HENRY SCHEIN, INC. 
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 Quarterly Report on Form 10-Q, and in particular the risks discussed under the caption "Risk Factors" in Item 1A of this report and those discussed in other documents we file with theSecurities and Exchange Commission (SEC), including our Annual Report on Form 10-K. Forward looking statements include the overall impact of the Novel Coronavirus Disease 2019 (COVID-19) on the Company, its results of operations, liquidity, and financial condition (including any estimates of the percentage impact on these items), the rate and consistency with which dental and other practices resume normal operations inthe United States and internationally, expectations regarding PPE and other COVID-19 related product sales and inventory levels and whether one or more resurgences of the virus will adversely impact the resumption of normal operations, as well as more generally current expectations regarding performance in current and future periods. Forward looking statements also include the Company's ability to make additional testing available, the nature of those tests and the number of tests intended to be made available and the timing for availability, the nature of the target market, as well as the efficacy or relative efficacy of the test results given that the test efficacy has not been, or will not have been, independently verified under normal FDA procedures. Risk factors and uncertainties that could cause actual results to differ materially from current and historical results include, but are not limited to: effects of a highly competitive and consolidating market; increased competition by third party online commerce sites; our dependence on third parties for the manufacture and supply of our products; our dependence upon sales personnel, customers, suppliers and manufacturers; our dependence on our senior management; fluctuations in quarterly earnings; 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 macro-economic conditions; risks associated with currency fluctuations; risks associated with political and economic uncertainty; disruptions in financial markets; volatility of the market price of our common stock; changes in the health care industry; implementation of health care laws; failure to comply with regulatory requirements and data privacy laws; risks associated with our global operations; risks associated with COVID-19, as well as other disease outbreaks, epidemics, pandemics, or similar wide spread public health concerns and other natural disasters; risks associated with theUnited Kingdom's withdrawal from theEuropean Union ; transitional challenges associated with acquisitions, dispositions and joint ventures, including the failure to achieve anticipated synergies/benefits; financial and tax risks associated with acquisitions, dispositions and joint ventures; litigation risks; new or unanticipated litigation developments and the status of litigation matters; the dependence on our continued product development, technical support and successful marketing in the technology segment; our dependence on third parties for certain technologically advanced components; risks from disruption to our information systems; cyberattacks or other privacy or data security breaches; certain provisions in our governing documents that may discourage third-party acquisitions of us; and changes in tax legislation. 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.
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Where You Can Find Important Information
We may disclose important information through one or more of the following
channels:
Recent Developments COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared the Novel Coronavirus Disease 2019 ("COVID-19") a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of global financial markets. In response, many countries implemented business closures and restrictions, stay-at-home and social distancing ordinances and similar measures to combat the pandemic, which significantly impacted global business and dramatically reduced demand for dental products and certain medical products in the second quarter of 2020. Demand increased in the third quarter resulting in growth over the prior year driven by sales of personal protective equipment (PPE) and COVID-19 related products. Our consolidated financial statements reflect estimates and assumptions made by us that affect, among other things, our goodwill, long-lived asset and indefinite-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; vendor rebates; measurement of compensation cost for certain share-based performance awards and cash bonus plans; and pension plan assumptions. Due to the significant uncertainty surrounding the future impact of COVID-19, our judgments regarding estimates and impairments could change in the future. In addition, the impact of COVID-19 had a material adverse effect on our business, results of operations and cash flows in the second quarter of 2020. In the latter half of the second quarter, dental and medical practices began to re-open worldwide, and continued to do so during the third quarter. However, patient volumes remain below pre-COVID-19 levels and certain regions in theU.S. and internationally are experiencing an increase in COVID-19 cases. As such, there is an ongoing risk that the COVID-19 pandemic 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. However, the extent of the potential impact cannot be reasonably estimated at this time. As part of a broad-based effort to support plans for the long-term health of our business and to strengthen our financial flexibility, we implemented cost reduction measures that included certain reductions in payroll, substantially decreased capital expenditures, reduced corporate spending and elimination of certain non-strategic targeted expenditures. As our markets have begun to recover we have ended most of those temporary expense-reduction initiatives during the third quarter. Corporate Transactions OnFebruary 7, 2019 (the "Distribution Date"), we completed the separation (the "Separation") and subsequent merger of our animal health business (the "Henry Schein Animal Health Business") withDirect Vet Marketing, Inc. (d/b/a Vets First Choice, "Vets First Choice") (the "Merger"). This was accomplished by a series of transactions among us, Vets First Choice, Covetrus, Inc. (f/k/aHS Spinco, Inc. "Covetrus"), a wholly owned subsidiary of ours prior to the Distribution Date, andHS Merger Sub, Inc. , a wholly owned subsidiary of Covetrus ("Merger Sub"). In connection with the Separation, we contributed, assigned and transferred to Covetrus certain applicable assets, liabilities and capital stock or other ownership interests relating to the Henry Schein Animal Health Business. On the Distribution Date, we received a tax-free distribution of$1,120 million from Covetrus pursuant to certain debt financing incurred by Covetrus. On the Distribution Date and prior to the Animal Health Spin-off, Covetrus issued shares of Covetrus common stock to certain institutional accredited investors (the "Share Sale Investors ") for$361.1 million (the "Share Sale"). The proceeds of the Share Sale were paid to Covetrus and distributed to us. Subsequent to the Share Sale, we distributed, on a pro rata basis, all of the shares of the common stock of Covetrus held by us to our stockholders of record as of the close of business onJanuary 17, 2019 (the "Animal Health Spin-off"). After the Share Sale and Animal Health Spin-off, Merger Sub consummated the 39
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Merger whereby it merged with and into Vets First Choice, with Vets First Choice surviving the Merger as a wholly owned subsidiary of Covetrus. Immediately following the consummation of the Merger, on a fully diluted basis, (i) approximately 63% of the shares of Covetrus common stock were (a) owned by our stockholders and theShare Sale Investors , and (b) held by certain employees of the Henry Schein Animal Health Business (in the form of certain equity awards), and (ii) approximately 37% of the shares of Covetrus common stock were (a) owned by stockholders of Vets First Choice immediately prior to the Merger, and (b) held by certain employees of Vets First Choice (in the form of certain equity awards). After the Separation and the Merger, we no longer beneficially owned any shares of Covetrus common stock and, following the Distribution Date, will not consolidate the financial results of Covetrus for the purpose of our financial reporting. Following the Separation and the Merger, Covetrus was an independent, publicly traded company on the Nasdaq Global Select Market. Executive-Level Overview We believe we are the world's largest provider of health care products and services primarily to office-based dental and medical practitioners. We serve more than one million customers worldwide including dental practitioners and laboratories and physician practices, 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 88 years of experience distributing health care products. We are headquartered inMelville, New York , employ more than 19,000 people (of which more than 9,500 are based outsidethe United States ) and have operations or affiliates in 31 countries, includingthe United States ,Australia ,Austria ,Belgium ,Brazil ,Canada ,Chile ,China , theCzech Republic ,France ,Germany , Hong Kong SAR,Ireland ,Israel ,Italy ,Japan ,Liechtenstein , Luxembourg,Malaysia ,the Netherlands ,New Zealand ,Poland ,Portugal ,Singapore ,South Africa ,Spain ,Sweden ,Switzerland ,Thailand ,United Arab Emirates and theUnited Kingdom . We have established strategically located distribution centers 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. Our infrastructure also allows us to provide convenient ordering and rapid, accurate and complete order fulfillment.
