filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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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 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 PPE products 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 the cybersecurity
incident disclosed in the Company’s Current Report on Form 8-K filed on October 15, 2023 on our business and
results of operations, including the accuracy of our estimates of the
impact, the timing and extent of any recovery
on insurance claims, 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 (i) our
ability to have continued access to a variety of COVID-19 test types,
and COVID-19 vaccines and ancillary
supplies, and (ii) expectations regarding COVID-19 test sales, demand and
inventory levels.
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; legal, regulatory, compliance,
cybersecurity, 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; adverse changes in supplier rebates
or other purchasing incentives; risks related to the sale of corporate brand
products; 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; geopolitical wars;
failure to comply with existing and future
regulatory requirements; risks associated with the EU Medical Device Regulation;
failure to comply with laws and
regulations relating to health care fraud or other laws and regulations; failure
to comply with laws and regulations
relating to the collection, storage and processing of sensitive personal
information or standards in electronic health
records or transmissions; changes in tax legislation; risks related to
product liability, intellectual property and other
claims; 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 (including the recent October 2023 incident); 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
During the year ended December 31, 2022 we experienced a decrease
in the sales of PPE and COVID-19 test kits
as compared to the comparable prior-year period.
During the three and nine months ended September 30, 2023, we
continued to experience a decrease in the sales of PPE and COVID-19
test kits, primarily due to ongoing decreases
in market prices for PPE (principally gloves) and lower market demand
for COVID-19 test kits compared with the
same periods in the prior year, and we expect further decreases in sales in 2023 compared to the prior
year.
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.
The impact from inflation, including manufacturer
price increases excluding PPE products, was slightly more pronounced
in Europe.
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.
Cybersecurity Incident
On October 14, 2023, we became aware of a cybersecurity incident
that primarily affected the operations of our
North American and European dental and medical distribution businesses.
Henry Schein One, our practice
management software, revenue cycle management and patient relationship
management solutions business was not
affected, and our manufacturing businesses and our equipment sales and
service operations were mostly unaffected.
Once we became aware of the issue, we took steps to assess, contain and
remediate this incident.
Our distribution
operations resumed and we reactivated our ecommerce platform.
We also notified law enforcement and our
customers and suppliers informing them of both the incident and
management’s efforts to mitigate its impact on our
daily operations.
As previously disclosed, while our forensic investigation is still
ongoing, we have determined that
a data breach occurred.
We are notifying potentially affected parties as appropriate.
On November 22, 2023, we experienced a disruption to our ecommerce
platform and related applications. The
Company has restored its ecommerce platform and certain other
applications in the United States, Canada and
certain European countries.
Our ecommerce platform in the remaining European countries and other applications
are expected to follow shortly.
We continue to review the impact of the incident on our business.
As previously disclosed, we believe the incident
will adversely impact our financial results for the fourth quarter and
full year 2023.
We maintain cyber insurance, subject to certain retentions and policy limitations.
There can be no assurance that
the insurance coverage we maintain is sufficient to cover costs and expenses related
to this cybersecurity incident.
Executive-Level Overview
Henry Schein, Inc. is a solutions company for health care professionals powered
by a network of people and
technology.
We
believe we are the world’s largest provider of health care products and services primarily to office-
based dental and medical practitioners, as well as alternate sites of care.
We
serve more than one million customers
worldwide including dental practitioners, laboratories, physician practices, and
ambulatory surgery centers, as well
as government, institutional health care clinics and other alternate care clinics.
We
believe that we have a strong
brand identity due to our more than 91 years of experience distributing health
care products.
We are headquartered in Melville, New York,
employ approximately 24,000 people (of which approximately
11,500 are based outside of the United States) and have operations or affiliates in 33 countries and territories.
Our
broad global footprint has evolved over time through our organic success as well as
through contribution from
strategic acquisitions.
We
have established strategically located distribution centers around
the world to enable us to better serve our
customers and increase our operating efficiency.
