Henry Schein, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 24, 2022; comparisons are with the quarter ended September 25, 2021. Year-to-date figures cover nine months. Amounts are in millions, except per-share data and percentages.
Business context
Henry Schein distributes dental and medical products and provides technology and value-added services to health care practitioners. Its two reportable segments are health care distribution and technology and value-added services. The interim financial statements are unaudited.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $3,067 | $3,178 | $9,276 | $9,070 |
| Gross profit | $914 | $912 | $2,832 | $2,694 |
| Gross margin | 29.8% | 28.7% | 30.5% | 29.7% |
| Operating income | $211 | $211 | $675 | $651 |
| Net income attributable to Henry Schein | $150 | $162 | $491 | $484 |
| Diluted EPS | $1.09 | $1.15 | $3.55 | $3.40 |
| Operating cash flow | — | $348 | $433 |
- Q3 sales declined 3.5%, including a 2.9% adverse foreign-exchange effect. Local-currency sales declined 0.6%; excluding PPE and COVID-19 test kits, internally generated local-currency sales increased an estimated 6.8%.
- For the first nine months, sales rose 2.3%: local-currency sales increased 4.5%, partly offset by a 2.2% foreign-exchange decline. Excluding PPE and COVID-19 test kits, internally generated local-currency sales increased an estimated 7.3%.
- Q3 health care distribution sales fell 3.9%; technology and value-added services sales rose 3.8%. Year-to-date, those segments grew 1.6% and 14.5%, respectively.
- Year-to-date gross profit increased 5.1%, while SG&A (including depreciation, amortization and restructuring/integration costs as presented in the MD&A comparison) rose 5.6% to $2,157. Q3 operating income was unchanged year over year.
- Cash and cash equivalents were $123 at September 24, 2022, versus $118 at December 25, 2021; reported working capital was $1,811 versus $1,537. Total debt was $1,045, up from $873, including $107 of short-term bank credit lines and $934 of long-term debt. The company reported no borrowings on its $1 billion revolving facility.
- Year-to-date investing cash outflow was $211 (versus $479), chiefly reflecting lower acquisition and equity-investment payments. Financing cash outflow was $121 (versus $254). Fixed-asset purchases were $67; operating cash flow was $348.
Material changes and unusual items
- Q3 dental sales declined 2.1% and medical sales declined 6.7%; technology and value-added services increased 3.8%. Lower PPE and COVID-19 test-kit sales were a major factor in the distribution declines. The company estimated Q3 sales of those products at $244, down 51.6% year over year.
- For the first nine months, estimated PPE and COVID-19 test-kit sales were $991, down 25.8% year over year. The company recorded a $12 inventory-obsolescence reserve for COVID-19 test kits in Q3.
- Q3 2021 included a $7 after-tax gain from contingent proceeds on the sale of Hu-Friedy; there was no comparable gain in Q3 2022.
- Foreign-currency translation losses were $176 for the first nine months of 2022, primarily reflecting U.S. dollar strengthening against the euro, pound, Australian dollar and Canadian dollar.
- Acquisitions during the first nine months of 2022 were described as immaterial to the financial statements; cash consideration was $132, with total acquisition consideration of $153. Acquisition and investment payments, net of cash acquired, were $127.
Outlook, management commentary and risks
- The filing provides no clear numerical earnings or revenue guidance. Management said restructuring savings are expected mainly in 2023 and beyond; it could not reasonably estimate the plan’s total costs or future cash expenditures.
- A restructuring plan begun in August 2022 targets strategic priorities, efficiency and North American office-space rationalization. Q3 charges were $9 for restructuring and $1 for integration; the initiative is expected to extend through 2023.
- Management said inflation and currency impacts had not been material to results to date, and expected inflation and foreign-currency fluctuations to moderate. It cited the breadth of its portfolio and lower-cost alternatives as ways to help protect gross profit.
- The company cautioned that renewed COVID-19 effects, supply-chain and labor challenges, changing demand for PPE and tests, inflation, recession, exchange rates, acquisitions and integration, competition, regulation, litigation and cybersecurity could affect results, liquidity or financial condition. It said the potential future impact of COVID-19 could not be reasonably estimated.
- Henry Schein is named in fewer than 150 opioid-related lawsuits and said it intends to defend itself. It also received U.S. grand jury subpoenas in August and October 2022 concerning a former subsidiary, Butler Animal Health Supply; the company said it was cooperating. The filing states recorded legal accruals were not material.
- The Inflation Reduction Act introduced a 15% corporate alternative minimum tax for tax years beginning after 2022 and a 1% excise tax on net stock repurchases after 2022; the company was still analyzing the law’s effects.
- Management reported effective disclosure controls as of September 24, 2022. It also identified acquisitions, integration and systems implementation activity, in aggregate, as a material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales trends excluding PPE and COVID-19 tests persist, and how lower test-kit demand and the $12 obsolescence reserve affect inventory and margins.
- How working-capital needs, slower inventory turns (4.7 versus 5.1 a year earlier) and receivables collection affect operating cash flow and borrowing needs.
- The level and cost of debt as interest rates change; short-term bank-line borrowings carried a 9.35% weighted-average rate at quarter-end.
- Future restructuring charges, cash costs and timing of expected savings, which management did not quantify.
- Developments in opioid litigation and the former-subsidiary investigation, as well as the financial effects of the Inflation Reduction Act.