Henry Schein, Inc. — FY 2022 Form 10-K
Business context and reporting period
Henry Schein distributes dental and medical products and provides practice-management software and other services. It serves more than one million customers in 32 countries through two reportable segments: health care distribution and technology and value-added services. This filing reports the fiscal year ended December 31, 2022, a 53-week year, compared with 52 weeks in FY 2021. The filing does not provide a clear standalone Q4 income statement; the figures below are annual.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data and percentages.
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Net sales | $12,647 | $12,401 | +2.0% |
| Gross profit / margin | $3,831 / 30.3% | $3,674 / 29.6% | +4.3% / +0.7 percentage points |
| Operating income / margin | $747 / 5.9% | $852 / 6.9% | -12.3% |
| Net income attributable to Henry Schein | $538 | $631 | -14.7% |
| Diluted EPS | $3.91 | $4.45 | -12.1% |
| Cash from operating activities | $602 | $710 | -$108 |
| Cash used in investing activities | $276 | $677 | -$401 used |
| Cash used in financing activities | $315 | $333 | -$18 used |
- At year-end, cash was $117 million, working capital $1.764 billion, and total debt $1.149 billion, up from $873 million. Debt comprised $103 million of bank credit lines, $6 million of current long-term debt maturities, and $1.040 billion of long-term debt. Operating lease liabilities totaled $348 million.
- Operating cash flow declined primarily due to working-capital movements, including higher other current assets and lower accounts payable and accrued expenses. Inventory was $1.963 billion versus $1.861 billion; inventory turns fell to 4.7 from 5.2.
- Health care distribution sales rose 1.4% to $11.924 billion; dental sales declined 0.9% to $7.473 billion and medical sales rose 5.7% to $4.451 billion. Technology and value-added services sales increased 11.8% to $723 million.
- Foreign exchange reduced reported sales growth by 2.4 percentage points. Local-currency growth was 4.4%; management estimated internally generated local-currency growth, excluding PPE and COVID-19 test kits, at 6.7%.
- The company repurchased $485 million of shares in 2022. It had $115 million remaining under its existing authorization at year-end; the board authorized a further $400 million repurchase in February 2023. No dividends were declared in 2022 or 2021.
Material changes versus FY 2021
- Sales grew modestly, but operating income, net income and diluted EPS declined. Operating expenses rose 9.3% to $3.084 billion, including restructuring and integration costs of $131 million, versus $8 million in 2021.
- COVID-19-related product sales receded: estimated PPE and COVID-19 test kit sales were $1.245 billion, down 34.7%. The company recorded a $17 million inventory obsolescence reserve for COVID-19 test kits.
- Distribution gross margin improved to 28.2% from 27.6%, driven in part by product mix and acquisitions. Technology and value-added services gross margin declined to 65.5% from 67.2%, partly due to acquired businesses with lower margins and investment in product development and customer service.
- Interest expense increased to $44 million from $28 million, reflecting higher borrowings and interest rates. The effective tax rate was 23.5%, compared with 23.8%.
- The company spent $158 million, net of acquired cash, on acquisitions and equity investments, compared with $571 million in 2021. FY 2022 included the acquisition of Midway Dental Supply.
Outlook, commentary, risks and unusual items
- The filing gives no specific FY 2023 revenue, earnings or cash-flow guidance. Management expects its restructuring initiative to continue through 2023, but says it cannot reasonably estimate the total expected costs or future cash expenditures.
- FY 2022 restructuring included $128 million of charges, primarily severance, accelerated lease-asset amortization, asset impairment and exit costs. The company recorded $49 million of costs related to an unprofitable U.S. business it planned to dispose of, with completion expected in Q1 2023. It also vacated a headquarters building, recording $34 million of accelerated lease-asset amortization.
- Management said inflation and U.S. dollar strength had not materially affected FY 2022 results, while identifying inflation, interest rates, foreign exchange, supply-chain disruption and customer demand as continuing uncertainties. The company expects order fulfillment to recover toward historical levels as supply chains stabilize; approximately 96% of items ordered in 2022 shipped without back-ordering, versus a historical level of approximately 99%.
- COVID-19-related demand, product pricing and inventory valuation remain uncertain. Other significant risks include supplier dependence, competition and customer consolidation, acquisitions and integration, health-care regulation and reimbursement changes, cybersecurity and privacy, and international and macroeconomic exposure.
- The company faces fewer than 150 opioid-related lawsuits and intends to defend itself. It settled seven Utah cases in December 2022 for $60,000. The filing states opioid sales were less than 0.2% of FY 2022 sales and accrued losses for probable, reasonably estimable claims were not material.
- Henry Schein received two grand jury subpoenas in 2022 related to an investigation of possible violations by former subsidiary Butler Animal Health Supply; the company said it was cooperating. The filing does not identify a quantified potential loss.
- A business was suspended by CMS from receiving Medicare payments in October 2021; CMS terminated the suspension on September 30, 2022. The company recognized $4 million of previously deferred revenue in 2022.
- BDO issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor reported effective controls as of December 31, 2022.
Important facts for investors to verify
- Whether core dental and medical demand can sustain growth as PPE and COVID-19 product sales continue to normalize, and whether inventory reserves need further adjustment.
- The remaining restructuring and disposal costs, the timing and proceeds or liabilities from the planned business disposal, and whether the initiative improves operating margins.
- The drivers of higher debt and interest costs, the maturity and refinancing profile, and the company’s capacity to fund working capital, acquisitions and share repurchases.
- Developments in opioid litigation and the former Butler investigation, including any changes to loss estimates or contingencies.
- Whether technology-segment growth translates into improved margins, given the reported decline in segment gross margin.