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OFFON

HENRY SCHEIN, INC.

(HSIC)
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HENRY SCHEIN : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/03/2021 | 12:47pm EDT

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 the documents we file with
the Securities 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 impact on
these items), the rate and consistency with which dental and other practices
resume or maintain normal operations in the United States and internationally,
expectations regarding personal protective equipment ("PPE") and COVID-19
related product sales and inventory levels and whether additional resurgences or
variants of the virus will adversely impact the resumption of normal operations,
the impact of restructuring programs as well as of any future acquisitions, and
more generally current expectations regarding performance in current and future
periods. Forward looking statements also include the (i) ability of the Company
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 and (ii) potential for the
Company to distribute the COVID-19 vaccines and ancillary supplies.



Risk factors and uncertainties that could cause actual results to differ
materially from current and historical results include, but are not limited to:
risks associated with COVID-19 and any variants thereof, as well as other
disease outbreaks, epidemics, pandemics, or similar wide spread public health
concerns and other natural disasters or acts of terrorism; 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; financial and tax risks associated with acquisitions,
dispositions and joint ventures; certain provisions in our governing documents
that may discourage third-party acquisitions of us; effects of a highly
competitive (including, without limitation, competition from third-party online
commerce sites) and consolidating market; the potential repeal or judicial
prohibition on implementation of the Affordable Care Act; 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
macro-economic and political conditions, including international trade
agreements and potential trade barriers; 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 confidentiality of sensitive personal information or standards
in electronic health records or transmissions; changes in tax legislation;
litigation risks; new or unanticipated litigation developments and the status of
litigation matters; cyberattacks or other privacy or data security breaches;
risks associated with our global operations; our dependence on our senior
management, as well as employee hiring and retention; and disruptions in
financial markets. The order in which these factors appear should not be
construed to indicate their relative importance or priority.



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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.

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



COVID-19 Pandemic



In March 2020, the World Health Organization declared COVID-19 a pandemic. The
COVID-19 pandemic 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 second half of 2020 and
continued into the first half of 2021, resulting in growth over the prior year
driven by sales of 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 of 2020, dental and medical practices
began to re-open worldwide, and continued to do so during the second half of
2020. During the first half of 2021, patient traffic levels returned to levels
approaching pre-pandemic levels. 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.

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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 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 in Melville, New York, employ approximately 21,000 people
(of which more than 10,200 are based outside the United States) and have
operations or affiliates in 32 countries and territories, 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, the Netherlands, New Zealand,
Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand,
United Arab Emirates and the United Kingdom.



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. 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. 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.



Our current and future results have been and could be impacted by the COVID-19
pandemic, the current economic environment and continued economic and public
health uncertainty. Since the onset of the COVID-19 pandemic in early 2020, we
have been carefully monitoring its impact on our global operations and have
taken appropriate steps

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to minimize the risk to our employees. We have seen and continue to see changes
in demand trends for some of our products and services as rates of infection
fluctuate, new strains or variants of COVID-19 emerge and spread, vaccine uptake
increases, governments adapt their approaches to combatting the virus, and local
conditions change across geographies. As a result, we expect to see continued
volatility through at least the duration of the pandemic.



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 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 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 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 second half of 2020, as global
conditions improved, we resumed our acquisition strategy.



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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 the U.S. Census Bureau'sInternational Data Base, in 2021 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 32% during the same time 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
Projections 2019-2028" indicating that total national health care spending
reached approximately $3.8 trillion in 2019, or 17.7% 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 $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, exportation,
marketing and sale of, and third party payment for, pharmaceuticals and 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, and as part of
our specialty home medical supply business that distributes and sells medical
equipment and supplies directly to patients. The federal government and state
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.



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. In addition, activities to control medical costs,
including laws and regulations lowering reimbursement rates for pharmaceuticals,
medical devices, and/or medical treatments or services, are ongoing. Many of
these laws and regulations are subject to change and their evolving
implementation may impact our operations and our financial performance.



Our businesses are also generally subject to numerous other laws and regulations
that could impact our financial performance, including securities, antitrust,
consumer protection, anti-bribery and anti-kickback, customer interaction
transparency, data privacy, data security, government contracting, price
gouging, and other laws and regulations.



Failure to comply with law or regulations could have a material adverse effect on our business.


