HENRY SCHEIN INC - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly
September 24, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to ____________
Commission File Number:
0-27078
HENRY SCHEIN, INC.
(Exact name of registrant as specified in its charter)
Delaware
11-3136595
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
135 Duryea Road
Melville
,
New York
(Address of principal executive offices)
11747
(Zip Code)
(
631
)
843-5500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.01 per share
HSIC
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
As of October 24, 2022,
there were
135,547,575
HENRY SCHEIN, INC.
INDEX
Page
3
4
5
6
7
8
9
9
10
11
12
13
15
17
19
20
21
24
24
26
27
28
28
29
46
46
47
47
47
48
49
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 24,
December 25,
2022
2021
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
123
$
118
Accounts receivable, net of reserves of $
63
67
1,507
1,452
Inventories, net
1,818
1,861
Prepaid expenses and other
509
413
Total current assets
3,957
3,844
Property and equipment, net
354
366
Operating lease right-of-use assets
319
325
Goodwill
2,870
2,854
Other intangibles, net
635
668
Investments and other
399
424
Total assets
$
8,534
$
8,481
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
957
$
1,054
Bank credit lines
107
51
Current maturities of long-term debt
4
11
Operating lease liabilities
72
76
Accrued expenses:
Payroll and related
330
385
Taxes
127
137
Other
549
593
Total current liabilities
2,146
2,307
Long-term debt
934
811
Deferred income taxes
37
42
Operating lease liabilities
271
268
Other liabilities
338
377
Total liabilities
3,726
3,805
Redeemable noncontrolling interests
563
613
Commitments and contingencies
(nil)
(nil)
Stockholders' equity:
Preferred stock, $
0.01
1,000,000
none
-
-
Common stock, $
0.01
480,000,000
135,258,887
137,145,558
1
1
Additional paid-in capital
-
-
Retained earnings
3,922
3,595
Accumulated other comprehensive loss
(312)
(171)
Total Henry Schein, Inc. stockholders' equity
3,611
3,425
Noncontrolling interests
634
638
Total stockholders' equity
4,245
4,063
Total liabilities, redeemable noncontrolling interests and stockholders' equity
$
8,534
$
8,481
See accompanying notes.
4
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in millions, except share and per share data)
Three Months Ended
Nine Months Ended
September 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Net sales
$
3,067
$
3,178
$
9,276
$
9,070
Cost of sales
2,153
2,266
6,444
6,376
Gross profit
914
912
2,832
2,694
Operating expenses:
Selling, general and administrative
648
657
2,010
1,906
Depreciation and amortization
45
44
137
133
Restructuring and integration costs
10
-
10
4
Operating income
211
211
675
651
Other income (expense):
Interest income
4
2
9
5
Interest expense
(11)
(7)
(27)
(20)
Other, net
1
-
1
1
Income before taxes, equity in earnings of affiliates
and noncontrolling interests
205
206
658
637
Income taxes
(46)
(50)
(155)
(154)
Equity in earnings of affiliates
3
6
12
18
Gain on sale of equity investment
-
7
-
7
Net income
162
169
515
508
Less: Net income attributable to noncontrolling interests
(12)
(7)
(24)
(24)
Net income attributable to Henry Schein, Inc.
$
150
$
162
$
491
$
484
Earnings per share attributable to Henry Schein, Inc.:
Basic
$
1.10
$
1.16
$
3.59
$
3.44
Diluted
$
1.09
$
1.15
$
3.55
$
3.40
Weighted-average common shares outstanding:
Basic
135,608,678
139,377,237
136,731,413
140,661,182
Diluted
137,084,049
141,079,337
138,488,254
142,178,702
See accompanying notes.
5
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in millions)
Three Months Ended
Nine Months Ended
September 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Net income
$
162
$
169
$
515
$
508
Other comprehensive loss, net of tax:
Foreign currency translation loss
(89)
(40)
(176)
(40)
Unrealized gain from foreign currency hedging
activities
11
4
20
5
Pension adjustment gain
1
-
1
1
Other comprehensive loss, net of tax
(77)
(36)
(155)
(34)
Comprehensive income
85
133
360
474
Comprehensive income attributable to noncontrolling
Net income
(12)
(7)
(24)
(24)
Foreign currency translation loss
6
5
14
4
Comprehensive income attributable to noncontrolling
interests
(6)
(2)
(10)
(20)
Comprehensive income attributable to Henry Schein, Inc.
$
79
$
131
$
350
$
454
See accompanying notes.
6
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY
(unaudited, in millions, except share and per share data)
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
136,439,560
$
1
$
-
$
3,834
$
(241)
$
633
$
4,227
Net income (excluding $
10
noncontrolling interests)
-
-
-
150
-
2
152
Foreign currency translation loss (excluding loss of $
6
attributable to Redeemable noncontrolling interests)
-
-
-
-
(83)
-
(83)
Unrealized gain from foreign currency hedging activities,
net of tax of $
4
-
-
-
-
11
-
11
Pension adjustment gain, net of tax of $
1
-
-
-
-
1
-
1
Dividends paid
-
-
-
-
-
(1)
(1)
Change in fair value of redeemable securities
-
-
11
-
-
-
11
Repurchases and retirement of common stock
(1,183,729)
-
(12)
(78)
-
-
(90)
Stock-based compensation expense
3,640
-
17
-
-
-
17
Stock issued upon exercise of stock options
597
-
-
-
-
-
-
Shares withheld for payroll taxes
(1,194)
-
(1)
-
-
-
(1)
Settlement of stock-based compensation awards
13
-
1
-
-
-
1
Transfer of charges in excess of capital
-
-
(16)
16
-
-
-
Balance, September 24, 2022
135,258,887
$
1
$
-
$
3,922
$
(312)
$
634
$
4,245
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 26, 2021
139,780,841
$
1
$
-
$
3,466
$
(107)
$
646
$
4,006
Net income (excluding $
5
noncontrolling interests)
-
-
-
162
-
2
164
Foreign currency translation loss (excluding loss of $
5
attributable to Redeemable noncontrolling interests)
-
-
-
-
(35)
-
(35)
Unrealized gain from foreign currency hedging activities,
net of tax of $
1
-
-
-
-
4
-
4
Change in fair value of redeemable securities
-
-
(11)
-
-
-
(11)
Repurchases and retirement of common stock
(651,289)
-
(7)
(43)
-
-
(50)
Stock-based compensation expense
11
-
28
-
-
-
28
Shares withheld for payroll taxes
(20)
-
-
-
-
-
-
Transfer of charges in excess of capital
-
-
(10)
10
-
-
-
Balance, September 25, 2021
139,129,543
$
1
$
-
$
3,595
$
(138)
$
648
$
4,106
See accompanying notes.
