Business context and reporting period
Henry Schein, Inc. distributes dental and medical products and provides healthcare-practice software and related services. This Form 10-K covers the 52-week fiscal year ended December 30, 2023; the comparable 2022 year contained 53 weeks. The filing provides full-year results, not a clear standalone Q4 income statement.
Financial results and liquidity
| Metric (US$ millions, except per-share data) | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $12,339 | $12,647 | (2.4%) |
| Gross profit / margin | $3,861 / 31.3% | $3,831 / 30.3% | Profit +0.8% |
| Operating income | $615 | $747 | (17.7%) |
| Net income attributable to Henry Schein | $416 | $538 | (22.7%) |
| Diluted EPS | $3.16 | $3.91 | (19.2%) |
| Cash from operations | $500 | $602 | (17.0%) |
| Cash used in investing | $1,135 | $276 | Use increased |
Health care distribution sales declined 3.3% to $11,533 million; dental sales rose 0.9% to $7,539 million, while medical sales fell 10.3% to $3,994 million. Technology and value-added services sales increased 11.4% to $806 million. Segment operating income was $470 million for distribution (down from $619 million) and $145 million for technology and services (up from $128 million).
At year-end, cash and cash equivalents were $171 million, working capital was $1,805 million, and total debt was $2,351 million, compared with $117 million, $1,764 million and $1,149 million, respectively, in 2022. Debt includes $264 million in bank credit lines, $150 million of current maturities and $1,937 million of long-term debt. Cash from financing was $701 million, primarily reflecting increased borrowings. The company states its cash, access to debt and equity markets, and credit facilities are sufficient for foreseeable needs.
Material changes and notable items
- October 2023 cybersecurity incident disrupted North American and European dental and medical distribution operations, including ecommerce; it adversely affected fourth-quarter and full-year results. The company recorded $11 million of direct remediation costs and expects some short-term residual financial impact in 2024. The scope of personal and sensitive information obtained remains under investigation; insurance coverage is $60 million after a $5 million retention.
- PPE and COVID-19 test-kit sales fell an estimated $532 million, or 42.7%, year over year. Excluding those products, internally generated local-currency sales were flat for the full year; the company attributed the deterioration from earlier-year growth partly to the cyber incident.
- Operating expenses increased 5.3% to $3,246 million, including higher payroll and other costs, acquisition-related expenses, impairments and restructuring. Interest expense rose to $87 million from $35 million, reflecting higher borrowings and rates.
- Investing cash outflow rose substantially, mainly from acquisitions, equity investments and capital spending. 2023 acquisitions included Shield Healthcare, S.I.N. Implant System and Biotech Dental; purchase accounting for these transactions was not complete at filing.
- The ongoing restructuring program, begun in 2022, was extended through the end of 2024. 2023 restructuring and integration costs were $80 million; management said it could not reasonably estimate total future costs or cash expenditures.
Outlook, risks and contingencies
The filing does not provide specific 2024 revenue or earnings guidance. Management expects a short-term residual effect from the cyber incident. It also noted that reduced Medicare DMEPOS reimbursement rates for non-rural suppliers took effect January 1, 2024, and that Pillar Two minimum-tax rules may affect future tax rates or cash taxes.
Key risks include cyber and data-security exposure, supplier availability and rebate terms, competition and customer consolidation, healthcare reimbursement and regulatory changes, integration of acquisitions, foreign exchange and interest rates, and litigation. The company faces fewer than 175 opioid-related lawsuits and intends to defend them; opioid sales were less than 0.4% of 2023 sales. A putative class action related to the cyber incident remained pending. The company also reported a federal grand jury investigation concerning a former subsidiary, Butler Animal Health Supply, and stated it is cooperating.
Control and audit matter: BDO issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting, identifying a material weakness involving logical and user access management and segregation of duties at the application-control level. Management concluded its controls were effective and disagreed that the deficiencies constituted a material weakness. Controls at three recently acquired businesses, together representing less than 1.5% of sales, were excluded from the assessment.
Most important facts for investors to verify
- Progress in remediating the auditor-identified ICFR material weakness and whether management’s control assessment changes.
- Final scope, costs, insurance recoveries and any additional operational or legal effects of the cybersecurity incident, including the 2024 residual impact.
- Underlying sales trends excluding declining PPE and COVID-19 test-kit sales, particularly recovery in medical and distribution operations.
- Debt, covenant headroom and refinancing requirements following the increase in borrowings; review amendments and waivers associated with credit and receivables facilities.
- Acquisition integration, final purchase accounting, restructuring costs through 2024, and developments in opioid and cyber-related litigation.