UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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quarterly
or
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As of November 13, 2023,
there were
HENRY SCHEIN, INC.
INDEX
Page
3
4
5
6
7
8
9
9
10
11
12
13
18
20
21
24
and Integration Costs
24
27
28
30
31
32
33
33
34
35
50
50
52
52
53
54
54
55
See accompanying notes.
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
September 30,
December 31,
2023
2022
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
$
Accounts receivable, net of allowance for credit losses of $
Inventories, net
Prepaid expenses and other
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Goodwill
Other intangibles, net
Investments and other
Total assets
$
$
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
$
Bank credit lines
Current maturities of long-term debt
Operating lease liabilities
Accrued expenses:
Payroll and related
Taxes
Other
Total current liabilities
Long-term debt
Deferred income taxes
Operating lease liabilities
Other liabilities
Total liabilities
Redeemable noncontrolling interests
Commitments and contingencies
(nil)
(nil)
Stockholders' equity:
Preferred stock, $
Common stock, $
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
(247 )
(233 )
Total Henry Schein, Inc. stockholders' equity
Noncontrolling interests
Total stockholders' equity
Total liabilities, redeemable noncontrolling interests and stockholders' equity
$
$
See accompanying notes.
4
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except share and per share data)
(unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 24,
September 30,
September 24,
2023
2022
2023
2022
Net sales
$
$
$
$
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Depreciation and amortization
Restructuring and integration costs
Operating income
Other income (expense):
Interest income
Interest expense
(25 )
(8 )
(58 )
(23 )
Other, net
(2 )
(2 )
Income before taxes, equity in earnings of affiliates and
noncontrolling interests
Income taxes
(39 )
(46 )
(119 )
(155 )
Equity in earnings of affiliates
Net income
Less: Net income attributable to noncontrolling interests
(6 )
(12 )
(21 )
(24 )
Net income attributable to Henry Schein, Inc.
$
$
$
$
Earnings per share attributable to Henry Schein, Inc.:
Basic
$
$
$
$
Diluted
$
$
$
$
Weighted-average common shares outstanding:
Basic
Diluted
See accompanying notes.
5
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 24,
September 30,
September 24,
2023
2022
2023
2022
Net income
$
$
$
$
Other comprehensive income (loss), net of tax:
Foreign currency translation loss
(45 )
(89 )
(17 )
(176 )
Unrealized gain from foreign currency hedging
activities
Pension adjustment gain
Other comprehensive loss, net of tax
(39 )
(77 )
(15 )
(155 )
Comprehensive income
Less: Comprehensive income attributable to noncontrolling
Net income
(6 )
(12 )
(21 )
(24 )
Foreign currency translation loss
Comprehensive income attributable to noncontrolling
interests
(4 )
(6 )
(20 )
(10 )
Comprehensive income attributable to Henry Schein, Inc.
$
$
$
$
See accompanying notes.
6
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY
(in millions, except share data)
(unaudited)
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Equity
Balance, July 1, 2023
$
$
$
$
(210 )
$
$
Net income (excluding $
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to redeemable noncontrolling interests)
-
-
-
-
(43 )
-
(43 )
Unrealized gain from foreign currency hedging activities,
net of tax of $
-
-
-
-
-
Dividends declared
-
-
-
-
-
(1 )
(1 )
Change in fair value of redeemable noncontrolling interests
-
-
-
-
-
Initial noncontrolling interests and adjustments related to
business acquisitions
-
-
(1 )
-
-
(1 )
Repurchases and retirement of common stock
(659,681 )
-
(6 )
(44 )
-
-
(50 )
Stock-based compensation expense
-
-
-
-
Stock issued upon exercise of stock options
-
-
-
-
-
-
Shares withheld for payroll taxes
(9,183 )
-
-
-
-
Settlement of stock-based compensation awards
-
-
-
-
Transfer of charges in excess of capital
-
-
(35 )
-
-
-
Balance, September 30, 2023
$
$
$
$
(247 )
$
$
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Equity
Balance, June 25, 2022
$
$
$
$
(241 )
$
$
Net income (excluding $
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to redeemable noncontrolling interests)
-
-
-
-
(83 )
-
(83 )
Unrealized gain from foreign currency hedging activities,
net of tax of $
-
-
-
-
-
Pension adjustment gain, net of tax of $
-
-
-
-
-
Dividends declared
-
-
-
-
-
(1 )
(1 )
Change in fair value of redeemable securities
-
-
-
-
-
Repurchases and retirement of common stock
(1,183,729 )
-
(12 )
(78 )
-
-
(90 )
Stock-based compensation expense
-
-
-
-
Stock issued upon exercise of stock options
-
-
-
-
-
-
Shares withheld for payroll taxes
(1,194 )
-
(1 )
-
-
-
(1 )
Settlement of stock-based compensation awards
-
-
-
-
Transfer of charges in excess of capital
-
-
(16 )
-
-
-
Balance, September 24, 2022
$
$
$
$
(312 )
$
$
See accompanying notes.
7
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(in millions, except share data)
(unaudited)
Accumulated
Common Stock
Additional
Other
Total
$.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Equity
Balance, December 31, 2022
$
$
$
$
(233 )
$
$
Net income (excluding $
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to redeemable noncontrolling interests)
-
-
-
-
(16 )
-
(16 )
Unrealized gain from foreign currency hedging activities,
net of tax of $
-
-
-
-
-
Dividends declared
-
-
-
-
-
(28 )
(28 )
Change in fair value of redeemable noncontrolling interests
-
-
-
-
-
Initial noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
(2 )
(2 )
Repurchases and retirement of common stock
(2,521,695 )
-
(26 )
(175 )
-
-
(201 )
Stock-based compensation expense
-
-
-
-
Stock issued upon exercise of stock options
-
-
-
-
Shares withheld for payroll taxes
(415,048 )
-
(32 )
-
-
-
(32 )
Settlement of stock-based compensation awards
(818 )
-
-
-
-
Transfer of charges in excess of capital
-
-
(4 )
-
-
-
Balance, September 30, 2023
$
$
$
$
(247 )
$
$
Accumulated
Common Stock
Additional
Other
Total
$.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Equity
Balance, December 25, 2021
$
$
$
$
(171 )
$
$
Net income (excluding $
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to redeemable noncontrolling interests)
-
-
-
-
(162 )
(1 )
(163 )
Unrealized gain from foreign currency hedging activities,
net of tax of $
-
-
-
-
-
Pension adjustment gain, net of tax of $
-
-
-
-
-
Dividends declared
-
-
-
-
-
(1 )
(1 )
Purchase of noncontrolling interests
-
-
-
-
-
(7 )
(7 )
Change in fair value of redeemable securities
-
-
-
-
-
Repurchases and retirement of common stock
(2,529,126 )
-
(28 )
(172 )
-
-
(200 )
Stock-based compensation expense
-
-
-
-
Stock issued upon exercise of stock options
-
-
-
-
Shares withheld for payroll taxes
(343,541 )
-
(30 )
-
-
-
(30 )
Settlement of stock-based compensation awards
(2,967 )
-
-
-
-
Transfer of charges in excess of capital
-
-
(8 )
-
-
-
Balance, September 24, 2022
$
$
$
$
(312 )
$
$
See accompanying notes.
8
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Nine Months Ended
September 30,
September 24,
2023
2022
Cash flows from operating activities:
Net income
$
$
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Non-cash restructuring charges
Stock-based compensation expense
Provision for losses on trade and other accounts receivable
Benefit from deferred income taxes
(4 )
(20 )
Equity in earnings of affiliates
(10 )
(12 )
Distributions from equity affiliates
Changes in unrecognized tax benefits
Other
(11 )
(25 )
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(72 )
(93 )
Inventories
(9 )
Other current assets
(55 )
(96 )
Accounts payable and accrued expenses
(170 )
(131 )
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of fixed assets
(108 )
(67 )
Payments related to equity investments and business acquisitions,
net of cash acquired
(668 )
(127 )
Proceeds from loan to affiliate
Other
(36 )
(26 )
Net cash used in investing activities
(808 )
(211 )
Cash flows from financing activities:
Net change in bank borrowings
(98 )
Proceeds from issuance of long-term debt
Principal payments for long-term debt
(457 )
(58 )
Debt issuance costs
(3 )
Proceeds from issuance of stock upon exercise of stock options
Payments for repurchases and retirement of common stock
(200 )
(200 )
Payments for taxes related to shares withheld for employee taxes
(34 )
(30 )
Distributions to noncontrolling shareholders
(41 )
(18 )
Acquisitions of noncontrolling interests in subsidiaries
(19 )
(33 )
Net cash provided by (used in) financing activities
(121 )
Effect of exchange rate changes on cash and cash equivalents
(11 )
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
9
Note 1 – Basis of Presentation
Our condensed consolidated financial statements include the accounts of Henry Schein, Inc. and all of our
controlled subsidiaries (“we”, “us” or “our”). All intercompany accounts and transactions are eliminated in
consolidation. Investments in unconsolidated affiliates in which we have the ability to influence the operating or
financial decisions are accounted for under the equity method. Certain prior period amounts have been reclassified
to conform to the current period presentation. These reclassifications, individually and in the aggregate, did not
have a material impact on our condensed consolidated financial condition, results of operations or cash flows.
Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnote disclosures required by U.S. GAAP for complete financial statements.
The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes to the consolidated financial statements contained in our Annual Report
on Form 10-K for the year ended December 31, 2022 and with the information contained in our other publicly-
available filings with the Securities and Exchange Commission. The condensed consolidated financial statements
reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and
financial position for the interim periods presented. All such adjustments are of a normal recurring nature.
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of
operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to
be expected for any other interim period or for the year ending December 30, 2023.
Our condensed consolidated financial statements reflect estimates and assumptions made by us that affect, among
other things, our goodwill, long-lived asset and definite-lived intangible asset valuation; inventory valuation; equity
investment valuation; assessment of the annual effective tax rate; valuation of deferred income taxes and income
tax contingencies; the allowance for doubtful accounts; hedging activity; supplier rebates; measurement of
compensation cost for certain share-based performance awards and cash bonus plans; and pension plan
assumptions.
We consolidate the results of operations and financial position of a trade accounts receivable securitization which
we consider a Variable Interest Entity (“VIE”) because we are the primary beneficiary, and we have the power to
direct activities that most significantly affect the economic performance and have the obligation to absorb the
majority of the losses or benefits. For this VIE, the trade accounts receivable transferred to the VIE are pledged as
collateral to the related debt. The creditors have recourse to us for losses on these trade accounts receivable. At
September 30, 2023 and December 31, 2022, certain trade accounts receivable that can only be used to settle
obligations of this VIE were $
creditors have recourse to us were $
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
10
Note 2 – Critical Accounting Policies, Accounting Standard Adopted, and Recently Issued Accounting
Standards
Critical Accounting Policies
There have been no material changes in our critical accounting policies during the nine months ended September
30, 2023, as compared to the critical accounting policies described in Item 7 of our Annual Report on Form 10-K
for the year ended December 31, 2022.
Accounting Standard Adopted
During the quarter ended September 30, 2023, we adopted Accounting Standards Codification (“ASC”) Topic 848,
Reference Rate Reform (Topic 848). The adoption of Topic 848 did not have a material impact on our condensed
consolidated financial statements.
Recently Issued Accounting Standards
In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance
Program Obligations,” which will increase transparency of supplier finance programs by requiring entities that use
such programs in connection with the purchase of goods and services to disclose certain qualitative and quantitative
information about such programs. ASU 2022-04 is effective for fiscal years beginning after December 15, 2022,
including interim periods within those fiscal years, except for amended roll forward information, which is effective
for fiscal years beginning after December 15, 2023. We do not expect that the requirements of this guidance will
have a material impact on our condensed consolidated financial statements.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
11
Note 3 – Net Sales from Contracts with Customers
Net sales are recognized in accordance with policies disclosed in Item 8 of our Annual Report on Form 10-K for
the year ended December 31, 2022.
