filings.toolsHenry Schein 10-Q 2022-09-24
Filed 2022-11-01. 7 sections, 139K 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
September 24, 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 October 24, 2022,
there were
135,547,575
shares of the registrant’s common stock outstanding.
HENRY SCHEIN, INC.
INDEX
Page
Condensed Consolidated Financial Statements:
Condensed Balance Sheets as of September 24, 2022 and December 25, 2021
Condensed Statements of Income for the three and nine months ended
September 24, 2022 and September 25, 2021
Condensed Statements of Comprehensive Income for the three and nine months ended
September 24, 2022 and September 25, 2021
Condensed Statement of Changes in Stockholders' Equity for the three months ended
September 24, 2022 and September 25, 2021
Condensed Statement of Changes in Stockholders' Equity for the nine months ended
September 24, 2022 and September 25, 2021
Condensed Statements of Cash Flows for the nine months ended
September 24, 2022 and September 25, 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 and Integration Costs
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)
September 24,
December 25,
2022
2021
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
$
Accounts receivable, net of reserves of $
and $
1,507
1,452
Inventories, net
1,818
1,861
Prepaid expenses and other
Total current assets
3,957
3,844
Property and equipment, net
Operating lease right-of-use assets
Goodwill
2,870
2,854
Other intangibles, net
Investments and other
Total assets
$
8,534
$
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
2,146
2,307
Long-term debt
Deferred income taxes
Operating lease liabilities
Other liabilities
Total liabilities
3,726
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,
135,258,887
outstanding on September 24, 2022 and
137,145,558
outstanding on December 25, 2021
Additional paid-in capital
-
-
Retained earnings
3,922
3,595
Accumulated other comprehensive loss
(312)
(171)
Total Henry Schein, Inc. stockholders' equity
3,611
3,425
Noncontrolling interests
Total stockholders' equity
4,245
4,063
Total liabilities, redeemable noncontrolling
interests and stockholders' equity
$
8,534
$
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
Nine Months Ended
September 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Net sales
$
3,067
$
3,178
$
9,276
$
9,070
Cost of sales
2,153
2,266
6,444
6,376
Gross profit
2,832
2,694
Operating expenses:
Selling, general and administrative
2,010
1,906
Depreciation and amortization
Restructuring and integration costs
-
Operating income
Other income (expense):
Interest income
Interest expense
(11)
(7)
(27)
(20)
Other, net
-
Income before taxes, equity in earnings of affiliates
and noncontrolling interests
Income taxes
(46)
(50)
(155)
(154)
Equity in earnings of affiliates
Gain on sale of equity investment
-
-
Net income
Less: Net income attributable to noncontrolling interests
(12)
(7)
(24)
(24)
Net income attributable to Henry Schein, Inc.
$
$
$
$
Earnings per share attributable to Henry Schein, Inc.:
Basic
$
1.10
$
1.16
$
3.59
$
3.44
Diluted
$
1.09
$
1.15
$
3.55
$
3.40
Weighted-average common
shares outstanding:
Basic
135,608,678
139,377,237
136,731,413
140,661,182
Diluted
137,084,049
141,079,337
138,488,254
142,178,702
See accompanying notes.