We conduct our business through two reportable segments: (i) health care distribution and (ii) technology and value-added services. These segments offer different products and services to the same customer base.
The health care distribution reportable segment aggregates our global dental and
medical operating segments. This segment distributes consumable products, small
equipment, laboratory products, large equipment, equipment repair services,
branded and generic pharmaceuticals, vaccines, surgical products, diagnostic
tests, infection-control products and vitamins. Our global dental group serves
office-based dental practitioners, dental laboratories, schools and other
institutions. Our global medical group serves office-based medical
practitioners, ambulatory surgery centers, other alternate-care settings and
other institutions.
Our global technology and value-added services group provides software,
technology and other value-added services to health care practitioners. Our
technology group offerings include practice management software systems for
dental and medical practitioners. Our value-added practice solutions include
financial services on a non-recourse basis, e-services, practice technology,
network and hardware services, as well as continuing education services for
practitioners.
Industry Overview
In recent years, the health care industry has increasingly focused on cost
containment and on value-based reimbursement arrangements that condition payment
to health care providers on the achievement of cost savings and quality targets.
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 group
practices, managed care arrangements 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 and value-based
reimbursement has the potential to favorably affect demand for
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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.
Our current and future results have been and could continue to be adversely impacted by the COVID-19 pandemic, the current economic environment and uncertainty, particularly impacting overall demand for our products and services.
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 practitionerswho 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 trend with regard 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 makerswho do not reside in the office-based practitioner setting. As the health care industry continues to change, we continually evaluate possible candidates for merger and 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. In response to the COVID-19 pandemic, we had taken a range of actions to preserve cash, including the temporary suspension of significant acquisition activity. During the third quarter of 2020, as global conditions improved, we resumed our acquisition strategy. 41
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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 pharmacology 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 theU.S. Census Bureau's International Data Base , in 2020 there were more than six and a half` 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 36% during the same time period. As a result of these market dynamics, annual expenditures for health care services continue to increase inthe 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. TheCenters for Medicare and Medicaid Services , or CMS, published "National Health Expenditure Projections 2019-2028" indicating that total national health care spending reached approximately$3.6 trillion in 2018, or 17.7% of the nation's gross domestic product, the benchmark measure for annual production of goods and services inthe United States . Health care spending is projected to reach approximately$6.2 trillion in 2028, approximately 19.7% of the nation's projected gross domestic product. Government Certain of our businesses involve the distribution, importation and sale of pharmaceuticals and medical devices, and in this regard we are subject to extensive local, state, federal and foreign governmental laws and regulations applicable to the distribution and sale of pharmaceuticals and medical devices. Additionally, government and private insurance programs fund a large portion of the total cost of medical care, and there has been an emphasis on efforts to control medical costs, including laws and regulations lowering reimbursement rates for pharmaceuticals, medical devices, and/or medical treatments or services. Also, many of these laws and regulations are subject to change and may impact our financial performance. For example, certain laws and regulations restricting medical supply sales inthe United States have been temporarily modified or waived in response to the COVID-19 pandemic. In addition, our businesses are generally subject to numerous other laws and regulations that could impact our financial performance, including securities, antitrust, anti-bribery and anti-kickback, customer interaction transparency, data privacy, data security, price gouging and other laws and regulations, and some of the related rules have been temporarily modified in response to the COVID-19 pandemic. Failure to comply with law or regulations could have a material adverse effect on our business. A more detailed discussion of governmental laws and regulations is included in Management's Discussion & Analysis, contained in our Annual Report on Form 10-K for the fiscal year endedDecember 28 2019 , filed onFebruary 20, 2020 . 42
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Table of Contents Results of Operations The following table summarizes the significant components of our operating results for the three and nine months endedSeptember 26, 2020 andSeptember 28, 2019 and cash flows for the nine months endedSeptember 26, 2020 andSeptember 28, 2019 (in thousands): Three Months Ended Nine Months Ended September 26, September 28, September 26, September 28, 2020 2019 2020 2019 Operating results: Net sales$ 2,840,146 $ 2,508,767 $ 6,953,416 $ 7,316,862 Cost of sales 2,085,847 1,747,600 4,998,784 5,036,574 Gross profit 754,299 761,167 1,954,632 2,280,288 Operating expenses:
Selling, general and administrative 559,636 574,771 1,572,816 1,742,597
Restructuring costs (credits) 6,992
(802) 27,713 15,764
Operating income $ 187,671 $ 187,198 $ 354,103 $ 521,927
Other expense, net $ (10,516) $ (8,607) $ (24,138) $ (31,103)
Net income from continuing operations 151,813 143,212 271,808 388,269
Income (loss) from discontinued operations (29) 5,641 274 (5,210)
Net income attributable to Henry Schein, Inc. 141,697 140,557 261,161 364,872
Nine Months Ended
September 26, September 28,
2020 2019
Cash flows:
Net cash provided by operating activities from continuing operations $ 248,414 $ 525,180
Net cash used in investing activities from continuing operations (93,956) (691,349)
Net cash provided by financing activities from continuing operations
264,433 176,139
Plans of Restructuring
On July 9, 2018 , we committed to an initiative to rationalize our operations and
provide expense efficiencies. These actions allowed us to execute on our plan to
reduce our cost structure and fund new initiatives that drive growth under our
2018 to 2020 strategic plan. This initiative has resulted in the elimination of
approximately 4% of our workforce and the closing of certain facilities.