Disaggregation of Net Sales
The following table disaggregates our net sales by reportable segment and geographic area:
Three Months Ended
Nine Months Ended
September 30, 2023
September 30, 2023
North
America
International
Global
North
America
International
Global
Net sales:
Health care distribution
Dental
$
$
$
$
$
$
Medical
Total health care distribution
Technology and value-added services
Total net sales
$
$
$
$
$
$
Three Months Ended
Nine Months Ended
September 24, 2022
September 24, 2022
North
America
International
Global
North
America
International
Global
Net sales:
Health care distribution
Dental
$
$
$
$
$
$
Medical
Total health care distribution
Technology and value-added services
Total net sales
$
$
$
$
$
$
Deferred Revenue
At September 30, 2023, the current and non-current portion of contract liabilities were $
respectively. During the nine months ended September 30, 2023, we recognized, in net sales, $
amount that was previously deferred at December 31, 2022. At December 31, 2022, the current portion of contract
liabilities of $
liabilities was reported in other liabilities.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
12
Note 4
Segment Data
We conduct our business through
value-added services. These segments offer different products and services to the same customer base. Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools, government and other
institutions. Our medical businesses serve physician offices, urgent care centers, ambulatory care sites, emergency
medical technicians, dialysis centers, home health, federal and state governments and large enterprises, such as
group practices and integrated delivery networks, among other providers across a wide range of specialties. Our
dental and medical groups serve practitioners in
The health care distribution reportable segment aggregates our global dental and medical operating segments. This
segment distributes consumable products, dental specialty products, small equipment, laboratory products, large
equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic
tests, infection-control products, personal protective equipment (“PPE”) and vitamins.
Our global technology and value-added services reportable segment provides software, technology and other value-
added services to health care practitioners. Our technology offerings include practice management software
systems for dental and medical practitioners. Our value-added practice solutions include practice consultancy,
education, revenue cycle management and financial services on a non-recourse basis, e-services, practice
technology, network and hardware services, as well as continuing education services for practitioners.
The following tables present information about our reportable and operating segments:
Three Months Ended
Nine Months Ended
September 30,
September 24,
September 30,
September 24,
2023
2022
2023
2022
Net Sales:
Health care distribution
(1)
Dental
$
$
$
$
Medical
Total health care distribution
Technology and value-added services
(2)
Total
$
$
$
$
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic
products), diagnostic tests, infection-control products, PPE products and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
Three Months Ended
Nine Months Ended
September 30,
September 24,
September 30,
September 24,
2023
2022
2023
2022
Operating Income:
Health care distribution
$
$
$
$
Technology and value-added services
Total
$
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
13
Note 5
Business Acquisitions
Our acquisition strategy is focused on investments in companies that add new customers and sales teams, increase
our geographic footprint (whether entering a new country, such as emerging markets, or building scale where we
have already invested in businesses), and finally, those that enable us to access new products and technologies. In
connection with our business acquisitions, the major classes of assets and liabilities to which we generally allocate
acquisition consideration to, excluding goodwill, include identifiable intangible assets (i.e., customer relationships
and lists, trademarks and trade names, product development and non-compete agreements), inventory and accounts
receivable. The estimated fair value of identifiable intangible assets is based on critical judgments and assumptions
derived from analysis of market conditions, including discount rates, projected revenue growth rates (which are
based on historical trends and assessment of financial projections), estimated customer attrition and projected cash
flows. These assumptions are forward-looking and could be affected by future economic and market conditions.
While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the
acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and
subject to refinement. As a result, within 12 months following the date of acquisition, or the measurement period,
we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill
within our condensed consolidated balance sheets. At the end of the measurement period or final determination of
the values of such assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are
recognized in our condensed consolidated statements of operations.
During the nine months ended September 30, 2023 we completed accounting for certain acquisitions that occurred
in the year ended December 31, 2022. In relation to these acquisitions, we did not record material adjustments in
our condensed consolidated financial statements relating to changes in estimated values of assets acquired,
liabilities assumed and contingent consideration assets and liabilities.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
14
Acquisition of S.I.N. Implant System
On July 5, 2023 we acquired a
% voting equity interest in S.I.N. Implant System (“S.I.N.”), one of Brazil’s
leading manufacturers of dental implants. Based in São Paulo and founded in 2003, S.I.N. manufactures an
extensive line of products to perform dental implant procedures and is focused on advancing the development of
value-priced dental implants. S.I.N. recently expanded the distribution of its products into the United States and
other international markets.
The following table aggregates the preliminary estimated fair value, as of the date of acquisition, of consideration
paid and net assets acquired in the S.I.N.:
2023
Acquisition consideration:
Cash
$
Total consideration
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
Intangible assets
Other noncurrent assets
Current liabilities
(33 )
Long-term debt
(22 )
Deferred income taxes
(55 )
Other noncurrent liabilities
(27 )
Total identifiable net assets
Goodwill
Total net assets acquired
$
Goodwill is a result of expected synergies that are expected to originate from the acquisition as well as the expected
growth potential of S.I.N. The acquired goodwill is not deductible for tax purposes.
The following table summarizes the preliminary identifiable intangible assets acquired as part of the acquisition of
S.I.N.:
2023
Estimated Useful Lives (in years)
Customer relationships and lists
$
Trademarks/ Tradenames
Non-compete agreements
Product development
Other
Total
$
The accounting for the acquisition of S.I.N. has not been completed in several areas, including but not limited to
pending assessments of accounts receivable, inventory, intangible assets, right-of-use lease assets, accrued
liabilities and income and non-income based taxes. To assist management in the allocation of consideration, we
engaged valuation specialists to determine the fair value of intangible and tangible assets acquired and liabilities
assumed.
We
will finalize the amounts recognized as the information necessary to complete the analysis is
obtained. We expect to finalize these amounts as soon as possible but no later than one year from the acquisition
date. The pro forma financial information has not been presented because the impact of the S.I.N. acquisition
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
15
during the three and nine months ended September 30, 2023 was immaterial to our condensed consolidated
financial statements.
Acquisition of Biotech Dental
On April 5, 2023, we acquired a
% voting equity interest in Biotech Dental (“Biotech Dental”), which is a
provider of dental implants, clear aligners, individualized prosthetics, and innovative digital dental software based
in France. Biotech Dental has several important solutions for dental practices and dental labs, including Nemotec, a
comprehensive, integrated suite of planning and diagnostic software using open architecture that connects disparate
medical devices to create a digital view of the patient, offering greater diagnostic accuracy and an improved patient
experience. The integration of Biotech Dental’s software with Henry Schein One’s industry-leading practice
management software solutions will help customers streamline their clinical as well as administrative workflow for
the ultimate benefit of patients.
The following table aggregates the preliminary estimated fair value, as of the date of acquisition, of consideration
paid and net assets acquired in the Biotech Dental acquisition:
2023
Acquisition consideration:
Cash
$
Fair value of contributed equity share in a controlled subsidiary
Redeemable noncontrolling interests
Total consideration
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
Intangible assets
Other noncurrent assets
Current liabilities
(51 )
Long-term debt
(84 )
Deferred income taxes
(38 )
Other noncurrent liabilities
(22 )
Total identifiable net assets
Goodwill
Total net assets acquired
$
Goodwill is a result of expected synergies that are expected to originate from the acquisition as well as the expected
growth potential of Biotech Dental. The acquired goodwill is deductible for tax purposes.
The following table summarizes the preliminary identifiable intangible assets acquired as part of the acquisition of
Biotech Dental:
2023
Estimated Useful Lives (in years)
Customer relationships and lists
$
Trademarks/ Tradenames
Non-compete agreements
Other
Total
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
16
The accounting for the acquisition of Biotech Dental has not been completed in several areas, including but not
limited to pending assessments of accounts receivable, inventory, intangible assets, right-of-use lease assets,
accrued liabilities and income and non-income based taxes. To assist management in the allocation of
consideration, we engaged valuation specialists to determine the fair value of intangible and tangible assets
acquired and liabilities assumed. We will finalize the amounts recognized as the information necessary to complete
the analysis is obtained. We expect to finalize these amounts as soon as possible but no later than one year from the
acquisition date. The pro forma financial information has not been presented because the impact of the Biotech
Dental acquisition during the three and nine months ended September 30, 2023 was immaterial to our condensed
consolidated financial statements.
Other 2023 Acquisitions
During the nine months ended September 30, 2023, we acquired companies within the health care distribution and
technology and value-added services segments. Our acquired ownership interest ranged between
% to
%.
The following table aggregates the preliminary estimated fair value, as of the date of acquisition, of consideration
paid and net assets acquired for these acquisitions during the nine months ended September 30, 2023.
2023
Acquisition consideration:
Cash
$
Deferred consideration
Estimated fair value of contingent consideration payable
Fair value of previously held equity method investment
Redeemable noncontrolling interests
Total consideration
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
Intangible assets
Other noncurrent assets
Current liabilities
(23 )
Deferred income taxes
(13 )
Long-term debt
(8 )
Other noncurrent liabilities
(10 )
Total identifiable net assets
Goodwill
Total net assets acquired
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
17
Goodwill is a result of the expected synergies and cross-selling opportunities that these acquisitions are expected to
provide for us, as well as the expected growth potential. Approximately half of the acquired goodwill is deductible
for tax purposes.
In connection with an acquisition of a controlling interest of an affiliate, we recognized a gain of approximately $
million related to the remeasurement to fair value of our previously held equity investment, using a discounted cash
flow model based on Level 3 inputs, as defined in
The following table summarizes the preliminary identifiable intangible assets acquired during the nine months
ended September 30, 2023 and their estimated useful lives as of the date of the acquisition:
2023
Estimated Useful Lives (in years)
Customer relationships and lists
$
-
Trademarks/ Tradenames
-
Non-compete agreements
Product development
Patents
Other
Total
$
The pro forma financial information has not been presented because the impact of the acquisitions during the three
and nine months ended September 30, 2023 was immaterial to our condensed consolidated financial statements.
Acquisition Costs
During the nine months ended September 30, 2023 and September 24, 2022 we incurred $
million, respectively, in acquisition costs, which are included in “selling, general and administrative” within our
condensed consolidated statements of income.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
18
Note 6 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value hierarchy distinguishes between
(1) market participant assumptions developed based on market data obtained from independent sources (observable
inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described as follows:
• Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the
measurement date.
• Level 2— Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted
prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
• Level 3— Inputs that are unobservable for the asset or liability.
The following section describes the fair values of our financial instruments and the methodologies that we used to
measure their fair values.
Investments and notes receivable
There are no quoted market prices available for investments in unconsolidated affiliates and notes receivable.
Certain of our notes receivable contain variable interest rates. We believe the carrying amounts are a reasonable
estimate of fair value based on the interest rates in the applicable markets.
Debt
The fair value of our debt (including bank credit lines, current maturities of long-term debt and long-term debt) is
classified as Level 3 within the fair value hierarchy, and as of September 30, 2023 and December 31, 2022 was
estimated at $
value of our debt include market conditions, such as interest rates and credit spreads.
Derivative contracts
Derivative contracts are valued using quoted market prices and significant other observable inputs. We use
derivative instruments to minimize our exposure to fluctuations in foreign currency exchange rates. Our derivative
instruments primarily include foreign currency forward agreements related to certain intercompany loans, certain
forecasted inventory purchase commitments with foreign suppliers, foreign currency forward contracts to hedge a
portion of our euro-denominated foreign operations which are designated as net investment hedges, hedging of the
floating interest rate to a fixed interest rate on our $
information)
, and a total return swap for the purpose of economically hedging our unfunded non-qualified
supplemental executive retirement plan (the “SERP”) and our deferred compensation plan (the “DCP”).
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
19
The fair values for the majority of our foreign currency derivative contracts are obtained by comparing our contract
rate to a published forward price of the underlying market rates, which is based on market rates for comparable
transactions and are classified within Level 2 of the fair value hierarchy.
Total Return Swaps
The fair value for the total return swap is measured by valuing the underlying exchange traded funds of the swap
using market-on-close pricing by industry providers as of the valuation date and are classified within Level 2 of the
fair value hierarchy.
Redeemable noncontrolling interests
The values for redeemable noncontrolling interests are classified within Level 3 of the fair value hierarchy and are
based on recent transactions and/or implied multiples of earnings.