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(unaudited, in millions)
Three Months Ended
Nine Months Ended
September 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Net income
$
$
$
$
Other comprehensive loss, net of tax:
Foreign currency translation loss
(89)
(40)
(176)
(40)
Unrealized gain from foreign currency hedging
activities
Pension adjustment gain
-
Other comprehensive loss, net of tax
(77)
(36)
(155)
(34)
Comprehensive income
Comprehensive income attributable to noncontrolling
interests:
Net income
(12)
(7)
(24)
(24)
Foreign currency translation loss
Comprehensive income attributable to noncontrolling
interests
(6)
(2)
(10)
(20)
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, June 25, 2022
136,439,560
$
$
-
$
3,834
$
(241)
$
$
4,227
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
(83)
-
(83)
Unrealized gain from foreign currency hedging activities,
net of tax of $
-
-
-
-
-
Pension adjustment gain, net of tax of $
-
-
-
-
-
Dividends paid
-
-
-
-
-
(1)
(1)
Change in fair value of redeemable securities
-
-
-
-
-
Repurchases and retirement of common stock
(1,183,729)
-
(12)
(78)
-
-
(90)
Stock-based compensation expense
3,640
-
-
-
-
Stock issued upon exercise of stock options
-
-
-
-
-
-
Shares withheld for payroll taxes
(1,194)
-
(1)
-
-
-
(1)
Settlement of stock-based compensation awards
-
-
-
-
Transfer of charges in excess of
capital
-
-
(16)
-
-
-
Balance, September 24, 2022
135,258,887
$
$
-
$
3,922
$
(312)
$
$
4,245
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, June 26, 2021
139,780,841
$
$
-
$
3,466
$
(107)
$
$
4,006
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
(35)
-
(35)
Unrealized gain from foreign currency hedging activities,
net of tax of $
-
-
-
-
-
Change in fair value of redeemable securities
-
-
(11)
-
-
-
(11)
Repurchases and retirement of common stock
(651,289)
-
(7)
(43)
-
-
(50)
Stock-based compensation expense
-
-
-
-
Shares withheld for payroll taxes
(20)
-
-
-
-
-
-
Transfer of charges in excess of
capital
-
-
(10)
-
-
-
Balance, September 25, 2021
139,129,543
$
$
-
$
3,595
$
(138)
$
$
4,106
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)
-
-
-
-
(162)
(1)
(163)
Unrealized gain from foreign currency hedging activities,
net of tax of $
-
-
-
-
-
Pension adjustment gain, net of tax of $
-
-
-
-
-
Dividends paid
-
-
-
-
-
(1)
(1)
Purchase of noncontrolling interests
-
-
-
-
-
(7)
(7)
Change in fair value of redeemable securities
-
-
-
-
-
Repurchases and retirement of common stock
(2,529,126)
-
(28)
(172)
-
-
(200)
Stock-based compensation expense
958,539
-
-
-
-
Stock issued upon exercise of stock options
30,424
-
-
-
-
Shares withheld for payroll taxes
(343,541)
-
(30)
-
-
-
(30)
Settlement of stock-based compensation awards
(2,967)
-
-
-
-
Transfer of charges in excess of
capital
-
-
(8)
-
-
-
Balance, September 24, 2022
135,258,887
$
$
-
$
3,922
$
(312)
$
$
4,245
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retaine
Showing the first 8K of 72K 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 OPERATI
ONS
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 supply chain disruptions
will adversely impact our business,
the impact of integration and restructuring programs as well as of any
future acquisitions, general economic
conditions including exchange rates, inflation and recession, 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,
recession, fluctuations in energy pricing and the value of the U.S. dollar as compared
to foreign currencies, and
changes to other economic indicators, international trade agreements, potential
trade barriers and terrorism; 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
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 and COVID-19 test kits.
During the six months ended June 25,
2022 we experienced a decrease in the sales volume of PPE and
COVID-19
test kits.
During the three months ended September 24, 2022, we continued
to experience a decrease in the sales
volume of PPE and COVID-19 test kits compared with the same period
in the prior year.
The volatility in sales of
COVID-19 test kits has moderated, albeit at a significantly
lower level of sales compared with 2021,
resulting in us
recording an inventory obsolescence reserve of $12 million for COVID-19
test kits during the quarter ended
September 24, 2022.
While the U.S. economy has recently experienced inflationary
pressures and strengthening of the U.S dollar, their
impacts have not been material to our results of operations, and
we currently expect moderating of inflation and
foreign currency fluctuations.
Though inflation impacts both our revenues and costs, the depth and
breadth of our
product portfolio often allows us to offer lower-cost national brand solutions
or corporate brand alternatives to our
more price-sensitive customers who are unable to absorb price
increases, thus positioning us to protect our gross
profit.
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 approximately 22,000 people (of which approximately
10,300 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 corporate brand products and proprietary specialty
products and solutions (including
implant, orthodontic and endodontic products).
