filings.toolsHenry Schein 10-Q 2022-06-25
Filed 2022-08-02. 8 sections, 132K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly
period ended
June 25, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For the transition period from ____________ to ____________
Commission File Number:
0-27078
HENRY SCHEIN, INC.
(Exact name of registrant as specified in its charter)
Delaware
11-3136595
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
135 Duryea Road
Melville
,
New York
(Address of principal executive offices)
11747
(Zip Code)
(
)
843-5500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.01 per share
HSIC
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes
☒
No
☐
Indicate by
check mark
whether the registrant
has submitted
electronically every Interactive
Data File
required to
be submitted
pursuant
to
Rule
of
Regulation
S-T
during
the
preceding
months
(or
for
such
shorter
period
that
the
registrant
was
required to submit such files).
Yes
☒
No
☐
Indicate by
check mark
whether the
registrant is
a large
accelerated filer,
an accelerated
filer,
a non-accelerated
filer,
a smaller
reporting
company,
or
an
emerging
growth
company.
See
the
definitions
of
“large
accelerated
filer,”
“accelerated
filer,”
“smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for
complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
As of July 25, 2022,
there were
136,114,744
shares of the registrant’s common stock outstanding.
HENRY SCHEIN, INC.
INDEX
Page
Condensed Consolidated Financial Statements:
Condensed Balance Sheets as of June 25, 2022 and December 25, 2021
Condensed Statements of Income for the three and six months ended
June 25, 2022 and June 26, 2021
Condensed Statements of Comprehensive Income for the three and six months ended
June 25, 2022 and June 26, 2021
Condensed Statement of Changes in Stockholders' Equity for the three months ended
June 25, 2022 and June 26, 2021
Condensed Statement of Changes in Stockholders' Equity for the six months ended
June 25, 2022 and June 26, 2021
Condensed Statements of Cash Flows for the six months ended
June 25, 2022 and June 26, 2021
Notes to Condensed Consolidated Financial Statements
Note 1 – Basis of Presentation
Note 2 – Critical Accounting Policies, Accounting Pronouncements Adopted
and Recently Issued Accounting Standards
Note 3 – Revenue from Contracts with Customers
Note 5 – Business Acquisitions
Note 6 – Fair Value Measurements
Note 10 – Stock-Based Compensation
Note 11 – Redeemable Noncontrolling Interests
Note 12 – Comprehensive Income
Note 13 – Plans of Restructuring
Note 15 – Supplemental Cash Flow Information
Note 16 – Related Party Transactions
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Unregistered Sales of Equity Securities and Use of Proceeds
See accompanying notes.
PART
I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions,
except share data)
June 25,
December 25,
2022
2021
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
$
Accounts receivable, net of reserves of $
and $
1,409
1,452
Inventories, net
1,823
1,861
Prepaid expenses and other
Total current assets
3,789
3,844
Property and equipment, net
Operating lease right-of-use assets
Goodwill
2,833
2,854
Other intangibles, net
Investments and other
Total assets
$
8,324
$
8,481
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
$
1,054
Bank credit lines
Current maturities of long-term debt
Operating lease liabilities
Accrued expenses:
Payroll and related
Taxes
Other
Total current liabilities
2,076
2,307
Long-term debt
Deferred income taxes
Operating lease liabilities
Other liabilities
Total liabilities
3,511
3,805
Redeemable noncontrolling interests
Commitments and contingencies
(nil)
(nil)
Stockholders' equity:
Preferred stock, $
0.01
par value,
1,000,000
shares authorized,
none
outstanding
-
-
Common stock, $
0.01
par value,
480,000,000
shares authorized,
136,439,560
outstanding on June 25, 2022 and
137,145,558
outstanding on December 25, 2021
Additional paid-in capital
-
-
Retained earnings
3,834
3,595
Accumulated other comprehensive loss
(241)
(171)
Total Henry Schein, Inc. stockholders' equity
3,594
3,425
Noncontrolling interests
Total stockholders' equity
4,227
4,063
Total liabilities, redeemable noncontrolling
interests and stockholders' equity
$
8,324
$
8,481
See accompanying notes.
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
(unaudited, in millions, except share and per share data)
Three Months Ended
Six Months Ended
June 25,
June 26,
June 25,
June 26,
2022
2021
2022
2021
Net sales
$
3,030
$
2,967
$
6,209
$
5,892
Cost of sales
2,085
2,076
4,291
4,110
Gross profit
1,918
1,782
Operating expenses:
Selling, general and administrative
1,362
1,249
Depreciation and amortization
Restructuring costs
-
-
Operating income
Other income (expense):
Interest income
Interest expense
(9)
(7)
(16)
(13)
Other, net
-
-
Income before taxes, equity in earnings of affiliates
and noncontrolling interests
Income taxes
(52)
(47)
(109)
(104)
Equity in earnings of affiliates
Net income
Less: Net income attributable to noncontrolling interests
(7)
(8)
(12)
(17)
Net income attributable to Henry Schein, Inc.
$
$
$
$
Earnings per share attributable to Henry Schein, Inc.:
Basic
$
1.17
$
1.11
$
2.49
$
2.28
Diluted
$
1.16
$
1.10
$
2.46
$
2.26
Weighted-average common
shares outstanding:
Basic
137,350,488
140,358,428
137,323,076
141,316,258
Diluted
138,869,064
141,656,883
139,055,205
142,537,906
See accompanying notes.