The following table presents our assets and liabilities that are measured and recognized at fair value on a recurring
basis classified under the appropriate level of the fair value hierarchy as of September 30, 2023 and December 31,
2022:
September 30, 2023
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
$
$
$
Derivative contracts undesignated
Total assets
$
$
$
$
Liabilities:
Derivative contracts designated as hedges
$
$
$
$
Derivative contracts undesignated
Total return swaps
Total liabilities
$
$
$
$
Redeemable noncontrolling interests
$
$
$
$
December 31, 2022
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
$
$
$
Derivative contracts undesignated
Total assets
$
$
$
$
Liabilities:
Derivative contracts designated as hedges
$
$
$
$
Derivative contracts undesignated
Total return swaps
Total liabilities
$
$
$
$
Redeemable noncontrolling interests
$
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
20
Note 7 – Derivatives and Hedging Activities
We are exposed to market risks as well as changes in foreign currency exchange rates as measured against the U.S.
dollar and changes to the credit risk of the derivative counterparties. We attempt to minimize these risks by
primarily using interest rate swaps, foreign currency forward contracts and by maintaining counter-party credit
limits. These hedging activities provide only limited protection against interest rate, currency exchange and credit
risks. Factors that could influence the effectiveness of our hedging programs include market interest rates, currency
markets and availability of hedging instruments and liquidity of the credit markets. All interest rate swaps and
foreign currency forward contracts that we enter into are components of hedging programs and are entered into for
the sole purpose of hedging an existing or anticipated interest rate or currency exposure. We do not enter into such
contracts for speculative purposes and we manage our credit risks by diversifying our counterparties, maintaining a
strong balance sheet and having multiple sources of capital.
During 2019 we entered into foreign currency forward contracts to hedge a portion of our euro-denominated
foreign operations which are designated as net investment hedges. These net investment hedges offset the change
in the U.S. dollar value of our investment in certain euro-functional currency subsidiaries due to fluctuating foreign
exchange rates. Gains and losses related to these net investment hedges are recorded in accumulated other
comprehensive loss within our condensed consolidated balance sheets. Amounts excluded from the assessment of
hedge effectiveness are included in interest expense within our condensed consolidated statements of income. The
aggregate notional value of this net investment hedge, which matured on
, is approximately
€
increase of $
currency forward contracts. During the nine months ended September 30, 2023 and September 24, 2022, we
recorded an increase of $
these foreign currency forward contracts.
On
, we entered into a total return swap for the purpose of economically hedging our unfunded non-
qualified SERP and our DCP. This swap will offset changes in our SERP and DCP liabilities. At the inception, the
notional value of the investments in these plans was $
investments in these plans was $
based on the Secured Overnight Financing Rate (“SOFR”) of
% plus
%, for a combined rate of
%. For
the three months ended September 30, 2023 and September 24, 2022, we have recorded a loss, within selling,
general and administrative in our condensed consolidated statement of income, of approximately $
million, respectively, net of transaction costs, related to this undesignated swap. For the nine months ended
September 30, 2023 and September 24, 2022, we have recorded a loss, within selling, general and administrative in
our condensed consolidated statement of income, of approximately $
transaction costs, related to this undesignated swap.
On July 11, 2023, we entered into interest rate swap agreements to hedge the cash flow of our variable rate $
million floating debt term loan facility, with
our obligation to a fixed rate. Under the terms of the interest rate swap agreements, we receive variable interest
payments based on the one-month Term SOFR rate and pay interest at a fixed rate. As of September 30, 2023, the
notional value of the interest rate swap agreements was $
September 30, 2023, we recorded, within accumulated other comprehensive loss within our condensed consolidated
balance sheets, a gain of $
since we have designated these swaps agreements as cash flow hedges.
Fluctuations in the value of certain foreign currencies as compared to the U.S. dollar may positively or negatively
affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S.
dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward
contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
21
short-term (i.e., generally 18 months or less) foreign currency forward contracts to protect against currency
exchange risks associated with intercompany loans due from our international subsidiaries and the payment of
merchandise purchases to our foreign suppliers. We do not hedge the translation of foreign currency profits into
U.S. dollars, as we regard this as an accounting exposure, not an economic exposure. Amounts related to our
hedging activities are recorded in prepaid expenses and other and/or accrued expenses: other within our condensed
consolidated balance sheets. Our hedging activities have historically not had a material impact on our condensed
consolidated financial statements. Accordingly, additional disclosures related to derivatives and hedging activities
required by ASC 815 have been omitted.
Note 8 – Debt
Bank Credit Lines
Bank credit lines consisted of the following:
September 30,
December 31,
2023
2022
Revolving credit agreement
$
$
Other short-term bank credit lines
Total
$
$
Revolving Credit Agreement
On
, we entered into a $
which was scheduled to mature on
. On
, we amended and restated the Revolving
Credit Agreement to, among other things, extend the maturity date to
provisions to reflect the current market approach for a multicurrency facility. The interest rate on this revolving
credit facility is based on Term Secured Overnight Financing Rate (“Term SOFR”) plus a spread based on our
leverage ratio at the end of each financial reporting quarter. The Revolving Credit Agreement requires, among
other things, that we maintain certain maximum leverage ratios. Additionally, the Revolving Credit Agreement
contains customary representations, warranties and affirmative covenants as well as customary negative covenants,
subject to negotiated exceptions, on liens, indebtedness, significant corporate changes (including mergers),
dispositions and certain restrictive agreements. As of September 30, 2023 and December 31, 2022, we had $
million and $
and December 31, 2022, there were $
parties under this credit facility.
Other Short-Term Bank Credit Lines
As of September 30, 2023 and December 31, 2022, we had various other short-term bank credit lines available, in
various currencies, with a maximum borrowing capacity of $
September 30, 2023 and December 31, 2022, $
September 30, 2023 and December 31, 2022, borrowings under all of these credit lines had a weighted average
interest rate of
% and
%, respectively.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
22
Long-term debt
Long-term debt consisted of the following:
September 30,
December 31,
2023
2022
Private placement facilities
$
$
U.S. trade accounts receivable securitization
Term loan
Various collateralized and uncollateralized loans payable with interest,
in varying installments through 2023 at interest rates
ranging from
% to
% at September 30, 2023 and
ranging from
% to
% at December 31, 2022
Finance lease obligations
Total
Less current maturities
(72 )
(6 )
Total long-term debt
$
$
Private Placement Facilities
Our private placement facilities include
are available on an uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from
time to time through
. The facilities allow us to issue senior promissory notes to the lenders at a
fixed rate based on an agreed upon spread over applicable treasury notes at the time of issuance. The term of each
possible issuance will be selected by us and can range from
five
). The proceeds of any issuances under the facilities will be used for general corporate purposes, including
working capital and capital expenditures, to refinance existing indebtedness, and/or to fund potential acquisitions.
The agreements provide, among other things, that we maintain certain maximum leverage ratios, and contain
restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal of assets and certain changes in
ownership. These facilities contain make-whole provisions in the event that we pay off the facilities prior to the
applicable due dates.
The components of our private placement facility borrowings, which have a weighted average interest rate of
%, as of September 30, 2023 are presented in the following table:
Amount of
Borrowing
Borrowing
Date of Borrowing
Outstanding
Rate
Due Date
January 20, 2012
$
%
January 20, 2024
December 24, 2012
December 24, 2024
June 16, 2017
June 16, 2027
September 15, 2017
September 15, 2029
January 2, 2018
January 2, 2028
September 2, 2020
September 2, 2030
June 2, 2021
June 2, 2031
June 2, 2021
June 2, 2033
May 4, 2023
May 4, 2028
May 4, 2023
May 4, 2030
May 4, 2023
May 4, 2033
May 4, 2023
May 4, 2033
Less: Deferred debt issuance costs
(1 )
Total
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
23
U.S. Trade Accounts Receivable Securitization
We have a facility agreement based on the securitization of our U.S. trade accounts receivable that is structured as
an asset-backed securitization program with pricing committed for up to
. This facility agreement has a
purchase limit of $
.
As of September 30, 2023 and December 31, 2022, the borrowings outstanding under this securitization facility
were $
facility was based on the asset-backed commercial paper rate of
% plus
%, for a combined rate of
%. At December 31, 2022, the interest rate on borrowings under this facility was based on the asset-backed
commercial paper rate of
% plus
%, for a combined rate of
%.
If our accounts receivable collection pattern changes due to customers either paying late or not making payments,
our ability to borrow under this facility may be reduced.
We are required to pay a commitment fee of
Term Loan
On July 11, 2023, we entered into a
three-year
Agreement”). The interest rate on this term loan is based on the Term SOFR plus a spread based on our leverage
ratio at the end of each financial reporting quarter. This term loan matures on July 11, 2026. As of September 30,
2023, the borrowings outstanding under this term loan were $
this Term Credit Agreement was
% plus
% for a combined rate of
%. However, we have a hedge in
place
that ultimately creates an
effective fixed rate of
%. The Term Credit Agreement requires, among other things, that we maintain certain
maximum leverage ratios. Additionally, the Term Credit Agreement contains customary representations,
warranties and affirmative covenants as well as customary negative covenants, subject to negotiated exceptions, on
liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive
agreements.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
24
Note 9 – Income Taxes
For the nine months ended September 30, 2023 our effective tax rate was
%, compared to
% for the prior
year period. The difference between our effective tax rate and the federal statutory tax rate primarily relates to state
and foreign income taxes and interest expense.
The total amount of unrecognized tax benefits, which are included in “other liabilities” within our condensed
consolidated balance sheets, as of September 30, 2023 and December 31, 2022 was $
respectively, of which $
It is possible that the amount of unrecognized tax benefits will change in the next 12 months, which may result in a
material impact on our condensed consolidated statements of income.
All tax returns audited by the IRS are officially closed through 2019. The tax years subject to examination by the
IRS include years 2020 and forward. In addition, limited positions reported in the 2017 tax year are subject to IRS
examination.
The total amounts of interest and penalties are classified as a component of the provision for income taxes. The
amount of tax interest expense was $
nine months ended September 24, 2022. The total amount of accrued interest is included in “other liabilities,” and
was $
accrued for during the periods presented were not material to our condensed consolidated financial statements.
Note 10 – Plan of Restructuring
On August 1, 2022, we committed to a restructuring plan focused on funding the priorities of the strategic plan and
streamlining operations and other initiatives to increase efficiency. We revised our previous expectations of
completion and now expect this initiative to extend through 2024. We are currently unable in good faith to make a
determination of an estimate of the amount or range of amounts expected to be incurred in connection with these
activities, both with respect to each major type of cost associated therewith and with respect to the total cost, or an
estimate of the amount or range of amounts that will result in future cash expenditures.
During the three months ended September 30, 2023 and September 24, 2022, we recorded restructuring costs of
$
2022, we recorded restructuring costs of $
periods primarily related to severance and employee-related costs, accelerated amortization of right-of-use lease
assets and fixed assets, and other lease exit costs. Included in restructuring costs for the nine months ended
September 30, 2023 were immaterial amounts related to the disposal of an unprofitable U.S. business initiated
during 2022 and completed during the first quarter of 2023.
On August 26, 2022, we acquired Midway Dental Supply. In connection with this acquisition, during the three
months ended September 24, 2022, we recorded integration costs of $
other costs, as well as restructuring charges of $
charges discussed above.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
25
Restructuring and integration costs recorded for the three and nine months ended September 30, 2023 and
September 24, 2022, consisted of the following:
Three Months Ended September 30, 2023
Health-Care Distribution
Technology and
Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Total
Severance and employee-related costs
$
$
-
$
$
Accelerated depreciation and amortization
-
Exit and other related costs
-
Total restructuring and integration costs
$
$
-
$
$
Three Months Ended September 24, 2022
Health-Care Distribution
Technology and
Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Total
Severance and employee-related costs
$
$
-
$
-
$
Accelerated depreciation and amortization
-
-
Exit and other related costs
-
-
Integration employee-related and other costs
-
-
Total restructuring and integration costs
$
$
$
-
$
Nine Months Ended September 30, 2023
Health-Care Distribution
Technology and
Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Total
Severance and employee-related costs
$
$
-
$
$
Accelerated depreciation and amortization
-
Exit and other related costs
-
Loss on disposal of a business
-
-
Total restructuring and integration costs
$
$
-
$
$
Nine Months Ended September 24, 2022
Health-Care Distribution
Technology and
Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Total
Severance and employee-related costs
$
$
-
$
-
$
Accelerated depreciation and amortization
-
-
Exit and other related costs
-
-
Integration employee-related and other costs
-
-
Total restructuring and integration costs
$
$
$
-
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
26
The following table summarizes, by reportable segment, the activity related to the liabilities associated with our
restructuring initiatives for the period ended September 30, 2023. The remaining accrued balance of restructuring
costs as of September 30, 2023, which primarily relates to severance and employee-related costs, is included in
accrued expenses: other within our condensed consolidated balance sheet. Liabilities related to exited leased
facilities are recorded within our current and non-current operating lease liabilities within our condensed
consolidated balance sheet.