On November 20, 2019 , we committed to a contemplated initiative, intended to
mitigate stranded costs associated with the Animal Health Spin-off and to
rationalize operations and to provide expense efficiencies. These activities
were originally expected to be completed by the end of 2020. We are re-assessing
that timeline in light of the current business environment brought on by the
COVID-19 pandemic.
During the three months ended September 26, 2020 and September 28, 2019 , we
recorded restructuring costs (credits) of $7.0 million and $(0.8) million .
During the nine months ended September 26, 2020 and September 28, 2019 , we
recorded restructuring costs of $27.7 million and $15.8 million . The
restructuring costs for these periods included costs for severance benefits and
facility exit costs. The costs associated with these restructurings are included
in a separate line item, "Restructuring costs" within our consolidated
statements of income.
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Three Months Ended
Net Sales
Net sales for the three months ended
September 26, % of September 28, % of Increase
2020 Total 2019 Total $ %Health care distribution (1)
Dental $ 1,649,853 58.1 % $ 1,545,981 61.6 % $ 103,872 6.7 %
Medical 1,027,146 36.2 803,709 32.0 223,437 27.8
Total health care
distribution 2,676,999 94.3 2,349,690 93.6 327,309 13.9
Technology and value-added
services (2) 138,355 4.9 137,334 5.5 1,021 0.7
Total excluding
Corporate TSA revenue 2,815,354 99.2 2,487,024 99.1 328,330 13.2
Corporate TSA revenue (3) 24,792 0.8 21,743 0.9 3,049 14.0
Total $ 2,840,146 100.0 % (1) Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.
(2) Consists of practice management software and other value-added products, which are distributed primarily to health care
providers, and financial services on a non-recourse basis, e-services, continuing education services for practitioners,
consulting and other services.
(3) Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in
connection with the Animal Health Spin-off, which has been substantially completed as of
The 13.2% increase in net sales for the three months endedSeptember 26, 2020 includes an increase of 13.1% in local currency revenue (13.0% increase in internally generated revenue and 0.1% growth from acquisitions) and an increase of 0.1% related to foreign currency exchange. Sales in the third quarter benefited from an approximate 291% increase in sales of personal protection equipment (PPE) and other COVID-19 related products, which accounts for nearly all the growth in sales. The 6.7% increase in dental net sales for the three months endedSeptember 26, 2020 includes an increase of 6.6% local currency revenue (6.5% increase in internally generated revenue and 0.1% growth from acquisitions) and an increase of 0.1% related to foreign currency exchange. The 6.6% increase in local currency sales was attributable to an increase in dental consumable merchandise sales of 9.4% (9.3% increase in internally generated revenue and 0.1% growth from acquisitions), partially offset by a decrease in dental equipment sales and service revenues of 2.6%, all of which is attributable to the decrease in internally generated revenue. Dental equipment sales in the third quarter continued to recover as internal sales in local currencies inNorth America were essentially flat. International dental equipment sales experienced only a slight decline as practices resumed investments in traditional and high-technology capital equipment solutions. Although the COVID-19 pandemic adversely impacted our worldwide revenue beginning in mid-March as many dental offices progressively closed or began seeing a limited number of patients, our dental sales began to improve in the second half of the quarter endedJune 27, 2020 and continuing into the quarter endedSeptember 26, 2020 as dental practices resumed operating and patient traffic increased. Global dental sales in the third quarter benefited from an approximate 130% increase in sales of PPE, which accounts for nearly all the growth in dental sales. The 27.8% increase in medical net sales for the three months endedSeptember 26, 2020 includes an increase of 27.7% local currency revenue and an increase of 0.1% related to foreign currency exchange. Economic conditions relating to the COVID-19 pandemic have had less of an impact on the performance of our medical group versus dental, in part due to continued strong sales of PPE, such as masks, gowns and face shields, and other COVID-19 related products, such as diagnostic test kits. Globally, our medical business experienced growth of sales of such products by approximately 600% compared to the prior year, which accounts for nearly all the growth in medical sales. The 0.7% increase in technology and value-added services net sales for the three months endedSeptember 26, 2020 includes an increase of 0.3% local currency revenue (1.3% decrease in internally generated revenue, partially offset by 1.6% growth from acquisitions) and an increase of 0.4% related to foreign currency exchange. During the 44
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quarter, in line with the resumption of dental practice operations, the trend for transactional software revenues improved as more patients visited dental practices worldwide. Although dental and medical practices continued to re-open during the third quarter, patient volumes remain below pre-COVID-19 levels and certain regions in theU.S and internationally are experiencing an increase in COVID-19 cases. As such, there is an ongoing risk that the COVID-19 pandemic may again have a material adverse effect on our net sales in future periods. Gross Profit Gross profit and gross margin percentages by segment and in total for the three months endedSeptember 26, 2020 andSeptember 28, 2019 were as follows (in thousands): September 26, Gross September 28, Gross Increase / (Decrease) 2020 Margin % 2019 Margin % $ % Health care distribution$ 653,204 24.4 %$ 659,955 28.1 %$ (6,751) (1.0) % Technology and value-added services 100,272 72.5 100,557 73.2 (285) (0.3) Total excluding Corporate TSA revenues 753,476 26.8 760,512 30.6 (7,036) (0.9) Corporate TSA revenues 823 3.3 655 3.0 168 25.6 Total$ 754,299 26.6$ 761,167 30.3$ (6,868) (0.9) 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 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. In connection with the completion of the Animal Health Spin-off (see Note 2-Discontinued Operations of the Notes to the Consolidated Financial Statements included under Item 1 for additional details), we entered into a transition services agreement with Covetrus, pursuant to which Covetrus purchases certain products from us. The agreement provides that these products will be sold to Covetrus at a mark-up that ranges from 3% to 6% of our product cost to cover handling costs. These sales have been substantially completed as ofOctober 2020 . Within our health care distribution segment, gross profit margins may vary from one period to the next. Changes in the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting our gross profit margin. For example, sales of our private label products achieve gross profit margins that are higher than average. 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 at greater frequencies. Health care distribution gross profit decreased$6.8 million , or 1.0%, for the three months endedSeptember 26, 2020 compared to the prior year period, due primarily to the COVID-19 pandemic. Health care distribution gross profit margin decreased to 24.4% for the three months endedSeptember 26, 2020 from 28.1% for the comparable prior year period. The overall decrease in our health care distribution gross profit is attributable to an$85.2 million decline in gross profit due to the decrease in the gross margin rates and$1.4 million reduction in gross profit from acquisitions, partially offset by an increase of$77.0 million from internally generated revenue. Gross profit margin was negatively affected by PPE products, primarily due to significant adjustments recorded for PPE inventory and other COVID-19 related products caused by volatility of pricing and demand experienced during the quarter, which conditions may recur and adversely impact gross profit margins in future periods. During the quarter, we continued to earn lower vendor rebates, due to lower purchase volumes, during the year in our health care distribution segment, which also contributes to the lower gross profit margin. 45
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Technology and value-added services gross profit decreased$0.3 million , or 0.3%, for the three months endedSeptember 26, 2020 compared to the prior year period. The overall decrease in our Technology and value-added services gross profit is attributable to a$0.8 million decrease in internally generated revenue, primarily due to the COVID-19 pandemic and a decrease of$1.3 million from gross margin rates, partially offset by$1.8 million additional gross profit from acquisitions. Technology and value-added services gross profit margin decreased to 72.5% for the three months endedSeptember 26, 2020 from 73.2% for the comparable prior year period primarily due to a decrease in the volume of our transactional revenue from eClaims and credit card processing.