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(unaudited, in millions)
Three Months Ended
Six Months Ended
June 25,
June 26,
June 25,
June 26,
2022
2021
2022
2021
Net income
$
$
$
$
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)
(90)
(87)
-
Unrealized gain (loss) from foreign currency hedging
activities
(2)
Pension adjustment gain
-
-
-
Other comprehensive income (loss), net of tax
(82)
(78)
Comprehensive income
Comprehensive income attributable to noncontrolling
interests:
Net income
(7)
(8)
(12)
(17)
Foreign currency translation (gain) loss
(7)
(1)
Comprehensive (income) loss attributable to noncontrolling
interests
(15)
(4)
(18)
Comprehensive income attributable to Henry Schein, Inc.
$
$
$
$
See accompanying notes.
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN
STOCKHOLDERS’ EQUITY
(unaudited, in millions, except share and per share data)
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Interests
Equity
Balance, March 26, 2022
137,708,809
$
$
-
$
3,759
$
(168)
$
$
4,224
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
(81)
(1)
(82)
Unrealized gain from foreign currency hedging activities,
net of tax of $
-
-
-
-
-
Change in fair value of redeemable securities
-
-
-
-
-
Repurchase and retirement of common stock
(1,345,397)
-
(16)
(94)
-
-
(110)
Stock-based compensation expense
78,738
-
-
-
-
Stock issued upon exercise of stock options
3,594
-
-
-
-
-
-
Shares withheld for payroll taxes
(6,016)
-
(1)
-
-
-
(1)
Settlement of stock-based compensation awards
(168)
-
-
-
-
Transfer of charges in excess of
capital
-
-
(9)
-
-
-
Balance, June 25, 2022
136,439,560
$
$
-
$
3,834
$
(241)
$
$
4,227
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Interests
Equity
Balance, March 27, 2021
141,310,113
$
$
-
$
3,493
$
(136)
$
$
3,997
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation gain (excluding gain of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
-
Unrealized loss from foreign currency hedging activities,
net of tax of $
-
-
-
-
(2)
-
(2)
Change in fair value of redeemable securities
-
-
(87)
-
-
-
(87)
Initial noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
Repurchase and retirement of common stock
(1,542,315)
-
(15)
(97)
-
-
(112)
Stock-based compensation expense
-
-
-
-
-
Stock issued upon exercise of stock options
17,916
-
-
-
-
-
-
Shares withheld for payroll taxes
(4,873)
-
-
-
-
-
-
Settlement of stock-based compensation awards
-
-
(1)
-
-
-
(1)
Transfer of charges in excess of
capital
-
-
(86)
-
-
-
Balance, June 26, 2021
139,780,841
$
$
-
$
3,466
$
(107)
$
$
4,006
See accompanying notes.
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN
STOCKHOLDERS' EQUITY
(unaudited, in millions, except share and per share data)
Accumulated
Common Stock
Additional
Other
Total
$.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Interests
Equity
Balance, December 25, 2021
137,145,558
$
$
-
$
3,595
$
(171)
$
$
4,063
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
(79)
(1)
(80)
Unrealized gain from foreign currency hedging activities,
net of tax of $
-
-
-
-
-
Purchase of noncontrolling interests
-
-
-
-
-
(7)
(7)
Change in fair value of redeemable securities
-
-
-
-
-
Repurchase and retirement of common stock
(1,345,397)
-
(16)
(94)
-
-
(110)
Stock-based compensation expense
954,899
-
-
-
-
Stock issued upon exercise of stock options
29,827
-
-
-
-
Shares withheld for payroll taxes
(342,347)
-
(29)
-
-
-
(29)
Settlement of stock-based compensation awards
(2,980)
-
-
-
-
Transfer of charges in excess of
capital
-
-
(8)
-
-
-
Balance, June 25, 2022
136,439,560
$
$
-
$
3,834
$
(241)
$
$
4,227
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Showing the first 8K of 67K characters. Open the full section
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
In accordance with the “Safe Harbor” provisions of the Private Securities
Litigation Reform Act of 1995, we
provide the following cautionary remarks regarding important factors
that, among others, could cause future results
to differ materially from the forward-looking statements, expectations and assumptions
expressed or implied
herein.
All forward-looking statements made by us are subject to risks
and uncertainties and are not guarantees of
future performance.
These forward-looking statements involve known and unknown
risks, uncertainties and other
factors that may cause our actual results, performance and achievements
or industry results to be materially
different from any future results, performance or achievements expressed or implied by such
forward-looking
statements.
These statements are generally identified by the use of such
terms as “may,” “could,” “expect,”
“intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,”
“to be,” “to make” or other comparable
terms.
Factors that could cause or contribute to such differences include, but are not limited
to, those discussed in
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 us, our 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, whether additional resurgences or variants
of the virus will adversely
impact the resumption of normal operations, whether vaccine mandates will
adversely impact us (by disrupting our
workforce and/or business), whether supply chain disruptions will adversely
impact our business, 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) our ability to have
continued access to a variety of COVID-19 test types, expectations regarding
COVID-19 test sales, demand and
inventory levels, 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 us 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; 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 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 and domestic macro-economic and political
conditions, including inflation, deflation,
fluctuations in the value of the U.S. dollar as compared to foreign currencies,
and changes to other economic
indicators, international trade agreements, potential trade barriers and
terrorism; failure to comply with existing and
future regulatory requirements; risks associated with the EU Medical
Device Regulation; failure to comply with
laws and regulations relating to health care fraud or other laws and regulations;
failure to comply with laws and
regulations relating to the collection, storage and processing of sensitive
personal information or standards in
electronic health records or transmissions; changes in tax legislation;
risks related to product liability, intellectual
property and other claims; litigation risks; new or unanticipated litigation
developments and the status of litigation
matters; risks associated with customs policies or legislative import restrictions;
cyberattacks or other privacy or
data security breaches; risks associated with our global operations;
our dependence on our senior management,
employee hiring and retention, and our relationships with customers,
suppliers and manufacturers; and disruptions
in financial markets.