This infrastructure, together with broad product and service
offerings at competitive prices, and a strong commitment to customer service, enables
us to be a single source of
supply for our customers’ needs.
While our primary go-to-market strategy is in our capacity as a distributor, we also market and sell our own
corporate brand portfolio of cost-effective, high-quality consumable merchandise products,
manufacture certain
dental specialty products in the areas of implants, orthodontics and endodontics,
and repackage/relabel prescription
drugs and/or devices.
We
have achieved scale in these global businesses primarily
through acquisitions, as
manufacturers of these products typically do not utilize a distribution channel
to serve customers.
We
conduct our business through two reportable segments: (i) health
care distribution and (ii) technology and
value-added services.
These segments offer different products and services to the same customer base.
Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools, government
and other
institutions.
Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,
emergency
medical technicians, dialysis centers, home health, federal and state governments
and large enterprises, such as
group practices and integrated delivery networks, among other providers
across a wide range of specialties.
The health care distribution reportable segment, combining our global dental and
medical operating segments,
distributes consumable products, small equipment, laboratory products, large equipment, equipment
repair services,
branded and generic pharmaceuticals, vaccines, surgical products, dental specialty
products (including implant,
orthodontic and endodontic products), diagnostic tests, infection-control products,
PPE products and vitamins.
Our global technology and value-added services business provides software, technology
and other value-added
services to health care practitioners.
Our technology business offerings include practice management software
systems for dental and medical practitioners.
Our value-added practice solutions include practice consultancy,
education, revenue cycle management and financial services on a non-recourse
basis, e-services, practice
technology, network and hardware services, as well as consulting, and continuing education services for
practitioners.
A key element to grow closer to our customers is our One Schein initiative, which
is a unified go-to-market
approach that enables practitioners to work synergistically with our supply chain,
equipment sales and service and
other value-added services, allowing our customers to leverage the
combined value that we offer through a single
program.
Specifically, One Schein provides customers with streamlined access to our comprehensive offering of
national brand products, our corporate brand products and proprietary specialty
products and solutions (including
implant, orthodontic and endodontic products).
In addition, customers have access to a wide range of services,
including software and other value-added services.
Industry Overview
In recent years, the health care industry has increasingly focused on cost containment.
This trend has benefited
distributors capable of providing a broad array of products and services at low
prices.
It also has accelerated the
growth of HMOs, group practices, other managed care accounts and collective buying
groups, which, in addition to
their emphasis on obtaining products at competitive prices, tend to favor distributors
capable of providing
specialized management information support.
We
believe that the trend towards cost containment has the potential
to favorably affect demand for technology solutions, including software, which can
enhance the efficiency and
facilitation of practice management.
Our operating results in recent years have been significantly affected by strategies
and transactions that we
undertook to expand our business, domestically and internationally, in part to address significant changes in the
health care industry, including consolidation of health care distribution companies, health care reform, trends
toward managed care, cuts in Medicare and collective purchasing arrangements.
Industry Consolidation
The health care products distribution industry, as it relates to office-based health care practitioners, is fragmented
and diverse.
The industry ranges from sole practitioners working out of
relatively small offices to group practices
or service organizations ranging in size from a few practitioners to a large number of practitioners who have
combined or otherwise associated their practices.
Due in part to the inability of office-based health care practitioners to store and manage
large quantities of supplies
in their offices, the distribution of health care supplies and small equipment to office-based health
care practitioners
has been characterized by frequent, small quantity orders, and a need for rapid,
reliable and substantially complete
order fulfillment.
The purchasing decisions within an office-based health care practice are typically
made by the
practitioner or an administrative assistant.
Supplies and small equipment are generally purchased from more
than
one distributor, with one generally serving as the primary supplier.
The trend of consolidation extends to our customer base.