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Results of Operations



The following table summarizes the significant components of our operating
results for the three and six months ended June 26, 2021 and June 27, 2020 and
cash flows for the six months ended June 26, 2021 and June 27, 2020 (in
thousands):



                                                 Three Months Ended           Six Months Ended
                                               June 26,      June 27,      June 26,      June 27,
                                                 2021          2020          2021          2020
Operating results:
Net sales                                     $ 2,967,223$ 1,684,399$ 5,892,184$ 4,113,270
Cost of sales                                   2,077,472     1,230,133     4,111,582     2,912,990
     Gross profit                                 889,751       454,266     1,780,602     1,200,280
Operating expenses:

Selling, general and administrative 678,801 445,765 1,336,793 1,013,127

     Restructuring costs                              604        15,934         3,535        20,721
           Operating income (loss)            $   210,346$   (7,433)$   440,274$   166,432

Other expense, net                            $   (4,665)$   (8,780)$   (8,858)$  (13,622)
Net income (loss) from continuing
operations                                        163,977      (13,852)       338,905       119,995
Income from discontinued operations                     -           585             -           303
Net income (loss) attributable to Henry
Schein, Inc.                                      155,716      (10,797)       321,713       119,464

                                                                              Six Months Ended
                                                                           June 26,      June 27,
                                                                             2021          2020
Cash flows:
Net cash provided by (used in) operating activities from continuing
operations                                                                $   221,726$  (12,843)
Net cash used in investing activities from continuing operations            (341,119)      (69,641)
Net cash provided by (used in) financing activities from continuing
operations                                                                  (139,395)       262,050




Plans of Restructuring



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. In light of the
changes to the business environment brought on by the COVID-19 pandemic, we
extended such activities to the end of 2021.



During the three months ended June 26, 2021 and June 27, 2020, we recorded
restructuring costs of $0.6 million and $15.9 million. During the six months
ended June 26, 2021 and June 27, 2020, we recorded restructuring costs of $3.5
million and $20.7 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.



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 in 2021, both with respect to each major type of cost associated
therewith and with respect to the total cost, or an estimate of the amount or
range of amounts that will result in future cash expenditures.

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Three Months Ended June 26, 2021 Compared to Three Months Ended June 27, 2020




Net Sales



Net sales for the three months ended June 26, 2021 and June 27, 2020 were as
follows (in thousands):



                                 June 26,      % of      June 27,      % of       Increase / (Decrease)
                                   2021        Total       2020        Total           $             %

Health care distribution (1)

   Dental                       $ 1,910,344    64.4 %   $   941,292    55.9 %   $       969,052   102.9 %
   Medical                          904,828    30.5         617,810    36.7             287,018    46.5
     Total health care
     distribution                 2,815,172    94.9       1,559,102    92.6           1,256,070    80.6
Technology and value-added
services (2)                        152,051     5.1         105,227     6.2              46,824    44.5

Total excluding

Corporate TSA revenue 2,967,223 100.0 1,664,329 98.8

           1,302,894    78.3
Corporate TSA revenue (3)                 -       -          20,070     1.2            (20,070)       -
     Total                      $ 2,967,223   100.0 %   $ 1,684,399   100.0 %   $     1,282,824    76.2


(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, personal protective equipment 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 ended in December 2020. See   Note-18 Related Party
Transactions   for further information.

The 76.2% increase in net sales for the three months ended June 26, 2021
includes an increase of 71.0% in local currency revenue (65.5% increase in
internally generated revenue and 5.5% growth from acquisitions) and an increase
of 5.2% related to foreign currency exchange. During December 2020, our previous
transition services agreement (TSA) with Covetrus, in connection with the
completion of the Animal-Health Spin-off, concluded. Accordingly, we recorded no
Corporate TSA revenues for the three months ended June 26, 2021. Sales for the
three months ended June 26, 2021 benefited from sales of PPE and COVID-19
related products of approximately $354.2 million, an increase of 76.0% versus
the prior year. Excluding PPE and COVID-19 related products, the increase in
internally generated local currency dental sales was 66.2%. Net sales in the
prior year were adversely affected by the COVID-19 pandemic, which significantly
impacted global business and dramatically reduced demand for dental products and
certain medical products in the second quarter of 2020. On a comparable basis to
the three months ended June 29, 2019, our net sales for the three months ended
June 26, 2021 increased by 15.2% in local currency.



The 102.9% increase in dental net sales for the three months ended June 26, 2021
includes an increase of 94.3% in local currency revenue (87.0% increase in
internally generated revenue and 7.3% growth from acquisitions) and an increase
of 8.6% related to foreign currency exchange. The 94.3% increase in local
currency sales was attributable to an increase in dental consumable merchandise
sales of 99.7% (90.5% increase in internally generated revenue and 9.2% growth
from acquisitions) and an increase in dental equipment sales and service
revenues of 76.3%, (75.3% increase in internally generated revenue and 1.0%
growth from acquisitions). The COVID-19 pandemic had an adverse impact on prior
year revenues when dental offices began closing or seeing a limited number of
patients beginning in mid-March of 2020. However, in the second half of the
quarter ended June 27, 2020 our dental sales began to improve as dental
practices began to resume activities and patient traffic increased. During the
second quarter of 2021, patient traffic levels continued to return to levels
approaching pre-pandemic levels, thus contributing to growth in worldwide dental
revenues. Additionally, dental sales for the three months ended June 26, 2021
benefited from sales of PPE and COVID-19 related products of approximately
$181.8 million, an increase of 87.6% versus the prior year. Excluding PPE and
COVID-19 related products, the increase in internally generated local currency
dental sales was 90.8%. On a comparable basis to the three months ended June 29,
2019, our dental net sales for the three months ended June 26, 2021 increased by
12.1% in local currency.