In addition, customers have access to a wide range of services,
including software and other value-added services.
Industry Overview
In recent years, the health care industry has increasingly focused on cost containment.
This trend has benefited
distributors capable of providing a broad array of products and services at
low prices.
It also has accelerated the
growth of HMOs, group practices, other managed care accounts and collective
buying groups, which, in addition to
their emphasis on obtaining products at competitive prices, tend to
favor distributors capable of providing
specialized management information support.
We believe that the trend towards cost containment has the potential
to favorably affect demand for technology solutions, including software, which
can enhance the efficiency and
facilitation of practice management.
Our operating results in recent years have been significantly affected by strategies
and transactions that we
undertook to expand our business, domestically and internationally, in part to address significant changes
in the
health care industry, including consolidation of health care distribution companies, health care reform, trends
toward managed care, cuts in Medicare and collective purchasing arrangements.
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, 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 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 suspended in October 2021 by CMS
from
receiving payments from Medicare, although it was permitted to continue
to perform and bill for Medicare services.
On September 30, 2022, CMS terminated the suspension of Medicare payments.
As a result of the termination of
the suspension, we recognized $13 million of previously deferred revenue
during the quarter ended September 24,
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 nine months
ended September 24, 2022 and September 25, 2021 and cash flows for
the nine months ended September 24, 2022
and September 25, 2021:
Three
Months Ended
Nine Months Ended
September 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Operating results:
Net sales
$
3,067
$
3,178
$
9,276
$
9,070
Cost of sales
2,153
2,266
6,444
6,376
Gross profit
2,832
2,694
Operating expenses:
Selling, general and administrative
2,010
1,906
Depreciation and amortization
Restructuring and integration costs
-
Operating income
$
$
$
$
Other expense, net
$
(6)
$
(5)
$
(17)
$
(14)
Gain on sale of equity investment
-
-
Net income
Net income attributable to Henry Schein, Inc.
Nine Months Ended
September 24,
September 25,
2022
2021
Cash flows:
Net cash provided by operating activities
$
$
Net cash used in investing activities
(211)
(479)
Net cash used in financing activities
(121)
(254)
Plans of Restructuring and Integration Costs
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.
This plan also includes the rationalization of the
Company’s office space in North America as a result of transitioning to a partial and full remote work model for
certain employees.
We recorded restructuring charges of $9 million primarily related to severance and employee-
related costs and lease right-of-use and other long-lived asset accelerated depreciation
and amortization and lease
exit costs.
We expect this initiative to extend through 2023.
We are currently unable in good faith to make a
determination of an estimate of the amount or range of amounts expected to
be incurred in connection with these
activities, both with respect to each major type of cost associated
therewith and with respect to the total cost, or an
estimate of the amount or range of amounts that will result in future
cash expenditures.
The expense savings
realized from this plan are expected to mainly affect 2023 and beyond.
On August 26, 2022, we acquired Midway Dental Supply.
In connection with this acquisition, during the three
months ended September 24, 2022 we recorded integration costs
of $1 million related to one-time employee and
other costs, as well as restructuring charges of $2 million, which are included
in the $9 million of restructuring
charges discussed above.
On November 20, 2019, we committed to a contemplated restructuring
initiative intended to mitigate stranded costs
associated with the spin-off of our animal health business and to rationalize operations
and provide expense
efficiencies.
These activities were originally expected to be completed by
the end of 2020 but we extended them to
the end of 2021 in light of the changes to the business environment brought
on by the COVID-19 pandemic.
The
restructuring activities under this prior initiative were completed
in 2021.
Three Months Ended September 24, 2022 Compared to Three
Months Ended September 25, 2021
Net Sales
Net sales were as follows:
September 24,
% of
September 25,
% of
Increase / (Decrease)
2022
Total
2021
Total
$
%
Health care distribution
(1)
Dental
$
1,785
58.2
%
$
1,823
57.3
%
$
(38)
(2.1)
%
Medical
1,106
36.0
1,185
37.3
(79)
(6.7)
Total health care distribution
2,891
94.2
3,008
94.6
(117)
(3.9)
Technology and value-added services
(2)
5.8
5.4
3.8
Total
$
3,067
100.0
%
$
3,178
100.0
%
$
(111)
(3.5)
(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.