7
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(unaudited, in millions, except share and per share data)
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
137,145,558
$
1
$
-
$
3,595
$
(171)
$
638
$
4,063
Net income (excluding $
19
noncontrolling interests)
-
-
-
491
-
5
496
Foreign currency translation loss (excluding loss of $
13
attributable to Redeemable noncontrolling interests)
-
-
-
-
(162)
(1)
(163)
Unrealized gain from foreign currency hedging activities,
net of tax of $
7
-
-
-
-
20
-
20
Pension adjustment gain, net of tax of $
1
-
-
-
-
1
-
1
Dividends paid
-
-
-
-
-
(1)
(1)
Purchase of noncontrolling interests
-
-
-
-
-
(7)
(7)
Change in fair value of redeemable securities
-
-
18
-
-
-
18
Repurchases and retirement of common stock
(2,529,126)
-
(28)
(172)
-
-
(200)
Stock-based compensation expense
958,539
-
44
-
-
-
44
Stock issued upon exercise of stock options
30,424
-
2
-
-
-
2
Shares withheld for payroll taxes
(343,541)
-
(30)
-
-
-
(30)
Settlement of stock-based compensation awards
(2,967)
-
2
-
-
-
2
Transfer of charges in excess of capital
-
-
(8)
8
-
-
-
Balance, September 24, 2022
135,258,887
$
1
$
-
$
3,922
$
(312)
$
634
$
4,245
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Equity
Balance, December 26, 2020
142,462,571
$
1
$
-
$
3,455
$
(108)
$
636
$
3,984
Net income (excluding $
19
noncontrolling interests)
-
-
-
484
-
5
489
Foreign currency translation loss (excluding loss of $
4
attributable to Redeemable noncontrolling interests)
-
-
-
-
(36)
-
(36)
Unrealized gain from foreign currency hedging activities,
net of tax of $
2
-
-
-
-
5
-
5
Pension adjustment gain, net of tax of $
0
-
-
-
-
1
-
1
Change in fair value of redeemable securities
-
-
(144)
-
-
-
(144)
Initial noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
7
7
Repurchases and retirement of common stock
(3,518,846)
-
(34)
(217)
-
-
(251)
Stock-based compensation expense
299,572
-
58
-
-
-
58
Shares withheld for payroll taxes
(113,754)
-
(7)
-
-
-
(7)
Transfer of charges in excess of capital
-
-
127
(127)
-
-
-
Balance, September 25, 2021
139,129,543
$
1
$
-
$
3,595
$
(138)
$
648
$
4,106
See accompanying notes.
8
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
Nine Months Ended
September 24,
September 25,
2022
2021
Cash flows from operating activities:
Net income
$
515
$
508
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
160
151
Gain on sale of equity investment
-
(10)
Stock-based compensation expense
44
58
Provision for (benefit from) losses on trade and other accounts receivable
2
(9)
Benefit from deferred income taxes
(20)
(1)
Equity in earnings of affiliates
(12)
(18)
Distributions from equity affiliates
12
15
Changes in unrecognized tax benefits
1
(6)
Other
(25)
-
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(93)
(83)
Inventories
(9)
(208)
Other current assets
(96)
(41)
Accounts payable and accrued expenses
(131)
77
Net cash provided by operating activities
348
433
Cash flows from investing activities:
Purchases of fixed assets
(67)
(49)
Payments related to equity investments and business
acquisitions, net of cash acquired
(127)
(415)
Proceeds from sale of equity investments
-
10
Proceeds from (payments for) loan to affiliate
9
(6)
Other
(26)
(19)
Net cash used in investing activities
(211)
(479)
Cash flows from financing activities:
Net change in bank borrowings
51
(13)
Proceeds from issuance of long-term debt
165
200
Principal payments for long-term debt
(58)
(122)
Debt issuance costs
-
(2)
Proceeds from issuance of stock upon exercise of stock options
2
-
Payments for repurchases and retirement of common stock
(200)
(251)
Payments for taxes related to shares withheld for employee taxes
(30)
(7)
Distributions to noncontrolling shareholders
(18)
(9)
Acquisitions of noncontrolling interests in subsidiaries
(33)
(50)
Net cash used in financing activities
(121)
(254)
Effect of exchange rate changes on cash and cash equivalents
(11)
(2)
Net change in cash and cash equivalents
5
(302)
Cash and cash equivalents, beginning of period
118
421
Cash and cash equivalents, end of period
$
123
$
119
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.
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 25, 2021 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 nine months ended September 24, 2022 are not necessarily indicative of the results to be expected
for any other interim period or for the year ending December 31, 2022.
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 24, 2022 and December 25, 2021, certain trade accounts receivable that can only be used to settle
obligations of this VIE were $
313
138
creditors have recourse to us were $
225
105
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. Due to the significant uncertainty surrounding the future impact of COVID-19, our judgments
regarding estimates and impairments could change in the future. There is an ongoing risk that the COVID-19
pandemic may again have a material adverse effect on our business, results of operations and cash flows and may
result in a material adverse effect on our financial condition and liquidity. However, the extent of the potential
impact cannot be reasonably estimated at this time
.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
10
Note 2 – Critical Accounting Policies, Accounting Pronouncements 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
24, 2022, as compared to the critical accounting policies described in Item 7 of our Annual Report on Form 10-K
for the year ended December 25, 2021.
Accounting Pronouncements Adopted
On
December 26, 2021
Contract Assets and Contract Liabilities from Contracts with Customers” (Subtopic 805). ASU 2021 – 08 requires
an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in
accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in
accordance with Topic 606 as if it had originated the contracts. To achieve this, an acquirer may assess how the
acquiree applied Topic 606 to determine what to record for the acquired revenue contracts. Generally, this should
result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with
how they were recognized and measured in the acquiree’s financial statements. Our
adoption
not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, “Reference Rate
Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which provides
optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other
transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another
reference rate expected to be discontinued because of reference rate reform. The guidance was effective beginning
March 12, 2020 and can be applied prospectively through December 31, 2022. In January 2021, the FASB issued
ASU 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”). ASU 2021-01 provides temporary
optional expedients and exceptions to certain guidance in U.S. GAAP to ease the financial reporting burdens related
to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such
as the Secured Overnight Financing Rate. The guidance is effective upon issuance, on January 7, 2021, and can be
applied through December 31, 2022. We do not expect that the requirements of this guidance will have a material
impact on our consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging –
Portfolio Layer Method,” which will expand companies' abilities to hedge the benchmark interest rate risk of
portfolios of financial assets (or beneficial interests) in a fair value hedge. This ASU expands the use of the
portfolio layer method (previously referred to as the last-of-layer method) to allow multiple hedges of a single
closed portfolio of assets using spot starting, forward starting and amortizing-notional swaps. It also permits both
prepayable and non-prepayable financial assets to be included in the closed portfolio of assets hedged in a portfolio
layer hedge. This ASU further requires that basis adjustments not be allocated to individual assets for active
portfolio layer method hedges, but rather be maintained on the closed portfolio of assets as a whole. ASU 2022 –
01 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal
years. Early adoption is permitted for any entity that has adopted the amendments in ASU 2017-12. We do not
expect that the requirements of this guidance will have a material impact on our consolidated financial statements.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
11
Note 3 – Revenue from Contracts with Customers
Revenue is recognized in accordance with policies disclosed in Item 8 of our Annual Report on Form 10-K for
the year ended December 25, 2021.
Disaggregation of Net Sales
The following table disaggregates our Net sales by reportable segment and geographic area:
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
$
1,131
$
654
$
1,785
$
3,360
$
2,106
$
5,466
Medical
1,088
18
1,106
3,215
59
3,274
Total health care distribution
2,219
672
2,891
6,575
2,165
8,740
Technology and value-added services
155
21
176
469
67
536
Total revenues
$
2,374
$
693
$
3,067
$
7,044
$
2,232
$
9,276
Three Months Ended
Nine Months Ended
September 25, 2021
September 25, 2021
North
America
International
Global
North
America
International
Global
Net Sales:
Health care distribution
Dental
$
1,115
$
708
$
1,823
$
3,289
$
2,235
$
5,524
Medical
1,162
23
1,185
3,000
78
3,078
Total health care distribution
2,277
731
3,008
6,289
2,313
8,602
Technology and value-added services
149
21
170
404
64
468
Total revenues
$
2,426
$
752
$
3,178
$
6,693
$
2,377
$
9,070
At December 25, 2021, the current portion of contract liabilities of $
89
Other, and $
10
months ended September 24, 2022, we recognized in net sales $
70
deferred at December 25, 2021. At September 24, 2022, the current and non-current portion of contract liabilities
were $
76
9
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
two
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 and other institutions. Our
global medical businesses serve office-based medical practitioners, ambulatory surgery centers, other alternate-care
settings and other institutions. Our global dental and medical groups serve practitioners in
32
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 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Net Sales:
Health care distribution
Dental
$
1,785
$
1,823
$
5,466
$
5,524
Medical
1,106
1,185
3,274
3,078
Total health care distribution
2,891
3,008
8,740
8,602
Technology and value-added services
176
170
536
468
Total
$
3,067
$
3,178
$
9,276
$
9,070
Three Months Ended
Nine Months Ended
September 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Operating Income:
Health care distribution
$
179
$
179
$
579
$
558
Technology and value-added services
32
32
96
93
Total
$
211
$
211
$
675
$
651
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
13
Note 5
Business Acquisitions
2022 Acquisitions
We completed several acquisitions during the nine months ended September 24, 2022, which were immaterial to
our condensed consolidated financial statements. Our acquired ownership interest ranged between
80
% to
100
%.
