and mature their electronic (versus paper), interoperable
systems, during which time the
FDA does not intend to take action to enforce the requirements for the interoperable,
electronic, package level
product tracing.
Additionally, the FDA announced that it does not intend to take action to enforce the portion of the
FDC Act with respect to drug product that is introduced in a transaction into
commerce by the product’s
manufacturer or repackager before November 27, 2024, and for subsequent transactions
of such product through the
product’s expiry.
FDA states this stabilization period is intended to avoid disruption
to the supply chain, and
ensure continued patient access to drug products as trading partners
move towards full implementation of the
DSCSA’s
enhanced drug security requirements.
The law’s track and trace requirements applicable to
manufacturers, wholesalers, third-party logistics providers (e.g., trading partners),
repackagers and dispensers (e.g.,
pharmacies) of prescription drugs took effect in January 2015, and, as stated, continues
to be implemented.
The
DSCSA product tracing requirements replace the former FDA drug pedigree
requirements and pre-empt certain
state requirements that are inconsistent with, more stringent than, or
in addition to, the DSCSA requirements.
The DSCSA also establishes certain requirements for the licensing and operation
of prescription drug wholesalers
and third-party logistics providers (“3PLs”), and includes the eventual
creation of national wholesaler and 3PL
licenses in cases where states do not license such entities.
The DSCSA requires that wholesalers and 3PLs
distribute drugs in accordance with certain standards regarding the recordkeeping,
storage and handling of
prescription drugs.
The DSCSA requires wholesalers and 3PLs to submit annual reports
to the FDA, which include
information regarding each state where the wholesaler or 3PL is licensed, the name
and address of each facility, and
contact information.
According to FDA guidance, states are pre-empted from imposing
any licensing requirements
that are inconsistent with, less stringent than, directly related to, or covered
by the standards established by federal
law in this area.
Current state licensing requirements concerning wholesalers will
remain in effect until the FDA
issues new regulations as directed by the DSCSA.
FDA issued a proposed rule establishing wholesaler and 3PL
national standards for licensing and other requirements in February 2022,
but that rule has not yet been finalized.
In addition, with respect to our specialty home medical supply business, we
are subject to certain state licensure
laws (including state pharmacy laws), and also certain accreditation standards,
including to qualify for
reimbursement from Medicare and other third-party payers.
The Food and Drug Administration Amendments Act of 2007 and
the Food and Drug Administration Safety and
Innovation Act of 2012 amended the FDC Act to require the FDA to promulgate
regulations to implement a unique
device identification (“UDI”) system for medical devices.
The UDI rule phased in the implementation of the UDI
regulations, generally beginning with the highest-risk devices (i.e., Class
III medical devices) and ending with the
lowest-risk devices.
Most compliance dates were reached as of September 24, 2018, with
a final set of
requirements for low risk devices being reached on September 24, 2022, which
completed the phase in.
However,
in May 2021, the FDA issued an enforcement policy stating that
it does not intend to object to the use of legacy
identification numbers on device labels and packages for finished devices
manufactured and labeled prior to
September 24, 2023.
The UDI regulations require “labelers” to include unique device
identifiers (“UDIs”), with a
content and format prescribed by the FDA and issued under a system operated
by an FDA-accredited issuing
agency, on the labels and packages of medical devices (including, but not limited to, certain software that qualifies
as a medical device under FDA rules), and to directly mark certain devices
with UDIs.
The UDI regulations also
require labelers to submit certain information concerning UDI-labeled devices
to the FDA, much of which
information is publicly available on an FDA database, the Global Unique Device
Identification Database.
On July
22, 2022, the FDA posted the final guidance regarding the Global Unique Device
Identification Database called
Unique Device Identification Policy Regarding Compliance Dates for Class
I and Unclassified Devices, Direct
Marketing, and Global Unique Device Identification Database Requirements
for Certain Devices.
The UDI
regulations and subsequent FDA guidance regarding the UDI requirements provide
for certain exceptions,
alternatives and time extensions.
For example, the UDI regulations include a general exception
for Class I devices
exempt from the Quality System Regulation (other than record-keeping
requirements and complaint files).
Regulated labelers include entities such as device manufacturers, repackagers,
reprocessors and relabelers that
cause a device’s label to be applied or modified, with the intent that the device will be commercially distributed
without any subsequent replacement or modification of the label and include certain
of our businesses.
As a distributor of controlled substances, we are required,
under the Controlled Substances Act, to obtain and renew
annually registrations for our facilities from the United States Drug Enforcement
Administration (“DEA”)
permitting us to handle controlled substances.
We
are also subject to other statutory and regulatory requirements
relating to the storage, sale, marketing, handling, reporting, record-keeping
and distribution of such drugs, in
accordance with the Controlled Substances Act and its implementing regulations,
and these requirements have been
subject to heightened enforcement activity in recent times.
We
are subject to inspection by the DEA.
Certain of
our businesses are also required to register for permits and/or licenses
with, and comply with operating and security
standards of, the DEA, the FDA, the United States Department of Health
and Human Services (“HHS”), and
various state boards of pharmacy, state health departments and/or comparable state agencies as well as comparable
foreign agencies, and certain accrediting bodies, depending on the type of
operations and location of product
distribution, manufacturing or sale.
These businesses include those that distribute, manufacture, relabel, and/or
repackage prescription pharmaceuticals and/or medical devices and/or HCT/P
products, or own pharmacy
operations, or install, maintain or repair equipment.
In addition, Section 301 of the National Organ Transplant Act, and a number of comparable state laws, impose civil
and/or criminal penalties for the transfer of human organs, as defined in the regulations, for valuable
consideration,
while generally permitting payments for the reasonable costs incurred
in their procurement, processing, storage and
distribution.
We
are also subject to foreign government regulation of such products.
The DEA, the FDA and state
regulatory authorities have broad inspection and enforcement powers, including
the ability to suspend or limit the
distribution of products by our distribution centers, seize or order the
recall of products and impose significant
criminal, civil and administrative sanctions for violations of these laws and regulations.
Foreign regulations subject
us to similar foreign enforcement powers.
EU Regulation of Medicinal and Dental Products
European Union (“EU”) member states regulate their own healthcare systems,
as does EU law.
The latter regulates
certain matters, most notably medicinal products and medical devices.
Medicinal products are defined, broadly, as
substances or combinations of substances having certain functionalities and
may not include medical devices.
EU
“regulations” apply in all member states, whereas “directives” are implemented
by the individual laws of member
states.
On medicines for humans, we are regulated under Directive No. 2001/83/EC
of 6 November 2001, as amended by
Directive 2003/63/EC of 25 June 2003, and EU Regulation (EC) No. 726/2004
of 31 March 2004.
These rules
provide for the authorization of products, and regulate their manufacture,
importation, marketing and distribution.
It implements requirements which may be implemented without warning, as
well as a national pharmacovigilance
system under which marketing authorizations may be withdrawn, and includes
potential sanctions for breaches of
the rules, and on other bases such as harmfulness or lack of efficacy.
EU Regulation No. 1223/2009 of 30 November 2009
on cosmetic products
requires that cosmetic products (which
includes dental products) be safe for human health when used under normal
or reasonably foreseeable conditions of
use and comply with certain obligations which apply to manufacturer, importer and distributor.
It includes market
surveillance, and non-compliance may result in the recall or withdrawal of
products, along with other sanctions.
In the EU, the EU Medical Device Regulation No. 2017/745 of 5 April 2017
(“EU MDR”) covers a wide scope of
our activities, from dental material to X-ray machines, and certain software.
It was meant to become applicable
three years after publication (i.e., May 26, 2020).
However, on April 23, 2020, to allow European Economic Area
(“EEA”) national authorities, notified bodies, manufacturers and other actors
to focus fully on urgent priorities
related to the COVID-19 pandemic, the European Council and Parliament
adopted Regulation 2020/561,
postponing the date of application of the EU MDR by one year (to
May 26, 2021).
The EU MDR significantly modifies and intensifies the regulatory compliance
requirements for the medical device
industry as a whole.
Among other things, the EU MDR:
•
strengthens the rules on placing devices on the market and reinforces surveillance
once they are available;
•
establishes explicit provisions on manufacturers’ responsibilities
for the follow-up of the quality,
performance and safety of devices placed on the market;
•
improves the traceability of medical devices throughout the supply chain to the
end-user or patient through
a unique identification number;
•
sets up a central database to provide patients, healthcare professionals and
the public with comprehensive
information on products available in the EU;
•
strengthens rules for the assessment of certain high-risk devices, such
as implants, which may have to
undergo an additional check by experts before they are placed on the market; and
•
identifies importers and distributors and medical device products through
registration in a database
(EUDAMED, which is not fully functional for the time being and might
not be so before the end of 2027 at
the earliest; therefore, the use of this database is only possible through
a voluntary basis and, by a way of
consequence, is currently not mandatory).
In particular, the EU MDR imposes strict requirements for the confirmation that a product meets
the regulatory
requirements, including regarding a product’s clinical evaluation and a company’s quality systems, and for the
distribution, marketing and sale of medical devices, including post-market
surveillance.
Regulation 2023/607 of the European Parliament and of the Council of
amending Regulations (EU) 2017/745 and
(EU) 2017/746 as regards the transitional provisions for certain medical devices and in vitro diagnostic medical
devices
has, notably, extended the EU MDR transitional periods applicable to certain medical devices that have
been assessed and/or certified under the Directive No. 93/42/EEC of
concerning medical devices
(“EU
Medical Device Directive”).
Subject to certain conditions, medical devices that (i) obtained a certificate
under the
EU Medical Device Directive from May 25, 2017, (ii) which was still valid
on May 26, 2021, and (iii) has not been
subsequently withdrawn may, for the moment, continue to be placed on the market or put into service until
December 31, 2027 for higher risk devices or December 31, 2028 for
medium and lower risk devices. Nevertheless,
EU MDR requirements regarding the distribution, marketing and sale
including quality systems and post-market
surveillance have to be observed by manufacturers, importers and distributors
as of the application date (i.e., since
May 26, 2021).
Other EU regulations that may apply under appropriate circumstances
include EU Regulation No. 1907/2006 of 18
December 2006
concerning the Registration, Evaluation, Authorisation and
Restriction of Chemicals
, which
requires importers to register substances or mixtures that they import
in the EU beyond certain quantities, and the
EU Regulation No. 1272/2008 of 16 December 2008
on classification, labelling and packaging of substances and
mixtures
(currently under revision), which sets various obligations with respect
to the labelling and packaging of
concerned substances and mixtures.
Furthermore, compliance with legal requirements has required and may in the future
require us to delay product
release, sale or distribution, or institute voluntary recalls of, or other corrective
action with respect to products we
sell, each of which could result in regulatory and enforcement actions, financial
losses and potential reputational
harm.
Our customers are also subject to significant federal, state, local
and foreign governmental regulation, which
may affect our interactions with customers, including the design and functionality
of our products.
Certain of our businesses are subject to various additional federal, state,
local and foreign laws and regulations,
including with respect to the sale, transportation, storage, handling and
disposal of hazardous or potentially
hazardous substances, and safe working conditions.
In addition, certain of our businesses must operate in
compliance with a variety of burdensome and complex billing and record-keeping
requirements in order to
substantiate claims for payment under federal, state and commercial healthcare
reimbursement programs.
Certain of our businesses also maintain contracts with governmental agencies
and are subject to certain regulatory
requirements specific to government contractors.
Antitrust and Consumer Protection
The federal government of the United States, most U.S. states and many
foreign countries have antitrust laws that
prohibit certain types of conduct deemed to be anti-competitive, as well as consumer
protection laws that seek to
protect consumers from improper business practices.
At the U.S. federal level, the Federal Trade Commission
oversees enforcement of these types of laws, and states have similar government
agencies.
Violations of antitrust
or consumer protection laws may result in various sanctions, including criminal
and civil penalties.
Private
plaintiffs may also bring civil lawsuits against us in the United States for alleged antitrust
law violations, including
claims for treble damages.
EU law also regulates competition and provides for detailed rules protecting
consumers.
The Biden Administration has indicated increased antitrust enforcement and
has been more aggressive in
enforcement activities, including investigation and challenging non-compete
restrictions and other restrictive
contractual terms that it believes harm workers and competition.
Health Care Fraud
Certain of our businesses are subject to federal and state (and similar
foreign) health care fraud and abuse, referral
and reimbursement laws and regulations with respect to their operations.
Some of these laws, referred to as “false
claims laws,” prohibit the submission or causing the submission of false or fraudulent
claims for reimbursement to
federal, state and other health care payers and programs.
Other laws, referred to as “anti-kickback laws,” prohibit
soliciting, offering, receiving or paying remuneration in order to induce the referral
of a patient or ordering,
purchasing, leasing or arranging for, or recommending, ordering, purchasing or leasing of, items or services
that are
paid for by federal, state and other health care payers and programs.
Certain additional state and federal laws, such
as the federal Physician Self-Referral Law, commonly known as the “Stark Law,” prohibit physicians and other
health care professionals from referring a patient to an entity with which
the physician (or family member) has a
financial relationship, for the furnishing of certain designated health services
(for example, durable medical
equipment and medical supplies), unless an exception applies.
Violations of Anti-Kickback Statutes or the Stark
Law may be enforced as violations of the federal False Claims Act.
The fraud and abuse laws and regulations have been subject to heightened
enforcement activity over the past few
years, and significant enforcement activity has been the result of “relators” who
serve as whistleblowers by filing
complaints in the name of the United States (and if applicable, particular states)
under applicable false claims laws,
and who may receive up to 30% of total government recoveries.
Penalties under fraud and abuse laws may be
severe, including treble damages and substantial civil penalties under
the federal False Claims Act, as well as
potential loss of licenses and the ability to participate in federal and state
health care programs, criminal penalties,
or imposition of a corporate integrity agreement or corporate compliance
monitor which could have a material
adverse effect on our business.
Also, these measures may be interpreted or applied by a prosecutorial,
regulatory or
judicial authority in a manner that could require us to make changes
in our operations or incur substantial defense
and settlement expenses.
Even unsuccessful challenges by regulatory authorities or private
relators could result in
reputational harm and the incurring of substantial costs.
Most states have adopted similar state false claims laws,
and these state laws have their own penalties, which may be in addition
to federal False Claims Act penalties, as
well as other fraud and abuse laws.
With respect to measures of this type, the United States government (among others) has expressed concerns
about
financial relationships between suppliers on the one hand and physicians,
dentists and other healthcare
professionals on the other.
As a result, we regularly review and revise our marketing practices as necessary
to
facilitate compliance.
We
also are subject to certain United States and foreign laws and regulations
concerning the conduct of our foreign
operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery
Act, German anti-corruption laws
and other anti-bribery laws and laws pertaining to the accuracy of our internal
books and records, which have been
the focus of increasing enforcement activity globally in recent years.
While we believe that we are substantially compliant with applicable fraud and
abuse laws and regulations, and
have adequate compliance programs and controls in place to ensure substantial
compliance, we cannot predict
whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in
response to changes in applicable law or interpretation of laws, or failure
to comply with applicable law, could have
a material adverse effect on our business.
Affordable Care Act and Other Insurance Reform
The ACA increased federal oversight of private health insurance plans and
included a number of provisions
designed to reduce Medicare expenditures and the cost of health care generally, to reduce fraud and abuse, and to
provide access to increased health coverage.
The ACA also materially expanded the number of individuals
in the
United States with health insurance.
The ACA has faced frequent legal challenges, including litigation seeking
to invalidate and Congressional action
seeking to repeal some of or all of the law or the manner in which it has been
implemented.
In 2012, the United
States Supreme Court, in upholding the constitutionality of the
ACA and its individual mandate provision requiring
that people buy health insurance or else face a penalty, simultaneously limited ACA provisions requiring Medicaid
expansion, making such expansion a state-by-state decision.
In addition, one of the major political parties in the
United States remains committed to seeking the ACA’s legislative repeal, but legislative efforts to do so have
previously failed to pass both chambers of Congress.
Under President Trump’s administration, a number of
administrative actions were taken to materially weaken the ACA, including,
without limitation, by permitting the
use of less robust plans with lower coverage and eliminating “premium support”
for insurers providing policies
under the ACA.
The Tax Cuts and Jobs Act enacted in 2017, which contains a broad range of tax reform provisions
that impact the individual and corporate tax rates, international tax provisions,
income tax add-back provisions and
deductions, also effectively repealed the ACA’s
individual mandate by zeroing out the penalty for non-compliance.
An ACA lawsuit decided by the federal Fifth Circuit Court of Appeals found
the individual mandate to be
unconstitutional, and returned the case to the District Court for the Northern
District of Texas for consideration of
whether the remainder of the ACA could survive the excision of the individual
mandate.
The Fifth Circuit’s
decision was appealed to the United States Supreme Court.
The Supreme Court issued a decision on June 17, 2021.
Without reaching the merits of the case, the Supreme Court held that the plaintiffs in the case did not have standing
to challenge the ACA.
Any outcomes of future cases that change the ACA, in addition
to future legislation,
regulation, guidance and/or Executive Orders that do the same, could have a
significant impact on the U.S.
healthcare industry.
For instance, the American Rescue Plan Act of 2021 enhanced
premium tax credits, which has
resulted in an expansion of the number of people covered under the ACA.
These changes were time-limited, with
some enhancements in place for 2021 only and others available through
the end of 2022.
An ACA provision, generally referred to as the Physician Payments Sunshine
Act or Open Payments Program (the
“Sunshine Act”), imposes annual reporting and disclosure requirements
for drug and device manufacturers and
distributors with regard to payments or other transfers of value made to certain
covered recipients (including
physicians, dentists, teaching hospitals, physician assistants, nurse practitioners,
clinical nurse specialists, certified
registered nurse anesthetists, and certified nurse midwives), and for such
manufacturers and distributors and for
group purchasing organizations, with regard to certain ownership interests held by covered
recipients in the
reporting entity.
CMS publishes information from these reports on a publicly available website,
including amounts
transferred and physician, dentist, teaching hospital, and non-physician practitioner
identities.
The Sunshine Act
pre-empts similar state reporting laws, although we or our subsidiaries may
be required to report under certain state
transparency laws that address circumstances not covered by the Sunshine
Act, and some of these state laws, as
well as the federal law, can be unclear.
We
are also subject to foreign regulations requiring transparency of
certain
interactions between suppliers and their customers.
In the United States, government actions to seek to increase health-related
price transparency may also affect our
business.
For example, hospitals are currently required to publish online a list of
their standard charges for all items
and services, including discounted cash prices and payer-specific and de-identified negotiated
charges, in a publicly
accessible online file.
Hospitals are also required to publish a consumer-friendly
list of standard charges for certain
“shoppable” services (i.e., services that can be scheduled by a patient in
advance) and associated ancillary services
or, alternatively, maintain an online price estimator tool.
CMS may impose civil monetary penalties for
noncompliance with these price transparency requirements.
Additionally, the No Surprises Act (“NSA”), generally
effective January 1, 2022, imposes additional price transparency requirements.
The NSA is intended to reduce the
number of “out-of-network” patients.
This will result in fewer out-of-network payments to physicians and
other
providers, which may cause financial stress to those providers who
are dependent on higher out-of-network fees.
Another notable Medicare health care reform initiative, the Medicare Access
and CHIP Reauthorization Act of
2015 (“MACRA”), enacted on April 16, 2015, established a new payment framework,
which modified certain
Medicare payments to “eligible clinicians,” including physicians, dentists and
other practitioners.
Under MACRA,
certain eligible clinicians are required to participate in Medicare through the Merit-Based
Incentive Payment
System (“MIPS”) or Advanced Alternative Payment Models, through which
Medicare reimbursement to eligible
clinicians includes both positive and negative payment adjustments that take
into account quality, promoting
interoperability, cost and improvement activities.
Data collected in the first MIPS performance year (2017)
determined payment adjustments that began January 1, 2019.
MACRA standards and payment levels continue to
evolve, and reflect a fundamental change in physician reimbursement
that is expected to provide substantial
financial incentives for physicians to participate in risk contracts, and to increase
physician information technology
and reporting obligations.
The implications of the implementation of MACRA are uncertain and will
depend on
future regulatory activity and physician activity in the marketplace.
New state-level payment and delivery system
reform programs, including those modeled after such federal programs, are
also increasingly being rolled out
through Medicaid administrators, as well as through the private sector, which may further
alter the marketplace and
impact our business.
Recently, in addition to other government efforts to control health care costs, there has been increased scrutiny on
drug pricing and concurrent efforts to control or reduce drug costs by Congress, the
President, executive branch
agencies and various states.
At the state level, several states have adopted laws that require drug manufacturers
(including relabelers and repackagers) to provide advance notice of certain
price increases and to report information
relating to those price increases, while others have taken legislative or administrative
action to establish
prescription drug affordability boards or multi-payer purchasing pools to reduce the cost of
prescription drugs.
At
the federal level, section 1927 of the Social Security Act sets forth Average Sales Price (ASP) reporting
requirements for manufacturers (including repackagers and relabelers) and
requires that manufacturers provide
CMS with pricing information for their Part B-covered drugs no later
than 30 days after the close of the previous
quarter.
Also at the federal level, several related bills have been introduced and
regulations proposed which, if
enacted or finalized, respectively, would impact drug pricing and related costs.
As a result of political, economic and regulatory influences, the health care distribution
industry in the United
States is under intense scrutiny and subject to fundamental changes.
We
cannot predict what further reform
proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us.
EU Directive on the pricing and reimbursement of medicinal products
EU law provides for the regulation of the pricing of medicinal products which are
implemented by EU member
states (Directive No. 89/105/EC of 21 December 1988
relating to the transparency of measures regulating the
pricing of medicinal products for human use and their inclusion in the scope of national health insurance
systems
).
Member states may, subject notably to transparency conditions and to the statement of reasons based upon
objective and verifiable criteria, regulate the price charged (or its increases) for authorized
medicines and their level
of reimbursement, or they may freeze prices, place controls on the profitability
of persons responsible for placing
medicinal products on the market, and include or exclude the medicine on
the list of products covered by national
health insurance systems.
EU law does not expressly include provisions like those of the Sunshine Act in
the United States, but a growing
number of EU member states (such as France in 2011 and Italy in 2022) have enacted laws to increase
the
transparency of relationships in the healthcare sector.
The scope of these laws varies from one member state to
another and may, for example, include the relations between healthcare industry players and physicians or their
associations, students preparing for medical professions or their associations,
teachers, health establishments or
publishers of prescription and dispensing assistance software.
Regulated Software; Electronic Health Records
The FDA has become increasingly active in addressing the regulation of
computer software and digital health
products intended for use in health care settings.
The 21st Century Cures Act (the “Cures Act”), signed into law on
December 13, 2016, among other things, amended the medical device definition
to exclude certain software from
FDA regulation, including clinical decision support software that meets certain
criteria.
On September 27, 2019,
the FDA issued a guidance document describing the impact the Cures Act
on existing software policies.
Concurrently, FDA issued a draft guidance describing FDA’s
approach to clinical decision support software.
On
September 28, 2022, FDA issued final guidance that made several changes
to the draft guidance and that provided a
more restrictive interpretation of exempt clinical decision support software.
Certain of our businesses involve the
development and sale of software and related products to support physician
and dental practice management, and it
is possible that the FDA or foreign government authorities could determine
that one or more of our products is a
medical device, which could subject us or one or more of our businesses to
substantial additional requirements with
respect to these products.
In addition, our businesses that involve physician and dental practice management
products, and our specialty home
medical supply business, include electronic information technology systems
that store and process personal health,
clinical, financial and other sensitive information of individuals.
These information technology systems may be
vulnerable to breakdown, wrongful intrusions, data breaches and malicious
attack, which could require us to
expend significant resources to eliminate these problems and address related
security concerns and could involve
claims against us by private parties and/or governmental agencies.
For example, we are directly or indirectly
subject to numerous and evolving federal, state, local and foreign laws and
regulations that protect the privacy and
security of personal information, such as the federal Health Insurance Portability
and Accountability Act of 1996,
as amended, and implementing regulations (“HIPAA”), the Controlling the Assault of Non-Solicited Pornography
and Marketing Act (“CAN-SPAM”), the Telephone
Consumer Protection Act of 1991 (“TCPA”), Section 5 of the
Federal Trade Commission Act (“FTC Act”), the California Privacy Act (“CCPA”), and the California Privacy
Rights Act (“CPRA”) that became effective on January 1, 2023.
Several other states have also passed
comprehensive privacy legislation, and several privacy bills have been proposed
both at the federal and state level
that may result in additional legal requirements that impact our business.
Laws and regulations relating to privacy
and data protection are continually evolving and subject to potentially differing interpretations.
These requirements
may not be harmonized, may be interpreted and applied in a manner that
is inconsistent from one jurisdiction to
another or may conflict with other rules or our practices.
Our businesses’ failure to comply with these laws and
regulations could expose us to breach of contract claims, substantial fines,
penalties and other liabilities and
expenses, costs for remediation and harm to our reputation.
Also, evolving laws and regulations in this area could
restrict the ability of our customers to obtain, use or disseminate patient
information, or could require us to incur
significant additional costs to re-design our products to reflect these legal requirements,
which could have a
material adverse effect on our operations.
Also, the European Parliament and the Council of the EU adopted the pan-European
General Data Protection
Regulation (“GDPR”), effective from May 25, 2018, which increased privacy
rights for individuals (“Data
Subjects”), including individuals who are our customers, suppliers and
employees.
The GDPR extended the scope
of responsibilities for data controllers and data processors, and generally
imposes increased requirements and
potential penalties on companies, such as us, that are either established
in the EU and process personal data of Data
Subjects (regardless the Data Subject location), or that are not established
in the EU but that offer goods or services
to Data Subjects in the EU or monitor their behavior in the EU. Noncompliance
can result in penalties of up to the
greater of EUR 20 million, or 4% of global company revenues (sanction
that may be public), and Data Subjects
may seek damages.
Member states may individually impose additional requirements
and penalties regarding
certain limited matters (for which the GDPR let some room of flexibility),
such as employee personal data.
With
respect to the personal data it protects, the GDPR requires, among other things,
controller accountability, consents
from Data Subjects or another acceptable legal basis to process the
personal data, notification within 72 hours of a
personal data breach where required, data integrity and security, and fairness and transparency regarding the
storage, use or other processing of the personal data.
The GDPR also provides rights to Data Subjects relating
notably to information, access, rectification, erasure of the personal
data and the right to object to the processing.
On August 20, 2021, China promulgated the PRC Personal Information
Protection Law (“PIPL”), which took effect
on November 1, 2021.
The PIPL imposes specific rules for processing personal information
and it also specifies
that the law shall also apply to personal information activities carried
out outside China but for the purpose of
providing products or services to PRC citizens.
Any non-compliance with these laws and regulations may
subject
us to fines, orders to rectify or terminate any actions that are deemed
illegal by regulatory authorities, other
penalties, as well as reputational damage or legal proceedings against us,
which may affect our business, financial
condition or results of operations.
The PIPL carries maximum penalties of CNY50 million or 5%
of the annual
revenue of entities that process personal data.
In the United States, the CCPA, which increases the privacy
protections afforded California residents, became effective January 1, 2020.
The CCPA generally requires
companies, such as us, to institute additional protections regarding
the collection, use and disclosure of certain
personal information of California residents.
Compliance with the obligations imposed by the CCPA depends in
part on how particular regulators interpret and apply them.
Regulations were released in August of 2020, but there
remains some uncertainty about how the CCPA will be interpreted by the courts and enforced by the regulators.
If
we fail to comply with the CCPA or if regulators assert that we have failed to comply with the CCPA, we may be
subject to certain fines or other penalties and litigation, any of which may
negatively impact our reputation, require
us to expend significant resources, and harm our business.
Furthermore, California voters approved the CPRA on
November 3, 2020, which amends and expands the CCPA, including by providing consumers with additional rights
with respect to their personal information, and creating a new state agency, the California Privacy Protection
Agency, to enforce the CCPA
and the CPRA.
The CPRA came into effect on January 1, 2023, applying to
information collected by businesses on or after January 1, 2022.
As noted above, other states, as well as the federal government, have increasingly
considered the adoption of
similarly expansive personal privacy laws, backed by significant
civil penalties for non-compliance.
While we
believe we have substantially compliant programs and controls in place to comply
with the GDPR, CCPA, PIPL,
CPRA and other state law requirements, our compliance with data privacy and
cybersecurity laws is likely to
impose additional costs on us, and we cannot predict whether the
interpretations of the requirements, or changes in
our practices in response to new requirements or interpretations of the
requirements, could have a material adverse
effect on our business.
We
also sell products and services that health care providers, such as physicians
and dentists, use to store and
manage patient medical or dental records.
These customers, and we, are subject to laws, regulations and industry
standards, such as HIPAA and the Payment Card Industry Data Security Standards, which require the protection of
the privacy and security of those records, and our products may also be
used as part of these customers’
comprehensive data security programs, including in connection with their efforts to comply with
applicable privacy
and security laws.
Perceived or actual security vulnerabilities in our products or services,
or the perceived or actual
failure by us or our customers who use our products or services to comply
with applicable legal or contractual data
privacy and security requirements, may not only cause us significant reputational
harm, but may also lead to claims
against us by our customers and/or governmental agencies and involve substantial
fines, penalties and other
liabilities and expenses and costs for remediation.
Various
federal initiatives involve the adoption and use by health care
providers of certain EHR systems and
processes.
The initiatives include, among others, programs that incentivize
physicians and dentists, through MIPS,
to use EHR technology in accordance with certain evolving requirements,
including regarding quality, promoting
interoperability, cost and improvement activities.
Qualification for the MIPS incentive payments requires the use
of EHRs that are certified as having certain capabilities designated
in evolving standards adopted by CMS and the
Office of the National Coordinator for Health Information Technology of HHS (“ONC”).
Certain of our businesses
involve the manufacture and sale of such certified EHR systems and other products
linked to government supported
incentive programs.
In order to maintain certification of our EHR products, we
must satisfy these changing
governmental standards.
If any of our EHR systems do not meet these standards,
yet have been relied upon by
health care providers to receive federal incentive payments, we may be exposed
to risk, such as under federal health
care fraud and abuse laws, including the False Claims Act.
Additionally, effective September 1, 2023, the Office of
the Inspector General (“OIG”) for HHS issued a final rule implementing
civil money penalties for information
blocking as established by the Cures Act.
OIG incorporated regulations published by ONC as the basis for
enforcing information blocking penalties.
Each information blocking violation carries up to a $1 million penalty.
Moreover, in order to satisfy our customers, and comply with evolving legal requirements, our products
may need
to incorporate increasingly complex functionality, such as with respect to reporting and information blocking.
Although we believe we are positioned to accomplish this, the effort may involve
increased costs, and our failure to
implement product modifications, or otherwise satisfy applicable standards,
could have a material adverse effect on
our business.
Other health information standards, such as regulations under HIPAA, establish standards regarding electronic
health data transmissions and transaction code set rules for specific electronic
transactions, such as transactions
involving claims submissions to third party payers.
Failure to abide by these and other electronic health data
transmission standards could expose us to breach of contract claims,
substantial fines, penalties, and other liabilities
and expenses, costs for remediation and harm to our reputation.
Additionally, as electronic medical devices are increasingly connected to each other and to other technology, the
ability of these connected systems to safely and effectively exchange and use exchanged
information becomes
increasingly important.
As a medical device manufacturer, we must manage risks including those associated with
an electronic interface that is incorporated into a medical device.
There may be additional legislative or regulatory initiatives in the future impacting
health care.
E-Commerce
Electronic commerce solutions have become an integral part of traditional health
care supply and distribution
relationships.
Our distribution business is characterized by rapid technological
developments and intense
competition.
The continuing advancement of online commerce requires
us to cost-effectively adapt to changing
technologies, to enhance existing services and to develop and introduce a
variety of new services to address the
changing demands of consumers and our customers on a timely basis, particularly
in response to competitive
offerings.
Through our proprietary, technologically-based suite of products, we offer customers a variety of competitive
alternatives.
We
believe that our tradition of reliable service, our name recognition
and large customer base built
on solid customer relationships, position us well to participate in
this significant aspect of the distribution business.
We
continue to explore ways and means to improve and expand our online
presence and capabilities, including our
online commerce offerings and our use of various social media outlets.
International Transactions
United States and foreign import and export laws and regulations require us to
abide by certain standards relating to
the importation and exportation of products.
We
also are subject to certain laws and regulations concerning the
conduct of our foreign operations, including the U.S. Foreign Corrupt Practices
Act, the U.K. Bribery Act, German
anti-corruption laws and other anti-bribery laws and laws pertaining
to the accuracy of our internal books and
records, as well as other types of foreign requirements similar to those
imposed in the United States.
While we believe that we are substantially compliant with the foregoing laws
and regulations promulgated
thereunder and possess all material permits and licenses required for the conduct
of our business, there can be no
assurance that laws and regulations that impact our business or laws and
regulations as they apply to our customers’
practices will not have a material adverse effect on our business.
See “
Item 1A. Risk Factors
.
” for a discussion of additional burdens, risks and regulatory developments
that may
affect our results of operations and financial condition.
Proprietary Rights
We hold trademarks relating to the “Henry Schein
®
” name and logo, as well as certain other trademarks.
We intend
to protect our trademarks to the fullest extent practicable.
Employees and Human Capital
Henry Schein has a long, rich history of a purpose-driven model that engages
our five key stakeholders - our
supplier partners, customers, our employees, who are referred to as Team Schein Members (“TSMs”), stockholders
and society at large - of our Mosaic of Success to drive sustained, long-term economic
success while also creating
shared value for society.
Through our strong values-based culture, our sustainability
approach and environmental,
social, and governance (“ESG”) efforts integrates our sense of purpose into the way we operate our
business so that
we can “do well by doing good” for a healthier planet and healthier people.
Overseen by the Nominating and
Governance Committee of our Board of Directors (“Board”) with the Compensation
Committee also playing a role
in ESG matters related to human capital engagement and executive
compensation, some key 2023 highlights related
to human capital matters include:
•
continuing to evaluate our pay equity analysis for the majority of
the U.S. workforce, which reviews
compensation across gender and ethnic groups for equity and fairness;
•
expanding our Diversity and Inclusion (“D&I”) learning journey by educating TSMs
on key D&I
topics; and
•
continuing to drive a culture of wellness and engagement for our TSMs by
fostering an environment
where they can feel engaged, included and psychologically safe.
At Henry Schein, our employees are our greatest asset.
We employ more than 25,000 people, approximately 55%
of our workforce is based in the United States and approximately 45%
is based outside of the United States.
Approximately 14% of our employees are subject to collective bargaining agreements.
We believe that our
relations with our employees are excellent.
Our TSMs are the cornerstone of the Company.
We provide a connected and caring community that invests in the
career journey of our TSMs and encourages their contribution to
our mission of making the world healthier.
Our
TSM experience strategy is centered around our Team Schein Values,
or the guiding principles and shared
responsibilities of Henry Schein and its TSMs.
We know our business success is built on the engagement and
commitment of our team, which is dedicated to meeting the needs of their
fellow TSMs, our customers, supplier
partners, stockholders and society.
We recognize the changes in how and where we work, and the expectations of our team members to still feel
connected to our values-based culture.
Throughout 2023, we rolled out a continuous listening program
that used
various vehicles, including The Pulse Global Culture Survey and TSM
roundtables, to garner feedback from our
TSMs on their employee experience.
The Pulse Global Culture Survey was redesigned in 2023 to measure
scores
aligned to our Team Schein Values
- and we received good or excellent scores in all values.
The feedback showed
us that TSMs overall enjoy working for the Company and intend
to stay, mainly driven by our values-based culture
and providing TSMs with a sense of purpose, a meaningful experience
and an overall positive work environment.
However, there are also areas of opportunity, which include a focus on reducing burnout and stress, and providing
more opportunities for career mobility.
This feedback is shared with our Executive Management Committee
and
Board, both of whom are committed to addressing the identified opportunities.
As part of this commitment, some
highlights in 2023 included:
•
Community
: Provide opportunities for TSMs to have fun while contributing to an inclusive team
that respects
and supports one another.
•
Continued focus on creating a diverse and inclusive environment where TSMs
feel a sense of
belonging.
In 2023, Diversity and Inclusion, for the second time, was our
top strength identified in The
Pulse Global Culture Survey.
To guide our efforts and education related to D&I, our Diversity and
Inclusion Council, with engagement from our Board and Executive
Management Committee, drives the
Company’s overall D&I strategy.
To deepen our commitment to D&I across the Company, Global
Directors and Vice Presidents each have a goal tied to their compensation to champion D&I and attend
educational training, and in 2023 we cascaded this goal down
to our U.S. Managers.
We continue to
expand our D&I learning journey, educating TSMs on key D&I topics.
We understand the importance
of ensuring our internal team reflects the diversity of our customers and society
and continue to focus
on this through our talent planning, compensation and recruitment processes
in alignment with our
corporate strategic planning objectives to achieve concrete results.
We continue to publish our United
States Equal Employment Opportunity Commission (“EEOC”) EEO-1
data for the U.S.
•
Launched Henry Schein Games, a virtual platform with a field-day type event
at various locations that
brought TSMs together through friendly competition by earning
points for their team by engaging in
cultural-related activities and posting photos.
•
Launched Community Circles, which brought TSMs across the Company
together to connect about
topics, hobbies and activities that they are passionate about.
•
Hosted Connection Days throughout the globe at Henry Schein facilities, which
were designed to boost
team morale by bringing TSMs together to participate in fun non-work-related
activities at least once
per quarter.
•
Continued to expand our Employee Resource Groups (“ERGs”), an
inclusive and diverse vehicle for all
TSMs to share, connect, learn and develop both personally and professionally.
Each of our ERGs has a
sponsor from our Executive Management Committee and our Board.
Our CEO engages directly in
many of our ERG programs.
•
Launched an enhanced Onboarding Program that provides TSMs with
strategic programming to help
ensure a successful start to their careers at Henry Schein.
To help ensure TSMs who are joining the
Company in a remote or hybrid working environment feel connected to
our values-based culture, we
launched a Culture Ambassador Program, which provides new hires with
a mentor for 90 days to walk
through how we live our values and how they can engage.
•
Caring:
Build a world we want to live in by supporting each other and
the communities in which we live and
work.
•
Continued to offer a variety of opportunities to volunteer for team-building and engaging
in local
communities in which TSMs live and work, such as through Carry the Load,
the We Care Global
Challenge, Back to School and Holiday Cheer.
•
Launched a new quarterly campaign to provide opportunities for TSMs
to engage in meaningful
ways that connect back to their own personal purpose, such as helping
the community through
corporate social responsibility activities virtually or in-person.