The order in which these factors appear should not be construed
to indicate their relative
importance or priority.
We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control
or predict.
Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction
of actual results.
We undertake no duty and have no obligation to update forward-looking statements except as
required by law.
Where You
Can Find Important Information
We may disclose important information through one or more of the following channels: SEC filings, public
conference calls and webcasts, press releases, the investor relations
page of our website (www.henryschein.com)
and the social media channels identified on the Newsroom page of our website.
Recent Developments
COVID-19 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
2020 and 2021.
The impact of COVID-19 had a
material adverse effect on our business, results of operations and cash flows in 2020.
During the year ended
December 25, 2021, patient traffic levels returned to levels approaching pre-pandemic levels.
Demand for dental
products and certain medical products throughout 2021 was driven
by sales of PPE, COVID-19 test kits and other
COVID-19 related products.
During the three months ended March 26, 2022, with the exception of
COVID-19 test
kits, we experienced a decrease in the sales volume of PPE and COVID-19
related products.
During the three
months ended June 25, 2022,
we continued to experience a decrease in the sales volume of PPE
and COVID-19
related products and additionally we began to experience declining demand
for COVID-19 test kits.
We expect
continued volatility in sales of test kits for the remainder of the year.
During the three months ended June 25, 2022,
as a result of an increase in COVID-19 variants, we experienced a
modest decline in dental patient traffic which we believe is related to an increase in
patient appointment
cancellations and staff shortages.
We are continuing to monitor these trends closely and expect patient traffic to
increase again once cases of COVID-19 moderate.
In contrast to our dental business, during the three months
ended June 25, 2022, our medical business benefited from strong sales
in point-of-care diagnostic tests including
flu test kits, as well as generic pharmaceuticals and equipment.
Our condensed consolidated financial statements reflect estimates and
assumptions made by us that affect, among
other things, our goodwill, long-lived asset and definite-lived intangible
asset valuation; inventory valuation; equity
investment valuation; assessment of the annual effective tax rate; valuation of
deferred income taxes and income
tax contingencies; the allowance for doubtful accounts; hedging activity;
supplier rebates; measurement of
compensation cost for certain share-based performance awards and cash bonus
plans; and pension plan
assumptions.
Due to the significant uncertainty surrounding the future impact
of COVID-19, our judgments
regarding estimates and impairments could change in the future.
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.
Executive-Level Overview
Henry Schein, Inc. is a solutions company for health care professionals powered
by a network of people and
technology.
We believe we are the world’s
largest provider of health care products and services primarily to office-
based dental and medical practitioners, as well as alternate sites of care.
We serve more than one million customers
worldwide including dental practitioners, laboratories, physician practices, and
ambulatory surgery centers, as well
as government, institutional health care clinics and other alternate care
clinics.
We believe that we have a strong
brand identity due to our more than 90 years of experience distributing health
care products.
We are headquartered in Melville, New York,
employ more than 22,000 people (of which approximately 10,600
are
based outside of the United States) and have operations or affiliates in 32 countries
and territories.
Our broad
global footprint has evolved over time through our organic success as well as through
contribution from strategic
acquisitions.
We have established strategically located distribution centers around the world to enable us to better serve our
customers and increase our operating efficiency.
This infrastructure, together with broad product and service
offerings at competitive prices, and a strong commitment to customer service,
enables us to be a single source of
supply for our customers’ needs.
While our primary go-to-market strategy is in our capacity as a distributor, we also manufacture certain dental
specialty products and solutions in the areas of implants, orthodontics
and endodontics.
We have achieved scale in
these global businesses primarily through acquisitions as manufacturers
of these products typically do not utilize a
distribution channel to serve customers.
We conduct our business through two reportable segments: (i) health care distribution and (ii) technology and
value-added services.
These segments offer different products and services to the same customer base.
Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools and
other institutions.
Our
global medical businesses serve office-based medical practitioners, ambulatory
surgery centers, other alternate-care
settings and other institutions.
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, dental
specialty products (including
implant, orthodontic and endodontic products), diagnostic tests, infection-control
products,
PPE and vitamins.
Our global technology and value-added services business provides software,
technology and other value-added
services to health care practitioners.
Our technology business offerings include practice management software
systems for dental and medical practitioners.
Our value-added practice solutions include practice consultancy,
education, revenue cycle management and financial services on a non-recourse
basis, e-services, practice
technology, network and hardware services, as well as consulting, and continuing education services for
practitioners.
A key element to grow closer to our customers is our One Schein
initiative, which is a unified go-to-market
approach that enables practitioners to work synergistically with our supply chain,
equipment sales and service and
other value-added services, allowing our customers to leverage
the combined value that we offer through a single
program.
Specifically, One Schein provides customers with streamlined access to our comprehensive offering of
national brand products, our private label products and proprietary specialty
products and solutions (including
implant, orthodontic and endodontic products).
In addition, customers have access to a wide range of services,
including software and other value-added services.
Industry Overview
In recent years, the health care industry has increasingly focused on cost containment.
This trend has benefited
distributors capable of providing a broad array of products and services at
low prices.
It also has accelerated the
growth of HMOs, group practices, other managed care accounts and collective
buying groups, which, in addition to
their emphasis on obtaining products at competitive prices, tend to
favor distributors capable of providing
specialized management information support.
We believe that the trend towards cost containment has the potential
to favorably affect demand for technology solutions, including software, which
can enhance the efficiency and
facilitation of practice management.
Our operating results in recent years have been significantly affected by strategies
and transactions that we
undertook to expand our business, domestically and internationally, in part to address significant changes
in the
health care industry, including consolidation of health care distribution companies, health care reform, trends
toward managed care, cuts in Medicare and collective purchasing arrangements.
