Henry Schein, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 30, 2024; comparable period ended April 1, 2023. Amounts are in U.S. dollars unless noted.
Business context
Henry Schein distributes health care products and provides technology and value-added services, primarily to dental and medical practitioners. It reports two segments: health care distribution and technology and value-added services. The company operates in 33 countries and serves more than one million customers.
Financial results and liquidity
| Metric | Q1 2024 | Prior period | Change |
|---|---|---|---|
| Net sales | $3.172 billion | $3.060 billion | +3.7% |
| Gross profit / margin | $1.012 billion / 31.9% | $966 million / 31.6% | +4.7% gross profit |
| Operating income | $150 million | $175 million | −14.3% |
| Net income | $98 million | $128 million | −23.4% |
| Net income attributable to Henry Schein | $93 million | $121 million | −23.1% |
| Diluted EPS | $0.72 | $0.91 | −20.9% |
| Operating cash flow | $197 million | $27 million | +$170 million |
Health care distribution sales were $2.955 billion, up 3.0%; technology and value-added services sales were $217 million, up 13.8%. Operating income was $126 million for distribution, versus $145 million, and $24 million for technology and services, versus $30 million. The filing attributes reported sales growth partly to acquisitions and foreign exchange: internally generated local-currency sales decreased 1.8% overall.
Cash and cash equivalents were $159 million at quarter-end, down from $171 million at year-end 2023. Working capital was $1.744 billion, versus $1.805 billion. Total debt was $2.377 billion, versus $2.351 billion; this includes $264 million in bank credit lines, $103 million of current maturities and $2.010 billion of long-term debt. Interest expense rose to $30 million from $14 million. Net cash used in investing activities was $72 million and net cash used in financing activities was $151 million.
Accounts receivable days sales outstanding increased to 50.4 days from 43.4 days a year earlier; inventory turns rose to 4.9 from 4.3. The company reported that it believes available cash, debt and equity market access, and credit facilities provide sufficient liquidity for foreseeable needs.
Material changes versus the prior period
- Sales increased, but operating income and earnings declined as operating expenses rose 9.0% to $862 million and interest expense increased. SG&A increased to $791 million from $717 million.
- Distribution sales growth included Shield Healthcare and other acquisitions; dental sales also benefited from Biotech Dental and S.I.N. acquisitions. Technology and services growth reflected more cloud-based users and increased revenue cycle management activity.
- Lower sales to episodic customers following the cyber incident, lower PPE sales and lower COVID-19 test-kit sales weighed on internally generated sales. Management estimated that, excluding PPE and COVID-19 test kits, internally generated local-currency sales decreased 1.2% overall.
- Operating cash flow improved substantially, primarily reflecting working-capital movements, including improved receivables collections, partly offset by payments of previously delayed payables and accrued expenses.
- Foreign-currency translation produced a $54 million loss in comprehensive income, compared with a $25 million gain in the prior period.
Outlook, risks and unusual items
- The filing provides no specific quarterly or full-year financial guidance. Management said it has programs planned and underway to re-establish customers affected by the cyber incident.
- The October 2023 cyber incident continued to reduce sales to episodic customers; the company incurred $5 million of related expenses in Q1. It maintains a $60 million policy for that incident, subject to a $5 million retention and policy limitations. A separate ecommerce disruption was reported as remediated.
- The restructuring plan, originally launched in 2022, was extended through the end of 2024. Q1 restructuring costs were $10 million, versus $30 million. Management said it cannot currently estimate the total expected costs or future cash expenditures.
- A $15 million increase in contingent consideration related to a 2023 acquisition was recorded in SG&A. Q1 acquisitions in technology and value-added services had total consideration of $19 million.
- Key risks include cyber and data-security exposures, supply and supplier-rebate risks, competition and customer consolidation, regulatory and reimbursement changes, foreign exchange and macroeconomic conditions, acquisitions and integration, and litigation. The filing describes opioid-related cases, a cyber-related putative class action and a False Claims Act case; management said accrued probable losses were not material and intends to defend the matters.
- Management concluded disclosure controls were effective at March 30, 2024. It reported a material change in internal control over financial reporting associated with acquisition integrations and systems implementations; remediation of previously identified access-management and segregation-of-duties deficiencies was ongoing, with testing expected to be completed before year-end.
Most important facts for investors to verify
- Whether customer recovery after the cyber incident translates into sustained organic sales growth, especially in dental and medical distribution.
- Whether operating expense growth, higher interest costs and acquisition-related items continue to pressure operating income and EPS.
- Receivables collection trends, working-capital needs and the availability and cost of borrowing, including the terms and utilization of the receivables securitization facility.
- The remaining restructuring costs and cash requirements, which management has not estimated, and progress on internal-control remediation.
- Developments in the cyber-related claims and other litigation, insurance recovery, and any change in the company’s assessment of potential losses.