•
Enhanced our strategic partnerships with industry associations, customers
and suppliers that
support access to quality health care through various key programs and
initiatives (e.g., Gives Kids
A Smile, Alpha Omega-Henry Schein Cares Holocaust Survivors Oral
Health Program and Release
the Pressure).
•
Expanded our Steps for Suicide Prevention campaign, which brings TSMs
together to walk for a
cause and provide education.
•
We also understand the importance of driving a culture of wellness for our own team members
through our Mental Wellness Committee, which is supported by our CEO, Executive Management
Committee and Board.
In 2023, we rolled out a ‘Year of Wellness’
campaign that provided
monthly tips, videos and educational programming to TSMs that focused
on how they may be
feeling that month.
We also launched an education program for managers of TSMs that provided
tactical examples of how to help reduce burnout amongst teams and support
the new way of
working.
•
Career:
Provide opportunities for TSMs to develop personally and professionally with an emphasis on
embodying our values to achieve our collective goals with excellence
and integrity.
•
Continued investment in our employees by providing both formal and
informal learning
opportunities focused on growing and enhancing knowledge, skills and abilities
through a
broad suite of professional development training programs for current and
future roles.
In
2023, we saw an increase in participation in our workshops, with TSMs
reporting a high
utilization of skills learned.
•
Continued expansion of our formal mentorship and coaching programs.
•
Continued roll-out of talent planning efforts designed to ensure a strong, diverse leadership
pipeline across the organization by strategically identifying and developing talent
through
targeted development opportunities and intentional succession plans.
Information derived from
talent planning efforts informs curriculum design and content to help focus on the
right
capabilities and help ensure alignment of career development efforts with the future
needs of
the organization.
Our Board is provided with periodic updates regarding our talent
and
succession planning efforts and participates in professional development activities
with our
TSMs.
•
Enhanced company-wide recognitions, including our Teddy Philson Team Schein Award,
which was redesigned in 2023 to provide more visibility and
meaningful recognition to TSMs
who exemplify our Team Schein Values,
as well as other programs including service awards
which highlight TSMs who exemplify our Team Schein Values.
Available Information
We make available free of charge through our Internet website, www.henryschein.com, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, statements
of beneficial ownership of
securities on Forms 3, 4 and 5 and amendments to these reports and statements
filed or furnished pursuant to
Section 13(a) and Section 16 of the Securities Exchange Act of 1934
as soon as reasonably practicable after such
materials are electronically filed with, or furnished to, the United States
Securities and Exchange Commission, or
SEC.
Our principal executive offices are located at 135 Duryea Road, Melville, New
York
11747, and our
telephone number is (631) 843-5500.
Unless the context specifically requires otherwise, the terms
the “Company,”
“Henry Schein,” “we,” “us” and “our” mean Henry Schein, Inc., a Delaware
corporation, and its consolidated
subsidiaries.
Information about our Executive Officers
The following table sets forth certain information regarding our executive
officers:
Name
Age
Position
Stanley M. Bergman
Chairman, Chief Executive Officer, Director
James P.
Breslawski
Vice Chairman, President, Director
Brad Connett
Chief Executive Officer, North America Distribution Group
Michael S. Ettinger
Executive Vice President and Chief Operating Officer
Lorelei McGlynn
Senior Vice President, Chief Human Resources Officer
Mark E. Mlotek
Executive Vice President, Chief Strategic Officer, Director
Walter Siegel
Senior Vice President and Chief Legal Officer
Ronald N. South
Senior Vice President, Chief Financial Officer
Stanley M. Bergman
has been our Chairman and Chief Executive Officer since 1989 and a director
since 1982.
Mr. Bergman held the position of President from 1989 to 2005.
Mr. Bergman held the position of Executive Vice
President from 1985 to 1989 and Vice President of Finance and Administration from 1980 to 1985.
James P. Breslawski
has been our Vice Chairman since 2018, President since 2005 and a director since 1992.
Mr.
Breslawski was the Chief Executive Officer of our Henry Schein Global Dental
Group from 2005 to 2018.
Mr.
Breslawski held the position of Executive Vice President and President of U.S. Dental from 1990 to 2005, with
primary responsibility for the North American Dental Group.
Between 1980 and 1990, Mr. Breslawski held
various positions with us, including Chief Financial Officer, Vice President of Finance and Administration and
Corporate Controller.
Brad Connett
has been our Chief Executive Officer, North American Distribution Group since 2021.
Previously
Mr. Connett was the President of our U.S. Medical Group from 2018 to 2021.
Mr. Connett joined us in 1997 and
has held a number of roles of increasing responsibility at the Company.
Throughout his career, he has received
numerous industry honors, including the John F. Sasen Leadership Award from the Health Industry Distributors
Association (HIDA), in recognition of his service to the industry, and induction into the Medical Distribution Hall
of Fame by Repertoire Magazine.
Michael S. Ettinger
has been our Executive Vice President and Chief Operating Officer since 2022.
Prior to his
current position, Mr. Ettinger served as Senior Vice President, Corporate & Legal Affairs, Chief of Staff and
Secretary from 2015 to 2022, Senior Vice President, Corporate & Legal Affairs and Secretary from 2013 to 2015,
Corporate Senior Vice President, General Counsel & Secretary from 2006 to 2013, Vice President, General
Counsel and Secretary from 2000 to 2006, Vice President and Associate General Counsel from 1998 to 2000
and
Associate General Counsel from 1994 to 1998.
Before joining us, Mr. Ettinger served as a senior associate with
Bower & Gardner and as a member of the Tax Department at Arthur Andersen.
Lorelei McGlynn
has been our Senior Vice President, Chief Human Resources Officer since 2013.
Since joining
us in 1999, Ms. McGlynn has served as Vice President, Global Human Resources and Financial Operations from
2008 to 2013, Chief Financial Officer, International Group and Vice President of Global Financial Operations from
2002 to 2008 and Vice President, Finance, North America from 1999 to 2002.
Prior to joining us, Ms. McGlynn
served as Assistant Vice President of Finance at Adecco Corporation.
Mark E. Mlotek
has been our Executive Vice President and Chief Strategic Officer since 2012.
Mr. Mlotek was
Senior Vice President and subsequently Executive Vice President of the Corporate Business Development Group
between 2000 and 2012.
Prior to that, Mr. Mlotek was Vice President, General Counsel and Secretary from 1994 to
1999 and became a director in 1995.
Prior to joining us, Mr. Mlotek was a partner in the law firm of Proskauer
Rose LLP,
counsel to us, specializing in mergers and acquisitions, corporate reorganizations and tax law from
to 1994.
Walter Siegel
has been our Senior Vice President and Chief Legal Officer since 2021.
Previously, Mr.
Siegel was
our Senior Vice President and General Counsel from 2013 until 2021.
Prior to joining us, Mr. Siegel was employed
with Standard Microsystems Corporation, a publicly traded global
semiconductor company from 2005 to 2012,
holding positions of increasing responsibility, most recently as Senior Vice President, General Counsel and
Secretary.
Ronald N. South
has been our Senior Vice President
and Chief Financial Officer (and principal financial officer
and principal accounting officer) since 2022.
Prior to holding his current position, Mr. South was our Vice
President Corporate Finance, and Chief Accounting Officer from 2013 until 2022.
Prior to joining us in 2008 as
our Vice President, Corporate Finance, Mr. South held leadership roles at Bristol-Myers Squibb, where he served as
Vice President, Finance, for the Cardiovascular and Metabolic business lines, as well as Vice President, Controller,
for its U.S. Pharmaceutical Division, and Vice President, Corporate General Auditor.
Prior to Bristol-Myers
Squibb, he served as North American Director of Corporate Audit at
PepsiCo, and held several roles of increasing
responsibility with PricewaterhouseCoopers LLP, where he advised clients located in the United States, Europe,
and Latin America.
Mr. South is a certified public accountant.
Other Executive Management
The following table sets forth certain information regarding other Executive
Management:
Name
Age
Position
Andrea Albertini
Chief Executive Officer, International Distribution Group
Leigh Benowitz
Senior Vice President and Chief Global Digital Transformation Officer
Trinh Clark
Senior Vice President and Chief Global Customer Experience Officer
James Mullins
Senior Vice President, Global Supply Chain
Kelly Murphy
Senior Vice President and General Counsel
Christopher Pendergast
Senior Vice President and Chief Technology Officer
René Willi, Ph.D.
Chief Executive Officer, Global Oral Reconstruction Group
Andrea Albertini
has been Chief Executive Officer, International Distribution Group since 2023.
Mr. Albertini
joined us in 2013 and has held several positions within the organization including
President, International
Distribution Group, President of our EMEA Dental Distribution Group,
and Vice-President of International Dental
Equipment.
Prior to joining Henry Schein, Mr. Albertini held leadership positions at Cefla Dental Group and
Castellini.
Leigh Benowitz
has been our Senior Vice President and Chief Global Digital Transformation Officer since August
2022.
Ms. Benowitz joined us in 2017 and has held several key positions
including Vice President Digital &
Customer Experience and Global eCommerce Platform Digital Transformation Officer.
Prior to joining Henry
Schein, Ms. Benowitz held various positions of increasing responsibility
at Citi.
Trinh Clark
has been our Senior Vice President and Chief Global Customer Experience Officer since August
2022.
Ms. Clark joined us in 2007 and has served as Vice President, Technology Enablement, North American
Distribution Group.
Prior to joining Henry Schein, Ms. Clark held various positions of
increasing responsibility at
eSurg.
James Mullins
has been our Senior Vice President of Global Supply Chain since 2018.
Mr. Mullins joined us in
1988 and has held a number of key positions with increasing responsibility, including Global Chief Customer
Service Officer.
Kelly Murphy
has been our Senior Vice President and General Counsel since 2021.
Since joining us in 2011, Ms.
Murphy has held several key positions of increasing responsibility within
the legal function, most recently serving
as Deputy General Counsel.
Christopher Pendergast
has been our Senior Vice President and Chief Technology Officer since 2018.
Prior to
joining us, Mr. Pendergast was employed by VSP Global from 2008 to 2018, most recently as the Chief
Technology Officer and Chief Information Officer.
Prior to VSP Global, Mr. Pendergast served in roles of
increasing responsibility at Natural Organics, Inc., from 2006 to 2008, IdeaSphere Inc./Twinlab Corporation from
2000 to 2006, IBM Corporation from 1987 to 1994 and 1998 to 2000
and Rohm and Haas from 1994 to 1998.
René Willi, Ph.D.
has been our Chief Executive Officer, Global Oral Reconstruction Group since 2021.
Previously, Dr.
Willi was the President of our Global Dental Surgical Group.
Prior to joining Henry Schein, Dr.
Willi held senior level roles with Institut Straumann AG as Executive Vice President, Surgical Business Unit from
2005 to 2013.
Prior to Straumann, he held roles of increasing responsibility
in Medtronic Plc’s cardiovascular
division from 2003 to 2005 and with McKinsey & Company as
a management consultant from 2000 to 2003.

---

ITEM 1A. RISK FACTORS
ITEM 1A. Risk Factors
Our business operations could be affected by factors that are not presently known
to us or that we currently
consider not to be material to our operations, so you should not consider
the risks disclosed in this section to
necessarily represent a complete statement of all risks and uncertainties.
The Company believes that the following
risks could have a material adverse impact on our business, reputation, financial
results, financial condition and/or
the trading price of our common stock.
The order in which these factors appear does not necessarily reflect
their
relative importance or priority.
COMPANY RISKS
We are dependent upon third parties for the manufacture and supply of a significant volume of our products.
We obtain a significant volume of the products we distribute from third parties, with whom we generally do not
have long-term contracts.
While there is typically more than one source of supply, some key suppliers, in the
aggregate, supply a significant portion of the products we sell.
In 2023, our top 10 health care distribution suppliers
and our single largest supplier accounted for approximately 25% and 4%, respectively, of our aggregate purchases.
Because of our dependence upon such suppliers, our operations are
subject to the suppliers’ ability and willingness
to supply products in the quantities that we require, and the risks include delays
caused by interruption in
production based on conditions outside of our control, including
a supplier’s failure to comply with applicable
government requirements (which may result in product recalls and/or
cessation of sales) or an interruption in the
suppliers’ manufacturing capabilities.
In the event of any such interruption in supply, we would need to identify
and obtain acceptable replacement sources on a timely basis.
There is no guarantee that we would be able to obtain
such alternative sources of supply on a timely basis, if at all, and an extended
interruption in supply, particularly of
a high-sales volume product, could result in a significant disruption in our
sales and operations, as well as damage
to our relationships with customers and our reputation.
In addition, certain of our suppliers have had their ability to
service certain markets restricted or negatively impacted because
of allegations of forced labor in their supply
chain.
Forced labor legislation affecting the supply chain has increased around
the world, and the United States
recently passed the Uyghur Forced Labor Prevention Act.
Our supply chain could be materially disrupted if our
suppliers fail to comply with, or are unable to satisfy our demand
for products, as a result of applicable forced labor
legislation and regulations.
Our
future
growth
(especially
for
our
technology
and
value-added
services
segment)
is
dependent
upon
our
ability
to
develop
or
acquire
and
maintain
and
protect
new
products
and
technologies
that
achieve
market
acceptance with acceptable margins.
Our future success depends on our ability to timely develop (or obtain the right
to sell) competitive and innovative
(particularly for our technology and value-added services segment)
products and services and to market them
quickly and cost-effectively.
Our ability to anticipate customer needs and emerging trends and develop or acquire
new products, services and technologies at competitive prices requires significant
resources, including employees
with the requisite skills, experience and expertise, particularly in our
technology segment, including dental practice
management, patient engagement and demand creation software solutions.
The failure to successfully address these
challenges could materially disrupt our sales and operations.
Additionally, our software and e-services products,
like software products generally, may contain undetected errors or bugs when introduced or as new versions are
released.
Any such defective software may result in increased expenses
related to the software and could adversely
affect our relationships with customers as well as our reputation.
With respect to certain software and e-services
that we develop, we rely primarily upon copyright, trademark and
trade secret laws, as well as contractual and
common law protections and confidentiality obligations.
We cannot provide assurance that such legal protections
will be available, adequate or enforceable in a timely manner to protect
our software or e-services products.
Risks inherent in acquisitions, dispositions and joint ventures could
offset the anticipated benefits.
One of our business strategies has been to expand our domestic and
international markets in part through
acquisitions and joint ventures and we expect to continue to make acquisitions
and enter into joint ventures in the
future.
Such transactions require significant management attention,
may place significant demands on our
operations, information systems, legal, regulatory, compliance, financial, and human resources functions, and
there
is risk that one or more may not succeed.
We cannot be sure, for example, that we will achieve the benefits of
revenue growth that we expect from these acquisitions or joint ventures
or that we will avoid unforeseen additional
costs, taxes, or expenses.
Our ability to successfully implement our acquisition and joint venture
strategy depends
upon, among other things, the following:
•
the availability of suitable acquisition or joint venture candidates at
acceptable prices;
•
our ability to consummate such transactions, which could potentially
be prohibited due to U.S. or
foreign antitrust regulations;
•
the liquidity of our investments and the availability of financing on
acceptable terms;
•
our ability to retain customers or product lines of the acquired businesses or
joint ventures;
•
our ability to retain, recruit and incentivize the management of the
companies we acquire; and
•
our ability to successfully integrate these companies’ operations, services,
products and personnel with
our culture, management policies, legal, regulatory, and compliance policies, cybersecurity systems and
policies, internal procedures, working capital management, financial,
and operational controls and
strategies.
Furthermore, some of our acquisitions and future acquisitions may give
rise to an obligation to make contingent
payments or to satisfy certain repurchase obligations, which payments
could have material adverse impacts on our
financial results individually or in the aggregate.
Additionally, when we decide to sell assets or a business, we may encounter difficulty in finding buyers or
executing alternative exit strategies on acceptable terms in a timely manner, which could delay
the accomplishment
of our strategic objectives.
Alternatively, we may dispose of assets or a business at a price or on terms that are less
than we had anticipated.
Dispositions may also involve continued financial involvement
in a divested business,
such as through transition service agreements, indemnities or other current
or contingent financial obligations.
Under these arrangements, performance by the acquired or divested
business, or other conditions outside our
control, could affect our future financial results.
Certain provisions in our governing documents and other documents to
which we are a party may discourage
third parties from seeking to acquire us that might otherwise result in
our stockholders receiving a premium
over the market price of their shares.
The provisions of our certificate of incorporation and by-laws may
make it more difficult for a third-party to
acquire us, may discourage acquisition bids and may impact the price
that certain investors might be willing to pay
in the future for shares of our common stock.
These provisions, among other things require (i) the affirmative vote
of the holders of at least 60% of the shares of common stock entitled to vote
to approve a merger, consolidation, or
a sale, lease, transfer or exchange of all or substantially all of our assets;
and (ii) the affirmative vote of the holders
of at least 66 2/3% of our common stock entitled to vote to (a)
remove a director; and (b) to amend or repeal our
by-laws, with certain limited exceptions.
In addition, certain of our employee incentive plans provide
for
accelerated vesting of stock options and other awards upon termination without
cause within two years following a
change in control, or grant the plan committee discretion to accelerate
awards upon a change of control.
Further,
certain agreements between us and our executive officers provide for increased severance
payments and certain
benefits if those executive officers are terminated without cause by us or if they terminate
for good reason, in each
case within two years following a change in control or within ninety days prior
to the effective date of the change in
control or after the first public announcement of the pendency of the change
in control.
Adverse changes in supplier rebates or other purchasing incentives
could negatively affect our business.
The terms
on which
we purchase
or sell
products from
many suppliers
may entitle
us to
receive a
rebate or
other
purchasing incentive based on the attainment of certain growth
goals.
Suppliers may reduce or eliminate rebates or
incentives
offered
under
their
programs,
or
increase
the
growth
goals
or
other
conditions
we
must
meet
to
earn
rebates
or
incentives
to
levels
that
we
cannot
achieve.
Increased
competition
either
from
generic
or
equivalent
branded products
could result
in us
failing to
earn rebates
or incentives
that are
conditioned upon
achievement of
growth goals.
Additionally, factors outside
of our control, such as customer
preferences, consolidation of suppliers
or supply issues, can have a material impact on
our ability to achieve the growth goals established by
our suppliers,
which
may
reduce the
amount of
rebates
or
incentives we
receive.
The
occurrence
of
any
of
these events
could
have an adverse impact on our business, financial condition or operating
results.
Sales of corporate brand products entail additional risks, including the risk that such sales could
adversely affect
our relationships with suppliers.
We offer
certain corporate brand products that are available exclusively from us.
The sale of such products subjects
us to the risks generally encountered by entities that source, market and sell corporate brand products, including but
not
limited to
potential product
liability risks,
mandatory or
voluntary product
recalls, potential
supply chain
and
distribution
chain
disruptions,
and
potential
intellectual
property
infringement
risks.
Any
failure
to
adequately
address
some
or
all
of
these
risks
could
have
an
adverse
effect
on
our
business, financial
condition
or
operating
results.
In
addition,
an
increase
in
the
sales
of
our
corporate
brand
products
may
negatively
affect
our
sales
of
products owned by our
suppliers which, consequently,
could adversely impact certain
of our supplier relationships.
Our ability to locate qualified, economically stable suppliers who satisfy our requirements, and to
acquire sufficient
products in
a timely
and effective
manner,
is critical
to ensuring,
among other
things, that
customer confidence
is
not diminished.
In addition, we
are exposed to
the risk
that our competitors
or our large
customers may introduce
their own
private label,
generic, or
low-cost products
that compete
with our
products at
lower price
points.
Such
products could
capture significant
market share
or decrease
market prices
overall, eroding
our sales
and margins.
Any failure
to develop sourcing
relationships with a
broad and deep
supplier base could
have an adverse
effect on
our business, financial condition or operating results.
INDUSTRY RISKS
Security risks generally associated with our information systems and our
technology products and services have
in the recent past adversely affected our business and results of operations, and could
in the future materially
adversely affect our business and our results of operations if such products, services,
or systems (or third-party
systems we rely on) are interrupted, damaged by unforeseen events, are subject
to cyberattacks or fail for any
extended period of time.
We rely on information systems (“IS”) in our business to obtain, rapidly process, analyze, manage and store
customer, product, supplier and employee data to, among other things:
•
maintain and manage worldwide systems to facilitate the purchase and
distribution of thousands of
inventory items from numerous distribution centers;
•
receive, process and ship orders on a timely basis;
•
manage the accurate billing and collections for our customers;
•
process payments to suppliers;
•
provide products and services that maintain certain of our customers’ electronic
medical or dental
records (including protected health information of their patients); and
•
maintain and manage global human resources, compensation and payroll
systems.
In addition to health information in our customers’ electronic
medical and dental records, certain of our IS stores
other sensitive personal and financial information, such as healthcare
and other information related to our
employees, as well as other sensitive information such as credit card
information from our third-party business
partners, that is confidential,
and in many cases subject to privacy laws.
Our IS are vulnerable to, among other things, natural disasters,
power losses, computer viruses, telecommunication
failures, cybersecurity threats and other criminal activity. Information security risks have significantly increased
in
recent years in part because of an overall increase in cyber incidents,
their increased sophistication, and the
involvement of organized crime, hackers, terrorists and foreign state agents. The healthcare
industry in particular
has been targeted by threat actors seeking to undermine companies’ cybersecurity
defensive measures.
We have processes in place intended to ensure that our security measures keep pace with new and emerging risks.
We regularly review,
monitor and implement multiple layers of security through technology, processes and our
people.
We utilize security technologies designed to protect and maintain the integrity of our IS and data, and our
defenses are monitored and routinely tested internally and by external
parties.
Despite these efforts, our facilities
and systems and those of our third-party service providers have been,
and may in the future be, vulnerable to
privacy and security incidents, cybersecurity attacks and data breaches,
acts of vandalism or theft, computer viruses
and other malicious code, misplaced or lost data, programming and/or human
errors,
attacks or other acts
undermining IS of third party business partners including our customers,
or other similar events that could impact
the security, reliability and availability of our systems.
In addition, hardware, software or applications developed
internally or procured from third parties may contain defects
in design or manufacture or other problems that could
unexpectedly compromise information security.
As a practical matter, so long as we depend on IS to operate our
business, and our business partners do the same, there can be no guaranty
that such measures will successfully stop
any one particular cybersecurity incident given the constantly evolving
nature of the threat.
We may also incur
substantial costs as we update our cybersecurity defense systems and our general
computer controls to meet
evolving challenges, and legislative or regulatory action related to cybersecurity
may increase our costs to develop
or implement new technology products and services.
A cyberattack that bypasses or compromises our IS cybersecurity / or general
information technology (“IT”)
controls (including third-party systems we rely on) causing an IS security breach
may lead, and has in the past led,
to a disruption of our IS business systems (including third-party systems we
rely on), interruption of operations
(including, without limitation, receiving, verifying, and processing customer orders,
customer service, accounts
payable, warehouse management and shipping, and systems tied to internal
controls over financial reporting), the
loss or alteration of business, financial, and other protected information,
a negative impact on our financial
performance, and to an adverse impact on our financial accounting
and reporting controls.
A cyberattack that bypasses or compromises our IS cybersecurity / or general
computer controls or those of third
parties with whom we engage may also lead to claims against us by
affected parties and/or governmental agencies,
and involve fines and penalties, as well as substantial defense and settlement
expenses.
Any of these impacts may
alone, or collectively, have a material impact on our business.
A successful cyberattack has, and may again in the
future, disrupt our business operations, adversely impact our financial
accounting and reporting of results of
operations, divert the attention of management, and adversely impact
our results of operations.
In addition, we develop products and provide services to our customers
that are technology-based, and a
cyberattack that bypasses the IS supporting our products or services causing
a security breach and/or perceived
security vulnerabilities in our products or services could also cause significant
loss of business and reputational
harm, and actual or perceived vulnerabilities may lead to claims against
us by our customers and/or governmental
agencies.
In addition, certain of our practice management products and services
purchased by health care
providers, such as physicians and dentists, are used to store and manage patient
medical or dental records.
These
customers are subject to laws and regulations which require that they
protect the privacy and security of those
records, and our products may be used as part of these customers’ comprehensive
data security programs, including
in connection with their efforts to comply with applicable privacy and security laws.
In addition to immaterial and unrelated prior incidents at certain of
our subsidiaries, in October 2023, Henry Schein
experienced a cybersecurity incident that primarily affected the operations of our
North American and European
dental and medical distribution businesses.
Henry Schein One, our practice management software, revenue
cycle
management and patient relationship management solutions business was
not affected, and our manufacturing
businesses were mostly unaffected.
Once we became aware of the issue, we took steps to assess, contain
and
remediate this incident.
We restored affected systems and applications, our distribution operations resumed and we
reactivated our ecommerce platform.
We also notified law enforcement and our employees, customers, suppliers
and investors, informing them of both the incident and management’s efforts to mitigate its impact on our daily
operations and data maintained on the Company’s systems.
Subsequently, on or about November 8, 2023, we
determined that the threat actor obtained personal and sensitive information
maintained on our systems belonging to
certain third parties and since that date we have notified affected parties and potentially
affected parties as
appropriate.
The scope of personal and sensitive data impacted is still under investigation.
On November 22, 2023,
we experienced a related disruption to our ecommerce platform and
related applications, which has since been
remediated.
The October 2023 cybersecurity incident disrupted key
business operations, adversely impacted our
financial results for the fourth quarter and full year 2023, diverted
attention of management, and caused the
Company to incur significant remediation costs.
We continue to review the effects of the incident on the
Company’s business as we do expect some short-term residual impact on our financial results in 2024.
In January
2024, two putative class actions were filed against us based on the incident
and one of these actions is still pending.
We are spending, and plan to expend in the future, additional resources to continue to protect against, or to address
problems caused by, business interruptions, and data security breaches.
In addition, customers and suppliers may impose additional cybersecurity
requirements on us as a result of the
incident we experienced in October 2023, and some customers and suppliers
have made such requests to date.
We
cannot guarantee that we will be able to satisfy such additional requirements,
and failure to satisfy such
requirements could result in a loss of revenue or diminished product
availability that could materially affect our
business adversely.
We also may be perceived as a more vulnerable target of the cyber hackers as a result of the
October 2023 incident.
If the Company is subject to more attacks in the future as a result of
the recent incident, this
could materially affect our business adversely.
We maintain cyber insurance, subject to certain retentions and policy limitations.
With respect to the October 2023
cybersecurity incident, we have a $60 million insurance policy, following a $5 million retention.
The health care products distribution industry is highly competitive
(including, without limitation, competition
from third-party online commerce sites) and consolidating, and we may not
be able to compete successfully.
We compete with numerous companies, including several major manufacturers and distributors.
Some of our
competitors have greater financial and other resources than we do, which
could allow them to compete more
successfully.
Most of our products are available from several sources and our customers
tend to have relationships
with several distributors.
Competitors could obtain exclusive rights to market particular
products, which we would
then be unable to market.
Manufacturers also could increase their efforts to sell directly to end-users and
thereby
eliminate or reduce our role in distribution.
Industry consolidation among health care product distributors and
manufacturers, price competition, product unavailability, whether due to our inability to gain access to products or
to interruptions in manufacturing supply, or the emergence of new competitors, also could increase competition.
Consolidation has also increased among manufacturers of health care
products, which could have a material
adverse effect on our margins and product availability.
We could be subject to charges and financial losses in the
event we fail to satisfy minimum purchase commitments contained
in some of our contracts.
Additionally,
traditional health care supply and distribution relationships are being challenged
by electronic online commerce
solutions.
The continued advancement of online commerce by third
parties will require us to cost-effectively adapt
to changing technologies, to enhance existing services and to differentiate our business
(including with additional
value-added services) to address changing demands of consumers and
our customers on a timely basis.
The
emergence of such potential competition and our inability to anticipate and
effectively respond to changes on a
timely basis could have a material adverse effect on our business.
The health care industry is experiencing changes due to political, economic
and regulatory influences that could
materially adversely affect our business.
The health care industry is highly regulated and subject to changing
political, economic, and regulatory influences.
In recent years, the health care industry has undergone, and is in the process of undergoing,
significant changes
driven by various efforts to reduce costs, including, among other factors: trends
toward managed care; collective
purchasing arrangements and consolidation among office-based health care practitioners;
and changes in
reimbursements to customers, including increased attention to value-based payment
arrangements, as well as
growing enforcement activities (and related monetary recoveries) by governmental
officials.
Both our profitability
and the profitability of our customers may be materially adversely affected by laws
and regulations reducing
reimbursement rates for pharmaceuticals, medical supplies and devices,
and/or medical treatments or services, or
changes to the methodology by which reimbursement levels are determined.
If we are unable to react effectively to
these and other changes in the health care industry, our business could be materially adversely affected.
The ACA
greatly expanded health insurance coverage in the United States and has been
the target of litigation and
Congressional reform efforts since its adoption.
Any outcome of future court cases that change the ACA, in
addition to future legislation, regulation, guidance and/or Executive Orders
that do the same, could have a
significant impact on the U.S. healthcare industry and the ability or willingness
of individuals to engage with it.
Expansion of GPOs, DSOs or provider networks and the multi-tiered
costing structure may place us at a
competitive disadvantage.
The health care products industry is subject to a multi-tiered costing structure, which
can vary by manufacturer
and/or product.
Under this structure, certain institutions can obtain more favorable
prices for health care products
than we are able to obtain.
The multi-tiered costing structure continues to expand as many large integrated health
care providers and others with significant purchasing power, such as GPOs and DSOs, demand more favorable
pricing terms.
Additionally, the formation of provider networks, GPOs and DSOs may shift purchasing decisions
to entities or persons with whom we do not have a historical relationship
and may threaten our ability to compete
effectively, which could in turn negatively impact our financial results.
In addition, such organizations may
establish direct relationships with manufacturers, thereby either eliminating
or reducing the services historically
provided by distributors.
Although we are seeking to obtain similar terms from manufacturers
to access lower
prices demanded by GPO and DSO contracts or other contracts,
and to develop relationships with existing and
emerging provider networks, GPOs and DSOs, we cannot guarantee that such terms will
be obtained or contracts
executed.
Increases in shipping costs or service issues with our third-party shippers
could harm our business.
Our ability to meet our customers’ expedited delivery expectations is an
integral component of our business
strategy for which our customers rely.
Shipping is a significant expense in the operation of our business.
We ship
almost all of our orders through third-party delivery services, and typically bear
the cost of shipment.
Accordingly,
any significant increase in shipping rates could have a material adverse
effect on our business, financial condition
or operating results.
While we have recently experienced increases in the cost of shipping,
we do not expect these
additional expenses to be material to our results.
However, it is possible that such costs could be material in the
future.
Similarly, strikes or other service interruptions by those shippers, including at transportation centers or
shipping ports, could cause our operating expenses to rise and materially
adversely affect our ability to deliver
products on a timely basis.
MACRO-ECONOMIC AND POLITICAL RISKS
Uncertain global and domestic macro-economic and political conditions
could materially adversely affect our
results of operations and financial condition.
Uncertain global and domestic macro-economic and political conditions
that affect the economy and the economic
outlook of the United States, Europe, Asia, and other parts of the
world could materially adversely affect our results
of operations and financial condition.
These uncertainties, include, among other things:
•
election results;
•
changes to laws and policies governing foreign trade, tariffs and sanctions, or greater
restrictions on
imports and exports;
•
supply chain disruptions;
•
changes in laws and policies governing health care or data privacy;
•
changes to the relationship between the United States and China;
•
sovereign debt levels;
•
the inability of political institutions to effectively resolve actual or perceived
economic, currency or
budgetary crises or issues;
•
consumer confidence;
•
unemployment levels (and a corresponding increase in the uninsured
and underinsured population);
•
changes in regulatory and tax regulations;
•
interest rate fluctuations, and strengthening of the dollar, which have and will continue to
impact our
results of operations;
•
availability of capital;
•
increases in fuel and energy costs;
•
the effect of inflation on our ability to procure products and our ability to increase
prices over time and
pass through to our customers price increases we may receive;
•
changes in tax rates and the availability of certain tax deductions;
•
increases in labor costs or health care costs;
•
the threat or outbreak of war, terrorism or public unrest (including, without limitation, the war in
Ukraine, the Israel-Gaza war and other unrest and threats in the Middle East,
and the possibility of a
wider European or global conflict); and
•
changes in laws and policies governing manufacturing, development, and
investment in territories and
countries where we do business.
Additionally, changes in government, government debt and/or budget crises may lead to reductions in government
spending in certain countries, which could reduce overall health care spending,
and/or higher income or corporate
taxes, which could depress spending overall.
Recessionary or inflationary conditions and depressed levels of
consumer and commercial spending may also cause customers to
reduce, modify, delay,
or cancel plans to purchase
our products and may cause suppliers to reduce their output or change
their terms of sale.
We have experienced
inflationary pressures, including higher freight costs and interest expense.
Although inflation impacts both our
revenues and costs, the depth and breadth of our product portfolio often
allows us to offer lower-cost national brand
solutions or corporate brand alternatives to our more price-sensitive
customers who are unable to absorb price
increases, thus positioning us to protect our gross profit.
The strengthening of the dollar, likewise, has impacted
our revenues and costs, but neither inflation nor exchange rates have
materially impacted our results of operations
in fiscal year 2023.
We generally sell products to customers with payment terms.
If customers’ cash flow or
operating and financial performance deteriorate, or if they are unable to
make scheduled payments or obtain credit,
they may not be able to, or may delay, payment to us.
Likewise, for similar reasons suppliers may restrict credit or
impose different payment terms.
REGULATORY
AND LITIGATION RISKS
Failure to comply with existing and future regulatory requirements
could materially adversely affect our
business.
We strive to be compliant with the applicable laws, regulations and guidance described below in all material
respects, and believe we have effective compliance programs and other controls
in place to ensure substantial
compliance.
However, compliance is not guaranteed either now or in the future as certain laws, regulations
and
guidance may be subject to varying and evolving interpretations that could
affect our ability to comply, as well as,
future changes, additions and enforcement approaches, including in light
of political changes.
When we discover
situations of non-compliance we seek to remedy them and bring
the affected area back into compliance.
Changes
with respect to the applicable laws, regulations and guidance described below
may require us to update or revise
our operations, services, marketing practices, and compliance programs
and controls, and may impose additional
and unforeseen costs on us, pose new or previously immaterial risks to us, or
may otherwise have a material
adverse effect on our business.
There can be no assurance that current and future government
regulations will not
adversely affect our business, and we cannot predict new regulatory priorities, the
form, content or timing of
regulatory actions, and their impact on the health care industry and on our
business and operations.
Global efforts toward healthcare cost containment continue to exert pressure on
product pricing.
In the United
States, in addition to other government efforts to control health care costs, there has been
increased scrutiny on drug
pricing and concurrent efforts to control or reduce drug costs by Congress, the President,
executive branch agencies
and various states.
We and our subsidiaries may be required to report drug pricing data under federal laws and
regulations.
At the state level, several states have adopted laws, that may
apply to some of our operations, that
require drug manufacturers, including re-packagers or re-labelers, to provide
advance notice of certain price
increases and to report information relating to those price increases, while
others have taken legislative or
administrative action to establish prescription drug affordability boards or
multi-payer purchasing pools to reduce
the cost of prescription drugs.
At the federal level, several related bills have been introduced
and regulations
proposed which, if enacted or finalized, respectively, would impact drug pricing and related costs.
Under the Sunshine Act, we are required to collect and report detailed
information regarding certain financial
relationships we have with covered recipients, including physicians, dentists,
teaching hospitals, and certain other
non-physician practitioners.
We and our subsidiaries may be required to report information under certain state
transparency laws that address circumstances not covered by the Sunshine
Act, and some of these state laws, as
well as the federal law, can be unclear.
We are also subject to foreign regulations requiring transparency of certain
interactions between suppliers and their customers.
While we believe we have substantially compliant programs
and controls in place satisfying the above laws and requirements,
such compliance imposes additional costs on us
and the requirements are sometimes unclear.
In the United States, government actions to seek to increase health-
related price transparency may also affect our business.
Our business is subject to additional requirements under various local, state,
federal and international laws and
regulations applicable to the sale and distribution of, and third-party payment
for, pharmaceuticals and medical
devices and HCT/P products.
Among the federal laws with which we must comply are the Controlled Substances
Act, the FDC Act, the Federal Drug Quality and Security Act, including DSCSA,
Section 361 of the Public Health
Services Act and Section 401 of the Consolidated Appropriations Act
of the Social Security Act.
Among other
things, such laws, and the regulations promulgated thereunder:
•
regulate the introduction, manufacture, advertising, marketing and promotion,
sampling, pricing and
reimbursement, labeling, packaging, storage, handling, returning or
recalling, reporting, and
distribution of, and record keeping for drugs, HCT/P products and
medical devices,
including
requirements with respect to unique medical device identifiers;
•
subject us to inspection by the FDA and DEA and similar state authorities;
•
regulate the storage, transportation and disposal of certain of our products
that are considered
hazardous materials;
•
require us to advertise and promote our drugs and devices in accordance
with applicable FDA
requirements;
•
require us to report average sales price (ASP) for drugs or biologicals payable
under Medicare Part B to
CMS with or without a Medicaid drug rebate agreement;
•
require registration with the FDA and the DEA and various state agencies;
•
require record keeping and documentation of transactions involving drug
products;
•
require us to design and operate a system to identify and report suspicious
orders of controlled
substances to the DEA and certain states;
•
require us to manage returns of products that have been recalled and subject
us to inspection of our
recall procedures and activities;
•
impose on us reporting requirements if a pharmaceutical, HCT/P product or
medical device causes
serious illness, injury or death;
•
require manufacturers, wholesalers, re-packagers and dispensers of prescription
drugs to identify and
trace certain prescription drugs as they are distributed;
•
require the licensing of prescription drug wholesalers and third-party
logistics providers; and
•
mandate compliance with standards for the recordkeeping, storage
and handling of prescription drugs,
and associated reporting requirements.
The FDA has become increasingly active in addressing the regulation of
computer software and digital health
products intended for use in health care settings.
The Cures Act, signed into law on December 13, 2016, among
other things, amended the medical device definition to exclude certain software
from FDA regulation, including
certain clinical decision support software.
On September 27, 2019, the FDA issued a suite of guidance documents
on digital health products, which incorporated applicable Cures Act standards,
and on September 28, 2022, the
FDA subsequently finalized certain of these guidance documents, including
regarding the types of clinical decision
support tools and other software that are exempt from regulation by the FDA as
medical devices, and the FDA
continues to issue new guidance in this area.
Certain of our businesses involve the development and
sale of
software and related products to support physician and dental practice management,
and it is possible that the FDA
or foreign government authorities could determine that one or more of our products
is subject to regulation as a
medical device, which could subject us or one or more of our businesses to
substantial additional requirements,
costs and potential enforcement actions or liabilities for noncompliance with
respect to these products. Some of our
imaging software is regulated as a medical device which subjects our businesses
to substantial additional
requirements, costs and potential enforcement actions or liabilities for noncompliance
with respect to these
products.
