Henry Schein, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended April 1, 2023; comparisons are with the three months ended March 26, 2022. Unless noted otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q1 2023 | Prior period | Change |
|---|---|---|---|
| Net sales | $3,060 | $3,179 | Down 3.8% |
| Gross profit / margin | $966 / 31.6% | $973 / 30.6% | Profit down $7; margin up 1.0 percentage point |
| Operating income / margin | $175 / 5.7% | $244 / 7.7% | Down 28.3% |
| Net income attributable to Henry Schein | $121 | $181 | Down 33.1% |
| Diluted EPS | $0.91 | $1.30 | Down 30.0% |
| Operating cash flow | $27 | $93 | Down $66 |
Gross margin improved despite lower sales, while operating expenses rose to $791 from $729, including $30 of restructuring costs (none in the prior period). Interest expense increased to $14 from $7, primarily reflecting higher borrowings and rates. The effective tax rate was 23.8%, versus 24.0%.
Segments and material changes
- Health care distribution: Sales decreased 4.4% to $2,869; operating income fell to $145 from $211. Dental sales rose 3.8% to $1,898, while medical sales fell 17.2% to $971.
- Technology and value-added services: Sales increased 6.8% to $191; operating income was $30 versus $33. Management cited improved transactional software trends and growth in cloud users, partly offset by expiration of a government contract.
- PPE products and COVID-19 test kits generated approximately $201 of sales, down 58.8%. Excluding those products, internally generated local-currency sales increased 6.3% overall, including 7.4% in dental and 4.2% in medical.
- Gross profit benefited from price increases, favorable product mix, and acquisition contributions; distribution gross profit was nevertheless lower due largely to reduced sales.
Cash, debt and liquidity
- Cash was $126 at quarter-end. Total debt was $1,312, up from $1,149 at December 31, 2022; this included $236 in bank credit-line borrowings and $1,021 in long-term debt. Cash less reported debt was approximately $1,186.
- Working capital was $1,780, compared with $1,764 at year-end. The company reported no borrowings under its $1.0 billion revolving credit facility; $9 of letters of credit were outstanding.
- Cash used in investing was $39, including $31 of fixed-asset purchases. Financing provided $21, including increased borrowings and $100 of share repurchases. Cash increased by $9 during the quarter.
- Operating cash flow declined mainly because of lower operating income and an unfavorable working-capital change. Accounts-receivable days sales outstanding rose to 43.4 from 41.6 a year earlier; inventory turns declined to 4.3 from 4.7.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management expects further declines in PPE and COVID-19 test-kit sales in 2023 compared with 2022.
- The restructuring plan, initiated in 2022 and expected to continue through 2023, incurred $30 of costs in the quarter. The company said it could not make a good-faith estimate of total expected costs or future cash expenditures.
- Management said inflation’s impact was slightly more pronounced in Europe than North America and that pricing and lower-cost product alternatives can help protect gross profit. It reported no material impact from inflation and U.S. dollar strength on current-quarter results.
- Risks highlighted include supplier dependence, economic and foreign-exchange conditions, competition, regulation, cybersecurity and privacy, acquisition integration, and possible renewed COVID-19 impacts. The company said the potential pandemic impact could not be reasonably estimated.
- The company faces fewer than 175 opioid-related lawsuits and intends to defend itself; opioid sales were less than 0.2% of 2022 sales. It is also cooperating with U.S. authorities’ investigation involving Butler Animal Health Supply, a former subsidiary. The filing says accrued probable and estimable legal losses were not material.
- Quarter-end receivables pledged in the securitization structure were $555, with related liabilities of $420; borrowing availability under that facility may be affected by customer payment patterns.
Key facts for investors to verify
- Whether underlying sales growth excluding PPE and COVID-19 test kits persists, particularly in medical distribution.
- How much of the margin improvement reflects durable pricing and mix versus temporary factors, and the full cost and cash impact of restructuring.
- Whether working-capital trends and operating cash generation improve, given lower quarterly operating cash flow and increased debt.
- Developments in opioid litigation and the former-subsidiary investigation, including any changes to loss estimates or contingencies.
- Future PPE and test-kit sales, acquisition integration, and the company’s liquidity and debt levels.