Acquisitions within our healthcare distribution segment included companies that specialize in the distribution of
dental products. Within our technology and value-added services segment, we acquired a company that educates
and connects dental office managers, practice administrators and dental business leaders across North America.
The following table aggregates the estimated fair value, as of the date of acquisition, of consideration paid and net
assets acquired for acquisitions during the nine months ended September 24, 2022. While we use our best
estimates and assumptions to accurately value those 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, during 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.
Approximately half of the acquired goodwill is deductible for tax purposes.
2022
Acquisition consideration:
Cash
$
132
Deferred consideration
1
Fair value of previously held equity method investment
16
Redeemable noncontrolling interests
4
Total consideration
$
153
Identifiable assets acquired and liabilities assumed:
Current assets
36
Intangible assets
70
Other noncurrent assets
7
Current liabilities
(23)
Deferred income taxes
(5)
Other noncurrent liabilities
(5)
Total identifiable net assets
80
Goodwill
73
Total net assets acquired
$
153
The following table summarizes the identifiable intangible assets acquired during the nine months ended September
24, 2022 and their estimated useful lives as of the date of the acquisition:
2022
Estimated Useful Lives (in years)
Customer relationships and lists
$
56
10
Trademarks/ Tradenames
10
5
Non-compete agreements
2
2
-
5
Other
2
10
Total
$
70
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
14
2021 Acquisitions
We completed several acquisitions during the nine months ended September 25, 2021 which were immaterial to our
financial statements. Our acquired ownership interest ranged between approximately
51
% to
100
%. Acquisitions
within our health care distribution segment included companies that specialize in the distribution and
manufacturing of dental and medical products, a provider of home medical supplies, and product kitting and sterile
packaging. Within our technology and value-added services segment, we acquired companies that focus on dental
marketing and website solutions, practice transition services, and business analytics and intelligence software.
The following table aggregates the estimated fair value, as of the date of acquisition, of consideration paid and net
assets acquired for acquisitions during the nine months ended September 25, 2021. While we use our best
estimates and assumptions to accurately value those 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, during 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.
Approximately half of the acquired goodwill is deductible for tax purposes.
2021
Acquisition consideration:
Cash
$
424
Deferred consideration
11
Fair value of previously held equity method investment
8
Redeemable noncontrolling interests
179
Total consideration
$
622
Identifiable assets acquired and liabilities assumed:
Current assets
159
Intangible assets
259
Other noncurrent assets
39
Current liabilities
(62)
Deferred income taxes
(18)
Other noncurrent liabilities
(39)
Total identifiable net assets
338
Goodwill
284
Total net assets acquired
$
622
The following table summarizes the identifiable intangible assets acquired during the nine months ended September
25, 2021 and their estimated useful lives as of the date of the acquisition:
2021
Estimated Useful Lives (in years)
Customer relationships and lists
$
175
6
-
12
Trademarks / Tradenames
42
5
-
10
Non-compete agreements
6
5
Product development
21
5
-
10
Other
15
18
Total
$
259
The major classes of assets and liabilities that we generally allocate purchase price 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, property, plant and equipment,
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
15
deferred taxes and other current and long-term assets and liabilities. The estimated fair value of identifiable
intangible assets is based on critical estimates, judgments and assumptions derived from analysis of market
conditions, discount rates, discounted cash flows, customer retention rates and estimated useful lives.
Some prior owners of acquired subsidiaries are eligible to receive additional purchase price cash consideration if
certain financial targets are met. We have accrued liabilities for the estimated fair value of additional purchase
price consideration at the time of the acquisition. Any adjustments to these accrual amounts are recorded in our
condensed consolidated statements of income. For the nine months ended September 24, 2022 and September 25,
2021, there were no material adjustments recorded in our condensed consolidated statements of income relating to
changes in estimated contingent purchase price liabilities.
During the nine months ended September 24, 2022 and September 25, 2021 we incurred $
6
6
respectively, in acquisition costs.
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;
however, 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) is classified as Level 3 within the fair value hierarchy, and
as of September 24, 2022 and December 25, 2021 was estimated at $
1,045
873
Factors that we considered when estimating the fair value of our debt included market conditions, such as interest
rates and credit spreads.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
16
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 and a total
return swap for the purpose of economically hedging our unfunded non-qualified supplemental executive retirement
plan and our deferred compensation plan.
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.
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. See
for additional information.
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 24, 2022 and December 25,
2021:
September 24, 2022
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
40
$
-
$
40
Derivative contracts undesignated
-
4
-
4
Total assets
$
-
$
44
$
-
$
44
Liabilities:
Derivative contracts designated as hedges
$
-
$
3
$
-
$
3
Derivative contracts undesignated
-
7
-
7
Total return swaps
-
7
-
7
Total liabilities
$
-
$
17
$
-
$
17
Redeemable noncontrolling interests
$
-
$
-
$
563
$
563
December 25, 2021
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
8
$
-
$
8
Derivative contracts undesignated
-
1
-
1
Total return swaps
-
1
-
1
Total assets
$
-
$
10
$
-
$
10
Liabilities:
Derivative contracts designated as hedges
$
-
$
1
$
-
$
1
Derivative contracts undesignated
-
2
-
2
Total liabilities
$
-
$
3
$
-
$
3
Redeemable noncontrolling interests
$
-
$
-
$
613
$
613
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
17
Note 7 – Debt
Bank Credit Lines
Bank credit lines consisted of the following:
September 24,
December 25,
2022
2021
Revolving credit agreement
$
-
$
-
Other short-term bank credit lines
107
51
Total
$
107
$
51
Revolving Credit Agreement
On
August 20, 2021
, we entered into a $
1
facility which matures on
August 20, 2026
750
to mature in April 2022. The interest rate is based on the USD LIBOR plus a spread based on our leverage ratio at
the end of each financial reporting quarter. Most LIBOR rates have been discontinued after December 31, 2021,
while the remaining LIBOR rates will be discontinued immediately after June 30, 2023. We do not expect the
discontinuation of LIBOR as a reference rate in our debt agreements to have a material adverse effect on our
financial position or to materially affect our interest expense. The Credit Agreement also requires, among other
things, that we maintain certain maximum leverage ratios. Additionally, the 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 24, 2022 and December 25, 2021, we had
no
revolving credit facility. As of September 24, 2022 and December 25, 2021, there were $
9
9
of letters of credit, respectively, provided to third parties under the credit facility.
Other Short-Term Bank Credit Lines
As of September 24, 2022 and December 25, 2021, we had various other short-term bank credit lines available, of
which $
107
51
2021, borrowings under all of these credit lines had a weighted average interest rate of
9.35
% and
10.44
%,
respectively.