Selling, General and Administrative
Selling, general and administrative expenses by segment and in total for the three months endedSeptember 26, 2020 andSeptember 28, 2019 were as follows (in thousands): % of % of September 26, Respective September 28, Respective Decrease 2020 Net Sales 2019 Net Sales $ % Health care distribution$ 505,370 18.9 %$ 511,116 21.8 %$ (5,746) (1.1) % Technology and value-added services 61,258 44.3 62,853 45.8 (1,595) (2.5) Total$ 566,628 20.0$ 573,969 22.9$ (7,341) (1.3) Selling, general and administrative expenses (including restructuring costs in the three months endedSeptember 26, 2020 andSeptember 26, 2020 ) decreased$7.3 million , or 1.3%, for the three months endedSeptember 26, 2020 from the comparable prior year period. The$5.7 million decrease in selling, general and administrative expenses within our health care distribution segment for the three months endedSeptember 26, 2020 as compared to the prior year period was attributable to a reduction of$16.9 million of operating costs, primarily as a result of cost-saving measures taken in response to the COVID-19 pandemic, partially offset by increases of$3.6 million of additional costs from acquired companies and an increase of$7.6 million in restructuring costs. The$1.6 million decrease in selling, general and administrative expenses within our technology and value-added services segment for the three months endedSeptember 26, 2020 as compared to the prior year period was attributable to a reduction of$3.3 million of operating costs, primarily as a result of cost-saving measures taken in response to the COVID-19 pandemic, partially offset by an increase of$1.5 million of additional costs from acquired companies and an increase of$0.2 million in restructuring costs. As a percentage of net sales, selling, general and administrative expenses decreased to 20.0% from 22.9% for the comparable prior year period, primarily due to the cost-saving measures taken in response to the COVID-19 pandemic, partially offset by an increase in restructuring costs. The cost savings achieved from measures taken in response to the COVID-19 pandemic are expected to diminish in future periods as most measures were temporary and ended during the third quarter of 2020. As a component of total selling, general and administrative expenses, selling expenses decreased$12.6 million , or 3.5% to$345.7 million , for the three months endedSeptember 26, 2020 from the comparable prior year period, primarily as a result of cost-saving measures taken in response to the COVID-19 pandemic. As a percentage of net sales, selling expenses decreased to 12.2% from 14.3% for the comparable prior year period. As a component of total selling, general and administrative expenses, general and administrative expenses increased$5.3 million , or 2.4% to$220.9 million , for the three months endedSeptember 26, 2020 from the comparable prior year period, primarily due to an increase in restructuring costs. As a percentage of net sales, general and administrative expenses decreased to 7.8% from 8.6% for the comparable prior year period. 46
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Table of Contents Other Expense, Net
Other expense, net, for the three months ended
September 26, September 28, Variance
2020 2019 $ %
Interest income $ 2,294 $ 3,943 $ (1,649) (41.8) %
Interest expense (11,111) (12,373) 1,262 10.2
Other, net (1,699) (177) (1,522) (859.9)
Other expense, net $ (10,516) $ (8,607) $ (1,909) (22.2)
Interest income decreased $1.6 million primarily due to lower interest rates and
reduced late fee income. Interest expense decreased $1.3 million primarily due
to reduced interest expense resulting from decreased borrowings under our U.S
trade accounts receivable securitization and lower interest rates, partially
offset by increased borrowings under our bank credit lines. Other, net increased
primarily due to certain litigation-related costs.
Income Taxes
For the three months ended September 26, 2020 , our effective tax rate was 16.4%
compared to 23.5% for the prior year period. The difference between our
effective tax rate and the federal statutory tax rate for the three months ended
September 26, 2020 , was primarily due to a U.S. federal income tax settlement,
reached during the third quarter, which lowered income tax expense by
approximately $15.6 million , as well as state and foreign income taxes and
interest. The difference between our effective tax rate and the federal
statutory tax rate for the three months ended September 28, 2019 primarily
relates to state and foreign income taxes and interest expense.
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Nine Months Ended
Net Sales
Net sales for the nine months ended
September 26, % of September 28, % of Increase/(Decrease)
2020 Total 2019 Total $ %Health care distribution (1)
Dental $ 4,066,221 58.5 % $ 4,693,711 64.1 % $ (627,490) (13.4) %
Medical 2,445,644 35.2 2,184,927 29.9 260,717 11.9
Total health care
distribution 6,511,865 93.7 6,878,638 94.0 (366,773) (5.3)
Technology and value-added services
(2) 375,547 5.4 377,983 5.2 (2,436) (0.6)
Total excluding Corporate
TSA revenue 6,887,412 99.1 7,256,621 99.2 (369,209) (5.1)
Corporate TSA revenue (3) 66,004 0.9 60,241 0.8 5,763 9.6
Total $ 6,953,416 100.0 % (1) Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic
pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.