Health care practitioners are increasingly seeking to
partner, affiliate or combine with larger entities such as hospitals, health systems, group practices or physician
hospital organizations.
In many cases, purchasing decisions for consolidated groups
are made at a centralized or
professional staff level; however, orders are delivered to the practitioners’ offices.
We
believe that consolidation within the industry will continue to
result in a number of distributors, particularly
those with limited financial, operating and marketing resources, seeking to
combine with larger companies that can
provide growth opportunities.
This consolidation also may continue to result in distributors seeking
to acquire
companies that can enhance their current product and service offerings or provide
opportunities to serve a broader
customer base.
Our approach to acquisitions and joint ventures has been to expand our role as
a provider of products and services
to the health care industry.
This trend has resulted in our expansion into service areas that complement
our existing
operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquired
businesses.
As industry consolidation continues, we believe that we are positioned to
capitalize on this trend, as we believe we
have the ability to support increased sales through our existing infrastructure, although
there can be no assurances
that we will be able to successfully accomplish this.
We
also have invested in expanding our sales/marketing
infrastructure to include a focus on building relationships with decision
makers who do not reside in the office-
based practitioner setting.
As the health care industry continues to change, we continually evaluate possible
candidates for joint venture or
acquisition and intend to continue to seek opportunities to expand our
role as a provider of products and services to
the health care industry.
There can be no assurance that we will be able to successfully pursue
any such
opportunity or consummate any such transaction, if pursued.
If additional transactions are entered into or
consummated, we would incur merger and/or acquisition-related costs, and there
can be no assurance that the
integration efforts associated with any such transaction would be successful.
Aging Population and Other Market Influences
The health care products distribution industry continues to experience growth
due to the aging population,
increased health care awareness, the proliferation of medical technology
and testing, new pharmacological
treatments, and expanded third-party insurance coverage, partially offset by the effects of unemployment
on
insurance coverage.
In addition, the physician market continues to benefit from the
shift of procedures and
diagnostic testing from acute care settings to alternate-care sites, particularly
physicians’ offices.
According to the U.S. Census Bureau’s International Database, between 2023 and 2033, the 45 and older
population is expected to grow by approximately 11%.
Between 2023 and 2043, this age group is expected to grow
by approximately 21%.
This compares with expected total U.S. population growth
rates of approximately 6%
between 2023 and 2033 and approximately 11% between 2023 and 2043.
According to the U.S. Census Bureau’s International Database, in 2023 there are approximately seven million
Americans aged 85 years or older, the segment of the population most in need of long-term care
and elder-care
services.
By the year 2050, that number is projected to nearly triple to approximately
19 million.
The population
aged 65 to 84 years is projected to increase by approximately 23% during
the same period.
As a result of these market dynamics, annual expenditures for health
care services continue to increase in the
United States.
We believe that demand for our products and services will grow while continuing to be impacted by
current and future operating, economic, and industry conditions.
The Centers for Medicare and Medicaid Services,
or CMS, published “National Health Expenditure Data” indicating
that total national health care spending reached
approximately $4.3 trillion in 2021, or 18.3% of the nation’s gross domestic product, the benchmark
measure for
annual production of goods and services in the United States.
Health care spending is projected to reach
approximately $7.2 trillion by 2031, or 19.6% of the nation’s projected gross domestic product.
Government
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.
Federal, state and certain foreign governments have also increased enforcement
activity in the health care
sector, particularly in areas of fraud and abuse, anti-bribery and corruption, controlled substances handling,
medical
device regulations and data privacy and security standards.
Certain of our businesses are subject to various additional federal, state,
local and foreign laws and regulations,
including with respect to the sale, transportation, importation, storage, handling
and disposal of hazardous or
potentially hazardous substances; “forever chemicals” such as per-and
polyfluoroalkyl substances (PFAS); and safe
working conditions.
In addition, certain of our businesses must operate in compliance with a
variety of burdensome
and complex coding, billing and record-keeping requirements in order to substantiate
claims for payment under
federal, state and commercial healthcare reimbursement programs.