Applicable federal, state, local, and foreign laws and regulations also may require
us to meet various standards
relating to, among other things, licensure or registration, program eligibility, procurement, third-party
reimbursement, sales and marketing practices, product integrity, and supply tracking to product manufacturers,
product labeling, personnel, privacy and security of health or other personal
information, installation, maintenance
and repair of equipment and the importation and exportation of products.
The FDA and DEA, as well as CMS
(including with respect to complex Medicare reimbursement requirements
applicable to our specialty home medical
supplies business) and state Medicaid agencies, have recently increased
their regulatory and enforcement activities
and, in particular, the DEA has heightened enforcement activities due to the opioid crisis in the United States.
Our
business is also subject to requirements of similar and other foreign governmental
laws and regulations affecting
our operations abroad.
The failure to comply with any of these laws or regulations, or new interpretations
of existing laws and regulations,
or the imposition of any additional laws and regulations, could
materially adversely affect our business.
The costs
to us associated with complying with the various applicable statutes
and regulations, as they now exist and as they
may be modified, could be material.
Allegations by a governmental body that we have not complied
with these
laws could have a material adverse effect on our businesses.
While we believe that we are substantially compliant
with applicable laws and regulations, and believe we have adequate
compliance programs and controls in place to
ensure substantial compliance, if it is determined that we have not complied
with these laws, we are potentially
subject to warning letters, substantial civil and criminal penalties,
mandatory recall of product, seizure of product
and injunction, consent decrees and suspension or limitation of payments
to us, product sale and distribution.
If we
enter into settlement agreements to resolve allegations of non-compliance, we
could be required to make settlement
payments or be subject to civil and criminal penalties, including
fines and the loss of licenses.
Non-compliance
with government requirements could also adversely affect our ability to participate
in important federal and state
government health care programs, such as Medicare and Medicaid,
and damage our reputation.
The EU Medical Device Regulation (“MDR”) may adversely affect our business.
The EU MDR, applicable since May 26, 2021, significantly modifies and intensifies
the regulatory compliance
requirements for the medical device industry as a whole.
Among other things, the EU MDR:
•
strengthens the rules on placing devices on the market and reinforces surveillance
once they are
available;
•
establishes explicit provisions on manufacturers’ responsibilities
for the follow-up of the quality,
performance and safety of devices placed on the market;
•
improves the traceability of medical devices throughout the supply chain to the end-user
or patient
through a unique identification number;
•
sets up a central database to provide patients, healthcare professionals and
the public with
comprehensive information on products available in the EU;
•
strengthens rules for the assessment of certain high-risk devices, such
as implants, which may have to
undergo an additional check by experts before they are placed on the market; and
•
identifies importers and distributors and medical device products through
registration in a database
(EUDAMED not due, for the time being, until the end of 2027 at
the earliest, as mentioned above).
In particular, the EU MDR imposes strict requirements for the confirmation that a product
meets the regulatory
requirements, including regarding a product’s clinical evaluation and a company’s quality systems, and for the
distribution, marketing and sale of medical devices, including post-market surveillance.
As mentioned above,
pursuant to Regulation 2023/607 and subject to certain conditions, medical devices
that (i) obtained a certificate
under the EU Medical Device Directive from May 25, 2017, (ii) which was
still valid on May 26, 2021, and (iii)
has not been subsequently withdrawn may, for the moment, continue to be placed on the market or put into service
until December 31, 2027 for higher risk devices or December 31, 2028 for medium
and lower risk devices.
Nevertheless, EU MDR requirements regarding the distribution,
marketing and sale including quality systems and
post-market surveillance have to be observed by manufacturers, importers
and distributors as of the application date
(i.e., May 26, 2021).
The modifications created by the EU MDR may have an impact
on the way we design and
manufacture products and the way we conduct our business in
the EEA.
If we fail to comply with laws and regulations relating to health care
fraud or other laws and regulations, we
could suffer penalties or be required to make significant changes to our operations,
which could materially
adversely affect our business.
Certain of our businesses are subject to federal and state (and similar
foreign) health care fraud and abuse, referral
and reimbursement laws and regulations with respect to their operations.
Some of these laws, referred to as “false
claims laws,” prohibit the submission or causing the submission of false or fraudulent
claims for reimbursement to
federal, state, and other health care payers and programs.
Other laws, referred to as “anti-kickback laws,” prohibit
soliciting, offering, receiving or paying remuneration in order to induce or reward
the referral of a patient or
ordering, purchasing, leasing or arranging for, or recommending ordering, purchasing or leasing of,
items or
services that are paid for by federal, state and other health care payers and programs.
Certain additional state and
federal laws, such as the federal Physician Self-Referral Law, commonly known as the “Stark Law,” prohibit
physicians and other health care professionals from referring a patient
to an entity with which the physician (or
family member) has a financial relationship, for the furnishing of certain designated
health services (for example,
durable medical equipment and medical supplies), unless an exception applies.
Violations of Anti-Kickback
statutes or the Stark Law may be enforced as violations of the federal False Claims
Act.
The fraud and abuse laws and regulations have been subject to heightened
enforcement activity over the past few
years, and significant enforcement activity has been the result of “relators” who
serve as whistleblowers by filing
complaints in the name of the United States (and if applicable, particular states)
under applicable false claims laws,
and who may receive up to 30% of total government recoveries.
Penalties under fraud and abuse laws may be
severe, including treble damages and substantial civil penalties under
the federal False Claims Act, as well as
potential loss of licenses and the ability to participate in federal and state
health care programs, criminal penalties,
or imposition of a corporate compliance monitor, which could have a material adverse effect on our business.
Also,
these measures may be interpreted or applied by a prosecutorial, regulatory or
judicial authority in a manner that
could require us to make changes in our operations or incur substantial defense
and settlement expenses.
Even
unsuccessful challenges by regulatory authorities or private relators could result
in reputational harm and the
incurring of substantial costs.
Most states have adopted similar state false claims laws, and these state
laws have
their own penalties which may be in addition to federal False Claims
Act penalties, as well as other fraud and abuse
laws.
With respect to measures of this type, the United States government (among others) has expressed concerns
about
financial relationships between suppliers on the one hand and physicians,
dentists, and other health care providers,
on the other.
As a result, we regularly review and revise our marketing practices
as necessary to facilitate
compliance.
Our aspirations, goals and disclosures related to environmental, social
and governance matters and the focus on
regulators and private litigants among other things on related claims made
by companies and funds expose us to
numerous risks, including reputational, financial, legal and other risks,
that could have an adverse impact on us,
including on our stock price.
California has adopted stringent new climate disclosure requirements,
as has the EU,
and the SEC appears about to adopt expansive new disclosure requirements
on climate change.
In the EU, the Directive No. 2019/1937 of October 23, 2019,
on the protection of persons who report breaches of
Union law,
organizes the legal protection of whistleblowers.
This Directive covers whistleblowers reporting
breaches of certain EU laws, in particular as regards public health, the above-mentioned
Directive No. 2001/83,
Regulation No. 726/2004 or, as regards data protection, the GDPR.
The Directive protects a wide range of people
and includes former employees.
All private companies with 50 or more employees are required
to create effective
internal reporting channels.
All EU Member States other than Poland and Estonia have now implemented
the
Directive.
We also are subject to the requirements of the new Directive No. 2022/2464 on corporate sustainability reporting
(“CSR Directive”) adopted on December 14, 2022 and which has to be
implemented by EU members states by July
6, 2024, at the latest.
By amending Directives No. 2004/109, No. 2006/43, No. 2013/34
and Regulation No.
537/2014, the CSR Directive strengthens the existing rules on non-financial
reporting by setting new requirements
for large companies to publish sustainability-related information and, in particular, disclose details about
their risks
and impacts on environmental matters.
We
also are subject to certain United States and foreign laws and regulations
concerning the conduct of our foreign
operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery
Act, German anti-corruption laws
and other anti-bribery laws and laws pertaining to the accuracy of our internal
books and records, which have been
the focus of increasing enforcement activity globally in recent years.
Our businesses are generally subject to
numerous other laws and regulations that could impact our financial
results, including, without limitation,
securities, antitrust, consumer protection, and marketing laws and regulations.
In the EU, both active and passive bribery are criminalized.
The EU Council Framework Decision 2003/568/JHA
of 22 July 2003
on combating corruption in the private sector
establishes more detailed rules on the liability of
legal persons and deterrent sanctions.
However, the liability of legal persons is regulated at a national level.
Failure to comply with fraud and abuse laws and regulations, and other
laws and regulations, could result in
significant civil and criminal penalties and costs, including the loss of
licenses and the ability to participate in
federal and state health care programs, and could have a material adverse
effect on our business.
We may
determine to enter into settlements, make payments, agree to consent decrees
or enter into other arrangements to
resolve such matters.
Intentional or unintentional failure to comply with settlement agreements
or consent decrees
could materially adversely affect our business.
While we believe that we are substantially compliant with applicable fraud and
abuse and other laws and
regulations, and believe we have adequate compliance programs and controls
in place to ensure substantial
compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our
services or marketing practices in response to changes in applicable law or
interpretation of laws, could have a
material adverse effect on our business.
If we fail to comply with laws and regulations relating to the collection,
storage and processing of sensitive
personal information or standards in electronic health records or transmissions,
we could be required to make
significant changes to our products, or incur substantial fines, penalties, or
other liabilities.
Our businesses that involve physician and dental practice management
products, and our specialty home medical
supply businesses, include electronic information technology systems
that store and process personal health,
clinical, financial, and other sensitive information of individuals.
These information technology systems may be
vulnerable to breakdown, wrongful intrusions, data breaches and
malicious attack, which could require us to
expend significant resources to eliminate these problems and address
related security concerns, and could involve
claims against us by private parties and/or governmental agencies.
We are directly or indirectly subject to numerous and evolving federal, state, local and foreign laws and regulations
that protect the privacy and security of personal information, such as HIPAA, CAN-SPAM, TCPA,
Section 5 of the
FTC Act, the CCPA, and the CPRA that became effective on January 1, 2023.
Laws and regulations relating to
privacy and data protection are continually evolving and subject to
potentially differing interpretations.
These
requirements may not be harmonized, may be interpreted and applied in
a manner that is inconsistent from one
jurisdiction to another or may conflict with other rules or our practices.
Our businesses’ failure to comply with
these laws and regulations could expose us to breach of contract claims, substantial
fines, penalties and other
liabilities and expenses, costs for remediation and harm to our reputation.
Also, evolving laws and regulations in
this area could restrict the ability of our customers to obtain, use or disseminate patient
information, or could
require us to incur significant additional costs to re-design our products
to reflect these legal requirements, which
could have a material adverse effect on our operations.
In addition, the European Parliament and the Council of the EU adopted
the GDPR effective from May 25, 2018,
which increased privacy rights for Data Subjects, including individuals
who are our customers, suppliers and
employees.
The GDPR extended the scope of responsibilities for data controllers
and data processors, and
generally imposes increased requirements and potential penalties on companies,
such as us, that are either
established in the EU and process personal data of Data Subjects (regardless
the Data Subject location), or that are
not established in the EU but that offer goods or services to Data Subjects in the EU
or monitor their behavior in the
EU. Noncompliance can result in penalties of up to the greater of EUR 20
million, or 4% of global company
revenues (sanction that may be public), and Data Subjects may seek damages.
Member states may individually
impose additional requirements and penalties regarding certain limited
matters (for which the GDPR left some
room of flexibility), such as employee personal data.
With respect to the personal data it protects, the GDPR
requires, among other things, controller accountability, consents from Data Subjects or another acceptable legal
basis to process the personal data, notification within 72 hours
of a personal data breach where required, data
integrity and security, and fairness and transparency regarding the storage, use or other processing of the personal
data.
The GDPR also provides rights to Data Subjects relating notably
to information, access, rectification, erasure
of the personal data and the right to object to the processing.
On August 20, 2021, China promulgated the PIPL, which took effect on November
1, 2021.
The PIPL imposes
specific rules for processing personal information and it also specifies
that the law shall also apply to personal
information activities carried out outside China but for the purpose
of providing products or services to PRC
citizens.
Any non-compliance with these laws and regulations may subject
us to fines, orders to rectify or terminate
any actions that are deemed illegal by regulatory authorities, other penalties,
as well as reputational damage or legal
proceedings against us, which may affect our business, financial condition or results
of operations.
The PIPL
carries maximum penalties of CNY50 million or 5% of the annual revenue
of entities that process personal data.
In the United States, the CCPA, which increases the privacy protections afforded California residents, became
effective January 1, 2020.
The CCPA generally requires companies, such as us, to institute additional protections
regarding the collection, use and disclosure of certain personal information
of California residents.
Compliance
with the obligations imposed by the CCPA depends in part on how particular regulators interpret and apply them.
Regulations were released in August of 2020, but there remains some
uncertainty about how the CCPA will be
interpreted by the courts and enforced by the regulators.
If we fail to comply with the CCPA or if regulators assert
that we have failed to comply with the CCPA, we may be subject to certain fines or other penalties and litigation,
any of which may negatively impact our reputation, require us to expend
significant resources, and harm our
business.
Furthermore, California voters approved the CPRA on November 3,
2020, which will amend and expand
the CCPA, including by providing consumers with additional rights with respect to their personal information, and
creating a new state agency to enforce CCPA and CPRA.
The CPRA came into effect on January 1, 2023, applying
to information collected by businesses on or after January 1, 2022.
Other states, as well as the federal government, have increasingly
considered the adoption of similarly expansive
personal privacy laws, backed by significant civil penalties for non-compliance.
While we believe we have
substantially compliant programs and controls in place to comply with
the GDPR, CCPA, PIPL and CPRA
requirements, our compliance with data privacy and cybersecurity laws
is likely to impose additional costs on us,
and we cannot predict whether the interpretations of the requirements, or
changes in our practices in response to
new requirements or interpretations of the requirements, could have a
material adverse effect on our business.
We also sell products and services that health care providers, such as physicians and dentists, use to store and
manage patient medical or dental records.
These customers and we are subject to laws, regulations and
industry
standards, such as HIPAA and the Payment Card Industry Data Security Standards, which require the protection of
the privacy and security of those records.
Our products or services may be used as part of these customers’
comprehensive data security programs, including in connection with their
efforts to comply with applicable data
privacy and security laws and contractual requirements.
Perceived or actual security vulnerabilities in our products
or services, or the perceived or actual failure by us or our customers who
use our products or services to comply
with applicable legal or contractual data privacy and security requirements,
may not only cause us significant
reputational harm, but may also lead to claims against us by our customers
and/or governmental agencies and
involve substantial fines, penalties and other liabilities and expenses
and costs for remediation.
Additionally, under
the GDPR, health data belong to the category of “sensitive data” and benefit
from specific protection.
Processing
of such data is generally prohibited, except for specific exceptions.
Certain of our businesses involve the manufacture and sale of electronic
health record (EHR) systems and other
products linked to government supported incentive programs, where
the EHR systems must be certified as having
certain capabilities designated in evolving standards, such as those adopted
by CMS and ONC.
In order to maintain
certification of our EHR products, we must satisfy the changing governmental
standards.
If any other EHR systems
do not meet these standards, yet have been relied upon by health care providers
to receive federal incentive
payments, we may be exposed to risk, such as under federal health care
fraud and abuse laws, including the False
Claims Act.
Additionally, effective September 1, 2023, the OIG for HHS issued a final rule implementing civil
money penalties for information blocking as established by the Cures Act.
OIG incorporated regulations published
by ONC as the basis for enforcing information blocking penalties.
Each information blocking violation carries a $1
million penalty.
While we believe we are substantially in compliance with such certifications
and with applicable
fraud and abuse laws and regulations and that we have adequate compliance
programs and controls in place to
ensure substantial compliance, we cannot predict whether changes in
applicable law, or interpretation of laws, or
resulting changes in our compliance programs and controls, could have a
material adverse effect on our business.
Moreover, in order to satisfy our customers and comply with evolving legal requirements, our products
may need to
incorporate increasingly complex functionality, such as with respect to reporting and information blocking.
Although we believe we are positioned to accomplish this, the effort may involve
increased costs, and our failure to
implement product modifications, or otherwise satisfy applicable standards,
could have a material adverse effect on
our business.
Additionally, as electronic medical devices are increasingly connected to each other and to other technology, the
ability of these connected systems to safely and effectively exchange and use exchanged
information becomes
increasingly important.
As a medical device manufacturer, we must manage risks including those associated with
an electronic interface that is incorporated into a medical device.
Tax legislation could materially adversely affect our financial results and tax liabilities.
We are subject to the tax laws and regulations of the United States federal, state, and local governments, as well as
foreign jurisdictions.
From time to time, various legislative initiatives may be proposed
that could materially
adversely affect our tax positions.
There can be no assurance that our effective tax rate will not be
materially
adversely affected by legislation resulting from these initiatives.
In addition, tax laws and regulations are extremely
complex and subject to varying interpretations.
Although we believe that our historical tax positions are sound and
consistent with applicable laws, regulations and existing precedent,
there can be no assurance that our tax positions
will not be challenged by relevant tax authorities or that we would be
successful in any such challenge.
We face inherent risk of exposure to product liability, intellectual property infringement and other claims in the
event that the use of the products we sell results in injury.
Our business involves a risk of product liability, intellectual property infringement and other claims in the ordinary
course of business, and from time to time we are named as a defendant
in cases as a result of our distribution of
products.
Additionally, we own interests in companies that manufacture certain dental and medical products.
As a
result, we could be subject to the potential risk of product liability, intellectual property infringement or other
claims relating to the manufacture and distribution of products by
those entities.
In addition, as our corporate brand
business continues to grow, purchasers of such products may increasingly seek recourse directly from us, rather
than the ultimate product manufacturer, for product-related claims.
Another potential risk we face in the
distribution of our products is liability resulting from counterfeit or tainted products
infiltrating the supply chain.
In
addition, some of the products that we transport and sell are considered hazardous
materials.
The improper
handling of such materials or accidents involving the transportation
of such materials could subject us to liability or
at least legal action that could harm our reputation.
Customs policies or legislative import restrictions could hinder the Company’s ability to import goods necessary
to our operations on a timely basis and result in government enforcement
actions and/or sanctions.
Government-imposed import policies and legislation regulating the
import of goods and prohibiting the use of
forced labor or human trafficking could result in delays or the inability to import
goods in a timely manner that are
necessary to our operations, and such policies or legislation could also
result in financial penalties, other sanctions,
government enforcement actions and reputational harm.
While the Company has policies against and seeks to
avoid the import of goods that are manufactured in whole or in part by forced
labor or through human trafficking,
as a result of legislative and governmental policy initiatives, we may be
subject to increasing potential delays,
added costs, supply chain disruption and other restrictions.
GENERAL RISKS
Our business operations, results of operations, cash flows, financial condition
and liquidity may be negatively
impacted by the effects of disease outbreaks, epidemics, pandemics, or similar wide-spread
public health
concerns and other natural or man-made disasters, such as terrorism, civil
unrest, fire, and extreme weather
.
Our business operations, results of operations, cash flows, financial condition
and liquidity may be negatively
impacted by the effects of disease outbreaks, epidemics, pandemics, similar wide-spread
public health concerns and
other natural or man-made disasters, such as terrorism, civil unrest, fire,
and extreme weather (“disasters”).
For
example, as a global healthcare solutions company, the COVID-19 pandemic and the governmental responses
to it
had, and may again have, a material adverse effect on our business, results of operations
and cash flows and may
result in a material adverse effect on our financial condition and liquidity.
The impacts and potential impacts from
the COVID-19 pandemic included, and could include as a result of other disasters,
the following, among other
impacts:
•
significant volatility in supply, demand and selling prices for personal protective equipment (PPE), test
kits and related products;
•
reduction in peoples’ ability and willingness to be in public;
•
reduction in peoples’ ability and willingness to seek elective care;
•
interrupted operations of industries that use or manufacture the products
we distribute;
•
impact of adapted business practices;
•
significant changes in political conditions;
•
volatility in the financial market; and
•
unavailability or impairment of our manufacturing, distribution, or other
facilities, or firmwide systems
such as our information systems.
The impact from disasters may also exacerbate other risks discussed herein,
any of which could have a material
adverse effect on us.
Our global operations are subject to inherent risks that could materially
adversely affect our business.
Our global operations are subject to risks that could materially adversely affect our business.
The risks that our
global operations are subject to include, among other things:
•
difficulties and costs relating to staffing and managing foreign operations;
•
difficulties and delays inherent in sourcing products, establishing channels of distribution
and contract
manufacturing in foreign markets;
•
fluctuations in the value of foreign currencies;
•
uncertainties relating to trade agreements and international trade relationships;
•
longer payment cycles of foreign customers and difficulty of collecting receivables
in foreign
jurisdictions;
•
repatriation of cash from our foreign operations to the United States;
•
regulatory requirements, including, without limitation, anti-bribery, anti-corruption and laws pertaining
to the accuracy of our internal books and records;
•
litigation risks, new or unanticipated litigation developments and
the status of litigation matters;
•
unexpected difficulties in importing or exporting our products and import/export
tariffs, quotas,
sanctions or penalties;
•
limitations on our ability under local laws to protect our intellectual
property;
•
unexpected regulatory, legal, economic and political changes in foreign markets;
•
changes in tax regulations that influence purchases of capital equipment;
•
civil disturbances, geopolitical turmoil, including terrorism, war or political
or military coups; and
•
risks associated with climate change, including physical risks such as
impacts from extreme weather
events and other potential physical consequences, regulatory and technological
requirements, market
developments, stakeholder expectations and reputational risk.
Our future success is substantially dependent upon our senior
management, and our revenues and profitability
depend on our relationships with capable sales representatives,
service technicians, and other personnel who
interact directly with our customers, as well as customers, suppliers
and manufacturers of the products that we
distribute.
Our future success is substantially dependent upon the efforts and abilities of
members of our existing senior
management, particularly Stanley M. Bergman, Chairman and Chief Executive Officer.
In November 2022, Mr.
Bergman’s employment agreement was extended through December 31, 2025.
Although the Company has an
internal succession plan for its senior leadership team, including Mr. Bergman, the loss of the services of Mr.
Bergman could have a material adverse effect on our business.
We do not currently have “key man” life insurance
policies on any of our employees.
Competition for senior management is intense, burnout and turn-over rates
are
increasing workplace concerns, and we may not be successful in
attracting and retaining key personnel.
Additionally, our future revenues and profitability depend on our ability to maintain satisfactory relationships with
qualified sales representatives, service technicians, and other personnel
who interact directly with our customers, as
well as customers, suppliers, and manufacturers.
If we fail to maintain our existing relationships with such persons
or fail to acquire relationships with such key persons in the future,
our business may be materially adversely
affected.
Disruptions in the financial markets may materially adversely
affect the availability and cost of credit to us.
Our ability to make scheduled payments or refinance our obligations with
respect to indebtedness will depend on
our operating and financial performance, which in turn is subject to prevailing
economic conditions and financial,
business and other factors beyond our control.
Disruptions in the financial markets may materially adversely affect
the availability and cost of credit to us.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.
Unresolved Staff Comments
We have no unresolved comments from the staff of the SEC that were issued 180 days or more preceding the end of
our 2023 fiscal year.

---

ITEM 2. PROPERTIES
ITEM 2.
Properties
Within our health care distribution segment (for properties with more than 100,000 square feet) we lease
and/or
own approximately 5.7 million square feet of properties, consisting of distribution,
office, showroom,
manufacturing and sales space, in locations including the United States, Australia,
Austria, Belgium, Brazil,
Canada, Chile, China, the Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Japan,
Liechtenstein, Luxembourg, Malaysia, Mexico, Morocco, the Netherlands, New Zealand,
Poland, Portugal,
Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United
Arab Emirates and the United Kingdom.
Lease expirations range from 2024 to 2041.
We believe that our properties are in good condition, are well maintained and are suitable and adequate to carry on
our business.
We have additional operating capacity at certain distribution center facilities.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
Legal Proceedings
For a discussion of Legal Proceedings, see
Note 16 - Commitments and Contingencies
of the Notes to the
Consolidated Financial Statements included under Item 8.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
Mine Safety Disclosures
Not applicable.
PART
II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is traded on the Nasdaq Global Select Market tier of
the Nasdaq Stock Market, or Nasdaq,
under the symbol HSIC.
On February 20, 2024, there were approximately 107,000 holders
of record of our common stock and the last
reported sales price was $75.64.
A substantially greater number of holders of our common stock are “street
name”
or beneficial holders, whose shares are held by banks, brokers and other financial
institutions.
Purchases of Equity Securities by the Issuer
Our share repurchase program, announced on March 3, 2003, originally
allowed us to repurchase up to two million
shares pre-stock splits (eight million shares post-stock splits) of our common
stock, which represented
approximately 2.3% of the shares outstanding at the commencement
of the program.
Subsequent additional
increases totaling $4.9 billion, authorized by our Board, to the repurchase
program provide for a total of $5.0 billion
(including $400 million authorized on February 8, 2023) of shares
of our common stock to be repurchased under
this program.
As of December 30, 2023,
we had repurchased approximately $4.7 billion of common stock (90,394,805
shares)
under these initiatives, with $265 million available for future common stock
share repurchases.
The following table summarizes repurchases of our common stock
under our stock repurchase program during the
fiscal quarter ended December 30, 2023:
Total Number
Maximum Number
Total
of Shares
of Shares
Number
Average
Purchased as Part
that May Yet
of Shares
Price Paid
of Our Publicly
Be Purchased Under
Fiscal Month
Purchased (1)
Per Share
Announced Program
Our Program (2)
10/1/2023 through 11/4/2023
-
-
-
5,048,074
11/5/2023 through 12/2/2023
-
-
-
4,529,764
12/3/2023 through 12/30/2023
692,441
$
72.32
692,441
3,499,205
692,441
692,441
(1)
All repurchases were executed in the open market under our existing publicly announced authorized program.
(2)
The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the
closing price of our common stock at that time.
This table excludes shares withheld from employees to satisfy minimum tax
withholding requirements for equity-based transactions.
Dividend Policy
We have not declared any cash or stock dividends on our common stock during fiscal years 2023 or 2022.
We
currently do not anticipate declaring any cash or stock dividends on our common
stock in the foreseeable future.
We intend to retain earnings to finance the expansion of our business and for general corporate purposes, including
our share repurchase program.
Any declaration of dividends will be at the discretion of our Board and
will depend
upon the earnings, financial condition, capital requirements, level
of indebtedness, contractual restrictions with
respect to payment of dividends and other factors.
$50
$100
$150
$200
$250
$300
December
December
December
December
December
December
Henry Schein, Inc.
Dow Jones US Health Care Index
NASDAQ Composite Index
Stock Performance Graph
The graph below compares the cumulative total stockholder return
on $100 invested, assuming the reinvestment of
all dividends, on December 29, 2018, the last trading day before the
beginning of our 2019 fiscal year, through the
end of our 2023 fiscal year with the cumulative total return on $100
invested for the same period in the Dow Jones
U.S. Health Care Index and the Nasdaq Stock Market Composite Index.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL
RETURN
ASSUMES $100 INVESTED ON DECEMBER 29, 2018
ASSUMES DIVIDENDS REINVESTED
December 29,
December 28,
December 26,
December 25,
December 31,
December 30,
Henry Schein, Inc.
$
100.00
$
110.31
$
109.05
$
124.11
$
132.28
$
125.37
Dow Jones U.S. Health
Care Index
100.00
123.48
140.83
175.06
168.44
171.61
NASDAQ Stock Market
Composite Index
100.00
138.27
198.34
244.03
164.56
238.01

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
[Reserved]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary Note Regarding Forward-Looking Statements
In accordance with the “Safe Harbor” provisions of the Private Securities
Litigation Reform Act of 1995, we
provide the following cautionary remarks regarding important factors
that, among others, could cause future results
to differ materially from the forward-looking statements, expectations and assumptions
expressed or implied
herein.
All forward-looking statements made by us are subject to
risks and uncertainties and are not guarantees of
future performance.
These forward-looking statements involve known and unknown
risks, uncertainties and other
factors that may cause our actual results, performance and achievements
or industry results to be materially
different from any future results, performance or achievements expressed or implied by such
forward-looking
statements.
These statements are generally identified by the use of such
terms as “may,” “could,” “expect,”
“intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,”
“to be,” “to make” or other comparable
terms.
Factors that could cause or contribute to such differences include, but are not limited
to, those discussed in
this Annual Report on Form 10-K, and in particular the risks discussed under
the caption “Risk Factors” in Item 1A
of this report and those that may be discussed in other documents we
file with the Securities and Exchange
Commission (“SEC”).
Risk factors and uncertainties that could cause actual results to differ materially from
current and historical results
include, but are not limited to: our dependence on third parties for
the manufacture and supply of our products; our
ability to develop or acquire and maintain and protect new products (particularly
technology products) and
technologies that achieve market acceptance with acceptable margins; transitional
challenges associated with
acquisitions, dispositions and joint ventures, including the failure
to achieve anticipated synergies/benefits, as well
as significant demands on our operations, information systems,
legal, regulatory, compliance, financial and human
resources functions in connection with acquisitions, dispositions and
joint ventures; certain provisions in our
governing documents that may discourage third-party acquisitions of us; adverse
changes in supplier rebates or
other purchasing incentives; risks related to the sale of corporate brand products;
security risks associated with our
information systems and technology products and services, such as
cyberattacks or other privacy or data security
breaches (including the October 2023 incident); effects of a highly competitive (including, without
limitation,
competition from third-party online commerce sites) and consolidating
market;
changes in the health care industry;
risks from expansion of customer purchasing power and multi-tiered
costing structures; increases in shipping costs
for our products or other service issues with our third-party shippers; general
global and domestic macro-economic
and political conditions, including inflation, deflation, recession, ongoing
wars, fluctuations in energy pricing and
the value of the U.S. dollar as compared to foreign currencies, and changes
to other economic indicators,
international trade agreements, potential trade barriers and terrorism; geopolitical
wars; failure to comply with
existing and future regulatory requirements; risks associated with the EU Medical
Device Regulation; failure to
comply with laws and regulations relating to health care fraud or other
laws and regulations; failure to comply with
laws and regulations relating to the collection, storage and processing of
sensitive personal information or standards
in electronic health records or transmissions; changes in tax legislation;
risks related to product liability, intellectual
property and other claims; risks associated with customs policies
or legislative import restrictions; risks associated
with disease outbreaks, epidemics, pandemics (such as the COVID-19
pandemic), or similar wide-spread public
health concerns and other natural or man-made disasters; risks associated with our
global operations; litigation
risks; new or unanticipated litigation developments and the status
of litigation matters; our dependence on our
senior management, employee hiring and retention, and our relationships
with customers, suppliers and
manufacturers; and disruptions in financial markets.
The order in which these factors appear should not be
construed to indicate their relative importance or priority.
We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control
or predict.
Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction
of actual results.
We undertake no duty and have no obligation to update forward-looking statements except as
required by law.
Where You
Can Find Important Information
We may disclose important information through one or more of the following channels: SEC filings, public
conference calls and webcasts, press releases, the investor relations
page of our website (www.henryschein.com)
and the social media channels identified on the Newsroom page of our website.
Recent Developments
During the years ended December 30, 2023 and December 31, 2022 we
continued to experience a decrease in the
sales of PPE and COVID-19 test kits as compared to the comparable
prior-year periods, primarily due to lower
market pricing of PPE and lower market demand for COVID-19
test kits.
While the U.S. economy has recently experienced inflationary
pressures and strengthening of the U.S. dollar, their
impacts have not been material to our results of operations.
Though inflation impacts both our revenues and costs,
the depth and breadth of our product portfolio often allows us to offer lower-cost
national brand solutions or
corporate brand alternatives to our more price-sensitive customers who
are unwilling to absorb price increases, thus
positioning us to protect our gross profit.
Our consolidated financial statements reflect estimates and assumptions
made by us that affect, among other things,
our goodwill, long-lived asset and definite-lived intangible asset valuation;
inventory valuation; equity investment
valuation; assessment of the annual effective tax rate; valuation of deferred income
taxes and income tax
contingencies; the allowance for doubtful accounts; hedging activity; supplier
rebates; measurement of
compensation cost for certain share-based performance awards and cash bonus
plans; and pension plan
assumptions.
Cybersecurity Incident
In addition to immaterial and unrelated prior incidents at certain of
our subsidiaries, in October 2023 Henry Schein
experienced a cybersecurity incident that primarily affected the operations of our
North American and European
dental and medical distribution businesses.
Henry Schein One, our practice management software, revenue
cycle
management and patient relationship management solutions business, was
not affected, and our manufacturing
businesses were mostly unaffected. Once we became aware of the issue, we took steps
to assess, contain and
remediate this incident.
We restored affected systems and applications, our distribution operations resumed and we
reactivated our ecommerce platform.
We also notified law enforcement and our employees, customers, suppliers
and investors, informing them of both the incident and management’s efforts to mitigate its impact on our daily
operations and data maintained on the Company’s systems.
Subsequently, on or about November 8, 2023, we
determined that the threat actor obtained personal and sensitive information
maintained on our systems belonging to
certain third parties and since that date we have notified affected and potentially affected parties
as appropriate.
The scope of personal and sensitive data impacted is still under investigation.
On November 22, 2023, we
experienced a related disruption to our ecommerce platform and related
applications, which has since been
remediated.
As described in “Management’s Discussion & Analysis - 2023 Compared to 2022, the incident
adversely impacted our financial results for the fourth quarter and full year 2023.
We also expect some short-term
residual impact on our financial results in 2024.
We maintain cybersecurity insurance, subject to certain retentions and policy limitations.
With respect to the
October 2023 cybersecurity incident, we have a $60 million insurance policy, following a $5 million retention.
Executive-Level Overview
Henry Schein, Inc. is a solutions company for health care professionals powered
by a network of people and
technology.
We
believe we are the world’s largest provider of health care products and services primarily to office-
based dental and medical practitioners, as well as alternate sites of care.
We
serve more than one million customers
worldwide including dental practitioners, laboratories, physician practices, and
ambulatory surgery centers, as well
as government, institutional health care clinics and other alternate care clinics.
We
believe that we have a strong
brand identity due to our more than 91 years of experience distributing health
care products.
We are headquartered in Melville, New York,
employ approximately 25,000 people (of which approximately
11,500 are based outside of the United States) and have operations or affiliates in 33 countries and territories.
Our
broad global footprint has evolved over time through our organic success as well as
through contribution from
strategic acquisitions.
We
have established strategically located distribution centers around
the world to enable us to better serve our
customers and increase our operating efficiency.
This infrastructure, together with broad product and service
offerings at competitive prices, and a strong commitment to customer service, enables
us to be a single source of
supply for our customers’ needs.
While our primary go-to-market strategy is in our capacity as a distributor, we also market and sell our own
corporate brand portfolio of cost-effective, high-quality consumable merchandise products,
including in vitro
diagnostic devices, manufacture certain dental specialty products in
the areas of implants, orthodontics and
endodontics, manufacture drug products, and repackage/relabel prescription drugs
and/or devices.
We
have
achieved scale in these global businesses primarily through acquisitions, as
manufacturers of these products
typically do not utilize a distribution channel to serve customers.
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.
Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools, government
and other
institutions.
Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,
emergency
medical technicians, dialysis centers, home health, federal and state governments
and large enterprises, such as
group practices and integrated delivery networks, among other providers
across a wide range of specialties.
The health care distribution reportable segment, combining our global dental and
medical operating segments,
distributes consumable products, small equipment, laboratory products, large equipment, equipment
repair services,
branded and generic pharmaceuticals, vaccines, surgical products, dental specialty
products (including implant,
orthodontic and endodontic products), diagnostic tests, infection-control products,
PPE products and vitamins.
Our global technology and value-added services business provides software, technology
and other value-added
services to health care practitioners.
Our technology business offerings include practice management software
systems for dental and medical practitioners.
Our value-added practice solutions include practice consultancy,
education, revenue cycle management and financial services on a non-recourse
basis, e-services, practice
technology, network and hardware services, as well as consulting, and continuing education services for
practitioners.
A key element to grow closer to our customers is our One Schein initiative, which
is a unified go-to-market
approach that enables practitioners to work synergistically with our supply chain,
equipment sales and service and
other value-added services, allowing our customers to leverage the
combined value that we offer through a single
program.
Specifically, One Schein provides customers with streamlined access to our comprehensive offering of
national brand products, our corporate brand products and proprietary specialty
products and solutions (including
implant, orthodontic and endodontic products).
In addition, customers have access to a wide range of services,
including software and other value-added services.
Industry Overview
In recent years, the health care industry has increasingly focused on cost containment.
This trend has benefited
distributors capable of providing a broad array of products and services at low
prices.
It also has accelerated the
growth of HMOs, group practices, other managed care accounts and collective buying
groups, which, in addition to
their emphasis on obtaining products at competitive prices, tend to favor distributors
capable of providing
specialized management information support.
We
believe that the trend towards cost containment has the potential
to favorably affect demand for technology solutions, including software, which can
enhance the efficiency and
facilitation of practice management.
Our operating results in recent years have been significantly affected by strategies
and transactions that we
undertook to expand our business, domestically and internationally, in part to address significant changes in the
health care industry, including consolidation of health care distribution companies, health care reform, trends
toward managed care, cuts in Medicare and collective purchasing arrangements.
Industry Consolidation
The health care products distribution industry, as it relates to office-based health care practitioners, is fragmented
and diverse.
The industry ranges from sole practitioners working out of
relatively small offices to group practices
or service organizations ranging in size from a few practitioners to a large number of practitioners who have
combined or otherwise associated their practices.
Due in part to the inability of office-based health care practitioners to store and manage
large quantities of supplies
in their offices, the distribution of health care supplies and small equipment to office-based health
care practitioners
has been characterized by frequent, small quantity orders, and a need for rapid,
reliable and substantially complete
order fulfillment.
The purchasing decisions within an office-based health care practice are typically
made by the
practitioner or an administrative assistant.
Supplies and small equipment are generally purchased from more
than
one distributor, with one generally serving as the primary supplier.
The trend of consolidation extends to our customer base.
Health care practitioners are increasingly seeking to
partner, affiliate or combine with larger entities such as hospitals, health systems, group practices or physician
hospital organizations.
In many cases, purchasing decisions for consolidated groups
are made at a centralized or
professional staff level; however, orders are delivered to the practitioners’ offices.
We
believe that consolidation within the industry will continue to
result in a number of distributors, particularly
those with limited financial, operating and marketing resources, seeking to
combine with larger companies that can
provide growth opportunities.
This consolidation also may continue to result in distributors seeking
to acquire
companies that can enhance their current product and service offerings or provide
opportunities to serve a broader
customer base.