(2) Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and
financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other services.
(3) Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in connection
with the Animal Health Spin-off, which has been substantially completed as of
The 5.0% decrease in net sales for the nine months endedSeptember 26, 2020 includes a decrease of 4.4% in local currency revenue (5.1% decrease in internally generated revenue, partially offset by 0.7% growth from acquisitions) and a decrease of 0.6% related to foreign currency exchange. Excluding sales of products under the transition services agreement with Covetrus, our net sales decreased 5.1%, including a decrease in local currency revenue of 4.5% (5.2% decrease in internally generated revenue, partially offset by 0.7% growth from acquisitions) and a decrease of 0.6% related to foreign currency exchange. Sales for the nine months endedSeptember 26, 2020 benefited from an approximate 142% increase in sales of PPE and other COVID-19 related products. The 13.4% decrease in dental net sales for the nine months endedSeptember 26, 2020 includes a decrease of 12.4% local currency revenue (12.7% decrease in internally generated revenue, partially offset by 0.3% growth from acquisitions) and a decrease of 1.0% related to foreign currency exchange. The 12.4% decrease in local currency sales was attributable to a decrease in dental consumable merchandise revenue of 11.6% (12.0% decrease in internally generated revenue, partially offset by 0.4% growth from acquisitions), and a decrease in dental equipment sales and service revenues of 15.4%, all of which is attributable to a decrease in internally generated revenue. The COVID-19 pandemic began to adversely impact our worldwide dental revenue beginning in mid-March as many dental offices progressively closed or began seeing a limited number of patients. However, in the second half of the quarter endedJune 27, 2020 and continuing into the quarter endedSeptember 26, 2020 our dental sales began to improve as dental practices began to resume activities and patient traffic increased. Global dental sales for the nine months endedSeptember 26, 2020 benefited from an approximate 66% increase in sales of PPE. The 11.9% increase in medical net sales for the nine months endedSeptember 26, 2020 is attributable to an increase of 11.9% local currency growth (10.8% increase in internally generated revenue and 1.1% growth from acquisitions). The COVID-19 pandemic began to adversely impact our medical revenue beginning in mid-March and continuing to a lesser extent into the third quarter, as medical offices began seeing a limited increase in the number of patients. Economic conditions relating to the COVID-19 pandemic have had less of an impact on the performance of our medical group versus dental, in part due to continued strong sales of PPE, such as masks, gowns and face shields, and other COVID-19 related products, such as diagnostic test kits. Globally, our medical business experienced growth of sales of such products during the nine months endedSeptember 26, 2020 by approximately 295% compared to the prior year, and these products are the primary contributor to the increase in sales during this period. 48
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The 0.6% decrease in technology and value-added services net sales for the nine months endedSeptember 26, 2020 is attributable to a decrease of 0.6% in local currency revenue (4.2% decrease in internally generated revenue, partially offset 3.6% growth from acquisitions). During the second quarter and continuing into the third quarter, in line with the resumption of dental practice operations, the trend for transactional software revenues improved as more patients visited dental practices worldwide. Although dental and medical practices continued to re-open globally in the third quarter, patient volumes remain below pre-COVID-19 levels and certain regions in theU.S and internationally are experiencing an increase in COVID-19 cases. As such, there is an ongoing risk that the COVID-19 pandemic may again have a material adverse effect on our net sales in future periods. Gross Profit Gross profit and gross margin percentages by segment and in total for the nine months endedSeptember 26, 2020 andSeptember 28, 2019 were as follows (in thousands): September 26, Gross September 28, Gross Increase/(Decrease) 2020 Margin % 2019 Margin % $ % Health care distribution$ 1,687,615 25.9 %$ 2,004,126 29.1 %$ (316,511) (15.8) % Technology and value-added services 265,040 70.6 274,358 72.6 (9,318) (3.4) Total excluding Corporate TSA revenues 1,952,655 28.4 2,278,484 31.4 (325,829) (14.3) Corporate TSA revenues 1,977 3.0 1,804 3.0 173 9.6 Total$ 1,954,632 28.1$ 2,280,288 31.2$ (325,656) (14.3) 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. In connection with the completion of the Animal Health Spin-off (see Note 2-Discontinued Operations of the Notes to the Consolidated Financial Statements included under Item 1 for additional details), we entered into a transition services agreement with Covetrus, pursuant to which Covetrus purchases certain products from us. The agreement provides that these products will be sold to Covetrus at a mark-up that ranges from 3% to 6% of our product cost to cover handling costs. These sales have been substantially completed as ofOctober 2020 . Within our health care distribution segment, gross profit margins may vary from one period to the next. Changes in the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting our gross profit margin. For example, sales of our private label products achieve gross profit margins that are higher than average. 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 at greater frequencies. Health care distribution gross profit decreased$316.5 million , or 15.8%, for the nine months endedSeptember 26, 2020 compared to the prior year period, due primarily to the COVID-19 pandemic. Health care distribution gross profit margin decreased to 25.9% for the nine months endedSeptember 26, 2020 from 29.1% for the comparable prior year period. The overall decrease in our health care distribution gross profit is attributable to a$165.7 million decrease in internally generated revenue and a$163.5 million decline in gross profit due to the decrease in the gross margin rates, partially offset by$12.7 million additional gross profit from acquisitions. Gross profit margin was negatively affected by PPE products, primarily due to significant adjustments recorded for PPE inventory and other COVID-19 related products caused by volatility of pricing and demand experienced during the quarter, which conditions may recur and adversely impact gross profit margins in future periods. Gross profit margin was also affected by fixed costs included in cost of goods sold that adversely affect gross margin rates when sales are lower. During the year, we continued to earn lower vendor rebates, due to lower purchase volumes, in our health care distribution segment, which also contributes to the lower gross profit margin. 49
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Table of Contents Technology and value-added services gross profit decreased$9.3 million , or 3.4%, for the nine months endedSeptember 26, 2020 compared to the prior year period. The overall decrease in our Technology and value-added services gross profit is attributable to a decrease of$11.5 million in internally generated revenue, primarily due to the COVID-19 pandemic and a$9.0 million decline in gross profit due to the decrease in the gross margin rates, partially offset by$11.2 million additional gross profit from acquisitions. Technology and value-added services gross profit margin decreased to 70.6% for the nine months endedSeptember 26, 2020 from 72.6% for the comparable prior year period primarily due to a decrease in the volume of our transactional revenue from eClaims and credit card processing.