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
to minimize the risk to our employees.
We have seen and expect to continue to see changes in demand trends for
some of our products and services, supply chain challenges and labor
challenges, as rates of infection fluctuate, new
strains or variants of COVID-19 emerge and spread, vaccine uptake and mandates increase
and change,
governments adapt their approaches to combatting the virus (including,
without limitation, vaccine mandates), and
local conditions change across geographies.
For example, vaccine mandates affecting our workforce, whether
imposed through government regulations or contracts with governmental authorities
or other customers, could
potentially cause staffing shortages if employees choose not to comply as well as
other consequences to our
business or operations, and managing and tracking vaccination status and
ongoing testing for exempt employees
could potentially increase our costs, as could addressing inconsistent COVID-19
vaccination mandates.
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 joint venture or
acquisition and intend to continue to seek opportunities to expand our
role as a provider of products and services to
the health care industry.
There can be no assurance that we will be able to successfully pursue
any such
opportunity or consummate any such transaction, if pursued.
If additional transactions are entered into or
consummated, we would incur merger and/or acquisition-related costs, and
there can be no assurance that the
integration efforts associated with any such transaction would be successful.
Aging Population and Other Market Influences
The health care products distribution industry continues to experience growth
due to the aging population,
increased health care awareness, the proliferation of medical technology
and testing, new 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’s International Database, in 2022 there are approximately seven million
Americans aged 85 years or older, the segment of the population most in need of long-term care
and elder-care
services.
By the year 2050, that number is projected to nearly triple to approximately
19 million.
The population
aged 65 to 84 years is projected to increase by approximately 27% during
the same period.
As a result of these market dynamics, annual expenditures for health
care services continue to increase in the
United States.
We believe that demand for our products and services will grow while continuing to be impacted by
current and future operating, economic, and industry conditions.
The Centers for Medicare and Medicaid Services,
or CMS, published “National Health Expenditure Data” indicating
that total national health care spending reached
approximately $4.1 trillion in 2020, or 19.7% 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.
The
latest projections begin after the latest historical year (2020) and go through
Government
Certain of our businesses involve the distribution, manufacturing,
importation, exportation, marketing and sale of,
and/or third party payment for, pharmaceuticals and/or medical devices, and in this regard, we
are subject to
extensive local, state, federal and foreign governmental laws and regulations,
including as applicable to our
wholesale distribution of pharmaceuticals and medical devices, manufacturing
activities, and as part of our
specialty home medical supply 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.
In addition, certain of our businesses must operate in compliance with
a variety of burdensome and complex billing
and record-keeping requirements in order to substantiate claims for payment under
federal, state and commercial
healthcare reimbursement programs.
One of these businesses was recently suspended by CMS from
receiving
payments from Medicare, although it is permitted to continue to perform
and bill for Medicare services.
The
amounts billed are being deposited in an escrow account pending resolution
of an audit.
We have not recognized
revenue for these services and have currently deferred $13 million in revenue
(including $8 million deferred during
the six months ended June 25, 2022 and $5 million deferred during
the three months ended December 25, 2021).
Government and private insurance programs fund a large portion of the total cost of medical
care, and there have
been efforts to limit such private and government insurance programs, including efforts,
thus far unsuccessful, to
seek repeal of the entire United States Patient Protection and Affordable Care Act,
as amended by the Health Care
and Education Reconciliation Act, each enacted in March 2010, (as amended,
the “ACA”).
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 generally subject to numerous laws and regulations that could
impact our financial performance,
and failure to comply with such laws or regulations could have a
material adverse effect on our business.
A more detailed discussion of governmental laws and regulations
is included in Management’s Discussion &
Analysis of Financial Condition and Results of Operations, contained in our
Annual Report on Form 10-K for the
fiscal year ended December 25, 2021, filed with the SEC on February
15, 2022.
Results of Operations
The following table summarizes the significant components of our operating
results for the three and six months
ended June 25, 2022 and June 26, 2021 and cash flows for the six
months ended June 25, 2022 and June 26, 2021:
Three Months Ended
Six Months Ended
June 25,
June 26,
June 25,
June 26,
2022
2021
2022
2021
Operating results:
Net sales
$
3,030
$
2,967
$
6,209
$
5,892
Cost of sales
2,085
2,076
4,291
4,110
Gross profit
1,918
1,782
Operating expenses:
Selling, general and administrative
1,362
1,249
Depreciation and amortization
Restructuring costs
-
-
Operating income
$
$
$
$
Other expense, net
$
(6)
$
(5)
$
(11)
$
(9)
Net income
Net income attributable to Henry Schein, Inc.
Six Months Ended
June 25,
June 26,
2022
2021
Cash flows:
Net cash provided by operating activities
$
$
Net cash used in investing activities
(59)
(341)
Net cash used in financing activities
(195)
(139)
Plans of Restructuring
On November 20, 2019, we committed to a contemplated restructuring
initiative intended to mitigate stranded costs
associated with the spin-off of our animal health business and to rationalize operations
and to provide expense
efficiencies.
These restructuring activities were completed in 2021.
During the three and six months ended June 26, 2021, we recorded
restructuring costs of $1 million and $4 million,
respectively.
As of June 25, 2022 and December 25, 2021, the remaining
accrued balance for restructuring costs
was $1 million and $4 million, respectively.
On August 1, 2022, we committed to a restructuring plan focused on
funding the priorities of the strategic plan and
streamlining operations and other initiatives to increase efficiency.
We expect to record restructuring charges in
2022 and 2023, however an estimate of the amount of these charges has not yet been
determined.
Any restructuring
charges are expected primarily to include severance pay and facility-related costs.
