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.
Risk factors and uncertainties that could cause actual results to differ materially from
current and historical results
include, but are not limited to: 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, as well
as significant demands on our operations, information systems,
legal, regulatory, compliance, financial and human
resources functions in connection 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;
security risks associated with our
information systems and technology products and services, such as
cyberattacks or other privacy or data security
breaches (including the October 2023 incident); effects of a highly competitive (including, without
limitation,
competition from third-party online commerce sites) and consolidating
market; 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, ongoing
wars, 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; risks associated with customs policies
or legislative import restrictions; risks associated
with disease outbreaks, epidemics, pandemics (such as the COVID-19
pandemic), or similar wide-spread public
health concerns and other natural or man-made disasters; risks associated with our
global operations; litigation
risks; new or unanticipated litigation developments and the status
of litigation matters; 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 About Media Center page
of our website.
Recent Developments
While the U.S. economy has experienced inflationary pressures and
strengthening of the U.S. dollar, their impacts
have not been material to our results of operations.
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 unwilling to
absorb price increases, thus positioning us
to protect our gross profit.
Cyber Incident
In October 2023 Henry Schein experienced a cyber 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 were mostly unaffected.
On November 22, 2023, we experienced a disruption of our
ecommerce platform and related applications, which was remediated.
During the three and nine months ended September 28, 2024, we had a
sales decrease in our dental and medical
distribution businesses, which we believe was primarily a result of lower sales
to episodic customers following last
year’s cyber incident.
We have a number of programs underway focused on re-establishing these customers.
We maintain cyber insurance, subject to certain retentions and policy limitations.
With respect to the October 2023
cyber incident, we have a $60 million insurance policy, following a $5 million retention.
During the three and nine
months ended September 28, 2024, we received insurance proceeds of
$10 million and $20 million, respectively,
representing a partial insurance recovery of losses related to the cyber 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 92 years of experience distributing health
care products.
We are headquartered in Melville, New York,
employ approximately 26,000 people (of which approximately
13,000 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,
including in vitro
diagnostic devices, manufacture certain dental specialty products in
the areas of implants, orthodontics and
endodontics, manufacture drug products, 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,
personal protective equipment
(“PPE”) products, vitamins and orthopedic implants.
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
are focused 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 2024
and 2034, the 45 and older
population is expected to grow by approximately 11%.
Between 2024 and 2044, this age group is expected to grow
by approximately 20%.
This compares with expected total U.S. population growth
rates of approximately 6%
between 2024 and 2034
and approximately 11% between 2024 and 2044.
According to the U.S. Census Bureau’s International Database, in 2024
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 20% 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
(“CMS”) published “National Health Expenditure Data” indicating that total
national health care spending reached
approximately $4.5 trillion in 2022, or 17.3% 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 $7.7 trillion by 2032, or 19.7% of the nation’s projected gross domestic product.
Government
Certain of our businesses involve the distribution, manufacturing, importation,
exportation, marketing, sale and
promotion of 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
businesses that distribute and sell 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 anti-corruption, controlled substances handling,
medical device regulations and data
privacy and security standards.
Certain of our businesses involve pharmaceuticals and/or medical devices,
including in vitro diagnostic devices,
that are paid for by third parties and 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.
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.
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; amalgam bans;
pricing disclosures; supply chain transparency around labor practices; and safe working
conditions.
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.
CMS
recently released the 2024 durable medical equipment, prosthetics, orthotics
and supplies (“DMEPOS”)
reimbursement schedule, which, effective January 1, 2024, reduced the DMEPOS reimbursement
rates for non-
rural suppliers, such as us, by removing the Coronavirus Aid, Relief,
and Economic Security (aka CARES) Act
relief rates in effect during the COVID-19 pandemic.
This and other 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 30, 2023, filed with the SEC on February 28, 2024.