Selling, General and Administrative
Selling, general and administrative expenses by segment and in total for the nine months endedSeptember 26, 2020 andSeptember 28, 2019 were as follows (in thousands): % of % of September 26, Respective September 28, Respective Increase / (Decrease) 2020 Net Sales 2019 Net Sales $ % Health care distribution$ 1,418,115 21.8 %$ 1,576,996 22.9 %$ (158,881) (10.1) % Technology and value-added services 182,414 48.6 181,365 48.0 1,049 0.6 Total$ 1,600,529 23.0$ 1,758,361 24.0$ (157,832) (9.0) Selling, general and administrative expenses (including restructuring costs in the nine months endedSeptember 26, 2020 andSeptember 26, 2020 ) decreased$157.8 million , or 9.0%, for the nine months endedSeptember 26, 2020 from the comparable prior year period. The$158.9 million decrease in selling, general and administrative expenses within our health care distribution segment for the nine months endedSeptember 26, 2020 as compared to the prior year period was attributable to a reduction of$188.2 million of operating costs, primarily as a result of cost-saving measures taken in response to the COVID-19 pandemic, partially offset by increases of$17.6 million of additional costs from acquired companies and an increase of$11.7 million in restructuring costs. The$1.0 million increase in selling, general and administrative expenses within our technology and value-added services segment for the nine months endedSeptember 26, 2020 as compared to the prior year period was attributable to an increase of$9.2 million of additional costs from acquired companies and an increase of$0.3 million in restructuring costs, partially offset by a reduction of$8.5 million of operating costs. As a percentage of net sales, selling, general and administrative expenses decreased to 23.0% from 24.0% for the comparable prior year period. The cost savings achieved from measures taken in response to the COVID-19 pandemic are expected to diminish in future periods as most of these measures were temporary and ended during the third quarter of 2020. As a component of total selling, general and administrative expenses, selling expenses decreased$104.1 million , or 9.6% to$ 980.9 million , for the nine months endedSeptember 26, 2020 from the comparable prior year period, primarily as a result of cost-saving measures taken in response to the COVID-19 pandemic. As a percentage of net sales, selling expenses decreased to 14.1% from 14.8% for the comparable prior year period. As a component of total selling, general and administrative expenses, general and administrative expenses decreased$53.7 million , or 8.0% to$ 619.6 million , for the nine months endedSeptember 26, 2020 from the comparable prior year period, primarily as a result of cost-saving measures taken in response to the COVID-19 pandemic. As a percentage of net sales, general and administrative expenses decreased to 8.9% from 9.2% for the comparable prior year period. Our selling, general and administrative expenses for the nine months endedSeptember 26, 2020 continued to be affected by certain estimates we made due to the adverse business environment brought on by the COVID-19 pandemic. For example, in the quarter endedMarch 28, 2020 we recorded incremental bad debt reserves of approximately$10 million for our global dental business. As ofSeptember 26, 2020 , we have retained the$10 million incremental bad debt reserves due to the ongoing uncertainties in the markets we serve. 50
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In the quarter endedMarch 28, 2020 , we also recognized a net credit of approximately$17.5 million in stock-based compensation expense during the quarter due to our previous estimate that no performance shares granted in 2018, 2019 or 2020 will ultimately vest. Our assumptions regarding vesting of performance shares under our 2018, 2019 and 2020 LTIP remain largely unchanged from those as ofMarch 28, 2020 . Accordingly, we did not recognize any significant stock compensation expense related to performance shares during the nine months endedSeptember 26, 2020 .
During the quarter ended
Other Expense, Net
Other expense, net, for the nine months ended
September 26, September 28, Variance
2020 2019 $ %
Interest income $ 7,481 $ 12,368 $ (4,887) (39.5) %
Interest expense (29,409) (41,459) 12,050 29.1
Other, net (2,210) (2,012) (198) (9.8)
Other expense, net $ (24,138) $ (31,103) $ 6,965 22.4
Interest income decreased $4.9 million primarily due to lower interest rates and
reduced late fee income. Interest expense decreased $12.1 million primarily due
to decreased borrowings under our U.S trade accounts receivable securitization
and lower interest rates, partially offset by increased borrowings under our
bank credit lines.
Income Taxes
For the nine months ended September 26, 2020 , our effective tax rate was 20.0%
compared to 23.9% for the prior year period. The difference between our
effective tax rate and the federal statutory tax rate for the nine months ended
September 26, 2020 , was primarily due to a U.S. federal income tax settlement,
reached during the third quarter, which lowered income tax expense by
approximately $15.6 million , as well as state and foreign income taxes and
interest. The difference between our effective tax rate and the federal
statutory tax rate for the nine months ended September 28, 2019 primarily
relates to state and foreign income taxes and interest expense.
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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 (which have been temporarily suspended). 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 third and fourth quarters 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. The pandemic and the governmental responses to it had a material adverse effect on our cash flows in the second quarter. In the latter half of the second quarter and continuing into the third quarter, dental and medical practices began to re-open worldwide. However, patient volumes remain below pre-COVID-19 levels and certain regions in theU.S. and internationally are experiencing an increase in COVID-19 cases. As such, there is an ongoing risk that the COVID-19 pandemic may again have a material adverse effect on our cash flows in future periods and may result in a material adverse effect on our financial condition and liquidity. However, the extent of the potential impact cannot be reasonably estimated at this time. As part of a broad-based effort to support plans for the long-term health of our business and to strengthen the our financial flexibility, we implemented cost reduction measures that included certain reductions in payroll, substantially decreased capital expenditures, reduced corporate spending and elimination of certain non-strategic targeted expenditures. As our markets have begun to recover we have ended most of those temporary expense-reduction initiatives during the third quarter. As the COVID-19 pandemic continues to unfold, we will continue to evaluate appropriate actions for its business. We finance our business primarily through cash generated from our operations, revolving credit facilities and debt placements. 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. We have no off-balance sheet arrangements.
