Henry Schein, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 25, 2022; comparisons are to periods ended June 26, 2021. Amounts are in millions of dollars except per-share data. The filing is unaudited.
Business context and results
Henry Schein distributes dental and medical products and provides technology and value-added services. Its two reportable segments are health care distribution and technology and value-added services.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $3,030 | $2,967 | $6,209 | $5,892 |
| Gross profit | $945 | $891 | $1,918 | $1,782 |
| Operating income | $220 | $210 | $464 | $440 |
| Net income attributable to Henry Schein | $160 | $156 | $341 | $322 |
| Diluted EPS | $1.16 | $1.10 | $2.46 | $2.26 |
Q2 sales increased 2.1% year over year; management attributed the increase to 4.5% local-currency growth, partly offset by a 2.4% foreign-exchange impact. Q2 gross margin rose to 31.2% from 30.0%; operating income increased 4.8%. For the first six months, sales grew 5.4%, including 7.3% local-currency growth and a 1.9% foreign-exchange drag. Six-month gross margin was 30.9%, versus 30.2%.
Segment performance and material changes
- Q2 health care distribution: Sales of $2,849, up 1.2%; operating income of $189, versus $182. Dental sales fell 3.1%, while medical sales rose 10.3%.
- Q2 technology and value-added services: Sales of $181, up 18.1%; operating income of $31, versus $28. Growth reflected internally generated sales and acquisitions. Segment gross margin declined to 65.9% from 68.9%, primarily due to investment in product development and customer service.
- Six-month trend: Distribution sales grew 4.6%, with medical up 14.5% and dental down 0.5%. Technology and value-added services grew 20.7%. The company estimated six-month PPE and COVID-19-related product sales at $747, down 10.1% year over year.
Q2 SG&A increased 6.6% to $725, reflecting higher operating and acquisition-related costs, payroll, travel and convention expenses. Management cited supplier rebates and product mix as contributors to distribution gross-profit improvement; technology segment margin pressure reflected acquired businesses and continued investment.
Cash flow, debt and liquidity
- Six-month cash flow: Operating cash flow was $250, versus $222. Investing cash outflow was $59, versus $341, mainly because acquisition and equity-investment payments were lower. Financing cash outflow was $195, versus $139.
- Balance sheet at June 25, 2022: Cash was $108, working capital was $1,713, and total debt was $858, compared with $873 at December 25, 2021. Total debt includes $85 of bank credit lines, $4 of current long-term debt maturities and $769 of long-term debt.
- The company reported no borrowings under its $1 billion revolving credit facility, which matures in 2026. It had $9 of letters of credit outstanding under that facility. Other short-term bank lines had $85 outstanding, at a weighted-average rate of 9.90%.
- Management said cash, access to debt and equity markets, and available credit facilities were sufficient for foreseeable short- and long-term needs. It also anticipated future increases in working-capital requirements. Inventory turns decreased to 4.6 from 5.1 a year earlier.
Outlook, risks and unusual items
- The filing provides no quantified full-year earnings or revenue guidance. Management expected continued volatility in COVID-19 test-kit sales; it reported declining test-kit demand in Q2, lower PPE and COVID-related product volumes, and a modest decline in dental patient traffic associated with appointment cancellations and staffing shortages. Medical benefited from point-of-care diagnostic tests, generic pharmaceuticals and equipment.
- COVID-19, supply-chain and labor disruptions, inflation, foreign exchange, competition, regulatory compliance, cybersecurity and acquisition integration were among the disclosed risks. Management said the potential future financial impact of COVID-19 could not be reasonably estimated.
- Subsequent event: On August 1, 2022, the company committed to a restructuring plan to streamline operations and support strategic priorities. Charges are expected in 2022 and 2023, but had not yet been estimated; anticipated expense savings are expected mainly in 2023 and later.
- Legal and regulatory matters: The company faced fewer than 150 opioid-related lawsuits and stated it would defend itself. In June 2022 it settled 26 West Virginia hospital cases and one additional hospital matter for a total of $300,000. Separately, a business was suspended by CMS from receiving Medicare payments while permitted to continue services; billed amounts are being escrowed, and $13 of revenue had been deferred.
- Foreign-currency translation losses reduced first-half other comprehensive income by $87. The company also reported $83 of unrecognized tax benefits, of which $69 would affect the effective tax rate if recognized; changes within 12 months could have a material income-statement impact.
Important facts for investors to verify
- Whether dental patient traffic and demand for COVID-19-related products stabilize, and how that affects organic sales and margins.
- The scale and timing of restructuring charges and the realization of expected savings.
- Developments in opioid litigation, the CMS payment suspension, the escrowed amounts and the $13 deferred revenue.
- Working-capital trends, particularly inventory turns, supplier payments and operating cash generation.
- Debt costs and covenant headroom as interest rates change; the filing reports $85 outstanding on other short-term bank lines at a 9.90% weighted-average rate.