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The 46.5% increase in medical net sales for the three months ended June 26, 2021
includes an increase of 46.1% in local currency revenue (43.5% increase in
internally generated revenue and 2.6% growth from acquisitions) and an increase
of 0.4% related to foreign currency exchange. The COVID-19 pandemic began to
adversely impact our medical revenue beginning in mid-March 2020 and in the
first half of the second quarter of 2020, as many medical offices closed or saw
a limited number of patients. Economic conditions relating to the COVID-19
pandemic had less of an impact on the performance of our medical group in the
prior year in part due to continued strong sales of PPE, such as masks, gowns
and face shields, and other COVID-19 related products, which have continued to
be strong in the current year. Our medical business recorded sales of $172.4
million of such PPE and other COVID-19 related products for the three months
ended June 26, 2021, an increase of 65.3% compared to the prior year. Excluding
sales of PPE and other COVID-19 related products, medical internal sales in
local currencies increased by 39.1%. On a comparable basis to the three months
ended June 29, 2019, our medical net sales for the three months ended June 26,
2021 increased by 27.2% in local currency.



The 44.5% increase in technology and value-added services net sales for the
three months ended June 26, 2021 includes an increase of 41.9% local currency
revenue (33.0% increase in internally generated revenue and 8.9% growth from
acquisitions) and an increase of 2.6% related to foreign currency exchange.
Sales growth was driven by our practice management business, as well as strong
financial services revenue, which benefited from dental equipment sales growth.
During the quarter ended June 26, 2021, the trend for transactional software
revenues improved compared to the prior year, as more patients visited dental
practices worldwide. Net sales in the prior year were adversely affected by the
COVID-19 pandemic, which significantly impacted transactional software revenues.
On a comparable basis to the three months ended June 29, 2019, our technology
and value-added services net sales for the three months ended June 26, 2021
increased by 10.1% in local currency.



Gross Profit


Gross profit and gross margin percentages by segment and in total for the three months ended June 26, 2021 and June 27, 2020 were as follows (in thousands):



                               June 26,      Gross      June 27,      Gross       Increase / (Decrease)
                                 2021      Margin %       2020      Margin %          $              %
Health care distribution      $  784,841      27.9 %   $  381,042      24.4 %   $     403,799      106.0 %
Technology and value-added
services                         104,910      69.0         72,683      69.1            32,227       44.3

Total excluding

Corporate TSA revenues 889,751 30.0 453,725 27.3

          436,026       96.1
Corporate TSA revenues                 -         -            541       2.7             (541)          -
   Total                      $  889,751      30.0     $  454,266      27.0     $     435,485       95.9




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.



During December 2020, our previous transition services agreement with Covetrus,
in connection with the completion of the Animal-Health Spin-off, concluded.
Under this agreement, Covetrus had agreed to purchase certain products from us
at a mark-up that ranged from 3% to 6% of our product cost to cover handling
costs.



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 pharmaceutical products are generally at
lower gross profit margins than other products. Conversely, 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.



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Health care distribution gross profit increased $403.8 million, or 106.0%, for
the three months ended June 26, 2021 compared to the prior year period, due
primarily to the increase in net sales discussed above. Health care distribution
gross profit margin increased to 27.9% for the three months ended June 26, 2021
from 24.4% for the comparable prior year period due primarily to lower
adjustments recorded for PPE inventory. Such adjustments to inventory may recur
and adversely impact gross profit margins in future periods, although we do not
expect further material inventory adjustments in 2021. The increase in health
care distribution gross profit margin is also attributable to an increase in
vendor rebates during the second quarter of 2021 due to increased purchase
volumes. The overall increase in our health care distribution gross profit is
attributable to an increase of $298.9 million from internally generated revenue,
a $78.3 million increase in gross profit due to the increase in the gross margin
rates and a $26.6 million increase in gross profit from acquisitions.