Technology and
Health Care
Value-Added
Distribution
Services
Total
Balance, December 31, 2022
$
$
$
Restructuring and integration costs
Non-cash asset impairment and accelerated
depreciation and amortization of right-of-use lease
assets and other long-lived assets
(12 )
(2 )
(14 )
Non-cash impairment on disposal of a business
-
Cash payments and other adjustments
(37 )
(6 )
(43 )
Balance, September 30, 2023
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
27
Note 11 – Legal Proceedings
Henry Schein, Inc. has been named as a defendant in multiple opioid related lawsuits (currently less than one-
hundred and seventy-five (
); one or more of Henry Schein, Inc.’s subsidiaries is also named as a defendant in a
number of those cases). Generally, the lawsuits allege that the manufacturers of prescription opioid drugs engaged
in a false advertising campaign to expand the market for such drugs and their own market share and that the entities
in the supply chain (including Henry Schein, Inc. and its subsidiaries) reaped financial rewards by refusing or
otherwise failing to monitor appropriately and restrict the improper distribution of those drugs. These actions
consist of some that have been consolidated within the MultiDistrict Litigation (“MDL”) proceeding In Re National
Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804) and are currently stayed, and others which
remain pending in state courts and are proceeding independently and outside of the MDL. At this time, the
following cases are set for trial: the action filed by Mobile County Board of Health, et al. in Alabama state court,
which has been set for a jury trial on August 12, 2024; and the action filed by Florida Health Sciences Center, Inc.
(and
other hospitals located throughout the State of Florida) in Florida state court, which is currently scheduled
for a jury trial in September 2025. Of Henry Schein’s 2022 net sales of approximately $
continuing operations, sales of opioids represented less than two-tenths of 1 percent. Opioids represent a negligible
part of our business. We intend to defend ourselves vigorously against these actions.
In August 2022, Henry Schein received a Grand Jury Subpoena from the United States Attorney’s Office for the
Western District of Virginia, seeking documents in connection with an investigation of possible violations of the
Federal Food, Drug & Cosmetic Act by Butler Animal Health Supply, LLC (“Butler”), a former subsidiary of
Henry Schein. The investigation relates to the sale of veterinary prescription drugs to certain customers. In
October 2022, Henry Schein received a second Grand Jury Subpoena from the United States Attorney’s Office for
the Western District of Virginia. The October Subpoena seeks documents relating to payments Henry Schein
received from Butler or Covetrus, Inc. (“Covetrus”). Butler was spun off into a separate company and became a
subsidiary of Covetrus in 2019 and is no longer owned by Henry Schein. We are cooperating with the
investigation.
From time to time, we may become a party to other legal proceedings, including, without limitation, product
liability claims, employment matters, commercial disputes, governmental inquiries and investigations (which may
in some cases involve our entering into settlement arrangements or consent decrees), and other matters arising out
of the ordinary course of our business. While the results of any legal proceeding cannot be predicted with certainty,
in our opinion none of these other pending matters are currently anticipated to have a material adverse effect on our
consolidated financial position, liquidity or results of operations.
As of September 30, 2023, we had accrued our best estimate of potential losses relating to claims that were
probable to result in liability and for which we were able to reasonably estimate a loss. This accrued amount, as
well as related expenses, was not material to our financial position, results of operations or cash flows. Our method
for determining estimated losses considers currently available facts, presently enacted laws and regulations and
other factors, including probable recoveries from third parties.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
28
Note 12 – Stock-Based Compensation
Stock-based awards are provided to certain employees under the terms of our 2020 Stock Incentive Plan and to
non-employee directors under the terms of our 2023 Non-Employee Director Stock Incentive Plan (formerly known
as the 2015 Non-Employee Director Stock Incentive Plan) (together, the “Plans”). The Plans are administered by
the Compensation Committee of the Board of Directors (the “Compensation Committee”). Historically, equity-
based awards to our employees have been granted solely in the form of time-based and performance-based
restricted stock units (“RSUs”) with the exception of our 2021 plan year in which non-qualified stock options were
issued in place of performance-based RSUs. In 2022, we granted time-based and performance-based RSUs, as well
as non-qualified stock options. For our 2023 plan year, we returned to granting our employees equity-based awards
solely in the form of time-based and performance-based RSUs. Our non-employee directors receive equity-based
awards solely in the form of time-based RSUs.
RSUs are stock-based awards granted to recipients with specified vesting provisions. In the case of RSUs, common
stock is delivered on or following satisfaction of vesting conditions. We issue RSUs to employees that primarily
vest (i) solely based on the recipient’s continued service over time, primarily with
four
-year cliff vesting and/or (ii)
based on achieving specified performance measurements and the recipient’s continued service over time, primarily
with
three
-year cliff vesting. RSUs granted to our non-employee directors primarily are granted with
12
-month
cliff vesting. For these RSUs, we recognize the cost as compensation expense on a straight-line basis.
With respect to time-based RSUs, we estimate the fair value based on our closing stock price on the date of
grant. With respect to performance-based RSUs, the number of shares that ultimately vest and are received by the
recipient is based upon our performance as measured against specified targets over a specified period, as
determined by the Compensation Committee. Although there is no guarantee that performance targets will be
achieved, we estimate the fair value of performance-based RSUs based on our closing stock price at time of grant.
Each of the Plans provide for certain adjustments to the performance measurement in connection with awards under
the Plans. With respect to the performance-based RSUs granted under our 2020 Stock Incentive Plan, such
performance measurement adjustments relate to significant events, including, without limitation, acquisitions,
divestitures, new business ventures, certain capital transactions (including share repurchases), differences in
budgeted average outstanding shares (other than those resulting from capital transactions referred to above),
restructuring costs, if any, certain litigation settlements or payments, if any, changes in accounting principles or in
applicable laws or regulations, changes in income tax rates in certain markets, foreign exchange fluctuations, the
financial impact either positive or negative, of the difference in projected earnings generated by COVID-19 test kits
(solely with respect to performance-based RSUs granted in the 2022 and 2023 plan years) and impairment charges
(solely with respect to performance-based RSUs granted in the 2023 plan year), and unforeseen events or
circumstances affecting us.
Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the
related compensation expense is adjusted upward or downward based upon our estimation of achieving such
performance targets. The ultimate number of shares delivered to recipients and the related compensation cost
recognized as an expense will be based on our actual performance metrics as defined under the Plans.
Stock options are awards that allow the recipient to purchase shares of our common stock at a fixed price following
vesting of the stock options. Stock options were granted at an exercise price equal to our closing stock price on the
date of grant. Stock options issued in 2021 and 2022 vest one-third per year based on the recipient’s continued
service, subject to the terms and conditions of the 2020 Stock Incentive Plan, are fully vested
grant date and have a contractual term of
upon certain events. Compensation expense for these stock options is recognized using a graded vesting method.
We estimated the fair value of stock options using the Black-Scholes valuation model. During the nine months
ended September 30, 2023 we did
t grant any stock options.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
29
Our accompanying condensed consolidated statements of income reflect pre-tax share-based compensation expense
of $
September 30, 2023, respectively. For the three and nine months ended September 24, 2022, we recorded pre-tax
share-based compensation expense of $
respectively.
Total unrecognized compensation cost related to unvested awards as of September 30, 2023 was $
is expected to be recognized over a weighted-average period of approximately
Our accompanying condensed consolidated statements of cash flows present our stock-based compensation expense
as an adjustment to reconcile net income to net cash provided by operating activities for all periods presented. In
the accompanying condensed consolidated statements of cash flows, there were no benefits associated with tax
deductions in excess of recognized compensation as a cash inflow from financing activities for the nine months
ended September 30, 2023 and September 24, 2022, respectively.
We have not declared cash dividends on our stock in the past and we do not anticipate declaring cash dividends in
the foreseeable future. The expected stock price volatility is based on implied volatilities from traded options on
our stock, historical volatility of our stock, and other factors. The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant in conjunction with considering the expected life of options. The
six
-year expected life of the options was determined using the simplified method for estimating the expected term
as permitted under SAB Topic 14. Estimates of fair value are not intended to predict actual future events or the
value ultimately realized by recipients of stock options, and subsequent events are not indicative of the
reasonableness of the original estimates of fair value made by us.
The following table summarizes the stock option activity during the nine months ended September 30, 2023:
Stock Options
Weighted Average
Weighted Average
Aggregate
Exercise
Remaining Contractual
Shares
Price
Life (in years)
Outstanding at beginning of period
$
Exercised
(21,204 )
Forfeited
(10,399 )
Outstanding at end of period
$
$
Options exercisable at end of period
$
Weighted Average
Weighted Average
Aggregate
Number of
Exercise
Remaining Contractual
Intrinsic
Options
Price
Life (in years)
Value
Vested or expected to vest
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
30
The following tables summarize the activity of our unvested RSUs for the nine months ended September 30, 2023:
Time-Based Restricted Stock Units
Performance-Based Restricted Stock Units
Weighted Average
Weighted Average
Grant Date Fair
Intrinsic Value
Grant Date Fair
Intrinsic Value
Shares/Units
Value Per Share
Per Share
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period
$
$
Granted
Vested
(429,425 )
(631,458 )
Forfeited
(75,227 )
(55,510 )
Outstanding at end of period
$
$
$
$
Note 13 – Redeemable Noncontrolling Interests
Some minority stockholders in certain of our subsidiaries have the right, at certain times, to require us to acquire
their ownership interest in those entities at fair value. ASC 480-10 is applicable for noncontrolling interests where
we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from
the noncontrolling interest holder under the terms of a put option contained in contractual agreements. The
components of the change in the redeemable noncontrolling interests for the nine months ended September 30,
2023 and the year ended December 31, 2022 are presented in the following table:
September 30,
December 31,
2023
2022
Balance, beginning of period
$
$
Decrease in redeemable noncontrolling interests due to acquisitions of
noncontrolling interests in subsidiaries
(19 )
(31 )
Increase in redeemable noncontrolling interests due to business
acquisitions
Net income attributable to redeemable noncontrolling interests
Dividends declared
(13 )
(21 )
Effect of foreign currency translation loss attributable to
redeemable noncontrolling interests
(1 )
(6 )
Change in fair value of redeemable securities
(14 )
(4 )
Balance, end of period
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
31
Note 14 – Comprehensive Income
Comprehensive income includes certain gains and losses that, under U.S. GAAP, are excluded from net income as
such amounts are recorded directly as an adjustment to stockholders’ equity.
The following table summarizes our Accumulated other comprehensive loss, net of applicable taxes as of:
September 30,
December 31,
2023
2022
Attributable to redeemable noncontrolling interests:
Foreign currency translation adjustment
$
(38 )
$
(37 )
Attributable to noncontrolling interests:
Foreign currency translation adjustment
$
(1 )
$
(1 )
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
(252 )
$
(236 )
Unrealized gain from foreign currency hedging activities
Pension adjustment loss
(2 )
(2 )
Accumulated other comprehensive loss
$
(247 )
$
(233 )
Total Accumulated other comprehensive loss
$
(286 )
$
(271 )
The following table summarizes the components of comprehensive income, net of applicable taxes as follows:
Three Months Ended
Nine Months Ended
September 30,
September 24,
September 30,
September 24,
2023
2022
2023
2022
Net income
$
$
$
$
Foreign currency translation loss
(45 )
(89 )
(17 )
(176 )
Tax effect
Foreign currency translation loss
(45 )
(89 )
(17 )
(176 )
Unrealized gain from foreign currency hedging
Tax effect
(3 )
(4 )
(1 )
(7 )
Unrealized gain from foreign currency hedging
Pension adjustment gain
Tax effect
(1 )
(1 )
Pension adjustment gain
Comprehensive income
$
$
$
$
Our financial statements are denominated in the U.S. Dollar currency. Fluctuations in the value of foreign
currencies as compared to the U.S. Dollar may have a significant impact on our comprehensive income. The
foreign currency translation loss during the nine months ended September 30, 2023 and nine months ended
September 24, 2022 was primarily due to changes in foreign currency exchange rates of the Australian Dollar,
Brazilian Real, British Pound, Canadian Dollar, Chinese Yuan, and Euro.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
32
The following table summarizes our total comprehensive income, net of applicable taxes as follows:
Three Months Ended
Nine Months Ended
September 30,
September 24,
September 30,
September 24,
2023
2022
2023
2022
Comprehensive income attributable to
Henry Schein, Inc.
$
$
$
$
Comprehensive income attributable to
noncontrolling interests
Comprehensive income attributable to
redeemable noncontrolling interests
Comprehensive income
$
$
$
$
Note 15
Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to Henry Schein, Inc. by the weighted-
average number of common shares outstanding for the period. Our diluted earnings per share is computed similarly
to basic earnings per share, except that it reflects the effect of common shares issuable for presently unvested RSUs
and upon exercise of stock options using the treasury stock method in periods in which they have a dilutive effect.
