Henry Schein, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 25, 2021 (52 weeks), compared primarily with the 52 weeks ended December 26, 2020. This filing reports annual results, not standalone fourth-quarter results. Amounts below are in U.S. dollars.
Business context
Henry Schein distributes dental and medical products and provides practice-management software and related services. It serves more than one million customers across 32 countries. Its two reportable segments are health care distribution and technology and value-added services.
Financial performance
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Net sales | $12.401 billion | $10.119 billion | Up 22.6%; excluding prior-year Covetrus transition-service revenue, up 23.5% |
| Gross profit / margin | $3.672 billion / 29.6% | $2.814 billion / 27.8% | Margin increased 1.8 percentage points |
| Operating income / margin | $851.7 million / 6.9% | $535.3 million / 5.3% | Operating income up 59.1% |
| Net income from continuing operations | $660.5 million | $418.4 million | Company-attributable net income was $631.2 million versus $403.8 million |
| Diluted EPS | $4.45 | $2.81 | Continuing-operations EPS |
| Operating cash flow | $709.6 million | $593.5 million | Up $116.1 million |
| Cash and cash equivalents | $118.0 million | $421.2 million | Down $303.2 million |
| Working capital | $1.538 billion | $1.508 billion | Up $29.2 million |
| Total debt | $872.5 million | $699.0 million | Includes bank credit lines and current and long-term debt |
Health care distribution sales rose 23.4% to $11.760 billion: dental sales increased 27.6% and medical sales 16.6%. Technology and value-added services sales rose 24.6% to $640.9 million. Management estimated PPE and COVID-19-related product sales of $1.744 billion in 2021, up 34.2%; excluding those products, internally generated local-currency sales also grew.
Cash used in investing activities was $677.2 million, principally reflecting increased payments for acquisitions and equity investments. Cash used in financing was $333.0 million, including $401.2 million of share repurchases. The company reported a $1.0 billion revolving credit facility with no borrowings at year-end; $105.0 million was outstanding under its receivables securitization facility.
Material changes and unusual items
- Results rebounded from pandemic-disrupted 2020 as practice activity recovered toward pre-pandemic levels; 2021 growth also included elevated sales of PPE and COVID-19 products.
- Distribution gross margin improved to 27.6% from 25.7%, helped by higher supplier rebates and lower inventory adjustments than in 2020. Management cautioned that inventory adjustments could recur.
- Technology and value-added services gross margin declined to 67.3% from 70.6%, partly due to lower margins at acquired business-services companies and certain U.S. federal-government transactions.
- The effective tax rate increased to 23.8% from 19.1%; 2020 benefited from IRS and other audit resolutions.
- Share-based compensation expense rose to $78.4 million from $8.8 million. The filing attributes the 2021 award structure partly to pandemic-related uncertainty and also reports a special pandemic recognition award.
- Acquisition and equity-investment cash payments, net of cash acquired, were $570.6 million. The filing reports $773.9 million of total acquisition consideration for 2021 acquisitions, including noncash and other consideration.
- The restructuring program concluded in 2021; charges were $7.9 million, compared with $32.1 million in 2020. No separately reported restructuring costs were expected in 2022.
Outlook, risks and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management expects continued uncertainty and volatility tied to COVID-19, variants, practice demand, PPE and test-product demand and pricing, supply chains, labor availability, and possible vaccination or testing requirements. It states that the potential future pandemic impact cannot be reasonably estimated.
Key risks include reliance on third-party suppliers, product and shipping availability and costs, competition and customer consolidation, acquisition integration, healthcare reimbursement and regulatory changes, privacy and cybersecurity, foreign-currency exposure, and macroeconomic conditions including inflation. The company says it had sufficient liquidity for foreseeable needs, while noting working-capital requirements may rise.
Henry Schein disclosed fewer than 175 opioid-related lawsuits alleging, among other claims, inadequate monitoring or restriction of opioid distribution. It intends to defend itself; opioid sales represented less than 0.2% of 2021 revenue. Other pending matters were not expected by management to materially affect consolidated financial position, liquidity or results. Separately, one business was suspended from receiving Medicare payments pending an audit; slightly more than $4 million of related revenue was deferred, with billed amounts held in escrow.
The auditor issued an unqualified opinion on the financial statements and internal controls. Management and the auditor concluded that internal control over financial reporting was effective as of year-end. The auditor identified acquired-customer-relationship revenue growth assumptions as a critical audit matter.
Investor verification priorities
- Assess how much growth and margin improvement is repeatable without elevated PPE and COVID-19 product sales, and compare reported growth with management’s estimates excluding those products.
- Review inventory levels, valuation reserves and supplier rebates, particularly given product-demand and pricing volatility.
- Track acquisition returns, integration progress, goodwill and intangible valuations, and the effects of contingent or redeemable noncontrolling interests.
- Reconcile the decline in year-end cash with operating cash generation, acquisition spending, debt changes and share repurchases; monitor debt maturities and covenant headroom.
- Follow the Medicare audit and deferred revenue, opioid litigation developments, and any changes in expected loss estimates or disclosures.
- Verify subsequent-period guidance and the impact of pandemic, supply-chain, labor, regulatory and cybersecurity developments, as the filing does not quantify their future effects.