Long-term debt
Long-term debt consisted of the following:
September 24,
December 25,
2022
2021
Private placement facilities
$
699
$
706
U.S. trade accounts receivable securitization
225
105
Various collateralized and uncollateralized loans payable with interest,
in varying installments through 2023 at interest rates
ranging from
0.00
% to
3.50
% at September 24, 2022 and
ranging from
2.62
% to
4.27
% at December 25, 2021
7
4
Finance lease obligations
7
7
Total
938
822
Less current maturities
(4)
(11)
Total long-term debt
$
934
$
811
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
18
Private Placement Facilities
Our private placement facilities were amended on
October 20, 2021
four
three
) insurance
companies, have a total facility amount of $
1.5
1.0
uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from time to time
through
October 20, 2026
June 23, 2023
). 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
15 years
average life no longer than
12 years
). 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 as of September 24, 2022 are presented in the
following table:
Amount of
Borrowing
Borrowing
Date of Borrowing
Outstanding
Rate
Due Date
January 20, 2012
$
50
3.45
%
January 20, 2024
December 24, 2012
50
3.00
December 24, 2024
June 16, 2017
100
3.42
June 16, 2027
September 15, 2017
100
3.52
September 15, 2029
January 2, 2018
100
3.32
January 2, 2028
September 2, 2020
100
2.35
September 2, 2030
June 2, 2021
100
2.48
June 2, 2031
June 2, 2021
100
2.58
June 2, 2033
Less: Deferred debt issuance costs
(1)
Total
$
699
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
three years
. On October 20, 2021, we
extended the expiration date of this facility agreement to
October 18, 2024
the facility from $
350
450
two
25, 2021, the borrowings outstanding under this securitization facility were $
225
105
respectively. At September 24, 2022, the interest rate on borrowings under this facility was based on the asset-
backed commercial paper rate of
2.89
% plus
0.75
%, for a combined rate of
3.64
%. At December 25, 2021, the
interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of
0.19
% plus
0.75
%, for a combined rate of
0.94
%.
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
30
35
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
19
Note 8 – Income Taxes
For the nine months ended September 24, 2022 our effective tax rate was
23.5
% compared to
24.2
% for the prior
year period. The difference between our effective tax rate and the federal statutory tax rate for the nine months
ended September 24, 2022 primarily relates to state and foreign income taxes and interest expense as well as share-
based compensation. The difference between our effective tax rate and the federal statutory tax rate for the nine
months ended September 25, 2021 primarily relates to state and foreign income taxes, interest expense and tax
charges and credits associated with legal entity reorganizations.
On August 16, 2022, the Inflation Reduction Act (H.R. 5376) (“IRA”) was signed into law in the United States.
Among other things, the IRA imposes a 15% corporate alternative minimum tax for tax years beginning after
December 31, 2022 and levies a 1% excise tax on net stock repurchases after December 31, 2022. We are still in
the process of analyzing the provisions of the IRA.
The total amount of unrecognized tax benefits, which are included in “Other liabilities” within our condensed
consolidated balance sheets, as of September 24, 2022 and December 25, 2021 was $
84
84
respectively, of which $
71
69
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 2016. The tax years subject to examination by the
IRS include years 2017 and forward. During the year ended December 25, 2021, we were notified by the IRS that
tax year 2019 was selected for examination.
During the quarter ended September 26, 2020 we reached an agreement with the Advanced Pricing Division on an
appropriate transfer pricing methodology for the years 2014-2025. The objective of this resolution was to mitigate
future transfer pricing audit adjustments.
The total amounts of interest and penalties are classified as a component of the provision for income taxes. The
amount of tax interest expense/(credit) was $
1
$
(2)
“Other liabilities,” and was $
14
12
No
penalties were accrued for the periods presented.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
20
Note 9 – Legal Proceedings
Henry Schein, Inc. has been named as a defendant in multiple lawsuits (currently less than one-hundred and fifty
(
150
); in less than half of those cases one or more of Henry Schein, Inc.’s subsidiaries is also named as a
defendant). 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 affiliated companies) 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 is currently stayed but remains set for a jury trial on January 9, 2023; the action filed by DCH Health Care
Authority, et al. in Alabama state court, which has been designated a bellwether with
eight
thirty-eight
set for a jury trial on July 24, 2023; and the action filed by Florida Health Sciences Center, Inc. (and
38
hospitals located throughout the State of Florida) in Florida state court, which is currently scheduled for a jury trial
in October 2024. In June 2022, we settled
twenty-six
one
additional hospital, for a total amount of
three-hundred thousand
twenty-six
dismissed. Of Henry Schein’s 2021 net sales of approximately $
12.4
two-tenths
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 24, 2022, 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)
)
21
Note 10 – 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 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”). However, for our 2021 fiscal year, in
light of the COVID-19 pandemic, the Compensation Committee determined it would be difficult for management
to set a meaningful three-year cumulative earnings per share target as the goal applicable to performance-based
RSU awards as it had done in prior years. Instead, the Compensation Committee set our equity-based awards to
employees for fiscal 2021 in the form of time-based RSUs and non-qualified stock options which focus on stock
value appreciation and retention instead of pre-established performance goals. Our non-employee directors
continued to receive equity-based awards for fiscal 2021 solely in the form of time-based RSUs. In March 2022,
the Compensation Committee reinstated performance-based RSUs for equity-based awards to employees for fiscal
2022 and awarded grants in the form of time-based RSUs, performance-based RSUs and non-qualified stock
options.
RSUs are stock-based awards granted to recipients with specified vesting provisions. In the case of RSUs, common
stock is generally delivered on or following satisfaction of vesting conditions. We issue RSUs to employees that
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 under the 2015 Non-Employee Director Stock Incentive Plan 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 on the date of grant based on our closing stock price at
the time 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 differences in projected earnings generated by sales of COVID-
19 test kits (solely with respect to performance-based RSUs granted in the 2022 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.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
22
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 are granted at an exercise price equal to our closing stock price on the
date of grant. Stock options issued beginning in 2021 vest
one-third
service, subject to the terms and conditions of the 2020 Stock Incentive Plan, are fully vested
three years
grant date and have a contractual term of
ten years
upon certain events. Compensation expense for these stock options is recognized using a graded vesting method.
We estimate the fair value of stock options using the Black-Scholes valuation model.
In addition to equity-based awards granted in fiscal 2021 under the long-term incentive program, the Compensation
Committee granted a Special Pandemic Recognition Award under the 2020 Stock Incentive Plan to recipients of
performance-based RSUs under the 2018 long-term incentive program. The payout under the performance-based
restricted stock units granted under the fiscal 2018 long-term incentive program (the “2018 LTIP”) was negatively
impacted by the global COVID-19 pandemic. Given the significance of the impact of the pandemic on our
three
-
year EPS goal under such equity awards and the contributions made by our employees (including those who
received such awards), on March 3, 2021, the Compensation Committee granted a Special Pandemic Recognition
Award to recipients of performance-based restricted stock units under the 2018 LTIP who were employed by us on
the grant date of the Special Pandemic Recognition Award. These time-based RSU awards vest
50
% on the first
anniversary of the grant date and
50
% on the second anniversary of the grant date, based on the recipient’s
continued service and subject to the terms and conditions of the 2020 Stock Incentive Plan, and are recorded as
compensation expense using a graded vesting method. The combination of the
20
% payout based on actual
performance of the 2018 LTIP and the one-time Special Pandemic Recognition Award granted in 2021 will
generate a cumulative payout of
75
% of each recipient’s original number of performance-based restricted stock
units awarded in 2018 if the recipient satisfies the
two
-year vesting schedule commencing on the grant date.
Our accompanying condensed consolidated statements of income reflect pre-tax share-based compensation expense
of $
17
13
44
34
September 24, 2022, respectively. For the three and nine months ended September 25, 2021, we recorded pre-tax
share-based compensation expense of $
28
21
58
44
respectively.