A reconciliation of shares used in calculating earnings per basic and diluted share follows:
Three Months Ended
Nine Months Ended
September 30,
September 24,
September 30,
September 24,
2023
2022
2023
2022
Basic
Effect of dilutive securities:
Stock options and restricted stock units
Diluted
The number of antidilutive securities that were excluded from the calculation of diluted weighted average common
shares outstanding are as follows:
Three Months Ended
Nine Months Ended
September 30,
September 24,
September 30,
September 24,
2023
2022
2023
2022
Stock options
Restricted stock units
Total anti-dilutive securities excluded from earnings per
share computation
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
33
Note 16 – Supplemental Cash Flow Information
Cash paid for interest and income taxes was:
Nine Months Ended
September 30,
September 24,
2023
2022
Interest
$
$
Income taxes
During the nine months ended September 30, 2023 and September 24, 2022, we had $
non-cash net unrealized gains related to foreign currency hedging activities, respectively.
additional information related to our total return swap and our interest rate swap
agreements.
Note 17 – Related Party Transactions
In connection with the formation of Henry Schein One, LLC, our joint venture with Internet Brands, which was
formed on July 1, 2018, we entered into a
ten-year
Internet Brands approximately $
nine months ended September 30, 2023, we recorded $
costs related to this royalty agreement. During the three and nine months ended September 24, 2022, we recorded
$
September 30, 2023 and December 31, 2022, Henry Schein One, LLC had a net payable balance due to Internet
Brands of $
royalty agreement. The components of this payable are recorded within accrued expenses: other, within our
condensed consolidated balance sheets.
$
recorded net sales of $
ended September 30, 2023, we purchased $
three and nine months ended September 24, 2022, we purchased $
entities. At September 30, 2023 and December 31, 2022, we had an aggregate of $
respectively, due from our equity affiliates, and $
Certain of our facilities related to our acquisitions are leased from employees and minority shareholders. These
leases are classified as operating leases and have a remaining lease term ranging from less than
years. As of September 30, 2023, current and non-current liabilities associated with related party operating leases
were $
% and
% of the total current
and non-current operating lease liabilities.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
34
Note 18 – Subsequent Event
On October 14, 2023, we became aware of a cybersecurity incident that primarily affected the operations of our
North American and European dental and medical distribution businesses. Henry Schein One, our practice
management software, revenue cycle management and patient relationship management solutions business was not
affected, and our manufacturing businesses and our equipment sales and service operations were mostly unaffected.
Once we became aware of the issue, we took steps to assess, contain and remediate this incident. Our distribution
operations resumed and we reactivated our ecommerce platform. We also notified law enforcement and our
customers and suppliers informing them of both the incident and management’s efforts to mitigate its impact on our
daily operations. As previously disclosed, while our forensic investigation is still ongoing, we have determined that
a data breach occurred. We are notifying potentially affected parties as appropriate.
On November 22, 2023, we experienced a disruption to our ecommerce platform and related applications. The
Company has restored its ecommerce platform and certain other applications in the United States, Canada and
certain European countries. Our ecommerce platform in the remaining European countries and other applications
are expected to follow shortly.
We continue to review the impact of the incident on our business. As previously disclosed, we believe the incident
will adversely impact our financial results for the fourth quarter and full year 2023.
We maintain cyber insurance, subject to certain retentions and policy limitations. There can be no assurance that
the insurance coverage we maintain is sufficient to cover costs and expenses related to this cybersecurity incident.
35
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
In accordance with the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, we
provide the following cautionary remarks regarding important factors that, among others, could cause future results
to differ materially from the forward-looking statements, expectations and assumptions expressed or implied
herein. All forward-looking statements made by us are subject to risks and uncertainties and are not guarantees of
future performance. These forward-looking statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance and achievements or industry results to be materially
different from any future results, performance or achievements expressed or implied by such forward-looking
statements. These statements are generally identified by the use of such terms as “may,” “could,” “expect,”
“intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,” “to be,” “to make” or other comparable
terms. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in
the documents we file with the Securities and Exchange Commission (SEC), including our Annual Report on Form
10-K. Forward looking statements include the overall impact of the Coronavirus Disease 2019 (COVID-19) on us,
our results of operations, liquidity and financial condition (including any estimates of the impact on these items),
the rate and consistency with which dental and other practices resume or maintain normal operations in the United
States and internationally, expectations regarding PPE products and COVID-19 related product sales and inventory
levels, whether additional resurgences or variants of the virus will adversely impact the resumption of normal
operations, whether supply chain disruptions will adversely impact our business, the impact of the cybersecurity
incident disclosed in the Company’s Current Report on Form 8-K filed on October 15, 2023 on our business and
results of operations, including the accuracy of our estimates of the impact, the timing and extent of any recovery
on insurance claims, the impact of integration and restructuring programs as well as of any future acquisitions,
general economic conditions including exchange rates, inflation and recession, and more generally current
expectations regarding performance in current and future periods. Forward looking statements also include (i) our
ability to have continued access to a variety of COVID-19 test types, and COVID-19 vaccines and ancillary
supplies, and (ii) expectations regarding COVID-19 test sales, demand and inventory levels.
Risk factors and uncertainties that could cause actual results to differ materially from current and historical results
include, but are not limited to: risks associated with COVID-19 and any variants thereof, as well as other disease
outbreaks, epidemics, pandemics, or similar wide-spread public health concerns and other natural disasters; our
dependence on third parties for the manufacture and supply of our products; our ability to develop or acquire and
maintain and protect new products (particularly technology products) and technologies that achieve market
acceptance with acceptable margins; transitional challenges associated with acquisitions, dispositions and joint
ventures, including the failure to achieve anticipated synergies/benefits; legal, regulatory, compliance,
cybersecurity, financial and tax risks associated with acquisitions, dispositions and joint ventures; certain provisions
in our governing documents that may discourage third-party acquisitions of us; adverse changes in supplier rebates
or other purchasing incentives; risks related to the sale of corporate brand products; effects of a highly competitive
(including, without limitation, competition from third-party online commerce sites) and consolidating market; the
repeal or judicial prohibition on implementation of the Affordable Care Act; changes in the health care industry;
risks from expansion of customer purchasing power and multi-tiered costing structures; increases in shipping costs
for our products or other service issues with our third-party shippers; general global and domestic macro-economic
and political conditions, including inflation, deflation, recession, fluctuations in energy pricing and the value of the
U.S. dollar as compared to foreign currencies, and changes to other economic indicators, international trade
agreements, potential trade barriers and terrorism; geopolitical wars; failure to comply with existing and future
regulatory requirements; risks associated with the EU Medical Device Regulation; failure to comply with laws and
regulations relating to health care fraud or other laws and regulations; failure to comply with laws and regulations
relating to the collection, storage and processing of sensitive personal information or standards in electronic health
records or transmissions; changes in tax legislation; risks related to product liability, intellectual property and other
claims; litigation risks; new or unanticipated litigation developments and the status of litigation matters; risks
associated with customs policies or legislative import restrictions; cyberattacks or other privacy or data security
breaches (including the recent October 2023 incident); risks associated with our global operations; our dependence
on our senior management, employee hiring and retention, and our relationships with customers, suppliers and
36
manufacturers; and disruptions in financial markets. The order in which these factors appear should not be
construed to indicate their relative importance or priority.
We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control
or predict. Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction
of actual results. We undertake no duty and have no obligation to update forward-looking statements except as
required by law.
Where You Can Find Important Information
We may disclose important information through one or more of the following channels: SEC filings, public
conference calls and webcasts, press releases, the investor relations page of our website (www.henryschein.com)
and the social media channels identified on the Newsroom page of our website.
Recent Developments
During the year ended December 31, 2022 we experienced a decrease in the sales of PPE and COVID-19 test kits
as compared to the comparable prior-year period. During the three and nine months ended September 30, 2023, we
continued to experience a decrease in the sales of PPE and COVID-19 test kits, primarily due to ongoing decreases
in market prices for PPE (principally gloves) and lower market demand for COVID-19 test kits compared with the
same periods in the prior year, and we expect further decreases in sales in 2023 compared to the prior year.
While the U.S. economy has recently experienced inflationary pressures and strengthening of the U.S. dollar, their
impacts have not been material to our results of operations. The impact from inflation, including manufacturer
price increases excluding PPE products, was slightly more pronounced in Europe. Though inflation impacts both
our revenues and costs, the depth and breadth of our product portfolio often allows us to offer lower-cost national
brand solutions or corporate brand alternatives to our more price-sensitive customers who are unable to absorb
price increases, thus positioning us to protect our gross profit.
Our condensed consolidated financial statements reflect estimates and assumptions made by us that affect, among
other things, our goodwill, long-lived asset and definite-lived intangible asset valuation; inventory valuation; equity
investment valuation; assessment of the annual effective tax rate; valuation of deferred income taxes and income
tax contingencies; the allowance for doubtful accounts; hedging activity; supplier rebates; measurement of
compensation cost for certain share-based performance awards and cash bonus plans; and pension plan
assumptions.
Cybersecurity Incident
On October 14, 2023, we became aware of a cybersecurity incident that primarily affected the operations of our
North American and European dental and medical distribution businesses. Henry Schein One, our practice
management software, revenue cycle management and patient relationship management solutions business was not
affected, and our manufacturing businesses and our equipment sales and service operations were mostly unaffected.
Once we became aware of the issue, we took steps to assess, contain and remediate this incident. Our distribution
operations resumed and we reactivated our ecommerce platform. We also notified law enforcement and our
customers and suppliers informing them of both the incident and management’s efforts to mitigate its impact on our
daily operations. As previously disclosed, while our forensic investigation is still ongoing, we have determined that
a data breach occurred. We are notifying potentially affected parties as appropriate.
On November 22, 2023, we experienced a disruption to our ecommerce platform and related applications. The
Company has restored its ecommerce platform and certain other applications in the United States, Canada and
certain European countries. Our ecommerce platform in the remaining European countries and other applications
are expected to follow shortly.
37
We continue to review the impact of the incident on our business. As previously disclosed, we believe the incident
will adversely impact our financial results for the fourth quarter and full year 2023.
We maintain cyber insurance, subject to certain retentions and policy limitations. There can be no assurance that
the insurance coverage we maintain is sufficient to cover costs and expenses related to this cybersecurity incident.
Executive-Level Overview
Henry Schein, Inc. is a solutions company for health care professionals powered by a network of people and
technology.
We
believe we are the world’s largest provider of health care products and services primarily to office-
based dental and medical practitioners, as well as alternate sites of care.
We
serve more than one million customers
worldwide including dental practitioners, laboratories, physician practices, and ambulatory surgery centers, as well
as government, institutional health care clinics and other alternate care clinics.
We
believe that we have a strong
brand identity due to our more than 91 years of experience distributing health care products.
We are headquartered in Melville, New York, employ approximately 24,000 people (of which approximately
11,500 are based outside of the United States) and have operations or affiliates in 33 countries and territories. Our
broad global footprint has evolved over time through our organic success as well as through contribution from
strategic acquisitions.
We
have established strategically located distribution centers around the world to enable us to better serve our
customers and increase our operating efficiency. This infrastructure, together with broad product and service
offerings at competitive prices, and a strong commitment to customer service, enables us to be a single source of
supply for our customers’ needs.
While our primary go-to-market strategy is in our capacity as a distributor, we also market and sell our own
corporate brand portfolio of cost-effective, high-quality consumable merchandise products, manufacture certain
dental specialty products in the areas of implants, orthodontics and endodontics, and repackage/relabel prescription
drugs and/or devices.
We
have achieved scale in these global businesses primarily through acquisitions, as
manufacturers of these products typically do not utilize a distribution channel to serve customers.
We
conduct our business through two reportable segments: (i) health care distribution and (ii) technology and
value-added services. These segments offer different products and services to the same customer base. Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools, government and other
institutions. Our medical businesses serve physician offices, urgent care centers, ambulatory care sites, emergency
medical technicians, dialysis centers, home health, federal and state governments and large enterprises, such as
group practices and integrated delivery networks, among other providers across a wide range of specialties.
The health care distribution reportable segment, combining our global dental and medical operating segments,
distributes consumable products, small equipment, laboratory products, large equipment, equipment repair services,
branded and generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant,
orthodontic and endodontic products), diagnostic tests, infection-control products, PPE products and vitamins.