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.
Such suspension was terminated on September 30, 2022.
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.
In addition, activities to control medical costs,
including laws and regulations lowering reimbursement rates for pharmaceuticals,
medical devices, medical
supplies, and/or medical treatments or services, are ongoing.
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 31, 2022, filed with the SEC on February 21, 2023.
Results of Operations
The following tables summarize the significant components of our operating
results for the three and nine months
ended September 30, 2023 and September 24, 2022 and cash flows for
the nine months ended September 30, 2023
and September 24, 2022:
Three Months Ended
Nine Months Ended
September 30,
September 24,
September 30,
September 24,
2023
2022
2023
2022
Operating results:
Net sales
$
3,162
$
3,067
$
9,322
$
9,276
Cost of sales
2,167
2,153
6,386
6,444
Gross profit
2,936
2,832
Operating expenses:
Selling, general and administrative
2,149
2,010
Depreciation and amortization
Restructuring and integration costs
Operating income
$
$
$
$
Other expense, net
$
(21)
$
(6)
$
(48)
$
(17)
Net income
Net income attributable to Henry Schein, Inc.
Nine Months Ended
September 30,
September 24,
2023
2022
Cash flows:
Net cash provided by operating activities
$
$
Net cash used in investing activities
(808)
(211)
Net cash provided by (used in) financing activities
(121)
Plan 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.
We revised our previous expectations of
completion and now expect this initiative to extend through 2024.
We are currently unable in good faith to make a
determination of an estimate of the amount or range of amounts expected to
be incurred in connection with these
activities, both with respect to each major type of cost associated
therewith and with respect to the total cost, or an
estimate of the amount or range of amounts that will result in future
cash expenditures.
During the three months ended September 30, 2023 and September 24, 2022,
we recorded restructuring costs of
$11 million and $9 million, respectively.
During the nine months ended September 30, 2023 and September
24,
2022, we recorded restructuring costs of $59 million and $9 million, respectively.
The restructuring costs for these
periods primarily related to severance and employee-related costs,
accelerated amortization of right-of-use lease
assets and fixed assets, and other lease exit costs.
Included in restructuring costs for the nine months ended
September 30, 2023 were immaterial amounts related to the disposal
of an unprofitable U.S. business initiated
during 2022 and completed during the first quarter of 2023.
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.
Three Months Ended September 30, 2023 Compared to Three Months Ended September 24, 2022
Net Sales
Net sales were as follows:
September 30,
% of
September 24,
% of
Increase / (Decrease)
2023
Total
2022
Total
$
%
Health care distribution
(1)
Dental
$
1,882
59.5
%
$
1,785
58.2
%
$
5.4
%
Medical
1,070
33.9
1,106
36.0
(36)
(3.1)
Total health care distribution
2,952
93.4
2,891
94.2
2.1
Technology and value-added services
(2)
6.6
5.8
18.8
Total
$
3,162
100.0
%
$
3,067
100.0
%
$
3.1
%
The components of our sales growth were as follows:
Total Local
Currency
Growth
Foreign
Exchange
Impact
Total Sales
Growth
Local Currency Growth
Local Internal
Growth
Acquisition
Growth
Health care distribution
(1)
Dental Merchandise
0.3
%
4.8
%
5.1
%
1.8
%
6.9
%
Dental Equipment
(2.0)
0.9
(1.1)
1.7
0.6
Total Dental
(0.2)
3.8
3.6
1.8
5.4
Medical
(4.6)
1.4
(3.2)
0.1
(3.1)
Total Health Care Distribution
(1.9)
2.9
1.0
1.1
2.1
Technology and value-added services
(2)
9.6
8.6
18.2
0.6
18.8
Total
(1.2)
%
3.2
%
2.0
%
1.1
%
3.1
%
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.
