Henry Schein, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 26, 2022; comparisons are with the three months ended March 27, 2021. Amounts are in U.S. dollars and, unless noted, millions.
Business context
Henry Schein distributes dental and medical products and provides technology and other value-added services to health care practitioners. It reports two segments: health care distribution and technology and value-added services, serving customers in 32 countries and territories.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $3,179 | $2,925 | +8.7% |
| Gross profit | $973 | $891 | +9.2% |
| Gross margin | 30.6% | 30.5% | +0.1 percentage point |
| Operating income | $244 | $230 | +6.1% |
| Net income attributable to Henry Schein | $181 | $166 | +9.0% |
| Diluted EPS | $1.30 | $1.16 | +12.1% |
| Operating cash flow | $93 | $63 | +$30 |
Sales growth reflected 10.1% growth in local currency, including 7.7% internally generated growth and 2.4% from acquisitions, partly offset by a 1.4% foreign-exchange impact. Health care distribution sales rose 7.9% to $3,000; dental sales rose 2.2% to $1,828 and medical sales rose 18.3% to $1,172. Technology and value-added services sales increased 23.4% to $179, including 13.0% acquisition growth.
Distribution gross margin improved to 28.6% from 28.4%, with management citing higher sales, supplier rebates, and product mix. Technology and value-added services gross margin declined to 64.9% from 70.3%, primarily because of lower margins at acquired business-services companies. Consolidated SG&A was $682 versus $614; depreciation and amortization was $47 versus $44. No restructuring costs were recorded in Q1 2022, compared with $3 in Q1 2021. The effective tax rate was 24.0%, down from 25.1%.
Financial position and liquidity
At March 26, 2022, cash and cash equivalents were $126, working capital was $1,686, and total debt was $866, compared with $118, $1,537, and $873, respectively, at December 25, 2021. Debt comprised $90 of short-term bank credit lines, $3 of current maturities, and $773 of long-term debt. The company had no borrowings on its $1 billion revolving credit facility. Operating lease liabilities totaled $353.
Operating cash flow was $93; investing cash outflow was $27 and financing cash outflow was $62. Operating cash flow improved by $30 year over year, reflecting higher net income and lower working-capital needs, including lower PPE and COVID-related inventory. Investing outflow fell from $223, largely because the prior-year period included more acquisition and equity-investment payments. Financing outflow fell from $120, principally due to no share repurchases in Q1 2022.
Management stated that cash, access to debt and equity markets, and available credit facilities were sufficient for foreseeable short- and long-term capital needs. It anticipated future increases in working-capital requirements. Inventory turns decreased to 4.7 from 5.2 a year earlier; accounts-receivable days sales outstanding decreased to 42 from 43.
Material changes, outlook, and risks
- Management reported lower dental patient traffic early in the quarter, associated with COVID-19 variants, especially in Europe; traffic began to improve as the quarter progressed. It expected recovery in affected European markets, but at a slower pace.
- Medical sales benefited from increased COVID-19 test-kit and point-of-care diagnostic sales. Estimated PPE and COVID-related product sales were $487, up 4.4% year over year; excluding these products, estimated internally generated local-currency sales growth was 8.9%.
- The filing provides no specific full-year 2022 earnings or revenue guidance. Management cautioned that the pandemic, variants, supply-chain and labor challenges, customer demand, and macroeconomic conditions could continue to create volatility; the potential future pandemic impact could not be reasonably estimated.
- Henry Schein was named in fewer than 175 opioid-related lawsuits alleging improper distribution monitoring. The company said opioid sales were less than 0.2% of 2021 sales and stated it would defend itself vigorously. It had accrued its best estimate of probable, estimable losses; the amount was not material.
- A business was suspended by CMS from receiving Medicare payments while it may continue performing and billing for services. Amounts billed are held in escrow pending an audit; slightly more than $8 million of revenue was deferred, including $4 million in Q1 2022.
- Unrecognized tax benefits were $87, of which $73 would affect the effective tax rate if recognized. The company said changes over the next 12 months could materially affect its income statement.
- Management identified acquisition integration and systems implementation activity as a material change in internal control over financial reporting; it said the related change-management controls were included in its assessments. Disclosure controls were concluded to be effective as of March 26, 2022.
Important facts for investors to verify
- Whether dental patient traffic and European market recovery improved after quarter-end, and how COVID-related product demand and inventory levels evolved.
- Whether medical sales growth and technology-segment acquisition contributions were sustainable, and whether the technology segment’s gross-margin decline persisted.
- The status and financial exposure of opioid litigation, including upcoming trial schedules, and the CMS audit and deferred Medicare-related revenue.
- Working-capital trends, inventory turns, short-term bank borrowings, and compliance with credit-facility leverage covenants.
- Changes in unrecognized tax benefits and the potential effect of tax audits or other tax matters.