The expense savings realized
from this plan are expected to mainly affect 2023 and beyond.
Three Months Ended June 25, 2022 Compared to Three Months Ended June 26, 2021
Net Sales
Net sales were as follows:
June 25,
% of
June 26,
% of
Increase / (Decrease)
2022
Total
2021
Total
$
%
Health care distribution
(1)
Dental
$
1,853
61.1
%
$
1,912
64.4
%
$
(59)
(3.1)
%
Medical
32.9
30.4
10.3
Total health care distribution
2,849
94.0
2,814
94.8
1.2
Technology and value-added services
(2)
6.0
5.2
18.1
Total
$
3,030
100.0
%
$
2,967
100.0
%
$
2.1
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic
products), diagnostic tests, infection-control products, PPE and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
The 2.1% increase in net sales includes an increase of 4.5% in local currency
sales (2.4% increase in internally
generated sales and 2.1% growth from acquisitions) partially offset by a decrease
of 2.4% related to foreign
currency exchange.
We estimate that sales of PPE and COVID-19 related products were approximately $259
million, a decrease of 28.8%
versus the prior year.
Excluding PPE and COVID-19 related products, the estimated
increase in internally generated local currency sales was 6.7%.
The 3.1% decrease in dental net sales includes an increase of 0.4% in local
currency sales (0.3% decrease in
internally generated sales and 0.7% growth from acquisitions) offset by a decrease
of 3.5% related to foreign
currency exchange.
The 0.4% increase in local currency sales was attributable to a decrease in dental
consumable
merchandise sales of 1.3% (2.2% decrease in internally generated
sales and 0.9% growth from acquisitions) and an
increase in dental equipment and service sales of 7.0%,
all of which was attributable to growth in internally
generated sales.
Our sales growth in dental merchandise was lower than our sales
growth in dental equipment
during the three months ended June 25, 2022 due to lower patient traffic related to
an increase in patient
appointment cancellations compared to the comparable prior-year period as well as
a decrease in PPE sales.
Dental
equipment sales increased in both our North American and international
markets, which is primarily attributable to
increased demand and strong order backlog.
We estimate that our dental business recorded sales of approximately
$114 million of PPE and COVID-19 related products, an estimated decrease of 37.2%
versus the prior year.
Excluding PPE and COVID-19 related products, the estimated increase in
internally generated local currency dental
sales was 3.5%.
The 10.3% increase in medical net sales includes an increase of 10.6%
in local currency sales (6.7% increase in
internally generated sales and 3.9% growth from acquisitions), partially offset by
a decrease of 0.3% related to
foreign currency exchange.
We estimate that our medical business recorded sales of approximately $145 million of
PPE and COVID-19 related products for the three months ended June 25, 2022,
an estimated decrease of 20.4%
compared to the prior year.
Excluding sales of PPE and COVID-19 related products,
the estimated increase in
internally generated local currency medical sales was 13.6%.
The 18.1% increase in technology and value-added services net sales includes
an increase of 19.6%
in local
currency sales (10.8% increase in internally generated sales and 8.8%
growth from acquisitions) partially offset by
a decrease of 1.5% related to foreign currency exchange.
During the quarter ended June 25, 2022, the trend for
transactional software sales improved compared to the prior year, as we increased the number of users,
generating
demand for our sales cycle management solutions, and also
from cloud-based solutions that drive practice
efficiency and patient engagement.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
June 25,
Gross
June 26,
Gross
Increase
2022
Margin %
2021
Margin %
$
%
Health care distribution
$
29.0
%
$
27.9
%
$
5.2
%
Technology and value-added services
65.9
68.9
13.0
Total
$
31.2
$
30.0
$
6.2
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 development.
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 total gross profit margins of all products.
With respect to customer mix, sales to our large-
group customers are typically completed at lower gross margins due to the higher
volumes sold as opposed to the
gross margin on sales to office-based practitioners, who normally purchase lower volumes at
greater frequencies.
Health care distribution gross profit increased $40 million, or 5.2%, primarily
due to the increase in net sales
discussed above.
The overall increase in our health care distribution gross profit
includes a $34 million increase in
the gross margin rates due to product mix and supplier rebates and $18 million additional
gross profit from
acquisitions, partially offset by a decrease of $12 million from internally generated
operations.
Technology and value-added services gross profit increased $14 million, or 13.0%, due to an $11 million increase
in internally generated sales and $5 million additional gross profit from acquisitions,
partially offset by a decrease
of $2 million from gross margin rates due to product mix.
Technology and value-added services gross profit
margin decreased to 65.9% from 68.9% primarily due to our continued investment
in product development and
customer service.
Selling, General and Administrative
Selling, general and administrative expenses by segment and in
total were as follows:
% of
% of
June 25,
Respective
June 26,
Respective
Increase
2022
Net Sales
2021
Net Sales
$
%
Health care distribution
$
22.4
%
$
21.4
%
$
5.6
%
Technology and value-added services
48.5
50.1
14.4
Total
$
23.9
$
22.9
$
6.6
Selling, general and administrative expenses (including restructuring costs
in the three months ended June 26,
- increased $44 million, or 6.6%.
The $33 million increase in selling, general and administrative expenses within
our health care distribution segment
was attributable to an increase of $18 million of operating costs and an increase
of $17 million of additional costs
from acquired companies, partially offset by a decrease of $1 million in restructuring costs.
The $11 million
increase in selling, general and administrative expenses within our technology
and value-added services segment
was attributable to an increase of $6 million of operating costs and an
increase of $5 million of additional costs
from acquired companies.
As a component of total selling, general and administrative expenses,
selling expenses increased $22 million, or
5.4% to $433 million primarily due to an increase in payroll and payroll
related costs and travel and convention
expenses.