Our approach to acquisitions and joint ventures has been to expand our role as
a provider of products and services
to the health care industry.
This trend has resulted in our expansion into service areas that complement
our existing
operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquired
businesses.
As industry consolidation continues, we believe that we are positioned to
capitalize on this trend, as we believe we
have the ability to support increased sales through our existing infrastructure, although
there can be no assurances
that we will be able to successfully accomplish this.
We
also have invested in expanding our sales/marketing
infrastructure to include a focus on building relationships with decision
makers who do not reside in the office-
based practitioner setting.
As the health care industry continues to change, we continually evaluate possible
candidates for joint venture or
acquisition and intend to continue to seek opportunities to expand our
role as a provider of products and services to
the health care industry.
There can be no assurance that we will be able to successfully pursue
any such
opportunity or consummate any such transaction, if pursued.
If additional transactions are entered into or
consummated, we would incur merger and/or acquisition-related costs, and there
can be no assurance that the
integration efforts associated with any such transaction would be successful.
Aging Population and Other Market Influences
The health care products distribution industry continues to experience growth
due to the aging population,
increased health care awareness, the proliferation of medical technology
and testing, new pharmacological
treatments, and expanded third-party insurance coverage, partially offset by the effects of unemployment
on
insurance coverage.
In addition, the physician market continues to benefit from the
shift of procedures and
diagnostic testing from acute care settings to alternate-care sites, particularly
physicians’ offices.
According to the U.S. Census Bureau’s International Database, between 2023
and 2033, the 45 and older
population is expected to grow by approximately 11%.
Between 2023 and 2043, this age group is expected to grow
by approximately 21%.
This compares with expected total U.S. population growth
rates of approximately 6%
between 2023 and 2033
and approximately 11% between 2023 and 2043.
According to the U.S. Census Bureau’s International Database, in 2023
there are approximately seven million
Americans aged 85 years or older, the segment of the population most in need of long-term care
and elder-care
services.
By the year 2050, that number is projected to nearly triple to approximately
19 million.
The population
aged 65 to 84 years is projected to increase by approximately 23% during
the same period.
As a result of these market dynamics, annual expenditures for health
care services continue to increase in the
United States.
We believe that demand for our products and services will grow while continuing to be impacted by
current and future operating, economic, and industry conditions.
The Centers for Medicare and Medicaid Services,
or CMS, published “National Health Expenditure Data” indicating
that total national health care spending reached
approximately $4.5 trillion in 2022, or 17.3% of the nation’s gross domestic product, the benchmark
measure for
annual production of goods and services in the United States.
Health care spending is projected to reach
approximately $7.2 trillion by 2031, or 19.6% of the nation’s projected gross domestic product.
Government
Our businesses are generally subject to numerous laws and regulations that could
impact our financial performance,
and failure to comply with such laws or regulations could have a
material adverse effect on our business.
See “
Item 1. Business - Governmental Regulations
” for a discussion of laws, regulations and governmental activity
that may affect our results of operations and financial condition.
Results of Operations
Refer to Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
in
our 2022 Annual Report on Form 10-K for management’s discussion and analysis of financial condition and results
of operations for the fiscal year 2022 compared to fiscal year 2021.
The following tables summarize the significant components of our operating
results and cash flows:
Years
Ended
December 30,
December 31,
December 25,
Operating results:
Net sales
$
12,339
$
12,647
$
12,401
Cost of sales
8,478
8,816
8,727
Gross profit
3,861
3,831
3,674
Operating expenses:
Selling, general and administrative
2,956
2,771
2,634
Depreciation and amortization
Restructuring and integration costs
Operating income
$
$
$
Other expense, net
$
(73)
$
(26)
$
(21)
Gain on sale of equity investment
-
-
Net income
Net income attributable to Henry Schein, Inc.
Years
Ended
December 30,
December 31,
December 25,
Cash flows:
Net cash provided by operating activities
$
$
$
Net cash used in investing activities
(1,135)
(276)
(677)
Net cash provided by (used in) financing activities
(315)
(333)
Plans of Restructuring and Integration Costs
On August 1, 2022, we committed to a restructuring plan focused on
funding the priorities of the BOLD+1 strategic
plan, streamlining operations and other initiatives to increase efficiency.
We revised our previous expectations of
completion and we have extended this initiative through the end of 2024.
We are currently unable in good faith to
make a determination of an estimate of the amount or range of amounts
expected to be incurred in connection with
these activities, both with respect to each major type of cost associated
therewith and to the total cost, or an
estimate of the amount or range of amounts that will result in future
cash expenditures.
During the years ended December 30, 2023, December 31, 2022, and December
25, 2021, we recorded
restructuring costs of $80 million, $128 million, and $8 million, respectively.
The restructuring costs for these
periods primarily related to severance and employee-related costs,
impairment of intangible assets, accelerated
amortization of right-of-use lease assets and fixed assets, other lease exit
costs, and certain business exit costs
discussed below.
During the year ended December 30, 2023, in connection with our restructuring
plan, we recorded an impairment of
an intangible asset of $12 million related to a planned disposal of a non-U.S.
business.
The disposal is expected to
be completed in 2024.
This impairment is included in the $80 million of restructuring
charges discussed above.
During the year ended December 31, 2022, in connection with our
restructuring plan, we vacated one of the
buildings at our corporate headquarters in Melville, New York, which resulted in an accelerated amortization of a
right-of-use lease asset of $34 million.
We also initiated the disposal of a non-profitable U.S. business and
recorded related costs of $49 million, which primarily consisted of
impairment of intangible assets and goodwill,
inventory impairment, and severance and employee-related costs.
These expenses are included in the $128 million
of restructuring charges discussed above.
The disposal was completed during the first quarter of 2023.
On August 26, 2022, we acquired Midway Dental Supply.
In connection with this acquisition, during the year
ended December 31, 2022, we recorded integration costs of $3 million
related to one-time employee and other
costs, as well as restructuring charges of $9 million, which are included in the
$128 million of restructuring charges
discussed above.
On November 20, 2019, we committed to a contemplated restructuring
initiative intended to mitigate stranded costs
associated with the spin-off of our animal health business and to rationalize operations
and provide expense
efficiencies.
These activities were originally expected to be completed by
the end of 2020 but we extended them to
the end of 2021 in light of the changes to the business environment brought
on by the COVID-19 pandemic.
The
restructuring activities under this prior initiative were completed
in 2021.
2023 Compared to 2022
Note: Percentages for Net Sales; Gross Profit; Operating Expenses; Other
Expense, Net; and Income Taxes are
based on actual values and may not recalculate due to rounding.
Net Sales
Net sales were as follows:
% of
% of
Increase / (Decrease)
Total
Total
$
%
Health care distribution
(1)
Dental
$
7,539
61.1
%
$
7,473
59.1
%
$
0.9
%
Medical
3,994
32.4
4,451
35.2
(457)
(10.3)
Total health care distribution
11,533
93.5
11,924
94.3
(391)
(3.3)
Technology and value-added services
(2)
6.5
5.7
11.4
Total
$
12,339
100.0
$
12,647
100.0
$
(308)
(2.4)
The components of our sales growth were as follows:
Local Currency Growth/(Decline)
Total Local
Currency
Growth/(Decline)
Foreign
Exchange
Impact
Total Sales
Growth/(Decline)
Local Internal
Growth
Acquisition
Growth
Extra Week
Impact
Health care distribution
(1)
Dental Merchandise
(1.6)
%
4.2
%
(1.0)
%
1.6
%
0.1
%
1.7
%
Dental Equipment
(0.9)
1.1
(2.1)
(1.9)
-
(1.9)
Total Dental
(1.4)
3.4
(1.3)
0.7
0.2
0.9
Medical
(11.2)
2.2
(1.3)
(10.3)
-
(10.3)
Total Health Care Distribution
(5.1)
2.9
(1.2)
(3.4)
0.1
(3.3)
Technology and value-added services
(2)
7.2
5.0
(0.8)
11.4
-
11.4
Total
(4.4)
3.1
(1.2)
(2.5)
0.1
(2.4)
(1)
Consists of consumable products, dental specialty products (including implant, orthodontic and endodontic products), small
equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical
products, diagnostic tests, infection-control products, PPE products and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
Global Sales
We report our results of operations on a 52 or 53 weeks per fiscal year basis ending on the last Saturday of
December.
The year ended December 30, 2023, consisted of 52 weeks,
and the year ended, December 31, 2022
consisted of 53 weeks,
resulting in an extra week of sales.
Global net sales for the year ended December 30, 2023 decreased 2.4%.
The components of our sales growth are
presented in the table above.
The 4.4% decrease in our internally generated local currency sales was primarily
attributable to a decrease in sales
of PPE products and COVID-19 test kits.
For the nine months ended September 30, 2023, the estimated
increase in
internally generated local currency sales, excluding PPE products
and COVID-19 test kits, was 3.5%.
However, as
a result of the adverse impact of the cybersecurity incident during the quarter
ended December 30, 2023, our
internally generated local currency sales, excluding sales of PPE products
and COVID-19 test kits, on a full year
basis were flat compared to the prior year.
In addition, we estimate that sales of PPE products and COVID-19
test kits were approximately $713 million and
$1,245 million for the years ended December 30, 2023 and December 31,
2022, respectively, representing an
estimated decrease of $532 million or 42.7%
versus the prior year, with the $532 million net decrease year-over-
year representing 4.2%
of global net sales for the year ended December 30, 2023.
Dental
Dental net sales for the year ended December 30, 2023 increased 0.9%.
The components of our sales growth are
presented in the table above.
Our decrease in internally generated local currency sales for dental
merchandise was
primarily attributable to the negative impact of the cybersecurity incident.
Our sales decrease in internally
generated local currency for dental equipment was also primarily attributable
to the impact of the cybersecurity
incident.
We estimate that sales of PPE products were approximately $338 million and $448 million for the years ended
December 30, 2023 and December 31, 2022, respectively, representing an estimated decrease of $110 million or
24.5% versus the prior year, with the $110 million net decrease year-over-year representing 1.5% of dental net sales
for the year ended December 30, 2023.
The decrease in sales of PPE products is primarily due to lower
market
prices and loss of demand during the cybersecurity incident.
Our estimated internally generated local currency
sales, excluding PPE products were flat compared to the prior year.
Medical
Medical net sales for the year ended December 30, 2023 decreased 10.3%.
The components of our sales growth are
presented in the table above.
The internally generated local currency decrease in medical sales
is primarily
attributable to the impact of the cybersecurity incident that occurred
during the fourth quarter of the year ended
December 30, 2023 and to lower sales of PPE products and COVID-19
test kits and other point-of-care diagnostic
products.
We estimate that sales of PPE products and COVID-19 test kits were approximately $375 million and $797 million
for the years ended December 30, 2023 and December 31, 2022, respectively, representing an estimated decrease
of
$422 million or 52.9% versus the prior year, with the $422 million net decrease year-over-year representing 10.6%
of medical net sales for the year ended December 30, 2023.
The decrease in sales of these products is primarily due
to lower market prices of PPE, lower market demand of COVID-19
test kits, and loss of sales of both product
categories during the cybersecurity incident.
The estimated decrease in internally generated local currency
sales,
excluding PPE products and COVID-19 test kits was 2.2%.
Technology and value-added services
Technology and value-added services net sales for the year ended December 30, 2023 increased 11.4%.
The
components of our sales growth are presented in the table above.
During the year ended December 30, 2023, the
trend for sales of practice management software growth remains
strong as we continued to increase the number of
cloud-based users.
We also experienced increased demand for our revenue cycle management solutions and our
analytical products.
The increase in sales during the year ended December 30, 2023
was partially offset by the
expiration, during the year ended December 31, 2022, of a modestly profitable
government contract in one of our
value-added services businesses.
This segment of our business was largely unaffected by the cybersecurity incident
in the fourth quarter.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
Gross
Gross
Increase / (Decrease)
Margin %
Margin %
$
%
Health care distribution
$
3,312
28.7
%
$
3,357
28.2
%
$
(45)
(1.3)
%
Technology and value-added services
68.0
65.5
15.7
Total
$
3,861
31.3
$
3,831
30.3
$
0.8
As a result of different practices of categorizing costs associated with distribution networks
throughout our
industry, our gross margins may not necessarily be comparable to other distribution companies.
Additionally, we
realize substantially higher gross margin percentages in our technology and value-added services
segment than in
our health care distribution segment.
These higher gross margins result from being both the developer and seller of
software products and services, as well as certain financial services.
The software industry typically realizes higher
gross margins to recover investments in research and development.
Within our health care distribution segment, gross profit margins may vary between the periods as a result of
the
changes in the mix of products sold as well as changes in our customer
mix.
For example, sales of our corporate
brand and certain specialty products achieve gross profit margins that are higher than average
total gross profit
margins of all products.
With respect to customer mix, sales to our large-group customers are typically completed
at lower gross margins due to the higher volumes sold as opposed to the gross margin on sales to office-based
practitioners, who normally purchase lower volumes.
Health care distribution gross profit for the year ended December 30, 2023
decreased compared to the prior-year-
period due to the decrease in sales resulting from the cybersecurity
incident and a reduction in sales of PPE
products and COVID-19 test kits, partially offset by gross profit from acquisitions
and gross margin expansion as a
result of a favorable impact of sales mix of higher-margin products.
Technology and value-added services gross profit increased as a result of a higher gross profit from internally
generated sales and gross profit from acquisitions, as well as an increase
in gross margin rates primarily due to
product mix and increases in productivity.
Operating Expenses
Operating expenses (consisting of selling, general and administrative
expenses; depreciation and amortization,
restructuring and integration costs) by segment and in total were as follows:
% of
% of
Respective
Respective
Increase
Net Sales
Net Sales
$
%
Health care distribution
$
2,842
24.6
%
$
2,738
23.0
%
$
3.8
%
Technology and value-added services
50.1
47.8
16.8
Total
$
3,246
26.3
%
$
3,084
24.4
%
$
5.3
%
The net increase in operating expenses is attributable to the following:
Operating Costs
Restructuring and
Integration Costs
Acquisitions
Total
Health care distribution
$
$
(55)
$
$
Technology and value-added services
Total
$
$
(51)
$
$
The increase in operating costs during the year ended December 30, 2023 includes
increases in payroll and payroll
related costs, travel, convention and consulting expenses in both of our reportable
segments and increased
acquisition expenses in our healthcare distribution segment.
During the year ended December 30, 2023, our
operating expenses were favorably impacted by the recognition of
a remeasurement gain of $18 million following
an acquisition of a controlling interest of a previously held equity
investment, and were negatively impacted by
restructuring, an impairment of capitalized costs of $27 million and impairment
of intangible assets of $7 million
within our health care distribution segment.
During the year ended December 30, 2023, we also incurred $11
million of direct costs, primarily professional fees, for the remediation of
the cybersecurity incident.
The
restructuring and integration costs are primarily related to severance and
employee-related costs, accelerated
amortization of right-of-use lease assets and fixed assets, and other lease exit
costs.
Other Expense, Net
Other expense, net was as follows:
Variance
$
%
Interest income
$
$
$
125.1
%
Interest expense
(87)
(35)
(52)
(148.7)
Other, net
(3)
(4)
n/a
Other expense, net
$
(73)
$
(26)
$
(47)
(172.9)
%
Interest income increased primarily due to increased interest rates.
Interest expense increased primarily due to
increased borrowings and increased interest rates.
Income Taxes
Our effective tax rate was 22.1% for the year ended December 30, 2023 compared to 23.5%
for the prior year.
In
each year, the difference between our effective and federal statutory tax rates primarily relates to state and foreign
income taxes and interest expense.
The Organization of Economic Co-Operation and Development (OECD) issued
technical and administrative
guidance on Pillar Two Model Rules in December 2021, which provides for a global minimum tax rate on the
earnings of large multinational businesses, on a country-by-country basis.
Effective January 1, 2024, the minimum
global tax rate is 15% for various jurisdictions pursuant to the Pillar Two framework.
Future tax reform resulting
from these developments may result in changes to long-standing tax principles,
which may adversely impact our
effective tax rate going forward or result in higher cash tax liabilities.
As we operate in jurisdictions which have
adopted Pillar 2, we are continuing to analyze the implications to effectively manage
the impact for 2024 and
beyond.
Liquidity and Capital Resources
Our principal capital requirements have included funding of acquisitions, purchases
of additional noncontrolling
interests, repayments of debt principal, the funding of working capital needs,
purchases of fixed assets and
repurchases of common stock.
Working capital requirements generally result from increased sales, special
inventory forward buy-in opportunities and payment terms for receivables
and payables.
Historically, sales have
tended to be stronger during the second half of the year and special inventory
forward buy-in opportunities have
been most prevalent just before the end of the year, and have caused our working capital requirements
to be higher
from the end of the third quarter to the end of the first quarter of
the following year.
We finance our business primarily through cash generated from our operations, revolving credit facilities and debt
placements.
Please see
Note 13 - Debt
for further information.
Our ability to generate sufficient cash flows from
operations is dependent on the continued demand of our customers
for our products and services, and access to
products and services from our suppliers.
Our business requires a substantial investment in working capital, which
is susceptible to fluctuations during the
year as a result of inventory purchase patterns and seasonal demands.
Inventory purchase activity is a function of
sales activity, special inventory forward buy-in opportunities and our desired level of inventory.
We anticipate
future increases in our working capital requirements.
We finance our business to provide adequate funding for at least 12 months.
Funding requirements are based on
forecasted profitability and working capital needs, which, on occasion, may
change.
Consequently, we may change
our funding structure to reflect any new requirements.
We believe that our cash and cash equivalents, our ability to access private debt markets and public equity markets,
and our available funds under existing credit facilities provide us with
sufficient liquidity to meet our currently
foreseeable short-term and long-term capital needs.
Our acquisition strategy is focused on investments in companies that
add new customers and sales teams, increase
our geographic footprint (whether entering a new country, such as emerging markets, or building scale where we
have already invested in businesses), and finally, those that enable us to access new products and technologies.
As
part of our BOLD+1 Strategic Plan, including pursuing focused mergers and acquisitions,
during the year ended
December 30, 2023 we have announced acquisitions of companies specializing
in implant systems, clear aligners,
homecare medical products delivered directly to patients, and dental practice
transition services.
Net cash provided by operating activities was $500 million for the
year ended December 30, 2023, compared to net
cash provided by operating activities of $602 million for the prior year.
The net change of $102 million was
primarily attributable to lower cash net income.
During the quarter ended December 30, 2023, the cybersecurity
incident had several offsetting impacts to the operating cash flows from our working
capital, net of acquisitions,
including a decrease in operating cash flows from accounts receivable
due to delayed timing of billings and limited
collection efforts resulting from the impact of the cybersecurity incident, and an increase
in operating cash flows
resulting from reduced inventory purchases.
Net cash used in investing activities was $1,135 million for the
year ended December 30, 2023, compared to net
cash used in investing activities of $276 million for the prior year.
The net change of $859 million was primarily
attributable to increased payments for equity investments and business acquisitions,
and increased purchases of
fixed assets resulting from our continued investment in our facilities and operations.
Net cash provided by financing activities was $701 million for the year
ended December 30, 2023, compared to net
cash used in financing activities of $315 million for the prior year.
The net change of $1,016 million was primarily
due to increased net borrowings from debt
to finance our investments, partially offset by decreased repurchases of
common stock.
The following table summarizes selected measures of liquidity and capital
resources:
December 30,
December 31,
Cash and cash equivalents
$
$
Working
capital
(1)
1,805
1,764
Debt:
Bank credit lines
$
$
Current maturities of long-term debt
Long-term debt
1,937
1,040
Total debt
$
2,351
$
1,149
Leases:
Current operating lease liabilities
$
$
Non-current operating lease liabilities
(1)
Includes $284 million and $327 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitizations at December 30, 2023 and December 31, 2022, respectively.
Our cash and cash equivalents consist of bank balances and investments
in money market funds representing
overnight investments with a high degree of liquidity.
Accounts receivable days sales outstanding and inventory turns
Our accounts receivable days sales outstanding from operations
increased to 46.2 days as of December 30, 2023
from 41.9 days as of December 31, 2022 due to delays in billings
leading to limited collections in the quarter ended
December 30, 2023 as a result of the cybersecurity incident.
During the years ended December 30, 2023 and
December 31, 2022, we wrote off approximately $16 million and $10 million, respectively, of fully reserved
accounts receivable against our trade receivable reserve.
Our inventory turns from operations was 4.5 as of
December 30, 2023 and 4.7 as of December 31, 2022.
Our working capital accounts may be impacted by current
and future economic conditions.
Contractual obligations
The following table summarizes our contractual obligations related
to fixed and variable rate long-term debt and
finance lease obligations, including interest (assuming a weighted
average interest rate of 4.8%), as well as
inventory purchase commitments and operating lease obligations
as of December 30, 2023:
Payments due by period
< 1 year
2 - 3 years
4 - 5 years
> 5 years
Total
Contractual obligations:
Long-term debt, including interest
$
$
1,097
$
$
$
2,469
Inventory purchase commitments
-
Operating lease obligations
Transition tax obligations
-
-
Finance lease obligations, including interest
-
Total
$
$
1,273
$
$
$
2,968
For information relating to our debt please see
Note 13 - Debt
.
Leases
We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles
and certain equipment.
Our leases have remaining terms of less than one year to
approximately 18 years, some of
which may include options to extend the leases for up to 15 years.
As of December 30, 2023, our right-of-use
assets related to operating leases were $325 million and our current and non-current
operating lease liabilities were
$80 million and $310 million, respectively.
Please see
Note 7 - Leases
for further information.
Stock Repurchases
On February 8, 2023, our Board authorized the repurchase of up
to an additional $400 million in shares of our
common stock.
From March 3, 2003 through December 30, 2023, we repurchased $4.7
billion, or 90,394,805 shares, under our
common stock repurchase programs, with $265 million available
as of December 30, 2023 for future common stock
share repurchases.
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our consolidated subsidiaries have
the right, at certain times, to require us
to acquire their ownership interest in those entities.
Accounting Standards Codification Topic 480-10 is applicable
for noncontrolling interests where we are or may be required to purchase
all or a portion of the outstanding interest
in a consolidated subsidiary from the noncontrolling interest holder
under the terms of a put option contained in
contractual agreements.
As of December 30, 2023 and December 31, 2022,
our balance for redeemable
noncontrolling interests was $864 million and $576 million, respectively.
Please see
Note 19 - Redeemable
Noncontrolling Interests
for further information.
Unrecognized tax benefits
As more fully disclosed in
Note 14 - Income Taxes
of “Notes to Consolidated Financial Statements,” we cannot
reasonably estimate the timing of future cash flows related to our unrecognized
tax benefits, including accrued
interest, of $115 million as of December 30, 2023.
Critical Accounting Estimates
Our accounting policies are more fully described in
Note 1 - Basis of Presentation and Significant Accounting
Policies
of the consolidated financial statements.
The preparation of consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and
related disclosures of contingent assets and liabilities.
We base our estimates on historical data, when available,
experience, industry and market trends, and on various other assumptions
that are believed to be reasonable under
the circumstances, the combined results of which form the basis for
making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
We believe that the estimates, judgments and
assumptions upon which we rely are reasonable based upon information
available to us at the time that these
estimates, judgments and assumptions are made.
However, by their nature, estimates are subject to various
assumptions and uncertainties.
Therefore, reported results may differ from estimates and any such differences may
be material to our consolidated financial statements.
We believe that the following critical accounting estimates, which have been discussed with the Audit Committee
of our Board, affect the significant estimates and judgments used in the preparation
of our consolidated financial
statements:
Inventories and Reserves
Inventories consist primarily of finished goods and are valued at
the lower of cost or net realizable value.
Cost is
determined by the first-in, first-out method for merchandise and actual cost
for large equipment and high tech
equipment.
In estimating carrying value of inventory, we consider many factors including the condition and
salability of the inventory by reviewing on-hand quantities, historical sales,
forecasted sales and market and
economic trends.
Certain of our products, specifically PPE and COVID-19 test kits, have experienced
changes in
net realizable value, due to volatility of pricing and changes in demand
for these products.
Business Combinations
The estimated fair value of acquired identifiable intangible assets (i.e., customer
relationships and lists, trademarks
and trade names, product development and non-compete agreements)
is based on critical judgments and
assumptions derived from analysis of market conditions, including discount
rates, projected revenue growth rates
(which are based on historical trends and assessment of financial projections),
estimated customer attrition and
projected cash flows.
These assumptions are forward-looking and could be affected by future economic
and market
conditions.
Please see
Note 5 - Business Acquisitions and Divestitures
for further discussion of our acquisitions.
Goodwill
Goodwill is subject to impairment analysis at least once annually as
of the first day of our fourth quarter, or if an
event occurs or circumstances change that would more likely than
not reduce a reporting unit’s fair value below
carrying value.
We regard our reporting units to be our operating segments: our global dental and medical
businesses, and technology and value-added services.
Goodwill is allocated to such reporting units, for the
purposes of preparing our impairment analyses, based on a specific identification
basis.
Application of the goodwill impairment test requires judgment, including
the identification of reporting units,
assignment of assets and liabilities that are considered shared services
to the reporting units, and ultimately the
determination of the fair value of each reporting unit.
The fair value of each reporting unit is calculated by
applying the discounted cash flow methodology and confirming with
a market approach.
There are inherent
uncertainties, however, related to fair value models, the inputs and our judgments in applying them
to this analysis.
The most significant inputs include estimation of detailed future cash flows based
on budget expectations, and
determination of comparable companies to develop a weighted average
cost of capital for each reporting unit.
On an annual basis, we prepare financial projections.
These projections are based on input from our leadership and
are presented annually to our Board.
Influences on this year's forecasted financial information and
the fair value
model include: the impact of planned strategic initiatives, the continued
integration of recent acquisitions and
overall market conditions.
The estimates used to calculate the fair value of a reporting unit change
from year to
year based on operating results, market conditions, and other factors.
Our third-party valuation specialists provide inputs into our determination
of the discount rate.
The rate is
dependent on a number of underlying assumptions, including the risk-free rate,
tax rate, equity risk premium, debt
to equity ratio and pre-tax cost of debt.
Long-term growth rates are applied to our estimation of future cash flows.
The long-term growth rates are tied to
growth rates we expect to achieve beyond the years for which we have
forecasted operating results.
We also
consider external benchmarks, and other data points which we believe are
applicable to our industry and the
composition of our global operations.
For the years ended December 30, 2023 and December 25, 2021, we believe
the fair value of each of our reporting
units sufficiently exceeds the carrying values and thus we did not record any amount
for goodwill impairment.
Based on our quantitative assessment for the year ended December 31, 2022,
we recorded a $20 million impairment
of goodwill relating to the disposal of an unprofitable business for which
estimated fair value was lower than
carrying value.
As part of our analysis for the rest of the goodwill balance, we performed
a sensitivity analysis on
the discount rate and long-term growth rate assumptions.
The sensitivities did not result in any additional
impairment charges.
Definite-Lived Intangible Assets
Annually or if we identify an impairment indicator,
definite-lived intangible assets such as non-compete
agreements, trademarks, trade names, customer relationships and lists, and
product development are reviewed for
impairment indicators.
If any impairment indicators exist, quantitative testing
is performed on the asset.
The quantitative impairment model is a two-step test under which we
first calculate the recoverability of the
carrying value by comparing the undiscounted projected cash flows associated
with the asset or asset group,
including its estimated residual value, to the carrying amount.
If the cash flows associated with the asset or asset
group are less than the carrying value, we perform a fair value assessment
of the asset, or asset group.
If the
carrying amount is found to be greater than the fair value, we record an
impairment loss for the excess of book
value over the fair value.
In addition, in all cases of an impairment review, we re-evaluate the remaining useful
lives of the assets and modify them, as appropriate.
Although we believe our judgments, estimates and/or
assumptions used in estimating cash flows and determining fair value
are reasonable, making material changes to
such judgments, estimates and/or assumptions could materially affect such impairment
analyses and our financial
results.
During the year ended December 30, 2023 we recorded $19 million of
impairment charges related to businesses in
our health care distribution segment, the components of which were
$7 million primarily related to customer lists
and relationships attributable to lower than anticipated operating
margins in certain businesses, and a $12 million
charge related to the planned exit of a business.
These impairment charges were calculated as the differences
between the carrying values and the estimated fair values of the impaired
intangible assets, using a discounted
estimate of future cash flows.
Please see
Note 15 - Plans of Restructuring and Integration Costs
for additional
details.
During the year ended December 31, 2022 we recorded $49 million of
impairment charges related to businesses in
our health care distribution segment, the components of which were
a $15 million charge related to the disposal of
an unprofitable business and a $34 million charge related to customer lists and relationships
attributable to
customer attrition rates being higher than expected in certain other
health care distribution businesses.
These
impairment charges were calculated as the differences between the carrying values and the
estimated fair values of
the impaired intangible assets, using a discounted estimate of future
cash flows.
Please see
Note 15 - Plans of
Restructuring and Integration Costs
for additional details.
During the year ended December 25, 2021, we recorded a $1 million
impairment charge related ratably to a
business within our health care distribution segment and a business within
our technology and value-added services
segment.
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our consolidated subsidiaries have
the right, at certain times, to require us
to acquire their ownership interest in those entities at fair value.
The redemption amounts have been estimated
based on recent transactions, expected future earnings and cash flows
and, if such earnings and cash flows are not
achieved, the value of the redeemable noncontrolling interests might be impacted.
See
Note 1 - Basis of
Presentation and Significant Accounting Policies
and
Note 19 - Redeemable Noncontrolling Interests
for additional
information.
Income Tax
When determining if the realization of a deferred tax asset is likely to assess
the need to record a valuation
allowance, estimates and judgement are required.
We
consider all available evidence, both positive and negative,
including estimated future taxable earnings, ongoing planning strategies,
future reversals of existing temporary
differences and historical operating results.
Additionally, changes to tax laws and statutory tax rates can have an
impact on our determination.
Our intention is to evaluate the realizability of our deferred tax assets quarterly.
ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in
accordance with provisions contained within its guidance.
This topic prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected to
be taken in a tax return.
For those benefits to be recognized, a tax position must be more
likely than not to be
sustained upon examination by the taxing authorities.
The amount recognized is measured as the largest amount of
benefit that has a greater than 50% likelihood of being realized upon ultimate
audit settlement.
In the normal
course of business, our tax returns are subject to examination by various
taxing authorities.
Such examinations may
result in future tax and interest assessments by these taxing authorities for uncertain
tax positions taken in respect of
certain tax matters.
Please see
Note 14 - Income Taxes
for further discussion.
The Financial Accounting Standards Board Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-
Taxed Income (“GILTI”),
states that an entity can make an accounting policy election to
either recognize deferred
taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related
to GILTI in the year the tax is incurred.
We have elected to recognize the tax on GILTI as a period expense in the
period the tax is incurred.
Accounting Standards Update
For a discussion of accounting standards updates that have been adopted
or will be adopted in the future, please see
Note 1 - Basis of Presentation and Significant Accounting Policies
included under Item 8.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, interest rate risks as well as changes in foreign currency exchange rates as
measured against the U.S. dollar and each other, and changes to the credit markets.
We attempt to minimize these
risks primarily by using foreign currency forward contracts and by
maintaining counter-party credit limits.
These
hedging activities provide only limited protection against currency exchange
and credit risks.
Factors that could
influence the effectiveness of our hedging programs include currency markets and
availability of hedging
instruments and liquidity of the credit markets.
All foreign currency forward contracts that we enter into are
components of hedging programs and are entered into for the sole purpose
of hedging an existing or anticipated
currency exposure.
We do not enter into such contracts for speculative purposes and we manage our credit risks by
diversifying our investments, maintaining a strong balance sheet and having
multiple sources of capital.
Foreign Currency
The value of certain foreign currencies compared to the U.S. dollar may
affect our financial results.
Fluctuations in
exchange rates may positively or negatively affect our revenues, gross margins, operating expenses
and retained
earnings, all of which are expressed in U.S. dollars.
Where we deem it prudent, we engage in hedging programs
using primarily foreign currency forward contracts aimed at limiting
the impact of foreign currency exchange rate
fluctuations on earnings.
We purchase short-term (i.e., generally 18 months or less) foreign currency forward
contracts to protect against currency exchange risks associated with intercompany
loans due from our international
subsidiaries and the payment of merchandise purchases to foreign
suppliers.
We do not hedge the translation of
foreign currency profits into U.S. dollars, as we consider foreign
currency translation to be an accounting exposure,
not an economic exposure.
A hypothetical 5% change in the average value of the U.S. dollar in 2023 compared
to
foreign currencies would have changed our 2023 reported Net income
attributable to Henry Schein, Inc. by
approximately $5 million.
As of December 30, 2023, our forward foreign currency exchange agreements,
which expire through November 3,
2028, had a fair value of $(8) million as determined by quoted market prices.
Included in the forward foreign
currency exchange agreements, Henry Schein, Inc. had net investment
designated EUR/USD forward contracts
with notional values of approximately €300 million and reported fair values
of $(7) million.
A 5% increase in the
value of the Euro to the USD from December 30, 2023 would decrease the fair
value of these forward contracts by
$18 million.
Total
Return Swaps
On March 20, 2020, we entered into a total return swap for the purpose
of economically hedging our unfunded non-
qualified supplemental retirement plan and our deferred compensation plan obligation.
At inception, the notional value of the investments in these plans was $43
million.
At December 30, 2023, the
notional value of the investments in these plans was $96 million.
At December 30, 2023, the financing blended rate
for this swap was based on the Secured Overnight Financing Rate (“SOFR”)
of 5.33%
plus 0.52%, for a combined
rate of 5.85%.
For the years ended December 30, 2023, December 31, 2022, and
December 25, 2021 we have
recorded a gain/(loss), within selling, general and administrative expense,
of approximately $10 million, $(17)
million and $12 million, respectively, net of transaction costs, related to this undesignated swap.
This swap is
expected to be renewed on an annual basis and is expected to result
in a neutral impact to our results of operations.
Credit Risk Monitoring
We limit our credit risk with respect to our cash equivalents, short-term investments and derivative instruments, by
monitoring the credit worthiness of the financial institutions who are
the counterparties to such financial
instruments.
As a risk management policy, we limit the amount of credit exposure by diversifying and utilizing
numerous investment grade counterparties.
Interest Rate Risk
As of December 30, 2023, we had variable interest rate exposure for certain
of our revolving credit facilities and
our U.S. trade accounts receivable securitization.
Our revolving credit facility which we entered into on July 11,
2023 and expires on July 11, 2028,
has a variable
interest rate that is based on the SOFR plus a spread based on our leverage
ratio at the end of each financial
reporting quarter.
As of December 30, 2023, there was $200 million outstanding under
this revolving credit
facility.
During the year ended December 30, 2023, the average outstanding
balance was approximately $61
million.
Based upon our average outstanding balances, for each hypothetical
increase of 25 basis points, our
interest expense thereunder would have increased by $0.2 million.
Our U.S. trade accounts receivable securitization, which we entered
into on April 17, 2013 and expires on
December 15, 2025, has a variable interest rate that is based upon the asset-backed
commercial paper rate.
As of
December 30, 2023, the commercial paper rate was 5.67% plus 0.75%,
for a combined rate of 6.42%,
and the
outstanding balance under this securitization facility was $210 million.
During the year ended December 30, 2023,
the average outstanding balance was approximately $238 million.
Based upon our average outstanding balances,
for each hypothetical increase of 25 basis points, our interest expense thereunder
would have increased by $1
million.
On July 11, 2023, we entered into interest rate swap agreements to hedge the cash flow of our variable
rate $750
million floating debt term loan facility, with three years maturity, effectively changing the floating rate portion of
our obligation to a fixed rate.
Under the terms of the interest rate swap agreements, we receive variable
interest
payments based on the one-month Term SOFR rate and pay interest at a fixed rate.
As of December 30, 2023, the
notional value of the interest rate swap agreements was $741
million.
This term loan matures on July 11, 2026.
At December 30, 2023, the interest on this Term Credit Agreement was 5.36% plus 1.35% for a combined rate of
6.71%.
However, we have a hedge in place (see
Note 12 - Derivatives and Hedging Activities
for additional
information) that ultimately creates an effective fixed rate of 5.79%.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. Financial Statements and Supplementary Data
HENRY SCHEIN, INC.
Page
Number
Report of Independent Registered Public Accounting Firm
(BDO USA, P.C.;
New York,
NY; PCAOB
ID#
)
Consolidated Financial Statements
:
Balance Sheets as of December 30, 2023 and December 31, 2022
Statements of Income for the years ended December 30, 2023,
December 31, 2022 and December 25, 2021
Statements of Comprehensive Income for the years ended December 30, 2023,
December 31, 2022 and December 25, 2021
Statements of Changes in Stockholders’ Equity for the years ended
December 30, 2023, December 31, 2022 and December 25, 2021
Statements of Cash Flows for the years ended December 30, 2023,
December 31, 2022 and December 25, 2021
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation and Significant Accounting Policies
Note 2 - Cybersecurity Incident
Note 3 - Net Sales from Contracts with Customers
Note 4 - Segment and Geographic Data
Note 5 - Business Acquisitions and Divestiture
Note 6 - Property and Equipment, Net
Note 7 - Leases
Note 8 - Goodwill and Other Intangibles, Net
Note 9 - Investments and Other
Note 10 - Fair Value Measurements
Note 11 - Concentrations of Risk
Note 12 - Derivatives and Hedging Activities
Note 13 - Debt
Note 14 - Income Taxes
Note 15 - Plans of Restructuring and Integration Costs
Note 16 - Commitments and Contingencies
Note 17 - Stock-Based Compensation
Note 18 - Employee Benefit Plans
Note 19 - Redeemable Noncontrolling Interests
Note 20 - Comprehensive Income
Note 21 - Earnings Per Share
Note 22 - Supplemental Cash Flow Information
Note 23 - Related Party Transactions
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Henry Schein, Inc.
Melville, NY
Opinion on the Consolidated Financial Statements
We
have
audited
the
accompanying
consolidated
balance
sheets
of
Henry
Schein,
Inc.
(the
“Company”)
as
of
December 30, 2023 and December 31, 2022, the related consolidated statements of income, comprehensive income,
changes in stockholders’ equity,
and cash flows for each of
the three years in the period
ended December 30, 2023,
and
the
related
notes
(collectively
referred
to
as
the
“consolidated
financial
statements”).
In
our
opinion,
the
consolidated financial
statements present
fairly,
in
all material
respects, the
financial position
of
the
Company at
December 30, 2023 and December 31, 2022, and the results of its operations and its cash flows for each of the three
years in
the period
ended December
30, 2023,
in conformity
with accounting
principles generally
accepted in
the
United States of America.