Results of Operations
The following tables summarize the significant components of our operating
results for the three and nine months
ended September 28, 2024 and September 30, 2023 and cash flows for
the nine months ended September 28, 2024
and September 30, 2023:
Three Months Ended
Nine Months Ended
September 28,
September 30,
September 28,
September 30,
2024
2023
2024
2023
Operating results:
Net sales
$
3,174
$
3,162
$
9,482
$
9,322
Cost of sales
2,181
2,167
6,459
6,386
Gross profit
3,023
2,936
Operating expenses:
Selling, general and administrative
2,296
2,149
Depreciation and amortization
Restructuring costs
Operating income
$
$
$
$
Other expense, net
$
(29)
$
(21)
$
(79)
$
(48)
Net income
Net income attributable to Henry Schein, Inc.
Nine Months Ended
September 28,
September 30,
2024
2023
Cash flows:
Net cash provided by operating activities
$
$
Net cash used in investing activities
(372)
(808)
Net cash provided by (used in) financing activities
(306)
Plans of Restructuring
On August 1, 2022, we committed to a restructuring plan (the “2022 Plan”)
focused on funding the priorities of the
BOLD+1 strategic plan, streamlining operations and other initiatives to
increase efficiency.
The 2022 Plan has
been completed as of July 31, 2024.
During the three months ended September 28, 2024 and
September 30, 2023,
in connection with our 2022 Plan, we recorded restructuring costs of
$12 million and $11 million, respectively.
During the nine months ended September 28, 2024 and September 30, 2023,
in connection with our 2022 Plan, we
recorded restructuring costs of $37 million and $59 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 exit costs.
We expect to record immaterial charges associated with the 2022 Plan during the
remainder of 2024.
On August 6, 2024, we committed to a new restructuring plan (the “2024
Plan”) to integrate recent acquisitions,
right-size operations and further increase efficiencies.
During the three and nine months ended September 28,
2024, we recorded restructuring charges associated with the 2024 Plan of $36 million
which primarily related to
severance and employee-related costs, accelerated amortization of right-of-use
lease assets and fixed assets, and
other lease exit costs.
We expect to record restructuring charges associated with the 2024 Plan during the fourth
quarter of 2024 and in 2025, however an estimate of the amount of these charges has not
yet been determined.
Three Months Ended September 28, 2024 Compared to Three Months Ended September 30, 2023
Note: Percentages for Net Sales; Gross Profit; Operating Expenses; Other Expense,
Net; and Income Taxes are
based on actual values and may not recalculate due to rounding.
Net Sales
Net sales were as follows:
September 28,
% of
September 30,
% of
Increase / (Decrease)
2024
Total
2023
Total
$
%
Health care distribution
(1)
Dental
$
1,852
58.4
%
$
1,882
59.5
%
$
(30)
(1.6)
%
Medical
1,101
34.7
1,070
33.9
2.9
Total health care distribution
2,953
93.1
2,952
93.4
-
Technology and value-added services
(2)
6.9
6.6
5.1
Total
$
3,174
100.0
%
$
3,162
100.0
%
$
0.4
%
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
(2.5)
%
0.3
%
(2.2)
%
(0.6)
%
(2.8)
%
Dental Equipment
1.8
0.9
2.7
0.1
2.8
Total Dental
(1.6)
0.5
(1.1)
(0.5)
(1.6)
Medical
(4.8)
7.6
2.8
0.1
2.9
Total Health Care Distribution
(2.7)
3.0
0.3
(0.3)
-
Technology and value-added services
(2)
(1.1)
6.0
4.9
0.2
5.1
Total
(2.6)
%
3.2
%
0.6
%
(0.2)
%
0.4
%
(1)
Consists of consumable products, dental specialty products (including implant, orthodontic and endodontic products), small
equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical
products, diagnostic tests, infection-control products, PPE products, vitamins and orthopedic implants.
(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, practice technology, network and hardware services, and other services.
Global Sales
Global net sales for the three months ended September 28, 2024 increased 0.4%.
The components of our sales
growth are presented in the table above.
The 2.6% decrease in our internally generated local currency sales was primarily
attributable to the slower than
anticipated pace of recovery from the cyber incident, the challenging economic
environment in certain markets and
lower sales of PPE products and COVID-19 test kits, partially offset by sales growth in
dental equipment and dental
specialty products.