As a percentage of net sales, selling expenses increased to 14.3%
from 13.8%.
As a component of total selling, general and administrative expenses, general
and administrative expenses
increased $22 million, or 8.5% to $292 million primarily due to an increase
in payroll and payroll related costs and
travel and convention expenses.
As a percentage of net sales, general and administrative expenses
increased to
9.6% from 9.1%.
Other Expense, Net
Other expense, net, was as follows:
June 25,
June 26,
Variance
2022
2021
$
%
Interest income
$
$
$
120.8
%
Interest expense
(9)
(7)
(2)
(30.4)
Other, net
-
(1)
(90.3)
Other expense, net
$
(6)
$
(5)
$
(1)
(13.3)
Interest income increased $2 million and interest expense increased
$2 million primarily due to increased interest
rates.
Income Taxes
For the three months ended June 25, 2022 our effective tax rate was 23.8% compared
to 23.4%
for the prior year
period.
The difference between our effective tax rates and the federal statutory tax rate for
the three months ended
June 25, 2022 primarily relates to state and foreign income taxes and interest
expense.
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.
Six Months Ended June 25, 2022 Compared to Six Months Ended June 26, 2021
Net Sales
Net sales were as follows:
June 25,
% of
June 26,
% of
Increase/(Decrease)
2022
Total
2021
Total
$
%
Health care distribution
(1)
Dental
$
3,681
59.3
%
$
3,701
62.8
%
$
(20)
(0.5)
%
Medical
2,168
34.9
1,893
32.1
14.5
Total health care distribution
5,849
94.2
5,594
94.9
4.6
Technology and value-added services
(2)
5.8
5.1
20.7
Total
$
6,209
100.0
%
$
5,892
100.0
%
$
5.4
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic
products), diagnostic tests, infection-control products, PPE and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
The 5.4% increase in net sales includes an increase of 7.3% in local currency
revenue (5.0% increase in internally
generated revenue and 2.3% growth from acquisitions) partially offset by a decrease of
1.9% related to foreign
currency exchange.
We estimate that sales for the six months ended June 25, 2022 of PPE and COVID-19 related
products were approximately $747 million, an estimated decrease of 10.1%
versus the prior year.
Excluding PPE
and COVID-19 related products, the estimated increase in internally generated
local
currency sales was 7.5%.
The 0.5% decrease in dental net sales includes an increase of 2.3% in
local currency revenue (1.6% increase in
internally generated revenue and 0.7% growth from acquisitions) partially
offset by a decrease of 2.8% related to
foreign currency exchange.
The 2.3% increase in local currency sales was attributable to an increase in dental
consumable merchandise revenue of 0.5% (0.5% decrease in internally generated
revenue and 1.0% growth from
acquisitions), and an increase in dental equipment sales and service revenues
of 9.4% (9.3% increase in internally
generated revenue and 0.1% growth from acquisitions).
Our sales growth in dental merchandise was lower than our
sales growth in dental equipment during the three months ended June 25,
2022 due to lower patient traffic
compared to the comparable prior-year period as well as a decrease in PPE sales.
Dental equipment sales increased
in both our North American and international markets, which
is primarily attributable to increased demand and
strong order backlog.
We estimate that global dental sales for the six months ended June 25, 2022 of PPE and
COVID-19 related products were approximately $258 million,
an estimated decrease of 26.6% versus the prior
year.
Excluding PPE and COVID-19 related products, the estimated
increase in internally generated local currency
dental sales was 4.4%.
The 14.5% increase in medical net sales is attributable to an increase of
14.7% in local currency growth (10.9%
increase in internally generated revenue and 3.8% growth from acquisitions)
partially offset by a decrease of 0.2%
related to foreign currency exchange.
Globally, we estimate our medical business recorded sales of approximately
$489 million sales of such PPE and other COVID-19 related products
for the six months ended June 25, 2022, an
increase of approximately 1.9%
compared to the prior year.
Excluding PPE and COVID-19 related products, the
estimated increase in internally generated local currency medical sales
was 14.1%.
The 20.7% increase in technology and value-added services net sales
is attributable to an increase of 21.8% in local
currency revenue (11.0% increase in internally generated revenue and 10.8% growth from acquisitions) partially
offset by a decrease of 1.1% related to foreign currency exchange.
During the six months ended June 25, 2022, the
trend for transactional software sales improved as we increased the number of
users, generating demand for our
sales cycle management solutions, and also from cloud-based solutions that
drive practice efficiency and patient
engagement.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
June 25,
Gross
June 26,
Gross
Increase
2022
Margin %
2021
Margin %
$
%
Health care distribution
$
1,683
28.8
%
$
1,575
28.1
%
$
6.9
%
Technology and value-added services
65.4
69.6
13.4
Total
$
1,918
30.9
$
1,782
30.2
$
7.7
As a result of different practices of categorizing costs associated with distribution networks
throughout our
industry, our gross margins may not necessarily be comparable to other distribution companies.
Additionally, we
realize substantially higher gross margin percentages in our technology and value-added
services segment than in
our health care distribution segment.
These higher gross margins result from being both the developer and seller of
software products and services, as well as certain financial services.
The software industry typically realizes higher
gross margins to recover investments in research and development.
Within our health care distribution segment, gross profit margins may vary 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 total gross profit margins of all products.
With respect to customer mix, sales to our large-
group customers are typically completed at lower gross margins due to the higher
volumes sold as opposed to the
gross margin on sales to office-based practitioners, who normally purchase lower volumes at
greater frequencies.
Health care distribution gross profit increased $108 million, or 6.9% primarily
due to the increase in net sales
discussed above.