We
also
have
audited,
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board
(United
States)
(“PCAOB”),
the
Company's
internal
control
over
financial
reporting
as
of
December
30,
2023,
based
on
criteria
established
in
Internal
Control
-
Integrated
Framework
(2013)
issued
by
the
Committee
of
Sponsoring
Organizations
of
the
Treadway
Commission
(“COSO”)
and
our
report
dated
February
28,
expressed an adverse opinion thereon.
Basis for Opinion
These consolidated financial statements are
the responsibility of the
Company’s management. Our
responsibility is
to
express
an
opinion
on
the
Company’s
consolidated
financial
statements
based
on
our
audits.
We
are
a
public
accounting
firm
registered
with
the
PCAOB
and
are
required
to
be
independent
with
respect
to
the
Company
in
accordance
with
the
U.S.
federal
securities
laws
and
the
applicable
rules
and
regulations
of
the
Securities
and
Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform
the
audit
to
obtain
reasonable
assurance
about
whether
the
consolidated
financial
statements
are
free
of
material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether
due to
error or
fraud, and
performing procedures
that respond
to those
risks. Such
procedures
included examining,
on a
test basis,
evidence regarding
the amounts
and disclosures
in the
consolidated financial
statements.
Our audits
also included
evaluating the
accounting principles
used
and significant
estimates made
by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical
audit matter
communicated below is
a matter
arising from
the current period
audit of
the consolidated
financial statements
that was
communicated or
required to
be communicated to
the Audit
Committee and that:
(1)
relates
to
accounts
or
disclosures that
are
material
to
the
consolidated
financial statements;
and
(2)
involved
our
especially challenging,
subjective or
complex judgments.
The communication
of the
critical audit
matter does
not
alter
in
any
way
our
opinion
on
the
consolidated
financial
statements,
taken
as
a
whole,
and
we
are
not,
by
communicating the
critical audit
matter below,
providing a
separate opinion
on the
critical audit
matter or
on the
accounts or disclosures to which it relates.
Business Acquisition
As
described
in
Note
of
the
consolidated
financial
statements,
the
Company
acquired
Shield
Healthcare,
Inc.,
(“Shield”)
in
2023.
As
a
result
of
this
acquisition,
management
was
required
to
determine
the
fair
values
of
the
identifiable
assets
acquired
and
liabilities
assumed.
In
connection
with
the
acquisition
of
Shield,
the
Company
recorded $156 million of identifiable intangible assets related to
customer relationships and lists.
We
identified management’s
judgements used to
determine the
revenue growth rates
and discount
rate used
in the
determination
of
the
fair
value
of
the
acquired
customer
relationships
and
lists
in
the
acquisition
of
Shield
as
a
critical audit matter.
The principal considerations
for our determination
were the subjective
judgement required by
management in formulating the
revenue growth rates and
assessing the appropriateness of the
discount rate used in
developing
the
fair
values
of
the
applicable
acquired identifiable
intangible
assets.
Auditing
these
considerations
involved
especially
subjective
and
challenging
auditor
judgement
due
to
the
nature
and
extent
of
audit
effort
required to address these matters, including the extent of specialized
skill or knowledge needed.
The primary procedures we performed to address this critical audit matter
included:
●
Evaluating the reasonableness of the revenue growth rates used in the determination
of the fair values of the
acquired
customer
relationships
and
lists
in
the
acquisition
of
Shield
by:
(i)
reviewing
the
historical
performance of
the
acquired company
using
their
audited financial
statements, and
(ii)
assessing revenue
projections against industry metrics and peer-group companies.
●
Utilizing
personnel
with
specialized
knowledge
and
skill
in
valuation
to
assist
in:
(i)
testing
the
source
information underlying
the determination
of the
discount rate,
and (ii)
developing a
range of
independent
estimates of discount rates and
comparing those to the discount
rate selected by management in connection
with the determination of the fair value of the acquired customer relationships and lists in
the acquisition of
Shield.
/s/
BDO USA,
P.C.
We have served as the Company's auditor since 1984.
New York, NY
February 28, 2024
See accompanying notes.
HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
December 30,
December 31,
ASSETS
Current assets:
Cash and cash equivalents
$
$
Accounts receivable, net of allowance for credit losses of $
and $
(1)
1,863
1,442
Inventories, net
1,815
1,963
Prepaid expenses and other
Total current assets
4,488
3,988
Property and equipment, net
Operating lease right-of-use assets
Goodwill
3,875
2,893
Other intangibles, net
Investments and other
Total assets
$
10,573
$
8,607
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
1,020
$
1,004
Bank credit lines
Current maturities of long-term debt
Operating lease liabilities
Accrued expenses:
Payroll and related
Taxes
Other
Total current liabilities
2,683
2,224
Long-term debt (1)
1,937
1,040
Deferred income taxes
Operating lease liabilities
Other liabilities
Total liabilities
5,420
3,936
Redeemable noncontrolling interests
Commitments and contingencies
(nil)
(nil)
Stockholders' equity:
Preferred stock, $
0.01
par value,
1,000,000
shares authorized,
none
outstanding
-
-
Common stock, $
0.01
par value,
480,000,000
shares authorized,
129,247,765
outstanding on December 30, 2023 and
131,792,817
outstanding on December 31, 2022
Additional paid-in capital
-
-
Retained earnings
3,860
3,678
Accumulated other comprehensive loss
(206)
(233)
Total Henry Schein, Inc. stockholders' equity
3,655
3,446
Noncontrolling interests
Total stockholders' equity
4,289
4,095
Total liabilities, redeemable noncontrolling
interests and stockholders' equity
$
10,573
$
8,607
(1)
Amounts presented include balances held by our consolidated variable interest entity (“VIE”).
At December 30, 2023 and
December 31, 2022, includes trade accounts receivable of $
million and $
million, respectively, and long-term debt of $
million and $
million, respectively.
See
Note 1 - Basis of Presentation and Significant Accounting Policies
for further
information.
See accompanying notes.
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF INCOME
(in millions, except share and per share data)
Years
Ended
December 30,
December 31,
December 25,
Net sales
$
12,339
$
12,647
$
12,401
Cost of sales
8,478
8,816
8,727
Gross profit
3,861
3,831
3,674
Operating expenses:
Selling, general and administrative
2,956
2,771
2,634
Depreciation and amortization
Restructuring and integration costs
Operating income
Other income (expense):
Interest income
Interest expense
(87)
(35)
(27)
Other, net
(3)
-
Income before taxes, equity in
earnings of affiliates and noncontrolling interests
Income taxes
(120)
(170)
(198)
Equity in earnings of affiliates, net of tax
Gain on sale of equity investment
-
-
Net income
Less: Net income attributable to noncontrolling interests
(20)
(28)
(29)
Net income attributable to Henry Schein, Inc.
$
$
$
Earnings per share attributable to Henry Schein, Inc.:
Basic
$
3.18
$
3.95
$
4.51
Diluted
$
3.16
$
3.91
$
4.45
Weighted-average common
shares outstanding:
Basic
130,618,990
136,064,221
140,090,889
Diluted
131,748,171
137,755,670
141,772,781
See accompanying notes.
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(in millions)
Years
Ended
December 30,
December 31,
December 25,
Net income
$
$
$
Other comprehensive income, net of tax:
Foreign currency translation gain (loss)
(88)
(84)
Unrealized gain (loss) from hedging activities
(18)
Pension adjustment gain (loss)
(3)
Other comprehensive income (loss), net of tax
(69)
(69)
Comprehensive income
Comprehensive income attributable to noncontrolling interests:
Net income
(20)
(28)
(29)
Foreign currency translation loss (gain)
(5)
Comprehensive income attributable to noncontrolling interests
(25)
(21)
(23)
Comprehensive income attributable to Henry Schein, Inc.
$
$
$
See accompanying notes.
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
(in millions,
except share and per share data)
Accumulated
Common Stock
Additional
Other
Total
$.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income (Loss)
Interests
Equity
Balance, December 26, 2020
142,462,571
$
$
-
$
3,455
$
(108)
$
$
3,984
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
(78)
-
(78)
Unrealized gain from hedging activities,
net of tax of $
-
-
-
-
-
Pension adjustment gain, including tax of $
-
-
-
-
-
Distributions to noncontrolling shareholders
-
-
-
-
-
(11)
(11)
Change in fair value of redeemable securities
-
-
(160)
-
-
-
(160)
Noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
Repurchase and retirement of common stock
(5,505,704)
-
(53)
(348)
-
-
(401)
Stock-based compensation expense
303,643
-
-
-
-
Shares withheld for payroll taxes
(114,952)
-
(8)
-
-
-
(8)
Transfer of charges in excess of capital
-
-
(143)
-
-
-
Balance, December 25, 2021
137,145,558
-
3,595
(171)
4,063
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
(81)
(1)
(82)
Unrealized gain from hedging activities,
net of tax of $
-
-
-
-
-
Pension adjustment gain, including tax of $
-
-
-
-
-
Distributions to noncontrolling shareholders
-
-
-
-
-
(1)
(1)
Purchase of noncontrolling interests
-
-
-
-
-
(7)
(7)
Change in fair value of redeemable securities
-
-
-
-
-
Noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
Repurchase and retirement of common stock
(6,111,676)
-
(65)
(420)
-
-
(485)
Stock issued upon exercise of stock options
35,792
-
-
-
-
Stock-based compensation expense
1,102,108
-
-
-
-
Shares withheld for payroll taxes
(376,034)
-
(32)
-
-
-
(32)
Settlement of stock-based compensation awards
(2,931)
-
-
-
-
Transfer of charges in excess of capital
-
-
(35)
-
-
-
Balance, December 31, 2022
131,792,817
-
3,678
(233)
4,095
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation gain (excluding gain of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
-
Unrealized loss from hedging activities,
including tax benefit of $
-
-
-
-
(18)
-
(18)
Pension adjustment loss, including tax benefit of $
-
-
-
-
(3)
-
(3)
Distributions to noncontrolling shareholders
-
-
-
-
-
(27)
(27)
Change in fair value of redeemable securities
-
-
-
-
-
Noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
(2)
(2)
Repurchase and retirement of common stock
(3,214,136)
-
(33)
(219)
-
-
(252)
Stock issued upon exercise of stock options
21,068
-
-
-
-
Stock-based compensation expense
1,065,319
-
-
-
-
Shares withheld for payroll taxes
(416,605)
-
(34)
-
-
-
(34)
Settlement of stock-based compensation awards
(698)
-
-
-
-
Transfer of charges in excess of capital
-
-
(15)
-
-
-
Balance, December 30, 2023
129,247,765
$
$
-
$
3,860
$
(206)
$
$
4,289
See accompanying notes.
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(in millions)
Years Ended
December 30,
December 31,
December 25,
Cash flows from operating activities:
Net income
$
$
$
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
Impairment charge on intangible assets
Impairment of capitalized software
-
-
Non-cash restructuring charges
-
Gain on sale of equity investment
-
-
(10)
Stock-based compensation expense
Provision for (benefits from) losses on trade and other
accounts receivable
(8)
Benefit from deferred income taxes
(20)
(73)
(11)
Equity in earnings of affiliates
(14)
(15)
(20)
Distributions from equity affiliates
Changes in unrecognized tax benefits
(2)
Other
(3)
(20)
(10)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(327)
(7)
Inventories
(126)
(295)
Other current assets
(138)
(52)
Accounts payable and accrued expenses
(56)
(96)
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
(147)
(96)
(79)
Payments related to equity investments and business acquisitions,
net of cash acquired
(955)
(158)
(571)
Proceeds from sale of equity investment
-
-
Proceeds from loan to affiliate
(4)
Settlements for net investment hedges
-
-
Capitalized software costs
(40)
(32)
(33)
Other
(21)
(1)
-
Net cash used in investing activities
(1,135)
(276)
(677)
Cash flows from financing activities:
Net change in bank credit lines
(18)
Proceeds from issuance of long-term debt
1,368
Principal payments for long-term debt
(468)
(59)
(122)
Debt issuance costs
(3)
-
(3)
Proceeds from issuance of stock upon exercise of stock options
-
Payments for repurchases and retirement of common stock
(250)
(485)
(401)
Payments for taxes related to shares withheld for employee
taxes
(34)
(32)
(8)
Distributions to noncontrolling shareholders
(47)
(21)
(26)
Acquisitions of noncontrolling interests in subsidiaries
(19)
(38)
(60)
Net cash provided by (used in) financing activities
(315)
(333)
Effect of exchange rate changes on cash and cash equivalents
(12)
(12)
(3)
Net change in cash and cash equivalents
(1)
(303)
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 1 - Basis of Presentation and Significant Accounting Policies
Nature of Operations
We distribute health care products and services primarily to office-based dental and medical practitioners, across
dental practices, laboratories, physician practices, and ambulatory surgery centers,
as well as government,
institutional health care clinics and alternate care clinics.
We also provide software, technology and other value-
added services to health care practitioners.
Our dental businesses serve office-based dental practitioners, dental
laboratories, schools, government and other institutions.
Our medical businesses serve physician offices, urgent
care centers, ambulatory care sites, emergency medical technicians, dialysis centers,
home health, federal and state
governments and large enterprises, such as group practices and integrated delivery
networks, among other providers
across a wide range of specialties.
We have operations or affiliates in the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the
Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg,
Malaysia, Mexico, Morocco, the Netherlands, New Zealand, Poland, Portugal,
Singapore, South Africa, Spain,
Sweden, Switzerland, Thailand, United Arab Emirates and the United Kingdom.
Basis of Presentation
Our consolidated financial statements include the accounts of Henry
Schein, Inc. and all of our controlled
subsidiaries.
All intercompany accounts and transactions are eliminated in
consolidation.
Investments in
unconsolidated affiliates for which we have the ability to influence the operating or
financial decisions are
accounted for under the equity method.
Certain prior period amounts have been reclassified to conform
to the
current period presentation.
These reclassifications, individually and in the aggregate, did not
have a material
impact on our consolidated financial condition, results of operations
or cash flows.
We consolidate the results of operations and financial position of a trade accounts receivable securitization which
we consider a Variable Interest Entity (“VIE”) because we are its primary beneficiary as we have the power to
direct activities that most significantly affect its economic performance and have
the obligation to absorb the
majority of its losses or benefits.
For this VIE, the trade accounts receivable transferred
to the VIE are pledged as
collateral to the related debt.
The VIE’s creditors have recourse to us for losses on these trade accounts receivable.
At December 30, 2023 and December 31, 2022,
certain trade accounts receivable that can only be used to settle
obligations of this VIE were $
million and $
million, respectively, and the liabilities of this VIE where the
creditors have recourse to us were $
million and $
million, respectively.
Fair Value
Measurements
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The fair value hierarchy distinguishes between
(1) market participant assumptions developed based on market data obtained
from independent sources (observable
inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the
highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest priority
to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described as follows:
•
Level 1- Unadjusted quoted prices in active markets for identical assets
or liabilities that are accessible at the
measurement date.
•
Level 2- Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability,
either directly or indirectly.
Level 2 inputs include: quoted prices for similar assets or liabilities
in active markets;
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
quoted prices for identical or similar assets or liabilities in markets
that are not active; inputs other than quoted
prices that are observable for the asset or liability; and inputs that are
derived principally from or corroborated by
observable market data by correlation or other means.
•
Level 3- Inputs that are unobservable for the asset or liability.
See
Note 10 - Fair Value Measurements
for additional information.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in
the United States 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.
Our consolidated financial statements reflect estimates and assumptions
made by us that affect, among other things,
our goodwill, long-lived asset and definite-lived intangible asset valuation;
inventory valuation; equity investment
valuation; assessment of the annual effective tax rate; valuation of deferred income
taxes and income tax
contingencies; the allowance for doubtful accounts; redeemable noncontrolling
interests; hedging activity; supplier
rebates; measurement of compensation cost for certain share-based
performance awards and cash bonus plans; and
pension plan assumptions.
Fiscal Year
We report our results of operations and cash flows on a
or
weeks per fiscal year basis ending on the last
Saturday of December.
The year ended December 30, 2023 consisted of
weeks, and the years ended December
31, 2022 and December 25, 2021 consisted of
weeks and
weeks, respectively.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods
or services in an amount that reflects the
consideration that we expect to receive for those goods or services.
To recognize revenue, we:
•
identify the contract(s) with a customer;
•
identify the performance obligations in the contract;
•
determine the transaction price;
•
allocate the transaction price to the performance obligations in the contract;
and
•
recognize revenue when, or as, we satisfy a performance obligation.
We generate revenue from the sale of dental and medical consumable products, equipment (Health care distribution
revenues), software products and services and other sources (Technology and value-added services revenues).
Provisions for discounts, rebates to customers, customer returns and other
contra revenue adjustments are included
in the transaction price at contract inception by estimating the most likely
amount based upon historical data and
estimates and are provided for in the period in which the related sales are
recognized.
Revenue derived from the sale of consumable products is recognized at the
point in time when control transfers to
the customer.
Such sales typically entail high-volume, low-dollar orders
shipped using third-party common
carriers.
We believe that the shipment date is the most appropriate point in time indicating control has transferred
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
to the customer.
On the shipment date, we have no post-shipment obligations,
legal title and risks and rewards of
ownership transfer to the customer and we have an enforceable right
to payment.
Revenue derived from the sale of equipment is recognized when control
transfers to the customer.
This occurs
when the equipment is delivered.
Such sales typically entail scheduled deliveries of large equipment primarily
by
equipment service technicians.
Most equipment requires minimal installation, which is
typically completed at the
time of delivery.
Our product generally carries standard warranty terms provided
by the manufacturer; however, in
instances where we provide warranty labor services, the warranty costs
are accrued in accordance with Accounting
Standards Codification (“ASC”) Topic 460 Guarantees.
At December 30, 2023 and December 31, 2022, we had
accrued approximately $
million and $
million, respectively, for warranty costs.
Revenue derived from the sale of software products is recognized when
products are delivered to customers or
made available electronically.
Such software is generally installed by customers and does
not require extensive
training.
Revenue derived from post-contract customer support for software,
including annual support and/or
training, is generally recognized over time using time elapsed as the input method
that best depicts the transfer of
control to the customer.
Revenue derived from software sold on a Software-as-a-Service
basis is recognized ratably
over the subscription period as control is transferred to the customer.
Revenue derived from other sources, including freight charges, equipment repairs and financial
services, is
recognized when the related product revenue is recognized or when
the services are provided.
We apply the
practical expedient to treat shipping and handling activities performed after
the customer obtains control as
fulfillment activities, rather than a separate performance obligation in the
contract.
Sales, value-add and other taxes we collect concurrent with revenue-producing
activities are excluded from
revenue.
Some of our revenue is derived from bundled arrangements that include
multiple distinct performance obligations,
which are accounted for separately.
When we sell software products together with related services (i.e.,
training
and technical support), we allocate revenue to software by the residual
method, using an estimate of the standalone
selling price to estimate the fair value of the undelivered elements.
Bundled arrangements that include elements
that are not considered software consist primarily of equipment and the related
installation service.
We allocate
revenue for such arrangements based on the relative selling prices of the goods
or services.
If an observable selling
price is not available (i.e., because we or others do not sell the goods or
services separately), we use one of the
following techniques to estimate the standalone selling price: adjusted
market approach; cost-plus approach; or the
residual method.
There is no specific hierarchy for the use of these methods,
but the estimated selling price reflects
our best estimate of what the selling prices of each deliverable would be
if it were sold regularly on a standalone
basis taking into consideration the cost structure of our business, technical skill
required, customer location and
other market conditions.
See
Note 3 - Revenue from Contracts with Customers
for additional disclosures of disaggregated net sales and
Note 4 - Segment and Geographic Data
for disclosures of net sales by segment and geographic data.
Sales Returns
Sales returns are recognized as a reduction of revenue by the amount
of expected returns and are recorded as refund
liability within accrued expenses-other within our consolidated balance sheets.
We estimate the sales return
liability based on historical data for specific products, adjusted as necessary
for new products.
The allowance for
returns is presented gross as a refund liability and we record an inventory
asset (and a corresponding adjustment to
cost of sales) for any products that we expect to be returned
and resaleable.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Cost of Sales
The primary components of cost of sales include the cost of the product
(net of purchase discounts, supplier
chargebacks and rebates) and inbound and outbound freight charges.
Costs related to purchasing, receiving, inspections, warehousing,
internal inventory transfers and other costs of our
distribution network are included in selling, general and administrative
expenses along with other operating costs.
Total distribution network costs were $
million, $
million and $
million for the years ended December 30,
2023, December 31, 2022 and December 25, 2021, respectively.
Supplier Rebates
Supplier rebates are included as a reduction of cost of sales and are recognized
over the period they are earned.
The
factors we consider in estimating supplier rebate accruals include forecasted
inventory purchases,
sales, supplier
rebate contract terms, which generally provide for increasing rebates based
on either increased purchase or sales
volumes.
Direct Shipping and Handling Costs
Freight and other direct shipping costs are included in cost of sales.
Direct handling costs, which represent
primarily direct compensation costs of employees who pick, pack and otherwise
prepare, if necessary, merchandise
for shipment to our customers are reflected in selling, general and administrative
expenses.
Direct handling costs
were $
million, $
million and $
million for the years ended December 30, 2023, December 31, 2022
and
December 25, 2021, respectively.
Advertising and Promotional Costs
We expense advertising and promotional costs as incurred.
Total advertising and promotional expenses were $
million, $
million and $
million for the years ended December 30, 2023, December 31, 2022 and
December
25, 2021, respectively.
Stock-Based Compensation Costs
We
measure stock-based compensation at the grant date, based on the estimated
fair value of the award, and
recognize the cost (net of estimated forfeitures) as compensation expense on
a straight-line basis over the requisite
service period for time-based restricted stock units and on a graded vesting
basis for the option awards.
For
performance-based awards, at each reporting date, we reassess whether achievement
of the performance condition
is probable and accrue compensation expense when achievement of
the performance condition is probable.
Our
stock-based compensation expense is reflected in selling, general and administrative
expenses.
Employment Benefit Plans and other Postretirement Benefit Plans
Some of our employees in our international markets participate
in various noncontributory defined benefit plans.
We recognize the funded status, measured as the difference between the fair value of plan assets and the projected
benefit obligation.
Each unfunded plan is recognized as a liability and each funded
plan is recognized as either an
asset or liability based on its funded status.
We measure our plan assets and liabilities at the end of our fiscal year.
Net periodic pension costs and valuations are dependent on assumptions
used by third-party actuaries in calculating
those amounts.
These assumptions include discount rates, expected return on plan
assets, rate of future
compensation levels, retirement rates, mortality rates, and other factors.
We record the service cost component of
net pension cost in selling, general and administrative expenses within
our consolidated statements of income.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Gains and losses that result from changes in actuarial assumptions or
from actual experience that differs from
actuarial assumptions are recognized in and then amortized from Accumulated
other comprehensive income (loss).
Cash and Cash Equivalents
We consider all highly liquid short-term investments with an original maturity of three months or less to be cash
equivalents.
Due to the short-term maturity of such investments,
the carrying amounts are a reasonable estimate of
fair value.
Outstanding checks in excess of funds on deposit of $
million and $
million, primarily related to
payments for inventory, were classified as accounts payable as of December 30, 2023 and December 31, 2022.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are generally recognized when health care distribution
and technology and value-added
services revenues are recognized.
In accordance with the “expected credit loss” model, the carrying amount
of
accounts receivable is reduced by a valuation allowance that reflects
our best estimate of the amounts that we do
not expect to collect.
In addition to reviewing delinquent accounts receivable, we consider many
factors in
estimating our reserve, including types of customers and their credit worthiness,
experience and historical data
adjusted for current conditions and reasonable supportable forecasts.
We
record allowances for credit losses based upon a specific review of all
significant outstanding invoices.
For
those invoices not specifically reviewed, provisions are provided at differing rates,
based upon the age of the
receivable, the collection history associated with the geographic region
that the receivable was recorded in, current
economic trends and reasonable supportable forecasts.
We
write-off a receivable and charge it against its recorded
allowance when we deem them uncollectible.
Our net accounts receivable balance was $
1,863
million, $
1,442
million, and $
1,452
million at December 30, 2023,
December 31, 2022, and December 25, 2021, respectively.
Our allowance for credit losses was $
million, $
million $
million, and $
million as of December 30, 2023, December 31, 2022, December 25, 2021,
and
December 26, 2020, respectively.
Additions to the allowance for the years ended December 30, 2023,
December
31, 2022 and December 25, 2021 were $
million, $
million and $
million, respectively.
Deductions to the
allowance for the years ended December 30, 2023, December 31, 2022
and December 25, 2021, were $
million,
$
million and $
million
, respectively.
Contract Assets
Contract assets include amounts related to any conditional right to consideration
for work completed but not billed
as of the reporting date.
Contract assets are transferred to accounts receivable when
the right becomes
unconditional.
The contract assets primarily relate to our bundled arrangements for
the sale of equipment and
consumables and sales of term software licenses.
Current contract assets are included in Prepaid expenses and
other and the non-current contract assets are included in investments and other
within our consolidated balance
sheets.
Current and non-current contract asset balances as of December 30,
2023 and December 31, 2022 were not
material.
Contract Liabilities
Contract liabilities are comprised of advance payments and upfront payments
for service arrangements provided
over time that are accounted for as deferred revenue amounts.
Contract liabilities are transferred to revenue once
the performance obligation has been satisfied.
Current contract liabilities are included in accrued expenses: other
and the non-current contract liabilities are included in other liabilities
within our consolidated balance sheets.
At
December 30, 2023 and December 31, 2022, the current and non-current contract
liabilities were $
million and
$
million, and $
million and $
million, respectively. During the year ended December 30, 2023, we recognized
substantially all of the current contract liability amounts that were previously
deferred at December 31, 2022.
At
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
December 25, 2021, the current and non-current contract liabilities were
$
million and $
million.
During the
year ended December 31, 2022, we recognized substantially all of the current
contract liability amounts that were
previously deferred at December 25, 2021.
Current contract liabilities at December 30, 2023 included
balances of
$
million related to business acquisitions completed in 2023.
Acquisition-related contract liability amounts at
December 31, 2022 and December 25, 2021 were immaterial.
Inventories and Reserves
Inventories consist primarily of finished goods and are valued at
the lower of cost or net realizable value.
Cost is
determined by the weighted-average first-in, first-out method for merchandise
and by actual cost for large
equipment and high tech equipment.
In accordance with our policy for inventory valuation, we consider
many
factors including the condition and salability of the inventory, historical sales, forecasted sales and market and
economic trends.
From time to time, we adjust our assumptions for anticipated
changes in any of these or other
factors expected to affect the value of inventory.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation or
amortization.
Depreciation is
computed under the straight-line method
using estimated useful lives (See
Note 6 - Property and Equipment, Net
for estimated useful lives).
Amortization of leasehold improvements is computed using the straight-line
method
over the lesser of the useful life of the assets or the remaining lease term.
Capitalized Software Development Costs
Capitalized internal-use software costs consist of costs to purchase and
develop software.
For software to be used
solely to meet internal needs and for cloud-based applications used to deliver
our services, we capitalize costs
incurred during the application development stage and include such costs within
property and equipment, net within
our consolidated balance sheets.
For software to be sold, leased, or marketed to external users, we capitalize
software development costs when technological feasibility is reached and
include such costs within investments and
other within our consolidated balance sheets.
Leases
We
determine if an arrangement contains a lease at inception.
An arrangement contains a lease if it implicitly or
explicitly identifies an asset to be used and conveys the right to control
the use of the identified asset in exchange
for consideration.
As a lessee, we include operating leases in operating lease right-of-use
(“ROU”) assets,
operating lease liabilities, and non-current operating lease liabilities in our
consolidated balance sheets.
Finance
leases are included in property and equipment, current maturities of
long-term debt, and long-term debt in our
consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease
term and lease liabilities represent our
obligation to make lease payments arising from the lease.
Operating lease ROU assets and liabilities are recognized
upon commencement of the lease based on the present value of the lease payments
over the lease term.
As most of
our leases do not provide an implicit interest rate, we generally use our incremental
borrowing rate based on the
estimated rate of interest for fully collateralized and fully amortizing borrowings
over a similar term of the lease
payments at commencement date to determine the present value of
lease payments.
When readily determinable, we
use the implicit rate.
Our lease terms may include options to extend or terminate the lease when it is reasonably
certain that we will exercise that option.
Lease expense for lease payments is recognized on a straight-line
basis
over the lease term.
Expenses associated with operating leases and finance leases
are included in selling, general
and administrative and interest expense, respectively within our consolidated
statement of income.
Short-term
leases with a term of 12 months or less are not capitalized.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
We
have lease agreements with lease and non-lease components, which are
generally accounted for as a single
lease component, except non-lease components for leases of vehicles, which
are accounted for separately.
When a
vehicle lease contains both lease and non-lease components, we allocate the
transaction price based on the relative
standalone selling price.
Business Acquisitions
We account for business acquisitions under the acquisition method of accounting, under which
the net assets of
acquired businesses are recorded at their fair value at the acquisition
date and our consolidated financial statements
include the acquired businesses’ results of operations from that date.
Some prior owners of acquired subsidiaries are eligible to receive additional
purchase price cash consideration, or
we may be entitled to recoup a portion of purchase price cash consideration
if certain financial targets are met.
We
have accrued liabilities for the estimated fair value of additional purchase
price consideration at the time of the
acquisition, using the income approach, including a probability-weighted
discounted cash flow method or an option
pricing method, where applicable.
Any adjustments to these accrual amounts are recorded
in selling, general and
administrative within our consolidated statements of income.
While we use our best estimates and assumptions to accurately value
assets acquired and liabilities assumed at the
acquisition date, our estimates are inherently uncertain and subject
to refinement.
As a result, within
12 months
following the date of acquisition, or the measurement period, we
may record adjustments to the assets acquired and
liabilities assumed with the corresponding offset to goodwill within our consolidated balance
sheets.
At the end of
the measurement period or final determination of the values of such assets
acquired or liabilities assumed,
whichever comes first, any subsequent adjustments are recognized
in our consolidated statements of operations.
Goodwill
Any excess of acquisition consideration over the fair value of identifiable
net assets acquired is recorded as
goodwill.
Goodwill is an asset representing the future economic benefits
arising from other assets acquired in a
business combination that are not individually identified and separately
recognized, such as future customers and
technology, as well as the assembled workforce.
Goodwill represents, for acquired business, the excess of the purchase price
over the estimated fair value of the net
assets acquired, including the amount assigned to identifiable intangible
assets.
Goodwill is subject to impairment
analysis annually or more frequently if needed.
Such impairment analyses for goodwill requires a comparison
of
the fair value to the carrying value of reporting units.
We regard our reporting units to be our operating segments:
global dental; global medical; and technology and value-added services.
Goodwill was allocated to such reporting
units, for the purposes of preparing our impairment analyses, based on
a specific identification basis.
For the years ended December 30, 2023 and December 31, 2022, we tested goodwill
for impairment, on the first
day of the fourth quarter, using a quantitative analysis comparing the carrying value of our reporting
units,
including goodwill, to their estimated fair values using a discounted
cash flow methodology.
When the estimated
fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not
impaired.
Conversely, when a reporting unit’s carrying value exceeds its fair value, an impairment charge against
goodwill, limited to the total amount of goodwill allocated to that
reporting unit, is recognized.
Application of the goodwill impairment test requires judgment, including
the identification of reporting units,
assignment of assets and liabilities that are considered shared services
to the reporting units, and ultimately the
determination of the fair value of each reporting unit.
The fair value of each reporting unit is calculated by
applying the discounted cash flow methodology and confirming with
a market approach.
There are inherent
uncertainties related to fair value models, the inputs and our judgments
in applying them to this analysis.
The most
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
significant inputs include estimation of future cash flows based on budget
expectations, and determination of
comparable companies to develop a weighted average cost of capital for each
reporting unit.
For the year ended December 30, 2023 and December 25, 2021, the results of
our goodwill impairment analysis did
no
t result in any impairments.
For the year ended December 31, 2022 we recorded a $
million impairment of
goodwill relating to the disposal of an unprofitable business whose
estimated fair value was lower than its carrying
value.
The disposal of this business is part of our restructuring initiative
as more fully discussed in
Note 15 - Plans
of Restructuring and Integration Costs
.
Intangible Assets
In connection with our business acquisitions, the major classes of
assets and liabilities to which we generally
allocate acquisition consideration to, excluding goodwill, include
identifiable intangible assets (i.e., customer
relationships and lists, trademarks and trade names, product development
and non-compete agreements), inventory
and accounts receivable.
The estimated fair value of identifiable intangible assets
is based on critical judgments
and assumptions derived from analysis of market conditions, including
discount rates, projected revenue growth
rates (which are based on historical trends and assessment of financial projections),
estimated customer attrition and
projected cash flows.
We have calculated the value of these intangible assets using the multi-period excess
earnings method, the relief-from-royalty method, and the with and without
method, where applicable.
These
assumptions are forward-looking and could be affected by future economic and
market conditions.
Intangible assets, other than goodwill, are evaluated for impairment whenever
events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable
through the undiscounted future cash flows
expected to be derived from such asset or asset group.
Definite-lived intangible assets primarily consist of non-compete agreements,
trademarks, trade names, customer
lists, customer relationships and product development.
For long-lived assets used in operations, impairment losses
are only recorded if the asset or asset groups carrying amount is not recoverable
through its undiscounted future
cash flows.
We measure the impairment loss based on the difference between the carrying amount and the
estimated fair value.
When an impairment exists, the related assets are written down to fair value.
During the years ended December 30, 2023, December 31, 2022
and December 25, 2021, we recorded total
impairment charges, within the selling, general and administrative line of our consolidated statements
of income, on
intangible assets of $
million, $
million and $
million, respectively, as more fully discussed in
Note 8 -
Goodwill and Other Intangibles, Net
.
Income Taxes
We account for income taxes under an asset and liability approach that requires the recognition of deferred income
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in our
financial statements or tax returns.
In estimating future tax consequences, we generally consider all expected
future
events other than expected enactments of changes in tax laws or rates.
The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized as income or expense in
the period that includes the enactment date.
We file a consolidated U.S. federal income tax return with our 80% or greater owned U.S. subsidiaries
.
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our consolidated subsidiaries have
the right, at certain times, to require us
to acquire their ownership interest in those entities at fair value.
Their interests in these subsidiaries are classified
outside permanent equity on our consolidated balance sheets and are
carried at the estimated redemption amounts.
The redemption amounts have been estimated based on expected future
earnings and cash flows and, if such
earnings and cash flows are not achieved, the value of the redeemable noncontrolling
interests might be impacted.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Changes in the estimated redemption amounts of the noncontrolling
interests subject to put options are reflected at
each reporting period with a corresponding adjustment to Additional paid-in
capital.
Future reductions in the
carrying amounts are subject to a “floor” amount that is equal to the
fair value of the redeemable noncontrolling
interests at the time they were originally recorded.
The recorded value of the redeemable noncontrolling interests
cannot go below the floor level.
Adjustments to the carrying amount of noncontrolling interests
to
reflect a fair value redemption feature do not impact the calculation of
earnings per share.
Our net income is
reduced by the portion of the subsidiaries’ net income that is attributable
to redeemable noncontrolling interests.
Noncontrolling Interests
Noncontrolling interest represents the ownership interests of certain
minority owners of our consolidated
subsidiaries.
Our net income is reduced by the portion of the subsidiaries’
net income that is attributable to
noncontrolling interests.
Comprehensive Income
Comprehensive income includes certain gains and losses that, under accounting
principles generally accepted in the
United States, are excluded from net income as such amounts are recorded
directly as an adjustment to
stockholders’ equity.
Our comprehensive income is primarily comprised of net income,
foreign currency
translation gain (loss), unrealized gain (loss) from hedging activities
and unrealized pension adjustment gain.
Risk Management and Derivative Financial Instruments
We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchange rates, interest
rates, and our unfunded non-qualified supplemental retirement plan (“SERP”)
and our deferred compensation plan
(“DCP”).
Our objective is to manage the impact that foreign currency
exchange rate fluctuations could have on
recognized asset and liability fair values, earnings and cash flows, as well
as our net investments in foreign
subsidiaries, the interest rate risk on variable rate debt, and the returns on
our SERP and DCP.
Our risk
management policy requires that derivative contracts used as hedges be
effective at reducing the risks associated
with the exposure being hedged and be designated hedges at inception
of the contracts.
We do not enter into
derivative instruments for speculative purposes.
Our derivative instruments primarily include foreign currency
forward contracts, total return swaps, and interest rate swaps.
Foreign currency forward agreements related to forecasted inventory
purchase commitments with foreign suppliers,
foreign currency swaps related to foreign currency denominated debt, and
interest rate swaps related to variable rate
debt are designated as cash flow hedges.
For derivatives that are designated and qualify as cash flow hedges,
the
changes in the fair value of the derivatives are recorded as a
component of Accumulated other comprehensive
income in stockholders’ equity and subsequently reclassified into
earnings in the period(s) during which the hedged
transactions affect earnings.
We classify the cash flows related to our hedging activities in the same category in our
consolidated statements of cash flows as the cash flows related
to the hedged item.
Foreign currency forward contracts related to our euro-denominated
foreign operations are designated as net
investment hedges.
For derivatives that are designated and qualify as net investment
hedges, changes in the fair
value of the derivatives are recorded in the foreign currency translation gain
(loss) component of Accumulated
other comprehensive income in stockholders’ equity until the net
investment is sold or substantially liquidated.
Interest swap agreements are entered into for the purpose of hedging
the cash flow of our variable interest rate term
loan.
Our foreign currency forward agreements related to foreign currency
balance sheet exposure provide economic
hedges but are not designated as hedges for accounting purposes.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
For agreements not designated as hedges, changes in the value of the derivative,
along with the transaction gain or
loss on the hedged item, are recorded in other, net, within our consolidated statements of income.
Total return swaps are entered into for the purpose of economically hedging our SERP and DCP.
These swaps are
expected to be renewed on an annual basis.
Changes in the fair values of these total return swaps are recorded in
selling, general, and administrative expenses within our consolidated
statements of income and offset recognized
changes in the fair values of our SERP and DCP liabilities.
Foreign Currency Translation
and Transactions
The financial position and results of operations of our foreign subsidiaries
are determined using local currencies as
the functional currencies.
Assets and liabilities of foreign subsidiaries are translated at the exchange
rate in effect at
each year-end.
Income statement accounts are translated at the average rate
of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from period to period are included
in
Accumulated other comprehensive income in stockholders’ equity.
Gains and losses resulting from foreign
currency transactions are included in earnings.
Accounting Pronouncements Adopted
During the year ended December 30, 2023, we adopted ASC Topic 848,
“Reference Rate Reform” (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
which provides optional expedients
and exceptions for applying GAAP to contracts, hedging relationships and
other transactions affected by the
discontinuation of the London Interbank Offered Rate or by another reference rate
expected to be discontinued
because of reference rate reform.