For the three months ended September 28, 2024, the estimated
decrease in internally generated
local currency sales, excluding PPE products and COVID-19
test kits, was 2.2%.
We estimate that sales of PPE products and COVID-19 test kits were approximately $157 million and $175 million
for the three months ended September 28, 2024 and September 30, 2023,
respectively, representing an estimated
decrease of $18 million, or 10.1% versus the prior year, with the $18 million net decrease year-over-year
representing 0.6% of global net sales for the three months ended September
28, 2024.
Dental
Dental net sales for the three months ended September 28, 2024 decreased 1.6%.
The components of our sales
decline are presented in the table above.
The decrease in local currency sales was attributable to a 1.6% decrease
in internally generated local currency sales
of dental merchandise,
partially offset by an increase in internally generated local currency sales of dental
equipment and dental specialty products and sales from entities acquired
during the twelve months ended
September 28, 2024.
The decrease in internally generated local currency sales
of dental merchandise was primarily
attributable to the slower than anticipated pace of recovery from
the cyber incident,
the challenging economic
environment in certain markets, and lower sales of PPE products.
The increase in internally generated local
currency sales of dental equipment was primarily attributable to certain
international markets and traditional
equipment and our parts and service business in North America, partially offset by
a decline in digital imaging in
North America.
We estimate that sales of PPE products were approximately $72 million and $83 million for the three months ended
September 28, 2024 and September 30, 2023, respectively, representing an estimated decrease of $11 million, or
13.0% versus the prior year, with the $11 million net decrease year-over-year representing 0.6% of dental net sales
for the three months ended September 28, 2024.
The decrease in sales of PPE products was primarily due to lower
glove prices.
The estimated decrease in internally generated local currency
sales, excluding PPE products,
was
1.0%.
Medical
Medical net sales for the three months ended September 28, 2024
increased 2.9%.
The components of our sales
growth are presented in the table above.
The increase in local currency sales was attributable to our expansion
in the Home Solutions market,
including the
acquisition of Shield Healthcare during the year ended December
30, 2023, and our acquisition of TriMed, Inc.
during the second quarter of 2024, partially offset by a 4.8% decrease in internally
generated local currency medical
sales, resulting from
the slower than anticipated pace of recovery from the cyber incident,
the conversion of
certain pharmaceutical products
to lower priced generics,
and lower sales of influenza vaccines,
PPE products and
COVID-19 test kits.
We estimate that sales of PPE products and COVID-19 test kits were approximately $85 million and $92 million
for the three months ended September 28, 2024 and September 30, 2023,
respectively, representing an estimated
decrease of $7 million, or 7.5%
versus the prior year, with the $7 million net decrease year-over-year representing
0.6% of medical net sales for the three months ended September 28, 2024.
The decrease in sales of these products
was primarily due to lower market prices of PPE products (primarily lower
glove pricing).
The estimated decrease
in internally generated local currency sales, excluding PPE
products and COVID-19 test kits,
was 4.6%.
Technology and value-added services
Technology and value-added services net sales for the three months ended September 28, 2024 increased 5.1%.
The components of our sales growth are presented in the table above.
The internally generated local currency
increase in technology and value-added services sales was primarily attributable
to entities acquired during the
twelve months ended September 28, 2024,
a continued increase in the number of cloud-based users of our practice
management software and an increase in revenue cycle management solutions.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
September 28,
Gross
September 30,
Gross
Increase / (Decrease)
2024
Margin %
2023
Margin %
$
%
Health care distribution
$
28.6
%
$
28.8
%
$
(7)
(0.9)
%
Technology and value-added services
67.8
68.7
3.8
Total
$
31.3
$
31.5
$
(2)
(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 product development.
Within our health care distribution segment, gross profit margins may vary between the periods as a result of
the
changes in the mix of products sold as well as changes in our customer
mix.
For example, sales of our corporate
brand and certain specialty 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 three months ended September
28, 2024 was relatively flat compared to
the prior-year-period.