In addition, health care distribution gross profit margin benefitted from supplier
rebates due to
increased purchase volumes compared to the comparable prior-year period.
The overall increase in our health care
distribution gross profit is attributable to a $46 million increase in gross profit
due to the increase in the gross
margin rates, $37 million additional gross profit from acquisitions and $25 million
increase in internally generated
revenue.
Technology and value-added services gross profit increased $28 million, or 13.4%, attributable to an increase of
$20 million in internally generated revenue and $14 million additional
gross profit from acquisitions,
partially
offset by a $6 million decrease in gross margin rates.
Technology and value-added services gross profit margin
decreased to 65.4% from 69.6% primarily due to lower gross margins of recently
acquired companies in the
business services sector and our continued investment in product
development and customer service.
Selling, General and Administrative
Selling, general and administrative expenses by segment and in
total were as follows:
% of
% of
June 25,
Respective
June 26,
Respective
Increase
2022
Net Sales
2021
Net Sales
$
%
Health care distribution
$
1,283
21.9
%
$
1,196
21.4
%
$
7.4
%
Technology and value-added services
47.5
49.1
16.7
Total
$
1,454
23.4
$
1,342
22.8
$
8.4
Selling, general and administrative expenses (including restructuring costs)
increased $112 million, or 8.4%.
The $87 million increase in selling, general and administrative expenses within
our health care distribution segment
was attributable to an increase of $53 million of operating costs and an increase
of $38 million of additional costs
from acquired companies, partially offset by a decrease of $4 million in restructuring costs.
The $25 million
increase in selling, general and administrative expenses within our technology
and value-added services segment
was attributable to an increase of $13 million of operating costs and an increase
of $12 million of additional costs
from acquired companies.
As a component of total selling, general and administrative expenses, selling
expenses increased $79 million, or
10.0% to $875 million, primarily due to an increase in payroll and payroll related
costs and travel and convention
expenses.
As a percentage of net sales, selling expenses increased to 14.1%
from 13.5%.
As a component of total selling, general and administrative expenses, general
and administrative expenses
increased $33 million, or 6.1% to $579 million, primarily due to an increase
in payroll and payroll related costs and
travel and convention expenses.
As a percentage of net sales, general and administrative expenses
remained
consistent at 9.3%.
Other Expense, Net
Other expense, net, was as follows:
June 25,
June 26,
Variance
2022
2021
$
%
Interest income
$
$
$
47.6
%
Interest expense
(16)
(13)
(3)
(23.0)
Other, net
-
(1)
(110.0)
Other expense, net
$
(11)
$
(9)
$
(2)
(23.6)
Interest income increased $2 million and interest expense increased
$3 million primarily due to increased interest
rates.
Income Taxes
For the six months ended June 25, 2022, our effective tax rate was 23.9% compared
to 24.3% for the prior year
period.
The difference between our effective tax rate and the federal statutory tax rate for
the six months ended
June 25, 2022 primarily relates to state and foreign income taxes and interest
expense as well as share-based
compensation.
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.
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 April 2020, but were resumed in early
March 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.
We finance our business primarily through cash generated from our operations, revolving credit facilities and debt
placements.
Please see
for further information.
Our ability to generate sufficient cash flows from
operations is dependent on the continued demand of our customers for
our products and services, and access to
products and services from our suppliers.
Our business requires a substantial investment in working capital, which
is susceptible to fluctuations during the
year as a result of inventory purchase patterns and seasonal demands.
Inventory purchase activity is a function of
sales activity, special inventory forward buy-in opportunities and our desired level of inventory.
We anticipate
future increases in our working capital requirements.
We finance our business to provide adequate funding for at least 12 months.
Funding requirements are based on
forecasted profitability and working capital needs, which, on occasion, may
change.
Consequently, we may change
our funding structure to reflect any new requirements.
We believe that our cash and cash equivalents, our ability to access private debt markets and public equity markets,
and our available funds under existing credit facilities provide us with
sufficient liquidity to meet our currently
foreseeable short-term and long-term capital needs.
Net cash provided by operating activities was $250 million for the
six months ended June 25, 2022, compared to
net cash provided by operating activities of $222 million for the comparable
prior year period.
The net change of
$28 million was primarily attributable to higher net income and increased
working capital, specifically a decrease in
inventory levels of PPE and COVID-19 related products.
These working capital increases were partially offset by
reduced accounts payable and accrued expenses.
Net cash used in investing activities was $59 million for the six
months ended June 25, 2022, compared to $341
million for the comparable prior year period.
The net change of $282 million was primarily attributable to
decreased payments for equity investments and business acquisitions.
Net cash used in financing activities was $195 million for the
six months ended June 25, 2022, compared to net
cash used in financing activities of $139 million for the comparable
prior year period.
The net change of $56
million was primarily due to reduced net borrowings from debt, partially
offset by decreased repurchases of
common stock.
The following table summarizes selected measures of liquidity and capital
resources:
June 25,
December 25,
2022
2021
Cash and cash equivalents
$
$
Working
capital
(1)
1,713
1,537
Debt:
Bank credit lines
$
$
Current maturities of long-term debt
Long-term debt
Total debt
$
$
Leases:
Current operating lease liabilities
$
$
Non-current operating lease liabilities
(1)
Includes $76 million and $138 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitization at June 25, 2022 and December 25, 2021, 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 decreased
to 42.2 days as of June 25, 2022 from
42.3 days as of June 26, 2021.
During the six months ended June 25, 2022, we wrote off approximately $4
million
of fully reserved accounts receivable against our trade receivable reserve.
Our inventory turns from operations
decreased to 4.6 as of June 25, 2022 from 5.1 as of June 26, 2021.