(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 products and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
Global Sales
Global net sales for the three months ended September 30, 2023 increased 3.1%
and was primarily attributable to
acquisitions.
The components of our sales growth are presented in the table
above.
The estimated increase in internally generated local currency sales, excluding
PPE products and COVID-19 test
kits, was 1.1%.
We estimate that sales of PPE products and COVID-19 test kits were approximately $175 million
and $244 million for the three months ended September 30, 2023 and
September 24, 2022, respectively,
representing an estimated decrease of $69 million or 28.2%
versus the prior year, with the $69 million net decrease
year-over-year representing 2.2% of global net sales for the three
months ended September 30, 2023.
Dental
Dental net sales for the three months ended September 30, 2023 increased 5.4%.
The components of our sales
growth are presented in the table above.
Our sales growth in local currency for dental merchandise was 5.1%
and
was primarily attributable to acquisitions.
Our decrease in sales in local currency for dental equipment was
primarily attributable to a slowdown in digital equipment sales, partially
offset by growth in North America for
traditional dental equipment.
The estimated increase in internally generated local currency sales, excluding
PPE products, was 0.3%.
We
estimate that sales of PPE products were approximately $83 million and
$94 million for the three months ended
September 30, 2023 and September 24, 2022,
respectively, representing an estimated decrease of $10 million or
11.0%
versus the prior year, with the $10 million net decrease year-over-year representing 0.5% of dental net sales
for the three months ended September 30, 2023.
Medical
Medical net sales for the three months ended September 30, 2023 decreased
3.1%.
The components of this
decrease are presented in the table above.
The local currency decrease in medical sales is primarily attributable
to
lower sales of PPE products and COVID-19 test kits.
The estimated increase in internally generated local currency sales, excluding
PPE products and COVID-19 test
kits, was 0.8%
and was adversely impacted by a replacement of branded pharmaceutical
sales with lower priced
generic products and an increase in lower priced corporate brand sales.
We estimate that sales of PPE products and
COVID-19 test kits were approximately $92 million and $150 million
for the three months ended September 30,
2023 and September 24, 2022,
respectively, representing an estimated decrease of $59 million or 39.0% versus the
prior year, with the $59 million net decrease year-over-year representing 5.4%
of medical net sales for the three
months ended September 30, 2023.
Technology and value-added services
Technology and value-added services net sales for the three months ended September 30, 2023 increased 18.8%
driven by acquisitions and revenue of practice management solutions.
The components of our sales growth are
presented in the table above.
During the three months ended September 30, 2023, the trend for sales
of practice
management software growth remains strong as we continued to increase
the number of cloud-based users.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
September 30,
Gross
September 24,
Gross
Increase
2023
Margin %
2022
Margin %
$
%
Health care distribution
$
28.8
%
$
27.7
%
$
6.5
%
Technology and value-added services
68.7
65.0
25.5
Total
$
31.5
$
29.8
$
8.8
As a result of different practices of categorizing costs associated with distribution networks
throughout our
industry, our gross margins may not necessarily be comparable to other distribution companies.
Additionally, we
realize substantially higher gross margin percentages in our technology and value-added services
segment than in
our health care distribution segment.
These higher gross margins result from being both the developer and seller of
software products and services, as well as certain financial services.
The software industry typically realizes higher
gross margins to recover investments in research and development.
Within our health care distribution segment, gross profit margins may vary 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.
Health care distribution gross profit increased primarily due to the increase
in net sales discussed above, including
$35 million of gross profit from acquisitions and gross margin expansion,
mainly as a result of a favorable impact
of sales mix of higher-margin products.
Technology and value-added services gross profit increased as a result of a higher gross profit from internally
generated sales and gross profit of $13 million from acquisitions, as well as
an increase in gross margin rates,
primarily due to product mix.