Technology and value-added services gross profit increased $32.2 million, or
44.3%, for the three months ended June 26, 2021 compared to the prior year
period. The overall increase in our Technology and value-added services gross
profit is attributable to a $25.8 million increase in internally generated
revenue and $6.8 million additional gross profit from acquisitions, partially
offset by a decrease of $0.4 million from gross margin rates. Technology and
value-added services gross profit margin decreased to 69.0% for the three months
ended June 26, 2021 from 69.1% for the comparable prior year period.



Selling, General and Administrative




Selling, general and administrative expenses by segment and in total for the
three months ended June 26, 2021 and June 27, 2020 were as follows (in
thousands):



                                                % of                       % of
                                 June 26,    Respective     June 27,    Respective          Increase
                                   2021       Net Sales       2020       Net Sales        $           %
Health care distribution        $  603,080       21.4 %    $  406,931       26.1 %    $  196,149    48.2 %
Technology and value-added
services                            76,325       50.2          54,768       52.0          21,557    39.4
       Total                    $  679,405       22.9      $  461,699       27.4      $  217,706    47.2




Selling, general and administrative expenses (including restructuring costs in
the three months ended June 26, 2021 and June 27, 2020) increased $217.7
million, or 47.2%, for the three months ended June 26, 2021 from the comparable
prior year period. In the prior year, there were significant cost-saving
measures taken in response to the COVID-19 pandemic. These cost-saving measures
were temporary and substantially ended during the second half of 2020.



The $196.1 million increase in selling, general and administrative expenses
within our health care distribution segment for the three months ended June 26,
2021 as compared to the prior year period was attributable to an increase of
$186.7 million of operating costs and an increase of $24.4 million of additional
costs from acquired companies, partially offset by a decrease of $15.0 million
in restructuring costs. The $21.6 million increase in selling, general and
administrative expenses within our technology and value-added services segment
for the three months ended June 26, 2021 as compared to the prior year period
was attributable to an increase of $16.2 million of operating costs and an
increase of $5.8 million of additional costs from acquired companies, partially
offset by a decrease of $0.4 million in restructuring costs. As a percentage of
net sales, selling, general and administrative expenses decreased to 22.9% from
27.4% for the comparable prior year period, primarily due to the increased sales
base.



As a component of total selling, general and administrative expenses, selling
expenses increased $151.3 million, or 58.5% to $409.8 million, for the three
months ended June 26, 2021 from the comparable prior year period primarily due
to an increase in payroll and payroll related costs. As a percentage of net
sales, selling expenses decreased to 13.8% from 15.3% for the comparable prior
year period, primarily due to the increased sales base.



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As a component of total selling, general and administrative expenses, general
and administrative expenses increased $66.4 million, or 32.7% to $269.6 million,
for the three months ended June 26, 2021 from the comparable prior year period,
primarily due to an increase in payroll and payroll related costs. As a
percentage of net sales, general and administrative expenses decreased to 9.1%
from 12.1% for the comparable prior year period, primarily due to the increased
sales base.



Other Expense, Net


Other expense, net, for the three months ended June 26, 2021 and June 27, 2020 was as follows (in thousands):



                       June 26,     June 27,         Variance
                         2021         2020         $         %
Interest income        $   1,357$    1,997$ (640)   (32.0) %
Interest expense         (6,376)     (10,486)     4,110     39.2
Other, net                   354        (291)       645    221.6
  Other expense, net   $ (4,665)$  (8,780)$ 4,115     46.9




Interest income decreased $0.6 million primarily due to lower interest rates and
reduced late fee income. Interest expense decreased $4.1 million primarily due
to reduced credit line borrowings and lower interest rates on certain of our
private placement borrowings.



Income Taxes



For the three months ended June 26, 2021, our effective tax rate was 23.4%
compared to 5.9% for the prior year period. The difference between our effective
tax rate and the federal statutory tax rate for the three months ended June 26,
2021, was primarily due to state and foreign income taxes, interest expense and
tax charges and credits associated with legal entity reorganizations. The
difference between our effective tax rate and the federal statutory tax rate for
the three months ended June 27, 2020, primarily relates to state and foreign
income taxes and a valuation allowance recognized on a portion of a deferred tax
asset. Further, our effective tax rate was distorted due to our low pretax loss
during the second quarter ended June 27, 2020.