Total unrecognized compensation cost related to unvested awards as of September 24, 2022 was $
104
which is expected to be recognized over a weighted-average period of approximately
2.2
The following weighted-average assumptions were used in determining the most recent fair values of stock options
granted using the Black-Scholes valuation model:
2022
Expected dividend yield
0.0
%
Expected stock price volatility
27.70
%
Risk-free interest rate
3.42
%
Expected life of options (years)
6.00
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.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
23
The following table summarizes stock option activity under the Plans during the nine months ended September 24,
2022:
Stock Options
Weighted
Average
Weighted
Remaining
Average
Contractual
Aggregate
Exercise
Life in
Shares
Price
Years
Outstanding at beginning of period
767,717
$
63.24
Granted
418,425
85.82
Exercised
(30,554)
62.71
Forfeited
(17,850)
72.96
Outstanding at end of period
1,137,738
$
71.41
8.8
$
3
Options exercisable at end of period
223,198
$
63.19
Weighted
Weighted
Average
Average
Remaining
Aggregate
Number of
Exercise
Contractual
Intrinsic
Options
Price
Life (in years)
Value
Vested or expected to vest
898,310
$
73.60
8.9
$
2
The following tables summarize the activity of our unvested RSUs for the nine months ended September 24, 2022:
Time-Based Restricted Stock Units
Weighted Average
Grant Date Fair
Intrinsic Value
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period
1,945,862
$
58.79
Granted
466,473
85.67
Vested
(505,004)
54.74
Forfeited
(54,618)
67.23
Outstanding at end of period
1,852,713
$
66.39
$
67.34
Performance-Based Restricted Stock Units
Weighted Average
Grant Date Fair
Intrinsic Value
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period
674,753
$
59.63
Granted
442,871
76.68
Vested
(392,646)
59.18
Forfeited
(13,631)
67.17
Outstanding at end of period
711,347
$
63.27
$
67.34
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
24
Note 11 – 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. Accounting Standards Codification Topic 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 24, 2022 and the year ended December 25, 2021 are presented in the
following table:
September 24,
December 25,
2022
2021
Balance, beginning of period
$
613
$
328
Decrease in redeemable noncontrolling interests due to acquisitions of
noncontrolling interests in subsidiaries
(26)
(60)
Increase in redeemable noncontrolling interests due to business
acquisitions
4
189
Net income attributable to redeemable noncontrolling interests
19
23
Dividends declared
(16)
(21)
Effect of foreign currency translation loss attributable to
redeemable noncontrolling interests
(13)
(6)
Change in fair value of redeemable securities
(18)
160
Balance, end of period
$
563
$
613
Note 12 – 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 24,
December 25,
2022
2021
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment
$
(44)
$
(31)
Attributable to noncontrolling interests:
Foreign currency translation adjustment
$
(1)
$
-
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
(317)
$
(155)
Unrealized gain (loss) from foreign currency hedging activities
18
(2)
Pension adjustment loss
(13)
(14)
Accumulated other comprehensive loss
$
(312)
$
(171)
Total Accumulated other comprehensive loss
$
(357)
$
(202)
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
25
The following table summarizes the components of comprehensive income, net of applicable taxes as follows:
Three Months Ended
Nine Months Ended
September 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Net income
$
162
$
169
$
515
$
508
Foreign currency translation loss
(89)
(40)
(176)
(40)
Tax effect
-
-
-
-
Foreign currency translation loss
(89)
(40)
(176)
(40)
Unrealized gain from foreign currency hedging
15
5
27
7
Tax effect
(4)
(1)
(7)
(2)
Unrealized gain from foreign currency hedging
11
4
20
5
Pension adjustment gain
2
-
2
1
Tax effect
(1)
-
(1)
-
Pension adjustment gain
1
-
1
1
Comprehensive income
$
85
$
133
$
360
$
474
The change in the unrealized gain from foreign currency hedging activities during the three and nine months ended
September 24, 2022 and September 25, 2021 was primarily attributable to a net investment hedge that was entered
into during 2019.
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 24, 2022 was primarily due to
strengthening of the U.S. Dollar as compared to the Euro, British Pound, Australian Dollar and Canadian Dollar.
The following table summarizes our total comprehensive income, net of applicable taxes, as follows:
Three Months Ended
Nine Months Ended
September 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Comprehensive income attributable to
Henry Schein, Inc.
$
79
$
131
$
350
$
454
Comprehensive income attributable to
noncontrolling interests
2
2
4
5
Comprehensive income attributable to
Redeemable noncontrolling interests
4
-
6
15
Comprehensive income
$
85
$
133
$
360
$
474
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
26
Note 13 – Plans 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. This plan also includes the rationalization of the
Company’s office space in North America as a result of transitioning to a partial and full remote work model for
certain employees. We recorded restructuring charges of $
9
related costs and lease right-of-use and other long-lived asset accelerated depreciation and amortization and lease
exit costs. We expect this initiative to extend through 2023. 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.
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
other costs, as well as restructuring charges of $
2
9
charges discussed above.
On November 20, 2019, we committed to a contemplated restructuring initiative intended to mitigate stranded costs
associated with the spin-off of our animal health business and to rationalize operations and provide expense
efficiencies. These activities were originally expected to be completed by the end of 2020 but we extended them to
the end of 2021 in light of the changes to the business environment brought on by the COVID-19 pandemic. The
restructuring activities under this prior initiative were completed in 2021.
Restructuring and integration costs recorded for the three and nine months ended September 24, 2022 and nine
months ended September 25, 2021 (there were
no
2021) consisted of the following:
Three and Nine Months Ended September 24, 2022
Health-Care Distribution
Technology and Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Integration
Costs
Total
Severance and employee-related costs
$
6
$
-
$
-
$
-
$
6
Accelerated depreciation and amortization
2
-
-
-
2
Exit and other related costs
1
-
-
-
1
Integration employee-related and other
costs
-
1
-
-
1
Total restructuring and integration costs
$
9
$
1
$
-
$
-
$
10
Nine Months Ended September 25, 2021
Health-Care Distribution
Technology and Value-Added
Services
Restructuring
Costs
Integration
Costs
Restructuring
Costs
Integration
Costs
Total
Severance and employee-related costs
$
3
$
-
$
1
$
-
$
4
Total restructuring and integration costs
$
3
$
-
$
1
$
-
$
4
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
27
The following table summarizes, by reportable segment, the activity related to the liabilities associated with our
restructuring initiatives for the period ended September 24, 2022. The remaining accrued balance of restructuring
costs as of September 24, 2022 is included in accrued expenses: other within our condensed consolidated balance
sheet.
Technology and
Health Care
Value-Added
Distribution
Services
Total
Balance, December 25, 2021
$
3
$
1
$
4
Restructuring charges
9
-
9
Non-cash charges
(2)
-
(2)
Cash payments and other adjustments
(5)
(1)
(6)
Balance, September 24, 2022
$
5
$
-
$
5
Note 14
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 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Basic
135,608,678
139,377,237
136,731,413
140,661,182
Effect of dilutive securities:
Stock options and restricted stock units
1,475,371
1,702,100
1,756,841
1,517,520
Diluted
137,084,049
141,079,337
138,488,254
142,178,702
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 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Stock options
482,497
789,130
310,565
595,798
Restricted stock units
445,494
-
261,718
5,716
Total anti-dilutive securities excluded from EPS
computation
927,991
789,130
572,283
601,514
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
)
28
Note 15 – Supplemental Cash Flow Information
Cash paid for interest and income taxes was:
Nine Months Ended
September 24,
September 25,
2022
2021
Interest
$
29
$
22
Income taxes
235
179
During the nine months ended September 24, 2022 and September 25, 2021, we had $
27
7
respectively of non-cash net unrealized gains related to foreign currency hedging activities.
Note 16 – 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 $
31
nine months ended September 24, 2022, we recorded $
8
23
costs related to this royalty agreement. During the three and nine months ended September 25, 2021, we recorded
$
8
23
September 24, 2022 and December 25, 2021, Henry Schein One, LLC had a net (payable) receivable balance due
(to) from Internet Brands of $
(14)
9
operations and the royalty agreement.
During our normal course of business, we have interests in entities that we account for under the equity accounting
method.
16
$
49
recorded net sales of $
18
51
ended September 24, 2022, we purchased $
4
14
three and nine months ended September 25, 2021, we purchased $
5
14
such entities. At September 24, 2022 and December 25, 2021, in the aggregate we had $
39
45
due from our equity affiliates, and $
9
9
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
one year
9 years
. As of
September 24, 2022, current and non-current liabilities associated with related party operating leases were $
4
million and $
16
5.2
% and
5.8
% of the total current and non-
current operating lease liabilities.