Our global technology and value-added services business provides software, technology and other value-added
services to health care practitioners. Our technology business offerings include practice management software
systems for dental and medical practitioners. Our value-added practice solutions include practice consultancy,
education, revenue cycle management and financial services on a non-recourse basis, e-services, practice
technology, network and hardware services, as well as consulting, and continuing education services for
practitioners.
A key element to grow closer to our customers is our One Schein initiative, which is a unified go-to-market
approach that enables practitioners to work synergistically with our supply chain, equipment sales and service and
other value-added services, allowing our customers to leverage the combined value that we offer through a single
program. Specifically, One Schein provides customers with streamlined access to our comprehensive offering of
38
national brand products, our corporate brand products and proprietary specialty products and solutions (including
implant, orthodontic and endodontic products). In addition, customers have access to a wide range of services,
including software and other value-added services.
Industry Overview
In recent years, the health care industry has increasingly focused on cost containment. This trend has benefited
distributors capable of providing a broad array of products and services at low prices. It also has accelerated the
growth of HMOs, group practices, other managed care accounts and collective buying groups, which, in addition to
their emphasis on obtaining products at competitive prices, tend to favor distributors capable of providing
specialized management information support.
We
believe that the trend towards cost containment has the potential
to favorably affect demand for technology solutions, including software, which can enhance the efficiency and
facilitation of practice management.
Our operating results in recent years have been significantly affected by strategies and transactions that we
undertook to expand our business, domestically and internationally, in part to address significant changes in the
health care industry, including consolidation of health care distribution companies, health care reform, trends
toward managed care, cuts in Medicare and collective purchasing arrangements.
Industry Consolidation
The health care products distribution industry, as it relates to office-based health care practitioners, is fragmented
and diverse. The industry ranges from sole practitioners working out of relatively small offices to group practices
or service organizations ranging in size from a few practitioners to a large number of practitioners who have
combined or otherwise associated their practices.
Due in part to the inability of office-based health care practitioners to store and manage large quantities of supplies
in their offices, the distribution of health care supplies and small equipment to office-based health care practitioners
has been characterized by frequent, small quantity orders, and a need for rapid, reliable and substantially complete
order fulfillment. The purchasing decisions within an office-based health care practice are typically made by the
practitioner or an administrative assistant. Supplies and small equipment are generally purchased from more than
one distributor, with one generally serving as the primary supplier.
The trend of consolidation extends to our customer base. Health care practitioners are increasingly seeking to
partner, affiliate or combine with larger entities such as hospitals, health systems, group practices or physician
hospital organizations. In many cases, purchasing decisions for consolidated groups are made at a centralized or
professional staff level; however, orders are delivered to the practitioners’ offices.
We
believe that consolidation within the industry will continue to result in a number of distributors, particularly
those with limited financial, operating and marketing resources, seeking to combine with larger companies that can
provide growth opportunities. This consolidation also may continue to result in distributors seeking to acquire
companies that can enhance their current product and service offerings or provide opportunities to serve a broader
customer base.
Our approach to acquisitions and joint ventures has been to expand our role as a provider of products and services
to the health care industry. This trend has resulted in our expansion into service areas that complement our existing
operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquired businesses.
As industry consolidation continues, we believe that we are positioned to capitalize on this trend, as we believe we
have the ability to support increased sales through our existing infrastructure, although there can be no assurances
that we will be able to successfully accomplish this.
We
also have invested in expanding our sales/marketing
infrastructure to include a focus on building relationships with decision makers who do not reside in the office-
based practitioner setting.
39
As the health care industry continues to change, we continually evaluate possible candidates for joint venture or
acquisition and intend to continue to seek opportunities to expand our role as a provider of products and services to
the health care industry. There can be no assurance that we will be able to successfully pursue any such
opportunity or consummate any such transaction, if pursued. If additional transactions are entered into or
consummated, we would incur merger and/or acquisition-related costs, and there can be no assurance that the
integration efforts associated with any such transaction would be successful.
Aging Population and Other Market Influences
The health care products distribution industry continues to experience growth due to the aging population,
increased health care awareness, the proliferation of medical technology and testing, new pharmacological
treatments, and expanded third-party insurance coverage, partially offset by the effects of unemployment on
insurance coverage. In addition, the physician market continues to benefit from the shift of procedures and
diagnostic testing from acute care settings to alternate-care sites, particularly physicians’ offices.
According to the U.S. Census Bureau’s International Database, between 2023 and 2033, the 45 and older
population is expected to grow by approximately 11%. Between 2023 and 2043, this age group is expected to grow
by approximately 21%. This compares with expected total U.S. population growth rates of approximately 6%
between 2023 and 2033 and approximately 11% between 2023 and 2043.
According to the U.S. Census Bureau’s International Database, in 2023 there are approximately seven million
Americans aged 85 years or older, the segment of the population most in need of long-term care and elder-care
services. By the year 2050, that number is projected to nearly triple to approximately 19 million. The population
aged 65 to 84 years is projected to increase by approximately 23% during the same period.
As a result of these market dynamics, annual expenditures for health care services continue to increase in the
United States. We believe that demand for our products and services will grow while continuing to be impacted by
current and future operating, economic, and industry conditions. The Centers for Medicare and Medicaid Services,
or CMS, published “National Health Expenditure Data” indicating that total national health care spending reached
approximately $4.3 trillion in 2021, or 18.3% of the nation’s gross domestic product, the benchmark measure for
annual production of goods and services in the United States. Health care spending is projected to reach
approximately $7.2 trillion by 2031, or 19.6% of the nation’s projected gross domestic product.
Government
Certain of our businesses involve the distribution, manufacturing, importation, exportation, marketing and sale of,
and/or third party payment for, pharmaceuticals and/or medical devices, and in this regard, we are subject to
extensive local, state, federal and foreign governmental laws and regulations, including as applicable to our
wholesale distribution of pharmaceuticals and medical devices, manufacturing activities, and as part of our
specialty home medical supply business that distributes and sells medical equipment and supplies directly to
patients. Federal, state and certain foreign governments have also increased enforcement activity in the health care
sector, particularly in areas of fraud and abuse, anti-bribery and corruption, controlled substances handling, medical
device regulations and data privacy and security standards.
Certain of our businesses are subject to various additional federal, state, local and foreign laws and regulations,
including with respect to the sale, transportation, importation, storage, handling and disposal of hazardous or
potentially hazardous substances; “forever chemicals” such as per-and polyfluoroalkyl substances (PFAS); and safe
working conditions. In addition, certain of our businesses must operate in compliance with a variety of burdensome
and complex coding, billing and record-keeping requirements in order to substantiate claims for payment under
federal, state and commercial healthcare reimbursement programs. One of these businesses was suspended in
October 2021 by CMS from receiving payments from Medicare, although it was permitted to continue to perform
and bill for Medicare services. Such suspension was terminated on September 30, 2022.
Government and private insurance programs fund a large portion of the total cost of medical care, and there have
been efforts to limit such private and government insurance programs, including efforts, thus far unsuccessful, to
40
seek repeal of the entire United States Patient Protection and Affordable Care Act, as amended by the Health Care
and Education Reconciliation Act, each enacted in March 2010. In addition, activities to control medical costs,
including laws and regulations lowering reimbursement rates for pharmaceuticals, medical devices, medical
supplies, and/or medical treatments or services, are ongoing. Many of these laws and regulations are subject to
change and their evolving implementation may impact our operations and our financial performance.
Our businesses are generally subject to numerous laws and regulations that could impact our financial performance,
and failure to comply with such laws or regulations could have a material adverse effect on our business.
A more detailed discussion of governmental laws and regulations is included in Management’s Discussion &
Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2022, filed with the SEC on February 21, 2023.
Results of Operations
The following tables summarize the significant components of our operating results for the three and nine months
ended September 30, 2023 and September 24, 2022 and cash flows for the nine months ended September 30, 2023
and September 24, 2022:
Three Months Ended
Nine Months Ended
September 30,
September 24,
September 30,
September 24,
2023
2022
2023
2022
Operating results:
Net sales
$
3,162
$
3,067
$
9,322
$
9,276
Cost of sales
2,167
2,153
6,386
6,444
Gross profit
995
914
2,936
2,832
Operating expenses:
Selling, general and administrative
725
648
2,149
2,010
Depreciation and amortization
59
45
152
137
Restructuring and integration costs
11
10
59
10
Operating income
$
200
$
211
$
576
$
675
Other expense, net
$
(21)
$
(6)
$
(48)
$
(17)
Net income
143
162
419
515
Net income attributable to Henry Schein, Inc.
137
150
398
491
Nine Months Ended
September 30,
September 24,
2023
2022
Cash flows:
Net cash provided by operating activities
$
532
$
348
Net cash used in investing activities
(808)
(211)
Net cash provided by (used in) financing activities
307
(121)
41
Plan of Restructuring and Integration Costs
On August 1, 2022, we committed to a restructuring plan focused on funding the priorities of the strategic plan and
streamlining operations and other initiatives to increase efficiency. We revised our previous expectations of
completion and now expect this initiative to extend through 2024. We are currently unable in good faith to make a
determination of an estimate of the amount or range of amounts expected to be incurred in connection with these
activities, both with respect to each major type of cost associated therewith and with respect to the total cost, or an
estimate of the amount or range of amounts that will result in future cash expenditures.
During the three months ended September 30, 2023 and September 24, 2022, we recorded restructuring costs of
$11 million and $9 million, respectively. During the nine months ended September 30, 2023 and September 24,
2022, we recorded restructuring costs of $59 million and $9 million, respectively. The restructuring costs for these
periods primarily related to severance and employee-related costs, accelerated amortization of right-of-use lease
assets and fixed assets, and other lease exit costs. Included in restructuring costs for the nine months ended
September 30, 2023 were immaterial amounts related to the disposal of an unprofitable U.S. business initiated
during 2022 and completed during the first quarter of 2023.
On August 26, 2022, we acquired Midway Dental Supply. In connection with this acquisition, during the three
months ended September 24, 2022, we recorded integration costs of $1 million related to one-time employee and
other costs, as well as restructuring charges of $2 million, which are included in the $9 million of restructuring
charges discussed above.
42
Three Months Ended September 30, 2023 Compared to Three Months Ended September 24, 2022
Net Sales
Net sales were as follows:
September 30,
% of
September 24,
% of
Increase / (Decrease)
2023
Total
2022
Total
$
%
Health care distribution
(1)
Dental
$
1,882
59.5
%
$
1,785
58.2
%
$
97
5.4
%
Medical
1,070
33.9
1,106
36.0
(36)
(3.1)
2,952
93.4
2,891
94.2
61
2.1
Technology and value-added services
(2)
210
6.6
176
5.8
34
18.8
Total
$
3,162
100.0
%
$
3,067
100.0
%
$
95
3.1
%
The components of our sales growth were as follows:
Total Local
Currency
Growth
Foreign
Exchange
Impact
Total Sales
Growth
Local Currency Growth
Local Internal
Growth
Acquisition
Growth
Health care distribution
(1)
Dental Merchandise
0.3
%
4.8
%
5.1
%
1.8
%
6.9
%
Dental Equipment
(2.0)
0.9
(1.1)
1.7
0.6
Total Dental
(0.2)
3.8
3.6
1.8
5.4
Medical
(4.6)
1.4
(3.2)
0.1
(3.1)
Total Health Care Distribution
(1.9)
2.9
1.0
1.1
2.1
Technology and value-added services
(2)
9.6
8.6
18.2
0.6
18.8
Total
(1.2)
%
3.2
%
2.0
%
1.1
%
3.1
%
Note: Percentages for Net Sales; Gross Profit; Selling, General and Administrative; Other Expense, Net; and Income Taxes are based on
actual values and may not recalculate due to rounding.
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic
products), diagnostic tests, infection-control products, PPE products and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
Global Sales
Global net sales for the three months ended September 30, 2023 increased 3.1% and was primarily attributable to
acquisitions. The components of our sales growth are presented in the table above.
The estimated increase in internally generated local currency sales, excluding PPE products and COVID-19 test
kits, was 1.1%. We estimate that sales of PPE products and COVID-19 test kits were approximately $175 million
and $244 million for the three months ended September 30, 2023 and September 24, 2022, respectively,
representing an estimated decrease of $69 million or 28.2% versus the prior year, with the $69 million net decrease
year-over-year representing 2.2% of global net sales for the three months ended September 30, 2023.