Note: Percentages for Net Sales; Gross Profit; Selling, General and Administrative; Other Expense, Net; and Income Taxes are based on
actual values and may not recalculate due to rounding.
The 3.5% decrease in net sales includes a decrease of 0.6% in local
currency sales (2.4% decrease in internally
generated sales partially offset by 1.8% growth from acquisitions) and a decrease of
2.9% related to foreign
currency exchange.
We estimate that sales of PPE and COVID-19 test kits were approximately $244 million, a
decrease of 51.6%
versus the prior year.
Excluding PPE and COVID-19 test kits, the estimated increase in
internally generated local currency sales was 6.8%.
The 2.1% decrease in dental net sales includes an increase of 2.6% in local
currency sales (1.2% increase in
internally generated sales and 1.4% growth from acquisitions) offset by a decrease
of 4.7% related to foreign
currency exchange.
The 2.6% increase in local currency sales was attributable to an increase in dental
consumable
merchandise sales of 1.0% (1.8% growth from acquisitions and 0.8% decrease
in internally generated sales)
and an
increase in dental equipment and service
sales of 8.3% (8.0% growth in internally generated sales
and 0.3% growth
from acquisitions).
Our sales growth in dental merchandise was lower than our sales growth
in dental equipment
during the three months ended September 24, 2022 primarily due to a decrease
in PPE sales.
Dental equipment
sales increased in both our North American and international markets,
primarily attributable to increased demand.
We estimate that our dental business recorded sales of approximately $94 million of PPE, an estimated decrease of
44.9% versus the prior year.
Excluding PPE, the estimated increase in internally generated local currency
dental
sales was 5.8%.
The 6.7% decrease in medical net sales includes a decrease of 6.4% in local
currency sales (8.8% decrease in
internally generated sales partially offset by 2.4%
growth from acquisitions), and a decrease of 0.3% related to
foreign currency exchange.
Our medical business was impacted by a continuing decrease in sales of PPE
and
COVID-19 test kits, partially offset by strong growth in sales of pharmaceutical,
medical equipment and point-of-
care diagnostic products.
We estimate that our medical business recorded sales of approximately $150 million of
PPE and COVID-19 test kits for the three months ended September
24, 2022, an estimated decrease of 55.0%
compared to the prior year.
Excluding sales of PPE and COVID-19 test kits, the estimated
increase in internally
generated local currency medical sales was 9.3%.
The 3.8% increase in technology and value-added services net sales includes
an increase of 5.6% in local currency
sales (4.2% increase in internally generated sales and 1.4% growth
from acquisitions) partially offset by a decrease
of 1.8% related to foreign currency exchange.
During the quarter ended September 24, 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.
The increase in sales during the quarter ended September 24,
2022, was
partially offset by the expiration of a modestly profitable government contract
in one of our value-added services
businesses.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
September 24,
Gross
September 25,
Gross
Increase
2022
Margin %
2021
Margin %
$
%
Health care distribution
$
27.7
%
$
26.6
%
$
-
-
%
Technology and value-added services
65.0
66.1
2.0
Total
$
29.8
$
28.7
$
0.2
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 corporate brand 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.
Our health care distribution gross profit includes a $21 million increase
in the gross margin rates due to product mix
and $19 million additional gross profit from acquisitions,
partially offset by a decrease of $40 million in gross profit
from internally generated sales.
Technology and value-added services gross profit increased $2 million, or 2.0%, due to a $2 million increase in
gross profit from internally generated sales and $2 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 65.0% from 66.1% 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
September 24,
Respective
September 25,
Respective
Increase
2022
Net Sales
2021
Net Sales
$
%
Health care distribution
$
21.5
%
$
20.6
%
$
-
-
%
Technology and value-added services
47.2
47.4
3.2
Total
$
22.9
$
22.1
$
0.3
Selling, general and administrative expenses (including depreciation and
amortization; and restructuring and
integration costs in the three months ended September 24, 2022) increased
$2 million, or 0.3%.