29
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATI ONS
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 Novel 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 personal protective equipment (“PPE”) 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 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 the (i) our ability to have
continued access to a variety of COVID-19 test types, expectations regarding COVID-19 test sales, demand and
inventory levels, as well as the efficacy or relative efficacy of the test results given that the test efficacy has not
been, or will not have been, independently verified under normal FDA procedures and (ii) potential for us to
distribute the COVID-19 vaccines and ancillary supplies.
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; 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; 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; 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; risks associated with our global operations; our
dependence on our senior management, employee hiring and retention, and our relationships with customers,
suppliers and manufacturers; and disruptions in financial markets. The order in which these factors appear should
not be construed to indicate their relative importance or priority.
30
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
The COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains and created
significant volatility and disruption of global financial markets in 2020 and 2021. The impact of COVID-19 had a
material adverse effect on our business, results of operations and cash flows in 2020. During the year ended
December 25, 2021, patient traffic levels returned to levels approaching pre-pandemic levels. Demand for dental
products and certain medical products throughout 2021 was driven by sales of PPE and COVID-19 test kits.
During the six months ended June 25, 2022 we experienced a decrease in the sales volume of PPE and COVID-19
test kits. During the three months ended September 24, 2022, we continued to experience a decrease in the sales
volume of PPE and COVID-19 test kits compared with the same period in the prior year. The volatility in sales of
COVID-19 test kits has moderated, albeit at a significantly lower level of sales compared with 2021, resulting in us
recording an inventory obsolescence reserve of $12 million for COVID-19 test kits during the quarter ended
September 24, 2022.
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, and we currently expect moderating of inflation and
foreign currency fluctuations. 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. Due to the significant uncertainty surrounding the future impact of COVID-19, our judgments
regarding estimates and impairments could change in the future. There is an ongoing risk that the COVID-19
pandemic may again have a material adverse effect on our business, results of operations and cash flows and may
result in a material adverse effect on our financial condition and liquidity. However, the extent of the potential
impact cannot be reasonably estimated at this time.
31
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 90 years of experience distributing health care products.
We are headquartered in Melville, New York, employ approximately 22,000 people (of which approximately
10,300 are based outside of the United States) and have operations or affiliates in 32 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 manufacture certain dental
specialty products and solutions in the areas of implants, orthodontics and endodontics. 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 and other institutions. Our
global medical businesses serve office-based medical practitioners, ambulatory surgery centers, other alternate-care
settings and other institutions.
The health care distribution reportable segment aggregates our global dental and medical operating segments. This
segment 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 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
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.
32
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.
Our current and future results have been and could be impacted by the COVID-19 pandemic, the current economic
environment and continued economic and public health uncertainty. Since the onset of the COVID-19 pandemic in
early 2020, we have been carefully monitoring its impact on our global operations and have taken appropriate steps
to minimize the risk to our employees. We have seen and expect to continue to see changes in demand trends for
some of our products and services, supply chain challenges and labor challenges, as rates of infection fluctuate, new
strains or variants of COVID-19 emerge and spread, governments adapt their approaches to combatting the virus,
and local conditions change across geographies. As a result, we expect to see continued volatility through at least
the duration of the pandemic.
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 trend with regard 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.
33
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.
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 pharmacology 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, in 2022 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 27% 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 $4.1 trillion in 2020, or 19.7% 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 $6.2 trillion in 2028, approximately 19.7% of the nation’s projected gross domestic product. The
latest projections begin after the latest historical year (2020) and go through 2030.
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. The federal government and state 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.
In addition, certain of our businesses must operate in compliance with a variety of burdensome and complex 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.
On September 30, 2022, CMS terminated the suspension of Medicare payments. As a result of the termination of
the suspension, we recognized $13 million of previously deferred revenue during the quarter ended September 24,
2022.
34
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
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 (as amended, the “ACA”). In addition, activities to
control medical costs, including laws and regulations lowering reimbursement rates for pharmaceuticals, medical
devices 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 25, 2021, filed with the SEC on February 15, 2022.
Results of Operations
The following table summarizes the significant components of our operating results for the three and nine months
ended September 24, 2022 and September 25, 2021 and cash flows for the nine months ended September 24, 2022
and September 25, 2021:
Three Months Ended
Nine Months Ended
September 24,
September 25,
September 24,
September 25,
2022
2021
2022
2021
Operating results:
Net sales
$
3,067
$
3,178
$
9,276
$
9,070
Cost of sales
2,153
2,266
6,444
6,376
Gross profit
914
912
2,832
2,694
Operating expenses:
Selling, general and administrative
648
657
2,010
1,906
Depreciation and amortization
45
44
137
133
Restructuring and integration costs
10
-
10
4
Operating income
$
211
$
211
$
675
$
651
Other expense, net
$
(6)
$
(5)
$
(17)
$
(14)
Gain on sale of equity investment
-
7
-
7
Net income
162
169
515
508
Net income attributable to Henry Schein, Inc.
150
162
491
484
Nine Months Ended
September 24,
September 25,
2022
2021
Cash flows:
Net cash provided by operating activities
$
348
$
433
Net cash used in investing activities
(211)
(479)
Net cash used in financing activities
(121)
(254)
35
Plans 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. This plan also includes the rationalization of the
Company’s office space in North America as a result of transitioning to a partial and full remote work model for
certain employees. We recorded restructuring charges of $9 million primarily related to severance and employee-
related costs and lease right-of-use and other long-lived asset accelerated depreciation and amortization and lease
exit costs. We expect this initiative to extend through 2023. 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. The expense savings
realized from this plan are expected to mainly affect 2023 and beyond.
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.
On November 20, 2019, we committed to a contemplated restructuring initiative intended to mitigate stranded costs
associated with the spin-off of our animal health business and to rationalize operations and provide expense
efficiencies. These activities were originally expected to be completed by the end of 2020 but we extended them to
the end of 2021 in light of the changes to the business environment brought on by the COVID-19 pandemic. The
restructuring activities under this prior initiative were completed in 2021.
36
Three Months Ended September 24, 2022 Compared to Three Months Ended September 25, 2021
Net Sales
Net sales were as follows:
September 24,
% of
September 25,
% of
Increase / (Decrease)
2022
Total
2021
Total
$
%
Health care distribution
(1)
Dental
$
1,785
58.2
%
$
1,823
57.3
%
$
(38)
(2.1)
%
Medical
1,106
36.0
1,185
37.3
(79)
(6.7)
2,891
94.2
3,008
94.6
(117)
(3.9)
Technology and value-added services
(2)
176
5.8
170
5.4
6
3.8
Total
$
3,067
100.0
%
$
3,178
100.0
%
$
(111)
(3.5)
(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 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.
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.
The 3.5% decrease in net sales includes a decrease of 0.6% in local currency sales (2.4% decrease in internally
generated sales partially offset by 1.8% growth from acquisitions) and a decrease of 2.9% related to foreign
currency exchange. We estimate that sales of PPE and COVID-19 test kits were approximately $244 million, a
decrease of 51.6% versus the prior year. Excluding PPE and COVID-19 test kits, the estimated increase in
internally generated local currency sales was 6.8%.
The 2.1% decrease in dental net sales includes an increase of 2.6% in local currency sales (1.2% increase in
internally generated sales and 1.4% growth from acquisitions) offset by a decrease of 4.7% related to foreign
currency exchange. The 2.6% increase in local currency sales was attributable to an increase in dental consumable
merchandise sales of 1.0% (1.8% growth from acquisitions and 0.8% decrease in internally generated sales) and an
increase in dental equipment and service sales of 8.3% (8.0% growth in internally generated sales and 0.3% growth
from acquisitions). Our sales growth in dental merchandise was lower than our sales growth in dental equipment
during the three months ended September 24, 2022 primarily due to a decrease in PPE sales. Dental equipment
sales increased in both our North American and international markets, primarily attributable to increased demand.
We estimate that our dental business recorded sales of approximately $94 million of PPE, an estimated decrease of
44.9% versus the prior year. Excluding PPE, the estimated increase in internally generated local currency dental
sales was 5.8%.