Dental
Dental net sales for the three months ended September 30, 2023 increased 5.4%. The components of our sales
growth are presented in the table above. Our sales growth in local currency for dental merchandise was 5.1% and
was primarily attributable to acquisitions. Our decrease in sales in local currency for dental equipment was
primarily attributable to a slowdown in digital equipment sales, partially offset by growth in North America for
traditional dental equipment.
43
The estimated increase in internally generated local currency sales, excluding PPE products, was 0.3%. We
estimate that sales of PPE products were approximately $83 million and $94 million for the three months ended
September 30, 2023 and September 24, 2022, respectively, representing an estimated decrease of $10 million or
11.0% versus the prior year, with the $10 million net decrease year-over-year representing 0.5% of dental net sales
for the three months ended September 30, 2023.
Medical
Medical net sales for the three months ended September 30, 2023 decreased 3.1%. The components of this
decrease are presented in the table above. The local currency decrease in medical sales is primarily attributable to
lower sales of PPE products and COVID-19 test kits.
The estimated increase in internally generated local currency sales, excluding PPE products and COVID-19 test
kits, was 0.8% and was adversely impacted by a replacement of branded pharmaceutical sales with lower priced
generic products and an increase in lower priced corporate brand sales. We estimate that sales of PPE products and
COVID-19 test kits were approximately $92 million and $150 million for the three months ended September 30,
2023 and September 24, 2022, respectively, representing an estimated decrease of $59 million or 39.0% versus the
prior year, with the $59 million net decrease year-over-year representing 5.4% of medical net sales for the three
months ended September 30, 2023.
Technology and value-added services
Technology and value-added services net sales for the three months ended September 30, 2023 increased 18.8%
driven by acquisitions and revenue of practice management solutions. The components of our sales growth are
presented in the table above. During the three months ended September 30, 2023, the trend for sales of practice
management software growth remains strong as we continued to increase the number of cloud-based users.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
September 30,
Gross
September 24,
Gross
Increase
2023
Margin %
2022
Margin %
$
%
Health care distribution
$
851
28.8
%
$
799
27.7
%
$
52
6.5
%
Technology and value-added services
144
68.7
115
65.0
29
25.5
Total
$
995
31.5
$
914
29.8
$
81
8.8
As a result of different practices of categorizing costs associated with distribution networks throughout our
industry, our gross margins may not necessarily be comparable to other distribution companies. Additionally, we
realize substantially higher gross margin percentages in our technology and value-added services segment than in
our health care distribution segment. These higher gross margins result from being both the developer and seller of
software products and services, as well as certain financial services. The software industry typically realizes higher
gross margins to recover investments in research and development.
Within our health care distribution segment, gross profit margins may vary from one period to the next. Changes in
the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting
our gross profit margin. For example, sales of our corporate brand products achieve gross profit margins that are
higher than average total gross profit margins of all products. With respect to customer mix, sales to our large-
group customers are typically completed at lower gross margins due to the higher volumes sold as opposed to the
gross margin on sales to office-based practitioners, who normally purchase lower volumes.
Health care distribution gross profit increased primarily due to the increase in net sales discussed above, including
$35 million of gross profit from acquisitions and gross margin expansion, mainly as a result of a favorable impact
of sales mix of higher-margin products.
44
Technology and value-added services gross profit increased as a result of a higher gross profit from internally
generated sales and gross profit of $13 million from acquisitions, as well as an increase in gross margin rates,
primarily due to product mix.
Operating Expenses
Operating expenses (consisting of selling, general and administrative expenses; depreciation and amortization; and
restructuring and integration costs) by segment and in total were as follows:
% of
% of
September 30,
Respective
September 24,
Respective
Increase
2023
Net Sales
2022
Net Sales
$
%
Health care distribution
$
691
23.4
%
$
620
21.5
%
$
71
11.3
%
Technology and value-added services
104
49.7
83
47.2
21
25.1
Total
$
795
25.1
$
703
22.9
$
92
12.9
The net increase in operating expenses is attributable to the following:
Restructuring and
Integration Costs
Operating Costs
Acquisitions
Total
Health care distribution
$
-
$
65
$
6
$
71
Technology and value-added services
1
(8)
28
21
Total
$
1
$
57
$
34
$
92
The restructuring and integration costs are primarily related to severance and employee-related costs, and other
lease exit costs. The increase in operating costs includes increases in payroll and payroll related costs, facility
related costs and consulting expenses in both of our reportable segments, and increased acquisition expenses in our
healthcare distribution segment.
Other Expense, Net
Other expense, net was as follows:
September 30,
September 24,
Variance
2023
2022
$
%
Interest income
$
6
$
1
$
5
300.2
%
Interest expense
(25)
(8)
(17)
(202.6)
Other, net
(2)
1
(3)
(292.4)
Other expense, net
$
(21)
$
(6)
$
(15)
(252.2)
Interest income increased primarily due to increased interest rates. Interest expense increased primarily due to
increased borrowings and increased interest rates.
Income Taxes
For the three months ended September 30, 2023 our effective tax rate was 21.9% compared to 22.7% for the prior
year period. The difference between our effective tax rate and the federal statutory tax rate primarily relates to state
and foreign income taxes and interest expense.
45
Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 24, 2022
Net Sales
Net sales were as follows:
September 30,
% of
September 24,
% of
Increase / (Decrease)
2023
Total
2022
Total
$
%
Health care distribution
(1)
Dental
$
5,737
61.5
%
$
5,466
58.9
%
$
271
5.0
%
Medical
2,991
32.1
3,274
35.3
(283)
(8.6)
Total health care distribution
8,728
93.6
8,740
94.2
(12)
(0.1)
Technology and value-added services
(2)
594
6.4
536
5.8
58
10.7
Total
$
9,322
100.0
%
$
9,276
100.0
%
$
46
0.5
%
The components of our sales growth were as follows:
Total Local
Currency
Growth
Foreign
Exchange
Impact
Total Sales
Growth
Local Currency Growth
Local Internal
Growth
Acquisition
Growth
Health care distribution
(1)
Dental Merchandise
1.7
%
4.0
%
5.7
%
(0.4)
%
5.3
%
Dental Equipment
2.7
1.5
4.2
(0.4)
3.8
Total Dental
1.9
3.5
5.4
(0.4)
5.0
Medical
(9.3)
0.7
(8.6)
-
(8.6)
Total Health Care Distribution
(2.3)
2.4
0.1
(0.2)
(0.1)
Technology and value-added services
(2)
7.2
3.8
11.0
(0.3)
10.7
Total
(1.7)
%
2.5
%
0.8
%
(0.3)
%
0.5
%
Note: Percentages for Net Sales; Gross Profit; Selling, General and Administrative; Other Expense, Net; and Income Taxes are based on
actual values and may not recalculate due to rounding.
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic
products), diagnostic tests, infection-control products, PPE products and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
Global Sales
Global net sales for the nine months ended September 30, 2023 increased 0.5%. The components of our sales
growth are presented in the table above.
The estimated increase in internally generated local currency sales, excluding PPE products and COVID-19 test
kits, was 3.5%. We estimate that sales of PPE products and COVID-19 test kits were approximately $540 million
and $990 million for the nine months ended September 30, 2023 and September 24, 2022, respectively,
representing an estimated decrease of $450 million or 45.5% versus the prior year, with the $450 million net
decrease year-over-year representing 4.8% of global net sales for the nine months ended September 30, 2023.
Dental
Dental net sales for the nine months ended September 30, 2023 increased 5.0%. The components of our sales
growth are presented in the table above. Our sales growth in local currency for dental merchandise was primarily
attributable to acquisitions. Our sales growth in local currency for dental equipment was primarily attributable to
growth in traditional equipment sales in North America.
46
The estimated increase in internally generated local currency sales, excluding PPE products and COVID-19 test
kits, was 3.8%. We estimate that sales of PPE products were approximately $264 million and $351 million for the
nine months ended September 30, 2023 and September 24, 2022, respectively, representing an estimated decrease
of $87 million or 25.0% versus the prior year, with the $87 million net decrease year-over-year representing 1.5%
of dental net sales for the nine months ended September 30, 2023.
Medical
Medical net sales for the nine months ended September 30, 2023 decreased 8.6%. The components of this decrease
are presented in the table above. The local currency decrease in medical sales is primarily attributable to lower
sales of PPE products and COVID-19 test kits and other point-of-care diagnostic products.
The estimated increase in internally generated local currency sales, excluding PPE products and COVID-19 test
kits, was 2.3%. We estimate that sales of PPE products and COVID-19 test kits were approximately $276 million
and $639 million for the nine months ended September 30, 2023 and September 24, 2022, respectively,
representing an estimated decrease of $363 million or 56.8% versus the prior year, with the $363 million net
decrease year-over-year representing 12.1% of medical net sales for the nine months ended September 30, 2023.
Technology and value-added services
Technology and value-added services net sales for the nine months ended September 30, 2023 increased 10.7%.
The components of our sales growth are presented in the table above. During the nine months ended September 30,
2023, the trend for sales of practice management software growth remains strong as we continued to increase the
number of cloud-based users. We also experienced increased demand for our revenue cycle management solutions.
The increase in sales during the quarter ended September 30, 2023 was partially offset by the expiration, during the
third quarter of 2022, of a modestly profitable government contract in one of our value-added services businesses.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
September 30,
Gross
September 24,
Gross
Increase
2023
Margin %
2022
Margin %
$
%
Health care distribution
$
2,534
29.0
%
$
2,482
28.4
%
$
52
2.1
%
Technology and value-added services
402
67.6
350
65.3
52
14.8
Total
$
2,936
31.5
$
2,832
30.5
$
104
3.7
As a result of different practices of categorizing costs associated with distribution networks throughout our
industry, our gross margins may not necessarily be comparable to other distribution companies. Additionally, we
realize substantially higher gross margin percentages in our technology and value-added services segment than in
our health care distribution segment. These higher gross margins result from being both the developer and seller of
software products and services, as well as certain financial services. The software industry typically realizes higher
gross margins to recover investments in research and development.
Within our health care distribution segment, gross profit margins may vary from one period to the next. Changes in
the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting
our gross profit margin. For example, sales of our corporate brand products achieve gross profit margins that are
higher than average total gross profit margins of all products. With respect to customer mix, sales to our large-
group customers are typically completed at lower gross margins due to the higher volumes sold as opposed to the
gross margin on sales to office-based practitioners, who normally purchase lower volumes.
Health care distribution gross profit for the nine months ended September 30, 2023 increased compared to the
prior-year period due to the increase in sales, mainly due to a reduction in sales of PPE products and COVID-19
47
test kits offset by $74 million of gross profit from acquisitions and gross margin expansion as a result of a favorable
impact of sales mix of higher-margin products.
Technology and value-added services gross profit increased as a result of a higher gross profit from internally
generated sales and gross profit of $18 million from acquisitions, as well as an increase in gross margin rates
primarily due to product mix and increases in productivity.
Operating Expenses
Operating expenses (consisting of selling, general and administrative expenses; depreciation and amortization; and
restructuring and integration costs) by segment and in total were as follows:
% of
% of
September 30,
Respective
September 24,
Respective
Increase
2023
Net Sales
2022
Net Sales
$
%
Health care distribution
$
2,063
23.6
%
$
1,903
21.8
%
$
160
8.4
%
Technology and value-added services
297
50.1
254
47.4
43
17.0
Total
$
2,360
25.3
$
2,157
23.3
$
203
9.4
The net increase in operating expenses is attributable to the following:
Restructuring and
Integration Costs
Operating Costs
Acquisitions
Total
Health care distribution
$
42
$
81
$
37
$
160
Technology and value-added services
7
4
32
43
Total
$
49
$
85
$
69
$
203
The restructuring and integration costs are primarily related to severance and employee-related costs, accelerated
amortization of right-of-use lease assets and fixed assets, and other lease exit costs. During the nine months ended
September 30, 2023, our operating expenses were favorably impacted by the recognition of a remeasurement gain
of $18 million following an acquisition of a controlling interest of a previously held equity investment. The
increase in operating costs includes increases in payroll and payroll related costs, travel, convention, consulting,
and occupancy expenses in both of our reportable segments and increased acquisition expenses in our healthcare
distribution segment.
Other Expense, Net
Other expense, net was as follows:
September 30,
September 24,
Variance
2023
2022
$
%
Interest income
$
12
$
5
$
7
132.2
%
Interest expense
(58)
(23)
(35)
(153.4)
Other, net
(2)
1
(3)
(331.4)
Other expense, net
$
(48)
$
(17)
$
(31)
(184.5)
Interest income increased primarily due to increased interest rates. Interest expense increased primarily due to
increased borrowings and increased interest rates.