Technology and value-added services gross profit increased as a result of gross profit from acquisitions, partially
offset by lower internally generated sales.
Operating Expenses
Operating expenses (consisting of selling, general and administrative
expenses; depreciation and amortization; and
restructuring costs) by segment and in total were as follows:
% of
% of
September 28,
Respective
September 30,
Respective
Increase
2024
Net Sales
2023
Net Sales
$
%
Health care distribution
$
24.6
%
$
23.4
%
$
5.1
%
Technology and value-added services
50.1
49.7
6.0
Total
$
26.3
$
25.1
$
5.2
The net increase (decrease) in operating expenses is attributable to
the following:
Operating Costs
Restructuring Costs
Acquisitions
Total
Health care distribution
$
(18)
$
$
$
Technology and value-added services
(6)
Total
$
(24)
$
$
$
The components of the net increase in total operating expenses are presented
in the table above.
The increase in
operating costs during the three months ended September 28, 2024
includes increases in payroll and payroll related
costs in both of our reportable segments, as well as increased acquisition
intangible amortization in our healthcare
distribution segment, partially offset by a gain of $19 million related to the remeasurement
to fair value of a
previously held equity investment within our healthcare distribution segment.
During the three months ended September 28, 2024,
we also incurred $1 million of expenses, within our health care
distribution segment, directly related to the cyber incident,
mostly consisting of professional fees.
During the three
months ended September 28, 2024, we received insurance proceeds of
$10 million, recorded as a reduction of
selling, general and administrative expenses, representing a partial
insurance recovery of losses related to the cyber
incident.
Other Expense, Net
Other expense, net was as follows:
September 28,
September 30,
Variance
2024
2023
$
%
Interest income
$
$
$
(3.2)
%
Interest expense
(34)
(25)
(9)
(31.9)
Other, net
(2)
(2)
-
(45.4)
Other expense, net
$
(29)
$
(21)
$
(8)
(36.4)
Interest expense increased primarily due to increased borrowings and increased
interest rates.
Income Taxes
Our effective tax rate was 24.7% for the three months ended September 28, 2024, compared
to 21.9% for the prior
year period.
The difference between our effective and federal statutory tax rates
primarily relates to state and
foreign income taxes and interest expense.
The Organization of Economic Co-Operation and Development (OECD) issued
technical and administrative
guidance on Pillar Two rules in December 2021, which provides for a global minimum tax rate on the earnings of
large multinational businesses on a country-by-country basis.
Effective January 1, 2024, the minimum global tax
rate is 15% for various jurisdictions pursuant to the Pillar Two rules.
As of September 28, 2024, the impact of the
Pillar Two rules to our financial statements was immaterial.
As we operate in jurisdictions which have adopted
Pillar Two, we are continuing to analyze the implications to effectively manage the impact for 2024 and beyond.
Future tax reform resulting from these developments may result in changes
to long-standing tax principles, which
may adversely impact our effective tax rate going forward or result in higher cash
tax liabilities.
Nine Months Ended September 28, 2024 Compared to Nine Months Ended September
30, 2023
Note: Percentages for Net Sales; Gross Profit; Operating Expenses; Other
Expense, Net; and Income Taxes are
based on actual values and may not recalculate due to rounding.
Net Sales
Net sales were as follows:
September 28,
% of
September 30,
% of
Increase / (Decrease)
2024
Total
2023
Total
$
%
Health care distribution
(1)
Dental
$
5,690
60.0
%
$
5,737
61.5
%
$
(47)
(0.8)
%
Medical
3,140
33.1
2,991
32.1
5.0
Total health care distribution
8,830
93.1
8,728
93.6
1.2
Technology and value-added services
(2)
6.9
6.4
9.7
Total
$
9,482
100.0
%
$
9,322
100.0
%
$
1.7
%
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
(3.0)
%
1.9
%
(1.1)
%
(0.2)
%
(1.3)
%
Dental Equipment
0.5
0.4
0.9
-
0.9
Total Dental
(2.2)
1.5
(0.7)
(0.1)
(0.8)
Medical
(3.3)
8.3
5.0
-
5.0
Total Health Care Distribution
(2.6)
3.9
1.3
(0.1)
1.2
Technology and value-added services
(2)
1.9
7.7
9.6
0.1
9.7
Total
(2.3)
%
4.1
%
1.8
%
(0.1)
%
1.7
%
(1)
Consists of consumable products, dental specialty products (including implant, orthodontic and endodontic products), small
equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical
products, diagnostic tests, infection-control products, PPE products, vitamins and orthopedic implants.