The adoption of Topic 848 did not have a material impact on our consolidated
financial statements.
On December 26, 2021 we adopted Accounting Standards Update
(“ASU”) No. 2021 - 08,
“Accounting for
Contract Assets and Contract Liabilities from Contracts with Customers” (Subtopic 805).
ASU 2021 - 08 requires
an acquirer to recognize and measure contract assets and contract liabilities acquired
in a business combination in
accordance with ASU No. 2014 - 09, “Revenue from Contracts with Customers”
(Topic 606).
At the acquisition
date, an acquirer should account for the related revenue contracts in accordance
with Topic 606 as if it had
originated the contracts.
To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine
what to record for the acquired revenue contracts.
Generally, this should result in an acquirer recognizing and
measuring the acquired contract assets and contract liabilities consistent with how
they were recognized and
measured in the acquiree’s financial statements.
Our adoption of ASU 2021 - 08 did not have a material impact on
our consolidated financial statements.
On December 27, 2020 we adopted ASU No. 2019-12,
“Income Taxes” (Topic
740): Simplifying the Accounting
for Income Taxes
(“ASU 2019-12”).
ASU 2019-12 simplifies the accounting for income taxes by
removing certain
exceptions to the general principles in Topic 740.
The amendments also improve consistent application of and
simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance.
Our adoption of
ASU 2019-12 did not have a material impact on our consolidated
financial statements.
Recently Issued Accounting Standards
In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09, “
Income Taxes
(Topic 740): Improvements to
Income Tax Disclosures
,” which requires public business entities to disclose
additional information in specified categories with respect to
the reconciliation of the effective tax rate to the
statutory rate for federal, state, and foreign income taxes.
It also requires greater detail about individual reconciling
items in the rate reconciliation to the extent the impact of those items
exceeds a specified threshold.
In addition to
new disclosures associated with the rate reconciliation, the ASU requires
information pertaining to taxes paid (net
of refunds received) to be disaggregated for federal, state, and foreign
taxes and further disaggregated for specific
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
jurisdictions to the extent the related amounts exceed a quantitative threshold.
The ASU also describes items that
need to be disaggregated based on their nature, which is determined by
reference to the item’s fundamental or
essential characteristics, such as the transaction or event that triggered
the establishment of the reconciling item and
the activity with which the reconciling item is associated.
The ASU eliminates the historic requirement that entities
disclose information concerning unrecognized tax benefits having a reasonable
possibility of significantly
increasing or decreasing in the 12 months following the reporting date.
This ASU is effective for annual periods
beginning after December 15, 2024.
Early adoption is permitted for annual financial statements
that have not yet
been issued or made available for issuance.
This ASU should be applied on a prospective basis; however,
retrospective application is permitted.
We are currently evaluating the impact that ASU 2023 - 09 will have on our
consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, “
Segment Reporting (Topic 280): Improvements to Reportable
Segments
,” which aims to improve financial reporting by requiring disclosure
of incremental segment information
on an annual and interim basis for all public entities to enable investors to
develop more decision-useful financial
analyses.
Currently, Topic
280 requires that a public entity disclose certain information about its
reportable
segments.
For example, a public entity is required to report a measure of
segment profit or loss that the CODM
uses to assess segment performance and make decisions about allocating
resources.
Topic 280 also requires other
specified segment items and amounts, such as depreciation, amortization,
and depletion expense, to be disclosed
under certain circumstances.
The amendments in this ASU do not change or remove those disclosure
requirements
and do not change how a public entity identifies its operating segments,
aggregates those operating segments, or
applies the quantitative thresholds to determine its reportable segments.
This ASU is effective for fiscal years
beginning after December 15, 2023, and interim periods within fiscal years
beginning after December 15, 2024.
Early adoption is permitted.
We do not expect that the requirements of ASU 2023 - 07 will have a material impact
on our consolidated financial statements.
Note 2 - Cybersecurity Incident
In October 2023 Henry Schein experienced a cybersecurity incident that
primarily affected the operations of our
North American and European dental and medical distribution businesses.
Henry Schein One, our practice
management software, revenue cycle management and patient relationship
management solutions business, was not
affected, and our manufacturing businesses were mostly unaffected.
We reported the incident to law enforcement
authorities, restored affected systems and applications, our distribution operations
resumed and we reactivated our
ecommerce platform. Subsequently, on or about November 8, 2023, we determined that the threat actor obtained
personal and sensitive information maintained on our systems belonging
to certain third parties and since that date
we have notified affected and potentially affected parties as appropriate.
The scope of personal and sensitive data
impacted is still under investigation.
On November 22, 2023, we experienced a disruption
of our ecommerce
platform and related applications, which has since been remediated.
The incident adversely impacted our financial
results for the fourth quarter and full year 2023.
During the year ended December 30, 2023, we incurred $
million of expenses directly related to the
cybersecurity incident, mostly consisting of professional fees.
We maintain cybersecurity insurance, subject to
certain retentions and policy limitations.
With respect to the October 2023 cybersecurity incident, we have a $
million insurance policy, following a $
million retention.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 3 - Net Sales from Contracts with Customers
Net sales are recognized in accordance with policies disclosed
in
Note 1 - Basis of Presentation and Significant
Accounting Policies
.
Disaggregation of Net sales
The following table disaggregates our net sales by reportable and operating segment
and geographic area:
Year
Ended
December 30, 2023
North America
International
Global
Net sales:
Health care distribution
Dental
$
4,500
$
3,039
$
7,539
Medical
3,897
3,994
Total health care distribution
8,397
3,136
11,533
Technology
and value-added services
Total net sales
$
9,102
$
3,237
$
12,339
Year
Ended
December 31, 2022
North America
International
Global
Net sales:
Health care distribution
Dental
$
4,628
$
2,845
$
7,473
Medical
4,375
4,451
Total health care distribution
9,003
2,921
11,924
Technology
and value-added services
Total net sales
$
9,636
$
3,011
$
12,647
Year
Ended
December 25, 2021
North America
International
Global
Net sales:
Health care distribution
Dental
$
4,506
$
3,038
$
7,544
Medical
4,107
4,210
Total health care distribution
8,613
3,141
11,754
Technology
and value-added services
Total net sales
$
9,173
$
3,228
-
$
12,401
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 4 - Segment and Geographic 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.
Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools, government
and other
institutions.
Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,
emergency
medical technicians, dialysis centers, home health, federal and state governments
and large enterprises, such as
group practices and integrated delivery networks, among other providers
across a wide range of specialties.
Our
dental and medical groups serve practitioners in
countries worldwide.
The health care distribution reportable segment aggregates our global dental
and medical operating segments.
This
segment distributes consumable products, dental specialty products, small
equipment, laboratory products, large
equipment, equipment repair services, branded and generic pharmaceuticals,
vaccines, surgical products, diagnostic
tests, infection-control products, personal protective equipment products (“PPE”)
and vitamins.
Our global technology and value-added services reportable segment provides
software, technology and other value-
added services to health care practitioners.
Our technology offerings include practice management software
systems for dental and medical practitioners.
Our value-added practice solutions include practice consultancy,
education, revenue cycle management and financial services on a non-recourse
basis, e-services, practice
technology, network and hardware services, as well as continuing education services for practitioners.
The following tables present information about our reportable and operating
segments:
Years
Ended
December 30,
December 31,
December 25,
Net sales:
Health care distribution
(1)
Dental
$
7,539
$
7,473
$
7,544
Medical
3,994
4,451
4,210
Total health care distribution
11,533
11,924
11,754
Technology
and value-added services
(2)
Total
$
12,339
$
12,647
$
12,401
(1)
Consists of consumable products, dental specialty products (including implant, orthodontic and endodontic products), small
equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical
products, diagnostic tests, infection-control products, PPE products and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Years
ended
December 30,
December 31,
December 25,
Operating Income:
Health care distribution
$
$
$
Technology
and value-added services
Total
$
$
$
Income before taxes and equity in earnings of affiliates:
Health care distribution
$
$
$
Technology
and value-added services
Total
$
$
$
Depreciation and Amortization:
Health care distribution
$
$
$
Technology
and value-added services
Total
$
$
$
Interest Income:
Health care distribution
$
$
$
Technology
and value-added services
-
Total
$
$
$
Interest Expense:
Health care distribution
$
$
$
Technology
and value-added services
-
-
-
Total
$
$
$
Income Tax
Expense:
Health care distribution
$
$
$
Technology
and value-added services
Total
$
$
$
Equity in Earnings of Affiliates:
Health care distribution
$
$
$
Technology
and value-added services
-
Total
$
$
$
Purchases of Property and Equipment:
Health care distribution
$
$
$
Technology
and value-added services
Total
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
As of
December 30,
December 31,
December 25,
Total
Assets:
Health care distribution
$
9,083
$
7,287
$
7,157
Technology
and value-added services
1,490
1,320
1,324
Total
$
10,573
$
8,607
$
8,481
The following table presents information about our operations by geographic
area as of and for the years ended
December 30, 2023, December 31, 2022 and December 25, 2021.
Net sales by geographic area are based on the
respective locations of our subsidiaries.
No country, except for the United States, generated net sales greater than
% of consolidated net sales.
There were no material amounts of sales or transfers among geographic
areas and
there were no material amounts of export sales.
Net Sales
Long-Lived
Assets
Net Sales
Long-Lived
Assets
Net Sales
Long-Lived
Assets
United States
$
8,631
$
3,434
$
9,190
$
2,891
$
8,722
$
2,981
Other
3,708
2,180
3,457
1,256
3,679
1,232
Consolidated total
$
12,339
$
5,614
$
12,647
$
4,147
$
12,401
$
4,213
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 5 - Business Acquisitions and Divestiture
Our acquisition strategy is focused on investments in companies that
add new customers and sales teams, increase
our geographic footprint (whether entering a new country, such as emerging markets, or building scale where we
have already invested in businesses), and finally, those that enable us to access new products and technologies
.
Acquisition of Shield Healthcare
On October 2, 2023 we acquired a
% voting equity interest in Shield Healthcare, Inc. (“Shield”), a supplier
of
homecare medical products delivered directly to patients in their homes.
Based in California, Shield expands our
existing medical business by delivering a diverse range of products,
including items such as incontinence, urology,
ostomy, enteral nutrition, advanced wound care, and diabetes supplies.
Additionally, Shield offers continuous
glucose monitoring devices directly to patients in their homes.
The following table aggregates
the preliminary estimated fair value, as of the date of acquisition, of
consideration
paid and net assets acquired in the Shield acquisition:
Acquisition consideration:
Cash
$
Deferred consideration
Redeemable noncontrolling interest
Total consideration
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
Intangible assets
Other noncurrent assets
Current liabilities
(24)
Deferred income taxes
(41)
Other noncurrent liabilities
(7)
Total identifiable
net assets
Goodwill
Total net assets acquired
$
Goodwill is a result of expected synergies that are expected to originate from the
acquisition as well as the expected
growth potential of Shield.
The acquired goodwill is not deductible for tax purposes.
The following table summarizes the preliminary identifiable intangible assets
acquired as part of the acquisition of
Shield:
Weighted Average
Useful
Lives (in years)
Customer relationships and lists
$
Trademarks / Tradenames
Total
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The accounting for the acquisition of Shield has not been completed
in several respects, including but not limited to
finalizing valuation assessments of accounts receivable, inventory, accrued liabilities and income and non-income
based taxes.
To assist in the allocation of consideration,
we engaged valuation specialists to determine the fair
value of intangible and tangible assets acquired and liabilities assumed.
We
will finalize the amounts recognized as
the information necessary to complete the analysis is obtained.
We expect to finalize these amounts as soon as
possible but no later than one year from the acquisition date.
The pro forma financial information has not been
presented because the impact of the Shield acquisition during the year ended
December 30, 2023 was immaterial to
our consolidated financial statements.
Acquisition of S.I.N. Implant System
On July 5, 2023, we acquired a
% voting equity interest in S.I.N. Implant System (“S.I.N.”).
Based in São
Paulo, S.I.N. manufactures an extensive line of products to perform dental
implant procedures and is focused on
advancing the development of value-priced dental implants.
S.I.N. recently expanded the distribution of its
products into the United States and other international markets.
The following table aggregates the preliminary estimated fair value, as of
the date of acquisition, of consideration
paid and net assets acquired in the S.I.N., including measurement period
adjustments recorded through December
30, 2023:
Preliminary
Allocation as
of September
30, 2023
Measurement
Period
Adjustments
Preliminary
Allocation as
of December
30, 2023
Acquisition consideration:
Cash
$
$
$
Total consideration
$
$
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
$
(8)
$
Intangible assets
(68)
Other noncurrent assets
Current liabilities
(33)
-
(33)
Long-term debt
(22)
-
(22)
Deferred income taxes
(55)
(35)
Other noncurrent liabilities
(27)
-
(27)
Total identifiable
net assets
(43)
Goodwill
Total net assets acquired
$
$
$
Goodwill is a result of expected synergies that are expected to originate from the
acquisition as well as the expected
growth potential of S.I.N.
The acquired goodwill is not deductible for tax purposes.
Measurement period
adjustments recorded in the year ended December 30, 2023 were primarily
a result of finalization of net working
capital adjustments and third party intangible valuations.
The following table summarizes the preliminary identifiable intangible assets
acquired as part of the acquisition of
S.I.N.:
Weighted Average
Useful
Lives (in years)
Customer relationships and lists
$
Trademarks / Tradenames
Product development
Total
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The accounting for the acquisition of S.I.N. has not been completed
in several respects, including but not limited to
finalizing valuation assessments of accounts receivable, inventory, accrued liabilities and income and non-income
based taxes.
To assist in the allocation of consideration,
we engaged valuation specialists to determine the fair
value of intangible and tangible assets acquired and liabilities assumed.
We
will finalize the amounts recognized as
the information necessary to complete the analysis is obtained.
We expect to finalize these amounts as soon as
possible but no later than one year from the acquisition date.
The pro forma financial information has not been
presented because the impact of the S.I.N. acquisition during the year ended
December 30, 2023 was immaterial to
our consolidated financial statements.
Acquisition of Biotech Dental
On April 5, 2023, we acquired a
% voting equity interest in Biotech Dental (“Biotech Dental”), which
is a
provider of dental implants, clear aligners, individualized prosthetics,
and innovative digital dental software based
in France.
Biotech Dental has several important solutions for dental practices
and dental labs, including Nemotec, a
comprehensive, integrated suite of planning and diagnostic software
using open architecture that connects disparate
medical devices to create a digital view of the patient, offering greater diagnostic
accuracy and an improved patient
experience.
The integration of Biotech Dental’s software with Henry Schein One’s industry-leading practice
management software solutions will help customers streamline their
clinical as well as administrative workflow for
the ultimate benefit of patients.
The following table aggregates the preliminary estimated fair value, as
of the date of acquisition, of consideration
paid and net assets acquired in the Biotech Dental acquisition, including
measurement period adjustments recorded
through December 30, 2023:
Preliminary
Allocation as
of July 1, 2023
Measurement
Period
Adjustments
Allocation as
of December
30, 2023
Acquisition consideration:
Cash
$
$
-
$
Fair value of contributed equity share in a controlled subsidiary
-
Redeemable noncontrolling interests
-
Total consideration
$
$
-
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
$
-
$
Intangible assets
Other noncurrent assets
Current liabilities
(50)
(9)
(59)
Long-term debt
(90)
(74)
Deferred income taxes
(38)
(7)
(45)
Other noncurrent liabilities
(16)
(7)
(23)
Total identifiable
net assets
Goodwill
(31)
Total net assets acquired
$
$
-
$
Goodwill is a result of expected synergies that are expected to originate from the
acquisition as well as the expected
growth potential of Biotech Dental.
The acquired goodwill is deductible for tax purposes.
Measurement period
adjustments recorded in the year ended December 30, 2023 were primarily
a result of preliminary third party
intangible valuation and various other adjustments.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The following table summarizes the preliminary identifiable intangible assets
acquired as part of the acquisition of
Biotech Dental:
Weighted Average
Useful
Lives (in years)
Customer relationships and lists
$
Trademarks / Tradenames
Product development
Total
$
The accounting for the acquisition of Biotech Dental has
not been completed in several areas, including but not
limited to pending assessments of accounts receivable, inventory, intangible assets, accrued liabilities and income
and non-income based taxes.
To assist in the allocation of consideration, we engaged valuation specialists to
determine the fair value of intangible and tangible assets acquired and liabilities
assumed.
We will finalize the
amounts recognized as the information necessary to complete the
analysis is obtained.
We expect to finalize these
amounts as soon as possible but no later than one year from the acquisition
date.
The pro forma financial
information has not been presented because the impact of the Biotech Dental
acquisition during the year ended
December 30, 2023 was immaterial to our consolidated financial statements.
Other 2023 Acquisitions
During the year ended December 30, 2023, we acquired companies within
the health care distribution and
technology and value-added services segments.
Our acquired ownership interest ranged between
% to
%.
The following table aggregates
the preliminary estimated fair value, as of the date of acquisition, of
consideration
paid and net assets acquired for these acquisitions during the year ended
December 30, 2023:
Acquisition consideration:
Cash
$
Deferred consideration
Estimated fair value of contingent consideration payable
Fair value of previously held equity method investment
Redeemable noncontrolling interests
Total consideration
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
Intangible assets
Other noncurrent assets
Current liabilities
(23)
Deferred income taxes
(11)
Long-term debt
(8)
Other noncurrent liabilities
(10)
Total identifiable
net assets
Goodwill
Total net assets acquired
$
Goodwill is a result of the expected synergies and cross-selling opportunities that
these acquisitions are expected to
provide for us, as well as the expected growth potential.
Approximately half of the acquired goodwill is deductible
for tax purposes.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
In connection with an acquisition of a controlling interest of an
affiliate, we recognized a gain of approximately $
million related to the remeasurement to fair value of our previously held
equity investment, using a discounted cash
flow model based on Level 3 inputs, as defined in
Note 10 - Fair Value Measurements
.
The following table summarizes the preliminary identifiable intangible
assets acquired during the year ended
December 30, 2023 and their estimated useful lives as of the date of the acquisition:
Weighted Average
Useful
Lives (in years)
Customer relationships and lists
$
Trademarks / Tradenames
Non-compete agreements
Product development
Patents
Other
Total
$
The pro forma financial information has not been presented because the
impact of the acquisitions during the year
ended December 30, 2023 was immaterial to our consolidated financial
statements.
2022 Acquisitions
We completed several acquisitions during the year ended December 31, 2022, which were immaterial to our
consolidated financial statements.
Our acquired ownership interests ranged from between
% to
%.
Acquisitions in our health care distribution segment included companies
that specialize in the distribution of dental
products.
Within our technology and value-added services segment, we acquired a company that educates and
connects dental office managers, practice administrators and dental business leaders
across North America.
The following table aggregates the estimated fair value, as of the
date of acquisition, of consideration paid and net
assets acquired for acquisitions during the year ended December 31, 2022.
Approximately half of the acquired
goodwill is deductible for tax purposes.
Acquisition consideration:
Cash
$
Deferred consideration
Fair value of previously held equity method investment
Redeemable noncontrolling interests
Total consideration
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
Intangible assets
Other noncurrent assets
Current liabilities
(29)
Deferred income taxes
(6)
Other noncurrent liabilities
(8)
Total identifiable
net assets
Goodwill
Total net assets acquired
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The following table summarizes the identifiable intangible assets acquired during
the year ended December 31,
2022 and their estimated useful lives as of the date of the acquisition:
Estimated
Useful Lives
(in years)
Customer relationships and lists
$
-
Trademarks / Tradenames
Non-compete agreements
-
Other
Total
$
2021 Acquisitions
We completed several acquisitions during the year ended December 25, 2021, which were immaterial to our
financial statements.
Our acquired ownership interests ranged from between approximately
% to
%.
Acquisitions within our health care distribution segment included companies
that specialize in the distribution and
manufacturing of dental and medical products, a provider of home
medical supplies, and a provider of product
kitting and sterile packaging.
Within our technology and value-added services segment, we acquired companies
that focus on dental marketing and website solutions, practice transition
services, revenue cycle management, and
business analytics and intelligence software.
Approximately half of the acquired goodwill is deductible for tax
purposes.
The following table aggregates the estimated fair value, as of the date of
acquisition, of consideration paid and net
assets acquired for acquisitions during the year ended December 25, 2021
:
Acquisition consideration:
Cash
$
Deferred consideration
Estimated fair value of contingent consideration receivable
(5)
Fair value of previously held equity method investment
Redeemable noncontrolling interests
Total consideration
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
Intangible assets
Other noncurrent assets
Current liabilities
(93)
Deferred income taxes
(26)
Other noncurrent liabilities
(46)
Total identifiable
net assets
Goodwill
Total net assets acquired
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The following table summarizes the identifiable intangible assets acquired during
the year ended December 25,
2021 and their estimated useful lives as of the date of the acquisition:
Estimated
Useful Lives
(in years)
Customer relationships and lists
$
-
Trademarks / Tradenames
-
Product development
-
Non-compete agreements
-
Other
Total
$
For the years ended December 30, 2023, December 31, 2022 and December
25, 2021, there were no material
adjustments recorded in our financial statements relating to acquisitions
for which provisional amounts were
recorded in prior periods.
At December 25, 2021 we recorded an estimated contingent consideration
receivable of
$
million, which was subsequently increased by an additional $
million during 2022, by crediting income from
operations, based on delays in timing of government approval of a certain
product.
During the years ended December 30, 2023, December 31, 2022
and December 25, 2021 we incurred $
million,
$
million and $
million in acquisition costs, which are included in “selling, general
and administrative” within
our consolidated statements of income.
Divestiture
In the third quarter of 2021 we received contingent proceeds of $
million from the 2019 sale of Hu-Friedy,
resulting in the recognition of an after-tax gain of $
million.
During the fourth quarter of 2020 we received
contingent proceeds of $
million from the 2019 sale of Hu-Friedy, resulting in the recognition of an after-tax gain
of $
million.
We do not expect to receive any additional proceeds from the sale of Hu-Friedy.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 6 - Property and Equipment, Net
Property and equipment, including related estimated useful lives, consisted
of the following as of:
December 30,
December 31,
Land
$
$
Buildings and permanent improvements
Leasehold improvements
Machinery and warehouse equipment
Furniture, fixtures and other
Computer equipment and software
1,170
Less accumulated depreciation and amortization
(672)
(573)
Property and equipment, net
$
$
Estimated Useful
Lives (in years)
Buildings and permanent improvements
Machinery and warehouse equipment
-
Furniture, fixtures and other
-
Computer equipment and software
-
Leasehold improvements are amortized on a straight-line basis over
the lesser of the useful life of the assets or the
remaining lease term.
Property and equipment related depreciation expense for the years
ended December 30, 2023, December 31, 2022
and December 25, 2021, was $
million, $
million and $
million, respectively.
Please see
Note 7 - Leases
for
finance lease amounts included in property and equipment, net within our
consolidated balance sheets.
During the year ended December 30, 2023 we recorded a $
million impairment of capitalized costs, within our
healthcare distribution segment.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 7 - Leases
We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles
and certain equipment.
Our leases have remaining terms of less than
one year
to approximately
years, some of
which may include options to extend the leases for up to
years.
The components of lease expense were as
follows:
Years
Ended
December 30,
December 31,
December 25,
Operating lease cost:
$
$
$
Variable
lease cost
Short-term lease cost
Total operating lease cost
(1)
Finance lease cost
Total lease cost
$
$
$
(1)
Total operating lease cost for the years ended December 30, 2023, December 31, 2022 and December 25, 2021, included costs of
$
million, $
million and $
million, respectively, related to facility leases recorded in "Restructuring and integration costs"
within our consolidated statements of income.
Further, for the years ended December 30, 2023,
December 31, 2022 and December 25, 2021, we recognized an
impairment of operating lease right-of-use assets of $
million, $
million, and $
million respectively, related to
facility leases recorded in “Restructuring and integration costs” within our consolidated
statement of income.
Supplemental balance sheet information related to leases is as follows:
Years
Ended
December 30,
December 31,
Operating Leases:
Operating lease right-of-use assets
$
$
Current operating lease liabilities
Non-current operating lease liabilities
Total operating lease liabilities
$
$
Finance Leases:
Property and equipment, at cost
$
$
Accumulated depreciation
(9)
(6)
Property and equipment, net of accumulated depreciation
$
$
Current maturities of long-term debt
$
$
Long-term debt
Total finance
lease liabilities
$
$
Weighted Average
Remaining Lease Term in
Years:
Operating leases
6.6
6.7
Finance leases
2.6
3.1
Weighted Average
Discount Rate:
Operating leases
3.6
%
2.8
%
Finance leases
4.0
%
3.3
%
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Supplemental cash flow information related to leases is as follows:
Years
Ended
December 30,
December 31,
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
Financing cash flows for finance leases
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
Finance leases
Maturities of lease liabilities are as follows:
December 30, 2023
Operating
Finance
Leases
Leases
$
$
Thereafter
-
Total future
lease payments
Less imputed interest
(48)
(1)
Total
$
$
As of December 30, 2023, we have additional operating leases that have
not yet commenced with total lease
payments of $
million for buildings and vehicles.
These operating leases will commence after December 30,
2023, with lease terms of
one year
to
10 years
.
Certain of our facilities related to our acquisitions are leased from
employees and minority shareholders.
These
leases are classified as operating leases and have a remaining lease term
ranging from
five months
to
14 years
.
As
of December 30, 2023, current and non-current liabilities associated with
related party operating leases were $
million and $
million, respectively.
At December 30, 2023 related party leases represented
6.3
% and
7.4
% of the
total current and non-current operating lease liabilities, respectively.
As of December 31, 2022, current and non-
current liabilities associated with related party operating leases were
$
million and $
million, respectively.
At
December 31, 2022 related party leases represented
5.0
% and
5.3
% of the total current and non-current operating
lease liabilities, respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 8 - Goodwill and Other Intangibles, Net
Changes in the carrying amounts
of goodwill for the years ended December 30, 2023 and December
31, 2022 were
as follows:
Health Care
Distribution
Technology
and
Value-Added
Services
Total
Balance as of December 25, 2021
$
1,831
$
1,023
$
2,854
Adjustments to goodwill:
Acquisitions
(1)
Impairment
(20)
-
(20)
Foreign currency translation
(22)
(4)
(26)
Balance as of December 31, 2022
1,875
1,018
2,893
Adjustments to goodwill:
Acquisitions
Foreign currency translation
Balance as of December 30, 2023
$
2,737
$
1,138
$
3,875
For the year ended December 31, 2022, we recorded a $
million impairment of goodwill relating to the disposal
of an unprofitable business whose estimated fair value was lower than
its carrying value.
The disposal of this
business is part of our restructuring initiative as more fully discussed
in
Note 15 - Plans of Restructuring and
Integration Costs
.
Other intangible assets consisted of the following:
December 30, 2023
Weighted Average
Accumulated
Remaining Life
Cost
Amortization
Net
(in years)
Customer relationships and lists
$
$
(346)
$
Trademarks / Tradenames
(69)
Product development
(62)
Non-compete agreements
(6)
Other
(18)
Total
$
1,417
$
(501)
$
December 31, 2022
Weighted Average
Accumulated
Remaining Life
Cost
Amortization
Net
(in years)
Customer relationships and lists
$
$
(387)
$
Trademarks / Tradenames
(51)
Product development
(56)
Non-compete agreements
(6)
Other
(10)
Total
$
1,097
$
(510)
$
Trademarks, trade names, customer lists and customer relationships were established through
business acquisitions
and are amortized on a straight-line basis over their respective asset life.
Non-compete agreements represent
amounts paid primarily to prior owners of acquired businesses and certain
sales persons, in exchange for placing
restrictions on their ability to pose a competitive risk to us.
Such amounts are amortized, on a straight-line basis
over the respective non-compete period, which generally commences upon
termination of employment or
separation from us.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Amortization expense, excluding impairment charges, related to definite-lived intangible assets
for the years ended
December 30, 2023, December 31, 2022 and December 25, 2021, was $
million, $
million and $
million.
During the year ended December 30, 2023 we recorded $
million of impairment charges related to businesses in
our health care distribution segment, the components of which were
$
million primarily related to customer lists
and relationships attributable to lower than anticipated operating
margins in certain businesses, and a $
million
charge related to the planned exit of a business.
These impairment charges were calculated as the differences
between the carrying values and the estimated fair values
of the impaired intangible assets, using a discounted
estimate of future cash flows.
Please see
Note 15 - Plans of Restructuring and Integration Costs
for additional
details.
During the year ended December 31, 2022 we recorded $
million of impairment charges related to businesses in
our health care distribution segment, the components of which were
a $
million charge related to the disposal of
an unprofitable business and a $
million charge related to customer lists and relationships attributable to
customer attrition rates being higher than expected in certain other health
care distribution businesses.
These
impairment charges were calculated as the differences between the carrying values and the estimated
fair values
of
the impaired intangible assets, using a discounted estimate of future
cash flows.
Please see
Note 15 - Plans of
Restructuring and Integration Costs
for additional details.
During the year ended December 25, 2021, we recorded a $
million impairment charge related ratably to a
business within our health care distribution segment and a business within
our technology and value-added services
segment.
The above intangible asset impairment charges were recorded within selling, general
and administrative expenses
and in restructuring and integration charges in our consolidated statement of income.
The annual amortization expense expected to be recorded for existing
intangibles assets for the years 2024 through
2028 is $
million, $
million, $
million, $
million and $
million.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 9 - Investments and Other
Investments and other consisted of the following:
December 30,
December 31,
Investments in unconsolidated affiliates
$
$
Non-current deferred foreign, state and local income taxes
Notes receivable
(1)
Capitalized costs for software to be sold, leased or marketed to external
users
Security deposits
Acquisition-related indemnification
Non-current pension assets
Other long-term assets
Total
$
$
(1)
Long-term notes receivable carry interest rates ranging from
3.0
% to
10.0
% and are due in varying installments through
November 21, 2028
.
Amortization expense, primarily related to capitalized costs for software to
be sold, leased or marketed to external
users, for the years ended December 30, 2023, December 31, 2022 and
December 25, 2021, was $
million, $
million and $
million, respectively, and is included in the selling, general and administrative line within our
consolidated statements of income.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 10 - Fair Value Measurements
The following section describes the fair values of our financial instruments
and the methodologies that we used to
measure their fair values.
Investments and notes receivable
There are no quoted market prices available for investments in unconsolidated
affiliates and notes receivable.
Certain of our notes receivable contain variable interest rates.
We believe the carrying amounts are a reasonable
estimate of fair value based on the interest rates in the applicable markets.
Our investments and notes receivable
fair value is based on Level 3 inputs within the fair value hierarchy.
Debt
The fair value of our debt (including bank credit lines, current maturities
of long-term debt and long-term debt) is
based on Level 3 inputs within the fair value hierarchy, and as of December 30, 2023 and December 31, 2022 was
estimated at $
2,351
million and $
1,149
million, respectively.
Factors that we considered when estimating the fair
value of our debt include market conditions, such as interest rates and credit
spreads.
Derivative contracts
Derivative contracts are valued using quoted market prices and
significant other observable inputs.
Our derivative
instruments primarily include foreign currency forward agreements, forecasted
inventory purchase commitments,
foreign currency forward contracts, interest rate swaps, and total return
swaps.
The fair values for the majority of our foreign currency derivative contracts
are obtained by comparing our contract
rate to a published forward price of the underlying market rates, which
are based on market rates for comparable
transactions that are classified within Level 2 of the fair value hierarchy.
The fair value of the interest rate swap, which is classified within Level 2
of the fair value hierarchy, is determined
by comparing our contract rate to a forward market rate as of the
valuation date.
The fair value of total return swaps is determined by valuing the underlying
exchange traded funds of the swap
using market-on-close pricing by industry providers as of the valuation
date that are classified within Level 2 of the
fair value hierarchy.
Redeemable noncontrolling interests
The values for redeemable noncontrolling interests are based on recent
transactions and/or implied multiples of
earnings that are classified within Level 3 of the fair value hierarchy.
See
Note 19 - Redeemable Noncontrolling
Interests
for additional information.
Assets measured on a non-recurring basis at fair value include intangibles.
Inputs for measuring intangibles are
classified as Level 3 within the fair value hierarchy.
See
Note 1 - Basis of Presentation and Significant Accounting
Policies
and
Note 8 - Goodwill and Other Intangibles, Net
for additional information.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The following table presents our assets and liabilities that are measured and
recognized at fair value on a recurring
basis classified under the appropriate level of the fair value hierarchy as of
December 30, 2023 and December 31,
2022:
December 30, 2023
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
$
-
$
Derivative contracts undesignated
-
-
Total return
swap
-
-
Total assets
$
-
$
$
-
$
Liabilities:
Derivative contracts designated as hedges
$
-
$
$
-
$
Derivative contracts undesignated
-
-
Total liabilities
$
-
$
$
-
$
Redeemable noncontrolling interests
$
-
$
-
$
$
December 31, 2022
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
$
-
$
Derivative contracts undesignated
-
-
Total assets
$
-
$
$
-
$
Liabilities:
Derivative contracts designated as hedges
$
-
$
$
-
$
Derivative contracts undesignated
-
-
Total return
swaps
-
-
Total liabilities
$
-
$
$
-
$
Redeemable noncontrolling interests
$
-
$
-
$
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 11 - Concentrations of Risk
Certain financial instruments potentially subject us to concentrations of
credit risk.
These financial instruments
consist primarily of cash equivalents, trade receivables, long-term investments,
notes receivable and derivative
instruments.
In all cases, our maximum exposure to loss from credit
risk equals the gross fair value of the financial
instruments.
We routinely maintain cash balances at financial institutions in excess of insured amounts.
We have
not experienced any loss in such accounts and we manage this risk through
maintaining cash deposits and other
highly liquid investments in high quality financial institutions.
We continuously assess the need for reserves for
such losses, which have been within our expectations.
We do not require collateral or other security to support
financial instruments subject to credit risk, except for long-term notes receivable.
We limit credit risk with respect to our cash equivalents, short-term and long-term investments and derivative
instruments, by monitoring the credit worthiness of the financial institutions
who are the counter-parties to such
financial instruments.
As a risk management policy, we limit the amount of credit exposure by diversifying and
utilizing numerous investment grade counter-parties.
With respect to our trade receivables, credit risk is somewhat limited due to a relatively large customer base
and its
dispersion across different types of health care professionals and geographic areas.
No single customer accounted
for more than
% of our net sales in either of the years ended December 30, 2023
or December 31, 2022.
With
respect to our sources of supply, our top 10 health care distribution suppliers and our single largest supplier
accounted for approximately
% and
%, respectively, of our aggregate purchases for the year ended December
30, 2023 and approximately
% and
%, respectively, of our aggregate purchases for the year ended December
31, 2022.
Our long-term notes receivable primarily represent strategic financing arrangements
with certain affiliates.
Generally, these notes are secured by certain assets of the counterparty; however, in most cases our security is
subordinate to the rights of other commercial financial institutions.
While we have exposure to credit loss in the
event of non-performance by these counter-parties, we conduct ongoing
assessments of their financial and
operational performance.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 12 - Derivatives and Hedging Activities
We are exposed to market risks and changes in foreign currency exchange rates against the U.S. dollar and each
other, and changes to the credit risk of the derivative counterparties.
We attempt to minimize these risks using
foreign currency forward contracts and by maintaining counter-party credit limits.
Our hedging activities provide
only limited protection against currency exchange and credit risks.
Factors that could influence the effectiveness of
our hedging programs include currency markets and availability of hedging
instruments and liquidity of the credit
markets.
All foreign currency forward contracts that we enter are for the sole
purpose of hedging an existing or
anticipated currency exposure.
We do not enter into foreign currency forward contracts for speculative purposes
and we manage our credit risks by diversifying our counterparties,
maintaining a strong balance sheet and having
multiple sources of capital.
Our derivative instruments primarily include foreign currency forward contracts,
total
return swaps, and interest rate swaps.
During 2019 we entered foreign currency forward contracts that we
designated as net investment hedges to hedge a
portion of our euro-denominated foreign operations.
These net investment hedges offset changes in the U.S. dollar
value of our investments in certain euro-functional currency subsidiaries due
to fluctuating foreign exchange rates.
Gains and losses related to these net investment hedges are recorded
in accumulated other comprehensive loss
within our consolidated balance sheets.
Amounts excluded from the assessment of hedge effectiveness are
included
in interest expense within our consolidated statements of income.
The aggregate notional value of these net
investment hedges, which matured on
November 16, 2023
, was approximately €
million.
On November 3,
2023 we entered into new foreign currency forward contracts to
hedge a portion of our euro-denominated foreign
operations which are designated as net investment hedges.
The aggregate notional value of these net investment
hedges, which matured on
November 16, 2023
, was approximately €
million.
The aggregate notional value of
this net investment hedge, which matures on
November 3, 2028
, is approximately €
million.
During the years
ended December 30, 2023, December 31, 2022, and December 25, 2021,
we recorded an increase/(decrease) of
$
(32)
million, $
million, and $
million, respectively, within other comprehensive income related to these foreign
currency forward contracts.
See
Note 10 - Fair Value Measurements
for additional information.
On
March 20, 2020
, we entered a total return swap to economically hedge our unfunded
non-qualified SERP and
our DCP.
This swap will offset changes in our SERP and DCP liabilities.
At the swap’s inception, the notional
value of the investments in these plans was $
million.
At December 30, 2023, the notional value of the
investments in these plans was $
million.
At December 30, 2023, the financing blended rate for
this swap was
based on the Secured Overnight Financing Rate (“SOFR”) of
5.33
% plus
0.52
%, for a combined rate of
5.85
%.
For
the years ended December 30, 2023, December 31, 2022,
and December 25, 2021, we recorded within selling,
general and administrative expenses in our consolidated statement of income,
a gain (loss ) of $
million, ($
)
million, and $
million, respectively, net of transaction costs, related to this undesignated swap.
See
Note 18 -
Employee Benefit Plans
for additional information.
On July 11, 2023, we entered into interest rate swap agreements to hedge the cash flow of our variable
rate $
million floating debt term loan facility, with
three years
maturity, effectively changing the floating rate portion of
our obligation to a fixed rate.
Under the terms of the interest rate swap agreements, we receive variable
interest
payments based on the one-month Term SOFR rate and pay interest at a fixed rate.
As of December 30, 2023, the
notional value of the interest rate swap agreements was $
million.
For the year ended December 30, 2023, we
recorded, within accumulated other comprehensive loss within our consolidated
balance sheets, a loss of $
million related to the change in the fair value of these interest rate
swap agreements, since we have designated these
swaps agreements as cash flow hedges.
Fluctuations in the value of certain foreign currencies as compared
to the U.S. dollar may positively or negatively
affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed
in U.S.
dollars.