On
Net cash from continuing operations provided by operating activities was$248.4 million for the nine months endedSeptember 26, 2020 , compared to net cash from continuing operations provided by operating activities of$525.2 million for the comparable prior year period. The net change of$276.8 million was primarily attributable to lower net income, lower distributions from equity affiliates, and increased working capital requirements, specifically an increase in inventories due to stocking of PPE and other COVID-19 related products, and an increase in accounts receivable due to higher third quarter sales volume. These working capital increases were partially offset by greater growth in accounts payable and accrued expenses. The decrease in distributions from equity affiliates is the result of having sold our equity investment inHu-Friedy Mfg. Co., LLC in the fourth quarter of 2019. 52
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Table of Contents Net cash from continuing operations used in investing activities was$94.0 million for the nine months endedSeptember 26, 2020 , compared to$691.3 million for the comparable prior year period. The net change of$597.3 million was primarily attributable to decreased payments for equity investments and business acquisitions. Net cash from continuing operations provided by financing activities was$264.4 million for the nine months endedSeptember 26, 2020 , compared to net cash provided by financing activities of$176.1 million for the comparable prior year period. The net change of$88.3 million was primarily due to increased net proceeds from bank borrowings and lower repurchases of our common stock, partially offset by proceeds received during the prior year related to the Animal Health Spin-off. The following table summarizes selected measures of liquidity and capital resources (in thousands): September 26, December 28, 2020 2019 Cash and cash equivalents$ 533,495 $ 106,097 Working capital (1) 1,265,443 1,188,133
Debt:
Bank credit lines $ 507,372 $ 23,975
Current maturities of long-term debt 110,015 109,849
Long-term debt
515,357 622,908
Total debt $ 1,132,744 $ 756,732
Leases:
Current operating lease liabilities $ 62,914 $ 65,349
Non-current operating lease liabilities 200,611 176,267
(1) Includes
trade accounts receivable securitization at
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 48.8 days as ofSeptember 26, 2020 from 45.3 days as ofSeptember 28, 2019 . During the nine months endedSeptember 26, 2020 , we wrote off approximately$5.0 million of fully reserved accounts receivable against our trade receivable reserve. Our inventory turns from operations decreased to 4.7 as ofSeptember 26, 2020 from 4.9 as ofSeptember 28, 2019 . Our working capital accounts may be impacted by current and future economic conditions.Bank Credit Lines
Bank credit lines consisted of the following:
September 26, December 28,
2020 2019
Revolving credit agreement $ - $ -
364-day credit agreement 500,000 -
Other short-term bank credit lines 7,372 23,975
Total $ 507,372 $ 23,975 The increase in the level of borrowings under our bank credit lines as of
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Table of Contents Revolving Credit Agreement OnApril 18, 2017 , we entered into a$750 million revolving credit agreement (the "Credit Agreement"), which matures inApril 2022 . The interest rate is based on the USD LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter. We expect the LIBOR rate to be discontinued at some point during 2021, which will require an amendment to our debt agreements to reflect a new reference rate. We do not expect the discontinuation of LIBOR as a reference rate in our debt agreements to have a material adverse effect on our financial position or to materially affect our interest expense. The Credit Agreement also requires, among other things, that we maintain maximum leverage ratios. Additionally, the 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 ofSeptember 26, 2020 andDecember 28, 2019 , the borrowings on this revolving credit facility were$0.0 million and$0.0 million , respectively. As ofSeptember 26, 2020 andDecember 28, 2019 , there were$9.5 million and$9.6 million of letters of credit, respectively, provided to third parties under the credit facility. OnApril 17, 2020 , we amended the Credit Agreement to, among other things, (i) modify the financial covenant from being based on total leverage ratio to net leverage ratio, (ii) adjust the pricing grid to reflect the net leverage ratio calculation, and (iii) increase the maximum maintenance leverage ratio throughMarch 31, 2021 . 364-Day Credit Agreement OnApril 17, 2020 , we entered into a new$700 million 364-day credit agreement, withJPMorgan Chase Bank, N.A . andU.S. Bank National Association as joint lead arrangers and joint bookrunners. This facility matures onApril 16, 2021 . As ofSeptember 26, 2020 , the borrowings on this credit facility were$500 million . We have the ability to borrow the remaining$200 million on a revolving basis as needed, subject to the terms and conditions of the credit agreement. The interest rate for borrowings under this facility will fluctuate based on our net leverage ratio. AtSeptember 26, 2020 , the interest rate on this facility was 2.81%. The proceeds from this facility can be used for working capital requirements and general corporate purposes, including, but not limited to, permitted refinancing of existing indebtedness. Other Short-Term Credit Lines As ofSeptember 26, 2020 andDecember 28, 2019 , we had various other short-term bank credit lines available, of which$7.4 million and$24 million , respectively, were outstanding. AtSeptember 26, 2020 andDecember 28, 2019 , borrowings under all of these credit lines had a weighted average interest rate of 2.82% and 3.45%, respectively. The decrease during the quarter endedSeptember 26, 2020 in the weighted average interest rate under all of our credit lines was attributable to theFederal Reserve lowering borrowing rates duringMarch 2020 in response to the COVID-19 pandemic. 54
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Table of Contents Long-term debt
Long-term debt consisted of the following:
September 26, December 28,
2020 2019
Private placement facilities $ 613,549 $ 621,274
U.S. trade accounts receivable securitization - 100,000
Note payable due in 2025 with an interest rate of
3.1%
at September 26, 2020 1,438 -
Various collateralized and uncollateralized loans
payable with interest,
in varying installments through 2023 at
interest rates
ranging from 2.62% to 4.22% at September 26,
2020 and
ranging from 2.56% to 10.5% at December 28,
2019 4,273 6,089
Finance lease obligations (see Note 7) 6,112 5,394
Total 625,372 732,757
Less current maturities (110,015) (109,849)
Total long-term debt $ 515,357 $ 622,908
Private Placement Facilities
On September 15, 2017 , we increased our available private placement facilities
with three insurance companies to a total facility amount of $1 billion . On June
23, 2020 , the expiration date for our private placement facilities was extended
through June 23, 2023 . These facilities 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 June 23, 2023 . 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 12 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. On June 29, 2018 , we amended and restated
the above private placement facilities to, among other things, (i) permit the
consummation of the Animal Health Spin-off and (ii) provide for the issuance of
notes in Euros, British Pounds and Australian Dollars, in addition to U.S.