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Six Months Ended June 26, 2021 Compared to Six Months Ended June 27, 2020



Net Sales



Net sales for the six months ended June 26, 2021 and June 27, 2020 were as
follows (in thousands):



                                June 26,      % of      June 27,      % of       Increase/(Decrease)
                                  2021        Total       2020        Total          $            %
Health care distribution (1)
   Dental                      $ 3,699,272    62.8 %   $ 2,416,368    58.7 %   $    1,282,904   53.1 %
   Medical                       1,897,865    32.2       1,418,498    34.5            479,367   33.8
     Total health care
     distribution                5,597,137    95.0       3,834,866    93.2          1,762,271   46.0
Technology and value-added
services (2)                       295,047     5.0         237,192     5.8             57,855   24.4
     Total excluding
     Corporate TSA revenue       5,892,184   100.0       4,072,058    99.0          1,820,126   44.7
Corporate TSA revenue (3)                -       -          41,212     1.0           (41,212)      -
     Total                     $ 5,892,184   100.0 %   $ 4,113,270   100.0 %   $    1,778,914   43.2



(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, personal protective equipment 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 ended in December 2020. See   Note-18 Related Party
Transactions   for further information.

The 43.2% increase in net sales for the six months ended June 26, 2021 includes
an increase of 39.8% in local currency revenue (35.6% increase in internally
generated revenue and 4.2% growth from acquisitions) and an increase of 3.4%
related to foreign currency exchange. Excluding sales of products under the
transition services agreement with Covetrus, our net sales increased 44.7%,
including an increase in local currency revenue of 41.2% (37.0% increase in
internally generated revenue and 4.2% growth from acquisitions) and an increase
of 3.5% related to foreign currency exchange. Sales for the six months ended
June 26, 2021 benefited from sales of PPE and COVID-19 related products of
approximately $811.7 million, an increase of 125.9% versus the prior year.
Excluding PPE and COVID-19 related products, the increase in internally
generated local currency sales was 28.8%. Net sales in the prior year were
adversely affected by the COVID-19 pandemic, which significantly impacted global
business and dramatically reduced demand for dental products and certain medical
products in the second quarter of 2020. On a comparable basis to the six months
ended June 29, 2019, our net sales for the six months ended June 26, 2021
increased by 16.3% in local currency.



The 53.1% increase in dental net sales for the six months ended June 26, 2021
includes an increase of 47.6% local currency revenue (42.2% increase in
internally generated revenue and 5.4% growth from acquisitions) and an increase
of 5.5% related to foreign currency exchange. The 47.6% increase in local
currency sales was attributable to an increase in dental consumable merchandise
revenue of 49.4% (42.7% increase in internally generated revenue and 6.7% growth
from acquisitions), and an increase in dental equipment sales and service
revenues of 41.1% (40.4% increase in internally generated revenue and 0.7%
growth from acquisitions). The COVID-19 pandemic began to adversely impact our
worldwide dental revenue beginning in mid-March of 2020 as many dental offices
progressively closed or began seeing a limited number of patients. However, in
the second half of the quarter ended June 27, 2020 and continuing through the
second quarter of 2021 patient traffic levels returned to levels approaching
pre-pandemic levels, thus contributing to growth in worldwide dental revenues.
Additionally, global dental sales for the six months ended June 26, 2021
benefited from sales of PPE and COVID-19 related products of approximately
$351.1 million, an increase of 80.0% versus the prior year. Excluding PPE and
COVID-19 related products, the increase in internally generated local currency
dental sales was 41.9%. On a comparable basis to the six months ended June 29,
2019, our dental net sales for the six months ended June 26, 2021 increased by
10.7% in local currency.



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The 33.8% increase in medical net sales for the six months ended June 26, 2021
is attributable to an increase of 33.5% local currency growth (31.4% increase in
internally generated revenue and 2.1% growth from acquisitions) and an increase
of 0.3% 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 recorded sales of $460.6
million sales of such PPE and other COVID-19 related products for the six months
ended June 26, 2021, an increase of approximately 180.5% compared to the prior
year. Excluding sales of PPE and other COVID-19 related products, medical
internal sales in local currencies increased by 12.0%. On a comparable basis to
the six months ended June 29, 2019, our medical net sales for the six months
ended June 26, 2021 increased by 33.3% in local currency.



The 24.4% increase in technology and value-added services net sales for the six
months ended June 26, 2021 is attributable to an increase of 22.5% in local
currency revenue (16.7% increase in internally generated revenue and 5.8% growth
from acquisitions) and 1.9% related to foreign currency exchange. Sales growth
was driven by our practice management business, as well as strong financial
services revenue, which benefitted from dental equipment sales growth. Net sales
in the prior year were adversely affected by the COVID-19 pandemic, which
significantly impacted transactional software revenues. On a comparable basis to
the six months ended June 29, 2019, our technology and value-added services net
sales for the six months ended June 26, 2021 increased by 10.4% in local
currency.