Selling, general and administrative expenses within our health care distribution
segment had an increase of $18
million of additional
costs from acquired companies and an increase of $10 million in restructuring
and integration
costs, offset by a decrease of $28 million in internally generated operating costs.
The $2 million increase in selling,
general and administrative expenses within our technology and value-added services
segment was attributable to an
increase of $2 million of operating costs and an increase of $1 million of additional
costs from acquired companies,
partially offset by a decrease of $1 million in restructuring and integration costs.
As a component of total selling, general and administrative expenses, selling
expenses increased $12 million, or
3.0% to $424 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 13.8%
from 13.0%.
As a component of total selling, general and administrative expenses, general
and administrative expenses
decreased $10 million, or 3.6% to $279 million primarily due to a decrease
in payroll and payroll related costs,
partially offset by an increase in travel expenses.
As a percentage of net sales, general and administrative expenses
remained consistent at 9.1%.
Other Expense, Net
Other expense, net, was as follows:
September 24,
September 25,
Variance
2022
2021
$
%
Interest income
$
$
$
191.5
%
Interest expense
(11)
(7)
(4)
(67.1)
Other, net
-
127.6
Other expense, net
$
(6)
$
(5)
$
(1)
(25.0)
Interest income increased $2 million and interest expense increased
$4 million primarily due to increased interest
rates.
Income Taxes
For the three months ended September 24, 2022 our effective tax rate was 22.7%
compared to 23.9% for the prior
year period.
The difference between our effective tax rate and the federal statutory tax rate for
the three months
ended September 24, 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 September 25, 2021 was
primarily due to state and foreign income taxes, interest expense and tax
charges and credits associated with legal
entity reorganizations.
Gain on Sale of Equity Investment
In the third quarter of 2021 we received contingent proceeds of $10 million
from the 2019 sale of Hu-Friedy
resulting in the recognition of an additional after-tax gain of $7
million.
Nine Months Ended September 24, 2022 Compared to Nine Months Ended September
25, 2021
Net Sales
Net sales were as follows:
September 24,
% of
September 25,
% of
Increase/(Decrease)
2022
Total
2021
Total
$
%
Health care distribution
(1)
Dental
$
5,466
58.9
%
$
5,524
60.9
%
$
(58)
(1.1)
%
Medical
3,274
35.3
3,078
33.9
6.3
Total health care distribution
8,740
94.2
8,602
94.8
1.6
Technology and value-added services
(2)
5.8
5.2
14.5
Total
$
9,276
100.0
%
$
9,070
100.0
%
$
2.3
(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.
Note: Percentages for Net Sales; Gross Profit; Selling, General and Administrative; Other Expense, Net; and Income Taxes are based on
actual values and may not recalculate due to rounding.
The 2.3% 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 2.2% related to foreign
currency exchange.
We estimate that sales for the nine months ended September 24, 2022 of PPE and COVID-19
test kits were approximately $991 million, an estimated decrease of 25.8% versus
the prior year.
Excluding PPE
and COVID-19 test kits,
the estimated increase in internally generated local currency sales was 7.3%.
The 1.1% decrease in dental net sales includes an increase of 2.4% in
local currency sales (1.4% increase in
internally generated sales and 1.0% growth from acquisitions) offset by a decrease
of 3.5% related to foreign
currency exchange.
The 2.4% increase in local currency sales was attributable to an increase in dental
consumable
merchandise sales of 0.6% (1.2% growth from acquisitions partially
offset by 0.6% decrease in internally generated
sales), and an increase in dental equipment sales and service sales of
9.0% (8.9% increase in internally generated
sales and 0.1% growth from acquisitions).
Our sales growth in dental merchandise was lower than our sales
growth
in dental equipment during the nine months ended September 24,
2022 primarily due to a decrease in PPE sales.
Dental equipment sales increased in both our North American and international
markets, primarily due to increased
demand.