Operating Expenses
Operating expenses (consisting of selling, general and administrative
expenses; depreciation and amortization; and
restructuring and integration costs) by segment and in total were as follows:
% of
% of
September 30,
Respective
September 24,
Respective
Increase
2023
Net Sales
2022
Net Sales
$
%
Health care distribution
$
23.4
%
$
21.5
%
$
11.3
%
Technology and value-added services
49.7
47.2
25.1
Total
$
25.1
$
22.9
$
12.9
The net increase in operating expenses is attributable to the following:
Restructuring and
Integration Costs
Operating Costs
Acquisitions
Total
Health care distribution
$
-
$
$
$
Technology and value-added services
(8)
Total
$
$
$
$
The restructuring and integration costs are primarily related to severance
and employee-related costs, and other
lease exit costs.
The increase in operating costs includes increases in payroll and
payroll related costs,
facility
related costs and consulting expenses in both of our reportable segments,
and increased acquisition expenses in our
healthcare distribution segment.
Other Expense, Net
Other expense, net was as follows:
September 30,
September 24,
Variance
2023
2022
$
%
Interest income
$
$
$
300.2
%
Interest expense
(25)
(8)
(17)
(202.6)
Other, net
(2)
(3)
(292.4)
Other expense, net
$
(21)
$
(6)
$
(15)
(252.2)
Interest income increased primarily due to increased interest rates.
Interest expense increased primarily due to
increased borrowings and increased interest rates.
Income Taxes
For the three months ended September 30, 2023 our effective tax rate was 21.9% compared
to 22.7% for the prior
year period.
The difference between our effective tax rate and the federal statutory tax rate primarily
relates to state
and foreign income taxes and interest expense.
Nine Months Ended September 30, 2023 Compared to Nine Months Ended September
24, 2022
Net Sales
Net sales were as follows:
September 30,
% of
September 24,
% of
Increase / (Decrease)
2023
Total
2022
Total
$
%
Health care distribution
(1)
Dental
$
5,737
61.5
%
$
5,466
58.9
%
$
5.0
%
Medical
2,991
32.1
3,274
35.3
(283)
(8.6)
Total health care distribution
8,728
93.6
8,740
94.2
(12)
(0.1)
Technology and value-added services
(2)
6.4
5.8
10.7
Total
$
9,322
100.0
%
$
9,276
100.0
%
$
0.5
%
The components of our sales growth were as follows:
Total Local
Currency
Growth
Foreign
Exchange
Impact
Total Sales
Growth
Local Currency Growth
Local Internal
Growth
Acquisition
Growth
Health care distribution
(1)
Dental Merchandise
1.7
%
4.0
%
5.7
%
(0.4)
%
5.3
%
Dental Equipment
2.7
1.5
4.2
(0.4)
3.8
Total Dental
1.9
3.5
5.4
(0.4)
5.0
Medical
(9.3)
0.7
(8.6)
-
(8.6)
Total Health Care Distribution
(2.3)
2.4
0.1
(0.2)
(0.1)
Technology and value-added services
(2)
7.2
3.8
11.0
(0.3)
10.7
Total
(1.7)
%
2.5
%
0.8
%
(0.3)
%
0.5
%
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.
(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 products and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
Global Sales
Global net sales for the nine months ended September 30, 2023 increased 0.5%.
The components of our sales
growth are presented in the table above.
The estimated increase in internally generated local currency sales, excluding
PPE products and COVID-19 test
kits, was 3.5%.
We estimate that sales of PPE products and COVID-19 test kits were approximately $540 million
and $990 million for the nine months ended September 30, 2023 and
September 24, 2022, respectively,
representing an estimated decrease of $450 million or 45.5% versus the prior year, with the $450 million net
decrease year-over-year representing 4.8% of global net sales for the nine months ended September 30,
Dental
Dental net sales for the nine months ended September 30, 2023 increased
5.0%.
The components of our sales
growth are presented in the table above.
Our sales growth in local currency for dental merchandise was primarily
attributable to acquisitions.