Gross Profit


Gross profit and gross margin percentages by segment and in total for the six months ended June 26, 2021 and June 27, 2020 were as follows (in thousands):



                               June 26,       Gross      June 27,       Gross       Increase/(Decrease)
                                 2021       Margin %       2020       Margin %          $            %
Health care distribution      $ 1,574,825      28.1 %   $ 1,034,358      27.0 %   $     540,467    52.3 %
Technology and value-added
services                          205,777      69.7         164,768      69.5            41,009    24.9

Total excluding

   Corporate TSA revenues       1,780,602      30.2       1,199,126      29.4           581,476    48.5
Corporate TSA revenues                  -         -           1,154       2.8           (1,154)       -
   Total                      $ 1,780,602      30.2     $ 1,200,280      29.2     $     580,322    48.3




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.



During December 2020, our previous transition services agreement with Covetrus,
in connection with the completion of the Animal-Health Spin-off, concluded.
Under this agreement, Covetrus had agreed to purchase certain products from us
at a mark-up that ranged from 3% to 6% of our product cost to cover handling
costs.



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.



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Health care distribution gross profit increased $540.5 million, or 52.3%, for
the six months ended June 26, 2021 compared to the prior year period. Health
care distribution gross profit margin increased to 28.1% for the six months
ended June 26, 2021 from 27.0% for the comparable prior year period, primarily
due to lower adjustments recorded for PPE inventory. Such adjustments to
inventory may recur and adversely impact gross profit margins in future periods,
although we do not expect further material inventory adjustments in 2021. The
increase in the health care distribution gross profit margin is also
attributable to an increase in vendor rebates during the first six months of
2021 due to increased purchase volumes. The overall increase in our health care
distribution gross profit is attributable to a $445.6 million increase in
internally generated revenue, $53.9 million additional gross profit from
acquisitions and an increase of $41.0 million in gross profit due to the
increase in the gross margin rates.



Technology and value-added services gross profit increased $41.0 million, or
24.9%, for the six months ended June 26, 2021 compared to the prior year period.
The overall increase in our Technology and value-added services gross profit is
attributable to an increase of $30.4 million in internally generated revenue and
$11.0 million additional gross profit from acquisitions, partially offset by a
$0.4 million decline in gross profit. Technology and value-added services gross
profit margin increased to 69.7% for the six months ended June 26, 2021 from
69.5% for the comparable prior year period.



Selling, General and Administrative




Selling, general and administrative expenses by segment and in total for the six
months ended June 26, 2021 and June 27, 2020 were as follows (in thousands):



                                                 % of                        % of
                                 June 26,     Respective     June 27,     Respective          Increase
                                   2021        Net Sales       2020        Net Sales        $           %

Health care distribution $ 1,195,132 21.4 % $ 912,693

   23.8 %    $  282,439    30.9 %
Technology and value-added
services                            145,196       49.2          121,155       51.1          24,041    19.8
       Total                    $ 1,340,328       22.7      $ 1,033,848       25.1      $  306,480    29.6




Selling, general and administrative expenses (including restructuring costs in
the six months ended June 26, 2021 and June 27, 2020) increased $306.5 million,
or 29.6%, for the six months ended June 26, 2021 from the comparable prior year
period. In the prior year, there were significant cost-saving measures taken in
response to the COVID-19 pandemic. These cost-saving measures were temporary and
substantially ended during the second half of 2020.



The $282.4 million increase in selling, general and administrative expenses
within our health care distribution segment for the six months ended June 26,
2021 as compared to the prior year period was attributable to an increase of
$251.5 million of operating costs and an increase of $47.8 million of additional
costs from acquired companies, partially offset by a decrease of $16.9 million
in restructuring costs. The $24.0 million increase in selling, general and
administrative expenses within our technology and value-added services segment
for the six months ended June 26, 2021 as compared to the prior year period was
attributable to an increase of $15.1 million of operating costs and an increase
of $9.2 million of additional costs from acquired companies, partially offset by
a decrease of $0.3 million in restructuring costs. As a percentage of net sales,
selling, general and administrative expenses decreased to 22.7% from 25.1% for
the comparable prior year period, primarily due to the increased sales base.



As a component of total selling, general and administrative expenses, selling
expenses increased $164.2 million, or 26.0% to $794.5 million, for the six
months ended June 26, 2021 from the comparable prior year period, primarily due
to an increase in payroll and payroll related costs. As a percentage of net
sales, selling expenses decreased to 13.5% from 15.3% for the comparable prior
year period, primarily due to the increased sales base.



As a component of total selling, general and administrative expenses, general
and administrative expenses increased $142.3 million, or 35.3% to $545.8
million, for the six months ended June 26, 2021 from the comparable prior year
period, primarily due to an increase in payroll and payroll related costs. As a
percentage of net sales, general and administrative expenses decreased to 9.2%
from 9.8% for the comparable prior year period, primarily due to the increased
sales base.