The 6.7% decrease in medical net sales includes a decrease of 6.4% in local currency sales (8.8% decrease in
internally generated sales partially offset by 2.4% growth from acquisitions), and a decrease of 0.3% related to
foreign currency exchange. Our medical business was impacted by a continuing decrease in sales of PPE and
COVID-19 test kits, partially offset by strong growth in sales of pharmaceutical, medical equipment and point-of-
care diagnostic products. We estimate that our medical business recorded sales of approximately $150 million of
PPE and COVID-19 test kits for the three months ended September 24, 2022, an estimated decrease of 55.0%
compared to the prior year. Excluding sales of PPE and COVID-19 test kits, the estimated increase in internally
generated local currency medical sales was 9.3%.
37
The 3.8% increase in technology and value-added services net sales includes an increase of 5.6% in local currency
sales (4.2% increase in internally generated sales and 1.4% growth from acquisitions) partially offset by a decrease
of 1.8% related to foreign currency exchange. During the quarter ended September 24, 2022, the trend for
transactional software sales improved compared to the prior year, as we increased the number of users, generating
demand for our sales cycle management solutions, and also from cloud-based solutions that drive practice
efficiency and patient engagement. The increase in sales during the quarter ended September 24, 2022, was
partially offset by the expiration 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 24,
Gross
September 25,
Gross
Increase
2022
Margin %
2021
Margin %
$
%
Health care distribution
$
799
27.7
%
$
799
26.6
%
$
-
-
%
Technology and value-added services
115
65.0
113
66.1
2
2.0
Total
$
914
29.8
$
912
28.7
$
2
0.2
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 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 at greater frequencies.
Our health care distribution gross profit includes a $21 million increase in the gross margin rates due to product mix
and $19 million additional gross profit from acquisitions, partially offset by a decrease of $40 million in gross profit
from internally generated sales.
Technology and value-added services gross profit increased $2 million, or 2.0%, due to a $2 million increase in
gross profit from internally generated sales and $2 million additional gross profit from acquisitions, partially offset
by a decrease of $2 million from gross margin rates due to product mix. Technology and value-added services
gross profit margin decreased to 65.0% from 66.1% primarily due to our continued investment in product
development and customer service.
38
Selling, General and Administrative
Selling, general and administrative expenses by segment and in total were as follows:
% of
% of
September 24,
Respective
September 25,
Respective
Increase
2022
Net Sales
2021
Net Sales
$
%
Health care distribution
$
620
21.5
%
$
620
20.6
%
$
-
-
%
Technology and value-added services
83
47.2
81
47.4
2
3.2
Total
$
703
22.9
$
701
22.1
$
2
0.3
Selling, general and administrative expenses (including depreciation and amortization; and restructuring and
integration costs in the three months ended September 24, 2022) increased $2 million, or 0.3%.
Selling, general and administrative expenses within our health care distribution segment had an increase of $18
million of additional costs from acquired companies and an increase of $10 million in restructuring and integration
costs, offset by a decrease of $28 million in internally generated operating costs. The $2 million increase in selling,
general and administrative expenses within our technology and value-added services segment was attributable to an
increase of $2 million of operating costs and an increase of $1 million of additional costs from acquired companies,
partially offset by a decrease of $1 million in restructuring and integration costs.
As a component of total selling, general and administrative expenses, selling expenses increased $12 million, or
3.0% to $424 million primarily due to an increase in payroll and payroll related costs and travel and convention
expenses. As a percentage of net sales, selling expenses increased to 13.8% from 13.0%.
As a component of total selling, general and administrative expenses, general and administrative expenses
decreased $10 million, or 3.6% to $279 million primarily due to a decrease in payroll and payroll related costs,
partially offset by an increase in travel expenses. As a percentage of net sales, general and administrative expenses
remained consistent at 9.1%.
Other Expense, Net
Other expense, net, was as follows:
September 24,
September 25,
Variance
2022
2021
$
%
Interest income
$
4
$
2
$
2
191.5
%
Interest expense
(11)
(7)
(4)
(67.1)
Other, net
1
-
1
127.6
Other expense, net
$
(6)
$
(5)
$
(1)
(25.0)
Interest income increased $2 million and interest expense increased $4 million primarily due to increased interest
rates.
Income Taxes
For the three months ended September 24, 2022 our effective tax rate was 22.7% compared to 23.9% for the prior
year period. The difference between our effective tax rate and the federal statutory tax rate for the three months
ended September 24, 2022 primarily relates to state and foreign income taxes and interest expense. The difference
between our effective tax rate and the federal statutory tax rate for the three months ended September 25, 2021 was
primarily due to state and foreign income taxes, interest expense and tax charges and credits associated with legal
entity reorganizations.
39
Gain on Sale of Equity Investment
In the third quarter of 2021 we received contingent proceeds of $10 million from the 2019 sale of Hu-Friedy
resulting in the recognition of an additional after-tax gain of $7 million.
40
Nine Months Ended September 24, 2022 Compared to Nine Months Ended September 25, 2021
Net Sales
Net sales were as follows:
September 24,
% of
September 25,
% of
Increase/(Decrease)
2022
Total
2021
Total
$
%
Health care distribution
(1)
Dental
$
5,466
58.9
%
$
5,524
60.9
%
$
(58)
(1.1)
%
Medical
3,274
35.3
3,078
33.9
196
6.3
Total health care distribution
8,740
94.2
8,602
94.8
138
1.6
Technology and value-added services
(2)
536
5.8
468
5.2
68
14.5
Total
$
9,276
100.0
%
$
9,070
100.0
%
$
206
2.3
(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 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.
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.
The 2.3% increase in net sales includes an increase of 4.5% in local currency sales (2.4% increase in internally
generated sales and 2.1% growth from acquisitions) partially offset by a decrease of 2.2% related to foreign
currency exchange. We estimate that sales for the nine months ended September 24, 2022 of PPE and COVID-19
test kits were approximately $991 million, an estimated decrease of 25.8% versus the prior year. Excluding PPE
and COVID-19 test kits, the estimated increase in internally generated local currency sales was 7.3%.
The 1.1% decrease in dental net sales includes an increase of 2.4% in local currency sales (1.4% increase in
internally generated sales and 1.0% growth from acquisitions) offset by a decrease of 3.5% related to foreign
currency exchange. The 2.4% increase in local currency sales was attributable to an increase in dental consumable
merchandise sales of 0.6% (1.2% growth from acquisitions partially offset by 0.6% decrease in internally generated
sales), and an increase in dental equipment sales and service sales of 9.0% (8.9% increase in internally generated
sales and 0.1% growth from acquisitions). Our sales growth in dental merchandise was lower than our sales growth
in dental equipment during the nine months ended September 24, 2022 primarily due to a decrease in PPE sales.
Dental equipment sales increased in both our North American and international markets, primarily due to increased
demand. We estimate that global dental sales for the nine months ended September 24, 2022 of PPE were
approximately $352 million, an estimated decrease of 32.5% versus the prior year. Excluding PPE, the estimated
increase in internally generated local currency dental sales was 4.9%.
The 6.3% increase in medical net sales was attributable to an increase of 6.6% in local currency sales (3.3%
increase in internally generated sales and 3.3% growth from acquisitions) partially offset by a decrease of 0.3%
related to foreign currency exchange. Globally, we estimate our medical business recorded sales of approximately
$639 million sales of PPE and COVID-19 test kits for the nine months ended September 24, 2022, a decrease of
approximately 21.4% compared to the prior year. Excluding PPE and COVID-19 test kits, the estimated increase in
internally generated local currency medical sales was 12.3%.
The 14.5% increase in technology and value-added services net sales was attributable to an increase of 15.9% in
local currency sales (8.5% increase in internally generated sales and 7.4% growth from acquisitions) partially offset
by a decrease of 1.4% related to foreign currency exchange. During the nine months ended September 24, 2022,
the trend for transactional software sales improved as we increased the number of users, generating demand for our
sales cycle management solutions, and also from cloud-based solutions that drive practice efficiency and patient
engagement.