We estimate that global dental sales for the nine months ended September 24, 2022 of PPE were
approximately $352 million, an estimated decrease of 32.5% versus
the prior year.
Excluding PPE, the estimated
increase in internally generated local currency dental sales was 4.9%.
The 6.3% increase in medical net sales was attributable to an increase of 6.6%
in local currency sales (3.3%
increase in internally generated sales and 3.3% growth from acquisitions)
partially offset by a decrease of 0.3%
related to foreign currency exchange.
Globally, we estimate our medical business recorded sales of approximately
$639 million sales of PPE and COVID-19 test kits for the nine months ended September
24, 2022, a decrease of
approximately 21.4% compared to the prior year.
Excluding PPE and COVID-19 test kits, the estimated increase
in
internally generated local currency medical sales was 12.3%.
The 14.5% increase in technology and value-added services net sales
was attributable to an increase of 15.9% in
local currency sales (8.5% increase in internally generated sales and 7.4%
growth from acquisitions) partially offset
by a decrease of 1.4% related to foreign currency exchange.
During the nine months ended September 24, 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:
September 24,
Gross
September 25,
Gross
Increase
2022
Margin %
2021
Margin %
$
%
Health care distribution
$
2,482
28.4
%
$
2,374
27.6
%
$
4.6
%
Technology and value-added services
65.3
68.3
9.4
Total
$
2,832
30.5
$
2,694
29.7
$
5.1
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 corporate brand 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 4.6% 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 was attributable to a $68 million increase in gross
profit due to the increase in the gross
margin rates and $57 million additional gross profit from acquisitions,
partially offset by $17 million decrease in
gross profit from internally generated sales.
Technology and value-added services gross profit increased $30 million, or 9.4%, attributable to an increase of $23
million in gross profit from internally generated sales and $15
million additional gross profit from acquisitions,
partially offset by a $8 million decrease in gross margin rates.
Technology and value-added services gross profit
margin decreased to 65.3% from 68.3% 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
September 24,
Respective
September 25,
Respective
Increase
2022
Net Sales
2021
Net Sales
$
%
Health care distribution
$
1,903
21.8
%
$
1,816
21.1
%
$
4.8
%
Technology and value-added services
47.4
48.5
11.9
Total
$
2,157
23.3
$
2,043
22.5
$
5.6
Selling, general and administrative expenses (including depreciation and
amortization; and restructuring and
integration costs) increased $114 million, or 5.6%.
The $87 million increase in selling, general and administrative expenses within
our health care distribution segment
was attributable to an increase of $24 million in internally generated operating
costs, an increase of $56 million of
additional costs from acquired companies,
and an increase of $7 million in restructuring and integration costs.
The
$27 million increase in selling, general and administrative expenses
within our technology and value-added services
segment was attributable to an increase of $15 million in internally generated
operating costs and an increase of $13
million of additional costs from acquired companies,
partially offset by a decrease in restructuring costs of $1
million.
As a component of total selling, general and administrative expenses, selling
expenses increased $91 million, or
7.6% to $1,299 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 14.0%
from 13.3%.
As a component of total selling, general and administrative expenses, general
and administrative expenses
increased $23 million, or 2.7% to $858 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
9.3% from 9.2%.
Other Expense, Net
Other expense, net, was as follows:
September 24,
September 25,
Variance
2022
2021
$
%
Interest income
$
$
$
90.3
%
Interest expense
(27)
(20)
(7)
(37.9)
Other, net
-
(20.2)
Other expense, net
$
(17)
$
(14)
$
(3)
(24.1)
Interest income increased $4 million and interest expense increased
$7 million primarily due to increased interest
rates.
Income Taxes
For the nine months ended September 24, 2022, our effective tax rate was 23.5% compared to
24.2% for the prior
year period.
The difference between our effective tax rate and the federal statutory tax rate for the nine
months
ended September 24, 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 nine
months ended September 25, 2021 was primarily due to state and
foreign income taxes, interest expense and tax
charges and credits associated with legal entity reorganizations.