Where we deem it prudent, we engage in hedging programs using primarily
foreign currency forward
contracts aimed at limiting the impact of foreign currency exchange
rate fluctuations on earnings.
We purchase
short-term (i.e., generally 18 months or less) foreign currency forward contracts
to protect against currency
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
exchange risks associated with intercompany loans due from our international
subsidiaries and the payment of
merchandise purchases to our foreign suppliers.
We do not hedge the translation of foreign currency profits into
U.S. dollars, as we consider foreign currency translation to be an accounting
exposure, not an economic
exposure.
Amounts related to our hedging activities are recorded in prepaid
expenses and other and/or accrued
expenses: other within our consolidated balance sheets.
The following table summarizes the terms and fair value of our outstanding derivative
financial instruments as of
December 30, 2023 and December 31, 2022:
December 30, 2023
Notional
Amount
Classification
Fair
Value
Maturity Date
Derivatives used in cash flow hedges:
Foreign currency forward contracts
$
Accrued expenses, other
$
(1)
November 21, 2024
Interest rate swaps
Accrued expenses, other
(10)
July 13, 2026
Derivatives used in net investment hedges:
Foreign currency forward contracts
Accrued expenses, other
(6)
November 3, 2028
Undesignated hedging relationships:
Total return
swaps
Prepaid expenses and other
January 3, 2024
Total
$
1,291
$
(13)
December 31, 2022
Notional
Amount
Classification
Fair
Value
Maturity Date
Derivatives used in cash flow hedges:
Foreign currency forward contracts
$
Prepaid expenses and other
$
December 28, 2023
Derivatives used in net investment hedges:
Foreign currency forward contracts
Prepaid expenses and other
November 16, 2023
Undesignated hedging relationships:
Total return
swaps
Accrued expenses, other
(3)
January 4, 2023
Total
$
$
The following table summarizes the effect of cash flow hedges and net investment hedges
on our consolidated
statements of income for the years ended
December 30, 2023, December 31, 2022 and December
25, 2021:
Years
Ended
December 30,
December 31,
December 25,
Derivatives used in cash flow hedges:
Foreign currency forward contracts
$
(1)
$
-
$
Interest rate swaps
(7)
-
-
Derivatives used in net investment hedges:
Foreign currency forward contracts
(10)
Total
$
(18)
$
$
The amount of gains or losses reclassified from accumulated other comprehensive
loss into income were not
material for the years ended December 30, 2023, December 31, 2022,
and December 25, 2021.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 13 - Debt
Bank Credit Lines
Bank credit lines consisted of the following:
December 30,
December 31,
Revolving credit agreement
$
$
-
Other short-term bank credit lines
Total
$
$
Revolving Credit Agreement
On
August 20, 2021
, we entered a $
1.0
billion revolving credit agreement (the “Revolving Credit Agreement”)
which was scheduled to mature on
August 20, 2026
.
On
July 11, 2023
, we amended and restated the Revolving
Credit Agreement to, among other things, extend the maturity date
to
July 11, 2028
and update the interest rate
provisions to reflect the current market approach for a multicurrency
facility.
The interest rate on this revolving
credit facility is based on Term Secured Overnight Financing Rate (“Term SOFR”) plus a spread based on our
leverage ratio at the end of each financial reporting quarter.
The Revolving Credit Agreement requires, among
other things, that we maintain certain maximum leverage ratios.
Additionally, the Revolving Credit Agreement
contains customary representations, warranties and affirmative covenants as well
as customary negative covenants,
subject to negotiated exceptions, on liens, indebtedness, significant corporate
changes (including mergers),
dispositions and certain restrictive agreements.
As of December 30, 2023 and December 31, 2022, we had $
million and $
million in borrowings, respectively under this revolving credit facility.
During the year ended
December 30, 2023, the average outstanding balance under the Revolving Credit
Agreement was approximately
$
million.
As of December 30, 2023 and December 31, 2022, there were $
million and $
million of letters of
credit, respectively, provided to third parties under this Revolving Credit Agreement.
Other Short-Term Bank Credit
Lines
As of December 30, 2023 and December 31, 2022, we had various other
short-term bank credit lines available, in
various currencies, with a maximum borrowing capacity of $
million and $
million, respectively.
As of
December 30, 2023 and December 31, 2022, $
million and $
million, respectively, were outstanding.
During
the year ended December 30, 2023, the average outstanding balances under our
various other short-term bank credit
lines was approximately $
million.
At December 30, 2023 and December 31, 2022, borrowings under
other
short-term bank credit lines had weighted average interest rates of
6.02
% and
10.11
%, respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Long-term debt
Long-term debt consisted of the following:
December 30,
December 31,
Private placement facilities
$
1,074
$
U.S. trade accounts receivable securitization
Term loan
-
Various
collateralized and uncollateralized loans payable with interest,
in varying installments through 2030 at interest rates
from
0.00
% to
9.42
% at December 30, 2023 and
from
0.00
% to
3.50
% at December 31, 2022
Finance lease obligations
Total
2,087
1,046
Less current maturities
(150)
(6)
Total long-term debt
$
1,937
$
1,040
As of December 30, 2023,
the aggregate amounts of long-term debt, including finance lease obligations
and net of
deferred debt issuance costs of $
million, maturing in each of the next five years and thereafter
are as follows:
$
Thereafter
Total
$
2,087
Private Placement Facilities
Our private placement facilities include four insurance companies, have
a total facility amount of $
1.5
billion, and
are available on an uncommitted basis at fixed rate economic
terms to be agreed upon at the time of issuance, from
time to time through
October 20, 2026
.
The facilities allow us to issue senior promissory notes to the
lenders at a
fixed rate based on an agreed upon spread over applicable treasury notes
at the time of issuance.
The term of each
possible issuance will be selected by us and can range from
five
to
15 years
(with an average life no longer than
years
).
The proceeds of any issuances under the facilities will be used
for general corporate purposes, including
working capital and capital expenditures, to refinance existing indebtedness,
and/or to fund potential acquisitions.
The agreements provide, among other things, that we maintain
certain maximum leverage ratios, and contain
restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal
of assets and certain changes in
ownership.
These facilities contain make-whole provisions in the event that we
pay off the facilities prior to the
applicable due dates.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The components of our private placement facility borrowings, which
have a weighted average interest rate of
3.65
%, as of December 30, 2023 are presented in the following table:
Amount of
Date of
Borrowing
Borrowing
Borrowing
Outstanding
Rate
Due Date
January 20, 2012
$
3.45
%
January 20, 2024
December 24, 2012
3.00
December 24, 2024
June 16, 2017
3.42
June 16, 2027
September 15, 2017
3.52
September 15, 2029
January 2, 2018
3.32
January 2, 2028
September 2, 2020
2.35
September 2, 2030
June 2, 2021
2.48
June 2, 2031
June 2, 2021
2.58
June 2, 2033
May 4, 2023
4.79
May 4, 2028
May 4, 2023
4.84
May 4, 2030
May 4, 2023
4.96
May 4, 2033
May 4, 2023
4.94
May 4, 2033
Less: Deferred debt issuance costs
(1)
Total
$
1,074
U.S. Trade Accounts Receivable Securitization
We have a facility agreement based on our U.S. trade accounts receivable that is structured as an asset-backed
securitization program with pricing committed for up to
three years
.
This facility agreement has a purchase limit of
$
million with
two
banks as agents, and expires on
December 15, 2025
.
As of December 30, 2023 and December 31, 2022, the borrowings outstanding
under this securitization facility
were $
million and $
million, respectively.
At December 30, 2023, the interest rate on borrowings under
this facility was based on the asset-backed commercial paper rate of
5.67
% plus
0.75
%, for a combined rate of
6.42
%.
At December 31, 2022, the interest rate on borrowings under
this facility was based on the asset-backed
commercial paper rate of
4.58
% plus
0.75
%, for a combined rate of
5.33
%.
If our accounts receivable collection pattern changes due to customers
either paying late or not making payments,
our ability to borrow under this facility may be reduced.
We are required to pay a commitment fee of
to
basis points depending upon program utilization.
On December 20, 2023 and February 23, 2024, we amended this facility
to temporarily adjust certain covenant
levels.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Term Loan
On July 11, 2023, we entered into a
three-year
$
million term loan credit agreement (the “Term Credit
Agreement”).
The interest rate on this term loan is based on the Term SOFR plus a spread based on our leverage
ratio at the end of each financial reporting quarter.
This term loan matures on July 11, 2026.
We are required to make quarterly payments of $
million from September 2023 through June 2024 and quarterly
payments of $
million from September 2024 through June 2026, with the remaining balance
due in July 2026.
As
of December 30, 2023, the borrowings outstanding under this term
loan were $
million.
At December 30, 2023,
the interest on this Term Credit Agreement was
5.36
% plus
1.35
% for a combined rate of
6.71
%.
However, we
have a hedge in place (see
Note 12 - Derivatives and Hedging Activities
for additional information) that ultimately
creates an effective fixed rate of
5.79
%.
The Term Credit Agreement requires, among other things, that we
maintain certain maximum leverage ratios.
Additionally, the Term
Credit Agreement contains customary
representations, warranties and affirmative covenants as well as customary negative
covenants, subject to
negotiated exceptions, on liens, indebtedness, significant corporate changes
(including mergers), dispositions and
certain restrictive agreements.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 14 - Income Taxes
Income before taxes and equity in earnings of affiliates was as follows:
Years
ended
December 30,
December 31,
December 25,
Domestic
$
$
$
Foreign
Total
$
$
$
The provisions for income taxes were as follows:
Years
ended
December 30,
December 31,
December 25,
Current income tax expense:
U.S. Federal
$
$
$
State and local
Foreign
Total current
Deferred income tax expense (benefit):
U.S. Federal
(48)
(12)
State and local
(3)
(13)
(3)
Foreign
(26)
(12)
Total deferred
(20)
(73)
(11)
Total provision
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The tax effects of temporary differences that give rise to our deferred income tax asset (liability) were
as follows:
Years
Ended
December 30,
December 31,
Deferred income tax asset:
Net operating losses
$
$
Other carryforwards
Inventory, premium
coupon redemptions and accounts receivable
valuation allowances
Operating lease liability
Other asset
Total deferred income
tax asset
Valuation
allowance for deferred tax assets
(1)
(36)
(36)
Net deferred income tax asset
Deferred income tax liability
Intangibles amortization
(219)
(112)
Operating lease right-of-use asset
(65)
(61)
Property and equipment
(10)
(7)
Total deferred tax
liability
(294)
(180)
Net deferred income tax asset (liability)
$
(16)
$
(1)
Primarily relates to operating losses, the benefits of which are uncertain.
Any future reductions of such valuation allowances will be
reflected as a reduction of income tax expense.
The assessment of the amount of value assigned to our deferred tax assets under
the applicable accounting rules is
judgmental.
We
are required to consider all available positive and negative evidence
in evaluating the likelihood
that we will be able to realize the benefit of our deferred tax assets in the future.
Such evidence includes reversals
of deferred tax liabilities and projected future taxable income.
Since this evaluation requires consideration of
events that may occur some years into the future, there is an element of
judgment involved.
Realization of our
deferred tax assets is dependent on generating sufficient taxable income in future periods.
We
believe that it is
more likely than not that future taxable income will be sufficient to allow us to recover
substantially all of the value
assigned to our deferred tax assets.
However, if future events cause us to conclude that it is not more likely than
not that we will be able to recover the value assigned to our deferred tax assets, we
will be required to adjust our
valuation allowance accordingly.
As of December 30, 2023, we had federal, state and foreign net operating
loss carryforwards of approximately
$
million, $
million and $
million, respectively.
The federal, state and foreign net operating loss
carryforwards will begin to expire in various years from 2024 through
2043.
The amounts of federal, state and
foreign net operating losses that can be carried-forward indefinitely are $
million, $
million and $
million,
respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The tax provisions differ from the amount computed using the federal statutory income
tax rate as follows:
Years
ended
December 30,
December 31,
December 25,
Income tax provision at federal statutory rate
$
$
$
State income tax provision, net of federal income tax effect
Foreign income tax provision
Pass-through noncontrolling interest
(8)
(4)
(4)
Valuation
allowance
(3)
(2)
(6)
Unrecognized tax benefits and audit settlements
Interest expense related to loans
(13)
(12)
(11)
Tax on global
intangible low-taxed income ("GILTI")
Other
(6)
(4)
Total income
tax provision
$
$
$
For the year ended December 30, 2023 our effective tax rate was
22.1
%, compared to
23.5
% for the prior year
period.
In 2023, the difference between our effective tax rate and the federal statutory tax rate primarily
relates to
state and foreign income taxes and interest expense.
In 2022, the difference between our effective tax rate and the
federal statutory tax rate was primarily due to state and foreign income
taxes and interest expense.
In 2021, our
effective tax rate was
23.8
%, the difference between our effective tax rate and the federal statutory tax rate was
primarily due to state and foreign income taxes and interest expense.
On December 22, 2017, the U.S. government passed the Tax Cuts and Jobs Act, which requires U.S. companies to
pay a mandatory one-time transition tax on historical offshore earnings that have not
been repatriated to the U.S.
The transition tax is payable over eight years.
Within our consolidated balance sheets, transition tax of $
million
and $
million were included in “accrued taxes” for 2023 and 2022, respectively, and $
million and $
million
were included in “other liabilities” for 2023 and 2022, respectively.
Due to the one-time transition tax and the imposition of the GILTI provisions, all previously unremitted earnings
will no longer be subject to U.S. federal income tax; however, there could be U.S., state and/or foreign withholding
taxes upon distribution of such unremitted earnings.
Determination of the amount of unrecognized deferred tax
liability with respect to such earnings is not practicable.
The Organization of Economic Co-Operation and Development (OECD) issued
technical and administrative
guidance on Pillar Two Model Rules in December 2021, which provides for a global minimum tax rate on the
earnings of large multinational businesses, on a country-by-country basis.
Effective January 1, 2024, the minimum
global tax rate is 15% for various jurisdictions pursuant to the Pillar Two framework.
Future tax reform resulting
from these developments may result in changes to long-standing tax principles,
which may adversely impact our
effective tax rate going forward or result in higher cash tax liabilities.
As we operate in jurisdictions which have
adopted Pillar 2, we are continuing to analyze the implications to effectively manage
the impact for 2024 and
beyond.
ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in accordance with other
provisions contained within its guidance.
This topic prescribes a recognition threshold and a measurement
attribute
for the financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax
return.
For those benefits to be recognized, a tax position must be
more likely than not to be sustained upon
examination by the taxing authorities.
The amount recognized is measured as the largest amount of benefit that has
a greater than 50% likelihood of being realized upon ultimate audit settlement.
In the normal course of business,
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
our tax returns are subject to examination by various taxing authorities.
Such examinations may result in future tax
and interest assessments by these taxing authorities for uncertain tax positions
taken in respect of certain tax
matters.
The total amount of unrecognized tax benefits, which are included in “other
liabilities” within our consolidated
balance sheets, as of December 30, 2023 and December 31, 2022, was $
million and $
million, respectively,
of which $
million and $
million, respectively, would affect the effective tax rate if recognized.
It is possible
that the amount of unrecognized tax benefits will change in the next 12
months, which may result in a material
impact on our consolidated statements of income.
All tax returns audited by the IRS are officially closed through 2019.
The tax years subject to examination by the
IRS include years 2020 and forward.
In addition, limited positions reported in the 2017 tax year are subject
to IRS
examination.
The amount of tax interest expense included as a component of the provision
for taxes was $
million, $
million
and $
million in 2023, 2022 and 2021, respectively.
The total amount of accrued interest is included in “other
liabilities,” and was $
million as of December 30, 2023 and $
million as of December 31, 2022.
The amount
of penalties accrued for during the periods presented were not material to
our consolidated financial statements.
The following table provides a reconciliation of unrecognized tax benefits:
December 30,
December 31,
December 25,
Balance, beginning of period
$
$
$
Additions based on current year tax positions
Additions based on prior year tax positions
Reductions based on prior year tax positions
(2)
-
(1)
Reductions resulting from settlements with taxing authorities
(3)
(1)
(9)
Reductions resulting from lapse in statutes of limitations
(14)
(10)
(3)
Balance, end of period
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 15 - Plans of Restructuring
and Integration Costs
On August 1, 2022, we committed to a restructuring plan focused on
funding the priorities of the BOLD+1 strategic
plan, streamlining operations and other initiatives to increase efficiency.
We revised our previous expectations of
completion and we have extended this initiative through the end of 2024.
We are currently unable in good faith to
make a determination of an estimate of the amount or range of amounts
expected to be incurred in connection with
these activities, both with respect to each major type of cost associated
therewith and to the total cost, or an
estimate of the amount or range of amounts that will result in future
cash expenditures.
During the years ended December 30, 2023, December 31, 2022, and December
25, 2021, we recorded
restructuring costs of $
million, $
million, and $
million, respectively.
The restructuring costs for these
periods primarily related to severance and employee-related costs,
impairment of intangible assets, accelerated
amortization of right-of-use lease assets and fixed assets, other lease exit
costs, and certain business exit costs
discussed below.
During the year ended December 30, 2023, in connection with our restructuring
plan, we recorded an impairment of
an intangible asset of $
million related to a planned disposal of a non-U.S. business.
The disposal is expected to
be completed in 2024.
This impairment is included in the $
million of restructuring charges discussed above.
During the year ended December 31, 2022, in connection with our
restructuring plan, we vacated
one
of the
buildings at our corporate headquarters in Melville, New York, which resulted in an accelerated amortization of a
right-of-use lease asset of $
million.
We also initiated the disposal of a non-profitable U.S. business and
recorded related costs of $
million, which primarily consisted of impairment of intangible
assets and goodwill,
inventory impairment, and severance and employee-related costs.
These expenses are included in the $
million
of restructuring charges discussed above.
The disposal was completed during the first quarter of 2023.
On August 26, 2022, we acquired Midway Dental Supply.
In connection with this acquisition, during the year
ended December 31, 2022, we recorded integration costs of $
million related to one-time employee and other
costs, as well as restructuring charges of $
million, which are included in the $
million of restructuring charges
discussed above.
On November 20, 2019, we committed to a contemplated restructuring
initiative intended to mitigate stranded costs
associated with the spin-off of our animal health business and to rationalize operations
and provide expense
efficiencies.
These activities were originally expected to be completed by
the end of 2020 but we extended them to
the end of 2021 in light of the changes to the business environment brought
on by the COVID-19 pandemic.
The
restructuring activities under this prior initiative were completed
in 2021.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Restructuring and integration costs recorded during our 2023, 2022 and
2021 fiscal years consisted of the
following:
Year
Ended December 30, 2023
Health Care Distribution
Technology
and Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Integration
Costs
Total
Severance and employee-related costs
$
$
-
$
$
-
$
Impairment and accelerated depreciation and
amortization of right-of-use lease assets and
other long-lived assets
-
-
Exit and other related costs
-
-
Loss on disposal of a business
-
-
-
Total restructuring and integration costs
$
$
-
$
$
-
$
Year
Ended December 31, 2022
Health Care Distribution
Technology
and Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Integration
Costs
Total
Severance and employee-related costs
$
$
-
$
$
-
$
Impairment and accelerated depreciation and
amortization of right-of-use lease assets and
other long-lived assets
-
-
-
Exit and other related costs
-
-
-
Loss on disposal of a business
-
-
-
Integration employee-related and other costs
-
-
-
Total restructuring and integration costs
$
$
$
$
-
$
Year
Ended December 25, 2021
Health Care Distribution
Technology
and Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Integration
Costs
Total
Severance and employee-related costs
$
$
-
$
$
-
$
Total restructuring and integration costs
$
$
-
$
$
-
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The following table summarizes, by reportable segment, the activity related
to the liabilities associated with our
restructuring initiatives for the year ended December 30, 2023.
The remaining accrued balance of restructuring
costs as of December 30, 2023, which primarily relates to severance and
employee-related costs, is included in
accrued expenses: other within our consolidated balance sheets.
Liabilities related to exited leased facilities are
recorded within our current and non-current operating lease liabilities within
our condensed consolidated balance
sheets.
Technology
and
Health Care
Value-Added
Distribution
Services
Total
Balance, December 25, 2021
$
$
$
Restructuring and integration costs
Non-cash asset impairment and accelerated depreciation and
amortization of right-of-use lease assets and other long-lived assets
(47)
-
(47)
Non-cash impairment on disposal of a business
(46)
-
(46)
Cash payments and other adjustments
(13)
(2)
(15)
Balance, December 31, 2022
Restructuring and integration costs
Non-cash asset impairment and accelerated depreciation and
amortization of right-of-use lease assets and other long-lived assets
(13)
(2)
(15)
Non-cash impairment on disposal of a business
(12)
-
(12)
Cash payments and other adjustments
(46)
(8)
(54)
Balance, December 30, 2023
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 16 - Commitments and Contingencies
Purchase Commitments
In our health care distribution business, we sometimes enter into long-term purchase
commitments to ensure the
availability of products for distribution.
Future minimum annual payments for inventory purchase commitments
as
of December 30, 2023 were:
$
-
Thereafter
-
Total minimum
inventory purchase commitment payments
$
Employment, Consulting and Non-Compete Agreements
We have employment, consulting and non-compete agreements that have varying base aggregate annual payments
for the years 2024 through 2028 and thereafter of approximately $
million, $
million, $
million, $
million, $
million, and $
million, respectively.
We also have lifetime consulting agreements that provide for current
compensation of four-hundred thousand dollars per year, with small scheduled increases every fifth year with the
next increase in 2027.
In addition, some agreements have provisions for additional
incentives and compensation.
Legal Proceedings
Henry Schein, Inc. has been named as a defendant in multiple opioid related
lawsuits (currently less than one-
hundred and seventy-five (
); one or more of Henry Schein, Inc.’s subsidiaries is also named as a defendant in a
number of those cases).
Generally, the lawsuits allege that the manufacturers of prescription opioid drugs engaged
in a false advertising campaign to expand the market for such drugs and
their own market share and that the entities
in the supply chain (including Henry Schein, Inc. and its subsidiaries) reaped
financial rewards by refusing or
otherwise failing to monitor appropriately and restrict the improper distribution
of those drugs.
These actions
consist of some that have been consolidated within the MultiDistrict Litigation
(“MDL”) proceeding In Re National
Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804)
and are currently stayed, and others which
remain pending in state courts and are proceeding independently and outside
of the MDL.
At this time, the
following cases are set for trial: the action filed by DCH Health Care Authority, et al. in Alabama state court, which
is currently set for a jury trial on July 8, 2024; the action filed by Mobile
County Board of Health, et al. in Alabama
state court, which has been set for a jury trial on August 12, 2024;
and the action filed by Florida Health Sciences
Center, Inc. (and
other hospitals located throughout the State of Florida) in Florida state court,
which is currently
scheduled for a jury trial in September 2025.
Of Henry Schein’s 2023 net sales of approximately $
12.3
billion,
sales of opioids represented less than four-tenths of 1 percent.
Opioids represent a negligible part of our
business.
We intend to defend ourselves vigorously against these actions.
In August 2022, Henry Schein received a Grand Jury Subpoena from the United
States Attorney’s Office for the
Western District of Virginia,
seeking documents in connection with an investigation of possible
violations of the
Federal Food, Drug & Cosmetic Act by Butler Animal Health Supply, LLC (“Butler”), a former subsidiary of
Henry Schein.
The investigation relates to the sale of veterinary prescription drugs
to certain customers.
In
October 2022, Henry Schein received a second Grand Jury Subpoena
from the United States Attorney’s Office for
the Western District of Virginia.
The October 2022 Subpoena seeks documents relating to payments Henry
Schein
received from Butler or Covetrus, Inc. (“Covetrus”).
Butler was spun off into a separate company and became a
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
subsidiary of Covetrus in 2019 and is no longer owned by Henry Schein.
We are cooperating with the
investigation.
On January 18, 2024, a putative class action was filed against the Company
in the U.S. District Court for the
Eastern District of New York (“EDNY”), Case No. 24-cv-387 (the “Cruz-Bermudez Action”), based on the
October 2023 cybersecurity incident described above.
On January 26, 2024, a second putative class action was
filed against the Company based on the cybersecurity incident, also in
the EDNY,
Case No. 24-cv-550 (the
“Depperschmidt Action”).
On February 12, 2024, the Depperschmidt Action was voluntarily dismissed
without
prejudice.
On February 16, 2024, an amended complaint was filed in
the Cruz-Bermudez Action with additional
plaintiffs’ counsel from the Depperschmidt Action and an additional new plaintiff.
Plaintiffs in the Cruz-Bermudez Action seek to represent a class of all individuals
whose personally identifying
information and personal health information was compromised by
the incident.
Plaintiffs generally claim to have
been harmed by alleged actions and/or omissions by the Company
in connection with the incident and that the
Company made deceptive public statements regarding privacy and data protection.
Plaintiffs assert a variety of
common law and statutory claims seeking monetary damages, injunctive
relief, costs and attorneys’ fees, and other
related relief.
The case remains pending.
We intend to defend ourselves vigorously against this action.
From time to time, we may become a party to other legal proceedings,
including, without limitation, product
liability claims, employment matters, commercial disputes, governmental
inquiries and investigations (which may
in some cases involve our entering into settlement arrangements or consent
decrees), and other matters arising out
of the ordinary course of our business.
While the results of any legal proceeding cannot be predicted with certainty,
in our opinion none of these other pending matters are currently
anticipated to have a material adverse effect on our
consolidated financial position, liquidity or results of operations.
As of December 30, 2023, we had accrued our best estimate of potential
losses relating to claims that were probable
to result in liability and for which we were able to reasonably estimate
a loss.
This accrued amount, as well as
related expenses, was not material to our financial position, results of operations
or cash flows.
Our method for
determining estimated losses considers currently available
facts, presently enacted laws and regulations and other
factors, including probable recoveries from third parties.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 17 - Stock-Based Compensation
Stock-based awards are provided to certain employees under our 2020 Stock Incentive
Plan and to non-employee
directors under our 2023 Non-Employee Director Stock Incentive Plan
(formerly known as the 2015 Non-
Employee Director Stock Incentive Plan) (together, the “Plans”).
The Plans are administered by the Compensation
Committee of the Board (the “Compensation Committee”).
Historically, equity-based awards to our employees
have been granted solely in the form of time-based and performance-based
restricted stock units (“RSUs”) with the
exception of our 2021 plan year in which non-qualified stock options were
issued in place of performance-based
RSUs and in 2022, when we granted time-based and performance-based
RSUs, as well as non-qualified stock
options.
For our 2023 plan year, we returned to granting our employees equity-based awards solely
in the form of
time-based and performance-based RSUs.
Our non-employee directors receive equity-based awards solely
in the
form of time-based RSUs.
As of December 30, 2023, there were
70,942,657
shares authorized and
6,773,234
shares available to be granted
under the 2020 Stock Incentive Plan and
2,075,000
shares authorized and
393,309
shares available to be granted
under the 2023 Non-Employee Director Stock Incentive Plan.
RSUs are stock-based awards granted to recipients with specified vesting provisions.
In the case of RSUs, common
stock is delivered on or following satisfaction of vesting conditions.
We issue RSUs to employees that primarily
vest (i) solely based on the recipient’s continued service over time, primarily with
four
-year cliff vesting and/or (ii)
based on achieving specified performance measurements and the recipient’s continued service over time, primarily
with
three
-year cliff vesting.
RSUs granted to our non-employee directors primarily include
-month cliff vesting.
For these RSUs, we recognize the cost as compensation expense on a straight-line
basis.
For all RSUs, we estimate the fair value based on our closing stock
price on the grant date.
With respect to
performance-based RSUs, the number of shares that ultimately vest and
are received by the recipient is based upon
our performance as measured against specified targets over a specified period, as
determined by the Compensation
Committee.
Although there is no guarantee that performance targets will be achieved, we
estimate the fair value of
performance-based RSUs based on our closing stock price at time of grant.
Each of the Plans provide for certain adjustments to the performance
measurement in connection with awards under
the Plans.
With respect to the performance-based RSUs granted under our 2020 Stock Incentive Plan, such
performance measurement adjustments relate to significant events, including,
without limitation, acquisitions,
divestitures, new business ventures, certain capital transactions (including share
repurchases), differences in
budgeted average outstanding shares (other than those resulting from capital
transactions referred to above),
restructuring costs, if any, certain litigation settlements or payments, if any, changes in accounting principles or in
applicable laws or regulations, changes in income tax rates in certain
markets, foreign exchange fluctuations, the
financial impact either positive or negative, of the difference in projected earnings
generated by COVID-19 test kits
(solely with respect to performance-based RSUs granted in the 2022 and
2023 plan years) and impairment charges
(solely with respect to performance-based RSUs granted in the 2023 plan
year), and unforeseen events or
circumstances affecting us.
Over the performance period, the number of RSUs that will ultimately vest
and be issued and the related
compensation expense is adjusted upward or downward based upon our
estimation of achieving such performance
targets.
The ultimate number of shares delivered to recipients and the related compensation
cost recognized as an
expense is based on our actual performance metrics as defined under
the 2020 Stock Incentive Plan.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Stock options are awards that allow the recipient to purchase shares of our
common stock after vesting at a fixed
price set at the time of grant.
Stock options were granted at an exercise price equal to our
closing stock price on the
date of grant.
Stock options issued in 2021 and 2022 vest one-third per year based
on the recipient’s continued
service, subject to the terms and conditions of the 2020 Stock Incentive Plan,
are fully vested
three years
from the
grant date and have a contractual term of
ten years
from the grant date, subject to earlier termination of term and
term acceleration upon certain events.
Compensation expense for stock options is recognized using
a graded
vesting method.
We estimate grant date fair value of stock options using the Black-Scholes valuation model.
During the year ended December 30, 2023, we did
no
t grant any stock options.
In addition to equity-based awards granted in fiscal 2021 under the long-term
incentive program, the Compensation
Committee granted a Special Pandemic Recognition Award under the 2020 Stock Incentive Plan to recipients of
performance-based RSUs under the 2018 long-term incentive program.
The payout under the performance-based
restricted stock units granted under the fiscal 2018 long-term incentive program
(the “2018 LTIP”) was negatively
impacted by the global COVID-19 pandemic.
Given the significance of the impact of the pandemic on our
three
-
year EPS goal under such equity awards and the contributions made by our
employees (including those who
received such awards), on March 3, 2021, the Compensation Committee granted
a Special Pandemic Recognition
Award to recipients of performance-based restricted stock units under the 2018 LTIP who were employed by us on
the grant date of the Special Pandemic Recognition Award.
These time-based RSU awards vested
% on the first
anniversary of the grant date and
% on the second anniversary of the grant date, based on the recipient’s
continued service and subject to the terms and conditions of the 2020 Stock Incentive
Plan, and were recorded as
compensation expense using a graded vesting method.
The combination of the
% payout based on actual
performance of the 2018 LTIP and the one-time Special Pandemic Recognition Award granted in 2021 generated a
cumulative payout of
% of each recipient’s original number of performance-based restricted stock units awarded
in 2018 if the recipient satisfied the
two
-year vesting schedule commencing on the grant date.
Our consolidated statements of income reflect pre-tax share-based compensation
expense of $
million, $
million and $
million for the years ended December 30, 2023, December 31, 2022
and December 25, 2021.
Total unrecognized compensation cost related to unvested awards as of December 30, 2023 was $
million, which
is expected to be recognized over a weighted-average period of approximately
2.6
years.
The weighted-average grant date fair value of stock-based awards granted
was $
76.43
, $
85.51
and $
62.72
per share
during the years ended December 30, 2023, December 31, 2022 and December
25, 2021.
Certain stock-based compensation is required to be settled in cash.
During the year ended December 30, 2023, we
recorded a liability of $
0.1
million for stock-based compensation to be settled in cash.
We
record deferred income tax assets for awards that will result in
future income tax deductions based on the
amount of compensation cost recognized and our statutory tax rate in the
jurisdiction in which we will receive a
deduction.
Our consolidated statements of cash flows present our stock-based compensation
expense as a reconciling
adjustment between net income and net cash provided by operating
activities for all periods presented.
There were
no cash benefits associated with tax deductions in excess of recognized
compensation for the years ended
December 30, 2023, December 31, 2022 and December 25, 2021.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The following weighted-average assumptions were used in determining
the most recent fair values of stock options
using the Black-Scholes valuation model:
Expected dividend yield
-
%
-
%
Expected stock price volatility
27.80
%
27.10
%
Risk-free interest rate
3.62
%
1.33
%
Expected life of options (in years)
6.00
6.00
We have not declared cash dividends on our stock in the past and we do not anticipate declaring cash dividends in
the foreseeable future.
The expected stock price volatility is based on implied volatilities
from traded options on
our stock, historical volatility of our stock and other factors.
The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant that most closely aligns to the expected life of options.
The six-
year expected life of the options was determined using the simplified
method for estimating the expected term as
permitted under Staff Accounting Bulletin Topic 14.
The following table summarizes the stock option activity for the year
ended December 30, 2023:
Stock Options
Weighted Average
Aggregate
Weighted Average
Remaining Contractual
Intrinsic
Shares
Exercise Price
Life (in years)
Value
Outstanding at beginning of year
1,117,574
$
71.38
Granted
-
-
Exercised
(23,498)
62.74
Forfeited
(15,617)
79.04
Outstanding at end of year
1,078,459
$
71.46
7.6
$
Options exercisable at end of year
573,459
$
68.43
Weighted Average
Aggregate
Number of
Weighted Average
Remaining Contractual
Intrinsic
Options
Exercise Price
Life (in years)
Value
Vested
or expected to vest
503,497
$
74.95
7.7
$
The following tables summarize the activity of our unvested RSUs for
the year ended December 30, 2023:
Time-Based Restricted Stock Units
Performance-Based Restricted Stock Units
Weighted Average
Weighted Average
Grant Date Fair
Intrinsic Value
Grant Date Fair
Intrinsic Value
Shares/Units
Value Per Share
Per Share
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period
1,756,044
$
66.59
520,916
$
60.23
Granted
426,021
77.50
381,571
81.00
Vested
(433,973)
61.96
(631,458)
60.65
Forfeited
(92,699)
72.37
(62,287)
77.45
Outstanding at end of period
1,655,393
$
70.34
$
75.71
208,742
$
78.02
$
75.71
The total intrinsic value per share of RSUs that vested was $
76.85
, $
78.74
and $
73.99
during the years ended
December 30, 2023, December 31, 2022 and December 25, 2021, respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 18 - Employee Benefit Plans
Defined benefit plans
Certain of our employees in our international markets participate
in various noncontributory defined benefit plans.
These plans are managed to provide pension benefits to covered employees
in accordance with local regulations
and practices.
Our net unfunded liability for these plans are recorded
in accrued expenses: other; and other
liabilities within our consolidated balance sheets.
The following table presents the changes in projected benefit
obligations, plan assets, and the funded status of our defined benefit
pension plans:
Years
Ended
December 30,
December 31,
Obligation and funded status:
Change in benefit obligation
Projected benefit obligation, beginning of period
$
$
Service costs
Interest cost
Past service cost
-
Actuarial gain (loss)
(19)
Benefits paid
(1)
-
(1)
Participant contributions
Settlements
(3)
(1)
Effect of foreign currency translation
(4)
Projected benefit obligation, end of period
$
$
Change in plan assets
Fair value of plan assets at beginning of period
$
$
Actual return on plan assets
(3)
Employer contributions
Plan participant contributions
Expected return on plan assets
Benefit received
(1)
-
Settlements
(2)
(1)
Effect of foreign currency translation
(2)
Fair value of plan assets at end of period
$
$
Unfunded status at end of period
$
$
(1)
Includes regular benefit payments and amounts transferred in by new
participants.
The majority of our defined benefit plans are unfunded, with the exception
of one plan in one country where the
amount of assets exceeds the projected benefit obligation by approximately
$
million and $
million as of
December 30, 2023 and December 31, 2022, respectively.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The following table provides the amounts recognized in our consolidated
balance sheets for our defined benefit
pension plans:
Years
Ended
December 30,
December 31,
Non-current assets
$
$
Current liabilities
(1)
(1)
Non-current liabilities
(65)
(59)
Accumulated other comprehensive loss, pre-tax
The following table provides the components of net periodic pension cost
for our defined benefit plans:
Years
Ended
December 30,
December 31,
December 25,
Service cost
$
$
$
Interest cost
-
Expected return on plan assets
(3)
(1)
(1)
Employee contributions
(1)
-
-
Amortization of prior service credit
-
Recognized net actuarial loss
-
-
-
Settlements
-
-
-
Net periodic pension cost
$
$
$
The following tables present the weighted-average actuarial assumptions
used to determine our pension benefit
obligation and our net periodic pension cost for the periods presented:
Years
Ended
December 30,
December 31,
Pension Benefit Obligation
Weighted average
discount rate
2.71
%
1.67
%
Years
Ended
December 30,
December 31,
December 25,
Net Periodic Pension Cost
Discount rate-pension benefit
1.50
%
1.25
%
0.56
%
Expected return on plan assets
0.51
%
0.81
%
0.71
%
Rate of compensation increase
1.64
%
1.68
%
1.95
%
Pension increase rate
0.80
%
0.61
%
0.72
%
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The following table presents the estimated pension benefit payments that
are payable to the plan’s participants as of
December 30, 2023:
Year
$
2029 to 2033
Total
$
401(k) Plans
We offer
qualified 401(k) plans to substantially all domestic full-time employees.
As determined by our Board,
matching contributions to these plans generally do not exceed
% of the participants’ contributions up to
% of
their base compensation, subject to applicable legal limits.
Matching contributions are made in cash and are
allocated consistent with the participants’ investment elections on file, subject
to a
% allocation limit to the
Henry Schein Stock Fund.
Forfeitures attributable to participants whose employment terminates
prior to becoming
fully vested are reallocated as part of our ongoing matching contributions
and to offset administrative expenses of
the 401(k) plans.
Assets of the 401(k) and other defined contribution plans are held
in self-directed accounts enabling participants to
choose from various investment fund options.
Matching contributions related to these plans charged to operations
during the years ended December 30, 2023, December 31, 2022 and December
25, 2021 amounted to $
million,
$
million and $
million, respectively.
Within our consolidated statements of income, $
million, $
million,
and $
million, is included in selling, general and administrative; and $
million, $
million, and $
million is
included in cost of goods sold for the years ended December 30, 2023, December
31, 2022, and December 25,
2021, respectively.
Supplemental Executive Retirement Plan
We offer
an unfunded, non-qualified SERP to eligible employees.
This plan generally covers officers and certain
highly compensated employees after they have reached the maximum
IRS allowed pre-tax 401(k) contribution
limit.