(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, practice technology, network and hardware services, and other services.
Global Sales
Global net sales for the nine months ended September 28, 2024 increased 1.7%.
The components of our sales
growth are presented in the table above.
The 2.3% decrease in our internally generated local currency sales was primarily
attributable to the slower than
anticipated pace of recovery from the cyber incident, the challenging economic
environment in certain markets and
lower sales of PPE products.
For the nine months ended September 28, 2024, the estimated decrease
in internally
generated local currency sales, excluding PPE products and COVID-19
test kits, was 1.7%.
We estimate that sales of PPE products and COVID-19 test kits were approximately $478 million and $540 million
for the nine months ended September 28, 2024 and September 30, 2023,
respectively, representing an estimated
decrease of $62 million, or 11.3%
versus the prior year, with the $62 million net decrease year-over-year
representing 0.6% of global net sales for the nine months ended September
28, 2024.
Dental
Dental net sales for the nine months ended September 28, 2024 decreased
0.8%.
The components of our sales
decline are presented in the table above.
The decrease in local currency sales was attributable to a decrease
in internally generated local currency sales for
dental merchandise of 2.2%,
partially offset by sales growth in internally generated local currency sales for dental
equipment and dental specialty products.
The decrease in internally generated local currency sales of dental
merchandise was primarily attributable to the slower than anticipated pace
of recovery from the cyber incident, the
challenging economic environment in certain markets, and lower sales
of PPE products.
Our sales growth in
internally generated local currency sales for dental equipment was primarily
due to growth in North America for
traditional equipment and our parts and service business, partially offset by lower North American
digital
equipment sales and declines in certain international markets, and some
sales shifting into the first quarter of 2024
due to the delay of equipment installations during the fourth quarter of 2023
resulting from the impact of the cyber
incident.
We estimate that sales of PPE products were approximately $228 million and $264 million for the nine months
ended September 28, 2024 and September 30, 2023, respectively, representing an estimated decrease of $36
million, or 13.4%
versus the prior year, with the $36 million net decrease year-over-year representing 0.6%
of
dental net sales for the nine months ended September 28, 2024.
The decrease in sales of PPE products was
primarily due to lower glove prices and reduced demand following the
cyber incident.
The estimated decrease in
internally generated local currency sales, excluding PPE products,
was 1.6%.
Medical
Medical net sales for the nine months ended September 28, 2024 increased
5.0%.
The components of our sales
growth are presented in the table above.
The increase in local currency sales was attributable to our expansion
in the Home Solutions market,
including the
acquisition of Shield Healthcare during the year ended December 30, 2023,
offset by a decrease of 3.3% in
internally generated local currency medical sales, resulting from the slower
than anticipated pace of recovery from
the cyber incident, the conversion of certain pharmaceutical products to lower
priced generics, and lower sales of
PPE products and influenza vaccines,
partially offset by strong sales of point-of-care diagnostics including multi-
assay flu/COVID combination test kits.
We estimate that sales of PPE products and COVID-19 test kits were approximately $250 million and $276 million
for the nine months ended September 28, 2024 and September 30, 2023,
respectively, representing an estimated
decrease of $26 million, or 9.4% versus the prior year, with the $26 million net decrease year-over-year
representing 0.8% of medical net sales for the nine months ended September
28, 2024.
The decrease in sales of
these products was primarily due to lower market prices of PPE products (primarily
lower glove pricing).
The
estimated decrease in internally generated local currency sales, excluding
PPE products and COVID-19 test kits,
was 2.6%.