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Other Expense, Net


Other expense, net, for the six months ended June 26, 2021 and June 27, 2020 was as follows (in thousands):



                        June 26,     June 27,          Variance
                          2021         2020          $          %
Interest income        $    3,340$    5,187$ (1,847)   (35.6) %
Interest expense         (12,861)     (18,298)       5,437     29.7
Other, net                    663        (511)       1,174    229.7
  Other expense, net   $  (8,858)$ (13,622)$   4,764     35.0




Interest income decreased $1.8 million primarily due to lower interest rates and
reduced late fee income. Interest expense decreased $5.4 million primarily due
to reduced credit line borrowings and lower interest rates on certain of our
private placement borrowings.



Income Taxes



For the six months ended June 26, 2021, our effective tax rate was 24.3%
compared to 24.2% for the prior year period. The difference between our
effective tax rate and the federal statutory tax rate for the six months ended
June 26, 2021, was primarily due to state and foreign income taxes, interest
expense and tax charges and credits associated with legal entity
reorganizations. The difference between our effective tax rates and the federal
statutory tax rate for the six months ended June 27, 2020, primarily relates to
state and foreign income taxes, interest expense, tax charges and credits
associated with legal entity reorganizations outside the U.S and a valuation
allowance recognized on a portion of a deferred tax asset.

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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 had been temporarily suspended in March of 2020, but were
resumed during the three months ended March 27, 2021). 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.



The pandemic and the governmental responses to it had a material adverse effect
on our cash flows in the second quarter of 2020. In the latter half of the
second quarter of 2020 and continuing through year-end, dental and medical
practices began to re-open worldwide. During the first half of 2021, patient
traffic levels returned to levels approaching pre-pandemic levels. 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.



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.



Net cash from continuing operations provided by operating activities was $221.7
million for the six months ended June 26, 2021, compared to net cash from
continuing operations used in operating activities of $12.8 million for the
comparable prior year period. The net change of $234.6 million was primarily
attributable to higher net income.



Net cash from continuing operations used in investing activities was $341.1 million for the six months ended June 26, 2021, compared to $69.6 million for the comparable prior year period. The net change of $271.5 million was attributable to increased payments for equity investments and business acquisitions.




Net cash from continuing operations used in financing activities was $139.4
million for the six months ended June 26, 2021, compared to net cash provided by
financing activities of $262.1 million for the comparable prior year period. The
net change of $401.5 million was primarily due to decreased net proceeds from
bank borrowings and increased repurchases of common stock.

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The following table summarizes selected measures of liquidity and capital
resources (in thousands):



                                                                                           December
                                                                         June 26,             26,
                                                                           2021              2020
Cash and cash equivalents                                             $      167,228$   421,185
Working capital (1)                                                        1,648,607        1,508,313

Debt:
       Bank credit lines                                              $       72,105$    73,366
       Current maturities of long-term debt                                    9,839          109,836
       Long-term debt                                                        706,487          515,773
           Total debt                                                 $      788,431$   698,975

Leases:
       Current operating lease liabilities                            $     

75,008 $ 64,716

       Non-current operating lease liabilities                              

243,232 238,727

(1) At June 26, 2021 and December 26, 2020, there were no trade accounts receivable that were

restricted to settle obligations of this VIE, nor were there liabilities of the VIE where the

       creditors have recourse to us.



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 decreased to 42.3
days as of June 26, 2021 from 52.4 days as of June 27, 2020. During the six
months ended June 26, 2021, we wrote off approximately $4.6 million of fully
reserved accounts receivable against our trade receivable reserve. Our inventory
turns from operations increased to 5.1 as of June 26, 2021 from 4.2 as of June
27, 2020. Our working capital accounts may be impacted by current and future
economic conditions.

Bank Credit Lines

Bank credit lines consisted of the following:




                                      June 26,     December 26,
                                        2021           2020
Revolving credit agreement            $       -   $            -
Other short-term bank credit lines       72,105           73,366
Total                                 $  72,105$       73,366




Revolving Credit Agreement



On April 18, 2017, we entered into a $750 million revolving credit agreement
(the "Credit Agreement"), which matures in April 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 most LIBOR rates to be discontinued
immediately after December 31, 2021, while the remaining LIBOR rates will be
discontinued immediately after June 30, 2023, 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 of June 26, 2021, and December 26, 2020,
we had no borrowings under this revolving credit facility. As of June 26, 2021,
and December 26, 2020, there were $9.3 million and $9.5 million of letters of
credit, respectively, provided to third parties under the credit facility.



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On April 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 through
March 31, 2021.



364-Day Credit Agreement



On March 4, 2021, we repaid the outstanding obligations and terminated the
lender commitments under our $700 million 364-day credit agreement which was
entered into on April 17, 2020. This facility was originally scheduled to mature
on April 16, 2021.