Our contributions to this plan are equal to the 401(k) employee-elected
contribution percentage applied to
base compensation for the portion of the year in which such employees are
not eligible to make pre-tax
contributions to the 401(k) plan.
The amounts charged to operations during the years ended December 30, 2023,
December 31, 2022 and December 25, 2021 amounted to $
million, $
(1)
million and $
million, respectively.
The
charges are included in selling, general and administrative within our consolidated
statements of income.
Please
see
Note 12 - Derivatives and Hedging Activities
for additional information.
Deferred Compensation Plan
During 2011, we began to offer DCP to a select group of management or highly compensated employees of
the
Company and certain subsidiaries.
This plan allows for the elective deferral of base salary, bonus and/or
commission compensation by eligible employees.
The amounts (credited)/charged to operations during the years
ended December 30, 2023, December 31, 2022 and December 25, 2021
were approximately $
million, $
(11)
million and $
million, respectively.
The charges are included in selling, general and administrative within our
consolidated statements of income.
Please see
Note 12 - Derivatives and Hedging Activities
for additional
information.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 19 - Redeemable Noncontrolling Interests
Some minority stockholders in certain of our subsidiaries have the right,
at certain times, to require us to acquire
their ownership interest in those entities at fair value.
ASC Topic 480-10 is applicable for noncontrolling interests
where we are or may be required to purchase all or a portion of the
outstanding interest in a consolidated subsidiary
from the noncontrolling interest holder under the terms of a put option contained
in contractual agreements.
The
components of the change in the redeemable noncontrolling interests for the
years ended December 30, 2023,
December 31, 2022 and December 25, 2021, are presented in the following table:
December 30,
December 31,
December 25,
Balance, beginning of period
$
$
$
Decrease in redeemable noncontrolling interests due to acquisitions of
noncontrolling interests in subsidiaries
(19)
(31)
(60)
Increase in redeemable noncontrolling interests due to business
acquisitions
Net income attributable to redeemable noncontrolling interests
Distributions declared, net of capital contributions
(19)
(21)
(21)
Effect of foreign currency translation gain (loss)
attributable to
redeemable noncontrolling interests
(6)
(6)
Change in fair value of redeemable securities
(11)
(4)
Balance, end of period
$
$
$
Note 20 - Comprehensive Income
Comprehensive income includes certain gains and losses that, under U.S.
GAAP,
are excluded from net income and
are recorded directly to stockholders’ equity.
The following table summarizes our Accumulated other comprehensive loss, net
of applicable taxes as of:
December 30,
December 31,
December 25,
Attributable to redeemable noncontrolling interests:
Foreign currency translation adjustment
$
(32)
$
(37)
$
(31)
Attributable to noncontrolling interests:
Foreign currency translation adjustment
$
(1)
$
(1)
$
-
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
(188)
$
(236)
$
(155)
Unrealized gain (loss) from hedging activities
(13)
(2)
Pension adjustment loss
(5)
(2)
(14)
Accumulated other comprehensive loss
$
(206)
$
(233)
$
(171)
Total Accumulated
other comprehensive loss
$
(239)
$
(271)
$
(202)
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
The following table summarizes the components of comprehensive income, net
of applicable taxes as follows:
December 30,
December 31,
December 25,
Net income
$
$
$
Foreign currency translation gain (loss)
(88)
(84)
Tax effect
-
-
-
Foreign currency translation gain (loss)
(88)
(84)
Unrealized gain (loss) from hedging activities
(25)
Tax effect
(3)
(3)
Unrealized gain (loss) from hedging activities
(18)
Pension adjustment gain (loss)
(3)
Tax effect
-
(4)
(2)
Pension adjustment gain (loss)
(3)
Comprehensive income
$
$
$
Our financial statements are denominated in U.S. Dollars.
Fluctuations in the value of foreign currencies as
compared to the U.S. Dollar may have a significant impact on our
comprehensive income.
The foreign currency
translation gain (loss) during the years ended December 30, 2023, December 31,
2022 and December 25, 2021 was
primarily due to changes in foreign currency exchange rates of the Euro,
Brazilian Real, British Pound, Swiss
Franc, and Canadian Dollar.
The hedging gain (loss) during the years ended December 30, 2023 , December
31, 2022, and December 25, 2021
was attributable to a net investment hedge.
See
Note 11 - Derivatives and Hedging Activities
for further
information.
The following table summarizes our total comprehensive income, net of
applicable taxes as follows:
December 30,
December 31,
December 25,
Comprehensive income attributable to
Henry Schein, Inc.
$
$
$
Comprehensive income attributable to
noncontrolling interests
Comprehensive income attributable to
Redeemable noncontrolling interests
Comprehensive income
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 21 - Earnings Per Share
Basic earnings per share is computed by dividing net income attributable
to Henry Schein, Inc. by the weighted-
average number of common shares outstanding for the period.
Our diluted earnings per share is computed similarly
to basic earnings per share, except that it reflects the effect of common shares issuable
for unvested RSUs and upon
exercise of stock options using the treasury stock method in periods
in which they have a dilutive effect.
A reconciliation of shares used in calculating earnings per basic and
diluted share follows:
Years
Ended
December 30,
December 31,
December 25,
Basic
130,618,990
136,064,221
140,090,889
Effect of dilutive securities:
Stock options and restricted stock units
1,129,181
1,691,449
1,681,892
Diluted
131,748,171
137,755,670
141,772,781
The number of antidilutive securities that were excluded from the calculation
of diluted weighted average common
shares outstanding are as follows:
Years
Ended
December 30,
December 31,
December 25,
Stock options
424,695
342,716
611,869
Restricted stock units
15,040
19,466
1,048
Total anti-dilutive
securities excluded from earnings per share
computation
439,735
362,182
612,917
Note 22 - Supplemental Cash Flow Information
Cash paid for interest and income taxes was:
Years
ended
December 30,
December 31,
December 25,
Interest
$
$
$
Income taxes
For the years ended December 30, 2023, December 31, 2022 and December
25, 2021, we had $
(25)
million, $
million and $
million of non-cash net unrealized gains (losses) related to hedging
activities, respectively.
See
Note 12 - Derivatives and Hedging Activities
for additional information related to our total return swap and
our
interest rate swap agreements.
There was approximately $
million of debt assumed as part of the acquisitions for the year ended
December 30,
2023.
Debt assumed during the year ended December 30, 2023 primarily
relates to the acquisitions of Biotech
Dental and S.I.N.
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in millions, except share and per share data)
Note 23 - Related Party Transactions
In connection with the formation of Henry Schein One, LLC, our joint venture
with Internet Brands, which was
formed on July 1, 2018, we entered into a
ten-year
royalty agreement with Internet Brands whereby we will pay
Internet Brands approximately $
million annually for the use of their intellectual property.
During the years
ended December 30, 2023, December 31, 2022 and December 25, 2021, we recorded
$
million, $
million and
$
million, respectively, in connection with costs related to this royalty agreement.
As of December 30, 2023 and
December 31, 2022, Henry Schein One, LLC had a net payable balance
to Internet Brands of $
million and $
million, respectively, comprised of amounts related to results of operations and the royalty agreement.
The
components of this payable are recorded within accrued expenses: other, respectively, within our consolidated
balance sheets.
We
have interests in entities that we account for under the equity accounting
method.
In our normal course of
business, during the years ended December 30, 2023, December 31, 2022
and December 25, 2021, we recorded net
sales of $
million, $
million, and $
million respectively, to such entities.
During the years ended December
30, 2023, December 31, 2022 and December 25, 2021, we purchased
$
million, $
million and $
million
respectively, from such entities.
At December 30, 2023 and December 31, 2022, we had an aggregate
$
million
and $
million, respectively, due from our equity affiliates, and $
million and $
million, respectively, due to our
equity affiliates.
Certain of our facilities related to our acquisitions are leased from employees
and minority shareholders.
Please see
Note 7 - Leases
for further information.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including
our principal executive officer and
principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this annual report as
such term is defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”).
Based on
this evaluation, our management, including our principal executive
officer and principal financial officer,
concluded that our disclosure controls and procedures were effective as of December 30,
2023, to ensure that all
material information required to be disclosed by us in reports that we file
or submit under the Exchange Act is
accumulated and communicated to them as appropriate to allow timely
decisions regarding required disclosure and
that all such information is recorded, processed, summarized and reported
within the time periods specified in the
SEC’s rules and forms, and the rules of the Nasdaq stock exchange.
Changes in Internal Control over Financial Reporting
During the quarter ended December 30, 2023, we acquired a 90% voting
equity interest in Shield, a supplier of
homecare medical products headquartered in California.
The full integration of this acquisition, as well as our
previously reported acquisitions of S.I.N and Biotech Dental, extended
beyond year-end and, therefore, we
excluded Shield, Biotech Dental, and S.I.N., which together represent
less than 1.5% of our total net sales, from our
annual assessment of internal control over financial reporting as of December
30, 2023, as permitted by SEC staff
interpretive guidance for newly acquired businesses.
Post-acquisition integration related activities for other dental and
medical businesses acquired during 2023 across
the U.S., Europe, Brazil, Australia, and China were included in
our annual assessment of internal control over
financial reporting as of December 30, 2023.
These acquisitions, the majority of which utilize separate information
and financial accounting systems, have been included in our consolidated financial
statements since their respective
dates of acquisition.
Finally, we continued systems implementation activities in the U.S. for two of our dental businesses.
The combination of acquisitions (including Shield, S.I.N., and Biotech
Dental), continued acquisition integrations
and systems implementation activities undertaken during the quarter
and carried over from prior quarters when
considered in the aggregate, represents a material change in our
internal control over financial reporting.
During the quarter, all acquisitions, continued acquisition integrations and systems implementation activities
involve necessary and appropriate change-management controls
that are considered in our quarterly assessment of
changes in our internal control over financial reporting.
In October 2023, we experienced a cybersecurity incident that primarily
affected the operations of our North
American and European dental and medical distribution businesses.
Once we became aware of the issue, as part of
the Company’s incident response plan, we took precautionary actions to contain the incident including shutting
down connectivity to networks and key business, operating and financial
accounting systems globally.
In addition
to notifying affected and potentially affected third parties and all relevant law enforcement
authorities, we engaged
external cyber-security experts to support our assessment of the cyber-incident’s impact as well as sanitize, rebuild
and restore our affected systems and applications.
We also notified law enforcement and our employees,
customers, suppliers and investors, informing them of both the incident and
management’s efforts to mitigate its
impact on our daily operations and data maintained on the Company’s systems.
Subsequently, on or about November 8, 2023, we determined that the threat actor obtained personal and sensitive
information maintained on our systems belonging to certain third parties and
since that date we have notified
affected parties and potentially affected parties as appropriate.
The scope of personal and sensitive data impacted is
still under investigation.
On November 22, 2023, we experienced a related disruption to our
ecommerce platform and related applications,
which has since been remediated.
In order to mitigate the impact of this disruption on our systems and on our
ability to service customers, alternative
procedures and controls were temporarily implemented.
Management’s
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting,
as such term is defined in Exchange Act Rule 13a-15(f).
Our internal control system is designed to provide
reasonable assurance to our management and Board regarding the preparation
and fair presentation of published
financial statements.
Under the supervision and with the participation of our management,
including our principal
executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control-Integrated
Framework (2013), updated
and reissued by the Committee of Sponsoring Organizations, or the COSO Framework.
Based on our evaluation
under the COSO Framework, our management concluded that our
internal control over financial reporting was
effective at a reasonable assurance level as of December 30, 2023.
The effectiveness of our internal control over financial reporting as of December 30,
2023, has been independently
audited by BDO USA, P.C., an independent registered public accounting firm, and their attestation is included
herein. The evaluation of internal controls involves judgment.
Our external auditor has concluded that the
Company has a material weakness resulting from the aggregation of certain
control deficiencies at the application
control level related to logical and user access management and segregation of
duties.
The Company agrees that
there are control deficiencies that our external auditor has identified, all of which
either have been addressed or are
being addressed. The Company’s management has considered the control deficiencies identified by our
external
auditor, and believes that, individually and in aggregate, they do not result in a material weakness.
A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that
there is a reasonable possibility that a material misstatement of the
company’s financial statements will not be
prevented or detected on a timely basis.
Limitations of the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance
that the objectives of the internal control system are met.
Because of the inherent limitations of any internal control
system, no evaluation of controls can provide absolute assurance that
all control issues, if any, within a company
have been detected.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Henry Schein, Inc.
Melville, NY
Opinion on Internal Control over Financial Reporting
We
have audited Henry
Schein, Inc.’s
(the “Company’s”)
internal control over
financial reporting as
of December
30, 2023, based on
criteria established in Internal Control
- Integrated Framework (2013) issued
by the Committee
of Sponsoring Organizations of the Treadway Commission (the
“COSO criteria”). In our opinion, the Company did
not maintain,
in all
material respects,
effective internal
control over
financial reporting
as of
December 30,
2023,
based on the COSO criteria.
We
do
not
express
an
opinion
or
any
other
form
of
assurance
on
management’s
statements
referring
to
any
corrective actions taken by the Company after the date of management’s assessment.
We
also
have
audited,
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board
(United
States)
(“PCAOB”),
the
consolidated
balance
sheets
of
the
Company
as
of
December
30,
and
December
31,
2022,
the
related
consolidated
statements
of
income,
comprehensive
income,
changes
in
stockholders’ equity,
and cash
flows for
each of
the three
years in
the
period ended
December 30,
2023, and
the
related
notes
(collectively
referred
to
as
“the
financial
statements”)
and
our
report
dated
February
28,
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s
management is
responsible for
maintaining effective
internal control
over financial
reporting and
for
its
assessment of
the
effectiveness
of
internal control
over financial
reporting, included
in
the
accompanying,
“Item 9A, Management’s
Report on Internal
Control over Financial Reporting”. Our
responsibility is to express
an
opinion on the
Company’s internal
control over financial
reporting based on
our audit. We
are a public
accounting
firm
registered
with
the
PCAOB and
are
required
to
be
independent
with
respect
to
the
Company in
accordance
with
U.S.
federal
securities
laws
and
the
applicable
rules
and
regulations
of
the
Securities
and
Exchange
Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB.
Those standards require
that we plan
and perform the
audit to
obtain reasonable assurance
about whether effective
internal
control
over
financial
reporting
was
maintained
in
all
material
respects.
Our
audit
included
obtaining
an
understanding
of
internal
control
over
financial
reporting,
assessing
the
risk
that
a
material
weakness
exists,
and
testing
and
evaluating
the
design
and
operating
effectiveness
of
internal
control
based
on
the
assessed
risk.
Our
audit also included performing
such other procedures as we
considered necessary in the
circumstances. We
believe
that our audit provides a reasonable basis for our opinion.
A material
weakness is
a deficiency,
or a
combination of
deficiencies, in
internal control
over financial
reporting,
such
that
there
is
a
reasonable
possibility
that
a
material
misstatement
of
the
Company’s
annual
or
interim
consolidated
financial
statements
will
not
be
prevented
or
detected
on
a
timely
basis.
We
have
identified
the
following material weakness
that has not
been identified as
a material weakness
in management’s
assessment. The
material weakness in
internal control over
financial reporting is
related to logical
and user access
management and
segregation
of
duties,
at
the
application
control
level,
in
certain
information
technology
environments
at
certain
components.
There
is
a
reasonable
possibility
that
a
material
misstatement
of
the
Company’s
annual
or
interim
consolidated
financial
statements
with
respect
to
these
matters
would
not
have
been
prevented
or
detected
on
a
timely
basis.
This
material
weakness
was
considered
in
determining
the
nature,
timing,
and
extent
of
audit
tests
applied in
our audit
of the
2023 consolidated
financial statements,
and this
report does
not affect
our report
dated
February 28, 2024, on those consolidated financial statements.
As indicated in
the accompanying “Item
9A, Management’s
Report on Internal
Control over Financial
Reporting”,
management’s assessment of and conclusion on the effectiveness of internal control
over financial reporting did not
include
the
internal
controls
of
Shield
Healthcare,
Inc.,
S.I.N.
Implant
System,
and
Biotech
Dental,
which
were
acquired
during
the
year
ended
December
30,
2023,
and
are
included
in
the
consolidated
balance
sheet
of
the
Company
as
of
December
30,
2023,
and
the
related
consolidated
statements
of
income,
comprehensive
income,
changes
in
stockholders’
equity,
and
cash
flows
for
the
year
then
ended.
Shield
Healthcare,
Inc.,
S.I.N.
Implant
System, and
Biotech Dental,
together represent
less than
1.5% of
total net
sales for
the year
ended December
30,
2023. Management did not assess the effectiveness of internal control over financial reporting of Shield Healthcare,
Inc.,
S.I.N.
Implant
System,
or
Biotech
Dental
because
of
the
timing
of
the
acquisitions
which
were
completed
during the
year ended
December 30,
2023. Our
audit of
internal control
over financial
reporting of
the Company
also did
not include
an evaluation
of the
internal control
over financial
reporting of
Shield Healthcare,
Inc., S.I.N.
Implant System, or Biotech Dental.
Definition and Limitations of Internal Control over Financial Reporting
A
company’s
internal
control
over
financial
reporting
is
a
process
designed
to
provide
reasonable
assurance
regarding the
reliability of
financial reporting
and the
preparation of
financial statements
for external
purposes in
accordance
with
generally
accepted
accounting
principles.
A
company’s
internal
control
over
financial
reporting
includes
those
policies
and
procedures
that
(1)
pertain
to
the
maintenance
of
records
that,
in
reasonable
detail,
accurately and
fairly reflect
the transactions
and dispositions
of the
assets of
the company;
(2) provide
reasonable
assurance
that
transactions
are
recorded
as
necessary
to
permit
preparation
of
financial
statements
in
accordance
with generally
accepted accounting
principles, and
that receipts
and expenditures
of the
company are
being made
only
in
accordance with
authorizations of
management and
directors of
the
company; and
(3) provide
reasonable
assurance
regarding
prevention
or
timely
detection
of
unauthorized
acquisition,
use,
or
disposition
of
the
company’s assets that could have a material effect on the financial statements.
Because
of
its
inherent
limitations,
internal
control
over
financial
reporting
may
not
prevent
or
detect
misstatements.
Also,
projections
of
any
evaluation
of
effectiveness
to
future
periods
are
subject
to
the
risk
that
controls
may
become
inadequate
because
of
changes
in
conditions,
or
that
the
degree
of
compliance
with
the
policies or procedures may deteriorate.
/s/ BDO USA, P.C.
New York
,
NY
February 28, 2024

---

ITEM 9B. OTHER INFORMATION
ITEM 9B.
Other Information
Not applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
Directors, Executive Officers and Corporate Governance
Information required by this item regarding our directors and executive
officers and our corporate governance is
hereby incorporated by reference to the Section entitled “Election of Directors,”
with respect to directors, and the
first paragraph of the Section entitled “Corporate Governance - Board
of Directors Meetings and Committees -
Audit Committee,” with respect to corporate governance, in each case
in our definitive 2024 Proxy Statement to be
filed pursuant to Regulation 14A and to the Section entitled “Information
about our Executive Officers” in Part I of
this report, with respect to executive officers.
There have been no changes to the procedures by which stockholders
may recommend nominees to our Board since
our last disclosure of such procedures, which appeared in our definitive
2023 Proxy Statement filed pursuant to
Regulation 14A on April 11, 2023.
Information required by this item concerning compliance with Section
16(a) of the Securities Exchange Act of
1934 is hereby incorporated by reference to the Section entitled
“Delinquent Section 16(a) Reports” in our
definitive 2024 Proxy Statement to be filed pursuant to Regulation 14A,
to the extent responsive disclosure is
required.
We have adopted a Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, Chief
Accounting Officer and Controller.
We make available free of charge through our Internet website,
www.henryschein.com,
under the “About Henry Schein--Corporate Governance
Highlights” caption, our Code of
Ethics.
We intend to disclose on our Web
site any amendment to, or waiver of, a provision of the Code
of Ethics.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
Executive Compensation
The information required by this item is hereby incorporated by reference
to the Sections
entitled “Compensation
Discussion and Analysis,” “Compensation Committee Report” (which
information shall be deemed furnished in
this Annual Report on Form 10-K), “Executive and Director Compensation” and
“Compensation Committee
Interlocks and Insider Participation” in our definitive 2024 Proxy Statement
to be filed pursuant to Regulation 14A.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder
Matters
We maintain several stock incentive plans for the benefit of certain officers, directors and employees.
All active
plans have been approved by our stockholders.
Descriptions of these plans appear in the notes to our consolidated
financial statements.
The following table summarizes information relating to these plans as
of December 30, 2023:
Number of Common
Shares to be Issued Upon
Weighted-
Average
Number of Common
Exercise of Outstanding
Exercise Price of
Shares Available
for
Plan Category
Options and Rights
Outstanding Options
Future Issuances
Plans Approved by Stockholders
-
$
-
7,166,543
Plans Not Approved by Stockholders
-
-
-
Total
-
$
-
7,166,543
The other information required by this item is hereby incorporated by
reference to the Section entitled “Security
Ownership of Certain Beneficial Owners and Management” in our definitive
2024 Proxy Statement to be filed
pursuant to Regulation 14A.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is hereby incorporated by reference
to the Section entitled “Certain
Relationships and Related Transactions” and “Corporate Governance - Board of Directors Meetings and
Committees - Independent Directors” in our definitive 2024 Proxy Statement
to be filed pursuant to Regulation
14A.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
Principal Accounting Fees and Services
The information required by this item is hereby incorporated by reference
to the Section entitled “Independent
Registered Public Accounting Firm Fees and Pre-Approval Policies and
Procedures” in our definitive 2024 Proxy
Statement to be filed pursuant to Regulation 14A.
PART
IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
Exhibits, Financial Statement Schedules
(a)
List of Documents Filed as a Part of This Report:
1.
Financial Statements:
Our Consolidated Financial Statements filed as a part of this report
are listed on the index on
Page 62.
2.
Index to Exhibits:
See exhibits listed under Item 15(b) below.
(b) Exhibits
3.1
Second Amended and Restated Certificate of Incorporation of Henry Schein, Inc.
(Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on June
1, 2018.)
3.2
Fourth Amended and Restated By-Laws of Henry Schein, Inc., effective March 23, 2023.
(Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on
March 24, 2023.)
4.1
Third Amended and Restated Multicurrency Master Note Purchase Agreement, dated as of
October 20, 2021, by and among us, Metropolitan Life Insurance Company, MetLife
Investment Management, LLC and each MetLife affiliate which becomes party thereto.
(Incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K filed on
October 21, 2021.)
4.2
Third Amended and Restated Master Note Facility, dated as of October 20, 2021, by and
among us, NYL Investors LLC and each New York Life affiliate which becomes party
thereto. (Incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K filed
on October 21, 2021.)
4.3
Third Amended and Restated Multicurrency Private Shelf Agreement, dated as of October
20, 2021, by and among us, PGIM, Inc. and each Prudential affiliate which becomes party
thereto. (Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed
on October 21, 2021.)
4.4
Multicurrency Private Shelf Agreement, dated as of October 20, 2021, by and among us,
AIG Asset Management (U.S.), LLC and each AIG affiliate which becomes party thereto.
(Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on
October 21, 2021.)
4.5
Description of Securities. (Incorporated by reference to Exhibit 4.5 to our Annual Report
on Form 10-K for the fiscal year ended December 25, 2021 filed on February 15, 2022.)
10.1
Henry Schein, Inc. 2013 Stock Incentive Plan, as amended and restated effective as of May
14, 2013. (Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K
filed on May 16, 2013.)**
10.2
Form of 2019 Restricted Stock Unit Agreement for performance-based restricted stock unit
awards pursuant to the Henry Schein, Inc. 2013 Stock Incentive Plan (as amended and
restated effective as of May 14, 2013). (Incorporated by reference to Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2019 filed on May
7, 2019.)**
10.3
Form of 2019 Restricted Stock Unit Agreement for time-based restricted stock unit awards
pursuant to the Henry Schein, Inc. 2013 Stock Incentive Plan (as amended and restated
effective as of May 14, 2013). (Incorporated by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2019 filed on May 7, 2019.)**
10.4
Henry Schein, Inc. 2020 Stock Incentive Plan, as amended and restated effective as of May
21, 2020. (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K
filed on May 26, 2020.)**
10.5
Form of 2021 Stock Option Agreement pursuant to the Henry Schein, Inc. 2020 Stock
Incentive Plan (as amended and restated effective as of May 21, 2020). (Incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 8, 2021.)**
10.6
Form of 2022 Restricted Stock Unit Agreement for time-based restricted stock unit awards
pursuant to the Henry Schein, Inc. 2020 Stock Incentive Plan (as amended and restated
effective as of May 21, 2020). (Incorporated by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended March 26, 2022 filed on May 3, 2022.)**
10.7
Form of 2022 Restricted Stock Unit Agreement for performance-based restricted stock unit
awards pursuant to the Henry Schein, Inc. 2020 Stock Incentive Plan (as amended and
restated effective as of May 21, 2020). (Incorporated by reference to Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended March 26, 2022 filed on May
3, 2022.)**
10.8
Henry Schein, Inc. 2015 Non-Employee Director Stock Incentive Plan. (Incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended
June 27, 2015 filed on July 29, 2015.)**
10.9
Form of 2018 Restricted Stock Unit Agreement for time-based restricted stock unit awards
pursuant to the Henry Schein, Inc. 2015 Non-Employee Director Stock Incentive Plan (as
amended and restated effective as of June 22, 2015). (Incorporated by reference to Exhibit
10.6 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2018
filed on May 8, 2018.)**
10.10
Henry Schein, Inc. 2023 Non-Employee Director Stock Incentive Plan, as
amended and
restated effective as of May 23, 2023. (Incorporated by reference
to Exhibit 10.1 to our
Current Report on Form 8-K filed on May 25, 2023
).**
10.11
Henry Schein, Inc. Supplemental Executive Retirement Plan, amended and restated
effective as of January 1, 2014. (Incorporated by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 28, 2013 filed on November
5, 2013.)**
10.12
Amendment Number One to the Henry Schein, Inc. Supplemental Executive Retirement
Plan, amended and restated effective as of January 1, 2014. (Incorporated by reference to
Exhibit 10.18 to our Annual Report on Form 10-K for the fiscal year ended December 28,
2019 filed on February 20, 2020.)**
10.13
Amendment Number Two to the Henry Schein, Inc. Supplemental Executive Retirement
Plan, amended and restated effective as of January 1, 2014. (Incorporated by reference to
Exhibit 10.3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 28,
2020 filed on May 5, 2020.)**
10.14
Amendment Number Three to the Henry Schein, Inc. Supplemental Executive Retirement
Plan, amended and restated effective as of January 1, 2014. (Incorporated by reference to
Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September
26, 2020 filed on November 2, 2020.)**
10.15
Amendment Number Four to the Henry Schein, Inc. Supplemental Executive Retirement
Plan, amended and restated effective as of January 1, 2014. (Incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K filed on December 18, 2023.)**
10.16
Henry Schein, Inc. 2004 Employee Stock Purchase Plan, effective as of May 25, 2004.
(Incorporated by reference to Exhibit D to our definitive 2004 Proxy Statement on
Schedule 14A, filed on April 27, 2004.)**
10.17
Henry Schein, Inc. 2023 Non-Employee Director Stock Incentive Plan, amended and
restated effective as of May 23, 2023. (Incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K filed on May 25, 2023.)**
10.18
Henry Schein, Inc. Deferred Compensation Plan, as amended and restated effective as of
November 14, 2023. (Incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed on November 16, 2023.)**
10.19
Henry Schein Management Team Performance Incentive Plan and Plan Summary,
effective as of January 1, 2014. (Incorporated by reference to Exhibit 10.7 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended March 29, 2014 filed on May 6, 2014.)**
10.20
Amended and Restated Employment Agreement dated as of November 28, 2022, by and
between Henry Schein, Inc. and Stanley M. Bergman. (Incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K filed on November 29, 2022.)**
10.21
Letter Agreement dated November 11, 2021 between Henry Schein, Inc. and Brad Connett
(Incorporated by reference to Exhibit 10.27 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2022 filed on February 21, 2023.)**
10.22
Agreement dated November 11, 2021 between Henry Schein, Inc. and Brad Connett
(Incorporated by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2022 filed on February 21, 2023.)**
10.23
Special Incentive Plan dated May 24, 2021 between Henry Schein, Inc. and Brad Connett
(Incorporated by reference to Exhibit 10.29 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2022 filed on February 21, 2023.)**
#
10.24
Form of Amended and Restated Change in Control Agreement dated December 12, 2008
between us and certain executive officers who are a party thereto (James Breslawski,
Michael S. Ettinger, and Mark Mlotek, respectively). (Incorporated by reference to Exhibit
10.15 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008
filed on February 24, 2009.)**
10.25
Form of Amendment to Amended and Restated Change in Control Agreement effective
January 1, 2012 between us and certain executive officers who are a party thereto (James
Breslawski, Michael S. Ettinger, and Mark Mlotek, respectively). (Incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 20, 2012.)**
10.26
Form of Change in Control Agreement between us and certain executive officers who are a
party thereto (Walter Siegel). (Incorporated by reference to Exhibit 10.3 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2019 filed on May 7, 2019.)
**
10.27
Henry Schein, Inc. Executive Change in Control Plan, effective as of May 2, 2022 between
us and certain executive officers who are a party thereto (Ronald N. South, Brad Connett,
and Lorelei McGlynn). (Incorporated by reference to Exhibit 10.3 to our Quarterly Report
on Form 10-Q for the fiscal quarter ended March 26, 2022 filed on May 3, 2022.)**
10.28
Form of Indemnification Agreement between us and certain directors and executive
officers who are a party thereto (Mohamed Ali, Deborah Derby, Carole T. Faig, Joseph L.
Herring, Kurt P. Kuehn, Philip A. Laskawy, Anne H. Margulies, Steven Paladino, Carol
Raphael, Scott P. Serota, Bradley T. Sheares, Ph.D., Reed V. Tuckson, M.D., FACP,
Stanley M. Bergman, James P. Breslawski, Brad Connett, Michael S. Ettinger, Lorelei
McGlynn, Mark E. Mlotek, Walter Siegel and Ronald N. South, respectively).
(Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the
fiscal quarter ended September 26, 2015 filed on November 4, 2015.)**
10.29
Second Amended and Restated Revolving Credit Agreement, dated as of July 11, 2023,
among us, the several lenders parties thereto, and JPMorgan Chase Bank, N.A., as
administrative agent, U.S. Bank National Association, as syndication agent, and TD Bank,
N.A., Bank of America, N.A., UniCredit Bank, A.G., the Bank of New York Mellon, ING
Bank, N.V. and HSBC Bank USA, N.A., as co-documentation agents. (Incorporated by
reference to Exhibit 10.2 to our Current Report on Form 8-K filed on July 13, 2023.)
10.30
Term Loan Credit Agreement, dated as of July 11, 2023, among us, the several lenders
parties thereto, JPMorgan Chase Bank, N.A., as administrative agent,
U.S. Bank National Association, as syndication agent, and TD Bank, N.A.,
Bank of America, N.A. and UniCredit Bank, A.G., as co-documentation agents.
(Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K
filed on July 13, 2023.)
10.31
Receivables Purchase Agreement, dated as of April 17, 2013, by and among us, as
servicer, HSFR, Inc., as seller, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as agent and the
various purchaser groups from time to time party thereto. (Incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K filed on April 19, 2013.)
10.32
Amendment No. 1 dated as of September 22, 2014 to the Receivables Purchase
Agreement, dated as of April 17, 2013, by and among us, as servicer, HSFR, Inc., as seller,
The Bank of Tokyo-Mitsubishi UFJ, LTD., New York Branch, as agent and the various
purchaser groups from time to time party thereto. (Incorporated by reference to Exhibit
10.2 to our Current Report on Form 8-K filed on September 26, 2014.)
10.33
Amendment No. 2 dated as of April 17, 2015 to Receivables Purchase Agreement, dated as
of April 17, 2013, by and among us, as performance guarantor, HSFR, Inc., as seller, The
Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as agent and the various
purchaser groups party thereto. (Incorporated by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended June 25, 2016 filed on August 4, 2016.)
10.34
Amendment No. 3 dated as of June 1, 2016 to Receivables Purchase Agreement, dated as
of April 17, 2013, by and among us, as performance guarantor, HSFR, Inc., as seller, The
Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as agent and the various
purchaser groups party thereto. (Incorporated by reference to Exhibit 10.2 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended June 25, 2016 filed on August 4, 2016.)
10.35
Amendment No. 4 dated as of July 6, 2017 to Receivables Purchase Agreement, dated as
of April 17, 2013, by and among us, as performance guarantor, HSFR, Inc., as seller, The
Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as agent and the various
purchaser groups party thereto. (Incorporated by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2017 filed on November
6, 2017.)
10.36
Amendment No. 5 dated as of May 13, 2019 to Receivables Purchase Agreement, dated as
of April 17, 2013, by and among us, as performance guarantor, HSFR, Inc., as seller, The
Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as agent and the various
purchaser groups party thereto. (Incorporated by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended June 29, 2019 filed on August 6, 2019.)
10.37
Limited Waiver dated as of May 22, 2020 to Receivables Purchase Agreement, dated as of
April 17, 2013, by and among us, as servicer, HSFR, Inc., as seller, lender, as agent and the
various purchaser groups from time to time party thereto, as amended. (Incorporated by
reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q for the fiscal quarter ended
June 27, 2020 filed on August 4, 2020.)
10.38
Amendment No. 6 dated as of June 22, 2020 to the Receivables Purchase Agreement,
dated as of April 17, 2013, by and among us, as servicer, HSFR, Inc., as seller, lender, as
agent and the various purchaser groups from time to time party thereto. (Incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 25, 2020.)
10.39
Amendment No. 7 dated as of October 20, 2021 to Receivables Purchase Agreement, dated
as of April 17, 2013, by and among us, as servicer, HSFR, Inc., as seller, lender, as agent
and the various purchaser groups from time to time party thereto. (Incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 21, 2021.)
10.40
Amendment No. 8 dated as of December 15, 2022 to Receivables Purchase Agreement,
dated as of April 17, 2013, by and among us, as servicer, HSFR, Inc., as seller, lender, as
agent and the various purchaser groups from time to time party thereto. (Incorporated by
reference to Exhibit 10.45 to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2022 filed on February 21, 2023.)
10.41
Omnibus Amendment No. 1, dated July 22, 2013, to Receivables Purchase Agreement
dated as of April 17, 2013, by and among us, as servicer, HSFR, Inc., as seller, The Bank
of Tokyo-Mitsubishi UFJ, Ltd., as agent, and the various purchaser groups from time to
time party thereto and Receivables Sales Agreement, dated as of April 17, 2013, by and
among us, certain of our wholly-owned subsidiaries and HSFR, Inc., as
buyer. (Incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q
for the fiscal quarter ended June 29, 2013 filed on August 6, 2013.)
10.42
Omnibus Amendment No. 2, dated April 21, 2014, to Receivables Purchase Agreement
dated as of April 17, 2013, as amended, by and among us, as servicer, HSFR, Inc., as
seller, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as agent, and the various purchaser
groups from time to time party thereto and Receivables Sales Agreement, dated as of April
17, 2013, by and among us, certain of our wholly-owned subsidiaries and HSFR, Inc., as
buyer. (Incorporated by reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q
for the fiscal quarter ended March 29, 2014 filed on May 6, 2014.)
10.43
Receivables Sale Agreement, dated as of April 17, 2013, by and among us, certain of our
wholly-owned subsidiaries and HSFR, Inc., as buyer. (Incorporated by reference to
Exhibit 10.2 to our Current Report on Form 8-K filed on April 19, 2013.)
21.1
List of our Subsidiaries.+
23.1
Consent of BDO USA, P.C.+
31.1
Certification of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.+
31.2
Certification of our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.+
32.1
Certification of our Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.+
97.1
Henry Schein, Inc. Dodd-Frank Clawback Policy, effective as of December 1, 2023.**+
99.1
Limited Waiver dated November 10, 2023 to the Multicurrency Private Shelf Agreement,
dated as of October 20, 2021, by and among us, AIG Asset Management (U.S.), LLC and
each AIG affiliate which becomes party thereto.+
99.2
Limited Waiver dated November 10, 2023 to the Third Amended and Restated
Multicurrency Master Note Purchase Agreement, dated as of October 20, 2021, by and
among us, Metropolitan Life Insurance Company, MetLife Investment Management, LLC
and each MetLife affiliate which becomes party thereto.+
99.3
Limited Waiver dated November 10, 2023 to the Third Amended and Restated Master
Note Facility, dated as of October 20, 2021, by and among us, NYL Investors LLC and
each New York Life affiliate which becomes party thereto.+
99.4
Limited Waiver dated November 10, 2023 to the Third Amended and Restated
Multicurrency Private Shelf Agreement, dated as of October 20, 2021, by and among us,
PGIM, Inc. and each Prudential affiliate which becomes party thereto.+
99.5
Limited Waiver dated as of November 10, 2023 to the Receivables Purchase Agreement,
dated as of April 17, 2013, by and among us, as servicer, HSFR, Inc., as seller, lender, as
agent and the various purchaser groups from time to time party thereto, as amended.+
99.6
Limited Waiver dated as of November 10, 2023 to the Second Amended and Restated
Revolving Credit Agreement, dated as of July11, 2023, among us, the several lenders from
time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent, and
the other parties from time to time party thereto.+
99.7
Limited Waiver dated as of November 10, 2023 to the Term Loan Credit Agreement, dated
as of July 11, 2023, among us, the several lenders from time to time party thereto,
JPMorgan Chase Bank, N.A., as administrative agent, and the other parties from time to
time party thereto.+
99.8
Amendment No. 9 dated as of December 20, 2023 to Receivables Purchase Agreement,
dated as of April 17, 2013, by and among us, as servicer, HSFR, Inc., as seller, lender, as
agent and the various purchaser groups from time to time party thereto.+
99.9
Amendment No. 10 dated as of February 23, 2024 to Receivables Purchase Agreement,
dated as of April 17, 2013, by and among us, as servicer, HSFR, Inc., as seller, lender, as
agent and the various purchaser groups from time to time party thereto.+
101.INS
Inline XBRL Instance Document - the instance document does not appear
in the
Interactive Data File because its XBRL tags are embedded within the Inline
XBRL
document.+
101.SCH
Inline XBRL Taxonomy Extension Schema Document+
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document+
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document+
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document+
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document+
The cover page of Henry Schein, Inc.’s Annual Report on Form 10-K for the year ended
December 30, 2023, formatted in Inline XBRL (included within Exhibit 101
attachments).+
_________
+
Filed or furnished herewith.
**
Indicates management contract or compensatory plan or agreement.
# Certain identified information has been excluded from the exhibit because
it is both not material and is the type
that the registrant treats as private or confidential.