Our working capital accounts may be impacted
by current and future economic conditions.
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 19 years, some of
which may include options to extend the leases for up to 10 years.
As of June 25, 2022, our right-of-use assets
related to operating leases were $327 million and our current and non-current
operating lease liabilities were $74
million and $276 million, respectively.
Stock Repurchases
From March 3, 2003 through June 25, 2022, we repurchased $4.1 billion,
or 82,414,390 shares, under our common
stock repurchase programs, with $90 million available as of June 25, 2022
for future common stock share
repurchases.
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 25, 2021,
except accounting policies adopted
as of December 26, 2021, which are discussed in
Note 2-Critical Accounting Policies, Accounting Pronouncements
Adopted and Recently Issued Accounting Standards
of the Notes to the Condensed Consolidated Financial
Statements included under Item 1.
Accounting Standards Update
For a discussion of accounting standards updates that have been adopted
or will be adopted, see
Accounting Policies, Accounting Pronouncements Adopted
and Recently Issued Accounting Standards of the Notes
to the Condensed Consolidated Financial Statements included under Item 1.
Item 3. QUANTITATIVE
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our exposure to market risk
from that disclosed in Item 7A of our Annual
Report on Form 10-K for the year ended December 25, 2021.
Item 4. CONTROLS AND PROCEDURES
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including
our principal executive officer and
principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report as such
term is defined in Rules 13a-15(e)
and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”).
Based
on this evaluation, our management, including our principal executive
officer and principal financial officer,
concluded that our disclosure controls and procedures were effective as of June 25, 2022,
to ensure that all material
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is accumulated
and communicated to them as appropriate to allow timely decisions
regarding required disclosure and that all such
information is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules
and forms.
Changes in Internal Control over Financial Reporting
The continued acquisition integrations and systems implementation activity
carried over from prior quarters when
considered in the aggregate, represents a material change in our
internal control over financial reporting.
During the quarter ended June 25, 2022, post-acquisition integration
related activities continued for our dental and
medical businesses acquired during prior quarters.
These acquisitions, the majority of which utilize separate
information and financial accounting systems, have been included
in our condensed consolidated financial
statements since their respective dates of acquisition.
Additionally, we continued systems implementation activities
related to the upgrade of the warehouse management system
for our Australian dental business.
All continued acquisition integrations and systems implementation activity
involve necessary and appropriate
change-management controls that are considered in our quarterly assessment of
the design and operating
effectiveness of our internal control over financial reporting.
Limitations of the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance
that the objectives of the internal control system are met.
Because of the inherent limitations of any internal control
system, no evaluation of controls can provide absolute assurance that
all control issues, if any, within a company
have been detected.
PART
II.
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
For a discussion of Legal Proceedings, see
of the Notes to the Condensed Consolidated
Financial Statements included under Item 1.
Item 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in
Part 1, Item 1A, of our Annual Report on
Form 10-K for the year ended December 25, 2021.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
Purchases of equity securities by the issuer
Our share repurchase program announced on March 3, 2003
, originally allowed us to repurchase up to two million
shares pre-stock splits (eight million shares post-stock splits) of our common
stock, which represented
approximately 2.3% of the shares outstanding at the commencement of
the program.
Subsequent additional
increases totaling $4.1 billion, authorized by our Board of Directors,
to the repurchase program provide for a total
of $4.2 billion of shares of our common stock to be repurchased under this
program.
As of June 25, 2022, we had repurchased approximately $4.1 billion
of common stock (82,414,390 shares) under
these initiatives, with $90 million available for future common stock
share repurchases.
The following table summarizes repurchases of our common stock
under our stock repurchase program during the
fiscal quarter ended June 25, 2022.
Total Number
Maximum Number
Total
of Shares
of Shares
Number
Average
Purchased as Part
that May Yet
of Shares
Price Paid
of Our Publicly
Be Purchased Under
Fiscal Month
Purchased (1)
Per Share
Announced Program
Our Program (2)
3/27/2022 through 4/23/2022
-
$
-
-
2,291,215
4/24/2022 through 5/28/2022
613,265
84.12
613,265
1,726,511
5/29/2022 through 6/25/2022
732,132
79.16
732,132
1,170,369
1,345,397
1,345,397
(1)
All repurchases were executed in the open market under our existing publicly announced authorized program.
(2)
The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the
closing price of our common stock at that time.
This table excludes shares withheld from employees to satisfy minimum tax withholding
requirements for equity-based transactions.
Item 5. OTHER INFORMATION
OTHER INFORMATION
On August 1, 2022, we committed to a restructuring plan focused on
funding the priorities of the strategic plan and
streamlining operations and other initiatives to increase efficiency.
We expect to record restructuring charges in
2022 and 2023, however an estimate of the amount of these charges has not yet been
determined.
Any restructuring
charges
are expected primarily to include severance pay and facility-related
costs.
Item 6. EXHIBITS
EXHIBITS
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+
101.INS
Inline XBRL Instance Document - the instance document does not appear
in the
Interactive Data File because its XBRL tags are embedded within the
Inline
XBRL document+
101.SCH
Inline XBRL Taxonomy Extension Schema Document+
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document+
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document+
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document+
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document+
The cover page of Henry Schein, Inc.’s Quarterly Report on Form 10-Q for the
quarter ended June 25, 2022, formatted in Inline XBRL (included within
Exhibit 101 attachments).+
+ Filed or furnished herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to
be signed on its behalf by the undersigned thereunto duly authorized.
Henry Schein, Inc.
(Registrant)
By: /s/ Ronald N. South
Ronald N. South
Senior Vice President and
Chief Financial Officer
(Authorized Signatory and Principal Financial
and Accounting Officer)
Dated: August 2, 2022