Our sales growth in local currency for dental equipment was primarily
attributable to
growth in traditional equipment sales in North America.
The estimated increase in internally generated local currency sales, excluding
PPE products and COVID-19 test
kits, was 3.8%.
We estimate that sales of PPE products were approximately $264 million and $351 million for the
nine months ended September 30, 2023 and September 24, 2022, respectively, representing an estimated decrease
of $87 million or 25.0%
versus the prior year, with the $87 million net decrease year-over-year representing 1.5%
of dental net sales for the nine months ended September 30, 2023.
Medical
Medical net sales for the nine months ended September 30, 2023 decreased
8.6%.
The components of this decrease
are presented in the table above.
The local currency decrease in medical sales is primarily attributable
to lower
sales of PPE products and COVID-19 test kits and other point-of-care
diagnostic products.
The estimated increase in internally generated local currency sales, excluding
PPE products and COVID-19 test
kits, was 2.3%.
We estimate that sales of PPE products and COVID-19 test kits were approximately $276 million
and $639 million for the nine months ended September 30, 2023 and
September 24, 2022, respectively,
representing an estimated decrease of $363 million or 56.8% versus
the prior year, with the $363 million net
decrease year-over-year representing 12.1% of medical net sales for the nine months ended September 30, 2023.
Technology and value-added services
Technology and value-added services net sales for the nine months ended September 30, 2023 increased 10.7%.
The components of our sales growth are presented in the table above.
During the nine months ended September 30,
2023, the trend for sales of practice management software growth remains
strong as we continued to increase the
number of cloud-based users.
We also experienced increased demand for our revenue cycle management solutions.
The increase in sales during the quarter ended September 30, 2023 was
partially offset by the expiration, during the
third quarter of 2022, 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 30,
Gross
September 24,
Gross
Increase
2023
Margin %
2022
Margin %
$
%
Health care distribution
$
2,534
29.0
%
$
2,482
28.4
%
$
2.1
%
Technology and value-added services
67.6
65.3
14.8
Total
$
2,936
31.5
$
2,832
30.5
$
3.7
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 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.
Health care distribution gross profit for the nine months ended September 30, 2023
increased compared to the
prior-year period due to the increase in sales, mainly due to a reduction in sales of
PPE products and COVID-19
test kits offset by $74 million of gross profit from acquisitions and gross margin expansion
as a result of a favorable
impact of sales mix of higher-margin products.
Technology and value-added services gross profit increased as a result of a higher gross profit from internally
generated sales and gross profit of $18 million from acquisitions, as well
as an increase in gross margin rates
primarily due to product mix and increases in productivity.
Operating Expenses
Operating expenses (consisting of selling, general and administrative expenses;
depreciation and amortization; and
restructuring and integration costs) by segment and in total were as follows:
% of
% of
September 30,
Respective
September 24,
Respective
Increase
2023
Net Sales
2022
Net Sales
$
%
Health care distribution
$
2,063
23.6
%
$
1,903
21.8
%
$
8.4
%
Technology and value-added services
50.1
47.4
17.0
Total
$
2,360
25.3
$
2,157
23.3
$
9.4
The net increase in operating expenses is attributable to the following:
Restructuring and
Integration Costs
Operating Costs
Acquisitions
Total
Health care distribution
$
$
$
$
Technology and value-added services
Total
$
$
$
$
The restructuring and integration costs are primarily related to severance
and employee-related costs, accelerated
amortization of right-of-use lease assets and fixed assets, and other lease exit
costs.
During the nine months ended
September 30, 2023, our operating expenses were favorably impacted
by the recognition of a remeasurement gain
of $18 million following an acquisition of a controlling interest of
a previously held equity investment.
The
increase in operating costs includes increases in payroll and payroll related costs,
travel, convention, consulting,
and occupancy expenses in both of our reportable segments and increased
acquisition expenses in our healthcare
distribution segment.