Technology and value-added services
Technology and value-added services net sales for the nine months ended September 28, 2024 increased 9.7%.
The
components of our sales growth are presented in the table above.
The internally generated local currency increase
of 1.9% in technology and value-added services sales was primarily
attributable to a continued increase in the
number of cloud-based users of our practice management software and an
increase in revenue cycle management
solutions and our analytical products.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
September 28,
Gross
September 30,
Gross
Increase
2024
Margin %
2023
Margin %
$
%
Health care distribution
$
2,586
29.3
%
$
2,534
29.0
%
$
2.0
%
Technology and value-added services
67.1
67.6
8.8
Total
$
3,023
31.9
$
2,936
31.5
$
2.9
As a result of different practices of categorizing costs associated with distribution networks
throughout our
industry, our gross margins may not necessarily be comparable to other distribution companies.
Additionally, we
realize substantially higher gross margin percentages in our technology 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 product development.
Within our health care distribution segment, gross profit margins may vary between the periods as a result of
the
changes in the mix of products sold as well as changes in our customer
mix.
For example, sales of our corporate
brand and certain specialty 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 28, 2024
increased compared to the
prior-year-period due to 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 from acquisitions.
Operating Expenses
Operating expenses (consisting of selling, general and administrative
expenses; depreciation and amortization; and
restructuring costs) by segment and in total were as follows:
% of
% of
September 28,
Respective
September 30,
Respective
Increase
2024
Net Sales
2023
Net Sales
$
%
Health care distribution
$
2,196
24.9
%
$
2,063
23.6
%
$
6.5
%
Technology and value-added services
55.4
50.1
21.4
Total
$
2,557
27.0
$
2,360
25.3
$
8.3
The net increase in operating expenses is attributable to the following:
Operating Costs
Restructuring Costs
Acquisitions
Total
Health care distribution
$
$
$
$
Technology and value-added services
Total
$
$
$
$
The components of the net increase in total operating expenses are presented
in the table above.
The increase in
operating costs during the nine months ended September 28, 2024
includes increases in payroll and payroll related
costs, travel, convention expenses and litigation settlement costs in both
of our reportable segments, as well as
increased acquisition intangible amortization in our healthcare distribution
segment, partially offset by a gain of
$19 million related to the remeasurement to fair value of a previously held
equity investment within our healthcare
distribution segment.
The impact from this remeasurement gain was similar to that of a
remeasurement gain related
to another buy-up of a business within our healthcare distribution segment
during the nine months ended September
30, 2023.
We
also recorded an increase of $38 million in accrued contingent consideration
related to a 2023 acquisition in our
technology and value-added services segment.
During the nine months ended September 28, 2024, we also
incurred $12 million of expenses, within our health care distribution segment,
directly related to the cyber incident,
mostly consisting of professional fees.
During the nine months ended September 28, 2024, we received
insurance
proceeds of $20 million, recorded as a reduction of selling, general
and administrative expenses, representing a
partial insurance recovery of losses related to the cyber incident.
Other Expense, Net
Other expense, net was as follows:
September 28,
September 30,
Variance
2024
2023
$
%
Interest income
$
$
$
44.7
%
Interest expense
(96)
(58)
(38)
(64.7)
Other, net
(1)
(2)
(82.4)
Other expense, net
$
(79)
$
(48)
$
(31)
(63.8)
Interest income increased primarily due to increased interest rates.
Interest expense increased primarily due to
increased borrowings and increased interest rates.
Income Taxes
Our effective tax rate was 25.1% for the nine months ended September 28, 2024, compared
to 22.5% for the prior
year period.
The difference between our effective and federal statutory tax rates primarily relates to state
and
foreign income taxes and interest expense.
The Organization of Economic Co-Operation and Development (OECD) issued
technical and administrative
guidance on Pillar Two rules in December 2021, which provides for a global minimum tax rate on the earnings of
large multinational businesses on a country-by-country basis.
Effective January 1, 2024, the minimum global tax
rate is 15% for various jurisdictions pursuant to the Pillar Two rules.