Other Short-Term Credit Lines



As of June 26, 2021 and December 26, 2020, we had various other short-term bank
credit lines available, of which $72.1 million and $73.4 million, respectively,
were outstanding. At June 26, 2021 and December 26, 2020, borrowings under all
of these credit lines had a weighted average interest rate of 5.98% and 4.14%,
respectively.



Long-term debt


Long-term debt consisted of the following:



                                                          June 26,      December 26,
                                                            2021            2020
Private placement facilities                            $    706,332$      613,498
Note payable                                                       -            1,554
Various collateralized and uncollateralized loans
payable with interest,
    in varying installments through 2023 at interest
    rates
    ranging from 2.45% to 4.27% at June 26, 2021 and
    ranging from 2.62% to 4.27% at December 26, 2020           4,293            4,596
Finance lease obligations (see Note 6)                         5,701            5,961
    Total                                                    716,326          625,609
Less current maturities                                      (9,839)        (109,836)
    Total long-term debt                                $    706,487$      515,773


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Private Placement Facilities



Our private placement facilities, with three insurance companies, have a total
facility amount of $1 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 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. 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 March 5, 2021, we amended the private placement facilities to, among other
things, (a) modify the financial covenant from being based on a net leverage
ratio to a total leverage ratio and (b) restore the maximum maintenance total
leverage ratio to 3.25x and remove the 1.00% interest rate increase triggered if
the net leverage ratio were to exceed 3.0x.



The components of our private placement facility borrowings as of June 26, 2021 are presented in the following table (in thousands):




                                 Amount of
                                 Borrowing          Borrowing
    Date of Borrowing           Outstanding            Rate                  Due Date
January 20, 2012 (1)         $           7,143           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 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                      100,000           2.35           September 2, 2030
June 2, 2021                           100,000           2.48              June 2, 2031
June 2, 2021                           100,000           2.58              June 2, 2033
Less: Deferred debt
issuance costs                           (811)
                             $         706,332

(1) Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016.

U.S. Trade Accounts Receivable Securitization




We have a facility agreement with a bank, as agent, based on the securitization
of our U.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 on
April 29, 2022. On June 22, 2020, the expiration date for this facility was
extended to June 12, 2023 and was amended to adjust certain covenant levels for
2020. As of June 26, 2021 and December 26, 2020, there were no borrowings
outstanding under this securitization facility. At June 26, 2021, the interest
rate on borrowings under this facility was based on the asset-backed commercial
paper rate of 0.14% plus 0.95%, for a combined rate of 1.09%. At December 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%.



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.




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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 15 years, some of
which may include options to extend the leases for up to 10 years. As of June
26, 2021, our right-of-use assets related to operating leases were $301.4
million and our current and non-current operating lease liabilities were $75
million and $243.2 million, respectively.



Stock Repurchases


On March 8, 2021, we announced the reinstatement of our share repurchase program.

From March 3, 2003 through June 26, 2021, we repurchased $3.8 billion, or 78,430,846 shares, under our common stock repurchase programs, with $400.0 million available as of June 26, 2021 for future common stock share repurchases.

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 six months ended June 26, 2021 and
the year ended December 26, 2020 are presented in the following table:



                                                                June 26,     December 26,
                                                                  2021           2020
Balance, beginning of period                                   $  327,699$      287,258
Decrease in redeemable noncontrolling interests due to
     redemptions                                                  (1,130)  

(17,241)

Increase in redeemable noncontrolling interests due to business

     acquisitions                                                 140,155  

28,387

Net income attributable to redeemable noncontrolling interests

                                                          14,033   

13,363

Dividends declared                                                (9,954)   

(12,631)

Effect of foreign currency translation gain (loss) attributable to

     redeemable noncontrolling interests                              570  

(4,279)

Change in fair value of redeemable securities                     132,708           32,842
Balance, end of period                                         $  604,081$      327,699




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 six months ended June 26, 2021 and
June 27, 2020, 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 ended December 26, 2020, except accounting policies adopted as of
December 27, 2020, which are discussed in   Note 2-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 six months ended June 27, 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 ended March 28, 2020 we
recorded incremental bad debt reserves of approximately $10.0 million for our
global dental business. During the quarter ended March 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 would ultimately vest. For the quarter ended June 27, 2020,
we continued to estimate that no such performance-based shares would ultimately
vest. In contrast, for the six months ended June 26, 2021, we recorded $30.2
million in stock-based compensation. Additionally, in the quarter ended March
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 ended June 26, 2021.
Although our selling, general and administrative expenses for the six months
ended June 26, 2021 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 2-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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