Other Expense, Net
Other expense, net was as follows:
September 30,
September 24,
Variance
2023
2022
$
%
Interest income
$
$
$
132.2
%
Interest expense
(58)
(23)
(35)
(153.4)
Other, net
(2)
(3)
(331.4)
Other expense, net
$
(48)
$
(17)
$
(31)
(184.5)
Interest income increased primarily due to increased interest rates.
Interest expense increased primarily due to
increased borrowings and increased interest rates.
Income Taxes
For the nine months ended September 30, 2023 our effective tax rate was 22.5% compared
to 23.5% for the prior
year period.
The difference between our effective tax rate and the federal statutory tax rate primarily
relates to state
and foreign income taxes and interest expense.
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.
Our acquisition strategy is focused on investments in companies that
add new customers and sales teams, increase
our geographic footprint (whether entering a new country, such as emerging markets, or building scale where we
have already invested in businesses), and finally, those that enable us to access new products and technologies.
As
part of our BOLD+1 Strategic Plan, including pursuing focused mergers and acquisitions,
subsequent to September
30, 2023 we have announced acquisitions of companies specializing
in clear aligners,
homecare medical products
delivered directly to patients, and dental practice transition services.
Net cash provided by operating activities was $532 million for the
nine months ended September 30, 2023,
compared to net cash provided by operating activities of $348 million for
the prior year.
The net change of $184
million was primarily due to a favorable change in working capital (primarily
inventories), net of acquisitions,
partially offset by a decrease in operating income.
Net cash used in investing activities was $808 million for the nine months
ended September 30, 2023, compared to
net cash used in investing activities of $211 million for the prior year.
The net change of $597 million was
primarily attributable to increased business combinations and investment activity.
Net cash provided by financing activities was $307 million for the nine
months ended September 30, 2023,
compared to net cash used in financing activities of $121 million for the prior
year.
The net change of $428 million
was primarily due to increased net borrowings from debt.
The following table summarizes selected measures of liquidity and capital
resources:
September 30,
December 31,
2023
2022
Cash and cash equivalents
$
$
Working
capital
(1)
2,020
1,764
Debt:
Bank credit lines
$
$
Current maturities of long-term debt
Long-term debt
1,815
1,040
Total debt
$
1,899
$
1,149
Leases:
Current operating lease liabilities
$
$
Non-current operating lease liabilities
(1)
Includes $0 million and $327 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitization at September 30, 2023 and December 31, 2022, respectively.
Our cash and cash equivalents consist of bank balances and investments
in money market funds representing
overnight investments with a high degree of liquidity.
Accounts receivable days sales outstanding and inventory turns
Our accounts receivable days sales outstanding from operations
increased to 43.7 days as of September 30, 2023
from 42.9 days as of September 24, 2022.
During the nine months ended September 30, 2023, we wrote
off
approximately $13 million of fully reserved accounts receivable against
our trade receivable reserve.
Our inventory
turns from operations decreased to 4.5 as of September 30, 2023 from 4.7
as of September 24, 2022.
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 one year to approximately
18 years, some of which
may include options to extend the leases for up to 15 years.
As of September 30, 2023, our right-of-use assets
related to operating leases were $323 million and our current and non-current
operating lease liabilities were $74
million and $314 million, respectively.
Stock Repurchases
On February 8, 2023, our Board of Directors authorized the repurchase
of up to an additional $400 million in shares
of our common stock.
From March 3, 2003 through September 30, 2023, we repurchased $4.7
billion, or 89,702,364 shares, under our
common stock repurchase programs, with $315 million available
as of September 30, 2023 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 31, 2022,
except accounting policies adopted
as of January 1, 2023, which are discussed in
Note 2 - Critical Accounting Policies and Recently Issued Accounting
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 and Recently Issued Accounting Standards
of the Notes to the Condensed Consolidated
Financial Statements included under Item 1.
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