As of September 28, 2024, the impact of the
Pillar Two rules to our financial statements was immaterial.
As we operate in jurisdictions which have adopted
Pillar Two, we are continuing to analyze the implications to effectively manage the impact for 2024 and beyond.
Future tax reform resulting from these developments may result in changes
to long-standing tax principles, which
may adversely impact our effective tax rate going forward or result in higher cash
tax liabilities.
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.
Net cash provided by operating activities was $644 million for the
nine months ended September 28, 2024,
compared to net cash provided by operating activities of $532 million for
the prior year.
The net change of $112
million was primarily attributable to changes in working capital accounts,
primarily accounts receivable and
inventory; partially offset by lower cash net income.
During the nine months ended September 28, 2024, the cyber
incident had several residual impacts to the operating cash flows from our
working capital, net of acquisitions,
including an increase in operating cash flows from accounts receivable due
to improved collection levels and
decreased cash flows from accounts payable and accrued expenses resulting
from previously delayed payments.
Net cash used in investing activities was $372 million for the nine
months ended September 28, 2024, compared to
net cash used in investing activities of $808 million for the prior year.
The net change of $436 million was
primarily attributable to decreased payments for equity investments
and business acquisitions.
Net cash used in financing activities was $306 million for the nine
months ended September 28, 2024, compared to
net cash provided by financing activities of $307 million for the
prior year.
The net change of $613 million was
primarily due to decreased net borrowings from debt to finance our investments
and increased acquisitions of
noncontrolling interests in subsidiaries and increased repurchases of common
stock.
The following table summarizes selected measures of liquidity and capital
resources:
September 28,
December 30,
2024
2023
Cash and cash equivalents
$
$
Working
capital
(1)
1,218
1,805
Debt:
Bank credit lines
$
$
Current maturities of long-term debt
Long-term debt
1,906
1,937
Total debt
$
2,653
$
2,351
Leases:
Current operating lease liabilities
$
$
Non-current operating lease liabilities
(1)
Includes $341 million and $284 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitization at September 28, 2024 and December 30, 2023, respectively.
Our cash and cash equivalents consist of bank balances and investments
in money market funds representing
overnight investments with a high degree of liquidity.
Accounts receivable days sales outstanding and inventory turns
Our accounts receivable days sales outstanding from operations
increased to 48.6 days as of September 28, 2024
from 43.7 days as of September 30, 2023, which was primarily attributable
to the impact of the cyber incident.
During the nine months ended September 28, 2024, we wrote off approximately $7
million of fully reserved
accounts receivable against our trade receivable reserve.
Our inventory turns from operations increased to 5.0 as of
September 28, 2024 from 4.5 as of September 30, 2023.
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 approximately one year
to approximately 17 years,
some of which may include options to extend the leases for up to 15 years.
As of September 28, 2024, our right-of-
use assets related to operating leases were $304 million and our current and non-current
operating lease liabilities
were $77 million and $262 million, respectively.
Stock Repurchases
On July 31, 2024 our Board of Directors authorized the repurchase of up
to an additional $500 million in shares of
our common stock.
From March 3, 2003 through September 28, 2024, we repurchased $5.1
billion, or 94,763,315 shares, under our
common stock repurchase programs, with $455 million available
as of September 28, 2024 for future common
stock share repurchases.
Subject to market conditions and other factors, we plan to continue
to accelerate our share
repurchase activity in light of our favorable cash position.
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our subsidiaries have the right,
at certain times, to require us to acquire
their ownership interest in those entities at fair value.
Accounting Standards Codification Topic 480-10 is
applicable for noncontrolling interests where we are or may be required
to purchase all or a portion of the
outstanding interest in a consolidated subsidiary from the noncontrolling
interest holder under the terms of a put
option contained in contractual agreements.
As of September 28, 2024 and December 30, 2023, our balance
for
redeemable noncontrolling interests was $832 million and $864 million,
respectively.
Please see
Redeemable Noncontrolling Interests
for further information.
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 30, 2023.
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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