Dollars. 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.
On June 23, 2020 , we amended the private placement facilities to, among other
things, (i) temporarily modify the financial covenant from being based on total
leverage ratio to net leverage ratio until March 31, 2021 , (ii) increase the
maximum maintenance leverage ratio through March 31, 2021 , but with a 1.00%
interest rate increase on the outstanding notes if the net leverage ratio
exceeds 3.0x, which will remain in effect until we deliver financials for a
four-quarter period ending on or after June 30, 2021 showing compliance with the
total leverage ratio requirement, and (iii) make certain other changes
conforming to the Credit Agreement, dated as of April 18, 2017 .
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The components of our private placement facility borrowings as of
Amount of
Borrowing Borrowing
Date of Borrowing Outstanding Rate Due Date
January 20, 2012 (1) $ 14,286 3.09 % January 20, 2022
January 20, 2012 50,000 3.45 January 20, 2024
December 24, 2012 50,000 3.00 December 24, 2024
June 2, 2014 100,000 3.19 June 2, 2021
June 16, 2017 100,000 3.42 June 16, 2027
September 15, 2017 100,000 3.52 September 15, 2029
January 2, 2018 100,000 3.32 January 2, 2028
September 2, 2020 (2) 100,000 2.35 September 3, 2030
Less: Deferred debt
issuance costs (737)
$ 613,549
(1) Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016 .
(2) On September 2, 2020 , we refinanced our $100 million private placement borrowing at 3.79%,
originally due on September 2, 2020 , with a similar 10-year borrowing at 2.35% maturing on September 2,
2030 .
We have a facility agreement with a bank, as agent, based on the securitization of ourU.S. trade accounts receivable that is structured as an asset-backed securitization program with pricing committed for up to three years. Our current facility, which has a purchase limit of$350 million , was scheduled to expire onApril 29, 2022 . OnJune 22, 2020 , the expiration date for this facility was extended toJune 12, 2023 . As ofSeptember 26, 2020 andDecember 28, 2019 , the borrowings outstanding under this securitization facility were$0 million and$100 million , respectively. AtSeptember 26, 2020 , the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 0.22% plus 0.95%, for a combined rate of 1.17%. AtDecember 28, 2019 , the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 1.90% plus 0.75%, for a combined rate of 2.65%. 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 25 to 45 basis points depending upon program utilization.
Borrowings under this facility are presented as a component of Long-term debt within our consolidated balance sheets.
On
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 16 years, some of which may include options to extend the leases for up to 10 years. As ofSeptember 26, 2020 , our right-of-use assets related to operating leases were$249.9 million and our current and non-current operating lease liabilities were$62.9 million and$200.6 million , respectively. 56
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Table of Contents Stock Repurchases
From
As a result of the COVID-19 pandemic, as previously announced, we have temporarily suspended our share repurchase program in an effort to preserve cash and exercise caution during this uncertain period and due to certain restrictions related to financial covenants in our credit facilities.
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. Accounting Standards Codification Topic 480-10 is applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. The components of the change in the redeemable noncontrolling interests for the nine months endedSeptember 26, 2020 and the year endedDecember 28, 2019 are presented in the following table: September 26, December 28, 2020 2019 Balance, beginning of period$ 287,258 $ 219,724 Decrease in redeemable noncontrolling interests due to redemptions
(12,636) (2,270) Increase in redeemable noncontrolling interests due to business
acquisitions 25,955 74,865
Net income attributable to redeemable noncontrolling interests
7,253 14,838
Dividends declared (7,272) (10,264)
Effect of foreign currency translation loss attributable to
redeemable noncontrolling interests (10,999) (2,335)
Change in fair value of redeemable securities 5,141 (7,300)
Balance, end of period $ 294,700 $ 287,258
Changes in the estimated redemption amounts of the noncontrolling interests
subject to put options are adjusted 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. These adjustments do not impact the calculation of
earnings per share.
Additionally, some prior owners of such acquired subsidiaries are eligible to
receive additional purchase price cash consideration if certain financial
targets are met. Any adjustments to these accrual amounts are recorded in our
consolidated statements of income. For the nine months ended September 26, 2020
and September 28, 2019 , there were no material adjustments recorded in our
consolidated statements of income relating to changes in estimated contingent
purchase price liabilities.
Noncontrolling Interests
Noncontrolling interests represent our less than 50% ownership interest in an acquired subsidiary. Our net income is reduced by the portion of the subsidiaries net income that is attributable to noncontrolling interests.
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Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates from those disclosed in Item 7 of our Annual Report on Form 10-K for the year endedDecember 28, 2019 , except accounting policies adopted as ofDecember 29, 2019 , which are discussed in Note 3-Critical Accounting Policies, Accounting Pronouncements Adopted and Recently Issued Accounting Standards
of
the Notes to the Consolidated Financial Statements included under Item 1.
Our financial results for the nine months endedSeptember 26, 2020 were affected by certain estimates we made due to the adverse business environment brought on by the COVID-19 pandemic. For example, in the quarter endedMarch 28, 2020 we recorded incremental bad debt reserves of approximately$10.0 million for our global dental business and continued to retain those incremental reserves through the quarter endedSeptember 26, 2020 . During the quarter endedMarch 28, 2020 , we also recognized a net credit of approximately$17.5 million in stock-based compensation expense due to our estimate that no performance shares granted in 2018, 2019 or 2020 will ultimately vest. For the quarter endedSeptember 26, 2020 , we continued to estimate that no such performance-based shares will ultimately vest. Additionally in the quarter endedMarch 28, 2020 , we recorded total impairment charges of approximately$6.1 million related to prepaid royalty expenses and a customer relationship intangible asset. We had no material impairment charges in the quarter endedSeptember 26, 2020 . Although our selling, general and administrative expenses for the nine months endedSeptember 26, 2020 represent management's best estimates and assumptions that affect the reported amounts, our judgment could change in the future due to the significant uncertainty surrounding the macroeconomic effect of the COVID-19 pandemic. Accounting Standards Update For a discussion of accounting standards updates that have been adopted or will be adopted, see Note 3-Critical Accounting Policies, Accounting Pronouncements Adopted and Recently Issued Accounting Standards of the Notes to the Consolidated Financial Statements included under Item 1.
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