Henry Schein, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2023; comparisons are to the quarter ended September 24, 2022. Amounts are in millions of dollars except per-share data. Henry Schein distributes health care products and provides technology and value-added services, primarily to dental and medical practitioners.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $3,162 | $3,067 | $9,322 | $9,276 |
| Gross profit | $995 | $914 | $2,936 | $2,832 |
| Gross margin | 31.5% | 29.8% | 31.5% | 30.5% |
| Operating income | $200 | $211 | $576 | $675 |
| Net income attributable to Henry Schein | $137 | $150 | $398 | $491 |
| Diluted EPS | $1.05 | $1.09 | $3.02 | $3.55 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $532 | $348 |
- Cash flow and investment: Nine-month investing cash outflow was $808 million, mainly reflecting acquisitions and investments; financing cash inflow was $307 million, primarily reflecting net borrowing. Cash rose to $166 million from $117 million at year-end 2022.
- Liquidity and debt: Working capital was $2,020 million, compared with $1,764 million at December 31, 2022. Total debt was $1,899 million, up from $1,149 million; this included $745 million outstanding on a new term loan. The $1.0 billion revolving facility had no borrowings at quarter-end. The company reported access to cash, debt markets and credit facilities sufficient for currently foreseeable needs.
- Segments: Q3 health care distribution sales were $2,952 million (+2.1%) and technology and value-added services sales were $210 million (+18.8%). Nine-month sales were $8,728 million (approximately flat) and $594 million (+10.7%), respectively.
Changes versus comparable periods
- Q3 sales increased 3.1%, but operating income fell to $200 million from $211 million and attributable net income declined to $137 million from $150 million. Higher gross profit and margins were more than offset by increased operating expenses and interest costs.
- Nine-month sales increased 0.5%, while operating income declined 14.7% and attributable net income declined 18.9%. Diluted EPS fell to $3.02 from $3.55.
- Management estimated nine-month PPE and COVID-19 test-kit sales declined $450 million, or 45.5%, year over year. Excluding those products, estimated internally generated local-currency sales increased 3.5%.
- Q3 technology and value-added services growth was supported by practice-management solutions and acquisitions. Dental distribution grew, while medical distribution declined, principally reflecting lower PPE and COVID-19 test-kit sales.
- Interest expense rose to $25 million in Q3 from $8 million and to $58 million for nine months from $23 million, mainly due to higher borrowings and interest rates.
Outlook, risks and unusual items
- Cybersecurity incident: Disclosed after quarter-end, the October 14 incident affected North American and European dental and medical distribution operations; the company determined a data breach occurred and its investigation remained ongoing. A November 22 disruption affected e-commerce and related applications; restoration was underway across regions. Management said the incident was expected to adversely affect fourth-quarter and full-year 2023 financial results. Cyber insurance is subject to retentions and limitations, and may not cover all related costs.
- Restructuring: The program, begun in 2022 and now expected to continue through 2024, generated $59 million of costs in the first nine months of 2023, versus $9 million in the prior-year period. The company said it could not reasonably estimate total expected costs or future cash expenditures.
- Acquisitions: Major 2023 transactions included S.I.N. Implant System and a 57% interest in Biotech Dental. Acquisition accounting remained preliminary. Nine-month cash payments for acquisitions and equity investments, net of acquired cash, were $668 million. Goodwill increased to $3,595 million from $2,893 million at year-end.
- Other exposures: The company faces opioid-related lawsuits and is cooperating with a U.S. grand jury investigation concerning a former subsidiary. It said accrued legal losses were not material and other pending matters were not expected to materially affect financial position, liquidity or results. Unrecognized tax benefits were $110 million; changes could materially affect income in the next 12 months.
- Outlook: The filing provides no clear numerical earnings or revenue guidance. Management cited continued declines in PPE and COVID-19 test-kit sales, economic and foreign-exchange uncertainty, acquisition integration, and cybersecurity risks. It also noted that its restructuring cost estimate was unavailable.
- Controls: Management concluded disclosure controls were effective as of September 30, 2023. Acquisition integration and systems implementation activities were a material change in internal control over financial reporting; the subsequent cyber incident’s effect on controls was still under review.
Important facts for investors to verify
- Subsequent company disclosures on the cyber incident, business recovery, data-breach impact, insurance recovery and revised 2023 outlook.
- Whether sales and margins excluding PPE and COVID-19 test kits continue to grow, particularly in medical distribution.
- Acquisition integration, final purchase-price allocations, goodwill and the effect of added debt and interest expense.
- Future restructuring charges and cash costs, given the extended timeline and lack of a total estimate.
- Debt maturities, covenant headroom, working-capital needs and cash generation as acquisition spending and borrowing remain elevated.