Gain on Sale of Equity Investment
In the third quarter of 2021 we received contingent proceeds of $10 million
from the 2019 sale of Hu-Friedy
resulting in the recognition of an additional after-tax gain of $7
million.
Liquidity and Capital Resources
Our principal capital requirements have included funding of acquisitions, purchases
of additional noncontrolling
interests, repayments of debt principal, the funding of working capital needs,
purchases of fixed assets and
repurchases of common stock.
Working capital requirements generally result from increased sales, special
inventory forward buy-in opportunities and payment terms for receivables
and payables.
Historically, sales have
tended to be stronger during the second half of the year and special inventory
forward buy-in opportunities have
been most prevalent just before the end of the year, and have caused our working capital requirements
to be higher
from the end of the third quarter to the end of the first quarter of
the following year.
We finance our business primarily through cash generated from our operations, revolving credit facilities and debt
placements.
Please see
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 $348 million for the nine
months ended September 24, 2022,
compared to net cash provided by operating activities of $433 million for the
comparable prior year period.
The net
change of $85 million was primarily attributable to a relative increase
in working capital, driven by an increase in
other current assets and a decrease in inventories, partially offset by a decrease in
accounts payable.
Net cash used in investing activities was $211 million for the nine months ended September 24,
2022, compared to
$479 million for the comparable prior year period.
The net change of $268 million was primarily attributable to
decreased payments for equity investments and business acquisitions.
Net cash used in financing activities was $121 million for the nine
months ended September 24, 2022, compared to
net cash used in financing activities of $254 million for the comparable
prior year period.
The net change of $133
million was primarily due to increased net borrowings from debt and decreased
repurchases of common stock.
The following table summarizes selected measures of liquidity and capital
resources:
September 24,
December 25,
2022
2021
Cash and cash equivalents
$
$
Working
capital
(1)
1,811
1,537
Debt:
Bank credit lines
$
$
Current maturities of long-term debt
Long-term debt
Total debt
$
1,045
$
Leases:
Current operating lease liabilities
$
$
Non-current operating lease liabilities
(1)
Includes $313 million and $138 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitization at September 24, 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
increased to 42.9 days as of September 24, 2022
from 42.6 days as of September 25, 2021.
During the nine months ended September 24, 2022, we wrote
off
approximately $7 million of fully reserved accounts receivable against our
trade receivable reserve.
Our inventory
turns from operations decreased to 4.7 as of September 24, 2022 from 5.1
as of September 25, 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 ten years.
As of September 24, 2022, our right-of-use
assets related to operating leases were $319 million and our current and non-current
operating lease liabilities were
$72 million and $271 million, respectively.
Stock Repurchases
From March 3, 2003 through September 24, 2022, we repurchased $4.2
billion, or 83,598,119 shares, under our
common stock repurchase programs, with $400 million available
as of September 24, 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 September 24,
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 combination of acquisitions, continued acquisition integrations and systems
implementation activity
undertaken during the quarter and carried over from prior quarters when considered
in the aggregate, represents a
material change in our internal control over financial reporting.
During the quarter ended September 24, 2022, we completed the acquisition
of dental businesses in North America
and Europe.
Also, 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.
In addition, we completed systems implementation activities
in North America related to a
new ERP system for a dental business as well as the integration of a
dental business onto an existing ERP system.
All acquisitions, 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 $4.5 billion, authorized by our Board of Directors,
to the repurchase program provide for a total
of $4.6 billion of shares of our common stock to be repurchased under this
program.
On August 17, 2022, our Board of Directors authorized the repurchase
of up to an additional $400 million in shares
of our common stock.
As of September 24, 2022, we had repurchased approximately $4.2 billion
of common stock (83,598,119 shares)
under these initiatives, with $400 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 September 24, 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)
6/26/2022 through 7/30/2022
745,762
$
76.71
745,762
421,839
8/1/2022 through 8/27/2022
437,967
75.93
437,967
5,450,334
8/28/2022 through 9/24/2022
-
-
-
5,940,006
1,183,729
1,183,729
(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 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 September 24, 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: November 1, 2022