Income Taxes
For the nine months ended September 30, 2023 our effective tax rate was 22.5% compared to 23.5% for the prior
year period. The difference between our effective tax rate and the federal statutory tax rate primarily relates to state
and foreign income taxes and interest expense.
48
Liquidity and Capital Resources
Our principal capital requirements have included funding of acquisitions, purchases of additional noncontrolling
interests, repayments of debt principal, the funding of working capital needs, purchases of fixed assets and
repurchases of common stock. Working capital requirements generally result from increased sales, special
inventory forward buy-in opportunities and payment terms for receivables and payables. Historically, sales have
tended to be stronger during the second half of the year and special inventory forward buy-in opportunities have
been most prevalent just before the end of the year, and have caused our working capital requirements to be higher
from the end of the third quarter to the end of the first quarter of the following year.
We finance our business primarily through cash generated from our operations, revolving credit facilities and debt
placements. Please see
operations is dependent on the continued demand of our customers for our products and services, and access to
products and services from our suppliers.
Our business requires a substantial investment in working capital, which is susceptible to fluctuations during the
year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of
sales activity, special inventory forward buy-in opportunities and our desired level of inventory. We anticipate
future increases in our working capital requirements.
We finance our business to provide adequate funding for at least 12 months. Funding requirements are based on
forecasted profitability and working capital needs, which, on occasion, may change. Consequently, we may change
our funding structure to reflect any new requirements.
We believe that our cash and cash equivalents, our ability to access private debt markets and public equity markets,
and our available funds under existing credit facilities provide us with sufficient liquidity to meet our currently
foreseeable short-term and long-term capital needs.
Our acquisition strategy is focused on investments in companies that add new customers and sales teams, increase
our geographic footprint (whether entering a new country, such as emerging markets, or building scale where we
have already invested in businesses), and finally, those that enable us to access new products and technologies. As
part of our BOLD+1 Strategic Plan, including pursuing focused mergers and acquisitions, subsequent to September
30, 2023 we have announced acquisitions of companies specializing in clear aligners, homecare medical products
delivered directly to patients, and dental practice transition services.
Net cash provided by operating activities was $532 million for the nine months ended September 30, 2023,
compared to net cash provided by operating activities of $348 million for the prior year. The net change of $184
million was primarily due to a favorable change in working capital (primarily inventories), net of acquisitions,
partially offset by a decrease in operating income.
Net cash used in investing activities was $808 million for the nine months ended September 30, 2023, compared to
net cash used in investing activities of $211 million for the prior year. The net change of $597 million was
primarily attributable to increased business combinations and investment activity.
Net cash provided by financing activities was $307 million for the nine months ended September 30, 2023,
compared to net cash used in financing activities of $121 million for the prior year. The net change of $428 million
was primarily due to increased net borrowings from debt.
49
The following table summarizes selected measures of liquidity and capital resources:
September 30,
December 31,
2023
2022
Cash and cash equivalents
$
166
$
117
Working capital
2,020
1,764
Debt:
Bank credit lines
$
12
$
103
Current maturities of long-term debt
72
6
Long-term debt
1,815
1,040
Total debt
$
1,899
$
1,149
Leases:
Current operating lease liabilities
$
74
$
73
Non-current operating lease liabilities
314
275
(1)
Includes $0 million and $327 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitization at September 30, 2023 and December 31, 2022, respectively.
Our cash and cash equivalents consist of bank balances and investments in money market funds representing
overnight investments with a high degree of liquidity.
Accounts receivable days sales outstanding and inventory turns
Our accounts receivable days sales outstanding from operations increased to 43.7 days as of September 30, 2023
from 42.9 days as of September 24, 2022. During the nine months ended September 30, 2023, we wrote off
approximately $13 million of fully reserved accounts receivable against our trade receivable reserve. Our inventory
turns from operations decreased to 4.5 as of September 30, 2023 from 4.7 as of September 24, 2022. Our working
capital accounts may be impacted by current and future economic conditions.
Leases
We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles,
and certain equipment. Our leases have remaining terms of one year to approximately 18 years, some of which
may include options to extend the leases for up to 15 years. As of September 30, 2023, our right-of-use assets
related to operating leases were $323 million and our current and non-current operating lease liabilities were $74
million and $314 million, respectively.
Stock Repurchases
On February 8, 2023, our Board of Directors authorized the repurchase of up to an additional $400 million in shares
of our common stock.
From March 3, 2003 through September 30, 2023, we repurchased $4.7 billion, or 89,702,364 shares, under our
common stock repurchase programs, with $315 million available as of September 30, 2023 for future common
stock share repurchases.
50
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates from those disclosed in Item
7 of our Annual Report on Form 10-K for the year ended December 31, 2022, except accounting policies adopted
as of January 1, 2023, which are discussed in
Accounting Standards Update
For a discussion of accounting standards updates that have been adopted or will be adopted, see
Financial Statements included under Item 1.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our exposure to market risk from that disclosed in Item 7A of our Annual
Report on Form 10-K for the year ended December 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our principal executive officer and
principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report as such term is defined in Rules 13a-15(e)
and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based
on this evaluation, our management, including our principal executive officer and principal financial officer,
concluded that our disclosure controls and procedures were effective as of September 30, 2023, to ensure that all
material information required to be disclosed by us in reports that we file or submit under the Exchange Act is
accumulated and communicated to them as appropriate to allow timely decisions regarding required disclosure and
that all such information is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2023, we acquired a 100% voting equity interest in S.I.N Implant System,
an implant manufacturer headquartered in Brazil. The full integration of this acquisition, as well as our previously
reported acquisition of Biotech Dental, will extend beyond year-end and, therefore, we anticipate excluding Biotech
Dental, and S.I.N. from our annual assessment of internal control over financial reporting as of December 30, 2023,
as permitted by SEC staff interpretive guidance for newly acquired businesses.
Post-acquisition integration related activities for other dental and medical businesses acquired during prior quarters
across the U.S., Europe, Australia, China, and Brazil will continue, and will be included in our annual assessment
of internal control over financial reporting as of December 30, 2023. These acquisitions, the majority of which
utilize separate information and financial accounting systems, have been included in our condensed consolidated
financial statements since their respective dates of acquisition.
Finally, we continued systems implementation activities in the U.S. for two of our dental businesses.
The combination of acquisitions (including S.I.N., and Biotech Dental), continued acquisition integrations and
systems implementation activities undertaken during the quarter and carried over from prior quarters when
considered in the aggregate, represents a material change in our internal control over financial reporting.
51
During the quarter, all acquisitions, continued acquisition integrations and systems implementation activities
involve necessary and appropriate change-management controls that are considered in our quarterly assessment of
changes in our internal control over financial reporting.
Subsequent to the September 30, 2023 quarter end, on October 14, 2023, we experienced a cybersecurity incident
that primarily affected the operations of our North American and European dental and medical distribution
businesses. As part of the Company’s incident response plan, precautionary actions were taken to contain the
incident including shutting down connectivity to networks and key business, operating and financial accounting
systems globally. In addition to notifying customers and all relevant law enforcement authorities, we engaged
external cyber-security experts to support our assessment of the cyber-incident’s impact as well as sanitize, rebuild
and restore our information systems.
On November 22, 2023, we experienced a disruption to our ecommerce platform and related applications. The
Company has restored its ecommerce platform and certain other applications in the United States, Canada and
certain European countries. Our ecommerce platform in the remaining European countries and other applications
are expected to follow shortly.
In order to mitigate the impact of this disruption on our systems and on our ability to service customers, alternative
procedures and controls were temporarily implemented. An investigation is ongoing to assess the impact on our
businesses and internal controls over financial reporting.
Limitations of the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the internal control system are met. Because of the inherent limitations of any internal control
system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company
have been detected.
52
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of Legal Proceedings, see
Financial Statements included under Item 1.
ITEM 1A. RISK FACTORS
Referring to risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the year ended
December 31, 2022, and in particular the first risk factor under General Risks addressing security risks associated
with our information systems, the third paragraph is amended and restated as follows:
While we have implemented measures to protect our IS systems, such measures may not prevent these events. Any
such security incidents could disrupt our operations, harm our reputation, or otherwise have a material adverse
effect on our business. In addition to immaterial prior incidents, in October 2023, Henry Schein experienced a
cybersecurity incident that primarily affected the operations of our North American and European dental and
medical distribution businesses. Henry Schein One, our practice management software, revenue cycle management
and patient relationship management solutions business was not affected, and our manufacturing businesses and our
equipment sales and service operations were mostly unaffected. Once we became aware of the issue, we took steps
to assess, contain and remediate this incident.
We
restored affected systems and applications, our distribution
operations resumed and we reactivated our ecommerce platform.
We
also notified law enforcement and our
customers and suppliers, informing them of both the incident and management’s efforts to mitigate its impact on
our daily operations. As previously disclosed, while our forensic investigation is still ongoing, we have determined
that a data breach occurred. We are notifying potentially affected parties as appropriate. On November 22, 2023,
we experienced a disruption to our ecommerce platform and related applications. The Company has restored its
ecommerce platform and certain other applications in the United States, Canada and certain European
countries. Our ecommerce platform in the remaining European countries and other applications are expected to
follow shortly.
We
continue to review the impact of the incident on the Company’s business. As previously
disclosed, we believe the incident will adversely impact our financial results for the fourth quarter and full year
2023. We maintain cyber insurance, subject to certain retentions and policy limitations. There can be no assurance
that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable
cost to cover costs and expenses related to security incidents.
53
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of equity securities by the issuer
Our share repurchase program, announced on March 3, 2003, originally allowed us to repurchase up to two million
shares pre-stock splits (eight million shares post-stock splits) of our common stock, which represented
approximately 2.3% of the shares outstanding at the commencement of the program. Subsequent additional
increases totaling $4.9 billion, authorized by our Board of Directors, to the repurchase program provide for a total
of $5.0 billion (including $400 million authorized on February 8, 2023) of shares of our common stock to be
repurchased under this program.
As of September 30, 2023, we had repurchased approximately $4.7 billion of common stock (89,702,364 shares)
under these initiatives, with $315 million available for future common stock share repurchases.
The following table summarizes repurchases of our common stock under our stock repurchase program during the
fiscal quarter ended September 30, 2023:
Total Number
Maximum Number
Total
of Shares
of Shares
Number
Average
Purchased as Part
that May Yet
of Shares
Price Paid
of Our Publicly
Be Purchased Under
Fiscal Month
Purchased (1)
Per Share
Announced Program
Our Program (2)
7/2/2023 through 8/5/2023
-
$
-
-
4,674,091
8/6/2023 through 9/2/2023
330,000
76.86
330,000
4,448,396
9/3/2023 through 9/30/2023
329,681
74.72
329,681
4,242,422
659,681
659,681
(1) All repurchases were executed in the open market under our existing publicly announced authorized program.
(2) The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the
closing price of our common stock at that time. This table excludes shares withheld from employees to satisfy minimum tax withholding
requirements for equity-based transactions.
54
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Arrangements
During the three months ended September 30, 2023, (i)
, the Company’s
, on behalf of himself and a family trust for which his wife serves as co-trustee,
and (ii)
, the Company’s
, each
arrangement which is a trading plan for the future sale of securities that is intended to satisfy the affirmative
defense of Exchange Act
(c), as well as the requirements of the Company’s insider trading policy. Each
plan is subject to an initial “cooling off” period during which there may be no transactions between the adoption
date and a date that is the later of 90 days or two business days following the Company’s filing of its next quarterly
report on Form 10-Q or Annual Report on form 10-K. On
, Mr. Bergman and the Bergman
Family 2010 Trust #2 adopted the trading plan to sell a total of
Bergman and
prices, with a term of eight months (
i.e.,
through May 7, 2024). On
, Mr. Breslawski adopted
the trading plan to sell
2024.
ITEM 6. EXHIBITS
101.INS
Inline XBRL Instance Document - the instance document does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document+
101.SCH
Inline XBRL Taxonomy Extension Schema Document+
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document+
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document+
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document+
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document+
104
The cover page of Henry Schein, Inc.’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2023, formatted in Inline XBRL (included within
Exhibit 101 attachments).+
** Indicates management contract or compensatory plan or agreement.
+ Filed or furnished herewith.
55
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned thereunto duly authorized.
Henry Schein, Inc.
(Registrant)
By: /s/ Ronald N. South
Ronald N. South
Senior Vice President and
Chief Financial Officer
(Authorized Signatory and Principal Financial
and Accounting Officer)
Dated: November 28, 2023