Henry Schein, Inc. — Q2 2023 Form 10-Q
Reporting period: Second quarter and six months ended July 1, 2023; comparisons are to the periods ended June 25, 2022. Amounts are in millions of dollars except per-share data.
Business context and financial performance
Henry Schein distributes dental and medical products and provides technology and value-added services to health care practitioners. It reports two segments: health care distribution and technology and value-added services.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $3,100 | $3,030 | $6,160 | $6,209 |
| Gross profit | $975 | $945 | $1,941 | $1,918 |
| Gross margin | 31.4% | 31.2% | 31.5% | 30.9% |
| Operating income | $201 | $220 | $376 | $464 |
| Net income attributable to Henry Schein | $140 | $160 | $261 | $341 |
| Diluted EPS | $1.06 | $1.16 | $1.97 | $2.46 |
- Q2 sales grew 2.3% as reported; six-month sales declined 0.8%. Excluding PPE and COVID-19 test kits, internally generated local-currency sales increased 3.3% in Q2 and 4.8% for the six months.
- Q2 segment sales: dental $1,957 (up 5.6%); medical $950 (down 4.6%); technology and value-added services $193 (up 6.7%). Six-month changes were up 4.7%, down 11.4%, and up 6.7%, respectively.
- Q2 operating income fell despite higher sales; six-month operating income also declined. Q2 segment operating income was $166 for distribution versus $189 a year earlier, and $35 for technology and value-added services versus $31.
- Cash from operations was $301 for the six months, versus $250. Investing cash use was $340 versus $59; financing provided $59 versus using $195. Cash and cash equivalents were $137 at July 1, 2023.
- Total debt was $1,524 at July 1, 2023, up from $1,149 at December 31, 2022. This comprised $325 in bank credit lines, $66 in current maturities, and $1,133 in long-term debt. Working capital was $1,635, down from $1,764.
Material changes and unusual items
- PPE and COVID-19 test kit sales were about $164 in Q2, down 36.9%; for the first six months, they were about $365, down 51.2%. Management expects further year-over-year decreases in these sales during 2023.
- Operating expenses increased, reflecting restructuring, higher operating costs and acquisitions. The company recorded $18 of restructuring costs in Q2 and $48 for the six months; the plan is now expected to extend through 2024. Management said it cannot reasonably estimate the total expected costs or future cash expenditures.
- Q2 and six-month operating expenses included an $18 remeasurement gain after the company acquired control of a previously held equity investment. The filing also reports an $18 gain in connection with that remeasurement.
- On April 5, 2023, Henry Schein acquired a 57% voting interest in French dental products and software provider Biotech Dental. Preliminary consideration was $423, including $182 of redeemable noncontrolling interests; purchase accounting remains incomplete.
- Six-month acquisition and investment payments, net of cash acquired, were $251. Goodwill rose to $3,335 from $2,893, and redeemable noncontrolling interests increased to $820 from $576.
Outlook, liquidity, risks and contingencies
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said it expects further 2023 declines in PPE and COVID-19 test kit sales, and anticipates higher working-capital requirements.
- Management believes cash, access to debt and equity markets, and available credit facilities are sufficient for foreseeable short- and long-term needs. Subsequent to quarter-end, the company amended its revolving facility, extending maturity to July 2028, and entered a $750 three-year term loan maturing in July 2026.
- Key stated risks include economic and foreign-exchange conditions, inflation, supplier and supply-chain dependence, competition, acquisition integration, regulation, cybersecurity and privacy, litigation, and changes in health care reimbursement. The company said inflation and the stronger U.S. dollar had not materially affected results; inflation’s impact was more pronounced in Europe.
- The company faces fewer than 175 opioid-related lawsuits and is cooperating with a U.S. grand jury investigation concerning a former subsidiary, Butler Animal Health Supply. It said recorded legal accruals and related expenses were not material; it intends to defend the opioid matters vigorously.
- Unrecognized tax benefits were $103, of which $88 would affect the effective tax rate if recognized; changes over the next 12 months could materially affect income. The company reported effective tax rates of 22.0% for Q2 and 22.8% for the six months.
- Disclosure controls were deemed effective. Acquisitions, integrations and systems implementations were a material change in internal control over financial reporting; Biotech Dental is expected to be excluded from the 2023 annual assessment as permitted for newly acquired businesses.
Investor verification priorities
- Review the drivers of weaker operating income and EPS, including expense growth, restructuring costs, interest expense and the nonrecurrence of acquisition-related gains.
- Track medical distribution and PPE/COVID-19 product sales, and compare underlying growth excluding those products with reported results.
- Assess acquisition integration, final Biotech Dental purchase accounting, goodwill and redeemable noncontrolling-interest valuations.
- Monitor debt levels, borrowing costs, facility availability, covenant compliance and the effect of acquisition funding on liquidity.
- Follow restructuring costs and cash requirements through 2024, and developments in the opioid litigation, Butler investigation and tax contingencies.