41
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
September 24,
Gross
September 25,
Gross
Increase
2022
Margin %
2021
Margin %
$
%
Health care distribution
$
2,482
28.4
%
$
2,374
27.6
%
$
108
4.6
%
Technology and value-added services
350
65.3
320
68.3
30
9.4
Total
$
2,832
30.5
$
2,694
29.7
$
138
5.1
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 at greater frequencies.
Health care distribution gross profit increased $108 million, or 4.6% primarily due to the increase in net sales
discussed above. In addition, health care distribution gross profit margin benefitted from supplier rebates due to
increased purchase volumes compared to the comparable prior-year period. The overall increase in our health care
distribution gross profit was attributable to a $68 million increase in gross profit due to the increase in the gross
margin rates and $57 million additional gross profit from acquisitions, partially offset by $17 million decrease in
gross profit from internally generated sales.
Technology and value-added services gross profit increased $30 million, or 9.4%, attributable to an increase of $23
million in gross profit from internally generated sales and $15 million additional gross profit from acquisitions,
partially offset by a $8 million decrease in gross margin rates. Technology and value-added services gross profit
margin decreased to 65.3% from 68.3% primarily due to lower gross margins of recently acquired companies in the
business services sector and our continued investment in product development and customer service.
42
Selling, General and Administrative
Selling, general and administrative expenses by segment and in total were as follows:
% of
% of
September 24,
Respective
September 25,
Respective
Increase
2022
Net Sales
2021
Net Sales
$
%
Health care distribution
$
1,903
21.8
%
$
1,816
21.1
%
$
87
4.8
%
Technology and value-added services
254
47.4
227
48.5
27
11.9
Total
$
2,157
23.3
$
2,043
22.5
$
114
5.6
Selling, general and administrative expenses (including depreciation and amortization; and restructuring and
integration costs) increased $114 million, or 5.6%.
The $87 million increase in selling, general and administrative expenses within our health care distribution segment
was attributable to an increase of $24 million in internally generated operating costs, an increase of $56 million of
additional costs from acquired companies, and an increase of $7 million in restructuring and integration costs. The
$27 million increase in selling, general and administrative expenses within our technology and value-added services
segment was attributable to an increase of $15 million in internally generated operating costs and an increase of $13
million of additional costs from acquired companies, partially offset by a decrease in restructuring costs of $1
million.
As a component of total selling, general and administrative expenses, selling expenses increased $91 million, or
7.6% to $1,299 million, primarily due to an increase in payroll and payroll related costs and travel and convention
expenses. As a percentage of net sales, selling expenses increased to 14.0% from 13.3%.
As a component of total selling, general and administrative expenses, general and administrative expenses
increased $23 million, or 2.7% to $858 million, primarily due to an increase in payroll and payroll related costs and
travel and convention expenses. As a percentage of net sales, general and administrative expenses increased to
9.3% from 9.2%.
Other Expense, Net
Other expense, net, was as follows:
September 24,
September 25,
Variance
2022
2021
$
%
Interest income
$
9
$
5
$
4
90.3
%
Interest expense
(27)
(20)
(7)
(37.9)
Other, net
1
1
-
(20.2)
Other expense, net
$
(17)
$
(14)
$
(3)
(24.1)
Interest income increased $4 million and interest expense increased $7 million primarily due to increased interest
rates.
Income Taxes
For the nine months ended September 24, 2022, our effective tax rate was 23.5% compared to 24.2% for the prior
year period. The difference between our effective tax rate and the federal statutory tax rate for the nine months
ended September 24, 2022 primarily relates to state and foreign income taxes and interest expense as well as share-
based compensation. The difference between our effective tax rate and the federal statutory tax rate for the nine
months ended September 25, 2021 was primarily due to state and foreign income taxes, interest expense and tax
charges and credits associated with legal entity reorganizations.
43
Gain on Sale of Equity Investment
In the third quarter of 2021 we received contingent proceeds of $10 million from the 2019 sale of Hu-Friedy
resulting in the recognition of an additional after-tax gain of $7 million.
44
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.
Net cash provided by operating activities was $348 million for the nine months ended September 24, 2022,
compared to net cash provided by operating activities of $433 million for the comparable prior year period. The net
change of $85 million was primarily attributable to a relative increase in working capital, driven by an increase in
other current assets and a decrease in inventories, partially offset by a decrease in accounts payable.
Net cash used in investing activities was $211 million for the nine months ended September 24, 2022, compared to
$479 million for the comparable prior year period. The net change of $268 million was primarily attributable to
decreased payments for equity investments and business acquisitions.
Net cash used in financing activities was $121 million for the nine months ended September 24, 2022, compared to
net cash used in financing activities of $254 million for the comparable prior year period. The net change of $133
million was primarily due to increased net borrowings from debt and decreased repurchases of common stock.
45
The following table summarizes selected measures of liquidity and capital resources:
September 24,
December 25,
2022
2021
Cash and cash equivalents
$
123
$
118
Working capital
1,811
1,537
Debt:
Bank credit lines
$
107
$
51
Current maturities of long-term debt
4
11
Long-term debt
934
811
Total debt
$
1,045
$
873
Leases:
Current operating lease liabilities
$
72
$
76
Non-current operating lease liabilities
271
268
(1)
Includes $313 million and $138 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitization at September 24, 2022 and December 25, 2021, 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 42.9 days as of September 24, 2022
from 42.6 days as of September 25, 2021. During the nine months ended September 24, 2022, we wrote off
approximately $7 million of fully reserved accounts receivable against our trade receivable reserve. Our inventory
turns from operations decreased to 4.7 as of September 24, 2022 from 5.1 as of September 25, 2021. 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 less than one year to approximately 19 years, some of
which may include options to extend the leases for up to ten years. As of September 24, 2022, our right-of-use
assets related to operating leases were $319 million and our current and non-current operating lease liabilities were
$72 million and $271 million, respectively.
Stock Repurchases
From March 3, 2003 through September 24, 2022, we repurchased $4.2 billion, or 83,598,119 shares, under our
common stock repurchase programs, with $400 million available as of September 24, 2022 for future common
stock share repurchases.
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 25, 2021, except accounting policies adopted
as of December 26, 2021, which are discussed in
Statements included under Item 1.
46
Accounting Standards Update
For a discussion of accounting standards updates that have been adopted or will be adopted, see
to the Condensed Consolidated 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 25, 2021.
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 24, 2022, 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
The combination of acquisitions, continued acquisition integrations and systems implementation activity
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.
During the quarter ended September 24, 2022, we completed the acquisition of dental businesses in North America
and Europe. Also, post-acquisition integration related activities continued for our dental and medical businesses
acquired during prior quarters. 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. In addition, we completed systems implementation activities in North America related to a
new ERP system for a dental business as well as the integration of a dental business onto an existing ERP system.
All acquisitions, continued acquisition integrations and systems implementation activity involve necessary and
appropriate change-management controls that are considered in our quarterly assessment of the design and
operating effectiveness of our internal control 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.
47
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
There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Annual Report on
Form 10-K for the year ended December 25, 2021.
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 $4.5 billion, authorized by our Board of Directors, to the repurchase program provide for a total
of $4.6 billion of shares of our common stock to be repurchased under this program.
On August 17, 2022, our Board of Directors authorized the repurchase of up to an additional $400 million in shares
of our common stock.
As of September 24, 2022, we had repurchased approximately $4.2 billion of common stock (83,598,119 shares)
under these initiatives, with $400 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 24, 2022.
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)
6/26/2022 through 7/30/2022
745,762
$
76.71
745,762
421,839
8/1/2022 through 8/27/2022
437,967
75.93
437,967
5,450,334
8/28/2022 through 9/24/2022
-
-
-
5,940,006
1,183,729
1,183,729
(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.
48
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 24, 2022, formatted in Inline XBRL (included within
Exhibit 101 attachments).+
+ Filed or furnished herewith.
49
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 1, 2022